Latham Group, Inc. — Q1 2021 Form 10-Q
Business and period: Latham designs, manufactures and markets residential in-ground swimming pools, liners and covers in North America, Australia and New Zealand. This unaudited report covers the fiscal quarter ended April 3, 2021, compared with the quarter ended March 28, 2020. The business is seasonal, with sales and income typically highest in spring and summer.
Financial performance
| Metric | Q1 2021 | Comparable 2020 quarter |
|---|---|---|
| Net sales | $148.7 million | $51.1 million |
| Gross profit / margin | $52.4 million / 35.3% | $10.1 million / 19.8% |
| Operating income (loss) | $19.7 million | $(9.4) million |
| Net income (loss) | $8.5 million; $0.08 per share | $(15.5) million; $(0.14) per share |
| Adjusted EBITDA / margin | $33.5 million / 22.5% | $(1.9) million / (3.7)% |
| Operating cash flow | $(41.0) million | $(26.3) million |
| Capital expenditures | $4.6 million | $2.8 million |
Sales increased $97.6 million, or 190.9%, reflecting $89.7 million of volume growth and $7.9 million of pricing. Management attributed $15.9 million of the volume increase to including a full quarter of GL International (GLI), acquired in October 2020. Sales growth by product was $64.2 million for in-ground pools, $20.4 million for liners and $13.0 million for covers.
Gross margin improved by 15.5 percentage points, which management attributed principally to better fixed-cost utilization, price increases and favorable in-ground pool mix, partly offset by raw-material inflation. SG&A rose to $27.2 million from $15.4 million, but declined as a share of sales. The increase included IPO-related professional fees, higher staffing and incentive costs, and stock-based compensation. Interest expense increased to $9.1 million from $5.3 million, primarily due to higher debt and financing costs.
Financial position, debt and liquidity
- At April 3, 2021, cash was $19.9 million, total assets were $675.1 million and total stockholders’ equity was $115.4 million.
- Total debt was $406.0 million, including $397.4 million of term-loan principal and $16.0 million drawn on the revolver, less $7.4 million of unamortized discount and issuance costs. The term loan’s effective interest rate was 9.36%; its maturity was June 2025. Debt is secured by substantially all assets of guarantor subsidiaries and is subject to financial and other covenants.
- Operating cash use reflected a $61.0 million increase in trade receivables and a $9.2 million increase in inventories, as sales grew and the company built inventory for demand. Management said working capital needs fluctuate seasonally.
- The company reported compliance with its debt covenants at quarter end. The $30 million revolver had $14 million of availability at that date.
- After quarter end, the April 27 IPO generated $400.1 million in net proceeds. The company used $152.7 million to repay term debt, $16.0 million to repay the revolver, $216.7 million to repurchase shares from existing holders and $14.7 million for general corporate purposes, including working capital. These transactions materially changed the post-quarter debt and cash position.
Material changes, outlook and risks
- The company swung from a net loss to net income and reported substantially higher sales and Adjusted EBITDA than in the comparable quarter. Adjusted EBITDA is a non-GAAP measure; the filing cautions that it excludes, among other things, interest, taxes, working-capital needs and capital expenditures and may not be comparable across companies.
- Before the IPO, the January 2021 term-loan amendment added $175 million of borrowing. Proceeds were used to repay a $64.9 million related-party note and pay a $110.0 million dividend to the parent. This increased debt and interest obligations during the quarter.
- No specific earnings or revenue guidance is provided. Management said it expects IPO proceeds remaining for corporate purposes, cash, operating cash generation and revolver availability to fund operating and capital expenditure needs for the next 12 months, while noting the estimate depends on assumptions that may prove incorrect.
- Management’s outlook remains exposed to uncertain COVID-19 effects, consumer demand and access to financing, weather, raw-material cost and availability, supplier and transportation capacity, competition, labor availability, foreign exchange, cybersecurity and regulatory risks. The company said pandemic effects in 2021 were difficult to predict and could vary by location.
- Unusual or notable items include $2.9 million of non-capitalizable IPO costs in the quarter and a $1.1 million charge related to modification of an employee’s profits-interest awards. A later-period note reports a $49.5 million stock-based compensation charge tied to the IPO reorganization, and a separate $1.6 million charge for accelerated vesting in May 2021.
- The company holds a 28% equity-method investment in Premier Pools & Spas and has a 10-year exclusive supply agreement with it and related franchisees, subject to rebates. It recorded $0.2 million of equity-method earnings in the quarter.
- The filing reports no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors. Management judged disclosure controls effective at a reasonable-assurance level.
Key facts for investors to verify
- How much of the exceptional sales growth reflects sustained demand versus seasonality, the prior-year comparison and GLI’s inclusion?
- Whether gross margin can hold up as raw-material inflation, pricing and product mix change.
- Receivables, inventory and operating cash conversion, particularly as seasonal sales and working-capital needs evolve.
- The post-IPO debt balance, interest burden, scheduled principal repayments and continued covenant compliance.
- The extent and timing of stock-based compensation from the reorganization and IPO-related awards, including the later-period charges disclosed.
- Whether management’s 12-month liquidity assessment remains adequate given capital spending plans, demand uncertainty and supplier constraints.