FOX FACTORY HOLDING CORP 10-Q

ITEM 1. FINANCIAL STATEMENTS FOX FACTORY HOLDING CORP. Condensed Consolidated Balance Sheets (in thousands, except per share data) As of As of July 2, January 1, 2021 2021 (unaudited) Assets Current assets: Cash and cash equivalents $ 274,976 $ 245,764 Accounts receivable (net of allowances of $ 974 and $ 663 at July 2, 2021 and January 1, 2021, respectively) 149,695 121,194 Inventory 208,550 127,091 Prepaids and other current assets 90,008 87,920 Total current assets 723,229 581,969 Property, plant and equipment, net 177,630 163,288 Lease right-of-use assets 31,955 26,148 Deferred tax assets 18,503 19,362 Goodwill 299,816 289,349 Intangibles, net 200,574 204,491 Other assets 2,283 1,954 Total assets $ 1,453,990 $ 1,286,561 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 154,089 $ 92,403 Accrued expenses 79,790 59,391 Reserve for uncertain tax positions — 1,095 Current portion of long-term debt 15,000 12,500 Total current liabilities 248,879 165,389 Line of credit 3,238 — Long-term debt, less current portion 370,275 377,088 Other liabilities 27,229 24,913 Total liabilities 649,621 567,390 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 July 2, 2021 and January 1, 2021 — — Common stock, $ 0.001 par value — 90,000 authorized; 42,972 shares issued and 42,083 outstanding as of July 2, 2021; 42,692 shares issued and 41,802 outstanding as of January 1, 2021 42 42 Additional paid-in capital 338,019 336,834 Treasury stock, at cost; 890 common shares as of July 2, 2021 and January 1, 2021 ( 13,754 ) ( 13,754 ) Accumulated other comprehensive income 2,820 1,068 Retained earnings 477,242 394,981 Total stockholders’ equity 804,369 719,171 Total liabilities and stockholders’ equity $ 1,453,990 $ 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 For the six months ended July 2, July 3, July 2, July 3, 2021 2020 2021 2020 Sales $ 328,164 $ 183,102 $ 609,300 $ 367,463 Cost of sales 217,076 123,116 400,288 250,862 Gross profit 111,088 59,986 209,012 116,601 Operating expenses: Sales and marketing 17,840 12,561 34,698 24,624 Research and development 11,216 8,236 21,092 16,265 General and administrative 24,226 14,566 44,595 36,979 Amortization of purchased intangibles 5,083 5,264 10,048 7,807 Total operating expenses 58,365 40,627 110,433 85,675 Income from operations 52,723 19,359 98,579 30,926 Interest and other expense, net: Interest expense 1,598 2,892 4,502 4,739 Other expense 83 71 1,042 133 Interest and other expense, net 1,681 2,963 5,544 4,872 Income before income taxes 51,042 16,396 93,035 26,054 Provision for income taxes 6,767 3,204 10,774 4,124 Net income 44,275 13,192 82,261 21,930 Less: net income attributable to non-controlling interest — 584 — 1,072 Net income attributable to FOX stockholders $ 44,275 $ 12,608 $ 82,261 $ 20,858 Earnings per share: Basic $ 1.05 $ 0.32 $ 1.96 $ 0.54 Diluted $ 1.05 $ 0.32 $ 1.94 $ 0.53 Weighted-average shares used to compute earnings per share: Basic 42,028 38,991 41,940 38,781 Diluted 42,367 39,584 42,355 39,368 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 For the six months ended July 2, July 3, July 2, July 3, 2021 2020 2021 2020 Net income $ 44,275 $ 13,192 $ 82,261 $ 21,930 Other comprehensive income (loss) Interest rate swap, net of tax effects ( 525 ) — 1,620 — Foreign currency translation adjustments, net of tax effects 656 923 132 ( 17 ) Other comprehensive income (loss) 131 923 1,752 ( 17 ) Comprehensive income 44,406 14,115 84,013 21,913 Less: comprehensive income attributable to non-controlling interest — 584 — 1,072 Comprehensive income attributable to FOX stockholders $ 44,406 $ 13,531 $ 84,013 $ 20,841 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 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 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 The accompanying notes are an integral part of these condensed 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 $ — Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 118 — — — ( 5,702 ) — — ( 5,702 ) — Stock-based compensation expense — — — — 3,374 — — 3,374 — Other comprehensive income — — — — — 131 — 131 — Net income — — — — — 44,275 44,275 — Balance - July 2, 2021 42,972 $ 42 890 $ ( 13,754 ) $ 338,019 $ 2,820 $ 477,242 $ 804,369 $ — The accompanying notes are an integral part of these condensed consolidated statements. 7 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) For the six months ended July 2, 2021 July 3, 2020 OPERATING ACTIVITIES: Net income $ 82,261 $ 21,930 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,433 15,019 Stock-based compensation 5,868 3,997 Deferred taxes and uncertain tax positions ( 1,080 ) ( 7,238 ) Amortization of loan fees 820 713 Changes in operating assets and liabilities, net of acquisition of business: Accounts receivable ( 28,258 ) 13,133 Inventory ( 79,212 ) ( 13,583 ) Income taxes 2,340 2,341 Prepaids and other assets ( 552 ) ( 30,707 ) Accounts payable 63,483 2,728 Accrued expenses and other liabilities 14,587 ( 2,644 ) Net cash provided by operating activities 81,690 5,689 INVESTING ACTIVITIES: Purchases of property and equipment ( 27,648 ) ( 32,770 ) Acquisition of businesses, net of cash acquired ( 15,625 ) ( 329,222 ) Net cash used in investing activities ( 43,273 ) ( 361,992 ) FINANCING ACTIVITIES: Proceeds from line of credit 17,093 201,768 Payments on line of credit ( 13,855 ) ( 254,768 ) Proceeds from issuance of debt, net of origination fees of $7,616 — 392,385 Repayment of debt ( 5,000 ) ( 2,500 ) Installment on purchase of non-controlling interest ( 2,750 ) — Proceeds from sale of common stock, net — 198,236 Proceeds (repurchases) from stock compensation program, net ( 5,104 ) ( 4,348 ) Net cash (used in) provided by financing activities ( 9,616 ) 530,773 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 411 ( 241 ) CHANGE IN CASH AND CASH EQUIVALENTS 29,212 174,229 CASH AND CASH EQUIVALENTS—Beginning of period 245,764 43,736 CASH AND CASH EQUIVALENTS—End of period $ 274,976 $ 217,965 8 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) For the six months ended SUPPLEMENTAL CASH FLOW INFORMATION: July 2, 2021 July 3, 2020 Cash paid during the period for: Income taxes $ 9,914 $ 9,734 Cash paid for interest, net of capitalized interest $ 3,990 $ 3,953 Cash paid for amounts included in the measurement of lease liabilities $ 4,021 $ 3,432 Non-cash operating activities: Right-of-use assets obtained in exchange for lease obligations $ 9,455 $ 4,336 Non-cash investing activities: Capital expenditures included in accounts payable $ 4,888 $ 4,784 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 and six month periods ended July 2, 2021 and July 3, 2020 each included 13 weeks and 26 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 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 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 condensed 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 condensed consolidated financial statements and related disclosures. 12 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 six months ended July 2, 2021 July 3, 2020 July 2, 2021 July 3, 2020 Powered Vehicles $ 189,419 $ 98,524 $ 352,166 $ 219,050 Specialty Sports 138,745 84,578 257,134 148,413 Total sales $ 328,164 $ 183,102 $ 609,300 $ 367,463 The following table summarizes total sales by sales channel: For the three months ended For the six months ended July 2, 2021 July 3, 2020 July 2, 2021 July 3, 2020 OEM $ 172,547 $ 87,860 $ 324,027 $ 191,608 Aftermarket 155,617 95,242 285,273 175,855 Total sales $ 328,164 $ 183,102 $ 609,300 $ 367,463 The following table summarizes total sales generated by geographic location of the customer: For the three months ended For the six months ended July 2, 2021 July 3, 2020 July 2, 2021 July 3, 2020 North America $ 217,695 $ 116,970 $ 398,178 $ 247,592 Asia 60,245 33,385 112,101 56,263 Europe 46,818 31,260 92,557 60,219 Rest of the world 3,406 1,487 6,464 3,389 Total sales $ 328,164 $ 183,102 $ 609,300 $ 367,463 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 July 2, 2021 for contracts with a duration more than one year was approximately $ 10,040 , all of which is expected to be recognized during fiscal year 2022. 13 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 3. Inventory Inventory consisted of the following: July 2, January 1, 2021 2021 Raw materials $ 151,385 $ 87,503 Work-in-process 13,848 5,306 Finished goods 43,317 34,282 Total inventory $ 208,550 $ 127,091 4. Prepaids and Other Current Assets Prepaids and other current assets consisted of the following: July 2, January 1, 2021 2021 Prepaid chassis deposits $ 65,368 $ 66,812 Advanced payments and prepaid contracts 11,931 8,683 Current portion of acquisition-related compensation held in escrow 3,100 4,518 Other current assets 9,609 7,907 Total $ 90,008 $ 87,920 14 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: July 2, January 1, 2021 2021 Building and building improvements $ 70,882 $ 75,753 Information systems, office equipment and furniture 18,615 14,176 Internal-use computer software 21,803 19,853 Land and land improvements 15,438 9,698 Leasehold improvements 18,136 15,075 Machinery and manufacturing equipment 94,891 81,281 Transportation equipment 6,898 6,187 Total 246,663 222,023 Less: accumulated depreciation and amortization ( 69,033 ) ( 58,735 ) Property, plant and equipment, net $ 177,630 $ 163,288 During the six months ended July 2, 2021, the Company reclassified certain assets from buildings to land and land improvements to better depict the nature of the assets. The Company’s long-lived assets by geographic location are as follows: July 2, January 1, 2021 2021 United States $ 153,894 $ 144,529 International 23,736 18,759 Total long-lived assets $ 177,630 $ 163,288 15 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 2.77 % as of July 2, 2021. Operating lease costs consisted of the following: For the three months ended For the six months ended July 2, 2021 July 3, 2020 July 2, 2021 July 3, 2020 Operating lease cost $ 1,983 $ 1,798 $ 4,053 $ 3,374 Other lease costs (1) 397 245 622 519 Total $ 2,380 $ 2,043 $ 4,675 $ 3,893 (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 July 2, 2021 Operating lease right-of-use assets Lease right-of-use assets $ 31,955 Current lease liabilities Accrued expenses $ 7,685 Non-current lease liabilities Other liabilities $ 23,426 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 6 months ended July 2, 2021) $ 4,375 2022 7,788 2023 6,811 2024 5,246 2025 3,981 Thereafter 4,935 Total lease payments 33,136 Less: imputed interest ( 2,025 ) Present value of lease liabilities 31,111 Less: current portion ( 7,685 ) Lease liabilities less current portion $ 23,426 16 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: July 2, January 1, 2021 2021 Payroll and related expenses $ 25,991 $ 22,407 Current portion of lease liabilities 7,685 6,754 Warranty 13,650 9,835 Income tax payable 10,426 7,595 Accrued sales rebate 10,637 4,471 Other accrued expenses 11,401 8,329 Total $ 79,790 $ 59,391 Activity related to warranties is as follows: For the three months ended For the six months ended July 2, 2021 July 3, 2020 July 2, 2021 July 3, 2020 Beginning warranty liability $ 11,521 $ 8,719 $ 9,835 $ 5,649 Charge to cost of sales 4,070 1,690 7,331 2,806 Fair value of warranty assumed in acquisition 150 — 150 3,158 Costs incurred ( 2,091 ) ( 1,494 ) ( 3,666 ) ( 2,698 ) Ending warranty liability $ 13,650 $ 8,915 $ 13,650 $ 8,915 17 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 8. Debt Credit Facility In June 2019, the Company entered into a credit facility with Bank of America and other named lenders, which has been periodically amended and restated and/or amended. The credit facility was amended and restated on March 11, 2020, and further amended on June 19, 2020, and June 11, 2021 (as amended to date, the "Credit Facility"). The 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 six months ended July 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 Credit Facility. The 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 0.00%, or based on the base rate offered by Bank of America plus a margin ranging from 0.00 % to 1.25 %. At July 2, 2021, the one-month LIBOR and prime rates were 0.10 % and 3.25 %, respectively. At July 2, 2021, our weighted-average interest rate on outstanding borrowing was 1.32 %. The 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 July 2, 2021. On June 11, 2021, the Company terminated its existing swap agreement and entered into a new interest rate swap agreement to obtain a more favorable interest rate and to manage interest rate risk exposure, which was effective July 2, 2021. Through the interest rate swap agreement, the Company hedges 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 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 July 2, 2021. The following table summarizes the line of credit under the Credit Facility: July 2, 2021 Amount outstanding $ 3,238 Standby letters of credit 15,000 Available borrowing capacity 231,762 Total borrowing capacity $ 250,000 Maturity date March 11, 2025 18 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) As of July 2, 2021, future principal payments for long-term debt, including the current portion, as summarized as follows: July 2, 2021 For fiscal year 2021 (remaining 6 months) $ 7,500 2022 17,500 2023 20,000 2024 20,000 2025 325,000 Total 390,000 Debt issuance cost ( 4,725 ) Long-term debt, net of issuance cost 385,275 Less: current portion ( 15,000 ) Long-term debt less current portion $ 370,275 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. 19 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 condensed 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 $ 900 and $ 2,750 during the three and six months ended July 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 and 39 shares of stock during the three and six months ended July 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 July 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. 20 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 10. Derivatives and Hedging The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. The Company utilizes interest rate swaps to limit its exposure to interest rate risk by converting a portion of its floating-rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. Interest rate swaps involve the receipt of floating-rate amounts in exchange for fixed-rate interest payments based on the one-month LIBOR over the lives of the agreements without an exchange of the underlying principal amounts. As of July 2, 2021 and January 1, 2021 the Company had the following open interest rate swap contracts: July 2, 2021 January 1, 2021 Effective Date Termination Date Notional Amount Unrealized Gain (Loss) in AOCI Unrealized Gain (Loss) in AOCI September 2, 2020 June 11, 2021 $ 200,000 $ 319 $ ( 915 ) July 2, 2021 March 11, 2025 $ 200,000 887 — Total $ 1,206 $ ( 915 ) On June 11, 2021 the Company terminated its existing swap agreement and entered into a new interest rate swap agreement with a notional amount of $ 200,000 . The terminated swap resulted in an unrealized gain of $ 324 at the termination date, that will continue to be accounted for in accumulated other comprehensive income and amortized into earnings over the term of the associated debt instrument. The new swap agreement (the "Interest Rate Swap"), has a maturity date of March 11, 2025 and is indexed to a one-month LIBOR with a fixed leg of 0.50 %. The Interest Rate Swap met the criteria for cash flow hedges under ASC 815, Derivatives and Hedging, and is recorded in other assets on the Condensed Consolidated Balance Sheet. Refer to Note 11 - Fair Value Measurements and Financial Instruments for additional information on determining the fair value. The unrealized gains or losses, after tax, are recorded in accumulated other comprehensive income, a component of equity, and are expected to be reclassified into interest expense on the Condensed Consolidated Statement of Income when the forecasted transactions affect earnings. As required under ASC 815, the Interest Rate Swap’s effectiveness will be assessed on a quarterly basis using a quantitative regression analysis. The gains and losses, net of tax, related to the effective portion of derivative instruments designated as cash flow hedges recognized in accumulated other comprehensive income for the three and six months ended July 2, 2021 were a loss of $ 525 and a gain of $ 1,620 , respectively. No gains or losses were incurred for the three and six months ended July 3, 2020. Unrealized losses of $ 808 included in accumulated other comprehensive income related to the Interest Rate Swap are expected to be recognized in interest expense over the next twelve months. 21 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 and liabilities measured at fair value on a recurring basis as of the following periods: July 2, 2021 January 1, 2021 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Interest Rate Swap $ — $ 887 $ — $ 887 $ — $ — $ — $ — Total assets measured at fair value $ — $ 887 $ — $ 887 $ — $ — $ — $ — Liabilities: Credit Facility $ — $ 388,513 $ — $ 388,513 $ — $ 389,588 $ — $ 389,588 Interest Rate Swap — — — — — 915 — 915 Total liabilities measured at fair value $ — $ 388,513 $ — $ 388,513 $ — $ 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 and six month period ended July 2, 2021. The Company used Level 2 inputs to determine the fair value of the Credit Facility. The Company believes the carrying amount of its Credit Facility approximates the fair value at July 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 June 11, 2021, 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 Condensed Consolidated Balance Sheets and is measured at fair value. The fair value was calculated utilizing Level 2 inputs. 22 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 12. Stockholders' Equity Follow-on Stock Offerings In June 2020, the Company completed a follow-on 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 Condensed Consolidated Statements of Income: For the three months ended For the six months ended July 2, 2021 July 3, 2020 July 2, 2021 July 3, 2020 Cost of sales $ 190 $ 147 $ 311 276 Sales and marketing 213 165 365 317 Research and development 238 218 425 419 General and administrative 2,733 1,546 4,767 2,985 Total $ 3,374 $ 2,076 $ 5,868 3,997 As of January 1, 2021, $ 421 of stock-based compensation expense related to our executive bonus plan is included in Accrued Expenses on the Condensed Consolidated Balance Sheets. This amount was recognized as additional paid in capital during the six months ended July 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 six months ended July 2, 2021: Unvested RSUs Number of shares outstanding Weighted-average grant date fair value Unvested at January 1, 2021 450 $ 50.12 Granted 86 $ 148.74 Canceled ( 9 ) $ 55.43 Vested ( 140 ) $ 48.76 Unvested at July 2, 2021 387 $ 72.47 As of July 2, 2021, the Company had approximately $ 23,982 of unrecognized stock-based compensation expense related to RSUs, which will be recognized over the remaining weighted-average vesting period of approximately 2.39 years. 23 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) During the six months ended July 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 six months ended July 2, 2021: Unvested PSUs Number of shares outstanding Weighted-average grant date fair value Unvested at January 1, 2021 — $ — Granted 29 $ 141.46 Unvested at July 2, 2021 29 $ 141.46 The stock-based compensation expense recognized each period is dependent upon our estimate of the number of shares that will ultimately vest based on the achievement of certain performance conditions. Future stock-based compensation expense for unvested performance based awards could reach a maximum of $ 7,635 assuming achievement at the maximum level. The unrecognized stock-based compensation expense is expected to be recognized over a weighted average period of 2.01 years. For the six months ended July 2, 2021, the Company had 53 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 six months ended July 2, 2021, 180 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 July 2, 2021, stock-based compensation expense related to stock options has been fully recognized. 24 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 six months ended July 2, 2021 July 3, 2020 July 2, 2021 July 3, 2020 Provision for income taxes $ 6,767 $ 3,204 $ 10,774 $ 4,124 Effective tax rates 13.3 % 19.5 % 11.6 % 15.8 % For the three months ended July 2, 2021, the difference between the Company's effective tax rate and the 21 % federal statutory rate resulted primarily from excess benefits related to stock-based compensation, 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 six months ended July 2, 2021, the difference between the Company’s effective tax rate and the 21 % federal statutory rate resulted primarily from excess benefits related to stock-based compensation, a lower tax rate on foreign derived intangible income and the recognition of uncertain tax positions due to the conclusion of an audit. 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 July 3, 2020, the difference between the Company's effective tax rate and the 21 % federal statutory rate resulted primarily from a lower tax rate on foreign derived intangible income, research and development credits, and excess benefits related to stock-based compensation. These benefits were partially offset by state taxes, global low-tax intangible income and non-deductible expenses. For the six months ended July 3, 2020, the difference between the Company's effective tax rate and the 21 % federal statutory rate resulted primarily from a lower tax rate on foreign derived intangible income, research and development credits, a negotiated reduction of Switzerland withholding tax on prior year earnings, and excess tax benefits related to stock-based compensation. These benefits were partially offset by state taxes, global low-tax intangible income and non-deductible expenses. We do not expect the results from any ongoing income tax audits 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. 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 and $ 96 for the three and six months ended July 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 $ 262 and $ 464 of parts and vehicles and sold approximately $ 130 and $ 250 of upfit packages to the dealership during the three and six ended July 2, 2021. As of July 2, 2021, the Company had $ 143 and $ 8 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. 25 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 $ 1,130 and $ 2,419 in costs associated with such retention incentives during the three and six months ended July 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 $ 10,582 of acquisition costs in conjunction with the SCA acquisition, including $ 1,750 of transaction compensation, during the six months ended July 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. On May 25, 2021, the Company, through its wholly owned subsidiary, SCA Performance, Inc., acquired 100 % of the issued and outstanding stock of Manifest Joy LLC, dba Outside Van ("Outside Van") for $ 15,139 , net of cash acquired. Outside Van is a custom van conversion company that designs and custom engineers recreational vehicles with headquarters in Portland, Oregon. This purchase was accounted for as a business combination. The purchase price of Outside Van is allocated to the assets acquired and liabilities assumed based on their estimated respective fair values as of May 25, 2021, with the excess purchase price allocated to goodwill. The allocation of the purchase price to the net liabilities assumed of $ 1,057 , $ 5,560 in identifiable intangible assets and goodwill acquired of $ 10,636 , is preliminary and subject to the completion of the Company's validation of working capital and its intangible valuation procedures, with the assistance of specialists. The acquisition was not material to the Company's financial statements. On May 21, 2021, the Company, through its wholly owned subsidiary, Fox Factory Australia Pty Ltd., acquired substantially all the assets of Sola Sport Pty Ltd. for $ 486 . The acquisition was not material to the Company's financial statements. 26 Table of Contents