Hayward Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended April 3, 2021; comparative period ended March 28, 2020. The 2021 quarter included six additional days, which limits direct year-over-year comparability. Hayward designs, manufactures and markets pool equipment and automation systems.
Financial results and liquidity
| Metric | Q1 2021 | Comparable 2020 period |
|---|---|---|
| Net sales | $334.4 million | $170.2 million |
| Gross profit / margin | $159.9 million / 47.8% | $75.6 million / 44.4% |
| Operating income | $79.8 million | $12.6 million |
| Net income (loss) | $36.9 million | $(10.4) million |
| Adjusted EBITDA / margin | $107.3 million / 32.1% | $35.8 million / 21.0% |
| Operating cash flow | $(131.8) million | $(97.8) million |
| Capital expenditures | $4.8 million | $3.9 million |
Sales rose 96.5%, primarily from higher residential pool equipment volumes, with additional contribution from pricing and currency. North America sales increased 105.1% to $271.5 million; Europe & Rest of World sales increased 66.4% to $62.9 million. Gross margin improved on pricing, manufacturing leverage, cost savings and mix, partly offset by raw-material, freight and duty inflation. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
Cash and cash equivalents were $13.8 million at April 3, versus $114.9 million at year-end 2020. The operating cash outflow principally reflected seasonal working-capital use, including a $210.0 million increase in receivables associated with the early-buy program. Management expected this cash use to reverse as second-quarter customer collections arrived and said operating cash flow plus ABL availability should cover needs for the next 12 months.
Reported long-term debt, net of issuance costs, was $991.8 million, plus a $2.1 million current portion; debt principal and capital leases totaled $1,006.7 million. IPO proceeds were used to repay $356.6 million of borrowings, including full repayment of the $205.0 million second-lien facility. The company had $48.8 million outstanding under its ABL revolver at quarter-end and reported covenant compliance.
Material changes and unusual items
- The company completed its IPO in March, issuing 22.2 million shares at $17 per share and receiving $356.6 million in net proceeds. The IPO and related reclassification substantially changed the capital structure.
- Q1 net income included a $5.8 million loss on debt extinguishment. Reported EPS was $(0.85) despite positive net income, principally because an $85.5 million non-cash deemed dividend associated with conversion of Class A shares reduced income attributable to common stockholders. The filing says this was a one-time accounting item with no current or future income-statement impact.
- SG&A increased 53.6%, including $10.6 million in stock-based compensation, while SG&A as a share of sales declined to 19.9% from 25.4%. The 2021 period had no acquisition and restructuring expense, compared with $5.5 million in the prior period.
- Operating cash use increased year over year despite the return to profitability, reflecting seasonal receivables and inventory investment. The company noted that its business is seasonal, with cash flow usually higher in the second and third quarters.
Outlook, risks and contingencies
No formal earnings or revenue guidance is provided in the supplied filing text. Management cited continued strong pool demand and expected seasonal cash generation in Q2, but emphasized uncertainty and that quarterly results are not necessarily indicative of full-year results. Price increases of 3% to 7% were announced in March and took effect in April or May by region to help mitigate rising input costs.
Management said COVID-19 had reinforced pool-industry growth trends and had not significantly affected the cost structure through the filing date; facilities were operating. However, transportation disruptions, supplier constraints and higher raw-material, labor, freight and logistics costs remained risks. Other disclosed risks include seasonality, competition, foreign exchange, debt service, and execution of growth and acquisition plans.
On May 17, 2021, the company announced commitments for a proposed $1.0 billion senior secured term loan to refinance existing loans and revolver borrowings, fund cash to the balance sheet and pay fees. The proposed facility was expected to mature in May 2028, subject to customary closing conditions; it was not yet completed as of the filing.
The company disclosed ongoing Pentair/Danfoss patent-infringement litigation involving variable-speed pumps, drives and controllers. Potential outcomes could include damages or an injunction; management stated it did not expect the pending litigation overall to have a material adverse effect, while noting uncertainty. Disclosure controls were deemed ineffective because of a continuing material weakness in internal control over financial reporting; the company did not know the time frame for full remediation.
Most important facts for investors to verify
- Whether Q2 collections reversed the early-buy-program working-capital outflow as management expected, and how cash and revolver use evolved.
- Whether the announced $1.0 billion refinancing closed on the stated terms and how it affected interest expense, liquidity and leverage.
- Whether elevated demand, pricing actions and margin improvement persisted as material, freight and labor costs changed.
- Progress in remediating the disclosed material weakness in internal controls.
- Developments in the Pentair/Danfoss litigation and any related operational or financial exposure.
- Comparability of growth rates, given the extra six days in Q1 2021 and the one-time IPO-related accounting effects.