10-Q: Latham Group Reports Strong Revenue Growth, Net Income Declines

Latham Group, Inc. announced a 14.4% increase in net sales for the fiscal quarter ended June 27, 2026, reaching $197.5 million, driven by volume and pricing, though net income decreased by $3.2 million to $12.8 million.

Summary

• Latham Group reported a 14.4% increase in net sales for the fiscal quarter ended June 27, 2026, reaching $197.5 million, compared to $172.6 million in the prior year period.
• Net income for the quarter decreased by $3.2 million to $12.8 million, resulting in a net income margin of 6.5%, down from 9.3% in the prior year.
• Adjusted EBITDA increased by 11.9% to $44.6 million for the quarter, though the Adjusted EBITDA margin slightly decreased to 22.6% from 23.1%.
• For the first two fiscal quarters of 2026, net sales increased by 10.8% to $314.8 million, while net income significantly decreased by $5.8 million to $4.2 million.
• The company completed the acquisition of Freedom Pools in Australia and New Zealand, which is expected to be immediately accretive to earnings.
• Investments in growth strategies, sales and marketing initiatives, and digital transformation efforts contributed to increased selling, general, and administrative expenses.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this filing as moderately positive, with strong revenue growth offset by a significant decrease in net income and increased operating expenses. The company's strategic acquisitions and market share gains are positive indicators, but the decline in profitability warrants careful observation.

Positives

• Net sales increased by 14.4% to $197.5 million for the fiscal quarter ended June 27, 2026, driven by a $19.0 million increase in sales volume and a $5.8 million increase from higher pricing.
• For the two fiscal quarters ended June 27, 2026, net sales increased by 10.8% to $314.8 million, with organic growth of 7.5% and contributions from the Freedom Pools acquisition.
• Adjusted EBITDA increased by 11.9% to $44.6 million for the fiscal quarter ended June 27, 2026.
• The acquisition of Freedom Pools is expected to be immediately accretive to earnings, adding approximately $20.0 million in net sales and $4.0 million in Adjusted EBITDA annually.
• The company is the largest designer, manufacturer, and marketer of in-ground residential swimming pools in North America, Australia, and New Zealand, holding a leading position in every product category.
• Investments in sales and marketing initiatives are designed to accelerate growth, particularly in the Sand States.

Negatives

• Net income for the fiscal quarter ended June 27, 2026, decreased by $3.2 million to $12.8 million, with a net income margin of 6.5%, down from 9.3% in the prior year.
• For the two fiscal quarters ended June 27, 2026, net income decreased by $5.8 million to $4.2 million, with a net income margin of 1.3%, down from 3.5% in the prior year.
• Selling, general, and administrative expenses increased by $5.7 million (17.8%) for the quarter and $11.6 million (18.6%) for the two fiscal quarters, driven by investments in growth strategies and acquisition-related costs.
• Gross margin decreased by 1.6% for the fiscal quarter due to approximately $2.8 million in incremental ramp-up costs for fiberglass pools.
• Other expense, net increased by $4.4 million for the quarter and $5.5 million for the two fiscal quarters, primarily due to unfavorable foreign currency transaction gains and losses.
• The effective tax rate increased to 32.4% for the quarter and 43.9% for the two fiscal quarters, compared to 24.3% and 9.5% respectively in the prior year periods.

Risks

• Global political uncertainty, financial market volatility, and geopolitical conflict, particularly in the Middle East, could disrupt global energy supplies, increase input costs, affect supply chains, and impact customer spending.
• The rise of economic nationalism and trade protectionism could lead to increased costs, longer transport times, and reduced global trade, adversely affecting the company's business and financial condition.
• The company is subject to interest rate risk, with a 1% increase in the effective interest rate potentially causing an increase of approximately $1.2 million in annual interest expense.
• The company's business is seasonal, with net sales and net income generally highest during the second and third quarters, making it susceptible to severe weather impacts in all periods.
• The company's credit agreement contains covenants that restrict its ability to incur additional indebtedness, create liens, make investments, and make restricted payments and other distributions.

Future Outlook

The company's strategic priorities and market share gains support expectations of continued growth. Investments in growth initiatives, particularly in the Sand States and fiberglass conversion strategy, are expected to accelerate growth. The acquisition of Freedom Pools is anticipated to be immediately accretive. The company believes its existing cash, cash generated from operations, and availability under its Revolving Credit Facility will be adequate to fund operating expenses and capital expenditure requirements over the next 12 months and for longer-term liquidity needs.

Management Comments

• Second quarter sales growth was driven by execution of our strategic priorities and supports our expectations of continued share gains across our product lines.
• We continued to gain traction in the Sand States, a key growth market for Latham, where second quarter sales increased at a double-digit rate.
• Second quarter gross profit increased, supported by higher volume and continued progress with lean manufacturing and value engineering initiatives.
• Strategic transactions continue to be part of our growth strategy.
• Our disciplined capital activity allocation strategy remains focused on deploying capital opportunistically to position Latham for profitable organic and acquisition-related growth and to de-lever and further reduce our net debt leverage ratio.

Industry Context

StockSavvy.ai notes that Latham Group operates in the highly competitive residential swimming pool market. The company's focus on direct-to-homeowner digital marketing and strong dealer relationships differentiates it. The acquisition of Freedom Pools in Australia and New Zealand indicates a strategy of international expansion and consolidation within the industry.

Comparison to Industry Standards

• The company's net sales growth of 14.4% for the quarter and 10.8% year-to-date exceeds typical growth rates for mature manufacturing industries, suggesting strong market penetration.
• The decrease in net income margin from 9.3% to 6.5% for the quarter, and from 3.5% to 1.3% year-to-date, is a concern when compared to industry benchmarks that often prioritize profitability alongside revenue growth. This suggests potential challenges in managing costs or pricing power.
• The Adjusted EBITDA margin of 22.6% for the quarter and 18.0% year-to-date, while strong, shows a slight decline for the quarter, indicating that non-GAAP profitability is also facing some pressure.
• Competitors in the pool industry include companies like Pentair, Hayward, and Pool Corporation, which also focus on pool equipment, chemicals, and services. Latham's focus on in-ground pools and covers, combined with its direct-to-consumer marketing, positions it uniquely.
• The company's stated goal of de-leveraging and reducing net debt leverage ratio aligns with prudent financial management practices observed in stable manufacturing sectors.

Legal Proceedings

• Currently, there are no legal proceedings against the company that are believed to have a material adverse effect on its 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 27, 2026.

Stakeholder Impact

• Shareholders may be concerned by the significant decrease in net income and net income margin, despite strong revenue growth.
• Employees may be impacted by increased SG&A expenses related to growth strategies and digital transformation, potentially leading to resource reallocation.
• Dealers benefit from the company's marketing strategies and lead generation, supporting their sales efforts.
• Creditors are subject to the company's debt covenants, which restrict certain financial activities.

Next Steps

• Continue to execute strategic priorities to drive share gains.
• Accelerate growth in the Sand States through new initiatives and sales resources.
• Continue to integrate Freedom Pools acquisition.
• Pursue discussions to extend the Revolving Credit Facility before its maturity in February 2027.
• Focus on deploying capital for profitable organic and acquisition-related growth.
• Continue digital transformation efforts to upgrade technology and ERP systems.

Key Dates

Recommendation

While revenue growth is strong and the company is expanding its market share and geographic reach through acquisitions, the significant decline in net income and margins is a concern. The increase in operating expenses and unfavorable foreign currency impacts warrant caution. The company's ability to convert revenue growth into sustainable profitability needs to be closely monitored. Therefore, a 'hold' recommendation is appropriate pending further clarity on cost management and margin improvement.

Keywords

swimming pools, pool covers, pool liners, fiberglass pools, residential swimming pools, manufacturing, distribution, acquisitions