HLLY 10-Q
Holley Inc. (HLLY)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
HOLLEY INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(
(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 | ||
| | | |
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.
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).
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 | ☐ | | ☒ | |||
| Non-accelerated filer | ☐ | Smaller reporting company | | |||
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes
There were
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 (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. Forward-looking statements may be accompanied by words such as “believe,” “estimate,” “expect,” “project,” “forecast,” “may,” “will,” “should,” “seek,” “plan,” “scheduled,” “anticipate,” “intend” or similar expressions. These forward-looking statements are subject to various risks and uncertainties, many 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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anticipate and manage through supply shortages of key component parts used in our products and the need to shift the mix of products offered in response thereto; |
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respond to interruption from catastrophic events and problems such as terrorism, public health crises, cyber-attacks, or failure of key information technology systems; |
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maintain key strategic relationships with partners and resellers; |
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anticipate and manage through the impact of elevated interest rate levels, which cause the cost of capital to increase, as well as respond to inflationary pressures; |
| • |
enhance future operating and financial results; |
| • |
respond to uncertainties associated with product and service development and market acceptance; |
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anticipate and manage through increased constraints in consumer demand and/or shifts in the mix of products sold; |
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attract and retain qualified employees and key personnel; |
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protect and enhance the Company’s corporate reputation and brand awareness; |
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recognition of goodwill and other intangible asset impairment charges; |
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effectively respond to general economic and business conditions; |
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acquire and protect intellectual property; |
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collect, store, process and use personal and payment information and other consumer data; |
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comply with privacy and data protection laws and other legal obligations related to privacy, information security, and data protection; |
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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; |
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maintain Holley’s New York Stock Exchange (“NYSE”) listing of its common stock (“Common Stock”) and warrants to purchase Common Stock (“Warrants”); |
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comply with existing and/or future laws and regulations applicable to its business, including laws and regulations related to environmental health and safety; |
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respond to litigation, complaints, product liability claims and/or adverse publicity; |
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anticipate the significance and timing of contractual obligations; |
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anticipate the impact of, and response to, new accounting standards; |
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maintain proper and effective internal controls; |
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respond to the impact of changes in U.S. tax laws and regulations, including the impact on deferred tax assets; |
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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 (the “JOBS Act”); |
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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, 2022, as filed with the U.S. Securities and Exchange Commission (the "SEC") on March 15, 2023, in Part II. Item 1A of this Quarterly Report on Form 10-Q, and/or as disclosed in any subsequent filings with the SEC. |
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 may be required under applicable securities laws.
PART I – FINANCIAL INFORMATION
HOLLEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
| As of | ||||||||
| July 2, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, less allowance for credit losses of $ and $ respectively | ||||||||
| Inventory | ||||||||
| Prepaids and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant, and equipment, net | ||||||||
| Goodwill | ||||||||
| Other intangibles assets, net | ||||||||
| Right-of-use assets | ||||||||
| Other noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued interest | ||||||||
| Accrued liabilities | ||||||||
| Current portion of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net of current portion | ||||||||
| Warrant liability | ||||||||
| Earn-out liability | ||||||||
| Deferred taxes | ||||||||
| Long-term operating lease liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Refer to Note 18 - Commitments and Contingencies) | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $ par value, shares authorized, issued and outstanding on July 2, 2023 and December 31, 2022 | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding on July 2, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
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 |
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| July 2, 2023 |
July 3, 2022 |
July 2, 2023 |
July 3, 2022 |
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| Net sales |
$ | $ | $ | $ | ||||||||||||
| Cost of goods sold |
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| Gross profit |
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| Selling, general, and administrative |
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| Research and development costs |
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| Amortization of intangible assets |
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| Acquisition and restructuring costs |
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| Other operating expense |
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| Total operating expense |
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| Operating income |
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| Change in fair value of warrant liability |
( |
) | ( |
) | ||||||||||||
| Change in fair value of earn-out liability |
( |
) | ( |
) | ||||||||||||
| Interest expense |
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| Total non-operating expense (income) |
( |
) | ( |
) | ||||||||||||
| Income before income taxes |
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| Income tax expense |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Comprehensive income: |
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| Foreign currency translation adjustment |
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| Total comprehensive income |
$ | $ | $ | $ | ||||||||||||
| Common Share Data: |
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| Weighted average common shares outstanding - basic |
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| Weighted average common shares outstanding - diluted |
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| Basic net income per share |
$ | $ | $ | $ | ||||||||||||
| Diluted net income per share |
$ | $ | $ | $ | ||||||||||||
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 |
Accumulated |
Retained |
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| Additional |
Other |
Earnings |
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| Paid-In |
Comprehensive |
(Accumulated |
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| Shares |
Amount |
Capital |
Gain (Loss) |
Deficit) |
Total |
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| Balance at December 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||||||
| Net income |
— | |||||||||||||||||||||||
| Equity compensation |
— | |||||||||||||||||||||||
| Foreign currency translation |
— | |||||||||||||||||||||||
| Issuance of vested Earn-out Shares |
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| Balance at April 3, 2022 |
( |
) | ( |
) | ||||||||||||||||||||
| Net income |
— | |||||||||||||||||||||||
| Equity compensation |
— | |||||||||||||||||||||||
| Foreign currency translation |
— | |||||||||||||||||||||||
| Warrants exercised |
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| Balance at July 3, 2022 |
$ | $ | $ | $ | $ | |||||||||||||||||||
| Balance at December 31, 2022 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
| Net income |
— | |||||||||||||||||||||||
| Equity compensation |
— | |||||||||||||||||||||||
| Foreign currency translation |
— | ( |
) | ( |
) | |||||||||||||||||||
| Tax withholding related to vesting of restricted stock units |
— | ( |
) | ( |
) | |||||||||||||||||||
| Issuance of shares for restricted stock units |
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| Balance at April 2, 2023 |
( |
) | ||||||||||||||||||||||
| Net income |
— | |||||||||||||||||||||||
| Equity compensation |
— | |||||||||||||||||||||||
| Foreign currency translation |
— | |||||||||||||||||||||||
| Tax withholding related to vesting of restricted stock units |
— | ( |
) | ( |
) | |||||||||||||||||||
| Issuance of shares for restricted stock units |
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| Balance at July 2, 2023 |
$ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
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 |
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| July 2, 2023 |
July 3, 2022 |
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| OPERATING ACTIVITIES: |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash from operating activities: |
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| Depreciation |
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| Amortization of intangible assets |
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| Amortization of deferred loan costs |
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| Amortization of right of use assets |
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| Gain on termination of leases |
( |
) | ||||||
| Fair value adjustments to warrant liability |
( |
) | ||||||
| Fair value adjustments to earn-out liability |
( |
) | ||||||
| Fair value adjustments to interest rate collar |
( |
) | ||||||
| Equity compensation |
||||||||
| Change in deferred taxes |
( |
) | ( |
) | ||||
| Loss on disposal of property, plant and equipment |
||||||||
| Provision for inventory reserves |
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| Provision for credit losses |
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| Change in operating assets and liabilities: |
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| Accounts receivable |
( |
) | ( |
) | ||||
| Inventories |
( |
) | ||||||
| Prepaids and other current assets |
||||||||
| Accounts payable |
( |
) | ( |
) | ||||
| Accrued interest |
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| Accrued and other liabilities |
( |
) | ||||||
| Net cash provided by operating activities |
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| INVESTING ACTIVITIES: |
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| Capital expenditures |
( |
) | ( |
) | ||||
| Proceeds from the disposal of fixed assets |
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| Cash paid for acquisitions, net |
( |
) | ||||||
| Net cash used in investing activities |
( |
) | ( |
) | ||||
| FINANCING ACTIVITIES: |
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| Proceeds from issuance of long-term debt |
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| Principal payments on long-term debt |
( |
) | ( |
) | ||||
| Deferred financing fees |
( |
) | ||||||
| Payments from stock-based award activities |
( |
) | ||||||
| Proceeds from issuance of common stock in connection with the exercise of Warrants |
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| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Effect of foreign currency rate fluctuations on cash |
( |
) | ||||||
| Net change in cash and cash equivalents |
( |
) | ||||||
| Cash and cash equivalents: |
||||||||
| Beginning of period |
||||||||
| End of period |
$ | $ | ||||||
| Supplemental disclosures of cash flow information: |
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| Cash paid for interest |
$ | $ | ||||||
| Cash paid for income taxes |
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| Noncash investing and financing activities: |
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| Vested Earn-out Shares issued to Empower Sponsor Holdings LLC |
$ | $ | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
| 1. | DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Holley Inc., a Delaware corporation headquartered in Bowling Green, Kentucky (the “Company” or “Holley”), conducts operations through its wholly 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.
The Company consummated a 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., Empower Merger Sub II LLC, 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. and its trading symbol on the New York Stock Exchange (the “NYSE”) from “EMPW” to “HLLY.”
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 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
The 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 been constrained by continuing supply chain challenges and automotive electronic component shortages. In response to the global supply chain volatility and inflationary impacts, the Company has attempted to minimize potential adverse impacts on its business with cost savings initiatives, price increases to customers, and by increasing inventory levels of certain products and 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 macroeconomic conditions not improve, or worsen, or if the Company's attempt to mitigate the impact on its supply chain, operations and costs is not successful, the Company’s business, results of operations and financial condition 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 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, 2022, as filed with the SEC on March 15, 2023, 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 fiscal year that ends on December 31, 2023 and 2022. The three- and six-month periods ended July 2, 2023 and July 3, 2022 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, 2022.
Equity-Based Compensation
The Company accounts for equity-based awards granted to employees 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 the estimated grant date fair value of the award and is recognized as expense over the requisite service period (generally the vesting period). The fair value of stock options is estimated using the Black Scholes option-pricing model. Restricted stock units are valued at the stock price on the grant date. The fair value of profit interest units ("PIUs") granted by Holley Parent Holdings, LLC (the "Holley Stockholder") is estimated based on the Company’s estimated equity value for each unit class at the time of granting 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, to 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 tranche 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 of the 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.
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 815, Derivatives and Hedging. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with 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 instrument could be required within 12 months of the balance sheet date.
The Company uses derivative instruments to manage its exposure to changes in interest rates on borrowings under its debt facility. These derivative instruments are primarily valued on the basis 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 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 other factors underlying derivative instruments.
Recent Accounting Pronouncements
Accounting Standards Recently Adopted
In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with 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. Prior to the adoption of ASU 2021-08, an acquirer generally recognized 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 results 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 ASU 2021-08 did not impact the Company's consolidated financial statements.
| 2. |
ACQUISITIONS |
In 2022, the Company completed three 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. 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 $
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 |
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| 2022 |
Period |
2022 |
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| (as initially reported) |
Adjustments |
(as adjusted) |
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| Accounts receivable |
$ | $ | ( |
) | $ | |||||||
| Inventory |
||||||||||||
| Property, plant and equipment |
— | |||||||||||
| Other assets |
( |
) | ||||||||||
| Tradenames |
— | |||||||||||
| Customer relationships |
— | |||||||||||
| Goodwill |
||||||||||||
| Accounts payable |
( |
) | ( |
) | ( |
) | ||||||
| Accrued liabilities |
( |
) | ( |
) | ( |
) | ||||||
| $ | $ | $ | ||||||||||
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
| 3. |
INVENTORY |
Inventories of the Company consisted of the following:
| As of |
||||||||
| July 2, 2023 |
December 31, 2022 |
|||||||
| Raw materials |
$ | $ | ||||||
| Work-in-process |
||||||||
| Finished goods |
||||||||
| $ | $ | |||||||
| 4. |
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 |
$ | $ | ||||||
| Buildings and improvements |
||||||||
| Machinery and equipment |
||||||||
| Construction in process |
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| Total property, plant and equipment |
||||||||
| Less: accumulated depreciation |
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| Property, plant and equipment, net |
$ | $ | ||||||
The Company’s long-lived assets by geographic locations are as follows:
| As of |
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| July 2, 2023 |
December 31, 2022 |
|||||||
| United States |
$ | $ | ||||||
| International |
||||||||
| Total property, plant and equipment, net |
$ | $ | ||||||
| 5. | 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 | ||||
| Measurement period adjustments | ||||
| Balance on July 2, 2023 | $ | |||
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 2, 2023 | ||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
| Finite-lived intangible assets: | ||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | |||||||
| Tradenames | ( | ) | ||||||||||
| Technology | ( | ) | ||||||||||
| Total finite-lived intangible assets | $ | $ | ( | ) | $ | |||||||
| Indefinite-lived intangible assets: | ||||||||||||
| Tradenames | $ | — | $ | |||||||||
| December 31, 2022 | ||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
| Finite-lived intangible assets: | ||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | |||||||
| Tradenames | ( | ) | ||||||||||
| Technology | ( | ) | ||||||||||
| Total finite-lived intangible assets | $ | $ | ( | ) | $ | |||||||
| Indefinite-lived intangible assets: | ||||||||||||
| Tradenames | $ | — | $ | |||||||||
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) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ |
| 6. |
ACCRUED LIABILITIES |
Accrued liabilities of the Company consisted of the following:
| As of |
||||||||
| July 2, 2023 |
December 31, 2022 |
|||||||
| Accrued freight |
$ | $ | ||||||
| Accrued employee compensation and benefits |
||||||||
| Accrued returns and allowances |
||||||||
| Accrued taxes |
||||||||
| Current portion of operating lease liabilities |
||||||||
| Accrued other |
||||||||
| Total accrued liabilities |
$ | $ | ||||||
| 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 | $ | $ | ||||||
| Revolver | ||||||||
| Other | ||||||||
| Less unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Less current portion of long-term debt | ( | ) | ( | ) | ||||
| $ | $ | |||||||
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 -year $
The revolving credit facility includes a letter of credit facility in the amount of $
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 $
The first lien term loan is to be repaid in quarterly payments of $
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
The Company has entered into an interest rate collar in the notional amount of $
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 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 $
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) | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Thereafter | ||||||||
| $ | $ | |||||||
| 8. |
COMMON STOCK WARRANTS AND EARN-OUT LIABILITY |
Upon the Closing, there were
The Company may redeem the Public Warrants at a price of $
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 $
Additionally, the Sponsor received
| 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 $
As of July 2, 2023, the Company recognized a derivative asset of $
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 |
$ | $ | $ | $ | ||||||||||||
| Liabilities: |
||||||||||||||||
| Warrant liability (Public) |
$ | $ | $ | $ | ||||||||||||
| Warrant liability (Private) |
||||||||||||||||
| Earn-out liability |
||||||||||||||||
| Total fair value liabilities |
$ | $ | $ | $ | ||||||||||||
| Fair Value Measured on December 31, 2022 |
||||||||||||||||
| Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
| Liabilities: |
||||||||||||||||
| Warrant liability (Public) |
$ | $ | $ | $ | ||||||||||||
| Warrant liability (Private) |
||||||||||||||||
| Earn-out liability |
||||||||||||||||
| Total fair value liabilities |
$ | $ | $ | $ | ||||||||||||
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 |
$ | $ | ||||||
| Strike price |
$ | $ | ||||||
| Remaining life (in years) |
||||||||
| Expected dividend |
$ | — | $ | — | ||||
| Risk-free interest rate |
% | % | ||||||
| Price threshold |
$ | $ | ||||||
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 |
$ | $ | ||||||
| Expected term (in years) |
||||||||
| Expected volatility |
% | % | ||||||
| Risk-free interest rate |
% | % | ||||||
| Price hurdle |
$ | $ | ||||||
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 |
$ | $ | $ | |||||||||
| Liabilities reclassed to equity |
( |
) | ( |
) | ||||||||
| Gains included in earnings |
( |
) | ( |
) | ( |
) | ||||||
| Balance at July 3, 2022 |
$ | $ | $ | |||||||||
| Balance at December 31, 2022 |
$ | $ | $ | |||||||||
| Losses included in earnings |
||||||||||||
| Balance at July 2, 2023 |
$ | $ | $ | |||||||||
| 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 |
$ | $ | $ | $ | ||||||||||||
| Mechanical systems |
||||||||||||||||
| Exhaust |
||||||||||||||||
| Accessories |
||||||||||||||||
| Safety |
||||||||||||||||
| Net sales |
$ | $ | $ | $ | ||||||||||||
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 |
$ | $ | $ | $ | ||||||||||||
| Italy |
||||||||||||||||
| Net sales |
$ | $ | $ | $ | ||||||||||||
| 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 |
$ | $ | $ | $ | ||||||||||||
| Effective tax rates |
% | % | % | % | ||||||||||||
For the 13-week period ended July 2, 2023, the Company's effective tax rate of
For the 26-week period ended July 2, 2023, the Company's effective tax rate of
| 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 |
$ | $ | $ | $ | ||||||||||||
| Less: fair value adjustment for Warrants |
( |
) | ||||||||||||||
| Net income (loss) - diluted |
$ | $ | $ | $ | ||||||||||||
| Denominator: |
||||||||||||||||
| Weighted average common shares outstanding - basic |
||||||||||||||||
| Dilutive effect of potential common shares from RSUs |
||||||||||||||||
| Dilutive effect of potential common shares from Warrants |
||||||||||||||||
| Weighted average common shares outstanding - diluted |
||||||||||||||||
| Earnings per share: |
||||||||||||||||
| Basic |
$ | $ | $ | $ | ||||||||||||
| Diluted |
$ | $ | $ | $ | ||||||||||||
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 |
||||||||||||||||
| Stock options |
||||||||||||||||
| Restricted stock units |
||||||||||||||||
| Performance stock units |
||||||||||||||||
| Unvested Earn-out Shares |
||||||||||||||||
| Total anti-dilutive shares |
||||||||||||||||
| 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 | $ | $ | ||||||
| Interest cost | ||||||||
| Expected return on plan assets | ( | ) | ( | ) | ||||
| Net periodic benefit cost | $ | $ | ||||||
The Company's contributions to the Plan were $
The Company made matching contributions totaling $
| 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
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 |
$ | $ | $ | $ | ||||||||||||
| Performance stock units |
||||||||||||||||
| Stock options |
||||||||||||||||
| Profit interest units |
||||||||||||||||
All equity-based compensation expenses are recorded in selling, general and administrative costs in the condensed consolidated statements of comprehensive income.
Restricted Stock Units
The Compensation Committee has awarded RSUs to select employees and non-employee directors. The RSUs vest ratably over to years of continued employment. The fair value of a RSU at the grant date is equal to the market price of Common Stock on the grant date. 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 2, 2023, there was $
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 |
$ | |||||||
| Granted |
||||||||
| Vested |
( |
) | ||||||
| Forfeited |
( |
) | ||||||
| July 2, 2023 |
$ | |||||||
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
On June 6, 2023, the Company granted
As of July 2, 2023, there was $
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 -year terms, and vest ratably over 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 $
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 |
$ | |||||||||||
| Forfeited |
( |
) | ||||||||||
| Expired |
( |
) | ||||||||||
| Options outstanding on July 2, 2023 |
$ | |||||||||||
| Options exercisable on, July 2, 2023 |
$ | |||||||||||
Profit Interest Units
The Holley Stockholder authorized an incentive pool of
In the fourth quarter of 2022, 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
| 16. |
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, Leases (Topic 842). The effect of applying this guidance resulted in an increase in noncurrent assets for right-of-use assets of $
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 to
The following table summarizes operating lease assets and obligations, and provides information associated with the measurement of operating lease obligations.
| As of | ||||||||
| July 2, 2023 | December 31, 2022 | |||||||
| Assets: | ||||||||
| Operating right of use assets | $ | $ | ||||||
| Liabilities: | ||||||||
| Current operating lease liabilities - Accrued liabilities | $ | $ | ||||||
| Long-term operating lease liabilities | ||||||||
| Total lease liabilities | $ | $ | ||||||
| Lease term and discount rate | ||||||||
| Weighted average remaining lease term (in years) | ||||||||
| Weighted average discount rate | % | % | ||||||
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 |
$ | $ | $ | $ | ||||||||||||
| Short-term lease expense |
||||||||||||||||
| Variable lease expense |
||||||||||||||||
| Total lease expense |
$ | $ | $ | $ | ||||||||||||
| Supplemental cash flow information related to leases: |
||||||||||||||||
| Cash paid for amounts included in measurement of operating lease liabilities |
$ | $ | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities |
||||||||||||||||
| Decapitalization of right-of-use assets upon lease termination or modification |
||||||||||||||||
The following table summarizes the maturities of the Company's operating lease liabilities as of July 2, 2023:
| 2023 (excluding the twenty-six weeks ended July 2, 2023) |
$ | |||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| 2027 |
||||
| Thereafter |
||||
| Total lease payments |
||||
| Less imputed interest |
( |
) | ||
| Present value of lease liabilities |
$ |
| 17. |
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 2, 2023 |
July 3, 2022 |
July 2, 2023 |
July 3, 2022 |
|||||||||||||
| Acquisitions (1) |
$ | $ | $ | $ | ||||||||||||
| Restructuring (2) |
||||||||||||||||
| Total acquisition, restructuring and management fees |
$ | $ | $ | $ | ||||||||||||
| (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. |
||||||||||||||||
| 18. | 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 such 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 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 | |||||||||||||||
| July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
| Beginning balance | $ | $ | $ | $ | ||||||||||||
| Accrued for current year warranty claims | ||||||||||||||||
| Settlement of warranty claims | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Ending balance | $ | $ | $ | $ | ||||||||||||
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. We design, market, manufacture and distribute a diversified line of performance automotive products including fuel injection systems, tuners, exhaust products, carburetors, safety equipment and various other performance automotive products. Our 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. 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, 2022, as filed with the SEC on March 15, 2023, and in our subsequent filings with the SEC.
Business Environment
Our 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, such as the conflict 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 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 condition may be adversely affected.
Key Components of Results of Operations
Net Sales
The principal activity from which we generate sales is the designing, marketing, manufacturing and distribution of performance after-market automotive parts for our 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.
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.
Interest Expense
Interest expense consists of interest due on the indebtedness under our credit facilities. Interest is based on SOFR or the base rate, at the Company's election, plus the applicable margin rate. As of July 2, 2023, $645.6 million was outstanding under our Credit Agreement.
Results of Operations
13-Week Period Ended July 2, 2023 Compared With 13-Week Period Ended July 3, 2022
The table below presents Holley’s results of operations for the 13-week periods ended July 2, 2023 and July 3, 2022 (dollars in thousands):
| For the thirteen weeks ended |
||||||||||||||||
| July 2, 2023 |
July 3, 2022 |
Change ($) |
Change (%) |
|||||||||||||
| Net sales |
$ | 175,262 | $ | 179,420 | $ | (4,158 | ) | (2.3 | %) | |||||||
| Cost of goods sold |
105,514 | 104,132 | 1,382 | 1.3 | % | |||||||||||
| Gross profit |
69,748 | 75,288 | (5,540 | ) | (7.4 | %) | ||||||||||
| Selling, general, and administrative |
29,101 | 36,269 | (7,168 | ) | (19.8 | %) | ||||||||||
| Research and development costs |
6,182 | 8,196 | (2,014 | ) | (24.6 | %) | ||||||||||
| Amortization of intangible assets |
3,674 | 3,662 | 12 | 0.3 | % | |||||||||||
| Acquisition and restructuring costs |
352 | 1,691 | (1,339 | ) | (79.2 | %) | ||||||||||
| Other expense |
485 | 325 | 160 | 49.2 | % | |||||||||||
| Operating income |
29,954 | 25,145 | 4,809 | 19.1 | % | |||||||||||
| Change in fair value of warrant liability |
2,017 | (23,168 | ) | 25,185 | (108.7 | %) | ||||||||||
| Change in fair value of earn-out liability |
961 | (4,234 | ) | 5,195 | (122.7 | %) | ||||||||||
| Interest expense |
9,899 | 8,961 | 938 | 10.5 | % | |||||||||||
| Income before income taxes |
17,077 | 43,586 | (26,509 | ) | (60.8 | %) | ||||||||||
| Income tax expense |
4,098 | 3,023 | 1,075 | 35.6 | % | |||||||||||
| Net income |
12,979 | 40,563 | (27,584 | ) | (68.0 | %) | ||||||||||
| Foreign currency translation adjustment |
272 | 501 | (229 | ) | (45.7 | %) | ||||||||||
| Total comprehensive income |
$ | 13,251 | $ | 41,064 | $ | (27,813 | ) | (67.7 | %) | |||||||
Net Sales
Net sales for the 13-week period ended July 2, 2023 decreased $4.2 million, or 2.3%, to $175.3 million, as compared to $179.4 million for the 13-week period ended July 3, 2022. Non-comparable sales associated with acquisitions contributed $2.6 million, or 1.5% of year-over-year growth. The remaining comparable sales decreased by $6.8 million, or 3.8%, compared to the prior year quarter, offsetting the impact from the acquisitions. The decline in comparable sales reflects a return to the sales trends experienced prior to the increased demand we experienced during the COVID pandemic. As a result, lower unit volume drove a decrease of approximately $10.9 million that was partially offset by improved price realization of approximately $4.1 million compared to the prior year period. Major categories driving the comparable year-over-year results include a decrease in safety products sales of $4.2 million (23.7% category decline), a decrease in mechanical systems sales of $3.3 million (7.4% category decline), a decrease in accessories sales of $2.0 million (7.0% category decline), and an increase in electronic systems sales of $3.3 million (4.7% category growth).
Cost of Goods Sold
Cost of goods sold for the 13-week period ended July 2, 2023 increased $1.4 million, or 1.3%, to $105.5 million, as compared to $104.1 million for the 13-week period ended July 3, 2022. The increase in cost of goods sold during the 13-week period ended July 2, 2023 in which product sales 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 2, 2023 decreased $7.2 million, or 19.8%, to $29.1 million, as compared to $36.3 million for the 13-week period ended July 3, 2022. When expressed as a percentage of sales, selling, general and administrative costs decreased to 16.6% of sales for the 13-week period ended July 2, 2023 compared to 20.2% of sales in 2022. The decrease in selling, general and administrative costs was driven by a $1.7 million decrease in equity compensation costs, a $1.7 million decrease in personnel costs, and a $1.2 million decrease in outbound shipping and handling costs, reflecting the implementation of cost-saving initiatives.
Research and Development Costs
Research and development costs for the 13-week period ended July 2, 2023 decreased $2.0 million, or 24.6%, to $6.2 million, as compared to $8.2 million for the 13-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 stable at $3.7 million for both the 13-week periods ended July 2, 2023 and July 3, 2022.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 13-week period ended July 2, 2023 decreased $1.3 million to $0.4 million, as compared to $1.7 million for the 13-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 13-week period ended July 2, 2023 increased $4.8 million, or 19.1%, to $30.0 million, as compared to $25.2 million for the 13-week period ended 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 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 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 unvested Earn-out Shares resulting from the Business Combination.
Interest Expense
Interest expense for the 13-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, reflecting a higher effective interest rate net of a $5.1 million fair value adjustment of the 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 $43.6 million for the 13-week period ended July 3, 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 $3.0 million for the 13-week period ended July 3, 2022. Our effective tax rate for the 13-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 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.
Net Income and Total Comprehensive Income
As a result of factors described above, we recognized net income of $13.0 million for the 13-week period ended July 2, 2023, as compared to net income of $40.6 million for the 13-week period ended July 3, 2022. Additionally, we recognized total comprehensive income of $13.3 million for the 13-week period ended July 2, 2023, as compared to total comprehensive income of $41.1 million for the 13-week period ended July 3, 2022. Comprehensive income includes the effect of foreign currency translation adjustments.
26-Week Period Ended July 2, 2023 Compared With 26-Week Period Ended July 3, 2022
The table below presents Holley’s results of operations for the 26-week periods ended July 2, 2023 and July 3, 2022 (dollars in thousands):
| For the twenty-six weeks ended |
||||||||||||||||
| July 2, 2023 |
July 3, 2022 |
Change ($) |
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
We 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 in comparing the Company’s results of operations between periods. We believe that the presentation of EBITDA and Adjusted EBITDA enhances the usefulness of our financial information by presenting measures that management uses internally to establish forecasts, budgets and operational goals to manage and monitor our business. We believe that these non-GAAP financial measures help to depict a more realistic representation of the performance of our underlying business, enabling us to evaluate and plan more effectively for the future.
We define EBITDA as earnings before depreciation, amortization of intangible assets, interest expense, and income tax expense. We define Adjusted EBITDA as EBITDA adjusted to exclude, to the extent applicable, acquisition and restructuring costs, which includes transaction fees and expenses, termination related benefits, facilities relocation, and executive transition costs; changes in the fair value of the warrant liability; changes in the fair value of the earn-out 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 to the adoption of ASC 842, “Leases,” and may also include certain fees and settlements; and other expenses or gains, which includes gains or losses from disposal of fixed assets and foreign currency transactions.
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, 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 (dollars in thousands):
| For the thirteen weeks ended |
For the twenty-six weeks ended |
|||||||||||||||
| July 2, 2023 |
July 3, 2022 |
July 2, 2023 |
July 3, 2022 |
|||||||||||||
| Net income |
$ | 12,979 | $ | 40,563 | $ | 17,226 | $ | 57,421 | ||||||||
| Adjustments: |
||||||||||||||||
| Depreciation |
2,468 | 2,523 | 4,953 | 4,663 | ||||||||||||
| Amortization of intangible assets |
3,674 | 3,662 | 7,353 | 7,323 | ||||||||||||
| Interest expense |
9,899 | 8,961 | 28,197 | 16,352 | ||||||||||||
| Income tax expense |
4,098 | 3,023 | 5,664 | 10,211 | ||||||||||||
| EBITDA |
33,118 | 58,732 | 63,393 | 95,970 | ||||||||||||
| Acquisition and restructuring costs |
352 | 1,691 | 1,691 | 1,981 | ||||||||||||
| Change in fair value of warrant liability |
2,017 | (23,168 | ) | 3,452 | (20,941 | ) | ||||||||||
| Change in fair value of earn-out liability |
961 | (4,234 | ) | 1,389 | (1,853 | ) | ||||||||||
| Equity-based compensation expense |
1,806 | 3,483 | 2,200 | 6,645 | ||||||||||||
| Product rationalization |
(800 | ) | — | (800 | ) | — | ||||||||||
| Notable items |
(16 | ) | 378 | 8 | 884 | |||||||||||
| Other expense |
485 | 325 | 536 | 547 | ||||||||||||
| Adjusted EBITDA |
$ | 37,923 | $ | 37,207 | $ | 71,869 | $ | 83,233 | ||||||||
Liquidity and Capital Resources
Our primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. We have generally financed our historical needs with operating cash flows, capital contributions and borrowings under our credit facilities. These sources of liquidity may be impacted by various factors, including demand for our products, investments made in acquired businesses, plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.
As of July 2, 2023, the Company had cash of $42.7 million and availability of $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 2, 2023, the Company had $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 $3.8 million,including short term leases, due during the remainder of fiscal year 2023. See Note 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 range of $5 million to $10 million in fiscal year 2023.
See Note 7, "Debt" in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further detail of our credit facility and the timing of principal maturities. As of July 2, 2023, based on the then current weighted average interest rate of 9.2%, expected interest payments associated with outstanding debt totaled approximately $29.6 million for the remainder of fiscal year 2023.
As discussed under “Business Environment” above, although the future impact of supply chain disruptions and inflationary pressures are highly uncertain, we believe that cash generated through our current operating performance, and our operating plans, cash position, and borrowings available under our revolving credit facility, will be sufficient to satisfy our liquidity needs and capital expenditure requirements for the next 12 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 April 2, 2023 Compared With 26-week period ended April 3, 2022
| For the twenty-six weeks ended |
||||||||
| July 2, 2023 |
July 3, 2022 |
|||||||
| Cash flows provided by operating activities |
$ | 34,383 | $ | 20,831 | ||||
| Cash flows used in investing activities |
(2,382 | ) | (23,442 | ) | ||||
| Cash flows used in financing activities |
(15,572 | ) | (2,716 | ) | ||||
| Effect of foreign currency rate fluctuations on cash |
161 | (443 | ) | |||||
| Net (decrease) increase in cash and cash equivalents |
$ | 16,590 | $ | (5,770 | ) | |||
Operating Activities. Net cash provided by operating activities for the 26-week period ended July 2, 2023 was $34.4 million compared to net cash provided by operating activities of $20.8 million for the 26-week period ended 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 changes in the year-over-year change in working capital activity included positive fluctuations from inventories of $41.2 million and accounts payable of $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 fluctuations in sales while changes in accounts receivable and accounts payable are 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 $9.6 million due to capital expenditures and $14.1 million due to acquisitions.
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 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, 2022, as filed with the SEC on March 15, 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 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 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. When appropriate, the Company uses derivative financial instruments to mitigate the risk from its interest rate exposure. The Company'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 term loan and revolver borrowings were subject to variable interest rates, with a weighted average borrowing rate of 9.2%. A hypothetical 100 basis point increase in 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 $6.5 million decrease 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 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 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 a 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 Euro 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 2, 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 a party to any material legal 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, 2022, as filed with the SEC on March 15, 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, 2023, except for the 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.
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).
# 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. |
| /s/ Jesse Weaver |
| Jesse Weaver |
| Chief Financial Officer (Duly Authorized Officer) |
| August 10, 2023 |