10-Q: Latham Group Posts Strong Q2 Growth, Boosted by Acquisitions

Latham Group, Inc. reported significant increases in net sales, net income, and Adjusted EBITDA for the second fiscal quarter ended June 28, 2025, driven by strategic acquisitions and operational efficiencies.

Summary

• Net sales for the fiscal quarter ended June 28, 2025, increased by 7.8% to $172.6 million, up from $160.1 million in the prior year quarter.
• Net income for the quarter rose by 20.3% to $16.0 million, compared to $13.3 million in the same period last year, with net income margin improving from 8.3% to 9.3%.
• Adjusted EBITDA for the quarter increased by 15.7% to $39.9 million, up from $34.5 million, with Adjusted EBITDA margin expanding from 21.5% to 23.1%.
• For the two fiscal quarters ended June 28, 2025, net sales grew 4.9% to $284.1 million, net income surged 85.0% to $10.0 million, and Adjusted EBITDA increased 9.1% to $51.0 million.
• The increase in net sales was primarily driven by a $12.0 million increase in sales volume for the quarter, with covers sales up $11.7 million and liners up $3.1 million, partially offset by a $2.4 million decrease in in-ground swimming pools.
• Gross margin improved by 4.0 percentage points to 37.1% for the quarter, attributed to higher volumes, lean manufacturing, value engineering, and benefits from Coverstar acquisitions.
• The company completed the acquisition of Coverstar Central, LLC in August 2024 for $71.5 million, and two smaller autocover dealers in early 2025, contributing to growth and vertical integration.
• Cash used in operating activities for the two fiscal quarters ended June 28, 2025, was $10.9 million, a significant change from $17.9 million provided in the prior year period, primarily due to a $57.4 million increase in trade receivables.
• Cash at the end of the period was $26.9 million, down from $56.4 million at December 31, 2024.
• The company repaid $25.0 million of outstanding borrowings on its Revolving Credit Facility on June 12, 2025, leaving $75.0 million available for future borrowing.
• A new interest rate swap was executed on June 4, 2025, fixing the SOFR borrowing rate at 3.92% on a notional amount of $140.0 million until May 18, 2027.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive. While the company reported strong financial performance with increased sales, net income, and Adjusted EBITDA, and successfully integrated acquisitions, there are notable concerns. Cash from operations significantly decreased, and the outlook for new pool starts remains cautious. The increase in trade receivables and SG&A expenses also warrants attention. The positive aspects outweigh the negatives, but the cautious outlook and cash flow dynamics temper overall enthusiasm.

Positives

• Net sales increased by 7.8% for the fiscal quarter and 4.9% for the two fiscal quarters, demonstrating revenue growth.
• Net income significantly increased by 20.3% for the quarter and 85.0% for the two fiscal quarters, indicating improved profitability.
• Gross margin improved by 4.0 percentage points to 37.1% for the quarter, reflecting production efficiencies and acquisition benefits.
• Adjusted EBITDA increased by 15.7% for the quarter and 9.1% for the two fiscal quarters, showing strong operational performance.
• Strategic acquisitions of Coverstar Central and two smaller autocover dealers are expected to increase margins and accelerate sales growth through vertical integration.
• Successful implementation of lean manufacturing and value engineering programs contributed to production efficiencies and offset cost increases.
• The company repaid $25.0 million on its Revolving Credit Facility, indicating prudent debt management and maintaining $75.0 million in available liquidity.

Negatives

• Cash used in operating activities for the two fiscal quarters ended June 28, 2025, was $10.9 million, a substantial decrease from $17.9 million provided in the prior year, primarily due to a $57.4 million increase in trade receivables.
• Cash on hand decreased by $29.5 million from December 31, 2024, to June 28, 2025.
• Sales of in-ground swimming pools decreased by $2.4 million for the quarter and $4.5 million for the two fiscal quarters, indicating a decline in a core product category.
• Selling, general, and administrative expenses increased by 20.1% for the quarter and 18.4% for the two fiscal quarters, driven by increased marketing, personnel investment, and ERP infrastructure costs.
• Interest expense, net, increased by 18.9% for the quarter and 23.0% for the two fiscal quarters, primarily due to changes in the fair value of the interest rate swap.
• Earnings from equity method investment decreased for the two fiscal quarters ended June 28, 2025, compared to the prior year period.

Risks

• Challenging market conditions may impact future business results.
• New pool starts for 2025 are projected to be roughly in line with 2024 levels, indicating a cautious outlook for growth in this segment.
• Potential impact of current macroeconomic and geopolitical conditions, as well as general reduced consumer confidence and increased economic uncertainty.
• Exposure to changes in interest rates and foreign currency exchange rates, which may impact future cash flow and earnings.
• Operating in a very competitive and rapidly changing environment, with new risks emerging over time.
• Inherent limitations in control systems mean that no evaluation of controls can provide absolute assurance that misstatements related to error or fraud will not occur.
• Legal proceedings, including contract, employment, personal injury, intellectual property, product liability, and warranty claims, could incur significant costs and divert management resources.

Future Outlook

The company's current business results for the two fiscal quarters ended June 28, 2025, were aligned with expectations, reflecting strong second-quarter sales growth despite challenging market conditions. Management remains cautious on 2025 new pool starts, projecting them to be roughly in line with 2024 levels. The company continues to execute its strategy to drive adoption and awareness of fiberglass pools and automatic safety covers, gain operating efficiencies through value engineering and lean manufacturing, and maintain a disciplined approach to capital investments focused on product innovation, facility upgrades, technology, and systems. Investments in sales, marketing, engineering, and R&D are ongoing to accelerate conversion to fiberglass pool products and support digital transformation programs. The company is also assessing the impact of the recently signed One Big Beautiful Bill Act (OBBBA) on its financial statements.

Management Comments

• Our current business results reflect a strong second quarter sales growth despite challenging market conditions and our results of operations for the two fiscal quarters ended June 28, 2025 were aligned with our expectations.
• These results were primarily driven by category share gains in autocovers, along with contributions from the Coverstar Central, LLC acquisition in August 2024 and the early 2025 acquisitions of two of our smaller autocover dealers.
• Based on current business trends and market conditions, we remain cautious on 2025 new pool starts, which we currently project to be roughly in line with 2024 levels.
• We are closely monitoring the potential impact of current macroeconomic and geopolitical conditions, as well as general reduced consumer confidence and increased economic uncertainty.
• We recently implemented targeted price increases on certain products to help further mitigate the potential impact of tariffs.
• We continue to make progress executing our strategy to drive adoption and awareness of fiberglass pools and automatic safety covers and gain additional operating efficiencies through value engineering and lean manufacturing initiatives.
• We continue to take a disciplined approach to capital investments, with the focus on product innovation, facility upgrades and technology and systems.
• Strategic transactions continue to be part of our growth strategy.

Industry Context

The company operates in the residential swimming pool industry, which is influenced by seasonality, weather, and consumer confidence. Despite challenging market conditions and a cautious outlook on new pool starts, the company's focus on vertical integration through acquisitions of autocover dealers and investments in fiberglass pool adoption aligns with trends towards more efficient supply chains and potentially higher-margin product categories. The emphasis on digital marketing and direct-to-homeowner engagement positions the company to capture demand in a traditionally business-to-business market, potentially differentiating it from competitors. The broader macroeconomic and geopolitical conditions, along with consumer confidence, remain key external factors for the industry.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Legal Proceedings

• No material legal proceedings against the company that are believed to have a material adverse effect on business, financial condition, results of operations, or cash flows.
• No material legal proceedings were terminated, settled, or otherwise resolved during the fiscal quarter ended June 28, 2025.
• The company may incur significant costs and experience a diversion of management resources as a result of any current or future legal proceedings, regardless of the outcome.

Stakeholder Impact

• Shareholders: Positive financial results (increased net income, Adjusted EBITDA, gross margin) could positively impact shareholder value, but decreased cash from operations and cautious outlook on new pool starts may temper enthusiasm. The expiration of the share repurchase program means no immediate buyback support.
• Employees: Continued investment in personnel and strategic initiatives suggests stability and growth opportunities. The amended officer severance plan provides clarity and extended benefits for executive management.
• Customers (Dealers/Distributors): Increased sales volume, particularly in covers and liners, indicates strong product demand. Acquisitions aim to strengthen dealer relationships and accelerate sales growth.
• Creditors: The company remains in compliance with all debt covenants and has repaid borrowings on its revolving credit facility, indicating sound financial management and ability to meet obligations. The new interest rate swap provides some stability on borrowing costs.

Next Steps

• Continue executing the strategy to drive adoption and awareness of fiberglass pools and automatic safety covers.
• Gain additional operating efficiencies through value engineering and lean manufacturing initiatives.
• Maintain a disciplined approach to capital investments, focusing on product innovation, facility upgrades, technology, and systems.
• Continue investment in sales, marketing, engineering, and research and development efforts to accelerate conversion to fiberglass pool products and ongoing digital transformation programs.
• Assess the impact of the One Big Beautiful Bill Act (OBBBA) on consolidated financial statements.
• File the full text of the Amended and Restated Officer Severance Plan as an exhibit to the Quarterly Report on Form 10-Q for the fiscal quarter ended September 27, 2025.

Key Dates

Recommendation

Latham Group demonstrated strong financial performance in Q2 2025 with significant increases in net sales, net income, and Adjusted EBITDA, driven by strategic acquisitions and operational efficiencies. The improved gross margin is a positive indicator of profitability. However, the substantial decrease in cash from operating activities, primarily due to a large increase in trade receivables, raises concerns about working capital management and cash generation. The cautious outlook on 2025 new pool starts also suggests potential headwinds in a key segment. While the company is executing well on its strategic initiatives and managing its debt, the mixed financial signals and external market uncertainties warrant a 'hold' recommendation. Investors should monitor cash flow improvements and the trajectory of new pool starts before considering a stronger position.

Keywords

Swimming Pools, Pool Covers, Pool Liners, Fiberglass Pools, Automatic Safety Covers, Residential Pools, Manufacturing, Distribution, SEC Filing, Quarterly Report, Financial Results, Acquisition, Latham Group