Latham Group, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and two fiscal quarters ended July 2, 2022; comparisons are to periods ended July 3, 2021. Financial statements are unaudited. Latham designs, manufactures and markets residential swimming pools, liners and covers in North America, Australia and New Zealand.
Key financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $206.8m | $180.9m | $398.4m | $329.6m |
| Gross profit / margin | $67.6m / 32.7% | $58.4m / 32.3% | $138.3m / 34.7% | $110.8m / 33.6% |
| Operating income (loss) | $18.6m | $(42.4)m | $25.4m | $(22.7)m |
| Net income (loss) | $4.3m | $(53.6)m | $1.5m | $(45.1)m |
| Adjusted EBITDA and margin | $48.7m / 23.5% | $42.8m / 23.7% | $96.6m / 24.2% | $76.4m / 23.2% |
Adjusted EBITDA is a non-GAAP measure; the company cautions it excludes items including interest, taxes, stock compensation and capital requirements, and is not a substitute for GAAP results.
- Sales and margins: Q2 sales rose 14.3%; first-half sales rose 20.9%. Management attributed the increases primarily to pricing actions: pricing added $34.2m in Q2 and $69.7m in the first half, while volume declined $8.3m in Q2 and $0.9m for the first half. Q2 volume was affected by distributor destocking and unseasonable weather. First-half sales growth by product was $22.3m for in-ground pools, $25.8m for liners and $20.7m for covers.
- Profitability: Gross margin improved year over year in both periods, reflecting pricing, inventory-build benefits and lower non-cash stock compensation, partly offset by inflation and fixed-cost investment. Net income comparisons also reflect sharply lower stock-based compensation than in the 2021 IPO period. Q2 SG&A fell $53.5m, primarily because stock compensation fell $55.3m. First-half SG&A fell $35.4m, while the period included $11.4m of underwriting fees for the January 2022 stock offering.
- Cash flow and investment: First-half operating cash flow was negative $15.1m, versus positive $14.1m a year earlier. Receivables and inventory increases used $45.7m and $53.2m, respectively; management said inventory was intentionally built partly to reduce supply-interruption risk. Capital expenditures were $16.8m, primarily for production capacity. Cash declined $18.7m to $25.2m.
- Debt and liquidity: At July 2, cash was $25.2m, total debt carrying value was $313.7m, and the $75m revolving facility was undrawn. The term loan matures in 2029; the revolver matures in 2027. The term loan’s effective rate was 5.95%, including the interest-rate swap. The company reported covenant compliance and said existing cash, operating cash generation and revolver availability should be adequate for its needs over the next 12 months, while noting estimates depend on assumptions.
- Balance sheet: Inventories were $161.9m, up from $109.6m at year-end 2021; trade receivables were $104.7m, up from $60.8m. Operating lease liabilities totaled $36.2m following adoption of the lease accounting standard in January 2022.
Material changes, outlook and risks
- In February 2022, Latham refinanced its prior debt with a $325m term loan and $75m revolving facility. The first half included a $3.5m debt-extinguishment loss.
- The company authorized a $100m share repurchase program and repurchased 2.03m shares for $15m during Q2; approximately $85m remained authorized. The January stock offering generated $257.7m, which was used to purchase shares from existing stockholders.
- Management provided no specific financial guidance in the supplied filing text. It cited ongoing investment in facilities, technology and fiberglass capacity, and noted results are seasonal, with sales and income historically highest in spring and summer.
- Key risks include resin and other raw-material shortages and cost inflation, employee-wage inflation, supply-chain and transportation disruptions, weaker demand as prices rise or consumer financing becomes more expensive, weather, and broader economic uncertainty. Management reported that an April 2022 fire caused a total loss of the Texas manufacturing facility; $1.5m of related costs were excluded from Adjusted EBITDA. The company said legal matters were not expected to have a material adverse effect.
- The effective tax rate was unusually high at 71.9% in Q2 and 91.8% for the first half, primarily due to stock compensation for which no associated tax benefit was recorded.
Important facts for investors to verify
- Whether pricing increases can continue to offset raw-material and wage inflation without materially weakening demand, and whether raw-material availability constrains fiberglass production.
- Whether inventory, receivables and seasonal working-capital needs convert to operating cash flow in subsequent periods.
- The outlook for production recovery and costs following the Odessa facility fire, and the timing and return on fiberglass-capacity investments.
- The reported Q2 repurchase average price of $7.40 per share alongside $15.0m spent for 2,026,231 shares; confirm the reported figures and trade-date accounting.
- Debt-service capacity, interest-rate exposure and compliance with credit-facility covenants as rates and operating conditions change.
- The sustainability of GAAP profitability, given the low first-half net margin and substantial non-cash and other adjustments in Adjusted EBITDA.