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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 June 30, 2024
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________to__________
Commission file number: 001-39599
HOLLEY INC.
(Exact name of registrant as specified in its charter)
Delaware | 87-1727560 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1801 Russellville Road, Bowling Green, KY 42101
(Address of principal executive offices)
(270) 782-2900
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report) N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.0001 Warrants to purchase common stock | | HLLY HLLY WS | | New York Stock Exchange New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | | ☐ | | Accelerated filer | | ☒ |
| | | | | | |
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 119,777,222 shares of Common Stock, including 1,093,750 restricted earn-out shares, par value $0.0001 per share, issued and outstanding as of August 5, 2024.
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 the Middle East, 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, whether through anticipated organic or external growth initiatives or through the implementation of cost savings initiatives; |
|
• |
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; |
|
• |
manage 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; |
|
• |
obtain additional capital, including through the sale of equity or debt securities; |
|
• |
finance operations on an economically viable basis; |
|
• |
maintain Holley’s New York Stock Exchange (“NYSE”) listing of its common stock (“Common Stock”) and warrants to purchase Common Stock ("Warrants"); |
|
• |
comply with existing and/or future laws and regulations applicable to our business, including laws and regulations related to environmental health and safety and the recently issued required climate-related disclosures; |
|
• |
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, 2023, as filed with the U.S. Securities and Exchange Commission (the "SEC") on March 14, 2024, and/or as disclosed in any subsequent filings with the SEC. |
Forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and our management’s expectations, forecasts and assumptions, and involve a number of judgements, risks and uncertainties, and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
HOLLEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
| | As of | |
| | June 30, 2024 | | | December 31, 2023 | |
ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 53,080 | | | $ | 41,081 | |
Accounts receivable, less allowance for credit losses of $1,544 and $1,577 respectively | | | 56,061 | | | | 48,360 | |
Inventory | | | 173,518 | | | | 192,260 | |
Prepaids and other current assets | | | 16,348 | | | | 15,665 | |
Assets held for sale | | | 2,096 | | | | - | |
Total current assets | | | 301,103 | | | | 297,366 | |
Property, plant, and equipment, net | | | 43,491 | | | | 47,206 | |
Goodwill | | | 419,056 | | | | 419,056 | |
Other intangibles assets, net | | | 403,483 | | | | 410,465 | |
Right-of-use assets | | | 29,767 | | | | 29,250 | |
Other noncurrent assets | | | 1,191 | | | | — | |
Total assets | | $ | 1,198,091 | | | $ | 1,203,343 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
Accounts payable | | $ | 58,595 | | | $ | 43,692 | |
Accrued interest | | | 359 | | | | 455 | |
Accrued liabilities | | | 41,130 | | | | 42,129 | |
Current portion of long-term debt | | | 7,437 | | | | 7,461 | |
Total current liabilities | | | 107,521 | | | | 93,737 | |
Long-term debt, net of current portion | | | 548,698 | | | | 576,710 | |
Warrant liability | | | 1,854 | | | | 8,383 | |
Earn-out liability | | | 1,772 | | | | 3,479 | |
Deferred taxes | | | 48,642 | | | | 53,542 | |
Other noncurrent liabilities | | | 26,435 | | | | 26,341 | |
Total liabilities | | | 734,922 | | | | 762,192 | |
Commitments and contingencies (Refer to Note 15 - Commitments and Contingencies) | | | | | | | | |
Stockholders' equity: | | | | | | | | |
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding on June 30, 2024 and December 31, 2023 | | | — | | | | — | |
Common stock, $0.0001 par value, 550,000,000 shares authorized, 118,683,472 and 117,707,280 shares issued and outstanding on June 30, 2024 and December 31, 2023, respectively | | | 12 | | | | 12 | |
Additional paid-in capital | | | 375,194 | | | | 373,869 | |
Accumulated other comprehensive loss | | | (852 | ) | | | (710 | ) |
Retained earnings | | | 88,815 | | | | 67,980 | |
Total stockholders' equity | | | 463,169 | | | | 441,151 | |
Total liabilities and stockholders' equity | | $ | 1,198,091 | | | $ | 1,203,343 | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOLLEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
|
|
For the thirteen weeks ended |
|
|
For the twenty-six weeks ended |
|
|
|
June 30, 2024 |
|
|
July 2, 2023 |
|
|
June 30, 2024 |
|
|
July 2, 2023 |
|
Net sales |
|
$ |
169,496 |
|
|
$ |
175,262 |
|
|
$ |
328,132 |
|
|
$ |
347,467 |
|
Cost of goods sold |
|
|
99,203 |
|
|
|
105,514 |
|
|
|
205,780 |
|
|
|
210,006 |
|
Gross profit |
|
|
70,293 |
|
|
|
69,748 |
|
|
|
122,352 |
|
|
|
137,461 |
|
Selling, general, and administrative |
|
|
34,570 |
|
|
|
29,101 |
|
|
|
67,566 |
|
|
|
59,118 |
|
Research and development costs |
|
|
4,311 |
|
|
|
6,182 |
|
|
|
9,123 |
|
|
|
12,835 |
|
Amortization of intangible assets |
|
|
3,435 |
|
|
|
3,674 |
|
|
|
6,871 |
|
|
|
7,353 |
|
Restructuring costs |
|
|
(3 |
) |
|
|
352 |
|
|
|
612 |
|
|
|
1,691 |
|
Other operating expense |
|
|
102 |
|
|
|
485 |
|
|
|
94 |
|
|
|
536 |
|
Total operating expense |
|
|
42,415 |
|
|
|
39,794 |
|
|
|
84,266 |
|
|
|
81,533 |
|
Operating income |
|
|
27,878 |
|
|
|
29,954 |
|
|
|
38,086 |
|
|
|
55,928 |
|
Change in fair value of warrant liability |
|
|
(3,402 |
) |
|
|
2,017 |
|
|
|
(6,529 |
) |
|
|
3,452 |
|
Change in fair value of earn-out liability |
|
|
(1,058 |
) |
|
|
961 |
|
|
|
(1,707 |
) |
|
|
1,389 |
|
Loss on early extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
141 |
|
|
|
— |
|
Interest expense, net |
|
|
13,178 |
|
|
|
9,899 |
|
|
|
24,182 |
|
|
|
28,197 |
|
Total non-operating expense |
|
|
8,718 |
|
|
|
12,877 |
|
|
|
16,087 |
|
|
|
33,038 |
|
Income before income taxes |
|
|
19,160 |
|
|
|
17,077 |
|
|
|
21,999 |
|
|
|
22,890 |
|
Income tax expense |
|
|
2,055 |
|
|
|
4,098 |
|
|
|
1,164 |
|
|
|
5,664 |
|
Net income |
|
$ |
17,105 |
|
|
$ |
12,979 |
|
|
$ |
20,835 |
|
|
$ |
17,226 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
44 |
|
|
|
272 |
|
|
|
(142 |
) |
|
|
73 |
|
Total comprehensive income |
|
$ |
17,149 |
|
|
$ |
13,251 |
|
|
$ |
20,693 |
|
|
$ |
17,299 |
|
Common Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic |
|
|
118,470,358 |
|
|
|
117,221,419 |
|
|
|
118,171,093 |
|
|
|
117,187,287 |
|
Weighted average common shares outstanding - diluted |
|
|
119,261,236 |
|
|
|
117,868,922 |
|
|
|
119,383,282 |
|
|
|
117,556,657 |
|
Basic net income per share |
|
$ |
0.14 |
|
|
$ |
0.11 |
|
|
$ |
0.18 |
|
|
$ |
0.15 |
|
Diluted net income per share |
|
$ |
0.14 |
|
|
$ |
0.11 |
|
|
$ |
0.17 |
|
|
$ |
0.15 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOLLEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
|
|
Common Stock |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-In |
|
|
Comprehensive |
|
|
Retained |
|
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Loss |
|
|
Earnings |
|
|
Total |
|
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 3, 2023 |
|
|
117,249,854 |
|
|
|
12 |
|
|
|
370,249 |
|
|
|
(871 |
) |
|
|
66,026 |
|
|
|
435,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2023 |
|
|
117,707,280 |
|
|
$ |
12 |
|
|
$ |
373,869 |
|
|
$ |
(710 |
) |
|
$ |
67,980 |
|
|
$ |
441,151 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,730 |
|
|
|
3,730 |
|
Equity compensation |
|
|
— |
|
|
|
— |
|
|
|
1,141 |
|
|
|
— |
|
|
|
— |
|
|
|
1,141 |
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(186 |
) |
|
|
— |
|
|
|
(186 |
) |
Tax withholding related to vesting of restricted stock units |
|
|
— |
|
|
|
— |
|
|
|
(921 |
) |
|
|
— |
|
|
|
— |
|
|
|
(921 |
) |
Issuance of shares for restricted stock units |
|
|
604,061 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance at March 31, 2024 |
|
|
118,311,341 |
|
|
$ |
12 |
|
|
$ |
374,089 |
|
|
$ |
(896 |
) |
|
$ |
71,710 |
|
|
$ |
444,915 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,105 |
|
|
|
17,105 |
|
Equity compensation |
|
|
— |
|
|
|
— |
|
|
|
1,621 |
|
|
|
— |
|
|
|
— |
|
|
|
1,621 |
|
Foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
44 |
|
|
|
— |
|
|
|
44 |
|
Tax withholding related to vesting of restricted stock units |
|
|
— |
|
|
|
— |
|
|
|
(516 |
) |
|
|
— |
|
|
|
— |
|
|
|
(516 |
) |
Issuance of shares for restricted stock units |
|
|
372,131 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance at June 30, 2024 |
|
|
118,683,472 |
|
|
$ |
12 |
|
|
$ |
375,194 |
|
|
$ |
(852 |
) |
|
$ |
88,815 |
|
|
$ |
463,169 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOLLEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
For the twenty-six weeks ended |
|
|
|
June 30, 2024 |
|
|
July 2, 2023 |
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
20,835 |
|
|
$ |
17,226 |
|
Adjustments to reconcile net income to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
5,133 |
|
|
|
4,953 |
|
Amortization of intangible assets |
|
|
6,871 |
|
|
|
7,353 |
|
Amortization of deferred loan costs |
|
|
871 |
|
|
|
901 |
|
Amortization of right of use assets |
|
|
2,810 |
|
|
|
2,707 |
|
Fair value adjustments to warrant liability |
|
|
(6,529 |
) |
|
|
3,452 |
|
Fair value adjustments to earn-out liability |
|
|
(1,707 |
) |
|
|
1,389 |
|
Fair value adjustments to interest rate collar |
|
|
(2,355 |
) |
|
|
(2,068 |
) |
Equity compensation |
|
|
2,762 |
|
|
|
2,200 |
|
Change in deferred taxes |
|
|
(4,901 |
) |
|
|
(10,663 |
) |
Loss on early extinguishment of long-term debt |
|
|
141 |
|
|
|
- |
|
Loss (gain) on disposal of property, plant and equipment |
|
|
(568 |
) |
|
|
69 |
|
Provision for inventory reserves |
|
|
11,694 |
|
|
|
2,973 |
|
Provision for credit losses |
|
|
369 |
|
|
|
717 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(8,114 |
) |
|
|
(10,707 |
) |
Inventories |
|
|
6,814 |
|
|
|
11,691 |
|
Prepaids and other current assets |
|
|
(716 |
) |
|
|
2,239 |
|
Accounts payable |
|
|
14,951 |
|
|
|
(1,337 |
) |
Accrued interest |
|
|
(96 |
) |
|
|
267 |
|
Accrued and other liabilities |
|
|
(3,744 |
) |
|
|
1,021 |
|
Net cash provided by operating activities |
|
|
44,521 |
|
|
|
34,383 |
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(2,645 |
) |
|
|
(2,738 |
) |
Proceeds from the disposal of fixed assets |
|
|
229 |
|
|
|
356 |
|
Net cash used in investing activities |
|
|
(2,416 |
) |
|
|
(2,382 |
) |
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Principal payments on long-term debt |
|
|
(28,605 |
) |
|
|
(14,072 |
) |
Deferred financing fees |
|
|
— |
|
|
|
(1,427 |
) |
Payments from stock-based award activities |
|
|
(1,437 |
) |
|
|
(73 |
) |
Net cash used in financing activities |
|
|
(30,042 |
) |
|
|
(15,572 |
) |
Effect of foreign currency rate fluctuations on cash |
|
|
(64 |
) |
|
|
161 |
|
Net change in cash and cash equivalents |
|
|
11,999 |
|
|
|
16,590 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
41,081 |
|
|
|
26,150 |
|
End of period |
|
$ |
53,080 |
|
|
$ |
42,740 |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
26,582 |
|
|
$ |
29,097 |
|
Cash paid for income taxes |
|
|
6,361 |
|
|
|
12,021 |
|
Supplemental non-cash investing activity: |
|
|
|
|
|
|
|
|
Property and equipment additions included in accounts payable |
|
$ |
124 |
|
|
$ |
— |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
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 designs, manufactures and distributes high-performance automotive products to car and truck enthusiasts 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, as well as by geopolitical events, including the conflict in Ukraine, the conflict in the Middle East, and the possible expansion of such conflicts and potential geopolitical consequences. The Company's business is impacted by various economic factors that affect both consumers and the automotive aftermarket industry, including by not limited to inflation, fuel costs, wage rates, supply chain disruptions, hiring, and other economic conditions. In response to inflationary impacts and supply chain disruptions, the Company has attempted to minimize potential adverse impacts on its business with cost savings initiatives, price increases to customers, and increased attention to maintaining appropriate inventory levels in the distribution channel. The Company's profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales to lower-margin products, and demands on our performance that increase our costs. Should the ongoing macroeconomic conditions not improve, or worsen, or if the Company's attempt to mitigate the impact on its supply chain, operations and costs is not successful, the Company’s business, results of operations and financial condition may be adversely affected.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or “GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2023, as filed with the SEC on March 14, 2024, 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.
9
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
The Company operates on a fiscal year that ends on December 31. The three- and six-month periods ended June 30, 2024 and July 2, 2023 each included 13 weeks and 26 weeks, respectively.
Principles of Consolidation
These unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
Recent Accounting Pronouncements
Accounting Standards Not Yet Adopted
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to SEC's Disclosure Update and Simplification Initiative. This ASU amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification. The effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company will monitor the removal of various requirements from the current regulations in order to determine when to adopt the related amendments, but it does not anticipate that the adoption of the new guidance will have a material impact on the Company’s consolidated financial statements and related disclosures. The Company will continue to evaluate the impact of this guidance on its consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The standard requires interim and annual disclosure of significant segment expenses that are regularly provided to the chief operating decision-maker ("CODM") and included within the reported measure of a segment’s profit or loss, requires interim disclosures about a reportable segment’s profit or loss and assets that are currently required annually, requires disclosure of the position and title of the CODM, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, and contains other disclosure requirements. This ASU is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the effect of this new guidance on its consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires additional disclosures of various income tax components that affect the rate reconciliation based on the applicable taxing jurisdictions, as well as the qualitative and quantitative aspects of those components. The standard also requires information pertaining to taxes paid to be disaggregated for federal, state and foreign taxes, and contains other disclosure requirements. This ASU is effective for fiscal years beginning after December 15, 2024 and interim periods within fiscal years beginning after December 15, 2025, with early adoption permitted. The Company is currently evaluating the effect of this new guidance on its consolidated financial statements and related disclosures.
Inventories of the Company consisted of the following:
| | As of | |
| | June 30, 2024 | | | December 31, 2023 | |
Raw materials | | $ | 36,769 | | | $ | 63,552 | |
Work-in-process | | | 23,256 | | | | 22,619 | |
Finished goods | | | 113,493 | | | | 106,089 | |
| | $ | 173,518 | | | $ | 192,260 | |
During the 13-week and 26-week periods ended June 30, 2024, the Company recognized inventory (gains) charges of ($878) and $8,835, respectively, primarily due to product rationalization initiatives aimed at eliminating unprofitable or slow-moving stock keeping units.
10
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
3. | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment of the Company consisted of the following:
| | As of | |
| | June 30, 2024 | | | December 31, 2023 | |
Land | | $ | 1,230 | | | $ | 3,326 | |
Buildings and improvements | | | 12,186 | | | | 11,404 | |
Machinery and equipment | | | 74,692 | | | | 73,332 | |
Construction in process | | | 7,099 | | | | 6,224 | |
Total property, plant and equipment | | | 95,207 | | | | 94,286 | |
Less: accumulated depreciation | | | 51,716 | | | | 47,080 | |
Property, plant and equipment, net | | $ | 43,491 | | | $ | 47,206 | |
The Company’s long-lived assets by geographic locations are as follows:
| | As of | |
| | June 30, 2024 | | | December 31, 2023 | |
United States | | $ | 40,648 | | | $ | 44,931 | |
International | | | 2,843 | | | | 2,275 | |
Total property, plant and equipment, net | | $ | 43,491 | | | $ | 47,206 | |
4. | GOODWILL AND OTHER INTANGIBLE ASSETS |
Goodwill represents the premium paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company's business combinations. There were no changes to goodwill during the 26-week period ended June 30, 2024.
No goodwill impairment charges were incurred during the 13-week and 26-week periods ended June 30, 2024 and July 2, 2023. 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.
11
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
Intangible assets consisted of the following:
| | June 30, 2024 | |
| | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Value | |
Finite-lived intangible assets: | | | | | | | | | | | | |
Customer relationships | | $ | 269,950 | | | $ | (61,509 | ) | | $ | 208,441 | |
Tradenames | | | 13,775 | | | | (5,931 | ) | | | 7,844 | |
Technology | | | 26,676 | | | | (14,532 | ) | | | 12,144 | |
Total finite-lived intangible assets | | $ | 310,401 | | | $ | (81,972 | ) | | $ | 228,429 | |
| | | | | | | | | | | | |
Indefinite-lived intangible assets: | | | | | | | | | | | | |
Tradenames | | $ | 175,054 | | | | — | | | $ | 175,054 | |
| | December 31, 2023 | |
| | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Value | |
Finite-lived intangible assets: | | | | | | | | | | | | |
Customer relationships | | $ | 269,950 | | | $ | (55,732 | ) | | $ | 214,218 | |
Tradenames | | | 13,775 | | | | (5,569 | ) | | | 8,206 | |
Technology | | | 26,676 | | | | (13,800 | ) | | | 12,876 | |
Total finite-lived intangible assets | | $ | 310,401 | | | $ | (75,101 | ) | | $ | 235,300 | |
| | | | | | | | | | | | |
Indefinite-lived intangible assets: | | | | | | | | | | | | |
Tradenames | | $ | 175,165 | | | | — | | | $ | 175,165 | |
The following outlines the estimated future amortization expense related to intangible assets held as of June 30, 2024:
2024 (excluding the twenty-six weeks ended June 30, 2024) | | $ | 6,872 | |
2025 | | | 13,713 | |
2026 | | | 13,608 | |
2027 | | | 13,602 | |
2028 | | | 13,602 | |
Thereafter | | | 167,032 | |
Total | | $ | 228,429 | |
Accrued liabilities of the Company consisted of the following:
| | As of | |
| | June 30, 2024 | | | December 31, 2023 | |
Accrued freight | | $ | 4,652 | | | $ | 5,654 | |
Accrued employee compensation and benefits | | | 9,601 | | | | 11,696 | |
Accrued returns and allowances | | | 13,594 | | | | 11,267 | |
Accrued taxes | | | 450 | | | | 1,475 | |
Current portion of operating lease liabilities | | | 4,302 | | | | 4,948 | |
Accrued other | | | 8,531 | | | | 7,089 | |
Total accrued liabilities | | $ | 41,130 | | | $ | 42,129 | |
12
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
Debt of the Company consisted of the following:
| | As of | |
| | June 30, 2024 | | | December 31, 2023 | |
First lien term loan due November 17, 2028 | | $ | 564,219 | | | $ | 592,505 | |
Revolver | | | — | | | | — | |
Other | | | 1,098 | | | | 1,974 | |
Less unamortized debt issuance costs | | | (9,182 | ) | | | (10,308 | ) |
| | | 556,135 | | | | 584,171 | |
Less current portion of long-term debt | | | (7,437 | ) | | | (7,461 | ) |
| | $ | 548,698 | | | $ | 576,710 | |
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. 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 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 $2,150 in outstanding letters of credit on June 30, 2024.
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 2023, no excess cash flow payment is required in 2024. Any such payments offset future mandatory quarterly payments. The Credit Agreement permits voluntary prepayments at any time, in whole or in part. The Company repurchased $25,000 outstanding principal on its first lien term loan at a discount to par during the 26-week period ended June 30, 2024.
As of June 30, 2024, 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 June 30, 2024, the weighted average interest rate on the Company's borrowings under the credit facility was 9.2%.
The Company has entered into an interest rate collar in the notional amount of $500,000 to hedge the Company's exposure to fluctuations in interest rates on its variable-rate debt. Refer to Note 8, "Derivative Instruments," for additional information.
Obligations under the Credit Agreement are secured by substantially all of the Company’s assets, including a secured interest in the Company's headquarter, with a carrying value of $5,847. 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.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
In February 2023, the Company entered into an amendment to the Credit Agreement which, among other things, increases the Total Leverage Ratio applicable under the Credit Agreement as of the quarter ending April 2, 2023 to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter through the fiscal quarter ending June 30, 2024 (the “Covenant Relief Period”). As of June 30, 2024, the required Total Leverage Ratio was5.00:1.00.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 June 30, 2024, 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 June 30, 2024 are as follows:
| | Debt | | | Debt Issuance Costs | |
2024 (excluding the twenty-six weeks ended June 30, 2024) | | $ | 3,733 | | | $ | 871 | |
2025 | | | 7,223 | | | | 1,876 | |
2026 | | | 6,571 | | | | 2,034 | |
2027 | | | 6,571 | | | | 2,209 | |
2028 | | | 541,219 | | | | 2,192 | |
| | $ | 565,317 | | | $ | 9,182 | |
7. | COMMON STOCK WARRANTS AND EARN-OUT LIABILITY |
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”). 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.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
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 June 30, 2024 and December 31, 2023, a warrant liability with a fair value of $1,854 and $8,383, respectively, was reflected as a long-term liability in the condensed consolidated balance sheet. A decrease of $3,402 and an increase of $2,017 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 June 30, 2024 and July 2, 2023, respectively. A decrease of $6,529 and an increase of $3,452 in the fair value of the warrant liability was reflected as change in fair value of warrant liability in the condensed consolidated statements of comprehensive income for the 26-week periods ended June 30, 2024 and July 2, 2023, respectively.
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 June 30, 2024 and December 31, 2023, an earn-out liability with a fair value of $1,772 and $3,479, respectively, was reflected as a long-term liability in the condensed consolidated balance sheet. A decrease of $1,058 and an increase of $961 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 June 30, 2024 and July 2, 2023, respectively. A decrease of $1,707 and an increase of $1,389 in the fair value of the earn-out liability was reflected as change in fair value of earn-out liability in the condensed consolidated statements of comprehensive income for the 26-week periods ended June 30, 2024 and July 2, 2023, respectively.
8. | 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 June 30, 2024, the Company recognized a derivative asset of $1,191 for the Collar in other noncurrent assets on the condensed consolidated balance sheet. The Company recorded a net change in the fair value of the Collar as a decrease to interest expense of $74 and $2,355, for the 13-week and 26-week periods ended June 30, 2024, respectively. Cash receipts for the Collar totaled $399 and $868 for the 13-week and 26-week periods ended June 30, 2024, respectively.
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 9, "Fair Value Measurements").
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
9. | 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 June 30, 2024 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | | | | | | | | | | | | | | | |
Interest rate collar | | $ | — | | | $ | 1,191 | | | $ | — | | | $ | 1,191 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Warrant liability (Public) | | $ | 1,245 | | | $ | — | | | $ | — | | | $ | 1,245 | |
Warrant liability (Private) | | | — | | | | — | | | | 609 | | | | 609 | |
Earn-out liability | | | — | | | | — | | | | 1,772 | | | | 1,772 | |
Total fair value liabilities | | $ | 1,245 | | | $ | — | | | $ | 2,381 | | | $ | 3,626 | |
| | Fair Value Measured on December 31, 2023 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Liabilities: | | | | | | | | | | | | | | | | |
Warrant liability (Public) | | $ | 5,480 | | | $ | — | | | $ | — | | | $ | 5,480 | |
Warrant liability (Private) | | | — | | | | — | | | | 2,903 | | | | 2,903 | |
Earn-out liability | | | — | | | | — | | | | 3,479 | | | | 3,479 | |
Interest rate collar liability | | | — | | | | 1,164 | | | | — | | | | 1,164 | |
Total fair value liabilities | | $ | 5,480 | | | $ | 1,164 | | | $ | 6,382 | | | $ | 13,026 | |
As of June 30, 2024, 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 7, “Common Stock Warrants and Earn-Out Liability,” and Note 8, "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. Changes in the fair value of the derivative liabilities related to Warrants and the earn-out liability and changes in the fair value of the Collar are recognized in net cash provided by operating activities on the condensed consolidated statements of cash flows.
The fair value of Private Warrants was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:
| | June 30, 2024 | | | December 31, 2023 | |
Valuation date price | | $ | 3.58 | | | $ | 4.87 | |
Strike price | | $ | 11.50 | | | $ | 11.50 | |
Remaining life (in years) | | | 2.04 | | | | 2.54 | |
Expected dividend | | $ | — | | | $ | — | |
Risk-free interest rate | | | 4.58 | % | | | 4.01 | % |
Price threshold | | $ | 18.00 | | | $ | 18.00 | |
16
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
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:
| | June 30, 2024 | | | December 31, 2023 | |
Valuation date price | | $ | 3.58 | | | $ | 4.87 | |
Expected term (in years) | | | 4.04 | | | | 4.54 | |
Expected volatility | | | 62.92 | % | | | 67.20 | % |
Risk-free interest rate | | | 4.31 | % | | | 3.79 | % |
Price hurdle | | $ | 15.00 | | | $ | 15.00 | |
As of June 30, 2024 and December 31, 2023, the Company has accounts receivable, accounts payable and accrued expenses for which the carrying value approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s long-term debt approximates fair value as the rates used approximate the market rates currently available to the Company. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements.
The reconciliation of changes in Level 3 liabilities during the 26-week periods ended June 30, 2024 and July 2, 2023 is as follows:
| | Private Warrants | | | Earn-Out Liability | | | Total | |
Balance at December 31, 2022 | | $ | 1,581 | | | $ | 1,176 | | | $ | 2,757 | |
Losses included in earnings | | | 518 | | | | 428 | | | | 946 | |
Balance at July 2, 2023 | | $ | 2,099 | | | $ | 1,604 | | | $ | 3,703 | |
| | | | | | | | | | | | |
Balance at December 31, 2023 | | $ | 2,903 | | | $ | 3,479 | | | $ | 6,382 | |
Gains included in earnings | | | (2,294 | ) | | | (1,707 | ) | | | (4,001 | ) |
Balance at June 30, 2024 | | $ | 609 | | | $ | 1,772 | | | $ | 2,381 | |
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.
17
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
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 15, “Commitments and Contingencies” for more information.
The following table summarizes total revenue by product category.
| | For the thirteen weeks ended | | | For the twenty-six weeks ended | |
| | June 30, 2024 | | | July 2, 2023 | | | June 30, 2024 | | | July 2, 2023 | |
Electronic systems | | $ | 71,615 | | | $ | 74,401 | | | $ | 135,495 | | | $ | 143,152 | |
Mechanical systems | | | 39,765 | | | | 40,920 | | | | 78,160 | | | | 84,238 | |
Exhaust | | | 15,199 | | | | 17,384 | | | | 29,189 | | | | 33,213 | |
Accessories | | | 24,429 | | | | 26,382 | | | | 47,813 | | | | 53,847 | |
Safety | | | 18,488 | | | | 16,175 | | | | 37,475 | | | | 33,017 | |
Net sales | | $ | 169,496 | | | $ | 175,262 | | | $ | 328,132 | | | $ | 347,467 | |
The following table summarizes total revenue based on geographic location from which the product is shipped:
| | For the thirteen weeks ended | | | For the twenty-six weeks ended | |
| | June 30, 2024 | | | July 2, 2023 | | | June 30, 2024 | | | July 2, 2023 | |
United States | | $ | 163,422 | | | $ | 170,817 | | | $ | 316,747 | | | $ | 337,235 | |
Italy | | | 6,074 | | | | 4,445 | | | | 11,385 | | | | 10,232 | |
Net sales | | $ | 169,496 | | | $ | 175,262 | | | $ | 328,132 | | | $ | 347,467 | |
The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
| | For the thirteen weeks ended | | | For the twenty-six weeks ended | |
| | June 30, 2024 | | | July 2, 2023 | | | June 30, 2024 | | | July 2, 2023 | |
Income tax expense | | $ | 2,055 | | | $ | 4,098 | | | $ | 1,164 | | | $ | 5,664 | |
Effective tax rate | | | 10.7 | % | | | 24.0 | % | | | 5.3 | % | | | 24.7 | % |
For the 13-week period ended June 30, 2024, the Company's effective tax rate of 10.7% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the warrant and earn-out liabilities recognized during the period and the impact of foreign taxes in higher tax rate jurisdictions. For the 13-week period ended July 2, 2023, the Company’s effective tax rate of 24.0% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in the fair value of the warrant and earn-out liabilities recognized during the period.
For the 26-week period ended June 30, 2024, the Company's effective tax rate of 5.3% 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, federal research and development tax credits, and the impact of foreign taxes in higher tax rate jurisdictions. In addition, the Company incurred expenses related to product rationalization that were determined to be significant and infrequent in nature; therefore, the full tax benefit of these expenses was recorded during the year as a discrete adjustment. For the 26-week period ended July 2, 2023, the Company’s effective tax rate of 24.7% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in the fair value of the warrant and earn-out liabilities recognized during the period.
18
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
The following table sets forth the calculation of basic and diluted earnings per share:
| | For the thirteen weeks ended | | | For the twenty-six weeks ended | |
| | June 30, 2024 | | | July 2, 2023 | | | June 30, 2024 | | | July 2, 2023 | |
Numerator: | | | | | | | | | | | | | | | | |
Net income | | $ | 17,105 | | | $ | 12,979 | | | $ | 20,835 | | | $ | 17,226 | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding - basic | | | 118,470,358 | | | | 117,221,419 | | | | 118,171,093 | | | | 117,187,287 | |
Dilutive effect of potential common shares from RSUs | | | 790,878 | | | | 647,503 | | | | 1,110,038 | | | | 369,370 | |
Dilutive effect of potential common shares from PSUs | | | — | | | | — | | | | 102,151 | | | | — | |
Weighted average common shares outstanding - diluted | | | 119,261,236 | | | | 117,868,922 | | | | 119,383,282 | | | | 117,556,657 | |
Earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.14 | | | $ | 0.11 | | | $ | 0.18 | | | $ | 0.15 | |
Diluted | | $ | 0.14 | | | $ | 0.11 | | | $ | 0.17 | | | $ | 0.15 | |
The following outstanding shares of Common Stock equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. Warrants to purchase shares of Common Stock having an exercise price greater than the average share market price are excluded from the calculation of diluted earnings per share.
| | For the thirteen weeks ended | | | For the twenty-six weeks ended | |
| | June 30, 2024 | | | July 2, 2023 | | | June 30, 2024 | | | July 2, 2023 | |
Anti-dilutive shares excluded from calculation of diluted EPS: | | | | | | | | | | | | | | | | |
|