FOX FACTORY HOLDING CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2022, as filed with the SEC on February 23, 2023, and our other reports and registration statements that we file with the SEC from time to time. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section included in Part II, Item 1A. Unless the context otherwise requires, the terms “FOX,” the “Company,” “we,” “us,” and “our” in this Quarterly Report on Form 10-Q refer to Fox Factory Holding Corp. and its operating subsidiaries on a consolidated basis. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements, which are subject to the “safe harbor” created by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may make forward-looking statements in our SEC filings, press releases, news articles, earnings presentations and when we are speaking on behalf of the Company. Forward-looking statements generally relate to future events or our future financial or operating performance that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements because they contain words such as “may,” “might,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “likely,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to numerous risks and uncertainties, including but not limited to risks related to: • the spread of highly infectious or contagious disease, such as COVID-19, could cause severe disruptions in the U.S. and global economy, which could in turn disrupt the business activities and operations of our customers, as well as our businesses and operations; • changes in general economic conditions, including market and macro-economic disruptions resulting from escalating tensions between China and Taiwan, the on-going Russian war in Ukraine or due to growing inflation or higher interest rates; • our dependency on a limited number of suppliers for materials, product parts, and vehicle chassis could lead to an increase in material costs, disruptions in our supply chain, or reputational costs; • our ability to develop new and innovative products in our current end-markets; • our ability to leverage our technologies and brand to expand into new categories and end-markets; • our ability to increase our aftermarket penetration; • our ability to accelerate international growth; • our exposure to exchange rate fluctuations; • the loss of key customers; • our ability to improve operating and supply chain efficiencies; • our ability to enforce our intellectual property rights; • our future financial performance, including our sales, cost of sales, gross profit or gross margins, operating expenses, ability to generate positive cash flow and ability to maintain our profitability; • our ability to maintain our premium brand image and high-performance products; • our ability to maintain relationships with the professional athletes and race teams we sponsor; • our ability to selectively add additional dealers and distributors in certain geographic markets; • the growth of the markets in which we compete, our expectations regarding consumer preferences and our ability to respond to changes in consumer preferences; • changes in demand for performance-defining products; 22 Table of Contents • the loss of key personnel, management and skilled engineers; • our ability to successfully identify, evaluate and manage potential or completed acquisitions and to benefit from such acquisitions; • the outcome of pending litigation; • future disruptions in the operations of our manufacturing facilities; • our ability to adapt our business model to mitigate the impact of certain changes in tax laws; • changes in the relative proportion of profit earned in the numerous jurisdictions in which we do business and in tax legislation, case law and other authoritative guidance in those jurisdictions; • product recalls and product liability claims; and • future economic or market conditions. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects and the outcomes of any of the events described in any forward-looking statements are subject to risks, uncertainties, and other factors. In addition to the risks, uncertainties and other factors discussed above and elsewhere in this Quarterly Report on Form 10-Q, the risks, uncertainties and other factors expressed or implied in Part I, Item 1A. “Risk Factors” of our 2022 Annual Report on Form 10-K, as filed with the SEC on February 23, 2023, could cause or contribute to actual results differing materially from those set forth in any forward-looking statement. Moreover, we operate in a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur. Actual results, events, or circumstances could differ materially from those contemplated by, set forth in, or underlying any forward-looking statements. For all of these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements in Section 27A of the Securities Act and Section 21E of the Exchange Act. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Critical Accounting Policies and Estimates There have been no changes to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended December 30, 2022, as filed with the SEC on February 23, 2023, that have had a material impact on our condensed consolidated financial statements and related notes. Recent Accounting Pronouncements See Note 1 - Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further details regarding this topic. 23 Table of Contents Results of Operations The table below summarizes our results of operations: For the three months ended For the six months ended (in thousands) June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Net sales $ 400,715 $ 406,705 $ 800,566 $ 784,682 Cost of sales 268,689 263,761 535,242 521,478 Gross profit 132,026 142,944 265,324 263,204 Operating expenses: General and administrative 30,221 28,444 63,982 54,011 Sales and marketing 26,556 24,175 50,225 46,764 Research and development 15,188 14,214 30,470 26,856 Amortization of purchased intangibles 7,277 5,636 13,173 10,943 Total operating expenses 79,242 72,469 157,850 138,574 Income from operations 52,784 70,475 107,474 124,630 Interest expense 4,418 1,697 7,939 3,674 Other expense, net 536 2,816 560 4,508 Income before income taxes 47,830 65,962 98,975 116,448 Provision for income taxes 8,095 12,464 17,473 14,900 Net income $ 39,735 $ 53,498 $ 81,502 $ 101,548 The following table sets forth selected statement of income data as a percentage of net sales for the periods indicated: For the three months ended For the six months ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 67.1 64.9 66.9 66.5 Gross profit 32.9 35.1 33.1 33.5 Operating expenses: General and administrative 7.5 7.0 8.0 6.9 Sales and marketing 6.6 5.9 6.3 6.0 Research and development 3.8 3.5 3.8 3.4 Amortization of purchased intangibles 1.8 1.4 1.6 1.4 Total operating expenses 19.8 17.8 19.7 17.7 Income from operations 13.2 17.3 13.4 15.9 Interest expense 1.1 0.4 1.0 0.5 Other expense, net 0.1 0.7 0.1 0.6 Income before income taxes 11.9 16.2 12.4 14.8 Provision for income taxes 2.0 3.1 2.2 1.9 Net income 9.9 % 13.2 % 10.2 % 12.9 % *Percentages may not foot due to rounding. 24 Table of Contents Three months ended June 30, 2023 compared to three months ended July 1, 2022 Net sales For the three months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Powered Vehicle Group $ 140.2 $ 105.7 $ 34.5 32.6 % Aftermarket Applications Group 155.6 123.3 32.3 26.2 Specialty Sports Group 104.9 177.7 (72.8) (41.0) Total net sales $ 400.7 $ 406.7 $ (6.0) (1.5) % Total net sales for the three months ended June 30, 2023 decreased $6.0 million, or 1.5%, compared to the three months ended July 1, 2022. Powered Vehicle Group net sales increased by $34.5 million, or 32.6%, due to increased demand in the OEM channel. Aftermarket Applications Group net sales increased by $32.3 million, or 26.2%, due to the inclusion of revenue from our Custom Wheel House subsidiary, which was acquired in March 2023, and strong performance in our upfitting product lines. Specialty Sports Group net sales decreased by $72.8 million, or 41.0%, due to the impacts of higher levels of inventory across various channels. In the second quarter of fiscal year 2023, the Company realigned Powered Vehicles Group into Powered Vehicles Group and Aftermarket Applications Group to be more aligned with the Company’s end customers and drive additional focus on product development. See Note 2 - Revenues to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further details. Cost of sales For the three months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Cost of sales $ 268.7 $ 263.8 $ 4.9 1.9 % Cost of sales for the three months ended June 30, 2023 increased $4.9 million, or 1.9%, compared to the three months ended July 1, 2022. The increase in cost of sales and resulting decrease in gross margin of 220 basis points to 32.9% for the three months ended June 30, 2023 as compared to the same prior fiscal year period was primarily due to amortization of an acquired inventory valuation markup and a shift in our product line mix, offset by increased efficiencies at our North American facilities. Operating expenses For the three months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Operating expenses: General and administrative $ 30.2 $ 28.5 $ 1.7 6.0 % Sales and marketing 26.5 24.2 2.3 9.5 Research and development 15.2 14.2 1.0 7.0 Amortization of purchased intangibles 7.3 5.6 1.7 30.4 Total operating expenses $ 79.2 $ 72.5 $ 6.7 9.2 % Total operating expenses for the three months ended June 30, 2023 were $79.2 million compared to $72.5 million for the three months ended July 1, 2022. Sales and marketing expenses and general and administrative expenses increased $2.3 million and $1.7 million, respectively, primarily due to the inclusion of Custom Wheel House operating costs. Research and development costs increased $1.0 million primarily due to personnel investments to support future growth and product innovation. Amortization of purchased intangibles increased by $1.7 million mainly due to the amortization of intangibles obtained in our acquisition of Custom Wheel House. 25 Table of Contents Income from operations For the three months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Income from operations $ 52.8 $ 70.5 $ (17.7) (25.1) % As a result of the factors discussed above, income from operations for the three months ended June 30, 2023 decreased $17.7 million, or 25.1%, compared to income from operations for the three months ended July 1, 2022. Interest and other expense, net For the three months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Interest expense $ 4.4 $ 1.7 $ 2.7 158.8 % Other expense, net 0.5 2.8 (2.3) (82.1) Interest and other expense, net $ 4.9 $ 4.5 $ 0.4 8.9 % Interest and other expense, net for the three months ended June 30, 2023 increased by $0.4 million to $4.9 million compared to $4.5 million for the three months ended July 1, 2022. Interest expense increased by $2.7 million due to higher interest rates. Other expense, net decreased $2.3 million primarily due lower losses on foreign currency transactions. Income taxes For the three months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Provision for income taxes $ 8.1 $ 12.5 $ (4.4) (35.2) % The effective tax rates were 16.9% and 18.9% for the three month periods ended June 30, 2023 and July 1, 2022, respectively. For the three months ended June 30, 2023, the difference between the Company’s effective tax rate of 16.9% and the 21% federal statutory rate resulted primarily from a lower tax rate on foreign derived intangible income and excess benefit related to stock-based compensation. This benefit was partially offset by state and foreign withholding taxes. For the three months ended July 1, 2022, the difference between our effective tax rate of 18.9% and the 21% federal statutory rate resulted primarily from a lower tax rate on foreign derived intangible income and excess benefits related to stock-based compensation. The benefits were partially offset by withholding and state taxes. Net income For the three months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Net income $ 39.7 $ 53.5 $ (13.8) (25.8) % As a result of the factors described above, our net income decreased $13.8 million, or 25.8%, to $39.7 million in the three months ended June 30, 2023 from $53.5 million for the three months ended July 1, 2022. 26 Table of Contents Six months ended June 30, 2023 compared to six months ended July 1, 2022 Net sales For the six months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Powered Vehicle Group $ 282.4 $ 190.4 $ 92.0 48.4 % Aftermarket Applications Group 294.4 246.8 47.6 19.3 Specialty Sports Group 223.8 347.5 (123.7) (35.6) Total net sales $ 800.6 $ 784.7 $ 15.9 2.0 % Total net sales for the six months ended June 30, 2023 increased $15.9 million, or 2.0%, compared to the six months ended July 1, 2022. Powered Vehicle Group net sales increased by $92.0 million, or 48.4%, mainly due to increased demand in the OEM channel. Aftermarket Applications Group net sales increased by $47.6 million, or 19.3%, primarily due to the inclusion of revenue from our Custom Wheel House subsidiary, which was acquired in March 2023, and strong performance in our upfitting product lines. Specialty Sports Group product net sales decreased by $123.7 million, or 35.6%, due to the impacts of higher levels of inventory across various channels. Cost of sales For the six months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Cost of sales $ 535.2 $ 521.5 $ 13.7 2.6 % Cost of sales for the six months ended June 30, 2023 increased $13.7 million, or 2.6%, compared to the six months ended July 1, 2022. The increase in cost of sales and resulting decrease in gross margin of 40 basis points to 33.1% for the six months ended June 30, 2023 as compared to the same prior fiscal year period was primarily due to amortization of an acquired inventory valuation markup and a shift in our product line mix, offset by increased efficiencies at our North American facilities. Operating expenses For the six months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Operating expenses: General and administrative $ 64.0 $ 54.0 $ 10.0 18.5 % Sales and marketing 50.2 46.8 3.4 7.3 Research and development 30.5 26.9 3.6 13.4 Amortization of purchased intangibles 13.2 10.9 2.3 21.1 Total operating expenses $ 157.9 $ 138.6 $ 19.3 13.9 % Total operating expenses for the six months ended June 30, 2023 were $157.9 million compared to $138.6 million for the six months ended July 1, 2022. General and administrative expenses increased by $10.0 million primarily due to higher employee headcount and benefits-related costs of $4.0 million, new U.S. facilities expansion costs of $1.9 million, and the inclusion of Custom Wheel House operating expenses of $1.8 million. Sales and marketing expenses increased $3.4 million primarily due to the inclusion of Custom Wheel House operating expenses. Research and development costs increased $3.6 million primarily due to personnel investments to support future growth and product innovation. Amortization of purchased intangibles increased by $2.3 million mainly due to the amortization of intangibles obtained in our acquisition of Custom Wheel House. 27 Table of Contents Income from operations For the six months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Income from operations $ 107.5 $ 124.6 $ (17.1) (13.7) % As a result of the factors discussed above, income from operations for the six months ended June 30, 2023 decreased $17.1 million, or 13.7% , compared to income from operations for the six months ended July 1, 2022. Interest and other expense, net For the six months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Interest expense $ 7.9 $ 3.7 $ 4.2 113.5 % Other expense, net 0.6 4.5 (3.9) (86.7) Interest and other expense, net $ 8.5 $ 8.2 $ 0.3 3.7 % Interest and other expense, net for the six months ended June 30, 2023 increased by $0.3 million to $8.5 million compared to $8.2 million for the six months ended July 1, 2022. Other expense, net decreased $3.9 million primarily due lower losses on foreign currency transactions. Interest expense increased by $4.2 million due to higher interest rates. Income taxes For the six months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Provision for income taxes $ 17.5 $ 14.9 $ 2.6 17.4 % The effective tax rates were 17.7% and 12.8% for the six month periods ended June 30, 2023 and July 1, 2022, respectively. For the six months ended June 30, 2023, the difference between the Company’s effective tax rate of 17.7% and the 21% federal statutory rate primarily due to a lower tax rate on foreign derived intangible income. This benefit was partially offset by state and foreign withholding taxes. For the six months ended July 1, 2022, the difference between our effective tax rate of 12.8% and the 21% federal statutory rate resulted primarily from the impact of the recently finalized U.S. tax regulations published by the U.S. Treasury and Internal Revenue Service on January 4, 2022 and from a lower tax rate on foreign derived intangible income. These regulations limit the amount of newly generated foreign taxes that are creditable against U.S. income taxes, which resulted in a release of the Company’s valuation allowance against foreign tax credits due to the Company’s ability to use foreign tax credit carryforwards that had previously been reserved against. These benefits were partially offset by withholding and state taxes. Net income For the six months ended (in millions) June 30, 2023 July 1, 2022 Change ($) Change (%) Net income $ 81.5 $ 101.5 $ (20.0) (19.7) % As a result of the factors described above, our net income decreased $20.0 million, or 19.7%, to $81.5 million in the six months ended June 30, 2023 from $101.5 million for the six months ended July 1, 2022. 28 Table of Contents Liquidity and Capital Resources Our primary cash needs are to support working capital, interest on debt, employee compensation, capital expenditures, acquisitions, debt repayments, and other general corporate purposes. Historically, we have generally financed our liquidity needs with operating cash flows, borrowings under our Prior Credit Facility and our 2022 Credit Facility, and the issuance of common stock. These sources of liquidity may be impacted by events described in Cautionary Note Regarding For ward-Looking S tatements and Item 1A. Risk Factors . As of June 30, 2023, we held $44.9 million of our $105.4 million of cash and cash equivalents in accounts of our subsidiaries outside of the U.S., which we may repatriate. A summary of our operating, investing and financing activities is shown in the following table: For the six months ended (in millions) June 30, 2023 July 1, 2022 Net cash used in operating activities $ (3.3) $ (85.4) Net cash used in investing activities (156.5) (19.9) Net cash provided by financing activities 119.8 32.2 Effect of exchange rate changes on cash and cash equivalents 0.2 2.0 Change in cash and cash equivalents $ (39.8) $ (71.0) We expect that cash on hand, cash flow from operations and availability under our 2022 Credit Facility will be sufficient to fund our operations during the next 12 months from the date of this Form 10-Q and beyond. Operating activities In the six months ended June 30, 2023, net cash used in operating activities was $3.3 million. Our investment in operating assets and liabilities is a result of increases in prepaids and other assets of $112.2 million primarily due to carrying more chassis to meet current year production needs for the upfitting product lines, and decreases in accounts payable of $41.6 million, income taxes payable of $16.4 million and accrued expenses and other liabilities of $6.5 million, partially offset by decreases in accounts receivable of $32.7 million and inventory of $13.1 million. The change in our accounts receivable reflects a shift in our product line mix. The change in our accounts payable is driven by timing of inventory purchases and vendor payments. The change in accrued expenses and other liabilities is primarily due to payments made for compensation and tax related accruals. The decrease in inventory reflects our continued efforts to optimize inventory levels. In the six months ended July 1, 2022, net cash used in operating activities was $85.4 million. Our investment in operating assets and liabilities is a result of increases in prepaids and other assets of $146.2 million, inventory of $74.8 million, accounts receivable of $57.4 million, and decreases in income taxes of $5.1 million, partially offset by an increase in accounts payable of $68.7 million and accrued expenses of $6.1 million. The change in prepaids and other assets is due to increased chassis deposits to secure supply for our upfitting business for the remainder of the year. The change in inventory is due to several factors, including receipt of long lead time items that had been delayed, higher levels of safety stock to mitigate uncertainty and the result of normal growth to meet anticipated demand. The changes in accounts receivable and accounts payable reflect business growth and the timing of vendor payments. The change in income taxes and accrued expenses is due to normal business growth and the timing of vendor and tax payments. Investing activities In the six months ended June 30, 2023 and July 1, 2022, net cash used in investing activities consisted of $156.5 million and $19.9 million, respectively. Investing activities for the six months ended June 30, 2023 consisted of $130.9 million of cash consideration for our purchase of Custom Wheel House, $23.2 million of property and equipment additions and $2.4 million in cash consideration for our purchase of other assets. Investing activities for the six months ended July 1, 2022 consisted of $19.9 million of property and equipment additions. 29 Table of Contents Financing activities In the six months ended June 30, 2023, net cash provided by financing activities was $119.8 million, and consisted of the proceeds from our 2022 Credit Facility of $210.0 million that were used to support our working capital and the purchase of Custom Wheel House, partially offset by payments of $85.0 million to reduce the revolver borrowings and payments of $5.2 million to repurchase shares of our common stock to cover withholding taxes from our stock-based compensation program. In the six months ended July 1, 2022, net cash provided by financing activities was $32.3 million, and consisted of net proceeds from our 2022 Credit Facility of $582.4 million, which was used to refinance our Prior Credit Facility, and proceeds from the termination of our 2021 Swap Agreement of $12.3 million. These changes were partially offset by the repayment of our term debt upon the refinancing of our Prior Credit Facility of $382.5 million, payments made on our line of credit of $174.3 million, payments of $3.8 million to repurchase shares of our common stock, net of proceeds from our stock-based compensation program, and $1.8 million in installment payments related to the purchase of the Tuscany non-controlling interest. Refer to Note 8 - Commitments and Contingencies for additional information on our purchase of the Tuscany non-controlling interest. Prior Credit Facility In June 2019, the Company entered into a credit facility with Bank of America and other named lenders, which was periodically amended and restated and/or amended. The credit facility was amended and restated on March 11, 2020, and further amended on June 19, 2020, and June 11, 2021 (as amended, the “Prior Credit Facility”). The Prior Credit Facility (which was terminated on April 5, 2022 and replaced with the 2022 Credit Facility (as discussed below)), would have matured on March 11, 2025, and provided a senior secured revolving line of credit with a borrowing capacity of $250.0 million and a term loan of $400.0 million. The term loan was subject to quarterly amortization payments. 2022 Credit Facility On April 5, 2022, the Company entered into a new credit agreement with Wells Fargo Bank, National Association, and other named lenders (the “2022 Credit Facility”), and concurrently repaid in full and terminated the Prior Credit Facility. The 2022 Credit Facility, which matures on April 5, 2027, provides for revolving loans, swingline loans and letters of credit up to an aggregate amount of $650.0 million. On April 5, 2022, the Company borrowed $475.0 million under the 2022 Credit Facility, which was used to repay all outstanding amounts owed under the Prior Credit Facility and for general corporate purposes. Future advances under the 2022 Credit Facility will be used to finance working capital, capital expenditures and other general corporate purposes of the Company. To the extent not previously paid, all then-outstanding amounts under the 2022 Credit Facility are due and payable on the maturity date. The Company paid $2.0 million in debt issuance costs in connection with the 2022 Credit Facility, which were allocated to the line of credit and amortized on a straight-line basis over the term of the facility. Additionally, the Company had $4.5 million of remaining unamortized debt issuance costs related to the Prior Credit Facility. The Company expensed $1.9 million of the remaining unamortized debt issuance costs and allocated $2.5 million to the 2022 Credit Facility. The Company may borrow, prepay and re-borrow principal under the 2022 Credit Facility during its term. Advances under the 2022 Credit Facility can be either Adjusted Term SOFR loans or base rate loans. SOFR rate revolving loans bear interest on the outstanding principal amount thereof for each interest period at a rate per annum equal to Term SOFR for such calculation plus 0.10% plus a margin ranging from 1.00% to 2.00%. Base rate revolving loans bear interest on the outstanding principal amount thereof at a rate per annum equal to the highest of (i) Federal Funds Rate plus 0.50%, (ii) the rate of interest in effect for such day as publicly announced from time to time by the lender as its “prime rate”, and (iii) Adjusted Term SOFR rate for a one-month tenor plus 1.00%, subject to the interest rate floors set forth therein, plus a margin ranging from 0.00% to 1.00%. At June 30, 2023, the one-month SOFR and three-month SOFR rates were 5.07% and 4.99%, respectively. At June 30, 2023, our weighted-average interest rate on outstanding borrowing was 5.56%. The 2022 Credit Facility is secured by substantially all of the Company’s assets, restricts the Company’s ability to make certain payments and engage in certain transactions, and requires that the Company satisfy customary financial ratios. The Company was in compliance with the covenants as of June 30, 2023. 30 Table of Contents Material Cash Requirements There have been no material changes to the information in our material cash requirements related to commitments or contractual obligations from those reported in our Annual Report on Form 10-K for the fiscal year ended December 30, 2022, as filed with the SEC on February 23, 2023. Inflation Historically, inflation has not had a material effect on our results of operations. However, significant increases in inflation, particularly those related to wages and increases in the cost of raw materials have and could continue to have an adverse impact on our business, financial condition and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the disclosures discussed in the section “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2022, as filed with the SEC on February 23, 2023.