Holley Inc.: Form 10-Q for the period ended Oct 1, 2023
Filed with the SEC on Nov 8, 2023 and accepted by EDGAR at Nov 8, 2023, 07:36 ET.
Management's discussion and analysis
As filed, 34,620 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Unless the context requires otherwise, references to “Holley,” “we,” “us,” “our” and “the Company” in this section are to the business and operations of Holley Inc. and its subsidiaries unless the context otherwise indicates. The following discussion and analysis should be read in conjunction with Holley’s condensed consolidated financial statements and related notes thereto included in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties, and assumptions that could cause Holley’s actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed herein and under the caption, “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We are a leading designer, marketer, and manufacturer of high performance automotive aftermarket products serving car and truck enthusiasts, with sales, processing, and distribution facilities reaching most major markets in the United States, Canada, Europe and China. We design, market, manufacture and distribute a diversified line of performance automotive products including fuel injection systems, tuners, exhaust products, carburetors, safety equipment and various other performance automotive products. Our products are designed to enhance street, off-road, recreational and competitive vehicle performance and safety.
Innovation is at the core of our business and growth strategy. We have a history of developing innovative products, including new products in existing product families, product line expansions, and accessories, as well as products that bring us into new categories. We have thoughtfully expanded our product portfolio over time to adapt to consumer needs.
In addition, we have historically used strategic acquisitions to (i) expand our brand portfolio, (ii) enter new product categories and consumer segments, (iii) increase direct-to-consumer scale and connection, (iv) expand share in current product categories and (v) realize value-enhancing revenue and cost synergies. While we believe our business is positioned for continued organic growth, we intend to continue evaluating opportunities for strategic acquisitions that would complement our current business and expand our addressable target market.
Factors Affecting our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed above, under the caption, "Cautionary Note Regarding Forward-Looking Statements," in this Quarterly Report on Form 10-Q, under the caption, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023, and in our subsequent filings with the SEC.
Business Environment
Our business and results of operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, labor shortages, and disruption of the supply chain, as well as by geopolitical events, including the conflict in Ukraine and the conflict in Israel and surrounding areas. Our operations have been adversely impacted, and may continue to be adversely impacted, by inflationary pressures primarily related to transportation, labor and component costs. Sales growth in certain products has been constrained by continuing supply chain challenges and automotive electronic component shortages. In response to the global supply chain volatility and inflationary impacts, we have attempted to minimize potential adverse impacts on our business with cost savings initiatives, price increases to customers, and by increasing inventory levels of certain products and working closely with our suppliers and customers to minimize disruptions in delivering products to customers. Our profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales mix to lower-margin products, and demands on our performance that increased our costs. Should the ongoing macroeconomic conditions not improve, or worsen, or if our attempts to mitigate the impact on our supply chain, operations and costs is not successful, our business, results of operations and financial condition may be adversely affected.
Key Components of Results of Operations
Net Sales
The principal activity from which we generate sales is the designing, marketing, manufacturing and distribution of performance after-market automotive parts for our end consumers. Sales are displayed net of rebates and sales returns allowances. Sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized.
Cost of Goods Sold
Cost of goods sold consists primarily of the cost of purchased parts and manufactured products, including materials and direct labor costs. In addition, warranty, incoming shipping and handling and inspection and repair costs are also included within costs of goods sold. Reductions in the cost of inventory to its net realizable value are also a component of cost of goods sold.
Selling, General, and Administrative
Selling, general, and administrative costs consist of payroll and related personnel expenses, IT and office services, office rent expense and professional services. In addition, self-insurance, advertising, research and development, outgoing shipping costs, pre-production and start-up costs are also included within selling, general, and administrative.
Acquisition and Restructuring Costs
Acquisition and restructuring costs consist of professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to potential acquisitions. In addition, operational restructuring costs and executive severance are included within this classification.
Interest Expense
Interest expense consists of interest due on the indebtedness under our credit facilities. Interest is based on SOFR or the base rate, at the Company's election, plus the applicable margin rate. As of October 1, 2023, $619.2 million was outstanding under our Credit Agreement.
Results of Operations
13-Week Period Ended October 1, 2023 Compared With 13-Week Period Ended October 2, 2022
The table below presents Holley’s results of operations for the 13-week periods ended October 1, 2023 and October 2, 2022 (dollars in thousands):
| For the thirteen weeks ended October 1, 2023 | October 2, 2022 | Change ($) | Change (%) | |
|---|---|---|---|---|
| Net sales | $156,530 | $154,775 | $1,755 | 1.1% |
| Cost of goods sold | 98,156 | 106,383 | (8,227) | (7.7)% |
| Gross profit | 58,374 | 48,392 | 9,982 | 20.6% |
| Selling, general, and administrative | 28,880 | 31,921 | (3,041) | (9.5)% |
| Research and development costs | 6,100 | 6,039 | 61 | 1.0% |
| Amortization of intangible assets | 3,687 | 3,662 | 25 | 0.7% |
| Impairment of indefinite-lived intangible assets | — | 2,395 | (2,395) | (100.0)% |
| Acquisition and restructuring costs | 415 | 1,266 | (851) | (67.2)% |
| Other expense | (28) | 47 | (75) | (159.6)% |
| Operating income | 19,320 | 3,062 | 16,258 | 531.0% |
| Change in fair value of warrant liability | 2,064 | (30,171) | 32,235 | (106.8)% |
| Change in fair value of earn-out liability | 700 | (7,429) | 8,129 | (109.4)% |
| Interest expense | 13,712 | 10,428 | 3,284 | 31.5% |
| Income before income taxes | 2,844 | 30,234 | (27,390) | (90.6)% |
| Income tax expense (benefit) | 2,092 | (1,345) | 3,437 | (255.5)% |
| Net income | 752 | 31,579 | (30,827) | (97.6)% |
| Foreign currency translation adjustment | (176) | 516 | (692) | (134.1)% |
| Total comprehensive income | $576 | $32,095 | $(31,519) | (98.2)% |
Net Sales
Net sales for the 13-week period ended October 1, 2023 increased $1.8 million, or 1.1%, to $156.5 million, as compared to $154.8 million for the 13-week period ended October 2, 2022. Improved price realization of approximately $2.4 million led the increase, offset partially by lower unit volume which resulted in a decrease of approximately $0.6 million compared to the prior year period. Major categories driving the comparable year-over-year results include an increase in electronic systems sales of $7.9 million (12.7% category growth), a decrease in safety products sales of $3.1 million (19.8% category decline), and a decrease in accessories sales of $2.8 million (11.3% category decline).
Cost of Goods Sold
Cost of goods sold for the 13-week period ended October 1, 2023 decreased $8.2 million, or 7.7%, to $98.2 million, as compared to $106.4 million for the 13-week period ended October 2, 2022. The decrease in cost of goods sold during the 13-week period ended October 1, 2023 in which product sales increased 1.1% reflects a higher gross profit margin due to decreased freight costs, lower warranty costs and product mix.
Gross Profit and Gross Margin
Gross profit for the 13-week period ended October 1, 2023 increased $10.0 million, or 20.6%, to $58.4 million, as compared to $48.4 million for the 13-week period ended October 2, 2022. Gross margin for the 13-week period ended October 1, 2023 of 37.3% increased as compared to a gross margin of 31.3% for the 13-week period ended October 2, 2022. The increase in gross profit and gross profit margin was driven primarily by higher sales volume and meaningful improvements in freight, lower warranty costs, and product mix.
Selling, General and Administrative
Selling, general and administrative costs for the 13-week period ended October 1, 2023 decreased $3.0 million, or 9.5%, to $28.9 million, as compared to $31.9 million for the 13-week period ended October 2, 2022. When expressed as a percentage of sales, selling, general and administrative costs decreased to 18.5% of sales for the 13-week period ended October 1, 2023 compared to 20.6% of sales for the 13-week period ended October 2, 2022. The decrease in selling, general and administrative costs was driven by lower outbound shipping and handling costs, reflecting the implementation of cost-saving initiatives.
Research and Development Costs
Research and development costs for the 13-week period ended October 1, 2023 were stable at $6.1 million as compared to $6.0 million for the 13-week period ended October 2, 2022.
Amortization and Impairment of Intangible Assets
Amortization of intangible assets was stable at $3.7 million for both the 13-week periods ended October 1, 2023 and October 2, 2022.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 13-week period ended October 1, 2023 decreased $0.9 million to $0.4 million, as compared to $1.3 million for the 13-week period ended October 2, 2022, reflecting a reduction in restructuring activities associated with acquisitions.
Operating Income
As a result of factors described above, operating income for the 13-week period ended October 1, 2023 increased $16.3 million, or 531.0%, to $19.3 million, as compared to $3.1 million for the 13-week period ended October 2, 2022.
Change in Fair Value of Warrant Liability
For the 13-week period ended October 1, 2023, we recognized a loss of $2.1 million from the change in fair value of the warrant liability. For the 13-week period ended October 2, 2022, we recognized a gain of $30.2 million from the change in fair value of the warrant liability. The warrant liability reflects the fair value of the Warrants issued in connection with the Business Combination.
Change in Fair Value of Earn-Out Liability
For the 13-week period ended October 1, 2023, we recognized a loss of $0.7 million from the change in fair value of the earn-out liability. For the 13-week period ended October 2, 2022, we recognized a gain of $7.4 million, from the change in fair value of the earn-out liability. The earn-out liability reflects the fair value of the unvested Earn-Out Shares resulting from the Business Combination.
Interest Expense
Interest expense for the 13-week period ended October 1, 2023 increased $3.3 million, or 31.5%, to $13.7 million, as compared to $10.4 million for the 13-week period ended October 2, 2022, reflecting a higher effective interest rate on outstanding debt, net of a $1.1 million fair value adjustment on the interest rate collar.
Income before Income Taxes
As a result of factors described above, we recognized $2.8 million of income before income taxes for the 13-week period ended October 1, 2023, as compared to income before income taxes of $30.2 million for the 13-week period ended October 2, 2022.
Income Tax Expense
Income tax expense for the 13-week period ended October 1, 2023 was $2.1 million, as compared to an income tax benefit of $1.3 million for the 13-week period ended October 2, 2022. Our effective tax rate for the 13-week period ended October 1, 2023 was 73.6%. The difference between the effective tax rate for the 13-week period ended October 1, 2023 and the federal statutory rate in 2023 was due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities and foreign taxes in higher tax rate jurisdictions. The effective tax rate for the 13-week period ended October 2, 2022 was -4.4%. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities.
Net Income and Total Comprehensive Income
As a result of factors described above, we recognized net income of $0.8 million for the 13-week period ended October 1, 2023, as compared to net income of $31.6 million for the 13-week period ended October 2, 2022. Additionally, we recognized total comprehensive income of $0.6 million for the 13-week period ended October 1, 2023, as compared to total comprehensive income of $32.1 million for the 13-week period ended October 2, 2022. Comprehensive income includes the effect of foreign currency translation adjustments.
39-Week Period Ended October 1, 2023 Compared With 39-Week Period Ended October 2, 2022
The table below presents Holley’s results of operations for the 39-week periods ended October 1, 2023 and October 2, 2022 (dollars in thousands):
| For the thirty-nine weeks ended October 1, 2023 | October 2, 2022 | Change ($) | Change (%) | |
|---|---|---|---|---|
| Net sales | $503,997 | $534,250 | $(30,253) | (5.7)% |
| Cost of goods sold | 308,162 | 327,849 | (19,687) | (6.0)% |
| Gross profit | 195,835 | 206,401 | (10,566) | (5.1)% |
| Selling, general, and administrative | 87,998 | 102,532 | (14,534) | (14.2)% |
| Research and development costs | 18,935 | 22,396 | (3,461) | (15.5)% |
| Amortization of intangible assets | 11,040 | 10,985 | 55 | 0.5% |
| Impairment of indefinite-lived intangible assets | — | 2,395 | (2,395) | (100.0)% |
| Acquisition and restructuring costs | 2,106 | 3,247 | (1,141) | (35.1)% |
| Other expense | 508 | 594 | (86) | (14.5)% |
| Operating income | 75,248 | 64,252 | 10,996 | 17.1% |
| Change in fair value of warrant liability | 5,516 | (51,112) | 56,628 | (110.8)% |
| Change in fair value of earn-out liability | 2,089 | (9,282) | 11,371 | (122.5)% |
| Interest expense | 41,909 | 26,780 | 15,129 | 56.5% |
| Income before income taxes | 25,734 | 97,866 | (72,132) | (73.7)% |
| Income tax expense | 7,756 | 8,866 | (1,110) | (12.5)% |
| Net income | 17,978 | 89,000 | (71,022) | (79.8)% |
| Foreign currency translation adjustment | (103) | 1,258 | (1,361) | (108.2)% |
| Total comprehensive income | $17,875 | $90,258 | $(72,383) | (80.2)% |
Net Sales
Net sales for the 39-week period ended October 1, 2023 decreased $30.3 million, or 5.7%, to $504.0 million, as compared to $534.3 million for the 39-week period ended October 2, 2022. The decline in sales was driven by supply chain constraints in electronic components and a return to the sales trends experienced prior to the increased demand experienced during the COVID-19 pandemic. As a result, lower unit volume drove a decrease of approximately $43.2 million that was partially offset by improved price realization of approximately $12.9 million compared to the prior year period. Comparable year-over-year results by category include a decrease in safety products sales of $7.8 million (14.7% category decline), a decrease in electronic systems sales of $6.2 million (2.8% category decline), a decrease in accessories sales of $6.0 million (7.4% category decline), a decrease in mechanical systems sales of $5.3 million (4.1% category decline), and a decrease in exhaust system sales of $5.0 million (9.5% category decline).
Cost of Goods Sold
Cost of goods sold for the 39-week period ended October 1, 2023 decreased $19.7 million, or 6.0%, to $308.2 million, as compared to $327.8 million for the 39-week period ended October 2, 2022. The decrease in cost of goods sold during the 39-week period ended October 1, 2023 reflects the decrease in product sales during such periodcombined with lower freight costs.
Gross Profit and Gross Margin
Gross profit for the 39-week period ended October 1, 2023 decreased $10.6 million, or 5.1%, to $195.8 million, as compared to $206.4 million for the 39-week period ended October 2, 2022. Gross margin for the 39-week period ended October 1, 2023 was 38.9% as compared to a gross margin of 38.6% for the 39-week period ended October 2, 2022. The decrease in gross profit was driven primarily by lower sales.In general, gross margin and margins on individual products remain under pressure due to various factors, including potential increases in manufacturing costs and shifts in sales mix towards products with lower gross margins.
Selling, General and Administrative
Selling, general and administrative costs for the 39-week period ended October 1, 2023 decreased $14.5 million, or 14.2%, to $88.0 million, as compared to $102.5 million for the 39-week period ended October 2, 2022. When expressed as a percentage of sales, selling, general and administrative costs decreased to 17.5% of sales for the 39-week period ended October 1, 2023 compared to 19.2% of sales in 2022. The decrease in selling, general and administrative costs was driven by lower equity compensation costs and the implementation of cost-saving initiatives, which resulted in decreases in personnel, outbound shipping and handling, and marketing costs.
Research and Development Costs
Research and development costs for the 39-week period ended October 1, 2023 decreased $3.5 million, or 15.5%, to $18.9 million, as compared to $22.4 million for the 39-week period ended October 2, 2022. The decrease in research and development costs was primarily due to headcount reductions, reflecting the implementation of cost-saving initiatives.
Amortization and Impairment of Intangible Assets
Amortization of intangible assets was stable at $11.0 million for both the 39-week periods ended October 1, 2023 and October 2, 2022.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 39-week period ended October 1, 2023 decreased $1.1 million to $2.1 million, as compared to $3.3 million for the 39-week period ended October 2, 2022, reflecting a reduction in restructuring activities associated with acquisitions.
Operating Income
As a result of factors described above, operating income for the 39-week period ended October 1, 2023 increased $11.0 million, or 17.1%, to $75.3 million, as compared to $64.3 million for the 39-week period ended October 2, 2022.
Change in Fair Value of Warrant Liability
For the 39-week period ended October 1, 2023 we recognized a loss of $5.5 million from the change in fair value of the warrant liability. For the 39-week period ended October 2, 2022 we recognized a gain of $51.1 million from the change in fair value of the warrant liability. The warrant liability reflects the fair value of the Warrants issued in connection with the Business Combination.
Change in Fair Value of Earn-Out Liability
For the 39-week period ended October 1, 2023 we recognized a loss of $2.1 million from the change in fair value of the earn-out liability. For the 39-week period ended October 2, 2022 we recognized a gain of $9.3 million from the change in fair value of earn-out liability. The earn-out liability reflects the fair value of the unvested Earn-Out Shares resulting from the Business Combination.
Interest Expense
Interest expense for the 39-week period ended October 1, 2023 increased $15.1 million, or 56.5%, to $41.9 million, as compared to $26.8 million for the 39-week period ended October 2, 2022, reflecting a higher effective interest rate on outstanding debt, net of a $3.2 million fair value adjustment on the interest rate collar.
Income before Income Taxes
As a result of factors described above, we recognized $25.7 million of income before income taxes for the 39-week period ended October 1, 2023, as compared to income before income taxes of $97.9 million for the 39-week period ended October 2, 2022.
Income Tax Expense
Income tax expense for the 39-week period ended October 1, 2023 was $7.8 million, as compared to income tax expense of $8.9 million for the 39-week period ended October 2, 2022. The effective tax rate for the 39-week period ended October 1, 2023 was 30.1%. The difference between the effective tax rate for the 39-week period ended October 1, 2023 and the federal statutory rate in 2023 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities. Our effective tax rate for the 39-week period ended October 2, 2022 was 9.1%. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of the warrant and earn-out liabilities.
Net Income and Total Comprehensive Income
As a result of factors described above, we recognized net income of $18.0 million for the 39-week period ended October 1, 2023, as compared to net income of $89.0 million for the 39-week period ended October 2, 2022. Additionally, we recognized total comprehensive income of $17.9 million for the 39-week period ended October 1, 2023, as compared to total comprehensive income of $90.3 million for the 39-week period ended October 2, 2022. Comprehensive income includes the effect of foreign currency translation adjustments.
Non-GAAP Financial Measures
We present EBITDA and Adjusted EBITDA as supplemental measures of our operating performance and believe that such non-GAAP financial measures provide useful information to investors, because they exclude the impact of certain items that we do not consider indicative of our ongoing operating performance and we believe are useful in comparing the Company’s results of operations between periods. We believe that the presentation of EBITDA and Adjusted EBITDA enhances the usefulness of our financial information by presenting measures that management uses internally to establish forecasts, budgets and operational goals to manage and monitor our business. We believe that these non-GAAP financial measures help to depict a more realistic representation of the performance of our underlying business, enabling us to evaluate and plan more effectively for the future.
We define EBITDA as earnings before depreciation, amortization of intangible assets, interest expense, and income tax expense. We define Adjusted EBITDA as EBITDA adjusted to exclude, to the extent applicable, acquisition and restructuring costs, which includes transaction fees and expenses, termination related benefits, facilities relocation, and executive transition costs; changes in the fair value of the warrant liability; changes in the fair value of the earn-out liability; equity-based compensation expense; impairment of intangible assets; non-cash charges due to our previously disclosed product rationalization initiative aimed at eliminating unprofitable or slow-moving stock keeping units, for which a partial reversal of the initial reserve was recognized during the 39-week period ended October 1, 2023; notable items that we do not believe are reflective of operating performance, which for the 39-week period ended October 1, 2023, includes certain costs incurred for advisory services related to identifying performance initiatives, and for the 39-week period ended October 2, 2022, includes a non-cash adjustment related to the adoption of ASC Topic 842, “Leases,” and legal fees and costs related to a settlement; and other expenses or gains, which includes gains or losses from disposal of fixed assets, franchise taxes, and gains or losses from foreign currency transactions.
EBITDA and Adjusted EBITDA are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. These measures should not be considered as measures of financial performance under GAAP, and the items excluded from or included in these metrics are significant components in understanding and assessing Holley’s financial performance. These metrics should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP.
The following unaudited table presents the reconciliation of net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the 13-week and 39-week periods ended October 1, 2023 and October 2, 2022 (dollars in thousands):
| For the thirteen weeks ended October 1, 2023 | October 2, 2022 | For the thirty-nine weeks ended October 1, 2023 | October 2, 2022 | |
|---|---|---|---|---|
| Net income | $752 | $31,579 | $17,978 | $89,000 |
| Adjustments: | ||||
| Depreciation | 2,785 | 2,837 | 7,738 | 7,500 |
| Amortization of intangible assets | 3,687 | 3,662 | 11,040 | 10,985 |
| Interest expense, net | 13,712 | 10,428 | 41,909 | 26,780 |
| Income tax expense (benefit) | 2,092 | (1,345) | 7,756 | 8,866 |
| EBITDA | 23,028 | 47,161 | 86,421 | 143,131 |
| Acquisition and restructuring costs | 415 | 1,266 | 2,106 | 3,247 |
| Impairment of indefinite-lived intangible assets | — | 2,395 | — | 2,395 |
| Change in fair value of warrant liability | 2,064 | (30,171) | 5,516 | (51,112) |
| Change in fair value of earn-out liability | 700 | (7,429) | 2,089 | (9,282) |
| Equity-based compensation expense | 2,970 | 2,873 | 5,170 | 9,518 |
| Product rationalization | — | — | (800) | — |
| Notable items | 556 | 213 | 564 | 1,097 |
| Other expense (gain) | (28) | 47 | 508 | 594 |
| Adjusted EBITDA | $29,705 | $16,355 | $101,574 | $99,588 |
Liquidity and Capital Resources
Our primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. We have generally financed our historical needs with operating cash flows, capital contributions and borrowings under our credit facilities. These sources of liquidity may be impacted by various factors, including demand for our products, investments made in acquired businesses, plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.
As of October 1, 2023, the Company had cash of $36.8 million and availability of $123.3 million under its revolving credit facility. The Company has a senior secured revolving credit facility with $125 million in borrowing capacity. As of October 1, 2023, the Company had $1.7 million in letters of credit outstanding under the revolving credit facility. In February 2023, the Company entered into an amendment to its Credit Agreement which, among other things, contains a minimum liquidity financial covenant of $45 million, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility. The amendment also increases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of the fiscal quarter ending April 2, 2023 through the fiscal quarter ending March 31, 2024, to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter.
The Company is obligated under various operating leases for facilities, equipment and automobiles with estimated lease payments of approximately $1.9 million, including short term leases, due during the remainder of fiscal year 2023. See Note 16, "Lease Commitments" in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information related to the Company’s lease obligations.
Holley's capital expenditures are primarily related to ongoing maintenance and improvements, including investments related to upgrading and maintaining our information technology systems, tooling for new products, vehicles for product development, and machinery and equipment for operations. We expect capital expenditures in the range of $6 million to $8 million in fiscal year 2023.
See Note 7, "Debt" in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further detail of our credit facility and the timing of principal maturities. As of October 1, 2023, based on the then current weighted average interest rate of 9.4%, expected interest payments associated with outstanding debt totaled approximately $14.6 million for the remainder of fiscal year 2023.
As discussed under “Business Environment” above, although the future impact of supply chain disruptions and inflationary pressures are highly uncertain, we believe that cash generated through our current operating performance, and our operating plans, cash position, and borrowings available under our revolving credit facility, will be sufficient to satisfy our liquidity needs and capital expenditure requirements for the next 12 months and thereafter for the foreseeable future.
Cash Flows
The following table provides a summary of cash flows from operating, investing, and financing activities for the periods presented (dollars in thousands):
39-week period ended October 1, 2023 Compared With 39-week period ended October 2, 2022
| For the thirty-nine weeks ended October 1, 2023 | October 2, 2022 | |
|---|---|---|
| Cash flows provided by operating activities | $56,863 | $12,164 |
| Cash flows used in investing activities | (3,125) | (25,349) |
| Cash flows used in financing activities | (42,998) | (5,457) |
| Effect of foreign currency rate fluctuations on cash | (57) | (1,077) |
| Net (decrease) increase in cash and cash equivalents | $10,683 | $(19,719) |
Operating Activities. Net cash provided by operating activities for the 39-week period ended October 1, 2023 was $56.9 million compared to net cash provided by operating activities of $12.2 million for the 39-week period ended October 2, 2022. Net income decreased $71.0 million to $18.0 million for the 39-week period ended October 1, 2023 from $89.0 million for the 39-week period ended October 2, 2022, largely due to a $68.0 million year-over-year impact of non-cash valuation adjustments for warrants and earn out liabilities. Significant changes in the year-over-year change in working capital activity included positive fluctuations from inventories of $67.4 million and accounts receivable of $7.5 million. Partially offsetting these increases were negative fluctuations in accrued interest of $7.1 million and accrued liabilities of $4.5 million. The change in inventory reflects the impact of inventory management initiatives and fluctuations in sales while changes in accounts receivable and accrued liabilities are impacted by the timing of payments.
Investing Activities. Cash used in investing activities for the 39-week period ended October 1, 2023 was $3.1 million which primarily reflects capital expenditures. Cash used in investing activities for the 39-week period ended October 2, 2022 was $25.4 million which included $11.7 million due to capital expenditures and $14.1 million due to acquisitions.
Financing Activities. Cash used in financing activities for the 39-week period ended October 1, 2023 was $43.0 million, which primarily reflects $40.4 million in principal payments on long-term debt. The principal payments of long-term debt during the 39-week period ended October 1, 2023 includes the Company’s pay down of an aggregate of $24.8 million in principal on its outstanding first lien term loan by repurchasing $13.8 million at a discount to par and making a voluntary prepayment of $11.0 million during the 13-week period ended October 1, 2023. Cash used in financing activities for the 39-week period ended October 2, 2022 was $5.5 million primarily due to $31.8 million in principal payments on long-term debt, which was partially offset by $27.0 million in borrowings under the delayed draw term loan to finance acquisitions.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgements and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures. We evaluate our estimates, judgements and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. For a discussion of our critical accounting estimates, refer to the section entitled “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023. For further information see also Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. There have been no material changes to the Company’s critical accounting estimates included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Recent Accounting Pronouncements
For a discussion of Holley’s new or recently adopted accounting pronouncements, see Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Market risk
As filed, 3,206 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Interest Rate Risk. Holley is exposed to market risk in the normal course of business due to the Company’s ongoing investing and financing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Holley has established policies and procedures governing the Company’s management of market risks and the use of financial instruments to manage exposure to such risks. When appropriate, the Company uses derivative financial instruments to mitigate the risk from its interest rate exposure. The Company's interest rate collar is intended to mitigate some of the effects of increases in interest rates. As of October 1, 2023, a total of $619.2 million of term loan and revolver borrowings were subject to variable interest rates, with a weighted average borrowing rate of 9.4%. A hypothetical 100 basis point increase in interest rates would result in an approximately $1.2 million increase in annual interest expense, while a hypothetical 100 basis point decrease in interest rates would result in an approximately $2.9 million decrease to Holley’s annual interest expense.
Credit and other Risks. Holley is exposed to credit risk associated with cash and cash equivalents and trade receivables. As of October 1, 2023, the majority of the Company’s cash and cash equivalents consisted of cash balances in non-interest bearing checking accounts which exceed the insurance coverage provided on such deposits. The Company does not believe that its cash equivalents present significant credit risks because the counterparties to the instruments consist of major financial institutions. Substantially all trade receivable balances of the business are unsecured. The credit risk with respect to trade receivables is concentrated by the number of significant customers that the Company has in its customer base and a prolonged economic downturn could increase exposure to credit risk on the Company’s trade receivables. To manage exposure to such risks, Holley performs ongoing credit evaluations of the Company’s customers and maintains an allowance for potential credit losses.
Exchange Rate Sensitivity. As of October 1, 2023, the Company is exposed to changes in foreign currency exchange rates. While historically this exposure to changes in foreign currency exchange rates has not had a material effect on the Company’s financial condition or results of operations, foreign currency fluctuations could have a material adverse effect on business and results of operations in the future. Historically, Holley’s primary exposure has been related to transactions denominated in the Euro and Canadian dollars. The majority of the Company’s sales, both domestically and internationally, are denominated in U.S. Dollars. Historically, the majority of the Company’s expenses have also been in U.S. Dollars and we have been somewhat insulated from currency fluctuations. However, Holley may be exposed to greater exchange rate sensitivity in the future. Currently, the Company does not hedge foreign currency exposure; however, the Company may consider strategies to mitigate foreign currency exposure in the future if deemed necessary.
Controls and procedures
As filed, 1,196 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of October 1, 2023 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Risk factors
As filed, 3,051 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. Factors that could materially affect our actual results, levels of activity, performance or achievements include, but are not limited to, those under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023. Such risks, uncertainties and other factors may cause our actual results, performance, and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occur, our business, financial condition or results of operations may be adversely affected.
There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023, except for the addition of the following risk factor:
Recent events affecting the financial services industry could have an adverse impact on the Company's business operations, financial condition, and results of operations.
The closures of certain regional banks have created bank-specific and broader financial institution liquidity risk and concerns. Future adverse developments with respect to specific financial institutions or the broader financial services industry may lead to market-wide liquidity shortages, impair the ability of companies to access working capital needs, and create additional market and economic uncertainty.
Although we do not have any funds in any of the banks that have been placed into receivership to date, we cannot guarantee that the banks or other financial institutions that hold our funds will not experience similar issues. These events have resulted in market disruption and volatility and could lead to greater instability in the credit and financial markets and a deterioration in confidence in economic conditions. Our operations may be adversely affected by any such economic downturn, liquidity shortages, volatile business environments, or unpredictable market conditions. These events could also make any necessary debt or equity financing more difficult and/or costly.
The future effect of these events on the financial services industry and broader economy are unknown and difficult to predict but could include failures of other financial institutions to which we or our customers, vendors, or other counterparties face direct or more significant exposure. Any such developments could adversely impact our results of operation and financial position. There may be other risks we have not yet identified. We are working to identify any potential impact of these events on our business in order to minimize any disruptions to our operations. However, we cannot guarantee we will be able to avoid any negative consequences relating to these recent developments or any future related developments.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2023-10-01. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2023-07-03 to 2023-10-01 | $156.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months2023-01-01 to 2023-10-01 | $504.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months2023-07-03 to 2023-10-01 | $98.2m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months2023-01-01 to 2023-10-01 | $308.2m | us-gaap:CostOfRevenue |
| Gross profit | 3 months2023-07-03 to 2023-10-01 | $58.4m | us-gaap:GrossProfit |
| Gross profit | 9 months2023-01-01 to 2023-10-01 | $195.8m | us-gaap:GrossProfit |
| Research and development | 3 months2023-07-03 to 2023-10-01 | $6.1m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months2023-01-01 to 2023-10-01 | $18.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months2023-07-03 to 2023-10-01 | $28.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months2023-01-01 to 2023-10-01 | $88.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months2023-07-03 to 2023-10-01 | $19.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months2023-01-01 to 2023-10-01 | $75.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2023-07-03 to 2023-10-01 | $13.7m | us-gaap:InterestExpense |
| Interest expense | 9 months2023-01-01 to 2023-10-01 | $41.9m | us-gaap:InterestExpense |
| Income tax | 3 months2023-07-03 to 2023-10-01 | $2.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2023-01-01 to 2023-10-01 | $7.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2023-07-03 to 2023-10-01 | $752.0k | us-gaap:NetIncomeLoss |
| Net income | 9 months2023-01-01 to 2023-10-01 | $18.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2023-07-03 to 2023-10-01 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months2023-01-01 to 2023-10-01 | $0.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2023-07-03 to 2023-10-01 | $0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months2023-01-01 to 2023-10-01 | $0.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2023-07-03 to 2023-10-01 | 119,245,956 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months2023-01-01 to 2023-10-01 | 118,119,501 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months2023-01-01 to 2023-10-01 | $56.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2023-01-01 to 2023-10-01 | $4.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | At period end2023-10-01 | $36.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2023-10-01 | $304.7m | us-gaap:AssetsCurrent |
| Total assets | At period end2023-10-01 | $1.22bn | us-gaap:Assets |
| Current liabilities | At period end2023-10-01 | $88.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2023-10-01 | $781.2m | us-gaap:Liabilities |
| Long-term debt | At period end2023-10-01 | $603.5m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | At period end2023-10-01 | $6.6m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | At period end2023-10-01 | $437.9m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0001437749-23-030772. Last ingested by Listed: Oct 24, 2026, 15:15 ET. Listed shows no prices and gives no investment advice.