FOX FACTORY HOLDING CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS 1 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Balance Sheets (in thousands, except per share data) (unaudited) As of As of October 2, January 3 2020 2020 (unaudited) Assets Current assets: Cash and cash equivalents $ 278,246 $ 43,736 Accounts receivable (net of allowances of $ 837 and $ 810 at October 2, 2020 and January 3, 2020, respectively) 114,097 91,632 Inventory 135,687 128,505 Prepaids and other current assets 31,605 17,940 Total current assets 559,635 281,813 Property, plant and equipment, net 156,819 108,379 Lease right-of-use assets 25,695 17,472 Deferred tax assets 18,525 25,725 Goodwill 287,113 93,527 Intangibles, net 209,590 81,949 Other assets 3,149 451 Total assets $ 1,260,526 $ 609,316 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 101,439 $ 55,144 Accrued expenses 61,393 35,744 Reserve for uncertain tax positions 1,055 925 Current portion of long-term debt 10,000 — Total current liabilities 173,887 91,813 Line of credit — 68,000 Long-term debt, less current portion 379,242 — Other liabilities 23,470 11,584 Total liabilities 576,599 171,397 Commitments and contingencies (Refer to Note 9 - Commitments and Contingencies ) Redeemable non-controlling interest — 15,719 Stockholders’ equity Preferred stock, $ 0.001 par value — 10,000 authorized and no shares issued or outstanding as of October 2, 2020 and January 3, 2020 — — Common stock, $ 0.001 par value — 90,000 authorized; 42,601 shares issued and 41,712 outstanding as of October 2, 2020; 39,448 shares issued and 38,559 outstanding as of January 3, 2020 42 39 Additional paid-in capital 334,486 123,274 Treasury stock, at cost; 890 common shares as of October 2, 2020 and January 3, 2020 ( 13,754 ) ( 13,754 ) Accumulated other comprehensive (loss) income ( 32 ) 150 Retained earnings 363,185 312,491 Total stockholders’ equity 683,927 422,200 Total liabilities, redeemable non-controlling interest and stockholders’ equity $ 1,260,526 $ 609,316 The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Statements of Income (in thousands, except per share data) (unaudited) For the three months ended For the nine months ended October 2, September 27, October 2, September 27, 2020 2019 2020 2019 Sales $ 260,700 $ 211,317 $ 628,163 $ 565,139 Cost of sales 171,226 141,500 422,088 382,045 Gross profit 89,474 69,817 206,075 183,094 Operating expenses: Sales and marketing 13,667 11,660 38,291 32,186 Research and development 8,514 8,376 24,779 23,442 General and administrative 16,463 12,727 53,443 36,065 Amortization of purchased intangibles 5,277 1,694 13,084 4,751 Total operating expenses 43,921 34,457 129,597 96,444 Income from operations 45,553 35,360 76,478 86,650 Other expense, net: Interest expense 2,291 748 7,030 2,582 Other (income) expense ( 189 ) ( 37 ) ( 57 ) 532 Other expense, net 2,102 711 6,973 3,114 Income before income taxes 43,451 34,649 69,505 83,536 Provision for income taxes 5,431 4,473 9,555 11,596 Net income 38,020 30,176 59,950 71,940 Less: net income attributable to non-controlling interest — 689 1,072 1,429 Net income attributable to FOX stockholders $ 38,020 $ 29,487 $ 58,878 $ 70,511 Earnings per share: Basic $ 0.91 $ 0.77 $ 1.48 $ 1.84 Diluted $ 0.90 $ 0.75 $ 1.46 $ 1.80 Weighted-average shares used to compute earnings per share: Basic 41,616 38,451 39,726 38,259 Diluted 42,206 39,174 40,314 39,151 The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Statements of Comprehensive Income (in thousands) (unaudited) For the three months ended For the nine months ended October 2, September 27, October 2, September 27, 2020 2019 2020 2019 Net income $ 38,020 $ 30,176 $ 59,950 $ 71,940 Other comprehensive (loss) income Interest rate swap, net of tax effects ( 801 ) — ( 801 ) — Foreign currency translation adjustments, net of tax effects 636 ( 352 ) 619 ( 197 ) Other comprehensive (loss) income ( 165 ) ( 352 ) ( 182 ) ( 197 ) Comprehensive income 37,855 29,824 59,768 71,743 Less: comprehensive income attributable to non-controlling interest — 689 1,072 1,429 Comprehensive income attributable to FOX stockholders $ 37,855 $ 29,135 $ 58,696 $ 70,314 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Statements of Stockholders' Equity and Redeemable Non-controlling Interest (in thousands) (unaudited) Common Stock Treasury Additional paid-in capital Accumulated other comprehensive (loss) income Retained earnings Total stockholders' equity Redeemable non-controlling interest Shares Amount Shares Amount Balance - December 28, 2018 38,881 $ 38 890 $ ( 13,754 ) $ 116,019 $ ( 784 ) $ 219,686 $ 321,205 $ 14,282 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 180 — — — ( 1,229 ) — — ( 1,229 ) — Stock-based compensation expense — — — — 1,729 — — 1,729 — Other comprehensive (loss) income — — — — — ( 159 ) — ( 159 ) — Adoption of new accounting standard, net of taxes — — — — — — ( 228 ) ( 228 ) — Net income — — — — — — 18,103 18,103 299 Balance - March 29, 2019 39,061 $ 38 890 $ ( 13,754 ) $ 116,519 $ ( 943 ) $ 237,561 $ 339,421 $ 14,581 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 115 — — — ( 2,264 ) — — ( 2,264 ) — Issuance of stock for business acquisition 98 — — — 7,167 — — 7,167 — Stock-based compensation expense — — — — 1,621 — — 1,621 — Other comprehensive (loss) income — — — — — 314 — 314 — Net income — — — — — 22,921 22,921 441 Balance - June 28, 2019 39,274 $ 38 890 $ ( 13,754 ) $ 123,043 $ ( 629 ) $ 260,482 $ 369,180 $ 15,022 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 140 — — — ( 3,300 ) — — ( 3,300 ) — Stock-based compensation expense — — — — 1,605 — — 1,605 — Other comprehensive (loss) income — — — — — ( 352 ) — ( 352 ) — Net income — — — — — — 29,487 29,487 689 Balance - September 27, 2019 39,414 $ 38 890 $ ( 13,754 ) $ 121,348 $ ( 981 ) $ 289,969 $ 396,620 $ 15,711 The accompanying notes are an integral part of these consolidated statements. 5 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Statements of Stockholders' Equity and Redeemable Non-controlling Interest (in thousands) (unaudited) Common Stock Treasury Additional paid-in capital Accumulated other comprehensive (loss) income Retained earnings Total stockholders' equity Redeemable non-controlling interest Shares Amount Shares Amount Balance - January 3, 2020 39,448 $ 39 890 $ ( 13,754 ) $ 123,274 $ 150 $ 312,491 $ 422,200 $ 15,719 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 45 — — — ( 2,047 ) — — ( 2,047 ) — Stock awards issued for business acquisition — — — — 322 — — 322 Stock-based compensation expense — — — — 1,921 — — 1,921 — Other comprehensive (loss) income — — — — — ( 940 ) — ( 940 ) — Net income — — — — — — 8,250 8,250 488 Balance - April 3, 2020 39,493 $ 39 890 $ ( 13,754 ) $ 123,470 $ ( 790 ) $ 320,741 $ 429,706 $ 16,207 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 74 — — — ( 2,301 ) — — ( 2,301 ) — Issuance of common stock, net 2,760 2 — — 198,234 — — 198,236 — Adjustment to the fair value of non-controlling interest — — — — — — ( 8,184 ) ( 8,184 ) 8,184 Stock-based compensation expense — — — — 2,076 — — 2,076 — Other comprehensive (loss) income — — — — — 923 — 923 — Net income — — — — — 12,608 12,608 584 Balance - July 3, 2020 42,327 $ 41 890 $ ( 13,754 ) $ 321,479 $ 133 $ 325,165 $ 633,064 $ 24,975 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 138 1 — — ( 254 ) — — ( 253 ) — Redeemable non-controlling interest 136 — — — 11,169 — — 11,169 ( 24,975 ) Stock-based compensation expense — — — — 2,092 — — 2,092 — Other comprehensive (loss) income — — — — — ( 165 ) — ( 165 ) — Net income — — — — — — 38,020 38,020 — Balance - October 2, 2020 42,601 $ 42 890 $ ( 13,754 ) $ 334,486 $ ( 32 ) $ 363,185 $ 683,927 $ — The accompanying notes are an integral part of these consolidated statements. 6 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) For the nine months ended October 2, 2020 September 27, 2019 OPERATING ACTIVITIES: Net income $ 59,950 $ 71,940 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,762 12,821 Stock-based compensation 6,360 4,955 Deferred taxes and uncertain tax positions ( 11,857 ) ( 5,503 ) Amortization of loan fees 1,129 146 Loss on extinguishment of debt — 516 Changes in operating assets and liabilities, net of effects of acquisition of business: Accounts receivable ( 12,610 ) ( 28,257 ) Inventory ( 579 ) ( 20,339 ) Income taxes 3,218 ( 7,339 ) Prepaids and other assets ( 14,737 ) ( 7,577 ) Accounts payable 36,712 9,797 Accrued expenses and other liabilities 7,453 ( 236 ) Net cash provided by operating activities 99,801 30,924 INVESTING ACTIVITIES: Purchases of property and equipment ( 45,983 ) ( 25,903 ) Acquisition of businesses, net of cash acquired ( 329,176 ) ( 6,804 ) Acquisition of other assets ( 250 ) — Net cash used in investing activities ( 375,409 ) ( 32,707 ) FINANCING ACTIVITIES: Proceeds from line of credit 204,131 67,500 Payments on line of credit ( 272,131 ) ( 52,053 ) Proceeds from issuance of debt, net of origination fees of $ 7,615 392,385 — Repayment of debt ( 5,000 ) ( 2,813 ) Installment on purchase of non-controlling interest ( 3,000 ) — Proceeds from sale of common stock, net 198,236 — Repurchases from stock compensation program, net ( 4,602 ) ( 6,793 ) Net cash provided by financing activities 510,019 5,841 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 99 ( 37 ) CHANGE IN CASH AND CASH EQUIVALENTS 234,510 4,021 CASH AND CASH EQUIVALENTS—Beginning of period 43,736 27,958 CASH AND CASH EQUIVALENTS—End of period $ 278,246 $ 31,979 7 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) For the nine months ended SUPPLEMENTAL CASH FLOW INFORMATION: October 2, 2020 September 27, 2019 Cash paid during the period for: Income taxes $ 17,484 $ 24,402 Cash paid for interest, net of capitalized interest $ 5,946 $ 1,971 Cash paid for amounts included in the measurement of lease liabilities $ 5,267 $ 4,476 Non-cash operating activities: Refinancing of the Second Amended and Restated Credit Facility $ — $ 88,875 Right-of-use assets obtained in exchange for lease obligations $ 12,293 $ 8,565 Acquisition of business in exchange for equity $ — $ 7,167 Non-cash investing activities: Capital expenditures included in accounts payable $ 6,530 $ 868 Acquisition of non-controlling interest in exchange for equity and installment payments $ 21,975 $ — The accompanying notes are an integral part of these condensed consolidated financial statements. 8 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 1. Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies - Fox Factory Holding Corp. (the "Company") designs, engineers, manufactures, and markets performance-defining products and systems for customers worldwide. Our premium brand, performance-defining products and systems are used primarily for bicycles ("bikes"), side-by-side vehicles ("Side-by-Sides"), on-road vehicles with and without off-road capabilities, off-road vehicles and trucks, all-terrain vehicles ("ATVs"), snowmobiles, specialty vehicles and applications, motorcycles and commercial trucks. Some of our products are specifically designed and marketed to the leading cycling and powered vehicle original equipment manufacturers ("OEMs"), while others are distributed to consumers through a global network of dealers and distributors. Throughout this Form 10-Q, unless stated otherwise or as the context otherwise requires, the "Company," "FOX," "Fox Factory," "we," "us," "our," and "ours" refer to Fox Factory Holding Corp. and its operating subsidiaries on a consolidated basis. Basis of Presentation - The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America ("U.S." or "United States") and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended January 3, 2020 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 3, 2020. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for any quarter are not necessarily indicative of the results for the full fiscal year. The Company operates on a 52-53 week fiscal calendar. For 2020 and 2019, the Company's fiscal year will end or has ended on January 1, 2021 and January 3, 2020, respectively. The twelve month periods ended January 1, 2021 and January 3, 2020, will include or have included 52 and 53 weeks, respectively. The three and nine month periods ended October 2, 2020 and September 27, 2019 each included 13 weeks and 39 weeks, respectively. Principles of Consolidation - These condensed consolidated financial statements include the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Summary of Significant Accounting Policies - There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended January 3, 2020, as filed with the SEC on March 3, 2020 that have had a material impact on our condensed consolidated financial statements and related notes. Revenue Recognition - Revenues are generated from the sale of performance-defining products and systems to customers worldwide. The Company’s performance-defining products and systems are solutions that improve performance of powered vehicles and bikes. Powered vehicles include Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, and motorcycles. Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product to a customer, generally at the time of shipment. Contracts are generally in the form of purchase orders and are governed by standard terms and conditions. For larger OEMs, the Company may also enter into master agreements. Revenues exclude sales tax. 9 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) Provisions for discounts, rebates, sales incentives, returns, and other adjustments are generally provided for in the period the related sales are recorded, based on management’s assessment of historical trends and projection of future results. Certain pricing provisions that provide the customer with future discounts are considered a material right. Such material rights result in the deferral of revenue that are recognized when the rights are exercised by the customer. Measuring the material rights requires judgments including forecasts of future sales and product mix. At January 3, 2020, the balance of deferred revenue related to pricing provisions was $ 172 which was recognized as revenue during the nine months ended October 2, 2020. Segments - The Company has determined that it has a single operating and reportable segment. The Company considers an operating segment to be a component of the Company for which separate financial information is available, that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Use of Estimates - The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from management’s estimates. Certain Significant Risks and Uncertainties - The Company is subject to those risks common in manufacturing-driven markets, including, but not limited to, competitive forces, dependence on key personnel, customer demand for its products, the successful protection of its proprietary technologies, compliance with government regulations, and the possibility of not being able to obtain additional financing when needed. Additionally, the Company has been impacted by the recent coronavirus (“COVID-19”) pandemic. The global outbreak of COVID-19 has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. The Company’s manufacturing facilities in North America have been affected by local and state “shelter-in-place” orders including the temporary suspension of non-essential operations in certain facilities. The Company took actions to manage costs during this time by enacting temporary executive pay cuts and furloughs, curtailing non-essential capital expenditures, and reducing expenses. Despite the Company’s efforts to manage and remedy these impacts to the Company, the ultimate impact and the extent to which the COVID-19 pandemic will continue to affect the business, results of operation and financial condition is difficult to predict and depends on numerous evolving factors outside of the Company’s control, including: the duration and scope of the pandemic; government, social, business and other actions that have been and will be taken in response to the pandemic; and the effect of the pandemic on short and long-term general economic conditions. Fair Value Measurements and Financial Instruments - The Financial Accounting Standards Board ("FASB") has issued Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures, that requires the valuation of assets and liabilities required or permitted to be either recorded or disclosed at fair value based on hierarchy of available inputs as follows: Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). The carrying amounts of the Company's financial instruments, including cash, receivables, accounts payable, and accrued liabilities approximate their fair values due to their short-term nature. Amounts owed under the Company's First Amended and Restated Credit Facility (as defined in Note 8 - Debt below) approximate fair value due to the variable interest rate features embedded in both the line of credit and the term debt. 10 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) Recent Accounting Pronouncements - In February 2016, the FASB issued accounting standards update ("ASU") 2016-02, Leases, which supersedes the existing guidance for lease accounting. To meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases, this ASU requires lessees to recognize most leases on the balance sheet as right-of-use assets and lease liabilities. The Company adopted this guidance as of the beginning of the first quarter of fiscal year 2019, with a cumulative effect adjustment to the opening balance of retained earnings at December 28, 2018 with no restatement of comparative periods’ financial information ("current-period adjustment method"). Additionally, the Company adopted this guidance using practical expedients with respect to the assessment of embedded leases, lease classification, and initial indirect costs for expired and existing leases. The Company also elected the practical expedient related to treating lease and non-lease components as a single lease component for all of its leases and elected a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the right-of-use assets and lease liabilities. The Company did not use the hindsight practical expedient to adopt this guidance. The Company recorded a cumulative effect adjustment of $ 13,637 to operating lease right-of-use assets, $ 13,937 to operating lease liabilities, and $ 300 gross ($ 228 net of taxes) to the opening balance of the Company's retained earnings to reflect the cumulative effect of the adoption of the standard. This standard did not have a material impact on our consolidated income statements. In June 2016, the FASB issue ASU 2016-13, Financial Instruments: Credit Losses, which adds an impairment model that is based on expected losses rather than incurred losses. Under this standard, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The Company adopted ASU 2016-13 effective in the first quarter of fiscal year 2020 using the aging method, which calculates the allowance based on how long a receivable has been outstanding, taking into account the historical credit loss rate and adjusting for both current conditions and forecasts of economic conditions into that expected credit loss rate. The adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial statements. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which clarifies the presentation of certain transactions, including but not limited to contingent consideration payments made after a business combination and debt prepayment and extinguishment costs in the cash flow statement. The Company adopted ASU 2016-15 effective in the first quarter of fiscal year 2019. The adoption of ASU 2016-15 did not have a material impact on the Company's consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements of fair value measurements in Topic 820. This standard is effective for fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-13 effective in the first quarter of fiscal year 2020. The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements. In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other: Internal-Use Software, which helps simplify how entities evaluate the accounting for costs paid by a customer in a cloud computing arrangement that is a service contract. This standard is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company adopted ASU 2018-15 effective in the first quarter of fiscal year 2020. The adoption of ASU 2018-15 did not have a material impact on the Company's consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which helps simplify how entities account for income taxes by removing various exceptions related to the recognition of deferred tax liabilities and updating other tax computation requirements. This standard is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Facilitation of Effects of Reference Rate Reform on Financial Reporting, which was created in response to concerns about structural risks of interbank offered rates ("IBORs") and the risk of cessation of the London Interbank Offered Rate ("LIBOR"). This standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This standard is effective for all entities as of March 12, 2020 through December 31, 2022. The Company adopted ASU 2020-04 effective in the first quarter of fiscal year 2020. The adoption of ASU 2020-04 did not have a material impact on the Company's consolidated financial statements. 11 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 2. Revenues The following table summarizes total sales by product category: For the three months ended For the nine months ended October 2, 2020 September 27, 2019 October 2, 2020 September 27, 2019 Powered Vehicles $ 153,031 $ 130,022 $ 372,081 $ 341,976 Specialty Sports 107,669 81,295 256,082 223,163 Total sales $ 260,700 $ 211,317 $ 628,163 $ 565,139 The following table summarizes total sales by sales channel: For the three months ended For the nine months ended October 2, 2020 September 27, 2019 October 2, 2020 September 27, 2019 OEM $ 143,687 $ 131,678 $ 335,295 $ 349,504 Aftermarket 117,013 79,639 292,868 215,635 Total sales $ 260,700 $ 211,317 $ 628,163 $ 565,139 The following table summarizes total sales generated by geographic location of the customer: For the three months ended For the nine months ended October 2, 2020 September 27, 2019 October 2, 2020 September 27, 2019 North America $ 175,486 $ 142,624 $ 423,078 $ 383,414 Asia 41,609 37,521 97,872 88,888 Europe 41,004 29,024 101,223 87,074 Rest of the world 2,601 2,148 5,990 5,763 Total sales $ 260,700 $ 211,317 $ 628,163 $ 565,139 3. Inventory Inventory consisted of the following: October 2, January 3 2020 2020 Raw materials $ 90,674 $ 87,779 Work-in-process 11,656 7,075 Finished goods 33,357 33,651 Total inventory $ 135,687 $ 128,505 12 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 4. Prepaids and Other Current Assets Prepaids and other current assets consisted of the following: October 2, January 3 2020 2020 Prepaid chassis deposits $ 12,424 $ 6,701 Advanced payments and prepaid contracts 8,374 5,774 Current portion of acquisition-related compensation held in escrow 4,765 — Other current assets 6,042 5,465 Total $ 31,605 $ 17,940 5. Property, Plant and Equipment, net Property, plant and equipment, net consisted of the following: October 2, January 3 2020 2020 Building and building improvements $ 74,434 $ 42,343 Information systems, office equipment and furniture 13,241 10,102 Internal-use computer software 19,370 16,860 Land 8,171 5,414 Leasehold improvements 13,082 13,841 Machinery and manufacturing equipment 76,564 57,331 Transportation equipment 5,933 5,006 Total 210,795 150,897 Less: accumulated depreciation and amortization ( 53,976 ) ( 42,518 ) Property, plant and equipment, net $ 156,819 $ 108,379 The Company’s long-lived assets by geographic location are as follows: October 2, January 3 2020 2020 United States $ 142,369 $ 100,508 International 14,450 7,871 Total long-lived assets $ 156,819 $ 108,379 13 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 6. Leases The Company has operating lease agreements for administrative, research and development, manufacturing, and sales and marketing facilities. These leases have remaining lease terms ranging from 1 to 8 years, some of which include options to extend the lease term for up to 5 years, and some of which include options to terminate the leases within 1 year. Certain leases are subject to annual escalations as specified in the lease agreements. The Company considered these options in determining the lease term used to establish its right-of-use assets and lease liabilities. These lease agreements do not contain any material residual value guarantees or material restrictive covenants. As most of the Company's leases do not provide an interest rate, the Company used the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The weighted-average remaining lease term for the Company's operating leases was 4.71 years and the weighted-average incremental borrowing rate was 3.24 % as of October 2, 2020. Operating lease costs consisted of the following: For the three months ended For the nine months ended October 2, 2020 September 27, 2019 October 2, 2020 September 27, 2019 Operating lease cost $ 1,835 $ 1,581 $ 5,209 $ 4,550 Other lease costs (1) 214 338 733 763 Total $ 2,049 $ 1,919 $ 5,942 $ 5,313 (1) Includes short-term leases and variable lease costs. The Company elected a policy permitting leases with an original lease term of less than one year to be excluded from the right-of-use assets and lease liabilities. Supplemental balance sheet information related to the Company's operating leases is as follows: Balance Sheet Classification October 2, 2020 Operating lease right-of-use assets Lease right-of-use assets $ 25,695 Current lease liabilities Accrued expenses $ 6,518 Non-current lease liabilities Other liabilities $ 18,832 Maturities of lease liabilities by fiscal year for the Company's operating leases are as follows: For fiscal year Total future payments 2020 (excluding the 9 months ended October 2, 2020) $ 1,856 2021 7,109 2022 5,807 2023 4,705 2024 3,031 Thereafter 4,875 Total lease payments 27,383 Less: imputed interest ( 2,033 ) Present value of lease liabilities 25,350 Less: current portion ( 6,518 ) Lease liabilities less current portion $ 18,832 14 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 7. Accrued Expenses Accrued expenses consisted of the following: October 2, January 3 2020 2020 Payroll and related expenses $ 17,442 $ 14,595 Current portion of lease liabilities 6,518 6,242 Warranty 9,485 5,649 Income tax payable 9,573 4,295 Current portion of non-controlling interest buyout liability 7,206 — Other accrued expenses 11,169 4,963 Total $ 61,393 $ 35,744 Activity related to warranties is as follows: For the three months ended For the nine months ended October 2, 2020 September 27, 2019 October 2, 2020 September 27, 2019 Beginning warranty liability $ 8,915 $ 6,208 $ 5,649 $ 6,433 Charge to cost of sales 2,181 1,054 4,987 3,204 Fair value of warranty assumed in acquisition — — 3,158 100 Costs incurred ( 1,611 ) ( 1,116 ) ( 4,309 ) ( 3,591 ) Ending warranty liability $ 9,485 $ 6,146 $ 9,485 $ 6,146 15 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 8. Debt Former Second Amended and Restated Credit Facility In August 2013, the Company entered into a credit facility with SunTrust Bank, N.A. and other named lenders, which was periodically amended and restated (the "Second Amended and Restated Credit Facility"). The Company paid off the Second Amended and Restated Credit Facility in June 2019 upon entering into the new credit facility with Bank of America, N.A. ("Bank of America"). First Amended and Restated Credit Facility In June 2019, the Company entered into a credit facility with Bank of America and other named lenders, which was amended and restated on March 11, 2020 and June 19, 2020 (as most recently amended and restated as the "First Amended and Restated Credit Facility"). The First Amended and Restated Credit Facility, which matures on March 11, 2025, provides a senior secured revolving line of credit with a borrowing capacity of $ 250,000 and a term loan of $ 400,000 . The term loan is subject to quarterly amortization payments. The Company paid $ 7,615 in debt issuance costs, of which $ 6,458 were allocated to the term debt and $ 1,157 were allocated to the line of credit. Additionally, the Company had $ 434 of remaining unamortized debt issuance costs. The Company expensed $ 277 of the remaining unamortized debt issuance costs, which are included in other expense, net in the condensed consolidated statements of income for the nine months ended October 2, 2020. The remaining $ 157 were allocated to the line of credit. Loan fees allocated to the term debt will be amortized using the interest method and loan fees allocated to the line of credit will be amortized on a straight-line basis over the term of the First Amended and Restated Credit Facility. The First Amended and Restated Credit Facility provides for interest at a rate either based on the London Interbank Offered Rate, or LIBOR, plus a margin ranging from 1.00 % to 2.25 %, with a floor rate of 0.50%, or based on the base rate offered by Bank of America plus a margin ranging from 0.00 % to 1.25 %. At October 2, 2020, the one-month LIBOR and prime rates were 0.14 % and 3.25 %, respectively. At October 2, 2020, our weighted-average interest rate on outstanding borrowing was 1.87 %. The First Amended and Restated Credit Facility is secured by substantially all of the Company’s assets, restricts the Company's ability to make certain payments and engage in certain transactions, and requires that the Company satisfy customary financial ratios. The Company was in compliance with the covenants as of October 2, 2020. In August 2020, the Company entered into an interest rate swap agreement to hedge the variability of cash flows in interest payments associated with $ 200,000 of its variable rate term debt. Refer to Note 10 - Derivatives and Hedging for further details of this agreement. The First Amended and Restated Credit Facility permits up to $ 25,000 of the aggregate revolving commitment to be used by the Company for issuance of letters of credit, of which $ 15,000 was outstanding at October 2, 2020. The following table summarizes the line of credit under the First Amended and Restated Credit Facility: October 2, 2020 Amount outstanding $ — Standby letters of credit 15,000 Available borrowing capacity 235,000 Total borrowing capacity $ 250,000 Maturity date March 11, 2025 16 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) As of October 2, 2020, future principal payments for long-term debt, including the current portion, as summarized as follows: October 2, 2020 For fiscal year 2020 (remaining three months) $ 2,500 2021 10,000 2022 17,500 2023 20,000 2024 20,000 Thereafter 325,000 Total 395,000 Debt issuance cost ( 5,758 ) Long-term debt, net of issuance cost 389,242 Less: current portion ( 10,000 ) Long-term debt less current portion $ 379,242 9. Commitments and Contingencies Indemnification Agreements - In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company or intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise due to their status or service as directors, officers or employees. While the outcome of these matters cannot be predicted with certainty, the Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on the Company’s results of operations, financial position or liquidity. Legal Proceedings - A lawsuit was filed on December 17, 2015 by SRAM Corporation (“SRAM”) in the U.S. District Court, Northern District of Illinois, against the Company’s wholly-owned subsidiary, RFE Canada Holding Corp. (“RFE Canada”). The lawsuit alleges patent infringement of U.S. Patent number 9,182,027 ("027 Patent") and violation of the Lanham Act. SRAM filed a second lawsuit in the same court against RFE Canada on May 16, 2016, alleging patent infringement of U.S Patent number 9,291,250 ("'250 Patent"). The Company believes that the lawsuits are without merit and intends vigorously to defend itself. As such, the Company has filed, before the U. S. Patent and Trademark Appeals Board ("PTAB"), for Interparties Reviews ("IPR") of the '027 Patent and separately the same for the '250 Patent. In April 2018, the PTAB issued opinions in the ‘027 Patent petition cases stating that the Company has not shown the claims of the ‘027 Patent to be obvious. Regarding the PTAB ‘027 opinions, the Company has filed an Appeal to the Court of Appeals for the Federal Circuit ("CAFC"). The CAFC found in favor of the Company and has vacated and remanded all of the PTAB findings with the exception of their finding that the ‘027 patent met the prima facia test for obviousness, which was affirmed. The CAFC has declined to rehear the case and has issued the final remand order sending the case back to the PTAB. SRAM filed ‘027 writ of certiorari before the Supreme Court of the United States, the writ of certiorari was denied and the case is before the PTAB on remand. The PTAB has issued an opinion in the ‘250 Patent case stating that the Company has not shown the claims of the ‘250 Patent to be obvious. The Company has appealed that PTAB opinion to the CAFC and the CAFC has affirmed the PTAB opinion. The U.S. District Court, Northern District of Illinois, has again stayed the SRAM lawsuits against the Company pending outcome of the remanded ‘027 PTAB issue. In a separate action, the Company filed a lawsuit on January 29, 2016 in the U.S. District Court, Northern District of California against SRAM. That lawsuit alleges SRAM’s infringement of two separate Company owned patents, specifically U.S. Patent numbers 6,135,434 and 6,557,674. The Company filed a second lawsuit on July 1, 2016 in the U.S. District Court, Northern District of California against SRAM alleging infringement of the Company’s U.S. Patent numbers 8,226,172 and 8,974,009. These lawsuits have been moved to U.S. District Court, District of Colorado and are otherwise proceeding. 17 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) Due to the inherent uncertainties of litigation, the Company is not able to predict either the outcome or a range of reasonably possible losses, if any, at this time. Accordingly, no amounts have been recorded in the consolidated financial statements for the settlement of these matters. Were an unfavorable ruling to occur, or if factors indicate that a loss is probable and reasonably estimable, the Company's business, financial condition or results of operations could be materially and adversely affected. The Company is involved in other legal matters that arise in the ordinary course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's financial condition, results of operations or cash flows. Other Commitments - On November 30, 2017, the Company through FF US Holding Corp., acquired the assets of Flagship, Inc. d/b/a Tuscany and issued a 20% interest in FF US Holding Corp. to Flagship, Inc. A stockholders' agreement with Flagship, Inc. provided the Company with a call option (the "Call Option") to acquire the remaining 20 % of FF US Holding Corp. at any time from November 30, 2019 through November 30, 2024 at a value that approximates fair market value. On July 22, 2020, the Company exercised the Call Option and, pursuant to a stock purchase agreement with Flagship, Inc., the Company purchased the remaining 20 % interest for $ 24,975 payable in a combination of stock and cash. The cash portion will be settled in quarterly installment payments through July 2022, which amount to $ 6,556 , $ 4,550 and $ 2,700 in 2020, 2021 and 2022, respectively. The Company paid $ 3,000 during the nine months ended October 2, 2020. The stock portion of 136 shares held in escrow will be released quarterly starting January 2021 through July 2022. The exercise of the Call Option effectively canceled the put option held by Flagship, Inc. Other Contingencies - On June 21, 2018, the U.S. Supreme Court (the “Court”) decided South Dakota v. Wayfair, Inc., et al., holding that internet retailers do not have to maintain a physical presence in a state in order to be required to collect the state’s sales and use tax. As a result of the Court’s decision, most states enacted legislation to require sellers who meet economic nexus thresholds to register, collect and remit sales and use taxes on transactions with out-of-state customers. The Company believes that it is possible that it will incur a liability for uncollected sales tax on some portion of its e-commerce sales through October 2, 2020. Based on information currently available, any retroactively imposed liability is not expected to be material to the Company’s results of operations or financial position because direct end-user sales in states where the Company is not registered comprise a small portion of total revenues. 10. Derivatives and Hedging On August 17, 2020 the Company entered into a Swap to mitigate the cash flow risk associated with changes in interest rates on $ 200,000 of its variable rate debt. Refer to Note 8 - Debt for further details of the Company's variable rate debt. The Swap matures on March 11, 2025. The Company pays a base fixed rate of 0.73 % and in return receives the greater of (1) 1-month LIBOR, or (2) 0.50 %. The Company accounts for interest rate swap contracts in accordance with ASC 815, Derivatives and Hedging, which requires all derivatives, including derivatives designated as accounting hedges, to be recorded on the balance sheet at fair value. The swap has been designated and accounted for as a cash flow hedge of the forecasted interest payments on the Company’s debt. As long as the swap continues to be a highly effective hedge of the designated interest rate risk, changes in the fair value of the swap are recorded in accumulated other comprehensive income (loss), a component of equity. Any ineffective portion of a change in the fair value of a hedge is recorded in earnings. The fair value of the Swap on October 2, 2020 was a liability of $ 1,038 . Refer to Note 11 - Fair Value Measurement s and Finan cial Instruments for information on determining the fair value. The liability is included in other liabilities in the consolidated balance sheets. At both the inception of the Swap and at October 2, 2020, the interest rate swap was considered highly effective and accordingly, the $ 1,038 change in fair value incurred from inception was deferred and recorded in other comprehensive income (loss), net of taxes. As required under ASC 815, the Swap’s effectiveness will be assessed on a quarterly basis. The Company’s derivative counterparty is an investment grade financial institution. The Company does not have any collateral arrangements with its derivative counterparty and the derivative contract does not contain credit risk related contingent features. 18 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 11. Fair Value Measurements and Financial Instruments The following table presents the Company's hierarchy for its assets, liabilities and redeemable non-controlling interest measured at fair value on a recurring basis as of the following periods: October 2, 2020 January 3, 2020 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Liabilities: Credit Facility $ — $ 389,242 $ — $ 389,242 $ — $ 68,000 $ — $ 68,000 Interest Rate Swap — 1,038 — 1,038 — — — — Non-controlling interest subject to put provisions — — — — — — 15,719 15,719 Total liabilities measured at fair value $ — $ 390,280 $ — $ 390,280 $ — $ 68,000 $ 15,719 $ 83,719 There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 categories of the fair value hierarchy during the three and nine month period ended October 2, 2020. The Company used Level 2 inputs to determine the fair value of its First Amended and Restated Credit Facility. The Company believes the carrying amount of its First Amended and Restated Credit Facility approximates the fair value at October 2, 2020 because, while subject to a minimum LIBOR floor rate, the interest rate approximates current market rates of debt with similar terms and comparable credit risk. On August 17, 2020 the Company entered into an interest rate swap agreement to mitigate the cash flow risk associated with changes in interest rates on its variable rate debt. Refer to N ote 10 - Derivatives and Hedging for additional details of the agreement. In accordance with ASC 815, Derivatives and Hedging Interest rate swap contract is recognized as an asset or liability on the consolidated balance sheets and is measured at fair value. The fair value was calculated utilizing Level 2 inputs. On July 22, 2020, the Company, pursuant to a stock purchase agreement with Flagship, Inc., dated as of the same date, purchased the remaining 20 % interest of FF US Holding Corp. for $ 24,975 payable in a combination of stock and cash. Refer to Note 9 - Commitments and Contingencies for additional details of this agreement. Prior to the consummation of the stock purchase, the non-controlling interest was measured at fair value using Level 3 inputs. The following table provides a reconciliation of the beginning and ending balances for the Company's redeemable non-controlling interest: Redeemable Non-Controlling Interest (Level 3 measurement) Balance at January 3, 2020 $ 15,719 Net income attributable to non-controlling interest 1,072 Change in fair value 8,184 Purchase of non-controlling interest (24,975) Balance at October 2, 2020 $ — 19 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 12. Stockholders' Equity Secondary Stock Offerings In June 2020, the Company completed a secondary offering whereby it sold 2,760 shares of its common stock at a price of $ 76.00 per share for gross proceeds of $ 209,760 . The net proceeds to the Company after underwriters' discounts and commissions of $ 11,015 and $ 511 of offering costs was $ 198,234 . The total shares sold included 360 shares that were sold in connection with the underwriters' option to purchase additional shares. This offering was made pursuant to the Company's registration statement on Form S-3. Equity Incentive Plans The following table summarizes the allocation of stock-based compensation in the accompanying consolidated statements of income: For the three months ended For the nine months ended October 2, 2020 September 27, 2019 October 2, 2020 September 27, 2019 Cost of sales $ 191 $ 107 $ 467 350 Sales and marketing 173 136 490 375 Research and development 184 198 603 518 General and administrative 1,815 1,164 4,800 3,712 Total $ 2,363 $ 1,605 $ 6,360 4,955 The following table summarizes the activity for the Company's unvested restricted stock units ("RSU") for the nine months ended October 2, 2020: Unvested RSUs Number of shares outstanding Weighted-average grant date fair value Unvested at January 3, 2020 427 $ 44.98 Granted 257 $ 47.08 Canceled ( 10 ) $ 47.97 Vested ( 217 ) $ 37.18 Unvested at October 2, 2020 457 $ 49.81 As of October 2, 2020, the Company had approximately $ 19,447 of unrecognized stock-based compensation expense related to RSUs, which will be recognized over the remaining weighted-average vesting period of approximately 2.74 years. During the nine months ended October 2, 2020, 120 shares of common stock were issued due to the exercise of stock options and no options to purchase common stock expired or were forfeited. As of October 2, 2020, stock-based compensation expense related to stock options has been fully recognized. 20 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 13. Income Taxes For the three months ended For the nine months ended October 2, 2020 September 27, 2019 October 2, 2020 September 27, 2019 Provision for income taxes $ 5,431 $ 4,473 $ 9,555 $ 11,596 Effective tax rates 12.5 % 12.9 % 13.7 % 13.9 % For the three and nine months ended October 2, 2020, the difference between the Company's effective tax rate and the 21 % federal statutory rate resulted primarily from lower foreign tax rates, a lower tax rate on foreign derived intangible income, research and development credits, realization of foreign tax credits, and $ 3,107 and $ 3,793 in excess benefits related to stock-based compensation, respectively. For the three months ended April 3, 2020, the Company benefited from a negotiated reduction of Switzerland withholding tax on prior year earnings. These benefits were partially offset by state taxes, global low-tax intangible income tax and non-deductible expenses. For the three and nine months ended September 27, 2019, the difference between the Company's effective tax rate and the 21 % federal statutory rate resulted primarily from lower foreign tax rates, lower effective federal rates on foreign derived intangible income, research and development credits, and $ 1,873 and $ 5,508 in excess benefits related to stock-based compensation, respectively. In the three months ended September 27, 2019, the Company refined its 2019 estimated deduction for foreign derived intangible income, resulting in a 4 % benefit to the effective tax rate. These benefits were partially offset by state taxes, foreign withholding taxes and the impact of non-deductible expenses. We do not expect the results from any ongoing income tax audit to have a material impact on our consolidated financial condition, results of operations, or cash flows. 14. Related Party Transactions On May 3, 2019, the Company acquired substantially all of the assets of Air Ride Technologies, Inc., d/b/a Ridetech, which has a building lease for its manufacturing and offices in Jasper, Indiana. The building is owned by a former owner of Ridetech, who is now an employee of the Company. The lease is effective through April 1, 2024, with monthly rent payments of $ 16 . Rent expense under this lease was $ 48 and $ 144 for the three and nine months ended October 2, 2020. On March 11, 2020, the Company acquired 100% of the issued and outstanding stock of SCA Performance Holdings, Inc. ("SCA"), which has a building lease for its manufacturing and offices in Trussville, Alabama. The building is owned by a former owner of SCA, who is now an employee of the Company. The lease is effective through April 13, 2028, with monthly rent payments of $ 28 . Rent expense under this lease was $ 84 and $ 196 for the three and nine months ended October 2, 2020. Refer to Note 15 - Acquisitions for further details of this acquisition. On July 22, 2020 the Company, pursuant to a stock purchase agreement with Flagship, Inc., purchased the remaining 20 % interest of FF US Holding Corp. for $ 24,975 payable in a combination of stock and cash. The cash portion will be settled in quarterly installment payments through July 2022. Refer to Note 9 - Commitments and Contingencies for additional details of this agreement. 21 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 15. Acquisitions On March 11, 2020, the Company, through Fox Factory, Inc., acquired 100 % of the issued and outstanding stock of SCA Performance Holdings, Inc. ("SCA") from Southern Rocky Holdings, LLC for $ 329,531 , net of cash acquired and exclusive of vehicle inventory. SCA is a leading OEM authorized specialty vehicle manufacturer for light duty trucks and SUVs with headquarters in Trussville, Alabama. SCA operates under three aftermarket brands: SCA Performance, Rocky Ridge Trucks, and Rocky Mountain Truckworks. The Company believes the acquisition will be complementary to FOX’s Tuscany business, expanding its North American geographic manufacturing footprint and broadening its product offering in a growing segment of the automotive industry. This transaction was accounted for as a business combination. The Company also agreed to an additional $ 10,589 of contingent retention incentives for key SCA management, of which $ 9,283 is cash and $ 1,306 is stock, to be held in escrow and payable over the next two years. The Company recognized $ 1,429 and $ 2,921 in costs associated with such retention incentives during the three and nine months ended October 2, 2020. Additionally, the Company paid $ 1,750 in transaction compensation to key SCA management concurrently with the closing. The purchase price of SCA has been preliminarily allocated to the assets acquired and liabilities assumed based on their estimated respective fair values as of March 11, 2020 with the excess purchase price allocated to goodwill. The Company’s allocation of the purchase price to the net tangible and intangible assets acquired and liabilities assumed is as follows: Acquisition consideration Cash consideration $ 329,209 Non-cash consideration 322 Total consideration at closing $ 329,531 Fair market values Other current assets $ 15,227 Property, plant and equipment 8,953 Lease right-of-use assets 4,027 Customer relationships 129,000 Trademarks and brand 11,500 Goodwill 193,544 Total assets acquired $ 362,251 Accounts payable and accrued expenses $ 9,454 Lease liabilities 4,027 Deferred taxes 19,239 Total liabilities assumed 32,720 Purchase price allocation $ 329,531 The Company incurred $ 10,582 of acquisition costs in conjunction with the SCA acquisition, including $ 1,750 of transaction compensation during the nine months ended October 2, 2020 and $ 602 of transaction costs during the three months ended January 3, 2020. These costs are classified as general and administrative expenses in the accompanying condensed consolidated statements of income. Additional debt issuance costs of $ 6,622 were incurred in association with financing the transaction and will be amortized over the term of the First Amended and Restated Credit Facility. Refer to Note 8 - Debt for further details. The primary areas of the preliminary purchase price allocations that have not been finalized relate to the finalization of working capital and the valuation of real estate, intangible assets and related deferred tax liabilities. Upon completion of the fair value assessment, the Company anticipates that the ultimate intangible assets may differ from the preliminary assessment outlined above. Any change in the finalization of working capital will reduce or increase the cash consideration. Any changes to the preliminary estimates of the fair value of the real estate and intangible assets will be adjusted to goodwill during the measurement period, with subsequent changes in estimates recorded in the statement of operations. 22 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) The preliminarily values assigned to the identifiable intangible assets were determined by discounting the estimated future cash flows associated with these assets to their present value. The goodwill of $ 193,544 reflects the strategic fit of SCA with the Company’s operations. The Company will amortize the acquired customer relationships assets over their expected useful lives of 5 - 10 years. Trademarks, brand names and goodwill are expected to have an indefinite life, and will be subject to impairment testing. The goodwill is not deductible for income tax purposes. SCA previously purchased intangibles in asset acquisitions with a remaining net tax basis approximating $ 77,989 , which the Company may deduct for income tax purposes. The following unaudited pro forma financial information shows the combined results of operations of the Company and SCA, as if the acquisition had occurred as of the beginning of the periods presented. The pro forma results include the effects of the amortization of purchased intangible assets and acquired inventory valuation step-up, interest expense on the term debt secured to finance the acquisition, and the net tax benefit of the above adjustments calculated at the statutory federal tax rate of 21 %. SCA was operated as a C Corporation for federal taxation purposes. A pro forma adjustment has been made to reflect the income taxes that would have been recorded at the federal statutory rate based on SCA’s net income. The pro forma results for the nine months ended October 2, 2020 exclude transaction costs associated with the acquisition and the results for the nine months ended September 27, 2019 have been adjusted to include these charges. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisition taken place in the periods noted below. For the nine months ended October 2, 2020 September 27, 2019 Pro forma sales $ 647,512 $ 632,848 Pro forma net income attributable to FOX stockholders $ 66,684 $ 57,432 Pro forma basic earnings per share $ 1.68 $ 1.50 Pro forma diluted earnings per share $ 1.65 $ 1.47 Total SCA revenues included in the condensed consolidated statements of income $ 49,868 Total SCA pre-tax income included in the condensed consolidated statements of income $ 2,950 23 Table of Contents