Hayward (US:HAYW)2022-03-09 21:36Part I Business Hayward Holdings, Inc. is a global leader in pool equipment and automation systems, leveraging a large installed base and strong channel partnerships, with aftermarket sales driving approximately 80% of its Fiscal Year 2021 net sales - The company is a leading global designer, manufacturer, and marketer of a broad portfolio of pool equipment and associated automation systems23 - Aftermarket sales, driven by replacements and upgrades, are a primary growth driver, representing approximately 80% of net sales in Fiscal Year 202123 Net Sales by Segment (Fiscal Year 2021 vs. 2020) | Segment | FY 2021 Net Sales % | FY 2020 Net Sales % | | :--- | :--- | :--- | | North America (NAM) | 83% | 81% | | Europe & Rest of World (E&RW) | 17% | 19% | - The company's largest customer, Pool Corporation, represented approximately 36% of net sales in Fiscal Year 202136 - As of December 31, 2021, the company held approximately 199 issued U.S. patents, 202 issued foreign patents, and numerous trademark registrations, highlighting its focus on intellectual property51 - As of December 31, 2021, the company had approximately 2,800 total full-time equivalent employees, with about 28% located internationally54 Risk Factors The company faces significant risks from distributor dependence, economic sensitivity, supply chain disruptions, substantial indebtedness, and material weaknesses in internal controls - The business is heavily dependent on its largest customers, with Pool Corporation representing approximately 36% of net sales in Fiscal Year 202182 - The company relies on single-source and sole-source suppliers for certain components, and any disruption could materially affect production, sales, and profit margins120121 - As of December 31, 2021, the company's total indebtedness was approximately $1,002.8 million, which could adversely affect its financial condition and limit operational flexibility164 - The company has identified material weaknesses in its internal control over financial reporting related to the control environment, control activities, and IT general controls, which had not been remediated as of December 31, 2021187189 - The company is a "controlled company" as its Sponsors collectively control a majority of the voting power, allowing them significant influence over the board and corporate actions185 Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None198 Properties The company's corporate headquarters is relocating to Charlotte, North Carolina, and it operates eight global manufacturing facilities and twelve global distribution facilities - The company is relocating its corporate headquarters from Berkeley Heights, NJ to Charlotte, NC199 Principal Property Summary (as of Dec 31, 2021) | Location | Manufacturing | Distribution | Warehouse | Corporate HQ | | :--- | :--- | :--- | :--- | :--- | | North America | | | | | | Arizona | 0 | 1 | 0 | 0 | | New Jersey | 0 | 0 | 0 | 1 | | North Carolina | 1 | 1 | 4 | 1 | | Rhode Island | 1 | 1 | 1 | 0 | | Tennessee | 1 | 1 | 3 | 0 | | Florida | 1 | 1 | 1 | 0 | | Canada | 0 | 1 | 0 | 0 | | Europe & Rest of World | | | | | | Australia | 0 | 4 | 0 | 0 | | China | 1 | 0 | 0 | 0 | | France | 0 | 1 | 0 | 0 | | Spain | 3 | 1 | 0 | 0 | Legal Proceedings The company is involved in ordinary course litigation but does not anticipate a material adverse effect on its financial condition - The company is subject to litigation in the ordinary course of business but does not expect it to have a material adverse effect203 Mine Safety Disclosures This section is not applicable to the company - None204 Information about our Executive Officers This section provides biographical information for the company's key executive officers Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Kevin Holleran | 54 | President, Chief Executive Officer and Director | | Eifion Jones | 54 | Senior Vice President, Chief Financial Officer | | Donald Smith | 55 | Senior Vice President, Chief Supply Chain Officer | | Rick Roetken | 56 | President, North America | | Fernando Blasco | 47 | Vice President, General Manager, Europe & Rest of World | Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "HAYW", and a $450 million share repurchase program was approved in December 2021, with no dividends currently expected - The company's common stock is traded on the New York Stock Exchange under the symbol "HAYW"211 - On December 20, 2021, the board of directors approved a share repurchase program authorizing up to $450 million of common stock repurchases, expiring December 20, 2024212 - No shares were repurchased during the fourth quarter of 2021; subsequent to year-end, the company repurchased 4.08 million shares for $80.8 million214 [Reserved]](index=43&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In Fiscal Year 2021, Hayward achieved substantial growth, with net sales increasing 60.1% to $1.40 billion, driven by strong residential pool demand, improved gross profit margins, and a significant increase in net income Consolidated Results of Operations (in thousands) | | 2021 | 2020 | | :--- | :--- | :--- | | Net Sales | $1,401,794 | $875,402 | | Gross profit | $655,782 | $397,031 | | Operating income | $317,974 | $124,552 | | Net income | $203,725 | $43,302 | | Adjusted EBITDA | $421,737 | $231,551 | - Net sales for FY 2021 increased by 60.1% year-over-year, primarily driven by a 50.4% increase in volume and a 7.5% net price increase248249 - Gross profit margin increased by 143 basis points to 46.8% in FY 2021, attributed to higher sales volumes, price increases, and favorable product mix250 - Adjusted EBITDA margin increased by 363 basis points to 30.1% in FY 2021 from 26.5% in FY 2020264 Results of Operations For Fiscal Year 2021, net sales surged 60.1% to $1.4 billion, with gross profit increasing 65.2% and net income rising 370.5% due to strong volume, pricing, and operating leverage Net Sales Growth Drivers (FY 2021 vs. FY 2020) | Driver | Contribution | | :--- | :--- | | Volume | 50.4% | | Price, net of discounts and allowances | 7.5% | | Currency and other | 2.2% | | Total | 60.1% | - SG&A expense increased by $72.0 million but decreased as a percentage of net sales to 19.1% in FY 2021 from 22.3% in FY 2020, demonstrating operating leverage251252 - Net interest expense, including a loss on debt extinguishment, decreased by 18.1% to $60.3 million in FY 2021, primarily due to debt repayments totaling $364.6 million and lower interest rates from refinancing259 - The effective income tax rate decreased to 21.7% in FY 2021 from 25.1% in FY 2020, mainly due to lower state taxes and a higher tax deduction from stock option exercises262 Segment Results of Operations Both North America (NAM) and Europe & Rest of World (E&RW) segments reported robust growth in Fiscal Year 2021, driven by significant volume increases and favorable pricing Segment Performance (FY 2021 vs. FY 2020, in thousands) | Segment | Net Sales 2021 | Net Sales 2020 | Segment Income 2021 | Segment Income 2020 | Segment Income Margin % 2021 | Segment Income Margin % 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | NAM | $1,160,850 | $706,514 | $359,886 | $171,815 | 31.0% | 24.3% | | E&RW | $240,944 | $168,888 | $59,195 | $30,804 | 24.6% | 18.2% | - NAM segment net sales growth of 64.3% was driven by a 54.5% increase in volume and an 8.3% favorable price impact269270 - E&RW segment net sales growth of 42.7% was driven by a 33.1% increase in volume, a 4.0% price impact, and a 5.6% favorable currency impact277278 Liquidity and Capital Resources The company's liquidity improved in 2021, with cash increasing to $265.8 million and total debt reduced to approximately $1.0 billion following its IPO and debt repayments - Unrestricted cash and cash equivalents increased by $150.9 million to $265.8 million as of December 31, 2021295 Summary of Cash Flows (in thousands) | | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $189,387 | $213,841 | | Net cash used in investing activities | $(48,777) | $(12,998) | | Net cash provided (used) by financing activities | $10,957 | $(135,121) | Long-Term Debt Summary (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | First Lien Term Facility | $995,000 | $957,985 | | Incremental First Lien Term Facility | — | $150,000 | | Second Lien Term Facility | — | $205,000 | | Total Debt (incl. finance leases) | $1,002,780 | $1,322,667 | - The ABL Facility was amended to increase revolving loan commitments to $425.0 million, with a peak season commitment of $475.0 million; as of year-end, the loan balance was zero with $128.9 million of availability298299 Critical Accounting Estimates Management's critical accounting estimates involve significant judgment for customer rebates, goodwill impairment, deferred tax asset realizability, stock-based compensation, product warranties, and inventory valuation - Goodwill and indefinite-lived intangible assets, valued at $924.3 million and $736.0 million respectively, are tested for impairment annually; for 2021, a qualitative analysis concluded that impairment was not likely320321 - The realizability of deferred tax assets is evaluated quarterly, considering factors like future profitability and tax planning strategies to determine if a valuation allowance is needed323324 - The company provides for product warranties at the time of sale, using historical data on the nature, frequency, and cost of claims to estimate future obligations326 Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from foreign currency fluctuations and interest rate changes, with 24% of 2021 net sales from international operations and $995.0 million in variable rate debt - Approximately 24% of FY 2021 net sales were from international locations using a functional currency other than the U.S. dollar; a hypothetical 10% change in currency rates would impact net sales by about $34 million332334 - The company has $995.0 million of outstanding variable rate loans; a 1% change in the effective interest rate would cause an approximate $6.0 million change in annual interest cost335 - The company's interest rate swap agreements, which hedged an initial notional amount of $550.0 million, expired on August 31, 2021336464 Financial Statements This section presents the company's audited consolidated financial statements for Fiscal Year 2021, including the independent auditor's report and detailed financial statements - The independent auditor's report from PricewaterhouseCoopers LLP expresses an unqualified opinion on the consolidated financial statements342 - The auditor's report identifies Revenue Recognition for product sales as a critical audit matter due to the high degree of auditor effort required, particularly in light of previously disclosed material weaknesses in the internal control environment349350 Consolidated Balance Sheets As of December 31, 2021, total assets increased to $2.98 billion, total liabilities decreased to $1.61 billion, and total stockholders' equity significantly rose to $1.37 billion Key Balance Sheet Items (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $2,978,470 | $2,607,150 | | Cash and cash equivalents | $265,796 | $114,864 | | Goodwill | $924,264 | $920,325 | | Total Liabilities | $1,608,957 | $1,803,389 | | Long-term debt | $973,124 | $1,300,256 | | Total Stockholders' Equity | $1,369,513 | $209,261 | Consolidated Statements of Operations and Comprehensive Income For Fiscal Year 2021, net sales reached $1.40 billion, resulting in a net income of $203.7 million and diluted EPS of $0.49 Key Income Statement Data (in thousands, except per share data) | | 2021 | 2020 | | :--- | :--- | :--- | | Net sales | $1,401,794 | $875,402 | | Gross profit | $655,782 | $397,031 | | Operating income | $317,974 | $124,552 | | Net income | $203,725 | $43,302 | | Diluted EPS | $0.49 | $0.25 | Consolidated Statements of Cash Flows For Fiscal Year 2021, net cash from operating activities was $189.4 million, with a $150.5 million increase in cash and cash equivalents Cash Flow Summary (in thousands) | | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $189,387 | $213,841 | | Net cash (used in) provided by investing activities | $(48,777) | $(12,998) | | Net cash provided by (used in) financing activities | $10,957 | $(135,121) | | Change in cash and cash equivalents | $150,502 | $68,088 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None548 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2021, due to unremediated material weaknesses in internal control over financial reporting, with remediation efforts underway - Management concluded that the company's disclosure controls and procedures were not effective at the reasonable assurance level as of December 31, 2021550 - The ineffectiveness is due to unremediated material weaknesses in internal control over financial reporting, specifically concerning the control environment, control activities, and IT general controls551552553 - Remediation efforts are underway, including developing a remediation plan, establishing an internal audit group, implementing new processes, expanding relevant teams, and engaging a third-party provider555 - As a newly public company, this annual report does not include a report of management's assessment regarding internal control over financial reporting or an attestation from the registered public accounting firm556 Other Information The company reports no other information for this item - None558 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable559 Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 annual meeting proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of shareholders560 Executive Compensation Information on executive and director compensation is incorporated by reference from the company's 2022 annual meeting proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of shareholders562 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership data and equity compensation plan information are incorporated by reference from the company's 2022 annual meeting proxy statement Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining Available for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 13,544,917 | $2.83 | 12,300,095 | Certain Relationships and Related Transactions, and Director Independence Information concerning related person transactions and director independence is incorporated by reference from the company's 2022 annual meeting proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of shareholders567 Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2022 annual meeting proxy statement - Information is incorporated by reference from the definitive proxy statement for the 2022 annual meeting of shareholders568 Part IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Form 10-K, with no financial statement schedules included - The financial statements filed as part of the report are listed in Part II, Item 8569 - No financial statement schedules are included569 Form 10-K Summary The company has not provided a summary for this item - None573