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 and nine months ended October 1, 2022 are not necessarily indicative of
the results for any subsequent periods or the entire fiscal year ending
December 31, 2022.
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, 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 ("IoT")
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. Based upon
feedback from certain representative customers and our interpretation of
available industry and government data in the United States, we estimate that
aftermarket sales represented approximately 80% of net sales. Aftermarket sales
are not based upon our GAAP net sales results. We believe aftermarket sales 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.
The Company has nine manufacturing facilities worldwide, which are located in
North Carolina, Tennessee, Rhode Island, Florida, California, 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 operating
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 full line of residential and commercial swimming pool equipment and supplies in United States and Canada
and manufactures and sells flow control products worldwide.
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 represented 83% and 85% of total net sales for the three months ended
October 1, 2022 and October 2, 2021respectively, and E&RW represented 17% and 15% of total net sales for the three months ended October 1, 2022 and
October 2, 2021respectively.
Factors affecting the comparability of our results of operations
Our results of operations for the three and nine months ended October 1, 2022
and the three and nine months ended October 2, 2021 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 dates for the first, second and third quarters of 2022 are
April 2, July 2, and October 1, compared to the respective April 3, July 3, and
October 2, 2021 dates. This resulted in one fewer working day
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in the nine months ended October 1, 2022 compared to the nine months ended
October 2, 2021. Throughout this discussion we may refer to the three months
ended October 1, 2022 and the three months ended October 2, 2021 as the "Third
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 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 the impact of the
COVID-19 pandemic has lessened, we believe that these trends have somewhat
abated. Although the long-term impact of the pandemic to our business is
unclear, we do anticipate that the industry will resume its more normalized
historical seasonal trends in the post-pandemic environment.
Cost inflation and supply shortages stemming from the COVID-19 pandemic has
caused prices to increase across various sectors of the economy and we have been
impacted by increases in the prices of our raw materials and other associated
manufacturing costs, as discussed in further detail below.
Materials and other cost increases
We have experienced increases in the cost of raw materials and commodities. We
strive for productivity improvements and implement price increases to help
mitigate this impact. We expect to see continuing price volatility (primarily
with respect to metals, resins, and electronic sub-assemblies) and import duty
charges (primarily with respect to motors, electronics, valves and cleaner
products) for some of our raw materials. We are uncertain as to the timing and
impact of these market changes, but have mitigation activities in place to
minimize the impact on costs.
Key Metrics 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, adjusted segment income, and adjusted
segment income margin.
For more information on our use of non-GAAP measures and a reconciliation of these measures to the most relevant GAAP measure, see “- Non-GAAP Reconciliation”.
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Operating results
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 and nine months ended October 1, 2022 and October 2, 2021 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 Nine Months Ended
October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021
Net sales $ 245,267 $ 350,624 $ 1,055,169 $ 1,049,409
Cost of sales 137,483 188,170 567,626 559,033
Gross profit 107,784 162,454 487,543 490,376
Selling, general, and
administrative expense 50,493 68,807 188,297 207,129
Research, development, and
engineering expense 6,142 6,370 16,411 16,187
Acquisition and restructuring
related expense 2,288 783 9,499 2,452
Amortization of intangible assets 8,521 8,700 23,828 26,162
Operating income 40,340 77,794 249,508 238,446
Interest expense, net 13,938 11,050 35,105 42,297
Loss on debt extinguishment - - - 9,418
Other (income) expense, net (234) 2,087 3,056 4,655
Total other expense 13,704 13,137 38,161 56,370
Income from operations before
income taxes 26,636 64,657 211,347 182,076
Provision for income taxes 3,549 14,336 47,968 42,072
Net income $ 23,087 $ 50,321 $ 163,379 $ 140,004
Adjusted EBITDA (a) $ 60,427 $ 98,329 $ 314,313 $ 316,035
(a) See “- Non-GAAP Reconciliation”.
Net sales
Net sales decreased to $245.3 million for the three months ended October 1, 2022
from $350.6 million for the three months ended October 2, 2021, a decrease of
$105.3 million or 30.0%. See the segment discussion below for further
information.
Net sales increased to $1,055.2 million for the nine months ended October 1, 2022 of $1,049.4 million for the nine months ended October 2, 2021an augmentation of $5.8 million or 0.5%. See segment discussion below for more information.
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The year-over-year increase (decrease) in net sales was driven by the following factors:
Three Months Ended Nine Months Ended
October 1, 2022 October 1, 2022
Volume (43.6) % (14.7) %
Price, net of discounts and allowances 12.0 % 15.2 %
Acquisitions 2.6 % 1.4 %
Currency and other (1.0) % (1.4) %
Total (30.0) % 0.5 %
The decrease in net sales for the three months ended October 1, 2022 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 pressure
eases, lead times normalize, and the industry starts to return to the
pre-pandemic seasonal trend of lower sales activity in the third quarter.
Macroeconomic uncertainty, particularly geopolitical factors in Europe, also
contributed to the decline in volume.
The increase in net sales for the nine months ended October 1, 2022 was driven
by increases in price and acquisitions, partially offset by decreases in volume
and the unfavorable impact of foreign currency translation. The increase due to
price reflects the cumulative impact of a number of announced price increases to
mitigate escalating inflationary cost pressures as well as lower sales
incentives to channel partners. The decline in volume was primarily the result
of channel inventory destocking due to inventory accumulation by distributors in
excess of near-term consumer demand, poor weather in seasonal markets in North
America, and lower net sales in Europe due to geopolitical and other economic
factors.
Gross profit and gross profit margin
Gross profit decreased to $107.8 million for the three months ended October 1,
2022 from $162.5 million for the three months ended October 2, 2021, a decrease
of $54.7 million or 33.7%.
Gross profit margin decreased to 43.9% for the three months ended October 1,
2022 compared to 46.3% for the three months ended October 2, 2021, a decrease of
239 basis points primarily due to the decline in volume resulting in lower
operating leverage. The gross margin decrease included a decrease of 108 basis
points due to a non-cash increase in cost of goods sold resulting from the fair
value inventory step-up adjustment recognized as part of the purchase accounting
for the specialty lighting business of Halco Lighting Technologies, LLC, which
includes the brands J&J Electronics and Sollos (the "Specialty Lighting
Business").
Gross profit decreased to $487.5 million for the nine months ended October 1,
2022 from $490.4 million for the nine months ended October 2, 2021, a decrease
of $2.9 million, or 0.6%.
Gross profit margin decreased to 46.2% for the nine months ended October 1, 2022
compared to 46.7% for the nine months ended October 2, 2021.
Selling, general and administrative expenses
Selling, general, and administrative expense (SG&A) decreased to $50.5 million
for the three months ended October 1, 2022 from $68.8 million for the three
months ended October 2, 2021, a decrease of $18.3 million or 26.6%, primarily as
a result of lower incentive based compensation, selling and distribution and
warranty expenses. The Comparable Quarter also included a patent infringement
litigation settlement.
As a percentage of net sales, SG&A increased to 20.6% for the three months ended
October 1, 2022 as compared to 19.6% for three months ended October 2, 2021, an
increase of 96 basis points driven by reduced operating leverage.
SG&A decreased to $188.3 million for the nine months ended October 1, 2022 from
$207.1 million for the nine months ended October 2, 2021, a decrease of $18.8
million or 9.1%. During the nine months ended October 2, 2021, we incurred
higher incentive compensation, including stock-based compensation expenses, as a
result of Hayward's initial public offering (the "IPO") and incurred one-time
expenses related to the fire in Yuncos, Spain.
As a percentage of net sales, SG&A decreased to 17.8% for the nine months ended
October 1, 2022 as compared to 19.7% for nine months ended October 2, 2021, a
decrease of 189 basis points driven by the elevated costs incurred in the prior
year as discussed above.
Research, development and engineering costs
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Research, development, and engineering expense (RD&E) remained approximately
consistent at $6.1 million for the three months ended October 1, 2022 compared
with $6.4 million for the three months ended October 2, 2021.
As a percentage of net sales, RD&E was 2.5% for the three months ended
October 1, 2022 compared to 1.8% for the three months ended October 2, 2021an increase of 69 basis points.
RD&E remained approximately consistent at $16.4 million for the nine months
ended October 1, 2022 compared with $16.2 million for the nine months ended
October 2, 2021. As a percentage of net sales, RD&E was relatively flat at 1.6%
for the nine months ended October 1, 2022 compared to 1.5% for the nine months
ended October 2, 2021.
Charges related to acquisition and restructuring
For the three months ended October 1, 2022, we incurred $2.3 million of
acquisition and restructuring related expense as compared to $0.8 million of
expense for the three months ended October 2, 2021. The expense in the Third
Quarter was primarily related to costs associated with the corporate
headquarters relocation from New Jersey to North Carolina and the
reduction-in-force executed during the quarter, compared to the Comparable
Quarter which only had costs associated with the corporate relocation.
Additionally, during the three months ended October 1, 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
totaling $25 million to $30 million in 2023, with initial savings of
approximately $8 million to be realized in 2022.
For the nine months ended October 1, 2022, we incurred $9.5 million of
acquisition and restructuring related expense as compared to an expense of $2.5
million for the nine months ended October 2, 2021. The nine months ended
October 1, 2022 included transaction costs associated with the acquisition of
the Specialty Lighting Business, costs associated with the reduction-in-force,
and costs associated with the corporate relocation, compared to the nine months
ended October 2, 2021, which primarily had costs pertaining to the exit from our
leased facility in Chandler, Arizona, as well as the costs from the corporate
relocation.
See Note 16. Acquisitions and restructurings.
Amortization of intangible assets
For the three and nine months ended October 1, 2022 and October 2, 2021
amortization of intangible assets decreased $0.2 million and $2.3 millionrespectively, due to the amortization rate of certain intangible assets using the declining balance method.
Operating result
For the three and nine months ended October 1, 2022 and October 2, 2021
operating profit decreased $37.5 million and increased $11.1 millionrespectively, due to the aggregate effect of the elements described above.
Interest expense, net
Interest expense, net, carried to $13.9 million for the three months ended
October 1, 2022 of $11.1 million for the three months ended October 2, 2021.
Interest expense for the three months ended October 1, 2022 consisted of $13.2
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 5.04% for the three months
ended October 1, 2022.
Interest expense for the three months ended October 2, 2021 consisted of $10.5
million of interest on the outstanding debt and $0.5 million of amortization of
deferred financing fees. The effective interest rate on our borrowings,
including the impact of an interest rate hedge, was 4.42% for the three months
ended October 2, 2021.
Interest expense increased by $2.9 million for the three months ended October 1,
2022 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.
For the nine months ended October 1, 2022interest charges, net, reduced to
$35.1 million of $42.3 million for the nine months ended October 2, 2021.
Interest expense decreased by $7.2 million mainly driven by the repayment of the debt of $364.6 million and lower interest rates due to debt refinancing activity completed in the first half of 2021.
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Interest expense for the nine months ended October 1, 2022 consisted of $33.0
million of interest on the outstanding debt and $2.3 million of amortization of
deferred financing fees. The effective interest rate on our borrowings,
including the impact of an interest rate hedge, was 4.37% for the nine months
ended October 1, 2022.
Interest expense for the nine months ended October 2, 2021 consisted of $39.6
million interest on the outstanding debt and $2.8 million of amortization of
deferred financing fees. The effective interest rate on our borrowings, net of
the impact of the interest rate hedges, was 5.17% for the nine months ended
October 2, 2021.
Loss on extinguishment of debt
There was no loss on extinguishment of debt for the three and nine months ended
October 1, 2022. The $9.4 million loss on extinguishment of debt for the nine
months ended October 2, 2021 was incurred due to the debt refinancing activity
in the first half of 2021.
Provision for income taxes
We incurred income tax expense of $3.5 million for the three months ended
October 1, 2022 compared to an income tax expense of $14.3 million for the three
months ended October 2, 2021, a decrease of $10.8 million or 75.2%. This was
primarily due to decreased income from operations, discrete items resulting from
the revaluation of deferred tax liabilities as a result of state tax law changes
and the tax benefit resulting from the exercise of stock options.
The decrease in the Company's effective tax rate from 22.2% for three months
ended October 2, 2021 to 13.3% for the three months ended October 1, 2022 was
primarily due to discrete items relating to a tax benefit due to the exercise of
stock options and state tax law changes.
We incurred income tax expense of $48.0 million for the nine months ended
October 1, 2022 compared to $42.1 million for the nine months ended October 2,
2021, an increase of $5.9 million. This was primarily due to increased income
from operations.
The decrease in the Company's effective tax rate from 23.1% for the nine months
ended October 2, 2021 to 22.7% for the nine months ended October 1, 2022 was
primarily due to discrete items relating to a tax benefit due to the exercise of
stock options and state tax law changes.
Net revenue
As a result of the foregoing, net income decreased $27.2 million and increased
$23.4 million for the three and nine months ended October 1, 2022 and October 2,
2021 respectively.
Adjusted EBITDA and Adjusted EBITDA margin
Adjusted EBITDA decreased to $60.4 million for the three months ended October 1,
2022 from $98.3 million for the three months ended October 2, 2021, a decrease
of $37.9 million or 38.5%, driven primarily by lower net sales resulting in a
decrease in gross profit of $54.7 million.
Adjusted EBITDA margin decreased to 24.6% for the three months ended October 1,
2022 compared to 28.0% for the three months ended October 2, 2021, a decrease of
341 basis points.
Adjusted EBITDA decreased to $314.3 million for the nine months ended October 1,
2022 from $316.0 million for the nine months ended October 2, 2021, a decrease
of $1.7 million or 0.5%, driven by a decrease in gross profit of $2.9 million
and a decrease in the adjustments for the non-cash and specified costs discussed
below in "- Non-GAAP Reconciliation."
Adjusted EBITDA margin decreased to 29.8% for the nine months ended October 1,
2022 compared to 30.1% for the nine months ended October 2, 2021, a decrease of
33 basis points.
See “- Non-GAAP Reconciliation” for a reconciliation of these measures to the most directly comparable GAAP measure.
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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. 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 certain intangible assets, 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
October 1, 2022 October 2, 2021
Total NAM E&RW Total NAM E&RW
Net sales $ 245,267 $ 203,674 $ 41,593 $ 350,624 $ 298,236 $ 52,388
Gross profit $ 107,784 $ 91,850 $ 15,934 $ 162,454 $ 141,655 $ 20,799
Gross profit margin % 43.9 % 45.1 % 38.3 % 46.3 % 47.5 % 39.7 %
Segment income $ 57,493 $ 48,704 $ 8,789 $ 102,502 $ 91,920 $ 10,582
Segment income margin % 23.4 % 23.9 % 21.1 % 29.2 % 30.8 % 20.2 %
Adjusted segment income (a) $ 65,510 $ 56,879 $ 8,631 $ 109,500 $ 98,320 $ 11,180
Adjusted segment income margin %
(a) 26.7 % 27.9 % 20.8 % 31.2 % 33.0 % 21.3 %
Expenses not allocated to segments
Corporate expense, net $ 6,344 $ 15,225
Acquisition and restructuring
related expense 2,288 783
Amortization of intangible assets 8,521 8,700
Operating income $ 40,340 $ 77,794
(Dollars in thousands) Nine Months Ended Nine Months Ended
October 1, 2022 October 2, 2021
Total NAM E&RW Total NAM E&RW
Net sales $ 1,055,169 $ 892,050 $ 163,119 $ 1,049,409 $ 863,276 $ 186,133
Gross profit $ 487,543 $ 421,725 $ 65,818 $ 490,376 $ 416,753 $ 73,623
Gross profit margin % 46.2 % 47.3 % 40.3 % 46.7 % 48.3 % 39.6 %
Segment income $ 306,844 $ 267,854 $ 38,990 $ 304,848 $ 267,020 $ 37,828
Segment income margin % 29.1 % 30.0 % 23.9 % 29.0 % 30.9 % 20.3 %
Adjusted segment income (a) $ 333,608 $ 293,586 $ 40,022 $ 337,979 $ 293,282 $ 44,697
Adjusted segment income margin %
(a) 31.6 % 32.9 % 24.5 % 32.2 % 34.0 % 24.0 %
Expenses not allocated to segments
Corporate expense, net $ 24,009 $ 37,788
Acquisition and restructuring
related expense 9,499 2,452
Amortization of intangible assets 23,828 26,162
Operating income $ 249,508 $ 238,446
(a) See “- Non-GAAP Reconciliation”.
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North America (“NAM”)
(Dollars in thousands) Three Months Ended Nine Months Ended
October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021
Net sales $ 203,674 $ 298,236 $ 892,050 $ 863,276
Gross profit $ 91,850 $
141,655 $421,725 $416,753
Gross margin %
45.1 % 47.5 % 47.3 % 48.3 %
Segment income $ 48,704 $
91,920 $267,854 $267,020
Sector Revenue Margin %
23.9 % 30.8 % 30.0 % 30.9 %
Adjusted segment income (a) $ 56,879 $
98,320 $293,586 $293,282
Adjusted segment profit margin % (a)
27.9 % 33.0 % 32.9 % 34.0 %
(a) See “- Non-GAAP Reconciliation”.
Net sales
Net sales decreased to $203.7 million for the three months ended October 1, 2022
from $298.2 million for the three months ended October 2, 2021, a decrease of
$94.5 million or 31.7%.
Net sales increased to $892.1 million for the nine months ended October 1, 2022
from $863.3 million for the nine months ended October 2, 2021, an increase of
$28.8 million or 3.3%.
Year-over-year net sales increase (decrease) was driven by the following
factors:
Three Months Ended Nine Months Ended
October 1, 2022 October 1, 2022
Volume (47.1) % (14.9) %
Price, net of allowances and discounts 12.4 % 16.7 %
Acquisitions 3.2 % 1.7 %
Currency and other (0.2) % (0.2) %
Total (31.7) % 3.3 %
This decrease for the three months ended October 1, 2022 was primarily the
result of a decline in volume, partially offset by increases in price to offset
inflationary pressure and from reduced sales incentives for the seasonal year to
customers, as well as the favorable impact of acquisitions. The decline in
volume was primarily the result of distribution channel destocking as supply
chain pressure eases, lead times normalize, and the industry starts to return to
the pre-pandemic seasonal trend of lower sales activity in the third quarter of
the calendar year.
The increase for the nine months ended October 1, 2022 was primarily due to the
cumulative impact of a number of announced price increases during the last 21
months that became fully effective in the second quarter to mitigate the
escalating inflationary cost pressures from the global supply chain and a
favorable impact from acquisitions, partially offset by a decrease in volume
driven by factors discussed above and cool and wet spring weather in the first
half of the year in weather effected seasonal markets, namely the Midwest,
Northeast and Canada.
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Gross profit and gross profit margin
Gross profit decreased to $91.9 million for the three months ended October 1,
2022 from $141.7 million for the three months ended October 2, 2021, a decrease
of $49.8 million or 35.2%.
Gross profit margin decreased to 45.1% for the three months ended October 1,
2022 from 47.5% for the three months ended October 2, 2021, a decrease of 240
basis points. Gross margin decreased 128 basis points due to a non-cash increase
in cost of goods sold resulting from the fair value inventory step-up adjustment
recognized as part of the purchase accounting for the Specialty Lighting
Business. The remaining decrease in gross margin was primarily due to the
decline in volume resulting in lower operating leverage.
Gross profit increased to $421.7 million for the nine months ended October 1,
2022 from $416.8 million for the nine months ended October 2, 2021, an increase
of $4.9 million or 1.2%.
Gross profit margin decreased to 47.3% for the nine months ended October 1, 2022
from 48.3% for the nine months ended October 2, 2021, a decrease of 100 basis
points, primarily driven by the decline in volume resulting in lower operating
leverage combined with the purchase accounting adjustment for the step-up of
inventory to fair value, partially offset by the net price increases discussed
above.
Segment Revenue and Segment Profit Margin
Segment income decreased to $48.7 million for the three months ended October 1,
2022 from $91.9 million for the three months ended October 2, 2021, a decrease
of $43.2 million or 47.0%. 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 to 23.9% for the three months ended October 1,
2022 from 30.8% for the three months ended October 2, 2021, a decrease of 691
basis points.
Segment income increased to $267.9 million for the nine months ended October 1,
2022 from $267.0 million for the nine months ended October 2, 2021, an increase
of $0.8 million or 0.3%. This was primarily driven by a decrease in gross profit
margin percentage as discussed above and higher SG&A expense primarily from
one-time expenses related to the discontinuation of a product joint development
agreement as well as higher distribution and warehousing costs and marketing
costs.
Segment income margin decreased to 30.0% for the nine months ended October 1,
2022 from 30.9% for the nine months ended October 2, 2021, a decrease of 90
basis points primarily resulting from decreased gross profit margin as discussed
above and higher SG&A expense.
Adjusted Segment Result and Adjusted Segment Result Margin
Adjusted segment income decreased to $56.9 million for the three months ended
October 1, 2022 from $98.3 million for the three months ended October 2, 2021, a
decrease of $41.4 million or 42.1%. 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 profit margin decreased to 27.9% for the three months ended
October 1, 2022 33.0% for the three months ended October 2, 2021, a decrease of 504 basis points. See “- Non-GAAP Reconciliation” for a reconciliation of Segment Earnings to Adjusted Segment Earnings.
Adjusted segment income increased to $293.6 million for the nine months ended
October 1, 2022 from $293.3 million for the nine months ended October 2, 2021,
an increase of $0.3 million or 0.1%. 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 32.9% for the nine months ended
October 1, 2022 from 34.0% for the nine months ended October 2, 2021, a decrease
of 106 basis points. Refer to "-Non-GAAP Reconciliation" for a reconciliation of
segment income to adjusted segment income.
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Europe & Rest of the World (“E&RW”)
(Dollars in thousands) Three Months Ended Nine Months Ended
October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021
Net sales $ 41,593 $ 52,388 $ 163,119 $ 186,133
Gross profit $ 15,934 $
20,799 $65,818 $73,623
Gross margin %
38.3 % 39.7 % 40.3 % 39.6 %
Segment income $ 8,789 $
10,582 $38,990 $37,828
Sector Revenue Margin %
21.1 % 20.2 % 23.9 % 20.3 %
Adjusted segment income (a) $ 8,631 $
11,180 $40,022 $44,697
Adjusted segment profit margin % (a)
20.8 % 21.3 % 24.5 % 24.0 %
(a) See “- Non-GAAP Reconciliation”.
Net sales
Net sales decreased to $41.6 million for the three months ended October 1, 2022
from $52.4 million for the three months ended October 2, 2021, a decrease of
$10.8 million or 20.6%.
Net sales decreased to $163.1 million for the nine months ended October 1, 2022
from $186.1 million for the nine months ended October 2, 2021, a decrease of
$23.0 million or 12.4%.
The year-over-year decreases in net sales are attributable to the following factors:
Three Months Ended Nine Months Ended
October 1, 2022 October 1, 2022
Volume (23.4) % (13.9) %
Price, net of allowances and discounts 9.5 % 8.1 %
Currency and other (6.7) % (6.6) %
Total (20.6) % (12.4) %
The decrease in net sales was primarily due to a decline in volume as a result
of geopolitical factors and macroeconomic uncertainty, unfavorable impact of
foreign currency translation, and channel inventory reductions, partially offset
by the favorable impact of price increases.
Gross profit and gross profit margin
Gross profit decreased to $15.9 million for the three months ended October 1,
2022 from $20.8 million for the three months ended October 2, 2021, a decrease
of $4.9 million or 23.4%.
Gross profit margin decreased to 38.3% for the three months ended October 1,
2022 from 39.7% for the three months ended October 2, 2021, a decrease of 139
basis points, primarily driven by the decline in volume resulting in lower
operating leverage and the inflationary impact on cost more than offsetting
price increases.
Gross profit decreased to $65.8 million for the nine months ended October 1,
2022 from $73.6 million for the nine months ended October 2, 2021, a decrease of
$7.8 million or 10.6%.
Gross profit margin increased to 40.3% for the nine months ended October 1, 2022
from 39.6% for the nine months ended October 2, 2021, an increase of 80 basis
points, primarily driven by price increases, favorable customer and product mix,
and quality improvement, despite the volume decline and inflationary impact from
shipping costs, supplies and raw materials.
Segment Revenue and Segment Profit Margin
Segment income decreased to $8.8 million for the three months ended October 1,
2022 from $10.6 million for the three months ended October 2, 2021, a decrease
of $1.8 million or 16.9%. This was primarily driven by a decrease in sales and
gross profit as discussed above, partially offset by lower SG&A expense.
Segment profit margin increased by 93 basis points from 20.2% in the quarter ended October 2, 2021 at 21.1% for the three months ended October 1, 2022resulting from the decline in gross profit margin, as indicated above.
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Segment income increased to $39.0 million for the nine months ended October 1,
2022 from $37.8 million for the nine months ended October 2, 2021, an increase
of $1.2 million or 3.1%. This was primarily driven by costs incurred in the nine
months ended October 2, 2021, including one-time expenses related to the fire in
Yuncos, Spain, as well as higher incentive compensation including stock-based
compensation related to the IPO.
Segment profit margin increased by 358 basis points to 23.9% for the nine months ended October 1, 2022 compared to 20.3% for the same period year over year.
Adjusted Segment Result and Adjusted Segment Result Margin
Adjusted segment income decreased to $8.6 million for the three months ended
October 1, 2022 from $11.2 million for the three months ended October 2, 2021, a
decrease of $2.5 million or 22.8%. This was primarily driven by the decreased
sales after excluding the non-cash and specified costs described in "-Non-GAAP
Reconciliation." below.
Adjusted segment profit margin decreased to 20.8% for the three months ended
October 1, 2022 21.3% for the three months ended October 2, 2021a drop of 59 basis points.
Adjusted segment income decreased to $40.0 million for the nine months ended
October 1, 2022 from $44.7 million for the nine months ended October 2, 2021, a
decrease of $4.7 million or 10.5%. This was primarily driven by the decreased
sales.
Adjusted segment income margin for the nine months ended October 1, 2022 of
24.5% remained effectively flat compared to the Comparable Quarter of 24.0%.
Refer to "-Non-GAAP Reconciliation" for a reconciliation of segment income to
adjusted segment income.
Non-GAAP Reconciliation
The Company uses EBITDA, adjusted EBITDA, adjusted EBITDA margin, 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, sponsor management fees 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. Adjusted segment income is
defined as segment income adjusted for the impact of depreciation and
amortization, 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, 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. Use of the terms EBITDA, adjusted EBITDA, adjusted
EBITDA margin, adjusted segment income and adjusted segment income margin may
differ from similar measures reported by other companies. EBITDA, adjusted
EBITDA, adjusted EBITDA margin, 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 entitled measures of
other companies and may not be an appropriate measure for performance relative
to other companies. EBITDA, adjusted EBITDA, 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, 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.
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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.
Net income on adjusted EBITDA and margin on adjusted EBITDA
Following is a reconciliation from net income to adjusted EBITDA and adjusted
EBITDA margin for the three and nine months ended October 1, 2022 and October 2,
2021:
(Dollars in thousands) Three Months Ended Nine Months Ended
October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021
Net income $ 23,087 $ 50,321 $ 163,379 $ 140,004
Depreciation 4,333 4,847 13,931 14,096
Amortization 10,249 10,405 28,437 30,903
Interest expense 13,938 11,050 35,105 42,297
Income taxes 3,549 14,336 47,968 42,072
Loss on extinguishment of debt - - - 9,418
EBITDA 55,156 90,959 288,820 278,790
Stock-based compensation (a) (4) 484 1,248 16,383
Sponsor management fees (b) - - - 90
Currency exchange items (c) 52 1,149 2,776 4,379
Acquisition and restructuring related
expense, net (d) 2,288 783 9,499 2,452
Other (e) 2,935 4,954 11,970 13,941
Total Adjustments 5,271 7,370 25,493 37,245
Adjusted EBITDA $ 60,427 $
98,329 $314,313 $316,035
Adjusted EBITDA margin
24.6 % 28.0 % 29.8 % 30.1 %
(a) Represents non-cash stock-based compensation expense related to issued equity awards
to management, employees, and directors. Beginning in the three
months ended July 2nd,
2022, the adjustment includes only expense related to awards
issued as part of 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
stock rewards. Under the
historical presentation, the stock-based compensation
adjustment for the three and
nine months ended October 1, 2022 would have been an expense of
$1.8 million and $4.7
million, respectively.
(b) Represents fees paid to certain of the majority shareholders of the Company for services
rendered pursuant to a 2017 management services agreement. This
the agreement and the
corresponding payment obligation ceased on March 16, 2021, the
effective date of
IPO.
(c) Represents non-cash unrealized losses (gains) on monetary assets denominated in foreign currencies
and liabilities and foreign currency contracts.
(d) Adjustments during the three months ended October 1, 2022 are mainly motivated by
separation costs associated with a reduction-in-force as well
that the costs associated with
the relocation of the corporate headquarters. Adjustments in
the nine months have ended
October 1, 2022 are primarily driven by transaction costs
associated with the
acquisition of the Specialty Lighting Business, costs
related to moving
of the corporate headquarters, and separation costs associated
with a
reduction-in-force. Adjustments in the three and nine months
ended October 2, 2021 are
primarily driven by restructuring related costs associated with
the exit of a
redundant manufacturing and distribution facility and costs
associated with the
relocation of the corporate headquarters.
(e) Adjustments during the three months ended October 1, 2022 mainly includes non-monetary items
increase in cost of goods sold resulting from the fair value
increase in inventory
adjustment recognized as part of the purchase accounting for
specialized lighting
Business. Adjustments in the three months ended October 2, 2021
include a legal framework
settlement and fees, costs related to a fire at our
manufacturing and administrative
facilities in Yuncos, Spain, and operating losses related to an
product in start-up phase
business acquired in 2018 that was phased out.
Adjustments in the nine months ended October 1, 2022 include
expenses related to
the discontinuation of a product joint development agreement, a
non-cash increase of
cost of goods sold resulting from the fair value inventory
gradual adjustment
recognized as part of the purchase accounting for the Specialty
lighting company, and
costs incurred related to the selling stockholder offering of
shares in May 2022,
which are reported in SG&A in our unaudited condensed
consolidated statements of
operations, partially offset by gains resulting from an
insurance policy reimbursement
related to the fire incident in Yuncos, Spain. Adjustments in
the nine months have ended
October 2, 2021 include a write-off related to the
the aforementioned fire in Yuncos,
Spain, a legal settlement and fees related to patent
infringement litigation, costs
incurred in preparation for the IPO and transaction related
premiums, costs related to
our debt refinancing, and operating losses related to an early
stage product company
acquired in 2018 that was phased out.
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The following is a reconciliation of Segment Earnings to Adjusted Segment Earnings for the three and nine months ended October 1, 2022 and October 2, 2021:
(Dollars in thousands) Three Months Ended Nine Months Ended
October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021
Segment income $ 57,493 $ 102,502 $ 306,844 $ 304,848
Depreciation 4,049 4,428 13,006 13,496
Amortization 1,728 1,705 4,609 4,740
Stock-based compensation (276) (92) 183 7,904
Other (a) 2,516 957 8,966 6,991
Total Adjustments 8,017 6,998 26,764 33,131
Adjusted segment income $ 65,510 $
109,500 $333,608 $337,979
Adjusted segment profit margin
26.7 % 31.2 % 31.6 % 32.2 %
(a) The three and nine month periods ended October 1, 2022 includes a non-cash increase in costs
of goods sold resulting from the fair value inventory step-up
recognized adjustment
as part of the purchase accounting for the Specialty Lighting
Business, bad debt
write-offs, and other miscellaneous items we believe are not
representative of our
ongoing business operations. The three and nine months ended
October 2, 2021 to understand
the impairment related to a fire at our manufacturing and
administrative facilities
in Yuncos, Spain and operating losses which relate to an early
stage product
business acquired in 2018 that was phased out in 2021.
Following is a reconciliation from segment income to adjusted segment income for
NAM for the three and nine months ended October 1, 2022 and October 2, 2021
(dollars in thousands):
NAM Three Months Ended Nine Months Ended
October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021
Segment income $ 48,704 $ 91,920 $ 267,854 $ 267,020
Depreciation 3,853 4,253 12,435 12,653
Amortization 1,728 1,705 4,609 4,740
Stock-based compensation (284) (126) 72 7,318
Other (a) 2,878 568 8,616 1,551
Total adjustments 8,175 6,400 25,732 26,262
Adjusted segment income $ 56,879 $
98,320 $293,586 $293,282
Adjusted segment profit margin
27.9 % 33.0 % 32.9 % 34.0 %
(a) The three months ended October 1, 2022 for NAM includes a non-cash increase in costs
of goods sold resulting from the fair value inventory step-up
recognized adjustment
as part of the purchase accounting for the Specialty Lighting
Company. The three
months ended October 2, 2021 includes operating losses which
relate to a beginning
stage product business acquired in 2018 that was phased out in
2021.
The nine months ended October 1, 2022 for NAM includes expenses
associated with the
discontinuation of a product joint development agreement and a
non-cash increase of
cost of goods sold resulting from the fair value inventory
gradual adjustment
recognized as part of the purchase accounting for the Specialty
Lighting company.
The nine months ended October 2, 2021 include operating losses
which concern a
early stage product business acquired in 2018 that was phased
release in 2021.
32
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Following is a reconciliation from segment income to adjusted segment income for
E&RW for the three and nine months ended October 1, 2022 and October 2, 2021
(dollars in thousands):
E&RW Three Months Ended Nine Months Ended
October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021
Segment income $ 8,789 $ 10,582 $ 38,990 $ 37,828
Depreciation 196 175 571 843
Amortization - - - -
Stock-based compensation 8 34 111 586
Other (a) (362) 389 350 5,440
Total Adjustments (158) 598 1,032 6,869
Adjusted segment income $ 8,631 $
11,180 $40,022 $44,697
Adjusted segment profit margin
20.8 % 21.3 % 24.5 % 24.0 %
(a) The three months ended October 1, 2022 for E&RW includes collections of
reserved bad debt expense related to certain customers impacted
by the conflict of
Russia and Ukraine. The three months ended October 2, 2021
represents the impact of
a fire at our manufacturing and administrative facilities in
yuncos, Spain.
The nine months ended October 1, 2022 for E&RW includes bad
debt reserves related to
certain customers impacted by the conflict in Russia and
Ukraine partially offset by
subsequent collections. The nine months ended October 2, 2021
represents the effect
of a fire at our manufacturing and administrative facilities in
yuncos, Spain.
Cash 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 $72.9 million as of October 1,
2022, which is a decrease of $192.9 million from $265.8 million at December 31,
2021.
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 Senior Term Facility and the ABL Facility (collectively the “Credit Facilities”) contain various restrictions, covenants and collateral requirements. Refer to
Note 7. Long-term debt of the notes to our unaudited condensed consolidated financial statements for further information on the terms of the credit facilities.
Long-term debt consisted of the following (in thousands):
October 1, 2022 December 31, 2021
First Lien Term Facility, due May 28, 2028 $ 987,500 $
995,000
ABL Revolving Credit Facility 100,000 -
Finance lease obligations 7,050 7,780
Subtotal 1,094,550 1,002,780
Less: Current portion of the long-term debt (11,957)
(12,155)
Less: Unamortized debt issuance costs (15,591) (17,501)
Total $ 1,067,002 $ 973,124
33
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ABL installation
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. The maturity of the facility is June 1, 2026. During
the periods reported, the borrowings under the ABL Facility bore interest at a
rate equal to the London Interbank Offered Rate (LIBOR) or a base rate plus a
margin of between 1.25% to 1.75% or 0.25% to 0.75%, respectively. On October 7,
2022, the Company entered into the Third Amendment to its existing ABL Revolving
Credit Facility (the "ABL Facility") to include a $35 million First-In, Last-Out
Sublimit ("FILO Sublimit") and to replace the LIBOR based reference rate with an
adjusted term Secured Overnight Financing Rate ("SOFR"). The borrowings under
the ABL Facility bear interest at a rate equal to SOFR or a base rate plus a
margin of between 1.25% to 1.75% or 0.25% to 0.75%, respectively, while the FILO
Sublimit borrowings bear interest at a rate equal to SOFR or a base rate plus a
margin of between 2.25% to 2.75% or 1.25% to 1.75%, respectively.
For the three months ended October 1, 2022, the average borrowing base under the
ABL Facility was $199.1 million and the average loan balance outstanding was
$125.3 million. As of October 1, 2022, the loan balance was $100.0 million with
a borrowing availability of $55.2 million. During the nine months ended
October 1, 2022, the effective interest rate was 6.00%, comprised of interest
charges of 3.02% and financing costs of 2.98%.
For the year ended December 31, 2021, the average borrowing base under the ABL
Facility was $170.1 million and the average loan balance outstanding was $14.3
million. As of December 31, 2021 the loan balance was zero with a borrowing
availability of $128.9 million. During the year ended December 31, 2021, the
effective interest rate was 3.37%.
Senior temporary 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 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.
As of October 1, 2022, the balance outstanding under the First Lien Term
Facility was $987.5 million and the effective interest rate, including the
impact of an interest rate hedge, for the nine months ended October 1, 2022 was
4.26% as net secured leverage is less than 2.5x. The effective interest rate is
comprised of 3.70% for interest, 0.29% for interest charges on the interest rate
swaps and 0.27% for financing costs.
Of the December 31, 2021the outstanding balance under the senior term facility was $995.0 million and the effective interest rate, including the effect of interest rate hedging, for the year ended December 31, 2021 was 4.77%.
Compliance with commitments
The Credit Facilities contain various restrictions, covenants and collateral
requirements. As of October 1, 2022, we were in compliance with all covenants
under the Credit Facilities.
34
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Sources and uses of species
Following is a summary of our cash flows from operating, investing, and
financing activities:
(Dollars in thousands) Nine Months Ended
October 1, 2022 October 2, 2021
Net cash provided by operating activities $ 143,664 $ 199,163
Net cash used in investing activities (84,866) (19,172)
Net cash (used in) provided by financing activities (245,947) 3,187
Effect of exchange rate changes on cash and cash
equivalents and restricted cash (5,740) (1,505)
Change in cash and cash equivalents and restricted cash ($192,889) $181,673
Net cash flow generated by operating activities
Net cash provided by operating activities decreased to $143.7 million for the
nine months ended October 1, 2022 from $199.2 million for the nine months ended
October 2, 2021, a decrease of $55.5 million or 27.9%. The reduction was driven
by increased cash used for working capital compared to the prior-year period,
partially offset by higher net income in the current year.
Net cash used in investing activities
Net cash used in investing activities was $84.9 million for the nine months ended October 1, 2022 compared to $19.2 million for the nine months ended
October 2, 2021an augmentation of $65.7 million or 342.7%. The increase is mainly due to acquisition activities and capital expenditures.
Net cash (used in) provided by financing activities
Net cash used in financing activities was $245.9 million for the nine months
ended October 1, 2022 compared to net cash provided of $3.2 million for the nine
months ended October 2, 2021, a change of $249.1 million or 7817.2%. The cash
use for the nine months ended October 1, 2022 is primarily due to share
repurchases partially offset by an inflow from borrowings on the ABL Facility,
compared to the cash provided for the nine months ended October 2, 2021 driven
by proceeds from the IPO and the issuance of long-term debt, partially offset by
the repayments of long-term debt.
Off-balance sheet arrangements
We have had $4.5 million outstanding letters of credit on our ABL revolving credit facility at each of the October 1, 2022 and December 31, 2021.
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, 2021 (our "Annual Report on Form 10-K"), which section is
incorporated herein by reference, and the Company has included certain new
critical accounting estimates during the nine months ended October 1, 2022, as
described below:
Business Combinations
We account for business combinations using the acquisition method of accounting
in accordance with ASC 805, Business Combinations. The acquisition method
requires identifiable assets acquired and liabilities assumed to be recognized
and measured at fair value on the acquisition date, which is the date the
acquirer obtains control of the business. The amount by which the fair value of
consideration transferred exceeds the net fair value of assets acquired and
liabilities assumed is recorded as goodwill.
The determination of estimated fair value of assets acquired, specifically
intangible assets, requires us to make extensive use of significant estimates
and assumptions. The fair value of estimates is based on available historical
financial information and on expectations about the future, considering the
perspective of market participants. Significant estimates and assumptions may
include but are not limited to expected revenue growth rates, weighted average
cost of capital, useful lives, and discount rates. Our estimates of the useful
lives of definite-lived intangible assets are based on the same criteria and
correspond with the
35
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expected future cash flows. As a result, we may record adjustments to the fair
values of assets acquired and liabilities assumed within the measurement period
(up to one year from the acquisition date) with the corresponding offset to
goodwill.
Recently issued accounting standards
See Note 2. Significant Accounting Policies in the Notes to our Unaudited Condensed Consolidated Financial Statements for more information.
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