Hayward Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 2, 2021; comparisons are with periods ended September 26, 2020. Amounts are in U.S. dollars unless stated otherwise. The company designs, manufactures, and markets pool equipment and automation systems. Its business is seasonal, with cash flow typically higher in the second and third quarters.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $350.6 million | $224.5 million | $1,049.4 million | $614.7 million |
| Gross profit / margin | $162.5 million / 46.3% | $106.2 million / 47.3% | $490.4 million / 46.7% | $279.6 million / 45.5% |
| Operating income / margin | $77.8 million / 22.2% | $35.2 million / 15.7% | $238.4 million / 22.7% | $82.7 million / 13.5% |
| Net income | $50.3 million | $15.2 million | $140.0 million | $23.5 million |
| Diluted EPS | $0.21 | $0.07 | $0.23 | $0.11 |
| Adjusted EBITDA (non-GAAP) / margin | $98.3 million / 28.0% | $61.0 million / 27.2% | $316.0 million / 30.1% | $157.7 million / 25.7% |
- Revenue and margins: Q3 sales rose 56.2%, driven principally by volume growth (47.9%), with price and currency contributing. Gross margin fell 95 basis points year over year as raw-material, freight, and tariff costs outweighed some pricing and productivity gains. For the nine-month period, gross margin improved 125 basis points.
- Cash flow: Nine-month operating cash flow was $199.2 million, down from $226.4 million. Strategic inventory purchases and higher receivables contributed to working-capital use. Investing cash outflow was $19.2 million, mainly for capital expenditures; financing cash inflow was $3.2 million.
- Liquidity and debt: Cash and cash equivalents were $295.1 million at October 2, 2021, versus $114.9 million at December 31, 2020. Long-term debt, net of issuance costs and including current maturities, was $988.1 million; gross debt including capital leases was $1,006.6 million. The ABL revolver had no borrowings and $106.5 million of reported borrowing availability. The company reported compliance with credit-facility covenants.
Material changes versus prior periods
- Net sales increased 56.2% in Q3 and 70.7% year to date, supported by demand for pool upgrades and new construction. The year-to-date comparison also includes five additional fiscal days in 2021.
- Net income increased to $50.3 million in Q3 and $140.0 million year to date. Interest expense declined with debt repayment and lower borrowing rates; however, nine-month results included a $9.4 million debt-extinguishment loss.
- The March 2021 IPO generated $356.6 million in net proceeds for the company, used principally to repay debt. The company repaid $364.6 million of term loans during the nine-month period, including full repayment of its second-lien facility. Its amended first-lien term facility has a May 2028 maturity.
- Inventory rose to $209.0 million from $145.3 million at year-end. Stockholders’ equity rose substantially following the IPO and conversion of pre-IPO stock.
Outlook, risks, and unusual items
- Outlook: No quantified full-year financial guidance is provided in the filing. Management expects inflationary pressures and supply-chain disruption to continue in Q4 2021, potentially affecting operations and timely customer deliveries. Management believes operating cash flow and ABL availability should fund working capital, capital expenditures, and debt service for the next 12 months.
- Operating risks: Management cited higher costs for metals, resins, electronics, shipping, and tariffs, along with labor constraints, port congestion, and component availability. Price increases were announced, but much of the latest increase had not yet flowed through North American shipments in Q3 because of order backlogs. COVID-19-related disruptions and demand sustainability also remain risks.
- Unusual items: A June fire damaged part of the Yuncos, Spain facility; manufacturing disruption was described as minimal, but $5.4 million of asset and inventory write-offs was recorded year to date. Insurance recovery remained under review. The company recorded a $3.5 million reserve for a probable, estimable settlement of the Pentair/Danfoss patent litigation; potential damages or injunctions could affect product activity if the company’s defenses are unsuccessful.
- Controls: Management concluded disclosure controls were not effective at October 2, 2021 because of a continuing material weakness in internal control over financial reporting. The company said it did not know the timeframe for full remediation.
- Other developments: The company is relocating corporate functions from New Jersey to Charlotte, expected to be largely complete by spring 2022. Estimated severance and retention costs are approximately $5.3 million, recognized as earned.
Important facts for investors to verify
- Whether pricing actions and productivity can offset continued input, freight, and tariff inflation without further gross-margin pressure.
- Whether supply constraints, labor availability, and inventory levels affect production, deliveries, and cash conversion.
- The eventual insurance recovery for the Yuncos fire and the outcome and potential exposure from the Pentair/Danfoss litigation.
- Progress remediating the material weakness in internal controls and any effects on future reporting.
- Debt repayment, interest costs, and actual borrowing availability under the borrowing-base-dependent ABL facility.
- How demand develops after pandemic-related pool-industry growth and whether reported growth is comparable given the extra five days in the year-to-date period.