Latham Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Fiscal quarter and two fiscal quarters ended July 1, 2023; comparatives are the quarter and first six months ended July 2, 2022. Unaudited. Amounts below are USD unless stated otherwise. Latham designs, manufactures, and markets in-ground pools, liners, and covers.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $177.1m | $206.8m | $314.8m | $398.4m |
| Gross profit / margin | $50.2m / 28.4% | $67.6m / 32.7% | $83.6m / 26.6% | $138.3m / 34.7% |
| Operating income | $13.4m | $18.6m | $7.1m | $25.4m |
| Net income (loss) | $5.7m | $4.3m | ($8.7m) | $1.5m |
| Adjusted EBITDA (non-GAAP) | $31.0m | $48.7m | $42.0m | $96.6m |
| Adjusted EBITDA margin | 17.5% | 23.5% | 13.3% | 24.2% |
Q2 diluted EPS was $0.05 versus $0.04. First-half diluted loss per share was $0.08 versus earnings of $0.01. Q2 sales fell 14.3%; lower volume reduced sales by $35.9m, partly offset by $6.2m from higher pricing. First-half sales fell 21.0%; a $93.1m volume decline was partly offset by $9.5m of pricing. In-ground pools drove most of the first-half decline; liners and covers also declined.
Q2 net income increased despite lower sales, while gross margin and Adjusted EBITDA declined. Management attributed lower gross margin to reduced sales, higher-cost inventory sell-through, inflation, and inventory right-sizing, partly offset in Q2 by pricing and cost reductions. First-half results also reflected negative fixed-cost leverage. SG&A fell 27.3% in Q2, primarily due to lower stock-based compensation, incentive accruals, and cost-saving actions. First-half interest expense rose to $15.3m from $4.9m, reflecting higher rates and unfavorable interest-rate-swap fair-value changes; the prior period included a $3.5m debt-extinguishment loss and $11.4m of stock-offering underwriting fees.
Cash flow, liquidity, and debt
- First-half operating cash flow was $36.3m, versus cash used of $15.1m in the prior-year period. Inventory reduction contributed $38.9m; receivables growth used $37.3m of cash.
- Investing cash outflow was $23.4m, primarily capital expenditures for production capacity, particularly fiberglass pools. Financing cash outflow was $1.9m. Cash increased $10.5m to $43.1m.
- At July 1, 2023, term debt was $312.0m gross ($308.8m long-term, net of discounts and current portion); no revolver borrowings were outstanding, and $75.0m was available. The term loan matures in 2029; the revolver matures in 2027. The effective term-loan interest rate, including swaps, was 10.23%.
- Working capital was $174.2m, based on current assets of $262.1m and current liabilities of $87.8m. Cash was $43.1m. Management said cash, operating cash generation, and revolver availability should cover operating and capital needs over the next 12 months, while cautioning that assumptions may prove incorrect. The company reported covenant compliance.
Outlook, risks, and notable items
- Management said macroeconomic challenges are weighing on consumer spending and demand, contributing to lower U.S. new in-ground pool installations in 2023. It cited the pool market’s return to pre-2020 seasonality and noted that demand and weather are seasonal factors.
- The company expects $12m of fiscal 2023 operating-expense savings from its 2022 cost-reduction plan and an additional $12m of annualized savings from 2023 actions; it expects $6m of the latter in 2023, for total 2023 cost savings of $18m from both plans. These are management expectations, not a formal earnings forecast.
- Management is prioritizing completion of previously announced investments, including the Kingston, Ontario facility and acquired fiberglass manufacturing assets in Seminole, Oklahoma. First-half capital expenditures were $23.4m.
- Interest-rate exposure remains material: a 1 percentage-point change in the effective rate would change annual interest expense by approximately $1.5m. A swap fixes the SOFR borrowing rate on $161m through May 2026; it is not designated as an accounting hedge.
- Trade receivables rose to $81.8m from $48.8m at year-end; first-half bad-debt expense was $4.4m versus $1.2m. The filing attributes receivables growth primarily to sales timing. Warranty reserve was $3.4m at period-end.
- The company reported no current legal proceedings believed likely to have a material adverse effect and no material changes to previously disclosed risk factors. It identified no material impact from the Inflation Reduction Act to date and did not expect one at that time.
Investor verification points
- Verify whether sales volumes and consumer demand stabilize, and how product mix and pricing affect revenue.
- Track gross margin recovery, inventory costs, fixed-cost absorption, and delivery of the stated cost savings.
- Assess receivables quality and collection timing given the increase in receivables and bad-debt expense.
- Monitor interest expense, swap fair-value volatility, debt service, covenant headroom, and available liquidity.
- Compare capital spending and facility-project progress with cash generation and management’s liquidity expectations.
- Interpret Adjusted EBITDA alongside GAAP results: the company’s measure excludes items including stock compensation, restructuring, and other costs, and is not directly comparable across all companies.