Holley Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Holley designs, manufactures and distributes performance automotive aftermarket products, including electronic and mechanical systems, exhaust products, accessories and safety equipment. This unaudited report covers the 13 weeks ended September 26, 2021 and the 39 weeks ended September 26, 2021; comparisons are with the corresponding periods ended September 27, 2020. Holley completed its business combination and began trading as a public company on July 16, 2021. The transaction was accounted for as a reverse recapitalization.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Net sales | $159.7m | $133.3m | $513.0m | $365.8m |
| Gross profit | $65.2m | $55.5m | $212.1m | $153.7m |
| Gross margin | 40.8% | 41.7% | 41.3% | 42.0% |
| Operating income | $1.9m | $28.4m | $54.8m | $72.4m |
| Net income (loss) | $(30.2)m | $13.5m | $(9.2)m | $30.9m |
| Diluted EPS | $(0.28) | $0.20 | $(0.11) | $0.46 |
| Adjusted EBITDA | $35.5m | $34.6m | $133.4m | $95.7m |
Amounts are rounded; EBITDA and Adjusted EBITDA are non-GAAP measures. The filing provides reconciliations and cautions that these measures are not substitutes for GAAP results.
- Cash flow: For the 39 weeks, operating cash flow was $24.9m, compared with $75.6m a year earlier. Investing used $71.9m, including $61.8m for acquisitions and $10.5m for capital expenditures. Financing provided $29.3m, including business-combination proceeds and debt repayments. Cash declined $17.7m to $53.9m.
- Liquidity and debt: Current assets were $282.6m and current liabilities were $101.6m at September 26, 2021. The company reported $48.8m available under its revolving credit facility and said available cash, operating cash flow and revolver borrowings should meet liquidity and capital expenditure needs for at least 12 months. Gross debt was approximately $588.5m; the carrying amount was lower after unamortized issuance costs. The company repaid $100m of second-lien principal during the quarter and reported compliance with debt covenants.
- Working capital: Inventory was $164.3m, up from $133.9m at December 31, 2020. Management cited inventory growth and changes in accrued liabilities as factors affecting operating cash flow.
Material changes versus comparable periods
- Q3 sales increased 19.8%; management attributed $29.8m of the increase to recent acquisitions. For the 39 weeks, sales rose 40.3%, including $93.0m attributed to acquisitions. Electronic and exhaust product sales also grew year to date, which management linked primarily to higher volume and new product introductions.
- Q3 and year-to-date gross margins declined year over year. Holley cited higher inbound freight, component costs and product mix.
- Operating income and net income fell despite higher sales. Q3 included a $23.3m related-party fee paid at the business-combination closing, a $17.3m warrant-liability fair-value loss, a $6.9m earn-out-liability fair-value loss and a $1.4m debt-extinguishment loss. Year-to-date acquisition and restructuring costs also included a $17.2m increase in Simpson acquisition contingent consideration.
- Reported Adjusted EBITDA increased to $35.5m for Q3 and $133.4m for the 39 weeks; the measure excludes specified items, including acquisition-related costs, equity compensation and fair-value changes.
Outlook, management commentary and risks
- The filing provides no specific numerical revenue or earnings guidance. Management described continued organic growth and product innovation as strategic priorities and said it expects to continue evaluating acquisitions.
- A cybersecurity incident in September temporarily suspended customer services. Management estimated approximately $7m of sales shifted from Q3 into Q4. The filing said the incident had not had a material impact to date, while warning that future cyber incidents could disrupt operations and adversely affect results.
- COVID-19-related supply-chain, manufacturing and logistics disruptions, product shortages and higher costs remained risks. Management identified freight, component costs and product mix as current margin pressures.
- Interest-rate exposure is material: the company stated that a hypothetical 100-basis-point rate change would change annual interest expense by approximately $5.9m. It generally does not hedge interest-rate or foreign-currency exposure.
- Management said ordinary-course lawsuits were not expected to materially affect financial position or results. The filing also discusses acquisition contingencies, warranty obligations and risks from competition, integration, consumer demand and regulatory changes.
Important facts for investors to verify
- Whether the estimated $7m of sales deferred by the cyber incident shifted into Q4, and whether remediation or related costs materially affected subsequent results.
- How much of sales growth and future performance is attributable to acquisitions versus organic demand, and whether expected acquisition synergies are being realized.
- Whether freight, component costs and product mix continue to pressure gross margin, and whether supply constraints ease.
- The cash, covenant and interest-rate implications of approximately $588.5m in gross debt, alongside the $48.8m reported revolver availability.
- The potential effects of contingent consideration and earn-out liabilities, and dilution from the 14.7m warrants outstanding, exercisable at $11.50 per share subject to their terms.