Hayward Holdings, Inc. - Quarter Report: 2021 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-40208

Hayward Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of

incorporation or organization)

400 Connell Drive

Suite 6100

Berkeley Heights, NJ

(Address of Principal Executive)

Offices)

82-2060643

(I.R.S. Employer Identification No.)

07922

(Zip Code)

(908) 351-5400

Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $.001 per share

HAYW

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

☐ Yes ☐ No

APPLICABLE ONLY TO CORPORATE ISSUERS:

The registrant had outstanding 232,077,812 shares of common stock as of October 25, 2021.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, us. These statements include, but are not limited to, statements about our strategies, plans, objectives, expectations, intentions, expenditures and assumptions and other statements contained in or incorporated by reference in this Quarterly Report on Form 10-Q that are not historical facts. When used in this document, words such as “may,” “will,” “should,” “could,” “intend,” “potential,” “continue,” “anticipate,” “believe,” “estimate,” “expect,” “plan,” “target,” “predict,” “project,” “seek” and similar expressions as they relate to us are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.

Examples of forward-looking statements include, among others, statements we make regarding: our financial position; business plans and objectives; general economic and industry trends; business prospects; future product development and acquisition strategies; growth and expansion opportunities; operating results; and working capital and liquidity. We may not achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place significant reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, including such statements taken from third-party industry and market reports. Important factors that could affect our future results and could cause those results or other outcomes to differ materially from those indicated in our forward-looking statements include the following:

• our ability to execute on our growth strategies and expansion opportunities;

• our ability to maintain favorable relationships with suppliers and manage disruptions to our global supply chain and the availability of raw materials;

• our relationships with and the performance of distributors, builders, buying groups, retailers and servicers who sell our products to pool owners;

• competition from national and global companies, as well as lower cost manufacturers;

• impacts on our business from the sensitivity of our business to seasonality and unfavorable economic and business conditions;

• our ability to identify emerging technological and other trends in our target end markets;

• our ability to develop, manufacture and effectively and profitably market and sell our new planned and future products;

• failure of markets to accept new product introductions and enhancements;

• the ability to successfully identify, finance, complete and integrate acquisitions;

• our ability to attract and retain senior management and other qualified personnel;

• regulatory changes and developments affecting our current and future products;

• volatility in currency exchange rates;

• our ability to service our existing indebtedness and obtain additional capital to finance operations and our growth opportunities;

• impacts on our business from political, regulatory, economic, trade, and other risks associated with operating foreign businesses;

• our ability to establish and maintain intellectual property protection for our products, as well as our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property rights of others;

• the impact of material cost and other inflation;

• the impact of changes in laws, regulations and administrative policy, including those that limit U.S. tax benefits or impact trade agreements and tariffs;

• the outcome of litigation and governmental proceedings;

• impacts on our business from the COVID-19 pandemic; and

• other factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q and in our IPO Prospectus

(as defined herein).

These forward-looking statements involve known and unknown risks, inherent uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Actual results and the timing of certain events may differ materially from those contained in these forward-looking statements.

Many of these factors are macroeconomic in nature and are, therefore, beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from those described in this Quarterly Report on Form 10-Q as anticipated, believed, estimated, expected, intended, planned or projected. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report. Unless required by United States federal securities laws, we neither intend nor assume any obligation to update these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

TABLE OF CONTENTS

Page

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

Unaudited Condensed Consolidated Balance Sheets

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income

Unaudited Condensed Consolidated Statements of Changes in Redeemable Stock and Stockholders' Equity

Unaudited Condensed Consolidated Statements of Cash Flows

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

Managements' Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

PART II—OTHER INFORMATION

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Hayward Holdings, Inc.

Unaudited Condensed Consolidated Balance Sheets

(Dollars in thousands, except share and per share data)


	October 2, 2021		December 31, 2020
Assets
Current assets
Cash and cash equivalents	$	295,077	$	114,864
Accounts receivable, net of allowances of $1,943 and $1,359, respectively	147,282		140,216
Inventories, net	208,993		145,330
Prepaid expenses	14,157		10,266
Other current assets	24,242		13,738
Total current assets	689,751		424,414
Property, plant, and equipment, net of accumulated depreciation of $62,205 and $51,900, respectively	143,403		142,318
Goodwill	917,914		920,325
Trademark	736,000		736,000
Customer relationships, net	249,106		271,462
Other intangibles, net	98,185		106,687
Other non-current assets	11,585		5,944
Total assets	$	2,845,944	$	2,607,150

Liabilities, Redeemable Stock, and Stockholders' Equity
Current liabilities
Current portion of the long-term debt	$	11,992	$	2,768
Accounts payable	78,569		69,632
Accrued expenses and other liabilities	188,516		141,819
Income taxes payable	—		4,435
Total current liabilities	279,077		218,654
Long-term debt, net	976,118		1,300,256
Deferred tax liabilities, net	275,228		273,628
Other non-current liabilities	13,223		10,851
Total liabilities	1,543,646		1,803,389

Redeemable stock
Class A stock $0.001 par value, no shares authorized, issued, or outstanding at October 2, 2021; 1,500,000 shares authorized, 872,598 issued and 869,823 outstanding at December 31, 2020	—		594,500
Class C stock $0.001 par value, no shares authorized, issued, or outstanding at October 2, 2021; 100 shares authorized, issued, and outstanding at December 31, 2020	—		—

Stockholders' equity
Preferred stock, $0.001 par value, 100,000,000 authorized, 0 issued and outstanding at October 2, 2021	—		—
Common stock $0.001 par value, 750,000,000 authorized; 231,967,140 issued and 231,967,140 outstanding at October 2, 2021; 3,846,960 issued and 2,772,900 outstanding at December 31, 2020	231		3
Additional paid-in capital	1,055,886		10,297
Common stock in treasury; 5,175,765 and 4,340,310 at October 2, 2021 and December 31, 2020, respectively	(14,216)		(3,686)
Retained earnings	257,155		202,997
Accumulated other comprehensive income (loss)	3,242		(350)
Total stockholders' equity	1,302,298		209,261
Total liabilities, redeemable stock, and stockholders' equity	$	2,845,944	$	2,607,150

See accompanying notes to the unaudited condensed consolidated financial statements.

Hayward Holdings, Inc.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income

(Dollars in thousands, except share and per share data)


	Three months ended				Nine months ended
	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net sales	$	350,624	$	224,485	$	1,049,409	$	614,704
Cost of sales	188,170		118,331		559,033		335,128
Gross profit	162,454		106,154		490,376		279,576
Selling, general, and administrative expenses	68,807		49,446		207,129		136,854
Research, development, and engineering	6,370		5,097		16,187		13,895
Acquisition and restructuring related expense	783		6,825		2,452		17,575
Amortization of intangible assets	8,700		9,544		26,162		28,537
Operating income	77,794		35,242		238,446		82,715
Interest expense, net	11,050		17,046		42,297		54,169
Loss on debt extinguishment	—		—		9,418		—
Other non-operating (income) expense, net	2,087		(2,474)		4,655		(2,855)
Total other expense	13,137		14,572		56,370		51,314
Income from operations before income taxes	64,657		20,670		182,076		31,401
Provision for income taxes	14,336		5,472		42,072		7,898
Net income	$	50,321	$	15,198	$	140,004	$	23,503

Earnings per share
Basic	$	0.22	$	0.07	$	0.24	$	0.11
Diluted	$	0.21	$	0.07	$	0.23	$	0.11

Comprehensive income, net of tax
Net income	$	50,321	$	15,198	$	140,004	$	23,503
Foreign currency translation adjustments, net of tax expense (benefit) of $0 and $(756), and $763 and $(183), for the three-month and nine-month periods, respectively.	(5,312)		1,985		(1,312)		(873)
Change in fair value of derivatives, net of tax expense (benefit) of $395 and $569, and $1,620 and $(1,605), for the three-month and nine-month periods, respectively.	1,204		1,704		4,904		(4,817)
Comprehensive income	$	46,213	$	18,887	$	143,596	$	17,813

See accompanying notes to the unaudited condensed consolidated financial statements.

Hayward Holdings, Inc.

Unaudited Condensed Consolidated Statements of Changes in Redeemable Stock and Stockholders' Equity

(Dollars in thousands, except share and per share data)


	Redeemable Class A and C Stock			Common Stock			Additional Paid-in Capital		Treasury Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2020	869,923	$	594,500	2,772,900	$	3	$	10,297	$	(3,686)	$	202,997	$	(350)	$	209,261
Net income	—	—		—	—		—		—		36,867		—		36,867
Conversion to common stock upon IPO	(869,923)	(594,500)		206,147,857	206		680,041		—		(85,541)		—		594,706
Issuance of common stock				22,200,000	22		351,553		—		—		—		351,575
Issuance of stock	186	—			—		221		—		—		—		221
Cash distributions	—	—		—	—		—		—		(41)		—		(41)
Stock-based compensation	—	—		—	—		10,634		—		—		—		10,634

Repurchase of stock	(186)	—		—	—		—		(214)		—		—		(214)
Comprehensive income (loss) items	—	—		—	—		—		—		—		3,650		3,650
Balance at April 3, 2021	—	$	—	231,120,757	$	231	$	1,052,746	$	(3,900)	$	154,282	$	3,300	$	1,206,659
Net income	—	—		—	—		—		—		52,816		—		52,816
Finalization for IPO conversion	—	—		—	—		(397)		—		(264)		—		(661)
Stock-based compensation	—	—		—	—		1,900		—		—		—		1,900
Exercise of stock options	—	—		—	—		—		—		—		—		—
Repurchase of stock	—	—		(19,500)	—		—		(768)		—		—		(768)
Comprehensive income (loss) items	—	—		—	—		—		—		—		4,050		4,050
Balance at July 3, 2021	—	$	—	231,101,257	$	231	$	1,054,249	$	(4,668)	$	206,834	$	7,350	$	1,263,996
Net income	—	—		—	—		—		—		50,321		—		50,321
Stock-based compensation	—	—		—	—		774		—		—		—		774
Issuance of Common Stock for compensation plans	—	—		1,323,564	—		863		—		—		—		863
Repurchase of stock	—	—		(457,681)	—		—		(9,548)		—		—		(9,548)
Comprehensive income (loss) items	—	—		—	—		—		—		—		(4,108)		(4,108)
Balance at October 2, 2021	—	$	—	231,967,140	$	231	$	1,055,886	$	(14,216)	$	257,155	$	3,242	$	1,302,298

See accompanying notes to the unaudited condensed consolidated financial statements.

Hayward Holdings, Inc.

Unaudited Condensed Consolidated Statements of Changes in Redeemable Stock and Stockholders' Equity

(Dollars in thousands, except share and per share data)


	Redeemable Class A and C Stock			Common Stock			Additional Paid-in Capital		Treasury Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance at December 31, 2019	872,397	$	869,500	3,114,150	$	3	$	7,995	$	(1,188)	$	159,900		$	(2,650)	$	164,057
Net (loss)	—	—		—	—		—		—		(10,398)			—		(10,398)

Cash distributions	—	—		—	—		—		—		(51)			—		(51)
Stock-based compensation	—	—		—	—		654		—		—			—		654
Exercise of stock options	(423)	—		—	—		58		—		—			—		58
Repurchase of stock	—	—		—	—		—		(1,996)		—			—		(1,996)
Comprehensive income (loss) items	—	—		—	—		—		—		—			(18,143)		(18,143)
Balance at March 28, 2020	871,974	$	869,500	3,114,150	$	3	$	8,748	$	(3,184)	$	149,451		$	(20,793)	$	134,222
Net income	—	—		—	—		—		—		18,703			—		18,703

Cash distributions	—	—		—	—		—		—		(51)			—		(51)
Stock-based compensation	—	—		—	—		653		—		—			—		653
Exercise of stock options	—	—		—	—		5		—		—			—		5
Repurchase of stock	—	—		—	—		—		(65)		—			—		(65)
Comprehensive income (loss) items	—	—		—	—		—		—		—			8,821		8,821
Balance at June 27, 2020	871,974	$	869,500	3,114,150	$	3	$	9,406	$	(3,249)	$	168,103		$	(11,972)	$	162,288
Net income	—	—		—	—		—		—		15,198			—		15,198

Cash distributions	—	—		—	—		—		—		(51)			—		(51)
Stock-based compensation	—	—		—	—		654		—		—			—		654
Exercise of stock options	—	—		654,843	—		243		—		—			—		243
Repurchase of stock	(2,051)	—		(1,044,810)	—		—		(437)		—			—		(437)
Comprehensive income (loss) items	—	—		—	—		—		—		—			3,689		3,689
Balance at September 26, 2020	869,923	$	869,500	2,724,183	$	3	$	10,303	$	(3,686)	$	183,250		$	(8,283)	$	181,584

See accompanying notes to the unaudited condensed consolidated financial statements.

Hayward Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollars in thousands, except share and per share data)


	Nine months ended
	October 2, 2021		September 26, 2020
Cash flows from operating activities
Net income	$	140,004	$	23,503
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	14,096		14,491
Amortization of intangible assets	30,903		32,822
Amortization of deferred debt issuance fees	2,771		3,970
Stock-based compensation	13,308		1,962
Deferred income taxes	(3,014)		(8,214)
Allowance for bad debts	584		(115)
Loss on debt extinguishment	9,418		—
Loss on disposal of properties	3,743		2,018
Changes in operating assets and liabilities
Accounts receivable	(9,115)		103,766
Inventories	(66,027)		5,151
Other current and non-current assets	(10,699)		(7,175)
Accounts payable, accrued expenses and other liabilities, current and non-current	73,191		54,256

Net cash provided by operating activities	199,163		226,435

Cash flows from investing activities
Purchases of property, plant, and equipment	(19,098)		(13,690)
Purchases of intangibles	(818)		(1,091)
Proceeds from sale of property, plant, and equipment	25		527
Proceeds from settlements of investment currency hedge	719		1,483
Net cash used in investing activities	(19,172)		(12,771)

Cash flows from financing activities
Proceeds from issuance of common stock - Initial Public Offering	377,400		—
Costs associated with Initial Public Offering	(26,124)		—


Purchase of common stock for treasury	(10,530)		(2,497)
Cash paid for taxes from share withholdings	(10,174)		—
Proceeds from the issuance of long-term debt	51,659		—
Debt issuance costs	(12,422)		—
Payments of long-term debt	(367,144)		(3,500)


Dividends paid	(41)		(153)
Other	563		8
Net cash provided by (used in) financing activities	3,187		(6,142)

Effect of exchange rate changes on cash and cash equivalents and restricted cash	(1,505)		1,137
Change in cash and cash equivalents and restricted cash	181,673		208,659
Cash and cash equivalents and restricted cash, beginning of period	115,294		47,246
Cash and cash equivalents and restricted cash, end of period	$	296,967	$	255,905

Supplemental disclosures of cash flow information
Cash paid - income taxes	$	53,686	$	45,546
Cash paid - interest	39,242		6,341
Equipment financed under capital leases	—		2,045

See accompanying notes to the unaudited condensed consolidated financial statements.

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Nature of Operations and Organization

Hayward Holdings, Inc. (“Holdings” or the “Company”) is a global designer, manufacturer, and marketer of a broad portfolio of pool equipment and associated automation systems. The Company has six primary manufacturing facilities worldwide, which are located in North Carolina, Tennessee, Rhode Island, Spain (two) and China, and other facilities in the United States, Canada, France and Australia. Cash flow is impacted by the seasonality of the swimming pool business. Cash flow is usually higher in the second and third quarters due to terms of sale to our customers.

Prior to March 2, 2021, the Company had three classes of stock designated as Class A, Class B and Class C stock. On March 2, 2021, the Company reclassified its Class B common stock into common stock, par value $0.001 per share ( “Common Stock”), and then effected a 195-for-1 split of its Common Stock. On March 11, 2021, the Company converted each outstanding share of Class A stock into 195 shares of Common Stock plus an additional 42.5671 shares, which amount was determined by dividing (a) the Class A preference amount of such share of Class A stock, or $683.84 per share (the “Class A Preference Amount”), by (b) the initial public offering price of $17.00 per a share of Common Stock in the Company’s initial public offering (“IPO”), net of the per share underwriting discount, and (ii) the Company redeemed each outstanding share of Class C stock for an aggregate price of $1.00.

References to the “Reclassification” refer to (i) the reclassification of the Company’s Class B common stock into Common Stock on March 2, 2021, (ii) the 195-for-1 stock split of the Company’s common stock on March 2, 2021, (iii) the conversion of the Company’s Class A stock into Common Stock, (iv) the redemption of the Company’s Class C stock and (v) the filing and effectiveness of the Company’s second restated certificate of incorporation and the adoption of its amended and restated bylaws on March 16, 2021.

All share and per share amounts for all periods presented in these condensed consolidated financial statements and related notes have been adjusted retroactively, where applicable, to reflect the Reclassification.

On March 16, 2021, the Company completed its IPO whereby it issued 22,200,000 shares of its Common Stock, and entities affiliated with CCMP Capital Advisors, LP (“CCMP”), MSD Partners, L.P. (“MSD Partners”) and Alberta Investment Management Corporation (“AIMCo”) and, together with CCMP and MSD Partners, the (“Sponsors”) sold an aggregate of 20,893,665 shares of the Company’s Common Stock, inclusive of 2,815,887 shares sold by entities affiliated with the Sponsors pursuant to the partial exercise of the underwriters’ option to purchase additional shares. The shares began trading on the New York Stock Exchange on March 12, 2021. The aggregate net proceeds received by the Company from the IPO were $356.6 million, after deducting underwriting discounts and commissions and other offering costs. The Company used the net proceeds from the IPO to repay existing indebtedness outstanding under its credit facilities as further described in Note 7. Long-term Debt.

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. Certain information and note disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), have been condensed or omitted pursuant to such rules and regulations.

These interim financial statements should be read in conjunction with the Company’s annual consolidated financial statements and notes thereto for the fiscal year ended December 31, 2020 included in the Company's final prospectus for the IPO filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, filed with the SEC on March 15, 2021 (the "IPO Prospectus"). The results of operations for the three and nine months ended October 2, 2021 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2021.

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

In the current year, the Company has changed its presentation from millions to thousands and, as a result, any necessary rounding adjustments have been made to prior year disclosed amounts.

Cash and Cash Equivalents

The following table provides supplemental cash flow information and a reconciliation of cash and cash equivalents and restricted cash to amounts reported within the Company's unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of cash flows (in thousands):


	October 2, 2021		December 31, 2020
Cash and cash equivalents	$	295,077	$	114,864
Restricted cash (a)	1,890		430
Total	$	296,967	$	115,294

(a) included in Other current assets

Recent Accounting Pronouncements Not Yet Adopted

Accounting for Leases

Accounting Standards Update (the "ASU") 2016-02, Leases, was issued by the Financial Accounting Standards Board (the "FASB") in February 2016. This standard requires the Company, as the lessee, to recognize most leases on the balance sheet thereby resulting in the recognition of right of use ("ROU") assets and lease obligations for those leases currently classified as operating leases. The standard will be effective for the Company on December 31, 2021 if the Company ceases to be an Emerging Growth Company ("EGC") as of December 31, 2021, and the Company would adopt the standard, including presenting ROU assets and liabilities, as of January 1, 2021 in its Annual Report on Form 10-K for fiscal year 2021. In the third quarter of 2021, the Company began the implementation process and selected the modified transition approach method as well as the package of practical expedients.

In addition to the recognition of the ROU assets and lease obligations, the Company anticipates changes in systems, processes, and controls via the use of a software solution for leases. While the requirements of the new guidance represent a material change from existing GAAP, the underlying economics of items in scope and related cash flows are unchanged.

New Credit Loss Standard

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, was issued by the FASB in June 2016. The standard will be effective for the Company on December 31, 2021 if the Company ceases to be an EGC as of December 31, 2021, and the Company would adopt the standard as of January 1, 2021 in its Annual Report on Form 10-K for fiscal year 2021.

While the requirements of the new guidance represent a change from existing GAAP, the underlying economics of items in scope and related cash flows are unchanged. The Company plans to focus on gathering data, developing procedures and testing before adoption. Focus areas include, but are not limited to (i) updating procedures to reflect new guidance requiring establishment of allowance for credit losses on accounts receivable; (ii) establishing procedures to identify and review all leases receivable, (iii) developing, testing, and implementing controls for newly developed procedures, if any, as well as for additional annual reporting requirements. The Company is currently evaluating the impact of this new accounting standard on its unaudited condensed consolidated financial statements.

Simplifying the Accounting for Income Taxes

ASU 2019-12, “Simplifying the Accounting for Income Taxes” (Topic 740), was issued by FASB in December 2019. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The standard will be effective for the Company on December 31, 2021 if the Company ceases to be an EGC as of December 31, 2021, and the Company would adopt the standard as of January 1, 2021 in its Annual Report

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

on Form 10-K for fiscal year 2021. The adoption of this standard is not expected to have a material impact on the Company's financial statements or its systems, processes and controls associated with accounting for income taxes.

Reference Rate Reform

ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, was issued by the FASB in March 2020. In January 2021, the FASB clarified the scope of that guidance with the issuance of ASU 2021-01, Reference Rate Reform: Scope. ASU 2020-04 provides optional expedients and exceptions to account for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. ASU 2020-04 may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating the potential effects of the adoption of ASU 2020-04.

3. Revenue

The following table disaggregates net sales between product groups and geographic destinations, respectively (in thousands):


	Three months ended				Nine months ended
	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Product groups
Residential pool	$	330,898	$	209,519	$	990,977	$	567,575
Commercial pool	7,360		4,762		23,297		16,872
Industrial flow control	12,366		10,204		35,135		30,257
Total	$	350,624	$	224,485	$	1,049,409	$	614,704

Geographic
United States	$	261,223	$	158,155	$	748,726	$	428,837
Canada	37,013		25,860		114,550		64,920
Europe	32,726		28,858		137,642		89,600
Rest of World	19,662		11,612		48,491		31,347
Total international revenue	$	89,401	$	66,330	$	300,683	$	185,867
Total	$	350,624	$	224,485	$	1,049,409	$	614,704

4. Inventories

Inventories, net, consist of the following (in thousands):


	October 2, 2021		December 31, 2020
Raw materials	$	101,370	$	67,867
Work in progress	18,886		13,539
Finished goods	88,737		63,924
Total	$	208,993	$	145,330

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

5. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following (in thousands):


	October 2, 2021		December 31, 2020
Selling, promotional, and advertising	$	29,269	$	25,377
Employee compensation and benefits	45,568		34,250
Warranty reserve	23,668		16,412
Inventory purchases	30,423		13,703
Insurance reserve	11,864		9,779
Deferred income	16,564		11,694
Payroll and other non-income taxes	7,043		3,759
Derivative liability	—		9,307
Other accrued liabilities	24,117		17,538
	$	188,516	$	141,819

The Company offers warranties on certain of its products and records an accrual for estimated future claims. Such accruals are based on historical experience and management’s estimate of the level of future claims.

The following table summarizes the warranty reserve activities (in thousands):


Balance at December 31, 2020	$	16,412

Accrual for warranties issued during the period	10,109
Payments	(4,644)
Balance at April 3, 2021	21,877

Accrual for warranties issued during the period	9,850
Payments	(7,030)
Balance at July 3, 2021	24,697

Accrual for warranties issued during the period	7,796
Payments	(8,825)
Balance at October 2, 2021	$	23,668

Warranty expenses for the three and nine months ended October 2, 2021 were $7.8 million and $27.8 million, respectively, and $7.1 million and $19.1 million, respectively, for the three and nine months ended September 26, 2020.

6. Income Taxes

The Company's effective tax rate for the three months ended October 2, 2021 and three months ended September 26, 2020 were 22.2% and 26.5% respectively. The change in the Company’s effective tax rate was primarily due to a Global Intangible Low Tax Income ("GILTI") inclusion, changes in the relative taxable income between tax jurisdictions, and several discrete items in 2021 relating to: (i) changes in state tax rates and tax return to provision adjustments, and (ii) a tax benefit due to the exercise of stock options.

The Company's effective tax rate for the nine months ended October 2, 2021 and nine months ended September 26, 2020 were 23.1% and 25.2%, respectively. The change in the Company’s effective tax rate was primarily due to a GILTI inclusion, additional tax benefits related to Foreign Derived Intangible Income, and several discrete items relating to: (i) changes in state tax rates and tax return to provision adjustments, (ii) a tax expense due to accelerated vesting of performance based grants due to the IPO, (iii) a tax benefit due to the release of the valuation allowance on the deferred tax assets of a France subsidiary, and (iv) a tax benefit due to the exercise of stock options.

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company will recognize a tax benefit in the financial statements for an uncertain tax position only if the Company's assessment is that the position is "more likely than not" (i.e., a likelihood greater than 50 percent) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term "tax position" refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes. There were no uncertain tax positions at October 2, 2021 and $0.3 million at September 26, 2020.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Management evaluates the need for valuation allowances on the deferred tax assets according to the provisions of ASC 740, Income Taxes. In making this determination, the Company assesses all available evidence (positive and negative) including recent earnings, internally-prepared income tax projections, and historical financial performance.

7. Long-Term Debt, net

Long-term debt, net, consists of the following (in thousands):


	October 2, 2021		December 31, 2020
First Lien Term Facility, due May 28, 2028	$	997,500	$	957,985
Incremental First Lien Term Facility, due August 4, 2026	—		150,000
Second Lien Term Facility	—		205,000
ABL Revolving Credit Facility	—		—
Capital lease obligations	9,071		9,732
Subtotal	1,006,571		1,322,717
Less: Current portion of the long-term debt	(11,992)		(2,768)
Less: Unamortized debt issuance costs	(18,461)		(19,693)
Total	$	976,118	$	1,300,256

The Company made $8.0 million and $356.6 million of voluntary term loan repayments on February 19, 2021 and March 19, 2021, respectively. The total voluntary loan repayments made in the nine months ended October 2, 2021 was $364.6 million. The March 19, 2021 repayment was funded with the net proceeds received from the IPO, of which (i) $205.0 million was used to repay in full outstanding borrowings under the Company's Second Lien Term Facility, (ii) $131.1 million was used to repay outstanding borrowings under the Company's First Lien Term Facility and (iii) $20.5 million was used to repay borrowings under the Incremental First Lien Term Facility. The Company recorded a $5.8 million debt extinguishment loss related to the write-off of unamortized deferred financing costs as a result of the partial repayment.

On May 28, 2021, the Company amended its First Lien Credit Agreement (the “First Lien Term Facility”) to, among other things, increase the aggregate amount available to borrow by $51.0 million to $1.0 billion, reduce the interest rate, and extend the maturity date to May 28, 2028. In addition, the Company has the option to increase the Term Loan Facility subject to certain conditions, including the commitment of the participating lenders.

In the second quarter of 2021, due to the May 28, 2021 amendment to the First Lien Term Facility and a change in participating lenders, the Company recorded a $3.6 million debt extinguishment loss related to the write-off of unamortized deferred financing costs. During the nine months ended October 2, 2021, the Company recorded a total loss on debt extinguishment of $9.4 million.

The First Lien Term Facility now bears interest at a rate equal to a base rate or the London Interbank Offered Rate (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 First Lien Term Loan will amortize 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. The effective interest rate over the life of the new $1.0 billion First Lien Term Facility to May 2028, net of the interest rate hedge, is estimated at 3.67% which compares to the interest rate in effect on April 3, 2021 of 4.90% for the then outstanding $820.0 million first lien term loan and 4.96% for the $128.4 million incremental first lien term loan.

On June 1, 2021, the Company amended its existing ABL Revolving Credit Facility (the “ABL Facility”) to increase the aggregate amount of the revolving loan commitments to $425.0 million, with a peak season commitment of $475.0 million,

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

subject to a borrowing base calculation based on available eligible receivables, inventory, and qualified cash in North America. An amount of up to 30% (or up to 40% with agent consent) of the then-outstanding commitments under the ABL Facility is available to our Canada and Spain subsidiaries. A portion of the ABL Facility not to exceed $50.0 million is available for the issuance of letters of credit in U.S. dollars, of which $20.0 million is available for the issuance of letters of credit in Canadian dollars. The ABL Facility also includes a $50.0 million swingline loan facility. The maturity of the facility has been extended to June 1, 2026. The borrowings under the ABL Facility bear interest at a rate equal to LIBOR or a base rate plus a margin of between 1.25% to 1.75% or 0.25% to 0.75%, respectively, which are unchanged following the amendment of the ABL Facility. In addition, we have the option to increase the ABL Facility, subject to certain conditions, including the commitment of the participating lenders.

The First Lien Term Facility and ABL Facility (collectively "Credit Facilities") contain various restrictions, covenants, and collateral requirements. Per the First Lien Credit Agreement, the Company must also make an annual mandatory prepayment of principal commencing April 2023 for between 0% and 50% of the excess cash, as defined in the First Lien Credit Agreement, generated in the prior calendar year. The amount due varies with the First Lien Leverage Ratio as defined in the First Lien Credit Agreement, from zero if the first lien net leverage ratio is less than or equal to 2.5 x, to fifty percent if the first lien net leverage ratio is greater than 3.0 x. For the year ending December 31, 2020, the mandatory prepayment of excess cash was $0, accordingly, there was no prepayment due for the year ending December 31, 2020. All outstanding principal is due at maturity on May 28, 2028. As of October 2, 2021, we were in compliance with all covenants under the Credit Facilities.

8. Derivatives and Hedging Transactions

The Company holds derivative financial instruments for the purpose of hedging the risks of certain identifiable and anticipated transactions. In general, the types of risks hedged are those relating to the variability of future earnings and cash flows caused by movements in foreign currency exchange rates and interest rates. In hedging these transactions, the Company holds the following types of derivatives, in the normal course of business.

Interest Rate Swap Agreements

The Company enters into interest rate swap agreements designated as cash flow hedges to manage its interest rate risk related to its variable rate debt obligations. As cash flow hedges, unrealized gains are recognized as assets while unrealized losses are recognized as liabilities. The interest rate swap agreements are highly correlated to the changes in interest rates to which the Company is exposed. Unrealized gains and losses on these instruments have been designated as effective and as such, the related gains or losses have been recorded as a component of accumulated other comprehensive income (loss), net of tax.

As of December 31, 2020, the Company was a party to two interest rate swap agreements that effectively convert an initial notional amount of $550.0 million of its variable rate debt obligations to a fixed rate debt. The interest rate swap agreements expired on August 31, 2021 and there are no interest rate swap agreements outstanding at October 2, 2021.

Foreign Exchange Contracts

The Company enters into foreign exchange contracts to manage risks associated with foreign currency transactions and future variability of intercompany cash flows arising from those transactions that may be adversely affected by changes in exchange rates.

Net Investment Hedges

The Company uses net investment hedges to minimize its exposure to variability in the foreign currency translation of its net investment in one of its international subsidiaries. The effective portion of changes in the fair value of the hedging instrument is recognized in accumulated other comprehensive income (loss) consistent with the related translation gains and losses of the hedged net investment. For net investment hedges, all critical terms of the hedged item and the hedging instrument are matched at inception and on an ongoing basis to minimize the risk of hedge ineffectiveness.

In August 2017, the Company entered into a four-year euro-denominated cross currency swap agreement of €75.0 million to hedge the net investment in one of its foreign subsidiaries designated as a hedge with an original expiry date of August 31, 2021. Since both the notional value of the derivative designated as a hedge of a net investment in a foreign subsidiary equals the portion of the net investment designated as being hedged and the derivative relates solely to the foreign exchange rate between the functional currency of the hedged net investment and the Company’s functional currency, all changes in fair value of the

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

derivative are reported in the cumulative translation adjustment accounts, net of tax within accumulated other comprehensive income (loss) in the Company's unaudited condensed consolidated balance sheets.

The amounts recorded in accumulated other comprehensive income (loss) will be reclassified to earnings only upon the sale or liquidation of the Company’s investment in one of its international subsidiaries or on maturity of the underlying agreements.

During the second quarter 2021, the Company terminated the aforementioned €75.0 million cross currency swap agreement. There was no sale or substantial liquidation of the Company's investments in the subsidiaries designated, therefore no amounts were reclassified from accumulated other comprehensive income (loss) to earnings upon termination of the hedge.

There were no outstanding net investment hedges as of October 2, 2021.

The following table summarizes the gross fair values and location of the significant derivative instruments within Company's unaudited condensed consolidated balance sheets (in thousands):


	Other Current Assets		Accrued Expenses and Other Liabilities		Other Current Assets		Accrued Expenses and Other Liabilities
	October 2, 2021				December 31, 2020
Interest rate swaps	$	—	$	1,693	$	—	$	6,480
Net investment hedge	$	—	$	—	$	—	$	2,800
Total	$	—	$	1,693	$	—	$	9,280

The following tables present the effects of derivative instruments by contract type in accumulated other comprehensive income (loss) in the Company's unaudited condensed consolidated statements of operations and comprehensive income (in thousands):


	Gain (Loss) Recognized in AOCI				Gain (Loss) Reclassified From AOCI to Earnings				Location of Gain (loss) Reclassified from AOCI into Earnings
	Nine months ended				Nine months ended
	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Interest rate swaps	$	1,185	$	1,704	$	(1,696)	$	(2,189)	Interest Expense
Net investment hedge	$	—	$	(2,649)	$	—	$	—	N/A
Total	$	1,185	$	(945)	$	(1,696)	$	(2,189)


	Gain (Loss) Recognized in AOCI				Gain (Loss) Reclassified From AOCI to Earnings				Location of Gain (loss) Reclassified from AOCI into Earnings
	Three months ended				Three months ended
	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Interest rate swaps	$	4,860	$	(4,817)	$	(6,598)	$	(3,239)	Interest Expense
Net investment hedge	$	1,268	$	(1,660)	$	—	$	—	N/A
Total	$	6,128	$	(6,477)	$	(6,598)	$	(3,239)

9. Fair Value Measurements

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company is required to disclose the estimated fair values of all financial instruments, even if they are not carried at their fair value. The fair values of financial instruments are estimates based upon market conditions and perceived risks. These estimates require management’s judgment and may not be indicative of the future fair values of the assets and liabilities.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, and accounts payable. The carrying amount of these instruments approximate fair value because of their short-term nature.

As of October 2, 2021, the Company’s long-term debt instruments had a carrying value of $997.5 million (excluding capital leases) and a fair value of approximately $996.3 million. As of December 31, 2020, the Company’s long-term debt instruments had a carrying value of $1.31 billion and a fair value of approximately $1.30 billion. The estimated fair value of the long-term debt is based on observable quoted prices in active markets for similar liabilities and is classified as a Level 2 input.

10. Segments and Related Information

The Company's operational and management structure is aligned to its key geographies and go-to market strategy resulting in two reportable segments: North America and Europe & Rest of World. Operating segments have not been aggregated to form the reportable segments. The Company determined its reportable segments based on how the Company's Chief Operating Decision Maker ("CODM") reviews the Company’s operating results in assessing performance and allocating resources. The CODM reviews net sales, gross profit and segment income for each of the reportable segments. Gross profit is defined as net sales less cost of sales incurred by the segment. The CODM does not evaluate reportable segments using asset information as these are managed on an enterprise wide basis. Segment income is defined as segment gross profit less sales, general, and administrative expenses ("SG&A") and research, development, and engineering ("RD&E").

The North America segment manufactures and sells residential and commercial swimming pool equipment and supplies as well as equipment that controls the flow of fluids. This segment is composed of three reporting units.

The Europe & Rest of World segment manufactures and sells residential and commercial swimming pool equipment and supplies. This segment is composed of two reporting units.

The Company sells its products primarily through distributors and retailers. Financial information by reportable segment, net of intercompany transactions, is included in the following summary (in thousands):


	Three months ended October 2, 2021						Three months ended September 26, 2020
	North America		Europe & Rest of World		Total		North America		Europe & Rest of World		Total
Net sales	$	298,236	$	52,388	$	350,624	$	184,015	$	40,470	$	224,485
Gross profit	$	141,655	$	20,799	$	162,454	$	90,764	$	15,390	$	106,154
Segment income	$	91,920	$	10,582	$	102,502	$	49,080	$	6,986	$	56,066
Capital expenditures (1)	$	7,762	$	1,005	$	8,767	$	3,555	$	185	$	3,740
Depreciation (1)	$	4,253	$	175	$	4,428	$	4,534	$	326	$	4,860


	Nine months ended October 2, 2021						Nine months ended September 26, 2020
	North America		Europe & Rest of World		Total			North America		Europe & Rest of World		Total
Net sales	$	863,276	$	186,133	$	1,049,409		$	493,757	$	120,947	$	614,704
Gross profit	$	416,753	$	73,623	$	490,376		$	234,496	$	45,080	$	279,576
Segment income	$	267,020	$	37,828	$	304,848		$	117,243	$	20,836	$	138,079
Capital expenditures (1)	$	17,362	$	1,305	$	18,667		$	12,556	$	680	$	13,236
Depreciation (1)	$	12,653	$	843	$	13,496		$	12,797	$	954	$	13,751

(1) Capital expenditures and depreciation associated with Corporate are not included in these totals.

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table presents a reconciliation of segment income to income from operations before income taxes (in thousands):


	Three months ended				Nine months ended
	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Total segment income	$	102,502	$	56,066	$	304,848	$	138,079
Corporate expense, net	15,225		4,455		37,788		9,252
Acquisition and restructuring related expense	783		6,825		2,452		17,575
Amortization of intangible assets	8,700		9,544		26,162		28,537
Operating income	$	77,794	$	35,242	$	238,446	$	82,715
Interest expense, net	11,050		17,046		42,297		54,169
Loss on debt extinguishment	—		—		9,418		—
Other non-operating (income) expense, net	2,087		(2,474)		4,655		(2,855)
Total other expense	$	13,137	$	14,572	$	56,370	$	51,314
Income from operations before income taxes	$	64,657	$	20,670	$	182,076	$	31,401

11. Earnings Per Share

The following table sets forth the computation of basic and diluted net income per share attributable to common stockholders (in thousands, except share and per share data):


	Three months ended				Nine months ended
	October 2, 2021		September 26, 2020		October 2, 2021		September 26, 2020
Net income	$	50,321	$	15,198	$	140,004	$	23,503
Deemed Dividend - Class A stock redemption(a)	—				(85,541)
Dividend paid to Class C stockholders	—		(51)		(41)		(153)
Net income attributable to Class A and common stock holders, basic	50,321		15,147		54,422		23,350
Net income attributable to Class A holders, basic	—		15,047		12,733		23,209
Net income attributable to common stockholders, basic	$	50,321	$	100	$	41,689	$	141
Net income attributable to Class A holders, diluted	—		14,986		$	12,046	$	23,066
Net income attributable to common stockholders, diluted	$	50,321	$	161	$	42,376	$	284

Weighted average number of common shares outstanding, basic	231,339,007		1,385,034		172,820,430		1,253,276
Effect of dilutive securities(b)	12,444,494		848,623		12,853,384		1,281,001
Weighted average number of common shares outstanding, diluted	243,783,501		2,233,657		185,673,814		2,534,277
Earnings per share attributable to common stockholders, basic	$	0.22	$	0.07	$	0.24	$	0.11
Earnings per share attributable to common shareholders, diluted	$	0.21	$	0.07	$	0.23	$	0.11

(a) For the nine months ended October 2, 2021, net income attributable to common stockholders, used as the numerator in our earnings per share computations, was reduced by a non-cash charge due to a beneficial conversion feature related to the redemption of Class A shares for common shares as a consequence of the IPO. Such non-cash charge was recorded as a deemed dividend during three months ended April 3, 2021. This is a one-time accounting reclassification within the unaudited condensed consolidated statements of changes in redeemable stock and stockholders' equity and does not have any current or future income statement or cash impact.

(b) Excludes 1.2 and 0.9 million of weighted average stock options outstanding for the three and nine months ended October 2, 2021, respectively, and 3.8 and 3.4 million of weighted average stock options outstanding for the three and nine months ended September 26, 2020, respectively, because their effect was antidilutive.

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

12. Commitments and Contingencies

Litigation

The Company is involved in litigation arising in the normal course of business. Where appropriate, these matters have been submitted to the Company’s insurance carrier. The Company determines whether an estimated loss from a contingency should be accrued by assessing whether a loss is deemed probable and can be reasonably estimated. It is not possible to quantify the ultimate liability, if any, in these matters. As of October 2, 2021, appropriate reserves have been recorded for all litigation and contingencies, including the matters described below. Although the Company can give no assurances about the resolution of pending claims, litigation or other disputes and the effect such outcomes may have on the Company, in the opinion of management, it is remote that such litigation will have a material adverse effect on the financial position, results of operations or cash flows of the Company.

Pentair Litigation

The Company is presently a defendant in a set of consolidated patent infringement actions brought by Pentair Water Pool and

Spa, Inc. and Danfoss Drives A/S(Civil Nos. 5:11-cv-459-D and 5:12-cv-251-D), pending in the United States District Court for the Eastern District of North Carolina. Collectively, the plaintiffs in these actions have asserted that certain of our variable speed pump and controller products infringe claims in seven United States patents: U.S. Patent Nos. 7,854,597; 7,815,420; 7,857,600; 7,686,587; 7,704,051; 8,019,479; and 8,043,070. The Company initiated related USPTO proceedings against certain of the asserted patents, including inter partes reexamination nos. 95/002005, 95/002006, 95/002007, and 95/002008 and inter partes review nos. IPR2013-00285 and IPR2013-00287. The Company has also raised non-infringement and invalidity defenses against each of the patents asserted against us in the district court actions, which are currently stayed. Additionally, the Company is aware of patents related to the asserted patents, including continuing, foreign and/or other related issued patents and pending patent applications, that could be asserted against us in the future. If defenses raised by the Company are not upheld, or if Pentair and/or Danfoss were to prevail in these proceedings and/or otherwise, then we may owe money damages and/or be subject to an injunction for any unexpired patent that would require the cessation of any infringing activity, which could have a negative impact on our supply chain or other business, including the ability of us, our vendor(s), and/or our customer(s) to make, use, sell, offer for sale and/or import variable speed drives or pumps, and/or the automation controllers therefor, any of which including the component(s), feature(s) and/or functionalit(ies) accused of infringement.

The Company has determined that a settlement with the plaintiffs thereof is probable and can be estimated and has reserved $3.5 million for such purposes.

Yuncos, Spain Fire

In June 2021, an accidental fire destroyed a portion of our manufacturing and administrative facilities in Yuncos, Spain. The Company has filed an insurance claim with its carrier and such claim is still under review. The Company has established alternative, temporary, facilities for administrative personnel affected by the fire. The disruption to our manufacturing operations was minimal. In the nine months ended October 2, 2021, approximately $5.4 million of expense was recorded representing the write-off of the net book value of the destroyed assets and inventory.

13. Stockholders’ Equity

Prior to the Reclassification, the outstanding capital stock of the Company consisted of three classes of stock: Class A stock, par value of $0.001 per share of which 1,500,000 shares were authorized; Class B common stock par value of $0.001 per share of which 150,000 shares were authorized; and Class C stock, par value $0.001 per share of which 100 shares were authorized.

In October 2020, the Board of Directors approved a distribution of $275.0 million, or $316.16 per share of Class A stock of the Company.

On March 2, 2021 the Company filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation pursuant to which all shares of Class B common stock were reclassified into an equal number of fully paid and non-assessable Common Stock and the Company then effected a 195-for-1 split of its Common Stock. The outstanding capital stock of the Company now consists of a single class of Common Stock.

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Prior to the IPO, each share of Class A stock was converted into a number of shares of Common Stock equal to 237.57 which is the sum of 195.00 plus the quotient of 42.57 obtained by dividing the then outstanding preference amount of $683.84 for such share by the IPO offering price of $17.00, net of any underwriting discount or a net conversion factor of 16.07.

Prior to the IPO all 100 shares of Class C stock were redeemed for $100 dollars in aggregate or $1 per share.

On March 16, 2021, the Company filed its Second Restated Certificate of Incorporation.

Preferred Stock

The Company’s Second Restated Certificate of Incorporation authorizes the Company to issue up to 100,000,000 shares of preferred stock, $0.001 value per share, all of which is undesignated.

Common Stock

The Company’s Second Restated Certificate of Incorporation authorizes the Company to issue up to 750,000,000 shares of Common Stock, $0.001 value per share. Each share of Common Stock is entitled to one vote on all matters submitted to a vote of the Company’s stockholders. The holders of Common Stock are entitled to receive dividends, if any, as may be declared by the board of directors. Through October 2, 2021, no dividends had been declared or paid.

Dividends paid

For the three and nine months ended October 2, 2021, no dividend was declared nor paid to the Company's common stockholders.

For the three months ended September 26, 2020, there was no dividend declared nor paid to the Company's Class A stockholders whereas $50 thousand was paid to the Company's Class C stockholders, or $511.25 per share. For the nine months ended September 26, 2020, there was no dividend declared nor paid to the Company's Class A stockholders whereas $153 thousand was paid to the Company's Class C stockholders, or $1,533.75 per share.

14. Stock-based Compensation

Overview

During the three months ended October 2, 2021, the Company did not have any significant stock-based compensation activity beyond grants of equity for new key personnel, forfeitures due to attrition, and exercise of vested options. Total stock-based compensation expense recognized was $0.8 million and $13.5 million, respectively, for the three and nine months ended October 2, 2021 and $0.7 million and $2.0 million, respectively, for the three and nine months ended September 26, 2020.

The Company has established two equity incentive plans as described below.

2021 Equity Incentive Plan

In March 2021, the Company adopted the 2021 Equity Incentive Plan (the “2021 Plan”). Under the 2021 Plan, up to 13,737,500 shares of common stock may be granted to employees, directors and consultants in the form of stock options, restricted stock units and other stock-based awards. The terms of awards granted under the 2021 Plan are determined by the Compensation Committee of the Board of Directors, subject to the provisions of the 2021 Plan. As of October 2, 2021 there were 12,307,548 shares available for future issuance under the 2021 Plan.

Options granted under the 2021 Plan expire no later than ten years from the date of grant. The vesting period of stock options and restricted stock units granted under the 2021 Plan is three years from the date of grant.

During the nine months ended October 2, 2021, the Company granted 1,256,454 options and 176,184 restricted stock units under the 2021 Plan with a weighted-average grant-date fair value per share of $6.45 and $17.68, respectively.

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company determined the fair value of these granted stock options at the date of grant using the Black-Scholes option-pricing model. The principal assumptions used in the Black-Scholes option-pricing model for the majority of these stock options granted were as follows:



Risk-free interest rate	1.08	%
Expected life in years	6
Expected dividend yield	—	%
Expected volatility	37.00	%

During the three and nine months ended October 2, 2021, the Company recognized $1.0 million and $2.2 million of compensation expense for the awards issued under the 2021 Plan. As of October 2, 2021 there were 1,256,454 outstanding options and 173,498 outstanding restricted stock units under the 2021 Plan.

2017 Equity Incentive Plan

In August 2017, the Company adopted the 2017 Equity Incentive Plan (the “2017 Plan”), which provided for the issuance of stock options, restricted stock and restricted stock awards to officers, directors and employees. The stock options granted under the 2017 Plan have a maximum term of up to ten years. Restricted stock, restricted stock awards, and stock options granted under the 2017 Plan are eligible to vest based on continued service, generally over five years ("time-based awards"), or upon an initial public offering and post-initial public offering stock price performance ("performance-based awards").

Due to the Company's IPO on March 12, 2021 and subsequent stock price performance, all performance and market vesting conditions for the performance-based awards were satisfied on March 26, 2021. All compensation expense for the performance-based awards was recognized upon the satisfaction of the performance and market vesting conditions. As a result, the Company recognized $9.7 million of compensation expense in the three-months ended April 3, 2021.

During the three and nine months ended October 2, 2021, the Company recognized $0.5 million and $1.6 million of compensation expense for the time-based awards issued under the 2017 Plan.

As of October 2, 2021, there were 12,702,284 outstanding options and 122,889 outstanding restricted stock awards under the 2017 Plan.

No future awards will be made under the 2017 Plan. Shares underlying awards under the 2017 Plan that expire or become unexercisable without delivery of shares, are forfeited to, or repurchased for cash by, the Company, are settled in cash, or otherwise become available again for grant as available for future awards under the 2021 Plan (as described above).

Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

15. Acquisition and Restructuring Related Expense

On March 29, 2021, we announced the relocation of our corporate office functions to Charlotte, North Carolina from Berkeley Heights, New Jersey. We are currently in process of moving our senior leadership team, corporate human resources, US sales leadership, corporate finance and other corporate functions to Charlotte.

The Company currently employs approximately 90 corporate employees in Berkeley Heights. As part of the planned relocation, a number of corporate operational jobs will also move from Berkeley Heights to our production facility in Clemmons, North Carolina. The facility currently employs 1,010 people, which includes the addition of approximately 230 jobs over the past year. The corporate relocation does not impact any other Hayward location in the United States or internationally. Relocation began in the summer of 2021 and is expected to be largely complete by spring 2022. The estimated severance and retention costs pertaining to this relocation are approximately $5.3 million and will be recognized when earned. The impacted employees must remain with the Company through their planned exit date to receive each of the severance and retention amounts. Such costs are accounted for in accordance with ASC 420, Exit or Disposal Cost Obligations.

In the three and nine months ended October 2, 2021 a total of $0.8 million and $2.5 million of restructuring expense was recognized primarily pertaining to the exit from our leased facility in Chandler, Arizona which had been previously announced as well as the ongoing relocation of our corporate functions to Charlotte, North Carolina.


(In thousands)			2021 Activity
	Liability as of December 31, 2020		Costs Recognized		Cash Payments		Liability as of October 2, 2021
One-time termination benefits	$	—	$	749	$	(749)	$	—
Facility-related	$	—	$	—	$	—	$	—
Other	$	—	$	1,703	$	(1,131)	$	572
Total	$	—	$	2,452	$	(1,880)	$	572

In 2019, we announced the cessation of certain manufacturing and distribution operations and sold the real estate associated with these operations with a one year lease back arrangement to allow for the orderly restructuring of these operations. The sale and leaseback was accounted for as separate transactions based on their respective terms in accordance with ASC 840, Leases. All activities related to this were fully completed in 2020.

The Company recognizes severance charges on a straight-line basis over the notification period in accordance with ASC 420. Such charges include the facility closure described above and other one-time termination benefits.


(In thousands)			2020 Activity
	Liability as of December 31, 2019		Costs Recognized		Cash Payments		Liability as of September 26, 2020
One-time termination benefits	$	6,278	$	3,170	$	(5,158)	$	4,290
Facility-related	$	—	$	10,570	$	(10,570)	$	—
Other	$	—	$	3,835	$	(3,835)	$	—
Total	$	6,278	$	17,575	$	(19,563)	$	4,290

Restructuring costs are included within acquisition and restructuring related costs on the Company’s unaudited condensed consolidated statements of operations and comprehensive income, while the restructuring liability is included as a component of accrued expenses and other liabilities on the Company's unaudited condensed consolidated balance sheets.

16. Related Party Transactions

Prior to the IPO, on an annual basis, the Company incurred approximately $0.8 million for Sponsor Management fees and paid $0.2 million of Sponsor Dividends (Class C dividends) payable in cash quarterly. These arrangements were terminated upon the consummation of the IPO in the first quarter of fiscal 2021. A total of $41 thousand and $153 thousand in Class C dividends were paid to one Sponsor in lieu of management fees for the nine months ended October 2, 2021 and September 26, 2020, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and related notes thereto appearing in the IPO Prospectus. 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 and in the IPO Prospectus, our actual results may differ materially from those contained in or implied by any forward-looking statements. The results of operations for the three and nine months ended October 2, 2021 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2021.

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 30%. 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 in the United States, we estimate that aftermarket sales represented approximately 75% 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 9 to 12 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 six primary manufacturing facilities worldwide, which are located in North Carolina, Tennessee, Rhode Island, Spain (two) and China, and other facilities in the United States, Canada, France, and Australia. In the second quarter of fiscal 2021, we commenced the process of opening a new distribution center in North Carolina. Such efforts are still ongoing.

Corporate Headquarters Relocation

On March 29, 2021, we announced the relocation of our corporate office functions to Charlotte, North Carolina from Berkeley Heights, New Jersey. We are in process of moving our senior leadership team, corporate human resources, US sales leadership, corporate finance and other corporate functions to Charlotte. Hayward currently employs approximately 90 corporate employees in Berkeley Heights.

As part of the relocation, a number of corporate operational jobs will also move from New Jersey to our production facility in Clemmons, North Carolina. The facility currently employs 1,010 people, which includes the addition of approximately 230 jobs over the past year.

The corporate relocation does not impact any other Hayward location in the United States or internationally. Relocation began in the summer of 2021 and will be largely complete by spring 2022.

Segments

Our business is organized into two reportable segments: North America (“NAM”) and Europe & 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 complete line of residential and commercial swimming pool equipment and supplies in the United States and Canada and manufactures and sells flow control products globally.

The E&RW segment manufactures and sells residential and commercial swimming pool equipment and supplies in Europe, Central and South America, the Middle East, Australia and other Asia Pacific countries.

NAM accounted for 85.1% and 81.7% of total net sales for the three months ended October 2, 2021 and September 26, 2020, respectively, and E&RW accounted for 14.9% and 18.3% of total net sales for the three months ended October 2, 2021 and September 26, 2020, respectively.

NAM accounted for 82.3% and 80.4% of total net sales for the nine months ended October 2, 2021 and September 26, 2020, respectively, and E&RW accounted for 17.7%, and 19.6%, of total net sales for nine months ended October 2, 2021 and September 26, 2020, respectively.

Factors Affecting the Comparability of our Results of Operations

Our results of operations for the three and nine months ended October 2, 2021 and the three and nine months ended September 26, 2020 have been affected by the following, among other events, which must be understood to assess the comparability of our period-to-period financial performance and condition.

Our fiscal quarters end on the Saturday closest to the calendar quarter end, with the exception of year-end which ends on December 31 of each fiscal year. The interim closing dates for the first, second and third quarters of 2021 are April 3, July 3, and October 2, compared to the respective March 28, June 27, and September 26, 2020 dates. This resulted in five more days in the nine months ended October 2, 2021 compared to the nine months ended September 26, 2020. Throughout this discussion we will refer to the three months ended October 2, 2021 and the three months ended September 26, 2020 as the "Third Quarter" and "Comparable Quarter", respectively. Additionally, the first and second quarters of fiscal 2021 will be referred to as the "First Quarter" and "Second Quarter" respectively and the comparable periods referred to as the "Comparable First Quarter" and "Comparable Second Quarter" respectively.

Materials and other cost increases

During the nine months ended October 2, 2021, we experienced an escalation in the cost of metals, resins, electronic sub-assemblies, containers and shipping, and import duty charges (motors, electronics, valves, and cleaner products) for some of our raw materials. We also experienced labor constraints and higher than normal turnover, especially in our North American facilities as we are striving to maximize production to meet increased demand. The availability of materials and labor along with longer transit time due to port congestion and lack of containers, has placed pressure on our supply chain. We have taken measures to secure labor and materials and protect our profitability, including strategic purchasing of raw materials and products, increasing factory wages, and passing cost inflation along to our customers.

In the First Quarter of Fiscal 2021, we announced global price increases up to 7%. E&RW realized most of this increase in the Third Quarter but in NAM, most of the increase has yet to be realized due to the backlog of orders placed prior to the price increase effective dates. During the Third quarter of Fiscal 2021, we announced an increase for the new seasonal year pricing for 2022 in the range of 5% to 7% across all regions. While we have taken actions to mitigate our supply chain pressures and cost increases, we expect inflationary pressure to continue and supply chain turmoil to remain in the fourth quarter of 2021, which could negatively affect our operations and our ability to timely meet customers demand. We will continue to monitor the market development, and take proactive actions as needed.

Impact of COVID-19

The COVID-19 pandemic has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and “stay at home” mandates, travel restrictions, certain business curtailments, limits on gatherings, and other measures. In addition, governments and central banks in several parts of

the world have enacted fiscal and monetary stimulus measures to counteract pandemic economic impacts. We believe that the pandemic has only reinforced existing pool industry growth trends. Hayward is classified as an essential business and as such we have implemented the necessary steps to protect our manufacturing and distribution facilities to ensure we have continuity of production and supply to our customers.

During the nine months ended October 2, 2021, we have faced challenges from the COVID-19 pandemic such as restrictions and disruption of transportation, reduced availability of air transport, and increased border controls or closures, which have resulted in higher costs and delays in both obtaining raw materials and components and in shipping finished goods, as well as continued labor shortages and health and safety concerns associated with the spread of virus variants. We expect our business operations and financial results will continue to be affected by a number of evolving factors such as the rate of vaccinations, the impact of virus variants, the pandemic's impact on the demand of our products and services, our supply chain and manufacturing capacity expansion in the next 6 to 12 months.

Key Measures 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 expenses, RD&E, 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 information about our use of Non-GAAP measures and a reconciliation of these metrics to the most relevant GAAP measure see "Non-GAAP Reconciliation."

Results of Operations

Consolidated

The following tables summarize key components of our results of operations for the periods indicated, both in U.S. dollars and as a percentage of our net sales. We derived the condensed consolidated statements of operations for the three and nine months ended October 2, 2021 and September 26, 2020 from our 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 and a comparison of the change between the periods:

Three Months Ended October 2, 2021 Compared to Three Months Ended September 26, 2020


(In thousands)	Three months ended				Increase (Decrease)	Percentage Change
	October 2, 2021		September 26, 2020
Net sales	$	350,624	$	224,485			$	126,139	56.2	%
Cost of sales	188,170		118,331				69,839		59.0	%
Gross profit	162,454		106,154				56,300		53.0	%
Selling, general, and administrative expenses	68,807		49,446				19,361		39.2	%
Research, development, and engineering	6,370		5,097				1,273		25.0	%
Acquisition and restructuring related expense	783		6,825				(6,042)		(88.5)	%
Amortization of intangible assets	8,700		9,544				(844)		(8.8)	%
Operating income	77,794		35,242				42,552		120.7	%
Interest expense, net	11,050		17,046				(5,996)		(35.2)	%
Loss on debt extinguishment	—		—				—		—	%
Other non operating (income) expense, net	2,087		(2,474)				4,561		184.4	%
Total other expense	13,137		14,572				(1,435)		(9.8)	%
Income from operations before income taxes	64,657		20,670				43,987		212.8	%
Provision for income taxes	14,336		5,472				8,864		162.0	%
Net income	$	50,321	$	15,198			$	35,123	231.1	%
Adjusted EBITDA (a)	$	98,329	$	60,994			$	37,335	61.2	%

(a) See “—Non-GAAP Reconciliation.”

Net sales

Increased to $350.6 million for the three months ended October 2, 2021 from $224.5 million for the three months ended September 26, 2020, an increase of $126.1 million or 56.2%. See the segment discussion below for further information.

Year-over-year net sales increases were driven by the following:


	Three months ended
	October 2, 2021
Volume	47.9	%
Price, net of discounts and allowances	7.1	%
Currency and other	1.2	%
Total	56.2	%

The increase in net sales was primarily the result of higher volumes, mainly in residential pool equipment sales from continued demand for pool upgrades and increasing new pool construction and our ability to increase production capacity utilization to keep up with demand despite global supply constraints, continued favorable foreign currency effects, and a net 7.1% price impact primarily from a price increase effective in October 2020, as well as the realization of a further off-cycle price increase in E&RW, and lower allowances and rebates as percentage of sales as they reach their upper contractual limit.

During the First Quarter of Fiscal Year 2021, we announced an off-cycle price increase of up to 7% globally. This price increase became effective on new orders within 30 to 60 days after the announcement, with realization limited to E&RW for the three months ended October 2, 2021, and minimal impact on NAM invoiced shipments for the three months ended October 2, 2021 given the backlog of orders prior to the effective date of this price increase.

Gross profit and Gross profit margin

Gross profit increased to $162.5 million for the three months ended October 2, 2021 from $106.2 million for the three months ended September 26, 2020, an increase of $56.3 million or 53.0%.

Gross profit margin decreased to 46.3% for the three months ended October 2, 2021 compared to 47.3% for the three months ended September 26, 2020, a reduction of 95 basis points primarily resulting from escalating cost increases in raw materials, logistics expenses as a result of global supply chain constraints, and higher tariffs, partially offset by the net 7.1% price increase discussed above, manufacturing leverage, and cost savings.

Selling, general, and administrative expenses

Increased to $68.8 million for the three months ended October 2, 2021 from $49.4 million for the three months ended September 26, 2020, an increase of $19.4 million or 39.2% primarily driven by $6.0 million increased expenses in warranty, distribution, and compensation and incentives as a result of higher volume, investments and expenses associated with becoming a public company, and a $3.5 million legal settlement reserve plus related legal fees.

As a percentage of net sales, SG&A decreased to 19.6% for the three months ended October 2, 2021 as compared to 22.0% for three months ended September 26, 2020, a decrease of 240 basis points driven by improved operating leverage.

Research, development, and engineering

Increased to $6.4 million for the three months ended October 2, 2021 from $5.1 million for the three months ended September 26, 2020. The $1.3 million increase was to support business growth and product development. As a percentage of net sales, RD&E was 1.8% for the three months ended October 2, 2021 compared to 2.3% for the three months ended September 26, 2020, a decrease of 45 basis points.

Acquisition and restructuring related expense

For the three months ended October 2, 2021 we incurred $0.8 million of restructuring expense as compared to an expense of $6.8 million for three months ended September 26, 2020. The expense in the Third Quarter was primarily related to the corporate relocation, as compared to the Comparable Quarter that was primarily related to the cessation of certain manufacturing and distribution operations on the United States west coast and the transition of such operations to manufacturing centers elsewhere in the United States and China.

See Note 15. Acquisition and Restructuring Related Expense

Amortization of intangible assets

Decreased to $8.7 million for the three months ended October 2, 2021 from $9.5 million for the three months ended September 26, 2020, a decrease of $0.8 million or 8.8%, due to the amortization pattern of certain intangibles based on the declining balance method.

Operating income

Increased to $77.8 million for the three months ended October 2, 2021 from $35.2 million for the three months ended September 26, 2020, an increase of $42.6 million or 120.7% due to the cumulative effect of the items described above.

Interest expense, net

Decreased to $11.1 million for the three months ended October 2, 2021 from $17.0 million for the three months ended September 26, 2020.

Interest expense for the three months ended October 2, 2021 consisted of $10.5 million of interest on the outstanding debt and $0.5 million of amortization of deferred financing fees. The effective interest rate on our borrowings, net of the impact of our interest rate hedge was 4.42% for the three months ended October 2, 2021.

Interest expense for the three months ended September 26, 2020 consisted of $15.7 million on the outstanding debt and $1.3 million of amortization of deferred financing fees. The effective interest rate on our borrowings, net of the impact of the interest rate hedge, was 5.83% for the three months ended September 26, 2020.

Interest expense decreased by $6.0 million primarily due to debt repayment of $364.6 million in the first quarter of 2021 and lower interest rates as a result of the Second Quarter amendment to the Credit Facilities.

Provision for income taxes

We incurred income tax expense of $14.3 million for the three months ended October 2, 2021 compared to an income tax expense of $5.5 million for the three months ended September 26, 2020, an increase of $8.9 million or 162.0%. This was primarily due to increased income from operations.

The decrease in the Company’s effective tax rate from 26.5% for three months ended September 26, 2020 to 22.2% for the three months ended October 2, 2021 was primarily due to a Global Intangible Low Tax Income ("GILTI") inclusion, additional tax benefits related to Foreign Derived Intangible Income, and changes in the relative income between tax jurisdictions.

Net income

As a result of the foregoing, net income increased to $50.3 million for the three months ended October 2, 2021 compared to net income of $15.2 million for the three months ended September 26, 2020, an increase of $35.1 million or 231.1%.

Adjusted EBITDA and Adjusted EBITDA margin

Adjusted EBITDA increased to $98.3 million for the three months ended October 2, 2021 from $61.0 million for the three months ended September 26, 2020, an increase of $37.3 million or 61.2% driven primarily by higher net sales resulting in an increase in gross profit of $56.3 million, and operating leverage across the SG&A and RD&E expense base.

Adjusted EBITDA margin increased to 28.0% for the three months ended October 2, 2021 compared to 27.2% for the three months ended September 26, 2020, an increase of 87 basis points.

See the Non-GAAP reconciliation section for detailed explanations.

Nine months ended October 2, 2021 Compared to Nine months ended September 26, 2020

The following table summarizes our results of operations and a comparison of the changes between periods:


(In thousands)	Nine months ended				Increase (Decrease)	Percentage Change
	October 2, 2021		September 26, 2020
Net sales	$	1,049,409	$	614,704			$	434,705	70.7	%
Cost of sales	559,033		335,128				223,905		66.8	%
Gross profit	490,376		279,576				210,800		75.4	%
Selling, general, and administrative expenses	207,129		136,854				70,275		51.4	%
Research, development, and engineering	16,187		13,895				2,292		16.5	%
Acquisition and restructuring related expense	2,452		17,575				(15,123)		(86.0)	%
Amortization of intangible assets	26,162		28,537				(2,375)		(8.3)	%
Operating income	238,446		82,715				155,731		188.3	%
Interest expense, net	42,297		54,169				(11,872)		(21.9)	%
Loss on debt extinguishment	9,418		—				9,418		—	%
Other (income) expense	4,655		(2,855)				7,510		263.0	%
Total other expense	56,370		51,314				5,056		9.9	%
Income from operations before income taxes	182,076		31,401				150,675		479.8	%
Provision for income taxes	42,072		7,898				34,174		432.7	%
Net income	$	140,004	$	23,503			$	116,501	495.7	%
Adjusted EBITDA (a)	$	316,035	$	157,745			$	158,290	100.3	%

(a) See “—Non-GAAP Reconciliation.”

Net sales

Increased to $1,049.4 million for the nine months ended October 2, 2021 from $614.7 million for the nine months ended September 26, 2020, an increase of $434.7 million or 70.7%.

Year-over-year net sales increases were driven by the following factors:


	October 2, 2021
Volume	62.6	%
Price, net of discounts and allowances	4.9	%
Currency and other	3.2	%
Total	70.7	%

The increase in net sales was primarily the result of higher volumes, mainly in residential pool equipment sales from continued demand for pool upgrades and increasing new pool construction and partially attributable to five more days in the nine months ended October 2, 2021 compared to the prior year, favorable foreign currency effects, and a net 4.9% price impact.

Gross profit and Gross profit margin

Gross profit increased to $490.4 million for the nine months ended October 2, 2021 from $279.6 million for the nine months ended September 26, 2020, an increase of $211 million, or 75.4%.

Gross profit margin increased to 46.7% for the nine months ended October 2, 2021 compared to 45.5% for the nine months ended September 26, 2020, an increase of 125 basis points primarily resulting from the net price increase discussed above, manufacturing leverage, net cost savings, a favorable mix due to stronger growth of higher margin NAM sales partly offset by inflationary increases in raw materials, logistics expenses, and tariffs.

Selling, general, and administrative expenses

Increased to $207.1 million for the nine months ended October 2, 2021 from $136.9 million for the nine months ended September 26, 2020, an increase of $70.3 million or 51.4% primarily driven by approximately $30.0 million of volume-related expenses in warranty, distribution, compensation and incentives, and $16.4 million of stock-based compensation expense, as well as non-recurring one-time charges including a $5.4 million write-off related to a fire at our manufacturing and administrative facilities in Yuncos, Spain, $4.0 million legal settlement reserve and certain legal fees, $1.9 million in debt refinancing costs, and $1.0 million of IPO related expense, partially offset by $2.5 million of cost savings, achieved from austerity measures taken at the onset of the COVID-19 pandemic in 2020 which did not repeat in 2021.

As a percentage of net sales, SG&A decreased to 19.7% for the nine months ended October 2, 2021 as compared to 22.3% for nine months ended September 26, 2020, a decrease of 253 basis points driven by improved operating leverage.

Research, development, and engineering

Increased to $16.2 million for the nine months ended October 2, 2021 from $13.9 million for the nine months ended September 26, 2020, as a result of increased activities to support business growth and product development. As a percentage of net sales, RD&E was 1.5% for the nine months ended October 2, 2021 compared to 2.3% for the nine months ended September 26, 2020, a decrease of 72 basis points.

Acquisition and restructuring related expense

For the nine months ended October 2, 2021, we incurred $2.5 million of restructuring expense as compared to an expense of $17.6 million for the nine months ended September 26, 2020.

See Note 15. Acquisition and Restructuring Related Expense

Amortization of intangible assets

Decreased to $26.2 million for the nine months ended October 2, 2021 from $28.5 million for the nine months ended September 26, 2020, a decrease of $2.4 million or 8.3%, due to the amortization pattern of certain intangibles based on the declining balance method.

Operating income

Increased to $238.4 million for the nine months ended October 2, 2021 from $82.7 million for the nine months ended September 26, 2020, an increase of $155.7 million or 188.3% due to the cumulative effect of the items described above.

Interest expense, net

Decreased to $42.3 million for the nine months ended October 2, 2021 from $54.2 million for the nine months ended September 26, 2020.

Interest expense for the nine months ended October 2, 2021 consisted of $39.6 million of interest on the outstanding debt and $2.8 million of amortization of deferred financing fees. The effective interest rate on our borrowings, net of the impact of our

interest rate hedges was 5.17% for the nine months ended October 2, 2021. Interest expense for the nine months ended September 26, 2020 consisted of $50.3 million interest on the outstanding debt and $4.0 million of amortization of deferred financing fees. The effective interest rate on our borrowings, net of the impact of the interest rate hedges, was 5.87% for the nine months ended September 26, 2020. Interest expense decreased by $11.9 million, net of a $3.4 million increase in interest swap costs from prior year's period, primarily driven by the first quarter debt repayment of $364.6 million and lower interest rates as a result of the second quarter amendment to the Credit Facilities.

Loss on extinguishment of debt

The $9.4 million loss on extinguishment of debt for the nine months ended October 2, 2021 was incurred due to the May 28, 2021 amendment to the First Lien Term Facility and the $356.6 million debt repayment made, with funds from the IPO, on March 19, 2021. There was no loss on extinguishment of debt for the nine months ended September 26, 2020.

Provision for income taxes

The Company incurred income tax expense of $42.1 million for the nine months ended October 2, 2021 compared to $7.9 million for the nine months ended September 26, 2020, an increase of $34.2 million. This was primarily due to increased income from operations.

The decrease in the Company’s effective tax rate from 25.2% for the nine months ended September 26, 2020 to 23.1% for the nine months ended October 2, 2021 was primarily due to a Global Intangible Low Tax Income ("GILTI") inclusion, changes in the relative income between jurisdictions, and a discreet tax charge relating to nondeductible GAAP stock compensation expense in excess of annual IRS compensation expense limitations due to the accelerated vesting of performance based grants due to the IPO.

Net income

As a result of the foregoing, net income increased to $140.0 million for the nine months ended October 2, 2021 compared to $23.5 million for the nine months ended September 26, 2020, an increase of $116.5 million or 495.7%.

Adjusted EBITDA and Adjusted EBITDA margin

Adjusted EBITDA increased to $316.0 million for the nine months ended October 2, 2021 from $157.7 million for the nine months ended September 26, 2020, an increase of $158.3 million or 100.3% driven primarily by higher net sales and operating leverage resulting in an increase in gross profit of $210.8 million, partially offset by an increase of $70.3 million in SG&A expense mostly related to volume increases and costs related to becoming a public company, as well as headwinds from non-recurring, one time charges and cost savings related to austerity measures during the same time period in last year.

Adjusted EBITDA margin increased to 30.1% for the nine months ended October 2, 2021 compared to 25.7% for the nine months ended September 26, 2020, an increase of 445 basis points.

See Non-GAAP reconciliation section for detailed explanations.

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 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, less 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:


(In thousands)	Three months ended October 2, 2021									Three months ended September 26, 2020
	Total			NAM			E&RW			Total			NAM			E&RW
Net sales	$	350,624		$	298,236		$	52,388		$	224,485		$	184,015		$	40,470
Gross profit	$	162,454		$	141,655		$	20,799		$	106,154		$	90,764		$	15,390
Gross profit margin %	46.3		%	47.5		%	39.7		%	47.3		%	49.3		%	38.0		%
Segment income	$	102,502		$	91,920		$	10,582		$	56,066		$	49,080		$	6,986
Segment income margin %	29.2		%	30.8		%	20.2		%	25.0		%	26.7		%	17.3		%
Adjusted segment income (a)	$	109,500		$	98,320		$	11,180		$	64,419		$	56,844		$	7,575
Adjusted segment income margin % (a)	31.2		%	33.0		%	21.3		%	28.7		%	30.9		%	18.7		%
Expenses not allocated to segments
Corporate expense, net	$	15,225								$	4,455
Acquisition and restructuring related expense	$	783								$	6,825
Amortization of intangible assets	$	8,700								$	9,544
Operating income	$	77,794								$	35,242

(a) See “—Non-GAAP Reconciliation.”


(In thousands)	Nine months ended October 2, 2021									Nine months ended September 26, 2020
	Total			NAM			E&RW			Total			NAM			E&RW
Net sales	$	1,049,409		$	863,276		$	186,133		$	614,704		$	493,757		$	120,947
Gross profit	$	490,376		$	416,753		$	73,623		$	279,576		$	234,496		$	45,080
Gross profit margin %	46.7		%	48.3		%	39.6		%	45.5		%	47.5		%	37.3		%
Segment income	$	304,848		$	267,020		$	37,828		$	138,079		$	117,243		$	20,836
Segment income margin %	29.0		%	30.9		%	20.3		%	22.5		%	23.7		%	17.2		%
Adjusted segment income (a)	$	337,978		$	293,283		$	44,695		$	161,818		$	139,365		$	22,453
Adjusted segment income margin % (a)	32.2		%	34.0		%	24.0		%	26.3		%	28.2		%	18.6		%
Expenses not allocated to segments
Corporate expense, net	$	37,788								$	9,252
Acquisition and restructuring related expense	$	2,452								$	17,575
Amortization of intangible assets	$	26,162								$	28,537
Operating income	$	238,446								$	82,715

(a) See “—Non-GAAP Reconciliation.”

North America ("NAM")

Three Months Ended October 2, 2021 Compared to Three Months Ended September 26, 2020


(In thousands)	Three months ended						Increase (Decrease)			Percentage / bps Change
	October 2, 2021			September 26, 2020
Net sales	$	298,236		$	184,015		$	114,221		62.1	%
Gross profit	$	141,655		$	90,764		$	50,891		56.1	%
Gross profit margin %	47.5		%	49.3		%	(1.8)		%	(183)
Segment income	$	91,920		$	49,080		$	42,840		87.3	%
Segment income margin %	30.8		%	26.7		%	4.1		%	415
Adjusted segment income (a)	$	98,320		$	56,844		$	41,476		73.0	%
Adjusted segment income margin % (a)	33.0		%	30.9		%	2.1		%	208

(a) See “—Non-GAAP Reconciliation.”

Net sales

Increased to $298.2 million for the three months ended October 2, 2021 from $184.0 million for the three months ended September 26, 2020, an increase of $114.2 million or 62.1%.

This was primarily the result of a 53.0% increase in volume mostly due to higher sales of residential pool equipment as demand for more efficient, environmentally friendly and automated pool products remains robust, and a net 8.0% positive price impact including price increases and lower rebates and allowances as percentage of sales as incentives reach their maximum, and 1.1% from the favorable impact of foreign currency translation.

Year-over-year net sales increases were driven by the following factors:


	Three months ended
	October 2, 2021
Volume	53.0	%
Price, net of allowances and discounts	8.0	%
Currency and other	1.1	%
Total	62.1	%

Gross profit and Gross profit margin

Gross profit increased to $141.7 million for the three months ended October 2, 2021 from $90.8 million for the three months ended September 26, 2020, an increase of $50.9 million or 56.1%.

Gross profit margin, decreased to 47.5% for the three months ended October 2, 2021 from 49.3% for the three months ended September 26, 2020, a reduction of 183 basis points, primarily driven by elevated inflation from raw materials and freight as supply chain gridlock became more pronounced and higher import duties, partially offset by the net price increase discussed above, improved manufacturing leverage, and cost savings.

Segment income and Segment income margin

Segment income increased to $91.9 million for the three months ended October 2, 2021 from $49.1 million for the three months ended September 26, 2020 an increase of $42.8 million, or 87.3%. This was primarily driven by an increase in sales and gross profit as discussed above partially offset by higher SG&A expenses of $6.8 million or 18.4% mainly from increased variable compensation expense and volume-related warranty, distribution and warehousing costs. For the three months ended October 2, 2021 a 598 basis point operating leverage improvement was achieved in RD&E and SG&A costs.

Segment income margin increased to 30.8% for the three months ended October 2, 2021 from 26.7% for the three months ended September 26, 2020, an increase of 415 basis points achieved from increased gross profit margin and operating expense leverage as discussed above.

Adjusted segment income and Adjusted segment income margin

Adjusted segment income increased to $98.3 million for the three months ended October 2, 2021 from $56.8 million for the three months ended September 26, 2020, an increase of $41.5 million, or 73.0%. This was driven by the higher segment income as discussed above, further increased by the adjustment for additional non-cash or non-recurring charges.

Adjusted segment income margin increased to 33.0% for the three months ended October 2, 2021 from 30.9% for the three months ended September 26, 2020, an increase of 208 basis points. Refer to section "Non-GAAP Reconciliation" for a reconciliation of segment income to adjusted segment income.

Nine months ended October 2, 2021 Compared to Nine months ended September 26, 2020


(In thousands)	Nine months ended						Increase (Decrease)			Percentage / bps Change
	October 2, 2021			September 26, 2020
Net sales	$	863,276		$	493,757		$	369,519		74.8	%
Gross profit	$	416,753		$	234,496		$	182,257		77.7	%
Gross profit margin %	48.3		%	47.5		%	0.8		%	78
Segment income	$	267,020		$	117,243		$	149,777		127.7	%
Segment income margin %	30.9		%	23.7		%	7.2		%	719
Adjusted segment income (a)	$	293,283		$	139,365		$	153,918		110.4	%
Adjusted segment income margin % (a)	34.0		%	28.2		%	5.7		%	575

(a) See “—Non-GAAP Reconciliation.”

Net sales

Increased to $863.3 million for the nine months ended October 2, 2021 from $493.8 million for the nine months ended September 26, 2020, an increase of $369.5 million or 74.8%.

This was primarily due to volume growth of 67.7% driven by continuing strong demand for pool products and five more days in the nine months ended October 2, 2021 as compared to the prior year, 1.8% from favorable foreign currencies effects, and 5.3% of net price increases.

Year-over-year net sales increases were driven by the following:


	Nine months ended
	October 2, 2021
Volume	67.7	%
Price, net of allowances and discounts	5.3	%
Currency and other	1.8	%
Total	74.8	%

Gross profit and Gross profit margin

Gross profit increased to $416.8 million for the nine months ended October 2, 2021 from $234.5 million for the nine months ended September 26, 2020, an increase of $182.3 million, or 77.7%.

Gross profit margin rose to 48.3% for the nine months ended October 2, 2021 from 47.5% for the nine months ended September 26, 2020, an increase of 78 basis points, primarily driven by the net price increase discussed above, manufacturing leverage, and cost savings, partially offset by the inflationary increases from raw materials and freight, and higher import duties.

Segment income and Segment income margin

Segment income increased to $267.0 million for the nine months ended October 2, 2021 from $117.2 million for the nine months ended September 26, 2020, an increase of $149.8 million or 127.7%. This was primarily driven by an increase in gross profit as discussed above partially offset by higher SG&A expenses of $30.3 million or 28.8% mainly from increased variable compensation expense and volume-related warranty, distribution and warehousing costs, and higher stock based compensation costs as a result of the IPO. For the nine months ended October 2, 2021 a 640 basis point operating leverage improvement was achieved in RD&E and SG&A costs.

Segment income margin increased to 30.9% for the nine months ended October 2, 2021 from 23.7% for the nine months ended September 26, 2020, an increase of 719 basis points achieved from increased gross profit margin and operating expense leverage as discussed above.

Adjusted segment income and Adjusted segment income margin

Adjusted segment income increased to $293.3 million for the nine months ended October 2, 2021 from $139.4 million for the nine months ended September 26, 2020, an increase of $153.9 million or 110.4%. This was driven by the higher segment income as discussed above, further increased by the adjustment for additional non-cash or non-recurring charges.

Adjusted segment income margin increased to 34.0% for the nine months ended October 2, 2021 from 28.2% for the nine months ended September 26, 2020, an increase 575 basis points. Refer to section "Non-GAAP Reconciliation" for a reconciliation of segment income to adjusted segment income.

Europe & Rest of World ("E&RW")

Three Months Ended October 2, 2021 Compared to Three Months Ended September 26, 2020


(In thousands)	Three months ended						Increase (Decrease)			Percentage / bps Change
	October 2, 2021			September 26, 2020
Net sales	$	52,388		$	40,470		$	11,918		29.4	%
Gross profit	$	20,799		$	15,390		$	5,409		35.1	%
Gross profit margin %	39.7		%	38.0		%	1.7		%	167
Segment income	$	10,582		$	6,986		$	3,596		51.5	%
Segment income margin %	20.2		%	17.3		%	2.9		%	294
Adjusted segment income (a)	$	11,180		$	7,575		$	3,605		47.6	%
Adjusted segment income margin % (a)	21.3		%	18.7		%	2.6		%	262

(a) See “—Non-GAAP Reconciliation.”

Net sales

Increased to $52.4 million for the three months ended October 2, 2021 from $40.5 million for the three months ended September 26, 2020, an increase of $11.9 million or 29.4%.

This was primarily due to volume growth of 24.2% driven by continuing strong demand for pool products on top of a very strong quarter from the prior year Comparable Quarter when business recovered from local government mandates to "shelter in place" and accelerated to meet pent-up demand, 1.7% from favorable foreign currencies effects, and 3.5% of net price increases.


Year-over-year net sales increases were driven by the following:	Three months ended
	October 2, 2021
Volume	24.2	%
Price, net of allowances and discounts	3.5	%
Currency and other	1.7	%
Total	29.4	%

Gross profit and Gross profit margin

Gross profit increased to $20.8 million for the three months ended October 2, 2021 from $15.4 million for the three months ended September 26, 2020, an increase of $5.4 million or 35.1%.

Gross profit margin increased to 39.7% for the three months ended October 2, 2021 from 38.0% for the three months ended September 26, 2020, an increase of 167 basis points, primarily driven by price increases, favorable product mix and volume leverage, partially offset by inflationary impact from supplies and shipping costs.

Segment income and Segment income margin

Segment income increased to $10.6 million for the three months ended October 2, 2021 from $7.0 million for the three months ended September 26, 2020, an increase of $3.6 million, or 51.5%. This was primarily driven by an increase in gross profit as discussed above offset in part by higher SG&A expenses of $1.7 million or 22.4% from increased variable compensation expense, volume-related distribution costs, warranty costs, and investments to support growth. For the three months ended October 2, 2021, operating leverage improved by 126 basis points.

Segment income margin increased by 294 basis points from 17.3% for the three months ended September 26, 2020 to 20.2% for the three months ended October 2, 2021, due to the aforementioned increase in net sales and gross profit year over year, and operating leverage.

Adjusted segment income and Adjusted segment income margin

Adjusted segment income increased to $11.2 million for the three months ended October 2, 2021 from $7.6 million for the three months ended September 26, 2020, an increase of $3.6 million or 47.6%. This was primarily driven by the increased sales and operating leverage after excluding the non-cash and one-time costs.

Adjusted segment income margin increased to 21.3% for the three months ended October 2, 2021 from 18.7% for the three months ended September 26, 2020, an increase of 262 basis points. Refer to section "Non-GAAP Reconciliation" for a reconciliation of segment income to adjusted segment income.

Nine months ended October 2, 2021 Compared to Nine months ended September 26, 2020


(In thousands)	Nine months ended						Increase (Decrease)			Percentage / bps Change
	October 2, 2021			September 26, 2020
Net sales	$	186,133		$	120,947		$	65,186		53.9	%
Gross profit	$	73,623		$	45,080		$	28,543		63.3	%
Gross profit margin %	39.6		%	37.3		%	2.3		%	228
Segment income	$	37,828		$	20,836		$	16,992		81.6	%
Segment income margin %	20.3		%	17.2		%	3.1		%	310
Adjusted segment income (a)	$	44,695		$	22,453		$	22,242		99.1	%
Adjusted segment income margin % (a)	24.0		%	18.6		%	5.4		%	545

(a) See “—Non-GAAP Reconciliation.”

Net sales

Increased to $186.1 million for the nine months ended October 2, 2021 from $120.9 million for the nine months ended September 26, 2020, an increase of $65.2 million or 53.9%. This was primarily due to volume growth of 41.9% driven by continuing strong demand for pool products and five more days in the nine months ended October 2, 2021 as compared to the prior year, 8.9% from favorable foreign currencies effects, and 3.1% of net price increases.


Year-over-year net sales increases were driven by the following:	Nine months ended
	October 2, 2021
Volume	41.9	%
Price, net of allowances and discounts	3.1	%
Currency and other	8.9	%
Total	53.9	%

Gross profit and Gross profit margin

Gross profit increased to $73.6 million for the nine months ended October 2, 2021 from $45.1 million for the nine months ended September 26, 2020, an increase of $28.5 million, or 63.3%.

Gross profit margin increased to 39.6% for the nine months ended October 2, 2021 from 37.3% for the nine months ended September 26, 2020, an increase of 228 basis points, primarily driven by price increases, favorable product mix, quality improvement and volume leverage, partially offset by inflationary impact from shipping costs, supplies and raw materials.

Segment income and Segment income margin

Segment income increased to $37.8 million for the nine months ended October 2, 2021 from $20.8 million for the nine months ended September 26, 2020, an increase of $17.0 million or 81.6%. This was primarily driven by an increase in gross profit as discussed above offset in part by higher SG&A expenses of $11.4 million or 50.4% from increased variable compensation expense, and volume-related distribution and warranty costs, $5.4 million of impairment costs related to the fire incident at our Yuncos, Spain facility, and foreign currencies effects. For the nine months ended October 2, 2021, a 86 basis point operating leverage improvement was achieved in RD&E and SG&A costs.

Segment income margin increased by 310 basis points, to 20.3% for the nine months ended October 2, 2021 as compared to 17.2% for the same period year over year.

Adjusted segment income and Adjusted segment income margin

Adjusted segment income increased to $44.7 million for the nine months ended October 2, 2021 from $22.5 million for the nine months ended September 26, 2020, an increase of $22.2 million or 99.1%. This was primarily driven by the increased sales and operating leverage after removing the one-time costs.

Adjusted segment income margin increased to 24.0% for the nine months ended October 2, 2021 from 18.6% for the nine months ended September 26, 2020, an increase of 545 basis points. Refer to section "Non-GAAP Reconciliation" 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, currency exchange items, 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.

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 should not be construed as an inference that our future results will be unaffected by these items.

Net Income to Adjusted EBITDA and Adjusted EBITDA Margin

Following is a reconciliation from net income to adjusted EBITDA and adjusted EBITDA margin for the three months ended October 2, 2021 and September 26, 2020:


(In thousands)	Three months ended						Increase (Decrease)		Percentage Change
	October 2, 2021			September 26, 2020
Net income	$	50,321		$	15,198		$	35,123	231.1	%
Depreciation	4,847			4,921			(74)		(1.5)	%
Amortization	10,405			11,251			(846)		(7.5)	%
Interest expense	11,050			17,046			(5,996)		(35.2)	%
Income taxes	14,336			5,472			8,864		162.0	%

EBITDA	$	90,959		$	53,888		$	37,071	68.8	%
Stock-based compensation (a)	484			654			(170)		(26.0)	%
Sponsor management fees (b)	—			199			(199)		(100.0)	%
Currency exchange items (c)	1,149			(2,171)			3,320		152.9	%
Acquisition and restructuring related expense, net (d)	783			6,825			(6,042)		(88.5)	%
Other (e)	4,954			1,599			3,355		209.9	%
Total Adjustments	$	7,370		$	7,106		$	264	3.7	%
Adjusted EBITDA	$	98,329		$	60,994		$	37,335	61.2	%
Adjusted EBITDA margin	28.0		%	27.2		%


(a)						Represents non-cash stock-based compensation expense related to equity awards issued 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 on March 16, 2021, the effective date of our IPO.
(c)						Represents non-cash mark-to-market losses (gains) on foreign currency contracts.
(d)						Adjustments in the three months ended October 2, 2021 include costs associated with the relocation of the corporate headquarters. Adjustments in the three months ended September 26, 2020 include $6.8 million of business restructuring costs mainly related to the manufacturing and distribution consolidation and expansion.
(e)						Adjustments in the three months ended October 2, 2021 include a $3.5 million legal settlement reserve related to the ongoing Pentair litigation, $0.4 million of certain legal fees, $0.4 million costs related to a fire at our manufacturing and administrative facilities in Yuncos Spain, as well as $0.6 million operating loss related to an early stage product business acquired in 2018 that is being phased out. Adjustments in the three months ended September 26, 2020 includes $0.8 million of operating losses related to the same early stage product business, and $0.9 million COVID-19 related health and safety expenses.

Following is a reconciliation from net income to adjusted EBITDA and adjusted EBITDA margin for the nine months ended October 2, 2021 and September 26, 2020:


(In thousands)	Nine months ended						Increase (Decrease)		Percentage Change
	October 2, 2021			September 26, 2020
Net income	$	140,004		$	23,503		$	116,501	495.7	%
Depreciation	14,096			14,491			(395)		(2.7)	%
Amortization	30,903			32,822			(1,919)		(5.8)	%
Interest expense	42,297			54,169			(11,872)		(21.9)	%
Income taxes	42,072			7,898			34,174		432.7	%
Loss on extinguishment of debt	9,418			—			9,418		—	%
EBITDA	278,790			132,883			145,907		109.8	%
Stock-based compensation (a)	16,383			1,962			14,421		735.0	%
Sponsor management fees (b)	90			597			(507)		(84.9)	%
Currency exchange items (c)	4,379			(2,778)			7,157		257.6	%
Acquisition and restructuring related expense, net (d)	2,452			17,574			(15,122)		(86.0)	%
Other (e)	13,941			7,507			6,434		85.7	%
Total Adjustments	$	37,245		$	24,862		$	12,383	49.8	%
Adjusted EBITDA	$	316,035		$	157,745		$	158,290	100.3	%
Adjusted EBITDA margin	30.1		%	25.7		%


(a)						Represents non-cash stock-based compensation expense related to equity awards issued 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 on March 16, 2021, the effective date of our IPO.
(c)						Represents non-cash mark-to-market losses (gains) on foreign currency contracts.
(d)						Adjustments in the nine months ended October 2, 2021 include $1.6 million of business restructuring related costs associated with the exit of a now redundant manufacturing and distribution facility and costs associated with the relocation of the corporate headquarters. Adjustments in the nine months ended September 26, 2020 include business restructuring costs related to a global manufacturing and distribution consolidation and expansion project.
(e)						Adjustments in the nine months ended October 2, 2021 includes $5.4 million of costs related to a fire at our manufacturing and administrative facilities in Yuncos Spain, a $4.0 million legal reserve and fees, $1.0 million related to the IPO, $1.9 million related to debt refinancing, and $1.5 million of operating loss related to an early stage product business acquired in 2018 that is being phased out. Adjustments in the nine months ended September 26, 2020 includes $3.0 million of operating losses related to the same early stage product business, $2.3 million severance and retention costs plus $1.9 million COVID-19 related health and safety expenses.

Following is a reconciliation from segment income to adjusted segment income for the three and nine months ended months ended October 2, 2021 and September 26, 2020:


(In thousands)	Three months ended						Nine months ended
	October 2, 2021			September 26, 2020			October 2, 2021			September 26, 2020
Segment income	$	102,502		$	56,066		$	304,848		$	138,079
Depreciation	4,428			4,860			13,496			13,751
Amortization	1,705			1,707			4,740			4,285
Stock-based compensation (a)	(92)			524			7,903			1,570
Currency exchange items	$	—		128			—			651

Other (b)	$	957		1,135			6,991			3,483
Total Adjustments	6,998			8,354			33,130			23,740
Adjusted segment income	$	109,500		$	64,420		$	337,978		$	161,819
Adjusted segment income margin	31.2		%	28.7		%	32.2		%	26.3		%




(a)						For the three months ended October 2, 2021, we recognized a benefit of $0.5 million related to mark-to-market accounting under the liability method for Stock Appreciation Rights in the North America segment.
(b)						The three months and nine months ended October 2, 2021 include $0.6 million and $1.5 million operating losses, respectively, which relate to the early stage product business acquired in 2018 that is being phased out in 2021 and other miscellaneous items we believe are not representative of our ongoing business operations, also includes $0.4 million and $5.4 million write-off related to the fire in Yuncos, Spain, respectively. The three months and nine months ended September 26, 2020 include $0.8 million and $3.0 million operating losses, respectively, which relate to an early stage product business acquired in 2018 that is being phased out, as well as professional fees, additional health and safety expenses related to COVID-19, and other miscellaneous items we believe are not representative of our ongoing business operations.

Following is a reconciliation from segment income to adjusted segment income for NAM for the three and nine months ended months ended October 2, 2021 and September 26, 2020 (in thousands):


NAM	Three months ended						Nine months ended
	October 2, 2021			September 26, 2020			October 2, 2021			September 26, 2020
Segment income	$	91,920		$	49,080		$	267,020		$	117,243
Depreciation	4,253			4,534			12,653			12,797
Amortization	1,705			1,707			4,740			4,285
Stock-based compensation (a)	(126)			419			7,318			1,256



Other (b)	568			1,105			1,551			3,785
Total adjustments	6,400			7,765			26,262			22,123
Adjusted segment income	$	98,320		$	56,845		$	293,282		$	139,366
Adjusted segment income margin	33.0		%	30.9		%	34.0		%	28.2		%




(a)						For the three months ended October 2, 2021, we recognized a $0.5 million benefit related to mark-to-market accounting under the liability method for Stock Appreciation Rights.
(b)						The three months and nine months ended October 2, 2021 include $0.6 million and $1.5 million operating losses, respectively, which relate to the early stage product business acquired in 2018 that is being phased out in 2021 and other miscellaneous items we believe are not representative of our ongoing business operations. The three months and nine months ended September 26, 2020 include $0.8 million and $3.0 million operating losses, respectively, which relate to an early stage product business acquired in 2018 that is being phased out, as well as professional fees, $0.6 million and $1.6 million health and safety expenses, respectively, and other miscellaneous items we believe are not representative of our ongoing business operations.

Following is a reconciliation from segment income to adjusted segment income for E&RW for the three and nine months ended months ended October 2, 2021 and September 26, 2020 (in thousands):


E&RW	Three months ended						Nine months ended
	October 2, 2021			September 26, 2020			October 2, 2021			September 26, 2020
Segment income	$	10,582		$	6,985		$	37,828		$	20,836
Depreciation	175			326			843			954
Amortization	—			105			—			—
Stock-based compensation	34			128			585			314

Currency exchange items	$	—		—			—			651

Other (a)	389			30			5,440			(302)
Total Adjustments	598			589			6,868			1,617
Adjusted segment income	$	11,180		$	7,575		$	44,696		$	22,453
Adjusted segment income margin	21.3		%	18.7		%	24.0		%	18.6		%



(a)						The three months and nine months ended October 2, 2021 include $0.4 million and $5.4 million write off related to a fire at our manufacturing and administrative facilities in Yuncos, Spain.

Liquidity 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 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 seasonal cash usage during the first quarter and drew on our revolving credit facility to fund our operations as a large proportion of our Net Sales were made on extended credit terms to fulfill seasonal stocking orders referred to herein as the "early buy program". This cash usage was reversed in the second quarter as the seasonality of our businesses peaked and early buy program receivables were collected. The cash generated allowed us to pay down the revolving credit facility in full by the end of the second quarter. During the Third Quarter, we continued to generate strong cash provided by operating activities, which allowed us to make strategic inventory purchases to mitigate supply chain constraints without any borrowing under our revolving Credit Facility.

Unrestricted cash and cash equivalents totaled $295.1 million as of October 2, 2021, which is an increase of $180.2 million from $114.9 million at December 31, 2020.

We focus on increasing cash flow, solidifying the liquidity position through working capital initiatives, and repaying debt, while continuing to fund business growth initiatives. We believe that net cash provided by operating activities and availability under the ABL Revolving Credit Facility will be adequate to finance our working capital requirements, inclusive of capital expenditures, and debt service over the next 12 months. On June 1, 2021, we increased the ABL Facility from $250.0 million to $475.0 million to provide for future liquidity needs.

Credit Facilities

We amended the First Lien Term Facility and ABL Revolving Credit Facility (collectively “Credit Facilities”) in the second quarter of 2021. For further information on the terms of the Credit Facilities, please see Note 7, Long-Term Debt to the condensed consolidated financial statements.

Long-term debt consisted of the following (in thousands):


	October 2, 2021		December 31, 2020
First Lien Term Facility, as amended, due May 28, 2028	$	997,500	$	957,985
Incremental First Lien Term Facility, due August 4, 2026	—		150,000
Second Lien Term Facility	—		205,000
ABL Revolving Credit Facility, as amended, term ending on June 1, 2026	—		—
Capital lease obligations	9,071		9,732
Subtotal	$	1,006,571	$	1,322,717
Less: Current portion of the long-term debt	(11,992)		(2,768)
Less: Unamortized debt issuance costs	(18,461)		(19,693)
Total	$	976,118	$	1,300,256

ABL Revolving Credit Facility

On June 1, 2021, the Company amended its existing ABL Revolving Credit Facility to increase the aggregate amount of the revolving loan commitments 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 in North 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 our Canada and Spain subsidiaries. A portion of the ABL Revolving Credit Facility not to exceed $50 million is available for the issuance of letters of credit in U.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 has been extended to June 1, 2026. The borrowings under the ABL Revolving Credit Facility bear interest at a rate equal to LIBOR or a base rate plus a margin of between 1.25% to 1.75% or 0.25% to 0.75% respectively, which are unchanged from the previous ABL Revolving Credit Facility. In addition, we have the option to increase the ABL Revolving Credit Facility, subject to certain conditions, including the commitment of the participating lenders.

For the three months ended October 2, 2021, the average borrowing base under the ABL Revolving Credit Facility was $120.7 million and the average loan balance outstanding was zero. As of October 2, 2021, the loan balance was zero with a borrowing availability of $106.5 million.

For the year ended December 31, 2020, the average borrowing base under the ABL Revolving Credit Facility was $149.5 million and the average loan balance outstanding was $51.7 million. As of December 31, 2020 the loan balance was zero with a borrowing availability of $87.0 million. During the year ended December 31, 2020, the effective interest rate was 4.74%.

First Lien Term Facilities

During the nine months ended October 2, 2021, the company made $8.0 million and $356.6 million of voluntary term loan repayments on February 19, 2021 and March 19, 2021, respectively. The total voluntary loan repayments made in the nine months ended October 2, 2021 was $364.6 million. The March 19, 2021 repayment was funded with the net proceeds received from the IPO, of which (i) $205.0 million was used to repay the outstanding borrowings under the Company’s Second Lien Term Facility in full, (ii) $131.1 million was used to repay borrowings under the Company’s First Lien Term Facility and (iii) $20.5 million was used to repay the borrowings under the Incremental First Lien Term Facility. The $8.0 million voluntary repayment on February 19, 2021 was applied to the First Lien Term Facility and the incremental First Lien Term Facility on a pro rata basis. The Company recorded $5.8 million of debt extinguishment loss related to the write off of unamortized deferred financing costs as a result of the partial repayments of the First Lien Term Facility and Incremental First Lien Term Facility.

As of October 2, 2021 the balance outstanding under the First Lien Term Facility was $997.5 million and the effective interest rate, net of the interest rate hedge, was 4.09%. The Incremental First Lien Term Facility was paid off as part of the refinancing of our Credit Facilities.

As of December 31, 2020 the balance outstanding under the First Lien Term Facility was $958.0 million and the effective interest rate, net of the interest rate hedge, was 5.16%. The balance outstanding under the Incremental First Lien Term Facility was $150.0 million and the effective interest rate was 4.93%.

Second Lien Term Facility

During the nine months ended October 2, 2021, we made $364.6 million of voluntary term loan repayments of which $205.0 million was used to repay outstanding borrowings under the Company’s Second Lien Term Facility in full. As of December 31, 2020, the balance outstanding under the Second Lien Term Facility was $205.0 million and the effective interest rate, net of the interest rate hedge, was 9.98%.

Covenant Compliance

The First Lien Term Facility and ABL Revolving Credit Facility (collectively, “Credit Facilities”) contain various restrictions, covenants and collateral requirements. As of October 2, 2021, we were in compliance with all covenants under the Credit Facilities.

Sources and Uses of Cash

Following is a summary of our cash flows from operating, investing, and financing activities:


(In thousands)	Nine months ended				Increase (Decrease)		Percentage Change
	October 2, 2021		September 26, 2020
Net cash provided by operating activities	$	199,163	$	226,435	$	(27,272)	(12.0)	%
Net cash used in investing activities	$	(19,172)	$	(12,771)	(6,401)		(50.1)	%
Net cash provided (used) by financing activities	$	3,187	$	(6,142)	9,329		151.9	%
Effect of exchange rate changes on cash and cash equivalents and restricted cash	$	(1,505)	$	1,137	(2,642)		(232.4)	%
Change in cash and cash equivalents and restricted cash	$	181,673	$	208,659	$	(26,986)	(12.9)	%

Net cash provided by operating activities

Net cash provided by operating activities decreased to $199.2 million for the nine months ended October 2, 2021 from $226.4 million for the nine months ended September 26, 2020, a decrease of $27.3 million, or (12.0)%. The decrease was primarily driven by a $168.6 million increase in net working capital driven by strategic inventory purchases to support strong demand coupled with inflationary impact to raw materials and longer transit time as a result of supply chain bottlenecks, and higher accounts receivables resulting from growth in net sales and lower collections from early buy program during the Third Quarter of 2021 as compared to prior year due to the fiscal calendar difference. This impact on working capital was partially offset by an increase in net income of $116.5 million and an increase in non-cash adjustments of $24.9 million.

Net cash used in investing activities

Net cash used in investing activities was $19.2 million for the nine months ended October 2, 2021 compared to $12.8 million for the nine months ended September 26, 2020, an increase of $6.4 million, or (50.1)%. The increase was primarily driven by increased capital expenditures in property, plant and equipment of $5.4 million to support production capacity ramp up and a new distribution center in North Carolina.

Net cash provided (used) by financing activities

Net cash provided (used) by financing activities increased to $3.2 million for the nine months ended October 2, 2021 from $(6.1) million for the nine months ended September 26, 2020, an increase of $9.3 million, or 151.9%. This increase is primarily due to net proceeds of $351.3 million from the IPO and proceeds from new borrowings of $51.7 million, partially offset by the payment of long-term debt of $367.1 million.

Off-Balance Sheet Arrangements

We had $4.7 million and $4.4 million of outstanding letters of credit on our ABL Revolving Credit Facility as of October 2, 2021 and December 31, 2020, respectively.

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 amounts reported therein. The estimates that require management’s most difficult, subjective or complex judgments are described in our IPO Prospectus and remain unchanged through the first nine months of 2021.

Customer Rebates

Many of our major customer agreements provide for rebates upon achievement of various performance targets. We account for customer rebates as a reduction of gross sales with a corresponding offset to accounts receivable. We estimate the rebates based on our latest projection of customer performance. We update the estimates regularly to reflect any changes to the projection of customer performance for the applicable period.

Goodwill and Indefinite Lived Intangibles

We review goodwill and indefinite lived intangible assets for impairment annually or on an interim basis whenever events or changes in circumstances indicate the fair value of such assets may be below their carrying amount. For goodwill, we may first make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value. The qualitative impairment assessment includes considering various factors including macroeconomic conditions, industry and market conditions, cost factors, and any reporting unit specific events. If it is determined through the qualitative assessment that the reporting unit’s fair value is more likely than not greater than its carrying value, the quantitative impairment assessment is not required. If the qualitative assessment indicates it is more likely than not that the reporting unit’s fair value is no greater than its carrying value, we must perform a quantitative impairment assessment. If it is determined a quantitative assessment is necessary, we would compare the fair value of the reporting unit to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss. Fair value of the reportable unit is estimated using a discounted six-year projected cash flow analyses and a terminal value calculation at the end of the six-year period.

Similar to the test for impairment of goodwill, we may first make a qualitative assessment of whether it is more likely than not that an indefinite lived intangible assets’ fair value is less than its carrying value to determine whether it is necessary to perform a quantitative impairment assessment. If it is determined a quantitative assessment is necessary, we would compare their estimated fair values to their carrying values. Fair value is generally estimated using discounted cash flows or relief from royalty approaches. We would recognize an impairment charge when the estimated fair value of the indefinite lived intangible asset is less than its carrying value. We annually evaluate whether the trade names continue to have an indefinite life.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and tax bases of existing assets and liabilities. Deferred tax assets, including the benefit of net operating loss and tax credit carryforwards, are evaluated based on the guidelines for realization and are reduced by a valuation allowance if it is deemed more likely than not that such assets will not be realized. We consider several factors in evaluating the realizability of our deferred tax assets, including the nature, frequency and severity of recent losses, the remaining years available for carryforwards, changes in tax laws, the future profitability of the operations in the jurisdiction, and tax planning strategies.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. On a quarterly basis, we evaluate whether it is more likely than not that our deferred tax assets will be realized in the future and conclude whether a valuation allowance must be established.

Stock-Based Compensation

We recognize stock-based compensation expense for awards of equity instruments based on the grant-date fair value of those awards. The grant-date fair value of the award is recognized as compensation expense ratably over the requisite service period, which generally equals the vesting period of the award. We may also grant performance-based stock options. The grant-date fair value of the performance-based stock options is recognized as compensation expense once it is probable that the performance condition will be achieved. We record actual forfeitures in the period in which the forfeiture occurs. We use the Black-Scholes option pricing model to estimate the grant-date fair value of option awards.

Warranties

We provide base warranties on the products we sell for specific periods of time, which vary depending upon the type of product and the geographic location of its sale. Pursuant to these warranties, we will repair, replace or remodel all parts that are defective in factory-supplied materials or workmanship. We accrue the estimated cost of warranty coverages at the time of sale using historical information regarding the nature, frequency, and average cost of claims for each product. We then compare the resulting accruals with present spending rates to assess whether the balances are adequate to meet expected future obligations.

Based on this data, we update the estimates as necessary.

Inventory Valuation

Inventories consist of merchandise held for sale and are stated at the lower of cost or net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recorded in cost of sales in our unaudited condensed consolidated statements of operations and comprehensive income in the period in which it occurs. We provide provisions for losses related to inventories based on historical purchase cost, selling price, margin, and current business trends. The estimates have calculations that require us to make assumptions based on the current rate of sales, age, salability of inventory, and profitability of inventory, all of which may be affected by changes in merchandising mix and consumer preferences. We do not believe there is a reasonable likelihood that there will be a material change in the assumptions we use to calculate inventory provisions. However, if actual results are not consistent with our estimates and assumptions, we may be exposed to losses that could be material. We review and update these reserves on a quarterly basis.

Due to the uncertainty and potential volatility of the factors used in establishing estimates, changes in assumptions could materially affect our financial condition and results of operations.

Recently Issued Accounting Standards

We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our unaudited condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

See Note 2. Significant Accounting Policies to our unaudited condensed consolidated financial statements for additional information.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. We

are exposed to various market risks, including changes in interest rates and foreign currency rates. Periodically, we use derivative financial instruments to manage or reduce the impact of changes in interest rates and foreign currency rates. Counterparties to all derivative contracts are major financial institutions. All instruments are entered into for other than trading purposes.

There have been no material changes in the foreign currency exchange risk or interest rate risk during the nine months ended October 2, 2021 from what we reported in the IPO Prospectus.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating such controls and procedures, the Company recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As required by Rule 13a-15(b) of the Exchange Act, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are not effective at October 2, 2021, due to the material weaknesses in internal control over financial reporting as described in our IPO Prospectus.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

Continuing Material Weakness

We continue to have a material weakness in our internal control over financial reporting as disclosed in the IPO Prospectus, in that the Company did not design and maintain effective controls over the accounting for certain aspects of our financial statements. We do not know the specific time frame needed to fully remediate the material weaknesses identified. These control deficiencies, in aggregate, could result in a misstatement of the Company’s aforementioned accounts and disclosures that would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that these control deficiencies, in aggregate, constitute a material weakness.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal control over financial reporting during the three months ended October 2, 2021 that had materially affected, or are reasonably likely to material affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We have been, and in the future may be, made a party to litigation arising in the ordinary course of our business, including

those relating to commercial or contractual disputes with suppliers, customers or parties to acquisitions and divestitures, intellectual property matters, product liability, the use or installation of our products, consumer matters, employment and labor matters, and environmental, safety and health matters, including claims based on alleged exposure to asbestos-containing

product components. We believe that we are not currently party to any legal proceeding that would be expected, either individually or in the aggregate, to have a material adverse effect on our business or financial condition.

We periodically reexamine our estimates of probable liabilities and any associated expenses and receivables and make appropriate adjustments to such estimates based on experience and developments in litigation. As a result, the current estimates of the potential impact on our consolidated financial position, results of operations and cash flows for the proceedings and claims described in the notes to our consolidated financial statements could change in the future. Regardless of outcome, legal proceedings can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Pentair Litigation

The Company is presently a defendant in a set of consolidated patent infringement actions brought by Pentair Water Pool and

Spa, Inc. and Danfoss Drives A/S (Civil Nos. 5:11-cv-459-D and 5:12-cv-251-D), pending in the United States District Court for the Eastern District of North Carolina.

See Footnote 12. Commitments and Contingencies to these unaudited condensed consolidated financial statements for additional information.

ITEM 1A. RISK FACTORS

An investment in our common stock involves risks. For a detailed discussion of the risks that affect our business please refer to the section titled "Risk Factors" in the IPO Prospectus, as filed with the SEC on March 12, 2021. Other than as noted below, there have been no material changes to our risk factors as previously disclosed in the IPO Prospectus.

The COVID-19 pandemic and associated responses could adversely impact our business, operations, financial condition, results of operations or cash flows.

While we believe that the COVID-19 pandemic has only reinforced existing pool industry growth trends and has not had a significant impact to our cost structure, recent supply chain disruptions caused by the pandemic and associated responses to it have impacted our business, operations, financial condition, results of operations and cash flows.

Early in the pandemic, certain of our suppliers faced challenges and were not able to timely deliver the quantities of raw materials or components we required. This negatively affected our production capabilities in the second quarter of fiscal 2020. During the third quarter of fiscal 2020 we secured secondary sources of supply and were able to return production to full capabilities. Continued restrictions and disruption of transportation, including reduced availability of air transport, port closures and increased border controls or closures, have resulted in higher costs and delays, both for obtaining raw materials and components and shipping finished goods to customers. Beginning in the third quarter of fiscal 2021, these supply chain disruptions escalated, which has had an impact on our profitability. However, if the COVID-19 pandemic is prolonged or worsens, we could experience further supply chain disruptions or delays that could have a material impact on our business.

Our North American operations are and have been continuously open since the start of the COVID-19 pandemic as water sanitization has been designated as an essential business in almost all of our markets. As such we have implemented the necessary steps to protect our manufacturing and distribution facilities to ensure we have continuity of production and supply to our customers. While we did experience in the early months of the pandemic partial or full facility closure for cleaning and sanitization, all of our manufacturing and distribution facilities are currently operational. However, a future shutdown or reduction of our manufacturing or distribution facilities as a result of the pandemic could have a negative impact on our operations, inventory, results of operations or cash flows.

The COVID-19 pandemic caused a global economic slowdown. Deteriorating economic and political conditions caused by the COVID-19 pandemic, such as increased unemployment, decreased capital spending, declines in consumer confidence, or economic slowdowns or recessions, could cause a decrease in demand for our products. In addition, a prolonged or worsened

COVID-19 pandemic could lead to the shutdown or material reduction of pool construction and repair, replacement and remodeling activity, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. While we have experienced higher demand in our pool business as pool owners sheltered-in-place and have spent more time at home as a result of the COVID-19 pandemic, such growth may not be sustainable and may not be repeated in future periods. Furthermore, even if growth in demand continues, we may not be able to meet that demand due to production and capacity challenges.

The severity, magnitude and duration of the current COVID-19 pandemic is uncertain, rapidly changing and hard to predict. We may not be able respond to the impacts of the COVID-19 pandemic on a timely basis to prevent near- or long-term adverse impacts to our results of operations. Any negative impact on our business, financial condition, results of operations and cash flows cannot be reasonably estimated at this time, but the COVID-19 pandemic could lead to extended disruption of economic activity and the impact on our business, financial condition, results of operations and cash flows could be material.

Item 6. Exhibits

Description

31.1

Certification of Chief Executive Officer of Hayward Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer of Hayward Holdings, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer of Hayward Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer of Hayward Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Label Linkbase Document.

101.PRE

XBRL Taxonomy Presentation Linkbase Document.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this day of October 27, 2021.


			HAYWARD HOLDINGS, INC.

			By:			/s/
			Name:			Eifion Jones
			Title:			Senior Vice President & Chief Financial Officer