SNAP ONE HOLDINGS CORP. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this quarterly report on Form 10-Q, as well as our Annual Report. The statements in this discussion contain forward-looking statements and are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management and involve risks and uncertainties. Actual results could differ materially from those discussed in or implied by forward-looking statements due to various factors, including those discussed below and elsewhere in this Form 10-Q and our Annual Report, particularly in the "Risk Factors" but also in other sections of this Form 10-Q and our Annual Report. We operate on a 52-week or 53-week fiscal year ending on the last Friday of December each year. Our fiscal year is divided into four quarters of 13 weeks, each beginning on a Saturday and containing one 5-week period followed by two 4-week periods. When a 53-week fiscal year occurs, we report the additional week in the fourth fiscal quarter. References to fiscal year 2021 are to our 53-week fiscal year endedDecember 31, 2021 . The fiscal quarters endedApril 1, 2022 , andMarch 26, 2021 were both 13-week periods.
Overview
Snap One powers smart living by enabling professional integrators to deliver seamless experiences in the connected homes and small businesses where people live, work and play. Our end-to-end product ecosystem delivered through our powerful distribution network and further bolstered by our technology-enabled workflow solutions delivers a compelling value proposition to our loyal and growing network of professional do-it-for-me ("DIFM") integrator customers. We distribute and provide integrators with a leading, comprehensive proprietary and third-party suite of connected, infrastructure, entertainment, and software solutions so the entire smart living experience is exceptional for the end consumer. Our product and service offerings encompass all of the elements required by integrators to build integrated smart living systems that are easy to install and simple to manage, serving the needs of both integrators and end consumers. Our differentiated technology and software-enabled workflow tools have been designed to support the integrator throughout the project lifecycle, enhancing their operations and helping them to profitably grow their businesses. We are vertically integrated with the majority of ourNet Sales and Contribution Margin coming from our proprietary-branded, internally developed products that are only available to integrators directly fromSnap One . These proprietary products are manufactured on an asset-light basis through our network of contract manufacturing and joint development suppliers located primarily inAsia . In addition, we offer a curated set of leading third-party products to enhance the one-stop shop experience for integrators, driving customer stickiness and sales growth.
Recent Developments
OnJanuary 20, 2022 , we announced the acquisition of Staub, a long-time Canadian distribution partner. The acquisition brings together two long-time business partners to provide more product choice, faster fulfillment, and superior support for professional integrators acrossCanada . The acquisition adds two Canadian locations to our distribution footprint. See Note 3 of the Notes to the Condensed Consolidated Financial Statements for more information regarding the acquisition.
As of
Key Factors Affecting Our Performance
Our historical financial performance has been primarily driven by the following factors, which we also expect to be the primary drivers of our financial performance in the future.
Wallet Share Growth Drives Increased Average Spend per Integrator. Increasing wallet share with integrators depends in part on our ability to continue expanding our omni-channel coverage, extending our product suite, bolstering our support services, and creating deeper integration across our products to make it compelling for integrators to useSnap One as their one-stop shop. Average wallet share with our integrators varies across DIFM markets, with particular strength in home technology and demonstrated success in commercial and security. 27 -------------------------------------------------------------------------------- New DIFM Integrator Additions in Home Technology, Security, Commercial and Internationally. We are a market leader in our core domestic home technology market, and we believe that our value proposition appeals to integrators in attractive adjacent markets. We are utilizing our proven strategy of acquiring integrators in the home technology market to attract integrators in security and commercial markets, where we are less penetrated but have displayed a track record of growth. We believe that strategic investments in expanding our product portfolio and targeted sales, marketing and new integrator onboarding initiatives will allow us to grow our network of integrators across these markets. We also believe there is a meaningful opportunity to expand our existing market share in non-U.S. markets. We plan to grow in these markets by investing in sales resources, broadening our available product portfolio, and strengthening our direct-to-integrator sales approach.
Investments in Our Integrated Platform. Our end-to-end product and software ecosystem and technology-enabled workflow solutions create an integrated platform of leading offerings, which we believe drive significant value for our integrators and personalized, immersive experiences for end consumers.
Omni-Channel Strategy Expansion. Our business model is built around an e-commerce centric, omni-channel go-to-market strategy. We provide a comprehensive e-commerce portal, which allows integrators to easily research products, design projects, receive training and certifications, order products, and solicit ongoing support. Our e-commerce portal is complemented by a growing network of 31 domestic local branches, two Canadian local branches, and seven distribution centers as ofApril 1, 2022 . The local branch presence is an important part of our strategy as it allows us to better serve integrators locally by providing same-day product availability when necessary, creating a site for relationship building with our support team and for training and product demonstration sessions. We believe integrators value the relationships and support we can deliver at the local level, and this further increases their loyalty to our business across channels. Strategic Acquisitions. In addition to our organic growth, we continue to grow our business through strategic acquisitions such as our acquisitions ofANLA, LLC ("Access Networks") and Staub to better serve existing and new integrators, broaden our product categories, and extend the geographic reach of our omni-channel capabilities. We will continue to pursue disciplined, accretive acquisitions that enhance our products, software and workflow solutions and expand into adjacent markets that allow us to serve our integrator base.
Impact of the COVID-19 Pandemic
Throughout the pandemic, we have supported professional integrators with their challenges, including staff considerations and the dynamic of practicing social distancing with their customers, to allow them to continue to provide their customers the infrastructure and connectivity needed to create personalized experiences for individuals and families who are spending more time at home. Following initial demand declines for our products and services in March andApril 2020 , sales recovered in 2021 as professional integrators' services became increasingly important for homeowners working and seeking entertainment from home. This resulted in accelerated growth in our business and reinforced that we provide a mission-critical function to our integrators. More recently, COVID-19 has affected our supply chain, including component sourcing and shipping and logistics challenges resulting in cost inflation, consistent with its effect across many industries. When combined with the demand for our products, these supply chain impacts have resulted in delayed product availability in some cases. We expect these impacts, including potential delayed product availability, to continue for as long as the global supply chain is experiencing these challenges. We continue to invest in supply chain initiatives to meet integrator demand and manage cost inflation, and while the situation caused by COVID-19 is dynamic, we have considered its impact when developing our estimates and assumptions. Actual results and outcomes may differ from our estimates and assumptions. For additional information of risks related to COVID-19, refer to "Risk Factors" in our Annual Report.
Key Metrics and Reconciliation of Non-GAAP Financial Data
In addition to the measures presented in our consolidated financial statements,
we present the following key business metrics on a fiscal year basis to help us
monitor the performance of our business, identify trends affecting our business
and assist us in making strategic decisions:
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Domestic Integrator
We define Domestic IntegratorNet Sales as sales in the fiscal year period from professional do-it-for-me integrator customers who transact withSnap One through a traditional integrator channel and excludes the impact of recently acquired businesses. Domestic IntegratorNet Sales is presented as a component of our revenue disaggregation.
We define Transacting Domestic Integrators as a unique integrator business that
transacted with
We calculate Spend per Transacting Domestic Integrator as Domestic Integrator
We believe these metrics are useful measures for evaluating our performance on a fiscal year basis.
The following table presents a reconciliation of Domestic IntegratorNet Sales , Transacting Domestic Integrators, and Spend per Transacting Domestic Integrator for the periods presented: Fiscal years ended December 25, December 31, 2021 2020 ($ in thousands) Domestic integrator(a) net sales$ 829,845 $ 684,980 Divided by: Transacting domestic integrators (in thousands) 20.0 17.9 Spend per domestic integrator $ 41.5$ 38.3 Year over year growth % Transacting domestic integrators 11.7 % Spend per domestic integrator
8.4 %
(a)Domestic integrator, or as it is defined in Note 4 of the Notes to the Condensed Consolidated Financial Statements,United States integrator, is defined as professional "do-it-for-me" integrator customers who transact withSnap One through a traditional integrator channel and excludes the impact of recently acquired businesses domestically.
Adjusted EBITDA and Adjusted Net Income
We define Adjusted EBITDA as net loss, plus interest expense, net, income tax benefit, depreciation and amortization, further adjusted to exclude equity-based compensation, acquisition-related and integration-related costs, IPO costs and certain other non-recurring, non-core, infrequent or unusual charges as described below.
We define Adjusted Net Income as net loss, plus amortization, further adjusted to exclude equity-based compensation, acquisition-related and integration-related costs, IPO costs and certain non-recurring, non-core, infrequent or unusual charges, including the estimated tax impacts of these adjustments.
Adjusted EBITDA and Adjusted Net Income are key measures used by management to
understand and evaluate our financial performance, trends and generate future
operating plans. Management uses these key measures to make strategic decisions
regarding the allocation of capital and analyze investments in initiatives that
are focused on cultivating new markets for our products and services. We believe
Adjusted EBITDA and Adjusted Net Income are useful measurements for analysts,
investors and other interested parties to evaluate companies in our markets as
they help identify underlying trends that could otherwise be masked by certain
expenses that we do not consider indicative of our ongoing performance.
Adjusted EBITDA and Adjusted Net Income have limitations as analytical tools.
These measures are not calculated in accordance with GAAP and should not be
considered in isolation from, or as a substitute for, financial information
prepared in accordance with GAAP. In addition, Adjusted EBITDA and Adjusted Net
Income may not be comparable to similarly titled metrics of other companies due
to differences among the methods of calculation.
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--------------------------------------------------------------------------------The following table presents a reconciliation of net (loss) income to Adjusted EBITDA for the periods presented:
Three Months Ended
April 1, March 26,
2022 2021
(in thousands)
Net loss $ (2,256) $ (6,036)
Interest expense 6,723 9,535
Income tax expense (benefit) (361) (763)
Depreciation and amortization 14,889 13,712
Other expense (income), net (420) (213)
Equity-based compensation 5,599 1,060
Compensation expense for payouts in lieu of TRA
participation(a) 279 -
Initial public offering costs(b) - 1,711
Fair value adjustment to contingent value rights(c) (2,800) 1,310
Deferred acquisition payments(d) 703 2,152
Deferred revenue purchase accounting adjustment(e) 97 148
Acquisition and integration related costs(f) 214 14
Other professional services costs(g) 837 -
Other(h) 87 712
Adjusted EBITDA $ 23,591 $ 23,342 The following table presents a reconciliation of net (loss) income to Adjusted Net Income for the periods presented:
Three Months Ended
April 1, March 26,
2022 2021
(in thousands)
Net loss $ (2,256) $ (6,036)
Amortization 12,661 11,888
Equity-based compensation 5,599 1,060
Foreign currency gains (179) (48)
Compensation expense for payouts in lieu of TRA
participation(a) 279 -
Initial public offering costs(b) - 1,711
Fair value adjustment to contingent value rights(c) (2,800) 1,310
Deferred acquisition payments(d) 703 2,152
Deferred revenue purchase accounting adjustment(e) 97 148
Acquisition and integration related costs(f) 214 14
Other professional services costs(g) 837 -
Other(h) 19 690
Income tax effect of adjustments(i) (4,457) (3,855)
Adjusted Net Income $ 10,717 $ 9,034
(a)Represents non-recurring expense related to payments to certain pre-IPO
owners in lieu of their participation in the TRA. Management does not believe
such costs are indicative of our ongoing operations as they are one-time awards
specific to the establishment of the TRA.
(b)Represents expenses related to professional fees in connection with preparation for our IPO.
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(c)Represents noncash gains and losses recorded from fair value adjustments
related to contingent value right liabilities. CVR liabilities represent
potential obligations to the prior sellers in conjunction with the acquisition
of the Company by investment funds managed by Hellman & Friedman in August 2017
and are based on estimates of expected cash payments to the prior sellers based
on specified targets for the return on the original capital investment.
(d)Represents expenses incurred related to deferred payments to employees
associated with our Control4 acquisition and other historical acquisitions. The
deferred payments are cash retention awards for key personnel from the acquired
companies and are expected to be paid to employees through 2023. Management does
not believe such costs are indicative of our ongoing operations as they are
one-time awards specific to acquisitions and are incremental to our typical
compensation costs incurred and we do not expect such costs to be reflective of
future increases in base compensation expense.
(e)Represents an adjustment related to the fair value of deferred revenue
related to the
(f)Represents costs directly associated with acquisitions and acquisition-related integration activities. These costs also include certain restructuring costs (e.g., severance) and other third-party transaction advisory fees associated with the acquisitions.
(g)Represents professional service fees associated with the preparation for Sarbanes-Oxley compliance, the implementation of new accounting standards and accounting for non-recurring transactions.
(h)Represents non-recurring expenses related to consulting, restructuring, and other expenses which management believes are not representative of our operating performance. (i)Represents the tax impacts with respect to each adjustment noted above after taking into account the impact of permanent differences using the statutory tax rate related to the applicable federal and foreign jurisdictions and the blended state tax rate. Contribution Margin We define Contribution Margin for a particular period as net sales, less cost of sales, exclusive of depreciation and amortization, divided by net sales. Management uses this key measure to understand and evaluate our financial performance, trends and generate future operating plans, make strategic decisions regarding the allocation of capital, and analyze investments in initiatives that are focused on cultivating new markets for our products and services. We believe Contribution Margin is a useful measurement for analysts, investors, and other interested parties to evaluate companies in our markets as they help identify underlying trends that could otherwise be masked by certain expenses that we do not consider indicative of our ongoing performance. Contribution Margin has limitations as an analytical tool. This measure is not calculated in accordance with GAAP and should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In addition, Contribution Margin may not be comparable to similarly titled metrics of other companies due to differences among the methods of calculation.
The following table presents the calculation of Contribution Margin:
Three Months Ended
April 1, March 26,
2022 2021
(in thousands)
Net sales $ 277,434 $ 220,468
Cost of sales, exclusive of depreciation and amortization(a) 172,332 128,876
Net sales less cost of sales, exclusive of depreciation and amortization
$ 105,102 $ 91,592 Contribution Margin 37.9 % 41.5 %
(a)Cost of sales for the three months ended
Free Cash Flow
We define Free Cash Flow as net cash (used in) provided by operating activities
less capital expenditures (which consist of purchases of property and equipment
as well as purchases of information technology, software development and
leasehold improvements). We believe it is useful to exclude capital expenditures
from our Free Cash Flow in order to
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measure the amount of cash we generate because the timing of such capital
investments made may not directly correlate to the underlying financial
performance of our business operations. Free Cash Flow is not a measure
calculated in accordance with GAAP and should not be considered in isolation
from, or as a substitute for financial information prepared in accordance with
GAAP. In addition, Free Cash Flow may not be comparable to similarly titled
metrics of other companies due to differences among methods of calculation. Free
Cash Flow provides useful information to investors and others in understanding
and evaluating our ability to generate additional cash from our business in the
same manner as our management and board of directors. Free Cash Flow may be
affected in the near to medium term by the timing of capital investments (such
as purchases of information technology and other equipment and leasehold
improvements), fluctuations in our growth and the effect of such fluctuations on
working capital and changes in our cash conversion cycle due to increases or
decreases of vendor payment terms as well as inventory turnover.
The following table presents a reconciliation of net cash used in operating activities to Free Cash Flow for the periods presented:
Three Months Ended
April 1 , March 26,
2022 2021
(in thousands)
Net cash (used in) provided by operating activities
(3,312) (2,050)
Free Cash Flow $ (26,334) $ (25,917)
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Basis of Presentation and Key Components of Results of Operations
We generate net sales by selling hardware products to our integrators both with and without embedded software, which are then resold to end consumers, typically in the installation of an audio/video, IT, smart-home, or surveillance-related package. We act both as a principal in selling proprietary products, and as an agent in selling certain third-party products through strategic partnerships with outside suppliers. In addition, we generate a small but growing percentage of our revenue through recurring revenue from subscription services associated with product sales including hosting services, technical support, and access to unspecified software updates and upgrades. Revenue is recognized when the integrator obtains control of the product, which occurs upon shipment, in an amount that reflects the consideration expected to be received in exchange for those products net of estimated discounts, rebates, returns, allowances and any taxes collected and remitted to government authorities. Revenue allocated to subscription services is recognized over time as services are provided. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates and Policies - Revenue Recognition" in the Annual Report.
Cost of sales, exclusive of depreciation and amortization
Cost of sales, exclusive of depreciation and amortization, includes expenses related to production of proprietary finished goods, including raw materials and inbound freight, purchase costs for third-party products produced by strategic partners and sold bySnap One , rebates, inventory reserve adjustments and employee costs related to assembly services. The components of our cost of sales, exclusive of depreciation and amortization may not be comparable to our peers. The changes in our cost of sales, exclusive of depreciation and amortization generally correspond with the changes in net sales and may be impacted by any significant fluctuations in the components of our cost of sales, exclusive of depreciation and amortization.
Selling, general and administrative expenses
Selling, general and administrative costs include payroll and related costs, occupancy costs, costs related to warehousing, distribution, outbound shipping to integrators, credit card processing fees, warranty, purchasing, advertising, research and development, non-income-based taxes, equity-based compensation, acquisition-related expenses, compensation expense for payouts in lieu of TRA participation and other corporate overhead costs. We expect that our selling, general and administrative expenses will increase at a growth rate below net sales growth when adjusted for one-time expenses, in future periods as we continue to grow, and due to additional legal, accounting, insurance and other expenses that we are incurring as a public company, including compliance with the Sarbanes-Oxley Act.
Depreciation and amortization
Depreciation expense is related to investments in property and equipment. Amortization expense consists of amortization of intangible assets originating from our acquisitions. Acquired intangible assets include developed technology, customer relationships, trademarks and trade names. We expect in the future that depreciation and amortization may increase based on acquisition activity, development of our platform and capitalized expenditures.
Interest expense
Interest expense includes interest expense on debt, including term loans and revolving credit facilities (each of which is described in more detail below under "- Liquidity and Capital Resources - Debt Obligations"), as well as the non-cash amortization of deferred financing costs.
Other (expense) income, net
Other (expense) income, net includes interest income, foreign currency remeasurement, TRA liability adjustments and transaction gains and losses.
Income tax expense (benefit)
We are subject toU.S. federal, state and local income taxes as well as foreign income taxes based on enacted tax rates in each jurisdiction, as adjusted for allowable credits and deductions. During the ordinary course of business, there are 33 --------------------------------------------------------------------------------
many transactions and calculations for which the ultimate tax determination is uncertain. As a result, we recognize tax liabilities based on estimates of whether additional taxes will be due.
Results of Operations
The following table sets forth our results of operations and results of operations data expressed as a percentage of net sales for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.
Three Months Ended
April 1, % of March 26, % of
2022 Net sales 2021 Net sales
($ in thousands)
Net Sales $ 277,434 100.0 % $ 220,468 100.0 %
Costs and expenses:
Cost of sales, exclusive of depreciation and
amortization 172,332 62.1 % 128,876 58.5 %
Selling, general and administrative expenses 86,527 31.2 % 75,357 34.2 %
Depreciation and amortization 14,889 5.4 % 13,712 6.2 %
Total costs and expenses 273,748 98.7 % 217,945 98.9 %
Income from operations 3,686 1.3 % 2,523 1.1 %
Other expenses (income):
Interest expense 6,723 2.4 % 9,535 4.3 %
Other expense (income), net (420) (0.2) % (213) (0.1) %
Total other expenses 6,303 2.3 % 9,322 4.2 %
Loss before income taxes (2,617) (0.9) % (6,799) (3.1) %
Income tax benefit (361) (0.1) % (763) (0.3) %
Net loss (2,256) (0.8) % (6,036) (2.7) %
Net loss attributable to noncontrolling
interest (20) 0.0 % (22) 0.0 %
Net loss attributable to Company $ (2,236) (0.8) % $ (6,014) (2.7) %
Three Months Ended April 1, 2022 , Compared to the Three Months Ended March 26,
2021
Net Sales
Three Months Ended
April 1, March 26,
2022 2021 $ Change % Change
($ in thousands)
Net Sales $ 277,434 $ 220,468 $ 56,966 25.8 %
Net sales increased by $57.0 million , or 25.8%, in the three months ended April
1, 2022 , compared to the three months ended March 26, 2021 . Growth was strong
across geographies, markets and product categories as we added new integrators
and increased spend per integrator. Approximately 5% of net sales growth was
attributed to the benefit of ownership of Access Networks and Staub for the full
and partial quarter period, respectively. Additionally, we benefited from the
continued ramp up of local branches, and the cumulative impact of price
increases enacted across our proprietary product portfolio since the first
quarter last year. While supply chain challenges represented a headwind in the
quarter, we took proactive measures to mitigate and deliver for our integrators.
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Three Months Ended
April 1, March 26,
2022 2021 $ Change % Change
($ in thousands)
Cost of sales, exclusive of depreciation and
amortization $ 172,332 $ 128,876 $ 43,456 33.7 %
As a percentage of net sales 62.1 % 58.5 %
Cost of sales, exclusive of depreciation and amortization, increased $43.5
million , or 33.7%, in the three months ended April 1, 2022 , compared to the
three months ended March 26, 2021 , primarily driven by higher sales volumes. As
a percentage of net sales, cost of sales, exclusive of depreciation and
amortization, increased to 62.1% in the current period from 58.5% in the prior
period. The increase in cost of sales, exclusive of depreciation and
amortization, as a percentage of net sales was primarily due to growth in
third-party product sales outpacing growth of proprietary product sales as we
further execute our omni-channel strategy by opening local branches, which
typically sell more third-party product than proprietary product. Additionally,
supplier costs and inbound freight costs increased due to ongoing supply chain
pressures. This increase in cost of sales, exclusive of depreciation and
amortization, as a percentage of net sales resulted in a lower Contribution
Margin of 37.9% for the three months ended April 1, 2022 , compared to 41.5% for
the three months ended March 26, 2021 .
Selling, General and Administrative ("SG&A") Expenses
Three Months Ended
April 1, March 26,
2022 2021 $ Change % Change
($ in thousands)
Selling, general and administrative expenses $ 86,527 $ 75,357 $ 11,170 14.8 %
As a percentage of net sales 31.2 % 34.2 %
Selling, general and administrative expenses increased $11.2 million , or 14.8%,
in the three months ended April 1, 2022 compared to the three months ended March
26, 2021 . The increase in selling, general, administrative expenses was
partially due to an increase in equity-based compensation expense of $4.5
million and increases in certain variable operating expenses (including outbound
shipping and credit card processing fees), driven by higher sales volumes. The
remaining increase in selling, general and administrative expenses was due to
increased costs associated with becoming and operating as a public company,
ongoing investments to support strategic growth initiatives and absorbing the
costs associated with recently acquired business.
Depreciation and Amortization
Three Months Ended
April 1, March 26,
2022 2021 $ Change % Change
($ in thousands)
Depreciation and amortization $ 14,889 $ 13,712 $ 1,177 8.6 %
As a percentage of net sales 5.4 % 6.2 %
Depreciation and amortization expenses increased by$1.2 million , or 8.6%, in the three months endedApril 1, 2022 compared to the three months endedMarch 26, 2021 . Amortization expense associated with intangible assets acquired increased between periods due to the acquisitions of Access Networks and Staub. Depreciation expense increased primarily due to the acquisitions of Access Networks and Staub, as well as the opening of new local branches between periods. 35 -------------------------------------------------------------------------------- Interest Expense Three Months Ended April 1, March 26, 2022 2021 $ Change % Change ($ in thousands) Interest expense$ 6,723 $ 9,535 $ (2,812) (29.5) % As a percentage of net sales 2.4
% 4.3 %
Interest expense decreased by$2.8 million , or 29.5%, in the three months endedApril 1, 2022 compared to the three months endedMarch 26, 2021 . The decrease was primarily driven by a lower average outstanding balance on our long-term debt in the first fiscal quarter of 2022 as compared to the first fiscal quarter of 2021. Other Expense (Income), net Three Months Ended April 1, March 26, 2022 2021 $ Change % Change ($ in thousands) Other expense (income)$ (420) $ (213) $ (207) 97.2 % As a percentage of net sales (0.2) % (0.1) % Other income increased by$0.2 million , or 97.2%, in the three months endedApril 1, 2022 , compared to the three months endedMarch 26, 2021 due to foreign currency gains resulting from favorable foreign currency movements, primarily related to the Canadian dollar. Income Tax Benefit Three Months Ended April 1, March 26, 2022 2021 $ Change % Change ($ in thousands) Income tax benefit$ (361) $ (763) $ 402 (52.7) % As a percentage of net sales (0.1) % (0.3) % Income tax benefit decreased by$0.4 million , or 52.7%, in the three months endedApril 1, 2022 compared to the three months endedMarch 26, 2021 . The effective tax rate for the three months endedApril 1, 2022 , was a benefit of 13.8% compared to a benefit of 11.3% for the three months endedMarch 26, 2021 . The change in the effective tax rate for the three months endedApril 1, 2022 , and the difference from theU.S. federal statutory rate of 21%, was primarily the result of allocation of income between jurisdictions, low pretax book income as compared to tax expense and a change in the state deferred rate.
Liquidity and Capital Resources
Sources of Liquidity
Our primary sources of liquidity are net cash provided by operating activities
and availability under our Credit Agreement. We assess our liquidity in terms of
our ability to generate adequate amounts of cash to meet current and future
needs. Our expected primary uses on a short-term and long-term basis are for
working capital requirements, capital expenditures, geographic or service
offering expansion, acquisitions, debt service requirements and other general
corporate purposes. Our primary working capital requirements are for the
purchase of inventory, payroll, rent, other facility costs, distribution costs
and general and administrative costs. Our working capital requirements fluctuate
during the year, driven primarily by seasonality and the timing of inventory
purchases. Our capital expenditures are primarily related to
infrastructure-related investments, including investments related to upgrading
and maintaining our information technology systems, ongoing location
improvements (joint design and manufacturing tooling), expenditures related to
our distributions centers, and new local branch openings.
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We have historically funded our operations and acquisitions primarily through
internally generated cash on hand and our Credit Facilities, except for the
acquisition of Control4 which was partially funded by a capital contribution
from the Former Parent Entity. Most recently, we completed our IPO of 13.9
million shares of our common stock, and on August 18, 2021 , we completed the
sale of 1.2 million shares of additional common stock to the underwriters
pursuant to their option to purchase additional shares, at an offering price of
$18.00 per share. We raised net proceeds of $249.2 million through the IPO,
after deducting underwriting discounts and other offering costs of $21.2
million .
Working Capital, Excluding Deferred Revenue
The following table summarizes our cash, cash equivalents, accounts receivable
and working capital, which we define as current assets minus current liabilities
excluding deferred revenue, for the periods indicated:
As of
April 1, December 31,
2022 2021
(in thousands)
Cash and cash equivalents $ 25,055 $ 40,577
Accounts receivable, net $ 57,151 $ 52,620
Working capital, excluding deferred revenue
Our cash and cash equivalents as ofApril 1, 2022 , are available for working capital purposes. We do not enter into investments for trading purposes, and our investment policy is to invest any excess cash in short term, highly liquid investments that reduce the risk of principal loss; therefore, our cash and cash equivalents are held in demand deposit accounts that generate very low returns. We believe that our existing cash and cash equivalents, together with expected cash flow from operating activities, will be sufficient to fund our operations and capital expenditure requirements for the next 12 months. Beyond the next 12 months, our primary capital requirements primarily consist of required principal and interest payments on long-term debt and lease payments under non-cancelable lease commitments as further described in Notes 8 and 14 to our consolidated financial statements included in our Annual Report. If cash provided by operating activities and borrowings under our Credit Agreement are not sufficient or available to meet our short and long-term capital requirements, then we may consider additional equity or debt financing in the future. There can be no assurance debt or equity financing will be available to us if we need it or, if available, the terms will be satisfactory to us. Our sources of liquidity could be affected by factors described under "Risk Factors" in our Annual Report. Debt Obligations OnDecember 8, 2021 , we entered into the Credit Agreement with various financial institutions consisting of a$465.0 million aggregate principal amount New Term Loan maturing in seven years and a$100.0 million New Revolving Credit Facility (which includes borrowing capacity available for letters of credit) maturing in five years. Borrowings under the New Term Loan will bear interest at a rate per annum equal to, at the Company's option, either (1) an applicable margin plus a base rate determined by reference to the highest of (a) 0.50% per annum plus the federal funds effective rate, (b) the prime rate and (c) the eurocurrency rate determined by reference to the cost of funds forU.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%; provided that such rate is not lower than a floor of 1.50% or (2) an applicable margin plus a eurocurrency rate determined by reference to the cost of funds forU.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs; provided that such rate is not lower than a floor of 0.50%. Borrowings under the New Revolving Credit Facility will bear interest at a rate per annum equal to an applicable margin based upon a leverage-based pricing grid, plus, at the Company's option, either (1) a base rate determined by reference to the highest of (a) 0.50% per annum plus the federal funds effective rate, (b) the prime rate and (c) the eurocurrency rate determined by reference to the cost of funds adjusted for certain additional costs, plus 1.00%; provided such rate is not lower than a floor of 1.00% or (2) a eurocurrency rate determined by reference to the applicable cost of funds for such borrowing adjusted for certain additional costs; provided such rate is not lower than a floor of zero. The New Term Loan amortizes in fixed equal quarterly installments in an amount equal to 1.0% per annum of the total aggregate principal amount thereof immediately after borrowing, with the balance due at maturity. We may voluntarily prepay loans or reduce commitments under the Credit Agreement, in whole or in part, subject to minimum amounts, with 37 -------------------------------------------------------------------------------- prior notice but without premium or penalty (subject to customary exceptions, including prepayments of the New Term Loan in connection with a repricing transaction that is consummated prior toJune 8, 2022 ). We may be required, with certain exceptions, to make mandatory payments under the Credit Agreement using a percentage of our annual excess cash flows or net proceeds from any non-ordinary course asset sales or certain debt issuances, if any.
The Credit Agreement contains various customary affirmative and negative
covenants. We were in compliance with such covenants as of
In addition, the New Revolving Credit Facility is subject to a first lien secured net leverage ratio of 7.50 to 1.00, tested quarterly commencing with the fiscal quarter ending on or aboutJune 30, 2022 , if, and only if, the aggregate principal amount from the revolving facility loans, letters of credit (to the extent not cash collateralized or backstopped or, in the aggregate, not in excess of the greater of$10.0 million and the stated face amount of letters of credit outstanding on the initial closing date of the Credit Agreement) and swingline loans outstanding and/or issued, as applicable, exceeds 35.0% of the total amount of the New Revolving Credit Facility commitments. OnAugust 4, 2021 , we used a portion of the net proceeds from the IPO to repay a portion of the Incremental Term Loan outstanding under the Old Credit Agreement totaling$215.9 million in principal, plus accrued interest of$1.0 million . We also incurred a charge of$6.6 million related to the write-off of unamortized debt issuance costs. In connection with the closing of the Credit Agreement, we repaid in full approximately$451.4 million of borrowings, including accrued interest, under the Old Credit Agreement. The term loan and revolving credit facilities and related agreements and documents under the Old Credit Agreement were terminated upon the effectiveness of the Credit Agreement. As ofApril 1, 2022 , we had$37,000 outstanding under the New Revolving Credit Facility. As ofDecember 31, 2021 , we had no borrowings outstanding under the New Revolving Credit Facility. As ofApril 1, 2022 andDecember 31, 2021 , we had$4,894 of outstanding letters of credit. The amount available under the New Revolving Credit Facility was$58,106 and$95,106 as ofApril 1, 2022 , andDecember 31, 2021 , respectively.
Historical Cash Flows
The following table sets forth our cash flows for the three months endedApril 1, 2022 andMarch 26, 2021 : Three Months Ended April 1, 2022 March 26, 2021 (in thousands) Net cash used in operating activities$ (23,022) $ (23,867) Net cash used in investing activities$ (29,521) $ (2,479) Net cash provided by (used in) financing activities$ 37,000 $ (2,146) Operating Activities Net cash used in operating activities was$23.0 million in the three months endedApril 1, 2022 , as compared to$23.9 million in the three months endedMarch 26, 2021 , a decrease of$0.9 million . The net cash used in operating activities during the three months endedApril 1, 2022 was driven primarily by a net increase in cash used for operating assets and liabilities, including an increase in inventory to protect against supply chain uncertainty.
Investing Activities
Net cash used in investing activities was$29.5 million in the three months endedApril 1, 2022 , as compared to$2.5 million in three months endedMarch 26, 2021 , an increase of$27.0 million . The increase in net cash used in investing activities for the three months endedApril 1, 2022 , was primarily due to the acquisition of Staub in the current period.
Financing Activities
Net cash provided by financing activities was$37.0 million for the three months endedApril 1, 2022 , compared to net cash used in financing activities of$2.1 million in the three months endedMarch 26, 2021 , an increase of$39.1 million . The increase in net cash provided by financing activities for the three months endedApril 1, 2022 , was due to borrowings on our New Revolving Credit Facility to help fund the acquisition of Staub. 38 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
As ofApril 1, 2022 andDecember 31, 2021 , we had off-balance sheet arrangements totaling$4.9 million related to our outstanding letters of credit. We have not entered into any other off-balance sheet arrangements, except as disclosed above. Contractual Obligations
We have contractual obligations comprised of payments of debt and interest, lease commitments, TRA and CVRs.
As of
Except as described herein, as ofApril 1, 2022 , there have been no material changes in our contractual obligations and commitments other than in the ordinary course of business from the contractual obligations and commitments for the year endedDecember 31, 2021 , as previously disclosed in our Annual Report.
Critical Accounting Estimates and Policies
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates and Policies" and our consolidated financial statements and related notes disclosed in our Annual Report for accounting policies and related estimates we believe are the most critical to understanding our consolidated financial statements, financial condition and results of operations and which require complex management judgment and assumptions or involve uncertainties. These critical accounting estimates and policies include revenue recognition; share-based compensation; income taxes; business combinations; inventories, net; goodwill and intangible assets; warranties; and CVRs. EffectiveJanuary 1, 2022 , we changed our approach to lease accounting in conjunction with our adoption of Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). There have been no other changes to our critical accounting estimates and policies or their application since the date of our Annual Report.
Recent Accounting Pronouncements
See Note 2 of the Notes to the Condensed Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
Emerging Growth Company Status
We qualify as an "emerging growth company" as defined in the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements that are not otherwise applicable to public companies. These provisions include, but are not limited to:
•not being required to comply with the auditor attestation requirements on the effectiveness of our internal controls over financial reporting;
•reduced disclosure obligations regarding executive compensation arrangements in our periodic reports, proxy statements and registration statements; and
•exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may use these provisions until the last day of our fiscal year in which the fifth anniversary of the completion of our IPO occurs (which will be our 2026 fiscal year). However, if certain events occur prior to the end of such five-year period, including if we become a "large accelerated filer," our annual gross revenues exceed$1.07 billion , or we issue more than$1.0 billion of nonconvertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period. Under the JOBS Act, emerging growth companies also can delay adopting new or revised accounting standards until such time as those standards would otherwise apply to private companies. We currently intend to take advantage of this exemption. 39
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