Holley Inc. — Q1 2024 Form 10-Q
Reporting period: Thirteen weeks ended March 31, 2024; comparisons are with the thirteen weeks ended April 2, 2023. Holley designs, manufactures, and distributes automotive aftermarket performance and safety products. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2024 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $158.6 million | $172.2 million | Down 7.9% |
| Gross profit / margin | $52.1 million / 32.8% | $67.7 million / 39.3% | Profit down 23.1%; margin down 6.5 percentage points |
| Operating income / margin | $10.2 million / 6.4% | $26.0 million / 15.1% | Income down 60.7% |
| Net income / diluted EPS | $3.7 million / $0.03 | $4.2 million / $0.04 | Net income down 12.2% |
| Adjusted EBITDA / margin | $30.7 million / 19.3% | $33.9 million / 19.7% | Down 9.7% |
| Operating cash flow | $18.8 million | $3.6 million | Increased |
| Free cash flow | $17.8 million | $3.0 million | Increased |
Adjusted EBITDA and free cash flow are non-GAAP measures. Adjusted EBITDA excludes specified items, including $9.7 million of inventory charges and $3.1 million of notable items; free cash flow is operating cash flow less capital expenditures, net of asset-sale proceeds.
Cash was $41.1 million at quarter-end, versus $41.1 million at December 31, 2023. The company reported $123.3 million of revolver availability and $1.7 million of outstanding letters of credit. Its minimum-liquidity covenant is $45 million, counting unrestricted cash and available revolver capacity. Holley said it was in compliance with all financial covenants at March 31.
Long-term debt, net of current portion, was $560.1 million; the first-lien term loan had $575.9 million of principal outstanding and matures in November 2028. The weighted-average borrowing rate was 9.2%. Holley repurchased $15.0 million of term-loan principal at a discount to par during the quarter. A $500 million interest-rate collar hedges variable-rate debt exposure.
Current assets were $289.8 million and current liabilities were $101.7 million. Inventory was $184.0 million, down from $192.3 million at year-end. Cash from operations increased substantially year over year; management attributed working-capital changes largely to timing, including favorable year-over-year movements in accounts payable and receivables, partly offset by inventory.
Material changes and drivers
- Sales fell by $13.6 million. Lower volume reduced sales by approximately $16.7 million, partly offset by approximately $3.1 million of improved price realization. Electronic systems, mechanical systems, and accessories each declined; safety sales increased.
- Gross margin was pressured by $9.7 million of inventory charges, primarily tied to product rationalization to eliminate unprofitable or slow-moving SKUs. Excluding those charges, Holley reported adjusted gross margin of 38.9%, versus 39.3% a year earlier.
- SG&A increased 9.9% to $33.0 million, including a $2.0 million litigation-settlement reserve, higher equity compensation, and advisory costs; lower outbound shipping costs partly offset the increase. R&D and restructuring costs decreased.
- Interest expense decreased 39.9% to $11.0 million, reflecting lower debt balances and the interest-rate collar, partly offset by a higher effective borrowing rate. Fair-value gains on warrant and earn-out liabilities also benefited non-operating results.
Outlook, risks, and unusual items
- Holley did not provide specific revenue or earnings guidance in the supplied filing text. It expects fiscal 2024 capital expenditures of $8 million to $12 million and approximately $39.7 million of interest payments for the remainder of 2024, based on the quarter-end borrowing rate.
- Management said operating cash generation, cash on hand, operating plans, and revolver availability should be sufficient for liquidity and capital expenditure needs for the next 12 months and thereafter for the foreseeable future.
- Management cited constrained consumer demand, product mix shifts, inflation, supply-chain and manufacturing costs, and geopolitical and broader economic uncertainty as risks. It noted these conditions could pressure demand, margins, and liquidity.
- The quarter included $9.7 million in inventory charges related primarily to product rationalization, a $2.0 million litigation reserve within SG&A, and a $0.1 million loss on early debt extinguishment. Holley reported a $0.9 million income-tax benefit; the effective rate was negative 31.4%, affected by fair-value changes, tax credits, foreign taxes, and a discrete benefit for product-rationalization expenses.
- A securities class action is pending and an amended complaint was filed April 26, 2024. Holley disputes the allegations and intends to defend the case; because it is at an early stage, the company cannot reasonably estimate any potential loss range. No goodwill impairment was recorded in the quarter, though the filing identifies future impairment risk if performance or assumptions deteriorate.
Important facts for investors to verify
- Whether sales volume stabilizes and price realization continues to offset demand weakness.
- Whether product rationalization improves underlying gross margins after the unusual inventory charges.
- Whether operating cash flow remains strong when working-capital timing effects normalize, and whether liquidity and covenant compliance are maintained.
- Debt repayment progress, borrowing costs, and the effectiveness and terms of the interest-rate collar.
- Developments in the securities litigation, including any change in the company’s ability to estimate potential exposure.
- The composition and recurrence of adjustments used in reported non-GAAP measures, particularly notable items and inventory charges.