Holley Inc. — Q2 2023 Form 10-Q Summary
Reporting period: Quarter and six months ended July 2, 2023 (13 and 26 weeks, respectively); comparative periods ended July 3, 2022. Financial amounts below are in U.S. dollars and rounded to millions unless stated otherwise.
Business context and reporting period
Holley designs, manufactures and distributes performance automotive aftermarket products, including electronic and mechanical systems, exhaust, accessories and safety products. The unaudited statements are prepared under U.S. GAAP. The filing reports no material changes to the company’s critical accounting estimates.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $175.3m | $179.4m | $347.5m | $379.5m |
| Gross profit / margin | $69.7m / 39.8% | $75.3m / 42.0% | $137.5m / 39.6% | $158.0m / 41.6% |
| Operating income | $30.0m | $25.1m | $55.9m | $61.2m |
| Net income | $13.0m | $40.6m | $17.2m | $57.4m |
| Basic earnings per share | $0.11 | $0.35 | $0.15 | $0.49 |
| Adjusted EBITDA (non-GAAP) | $37.9m | $37.2m | $71.9m | $83.2m |
| Cash provided by operating activities | Not stated separately | Not stated separately | $34.4m | $20.8m |
- Liquidity: Cash was $42.7m at July 2, 2023, versus $26.2m at year-end 2022. Revolver availability was $123.3m; $1.7m of letters of credit was outstanding. Current assets were $333.3m and current liabilities $103.2m.
- Debt and interest: Long-term debt, net of issuance costs and current portion, was $629.4m; total debt carrying value was $636.0m. Term-loan principal was $645.6m, with no revolver borrowings. The weighted-average borrowing rate was 9.2%; first-half interest expense was $28.2m.
- Cash flows and investment: First-half investing cash use was $2.4m, including $2.7m of capital expenditures; financing cash use was $15.6m, primarily debt principal payments and financing fees. Cash increased $16.6m during the first half.
Material changes versus the prior comparable period
- Q2 sales declined 2.3%; first-half sales fell 8.4%. Management attributed comparable-sales declines principally to lower unit volumes, post-pandemic demand normalization and, year to date, electronic-component supply constraints. Price realization partially offset lower volumes.
- First-half comparable sales declined 9.6%; acquisitions contributed $4.4m of non-comparable sales. In Q2, acquisitions contributed $2.6m while comparable sales declined 3.8%.
- First-half gross margin contracted 2.0 percentage points, primarily from selling through higher-cost inventory and inflation in labor and component costs. Q2 margin fell 2.2 points.
- Cost reductions lowered first-half SG&A by 16.3% and research and development expense by 21.5%, but operating income still declined 8.6% year over year.
- First-half net income fell 70.0%, reflecting lower operating income, higher interest expense and a swing from prior-year noncash gains to losses on the fair value of warrant and earn-out liabilities. These fair-value changes materially affect GAAP earnings and are excluded from Adjusted EBITDA.
- First-half operating cash flow improved despite lower net income, with inventory changes contributing materially; inventory on the balance sheet declined to $217.5m from $233.6m at December 31, 2022.
Outlook, management commentary, risks and contingencies
- Management expects fiscal 2023 capital expenditures of $5m–$10m. It stated that cash, operating cash generation and available revolver capacity are expected to meet liquidity and capital needs for the next 12 months and foreseeable future. No revenue or earnings guidance is provided in the supplied filing text.
- The credit agreement was amended to provide covenant relief through the quarter ending March 31, 2024, including an initially 7.25:1.00 maximum consolidated net leverage ratio and a $45m minimum-liquidity covenant. Holley reported compliance with all financial covenants at July 2, 2023.
- A $500m interest-rate collar runs through February 2026, with a 2.811% floor and 5% cap based on three-month SOFR. The filing estimates that a hypothetical 100-basis-point rate increase would raise annual interest expense by about $1.5m; a 100-basis-point decrease would lower it by about $6.5m.
- Management cited inflation, labor costs, supply-chain disruption and electronic-component shortages, constrained consumer demand, and a shift toward lower-margin products as continuing risks. It warned that adverse conditions or unsuccessful mitigation could harm results and liquidity.
- The filing identifies potential future goodwill or indefinite-lived intangible impairment if cash-flow projections, strategic execution, industry performance or discount rates deteriorate. No impairment charges were recorded in the periods presented.
- Holley reported no material legal proceedings, while noting ordinary-course claims and product warranties. The warranty accrual was $3.9m at July 2, 2023. A newly added risk factor discusses possible financial-services industry disruption; the company said it had no funds in banks placed into receivership to date.
- The company granted its new CEO 1.0m restricted stock units and 1.52m performance stock units as inducement awards. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales volumes and electronic-component availability improve, and whether price increases can offset lower demand and cost pressure.
- Whether gross margins recover as higher-cost inventory is worked through, and how much of expense savings can be sustained without weakening product development or execution.
- Debt-service capacity at a 9.2% borrowing rate, compliance with amended leverage and minimum-liquidity covenants, and the availability of revolver capacity.
- The drivers and sensitivity of GAAP earnings to warrant and earn-out fair-value changes, and the reconciliation and sustainability of non-GAAP Adjusted EBITDA.
- Potential dilution and compensation expense from CEO inducement awards and other outstanding equity awards, as well as the assumptions supporting goodwill and intangible-asset valuations.