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 1, 2022

OR

☐			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)

1415 Vantage Park Drive

Suite 400

Charlotte, NC

(Address of Principal Executive

Office)

82-2060643

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

28203

(Zip Code)

(704) 285-5445

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 every Interactive Data File required to be submitted 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 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  ☒

The registrant had outstanding 211,276,558 shares of common stock as of October 31, 2022.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q of Hayward Holdings, Inc. (“Holdings,” the “Company,” “we” or “us”) contains certain “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relating to us 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.

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.

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, including as a result of the COVID-19 pandemic;

• 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, adverse weather conditions 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;

• our ability to realize anticipated cost savings from restructuring activities;

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

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• 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, including risks associated with geopolitical conflict;

• 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;

• the impact of product manufacturing disruptions, including as a result of catastrophic and other events beyond our     businesses, including risks associated with geopolitical conflict;

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

• other factors set forth in the respective “Risk Factors” section of this Quarterly Report on Form 10-Q and of our Annual Report on Form 10-K for the year ended December 31, 2021.         

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.

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TABLE OF CONTENTS

												Page
PART I—FINANCIAL INFORMATION
			ITEM 1.			Financial Statements (unaudited)						1
						Unaudited Condensed Consolidated Balance Sheets						1
						Unaudited Condensed Consolidated Statements of Operations						2
						Unaudited Condensed Consolidated Statements of Comprehensive Income						3
						Unaudited Condensed Consolidated Statements of Changes in Redeemable Stock and Stockholders' Equity						4
						Unaudited Condensed Consolidated Statements of Cash Flows						6
						Notes to Unaudited Condensed Consolidated Financial Statements						8
						Note 1 Nature of Operations and Organization						8
						Note 2 Significant Accounting Policies						8
						Note 3 Revenue						9
						Note 4 Inventories						9
						Note 5 Accrued Expenses and Other Liabilities						9
						Note 6 Income Taxes						10
						Note 7 Long-Term Debt						11
						Note 8 Derivatives and Hedging Transactions						11
						Note 9 Fair Value Measurements						12
						Note 10 Segments and Related Information						13
						Note 11 Earnings Per Share						14
						Note 12 Commitments and Contingencies						15
						Note 13 Leases						15
						Note 14 Stockholders’ Equity						15
						Note 15 Stock-based Compensation						16
						Note 16 Acquisitions and Restructuring						17
						Note 17 Related-Party Transactions						19
						Note 18 Subsequent Events						19
			ITEM 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations						20
			ITEM 3.			Quantitative and Qualitative Disclosures About Market Risk						36
			ITEM 4.			Controls and Procedures						36
PART II—OTHER INFORMATION
			ITEM 1.			Legal Proceedings						38
			ITEM 1A.			Risk Factors						38
			ITEM 2.			Unregistered Sales of Equity Securities and Use of Proceeds						39
			ITEM 6.			Exhibits						40
SIGNATURES												41

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Hayward Holdings, Inc.

Unaudited Condensed Consolidated Balance Sheets

(Dollars in thousands, except per share data)

						October 1, 2022						December 31, 2021
Assets
Current assets
Cash and cash equivalents						$	72,907					$	265,796
Accounts receivable, net of allowances of $2,872 and $2,003, respectively						108,543						208,112
Inventories, net						313,379						233,449
Prepaid expenses						16,051						12,459
Other current assets						51,368						30,705
Total current assets						562,248						750,521
Property, plant, and equipment, net of accumulated depreciation of $76,600 and $67,366, respectively						148,428						146,754
Goodwill						927,055						924,264
Trademark						736,000						736,000
Customer relationships, net						236,321						242,854
Other intangibles, net						108,983						103,192
Other non-current assets						111,363						74,885
Total assets						$	2,830,398					$	2,978,470
Liabilities and Stockholders' Equity
Current liabilities
Current portion of the long-term debt						$	11,957					$	12,155
Accounts payable						65,354						87,445
Accrued expenses and other liabilities						152,011						190,378
Income taxes payable						—						13,886
Total current liabilities						229,322						303,864
Long-term debt, net						1,067,002						973,124
Deferred tax liabilities, net						266,290						262,378
Other non-current liabilities						71,523						69,591
Total liabilities						1,634,137						1,608,957
Commitments and contingencies (Note 12)
Stockholders' equity
Preferred stock, $0.001 par value, 100,000,000 authorized, no shares issued or outstanding as of October 1, 2022 and December 31, 2021						—						—
Common stock $0.001 par value, 750,000,000 authorized; 239,942,927 issued and 211,276,558 outstanding at October 1, 2022; 238,432,216 issued and 233,056,799 outstanding at December 31, 2021						240						238
Additional paid-in capital						1,067,148						1,058,724
Common stock in treasury; 28,666,369 and 5,375,417 at October 1, 2022 and December 31, 2021, respectively						(357,408)						(14,066)
Retained earnings						484,254						320,875
Accumulated other comprehensive income						2,027						3,742
Total stockholders' equity						1,196,261						1,369,513
Total liabilities, redeemable stock, and stockholders' equity						$	2,830,398					$	2,978,470

See accompanying notes to the unaudited condensed consolidated financial statements.

1

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Hayward Holdings, Inc.

Unaudited Condensed Consolidated Statements of Operations

(Dollars in thousands, except per share data)

						Three Months Ended												Nine Months Ended
						October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Net sales						$	245,267					$	350,624					$	1,055,169					$	1,049,409
Cost of sales						137,483						188,170						567,626						559,033
Gross profit						107,784						162,454						487,543						490,376
Selling, general, and administrative expense						50,493						68,807						188,297						207,129
Research, development, and engineering expense						6,142						6,370						16,411						16,187
Acquisition and restructuring related expense						2,288						783						9,499						2,452
Amortization of intangible assets						8,521						8,700						23,828						26,162
Operating income						40,340						77,794						249,508						238,446
Interest expense, net						13,938						11,050						35,105						42,297
Loss on debt extinguishment						—						—						—						9,418
Other (income) expense, net						(234)						2,087						3,056						4,655
Total other expense						13,704						13,137						38,161						56,370
Income from operations before income taxes						26,636						64,657						211,347						182,076
Provision for income taxes						3,549						14,336						47,968						42,072
Net income						$	23,087					$	50,321					$	163,379					$	140,004
Earnings per share
Basic						$	0.11					$	0.22					$	0.74					$	0.24
Diluted						$	0.10					$	0.21					$	0.70					$	0.23
Weighted average common shares outstanding
Basic						212,905,429						231,339,007						222,009,824						172,820,430
Diluted						222,006,615						243,783,501						232,131,395						185,673,814

See accompanying notes to the unaudited condensed consolidated financial statements.

2

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Hayward Holdings, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income

(In thousands)

						Three Months Ended
						October 1, 2022																		October 2, 2021
						Gross						Taxes						Net						Gross						Taxes						Net
Net income																		$	23,087																	$	50,321
Other comprehensive income (loss):
Foreign currency translation adjustments						(15,589)						—						(15,589)						(5,312)						—						(5,312)
Change in fair value of derivatives						19,053						(4,763)						14,290						1,599						(395)						1,204
Comprehensive income																		$	21,788																	$	46,213
						Nine Months Ended
						October 1, 2022																		October 2, 2021
						Gross						Taxes						Net						Gross						Taxes						Net
Net income																		$	163,379																	$	140,004
Other comprehensive income (loss):
Foreign currency translation adjustments						(27,069)						—						(27,069)						(549)						(763)						(1,312)
Change in fair value of derivatives						33,805						(8,451)						25,354						6,524						(1,620)						4,904
Comprehensive income																		$	161,664																	$	143,596

See accompanying notes to the unaudited condensed consolidated financial statements.

3

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Hayward Holdings, Inc.

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

(Dollars in thousands)

															Common Stock												Additional Paid-in Capital						Treasury Stock						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Total Stockholders' Equity
																					Shares									Amount
Balance as of December 31, 2021																					233,056,799						$	238					$	1,058,724					$	(14,066)					$	320,875					$	3,742					$	1,369,513
Net income																					—						—						—						—						74,032						—						74,032
Stock-based compensation																					—						—						1,641						—						—						—						1,641
Issuance of Common Stock for compensation plans																					403,158						1						427						—						—						—						428
Repurchase of stock																					(4,080,000)						—						—						(80,784)						—						—						(80,784)
Treasury stock purchase for tax withholdings on stock exercises																					—						—						—						(23)						—						—						(23)
Other comprehensive income																					—						—						—						—						—						8,113						8,113
Balance as of April 2, 2022																					229,379,957						$	239					$	1,060,792					$	(94,873)					$	394,907					$	11,855					$	1,372,920
Net income																					—						—						—						—						66,260						—						66,260
Stock-based compensation																					—						—						1,991						—						—						—						1,991
Issuance of Common Stock for compensation plans																					748,247						1						1,330						—						—						—						1,331
Repurchase of stock																					(14,441,118)						—						—						(212,352)						—						—						(212,352)
Other comprehensive income																					—						—						—						—						—						(8,529)						(8,529)
Balance as of July 2, 2022																					215,687,086						$	240					$	1,064,113					$	(307,225)					$	461,167					$	3,326					$	1,221,621
Net income																					—						—						—						—						23,087						—						23,087
Stock-based compensation																					—						—						2,155						—						—						—						2,155
Issuance of Common Stock for compensation plans																					359,306						—						880						—						—						—						880
Repurchase of stock																					(4,769,834)						—						—						(50,183)						—						—						(50,183)
Other comprehensive income																					—						—						—						—						—						(1,299)						(1,299)
Balance as of October 1, 2022																					211,276,558						$	240					$	1,067,148					$	(357,408)					$	484,254					$	2,027					$	1,196,261

See accompanying notes to the unaudited condensed consolidated financial statements.

4

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Hayward Holdings, Inc.

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

(Dollars in thousands)

						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 as of 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 Class A stock						186						—									—						—						221						—						—						—						221
Stock-based compensation						—						—									—						—						10,634						—						—						—						10,634
Cash distributions						—						—									—						—						—						—						(41)						—						(41)
Repurchase of stock						(186)						—									—						—						—						(214)						—						—						(214)
Other comprehensive income						—						—									—						—						—						—						—						3,650						3,650
Balance as of 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
Repurchase of stock						—						—									(19,500)						—						—						(768)						—						—						(768)
Other comprehensive income						—						—									—						—						—						—						—						4,050						4,050
Balance as of 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)
Other comprehensive income						—						—									—						—						—						—						—						(4,108)						(4,108)
Balance as of 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.

5

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Hayward Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

						Nine Months Ended
						October 1, 2022						October 2, 2021
Cash flows from operating activities
Net income						$	163,379					$	140,004
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation						13,931						14,096
Amortization of intangible assets						28,437						30,903
Amortization of deferred debt issuance fees						2,312						2,771
Stock-based compensation						5,787						13,308
Deferred income taxes						(4,221)						(3,014)
Allowance for bad debts						869						584
Loss on debt extinguishment						—						9,418
Loss on disposal of property, plant and equipment						5,550						3,743
Changes in operating assets and liabilities
Accounts receivable						96,874						(9,115)
Inventories						(70,469)						(66,027)
Other current and non-current assets						(16,902)						(10,699)
Accounts payable						(24,472)						9,671
Accrued expenses and other liabilities						(57,411)						63,520
Net cash provided by operating activities						143,664						199,163
Cash flows from investing activities
Purchases of property, plant, and equipment						(23,533)						(19,098)
Purchases of intangibles						—						(818)
Acquisitions, net of cash acquired						(61,337)						—
Proceeds from sale of property, plant, and equipment						4						25
Proceeds from settlements of investment currency hedge						—						719
Net cash used in investing activities						(84,866)						(19,172)
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						(343,319)						(10,530)
Cash paid for taxes from share withholdings						(871)						(10,174)
Proceeds from issuance of long-term debt						—						51,659
Debt issuance costs						—						(12,422)
Payments of long-term debt						(7,500)						(367,144)
Proceeds from revolving credit facility						150,000						68,000
Payments on revolving credit facility						(50,000)						(68,000)
Proceeds from issuance of short term debt						8,119						—
Payments of short term debt						(2,849)						—
Other, net						473						522
Net cash (used in) provided by financing activities						(245,947)						3,187
Effect of exchange rate changes on cash and cash equivalents and restricted cash						(5,740)						(1,505)
Change in cash and cash equivalents and restricted cash						(192,889)						181,673
Cash and cash equivalents and restricted cash, beginning of period						265,796						115,294
Cash and cash equivalents and restricted cash, end of period						$	72,907					$	296,967

See accompanying notes to the unaudited condensed consolidated financial statements.

6

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Hayward Holdings, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

Supplemental disclosures of cash flow information
Cash paid-interest						$	32,725					$	53,686
Cash paid-income taxes						93,503						39,242
Equipment financed under finance leases						1,603						—

See accompanying notes to the unaudited condensed consolidated financial statements.

7

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Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Nature of Operations and Organization

Hayward Holdings, Inc. (“Holdings,” the “Company,” “we” or “us”) is a global designer, manufacturer, and marketer of a broad portfolio of pool equipment and associated automation systems. The Company has nine manufacturing facilities worldwide, which are located in North Carolina, Tennessee, Rhode Island, Florida, California, Spain (three) 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.

We establish actual interim closing dates using a fiscal calendar in which 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 2022 are April 2, July 2, and October 1, compared to the respective April 3, July 3, and October 2, 2021 dates. We had one fewer working day in the nine months ended October 1, 2022 than in the respective 2021 period.

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, 2021. The results of operations for the three and nine months ended October 1, 2022 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2022.

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. Certain prior-period amounts have been reclassified for comparative purposes to conform to the current presentation.

Recent Accounting Pronouncements Not Yet Adopted

Reference Rate Reform

In March 2020, the Financial Accounting Standards Board (“FASB”) issued guidance that provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by the transition away from reference rates expected to be discontinued to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. The Company is currently evaluating the potential effects of the adoption of this guidance and has begun to transition some debt instruments to an alternative reference rate (see Note 18. Subsequent Events).

Recently Adopted Accounting Standards

Accounting for Leases

In February 2016, the FASB issued ASU 2016-02, Leases (“Topic 842” or the “new standard”), and issued subsequent amendments to the initial guidance thereafter. The standard became effective for the Company on December 31, 2021 because the Company ceased to be an Emerging Growth Company (“EGC”) under applicable rules of the SEC as of December 31, 2021, and the Company retrospectively adopted the standard as of January 1, 2021. The impact upon adoption as of January 1, 2021 resulted in the initial recognition of lease liabilities based on the present value of the remaining minimum rental payments for existing operating leases of approximately $48.6 million and corresponding right-of-use (“ROU”) assets of approximately $43.9 million on the consolidated balance sheets. The ROU assets are net of $4.7 million of liabilities for deferred rent and unamortized landlord lease incentives that were previously recorded as other noncurrent liabilities. The adoption did not have a material impact on the unaudited condensed consolidated statements of operations and comprehensive income or unaudited condensed consolidated statements of cash flows.

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Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

3. Revenue

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

						Three Months Ended												Nine Months Ended
						October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Product groups
Residential pool						$	223,661					$	330,898					$	990,693					$	990,977
Commercial pool						8,370						7,360						27,262						23,297
Industrial flow control						13,236						12,366						37,214						35,135
Total						$	245,267					$	350,624					$	1,055,169					$	1,049,409
Geographic
United States						$	190,849					$	261,223					$	795,781					$	748,726
Canada						12,825						37,013						96,269						114,550
Europe						18,674						32,726						100,062						137,642
Rest of World						22,919						19,662						63,057						48,491
Total international revenue						54,418						89,401						259,388						300,683
Total						$	245,267					$	350,624					$	1,055,169					$	1,049,409

4. Inventories

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

						October 1, 2022						December 31, 2021
Raw materials						$	134,413					$	124,545
Work in progress						18,688						22,669
Finished goods						160,278						86,235
Total						$	313,379					$	233,449

5. Accrued Expenses and Other Liabilities

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

						October 1, 2022												December 31, 2021
Selling, promotional and advertising						$	46,538											$	41,975
Employee compensation and benefits						18,768												49,552
Warranty reserve						20,524												24,174
Inventory purchases						12,135												18,606
Insurance reserve						10,656												8,842
Deferred income						8,854												8,074
Operating lease liability - short term						8,980												7,546
Business restructuring costs						1,619												1,397
Professional fees						1,657												2,027
Payroll taxes						3,238												4,522
Short-term notes payable						5,270												—
Other accrued liabilities						13,772												23,663
Total						$	152,011											$	190,378

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.

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Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

Balance at December 31, 2021						$	24,174
Accrual for warranties issued during the period						9,413
Payments						(6,399)
Balance at April 2, 2022						27,188
Accrual for warranties issued during the period						8,784
Payments						(9,053)
Balance at July 2, 2022						26,919
Accrual for warranties issued during the period						6,199
Payments						(12,594)
Balance at October 1, 2022						$	20,524

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 1, 2022 were $6.2 million and $24.4 million, respectively, and $7.8 million and $27.8 million, respectively, for the three and nine months ended October 2, 2021.

6. Income Taxes

The Company’s effective tax rate for the three months ended October 1, 2022 and three months ended October 2, 2021 was 13.3% and 22.2%, respectively. The change in the Company’s effective tax rate was primarily due to discrete items resulting from the revaluation of deferred tax liabilities as a result of state tax law changes and the tax benefit resulting from the exercise of stock options.

The Company’s effective tax rate for the nine months ended October 1, 2022 and nine months ended October 2, 2021 was 22.7% and 23.1%, respectively. The change in the Company’s effective tax rate was primarily due to discrete items resulting from the state tax law changes and the tax benefit resulting from the exercise of stock options. In addition, the Company's effective tax rate for the nine months ended October 2, 2021 included a benefit for the release of the valuation allowance on the deferred tax assets of the France subsidiary.

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 1, 2022 or October 2, 2021.

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,

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Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 1, 2022						December 31, 2021
First Lien Term Facility, due May 28, 2028						$	987,500					$	995,000
ABL Revolving Credit Facility						100,000						—
Finance lease obligations						7,050						7,780
Subtotal						1,094,550						1,002,780
Less: Current portion of the long-term debt						(11,957)						(12,155)
Less: Unamortized debt issuance costs						(15,591)						(17,501)
Total						$	1,067,002					$	973,124

The Company's First Lien Term Facility and ABL Revolving Credit Facility (collectively “Credit Facilities”) contain collateral requirements, restrictions, and covenants, including restrictions under the First Lien Term Facility on the Company's ability to pay dividends on the Common Stock. Under the agreement governing the First Lien Credit Facility (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 Leverage Ratio is less than or equal to 2.5x, to 50 percent if the First Lien Leverage Ratio is greater than 3.0x less certain allowed deductions. All outstanding principal under the First Lien Credit Agreement is due at maturity on May 28, 2028. The initial maturity date under the ABL Revolving Credit Facility (“ABL Facility”) is June 1, 2026. As of October 1, 2022, the Company was 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. Other comprehensive income or loss is reclassified into current period income when the hedged interest expense affects earnings.

In the first quarter of 2022, the Company entered into interest rate swap agreements that effectively convert an initial notional amount of $500.0 million of its variable-rate debt obligations to fixed-rate debt. As of October 1, 2022 and October 2, 2021, the Company was a party to interest rate swap agreements of a notional amount of $500.0 million and zero, respectively.

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. These contracts are marked-to-market with the resulting gains and losses recognized in earnings. For the three months ended October 1, 2022 and October 2, 2021, the Company recognized $4.5 million of income and $0.4 million of expense, respectively, and for the nine months ended October 1, 2022 and October 2, 2021, the Company recognized $3.1 million of income and $0.7 million of expense, respectively, in Other (income) expense, net, related to foreign exchange contracts.

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Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

There were no outstanding net investment hedges as of October 1, 2022 or December 31, 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						Other Non-Current Assets						Accrued Expenses and Other Liabilities						Other Current Assets
			October 1, 2022																		December 31, 2021
Interest rate swaps			$	—					$	33,806					$	—					$	—
Foreign exchange contracts			4,025						—						—						410
Total			$	4,025					$	33,806					$	—					$	410

The following tables present the effects of derivative instruments by contract type in accumulated other comprehensive income (“AOCI”) in the Company's unaudited condensed consolidated statements of 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
			Three Months Ended												Three Months Ended
			October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Interest rate swaps (1)			$	14,290					$	4,860					$	122					$	(6,598)					Interest Expense
Net investment hedge			—						1,268						—						—						N/A
Total			$	14,290					$	6,128					$	122					$	(6,598)
(1) The Company estimates that $11.2 million of unrealized gains will be reclassified from accumulated other comprehensive income (loss) into earnings in the next twelve months.
			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 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Interest rate swaps			$	25,354					$	1,185					$	(2,127)					$	(1,696)					Interest Expense
Net investment hedge			—						—						—						—						N/A
Total			$	25,354					$	1,185					$	(2,127)					$	(1,696)

9. Fair Value Measurements

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.

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Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company’s interest rate swaps, foreign exchange contracts, and net investment hedges are measured in the financial statements at fair value on a recurring basis. The fair values of the interest rate swaps are estimated using industry standard valuation models using market-based observable inputs, including interest rate curves. The fair value of net investment hedges and foreign exchanges contracts are estimated using readily observable market inputs, such as quotations on forward foreign exchange points and foreign interest rates. These instruments are customary, over-the-counter contracts with various bank counterparties. Accordingly, the fair value measurements of the interest rate swaps, foreign exchange contracts and net investment hedges are categorized as Level 2.

As of October 1, 2022, the Company’s long-term debt instruments had a carrying value of $987.5 million (excluding finance leases and the ABL Facility) and a fair value of approximately $930.7 million. As of December 31, 2021, the Company’s long-term debt instruments had a carrying value of $995.0 million and a fair value of approximately $991.9 million. 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 (“NAM”) and Europe & Rest of World (“E&RW”). 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 expense (“RD&E”). The accounting policies of the segments are the same as those of Holdings.

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																		Three Months Ended
						October 1, 2022																		October 2, 2021
						North America						Europe & Rest of World						Total						North America						Europe & Rest of World						Total
External net sales						$	203,674					$	41,593					$	245,267					$	298,236					$	52,388					$	350,624
Segment income						48,704						8,789						57,493						91,920						10,582						102,502
Capital expenditures (1)						8,035						387						8,422						7,762						1,005						8,767
Depreciation (1)						3,853						196						4,049						4,253						175						4,428
Intersegment sales						3,759						47						3,806						5,897						72						5,969
						Nine Months Ended																		Nine Months Ended
						October 1, 2022																		October 2, 2021
						North America						Europe & Rest of World						Total						North America						Europe & Rest of World						Total
External net sales						$	892,050					$	163,119					$	1,055,169					$	863,276					$	186,133					$	1,049,409
Segment income						267,854						38,990						306,844						267,020						37,828						304,848
Capital expenditures (1)						18,611						1,977						20,588						17,362						1,305						18,667
Depreciation (1)						12,435						571						13,006						12,653						843						13,496
Intersegment sales						27,437						401						27,838						25,509						343						25,852

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

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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 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Total segment income						$	57,493					$	102,502					$	306,844					$	304,848
Corporate expense, net						6,344						15,225						24,009						37,788
Acquisition and restructuring related expense						2,288						783						9,499						2,452
Amortization of intangible assets						8,521						8,700						23,828						26,162
Operating income						40,340						77,794						249,508						238,446
Interest expense, net						13,938						11,050						35,105						42,297
Loss on debt extinguishment						—						—						—						9,418
Other (income) expense, net						(234)						2,087						3,056						4,655
Total other expense						13,704						13,137						38,161						56,370
Income from operations before income taxes						$	26,636					$	64,657					$	211,347					$	182,076

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 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Net income						$	23,087					$	50,321					$	163,379					$	140,004
Deemed Dividend - Class A stock redemption(a)						—						—						—						(85,541)
Dividends paid to Class C stockholders						—						—						—						(41)
Net income attributable to Class A and common stockholders, basic(b)						23,087						50,321						163,379						54,422
Net income attributable to Class A holders, basic						—						—						—						12,733
Net income attributable to common stockholders, basic						$	23,087					$	50,321					$	163,379					$	41,689
Net income attributable to Class A holders, diluted						—						$	—					$	—					$	12,046
Net income attributable to common stockholders, diluted						$	23,087					$	50,321					$	163,379					$	42,376
Weighted average number of common shares outstanding, basic						212,905,429						231,339,007						222,009,824						172,820,430
Effect of dilutive securities(c)						9,101,186						12,444,494						10,121,571						12,853,384
Weighted average number of common shares outstanding, diluted						222,006,615						243,783,501						232,131,395						185,673,814
Earnings per share attributable to common stockholders, basic						$	0.11					$	0.22					$	0.74					$	0.24
Earnings per share attributable to common stockholders, diluted						$	0.10					$	0.21					$	0.70					$	0.23

(a) For the nine months ended October 2, 2021, the non-cash deemed dividend represents the beneficial conversion feature related to the redemption of Class A shares for common shares as a consequence of the Company's initial public offering (the “IPO”).

(b) Net income attributable to Class A stockholders is impacted by the total shares of participating securities, basic and diluted, on an as converted basis.

(c) For the three months ended October 1, 2022 and October 2, 2021 there were potential common shares totaling approximately 2.5 million and 1.2 million, respectively, and for the nine months ended October 1, 2022 and October 2, 2021, there were potential common shares totaling approximately 2.2 million and 0.9 million, respectively, that were excluded from the computation of diluted EPS as the effect of inclusion of such shares would have been anti-dilutive.

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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 1, 2022, the Company does not have any significant pending litigation.

13. Leases

The Company’s operating and finance lease portfolio is described in Note 15. Leases of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021.

Supplemental cash flow information related to leases was as follows (in thousands):

			Nine Months Ended
			October 1, 2022						October 2, 2021
Right-of-use assets obtained in exchange for lease obligations:
Operating leases			$	11,941					$	3,640
Finance leases			1,531						—

Supplemental balance sheet information related to leases was as follows (in thousands):

			October 1, 2022						December 31, 2021
Operating leases
Other non-current assets			$	67,106					$	63,611
Accrued expenses and other liabilities			8,980						7,546
Other non-current liabilities			66,192						61,565
Total operating lease liabilities			75,172						69,111
Finance leases
Property, plant and equipment			10,732						9,280
Accumulated depreciation			(1,811)						(1,262)
Property, plant and equipment, net			8,921						8,017
Current maturities of long-term debt			1,957						2,155
Long-term debt			5,093						5,625
Total finance lease liabilities			$	7,050					$	7,780

14. Stockholders’ Equity

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.

Dividends paid

For the three and nine months ended October 1, 2022, no dividend was declared nor paid to the Company's common stockholders.

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Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Share Repurchases

As part of the Company’s previously announced $450 million share repurchase program, on January 24, 2022, the Company agreed to repurchase 4.08 million shares of common stock from certain affiliates of one of the Company’s controlling stockholders, CCMP Capital Advisors, LP (“CCMP”), at a price per share of $19.80, for an aggregate consideration of approximately $81 million. The price per share was approved by an independent committee of the board of the directors and is the same price at which the certain affiliates of the Company's controlling stockholders (collectively, the “Sponsors”), sold their shares in a block trade in compliance with Rule 144. Closing of this share repurchase occurred on March 11, 2022.

On May 2, 2022, the Company entered into an underwriting agreement (the “Underwriting Agreement”) by and among the Company, the underwriters named therein (the “Underwriters”) and the selling stockholders listed on Schedule B thereto (the “Selling Stockholders”), relating to the underwritten offering of Company common stock from the Selling Stockholders (the “Underwritten Offering”). As part of the Company’s previously announced $450 million share repurchase program, the Company agreed to purchase from the Underwriters 8 million shares being sold in the Underwritten Offering by certain affiliates of one of the Company’s controlling stockholders, CCMP, to the Underwriters, at a price per share of approximately $13.88, for an aggregate consideration of approximately $111 million. The price per share was approved by an independent committee of the board of the directors and is the same price at which the Underwriters agreed to purchase shares from the Selling Stockholders in the Underwritten Offering. Closing of this share repurchase occurred on May 5, 2022.

On July 26, 2022, the board of directors renewed the initial authorization of its share repurchase program such that the Company is authorized, commencing at that time, to repurchase from time to time up to an aggregate of $450 million of its common stock with such authority expiring on July 26, 2025.

During the three months ended October 1, 2022, the Company repurchased approximately 4.8 million shares of common stock on the open market at an average price per share of $10.48, for an aggregate consideration of approximately $50.0 million, as part of the Company’s previously announced share repurchase program.

For the nine months ended October 1, 2022, the Company repurchased approximately 11.2 million shares of common stock in the open market at an average price per share of $13.49, for an aggregate consideration of approximately $151.3 million, as part of the Company's previously announced share repurchase program.

For the nine months ended October 1, 2022, the Company has repurchased approximately 23.3 million shares of common stock in the open market and in privately negotiated transactions for an aggregate consideration of approximately $343.1 million. As of October 1, 2022, $400.0 million remained available for additional share repurchases under the program.

15. Stock-based Compensation

Stock-based compensation expense recorded in the unaudited condensed consolidated statements of operations for equity-classified stock-based awards for the three and nine months ended October 1, 2022 was $2.2 million and $5.8 million, respectively, and $0.8 million and $13.3 million, respectively, for the three and nine months ended October 2, 2021.

The Company has established two equity incentive plans, the 2021 Equity Incentive Plan and the 2017 Equity Incentive Plan. The Company no longer issues awards under the 2017 Equity Incentive Plan.

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.

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.

In 2022, the Company began utilizing performance-based stock units (“PSUs”) as part of its equity awards program for certain senior management and executive officers. The vesting of the PSUs will be tied to organic net revenue growth and adjusted EBITDA margin, each with a relative weighting of 50%. The PSUs will be measured over 3-year performance period with a minimum of 50% of the target awarded PSUs to be earned for threshold performance and a maximum of 200% of the target awarded PSUs to be earned for maximum performance.

During the three months ended October 1, 2022, the Company granted 66,946 options and 92,838 restricted stock units under the 2021 plan with a fair value per share of $4.11 and $11.67 respectively. During the nine months ended October 1,

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Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

2022, the Company granted 1,145,845 options, 228,368 restricted stock units and 101,215 PSUs under the 2021 Plan with a weighted-average grant-date fair value per share of $5.43, $15.12 and $16.76, respectively.

The Company determined the fair value of 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 stock options granted on March 3, 2022 and July 29, 2022 were as follows:

												March 3, 2022						July 29, 2022
Risk-free interest rate												1.78		%				2.70		%
Expected life in years												6						6
Expected dividend yield												—		%				—		%
Expected volatility												29.61		%				30.73		%

The risk-free interest rate was based on the U.S. Treasury yield curve at date of grant over the expected term of these stock options. The expected volatility was based upon comparable public company historical volatility. The expected life was based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as prescribed in the SEC’s Staff Accounting Bulletin (SAB) No. 107, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards.

16. Acquisitions and Restructuring

Acquisition and restructuring related expense, net consists of the following (in thousands):

			Three Months Ended												Nine Months Ended
			October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Business restructuring costs			$	2,288					$	783					$	6,276					$	2,452
Acquisition transaction and integration costs			—						—						3,223						—
Total			$	2,288					$	783					$	9,499					$	2,452

On March 29, 2021, the Company announced the relocation of its corporate office functions to Charlotte, North Carolina from Berkeley Heights, New Jersey. As of October 1, 2022, the Company has largely completed the relocation. The estimated severance and retention costs pertaining to this relocation are approximately $5.9 million. 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. The Company incurred approximately $4.2 million of expense related to the relocation during the nine months ended October 1, 2022.

During the three months ended October 1, 2022, the Company initiated an enterprise cost reduction program to address the current market dynamics and maintain the Company’s strong financial metrics. The initial focus was on a reduction of variable costs with specific attention to eliminating cost inefficiencies in our supply chain and reducing variable labor in our production cost base. In addition to these variable cost reductions, the Company identified structural selling, general and administrative cost reduction opportunities with initial savings commencing in the third quarter. For the three months ended October 1, 2022, the Company incurred $1.3 million of expense related to the cost reduction program. These include severance and employee benefit costs, as well as other direct separation benefit costs.

The following tables summarize the status of the Company's restructuring related expense and related liability balances (in thousands):

												2022 Activity
						Liability as of December 31, 2021						Costs Recognized						Cash Payments												Liability as of October 1, 2022
One-time termination benefits						$	1,035					$	3,609					$	(2,677)											$	1,967
Facility-related						27						337						(364)												—
Other (1)						4,374						2,330						(4,981)												1,723
Total						$	5,436					$	6,276					$	(8,022)											$	3,690

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Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(1) ‘Other’ restructuring related expense primarily consists of expenses pertaining to the relocation of the corporate headquarters.

									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			—						1,635						(1,063)												572
Other			—						68						(68)												—
Total Restructuring			$	—					$	2,452					$	(1,880)											$	572

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

Acquisitions

On June 2, 2022, the Company acquired the specialty lighting business of Halco Lighting Technologies, LLC. The acquired business includes a robust portfolio of lighting solutions serving the residential and commercial pool, spa, fountain, and landscape lighting market segments. The acquisition is included in our North America segment.

The net acquisition cost was $59.7 million. The purchase price was funded with proceeds from the ABL Facility and cash on hand. For the nine months ended October 1, 2022, transaction expenses recognized for the acquisition were $3.1 million. These expenses are included within acquisition and restructuring related costs on the Company’s unaudited condensed consolidated statements of operations.

The allocation of purchase price is still preliminary as the Company finalizes aspects of the valuation including intangible, inventory and fixed asset valuations. Preliminary estimates will be finalized within one year of the date of acquisition. The following table summarizes the consideration transferred and the preliminary allocation of the purchase price among the assets acquired and liabilities assumed, including measurement period adjustments recorded through October 1, 2022 (in thousands):

			Preliminary Allocation As of June 2, 2022												Revised Preliminary Allocation As of October 1, 2022
									Measurement Period Adjustments
Assets
Accounts receivable			$	3,905					$	—					$	3,905
Inventory			16,465						3,324						19,789
Other current assets			521						—						521
Property, plant and equipment			187						—						187
Goodwill			6,740						6,226						12,966
Identifiable intangible assets, net			39,350						(9,550)						29,800
Other noncurrent assets			13						—						13
Less: Liabilities assumed
Accounts payable			(6,091)						—						(6,091)
Accrued liabilities			(1,430)						—						(1,430)
Net assets acquired			$	59,660					$	—					$	59,660

The following table summarizes the identifiable intangible assets, net and their useful lives. The weighted average amortization period for the acquired intangible assets is 13.2 years.

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Hayward Holdings, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

			Useful life			Amount
			(in years)			(in thousands)
Customer relationships			15			$	17,100
Tradename			15			3,400
Developed technology			10			7,900
Noncompete agreements			5			1,400
Total intangible assets with definite lives						$	29,800

Goodwill is a result of the expected synergies and cross-selling opportunities this acquisition is expected to bring as well as the expected growth potential from the integration of the specialty lighting products into Hayward’s OmniLogic automation technology. The goodwill balance has been recorded to the North America reportable segment and is deductible for tax purposes.

17. Related-Party Transactions

Other than the stock repurchases described in Note 14. Stockholders’ Equity, the Company did not incur any significant related party transactions for the three and nine months ended October 1, 2022.

Prior to the IPO in March 2021, the Company incurred management fees to certain affiliates of the Company's controlling stockholders (the “Sponsors”) in the amount of $0.2 million for the nine months ended October 2, 2021. In addition, $41 thousand in Class C dividends were incurred to one Sponsor in lieu of management fees for the nine months ended October 2, 2021.

18. Subsequent Events

On October 7, 2022, the Company entered into the Third Amendment to its existing ABL Revolving Credit Facility (the “ABL Facility”) to include a $35 million First-In, Last-Out Sublimit (“FILO Sublimit”) and to replace the LIBOR based reference rate with an adjusted term Secured Overnight Financing Rate (“SOFR”). The borrowings under the ABL Facility bear interest at a rate equal to SOFR or a base rate plus a margin of between 1.25% to 1.75% or 0.25% to 0.75%, respectively, while the FILO Sublimit borrowings bear interest at a rate equal to SOFR or a base rate plus a margin of between 2.25% to 2.75% or 1.25% to 1.75%, respectively.

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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 consolidated financial statements and related notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, this discussion and analysis includes forward-looking statements that reflect our plans, estimates and beliefs and involve risks and uncertainties. As a result of many factors, including those set forth in the section “Risk Factors” in this Quarterly Report on Form 10-Q, our actual results may differ materially from those contained in or implied by any forward-looking statements. The results of operations for the three and nine months ended October 1, 2022 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending December 31, 2022.

Our Company

The Company is an industry-leading global designer, manufacturer, and marketer of a broad portfolio of pool equipment and associated automation systems. With the pool as the centerpiece of the growing outdoor living space, the pool industry has attractive market characteristics, including significant aftermarket requirements, innovation-led growth opportunities, and a favorable industry structure. We are a leader in this market with a highly-recognized brand, one of the largest installed bases of pool equipment in the world, decades-long relationships with our key channel partners and trade customers and a history of technological innovation. Our engineered products, which include various energy efficient and more environmentally sustainable offerings, enhance the pool owner’s outdoor living lifestyle while also delivering high quality water, pleasant ambiance and ease of use for the ultimate backyard experience. Aftermarket replacements and upgrades to higher value Internet of Things (“IoT”) and energy efficient models are a primary growth driver for our business.

We have an estimated North American residential pool market share of approximately 34%. We believe that we are well-positioned for future growth. On average, we have 20+ year relationships with our top 20 customers. Based upon feedback from certain representative customers and our interpretation of available industry and government data in the United States, we estimate that aftermarket sales represented approximately 80% of net sales. Aftermarket sales are not based upon our GAAP net sales results. We believe aftermarket sales are generally recurring in nature since these products are critical to the ongoing operation of pools given requirements for water quality and sanitization. Our product replacement cycle of approximately 8 to 11 years drives multiple replacement opportunities over the typical life of a pool, creating opportunities to generate aftermarket product sales as pool owners repair, remodel and upgrade their pools.

The Company has nine manufacturing facilities worldwide, which are located in North Carolina, Tennessee, Rhode Island, Florida, California, Spain (three) and China, and other facilities in the United States, Canada, France, and Australia.

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 83% and 85% of total net sales for the three months ended October 1, 2022 and October 2, 2021, respectively, and E&RW accounted for 17% and 15% of total net sales for the three months ended October 1, 2022 and October 2, 2021, respectively.

Factors Affecting the Comparability of our Results of Operations

Our results of operations for the three and nine months ended October 1, 2022 and the three and nine months ended October 2, 2021 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 2022 are April 2, July 2, and October 1, compared to the respective April 3, July 3, and October 2, 2021 dates. This resulted in one fewer working day

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in the nine months ended October 1, 2022 compared to the nine months ended October 2, 2021. Throughout this discussion we may refer to the three months ended October 1, 2022 and the three months ended October 2, 2021 as the “Third Quarter” and “Comparable Quarter,” respectively.

Impact of COVID-19

Residential pool equipment sales increased during the first two years of the COVID-19 pandemic. This increase in demand was broadly across all of our product lines as consumers refocused attention on improving the quality of the homeowner’s outdoor living experience. We believe that during this period, the pandemic reinforced existing pool industry growth trends. As the impact of the COVID-19 pandemic has lessened, we believe that these trends have somewhat abated. Although the long-term impact of the pandemic to our business is unclear, we do anticipate that the industry will resume its more normalized historical seasonal trends in the post-pandemic environment.

Cost inflation and supply shortages stemming from the COVID-19 pandemic has caused prices to increase across various sectors of the economy and we have been impacted by increases in the prices of our raw materials and other associated manufacturing costs, as discussed in further detail below.

Materials and other cost increases

We have experienced increases in the cost of raw materials and commodities. We strive for productivity improvements and implement price increases to help mitigate this impact. We expect to see continuing price volatility (primarily with respect to metals, resins, and electronic sub-assemblies) and import duty charges (primarily with respect to motors, electronics, valves and cleaner products) for some of our raw materials. We are uncertain as to the timing and impact of these market changes, but have mitigation activities in place to minimize the impact on costs.

Key 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, selling, general, and administrative expense (“SG&A”), research, development, and engineering expense (“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.”

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Results of Operations

Consolidated

The following tables summarize key components of our results of operations for the periods indicated. We derived the consolidated statements of operations for the three and nine months ended October 1, 2022 and October 2, 2021 from our unaudited condensed consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following table summarizes our results of operations:

(In thousands)						Three Months Ended												Nine Months Ended
						October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Net sales						$	245,267					$	350,624					$	1,055,169					$	1,049,409
Cost of sales						137,483						188,170						567,626						559,033
Gross profit						107,784						162,454						487,543						490,376
Selling, general, and administrative expense						50,493						68,807						188,297						207,129
Research, development, and engineering expense						6,142						6,370						16,411						16,187
Acquisition and restructuring related expense						2,288						783						9,499						2,452
Amortization of intangible assets						8,521						8,700						23,828						26,162
Operating income						40,340						77,794						249,508						238,446
Interest expense, net						13,938						11,050						35,105						42,297
Loss on debt extinguishment						—						—						—						9,418
Other (income) expense, net						(234)						2,087						3,056						4,655
Total other expense						13,704						13,137						38,161						56,370
Income from operations before income taxes						26,636						64,657						211,347						182,076
Provision for income taxes						3,549						14,336						47,968						42,072
Net income						$	23,087					$	50,321					$	163,379					$	140,004
Adjusted EBITDA (a)						$	60,427					$	98,329					$	314,313					$	316,035

(a) See “—Non-GAAP Reconciliation.”

Net sales

Net sales decreased to $245.3 million for the three months ended October 1, 2022 from $350.6 million for the three months ended October 2, 2021, a decrease of $105.3 million or 30.0%. See the segment discussion below for further information.

Net sales increased to $1,055.2 million for the nine months ended October 1, 2022 from $1,049.4 million for the nine months ended October 2, 2021, an increase of $5.8 million or 0.5%. See segment discussion below for further information.

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Year-over-year net sales increase (decrease) was driven by the following:

						Three Months Ended						Nine Months Ended
						October 1, 2022						October 1, 2022
Volume						(43.6)		%				(14.7)		%
Price, net of discounts and allowances						12.0		%				15.2		%
Acquisitions						2.6		%				1.4		%
Currency and other						(1.0)		%				(1.4)		%
Total						(30.0)		%				0.5		%

The decrease in net sales for the three months ended October 1, 2022 was primarily the result of a decline in volume, partially offset by increases in price and the favorable impact of acquisitions. The decline in volume was primarily the result of distribution channel destocking as supply chain pressure eases, lead times normalize, and the industry starts to return to the pre-pandemic seasonal trend of lower sales activity in the third quarter. Macroeconomic uncertainty, particularly geopolitical factors in Europe, also contributed to the decline in volume.

The increase in net sales for the nine months ended October 1, 2022 was driven by increases in price and acquisitions, partially offset by decreases in volume and the unfavorable impact of foreign currency translation. The increase due to price reflects the cumulative impact of a number of announced price increases to mitigate escalating inflationary cost pressures as well as lower sales incentives to channel partners. The decline in volume was primarily the result of channel inventory destocking due to inventory accumulation by distributors in excess of near-term consumer demand, poor weather in seasonal markets in North America, and lower net sales in Europe due to geopolitical and other economic factors.

Gross profit and Gross profit margin

Gross profit decreased to $107.8 million for the three months ended October 1, 2022 from $162.5 million for the three months ended October 2, 2021, a decrease of $54.7 million or 33.7%.

Gross profit margin decreased to 43.9% for the three months ended October 1, 2022 compared to 46.3% for the three months ended October 2, 2021, a decrease of 239 basis points primarily due to the decline in volume resulting in lower operating leverage. The gross margin decrease included a decrease of 108 basis points due to a non-cash increase in cost of goods sold resulting from the fair value inventory step-up adjustment recognized as part of the purchase accounting for the specialty lighting business of Halco Lighting Technologies, LLC, which includes the brands J&J Electronics and Sollos (the "Specialty Lighting Business").

Gross profit decreased to $487.5 million for the nine months ended October 1, 2022 from $490.4 million for the nine months ended October 2, 2021, a decrease of $2.9 million, or 0.6%.

Gross profit margin decreased to 46.2% for the nine months ended October 1, 2022 compared to 46.7% the nine months ended October 2, 2021.

Selling, general, and administrative expense

Selling, general, and administrative expense (SG&A) decreased to $50.5 million for the three months ended October 1, 2022 from $68.8 million for the three months ended October 2, 2021, a decrease of $18.3 million or 26.6%, primarily as a result of lower incentive based compensation, selling and distribution and warranty expenses. The Comparable Quarter also included a patent infringement litigation settlement.

As a percentage of net sales, SG&A increased to 20.6% for the three months ended October 1, 2022 as compared to 19.6% for three months ended October 2, 2021, an increase of 96 basis points driven by reduced operating leverage.

SG&A decreased to $188.3 million for the nine months ended October 1, 2022 from $207.1 million for the nine months ended October 2, 2021, a decrease of $18.8 million or 9.1%. During the nine months ended October 2, 2021, we incurred higher incentive compensation, including stock-based compensation expenses, as a result of Hayward's initial public offering (the "IPO") and incurred one-time expenses related to the fire in Yuncos, Spain.

As a percentage of net sales, SG&A decreased to 17.8% for the nine months ended October 1, 2022 as compared to 19.7% for nine months ended October 2, 2021, a decrease of 189 basis points driven by the elevated costs incurred in the prior year as discussed above.

Research, development, and engineering expense

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Research, development, and engineering expense (RD&E) remained approximately consistent at $6.1 million for the three months ended October 1, 2022 compared with $6.4 million for the three months ended October 2, 2021.

As a percentage of net sales, RD&E was 2.5% for the three months ended October 1, 2022 compared to 1.8% for the three months ended October 2, 2021, an increase of 69 basis points.

RD&E remained approximately consistent at $16.4 million for the nine months ended October 1, 2022 compared with $16.2 million for the nine months ended October 2, 2021. As a percentage of net sales, RD&E was relatively flat at 1.6% for the nine months ended October 1, 2022 compared to 1.5% for the nine months ended October 2, 2021.

Acquisition and restructuring related expense

For the three months ended October 1, 2022, we incurred $2.3 million of acquisition and restructuring related expense as compared to $0.8 million of expense for the three months ended October 2, 2021. The expense in the Third Quarter was primarily related to costs associated with the corporate headquarters relocation from New Jersey to North Carolina and the reduction-in-force executed during the quarter, compared to the Comparable Quarter which only had costs associated with the corporate relocation. Additionally, during the three months ended October 1, 2022, the Company initiated an enterprise cost reduction program to address the current market dynamics and maintain the Company’s strong financial metrics. The initial focus was on a reduction of variable costs with specific attention to eliminating cost inefficiencies in our supply chain and reducing variable labor in our production cost base. In addition to these variable cost reductions, the Company identified structural selling, general and administrative cost reduction opportunities totaling $25 million to $30 million in 2023, with initial savings of approximately $8 million to be realized in 2022.

For the nine months ended October 1, 2022, we incurred $9.5 million of acquisition and restructuring related expense as compared to an expense of $2.5 million for the nine months ended October 2, 2021. The nine months ended October 1, 2022 included transaction costs associated with the acquisition of the Specialty Lighting Business, costs associated with the reduction-in-force, and costs associated with the corporate relocation, compared to the nine months ended October 2, 2021, which primarily had costs pertaining to the exit from our leased facility in Chandler, Arizona, as well as the costs from the corporate relocation.

See Note 16. Acquisitions and Restructuring.

Amortization of intangible assets

For the three and nine months ended October 1, 2022 and October 2, 2021 amortization of intangible assets decreased $0.2 million and $2.3 million, respectively, due to the amortization pattern of certain intangibles based on the declining balance method.

Operating income

For the three and nine months ended October 1, 2022 and October 2, 2021 operating income decreased $37.5 million and increased $11.1 million, respectively, due to the aggregated effect of the items described above.

Interest expense, net

Interest expense, net, increased to $13.9 million for the three months ended October 1, 2022 from $11.1 million for the three months ended October 2, 2021.

Interest expense for the three months ended October 1, 2022 consisted of $13.2 million of interest on the outstanding debt and $0.8 million of amortization of deferred financing fees. The effective interest rate on our borrowings, including the impact of an interest rate hedge, was 5.04% for the three months ended October 1, 2022.

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, including the impact of an interest rate hedge, was 4.42% for the three months ended October 2, 2021.

Interest expense increased by $2.9 million for the three months ended October 1, 2022 primarily due to variable rate increases on the Company's First Lien Term Facility and outstanding borrowings on the ABL Revolving Credit Facility, partially offset by decreased interest expense on the interest rate swaps.

For the nine months ended October 1, 2022, interest expense, net, decreased to $35.1 million from $42.3 million for the nine months ended October 2, 2021.

Interest expense decreased by $7.2 million primarily driven by the debt repayment of $364.6 million and lower interest rates as a result of the debt refinancing activity completed in the first half of 2021.

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Interest expense for the nine months ended October 1, 2022 consisted of $33.0 million of interest on the outstanding debt and $2.3 million of amortization of deferred financing fees. The effective interest rate on our borrowings, including the impact of an interest rate hedge, was 4.37% for the nine months ended October 1, 2022.

Interest expense for the nine months ended October 2, 2021 consisted of $39.6 million 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 the interest rate hedges, was 5.17% for the nine months ended October 2, 2021.

Loss on extinguishment of debt

There was no loss on extinguishment of debt for the three and nine months ended October 1, 2022. The $9.4 million loss on extinguishment of debt for the nine months ended October 2, 2021 was incurred due to the debt refinancing activity in the first half of 2021.

Provision for income taxes

We incurred income tax expense of $3.5 million for the three months ended October 1, 2022 compared to an income tax expense of $14.3 million for the three months ended October 2, 2021, a decrease of $10.8 million or 75.2%. This was primarily due to decreased income from operations, discrete items resulting from the revaluation of deferred tax liabilities as a result of state tax law changes and the tax benefit resulting from the exercise of stock options.

The decrease in the Company’s effective tax rate from 22.2% for three months ended October 2, 2021 to 13.3% for the three months ended October 1, 2022 was primarily due to discrete items relating to a tax benefit due to the exercise of stock options and state tax law changes.

We incurred income tax expense of $48.0 million for the nine months ended October 1, 2022 compared to $42.1 million for the nine months ended October 2, 2021, an increase of $5.9 million. This was primarily due to increased income from operations.

The decrease in the Company’s effective tax rate from 23.1% for the nine months ended October 2, 2021 to 22.7% for the nine months ended October 1, 2022 was primarily due to discrete items relating to a tax benefit due to the exercise of stock options and state tax law changes.

Net income

As a result of the foregoing, net income decreased $27.2 million and increased $23.4 million for the three and nine months ended October 1, 2022 and October 2, 2021 respectively.

Adjusted EBITDA and Adjusted EBITDA margin

Adjusted EBITDA decreased to $60.4 million for the three months ended October 1, 2022 from $98.3 million for the three months ended October 2, 2021, a decrease of $37.9 million or 38.5%, driven primarily by lower net sales resulting in a decrease in gross profit of $54.7 million.

Adjusted EBITDA margin decreased to 24.6% for the three months ended October 1, 2022 compared to 28.0% for the three months ended October 2, 2021, a decrease of 341 basis points.

Adjusted EBITDA decreased to $314.3 million for the nine months ended October 1, 2022 from $316.0 million for the nine months ended October 2, 2021, a decrease of $1.7 million or 0.5%, driven by a decrease in gross profit of $2.9 million and a decrease in the adjustments for the non-cash and specified costs discussed below in “— Non-GAAP Reconciliation.”

Adjusted EBITDA margin decreased to 29.8% for the nine months ended October 1, 2022 compared to 30.1% for the nine months ended October 2, 2021, a decrease of 33 basis points.

See “— Non-GAAP Reconciliation” for a reconciliation of these metrics to the most directly comparable GAAP metric.

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Segment

The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of NAM and E&RW. We evaluate performance based on net sales, gross profit, segment income and adjusted segment income, and we use gross profit margin, segment income margin and adjusted segment income margin as comparable performance measures for our reporting segments.

Segment income represents net sales less cost of sales, segment SG&A and RD&E. A reconciliation of segment income to our operating income is detailed below. Adjusted segment income represents segment income adjusted for the impact of depreciation, amortization of certain intangible assets, stock-based compensation and certain non-cash, nonrecurring or other items that are included in segment income that we do not consider indicative of the ongoing segment operating performance. See “—Non-GAAP Reconciliation” for a reconciliation of these metrics to the most directly comparable GAAP metric:

(Dollars in thousands)						Three Months Ended																		Three Months Ended
						October 1, 2022																		October 2, 2021
						Total						NAM						E&RW						Total						NAM						E&RW
Net sales						$	245,267					$	203,674					$	41,593					$	350,624					$	298,236					$	52,388
Gross profit						$	107,784					$	91,850					$	15,934					$	162,454					$	141,655					$	20,799
Gross profit margin %						43.9		%				45.1		%				38.3		%				46.3		%				47.5		%				39.7		%
Segment income						$	57,493					$	48,704					$	8,789					$	102,502					$	91,920					$	10,582
Segment income margin %						23.4		%				23.9		%				21.1		%				29.2		%				30.8		%				20.2		%
Adjusted segment income (a)						$	65,510					$	56,879					$	8,631					$	109,500					$	98,320					$	11,180
Adjusted segment income margin % (a)						26.7		%				27.9		%				20.8		%				31.2		%				33.0		%				21.3		%
Expenses not allocated to segments
Corporate expense, net						$	6,344																	$	15,225
Acquisition and restructuring related expense						2,288																		783
Amortization of intangible assets						8,521																		8,700
Operating income						$	40,340																	$	77,794
(Dollars in thousands)						Nine Months Ended																		Nine Months Ended
						October 1, 2022																		October 2, 2021
						Total						NAM						E&RW						Total						NAM						E&RW
Net sales						$	1,055,169					$	892,050					$	163,119					$	1,049,409					$	863,276					$	186,133
Gross profit						$	487,543					$	421,725					$	65,818					$	490,376					$	416,753					$	73,623
Gross profit margin %						46.2		%				47.3		%				40.3		%				46.7		%				48.3		%				39.6		%
Segment income						$	306,844					$	267,854					$	38,990					$	304,848					$	267,020					$	37,828
Segment income margin %						29.1		%				30.0		%				23.9		%				29.0		%				30.9		%				20.3		%
Adjusted segment income (a)						$	333,608					$	293,586					$	40,022					$	337,979					$	293,282					$	44,697
Adjusted segment income margin % (a)						31.6		%				32.9		%				24.5		%				32.2		%				34.0		%				24.0		%
Expenses not allocated to segments
Corporate expense, net						$	24,009																	$	37,788
Acquisition and restructuring related expense						9,499																		2,452
Amortization of intangible assets						23,828																		26,162
Operating income						$	249,508																	$	238,446

(a) See “—Non-GAAP Reconciliation.”

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North America (“NAM”)

(Dollars in thousands)						Three Months Ended												Nine Months Ended
						October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Net sales						$	203,674					$	298,236					$	892,050					$	863,276
Gross profit						$	91,850					$	141,655					$	421,725					$	416,753
Gross profit margin %						45.1		%				47.5		%				47.3		%				48.3		%
Segment income						$	48,704					$	91,920					$	267,854					$	267,020
Segment income margin %						23.9		%				30.8		%				30.0		%				30.9		%
Adjusted segment income (a)						$	56,879					$	98,320					$	293,586					$	293,282
Adjusted segment income margin % (a)						27.9		%				33.0		%				32.9		%				34.0		%

(a) See “—Non-GAAP Reconciliation.”

Net sales

Net sales decreased to $203.7 million for the three months ended October 1, 2022 from $298.2 million for the three months ended October 2, 2021, a decrease of $94.5 million or 31.7%.

Net sales increased to $892.1 million for the nine months ended October 1, 2022 from $863.3 million for the nine months ended October 2, 2021, an increase of $28.8 million or 3.3%.

Year-over-year net sales increase (decrease) was driven by the following factors:

						Three Months Ended						Nine Months Ended
						October 1, 2022						October 1, 2022
Volume						(47.1)		%				(14.9)		%
Price, net of allowances and discounts						12.4		%				16.7		%
Acquisitions						3.2		%				1.7		%
Currency and other						(0.2)		%				(0.2)		%
Total						(31.7)		%				3.3		%

This decrease for the three months ended October 1, 2022 was primarily the result of a decline in volume, partially offset by increases in price to offset inflationary pressure and from reduced sales incentives for the seasonal year to customers, as well as the favorable impact of acquisitions. The decline in volume was primarily the result of distribution channel destocking as supply chain pressure eases, lead times normalize, and the industry starts to return to the pre-pandemic seasonal trend of lower sales activity in the third quarter of the calendar year.

The increase for the nine months ended October 1, 2022 was primarily due to the cumulative impact of a number of announced price increases during the last 21 months that became fully effective in the second quarter to mitigate the escalating inflationary cost pressures from the global supply chain and a favorable impact from acquisitions, partially offset by a decrease in volume driven by factors discussed above and cool and wet spring weather in the first half of the year in weather effected seasonal markets, namely the Midwest, Northeast and Canada.

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Gross profit and Gross profit margin

Gross profit decreased to $91.9 million for the three months ended October 1, 2022 from $141.7 million for the three months ended October 2, 2021, a decrease of $49.8 million or 35.2%.

Gross profit margin decreased to 45.1% for the three months ended October 1, 2022 from 47.5% for the three months ended October 2, 2021, a decrease of 240 basis points. Gross margin decreased 128 basis points due to a non-cash increase in cost of goods sold resulting from the fair value inventory step-up adjustment recognized as part of the purchase accounting for the Specialty Lighting Business. The remaining decrease in gross margin was primarily due to the decline in volume resulting in lower operating leverage.

Gross profit increased to $421.7 million for the nine months ended October 1, 2022 from $416.8 million for the nine months ended October 2, 2021, an increase of $4.9 million or 1.2%.

Gross profit margin decreased to 47.3% for the nine months ended October 1, 2022 from 48.3% for the nine months ended October 2, 2021, a decrease of 100 basis points, primarily driven by the decline in volume resulting in lower operating leverage combined with the purchase accounting adjustment for the step-up of inventory to fair value, partially offset by the net price increases discussed above.

Segment income and Segment income margin

Segment income decreased to $48.7 million for the three months ended October 1, 2022 from $91.9 million for the three months ended October 2, 2021, a decrease of $43.2 million or 47.0%. This was primarily driven by a decrease in sales and gross profit as discussed above, partially offset by lower SG&A expense.

Segment income margin decreased to 23.9% for the three months ended October 1, 2022 from 30.8% for the three months ended October 2, 2021, a decrease of 691 basis points.

Segment income increased to $267.9 million for the nine months ended October 1, 2022 from $267.0 million for the nine months ended October 2, 2021, an increase of $0.8 million or 0.3%. This was primarily driven by a decrease in gross profit margin percentage as discussed above and higher SG&A expense primarily from one-time expenses related to the discontinuation of a product joint development agreement as well as higher distribution and warehousing costs and marketing costs.

Segment income margin decreased to 30.0% for the nine months ended October 1, 2022 from 30.9% for the nine months ended October 2, 2021, a decrease of 90 basis points primarily resulting from decreased gross profit margin as discussed above and higher SG&A expense.

Adjusted segment income and Adjusted segment income margin

Adjusted segment income decreased to $56.9 million for the three months ended October 1, 2022 from $98.3 million for the three months ended October 2, 2021, a decrease of $41.4 million or 42.1%. This was driven by the reduced segment income as discussed above, after adjusting for the non-cash and specified costs discussed below in “— Non-GAAP Reconciliation.”

Adjusted segment income margin decreased to 27.9% for the three months ended October 1, 2022 from 33.0% for the three months ended October 2, 2021, a decrease of 504 basis points. Refer to “—Non-GAAP Reconciliation” for a reconciliation of segment income to adjusted segment income.

Adjusted segment income increased to $293.6 million for the nine months ended October 1, 2022 from $293.3 million for the nine months ended October 2, 2021, an increase of $0.3 million or 0.1%. This was driven by the reduced segment income as discussed above, after adjusting for the non-cash and specified costs discussed below in “— Non-GAAP Reconciliation.”

Adjusted segment income margin decreased to 32.9% for the nine months ended October 1, 2022 from 34.0% for the nine months ended October 2, 2021, a decrease of 106 basis points. Refer to “—Non-GAAP Reconciliation” for a reconciliation of segment income to adjusted segment income.

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Europe & Rest of World (“E&RW”)

(Dollars in thousands)						Three Months Ended												Nine Months Ended
						October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Net sales						$	41,593					$	52,388					$	163,119					$	186,133
Gross profit						$	15,934					$	20,799					$	65,818					$	73,623
Gross profit margin %						38.3		%				39.7		%				40.3		%				39.6		%
Segment income						$	8,789					$	10,582					$	38,990					$	37,828
Segment income margin %						21.1		%				20.2		%				23.9		%				20.3		%
Adjusted segment income (a)						$	8,631					$	11,180					$	40,022					$	44,697
Adjusted segment income margin % (a)						20.8		%				21.3		%				24.5		%				24.0		%

(a) See “—Non-GAAP Reconciliation.”

Net sales

Net sales decreased to $41.6 million for the three months ended October 1, 2022 from $52.4 million for the three months ended October 2, 2021, a decrease of $10.8 million or 20.6%.

Net sales decreased to $163.1 million for the nine months ended October 1, 2022 from $186.1 million for the nine months ended October 2, 2021, a decrease of $23.0 million or 12.4%.

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

						Three Months Ended						Nine Months Ended
						October 1, 2022						October 1, 2022
Volume						(23.4)		%				(13.9)		%
Price, net of allowances and discounts						9.5		%				8.1		%
Currency and other						(6.7)		%				(6.6)		%
Total						(20.6)		%				(12.4)		%

The decrease in net sales was primarily due to a decline in volume as a result of geopolitical factors and macroeconomic uncertainty, unfavorable impact of foreign currency translation, and channel inventory reductions, partially offset by the favorable impact of price increases.

Gross profit and Gross profit margin

Gross profit decreased to $15.9 million for the three months ended October 1, 2022 from $20.8 million for the three months ended October 2, 2021, a decrease of $4.9 million or 23.4%.

Gross profit margin decreased to 38.3% for the three months ended October 1, 2022 from 39.7% for the three months ended October 2, 2021, a decrease of 139 basis points, primarily driven by the decline in volume resulting in lower operating leverage and the inflationary impact on cost more than offsetting price increases.

Gross profit decreased to $65.8 million for the nine months ended October 1, 2022 from $73.6 million for the nine months ended October 2, 2021, a decrease of $7.8 million or 10.6%.

Gross profit margin increased to 40.3% for the nine months ended October 1, 2022 from 39.6% for the nine months ended October 2, 2021, an increase of 80 basis points, primarily driven by price increases, favorable customer and product mix, and quality improvement, despite the volume decline and inflationary impact from shipping costs, supplies and raw materials.

Segment income and Segment income margin

Segment income decreased to $8.8 million for the three months ended October 1, 2022 from $10.6 million for the three months ended October 2, 2021, a decrease of $1.8 million or 16.9%. This was primarily driven by a decrease in sales and gross profit as discussed above, partially offset by lower SG&A expense.

Segment income margin increased by 93 basis points from 20.2% for the three months ended October 2, 2021 to 21.1% for the three months ended October 1, 2022, resulting from decreased gross profit margin as discussed above.

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Segment income increased to $39.0 million for the nine months ended October 1, 2022 from $37.8 million for the nine months ended October 2, 2021, an increase of $1.2 million or 3.1%. This was primarily driven by costs incurred in the nine months ended October 2, 2021, including one-time expenses related to the fire in Yuncos, Spain, as well as higher incentive compensation including stock-based compensation related to the IPO.

Segment income margin increased by 358 basis points, to 23.9% for the nine months ended October 1, 2022 as compared to 20.3% for the same period year over year.

Adjusted segment income and Adjusted segment income margin

Adjusted segment income decreased to $8.6 million for the three months ended October 1, 2022 from $11.2 million for the three months ended October 2, 2021, a decrease of $2.5 million or 22.8%. This was primarily driven by the decreased sales after excluding the non-cash and specified costs described in “—Non-GAAP Reconciliation.” below.

Adjusted segment income margin decreased to 20.8% for the three months ended October 1, 2022 from 21.3% for the three months ended October 2, 2021, a decrease of 59 basis points.

Adjusted segment income decreased to $40.0 million for the nine months ended October 1, 2022 from $44.7 million for the nine months ended October 2, 2021, a decrease of $4.7 million or 10.5%. This was primarily driven by the decreased sales.

Adjusted segment income margin for the nine months ended October 1, 2022 of 24.5% remained effectively flat compared to the Comparable Quarter of 24.0%. Refer to “—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, 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.

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Our presentation of adjusted EBITDA and adjusted segment income should not be construed as an inference that our future results will be unaffected by these items.

Net Income to Adjusted EBITDA and Adjusted EBITDA Margin

Following is a reconciliation from net income to adjusted EBITDA and adjusted EBITDA margin for the three and nine months ended October 1, 2022 and October 2, 2021:

(Dollars in thousands)						Three Months Ended												Nine Months Ended
						October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Net income						$	23,087					$	50,321					$	163,379					$	140,004
Depreciation						4,333						4,847						13,931						14,096
Amortization						10,249						10,405						28,437						30,903
Interest expense						13,938						11,050						35,105						42,297
Income taxes						3,549						14,336						47,968						42,072
Loss on extinguishment of debt						—						—						—						9,418
EBITDA						55,156						90,959						288,820						278,790
Stock-based compensation (a)						(4)						484						1,248						16,383
Sponsor management fees (b)						—						—						—						90
Currency exchange items (c)						52						1,149						2,776						4,379
Acquisition and restructuring related expense, net (d)						2,288						783						9,499						2,452
Other (e)						2,935						4,954						11,970						13,941
Total Adjustments						5,271						7,370						25,493						37,245
Adjusted EBITDA						$	60,427					$	98,329					$	314,313					$	316,035
Adjusted EBITDA margin						24.6		%				28.0		%				29.8		%				30.1		%

(a)						Represents non-cash stock-based compensation expense related to equity awards issued to management, employees, and directors. Beginning in the three months ended July 2, 2022, the adjustment includes only expense related to awards issued under the 2017 Equity Incentive Plan, which were awards granted prior to the effective date of Hayward’s initial public offering (the “IPO”), whereas in prior periods, the adjustment included stock-based compensation expense for all equity awards. Under the historical presentation, the stock-based compensation adjustment for the three and nine months ended October 1, 2022 would have been an expense of $1.8 million and $4.7 million, respectively.
(b)						Represents fees paid to certain of the Company’s controlling stockholders 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 the IPO.
(c)						Represents unrealized non-cash losses (gains) on foreign denominated monetary assets and liabilities and foreign currency contracts.
(d)						Adjustments in the three months ended October 1, 2022 are primarily driven by separation costs associated with a reduction-in-force as well as costs associated with the relocation of the corporate headquarters. Adjustments in the nine months ended October 1, 2022 are primarily driven by transaction costs associated with the acquisition of the Specialty Lighting Business, costs associated with the relocation of the corporate headquarters, and separation costs associated with a reduction-in-force. Adjustments in the three and nine months ended October 2, 2021 are primarily driven by restructuring related costs associated with the exit of a redundant manufacturing and distribution facility and costs associated with the relocation of the corporate headquarters.
(e)						Adjustments in the three months ended October 1, 2022 primarily includes the non-cash increase in cost of goods sold resulting from the fair value inventory step-up adjustment recognized as part of the purchase accounting for the Specialty Lighting Business. Adjustments in the three months ended October 2, 2021 include a legal settlement and fees, costs related to a fire at our manufacturing and administrative facilities in Yuncos, Spain, and operating losses related to an early-stage product business acquired in 2018 that was phased out. Adjustments in the nine months ended October 1, 2022 include expenses associated with the discontinuation of a product joint development agreement, a non-cash increase in cost of goods sold resulting from the fair value inventory step-up adjustment recognized as part of the purchase accounting for the Specialty Lighting Business, and costs incurred related to the selling stockholder offering of shares in May 2022, which are reported in SG&A in our unaudited condensed consolidated statements of operations, partially offset by gains resulting from an insurance policy reimbursement related to the fire incident in Yuncos, Spain. Adjustments in the nine months ended October 2, 2021 include a write-off related to the aforementioned fire in Yuncos, Spain, a legal settlement and fees related to patent infringement litigation, expenses incurred in preparation for the IPO and transaction related bonuses, costs related to our debt refinancing, and operating losses related to an early stage product business acquired in 2018 that was phased out.

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Following is a reconciliation from segment income to adjusted segment income for the three and nine months ended October 1, 2022 and October 2, 2021:

(Dollars in thousands)						Three Months Ended												Nine Months Ended
						October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Segment income						$	57,493					$	102,502					$	306,844					$	304,848
Depreciation						4,049						4,428						13,006						13,496
Amortization						1,728						1,705						4,609						4,740
Stock-based compensation						(276)						(92)						183						7,904
Other (a)						2,516						957						8,966						6,991
Total Adjustments						8,017						6,998						26,764						33,131
Adjusted segment income						$	65,510					$	109,500					$	333,608					$	337,979
Adjusted segment income margin						26.7		%				31.2		%				31.6		%				32.2		%

(a)						The three and nine months ended October 1, 2022 includes a non-cash increase in cost of goods sold resulting from the fair value inventory step-up adjustment recognized as part of the purchase accounting for the Specialty Lighting Business, bad debt write-offs, and other miscellaneous items we believe are not representative of our ongoing business operations. The three and nine months ended October 2, 2021 include the impairment related to a fire at our manufacturing and administrative facilities in Yuncos, Spain and operating losses which relate to an early stage product business acquired in 2018 that was phased out in 2021.

Following is a reconciliation from segment income to adjusted segment income for NAM for the three and nine months ended October 1, 2022 and October 2, 2021 (dollars in thousands):

NAM						Three Months Ended												Nine Months Ended
						October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Segment income						$	48,704					$	91,920					$	267,854					$	267,020
Depreciation						3,853						4,253						12,435						12,653
Amortization						1,728						1,705						4,609						4,740
Stock-based compensation						(284)						(126)						72						7,318
Other (a)						2,878						568						8,616						1,551
Total adjustments						8,175						6,400						25,732						26,262
Adjusted segment income						$	56,879					$	98,320					$	293,586					$	293,282
Adjusted segment income margin						27.9		%				33.0		%				32.9		%				34.0		%

(a)						The three months ended October 1, 2022 for NAM includes a non-cash increase in cost of goods sold resulting from the fair value inventory step-up adjustment recognized as part of the purchase accounting for the Specialty Lighting Business. The three months ended October 2, 2021 includes operating losses which relate to an early stage product business acquired in 2018 that was phased out in 2021.
						The nine months ended October 1, 2022 for NAM includes expenses associated with the discontinuation of a product joint development agreement and a non-cash increase in cost of goods sold resulting from the fair value inventory step-up adjustment recognized as part of the purchase accounting for the Specialty Lighting Business. The nine months ended October 2, 2021 include operating losses which relate to an early stage product business acquired in 2018 that was phased out in 2021.

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Following is a reconciliation from segment income to adjusted segment income for E&RW for the three and nine months ended October 1, 2022 and October 2, 2021 (dollars in thousands):

E&RW						Three Months Ended												Nine Months Ended
						October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
Segment income						$	8,789					$	10,582					$	38,990					$	37,828
Depreciation						196						175						571						843
Amortization						—						—						—						—
Stock-based compensation						8						34						111						586
Other (a)						(362)						389						350						5,440
Total Adjustments						(158)						598						1,032						6,869
Adjusted segment income						$	8,631					$	11,180					$	40,022					$	44,697
Adjusted segment income margin						20.8		%				21.3		%				24.5		%				24.0		%

(a)						The three months ended October 1, 2022 for E&RW includes collections of previously reserved bad debt expense related to certain customers impacted by the conflict in Russia and Ukraine. The three months ended October 2, 2021 represents the impact of a fire at our manufacturing and administrative facilities in Yuncos, Spain.
						The nine months ended October 1, 2022 for E&RW includes bad debt reserves related to certain customers impacted by the conflict in Russia and Ukraine partially offset by subsequent collections. The nine months ended October 2, 2021 represents the impact of 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 from operations and working capital requirements fluctuate during the year, driven primarily by the seasonal demand for our products, an early buy program, the timing of inventory purchases and receipt of customer payments and as such, the utilization of the ABL Facility fluctuates during the year.

Unrestricted cash and cash equivalents totaled $72.9 million as of October 1, 2022, which is a decrease of $192.9 million from $265.8 million at December 31, 2021.

We focus on increasing cash flow, solidifying the liquidity position through working capital initiatives, and paying our debt obligations, while continuing to fund business growth initiatives and return of capital to shareholders. We believe that net cash provided by operating activities and availability under the ABL Facility will be adequate to finance our working capital requirements, inclusive of capital expenditures, and debt service over the next 12 months.

Credit Facilities

The First Lien Term Facility and ABL Facility (collectively “Credit Facilities”) contain various restrictions, covenants and collateral requirements. Refer to Note 7. Long-Term Debt of notes to our unaudited condensed consolidated financial statements for further information on the terms of the Credit Facilities.

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

						October 1, 2022						December 31, 2021
First Lien Term Facility, due May 28, 2028						$	987,500					$	995,000
ABL Revolving Credit Facility						100,000						—
Finance lease obligations						7,050						7,780
Subtotal						1,094,550						1,002,780
Less: Current portion of the long-term debt						(11,957)						(12,155)
Less: Unamortized debt issuance costs						(15,591)						(17,501)
Total						$	1,067,002					$	973,124

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ABL Facility

The ABL Facility provides for an aggregate amount of borrowings up to $425.0 million, with a peak season commitment of $475.0 million, subject to a borrowing base calculation based on available eligible receivables, inventory, and qualified cash 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 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 is June 1, 2026. During the periods reported, the borrowings under the ABL Facility bore interest at a rate equal to the London Interbank Offered Rate (LIBOR) or a base rate plus a margin of between 1.25% to 1.75% or 0.25% to 0.75%, respectively. On October 7, 2022, the Company entered into the Third Amendment to its existing ABL Revolving Credit Facility (the “ABL Facility”) to include a $35 million First-In, Last-Out Sublimit (“FILO Sublimit”) and to replace the LIBOR based reference rate with an adjusted term Secured Overnight Financing Rate (“SOFR”). The borrowings under the ABL Facility bear interest at a rate equal to SOFR or a base rate plus a margin of between 1.25% to 1.75% or 0.25% to 0.75%, respectively, while the FILO Sublimit borrowings bear interest at a rate equal to SOFR or a base rate plus a margin of between 2.25% to 2.75% or 1.25% to 1.75%, respectively.

For the three months ended October 1, 2022, the average borrowing base under the ABL Facility was $199.1 million and the average loan balance outstanding was $125.3 million. As of October 1, 2022, the loan balance was $100.0 million with a borrowing availability of $55.2 million. During the nine months ended October 1, 2022, the effective interest rate was 6.00%, comprised of interest charges of 3.02% and financing costs of 2.98%.

For the year ended December 31, 2021, the average borrowing base under the ABL Facility was $170.1 million and the average loan balance outstanding was $14.3 million. As of December 31, 2021 the loan balance was zero with a borrowing availability of $128.9 million. During the year ended December 31, 2021, the effective interest rate was 3.37%.

First Lien Term Facilities

The First Lien Term Facility bears interest at a rate equal to a base rate or LIBOR, plus, in either case, an applicable margin. In the case of LIBOR tranches, the applicable margin is 2.75% per annum with a 0.50% floor, with a stepdown to 2.50% per annum with a 0.50% floor when net secured leverage is less than 2.5x. The loan under the First Lien Term Facility amortizes quarterly at a rate of 0.25% of the original principal amount and requires a $2.5 million repayment of principal on the last business day of each March, June, September and December.

As of October 1, 2022, the balance outstanding under the First Lien Term Facility was $987.5 million and the effective interest rate, including the impact of an interest rate hedge, for the nine months ended October 1, 2022 was 4.26% as net secured leverage is less than 2.5x. The effective interest rate is comprised of 3.70% for interest, 0.29% for interest charges on the interest rate swaps and 0.27% for financing costs.

As of December 31, 2021, the balance outstanding under the First Lien Term Facility was $995.0 million and the effective interest rate, including the impact of an interest rate hedge, for the year ended December 31, 2021 was 4.77%.

Covenant Compliance

The Credit Facilities contain various restrictions, covenants and collateral requirements. As of October 1, 2022, we were in compliance with all covenants under the Credit Facilities.

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Sources and Uses of Cash

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

(Dollars in thousands)						Nine Months Ended
						October 1, 2022						October 2, 2021
Net cash provided by operating activities						$	143,664					$	199,163
Net cash used in investing activities						(84,866)						(19,172)
Net cash (used in) provided by financing activities						(245,947)						3,187
Effect of exchange rate changes on cash and cash equivalents and restricted cash						(5,740)						(1,505)
Change in cash and cash equivalents and restricted cash						$	(192,889)					$	181,673

Net cash provided by operating activities

Net cash provided by operating activities decreased to $143.7 million for the nine months ended October 1, 2022 from $199.2 million for the nine months ended October 2, 2021, a decrease of $55.5 million or 27.9%. The reduction was driven by increased cash used for working capital compared to the prior-year period, partially offset by higher net income in the current year.

Net cash used in investing activities

Net cash used in investing activities was $84.9 million for the nine months ended October 1, 2022 compared to $19.2 million for the nine months ended October 2, 2021, an increase of $65.7 million or 342.7%. The increase was primarily driven by acquisition activity and capital expenditures.

Net cash (used in) provided by financing activities

Net cash used in financing activities was $245.9 million for the nine months ended October 1, 2022 compared to net cash provided of $3.2 million for the nine months ended October 2, 2021, a change of $249.1 million or 7817.2%. The cash use for the nine months ended October 1, 2022 is primarily due to share repurchases partially offset by an inflow from borrowings on the ABL Facility, compared to the cash provided for the nine months ended October 2, 2021 driven by proceeds from the IPO and the issuance of long-term debt, partially offset by the repayments of long-term debt.

Off-Balance Sheet Arrangements

We had $4.5 million of outstanding letters of credit on our ABL Revolving Credit Facility as of each of October 1, 2022 and December 31, 2021.

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 Part II, Item 7, under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021 (our “Annual Report on Form 10-K”), which section is incorporated herein by reference, and the Company has included certain new critical accounting estimates during the nine months ended October 1, 2022, as described below:

Business Combinations

We account for business combinations using the acquisition method of accounting in accordance with ASC 805, Business Combinations. The acquisition method requires identifiable assets acquired and liabilities assumed to be recognized and measured at fair value on the acquisition date, which is the date the acquirer obtains control of the business. The amount by which the fair value of consideration transferred exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill.

The determination of estimated fair value of assets acquired, specifically intangible assets, requires us to make extensive use of significant estimates and assumptions. The fair value of estimates is based on available historical financial information and on expectations about the future, considering the perspective of market participants. Significant estimates and assumptions may include but are not limited to expected revenue growth rates, weighted average cost of capital, useful lives, and discount rates. Our estimates of the useful lives of definite-lived intangible assets are based on the same criteria and correspond with the

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expected future cash flows. As a result, we may record adjustments to the fair values of assets acquired and liabilities assumed within the measurement period (up to one year from the acquisition date) with the corresponding offset to goodwill.

Recently Issued Accounting Standards

See Note 2. Significant Accounting Policies of notes 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 1, 2022 from what we reported in our Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure 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 1, 2022, due to the material weaknesses in internal control over financial reporting as described in our Annual Report on Form 10-K.

Continuing Material Weakness

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.

We continue to have material weaknesses in our internal control over financial reporting as disclosed in our Annual Report on Form 10-K. We do not know the specific time frame needed to fully remediate the material weaknesses identified. These material weaknesses could result in misstatements of the Company’s accounts and disclosures that would result in material misstatements of the annual or interim consolidated financial statements that would not be prevented or detected.

Remediation of Material Weaknesses

As disclosed in our Annual Report on Form 10-K, upon identifying the material weaknesses, we began taking steps intended to address the underlying causes of the control deficiencies in order to remediate the material weaknesses. We have: (i) developed a remediation plan to fully address the control deficiencies; (ii) established an internal audit group; (iii) implemented processes and controls to better identify and manage segregation of duties; (iv) expanded our accounting, finance, and information technology teams; and (v) engaged a third-party provider who supports us in evaluation and documentation of the design of our internal controls, assistance with the remediation of the deficiencies, and design and implementation of formal accounting policies and procedures.

We have implemented controls design enhancements to address segregation of duties within financial reporting, including the preparation and review of journal entries. We have also formalized policies and procedures, and designed and implemented

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controls which operate at a sufficient level of precision to identify material misstatements to our financial statements. These controls include enhancements to address program change management controls, user access controls, computer operations controls, and testing and approval controls for program development.

During the third quarter of 2022, we implemented an identity and access management tool to facilitate our system user access reviews.

Status of Remediation Efforts

We believe the measures described above will facilitate the remediation of the control deficiencies we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our currently designed internal control processes. These material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Control over Financial Reporting

The third quarter remediation measures described above are changes in the Company's internal control over financial reporting during the three months ended October 1, 2022 that had materially affected, or are reasonably likely to material affect, the Company's internal control over financial reporting.

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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.

See Note 12. Commitments and Contingencies of notes to our 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 our Annual Report on Form 10-K. Other than as noted below, there have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K.

We are exposed to political, regulatory, economic, trade, and other risks that arise from our international business operations, including the risks associated with geopolitical conflicts.

Sales outside of the United States for the nine months ended October 1, 2022 and for the fiscal year ending December 31, 2021 accounted for approximately 25% and 28%, respectively of our net sales. Furthermore, we obtain some components and raw materials from non-U.S. suppliers and have manufacturing facilities in Europe and China. Accordingly, our business is subject to the political, regulatory, economic, trade, and other risks that are inherent in operating in numerous countries. These risks include:

•changes in general economic and political conditions in countries where we operate, particularly in emerging markets;

•relatively more severe economic conditions in some international markets than in the United States;

•the imposition of tariffs, duties, exchange controls or other trade restrictions, including sanctions imposed in response to geopolitical conflicts;

•changes in tax treaties, laws or rulings that could have a material adverse impact on our effective tax rate;

•the difficulty of enforcing agreements and collecting receivables through non-U.S. legal systems;

•the difficulty of communicating and monitoring evolving standards and directives across our product lines, services, and global facilities;

•trade protection measures and import or export licensing requirements and restrictions;

•the possibility of terrorist action affecting us or our operations;

•the threat of nationalization and expropriation;

•difficulty in staffing and managing widespread operations in non-U.S. labor markets;

•limitations on repatriation of earnings or other regionally-imposed capital requirements;

•the difficulty of protecting intellectual property and other proprietary rights in non-U.S. countries; and

•changes in and required compliance with a variety of non-U.S. laws and regulations.

Our success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure that these and other factors will not have a material adverse effect on our international operations or on our business as a whole.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company purchased 4.8 million shares of its common stock, par value $0.001 per share, in the quarter ended October 1, 2022. During the third quarter of 2022, the board of directors renewed the initial authorization of its share repurchase program (the “Share Repurchase Program”) such that commencing at that time the Company is authorized to repurchase from time to time up to an aggregate of $450 million of its outstanding shares of common stock, which authorization expires on July 26, 2025.

Under the Share Repurchase Program, the Company may purchase shares of its common stock on a discretionary basis from time to time and may be conducted through privately negotiated transactions, including with the Sponsors, as well as through open market repurchases or other means, including through Rule 10b5-1(c) trading plans or through the use of other techniques such as accelerated share repurchases. The amount and timing of future repurchases may vary depending on market conditions and the level of operating, financing and other investing activities.

As of October 1, 2022, $400.0 million remained available under the current authorization for additional share repurchases. The following table summarizes the Company’s purchase of its common stock for the quarter ended October 1, 2022:

Period						(a) Total Number of Shares Purchased						(b) Average Price Paid per Share						(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Program (1)						(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Program
July 3 - August 6, 2022						—						$	—					—						$	450,000,000
August 7 - September 3, 2022						—						—						—						450,000,000
September 4 - October 1, 2022						4,769,834						10.48						4,769,834						400,000,000
Total						4,769,834						$	10.48					4,769,834						$	400,000,000

(1) On July 26, 2022, the board of directors renewed the initial authorization of its Share Repurchase Program such that the Company is authorized commencing at that time to repurchase from time to time up to an aggregate of $450 million of our common stock with such authority expiring on July 26, 2025. The Share Repurchase Program is expected to be conducted through privately negotiated transactions, including with the Sponsors, as well as through open market repurchases or other means, including through Rule 10b5-1(c) trading plans or through the use of other techniques such as accelerated share repurchases.

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ITEM 6. EXHIBITS

Exhibit No.

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

Inline XBRL Instance Document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in the Interactive Data Files submitted as Exhibits 101.*)

    

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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 November 2, 2022.

			HAYWARD HOLDINGS, INC.
			By:			/s/ Eifion Jones
			Name:			Eifion Jones
			Title:			Senior Vice President & Chief Financial Officer

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