# Hayward Holdings, Inc. (HAYW) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Hayward Holdings, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1834622/000183462223000017/hayw-20221231.htm
Accession: 0001834622-23-000017
Filing date: 2023-02-28
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/HAYW/
All MD&A years: /company/HAYW/mda/
Previous year: /company/HAYW/mda/fy2021/ (FY 2021)
Next year: /company/HAYW/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition together with the discussion in Part I, Item 1A, “Risk Factors,” and our audited consolidated financial statements and notes thereto, each included elsewhere in this Form 10-K. In addition to historical financial information, this discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

We define the year ended December 31, 2022 as Fiscal Year 2022 and the year ended December 31, 2021 as Fiscal Year 2021. Our fiscal quarters are 13 weeks except the fourth quarter that ends on December 31 of each fiscal year. The first quarter 2022 refers to the quarter ended April 2, the second quarter 2022 refers to the quarter ended July 2, the third quarter 2022 refers to the quarter ended October 1, and the fourth quarter 2022 refers to the quarter ended December 31.

Our Company

We are 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 (such as the ongoing repair, replacement, remodeling and upgrading of equipment for existing pools), innovation- led growth opportunities, and a favorable industry structure. We are a leader in this market with a highly-recognized brand, one of the largest installed bases of pool equipment in the world, decades-long relationships with our key channel partners and trade customers and a history of technological innovation. Our engineered products, which include various energy efficient and more environmentally sustainable offerings, enhance the pool owner’s outdoor living lifestyle while also delivering high quality water, pleasant ambiance and ease of use for the ultimate backyard experience. Aftermarket replacements and upgrades to higher value IoT and energy efficient models are a primary growth driver for our business.

We have an estimated North American seasonal 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. We estimate that aftermarket sales represent approximately 80% of net sales and 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 and replace equipment and remodel and upgrade their pools. We estimate aftermarket sales based upon feedback from certain representative customers and management’s interpretation of available industry and government data, and not upon our GAAP net sales results.

We manufacture our products at seven facilities worldwide, which are located in North Carolina, Tennessee, Rhode Island, Spain (three) and China.

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. NAM and E&RW accounted for approximately 84% and 16% and 83% and 17% of total net sales for Fiscal Year 2022 and Fiscal Year 2021, respectively.

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.

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Key Trends and Uncertainties Regarding Our Existing Business

The following trends and uncertainties affect the period-to-period comparability of our results of operations and may affect our financial performance in the future:

•Demand related to the aging base of pools and the COVID-19 pandemic. Irrespective of broader macroeconomic trends, the primary driver for the industry continues to be aftermarket spending on the base of installed pools. In the United States, our primary market, the record construction of pools from 1999 to 2005 is manifesting itself in the aftermarket repair, replace, and remodel cycle given that the average age of this pool cohort is over 20 years. Residential pool equipment sales increased during the COVID-19 pandemic. This increase in demand occurred 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 well as partially accelerated demand due to the impact of longer lead times that resulted from supply chain shortages. 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.

•Seasonality. Our business is seasonal with sales typically higher in the second and fourth quarters. During the second quarter, sales are higher in anticipation of the start of the summer pool season and in the fourth quarter, we incent trade customers to buy and stock in readiness for next year’s pool season under an “early buy” program which offers a price discount and extended payment terms. Under the early buy program in 2022, we generally ship products during October through March and receive payments for these shipments during February through July 2023. Revenue is recognized upon shipment of products, which cannot be returned unless damaged. For more information, see “—Key Factors and Measures We Use to Evaluate Our Business—Net Sales.’’ We aim to keep our manufacturing plants running at a constant level throughout the year and consequently we build inventory in the first and third quarters and inventory is sold-down in the second and fourth quarters. Our accounts receivable balance increases from October to April as a result of the early buy extended terms and increases through June due to higher sales in the second quarter. Also, because the majority of our sales are to distributors whose inventory of our products may vary due to reasons beyond our control, such as end-user demand, supply chain lead times and macroeconomic factors, our revenue may fluctuate from period to period.

•Targeted expansion efforts. We continue to pursue attractive product and global geographic market opportunities to grow our presence in new markets or markets in which we have less penetration. We believe that our business can effectively address these opportunities through new product development and scalable sales, marketing, and administration. We also have and may in the future pursue acquisitions to opportunistically add product offerings or increase our geographic footprint. If we do not execute this strategic objective, our core net sales growth will likely be limited or may decline.

•New product offerings. Our business is primarily driven by aftermarket spending. Pool owners are increasingly demanding new technologies, such as IoT-enabled and more energy efficient products, as they replace or upgrade their existing pool equipment. In Fiscal Year 2022, new products launched in the last three years contributed approximately 16% of net sales. These new products offer higher energy efficiency, automation capabilities and enhanced water care solutions, and we expect will become primary drivers of our sales growth. Staying at the forefront of technological innovation and introducing new product offerings with new features will continue to be critical in growing our market share and revenue.

•Materials and other cost increases. 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 and operating costs such as freight, utilities and wages. We strive for productivity improvements, and implement price increases to help mitigate this impact. We expect to see continuing price volatility (metals, resins, and electronic sub-assemblies) and import duty charges (motors, electronics, valves and cleaner products) for some of our raw materials. We are uncertain as to the timing and impact of these market changes, but have mitigation activities in place to minimize the impact on costs. In addition, rising interest rates resulting from central

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banks’ efforts to combat this price inflation has caused increases in the cost to service our variable rate indebtedness.

Key Factors and 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 (“SG&A”) expense, research, development and engineering (“RD&E”) expense, operating income and operating income margin. The key non-GAAP measures we use are EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted segment income and adjusted segment income margin.

Net sales

We offer a broad range of pool equipment including pumps, filters, heaters, automatic cleaners, sanitizers, controls, LED lights, as well as industrial thermoplastic valves and process liquid control products. Sales are impacted by product and geographic segment mix, as well as promotional and competitive activities. Growth of our sales is primarily driven by market demand, expansion of our trade customers and product offering.

Revenue is recognized upon shipment and recorded net of related discounts, allowances, returns, and sales tax. Customers are offered volume discounts and other promotional benefits. We estimate these volume discounts, promotional allowance benefits, and returns based upon the terms of the customer contracts and historical experience and record such amounts as a reduction of gross sales with an offsetting adjustment to account receivable. We regularly monitor the adequacy of these allowances.

Gross profit and gross profit margin

Gross profit is equal to net sales less cost of sales. Cost of sales includes the direct cost of manufacturing, including direct materials, labor and related overhead, as well as inbound and outbound freight and import duties.

Gross profit margin is gross profit as a percentage of net sales. Gross profit margin is impacted by costs of raw material, product mix, salary and wage inflation, production costs, shipping and handling costs, and import duties, all of which can vary.

Selling, general and administrative expense

Our SG&A includes expenses arising from activities in selling, marketing, technical and customer services, warranty, warehousing, and administrative expenses. Other than warranty and variable compensation, SG&A is generally not directly proportional to net sales.

Research, development and engineering expense

The Company conducts RD&E activities in its own facilities. These expenses consist primarily of salaries, supplies and overhead costs related to the active development of new products, enhanced product applications and improved manufacturing and value engineering of existing products.

Generally, RD&E costs are expensed as incurred. Certain RD&E costs applicable to the development of software are capitalized and amortized over the expected life of the product.

Amortization of intangible assets

Customer relationships, trademarks and other intangible assets arising from business combinations are amortized over their expected useful lives of 5-20 years.

Acquisition and restructuring related costs (or income)

The Company records costs or expenses incurred related to business combinations, organizational restructuring, or gains or losses attributable to any sales or dispositions of assets to acquisition and restructuring related expense, net.

Operating income

Operating income is gross profit less SG&A, RD&E, acquisition and restructuring related expense or income and amortization of intangible assets. Operating income excludes interest expense, income tax expense, and other

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non-operating expenses, net. We use operating income as well as other indicators as a measure of the profitability of our business.

Interest expense

The Company incurs interest expense on its Credit Facilities, as defined herein. The amortization of debt issuance costs and impact of our interest rate hedging instruments are also included in interest expense.

Net income

Net income is operating income less interest expense, other non-operating items, and provision for income taxes.

EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Consolidated segment income, Adjusted segment income, Adjusted segment income margin

EBITDA, adjusted EBITDA, adjusted EBITDA margin, consolidated segment income, adjusted segment income and adjusted segment income margin are key metrics used by management and our Board of Directors to assess our financial performance. For information about our use of these Non-GAAP measures and a reconciliation of these metrics to the nearest GAAP metric see “—Non-GAAP Reconciliation.” The reconciliation of consolidated segment income is included in “— Summary of Results of Operations.”

Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales. We derived the consolidated statements of operations for the Fiscal Years 2022 and 2021 from our audited consolidated financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. A discussion regarding our financial condition and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 is included under “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 9, 2022.

The following table summarizes our results of operations and a comparison of the change between the periods (in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2022","","2021"],["Net Sales","$","1,314,136","","","$","1,401,794"],["Cost of sales","717,101","","","746,012"],["Gross profit","597,035","","","655,782"],["Selling, general, and administrative expense","248,812","","","267,264"],["Research, development, and engineering expense","22,359","","","22,867"],["Acquisition and restructuring related expense","8,162","","","15,030"],["Amortization of intangible assets","32,129","","","32,647"],["Operating income","285,573","","","317,974"],["Interest expense, net","51,387","","","50,854"],["Loss on debt extinguishment","\u2014","","","9,418"],["Other (income) expense, net","(51)","","","(2,439)"],["Total other expense","51,336","","","57,833"],["Income from operations before income taxes","234,237","","","260,141"],["Provision for income taxes","54,890","","","56,416"],["Net income","$","179,347","","","$","203,725"],["Adjusted EBITDA (a)","$","367,575","","","$","421,737"]]
[[/GREPCENT_TABLE]]

(a) See “— Non-GAAP Reconciliation.”

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Fiscal Year 2022 Compared to Fiscal Year 2021

Net sales

Net sales decreased to $1,314.1 million in Fiscal Year 2022 from $1,401.8 million in Fiscal Year 2021, a decrease of $87.7 million or 6.3%. See segment discussion below for further information.

[[GREPCENT_TABLE]]
[["","2022"],["Volume","(19.8)","%"],["Price, net of discounts and allowances","13.4","%"],["Acquisitions","1.6","%"],["Currency and other","(1.5)","%"],["Total","(6.3)","%"]]
[[/GREPCENT_TABLE]]

The Fiscal Year 2022 decrease in net sales 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 eased and lead times normalized. Macroeconomic uncertainty associated with increasing concerns of an economic slowdown due to the rising interest rate environment and geopolitical factors in Europe also contributed to the decline in volume. The increase in the net price was due to price increases enacted to offset inflationary pressure, as well as reduced sales rebates to customers for the seasonal year.

Gross profit and Gross profit margin

Gross profit decreased to $597.0 million in Fiscal Year 2022 from $655.8 million in Fiscal Year 2021, a decrease of $58.8 million or 9.0%.

Gross profit margin decreased to 45.4% in Fiscal Year 2022 compared to 46.8% in Fiscal Year 2021, a decrease of 135 basis points primarily due to the decline in volume resulting in lower operating leverage as well as provisioning for slow moving or obsolete inventory. The gross margin decrease included a decrease of 25 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").

Selling, general, and administrative expense

Selling, general, and administrative expense decreased to $248.8 million in Fiscal Year 2022 from $267.3 million in Fiscal Year 2021, a decrease of $18.5 million or 6.9% primarily as a result of lower performance-related incentive based compensation and lower volume-based selling incentives and warranty expenses. Additionally, the Company initiated an enterprise cost reduction program to address the current market dynamics and maintain the Company’s strong financial metrics. As part of the program, the Company identified structural selling, general and administrative cost reduction opportunities totaling $25 million to $30 million in 2023, with initial savings of approximately $9 million that were realized in Fiscal Year 2022. These reductions are partially offset by a one-time expense associated with the discontinuation of a product joint development agreement. In Fiscal Year 2021, the Company incurred higher incentive compensation, increased stock-based compensation in connection with its IPO, and other IPO costs.

As a percentage of net sales, SG&A decreased to 18.9% in Fiscal Year 2022 as compared to 19.1% in Fiscal Year 2021, a decrease of 13 basis points primarily driven by the elevated costs incurred in the prior year as discussed above.

Research, development, and engineering expense

RD&E expense decreased to $22.4 million in Fiscal Year 2022 compared to $22.9 million in Fiscal Year 2021, a decrease of $0.5 million or 2.2%. As a percentage of net sales, RD&E remained effectively flat at 1.7% in Fiscal Year 2022 compared to 1.6% in Fiscal Year 2021.

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Acquisition and restructuring related expense

Acquisition and restructuring related expense decreased to $8.2 million in Fiscal Year 2022 as compared to $15.0 million in Fiscal Year 2021, a decrease of $6.8 million.

The $8.2 million expense in Fiscal Year 2022 was primarily driven by restructuring expenses related to the relocation of the corporate headquarters to Charlotte, North Carolina and the Company’s enterprise cost reduction program, as well as acquisition transaction and integration costs associated with the purchase of the Specialty Lighting Business, partially offset by a gain resulting from the release of certain reserves associated with the exit of an early-stage product line discontinued in 2021.

The $15.0 million expense in Fiscal Year 2021 was primarily driven by expenses related to a product discontinuance related to an early-stage product line acquired in 2018, the relocation of the corporate headquarters to Charlotte, North Carolina, and business-restructuring-related costs associated with the exit of redundant manufacturing and distribution facilities.

For additional information, see Note “19. Acquisition and Restructuring Related Expense” of Notes to Consolidated Financial Statements in this Form 10-K.

Amortization of intangible assets

Amortization of intangible assets decreased to $32.1 million in Fiscal Year 2022 from $32.6 million in Fiscal Year 2021, a decrease of $0.5 million or 1.6%, due to the amortization pattern of certain intangibles based on the declining balance method.

Operating income and operating income margin

Operating income decreased to $285.6 million in Fiscal Year 2022 from $318.0 million in Fiscal Year 2021, a decrease of $32.4 million or 10.2% due to the accumulated effect of the items described above. Operating income as a percentage of net sales (“operating margin”) was 21.7% in Fiscal Year 2022, a 95 basis point reduction from the 22.7% operating margin in Fiscal Year 2021.

Interest expense, net

Interest expense, net, inclusive of the loss on debt extinguishment, decreased to $51.4 million in Fiscal Year 2022 from $60.3 million in Fiscal Year 2021, a decrease of $8.9 million or 14.7%. The decrease was primarily due to the absence of a loss on debt extinguishment in 2022, which resulted in a $9.4 million expense in the prior year.

Interest expense in Fiscal Year 2022 consisted of $48.5 million of interest on the outstanding debt and $3.3 million of amortization of deferred financing fees, partially offset by $0.4 million of interest income. Interest expense in Fiscal Year 2021 consisted of $46.9 million on the outstanding debt, $9.4 million of a loss on debt extinguishment, and $4.0 million of amortization of deferred financing fees net of interest income.

Provision for income taxes

We incurred income tax expense of $54.9 million for Fiscal Year 2022 and $56.4 million for Fiscal Year 2021, a decrease of $1.5 million or 2.7%. This decrease in tax expense was primarily due to decreased income from operations.

Our effective income tax rate increased to 23.4% for Fiscal Year 2022 from 21.7% for Fiscal Year 2021 primarily due to withholding taxes related to repatriation of foreign earnings, the valuation allowance reduction in Fiscal Year 2021 and reduced benefits for stock option exercises during Fiscal Year 2022.

Net income

As a result of the foregoing, net income decreased to $179.3 million in Fiscal Year 2022 compared to net income of $203.7 million in Fiscal Year 2021, a decrease of $24.4 million or 12.0%.

Adjusted EBITDA and adjusted EBITDA margin

Adjusted EBITDA decreased to $367.6 million in Fiscal Year 2022 from $421.7 million in Fiscal Year 2021, a decrease of $54.1 million or 12.8% driven primarily by lower net sales and operating leverage resulting in a decrease in gross profit of $58.8 million, partially offset by a decrease in SG&A expenses of $18.5 million.

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Adjusted EBITDA margin decreased to 28.0% in Fiscal Year 2022 compared to 30.1% in Fiscal Year 2021, a decrease of 211 basis points.

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

Segment Results of Operations

The Company manages its business primarily on a geographic basis. The Company’s reportable segments consist of NAM and E&RW.

We evaluate performance based on net sales, gross profit, segment income and adjusted segment income, and use gross profit margin, segment income margin and adjusted segment income margin as comparable performance measures for our reporting segments.

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

[[GREPCENT_TABLE]]
[["(Dollars in Thousands)","Fiscal Year 2022","","Fiscal Year 2021"],["","Total","","NAM","","E&RW","","Total","","NAM","","E&RW"],["Net sales","$","1,314,136","","","$","1,108,859","","","$","205,277","","","$","1,401,794","","","$","1,160,850","","","$","240,944"],["Gross profit","597,035","","","514,855","","","82,180","","","655,782","","","558,950","","","96,832"],["Gross profit margin %","45.4","%","","46.4","%","","40.0","%","","46.8","%","","48.2","%","","40.2","%"],["Income from operations before income taxes","$","234,237","","","","","","","$","260,141"],["Expenses not allocated to segments"],["Corporate expense, net","30,151","","","","","","","53,430"],["Acquisition and restructuring related expense","8,162","","","","","","","15,030"],["Amortization of intangible assets in selling, general, and administrative expense","32,129","","","","","","","32,647"],["Interest expense, net","51,387","","","","","","","50,854"],["Loss on debt extinguishment","\u2014","","","","","","","9,418"],["Other (income) expense, net","(51)","","","","","","","(2,439)"],["Segment income (a)","$","356,015","","","$","308,627","","","$","47,388","","","$","419,081","","","$","359,886","","","$","59,195"],["Segment income margin %","27.1","%","","27.8","%","","23.1","%","","29.9","%","","31.0","%","","24.6","%"],["Adjusted segment income (b)","$","389,195","","","$","340,779","","","$","48,416","","","$","457,503","","","$","396,414","","","$","61,089"],["Adjusted segment income margin % (a)","29.6","%","","30.7","%","","23.6","%","","32.6","%","","34.1","%","","25.4","%"]]
[[/GREPCENT_TABLE]]

(a)Consolidated segment income is a non-GAAP measure.

(b)See “—Non-GAAP Reconciliation.”

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North America (“NAM’’)

(Dollars in thousands)

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2022","","2021"],["Net sales","$","1,108,859","","","$","1,160,850"],["Gross profit","$","514,855","","","$","558,950"],["Gross profit margin %","46.4","%","","48.2","%"],["Segment income","$","308,627","","","$","359,886"],["Segment income margin %","27.8","%","","31.0","%"],["Adjusted segment income(a)","$","340,779","","","$","396,414"],["Adjusted segment income margin %(a)","30.7","%","","34.1","%"]]
[[/GREPCENT_TABLE]]

(a)See “—Non-GAAP Reconciliation.”

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

[[GREPCENT_TABLE]]
[["","2022"],["Volume","(20.5)","%"],["Price, net of discounts and allowances","14.5","%"],["Acquisitions","1.9","%"],["Currency and other","(0.4)","%"],["Total","(4.5)","%"]]
[[/GREPCENT_TABLE]]

Net sales

Net sales decreased to $1,108.9 million in Fiscal Year 2022 from $1,160.9 million in Fiscal Year 2021, a decrease of $52.0 million or 4.5%.

This decrease 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 eased and lead times normalized, as well as macroeconomic uncertainty associated with increasing concerns of an economic slowdown due to the rising interest rate environment. The increase in the net price was due to price increases enacted to offset inflationary pressure as well as reduced sales rebates to customers for the seasonal year.

Gross profit and Gross profit margin

Gross profit decreased to $514.9 million in Fiscal Year 2022 from $559.0 million in Fiscal Year 2021, a decrease of $44.1 million or 7.9%.

Gross profit margin decreased to 46.4% in Fiscal Year 2022 from 48.2% in Fiscal Year 2021, a decline of 172 basis points, primarily driven by the decline in volume resulting in lower operating leverage combined with cost inflation and 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, partially offset by the net price increases discussed above.

Segment income and Segment income margin

Segment income decreased to $308.6 million in Fiscal Year 2022 from $359.9 million in Fiscal Year 2021, a decrease of $51.3 million or 14.2%. This was primarily driven by a decrease in sales and gross profit as discussed above, and higher SG&A expense partially attributable to a one-time expense associated with the discontinuation of a product joint development agreement, partially offset by lower volume-based incentive expenses. As a percentage of segment net sales, SG&A and RD&E expenses increased from 17.1% in the Fiscal Year 2021 to 18.6% as a result of the decline in sales as discussed above.

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Segment income margin decreased to 27.8% in Fiscal Year 2022 from 31.0% in Fiscal Year 2021, a decrease of 317 basis points primarily resulting from decreased gross profit margin as discussed above and higher SG&A expense as a percentage of segment net sales.

Adjusted segment income and Adjusted segment income margin

Adjusted segment income decreased to $340.8 million in Fiscal Year 2022 from $396.4 million in Fiscal Year 2021, a decrease of $55.6 million or 14.0%. This was driven by the lower segment income as discussed above, adjusted for additional non-cash or non-recurring charges.

Adjusted segment income margin decreased to 30.7% in Fiscal Year 2022 from 34.1% in Fiscal Year 2021, a decrease of 342 basis points.

Europe & Rest of World (“E&RW”)

(Dollars in thousands)

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2022","","2021"],["Net sales","$","205,277","","","$","240,944"],["Gross profit","$","82,180","","","$","96,832"],["Gross profit margin %","40.0","%","","40.2","%"],["Segment income","$","47,388","","","$","59,195"],["Segment income margin %","23.1","%","","24.6","%"],["Adjusted segment income(a)","$","48,416","","","$","61,089"],["Adjusted segment income margin %(a)","23.6","%","","25.4","%"]]
[[/GREPCENT_TABLE]]

(a)See “—Non-GAAP Reconciliation.”

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

[[GREPCENT_TABLE]]
[["","2022"],["Volume","(16.5)","%"],["Price, net of discounts and allowances","8.0","%"],["Currency and other","(6.3)","%"],["Total","(14.8)","%"]]
[[/GREPCENT_TABLE]]

Net sales

Net sales decreased to $205.3 million in Fiscal Year 2022 from $240.9 million in Fiscal Year 2021, a decrease of $35.6 million or 14.8%.

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

Gross profit and Gross profit margin

Gross profit decreased to $82.2 million in Fiscal Year 2022 from $96.8 million in Fiscal Year 2021, a decrease of $14.6 million or 15.1%.

Gross profit margin remained approximately consistent at 40.0% in Fiscal Year 2022 compared to 40.2% in Fiscal Year 2021.

Segment income and Segment income margin

Segment income decreased to $47.4 million in Fiscal Year 2022 from $59.2 million in Fiscal Year 2021, a decrease of $11.8 million or 19.9%. This was primarily driven by a decrease in sales and gross profit as discussed

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above, partially offset by lower SG&A expense. As a percentage of segment net sales, SG&A and RD&E expenses increased from 15.7% in the Fiscal Year 2021 to 16.9% as a result of lower net sales as discussed above.

Segment income margin decreased to 23.1% in Fiscal Year 2022 from 24.6% in Fiscal Year 2021, a decrease of 148 basis points. The decline was primarily attributable to the decreased sales and operating leverage

Adjusted segment income and Adjusted segment income margin

Adjusted segment income decreased to $48.4 million in Fiscal Year 2022 from $61.1 million in Fiscal Year 2021, a decrease of $12.7 million or 20.7%. This was primarily driven by the decreased sales and operating leverage adjusted for additional non-cash or non-recurring charges.

Adjusted segment income margin decreased to 23.6% in Fiscal Year 2022 from 25.4% in Fiscal Year 2021, a decrease of 177 basis points.

Non-GAAP Reconciliation

The Company uses EBITDA, adjusted EBITDA, adjusted EBITDA margin, consolidated segment income, 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), income taxes, depreciation, and amortization. Adjusted EBITDA is defined as EBITDA further adjusted for the impact of restructuring related income or expenses, stock-based compensation, currency exchange items and certain non-cash, nonrecurring, or other items that are included in net income 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, consolidated segment income, 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, consolidated segment income, adjusted segment income and adjusted segment income margin may differ from similar measures reported by other companies. EBITDA, adjusted EBITDA, adjusted EBITDA margin, consolidated segment income, 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, consolidated segment income and 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), operating income and segment income, which are prepared in accordance with GAAP. We have presented EBITDA, adjusted EBITDA, adjusted EBITDA margin, consolidated segment income, adjusted segment income and adjusted segment income margin solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. In the future we may incur expenses such as those added back to calculate adjusted EBITDA. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items.

45

Following is a reconciliation from net income to adjusted EBITDA (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2022","","2021"],["Net income","$","179,347","","","$","203,725"],["Depreciation","19,246","","","18,826"],["Amortization","38,393","","","38,990"],["Interest expense","51,387","","","50,854"],["Income taxes","54,890","","","56,416"],["Loss on extinguishment of debt","\u2014","","","9,418"],["EBITDA","343,263","","","378,229"],["Stock-based compensation(a)","1,602","","","19,019"],["Sponsor management fees(b)","\u2014","","","90"],["Currency exchange items(c)","926","","","4,485"],["Acquisition and restructuring related expense, net(d)","8,162","","","15,030"],["Other(e)","13,622","","","4,884"],["Total Adjustments","24,312","","","43,508"],["Adjusted EBITDA","$","367,575","","","$","421,737"],["Adjusted EBITDA margin","28.0","%","","30.1","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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\u2019s initial public offering (the \u201cIPO\u201d), 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 year ended December 31, 2022 would have been an expense of $6.9 million."],["(b)","","Represents fees paid to certain of the Company\u2019s 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 year ended December 31, 2022 primarily include $5.0 million of costs associated with the relocation of the Corporate headquarters, $2.9 million separation costs associated with a reduction-in-force, and $1.9 million transaction costs associated with the acquisition of the Specialty Lighting Business, partially offset by a $2.4 million gain resulting from the release of certain reserves associated with the exit of an early-stage product line discontinued in 2021. Adjustments in the year ended December 31, 2021 primarily include $9.9 million of business restructuring related costs associated with the exit of an early-stage product line acquired in 2018, $3.0 million severance and relocation costs associated with the relocation of our Corporate headquarters, and $2.1 million of business restructuring related costs associated with the exit of redundant manufacturing and distribution facilities."],["(e)","","Adjustments in the year ended December 31, 2022 include $5.5 million of expenses associated with the discontinuation of a product joint development agreement, a $3.3 million 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, $2.3 million of transitional expenses incurred to enable go-forward public company regulatory compliance, $1.4 million of costs incurred related to the selling stockholder offering of shares in May 2022, which are reported in SG&A in our consolidated statements of operations, $0.9 million of expenses related to the Corporate headquarters transition, $0.2 million bad debt reserves related to certain customers impacted by the conflict in Russia and Ukraine, and other immaterial items, partially offset by subsequent collections and $1.1 million of gains resulting from an insurance policy reimbursement related to the fire incident in our manufacturing and administrative facilities in Yuncos, Spain. Adjustments in the year ended December 31, 2021 primarily include $7.4 million net insurance settlement proceeds which reflects an incurred property damage loss of $5.4 million, recorded in the second quarter, offset by an insurance policy reimbursement of $12.8 million received in the fourth quarter for the aforementioned property loss as well as the consequential business interruption loss amount caused by the fire incident in Yuncos Spain, a $4.0 million legal reserve and fees, $4.0 million of operating losses related to the early-stage product line acquired in 2018 mentioned above, $1.9 million related to debt refinancing, $1.0 million related to our IPO, and other immaterial items."]]
[[/GREPCENT_TABLE]]

46

Following is a reconciliation from income from operations before income taxes to consolidated segment income and adjusted segment income (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2022","","2021"],["Income from operations before income taxes","$","234,237","","","$","260,141"],["Expenses not allocated to segments"],["Corporate expense, net","30,151","","","53,430"],["Acquisition and restructuring related expense","8,162","","","15,030"],["Amortization of intangible assets in selling, general, and administrative expense","32,129","","","32,647"],["Interest expense, net","51,387","","","50,854"],["Loss on debt extinguishment","\u2014","","","9,418"],["Other (income) expense, net","(51)","","","(2,439)"],["Segment income","356,015","","","419,081"],["Depreciation","17,815","","","17,891"],["Amortization","6,265","","","6,352"],["Stock-based compensation (a)","(434)","","","9,231"],["Other (b)","9,534","","","4,948"],["Total Adjustments","33,180","","","38,422"],["Adjusted segment income","$","389,195","","","$","457,503"],["Adjusted segment income margin","29.6","%","","32.6","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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 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 year ended December 31, 2022 would have been an expense of $0.8 million."],["(b)","","Adjustments in the year ended December 31, 2022 include $5.5 million of expenses associated with the discontinuation of a product joint development agreement and a $3.3 million 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, $0.2 million bad debt reserves related to certain customers impacted by the conflict in Russia and Ukraine, and other immaterial items. Adjustments in the year ended December 31, 2021 include non-recurring severance expenses, retention bonuses, legal fees, and the operating losses of approximately $4.0 million related to an early-stage product line acquired in 2018 that was phased out in 2021, $5.4 million of costs related to a fire at our manufacturing and administrative facilities in Yuncos Spain incurred in the second quarter of 2021 were offset by insurance proceeds received in the fourth quarter of 2021."]]
[[/GREPCENT_TABLE]]

47

Following is a reconciliation from segment income to adjusted segment income for NAM (dollars in thousands):    

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2022","","2021"],["Segment income","$","308,627","","","$","359,886"],["Depreciation","17,049","","","16,871"],["Amortization","6,265","","","6,351"],["Stock-based compensation (a)","(494)","","","8,641"],["Other (b)","9,332","","","4,665"],["Total Adjustments","32,152","","","36,528"],["Adjusted segment income","$","340,779","","","$","396,414"],["Adjusted segment income margin","30.7","%","","34.1","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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 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 year ended December 31, 2022 would have been an expense of $0.6 million."],["(b)","","Adjustments in the year ended December 31, 2022 for NAM include $5.5 million of expenses associated with the discontinuation of a product joint development agreement and a $3.3 million 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 other immaterial items. Adjustments in the year ended December 31, 2021 for NAM include non-recurring severance expenses, retention bonuses, legal fees, and the operating losses of approximately $4.0 million related to an early-stage product line acquired in 2018 that was phased out in 2021."]]
[[/GREPCENT_TABLE]]

48

Following is a reconciliation from segment income to adjusted segment income for E&RW (dollars in thousands):

[[GREPCENT_TABLE]]
[["","Years Ended December 31,"],["","2022","","2021"],["Segment income","$","47,388","","","$","59,195"],["Depreciation","766","","","1,020"],["Amortization","\u2014","","","1"],["Stock-based compensation (a)","60","","","590"],["Other (b)","202","","","283"],["Total Adjustments","1,028","","","1,894"],["Adjusted segment income","$","48,416","","","$","61,089"],["Adjusted segment income margin","23.6","%","","25.4","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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 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 year ended December 31, 2022 would have been an expense of $0.2 million."],["(b)","","Adjustments in the year ended December 31, 2022 for E&RW include $0.2 million bad debt reserves related to certain customers impacted by the conflict in Russia and Ukraine partially offset by subsequent collections. Adjustments in the year ended December 31, 2021 for E&RW include $5.4 million of costs related to a fire at our manufacturing and administrative facilities in Yuncos Spain incurred in the second quarter of 2021 that were offset by the insurance proceeds received in the fourth quarter of 2021."]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

Our primary sources of liquidity are net cash provided by operating activities and availability under the ABL Facility. During the year ended December 31, 2022, we also opened a revolving credit facility for our Spain subsidiary in the amount of €3 million as a local source of liquidity. As of December 31, 2022, the Spain revolving facility balance was zero with a borrowing availability of €3 million.

Primary working capital requirements are for raw materials, assembled component and certain finished goods inventories and supplies, payroll, manufacturing, freight and distribution, facility, and other operating expenses. Cash flow and working capital requirements fluctuate during the year, driven primarily by the seasonal demand for our products, an early buy program, the timing of inventory purchases and receipt of customer payments. As such, the utilization of the ABL Facility fluctuates during the year.

In the fourth quarter, we incentivize trade customers to buy and stock up in preparation for next year’s pool season under an “early buy” program that offers a price discount and extended payment terms. Under the early buy program in 2022, we generally shipped products from October through March and receive payments for these shipments on extended credit terms, generally from February through July 2023. As a result, our accounts receivable balance increases from October through March before the early buy payments are received. In addition, cash flow is higher in the second quarter as the seasonality of our business peaks and payments are received.

Unrestricted cash and cash equivalents totaled $56.2 million as of December 31, 2022, which is a decrease of $209.6 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 stockholders. We believe that net cash provided by operating activities and availability under the ABL Facility will

49

be adequate to finance our working capital requirements, inclusive of capital expenditures, and debt service over the next 12 months.

Credit Facilities

We amended the First Lien Term Facility and ABL Facility (collectively “Credit Facilities”) in the fourth quarter of 2022. For further information on the terms of the Credit Facilities, please see Note 9, “Long-Term Debt” of Notes to the Consolidated Financial Statements in this Form 10-K.

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

[[GREPCENT_TABLE]]
[["","December 31,"],["","2022","","2021"],["First Lien Term Facility, due May 28, 2028","$","985,000","","","$","995,000"],["Incremental Term Loan B, due May 28, 2028","124,688","","","\u2014"],["ABL Revolving Credit Facility","\u2014","","","\u2014"],["Other bank debt","4,593","","","\u2014"],["Finance lease obligations","6,728","","","7,780"],["Subtotal","1,121,009","","","1,002,780"],["Less: Current portion of the long-term debt","(14,531)","","","(12,155)"],["Less: Unamortized debt issuance costs","(21,423)","","","(17,501)"],["Total","$","1,085,055","","","$","973,124"]]
[[/GREPCENT_TABLE]]

ABL Facility

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.

The aggregate amount of the revolving loan commitments on the ABL Facility is $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 $50.0 million is available for the issuance of letters of credit in U.S. Dollars, of which $20.0 million is available for the issuance of letters of credit in Canadian dollars. The ABL Facility also includes a $50.0 million swingline loan facility. The ABL Facility matures June 1, 2026. We have the option to increase the ABL Facility, subject to certain conditions, including the commitment of the participating lenders.

For the year ended December 31, 2022, the average borrowing base under the ABL Facility was $246.5 million and the average loan balance outstanding was $73.1 million. As of December 31, 2022, the loan balance was zero with a borrowing availability of $208.4 million. During the year ended December 31, 2022, the effective interest rate was 6.84%.

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 as defined by the credit

50

agreement 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.

On December 13, 2022, the Company entered into a fourth amendment to the Company’s First Lien Credit Agreement, which provides for, among other things, an incremental term loan under the First Lien Term Facility in an aggregate original principal amount of $125 million (the “Incremental Term Loan B”). The Incremental Term Loan B matures on May 28, 2028. The Incremental Term Loan B bears interest at an annual floating rate based on a forward-looking rate of the Secured Overnight Financing rate (“Term SOFR”) (with a 0.50% floor) plus 3.25%. The incremental loan requires a $0.3 million repayment of principal on the last business day of each March, June, September and December.

As of December 31, 2022, the balance outstanding under the First Lien Term Facility was $985.0 million and the balance outstanding under the Incremental Term Loan B was $124.7 million. The effective interest rate of the First Lien facilities, net of the interest rate hedge, was 4.61%.

As of December 31, 2021, the balance outstanding under the First Lien Term Facility was $995.0 million and the effective interest rate, net of the interest rate hedge, was 4.77%.

Covenant Compliance

The Credit Facilities contain various restrictions, covenants and collateral requirements. As of December 31, 2022, we were in compliance with all covenants under the Credit Facilities.

Sources and Uses of Cash

Following is a summary of our cash flows from operating, investing, and financing activities (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","Years Ended December 31,"],["","","2022","","2021"],["Net cash provided by operating activities","","$","115,944","","","$","189,387"],["Net cash used in investing activities","","(92,573)","","","(48,777)"],["Net cash (used in) provided by financing activities","","(229,240)","","","10,957"],["Effect of exchange rate changes on cash and cash equivalents and restricted cash","","(3,750)","","","(1,065)"],["Change in cash and cash equivalents and restricted cash","","$","(209,619)","","","$","150,502"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities

Net cash provided by operating activities decreased to $115.9 million for the year ended December 31, 2022 from $189.4 million for the year ended December 31, 2021, a decrease of $73.5 million, or 38.8%. The decrease was driven by increased cash used for working capital compared to the prior-year period and a decrease in net income.

Net cash used in investing activities

Net cash used in investing activities increased to $92.6 million for the year ended December 31, 2022 compared to $48.8 million for the year ended December 31, 2021, an increase of $43.8 million, or 89.8%. The increase was primarily driven by the acquisition of the Specialty Lighting Business combined with increased capital expenditures in property, plant and equipment.

Net cash (used in) provided by financing activities

Net cash used in financing activities was $229.2 million for the year ended December 31, 2022 compared to net cash provided of $11.0 million for the year ended December 31, 2021, a decrease of $240.2 million. For the year ended December 31, 2022, net cash used by financing activities was primarily driven by share repurchases, partially offset by the proceeds from the issuance of long-term debt. For the year ended December 31, 2021, net cash provided by financing activities was primarily driven by net proceeds from the IPO and proceeds from new borrowings, partially offset by the repayment of long-term debt.

51

Contractual Obligations and Other Commitments

The following table summarizes our contractual cash obligations as of December 31, 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","2023","","2024","","2025","","2026","","2027","","Thereafter","","Total"],["Long-term debt (a)","$","12,325","","","$","12,399","","","$","12,478","","","$","12,390","","","$","11,250","","","$","1,053,439","","","$","1,114,281"],["Letters of credit","4,500","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","4,500"],["Operating lease commitments (b)","11,522","","","9,809","","","8,579","","","7,979","","","7,683","","","47,605","","","93,177"],["Finance lease commitments","2,254","","","2,247","","","1,878","","","312","","","307","","","77","","","7,075"],["Total","$","30,601","","","$","24,455","","","$","22,935","","","$","20,681","","","$","19,240","","","$","1,101,121","","","$","1,219,033"]]
[[/GREPCENT_TABLE]]

(a)     For further information on the terms of the Credit Facilities, please see Note 9. “Long-Term Debt” of Notes to Consolidated Financial Statements in this Form 10-K and “Liquidity and Capital Resources”.

(b)     Operating lease commitments primarily relate to our office, distribution, and manufacturing facilities. All of these obligations require cash payments to be made by us over varying periods of time. Certain leases are renewable at our option for periods of one to ten years and certain of these arrangements are cancellable on short notice while others require payment upon early termination. Refer to Note 15. “Leases” of Notes to Consolidated Financial Statements in this Form 10-K for further information.

Off-Balance Sheet Arrangements

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

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of our consolidated financial statements and notes to consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosures of contingent assets and liabilities. We base these estimates on historical results and various other assumptions believed to be reasonable, all of which form the basis for making estimates concerning the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

Our significant accounting policies are described in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We believe that the following critical accounting estimates include the most significant estimates and management judgments used in preparing the consolidated financial statements.

Customer Rebates

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

Goodwill and Indefinite Lived Intangibles

We review goodwill and indefinite lived intangible assets for impairment annually or on an interim basis whenever events or changes in circumstances indicate the fair value of such assets may be below their carrying amount. At December 31, 2022, goodwill and indefinite lived intangible assets were $932.4 million and $736.0 million respectively.

For goodwill, we may first make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value. The qualitative impairment assessment includes considering various factors including macroeconomic conditions, industry and market conditions, cost factors, and any reporting unit specific events. If it is determined through the qualitative assessment that the reporting unit’s fair value is more likely than not greater than its carrying value, the quantitative impairment assessment is not required. If the qualitative assessment indicates it is more likely than not that the reporting unit’s fair value is no greater than its

52

carrying value, we must perform a quantitative impairment assessment. If it is determined a quantitative assessment is necessary, we would compare the fair value of the reporting unit to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss. Fair value of the reportable unit is estimated using a discounted six-year projected cash flow analyses and a terminal value calculation at the end of the six-year period. As of December 31, 2022 we performed a qualitative analysis and determined that the fair values of the reporting units were more likely than not greater than the carrying amounts. In 2022 and 2021, the Company did not need to proceed beyond the qualitative analysis, and no goodwill impairments were recorded.

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

Stock-Based Compensation

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

Warranties

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

Inventory Valuation

Inventories consist of merchandise held for sale and are stated at the lower of cost or net realizable value. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recorded in cost of sales in our consolidated statement of operations as a loss in the period in which it occurs. We provide provisions for losses related to inventories based on historical purchase cost, selling price, margin, and current business trends. The estimates have calculations that require us to make assumptions based on the current rate of sales, age, salability of inventory, and profitability of inventory, all of which may be affected by changes in merchandising mix and consumer preferences. We review and update these reserves on a quarterly basis.

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

Recently Issued and Adopted Accounting Standards

See Note 2. “Significant Accounting Policies” of Notes to Consolidated Financial Statements in this Form 10-K for additional information.