Latham Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Fiscal quarter ended July 3, 2021; comparisons are with the fiscal quarter ended June 27, 2020. Six-month figures compare the two fiscal quarters ended on those dates. Amounts below are in U.S. dollars.
Business context and results
Latham designs, manufactures and markets in-ground residential pools, liners and covers in North America, Australia and New Zealand. The business is seasonal, with sales and earnings typically highest in spring and summer. The 2021 results include GLI, acquired in October 2020; management said GLI contributed $18.2 million of Q2 sales and $34.1 million of six-month sales.
- Q2 revenue: $180.9 million, up 60.3% year over year, driven by $54.1 million of volume growth and $14.0 million of pricing. Sales rose across pools, liners and covers.
- Q2 profit and margins: Gross profit was $58.4 million and gross margin was 32.3%, down from 39.3%. Operating loss was $42.4 million and net loss was $53.6 million, compared with net income of $16.4 million. Net loss margin was 29.6%; diluted loss per share was $0.49.
- Q2 adjusted results: Adjusted EBITDA, a non-GAAP measure, was $42.8 million, up 29.5%; its margin declined to 23.7% from 29.3%.
- First six months: Revenue was $329.6 million, up 101.1%. Gross margin increased to 33.6% from 33.2%. Net loss was $45.1 million versus net income of $1.0 million; adjusted EBITDA was $76.4 million versus $31.2 million, with margin rising to 23.2% from 19.0%.
Cash flow, debt and liquidity
- Cash from operating activities was $14.2 million for the first six months, compared with $10.2 million a year earlier. Receivables increased $44.5 million and inventories increased $9.5 million, reflecting higher sales and inventory build.
- Capital expenditures were $13.0 million, primarily for production capacity. Cash was $76.5 million at July 3, 2021, versus $59.3 million at December 31, 2020.
- Debt was $237.3 million, all under the term loan; the $30 million revolving facility was undrawn. Management reported covenant compliance and said cash, operating cash generation and revolver availability should fund operating and capital needs for the next 12 months, subject to assumptions.
- The term loan matures June 2025 and carries a stated loan margin of 6.00% for Eurocurrency loans or 5.00% for base-rate loans, in addition to the applicable benchmark rate. The reported effective interest rate was 11.57% in Q2 2021.
Material changes, outlook and risks
- The April 2021 IPO generated $399.3 million in net proceeds. The company reported using $168.7 million to repay term and revolver borrowings, $216.7 million to repurchase shares from existing holders, and $13.9 million for general corporate purposes, including working capital.
- A January term-loan amendment added $175 million of borrowing; before the IPO, proceeds funded a $110.0 million dividend to Class A unitholders and a $64.9 million share repurchase. The IPO proceeds subsequently funded substantial debt repayment.
- Q2 selling, general and administrative expense included $75.5 million of stock-based compensation, including $49.0 million attributed to modification in connection with the reorganization. Management cited this, supply-chain constraints, raw-material inflation and higher growth-related rebates as factors weighing on Q2 margins. The tax provision did not reflect a tax benefit for $73.5 million of reorganization-related stock compensation.
- Management described strong consumer demand and continued dealer growth, but gave no specific quantified forward revenue or earnings guidance. It identified risks including supply and transportation availability and cost, weather, consumer demand and financing conditions, competition, labor availability, interest rates, foreign exchange and seasonality.
- The filing reported no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors. Management said disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- How much of sales growth is sustainable demand and pricing versus the acquired GLI business and seasonal timing.
- Whether supply constraints, input-cost inflation and rebates continue to pressure gross margin, and whether price increases offset those pressures.
- The size, timing and future expense impact of stock-based awards; reported GAAP losses differ substantially from adjusted EBITDA.
- Working-capital needs, particularly receivables and inventory, and whether operating cash flow can support the stated capital plan and debt service.
- Term-loan amortization, interest-rate exposure, covenant headroom and the assumptions behind management’s 12-month liquidity assessment.
- The filing’s differing share-count presentations around the reorganization and IPO, and the exact basis for comparisons with the prior-year period.