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 endedJuly 1, 2022 , andJune 25, 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 ofStaub Electronics, LTD. ("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
OnAugust 8, 2022 , the Company acquiredClare Controls, LLC ("Clare"), a provider of home automation and security products for whomSnap One has been the distributor since 2019. The Clare acquisition will enableSnap One to convert Clare's product suite into higher-margin proprietary products, and drive growth with professional integrators in adjacent markets.
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.
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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 use Snap 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.
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 32 domestic local branches, two Canadian local branches, and seven distribution centers as ofJuly 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"), Staub and Clare 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 COVID-19 and the lingering effects of 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. 32 --------------------------------------------------------------------------------
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:
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.
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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.
The following table presents a reconciliation of net loss to Adjusted EBITDA for the periods presented:
Three Months Ended Six Months Ended
July 1, June 25, July 1, June 25,
2022 2021 2022 2021
(in thousands)
Net loss $ (1,344) $ (1,056) $ (3,600) $ (7,092)
Interest expense 7,720 9,543 14,443 19,078
Income tax (benefit) expense (163) 119 (524) (644)
Depreciation and amortization 14,966 14,198 29,855 27,910
Other expense (income), net (63) (296) (483) (509)
Equity-based compensation 6,768 1,178 12,367 2,238
Provision for credit losses on notes
receivable(a) 5,872 - 5,872 -
Fair value adjustment to contingent
value rights(b) (3,275) 1,530 (6,075) 2,840
Deferred acquisition payments(c) 327 1,428 1,030 3,580
Compensation expense for payouts in lieu
of TRA participation(d) 279 - 558 -
Acquisition and integration related
costs(e) 64 222 278 236
Deferred revenue purchase accounting
adjustment(f) 53 141 150 289
Initial public offering costs(g) - 1,210 - 2,921
Other professional services costs(h) 376 - 1,213 -
Other(i) 100 1,095 187 1,807
Adjusted EBITDA $ 31,680 $ 29,312 $ 55,271 $ 52,654
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The following table presents a reconciliation of net loss to Adjusted Net Income
for the periods presented:
Three Months Ended Six Months Ended
July 1, June 25, July 1, June 25,
2022 2021 2022 2021
(in thousands)
Net loss $ (1,344) $ (1,056) $ (3,600) $ (7,092)
Amortization 12,597 12,079 25,258 23,967
Equity-based compensation 6,768 1,178 12,367 2,238
Foreign currency loss (gains) 166 (143) (13) (191)
Provision for credit losses on notes 5,872 - 5,872 -
receivables(a)
Fair value adjustment to contingent (3,275) 1,530 (6,075) 2,840 value rights(b) Deferred acquisition payments(c) 327 1,428 1,030 3,580 Compensation expense for payouts in lieu of TRA participation(d) 279 - 558 - Acquisition and integration related 64 222 278 236
costs(e)
Deferred revenue purchase accounting 53 141 150 289
adjustment(f)
Initial public offering costs(g) - 1,210 - 2,921 Other professional services costs(h) 376 - 1,213 - Other(i) 33 1,067 52 1,757 Income tax effect of adjustments(j) (5,416) (3,790) (9,873) (7,645) Adjusted Net Income$ 16,500 $ 13,866 $ 27,217 $ 22,900
(a)Represents provision for credit losses on notes receivable related to the Company's unsecured loan to Clare.
(b)Represents noncash gains and losses recorded from fair value adjustments
related to contingent value right ("CVR") liabilities. Fair value adjustments
related to 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.
(c)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.
(d)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.
(e)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.
(f)Represents an adjustment related to the fair value of deferred revenue
related to the
(g)Represents expenses related to professional fees in connection with preparation for our IPO.
(h)Represents professional service fees associated with the preparation for Sarbanes-Oxley compliance, the implementation of new accounting standards and accounting for non-recurring transactions.
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(i)Represents non-recurring expenses related to consulting, restructuring, and
other expenses which management believes are not representative of our operating
performance.
(j)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 Six Months Ended
July 1, June 25, July 1, June 25,
2022 2021 2022 2021
(in thousands)
Net sales $ 296,905 $ 253,305 $ 574,339 $ 473,773
Cost of sales, exclusive of depreciation
and amortization(a) 180,395 152,140 352,727 281,016
Net sales less cost of sales, exclusive
of depreciation and amortization $ 116,510 $ 101,165 $ 221,612 $ 192,757
Contribution Margin 39.2 % 39.9 % 38.6 % 40.7 %
(a)Cost of sales for the three months ended July 1, 2022 and June 25, 2021 ,
excludes depreciation and amortization of $14,966 and $14,198 , respectively.
Cost of sales for the six months ended July 1, 2022 and June 25, 2021 , excludes
depreciation and amortization of $29,855 and $27,910 , respectively.
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 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.
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--------------------------------------------------------------------------------The following table presents a reconciliation of net cash used in operating activities to Free Cash Flow for the periods presented:
Six Months Ended
July 1 , June 25,
2022 2021
(in thousands)
Net cash used in operating activities
$ (25,967) $ (9,028)
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, provision for credit losses 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
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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 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 Six Months Ended
July 1, % of June 25, % of July 1, % of June 25, % of
2022 Net sales 2021 Net sales 2022 Net sales 2021 Net sales
($ in thousands)
Net Sales $ 296,905 100.0 % $ 253,305 100.0 % $ 574,339 100.0 % $ 473,773 100.0 %
Costs and expenses:
Cost of sales,
exclusive of
depreciation and
amortization 180,395 60.8 % 152,140 60.1 % 352,727 61.4 % 281,016 59.3 %
Selling, general and
administrative expenses 95,394 32.1 % 78,657 31.1 % 181,921 31.7 % 154,014 32.5 %
Depreciation and
amortization 14,966 5.0 % 14,198 5.6 % 29,855 5.2 % 27,910 5.9 %
Total costs and
expenses 290,755 97.9 % 244,995 96.7 % 564,503 98.3 % 462,940 97.7 %
Income from operations 6,150 2.1 % 8,310 3.3 % 9,836 1.7 % 10,833 2.3 %
Other expenses
(income):
Interest expense 7,720 2.6 % 9,543 3.8 % 14,443 2.5 % 19,078 4.0 %
Other expense (income),
net (63) - % (296) (0.1) % (483) (0.1) % (509) (0.1) %
Total other expenses 7,657 2.6 % 9,247 3.7 % 13,960 2.4 % 18,569 3.9 %
Loss before income
taxes (1,507) (0.5) % (937) (0.4) % (4,124) (0.7) % (7,736) (1.6) %
Income tax (benefit)
expense (163) (0.1) % 119 - % (524) (0.1) % (644) (0.1) %
Net loss (1,344) (0.5) % (1,056) (0.4) % (3,600) (0.6) % (7,092) (1.5) %
Net loss attributable
to noncontrolling
interest (17) - % (12) - % (37) - % (34) - %
Net loss attributable
to Company $ (1,327) (0.4) % $ (1,044) (0.4) % $ (3,563) (0.6) % $ (7,058) (1.5) %
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Three Months and Six Months Ended
Three Months Ended Six Months Ended
July 1, June 25, July 1, June 25,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
($ in thousands)
Net Sales $ 296,905 $ 253,305 $ 43,600 17.2 % $ 574,339 $ 473,773 $ 100,566 21.2 %
Net sales increased by $43.6 million , or 17.2%, in the three months ended July
1, 2022 , compared to the three months ended June 25, 2021 . Approximately 13.4%
of net sales growth was driven by organic growth, including the continued ramp
of local branches opened in the past year, and the cumulative impact of
proprietary product price adjustments taken in the past year, offset by a modest
foreign currency headwind. Approximately 3.8% of net sales growth was attributed
to the full quarter benefit of the recent acquisitions of Access Networks and
Staub.
Net sales increased by $100.6 million , or 21.2%, in the six months ended July 1,
2022 , compared to the six months ended June 25, 2021 . Approximately 17.0% of net
sales growth was driven by organic growth, including the continued ramp of local
branches opened in the past year, and the cumulative impact of proprietary
product price adjustments taken in the past year, offset by supply chain and
foreign currency headwinds. Approximately 4.2% of net sales growth was
attributed to the year-to-date benefit of recent acquisitions of Access Networks
and Staub.
Cost of Sales, Exclusive of Depreciation and Amortization
Three Months Ended Six Months Ended
July 1, June 25, July 1, June 25,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
($ in thousands)Cost of sales, exclusive of depreciation and amortization$ 180,395 $ 152,140 $ 28,255 18.6 %$ 352,727 $ 281,016 $ 71,711 25.5 % As a percentage of net sales 60.8 % 60.1 % 61.4 % 59.3 % Cost of sales, exclusive of depreciation and amortization, increased$28.3 million , or 18.6%, in the three months endedJuly 1, 2022 , compared to the three months endedJune 25, 2021 , primarily driven by higher sales volumes. As a percentage of net sales, cost of sales, exclusive of depreciation and amortization, increased to 60.8% in the current period from 60.1% 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. The accelerated growth in third-party product sales resulted in a third-party product mix of 29.9% compared to 28.8% in the comparable year ago period. 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 39.2% for the three months endedJuly 1, 2022 , compared to 39.9% for the three months endedJune 25, 2021 . Cost of sales, exclusive of depreciation and amortization, increased$71.7 million , or 25.5%, in the six months endedJuly 1, 2022 , compared to the six months endedJune 25, 2021 , primarily driven by higher sales volumes. As a percentage of net sales, cost of sales, exclusive of depreciation and amortization, increased to 61.4% in the current period from 59.3% 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. The accelerated growth in third-party product sales resulted in a third-party product mix of 31.1% compared to 29.8% in the comparable year ago period. 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 39 -------------------------------------------------------------------------------- percentage of net sales resulted in a lower Contribution Margin of 38.6% for the six months endedJuly 1, 2022 , compared to 40.7% for the six months endedJune 25, 2021 .
Selling, General and Administrative ("SG&A") Expenses
Three Months Ended Six Months Ended
July 1, June 25, July 1, June 25,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
($ in thousands)
Selling, general and
administrative
expenses $ 95,394 $ 78,657 $ 16,737 21.3 % $ 181,921 $ 154,014 $ 27,907 18.1 %
As a percentage of
net sales 32.1 % 31.1 % 31.7 % 32.5 %
Selling, general and administrative expenses increased $16.7 million , or 21.3%,
in the three months ended July 1, 2022 compared to the three months ended June
25, 2021 . The increase in selling, general, administrative expenses was due in
part to a $5.9 million provision for credit losses on notes receivable. The
provision was recorded in consideration of internal and external sources,
including the Company's acquisition of Clare subsequent to quarter end, where
certain credit obligations owed by Clare to third-parties were forgiven or
settled at reduced rates. The remaining increase in selling, general and
administrative expenses is primarily related to an increase in equity-based
compensation expense of $5.6 million , increased costs associated with becoming
and operating as a public company, ongoing investments to support strategic
growth initiatives, wage inflation and absorbing the costs associated with
recently acquired businesses. The increase in selling, general and
administrative expenses was offset by a $4.8 million decrease related to the
fair value adjustment to contingent value rights.
Selling, general and administrative expenses increased $27.9 million , or 18.1%,
in the six months ended July 1, 2022 compared to the six months ended June 25,
2021 . The increase in selling, general, administrative expenses was due in part
to the previously noted $5.9 million provision for credit losses on notes
receivable. The remaining increase in selling, general and administrative
expenses is primarily related to an increase in equity-based compensation
expense of $10.1 million , increased costs associated with becoming and operating
as a public company, ongoing investments to support strategic growth
initiatives, wage inflation and absorbing the costs associated with recently
acquired businesses. The increase in selling, general and administrative
expenses was offset by a $8.9 million decrease related to the fair value
adjustment to contingent value rights.
Depreciation and Amortization
Three Months Ended Six Months Ended
July 1, June 25, July 1, June 25,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
($ in thousands)Depreciation and amortization$ 14,966 $ 14,198 $ 768 5.4 %$ 29,855 $ 27,910 $ 1,945 7.0 % As a percentage of net sales 5.0 % 5.6 % 5.2 % 5.9 % Depreciation and amortization expenses increased by$0.8 million , or 5.4%, in the three months endedJuly 1, 2022 compared to the three months endedJune 25, 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. Depreciation and amortization expenses increased by$1.9 million , or 7.0%, in the six months endedJuly 1, 2022 compared to the six months endedJune 25, 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. 40 --------------------------------------------------------------------------------
Interest Expense
Three Months Ended Six Months Ended
July 1, June 25, July 1, June 25,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
($ in thousands)
Interest expense $ 7,720 $ 9,543 $ (1,823) (19.1) % $ 14,443 $ 19,078 $ (4,635) (24.3) %
As a percentage of
net sales 2.6 % 3.8 % 2.5 % 4.0 %
Interest expense decreased by $1.8 million , or 19.1%, in the three months ended
July 1, 2022 compared to the three months ended June 25, 2021 . The decrease was
primarily driven by a lower average outstanding balance on our long-term debt in
the three months ended July 1, 2022 as compared to the three months ended June
25, 2021 .
Interest expense decreased by $4.6 million , or 24.3%, in the six months ended
July 1, 2022 compared to the six months ended June 25, 2021 . The decrease was
primarily driven by a lower average outstanding balance on our long-term debt in
the six months ended July 1, 2022 as compared to the six months ended June 25,
2021 .
Other Expense (Income), Net
Three Months Ended Six Months Ended
July 1, June 25, July 1, June 25,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
($ in thousands)Other expense (income)$ (63) $ (296) $ 233 (78.7) %$ (483) $ (509) $ 26 (5.1) % As a percentage of net sales - % (0.1) % (0.1) % (0.1) % Other income decreased by$0.2 million , or 78.7%, in the three months endedJuly 1, 2022 , compared to the three months endedJune 25, 2021 due to less favorable foreign currency movements. Other income for the six months endedJuly 1, 2022 , was consistent with unfavorable foreign currency movements, primarily related to theU.S. dollar. Income Tax (Benefit) Expense
Three Months Ended Six Months Ended
July 1, June 25, July 1, June 25,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
($ in thousands)Income tax (benefit) expense$ (163) $ 119 $ (282) (237.0) %$ (524) $ (644) $ 120 (18.6) % As a percentage of net sales (0.1) % - % (0.1) % (0.1) % Income tax benefit increased by$0.3 million , or 237.0%, to a benefit, in the three months endedJuly 1, 2022 , compared to an expense in the three months endedJune 25, 2021 . The effective tax rate for the three months endedJuly 1, 2022 , was a benefit of 10.8% compared to an expense of 12.7% for the three months endedJune 25, 2021 . The change in the effective tax rate for the three months endedJuly 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. Income tax benefit decreased by$0.1 million , or (18.6)%, in the six months endedJuly 1, 2022 compared to the six months endedJune 25, 2021 . The effective tax rate for the six months endedJuly 1, 2022 , was a benefit of 12.7% compared to a benefit of 8.3% for the six months endedJune 25, 2021 . The change in the effective tax rate for the six months endedJuly 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. 41 --------------------------------------------------------------------------------
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. We have historically funded our operations and acquisitions primarily through internally generated cash on hand and our Credit Facilities, except for the acquisition ofControl4 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 onAugust 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
July 1, December 31,
2022 2021
(in thousands)
Cash and cash equivalents $ 31,318 $ 40,577
Accounts receivable, net $ 59,172 $ 52,620
Working capital, excluding deferred revenue
Our cash and cash equivalents as ofJuly 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, lease payments under non-cancelable lease commitments and TRA payments as further described in Notes 7, 14 and 16 of the Notes to the Condensed Consolidated Financial Statements. 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 a credit agreement (the "Credit Agreement") with various financial institutions consisting of a$465.0 million aggregate principal amount of senior secured term notes (the "New Term Loan") maturing in seven years and a$100.0 million senior secured revolving credit facility (the "New Revolving Credit Facility") (which includes borrowing capacity available for letters of credit) maturing in five years. 42 -------------------------------------------------------------------------------- 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 prior notice but without premium or penalty (subject to customary exceptions). 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 senior secured term loan outstanding under a credit agreement, datedAugust 4, 2017 , between the Company's wholly owned subsidiary,Wirepath LLC , and the lenders thereunder (as amended, 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 ofJuly 1, 2022 , we had$47.0 million outstanding under the New Revolving Credit Facility. As ofDecember 31, 2021 , we had no borrowings outstanding under the New Revolving Credit Facility. As ofJuly 1, 2022 andDecember 31, 2021 , we had$5.3 million and$4.9 million of outstanding letters of credit. The amount available under the New Revolving Credit Facility was$47.7 million and$95.1 million as ofJuly 1, 2022 , andDecember 31, 2021 , respectively.
Historical Cash Flows
The following table sets forth our cash flows for the six months endedJuly 1, 2022 andJune 25, 2021 : Six Months Ended July 1, 2022 June 25, 2021 (in thousands) Net cash used in operating activities$ (19,553) $
(4,615)
Net cash used in investing activities$ (32,608) $
(30,663)
Net cash provided by (used in) financing activities
(6,325)
43
--------------------------------------------------------------------------------Operating Activities
Net cash used in operating activities was$19.6 million in the six months endedJuly 1, 2022 , as compared to$4.6 million in the six months endedJune 25, 2021 , an increase of$14.9 million . The increase in net cash used in operating activities during the six months endedJuly 1, 2022 was due to a$24.2 million net increase in cash used for operating assets and liabilities. Net cash used was primarily driven by an increase in inventory to protect against supply chain uncertainty. The increase was offset by profit from operations, excluding the non-cash impacts of$10.1 million equity-based compensation expenses and a$5.9 million provision for credit losses on notes receivable.
Investing Activities
Net cash used in investing activities was$32.6 million in the six months endedJuly 1, 2022 , as compared to$30.7 million in the six months endedJune 25, 2021 , an increase of$1.9 million . The increase in net cash used in investing activities for the six months endedJuly 1, 2022 , was primarily due to a$2.0 million increase in cash used to purchase property and equipment. Investing activities include cash used to acquire Staub in the six months endedJuly 1, 2022 and cash used to acquire Access in the six months endedJune 25, 2021 .
Financing Activities
Net cash provided by financing activities was$44.9 million for the six months endedJuly 1, 2022 , compared to net cash used in financing activities of$6.3 million in the six months endedJune 25, 2021 , an increase of$51.2 million . The increase in net cash provided by financing activities for the six months endedJuly 1, 2022 , was due to$47.0 million in borrowings on our New Revolving Credit Facility to help fund the acquisition of Staub and general corporate purchases. Additionally, we had an increase of$2.7 million due to IPO-related costs in the prior period and an increase of$2.4 million due to less principal payments on long-term debt in the current period. These increases were partially offset by$1.0 million of company stock repurchases as part of the share repurchase program.
Off-Balance Sheet Arrangements
As ofJuly 1, 2022 andDecember 31, 2021 , we had off-balance sheet arrangements totaling$5.3 million and$4.9 million related to our outstanding letters of credit. We have not entered into any other off-balance sheet arrangements, except as disclosed herein. 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 of
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. 44 --------------------------------------------------------------------------------
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 and Smaller Reporting 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. We are also a "smaller reporting company," because the market value of our shares held by non-affiliates was less than$200 million as of the end of our most recently completed second fiscal quarter. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than$250 million or (ii) our annual revenue was less than$100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than$700 million . If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies.
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