Hayward Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are to the three and nine months ended October 1, 2022. Figures below are in U.S. dollars; financial statements are unaudited.
Business context and reporting period
Hayward designs and manufactures pool and outdoor-living technology. It reports North America (NAM) and Europe & Rest of World (E&RW) segments. Management estimates aftermarket sales are about 80% of net sales. The company says 2023 sales were pressured by distributor destocking and moderating end-market demand following pandemic-era demand growth. The 2023 comparison period had one fewer working day.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $220.3m | $245.3m | $714.0m | $1,055.2m |
| Gross profit / margin | $105.4m / 47.8% | $107.8m / 43.9% | $339.8m / 47.6% | $487.5m / 46.2% |
| Operating income | $28.9m | $40.3m | $119.7m | $249.5m |
| Net income | $11.8m | $23.1m | $49.7m | $163.4m |
| Diluted EPS | $0.05 | $0.10 | $0.23 | $0.70 |
| Adjusted EBITDA (non-GAAP) | $47.2m | $60.4m | $171.6m | $314.3m |
| Adjusted EBITDA margin (non-GAAP) | 21.4% | 24.6% | 24.0% | 29.8% |
For the nine months, operating cash flow was $216.9m, compared with $143.7m in the prior-year period. Capital expenditures were $22.6m; cash used in investing activities was $22.6m, versus $84.9m, including prior-year acquisition spending. Cash and cash equivalents were $244.2m at September 30, 2023, up from $56.2m at December 31, 2022.
At September 30, 2023, reported debt was $1,080.3m net of unamortized issuance costs, plus a $14.6m current portion. The debt schedule lists $1,113.5m before those deductions, including finance leases. The ABL revolving facility had no borrowings and $155.9m available. The company reported compliance with credit-facility covenants. Its effective borrowing rate, including the impact of hedging, was 7.34% in Q3 and 7.02% for the nine-month period.
Changes versus the prior comparable period
- Net sales fell 10.2% in Q3 and 32.3% for the first nine months. The company attributed the declines mainly to lower volume from channel destocking and softer demand; Q3 also reflected lower net price from sales allowances.
- Q3 gross margin rose 390 basis points, primarily from manufacturing cost management and lower freight and tariffs; the prior-year quarter also included a purchase-accounting inventory step-up. Nine-month gross margin improved 140 basis points.
- Despite the Q3 gross-margin improvement, operating income fell $11.4m and adjusted EBITDA declined 21.9%, with lower sales, reduced operating leverage, and higher SG&A weighing on results. Nine-month adjusted EBITDA declined 45.4%.
- Net interest expense increased to $17.4m in Q3 from $13.9m and to $55.9m for nine months from $35.1m, primarily reflecting higher variable rates. Q3 SG&A rose 17.7%, primarily due to increased field-service warranty costs; reported warranty expense was $16.4m for Q3 versus $6.2m.
Outlook, risks, and unusual items
- Outlook: The filing provides no specific numerical earnings or sales guidance. Management expects operating cash flow and ABL availability to cover working-capital needs, capital expenditures, and debt service for the next 12 months. The seasonal early-buy program generally ships from September through March, with payments received from February through July.
- Segments: Q3 NAM sales declined 9.1% and E&RW sales declined 15.3%. E&RW cited channel destocking, geopolitical factors, and macroeconomic uncertainty; its nine-month gross margin was affected by customer/product mix, lower volume, and obsolescence reserves.
- Taxes: The Q3 tax benefit was $2.3m, with a negative 23.7% effective tax rate, attributed mainly to stock-option exercises, release of a valuation allowance on foreign tax credit carryovers, and prior-period adjustments. The filing reports a 19.9% effective rate for nine months.
- Restructuring: Q3 restructuring and acquisition-related expense was $3.3m, including costs for centralizing and consolidating European operations. The company also continued its headquarters relocation and prior cost-reduction activities.
- Litigation: Two related securities class actions allege misleading statements about growth and demand trends after the 2021 IPO; damages are unspecified. The company intends to defend the claims and cannot estimate a potential loss or range.
- Controls: Management concluded disclosure controls were not effective at September 30, 2023 because previously reported material weaknesses in internal control over financial reporting remained. Remediation is ongoing, and management did not specify when it would be complete.
- Other risks: The company identifies interest-rate and currency exposure, seasonality, channel inventory levels, supply-chain risks, and macroeconomic conditions. It uses interest-rate swaps and foreign-exchange contracts to manage certain exposures.
Important facts for investors to verify
- Whether distributor destocking and softer end-market demand are easing, and how channel inventory trends affect sales volumes.
- Whether warranty costs remain elevated and whether gross-margin gains can offset weaker volume and operating leverage.
- Debt-servicing costs, interest-rate exposure, ABL availability, covenant compliance, and the effect of the company’s interest-rate hedges.
- Progress and testing of remediation for the material weaknesses in internal controls.
- Developments in the securities litigation, including any change in the currently unestimable potential exposure.
- Any subsequent management guidance; this filing does not provide numerical full-year guidance.