Hayward Holdings, Inc. — Q2 2022 Form 10-Q
Business and period: Hayward designs, manufactures and markets pool equipment and automation systems, with North America (NAM) and Europe & Rest of World (E&RW) as reportable segments. The quarter ended July 2, 2022; comparisons are to the quarter ended July 3, 2021. Six-month results are for the same fiscal periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended July 2, 2022 | Six months ended July 2, 2022 |
|---|---|---|
| Net sales | $399.4 million, up 9.6% | $809.9 million, up 15.9% |
| Gross profit and margin | $189.4 million; 47.4% (46.1% prior year) | $379.8 million; 46.9% (unchanged) |
| Operating income | $102.7 million | $209.2 million |
| Net income | $66.3 million; diluted EPS $0.29 | $140.3 million; diluted EPS $0.59 |
| Adjusted EBITDA and margin (non-GAAP) | $127.6 million; 32.0% | $253.9 million; 31.3% |
| Net cash from operating activities | Not presented quarterly in the supplied filing text | $63.7 million, versus $123.4 million |
- Sales drivers: Price increases contributed 16.5% to quarterly sales growth and acquisitions 1.3%; volume declined 6.4% and currency and other factors reduced growth by 1.8%. For the six months, price contributed 16.7%, while volume was approximately flat.
- Cash and working capital: Cash was $109.0 million at July 2, down from $265.8 million at year-end 2021. Inventory rose to $312.5 million from $233.4 million. Management attributed lower year-to-date operating cash flow mainly to increased working-capital use.
- Debt and liquidity: Debt consisted of a $990.0 million First Lien Term Facility, $150.0 million drawn on the ABL revolver, and $7.6 million of finance leases. Reported long-term debt, net of current maturities and issuance costs, was $1.119 billion. ABL availability was $130.1 million; the company reported compliance with all credit covenants.
- Capital allocation: The company repurchased approximately 18.5 million shares for $293.1 million in the first half, leaving $156.9 million under the existing authorization at July 2. No common dividend was declared or paid in the period.
Changes versus prior comparable periods
- Quarterly sales growth was led by NAM: its sales rose 16.5% to $342.1 million, while E&RW sales fell 19.0% to $57.4 million. For the first half, NAM sales rose 21.8%; E&RW sales declined 9.1%.
- Quarterly gross margin improved 130 basis points, mainly from price increases. First-half consolidated gross margin was flat: inflation in materials, freight and import duties weighed on NAM’s first-half margin, while E&RW margin improved with pricing and product mix.
- Quarterly net income increased from $52.8 million to $66.3 million; first-half net income increased from $89.7 million to $140.3 million. Lower interest expense and the absence of prior-year debt-extinguishment losses helped the first-half comparison. Prior-year first-half EPS was affected by an $85.5 million non-cash deemed dividend related to the IPO, making EPS comparisons less representative of underlying earnings.
- First-half operating cash flow fell 48.4% year over year, while investing cash use increased to $77.2 million, including the Halco acquisition and capital expenditures. Financing used $141.1 million, primarily for share repurchases, partly offset by ABL borrowings.
Outlook, commentary and risks
- No specific full-year financial guidance is provided in the supplied filing text. Management said operating cash generation and ABL availability should be adequate for working capital, capital expenditures and debt service over the next 12 months.
- Management cited channel inventory reductions, cool and wet spring weather in some North American markets, European geopolitical and macroeconomic conditions, and unfavorable currency translation as factors affecting sales. It expects continued price volatility in metals, resins and electronic components, along with import-duty exposure; pricing and productivity initiatives are intended to mitigate cost pressures.
- The company acquired Halco Lighting’s specialty pool, spa, fountain and landscape lighting business on June 2 for net consideration of $59.7 million. The purchase-price allocation remained preliminary; the company recorded $3.1 million of quarterly transaction costs. The acquisition was funded with ABL proceeds and cash.
- Yuncos, Spain’s 2021 fire caused limited manufacturing disruption; insurance proceeds mitigated losses. The filing reports no significant pending litigation, while noting ordinary-course legal matters and possible future claims.
- Controls: Management concluded disclosure controls and procedures were not effective as of July 2 because previously reported material weaknesses in internal control over financial reporting remained. Remediation efforts were underway, but management could not specify when remediation would be complete.
- Other risks include inflation and supply-chain disruption, seasonality, international and geopolitical exposure, foreign exchange, competition, and the ability to service debt. The filing notes that approximately 25% of first-half sales were outside the United States.
- After quarter-end, on July 26, the board renewed a share repurchase authorization of up to $450 million, with authority expiring July 26, 2025. Repurchases may be suspended or changed at any time.
Most important facts for investors to verify
- Whether falling volume, channel inventory reductions and E&RW weakness persist, and how they affect sales after price increases.
- Whether price realization continues to offset raw-material, freight, duty and other inflation, particularly in NAM.
- Working-capital trends, especially inventory and receivables, and the resulting operating cash flow and ABL usage.
- Debt-service capacity and liquidity if interest rates, seasonal borrowing needs or business conditions worsen.
- Progress and testing of controls remediation, given the disclosed material weaknesses and ineffective disclosure controls.
- Final Halco purchase accounting, integration results and the returns generated by the acquisition and share repurchases.