Holley Inc. — Q3 2023 Form 10-Q
Reporting period and business context. The unaudited quarter ended October 1, 2023 comprised 13 weeks; year-to-date (YTD) covers 39 weeks. Holley designs, manufactures and distributes performance automotive aftermarket and safety products. Financial amounts below are in millions of dollars unless otherwise noted.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Net sales | $156.5 | $154.8 | $504.0 | $534.3 |
| Gross profit / margin | $58.4 / 37.3% | $48.4 / 31.3% | $195.8 / 38.9% | $206.4 / 38.6% |
| Operating income | $19.3 | $3.1 | $75.2 | $64.3 |
| Net income | $0.8 | $31.6 | $18.0 | $89.0 |
| Adjusted EBITDA (non-GAAP) | $29.7 | $16.4 | $101.6 | $99.6 |
| Operating cash flow | Not separately presented for the quarter | $56.9 | $12.2 |
Q3 diluted EPS was $0.01, compared with $0.27. YTD diluted EPS was $0.15, compared with $0.32; the filing’s EPS calculation reflects adjustments for warrant fair value in the 2022 comparison.
- Cash and liquidity: Cash was $36.8 at October 1, versus $26.2 at December 31, 2022. Revolver availability was $123.3, with $1.7 of letters of credit outstanding. The amended credit agreement requires minimum liquidity of $45.0; Holley reported compliance with all financial covenants.
- Debt and interest: Debt carrying value was $610.1, net of unamortized issuance costs and including other debt; credit-agreement borrowings were approximately $619.2. The weighted-average borrowing rate was 9.4%. YTD interest expense was $41.9, up from $26.8.
- Balance sheet: Current assets were $304.7 and current liabilities $88.9. Inventory was $207.2, down from $233.6 at year-end. Total liabilities were $781.2 and stockholders’ equity $437.9.
Material changes versus comparable periods
- Q3 sales increased 1.1%, as approximately $2.4 of improved price realization more than offset a roughly $0.6 decline from lower unit volume. Electronic systems grew 12.7%; safety and accessories declined 19.8% and 11.3%, respectively.
- Q3 gross margin rose to 37.3% from 31.3%, attributed to lower freight and warranty costs and favorable product mix. SG&A fell 9.5%, partly due to lower outbound shipping costs and cost-saving initiatives.
- YTD sales declined 5.7%. Management attributed the decrease mainly to lower unit volume, supply constraints in electronic components, and a return toward pre-pandemic demand trends; pricing gains partly offset volume declines. YTD gross margin was broadly stable at 38.9% versus 38.6%.
- YTD operating income increased 17.1%, despite lower sales, with lower SG&A and R&D costs. YTD net income fell to $18.0 from $89.0, largely reflecting the prior-year benefit from warrant and earn-out valuation gains, which reversed to losses in 2023, and higher interest expense.
- YTD operating cash flow improved to $56.9 from $12.2, supported by working-capital changes, including inventory reductions. Investing cash use fell to $3.1 from $25.3; financing cash use increased to $43.0, primarily from debt repayments. Cash increased by $10.7 during the 2023 YTD period.
Outlook, commentary, risks and unusual items
- Management expected operating cash generation, cash on hand and revolving-credit availability to meet liquidity and capital needs for the next 12 months and the foreseeable future. Fiscal 2023 capital expenditures were expected to be $6–$8; no specific sales or earnings guidance is provided in the filing text.
- Management cited inflation in transportation, labor and components; supply-chain and electronic-component shortages; constrained consumer demand; and possible lower-margin product mix as risks to costs, sales and profitability. The company described cost reductions, customer price increases, inventory actions and supplier/customer coordination as mitigation efforts.
- A $500.0 notional interest-rate collar, with a 2.811% floor and 5.0% cap based on three-month SOFR, hedges part of the variable-rate debt exposure and expires February 2026. The filing estimates a 100-basis-point rate increase would add approximately $1.2 to annual interest expense; a 100-basis-point decrease would reduce it by approximately $2.9.
- A putative securities class action was filed November 6, 2023, after the quarter ended, naming Holley and two former executives. Holley disputes the allegations and intends to defend the case; the potential loss could not be reasonably estimated at this stage.
- No goodwill impairment was recorded in the periods presented. The filing cautions that weaker performance, higher capital costs or failure to execute plans could trigger impairment of goodwill or indefinite-lived intangibles. A $2.4 impairment of certain tradenames was recorded in Q3 2022, not Q3 2023.
Investor verification priorities
- Assess whether the Q3 margin recovery and cost savings can persist while YTD sales remain below the prior year and consumer demand and product mix remain risks.
- Review debt-service capacity, the 9.4% borrowing rate, covenant headroom and the terms of the temporary covenant relief and minimum-liquidity requirement.
- Evaluate the quality and repeatability of operating cash flow, including the contribution from inventory reductions and other working-capital timing effects.
- Track the securities litigation as it progresses; the filing provides no estimable loss range.
- Distinguish GAAP earnings from non-GAAP Adjusted EBITDA and from non-cash warrant and earn-out fair-value changes when comparing periods.