Hayward Holdings Inc.
02/25/2026 | Press release | Distributed by Public on 02/25/2026 06:08
Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Company
The Company is a leading global designer and manufacturer of a broad portfolio of pool equipment, outdoor living products and industrial flow control products. The Company benefits from a large installed base, recurring aftermarket demand (such as the ongoing repair, replacement, remodeling and upgrading of equipment for existing pools) and from a history of innovation, which together support long-term growth and cash generation. Our engineered products, which include various energy-efficient and more environmentally sustainable offerings, enhance the pool owner's outdoor living lifestyle while also delivering high quality water, pleasant ambiance and ease of use for the ultimate backyard experience. Aftermarket replacements and upgrades to higher value IoT and energy efficient models are a primary growth driver for our business.
We have an estimated North American residential pool market share of approximately 33%. We believe that we are well-positioned for future growth. We estimate aftermarket sales represent approximately 85% of North American residential pool 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 eight 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. 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.
The Company has seven manufacturing facilities worldwide, which are located in North Carolina, Georgia, Tennessee, Rhode Island, Spain (two) and China, and other facilities in the United States, Canada, France and Australia.
Segments
Our business is organized into two reportable segments: NAM and E&RW. The Company determined its reportable segments based on how the Chief Operating Decision Maker ("CODM") reviews the Company's operating results in assessing performance and allocating resources. The Company's CODM is the President and Chief Executive Officer. NAM and E&RW accounted for approximately 85% and 15% of total net sales, respectively, for both Fiscal Year 2025 and Fiscal Year 2024.
NAM 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.
E&RW 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.
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:
•Seasonality.Our business is seasonal, with sales typically higher in the second and fourth quarters. Seasonality is influenced by the timing of customer purchasing patterns and the Company's "Early Buy" Program, which features price discounts and extended payment terms. These purchasing patterns can impact inventory levels, accounts receivable and cash flows during the year. Revenue is recognized upon shipment of products, which cannot be returned after 10 days from receipt of goods. 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 generally 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 September 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 most of our sales are to distributors whose inventory of our products may vary, including 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. 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.
•Tariffs, Trade Restrictions and Other Geopolitical Events. The imposition of, and threat of imposition of, tariffs and other trade restrictions by the United States government in 2025, and tariffs and other trade restrictions announced by governments of other nations in response to these actions, have created substantial uncertainty in the global economy. This uncertainty, as well as the direct impact of these tariffs and other trade restrictions, may adversely affect the Company's business by reducing market demand for the Company's products, increasing the Company's supply costs that cannot be passed on to customers and/or adversely affecting the competitiveness of the Company's products against those of manufacturers not subject to such tariffs and trade restrictions. Geopolitical conflicts around the world have also created substantial uncertainty in the global economy, including as a result of sanctions and penalties imposed in response to these conflicts. In particular, armed conflicts in the Middle East and in Ukraine and Russia have adversely affected market demand in the Middle East and Asia, which has negatively impacted our results in our E&RW segment. See "-Segment-Europe & Rest of World ("E&RW")" below. Given the nature of our business and global operations, if these or other geopolitical conflicts continue or worsen, our business and results of operations may be adversely affected.
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, chlorine generators, 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 either an offsetting adjustment to accounts receivable or recognition of an accrued liability. 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 warranty, 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, warehousing, and administrative expenses. Other than variable compensation, SG&A is generally not directly proportional to net sales.
Research, development and engineering expense
The Company primarily 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 expense (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, including impairments, 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 non-operating expenses, net. We use operating income as well as other indicators as a measure of the profitability of our business.
Interest expense, net
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 net interest expense, other non-operating items, and provision for income taxes.
EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted segment income, Adjusted segment income margin
EBITDA, adjusted EBITDA, adjusted EBITDA margin, 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."
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 Fiscal Years 2025 and 2024 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, 2024, compared to the year ended December 31, 2023, 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, 2024, filed with the SEC on February 27, 2025.
The following table summarizes our results of operations and a comparison of the change between the periods (in thousands):
| Years Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Net Sales | $ | 1,122,155 | $ | 1,051,606 | |||||||
| Cost of sales | 583,465 | 564,630 | |||||||||
| Gross profit | 538,690 | 486,976 | |||||||||
| Selling, general, and administrative expense | 246,892 | 217,147 | |||||||||
| Research, development, and engineering expense | 27,201 | 25,778 | |||||||||
| Acquisition and restructuring related expense | 3,886 | 6,464 | |||||||||
| Amortization of intangible assets | 27,461 | 28,800 | |||||||||
| Operating income | 233,250 | 208,787 | |||||||||
| Interest expense, net | 50,282 | 62,163 | |||||||||
| Loss on debt extinguishment | - | 4,926 | |||||||||
| Other income, net | (1,669) | (2,484) | |||||||||
| Total other expense | 48,613 | 64,605 | |||||||||
| Income from operations before income taxes | 184,637 | 144,182 | |||||||||
| Provision for income taxes | 33,067 | 25,527 | |||||||||
| Net income | $ | 151,570 | $ | 118,655 | |||||||
|
Adjusted EBITDA (a)
|
$ | 299,279 | $ | 277,447 | |||||||
(a) See "- Non-GAAP Reconciliation."
Fiscal Year 2025 Compared to Fiscal Year 2024
Net sales
Net sales increased to $1,122.2 million in Fiscal Year 2025 from $1,051.6 million in Fiscal Year 2024, an increase of $70.6 million, or 6.7%. See segment discussion below for further information.
| 2025 | |||||
| Price, net of discounts and allowances | 5.4 | % | |||
| Acquisitions | 1.1 | % | |||
| Currency and other | 0.2 | % | |||
| Volume | - | % | |||
| Total | 6.7 | % | |||
The Fiscal Year 2025 increase in net sales was primarily driven by positive net price and the favorable impact from acquisitions. The increase in net price was due to price increases enacted to offset inflationary and tariff pressures.
Gross profit and Gross profit margin
Gross profit increased to $538.7 million in Fiscal Year 2025 from $487.0 million in Fiscal Year 2024, an increase of $51.7 million, or 10.6%.
Gross profit margin increased to 48.0% in Fiscal Year 2025 compared to 46.3% in Fiscal Year 2024, an increase of 170 basis points, due to positive net price impact, decreased warranty expenses and operational efficiencies in our manufacturing facilities, partially offset by higher net tariffs and inflation.
Selling, general and administrative expense
Selling, general and administrative expense increased to $246.9 million in Fiscal Year 2025 from $217.1 million in Fiscal Year 2024, an increase of $29.8 million, or 13.7%, primarily due to higher incentive compensation, higher wage inflation, investments in our selling and customer service teams and a full year of expense related to ChlorKing HoldCo, LLC and related entities ("ChlorKing") acquired in June 2024 compared to six months of expense in the prior year.
As a percentage of net sales, SG&A increased to 22.0% in Fiscal Year 2025 as compared to 20.6% in Fiscal Year 2024, an increase of 140 basis points, primarily due to the factors described above.
Research, development and engineering expense
RD&E expense increased to $27.2 million in Fiscal Year 2025 compared to $25.8 million in Fiscal Year 2024, an increase of $1.4 million, or 5.5%. As a percentage of net sales, RD&E remained relatively flat at 2.4% in Fiscal Year 2025 as compared to 2.5% in Fiscal Year 2024. RD&E spend continues to be focused on new product development and new product quality.
Acquisition and restructuring related expense
Acquisition and restructuring related expense decreased to $3.9 million in Fiscal Year 2025 as compared to $6.5 million in Fiscal Year 2024, a decrease of $2.6 million.
The $3.9 million expense in Fiscal Year 2025 primarily included $3.1 million of compensation expenses for the retention of key employees acquired in the ChlorKing acquisition. The expense was recognized over the 12-month service period from the date of the acquisition on June 26, 2024. Other costs incurred in Fiscal Year 2025 related to restructuring actions within E&RW. In comparison, the $6.5 million expense in Fiscal Year 2024 was primarily driven by $4.3 million of acquisition and integration costs associated with the acquisition of the ChlorKing business, which included $3.2 million of compensation expenses for the retention of key employees acquired in the ChlorKing acquisition. Fiscal Year 2024 also included costs associated with the centralization and consolidation of operations in Europe.
For additional information, see Note 19."Acquisitions and Restructuring" of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Amortization of intangible assets
Amortization of intangible assets decreased to $27.5 million in Fiscal Year 2025 from $28.8 million in Fiscal Year 2024, a decrease of $1.3 million, or 4.6%, due to the amortization pattern of certain intangible asset classes based on the declining balance method, partially offset by a full year of amortization expense on the intangible assets acquired as part of the acquisition of ChlorKing in June 2024 compared to six months of expense in the prior year.
Operating income and operating income margin
Operating income increased to $233.3 million in Fiscal Year 2025 from $208.8 million in Fiscal Year 2024, an increase of $24.5 million, or 11.7%, due to the accumulated effect of the items described above. Operating income as a percentage of net sales ("operating margin") was 20.8% in Fiscal Year 2025, a 90 basis point increase from the 19.9% operating margin in Fiscal Year 2024.
Interest expense, net
Interest expense, net, decreased to $50.3 million in Fiscal Year 2025 from $62.2 million in Fiscal Year 2024, a decrease of $11.9 million, or 19.1%. The decrease was primarily due to lower interest rates, reduced debt as a result of the repayment of the Incremental Term Loan B principal balance in April 2024 and increased interest income on cash investment balances.
Interest expense in Fiscal Year 2025 consisted of $59.7 million of interest on the outstanding debt, net of the impact from the interest rate swaps, and $3.8 million of amortization of deferred financing fees, partially offset by $13.2 million of interest income. Interest expense in Fiscal Year 2024 consisted of $68.0 million of interest on the outstanding debt, net of the impact from the interest rate swaps, and $4.2 million of amortization of deferred financing fees, partially offset by $10.1 million of interest income.
Loss on extinguishment of debt
There was no loss on extinguishment of debt in Fiscal Year 2025. The $4.9 million loss on extinguishment of debt for Fiscal Year 2024 was incurred as a result of the voluntary repayment of the Incremental Term Loan B principal balance in April 2024.
Provision for income taxes
We incurred income tax expense of $33.1 million for Fiscal Year 2025 and $25.5 million for Fiscal Year 2024, an increase of $7.6 million, or 29.5%. This increase in tax expense was primarily due to increased operating income.
Our effective income tax rate increased to 17.9% for Fiscal Year 2025 from 17.7% for Fiscal Year 2024 primarily due to higher foreign derived intangible income deductions during the prior year, partially offset by lower state and local income taxes.
Net income
As a result of the foregoing, net income increased to $151.6 million in Fiscal Year 2025 compared to net income of $118.7 million in Fiscal Year 2024, an increase of $32.9 million, or 27.7%.
Net income margin increased to 13.5% for Fiscal Year 2025 compared to 11.3% for Fiscal Year 2024, an increase of 220 basis points.
Adjusted EBITDA
Adjusted EBITDA increased to $299.3 million in Fiscal Year 2025 from $277.4 million in Fiscal Year 2024, an increase of $21.9 million, or 7.9%, driven primarily by increased net sales and higher gross profit, partially offset by an increase in SG&A expenses.
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 we use gross profit margin, segment income margin and adjusted segment income margin as comparable performance measures for our reporting segments.
Segment income represents segment net sales less cost of sales, segment SG&A and RD&E, excluding acquisition and restructuring related expense as well as amortization of intangible assets. 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 intangible assets recorded within cost of sales, 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.
North America
| (Dollars in thousands) | Year Ended | |||||||||||||||||||
| December 31, 2025 | December 31, 2024 | |||||||||||||||||||
| Net sales | $ | 959,158 | $ | 895,498 | ||||||||||||||||
| Gross profit | $ | 478,906 | $ | 433,274 | ||||||||||||||||
| Gross profit margin % | 49.9 | % | 48.4 | % | ||||||||||||||||
| Segment income | $ | 284,758 | $ | 261,735 | ||||||||||||||||
| Segment income margin % | 29.7 | % | 29.2 | % | ||||||||||||||||
|
Adjusted segment income (a)
|
$ | 310,683 | $ | 290,964 | ||||||||||||||||
|
Adjusted segment income margin % (a)
|
32.4 | % | 32.5 | % | ||||||||||||||||
(a) See "-Non-GAAP Reconciliation."
The year-over-year net sales increase was driven by the following factors:
| 2025 | |||||||||||
| Price, net of allowances and discounts | 6.3 | % | |||||||||
| Acquisitions | 1.3 | % | |||||||||
| Currency and other | (0.1) | % | |||||||||
| Volume | (0.3) | % | |||||||||
| Total | 7.1 | % | |||||||||
Net sales
Net sales increased to $959.2 million in Fiscal Year 2025 from $895.5 million in Fiscal Year 2024, an increase of $63.7 million, or 7.1%.
This increase was driven primarily by factors consistent with those discussed in the consolidated results above, partially offset by a modest decline in volume.
Gross profit and Gross profit margin
Gross profit increased to $478.9 million in Fiscal Year 2025 from $433.3 million in Fiscal Year 2024, an increase of $45.6 million, or 10.5%.
Gross profit margin increased to 49.9% for Fiscal Year 2025 from 48.4% for Fiscal Year 2024, an increase of 150 basis points. Gross margin increased due to positive net price impact, decreased warranty expenses and operational efficiencies in our manufacturing facilities, partially offset by higher net tariffs and inflation.
Segment income and Segment income margin
Segment income increased to $284.8 million in Fiscal Year 2025 from $261.7 million in Fiscal Year 2024, an increase of $23.1 million, or 8.8%. This was primarily attributable to the increase in net sales as discussed above, partially offset by higher SG&A expense due to higher incentive compensation and higher salary costs driven by investments in our selling and customer care teams and wage inflation.
Segment income margin increased to 29.7% in Fiscal Year 2025 from 29.2% in Fiscal Year 2024, an increase of 50 basis points primarily resulting from the increase in segment income discussed above.
Adjusted segment income and Adjusted segment income margin
Adjusted segment income increased to $310.7 million in Fiscal Year 2025 from $291.0 million in Fiscal Year 2024, an increase of $19.7 million, or 6.8%. This was driven by the increased 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 32.4% in Fiscal Year 2025 from 32.5% in Fiscal Year 2024, a decrease of 10 basis points.
Refer to "-Non-GAAP Reconciliation" for a reconciliation of segment income to adjusted segment income.
Europe & Rest of World
| (Dollars in thousands) | Years Ended December 31, | ||||||||||||||||
| 2025 | 2024 | ||||||||||||||||
| Net sales | $ | 162,997 | $ | 156,108 | |||||||||||||
| Gross profit | $ | 59,784 | $ | 53,702 | |||||||||||||
| Gross profit margin % | 36.7 | % | 34.4 | % | |||||||||||||
| Segment income | $ | 26,540 | $ | 21,632 | |||||||||||||
| Segment income margin % | 16.3 | % | 13.9 | % | |||||||||||||
|
Adjusted segment income (a)
|
$ | 28,301 | $ | 22,857 | |||||||||||||
|
Adjusted segment income margin % (a)
|
17.4 | % | 14.6 | % | |||||||||||||
(a) See "-Non-GAAP Reconciliation."
The year-over-year net sales increase was driven by the following:
| 2025 | ||||||||
| Volume | 2.2 | % | ||||||
| Currency and other | 2.1 | % | ||||||
| Price, net of allowances and discounts | 0.1 | % | ||||||
| Total | 4.4 | % | ||||||
Net sales
Net sales increased to $163.0 million in Fiscal Year 2025 from $156.1 million in Fiscal Year 2024, an increase of $6.9 million, or 4.4%.
The increase in net sales was primarily due to growth in volume, the favorable impact from foreign currency translation and positive net price to offset inflation. The volume growth was driven by Early Buy shipments and improved market conditions in Asia and Europe compared to the prior year.
Gross profit and Gross profit margin
Gross profit increased to $59.8 million in Fiscal Year 2025 from $53.7 million in Fiscal Year 2024, an increase of $6.1 million, or 11.3%.
Gross profit margin increased to 36.7% in Fiscal Year 2025 compared to 34.4% in Fiscal Year 2024, an increase of 230 basis points, primarily driven by operational efficiencies related to higher volume.
Segment income and Segment income margin
Segment income increased to $26.5 million in Fiscal Year 2025 from $21.6 million in Fiscal Year 2024, an increase of $4.9 million, or 22.7%. This was primarily driven by an increase in net sales and gross profit as discussed above.
Segment income margin increased to 16.3% in Fiscal Year 2025 from 13.9% in Fiscal Year 2024, an increase of 240 basis points, resulting from the increase in gross profit.
Adjusted segment income and Adjusted segment income margin
Adjusted segment income increased to $28.3 million in Fiscal Year 2025 from $22.9 million in Fiscal Year 2024, an increase of $5.4 million, or 23.8%. This was primarily driven by the increase in net sales and gross profit as discussed above, after adjusting for the non-cash and specified costs described in "-Non-GAAP Reconciliation" below.
Adjusted segment income margin increased to 17.4% in Fiscal Year 2025 from 14.6% in Fiscal Year 2024, an increase of 280 basis points.
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), 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, 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, amortization of intangible assets recorded within cost of sales, 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.
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 titled measures of other companies and may not be an appropriate measure for performance relative to other companies. EBITDA, adjusted EBITDA 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) and segment income which are prepared in accordance with GAAP. We have presented EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted segment income and adjusted segment income margin solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. In the future we may incur expenses such as those added back to calculate adjusted EBITDA. Our presentation of adjusted EBITDA and adjusted segment income should not be construed as an inference that our future results will be unaffected by these items.
Net Income and Net Income Margin to Adjusted EBITDA and Adjusted EBITDA Margin
Following is a reconciliation from net income and net income margin to adjusted EBITDA and adjusted EBITDA margin:
| (Dollars in thousands) | Years Ended December 31, | |||||||||||||
| 2025 | 2024 | |||||||||||||
| Net income | $ | 151,570 | $ | 118,655 | ||||||||||
| Depreciation | 22,835 | 20,078 | ||||||||||||
| Amortization | 34,451 | 35,783 | ||||||||||||
|
Interest expense, net
|
50,282 | 62,163 | ||||||||||||
| Income taxes | 33,067 | 25,527 | ||||||||||||
| Loss on debt extinguishment | - | 4,926 | ||||||||||||
| EBITDA | 292,205 | 267,132 | ||||||||||||
|
Stock-based compensation (a)
|
57 | 608 | ||||||||||||
|
Currency exchange items(b)
|
79 | (836) | ||||||||||||
|
Acquisition and restructuring related expense, net(c)
|
3,886 | 6,464 | ||||||||||||
|
Other(d)
|
3,052 | 4,079 | ||||||||||||
| Total Adjustments | 7,074 | 10,315 | ||||||||||||
| Adjusted EBITDA | $ | 299,279 | $ | 277,447 | ||||||||||
| Net income margin | 13.5 | % | 11.3 | % | ||||||||||
| Adjusted EBITDA margin | 26.7 | % | 26.4 | % | ||||||||||
|
(a)
|
Represents non-cash stock-based compensation expense related to equity awards issued to management, employees, and directors. 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").
|
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| (b) |
Represents unrealized non-cash (gains) losses on foreign denominated monetary assets and liabilities and foreign currency contracts.
|
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| (c) |
Adjustments in the year ended December 31, 2025 are primarily driven by $3.1 million of compensation expenses for the retention of key employees acquired in the ChlorKing acquisition. Pursuant to the ChlorKing acquisition agreement, the full amount held in escrow was released to the specified key employees if such employees were employed by Hayward on the one-year anniversary of the acquisition. These payments were contingent on continued employment and were not dependent on the achievement of any metric or performance measure. The retention costs were recognized over the 12-month period from the date of acquisition. Other adjustments for the year ended December 31, 2025 include $0.4 million of costs related to restructuring actions in E&RW, $0.3 million of separation costs for the consolidation of operations in North America and $0.2 million of other acquisition and integration costs, partially offset by a reduction in expense of $0.2 million to finalize the relocation of the Company's corporate office functions to Charlotte, North Carolina from Berkeley Heights, New Jersey.
Adjustments in the year ended December 31, 2024 are primarily driven by $3.2 million of compensation expenses for the retention of key employees acquired in the ChlorKing acquisition. Pursuant to the ChlorKing acquisition agreement, the full amount held in escrow was released to the specified key employees if such employees were employed by Hayward on the one-year anniversary of the acquisition. These payments were contingent on continued employment and were not dependent on the achievement of any metric or performance measure. The retention costs were recognized over the 12-month period from the date of acquisition. Other adjustments for the year ended December 31, 2024 include $1.1 million of transaction and integration costs associated with the acquisition for the ChlorKing business, $0.9 million of termination benefits related to a reduction-in-force within E&RW, $0.8 million of separation and other costs associated with the centralization and consolidation of operations in Europe and $0.4 million of costs to finalize restructuring actions initiated in prior years.
|
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| (d) |
Adjustments in the year ended December 31, 2025 primarily include $4.3 million for the settlement in principle of the securities class action litigation. Expenses beyond the $4.3 million related to this case are subject to insurance recoveries pursuant to the Company's retention amount with its insurance carriers. Other adjustments include $1.3 million of income from insurance proceeds related to flood damage associated with a hurricane at a contract manufacturing facility. Adjustments in the year ended December 31, 2024 are primarily driven by a $3.3 million increase in cost of goods sold resulting from the fair value inventory step-up adjustment recognized as part of the purchase accounting for the acquisition of the ChlorKing business, $0.7 million of costs sustained from flood damage associated with a hurricane at a contract manufacturing facility and $0.5 million of costs incurred related to litigation, partially offset by $0.5 million of gains on the sale of assets. |
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Following is a reconciliation from segment income and segment income margin to adjusted segment income and adjusted segment income margin for NAM (dollars in thousands):
| NAM | Years Ended December 31, | |||||||||||||
| 2025 | 2024 | |||||||||||||
| Segment income | $ | 284,758 | $ | 261,735 | ||||||||||
| Depreciation | 19,540 | 17,989 | ||||||||||||
| Amortization | 6,990 | 6,985 | ||||||||||||
|
Stock-based compensation (a)
|
- | 176 | ||||||||||||
|
Other (b)
|
(605) | 4,079 | ||||||||||||
| Total adjustments | 25,925 | 29,229 | ||||||||||||
| Adjusted segment income | $ | 310,683 | $ | 290,964 | ||||||||||
| Segment income margin | 29.7 | % | 29.2 | % | ||||||||||
| Adjusted segment income margin | 32.4 | % | 32.5 | % | ||||||||||
| (a) | Represents non-cash stock-based compensation expense related to equity awards issued to management, employees, and directors. 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. | |||||||
| (b) |
Adjustments in the year ended December 31, 2025 for NAM primarily includes $0.6 million of insurance proceeds related to flood damage associated with a hurricane at a contract manufacturing facility. Adjustments in the year ended December 31, 2024 for NAM include a $3.3 million increase in cost of goods sold resulting from the fair value inventory step-up adjustment recognized as part of the purchase accounting for the acquisition of the ChlorKing business and $0.7 million of costs related to a flood sustained at a contract manufacturer. |
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Following is a reconciliation from segment income and segment income margin to adjusted segment income and adjusted segment income margin for E&RW (dollars in thousands):
| E&RW | Years Ended December 31, | |||||||||||||
| 2025 | 2024 | |||||||||||||
| Segment income | $ | 26,540 | $ | 21,632 | ||||||||||
| Depreciation | 1,761 | 1,215 | ||||||||||||
|
Stock-based compensation (a)
|
- | 10 | ||||||||||||
| Total Adjustments | 1,761 | 1,225 | ||||||||||||
| Adjusted segment income | $ | 28,301 | $ | 22,857 | ||||||||||
| Segment income margin | 16.3 | % | 13.9 | % | ||||||||||
| Adjusted segment income margin | 17.4 | % | 14.6 | % | ||||||||||
| (a) |
Represents non-cash stock-based compensation expense related to equity awards issued to management, employees, and directors. 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.
|
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Liquidity and Capital Resources
Our primary sources of liquidity are net cash provided by operating activities and availability under the ABL Facility.
Primary working capital requirements are for raw materials, components and certain finished goods inventories and supplies, payroll, manufacturing, freight and distribution, facility, and other operating expenses. Cash flows from operating activities 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 may fluctuate during the year. Our borrowing availability reported under the ABL Facility includes a reduction from the impact of accounts receivable for customers eligible under the Receivables Purchase Agreement.
Unrestricted cash and cash equivalents totaled $329.6 million as of December 31, 2025, which is an increase of $133.0 million from $196.6 million at December 31, 2024. The increase reflects strong operating cash flow and disciplined working capital management. As of December 31, 2025and December 31, 2024, the Company had $69.5 million and zero, respectively, in commercial paper, which was included in short-term investments on the consolidated balance sheets.
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 be adequate to finance our working capital requirements, inclusive of capital expenditures, and debt service over the next 12 months.
Beyond the next 12 months, our principal demand for funds will be for maintenance of our core business, to satisfy long-term contractual obligations, the Company's ongoing capital expenditure program designed to improve the effectiveness and capabilities of its facilities and technology, research and development activities, potential share repurchases and any potential merger and acquisition activity. The Company's material contractual obligations include outstanding debt, operating leases and finance leases. For additional details related to the Company's long-term contractual obligations for long-term debt, see Note 9and for contractual obligations for leases see Note 15. We believe the combination of our current cash level, net cash flows provided by operating activities, and availability under the ABL Facility will be sufficient to satisfy the above requirements.
Accounts Receivable Sales
On July 3, 2024, we entered into a Receivables Purchase Agreement under which we may offer to sell eligible accounts receivable. The agreement is uncommitted and the eligible accounts receivable to be sold under the agreement consist of up to $125 million in accounts receivable generated by sales to specified customers of the Company. The Company will be paid a discounted purchase price for each receivable sold. The discount rate used to determine the purchase price for the subject receivables is based upon an annual interest rate equal to the forward-looking term rate based on the secured overnight financing rate for the period of time between payment to the Company and the due date for the receivable plus a buffer period specific to the obligor, plus a margin applicable to the specified obligor.
Transactions under this agreement are accounted for as sales of accounts receivable, and the receivables sold are removed from the consolidated balance sheets at the time of the sales transaction. For ease of administration, the Company collects customer payments related to the receivables sold and remits those payments to the purchaser. Proceeds received from the sales of accounts receivable are classified as operating cash flows and collections of previously sold accounts receivable not yet submitted to the financial institution are classified as financing cash flows in the consolidated statement of cash flows. We record the discount in the "Other expense, net" line in the consolidated statements of operations.
During the year ended December 31, 2025, there were proceeds of $99.1 million from the sale of $100.0 million of receivables under the Receivables Purchase Agreement. As of December 31, 2025, none of the sold receivables remained to be collected and remitted to the transferee. The expense recognized related to the discount on sales for the year ended December 31, 2025 was $0.9 million.
Credit Facilities
The First Lien Term Facility and ABL Facility (collectively, the "Credit Facilities") contain various restrictions, covenants and collateral requirements. Refer to Note 9."Long-Term Debt" of Notes to Consolidated Financial Statements for further information on the terms of the Credit Facilities. We also have a revolving credit facility for our Spain subsidiary in the amount of €0.5 million as a local source of liquidity. As of December 31, 2025, the Spain revolving facility balance was zero with a borrowing availability of €0.5 million.
Long-term debt consisted of the following (in thousands):
| December 31, | ||||||||||||||
| 2025 | 2024 | |||||||||||||
| First Lien Term Facility, due May 28, 2028 | $ | 955,000 | $ | 965,000 | ||||||||||
| Other bank debt | 4,826 | 6,461 | ||||||||||||
| Finance lease obligations | 3,639 | 2,448 | ||||||||||||
| Subtotal | 963,465 | 973,909 | ||||||||||||
| Less: Current portion of the long-term debt | (13,261) | (13,991) | ||||||||||||
| Less: Unamortized debt issuance costs | (6,657) | (9,356) | ||||||||||||
| Total | $ | 943,547 | $ | 950,562 | ||||||||||
ABL Facility
The ABL Facility provides for an aggregate amount of borrowings up to $425.0 million, with a discretionary peak season commitment of $475.0 million, subject to a borrowing base calculation based on available eligible receivables, eligible inventory, and qualified cash in North America. Accounts receivable for customers whose receivables are eligible for purchase under the Receivables Purchase Agreement, regardless of whether any amount of outstanding accounts receivable with those specific customers have been sold under the Receivables Purchase Agreement, are not eligible accounts receivable under the ABL Facility. 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 maturity of the facility is February 25, 2028.
On June 18, 2025, the Company entered into the Fifth Amendment to its existing ABL Facility to extend the maturity date to February 25, 2028. The amendment also included the removal of the 10 basis points credit spread adjustment previously applicable to Secured Overnight Financing Rate ("Term SOFR") borrowings and the removal of the first-in, last-out subfacility.
The borrowings under the ABL Facility bear interest at a rate equal to the Term SOFRand a margin of between 1.25% to 1.75%, or at a base rate plus a margin of 0.25% to 0.75%.
The borrowings under the ABL Facility prior to the Fifth Amendment on June 18, 2025, bore interest at a rate equal to the Term SOFR plus a 0.10% credit spread adjustment and a margin of between 1.25% to 1.75%, or at a base rate plus a margin of 0.25% to 0.75% with no credit spread adjustment.
For the year ended December 31, 2025, the average borrowing base under the ABL Facility was $153.3 million, and the average loan balance outstanding was zero. As of December 31, 2025, the loan balance was zero with a borrowing availability of $124.9 million.
For the year ended December 31, 2024, the average borrowing base under the ABL Facility was $212.6 million, and the average loan balance outstanding was zero. As of December 31, 2024 the loan balance was zero with a borrowing availability of $163.4 million.
First Lien Term Facilities
The Company's First Lien Term Facility bears interest at a rate equal to a base rate or Term SOFR, plus, in either case, an applicable margin. 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 First Lien Credit 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.
Under the agreement governing the First Lien Credit Facility (the "First Lien Credit Agreement"), the Company must make an annual mandatory prepayment of principal for between 0% and 50% of the excess cash and subject to permitted deductions, 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 fifty percent if the First Lien Leverage Ratio is greater than 3.0x, in each case as of December 31 of the prior year. The First Lien Term Facility matures on May 28, 2028.
As of December 31, 2025,the balance outstanding under the First Lien Term Facility was$955.0 million.
For the year ended December 31, 2025, the effective interest rate on borrowings under the First Lien Term Facility, including the impact of an interest rate hedge, was 6.25%. The effective interest rate is comprised of 6.96%for interest and 0.29%for financing costs, partially offset by 1.00%for interest income on the interest rate swaps.
Covenant Compliance
The Credit Facilities contain various restrictions, covenants and collateral requirements. As of December 31, 2025, 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) | Year Ended December 31, | |||||||||||||
| 2025 | 2024 | |||||||||||||
| Net cash provided by operating activities | $ | 256,034 | $ | 212,068 | ||||||||||
| Net cash used in investing activities | (103,777) | (54,131) | ||||||||||||
| Net cash used in financing activities | (20,846) | (136,790) | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 1,648 | (2,655) | ||||||||||||
| Change in cash and cash equivalents | $ | 133,059 | $ | 18,492 | ||||||||||
Net cash provided by operating activities
Net cash provided by operating activities increased to $256.0 million for the year ended December 31, 2025 from $212.1 million for the year ended December 31, 2024, an increase of $43.9 million, or 20.7%. The increase in cash provided in the year ended December 31, 2025 was primarily driven by an increase in net income and an increase in cash generated by changes in working capital compared to the prior year.
Net cash used in investing activities
Net cash used in investing activities was $103.8 million for the year ended December 31, 2025 compared to net cash used in investing activities of $54.1 million for the year ended December 31, 2024, an increase of $49.7 million, or 91.7%. The increase in cash used in the year ended December 31, 2025 was driven by purchases of short-term investments and capital expenditures, compared to the prior year, which was driven by the acquisition of the ChlorKing business and capital expenditures, partially offset by proceeds of short-term investments.
Net cash used in financing activities
Net cash used in financing activities was $20.8 million for the year ended December 31, 2025 compared to net cash used in financing activities of $136.8 million for the year ended December 31, 2024, a decrease of $116.0 million, or 84.8%. The decrease in cash used in the year ended December 31, 2025 was driven by payments of long-term debt and purchases of common stock compared to the prior year, which was primarily driven by the prepayment of the Incremental Term Loan B principal balance.
Contractual Obligations and Other Commitments
The following table summarizes our contractual cash obligations as of December 31, 2025 (in thousands):
| 2026 | 2027 | 2028 | 2029 | 2030 | Thereafter | Total | |||||||||||||||||||||||||||||||||||
|
Long-term debt(a)
|
$ | 12,766 | $ | 11,471 | $ | 935,435 | $ | 102 | $ | 38 | $ | 14 | $ | 959,826 | |||||||||||||||||||||||||||
| Letters of credit | 3,868 | - | - | - | - | - | 3,868 | ||||||||||||||||||||||||||||||||||
|
Operating lease commitments(b)
|
12,750 | 9,728 | 8,614 | 8,175 | 7,114 | 27,455 | 73,836 | ||||||||||||||||||||||||||||||||||
| Finance lease commitments | 982 | 1,050 | 942 | 698 | 423 | - | 4,095 | ||||||||||||||||||||||||||||||||||
| Total | $ | 30,366 | $ | 22,249 | $ | 944,991 | $ | 8,975 | $ | 7,575 | $ | 27,469 | $ | 1,041,625 | |||||||||||||||||||||||||||
(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 Annual Report on 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 10 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 Annual Report on Form 10-K for further information.
Off-Balance Sheet Arrangements
We had $3.9 million and $4.3 million of outstanding letters of credit on our ABL Facility as of December 31, 2025 and December 31, 2024, respectively.
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, some of which require achievement of various performance targets. We account for customer rebates as a reduction of gross sales with either a corresponding offset to accounts receivable or recognition of an accrued liability. 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. As of December 31, 2025, goodwill and indefinite lived intangible assets were $951.2 million and $1,003.0 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 carrying value, we must perform a quantitative impairment assessment. If it is determined a quantitative assessment is necessary, we 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 is 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. For the years ended December 31, 2025 and 2024, the Company performed a qualitative analysis and determined that the fair values of the reporting units were more likely than not greater than the carrying amounts. As such, 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 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 restricted share units ("PSUs"). PSU awards are recognized as compensation expense beginning at the grant date and
reassessed quarterly for probability. We reassess the probability of achievement at each reporting period and adjust compensation cost, as necessary. If there are any changes in our probability assessment, we recognize a cumulative catch-up adjustment in the period of the change in estimate, with the remaining unrecognized expense recognized prospectively over the remaining requisite service period. If we subsequently determine that the performance criteria are not met or are not expected to be met, any amounts previously recognized as compensation expense are reversed in the period when such determination is made. 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 and a Monte Carlo simulation model to estimate the fair value of PSU 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, among other factors, 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.
Acquisitions
We apply the provisions of the Accounting Standards Codification ("ASC") 805, Business Combinations. Under this provision, we use the acquisition method of accounting where the purchase consideration is allocated to the underlying net tangible and intangible assets acquired, based on their respective fair values. The excess of the purchase consideration over the estimated fair values of the net assets acquired is recorded as goodwill. Identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree are recognized and measured as of the acquisition date at fair value. Additionally, any contingent consideration is recorded at fair value on the acquisition date and classified as a liability. Goodwill is recognized to the extent by which the aggregate of the acquisition-date fair value of the consideration transferred and any noncontrolling interest in the acquiree exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities.
Determining the fair value of assets acquired, liabilities assumed and noncontrolling interest requires management's judgement and often involves the use of estimates and assumptions, including but not limited to, the selection of appropriate valuation methodology, projected revenue, expense and cash flows, weighted average cost of capital, discount rates, estimate of customer turnover, estimates of terminal values, and royalty rates. We may use third-party valuation specialists to determine the assets acquired, liabilities assumed, and corresponding offset to goodwill.
Recently Issued Accounting Standards
See Note 2."Significant Accounting Policies" of Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for additional information.
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