10-Q: Holley Q2 2025: Sales Dip, Gross Margin Up, Legal Costs Rise

Holley Inc. reported a 1.7% decrease in net sales for Q2 2025 to $166.7 million, alongside a 0.2 percentage point increase in gross margin to 41.7%, while net income fell 36.5% due to higher interest and legal expenses.

Summary

• Net sales for the 13-week period ended June 29, 2025, decreased by $2.8 million, or 1.7%, to $166.7 million, primarily due to lower sales volume of approximately $4.2 million, partially offset by improved price realization of $1.4 million.
• Net sales for the 26-week period ended June 29, 2025, decreased by $8.4 million, or 2.6%, to $319.7 million, driven by lower sales volume of approximately $12.2 million, partially offset by improved price realization of $3.8 million.
• Gross profit for the 13-week period decreased by $0.7 million, or 1.0%, to $69.6 million, while gross margin slightly increased to 41.7% from 41.5% in the prior year, mainly due to the absence of significant clearance activity from the prior year.
• Gross profit for the 26-week period increased by $11.3 million, or 9.2%, to $133.6 million, with gross margin improving to 41.8% from 37.3%, primarily due to inventory charges in 2024 related to product rationalization and lower freight costs.
• Net income for the 13-week period decreased by $6.2 million, or 36.5%, to $10.9 million.
• Net income for the 26-week period decreased by $7.2 million, or 34.3%, to $13.7 million.
• Diluted net income per share was $0.09 for the 13-week period and $0.11 for the 26-week period, down from $0.14 and $0.17 respectively in the prior year periods.
• Selling, general, and administrative costs decreased by 4.7% for the 13-week period to $33.0 million, but increased by 3.1% for the 26-week period to $69.7 million, driven by a $2.3 million increase in legal fees, including $1.3 million in legal settlement costs.
• Interest expense, net, increased by 1.5% to $13.4 million for the 13-week period and by 20.3% to $29.1 million for the 26-week period, reflecting the negative impact of interest rate collars.
• Acquired a perpetual exclusive license in North America for Cataclean products on January 1, 2025, for a total purchase price of $23.8 million, with $13.09 million paid and $10.71 million accrued as of June 29, 2025.
• An ongoing material weakness in internal control over financial reporting was identified, related to insufficient accounting expertise and inadequate controls over reconciliations, manual journal entries, and third-party reports.

Sentiment

Score: 4

Explanation: While gross margin improved due to prior year's clearance not repeating and lower freight costs, the decline in net sales and significant drop in net income and EPS, coupled with increased legal expenses and an ongoing material weakness in internal controls, indicate a challenging period. The acquisition of the Cataclean license is a positive strategic move, but overall financial performance is weaker.

Positives

• Gross margin improved to 41.7% for the 13-week period and 41.8% for the 26-week period, up from 41.5% and 37.3% respectively, primarily due to the absence of prior-year clearance activities and lower freight costs.
• Cost of goods sold decreased by 2.1% for the 13-week period and 9.6% for the 26-week period, attributed to lower inbound freight costs and the 2024 product rationalization initiative.
• Selling, general, and administrative costs decreased by 4.7% for the 13-week period, and as a percentage of sales, decreased to 19.8% from 20.4% in the prior year period.
• Operating income for the 26-week period increased by $8.8 million, or 23.0%, to $46.9 million.
• Cash and cash equivalents increased to $63.8 million as of June 29, 2025, from $56.1 million at December 31, 2024.
• Long-term debt, net of current portion, slightly decreased to $543.3 million from $545.4 million.
• Successfully exited the Credit Agreement's Covenant Relief Period as of June 30, 2024, and was in compliance with all financial covenants as of June 29, 2025.
• Implemented strategies to mitigate the impact of tariffs, including diversifying supplier locations outside of China, reshoring products to North America, and exploring direct shipping from suppliers to international customers.

Negatives

• Net sales decreased by 1.7% for the 13-week period and 2.6% for the 26-week period, primarily due to lower sales volume.
• Net income decreased significantly by 36.5% for the 13-week period and 34.3% for the 26-week period.
• Diluted net income per share decreased from $0.14 to $0.09 for the 13-week period and from $0.17 to $0.11 for the 26-week period.
• Selling, general, and administrative costs increased by 3.1% for the 26-week period, driven by a $2.3 million increase in legal fees, including $1.3 million in legal settlement costs.
• Interest expense, net, increased by 1.5% for the 13-week period and 20.3% for the 26-week period, negatively impacted by interest rate collars.
• Restructuring costs increased to $0.4 million for the 13-week period and $0.8 million for the 26-week period, reflecting resource allocation efforts.
• Net cash provided by operating activities decreased to $32.6 million for the 26-week period from $44.5 million in the prior year, due to negative fluctuations in accounts receivable and accrued liabilities.
• Net cash used in investing activities significantly increased to $20.9 million for the 26-week period from $2.4 million in the prior year, primarily due to the Cataclean license acquisition.

Risks

• Inability to execute business strategy, including monetization of services and expansion into new lines of business.
• Disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain products.
• Supply shortages of key component parts and the need to shift product mix.
• Impact of geopolitical events, including military conflicts (Ukraine, Middle East), tariffs, terrorism, and public health crises.
• Inability to maintain key strategic relationships with partners and resellers.
• Impact of elevated interest rate levels, increasing cost of capital, and inflationary pressures.
• Impact of changing trade policies, including tariffs, which could negatively affect profitability, cash flows, and financial estimates.
• Uncertainties associated with product and service development and market acceptance.
• Increased constraints in consumer demand and/or shifts in the mix of products sold.
• Inability to attract and retain qualified employees and key personnel.
• Failure to protect and enhance corporate reputation and brand awareness.
• Recognition of goodwill and other intangible asset impairment charges.
• Adverse general economic and business conditions.
• Inability to acquire and protect intellectual property.
• Challenges in collecting, storing, processing, and using personal and payment information and other consumer data.
• Non-compliance with privacy and data protection laws and other legal obligations.
• Impact of security breaches, cyber-attacks, or other cybersecurity threats or incidents, or failure of key information technology systems.
• Inability to meet future liquidity requirements and comply with restrictive covenants related to long-term indebtedness.
• Inability to obtain additional capital, including through the sale of equity or debt securities.
• Inability to finance operations on an economically viable basis.
• Failure to maintain NYSE listing of common stock and warrants.
• Non-compliance with existing and/or future laws and regulations, including environmental health and safety or climate-related disclosures.
• Litigation, complaints, product liability claims, and/or adverse publicity.
• Uncertainty regarding the significance and timing of contractual obligations.
• Impact of, and response to, new accounting standards.
• Inability to maintain proper and effective internal controls, including a previously reported material weakness.
• Impact of changes in U.S. tax laws and regulations, including on deferred tax assets.
• Impact of changes in consumer spending patterns, consumer preferences, local, regional, and national economic conditions, crime, weather, and demographic trends.

Future Outlook

The company believes its business is positioned for continued organic growth and intends to continue evaluating opportunities for strategic acquisitions. It is actively monitoring international trade developments, including potential changes in tariff rates, and continues to evaluate and implement strategies to minimize the impact of tariffs on operations. The company is committed to optimizing operations, managing costs, and leveraging its diversified supply chain. It believes that cash generated through current operating performance, operating plans, cash position, and available borrowings will be sufficient to satisfy liquidity needs and capital expenditure requirements for the next 12 months and the foreseeable future. The financial impacts of the recently enacted One Big Beautiful Bill Act (OBBBA) are currently unable to be estimated but could be material.

Management Comments

• Management believes the company's business model and sourcing strategies have positioned it to manage challenges effectively, particularly regarding tariffs.
• Management believes the U.S. focus enables the company to better manage and mitigate the impact of tariffs on pricing more effectively than competitors who are less diversified and more reliant on single-source imports from China.
• Management believes that initiatives undertaken during Q2 2025 to mitigate the economic impact of tariffs, combined with pricing actions, have allowed the company to successfully manage the impact of the latest tariff decisions.
• Management believes that cash generated through current operating performance, operating plans, cash position, and borrowings available under the revolving credit facility will be sufficient to satisfy liquidity needs and capital expenditure requirements for the next 12 months and thereafter for the foreseeable future.

Industry Context

The company operates in the high-performance automotive aftermarket industry, which is significantly impacted by broad economic conditions, geopolitical events (including conflicts in Ukraine and the Middle East), inflation, fuel costs, wage rates, trade restrictions (tariffs), and supply chain disruptions. Consumer demand constraints and shifts towards lower-margin products also affect profitability. The company's strategy emphasizes innovation, product portfolio expansion, and strategic acquisitions to adapt to consumer needs and market changes. Its primarily U.S.-based production costs and diversified product portfolio are highlighted as advantages in managing tariff impacts compared to competitors more reliant on single-source imports from China.

Corporate Governance

Legal Proceedings

• A putative securities class action, captioned City of Fort Lauderdale General Employees Retirement System v. Holley, Inc., f/k/a Empower LTD., Tom Tomlinson, and Dominic Bardos, Civil Action No. 1:23-cv-148-S, was filed on November 6, 2023, in the United States District Court for the Western District of Kentucky.
• The lawsuit alleges that statements made regarding the company's business, operations, and prospects violated Sections 10(b), Section 20(a), and Rule 10b-5 of the Securities Exchange Act of 1934.
• The lead plaintiff filed an amended Complaint on April 26, 2024, adding Vinod Nimmagadda as a defendant.
• The company filed a motion to dismiss on June 28, 2024, and a motion to dismiss the supplemented amended Complaint on April 3, 2025, with briefing completed on May 8, 2025.
• Due to the early stage of this proceeding, the potential range of loss, if any, cannot be reasonably estimated, but the company disputes the allegations and intends to vigorously defend against them.

Stakeholder Impact

• Shareholders: Experienced a significant decrease in net income and diluted EPS, and face uncertainty due to an ongoing securities class action lawsuit and a material weakness in internal controls.
• Employees: Underwent realignment of roles and responsibilities, with overall salaries increasing due to the end of 2024 furloughs, and continue to receive equity-based compensation.
• Customers: May experience impacts from price increases implemented by the company in response to inflationary pressures, and from the strategic product rationalization initiative which discontinued certain SKUs.
• Creditors: The company remains in compliance with all financial covenants under its credit facility, but faces increased interest expense due to interest rate collars and variable-rate debt.

Next Steps

• Continue to design and implement remediation measures to address the material weakness in internal control over financial reporting, including hiring qualified accounting professionals, engaging third-party experts, enhancing policies and documentation, redesigning controls, improving process owner skills, and developing knowledge transfer documentation.
• Monitor international trade developments, including potential changes in tariff rates and new exemptions or retaliatory actions, to analyze their impact on the business.
• Evaluate and implement additional strategies to further minimize the impact of tariffs on operations.
• Continue to evaluate opportunities for strategic acquisitions that would complement the current business and expand the addressable target market.
• Optimize operations, manage costs, and leverage the diversified supply chain to minimize the impact of tariffs on results of operations and financial condition.

Key Dates

Recommendation

Holley Inc. reported a decline in net sales and a significant drop in net income and diluted EPS for both the 13-week and 26-week periods ended June 29, 2025, compared to the prior year. While gross margin improved due to the absence of prior-year clearance activities and lower freight costs, increased legal expenses and the negative impact of interest rate collars weighed on profitability. The company also disclosed an ongoing material weakness in internal controls over financial reporting and is defending a securities class action lawsuit. Despite strategic efforts like the Cataclean license acquisition and tariff mitigation, the current financial performance and governance challenges suggest a 'hold' recommendation, as the company navigates a complex macroeconomic environment and internal remediation efforts.

Keywords

Automotive aftermarket, Performance parts, Holley, SEC filing, 10-Q, Financial results, Q2 2025, Auto parts, Vehicle performance, Fuel injection, Exhaust systems, Tariffs, Supply chain, Corporate governance, Internal controls, Cataclean