FOX FACTORY HOLDING CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS FOX FACTORY HOLDING CORP. Condensed Consolidated Balance Sheets (in thousands, except per share data) (unaudited) As of As of April 2, January 1, 2021 2021 (unaudited) Assets Current assets: Cash and cash equivalents $ 291,471 $ 245,764 Accounts receivable (net of allowances of $ 803 and $ 663 at April 2, 2021 and January 1, 2021, respectively) 137,022 121,194 Inventory 166,546 127,091 Prepaids and other current assets 55,814 87,920 Total current assets 650,853 581,969 Property, plant and equipment, net 170,793 163,288 Lease right-of-use assets 25,308 26,148 Deferred tax assets 17,663 19,362 Goodwill 289,175 289,349 Intangibles, net 200,027 204,491 Other assets 3,279 1,954 Total assets $ 1,357,098 $ 1,286,561 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 121,722 $ 92,403 Accrued expenses 63,812 59,391 Reserve for uncertain tax positions — 1,095 Current portion of long-term debt 12,500 12,500 Total current liabilities 198,034 165,389 Long-term debt, less current portion 374,933 377,088 Other liabilities 21,840 24,913 Total liabilities 594,807 567,390 Commitments and contingencies (Refer to Note 9 - Commitments and Contingencies ) Stockholders’ equity Preferred stock, $ 0.001 par value — 10,000 authorized and no shares issued or outstanding as of April 2, 2021 and January 1, 2021 — — Common stock, $ 0.001 par value — 90,000 authorized; 42,854 shares issued and 41,964 outstanding as of April 2, 2021; 42,692 shares issued and 41,802 outstanding as of January 1, 2021 42 42 Additional paid-in capital 340,347 336,834 Treasury stock, at cost; 890 common shares as of April 2, 2021 and January 1, 2021 ( 13,754 ) ( 13,754 ) Accumulated other comprehensive income 2,689 1,068 Retained earnings 432,967 394,981 Total stockholders’ equity 762,291 719,171 Total liabilities and stockholders’ equity $ 1,357,098 $ 1,286,561 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 Income (in thousands, except per share data) (unaudited) For the three months ended April 2, April 3, 2021 2020 Sales $ 281,136 $ 184,361 Cost of sales 183,212 127,746 Gross profit 97,924 56,615 Operating expenses: Sales and marketing 16,858 12,063 Research and development 9,876 8,029 General and administrative 20,369 22,413 Amortization of purchased intangibles 4,965 2,543 Total operating expenses 52,068 45,048 Income from operations 45,856 11,567 Interest and other expense, net: Interest expense 2,904 1,847 Other expense 959 62 Interest and other expense, net 3,863 1,909 Income before income taxes 41,993 9,658 Provision for income taxes 4,007 920 Net income 37,986 8,738 Less: net income attributable to non-controlling interest — 488 Net income attributable to FOX stockholders $ 37,986 $ 8,250 Earnings per share: Basic $ 0.91 $ 0.21 Diluted $ 0.90 $ 0.21 Weighted-average shares used to compute earnings per share: Basic 41,851 38,571 Diluted 42,343 39,151 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 Comprehensive Income (in thousands) (unaudited) For the three months ended April 2, April 3, 2021 2020 Net income $ 37,986 $ 8,738 Other comprehensive income (loss) Interest rate swap, net of tax effects 2,145 — Foreign currency translation adjustments, net of tax effects ( 524 ) ( 940 ) Other comprehensive income (loss) 1,621 ( 940 ) Comprehensive income 39,607 7,798 Less: comprehensive income attributable to non-controlling interest — 488 Comprehensive income attributable to FOX stockholders $ 39,607 $ 7,310 The accompanying notes are an integral part of these condensed consolidated financial 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 income (loss) 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 ) — Issuance of stock for business acquisition — — — — 322 — — 322 Stock-based compensation expense — — — — 1,921 — — 1,921 — Other comprehensive loss — — — — — ( 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 The accompanying notes are an integral part of these consolidated statements. 6 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 income Retained earnings Total stockholders' equity Redeemable non-controlling interest Shares Amount Shares Amount Balance - January 1, 2021 42,692 $ 42 890 $ ( 13,754 ) $ 336,834 $ 1,068 $ 394,981 $ 719,171 $ — Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 162 — — — 598 — — 598 — Stock-based compensation expense — — — — 2,915 — — 2,915 — Other comprehensive income — — — — — 1,621 — 1,621 — Net income — — — — — — 37,986 37,986 — Balance - April 2, 2021 42,854 $ 42 890 $ ( 13,754 ) $ 340,347 $ 2,689 $ 432,967 $ 762,291 $ — The accompanying notes are an integral part of these consolidated statements. 7 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) For the three months ended April 2, 2021 April 3, 2020 OPERATING ACTIVITIES: Net income $ 37,986 $ 8,738 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 10,069 5,829 Stock-based compensation 2,494 1,921 Deferred taxes and uncertain tax positions ( 438 ) ( 8,649 ) Amortization of loan fees 411 389 Changes in operating assets and liabilities, net of acquisition of business: Accounts receivable ( 16,536 ) 14,391 Inventory ( 40,074 ) ( 22,479 ) Income taxes 2,288 916 Prepaids and other assets 33,263 ( 61,695 ) Accounts payable 33,653 30,345 Accrued expenses and other liabilities 2,912 ( 3,191 ) Net cash provided by (used in) operating activities 66,028 ( 33,485 ) INVESTING ACTIVITIES: Purchases of property and equipment ( 16,885 ) ( 12,841 ) Acquisition of businesses, net of cash acquired — ( 329,209 ) Net cash used in investing activities ( 16,885 ) ( 342,050 ) FINANCING ACTIVITIES: Proceeds from line of credit 8,480 156,000 Payments on line of credit ( 8,480 ) ( 139,000 ) Proceeds from issuance of debt, net of origination fees of $6,622 — 393,379 Repayment of debt ( 2,500 ) — Installment on purchase of non-controlling interest ( 1,850 ) — Proceeds (repurchases) from stock compensation program, net 598 ( 2,047 ) Net cash (used in) provided by financing activities ( 3,752 ) 408,332 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 316 ( 351 ) CHANGE IN CASH AND CASH EQUIVALENTS 45,707 32,446 CASH AND CASH EQUIVALENTS—Beginning of period 245,764 43,736 CASH AND CASH EQUIVALENTS—End of period $ 291,471 $ 76,182 8 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) For the three months ended SUPPLEMENTAL CASH FLOW INFORMATION: April 2, 2021 April 3, 2020 Cash paid during the period for: Income taxes $ 2,048 $ 9,280 Cash paid for interest, net of capitalized interest $ 2,422 $ 729 Cash paid for amounts included in the measurement of lease liabilities $ 1,994 $ 1,602 Non-cash operating activities: Right-of-use assets obtained in exchange for lease obligations $ 1,160 $ 4,336 Non-cash investing activities: Capital expenditures included in accounts payable $ 3,633 $ 3,805 The accompanying notes are an integral part of these condensed consolidated financial statements. 9 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 1, 2021 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 25, 2021. 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. Fiscal Year Calendar - The Company operates on a 52-53 week fiscal year calendar. For 2021 and 2020, the Company's fiscal year will end or has ended on December 31, 2021 and January 1, 2021, respectively. The twelve month periods ended December 31, 2021 and January 1, 2021, will include or have included 52 weeks. The three month periods ended April 2, 2021 and April 3, 2020 each included 13 weeks. 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 1, 2021, as filed with the SEC on February 25, 2021 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. 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. 10 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) Segments - The Company has determined that it has a single operating and reportable segment; manufacturing, sale and service of performance-defining products. The Company considers operating segments to be components of the Company in 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 ongoing coronavirus (“COVID-19”) outbreak. 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. 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; increases in COVID-19 case counts; any additional waves of the virus, availability and ultimate efficacy of the vaccine on the new variants of the virus; 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. 11 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) Recent Accounting Pronouncements - 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 adopted ASU 2019-12 effective in the first quarter of fiscal year 2021. The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements. In October 2020, the FASB issued ASU 2020-10, Codification Improvements. The amendments in ASU 2020-10 contain improvements to the Codification by including disclosure guidance in appropriate disclosure and ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the Disclosure Section of the Codification. The ASU also provides clarification to various codification topics to improve consistency in guidance application. The amendments are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2020-10 effective in the first quarter of fiscal year 2021. The adoption of ASU 2020-10 did not have a material impact on the Company's consolidated financial statements and related disclosures. 2. Revenues The following table summarizes total sales by product category: For the three months ended April 2, 2021 April 3, 2020 Powered Vehicles $ 162,747 $ 120,526 Specialty Sports 118,389 63,835 Total sales $ 281,136 $ 184,361 The following table summarizes total sales by sales channel: For the three months ended April 2, 2021 April 3, 2020 OEM $ 151,480 $ 103,748 Aftermarket 129,656 80,613 Total sales $ 281,136 $ 184,361 The following table summarizes total sales generated by geographic location of the customer: For the three months ended April 2, 2021 April 3, 2020 North America $ 180,483 $ 130,622 Asia 51,856 22,878 Europe 45,739 28,959 Rest of the world 3,058 1,902 Total sales $ 281,136 $ 184,361 12 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) Remaining performance obligations represent the transaction price of contracts, generally considered to be the customer's purchase order, for which work has not been performed or has been partially performed. The Company has elected to exclude remaining performance obligations with an original expected duration of one year or less. Revenue expected to be recognized from remaining performance obligations as of April 2, 2021 for contracts with a duration more than one year was approximately $ 30,304 , all of which is expected to be recognized during fiscal year 2022. 3. Inventory Inventory consisted of the following: April 2, January 1, 2021 2021 Raw materials $ 118,902 $ 87,503 Work-in-process 12,067 5,306 Finished goods 35,577 34,282 Total inventory $ 166,546 $ 127,091 4. Prepaids and Other Current Assets Prepaids and other current assets consisted of the following: April 2, January 1, 2021 2021 Prepaid chassis deposits $ 30,150 $ 66,812 Advanced payments and prepaid contracts 12,140 8,683 Current portion of acquisition-related compensation held in escrow 4,229 4,518 Other current assets 9,295 7,907 Total $ 55,814 $ 87,920 13 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 5. Property, Plant and Equipment, net Property, plant and equipment, net consisted of the following: April 2, January 1, 2021 2021 Building and building improvements $ 75,738 $ 75,753 Information systems, office equipment and furniture 15,396 14,176 Internal-use computer software 20,752 19,853 Land 9,642 9,698 Leasehold improvements 16,385 15,075 Machinery and manufacturing equipment 89,517 81,281 Transportation equipment 6,475 6,187 Total 233,905 222,023 Less: accumulated depreciation and amortization ( 63,112 ) ( 58,735 ) Property, plant and equipment, net $ 170,793 $ 163,288 The Company’s long-lived assets by geographic location are as follows: April 2, January 1, 2021 2021 United States $ 149,277 $ 144,529 International 21,516 18,759 Total long-lived assets $ 170,793 $ 163,288 14 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 7 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 4.36 years and the weighted-average incremental borrowing rate was 3.14 % as of April 2, 2021. Operating lease costs consisted of the following: For the three months ended April 2, 2021 April 3, 2020 Operating lease cost $ 2,070 $ 1,576 Other lease costs (1) 225 274 Total $ 2,295 $ 1,850 (1) Includes short-term leases and variable lease costs. The Company 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. Supplemental balance sheet information related to the Company's operating leases is as follows: Balance Sheet Classification April 2, 2021 Operating lease right-of-use assets Lease right-of-use assets $ 25,308 Current lease liabilities Accrued expenses $ 7,200 Non-current lease liabilities Other liabilities $ 17,947 Maturities of lease liabilities by fiscal year for the Company's operating leases are as follows: For fiscal year Total future payments 2021 (excluding the 3 months ended April 2, 2021) $ 5,983 2022 6,731 2023 5,260 2024 3,499 2025 2,775 Thereafter 2,727 Total lease payments 26,975 Less: imputed interest ( 1,828 ) Present value of lease liabilities 25,147 Less: current portion ( 7,200 ) Lease liabilities less current portion $ 17,947 15 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: April 2, January 1, 2021 2021 Payroll and related expenses $ 19,268 $ 22,407 Current portion of lease liabilities 7,200 6,754 Warranty 11,521 9,835 Income tax payable 10,231 7,595 Accrued sales rebate 6,904 4,471 Current portion of non-controlling interest buyout liability 3,600 4,550 Other accrued expenses 5,088 3,779 Total $ 63,812 $ 59,391 Activity related to warranties is as follows: For the three months ended April 2, 2021 April 3, 2020 Beginning warranty liability $ 9,835 $ 5,649 Charge to cost of sales 3,261 1,054 Fair value of warranty assumed in acquisition — 3,158 Costs incurred ( 1,575 ) ( 1,142 ) Ending warranty liability $ 11,521 $ 8,719 16 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 8. Debt 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 interest and other expense, net in the condensed consolidated statements of income for the three months ended April 3, 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 April 2, 2021, the one-month LIBOR and prime rates were 0.11 % and 3.25 %, respectively. At April 2, 2021, 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 April 2, 2021. 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 April 2, 2021. The following table summarizes the line of credit under the First Amended and Restated Credit Facility: April 2, 2021 Amount outstanding $ — Standby letters of credit 15,000 Available borrowing capacity 235,000 Total borrowing capacity $ 250,000 Maturity date March 11, 2025 17 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) As of April 2, 2021, future principal payments for long-term debt, including the current portion, as summarized as follows: April 2, 2021 For fiscal year 2021 (remaining 9 months) $ 10,000 2022 17,500 2023 20,000 2024 20,000 2025 325,000 Total 392,500 Debt issuance cost ( 5,067 ) Long-term debt, net of issuance cost 387,433 Less: current portion ( 12,500 ) Long-term debt less current portion $ 374,933 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 by reason of 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 to vigorously 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 February 2021, the PTAB issued opinions in the 027 Patent petition cases stating that the Company has shown all of the claims of the 027 Patent to be obvious. The PTAB has also issued an opinion in the 250 Patent case stating that the Company has not shown the claims of the 250 Patent to be obvious. 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. The U.S. District Court, Northern District of Illinois has, in view of the 027 Patent PTAB process and opinion, stayed the SRAM lawsuits against the Company. 18 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 outcomes 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 has been or will be settled in quarterly installment payments beginning in July 2020 through July 2022, which amount to $ 6,556 , $ 4,550 and $ 2,700 in 2020, 2021 and 2022, respectively. The Company paid $ 1,850 during the three months ended April 2, 2021 and had a remaining liability of $ 16,569 as of April 2, 2021. The stock portion of 136 shares held in escrow has been or will be released quarterly starting January 2021 through July 2022. The Company released 19 shares of stock during the three months ended April 2, 2021. 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 April 2, 2021. 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 (the "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 for a portion 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 April 2, 2021 was an asset of $ 1,895 . Refer to Note 11 - Fair Value Measurements and Financial Instruments for additional information on determining the fair value. The asset is included in Other Assets in the Consolidated Balance Sheets. At both the inception of the Swap and at April 2, 2021, the interest rate swap was considered highly effective and accordingly, the $ 1,895 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. 19 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: April 2, 2021 January 1, 2021 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Interest Rate Swap $ — $ 1,895 $ — $ 1,895 $ — $ — $ — $ — Total assets measured at fair value $ — $ 1,895 $ — $ 1,895 $ — $ — $ — $ — Liabilities: Credit Facility $ — $ 387,433 $ — $ 387,433 $ — $ 389,588 $ — $ 389,588 Interest Rate Swap — — — — — 915 — 915 Total liabilities measured at fair value $ — $ 387,433 $ — $ 387,433 $ — $ 390,503 $ — $ 390,503 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 month period ended April 2, 2021. 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 April 2, 2021 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, an 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. 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 $ 198,233 . 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 April 2, 2021 April 3, 2020 Cost of sales $ 121 $ 129 Sales and marketing 152 152 Research and development 187 201 General and administrative 2,034 1,439 Total $ 2,494 $ 1,921 20 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) As of January 1, 2021, $ 421 of stock-based compensation expense related to our executive bonus plan is included in Accrued Expenses on the Consolidated Balance Sheets. This amount was recognized as additional paid in capital during the three months ended April 2, 2021 upon the issuance of the underlying restricted stock units. The following table summarizes the activity for the Company's unvested restricted stock units ("RSU") for the three months ended April 2, 2021: Unvested RSUs Number of shares outstanding Weighted-average grant date fair value Unvested at January 1, 2021 450 $ 50.12 Granted 36 $ 141.35 Canceled ( 3 ) $ 46.70 Vested ( 19 ) $ 55.00 Unvested at April 2, 2021 464 $ 56.97 As of April 2, 2021, the Company had approximately $ 19,544 of unrecognized stock-based compensation expense related to RSUs, which will be recognized over the remaining weighted-average vesting period of approximately 2.45 years. During the three months ended April 2, 2021, the Company issued performance share units (“PSUs”) to certain executives that represent shares potentially issuable in the future. Issuance is based upon the Company's performance, over a 2 - 3 year performance period, on certain measures including return on invested capital and free cash flow. The PSUs vest only upon the achievement of the applicable performance goals for the performance period and depending on the actual achievement on the performance goals, the grantee may earn between 0 % and 200 % of the target PSUs. The fair value of performance share units is calculated based on the stock price on the date of grant. The following table summarizes the activity for the Company's unvested PSUs for the three months ended April 2, 2021: Unvested PSUs Number of shares outstanding Weighted-average grant date fair value Unvested at January 1, 2021 — $ — Granted 26 $ 140.24 Unvested at April 2, 2021 26 $ 140.24 The stock-based compensation expense recognized each period is dependent upon our estimate of the number of shares that will ultimately be issued. Future stock-based compensation expense for unvested performance based awards could reach a maximum of $ 7,270 assuming payout of all unvested awards. The unrecognized stock-based compensation expense is expected to be recognized over a weighted average period of 2.25 years. For the three months ended April 2, 2021, the Company had 54 unvested RSUs and PSUs outstanding which were excluded from the calculation of dilutive earnings per share because the effect would be anti-dilutive. During the three months ended April 2, 2021, 144 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 April 2, 2021, stock-based compensation expense related to stock options has been fully recognized. 21 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 April 2, 2021 April 3, 2020 Provision for income taxes $ 4,007 $ 920 Effective tax rates 9.5 % 9.5 % For the three months ended April 2, 2021, the difference between the Company's effective tax rate of 9.5 % and the 21 % federal statutory rate resulted primarily from windfall on stock based compensation, the recognition of uncertain tax positions due to the conclusion of an audit and a lower tax rate on foreign derived intangible income. These benefits were partially offset by an increase in the valuation allowance for foreign tax credits, state taxes and non-deductible expenses. For the three months ended April 3, 2020, the difference between the Company's effective tax rate of 9.5 % and the 21 % federal statutory rate resulted primarily from the negotiated reduction of Switzerland withholding tax on prior year earnings. These benefits were partially offset by state taxes, global low-tax intangible income tax, non-deductible expenses, and an excess benefit related to stock-based compensation. There are no ongoing income tax audits as of April 2, 2021. 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. Ridetech has a building lease for its manufacturing and office facilities in Jasper, Indiana. The buildings are owned by a former owner of Ridetech, who is now an employee of the Company. The lease is effective from May 1, 2019 through April 1, 2024, with monthly rent payments of $ 16 . Rent expense under this lease was $ 48 for the three months ended April 2, 2021. On March 11, 2020, the Company acquired 100% of the issued and outstanding stock of SCA Performance Holdings, Inc. ("SCA"). The Company has transactions with an automotive dealership owned by a former owner of SCA, who is now an employee of the Company. The Company purchased approximately $ 202 of parts and vehicles and sold approximately $ 120 of upfit packages to the dealership during the three months ended April 2, 2021. As of April 2, 2021, the Company had $ 27 and $ 88 in accounts payable and accounts receivable, respectively, related to this dealership. 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. 22 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 from Southern Rocky Holdings, LLC for $ 331,853 , 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. 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 $ 1,290 in costs associated with such retention incentives during the three months ended April 2, 2021. The Company’s allocation of the purchase price to the net tangible and intangible assets acquired and liabilities assumed is as follows: Fair market values Tangible assets acquired $ 28,678 Liabilities assumed ( 32,479 ) Intangible assets 139,900 Goodwill 195,754 Total $ 331,853 The Company incurred $ 10,579 of acquisition costs in conjunction with the SCA acquisition, including $ 1,750 of transaction compensation, during the three months ended April 3, 2020. These costs are classified as general and administrative expenses in the accompanying condensed consolidated statements of income. The 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 $ 195,754 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. 23 Table of Contents