# Holley Inc. (HLLY) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Holley Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1822928/000143774925007614/hlly20241112_10k.htm
Accession: 0001437749-25-007614
Filing date: 2025-03-14
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HLLY/
All MD&A years: /company/HLLY/mda/
Previous year: /company/HLLY/mda/fy2023/ (FY 2023)
Next year: /company/HLLY/mda/fy2025/ (FY 2025)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, references to “Holley,” “we,” “us,” “our” and “the Company” in this section are to the business and operations of Holley Inc. The following discussion and analysis should be read in conjunction with Holley’s consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause Holley’s actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed herein and under the caption, “Cautionary Note Regarding Forward-Looking Statements.”

Overview

We are a designer, marketer, and manufacturer of high-performance automotive aftermarket products serving car and truck enthusiasts, with sales, processing, and distribution facilities reaching most major markets in the United States, Canada, Europe and China. Holley designs, markets, manufactures and distributes a diversified line of performance automotive products including fuel injection systems, tuners, exhaust products, carburetors, safety equipment and various other performance automotive products. Our products are designed to enhance street, off-road, recreational and competitive vehicle performance and safety.

Central to our business and growth strategy is a commitment to innovation. We have a history of developing innovative products, including new additions to existing product families, expansions of product lines, accessory offerings, and ventures into entirely new categories. We believe this strategic approach allows us to continually adapt to evolving consumer needs. Furthermore, strategic acquisitions have played a significant role in our evolution. These acquisitions have enabled us to expand our brand portfolio, enter new product categories and consumer segments, enhance DTC scale and connection, increase market share in existing product categories, and realize valuable revenue and cost synergies. While we anticipate continued organic growth, we intend to continue evaluating opportunities for strategic acquisitions that align with our current business, expanding our reach within the target market.

Factors Affecting our Performance

We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section of this Form 10-K titled “Risk Factors.”

Business Combination

On July 16, 2021, we consummated the Business Combination pursuant to the Merger Agreement, by and among Empower, Merger Sub I, Merger Sub II, and Holley Intermediate. The Merger Agreement provided for, among other things, the following transactions: (i) Merger Sub I merged with and into Holley Intermediate, the separate corporate existence of Merger Sub I ceased and Holley Intermediate became the surviving corporation, and (ii) Holley Intermediate merged with and into Merger Sub II, the separate corporate existence of Holley Intermediate, and Merger Sub II became the surviving limited liability company. Upon closing of the Business Combination, Empower changed its name to Holley Inc. and its trading symbol on the NYSE from “EMPW” to “HLLY.” 

The Business Combination was accounted for as a reverse recapitalization in accordance with GAAP. Holley Intermediate was deemed the accounting acquirer with Holley Inc. as the successor registrant. As such, Empower was treated as the acquired company for financial reporting purposes, and financial statements for periods prior to the Business Combination are those of Holley Intermediate.

As a result of the Business Combination, Holley Inc. listed on the NYSE, which required us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We have incurred and expect to continue to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees, and additional internal and external accounting, legal, and administrative resources, including increased personnel costs, audit and other professional service fees.

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Acquisitions

We have historically pursued a growth strategy through both organic growth and acquisitions. We have pursued acquisitions that we believe will help drive profitability, cash flow and stockholder value. We target companies that we believe are market leaders, expand our geographic presence, provide a highly synergistic opportunity and/or enhance our ability to provide a wide array of our products to our customers through our distribution network.

The acquisitions have all been accounted for in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805, Business Combinations, and the operations of the acquired entities are included in our historical results for the periods following the closing of the applicable acquisition. See Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information related to our acquisitions and investments.

Business Environment

Our business and results of operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, labor shortages, disruption of the supply chain, and potential tariffs, as well as by geopolitical events, including military conflicts (including the conflict in Ukraine, the conflict in Israel and surrounding areas, and the possible expansion of such conflicts). Our operations have been adversely impacted, and may continue to be adversely impacted, by inflationary pressures primarily related to transportation, labor and component costs. In response to the global supply chain volatility and inflationary impacts, we have attempted to minimize potential adverse impacts on our business with cost savings initiatives, price increases to customers, and by increasing inventory levels of certain products and working closely with our suppliers and customers to minimize disruptions in delivering products to customers. Our profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales mix to lower-margin products, which is offset by our cost cutting and operating efficiency gains. Should the ongoing macroeconomic conditions not improve, or worsen, or if our attempts to mitigate the impact on our supply chain, operations and costs is not successful, our business, results of operations and financial condition may be adversely affected. 

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Key Components of Results of Operations

Net Sales

The principal activity from which we generate our sales is the designing, marketing, manufacturing and distribution of performance aftermarket automotive parts for our end consumers. Sales are displayed net of rebates and sales returns allowances. Sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized.

Cost of Goods Sold

Cost of goods sold consists primarily of the cost of purchased parts and manufactured products, including materials and direct labor costs. In addition, warranty, incoming shipping and handling and inspection and repair costs are also included within costs of goods sold. Reductions in the cost of inventory to its net realizable value are also a component of cost of goods sold.

Selling, General, and Administrative

Selling, general, and administrative consist of payroll and related personnel expenses, IT and office services, office rent expense and professional services. In addition, self-insurance, advertising, research and development, outgoing shipping costs, pre-production and start-up costs are also included within selling, general, and administrative. We have incurred additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations and other professional services.

Restructuring Costs

Restructuring costs consist of professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to restructuring. 

Impairment of Indefinite-lived Assets

Impairment of indefinite-lived assets relates to indefinite-live trade name impairment charges.

Impairment of Goodwill

Impairment of goodwill relates to goodwill impairment charges.

Loss on Sale of Assets

Loss on sale of assets relates to the loss incurred related to the sale of Detroit Speed Engineering.

Interest Expense

Interest expense consists of interest due on the indebtedness under our credit facilities. On December 31, 2024, $560.9 million was outstanding under the Credit Agreement. Interest is based on the SOFR or prime rate, plus the applicable margin rate.

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Results of Operations

Year Ended December 31, 2024 Compared With Year Ended December 31, 2023

The table below presents our results of operations for the years ended December 31, 2024 and 2023 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","For the years ended December 31,"],["","","2024","","","2023","","","Change ($)","","","Change (%)"],["Net sales","","$","602,224","","","$","659,704","","","$","(57,480",")","","","(8.7",")%"],["Cost of goods sold","","","363,680","","","","403,615","","","","(39,935",")","","","(9.9",")%"],["Gross profit","","","238,544","","","","256,089","","","","(17,545",")","","","(6.9",")%"],["Selling, general, and administrative","","","132,149","","","","120,244","","","","11,905","","","","9.9","%"],["Research and development costs","","","18,710","","","","23,844","","","","(5,134",")","","","(21.5",")%"],["Amortization of intangible assets","","","13,884","","","","14,557","","","","(673",")","","","(4.6",")%"],["Impairment of indefinite-lived intangible assets","","","7,695","","","","\u2014","","","","7,695","","","","100.0","%"],["Impairment of goodwill","","","40,906","","","","\u2014","","","","40,906","","","","100.0","%"],["Loss on sale of assets","","","9,234","","","","\u2014","","","","9,234","","","","100.0","%"],["Restructuring costs","","","1,566","","","","2,641","","","","(1,075",")","","","(40.7",")%"],["Other expense","","","(268",")","","","765","","","","(1,033",")","","","(135.0",")%"],["Operating income","","","14,668","","","","94,038","","","","(79,370",")","","","(84.4",")%"],["Change in fair value of warrant liability","","","(7,570",")","","","4,111","","","","(11,681",")","","","nm"],["Change in fair value of earn-out liability","","","(2,333",")","","","2,303","","","","(4,636",")","","","(nm"],["Loss (gain) on early extinguishment of debt","","","141","","","","(701",")","","","842","","","","(120.1",")%"],["Interest expense","","","50,690","","","","60,746","","","","(10,056",")","","","(16.6",")%"],["Income (loss) before income taxes","","","(26,260",")","","","27,579","","","","(53,839",")","","","(195.2",")%"],["Income tax expense (benefit)","","","(3,025",")","","","8,399","","","","(11,424",")","","","(136.0",")%"],["Net income (loss)","","","(23,235",")","","","19,180","","","","(42,415",")","","","(221.1",")%"],["Foreign currency translation adjustment","","","(452",")","","","234","","","","(686",")","","","(293.2",")%"],["Total comprehensive income (loss)","","$","(23,687",")","","$","19,414","","","$","(43,101",")","","","(222.0",")%"]]
[[/GREPCENT_TABLE]]

Net Sales

Net sales for the year ended December 31, 2024, decreased $57.5 million, or 8.7%, to $602.2 million as compared to $659.7 million for the year ended December 31, 2023. Lower sales volume resulted in a decrease of approximately$67.7 million offset partially by improved price realization of approximately $10.2 million compared to the prior year period. Major categories driving the comparable year-over-year results include a decrease in electronic systems sales of $33.4 million (11.6% category decline), a decrease in mechanical systems sales of $11.5 million (7.3% category decline), a decrease in accessories sales of $10.6 million (10.7% category decline) and a decrease in exhaust system sales of $6.3 million (10.5% category decline.) This was partially offset by an increase in safety products sales of $4.2 million (7.5% category incline).

The table below presents our net sales for the year ended December 31, 2024 and 2023, as well as sales related to divestitures and sales part of our strategic product rationalization project. The divestitures sales relate to divested businesses prior to the divestiture date. The divestitures include Detroit Speed Engineering, Gear FX and Proforged. The strategic product rationalization sales relate to discontinued SKUs.

[[GREPCENT_TABLE]]
[["","","For the year ended December 31,"],["","","2024","","","2023"],["Net Sales","","$","602,224","","","$","659,704"],["Divestitures","","","12,821","","","","13,437"],["Strategic Product Rationalization","","","13,953","","","","7,298"]]
[[/GREPCENT_TABLE]]

Cost of Goods Sold

Cost of goods sold for year ended December 31, 2024, decreased $39.9 million, or 9.9%, to $363.7 million as compared to $403.6 million for the year ended December 31, 2023. The decrease in cost of goods sold during the year ended December 31, 2024, resulted from a 8.7% decrease in product sales and lower freight costs, partially offset by $8.2 million of strategic product rationalization charge that is part of a portfolio transformation aimed at eliminating unprofitable or slow-moving stock keeping units ("SKUs"), which was completed in the first quarter of 2024.

Gross Profit and Gross Margin

Gross profit for the year ended December 31, 2024, decreased $17.5 million, or 6.9%, to $238.5 million as compared to $256.1 million for the year ended December 31, 2023. Gross margin for the year ended December 31, 2024, was 39.6% as compared to a gross margin of 38.8% for the year ended December 31, 2023. The decrease in gross profit was primarily due to lower sales volume and a $8.2 million related to the strategic product rationalization charge. The improvement in gross margin was largely driven by cost to serve efforts related to lower freight costs and improved warranty performance, as well as reduced write-downs for excess and obsolete inventory, partially offset by the million related to the strategic product rationalization charge.

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Selling, General and Administrative

Selling, general and administrative costs for the year ended December 31, 2024, increased $11.9 million, or 9.9%, to $132.2 million as compared to $120.2 million for the year ended December 31, 2023. When expressed as a percentage of sales, selling, general and administrative costs increased to 21.9% of sales for the year ended December 31, 2024, compared to 18.2% of sales in 2023. The net increase in selling, general and administrative costs was predominately driven by a $2.0 million reserve related to litigation settlements, an increase in marketing and advertising to support growth, and incremental spend related to advisory services supporting transformation initiatives.  These increases were partially offset by furloughs and temporary headcount reductions from earlier in the year, reflecting resource allocation efforts for portfolio development optimization

Research and Development Costs

Research and development costs for the year ended December 31, 2024, decreased $5.1 million, or 21.5%, to $18.7 million as compared to $23.8 million for the year ended December 31, 2023. The decrease was primarily due to headcount reductions, reflecting the implementation of resource allocation efforts in support of portfolio development optimization. 

Amortization and Impairment of Intangible Assets

Amortization of intangible assets for the year ended December 31, 2024, decreased $0.7 million, or 4.6%, to $13.9 million as compared to $14.6 million for the year ended December 31, 2023.

Impairment of Indefinite-lived Assets

Impairment of indefinite-lived assets for the year ended December 31, 2024 was $7.7 million, which related to our tradenames. Refer to Note 5, “Goodwill and Other Intangible Assets” in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information related to our recognition of impairment charges.

Impairment of Goodwill

Impairment of goodwill for the year ended
December 31, 2024
 was $40.9 million.  Refer Note 5, “Goodwill and Other Intangible Assets” in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information related to our recognition of impairment charges.

Loss on Sale of Assets

Loss on sale of assets for the year ended December 31, 2024 was $9.2 million, which relates to the sale of Detroit Speed Engineering.

Restructuring Costs

Restructuring costs for the year ended December 31, 2024, decreased $1.1 million to $1.6 million, as compared to $2.6 million for the year ended December 31, 2023, reflecting a reduction in restructuring and integration activities associated with acquisitions.

Operating Income

As a result of factors described above, operating income for the year ended December 31, 2024, decreased $79.3 million, or 84.4%, to $14.7 million as compared to $94.0 million for the year ended December 31, 2023, which is primarily attributable to the $48.6 million impairment charges.

Change in Fair Value of Warrant Liability

For the year ended December 31, 2024, we recognized a gain of $7.6 million due to the change in fair value of the warrant liability. This compares to a loss of $4.1 million for the year ended December 31, 2023, a period during which Holley's stock price increased. The warrant liability reflects the fair value of the Warrants issued in connection with the Business Combination.

Change in Fair Value of Earn-Out Liability

For the year ended December 31, 2024, we recognized a gain of $2.3 million due to the change in fair value of the earn-out liability, which reflects a decrease in Holley's stock price during 2024. This compares to a loss of $2.3 million for the year ended December 31, 2023, a period during which Holley's stock price increased. The earn-out liability reflects the fair value of the unvested Earn-Out Shares resulting from the Business Combination.

Loss (Gain) on Early Extinguishment of Debt

For the year ended December 31, 2024, we recognized a loss of $0.1 million on the early extinguishment of debt as compared to a gain of $0.7 million for the year ended December 31, 2023. The loss in the year ended December 31, 2024 was recognized on the repurchase of $25.0 million of our first lien term loan at a discount to par, net of the write-off of unamortized debt issuance costs. The gain in the year ended December 31, 2023 was recognized on the repurchase of $38.8 million of our first lien term loan at a discount to par, net of the write-off of unamortized debt issuance costs (refer to Note 7, “Debt” for further discussion). 

Interest Expense (Benefit)

Interest expense for the year ended December 31, 2024, decreased $10.1 million, or 16.6%, to $50.7 million as compared to $60.8 million for the year ended December 31, 2023, reflecting a lower outstanding debt balances, offset in part by a higher effective interest rate on outstanding debt. The Company recognized $1.1 million of interest income and $1.2 million of interest expense related to the interest rate collar for the year ended December 31, 2024 and 2023, respectively. 

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Income (Loss) before Income Taxes

As a result of factors described above, we recognized $26.3 million of loss before income taxes for the year ended December 31, 2024, as compared to net income before income taxes of $27.6 million for the year ended December 31, 2023.

Income Tax Expense (Benefit)

We recognized income tax benefit of $3.0 million for the year ended December 31, 2024, as compared to income tax expense of $8.4 million for the year ended December 31, 2023. The effective tax rate was 11.5% and 30.5% for the years ended December 31, 2024 and 2023, respectively. The difference between the effective tax rate and the federal statutory rate in 2024 was primarily due to permanent differences resulting from state income taxes, foreign rate differentials, compensation limits with respect to covered employees, goodwill asset impairment, valuation allowance and the change in fair value of warrant and earn-out liabilities. The difference between the effective tax rate and the federal statutory rate in 2023 was primarily due to permanent differences resulting from state income taxes, foreign rate differentials, compensation limits with respect to covered employees, and the change in fair value of warrant and earn-out liabilities

Net Income (Loss) and Total Comprehensive Income (Loss)

As a result of factors described above, we recognized net loss of $23.2 million for the year ended December 31, 2024, as compared to net income of $19.2 million for the year ended December 31, 2023. Additionally, we recognized total comprehensive loss of $23.7 million for the year ended December 31, 2024, as compared to total comprehensive income of $19.4 million for the year ended December 31, 2023. Comprehensive income includes the effect of foreign currency translation.

Year Ended December 31, 2023 Compared With Year Ended December 31, 2022

The table below presents our results of operations for the years ended December 31, 2023 and 2022 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","For the years ended December 31,"],["","","2023","","","2022","","","Change ($)","","","Change (%)"],["Net sales","","$","659,704","","","$","688,415","","","$","(28,711",")","","","(4.2","%)"],["Cost of goods sold","","","403,615","","","","434,757","","","","(31,142",")","","","(7.2","%)"],["Gross profit","","","256,089","","","","253,658","","","","2,431","","","","1.0","%"],["Selling, general, and administrative","","","120,244","","","","150,728","","","","(30,484",")","","","(20.2","%)"],["Research and development costs","","","23,844","","","","29,083","","","","(5,239",")","","","(18.0","%)"],["Amortization of intangible assets","","","14,557","","","","14,683","","","","(126",")","","","(0.9","%)"],["Impairment of indefinite-lived intangible assets","","","\u2014","","","","2,395","","","","(2,395",")","","","(100.0","%)"],["Acquisition and restructuring costs","","","2,641","","","","4,513","","","","(1,872",")","","","(41.5","%)"],["Other operating expense","","","765","","","","1,514","","","","(749",")","","","(49.5","%)"],["Operating income","","","94,038","","","","50,742","","","","43,296","","","","85.3","%"],["Change in fair value of warrant liability","","","4,111","","","","(57,021",")","","","61,132","","","","nm"],["Change in fair value of earn-out liability","","","2,303","","","","(10,731",")","","","13,034","","","","nm"],["Gain on early extinguishment of debt","","","(701",")","","","\u2014","","","","(701",")","","","(100.0","%)"],["Interest expense","","","60,746","","","","40,227","","","","20,519","","","","51.0","%"],["Income before income taxes","","","27,579","","","","78,267","","","","(50,688",")","","","nm"],["Income tax expense","","","8,399","","","","4,493","","","","3,906","","","","86.9","%"],["Net income","","","19,180","","","","73,774","","","","(54,594",")","","","nm"],["Foreign currency translation adjustment","","","234","","","","(990",")","","","1,224","","","","(123.6","%)"],["Pension liability gain","","","\u2014","","","","302","","","","(302",")","","","(100.0","%)"],["Total comprehensive income","","$","19,414","","","$","73,086","","","$","(53,672",")","","","nm"]]
[[/GREPCENT_TABLE]]

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Net Sales

Net sales for the year ended December 31, 2023, decreased $28.7 million, or 4.2%, to $659.7 million as compared to $688.4 million for the year ended December 31, 2022. The decline in sales was driven by supply chain constraints in electronic components and a return to the sales trends experienced prior to the increased demand experienced during the COVID-19 pandemic. As a result, lower unit volume drove a decrease of approximately $42.3 million that was partially offset by improved price realization of approximately $13.6 million compared to the prior year period. Comparable year-over-year results by category include a decrease in safety products sales of $9.4 million (14.3% category decline), a decrease in accessories sales of $9.3 million (8.6% category decline), a decrease in mechanical systems sales of $7.6 million (4.6% category decline), a decrease in exhaust system sales of $6.8 million (10.2% category decline), and electronic systems sales growth of $4.4 million (1.5% category growth).

Cost of Goods Sold

Cost of goods sold for year ended December 31, 2023, decreased $31.1 million, or 7.2%, to $403.6 million as compared to $434.8 million for the year ended December 31, 2022. The decrease in cost of goods sold during the year ended December 31, 2023, reflects the decrease in product sales during such period combined with lower freight costs.

Gross Profit and Gross Margin

Gross profit for the year ended December 31, 2023, increased $2.4 million, or 1.0%, to $256.1 million as compared to $253.7 million for the year ended December 31, 2022. Gross margin for the year ended December 31, 2023, was 38.8% as compared to a gross margin of 36.8% for the year ended December 31, 2022. The increase in gross profit and gross profit margin, during a period in which sales volume was down, was driven primarily by meaningful improvements in freight, lower warranty costs, and product mix. 

Selling, General and Administrative

Selling, general and administrative costs for the year ended December 31, 2023, decreased $30.5 million, or 20.2%, to $120.2 million as compared to $150.7 million for the year ended December 31, 2022. When expressed as a percentage of sales, selling, general and administrative costs decreased to 18.2% of sales for the year ended December 31, 2023, compared to 21.9% of sales in 2022. The decrease selling, general and administrative costs was driven by a lower equity compensation cost and the implementation of cost-saving initiatives, which resulted in decreases in outbound shipping and handling, professional fees, personnel and marketing costs. 

Research and Development Costs

Research and development costs for the year ended December 31, 2023, decreased $5.2 million, or 18.0%, to $23.8 million as compared to $29.1 million for the year ended December 31, 2022. The decrease in research and development costs was primarily due to headcount reductions, reflecting the implementation of cost-saving initiatives.

Amortization and Impairment of Intangible Assets

Amortization of intangible assets for the year ended December 31, 2023, decreased $0.1 million, or 0.9%, to $14.6 million as compared to $14.7 million for the year ended December 31, 2022. Additionally, an impairment charge of $2.4 million was recognized on certain indefinite-lived tradenames during 2022 (see Note 5, “Goodwill and Other Intangible Assets” in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information related to our recognition of impairment charges).

Acquisition and Restructuring Costs

Acquisition and restructuring costs for the year ended December 31, 2023, decreased $1.9 million to $2.6 million, as compared to $4.5 million for the year ended December 31, 2022, reflecting a reduction in restructuring activities associated with acquisitions.

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Operating Income

As a result of factors described above, operating income for the year ended December 31, 2023, increased $43.3 million, or 85.3%, to $94.0 million as compared to $50.7 million for the year ended December 31, 2022.

Change in Fair Value of Warrant Liability

For the year ended December 31, 2023, we recognized a loss of $4.1 million due to the change in fair value of the warrant liability, which reflects an increase in Holley's stock price during 2023. This compares to a gain of $57.0 million for the year ended December 31, 2022, a period during which Holley's stock price declined. The warrant liability reflects the fair value of the Warrants issued in connection with the Business Combination.

Change in Fair Value of Earn-Out Liability

For the year ended December 31, 2023, we recognized a loss of $2.3 million due to the change in fair value of the earn-out liability, which reflects an increase in Holley's stock price during 2023. This compares to a gain of $10.7 million for the year ended December 31, 2022, a period during which Holley's stock price declined. The earn-out liability reflects the fair value of the unvested Earn-Out Shares resulting from the Business Combination.

Gain on Early Extinguishment of Debt

For the year ended December 31, 2023, we recognized a gain of $0.7 million on the early extinguishment of debt. The gain was recognized on the repurchase of $38.8 million of our first lien term loan at a discount to par, net of the write-off of unamortized debt issuance costs (refer to Note 7, “Debt” for further discussion). 

Interest Expense

Interest expense for the year ended December 31, 2023, increased $20.5 million, or 51.0%, to $60.8 million as compared to $40.2 million for the year ended December 31, 2022, reflecting a higher effective interest rate on outstanding debt. Interest expense for 2023 is net of a $1.2 million fair value adjustment on the interest rate collar and $0.6 million in cash payments received on the interest rate collar.

Income before Income Taxes

As a result of factors described above, we recognized $27.6 million of income before income taxes for the year ended December 31, 2023, as compared to net income before income taxes of $78.3 million for the year ended December 31, 2022.

Income Tax Expense

We recognized income tax expense of $8.4 million for the year ended December 31, 2023, as compared to $4.5 million for the year ended December 31, 2022. The effective tax rate was 30.5% and 5.7% for the years ended December 31, 2023 and 2022, respectively. The difference between the effective tax rate and the federal statutory rate in 2023 was primarily due to permanent differences resulting from state income taxes, foreign rate differentials, compensation limits with respect to covered employees, and the change in fair value of warrant and earn-out liabilities. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of warrant and earn-out liabilities. 

Net Income and Total Comprehensive Income

As a result of factors described above, we recognized net income of $19.2 million for the year ended December 31, 2023, as compared to net income of $73.8 million for the year ended December 31, 2022. Additionally, we recognized total comprehensive income of $19.4 million for the year ended December 31, 2023, as compared to total comprehensive income of $73.1 million for the year ended December 31, 2022. Comprehensive income (loss) includes the effect of foreign currency translation and pension liability adjustments.

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Non-GAAP Financial Measures

We present EBITDA and Adjusted EBITDA as supplemental measures of our operating performance and believe that such non-GAAP financial measures provide useful information to investors, because they exclude the impact of certain items that we do not consider indicative of our ongoing operating performance and we believe are useful in comparing our results of operations between periods. We believe that the presentation of EBITDA and Adjusted EBITDA enhances the usefulness of our financial information by presenting measures that management uses internally to establish forecasts, budgets and operational goals to manage and monitor our business. We believe that these non-GAAP financial measures help to depict a more realistic representation of the performance of our underlying business, enabling us to evaluate and plan more effectively for the future. 

EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Diluted EPS, and Free Cash Flow are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. These measures should not be considered as measures of financial performance under GAAP, and the items excluded from or included in these metrics are significant components in understanding and assessing our financial performance. These metrics should not be considered as alternatives to net income, gross profit, net cash provided by operating activities, or any other performance measures, as applicable, derived in accordance with GAAP.

Adjusted EBITDA

We define EBITDA as earnings before depreciation, amortization of intangible assets, interest expense, and income tax expense. We define Adjusted EBITDA as EBITDA adjusted to exclude, to the extent applicable, restructuring costs, which includes transaction fees and expenses, termination related benefits, facilities relocation, and executive transition costs; changes in the fair value of the warrant liability; changes in the fair value of the earn-out liability; equity-based compensation expense; impairment of goodwill and indefinite-lived intangible assets; loss on assets sold; loss or (gain) on the early extinguishment of debt; related party acquisition and management fee costs; notable items that we do not believe are reflective of operating performance, which for the year ended December 31, 2024, includes; $2.0 million legal settlement accrual, costs incurred for advisory services related to identifying performance initiatives, for the year ended December 31, 2023, includes certain costs incurred for advisory services related to identifying performance initiatives, and for the year ended December 31, 2022, included a non-cash adjustment related to the adoption of ASC Topic 842, “Leases,” and legal fees and costs related to a settlement; and other expenses or gains, which for the year ended December 31, 2022, includes a $1.0 million loss on the sale of a business and for all periods includes net gains or losses from disposal of fixed assets, franchise taxes, and gains or losses from foreign currency transactions. 

EBITDA and Adjusted EBITDA are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. These measures should not be considered as measures of financial performance under GAAP, and the items excluded from or included in these metrics are significant components in understanding and assessing Holley’s financial performance. These metrics should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP.

The following unaudited table presents the reconciliation of net income (loss), the most directly comparable GAAP measure, to EBITDA,  Adjusted EBITDA and Adjusted EBITDA Margin for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","For the years ended December 31,"],["","","2024","","","2023","","","2022"],["Net income (loss)","","$","(23,235",")","","$","19,180","","","$","73,774"],["Adjustments:"],["Depreciation","","","10,551","","","","10,308","","","","10,107"],["Amortization of intangible assets","","","13,884","","","","14,557","","","","14,683"],["Interest expense, net","","","50,690","","","","60,746","","","","40,227"],["Income tax expense (benefit)","","","(3,025",")","","","8,399","","","","4,493"],["EBITDA","","","48,865","","","","113,190","","","","143,284"],["Restructuring costs","","","1,372","","","","2,641","","","","4,513"],["Change in fair value of warrant liability","","","(7,570",")","","","4,111","","","","(57,021",")"],["Change in fair value of earn-out liability","","","(2,333",")","","","2,303","","","","(10,731",")"],["Equity-based compensation expense","","","5,170","","","","7,291","","","","24,395"],["Impairment of indefinite-lived intangible assets","","","7,695","","","","\u2014","","","","2,395"],["Impairment of goodwill","","","40,906","","","","\u2014","","","","\u2014"],["Loss on assets sold","","","9,234","","","","\u2014","","","","\u2014"],["(Gain) loss on early extinguishment of debt","","","141","","","","(701",")","","","\u2014"],["Notable items","","","7,100","","","","1,285","","","","1,838"],["Other expense","","","(86",")","","","765","","","","477"],["Adjusted EBITDA","","$","110,494","","","$","130,885","","","$","109,150"]]
[[/GREPCENT_TABLE]]

Adjusted EBITDA for 2024 and 2023 includes the impact of an $8.2 million and $(0.8) million, respectively, non-cash charge related to a previously announced strategic product rationalization. For 2024, Adjusted EBITDA includes $1.7 million benefit also related to the strategic product rationalization, netting to $6.5 million non-cash charge.

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Adjusted Net Income and Adjusted Diluted EPS

We define Adjusted Net Income as earnings excluding the after-tax effect of changes in the fair value of the warrant liability, changes in the fair value of the earn-out liability, impairment of goodwill and indefinite-lived intangible assets, loss on sale of assets, and gain or loss on the early extinguishment of debt. We define Adjusted Diluted EPS as Adjusted Net Income on a per share basis. Management uses these measures to focus on on-going operations and believes that it is useful to investors because it enables them to perform meaningful comparisons of past and present consolidated operating results. We believe that using this information, along with net income and net income per diluted share, provides for a more complete analysis of the results of operations.

The following unaudited tables present the reconciliation of net income and net income per diluted share, the most directly comparable GAAP measures, to Adjusted Net Income and Adjusted Diluted EPS for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","For the years ended December 31,"],["","","2024","","","2023","","","2022"],["Net income (loss)","","$","(23,235",")","","$","19,180","","","$","73,774"],["Special items:"],["Adjust for: Change in fair value of warrant liability","","","(7,570",")","","","4,111","","","","(57,021",")"],["Adjust for: Change in fair value of earn-out liability","","","(2,333",")","","","2,303","","","","(10,731",")"],["Adjust for: Impairment of indefinite-lived intangible assets","","","7,695","","","","-","","","","2,395"],["Adjust for: Impairment of goodwill","","","40,906","","","","-","","","","-"],["Adjust for: Loss on sale of assets","","","9,234","","","","-","","","","-"],["Adjust for: Loss (gain) on early extinguishment of debt","","","141","","","","(701",")","","","-"],["Adjusted Net Income","","$","24,838","","","$","24,893","","","$","8,417"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","For the years ended December 31,"],["","","2024","","","2023","","","2022"],["Net income (loss) per diluted share","","$","(0.20",")","","","0.16","","","$","0.63"],["Special items:"],["Adjust for: Change in fair value of warrant liability","","","(0.06",")","","","0.03","","","","(0.48",")"],["Adjust for: Change in fair value of earn-out liability","","","(0.03",")","","","0.02","","","","(0.09",")"],["Adjust for: Impairment of indefinite-lived intangible assets","","","0.06","","","","-","","","","0.02"],["Adjust for: Impairment of goodwill","","","0.35","","","","-","","","","-"],["Adjust for: Loss on sale of assets","","","0.08","","","","-","","","","-"],["Adjust for: Loss (gain) on early extinguishment of debt","","","-","","","","-","","","","-"],["Adjusted Diluted EPS","","$","0.20","","","$","0.21","","","$","0.08"]]
[[/GREPCENT_TABLE]]

We define Free Cash Flow as net cash provided by operating activities minus cash payments for capital expenditures, net of dispositions. Management believes providing Free Cash Flow is useful for investors to understand our performance and results of cash generation after making capital investments required to support ongoing business operations. 

The following unaudited table presents the reconciliation of net cash provided by operating activities, the most directly comparable GAAP measure, to Free Cash Flow for the years ended December 31, 2024, 2023 and 2022 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","For the years ended December 31,"],["","","2024","","","2023","","","2022"],["Net cash provided by operating activities","","$","46,899","","","$","88,092","","","$","12,312"],["Capital expenditures","","","(6,804",")","","","(5,934",")","","","(13,590",")"],["Proceeds from the disposal of fixed assets","","","1,726","","","","1,481","","","","888"],["Cash paid for acquisitions, net","","","\u2014","","","","\u2014","","","","(14,301",")"],["Free Cash Flow","","$","41,821","","","$","83,639","","","$","(14,691",")"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

Our primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. We have generally financed our historical needs with operating cash flows, capital contributions and borrowings under our credit facilities. These sources of liquidity may be impacted by various factors, including demand for our products, investments made in acquired businesses, plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.

On December 31, 2024, we had cash of $56.1 million and availability of $97.8 million under our revolving credit facility. We have a senior secured revolving credit facility with $100 million in borrowing capacity. On December 31, 2024, we had $2.2 million in letters of credit outstanding under the revolving credit facility. In March 2023, the Company entered into an amendment to its Credit Agreement which, among other things, contains a minimum liquidity financial covenant of $45 million, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility. The amendment also increased the Total Leverage Ratio applicable under the Credit Agreement as of the fiscal quarter ending April 2, 2023, to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter through the fiscal quarter ending June 30, 2024. During the year ended December 31, 2024, the Company successfully exited the Covenant Relief Period.

We are obligated under various operating leases for facilities, equipment, and automobiles with estimated lease payments of approximately $6.4 million, including short-term leases, due in fiscal year 2025. See Note 15, "Lease Commitments" in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information related to our lease obligations.

Our capital expenditures for the year ended December 31, 2024 of $6.8 million are primarily related to ongoing maintenance and improvements, including investments related to upgrading and maintaining our information technology systems, tooling for new products, vehicles for product development, and machinery and equipment for operations. We expect capital expenditures of up to $16 million in fiscal year 2025.

See Note 7, "Debt" in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further detail of our credit facility and the timing of principal maturities. On December 31, 2024, based on the then current weighted average interest rate of 8.4%, expected interest payments associated with outstanding debt totaled approximately $47.3 million for fiscal year 2025.

As discussed under “Business Environment” above, although the future impact of supply chain disruptions, potential tariffs and inflationary pressures are highly uncertain, we believe that our current operating performance, operating plan, cash position, and borrowings available under our revolving credit facility will be sufficient to satisfy our liquidity needs and capital expenditure requirements for at least the next twelve months and thereafter for the foreseeable future.

Cash Flows

The following table provides a summary of cash flows from operating, investing, and financing activities for the periods presented (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","For the years ended December 31,"],["","","2024","","","2023","","","2022"],["Cash flows provided by operating activities","","$","46,899","","","$","88,092","","","$","12,312"],["Cash flows (used in) provided by investing activities","","","2,021","","","","(4,453",")","","","(25,037",")"],["Cash flows (used in) provided by financing activities","","","(34,605",")","","","(69,008",")","","","2,850"],["Effect of foreign currency rate fluctuations on cash","","","691","","","","300","","","","(300",")"],["Net (decrease) increase in cash and cash equivalents","","$","15,006","","","$","14,931","","","$","(10,175",")"]]
[[/GREPCENT_TABLE]]

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Operating Activities. Cash provided by operating activities for the year ended December 31, 2024, was $46.9 million compared to cash provided by operating activities of $88.1 million for the year ended December 31, 2023. Cash provided by inventory of $38.2 million for the year ended December 31, 2023 decreased to cash used by inventory of $16.6 million for the year ended December 31, 2024, resulting in a decrease of operating cash flows due to inventory of $54.8 million. Offsetting this decrease were increases in cash provided by accrued interest, accounts receivable, and accounts payable of $5.1 million, $13.0 million, and $2.9 million, respectively. The changes in accounts receivable, accounts payable, and inventory are impacted by fluctuations in sales and accrued interest, accounts receivable and accounts payable are impacted by the timing of receipts and payments.

Cash provided by operating activities for the year ended December 31, 2023, was $88.1 million compared to cash provided by operating activities of $12.3 million for the year ended December 31, 2022. Cash provided by inventory and prepaids and other current assets increased by $96.6 million and $1.4 million, respectively. Offsetting these increases were decreases in cash used by accrued interest, accounts receivable, and accounts payable of $8.2 million, $6.1 million, and $0.9 million, respectively. The changes in accounts receivable, accounts payable, and inventory are impacted by fluctuations in sales and accrued interest, accounts receivable and accounts payable are impacted by the timing of receipts and payments.

Investing Activities. Cash provided by investing activities for the year ended December 31, 2024, was $2.0 million, primarily relating to the sales of Detroit Speed Engineering, which was partially offset by capital expenditures of $6.8 million. Cash used in investing activities for the year ended December 31, 2023, was $4.5 million, primarily relating to capital expenditures of $5.9 million. For the year ended December 31, 2022, cash used in investing activities was $25.0 million, primarily relating to acquisitions of $14.3 million and capital expenditures of $13.6 million.

Financing Activities. Cash used in financing activities for the year ended December 31, 2024, was $34.6 million, which primarily reflected principal payments on long-term debt. Cash used in financing activities for the year ended December 31, 2023, was $69.0 million, which primarily reflected principal payments on long-term debt. Cash provided by financing activities for the year ended December 31, 2022, was $2.9 million, which primarily reflected net borrowings on long-term debt.

Working Capital. On December 31, 2024, working capital was $202.2 million compared to $203.6 million on December 31, 2023. For the year ended December 31, 2024, prepaids and other current assets decreased by $3.1 million and accrued liabilities decreased by $1.1 million. Offsetting this decrease in working capital was an increase in cash of $15.0 million.

Holley’s working capital on December 31, 2023, decreased $20.1 million from $223.7 million on December 31, 2022. For the year ended December 31, 2023, inventories decreased by $41.3 million. Offsetting this decrease in working capital was an increase in cash of $14.9 million.

Critical Accounting Estimates

The discussion and analysis of Holley's financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with GAAP. See Note 1, "Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies", in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for a complete summary of the significant accounting policies used in the presentation of our financial statements. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses. We evaluate our estimates and assumptions on an ongoing basis. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, impacting our reported results of operations and financial condition.

Critical accounting policies and estimates are those that management considers the most important to the portrayal of our financial condition and results of operations because they require the most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that our most critical accounting estimates are related to accounting for inventory reserves, the fair value of assets and liabilities acquired in the Business Combination and acquisitions, and accounting for goodwill and intangible assets. These critical accounting policies are addressed below. 

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Inventory Reserve

Our inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolescence or impaired balances. See Part IV, Item 15 in this Annual Report on Form 10-K for additional information related to our inventory valuation reserve.

We regularly monitor inventory quantities on hand and on order and record write-downs for excess and obsolete inventories based on our estimate of the demand for our products, potential obsolescence of technology, product life cycles, and when pricing trends or forecast indicate that the carrying value of inventory exceeds our estimated selling price. These factors are affected by market and economic conditions, technology changes, and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on our gross margin. If inventory is written down, a new cost basis will be established that cannot be increased in future periods.

Fair Value of Acquired Assets and Liabilities

Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values and the values of assets in use, and often requires the application of significant judgment regarding estimates and assumptions. The same applies to assigning fair market values to the liabilities assumed in the Business Combination at the date of the transaction and at each reporting date thereafter. While the ultimate responsibility resides with management, for certain acquisitions we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets, tangible long- lived assets, and liabilities assumed in the Business Combination. Acquired intangible assets, excluding goodwill, are valued using various methodologies including discounted cash flows, relief from royalty, and multiperiod excess earnings depending on the type of intangible asset purchased. These methodologies incorporate various estimates and assumptions, such as projected revenue growth rates, profit margins and forecasted cash flows based on discount rates and terminal growth rates. We use a Monte Carlo simulation model to estimate the fair value of our Private Warrants and earn-out liability assumed in the Business Combination, which requires certain subjective inputs and assumptions, including expected common stock price volatility, expected term, and risk-free interest rates. These estimates and assumptions could vary significantly, which could result in material differences in the fair values assigned to the assets and liabilities. See Note 10, "Fair Value Measurements" in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information related to our assets and liabilities measured at fair value.

Goodwill and Intangible Assets

Goodwill and intangible assets deemed to have indefinite lives are not amortized but rather are tested at least annually for impairment, or more often if events or changes in circumstances indicate that more likely than not the carrying amount of the asset may not be recoverable.

Goodwill is tested for impairment at the reporting unit level. A reporting unit represents an operating segment or a component of an operating segment. Goodwill is tested for impairment by either performing a qualitative evaluation or a quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment and perform a quantitative impairment test. The estimate of the fair value of our reporting unit is based on the best information available as of the date of the assessment. We base our fair value estimate on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. We generally use a blended analysis of the present value of discounted cash flows and the market valuation approach. The discounted cash flow model uses the present values of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and external economic factors in estimating our future cash flows. The assumptions we use in our evaluations include projections of growth rates and profitability, our estimated working capital needs, as well as our weighted average cost of capital. The market valuation approach indicates the fair value of a reporting unit based on a comparison to comparable publicly traded firms in similar businesses. Estimates used in the market value approach include the identification of similar companies with comparable business factors. These key assumptions are inherently uncertain and require a high degree of estimation and are subject to change based on, among others, industry and geopolitical conditions, our ability to navigate changing macroeconomic conditions and trends and the timing and success of strategic initiatives. Changes in economic and operating conditions impacting the assumptions we made could result in additional goodwill impairment in future periods. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.

The Company completed its annual goodwill impairment analysis in the fourth quarter of fiscal 2024, in conjunction with its budgeting and forecasting process for fiscal year 2024 and concluded that impairment existed for its reporting unit.  Immediately prior to the goodwill impairment analysis in the fourth quarter of fiscal year 2024, the carrying value of goodwill was $413.2 million, which was ascribed to one reporting unit. For the fiscal 2024 impairment analysis, the Company performed a quantitative assessment for its reporting unit. The estimated fair value of the reporting unit was below its carrying value based on the analysis performed by 4%. As a result of this evaluation, a pre-tax impairment of $40.9 million was recognized on goodwill. As of December 31, 2024, the carrying value of goodwill was reduced to $372.3  million.

During our annual impairment assessment and in subsequent interim quarters, we review events that occur or circumstances that change, including the macroeconomic environment, our business performance and our market capitalization, to determine if a quantitative impairment assessment is necessary. If assumptions are not achieved or market conditions decline, potential impairment charges could result. Impairments to goodwill and other intangible assets may be caused by factors outside our control, such as increasing competitive pricing pressures, changes in discount rates based on changes in cost of capital (i.e., as a result of changes in interest rates or other conditions), lower than expected sales and profit growth rates, changes in industry EBITDA multiples, the inability to quickly replace lost co-manufacturing business, or the bankruptcy of a significant customer.

Intangible assets include trade names, customer relationships and developed technology obtained through business acquisitions. Acquired finite-lived tangible assets are initially recorded at fair value and are amortized on a straight-line basis over their estimated useful lives. Indefinite life intangible assets are not amortized but are tested for impairment at least annually or more often if circumstances indicate that the carrying amounts may not be recoverable. During the fourth quarter of 2024, a quantitative assessment of indefinite life intangible assets identified certain tradenames for which the carrying amounts might not be recoverable. As a result of this evaluation, a pre-tax impairment of $7.7 million was recognized on certain indefinite-lived tradenames.

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Recent Accounting Pronouncements

For a discussion of Holley’s new or recently adopted accounting pronouncements, see Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

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