Hayward Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended July 1, 2023; comparisons are to periods ended July 2, 2022. Hayward designs, manufactures and markets pool and outdoor living technology. Its reportable segments are North America (NAM) and Europe & Rest of World (E&RW). Results reflect a seasonal business and one additional working day in Q2 2023.
Key financial results
| Metric | Q2 2023 | Q2 2022 | First six months 2023 | First six months 2022 |
|---|---|---|---|---|
| Net sales | $283.5 million | $399.4 million | $493.7 million | $809.9 million |
| Gross profit / margin | $136.5 million / 48.1% | $189.4 million / 47.4% | $234.4 million / 47.5% | $379.8 million / 46.9% |
| Operating income | $63.0 million | $102.7 million | $90.8 million | $209.2 million |
| Net income | $29.5 million | $66.3 million | $37.9 million | $140.3 million |
| Diluted EPS | $0.13 | $0.29 | $0.17 | $0.59 |
| Adjusted EBITDA (non-GAAP) | $79.5 million | $127.6 million | $124.4 million | $253.9 million |
| Adjusted EBITDA margin (non-GAAP) | 28.0% | 32.0% | 25.2% | 31.3% |
Q2 sales fell 29.0% year over year; first-half sales fell 39.0%. Management attributed the declines mainly to lower volumes from distributor channel destocking and softer end-market demand amid macroeconomic conditions; geopolitical factors also weighed on E&RW. Price increases and acquisitions partly offset lower volume. Gross margin improved, principally from pricing, manufacturing cost management and tariff refunds, but lower operating leverage pressured operating and adjusted EBITDA margins.
Q2 interest expense, net, rose to $19.1 million from $11.6 million; the effective borrowing rate including hedges was 7.01%, versus 4.28%. The higher rate primarily reflected increases in variable rates on the term facility, partly offset by interest-rate swaps. The effective tax rate rose to 31.9% from 24.1%, mainly due to withholding tax recognized after a change in the indefinite-reinvestment assertion for a subsidiary.
Cash flow, debt and liquidity
- Six-month operating cash flow was $166.5 million, versus $63.7 million in 2022. The increase reflected cash generated by working capital, including reductions in receivables and inventory, partly offset by lower net income.
- Six-month capital expenditures were $15.7 million. Investing cash outflow was $15.7 million, compared with $77.2 million in 2022, which included $61.3 million for an acquisition.
- Cash and cash equivalents were $205.0 million at July 1, 2023, up from $56.2 million at December 31, 2022. Reported long-term debt, net, was $1.081 billion; the First Lien Term Facility and incremental term loan balances were $980.0 million and $124.1 million, respectively.
- The ABL facility had no borrowings outstanding at quarter-end and $228.4 million of borrowing availability. The company reported compliance with all credit-facility covenants and stated that operating cash flow and ABL availability should cover working capital, capital expenditures and debt service over the next 12 months.
- The term loan was amended in May 2023 to replace LIBOR with adjusted SOFR. The company had $600 million of interest-rate swaps outstanding. Term debt matures May 28, 2028; the ABL facility matures June 1, 2026.
Material changes and management commentary
- Q2 sales declined in both segments: NAM revenue was $237.4 million, down 30.6%; E&RW revenue was $46.2 million, down 19.5%. NAM gross margin increased to 49.9% from 48.8%; E&RW gross margin edged down to 39.1% from 39.3%.
- SG&A declined year over year, reflecting cost reductions and lower compensation costs, but rose as a share of sales because of reduced operating leverage. RD&E increased as the company invested in new product development.
- The company said aftermarket sales are approximately 80% of net sales, based on management estimates, and described replacement and upgrades to higher-value connected and energy-efficient products as growth drivers.
- Restructuring and acquisition-related expenses were $1.3 million in Q2 and $2.9 million in the first half. The company said its headquarters relocation was largely complete and continued an enterprise cost-reduction program.
- No specific numerical full-year guidance was provided in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results.
Risks, contingencies and controls
- Management cited uncertainty around the pace of channel destocking, end-market demand, seasonality, macroeconomic conditions, inflation, interest and currency rates, supply-chain availability, and geopolitical risks. Variable-rate debt exposes the company to higher interest costs despite its hedging program.
- Disclosure controls and procedures were assessed as not effective at the reasonable-assurance level as of July 1, 2023 because previously disclosed material weaknesses in internal control over financial reporting remained unremediated. Remediation work is ongoing; management did not specify when it would be complete.
- The company reported no significant pending litigation as of July 1, 2023 and no legal proceeding expected to have a material adverse effect. It noted that ordinary-course litigation can still entail costs and management distraction.
- The company is no longer a NYSE “controlled company” following a March 2023 share sale but may continue using certain governance exemptions during a transition period. It reported that the board had a majority of independent directors and relevant committees were entirely independent as of June 1, 2023.
Investor facts to verify
- Whether channel destocking is easing and whether reported sales trends are improving across both segments.
- Whether cash generation remains sustainable as working capital normalizes, and whether available ABL capacity and debt service remain adequate.
- How higher interest rates affect interest expense, and the extent and duration of swap protection.
- Progress, testing and timing for remediation of the material weaknesses in internal controls.
- Whether E&RW margin pressure and restructuring costs persist; assess non-GAAP measures alongside GAAP results.