Holley Inc. — Q1 2023 Form 10-Q
Reporting period: Thirteen weeks ended April 2, 2023; comparative period ended April 3, 2022. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
Holley designs, manufactures and distributes performance automotive aftermarket and safety products. Its product categories include electronic and mechanical systems, exhaust, accessories and safety products. Sales are primarily in the United States.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $172.2 | $200.1 | Down 13.9% |
| Gross profit / margin | $67.7 / 39.3% | $82.7 / 41.3% | Profit down 18.1%; margin down 2.0 percentage points |
| Operating income / margin | $26.0 / 15.1% | $36.0 / 18.0% | Income down 27.9% |
| Net income / diluted EPS | $4.2 / $0.04 | $16.9 / $0.15 | Net income down 74.8% |
| Adjusted EBITDA | $33.9 | $46.0 | Down 26.2% |
| Cash from operations | $3.6 | $18.3 | Down $14.7 |
| Capital expenditures | $1.0 | $5.7 | Down $4.7 |
Revenue fell across all reported product categories. Electronic systems declined $17.4 million on a comparable basis, the largest category decrease; safety fell $4.9 million, exhaust $3.5 million, mechanical systems $2.5 million and accessories $1.3 million. Acquisitions contributed $1.8 million of sales, while comparable sales declined $29.6 million. Management attributed the comparable decline mainly to lower unit volume, electronic-component supply constraints and normalization from pandemic-era demand. Improved pricing contributed about $7.0 million, partly offsetting an estimated $36.7 million volume-related decline.
Cost of goods sold declined less than sales, and gross margin contracted amid higher transportation, labor and component costs. SG&A fell 12.6%, reflecting lower equity compensation and personnel costs from savings initiatives, partly offset by higher outbound shipping costs. Research and development spending also decreased, primarily due to headcount reductions.
Balance sheet, debt and liquidity
- Cash was $20.8 million at April 2, 2023, down from $26.2 million at year-end 2022. Current assets were $324.2 million and current liabilities $95.6 million.
- Debt carrying value, net of issuance costs, was $642.7 million, including $636.2 million long-term and $6.6 million current; reported term-loan and revolver borrowings before debt costs were approximately $652.3 million. Gross borrowings less cash were approximately $631.5 million.
- The $125 million revolving facility had $118.3 million available and $1.7 million of letters of credit outstanding. The weighted-average borrowing rate was 8.7%.
- A February credit amendment raised the leverage covenant threshold to 7.25:1.00 initially for the period through March 31, 2024, with modified step-downs thereafter, and added a $45 million minimum liquidity covenant and other tests. Holley reported compliance with all financial covenants at quarter-end.
- Operating cash flow less capital expenditures was approximately $2.6 million. Cash declined $5.3 million overall, principally reflecting debt principal payments and financing fees.
Outlook, risks and unusual items
- Management expects fiscal 2023 capital expenditures of $10 million to $15 million. It 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; this is subject to significant uncertainties.
- Management cited inflation, labor costs, supply-chain disruption and electronic-component shortages, constrained consumer demand, and a possible shift toward lower-margin products as ongoing pressures. Cost savings, customer price increases and higher inventory levels are among its mitigation actions.
- Interest expense increased to $18.3 million from $7.4 million, reflecting higher rates and a $3.0 million noncash fair-value loss on an interest-rate collar. The collar covers $500 million notional, with a 2.811% floor and 5% cap based on three-month SOFR, and expires in February 2026. A later April 2023 credit amendment changed the borrowing-rate reference from LIBOR to SOFR.
- Fair-value losses on warrant and earn-out liabilities were $1.4 million and $0.4 million, respectively. Restructuring costs increased to $1.3 million, primarily for restructuring connected with recent acquisitions and executive severance. Inventory-reserve provision was $2.7 million versus $0.04 million a year earlier.
- No goodwill or intangible impairment was recorded. Management warned that weaker cash-flow expectations, execution challenges or higher capital costs could increase future impairment risk. It reported no legal proceedings expected to have a material adverse effect.
- The filing added a risk concerning financial-institution instability and potential effects on liquidity, financing access and the broader economy. The company said it held no funds at banks already placed into receivership but could not assure that other institutions would not face similar problems.
Most important facts for investors to verify
- Whether sales volumes, especially electronic systems, stabilize and component shortages ease; monitor comparable sales and product mix.
- Whether pricing and cost actions can restore gross margin despite inflation and shipping costs.
- Debt-service capacity and covenant headroom as borrowing costs remain high; verify the impact of the SOFR transition and interest-rate collar.
- Liquidity against the $45 million minimum covenant, the availability of the revolver and the cash-flow outlook.
- Whether planned savings and restructuring deliver sustained benefits, and whether inventory reserves or goodwill and intangible values require further adjustment.