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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from     to    

Commission file number: 001-40358

LATHAM GROUP, Inc.

(Exact name of registrant as specified in its charter)

Delaware

    

83-2797583

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)

787 Watervliet Shaker Road, Latham, NY

12110

(Address of principal executive offices)

(Zip Code)

(800) 833-3800

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.0001 per share

SWIM

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filers

Accelerated filers

Non-accelerated filers

Smaller reporting companies

Emerging growth companies

If emerging growth companies, indicate by check mark if the registrants have elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of November 8, 2021, 119,849,589 shares of the registrant’s common stock, $0.0001 par value were outstanding.

Table of Contents

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3. Quantitative and Qualitative Disclosures About Market Risk

42

Item 4. Controls and Procedures

42

PART II — OTHER INFORMATION

42

Item 1A. Risk Factors

43

Item 6. Exhibits

44

SIGNATURES

2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Index to Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets

    

4

Condensed Consolidated Statements of Operations

5

Condensed Consolidated Statements of Comprehensive (Loss) Income

6

Condensed Consolidated Statements of Stockholders’ Equity

7

Condensed Consolidated Statements of Cash Flows

9

Notes to Condensed Consolidated Financial Statements

10

3

Table of Contents

Latham Group, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

October 2,

December 31,

    

2021

    

2020

Assets

Current assets:

 

  

 

  

Cash

$

90,869

$

59,310

Trade receivables, net

 

75,314

 

32,758

Inventories, net

 

80,705

 

64,818

Income tax receivable

 

6,129

 

4,377

Prepaid expenses and other current assets

 

10,676

 

6,063

Total current assets

 

263,693

 

167,326

Property and equipment, net

 

58,767

 

47,357

Equity method investment

 

21,997

 

25,384

Deferred tax assets

 

793

 

345

Deferred offering costs

 

 

1,041

Goodwill

 

115,158

 

115,750

Intangible assets, net

 

271,831

 

289,473

Other assets

1,506

Total assets

$

733,745

$

646,676

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

39,921

$

29,789

Accounts payable – related party

 

1,050

 

500

Current maturities of long-term debt

 

14,234

 

13,042

Accrued expenses and other current liabilities

 

59,454

 

50,606

Total current liabilities

 

114,659

 

93,937

Long-term debt, net of discount and current portion

 

219,967

 

208,454

Deferred income tax liabilities, net

 

55,949

 

55,193

Liability for uncertain tax positions

 

5,649

 

5,540

Other long-term liabilities

 

2,026

 

1,943

Total liabilities

 

398,250

 

365,067

Commitments and contingencies

 

  

 

  

Stockholders’ equity:

 

  

 

  

Preferred stock, $0.0001 par value; 100,000,000 and no shares authorized as of October 2, 2021 and December 31, 2020, respectively; no shares issued and outstanding as of both October 2, 2021 and December 31, 2020

Common stock, $0.0001 par value; 900,000,000 and 500,000,000 shares authorized as of October 2, 2021 and December 31, 2020, respectively; 119,849,589 and 118,854,249 shares issued and outstanding as of October 2, 2021 and December 31, 2020, respectively

 

12

 

12

Additional paid-in capital

 

377,649

 

265,478

(Accumulated deficit) retained earnings

 

(42,596)

 

13,765

Accumulated other comprehensive income

 

430

 

2,354

Total stockholders’ equity

 

335,495

 

281,609

Total liabilities and stockholders’ equity

$

733,745

$

646,676

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

Table of Contents

Latham Group, Inc.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)

Fiscal Quarter Ended

Three Fiscal Quarters Ended

    

October 2, 2021

    

September 26, 2020

   

October 2, 2021

    

September 26, 2020

Net sales

$

161,957

$

127,512

$

491,592

$

291,468

Cost of sales

 

110,965

 

77,204

 

329,805

 

186,699

Gross profit

 

50,992

 

50,308

 

161,787

 

104,769

Selling, general and administrative expense

 

48,072

 

20,096

 

170,532

 

50,888

Amortization

 

5,486

 

4,047

 

16,560

 

12,173

(Loss) income from operations

 

(2,566)

 

26,165

 

(25,305)

 

41,708

Other expense (income):

 

  

 

  

 

  

 

  

Interest expense

 

4,271

 

3,992

 

20,843

 

13,633

Other (income) expense, net

 

(2,538)

 

(1,378)

 

(3,887)

 

1,121

Total other expense, net

 

1,733

 

2,614

 

16,956

 

14,754

Earnings from equity method investment

810

1,808

(Loss) income before income taxes

 

(3,489)

 

23,551

 

(40,453)

 

26,954

Income tax expense

 

7,807

 

5,811

 

15,908

 

8,251

Net (loss) income

$

(11,296)

$

17,740

$

(56,361)

$

18,703

Net (loss) income per share attributable to common stockholders:

 

  

 

  

 

  

 

  

Basic

$

(0.10)

$

0.18

$

(0.51)

$

0.19

Diluted

$

(0.10)

$

0.18

$

(0.51)

$

0.19

Weighted-average common shares outstanding – basic and diluted

 

  

 

  

 

  

 

  

Basic

 

112,153,832

 

97,393,002

 

110,121,240

 

96,665,708

Diluted

 

112,153,832

 

98,011,795

 

110,121,240

 

97,122,885

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Latham Group, Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(in thousands)

(unaudited)

Fiscal Quarter Ended

Three Fiscal Quarters Ended

    

October 2, 2021

    

September 26, 2020

   

October 2, 2021

    

September 26, 2020

Net (loss) income

$

(11,296)

$

17,740

$

(56,361)

$

18,703

Other comprehensive (loss) income, net of tax:

 

  

 

  

 

  

 

  

Foreign currency translation adjustments

 

(887)

 

47

 

(1,924)

 

404

Comprehensive (loss) income

$

(12,183)

$

17,787

$

(58,285)

$

19,107

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Latham Group, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

(unaudited)

    

    

    

    

Retained 

    

Accumulated 

    

Additional

Earnings

Other

Total

 Paid-in 

 (Accumulated

 Comprehensive

 Stockholders'

Shares

Amount

Capital

 Deficit)

 Income (Loss)

 Equity

Balances at December 31, 2019

 

96,498,943

$

10

$

196,474

$

(2,218)

$

(471)

$

193,795

Net loss

 

 

 

 

(15,451)

 

 

(15,451)

Foreign currency translation adjustments

 

 

 

 

 

(1,938)

 

(1,938)

Repurchase and retirement of treasury stock

(200,173)

(400)

(400)

Stock-based compensation expense

 

 

 

224

 

 

 

224

Balances at March 28, 2020

 

96,298,770

 

10

 

196,298

 

(17,669)

 

(2,409)

 

176,230

Net income

 

 

 

 

16,414

 

 

16,414

Foreign currency translation adjustments

 

 

 

 

 

2,295

 

2,295

Repurchase and retirement of treasury stock

 

(75,065)

 

 

(176)

 

 

 

(176)

Stock-based compensation expense

240

240

Balances at June 27, 2020

 

96,223,705

10

196,362

(1,255)

(114)

195,003

Net income

 

 

 

 

17,740

 

 

17,740

Foreign currency translation adjustments

 

 

 

 

 

47

 

47

Issuance of common stock

963,891

2,823

2,823

Stock-based compensation expense

978

978

Balances at September 26, 2020

 

97,187,596

$

10

$

200,163

$

16,485

$

(67)

$

216,591

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Latham Group, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

(unaudited)

    

    

    

    

Retained 

    

Accumulated 

    

Additional

Earnings

Other

Total

 Paid-in 

 (Accumulated

 Comprehensive

 Stockholders'

Shares

Amount

Capital

 Deficit)

 Income (Loss)

 Equity

Balances at December 31, 2020

 

118,854,249

$

12

$

265,478

$

13,765

$

2,354

$

281,609

Net income

 

 

 

 

8,533

 

 

8,533

Foreign currency translation adjustments

 

 

 

 

 

(1,201)

 

(1,201)

Dividend ($1.00 per share)

 

 

 

(110,033)

 

 

 

(110,033)

Repurchase and retirement of treasury stock

(21,666,653)

(2)

(64,936)

(64,938)

Stock-based compensation expense

 

 

 

1,464

 

 

 

1,464

Balances at April 3, 2021

 

97,187,596

 

10

 

91,973

 

22,298

 

1,153

 

115,434

Net loss

 

 

 

 

(53,598)

 

 

(53,598)

Foreign currency translation adjustments

 

 

 

 

 

164

 

164

Net proceeds from initial public offering

23,000,000

2

399,262

399,264

Repurchase and retirement of treasury stock

 

(12,264,438)

 

(1)

 

(216,699)

 

 

 

(216,700)

Issuance of restricted stock in connection with the Reorganization

8,340,126

1

(1)

Issuance of common stock upon conversion of Class B units

4,145,987

Stock-based compensation expense

75,511

75,511

Balances at July 3, 2021

 

120,409,271

12

350,046

(31,300)

1,317

320,075

Net loss

 

 

 

 

(11,296)

 

 

(11,296)

Foreign currency translation adjustments

 

 

 

 

 

(887)

 

(887)

Retirement of restricted stock

 

(559,682)

 

 

 

 

 

Stock-based compensation expense

27,603

27,603

Balances at October 2, 2021

 

119,849,589

$

12

$

377,649

$

(42,596)

$

430

$

335,495

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Latham Group, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three Fiscal Quarters Ended

October 2,

September 26,

    

2021

    

2020

Cash flows from operating activities:

Net (loss) income

$

(56,361)

$

18,703

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

23,689

 

17,461

Amortization of deferred financing costs and debt discount

 

5,907

 

1,867

Stock-based compensation expense

 

104,578

 

1,442

Other non-cash

1,349

825

Gain on sale of equity method investment

(3,856)

Earnings from equity method investment

(1,808)

Distributions received from equity method investment

1,808

Changes in operating assets and liabilities:

 

  

 

  

Trade receivables

 

(43,134)

 

(18,732)

Inventories

 

(16,128)

 

(2,202)

Prepaid expenses and other current assets

 

(4,774)

 

279

Income tax receivable

 

(1,752)

 

(1,287)

Other assets

(465)

Accounts payable

 

10,550

 

16,192

Accrued expenses and other current liabilities

 

9,740

 

20,449

Other long-term liabilities

 

83

 

59

Net cash provided by operating activities

 

29,426

 

55,056

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(19,242)

 

(9,677)

Proceeds from the sale of property and equipment

 

33

 

560

Return of equity method investment

447

Proceeds from the sale of equity method investment    

6,796

Net cash used in investing activities

 

(11,966)

 

(9,117)

Cash flows from financing activities:

 

  

 

  

Proceeds from long-term debt borrowings

 

172,813

 

Payments on long-term debt borrowings

 

(164,833)

 

(20,925)

Proceeds from borrowings on revolving credit facility

16,000

5,000

Payments on revolving credit facility

(16,000)

(5,000)

Deferred financing fees paid

(1,250)

Dividend to Class A unitholders

(110,033)

Proceeds from the issuance of common stock

615

Proceeds from initial public offering, net of underwriting discounts, commissions and offering costs

 

399,264

 

Repurchase and retirement of treasury stock

(281,638)

(576)

Payments of Narellan Group Pty Limited contingent consideration

 

 

(6,624)

Net cash provided by (used in) financing activities

 

14,323

 

(27,510)

Effect of exchange rate changes on cash

 

(224)

 

769

Net increase (decrease) in cash

 

31,559

 

19,198

Cash at beginning of period

 

59,310

 

56,655

Cash at end of period

$

90,869

$

75,853

Supplemental cash flow information:

 

  

 

  

Cash paid for interest

$

14,208

$

12,693

Income taxes paid, net

$

15,213

$

9,100

Supplemental disclosure of non-cash investing and financing activities:

 

  

 

  

Purchases of property and equipment included in accounts payable and accrued expenses

$

226

$

635

Capitalized internal-use software included in accounts payable – related party

$

1,050

$

Fair value of equity issued by Parent to settle contingent consideration in connection with the acquisition of Narellan Group Pty Limited

$

$

2,208

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements 

1. NATURE OF THE BUSINESS

Latham Group, Inc. (“the Company”) wholly owns Latham Pool Products, Inc. (“Latham Pool Products”) (together, “Latham”) and is a designer, manufacturer and marketer of in-ground residential swimming pools in North America, Australia and New Zealand. Latham offers a portfolio of pools and related products, including in-ground swimming pools, pool liners and pool covers.

On December 18, 2018, Latham Investment Holdings, LP (“Parent”), an investment fund managed by affiliates of Pamplona Capital Management (the “Sponsor”), Wynnchurch Capital, L.P. and management acquired all of the outstanding equity interests of Latham Topco., Inc., a newly incorporated entity in the State of Delaware. Latham Topco, Inc. changed its name to Latham Group, Inc. on March 3, 2021.

Initial Public Offering, Reorganization and Stock Split

On April 27, 2021, the Company completed its initial public offering (the “IPO”), pursuant to which it issued and sold 23,000,000 shares of common stock, inclusive of 3,000,000 shares sold by the Company pursuant to the full exercise of the underwriters’ option to purchase additional shares. The aggregate net proceeds received by the Company from the IPO were $399.3 million, after deducting underwriting discounts and commissions and other offering costs.

Prior to the closing of the Company’s IPO on April 27, 2021 (the “Closing of the IPO”), the Company’s parent entity, Parent, merged with and into Latham Group, Inc., with Latham Group, Inc. surviving the merger (the “Reorganization”). The purpose of the Reorganization was to allow existing indirect owners of the Company to become direct shareholders of the Company.

In connection with the Reorganization, Class A units of the Parent (the “Class A units”) were converted into shares of the Company’s common stock, and Class B units of the Parent (the “Class B units”) were converted into an economically equivalent number of restricted and unrestricted shares of the Company’s common stock on a pro rata basis. The Reorganization was accounted for as an equity reorganization between entities under common control. As the Class A units were akin to common shares as all holders held economic interest of the Parent and were entitled to distributions on a pro rata basis to their ownership, the conversion of Class A units to common shares as part of the Reorganization was considered to be equivalent to a stock split , which requires retrospective treatment for accounting purposes. Accordingly, all share and per share amounts in these condensed consolidated financial statements and related notes have been retroactively restated, where applicable, to give effect to the conversion ratio applied in connection with the Reorganization.

Class B units were historically accounted for as compensatory arrangements in accordance with ASC 718 “Compensation – Stock Compensation”, akin to stock appreciation rights, that, when vested, would share on the economic appreciation of the equity value of Parent over the agreed hurdles. As a result of the Reorganization, the Company determined that only vested Class B units are considered outstanding for accounting purposes. A portion of the Class B units vest based on continued employment by the holder, or time-vesting units, and the remaining Class B units vest upon defined performance and market conditions, or performance-vesting units. Therefore, the Company has considered any unvested restricted shares as contingently issuable shares until they vest. The conversion of time-vesting Class B units to restricted shares is retrospectively included in the weighted-average common shares outstanding for diluted net income (loss) per share using the treasury stock method for each period in which the individual unit holder’s threshold was met at the reporting date and therefore the individual unit holder would have participated in a hypothetical distribution to the Parent unit holders. The conversion of performance-vesting Class B units to restricted shares is not included in the shares outstanding for diluted net income (loss) per share for any period prior to the Reorganization and IPO as the performance vesting thresholds were not satisfied and the performance units were not considered probable to vest historically.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

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Unaudited Interim Financial Information

The consolidated balance sheet at December 31, 2020 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements as of October 2, 2021 and for the fiscal quarters and three fiscal quarters ended October 2, 2021 and September 26, 2020 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with Latham Group, Inc.’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2020 included in the Company’s Registration Statement on Form S-1, as amended, File No. 333-254930 on file with the SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of October 2, 2021 and results of operations for the fiscal quarters and three fiscal quarters ended October 2, 2021 and September 26, 2020 and cash flows for the three fiscal quarters ended October 2, 2021 and September 26, 2020 have been made. The Company’s results of operations for the fiscal quarter and three fiscal quarters ended October 2, 2021 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2021.

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. Estimates are evaluated on an ongoing basis and revised as there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known.

Seasonality

Although the Company generally has demand for its products throughout the year, its business is seasonal and weather is one of the principal external factors affecting the business. Historically, 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. Sales periods having severe weather may also affect net sales.

Accounting Policies

Refer to the Company’s final prospectus for the IPO filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on April 26, 2021 (“the Prospectus”) for a discussion of the Company’s accounting policies, as updated below.

Stock-based Compensation

Stock-based compensation is measured and recognized based on the grant date fair value of the awards. The Class B units of the Parent were granted to employees in the form of Profits Interest Units (“PIUs”). The Company determined the grant date fair value of PIUs using the Black-Scholes option pricing model. As part of the Reorganization, the vested and unvested PIUs of the Parent, were converted on a pro rata basis into equivalent restricted stock units and restricted stock awards of the Company’s underlying common stock. The fair value of the awards is expensed using a graded vesting method over the requisite service period in which employees earn the awards. The Company accounts for forfeitures of stock-based awards as they occur rather than applying an estimated forfeiture rate to stock-based compensation expense.

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. The Company uses the simplified method to calculate expected term of the PIUs as the Company does 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. The Company considers the historical volatility of the Company’s stock price, as well as implied volatility. The Company utilized a dividend yield of zero, as it had no history or plan of declaring dividends on its common stock. The assumptions underlying these valuations represented the Company’s best estimate, which involved inherent

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uncertainties and the application of judgment. As a result, if the Company had used significantly different assumptions or estimates, the fair value of the Company’s stock-based compensation expense could have been materially different.

Contemporaneously with the pricing of the Company’s IPO, on April 22, 2021, the Company effected its Omnibus Incentive Plan in which it granted to certain employees of the Company restricted stock awards, restricted stock units and option awards inclusive of the as converted Class B units as a result of the Reorganization (see Note 14).

Equity Method Investments

Investments and ownership interests in common stock or in-substance common stock are accounted for under the equity method accounting if the Company has the ability to exercise significant influence over the entity but does not have a controlling financial interest. Under the equity method, investments are initially recognized at cost and adjusted to reflect the Company’s interest in net earnings, dividends received and other-than-temporary impairments. The Company records its interest in the net earnings of its equity method investee, along with adjustments for amortization of basis differences, investee capital transactions and other comprehensive income (loss), within earnings from equity method investment in the condensed consolidated statements of operations. Basis differences represent differences between the cost of the investment and the underlying equity in net assets of the investment and are generally amortized over the lives of the related assets that gave rise to the underlying basis differences. Profits or losses related to intra-entity sales with its equity method investee are eliminated until realized by the investor or investee.

The Company records its proportionate share of earnings or losses of Premier Holdco, LLC (“Premier Pools & Spas”) within earnings from equity method investment in the condensed consolidated statements of operations on a three-month lag. The Company recorded its interest in the net earnings of Premier Pools & Spas of $0.8 million and $1.8 million, respectively, for the fiscal quarter and three fiscal quarters ended October 2, 2021, which included a $0.1 million and $0.2 million adjustment for the amortization of basis differences, within earnings from equity method investment in the condensed consolidated statements of operations during the fiscal quarter and three fiscal quarters ended October 2, 2021. As the Company initially invested in Premier Pools & Spas on October 30, 2020, there was no earnings from equity method investment recorded during the fiscal quarter and the three fiscal quarters ended September 26, 2020. The Company received distributions of $1.1 million and $2.2 million during the fiscal quarter and three fiscal quarters ended October 2, 2021, respectively.

For presentation in the condensed consolidated statements of cash flows, the Company utilizes the cumulative earnings approach for purposes of determining whether distributions should be classified as either a return on investment, which are be included in operating activities, or a return of investment, which would be included in investing activities. Under the cumulative earnings approach, the Company compares the distributions received to its cumulative equity-method earnings since inception. Any distributions received up to the amount of cumulative equity earnings are be considered a return on investment and classified in operating activities. Any excess distributions would be considered a return of investment and classified in investing activities.

Equity method goodwill is not amortized or tested for impairment; instead the Company evaluates equity method investments for impairment when events or changes in circumstances indicate that the decline in value below the carrying amount of its equity method investment is determined to be other than temporary. In such a case, the decline in value below the carrying amount of its equity method investment is recognized in the condensed consolidated statements of operations in the period the impairment occurs.

Recently Issued Accounting Pronouncements

The Company qualifies as “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and has elected to “opt in” to the extended transition related to complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public and nonpublic companies, the Company will adopt the new or revised standard at the time nonpublic companies adopt the new or revised standard and will do so until such time that the Company either (i) irrevocably elects to “opt out” of such extended transition period or (ii) no longer qualifies as an emerging growth company. The Company may choose to early adopt any new or revised accounting standards whenever such early adoption is permitted for private companies.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is

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recognized based on an effective interest method or on a straight-line basis over the term of the lease. In addition, a lessee is required to record (i) a right-of-use asset and a lease liability on its balance sheet for all leases with accounting lease terms of more than 12 months regardless of whether it is an operating or financing lease and (ii) lease expense in its consolidated statement of operations for operating leases and amortization and interest expense in its consolidated statement of operations for financing leases. Leases with a term of 12 months or less may be accounted for similar to prior guidance for operating leases today. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), which added an optional transition method that allows companies to adopt the standard as of the beginning of the year of adoption as opposed to the earliest comparative period presented. In November 2019, the FASB issued guidance delaying the effective date for all entities, except for public business entities. For nonpublic entities, this guidance is effective for annual periods beginning after December 15, 2020. In June 2020, the FASB issued additional guidance delaying the effective date for all entities, except for public business entities. For public entities, ASU 2016-02 was effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. For nonpublic entities, this guidance is effective for annual periods beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, which narrowed the scope and changed the effective date for nonpublic entities for ASU 2016-13. The FASB subsequently issued supplemental guidance within ASU 2019-05, Financial Instruments — Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”). ASU 2019-05 provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For public entities that are SEC filers, excluding entities eligible to be smaller reporting companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-13 will have on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which is intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its consolidated financial statements. In addition to that main objective, the amendments in the update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. Additional updates to further clarify the guidance in ASU 2017-12 were issued by the FASB in October 2018 within ASU 2018-16. For public entities, the amendment is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For nonpublic entities, ASU 2017-12 is effective for fiscal years beginning after December 15, 2020 and interim periods beginning after December 15, 2021. Early application is permitted in any interim period after the issuance of the update. The Company is currently evaluating the impact that the adoption of ASU 2017-12 will have on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in ASC 740 and also clarifies and amends existing guidance to improve consistent application. For public entities, ASU 2019-12 is effective for annual periods beginning after December 15, 2020, and interim periods within those reporting periods. For nonpublic companies, ASU 2019-12 is effective for annual periods beginning after December 15, 2021, and interim periods within those reporting periods. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2019-12 will have on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. For public entities, ASU 2020-01 is effective for annual periods beginning after December 15, 2020, and interim periods within those reporting periods. For nonpublic companies, ASU 2020-01 is effective for annual periods beginning after December 15, 2021, and

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interim periods within those reporting periods. The Company is currently evaluating the impact that the adoption of ASU 2020-01 will have on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. This guidance is effective for all entities upon issuance on March 12, 2020 and may be applied through December 31, 2022. The expedients and exceptions in this guidance are optional, and the Company is evaluating the potential future financial statement impact of any such expedient or exception that it may elect to apply as the Company evaluates the effects of adopting this guidance on its consolidated financial statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, this guidance applies to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The ASU became effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact that the adoption of ASU 2021-01 will have on its consolidated financial statements.

3. ACQUISITIONS

GL International, LLC

On October 22, 2020, Latham Pool Products acquired GL International, LLC (“GLI”) for a total purchase price of $79.7 million (the “GLI Acquisition”). The results of GLI’s operations have been included in the condensed consolidated financial statements since that date. GLI specializes in manufacturing custom pool liners and safety covers. As a result, this acquisition expanded the Company’s liner and safety cover product offerings. In connection with the GLI Acquisition, consideration paid was $79.7 million in cash, or $74.7 million net of cash acquired of $5.0 million, and excluding a net working capital adjustment receivable of $0.8 million. The net working capital adjustment receivable was settled during fiscal quarter ended April 3, 2021. The cash consideration was funded from existing cash on hand. The Company incurred $2.4 million in transaction costs.

The Company accounted for the GLI Acquisition using the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations (“ASC 805”). This requires that the assets acquired and liabilities assumed be measured at fair value. The Company estimated, using Level 3 inputs, the fair value of certain fixed assets using a combination of the cost approach and the market approach. Inventories were valued using the comparative sales method, less the cost of disposal. Specific to intangible assets, dealer relationships were valued using the multi-period excess earnings method, whereas trade names were valued using the relief from royalty method. The Company recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date.

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The following summarizes the purchase price allocation for the GLI Acquisition:

(in thousands)

    

October 22, 2020

Total consideration

$

79,743

Allocation of purchase price:

 

  

Cash

 

5,007

Trade receivables

 

10,639

Inventories

 

11,854

Prepaid expenses and other current assets

 

3,949

Property and equipment

 

1,402

Intangible assets

 

46,700

Total assets acquired

 

79,551

Accounts payable

 

3,536

Accrued expenses and other current liabilities

 

8,853

Other long-term liabilities

 

524

Total liabilities assumed

 

12,913

Total fair value of net assets acquired, excluding goodwill:

 

66,638

Goodwill

$

13,105

The excess of the purchase price over the fair value of the identifiable assets acquired and the liabilities assumed in the acquisition was allocated to goodwill in the amount of $13.1 million. Goodwill resulting from the GLI Acquisition was attributable to the expanded market share and product offerings. Goodwill resulting from the GLI Acquisition is deductible for tax purposes.

The Company allocated a portion of the purchase price to specific intangible asset categories as follows:

Fair Value

Amortization Period

Definite-lived intangible assets:

    

(in thousands)

    

(in years)

Trade names

$

9,500

 

9

Dealer relationships

 

37,200

 

8

$

46,700

Pro Forma Financial Information (Unaudited)

The following pro forma financial information presents the statements of operations of the Company combined with GLI as if the acquisition occurred on January 1, 2020. The pro forma results do not include any anticipated synergies, cost savings or other expected benefits of an acquisition. The pro forma financial information is not necessarily indicative of what the financial results would have been had the acquisition been completed on January 1, 2020 and is not necessarily indicative of the Company’s future financial results.

Fiscal Quarter Ended

Three Fiscal Quarters Ended

(in thousands)

    

September 26, 2020

September 26, 2020

Net sales

$

152,508

$

345,200

Net loss

$

22,598

$

21,952

The pro forma financial information presented above has been calculated after adjusting for the results of the GLI Acquisition for the fiscal quarter and the three fiscal quarters ended September 26, 2020 to reflect the accounting effects as a result of the acquisition, including the amortization expense from acquired intangible assets, the depreciation and amortization expense from acquired property and equipment, the additional cost of sales from acquired inventory, interest expense from debt financing, and any related tax effects.

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4. EQUITY METHOD INVESTMENT

On October 30, 2020, the Company entered into a securities purchase agreement to purchase 28% of the common units of Premier Pools & Spas for $25.4 million. On August 6, 2021, the Company entered into a securities purchase agreement, together with Premier Holdco LLC, Premier Pools Management Corp. Holdco, Premier Franchise Management Holdco, PFC Holdco, and PPSF, LLC, pursuant to which Premier Group Holdings Inc., an affiliate of Wynnchurch Capital, L.P., acquired 29.8% of the common units of Premier Pools & Spas in aggregate from all sellers, including the Company. Sellers who were not related parties of Wynnchurch Capital, L.P. or the Company determined the purchase price per common unit paid by Premier Group Holdings Inc., indicating the amount paid for the common units of Premier Pools & Spas reflects the price that would be paid in an arm's-length transaction. As a result of the transaction, the Company received cash proceeds of $6.8 million and recorded a gain on the sale of equity method investment of $3.9 million, which was recorded within other (income) expense, net on the condensed consolidated statements of operations during the fiscal quarter ended October 2, 2021.

The Company’s post-sale ownership interest in Premier Pools & Spas is 20.1%. The Company concluded, both before and after the sale of common units on August 6, 2021, that it holds common stock of Premier Pools & Spas and has the ability to exercise significant influence over Premier Pools & Spas but does not have a controlling financial interest. Accordingly, the Company accounts for this investment using the equity method of accounting. The Company’s proportionate share of the earnings or losses of the investee are reported as a separate line in the condensed consolidated statements of operations.

Premier Pools & Spas is a holding company for its manufacturing and franchising companies including PFC LLC, Premier Franchise Management LLC, Premier Pools Management LLC, and Premier Fiberglass LLC (the “Premier Companies”). The Premier Companies are a leading swimming pool-building brand that uses its franchisee network to sell and install pools around the United States.

In connection with Latham’s Investment in Premier Pools & Spas, the Company entered into an exclusive supply agreement with Premier Pools & Spas, the Premier Companies, and Premier Pools & Spas’ franchisees (“Premier Franchisees”) (together, the “Customer”). Premier Pools & Spas does not consolidate the operations of the Premier Franchisees. Per the supply agreement, Latham is the exclusive supplier of the Premier Franchisees for specific pool and pool products. These products include fiberglass products and package pool products. The initial term of the supply agreement is ten years.

For the first three years of the supply agreement, the Customer is entitled to a low-teens percentage rebate for all fiberglass pools sold and an additional growth rebate of a low single-digit to low-teens percentage based on year over year sales growth on fiberglass pools (the “Rebates”). The Rebates will be paid directly to Premier Pools Management Corp. Holdco.

As of October 2, 2021, the Company’s carrying amount for the equity method investment in Premier Pools & Spas was $22.0 million. During the three fiscal quarters ended October 2, 2021, Premier Pools & Spas paid the Company dividends of $2.2 million that are presented on the condensed consolidated statement of cash flows as distribution received from equity method investment of $1.8 million and return of equity method investment of $0.4 million, respectively. The Company has elected a three-month financial reporting lag. The Company recorded its interest in net earnings of Premier Pools & Spas of $0.8 million and $1.8 million for the fiscal quarter and three fiscal quarters ended October 2, 2021, along with a basis difference adjustment of $0.1 million and $0.2 million, respectively.

5. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value.

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.

Level 3 — Unobservable inputs that reflect the Company’s own assumptions incorporated into valuation techniques. These valuations require significant judgment.

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In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When there is more than one input at different levels within the hierarchy, the fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assessment of the significance of a particular input to the fair value measurement in its entirety requires substantial judgment and consideration of factors specific to the asset or liability. Level 3 inputs are inherently difficult to estimate. Changes to these inputs can have significant impact on fair value measurements. Assets and liabilities measured at fair value using Level 3 inputs are based on one or more of the following valuation techniques: market approach, income approach or cost approach. There were no transfers between fair value measurement levels during the three fiscal quarters ended October 2, 2021 or September 26, 2020.

Assets and liabilities measured at fair value on a nonrecurring basis

The Company’s non-financial assets such as goodwill, intangible assets and property and equipment are measured at fair value upon acquisition or remeasured to fair value when an impairment charge is recognized. Such fair value measurements are based predominantly on Level 2 and Level 3 inputs.

Assets and liabilities measured at fair value on a recurring basis

On May 31, 2019 (the “Acquisition Date”), Latham Pool Products acquired Narellan Group Pty Limited and its subsidiaries (collectively “Narellan”) for a total purchase price of $35.2 million (the “Narellan Acquisition”). In connection with the Narellan Acquisition, consideration paid included $20.2 million in cash, $7.6 million in equity consideration and $7.4 million of contingent consideration as of the Acquisition Date. The Company agreed to pay the contingent consideration in the form of cash and equity consideration to the seller if certain EBITDA targets were achieved for any of the trailing twelve months periods ended December 31, 2019, June 30, 2020 or the year ended December 31, 2020 (the “Contingent Consideration”). The fair value of the Contingent Consideration at the Acquisition Date was $7.4 million. On September 25, 2020, the Company amended the terms of the Narellan Share Purchase Agreement and settled the Contingent Consideration with the selling shareholders of Narellan based upon estimated EBITDA for the year ended December 31, 2020.

The fair value of the Company’s Contingent Consideration was measured and recorded on the condensed consolidated balance sheets using Level 3 inputs because it was valued based on unobservable inputs and other estimation techniques due to the absence of quoted market prices. The Company valued the Contingent Consideration using a Monte Carlo simulation, which relied on management’s projections of EBITDA and the estimated probability of achieving such targets.

Estimates of fair value are subjective in nature, involve uncertainties and matters of significant judgment, and are made at a specific point in time. Thus, changes in key assumptions from period to period could significantly affect the estimate of fair value.

Pension Plan

The fair value of the benefit plan assets related to the Company’s pension plan was historically measured and recorded on the condensed consolidated balance sheets using Level 2 inputs. During the fiscal quarter ended September 26, 2020, the Company terminated its defined benefit pension plan.

Fair value of financial instruments

The Company considers the carrying amounts of cash, trade receivables, prepaid expenses and other current assets, accounts payable, and accrued expenses and other current liabilities, to approximate fair value due to the short-term maturities of these instruments.

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Term loan

The term loan is carried at amortized cost; however, the Company estimates the fair value of the term loan for disclosure purposes. The fair value of the term loan is determined using inputs based on observable market data of a non-public exchange using, which are classified as Level 2 inputs. The following table sets forth the carrying amount and fair value of the term loan (in thousands):

October 2, 2021

December 31, 2020

Carrying

Estimated

Carrying

Estimated

    

Value

    

Fair Value

    

Value

    

Fair Value

Term loan

$

234,201

$

235,372

$

221,496

$

221,081

Interest rate swap

The Company estimates the fair value of the interest rate swap (see Note 8) on a quarterly basis using Level 2 inputs, including the forward LIBOR curve. The fair value is estimated by comparing (i) the present value of all future monthly fixed rate payments versus (ii) the variable payments based on the forward LIBOR curve. As of October 2, 2021 and December 31, 2020, the Company’s interest rate swap liability was $0.6 million and $0.3 million, respectively, which was recorded within other long-term liabilities on the condensed consolidated balance sheets.

6. GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

The carrying amount of goodwill as of October 2, 2021 and as of December 31, 2020 was $115.2 million and $115.8 million, respectively. The change in the carrying value during the three fiscal quarters ended October 2, 2021 was solely due to fluctuations in foreign currency exchange rates.

Intangible Assets

Intangible assets, net as of October 2, 2021 consisted of the following (in thousands):

October 2, 2021

Gross

Foreign

Carrying

Currency

Accumulated

Net

    

Amount

    

Translation

    

Amortization

    

Amount

Trade names and trademarks

$

135,100

$

476

$

14,839

$

120,737

Patented technology

 

16,126

 

70

 

4,772

 

11,424

Pool designs

 

5,728

 

286

 

956

 

5,058

Franchise relationships

 

1,187

 

59

 

694

 

552

Dealer relationships

 

160,376

 

23

 

27,434

 

132,965

Non-competition agreements

 

2,476

 

 

1,381

 

1,095

$

320,993

$

914

$

50,076

$

271,831

The Company recognized $5.5 million and $16.6 million of amortization expense related to intangible assets during the fiscal quarter and the three fiscal quarters ended October 2, 2021, respectively.

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Intangible assets, net as of December 31, 2020 consisted of the following (in thousands):

December 31, 2020

Gross

Foreign

Carrying

Currency

Accumulated

Net

    

Amount

    

Translation

    

Amortization

    

Amount

Trade names and trademarks

$

135,100

$

1,047

$

10,258

$

125,889

Patented technology

 

16,126

 

155

 

3,452

 

12,829

Pool designs

 

5,728

 

629

 

648

 

5,709

Franchise relationships

 

1,187