Holley Inc. and Subsidiaries
See Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.
NOTES TO THE 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 (the “Company” or “Holley”), conducts operations through its wholly owned subsidiaries. These operating subsidiaries are comprised of Holley Performance Products Inc. (“Holley Performance”), Hot Rod Brands, Inc. (“Hot Rod Brands”), Simpson Safety Solutions, Inc., B&M Racing and Performance Products, Inc., and Speedshop.com, Inc.
On July 16, 2021, (the “Closing” and such date, the “Closing Date”) the Company consummated the business combination (the “Business Combination”) pursuant to that certain Agreement and Plan of Merger dated March 11, 2021, (the “Merger Agreement”), by and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc. (“Merger Sub I”), Empower Merger Sub II LLC (“Merger Sub II”), and Holley Intermediate Holdings, Inc. (“Holley Intermediate”). On the Closing Date, Empower changed its name to Holley Inc. See Note 2, “Business Combination, Acquisitions, and Divestiture,” for more information.
Holley Intermediate, the predecessor to Holley, was incorporated on October 25, 2018, to effect the merger of Driven Performance Brands, Inc. (“Driven”) and the purchase of High Performance Industries, Inc. (“HPI”). The Company designs, manufactures and distributes performance automotive products to customers primarily in the United States, Canada and Europe. The Company is a leading manufacturer of a diversified line of performance automotive products, including carburetors, fuel pumps, fuel injection systems, nitrous oxide injection systems, superchargers, exhaust headers, mufflers, distributors, ignition components, engine tuners and automotive performance plumbing products that are produced through its two major subsidiaries, Holley Performance and Hot Rod Brands. The Company is also a leading manufacturer of exhaust products as well as shifters, converters, transmission kits, transmissions, tuners and automotive software. The Company’s products are designed to enhance street, off-road, recreational and competitive vehicle performance through increased horsepower, torque and drivability. The Company has locations in North America, Canada, Italy and China.
Emerging Growth Company Status
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company is an emerging growth company, and, as such, has elected to take advantage of the benefits of the extended transition period for new or revised financial accounting standards.
Risks and Uncertainties
COVID-19 has adversely impacted global supply chain and general economic conditions. The Company has continued to experience disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain Company products in distribution channels. The full extent of COVID-19's effect on the Company's operational and financial performance in the future will depend on future developments, including but not limited to the duration, spread, intensity and phase of the pandemic in various countries; the emergence of COVID-19 variants and the utilization and effectiveness of treatments and vaccines against these variants; the further impact of COVID-19 on the global economy; and demand for the Company's products and services. Should the ongoing COVID-19 pandemic not improve, or worsen, or if the Company's attempt to mitigate its impact on its supply chain, operations and costs is not successful, the Company's business, results of operations, and financial condition may be adversely affected. See Part I: Item 1A. Risk Factors for additional discussion on the COVID-19 pandemic and the impact on our business.
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 Company's operations have been adversely impacted by inflationary pressures primarily related to transportation, labor and component costs. Sales growth in certain products has been constrained by continuing supply chain challenges and automotive electronic component shortages. In response to the global supply chain volatility and inflationary impacts, the Company has attempted to minimize potential adverse impacts on its business with cost savings initiatives, price increases to customers, and by increasing inventory levels of certain products and working closely with its suppliers and customers to minimize disruptions in delivering products to customers. Should the ongoing macroeconomic conditions not improve, or worsen, or if the Company's attempt to mitigate the impact on its supply chain, operations and costs is not successful, the Company’s business, results of operations and financial condition may be adversely affected.
Basis of Presentation
The accompanying 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 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
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. These estimates require the use of judgment as future events, and the effect of these events, cannot be predicted with certainty. The estimates will change as new events occur, as more experience is acquired and as more information is obtained. The Company evaluates and updates assumptions and estimates on an ongoing basis and may consult outside experts to assist as considered necessary.
Cash and Cash Equivalents
Cash and cash equivalents include cash and deposits with financial institutions with original maturities less than 90 days. The Federal Deposit Insurance Corporation insures financial institution deposits up to $250. The Company maintains deposits exceeding $250 in certain accounts at financial institutions. On December 31, 2022 and 2021, the Company had cash in foreign bank accounts of $5,878 and $5,765, respectively.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable represent amounts due from customers in the ordinary course of business. The receivables are stated at the amount management expects to collect. The Company is subject to risk of loss from uncollectible receivables in excess of its allowance. The Company maintains an allowance for credit losses for estimated losses from customers’ inability to make required payments. In order to estimate the appropriate level of this allowance, the Company analyzes historical bad debts, customer concentrations, current customer credit worthiness, current economic trends and changes in customer payment patterns. Accounts are written off when management determines the account is uncollectable. Interest is not charged on past due accounts.
Inventory Valuation
The Company's inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence or impaired balances.
Segments
The Company's operations are managed and reported to its Chief Executive Officer (“CEO”), the Company’s chief operating decision maker, on a consolidated basis. The CEO assesses performance and allocates resources based on the consolidated results of operations. Under this organizational and reporting structure, the Company has one reportable segment.
Goodwill
Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. On an annual basis or whenever events or changes in circumstances indicate the carrying value of goodwill may have been impaired, the Company may perform a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If the Company determines that the fair value of the reporting unit is less than its carrying amount or elects not to perform a qualitative assessment, it will perform a quantitative analysis; otherwise, no further evaluation is necessary. For the quantitative impairment assessment, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company determines the fair value of the reporting unit based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company will recognize a loss equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. Impairments, if any, are charged directly to earnings.
Intangible Assets Other Than Goodwill
Tradenames acquired in certain business combinations were determined to have indefinite useful lives and are not amortized, but instead are tested for impairment on an annual basis and when facts and circumstances indicate that the carrying values of the assets may be impaired. If such review indicates an asset’s carrying value may not be recoverable, an impairment loss is recognized for the excess of the carrying value over the fair value of the asset.
As part of separate business acquisitions, the Company’s customer relationships, technology and certain tradenames were identified as definite-lived intangible assets. The customer relationship intangible assets are being amortized over a ten to twenty-five year life based on the attrition rate of customers with a weighted-average amortization period of 23.6 years. The technology intangible assets are being amortized over a five to fourteen year life based on the lifecycle of previous technology with a weighted-average amortization period of 12.1 years. The tradenames are being amortized over a fifteen to twenty year life based on the estimated life of the tradename with a weighted-average amortization period of 19.2 years. The weighted-average amortization period for all amortizable intangibles on a combined basis is 22.5 years.
Property, Plant and Equipment
Property, plant and equipment acquired in various acquisitions have been recorded at fair value. All other property, plant and equipment is recorded at cost. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the assets. Estimated useful lives for new property, plant and equipment additions are seven years to twenty-five years for buildings and improvements and three to ten years for machinery and equipment. Maintenance, repairs, and betterments which do not enhance the value of or increase the life of the assets are expensed as incurred.
Leases
Operating lease right of use ("ROU") assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The Company's leases may include options to extend or terminate the lease. These options to extend are included in the lease term when it is reasonably certain that the Company will exercise that option. Some leases have variable payments, however, because they are not based on an index or rate, they are not included in the ROU assets and liabilities. Variable payments for real estate leases primarily relate to common area maintenance, insurance, taxes and utilities. Since the Company's leases generally do not provide an implicit rate, the Company applies a portfolio approach using an estimated incremental borrowing rate based on the lease term and other information available at the commencement date in determining the present value of lease payments. The rate applied is based on the currency of the lease. Leases having a lease term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the term of the lease. In addition, the Company has applied the practical expedient to account for the lease and non-lease components as a single lease component for all of the Company's leases. See Note 14, "Lease Commitments," for further details.
Debt Issuance Costs
Debt issuance costs include fees and costs incurred to obtain financing. Debt issuance costs related to the Company's term loans are presented in the consolidated balance sheet as a direct deduction from the carrying amount of the term loans. These fees and costs are being amortized using the effective interest method over the term of the related loans and are included in interest expense in the Company's consolidated statements of comprehensive income (loss). If the debt is retired before its scheduled maturity date, any remaining unamortized debt issuance costs are written off in the period the debt is retired as a non-operating expense in the statement of operations as loss on the early extinguishment of debt. For the years ended 2022, 2021 and 2020, the amortization of debt issuance costs included in interest expense was $1,707, $3,182, and $3,092, respectively.
Self-Insurance
The Company is self-insured for employee medical and prescription drug benefits up to certain stop loss coverage amounts. The Company accrues an estimate for unpaid claims, as well as incurred but not reported claims, based upon the Company’s claim experience and expectations of future claim activity. The resulting liability and expense are reflected as a component of accrued expenses, cost of sales and selling, general and administrative expenses in the accompanying consolidated balance sheets and consolidated statements of comprehensive income (loss), respectively.
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Revenue Recognition
The Company recognizes revenue with customers when control of the promised goods transfers to the customer. This generally occurs when the product is shipped to the customer. Revenue is recorded at the amount of consideration the Company expects to be entitled to in exchange for the delivered goods, which includes an estimate of variable consideration, expected returns, or refunds when applicable. The Company estimates variable consideration, such as sales incentives, by using the most likely amount approach, which considers the single most likely amount from a range of possible consideration amounts. Estimates of variable consideration result in an adjustment to the transaction price such that it is probable that a significant reversal of cumulative revenue would not occur in the future. Sales incentives and allowances are recognized as a reduction to revenue at the time of the related sale. Revenue is recorded net of sales tax. Shipping and handling fees billed to customers are included in net sales, while costs of shipping and handling are included in selling, general and administrative costs.
For more information about the Company’s revenue from contracts with customers, see Note 9, “Revenue”.
Customer Sales Incentives
Sales incentives provided take the form of either sales discounts or rebates and are treated as a reduction of net sales. The Company also maintains a cooperative advertising program with its customers and provides sales incentives to the extent of the estimated value of advertising provided by the customer on behalf of the Company. The costs incurred under the cooperative advertising program are included as a reduction of net sales.
Product Warranty
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. These obligations are recorded within accrued liabilities in the consolidated balance sheets (see also Note 17, “Commitments and Contingencies” for additional information on warranty reserves). Significant judgments and estimates must be made and used in connection with establishing warranty allowances in any accounting period. Revision to these estimates is made, when necessary, based upon changes in these factors.
Sales Returns
Estimated sales returns and allowances are recorded as a charge against gross sales in the period in which the related sales are recognized, net of returns to stock. The Company’s customers are permitted to return new, undamaged products within customer-specific limits (which are generally limited to a specified percentage of their annual purchases) in the event that they have overstocked their inventories. The Company estimates sales returns based primarily upon actual historical returns, planned product discontinuances, and promotional sales. 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.
Cost of Goods Sold
Cost of goods sold primarily consists of materials and labor expense in the manufacturing of the Company’s products sold to its customers. Cost of goods sold also includes provisions for excess and obsolete inventory, warranty costs, certain allocated costs for facilities, depreciation and other manufacturing overhead.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include personnel costs for employees in selling, general and administrative functions (including equity-based compensation); costs to operate branch locations, corporate offices and back-office support centers; costs to transport products from facilities to our customers; and other selling, general and administrative expenses, such as professional fees, supplies, and advertising expenses.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes income tax positions only if those positions are “more likely than not” of being sustained upon examination by taxing authorities. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company recognizes interest on liabilities for uncertain tax positions in interest expense and would recognize penalties, if any, in operating expenses in its consolidated income statements. The Company has no amounts accrued for such interest or penalties on December 31, 2022 and 2021. The Company files income tax returns in the U.S. federal jurisdiction and various foreign and state jurisdictions.
On December 31, 2022 and 2021, the Company did not have any unrecognized tax benefits. The statute of limitations remains open for U.S. federal income tax examinations for the years ended December 31, 2019, through December 31, 2021. U.S. state jurisdictions have statues of limitations generally ranging from three to eight years. The Company does not expect the total amount of unrecognized tax benefits to significantly change in the next 12 months.
Impairment or Disposal of Long-Lived Assets
The Company accounts for long-lived assets, including intangible assets subject to amortization, in accordance with the provisions that require long-lived assets, such as property and equipment, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the sum of undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Advertising
Advertising production costs are expensed the first time the advertising takes place. Total advertising expenses were $7,159, $6,299, and $4,379 for the years ended December 31, 2022, 2021, and 2020, respectively. Advertising costs are classified as a component of selling, general and administrative costs in the accompanying consolidated statements of comprehensive income (loss).
Research and Development Costs
Research, development, pre-production and start-up costs related to both present and future products are expensed as incurred. Such costs amount to $29,083, $28,280, and $23,483 for the years ended December 31, 2022, 2021, and 2020, respectively.
Other Comprehensive Income (Loss)
Comprehensive loss encompasses all changes in stockholder’s equity and includes net income, change in the foreign currency translation adjustment and minimum pension liability. The Company’s accumulated other comprehensive loss shown on the consolidated balance sheets on December 31, 2022 and 2021 consists of minimum pension loss of $0 and $302, respectively, and foreign currency translation adjustments of $ 944 and $(46), respectively.
Foreign Currencies
The functional currency of the Company’s Italian subsidiary is the Euro. Assets and liabilities of foreign operations are translated using period end exchange rates. Revenue and expenses are translated using average exchange rates during each period reported. Translation gains are reported in accumulated other comprehensive loss as a component of shareholders equity and were $990, $30, and $16 for the years ended December 31, 2022, 2021 and 2020, respectively. The Company recognizes foreign currency transaction gains (losses) on certain assets and liabilities. These transaction (gains) losses are reported in other expense in the consolidated statements of comprehensive income (loss) and were $(97), $44, and $(284) for the years ended December 31, 2022, 2021 and 2020, respectively.
Earnings per Share
Earnings per share is computed by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method.
Warrants
The Company accounts for warrants to purchase its common stock as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in Accounting Standards Codification ("ASC") Topic 480, Distinguishing Liabilities from Equity, and ASC Topic 815, Derivatives and Hedging. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC Topic 480, meet the definition of a liability pursuant to ASC Topic 480, and whether the warrants meet all of the requirements for equity classification under ASC Topic 815, including whether the warrants are indexed to the Company’s own shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
Equity-Based Compensation
The Company accounts for equity-based awards granted to employees and nonemployees under the fair value method prescribed by 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 Company accounts for forfeitures as they occur.
The fair value of stock options is estimated using the Black Scholes option-pricing model. Restricted stock units are valued at the stock price on the grant date. The fair value of profit interest units ("PIUs") granted by 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.
Fair Value Measurements
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable inputs to the extent possible. The inputs used to measure fair value are prioritized based on a three-level hierarchy, which are defined as follows:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, Derivatives and Hedging. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. Derivative liabilities are classified on the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.
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Concentration of Credit Risk
Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and accounts receivable. The Company controls its exposure to credit risk associated with these instruments by (i) placing cash and cash equivalents with several major financial institutions and (ii) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures. For more information on the Company’s net sales to its three largest customers, see Note 15, “Major Reseller Customers”.
Recent Accounting Pronouncements
Accounting Standards Recently Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires lessees to recognize right-of-use assets, representing their right to use the underlying asset for the lease term, and lease liabilities on the balance sheet for all leases with terms greater than 12 months. The Company adopted the provisions of this guidance effective January 1, 2022, using the modified retrospective optional transition method. Therefore, the standard was applied beginning January 1, 2022, and prior periods were not restated. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of retained earnings. The Company elected the package of practical expedients and implemented internal controls and executed changes to business processes to enable the preparation of financial information upon adoption. The adoption of the new standard resulted in the recognition of a right of use asset and short-term and long-term liabilities recorded on the Company's consolidated balance sheet related to operating leases. In addition, the adoption of the standard did not have a material impact on the Company's results of operations or cash flows. See Note 14, "Lease Commitments," for further details.
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirements Benefits – Defined Benefit Plans – General (Subtopic 715-20). The ASU will update disclosure requirements for employers that sponsor defined benefit pension or other post retirement plans. The Company adopted ASU 2018-14 on a retrospective basis as of January 1, 2022. Adoption did not result in a significant change to the Company's consolidated financial statement disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which is intended to simplify various aspects related to accounting for income taxes. The ASU removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 on a prospective basis as of January 1, 2022. Adoption of the ASU did not have a material effect on the Company's consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (Subtopic 470-20). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. The new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. The Company adopted ASU 2020-06 on January 1, 2022. Adoption of the ASU did not impact the Company's consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), as further modified by ASU 2021-01 and ASU 2022-06 (collectively, the "ASUs"). The ASUs provide temporary optional expedients and exceptions, if certain conditions are met, for applying GAAP to contracts, hedging relationships, and other transactions affected by the transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate ("SOFR"). The standard is currently applicable to contracts entered into before January 1, 2025. The ASUs were effective upon issuance and allowed companies to adopt the amendments on a prospective basis through December 31, 2022. The Company has not adopted any expedients or exceptions under ASU 2020-04.
Accounting Standards Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires entities to apply the definition of a performance obligation under ASC Topic 606, 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. Under current U.S. GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. Adoption of the provisions of ASU 2021-08 are effective for the Company's fiscal year beginning after December 15, 2022, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.
| 2. | BUSINESS COMBINATION, ACQUISITIONS, AND DIVESTITURE BUSINESS COMBINATION |
On July 16, 2021, Holley consummated the Business Combination pursuant to the terms of the Merger Agreement, whereby (i) Merger Sub I, a direct wholly owned subsidiary of Empower, merged with and into Holley Intermediate, with Holley Intermediate surviving such merger as a wholly owned subsidiary of Holley (“Merger I”) and (ii) Merger Sub II, a direct wholly owned subsidiary of Empower, merged with and into Holley Intermediate, with Merger Sub II surviving such merger as a wholly owned subsidiary of Holley (“Merger II”).
Pursuant to the Merger Agreement, at the Closing, all outstanding shares of Holley Intermediate common stock as of immediately prior to the effective time of Merger I were cancelled and the Holley Stockholder, the sole stockholder of Holley Intermediate, received $264,718 in cash and 67,673,884 shares of common stock (at a deemed value of $10.00 per share). The Company’s common stock is listed on the NYSE under the symbol “HLLY.”
In connection with the Business Combination, a number of subscribers purchased from the Company an aggregate of 24,000,000 shares of common stock (the “PIPE”), for a purchase price of $10.00 per share, or $240,000 in the aggregate. Per the Merger Agreement, $100,000 of the PIPE proceeds were used to partially pay off Holley’s debt.
Pursuant to the Amended and Restated Forward Purchase Agreement (“A&R FPA”), at the Closing, 5,000,000 shares of the Company’s common stock and 1,666,667 warrants were issued to certain investors for an aggregate purchase price of $50,000. Pursuant to the A&R FPA, each warrant entitles the holder to purchase one share of the Company’s common stock at a price of $11.50 per share (the ”Public Warrants”), subject to certain conditions.
The Company also assumed 8,333,310 Public Warrants and 4,666,667 private placement warrants (the “Private Warrants”, and together with the Public Warrants, the “Warrants”) upon the Business Combination, all of which were issued in connection with Empower’s initial public offering. Each Warrant represents the right to purchase one share of the Company’s common stock at a price of $11.50 per share, subject to certain conditions. The Warrants are exercisable commencing on October 9, 2021 (the one-year anniversary of Empower’s initial public offering) and expire on July 16, 2026 (five years after the Closing Date). The Public Warrants are listed on the NYSE under the symbol “HLLY WS.”
Additionally, Empower Sponsor Holdings LLC (the "Sponsor") received 2,187,500 shares of the Company’s common stock, which vest in two equal tranches upon achieving certain market share price milestones as outlined in the Merger Agreement during the earn-out period (“the “Earn-Out Shares”). The first tranche of Earn-Out Shares vested during the first quarter of 2022. Upon vesting, the first tranche of the Earn-Out Shares, or 1,093,750 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 remaining Earn-Out Shares are classified as a liability on the condensed consolidated balance sheet and are remeasured at fair value with changes in the post-Business Combination fair value recognized in the Company’s condensed consolidated statement of comprehensive income as non-operating expense.
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. GAAP. This determination was primarily based on the Holley Stockholder having a relative majority of the voting power of the Company, the operations of Holley prior to the acquisition comprising the only ongoing operations of the Company, and senior management of Holley comprising the majority of the senior management of the Company. Under this method of accounting, Empower was treated as the acquired company for financial reporting. Accordingly, the Business Combination was accounted for as the equivalent of Holley issuing stock for the net assets of Empower, accompanied by a recapitalization. The net assets of Empower are stated at historical cost, with no goodwill or other intangible assets recorded. Reported amounts from operations included herein prior to the Business Combination are those of Holley Intermediate. The shares and corresponding capital amounts and earnings per share, prior to the Business Combination, have been retroactively restated based on shares received by the Holley Stockholder.
The following table reconciles the elements of the Business Combination to the consolidated statements of cash flows for the year ended December 31, 2021:
| | | Recapitalization | |
| Cash - Empower's trust and cash (net of redemptions of $99,353 and transaction costs of $44,314) | | $ | 107,017 | |
| Cash - Forward Purchase Agreement | | | 50,000 | |
| Cash - PIPE Financing | | | 240,000 | |
| Net cash provided by Business Combination and PIPE Financing | | | 397,017 | |
| Less: cash consideration paid to Holley Stockholder | | | (264,718 | ) |
| Net contributions from Business Combination and PIPE Financing | | $ | 132,299 | |
ACQUISITIONS
During the three years ended December 31, 2022, the Company completed 14 acquisitions. These acquisitions are expected to enhance the Company's portfolio of products and services in the automotive aftermarket and automotive safety solutions market.
The Company accounts for acquisitions using the acquisition method, and accordingly, the purchase price has been allocated based upon the fair value of the assets acquired and liabilities assumed. The valuation of the assets acquired and liabilities assumed is subject to revision. If additional information becomes available, the Company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date; however, material changes are not expected. Goodwill generated by the acquisitions is primarily attributable to the strong market position of the entities acquired.
Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions were for 100 percent of the acquired business and are reported in the Consolidated Statements of Cash Flows, net of acquired cash and cash equivalents. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are typically expensed in the periods in which the costs are incurred and are recorded in acquisition and restructuring costs. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
In 2022, the Company acquired substantially all the assets of John's Ind., Inc. ("John's"), Southern Kentucky Classics ("SKC"), and Vesta Motorsports USA, Inc., doing business as RaceQuip ("RaceQuip"). These acquisitions were immaterial business combinations. Cash paid for the three acquisitions, net of cash acquired, was $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 $9,618. The goodwill and intangibles generated as a result of these acquisitions are deductible for income tax purposes. Pro forma results of operations and the results of operations since the acquisition dates for these immaterial acquisitions have not been separately disclosed because the effects were not significant compared to the consolidated financial statements, individually or in the aggregate.
63
The final allocation of the purchase price to specific assets acquired and liabilities assumed may change in future periods as the fair value estimates of inventory and intangibles are completed. 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 | | | | 1,081 | | | | 4,562 | |
| 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 | | | | 559 | | | | 6,417 | |
| 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.
In 2021, the Company acquired substantially all the assets of Finspeed, LLC (“Finspeed”), Classic Instruments LLC (“Classic Instruments”), ADS Precision Machining, Inc., doing business as Arizona Desert Shocks (“ADS”), Rocket Performance Machine, Inc., doing business as Rocket Racing Wheels (“Rocket”), and Speartech Fuel Injections Systems, Inc. (“Speartech”). These five acquisitions were individually immaterial business combinations that are material in the aggregate. Cash paid for the five immaterial acquisitions, net of cash acquired, was $19,909, and was funded with borrowings from the Company's credit facility and cash on hand. The acquisitions resulted in both amortizable and non-amortizable intangibles and goodwill totaling $13,247. The goodwill and intangibles generated as a result of these acquisitions are deductible for income tax purposes. Pro forma results of operations and the results of operations since the acquisition dates for these immaterial acquisitions have not been separately disclosed because the effects were not significant compared to the consolidated financial statements, individually or in the aggregate.
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of acquired assets and liabilities, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
| | | | | | | Measurement | | | | | |
| | | 2021 | | | Period | | | 2021 | |
| | | (as initially reported) | | | Adjustments | | | (as adjusted) | |
| Cash | | $ | 122 | | | $ | — | | | $ | 122 | |
| Accounts receivable | | | 618 | | | | — | | | | 618 | |
| Inventory | | | 3,975 | | | | — | | | | 3,975 | |
| Property, plant and equipment | | | 2,274 | | | | — | | | | 2,274 | |
| Other assets | | | 23 | | | | — | | | | 23 | |
| Tradenames | | | 2,608 | | | | — | | | | 2,608 | |
| Customer relationships | | | 2,450 | | | | — | | | | 2,450 | |
| Goodwill | | | 11,017 | | | | (2,828 | ) | | | 8,189 | |
| Accounts payable | | | (343 | ) | | | — | | | | (343 | ) |
| Accrued liabilities | | | (129 | ) | | | 122 | | | | (7 | ) |
| | | $ | 22,615 | | | $ | (2,706 | ) | | $ | 19,909 | |
The fair value of the acquired customer relationship intangible assets was estimated using the excess earnings approach. The customer relationship intangible assets are being amortized based on the attrition rate of customers which have an estimated weighted average life of 18 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.
The remaining six acquisitions completed during the years ended December 31, 2021 and 2020 are described below.
Baer, Inc.
On December 23, 2021, the Company acquired substantially all the assets and liabilities of Baer, Inc., doing business as Baer Brakes ("Baer"). Consideration for the assets acquired was cash payments of $22,170. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill totaling $18,989. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded with borrowings from the Company's credit facility and cash on hand.
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of acquired assets and liabilities, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
| | | | | | | Measurement | | | | | |
| | | December 23, 2021 | | | Period | | | December 23, 2021 | |
| | | (as initially reported) | | | Adjustments | | | (as adjusted) | |
| Accounts receivable | | $ | 627 | | | $ | — | | | $ | 627 | |
| Inventory | | | 1,813 | | | | — | | | | 1,813 | |
| Property, plant and equipment | | | 695 | | | | — | | | | 695 | |
| Other assets | | | 76 | | | | — | | | | 76 | |
| Tradenames | | | 4,630 | | | | — | | | | 4,630 | |
| Customer relationships | | | 6,075 | | | | — | | | | 6,075 | |
| Goodwill | | | 8,363 | | | | (79 | ) | | | 8,284 | |
| Accounts payable | | | (81 | ) | | | 79 | | | | (2 | ) |
| Accrued liabilities | | | (28 | ) | | | — | | | | (28 | ) |
| | | $ | 22,170 | | | $ | — | | | $ | 22,170 | |
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.
The contractual value of the accounts receivable acquired was $800.
The Company incurred transaction costs in the amount of $222, which are reflected in operating expenses for the year ended December 31, 2021.
Brothers Mail Order Industries, Inc.
On December 16, 2021, the Company acquired substantially all the assets and liabilities of Brothers Mail Order Industries, Inc., doing business as Brothers Trucks ("Brothers"). Consideration for the assets acquired was cash payments of $26,135. The acquisition resulted in non-amortizable intangibles and goodwill totaling $24,835. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded with borrowings from the Company's credit facility and cash on hand.
65
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of acquired assets and liabilities, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
| | | | | | | Measurement | | | | | |
| | | December 16, 2021 | | | Period | | | December 16, 2021 | |
| | | (as initially reported) | | | Adjustments | | | (as adjusted) | |
| Accounts receivable | | $ | 22 | | | $ | — | | | $ | 22 | |
| Inventory | | | 1,682 | | | | — | | | | 1,682 | |
| Property, plant and equipment | | | 20 | | | | — | | | | 20 | |
| Other assets | | | 13 | | | | — | | | | 13 | |
| Tradenames | | | 4,975 | | | | — | | | | 4,975 | |
| Goodwill | | | 19,561 | | | | 299 | | | | 19,860 | |
| Accounts payable | | | (34 | ) | | | — | | | | (34 | ) |
| Accrued liabilities | | | (403 | ) | | | — | | | | (403 | ) |
| | | $ | 25,836 | | | $ | 299 | | | $ | 26,135 | |
The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
The contractual value of the accounts receivable acquired was $22.
The Company incurred transaction costs in the amount of $191, which are reflected in operating expenses for the year ended December 31, 2021.
Advance Engine Management Inc.
On April 14, 2021, the Company acquired substantially all the assets and liabilities of Advance Engine Management Inc. doing business as AEM Performance Electronics (“AEM”). Consideration for the assets acquired was cash payments of $51,243. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill, totaling $44,486. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded from cash on hand.
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of acquired assets and liabilities, as noted below. The allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
| | | | | | | Measurement | | | | | |
| | | April 14, 2021 | | | Period | | | April 14, 2021 | |
| | | (as initially reported) | | | Adjustments | | | (as adjusted) | |
| Accounts receivable | | $ | 3,454 | | | $ | (61 | ) | | $ | 3,393 | |
| Inventory | | | 3,892 | | | | — | | | | 3,892 | |
| Property, plant and equipment | | | 1,342 | | | | — | | | | 1,342 | |
| Other assets | | | 493 | | | | (91 | ) | | | 402 | |
| Tradenames | | | 10,760 | | | | — | | | | 10,760 | |
| Customer relationships | | | 14,640 | | | | — | | | | 14,640 | |
| Patents | | | 1,970 | | | | — | | | | 1,970 | |
| Technology intangibles | | | 110 | | | | — | | | | 110 | |
| Goodwill | | | 17,426 | | | | (420 | ) | | | 17,006 | |
| Accounts payable | | | (2,032 | ) | | | 110 | | | | (1,922 | ) |
| Accrued liabilities | | | (489 | ) | | | 139 | | | | (350 | ) |
| | | $ | 51,566 | | | $ | (323 | ) | | $ | 51,243 | |
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 and patents intangible assets were estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life. The patents are being amortized over 13 years based on the weighted average remaining life of the patent portfolio.
The contractual value of the accounts receivable acquired was $3,454.
The Company’s results for the year ended December 31, 2021, include $16,593 of net sales and $2,664 of net income from AEM since the date of acquisition. The Company incurred transaction costs in the amount of $2,264, which are reflected in operating expenses for the year ended December 31, 2021.
Drake Automotive Group LLC
On November 11, 2020, the Company acquired Drake Automotive Group LLC (“Drake”). The purchase price was $49,104. The Company acquired 100% of the outstanding member units of Drake. Consideration for the assets acquired consisted of cash payments of $47,104 plus an estimated earn-out payment of $2,000 based on expected 2020 performance. The earn-out payment of $2,000 was paid in March 2021. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill, totaling $32,441. The goodwill and intangibles generated as a result of this acquisition are deductible for income tax purposes. The purchase price was funded from the proceeds of debt and cash on hand.
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:
| Cash | | $ | 205 | |
| Accounts receivable | | | 3,947 | |
| Inventory | | | 14,198 | |
| Property, plant and equipment | | | 1,296 | |
| Other assets | | | 189 | |
| Tradenames | | | 7,715 | |
| Customer relationships | | | 17,175 | |
| Goodwill | | | 7,551 | |
| Accounts payable | | | (2,524 | ) |
| Accrued liabilities | | | (648 | ) |
| | | $ | 49,104 | |
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.
The contractual value of the accounts receivable acquired was $4,155.
Simpson Performance Products, Inc.
On November 16, 2020, the Company acquired Simpson Performance Products, Inc. (“Simpson”). The purchase price was $117,409. The Company acquired 100% of the outstanding common stock of Simpson. Consideration for the assets acquired consisted of cash payments of $110,209 and an earnout initially valued at $7,200. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill, totaling $105,882. The goodwill and intangibles generated as a result of this acquisition are not deductible for income tax purposes. The purchase price was funded from the proceeds of debt and cash on hand.
The purchase agreement included a potential contingent payment based on the performance for the twelve months ended October 3, 2021. The seller could earn up to an additional $25,000. The fair value of this contingent payment was initially determined to be $7,200 using the “Bull Call” option strategy utilizing the option values from the Black-Scholes Option Pricing Model. Based on actual performance and updated projections of Simpson’s performance for the earn-out period, the fair value of the contingent payment was determined to be $24,373, resulting in an adjustment of $17,173, which is recognized in acquisition and restructuring costs in the consolidated statement of comprehensive income for the year ended December 31, 2021.
The determination of the final purchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the final fair value estimate of finished goods inventory, 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 | | | | | |
| | | November 16, 2020 | | | Period | | | November 16, 2020 | |
| | | (as initially reported) | | | Adjustments | | | (as adjusted) | |
| Cash | | $ | 7,715 | | | $ | - | | | $ | 7,715 | |
| Accounts receivable | | | 3,894 | | | | — | | | | 3,894 | |
| Inventory | | | 19,265 | | | | (770 | ) | | | 18,495 | |
| Property, plant and equipment | | | 5,952 | | | | — | | | | 5,952 | |
| Other assets | | | 1,613 | | | | — | | | | 1,613 | |
| Tradenames | | | 23,980 | | | | — | | | | 23,980 | |
| Customer relationships | | | 28,770 | | | | — | | | | 28,770 | |
| Patents | | | 2,720 | | | | — | | | | 2,720 | |
| Goodwill | | | 51,305 | | | | (893 | ) | | | 50,412 | |
| Accounts payable | | | (2,483 | ) | | | — | | | | (2,483 | ) |
| Accrued liabilities | | | (7,787 | ) | | | 361 | | | | (7,426 | ) |
| Deferred tax liability | | | (12,993 | ) | | | 1,375 | | | | (11,618 | ) |
| Debt | | | (4,615 | ) | | | — | | | | (4,615 | ) |
| | | $ | 117,336 | | | $ | 73 | | | $ | 117,409 | |
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 and patents intangible assets were estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life. The patents are being amortized over 10 years based on the weighted average remaining life of the patent portfolio.
The contractual value of the accounts receivable acquired was $3,894.
Detroit Speed, Inc.
On December 18, 2020, the Company acquired Detroit Speed, Inc. (“Detroit Speed”). The purchase price was $11,632. The Company acquired substantially all of the assets and liabilities of Detroit Speed. Consideration for the assets acquired includes cash payments of $9,297 and Class A Units of the Holley Stockholder of $2,000. The acquisition resulted in both amortizable and non-amortizable intangibles and goodwill, totaling $4,482. The goodwill and intangibles generated as a result of this acquisition are partially deductible for income tax purposes. The purchase price was funded from cash on hand and distribution of Class A Units of the Holley Stockholder.
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 | | | | | |
| | | December 18, 2020 | | | Period | | | December 18, 2020 | |
| | | (as initially reported) | | | Adjustments | | | as adjusted) | |
| Cash | | $ | 1,784 | | | $ | — | | | $ | 1,784 | |
| Accounts receivable | | | 418 | | | | — | | | | 418 | |
| Inventory | | | 3,478 | | | | (324 | ) | | | 3,154 | |
| Property, plant and equipment | | | 3,040 | | | | — | | | | 3,040 | |
| Other assets | | | 215 | | | | — | | | | 215 | |
| Tradenames | | | 1,127 | | | | — | | | | 1,127 | |
| Customer relationships | | | 560 | | | | — | | | | 560 | |
| Goodwill | | | 2,636 | | | | 159 | | | | 2,795 | |
| Accounts payable | | | (668 | ) | | | — | | | | (668 | ) |
| Accrued liabilities | | | (1,019 | ) | | | 500 | | | | (519 | ) |
| Deferred tax liability | | | (274 | ) | | | — | | | | (274 | ) |
| | | $ | 11,297 | | | $ | 335 | | | $ | 11,632 | |
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 10 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.
The contractual value of the accounts receivable acquired was $418.
The following table provides the unaudited consolidated pro forma results for the periods presented as if Baer, Brothers, and AEM had been acquired as of January 1, 2020.
| | | For the years ended December 31, | |
| | | 2021 | | | 2020 | |
| Pro forma net sales | | $ | 727,369 | | | $ | 551,469 | |
| Pro forma net income | | | (16,248 | ) | | | 35,969 | |
The pro forma results include the effects of the amortization of purchased intangible assets and acquired inventory step- up. The pro forma results are based upon unaudited financial information of the acquired entity and are presented for informational purposes only and are not necessarily indicative of the results of future operations or the results that would have occurred had the acquisitions taken place in the periods noted.
DIVESTITURE
In the fourth quarter of 2022, in connection with a strategic review of its product portfolio, the Company made the decision to sell Finspeed. Finspeed generated approximately $426 in net sales in 2022. The Company received $1,966 cash consideration and recorded a pre-tax loss of $1,037 on the sale of the business, which included a $268 write-down of intangible assets, and was reported as other operating expense in the Consolidated Statements of Comprehensive Income (Loss).
Inventories of the Company consisted of the following:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Raw materials | | $ | 78,586 | | | $ | 54,818 | |
| Work-in-process | | | 23,906 | | | | 21,728 | |
| Finished goods | | | 131,081 | | | | 108,494 | |
| | | $ | 233,573 | | | $ | 185,040 | |
Property, Plant and Equipment, net
Property, plant and equipment of the Company consisted of the following:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Land | | $ | 3,426 | | | $ | 1,330 | |
| Buildings and improvements | | | 11,051 | | | | 10,623 | |
| Machinery and equipment | | | 66,140 | | | | 56,824 | |
| Construction in process | | | 9,563 | | | | 12,859 | |
| Total property, plant and equipment | | | 90,180 | | | | 81,636 | |
| Less: accumulated depreciation | | | 37,999 | | | | 30,141 | |
| Property, plant and equipment, net | | $ | 52,181 | | | $ | 51,495 | |
The Company’s long-lived assets by geographic locations are as follows:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| United States | | $ | 50,434 | | | $ | 49,547 | |
| International | | | 1,747 | | | | 1,948 | |
| Total property, plant and equipment, net | | $ | 52,181 | | | $ | 51,495 | |
Accrued Liabilities
Accrued liabilities of the Company consisted of the following:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Accrued freight | | $ | 6,861 | | | $ | 3,866 | |
| Accrued employee compensation and benefits | | | 6,259 | | | | 9,043 | |
| Accrued returns and allowances | | | 5,214 | | | | 6,135 | |
| Accrued taxes | | | 5,222 | | | | 1,412 | |
| Current portion of operating lease liabilities | | | 5,112 | | | | - | |
| Accrued other | | | 14,649 | | | | 14,397 | |
| Accrued liabilities | | $ | 43,317 | | | $ | 34,853 | |
| 5. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The following presents changes to goodwill for the periods indicated:
| Balance on December 31, 2020 | | $ | 359,099 | |
| AEM acquisition | | | 17,426 | |
| Classic Instruments acquisition | | | 4,912 | |
| Speartech acquisition | | | 2,705 | |
| ADS acquisition | | | 1,260 | |
| Baer acquisition | | | 8,363 | |
| Brothers acquisition | | | 19,561 | |
| Rocket acquisition | | | 2,141 | |
| Measurement period adjustments* | | | (4,084 | ) |
| Balance on December 31, 2021 | | $ | 411,383 | |
| John's acquisition | | | 240 | |
| SKC acquisition | | | 1,270 | |
| RaceQuip acquisition | | | 4,348 | |
| Measurement period adjustments* | | | 880 | |
| Balance on December 31, 2022 | | $ | 418,121 | |
* See Note 2, "Business Combination, Acquisitions, and Divestiture"
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. In the third quarter and fourth quarters of 2022, the Company performed quantitative and qualitative assessments and did not identify any indicators of impairment. No impairment changes were incurred during 2022 and 2021.
Intangible assets consisted of the following:
| | | 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 | |
| | | December 31, 2021 | |
| | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Value | |
| Finite-lived intangible assets: | | | | | | | | | | | | |
| Customer relationships | | $ | 268,438 | | | $ | (32,662 | ) | | $ | 235,776 | |
| Tradenames | | | 13,775 | | | | (4,119 | ) | | | 9,656 | |
| Technology | | | 26,675 | | | | (9,080 | ) | | | 17,595 | |
| Total finite-lived intangible assets | | $ | 308,888 | | | $ | (45,861 | ) | | $ | 263,027 | |
| | | | | | | | | | | | | |
| Indefinite-lived intangible assets: | | | | | | | | | | | | |
| Tradenames | | $ | 175,434 | | | | — | | | $ | 175,434 | |
The following outlines the estimated future amortization expense related to intangible assets held on December 31, 2022:
| 2023 | | $ | 14,557 | |
| 2024 | | | 13,744 | |
| 2025 | | | 13,714 | |
| 2026 | | | 13,608 | |
| 2027 | | | 13,493 | |
| Thereafter | | | 180,741 | |
| Total | | $ | 249,857 | |
In the third quarter of 2022, management concluded it was necessary to reevaluate indefinite-lived intangible assets for impairment after supply chain challenges led to the Company revising its earnings estimate for 2022, which resulted in a decline in the Company's market capitalization. As a result of this evaluation, a pre-tax impairment of $2,395 was recognized on certain indefinite-lived tradenames. In the fourth quarter of 2022, the Company performed a qualitative assessment of indefinite-lived intangible assets and did not identify any indicators of impairment.
The fair value of the indefinite-lived tradenames was estimated using the relief from royalty method, a form of the income approach. Significant judgement is required in estimating the fair value of intangible assets and in performing impairment tests. The most significant assumptions utilized in the determination of the estimated fair values of the indefinite-lived tradenames were the sales projections and long-term earnings growth rates, the royalty rate and the discount rate. The long-term earnings growth rate represents the expected rate at which the brands are expected to grow beyond the shorter-term business planning period. The royalty rate is based on observed market royalty rates for various industrial, consumer and commercial trademarks. The discount rate is based on the Company's weighted average cost of capital adjusted for risk. Due to the inherent uncertainty in forecasting future sales, actual results in the future may vary significantly from the forecasts.
Potential changes in our costs and operating structure, the implementation of synergies, and overall performance in the automotive aftermarket industry, could negatively impact our 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.
Debt of the Company consisted of the following:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| First lien term loan due November 17, 2028 | | $ | 649,350 | | | $ | 630,000 | |
| Revolver | | | 10,000 | | | | 25,000 | |
| Other | | | 2,770 | | | | 3,812 | |
| Less unamortized debt issuance costs | | | (11,557 | ) | | | (13,264 | ) |
| | | | 650,563 | | | | 645,548 | |
| Less current portion of long-term debt | | | (7,000 | ) | | | (7,875 | ) |
| | | $ | 643,563 | | | $ | 637,673 | |
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 consists 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 any 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 $1,200 in outstanding letters of credit on December 31, 2022.
Proceeds from the credit facility were used to repay in full the Company’s obligations under its existing first lien and second lien notes and to pay $13,413 in original issue discount and issuance costs 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. Beginning with the year ended December 31, 2022, the Company is required to pay down the term loan by an amount equal to 50% of annual excess cash flow, as defined in the Credit Agreement. This percentage requirement may decrease or be eliminated if certain leverage ratios are achieved. Based on our results for 2022, no excess cash flow payment is expected to be required in 2023. Any such payments offset future mandatory quarterly payments.
Amounts outstanding under the credit facility will accrue interest at a rate equal to either the London Interbank Offering Rate ("LIBOR") or base rate, at the Company's election, plus a specified margin. LIBOR is expected to be phased out by June 2023. The Company's LIBOR-based borrowings under the credit facility contemplate a transition from LIBOR to an alternative index. 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 December 31, 2022, the weighted average interest rate on the Company's borrowings under the credit facility was 8.4%.
Obligations under the Credit Agreement are secured by substantially all of the Company’s assets. The Credit Agreement includes representations and warranties, and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on restricted payments, additional borrowings, additional investments, and asset sales. The Credit Agreement also requires that Holley maintain on the last day of each quarter, a Total Leverage Ratio not to exceed a maximum amount. On December 31, 2022, the Company was in compliance with all financial covenants.
In February 2023, the Company entered into an amendment to its Credit Agreement which, among other things, increases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of the fiscal quarter ending March 31, 2023 through the fiscal 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 million, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility.
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.
In 2021, as a result of prepayments of the Company’s existing first lien and second lien notes, losses of $13,650 were recognized on the early extinguishment of debt due to the write-off of unamortized debt issuance costs.
Future maturities of long-term debt and amortization of debt issuance costs on December 31, 2022, are as follows:
| | | | Debt | | | | Debt Issuance Costs | |
| 2023 | | $ | 7,851 | | | $ | 1,782 | |
| 2024 | | | 7,430 | | | | 1,847 | |
| 2025 | | | 7,632 | | | | 1,915 | |
| 2026 | | | 6,571 | | | | 1,987 | |
| 2027 | | | 6,571 | | | | 2,061 | |
| Thereafter | | | 626,065 | | | | 1,965 | |
| | | $ | 662,120 | | | $ | 11,557 | |
Upon the Closing, there were 14,666,644 Warrants, consisting of 9,999,977 Public Warrants and 4,666,667 Private Warrants, outstanding to purchase shares of the Company's common stock that were issued by Empower prior to the Business Combination. Each warrant entitles the registered holder to purchase one share of the Company's common stock at a price of $11.50 per share, subject to adjustments, commencing on October 9, 2021 (the one-year anniversary of Empower’s initial public offering), 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 the Company’s 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 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 the Company’s 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 the Company’s 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 the Company’s 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, but the Company will use its commercially reasonable best efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.
The Company’s Warrants were accounted for as liabilities in accordance with ASC Subtopic 815-40, Derivatives and Hedging - Contracts in Entity's Own Equity, and are presented as 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. On December 31, 2022 and 2021, a warrant liability with a fair value of $4,272 and $61,293, respectively, was reflected as a long-term liability in the consolidated balance sheet. As of December 31, 2022 and 2021, there were 14,633,311 and 14,666,644 Warrants outstanding, respectively. For the year ended December 31, 2022, a decrease of $57,021 in the fair value of the warrant liability as compared to an increase of $32,580 in the fair value of the warrant liability for the year ended December 31, 2021, was reflected as change in fair value of warrant liability in the consolidated statements of comprehensive income.
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| 8. | FAIR VALUE MEASUREMENTS |
The Company’s financial liabilities subject to fair value measurement on a recurring basis and the level of inputs used for such measurements were as follows:
| | | Fair Value Measured on December 31, 2022 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Liabilities included in: | | | | | | | | | | | | | | | | |
| Warrant liability (Public) | | $ | 2,691 | | | $ | — | | | $ | — | | | $ | 2,691 | |
| Warrant liability (Private) | | | — | | | | — | | | | 1,581 | | | | 1,581 | |
| Earn-out liability | | | — | | | | — | | | | 1,176 | | | | 1,176 | |
| Total fair value | | $ | 2,691 | | | $ | — | | | $ | 2,757 | | | $ | 5,448 | |
| | | Fair Value Measured on December 31, 2021 | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Liabilities included in: | | | | | | | | | | | | | | | | |
| Warrant liability (Public) | | $ | 39,500 | | | $ | — | | | $ | — | | | $ | 39,500 | |
| Warrant liability (Private) | | | — | | | | — | | | | 21,793 | | | | 21,793 | |
| Earn-out liability | | | — | | | | — | | | | 26,596 | | | | 26,596 | |
| Total fair value | | $ | 39,500 | | | $ | — | | | $ | 48,389 | | | $ | 87,889 | |
On December 31, 2022 and 2021, the Company's derivative liabilities for its private and public warrants and the earn-out liability (see Note 2, “Business Combination, Acquisitions, and Divestiture,” for more details) are measured at fair value on a recurring basis. The fair value for the private warrants, earn-out liability, and acquisition contingent consideration payable are determined based on significant inputs not observable in the market (Level 3). The valuation of the Level 3 liabilities uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. The Company uses a Monte Carlo simulation model to estimate the fair value of its private warrants and earn-out liability. The fair value of the public warrants is determined using publicly traded prices (Level 1). Changes in the fair value of the derivative liabilities related to warrants and the earn-out liability are recognized as non-operating expense in the consolidated statements of comprehensive income (loss). Changes in the fair value of acquisition contingent consideration payable are recognized as acquisition and restructuring costs in the consolidated statements of comprehensive income (loss).
The fair value of private warrants was estimated at December 31, 2022 and 2021 using the Monte Carlo simulation model with the following assumptions:
| | | 2022 | | | 2021 | |
| Valuation date price | | $ | 2.12 | | | $ | 12.99 | |
| Strike price | | $ | 11.50 | | | $ | 11.50 | |
| Remaining life (in years) | | | 3.54 | | | | 4.54 | |
| Expected dividend | | $ | — | | | $ | — | |
| Risk-free interest rate | | | 4.06 | % | | | 1.19 | % |
| Price threshold | | $ | 18.00 | | | $ | 18.00 | |
The fair value of the earn-out liability was estimated at December 31, 2022 and 2021 using the Monte Carlo simulation model with the following assumptions:
| | | 2022 | | | 2021 | |
| Valuation date price | | $ | 2.12 | | | $ | 12.99 | |
| Expected term (in years) | | | 5.54 | | | | 6.54 | |
| Expected volatility | | | 70.33 | % | | | 40.59 | % |
| Risk-free interest rate | | | 3.88 | % | | | 1.40 | % |
| Price hurdle 1 | | not applicable | | | $ | 13.00 | |
| Price hurdle 2 | | $ | 15.00 | | | $ | 15.00 | |
On December 31, 2022 and 2021, the Company had accounts receivable, accounts payable and accrued expenses for which the carrying value approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s long-term debt approximates fair value as the rates used approximate the market rates currently available to the Company. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements.
The reconciliation of changes in Level 3 during the years ended December 31, 2022 and 2021 is as follows:
| | | Private Warrants | | | Acquisition Contingent Consideration | | | Earn-Out Liability | | | Total | |
| Balance on December 31, 2020 | | $ | — | | | $ | 9,200 | | | $ | — | | | $ | 9,200 | |
| Cash paid for contingent consideration | | | — | | | | (26,573 | ) | | | — | | | | (26,573 | ) |
| Liabilities assumed in recapitalization | | | 9,613 | | | | — | | | | 17,722 | | | | 27,335 | |
| Losses included in earnings | | | 12,180 | | | | 17,373 | | | | 8,874 | | | | 38,427 | |
| Balance on December 31, 2021 | | | 21,793 | | | | — | | | | 26,596 | | | | 48,389 | |
| Liabilities reclassed to equity | | | — | | | | — | | | | (14,689 | ) | | | (14,689 | ) |
| Gains included in earnings | | | (20,212 | ) | | | — | | | | (10,731 | ) | | | (30,943 | ) |
| Balance on December 31, 2022 | | $ | 1,581 | | | $ | — | | | $ | 1,176 | | | $ | 2,757 | |
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 17, “Commitments and Contingencies” for more information.
The following table summarizes total revenue by product category. The Company's product category definitions have been revised by management in 2022. The prior-year periods have been revised to conform with the current presentation. There is no change to total sales.
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Electronic systems | | $ | 282,865 | | | $ | 309,233 | | | $ | 262,164 | |
| Mechanical systems | | | 165,007 | | | | 154,878 | | | | 120,893 | |
| Exhaust | | | 66,767 | | | | 78,179 | | | | 72,294 | |
| Accessories | | | 108,150 | | | | 85,280 | | | | 41,805 | |
| Safety | | | 65,626 | | | | 65,277 | | | | 7,023 | |
| Total sales | | $ | 688,415 | | | $ | 692,847 | | | $ | 504,179 | |
The following table summarizes total revenue based on geographic location from which the product is shipped:
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| United States | | $ | 669,187 | | | $ | 674,491 | | | $ | 502,661 | |
| Italy | | | 19,228 | | | | 18,356 | | | | 1,518 | |
| Total sales | | $ | 688,415 | | | $ | 692,847 | | | $ | 504,179 | |
Income tax expense (benefit) of the Company consisted of the following:
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Current income tax expense (benefit): | | | | | | | | | | | | |
| Federal | | $ | 12,356 | | | $ | 7,422 | | | $ | (530 | ) |
| State | | | 1,253 | | | | 323 | | | | 1,174 | |
| Foreign | | | 2,450 | | | | 2,602 | | | | 1,668 | |
| Total current income tax expense (benefit) | | | 16,059 | | | | 10,347 | | | | 2,312 | |
| Deferred income tax expense (benefit): | | | | | | | | | | | | |
| Federal | | | (8,679 | ) | | | 823 | | | | 7,136 | |
| State | | | (2,591 | ) | | | (552 | ) | | | (622 | ) |
| Foreign | | | (296 | ) | | | (189 | ) | | | — | |
| Total deferred income tax expense (benefit) | | | (11,566 | ) | | | 82 | | | | 6,514 | |
| Total income tax expense (benefit) | | $ | 4,493 | | | $ | 10,429 | | | $ | 8,826 | |
The Company’s income before income taxes was subject to taxes in the following jurisdictions:
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| United States | | $ | 72,276 | | | $ | (24,772 | ) | | $ | 37,548 | |
| Foreign | | | 5,991 | | | | 8,062 | | | | 4,135 | |
| Income (loss) before income taxes | | $ | 78,267 | | | $ | (16,710 | ) | | $ | 41,683 | |
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Reported income tax expense (benefit) for the year ended December 31, 2022, 2021 and 2020 differs from the “expected” tax expense (benefit), computed by applying the U.S. Federal statutory income tax rate of 21% to income before income taxes as follows:
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Expected tax expense (benefit) at U.S. Federal statutory rates | | $ | 16,479 | | | $ | (3,510 | ) | | $ | 8,753 | |
| State income tax expense (benefit) | | | (1,057 | ) | | | (180 | ) | | | 335 | |
| Permanent tax differences | | | 4,275 | | | | 825 | | | | (53 | ) |
| Foreign-derived intangible income deduction | | | (298 | ) | | | — | | | | — | |
| Global intangible low-taxed income | | | — | | | | 375 | | | | 220 | |
| Foreign rate differential | | | 560 | | | | 719 | | | | 389 | |
| Tax credit | | | (1,393 | ) | | | (1,620 | ) | | | (646 | ) |
| Earn-outs | | | (2,254 | ) | | | 5,470 | | | | — | |
| Change in fair value of warrants | | | (11,974 | ) | | | 6,842 | | | | — | |
| Transaction costs | | | — | | | | 1,465 | | | | 280 | |
| Other differences, net | | | 155 | | | | 43 | | | | (452 | ) |
| Total income tax expense (benefit) | | $ | 4,493 | | | $ | 10,429 | | | $ | 8,826 | |
The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and deferred tax liabilities consisted of the following:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Deferred tax assets: | | | | | | | | |
| Reserves on assets | | $ | 12,305 | | | $ | 8,220 | |
| Liabilities not yet deductible | | | 3,371 | | | | 3,040 | |
| Interest expense limitation | | | 9,624 | | | | 7,863 | |
| Right-of-use liability | | | 6,899 | | | | — | |
| Section 174 expenses | | | 6,197 | | | | — | |
| Net operating losses | | | 1,493 | | | | 1,431 | |
| Other | | | 526 | | | | 253 | |
| Total gross deferred tax assets | | | 40,415 | | | | 20,807 | |
| Deferred tax liabilities: | | | | | | | | |
| Tradename | | | 33,770 | | | | 32,713 | |
| Intangible assets | | | 41,126 | | | | 43,965 | |
| Goodwill | | | 10,037 | | | | 7,969 | |
| Property, plant and equipment | | | 7,110 | | | | 6,205 | |
| Right-of-use asset | | | 6,762 | | | | — | |
| Total gross deferred tax liabilities | | | 98,805 | | | | 90,852 | |
| Net deferred tax liabilities | | $ | 58,390 | | | $ | 70,045 | |
Based on the Company’s projected pretax earnings, reversal of deferred tax liabilities and other relevant factors, management believes that it is more likely than not that the Company’s deferred tax assets on December 31, 2022 and 2021 will be realized.
On December 31, 2022, the Company's federal and state net operating loss carryforwards for income tax purposes were immaterial. A majority of the U.S. net operating loss carryforwards have no expiration date. The remaining state net operating loss carryforwards expire at various dates through 2035. The entire amount of federal net operating loss carryforward of $625 and a significant portion of state net operating loss carryforward of $868 relate to acquisitions, and, as a result, are limited in the amount that can be recognized in any one year.
Uncertain Tax Positions
Under the accounting rules for income taxes, the Company is not permitted to recognize the tax benefit attributable to a tax position unless such position is more likely than not to be sustained upon examination by taxing authorities, including resolution of any related appeals and litigation processes, based solely on the technical merits of the position. The Company did not have any uncertain tax positions for the year ended December 31, 2022.
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The Company recognizes interest on liabilities for uncertain tax positions in interest expense and would recognize penalties, if any, in operating expenses in its consolidated statements of comprehensive income (loss). In 2022 and 2021, the Company has not recognized any amount of interest and penalties for uncertain tax positions in its consolidated statements of comprehensive income (loss).
The Company files federal, state, and non-U.S. tax returns in various foreign jurisdictions. For state and non-U.S. tax returns, the Company is generally no longer subject to tax examinations for years prior to 2013. For federal tax returns, the Company is no longer subject to tax examination for years prior to 2018. The federal tax returns for 2019 through 2021 remain open for examinations. State income tax returns remain open for examination in various states for tax years 2013 through 2021.
The Company's tax policy is to comply with the laws, regulations, and filing requirements of all jurisdictions in which it conducts business. Management regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. Although the timing of the resolutions and/or closures of audits is highly uncertain, it is reasonably possible, that certain U.S. federal and non-U.S. tax audits may be concluded within the next 12 months, which could significantly increase or decrease the balance of our gross unrecognized tax benefits. However, the estimated impact of income tax expense and net income is not expected to be significant.
The following table sets forth the calculation of basic and diluted earnings per share:
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Numerator: | | | | | | | | | | | | |
| Net income (loss) - basic | | $ | 73,774 | | | $ | (27,139 | ) | | $ | 32,857 | |
| Less: fair value adjustment for warrants | | | (57,021 | ) | | | — | | | | — | |
| Net income (loss) - diluted | | $ | 16,753 | | | $ | (27,139 | ) | | $ | 32,857 | |
| Denominator: | | | | | | | | | | | | |
| Weighted average common shares outstanding - basic | | | 116,762,928 | | | | 89,959,993 | | | | 67,673,884 | |
| Dilutive effect of potential common shares from RSUs | | | 101,290 | | | | — | | | | — | |
| Dilutive effect of potential common shares from warrants | | | 384,078 | | | | — | | | | — | |
| Weighted average common shares outstanding - diluted | | | 117,248,296 | | | | 89,959,993 | | | | 67,673,884 | |
| Earnings (loss) per share: | | | | | | | | | | | | |
| Basic | | $ | 0.63 | | | $ | (0.30 | ) | | $ | 0.49 | |
| Diluted | | $ | 0.14 | | | $ | (0.30 | ) | | $ | 0.49 | |
The following outstanding shares of common stock equivalents were excluded from the calculation of diluted earnings per share due to the anti-dilutive effect such shares would have on net loss per common share.
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Anti-dilutive shares excluded from calculation of diluted EPS: | | | | | | | | | | | | |
| Warrants | | | — | | | | 14,666,644 | | | | — | |
| Stock options | | | 1,709,690 | | | | 1,386,974 | | | | — | |
| Restricted stock units | | | 540,344 | | | | 656,485 | | | | — | |
| Earn-out shares | | | 1,093,750 | | | | 2,187,500 | | | | — | |
| Total anti-dilutive shares | | | 3,343,784 | | | | 18,897,603 | | | | — | |
The Company has a defined benefit pension plan (the “Plan”) for its employees. The Projected Unit Credit Actuarial Cost Method is used to determine the normal cost of the Plan and estimated pension benefit obligation. During 2002, the Plan was amended to curtail accrual of future benefits under the Plan. The pension plan assets are managed to maximize total return over the long term while providing sufficient liquidity and current return to satisfy the cash flow requirements of the plan. The plan’s day-to-day investment decisions are managed by our outside investment manager; however, overall investment strategies are discussed with our employee benefits committee. Our investment strategy is to weight our portfolio towards large-cap, high-quality, dividend-growing equities that we have historically favored. As our plan matures and interest rates normalize, we expect a greater allocation to fixed-income securities to better align asset and liability market risks. Our fixed-maturity bond portfolio is investment grade. The plan does not engage in derivative transactions.
On January 28, 2022, the Company approved the termination of its defined benefit pension plan, effective March 31, 2022. The final distribution of Plan assets pursuant to the termination was not made until the plan termination satisfied all regulatory requirements in the fourth quarter of 2022. 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 resulting settlement effect of the Plan termination was determined based on prevailing market conditions, the lump sum offer participation rate of eligible participants, the actual lump sum distributions, and annuity purchase rates at the date of distribution. As a result, the Plan recognized a final settlement loss of $154.
The following table shows the changes in the benefit obligation and plan assets and the plan’s funded status.
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Change in Projected Benefit Obligation: | | | | | | | | |
| Benefit obligation, January 1 | | $ | 6,104 | | | $ | 6,551 | |
| Service cost | | | 113 | | | | 143 | |
| Interest cost | | | 138 | | | | 152 | |
| Plan curtailments | | | (5,185 | ) | | | — | |
| Benefits paid | | | (299 | ) | | | (349 | ) |
| Expenses paid | | | (149 | ) | | | (135 | ) |
| Actuarial (gain) loss | | | (722 | ) | | | (258 | ) |
| Benefit obligation, December 31 | | $ | — | | | $ | 6,104 | |
| Change in Plan Assets: | | | | | | | | |
| Fair value of plan assets, January 1 | | $ | 5,242 | | | $ | 4,756 | |
| Actual return on plan assets | | | (374 | ) | | | 499 | |
| Employer contributions | | | 765 | | | | 471 | |
| Plan settlements | | | (5,185 | ) | | | — | |
| Benefits paid from plan assets | | | (299 | ) | | | (349 | ) |
| Expenses paid | | | (149 | ) | | | (135 | ) |
| Fair value of plan net assets, December 31 | | $ | — | | | $ | 5,242 | |
| Underfunded status at end of period | | $ | — | | | $ | (862 | ) |
| Amounts recognized in the consolidated balance sheet: | | | | | | | | |
| Current liabilities | | $ | — | | | $ | — | |
| Non-current liabilities | | | — | | | | (862 | ) |
| Net amount recorded | | $ | — | | | $ | (862 | ) |
There was no remaining accumulated benefit obligation for the Plan as of December 31, 2022. The accumulated benefit obligation for the Plan was $6,104 on December 31, 2021. The Company made contributions of $765, $471, and $589 in 2022, 2021 and 2020, respectively. There were no participant contributions in 2022, 2021 or 2020.
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Unrecognized actuarial losses are recognized as a component of accumulated other comprehensive income. The following table shows the balances reflected in accumulated other comprehensive income on a pre-tax basis for the periods presented:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Amounts recognized in accumulated other comprehensive loss (pre-tax): | | | | | | | | |
| Net actuarial loss | | $ | — | | | $ | 283 | |
The pre-tax amounts recognized in other comprehensive income were as follows:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Actuarial (gain) loss arising during measurement period | | $ | (129 | ) | | $ | (513 | ) |
| Amortization of actuarial loss | | | (154 | ) | | | (25 | ) |
| Total recognized in other comprehensive (income) loss | | $ | (283 | ) | | $ | (538 | ) |
The following summarizes the components of net periodic benefit cost for the defined benefit pension plan:
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Components of expense: | | | | | | | | | | | | |
| Service cost | | $ | 113 | | | $ | 143 | | | $ | 159 | |
| Interest cost | | | 138 | | | | 152 | | | | 190 | |
| Expected return on plan assets | | | (218 | ) | | | (240 | ) | | | (255 | ) |
| Settlement loss recognized | | | 154 | | | | — | | | | — | |
| Amortization of net loss | | | — | | | | 25 | | | | — | |
| Net periodic benefit cost | | $ | 187 | | | $ | 80 | | | $ | 94 | |
Weighted-average assumptions used to determine net cost:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Discount rate | | | 2.78 | % | | | 2.38 | % |
| Expected return on plan assets | | | 5.20 | % | | | 6.35 | % |
The Company uses a measurement date of December 31 for its defined benefit pension plan.
Weighted-average assumptions used to determine the benefit obligation:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Discount rate | | | not applicable | | | | 2.78 | % |
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In order to develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. The fair value of Plan assets on December 31, 2022, was zero. The fair value of Plan assets on December 31, 2021, by asset category using the Fair Value measurement hierarchy is shown in the table below. See Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” for more details about fair value measurements.
| | | December 31, 2021 | |
| | | Fair Value | | | Level 1 | | | Level 2 | | | Level 3 | |
| Common stock | | $ | 789 | | | $ | 789 | | | $ | — | | | $ | — | |
| Mutual funds | | | 2,171 | | | | 2,171 | | | | — | | | | — | |
| Corporate / government bonds | | | 2,354 | | | | — | | | | 2,354 | | | | — | |
| Cash and cash equivalents | | | 20 | | | | — | | | | 20 | | | | — | |
| Total | | $ | 5,334 | | | $ | 2,960 | | | $ | 2,374 | | | $ | — | |
Following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis as well as the general classification of such assets pursuant to the valuation hierarchy.
Common Stock: The fair value of common stock investments is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs).
Mutual Funds: The fair value of mutual fund investments is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs).
Corporate/government bonds: The fair value of corporate/government bonds is based upon recent bid prices or the average of the recent bid and ask prices when available (Level 2 inputs) and if not available, they are valued through matrix pricing models developed by sources considered by management to be reliable. Matrix pricing, which is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
401(k) Plan
The Company has 401(k) savings plan for salaried and non-salaried employees. Participation in the plan is optional. The Company matches employee contributions up to 3.5% each pay period. The Company's matching contributions for the years ended December 31, 2022, 2021, and 2020, include additional discretionary matching contributions of 1% based on the Company's performance targets for 2021, 2020 and 2019, respectively. The Company made matching contributions of $2,990, $2,579, and $1,997 for the years ended December 31, 2022, 2021, and 2020, respectively.
| 13. | EQUITY-BASED COMPENSATION PLANS |
In 2021, the Company adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”), which provides for the grant of restricted stock awards, incentive and nonqualified stock options, and other share-based awards to employees, directors and non-employees. On December 31, 2022, the Company had 8,850,000 shares of common stock reserved for issuance and 5,816,705 shares available for future grants under the 2021 Plan.
Stock Options
Stock option grants generally 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 at termination of service. The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2022 and 2021, was $4.65 and $3.88, respectively.
The following table presents a summary of stock option activity for the year ended December 31, 2022:
| | | | | | | Weighted | | | Weighted Average | | | Aggregate | |
| | | Number of | | | Average | | | Remaining Contractual | | | Intrinsic Value | |
| | | Stock Options | | | Exercise Price | | | Term (years) | | | (in millions) | |
| Options outstanding on December 31, 2021 | | | 1,386,974 | | | $ | 10.50 | | | | | | | | | |
| Granted | | | 592,056 | | | | 12.12 | | | | | | | | | |
| Forfeited | | | (209,417 | ) | | | 11.20 | | | | | | | | | |
| Expired | | | (59,923 | ) | | | 10.50 | | | | | | | | | |
| Options outstanding on December 31, 2022 | | | 1,709,690 | | | $ | 10.97 | | | | 8.73 | | | $ | — | |
| Options exercisable on December 31, 2022 | | | 399,840 | | | $ | 10.50 | | | | 8.55 | | | $ | — | |
Compensation expense for stock options is recorded based on straight-line amortization of the grant date fair value over the requisite service period. On December 31, 2022, there was $4,085 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a remaining weighted-average period of 1.79 years.
The fair value of each stock option granted in 2022 and 2021 was estimated on the grant date using a Black-Scholes option pricing model with the following assumptions:
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | |
| Weighted-average expected term | | | 6.0 | | | | 6.0 | |
| Expected volatility | | | 36.0% - 40.0 | % | | | 40.3 | % |
| Expected dividend | | | — | | | | — | |
| Risk-free interest rate | | | 1.98% - 3.06 | % | | | 0.94 | % |
The expected term has been estimated using a simplified method, which calculates the expected term as the mid-point between the vesting date and the contractual life of the awards since the Company does not have an extended history of actual exercises. The expected dividend yield is assumed to be zero since the Company has never paid dividends and does not have current plans to pay any dividends. The risk-free interest rate is based on yields of U.S. Treasury securities with maturities similar to the expected term of the options. Expected volatility is based on an evenly weighted blend of implied volatility and historical volatility of publicly traded peer companies since the Company has limited historical volatility.
Restricted Stock Units
Restricted stock units (“RSUs”) vest ratably over one to three years of continued employment. The fair value of a RSU at the grant date is equal to the market price of the Company’s common stock on the grant date. The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2022 and 2021, was $5.87 and $12.06, respectively. The total fair value of shares vested on the vesting date during the year ended December 31, 2022, was $3,497.
The following table summarizes activities for the Company’s unvested RSUs for the year ended December 31, 2022:
| | | Unvested Restricted Stock Units | |
| | | | | | | Weighted | |
| | | Number of | | | Average Grant | |
| | | RSUs | | | Date Fair Value | |
| December 31, 2021 | | | 656,485 | | | $ | 12.06 | |
| Granted | | | 868,853 | | | | 5.87 | |
| Vested | | | (303,283 | ) | | | 12.06 | |
| Forfeited | | | (113,725 | ) | | | 12.13 | |
| December 31, 2022 | | | 1,108,330 | | | $ | 9.43 | |
Compensation expense for RSUs is recorded based on amortization of the grant date fair market value over the period the restrictions lapse. On December 31, 2022, there was $6,262 of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a remaining weighted-average period of 1.77 years.
Profit Interest Units
The Holley Stockholder authorized an incentive pool of 41,400,000 units of Holley Stockholder that its management has the right to grant to certain employees of the Company. As of December 31, 2022, no units are available for grant. The units, which are designated as PIU's, 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. Compensation expense related to PIUs is recorded based on the grant-date fair value over the requisite service period.
In October 2022, the Holley Stockholder amended the vesting criteria to allow for immediate vesting of all outstanding and unvested units. The changes to these awards were deemed to be modification events under ASC Subtopic 718-10, Stock Compensation. Accordingly, during the year ended December 31, 2022, the Company recognized catch-up equity-based compensation expense, including incremental fair value resulting from the modification, as applicable to each award grant, amounting to a cumulative adjustment of $11,351 presented in selling, general and administrative expenses.
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The following table summarizes activities for unvested PIUs for the year ended December 31, 2022:
| | | Unvested Profit Interest Units | |
| | | | | | | Weighted | |
| | | Number of | | | Average Grant | |
| | | PIUs | | | Date Fair Value | |
| December 31, 2021 | | | 36,506,814 | | | $ | 0.56 | |
| Vested | | | (36,506,814 | ) | | | 0.56 | |
| December 31, 2022 | | $ | — | | | | | |
For the years ended December 31, 2022, 2021 and 2020, 36,506,814, 1,693,804, and 1,697,071 PIUs vested with total grant-date fair values of $20,276, $535, and $487, respectively. On December 31, 2022, all PIUs were vested and all compensation expense related to the PIUs has been recognized.
The Holley Stockholder's previously granted PIUs included 24,074,944 units that contained certain performance vesting criteria related to the attainment of specified levels of return for certain other investors in the Holley Stockholder and the occurrence of certain events. Compensation expense for these performance-based awards was not previously recognized, as meeting the necessary performance conditions for vesting was not considered probable. The early vesting of these awards was classified as a Type III: Improbable to Probable modification event under ASC Subtopic 718-10, and the fair value of the modified awards was estimated on the modification date using a Black-Scholes option pricing model. Determining the fair value of PIUs is affected by estimates involving inherent uncertainties, as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of the equity unit classes, value adjustments for a reduction in marketability, expected unit price volatility over the expected term of the units, unit redemption and cancellation behaviors, risk-free interest rates and expected dividends. The fair value of PIUs was estimated on the grant date with the following assumptions:
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Weighted-average expected term | | | 3.0 | | | | 2.0 | | | | 3.4 | |
| Expected volatility | | | 65.0 | % | | | 55.0 | % | | | 72.5 | % |
| Expected dividend | | | — | | | | — | | | | — | |
| Risk-free interest rate | | | 4.3 | % | | | 0.3 | % | | | 0.3 | % |
The expected term has been estimated based on the contractual terms, vesting schedules and expectations of future unit holder behavior. The expected dividend yield is assumed to be zero since the Company has never paid dividends and does not have current plans to pay any dividends. The risk-free interest rate is based on yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group. As the Holley Stockholder is a private company and does not have a trading history for its equity units, the expected price volatility for the equity units is estimated by taking the average historical price volatility for industry peers. Industry peers, which the Company has designated, consist of several public companies in the industry similar in size, stage of life cycle and financial leverage.
The components of share-based compensation expense, included within selling, general and administrative costs in the consolidated statements of comprehensive income, is as follows:
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Stock options | | $ | 2,349 | | | $ | 824 | | | $ | — | |
| Restricted stock units | | | 4,304 | | | | 1,070 | | | | — | |
| Profit interest units | | | 17,742 | | | | 3,069 | | | | 487 | |
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 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 14 years, inclusive of renewal options that the Company is reasonably certain to exercise. Taxes, insurance and maintenance expenses relating to all leases are obligations of the Company.
The following table summarizes operating lease assets and obligations:
| | | December 31, | |
| | | 2022 | |
| Assets: | | | | |
| Operating right of use assets | | $ | 29,522 | |
| Liabilities: | | | | |
| Current operating lease liabilities - Accrued liabilities | | $ | 5,112 | |
| Long-term operating lease liabilities - Other noncurrent liabilities | | | 24,992 | |
| Total lease liabilities | | $ | 30,104 | |
The following summarizes the components of operating lease expense and provides supplemental cash flow information for operating leases:
| | | For the year ended December 31, | |
| | | 2022 | |
| Components of lease expense: | | | | |
| Operating lease expense | | $ | 7,294 | |
| Short-term lease expense | | | 2,402 | |
| Variable lease expense | | | 763 | |
| Total lease expense | | $ | 10,459 | |
| Supplemental cash flow information related to leases: | | | | |
| Cash paid for amounts included in measurement of operating lease liabilities | | $ | 7,311 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | | 13,942 | |
| Decapitalization of right-of-use assets upon lease termination and/or modification | | | 12,658 | |
Information associated with the measurement of operating lease obligations as of December 31, 2022, is as follows:
| Weighted average remaining lease term (in years) | | | 7.9 | |
| Weighted average discount rate | | | 5.77 | % |
The following table summarizes the maturities of the Company's operating lease liabilities as of December 31, 2022:
| 2023 | | $ | 6,683 | |
| 2024 | | | 5,440 | |
| 2025 | | | 3,861 | |
| 2026 | | | 3,665 | |
| 2027 | | | 3,612 | |
| Thereafter | | | 14,713 | |
| Total lease payments | | | 37,974 | |
| Less imputed interest | | | (7,870 | ) |
| Present value of lease liabilities | | $ | 30,104 | |
For the years ended December 31, 2021 and 2020, total rent expense under operating leases approximated $8,412, and $4,688, respectively.
Prior to the Company's adoption of ASC Topic 842 on January 1, 2022, the maturity schedule of future minimum non-cancelable lease payments under the Company's operating leases in effect as of December 31, 2021 were as follows:
| 2022 | | $ | 8,517 | |
| 2023 | | | 6,320 | |
| 2024 | | | 4,766 | |
| 2025 | | | 2,995 | |
| 2026 | | | 2,813 | |
| Thereafter | | | 8,546 | |
| Total minimum lease commitments | | $ | 33,957 | |
| 15. | MAJOR RESELLER CUSTOMERS |
The Company's reseller customers include many large and well-known automotive parts retailers and distributors. The following table summarizes resellers that individually account for more than 5% of the Company’s net sales in any of the periods presented:
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Customer A | | | 19.2 | % | | | 19.3 | % | | | 21.5 | % |
| Customer B | | | 3.4 | % | | | 4.1 | % | | | 5.4 | % |
The following reseller customers accounted for 10% or more of the Company’s account receivable balance in any of the periods presented:
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Customer A | | | 11.3 | % | | | 7.4 | % |
| 16. | ACQUISITION, RESTRUCTURING AND MANAGEMENT FEE COSTS |
The following table summarizes total acquisition, restructuring and management fee costs:
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Acquisitions (1) | | $ | 1,887 | | | $ | 5,074 | | | $ | 4,434 | |
| Restructuring (2) | | | 2,626 | | | | 1,421 | | | | 5,309 | |
| Management fees (3) | | | — | | | | 25,789 | | | | 6,089 | |
| Earn out adjustment (4) | | | — | | | | 17,173 | | | | — | |
| Total acquisition, restructuring and management fees | | $ | 4,513 | | | $ | 49,457 | | | $ | 15,832 | |
| | (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. |
| | (3) | Includes acquisition costs and management fees paid to Sentinel Capital Partners, including a fee of $23,275 paid in 2021 upon the Closing of the Business Combination. Director compensation of $180 and $90 attributable to Mr. Basham's and Mr. Coady's service on Holley's Board of Directors paid to Sentinel Capital Partners is included in selling, general, and administrative cost for the years ended December 31, 2022 and 2021. |
| | (4) | A fair value adjustment to the contingent consideration payable from the Simpson acquisition. |
| 17. | COMMITMENTS AND CONTINGENCIES |
The Company is a party to various lawsuits and claims in the normal course of business. While the lawsuits and claims against the Company cannot be predicted with certainty, management believes that the ultimate resolution of the matters will not have a material effect on the consolidated financial position or results of operations of the Company.
The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. The accrued product warranty costs are based primarily on historical experience of actual warranty claims and are recorded at the time of the sale.
The following table provides the changes in the Company's accrual for product warranties, which is classified as a component of accrued liabilities in the consolidated balance sheets.
| | | For the years ended December 31, | |
| | | 2022 | | | 2021 | | | 2020 | |
| Beginning balance | | $ | 3,994 | | | $ | 3,989 | | | $ | 3,454 | |
| Accrued for current year warranty claims | | | 12,261 | | | | 10,185 | | | | 11,251 | |
| Settlement of warranty claims | | | (12,671 | ) | | | (10,180 | ) | | | (10,716 | ) |
| Ending balance | | $ | 3,584 | | | $ | 3,994 | | | $ | 3,989 | |
In February 2023, the Company entered into an amendment to its Credit Agreement which, among other things, increases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of the fiscal quarter ending March 31, 2023 through the fiscal 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.
Refer to Note 6 - Debt for more information regarding the Company's debt and Credit Agreement.
