UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 3, 20222, 2023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________to__________
Commission file number: 001-39599
HOLLEY INC.
(Exact name of registrant as specified in its charter)
Delaware | 87-1727560 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1801 Russellville Road, Bowling Green, KY 42101
(Address of principal executive offices)
(270) 782-2900
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report) N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.0001 Warrants to purchase common stock | HLLY HLLY WS | New York Stock Exchange New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer |
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Non-accelerated filer |
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Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).Yes ☐ No ☒
There were 118,026,472118,343,604 shares of Common Stock, including 1,093,750 restricted earn-out shares, par value $0.0001 per share, issued and outstanding as of August 6, 2022.4, 2023.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended.amended (the "Exchange Act") that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by the Securities Act and Exchange Act, as well as protections afforded by other federal securities laws. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for the Company’s business. TheseForward-looking statements may be precededaccompanied by followed by or include the words “believes,such as “believe,” “estimates,“estimate,” “expects,“expect,” “projects,“project,” “forecasts,“forecast,” “may,” “will,” “should,” “seeks,“seek,” “plans,“plan,” “scheduled,” “anticipates,“anticipate,” “intends”“intend” or similar expressions. These forward-looking statements are subject to a number ofvarious risks and uncertainties, and actualmany of which are outside our control. Therefore, you should not place undue reliance on such statements. Actual results could differ materially due to numerous factors, including but not limited to the Company’s ability to do any of the following:
• | execute its business strategy, including monetization of services provided and expansions in and into existing and new lines of business; |
• | anticipate and manage through disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain company products in distribution channels; |
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• | maintain key strategic relationships with partners and resellers; |
• | anticipate and manage through the impact of elevated interest rate levels, which cause the cost of capital to increase, as well as respond to |
• | enhance future operating and financial results; |
• | respond to uncertainties associated with product and service development and market acceptance; |
• | anticipate and manage through increased constraints in consumer demand and/or |
• | attract and retain qualified employees and key personnel; |
• | protect and enhance the Company’s corporate reputation and brand awareness; |
• | recognition of goodwill and other intangible asset impairment charges; |
• | effectively respond to general economic and business conditions; |
• | acquire and protect intellectual property; |
• | collect, store, process and use personal and payment information and other consumer data; |
• | comply with privacy and data protection laws and |
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• | meet future liquidity requirements and comply with restrictive covenants related to long-term indebtedness; |
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| obtain additional capital, including use of the debt market; |
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• | manage to finance operations on an economically viable basis; |
• | maintain Holley’s New York Stock Exchange (“NYSE”) listing of its common stock (“Common Stock”) and warrants to purchase Common Stock (“Warrants”); |
• | comply with existing and/or future laws and regulations applicable to its business, |
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• | anticipate the significance and timing of |
• | anticipate the impact of, and response to, new accounting standards; |
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• | respond to |
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• | anticipate the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012 |
• | anticipate the impact of changes in consumer spending patterns, consumer preferences, local, regional and national economic conditions, crime, weather, and demographic trends; and |
• | respond to other risks and factors, listed under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, |
Forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and our management’s expectations, forecasts and assumptions, and involve a number of judgements, risks and uncertainties, and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as mymay be required under applicable securities laws.
PART I – FINANCIAL INFORMATION
HOLLEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
As of | As of | |||||||||||||||
July 3, 2022 | December 31, 2021 | July 2, 2023 | December 31, 2022 | |||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 30,555 | $ | 36,325 | $ | 42,740 | $ | 26,150 | ||||||||
Accounts receivable, less allowance for credit losses of $1,269 and $1,387, respectively | 58,222 | 51,390 | ||||||||||||||
Accounts receivable, less allowance for credit losses of $2,092 and $1,550 respectively | 57,080 | 47,083 | ||||||||||||||
Inventory | 214,867 | 185,040 | 217,504 | 233,573 | ||||||||||||
Prepaids and other current assets | 16,881 | 18,962 | 15,951 | 18,157 | ||||||||||||
Total current assets | 320,525 | 291,717 | 333,275 | 324,963 | ||||||||||||
Property, plant, and equipment, net | 56,009 | 51,495 | 49,691 | 52,181 | ||||||||||||
Goodwill | 417,339 | 411,383 | 419,056 | 418,121 | ||||||||||||
Other intangibles assets, net | 434,120 | 438,461 | 417,613 | 424,855 | ||||||||||||
Right-of-use assets | 32,762 | 0 | 28,965 | 29,522 | ||||||||||||
Other noncurrent assets | 2,068 | — | ||||||||||||||
Total assets | $ | 1,260,755 | $ | 1,193,056 | $ | 1,250,668 | $ | 1,249,642 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Accounts payable | $ | 39,648 | $ | 45,708 | $ | 43,774 | $ | 44,948 | ||||||||
Accrued interest | 3,843 | 3,359 | 6,261 | 5,994 | ||||||||||||
Accrued liabilities | 41,051 | 34,853 | 46,605 | 43,317 | ||||||||||||
Current portion of long-term debt | 6,300 | 7,875 | 6,571 | 7,000 | ||||||||||||
Total current liabilities | 90,842 | 91,795 | 103,211 | 101,259 | ||||||||||||
Long-term debt, net of current portion | 636,756 | 637,673 | 629,435 | 643,563 | ||||||||||||
Warrant liability | 40,352 | 61,293 | 7,725 | 4,272 | ||||||||||||
Earn-out liability | 10,054 | 26,596 | 2,565 | 1,176 | ||||||||||||
Deferred taxes | 68,955 | 70,045 | 47,727 | 58,390 | ||||||||||||
Other noncurrent liabilities | 29,429 | 1,167 | ||||||||||||||
Long-term operating lease liabilities | 24,589 | 24,992 | ||||||||||||||
Total liabilities | 876,388 | 888,569 | 815,252 | 833,652 | ||||||||||||
Commitments and contingencies (Refer to Note 16 - Commitments and Contingencies) | ||||||||||||||||
Commitments and contingencies (Refer to Note 18 - Commitments and Contingencies) | ||||||||||||||||
Stockholders' equity: | ||||||||||||||||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding as of July 3, 2022 and December 31, 2021 | 0 | 0 | ||||||||||||||
Common stock, $0.0001 par value, 550,000,000 shares authorized, 116,932,722 and 115,805,639 shares issued and outstanding as of July 3, 2022 and December 31, 2021, respectively | 12 | 12 | ||||||||||||||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding on July 2, 2023 and December 31, 2022 | — | — | ||||||||||||||
Common stock, $0.0001 par value, 550,000,000 shares authorized, 117,249,854 and 117,147,997 shares issued and outstanding on July 2, 2023 and December 31, 2022, respectively | 12 | 12 | ||||||||||||||
Additional paid-in capital | 351,422 | 329,705 | 370,249 | 368,122 | ||||||||||||
Accumulated other comprehensive gain (loss) | 486 | (256 | ) | |||||||||||||
Retained earnings (accumulated deficit) | 32,447 | (24,974 | ) | |||||||||||||
Accumulated other comprehensive loss | (871 | ) | (944 | ) | ||||||||||||
Retained earnings | 66,026 | 48,800 | ||||||||||||||
Total stockholders' equity | 384,367 | 304,487 | 435,416 | 415,990 | ||||||||||||
Total liabilities and stockholders' equity | $ | 1,260,755 | $ | 1,193,056 | $ | 1,250,668 | $ | 1,249,642 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOLLEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
For the thirteen weeks ended | For the twenty-six weeks ended | For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||||||||||||||
Net sales | $ | 179,420 | $ | 193,041 | $ | 379,475 | $ | 353,373 | $ | 175,262 | $ | 179,420 | $ | 347,467 | $ | 379,475 | ||||||||||||||||
Cost of goods sold | 104,132 | 111,841 | 221,466 | 206,494 | 105,514 | 104,132 | 210,006 | 221,466 | ||||||||||||||||||||||||
Gross profit | 75,288 | 81,200 | 158,009 | 146,879 | 69,748 | 75,288 | 137,461 | 158,009 | ||||||||||||||||||||||||
Selling, general, and administrative | 36,269 | 26,190 | 70,611 | 50,202 | 29,101 | 36,269 | 59,118 | 70,611 | ||||||||||||||||||||||||
Research and development costs | 8,196 | 7,065 | 16,357 | 13,034 | 6,182 | 8,196 | 12,835 | 16,357 | ||||||||||||||||||||||||
Amortization of intangible assets | 3,662 | 3,502 | 7,323 | 6,838 | 3,674 | 3,662 | 7,353 | 7,323 | ||||||||||||||||||||||||
Acquisition and restructuring costs | 1,691 | 2,676 | 1,981 | 21,509 | 352 | 1,691 | 1,691 | 1,981 | ||||||||||||||||||||||||
Related party acquisition and management fee costs | 0 | 1,658 | 0 | 2,539 | ||||||||||||||||||||||||||||
Other operating expense (income) | 325 | 47 | 547 | (86 | ) | |||||||||||||||||||||||||||
Other operating expense | 485 | 325 | 536 | 547 | ||||||||||||||||||||||||||||
Total operating expense | 50,143 | 41,138 | 96,819 | 94,036 | 39,794 | 50,143 | 81,533 | 96,819 | ||||||||||||||||||||||||
Operating income | 25,145 | 40,062 | 61,190 | 52,843 | 29,954 | 25,145 | 55,928 | 61,190 | ||||||||||||||||||||||||
Change in fair value of warrant liability | (23,168 | ) | 0 | (20,941 | ) | 0 | 2,017 | (23,168 | ) | 3,452 | (20,941 | ) | ||||||||||||||||||||
Change in fair value of earn-out liability | (4,234 | ) | 0 | (1,853 | ) | 0 | 961 | (4,234 | ) | 1,389 | (1,853 | ) | ||||||||||||||||||||
Interest expense | 8,961 | 11,174 | 16,352 | 21,245 | 9,899 | 8,961 | 28,197 | 16,352 | ||||||||||||||||||||||||
Total non-operating (income) expense | (18,441 | ) | 11,174 | (6,442 | ) | 21,245 | ||||||||||||||||||||||||||
Total non-operating expense (income) | 12,877 | (18,441 | ) | 33,038 | (6,442 | ) | ||||||||||||||||||||||||||
Income before income taxes | 43,586 | 28,888 | 67,632 | 31,598 | 17,077 | 43,586 | 22,890 | 67,632 | ||||||||||||||||||||||||
Income tax expense | 3,023 | 5,790 | 10,211 | 10,556 | 4,098 | 3,023 | 5,664 | 10,211 | ||||||||||||||||||||||||
Net income | $ | 40,563 | $ | 23,098 | $ | 57,421 | $ | 21,042 | $ | 12,979 | $ | 40,563 | $ | 17,226 | $ | 57,421 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | 501 | 35 | 742 | 19 | 272 | 501 | 73 | 742 | ||||||||||||||||||||||||
Total comprehensive income | $ | 41,064 | $ | 23,133 | $ | 58,163 | $ | 21,061 | $ | 13,251 | $ | 41,064 | $ | 17,299 | $ | 58,163 | ||||||||||||||||
Common Share Data: | ||||||||||||||||||||||||||||||||
Weighted average common shares outstanding - basic | 116,931,623 | 67,673,884 | 116,398,177 | 67,673,884 | 117,221,419 | 116,931,623 | 117,187,287 | 116,398,177 | ||||||||||||||||||||||||
Weighted average common shares outstanding - diluted | 117,114,553 | 67,673,884 | 117,343,975 | 67,673,884 | 117,868,922 | 117,114,553 | 117,556,657 | 117,343,975 | ||||||||||||||||||||||||
Basic net income per share | $ | 0.35 | $ | 0.34 | $ | 0.49 | $ | 0.31 | $ | 0.11 | $ | 0.35 | $ | 0.15 | $ | 0.49 | ||||||||||||||||
Diluted net income per share | $ | 0.35 | $ | 0.34 | $ | 0.31 | $ | 0.31 | $ | 0.11 | $ | 0.35 | $ | 0.15 | $ | 0.31 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOLLEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
Common Stock | Common Stock | Accumulated | Retained | |||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Gain (Loss) | Retained Earnings (Accumulated Deficit) | Total | Additional | Other | Earnings | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 100 | $ | — | $ | 238,890 | $ | (674 | ) | $ | 2,165 | $ | 240,381 | ||||||||||||||||||||||||||||||||||||
Retroactive application of recapitalization | 67,673,784 | 7 | (7 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Adjusted balance at December 31, 2020 | 67,673,884 | 7 | 238,883 | (674 | ) | 2,165 | 240,381 | |||||||||||||||||||||||||||||||||||||||||
Net loss | — | 0 | 0 | 0 | (2,056 | ) | (2,056 | ) | ||||||||||||||||||||||||||||||||||||||||
Equity compensation | — | 0 | 131 | 0 | 0 | 131 | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | 0 | 0 | (16 | ) | 0 | (16 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at March 28, 2021 | 67,673,884 | 7 | 239,014 | (690 | ) | 109 | 238,440 | |||||||||||||||||||||||||||||||||||||||||
Net income | — | 0 | 0 | 0 | 23,098 | 23,098 | ||||||||||||||||||||||||||||||||||||||||||
Equity compensation | — | 0 | 131 | 0 | 0 | 131 | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | 0 | 0 | 35 | 0 | 35 | ||||||||||||||||||||||||||||||||||||||||||
Balance at June 27, 2021 | 67,673,884 | $ | 7 | $ | 239,145 | $ | (655 | ) | $ | 23,207 | $ | 261,704 | ||||||||||||||||||||||||||||||||||||
Paid-In | Comprehensive | (Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Gain (Loss) | Deficit) | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | 115,805,639 | $ | 12 | $ | 329,705 | $ | (256 | ) | $ | (24,974 | ) | $ | 304,487 | 115,805,639 | $ | 12 | $ | 329,705 | $ | (256 | ) | $ | (24,974 | ) | $ | 304,487 | ||||||||||||||||||||||
Net income | — | 0 | 0 | 0 | 16,858 | 16,858 | — | — | — | — | 16,858 | 16,858 | ||||||||||||||||||||||||||||||||||||
Equity compensation | — | 0 | 3,162 | 0 | 0 | 3,162 | — | — | 3,162 | — | — | 3,162 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | 0 | 0 | 241 | 0 | 241 | — | — | — | 241 | — | 241 | ||||||||||||||||||||||||||||||||||||
Issuance of earn-out shares | 1,093,750 | 0 | 14,689 | 0 | 0 | 14,689 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of vested Earn-out Shares | 1,093,750 | — | 14,689 | — | — | 14,689 | ||||||||||||||||||||||||||||||||||||||||||
Balance at April 3, 2022 | 116,899,389 | 12 | 347,556 | (15 | ) | (8,116 | ) | 339,437 | 116,899,389 | 12 | 347,556 | (15 | ) | (8,116 | ) | 339,437 | ||||||||||||||||||||||||||||||||
Net income | — | 0 | 0 | 0 | 40,563 | 40,563 | — | — | — | — | 40,563 | 40,563 | ||||||||||||||||||||||||||||||||||||
Equity compensation | — | 0 | 3,483 | 0 | 0 | 3,483 | — | — | 3,483 | — | — | 3,483 | ||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | 501 | — | 501 | ||||||||||||||||||||||||||||||||||||||||||
Warrants exercised | 33,333 | 0 | 383 | 0 | 0 | 383 | 33,333 | — | 383 | — | — | 383 | ||||||||||||||||||||||||||||||||||||
Balance at July 3, 2022 | 116,932,722 | $ | 12 | $ | 351,422 | $ | 486 | $ | 32,447 | $ | 384,367 | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | 117,147,997 | $ | 12 | $ | 368,122 | $ | (944 | ) | $ | 48,800 | $ | 415,990 | ||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 4,247 | 4,247 | ||||||||||||||||||||||||||||||||||||||||||
Equity compensation | — | — | 394 | — | — | 394 | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | 0 | 0 | 501 | 0 | 501 | — | — | — | (199 | ) | — | (199 | ) | ||||||||||||||||||||||||||||||||||
Balance at July 3, 2022 | 116,932,722 | $ | 12 | $ | 351,422 | $ | 486 | $ | 32,447 | $ | 384,367 | |||||||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock units | — | — | (34 | ) | — | — | (34 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of shares for restricted stock units | 24,219 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Balance at April 2, 2023 | 117,172,216 | 12 | 368,482 | (1,143 | ) | 53,047 | 420,398 | |||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 12,979 | 12,979 | ||||||||||||||||||||||||||||||||||||||||||
Equity compensation | — | — | 1,806 | — | — | 1,806 | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | 272 | — | 272 | ||||||||||||||||||||||||||||||||||||||||||
Tax withholding related to vesting of restricted stock units | — | — | (39 | ) | — | — | (39 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of shares for restricted stock units | 77,638 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Balance at July 2, 2023 | 117,249,854 | $ | 12 | $ | 370,249 | $ | (871 | ) | $ | 66,026 | $ | 435,416 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOLLEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the twenty-six weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 2, 2023 | July 3, 2022 | |||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 57,421 | $ | 21,042 | $ | 17,226 | $ | 57,421 | ||||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||||||||
Depreciation | 4,663 | 4,453 | 4,953 | 4,663 | ||||||||||||
Amortization of intangible assets | 7,323 | 6,838 | 7,353 | 7,323 | ||||||||||||
Amortization of deferred loan costs | 846 | 1,955 | 901 | 846 | ||||||||||||
Amortization of right of use assets | 2,753 | 0 | 2,707 | 2,753 | ||||||||||||
Gain on termination of leases | (279 | ) | 0 | — | (279 | ) | ||||||||||
Decrease in warrant liability | (20,941 | ) | 0 | |||||||||||||
Decrease in earn-out liability | (1,853 | ) | 0 | |||||||||||||
Increase in acquisition contingent consideration payable | 0 | 17,173 | ||||||||||||||
Fair value adjustments to warrant liability | 3,452 | (20,941 | ) | |||||||||||||
Fair value adjustments to earn-out liability | 1,389 | (1,853 | ) | |||||||||||||
Fair value adjustments to interest rate collar | (2,068 | ) | — | |||||||||||||
Equity compensation | 6,645 | 262 | 2,200 | 6,645 | ||||||||||||
Change in deferred taxes | (1,090 | ) | 1,188 | (10,663 | ) | (1,090 | ) | |||||||||
Loss (gain) on disposal of property, plant and equipment | 336 | (282 | ) | |||||||||||||
Loss on disposal of property, plant and equipment | 69 | 336 | ||||||||||||||
Provision for inventory reserves | 2,787 | 3,173 | 2,973 | 2,787 | ||||||||||||
Provision for credit losses | 145 | 410 | 717 | 145 | ||||||||||||
Change in operating assets and liabilities: | - | |||||||||||||||
Accounts receivable | (6,343 | ) | (12,457 | ) | (10,707 | ) | (6,343 | ) | ||||||||
Inventories | (29,483 | ) | (708 | ) | 11,691 | (29,483 | ) | |||||||||
Prepaids and other current assets | 3,838 | (2,295 | ) | 2,239 | 3,838 | |||||||||||
Accounts payable | (5,778 | ) | 6,038 | (1,337 | ) | (5,778 | ) | |||||||||
Accrued interest | 484 | (901 | ) | 267 | 484 | |||||||||||
Accrued and other liabilities | (643 | ) | 508 | 1,021 | (643 | ) | ||||||||||
Net cash provided by operating activities | 20,831 | 46,397 | 34,383 | 20,831 | ||||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||
Capital expenditures | (9,609 | ) | (7,141 | ) | (2,738 | ) | (9,609 | ) | ||||||||
Proceeds from the disposal of fixed assets | 244 | 285 | 356 | 244 | ||||||||||||
Cash paid for acquisitions, net | (14,077 | ) | (54,011 | ) | — | (14,077 | ) | |||||||||
Net cash used in investing activities | (23,442 | ) | (60,867 | ) | (2,382 | ) | (23,442 | ) | ||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Net change under revolving credit agreement | (25,000 | ) | 0 | |||||||||||||
Proceeds from long-term debt | 27,000 | 0 | ||||||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||
Proceeds from issuance of long-term debt | — | 27,000 | ||||||||||||||
Principal payments on long-term debt | (5,099 | ) | (1,539 | ) | (14,072 | ) | (30,099 | ) | ||||||||
Proceeds from issuance of common stock in connection with the exercise of warrants | 383 | 0 | ||||||||||||||
Deferred financing fees | (1,427 | ) | — | |||||||||||||
Payments from stock-based award activities | (73 | ) | — | |||||||||||||
Proceeds from issuance of common stock in connection with the exercise of Warrants | — | 383 | ||||||||||||||
Net cash used in financing activities | (2,716 | ) | (1,539 | ) | (15,572 | ) | (2,716 | ) | ||||||||
Effect of foreign currency rate fluctuations on cash | (443 | ) | 0 | 161 | (443 | ) | ||||||||||
Net change in cash and cash equivalents | (5,770 | ) | (16,009 | ) | 16,590 | (5,770 | ) | |||||||||
Cash and cash equivalents: | ||||||||||||||||
Beginning of period | 36,325 | 71,674 | 26,150 | 36,325 | ||||||||||||
End of period | $ | 30,555 | $ | 55,665 | $ | 42,740 | $ | 30,555 | ||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||
Earn-out shares issued to Empower Sponsor Holdings LLC | $ | 14,689 | $ | 0 | ||||||||||||
Cash paid for interest | $ | 16,005 | $ | 20,191 | $ | 29,097 | $ | 16,005 | ||||||||
Cash paid for income taxes | $ | 4,276 | $ | 7,182 | 12,021 | 4,276 | ||||||||||
Noncash investing and financing activities: | ||||||||||||||||
Vested Earn-out Shares issued to Empower Sponsor Holdings LLC | $ | — | $ | 14,689 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
1. |
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Holley Inc., a Delaware corporation headquartered in Bowling Green, Kentucky (the “Company” or “Holley”), conducts operations through its wholly-ownedwholly owned subsidiaries. These operating subsidiaries are comprised of Holley Performance Products Inc. (“Holley Performance”), Hot Rod Brands, Inc. (“Hot Rod Brands”), Simpson Safety Solutions, Inc., B&M Racing and Performance Products, Inc., and Speedshop.com, Inc. Investment funds managed by Sentinel Capital Partners hold a controlling interest in Holley.
On July 16, 2021, (the “Closing” and such date, the “Closing Date”) theThe Company consummated thea business combination (the “Business Combination”) pursuant to that certain Agreement and Plan of Merger dated March 11, 2021 (the “Merger Agreement”), by and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc. (“Merger Sub I”), Empower Merger Sub II LLC, (“Merger Sub II”), and Holley Intermediate Holdings, Inc. (“Holley Intermediate”) on July 16, 2021, (the “Closing” and such date, the “Closing Date”). The Business Combination was accounted for as a reverse recapitalization in which Holley Intermediate was deemed the accounting acquirer with Holley Inc. as the successor registrant. As such, Empower was treated as the acquired company for financial reporting purposes. On the Closing Date, Empower changed its name to Holley Inc. See Note 2, “Business Combination and Acquisitions,its trading symbol on the New York Stock Exchange (the “NYSE”) from “EMPW” to “HLLY.” for more information.
Holley Intermediate, the predecessor to Holley, was incorporated on October 25, 2018 to effect the merger of Driven Performance Brands, Inc. (“Driven”) and the purchase of High Performance Industries, Inc. (“HPI”). The Company designs, manufactures and distributes performance automotive products to customers primarily in the United States, Canada and Europe. The Company is a leading manufacturer of a diversified line of performance automotive products, including carburetors, fuel pumps, fuel injection systems, nitrous oxide injection systems, superchargers, exhaust headers, mufflers, distributors, ignition components, engine tuners and automotive performance plumbing products. The Company is also a leading manufacturer of exhaust products as well as shifters, converters, transmission kits, transmissions, tuners and automotive software. The Company’s products are designed to enhance street, off-road, recreational and competitive vehicle performance through increased horsepower, torque and drivability. The Company has locations in North America,the United States, Canada, Italy and China.
Emerging Growth Company Status
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company is an emerging growth company, and, as such, has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.
Risks and Uncertainties
COVID-19The Company's business and results of operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, labor shortages, and disruption of the supply chain, as well as by geopolitical events, specifically the conflict in Ukraine. The Company's operations have been adversely impacted by inflationary pressures primarily related to transportation, labor and component costs. Sales growth in certain products has adversely impactedbeen constrained by continuing supply chain challenges and automotive electronic component shortages. In response to the global supply chain volatility and general economic conditions. Theinflationary impacts, the Company has experienced disruptionsattempted to minimize potential adverse impacts on its business with cost savings initiatives, price increases to customers, and higher costs in manufacturing, supply chain, logistical operations, and shortagesby increasing inventory levels of certain Company products in distribution channels. The full extent of the impact of the COVID-19 pandemic on the Company's business and operational and financial performance and condition is currently uncertain and will depend on many factors outside the Company's control, including but not limited to the timing, extent, duration and effects of the virus and any of its mutations, the utilization and effectiveness of treatments and vaccines, the imposition of effective public safety and other protective measures, the further impact of COVID-19 on the global economy and demand for the Company's products and services.working closely with its suppliers and customers to minimize disruptions in delivering products to customers. Our profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales to lower-margin products, and demands on our performance that increase our costs. Should the ongoing COVID-19 pandemic, including any variants of COVID-19,macroeconomic conditions not improve, or worsen, or if the Company's attempt to mitigate itsthe impact on its supply chain, operations and costs is not successful, the Company'sCompany’s business, results of operations and financial condition and prospects may be adversely affected.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or “GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”)SEC regarding interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 20212022, , as filed with the SEC on March 15, 20222023, in the Company’s annual report on Form 10-K. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for any quarter are not necessarily indicative of the results for the full fiscal year.
The Company operates on a calendarfiscal year that ends on December 31, 20222023 and 20212022.. The three- and six month-month periods ended July 2, 2023 and July 3, 2022and June 27, 2021 each included 13 weeks and 26 weeks, respectively.
Principles of Consolidation
These unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
Summary of Significant Accounting Policies
The following are updates to the significant accounting policies described in our audited consolidated financial statements as of and for the year ended December 31, 20212022..
Leases
Operating lease right of use (ROU) assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company's leases may include options to extend or terminate the lease. These options to extend are included in the lease term when it is reasonably certain that the Company will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Since the Company's leases generally do not provide an implicit rate, the Company applies a portfolio approach using an estimated incremental borrowing rate based on the lease term and other information available at the commencement date in determining the present value of lease payments. The rate applied is based on the currency of the lease. Leases having a lease term of twelve months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the term of the lease. In addition, the Company has applied the practical expedient to account for the lease and non-lease components as a single lease component for all of the Company's leases. See Note 14,"Lease Commitments," for further details.
WarrantsEquity-Based Compensation
The Company accounts for warrantsequity-based awards granted to purchase its common stock as either equity-classified or liability-classified instrumentsemployees and nonemployees under the fair value method prescribed by Accounting Standards Codification ("ASC") Subtopic 718-10, Stock Compensation. Equity-based compensation cost is measured based on an assessmentthe estimated grant date fair value of the warrant’s specific termsaward and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”)is recognized as expense over the requisite service period (generally the vesting period). The assessment considers whetherfair value of stock options is estimated using the warrantsBlack Scholes option-pricing model. Restricted stock units are freestanding financial instruments pursuant to ASC 480, meetvalued at the definitionstock price on the grant date. The fair value of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed toprofit interest units ("PIUs") granted by Holley Parent Holdings, LLC (the "Holley Stockholder") is estimated based on the Company’s own shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditionsestimated equity value for equity classification. This assessment, which requires the use of professional judgment, is conductedeach unit class at the time of warrant issuancegranting using the Black-Scholes option-pricing model, discounted to reflect market considerations for illiquidity.
Performance share units that vest based on the achievement of company-designated performance targets are valued at the stock price on the grant date. Compensation expense in respect of such performance share units is recognized each period based on the expected level of achievement and, asto the extent that the expected levels of achievement change, compensation cost is adjusted in the period of change with the remaining unrecognized cost recognized over the remaining requisite service period. For performance share units that vest based on the achievement of predetermined market conditions, the Company estimates the grant date fair value using a Monte Carlo simulation model.The fair value associated with each subsequent quarterlytranche of the award is recognized, straight-line, over the associated requisite service period for that tranche, subject to acceleration if the market condition is met prior to the end date whileof the warrants are outstanding.derived service period.
Unless the awards contain a market condition, previously recognized expense related to forfeited awards is reversed in the period in which the forfeiture occurs. For awards containing a market condition, previously recognized stock-based compensation expense is not reversed when the awards are forfeited as long as the service is provided for the duration of the required service period.
If a warrant does
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic not815, meetDerivatives and Hedging. For derivative financial instruments that are accounted for as liabilities, the conditions for equity classification, itderivative instrument is carried in the consolidated balance sheet as a warrant liability measuredinitially recorded at its fair value on the grant date and is then re-valued at each reporting date, with subsequent changes in the fair value reported in the statements of operations. Derivative liabilities are classified on the balance sheet as current or non-current based on whether or not net cash settlement or conversion of the warrant recordedinstrument could be required within 12 months of the balance sheet date.
The Company uses derivative instruments to manage its exposure to changes in the consolidated statements of comprehensive income as a non-operating expense. If a warrant meets both conditions for equity classification, the warrant is initially recorded in additional paid-in capitalinterest rates on borrowings under its debt facility. These derivative instruments are primarily valued on the consolidatedbasis of quotes obtained from banks, brokers, and/or dealers. The valuation of the derivative instruments considers future expected interest rates on the notional principal balance sheet,remaining, which is comparable to what a prospective acquirer would pay on the measurement date. Valuation pricing models consider inputs such as forward rates, anticipated interest rate volatility relating to the reference rate, as well as time value, counterparty risk and the amount initially recorded is not subsequently re-measured at fair value. See Note 7,"Common Stock Warrants," and Note 8,"Fair Value Measurements," for further details.
other factors underlying derivative instruments.
Recent Accounting Pronouncements
Accounting Standards Recently Adopted
In February 2016,October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) which requires lessees to recognize right-of-use assets, representing their right to use the underlying asset for the lease term, and lease liabilities on the balance sheet for all leases with terms greater than 12 months. The Company adopted the provisions of this guidance effective January 1, 2022, using the modified retrospective optional transition method. Therefore, the standard was applied beginning January 1, 2022 and prior periods were not restated. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of retained earnings. The Company elected the package of practical expedients and implemented internal controls and executed changes to business processes to enable the preparation of financial information upon adoption. The adoption of the new standard resulted in the recognition of a right of use asset and short-term and long-term liabilities recorded on the Company's consolidated balance sheet related to operating leases. In addition, the adoption of the standard did not have a material impact on the Company's results of operations or cash flows. See Note 14,"Lease Commitments," for further details.
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirements Benefits – Defined Benefit Plans – General (Subtopic 715-20). The ASU will update disclosure requirements for employers that sponsor defined benefit pension or other post retirement plans. The Company adopted ASU 2019-12 on a retrospective basis as of January 1, 2022. Adoption did not result in a significant change to the Company's consolidated financial statement disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) which is intended to simplify various aspects related to accounting for income taxes. The ASU removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 on a prospective basis as of January 1, 2022. Adoption of the ASU did not have a material effect on the Company's consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (Subtopic 470-20). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. The new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. The Company adopted ASU 2020-06 on January 1, 2022. Adoption of the ASU did not impact the Company's consolidated financial statements.
Accounting Standards Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.Customers. This ASU requires entities to apply the definition of a performance obligation under ASC Topic 606,Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current U.S. GAAP,Prior to the adoption of ASU 2021-08, an acquirer generally recognizesrecognized assets acquired, and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 will resultresults in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. The Company adopted ASU 2021-08 on January 1, 2023. Adoption of the provisions of ASU 2021-08 are effective fordid not impact the Company's fiscal year beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. As of July 3, 2022, the Company did not adopt any expedients or exceptions under ASU 2020-04. The Company will continue to evaluate the impact of ASU 2020-04 and whether it will apply the optional expedients and exceptions.
2. |
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BUSINESS COMBINATION
On July 16, 2021, Holley consummated the Business Combination pursuant to the terms of the Merger Agreement, whereby (i) Merger Sub I, a direct wholly owned subsidiary of Empower, merged with and into Holley Intermediate, with Holley Intermediate surviving such merger as a wholly owned subsidiary of Holley (“Merger I”) and (ii) Merger Sub II, a direct wholly owned subsidiary of Empower, merged with and into Holley Intermediate, with Merger Sub II surviving such merger as a wholly owned subsidiary of Holley (“Merger II”).
Pursuant to the Merger Agreement, at the Closing, all outstanding shares of Holley Intermediate common stock as of immediately prior to the effective time of Merger I were cancelled and Holley Parent Holdings, LLC, the sole stockholder of Holley Intermediate (the “Holley Stockholder” or “Parent”), received $264,718 in cash and 67,673,884 shares of common stock (at a deemed value of $10.00 per share). The Company’s common stock is listed on the New York Stock Exchange (the "NYSE") under the symbol “HLLY.”
In connection with the Business Combination, a number of subscribers purchased from the Company an aggregate of 24,000,000 shares of common stock (the “PIPE”), for a purchase price of $10.00 per share, or $240,000 in the aggregate. Per the Merger Agreement, $100,000 of the PIPE proceeds were used to partially pay off Holley’s debt.
Pursuant to the Amended and Restated Forward Purchase Agreement (“A&R FPA”), at the Closing, 5,000,000 shares of the Company’s common stock and 1,666,667 warrants were issued to certain investors for an aggregate purchase price of $50,000. Pursuant to the A&R FPA, each warrant entitles the holder to purchase one share of the Company’s common stock at a price of $11.50 per share (the ”Public Warrants”), subject to certain conditions.
The Company also assumed 8,333,310 Public Warrants and 4,666,667 private placement warrants (the “Private Warrants”, and together with the Public Warrants, the “Warrants”) upon the Business Combination, all of which were issued in connection with Empower’s initial public offering. Each Warrant represents the right to purchase one share of the Company’s common stock at a price of $11.50 per share, subject to certain conditions. The Warrants became exercisable on October 9, 2021 (the one-year anniversary of Empower’s initial public offering) and expire on July 16, 2026 (five years after the Closing Date). The Public Warrants are listed on the NYSE under the symbol “HLLY WS.”
Additionally, Empower Sponsor Holdings LLC (the "Sponsor") received 2,187,500 shares of the Company’s common stock, which vest in two equal tranches upon achieving certain market share price milestones as outlined in the Merger Agreement during the earn-out period (“the “Earn-Out Shares”). The first tranche of Earn-Out Shares vested during the first quarter of 2022. Upon vesting, the first tranche of the Earn-Out Shares, or 1,093,750 shares, were issued and a liability of $14,689, representing the fair value of the shares on the date of vesting, was reclassified from liabilities to equity. The remaining tranche of Earn-Out Shares will be forfeited if the applicable conditions are not satisfied before July 16, 2028 (seven years after the Closing Date). The remaining Earn-Out Shares are classified as a liability on the condensed consolidated balance sheet and are remeasured at fair value with changes in the post-Business Combination fair value recognized in the Company’s condensed consolidated statement of comprehensive income as non-operating expense.
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. This determination was primarily based on current shareholders of Holley having a relative majority of the voting power of the Company, the operations of Holley prior to the acquisition comprising the only ongoing operations of the Company, and senior management of Holley comprising the majority of the senior management of the Company. Under this method of accounting, Empower was treated as the acquired company for financial reporting. Accordingly, the Business Combination was accounted for as the equivalent of Holley issuing stock for the net assets of Empower, accompanied by a recapitalization. The net assets of Empower are stated at historical cost, with no goodwill or other intangible assets recorded. Reported amounts from operations included herein prior to the Business Combination are those of Holley Intermediate. The shares and corresponding capital amounts and earnings per share, prior to the Business Combination, have been retroactively restated based on shares received by the Holley Stockholder.
ACQUISITIONS
During the
In 26-weeks ended July 3, 2022,the Company has completed three acquisitions, and during the year ended December 31, 2021, the Company completed eight acquisitions. These acquisitions are expected to enhance the Company's portfolio of products and services in the automotive aftermarket and automotive safety solutions market.
The Company accounts for acquisitions using the acquisition method, and accordingly, the purchase price has been allocated based upon the fair value of the assets acquired and liabilities assumed. The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the Company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date; however, material changes are not expected. Goodwill generated by the acquisitions is primarily attributable to the strong market position of the entities acquired.
Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions were for 100 percent of the acquired business and are reported in the Consolidated Statements of Cash Flows, net of acquired cash and cash equivalents. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are typically expensed in the periods in which the costs are incurred and are recorded in acquisition and restructuring costs. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
During the twenty-six weeks ended July 3, 2022, the Company acquired substantially all the assets of John's Ind., Inc. ("John's"), Southern Kentucky Classics ("SKC"), and Vesta Motorsports USA, Inc., doing business as RaceQuip ("RaceQuip"). These acquisitions were immaterial business combinations. Cash paid for the three acquisitions, net of cash acquired, was $13,778, and was funded with borrowings from the Company's credit facility and cash on hand. The acquisitions resulted in both amortizable and nonamortizable intangibles and goodwill totaling $9,059. The goodwill and intangibles generated as a result of these acquisitions are deductible for income tax purposes. The final allocation of the purchase price to specific assets acquired and liabilities assumed may change in future periods as the fair value estimates of inventory and intangibles are completed.
The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
2022 | ||||
Accounts receivable | $ | 959 | ||
Inventory | 3,481 | |||
Property, plant and equipment | 275 | |||
Other assets | 1,132 | |||
Tradenames | 1,689 | |||
Customer relationships | 1,512 | |||
Goodwill | 5,858 | |||
Accounts payable | (25 | ) | ||
Accrued liabilities | (1,103 | ) | ||
$ | 13,778 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
In 2021, the Company acquired substantially all the assets of Finspeed, LLC ("Finspeed"), Classic Instruments LLC, ADS Precision Machining, Inc., doing business as Arizona Desert Shocks, Rocket Performance Machine, Inc., doing business as Rocket Racing Wheels, and Speartech Fuel Injections Systems, Inc. These five acquisitions were individually immaterial business combinations that are material in the aggregate. Cash paid for the five immaterial acquisitions, net of cash acquired, was $19,685, and was funded with borrowings from the Company's credit facility and cash on hand. The acquisitions resulted in both amortizable and nonamortizable intangibles and goodwill totaling $13,023. The goodwill and intangibles generated as a result of these acquisitions are deductible for income tax purposes. The final allocation of the purchase price to specific assets acquired and liabilities assumed may change in future periods as the fair value estimates of inventory and intangibles are completed. However, for Finspeed, the measurement period has ended and the final fair value estimates of acquired assets and liabilities is reflected below.
The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
2021 | Measurement | 2021 | ||||||||||
Cash | $ | 122 | $ | 122 | ||||||||
Accounts receivable | 618 | 618 | ||||||||||
Inventory | 3,975 | 3,975 | ||||||||||
Property, plant and equipment | 2,274 | 2,274 | ||||||||||
Other assets | 23 | 23 | ||||||||||
Tradenames | 2,608 | 2,608 | ||||||||||
Customer relationships | 2,450 | 2,450 | ||||||||||
Goodwill | 8,087 | (122 | ) | 7,965 | ||||||||
Accounts payable | (343 | ) | (343 | ) | ||||||||
Accrued liabilities | (129 | ) | 122 | (7 | ) | |||||||
$ | 19,685 | $ | — | $ | 19,685 |
The fair value of the acquired customer relationship intangible assets were estimated using the excess earnings approach. The customer relationship intangible assets are being amortized based on the attrition rate of customers which have an estimated weighted average life of 18 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The remaining three acquisitions completed during 2021 are described below.
The Company accounts for acquisitions using the acquisition method, and accordingly, the purchase price has been allocated based upon the fair value of the assets acquired and liabilities assumed. The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the Company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date. Goodwill generated by the acquisitions is primarily attributable to the strong market position of the entities acquired.
Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions were for 100 percent of the acquired business and are reported in the Consolidated Statements of Cash Flows, net of acquired cash and cash equivalents. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are typically expensed in the periods in which the costs are incurred and are recorded in acquisition and restructuring costs. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
In 2022, the Company acquired substantially all the assets of John's Ind., Inc. ("John's"), Southern Kentucky Classics ("SKC"), and Vesta Motorsports USA, Inc., doing business as RaceQuip ("RaceQuip"). These acquisitions were immaterial business combinations. Cash paid for the three acquisitions, net of cash acquired, was $14,863, and was funded with borrowings from the Company's credit facility and cash on hand. The acquisitions resulted in both amortizable and nonamortizable intangibles and goodwill totaling $10,553. The goodwill and intangibles generated as a result of these acquisitions are deductible for income tax purposes. The final allocation of the purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of acquired assets and liabilities, as noted below.
The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
Measurement | ||||||||||||
2022 | Period | 2022 | ||||||||||
(as initially reported) | Adjustments | (as adjusted) | ||||||||||
Accounts receivable | $ | 959 | $ | (397 | ) | $ | 562 | |||||
Inventory | 3,481 | 146 | 3,627 | |||||||||
Property, plant and equipment | 275 | — | 275 | |||||||||
Other assets | 1,132 | (1,108 | ) | 24 | ||||||||
Tradenames | 1,689 | — | 1,689 | |||||||||
Customer relationships | 1,512 | — | 1,512 | |||||||||
Goodwill | 5,858 | 1,494 | 7,352 | |||||||||
Accounts payable | (25 | ) | (133 | ) | (158 | ) | ||||||
Accrued liabilities | (18 | ) | (2 | ) | (20 | ) | ||||||
$ | 14,863 | $ | — | $ | 14,863 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
| INVENTORY
|
Inventories of the Company consisted of the following:
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
Raw materials | $ | 71,392 | $ | 78,586 | ||||
Work-in-process | 24,915 | 23,906 | ||||||
Finished goods | 121,197 | 131,081 | ||||||
$ | 217,504 | $ | 233,573 |
| PROPERTY, PLANT AND EQUIPMENT, NET
|
Property, plant and equipment of the Company consisted of the following:
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
Land | $ | 3,426 | $ | 3,426 | ||||
Buildings and improvements | 11,669 | 11,051 | ||||||
Machinery and equipment | 70,947 | 66,140 | ||||||
Construction in process | 5,939 | 9,563 | ||||||
Total property, plant and equipment | 91,981 | 90,180 | ||||||
Less: accumulated depreciation | 42,290 | 37,999 | ||||||
Property, plant and equipment, net | $ | 49,691 | $ | 52,181 |
The Company’s long-lived assets by geographic locations are as follows:
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
United States | $ | 47,856 | $ | 50,434 | ||||
International | 1,835 | 1,747 | ||||||
Total property, plant and equipment, net | $ | 49,691 | $ | 52,181 |
| GOODWILL AND OTHER INTANGIBLE ASSETS |
The following presents changes to goodwill for the period indicated:
For the twenty-six weeks ended | ||||
July 2, 2023 | ||||
Balance on December 31, 2022 | 418,121 | |||
Measurement period adjustments | 935 | |||
Balance on July 2, 2023 | $ | 419,056 |
Goodwill represents the premium paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company's business combinations. The measurement period for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes available, not to exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
No impairment charges were incurred during the 13-week and 26-week periods ended July 2, 2023 and July 3, 2022. Potential changes in our costs and operating structure, the implementation of synergies, and overall performance in the automotive aftermarket industry, could negatively impact our near-term cash-flow projections and could trigger a potential impairment of the Company's goodwill and / or indefinite-lived intangible assets. In addition, failure to execute the Company's strategic plans as well as increases in weighted average costs of capital could negatively impact the fair value of the reporting unit and increase the risk of future impairment charges.
Intangible assets consisted of the following:
July 2, 2023 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 269,950 | $ | (49,949 | ) | $ | 220,001 | |||||
Tradenames | 13,775 | (5,206 | ) | 8,569 | ||||||||
Technology | 26,676 | (12,742 | ) | 13,934 | ||||||||
Total finite-lived intangible assets | $ | 310,401 | $ | (67,897 | ) | $ | 242,504 | |||||
Indefinite-lived intangible assets: | ||||||||||||
Tradenames | $ | 175,109 | — | $ | 175,109 |
December 31, 2022 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 269,950 | $ | (44,178 | ) | $ | 225,772 | |||||
Tradenames | 13,775 | (4,843 | ) | 8,932 | ||||||||
Technology | 26,676 | (11,523 | ) | 15,153 | ||||||||
Total finite-lived intangible assets | $ | 310,401 | $ | (60,544 | ) | $ | 249,857 | |||||
Indefinite-lived intangible assets: | ||||||||||||
Tradenames | $ | 174,998 | — | $ | 174,998 |
The following outlines the estimated future amortization expense related to intangible assets held as of July 2, 2023:
2023 (excluding the twenty-six weeks ended July 2, 2023) | $ | 7,204 | ||
2024 | 13,744 | |||
2025 | 13,714 | |||
2026 | 13,608 | |||
2027 | 13,493 | |||
Thereafter | 180,741 | |||
Total | $ | 242,504 |
| ACCRUED LIABILITIES |
Accrued liabilities of the Company consisted of the following:
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
Accrued freight | $ | 5,865 | $ | 6,861 | ||||
Accrued employee compensation and benefits | 8,682 | 6,259 | ||||||
Accrued returns and allowances | 6,094 | 5,214 | ||||||
Accrued taxes | 8,793 | 5,222 | ||||||
Current portion of operating lease liabilities | 5,112 | 5,112 | ||||||
Accrued other | 12,059 | 14,649 | ||||||
Total accrued liabilities | $ | 46,605 | $ | 43,317 |
7. | DEBT |
Debt of the Company consisted of the following:
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
First lien term loan due November 17, 2028 | $ | 645,636 | $ | 649,350 | ||||
Revolver | — | 10,000 | ||||||
Other | 2,453 | 2,770 | ||||||
Less unamortized debt issuance costs | (12,083 | ) | (11,557 | ) | ||||
636,006 | 650,563 | |||||||
Less current portion of long-term debt | (6,571 | ) | (7,000 | ) | ||||
$ | 629,435 | $ | 643,563 |
On November 18, 2021, the Company entered into a credit facility with a syndicate of lenders and Wells Fargo Bank, N.A., as administrative agent for the lenders, letter of credit issuer and swing line lender (the "Credit Agreement"). The financing consisted of a seven-year $600,000 first lien term loan, a five-year $125,000 revolving credit facility, and a $100,000 delayed draw term loan. The proceeds of delayed draw loans made after closing were available to the Company to finance acquisitions. Upon the expiration of the delayed draw term loan in May 2022, the Company had drawn $57,000, which is included in the amount outstanding under the first lien term loan due November 17, 2028.
The revolving credit facility includes a letter of credit facility in the amount of $10,000, pursuant to which letters of credit may be issued as long as revolving loans may be advanced and subject to availability under the revolving credit facility. The Company had $1,728 in outstanding letters of credit on July 2, 2023.
Proceeds from the credit facility were used to repay in full the Company’s obligations under its previously existing first lien and second lien notes and to pay $13,413 in deferred financing fees related to the refinancing.
The first lien term loan is to be repaid in quarterly payments of $1,643 through September 30, 2028 with the balance due upon maturity on November 17, 2028. The Company is required to make annual payments on the term loan in an amount equal to 50% of annual excess cash flow greater than $5,000, as defined in the Credit Agreement. This percentage requirement may decrease or be eliminated if certain leverage ratios are achieved. Based on the Company's results for 2022,no excess cash flow payment was required in 2023. Any such payments offset future mandatory quarterly payments.
As of July 2, 2023, amounts outstanding under the credit facility accrue interest at a rate equal to either the Secured Overnight Financing Rate ("SOFR") or base rate, at the Company's election, plus a specified margin. In the case of revolving credit loans and letter of credit fees, the specified margin is based on the Company's Total Leverage Ratio, as defined in the Credit Agreement. Commitment fees payable under the revolving credit facility are based on the Company's Total Leverage Ratio. On July 2, 2023, the weighted average interest rate on the Company's borrowings under the credit facility was 9.2%.
The Company has entered into an interest rate collar in the notional amount of $500,000 to hedge the Company's exposure to fluctuations in interest rates on its variable-rate debt. Refer to Note 9,"Derivative Instruments," for additional information.
Obligations under the Credit Agreement are secured by substantially all of the Company’s assets. The Credit Agreement includes representations and warranties and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on restricted payments, additional borrowings, additional investments, and asset sales.
In February 2023, the Company entered into an amendment to the Credit Agreement which, among other things, increases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of the quarter ending April 2, 2023 through the quarter ending March 31, 2024 (the “Covenant Relief Period”), to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter. As an ongoing condition to the Covenant Relief Period, the Company also agreed to (i) a minimum liquidity test, (ii) an interest coverage test, (iii) an anti-cash hoarding test at any time revolving loans are outstanding, and (iv) additional reporting obligations. Under the amended Credit Agreement, the revolving credit facility contains a minimum liquidity financial covenant of $45,000, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility. In April 2023, the Company entered into a second amendment to the Credit Agreement in which the interest rate on any outstanding borrowings under the Credit Agreement was changed from LIBOR to SOFR. In May 2023, the Company entered into a third amendment to the Credit Agreement in which certain defined terms were clarified. The Company incurred $1,427 of deferred financing fees related to these amendments. On July 2, 2023, the Company was in compliance with all financial covenants.
Some of the lenders that are parties to the Credit Agreement, and their respective affiliates, have various relationships with the Company in the ordinary course of business involving the provision of financial services, including cash management, commercial banking, investment banking or other services.
Future maturities of long-term debt and amortization of debt issuance costs as of July 2, 2023 are as follows:
Debt | Debt Issuance Costs | |||||||
2023 (excluding the twenty-six weeks ended July 2, 2023) | $ | 3,793 | $ | 907 | ||||
2024 | 7,447 | 1,942 | ||||||
2025 | 7,642 | 2,096 | ||||||
2026 | 6,571 | 2,265 | ||||||
2027 | 6,571 | 2,450 | ||||||
Thereafter | 616,065 | 2,423 | ||||||
$ | 648,089 | $ | 12,083 |
8. | COMMON STOCK WARRANTS AND EARN-OUT LIABILITY |
Upon the Closing, there were 14,666,644 Warrants, consisting of 9,999,977 public warrants ("Public Warrants") and 4,666,667 private warrants ("Private Warrants"), outstanding to purchase shares of Common Stock that were issued by Empower prior to the Business Combination. Each warrant entitles the registered holder to purchase one share of Common Stock at a price of $11.50 per share, subject to adjustments, provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the Warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities laws of the state of residence of the holder. The Warrants may be exercised only for a whole number of shares of Common Stock. The Warrants expire on July 16, 2026, the date that is five years after the Closing date, or earlier upon redemption or liquidation. Additionally, the Private Warrants will be non-redeemable and are exercisable on a cashless basis so long as they are held by Empower Sponsor Holdings, LLC (the "Sponsor") or any of its permitted transferees. If the Private Warrants are held by someone other than the Sponsor or its permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
The Company may redeem the Public Warrants at a price of $0.01 per warrant upon 30 days' notice if the closing price of Common Stock equals or exceeds $18.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given, provided there is an effective registration statement and current prospectus in effect with respect to the ordinary shares underlying such Warrants throughout the 30-day redemption period. If the foregoing conditions are satisfied and the Company issues a notice of redemption of the Warrants, the Warrant holder is entitled to exercise his, her or its Warrant prior to the scheduled redemption date. Any such exercise requires the Warrant holder to pay the exercise price for each Warrant being exercised. Further, the Company may redeem the Public Warrants at a price of $0.10 per warrant upon 30 days' notice if the closing price of Common Stock equals or exceeds $10.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given. Beginning on the date the notice of redemption is given until the Warrants are redeemed or exercised, holders may elect to exercise their Warrants on a cashless basis and receive that number of shares of Common Stock as determined by reference to a table in the warrant agreement.
During any period when the Company has failed to maintain an effective registration statement, warrant holders may exercise Warrants on a cashless basis in accordance with Section 3(a)(9) of the Securities Act or another exemption, and the Company will use its commercially reasonable best efforts to register or qualify the shares under applicable blue-sky laws to the extent an exemption is not available.
The Company’s Warrants are accounted for as a liability in accordance with ASC 815-40 and are presented as a warrant liability on the balance sheet. The warrant liability was measured at fair value at inception and on a recurring basis, with changes in fair value recognized as non-operating expense. As of July 2, 2023 and December 31, 2022, a warrant liability with a fair value of $7,725 and $4,272, respectively, was reflected as a long-term liability in the condensed consolidated balance sheet. An increase of $2,017 and a decrease of $23,168 in the fair value of the warrant liability was reflected as change in fair value of warrant liability in the condensed consolidated statements of comprehensive income for the 13-week periods ended July 2, 2023 and July 3, 2022, respectively. An increase of $3,452 and a decrease of $20,941 in the fair value of the warrant liability was reflected as change in fair value of warrant liability in the condensed consolidated statements of comprehensive income for the 26-week periods ended July 2, 2023 and July 3, 2022, respectively. In April 2022, the Company issued 33,333 shares of Common Stock in connection with the exercise of Public Warrants assumed in the Business Combination.
Additionally, the Sponsor received 2,187,500 shares of Common Stock upon the Closing, which vest in two equal tranches upon achievement of certain market share price milestones during the earn-out period, as outlined in the Merger Agreement (“the “Earn-Out Shares”). The first tranche of Earn-Out Shares vested during the first quarter of 2022. Upon vesting, the first tranche of 1,093,750 Earn-Out Shares were issued and a liability of $14,689, representing the fair value of the shares on the date of vesting, was reclassified from liabilities to equity. The remaining tranche of Earn-Out Shares will be forfeited if the applicable conditions are not satisfied before July 16, 2028 (seven years after the Closing Date). The unvested Earn-Out Shares are presented as an earn-out liability on the balance sheet and are remeasured at fair value with changes in fair value recognized as non-operating expense. As of July 2, 2023 and December 31, 2022, an earn-out liability with a fair value of $2,565 and $1,176, respectively, was reflected as a long-term liability in the condensed consolidated balance sheet. An increase of $961 and a decrease of $4,234 in the fair value of the earn-out liability was reflected as change in fair value of earn-out liability in the condensed consolidated statements of comprehensive income for the 13-week periods ended July 2, 2023 and July 3, 2022, respectively. An increase of $1,389 and a decrease of $1,853 in the fair value of the earn-out liability was reflected as change in fair value of earn-out liability in the condensed consolidated statements of comprehensive income for the 26-week periods ended July 2, 2023 and July 3, 2022, respectively.
9. | DERIVATIVE INSTRUMENTS |
The Company from time to time enters into derivative financial instruments, such as interest rate collar agreements (“Collars”), to manage its exposure to fluctuations in interest rates on the Company’s variable rate debt. On January 4, 2023, the Company entered into a Collar with Wells Fargo Bank, N.A. ("Wells Fargo") with a notional amount of $500,000 that expires on February 18, 2026. The Collar has a floor of 2.811% and a cap of 5% (based on three-month SOFR). The structure of this Collar is such that the Company receives an incremental amount if the Collar index exceeds the cap rate. Conversely, the Company pays an incremental amount to Wells Fargo if the Collar index falls below the floor rate. No payments are required if the Collar index falls between the cap and floor rates.
As of July 2, 2023, the Company recognized a derivative asset of $2,068 for the Collar in other noncurrent assets on the condensed consolidated balance sheet. For the 13-week and 26-week periods ended July 2, 2023, the Company recorded a net change in the fair value of the Collar as a decrease to interest expense of $5,088 and $2,068, respectively. No cash payments were made or received during the 13-week and 26-week periods ended July 2, 2023, as the applicable rate was between the cap and floor rates as of the settlement dates.
The fair value of the Collar is determined using observable market-based inputs and the impact of credit risk on the derivative’s fair value (the creditworthiness of the Company’s counterparty for assets and the creditworthiness of the Company for liabilities) (a Level 2 measurement, as described in Note 10,"Fair Value Measurements").
10. | FAIR VALUE MEASUREMENTS |
The Company’s financial liabilities subject to fair value measurement on a recurring basis and the level of inputs used for such measurements were as follows:
Fair Value Measured on July 2, 2023 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Interest rate collar | $ | — | $ | 2,068 | $ | — | $ | 2,068 | ||||||||
Liabilities: | ||||||||||||||||
Warrant liability (Public) | $ | 4,994 | $ | — | $ | — | $ | 4,994 | ||||||||
Warrant liability (Private) | — | — | 2,731 | 2,731 | ||||||||||||
Earn-out liability | — | — | 2,565 | 2,565 | ||||||||||||
Total fair value liabilities | $ | 4,994 | $ | — | $ | 5,296 | $ | 10,290 |
Fair Value Measured on December 31, 2022 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities: | ||||||||||||||||
Warrant liability (Public) | $ | 2,691 | $ | — | $ | — | $ | 2,691 | ||||||||
Warrant liability (Private) | — | — | 1,581 | 1,581 | ||||||||||||
Earn-out liability | — | — | 1,176 | 1,176 | ||||||||||||
Total fair value liabilities | $ | 2,691 | $ | — | $ | 2,757 | $ | 5,448 |
As of July 2, 2023, the Company's derivative liabilities for its Private and Public Warrants, earn-out liability, and derivative asset for its Collar are measured at fair value on a recurring basis (see Note 8, “Common Stock Warrants and Earn-Out Liability,” and Note 9, "Derivative Instruments," for more details). The fair values of the private warrants and earn-out liability are determined based on significant inputs not observable in the market (Level 3). The valuation of the Level 3 liabilities uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. The Company uses a Monte Carlo simulation model to estimate the fair value of its Private Warrants and earn-out liability. The fair value of the Collar, which is included in other noncurrent assets on the condensed consolidated balance sheet, is determined based on models that reflect the contractual terms of the derivative, yield curves, and the credit quality of the counterparties. Inputs are generally observable and do not contain a high level of subjectivity (Level 2). The fair value of the Public Warrants is determined using publicly traded prices (Level 1). Changes in the fair value of the derivative liabilities related to Warrants and the earn-out liability are recognized as non-operating expense in the condensed consolidated statements of comprehensive income. Changes in the fair value of the Collar is recognized as an adjustment to interest expense in the condensed consolidated statements of comprehensive income.
The fair value of Private Warrants was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:
July 2, 2023 | December 31, 2022 | |||||||
Valuation date price | $ | 4.09 | $ | 2.12 | ||||
Strike price | $ | 11.50 | $ | 11.50 | ||||
Remaining life (in years) | 3.04 | 3.54 | ||||||
Expected dividend | $ | — | $ | — | ||||
Risk-free interest rate | 4.36 | % | 4.06 | % | ||||
Price threshold | $ | 18.00 | $ | 18.00 |
The fair value of the earn-out liability was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:
July 2, 2023 | December 31, 2022 | |||||||
Valuation date price | $ | 4.09 | $ | 2.12 | ||||
Expected term (in years) | 5.04 | 5.54 | ||||||
Expected volatility | 61.26 | % | 70.33 | % | ||||
Risk-free interest rate | 4.01 | % | 3.88 | % | ||||
Price hurdle | $ | 15.00 | $ | 15.00 |
As of July 2, 2023 and December 31, 2022, the Company has accounts receivable, accounts payable and accrued expenses for which the carrying value approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s long-term debt approximates fair value as the rates used approximate the market rates currently available to the Company. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements.
The reconciliation of changes in Level 3 liabilities during the 26-week periods ended July 2, 2023 and July 3, 2022 is as follows:
Private Warrants | Earn-Out Liability | Total | ||||||||||
Balance at December 31, 2021 | $ | 21,793 | $ | 26,596 | $ | 48,389 | ||||||
Liabilities reclassed to equity | — | (14,689 | ) | (14,689 | ) | |||||||
Gains included in earnings | (7,653 | ) | (1,853 | ) | (9,506 | ) | ||||||
Balance at July 3, 2022 | $ | 14,140 | $ | 10,054 | $ | 24,194 | ||||||
Balance at December 31, 2022 | $ | 1,581 | $ | 1,176 | $ | 2,757 | ||||||
Losses included in earnings | 1,150 | 1,389 | 2,539 | |||||||||
Balance at July 2, 2023 | $ | 2,731 | $ | 2,565 | $ | 5,296 |
11. | REVENUE |
The principal activity from which the Company generates its revenue is the manufacturing and distribution of after-market automotive parts for its customers, comprised of resellers and end users. The Company recognizes revenue at a point in time, rather than over time, as the performance obligation is satisfied when customer obtains control of the product upon title transfer and not as the product is manufactured or developed. The amount of revenue recognized is based on the purchase order price and adjusted for revenue allocated to variable consideration (i.e., estimated rebates, co-op advertising, etc.).
The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs incurred after control of the product is transferred to our customers are treated as fulfillment costs and not a separate performance obligation.
The Company allows customers to return products when certain Company-established criteria are met. These sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized, net of returns to stock. Returned products, which are recorded as inventories, are valued at the lower of cost or net realizable value. The physical condition and marketability of the returned products are the major factors considered in estimating realizable value. The Company also estimates expected sales returns and records the necessary adjustment as a charge against gross sales.
The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 365 days. The Company elected the practical expedient to disregard the possible existence of a significant financing component related to payment on contracts, as the Company expects that customers will pay for the products within one year. The Company has evaluated the terms of our arrangements and determined that they do not contain significant financing components. Additionally, as all contracts with customers have an expected duration of one year or less, the Company has elected the practical expedient to exclude disclosure of information regarding the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period. The Company provides limited warranties on most of its products against certain manufacturing and other defects. Provisions for estimated expenses related to product warranty are made at the time products are sold. Refer to Note 18, “Commitments and Contingencies” for more information.
The following table summarizes total revenue by product category.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Electronic systems | $ | 74,401 | $ | 71,060 | $ | 143,152 | $ | 157,206 | ||||||||
Mechanical systems | 40,920 | 44,206 | 84,238 | 90,048 | ||||||||||||
Exhaust | 17,384 | 18,037 | 33,213 | 37,369 | ||||||||||||
Accessories | 26,382 | 28,353 | 53,847 | 57,099 | ||||||||||||
Safety | 16,175 | 17,764 | 33,017 | 37,753 | ||||||||||||
Net sales | $ | 175,262 | $ | 179,420 | $ | 347,467 | $ | 379,475 |
The following table summarizes total revenue based on geographic location from which the product is shipped:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
United States | $ | 170,817 | $ | 173,514 | $ | 337,235 | $ | 369,573 | ||||||||
Italy | 4,445 | 5,906 | 10,232 | 9,902 | ||||||||||||
Net sales | $ | 175,262 | $ | 179,420 | $ | 347,467 | $ | 379,475 |
12. | INCOME TAXES |
The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Income tax expense | $ | 4,098 | $ | 3,023 | $ | 5,664 | $ | 10,211 | ||||||||
Effective tax rates | 24.0 | % | 6.9 | % | 24.7 | % | 15.1 | % |
For the 13-week period ended July 2, 2023, the Company's effective tax rate of 24.0% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the warrant and earn-out liabilities recognized during the period. For the 13-week period ended July 3, 2022, the Company’s effective tax rate of 6.9% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in the fair value of the warrant and earn-out liabilities recognized during the period.
For the 26-week period ended July 2, 2023, the Company's effective tax rate of 24.7% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the warrant and earn-out liabilities recognized during the period. For the 26-week period ended July 3, 2022, the Company’s effective tax rate of 15.1% differed from the 21% federal statutory rate primarily due a permanent difference related to changes in the fair value of the warrant and earn-out liabilities recognized during the period.
13. | EARNINGS PER SHARE |
The following table sets forth the calculation of basic and diluted earnings per share:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 12,979 | $ | 40,563 | $ | 17,226 | $ | 57,421 | ||||||||
Less: fair value adjustment for Warrants | — | — | — | (20,941 | ) | |||||||||||
Net income (loss) - diluted | $ | 12,979 | $ | 40,563 | $ | 17,226 | $ | 36,480 | ||||||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding - basic | 117,221,419 | 116,931,623 | 117,187,287 | 116,398,177 | ||||||||||||
Dilutive effect of potential common shares from RSUs | 647,503 | 182,930 | 369,370 | 177,642 | ||||||||||||
Dilutive effect of potential common shares from Warrants | — | — | — | 768,156 | ||||||||||||
Weighted average common shares outstanding - diluted | 117,868,922 | 117,114,553 | 117,556,657 | 117,343,975 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.11 | $ | 0.35 | $ | 0.15 | $ | 0.49 | ||||||||
Diluted | $ | 0.11 | $ | 0.35 | $ | 0.15 | $ | 0.31 |
The following outstanding shares of Common Stock equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. Warrants to purchase shares of Common Stock having an exercise price greater than the average share market price are excluded from the calculation of diluted earnings per share.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Anti-dilutive shares excluded from calculation of diluted EPS: | ||||||||||||||||
Warrants | 14,633,311 | 14,633,311 | 14,633,311 | — | ||||||||||||
Stock options | 922,228 | 1,960,708 | 922,228 | 1,960,708 | ||||||||||||
Restricted stock units | 1,224,507 | 220,051 | 1,224,507 | 220,051 | ||||||||||||
Performance stock units | 2,469,412 | — | 2,469,412 | — | ||||||||||||
Unvested Earn-out Shares | 1,093,750 | 1,093,750 | 1,093,750 | 1,093,750 | ||||||||||||
Total anti-dilutive shares | 20,343,208 | 17,907,820 | 20,343,208 | 3,274,509 |
14. | BENEFIT PLANS |
On January 28, 2022, the Company approved the termination of its defined benefit pension plan (the "Plan"), effective March 31, 2022. The final distribution of the Plan's assets pursuant to the termination was made in the fourth quarter of 2022 when the plan termination satisfied all regulatory requirements. Plan participants received their accrued benefits from plan assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider.
The following table provides the components of net periodic benefit cost for the 13-week and 26-week periods ended July 3, 2022:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||
July 3, 2022 | July 3, 2022 | |||||||
Components of expense: | ||||||||
Service cost | $ | 27 | $ | 54 | ||||
Interest cost | 32 | 64 | ||||||
Expected return on plan assets | (52 | ) | (104 | ) | ||||
Net periodic benefit cost | $ | 7 | $ | 14 |
The Company's contributions to the Plan were $150 for the 26-week period ended July 3, 2022.
The Company made matching contributions totaling $565 and $1,156 to its 401(k) plan during the 13-week periods ended July 2, 2023 and July 3, 2022, respectively. The Company made matching contributions totaling $1,140 and $1,844 to its 401(k) plan during the 26-week periods ended July 2, 2023 and July 3, 2022, respectively.
15. | EQUITY-BASED COMPENSATION PLANS |
In 2021, the Company adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”), under which awards, including stock options, restricted stock units ("RSUs") and performance stock units ("PSUs") may be granted to employees and non-employee directors. The 2021 Plan authorized 8,850,000 shares of Common Stock to be available for award grants. As of July 2, 2023, 4,422,936 shares of Common Stock remained available for future issuance under the 2021 Plan. On June 6, 2023, the Company granted 1,000,000 RSUs and 1,520,000 PSUs to its new President and Chief Executive Officer. These awards were granted outside of the 2021 Plan as employment inducement awards and did not require shareholder approval under the rules of the New York Stock Exchange or otherwise.
Equity-based compensation expense included the following components:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Restricted stock units | $ | 1,167 | $ | 1,350 | $ | 1,815 | $ | 2,533 | ||||||||
Performance stock units | 322 | — | 374 | — | ||||||||||||
Stock options | 317 | 652 | 11 | 1,205 | ||||||||||||
Profit interest units | — | 1,481 | — | 2,907 |
All equity-based compensation expenses are deductible for income tax purposes. The purchase price was funded from cash on hand.
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of acquired assets and liabilities, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
April 14, 2021 | Measurement | April 14, 2021 | ||||||||||
Accounts receivable | $ | 3,454 | $ | (61 | ) | $ | 3,393 | |||||
Inventory | 3,892 | — | 3,892 | |||||||||
Property, plant and equipment | 1,342 | — | 1,342 | |||||||||
Other assets | 493 | (91 | ) | 402 | ||||||||
Tradenames | 10,760 | — | 10,760 | |||||||||
Customer relationships | 14,640 | — | 14,640 | |||||||||
Patents | 1,970 | — | 1,970 | |||||||||
Technology intangibles | 110 | — | 110 | |||||||||
Goodwill | 17,426 | (420 | ) | 17,006 | ||||||||
Accounts payable | (2,032 | ) | 110 | (1,922 | ) | |||||||
Accrued liabilities | (489 | ) | 139 | (350 | ) | |||||||
$ | 51,566 | $ | (323 | ) | $ | 51,243 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames and patents intangible assets were estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life. The patents are being amortized over 13 years based on the weighted average remaining life of the patent portfolio.
The contractual value of the accounts receivable acquired was $3,454.
|
|
Inventories of the Company consisted of the following:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
Raw materials | $ | 61,146 | $ | 54,818 | ||||
Work-in-process | 26,334 | 21,728 | ||||||
Finished goods | 127,387 | 108,494 | ||||||
$ | 214,867 | $ | 185,040 |
|
|
Property, plant and equipment of the Company consisted of the following:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
Land | $ | 3,426 | $ | 1,330 | ||||
Buildings and improvements | 10,935 | 10,623 | ||||||
Machinery and equipment | 63,367 | 56,824 | ||||||
Construction in process | 12,076 | 12,859 | ||||||
Total property, plant and equipment | 89,804 | 81,636 | ||||||
Less: accumulated depreciation | 33,795 | 30,141 | ||||||
Property, plant and equipment, net | $ | 56,009 | $ | 51,495 |
The Company’s long-lived assets by geographic locations are as follows:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
United States | $ | 54,260 | $ | 49,547 | ||||
International | 1,749 | 1,948 | ||||||
Total property, plant and equipment, net | $ | 56,009 | $ | 51,495 |
|
|
The following presents changes to goodwill for the period indicated:
For the twenty-six weeks ended July 3, 2022 | ||||
Balance at December 31, 2021 | $ | 411,383 | ||
John's acquisition | 240 | |||
SKC acquisition | 1,270 | |||
RaceQuip acquisition | 4,348 | |||
Measurement period adjustments* | 98 | |||
Balance at July 3, 2022 | $ | 417,339 |
* See Note 2, "Business Combination and Acquisitions - Acquisitions," for further details."
Goodwill represents the premium paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company's business combinations. The measurement period for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes available, not to exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Intangible assets consisted of the following:
July 3, 2022 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 269,950 | $ | (38,401 | ) | $ | 231,549 | |||||
Tradenames | 13,775 | (4,481 | ) | 9,294 | ||||||||
Technology | 26,676 | (10,302 | ) | 16,374 | ||||||||
Total finite-lived intangible assets | $ | 310,401 | $ | (53,184 | ) | $ | 257,217 | |||||
Indefinite-lived intangible assets: | ||||||||||||
Tradenames | $ | 176,903 | — | $ | 176,903 |
December 31, 2021 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 268,438 | $ | (32,662 | ) | $ | 235,776 | |||||
Tradenames | 13,775 | (4,119 | ) | 9,656 | ||||||||
Technology | 26,675 | (9,080 | ) | 17,595 | ||||||||
Total finite-lived intangible assets | $ | 308,888 | $ | (45,861 | ) | $ | 263,027 | |||||
Indefinite-lived intangible assets: | ||||||||||||
Tradenames | $ | 175,434 | — | $ | 175,434 |
The following outlines the estimated future amortization expense related to intangible assets held as of July 3, 2022:
2022 (excluding the twenty-six weeks ended July 3, 2022) | $ | 7,372 | ||
2023 | 14,582 | |||
2024 | 13,769 | |||
2025 | 13,739 | |||
2026 | 13,633 | |||
Thereafter | 194,122 | |||
Total | $ | 257,217 |
|
|
Debt of the Company consisted of the following:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
First lien term loan due November 17, 2028 | $ | 652,350 | $ | 630,000 | ||||
Revolver | 0 | 25,000 | ||||||
Other | 3,124 | 3,812 | ||||||
Less unamortized debt issuance costs | (12,418 | ) | (13,264 | ) | ||||
643,056 | 645,548 | |||||||
Less current portion of long-term debt | (6,300 | ) | (7,875 | ) | ||||
$ | 636,756 | $ | 637,673 |
On November 18, 2021, the Company entered into a new credit facility with a syndicate of lenders and Wells Fargo Bank, N.A., as administrative agent for the lenders, letter of credit issuer and swing line lender (the "Credit Agreement"). The financing consisted of a seven-year $600,000first lien term loan, a five-year $125,000 revolving credit facility, and a $100,000 delayed draw term loan.
The proceeds of any delayed draw loans made after closing were available to the Company to finance acquisitions. As of July 3, 2022, the Company had drawn $57,000 under the delayed draw term loan. Availability under the delayed draw term loan expired in May 2022.
The revolving credit facility includes a letter of credit facility in the amount of $10,000, pursuant to which letters of credit may be issued as long as revolving loans may be advanced and subject to availability under the revolving credit facility. The Company had $1,236 in outstanding letters of credit at July 3, 2022.
Proceeds from the new credit facility were used to repay in full the Company’s obligations under its existing first lien and second lien notes and to pay $13,413 in original issue discount and issuance costs related to the refinancing.
The first lien term loan is to be repaid in quarterly payments of $1,575through September 30, 2028 with the balance due upon maturity on November 17, 2028. Beginning with the fiscal year ending on December 31, 2022, the Company is required to make a payment based on its available free cash flow (as defined in the Credit Agreement). Any such payments offset future mandatory quarterly payments.
Amounts outstanding under the new credit facility will accrue interest at a rate equal to either the London Interbank Offering Rate ("LIBOR") or base rate, at the Company's election, plus a specified margin. In the case of revolving credit loans and letter of credit fees, the specified margin is based on the Company's Total Leverage Ratio, as defined in the Credit Agreement. Commitment fees payable under the revolving credit facility are based on the Company's Total Leverage Ratio. At July 3, 2022, the weighted average interest rate on the Company's borrowings under the credit facility was 5.2%.
Obligations under the Credit Agreement are secured by substantially all of the Company’s assets. The Credit Agreement includes representations and warranties and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on restricted payments, additional borrowings, additional investments, and asset sales. The Credit Agreement also requires that Holley maintain on the last day of each quarter, a Total Leverage Ratio not to exceed a maximum amount. At July 3, 2022, the Company was in compliance with all financial covenants.
Some of the lenders that are parties to the Credit Agreement, and their respective affiliates, have various relationships with the Company in the ordinary course of business involving the provision of financial services, including cash management, commercial banking, investment banking or other services.
Future maturities of long-term debt and amortization of debt issuance costs as of July 3, 2022 are as follows:
2022 (excluding the twenty-six weeks ended July 3, 2022) | $ | 3,563 | $ | 867 | ||||
2023 | 7,132 | 1,782 | ||||||
2024 | 7,140 | 1,690 | ||||||
2025 | 7,335 | 1,909 | ||||||
2026 | 6,300 | 1,980 | ||||||
Thereafter | 624,004 | 4,190 | ||||||
$ | 655,474 | $ | 12,418 |
|
|
Upon the Closing, there were 14,666,644 Warrants, consisting of 9,999,977 Public Warrants and 4,666,667 Private Warrants, outstanding to purchase shares of the Company's common stock that were issued by Empower prior to the Business Combination. Each warrant entitles the registered holder to purchase one share of the Company's common stock at a price of $11.50 per share, subject to adjustments, commencing on October 9, 2021 (the one-year anniversary of Empower’s initial public offering), provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities laws of the state of residence of the holder. The Warrants may be exercised only for a whole number of shares of the Company’s common stock. The Warrants expire on July 16, 2026, the date that is five years after the Closing date, or earlier upon redemption or liquidation. Additionally, the Private Warrants will be non-redeemable and are exercisable on a cashless basis so long as they are held by the Sponsor or any of its permitted transferees. If the Private Warrants are held by someone other than the Sponsor or its permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
The Company may redeem the Public Warrants at a price of $0.01 per warrant upon 30 days' notice if the closing price of the Company’s common stock equals or exceeds $18.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given, provided there is an effective registration statement and current prospectus in effect with respect to the ordinary shares underlying such Warrants throughout the 30-day redemption period. If the foregoing conditions are satisfied and the Company issues a notice of redemption of the Warrants, the Warrant holder is entitled to exercise his, her or its Warrant prior to the scheduled redemption date. Any such exercise requires the Warrant holder to pay the exercise price for each Warrant being exercised.
Further, the Company may redeem the Public Warrants at a price of $0.10 per warrant upon 30 days' notice if the closing price of the Company’s common stock equals or exceeds $10.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given. Beginning on the date the notice of redemption is given until the Warrants are redeemed or exercised, holders may elect to exercise their Warrants on a cashless basis and receive that number of shares of the Company’s common stock as determined by reference to a table in the warrant agreement.
During any period when the Company has failed to maintain an effective registration statement, warrant holders may exercise warrants on a cashless basis in accordance with Section 3(a)(9) of the Securities Act or another exemption, but the Company will use its commercially reasonable best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.
In April 2022, the Company issued 33,333 shares of common stock in connection with the exercise of Public Warrants assumed in the Business Combination.
The Company’s Warrants are accounted for as a liability in accordance with ASC 815-40 and are presented as a warrant liability on the balance sheet. The warrant liability was measured at fair value at inception and on a recurring basis, with changes in fair value recognized as non-operating expense. As of July 3, 2022, a warrant liability with a fair value of $40,352 was reflected as a long-term liability in the condensed consolidated balance sheet, and a $23,168 and $20,941 decrease in the fair value of the warrant liability was reflected as change in fair value of warrant liability in the condensed consolidated statements of comprehensive income for the 13-week and 26-week periods ended July 3, 2022, respectively.
|
|
The Company’s financial liabilities subject to fair value measurement on a recurring basis and the level of inputs used for such measurements were as follows:
Fair Value Measured as of July 3, 2022 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities included in: | ||||||||||||||||
Warrant liability (Public) | $ | 26,212 | $ | — | $ | — | $ | 26,212 | ||||||||
Warrant liability (Private) | — | — | 14,140 | 14,140 | ||||||||||||
Earn-out liability | — | — | 10,054 | 10,054 | ||||||||||||
Total fair value | $ | 26,212 | $ | — | $ | 24,194 | $ | 50,406 |
Fair Value Measured as of December 31, 2021 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities included in: | ||||||||||||||||
Warrant liability (Public) | $ | 39,500 | $ | — | $ | — | $ | 39,500 | ||||||||
Warrant liability (Private) | — | — | 21,793 | 21,793 | ||||||||||||
Earn-out liability | — | — | 26,596 | 26,596 | ||||||||||||
Total fair value | $ | 39,500 | $ | — | $ | 48,389 | $ | 87,889 |
As of July 3, 2022, the Company's derivative liabilities for its private and public warrants and the earn-out liability (see Note 2, “Business Combination and Acquisitions,” for more details) are measured at fair value on a recurring basis. The fair value for the private warrants and earn-out liability are determined based on significant inputs not observable in the market (Level 3). The valuation of the Level 3 liabilities uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. The Company uses a Monte Carlo simulation model to estimate the fair value of its private warrants and earn-out liability. The fair value of the public warrants is determined using publicly traded prices (Level 1). Changes in the fair value of the derivative liabilities related to warrants and the earn-out liability are recognized as non-operating expense in the condensed consolidated statements of comprehensive income.
The fair value of private warrants was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
Valuation date price | $ | 10.98 | $ | 12.99 | ||||
Strike price | $ | 11.50 | $ | 11.50 | ||||
Remaining life (in years) | 4.04 | 4.54 | ||||||
Expected dividend | $ | — | $ | — | ||||
Risk-free interest rate | 2.83 | % | 1.19 | % | ||||
Price threshold | $ | 18.00 | $ | 18.00 |
The fair value of the earn-out liability was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:
July 3, | December 31, | |||||||
2022 | 2021 | |||||||
Valuation date price | $ | 10.98 | $ | 12.99 | ||||
Expected term (in years) | 6.04 | 6.54 | ||||||
Expected volatility | 39.78 | % | 40.59 | % | ||||
Risk-free interest rate | 2.86 | % | 1.40 | % | ||||
Price hurdle 1 | not applicable | $ | 13.00 | |||||
Price hurdle 2 | $ | 15.00 | $ | 15.00 |
As of July 3, 2022 and December 31, 2021, the Company has accounts receivable, accounts payable and accrued expenses for which the carrying value approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s long-term debt approximates fair value as the rates used approximate the market rates currently available to the Company. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements.
The reconciliation of changes in Level 3 during the 26-week period ended July 3, 2022 is as follows:
For the twenty-six weeks ended July 3, 2022 | ||||||||||||
Private Warrants | Earn-Out Liability | Total | ||||||||||
Balance at December 31, 2021 | $ | 21,793 | $ | 26,596 | $ | 48,389 | ||||||
Liabilities reclassed to equity | 0 | (14,689 | ) | (14,689 | ) | |||||||
Losses included in earnings | (7,653 | ) | (1,853 | ) | (9,506 | ) | ||||||
Balance at July 3, 2022 | $ | 14,140 | $ | 10,054 | $ | 24,194 |
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The principal activity from which the Company generates its revenue is the manufacturing and distribution of after-market automotive parts for its customers, comprised of resellers and end users. The Company recognizes revenue at a point in time, rather than over time, as the performance obligation is satisfied when customer obtains control of the product upon title transfer and not as the product is manufactured or developed. The amount of revenue recognized is based on the purchase order price and adjusted for revenue allocated to variable consideration (i.e., estimated rebates, co-op advertising, etc.).
The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs incurred after control of the product is transferred to our customers are treated as fulfillment costs and not a separate performance obligation.
The Company allows customers to return products when certain Company-established criteria are met. These sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized, net of returns to stock. Returned products, which are recorded as inventories, are valued at the lower of cost or net realizable value. The physical condition and marketability of the returned products are the major factors considered in estimating realizable value. The Company also estimates expected sales returns and records the necessary adjustment as a charge against gross sales.
The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 365 days. The Company elected the practical expedient to disregard the possible existence of a significant financing component related to payment on contracts, as the Company expects that customers will pay for the products within one year. The Company has evaluated the terms of our arrangements and determined that they do not contain significant financing components. Additionally, as all contracts with customers have an expected duration of one year or less, the Company has elected the practical expedient to exclude disclosure of information regarding the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period. The Company provides limited warranties on most of its products against certain manufacturing and other defects. Provisions for estimated expenses related to product warranty are made at the time products are sold. Refer to Note 16 for more information.
The following table summarizes total revenue by product category. The Company's product category definitions have been revised by management in 2022. The prior-year period has been revised to conform with the current presentation. There is no change to total sales.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Electronic systems | $ | 71,060 | $ | 87,195 | $ | 157,206 | $ | 157,934 | ||||||||
Mechanical systems | 44,206 | 42,042 | 90,048 | 78,131 | ||||||||||||
Exhaust | 18,037 | 23,042 | 37,369 | 43,342 | ||||||||||||
Accessories | 28,353 | 22,508 | 57,099 | 39,941 | ||||||||||||
Safety | 17,764 | 18,254 | 37,753 | 34,025 | ||||||||||||
Total sales | $ | 179,420 | $ | 193,041 | $ | 379,475 | $ | 353,373 |
The following table summarizes total revenue based on geographic location from which the product is shipped:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
United States | $ | 173,514 | $ | 187,993 | $ | 369,573 | $ | 345,570 | ||||||||
Italy | 5,906 | 5,048 | 9,902 | 7,803 | ||||||||||||
Total sales | $ | 179,420 | $ | 193,041 | $ | 379,475 | $ | 353,373 |
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The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Income tax expense | $ | 3,023 | $ | 5,790 | $ | 10,211 | $ | 10,556 | ||||||||
Effective tax rates | 6.9 | % | 20.0 | % | 15.1 | % | 33.4 | % |
For the 13-week period ended July 3, 2022, the Company's effective tax rate of 6.9% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the Private Warrants and the earn-out liability recognized during the period. For the 13-week period ended June 27, 2021, the Company’s effective tax rate was 20.0%.
For the 26-week period ended July 3, 2022, the Company's effective tax rate of 15.1% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the Private Warrants and the earn-out liability recognized during the period. For the 26-week period ended June 27, 2021, the Company’s effective tax rate of 33.4% differed from the 21% federal statutory rate primarily due a permanent difference resulting from the change in fair value of an earn-out liability related to the 2020 acquisition of Simpson Performance Products ("Simpson") recognized during the period.
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The following table sets forth the calculation of basic and diluted earnings per share:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Numerator: | ||||||||||||||||
Net income - basic | $ | 40,563 | $ | 23,098 | $ | 57,421 | $ | 21,042 | ||||||||
Less: fair value adjustment for warrants | 0 | 0 | (20,941 | ) | 0 | |||||||||||
Net income - diluted | $ | 40,563 | $ | 23,098 | $ | 36,480 | $ | 21,042 | ||||||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding - basic | 116,931,623 | 67,673,884 | 116,398,177 | 67,673,884 | ||||||||||||
Dilutive effect of potential common shares from RSUs | 182,930 | 0 | 177,642 | 0 | ||||||||||||
Dilutive effect of potential common shares from warrants | 0 | 0 | 768,156 | 0 | ||||||||||||
Weighted average common shares outstanding - diluted | 117,114,553 | 67,673,884 | 117,343,975 | 67,673,884 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.35 | $ | 0.34 | $ | 0.49 | $ | 0.31 | ||||||||
Diluted | $ | 0.35 | $ | 0.34 | $ | 0.31 | $ | 0.31 |
The following outstanding shares of common stock equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. Warrants to purchase shares of common stock having an exercise price greater than the average share market price for the thirteen weeks ended July 3, 2022 are excluded from the calculation of diluted earnings per share.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Anti-dilutive shares excluded from calculation of diluted EPS: | ||||||||||||||||
Warrants | 14,633,311 | 0 | 0 | 0 | ||||||||||||
Stock options | 1,960,708 | 0 | 1,960,708 | 0 | ||||||||||||
Restricted stock units | 220,051 | 0 | 220,051 | 0 | ||||||||||||
Earn-out shares | 1,093,750 | 0 | 1,093,750 | 0 | ||||||||||||
Total anti-dilutive shares | 17,907,820 | 0 | 3,274,509 | 0 |
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|
The Company has a defined benefit pension plan (the “Plan”) for its employees. On January 28, 2022, the Company approved the termination of the Plan, effective March 31, 2022. Distribution of the Plan's assets, pursuant to the termination, will not be made until the Plan termination satisfies all regulatory requirements, which is expected to be completed by the fourth quarter of 2022. Plan participants will receive their full accrued benefits from the Plan's assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider. The resulting settlement effect of the Plan termination will be determined based on prevailing market conditions, the lump sum offer participation rate of eligible participants, the actual lump sum distributions, and annuity purchase rates at the date of distribution. The Company estimates that the settlement charge will be in the range of $400 - $550.
The following summarizes the components of net periodic benefit cost for the Plan:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Components of expense: | ||||||||||||||||
Service cost | $ | 27 | $ | 36 | $ | 54 | $ | 36 | ||||||||
Interest cost | 32 | 38 | 64 | 38 | ||||||||||||
Expected return on plan assets | (52 | ) | (61 | ) | (104 | ) | (61 | ) | ||||||||
Amortization of net loss | 0 | 5 | 0 | 5 | ||||||||||||
Net periodic benefit cost | $ | 7 | $ | 18 | $ | 14 | $ | 18 |
The Company made matching contributions totaling $1,156 and $526 to our 401(k) plan during the 13-week periods ended July 3, 2022 and June 27, 2021, respectively. The Company made matching contributions totaling $1,844 and $1,000 to our 401(k) plan during the 26-week periods ended July 3, 2022 and June 27, 2021, respectively.
The Company made 0 contributions and contributions of $98 to the Plan during the 13-week periods ended July 3, 2022 and June 27, 2021, respectively. The Company made contributions of $150 and $117 to the Plan during the 26-week periods ended July 3, 2022 and June 27, 2021, respectively.
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|
In 2021, the Company adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”), which provides for the grant of restricted stock awards, incentive and nonqualified stock options, and other share based awards to employees, directors and non-employees. The 2021 Plan authorized 8,850,000 shares of the Company’s common stock to be available for award grants. As of July 3, 2022, 5,951,568 shares of common stock remained available for future issuance under the 2021 Plan.
Equity-based compensation expense included the following components:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Stock options | $ | 652 | $ | 0 | $ | 1,205 | $ | 0 | ||||||||
Restricted stock units | 1,350 | 0 | 2,533 | 0 | ||||||||||||
Profit interest units | 1,481 | 131 | 2,907 | 262 |
All equity-based compensation expense is recorded in selling, general and administrative costs in the condensed consolidated statements of comprehensive income.
Stock Options
Stock option grants have an exercise price at least equal to the market value of the underlying common stock on the date of grant, have ten-year terms, and vest ratably over three years of continued employment. In general, vested options expire if not exercised at termination of service. On February 15, 2022 and May 6, 2022, the Company granted 548,001 and 44,055 options to purchase shares of the Company’s common stock to key employees, respectively. These stock options had weighted-average grant date fair values of $4.68 per share and $4.32per share, respectively, which values were estimated as of their respective grant dates using a Black-Scholes option pricing model with the following assumptions:
Granted Feb. 15, 2022 | Granted May 6, 2022 | |||||||
Weighted-average expected term | 6.0 | 6.0 | ||||||
Expected volatility | 36.0 | % | 40.0 | % | ||||
Expected dividend | $ | 0 | $ | 0 | ||||
Risk-free interest rate | 1.98 | % | 3.06 | % |
The expected term has been estimated using a simplified method, which calculates the expected term as the mid-point between the vesting date and the contractual life of the awards since the Company does not have an extended history of actual exercises. The expected dividend yield is assumed to be zero since the Company has never paid dividends and does not have current plans to pay any dividends. The risk-free interest rate is based on yields of U.S. Treasury securities with maturities similar to the expected term of the options. Expected volatility is based on an evenly weighted blend of implied volatility and historical volatility of publicly-traded peer companies since the Company has limited historical volatility.
Compensation expense for stock options is recorded based on straight-line amortization of the grant date fair value over the requisite service period. As of July 3, 2022, there was $5,986 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a remaining weighted-average period of 2.3 years.
Restricted Stock Units
Restricted stock units (“RSUs”)The Compensation Committee has awarded RSUs to select employees and non-employee directors. The RSUs vest ratably over one to threefour years of continued employment. The fair value of a RSU at the grant date is equal to the market price of the Company’s common stockCommon Stock on the grant date. On February 15, 2022 and May 6, 2022, the Company granted 228,180 and 16,767 RSUs, respectively to key employees with grant date fair values of $12.29 per unit and $9.95 per unit, respectively. Additionally, on May 11, 2022, 55,920 RSUs were granted to members of Holley's Board of Directors with a grant date fair value of $8.53 per unit. Compensation expense for RSUs is recorded based on amortization of the grant date fair market value over the period the restrictions lapse. As of July 3, 20222, 2023, there was $7,630$8,849 of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a remaining weighted average period of 2.22.5 years. The weighted average grant date fair value for RSUs was $2.75 and $11.46 for the 26-week periods ended July 2, 2023 and July 3, 2022, respectively. The fair value of RSUs vested and converted to shares of Common Stock was $303 for the 26-week period ended July 2, 2023.
The following table summarizes RSU activity for the 26-week period ended July 2, 2023:
Unvested Restricted Stock Units | ||||||||
Weighted | ||||||||
Number of | Average Grant | |||||||
RSUs | Date Fair Value | |||||||
December 31, 2022 | 1,108,330 | $ | 9.43 | |||||
Granted | 2,437,743 | 2.75 | ||||||
Vested | (126,197 | ) | 10.56 | |||||
Forfeited | (189,640 | ) | 12.13 | |||||
July 2, 2023 | 3,230,236 | $ | 3.42 |
Performance Stock Units
The Compensation Committee has awarded PSUs to select employees. The PSUs represent shares of Common Stock that are potentially issuable in the future based on a combination of performance and service requirements. On March 8, 2023, the Company granted 949,412 PSUs under the 2021 Plan to key employees with a grant date fair value of $1.98. The PSUs granted to employees were based on salary and include annual net sales and adjusted EBITDA growth targets with threshold and stretch goals. The awards vest ratably over three years, subject to the employee’s continuous employment through the vesting date and the level of performance achieved. The number of PSUs granted reflects the target number able to be earned under a given award. Non-vested PSU compensation expense is based on the most recent performance assumption available and is adjusted as assumptions change. The fair value of a PSU at the grant date is equal to the market price of Common Stock on the grant date. The cost estimates for PSU grants represent initial target awards until the Company can reasonably forecast the financial performance of each PSU award grant. The actual number of shares of Common Stock to be issued at the end of each performance period will range from 0% to 150% of the initial target awards.
On June 6, 2023, the Company granted 1,520,000 PSUs to its new President and Chief Executive Officer as an employment inducement award, which are potentially issuable in the future based on a combination of achievement of certain stock price metrics and service requirements through the expiration date of December 31, 2030. The fair value of this award is determined using a Monte Carlo simulation as of the date of the grant and share-based compensation expense will not be adjusted should the target awards vary from actual awards. The Company's estimates of fair value may be impacted by certain variables including, but not limited to, stock price volatility, the risk-free interest rate, expected dividend yields, and the Company's performance.
As of July 2, 2023, there was $4,397 of unrecognized compensation cost related to unvested PSUs that is expected to be recognized over a remaining weighted average period of 2.35 years.
Stock Options
Stock option grants have an exercise price at least equal to the market value of the underlying Common Stock on the date of grant, have ten-year terms, and vest ratably over three years of continued employment. In general, vested options expire if not exercised within 90 days of termination of service. Compensation expense for stock options is recorded based on straight-line amortization of the grant date fair value over the requisite service period. As of July 2, 2023, there was $1,611 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a remaining weighted-average period of 1.3 years.
The following table summarizes stock option activity for the 26-week period ended July 2, 2023:
Weighted Average | ||||||||||||
Weighted | Remaining | |||||||||||
Number of | Average | Contractual | ||||||||||
Stock Options | Exercise Price | Term (years) | ||||||||||
Options outstanding on December 31, 2022 | 1,709,690 | $ | 10.97 | |||||||||
Forfeited | (592,588 | ) | 11.11 | |||||||||
Expired | (194,874 | ) | 10.50 | |||||||||
Options outstanding on July 2, 2023 | 922,228 | $ | 10.98 | 8.26 | ||||||||
Options exercisable on, July 2, 2023 | 307,401 | $ | 10.98 | 8.26 |
Profit Interest Units
The Holley Stockholder has authorized an incentive pool of 41.4 million41,400,000 units of Parent, which are designated as PIUs,Holley Stockholder that its management hashad the right to grant to certain employees of the Company. As of July 3, 2022, noThe units, which are available for grant. The PIU'sdesignated as Profit Interest Units (“PIUs”), are a special type of limited liability company equity unit that allows the recipient to potentially participate in a future increase in the value of the Company. The PIUs arewere issued for no consideration and generally provideprovided for vesting over thea requisite service period, subject to the recipient remaining an employee of the Company through each vesting date.
AsIn the fourth quarter of July 3, 2022,, there was $6,578 the Holley Stockholder amended the vesting criteria to allow for immediate vesting of all outstanding and unvested PIUs. The changes to these awards were deemed to be modification events under ASC Subtopic 718-10,Stock Compensation. Accordingly, during the fourth quarter of 2022, the Company recognized catch-up equity-based compensation expense, including incremental fair value resulting from the modification, as applicable to each award grant. At that time all PIUs were fully vested with no remaining unrecognized compensation cost, related to unvested time-basedand there are no remaining PIUs that is expected to be recognized over a remaining weighted-average period of 1.2 years.authorized for issuance.
| LEASE COMMITMENTS |
On January 1, 2022, the Company adopted ASC Topic 842,Leases, using the modified retrospective optional transition method provided by ASU 2018-11.11,Leases (Topic 842). The effect of applying this guidance resulted in an increase in noncurrent assets for right-of-use assets of $33.9 million$33,887 and an increase in liabilities for associated lease obligations of $34.6 million,$34,579, most of which were classified as noncurrent. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of retained earnings.
Under the transition option elected by the Company, ASC Topic 842 is applied only to the most current period and reporting for comparative periods presented in the financial statements continues to be in accordance with ASC Topic 840,Leases, including disclosures. Upon adoption, the Company elected the following practical expedients related to ASC 842:
• | not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing leases, and not reassess initial direct costs for any existing leases; |
• | to account for the lease and non-lease components as a single lease component for all of the Company's leases; and |
• | to apply accounting similar to ASC Topic 840 to leases that meet the definition of short-term leases. |
The Company leases retail stores, manufacturing, distribution, engineering, and research and development facilities, office space, equipment, and automobiles under operating lease agreements. Leases have remaining lease terms of one to 1411 years, inclusive of renewal options that the Company is reasonably certain to exercise.
The following table summarizes operating lease assets and obligations:obligations, and provides information associated with the measurement of operating lease obligations.
As of | ||||||||||||
July 3, 2022 | July 2, 2023 | December 31, 2022 | ||||||||||
Assets: | ||||||||||||
Operating right of use assets | $ | 32,762 | $ | 28,965 | $ | 29,522 | ||||||
Liabilities: | ||||||||||||
Current operating lease liabilities | $ | 5,006 | ||||||||||
Long-term lease liabilities | 28,225 | |||||||||||
Current operating lease liabilities - Accrued liabilities | $ | 5,112 | $ | 5,112 | ||||||||
Long-term operating lease liabilities | 24,589 | 24,992 | ||||||||||
Total lease liabilities | $ | 33,231 | $ | 29,701 | $ | 30,104 | ||||||
Lease term and discount rate | ||||||||||||
Weighted average remaining lease term (in years) | 7.6 | 7.9 | ||||||||||
Weighted average discount rate | 5.91 | % | 5.77 | % |
The following summarizes the components of operating lease expense and provides supplemental cash flow information for operating leases:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Components of lease expense: | ||||||||||||||||
Operating lease expense | $ | 1,707 | $ | 1,482 | $ | 3,293 | $ | 3,901 | ||||||||
Short-term lease expense | 466 | 642 | 978 | 1,250 | ||||||||||||
Variable lease expense | 17 | 327 | 169 | 414 | ||||||||||||
Total lease expense | $ | 2,190 | $ | 2,451 | $ | 4,440 | $ | 5,565 | ||||||||
Supplemental cash flow information related to leases: | ||||||||||||||||
Cash paid for amounts included in measurement of operating lease liabilities | $ | 1,720 | $ | 1,821 | $ | 3,471 | $ | 3,581 | ||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | 2,354 | 13,491 | 2,354 | 13,769 | ||||||||||||
Decapitalization of right-of-use assets upon lease termination or modification | 154 | 12,178 | 154 | 12,178 |
The following summarizes the components of operating lease expense and provides supplemental cash flow information for operating leases:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||
July 3, 2022 | July 3, 2022 | |||||||
Components of lease expense: | ||||||||
Operating lease expense | $ | 1,482 | $ | 3,901 | ||||
Short-term lease expense | 642 | 1,250 | ||||||
Variable lease expense | 327 | 414 | ||||||
Total lease expense | $ | 2,451 | $ | 5,565 | ||||
Supplemental cash flow information related to leases: | ||||||||
Cash paid for amounts included in measurement of operating lease liabilities | $ | 1,821 | $ | 3,581 | ||||
Right of use assets obtained in exchange for new operating lease liabilities | 13,491 | 13,769 | ||||||
Decapitalization of right-of-use assets upon lease termination and/or modification | 12,178 | 12,178 |
Information associated with the measurement of operating lease obligations as of July 3, 2022 is as follows:
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The following table summarizes the maturities of the Company's operating lease liabilities as of July 3, 20222, 2023:
2022 (excluding the twenty-six weeks ended July 3, 2022) | $ | 3,718 | ||||||
2023 | 6,830 | |||||||
2023 (excluding the twenty-six weeks ended July 2, 2023) | $ | 3,434 | ||||||
2024 | 5,583 | 5,964 | ||||||
2025 | 3,867 | 4,433 | ||||||
2026 | 3,660 | 4,236 | ||||||
2027 | 4,182 | |||||||
Thereafter | 18,318 | 15,035 | ||||||
Total lease payments | 41,976 | 37,284 | ||||||
Less imputed interest | (8,745 | ) | (7,583 | ) | ||||
Present value of lease liabilities | $ | 33,231 | $ | 29,701 |
For the 13-week and 26-week periods ended June 27, 2021, total rent expense under operating leases approximated $1,979 and $3,672.
In accordance with ASC 840, Leases, the aggregate minimum non-cancelable annual lease payments under operating leases in effect on December 31, 2021 were as follows:
2022 | $ | 8,517 | ||
2023 | 6,320 | |||
2024 | 4,766 | |||
2025 | 2,995 | |||
2026 | 2,813 | |||
Thereafter | 8,546 | |||
Total minimum lease commitments | $ | 33,957 |
| ACQUISITION, RESTRUCTURING AND MANAGEMENT FEE COSTS |
The following table summarizes the Company's total acquisition, restructuring and management fee costs:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | |||||||||||||
Acquisitions (1) | $ | 1,372 | $ | 2,172 | $ | 1,621 | $ | 3,211 | ||||||||
Restructuring (2) | 319 | 504 | 360 | 1,125 | ||||||||||||
Management fees (3) | 0 | 1,658 | 0 | 2,539 | ||||||||||||
Earn out adjustment (4) | 0 | 0 | 0 | 17,173 | ||||||||||||
Total acquisition, restructuring and management fees | $ | 1,691 | $ | 4,334 | $ | 1,981 | $ | 24,048 |
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For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Acquisitions (1) | $ | — | $ | 1,372 | $ | — | $ | 1,621 | ||||||||
Restructuring (2) | 352 | 319 | 1,691 | 360 | ||||||||||||
Total acquisition, restructuring and management fees | $ | 352 | $ | 1,691 | $ | 1,691 | $ | 1,981 | ||||||||
(1) Includes professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to acquisitions. | ||||||||||||||||
(2) Includes costs incurred as part of the restructuring of operations including professional and consulting services and executive severance. |
| COMMITMENTS AND CONTINGENCIES |
The Company is a party to various lawsuits and claims in the normal course of business. While the lawsuits and claims against the Company cannot be predicted with certainty, management believes that the ultimate resolution of thesuch matters will not have a material effect on the consolidated financial position or liquidity of the Company; however, in light of the inherent uncertainties involved in such lawsuits and claims, some of which may be beyond the Company’s control, an adverse outcome in one or more of these matters could be material to the Company’s results of operations of the Company.or cash flows for any particular reporting period.
The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. The accrued product warranty costs are based primarily on historical experience of actual warranty claims and are recorded at the time of the sale.
The following table provides the changes in the Company's accrual for product warranties, which is classified as a component of accrued liabilities in the condensed consolidated balance sheets.
For the thirteen weeks ended | For the twenty-six weeks ended | For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||||||||||||||
Beginning balance | $ | 3,816 | $ | 2,867 | $ | 3,994 | $ | 3,989 | $ | 3,181 | $ | 3,816 | $ | 3,584 | $ | 3,994 | ||||||||||||||||
Accrued for current year warranty claims | 446 | 2,479 | 3,034 | 3,436 | 3,513 | 446 | 6,467 | 3,034 | ||||||||||||||||||||||||
Settlement of warranty claims | (1,937 | ) | (2,418 | ) | (4,703 | ) | (4,497 | ) | (2,818 | ) | (1,937 | ) | (6,175 | ) | (4,703 | ) | ||||||||||||||||
Ending balance | $ | 2,325 | $ | 2,928 | $ | 2,325 | $ | 2,928 | $ | 3,876 | $ | 2,325 | $ | 3,876 | $ | 2,325 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context requires otherwise, references to “Holley,” “we,” “us,” “our” and “the Company” in this section are to the business and operations of Holley Inc. and its subsidiaries unless the context otherwise indicates. The following discussion and analysis should be read in conjunction with Holley’s condensed consolidated financial statements and related notes thereto included in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause Holley’s actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed herein and under the caption, “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We are a leading designer, marketer, and manufacturer of high performance automotive aftermarket products serving car and truck enthusiasts, with sales, processing, and distribution facilities reaching most major markets in the United States, Canada, Europe and China. Holley designs, markets, manufacturesWe design, market, manufacture and distributesdistribute a diversified line of performance automotive products including fuel injection systems, tuners, exhaust products, carburetors, safety equipment and various other performance automotive products. The Company’sOur products are designed to enhance street, off-road, recreational and competitive vehicle performance and safety.
Innovation is at the core of our business and growth strategy with approximately 35% of our 2021 sales coming from products introduced by us into the market since 2016.strategy. We have a history of developing innovative products, including new products in existing product families, product line expansions, and accessories, as well as products that bring us into new categories. We have thoughtfully expanded our product portfolio over time to adapt to consumer needs.
In addition, we have historically used strategic acquisitions to (i) expand our brand portfolio, (ii) enter new product categories and consumer segments, (iii) increase direct-to-consumer (“DTC”) scale and connection, (iv) expand share in current product categories and (v) realize value-enhancing revenue and cost synergies. While we believe our business is positioned for continued organic growth, we intend to continue evaluating opportunities for strategic acquisitions that would complement our current business and expand our addressable target market.
Factors Affecting our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below, under the caption, "Cautionary Note Regarding Forward-Looking Statements," in this Quarterly Report on Form 10-Q, under the caption, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, as filed with the SEC on March 15, 2022,2023, and in our subsequent filings with the SEC.
Business CombinationEnvironment
On July 16, 2021 we consummated aOur business combination (“Business Combination”) pursuant to that certain Agreement and Planresults of Merger dated March 11, 2021 (the “Merger Agreement”),operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, labor shortages, and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc., a direct wholly owned subsidiarydisruption of Empower (“Merger Sub I”), Empower Merger Sub II LLC, a direct wholly owned subsidiary of Empower (“Merger Sub II”), and Holley Intermediate Holdings, Inc. ("Holley Intermediate").
The Merger Agreement provided for, among other things, the following transactions: (i) Merger Sub I merged with and into Holley Intermediate, the separate corporate existence of Merger Sub I ceased and Holley Intermediate became the surviving corporation, and (ii) Holley Intermediate merged with and into Merger Sub II, the separate corporate existence of Holley Intermediate ceased and Merger Sub II became the surviving limited liability company. Upon closing, Empower changed its name to Holley Inc. and its trading symbol on the New York Stock Exchange (the “NYSE”) from “EMPW” to “HLLY.”
The Business Combination was accounted forsupply chain, as a reverse recapitalization. Holley Intermediate was deemed the accounting acquirer with Holley Inc.well as by geopolitical events, such as the successor registrant. As such, Empower was treated asconflict in Ukraine. Our operations have been adversely impacted by inflationary pressures primarily related to transportation, labor and component costs. Sales growth in certain products has been constrained by continuing supply chain challenges and automotive electronic component shortages. In response to the acquired company for financial reporting purposes,global supply chain volatility and inflationary impacts, we have attempted to minimize potential adverse impacts on our business with cost savings initiatives, price increases to customers, and by increasing inventory levels of certain products and working closely with our suppliers and customers to minimize disruptions in delivering products to customers. Our profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales mix to lower-margin products, and demands on our performance that increased our costs. Should the ongoing macroeconomic conditions not improve, or worsen, or if our attempts to mitigate the impact on our supply chain, operations and costs is not successful, our business, results of operations and financial statements for periods prior to the Business Combination are those of Holley Intermediate.
As a result of the Business Combination, Holley Inc. listed on the NYSE, which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred and expect to continue to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal, and administrative resources, including increased personnel costs, audit and other professional service fees.condition may be adversely affected.
Acquisitions
Holley has historically pursued a growth strategy through both organic growth and acquisitions. The Company has pursued acquisitions that it believes will help drive profitability, cash flow and stockholder value. Holley targets companies that are market leaders, expand the Company’s geographic presence, provide a highly synergistic opportunity and/or enhance Holley’s ability to provide a wide array of its products to its customers through its distribution network.
In 2021 Holley completed eight acquisitions. The most significant acquisitions impacting the comparability of our operating results were:
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The acquisitions have all been accounted for in accordance with FASB ASC Topic 805, Business Combinations, and the operations of the acquired entities are included in our historical results for the periods following the closing of the acquisition. See Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” and Note 2, “Business Combination and Acquisitions,” in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information related to the Company’s acquisitions and investments.
COVID-19 Update
COVID-19 has adversely impacted global supply chain and general economic conditions. The Company has continued to experience disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain Company products in distribution channels. The full extent of the impact of the COVID-19 pandemic on the Company's business and operational and financial performance and condition is currently uncertain and will depend on many factors outside the Company's control, including but not limited to the timing, extent, duration and effects of the virus and any of its mutations, the utilization and effectiveness of treatments and vaccines, the imposition of effective public safety and other protective measures, the further impact of COVID-19 on the global economy and demand for the Company's products and services. During the second quarter of 2022, we continued to experience supply chain headwinds, including microchip shortages and other supply chain challenges that prevented us from building and shipping many of our most popular products, which has had, and may continue to have, a negative impact on product availability. Should the ongoing COVID-19 pandemic, including any variants of COVID-19, not improve or worsen, or if the Company's attempt to mitigate its impact on its supply chain, operations and costs is not successful, the Company's business, results of operations, financial condition and prospects may be adversely affected.
Key Components of Results of Operations
Net Sales
The principal activity from which the Company generates itswe generate sales is the designing, marketing, manufacturing and distribution of performance after-market automotive parts for itsour end consumers. Sales are displayed net of rebates and sales returns allowances. Sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized.
Cost of Goods Sold
Cost of goods sold consists primarily of the cost of purchased parts and manufactured products, including materials and direct labor costs. In addition, warranty, incoming shipping and handling and inspection and repair costs are also included within costs of goods sold. Reductions in the cost of inventory to its net realizable value are also a component of cost of goods sold.
Selling, General, and Administrative
Selling, general, and administrative costs consist of payroll and related personnel expenses, IT and office services, office rent expense and professional services. In addition, self-insurance, advertising, research and development, outgoing shipping costs, pre-production and start-up costs are also included within selling, general, and administrative. The Company expects to incur additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations and other professional services.
Acquisition and Restructuring Costs
Acquisition and restructuring costs consist of professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to potential acquisitions. In addition, operational restructuring costs and executive severance are included within this classification.
Related Party Acquisition and Management Fee Costs
Related party acquisition and management fee costs consist of fees paid to the Company’s private equity sponsor pursuant to a management services agreement for management services and consulting services directly attributable to potential acquisitions. Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated.
Interest Expense
Interest expense consists of interest due on the indebtedness under our credit facilities. Interest is based on LIBORSOFR or the primebase rate, at the Company's election, plus the applicable margin rate. As of July 3, 2022, $652.42, 2023, $645.6 million was outstanding under the Company'sour Credit Agreement.
Results of Operations
13-Week Period Ended July 3, 20222, 2023 ComparedCompared With 13-Week Period Ended June 27, 2021July 3, 2022
The table below presents Holley’s results of operations for the 13-week periods ended July 2, 2023 and July 3, 2022 and June 27, 2021 (dollars in thousands):
For the thirteen weeks ended | For the thirteen weeks ended | |||||||||||||||||||||||||||||||
July 3, 2022 | June 27, 2021 | Change ($) | Change (%) | July 2, 2023 | July 3, 2022 | Change ($) | Change (%) | |||||||||||||||||||||||||
Net sales | $ | 179,420 | $ | 193,041 | $ | (13,621 | ) | (7.1 | %) | $ | 175,262 | $ | 179,420 | $ | (4,158 | ) | (2.3 | %) | ||||||||||||||
Cost of goods sold | 104,132 | 111,841 | (7,709 | ) | (6.9 | %) | 105,514 | 104,132 | 1,382 | 1.3 | % | |||||||||||||||||||||
Gross profit | 75,288 | 81,200 | (5,912 | ) | (7.3 | %) | 69,748 | 75,288 | (5,540 | ) | (7.4 | %) | ||||||||||||||||||||
Selling, general, and administrative | 36,269 | 26,190 | 10,079 | 38.5 | % | 29,101 | 36,269 | (7,168 | ) | (19.8 | %) | |||||||||||||||||||||
Research and development costs | 8,196 | 7,065 | 1,131 | 16.0 | % | 6,182 | 8,196 | (2,014 | ) | (24.6 | %) | |||||||||||||||||||||
Amortization of intangible assets | 3,662 | 3,502 | 160 | 4.6 | % | 3,674 | 3,662 | 12 | 0.3 | % | ||||||||||||||||||||||
Acquisition and restructuring costs | 1,691 | 2,676 | (985 | ) | (36.8 | %) | 352 | 1,691 | (1,339 | ) | (79.2 | %) | ||||||||||||||||||||
Related party acquisition and management fee costs | — | 1,658 | (1,658 | ) | (100.0 | %) | ||||||||||||||||||||||||||
Other expense | 325 | 47 | 278 | 591.5 | % | 485 | 325 | 160 | 49.2 | % | ||||||||||||||||||||||
Operating income | 25,145 | 40,062 | (14,917 | ) | (37.2 | %) | 29,954 | 25,145 | 4,809 | 19.1 | % | |||||||||||||||||||||
Change in fair value of warrant liability | (23,168 | ) | — | (23,168 | ) | n/a | 2,017 | (23,168 | ) | 25,185 | (108.7 | %) | ||||||||||||||||||||
Change in fair value of earn-out liability | (4,234 | ) | — | (4,234 | ) | n/a | 961 | (4,234 | ) | 5,195 | (122.7 | %) | ||||||||||||||||||||
Interest expense | 8,961 | 11,174 | (2,213 | ) | (19.8 | %) | 9,899 | 8,961 | 938 | 10.5 | % | |||||||||||||||||||||
Income before income taxes | 43,586 | 28,888 | 14,698 | 50.9 | % | 17,077 | 43,586 | (26,509 | ) | (60.8 | %) | |||||||||||||||||||||
Income tax expense | 3,023 | 5,790 | (2,767 | ) | (47.8 | %) | 4,098 | 3,023 | 1,075 | 35.6 | % | |||||||||||||||||||||
Net income | 40,563 | 23,098 | 17,465 | 75.6 | % | 12,979 | 40,563 | (27,584 | ) | (68.0 | %) | |||||||||||||||||||||
Foreign currency translation adjustment | 501 | 35 | 466 | nm | 272 | 501 | (229 | ) | (45.7 | %) | ||||||||||||||||||||||
Total comprehensive income | $ | 41,064 | $ | 23,133 | $ | 17,931 | 77.5 | % | $ | 13,251 | $ | 41,064 | $ | (27,813 | ) | (67.7 | %) |
Net Sales
Net sales for the 13-week period ended July 3, 20222, 2023 decreased $13.6 $4.2 million, or 7.1%2.3%, to $179.4$175.3 million, as compared to $193.0$179.4 million for the 13-week period ended June 27, 2021. July 3, 2022. Non-comparable sales associated with acquisitions contributed $9.4$2.6 million, or 4.8%1.5% of year-over-year growth. The remaining comparable sales decreased by $23.0$6.8 million, or 11.9%3.8%, compared to the prior year quarter, offsetting the impact from the acquisitions. The decline in comparable sales was primarily driven by microchip shortages and other supply chain challenges that prevented us from building and shipping many of our most popular products, destocking from our resellers in responsereflects a return to the current economic environment as well as softening consumersales trends experienced prior to the increased demand which resulted inwe experienced during the COVID pandemic. As a result, lower unit volume drove a decrease of $37.0approximately $10.9 million due to lower unit volume net ofthat was partially offset by improved price realization of $14.0approximately $4.1 million compared to the prior year period. Major categories driving the comparable year-over-year results include a declinedecrease in safety products sales of $16.3$4.2 million in electronic system sales (18.7%(23.7% category decline), a decline of $1.1 milliondecrease in mechanical systemsystems sales (2.6%of $3.3 million (7.4% category decline), a decrease in accessories sales of $2.0 million (7.0% category decline), and a declinean increase in electronic systems sales of $0.5$3.3 million in safety product sales (2.7%(4.7% category decline)growth).
Cost of Goods Sold
Cost of goods sold for the 13-week period ended July 3, 2022 decreased$7.72, 2023 increased $1.4 million, or 6.9%1.3%, to $104.1$105.5 million, as compared to $111.8$104.1 million for the 13-week period ended June 27, 2021.July 3, 2022. The decreaseincrease in cost of goods sold during the 13-week period ended July 3, 2022 was2, 2023 in line with a corresponding decrease inwhich product sales during such period.decreased 2.3% reflects compression in gross profit margin due primarily to inflationary pressures on labor and component costs.
Gross Profit and Gross Margin
Selling, General and Administrative
Selling, general and administrative costs for the 13-week period ended July 3, 2022 increased $10.12, 2023 decreased $7.2 million, or 38.5%19.8%, to $36.3$29.1 million, as compared to $26.2$36.3 million for the 13-week period ended June 27, 2021.July 3, 2022. When expressed as a percentage of sales, selling, general and administrative costs increaseddecreased to 20.2%16.6% of sales for the 13-week period ended July 3, 2022, as2, 2023 compared to 13.6%20.2% of sales in 2021. Recent acquisitions accounted for $1.4 million of the increase2022. The decrease in selling, general and administrative costs. The increase in costs was also driven by a $3.41.7 million increase decrease in equity compensation expense related to equity awards,costs, a $2.3$1.7 million increase decrease in personnel costs, reflecting company growth and the additional requirements of becoming a public company, and a $1.4$1.2 million increase decrease in outbound shipping and handling costs, related to domestic supply chain pressures.reflecting the implementation of cost-saving initiatives.
Research and Development Costs
Research and development costs for the 13-week period ended July 3, 2022 increased $1.12, 2023 decreased $2.0 million, or 16.0%24.6%, to $8.2$6.2 million, as compared to $7.1$8.2 million for the 13-week period ended June 27, 2021.July 3, 2022. The increasedecrease in research and development costs was primarily due to headcount investments as we continue to pursue product innovation and new products.reductions, reflecting the implementation of cost-saving initiatives.
Amortization and Impairment of Intangible Assets
Amortization of intangible assets was stable at $3.7 million for both the 13-week periodperiods ended July 2, 2023 and July 3, 2022 increased $0.2 million, or 4.6%, to $3.7 million, as compared to $3.5 million for the 13-week period ended June 27, 2021 due to recent acquisitions.2022.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 13-week period ended July 3, 2022 2, 2023 decreased $1.0$1.3 million or 36.8%to $0.4 million, to $1.7 million, as compared to $2.7$1.7 million for the 13-week period ended June 27, 2021.
Related Party Acquisition and Management Fee Costs
Upon the Closing of the Business Combination, the management services agreementJuly 3, 2022. This decrease primarily reflects a reduction in restructuring activities associated with our private equity sponsor was terminated. Related party acquisition and management fee costs for the 13-week period ended June 27, 2021 were $1.7 million.acquisitions.
Operating Income
As a result of factors described above, operating income for the 13-week period ended July 3, 2022 decreased $14.92, 2023 increased $4.8 million, or 37.2%19.1%, to $25.2$30.0 million, as compared to $40.1$25.2 million for the 13-week period ended June 27, 2021.July 3, 2022.
Change in Fair Value of Warrant Liability
For the 13-week period ended July 2, 2023, we recognized a loss of $2.0 million from the change in fair value of the warrant liability. For the 13-week period ended July 3, 2022, we recognized a gain of $23.2$23.2 million from the change in fair value of the warrant liability. The warrant liability reflects the fair value of the warrantsWarrants issued in connection with the Business Combination.
Change in Fair Value of Earn-Out Liability
For the 13-week period ended July 2, 2023, we recognized a loss of $1.0 million from the change in fair value of the earn-out liability. For the 13-week period ended July 3, 2022, we recognized a gain of $4.2 million, from the change in fair value of the earn-out liability. The earn-out liability reflects the fair value of the earn-out sharesunvested Earn-out Shares resulting from the Business Combination.
Interest Expense
Interest expense for the 13-week period ended July 3, 2022 decreased $2.2 million, or 19.8%, to $9.0 million, as compared to $11.2 million for the 13-week period ended June 27, 2021. The decrease was primarily due to a lower effective interest rate combined with the favorable impact of the $100 million paydown on our second lien note in July 2021.
Income before Income Taxes
As a result of factors described above, we recognized $43.6 million of income before income taxes for the 13-week period ended July 3, 2022, as compared to $28.9 million for the 13-week period ended June 27, 2021.
Income Tax Expense
Income tax expense for the 13-week period ended July 3, 2022 decreased $2.8 million to $3.0 million, as compared to $5.8 million for the 13-week period ended June 27, 2021. The effective tax rate for the 13-week period ended July 3, 2022 was 6.9%. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities. The effective tax rate for the 13-week period ended June 27, 2021 was 20.0%. The difference between the effective tax rate and the federal statutory rate in 2021 was primarily due to permanent differences.
Net Income and Total Comprehensive Income
As a result of factors described above, we recognized net income of $40.6 million for the 13-week period ended July 3, 2022, as compared to$23.1 million for the 13-week period ended June 27, 2021. Additionally, we recognized total comprehensive income of $41.1 million for the 13-week period ended July 3, 2022, as compared to $23.1 million for the 13-week period ended June 27, 2021. Comprehensive income includes the effect of foreign currency translation adjustments.
26-week period ended July 3, 2022 Compared With 26-week period ended June 27, 2021
The table below presents Holley’s results of operations for the 26-week periods ended July 3, 2022 and June 27, 2021 (dollars in thousands):
For the twenty-six weeks ended | ||||||||||||||||
July 3, 2022 | June 27, 2021 | Change ($) | Change (%) | |||||||||||||
Net sales | $ | 379,475 | $ | 353,373 | $ | 26,102 | 7.4 | % | ||||||||
Cost of goods sold | 221,466 | 206,494 | 14,972 | 7.3 | % | |||||||||||
Gross profit | 158,009 | 146,879 | 11,130 | 7.6 | % | |||||||||||
Selling, general, and administrative | 70,611 | 50,202 | 20,409 | 40.7 | % | |||||||||||
Research and development costs | 16,357 | 13,034 | 3,323 | 25.5 | % | |||||||||||
Amortization of intangible assets | 7,323 | 6,838 | 485 | 7.1 | % | |||||||||||
Acquisition and restructuring costs | 1,981 | 21,509 | (19,528 | ) | (90.8 | %) | ||||||||||
Related party acquisition and management fee costs | — | 2,539 | (2,539 | ) | (100.0 | %) | ||||||||||
Other expense (income) | 547 | (86 | ) | 633 | (736.0 | %) | ||||||||||
Operating income | 61,190 | 52,843 | 8,347 | 15.8 | % | |||||||||||
Change in fair value of warrant liability | (20,941 | ) | — | (20,941 | ) | n/a | ||||||||||
Change in fair value of earn-out liability | (1,853 | ) | — | (1,853 | ) | n/a | ||||||||||
Interest expense | 16,352 | 21,245 | (4,893 | ) | (23.0 | %) | ||||||||||
Income before income taxes | 67,632 | 31,598 | 36,034 | 114.0 | % | |||||||||||
Income tax expense | 10,211 | 10,556 | (345 | ) | (3.3 | %) | ||||||||||
Net income | 57,421 | 21,042 | 36,379 | 172.9 | % | |||||||||||
Foreign currency translation adjustment | 742 | 19 | 723 | nm | ||||||||||||
Total comprehensive income | $ | 58,163 | $ | 21,061 | $ | 37,102 | 176.2 | % |
Net Sales
Net sales for the 26-week period ended July 3, 2022 increased $26.1 million, or 7.4%, to $379.5 million, as compared to $353.4 million for the 26-week period ended June 27, 2021. Non-comparable sales associated with acquisitions contributed $27.4 million, or 7.8% of total year-over-year growth. The remaining comparable sales for the year-to-date period decreased by $1.3 million, or 0.4%. The comparable sales reflect a decrease of $32.0 million due to lower unit volume net of improved price realization of $30.7 million compared to the prior year period. Major categories driving the comparable year-over-year results include a decrease in electronic system sales of $5.6 million (3.5% category decline), mechanical system growth of $4.0 million (5.1% category growth), and safety product growth of $3.7 million (11.0% category growth).
Cost of Goods Sold
Cost of goods sold for the 26-week period ended July 3, 2022 increased $15.0 million, or 7.3%, to $221.5 million, as compared to $206.5 million for the 26-week period ended June 27, 2021. The increase in cost of goods sold during the 26-week period ended July 3, 2022 was in line with a corresponding increase in product sales during such period.
Gross Profit and Gross Margin
Gross profit for the 26-week period ended July 3, 2022 increased $11.1 million, or 7.6%, to $158.0 million, as compared to $146.9 million for the 26-week period ended June 27, 2021. The increase in gross profit was driven by the increase in sales. Gross margin for the 26-week period ended July 3, 2022 of 41.6% was comparable to gross margin of 41.6% for the 26-week period ended June 27, 2021.
Selling, General and Administrative
Selling, general and administrative costs for the 26-week period ended July 3, 2022 increased $20.4 million, or 40.7%, to $70.6 million, as compared to $50.2 million for the 26-week period ended June 27, 2021. When expressed as a percentage of sales, selling, general and administrative costs increased to 18.6% of sales for the 26-week period ended July 3, 2022, as compared to 14.2% of sales in 2021. Recent acquisitions accounted for $3.3 million of the increase in selling, general and administrative costs. The increase in costs was also driven by a $6.4 million increase in compensation expense related to equity awards, a $3.6 million increase in administrative and sales personnel costs, reflecting company growth and the additional requirements of becoming a public company, and a $2.3 million increase in outbound shipping and handling costs related to higher sales and domestic supply chain pressure.
Research and Development Costs
Research and development costs for the 26-week period ended July 3, 2022 increased $3.3 million, or 25.5%, to $16.4 million, as compared to $13.0 million for the 26-week period ended June 27, 2021. The increase in research and development costs were primarily due to headcount investments as we continue to pursue product innovation and new products.
Amortization of Intangible Assets
Amortization of intangible assets for the 26-week period ended July 3, 2022 increased $0.5 million, or 7.1%, to $7.3 million, as compared to $6.8 million for the 26-week period ended June 27, 2021 due to recent acquisitions.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 26-week period ended July 3, 2022 decreased $19.5 million, or 90.8%, to $2.0 million, as compared to $21.5 million for the 26-week period ended June 27, 2021. The 26-week period ended June 27, 2021 included an adjustment of $17.2 million for contingent consideration payable for the acquisition of Simpson Performance Products ("Simpson").
Related Party Acquisition and Management Fee Costs
Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated. Related party acquisition and management fee costs for the 26-week period ended June 27, 2021 were $2.5 million.
Operating Income
As a result of factors described above, operating income for the 26-week period ended July 3, 2022 increased $8.4 million, or 15.8%, to $61.2 million, as compared to $52.8 million for the 26-week period ended June 27, 2021.
Change in Fair Value of Warrant Liability
For the 26-week period ended July 3, 2022 we recognized a gain of $20.9 million from the change in fair value of the warrant liability. The warrant liability reflects the fair value of the warrants issued in connection with the Business Combination.
Change in Fair Value of Earn-Out Liability
For the 26-week period ended July 3, 2022 we recognized a gain of $1.9 million from the change in fair value of the earn-out liability. The earn-out liability reflects the fair value of the earn-out shares resulting from the Business Combination. During the first quarter of 2022, the first tranche, representing half of the Earn-Out Shares, met the required market share price criteria and were issued. This issuance of the Company's common stock resulted in a reduction of the earn-out liability of $14.7 million, representing the fair value of the earn-out shares on the vesting date, which was reclassified from liabilities to equity. At July 3, 2022, there are 1,093,750 potential future Earn-Out Shares remaining.
Interest Expense
Interest expense for the 26-week13-week period ended July 2, 2023 increased $0.9 million, or 10.5%, to $9.9 million, as compared to $9.0 million for the 13-week period ended July 3, 2022, decreased $4.9 million, or 23.0%, to $16.4 million, as compared to $21.3 million for the 26-week period ended June 27, 2021. The decrease was primarily due toreflecting a lowerhigher effective interest rate combined with the favorable impactnet of a $5.1 million fair value adjustment of the $100 million paydown on our second lien note in July 2021.interest rate collar.
Income before Income Taxes
As a result of factors described above, we recognized $17.1 million of income before income taxes for the 13-week period ended July 2, 2023, as compared to income before income taxes of $67.6 $43.6 million for the 26-week13-week period ended July 3, 2022, as compared to $31.6 million for the 26-week period ended June 27, 2021.2022.
Income Tax Expense
Income tax expense for the 13-week period ended July 2, 2023 was $4.1 million, as compared to income tax expense of $10.2$3.0 million for the 26-week13-week period ended July 3, 2022 decreased by $0.4 million compared to $10.6 million for the 26-week period ended June 27, 2021. The2022. Our effective tax rate for the 26-week13-week period ended July 2, 2023 was 24.0%. The difference between the effective tax rate for the 13-week period ended July 2, 2023 and the federal statutory rate in 2023 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities. Our effective tax rate for the 13-week period ended July 3, 2022 was 15.1%6.9%. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities. The effective tax rate for the 26-week period ended June 27, 2021 was 33.4%. The difference between the effective tax rate and the federal statutory rate in 2021 was due to the permanent difference resulting from the adjustment to the Simpson earn-out liability during the period.
Net Income and Total Comprehensive Income
As a result of factors described above, we recognizedrecognized net income of $57.4of $13.0 million for the 26-week13-week period ended July 2, 2023, as compared to net income of $40.6 million for the 13-week period ended July 3, 2022,2022. Additionally, we recognized total comprehensive income of $13.3 million for the 13-week period ended July 2, 2023, as compared to $21.0total comprehensive income of $41.1 million for the 26-week period ended June 27, 2021. Additionally, we recognized total comprehensive income of $58.2 million for the 26-week13-week period ended July 3, 2022, as compared to $21.1 million for the 26-week period ended June 27, 2021.2022. Comprehensive income includes the effect of foreign currency translation adjustments.
26-Week Period Ended July 2, 2023Compared With 26-Week Period Ended July 3, 2022
The table below presents Holley’s results of operations for the 26-week periods ended July 2, 2023 and July 3, 2022 (dollars in thousands):
For the twenty-six weeks ended | ||||||||||||||||
July 2, 2023 | July 3, 2022 | Change ($) | Change (%) | |||||||||||||
Net sales | $ | 347,467 | $ | 379,475 | $ | (32,008 | ) | (8.4 | %) | |||||||
Cost of goods sold | 210,006 | 221,466 | (11,460 | ) | (5.2 | %) | ||||||||||
Gross profit | 137,461 | 158,009 | (20,548 | ) | (13.0 | %) | ||||||||||
Selling, general, and administrative | 59,118 | 70,611 | (11,493 | ) | (16.3 | %) | ||||||||||
Research and development costs | 12,835 | 16,357 | (3,522 | ) | (21.5 | %) | ||||||||||
Amortization of intangible assets | 7,353 | 7,323 | 30 | 0.4 | % | |||||||||||
Acquisition and restructuring costs | 1,691 | 1,981 | (290 | ) | (14.6 | %) | ||||||||||
Other expense | 536 | 547 | (11 | ) | (2.0 | %) | ||||||||||
Operating income | 55,928 | 61,190 | (5,262 | ) | (8.6 | %) | ||||||||||
Change in fair value of warrant liability | 3,452 | (20,941 | ) | 24,393 | (116.5 | %) | ||||||||||
Change in fair value of earn-out liability | 1,389 | (1,853 | ) | 3,242 | (175.0 | %) | ||||||||||
Interest expense | 28,197 | 16,352 | 11,845 | 72.4 | % | |||||||||||
Income before income taxes | 22,890 | 67,632 | (44,742 | ) | (66.2 | %) | ||||||||||
Income tax expense | 5,664 | 10,211 | (4,547 | ) | (44.5 | %) | ||||||||||
Net income | 17,226 | 57,421 | (40,195 | ) | (70.0 | %) | ||||||||||
Foreign currency translation adjustment | 73 | 742 | (669 | ) | (90.2 | %) | ||||||||||
Total comprehensive income | $ | 17,299 | $ | 58,163 | $ | (40,864 | ) | (70.3 | %) |
Net Sales
Net sales for the 26-week period ended July 2, 2023 decreased $32.0 million, or 8.4%, to $347.5 million, as compared to $379.5 million for the 26-week period ended July 3, 2022. Non-comparable sales associated with acquisitions contributed $4.4 million, or 1.2% of total year-over-year growth. The remaining comparable sales for the year-to-date period decreased by $36.4 million, or 9.6%, offsetting the impact from the acquisitions. The decline in comparable sales was driven by supply chain constraints in electronic components and a return to the sales trends experienced prior to the increased demand experienced during the COVID pandemic. As a result, lower unit volume drove a decrease of approximately $47.5 million that was partially offset by improved price realization of approximately $11.2 million compared to the prior year period. Comparable year-over-year results by category include a decrease in electronic systems sales of $14.1 million (8.9% category decline), a decrease in safety products sales of $9.1 million (24.1% category decline), a decrease in mechanical systems sales of $5.8 million (6.5% category decline), a decrease in exhaust system sales of $4.2 million (11.1% category decline), and a decrease in accessories sales of $3.2 million (5.7% category decline).
Cost of Goods Sold
Cost of goods sold for the 26-week period ended July 2, 2023 decreased $11.5 million, or 5.2%, to $210.0 million, as compared to $221.5 million for the 26-week period ended July 3, 2022. The decrease in cost of goods sold during the 26-week period ended July 2, 2023 reflects the decrease in product sales during such period combined with compression in gross profit margin due primarily to inflationary pressures on labor and component costs.
Gross Profit and Gross Margin
Selling, General and Administrative
Selling, general and administrative costs for the 26-week period ended July 2, 2023 decreased $11.5 million, or 16.3%, to $59.1 million, as compared to $70.6 million for the 26-week period ended July 3, 2022. When expressed as a percentage of sales, selling, general and administrative costs decreased to 17.0% of sales for the 26-week period ended July 2, 2023 compared to 18.6% of sales in 2022. The decrease in selling, general and administrative costs was driven by a $4.4 million decrease in equity compensation costs and a $3.9 million decrease in personnel costs, reflecting the implementation of cost-saving initiatives.
Research and Development Costs
Research and development costs for the 26-week period ended July 2, 2023 decreased $3.5 million, or 21.5%, to $12.8 million, as compared to $16.4 million for the 26-week period ended July 3, 2022. The decrease in research and development costs was primarily due to headcount reductions, reflecting the implementation of cost-saving initiatives.
Amortization and Impairment of Intangible Assets
Amortization of intangible assets was $7.4 million for the 26-week period ended July 2, 2023 compared to $7.3 million for the 26-week period ended July 3, 2022.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 26-week period ended July 2, 2023 decreased $0.3 million to $1.7 million, as compared to $2.0 million for the 26-week period ended July 3, 2022. This decrease primarily reflects a reduction in restructuring activities associated with acquisitions.
Operating Income
As a result of factors described above, operating income for the 26-week period ended July 2, 2023 decreased $5.3 million, or 8.6%, to $55.9 million, as compared to $61.2 million for the 26-week period ended July 3, 2022.
Change in Fair Value of Warrant Liability
For the 26-week period ended July 2, 2023 we recognized a loss of $3.5 million from the change in fair value of the warrant liability. For the 26-week period ended July 3, 2022 we recognized a gain of $20.9 million from the change in fair value of the warrant liability. The warrant liability reflects the fair value of the Warrants issued in connection with the Business Combination.
Change in Fair Value of Earn-Out Liability
For the 26-week period ended July 2, 2023 we recognized a loss of $1.4 million from the change in fair value of the earn-out liability. For the 26-week period ended July 3, 2022 we recognized a gain of $1.9 million from the change in fair value of earn-out liability. The earn-out liability reflects the fair value of the unvested Earn-out Shares resulting from the Business Combination.
Interest Expense
Interest expense for the 26-week period ended July 2, 2023 increased $11.9 million, or 72.4%, to $28.2 million, as compared to $16.4 million for the 26-week period ended July 3, 2022, reflecting a higher effective interest rate.
Income before Income Taxes
As a result of factors described above, we recognized $22.9 million of income before income taxes for the 26-week period ended July 2, 2023, as compared to income before income taxes of $67.6 million for the 26-week period ended July 3, 2022.
Income Tax Expense
Income tax expense for the 26-week period ended July 2, 2023 was $5.7 million, as compared to income tax expense of $10.2 million for the 26-week period ended July 3, 2022. Our effective tax rate for the 26-week period ended July 2, 2023 was 24.7%. The difference between the effective tax rate for the 26-week period ended July 2, 2023 and the federal statutory rate in 2023 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities. Our effective tax rate for the 26-week period ended July 3, 2022 was 15.1%. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities.
Net Income and Total Comprehensive Income
As a result of factors described above, we recognized net income of $17.2 million for the 26-week period ended July 2, 2023, as compared to net income of $57.4 million for the 26-week period ended July 3, 2022. Additionally, we recognized total comprehensive income of $17.3 million for the 26-week period ended July 2, 2023, as compared to total comprehensive income of $58.2 million for the 26-week period ended July 3, 2022. Comprehensive income includes the effect of foreign currency translation adjustments.
Non-GAAP Financial Measures
Holley believesWe present EBITDA and Adjusted EBITDA as supplemental measures of our operating performance, and believe that such non-GAAP financial measures provide useful information to investors, because they exclude the impact of certain items that we do not consider indicative of our ongoing operating performance and are useful to investors in evaluatingcomparing the Company’s results of operations between periods. We believe that the presentation of EBITDA and Adjusted EBITDA enhances the usefulness of our financial performance. In addition, Holleyinformation by presenting measures that management uses these measures internally to establish forecasts, budgets and operational goals to manage and monitor itsour business. Holley believesWe believe that these non-GAAP financial measures help to depict a more realistic representation of the performance of theour underlying business, enabling the Companyus to evaluate and plan more effectively for the future. Holley believes that investors should have access to the same set of tools that its management uses in analyzing operating results.
Holley definesWe define EBITDA as earnings before (a)depreciation, amortization of intangible assets, interest expense, (b)and income taxes and (c) depreciation and amortization. Holley definestax expense. We define Adjusted EBITDA as EBITDA plus (i) notable items that in 2022 consist primarily of non-cash adjustments relatedadjusted to exclude, to the adoption of ASC 842, "Leases," and in 2021 consist primarily of the amortization of the fair market value increase in inventory due to acquisitions, (ii) compensation expense related to equity awards (iii)extent applicable, acquisition and restructuring costs, which for the 13-week period ended March 28, 2021 includes a $17.2 million adjustment due to a change in the fair value of the Simpson acquisition contingent consideration payable, (iv)transaction fees and expenses, termination related benefits, facilities relocation, and executive transition costs; changes in the fair value of the warrant liability, (v)liability; changes in the fair value of the earn-out liability, (vi)liability; equity-based compensation expense; impairment of intangible assets; gain or loss on the early extinguishment of debt; non-cash charges due to a product rationalization initiative aimed at eliminating unprofitable or slow-moving stock keeping units, for which a partial reversal of the initial reserve was recognized during the thirteen weeks ended July 2, 2023; notable items, which for the twenty-six weeks ended July 3, 2022 includes a non-cash adjustment related party acquisitionto the adoption of ASC 842, “Leases,” and management fee costs,may also include certain fees and (vii)settlements; and other expenses or gains, which includes gains or losses from disposal of fixed assets and foreign currency transactions. We have included within the definition of Adjusted EBITDA the changes in the fair value of the warrant liability and changes in the fair value of the earn-out liability, as management believes such matters, when they occur, do not directly reflect the performance of the underlying business.
EBITDA and Adjusted EBITDA are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and may be different from non-GAAP financial measures used by other companies. These measures should not be considered as measures of financial performance under GAAP, and the items excluded from or included in these metrics are significant components in understanding and assessing Holley’s financial performance. These metrics should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP.
The following unaudited table presents the reconciliation of net income, (loss), the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the 13-week and 26-week periods ended July 2, 2023 and July 3, 2022 and June 27, 2021 (dollars in thousands):
For the thirteen weeks ended | For the twenty-six weeks ended | For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||||||||||||||||
July 3, 2022 | June 27, 2021 | July 3, 2022 | June 27, 2021 | July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||||||||||||||
Net income | $ | 40,563 | $ | 23,098 | $ | 57,421 | $ | 21,042 | $ | 12,979 | $ | 40,563 | $ | 17,226 | $ | 57,421 | ||||||||||||||||
Adjustments: | ||||||||||||||||||||||||||||||||
Depreciation | 2,523 | 2,201 | 4,663 | 4,453 | 2,468 | 2,523 | 4,953 | 4,663 | ||||||||||||||||||||||||
Amortization of intangible assets | 3,662 | 3,502 | 7,323 | 6,838 | 3,674 | 3,662 | 7,353 | 7,323 | ||||||||||||||||||||||||
Interest expense | 8,961 | 11,174 | 16,352 | 21,245 | 9,899 | 8,961 | 28,197 | 16,352 | ||||||||||||||||||||||||
Income tax expense | 3,023 | 5,790 | 10,211 | 10,556 | 4,098 | 3,023 | 5,664 | 10,211 | ||||||||||||||||||||||||
EBITDA | 58,732 | 45,765 | 95,970 | 64,134 | 33,118 | 58,732 | 63,393 | 95,970 | ||||||||||||||||||||||||
Acquisition and restructuring costs | 1,691 | 2,676 | 1,981 | 21,509 | 352 | 1,691 | 1,691 | 1,981 | ||||||||||||||||||||||||
Change in fair value of warrant liability | (23,168 | ) | — | (20,941 | ) | — | 2,017 | (23,168 | ) | 3,452 | (20,941 | ) | ||||||||||||||||||||
Change in fair value of earn-out liability | (4,234 | ) | — | (1,853 | ) | — | 961 | (4,234 | ) | 1,389 | (1,853 | ) | ||||||||||||||||||||
Equity-based compensation expense | 3,483 | 131 | 6,645 | 262 | 1,806 | 3,483 | 2,200 | 6,645 | ||||||||||||||||||||||||
Related party acquisition and management fee costs | — | 1,658 | — | 2,539 | ||||||||||||||||||||||||||||
Product rationalization | (800 | ) | — | (800 | ) | — | ||||||||||||||||||||||||||
Notable items | 378 | 3,862 | 884 | 9,575 | (16 | ) | 378 | 8 | 884 | |||||||||||||||||||||||
Other expense (income) | 325 | 47 | 547 | (86 | ) | |||||||||||||||||||||||||||
Other expense | 485 | 325 | 536 | 547 | ||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 37,207 | $ | 54,139 | $ | 83,233 | $ | 97,933 | $ | 37,923 | $ | 37,207 | $ | 71,869 | $ | 83,233 |
Liquidity and Capital Resources
Holley’sOur primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. The Company hasWe have generally financed itsour historical needs with operating cash flows, capital contributions and borrowings under itsour credit facilities. These sources of liquidity may be impacted by various factors, including demand for Holley’sour products, investments made in acquired businesses, plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.
As of July 3, 2022,2, 2023, the Company had cash of $30.6$42.7 million and availability of $123.8$123.3 million under its revolving credit facility. The Company has a senior secured revolving credit facility with $125 million in borrowing capacity. As of July 3, 2022,2, 2023, the Company had $1.2$1.7 million of letters of credit outstanding under the revolving credit facility. In February 2023, the Company entered into an amendment to its Credit Agreement which, among other things, contains a minimum liquidity financial covenant of $45 million, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility. The amendment also increases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of the fiscal quarter ending April 2, 2023 through the fiscal quarter ending March 31, 2024, to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter.
The Company is obligated under various operating leases for facilities, equipment and automobiles with estimated lease payments of approximately $4.4$3.8 million,including short term leases, due during the remainder of fiscal year 2022.2023. See Note 14,16, "Lease Commitments" in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information related to the Company’s lease obligations.
Holley's capital expenditures are primarily related to ongoing maintenance and improvements, including investments related to upgrading and maintaining our information technology systems, tooling for new products, vehicles for product development, and machinery and equipment for operations. We expect capital expenditures in the rangerange of $14$5 million to $16$10 million in fiscal year 2022.2023.
See Note 6,7, "Debt" in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for further detail of our credit facility and the timing of principal maturities. As of July 3, 2022,2, 2023, based on the then current weighted average interest rate of 5.2%9.2%, expected interest payments associated with outstanding debt totaled approximately $17.1$29.6 million for the remainder of fiscal year 2022.2023.
The Company believesAs discussed under “Business Environment” above, although the future impact of supply chain disruptions and inflationary pressures are highly uncertain, we believe that its cash on hand,generated through our current operating performance, and our operating plans, cash from operationsposition, and borrowings available under itsour revolving credit facility, will be sufficient to satisfy itsour liquidity needs and capital expenditure requirements for at least the next twelve12 months and thereafter for the foreseeable future.
Cash Flows
The following table provides a summary of cash flows from operating, investing, and financing activities for the periods presented (dollars in thousands):
26-week period ended July 3, 2022 April 2, 2023Compared With 26-week period ended June 27, 2021April 3, 2022
For the twenty-six weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 3, 2022 | June 27, 2021 | July 2, 2023 | July 3, 2022 | |||||||||||||
Cash flows from operating activities | $ | 20,831 | $ | 46,397 | ||||||||||||
Cash flows provided by operating activities | $ | 34,383 | $ | 20,831 | ||||||||||||
Cash flows used in investing activities | (23,442 | ) | (60,867 | ) | (2,382 | ) | (23,442 | ) | ||||||||
Cash flows used in financing activities | (2,716 | ) | (1,539 | ) | (15,572 | ) | (2,716 | ) | ||||||||
Effect of foreign currency rate fluctuations on cash | (443 | ) | — | 161 | (443 | ) | ||||||||||
Net decrease in cash and cash equivalents | $ | (5,770 | ) | $ | (16,009 | ) | ||||||||||
Net (decrease) increase in cash and cash equivalents | $ | 16,590 | $ | (5,770 | ) |
Operating Activities. CashNet cash provided by operating activities for the 26-week period ended July 3, 20222, 2023 was $20.8$34.4 million compared to $46.4net cash provided by operating activities of $20.8 million for the 26-week period ended June 27, 2021.July 3, 2022. Net income decreased $40.2 million to $17.2 million for the 26-week period ended July 2, 2023 from $57.4 million for the 26-week period ended July 3, 2022. Significant components ofchanges in the year-over-year change in cash provided by operating activitiesworking capital activity included negativepositive fluctuations from inventories of $41.2 million and accounts payable of $28.8$4.4 million. Partially offsetting these increases was a negative fluctuation in accounts receivable of $4.4 million The change in inventory reflects the impact of inventory management initiatives and $11.8 million, respectively. Offsetting these decreases were increasesfluctuations in cash provided bysales while changes in accounts receivable and prepaids and other current assets of $6.1 million and $6.1 million, respectively. The changes in inventory, accounts payable and accounts receivable reflect the fluctuations in sales during 2022 while accounts payable and accounts receivable are also impacted by the timing of payments.
Investing Activities. Cash used in investing activities for the 26-week period ended July 2, 2023 was $2.4 million which primarily reflects capital expenditures. Cash used in investing activities for the 26-week period ended July 3, 2022 was $23.4 million which included $9.4included $9.6 million relatingdue to capital expenditures and $14.0$14.1 million relatingdue to acquisitions. During the 26-week period ended June 27, 2021, cash used in investing activities was $60.9 million which included $54.0 million relating to acquisitions and $6.8 million due to capital expenditures.
Financing Activities. Cash used in financing activities for the 26-week period ended July 2, 2023 was $15.6 million, which primarily reflects principal payments on long-term debt and deferred financing fees. Cash used in financing activities for the 26-week period ended July 3, 2022 was $2.7 million due to net principal payments on long-term debt. Cash used in financing activities for the 26-week period ended June 27, 2021 reflected principal payments on long-term debt.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgements and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures. We evaluate our estimates, judgements and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. For a discussion of our critical accounting estimates, refer to the section entitled “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, as filed with the SEC on March 15, 2022.2023. For further information see also Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies” in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. There have been no material changes to the Company’s critical accounting estimates included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Recent Accounting Pronouncements
For a discussion of Holley’s new or recently adopted accounting pronouncements, see Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. Holley is exposed to market risk in the normal course of business due to the Company’s ongoing investing and financing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Holley has established policies and procedures governing the Company’s management of market risks and the use of financial instruments to manage exposure to such risks. TheWhen appropriate, the Company generally does not hedgeuses derivative financial instruments to mitigate the risk from its interest rate exposure. The Company had $655.5Company's interest rate collar is intended to mitigate some of the effects of increases in interest rates. As of July 2, 2023, a total of $645.6 million of debt outstanding asterm loan and revolver borrowings were subject to variable interest rates, with a weighted average borrowing rate of July 3, 2022.9.2%. A hypothetical 100 basis point increase orin interest rates would result in an approximately $1.5 million increase in annual interest expense, while a hypothetical 100 basis point decrease in interest rates would result in an approximately $6.6$6.5 million changedecrease to Holley’s annual interest expense.
Credit and other Risks. Holley is exposed to credit risk associated with cash and cash equivalents and trade receivables. As of July 3, 2022,2, 2023, the majority of the Company’s cash and cash equivalents consisted of cash balances in non-interest bearing checking accounts which exceed the insurance coverage provided on such deposits. The Company does not believe that its cash equivalents present significant credit risks because the counterparties to the instruments consist of major financial institutions. Substantially all trade receivable balances of the business are unsecured. The credit risk with respect to trade receivables is concentrated by the number of significant customers that the Company has in its customer base and a prolonged economic downturn could increase exposure to credit risk on the Company’s trade receivables. To manage exposure to such risks, Holley performs ongoing credit evaluations of the Company’s customers and maintains an allowance for potential credit losses.
Exchange Rate Sensitivity. As of July 3, 2022,2, 2023, the Company is exposed to changes in foreign currency exchange rates. While historically this exposure to changes in foreign currency exchange rates has not had a material effect on the Company’s financial condition or results of operations, foreign currency fluctuations could have ana material adverse effect on business and results of operations in the future. Historically, Holley’s primary exposure has been related to transactions denominated in the EurosEuro and Canadian dollars. The majority of the Company’s sales, both domestically and internationally, are denominated in U.S. Dollars. Historically, the majority of the Company’s expenses have also been in U.S. Dollars and we have been somewhat insulated from currency fluctuations. However, Holley may be exposed to greater exchange rate sensitivity in the future. Currently, the Company does not hedge foreign currency exposure; however, the Company may consider strategies to mitigate foreign currency exposure in the future if deemed necessary.
Item 4. Controls and Procedures.
Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of July 3, 20222, 2023 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
We are not currently not a party to any material legal proceedings that would be expected to have a material adverse effect on our business or financial condition.proceedings. From time to time, we are subject to litigation incidental to our business, as well as other litigation of a non-material nature in the ordinary course of business.
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. Factors that could materially affect our actual results, levels of activity, performance or achievements include, but are not limited to, those under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, as filed with the SEC on March 15, 2022.2023. Such risks, uncertainties and other factors may cause our actual results, performance, and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occur, our business, financial condition or results of operations may be adversely affected.
There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2022,2023, except for the year ended December 31, 2021.addition of the following risk factor:
Recent events affecting the financial services industry could have an adverse impact on the Company's business operations, financial condition, and results of operations.
The closures of certain regional banks have created bank-specific and broader financial institution liquidity risk and concerns. Future adverse developments with respect to specific financial institutions or the broader financial services industry may lead to market-wide liquidity shortages, impair the ability of companies to access working capital needs, and create additional market and economic uncertainty.
Although we do not have any funds in any of the banks that have been placed into receivership to date, we cannot guarantee that the banks or other financial institutions that hold our funds will not experience similar issues. These events have resulted in market disruption and volatility and could lead to greater instability in the credit and financial markets and a deterioration in confidence in economic conditions. Our operations may be adversely affected by any such economic downturn, liquidity shortages, volatile business environments, or unpredictable market conditions. These events could also make any necessary debt or equity financing more difficult and/or costly.
The future effect of these events on the financial services industry and broader economy are unknown and difficult to predict but could include failures of other financial institutions to which we or our customers, vendors, or other counterparties face direct or more significant exposure. Any such developments could adversely impact our results of operation and financial position. There may be other risks we have not yet identified. We are working to identify any potential impact of these events on our business in order to minimize any disruptions to our operations. However, we cannot guarantee we will be able to avoid any negative consequences relating to these recent developments or any future related developments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.Trading Plans
During the fiscal quarter ended July 2, 2023, no director or Section 16 officer adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S-K).
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# Indicates management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Holley Inc. |
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Chief Financial Officer
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August |