Latham Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Fiscal quarter ended October 2, 2021; year-to-date results cover the three fiscal quarters ended that date. Comparisons are with the fiscal quarter and three fiscal quarters ended September 26, 2020. Amounts below are in millions unless noted.
Business context
Latham designs, manufactures and markets residential in-ground swimming pools, liners and covers in North America, Australia and New Zealand. It reports one operating segment. The filing describes demand as seasonal, typically strongest in spring and summer, and notes its April 2021 IPO and related corporate reorganization.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | First three quarters 2021 | First three quarters 2020 |
|---|---|---|---|---|
| Net sales | $162.0 | $127.5 | $491.6 | $291.5 |
| Gross profit / margin | $51.0 / 31.5% | $50.3 / 39.5% | $161.8 / 32.9% | $104.8 / 35.9% |
| Operating income (loss) | $(2.6) | $26.2 | $(25.3) | $41.7 |
| Net income (loss) / diluted EPS | $(11.3) / $(0.10) | $17.7 / $0.18 | $(56.4) / $(0.51) | $18.7 / $0.19 |
| Adjusted EBITDA / margin | $36.1 / 22.3% | $35.2 / 27.6% | $112.5 / 22.9% | $66.4 / 22.8% |
Q3 sales rose 27.0%, attributed to $19.0 million of volume and $15.5 million of pricing. Year-to-date sales rose 68.7%, attributed to $162.7 million of volume and $37.4 million of pricing; the acquired GLI business contributed $60.2 million of year-to-date sales. Covers and liners grew substantially, while Q3 in-ground pool volume was constrained by raw-material shortages.
For the first three fiscal quarters, operating cash flow was $29.4 million, versus $55.1 million in 2020; investing cash outflow was $12.0 million, including $19.2 million of capital expenditures. Cash increased by $31.6 million to $90.9 million. At October 2, 2021, current assets were $263.7 million and current liabilities were $114.7 million. Long-term debt, net of discount and current portion, was $220.0 million; total debt carrying value was $234.2 million. The $30.0 million revolver was undrawn.
Material changes and unusual items
- Despite higher sales, Q3 gross margin fell 8.0 percentage points year over year. Management cited an adverse mix away from in-ground pools, raw-material inflation and shortages, manufacturing inefficiencies, and a timing gap between price increases and higher costs. Year-to-date gross margin declined 3.0 percentage points.
- Net results included substantial stock-based compensation following the IPO reorganization: $27.6 million for Q3 and $104.6 million year to date. The company cited $49.0 million of year-to-date expense related to the reorganization modification. Management said $98.9 million of year-to-date reorganization-related compensation expense had no associated tax benefit, contributing to an unusual effective tax rate.
- The IPO generated $399.3 million in net proceeds. Uses included $152.7 million to repay term debt, $16.0 million to repay the revolver, $216.7 million to repurchase shares, and general corporate purposes. Earlier in 2021, the company borrowed $175.0 million under a term-loan amendment and used proceeds for a $110.0 million distribution to Class A unitholders and $64.9 million of share repurchases.
- Q3 other income included a $3.9 million gain from selling part of the Premier Pools & Spas investment. The company retained a 20.1% interest and an exclusive supply agreement with the network.
- Year-to-date working-capital demands included increases of $43.1 million in receivables and $16.1 million in inventory. The company also reported $19.2 million of capital expenditures, primarily to expand production capacity.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided. Management stated that cash, expected operating cash generation and revolver availability should fund operating expenses and capital expenditures for the next 12 months, while cautioning that assumptions may prove incorrect. It described a multi-year investment plan for facilities, technology, systems and fiberglass capacity. The company was in compliance with debt covenants at quarter-end.
Risks highlighted include raw-material supply and cost, transportation availability and cost, weather and seasonality, consumer demand and financing conditions, competition, execution of growth plans, foreign currency and international operations, product quality, cybersecurity, regulation and litigation. The company said it was not party to legal proceedings expected to have a material adverse effect and reported no material changes to previously disclosed risk factors. Its term debt matures June 18, 2025, is secured by substantially all assets of guarantors, and carries variable-rate exposure; an interest-rate swap fixes LIBOR on a $200.0 million notional amount through May 2023.
Important facts for investors to verify
- Whether raw-material constraints, input-cost inflation and the price/cost timing gap persist, and how they affect gross margin and fiberglass pool volumes.
- The scale and duration of stock-based compensation, its effects on reported earnings and dilution, and the extent to which Adjusted EBITDA adjustments are appropriate; Adjusted EBITDA is a non-GAAP measure.
- Cash conversion and working-capital trends, particularly receivables and inventories, alongside planned capacity-related capital spending.
- Debt terms, required principal payments, interest-rate exposure, covenant compliance and the availability of the undrawn revolver.
- The contribution and economics of GLI and the Premier Pools & Spas investment and supply agreement, including applicable rebates.
- Management’s 12-month liquidity assessment and the sensitivity of demand to seasonality, weather, consumer financing and broader economic conditions.