Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless the context requires otherwise, references to “Holley,” “we,” “us,” “our” and “the Company” in this section are to the business and operations of Holley Inc. The following discussion and analysis should be read in conjunction with Holley’s condensed consolidated financial statements and related notes thereto included in this quarterly report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause Holley’s actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed herein and under the caption, “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We are a designer, marketer, and manufacturer of high performance automotive aftermarket products serving car and truck enthusiasts, with sales, processing, and distribution facilities reaching most major markets in the United States, Canada, Europe and China. Holley designs, markets, manufactures and distributes a diversified line of performance automotive products including fuel injection systems, tuners, exhaust products, carburetors, safety equipment and various other performance automotive products. The Company’s products are designed to enhance street, off-road, recreational and competitive vehicle performance and safety.
Innovation is at the core of our business and growth strategy with approximately 35% of our 2021 sales coming from products introduced by us into the market since 2016. We have a history of developing innovative products, including new products in existing product families, product line expansions, and accessories, as well as products that bring us into new categories. We have thoughtfully expanded our product portfolio over time to adapt to consumer needs.
In addition, we have historically used strategic acquisitions to (i) expand our brand portfolio, (ii) enter new product categories and consumer segments, (iii) increase direct-to-consumer (“DTC”) scale and connection, (iv) expand share in current product categories and (v) realize value-enhancing revenue and cost synergies. While we believe our business is positioned for continued organic growth, we intend to continue evaluating opportunities for strategic acquisitions that would complement our current business and expand our addressable target market.
Factors Affecting our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and those under the caption, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 15, 2022, and those in our subsequent filings with the SEC.
Business Combination
On July 16, 2021 we consummated a business combination (“Business Combination”) pursuant to that certain Agreement and Plan of Merger dated March 11, 2021 (the “Merger Agreement”), by and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc., a direct wholly owned subsidiary of Empower (“Merger Sub I”), Empower Merger Sub II LLC, a direct wholly owned subsidiary of Empower (“Merger Sub II”), and Holley Intermediate Holdings, Inc. ("Holdings").
The Merger Agreement provided for, among other things, the following transactions: (i) Merger Sub I merged with and into Holdings, the separate corporate existence of Merger Sub I ceased and Holdings became the surviving corporation, and (ii) Holdings merged with and into Merger Sub II, the separate corporate existence of Holdings ceased and Merger Sub II became the surviving limited liability company. Upon closing, Empower changed its name to Holley Inc. and its trading symbol on the New York Stock Exchange (the “NYSE”) from “EMPW” to “HLLY.”
The Business Combination was accounted for as a reverse recapitalization. Holdings was deemed the accounting acquirer with Holley Inc. as the successor registrant. As such, Empower was treated as the acquired company for financial reporting purposes, and financial statements for periods prior to the Business Combination are those of Holdings.
As a result of the Business Combination, Holley Inc. listed on the NYSE, which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred and expect to continue to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal, and administrative resources, including increased personnel costs, audit and other professional service fees.
29
Acquisitions
Holley has historically pursued a growth strategy through both organic growth and acquisitions. The Company has pursued acquisitions that it believes will help drive profitability, cash flow and stockholder value. Holley targets companies that are market leaders, expand the Company’s geographic presence, provide a highly synergistic opportunity and/or enhance Holley’s ability to provide a wide array of its products to its customers through its distribution network.
In 2021 Holley completed 8 acquisitions. The most significant acquisitions impacting the comparability of our operating results were:
•Advance Engine Management Inc.: On April 14, 2021 Holley acquired Advance Engine Management Inc., doing business as AEM Performance Electronics (“AEM”), a developer and supplier of electronic control and monitoring systems for performance automotive applications. This acquisition increases Holley’s penetration into the import and other sport compact cars submarket.
•Brothers Mail Order Industries, Inc.: On December 16, 2021, Holley acquired Brothers Mail Order Industries, Inc., doing business as Brothers Trucks ("Brothers"), a distributor of classic and custom vehicle restoration parts serving the Chevrolet and GMC truck aftermarket. This acquisition increases Holley's offerings in truck and SUV appearance items.
•Baer, Inc.: On December 23, 2021, Holley acquired Baer, Inc., doing business as Baer Brakes ("Baer"), a developer and supplier of brakes and brake systems. This acquisition moves Holley closer to its goal of providing complete vehicle solutions by adding a new product category and brake system expertise.
The acquisitions have all been accounted for in accordance with FASB ASC Topic 805, Business Combinations, and the operations of the acquired entities are included in our historical results for the periods following the closing of the acquisition. See Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” and Note 2, “Business Combination and Acquisitions,” in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this quarterly report on Form 10-Q for additional information related to the Company’s acquisitions and investments.
COVID-19 Outbreak
COVID-19 has adversely impacted global supply chain and general economic conditions. The Company has continued to experience disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain Company products in distribution channels. The full extent of the impact of the COVID-19 pandemic on the Company's business and operational and financial performance and condition is currently uncertain and will depend on many factors outside the Company's control, including but not limited to the timing, extent, duration and effects of the virus and any of its mutations, the utilization and effectiveness of treatments and vaccines, the imposition of effective public safety and other protective measures, the further impact of COVID-19 on the global economy and demand for the Company's products and services. Should the COVID-19 pandemic, including variants such as Delta and Omicron, not improve or worsen, or if the Company's attempt to mitigate its impact on its supply chain, operations and costs is not successful, the Company's business, results of operations, financial condition and prospects may be adversely affected.
Key Components of Results of Operations
Net Sales
The principal activity from which the Company generates its sales is the designing, marketing, manufacturing and distribution of performance after-market automotive parts for its end consumers. Sales are displayed net of rebates and sales returns allowances. Sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized.
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Cost of Goods Sold
Cost of goods sold consists primarily of the cost of purchased parts and manufactured products, including materials and direct labor costs. In addition, warranty, incoming shipping and handling and inspection and repair costs are also included within costs of goods sold. Reductions in the cost of inventory to its net realizable value are also a component of cost of goods sold.
Selling, General, and Administrative
Selling, general, and administrative consist of payroll and related personnel expenses, IT and office services, office rent expense and professional services. In addition, self-insurance, advertising, research and development, pre-production and start-up costs are also included within selling, general, and administrative. The Company expects to incur additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations and other professional services.
Acquisition and Restructuring Costs
Acquisition and restructuring costs consist of professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to potential acquisitions. In addition, operational restructuring costs are included within this classification.
Related Party Acquisition and Management Fee Costs
Related party acquisition and management fee costs consist of fees paid to the Company’s private equity sponsor pursuant to a management services agreement for management services and consulting services directly attributable to potential acquisitions. Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated.
Interest Expense
Interest expense consists of interest due on the indebtedness under our credit facilities. Interest is based on LIBOR or the prime rate, plus the applicable margin rate. As of April 3, 2022, $626.9 million was outstanding under the Company's Credit Agreement.
31
Results of Operations
13-Week Period Ended April 3, 2022 Compared With 13-Week Period Ended March 28, 2021
The table below presents Holley’s results of operations for the 13-week periods ended April 3, 2022 and March 28, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the thirteen weeks ended |
|
|
Change |
|
|
|
April 3, 2022 |
|
|
March 28, 2021 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
200,055 |
|
|
$ |
160,332 |
|
|
$ |
39,723 |
|
|
|
24.8 |
% |
Cost of goods sold |
|
|
117,334 |
|
|
|
94,653 |
|
|
|
22,681 |
|
|
|
24.0 |
% |
Gross profit |
|
|
82,721 |
|
|
|
65,679 |
|
|
|
17,042 |
|
|
|
25.9 |
% |
Selling, general, and administrative |
|
|
34,342 |
|
|
|
24,012 |
|
|
|
10,330 |
|
|
|
43.0 |
% |
Research and development costs |
|
|
8,161 |
|
|
|
5,969 |
|
|
|
2,192 |
|
|
|
36.7 |
% |
Amortization of intangible assets |
|
|
3,661 |
|
|
|
3,336 |
|
|
|
325 |
|
|
|
9.7 |
% |
Acquisition and restructuring costs |
|
|
290 |
|
|
|
18,833 |
|
|
|
(18,543 |
) |
|
|
(98.5 |
%) |
Related party acquisition and management fee costs |
|
|
— |
|
|
|
881 |
|
|
|
(881 |
) |
|
|
(100.0 |
%) |
Other expense (income) |
|
|
222 |
|
|
|
(133 |
) |
|
|
355 |
|
|
n/a |
|
Operating income |
|
|
36,045 |
|
|
|
12,781 |
|
|
|
23,264 |
|
|
|
182.0 |
% |
Change in fair value of warrant liability |
|
|
2,227 |
|
|
|
— |
|
|
|
2,227 |
|
|
n/a |
|
Change in fair value of earn-out liability |
|
|
2,381 |
|
|
|
— |
|
|
|
2,381 |
|
|
n/a |
|
Interest expense |
|
|
7,391 |
|
|
|
10,071 |
|
|
|
(2,680 |
) |
|
|
(26.6 |
%) |
Income before income taxes |
|
|
24,046 |
|
|
|
2,710 |
|
|
|
21,336 |
|
|
|
787.3 |
% |
Income tax expense |
|
|
7,188 |
|
|
|
4,766 |
|
|
|
2,422 |
|
|
|
50.8 |
% |
Net income (loss) |
|
|
16,858 |
|
|
|
(2,056 |
) |
|
|
18,914 |
|
|
n/a |
|
Foreign currency translation adjustment |
|
|
241 |
|
|
|
(16 |
) |
|
|
257 |
|
|
n/a |
|
Total comprehensive income (loss) |
|
$ |
17,099 |
|
|
$ |
(2,072 |
) |
|
$ |
19,171 |
|
|
n/a |
|
Net Sales
Net sales for the 13-week period ended April 3, 2022 increased $39.7 million, or 24.8%, to $200.1 million, as compared to $160.3 million for the 13-week period ended March 28, 2021. Non-comparable sales associated with acquisitions contributed $18.1 million, or 11.3% of year-over-year growth. The remaining comparable sales growth in the quarter was $21.6 million, or 13.5% of year-over-year growth. This comparable growth was driven by improved price realization of $13.6 million and unit volume growth of $8.0 million over the prior year period. Major categories driving the comparable year-over-year growth include: electronic system growth of $10.7 million (15.2% category growth), mechanical system growth of $5.0 million (14.0% category growth), and safety product growth of $4.2 million (26.7% category growth).
Cost of Goods Sold
Cost of goods sold for the 13-week period ended April 3, 2022 increased $22.7 million, or 24.0%, to $117.3 million, as compared to $94.6 million for the 13-week period ended March 28, 2021. The increase in cost of goods sold during the 13-week period ended April 3, 2022 was in line with a corresponding increase in product sales during such period.
Gross Profit and Gross Margin
Gross profit for the 13-week period ended April 3, 2022 increased $17.0 million, or 25.9%, to $82.7 million, as compared to $65.7 million for the 13-week period ended March 28, 2021. The increase in gross profit was driven by the increase in sales. Gross margin for the 13-week period ended April 3, 2022 was 41.3% compared to a gross margin of 41.0% for the 13-week period ended March 28, 2021. Gains in price realization fully offset higher freight and product cost increases and allowed for a slight increase in gross margin.
32
Selling, General and Administrative
Selling, general and administrative costs for the 13-week period ended April 3, 2022 increased $10.3 million, or 43.0%, to $34.3 million, as compared to $24.0 million for the 13-week period ended March 28, 2021. When expressed as a percentage of sales, selling, general and administrative costs increased to 17.2% of sales for the 13-week period ended April 3, 2022, as compared to 15.0% of sales in 2021. Recent acquisitions accounted for $1.9 million of the increase in selling, general and administrative costs. The increase in costs was also driven by a $3.0 million increase in compensation expense related to equity awards, a $1.0 million increase in outbound shipping and handling costs related to higher sales and domestic supply chain pressure, and a $2.8 million increase in administrative and sales personnel costs, reflecting company growth and the additional requirements of becoming a public company.
Research and Development Costs
Research and development costs for the 13-week period ended April 3, 2022 increased $2.2 million, or 36.7%, to $8.2 million, as compared to $6.0 million for the 13-week period ended March 28, 2021. The increase in research and development costs were primarily due to headcount investments as we continue to pursue product innovation and new products.
Amortization of Intangible Assets
Amortization of intangible assets for the 13-week period ended April 3, 2022 increased $0.4 million, or 9.7%, to $3.7 million, as compared to $3.3 million for the 13-week period ended March 28, 2021 due to recent acquisitions.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 13-week period ended April 3, 2022 decreased $18.5 million, or 98.5%, to $0.3 million, as compared to $18.8 million for the 13-week period ended March 28, 2021. The 13-week period ended March 28, 2021 included an adjustment of $17.2 million for contingent consideration payable for the Simpson acquisition.
Related Party Acquisition and Management Fee Costs
Upon the Closing of the Business Combination, the management services agreement with our private equity sponsor was terminated. Related party acquisition and management fee costs for the 13-week period ended March 28, 2021 were $0.9 million.
Operating Income
As a result of factors described above, operating income for the 13-week period ended April 3, 2022 increased $23.2 million, or 182.0%, to $36.0 million, as compared to $12.8 million for the 13-week period ended March 28, 2021.
Change in Fair Value of Warrant Liability
For the 13-week period ended April 3, 2022 we recognized a loss of $2.2 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 April 3, 2022 we recognized a loss of $2.4 million from the change in fair value of the earn-out liability. The earn-out liability reflects the fair value of the earn-out shares resulting from the Business Combination. During the first quarter of 2022, the first tranche, representing half of the Earn-Out Shares, met the required market share price criteria and were issued. This issuance of the Company's common stock resulted in a reduction of the earn-out liability of $14.7 million, representing the fair value of the earn-out shares on the vesting date, which was reclassified from liabilities to equity. At April 3, 2022, there are 1,093,750 potential future Earn-Out Shares remaining.
Interest Expense
Interest expense for the 13-week period ended April 3, 2022 decreased $2.7 million, or 26.6%, to $7.4 million, as compared to $10.1 million for the 13-week period ended March 28, 2021. The decrease was primarily due to a lower effective interest rate combined with the favorable impact of the $100 million paydown on our second lien note in July 2021.
33
Income (Loss) before Income Taxes
As a result of factors described above, we recognized $24.0 million of income before income taxes for the 13-week period ended April 3, 2022, as compared to income before income taxes of $2.7 million for the 13-week period ended March 28, 2021.
Income Tax Expense
Income tax expense for the 13-week period ended April 3, 2022 increased $2.4 million to $7.2 million, as compared to $4.8 million for the 13-week period ended March 28, 2021. The effective tax rate for the 13-week period ended April 3, 2022 was 29.9%. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities. The effective tax rate for the 13-week period ended March 28, 2021 was 175.9%. The difference between the effective tax rate and the federal statutory rate in 2021 was due to the permanent difference resulting from the adjustment to the Simpson earn-out liability during the period.
Net Income (Loss) and Total Comprehensive Income (Loss)
As a result of factors described above, we recognized net income of $16.8 million for the 13-week period ended April 3, 2022, as compared to a net loss of ($2.1) million for the 13-week period ended March 28, 2021. Additionally, we recognized total comprehensive income of $17.1 million for the 13-week period ended April 3, 2022, as compared to a total comprehensive loss of ($2.1) million for the 13-week period ended March 28, 2021. Comprehensive income (loss) includes the effect of foreign currency translation adjustments.
Non-GAAP Financial Measures
Holley believes EBITDA and Adjusted EBITDA are useful to investors in evaluating the Company’s financial performance. In addition, Holley uses these measures internally to establish forecasts, budgets and operational goals to manage and monitor its business. Holley believes that these non-GAAP financial measures help to depict a more realistic representation of the performance of the underlying business, enabling the Company to evaluate and plan more effectively for the future. Holley believes that investors should have access to the same set of tools that its management uses in analyzing operating results.
Holley defines EBITDA as earnings before (a) interest expense, (b) income taxes and (c) depreciation and amortization. Holley defines Adjusted EBITDA as EBITDA plus (i) notable items that in 2022 consist primarily of non-cash adjustments related to the adoption of ASC 842, "Leases," and in 2021 consist primarily of the amortization of the fair market value increase in inventory due to acquisitions, (ii) compensation expense related to equity awards (iii) acquisition and restructuring costs, which for the 13-week period ended March 28, 2021 includes a $17.2 million adjustment due to a change in the fair value of the Simpson acquisition contingent consideration payable, (iv) changes in the fair value of the warrant liability, (v) changes in the fair value of the earn-out liability, (vi) related party acquisition and management fee costs, and (vii) other expenses, which includes losses from disposal of fixed assets and foreign currency transactions. We have included within the definition of Adjusted EBITDA the changes in the fair value of the warrant liability and changes in the fair value of the earn-out liability, as management believes such matters, when they occur, do not directly reflect the performance of the underlying business.
EBITDA and Adjusted EBITDA are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and may be different from non-GAAP financial measures used by other companies. These measures should not be considered as measures of financial performance under GAAP, and the items excluded from or included in these metrics are significant components in understanding and assessing Holley’s financial performance. These metrics should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP.
34
The following unaudited table presents the reconciliation of net income (loss), the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the 13-week periods ended April 3, 2022 and March 28, 2021:
|
|
|
|
|
|
|
|
|
|
|
For the thirteen weeks ended |
|
|
|
April 3, 2022 |
|
|
March 28, 2021 |
|
Net income (loss) |
|
$ |
16,858 |
|
|
$ |
(2,056 |
) |
Adjustments: |
|
|
|
|
|
|
Depreciation |
|
|
2,140 |
|
|
|
2,252 |
|
Amortization of intangible assets |
|
|
3,661 |
|
|
|
3,336 |
|
Interest expense |
|
|
7,391 |
|
|
|
10,071 |
|
Income tax expense |
|
|
7,188 |
|
|
|
4,766 |
|
EBITDA |
|
|
37,238 |
|
|
|
18,369 |
|
Acquisition and restructuring costs |
|
|
290 |
|
|
|
18,833 |
|
Change in fair value of warrant liability |
|
|
2,227 |
|
|
|
— |
|
Change in fair value of earn-out liability |
|
|
2,381 |
|
|
|
— |
|
Equity-based compensation expense |
|
|
3,162 |
|
|
|
131 |
|
Related party acquisition and management fee costs |
|
|
— |
|
|
|
881 |
|
Notable items |
|
|
506 |
|
|
|
5,713 |
|
Other expense (income) |
|
|
222 |
|
|
|
(133 |
) |
Adjusted EBITDA |
|
$ |
46,026 |
|
|
$ |
43,794 |
|
Liquidity and Capital Resources
Holley’s primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. The Company has generally financed its historical needs with operating cash flows, capital contributions and borrowings under its credit facilities. These sources of liquidity may be impacted by various factors, including demand for Holley’s products, investments made in acquired businesses, plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.
As of April 3, 2022, the Company had cash of $44.1 million and availability of $97.6 million under its revolving credit facility. The Company has a senior secured revolving credit facility with $125 million in borrowing capacity. As of April 3, 2022, $25.0 million was outstanding under the revolving credit facility. The Company also had $2.4 million of outstanding letters of credit as of April 3, 2022.
The Company is obligated under various operating leases for facilities, equipment and automobiles with estimated lease payments of approximately $6.4 million, including short term leases, due during the remainder of fiscal year 2022. See Note 14, "Lease Commitments" in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this quarterly report on Form 10-Q for additional information related to the Company’s lease obligations.
Holley's capital expenditures are primarily related to ongoing maintenance and improvements, including investments related to upgrading and maintaining our information technology systems, tooling for new products, vehicles for product development, and machinery and equipment for operations. We expect capital expenditures in the range of $14 million to $16 million in fiscal year 2022.
See Note 6, "Debt" in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this quarterly report on Form 10-Q for further detail of our credit facility and the timing of principal maturities. As of April 3, 2022, based on the then current weighted average interest rate of 4.5%, expected interest payments associated with outstanding debt totaled approximately $23 million for the remainder of fiscal year 2022.
The Company believes that its cash on hand, cash from operations and borrowings available under its revolving credit facility will be sufficient to satisfy its liquidity needs and capital expenditure requirements for at least the next twelve months.
35