Key Highlights

● Sales and margins rose and Net Income beat a prior-year loss

● Leverage goal reached a quarter early

● Upper end of the outlook trimmed on a cautious consumer view

● New retail program supports brands and channels

Holley Inc. (NYSE:HLLY), which sells performance products to enthusiasts in the automobile aftermarket under the Holley Performance Brands name, said that it reached its year-end Leverage goal a full quarter ahead of schedule, even as it lowered the upper limits of its full-year sales and profit ranges. Third-quarter net sales rose from the prior-year period, Gross Profit and Operating Income increased, and the company recorded net income against a net loss a year earlier.

The Nashville-based company paid down Debt during the quarter, including a previously announced repayment, and its cumulative reduction under a program running for several years has grown further. The Leverage Ratio defined in its Credit agreement fell from the year-end level to what the company called the lowest point in several years.

Chief Financial Officer Jesse Weaver paired that achievement with a note of caution, saying it is “prudent to be conservative” on the outlook given the current consumer environment. Chief Executive Officer Matthew Stevenson said teams delivered in a moderating macro environment, and that the core Business has grown in nearly every quarter of the recent stretch.

Reading the Third-Quarter Figures

Reported net sales growth understates the momentum in the continuing business, because Holley has been exiting certain product lines. Core business sales, which exclude divested businesses and the portfolio Rebalancing effort, grew at a noticeably faster rate than the total. Gross profit climbed, and operating income rose at a faster pace than sales.

Expense lines explain part of that operating gain. Selling, general and administrative expense declined modestly from the prior-year quarter, and Research and Development costs fell sharply. Restructuring costs went the other way, rising from the prior-year period, consistent with a company in the middle of reorganizing its portfolio and operations. Net interest expense also fell by a double-digit percentage, which fits with the lower debt balance.

Adjusted EBITDA grew faster than sales, and the associated Margin widened from the prior-year quarter. Adjusted net income more than doubled. The gap between adjusted and reported results in the prior year was larger than in the current quarter, when the reported and adjusted net income figures landed very close to each other.

Cash Generation Funds the Paydown

Cash flow gave the leverage progress its underpinning. Operating Cash Flow nearly doubled from the prior-year quarter, while free cash flow also rose by a healthy margin. For the year to date, both Operating Cash Flow and free cash flow were meaningfully above the prior-year totals.

Debt reduction has been a steady theme of recent reports. The second-quarter release, issued in August, said Holley had expected to finish the year below its leverage target. The third-quarter ratio reaches that target level earlier than planned. The company ended the quarter with total debt that remains substantial relative to its market value, partly offset by a cash balance, and it also repurchased a modest amount of stock during the year.

Interest expense guidance shows the practical gain from this work. Holley lowered its full-year range for interest expense, excluding collar revaluation, from the range it. Every reduction in interest cost leaves more operating cash available either for further debt reduction or for Investment in the business.

Year-to-Date Results Carry a Divestiture Scar

The year-to-date figures look different from the third-quarter ones, largely because of asset sales. Net sales for the year to date were up only slightly. Operating income declined substantially from the prior-year period, weighed down by a loss on asset sales, and net income finished roughly flat. Adjusted EBITDA was also essentially unchanged, while its margin slipped slightly.

The second-quarter release identified the source of that loss. Holley sold its non-core Restoration brands, including Scott Drake and Brothers Trucks, and recorded a loss on the sale of those Assets that produced a net loss for that quarter. The same release said the prior-year second quarter had included a one-time, non-cash Tariff Capitalization benefit, a Factor that also complicates year-over-year comparisons.

Against this background, the third quarter may be a cleaner view of the reshaped company, with fewer non-core lines and less noise from divestiture accounting. Management said that exiting non-core businesses simplified operations and supported margin gains, and adjusted Diluted Earnings per Share for the year to date were well above the same period last year.

From a Noisy Second Quarter to a Cleaner Third

Comparing the latest quarter with the one before it shows how much the asset sale distorted the earlier report. The second quarter produced a net loss per diluted share, against net income in the prior-year period, largely because of the loss on the sale of non-core assets. Adjusted EBITDA fell in that quarter and its margin contracted, although management said that excluding the prior-year tariff capitalization benefit, adjusted EBITDA would have been about flat. In the third quarter, by contrast, net income, adjusted EBITDA and margin all improved from a year earlier, with no such caveat needed to reach that conclusion.

Core growth also picked up between the periods. Core sales grew at a mid-single-digit rate in the second quarter and at a higher rate in the third. Total net sales grew at a slightly slower rate in the third quarter than in the second, even though the third was a smaller quarter in absolute dollars, which illustrates how much the exited lines still subtract from the reported comparison.

The company has moved from describing a target to reporting an outcome. The leverage ratio barely changed between year-end and June, then dropped noticeably by late September, with the additional repayment announced after the second quarter and further debt reduction doing much of the work. In August the company described the ratio as already at its lowest level in several years. The latest figure extends that low, and it brings the cumulative voluntary reduction to a higher total than the amount reported in August.

A Ceiling Lowered, a Floor Left in Place

The most instructive comparison in the release is between the outlook published and the one issued in August. The net sales range kept the same lower bound but lost a significant slice from the top. The core growth range moved in the same way, with the bottom of the range unchanged and its upper end trimmed.

Adjusted EBITDA followed the same pattern, with the low end retained and the high end reduced. In the company's terms this is a narrowing, and that is accurate, although the effect is to pull the midpoint down rather than to tighten evenly on both sides. Capital Expenditure and Depreciation and amortization guidance were left unchanged, while interest expense guidance was reduced. The company said it is not providing a reconciliation of forward-looking adjusted EBITDA to net income.

The direction of the change fits Weaver's comment on consumers. It also fits with a company that has just delivered a solid quarter yet sees reasons not to extrapolate it. The release gives no separate fourth-quarter forecast, but the narrower ranges limit what the company is asking the closing months of the year to deliver.

Brands, Channels and a New Retail Program

Holley's release points to a broad base of growth. A long list of its brands grew across direct-to-consumer and business-to-business channels, the company said, and a new national retailer program shipped during the quarter, expanding its presence on store shelves. The release does not size that program, and it does not name the retailer.

Long-term strategic initiatives also added to results, producing both Revenue and cost savings during the period, according to the company. Holley is embedding Marketing within its divisions to strengthen Brand activation, an organizational change that puts promotion closer to the people running each customer grouping.

Those groupings are American Performance, Modern Truck & Off-Road, Euro & Import, and Safety & Racing. Founded more than a century ago, the company describes its portfolio as serving automotive enthusiasts through well-known brands. The second-quarter release reported double-digit core growth in most of its divisions, a sign that growth at that stage had not depended on any single corner of the portfolio. The third-quarter release does not repeat that breakdown in the same form.

How Large Is the Enthusiast Market?

Trade group data provides helpful scale for Holley's opportunity. A market report from the Specialty Equipment Market Association, described the accessory and performance parts industry as steady and resilient despite mixed economic conditions, with a very large annual sales total for accessory and performance parts.

Several of SEMA's findings align with where Holley has been placing emphasis. The trade group said pickups accounted for a large share of industry sales, as owners modified them for off-road, Utility and lifestyle use, which is the customer base of Holley's Modern Truck & Off-Road grouping. It also said most buyers focus on everyday drivers rather than project cars, and that a majority of buyers are relatively young. Younger buyers, according to SEMA, are more likely to take on performance-focused and complex builds.

The report also addressed the powertrain question that hangs over performance parts. While electric and hybrid vehicles account for a growing share of new-vehicle sales, the trade group expects internal combustion engines to remain the dominant powertrain for new sales in the United States through the next decade. That matters for a company with deep roots in engine and fuel system performance, and for the American Performance grouping in particular.

Consumer Signals Beyond the Earnings Release

Weaver's caution is consistent with what other parts of the auto market are reporting. Market commentary said in an October new-vehicle forecast that declining consumer sentiment, higher borrowing costs and high gas prices are features of the current market, although it said wealthier buyers and better access to credit are keeping new-vehicle sales relatively strong. Enthusiast customers are not identical to new-vehicle buyers, so that relative strength may not translate directly.

Wholesale used vehicle data offers another relevant signal. Market data, reporting on Cox's Manheim index for September, cited higher fuel costs, rising interest rates and broader economic pressure as reasons for a softening in values during the third quarter. It also said large pickups and SUVs experienced declining Demand and values, while older and lower-priced vehicles held up better.

Softer demand for large trucks in the wholesale channel does not necessarily mean owners will stop modifying the trucks they already have. Even so, it is one of the outside indicators relevant to the truck and off-road category, and it helps explain why a company selling discretionary upgrades may prefer a conservative stance going into the end of the year.

A Fleet in Transition

SEMA's report also outlined how the vehicles on the road are changing, which has implications for the types of products enthusiasts want. The trade group said the vehicle population in the United States is shifting toward crossovers and utility vehicles as automakers build fewer passenger cars, although coupes, sedans and convertibles still represent a sizable part of the vehicles in use. Holley's Modern Truck & Off-Road grouping connects with the utility trend, while the release does not map its other groupings to particular body styles.

That breadth is one reason portfolio pruning is a meaningful exercise for a company like Holley. Selling Restoration brands, as it did this year, simplifies operations around the groupings it has chosen to keep, in management's description. Whether the remaining mix is the right one will depend partly on how those vehicle trends and owner preferences develop, and on whether younger buyers continue taking on complex builds at the rate SEMA describes.

Market Reaction and Remaining Unknowns

Several things remain to be seen. The release does not specify how much of the trimmed outlook reflects observed sales trends rather than prudence. It also leaves open whether Holley will set a lower leverage goal now that the current one has been reached, and how the balance between further debt reduction, stock repurchases and investment in brands may evolve.

The Bigger Picture for the Portfolio

Taken as a whole, the report describes a company in a later stage of a clean-up. The non-core Restoration exit has passed through the accounts, operating costs have come down, and leverage has reached a level that management set as a goal. Those are measures largely within management's control, and each moved in the desired direction during the quarter.

Consumer demand is the variable the company cannot control, and that is where its language has become more guarded. A year-end report that lands within the narrower ranges would confirm that the cautious stance was reasonable. The fourth quarter will therefore test how well core growth can continue in a moderating environment, with a simpler portfolio and a lighter interest burden than the company carried a year ago.