Hayward Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended April 1, 2023; comparisons are with the three months ended April 2, 2022. Hayward designs, manufactures and markets pool equipment and automation systems. Its reportable segments are North America and Europe & Rest of World (E&RW). The quarter had one fewer working day than the comparable period. Results are seasonal and are not necessarily indicative of full-year performance.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $210.1 million | $410.5 million | Down 48.8% |
| Gross profit / margin | $97.9 million / 46.6% | $190.4 million / 46.4% | Profit down 48.6%; margin up 0.2 points |
| Operating income | $27.8 million | $106.4 million | Down $78.6 million |
| Net income | $8.4 million | $74.0 million | Down $65.6 million |
| Diluted EPS | $0.04 | $0.30 | Down $0.26 |
| Adjusted EBITDA and margin (non-GAAP) | $44.9 million / 21.4% | $126.2 million / 30.8% | EBITDA down 64.4%; margin down 9.4 points |
| Net cash used by operations | $90.9 million | $56.9 million | Cash use increased $34.0 million |
SG&A fell 20.3% to $54.9 million, but rose to 26.1% of sales from 16.8% because of lower sales and reduced operating leverage. Net interest expense increased to $19.4 million from $9.6 million; the effective borrowing rate, including hedges, was 6.71% versus 3.59%. The effective tax rate was 9.0% versus 24.0%, reflecting lower operating income and a discrete tax benefit from stock-option exercises.
Sales and segment trends
- Management attributed the consolidated sales decline principally to a 54.0% volume decrease, driven by distributor destocking as supply-chain lead times normalized, moderated end-market demand, geopolitical factors in Europe and poor weather in some markets. Pricing and acquisitions partly offset the decline.
- North America sales fell 53.0% to $162.7 million; segment income fell 69.4% to $33.3 million. Gross margin improved to 48.6% from 47.1%, while segment income margin declined to 20.5% from 31.4%.
- E&RW sales fell 26.1% to $47.4 million; segment income fell 42.0% to $9.9 million. Gross margin declined to 39.8% from 42.6%, reflecting inflation in utilities and wages, lower volume and obsolescence reserves.
Liquidity, debt and cash flow
Cash and cash equivalents were $41.0 million at April 1, 2023, down from $56.2 million at December 31, 2022. Operating cash outflow was $90.9 million; investing cash outflow was $6.2 million, primarily capital expenditures; financing provided $81.8 million, primarily from ABL borrowings. Cash-flow and working-capital needs fluctuate seasonally, including under the early-buy program.
Total debt, including current maturities and finance leases before unamortized issuance costs, was $1.204 billion; reported long-term debt, net, was $1.169 billion. The ABL balance was $86.7 million at quarter-end, with $253.6 million of borrowing availability. On May 1, 2023, the company repaid the ABL balance in full. The term facilities mature May 28, 2028, and the ABL facility matures June 1, 2026. 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 for the next 12 months.
Outlook, risks and notable items
- The filing provides no specific numerical revenue or earnings guidance. Management described channel destocking, normalized lead times, easing pandemic-driven demand, macroeconomic uncertainty, seasonality and interest-rate costs as relevant factors.
- Management said higher rates increased variable-rate borrowing costs; interest-rate swaps are used to manage exposure. During the quarter, it entered swaps covering an initial $100 million notional amount; total swap notional was $600 million at April 1.
- The company continued an enterprise cost-reduction program and incurred $1.6 million in restructuring-related expense, including costs associated with that program and the headquarters relocation.
- Disclosure controls and procedures were deemed not effective at the reasonable assurance level because material weaknesses in internal control over financial reporting remained. Remediation work was ongoing, with no specific completion timeline stated.
- The company reported no significant pending litigation. It also disclosed that it ceased to be a NYSE “controlled company” on March 3, 2023, but may use certain governance exemptions during transition periods; failure to meet applicable independence deadlines could risk delisting.
Important facts for investors to verify
- Whether distributor inventory destocking is easing and end-market demand is stabilizing, particularly in North America.
- Whether the ABL repayment remains sustained and seasonal operating cash outflows are followed by the expected stronger cash generation in later quarters.
- Debt costs, variable-rate exposure, interest-rate swap coverage and compliance with credit-facility covenants.
- Progress and testing of internal-control remediation, including the timing and sustainability of effective controls.
- Underlying trends alongside non-GAAP adjusted EBITDA and segment measures; the filing cautions that non-GAAP measures are supplemental and may not be comparable across companies.