Latham Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Fiscal quarter ended September 30, 2023; year-to-date figures cover the three fiscal quarters ended September 30, 2023. Comparatives are the fiscal quarter and three fiscal quarters ended October 1, 2022. Latham designs, manufactures, and markets residential in-ground pools, covers, and liners in North America, Australia, and New Zealand.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Three quarters 2023 | Three quarters 2022 |
|---|---|---|---|---|
| Net sales | $160.8m | $189.4m | $475.6m | $587.8m |
| Gross profit / margin | $48.1m / 29.9% | $58.9m / 31.1% | $131.7m / 27.7% | $197.1m / 33.5% |
| Operating income | $18.1m | $25.0m | $25.1m | $50.4m |
| Net income (loss) | $6.2m | $11.9m | $(2.5)m | $13.3m |
| Net margin | 3.8% | 6.3% | (0.5)% | 2.3% |
| Adjusted EBITDA / margin | $36.1m / 22.4% | $42.3m / 22.3% | $78.1m / 16.4% | $138.9m / 23.6% |
Q3 sales fell 15.1%; management attributed the decline to a $32.8m volume reduction, partly offset by $4.2m of higher pricing. Year-to-date sales fell 19.1%, with volume down $125.9m and pricing contributing $13.7m. Pool sales accounted for most of the decline. Year-to-date gross margin contracted 5.8 percentage points, reflecting lower volume, higher-cost inventory sell-through, inventory right-sizing, and negative fixed-cost leverage; pricing, material-cost deflation, and productivity partially offset these pressures.
Q3 interest expense rose to $6.0m from $4.3m. Year-to-date interest expense was $21.3m versus $9.2m, mainly due to higher effective rates and interest-rate-swap fair-value movements. The year-to-date effective tax rate was 140.7%, reflecting, among other factors, stock-based compensation with no associated tax benefit.
Cash flow, debt, and liquidity
- Year-to-date operating cash flow was $88.1m, compared with $5.2m; inventory reduction contributed $61.7m, partly offset by a $28.7m increase in receivables.
- Investing activities used $28.3m, principally capital expenditures. Financing activities used $12.9m. Cash increased $45.5m to $78.1m.
- At September 30, cash was $78.1m; term-loan borrowings were reported at $301.6m, with $298.4m shown as long-term debt net of current maturities, discounts, and issuance costs. No revolver borrowings were outstanding; $75.0m was available.
- The term loan matures in February 2029; the revolving facility matures in February 2027. The term loan’s effective rate was 10.26%, including swaps. A 1 percentage-point rate change would affect annual net interest expense by approximately $1.4m. The company reported compliance with credit covenants.
Outlook, commentary, and notable items
- Management said macroeconomic pressure is weighing on consumer spending and pool demand, expects U.S. new in-ground residential pool installations to decline in 2023, and expects the decline to continue into 2024. Results are seasonal, with sales and income historically strongest in the second and third fiscal quarters.
- Management expects $18.0m of cost savings in 2023: $12.0m from a plan approved in late 2022 and $6.0m from plans initiated in 2023. The latter plans are expected to generate $12.0m of annualized savings, with the remaining $6.0m expected in 2024. The company initiated workforce reductions and facility closures; it recorded $1.8m of related Q3 costs and expects approximately $1.0m more in Q4.
- The company expects cash, operating cash flow, and revolver availability to fund operating and capital needs over the next 12 months, while cautioning that assumptions may prove incorrect. Capital investment remains focused on previously announced projects, including fiberglass capacity.
- Because of a decline in its stock price, the company planned a quantitative 2023 goodwill impairment assessment. It warned that this could result in a non-cash impairment charge in Q4. Goodwill was $130.9m and acquired intangible assets were $288.7m at quarter-end.
- The statute of limitations expired for the 2019 U.S. federal tax return after quarter-end; management expected a net tax benefit of $7.5m in Q4 from releasing the uncertain-tax-position liability, partly offset by a valuation allowance.
- A new CFO was appointed effective November 13, 2023. Management reported no legal proceedings believed likely to have a material adverse effect and no material changes to previously disclosed risk factors apart from the impairment risk.
Key facts for investors to verify
- Whether pool demand and sales volumes stabilize, particularly given management’s expectation of continued U.S. installation weakness into 2024.
- Whether gross margins recover as higher-cost inventory clears and cost reductions offset lower volumes and fixed-cost deleverage.
- The outcome of the quantitative goodwill test and any resulting impairment charge.
- Delivery and timing of the stated cost savings and remaining restructuring charges.
- Actual Q4 recognition of the expected $7.5m tax benefit, and the company’s ability to manage interest costs and remain within debt covenants.