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 | ☐ | 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, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for the Company’s business. These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,” “anticipates,” “intends” or similar expressions. These forward-looking statements are subject to a number of risks and uncertainties and actual results could differ materially due to numerous factors, including but not limited to the Company’s ability to do any of the following:
| • |
anticipate and manage through disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain company products in distribution channels; |
| • |
anticipate and manage through supply shortages of key component parts used in Company products and the need to shift the mix of products offered in response thereto; |
| • |
access, collect and use personal data about consumers; |
| • |
execute its business strategy, including monetization of services provided and expansions in and into existing and new lines of business; |
| • |
anticipate the impact of the coronavirus disease 2019 (“COVID-19”) pandemic and its effect on business and financial conditions; |
| • |
manage risks associated with operational changes in response to the COVID-19 pandemic; |
| • |
recognize the anticipated benefits of and successfully deploy the proceeds from the Business Combination (as defined herein), which may be affected by, among other things, competition, the ability to integrate the combined businesses and the ability of the combined business to grow and manage growth profitably; |
| • |
anticipate the uncertainties inherent in the development of new business lines and business strategies; |
| • |
retain and hire necessary employees; |
| • |
increase brand awareness; |
| • |
attract, train and retain effective officers, key employees or directors; |
| • |
upgrade and maintain information technology systems; |
| • |
respond to cyber-attacks, security breaches, or computer viruses; |
| • |
comply with privacy and data protection laws, and respond to privacy or data breaches, or the loss of data; |
| • |
acquire and protect intellectual property; |
| • |
meet future liquidity requirements and comply with restrictive covenants related to long-term indebtedness; |
| • |
effectively respond to general economic and business conditions (including the impacts of the Russian invasion of Ukraine and its regional and global ramifications); |
| • |
maintain proper and effective internal controls; |
| • |
maintain the listing on, or the delisting of the Company’s securities from, the NYSE or an inability to have our securities listed on another national securities exchange; |
| • |
obtain additional capital, including use of the debt market; |
| • |
enhance future operating and financial results; |
| • |
anticipate rapid technological changes; |
| • |
comply with laws and regulations applicable to its business and industry, including laws and regulations related to environmental health and safety; |
| • |
stay abreast of modified or new laws and regulations; |
| • |
anticipate the impact of, and response to, new accounting standards; |
| • |
respond to fluctuations in foreign currency exchange rates and political unrest and regulatory changes in international markets from various events; |
| • |
anticipate and manage through the rise in interest rates which would increase the cost of capital, as well as responding to inflationary pressures; |
| • |
anticipate the significance and timing of contractual obligations; |
| • |
maintain key strategic relationships with partners and resellers; |
| • |
respond to uncertainties associated with product and service development and market acceptance; |
| • |
manage to finance operations on an economically viable basis; |
| • |
anticipate the impact of new U.S. federal income tax law, including the impact on deferred tax assets; |
| • |
respond to litigation, investigations, complaints, product liability claims and/or adverse publicity; |
| • |
anticipate the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"); |
| • |
anticipate the impact of changes in consumer spending patterns, consumer preferences, local, regional and national economic conditions, crime, weather, and demographic trends; and |
| • |
other risks and factors, listed under the caption “Risk Factors” included in our Annual Report on 10-K for the year ended December 31, 2021, as filed with the SEC on March 15, 2022, and 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 my be required under applicable securities laws.
PART I – FINANCIAL INFORMATION
HOLLEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
| As of | ||||||||
| October 2, 2022 | December 31, 2021 | |||||||
| 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 | ||||||||
| 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 | ||||||||
| Other noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Refer to Note 16 - Commitments and Contingencies) | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $ par value, shares authorized, issued and outstanding as of October 2, 2022 and December 31, 2021 | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding as of October 2, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive gain (loss) | ( | ) | ||||||
| Retained earnings (accumulated deficit) | ( | ) | ||||||
| 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 thirty-nine weeks ended | |||||||||||||||
| October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general, and administrative | ||||||||||||||||
| Research and development costs | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| Impairment of indefinite-lived intangible assets | ||||||||||||||||
| Acquisition and restructuring costs | ||||||||||||||||
| Related party acquisition and management fee costs | ||||||||||||||||
| Other operating expense | ||||||||||||||||
| Total operating expense | ||||||||||||||||
| Operating income | ||||||||||||||||
| Change in fair value of warrant liability | ( | ) | ( | ) | ||||||||||||
| Change in fair value of earn-out liability | ( | ) | ( | ) | ||||||||||||
| Loss on early extinguishment of debt | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Total non-operating (income) expense | ( | ) | ( | ) | ||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax expense | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Comprehensive income (loss): | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ||||||||||||
| Total comprehensive income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Common Share Data: | ||||||||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||||
| Basic net income (loss) per share | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted net income (loss) 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 | ||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Accumulated Other Comprehensive Gain (Loss) | Retained Earnings (Accumulated Deficit) | Total | |||||||||||||||||||
| Balance at December 31, 2020 | $ | — | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Retroactive application of recapitalization | ( | ) | — | — | — | |||||||||||||||||||
| Adjusted balance at December 31, 2020 | ( | ) | ||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Equity compensation | — | |||||||||||||||||||||||
| Foreign currency translation | — | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 28, 2021 | ( | ) | ||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Equity compensation | — | |||||||||||||||||||||||
| Foreign currency translation | — | |||||||||||||||||||||||
| Balance at June 27, 2021 | ( | ) | ||||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Equity compensation | — | |||||||||||||||||||||||
| Foreign currency translation | — | ( | ) | ( | ) | |||||||||||||||||||
| Recapitalization transaction, net | ||||||||||||||||||||||||
| Balance at September 26, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Equity compensation | — | |||||||||||||||||||||||
| Foreign currency translation | — | |||||||||||||||||||||||
| Issuance of earn-out shares | ||||||||||||||||||||||||
| Balance at April 3, 2022 | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Equity compensation | — | |||||||||||||||||||||||
| Foreign currency translation | — | |||||||||||||||||||||||
| Warrants exercised | ||||||||||||||||||||||||
| Balance at July 3, 2022 | ||||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Equity compensation | — | |||||||||||||||||||||||
| Foreign currency translation | — | |||||||||||||||||||||||
| Tax withholding related to vesting of restricted stock units | — | ( | ) | ( | ) | |||||||||||||||||||
| Issuance of shares for restricted stock units | ||||||||||||||||||||||||
| Balance at October 2, 2022 | $ | $ | $ | $ | $ | |||||||||||||||||||
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 thirty-nine weeks ended | ||||||||
| October 2, 2022 | September 26, 2021 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of intangible assets | ||||||||
| Impairment of indefinite-lived intangible assets | ||||||||
| Amortization of deferred loan costs | ||||||||
| Amortization of right of use assets | ||||||||
| Gain on termination of leases | ( | ) | ||||||
| (Decrease) increase in warrant liability | ( | ) | ||||||
| (Decrease) increase in earn-out liability | ( | ) | ||||||
| Increase in acquisition contingent consideration payable | ||||||||
| Equity compensation | ||||||||
| Change in deferred taxes | ( | ) | ||||||
| Loss on early extinguishment of long-term debt | ||||||||
| Loss (gain) on disposal of property, plant and equipment | ( | ) | ||||||
| Provision for inventory reserves | ||||||||
| Provision for credit losses | ||||||||
| Change in operating assets and liabilities: | - | |||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaids and other current assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued interest | ( | ) | ||||||
| Accrued and other liabilities | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| INVESTING ACTIVITIES | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Proceeds from the disposal of fixed assets | ||||||||
| Cash paid for acquisitions, net | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Net change under revolving credit agreement | ( | ) | ||||||
| Proceeds from long-term debt | ||||||||
| Principal payments on long-term debt | ( | ) | ( | ) | ||||
| Payments from stock-based award activities | ( | ) | ||||||
| Proceeds from issuance of common stock in connection with the exercise of warrants | ||||||||
| Proceeds from Business Combination and PIPE financing, net of issuance costs paid | ||||||||
| Net cash (used in) provided by 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: | ||||||||
| Earn-out shares issued to Empower Sponsor Holdings LLC | $ | $ | ||||||
| Cash paid for interest | ||||||||
| Cash paid for income taxes | ||||||||
| Noncash investing and financing activities: | ||||||||
| Assumption of warrant liability | ||||||||
| Assumption of earn-out liability | ||||||||
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.
On July 16, 2021, (the “Closing” and such date, the “Closing Date”) the Company consummated the business combination (the “Business Combination”) pursuant to that certain Agreement and Plan of Merger dated March 11, 2021 (the “Merger Agreement”), by and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc. (“Merger Sub I”), Empower Merger Sub II LLC (“Merger Sub II”), and Holley Intermediate Holdings, Inc. (“Holley Intermediate”). On the Closing Date, Empower changed its name to Holley Inc. See Note 2, “Business Combination and Acquisitions,” for more information.
Holley Intermediate, the predecessor to Holley, was incorporated on October 25, 2018 to effect the merger of Driven Performance Brands, Inc. (“Driven”) and the purchase of High Performance Industries, Inc. (“HPI”). The Company designs, manufactures and distributes performance automotive products to customers primarily in the United States, Canada and Europe. The Company is a leading manufacturer of a diversified line of performance automotive products, including carburetors, fuel pumps, fuel injection systems, nitrous oxide injection systems, superchargers, exhaust headers, mufflers, distributors, ignition components, engine tuners and automotive performance plumbing products. The Company is also a leading manufacturer of exhaust products as well as shifters, converters, transmission kits, transmissions, tuners and automotive software. The Company’s products are designed to enhance street, off-road, recreational and competitive vehicle performance through increased horsepower, torque and drivability. The Company has locations in North America, Canada, Italy and China.
Emerging Growth Company Status
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company is an emerging growth company, and, as such, has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.
Risks and Uncertainties
COVID-19 has adversely impacted global supply chain and general economic conditions. The Company has continued to experience disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain Company products in distribution channels. The full extent of COVID-19's effect on the Company's operational and financial performance in the future will depend on future developments, including but not limited to the duration, spread, intensity and phase of the pandemic in various countries; the emergence of COVID-19 variants and the utilization and effectiveness of treatments and vaccines against these variants; the further impact of COVID-19 on the global economy; and demand for the Company's products and services. Should the ongoing COVID-19 pandemic not improve, or worsen, or if the Company's attempt to mitigate its impact on its supply chain, operations and costs is not successful, the Company's business, results of operations, and financial condition may be adversely affected.
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. 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 U.S. Securities and Exchange Commission (“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, 2021, as filed with the SEC on March 15, 2022 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 calendar year that ends on December 31, 2022 and 2021. The three and nine month periods ended October 2, 2022 and September 26, 2021 each included 13 weeks and 39 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, 2021.
Leases
Operating lease right of use ("ROU") assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company's leases may include options to extend or terminate the lease. These options to extend are included in the lease term when it is reasonably certain that the Company will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Since the Company's leases generally do not provide an implicit rate, the Company applies a portfolio approach using an estimated incremental borrowing rate based on the lease term and other information available at the commencement date in determining the present value of lease payments. The rate applied is based on the currency of the lease. Leases having a lease term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the term of the lease. In addition, the Company has applied the practical expedient to account for the lease and non-lease components as a single lease component for all of the Company's leases. See Note 14, "Lease Commitments," for further details.
Warrants
The Company accounts for warrants to purchase its common stock as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
If a warrant does not meet the conditions for equity classification, it is carried in the consolidated balance sheet as a warrant liability measured at fair value, with subsequent changes in the fair value of the warrant recorded in the consolidated statements of comprehensive income as a non-operating expense. If a warrant meets both conditions for equity classification, the warrant is initially recorded in additional paid-in capital on the consolidated balance sheet, and the amount initially recorded is not subsequently re-measured at fair value. See Note 7, "Common Stock Warrants," and Note 8, "Fair Value Measurements," for further details.
Recent Accounting Pronouncements
Accounting Standards Recently Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) which requires lessees to recognize right-of-use assets, representing their right to use the underlying asset for the lease term, and lease liabilities on the balance sheet for all leases with terms greater than 12 months. The Company adopted the provisions of this guidance effective January 1, 2022, using the modified retrospective optional transition method. Therefore, the standard was applied beginning January 1, 2022 and prior periods were not restated. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of retained earnings. The Company elected the package of practical expedients and implemented internal controls and executed changes to business processes to enable the preparation of financial information upon adoption. The adoption of the new standard resulted in the recognition of a right of use asset and short-term and long-term liabilities recorded on the Company's consolidated balance sheet related to operating leases. In addition, the adoption of the standard did not have a material impact on the Company's results of operations or cash flows. See Note 14, "Lease Commitments," for further details.
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirements Benefits – Defined Benefit Plans – General (Subtopic 715-20). The ASU will update disclosure requirements for employers that sponsor defined benefit pension or other post retirement plans. The Company adopted ASU 2019-12 on a retrospective basis as of January 1, 2022. Adoption did not result in a significant change to the Company's consolidated financial statement disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) which is intended to simplify various aspects related to accounting for income taxes. The ASU removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 on a prospective basis as of January 1, 2022. Adoption of the ASU did not have a material effect on the Company's consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (Subtopic 470-20). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. The new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. The Company adopted ASU 2020-06 on January 1, 2022. Adoption of the ASU did not impact the Company's consolidated financial statements.
Accounting Standards Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires entities to apply the definition of a performance obligation under ASC Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under current U.S. GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 will result 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. Adoption of the provisions of ASU 2021-08 are effective for the Company's fiscal year beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the potential impact of adopting this guidance on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2022. As of October 2, 2022, the Company did not adopt any expedients or exceptions under ASU 2020-04. The Company will continue to evaluate the impact of ASU 2020-04 and whether it will apply the optional expedients and exceptions.
| 2. | BUSINESS COMBINATION AND ACQUISITIONS |
BUSINESS COMBINATION
On July 16, 2021, Holley consummated the Business Combination pursuant to the terms of the Merger Agreement, whereby (i) Merger Sub I, a direct wholly owned subsidiary of Empower, merged with and into Holley Intermediate, with Holley Intermediate surviving such merger as a wholly owned subsidiary of Holley (“Merger I”) and (ii) Merger Sub II, a direct wholly owned subsidiary of Empower, merged with and into Holley Intermediate, with Merger Sub II surviving such merger as a wholly owned subsidiary of Holley (“Merger II”).
Pursuant to the Merger Agreement, at the Closing, all outstanding shares of Holley Intermediate common stock as of immediately prior to the effective time of Merger I were cancelled and Holley Parent Holdings, LLC, the sole stockholder of Holley Intermediate (the “Holley Stockholder” or “Parent”), received $
In connection with the Business Combination, a number of subscribers purchased from the Company an aggregate of
Pursuant to the Amended and Restated Forward Purchase Agreement (“A&R FPA”), at the Closing,
The Company also assumed
Additionally, Empower Sponsor Holdings LLC (the "Sponsor") received
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. This determination was primarily based on current shareholders of Holley having a relative majority of the voting power of the Company, the operations of Holley prior to the acquisition comprising the only ongoing operations of the Company, and senior management of Holley comprising the majority of the senior management of the Company. Under this method of accounting, Empower was treated as the acquired company for financial reporting. Accordingly, the Business Combination was accounted for as the equivalent of Holley issuing stock for the net assets of Empower, accompanied by a recapitalization. The net assets of Empower are stated at historical cost, with no goodwill or other intangible assets recorded. Reported amounts from operations included herein prior to the Business Combination are those of Holley Intermediate. The shares and corresponding capital amounts and earnings per share, prior to the Business Combination, have been retroactively restated based on shares received by the Holley Stockholder.
ACQUISITIONS
During the 39-week period ended October 2, 2022, the Company has completed three acquisitions, and during the year ended December 31, 2021, the Company completed eight acquisitions. These acquisitions are expected to enhance the Company's portfolio of products and services in the automotive aftermarket and automotive safety solutions market.
The Company accounts for acquisitions using the acquisition method, and accordingly, the purchase price has been allocated based upon the fair value of the assets acquired and liabilities assumed. The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the Company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date; however, material changes are not expected. Goodwill generated by the acquisitions is primarily attributable to the strong market position of the entities acquired.
Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions were for 100 percent of the acquired business and are reported in the Consolidated Statements of Cash Flows, net of acquired cash and cash equivalents. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are typically expensed in the periods in which the costs are incurred and are recorded in acquisition and restructuring costs. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
During the 39-week period ended October 2, 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:
| 2022 (as initially reported) | Measurement Period Adjustments | 2022 (as adjusted) | ||||||||||
| 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
In 2021, the Company acquired substantially all the assets of Finspeed, LLC ("Finspeed"), Classic Instruments LLC ("Classic Instruments"), ADS Precision Machining, Inc., doing business as Arizona Desert Shocks ("ADS"), Rocket Performance Machine, Inc., doing business as Rocket Racing Wheels ("Rocket"), and Speartech Fuel Injections Systems, Inc ("Speartech"). These five acquisitions were individually immaterial business combinations that are material in the aggregate. Cash paid for the five immaterial acquisitions, net of cash acquired, was $
The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
| 2021 (as initially reported) | Measurement Period Adjustments | 2021 (as adjusted) | ||||||||||
| Cash | $ | $ | — | $ | ||||||||
| 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 assets were estimated using the excess earnings approach. The customer relationship intangible assets are being amortized based on the attrition rate of customers which have an estimated weighted average life of
The remaining three acquisitions completed during 2021 are described below.
Baer, Inc.
On December 23, 2021, the Company acquired substantially all the assets and liabilities of Baer, Inc., doing business as Baer Brakes. Consideration for the assets acquired was cash payments of $
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:
| December 23, 2021 (as initially reported) | Measurement Period Adjustments | December 23, 2021 (as adjusted) | ||||||||||
| 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
The contractual value of the accounts receivable acquired was $
Brothers Mail Order Industries, Inc.
On December 16, 2021, the Company acquired substantially all the assets and liabilities of Brothers Mail Order Industries, Inc., doing business as Brothers Trucks. Consideration for the assets acquired was cash payments of $
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:
| December 16, 2021 (as initially reported) | Measurement Period Adjustments | December 16, 2021 (as adjusted) | ||||||||||
| Accounts receivable | $ | $ | — | $ | ||||||||
| Inventory | — | |||||||||||
| Property, plant and equipment | — | |||||||||||
| Other assets | — | |||||||||||
| Tradenames | — | |||||||||||
| Goodwill | ||||||||||||
| Accounts payable | ( | ) | — | ( | ) | |||||||
| Accrued liabilities | ( | ) | — | ( | ) | |||||||
| $ | $ | $ | ||||||||||
The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The contractual value of the accounts receivable acquired was $
Advance Engine Management Inc.
On April 14, 2021, the Company acquired substantially all the assets and liabilities of Advance Engine Management Inc. doing business as AEM Performance Electronics. Consideration for the assets acquired was cash payments of $
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of acquired assets and liabilities, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
| April 14, 2021 (as initially reported) | Measurement Period Adjustments | April 14, 2021 (as adjusted) | ||||||||||
| Accounts receivable | $ | $ | ( | ) | $ | |||||||
| Inventory | — | |||||||||||
| Property, plant and equipment | — | |||||||||||
| Other assets | ( | ) | ||||||||||
| Tradenames | — | |||||||||||
| Customer relationships | — | |||||||||||
| Patents | — | |||||||||||
| Technology intangibles | — | |||||||||||
| 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
The contractual value of the accounts receivable acquired was $
| 3. | INVENTORY |
Inventories of the Company consisted of the following:
| October 2, 2022 | December 31, 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
| 4. | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment of the Company consisted of the following:
| October 2, 2022 | December 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Buildings and improvements | ||||||||
| Machinery and equipment | ||||||||
| Construction in process | ||||||||
| Total property, plant and equipment | ||||||||
| Less: accumulated depreciation | ||||||||
| Property, plant and equipment, net | $ | $ | ||||||
The Company’s long-lived assets by geographic locations are as follows:
| October 2, 2022 | December 31, 2021 | |||||||
| 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 thirty-nine weeks ended October 2, 2022 | ||||
| Balance at December 31, 2021 | $ | |||
| John's acquisition | ||||
| SKC acquisition | ||||
| RaceQuip acquisition | ||||
| Measurement period adjustments* | ||||
| Balance at October 2, 2022 | $ | |||
* See Note 2, "Business Combination and Acquisitions - Acquisitions," for further details."
Goodwill represents the premium paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company's business combinations. The measurement period for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes available, not to exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined.
Intangible assets consisted of the following:
| October 2, 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 | $ | — | $ | |||||||||
| December 31, 2021 | ||||||||||||
| 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 October 2, 2022:
| 2022 (excluding the thirty-nine weeks ended October 2, 2022) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ |
During the third quarter of 2022, management concluded it was necessary to reevaluate goodwill and indefinite-lived intangible assets for impairment due to the supply chain challenges that have prevented us from building and shipping many of our most popular products, which resulted in the Company revising its earnings estimates for 2022. As a result of this evaluation, a pre-tax impairment of $
The fair value of the indefinite-lived tradenames was estimated using the relief from royalty method, a form of the income approach. Significant judgement is required in estimating the fair value of a reporting unit and in performing impairment tests. The most significant assumptions utilized in the determination of the estimated fair values of the indefinite-lived tradenames were the sales projections and long-term earnings growth rates, the royalty rate and the discount rate. The long-term earnings growth rate represents the expected rate at which the brands are expected to grow beyond the shorter-term business planning period. The royalty rate is based on observed market royalty rates for various industrial, consumer and commercial trademarks. The discount rate is based on the Company's weighted average cost of capital adjusted for risk. Due to the inherent uncertainty in forecasting future sales, actual results in the future may vary significantly from the forecasts. Disruptions arising from supply chain issues and other factors outside our control, such as ongoing or escalated international conflict and the U.S. response thereto, political unrest, terrorist attacks, and war (including the ongoing conflict in Ukraine) will likely continue to evolve and the effects on our business may differ from what we currently estimate. If the effects prove to be worse than is reflected in our current estimates, additional indefinite-lived intangible asset impairment and / or goodwill impairment charges could be required.
| 6. | DEBT |
Debt of the Company consisted of the following:
| October 2, 2022 | December 31, 2021 | |||||||
| 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 new credit facility with a syndicate of lenders and Wells Fargo Bank, N.A., as administrative agent for the lenders, letter of credit issuer and swing line lender (the "Credit Agreement"). The financing consisted of a -year first lien term loan, a -year $
The proceeds of any delayed draw loans made after closing were available to the Company to finance acquisitions. As of October 2, 2022, the Company had drawn $
The revolving credit facility includes a letter of credit facility in the amount of $
Proceeds from the new credit facility were used to repay in full the Company’s obligations under its existing first lien and second lien notes and to pay $
The first lien term loan is to be repaid in quarterly payments of$
Amounts outstanding under the new credit facility will accrue interest at a rate equal to either the London Interbank Offering Rate ("LIBOR") or base rate, at the Company's election, plus a specified margin. In the case of revolving credit loans and letter of credit fees, the specified margin is based on the Company's Total Leverage Ratio, as defined in the Credit Agreement. Commitment fees payable under the revolving credit facility are based on the Company's Total Leverage Ratio. At October 2, 2022, the weighted average interest rate on the Company's borrowings under the credit facility was
Obligations under the Credit Agreement are secured by substantially all of the Company’s assets. The Credit Agreement includes representations and warranties and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on restricted payments, additional borrowings, additional investments, and asset sales. The Credit Agreement also requires that Holley maintain on the last day of each quarter, a Total Leverage Ratio not to exceed a maximum amount. At October 2, 2022, the Company was in compliance with all financial covenants.
Some of the lenders that are parties to the Credit Agreement, and their respective affiliates, have various relationships with the Company in the ordinary course of business involving the provision of financial services, including cash management, commercial banking, investment banking or other services.
Future maturities of long-term debt and amortization of debt issuance costs as of October 2, 2022 are as follows:
| 2022 (excluding the thirty-nine weeks ended October 2, 2022) | $ | $ | ||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| $ | $ |
| 7. | COMMON STOCK WARRANTS |
Upon the Closing, there were
The Company may redeem the Public Warrants at a price of $
Further, 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, but the Company will use its commercially reasonable best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.
In April 2022, the Company issued
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 October 2, 2022 and December 31, 2021, a warrant liability with a fair value of $
| 8. | 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 as of October 2, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities included in: | ||||||||||||||||
| Warrant liability (Public) | $ | $ | — | $ | — | $ | ||||||||||
| Warrant liability (Private) | — | — | ||||||||||||||
| Earn-out liability | — | — | ||||||||||||||
| Total fair value | $ | $ | — | $ | $ | |||||||||||
| Fair Value Measured as of December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities included in: | ||||||||||||||||
| Warrant liability (Public) | $ | $ | — | $ | — | $ | ||||||||||
| Warrant liability (Private) | — | — | ||||||||||||||
| Earn-out liability | — | — | ||||||||||||||
| Total fair value | $ | $ | — | $ | $ | |||||||||||
As of October 2, 2022, the Company's derivative liabilities for its private and public warrants and the earn-out liability (see Note 2, “Business Combination and Acquisitions,” for more details) are measured at fair value on a recurring basis. The fair value for the private warrants and earn-out liability are determined based on significant inputs not observable in the market (Level 3). The valuation of the Level 3 liabilities uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. The Company uses a Monte Carlo simulation model to estimate the fair value of its private warrants and earn-out liability. The fair value of the public warrants is determined using publicly traded prices (Level 1). Changes in the fair value of the derivative liabilities related to warrants and the earn-out liability are recognized as non-operating expense in the condensed consolidated statements of comprehensive income.
The fair value of private warrants was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:
| October 2, 2022 | December 31, 2021 | |||||||
| 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:
| October 2, 2022 | December 31, 2021 | |||||||
| Valuation date price | $ | $ | ||||||
| Expected term (in years) | ||||||||
| Expected volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Price hurdle 1 | not applicable | $ | ||||||
| Price hurdle 2 | $ | $ | ||||||
As of October 2, 2022 and December 31, 2021, the Company has accounts receivable, accounts payable and accrued expenses for which the carrying value approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s long-term debt approximates fair value as the rates used approximate the market rates currently available to the Company. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements.
The reconciliation of changes in Level 3 during the 39-week period ended October 2, 2022 is as follows:
| For the thirty-nine weeks ended October 2, 2022 | ||||||||||||
| Private Warrants | Earn-Out Liability | Total | ||||||||||
| Balance at December 31, 2021 | $ | $ | $ | |||||||||
| Liabilities reclassed to equity | ( | ) | ( | ) | ||||||||
| Losses included in earnings | ( | ) | ( | ) | ( | ) | ||||||
| Balance at October 2, 2022 | $ | $ | $ | |||||||||
| 9. | 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 16 for more information.
The following table summarizes total revenue by product category. The Company's product category definitions have been revised by management in 2022. The prior-year period has been revised to conform with the current presentation. There is no change to total sales.
| For the thirteen weeks ended | For the thirty-nine weeks ended | |||||||||||||||
| October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | |||||||||||||
| Electronic systems | $ | $ | $ | $ | ||||||||||||
| Mechanical systems | ||||||||||||||||
| Exhaust | ||||||||||||||||
| Accessories | ||||||||||||||||
| Safety | ||||||||||||||||
| Total sales | $ | $ | $ | $ | ||||||||||||
The following table summarizes total revenue based on geographic location from which the product is shipped:
| For the thirteen weeks ended | For the thirty-nine weeks ended | |||||||||||||||
| October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Italy | ||||||||||||||||
| Total sales | $ | $ | $ | $ | ||||||||||||
| 10. | 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 thirty-nine weeks ended | |||||||||||||||
| October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | |||||||||||||
| Income tax expense (benefit) | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Effective tax rates | nm | % | % | nm | ||||||||||||
| nm - not meaningful | ||||||||||||||||
For the 13-week period ended October 2, 2022, the Company's effective tax rate differed from the
For the 39-week period ended October 2, 2022, the Company's effective tax rate of
| 11. | EARNINGS (LOSS) PER SHARE |
The following table sets forth the calculation of basic and diluted earnings (loss) per share:
| For the thirteen weeks ended | For the thirty-nine weeks ended | |||||||||||||||
| October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) - basic | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 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 (loss) 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 for the thirteen weeks ended October 2, 2022 are excluded from the calculation of diluted earnings per share.
| For the thirteen weeks ended | For the thirty-nine weeks ended | |||||||||||||||
| October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | |||||||||||||
| Anti-dilutive shares excluded from calculation of diluted EPS: | ||||||||||||||||
| Warrants | ||||||||||||||||
| Stock options | ||||||||||||||||
| Restricted stock units | ||||||||||||||||
| Earn-out shares | ||||||||||||||||
| Total anti-dilutive shares | ||||||||||||||||
| 12. | BENEFIT PLANS |
The Company has a defined benefit pension plan (the “Plan”) for its employees. On January 28, 2022, the Company approved the termination of the Plan, effective March 31, 2022. Distribution of the Plan's assets, pursuant to the termination, will not be made until the Plan termination satisfies all regulatory requirements, which is expected to be completed by the fourth quarter of 2022. Plan participants will receive their full accrued benefits from the Plan's assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider. The resulting settlement effect of the Plan termination will be determined based on prevailing market conditions, the lump sum offer participation rate of eligible participants, the actual lump sum distributions, and annuity purchase rates at the date of distribution. The Company estimates that the settlement charge will be in the range of $
The following summarizes the components of net periodic benefit cost for the Plan:
| For the thirteen weeks ended | For the thirty-nine weeks ended | |||||||||||||||
| October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | |||||||||||||
| Components of expense: | ||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||
| Interest cost | ||||||||||||||||
| Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of net loss | ||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | ||||||||||||
The Company made matching contributions totaling $
The Company made
| 13. | EQUITY-BASED COMPENSATION PLANS |
In 2021, the Company adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”), which provides for the grant of restricted stock awards, incentive and nonqualified stock options, and other share based awards to employees, directors and non-employees. The 2021 Plan authorized
Equity-based compensation expense included the following components:
| For the thirteen weeks ended | For the thirty-nine weeks ended | |||||||||||||||
| October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | |||||||||||||
| Stock options | $ | $ | $ | $ | ||||||||||||
| Restricted stock units | ||||||||||||||||
| Profit interest units | ||||||||||||||||
All equity-based compensation expense is recorded in selling, general and administrative costs in the condensed consolidated statements of comprehensive income.
Stock Options
Stock option grants have an exercise price at least equal to the market value of the underlying common stock on the date of grant, have -year terms, and vest ratably over years of continued employment. In general, vested options expire if not exercised at termination of service. On February 15, 2022 and May 6, 2022, the Company granted
| Granted Feb. 15, 2022 | Granted May 6, 2022 | |||||||
| Weighted-average expected term | ||||||||
| Expected volatility | % | % | ||||||
| Expected dividend | $ | $ | ||||||
| Risk-free interest rate | % | % | ||||||
The expected term has been estimated using a simplified method, which calculates the expected term as the mid-point between the vesting date and the contractual life of the awards since the Company does not have an extended history of actual exercises. The expected dividend yield is assumed to be since the Company has never paid dividends and does not have current plans to pay any dividends. The risk-free interest rate is based on yields of U.S. Treasury securities with maturities similar to the expected term of the options. Expected volatility is based on an evenly weighted blend of implied volatility and historical volatility of publicly-traded peer companies since the Company has limited historical volatility.
Compensation expense for stock options is recorded based on straight-line amortization of the grant date fair value over the requisite service period. As of October 2, 2022, there was $
Restricted Stock Units
Restricted stock units (“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 the Company’s common stock on the grant date. On February 15, 2022 and May 6, 2022, the Company granted
Profit Interest Units
The Holley Stockholder has authorized an incentive pool of
As of October 2, 2022, there was $
| 14. | LEASE COMMITMENTS |
On January 1, 2022, the Company adopted ASC 842 using the modified retrospective optional transition method provided by ASU 2018-11. 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 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 Topic 840, 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 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:
| October 2, 2022 | ||||
| Assets: | ||||
| Operating right of use assets | $ | |||
| Liabilities: | ||||
| Current operating lease liabilities | $ | |||
| Long-term lease liabilities | ||||
| Total lease liabilities | $ | |||
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 thirty-nine weeks ended | |||||||
| October 2, 2022 | October 2, 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 and/or modification | ||||||||
Information associated with the measurement of operating lease obligations as of October 2, 2022 is as follows:
| Weighted average remaining lease term (in years) | ||||
| Weighted average discount rate | % |
The following table summarizes the maturities of the Company's operating lease liabilities as of October 2, 2022:
| 2022 (excluding the thirty-nine weeks ended October 2, 2022) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less imputed interest | ( | ) | ||
| Present value of lease liabilities | $ |
For the 13-week and 39-week periods ended September 26, 2021, total rent expense under operating leases approximated $
In accordance with ASC 840, Leases, the aggregate minimum non-cancelable annual lease payments under operating leases in effect on December 31, 2021 were as follows:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total minimum lease commitments | $ |
| 15. | 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 thirty-nine weeks ended | |||||||||||||||
| October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | |||||||||||||
| Acquisitions (1) | $ | $ | $ | $ | ||||||||||||
| Restructuring (2) | ||||||||||||||||
| Management fees (3) | ||||||||||||||||
| Earn out adjustment (4) | ||||||||||||||||
| Total acquisition, restructuring and management fees | $ | $ | $ | $ | ||||||||||||
| (1) | Includes professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to potential acquisitions. |
| (2) | Includes costs incurred as part of the restructuring of operations including professional and consulting services. |
| (3) | Includes acquisition costs and management fees paid to Sentinel Capital Partners. |
| (4) | A fair value adjustment to the contingent consideration payable from the Simpson acquisition. |
| 16. | 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 the matters will not have a material effect on the consolidated financial position or results of operations of the Company.
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 thirty-nine weeks ended | |||||||||||||||
| October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | |||||||||||||
| 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. 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 designer, marketer, and manufacturer of high performance automotive aftermarket products serving car and truck enthusiasts, with sales, processing, and distribution facilities reaching most major markets in the United States, Canada, Europe and China. Holley designs, markets, manufactures and distributes a diversified line of performance automotive products including fuel injection systems, tuners, exhaust products, carburetors, safety equipment and various other performance automotive products. The Company’s products are designed to enhance street, off-road, recreational and competitive vehicle performance and safety.
Innovation is at the core of our business and growth strategy with approximately 35% of our 2021 sales coming from products introduced by us into the market since 2016. We have a history of developing innovative products, including new products in existing product families, product line expansions, and accessories, as well as products that bring us into new categories. We have thoughtfully expanded our product portfolio over time to adapt to consumer needs.
In addition, we have historically used strategic acquisitions to (i) expand our brand portfolio, (ii) enter new product categories and consumer segments, (iii) increase direct-to-consumer (“DTC”) scale and connection, (iv) expand share in current product categories and (v) realize value-enhancing revenue and cost synergies. While we believe our business is positioned for continued organic growth, we intend to continue evaluating opportunities for strategic acquisitions that would complement our current business and expand our addressable target market.
Factors Affecting our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below, under the caption, "Cautionary Note Regarding Forward-Looking Statements," in this Quarterly Report on Form 10-Q, under the caption, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 15, 2022, and in our subsequent filings with the SEC.
Business Combination
On July 16, 2021 we consummated a business combination (“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., a direct wholly owned subsidiary of Empower (“Merger Sub I”), Empower Merger Sub II LLC, a direct wholly owned subsidiary of Empower (“Merger Sub II”), and Holley Intermediate Holdings, Inc. ("Holley Intermediate").
The Merger Agreement provided for, among other things, the following transactions: (i) Merger Sub I merged with and into Holley Intermediate, the separate corporate existence of Merger Sub I ceased and Holley Intermediate became the surviving corporation, and (ii) Holley Intermediate merged with and into Merger Sub II, the separate corporate existence of Holley Intermediate ceased and Merger Sub II became the surviving limited liability company. Upon closing, Empower changed its name to Holley Inc. and its trading symbol on the New York Stock Exchange (the “NYSE”) from “EMPW” to “HLLY.”
The Business Combination was accounted for as a reverse recapitalization. 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, and financial statements for periods prior to the Business Combination are those of Holley Intermediate.
As a result of the Business Combination, Holley Inc. listed on the NYSE, which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred and expect to continue to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal, and administrative resources, including increased personnel costs, audit and other professional service fees.
Acquisitions
Holley has historically pursued a growth strategy through both organic growth and acquisitions. The Company has pursued acquisitions that it believes will help drive profitability, cash flow and stockholder value. Holley targets companies that are market leaders, expand the Company’s geographic presence, provide a highly synergistic opportunity and/or enhance Holley’s ability to provide a wide array of its products to its customers through its distribution network.
In 2022 and 2021 Holley completed three acquisitions and eight acquisitions, respectively. The most significant acquisitions impacting the comparability of our operating results were:
| ● |
Advance Engine Management Inc.: On April 14, 2021 Holley acquired Advance Engine Management Inc., doing business as AEM Performance Electronics, a developer and supplier of electronic control and monitoring systems for performance automotive applications. This acquisition increases Holley’s penetration into the import and other sport compact cars submarket. |
| ● |
Brothers Mail Order Industries, Inc.: On December 16, 2021, Holley acquired Brothers Mail Order Industries, Inc., doing business as Brothers Trucks, a distributor of classic and custom vehicle restoration parts serving the Chevrolet and GMC truck aftermarket. This acquisition increases Holley's offerings in truck and SUV appearance items. |
| ● |
Baer, Inc.: On December 23, 2021, Holley acquired Baer, Inc., doing business as Baer Brakes, a developer and supplier of brakes and brake systems. This acquisition moves Holley closer to its goal of providing complete vehicle solutions by adding a new product category and brake system expertise. |
The acquisitions have all been accounted for in accordance with FASB ASC Topic 805, Business Combinations, and the operations of the acquired entities are included in our historical results for the periods following the closing of the acquisition. See Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” and Note 2, “Business Combination and Acquisitions,” in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information related to the Company’s acquisitions and investments.
Business Environment
COVID-19 has adversely impacted global supply chain and general economic conditions. The Company has continued to experience disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain Company products in distribution channels. The full extent of COVID-19's effect on the Company's operational and financial performance in the future will depend on future developments, including but not limited to the duration, spread, intensity and phase of the pandemic in various countries; the emergence of COVID-19 variants and the utilization and effectiveness of treatments and vaccines against these variants; the further impact of COVID-19 on the global economy; and demand for the Company's products and services. Should the ongoing COVID-19 pandemic not improve, or worsen, or if the Company's attempt to mitigate its impact on its supply chain, operations and costs is not successful, the Company's business, results of operations, and financial condition may be adversely affected.
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. 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.
Key Components of Results of Operations
Net Sales
The principal activity from which the Company generates its sales is the designing, marketing, manufacturing and distribution of performance after-market automotive parts for its 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 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, pre-production and start-up costs are also included within selling, general, and administrative. The Company expects to incur additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations and other professional services.
Acquisition and Restructuring Costs
Acquisition and restructuring costs consist of professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to potential acquisitions. In addition, operational restructuring costs are included within this classification.
Related Party Acquisition and Management Fee Costs
Related party acquisition and management fee costs consist of fees paid to the Company’s private equity sponsor pursuant to a management services agreement for management services and consulting services directly attributable to potential acquisitions. Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated.
Interest Expense
Interest expense consists of interest due on the indebtedness under our credit facilities. Interest is based on LIBOR or the prime rate, plus the applicable margin rate. As of October 2, 2022, $650.9 million was outstanding under the Company's Credit Agreement.
Results of Operations
13-Week Period Ended October 2, 2022 Compared With 13-Week Period Ended September 26, 2021
The table below presents Holley’s results of operations for the 13-week periods ended October 2, 2022 and September 26, 2021 (dollars in thousands):
| For the thirteen weeks ended |
||||||||||||||||
| October 2, 2022 |
September 26, 2021 |
Change ($) |
Change (%) |
|||||||||||||
| Net sales |
$ | 154,775 | $ | 159,673 | $ | (4,898 | ) | (3.1 | %) | |||||||
| Cost of goods sold |
106,383 | 94,475 | 11,908 | 12.6 | % | |||||||||||
| Gross profit |
48,392 | 65,198 | (16,806 | ) | (25.8 | %) | ||||||||||
| Selling, general, and administrative |
31,921 | 28,891 | 3,030 | 10.5 | % | |||||||||||
| Research and development costs |
6,039 | 7,133 | (1,094 | ) | (15.3 | %) | ||||||||||
| Amortization of intangible assets |
3,662 | 3,553 | 109 | 3.1 | % | |||||||||||
| Impairment of indefinite-lived intangible assets |
2,395 | — | 2,395 | n/a | ||||||||||||
| Acquisition and restructuring costs |
1,266 | 368 | 898 | 244.0 | % | |||||||||||
| Related party acquisition and management fee costs |
— | 23,250 | (23,250 | ) | (100.0 | %) | ||||||||||
| Other expense |
47 | 89 | (42 | ) | (47.2 | %) | ||||||||||
| Operating income |
3,062 | 1,914 | 1,148 | 60.0 | % | |||||||||||
| Change in fair value of warrant liability |
(30,171 | ) | 17,273 | (47,444 | ) | nm | ||||||||||
| Change in fair value of earn-out liability |
(7,429 | ) | 6,866 | (14,295 | ) | nm | ||||||||||
| Loss on early extinguishment of debt |
— | 1,425 | (1,425 | ) | (100.0 | %) | ||||||||||
| Interest expense |
10,428 | 9,851 | 577 | 5.9 | % | |||||||||||
| Income (loss) before income taxes |
30,234 | (33,501 | ) | 63,735 | nm | |||||||||||
| Income tax benefit |
(1,345 | ) | (3,301 | ) | 1,956 | (59.3 | %) | |||||||||
| Net income (loss) |
31,579 | (30,200 | ) | 61,779 | nm | |||||||||||
| Foreign currency translation adjustment |
516 | (31 | ) | 547 | nm | |||||||||||
| Total comprehensive income (loss) |
$ | 32,095 | $ | (30,231 | ) | $ | 62,326 | nm | ||||||||
Net Sales
Net sales for the 13-week period ended October 2, 2022 decreased $4.9 million, or 3.1%, to $154.8 million, as compared to $159.7 million for the 13-week period ended September 26, 2021. Non-comparable sales associated with acquisitions contributed $7.7 million, or 4.8% of year-over-year growth. The remaining comparable sales decreased by $12.6 million, or 7.9%, compared to the prior year quarter, offsetting the impact from the acquisitions. The decline in comparable sales was primarily driven by supply chain constraints that prevented us from building and shipping to orders received from our customers. As a result, lower unit volume drove a decrease of approximately $24.0 million that was partially offset by improved price realization of approximately $11.4 million compared to the prior year period. Comparable year-over-year results by category include a decrease in electronic systems sales of $11.5 million (15.7% category decline), a decrease in exhaust system sales of $1.8 million (10.8% category decline), a decrease in mechanical systems sales of $1.0 million (2.8% category decline), and accessories sales growth of $1.8 million (8.6% category growth).
Cost of Goods Sold
Cost of goods sold for the 13-week period ended October 2, 2022 increased$11.9 million, or 12.6%, to $106.4 million, as compared to $94.5 million for the 13-week period ended September 26, 2021. The increase in cost of goods sold during the 13-week period ended October 2, 2022 in which net sales decreased reflects compression in gross profit margin primarily due to manufacturing inefficiencies driven by supply chain constraints, higher warranty costs, which increased $4.5 million compared to the prior year period, and inflationary pressures on certain other costs.
Gross Profit and Gross Margin
Gross profit for the 13-week period ended October 2, 2022 decreased $16.8 million, or 25.8%, to $48.4 million, as compared to $65.2 million for the 13-week period ended September 26, 2021. Gross margin for the 13-week period ended October 2, 2022 of 31.3% decreased as compared to a gross margin of 40.8% for the 13-week period ended September 26, 2021. The decrease in gross profit and gross profit margin was driven primarily by inflationary factors, higher expenses associated with warranty costs, and a shift in the mix of products sold towards products with lower margins due in part to limitations caused by supply chain challenges. In general, gross margin and margins on individual products will remain under pressure due to various factors, including potential increases in manufacturing costs and the shift of the Company's sales mix towards products with lower gross margins. Gross margins could also be affected by the Company's ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products.
Selling, General and Administrative
Selling, general and administrative costs for the 13-week period ended October 2, 2022 increased $3.0 million, or 10.5%, to $31.9 million, as compared to $28.9 million for the 13-week period ended September 26, 2021. When expressed as a percentage of sales, selling, general and administrative costs increased to 20.6% of sales for the 13-week period ended October 2, 2022, as compared to 18.1% of sales in 2021. The increase in selling, general and administrative costs was driven by a $2.6 million increase in outbound shipping and handling costs related to inflationary pressures from domestic shipping companies and an increase of $1.0 million attributable to recent acquisitions. Partially offsetting these increases was a decrease of $1.6 million in administrative and sales personnel costs, reflecting the Company's implementation of recent cost saving initiatives.
Research and Development Costs
Research and development costs for the 13-week period ended October 2, 2022 decreased $1.1 million, or 15.3%, to $6.0 million, as compared to $7.1 million for the 13-week period ended September 26, 2021. The decrease in research and development costs was primarily due to headcount reductions, reflecting the Company's implementation of recent cost saving initiatives.
Amortization and Impairment of Intangible Assets
Amortization of intangible assets for the 13-week period ended October 2, 2022 was stable at $3.7 million as compared to $3.6 million for the 13-week period ended September 26, 2021. Additionally, an impairment charge of $2.4 million was recognized on certain indefinite-lived tradenames during the 13-week period ended October 2, 2022 (see Note 5, "Goodwill and Other Intangible Assets" 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 recognition of impairment charges).
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 13-week period ended October 2, 2022 increased $0.9 million to $1.3 million, as compared to $0.4 million for the 13-week period ended September 26, 2021. This increase primarily reflects restructuring activities associated with recent acquisitions.
Related Party Acquisition and Management Fee Costs
Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated. Related party acquisition and management fee costs for the 13-week period ended September 26, 2021 were $23.3 million.
Operating Income
As a result of factors described above, operating income for the 13-week period ended October 2, 2022 increased $1.2 million, or 60.0%, to $3.1 million, as compared to $1.9 million for the 13-week period ended September 26, 2021.
Change in Fair Value of Warrant Liability
For the 13-week period ended October 2, 2022 we recognized a gain of $30.2 million from the change in fair value of the warrant liability as compared to a loss of $17.3 million for the 13-week period ended September 26, 2021. 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 October 2, 2022 we recognized a gain of $7.4 million from the change in fair value of the earn-out liability as compared to a loss of $6.9 million for the 13-week period ended September 26, 2021. The earn-out liability reflects the fair value of the earn-out shares resulting from the Business Combination.
Interest Expense
Interest expense for the 13-week period ended October 2, 2022 increased $0.6 million, or 5.9%, to $10.4 million, as compared to $9.9 million for the 13-week period ended September 26, 2021, reflecting a higher level of debt and a higher effective interest rate.
Income (Loss) before Income Taxes
As a result of factors described above, we recognized $30.2 million of income before income taxes for the 13-week period ended October 2, 2022, as compared to a pre-tax loss of $33.5 million for the 13-week period ended September 26, 2021.
Income Tax Benefit
Income tax benefit for the 13-week period ended October 2, 2022 was $1.4 million, as compared to an income tax benefit of $3.3 million for the 13-week period ended September 26, 2021. The difference between the effective tax rate for the 13-week period ended October 2, 2022 and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities. The effective tax rate for the 13-week period ended September 26, 2021 was 9.9%. The difference between the effective tax rate and the federal statutory rate in 2021 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities.
Net Income (Loss) and Total Comprehensive Income (Loss)
As a result of factors described above, we recognized net income of $31.6 million for the 13-week period ended October 2, 2022, as compared to a net loss of $30.2 million for the 13-week period ended September 26, 2021. Additionally, we recognized total comprehensive income of $32.1 million for the 13-week period ended October 2, 2022, as compared to a comprehensive loss of $30.2 million for the 13-week period ended September 26, 2021. Comprehensive income (loss) includes the effect of foreign currency translation adjustments.
39-week period ended October 2, 2022 Compared With 39-week period ended September 26, 2021
The table below presents Holley’s results of operations for the 39-week periods ended October 2, 2022 and September 26, 2021 (dollars in thousands):
| For the thirty-nine weeks ended |
||||||||||||||||
| October 2, 2022 |
September 26, 2021 |
Change ($) |
Change (%) |
|||||||||||||
| Net sales |
$ | 534,250 | $ | 513,046 | $ | 21,204 | 4.1 | % | ||||||||
| Cost of goods sold |
327,849 | 300,969 | 26,880 | 8.9 | % | |||||||||||
| Gross profit |
206,401 | 212,077 | (5,676 | ) | (2.7 | %) | ||||||||||
| Selling, general, and administrative |
102,532 | 79,093 | 23,439 | 29.6 | % | |||||||||||
| Research and development costs |
22,396 | 20,167 | 2,229 | 11.1 | % | |||||||||||
| Amortization of intangible assets |
10,985 | 10,391 | 594 | 5.7 | % | |||||||||||
| Impairment of indefinite-lived intangible assets |
2,395 | — | 2,395 | n/a | ||||||||||||
| Acquisition and restructuring costs |
3,247 | 21,877 | (18,630 | ) | (85.2 | %) | ||||||||||
| Related party acquisition and management fee costs |
— | 25,789 | (25,789 | ) | (100.0 | %) | ||||||||||
| Other expense |
594 | 3 | 591 | nm | ||||||||||||
| Operating income |
64,252 | 54,757 | 9,495 | 17.3 | % | |||||||||||
| Change in fair value of warrant liability |
(51,112 | ) | 17,273 | (68,385 | ) | nm | ||||||||||
| Change in fair value of earn-out liability |
(9,282 | ) | 6,866 | (16,148 | ) | nm | ||||||||||
| Loss on early extinguishment of debt |
— | 1,425 | (1,425 | ) | (100.0 | %) | ||||||||||
| Interest expense |
26,780 | 31,096 | (4,316 | ) | (13.9 | %) | ||||||||||
| Income (loss) before income taxes |
97,866 | (1,903 | ) | 99,769 | nm | |||||||||||
| Income tax expense |
8,866 | 7,255 | 1,611 | 22.2 | % | |||||||||||
| Net income (loss) |
89,000 | (9,158 | ) | 98,158 | nm | |||||||||||
| Foreign currency translation adjustment |
1,258 | (12 | ) | 1,270 | nm | |||||||||||
| Total comprehensive income (loss) |
$ | 90,258 | $ | (9,170 | ) | $ | 99,428 | nm | ||||||||
Net Sales
Net sales for the 39-week period ended October 2, 2022 increased $21.2 million, or 4.1%, to $534.3 million, as compared to $513.1 million for the 39-week period ended September 26, 2021. Non-comparable sales associated with acquisitions contributed $25.4 million, or 5.0% of total year-over-year growth. The remaining comparable sales for the year-to-date period decreased by $4.2 million, or 0.8%. The decline in comparable sales was primarily driven by supply chain constraints that prevented us from building and shipping to orders received from our customers. As a result, lower unit volume drive a decrease of approximately $47.1 million that was partially offset by improved price realization of approximately $42.9 million compared to the prior year period.Comparable year-over-year results by category include a decrease in electronic system sales of $13.2 million (5.7% category decline), a decrease in exhaust system sales of $7.8 million (12.9% category decline), accessories sales growth of $9.8 million (16.1% category growth), safety product sales growth of $3.7 million (7.6% category growth), and mechanical system sales growth of $3.3 million (3.0% category growth).
Cost of Goods Sold
Cost of goods sold for the 39-week period ended October 2, 2022 increased $26.9 million, or 8.9%, to $327.9 million, as compared to $301.0 million for the 39-week period ended September 26, 2021. The increase in cost of goods sold during the 39-week period ended October 2, 2022 reflects the increase in product sales during such period combined with compression in gross profit margin due to manufacturing inefficiencies driven by supply chain constraints, higher warranty costs, which increased $4.1 million compared to the prior year, and inflationary pressures on certain other costs.
Gross Profit and Gross Margin
Gross profit for the 39-week period ended October 2, 2022 decreased $5.7 million, or 2.7%, to $206.4 million, as compared to $212.1 million for the 39-week period ended September 26, 2021. Gross margin for the 39-week period ended October 2, 2022 of 38.6% decreased from gross margin of 41.3% for the 39-week period ended September 26, 2021. The decrease in gross profit and gross profit margin was driven primarily by inflationary factors, higher expenses associated with warranty costs, and a shift in the mix of products sold towards products with lower margins due in part to limitations caused by supply chain challenges. In general, gross margin and margins on individual products will remain under pressure due to various factors, including potential increases in manufacturing costs and the shift of the Company's sales mix towards products with lower gross margins. Gross margins could also be affected by the Company's ability to manage product quality and warranty costs effectively and to stimulate demand for certain of its products.
Selling, General and Administrative
Selling, general and administrative costs for the 39-week period ended October 2, 2022 increased $23.4 million, or 29.6%, to $102.5 million, as compared to $79.1 million for the 39-week period ended September 26, 2021. When expressed as a percentage of sales, selling, general and administrative costs increased to 19.2% of sales for the 39-week period ended October 2, 2022, as compared to 15.4% of sales in 2021. Recent acquisitions accounted for $2.7 million of the increase in selling, general and administrative costs. The increase in costs was also driven by a $6.8 million increase in compensation expense related to equity awards, a $3.0 million increase in administrative and sales personnel costs, reflecting company growth and the additional requirements of becoming a public company, and a $5.0 million increase in outbound shipping and handling costs related to inflationary pressures from domestic shipping companies.
Research and Development Costs
Research and development costs for the 39-week period ended October 2, 2022 increased $2.2 million, or 11.1%, to $22.4 million, as compared to $20.2 million for the 39-week period ended September 26, 2021. The increase in research and development costs were primarily due to headcount investments as we continue to pursue product innovation and new products.
Amortization and Impairment of Intangible Assets
Amortization of intangible assets for the 39-week period ended October 2, 2022 increased $0.6 million, or 5.7%, to $11.0 million, as compared to $10.4 million for the 39-week period ended September 26, 2021 due to recent acquisitions. Additionally, an impairment charge of $2.4 million was recognized on certain indefinite-lived tradenames during the 39-week period ended October 2, 2022 (see Note 5, "Goodwill and Other Intangible Assets" 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 recognition of impairment charges).
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 39-week period ended October 2, 2022 decreased $18.6 million, or 85.2%, to $3.3 million, as compared to $21.9 million for the 39-week period ended September 26, 2021. The 39-week period ended September 26, 2021 included an adjustment of $17.2 million for contingent consideration payable for the acquisition of Simpson Performance Products ("Simpson").
Related Party Acquisition and Management Fee Costs
Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated. Related party acquisition and management fee costs for the 39-week period ended September 26, 2021 were $25.8 million.
Operating Income
As a result of factors described above, operating income for the 39-week period ended October 2, 2022 increased $9.5 million, or 17.3%, to $64.3 million, as compared to $54.8 million for the 39-week period ended September 26, 2021.
Change in Fair Value of Warrant Liability
For the 39-week period ended October 2, 2022 we recognized a gain of $51.1 million from the change in fair value of the warrant liability as compared to a loss of $17.3 million for the 39-week period ended September 26, 2021. 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 39-week period ended October 2, 2022 we recognized a gain of $9.3 million from the change in fair value of the earn-out liability as compared to a loss of $6.9 million for the 39-week period ended September 26, 2021. The earn-out liability reflects the fair value of the earn-out shares resulting from the Business Combination. During the first quarter of 2022, the first tranche, representing half of the Earn-Out Shares, met the required market share price criteria and were issued. This issuance of the Company's common stock resulted in a reduction of the earn-out liability of $14.7 million, representing the fair value of the earn-out shares on the vesting date, which was reclassified from liabilities to equity. At October 2, 2022, there are 1,093,750 potential future Earn-Out Shares remaining.
Interest Expense
Interest expense for the 39-week period ended October 2, 2022 decreased $4.3 million, or 13.9%, to $26.8 million, as compared to $31.1 million for the 39-week period ended September 26, 2021. The decrease was primarily due to a lower effective interest rate combined with the favorable impact of the $100 million paydown on our second lien note in July 2021.
Income (Loss) before Income Taxes
As a result of factors described above, we recognized income before income taxes of $97.9 million for the 39-week period ended October 2, 2022, as compared to a pre-tax loss of $1.9 million for the 39-week period ended September 26, 2021.
Income Tax Expense
Income tax expense of $8.9 million for the 39-week period ended October 2, 2022 increased by $1.6 million as compared to $7.3 million for the 39-week period ended September 26, 2021. The effective tax rate for the 39-week period ended October 2, 2022 was 9.1%. 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. The difference between the effective tax rate for the 39-week period ended September 26, 2021and the federal statutory rate in 2021 was due to the permanent difference resulting from the adjustment to the Simpson earn-out liability during the period and the change in fair value of the warrant and earn-out liabilities.
Net Income (Loss) and Total Comprehensive Income (Loss)
As a result of factors described above, we recognized net income of $89.0 million for the 39-week period ended October 2, 2022, as compared to a net loss of $9.2 million for the 39-week period ended September 26, 2021. Additionally, we recognized total comprehensive income of $90.3 million for the 39-week period ended October 2, 2022, as compared to a comprehensive loss of $9.2 million for the 39-week period ended September 26, 2021. Comprehensive income (loss) includes the effect of foreign currency translation adjustments.
Non-GAAP Financial Measures
Holley believes EBITDA and Adjusted EBITDA are useful to investors in evaluating the Company’s financial performance. In addition, Holley uses these measures internally to establish forecasts, budgets and operational goals to manage and monitor its business. Holley believes that these non-GAAP financial measures help to depict a more realistic representation of the performance of the underlying business, enabling the Company to evaluate and plan more effectively for the future. Holley believes that investors should have access to the same set of tools that its management uses in analyzing operating results.
Holley defines EBITDA as earnings before (a) depreciation, (b) amortization of intangible assets, (c) interest expense, and (d) income tax expense. Holley defines Adjusted EBITDA as EBITDA plus (i) acquisition and restructuring costs, which for the 39-week period ended September 26, 2021 includes a $17.2 million adjustment due to a change in the fair value of the Simpson acquisition contingent consideration payable, (ii) impairment of indefinite-lived intangible assets, (iii) changes in the fair value of the warrant liability, (iv) changes in the fair value of the earn-out liability, (v) loss on the early extinguishment of debt, (vi) compensation expense related to equity awards, (vii) related party acquisition and management fee costs, (viii) notable items that in 2022 consist primarily of non-cash adjustments related to the adoption of ASC 842, "Leases," and in 2021 consist primarily of the amortization of the fair market value increase in inventory due to acquisitions, and (ix) other expenses, which includes losses from disposal of fixed assets and foreign currency transactions. We have included within the definition of Adjusted EBITDA impairment of indefinite-lived intangible assets, changes in the fair value of warrant liabilities, changes in the fair value of the earn-out liability, and losses from the early extinguishment of debt, as management believes such matters, when they occur, do not directly reflect the performance of the underlying business.
EBITDA and Adjusted EBITDA are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and may be different from non-GAAP financial measures used by other companies. These measures should not be considered as measures of financial performance under GAAP, and the items excluded from or included in these metrics are significant components in understanding and assessing Holley’s financial performance. These metrics should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP.
The following unaudited table presents the reconciliation of net income (loss), the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the 13-week and 39-week periods ended October 2, 2022 and September 26, 2021 (dollars in thousands):
| For the thirteen weeks ended |
For the thirty-nine weeks ended |
|||||||||||||||
| October 2, 2022 |
September 26, 2021 |
October 2, 2022 |
September 26, 2021 |
|||||||||||||
| Net income (loss) |
$ | 31,579 | $ | (30,200 | ) | $ | 89,000 | $ | (9,158 | ) | ||||||
| Adjustments: |
||||||||||||||||
| Depreciation |
2,837 | 2,875 | 7,500 | 7,328 | ||||||||||||
| Amortization of intangible assets |
3,662 | 3,553 | 10,985 | 10,391 | ||||||||||||
| Interest expense |
10,428 | 9,851 | 26,780 | 31,096 | ||||||||||||
| Income tax expense |
(1,345 | ) | (3,301 | ) | 8,866 | 7,255 | ||||||||||
| EBITDA |
47,161 | (17,222 | ) | 143,131 | 46,912 | |||||||||||
| Acquisition and restructuring costs |
1,266 | 368 | 3,247 | 21,877 | ||||||||||||
| Impairment of indefinite-lived intangible assets |
2,395 | — | 2,395 | — | ||||||||||||
| Change in fair value of warrant liability |
(30,171 | ) | 17,273 | (51,112 | ) | 17,273 | ||||||||||
| Change in fair value of earn-out liability |
(7,429 | ) | 6,866 | (9,282 | ) | 6,866 | ||||||||||
| Loss on early extinguishment of debt |
— | 1,425 | — | 1,425 | ||||||||||||
| Equity-based compensation expense |
2,873 | 2,486 | 9,518 | 2,748 | ||||||||||||
| Related party acquisition and management fee costs |
— | 23,250 | — | 25,789 | ||||||||||||
| Notable items |
213 | 938 | 1,097 | 10,513 | ||||||||||||
| Other expense |
47 | 89 | 594 | 3 | ||||||||||||
| Adjusted EBITDA |
$ | 16,355 | $ | 35,473 | $ | 99,588 | $ | 133,406 | ||||||||
Liquidity and Capital Resources
Holley’s primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. The Company has generally financed its historical needs with operating cash flows, capital contributions and borrowings under its credit facilities. These sources of liquidity may be impacted by various factors, including demand for Holley’s products, investments made in acquired businesses, plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.
As of October 2, 2022, the Company had cash of $16.6 million and availability of $123.8 million under its revolving credit facility. The Company has a senior secured revolving credit facility with $125 million in borrowing capacity. As of October 2, 2022, the Company had $1.2 million of letters of credit outstanding under the revolving credit facility.
The Company is obligated under various operating leases for facilities, equipment and automobiles with estimated lease payments of approximately $2.2 million, including short term leases, due during the remainder of fiscal year 2022. See Note 14, "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 $14 million to $15 million in fiscal year 2022.
See Note 6, "Debt" in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for further detail of our credit facility and the timing of principal maturities. As of October 2, 2022, based on the then current weighted average interest rate of 6.8%, expected interest payments associated with outstanding debt totaled approximately $11.3 million for the remainder of fiscal year 2022.
As discussed under “Business Environment” above, although the future impact of supply chain disruptions and inflationary pressures are highly uncertain, we believe that our current operating performance, operating plan, cash position, and borrowings available under our revolving credit facility, will be sufficient to satisfy our liquidity needs and capital expenditure requirements for at least 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):
39-week period ended October 2, 2022 Compared With 39-week period ended September 26, 2021
| For the thirty-nine weeks ended |
||||||||
| October 2, 2022 |
September 26, 2021 |
|||||||
| Cash flows from operating activities |
$ | 12,164 | $ | 24,917 | ||||
| Cash flows used in investing activities |
(25,349 | ) | (71,931 | ) | ||||
| Cash flows used in financing activities |
(5,457 | ) | 29,267 | |||||
| Effect of foreign currency rate fluctuations on cash |
(1,077 | ) | — | |||||
| Net decrease in cash and cash equivalents |
$ | (19,719 | ) | $ | (17,747 | ) | ||
Operating Activities. Cash provided by operating activities for the 39-week period ended October 2, 2022 was $12.2 million compared to $24.9 million for the 39-week period ended September 26, 2021. Significant components of the year-over-year change in cash provided by operating activities included negative fluctuations from inventories and accounts payable of $15.7 million and $11.7 million, respectively. Offsetting these decreases were increases in cash provided by accrued liabilities and prepaids and other current assets of $8.0 million and $4.5 million, respectively. The changes in inventory and accounts payable reflect the fluctuations in sales during 2022 while accounts payable is also impacted by the timing of payments.
Investing Activities. Cash used in investing activities for the 39-week period ended October 2, 2022 was $25.4 million, which included $11.3 million relating to capital expenditures and $14.1 million relating to acquisitions. During the 39-week period ended September 26, 2021, cash used in investing activities was $71.9 million which included $61.8 million relating to acquisitions and $10.2 million due to capital expenditures.
Financing Activities. Cash used in financing activities for the 39-week period ended October 2, 2022 was $5.5 million, which primarily reflected net principal payments on long-term debt. Cash provided by financing activities for the 39-week period ended September 26, 2021 was $29.3 million, which included $132.3 million in cash received due to the recapitalization and $103.0 million in principal payments on long-term debt.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgements and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures. We evaluate our estimates, judgements and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. For a discussion of our critical accounting estimates, refer to the section entitled “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 15, 2022. For further information see also Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies” in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
For a discussion of Holley’s new or recently adopted accounting pronouncements, see Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. Holley is exposed to market risk in the normal course of business due to the Company’s ongoing investing and financing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Holley has established policies and procedures governing the Company’s management of market risks and the use of financial instruments to manage exposure to such risks. The Company generally does not hedge its interest rate exposure. The Company had $653.6 million of debt outstanding as of October 2, 2022. A hypothetical 100 basis point increase or decrease in interest rates would result in an approximately $6.5 million change 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 October 2, 2022, the majority 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 October 2, 2022, 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 an adverse effect on business and results of operations in the future. Historically, Holley’s primary exposure has been related to transactions denominated in the Euros 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 October 2, 2022 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 currently not a party to any legal proceedings that would be expected to have a material adverse effect on our business or financial condition. From time to time, we are subject to litigation incidental to our business, as well as other litigation of a non-material nature in the ordinary course of business.
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. Factors that could materially affect our actual results, levels of activity, performance or achievements include, but are not limited to, those under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 15, 2022. 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, 2021, as filed with the SEC on March 15, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
| Exhibit No. |
Description |
|
| 2.1 |
||
| 3.1 |
||
| 3.2 |
||
| 31.1 |
||
| 31.2 |
||
| 32.1 |
||
| 32.2 |
| 101.INS |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101) |
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/ Stephen Trussell |
| Stephen Trussell |
| Interim Chief Financial Officer and V.P. of Finance (Duly Authorized Officer) |
| November 14, 2022 |