HAYWARD HOLDINGS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, this discussion and analysis includes forward-looking statements that reflect our plans, estimates and beliefs and involve risks and uncertainties. As a result of many factors, including those set forth in the section "Risk Factors" in this Quarterly Report on Form 10-Q, our actual results may differ materially from those contained in or implied by any forward-looking statements. The results of operations for the three months endedApril 2, 2022 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year endingDecember 31, 2022 . Our Company The Company is an industry-leading global designer, manufacturer, and marketer of a broad portfolio of pool equipment and associated automation systems. With the pool as the centerpiece of the growing outdoor living space, the pool industry has attractive market characteristics, including significant aftermarket requirements, innovation-led growth opportunities, and a favorable industry structure. We are a leader in this market with a highly-recognized brand, one of the largest installed bases of pool equipment in the world, decades-long relationships with our key channel partners and trade customers and a history of technological innovation. Our engineered products, which include various energy efficient and more environmentally sustainable offerings, enhance the pool owner's outdoor living lifestyle while also delivering high quality water, pleasant ambiance and ease of use for the ultimate backyard experience. Aftermarket replacements and upgrades to higher value IoT and energy efficient models are a primary growth driver for our business. We have an estimated North American residential pool market share of approximately 34%. We believe that we are well-positioned for future growth. On average, we have 20+ year relationships with our top 20 customers. Based upon feedback from certain representative customers and our interpretation of available industry and government data inthe United States , we estimate that aftermarket sales represented approximately 80% of net sales. Aftermarket sales are not based upon our GAAP net sales results. We believe aftermarket sales are generally recurring in nature since these products are critical to the ongoing operation of pools given requirements for water quality and sanitization. Our product replacement cycle of approximately 8 to 11 years drives multiple replacement opportunities over the typical life of a pool, creating opportunities to generate aftermarket product sales as pool owners repair, remodel and upgrade their pools. The Company has eight manufacturing facilities worldwide, which are located inNorth Carolina ,Tennessee ,Rhode Island ,Florida ,Spain (three) andChina , and other facilities inthe United States ,Canada ,France , andAustralia .
segments
Our business is organized into two reportable segments:North America ("NAM") andEurope & Rest of World ("E&RW"). The Company determined its operating segments based on how the Chief Operating Decision Maker ("CODM") reviews the Company's operating results in assessing performance and allocating resources.
The NAM segment manufactures and sells a full line of residential and commercial swimming pool equipment and supplies in
and manufactures and sells flow control products worldwide.
The E&RW segment manufactures and sells residential and commercial swimming pool equipment and supplies inEurope , Central andSouth America , theMiddle East ,Australia and otherAsia Pacific countries. NAM accounted for 84% and 81% of total net sales for the three months endedApril 2, 2022 andApril 3, 2021 , respectively, and E&RW accounted for 16% and 19% of total net sales for the three months endedApril 2, 2022 andApril 3, 2021 , respectively.
Factors affecting the comparability of our results of operations
Our operating results for the three months ended
16 -------------------------------------------------------------------------------- Our fiscal quarters end on the Saturday closest to the calendar quarter end, with the exception of year-end which ends onDecember 31 of each fiscal year. The interim closing dates for the first, second and third quarters of 2022 areApril 2 ,July 2 , andOctober 1 , compared to the respectiveApril 3 ,July 3 , andOctober 2, 2021 dates. This resulted in one fewer day in the three months endedApril 2, 2022 compared to the three months endedApril 3, 2021 . Throughout this discussion we may refer to the three months endedApril 2, 2022 and the three months endedApril 3, 2021 as the "First Quarter" and "Comparable Quarter ," respectively.
Impact of COVID-19
Residential pool equipment sales have increased during the COVID-19 pandemic. This increase in demand has broadly been across all of our product lines as consumers have refocused attention on improving the quality of the homeowner's outdoor living experience. We believe that the pandemic has only reinforced existing pool industry growth trends. Recently, cost inflation stemming from the COVID-19 pandemic has caused prices to increase across various sectors of the economy and we have been impacted by increases in the prices of our raw materials and other associated manufacturing costs, as discussed in further detail below.
Materials and other cost increases
We have experienced increases in the cost of raw materials and commodities. We strive for productivity improvements, and implement price increases to help mitigate this impact. We expect to see continuing price volatility (metals, resins, and electronic sub-assemblies) and import duty charges (motors, electronics, valves and cleaner products) for some of our raw materials. We are uncertain as to the timing and impact of these market changes, but have mitigation activities in place to minimize the impact on costs.
Key Metrics We Use to Evaluate Our Business
We consider a variety of financial and operating measures in assessing the performance of our business. The key GAAP measures we use are net sales, gross profit and gross profit margin, SG&A expense, RD&E expense, operating income and operating income margin. The key non-GAAP measures we use are EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted segment income, and adjusted segment income margin.
For more information on our use of non-GAAP measures and a reconciliation of these measures to the most relevant GAAP measure, see “Non-GAAP Reconciliation”.
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Operating results
Consolidated
The following tables summarize key components of our results of operations for the periods indicated. We derived the consolidated statements of operations for the three months endedApril 2, 2022 andApril 3, 2021 from our unaudited condensed consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following table summarizes our results of operations: Three Months EndedApril 2, 2022 Compared to Three Months EndedApril 3, 2021 (Dollars in thousands) Three Months Ended April 2, 2022 April 3, 2021 Net sales $ 410,460$ 334,363 Cost of sales 220,066 174,459 Gross profit 190,394 159,904 Selling, general, and administrative expense 68,857 66,520 Research, development, and engineering expense 5,236 4,820 Acquisition and restructuring related expense 2,271 33 Amortization of intangible assets 7,610 8,830 Operating income 106,420 79,701 Interest expense, net 9,562 18,272 Loss on debt extinguishment - 5,810 Other (income) expense, net (514) 3,568 Total other expense 9,048 27,650 Income from operations before income taxes 97,372 52,051 Provision for income taxes 23,340 15,184 Net income $ 74,032$ 36,867 Adjusted EBITDA (a) $ 126,249$ 107,312
(a) See “- Non-GAAP Reconciliation”.
Net sales
Net sales increased to$410.5 million for the three months endedApril 2, 2022 from$334.4 million for the three months endedApril 3, 2021 , an increase of$76.1 million or 22.8%. See the segment discussion below for further information.
The year-over-year increases in net sales are attributable to the following:
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Three Months Ended
April 2, 2022
Volume 6.7 %
Price, net of discounts and allowances 17.0 %
Acquisitions 0.3 %
Currency and other (1.2) %
Total 22.8 %
The increase in net sales was primarily the result of increases in price and
volume, partially offset by the unfavorable impact of foreign currency
translation. The increase due to price reflects the cumulative impact of a
number of announced price increases during the last 12 months to mitigate the
escalating inflationary cost pressures from a global supply chain crisis
post-pandemic. Volume growth was mainly driven by new products offering Omni
automation systems and increased energy efficiency.
Gross profit and gross profit margin
Gross profit increased to$190.4 million for the three months endedApril 2, 2022 from$159.9 million for the three months endedApril 3, 2021 , an increase of$30.5 million or 19.1%. Gross profit margin decreased to 46.4% for the three months endedApril 2, 2022 compared to 47.8% for the three months endedApril 3, 2021 , a decrease of 144 basis points primarily resulting from inflationary pressure in certain commodities and freight costs, partially offset by the net price increase discussed above.
Selling, general and administrative expenses
Selling, general, and administrative expense (SG&A) increased to$68.9 million for the three months endedApril 2, 2022 from$66.5 million for the three months endedApril 3, 2021 , an increase of$2.3 million or 3.5%, primarily as a result of higher variable expenses driven by the 22.8% sales growth of$76.1 million , including distribution & warehousing and marketing, increased regulatory costs as a publicly traded company, and bad debt expense, partially offset by lower incentive compensation in the First Quarter due to the stock-based compensation expenses recognized in theComparable Quarter as a result of the IPO. As a percentage of net sales, SG&A decreased to 16.8% for the three months endedApril 2, 2022 as compared to 19.9% for three months endedApril 3, 2021 , a decrease of 312 basis points driven by reduced stock compensation expense and improved operating leverage.
Research, development and engineering costs
Research, development, and engineering expense (RD&E) increased to$5.2 million for the three months endedApril 2, 2022 from$4.8 million for the three months endedApril 3, 2021 . The$0.4 million increase was to support business growth and product development. As a percentage of net sales, RD&E was 1.3% for the three months endedApril 2, 2022 compared to 1.4% for the three months endedApril 3, 2021 , a decrease of 17 basis points.
Charges related to acquisition and restructuring
For the three months ended
See Note 16. Charges related to acquisition and restructuring.
Amortization of intangible assets
Amortization of intangible assets decreased to$7.6 million for the three months endedApril 2, 2022 from$8.8 million for the three months endedApril 3, 2021 , a decrease of$1.2 million or 13.8%, due to the amortization pattern of certain intangibles based on the declining balance method.
Operating result
Operating income increased to$106.4 million for the three months endedApril 2, 2022 from$79.7 million for the three months endedApril 3, 2021 , an increase of$26.7 million or 33.5%, due to the aggregated effect of the items described above. 19 --------------------------------------------------------------------------------
Interest expense, net
Interest expense, net, including loss on extinguishment of debt
Interest expense for the three months endedApril 2, 2022 consisted of$8.8 million of interest on the outstanding debt and$0.8 million of amortization of deferred financing fees. The effective interest rate on our borrowings, including the impact of an interest rate hedge, was 3.59% for the three months endedApril 2, 2022 . Interest expense, inclusive of the loss on debt extinguishment, for the three months endedApril 3, 2021 consisted of$16.9 million of interest on the outstanding debt,$5.8 million of a loss on debt extinguishment and$1.4 million of amortization of deferred financing fees. The effective interest rate on our borrowings, including the impact of an interest rate hedge, was 5.74% for the three months endedApril 3, 2021 . Interest expense, inclusive of the loss on debt extinguishment, decreased by$14.5 million primarily due to debt repayment of$364.6 million in theComparable Quarter ,$5.8 million of a loss on debt extinguishment in theComparable Quarter and lower interest rates as a result of the amendment to the Credit Facilities in the three months endedJuly 3, 2021 .
Provision for income taxes
We incurred an income tax expense of
The decrease in the Company's effective tax rate from 29.2% for three months endedApril 3, 2021 to 24.0% for the three months endedApril 2, 2022 was primarily due to additional benefit for foreign derived intangible income ("FDII"), a reduction in global intangible low tax income ("GILTI") inclusion, and a discrete tax benefit for the exercise of stock options.
Net revenue
As a result of the above, net profit increased to
Adjusted EBITDA and Adjusted EBITDA margin
Adjusted EBITDA increased to$126.2 million for the three months endedApril 2, 2022 from$107.3 million for the three months endedApril 3, 2021 , an increase of$18.9 million or 17.6%, driven primarily by higher net sales resulting in an increase in gross profit of$30.5 million . Adjusted EBITDA margin decreased to 30.8% for the three months endedApril 2, 2022 compared to 32.1% for the three months endedApril 3, 2021 , a decrease of 134 basis points.
See the Non-GAAP Reconciliation section for more information.
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Segment
The Company manages its business primarily on a geographic basis. The Company's
reportable segments consist of NAM and E&RW. We evaluate performance based on
net sales, gross profit, segment income and adjusted segment income, and we use
gross profit margin, segment income margin and adjusted segment income margin as
comparable performance measures for our reporting segments.
Segment income represents net sales less cost of sales, segment SG&A and RD&E. A
reconciliation of segment income to our operating income is detailed below.
Adjusted segment income represents segment income adjusted for the impact of
depreciation, amortization of certain intangible assets, stock-based
compensation and certain non-cash, nonrecurring or other items that are included
in segment income that we do not consider indicative of the ongoing segment
operating performance. See "-Non-GAAP Reconciliation" for a reconciliation of
these metrics to the most directly comparable GAAP metric:
(Dollars in thousands) Three Months Ended Three Months Ended
April 2, 2022 April 3, 2021
Total NAM E&RW Total NAM E&RW
Net sales $ 410,460 $ 346,296 $ 64,164 $ 334,363 $ 271,465 $ 62,898
Gross profit $ 190,394 $ 163,057 $ 27,337 $ 159,904 $ 134,656 $ 25,248
Gross profit margin % 46.4 % 47.1 % 42.6 % 47.8 % 49.6 % 40.1 %
Segment income $ 125,580 $ 108,611 $ 16,969 $ 100,694 $ 85,815 $ 14,879
Segment income margin % 30.6 % 31.4 % 26.4 % 30.1 % 31.6 % 23.7 %
Adjusted segment income (a) $ 132,610 $ 114,223
Adjusted segment profit margin % (a)
32.3 % 33.0 % 28.7 % 33.4 % 35.3 % 25.1 % Expenses not allocated to segments Corporate expense, net$ 9,279 $ 12,130 Acquisition and restructuring related expense 2,271 33 Amortization of intangible assets 7,610 8,830 Operating income$ 106,420 $ 79,701
(a) See “- Non-GAAP Reconciliation”.
Three Months EndedApril 2, 2022 Compared to Three Months EndedApril 3, 2021 (Dollars in thousands) Three Months Ended April 2, 2022 April 3, 2021 Net sales$ 346,296 $ 271,465 Gross profit$ 163,057 $ 134,656 Gross profit margin % 47.1 % 49.6 % Segment income$ 108,611 $ 85,815 Segment income margin % 31.4 % 31.6 % Adjusted segment income (a)$ 114,223 $ 95,796 Adjusted segment income margin % (a) 33.0 % 35.3
%
(a) See “- Non-GAAP Reconciliation”.
Net sales
Net sales increased to$346.3 million for the three months endedApril 2, 2022 from$271.5 million for the three months endedApril 3, 2021 , an increase of$74.8 million or 27.6%. 21
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The year-over-year increases in net sales were driven by the following factors:
Three Months Ended
April 2, 2022
Volume 8.2 %
Price, net of allowances and discounts 19.2 %
Acquisitions 0.3 %
Currency and other (0.1) %
Total 27.6 %
This increase was primarily the result of price increases to offset inflationary
pressure, an increase in volume driven by new products offering Omni automation
systems and increased energy efficiency, and an increase from the impact of
acquisitions, partially offset by the unfavorable impact of foreign currency
translation.
Gross profit and gross profit margin
Gross profit increased to$163.1 million for the three months endedApril 2, 2022 from$134.7 million for the three months endedApril 3, 2021 , an increase of$28.4 million or 21.1%. Gross profit margin decreased to 47.1% for the three months endedApril 2, 2022 from 49.6% for the three months endedApril 3, 2021 , a decrease of 252 basis points, primarily driven by sustained inflation from raw materials and freight, partially offset by the net price increase discussed above.
Segment Revenue and Segment Profit Margin
Segment income increased to$108.6 million for the three months endedApril 2, 2022 from$85.8 million for the three months endedApril 3, 2021 , an increase of$22.8 million or 26.6%. This was primarily driven by an increase in sales and gross profit as discussed above, partially offset by higher SG&A expense mainly from marketing expense and volume-related distribution and warehousing costs. Segment income margin decreased to 31.4% for the three months endedApril 2, 2022 from 31.6% for the three months endedApril 3, 2021 , a decrease of 25 basis points, effectively flat from theComparable Quarter .
Adjusted Segment Result and Adjusted Segment Result Margin
Adjusted segment income increased to$114.2 million for the three months endedApril 2, 2022 from$95.8 million for the three months endedApril 3, 2021 , an increase of$18.4 million or 19.2%. This was driven by the higher segment income as discussed above, after excluding the non-cash and one-time costs discussed below in "Non-GAAP Reconciliation." Adjusted segment income margin decreased to 33.0% for the three months endedApril 2, 2022 from 35.3% for the three months endedApril 3, 2021 , a decrease of 230 basis points. Refer to section "Non-GAAP Reconciliation" for a reconciliation of segment income to adjusted segment income.
Three Months EndedApril 2, 2022 Compared to Three Months EndedApril 3, 2021 (Dollars in thousands) Three Months Ended April 2, 2022 April 3, 2021 Net sales$ 64,164 $ 62,898 Gross profit$ 27,337 $ 25,248 Gross profit margin % 42.6 % 40.1 % Segment income$ 16,969 $ 14,879 Segment income margin % 26.4 % 23.7 % Adjusted segment income (a)$ 18,387 $ 15,798 Adjusted segment income margin % (a) 28.7 % 25.1
%
(a) See “- Non-GAAP Reconciliation”.
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Net sales
Net sales increased to$64.2 million for the three months endedApril 2, 2022 from$62.9 million for the three months endedApril 3, 2021 , an increase of$1.3 million or 2.0%.
The year-over-year increases in net sales are attributable to the following:
Three Months Ended
April 2, 2022
Volume 0.3 %
Price, net of allowances and discounts 7.6 %
Currency and other (5.9) %
Total 2.0 %
This was primarily due to net price increases and volume growth, partially offset by the unfavorable impact of currency translation as well as macroeconomic uncertainty in the
Gross profit and gross profit margin
Gross profit increased to$27.3 million for the three months endedApril 2, 2022 from$25.2 million for the three months endedApril 3, 2021 , an increase of$2.1 million or 8.3%. Gross profit margin increased to 42.6% for the three months endedApril 2, 2022 from 40.1% for the three months endedApril 3, 2021 , an increase of 246 basis points, primarily driven by price increases and favorable customer mix.
Segment Revenue and Segment Profit Margin
Segment income increased to$17.0 million for the three months endedApril 2, 2022 from$14.9 million for the three months endedApril 3, 2021 , an increase of$2.1 million or 14.0%. This was primarily driven by an increase in gross profit as discussed above and a decrease in SG&A expense from less variable compensation expense, partially offset by bad debt write-off expense related to certain customers impacted by the conflict inRussia andUkraine . Segment income margin increased by 279 basis points from 23.7% for the three months endedApril 3, 2021 to 26.4% for the three months endedApril 2, 2022 , due to the aforementioned increase in net sales and gross profit year over year.
Adjusted Segment Result and Adjusted Segment Result Margin
Adjusted segment income increased to$18.4 million for the three months endedApril 2, 2022 from$15.8 million for the three months endedApril 3, 2021 , an increase of$2.6 million or 16.4%. This was primarily driven by the increased sales after excluding the non-cash and one-time costs described in "Non-GAAP Reconciliation," below. Adjusted segment income margin increased to 28.7% for the three months endedApril 2, 2022 from 25.1% for the three months endedApril 3, 2021 , an increase of 354 basis points. Refer to "Non-GAAP Reconciliation" below, for a reconciliation of segment income to adjusted segment income.
Non-GAAP reconciliation
The Company uses EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted
segment income and adjusted segment income margin to supplement GAAP measures of
performance to evaluate the effectiveness of our business strategies. These
metrics are also frequently used by analysts, investors and other interested
parties to evaluate companies in our industry, when considered alongside other
GAAP measures.
EBITDA is defined as earnings before interest (including amortization of debt
costs and loss on extinguishment of debt), income taxes, depreciation, and
amortization. Adjusted EBITDA is defined as EBITDA adjusted for the impact of
restructuring related income or expenses, stock-based compensation, currency
exchange items, sponsor management fees and certain non-cash, nonrecurring, or
other items that are included in net income and EBITDA that we do not consider
indicative of our ongoing operating performance. Adjusted EBITDA margin is
defined as adjusted EBITDA divided by net sales. Adjusted segment income is
defined as segment income adjusted for the impact of depreciation and
amortization, stock-based compensation, and certain non-cash, nonrecurring, or
other items that are included in segment income that we do not consider
indicative of the ongoing segment operating performance. Adjusted segment income
margin is defined as adjusted segment income divided by segment net sales.
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EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted segment income and
adjusted segment income margin are not recognized measures of financial
performance under GAAP. We believe these non-GAAP measures provide analysts,
investors and other interested parties with additional insight into the
underlying trends of our business and assist these parties in analyzing our
performance across reporting periods on a consistent basis by excluding items
that we do not believe are indicative of our core operating performance, which
allows for a better comparison against historical results and expectations for
future performance. Management uses these non-GAAP measures to understand and
compare operating results across reporting periods for various purposes
including internal budgeting and forecasting, short and long-term operating
planning, employee incentive compensation, and debt compliance. These non-GAAP
measures are not intended to replace the presentation of our financial results
in accordance with GAAP. Use of the terms EBITDA, adjusted EBITDA, adjusted
EBITDA margin, adjusted segment income and adjusted segment income margin may
differ from similar measures reported by other companies. EBITDA, adjusted
EBITDA, adjusted EBITDA margin, adjusted segment income and adjusted segment
income margin are not calculated in the same manner by all companies, and
accordingly, are not necessarily comparable to similarly entitled measures of
other companies and may not be an appropriate measure for performance relative
to other companies. EBITDA, adjusted EBITDA, adjusted segment income should not
be construed as indicators of a company's operating performance in isolation
from, or as a substitute for, net income (loss) and segment income which are
prepared in accordance with GAAP. We have presented EBITDA, adjusted EBITDA,
adjusted EBITDA margin, adjusted segment income and adjusted segment income
margin solely as supplemental disclosure because we believe it allows for a more
complete analysis of results of operations. In the future we may incur expenses
such as those added back to calculate adjusted EBITDA. Our presentation of
adjusted EBITDA and adjusted segment income should not be construed as an
inference that our future results will be unaffected by these items.
Net income on adjusted EBITDA and margin on adjusted EBITDA
Here is a reconciliation of net earnings with adjusted EBITDA and adjusted EBITDA margin for the three months ended
(Dollars in thousands) Three Months Ended
April 2, 2022 April 3, 2021
Net income $ 74,032 $ 36,867
Depreciation 4,840 4,748
Amortization 9,097 10,392
Interest expense 9,562 18,272
Income taxes 23,340 15,184
Loss on extinguishment of debt - 5,810
EBITDA 120,871 91,273
Stock-based compensation (a) 937 10,634
Sponsor management fees (b) - 90
Currency exchange items (c) (729) 3,823
Acquisition and restructuring related expense, net (d) 2,271 33
Other (e) 2,899 1,459
Total Adjustments 5,378 16,039
Adjusted EBITDA $ 126,249 $ 107,312
Adjusted EBITDA margin 30.8 % 32.1 %
(a) Represents non-cash stock-based compensation expense related to issued equity awards
to management, employees, and directors.
(b) Represents fees paid to certain of our sponsors for services rendered pursuant to a
2017 management services agreement. This agreement and the
corresponding payment
obligation ceased onMarch 16, 2021 , the effective date of
Hayward’s first audience
offering.
(c) Represents non-cash losses (gains) on foreign exchange contracts. (d) Adjustments during the three months ended
the relocation of the corporate headquarters. For the three
months ended
2021, costs associated with an early stage product business
acquired in 2018 have
been reclassified from "Acquisition and restructuring related
expenses, net” to
"Other" to be consistent with the current period's
presentation.
(e) Adjustments during the three months ended
certain customers inRussia andUkraine . Adjustments in the
three months completed
April 3, 2021 include expenses incurred in preparation for the IPO and transaction related bonuses. 24
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Here is a reconciliation of Segment Revenue to Adjusted Segment Revenue for the three months ended
(Dollars in thousands) Three Months Ended
April 2, 2022 April 3, 2021
Segment income $ 125,580 $ 100,694
Depreciation 4,503 4,658
Amortization 1,487 1,562
Stock-based compensation (370) 4,243
Other (a) 1,410 437
Total Adjustments 7,030 10,900
Adjusted segment income $ 132,610 $ 111,594
Adjusted segment income margin 32.3 % 33.4 %
(a) The three months ended
other miscellaneous items we believe are not representative of
our current activity
operations. The three months endedApril 3, 2021 include$0.4
million operating
losses which relate to an early stage product business acquired
in 2018 it was
phased out in 2021. Following is a reconciliation from segment income to adjusted segment income for NAM for the three months endedApril 2, 2022 andApril 3, 2021 (dollars in thousands): NAM Three Months Ended April 2, 2022 April 3, 2021 Segment income$ 108,611 $ 85,815 Depreciation 4,334 4,291 Amortization 1,487 1,562 Stock-based compensation (409) 3,696 Other (a) 200 432 Total adjustments 5,612 9,981 Adjusted segment income$ 114,223 $ 95,796 Adjusted segment income margin 33.0 % 35.3 %
(a) The three months ended
administrative expenses we believe are not representative of
our current activity
operations. The three months endedApril 3, 2021 include$0.4
million operating
losses which relate to an early stage product business acquired
in 2018 it was
phased out in 2021. Following is a reconciliation from segment income to adjusted segment income for E&RW for the three months endedApril 2, 2022 andApril 3, 2021 (dollars in thousands): E&RW Three Months Ended April 2, 2022 April 3, 2021 Segment income$ 16,969 $ 14,879 Depreciation 169 367 Amortization - - Stock-based compensation 39 547 Other (a) 1,210 5 Total Adjustments 1,418 919 Adjusted segment income$ 18,387 $ 15,798 Adjusted segment income margin 28.7 % 25.1 %
(a) The three months ended
related certain customers impacted by the conflict inRussia andUkraine . 25
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Cash and capital resources
Our primary sources of liquidity are net cash provided by operating activities and availability under the ABL Revolving Credit Facility (“ABL Facility”).
Primary working capital requirements are for raw materials, component and certain finished goods inventories and supplies, payroll, manufacturing, freight and distribution, facility, and other operating expenses. Cash flow from operations and working capital requirements fluctuate during the year, driven primarily by the seasonal demand for our products, an early buy program, the timing of inventory purchases and receipt of customer payments and as such, the utilization of the ABL Facility fluctuates during the year.
Consistent with historical trends, we experienced a seasonal use of cash in the first quarter, with a large portion of our
Unrestricted cash and cash equivalents totaled$118.2 million as ofApril 2, 2022 , which is a decrease of$147.6 million from$265.8 million atDecember 31, 2021 .
We are focused on increasing cash flow, solidifying the liquidity position through working capital initiatives and paying down debt, while continuing to fund the company’s growth initiatives. We believe that the net cash provided by operating activities and availability under the ABL Revolving Credit Facility will be sufficient to fund our working capital requirements, including capital expenditures and debt service at over the next 12 months.
Credit facilities
The First Lien Term Facility and ABL Revolving Credit Facility (collectively "Credit Facilities") contain various restrictions, covenants and collateral requirements. Refer to Note 7 . Long-Term Debt of notes to our unaudited condensed consolidated financial statements for further information on the terms of the Credit Facilities.
Long-term debt consisted of the following (in thousands):
April 2, 2022 December 31, 2021
First Lien Term Facility, due May 8, 2028 $ 992,500 $
995,000
ABL Revolving Credit Facility - - Finance lease obligations 7,280 7,780 Subtotal 999,780 1,002,780 Less: Current portion of the long-term debt (12,096)
(12,155)
Less: Unamortized debt issuance costs (16,812) (17,501) Total$ 970,872 $ 973,124 ABL Revolving Credit Facility The ABL Revolving Credit Facility provides for an aggregate amount of borrowings up to$425.0 million , with a peak season commitment of$475.0 million , subject to a borrowing base calculation based on available eligible receivables, inventory, and qualified cash inNorth America . An amount of up to 30% (or up to 40% with agent consent) of the then-outstanding commitments under the ABL Revolving Credit Facility is available to ourCanada andSpain subsidiaries. A portion of the ABL Revolving Credit Facility not to exceed$50 million is available for the issuance of letters of credit inU.S. Dollars, of which$20.0 million is available for the issuance of letters of credit in Canadian dollars. The ABL Revolving Credit Facility also includes a$50.0 million swingline loan facility. The maturity of the facility isJune 1, 2026 . The borrowings under the ABL Revolving Credit Facility bear interest at a rate equal to theLondon Interbank Offered Rate (LIBOR) or a base rate plus a margin of between 1.25% to 1.75% or 0.25% to 0.75%, respectively. For the three months endedApril 2, 2022 , the average borrowing base under the ABL Revolving Credit Facility was$260.3 million and the average loan balance outstanding was zero. As ofApril 2, 2022 , the loan balance was zero with a borrowing availability of$325.4 million . For the year endedDecember 31, 2021 , the average borrowing base under the ABL Revolving Credit Facility was$170.1 million and the average loan balance outstanding was$14.3 million . As ofDecember 31, 2021 the loan balance was zero with a borrowing availability of$128.9 million . During the year endedDecember 31, 2021 , the effective interest rate was 3.37%. 26 --------------------------------------------------------------------------------
Senior temporary facilities
The First Lien Term Facility bears interest at a rate equal to a base rate or LIBOR, plus, in either case, an applicable margin. In the case of LIBOR tranches, the applicable margin is 2.75% per annum with a 0.50% floor, with a stepdown to 2.50% per annum with a 0.50% floor when net secured leverage is less than 2.5x. The loan under the First Lien Term Facility amortizes quarterly at a rate of 0.25% of the original principal amount and requires a$2.5 million repayment of principal on the last business day of each March, June, September and December. As ofApril 2, 2022 the balance outstanding under the First Lien Term Facility was$992.5 million and the effective interest rate, including the impact of an interest rate hedge, was 3.59%.
From
Compliance with commitments
The Credit Facilities contain various restrictions, covenants and collateral requirements. From
Sources and uses of species
Following is a summary of our cash flows from operating, investing, and
financing activities:
(Dollars in thousands) Three Months Ended
April 2, 2022 April 3, 2021
Net cash used by operating activities $ (56,940) $ (131,644)
Net cash used in investing activities (7,506) (4,591)
Net cash (used in) provided by financing activities (83,006) 35,658
Effect of exchange rate changes on cash and cash
equivalents and restricted cash (187) (365)
Change in cash and cash equivalents and restricted cash
Net cash used by operating activities
Net cash used by operating activities decreased to$56.9 million for the three months endedApril 2, 2022 from$131.6 million for the three months endedApril 3, 2021 , a decrease of$74.7 million or 56.7%. The reduction was primarily driven by a decreased seasonal cash use for working capital in the First Quarter compared to theComparable Quarter , in addition to the increase in net income. Despite the increase in net sales, the seasonal cash use for working capital was reduced due to the shortening of the extended terms of the early buy program in comparison to the extended terms of the early buy program in the prior year.
Net cash used in investing activities
Net cash used in investing activities was$7.5 million for the three months endedApril 2, 2022 compared to$4.6 million for the three months endedApril 3, 2021 , an increase of$2.9 million or 63.5%. The increase was primarily driven by increased capital expenditures for property, plant and equipment.
Net cash (used in) provided by financing activities
Net cash used in financing activities was$83.0 million for the three months endedApril 2, 2022 compared to net cash provided of$35.7 million for the three months endedApril 3, 2021 , a change of$118.7 million or 332.8%. The cash outflow for the three months endedApril 2, 2022 is primarily due to share repurchases compared to the cash inflow for the three months endedApril 3, 2021 driven by borrowings on our ABL Revolving Credit Facility.
Off-balance sheet arrangements
We have had
Critical accounting estimates
Our unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported therein. the
27 -------------------------------------------------------------------------------- estimates that require management's most difficult, subjective or complex judgments are described in Part II, Item 7, under the heading "Critical Accounting Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (our "Annual Report on Form 10-K"), which section is incorporated herein by reference, and remain unchanged through the first three months of 2022.
Recently issued accounting standards
See Note 2. Significant Accounting Policies in the Notes to our Unaudited Condensed Consolidated Financial Statements for more information.
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