Hydrofarm Holdings Group Announces Second Quarter 2022 Results

Hydrofarm Holdings Group, Inc. (“Hydrofarm” or the “Company”) (Nasdaq: HYFM), a leading independent manufacturer and distributor of branded hydroponics equipment and supplies for controlled environment agriculture (“CEA”), today announced financial results for its second quarter ended June 30, 2022.

Second Quarter 2022 Highlights vs. Prior Year Period: 

  • Net sales decreased to $97.5 million compared to $133.8 million.
  • Gross Profit decreased to $7.3 million compared to $29.6 million. Adjusted Gross Profit(1)(2) was $9.1 million compared to $30.2 million.
  • Net loss was $(203.3) million, or $(4.53) per diluted share, compared to net income of $2.3 million, or $0.05 per diluted share. Net loss in the second quarter of 2022 included a non-cash charge of $189.6 million in goodwill impairment and a $10.2 million inventory reserve.   Adjusted Net Loss(1)(2) was $(8.4) million, or $(0.19) per diluted share, compared to Adjusted Net Income(1)(2) of $12.9 million, or $0.31 per diluted share.
  • The Company recorded a $10.2 million inventory reserve during the quarter, which was not treated as an adjustment. Adjusted EBITDA(1)(2) decreased to $(6.8) million compared to $16.2 million.

Full Year 2022 Outlook:  

  • Net sales of approximately $330 million to $347 million.
  • Adjusted EBITDA(1)(2) of $(25) million to $(16) million.

(1) Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net (Loss) Income, Adjusted EPS, Adjusted SG&A, Adjusted SG&A as a percent of net sales, and Adjusted EBITDA are non-GAAP measures. For reconciliations of GAAP to non-GAAP measures see the “Reconciliation of Non-GAAP Measures” accompanying the release.

(2) As a result of the $10.2 million inventory reserve, Adjusted Gross Profit, Adjusted Net (Loss) Income, Adjusted EPS, and Adjusted EBITDA were negatively impacted.

Bill Toler, Chairman and Chief Executive Officer of Hydrofarm, said, “Our second quarter results reflect the ongoing impact of the hydroponic industry recession in the U.S. and Canada. Nonetheless, we took positive steps to lower our cost structure and maintain a solid liquidity position.”

Toler added, “Despite the external challenges, the strength of Hydrofarm continues to be driven by the quality of our people and our brands. Additionally, we believe our strong consumable sales mix gives us insulation against further weakness in the category. We remain confident that the industry will eventually return to normalized growth, and the actions we are taking to refine our organization will leave our business leaner and stronger, and as a result, better positioned to take advantage of future growth opportunities.”

Second Quarter 2022 Financial Results

Net sales in the second quarter of 2022 decreased to $97.5 million compared to the second quarter of 2021, driven by an approximate 29.9% decrease in volume of products sold, offset by an approximate 3.1% increase in price and mix of products sold, and an approximate 0.3% decline from unfavorable foreign exchange rates. The decrease in product volumes was primarily related to an agricultural oversupply, partially offset by a 13.5% benefit from recently acquired proprietary brands.

Gross profit decreased to $7.3 million, or 7.5% of sales, during the second quarter of 2022 was primarily due to the aforementioned decrease in net sales and a $10.2 million inventory reserve. Adjusted Gross Profit(1)(2) was $9.1 million or 9.3% of net sales, compared to $30.2 million or 22.5% in the second quarter of 2021. Adjusted gross profit margin(1)(2) was negatively impacted by a $10.2 million increase in inventory reserves primarily related to lighting products. During the second quarter of 2022, we experienced higher freight and labor costs, partially offset by pricing actions and a favorable sales mix of the Company’s proprietary brand products compared to the prior year period.  

Selling, general and administrative (“SG&A”) expense was $26.0 million in the second quarter of 2022, or 26.6% of net sales, compared to $27.3 million in the second quarter of 2021, or 20.4% of net sales. The decrease in SG&A expense was primarily related to a reduction in acquisition expenses of $8.4 million, partially offset by higher depreciation, depletion and amortization expenses of $4.7 million. Adjusted SG&A(1)(2) increased to $15.9 million or 16.3% of net sales in the second quarter of 2022, compared to $14.0 million or 10.5% of net sales in the prior year period. The increase in Adjusted SG&A(1)(2) primarily relates to increases in compensation costs, facility costs, and insurance expenses. The added costs were largely the result of our distribution center expansions and the five acquisitions completed in 2021.

Net loss was $(203.3) million, or $(4.53) per diluted share, in the second quarter of 2022, compared to a net income of $2.3 million, or $0.05 per diluted share in the second quarter of 2021. Net loss for the second quarter of 2022 included a non-cash expense of $189.6 million in goodwill impairment and $10.2 million in inventory reserve. Excluding impairment and certain other adjustments, but not adjusting for the inventory reserve, Adjusted Net Loss(1)(2) was $(8.4) million, or $(0.19) per diluted share, in the second quarter of 2022, compared to Adjusted Net Income(1)(2) of $12.9 million, or $0.31 per diluted share, in the second quarter of 2021.  

Adjusted EBITDA(1)(2) was $(6.8) million, or (7.0)% of net sales, for the second quarter of 2022, compared to $16.2 million, or 12.1% of net sales, in the second quarter of 2021. The decrease in Adjusted EBITDA(1)(2) was primarily related to lower gross profit due to a decline in net sales and an additional inventory reserve of $10.2 million.    

Balance Sheet and Liquidity

As of June 30, 2022, the Company had $27.4 million in cash, cash equivalents and restricted cash, an aggregate principal amount of debt outstanding of $126.7 million (including $0 drawn on the Company’s revolving credit facility, approximately $124.4 million in principal balance on its Term Loan and approximately $2.4 million in finance leases and other debt), $15.3 million in contingent payments (composed of an earn-out on the 2021 Aurora acquisition which was subsequently paid out in July 2022) and approximately $70 million of available borrowing capacity under its revolving credit agreement. The Company decreased its net debt by approximately $14.1 million during the second quarter by improving its working capital position and controlling costs. The Company was in compliance with all debt covenants as of June 30, 2022.

Full Year 2022 Outlook

The Company is reiterating its full year 2022 outlook, which was updated on August 2, 2022:

  • Net sales of approximately $330 million to $347 million, which assumes similar sales levels to those experienced from late second quarter through July 2022 continue over the remaining months in the fiscal year, combined with some further reduction to account for holiday shortened months in the fourth quarter.
  • Adjusted EBITDA(1)(2), which is impacted by $13.4 million of inventory reserves in the year-to-date period, of $(25) million to $(16) million, which assumes no further material increase in the amount of inventory or accounts receivable reserves.

The Company’s 2022 outlook includes the following updated assumptions:

  • Capital expenditures of approximately $7.5 million to $9.0 million; and
  • An estimated tax expense between $0 and $2 million for the full year, excluding the large discrete tax benefit of approximately $12 million recognized in the first half of 2022.

With respect to projected fiscal year 2022 Adjusted EBITDA, a quantitative reconciliation is not available without unreasonable effort due to the variability, complexity and low visibility with respect to certain items, including, but not limited to, impairment, certain potential future acquisition expenses, and the potential tax implications of these estimated expenses, all of which are excluded from Adjusted EBITDA. The Company expects the variability of these items to have a potentially unpredictable, and potentially significant, impact on its future GAAP financial results.

(1) Adjusted Gross Profit, Adjusted Gross Profit Margin, Adjusted Net (Loss) Income, Adjusted SG&A, Adjusted SG&A as a percent of net sales, and Adjusted EBITDA are non-GAAP measures. For reconciliations of GAAP to non-GAAP measures see the “Reconciliation of Non-GAAP Measures” accompanying the release.

(2) Adjusted Gross Profit, Adjusted Net Income and Adjusted EBITDA were negatively impacted, as a result of the inventory reserves of $10.2 million and $13.4 million, in the three and six months periods, respectively, ended June 30, 2022.

Conference Call

The Company will host a conference call to discuss financial results for the second quarter 2022 today at 4:30 p.m. Eastern Time. Bill Toler, Chairman and Chief Executive Officer, and John Lindeman, Chief Financial Officer, will host the call.

The conference call can be accessed live over the phone by dialing 412-317-6026. A replay will be available after the call until Tuesday, August 16, 2022 and can be accessed by dialing 412-317-6671. The passcode is 10168842. The conference call will also be webcast live and archived on the corporate website at www.hydrofarm.com, under the “Investors” section.  

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