QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2023
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 001-40208
Hayward Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1415 Vantage Park Drive
Suite 400
Charlotte, NC
(Address of Principal Executive
Office)
82-2060643
(I.R.S. Employer Identification No.)
28203
(Zip Code)
(704) 285-5445
Registrant's telephone number, including area code
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, $.001 per share
HAYW
New York Stock Exchange
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has 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 registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The registrant had outstanding 212,807,774 shares of common stock as of May 2, 2023.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q of Hayward Holdings, Inc. (the “Company,” “we” or “us”) contains certain “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relating to us are based on the beliefs of our management as well as assumptions made by, and information currently available to, us. These statements include, but are not limited to, statements about our strategies, plans, objectives, expectations, intentions, expenditures and assumptions and other statements contained in or incorporated by reference in this Quarterly Report on Form 10-Q that are not historical facts. When used in this document, words such as “may,” “will,” “should,” “could,” “intend,” “potential,” “continue,” “anticipate,” “believe,” “estimate,” “expect,” “plan,” “target,” “predict,” “project,” “seek” and similar expressions as they relate to us are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.
Examples of forward-looking statements include, among others, statements we make regarding: our financial position; business plans and objectives; general economic and industry trends; business prospects; future product development and acquisition strategies; future channel stocking levels; growth and expansion opportunities; operating results; and working capital and liquidity. We may not achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place significant reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make.
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, including such statements taken from third-party industry and market reports.
These forward-looking statements involve known and unknown risks, inherent uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Actual results and the timing of certain events may differ materially from those contained in these forward-looking statements.
Important factors that could affect our future results and could cause those results or other outcomes to differ materially from those indicated in our forward-looking statements include the following:
• our relationships with and the performance of distributors, builders, buying groups, retailers and servicers who sell our products to pool owners;
• impacts on our business from the sensitivity of our business to seasonality and unfavorable economic and business conditions;
• competition from national and global companies, as well as lower cost manufacturers;
• our ability to develop, manufacture and effectively and profitably market and sell our new planned and future products;
• our ability to execute on our growth strategies and expansion opportunities;
• impacts on our business from political, regulatory, economic, trade, and other risks associated with operating foreign businesses, including risks associated with geopolitical conflict;
• our ability to maintain favorable relationships with suppliers and manage disruptions to our global supply chain and the availability of raw materials;
• our ability to identify emerging technological and other trends in our target end markets;
• failure of markets to accept new product introductions and enhancements;
• the ability to successfully identify, finance, complete and integrate acquisitions;
• our reliance on information technology systems and susceptibility to threats to those systems, including cybersecurity threats, and risks arising from our collection and use of personal information data;
• regulatory changes and developments affecting our current and future products;
• volatility in currency exchange rates and interest rates;
• our ability to service our existing indebtedness and obtain additional capital to finance operations and our growth opportunities;
• our ability to establish and maintain intellectual property protection for our products, as well as our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property rights of others;
• the impact of material cost and other inflation;
• our ability to attract and retain senior management and other qualified personnel;
• the impact of changes in laws, regulations and administrative policy, including those that limit U.S. tax benefits, impact trade agreements and tariffs, or address the impacts of climate change;
• the outcome of litigation and governmental proceedings;
• the impact of product manufacturing disruptions, including as a result of catastrophic and other events beyond our businesses, including risks associated with geopolitical conflict;
• uncertainties of the pace of distribution channel destocking and its impact on sales volumes;
• our ability to realize cost savings from restructuring activities;
• our and our customers’ ability to manage product inventory in an effective and efficient manner; and
• other factors set forth in the respective “Risk Factors” section of this Quarterly Report on Form 10-Q and of our Annual Report on Form 10-K for the year ended December 31, 2022.
Many of these factors are macroeconomic in nature and are, therefore, beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from those described in this Quarterly Report on Form 10-Q as anticipated, believed, estimated, expected, intended, planned or projected. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report. Unless required by United States federal securities laws, we neither intend nor assume any obligation to update these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.
Accounts receivable, net of allowances of $4,088 and $3,937, respectively
308,274
209,109
Inventories, net
274,682
283,658
Prepaid expenses
8,641
14,981
Income tax receivable
27,847
27,173
Other current assets
17,903
21,186
Total current assets
678,374
612,284
Property, plant, and equipment, net of accumulated depreciation of $88,543 and $84,119, respectively
151,782
149,828
Goodwill
933,044
932,396
Trademark
736,000
736,000
Customer relationships, net
224,396
230,503
Other intangibles, net
103,685
106,673
Other non-current assets
98,412
107,329
Total assets
$
2,925,693
$
2,875,013
Liabilities and Stockholders’ Equity
Current liabilities
Current portion of the long-term debt
$
14,570
$
14,531
Accounts payable
56,099
54,022
Accrued expenses and other liabilities
124,384
163,283
Income taxes payable
—
574
Total current liabilities
195,053
232,410
Long-term debt, net
1,169,114
1,085,055
Deferred tax liabilities, net
261,985
264,111
Other non-current liabilities
69,422
70,403
Total liabilities
1,695,574
1,651,979
Commitments and contingencies (Note 12)
Stockholders’ equity
Preferred stock, $0.001 par value, 100,000,000 authorized, no shares issued or outstanding as of April 1, 2023 and December 31, 2022
—
—
Common stock $0.001 par value, 750,000,000 authorized; 241,441,438 issued and 212,775,069 outstanding at April 1, 2023; 240,529,150 issued and 211,862,781 outstanding at December 31, 2022
242
241
Additional paid-in capital
1,072,494
1,069,878
Common stock in treasury; 28,666,369 and 28,666,369 at April 1, 2023 and December 31, 2022, respectively
(357,424)
(357,415)
Retained earnings
508,632
500,222
Accumulated other comprehensive income
6,175
10,108
Total stockholders’ equity
1,230,119
1,223,034
Total liabilities, redeemable stock, and stockholders’ equity
$
2,925,693
$
2,875,013
See accompanying notes to the unaudited condensed consolidated financial statements.
1
Hayward Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Three Months Ended
April 1, 2023
April 2, 2022
Net sales
$
210,136
$
410,460
Cost of sales
112,245
220,066
Gross profit
97,891
190,394
Selling, general, and administrative expense
54,887
68,857
Research, development, and engineering expense
5,977
5,236
Acquisition and restructuring related expense
1,563
2,271
Amortization of intangible assets
7,617
7,610
Operating income
27,847
106,420
Interest expense, net
19,361
9,562
Other (income) expense, net
(759)
(514)
Total other expense
18,602
9,048
Income from operations before income taxes
9,245
97,372
Provision for income taxes
835
23,340
Net income
$
8,410
$
74,032
Earnings per share
Basic
$
0.04
$
0.32
Diluted
$
0.04
$
0.30
Weighted average common shares outstanding
Basic
212,523,221
232,271,684
Diluted
220,501,177
243,143,149
See accompanying notes to the unaudited condensed consolidated financial statements.
2
Hayward Holdings, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
(In thousands)
Three Months Ended
April 1, 2023
April 2, 2022
Gross
Taxes
Net
Gross
Taxes
Net
Net income
$
8,410
$
74,032
Other comprehensive income (loss):
Foreign currency translation adjustments
1,621
—
1,621
(360)
—
(360)
Change in fair value of derivatives
(7,405)
1,851
(5,554)
11,297
(2,824)
8,473
Comprehensive income
$
4,477
$
82,145
See accompanying notes to the unaudited condensed consolidated financial statements.
3
Hayward Holdings, Inc.
Unaudited Condensed Consolidated Statements of Changes in Redeemable Stock and Stockholders' Equity
(Dollars in thousands)
Common Stock
Additional Paid-in Capital
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Total Stockholders' Equity
Shares
Amount
Balance as of December 31, 2022
211,862,781
$
241
$
1,069,878
$
(357,415)
$
500,222
$
10,108
$
1,223,034
Net income
—
—
—
—
8,410
—
8,410
Stock-based compensation
—
—
2,047
—
—
—
2,047
Issuance of Common Stock for compensation plans
912,288
1
569
—
—
—
570
Repurchase of stock
—
—
—
(9)
—
—
(9)
Other comprehensive loss
—
—
—
—
—
(3,933)
(3,933)
Balance as of April 1, 2023
212,775,069
$
242
$
1,072,494
$
(357,424)
$
508,632
$
6,175
$
1,230,119
Common Stock
Additional Paid-in Capital
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Total Stockholders' Equity
Shares
Amount
Balance as of December 31, 2021
233,056,799
$
238
$
1,058,724
$
(14,066)
$
320,875
$
3,742
$
1,369,513
Net income
—
—
—
—
74,032
—
74,032
Stock-based compensation
—
—
1,641
—
—
—
1,641
Issuance of Common Stock for compensation plans
403,158
1
427
—
—
—
428
Repurchase of stock
(4,080,000)
—
—
(80,807)
—
—
(80,807)
Other comprehensive income
—
—
—
—
—
8,113
8,113
Balance as of April 2, 2022
229,379,957
$
239
$
1,060,792
$
(94,873)
$
394,907
$
11,855
$
1,372,920
See accompanying notes to the unaudited condensed consolidated financial statements.
4
Hayward Holdings, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
April 1, 2023
April 2, 2022
Cash flows from operating activities
Net income
$
8,410
$
74,032
Adjustments to reconcile net income to net cash used by operating activities
Depreciation
4,362
4,840
Amortization of intangible assets
9,254
9,097
Amortization of deferred debt issuance fees
1,090
825
Stock-based compensation
2,047
1,641
Deferred income taxes
(328)
(4,722)
Allowance for bad debts
145
3,051
Loss on disposal of property, plant and equipment
32
53
Changes in operating assets and liabilities
Accounts receivable
(98,802)
(144,045)
Inventories
9,933
(28,131)
Other current and non-current assets
8,150
10,234
Accounts payable
1,855
8,015
Accrued expenses and other liabilities
(37,030)
8,170
Net cash used by operating activities
(90,882)
(56,940)
Cash flows from investing activities
Purchases of property, plant, and equipment
(6,239)
(7,329)
Acquisitions, net of cash acquired
—
(177)
Net cash used by investing activities
(6,239)
(7,506)
Cash flows from financing activities
Purchase of common stock for treasury
(9)
(80,927)
Payments of short-term notes payable
(2,214)
—
Payments of long-term debt
(3,074)
(2,500)
Proceeds from revolving credit facility
139,200
—
Payments on revolving credit facility
(52,500)
—
Other, net
367
421
Net cash provided by (used by) financing activities
81,770
(83,006)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
201
(187)
Change in cash and cash equivalents and restricted cash
(15,150)
(147,639)
Cash and cash equivalents and restricted cash, beginning of period
56,177
265,796
Cash and cash equivalents and restricted cash, end of period
$
41,027
$
118,157
Supplemental disclosures of cash flow information
Cash paid-interest
$
18,898
$
8,477
Cash paid-income taxes
2,384
9,713
See accompanying notes to the unaudited condensed consolidated financial statements.
5
Hayward Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Nature of Operations and Organization
Hayward Holdings, Inc. (“Holdings,” the “Company,” “we” or “us”) is a global designer, manufacturer, and marketer of a broad portfolio of pool equipment and associated automation systems. The Company has seven manufacturing facilities worldwide, which are located in North Carolina, Tennessee, Rhode Island, Spain (three) and China, and other facilities in the United States, Canada, France and Australia. Cash flow is impacted by the seasonality of the swimming pool business. Cash flow is usually higher in the second and third quarters due to terms of sale to our customers.
We establish actual interim closing dates using a fiscal calendar in which our fiscal quarters end on the Saturday closest to the calendar quarter end, with the exception of year-end which ends on December 31 of each fiscal year. The interim closing date for the first quarter of 2023 is April 1, compared to the respective April 2, 2022 date. We had one fewer working day in the three months ended April 1, 2023 than in the respective 2022 period.
2. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. Certain information and note disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), have been condensed or omitted pursuant to such rules and regulations.
These interim financial statements should be read in conjunction with the Company’s annual consolidated financial statements and notes thereto for the fiscal year ended December 31, 2022. The results of operations for the three months ended April 1, 2023 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2023.
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified for comparative purposes to conform to the current presentation.
Recent Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board (“FASB”) issued guidance that provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the transition away from reference rates expected to be discontinued to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. In December 2022, the FASB issued additional guidance deferring the sunset date of Topic 848 until December 31, 2024. The Company is currently in the process of transitioning the variable interest rate provisions included in its remaining agreements that have reference rates to be discontinued before the sunset date of December 31, 2024. The Company will apply the guidance to impacted transactions during the transition period. The Company does not anticipate the adoption of this standard will have a material impact on the Company’s consolidated financial statements.
6
Hayward Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
3. Revenue
The following table disaggregates net sales between product groups and geographic regions, respectively (in thousands):
Three Months Ended
April 1, 2023
April 2, 2022
Product groups
Residential pool
$
190,167
$
389,632
Commercial pool
8,663
9,154
Industrial flow control
11,306
11,674
Total
$
210,136
$
410,460
Geographic
United States
$
150,581
$
299,064
Canada
12,123
47,232
Europe
29,210
44,841
Rest of World
18,222
19,323
Total international
59,555
111,396
Total
$
210,136
$
410,460
4. Inventories
Inventories, net, consist of the following (in thousands):
April 1, 2023
December 31, 2022
Raw materials
$
131,614
$
133,516
Work in progress
15,692
16,467
Finished goods
127,376
133,675
Total
$
274,682
$
283,658
5. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following (in thousands):
April 1, 2023
December 31, 2022
Selling, promotional and advertising
$
33,145
$
47,511
Warranty reserve
18,000
19,652
Inventory purchases
16,741
24,154
Employee compensation and benefits
14,395
18,955
Insurance reserve
9,072
9,987
Operating lease liability - short term
8,538
8,749
Deferred income
3,443
7,178
Professional fees
2,218
1,543
Short-term notes payable
842
3,056
Payroll taxes
519
1,404
Business restructuring costs
497
2,337
Other accrued liabilities
16,974
18,757
Total
$
124,384
$
163,283
The Company offers warranties on certain of its products and records an accrual for estimated future claims. Such accruals are based on historical experience and management’s estimate of the level of future claims.
7
Hayward Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the warranty reserve activities (in thousands):
Balance at December 31, 2022
$
19,652
Accrual for warranties issued during the period
5,424
Payments
(7,076)
Balance at April 1, 2023
$
18,000
Balance at December 31, 2021
$
24,174
Accrual for warranties issued during the period
9,413
Payments
(6,399)
Balance at April 2, 2022
$
27,188
Warranty expenses for the three months ended April 1, 2023 and April 2, 2022 were $5.4 million and $9.4 million, respectively.
6. Income Taxes
The Company’s effective tax rate for the three months ended April 1, 2023 and three months ended April 2, 2022 was 9.0% and 24.0%,respectively. The change in the Company’s effective tax rate was primarily due to decreased income from operations and a discrete tax benefit from the exercise of stock options.
The Company will recognize a tax benefit in the financial statements for an uncertain tax position only if the Company’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes. There were no uncertain tax positions at April 1, 2023 or April 2, 2022.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Management evaluates the need for valuation allowances on the deferred tax assets according to the provisions of ASC 740, Income Taxes. In making this determination, the Company assesses all available evidence (positive and negative) including recent earnings, internally-prepared income tax projections, and historical financial performance.
7. Long-Term Debt, Net
Long-term debt, net, consists of the following (in thousands):
April 1, 2023
December 31, 2022
First Lien Term Facility, due May 28, 2028
$
982,500
$
985,000
Incremental B First Lien Term Facility, due May 28, 2028
124,375
124,688
ABL Revolving Credit Facility
86,700
—
Other bank debt
4,334
4,593
Finance lease obligations
6,314
6,728
Subtotal
1,204,223
1,121,009
Less: Current portion of the long-term debt
(14,570)
(14,531)
Less: Unamortized debt issuance costs
(20,539)
(21,423)
Total
$
1,169,114
$
1,085,055
The Company’s First Lien Term Facility and ABL Revolving Credit Facility (collectively “Credit Facilities”) contain collateral requirements, restrictions, and covenants, including restrictions under the First Lien Term Facility on the Company's ability to pay dividends on the Common Stock. Under the agreement governing the First Lien Credit Facility (the “First Lien Credit Agreement”), the Company must also make an annual mandatory prepayment of principal commencing April 2023 for
8
Hayward Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
between 0% and 50% of the excess cash, as defined in the First Lien Credit Agreement, generated in the prior calendar year. The amount due varies with the First Lien Leverage Ratio as defined in the First Lien Credit Agreement, from zero if the First Lien Leverage Ratio is less than or equal to 2.5x, to 50 percent if the First Lien Leverage Ratio is greater than 3.0x less certain allowed deductions. The Company does not have a mandatory prepayment for 2023 based on the First Lien Leverage Ratio as of December 31, 2022 and the applicable criteria under the First Lien Credit Agreement. All outstanding principal under the First Lien Credit Agreement is due at maturity on May 28, 2028. The initial maturity date under the ABL Revolving Credit Facility (“ABL Facility”) is June 1, 2026. As of April 1, 2023, the Company was in compliance with all covenants under the Credit Facilities.
8. Derivatives and Hedging Transactions
The Company holds derivative financial instruments for the purpose of hedging the risks of certain identifiable and anticipated transactions. In general, the types of risks hedged are those relating to the variability of future earnings and cash flows caused by movements in foreign currency exchange rates and interest rates. In hedging these transactions, the Company holds the following types of derivatives in the normal course of business.
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements designated as cash flow hedges to manage its interest rate risk related to its variable rate debt obligations. As cash flow hedges, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The interest rate swap agreements are highly correlated to the changes in interest rates to which the Company is exposed. Unrealized gains and losses on these instruments have been designated as effectiveand as such, the related gains or losses have been recorded as a component of accumulated other comprehensive income, net of tax. Other comprehensive income or loss is reclassified into current period income when the hedged interest expense affects earnings.
In the three months ended April 1, 2023, the Company entered into interest rate swap agreements that effectively convert an initial notional amount of $100.0 million of its variable-rate debt obligations to fixed-rate debt. As of April 1, 2023 and April 2, 2022, the Company was a party to interest rate swap agreements of a notional amount of $600.0 million and $500.0 million, respectively.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts to manage risks associated with foreign currency transactions and future variability of intercompany cash flows arising from those transactions that may be adversely affected by changes in exchange rates. These contracts are marked-to-market with the resulting gains and losses recognized in earnings. For the three months ended April 1, 2023 and April 2, 2022, the Company recognized $0.7 million of expense and $1.1 million of income, respectively, in Other (income) expense, net, related to foreign exchange contracts.
The following table summarizes the gross fair values and location of the significant derivative instruments within Company's unaudited condensed consolidated balance sheets (in thousands):
Other Current Assets
Other Non-Current Assets
Accrued Expenses and Other Liabilities
Other Current Assets
Other Non-Current Assets
Accrued Expenses and Other Liabilities
April 1, 2023
December 31, 2022
Interest rate swaps
$
—
$
24,271
$
—
$
—
$
31,676
$
—
Foreign exchange contracts
861
—
328
1,450
—
232
Total
$
861
$
24,271
$
328
$
1,450
$
31,676
$
232
9
Hayward Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The following tables present the effects of derivative instruments by contract type in accumulated other comprehensive income (“AOCI”) in the Company's unaudited condensed consolidated statements of comprehensive income (in thousands):
Gain (Loss) Recognized in AOCI
Gain (Loss) Reclassified From AOCI to Earnings
Location of Gain (Loss) Reclassified from AOCI into Earnings
Three Months Ended
Three Months Ended
April 1, 2023
April 2, 2022
April 1, 2023
April 2, 2022
Interest rate swaps (1)
$
(5,554)
$
8,473
$
3,036
$
(575)
Interest expense, net
(1) The Company estimates that $13.4 million of unrealized gains will be reclassified from AOCI into earnings in the next twelve months.
9. Fair Value Measurements
The Company is required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair value. The fair values of financial instruments are estimates based upon market conditions and perceived risks. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.
The Company’s financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. The carrying amount of these instruments approximate fair value because of their short-term nature.
The Company’s interest rate swaps and foreign exchange contracts are measured in the financial statements at fair value on a recurring basis. The fair values of these instruments are estimated using industry standard valuation models using market-based observable inputs, including interest rate curves. These instruments are customary, over-the-counter contracts with various bank counterparties that are not traded in active markets. Accordingly, the fair value measurements of the interest rate swaps and foreign exchange contracts are categorized as Level 2.
As of April 1, 2023, the Company’s long-term debt instruments had a carrying value of $1,106.9 million (excluding finance leases, the ABL Facility, and other bank debt) and a fair value of approximately $1,075.1 million. As of December 31, 2022, the Company’s long-term debt instruments had a carrying value of $1,109.7 million and a fair value of approximately $1,071.5 million. The estimated fair value of the long-term debt is based on observable quoted prices in active markets for similar liabilities and is classified as a Level 2 input. The fair value of the ABL Facility approximates its carrying value.
10. Segments and Related Information
The Company’s operational and management structure is aligned to its key geographies and go-to market strategy resulting in two reportable segments: North America (“NAM”) and Europe & Rest of World (“E&RW”). Operating segments have not been aggregated to form the reportable segments. The Company determined its reportable segments based on how the Company’s Chief Operating Decision Maker (“CODM”) reviews the Company’s operating results in assessing performance and allocating resources. The CODM reviews net sales, gross profit and segment income for each of the reportable segments. Gross profit is defined as net sales less cost of sales incurred by the segment. The CODM does not evaluate reportable segments using asset information as these are managed on an enterprise-wide basis. Segment income is defined as segment gross profit less cost of sales, segment selling, general, and administrative expenses (“SG&A”) and research, development, and engineering expense (“RD&E”), excluding segment acquisition and restructuring related expense as well as amortization of intangible assets recorded within segment SG&A expense. The accounting policies of the segments are the same as those of Holdings.
The North America segment manufactures and sells residential and commercial swimming pool equipment and supplies as well as equipment that controls the flow of fluids. This segment is composed of three reporting units.
The Europe & Rest of World segment manufactures and sells residential and commercial swimming pool equipment and supplies. This segment is composed of two reporting units.
The Company sells its products primarily through distributors and retailers. Financial information by reportable segment, net of intercompany transactions, is included in the following summary (in thousands):
10
Hayward Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Three Months Ended
Three Months Ended
April 1, 2023
April 2, 2022
North America
Europe & Rest of World
Total
North America
Europe & Rest of World
Total
External net sales
$
162,704
$
47,432
$
210,136
$
346,296
$
64,164
$
410,460
Segment income
33,276
9,850
43,126
108,611
16,969
125,580
Capital expenditures (1)
5,912
186
6,098
5,586
962
6,548
Depreciation and amortization (1)
5,725
217
5,942
5,821
169
5,990
Intersegment sales
4,723
6
4,729
13,124
172
13,296
(1) Capital expenditures and depreciation associated with Corporate are not included in these totals. Amortization expense excluded from segment income is not included in these totals.
The following table presents a reconciliation of segment income to income from operations before income taxes (in thousands):
Three Months Ended
April 1, 2023
April 2, 2022
Total segment income
$
43,126
$
125,580
Corporate expense, net
6,099
9,279
Acquisition and restructuring related expense
1,563
2,271
Amortization of intangible assets
7,617
7,610
Operating income
27,847
106,420
Interest expense, net
19,361
9,562
Other (income) expense, net
(759)
(514)
Total other expense
18,602
9,048
Income from operations before income taxes
$
9,245
$
97,372
11. Earnings Per Share
The following table sets forth the computation of basic and diluted net income per share attributable to common stockholders (in thousands, except share and per share data):
Three Months Ended
April 1, 2023
April 2, 2022
Net income attributable to common stockholders
$
8,410
$
74,032
Weighted average number of common shares outstanding, basic
212,523,221
232,271,684
Effect of dilutive securities(a)
7,977,956
10,871,465
Weighted average number of common shares outstanding, diluted
220,501,177
243,143,149
Earnings per share attributable to common stockholders, basic
$
0.04
$
0.32
Earnings per share attributable to common stockholders, diluted
$
0.04
$
0.30
(a) For the three months ended April 1, 2023 and April 2, 2022 there were potential common shares totaling approximately 2.5 million and 1.6 million, respectively, that were excluded from the computation of diluted EPS as the effect of inclusion of such shares would have been anti-dilutive.
11
Hayward Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
12. Commitments and Contingencies
Litigation
The Company is involved in litigation arising in the normal course of business. Where appropriate, these matters have been submitted to the Company’s insurance carrier. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. It is not possible to quantify the ultimate liability, if any, in these matters. As of April 1, 2023, the Company does not have any significant pending litigation.
13. Leases
The Company’s operating and finance lease portfolio is described in Note 15. Leases of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2022.
Supplemental cash flow information related to leases was as follows (in thousands):
Three Months Ended
April 1, 2023
April 2, 2022
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
468
$
8,385
Finance leases
—
—
Supplemental balance sheet information related to leases was as follows (in thousands):
April 1, 2023
December 31, 2022
Operating leases
Other non-current assets
$
63,800
$
65,495
Accrued expenses and other liabilities
8,538
8,749
Other non-current liabilities
63,294
64,800
Total operating lease liabilities
71,832
73,549
Finance leases
Property, plant and equipment
10,886
10,879
Accumulated depreciation
(2,177)
(1,991)
Property, plant and equipment, net
8,709
8,888
Current maturities of long-term debt
2,224
2,206
Long-term debt
4,090
4,522
Total finance lease liabilities
$
6,314
$
6,728
14. Stockholders’ Equity
Preferred Stock
The Company’s Second Restated Certificate of Incorporation authorizes the Company to issue up to 100,000,000 shares of preferred stock, $0.001 value per share, all of which is undesignated.
Common Stock
The Company’s Second Restated Certificate of Incorporation authorizes the Company to issue up to 750,000,000 shares of Common Stock, $0.001 value per share. Each share of Common Stock is entitled to one vote on all matters submitted to a vote of the Company’s stockholders. The holders of Common Stock are entitled to receive dividends, if any, as may be declared by the board of directors.
Dividends paid
12
Hayward Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For the three months ended April 1, 2023 and April 2, 2022 no dividends were declared nor paid to the Company’s common stockholders.
Share Repurchase Program
The board of directors authorized the Company’s share repurchase program (the “Share Repurchase Program”) such that the Company is authorized to repurchase from time to time up to an aggregate of $450 million of its outstanding shares of common stock, which authorization expires on July 26, 2025. The Company had no repurchases of its common stock in the quarter ended April 1, 2023. As of April 1, 2023, $400.0 million remained available for additional share repurchases under the program.
15. Stock-based Compensation
Stock-based compensation expense recorded in the unaudited condensed consolidated statements of operations for equity-classified stock-based awards for the three months ended April 1, 2023 and April 2, 2022 was $2.0 million, and $1.6 million, respectively.
The Company has established two equity incentive plans, the 2021 Equity Incentive Plan and the 2017 Equity Incentive Plan. The Company no longer issues awards under the 2017 Equity Incentive Plan.
2021 Equity Incentive Plan
In March 2021, the Company adopted the 2021 Equity Incentive Plan (the “2021 Plan”). Under the 2021 Plan, up to 13,737,500 shares of common stock may be granted to employees, directors and consultants in the form of stock options, restricted stock units and other stock-based awards. The terms of awards granted under the 2021 Plan are determined by the Compensation Committee of the Board of Directors, subject to the provisions of the 2021 Plan.
Options granted under the 2021 Plan expire no later than ten years from the date of grant. Options and time-based restricted stock units granted under the 2021 Plan generally vest ratably over a three-year period and performance-based restricted stock units vest at the end of three years subject to the performance criteria.
During the three months ended April 1, 2023, the Company granted 737,907 options, 406,157 time-based restricted stock units and 147,792 performance-based restricted stock units under the 2021 Plan with a weighted-average grant-date fair value per share of $4.73, $11.81 and $11.81 respectively.
The Company determined the fair value of granted stock options at the date of grant using the Black-Scholes option-pricing model. The principal assumptions used in the Black-Scholes option-pricing model for the stock options granted on March 2, 2023 were as follows:
March 2, 2023
Risk-free interest rate
4.28
%
Expected life in years
6
Expected dividend yield
—
%
Expected volatility
32.46
%
The risk-free interest rate was based on the U.S. Treasury yield curve at date of grant over the expected term of these stock options. The expected volatility was based upon comparable public company historical volatility. The expected life was based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as prescribed in the SEC’s Staff Accounting Bulletin (SAB) No. 107, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards.
13
Hayward Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
16. Acquisitions and Restructuring
Acquisition and restructuring related expense, net consists of the following (in thousands):
Three Months Ended
April 1, 2023
April 2, 2022
Business restructuring costs
$
1,563
$
2,271
On March 29, 2021, the Company announced the relocation of its corporate office functions to Charlotte, North Carolina from Berkeley Heights, New Jersey. As of April 1, 2023, the Company has largely completed the relocation. The estimated severance and retention costs pertaining to this relocation are approximately $5.9 million. The impacted employees must remain with the Company through their planned exit date to receive each of the severance and retention amounts. Such costs are accounted for in accordance with ASC 420, Exit or Disposal Cost Obligations. The Company incurred approximately $0.3 million of expense related to the relocation during the three months ended April 1, 2023.
During the third quarter of 2022, the Company initiated an enterprise cost reduction program to address the current market dynamics and maintain the Company’s strong financial metrics. The initial focus was on a reduction of variable costs with specific attention to eliminating cost inefficiencies in our supply chain and reducing variable labor in our production cost base. In addition to these variable cost reductions, the Company identified structural selling, general and administrative cost reduction opportunities with initial savings commencing in the third quarter of 2022. For the three months ended April 1, 2023, the Company incurred $0.8 million of expense related to the cost reduction program. These include severance and employee benefit costs, as well as other direct separation benefit costs.
The following tables summarize the status of the Company’s restructuring related expense and related liability balances (in thousands):
2023 Activity
Liability as of December 31, 2022
Costs Recognized
Cash Payments
Liability as of April 1, 2023
One-time termination benefits
$
2,422
$
1,074
$
(2,999)
$
497
Facility-related
—
143
(143)
—
Other
—
346
(336)
10
Total
$
2,422
$
1,563
$
(3,478)
$
507
2022 Activity
Liability as of December 31, 2021
Costs Recognized
Cash Payments
Liability as of April 2, 2022
One-time termination benefits
$
1,035
$
554
$
(677)
$
912
Facility-related
27
35
(62)
—
Other (1)
4,374
1,682
(3,568)
2,488
Total
$
5,436
$
2,271
$
(4,307)
$
3,400
(1) “Other” restructuring related expense primarily consists of expenses pertaining to the relocation of the corporate headquarters.
Restructuring costs are included within acquisition and restructuring related costs on the Company’s unaudited condensed consolidated statements of operations, while the restructuring liability is included as a component of accrued expenses and other liabilities on the Company’s unaudited condensed consolidated balance sheets.
14
Hayward Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
17. Related-Party Transactions
During the three months ended April 1, 2023, the Company did not incur any significant related party transactions.
During the three months ended April 2, 2022, as part of the Company’s previously announced $450 million share repurchase program, on January 24, 2022, the Company agreed to repurchase 4.08 million shares of common stock from certain affiliates of one of the Company’s then-controlling stockholders, CCMP Capital Advisors, LP (“CCMP”), at a price per share of $19.80, for an aggregate consideration of approximately $81 million. The price per share was approved by an independent committee of the board of the directors and is the same price at which certain affiliates of the Company's then-controlling stockholders sold their shares in a block trade in compliance with Rule 144. Closing of this share repurchase occurred on March 11, 2022.
18. Subsequent Events
As of May 1, 2023, we had repaid in full the $86.7 million outstanding as of April 1, 2023 under the ABL Revolving Credit Facility and had no borrowings outstanding under the ABL Facility.
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, this discussion and analysis includes forward-looking statements that reflect our plans, estimates and beliefs and involve risks and uncertainties. As a result of many factors, including those set forth in the section “Risk Factors” in this Quarterly Report on Form 10-Q, our actual results may differ materially from those contained in or implied by any forward-looking statements. The results of operations for the three months ended April 1, 2023 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2023.
Our Company
The Company is an industry-leading global designer, manufacturer, and marketer of a broad portfolio of pool equipment and associated automation systems. With the pool as the centerpiece of the growing outdoor living space, the pool industry has attractive market characteristics, including significant aftermarket requirements (such as the ongoing repair, replacement, remodeling and upgrading of equipment for existing pools), innovation-led growth opportunities, and a favorable industry structure. We are a leader in this market with a highly-recognized brand, one of the largest installed bases of pool equipment in the world, decades-long relationships with our key channel partners and trade customers and a history of technological innovation. Our engineered products, which include various energy efficient and more environmentally sustainable offerings, enhance the pool owner’s outdoor living lifestyle while also delivering high quality water, pleasant ambiance and ease of use for the ultimate backyard experience. Aftermarket replacements and upgrades to higher value Internet of Things and energy efficient models are a primary growth driver for our business.
We have an estimated North American residential pool market share of approximately 34%. We believe that we are well-positioned for future growth. On average, we have 20+ year relationships with our top 20 customers. We estimate that aftermarket sales represent approximately 80% of net sales and are generally recurring in nature since these products are critical to the ongoing operation of pools given requirements for water quality and sanitization. Our product replacement cycle of approximately 8 to 11 years drives multiple replacement opportunities over the typical life of a pool, creating opportunities to generate aftermarket product sales as pool owners repair, remodel and upgrade their pools. We estimate aftermarket sales based upon feedback from certain representative customers and management’s interpretation of available industry and government data, and not upon our GAAP net sales results.
The Company has seven manufacturing facilities worldwide, which are located in North Carolina, Tennessee, Rhode Island, Spain (three) and China, and other facilities in the United States, Canada, France, and Australia.
Segments
Our business is organized into two reportable segments: North America (“NAM”) and Europe & Rest of World (“E&RW”). The Company determined its reportable segments based on how the Chief Operating Decision Maker (“CODM”) reviews the Company’s operating results in assessing performance and allocating resources.
The NAM segment manufactures and sells a complete line of residential and commercial swimming pool equipment and supplies in the United States and Canada and manufactures and sells flow control products.
The E&RW segment manufactures and sells residential and commercial swimming pool equipment and supplies in Europe, Central and South America, the Middle East, Australia and other Asia Pacific countries.
NAM accounted for 77% and 84% of total net sales for the three months ended April 1, 2023 and April 2, 2022, respectively, and E&RW accounted for 23% and 16% of total net sales for the three months ended April 1, 2023 and April 2, 2022, respectively.
Factors Affecting the Comparability of our Results of Operations
Our results of operations for the three months ended April 1, 2023 and the three months ended April 2, 2022 have been affected by the following, among other events, which must be understood to assess the comparability of our period-to-period financial performance and condition.
Our fiscal quarters end on the Saturday closest to the calendar quarter end, with the exception of year end which ends on December 31 of each fiscal year. The interim closing date for the first quarter of 2023 is April 1, compared to the respective
16
April 2, 2022 date. This resulted in one fewer working day in the three months ended April 1, 2023 compared to the three months ended April 2, 2022. Throughout this discussion we may refer to the three months ended April 1, 2023 and the three months ended April 2, 2022 as the “First Quarter” and “Comparable Quarter,” respectively.
Impact of COVID-19
Residential pool equipment sales increased during the first two years of the COVID-19 pandemic. This increase in demand was experienced broadly across all of our product lines as consumers refocused attention on improving the quality of the homeowner’s outdoor living experience. We believe that during this period, the pandemic reinforced existing pool industry growth trends, as well as partially accelerated demand due to the impact of longer lead times that resulted from supply chain shortages. As the impact of the COVID-19 pandemic has lessened, we believe that these pandemic-fueled demand trends have somewhat abated and the industry has returned to more normalized historical seasonal trends.
Seasonality
Our business is seasonal, with sales typically higher in the second and fourth quarters. During the second quarter, sales are higher in anticipation of the start of the summer pool season and in the fourth quarter, we incentivize trade customers to buy and stock in preparation for next year’s pool season under an “early buy” program, which features a price discount and extended payment terms. Under the early buy program for 2022, we generally shipped products during October 2022 through March 2023 and will receive payments for these shipments during February through July 2023. The favorable payment terms extended as part of the early buy program generally do not exceed 120 days, except for the frost belt region in which payments are due May 1 of each year. We aim to keep our manufacturing plants running at a constant level throughout the year and consequently we typically build inventory in the first and third quarters, and inventory is sold-down in the second and fourth quarters. Our accounts receivable balance increases from October to April as a result of the early buy extended terms and increases through June due to higher sales in the second quarter. Also, because the majority of our sales are to distributors whose inventory of our products may vary, including due to reasons beyond our control, such as end-user demand, supply chain lead times and macroeconomic factors, our revenue may fluctuate from period to period.
Macroeconomic Factors on Variable Rate Indebtedness
Rising interest rates resulting from central banks’ efforts to combat macroeconomic price inflation has caused increases in the cost to service our variable rate indebtedness. The Company limits its exposure to these risks by following established risk management policies and procedures, including the use of derivatives. The Company uses interest rate swaps to manage the exposure to changes in rates and the related cost of debt.
Key Measures We Use to Evaluate Our Business
We consider a variety of financial and operating measures in assessing the performance of our business. The key GAAP measures we use are net sales, gross profit and gross profit margin, selling, general, and administrative expense (“SG&A”), research, development, and engineering expense (“RD&E”), operating income and operating income margin. The key non-GAAP measures we use are EBITDA, adjusted EBITDA, adjusted EBITDA margin, consolidated segment income, adjusted segment income, and adjusted segment income margin.
For information about our use of Non-GAAP measures and a reconciliation of these metrics to the most relevant GAAP measure see “— Non-GAAP Reconciliation.”
17
Results of Operations
Consolidated
The following tables summarize key components of our results of operations for the periods indicated. We derived the consolidated statements of operations for the three months ended April 1, 2023 and April 2, 2022 from our unaudited condensed consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following table summarizes our results of operations:
(In thousands)
Three Months Ended
April 1, 2023
April 2, 2022
Net sales
$
210,136
$
410,460
Cost of sales
112,245
220,066
Gross profit
97,891
190,394
Selling, general, and administrative expense
54,887
68,857
Research, development, and engineering expense
5,977
5,236
Acquisition and restructuring related expense
1,563
2,271
Amortization of intangible assets
7,617
7,610
Operating income
27,847
106,420
Interest expense, net
19,361
9,562
Other (income) expense, net
(759)
(514)
Total other expense
18,602
9,048
Income from operations before income taxes
9,245
97,372
Provision for income taxes
835
23,340
Net income
$
8,410
$
74,032
Adjusted EBITDA (a)
$
44,929
$
126,249
(a) See “—Non-GAAP Reconciliation.”
Net sales
Net sales decreased to $210.1 million for the three months ended April 1, 2023 from $410.5 million for the three months ended April 2, 2022, a decrease of $200.4 million or 48.8%. See the segment discussion below for further information.
18
Year-over-year net sales decrease was driven by the following:
Three Months Ended
April 1, 2023
Volume
(54.0)
%
Price, net of discounts and allowances
4.6
%
Acquisitions
1.1
%
Currency and other
(0.5)
%
Total
(48.8)
%
The decrease in net sales for the three months ended April 1, 2023 was primarily the result of a decline in volume, partially offset by increases in price and the favorable impact of acquisitions. The decline in volume was primarily the result of distribution channel destocking as supply chain pressures ease and lead times normalize. The moderating of end market demand trends, geopolitical factors in Europe and poor weather conditions in certain markets also contributed to the decline in volume.
Gross profit and Gross profit margin
Gross profit decreased to $97.9 million for the three months ended April 1, 2023 from $190.4 million for the three months ended April 2, 2022, a decrease of $92.5 million or 48.6%.
Gross profit margin increased to 46.6% for the three months ended April 1, 2023 compared to 46.4% for the three months ended April 2, 2022, an increase of 20 basis points, primarily due to the net price increase discussed above, and managing our manufacturing costs, including the cost base as well as the ease of inflation in both commodities and freight. The Comparable Quarter experienced heightened manufacturing costs, specifically in freight and overhead, resulting from escalated and expedited production activity to meet customer demand.
Selling, general, and administrative expense
Selling, general, and administrative expense (SG&A) decreased to $54.9 million for the three months ended April 1, 2023 from $68.9 million for the three months ended April 2, 2022, a decrease of $14.0 million or 20.3%, primarily as a result of cost reductions and lower compensation related expenses associated with the reduction in headcount from the enterprise cost reduction program implemented during 2022, as well as decreased warranty expenses and bad debt expense.
As a percentage of net sales, SG&A increased to 26.1% for the three months ended April 1, 2023 as compared to 16.8% for three months ended April 2, 2022, an increase of 930 basis points driven by reduced operating leverage.
Research, development, and engineering expense
Research, development, and engineering expense (RD&E) increased to $6.0 million for the three months ended April 1, 2023 compared with $5.2 million for the three months ended April 2, 2022.
As a percentage of net sales, RD&E was 2.8% for the three months ended April 1, 2023 compared to 1.3% for the three months ended April 2, 2022, an increase of 150 basis points driven by reduced operating leverage.
Acquisition and restructuring related expense
For the three months ended April 1, 2023, we incurred $1.6 million of acquisition and restructuring related expense as compared to $2.3 million of expense for the three months ended April 2, 2022. The expense in the First Quarter was primarily related to severance and employee benefit costs as part of the enterprise cost reduction program initiated in 2022 as well as costs associated with the relocation of the corporate headquarters from New Jersey to North Carolina, compared to the Comparable Quarter which was primarily related to the corporate headquarters relocation.
For the three months ended April 1, 2023, amortization of intangible assets remained effectively flat compared to the Comparable Quarter.
19
Operating income
For the three months ended April 1, 2023, operating income decreased $78.6 million due to the aggregated effect of the items described above.
Interest expense, net
Interest expense, net, increased to $19.4 million for the three months ended April 1, 2023 from $9.6 million for the three months ended April 2, 2022.
Interest expense for the three months ended April 1, 2023 consisted of $18.5 million of interest on the outstanding debt and $1.1 million of amortization of deferred financing fees, partially offset by $0.2 million of interest income. The effective interest rate on our borrowings, including the impact of an interest rate hedge, was 6.71% for the three months ended April 1, 2023.
Interest expense for the three months ended April 2, 2022 consisted of $8.8 million of interest on the outstanding debt and $0.8 million of amortization of deferred financing fees. The effective interest rate on our borrowings, including the impact of an interest rate hedge, was 3.59% for the three months ended April 2, 2022.
Interest expense increased by $9.8 million for the First Quarter compared to the Comparable Quarter, primarily due to variable rate increases on the Company’s First Lien Term Facility and outstanding borrowings on the ABL Revolving Credit Facility, partially offset by decreased interest expense on the interest rate swaps.
Provision for income taxes
We incurred income tax expense of $0.8 million for the three months ended April 1, 2023 compared to an income tax expense of $23.3 million for the three months ended April 2, 2022, a decrease of $22.5 million or 96.4%. This was primarily due to decreased income from operations and a discrete tax benefit resulting from the exercise of stock options.
The decrease in the Company’s effective tax rate from 24.0% for three months ended April 2, 2022 to 9.0% for the three months ended April 1, 2023 was primarily due to decreased income from operations and a discrete tax benefit resulting from the exercise of stock options.
Net income
As a result of the foregoing, net income decreased $65.6 million for the three months ended April 1, 2023.
Adjusted EBITDA and Adjusted EBITDA margin
Adjusted EBITDA decreased to $44.9 million for the three months ended April 1, 2023 from $126.2 million for the three months ended April 2, 2022, a decrease of $81.3 million or 64.4%, driven primarily by lower net sales resulting in a decrease in gross profit of $92.5 million.
Adjusted EBITDA margin decreased to 21.4% for the three months ended April 1, 2023 compared to 30.8% for the three months ended April 2, 2022, a decrease of 940 basis points, primarily driven by lower operating leverage.
See “— Non-GAAP Reconciliation” for a reconciliation of these metrics to the most directly comparable GAAP metric.
20
Segment
The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of NAM and E&RW. We evaluate performance based on net sales, gross profit, segment income and adjusted segment income, and we use gross profit margin, segment income margin and adjusted segment income margin as comparable performance measures for our reporting segments.
Segment income represents net sales less cost of sales, segment SG&A and RD&E, excluding acquisition and restructuring related expense as well as amortization of intangible assets. A reconciliation of segment income to our operating income is detailed below. Adjusted segment income represents segment income adjusted for the impact of depreciation, amortization of intangible assets recorded within cost of sales, stock-based compensation and certain non-cash, nonrecurring or other items that are included in segment income that we do not consider indicative of the ongoing segment operating performance. See “—Non-GAAP Reconciliation” for a reconciliation of these metrics to the most directly comparable GAAP metric:
(Dollars in thousands)
Three Months Ended
Three Months Ended
April 1, 2023
April 2, 2022
Total
NAM
E&RW
Total
NAM
E&RW
Net sales
$
210,136
$
162,704
$
47,432
$
410,460
$
346,296
$
64,164
Gross profit
$
97,891
$
79,013
$
18,878
$
190,394
$
163,057
$
27,337
Gross profit margin %
46.6
%
48.6
%
39.8
%
46.4
%
47.1
%
42.6
%
Income from operations before income taxes
$
9,245
$
97,372
Expenses not allocated to segments
Corporate expense
6,099
9,279
Acquisition and restructuring related expense
1,563
2,271
Amortization of intangible assets
7,617
7,610
Interest expense, net
19,361
9,562
Other (income) expense, net
(759)
(514)
Segment income (a)
$
43,126
$
33,276
$
9,850
$
125,580
$
108,611
$
16,969
Segment income margin %
20.5
%
20.5
%
20.8
%
30.6
%
31.4
%
26.4
%
Adjusted segment income (a)
$
49,339
$
39,261
$
10,078
$
132,610
$
114,223
$
18,387
Adjusted segment income margin % (b)
23.5
%
24.1
%
21.2
%
32.3
%
33.0
%
28.7
%
(a) Consolidated segment income is a non-GAAP measure.
(b) See “—Non-GAAP Reconciliation.”
North America (“NAM”)
(Dollars in thousands)
Three Months Ended
April 1, 2023
April 2, 2022
Net sales
$
162,704
$
346,296
Gross profit
$
79,013
$
163,057
Gross profit margin %
48.6
%
47.1
%
Segment income
$
33,276
$
108,611
Segment income margin %
20.5
%
31.4
%
Adjusted segment income (a)
$
39,261
$
114,223
Adjusted segment income margin % (a)
24.1
%
33.0
%
(a) See “—Non-GAAP Reconciliation.”
21
Net sales
Net sales decreased to $162.7 million for the three months ended April 1, 2023 from $346.3 million for the three months ended April 2, 2022, a decrease of $183.6 million or 53.0%.
Year-over-year net sales decrease was driven by the following factors:
Three Months Ended
April 1, 2023
Volume
(58.7)
%
Price, net of allowances and discounts
4.6
%
Acquisitions
1.3
%
Currency and other
(0.2)
%
Total
(53.0)
%
This decrease for the three months ended April 1, 2023 was primarily the result of a decline in volume, partially offset by increases in price, as well as the favorable impact of acquisitions. The decline in volume was primarily driven by distribution channel destocking as supply chain pressures ease and lead times normalize, the moderation of end market demand trends, and adverse weather conditions in certain markets.
Gross profit and Gross profit margin
Gross profit decreased to $79.0 million for the three months ended April 1, 2023 from $163.1 million for the three months ended April 2, 2022, a decrease of $84.1 million or 51.5%.
Gross profit margin increased to 48.6% for the three months ended April 1, 2023 from 47.1% for the three months ended April 2, 2022, an increase of 148 basis points. Gross margin increased due to the net price increase discussed above, and managing our manufacturing costs, which reduced the under absorption impact from lower operating leverage. The Comparable Quarter experienced heightened manufacturing costs, specifically in freight and overhead, resulting from escalated and expedited production activity to meet customer demand.
Segment income and Segment income margin
Segment income decreased to $33.3 million for the three months ended April 1, 2023 from $108.6 million for the three months ended April 2, 2022, a decrease of $75.3 million or 69.4%. This was primarily driven by a decrease in sales and gross profit as discussed above, partially offset by lower SG&A expense.
Segment income margin decreased to 20.5% for the three months ended April 1, 2023 from 31.4% for the three months ended April 2, 2022, a decrease of 1,091 basis points.
Adjusted segment income and Adjusted segment income margin
Adjusted segment income decreased to $39.3 million for the three months ended April 1, 2023 from $114.2 million for the three months ended April 2, 2022, a decrease of $74.9 million or 65.6%. This was driven by the reduced segment income as discussed above, after adjusting for the non-cash and specified costs discussed below in “— Non-GAAP Reconciliation.”
Adjusted segment income margin decreased to 24.1% for the three months ended April 1, 2023 from 33.0% for the three months ended April 2, 2022, a decrease of 885 basis points. Refer to “—Non-GAAP Reconciliation” for a reconciliation of segment income to adjusted segment income.
22
Europe & Rest of World (“E&RW”)
(Dollars in thousands)
Three Months Ended
April 1, 2023
April 2, 2022
Net sales
$
47,432
$
64,164
Gross profit
$
18,878
$
27,337
Gross profit margin %
39.8
%
42.6
%
Segment income
$
9,850
$
16,969
Segment income margin %
20.8
%
26.4
%
Adjusted segment income (a)
$
10,078
$
18,387
Adjusted segment income margin % (a)
21.2
%
28.7
%
(a) See “—Non-GAAP Reconciliation.”
Net sales
Net sales decreased to $47.4 million for the three months ended April 1, 2023 from $64.2 million for the three months ended April 2, 2022, a decrease of $16.8 million or 26.1%.
Year-over-year net sales decrease was driven by the following:
Three Months Ended
April 1, 2023
Volume
(28.4)
%
Price, net of allowances and discounts
4.7
%
Currency and other
(2.4)
%
Total
(26.1)
%
The decrease in net sales was primarily due to a decline in volume and an unfavorable impact of foreign currency translation, partially offset by the favorable impact of price increases. The decline in volume is driven by distribution channel destocking as well as geopolitical factors and macroeconomic uncertainty.
Gross profit and Gross profit margin
Gross profit decreased to $18.9 million for the three months ended April 1, 2023 from $27.3 million for the three months ended April 2, 2022, a decrease of $8.4 million or 30.9%.
Gross profit margin decreased to 39.8% for the three months ended April 1, 2023 from 42.6% for the three months ended April 2, 2022, a decrease of 280 basis points, primarily driven by the inflationary impact on utilities and wages followed by the decline in volume resulting in lower operating leverage and the impact of obsolescence reserves.
Segment income and Segment income margin
Segment income decreased to $9.9 million for the three months ended April 1, 2023 from $17.0 million for the three months ended April 2, 2022, a decrease of $7.1 million or 42.0%. This was primarily driven by a decrease in sales and gross profit as discussed above, partially offset by lower SG&A expense.
Segment income margin decreased by 568 basis points from 26.4% for the three months ended April 2, 2022 to 20.8% for the three months ended April 1, 2023, resulting from decreased gross profit margin as discussed above.
Adjusted segment income and Adjusted segment income margin
Adjusted segment income decreased to $10.1 million for the three months ended April 1, 2023 from $18.4 million for the three months ended April 2, 2022, a decrease of $8.3 million or 45.2%. This was primarily driven by the decreased sales after excluding the non-cash and specified costs described in “—Non-GAAP Reconciliation.” below.
Adjusted segment income margin decreased to 21.2% for the three months ended April 1, 2023 from 28.7% for the three months ended April 2, 2022, a decrease of 741 basis points.
23
Non-GAAP Reconciliation
The Company uses EBITDA, adjusted EBITDA, adjusted EBITDA margin, consolidated segment income, adjusted segment income and adjusted segment income margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies. These metrics are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry, when considered alongside other GAAP measures.
EBITDA is defined as earnings before interest (including amortization of debt costs and loss on extinguishment of debt), income taxes, depreciation, and amortization. Adjusted EBITDA is defined as EBITDA adjusted for the impact of restructuring related income or expenses, stock-based compensation, currency exchange items, and certain non-cash, nonrecurring, or other items that are included in net income and EBITDA that we do not consider indicative of our ongoing operating performance. Adjusted EBITDA margin is defined as adjusted EBITDA divided by net sales. Consolidated segment income represents net sales less cost of sales, segment SG&A and RD&E, excluding acquisition and restructuring related expense as well as amortization of intangible assets. Adjusted segment income is defined as segment income adjusted for the impact of depreciation, amortization of intangible assets recorded within cost of sales, stock-based compensation and certain non-cash, nonrecurring or other items that are included in segment income that we do not consider indicative of the ongoing segment operating performance. Adjusted segment income margin is defined as adjusted segment income divided by segment net sales.
EBITDA, adjusted EBITDA, adjusted EBITDA margin, consolidated segment income, adjusted segment income and adjusted segment income margin are not recognized measures of financial performance under GAAP. We believe these non-GAAP measures provide analysts, investors and other interested parties with additional insight into the underlying trends of our business and assist these parties in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, which allows for a better comparison against historical results and expectations for future performance. Management uses these non-GAAP measures to understand and compare operating results across reporting periods for various purposes including internal budgeting and forecasting, short and long-term operating planning, employee incentive compensation, and debt compliance. These non-GAAP measures are not intended to replace the presentation of our financial results in accordance with GAAP.
EBITDA, adjusted EBITDA, adjusted EBITDA margin, consolidated segment income, adjusted segment income and adjusted segment income margin are not calculated in the same manner by all companies, and accordingly, are not necessarily comparable to similarly titled measures of other companies and may not be an appropriate measure for performance relative to other companies. EBITDA, adjusted EBITDA, consolidated segment income, adjusted segment income should not be construed as indicators of a company’s operating performance in isolation from, or as a substitute for, net income (loss) and segment income which are prepared in accordance with GAAP. We have presented EBITDA, adjusted EBITDA, adjusted EBITDA margin, consolidated segment income, adjusted segment income and adjusted segment income margin solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. In the future we may incur expenses such as those added back to calculate adjusted EBITDA. Our presentation of adjusted EBITDA and adjusted segment income should not be construed as an inference that our future results will be unaffected by these items.
24
Net Income to Adjusted EBITDA and Adjusted EBITDA Margin
Following is a reconciliation from net income to adjusted EBITDA and adjusted EBITDA margin for the three months ended April 1, 2023 and April 2, 2022:
(Dollars in thousands)
Three Months Ended
April 1, 2023
April 2, 2022
Net income
$
8,410
$
74,032
Depreciation
4,362
4,840
Amortization
9,254
9,097
Interest expense
19,361
9,562
Income taxes
835
23,340
EBITDA
42,222
120,871
Stock-based compensation (a)
357
937
Currency exchange items (b)
(74)
(729)
Acquisition and restructuring related expense, net (c)
1,563
2,271
Other (d)
861
2,899
Total Adjustments
2,707
5,378
Adjusted EBITDA
$
44,929
$
126,249
Adjusted EBITDA margin
21.4
%
30.8
%
(a)
Represents non-cash stock-based compensation expense related to equity awards issued to management, employees, and directors. Beginning in the three months ended July 2, 2022, the adjustment includes only expense related to awards issued under the 2017 Equity Incentive Plan, which were awards granted prior to the effective date of Hayward’s initial public offering (the “IPO”), whereas in prior periods, the adjustment included stock-based compensation expense for all equity awards. Under the historical presentation, the stock-based compensation adjustment for the three months ended April 1, 2023 would have been an expense of $2.0 million.
(b)
Represents unrealized non-cash losses (gains) on foreign denominated monetary assets and liabilities and foreign currency contracts.
(c)
Adjustments in the three months ended April 1, 2023 are primarily driven by $0.8 million of separation costs associated with the enterprise cost reduction program initiated in 2022, $0.3 million of integration costs from prior acquisitions and $0.3 million of costs associated with the relocation of the corporate headquarters. Adjustments in the three months ended April 2, 2022 primarily includes costs associated with the relocation of the corporate headquarters.
(d)
Adjustments in the three months ended April 1, 2023 primarily includes $0.4 million of transitional expenses incurred to enable go-forward public company regulatory compliance and $0.4 million of costs incurred related to the selling stockholder offering of shares in March 2023. Adjustments in the three months ended April 2, 2022 are primarily driven by $1.2 million of bad debt write-offs for certain customers in Russia and Ukraine and other miscellaneous items we believe are not representative of our ongoing business operations.
25
Following is a reconciliation from income from operations before income taxes to consolidated segment income and adjusted segment income for the three months ended April 1, 2023 and April 2, 2022:
(Dollars in thousands)
Three Months Ended
April 1, 2023
April 2, 2022
Income from operations before income taxes
$
9,245
$
97,372
Expenses not allocated to segments
Corporate expense, net
6,099
9,279
Acquisition and restructuring related expense
1,563
2,271
Amortization of intangible assets
7,617
7,610
Interest expense, net
19,361
9,562
Other (income) expense, net
(759)
(514)
Segment income
43,126
125,580
Depreciation
4,305
4,503
Amortization
1,637
1,487
Stock-based compensation
173
(370)
Other (a)
98
1,410
Total Adjustments
6,213
7,030
Adjusted segment income
$
49,339
$
132,610
Adjusted segment income margin
23.5
%
32.3
%
(a)
The three months ended April 1, 2023 includes miscellaneous items we believe are not representative of our ongoing business operations. The three months ended April 2, 2022 include $1.2 million of bad debt write-offs and other miscellaneous items we believe are not representative of our ongoing business operations.
Following is a reconciliation from segment income to adjusted segment income for NAM for the three months ended April 1, 2023 and April 2, 2022 (dollars in thousands):
NAM
Three Months Ended
April 1, 2023
April 2, 2022
Segment income
$
33,276
$
108,611
Depreciation
4,088
4,334
Amortization
1,637
1,487
Stock-based compensation
162
(409)
Other (a)
98
200
Total adjustments
5,985
5,612
Adjusted segment income
$
39,261
$
114,223
Adjusted segment income margin
24.1
%
33.0
%
(a)
The three months ended April 1, 2023 for NAM includes miscellaneous items we believe are not representative of our ongoing business operations. The three months ended April 2, 2022 includes $0.2 million of one-time general and administrative expenses we believe are not representative of our ongoing business operations.
26
Following is a reconciliation from segment income to adjusted segment income for E&RW for the three months ended April 1, 2023 and April 2, 2022 (dollars in thousands):
E&RW
Three Months Ended
April 1, 2023
April 2, 2022
Segment income
$
9,850
$
16,969
Depreciation
217
169
Amortization
—
—
Stock-based compensation
11
39
Other (a)
—
1,210
Total Adjustments
228
1,418
Adjusted segment income
$
10,078
$
18,387
Adjusted segment income margin
21.2
%
28.7
%
(a)
The three months ended April 2, 2022 includes $1.2 million of bad debt write-offs related to certain customers impacted by the conflict between Russia and Ukraine.
Liquidity and Capital Resources
Our primary sources of liquidity are net cash provided by operating activities and availability under the ABL Revolving Credit Facility (“ABL Facility”).
Primary working capital requirements are for raw materials, component and certain finished goods inventories and supplies, payroll, manufacturing, freight and distribution, facility, and other operating expenses. Cash flow from operations and working capital requirements fluctuate during the year, driven primarily by the seasonal demand for our products, an early buy program, the timing of inventory purchases and receipt of customer payments and as such, the utilization of the ABL Facility fluctuates during the year.
Unrestricted cash and cash equivalents totaled $41.0 million as of April 1, 2023, which is a decrease of $15.2 million from $56.2 million at December 31, 2022.
We focus on increasing cash flow, solidifying the liquidity position through working capital initiatives, and paying our debt obligations, while continuing to fund business growth initiatives and return of capital to shareholders. We believe that net cash provided by operating activities and availability under the ABL Facility will be adequate to finance our working capital requirements, inclusive of capital expenditures, and debt service over the next 12 months.
Credit Facilities
The First Lien Term Facility and ABL Facility (collectively “Credit Facilities”) contain various restrictions, covenants and collateral requirements. Refer to Note 7. Long-Term Debt of notes to our unaudited condensed consolidated financial statements for further information on the terms of the Credit Facilities. We also have a revolving credit facility for our Spain subsidiary in the amount of €3 million as a local source of liquidity. As of April 1, 2023, the Spain revolving facility balance was zero with a borrowing availability of €3 million.
Long-term debt consisted of the following (in thousands):
April 1, 2023
December 31, 2022
First Lien Term Facility, due May 28, 2028
$
982,500
$
985,000
Incremental B First Lien Term Facility, due May 28, 2028
124,375
124,688
ABL Revolving Credit Facility
86,700
—
Other bank debt
4,334
4,593
Finance lease obligations
6,314
6,728
Subtotal
1,204,223
1,121,009
Less: Current portion of the long-term debt
(14,570)
(14,531)
Less: Unamortized debt issuance costs
(20,539)
(21,423)
Total
$
1,169,114
$
1,085,055
27
ABL Facility
The ABL Facility provides for an aggregate amount of borrowings up to $425.0 million, with a peak season commitment of $475.0 million, subject to a borrowing base calculation based on available eligible receivables, inventory, and qualified cash in North America. An amount of up to 30% (or up to 40% with agent consent) of the then-outstanding commitments under the ABL Facility is available to our Canada and Spain subsidiaries. A portion of the ABL Facility not to exceed $50 million is available for the issuance of letters of credit in U.S. Dollars, of which $20.0 million is available for the issuance of letters of credit in Canadian dollars. The ABL Facility also includes a $50.0 million swingline loan facility and a $35 million First-In, Last-Out Sublimit (“FILO Sublimit”). The maturity of the facility is June 1, 2026.
During the fourth quarter of fiscal year 2022, the Company entered into the Third Amendment to its existing ABL Facility to replace the London Interbank Offered Rate (“LIBOR”) with an annual floating rate based on a forward-looking rate of the Secured Overnight Financing rate (“Term SOFR”). The borrowings under the ABL Facility bear interest at a rate equal to Term SOFR plus a 0.10% credit spread adjustment and a margin of between 1.25% to 1.75%, or at a base rate plus a margin of 0.25% to 0.75% with no credit spread adjustment, while the FILO Sublimit borrowings bear interest at a rate equal to Term SOFR or a base rate plus a margin of between 2.25% to 2.75% or 1.25% to 1.75%, respectively. For the Comparable Quarter, the borrowings under the ABL Facility bore interest at a rate equal to LIBOR or a base rate plus a margin of between 1.25% to 1.75% or 0.25% to 0.75%, respectively.
For the three months ended April 1, 2023, the average borrowing base under the ABL Facility was $308.2 million and the average loan balance outstanding was $46.1 million. As of April 1, 2023, the loan balance was $86.7 million with a borrowing availability of $253.6 million. During the three months ended April 1, 2023, the effective interest rate was 13.23%, comprised of interest charges of 7.87% and financing costs of 5.37%.
For the year ended December 31, 2022, the average borrowing base under the ABL Facility was $246.5 million and the average loan balance outstanding was $73.1 million. As of December 31, 2022 the loan balance was zero with a borrowing availability of $208.4 million. During the year ended December 31, 2022, the effective interest rate was 6.84%, comprised of interest charges of 3.81% and financing costs of 3.03%.
First Lien Term Facilities
The First Lien Term Facility bears interest at a rate equal to a base rate or LIBOR, plus, in either case, an applicable margin. In the case of LIBOR tranches, the applicable margin is 2.75% per annum with a 0.50% floor, with a stepdown to 2.50% per annum with a 0.50% floor when net secured leverage as defined by the credit agreement is less than 2.5x. The loan under the First Lien Term Facility amortizes quarterly at a rate of 0.25% of the original principal amount and requires a $2.5 million repayment of principal on the last business day of each March, June, September and December.
The First Lien Term Facility also includes an incremental term loan in an aggregate original principal amount of $125 million (the “Incremental Term Loan B”). The Incremental Term Loan B bears interest at an annual floating rate based on a forward-looking rate of the Secured Overnight Financing rate (with a 0.50% floor) plus 3.25% and a 0.10% credit spread adjustment. The incremental loan requires a $0.3 million repayment of principal on the last business day of each March, June, September and December. The First Lien Term Facility including the Incremental Term Loan B matures on May 28, 2028.
As of April 1, 2023, the balance outstanding under the First Lien Term Facility was $982.5 million and the balance outstanding under the Incremental Term Loan B was $124.4 million. The effective interest rate on borrowings under the First Lien Term Facility, including the impact of an interest rate hedge, for the three months ended April 1, 2023 was 6.43% as net secured leverage as defined by the credit agreement is less than 2.5x. The effective interest rate is comprised of 7.19% for interest and 0.33% for financing costs, partially offset by 1.09% for interest income on the interest rate swaps.
As of December 31, 2022, the balance outstanding under the First Lien Term Facility was $985.0 million and the balance outstanding under the Incremental Term Loan B was $124.7 million. The effective interest rate on borrowings under the First Lien Term Facility, including the impact of an interest rate hedge, for the year ended December 31, 2022 was 4.61%. The effective interest rate is comprised of 4.33% for interest, 0.25% for financing costs and 0.03% for expense on the interest rate swaps.
Covenant Compliance
The Credit Facilities contain various restrictions, covenants and collateral requirements. As of April 1, 2023, we were in compliance with all covenants under the Credit Facilities.
28
Sources and Uses of Cash
Following is a summary of our cash flows from operating, investing, and financing activities:
(Dollars in thousands)
Three Months Ended
April 1, 2023
April 2, 2022
Net cash used by operating activities
$
(90,882)
$
(56,940)
Net cash used by investing activities
(6,239)
(7,506)
Net cash provided by (used by) financing activities
81,770
(83,006)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
201
(187)
Change in cash and cash equivalents and restricted cash
$
(15,150)
$
(147,639)
Net cash used by operating activities
Net cash used in operating activities increased to $90.9 million for the three months ended April 1, 2023 from $56.9 million for the three months ended April 2, 2022, an increase of $34.0 million or 59.6%. The increase in cash used was driven by the decrease in net income, partially offset by a decrease in cash used for working capital compared to the prior-year period.
Net cash used by investing activities
Net cash used in investing activities was $6.2 million for the three months ended April 1, 2023 compared to $7.5 million for the three months ended April 2, 2022, a decrease of $1.3 million or 16.9%. The cash used in both periods was primarily driven by capital expenditures for property, plant and equipment.
Net cash provided by (used by) financing activities
Net cash provided by financing activities was $81.8 million for the three months ended April 1, 2023 compared to net cash used of $83.0 million for the three months ended April 2, 2022, a change of $164.8 million or 198.5%. The cash inflow for the three months ended April 1, 2023 is primarily due to borrowings on the ABL Facility, compared to the cash used for the three months ended April 2, 2022 primarily for share repurchases.
Off-Balance Sheet Arrangements
We had $4.5 million of outstanding letters of credit on our ABL Revolving Credit Facility as of each of April 1, 2023 and December 31, 2022.
Critical Accounting Estimates
Our unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The estimates that require management’s most difficult, subjective or complex judgments are described in Part II, Item 7, under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022 (our “Annual Report on Form 10-K”), which section is incorporated herein by reference, and remain unchanged through the first three months of 2023.
Recently Issued Accounting Standards
See Note 2. Significant Accounting Policies of notes to our unaudited condensed consolidated financial statements for additional information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. We are exposed to various market risks, including changes in interest rates and foreign currency rates. Periodically, we use derivative financial instruments to manage or reduce the impact of changes in interest rates and foreign currency rates. Counterparties to all derivative contracts are major financial institutions. All instruments are entered into for other than trading purposes.
There have been no material changes in the foreign currency exchange risk or interest rate risk during the three months ended April 1, 2023 from what we reported in our Annual Report on Form 10-K.
29
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective at the reasonable assurance level as of April 1, 2023, due to the material weaknesses in internal control over financial reporting as described in our Annual Report on Form 10-K.
Continuing Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
We continue to have material weaknesses in our internal control over financial reporting as disclosed in our Annual Report on Form 10-K. We do not know the specific time frame needed to fully remediate the material weaknesses identified. These material weaknesses could result in misstatements of the Company’s accounts and disclosures that would result in material misstatements of the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation of Material Weaknesses
As disclosed in our Annual Report on Form 10-K, the Company has continued taking steps intended to address the underlying causes of the control deficiencies in order to remediate the material weakness. The Company has: (i) enhanced the internal control environment to address the material weaknesses identified in our Annual Report on Form 10-K; (ii) implemented IT general controls specific to key information systems that are relevant to the preparation of our consolidated financial statements, including user access review; and (iii) implemented business process controls over all significant business processes, including implementing appropriate level of precision.
The following additional remediation activities remain to be undertaken: (i) ensure that IT general controls are being consistently operated and evidenced such that persuasive evidence is obtained that the IT general controls are effective and sustainable; (ii) ensure that controls over key reports and data derived from systems supporting financial reporting are consistently evidenced; and (iii) ensure controls are fully evidenced to address segregation of duties risks that could present a reasonable possibility of material misstatements.
Management believes the measures described above, once implemented and tested, will remediate the material weaknesses identified and strengthen the Company’s internal control over financial reporting. The Company is committed to continuing to improve its internal control processes and will continue to review, optimize and enhance financial reporting controls and procedures. As the Company continues to evaluate and work to improve its internal control over financial reporting, it may take additional measures to address control deficiencies, or may modify, or in appropriate circumstances not complete, certain of the remediation measures described above.
Status of Remediation Efforts
We believe the measures described above will facilitate the remediation of the control deficiencies we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our currently designed internal control processes. These material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
Other than those noted above, there have been no changes in the Company’s internal control over financial reporting during the three months ended April 1, 2023 that had materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have been, and in the future may be, made a party to litigation arising in the ordinary course of our business, including those relating to commercial or contractual disputes with suppliers, customers or parties to acquisitions and divestitures, intellectual property matters, product liability, the use or installation of our products, consumer matters, employment and labor matters, and environmental, safety and health matters, including claims based on alleged exposure to asbestos-containing product components. We believe that we are not currently party to any legal proceeding that would be expected, either individually or in the aggregate, to have a material adverse effect on our business or financial condition.
We periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations and cash flows for the proceedings and claims described in the notes to our consolidated financial statements could change in the future. Regardless of outcome, legal proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
See Note 12. Commitments and Contingencies of notes to our unaudited condensed consolidated financial statements for additional information.
ITEM 1A. RISK FACTORS
An investment in our common stock involves risks. For a detailed discussion of the risks that affect our business please refer to the section titled “Risk Factors” in our Annual Report on Form 10-K. Other than as noted below, there have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K.
We are no longer a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange. However, we will continue to qualify for, and may rely upon, exemptions from certain corporate governance requirements that would otherwise provide protection to stockholders of other companies during a one-year transition period.
Prior to March 3, 2023, we were a “controlled company” within the meaning of the New York Stock Exchange's (“NYSE”) corporate governance standards because more than 50% of the voting power of our common stock was held by investment funds affiliated with CCMP Capital Advisors, L.P. (“CCMP”) and MSD Partners, L.P. (“MSD”). As a result of an underwritten trade on March 3, 2023, that group’s holdings fell to approximately 48% of our common stock, below the threshold at which we are considered a “controlled company” under NYSE rules. Even though we are not a “controlled company,” we will continue to qualify for, and may rely on, exemptions from certain corporate governance requirements that would otherwise provide protection to stockholders of other companies during a one-year transition period. The NYSE rules require that our Board be composed of a majority of “independent directors,” as defined under the NYSE rules, by March 3, 2024 and that our compensation committee and our nominating and corporate governance committee each consist of a majority of “independent directors” by June 1, 2023 and entirely of “independent directors” by March 3, 2024.
During these transition periods, we may continue to utilize the available exemptions from certain corporate governance requirements that would otherwise provide protection to stockholders of other companies, as permitted by the NYSE rules. If we fail to meet the above deadlines for these requirements, our common stock could be delisted from the NYSE, which would negatively impact the trading of our common shares and our business and financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company had no repurchases of its common stock, par value $0.001 per share, in the quarter ended April 1, 2023. The board of directors authorized the Company’s share repurchase program (the “Share Repurchase Program”) such that the Company is authorized to repurchase from time to time up to an aggregate of $450 million of its outstanding shares of common stock, which authorization expires on July 26, 2025.
Under the Share Repurchase Program, the Company may purchase shares of its common stock on a discretionary basis from time to time and may be conducted through privately negotiated transactions, including with our significant stockholders, as well as through open market repurchases or other means, including through Rule 10b5-1(c) trading plans or through the use of other techniques such as accelerated share repurchases. The amount and timing of future repurchases may vary depending on market conditions and the level of operating, financing and other investing activities.
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As of April 1, 2023, $400.0 million remained available under the current authorization for additional share repurchases. The following table summarizes the Company’s purchase of its common stock for the quarter ended April 1, 2023:
Period
(a) Total Number of Shares Purchased
(b) Average Price Paid per Share
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Program
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Program
Certification of Chief Executive Officer of Hayward Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer of Hayward Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Interactive Data Files submitted as Exhibits 101.*)
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this day of May 4, 2023.
