Latham Group, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Latham designs, manufactures and markets in-ground residential swimming pools, liners and covers in North America, Australia and New Zealand. This unaudited report covers the fiscal quarter ended April 1, 2023, compared with the quarter ended April 2, 2022. The company notes that sales and income are typically highest in the second and third fiscal quarters, so first-quarter results are not necessarily indicative of the full year.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $137.7 million | $191.6 million |
| Gross profit / gross margin | $33.4 million / 24.2% | $70.7 million / 36.9% |
| Operating income (loss) | ($6.3) million | $6.8 million |
| Net loss | ($14.4) million | ($2.8) million |
| Net loss per share, basic and diluted | ($0.13) | ($0.02) |
| Adjusted EBITDA and margin | $11.0 million / 8.0% | $48.0 million / 25.0% |
| Net cash used in operating activities | $14.5 million | $57.5 million |
- Sales fell 28.1% year over year: lower volume reduced sales by $57.2 million, partly offset by $3.3 million from pricing. Management attributed lower volume to a return toward pre-2020 seasonality, wholesale-channel inventory destocking and macroeconomic pressures.
- By product, in-ground pool sales were $78.6 million versus $111.8 million; liner sales were $26.4 million versus $47.3 million; and cover sales were $32.7 million versus $32.5 million.
- Gross margin declined 12.7 percentage points. The company cited lower volume and fixed-cost leverage, inflation and inventory right-sizing; lower stock-based compensation partly offset these factors.
- SG&A decreased to $33.1 million from $45.2 million, mainly due to lower non-cash stock-based compensation and cost-reduction actions. Interest expense rose to $10.8 million from $1.8 million, including a $4.9 million unrealized loss from interest-rate swap fair-value changes.
- Operating cash use improved from $57.5 million to $14.5 million. Working capital included a $55.3 million increase in receivables, partly offset by a $15.6 million inventory reduction and a $20.9 million increase in accounts payable. Investing activities used $9.9 million, primarily for property and equipment.
Financial position, liquidity and debt
At April 1, 2023, cash was $55.0 million, total current assets were $318.7 million and current liabilities were $106.3 million. Total debt was $360.5 million, including $48.0 million drawn on the $75.0 million revolving facility; reported additional revolver availability was $27.0 million. The term loan had $312.5 million outstanding before unamortized discount and issuance costs, a 9.96% effective interest rate including swaps, and a February 2029 maturity. The revolving facility matures in February 2027. The company reported compliance with credit-agreement covenants.
Management said cash, operating cash generation and revolver availability should fund operating and capital expenditure needs over the next 12 months, while cautioning that assumptions could prove incorrect. Debt is secured by substantially all assets of specified guarantor subsidiaries, and credit-agreement restrictions may limit dividends and other distributions.
Outlook, risks and unusual items
- No specific revenue, earnings or Adjusted EBITDA guidance is provided in the supplied filing text. Management expects macroeconomic challenges to weigh on consumer spending and U.S. new pool installations, and packaged-pool channel destocking to remain a headwind through at least the first half of fiscal 2023.
- Management views fiberglass conversion efforts and continued homeowner/dealer lead-generation activity as potential tailwinds. It is prioritizing completion of previously announced projects, including the Kingston, Ontario facility and acquired fiberglass manufacturing assets in Seminole, Oklahoma.
- A cost-reduction plan includes production and shift optimization, workforce reductions and closure of the Bossier City, Louisiana facility. The company expects approximately $12.0 million in fiscal 2023 annual operating expense savings.
- After quarter-end, the company’s stock-price decline may require goodwill impairment analysis and could result in a non-cash impairment charge in the quarter ended July 1, 2023 or a later period. Goodwill was $131.2 million at April 1, 2023.
- The company entered into a $161.0 million interest-rate swap effective May 18, 2023 through May 18, 2026. Management estimated that a 1% change in the effective rate, after swaps, would change annual interest expense by approximately $1.5 million.
- The company reported no claims or proceedings it believes would have a material adverse effect, and no material changes to previously disclosed risk factors. It stated that disclosure controls were effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether pool demand, dealer inventory destocking and sales volumes recover after the anticipated first-half headwind, and how those trends affect gross margin.
- Progress toward the stated $12.0 million savings target, including execution and costs associated with facility closure and workforce actions.
- Receivables collection and seasonal working-capital needs, given the quarter’s large receivables increase and negative operating cash flow.
- Debt costs, revolver availability, covenant compliance and the effects of interest-rate swaps and their fair-value volatility.
- Whether subsequent share-price performance triggers goodwill testing or impairment, and whether capital projects remain consistent with management’s liquidity expectations.
- Adjusted EBITDA is a non-GAAP measure; review its reconciliation and exclusions alongside GAAP results, cash flow and debt service requirements.