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 endedOctober 1, 2022 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year endingDecember 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 inthe 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 inNorth Carolina ,Tennessee ,Rhode Island ,Florida ,California ,Spain (three) andChina , and other facilities inthe United States ,Canada ,France , andAustralia . Segments Our business is organized into two reportable segments:North America ("NAM") andEurope & 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
and manufactures and sells flow control products worldwide.
The E&RW segment manufactures and sells residential and commercial swimming pool equipment and supplies inEurope , Central andSouth America , theMiddle East ,Australia and otherAsia Pacific countries.
NAM represented 83% and 85% of total net sales for the three months ended
Factors affecting the comparability of our results of operations
Our results of operations for the three and nine months endedOctober 1, 2022 and the three and nine months endedOctober 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 onDecember 31 of each fiscal year. The interim closing dates for the first, second and third quarters of 2022 areApril 2 ,July 2 , andOctober 1 , compared to the respectiveApril 3 ,July 3 , andOctober 2, 2021 dates. This resulted in one fewer working day 20 -------------------------------------------------------------------------------- in the nine months endedOctober 1, 2022 compared to the nine months endedOctober 2, 2021 . Throughout this discussion we may refer to the three months endedOctober 1, 2022 and the three months endedOctober 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 endedOctober 1, 2022 andOctober 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 endedOctober 1, 2022 from$350.6 million for the three months endedOctober 2, 2021 , a decrease of$105.3 million or 30.0%. See the segment discussion below for further information.
Net sales increased to
22
--------------------------------------------------------------------------------
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 endedOctober 1, 2022 from$162.5 million for the three months endedOctober 2, 2021 , a decrease of$54.7 million or 33.7%. Gross profit margin decreased to 43.9% for the three months endedOctober 1, 2022 compared to 46.3% for the three months endedOctober 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 ofHalco 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 endedOctober 1, 2022 from$490.4 million for the nine months endedOctober 2, 2021 , a decrease of$2.9 million , or 0.6%.
Gross profit margin decreased to 46.2% for the nine months ended
compared to 46.7% for the nine months ended
Selling, general and administrative expenses
Selling, general, and administrative expense (SG&A) decreased to$50.5 million for the three months endedOctober 1, 2022 from$68.8 million for the three months endedOctober 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 endedOctober 1, 2022 as compared to 19.6% for three months endedOctober 2, 2021 , an increase of 96 basis points driven by reduced operating leverage. SG&A decreased to$188.3 million for the nine months endedOctober 1, 2022 from$207.1 million for the nine months endedOctober 2, 2021 , a decrease of$18.8 million or 9.1%. During the nine months endedOctober 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 endedOctober 1, 2022 as compared to 19.7% for nine months endedOctober 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
23 -------------------------------------------------------------------------------- Research, development, and engineering expense (RD&E) remained approximately consistent at$6.1 million for the three months endedOctober 1, 2022 compared with$6.4 million for the three months endedOctober 2, 2021 .
As a percentage of net sales, RD&E was 2.5% for the three months ended
RD&E remained approximately consistent at$16.4 million for the nine months endedOctober 1, 2022 compared with$16.2 million for the nine months endedOctober 2, 2021 . As a percentage of net sales, RD&E was relatively flat at 1.6% for the nine months endedOctober 1, 2022 compared to 1.5% for the nine months endedOctober 2, 2021 .
Charges related to acquisition and restructuring
For the three months endedOctober 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 endedOctober 2, 2021 . The expense in the Third Quarter was primarily related to costs associated with the corporate headquarters relocation fromNew Jersey toNorth Carolina and the reduction-in-force executed during the quarter, compared to theComparable Quarter which only had costs associated with the corporate relocation. Additionally, during the three months endedOctober 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 endedOctober 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 endedOctober 2, 2021 . The nine months endedOctober 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 endedOctober 2, 2021 , which primarily had costs pertaining to the exit from our leased facility inChandler, 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
amortization of intangible assets decreased
Operating result
For the three and nine months ended
operating profit decreased
Interest expense, net
Interest expense, net, carried to
Interest expense for the three months endedOctober 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 endedOctober 1, 2022 . Interest expense for the three months endedOctober 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 endedOctober 2, 2021 . Interest expense increased by$2.9 million for the three months endedOctober 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
Interest expense decreased by
24 -------------------------------------------------------------------------------- Interest expense for the nine months endedOctober 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 endedOctober 1, 2022 . Interest expense for the nine months endedOctober 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 endedOctober 2, 2021 .
Loss on extinguishment of debt
There was no loss on extinguishment of debt for the three and nine months endedOctober 1, 2022 . The$9.4 million loss on extinguishment of debt for the nine months endedOctober 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 endedOctober 1, 2022 compared to an income tax expense of$14.3 million for the three months endedOctober 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 endedOctober 2, 2021 to 13.3% for the three months endedOctober 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 endedOctober 1, 2022 compared to$42.1 million for the nine months endedOctober 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 endedOctober 2, 2021 to 22.7% for the nine months endedOctober 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 endedOctober 1, 2022 andOctober 2, 2021 respectively.
Adjusted EBITDA and Adjusted EBITDA margin
Adjusted EBITDA decreased to$60.4 million for the three months endedOctober 1, 2022 from$98.3 million for the three months endedOctober 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 endedOctober 1, 2022 compared to 28.0% for the three months endedOctober 2, 2021 , a decrease of 341 basis points. Adjusted EBITDA decreased to$314.3 million for the nine months endedOctober 1, 2022 from$316.0 million for the nine months endedOctober 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 endedOctober 1, 2022 compared to 30.1% for the nine months endedOctober 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.
25 --------------------------------------------------------------------------------
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”.
26 --------------------------------------------------------------------------------
(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
Gross margin %
45.1 % 47.5 % 47.3 % 48.3 % Segment income$ 48,704 $
91,920
Sector Revenue Margin %
23.9 % 30.8 % 30.0 % 30.9 % Adjusted segment income (a)$ 56,879 $
98,320
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 endedOctober 1, 2022 from$298.2 million for the three months endedOctober 2, 2021 , a decrease of$94.5 million or 31.7%. Net sales increased to$892.1 million for the nine months endedOctober 1, 2022 from$863.3 million for the nine months endedOctober 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 endedOctober 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 endedOctober 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 andCanada . 27 --------------------------------------------------------------------------------
Gross profit and gross profit margin
Gross profit decreased to$91.9 million for the three months endedOctober 1, 2022 from$141.7 million for the three months endedOctober 2, 2021 , a decrease of$49.8 million or 35.2%. Gross profit margin decreased to 45.1% for the three months endedOctober 1, 2022 from 47.5% for the three months endedOctober 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 endedOctober 1, 2022 from$416.8 million for the nine months endedOctober 2, 2021 , an increase of$4.9 million or 1.2%. Gross profit margin decreased to 47.3% for the nine months endedOctober 1, 2022 from 48.3% for the nine months endedOctober 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 endedOctober 1, 2022 from$91.9 million for the three months endedOctober 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 endedOctober 1, 2022 from 30.8% for the three months endedOctober 2, 2021 , a decrease of 691 basis points. Segment income increased to$267.9 million for the nine months endedOctober 1, 2022 from$267.0 million for the nine months endedOctober 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 endedOctober 1, 2022 from 30.9% for the nine months endedOctober 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 endedOctober 1, 2022 from$98.3 million for the three months endedOctober 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
Adjusted segment income increased to$293.6 million for the nine months endedOctober 1, 2022 from$293.3 million for the nine months endedOctober 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 endedOctober 1, 2022 from 34.0% for the nine months endedOctober 2, 2021 , a decrease of 106 basis points. Refer to "-Non-GAAP Reconciliation" for a reconciliation of segment income to adjusted segment income. 28 --------------------------------------------------------------------------------
(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
Gross margin %
38.3 % 39.7 % 40.3 % 39.6 % Segment income$ 8,789 $
10,582
Sector Revenue Margin %
21.1 % 20.2 % 23.9 % 20.3 % Adjusted segment income (a)$ 8,631 $
11,180
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 endedOctober 1, 2022 from$52.4 million for the three months endedOctober 2, 2021 , a decrease of$10.8 million or 20.6%. Net sales decreased to$163.1 million for the nine months endedOctober 1, 2022 from$186.1 million for the nine months endedOctober 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 endedOctober 1, 2022 from$20.8 million for the three months endedOctober 2, 2021 , a decrease of$4.9 million or 23.4%. Gross profit margin decreased to 38.3% for the three months endedOctober 1, 2022 from 39.7% for the three months endedOctober 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 endedOctober 1, 2022 from$73.6 million for the nine months endedOctober 2, 2021 , a decrease of$7.8 million or 10.6%. Gross profit margin increased to 40.3% for the nine months endedOctober 1, 2022 from 39.6% for the nine months endedOctober 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 endedOctober 1, 2022 from$10.6 million for the three months endedOctober 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
29 -------------------------------------------------------------------------------- Segment income increased to$39.0 million for the nine months endedOctober 1, 2022 from$37.8 million for the nine months endedOctober 2, 2021 , an increase of$1.2 million or 3.1%. This was primarily driven by costs incurred in the nine months endedOctober 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
Adjusted Segment Result and Adjusted Segment Result Margin
Adjusted segment income decreased to$8.6 million for the three months endedOctober 1, 2022 from$11.2 million for the three months endedOctober 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
Adjusted segment income decreased to$40.0 million for the nine months endedOctober 1, 2022 from$44.7 million for the nine months endedOctober 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 endedOctober 1, 2022 of 24.5% remained effectively flat compared to theComparable 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. 30 -------------------------------------------------------------------------------- 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 endedOctober 1, 2022 andOctober 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
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
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
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
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
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
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
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.
31
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The following is a reconciliation of Segment Earnings to Adjusted Segment Earnings for the three and nine months ended
(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
Adjusted segment profit margin
26.7 % 31.2 % 31.6 % 32.2 %
(a) The three and nine month periods ended
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
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
Adjusted segment profit margin
27.9 % 33.0 % 32.9 % 34.0 %
(a) The three months ended
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 -------------------------------------------------------------------------------- Following is a reconciliation from segment income to adjusted segment income for E&RW for the three and nine months endedOctober 1, 2022 andOctober 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
Adjusted segment profit margin
20.8 % 21.3 % 24.5 % 24.0 %
(a) The three months ended
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,
The nine months ended October 1, 2022 for E&RW includes bad
debt reserves related to
certain customers impacted by the conflict inRussia and
subsequent collections. The nine months ended October 2, 2021
represents the effect
of a fire at our manufacturing and administrative facilities in
yuncos,
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 ofOctober 1, 2022 , which is a decrease of$192.9 million from$265.8 million atDecember 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 inNorth 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 ourCanada andSpain subsidiaries. A portion of the ABL Facility not to exceed$50 million is available for the issuance of letters of credit inU.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 isJune 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. OnOctober 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 endedOctober 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 ofOctober 1, 2022 , the loan balance was$100.0 million with a borrowing availability of$55.2 million . During the nine months endedOctober 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 endedDecember 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 ofDecember 31, 2021 the loan balance was zero with a borrowing availability of$128.9 million . During the year endedDecember 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 ofOctober 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 endedOctober 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
Compliance with commitments
The Credit Facilities contain various restrictions, covenants and collateral requirements. As ofOctober 1, 2022 , we were in compliance with all covenants under the Credit Facilities. 34 --------------------------------------------------------------------------------
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
Net cash flow generated by operating activities
Net cash provided by operating activities decreased to$143.7 million for the nine months endedOctober 1, 2022 from$199.2 million for the nine months endedOctober 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
Net cash (used in) provided by financing activities
Net cash used in financing activities was$245.9 million for the nine months endedOctober 1, 2022 compared to net cash provided of$3.2 million for the nine months endedOctober 2, 2021 , a change of$249.1 million or 7817.2%. The cash use for the nine months endedOctober 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 endedOctober 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
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 endedDecember 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 endedOctober 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 -------------------------------------------------------------------------------- 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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