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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 1, 2023

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________to__________

 

Commission file number: 001-39599

 

HOLLEY INC.

(Exact name of registrant as specified in its charter)

 

Delaware

87-1727560

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

1801 Russellville Road, Bowling Green, KY 42101

(Address of principal executive offices)

 

(270) 782-2900

(Registrants telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report) N/A

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

symbol(s)

 

Name of each exchange

on which registered

Common Stock, par value $0.0001

Warrants to purchase common stock

 

HLLY

HLLY WS

 

New York Stock Exchange

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

       

Non-accelerated filer

  

Smaller reporting company

 

       
    

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes No ☒

 

There were 118,566,872 shares of Common Stock, including 1,093,750 restricted earn-out shares, par value $0.0001 per share, issued and outstanding as of November 3, 2023.

 

 

 

 

 

TABLE OF CONTENTS

 

PART I  FINANCIAL INFORMATION

 

Item 1. Financial Statements.

5

   

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

27

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

37

   

Item 4. Controls and Procedures

37

   
   

PART II  OTHER INFORMATION

 

Item 1. Legal Proceedings.

38

   

Item 1A. Risk Factors.

38

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

38

   

Item 3. Defaults Upon Senior Securities.

38

   

Item 4. Mine Safety Disclosures

38

   

Item 5. Other Information.

38

   

Item 6. Exhibits.

39

   

SIGNATURE

40

 

2

  

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by the Securities Act and Exchange Act, as well as protections afforded by other federal securities laws. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for the Company’s business. Forward-looking statements may be accompanied by words such as “believe,” “estimate,” “expect,” “project,” “forecast,” “may,” “will,” “should,” “seek,” “plan,” “scheduled,” “anticipate,” “intend” or similar expressions. These forward-looking statements are subject to various risks and uncertainties, many of which are outside our control. Therefore, you should not place undue reliance on such statements. Actual results could differ materially due to numerous factors, including but not limited to the Company’s ability to do any of the following:

 

 

execute its business strategy, including monetization of services provided and expansions in and into existing and new lines of business;

 

 

anticipate and manage through disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain company products in distribution channels;

 

 

anticipate and manage through supply shortages of key component parts used in our products and the need to shift the mix of products offered in response thereto;

 

 

respond to the impact of geopolitical events, including military conflicts (including the conflict in Ukraine, the conflict in Israel and surrounding areas, the possible expansion of such conflicts and potential geopolitical consequences), the interruption from catastrophic events and problems such as terrorism, and public health crises;

 

 

maintain key strategic relationships with partners and resellers;

 

 

anticipate and manage through the impact of elevated interest rate levels, which cause the cost of capital to increase, as well as respond to inflationary pressures;

 

 

enhance future operating and financial results;

 

 

respond to uncertainties associated with product and service development and market acceptance;

 

 

anticipate and manage through increased constraints in consumer demand and/or shifts in the mix of products sold;

 

 

attract and retain qualified employees and key personnel;

 

 

protect and enhance the Company’s corporate reputation and brand awareness;

 

 

recognition of goodwill and other intangible asset impairment charges;

 

 

effectively respond to general economic and business conditions;

 

 

acquire and protect intellectual property;

 

 

collect, store, process and use personal and payment information and other consumer data;

 

 

comply with privacy and data protection laws and other legal obligations related to privacy, information security, and data protection;

 

 

The impact of any security breaches, cyber-attacks, or other cybersecurity threats or incidents, or the failure of any key information technology systems;

 

 

meet future liquidity requirements and comply with restrictive covenants related to long-term indebtedness;

 

3

 

 

obtain additional capital, including use of the debt market;

 

 

manage to finance operations on an economically viable basis;

 

 

maintain Holley’s New York Stock Exchange (“NYSE”) listing of its common stock (“Common Stock”) and warrants to purchase Common Stock;

 

 

comply with existing and/or future laws and regulations applicable to its business, including laws and regulations related to environmental health and safety;

 

 

respond to litigation, complaints, product liability claims and/or adverse publicity;

 

 

anticipate the significance and timing of contractual obligations;

 

 

anticipate the impact of, and response to, new accounting standards;

 

 

maintain proper and effective internal controls;

 

 

respond to the impact of changes in U.S. tax laws and regulations, including the impact on deferred tax assets;

 

 

anticipate the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “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

 

 

respond to other risks and factors, listed under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the U.S. Securities and Exchange Commission (the "SEC") on March 15, 2023, in Part II. Item 1A of this Quarterly Report on Form 10-Q, and/or as disclosed in any subsequent filings with the SEC.

 

Forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and our management’s expectations, forecasts and assumptions, and involve a number of judgements, risks and uncertainties, and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 

4

 

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HOLLEY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

  

As of

 
  

October 1, 2023

  

December 31, 2022

 

ASSETS

        

Cash and cash equivalents

 $36,833  $26,150 

Accounts receivable, less allowance for credit losses of $1,852 and $1,550 respectively

  47,390   47,083 

Inventory

  207,161   233,573 

Prepaids and other current assets

  13,283   18,157 

Total current assets

  304,667   324,963 

Property, plant, and equipment, net

  48,026   52,181 

Goodwill

  419,056   418,121 

Other intangibles assets, net

  413,774   424,855 

Right-of-use assets

  30,415   29,522 

Other noncurrent assets

  3,185    

Total assets

 $1,219,123  $1,249,642 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Accounts payable

 $39,762  $44,948 

Accrued interest

  324   5,994 

Accrued liabilities

  42,225   43,317 

Current portion of long-term debt

  6,571   7,000 

Total current liabilities

  88,882   101,259 

Long-term debt, net of current portion

  603,507   643,563 

Warrant liability

  9,788   4,272 

Earn-out liability

  3,265   1,176 

Deferred taxes

  49,774   58,390 

Long-term operating lease liabilities

  26,006   24,992 

Total liabilities

  781,222   833,652 

Commitments and contingencies (Refer to Note 18 - Commitments and Contingencies)

          

Stockholders' equity:

        

Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding on October 1, 2023 and December 31, 2022

      

Common stock, $0.0001 par value, 550,000,000 shares authorized, 117,473,122 and 117,147,997 shares issued and outstanding on October 1, 2023 and December 31, 2022, respectively

  12   12 

Additional paid-in capital

  372,158   368,122 

Accumulated other comprehensive loss

  (1,047)  (944)

Retained earnings

  66,778   48,800 

Total stockholders' equity

  437,901   415,990 

Total liabilities and stockholders' equity

 $1,219,123  $1,249,642 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

5

 

 

HOLLEY INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

  

For the thirteen weeks ended

  

For the thirty-nine weeks ended

 
  

October 1, 2023

  

October 2, 2022

  

October 1, 2023

  

October 2, 2022

 

Net sales

 $156,530  $154,775  $503,997  $534,250 

Cost of goods sold

  98,156   106,383   308,162   327,849 

Gross profit

  58,374   48,392   195,835   206,401 

Selling, general, and administrative

  28,880   31,921   87,998   102,532 

Research and development costs

  6,100   6,039   18,935   22,396 

Amortization of intangible assets

  3,687   3,662   11,040   10,985 

Impairment of indefinite-lived intangible assets

     2,395      2,395 

Acquisition and restructuring costs

  415   1,266   2,106   3,247 

Other operating expense (income)

  (28)  47   508   594 

Total operating expense

  39,054   45,330   120,587   142,149 

Operating income

  19,320   3,062   75,248   64,252 

Change in fair value of warrant liability

  2,064   (30,171)  5,516   (51,112)

Change in fair value of earn-out liability

  700   (7,429)  2,089   (9,282)

Interest expense, net

  13,712   10,428   41,909   26,780 

Total non-operating expense (income)

  16,476   (27,172)  49,514   (33,614)

Income before income taxes

  2,844   30,234   25,734   97,866 

Income tax expense (benefit)

  2,092   (1,345)  7,756   8,866 

Net income

 $752  $31,579  $17,978  $89,000 

Comprehensive income:

                

Foreign currency translation adjustment

  (176)  516   (103)  1,258 

Total comprehensive income

 $576  $32,095  $17,875  $90,258 

Common Share Data:

                

Weighted average common shares outstanding - basic

  117,397,069   117,119,609   117,256,959   116,636,906 

Weighted average common shares outstanding - diluted

  119,245,956   117,138,134   118,119,501   117,273,613 

Basic net income per share

 $0.01  $0.27  $0.15  $0.76 

Diluted net income per share

 $0.01  $0.27  $0.15  $0.32 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

6

 

 

HOLLEY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, except share data)

(unaudited)

 

   

Common Stock

           

Accumulated

   

Retained

         
                   

Additional

   

Other

   

Earnings

         
                   

Paid-In

   

Comprehensive

   

(Accumulated

         
   

Shares

   

Amount

   

Capital

   

Gain (Loss)

   

Deficit)

   

Total

 

Balance at December 31, 2021

    115,805,639     $ 12     $ 329,705     $ (256 )   $ (24,974 )   $ 304,487  

Net income

                            16,858       16,858  

Equity compensation

                3,162                   3,162  

Foreign currency translation

                      241             241  

Issuance of vested Earn-Out Shares

    1,093,750             14,689                   14,689  

Balance at April 3, 2022

    116,899,389       12       347,556       (15 )     (8,116 )     339,437  

Net income

                            40,563       40,563  

Equity compensation

                3,483                   3,483  

Foreign currency translation

                      501             501  

Warrants exercised

    33,333             383                   383  

Balance at July 3, 2022

    116,932,722       12       351,422       486       32,447       384,367  

Net income

                            31,579       31,579  

Equity compensation

                2,873                   2,873  

Foreign currency translation

                      516             516  

Tax withholding related to vesting of restricted stock units

                (1,050 )                 (1,050 )

Issuance of shares for restricted stock units

    215,275                                

Balance at October 2, 2022

    117,147,997     $ 12     $ 353,245     $ 1,002     $ 64,026     $ 418,285  
                                                 

Balance at December 31, 2022

    117,147,997     $ 12     $ 368,122     $ (944 )   $ 48,800     $ 415,990  

Net income

                            4,247       4,247  

Equity compensation

                394                   394  

Foreign currency translation

                      (199 )           (199 )

Tax withholding related to vesting of restricted stock units

                (34 )                 (34 )

Issuance of shares for restricted stock units

    24,219                                

Balance at April 2, 2023

    117,172,216       12       368,482       (1,143 )     53,047       420,398  

Net income

                            12,979       12,979  

Equity compensation

                1,806                   1,806  

Foreign currency translation

                      272             272  

Tax withholding related to vesting of restricted stock units

                (39 )                 (39 )

Issuance of shares for restricted stock units

    77,638                                

Balance at July 2, 2023

    117,249,854       12       370,249       (871 )     66,026       435,416  

Net income

                            752       752  

Equity compensation

                2,970                   2,970  

Foreign currency translation

                      (176 )           (176 )

Tax withholding related to vesting of restricted stock units

                (1,061 )                 (1,061 )

Issuance of shares for restricted stock units

    223,268                                

Balance at October 1, 2023

    117,473,122     $ 12     $ 372,158     $ (1,047 )   $ 66,778     $ 437,901  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

7

 

 

HOLLEY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

   

For the thirty-nine weeks ended

 
   

October 1, 2023

   

October 2, 2022

 

OPERATING ACTIVITIES:

               

Net income

  $ 17,978     $ 89,000  

Adjustments to reconcile net income to net cash from operating activities:

               

Depreciation

    7,738       7,500  

Amortization of intangible assets

    11,040       10,985  

Impairment of indefinite-lived intangible assets

          2,395  

Amortization of deferred loan costs

    1,339       1,277  

Amortization of right of use assets

    4,014       4,203  

Gain on termination of leases

          (279 )

Fair value adjustments to warrant liability

    5,516       (51,112 )

Fair value adjustments to earn-out liability

    2,089       (9,282 )

Fair value adjustments to interest rate collar

    (3,185 )      

Equity compensation

    5,170       9,518  

Change in deferred taxes

    (8,616 )     (4,219 )

Loss (gain) on disposal of property, plant and equipment

    (227 )     559  

Provision for inventory reserves

    3,824       5,432  

Provision for credit losses

    744       403  

Change in operating assets and liabilities:

               

Accounts receivable

    (1,054 )     (8,573 )

Inventories

    21,046       (46,299 )

Prepaids and other current assets

    4,862       1,027  

Accounts payable

    (5,413 )     (1,922 )

Accrued interest

    (5,670 )     1,416  

Accrued and other liabilities

    (4,332 )     135  

Net cash provided by operating activities

    56,863       12,164  

INVESTING ACTIVITIES:

               

Capital expenditures

    (4,417 )     (11,745 )

Proceeds from the disposal of fixed assets

    1,292       473  

Cash paid for acquisitions, net

          (14,077 )

Net cash used in investing activities

    (3,125 )     (25,349 )

FINANCING ACTIVITIES:

               

Proceeds from issuance of long-term debt

          27,000  

Principal payments on long-term debt

    (40,437 )     (31,790 )

Deferred financing fees

    (1,427 )      

Payments from stock-based award activities

    (1,134 )     (1,050 )

Proceeds from issuance of common stock in connection with the exercise of Warrants

          383  

Net cash used in financing activities

    (42,998 )     (5,457 )

Effect of foreign currency rate fluctuations on cash

    (57 )     (1,077 )

Net change in cash and cash equivalents

    10,683       (19,719 )

Cash and cash equivalents:

               

Beginning of period

    26,150       36,325  

End of period

  $ 36,833     $ 16,606  

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 50,290     $ 25,070  

Cash paid for income taxes

    16,041       6,834  

Noncash investing and financing activities:

               

Vested Earn-Out Shares issued to Empower Sponsor Holdings LLC

  $     $ 14,689  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

8

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)

 

 

1.

DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Holley Inc., a Delaware corporation headquartered in Bowling Green, Kentucky, conducts operations through its wholly owned subsidiaries. These operating subsidiaries are comprised of Holley Performance Products Inc., Hot Rod Brands, Inc., Simpson Safety Solutions, Inc., B&M Racing and Performance Products, Inc., and Speedshop.com, Inc. When used in these notes, the terms the “Company” or “Holley” mean Holley, Inc. and all entities included in its consolidated financial statements.

 

The Company consummated a business combination (the “Business Combination”) pursuant to that certain Agreement and Plan of Merger dated March 11, 2021 (the “Merger Agreement”), by and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc., Empower Merger Sub II LLC, and Holley Intermediate Holdings, Inc. (“Holley Intermediate”) on July 16, 2021, (the “Closing” and such date, the “Closing Date”). The Business Combination was accounted for as a reverse recapitalization in which Holley Intermediate was deemed the accounting acquirer with Holley Inc. as the successor registrant. As such, Empower was treated as the acquired company for financial reporting purposes. On the Closing Date, Empower changed its name to Holley Inc. and its trading symbol on the NYSE from “EMPW” to “HLLY.”

 

The Company designs, manufactures and distributes performance automotive products to customers primarily in the United States, Canada and Europe. The Company is a leading manufacturer of a diversified line of performance automotive products, including carburetors, fuel pumps, fuel injection systems, nitrous oxide injection systems, superchargers, exhaust headers, mufflers, distributors, ignition components, engine tuners and automotive performance plumbing products. The Company is also a leading manufacturer of exhaust products as well as shifters, converters, transmission kits, transmissions, tuners and automotive software. The Company’s products are designed to enhance street, off-road, recreational and competitive vehicle performance through increased horsepower, torque and drivability. The Company has locations in the United States, Canada, Italy and China.

 

Emerging Growth Company Status

 

Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company is an emerging growth company, and, as such, has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.

 

Risks and Uncertainties

 

The Company's business and results of operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, labor shortages, and disruption of the supply chain, as well as by geopolitical events, including the conflict in Ukraine, the conflict in Israel and surrounding areas, and the possible expansion of such conflicts and potential geopolitical consequences. 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 supply chain challenges and automotive electronic component shortages. In response to the global supply chain volatility and inflationary impacts, the Company has attempted to minimize potential adverse impacts on its business with cost savings initiatives, price increases to customers, and by increasing inventory levels of certain products and working closely with its suppliers and customers to minimize disruptions in delivering products to customers. Our profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales to lower-margin products, and demands on our performance that increase our costs. Should the ongoing macroeconomic conditions not improve, or worsen, or if the Company's attempt to mitigate the impact on its supply chain, operations and costs is not successful, the Company’s business, results of operations and financial condition may be adversely affected.

 

9

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or “GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2022, as filed with the SEC on March 15, 2023, in the Company’s annual report on Form 10-K. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for any quarter are not necessarily indicative of the results for the full fiscal year.

 

The Company operates on a fiscal year that ends on  December 31. The three- and nine-month periods ended October 1, 2023 and October 2, 2022 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, 2022.

 

Equity-Based Compensation

 

The Company accounts for equity-based awards granted to employees and nonemployees under the fair value method prescribed by Accounting Standards Codification ("ASC") Subtopic 718-10, Stock Compensation. Equity-based compensation cost is measured based on the estimated grant date fair value of the award and is recognized as expense over the requisite service period (generally the vesting period). The fair value of stock options is estimated using the Black Scholes option-pricing model. Restricted stock units are valued at the stock price on the grant date. The fair value of profit interest units granted by Holley Parent Holdings, LLC (the "Holley Stockholder") is estimated based on the Company’s estimated equity value for each unit class at the time of granting using the Black-Scholes option-pricing model, discounted to reflect market considerations for illiquidity.

 

Performance share units that vest based on the achievement of company-designated performance targets are valued at the stock price on the grant date. Compensation expense in respect of such performance share units is recognized each period based on the expected level of achievement and, to the extent that the expected levels of achievement change, compensation cost is adjusted in the period of change with the remaining unrecognized cost recognized over the remaining requisite service period. For performance share units that vest based on the achievement of predetermined market conditions, the Company estimates the grant date fair value using a Monte Carlo simulation model. The fair value associated with each tranche of the award is recognized, straight-line, over the associated requisite service period for that tranche, subject to acceleration if the market condition is met prior to the end of the derived service period.

 

Unless the awards contain a market condition, previously recognized expense related to forfeited awards is reversed in the period in which the forfeiture occurs. For awards containing a market condition, previously recognized stock-based compensation expense is not reversed when the awards are forfeited as long as the service is provided for the duration of the required service period.

 

10

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

Derivative Financial Instruments

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, Derivatives and Hedging. For derivative financial instruments that are accounted for as assets or liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. Derivative assets and liabilities are classified on the balance sheet as current or non-current based on whether or not net cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.

 

The Company uses derivative instruments to manage its exposure to changes in interest rates on borrowings under its debt facility. These derivative instruments are primarily valued on the basis of quotes obtained from banks, brokers, and/or dealers. The valuation of the derivative instruments considers future expected interest rates on the notional principal balance remaining, which is comparable to what a prospective acquirer would pay on the measurement date. Valuation pricing models consider inputs such as forward rates, anticipated interest rate volatility relating to the reference rate, as well as time value, counterparty risk and other factors underlying derivative instruments. 

 

Recent Accounting Pronouncements

 

Accounting Standards Recently Adopted

 

In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires entities to apply the definition of a performance obligation under ASC Topic 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Prior to the adoption of ASU 2021-08, an acquirer generally recognized assets acquired, and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 results in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. The Company adopted ASU 2021-08 on January 1, 2023. Adoption of ASU 2021-08 did not impact the Company's consolidated financial statements.

 

11

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
  
 

2.

ACQUISITIONS

 

In 2022, the Company completed three acquisitions. These acquisitions are expected to enhance the Company's portfolio of products and services in the automotive aftermarket and automotive safety solutions market.

 

The Company accounts for acquisitions using the acquisition method, and accordingly, the purchase price has been allocated based upon the fair value of the assets acquired and liabilities assumed. Goodwill generated by the acquisitions is primarily attributable to the strong market position of the entities acquired.

 

Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions were for 100 percent of the acquired business and are reported in the Consolidated Statements of Cash Flows, net of acquired cash and cash equivalents. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are typically expensed in the periods in which the costs are incurred and are recorded in acquisition and restructuring costs. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

 

In 2022, the Company acquired substantially all the assets of John's Ind., Inc., Southern Kentucky Classics, and Vesta Motorsports USA, Inc., doing business as RaceQuip. These acquisitions were immaterial business combinations. Cash paid for the three acquisitions, net of cash acquired, was $14,863, and was funded with borrowings from the Company's credit facility and cash on hand. The acquisitions resulted in both amortizable and nonamortizable intangibles and goodwill totaling $10,553. The goodwill and intangibles generated as a result of these acquisitions are deductible for income tax purposes. The final allocation of the purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of acquired assets and liabilities, as noted below. 

 

The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:

 

           

Measurement

         
   

2022

   

Period

   

2022

 
   

(as initially reported)

   

Adjustments

   

(as adjusted)

 

Accounts receivable

  $ 959     $ (397 )   $ 562  

Inventory

    3,481       146       3,627  

Property, plant and equipment

    275             275  

Other assets

    1,132       (1,108 )     24  

Tradenames

    1,689             1,689  

Customer relationships

    1,512             1,512  

Goodwill

    5,858       1,494       7,352  

Accounts payable

    (25 )     (133 )     (158 )

Accrued liabilities

    (18 )     (2 )     (20 )
    $ 14,863     $     $ 14,863  

 

The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.

 

12

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 
 

3.

INVENTORY

 

Inventories of the Company consisted of the following:

 

   

As of

 
   

October 1, 2023

   

December 31, 2022

 

Raw materials

  $ 67,811     $ 78,586  

Work-in-process

    23,424       23,906  

Finished goods

    115,926       131,081  
    $ 207,161     $ 233,573  

 

 

4.

PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment of the Company consisted of the following:

 

   

As of

 
   

October 1, 2023

   

December 31, 2022

 

Land

  $ 3,326     $ 3,426  

Buildings and improvements

    11,164       11,051  

Machinery and equipment

    71,620       66,140  

Construction in process

    6,592       9,563  

Total property, plant and equipment

    92,702       90,180  

Less: accumulated depreciation

    44,676       37,999  

Property, plant and equipment, net

  $ 48,026     $ 52,181  

 

The Company’s long-lived assets by geographic locations are as follows:

 

   

As of

 
   

October 1, 2023

   

December 31, 2022

 

United States

  $ 46,056     $ 50,434  

International

    1,970       1,747  

Total property, plant and equipment, net

  $ 48,026     $ 52,181  

 

13

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 
 

5.

GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following presents changes to goodwill for the period indicated:

 

  

For the thirty-nine weeks ended

 
  

October 1, 2023

 

Balance on December 31, 2022

  418,121 

Measurement period adjustments

  935 

Balance on October 1, 2023

 $419,056 

 

Goodwill represents the premium paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company's business combinations. The measurement period for the valuation of assets acquired and liabilities assumed ends as soon as information on the facts and circumstances that existed as of the acquisition date becomes available, not to exceed 12 months. Adjustments in purchase price allocations may require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined. 

 

No goodwill impairment charges were incurred during the 13-week and 39-week periods ended October 1, 2023 and October 2, 2022. During the third quarter of 2022, management concluded that it was necessary to reevaluate goodwill and indefinite-lived intangible assets for impairment due to supply chain constraints that resulted in the Company revising its earnings estimates for 2022. As a result of this evaluation, a pre-tax impairment of $2.4 million was recognized on certain indefinite-lived tradenames. Potential changes in the Company's costs and operating structure, the implementation of synergies, and overall performance in the automotive aftermarket industry, could negatively impact near-term cash-flow projections and could trigger a potential impairment of the Company's goodwill and / or indefinite-lived intangible assets. In addition, failure to execute the Company's strategic plans as well as increases in weighted average costs of capital could negatively impact the fair value of the reporting unit and increase the risk of future impairment charges. 

 

Intangible assets consisted of the following:

 

  

October 1, 2023

 
  

Gross Carrying Amount

  

Accumulated Amortization

  

Net Carrying Value

 

Finite-lived intangible assets:

            

Customer relationships

 $269,950  $(52,844) $217,106 

Tradenames

  13,775   (5,387)  8,388 

Technology

  26,676   (13,353)  13,323 

Total finite-lived intangible assets

 $310,401  $(71,584) $238,817 
             

Indefinite-lived intangible assets:

            

Tradenames

 $174,957     $174,957 

 

  

December 31, 2022

 
  

Gross Carrying Amount

  

Accumulated Amortization

  

Net Carrying Value

 

Finite-lived intangible assets:

            

Customer relationships

 $269,950  $(44,178) $225,772 

Tradenames

  13,775   (4,843)  8,932 

Technology

  26,676   (11,523)  15,153 

Total finite-lived intangible assets

 $310,401  $(60,544) $249,857 
             

Indefinite-lived intangible assets:

            

Tradenames

 $174,998     $174,998 

 

The following outlines the estimated future amortization expense related to intangible assets held as of October 1, 2023:

 

2023 (excluding the thirty-nine weeks ended October 1, 2023)

 $3,517 

2024

  13,744 

2025

  13,714 

2026

  13,608 

2027

  13,493 

Thereafter

  180,741 

Total

 $238,817 

 

14

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
  
 

6.

ACCRUED LIABILITIES

 

Accrued liabilities of the Company consisted of the following:

 

   

As of

 
   

October 1, 2023

   

December 31, 2022

 

Accrued freight

  $ 5,468     $ 6,861  

Accrued employee compensation and benefits

    11,327       6,259  

Accrued returns and allowances

    5,758       5,214  

Accrued taxes

    4,030       5,222  

Current portion of operating lease liabilities

    5,231       5,112  

Accrued other

    10,411       14,649  

Total accrued liabilities

  $ 42,225     $ 43,317  

  

 

7.

DEBT

 

Debt of the Company consisted of the following:

 

   

As of

 
   

October 1, 2023

   

December 31, 2022

 

First lien term loan due November 17, 2028

  $ 619,147     $ 649,350  

Revolver

          10,000  

Other

    2,122       2,770  

Less unamortized debt issuance costs

    (11,191 )     (11,557 )
      610,078       650,563  

Less current portion of long-term debt

    (6,571 )     (7,000 )
    $ 603,507     $ 643,563  

 

On November 18, 2021, the Company entered into a credit facility with a syndicate of lenders and Wells Fargo Bank, N.A., as administrative agent for the lenders, letter of credit issuer and swing line lender (the "Credit Agreement"). The financing consisted of a seven-year $600,000 first lien term loan, a five-year $125,000 revolving credit facility, and a $100,000 delayed draw term loan. The proceeds of delayed draw loans made after closing were available to the Company to finance acquisitions. Upon the expiration of the delayed draw term loan in May 2022, the Company had drawn $57,000, which is included in the amount outstanding under the first lien term loan due November 17, 2028.

 

The revolving credit facility includes a letter of credit facility in the amount of $10,000, pursuant to which letters of credit may be issued as long as revolving loans may be advanced and subject to availability under the revolving credit facility. The Company had $1,728 in outstanding letters of credit on October 1, 2023.

 

Proceeds from the credit facility were used to repay in full the Company’s obligations under its previously existing first lien and second lien notes and to pay $13,413 in deferred financing fees related to the refinancing.

 

The first lien term loan is to be repaid in quarterly payments of $1,643 through September 30, 2028 with the balance due upon maturity on November 17, 2028. The Company is required to make annual payments on the term loan in an amount equal to 50% of annual excess cash flow greater than $5,000, as defined in the Credit Agreement. This percentage requirement may decrease or be eliminated if certain leverage ratios are achieved. Based on the Company's results for 2022, no excess cash flow payment was required in 2023. Any such payments offset future mandatory quarterly payments. The Credit Agreement permits voluntary prepayments at any time, in whole or in part. The Company paid down an aggregate of $24,845 in principal on its outstanding first lien term loan by repurchasing $13,845 at a discount to par and making a voluntary repayment of $11,000 during the 13-week period ended October 1, 2023.

 

15

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

As of October 1, 2023, amounts outstanding under the credit facility accrue interest at a rate equal to either the Secured Overnight Financing Rate ("SOFR") or base rate, at the Company's election, plus a specified margin. In the case of revolving credit loans and letter of credit fees, the specified margin is based on the Company's Total Leverage Ratio, as defined in the Credit Agreement. Commitment fees payable under the revolving credit facility are based on the Company's Total Leverage Ratio. On October 1, 2023, the weighted average interest rate on the Company's borrowings under the credit facility was 9.4%.

 

The Company has entered into an interest rate collar in the notional amount of $500,000 to hedge the Company's exposure to fluctuations in interest rates on its variable-rate debt. Refer to Note 9, "Derivative Instruments," for additional information.

 

Obligations under the Credit Agreement are secured by substantially all of the Company’s assets. The Credit Agreement includes representations and warranties and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on restricted payments, additional borrowings, additional investments, and asset sales.

 

In February 2023, the Company entered into an amendment to the Credit Agreement which, among other things, increases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of the quarter ending April 2, 2023 through the quarter ending March 31, 2024 (the “Covenant Relief Period”), to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter. As an ongoing condition to the Covenant Relief Period, the Company also agreed to (i) a minimum liquidity test, (ii) an interest coverage test, (iii) an anti-cash hoarding test at any time revolving loans are outstanding, and (iv) additional reporting obligations. Under the amended Credit Agreement, the revolving credit facility contains a minimum liquidity financial covenant of $45,000, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility. In April 2023, the Company entered into a second amendment to the Credit Agreement in which the interest rate on any outstanding borrowings under the Credit Agreement was changed from LIBOR to SOFR. In May 2023, the Company entered into a third amendment to the Credit Agreement in which certain defined terms were clarified. The Company incurred $1,427 of deferred financing fees related to these amendments. On October 1, 2023, the Company was in compliance with all financial covenants. 

 

Some of the lenders that are parties to the Credit Agreement, and their respective affiliates, have various relationships with the Company in the ordinary course of business involving the provision of financial services, including cash management, commercial banking, investment banking or other services.

 

Future maturities of long-term debt and amortization of debt issuance costs as of October 1, 2023 are as follows:

 

   

Debt

   

Debt Issuance Costs

 

2023 (excluding the thirty-nine weeks ended October 1, 2023)

  $ 1,855     $ 446  

2024

    7,425       1,869  

2025

    7,628       2,016  

2026

    6,571       2,178  

2027

    6,571       2,354  

Thereafter

    591,219       2,328  
    $ 621,269     $ 11,191  

  

16

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 
 

8.

COMMON STOCK WARRANTS AND EARN-OUT LIABILITY

 

Upon the Closing, there were 14,666,644 Warrants, consisting of 9,999,977 public warrants ("Public Warrants") and 4,666,667 private warrants ("Private Warrants" and together with the Public Warrants, the “Warrants”), outstanding to purchase shares of Common Stock that were issued by Empower prior to the Business Combination. Each Warrant entitles the registered holder to purchase one share of Common Stock at a price of $11.50 per share, subject to adjustments, provided that the Company has an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the Warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities laws of the state of residence of the holder. The Warrants may be exercised only for a whole number of shares of Common Stock. The Warrants expire on July 16, 2026, the date that is five years after the Closing Date, or earlier upon redemption or liquidation. Additionally, the Private Warrants will be non-redeemable and are exercisable on a cashless basis so long as they are held by Empower Sponsor Holdings, LLC (the "Sponsor") or any of its permitted transferees. If the Private Warrants are held by someone other than the Sponsor or its permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

 

The Company may redeem the Public Warrants at a price of $0.01 per warrant upon 30 days' notice if the closing price of Common Stock equals or exceeds $18.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given, provided there is an effective registration statement and current prospectus in effect with respect to the ordinary shares underlying such Warrants throughout the 30-day redemption period. If the foregoing conditions are satisfied and the Company issues a notice of redemption of the Warrants, the Warrant holder is entitled to exercise his, her or its Warrant prior to the scheduled redemption date. Any such exercise requires the Warrant holder to pay the exercise price for each Warrant being exercised. Further, the Company may redeem the Public Warrants at a price of $0.10 per warrant upon 30 days' notice if the closing price of Common Stock equals or exceeds $10.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given. Beginning on the date the notice of redemption is given until the Warrants are redeemed or exercised, holders may elect to exercise their Warrants on a cashless basis and receive that number of shares of Common Stock as determined by reference to a table in the warrant agreement.

 

During any period when the Company has failed to maintain an effective registration statement, warrant holders may exercise Warrants on a cashless basis in accordance with Section 3(a)(9) of the Securities Act or another exemption, and the Company will use its commercially reasonable best efforts to register or qualify the shares under applicable blue-sky laws to the extent an exemption is not available.

 

The Company’s Warrants are accounted for as a liability in accordance with ASC 815-40 and are presented as a warrant liability on the balance sheet. The warrant liability was measured at fair value at inception and on a recurring basis, with changes in fair value recognized as non-operating expense. As of October 1, 2023 and  December 31, 2022, a warrant liability with a fair value of $9,788 and $4,272, respectively, was reflected as a long-term liability in the condensed consolidated balance sheet. An increase of $2,064 and a decrease of $30,171 in the fair value of the warrant liability was reflected as change in fair value of warrant liability in the condensed consolidated statements of comprehensive income for the 13-week periods ended October 1, 2023 and October 2, 2022, respectively. An increase of $5,516 and a decrease of $51,112 in the fair value of the warrant liability was reflected as change in fair value of warrant liability in the condensed consolidated statements of comprehensive income for the 39-week periods ended October 1, 2023 and October 2, 2022, respectively. In April 2022, the Company issued 33,333 shares of Common Stock in connection with the exercise of Public Warrants assumed in the Business Combination.

 

Additionally, the Sponsor received 2,187,500 shares of Common Stock upon the Closing, which vest in two equal tranches upon achievement of certain market share price milestones during the earn-out period, as outlined in the Merger Agreement (the “Earn-Out Shares”). The first tranche of Earn-Out Shares vested during the first quarter of 2022. Upon vesting, the first tranche of 1,093,750 Earn-Out Shares were issued and a liability of $14,689, representing the fair value of the shares on the date of vesting, was reclassified from liabilities to equity. The remaining tranche of Earn-Out Shares will be forfeited if the applicable conditions are not satisfied before July 16, 2028 (seven years after the Closing Date). The unvested Earn-Out Shares are presented as an earn-out liability on the balance sheet and are remeasured at fair value with changes in fair value recognized as non-operating expense. As of October 1, 2023 and  December 31, 2022, an earn-out liability with a fair value of $3,265 and $1,176, respectively, was reflected as a long-term liability in the condensed consolidated balance sheet. An increase of $700 and a decrease of $7,429 in the fair value of the earn-out liability was reflected as change in fair value of earn-out liability in the condensed consolidated statements of comprehensive income for the 13-week periods ended October 1, 2023 and October 2, 2022, respectively. An increase of $2,089 and a decrease of $9,282 in the fair value of the earn-out liability was reflected as change in fair value of earn-out liability in the condensed consolidated statements of comprehensive income for the 39-week periods ended October 1, 2023 and October 2, 2022, respectively. 

 

17

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 
 

9.

DERIVATIVE INSTRUMENTS

 

The Company from time to time enters into derivative financial instruments, such as interest rate collar agreements (each, a “Collar”), to manage its exposure to fluctuations in interest rates on the Company’s variable rate debt. On January 4, 2023, the Company entered into a Collar with Wells Fargo Bank, N.A. ("Wells Fargo") with a notional amount of $500,000 that expires on February 18, 2026. The Collar has a floor of 2.811% and a cap of 5% (based on three-month SOFR). The structure of this Collar is such that the Company receives an incremental amount if the Collar index exceeds the cap rate. Conversely, the Company pays an incremental amount to Wells Fargo if the Collar index falls below the floor rate. No payments are required if the Collar index falls between the cap and floor rates. 

 

As of October 1, 2023, the Company recognized a derivative asset of $3,185 for the Collar in other noncurrent assets on the condensed consolidated balance sheet. For the 13-week and 39-week periods ended October 1, 2023, the Company recorded a net change in the fair value of the Collar as a decrease to interest expense of $1,117 and $3,185, respectively. Cash receipts for the Collar totaled $125 for both the 13-week and 39-week periods ended October 1, 2023.

 

The fair value of the Collar is determined using observable market-based inputs and the impact of credit risk on the derivative’s fair value (the creditworthiness of the Company’s counterparty for assets and the creditworthiness of the Company for liabilities) (a Level 2 measurement, as described in Note 10, "Fair Value Measurements").

 

 

10.

FAIR VALUE MEASUREMENTS

 

The Company’s financial liabilities subject to fair value measurement on a recurring basis and the level of inputs used for such measurements were as follows:

 

   

Fair Value Measured on October 1, 2023

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Assets:

                               

Interest rate collar

  $     $ 3,185     $     $ 3,185  
                                 

Liabilities:

                               

Warrant liability (Public)

  $ 6,379     $     $     $ 6,379  

Warrant liability (Private)

                3,409       3,409  

Earn-out liability

                3,265       3,265  

Total fair value liabilities

  $ 6,379     $     $ 6,674     $ 13,053  

 

   

Fair Value Measured on December 31, 2022

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Liabilities:

                               

Warrant liability (Public)

  $ 2,691     $     $     $ 2,691  

Warrant liability (Private)

                1,581       1,581  

Earn-out liability

                1,176       1,176  

Total fair value liabilities

  $ 2,691     $     $ 2,757     $ 5,448  

 

As of October 1, 2023, the Company's derivative liabilities for its Private and Public Warrants, earn-out liability, and derivative asset for its Collar are measured at fair value on a recurring basis (see Note 8,Common Stock Warrants and Earn-Out Liability,” and Note 9, "Derivative Instruments," for more details). The fair values of the Private Warrants and earn-out liability are determined based on significant inputs not observable in the market (Level 3). The valuation of the Level 3 liabilities uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. The Company uses a Monte Carlo simulation model to estimate the fair value of its Private Warrants and earn-out liability. The fair value of the Collar, which is included in other noncurrent assets on the condensed consolidated balance sheet, is determined based on models that reflect the contractual terms of the derivative, yield curves, and the credit quality of the counterparties. Inputs are generally observable and do not contain a high level of subjectivity (Level 2). The fair value of the Public Warrants is determined using publicly traded prices (Level 1). Changes in the fair value of the derivative liabilities related to Warrants and the earn-out liability are recognized as non-operating expense in the condensed consolidated statements of comprehensive income. Changes in the fair value of the Collar is recognized as an adjustment to interest expense in the condensed consolidated statements of comprehensive income.

 

18

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

The fair value of Private Warrants was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:

 

   

October 1, 2023

   

December 31, 2022

 

Valuation date price

  $ 4.99     $ 2.12  

Strike price

  $ 11.50     $ 11.50  

Remaining life (in years)

    2.79       3.54  

Expected dividend

  $     $  

Risk-free interest rate

    4.72 %     4.06 %

Price threshold

  $ 18.00     $ 18.00  

 

The fair value of the earn-out liability was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:

 

   

October 1, 2023

   

December 31, 2022

 

Valuation date price

  $ 4.99     $ 2.12  

Expected term (in years)

    4.79       5.54  

Expected volatility

    57.68 %     70.33 %

Risk-free interest rate

    4.49 %     3.88 %

Price hurdle

  $ 15.00     $ 15.00  

   

As of October 1, 2023 and December 31, 2022, the Company has accounts receivable, accounts payable and accrued expenses for which the carrying value approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s long-term debt approximates fair value as the rates used approximate the market rates currently available to the Company. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements.

 

The reconciliation of changes in Level 3 liabilities during the 39-week periods ended October 1, 2023 and October 2, 2022 is as follows:

 

   

Private Warrants

   

Earn-Out Liability

   

Total

 

Balance at December 31, 2021

  $ 21,793     $ 26,596     $ 48,389  

Liabilities reclassed to equity

          (14,689 )     (14,689 )

Gains included in earnings

    (7,653 )     (1,853 )     (9,506 )

Balance at October 2, 2022

  $ 14,140     $ 10,054     $ 24,194  
                         

Balance at December 31, 2022

  $ 1,581     $ 1,176     $ 2,757  

Losses included in earnings

    1,828       2,089       3,917  

Balance at October 1, 2023

  $ 3,409     $ 3,265     $ 6,674  

 

19

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 
 

11.

REVENUE

 

The principal activity from which the Company generates its revenue is the manufacturing and distribution of after-market automotive parts for its customers, comprised of resellers and end users. The Company recognizes revenue at a point in time, rather than over time, as the performance obligation is satisfied when customer obtains control of the product upon title transfer and not as the product is manufactured or developed. The amount of revenue recognized is based on the purchase order price and adjusted for revenue allocated to variable consideration (i.e., estimated rebates, co-op advertising, etc.).

 

The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs incurred after control of the product is transferred to our customers are treated as fulfillment costs and not a separate performance obligation.

 

The Company allows customers to return products when certain Company-established criteria are met. These sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized, net of returns to stock. Returned products, which are recorded as inventories, are valued at the lower of cost or net realizable value. The physical condition and marketability of the returned products are the major factors considered in estimating realizable value. The Company also estimates expected sales returns and records the necessary adjustment as a charge against gross sales.

 

The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 365 days. The Company elected the practical expedient to disregard the possible existence of a significant financing component related to payment on contracts, as the Company expects that customers will pay for the products within one year. The Company has evaluated the terms of our arrangements and determined that they do not contain significant financing components. Additionally, as all contracts with customers have an expected duration of one year or less, the Company has elected the practical expedient to exclude disclosure of information regarding the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period. The Company provides limited warranties on most of its products against certain manufacturing and other defects. Provisions for estimated expenses related to product warranty are made at the time products are sold. Refer to Note 18,Commitments and Contingencies” for more information.

 

The following table summarizes total revenue by product category.

 

   

For the thirteen weeks ended

   

For the thirty-nine weeks ended

 
   

October 1, 2023

   

October 2, 2022

   

October 1, 2023

   

October 2, 2022

 

Electronic systems

  $ 70,062     $ 62,174     $ 213,214     $ 219,380  

Mechanical systems

    37,870       37,317       122,108       127,365  

Exhaust

    14,343       15,183       47,556       52,552  

Accessories

    21,788       24,561       75,635       81,660  

Safety

    12,467       15,540       45,484       53,293  

Net sales

  $ 156,530     $ 154,775     $ 503,997     $ 534,250  

 

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 1, 2023

   

October 2, 2022

   

October 1, 2023

   

October 2, 2022

 

United States

  $ 154,150     $ 150,155     $ 491,385     $ 519,728  

Italy

    2,380       4,620       12,612       14,522  

Net sales

  $ 156,530     $ 154,775     $ 503,997     $ 534,250  

 

20

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 
 

12.

INCOME TAXES

 

The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.

 

   

For the thirteen weeks ended

   

For the thirty-nine weeks ended

 
   

October 1, 2023

   

October 2, 2022

   

October 1, 2023

   

October 2, 2022

 

Income tax expense (benefit)

  $ 2,092     $ (1,345 )   $ 7,756     $ 8,866  

Effective tax rates

    73.6 %     (4.4 )%     30.1 %     9.1 %

 

For the 13-week period ended October 1, 2023, the Company's effective tax rate of 73.6% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the warrant and earn-out liabilities recognized during the period and the impact of foreign taxes in higher tax rate jurisdictions. For the 13-week period ended October 2, 2022, the Company’s effective tax rate of -4.4% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in the fair value of the warrant and earn-out liabilities recognized during the period

 

For the 39-week period ended October 1, 2023, the Company's effective tax rate of 30.1% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the warrant and earn-out liabilities recognized during the period. For the 39-week period ended October 2, 2022, the Company’s effective tax rate of 9.1% differed from the 21% federal statutory rate primarily due a permanent difference related to changes in the fair value of the warrant and earn-out liabilities recognized during the period.

  

 

13.

EARNINGS PER SHARE

 

The following table sets forth the calculation of basic and diluted earnings per share:

 

   

For the thirteen weeks ended

   

For the thirty-nine weeks ended

 
   

October 1, 2023

   

October 2, 2022

   

October 1, 2023

   

October 2, 2022

 

Numerator:

                               

Net income

  $ 752     $ 31,579     $ 17,978     $ 89,000  

Less: fair value adjustment for Warrants

                      (51,112 )

Net income - diluted

  $ 752     $ 31,579     $ 17,978     $ 37,888  

Denominator:

                               

Weighted average common shares outstanding - basic

    117,397,069       117,119,609       117,256,959       116,636,906  

Dilutive effect of potential common shares from RSUs

    1,848,887       18,525       862,542       124,603  

Dilutive effect of potential common shares from Warrants

                      512,104  

Weighted average common shares outstanding - diluted

    119,245,956       117,138,134       118,119,501       117,273,613  

Earnings per share:

                               

Basic

  $ 0.01     $ 0.27     $ 0.15     $ 0.76  

Diluted

  $ 0.01     $ 0.27     $ 0.15     $ 0.32  

 

21

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

The following outstanding shares of Common Stock equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. Warrants to purchase shares of Common Stock having an exercise price greater than the average share market price are excluded from the calculation of diluted earnings per share. 

 

   

For the thirteen weeks ended

   

For the thirty-nine weeks ended

 
   

October 1, 2023

   

October 2, 2022

   

October 1, 2023

   

October 2, 2022

 

Anti-dilutive shares excluded from calculation of diluted EPS:

                               

Warrants

    14,633,311       14,633,311       14,633,311        

Stock options

    922,228       1,769,614       922,228       1,769,614  

Restricted stock units

    175,783       220,051       175,783       220,051  

Performance stock units

    2,177,462             2,177,462        

Unvested Earn-Out Shares

    1,093,750       1,093,750       1,093,750       1,093,750  

Total anti-dilutive shares

    19,002,534       17,716,726       19,002,534       3,083,415  

 

 

14.

BENEFIT PLANS

 

On January 28, 2022, the Company approved the termination of its defined benefit pension plan (the "Plan"), effective March 31, 2022. The final distribution of the Plan's assets pursuant to the termination was made in the fourth quarter of 2022 when the Plan termination satisfied all regulatory requirements. Plan participants received their accrued benefits from plan assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider.

 

The following table provides the components of net periodic benefit cost for the 13-week and 39-week periods ended October 2, 2022:

    For the thirteen weeks ended     For the thirty-nine weeks ended  
   

October 2, 2022

   

October 2, 2022

 

Components of expense:

               

Service cost

  $ 27     $ 81  

Interest cost

    32       96  

Expected return on plan assets

    (52 )     (156 )

Net periodic benefit cost

  $ 7     $ 21  

 

The Company's contributions to the Plan were $150 for the 39-week period ended October 2, 2022

 

The Company made matching contributions totaling $562 and $587 to its 401(k) plan during the 13-week periods ended October 1, 2023 and October 2, 2022, respectively. The Company made matching contributions totaling $1,702 and $2,431 to its 401(k) plan during the 39-week periods ended October 1, 2023 and October 2, 2022, respectively.

  

 

15.

EQUITY-BASED COMPENSATION PLANS

 

In 2021, the Company adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”), under which awards, including stock options, restricted stock units ("RSUs") and performance stock units ("PSUs") may be granted to employees and non-employee directors. The 2021 Plan authorized 8,850,000 shares of Common Stock to be available for award grants. As of October 1, 2023, 4,423,103 shares of Common Stock remained available for future issuance under the 2021 Plan. On June 6, 2023, the Company granted 1,000,000 RSUs and 1,520,000 PSUs to its new President and Chief Executive Officer. These awards were granted outside of the 2021 Plan as employment inducement awards and did not require shareholder approval under the rules of the NYSE or otherwise. 

 

Equity-based compensation expense included the following components:

 

   

For the thirteen weeks ended

   

For the thirty-nine weeks ended

 
   

October 1, 2023

   

October 2, 2022

   

October 1, 2023

   

October 2, 2022

 

Restricted stock units

  $ 1,331     $ 876     $ 3,146     $ 3,409  

Performance stock units

    1,322             1,696        

Stock options

    317       559       328       1,764  

Profit interest units

          1,438             4,345  

 

22

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

All equity-based compensation expenses are recorded in selling, general and administrative costs in the condensed consolidated statements of comprehensive income.

 

Restricted Stock Units

 

The Compensation Committee has awarded RSUs to select employees and non-employee directors. The RSUs vest ratably over one to four years of continued employment. The fair value of a RSU at the grant date is equal to the market price of Common Stock on the grant date. Compensation expense for RSUs is recorded based on amortization of the grant date fair market value over the period the restrictions lapse. As of October 1, 2023, there was $7,608 of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a remaining weighted average period of 2.4 years. The weighted average grant date fair value for RSUs was $2.76 and $11.46 for the 39-week periods ended October 1, 2023 and October 2, 2022, respectively. The fair value of RSUs vested and converted to shares of Common Stock was $685 for the 39-week period ended October 1, 2023.

 

The following table summarizes RSU activity for the 39-week period ended October 1, 2023:

 

   

Unvested Restricted Stock Units

 
           

Weighted

 
   

Number of

   

Average Grant

 
   

RSUs

   

Date Fair Value

 

December 31, 2022

    1,108,330     $ 9.43  

Granted

    2,459,140       2.76  

Vested

    (196,318 )     11.07  

Forfeited

    (189,640 )     12.13  

October 1, 2023

    3,181,512     $ 3.24  

 

Performance Stock Units

 

The Compensation Committee has awarded PSUs to select employees. The PSUs represent shares of Common Stock that are potentially issuable in the future based on a combination of performance and service requirements. On March 8, 2023, the Company granted 949,412 PSUs under the 2021 Plan to key employees with a grant date fair value of $1.98 and on May 8, 2023, the Company granted an additional 8,050 PSUs with a grant data fair value of $2.43. The PSUs granted to employees were based on salary and include annual net sales and adjusted EBITDA growth targets with threshold and stretch goals. The awards vest ratably over three years, subject to the employee’s continuous employment through the vesting date and the level of performance achieved. The number of PSUs granted reflects the target number able to be earned under a given award. Non-vested PSU compensation expense is based on the most recent performance assumption available and is adjusted as assumptions change. The fair value of a PSU at the grant date is equal to the market price of Common Stock on the grant date. The cost estimates for PSU grants represent initial target awards until the Company can reasonably forecast the financial performance of each PSU award grant. The actual number of shares of Common Stock to be issued at the end of each performance period will range from 0% to 150% of the initial target awards.

 

On June 6, 2023, the Company granted 1,520,000 PSUs to its new President and Chief Executive Officer as an employment inducement award, which are potentially issuable in the future based on a combination of achievement of certain stock price metrics and service requirements through the expiration date of December 31, 2030. The fair value of this award is determined using a Monte Carlo simulation as of the date of the grant and share-based compensation expense will not be adjusted should the target awards vary from actual awards. The Company's estimates of fair value may be impacted by certain variables including, but not limited to, stock price volatility, the risk-free interest rate, expected dividend yields, and the Company's performance.

 

As of October 1, 2023, there was $3,081 of unrecognized compensation cost related to unvested PSUs that is expected to be recognized over a remaining weighted average period of 2.5 yearsThe fair value of PSUs vested and converted to shares of Common Stock was $2,199 for the 39-week period ended October 1, 2023.

 

23

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

Stock Options

 

Stock option grants have an exercise price at least equal to the market value of the underlying Common Stock on the date of grant, have ten-year terms, and vest ratably over three years of continued employment. In general, vested options expire if not exercised within 90 days of termination of service. Compensation expense for stock options is recorded based on straight-line amortization of the grant date fair value over the requisite service period. As of October 1, 2023, there was $1,295 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a remaining weighted-average period of 1.1 years.

 

The following table summarizes stock option activity for the 39-week period ended October 1, 2023:

 

                   

Weighted Average

 
           

Weighted

   

Remaining

 
   

Number of

   

Average

   

Contractual

 
   

Stock Options

   

Exercise Price

   

Term (years)

 

Options outstanding on December 31, 2022

    1,709,690     $ 10.97          

Forfeited

    (592,588 )     11.11          

Expired

    (194,874 )     10.50          

Options outstanding on October 1, 2023

    922,228     $ 10.98       8.05  

Options exercisable on, October 1, 2023

    512,370     $ 10.79       7.96  

 

Profit Interest Units

 

The Holley Stockholder authorized an incentive pool of 41,400,000 units of Holley Stockholder that its management had the right to grant to certain employees of the Company. The units, which are designated as Profit Interest Units (“PIUs”), are a special type of limited liability company equity unit that allows the recipient to potentially participate in a future increase in the value of the Company. The PIUs were issued for no consideration and generally provided for vesting over a requisite service period, subject to the recipient remaining an employee of the Company through each vesting date.

 

In the fourth quarter of 2022, the Holley Stockholder amended the vesting criteria to allow for immediate vesting of all outstanding and unvested PIUs. The changes to these awards were deemed to be modification events under ASC Subtopic 718-10, Stock Compensation. Accordingly, during the fourth quarter of 2022, the Company recognized catch-up equity-based compensation expense, including incremental fair value resulting from the modification, as applicable to each award grant. At that time all PIUs were fully vested with no remaining unrecognized compensation cost, and there are no remaining PIUs authorized for issuance.

 

24

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 
 

16.

LEASE COMMITMENTS

 

On January 1, 2022, the Company adopted ASC Topic 842, Leases, using the modified retrospective optional transition method provided by ASU 2018-11, Leases (Topic 842). The effect of applying this guidance resulted in an increase in noncurrent assets for right-of-use assets of $33,887 and an increase in liabilities for associated lease obligations of $34,579, most of which were classified as noncurrent. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of retained earnings.

 

Under the transition option elected by the Company, ASC Topic 842 is applied only to the most current period and reporting for comparative periods presented in the financial statements continues to be in accordance with ASC Topic 840, Leases, including disclosures. Upon adoption, the Company elected the following practical expedients related to ASC Topic 842:

 

 

not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing leases, and not reassess initial direct costs for any existing leases;

 

to account for the lease and non-lease components as a single lease component for all of the Company's leases; and

 

to apply accounting similar to ASC Topic 840 to leases that meet the definition of short-term leases.

 

The Company leases retail stores, manufacturing, distribution, engineering, and research and development facilities, office space, equipment, and automobiles under operating lease agreements. Leases have remaining lease terms of one to 11 years, inclusive of renewal options that the Company is reasonably certain to exercise.

 

The following table summarizes operating lease assets and obligations, and provides information associated with the measurement of operating lease obligations.

 

   

As of

 
   

October 1, 2023

   

December 31, 2022

 

Assets:

               

Operating right of use assets

  $ 30,415     $ 29,522  

Liabilities:

               

Current operating lease liabilities - Accrued liabilities

  $ 5,231     $ 5,112  

Long-term operating lease liabilities

    26,006       24,992  

Total lease liabilities

  $ 31,237     $ 30,104  

Lease term and discount rate

               

Weighted average remaining lease term (in years)

    7.6       7.9  

Weighted average discount rate

    5.91 %     5.77 %

 

The following summarizes the components of operating lease expense and provides supplemental cash flow information for operating leases:

 

   

For the thirteen weeks ended

   

For the thirty-nine weeks ended

 
   

October 1, 2023

   

October 2, 2022

   

October 1, 2023

   

October 2, 2022

 

Components of lease expense:

                               

Operating lease expense

  $ 1,630     $ 1,753     $ 4,923     $ 5,654  

Short-term lease expense

    521       599       1,499       1,849  

Variable lease expense

    88       195       257       609  

Total lease expense

  $ 2,239     $ 2,547     $ 6,679     $ 8,112  

Supplemental cash flow information related to leases:

                               

Cash paid for amounts included in measurement of operating lease liabilities

  $ 1,732     $ 1,843     $ 5,203     $ 5,424  

Right-of-use assets obtained in exchange for new operating lease liabilities

    2,370             4,724       13,769  

Decapitalization of right-of-use assets upon lease termination or modification

    353             507       12,178  

 

25

HOLLEY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
(unaudited)
 

The following table summarizes the maturities of the Company's operating lease liabilities as of October 1, 2023:

 

2023 (excluding the thirty-nine weeks ended October 1, 2023)

 $1,802 

2024

  6,570 

2025

  5,122 

2026

  4,632 

2027

  4,629 

Thereafter

  16,338 

Total lease payments

  39,093 

Less imputed interest

  (7,856)

Present value of lease liabilities

 $31,237 

  

 

17.

ACQUISITION AND RESTRUCTURING COSTS

 

The following table summarizes the Company's total acquisition and restructuring costs:

 

   

For the thirteen weeks ended

   

For the thirty-nine weeks ended

 
   

October 1, 2023

   

October 2, 2022

   

October 1, 2023

   

October 2, 2022

 

Acquisitions (1)

  $     $ 4     $     $ 1,625  

Restructuring (2)

    415       1,262       2,106       1,622  

Total acquisition and restructuring costs

  $ 415     $ 1,266     $ 2,106     $ 3,247  

(1) Includes professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to acquisitions.

 

(2) Includes costs incurred as part of the restructuring of operations including professional and consulting services and executive severance.

 

 

 

18.

COMMITMENTS AND CONTINGENCIES

 

Litigation

 

The Company is a party to various lawsuits and claims in the normal course of business, as well as the putative securities class action described below. While the lawsuits and claims against the Company cannot be predicted with certainty, management believes that the ultimate resolution of such matters will not have a material effect on the consolidated financial position or liquidity of the Company; however, in light of the inherent uncertainties involved in such lawsuits and claims, some of which may be beyond the Company’s control, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period. 

 

A putative securities class action was filed on November 6, 2023, against the Company, Tom Tomlinson (the Company’s former Director, President, and Chief Executive Officer), and Dominic Bardos (the Company’s former Chief Financial Officer) in the United States District Court for the Western District of Kentucky (the “Complaint”). The complaint, which is captioned City of Fort Lauderdale General Employees’ Retirement System v. Holley, Inc., f/k/a Empower LTD., Tom Tomlinson, and Dominic Bardos, Civil Action No. 1:23-cv-148-GNS, alleges that the Company violated various securities laws and seeks class certification, damages, interest, attorneys’ fees, and other relief.  Due to the early stage of this proceeding, we cannot reasonably estimate the potential range of loss, if any. The Company disputes the allegations and intends to vigorously defend against them.

 

Product Warranties

 

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 1, 2023

  

October 2, 2022

  

October 1, 2023

  

October 2, 2022

 

Beginning balance

 $3,876  $2,325  $3,584  $3,994 

Accrued for current year warranty claims

  3,005   6,535   9,472   9,569 

Settlement of warranty claims

  (2,857)  (5,216)  (9,032)  (9,919)

Ending balance

 $4,024  $3,644  $4,024  $3,644 

 

26

  
 
 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

Unless the context requires otherwise, references to Holley, we, us, our and the Company in this section are to the business and operations of Holley Inc. and its subsidiaries unless the context otherwise indicates. The following discussion and analysis should be read in conjunction with Holleys 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 Holleys actual results to differ materially from managements expectations. Factors that could cause such differences are discussed herein and under the caption, Cautionary Note Regarding Forward-Looking Statements.

 

Overview

 

We are a leading designer, marketer, and manufacturer of high performance automotive aftermarket products serving car and truck enthusiasts, with sales, processing, and distribution facilities reaching most major markets in the United States, Canada, Europe and China. We design, market, manufacture and distribute a diversified line of performance automotive products including fuel injection systems, tuners, exhaust products, carburetors, safety equipment and various other performance automotive products. Our products are designed to enhance street, off-road, recreational and competitive vehicle performance and safety. 

 

Innovation is at the core of our business and growth strategy. We have a history of developing innovative products, including new products in existing product families, product line expansions, and accessories, as well as products that bring us into new categories. We have thoughtfully expanded our product portfolio over time to adapt to consumer needs.

 

In addition, we have historically used strategic acquisitions to (i) expand our brand portfolio, (ii) enter new product categories and consumer segments, (iii) increase direct-to-consumer 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 above, under the caption, "Cautionary Note Regarding Forward-Looking Statements," in this Quarterly Report on Form 10-Q, under the caption, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023, and in our subsequent filings with the SEC.

 

Business Environment

 

Our business and results of operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, labor shortages, and disruption of the supply chain, as well as by geopolitical events, including the conflict in Ukraine and the conflict in Israel and surrounding areas. Our operations have been adversely impacted, and may continue to be adversely impacted, by inflationary pressures primarily related to transportation, labor and component costs. Sales growth in certain products has been constrained by continuing supply chain challenges and automotive electronic component shortages. In response to the global supply chain volatility and inflationary impacts, we have attempted to minimize potential adverse impacts on our business with cost savings initiatives, price increases to customers, and by increasing inventory levels of certain products and working closely with our suppliers and customers to minimize disruptions in delivering products to customers. Our profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales mix to lower-margin products, and demands on our performance that increased our costs. Should the ongoing macroeconomic conditions not improve, or worsen, or if our attempts to mitigate the impact on our supply chain, operations and costs is not successful, our business, results of operations and financial condition may be adversely affected.

 

27

 

Key Components of Results of Operations

 

Net Sales

 

The principal activity from which we generate sales is the designing, marketing, manufacturing and distribution of performance after-market automotive parts for our end consumers. Sales are displayed net of rebates and sales returns allowances. Sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized.

 

Cost of Goods Sold

 

Cost of goods sold consists primarily of the cost of purchased parts and manufactured products, including materials and direct labor costs. In addition, warranty, incoming shipping and handling and inspection and repair costs are also included within costs of goods sold. Reductions in the cost of inventory to its net realizable value are also a component of cost of goods sold.

 

Selling, General, and Administrative

 

Selling, general, and administrative costs consist of payroll and related personnel expenses, IT and office services, office rent expense and professional services. In addition, self-insurance, advertising, research and development, outgoing shipping costs, pre-production and start-up costs are also included within selling, general, and administrative. 

 

Acquisition and Restructuring Costs

 

Acquisition and restructuring costs consist of professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to potential acquisitions. In addition, operational restructuring costs and executive severance are included within this classification.

 

Interest Expense

 

Interest expense consists of interest due on the indebtedness under our credit facilities. Interest is based on SOFR or the base rate, at the Company's election, plus the applicable margin rate. As of October 1, 2023, $619.2 million was outstanding under our Credit Agreement.

 

28

 

 

Results of Operations

 

13-Week Period Ended October 1, 2023 Compared With 13-Week Period Ended October 2, 2022

 

The table below presents Holley’s results of operations for the 13-week periods ended October 1, 2023 and October 2, 2022 (dollars in thousands):

 

   

For the thirteen weeks ended

 
   

October 1, 2023

   

October 2, 2022

   

Change ($)

   

Change (%)

 

Net sales

  $ 156,530     $ 154,775     $ 1,755       1.1 %

Cost of goods sold

    98,156       106,383       (8,227 )     (7.7 )%

Gross profit

    58,374       48,392       9,982       20.6 %

Selling, general, and administrative

    28,880       31,921       (3,041 )     (9.5 )%

Research and development costs

    6,100       6,039       61       1.0 %

Amortization of intangible assets

    3,687       3,662       25       0.7 %

Impairment of indefinite-lived intangible assets

          2,395       (2,395 )     (100.0 )%

Acquisition and restructuring costs

    415       1,266       (851 )     (67.2 )%

Other expense

    (28 )     47       (75 )     (159.6 )%

Operating income

    19,320       3,062       16,258       531.0 %

Change in fair value of warrant liability

    2,064       (30,171 )     32,235       (106.8 )%

Change in fair value of earn-out liability

    700       (7,429 )     8,129       (109.4 )%

Interest expense

    13,712       10,428       3,284       31.5 %

Income before income taxes

    2,844       30,234       (27,390 )     (90.6 )%

Income tax expense (benefit)

    2,092       (1,345 )     3,437       (255.5 )%

Net income

    752       31,579       (30,827 )     (97.6 )%

Foreign currency translation adjustment

    (176 )     516       (692 )     (134.1 )%

Total comprehensive income

  $ 576     $ 32,095     $ (31,519 )     (98.2 )%

 

Net Sales

 

Net sales for the 13-week period ended October 1, 2023 increased $1.8 million, or 1.1%, to $156.5 million, as compared to $154.8 million for the 13-week period ended October 2, 2022. Improved price realization of approximately $2.4 million led the increase, offset partially by lower unit volume which resulted in a decrease of approximately $0.6 million compared to the prior year period. Major categories driving the comparable year-over-year results include an increase in electronic systems sales of $7.9 million (12.7% category growth), a decrease in safety products sales of $3.1 million (19.8% category decline), and a decrease in accessories sales of $2.8 million (11.3% category decline).

 

Cost of Goods Sold

 

Cost of goods sold for the 13-week period ended October 1, 2023 decreased $8.2 million, or 7.7%, to $98.2 million, as compared to $106.4 million for the 13-week period ended October 2, 2022. The decrease in cost of goods sold during the 13-week period ended October 1, 2023 in which product sales increased 1.1% reflects a higher gross profit margin due to decreased freight costs, lower warranty costs and product mix. 

 

29

 

Gross Profit and Gross Margin

 

Gross profit for the 13-week period ended October 1, 2023 increased $10.0 million, or 20.6%, to $58.4 million, as compared to $48.4 million for the 13-week period ended October 2, 2022. Gross margin for the 13-week period ended October 1, 2023 of  37.3% increased as compared to a gross margin of 31.3% for the 13-week period ended October 2, 2022. The increase in gross profit and gross profit margin was driven  primarily by higher sales volume and meaningful improvements in freight, lower warranty costs, and product mix.  

 

Selling, General and Administrative

 

Selling, general and administrative costs for the 13-week period ended October 1, 2023 decreased $3.0 million, or 9.5%, to $28.9 million, as compared to $31.9 million for the 13-week period ended October 2, 2022. When expressed as a percentage of sales, selling, general and administrative costs decreased to 18.5% of sales for the 13-week period ended October 1, 2023 compared to 20.6% of sales for the 13-week period ended October 2, 2022. The decrease in selling, general and administrative costs was driven by lower outbound shipping and handling costs, reflecting the implementation of cost-saving initiatives. 

 

Research and Development Costs

 

Research and development costs for the 13-week period ended October 1, 2023 were stable at $6.1 million as compared to $6.0 million for the 13-week period ended October 2, 2022. 

 

Amortization and Impairment of Intangible Assets

 

Amortization of intangible assets was stable at $3.7 million for both the 13-week periods ended October 1, 2023 and October 2, 2022. 

 

Acquisition and Restructuring Costs

 

Acquisition and restructuring costs for the 13-week period ended October 1, 2023 decreased $0.9 million to $0.4 million, as compared to $1.3 million for the 13-week period ended October 2, 2022, reflecting a reduction in restructuring activities associated with acquisitions.

 

Operating Income

 

As a result of factors described above, operating income for the 13-week period ended October 1, 2023 increased $16.3 million, or 531.0%, to $19.3 million, as compared to $3.1 million for the 13-week period ended October 2, 2022.

 

Change in Fair Value of Warrant Liability

 

For the 13-week period ended October 1, 2023, we recognized a loss of $2.1 million from the change in fair value of the 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. 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 1, 2023, we recognized a loss of $0.7 million from the change in fair value of the 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. The earn-out liability reflects the fair value of the unvested Earn-Out Shares resulting from the Business Combination. 

 

30

 

Interest Expense

 

Interest expense for the 13-week period ended October 1, 2023 increased $3.3 million, or 31.5%, to $13.7 million, as compared to $10.4 million for the 13-week period ended October 2, 2022, reflecting a higher effective interest rate on outstanding debt, net of a $1.1 million fair value adjustment on the interest rate collar.

 

Income before Income Taxes

 

As a result of factors described above, we recognized $2.8 million of income before income taxes for the 13-week period ended October 1, 2023, as compared to income before income taxes of $30.2 million for the 13-week period ended October 2, 2022.

 

Income Tax Expense

 

Income tax expense for the 13-week period ended October 1, 2023 was $2.1 million, as compared to an income tax benefit of $1.3 million for the 13-week period ended October 2, 2022. Our effective tax rate for the 13-week period ended October 1, 2023 was 73.6%. The difference between the effective tax rate for the 13-week period ended October 1, 2023 and the federal statutory rate in 2023 was due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities and foreign taxes in higher tax rate jurisdictions. The effective tax rate for the 13-week period ended October 2, 2022 was -4.4%. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities.

 

Net Income and Total Comprehensive Income 

 

As a result of factors described above, we recognized net income of $0.8 million for the 13-week period ended October 1, 2023, as compared to net income of $31.6 million for the 13-week period ended October 2, 2022. Additionally, we recognized total comprehensive income of $0.6 million for the 13-week period ended October 1, 2023, as compared to total comprehensive income of $32.1 million for the 13-week period ended October 2, 2022. Comprehensive income includes the effect of foreign currency translation adjustments.

 

31

 

39-Week Period Ended October 1, 2023 Compared With 39-Week Period Ended October 2, 2022

 

The table below presents Holley’s results of operations for the 39-week periods ended October 1, 2023 and October 2, 2022 (dollars in thousands):

 

   

For the thirty-nine weeks ended

 
   

October 1, 2023

   

October 2, 2022

   

Change ($)

   

Change (%)

 

Net sales

  $ 503,997     $ 534,250     $ (30,253 )     (5.7 )%

Cost of goods sold

    308,162       327,849       (19,687 )     (6.0 )%

Gross profit

    195,835       206,401       (10,566 )     (5.1 )%

Selling, general, and administrative

    87,998       102,532       (14,534 )     (14.2 )%

Research and development costs

    18,935       22,396       (3,461 )     (15.5 )%

Amortization of intangible assets

    11,040       10,985       55       0.5 %

Impairment of indefinite-lived intangible assets

          2,395       (2,395 )     (100.0 )%

Acquisition and restructuring costs

    2,106       3,247       (1,141 )     (35.1 )%

Other expense

    508       594       (86 )     (14.5 )%

Operating income

    75,248       64,252       10,996       17.1 %

Change in fair value of warrant liability

    5,516       (51,112 )     56,628       (110.8 )%

Change in fair value of earn-out liability

    2,089       (9,282 )     11,371       (122.5 )%

Interest expense

    41,909       26,780       15,129       56.5 %

Income before income taxes

    25,734       97,866       (72,132 )     (73.7 )%

Income tax expense

    7,756       8,866       (1,110 )     (12.5 )%

Net income

    17,978       89,000       (71,022 )     (79.8 )%

Foreign currency translation adjustment

    (103 )     1,258       (1,361 )     (108.2 )%

Total comprehensive income

  $ 17,875     $ 90,258     $ (72,383 )     (80.2 )%

 

Net Sales

 

Net sales for the 39-week period ended October 1, 2023 decreased $30.3 million, or 5.7%, to $504.0 million, as compared to $534.3 million for the 39-week period ended October 2, 2022. The decline in sales was driven by supply chain constraints in electronic components and a return to the sales trends experienced prior to the increased demand experienced during the COVID-19 pandemic. As a result, lower unit volume drove a decrease of approximately $43.2 million that was partially offset by improved price realization of approximately $12.9 million compared to the prior year period. Comparable year-over-year results by category include a decrease in safety products sales of $7.8 million (14.7% category decline), a decrease in electronic systems sales of $6.2 million (2.8% category decline), a decrease in accessories sales of $6.0 million (7.4% category decline), a decrease in mechanical systems sales of $5.3 million (4.1% category decline), and a decrease in exhaust system sales of $5.0 million (9.5% category decline).

 

Cost of Goods Sold

 

Cost of goods sold for the 39-week period ended October 1, 2023 decreased $19.7 million, or 6.0%, to $308.2 million, as compared to $327.8 million for the 39-week period ended October 2, 2022. The decrease in cost of goods sold during the 39-week period ended October 1, 2023 reflects the decrease in product sales during such periodcombined with lower freight costs

 

32

 

Gross Profit and Gross Margin

 

Gross profit for the  39-week period ended October 1, 2023 decreased  $10.6 million, or  5.1%, to  $195.8 million, as compared to  $206.4 million for the 39-week period ended October 2, 2022. Gross margin for the  39-week period ended October 1, 2023 was  38.9% as compared to a gross margin of  38.6% for the  39-week period ended October 2, 2022. The decrease in gross profit was driven primarily by lower sales.In general, gross margin and margins on individual products remain under pressure due to various factors, including potential increases in manufacturing costs and shifts in sales mix towards products with lower gross margins. 

 

Selling, General and Administrative

 

Selling, general and administrative costs for the 39-week period ended October 1, 2023 decreased $14.5 million, or 14.2%, to $88.0 million, as compared to $102.5 million for the 39-week period ended October 2, 2022. When expressed as a percentage of sales, selling, general and administrative costs decreased to 17.5% of sales for the 39-week period ended October 1, 2023 compared to 19.2% of sales in 2022. The decrease in selling, general and administrative costs was driven by lower equity compensation costs and the implementation of cost-saving initiatives, which resulted in decreases in personnel, outbound shipping and handling, and marketing costs. 

 

Research and Development Costs

 

Research and development costs for the 39-week period ended October 1, 2023 decreased $3.5 million, or 15.5%, to $18.9 million, as compared to $22.4 million for the 39-week period ended October 2, 2022. The decrease in research and development costs was primarily due to headcount reductions, reflecting the implementation of cost-saving initiatives.

 

Amortization and Impairment of Intangible Assets

 

Amortization of intangible assets was stable at $11.0 million for both the 39-week periods ended October 1, 2023 and October 2, 2022.

 

Acquisition and Restructuring Costs

 

Acquisition and restructuring costs for the 39-week period ended October 1, 2023 decreased $1.1 million to $2.1 million, as compared to $3.3 million for the 39-week period ended October 2, 2022, reflecting a reduction in restructuring activities associated with acquisitions.

 

Operating Income

 

As a result of factors described above, operating income for the 39-week period ended October 1, 2023 increased $11.0 million, or 17.1%, to $75.3 million, as compared to $64.3 million for the 39-week period ended October 2, 2022.

 

Change in Fair Value of Warrant Liability

 

For the 39-week period ended October 1, 2023 we recognized a loss of $5.5 million from the change in fair value of the 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. 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 1, 2023 we recognized a loss of $2.1 million from the change in fair value of the 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 earn-out liability. The earn-out liability reflects the fair value of the unvested Earn-Out Shares resulting from the Business Combination. 

 

33

 

Interest Expense

 

Interest expense for the 39-week period ended October 1, 2023 increased $15.1 million, or 56.5%, to $41.9 million, as compared to $26.8 million for the 39-week period ended October 2, 2022, reflecting a higher effective interest rate on outstanding debt, net of a $3.2 million fair value adjustment on the interest rate collar.

 

Income before Income Taxes

 

As a result of factors described above, we recognized $25.7 million of income before income taxes for the 39-week period ended October 1, 2023, as compared to income before income taxes of $97.9 million for the 39-week period ended October 2, 2022.

 

Income Tax Expense

 

Income tax expense for the 39-week period ended October 1, 2023 was $7.8 million, as compared to income tax expense of $8.9 million for the 39-week period ended October 2, 2022. The effective tax rate for the 39-week period ended October 1, 2023 was 30.1%. The difference between the effective tax rate for the 39-week period ended October 1, 2023 and the federal statutory rate in 2023 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities. Our effective tax rate for the 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.

 

Net Income and Total Comprehensive Income 

 

As a result of factors described above, we recognized net income of $18.0 million for the 39-week period ended October 1, 2023, as compared to net income of $89.0 million for the 39-week period ended October 2, 2022. Additionally, we recognized total comprehensive income of $17.9 million for the 39-week period ended October 1, 2023, as compared to total comprehensive income of $90.3 million for the 39-week period ended October 2, 2022. Comprehensive income includes the effect of foreign currency translation adjustments.

 

Non-GAAP Financial Measures

 

We present EBITDA and Adjusted EBITDA as supplemental measures of our operating performance and believe that such non-GAAP financial measures provide useful information to investors, because they exclude the impact of certain items that we do not consider indicative of our ongoing operating performance and we believe are useful in comparing the Company’s results of operations between periods. We believe that the presentation of EBITDA and Adjusted EBITDA enhances the usefulness of our financial information by presenting measures that management uses internally to establish forecasts, budgets and operational goals to manage and monitor our business. We believe that these non-GAAP financial measures help to depict a more realistic representation of the performance of our underlying business, enabling us to evaluate and plan more effectively for the future. 

 

We define EBITDA as earnings before depreciation, amortization of intangible assets, interest expense, and income tax expense. We define Adjusted EBITDA as EBITDA adjusted to exclude, to the extent applicable, acquisition and restructuring costs, which includes transaction fees and expenses, termination related benefits, facilities relocation, and executive transition costs; changes in the fair value of the warrant liability; changes in the fair value of the earn-out liability; equity-based compensation expense; impairment of intangible assets; non-cash charges due to our previously disclosed product rationalization initiative aimed at eliminating unprofitable or slow-moving stock keeping units, for which a partial reversal of the initial reserve was recognized during the 39-week period ended October 1, 2023; notable items that we do not believe are reflective of operating performance, which for the 39-week period ended October 1, 2023, includes certain costs incurred for advisory services related to identifying performance initiatives, and for the 39-week period ended October 2, 2022, includes a non-cash adjustment related to the adoption of ASC Topic 842, “Leases,” and legal fees and costs related to a settlement; and other expenses or gains, which includes gains or losses from disposal of fixed assets, franchise taxes, and gains or losses from foreign currency transactions.

 

EBITDA and Adjusted EBITDA are not prepared in accordance with 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.

 

34

 

The following unaudited table presents the reconciliation of net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the 13-week and 39-week periods ended October 1, 2023 and October 2, 2022 (dollars in thousands):

 

   

For the thirteen weeks ended

   

For the thirty-nine weeks ended

 
   

October 1, 2023

   

October 2, 2022

   

October 1, 2023

   

October 2, 2022

 

Net income

  $ 752     $ 31,579     $ 17,978     $ 89,000  

Adjustments:

                               

Depreciation

    2,785       2,837       7,738       7,500  

Amortization of intangible assets

    3,687       3,662       11,040       10,985  

Interest expense, net

    13,712       10,428       41,909       26,780  

Income tax expense (benefit)

    2,092       (1,345 )     7,756       8,866  

EBITDA

    23,028       47,161       86,421       143,131  

Acquisition and restructuring costs

    415       1,266       2,106       3,247  

Impairment of indefinite-lived intangible assets

          2,395             2,395  

Change in fair value of warrant liability

    2,064       (30,171 )     5,516       (51,112 )

Change in fair value of earn-out liability

    700       (7,429 )     2,089       (9,282 )

Equity-based compensation expense

    2,970       2,873       5,170       9,518  

Product rationalization

                (800 )      

Notable items

    556       213       564       1,097  

Other expense (gain)

    (28 )     47       508       594  

Adjusted EBITDA

  $ 29,705     $ 16,355     $ 101,574     $ 99,588  

 

Liquidity and Capital Resources

 

Our primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. We have generally financed our historical needs with operating cash flows, capital contributions and borrowings under our credit facilities. These sources of liquidity may be impacted by various factors, including demand for our products, investments made in acquired businesses, plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.

 

As of October 1, 2023, the Company had cash of $36.8 million and availability of $123.3 million under its revolving credit facility. The Company has a senior secured revolving credit facility with $125 million in borrowing capacity. As of October 1, 2023, the Company had $1.7 million in letters of credit outstanding under the revolving credit facility. In February 2023, the Company entered into an amendment to its Credit Agreement which, among other things, contains a minimum liquidity financial covenant of $45 million, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility. The amendment also increases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of the fiscal quarter ending April 2, 2023 through the fiscal quarter ending March 31, 2024, to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter.

 

The Company is obligated under various operating leases for facilities, equipment and automobiles with estimated lease payments of approximately $1.9 million, including short term leases, due during the remainder of fiscal year 2023. See Note 16, "Lease Commitments" in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information related to the Company’s lease obligations.

 

Holley's capital expenditures are primarily related to ongoing maintenance and improvements, including investments related to upgrading and maintaining our information technology systems, tooling for new products, vehicles for product development, and machinery and equipment for operations. We expect capital expenditures in the range of $6 million to $8 million in fiscal year 2023.

 

See Note 7, "Debt" in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further detail of our credit facility and the timing of principal maturities. As of October 1, 2023, based on the then current weighted average interest rate of 9.4%, expected interest payments associated with outstanding debt totaled approximately $14.6 million for the remainder of fiscal year 2023. 

 

As discussed under “Business Environment” above, although the future impact of supply chain disruptions and inflationary pressures are highly uncertain, we believe that cash generated through our current operating performance, and our operating plans, cash position, and borrowings available under our revolving credit facility, will be sufficient to satisfy our liquidity needs and capital expenditure requirements for the next 12 months and thereafter for the foreseeable future.

 

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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 1, 2023 Compared With 39-week period ended October 2, 2022

 

   

For the thirty-nine weeks ended

 
   

October 1, 2023

   

October 2, 2022

 

Cash flows provided by operating activities

  $ 56,863     $ 12,164  

Cash flows used in investing activities

    (3,125 )     (25,349 )

Cash flows used in financing activities

    (42,998 )     (5,457 )

Effect of foreign currency rate fluctuations on cash

    (57 )     (1,077 )

Net (decrease) increase in cash and cash equivalents

  $ 10,683     $ (19,719 )

 

Operating Activities. Net cash provided by operating activities for the 39-week period ended October 1, 2023 was $56.9 million compared to net cash provided by operating activities of $12.2 million for the 39-week period ended October 2, 2022. Net income decreased $71.0 million to $18.0 million for the 39-week period ended October 1, 2023 from $89.0 million for the 39-week period ended October 2, 2022, largely due to a $68.0 million year-over-year impact of non-cash valuation adjustments for warrants and earn out liabilities. Significant changes in the year-over-year change in working capital activity included positive fluctuations from inventories of $67.4 million and accounts receivable of $7.5 million. Partially offsetting these increases were negative fluctuations in accrued interest of $7.1 million and accrued liabilities of $4.5 million. The change in inventory reflects the impact of inventory management initiatives and fluctuations in sales while changes in accounts receivable and accrued liabilities are impacted by the timing of payments.

 

Investing Activities. Cash used in investing activities for the 39-week period ended October 1, 2023 was $3.1 million which primarily reflects capital expenditures. Cash used in investing activities for the 39-week period ended October 2, 2022 was $25.4 million which included $11.7 million due to capital expenditures and $14.1 million due to acquisitions.

 

Financing Activities. Cash used in financing activities for the 39-week period ended October 1, 2023 was $43.0 million, which primarily reflects $40.4 million in principal payments on long-term debt. The principal payments of long-term debt during the 39-week period ended October 1, 2023 includes the Company’s pay down of an aggregate of $24.8 million in principal on its outstanding first lien term loan by repurchasing $13.8 million at a discount to par and making a voluntary prepayment of $11.0 million during the 13-week period ended October 1, 2023.  Cash used in financing activities for the 39-week period ended October 2, 2022 was $5.5 million primarily due to $31.8 million in principal payments on long-term debt, which was partially offset by $27.0 million in borrowings under the delayed draw term loan to finance acquisitions.

 

Critical Accounting Estimates

 

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgements and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures. We evaluate our estimates, judgements and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. For a discussion of our critical accounting estimates, refer to the section entitled “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023. For further information see also Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. There have been no material changes to the Company’s critical accounting estimates included in our Annual Report on Form 10-K for the year ended December 31, 2022.

 

Recent Accounting Pronouncements

 

For a discussion of Holley’s new or recently adopted accounting pronouncements, see Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Interest Rate Risk. Holley is exposed to market risk in the normal course of business due to the Company’s ongoing investing and financing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Holley has established policies and procedures governing the Company’s management of market risks and the use of financial instruments to manage exposure to such risks. When appropriate, the Company uses derivative financial instruments to mitigate the risk from its interest rate exposure. The Company's interest rate collar is intended to mitigate some of the effects of increases in interest rates. As of October 1, 2023, a total of $619.2 million of term loan and revolver borrowings were subject to variable interest rates, with a weighted average borrowing rate of 9.4%. A hypothetical 100 basis point increase in interest rates would result in an approximately $1.2 million increase in annual interest expense, while a hypothetical 100 basis point decrease in interest rates would result in an approximately $2.9 million decrease to Holley’s annual interest expense.

 

Credit and other Risks. Holley is exposed to credit risk associated with cash and cash equivalents and trade receivables. As of October 1, 2023, the majority of the Company’s cash and cash equivalents consisted of cash balances in non-interest bearing checking accounts which exceed the insurance coverage provided on such deposits. The Company does not believe that its cash equivalents present significant credit risks because the counterparties to the instruments consist of major financial institutions. Substantially all trade receivable balances of the business are unsecured. The credit risk with respect to trade receivables is concentrated by the number of significant customers that the Company has in its customer base and a prolonged economic downturn could increase exposure to credit risk on the Company’s trade receivables. To manage exposure to such risks, Holley performs ongoing credit evaluations of the Company’s customers and maintains an allowance for potential credit losses.

 

Exchange Rate Sensitivity. As of October 1, 2023, the Company is exposed to changes in foreign currency exchange rates. While historically this exposure to changes in foreign currency exchange rates has not had a material effect on the Company’s financial condition or results of operations, foreign currency fluctuations could have a material adverse effect on business and results of operations in the future. Historically, Holley’s primary exposure has been related to transactions denominated in the Euro and Canadian dollars. The majority of the Company’s sales, both domestically and internationally, are denominated in U.S. Dollars. Historically, the majority of the Company’s expenses have also been in U.S. Dollars and we have been somewhat insulated from currency fluctuations. However, Holley may be exposed to greater exchange rate sensitivity in the future. Currently, the Company does not hedge foreign currency exposure; however, the Company may consider strategies to mitigate foreign currency exposure in the future if deemed necessary.

 

Item 4. Controls and Procedures.

 

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of October 1, 2023 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

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Part II - Other Information

 

Item 1. Legal Proceedings

 

See Litigation in Note 18 “Commitments and Contingencies” to the Condensed Consolidated Financial Statements, which is incorporated by reference in this Item 1. Legal Proceedings.

 

Item 1A. Risk Factors

 

We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. Factors that could materially affect our actual results, levels of activity, performance or achievements include, but are not limited to, those under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023. Such risks, uncertainties and other factors may cause our actual results, performance, and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occur, our business, financial condition or results of operations may be adversely affected.

 

There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023, except for the addition of the following risk factor:

 

Recent events affecting the financial services industry could have an adverse impact on the Company's business operations, financial condition, and results of operations.

 

The closures of certain regional banks have created bank-specific and broader financial institution liquidity risk and concerns. Future adverse developments with respect to specific financial institutions or the broader financial services industry may lead to market-wide liquidity shortages, impair the ability of companies to access working capital needs, and create additional market and economic uncertainty. 

 

Although we do not have any funds in any of the banks that have been placed into receivership to date, we cannot guarantee that the banks or other financial institutions that hold our funds will not experience similar issues. These events have resulted in market disruption and volatility and could lead to greater instability in the credit and financial markets and a deterioration in confidence in economic conditions. Our operations may be adversely affected by any such economic downturn, liquidity shortages, volatile business environments, or unpredictable market conditions. These events could also make any necessary debt or equity financing more difficult and/or costly. 

 

The future effect of these events on the financial services industry and broader economy are unknown and difficult to predict but could include failures of other financial institutions to which we or our customers, vendors, or other counterparties face direct or more significant exposure. Any such developments could adversely impact our results of operation and financial position. There may be other risks we have not yet identified. We are working to identify any potential impact of these events on our business in order to minimize any disruptions to our operations. However, we cannot guarantee we will be able to avoid any negative consequences relating to these recent developments or any future related developments.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

Item 5. Other Information

 

Trading Plans

 

During the fiscal quarter ended October 1, 2023, no director or Section 16 officer adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S-K).

 

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Item 6. Exhibits

 

Exhibit No.

 

Description

2.1

 

Agreement and Plan of Merger, dated as of March 11, 2021, by and among Empower Ltd., Empower Merger Sub I Inc., Empower Merger Sub II LLC and Holley Intermediate Holdings, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the SEC on March 12, 2021).

3.1

 

Certificate of Incorporation of the Company, dated July 16, 2021 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed with the SEC on July 21, 2021).

3.2

 

Amended and Restated By-Laws of the Company, dated August 8, 2023 (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K, filed with the SEC on August 9, 2023).

31.1

 

Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act

31.2

 

Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act

32.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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)

 

 

39

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Holley Inc.

 

/s/ Jesse Weaver

Jesse Weaver

Chief Financial Officer (Duly Authorized Officer)

 

November 8, 2023

 

40