Latham Group, Inc. — Q3 2022 Form 10-Q
Business and period: Latham designs, manufactures and markets residential in-ground pools, liners and covers in North America, Australia and New Zealand. This filing covers the fiscal quarter ended October 1, 2022 and the first three fiscal quarters of 2022; comparisons are with periods ended October 2, 2021. The business is seasonal, with sales and earnings generally highest in spring and summer.
Financial performance
| Metric | Q3 2022 | First three quarters 2022 |
|---|---|---|
| Net sales | $189.4 million, up 16.9% | $587.8 million, up 19.6% |
| Gross profit / margin | $58.9 million / 31.1%, versus 31.5% | $197.1 million / 33.5%, versus 32.9% |
| Operating income (loss) | $25.0 million, versus $(2.6) million | $50.4 million, versus $(25.3) million |
| Net income (loss) | $11.9 million, versus $(11.3) million; diluted EPS $0.10 | $13.3 million, versus $(56.4) million; diluted EPS $0.12 |
| Adjusted EBITDA and margin | $42.3 million / 22.3%, versus $36.1 million / 22.3% | $138.9 million / 23.6%, versus $112.5 million / 22.9% |
Quarterly sales growth came from a $27.6 million pricing benefit, partly offset by a $0.2 million volume decline. For the first three quarters, a $97.4 million pricing benefit more than offset a $1.2 million volume decline. Management said pricing actions addressed inflation, but did not fully protect quarterly gross margin. Nine-month margin improved partly due to lower non-cash stock compensation and inventory-build benefits. Adjusted EBITDA is a non-GAAP measure; the company cautions it should not be viewed in isolation or as a substitute for GAAP results.
Cash flow, balance sheet and debt
- For the first three quarters, operating cash flow was $5.2 million, down from $29.4 million. Receivables used $44.9 million and inventory used $59.1 million; management attributed the inventory increase to a deliberate build, higher costs and efforts to restore normal lead times.
- Investing activities used $29.4 million, including $29.0 million of capital expenditures, primarily for production capacity. Financing activities provided $12.6 million. Cash decreased by $13.3 million to $30.6 million.
- At October 1, cash was $30.6 million, current assets $314.2 million and current liabilities $115.9 million. Receivables were $103.0 million and inventory $166.4 million.
- Debt carrying value was $313.3 million, including $3.3 million current and $310.1 million long-term. The company had an undrawn $75 million revolving facility and reported covenant compliance. Its term loan matures in 2029; the disclosed effective interest rate was 7.45%, including the interest-rate swap.
- Total liabilities were $522.5 million. The company said available cash, operating cash generation and revolver availability should meet operating and capital needs over the next 12 months, while noting that its assumptions may prove inaccurate.
Material changes and unusual items
- The February 2022 refinancing replaced the prior debt with a $325 million term loan and $75 million revolver. The nine-month results include a $3.5 million debt-extinguishment loss and $11.4 million in underwriting fees tied to a January common-stock offering.
- Lower stock-based compensation materially reduced reported SG&A year over year; the nine-month comparison also reflects prior-year IPO-related and other unusual items. The company’s nine-month effective tax rate was 65.6%, primarily affected by stock-based compensation for which no tax benefit was available.
- The company adopted lease accounting Topic 842 in January 2022, recording operating lease right-of-use assets and liabilities; management said adoption did not materially affect operating results or cash flows.
- A $100 million share-repurchase program was authorized in May. The company had repurchased $15.0 million of shares earlier in the year, with approximately $85.0 million remaining; no shares were repurchased in the fiscal quarter ended October 1.
Outlook, commentary and risks
The filing provides no quantified sales or earnings guidance. Management reported continued wholesale-channel destocking of packaged pools, contributing to fourth-quarter volume declines, and said some homeowners were taking longer to decide and set installation dates amid macroeconomic uncertainty. On November 8, the company approved a cost-reduction plan that includes workforce reductions, production and shift changes, and closing its Bossier City, Louisiana facility in the first quarter of 2023. It expects approximately $2.0 million of severance and facility-related charges, recognized in Q4 2022 and Q1 2023, and approximately $12.0 million of annual operating expense savings in fiscal 2023.
Key risks include discretionary-demand weakness, higher interest rates and tighter consumer credit, inflation and the ability to pass through costs, raw-material availability and quality, weather and seasonality, foreign-exchange movements, and disruption at manufacturing facilities. The filing notes prior resin shortages and an April 2022 fire that destroyed a Texas manufacturing facility. Management said ongoing legal matters are not expected to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor facts to verify
- Whether distributor destocking and slower consumer decisions persist, and how they affect pool volumes and dealer demand.
- Whether pricing continues to offset material and labor inflation without further gross-margin pressure.
- Whether receivables and the substantial inventory build convert to cash as expected; operating cash flow was low despite reported profit.
- Whether the planned facility closure and workforce actions deliver the stated 2023 savings and remain within the estimated charges.
- Debt-service exposure to variable rates, covenant restrictions, and the availability of the undrawn revolver.
- The extent to which non-cash stock compensation and other adjustments affect comparisons between GAAP earnings and Adjusted EBITDA, and the drivers of the unusually high effective tax rate.