The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with other sections of this Annual
Report, including “Item 1. Business,” and our audited Consolidated Financial
Statements and related Notes for the three years ended December 31, 2021, 2020
and 2019, included elsewhere in this Annual Report.
Cautionary Note Regarding Forward-Looking Statements
This discussion contains forward-looking statements that involve risk,
assumptions and uncertainties, such as statements of our plans, objectives,
expectations, intentions and forecasts. These forward-looking statements are
generally identified by the use of forward-looking terminology, including the
terms “anticipate,” “believe,” “confident,” “continue,” “could,” “estimate,”
“expect,” “intend,” “likely,” “may,” “plan,” “possible,” “potential,” “predict,”
“project,” “should,” “target,” “will,” “would” and, in each case, their negative
or other various or comparable terminology. Our actual results and the timing of
selected events could differ materially from those discussed in these
forward-looking statements as a result of several factors, including those set
forth under the section of this Annual Report on Form 10-K titled “Risk Factors”
and elsewhere in this Annual Report on Form 10-K. These statements involve known
and unknown risks, uncertainties and other important factors that may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking statements. Important factors that could cause our results to
vary from expectations include, but are not limited to secular shifts in
consumer demand for swimming pools and spending on outdoor living spaces; slow
pace of material conversion from concrete pools to fiberglass pools in the pool
industry; general economic conditions and uncertainties affecting markets in
which we operate and economic volatility that could adversely impact our
business, including the COVID-19 pandemic; changes in access to consumer credit
or increases in interest rates impacting consumers’ ability to finance their
purchases of pools; the impact of weather on our business; our ability to
attract new customers and retain existing customers; our ability to sustain
further growth and to manage it effectively; the ability of our suppliers to
continue to deliver the quantity or quality of materials sufficient to meet our
needs to manufacture our products; the availability and cost of third-party
transportation services for our products and raw materials; product quality
issues; our ability to successfully defend litigation brought against us; our
ability to adequately obtain, maintain, protect and enforce our intellectual
property and proprietary rights and claims of intellectual property and
proprietary right infringement, misappropriation or other violation by
competitors and third parties; failure to hire and retain qualified employees
and personnel; exposure to risks associated with international sales and
operations, including foreign currency exchange rates, corruption and
instability; security breaches, cyber-attacks and other interruptions to our and
our third-party service providers’ technological and physical infrastructures;
catastrophic events, including war, terrorism and other international conflicts,
public health issues or natural catastrophes and accidents; risk of increased
regulation of our operations, particularly related to environmental laws;
fluctuations in our operating results; inability to compete successfully against
current and future competitors; and other risks, uncertainties and factors set
forth in this Annual Report on Form 10-K, including those set forth under
section titled “Risk Factors.” These forward-looking statements reflect our
views with respect to future events as of the date of this Annual Report on
Form 10-K and are based on assumptions and subject to risks and uncertainties.
Given these uncertainties, you should not place undue reliance on these
forward-looking statements. These forward-looking statements represent our
estimates and assumptions only as of the date of this Annual Report on Form 10-K
and, except as required by law, we undertake no obligation to update or review
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise after the date of this Annual Report on Form 10-K. We
anticipate that subsequent events and developments will cause our views to
change. You should read this Annual Report on Form 10-K completely and with the
understanding that our actual future results may be materially different from
what we expect. Our forward-looking statements do not reflect the potential
impact of any future acquisitions, merger, dispositions, joint ventures or
investments we may undertake. We qualify all of our forward-looking statements
by these cautionary statements.
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Overview
We are the largest designer, manufacturer and marketer of in-ground residential
swimming pools in North America, Australia and New Zealand. We hold the #1
market position in North America in every product category in which we compete.
We believe that we are the most sought-after brand in the pool industry and the
only pool company that has established a direct relationship with the homeowner.
We are Latham, The Pool CompanyTM.
With an operating history that spans over 65 years, we offer the industry’s
broadest portfolio of pools and related products, including in-ground swimming
pools, pool liners and pool covers.
We have a heritage of innovation. In an industry that has traditionally marketed
on a business-to-business basis (pool manufacturer to dealer), we pioneered the
first “direct-to-homeowner” digital and social marketing strategy that has
transformed the homeowner’s purchase journey. Through this marketing strategy,
we are able to create demand for our pools and generate and provide high
quality, purchase-ready consumer leads to our dealer partners.
Partnership with our dealers is integral to our collective success, and we have
enjoyed long-tenured relationships averaging over 14 years. We support our
dealer network with business development tools, co-branded marketing programs
and in-house training, as well as an operations platform consisting of over
2,300 employees across over 30 facilities.
The full resources of our company are dedicated to designing and manufacturing
high-quality pool products with the homeowner in mind, and positioning ourselves
as a value-added partner to our dealers. As a result of this approach, 2021
marked our 12th consecutive year of net sales growth, Adjusted EBITDA growth and
Adjusted EBITDA margin expansion. Net income does not adhere to this trend.
We conduct our business as one operating and reportable segment that designs,
manufactures and markets in-ground swimming pools, liners and covers.
Recent Developments
Highlights for the year ended December 31, 2021
Increase in net sales of 56.3%, or $227.1 million, to $630.5 million for
? the year ended December 31, 2021, compared to $403.4 million for the year ended
December 31, 2020.
Increase in net loss of $78.3 million, to $62.3 million for the year ended
? December 31, 2021, compared to a net income of $16.0 million for the year ended
December 31, 2020, representing a 9.9% net loss margin for the year ended
December 31, 2021.
Increase in Adjusted EBITDA (as defined below) of $56.0 million, to $139.8
? million for the year ended December 31, 2021, compared to $83.8 million for
the year ended December 31, 2020.
Debt Refinancing
On February 23, 2022, we entered into an agreement (the “New Credit Agreement”)
with Barclays Bank PLC, which provides a senior secured multicurrency revolving
line of credit (the “New Revolving Credit Facility”) in an initial principal
amount of $75.0 million and a U.S. Dollar senior secured term loan facility (the
“New Term Loan Facility”) in an initial principal amount of $325.0 million. On
the closing date, proceeds under the agreement were used to repay and replace
$294.0 million under, and terminate, the Credit Agreement and for general
corporate purposes.
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Initial Public Offering
On April 27, 2021, we completed our initial public offering (the “IPO”) in which
we sold 23,000,000 shares of common stock, inclusive of 3,000,000 shares sold by
us pursuant to the full exercise of the underwriters’ option to purchase
additional shares. The aggregate net proceeds received by us from the IPO were
$399.3 million, after deducting underwriting discounts and commissions and other
offering costs. We used the net proceeds to (i) pay down $152.7 million of the
Amended Term Loan (as defined below) under the Credit Agreement (as defined
below), (ii) repay the $16.0 million outstanding on the Revolving Credit
Facility (as defined below), (iii) repurchase 12,264,438 shares of common stock
from certain existing shareholders for $216.7 million and (iv) fund general
corporate requirements, including working capital, for $13.9 million.
Contemporaneously with the pricing of the IPO, on April 22, 2021, we put in
place our Omnibus Incentive Plan, pursuant to which we granted to certain of our
employees restricted stock awards, restricted stock units and option awards
(the
“Omnibus Plan”).
Secondary Offering
On January 11, 2022, we completed an offering of 13,800,000 shares of common
stock, including the exercise in full by the underwriters of their option to
purchase up to 1,800,000 additional shares of common stock, at a public offering
price of $19.50 per share. All of the net proceeds from this offering were used
to purchase 13,800,000 shares of our common stock from certain of our
stockholders. In connection with the offering we incurred approximately $12.9
million in expenses, including underwriter fees.
Reorganization
Prior to the closing of the IPO, our parent entity, Latham Investment Holdings,
LP (“Parent”) merged with and into Latham Group, Inc., with Latham Group, Inc.
surviving the merger (the “Reorganization”). The purpose of the Reorganization
was to reorganize our structure so that our existing investors would own only
common stock rather than limited partnership interests in our Parent. In
connection with the Reorganization, 194,207,115 Class A units of our Parent
(“Class A units”) were converted into 97,187,596 shares of our common stock and
26,158,894 Class B units of our Parent were converted into 4,145,987 shares of
common stock and 8,340,126 shares of restricted stock. The Reorganization was
accounted for as a transaction between entities under common control and
retrospectively applied.
Stock Split
On April 13, 2021, our Board of Directors approved a 109,673.709-for-one stock
split of our common stock, par value $0.0001. Accordingly, all share and per
share data for all periods presented have been adjusted retroactively to reflect
the impact of the amended certificate of incorporation and the stock split.
Charter Amendment
On April 13, 2021, our certificate of incorporation was amended, which amended
and restated certain terms of the certificate of incorporation. Under the
amended certificate of incorporation, we had the authority to issue 500,000,000
shares of common stock, par value $0.0001 per share.
On April 22, 2021, as part of the Reorganization, our certificate of
incorporation was further amended and restated to, among other things, increase
the authorized shares to 1,000,000,000, of which 900,000,000 are shares of
common stock, par value $0.0001 per share and 100,000,000 are shares of
preferred stock, par value 0.0001 per share.
Key Factors Affecting our Performance
Our results of operations and financial condition are affected by the following
factors, which reflect our operating philosophy and focus on designing,
manufacturing and marketing high quality and innovative pools and pool covers
for the in-ground swimming pool market.
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Volume of Products Sold
Our net sales depend primarily on the volume of products we sell during any
given period, and volume is affected by the following items, among others:
Sales, distribution and marketing: While we have traditionally relied on our
dealers and distributors to raise awareness of our products, we pioneered the
? first “direct-to-homeowner” digital and social marketing strategy that has
transformed the homeowner’s purchase journey. Through this marketing strategy,
we are able to create demand for our pools and generate and provide high
quality, purchase-ready consumer leads to our dealer partners.
In order to strengthen our relationship with our loyal dealer partners, we have
implemented “Latham Grand,” a key dealer strategy whereby we have secured
exclusivity from over 250 of our largest dealers in North America, which also
includes the nation’s largest franchised dealer network, Premier Pools & Spas.
We also have a strong distribution network as a result of over 450 distributor
branch locations that represent our products. Through our significant
investments in partnerships with dealers and distributors and our
consumer-oriented marketing efforts, we have created both a “push and pull”
demand dynamic for our products in the marketplace. We invest in our exclusive
dealers through localized marketing spend, co-branding opportunities, tailored
offerings and priority lead generation. We also provide our dealers with
enhanced product literature, in-store display samples and other initiatives to
drive sales. We have directed a significant portion of our advertising spend to
digital channels, including social media and search advertising. Our improved
digital marketing engine has the ability to strategically target market spend
and generate leads in territories where dealers have capacity to install more
pools, markets where we are underpenetrated, or simply into the largest
in-ground swimming pool markets. Our volume of product sales in a given period
will be impacted by changes in our distribution platform, and by our ability to
generate leads for our dealers.
Material conversion: We have continued to increase sales of our products
through our focused efforts to drive material conversion and market penetration
of our products, specifically our fiberglass pools, which continue to take
market share from traditional concrete pools and enable dramatically improved
economics for consumers, dealers and for pool installers. We believe that this
will be a long-term trend toward material conversion from traditional concrete
? pools. We believe that our fiberglass pools offer a compelling value
proposition due to their lower up-front and lifecycle cost of ownership, less
maintenance, higher quality, lower usage of harsh chemicals, quicker
installation and more convenient experience, compared to products manufactured
from traditional materials, and we anticipate that sales of our fiberglass pool
products will continue to benefit from material conversion. The success of our
efforts to drive conversion during any given period will impact the volume of
our products sold during that period.
Product Innovation: We continue to develop and introduce innovative products
to accelerate material conversion and expand our markets. The continuous
evolution and expansion of our product portfolio is critical to our sales
growth, expanding market share and overall success. Our broad product offering
allows dealers and distributors to offer consumers a wide variety of innovative
pool shapes, depths and lengths. Specifically, our innovative fiberglass pool
offering employs the most durable components, consisting of a carbon fiber,
Kevlar and ceramic fiberglass build. Our use of innovative technology and
? premium materials result in long-lasting products that not only require lower
up-front costs, but also save homeowners time and money from continuous
maintenance throughout the product lifecycle. We believe that new products will
enhance our ability to compete with traditional materials at a variety of price
points, and we expect to continue to devote significant resources to developing
innovative new products. The volume of our products sold during a given period
will depend in part on our successfully introducing new products that generate
additional demand, as well as the extent to which new products may impact our
sales of existing products.
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Economic conditions: Demand for our products is affected by a number of
economic factors impacting our customers and consumers. The in-ground swimming
pool market depends in part on home equity financing, and accordingly, the
level of equity in homes will affect consumers’ ability to obtain a home equity
line of credit and engage in backyard renovations that would result in
? purchases of our products. Demand for our products is also affected by the
level of interest rates and the availability of credit, consumer confidence and
spending, housing affordability, demographic trends, employment levels and
other macroeconomic factors that may influence the extent to which consumers
engage in renovations to their backyard, including pool installation projects
to enhance the outdoor living spaces of their homes.
Seasonality and weather: Although we generally have demand for our products
throughout the year, our business is seasonal, and weather is one of the
principal external factors affecting the business. In general, net sales and
net income are highest during spring and summer, representing the peak months
of swimming pool use, pool installation and remodeling and repair activities.
? Calendar years having severe weather also may play a role in affecting sales
growth, as particularly rainy or cold years tend to slow the volume of sales,
including as a result of complicating conditions for pool installations.
Catastrophic events, such as hurricanes, tornadoes, and earthquakes, can cause
interruptions to our operations and these scenarios are at least partially
mitigated by our geographic diversity, both across the United States and
through international markets.
Pricing
In general, our products are priced to be competitive in the in-ground swimming
pool market and to keep in line with changes in our input costs.
Cost and Availability of Materials
Raw material costs, including costs of PVC, galvanized steel, fiberglass,
aluminum, carbon fiber, Kevlar fiber, various resins, gelcoat, polypropylene
fabric, ceramic and roving, represent a majority of our cost of sales. Our
contracts with key suppliers are typically negotiated on an annual basis. The
cost of the raw materials used in our manufacturing processes is subject to
volatility and has been affected by changes in supply and demand. We have no
fixed-price contracts with any of our major vendors. We have not entered into
hedges of our raw material costs at this time, but we may choose to enter into
such hedges in the future.
Prices for spot market purchases are negotiated on a continuous basis in line
with current market prices. Other than occasional strategic purchases of larger
quantities of certain raw materials, we generally buy materials on an as-needed
basis. Changes in prices of our raw materials have a direct impact on our cost
of sales.
In the second and third quarters of 2021, we experienced supply chain
disruptions, especially for the resin used in making fiberglass pools. Due to
the supply chain disruption, we experienced manufacturing inefficiencies and
fixed cost deleverage, as well as lower margins due to lower fiberglass pool
sales. Despite strong demand for our products, we estimate that the resin
shortfall limited our North American fiberglass production to just 58% of our
capacity in 2021.
We have worked with our existing suppliers to increase their shipments to us and
have secured additional supplies of resin during the fourth quarter of 2021,
with additional sources expected to begin supplying our operations in the first
quarter of 2022. We have also increased our warehousing capacity for key raw
materials to help mitigate any future supply issues. We believe that our efforts
to secure our resin supply will allow us to ramp up production to match our
order growth and to improve our sales mix through higher fiberglass pool sales.
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We have also experienced raw material inflation in 2021. Although we have taken
pricing action to minimize the impact on our profitability, we chose not to
raise pricing of our fiberglass pools order backlog to protect our long-term
relationships with our dealer partners, with the pricing increases applying only
to new orders. This strategic decision resulted in a timing gap between raw
material inflation and pricing actions that impacted our profitability in the
year ended December 31, 2021. The gap between raw material inflation and pricing
actions was a leading driver of gross margin compression in the year ended
December 31, 2021. We expect that the gap will lessen as we work through our
order backlog and the pricing action that we have taken will reverse the gross
margin compression due to a higher gross margin from the sale of fiberglass
pools, and an increase in gross margin from a higher mix of sales from
fiberglass pools.
Acquisitions and Partnerships
On May 31, 2019, we acquired Narellan, a fiberglass pool manufacturer based in
Australia with existing operations in Australia, New Zealand and Canada. The
acquisition expanded our market share giving us a broader geographical footprint
and an increase in dealer and franchise relationships.
On October 22, 2020, we acquired GLI, which specializes in manufacturing custom
vinyl pool liners and safety covers. The acquisition expanded our liner and
safety cover product offerings.
On November 24, 2021, we acquired Radiant Pools, a manufacturer of vinyl-lined
and aluminum-walled swimming pools. The acquisition expands our product
portfolio into vinyl-lined and aluminum-walled swimming pools.
The consolidated financial statements include the results of operations of the
Narellan, GLI and Radiant acquisitions since their respective acquisition dates.
The total purchase consideration was allocated to the assets acquired and
liabilities assumed at their estimated fair values as of the date of
acquisition, as determined by management. The excess of the purchase price over
the amounts allocated to assets acquired and liabilities assumed has been
recorded as goodwill.
On October 30, 2020, we entered into a long-term strategic partnership with and
acquired a 28% equity interest in Premier Pools & Spas, a pool builder focusing
on in-ground swimming pools. In August 2021, we sold a portion of our interest
in Premier Pools & Spas, retaining a post-sale ownership interest of 20.1%. On
December 17, 2021, Premier Pools & Spas issued additional non-voting common
units. Our ownership interest in Premier Pools & Spas after the issuance of
additional non-voting common units is 18.2% while our voting interest remains
20.1%. The purpose of this investment in Premier Pools & Spas is to help expand
our sales and distribution channels. Products are sold directly to the
franchisees, third parties independent of Premier Pools and Spas, and are
therefore not considered related party transactions. Our investment in Premier
Pools & Spas is reflected as an equity method investment on our consolidated
balance sheet as of December 31, 2021, and our proportionate share of earnings
or losses of Premier Pools & Spas is recognized in earnings (losses) from equity
method investment in our consolidated statement of operations on a three-month
lag.
Product Mix
We seek to continue to enhance our gross margins by improving the mix of
products we sell, improving efficiency across our operations, including by
investing in, and expanding, our digitally-enabled lead sourcing capabilities,
expanding our specialized training opportunities, such as “Latham University,”
and sales support initiatives, such as localized digital marketing spend,
co-branding, enhanced product literature, in-store display samples and social
media initiatives.
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Impact of COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared COVID-19 a global
pandemic and recommended containment and mitigation measures worldwide. In
response to the COVID-19 pandemic, federal, state and local governments put in
place travel restrictions, quarantines, “shelter-in-place” orders, and various
other restrictive measures in an attempt to control the spread of the disease.
Such restrictions or orders have resulted in, and continue to result in,
business closures, work stoppages, slowdowns and delays, among other measures
that affect our operations, as well as customer demand and the operations of our
suppliers.
Since the onset of the COVID-19 pandemic, we have been focused on protecting our
employees’ health and safety, meeting our customers’ needs as they navigate an
uncertain financial and operating environment, working closely with our
suppliers to protect our ongoing business operations and rapidly adjusting our
short-, medium- and long-term operational plans to proactively and effectively
respond to the current and potential future public health crises. While the
COVID-19 pandemic presents very serious concerns for our business and
operations, our employees and their families, our customers and our suppliers,
we believe that we are adapting well to the wide-ranging changes that the global
economy is currently undergoing, and we remain confident that we will continue
to maintain business continuity, produce and sell our products safely and in
compliance with applicable laws and governmental orders and mandates, maintain
our robust and flexible supply chains and be in a strong position to maintain
financial flexibility in the event of a potentially extended economic downturn.
To mitigate the impact of the COVID-19 pandemic on our business, we increased
frequency and intensity of cleaning of our properties, implemented policies to
enable our factory employees to work flexible working hours, shifted our
corporate employees to remote work, temporarily stopped hiring, temporarily cut
salaries (which cuts we repaid to our employees later in the year), and have
greatly reduced travel for our employees. Substantially all of our plants have
remained operational throughout the pandemic. We did not experience any
significant impacts on our liquidity as a result of the COVID-19 pandemic.
Although we have implemented measures to mitigate the impact of the COVID-19
pandemic on our business, financial condition and results of operations, we
expect that these measures may not fully mitigate the impact of the COVID-19
pandemic on our business, financial condition and results of operations. We
cannot predict the degree to, or the period over, which we will be affected by
the pandemic and resulting governmental and other measures. The global impact of
the COVID-19 pandemic continues to rapidly evolve, and we will continue to
monitor the situation closely. As the COVID-19 pandemic continues, it may also
have the effect of heightening many of the risks described in “Risk Factors” in
this Annual Report. See “Risk Factors – Risks Related to Our Operations – The
current outbreak of the COVID-19, or the future outbreak of any other highly
infectious or contagious diseases, has caused, and may continue to cause,
disruption to our business and operations” for a further discussion of the
adverse impacts of the COVID-19 pandemic on our business.
Key Performance Indicators
Net Sales
We derive our revenue from the design, manufacture and sale of in-ground
swimming pools, pool covers and liners. We sell fiberglass pools, which are
one-piece manufactured fiberglass pools that are ready to be installed in a
consumer’s backyard and custom vinyl pools, which are manufactured pools that
are made out of non-corrosive steel or composite polymer frame, on top of which
a vinyl liner is installed. We sell liners for the interior surface of vinyl
pools (including pools that were not manufactured by us). We also sell
all-season covers, which are winterizing mesh and solid pool covers that protect
pools against debris and cold or inclement weather and automatic safety covers
for pools that can be operated with a switch.
Our sales are made through one-step and two-step business-to-business
distribution channels. In our one-step distribution channel, we sell our
products directly to dealers who, in turn, sell our products to consumers. In
our two-step distribution channel, we sell our products to distributors who
warehouse our products and sell them on to dealers, who ultimately sell our
products to consumers.
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Each product shipped is considered to be one performance obligation. With the
exception of our extended service warranties and our custom product contracts,
we recognize our revenue when control of our promised goods is transferred to
our customers (dealer in one-step distribution channel or distributor in
two-step distribution channel), either upon shipment or arrival at our
customer’s destination depending upon the terms of the purchase order. Sales are
recognized net of any estimated rebates, returns, allowances, cash discounts or
other sales incentives. Revenue that is derived from our extended service
warranties, which are separately priced and sold, is recognized over the term of
the contracts. Revenue from custom products is recognized over time utilizing an
input method that compares the cost of cumulative work-in-process to date to the
most current estimates for the entire cost of the performance obligation. See
“- Critical Accounting Policies and Estimates – Revenue Recognition.”
Gross Margin
Gross margin is gross profit as a percentage of our net sales. Gross margin is
dependent upon several factors, such as changes in prices of raw materials, the
volume and relative sales mix among product lines, the average price of our
products sold and plant performance, among other factors. Gross margin is also
impacted by the costs of distribution and occupancy costs, which can vary.
Our gross profit is variable in nature and generally follows changes in net
sales. The components of our cost of sales may not be comparable to the
components of cost of sales or similar measures of other companies. As a result,
our gross profit and gross margin may not be comparable to similar data made
available by other companies.
Adjusted EBITDA and Adjusted EBITDA Margin
We use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of
performance to evaluate the effectiveness of our business strategies, to make
budgeting decisions, to establish our annual management incentive bonus plan
compensation and to compare our performance against that of other peer companies
using similar measures. We define Adjusted EBITDA as net income (loss) plus
(i) depreciation and amortization, (ii) interest expense, (iii) income tax
(benefit) expense, (iv) loss on sale and disposal of property and equipment,
(v) restructuring charges, (vi) management fees, (vii) stock-based compensation
expense, (viii) unrealized (gains) losses on foreign currency transactions,
(ix) strategic initiative costs, (x) acquisition and integration related costs,
(xi) other and (xii) IPO costs. We believe excluding these items allows for
better comparison of our financial results across reporting periods.
We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales. Our
definitions of Adjusted EBITDA and Adjusted EBITDA margin may not be comparable
to similarly titled measures of other companies.
We believe Adjusted EBITDA and Adjusted EBITDA margin are useful measurements
for investors as they help identify underlying trends that could otherwise be
masked by certain expenses that we do not consider indicative of our ongoing
operating performance. We also use Adjusted EBITDA and Adjusted EBITDA margin
for planning purposes, assessing our financial performance, and other strategic
decisions. For a discussion of Adjusted EBITDA and Adjusted EBITDA margin and
the limitations on their use, and the reconciliation of Adjusted EBITDA to net
income, the most directly comparable GAAP financial measure, and our calculation
of Adjusted EBITDA margin see “- Non-GAAP Financial Measures” below.
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Results of Operations
Year ended December 31, 2021 Compared to Year ended December 31, 2020
The following table summarizes our results of operations for the years ended
December 31, 2021 and 2020:
Year Ended December 31,
Change
% of % of Change % of
2021 Net Sales 2020 Net Sales Amount Net Sales
(dollars in
thousands)
Net sales $ 630,456 100.0 % $ 403,389 100.0 % $ 227,067 – %
Cost of sales 426,294 67.6 % 260,616 64.6 % 165,678 3.0 %
Gross profit 204,162 32.4 % 142,773 35.4 % 61,389 (3.0) %
Selling, general and
administrative expense 217,775 34.5 % 85,527 21.2 % 132,248 13.3 %
Amortization 22,566 3.6 % 17,347 4.3 % 5,219 (0.7) %
(Loss) income from
operations (36,179) (5.7) % 39,899 9.9 % (76,078) (15.6) %
Other expense
(income):
Interest expense 24,433 3.9 % 18,251 4.5 % 6,182 (0.6) %
Other (income)
expense, net (4,860) (0.8) % (1,111) (0.3) % (3,749) (0.5) %
Total other expense
(income), net 19,573 3.1 % 17,140 4.2 % 2,433 (1.1) %
Earnings from equity
method investment 2,222 0.3 % – – % 2,222 0.3 %
(Loss) income before
income taxes (53,530) (8.5) % 22,759 5.7 % (76,289) (14.2) %
Income tax expense 8,818 1.4 % 6,776 1.7 % 2,042 (0.3) %
Net (loss) income $ (62,348) (9.9) % $ 15,983 4.0 % $ (78,331) (13.9) %
Adjusted EBITDA $ 139,819 22.2 % $ 83,836 20.8 % $ 55,983 1.4 %
Net Sales
Net sales was $630.5 million for the year ended December 31, 2021, compared to
$403.4 million for the year ended December 31, 2020. The $227.1 million, or
56.3%, increase in net sales was due to a $171.7 million increase from volume
and a $55.4 million increase from pricing. The $171.7 million volume increase
spanned our product lines and was primarily attributable to strong market
demand, homeowner preferences for Latham’s products, and expanded strategic
partnerships within our network of dealers, and also includes $68.5 million due
to having a full year of GLI’s net sales in our net sales in the year ended
December 31, 2021. The increase in total net sales across our product lines was
$131.1 million for in-ground swimming pools, $47.6 million for covers and
$48.4 million for liners.
Cost of Sales and Gross Margin
Cost of sales was $426.3 million for the year ended December 31, 2021, compared
to $260.6 million for the year ended December 31, 2020, and increased as
a percentage of net sales by 3.0%. Gross margin decreased by 3.0% to 32.4% for
the year ended December 31, 2021, compared to 35.4% for the year ended December
31, 2020. The $165.7 million, or 63.6%, increase in cost of sales was primarily
the result of the overall increase in sales volume, cost inflation and $8.7
million of non-cash stock-based compensation expense. The 3.0% decrease in gross
margin was primarily driven by supply chain headwinds, strategic decisions
around re-pricing our order backlog, and stock-based compensation expense.
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Selling, General and Administrative Expense
Selling, general and administrative expense was $217.8 million for the year
ended December 31, 2021, compared to $85.5 million for the year ended
December 31, 2020, and increased as a percentage of net sales by 13.3%. The
$132.3 million, or 154.6% increase in selling, general and administrative
expense was primarily due to a $118.3 million increase in stock-based
compensation expense, $5.1 million in wages from an increase in headcount,
particularly for customer-facing activities to support future business growth, a
$5.1 million increase in expense related to the acquisition of GLI, a $2.2
million increase due to legal, accounting and professional fees incurred in
connection with our IPO that were not capitalizable, and ongoing public company
costs.
Amortization
Amortization was $22.6 million for the year ended December 31, 2021, compared to
$17.3 million for the year ended December 31, 2020. The $5.3 million, or 30.1%
increase in amortization was due to the increase in our definite-lived
intangible assets resulting from our acquisitions of GLI and Radiant in October
2020 and November 2021, respectively.
Interest Expense
Interest expense was $24.4 million for the year ended December 31, 2021,
compared to $18.3 million for the year ended December 31, 2020. The
$6.1 million, or 33.9% increase in interest expense was primarily due to an
increase in the average outstanding balance of long-term debt and amortization
from increased deferred financing fees and discount from entering into an
amendment to the Term Loan, compared to the year ended December 31, 2020.
Other (Income) Expense, Net
Other (income) expense, net was ($4.9) million for the year ended December 31,
2021, compared to ($1.1) million for the year ended December 31, 2020. The
($3.8) million increase in other (income) expense, net was primarily due to a
$4.8 million gain related to the partial sale of our equity method investment,
partially offset by a $1.0 million unfavorable change in net foreign currency
transaction gains and losses associated with our international subsidiaries.
Earnings from Equity Method Investments
Earnings from equity method investment of Premier Pools & Spa was $2.2 million
for the year ended December 31, 2021, compared to no equity in net earnings of
Premier Pools & Spa for the year ended December 31, 2020 as the equity method
investment was made in October 2020 and we record our proportionate share of
earnings or losses in Premier Pools & Spa on a three-month lag.
Income Tax Expense
Income tax expense was $8.8 million for the year ended December 31, 2021,
compared to $6.8 million for the year ended December 31, 2020. Our effective tax
rate was (16.5)% for the year ended December 31, 2021, compared to 29.8% for
the year ended December 31, 2020. For the year ended December 31, 2021, the
effective tax rate differed from the statutory tax rate primarily due to non
deductible stock compensation of $25.7 million, partially offset by $12.7
million benefit related to the release of the valuation allowance on Canadian
deferred tax assets. For the year ended December 31, 2020, the effective tax
rate was higher than the statutory tax rate primarily due to various non
deductible expenses.
Net (Loss) Income
Net loss was $62.3 million for the year ended December 31, 2021, compared to
$16.0 million of net income for the year ended December 31, 2020. The
$78.3 million, or 490.1% increase in net loss was primarily due to the factors
described above.
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Net (Loss) Income Margin
Net loss margin was 9.9% for the year ended December 31, 2021, compared to net
income margin of 4.0% for the year ended December 31, 2020. The 13.9% increase
in net loss margin was due to a $78.3 million increase in net loss and a
$227.1 million increase in net sales, compared to the year ended December 31,
2020 due to the factors described above.
Adjusted EBITDA
Adjusted EBITDA was $139.8 million for the year ended December 31, 2021,
compared to $83.8 million for the year ended December 31, 2020. The
$56.0 million, or 66.8% increase in Adjusted EBITDA was primarily due to the
increase in net sales. For a discussion of Adjusted EBITDA and Adjusted EBITDA
margin and the limitations on their use, and the reconciliation of Adjusted
EBITDA to net income, the most directly comparable GAAP financial measure, and
our calculation of Adjusted EBITDA margin see “- Non-GAAP Financial Measures”
below.
Adjusted EBITDA Margin
Adjusted EBITDA margin was 22.2% for the year ended December 31, 2021, compared
to 20.8% for the year ended December 31, 2020. The 1.4% increase in Adjusted
EBITDA margin was primarily due to a $56.0 million increase in Adjusted EBITDA
and an $227.1 million increase in net sales, compared to the year ended
December 31, 2020.
Year ended December 31, 2020 Compared to Year ended December 31, 2019
Year Ended December 31,
Change
% of % of Change % of
2020 Net Sales 2019 Net
Sales Amount Net Sales
(dollars in thousands)
Net sales $ 403,389 100.0 % $ 317,975 100.0 % $ 85,414 – %
Cost of sales 260,616 64.6 % 219,819 69.1 % 40,797 (4.5) %
Gross profit 142,773 35.4 % 98,156 30.9 % 44,617 4.5 %
Selling, general and
administrative expense 85,527 21.2 % 57,388 18.0 % 28,139 3.2 %
Amortization 17,347 4.3 % 15,643 5.0 % 1,704 (0.7) %
Income from operations 39,899 9.9 % 25,125 7.9 % 14,774 2.0 %
Other expense
(income):
Interest expense 18,251 4.5 % 22,639 7.1 % (4,388) (2.6) %
Other (income)
expense, net (1,111) (0.3) % (300) (0.1) % (811) (0.2) %
Total other expense
(income), net 17,140 4.2 % 22,339 7.0 % (5,199) (2.8) %
Income before income
taxes 22,759 5.7 % 2,786 0.9 % 19,973 4.8 %
Income tax expense
(benefit) 6,776 1.7 % (4,671) (1.4) % 11,447 3.1 %
Net income $ 15,983 4.0 % $ 7,457 2.3 % $ 8,526 1.7 %
Adjusted EBITDA $ 83,836 20.8 % $ 61,050 19.2 % $ 22,786 1.6 %
For discussion on comparison of the fiscal years ended December 31, 2020 and
2019, see the Results of Operations section disclosed in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of our
Prospectus, which was filed with the SEC on January 7, 2022.
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Non-GAAP Financial Measures
We track our non-GAAP financial measures to monitor and manage our underlying
financial performance. The following discussion includes the presentation of
Adjusted EBITDA and Adjusted EBITDA margin, which are non-GAAP financial
measures that exclude the impact of certain costs, losses and gains that are
required to be included in our profit and loss measures under GAAP. Although we
believe these measures are useful to investors and analysts for the same reasons
it is useful to management, as discussed below, these measures are neither a
substitute for, nor superior to, U.S. GAAP financial measures or disclosures.
Other companies may calculate similarly-titled non-GAAP measures differently,
limiting their usefulness as comparative measures. To address these limitations,
we have reconciled Adjusted EBITDA to the applicable most comparable GAAP
measure, net income, throughout this Annual Report.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA margin are key metrics used by management
and our board of directors to assess our financial performance. Adjusted EBITDA
and Adjusted EBITDA margin are also frequently used by analysts, investors and
other interested parties to evaluate companies in our industry, when considered
alongside other GAAP measures. We use Adjusted EBITDA and Adjusted EBITDA margin
to supplement GAAP measures of performance to evaluate the effectiveness of our
business strategies, to make budgeting decisions and to compare our performance
against that of other companies using similar measures. We have presented
Adjusted EBITDA and Adjusted EBITDA margin solely as supplemental disclosures
because we believe they allow for a more complete analysis of results of
operations and assist investors and analysts in comparing our operating
performance across reporting periods on a consistent basis by excluding items
that we do not believe are indicative of our core operating performance, such as
(i) depreciation and amortization, (ii) interest expense, (iii) income tax
(benefit) expense, (iv) loss on sale and disposal of property and equipment,
(v) restructuring charges, (vi) management fees, (vii) stock-based compensation
expense, (viii) unrealized (gains) losses on foreign currency transactions,
(ix) strategic initiative costs, (x) acquisition and integration related costs,
(xi) other and (xii) IPO costs.
Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures and
should not be considered as alternatives to net income as a measure of financial
performance or any other performance measure derived in accordance with GAAP,
and they should not be construed as an inference that our future results will be
unaffected by unusual or non-recurring items. You are encouraged to evaluate
these adjustments and the reasons we consider them appropriate for supplemental
analysis. In evaluating Adjusted EBITDA and Adjusted EBITDA margin, you should
be aware that in the future we may incur expenses that are the same as or
similar to some of the adjustments in this presentation. There can be no
assurance that we will not modify the presentation of Adjusted EBITDA and
Adjusted EBITDA margin in the future, and any such modification may be material.
Our presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be
construed to imply that our future results will be unaffected by any such
adjustments. In addition, other companies, including companies in our industry,
may not calculate Adjusted EBITDA and Adjusted EBITDA margin at all or may
calculate Adjusted EBITDA and Adjusted EBITDA margin differently and
accordingly, are not necessarily comparable to similarly entitled measures of
other companies, which reduces the usefulness of Adjusted EBITDA and Adjusted
EBITDA margin as tools for comparison.
Adjusted EBITDA and Adjusted EBITDA margin have their limitations as analytical
tools, and you should not consider them in isolation or as a substitute for
analysis of our results as reported under GAAP. Some of these limitations are
that Adjusted EBITDA and Adjusted EBITDA margin:
? do not reflect every expenditure, future requirements for capital expenditures
or contractual commitments;
? do not reflect changes in our working capital needs;
? do not reflect the interest expense, or the amounts necessary to service
interest or principal payments, on our outstanding debt;
do not reflect income tax (benefit) expense, and because the payment of taxes
? is part of our operations, tax expense is a necessary element of our costs and
ability to operate;
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? do not reflect non-cash equity compensation, which will remain a key element of
our overall equity-based compensation package; and
? do not reflect the impact of earnings or charges resulting from matters we
consider not to be indicative of our ongoing operations.
Although depreciation and amortization are eliminated in the calculation of
Adjusted EBITDA and Adjusted EBITDA margin, the assets being depreciated and
amortized will often have to be replaced in the future, and Adjusted EBITDA and
Adjusted EBITDA margin do not reflect any costs of such replacements.
Management compensates for these limitations by primarily relying on our GAAP
results, while using Adjusted EBITDA and Adjusted EBITDA margin as supplements
to the corresponding GAAP financial measures.
The following table provides a reconciliation of our net income to Adjusted
EBITDA for the periods presented and the calculation of Adjusted EBITDA margin:
Year Ended December 31,
2021 2020 2019
(in thousands)
Net (loss) income $ (62,348)$ 15,983$ 7,457
Depreciation and amortization 32,230 25,365 21,659
Interest expense 24,433 18,251 22,639
Income tax expense (benefit) 8,818 6,776 (4,671)
Loss on sale and disposal of property and
equipment 275 332 680
Restructuring charges(a) 906 1,265 980
Management fees(b) – – 500
Stock-based compensation expense 128,775 1,827
808
Unrealized losses (gains) on foreign
currency transactions (c) 1,151 (1,111)
(300)
Strategic initiative costs(d) 2,531 6,264
964
Acquisition and integration related
costs(e) 3,576 5,497 3,612
Other(f) (4,484) 1,656 6,722
IPO costs(g) 3,956 1,731 –
Adjusted EBITDA $ 139,819$ 83,836$ 61,050
Net sales $ 630,456$ 403,389$ 317,975
Net (loss) income margin (9.9) % 4.0 % 2.3 %
Adjusted EBITDA margin 22.2 % 20.8 % 19.2 %
Represents the cost of shutting down production and warehouse facilities in
Decatur, Georgia and Mississauga, Ontario, Canada, including the cost to
(a) transfer and dispose of property and equipment and involuntary workforce
reductions. Also includes severance and other costs for our executive
management changes.
Represents management fees paid to our Principal Stockholders in accordance
(b) with our arrangement, which terminated as of the effective date of our
initial public offering.
Represents foreign currency transaction (gains) and losses associated with
(c) our international subsidiaries and changes in the fair value of the
contingent consideration recorded in connection with the acquisition of
Narellan, which was settled in September 2020.
(d) Represents fees paid to external consultants for our strategic initiatives,
including our rebranding initiative.
Represents acquisition and integration costs primarily related to the
(e) acquisitions of Narellan, GLI and Radiant, the equity investment in Premier
Pools & Spas, as well as other costs related to potential transactions.
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Other costs consist of other discrete items as determined by management,
primarily including: (i) fees paid to external advisors for various matters,
(ii) the cost incurred and insurance proceeds related to our production
facility fire in Picton, Australia in 2020, (iii) non-cash adjustments to
(f) record the step-up in the fair value of inventory related to the acquisition
by Pamplona and the acquisitions of Narellan, GLI and Radiant, which are
amortized through cost of sales in the annual consolidated statements of
operations, (iv) gain on sale of portion of equity method investment, and
(v) other items.
These expenses are primarily composed of legal, accounting and professional
(g) fees incurred in connection with our initial public offering that are not
capitalizable, which are included within selling, general and administrative
expense.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are net cash provided by operating activities
and availability under our New Revolving Credit Facility. Historically, we have
funded working capital requirements, capital expenditures, payments related to
acquisitions, and debt service requirements with internally generated cash on
hand and through our Amended Term Loan and Revolving Credit Facility (each as
defined below under “- Our Indebtedness”) and through the issuance of shares of
our common stock. Our primary cash needs are to fund working capital, capital
expenditures, debt service requirements and any acquisitions we may undertake.
As of December 31, 2021, we had $44.0 million of cash, $280.4 million of
outstanding borrowings and an additional $30.0 million of availability under our
Revolving Credit Facility.
Our primary working capital requirements are for the purchase of inventory,
payroll, rent, facility costs and other selling, general and administrative
costs. Our working capital requirements fluctuate during the year, driven
primarily by seasonality and the timing of raw material purchases. Our capital
expenditures are primarily related to growth, including production capacity,
storage and delivery equipment. We are in the midst of a multi-year capital plan
to invest in our facilities, technology and systems, including investments to
expand our fiberglass manufacturing capacity. We expect to fund these capital
expenditures from net cash provided by operating activities.
We believe our existing cash, cash generated from operations and availability
under our New Revolving Credit Facility, will be adequate to fund our operating
expenses and capital expenditure requirements over the next 12 months. We have
based this estimate on assumptions that may prove to be wrong, and we could
utilize our available capital resources sooner than we expect.
Our Indebtedness
On February 23, 2022, Latham Pool Products, Inc. (“Latham Pool Products”), our
wholly owned subsidiary, entered into the New Credit Agreement with Barclays
Bank PLC, which provides a senior secured multicurrency revolving line of credit
(the “New Revolving Credit Facility”) in an initial principal amount of $75.0
million and a U.S. Dollar senior secured term loan facility (the “New Term Loan
Facility”) in an initial principal amount of $325.0 million. On the closing
date, proceeds under the agreement were used to repay and replace $294.0 million
under, and terminate, the Credit Agreement and for general corporate purposes.
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New Revolving Credit Facility
The New Revolving Credit Facility may be utilized to finance ongoing general
corporate and working capital needs and permits Latham Pools Products to borrow
loans in U.S. Dollars, Canadian Dollars, Euros and Australian Dollars. The New
Revolving Credit Facility matures on February 23, 2027. Loans outstanding under
the New Revolving Credit Facility denominated in U.S. Dollars and Canadian
Dollars bear interest, at the borrower’s option, at a rate per annum based on
Term SOFR or CDO (each, as defined in the New Credit Agreement), as applicable,
plus a margin of 3.50%, or at a rate per annum based on the Base Rate or the
Canadian Prime Rate (each, as defined in the New Credit Agreement), plus a
margin of 2.50%. Loans outstanding under the New Revolving Credit Facility
denominated in Euros or Australian Dollars bear interest based on EURIBOR or the
AUD Rate (each, as defined in the New Credit Agreement), respectively, plus a
margin of 3.50%. A commitment fee accrues on any unused portion of the
commitments under the New Revolving Credit Facility. The commitment fee is due
and payable quarterly in arrears and is, initially, 0.375% per annum and will,
thereafter, accrue at a rate per annum ranging from 0.25% to 0.50%, depending on
the First Lien Net Leverage Ratio. The New Revolving Credit Facility is not
subject to amortization.
New Term Loan Facility
The New Term Loan Facility matures on February 23, 2029. Loans outstanding under
the New Term Loan Facility bear interest, at the borrower’s option, at a rate
per annum based on Term SOFR (as defined in the New Credit Agreement), plus a
margin ranging from 3.75% to 4.00%, depending on the First Lien Net Leverage
Ratio (as defined in the New Credit Agreement, the “First Lien Net Leverage
Ratio”), or based on the Base Rate (as defined in the New Credit Agreement),
plus a margin ranging from 2.75% to 3.00%, depending on the First Lien Net
Leverage Ratio. Loans under the New Term Loan Facility are subject to scheduled
quarterly amortization payments equal to 0.25% of the initial principal amount
of the New Term Loan Facility.
Revolving Credit Facility
On December 18, 2018, Latham Pool Products entered into an agreement (the
“Credit Agreement”) with Nomura Corporate Funding Americas, LLC (“Nomura”) that
included a revolving line of credit (the “Revolver”) and letters of credit
(“Letters of Credit” or collectively with the Revolver, the “Revolving Credit
Facility”), as well as a Term Loan (as described and defined below). The
Revolving Credit Facility was utilized to finance ongoing general corporate and
working capital needs with the Revolver of up to $30.0 million. The Revolving
Credit Facility was terminated in connection with the debt refinancing on
February 23, 2022.
Term Loan Facility
Pursuant to the Credit Agreement, Latham Pool Products also borrowed $215.0
million in term loans (the “Term Loan”). The Term Loan was amended on May 29,
2019, to provide additional borrowings of $23.0 million, which was accounted for
as a modification to the Term Loan, to fund our acquisition of Narellan (the
“First Amendment”). On October 14, 2020, we amended the First Amendment to
provide additional borrowings of $20.0 million, which was accounted for as new
debt (the “Second Amendment”). The Second Amendment was further amended on
January 25, 2021, to provide an additional incremental term loan of $175.0
million (the “Third Amendment”). On January 25, 2021, Latham Pool Products
borrowed the incremental term loan, and the proceeds were used on February 2,
2021 to purchase and retire equity interests and to pay a distribution. On March
31, 2021, we amended our Term Loan to revise the applicable reporting
requirements (the “Fourth Amendment”). On November 24, 2021, we amended the Term
Loan to provide additional borrowings of $50 million (the “Fifth Amendment”).
The proceeds from this incremental term loan were used to finance the Radiant
Acquisition in part. The Term Loan, collectively with the First Amendment,
Second Amendment, Third Amendment, the Fourth Amendment and the Fifth Amendment,
is referred to as the “Amended Term Loan.”
As of December 31, 2021, we were in compliance with all covenants under the
Revolving Credit Facility and the Amended Term Loan. The Amended Term Loan was
terminated in connection with the debt refinancing on February 23, 2022.
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Cash Flows
The following table summarizes our sources and uses of cash for each of the
periods presented:
Year Ended December 31,
2021 2020 2019
(in thousands)
Net cash provided by operating activities $ 33,690$ 63,160$ 35,655
Net cash used in investing activities (108,205) (115,805)
(27,083)
Net cash provided by financing activities 60,018 54,303
16,551
Effect of exchange rate changes on cash (861) 997
(956)
Net (decrease) increase in cash $ (15,358)$ 2,655
$ 24,167
Operating Activities
During the year ended December 31, 2021, operating activities provided
$33.7 million of cash. Net income, after adjustments for non-cash items,
provided cash of $88.5 million. Cash provided by operating activities was
further driven by changes in our operating assets and liabilities which used
$54.8 million. Net cash used in changes in our operating assets and liabilities
for the year ended December 31, 2021 consisted primarily of a $26.0 million
increase in trade receivables, a $39.7 million increase in inventories, a $4.5
million increase in prepaid expenses and other current assets and a $1.2 million
decrease in other long-term liabilities, partially offset by a $10.7 million
increase in accounts payable, a $4.7 million increase in accrued expenses and
other current liabilities, a $0.8 million decrease in other assets and a
$0.3 million decrease in income tax receivable. The change in trade receivables
was primarily due to the timing of and increase in net sales, and the increase
in inventories was primarily due to increased production and cost inflation. The
changes in accrued expenses and other current liabilities, and accounts payable
were primarily due to volume of purchases and timing of payments.
During the year ended December 31, 2020, operating activities provided
$63.2 million of cash. Net income, after adjustments for non-cash items,
provided cash of $42.1 million. Cash provided by operating activities was
further driven by changes in our operating assets and liabilities which provided
$21.1 million. Net cash provided by changes in our operating assets and
liabilities for the year ended December 31, 2020 consisted primarily of an
$20.6 million increase in accrued expenses and other current liabilities, a
$9.8 million increase in accounts payable and a $9.5 million decrease in trade
receivables, partially offset by a $17.0 million increase in inventories and a
$4.2 million increase in income tax receivable. The changes in accrued expenses
and other current liabilities and accounts payable were primarily due to the
increase and timing of payments for rebate accruals, the increase in accrued
incentives related to the management incentive bonus plan and GLI
acquisition-related fees. The change in trade receivables was driven by the
timing of inventory shipments. The increase in inventories was primarily due to
increased production in response to customer demand. The increase in income tax
receivable was due to estimated tax payments made in in excess of the actual
annual tax provision.
Investing Activities
During the year ended December 31, 2021, investing activities used
$108.2 million of cash, primarily consisting of the acquisition of Radiant of
$90.5 million, and the purchase of property and equipment for $25.0 million,
partially offset by proceeds from the sale of equity method investment of $6.8
million and return of equity method investment of $0.4 million. The purchase of
property and equipment was to expand capacity for inventory production in order
to meet increasing customer demand.
During the year ended December 31, 2020, investing activities used
$115.8 million of cash, consisting of the acquisition of GLI of $74.7 million,
the equity investment in Premier Pools & Spas of $25.4 million and the purchase
of property and equipment for $16.3 million, partially offset by proceeds from
the sale of property and equipment of $0.6 million. The purchase of property and
equipment was to expand capacity for inventory production in order to meet
increasing customer demand.
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Financing Activities
During the year ended December 31, 2021, financing activities provided
$60.0 million of cash, primarily consisting of proceeds from our IPO, net of
underwriting discounts, commissions and offering costs of $399.3 million,
proceeds from borrowings on the Amended Term Loan of $222.8 million and
borrowings on the Revolving Credit Facility of $16.0 million, partially offset
by the repurchase of treasury stock of $281.6 million, payments on long-term
debt borrowings of $169.1 million, dividends to Class A unitholders of $110.0
million, and payments on Revolving Credit Facility borrowings of $16.0 million.
During the year ended December 31, 2020, financing activities provided $54.3
million of cash, primarily consisting of proceeds from the issuance of common
stock of $65.6 million and proceeds from long-term debt borrowings of $20.0
million, partially offset by payments on long-term debt borrowings of $24.0
million and payments to settle the Narellan contingent consideration of $6.6
million.
For discussion on operating, investing, and financing activities of the
fiscal year ended December 31, 2019, see the Liquidity and Capital Resources
section disclosed in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of our Prospectus, which was filed with the
SEC on January 7, 2022.
Contractual Obligations
Our largest contractual obligations as of December 31, 2021 consisted of
principal payments related to our long-term indebtedness that are included in
our consolidated balance sheet and the related periodic interest payments, and
non-cancelable capital and operating leases. For a description of our
contractual obligations and commitments, see Notes 7 “Long-Term Debt” and 14
“Commitments and Contingencies” to our Consolidated Financial Statements
included elsewhere in this Annual Report.
Long-term indebtedness and interest on long-term indebtedness changed materially
due to the termination of the Credit Agreement and its replacement with the New
Credit Agreement described in “-Our Indebtedness” above since December 31, 2021.
As a result, the required principal payments would be $2.4 million in 2022, $3.3
million in 2023, $3.3 million in 2024, $3.3 million in 2025, $3.3 million in
2026, and $309.6 million thereafter. At the new assumed interest rate of 4.37%
as of February 23, 2022, required interest payments would be $11.8 million in
2022, $14.0 million in 2023, $13.9 million in 2024, $13.8 million in 2025, $13.6
million in 2026, and $29.0 million thereafter.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States. Throughout the preparation
of these financial statements, we have made estimates and assumptions that
impact the reported amounts of assets, liabilities and the disclosure of
contingent liabilities at the date of the financial statements and revenues and
expenses during the reporting period. These estimates are based on historical
results, trends and other assumptions we believe to be reasonable. We evaluate
these estimates on an ongoing basis. Actual results may differ from estimates.
Our significant accounting policies are presented in Note 2 of our consolidated
financial statements. We believe that the following critical accounting policies
affect the most significant estimates and management judgments used in
preparation of the consolidated financial statements.
Revenue Recognition
We adopted ASC 606 on January 1, 2019, using the modified retrospective method.
This standard applies to all contracts with customers, except for contracts that
are within the scope of other standards. The adoption of ASC 606 resulted in a
net decrease to retained earnings (accumulated deficit) of $1.7 million, a
reduction to prepaid expenses of $1.2 million and an increase to accrued
expenses of $0.5 million as of January 1, 2019, as a result of adjusting the
timing of recording customer incentives to more closely match the revenues
to
which they are associated.
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With the exception of our extended service warranties and our custom product
contracts, we recognize our revenue at a point in time when control of the
promised goods is transferred to our customers, and in an amount that reflects
the consideration we expect to be entitled to in exchange for those goods.
Control of the goods is considered to have been transferred upon shipping or
upon arrival at the customer’s destination, depending on the terms of the
purchase order. Revenue that is derived from our extended service warranties,
which are separately priced and sold, is recognized over the term of the
contract. Revenue from custom products is recognized over time utilizing an
input method that compares the cost of cumulative work-in-process to date to the
most current estimates for the entire cost of the performance obligation. Custom
products are generally delivered to the customer within three days of receipt of
the purchase order. Each product shipped is considered to be one performance
obligation. For each product shipped, the transaction price by product is
specified in the purchase order.
We recognize revenue on the transaction price less any estimated rebates,
returns, allowances, cash discounts or other sales incentives. Customer rebates,
returns, allowances, cash discounts, and other sales incentives are estimated by
applying the portfolio approach using the most-likely-amount method and are
recorded as a reduction to revenue at the time of the initial sale.
Customer Rebates and Cash Discounts
We offer rebates to our customers based on factors such as the total amount of
the customer’s purchase and expected sales for a particular customer during
the year. Rebates are estimated by applying the portfolio approach using the
most-likely-amount method and are deducted from revenue at the time of sale.
Estimates are updated each reporting period and are allocated accordingly to the
performance obligations of the contract (the individual products).
Business Combinations
We account for business combinations that are deemed to be businesses under the
acquisition method of accounting. Application of this method of accounting
requires that the identifiable assets acquired (including identifiable
intangible assets) and liabilities assumed generally be measured and recognized
at fair value as of the acquisition date. Any contingent assets acquired and
contingent liabilities assumed are also recognized at fair value if we can
reasonably estimate fair value during the measurement period. We remeasure any
contingent liabilities at fair value in each subsequent reporting period. The
excess of the purchase price over the fair value of net assets acquired is
recorded as goodwill. Determining the fair value of assets acquired and
liabilities assumed requires management’s judgment, based on available
information at the time of acquisition and subsequently obtained during a
measurement period up to one year following the date of acquisition, relating to
events or circumstances that existed at the acquisition date. Management’s
judgment relies upon estimates and assumptions related to future cash flows,
discount rates, useful lives of assets, market conditions and other items. The
fair value of intangible assets other than goodwill acquired in a business
combination are estimated in accordance with the policy described below.
The fair value of intangible assets other than goodwill acquired in a business
combination is recorded at fair value at the date of acquisition. Management
values dealer relationships and franchise relationships using the multi-period
excess earnings method. Under this method, the value of an intangible asset is
equal to the present value of the after-tax cash flows attributable solely to
the intangible asset, after making adjustments for the required return on and of
the other associated assets. We value trade names, trademarks and proprietary
pool designs using the relief from royalty method. The relief-from-royalty
method determines the present value of the economic royalty savings associated
with the ownership or possession of the trade name, trademark or proprietary
pool design based on an estimated royalty rate applied to the cash flows to be
generated by the business. The estimated royalty rate is determined based on the
assessment of a reasonable royalty rate that a third party would negotiate in an
arm’s-length license agreement for the use of the trade name, trademark or
proprietary pool design.
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Impairment of Goodwill
We evaluate goodwill for impairment at least annually, or more frequently when
events or changes in circumstances indicate that the carrying value may not be
recoverable. We have selected the first day of the fourth fiscal quarter to
perform our annual goodwill impairment testing. Historically, including for our
annual impairment test conducted during the year ended December 31, 2020, we had
two reporting units for the purpose of performing our goodwill impairment test.
In November 2020, we made changes to our internal organizational structure,
including roles and responsibilities and to our internal reporting, resulting in
a change to segment management. As a result of the change in segment management
and in the information that is regularly reviewed, the results of the previous
two reporting units are no longer being reviewed for profitability on an
individual basis. Due to these factors, we recognized a change in our
reporting units effective in November 2020 and determined that only one
reporting unit exists. We completed an assessment of any potential impairment
for all reporting units immediately prior to and after the reporting unit change
and determined that no impairment existed.
We may assess our goodwill for impairment initially using a qualitative
approach, or step zero, to determine whether conditions exist to indicate that
it is more likely than not that the fair value of the reporting unit is less
than its carrying value. The qualitative assessment requires significant
judgments by management about economic conditions including the entity’s
operating environment, its industry and other market considerations,
entity-specific events related to financial performance or loss of key personnel
and other events that could impact the reporting unit. If management concludes,
based on assessment of relevant events, facts and circumstances, that it is more
likely than not that the reporting unit’s fair value is greater than its
carrying value, no further impairment testing is required.
If our assessment of qualitative factors indicates that it is more likely than
not that the fair value of the reporting unit is less than its carrying value,
then a quantitative assessment is performed. We may also elect to initially
perform a quantitative analysis instead of starting with step zero. The
quantitative analysis requires comparing the carrying value of the reporting
unit, including goodwill, to its fair value. If the fair value of the reporting
unit exceeds its carrying amount, goodwill is not considered to be impaired and
no further testing is required. If the carrying amount of the reporting unit
exceeds its fair value, there is an impairment of goodwill and an impairment
loss is recorded. We calculate the impairment loss by comparing the fair value
of the reporting unit less the carrying value, including goodwill. The goodwill
impairment is limited to the carrying value of the goodwill.
Based on the results of the qualitative assessment performed for our one
reporting unit, we determined that goodwill was not impaired at October 3, 2021.
Based on the results of our quantitative impairment test performed for our two
reporting units at September 27, 2020, we determined that goodwill was not
impaired at September 27, 2020.
For our quantitative impairment test performed for our reporting units at
September 27, 2020, we estimated the fair value of our reporting unit based on
the weighting of the enterprise value derived using an income approach and a
market approach. We applied a weighting of 75% to the income approach and a
weighting of 25% to the market approach. Under the income approach, fair value
is estimated using a discounted cash flow (the “DCF”) analysis. The DCF analysis
involved applying appropriate discount rates to estimated future cash flows
based on forecasts of sales, costs and capital requirements. Significant
estimates in the DCF method included the weighted average cost of capital,
growth and profitability expectations for the business, and working capital
effects. The weighted average cost of capital accounts for the time value of
money and the appropriate degree of risks inherent in our business. We estimated
future sales growth using a number of factors, including among others, our
nature and our history, financial and economic conditions affecting us, our
industry and the general company, past results and our current operations and
future prospects. Forecasts of future operations are based, in part, on
operating results and our expectations as to future market conditions. We deemed
the discount rate used in our analysis to be commensurate with the underlying
uncertainties associated with achieving the estimated cash flows we project.
This analysis contained uncertainties because it required us to make assumptions
and to apply judgments to estimate industry economic factors and the
profitability of future business strategies. Under the market approach, fair
value is estimated using the merger and acquisition (“M&A”) method. The M&A
method indicates our enterprise value by looking at historical prices from our
completed M&A transactions and those from comparable companies to get a range of
multiples. Significant estimates in the M&A method included identifying
appropriate market multiples and assessing earnings before interest, income
taxes, depreciation and amortization, or EBITDA, in estimating the fair value of
the reporting unit.
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Stock-Based Compensation
Stock-based compensation is measured and recognized based on the grant date fair
value of the awards. The fair value of our common stock is determined based on
the quoted market price of our common stock for purposes of computing stock
compensation expense. For stock options, we use a Black-Scholes model for
estimating the grant date fair value. The Black-Scholes pricing model requires
critical assumptions including risk-free rate, volatility, expected term and
expected dividend yield. The expected term is computed using the simplified
method. We use the simplified method to calculate expected term of the stock
options as we do not have sufficient historical exercise data to provide a
reasonable basis upon which to estimate expected term. The risk-free interest
rate is based on the yield available on U.S.Treasury zero-coupon issues similar
in duration to the expected term of the stock-based award. We consider the
historical volatility of our stock price, as well as implied volatility. We
utilized a dividend yield of zero, as we have no history or plan of declaring
dividends on our common stock. The assumptions underlying these valuations
represented our best estimate, which involved inherent uncertainties and the
application of judgment. As a result, if we had used significantly different
assumptions or estimates, the fair value of our stock-based compensation expense
could have been materially different.
For stock options, restricted stock awards and restricted stock units,
stock-based compensation is recognized using a graded vesting method over the
requisite service period in which employees earn the awards. We account for
forfeitures of stock-based awards as they occur rather than applying an
estimated forfeiture rate to stock-based compensation expense.
Contemporaneously with the pricing of our IPO, on April 22, 2021, we effected
the Omnibus Incentive Plan in which we granted to certain of our employees
restricted stock awards, restricted stock units and option awards inclusive of
the as converted Class B units as a result of the Reorganization.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary
differences resulting from the different treatment of items for tax and
financial reporting purposes. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to reverse. We reduce deferred
taxes by a valuation allowance when we conclude such deferred taxes are not more
than likely to be realized. The determination of whether a deferred tax asset
will be realized is made on both a jurisdictional basis and the use of our
estimate of the recoverability of the deferred tax asset. In evaluating whether
a valuation allowance is required under such rules, we consider all available
positive and negative evidence, including our prior operating results, the
nature and reason for any losses, our forecast of future taxable income in each
respective tax jurisdiction and the dates on which any deferred tax assets are
expected to expire. These assumptions require a significant amount of judgment,
including estimates of future taxable income. As of December 31, 2021 and 2020,
our valuation allowance was $0.0 million and $12.7 million, respectively. We
continue to assess whether any significant changes in circumstances or
assumptions have occurred that could materially affect our ability to realize
deferred tax assets. We released the valuation allowance in 2021 since we
believe we have sufficient positive evidence, including, but not limited to,
three years’ of cumulative pre-tax book income including permanent adjustments
and recent profits within taxing jurisdictions to overcome any negative evidence
related to loss utilization expiration periods.
We record liabilities for uncertain income tax positions based on a two-step
process. The first step is recognition, where an individual tax position is
evaluated as to whether it has a likelihood of greater than 50% of being
sustained upon examination based on the technical merits of the position,
including resolution of any related appeals or litigation processes. The amount
of the benefit that may be recognized is the largest amount that has a greater
than 50% likelihood of being realized on ultimate settlement. The actual
benefits ultimately realized may differ from the estimates. We classify interest
and penalties related to unrecognized tax benefits as a component of income tax
(benefit) expense within the consolidated statements of operations.
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Although we believe that we have adequately reserved for our uncertain tax
positions, we can provide no assurance that the final tax outcome of these
matters will not be materially different. In future periods, changes in facts,
circumstances and new information may require us to change the recognition and
measurement estimates with regard to individual tax positions. Our liabilities
for uncertain tax positions were $5.7 million and $5.5 million for the years
ended December 31, 2021 and 2020, respectively. Changes in recognition and
measurement estimates are recorded in income tax (benefit) expense and liability
in the period in which such changes occur.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined in the rules and regulations of the
SEC.
Recently Issued and Adopted Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially
impact our financial position, results of operations or cash flows is disclosed
in Note 2 to our consolidated financial statements included elsewhere in this
Annual Report.
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