10-Q: Holley Q3 2025: Profitability Rises Amidst Sales Dip

Holley Inc. reported a significant increase in quarterly operating income and gross profit margin, despite a slight decline in net sales for the nine-month period, driven by strategic operational improvements and product rationalization.

Summary

• Net sales for the 13-week period ended September 28, 2025, increased by 3.2% to $138.4 million, compared to $134.0 million in the prior year, primarily due to improved price realization of approximately $4.4 million.
• Gross profit for the 13-week period increased by 14.4% to $59.8 million, with gross margin improving to 43.2% from 39.0% in the prior year, driven by pricing flow-through and operational efficiencies.
• Operating income for the 13-week period surged by 185.2% to $15.9 million, up from $5.6 million in the comparable prior-year period.
• The company reported a net loss of $(0.8) million for the 13-week period, a significant improvement from a net loss of $(6.3) million in the prior year.
• For the 39-week period ended September 28, 2025, net sales decreased by 0.9% to $458.1 million, compared to $462.2 million in the prior year, primarily due to lower sales volume of approximately $12.5 million.
• Gross profit for the 39-week period increased by 10.8% to $193.5 million, with gross margin improving to 42.2% from 37.8% in the prior year, largely due to inventory charges in 2024 from product rationalization and lower freight costs.
• Operating income for the 39-week period increased by 43.7% to $62.7 million, up from $43.6 million in the comparable prior-year period.
• Net income for the 39-week period decreased by 11.5% to $12.9 million, compared to $14.5 million in the prior year.
• Holley Inc. 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 $16.66 million paid and $7.14 million accrued.
• The company repaid $15.0 million of outstanding principal on its first lien term loan at a discount to par during the 39-week period ended September 28, 2025.
• A material weakness in internal control over financial reporting, previously reported, has not been remediated as of September 28, 2025.

Sentiment

Score: 6

Explanation: The company demonstrated strong operational improvements in the third quarter, leading to significantly higher gross profit and operating income, and a reduced net loss. Strategic initiatives like product rationalization and tariff mitigation are showing positive effects on margins. However, the 39-week net sales saw a slight decline, and net income for the nine-month period was down. The unremediated material weakness in internal controls and ongoing legal proceedings remain notable concerns, creating a mixed but generally improving sentiment for the quarter.

Positives

• Operating income for the 13-week period increased significantly by 185.2% to $15.9 million.
• Gross profit margin for the 13-week period improved to 43.2% from 39.0%, driven by pricing and operational efficiencies.
• Net loss for the 13-week period narrowed substantially to $(0.8) million from $(6.3) million in the prior year.
• Cost of goods sold decreased by 3.9% for the 13-week period despite increased sales, indicating improved operational initiatives and reduced warranty claims.
• Operating income for the 39-week period increased by 43.7% to $62.7 million.
• Gross profit margin for the 39-week period improved to 42.2% from 37.8%, benefiting from product rationalization and lower freight costs.
• The company acquired a perpetual exclusive license for Cataclean products in North America, expanding its product portfolio.
• Holley Inc. was in compliance with all financial covenants under its Credit Agreement as of September 28, 2025.
• The company repaid $15.0 million of long-term debt during the 39-week period and an additional $10.0 million post-period, reducing debt obligations.

Negatives

• Net sales for the 39-week period decreased by 0.9% to $458.1 million, primarily due to lower sales volume.
• Net income for the 39-week period decreased by 11.5% to $12.9 million.
• Selling, general, and administrative costs increased by 11.1% for the 13-week period and 5.6% for the 39-week period, partly due to increased salaries, SOX compliance, cyber security, and tariff mitigation investments, as well as higher legal fees.
• Interest expense, net, increased by 2.9% for the 39-week period to $40.3 million, primarily due to the unfavorable impact of the interest rate collar.
• A material weakness in internal control over financial reporting, identified in the prior annual report, has not been remediated as of September 28, 2025.
• The company recognized losses from changes in the fair value of warrant liability ($3.0 million for 13-week, $2.9 million for 39-week) and earn-out liability ($1.1 million for 13-week, $0.7 million for 39-week).

Risks

• Ability to execute business strategy, including monetization of services and expansion into existing and new lines of business.
• Disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain company products.
• Supply shortages of key component parts and the need to shift the mix of products offered.
• Impact of geopolitical events, including military conflicts (Ukraine, Middle East), tariffs, catastrophic events, terrorism, and public health crises.
• Unremediated material weakness in internal control over financial reporting, which could affect the reliability of financial statements.
• Ability to maintain key strategic relationships with partners and resellers.
• Impact of elevated interest rate levels, increased cost of capital, inflationary pressures, and tariffs.
• Uncertainties associated with product and service development and market acceptance.
• Increased constraints in consumer demand and/or shifts in the mix of products sold.
• Ability to attract and retain qualified employees and key personnel.
• Recognition of goodwill and other intangible asset impairment charges.
• Effectively responding to general economic and business conditions.
• Ability to acquire and protect intellectual property.
• Compliance with privacy and data protection laws and managing security breaches, cyber-attacks, or IT system failures.
• Meeting future liquidity requirements and complying with restrictive covenants related to long-term indebtedness.
• Ability to obtain additional capital, including through the sale of equity or debt securities.
• Maintaining the company's New York Stock Exchange (NYSE) listing.
• Complying with existing and/or future laws and regulations, including environmental health and safety or climate-related disclosures.
• Litigation, complaints, product liability claims, and adverse publicity, specifically the ongoing putative securities class action.
• Anticipating the impact of, and response to, new accounting standards.
• Maintaining proper and effective internal controls.
• Responding to the impact of changes in U.S. tax laws and regulations.
• Anticipating the impact of changes in consumer spending patterns, preferences, economic conditions, crime, weather, and demographic trends.

Future Outlook

The company expects the provisions of the One Big Beautiful Bill Act (OBBBA) to result in a reduction to current tax expense for 2025. Management believes that cash generated through current operating performance, operating plans, cash position, and available borrowings under its revolving credit facility will be sufficient to satisfy liquidity needs and capital expenditure requirements for the next 12 months and the foreseeable future. The company intends to continue evaluating opportunities for strategic acquisitions that would complement its current business and expand its addressable target market. It remains committed to optimizing operations, managing costs, and leveraging its diversified supply chain to minimize the impact of tariffs on its financial results.

Management Comments

• "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."
• "We believe Holley's business model and sourcing strategies have positioned us to manage these challenges effectively." (referring to tariffs)
• "Because our production costs are primarily U.S.-based and we have a broad product portfolio with a strong concentration of manufacturing and sourcing in the United States, we believe our U.S. focus enables us 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."
• "We remain committed to optimizing our operations, managing costs and leveraging our diversified supply chain to minimize the impact of tariffs on our results of operations and financial condition."
• "We are committed to successfully implementing the remediation plan as promptly as possible and believe that these actions will remediate the material weakness." (regarding internal controls)

Industry Context

Holley Inc. operates within the high-performance automotive aftermarket, catering to car and truck enthusiasts. The industry is currently influenced by broad economic conditions, geopolitical events (including conflicts in Ukraine and the Middle East), inflationary pressures, fuel costs, wage rates, and trade restrictions such as tariffs. The company has actively responded to these challenges by diversifying supplier locations, reshoring products to North America, and implementing price increases and cost savings initiatives. Holley believes its predominantly U.S.-based production and diversified product portfolio provide a competitive advantage in managing tariff impacts compared to less diversified competitors reliant on single-source imports. Profitability continues to be affected by constrained consumer demand and a shift towards lower-margin products.

Comparison to Industry Standards

• NA

Legal Proceedings

• A putative securities class action was filed on November 6, 2023, against the company, former CEO Tom Tomlinson, former CFO Dominic Bardos, and Executive VP Vinod Nimmagadda.
• Lead plaintiff alleges violations of Sections 10(b), 20(a), and Rule 10b-5 of the Securities Exchange Act of 1934, seeking class certification, damages, interest, and attorneys' fees.
• The court denied the company's motion to dismiss on August 29, 2025.
• Defendants' answer to the operative Complaint is due on November 12, 2025.
• The company disputes the allegations and intends to vigorously defend against them, but cannot reasonably estimate the potential range of loss due to the early stage of the proceeding.

Stakeholder Impact

• Shareholders face potential impacts from the securities class action, changes in warrant and earn-out liability fair values, and the unremediated material weakness in internal controls, balanced by positive impacts from improved operational profitability and debt reduction.
• Employees may experience changes due to realignment of roles and responsibilities (e.g., from SG&A to R&D) and increased salaries in 2025 compared to 2024 (following furlough activity in 2024).
• Customers are affected by price increases, SKU rationalization (discontinued products), and potential benefits from the expansion of the product portfolio through the Cataclean license.
• Suppliers are impacted by the company's strategic shift towards diversifying supplier locations outside of China and reshoring products to North America in response to tariffs.
• Creditors benefit from debt repayments, compliance with financial covenants, and the use of interest rate collars to manage exposure to variable rate debt fluctuations.

Next Steps

• Continue implementing remediation efforts for the material weakness in internal control over financial reporting.
• Defendants' answer to the operative Complaint in the securities class action is due on November 12, 2025.
• Monitor international trade developments, including potential changes in tariff rates and new exemptions or retaliatory actions.
• Evaluate opportunities for strategic acquisitions to complement the current business and expand the addressable target market.
• Finalize and determine an updated incremental borrowing rate (IBR) to apply at the commencement of the new Lease Agreement on February 1, 2026.

Key Dates

Recommendation

While Holley Inc. demonstrated strong operational improvements in the latest quarter, reflected in significantly higher gross profit and operating income, and a reduced net loss, the overall nine-month performance shows a slight decline in net sales and net income. The company is actively managing costs, tariffs, and product portfolio, which is positive. However, the persistent material weakness in internal controls over financial reporting and the ongoing securities class action, where a motion to dismiss was denied, introduce considerable uncertainty and risk. The mixed financial signals and unresolved internal control and legal issues suggest a 'Hold' recommendation until there is clearer progress on remediation and legal outcomes.

Keywords

Automotive aftermarket, Performance products, SEC filing, 10-Q, Holley Inc., Financial results, Gross margin, Operating income, Debt, Interest rates, Supply chain, Tariffs, Internal controls, Cataclean, Product rationalization, Equity-based compensation, Legal proceedings