Holley Inc. — Q3 2022 Form 10-Q
Reporting period: The 13 weeks ended October 2, 2022; comparisons are with the 13 weeks ended September 26, 2021. Year-to-date figures cover 39 weeks. Amounts below are in millions unless stated otherwise. Holley designs, manufactures and distributes performance automotive aftermarket products.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 39 weeks 2022 | 39 weeks 2021 |
|---|---|---|---|---|
| Net sales | $154.8 | $159.7 | $534.3 | $513.0 |
| Gross profit | $48.4 | $65.2 | $206.4 | $212.1 |
| Gross margin | 31.3% | 40.8% | 38.6% | 41.3% |
| Operating income | $3.1 | $1.9 | $64.3 | $54.8 |
| Net income (loss) | $31.6 | $(30.2) | $89.0 | $(9.2) |
| Adjusted EBITDA (non-GAAP) | $16.4 | $35.5 | $99.6 | $133.4 |
- Q3 sales fell 3.1%; acquisitions added $7.7 million, while comparable sales declined $12.6 million (7.9%). Management attributed the comparable decline mainly to supply constraints that prevented fulfillment of customer orders. Lower unit volume reduced sales by about $24.0 million, partly offset by about $11.4 million of improved pricing.
- Gross margin contracted as manufacturing inefficiencies, inflation, higher warranty costs and product mix pressured profitability. Q3 warranty costs increased $4.5 million year over year.
- Q3 SG&A rose 10.5% to $31.9 million; research and development declined 15.3% to $6.0 million. Year-to-date SG&A increased 29.6% to $102.5 million, including higher equity compensation, personnel, shipping and public-company costs.
- Reported net income benefited materially from noncash fair-value gains: $30.2 million on warrant liabilities and $7.4 million on the earn-out liability in Q3; year-to-date gains were $51.1 million and $9.3 million, respectively. These gains do not represent operating cash generation.
- Q3 basic and diluted EPS were each $0.27. Year-to-date basic EPS was $0.76 and diluted EPS was $0.32; the filing’s diluted EPS calculation includes a warrant-related numerator adjustment.
Cash flow, debt and liquidity
- For the 39 weeks, operating cash flow was $12.2 million, investing cash outflow was $25.3 million and financing cash outflow was $5.5 million. Cash decreased $19.7 million to $16.6 million.
- Inventory was $230.5 million at October 2, up from $185.0 million at December 31, 2021. Management identified inventory and accounts payable movements as significant influences on operating cash flow.
- Debt obligations totaled $653.6 million, including a $650.9 million first-lien term loan; no revolving loans were outstanding. The term loan matures in November 2028. The weighted-average borrowing rate was 6.8%, and the company was in compliance with financial covenants.
- Holley reported $123.8 million of availability under its $125 million revolving facility, with $1.2 million of letters of credit outstanding. Management stated that operating performance, cash and revolver availability should meet liquidity and capital expenditure needs for at least the next 12 months and thereafter for the foreseeable future.
Outlook, risks and unusual items
- Holley expected fiscal 2022 capital expenditures of $14–$15 million and estimated about $11.3 million of interest payments for the remainder of 2022, based on the then-current borrowing rate.
- Management cited continuing supply-chain and logistics disruption, electronic-component shortages, inflation in transportation, labor and component costs, labor shortages, and geopolitical uncertainty including the war in Ukraine. The company said it was responding with cost savings, customer price increases, higher inventory for selected products, and supplier and customer coordination.
- Supply challenges and revised 2022 earnings estimates led to a $2.4 million impairment charge on certain indefinite-lived tradenames. The filing warns that worse-than-estimated conditions could result in further intangible-asset or goodwill impairments.
- The company adopted lease accounting standard ASC 842 in 2022, recognizing $31.3 million of right-of-use assets and $31.8 million of lease liabilities at quarter-end; adoption did not materially affect earnings or cash flows.
- Management estimated a $0.4–$0.55 million settlement charge from termination of its defined-benefit pension plan. It reported no legal proceedings expected to materially affect the company and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether supply constraints ease and comparable sales, product availability and gross margins recover; Q3 comparable sales and gross margin both weakened.
- How much reported earnings depend on noncash warrant and earn-out valuation gains, and how the year-to-date diluted EPS adjustment affects per-share comparisons.
- Whether working-capital needs, particularly elevated inventory, limit operating cash generation or liquidity.
- Debt-service capacity under higher interest rates: the filing estimates a 100-basis-point rate change would alter annual interest expense by approximately $6.5 million.
- Whether further impairment charges, warranty costs or pension settlement costs arise, and whether the company remains within credit-facility covenants.