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 September 30, December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 153,137 $ 179,686 Accounts receivable (net of allowances of $ 455 and $ 410 at September 30, 2022 and December 31, 2021, respectively) 194,422 142,040 Inventory 354,223 279,837 Prepaids and other current assets 175,360 123,107 Total current assets 877,142 724,670 Property, plant and equipment, net 199,568 192,003 Lease right-of-use assets 41,524 38,752 Deferred tax assets 44,378 34,998 Goodwill 323,931 323,299 Intangibles, net 180,800 197,021 Other assets 10,522 4,986 Total assets $ 1,677,865 $ 1,515,729 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 131,659 $ 99,984 Accrued expenses 133,432 112,378 Current portion of long-term debt — 17,500 Total current liabilities 265,091 229,862 Line of credit 325,000 — Long-term debt, less current portion — 360,953 Other liabilities 32,640 30,832 Total liabilities 622,731 621,647 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 September 30, 2022 and December 31, 2021 — — Common stock, $ 0.001 par value — 90,000 authorized; 43,157 shares issued and 42,267 outstanding as of September 30, 2022; 43,010 shares issued and 42,120 outstanding as of December 31, 2021 42 42 Additional paid-in capital 351,403 344,119 Treasury stock, at cost; 890 common shares as of September 30, 2022 and December 31, 2021 ( 13,754 ) ( 13,754 ) Accumulated other comprehensive income 6,325 4,876 Retained earnings 711,118 558,799 Total stockholders’ equity 1,055,134 894,082 Total liabilities and stockholders’ equity $ 1,677,865 $ 1,515,729 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 nine months ended September 30, October 1, September 30, October 1, 2022 2021 2022 2021 Sales $ 409,168 $ 347,435 $ 1,193,850 $ 956,735 Cost of sales 271,901 231,417 793,379 631,705 Gross profit 137,267 116,018 400,471 325,030 Operating expenses: Sales and marketing 23,508 17,517 70,272 52,215 Research and development 13,955 12,318 40,811 33,410 General and administrative 29,171 25,614 83,182 70,209 Amortization of purchased intangibles 5,271 5,320 16,214 15,368 Total operating expenses 71,905 60,769 210,479 171,202 Income from operations 65,362 55,249 189,992 153,828 Interest and other (income) expense, net: Interest expense 2,667 1,849 6,341 6,351 Other (income) expense, net ( 1,441 ) ( 187 ) 3,067 855 Interest and other (income) expense, net 1,226 1,662 9,408 7,206 Income before income taxes 64,136 53,587 180,584 146,622 Provision for income taxes 13,365 9,764 28,265 20,538 Net income $ 50,771 $ 43,823 $ 152,319 $ 126,084 Earnings per share: Basic $ 1.20 $ 1.04 $ 3.61 $ 3.00 Diluted $ 1.20 $ 1.03 $ 3.59 $ 2.98 Weighted-average shares used to compute earnings per share: Basic 42,281 42,097 42,215 41,992 Diluted 42,387 42,363 42,374 42,357 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 nine months ended September 30, October 1, September 30, October 1, 2022 2021 2022 2021 Net income $ 50,771 $ 43,823 $ 152,319 $ 126,084 Other comprehensive (loss) income Interest rate swap, net of tax effects 2,563 ( 45 ) 9,296 1,575 Foreign currency translation adjustments, net of tax effects ( 4,091 ) ( 556 ) ( 7,847 ) ( 424 ) Other comprehensive (loss) income ( 1,528 ) ( 601 ) 1,449 1,151 Comprehensive income $ 49,243 $ 43,222 $ 153,768 $ 127,235 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 (in thousands) (unaudited) Common Stock Treasury Additional paid-in capital Accumulated other comprehensive income Retained earnings Total stockholders' equity 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 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 22 — — — ( 1,537 ) — — ( 1,537 ) Stock-based compensation expense — — — — 3,986 — — 3,986 Other comprehensive loss — — — — — ( 601 ) — ( 601 ) Net income — — — — — — 43,823 43,823 Balance - October 1, 2021 42,994 $ 42 890 $ ( 13,754 ) $ 340,468 $ 2,219 $ 521,065 $ 850,040 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 (in thousands) (unaudited) Common Stock Treasury Additional paid-in capital Accumulated other comprehensive income Retained earnings Total stockholders' equity Shares Amount Shares Amount Balance - December 31, 2021 43,010 $ 42 890 $ ( 13,754 ) $ 344,119 $ 4,876 $ 558,799 $ 894,082 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 29 — — — ( 820 ) — — ( 820 ) Stock-based compensation expense — — — — 3,029 — — 3,029 Other comprehensive income — — — — — 4,743 — 4,743 Net income — — — — — — 48,050 48,050 Balance - April 1, 2022 43,039 $ 42 890 $ ( 13,754 ) $ 346,328 $ 9,619 $ 606,849 $ 949,084 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 114 — — — ( 2,950 ) — — ( 2,950 ) Stock-based compensation expense — — — — 4,061 — — 4,061 Other comprehensive loss — — — — — ( 1,766 ) — ( 1,766 ) Net income — — — — — — 53,498 53,498 Balance - July 1, 2022 43,153 $ 42 890 $ ( 13,754 ) $ 347,439 $ 7,853 $ 660,347 $ 1,001,927 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 4 — — — ( 325 ) — — ( 325 ) Stock-based compensation expense — — — — 4,289 — — 4,289 Other comprehensive loss — — — — — ( 1,528 ) — ( 1,528 ) Net income — — — — — — 50,771 50,771 Balance - September 30, 2022 43,157 $ 42 890 $ ( 13,754 ) $ 351,403 $ 6,325 $ 711,118 $ 1,055,134 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 nine months ended September 30, 2022 October 1, 2021 OPERATING ACTIVITIES: Net income $ 152,319 $ 126,084 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 36,813 31,906 Stock-based compensation 11,379 9,854 Write off of unamortized loan origination fees 1,927 — Amortization of loan fees 860 1,227 Amortization of deferred gains on prior swap agreements ( 2,113 ) ( 27 ) (Gain) loss on disposal of property and equipment ( 1,845 ) 414 Deferred taxes and uncertain tax positions ( 12,515 ) ( 1,218 ) Changes in operating assets and liabilities: Accounts receivable ( 59,976 ) ( 37,867 ) Inventory ( 84,834 ) ( 116,791 ) Income taxes 4,171 8,257 Prepaids and other assets ( 55,000 ) 35,170 Accounts payable 43,439 66,099 Accrued expenses and other liabilities 22,410 25,875 Net cash provided by operating activities 57,035 148,983 INVESTING ACTIVITIES: Purchases of property and equipment ( 35,559 ) ( 39,983 ) Acquisition of businesses, net of cash acquired — ( 15,625 ) Proceeds from sale of property and equipment 3,180 49 Net cash used in investing activities ( 32,379 ) ( 55,559 ) FINANCING ACTIVITIES: Proceeds from line of credit, net of origination fees of $1,980 582,356 17,093 Payments on line of credit ( 259,336 ) ( 17,093 ) Repayment of term debt upon refinancing of Prior Credit Facility ( 382,500 ) ( 10,000 ) Proceeds from termination of swap agreement 12,270 324 Installment on purchase of non-controlling interest ( 2,700 ) ( 3,650 ) Repurchases from stock compensation program, net ( 4,094 ) ( 6,641 ) Net cash used in financing activities ( 54,004 ) ( 19,967 ) EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 2,799 121 CHANGE IN CASH AND CASH EQUIVALENTS ( 26,549 ) 73,578 CASH AND CASH EQUIVALENTS—Beginning of period 179,686 245,764 CASH AND CASH EQUIVALENTS—End of period $ 153,137 $ 319,342 The accompanying notes are an integral part of these condensed consolidated statements. 8 Table of Contents FOX FACTORY HOLDING CORP. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) For the nine months ended SUPPLEMENTAL CASH FLOW INFORMATION: September 30, 2022 October 1, 2021 Cash paid during the period for: Income taxes $ 36,487 $ 13,899 Cash paid for interest, net of capitalized interest $ 6,649 $ 5,184 Cash paid for amounts included in the measurement of lease liabilities $ 7,807 $ 6,276 Non-cash operating activities: Right-of-use assets obtained in exchange for lease obligations $ 11,966 $ 14,276 Non-cash investing and financing activities: Capital expenditures included in accounts payable $ 1,698 $ 4,428 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"), on-road vehicles with and without off-road capabilities, side-by-side vehicles ("Side-by-Sides"), 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 December 31, 2021 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 24, 2022. 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 2022 and 2021, the Company's fiscal year will end or has ended on December 30, 2022 and December 31, 2021, respectively. The twelve month periods ended December 30, 2022 and December 31, 2021, will include or have included 52 weeks. The three and nine month periods ended September 30, 2022 and October 1, 2021 each included 13 weeks and 39 weeks, respectively. Principles of Consolidation - These condensed consolidated financial statements include the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Summary of Significant Accounting Policies - There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 24, 2022 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 on-road vehicles with off-road capabilities, Side-by-Sides, 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. Sales tax and other similar taxes are excluded from revenues. 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 revenues 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. Reclassifications - We have reclassified certain prior period amounts within our condensed consolidated statement of cash flows for the nine months ended October 1, 2021 to conform to our current year presentation. 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”) pandemic. The global outbreak of COVID-19 has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. 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 COVID-19 pandemic; government, social, business and other actions that have been and will be taken in response to the COVID-19 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, including the Omicron variant; and the effect of the COVID-19 pandemic on short- and long-term general economic conditions. In addition, heightened political tensions between China and Taiwan, could negatively impact our business and operations. For example, our bike suspension manufacturing is located in Taiwan. We cannot assure you that any contentious situation between Taiwan and China will always resolve in maintaining the current status quo or remain peaceful. Relations between Taiwan and China, potential confrontations between the United States and China and other factors affecting military, political, social or economic conditions in Taiwan could have a material adverse effect on our business, our supply chain and our operations. Furthermore, during the first quarter of 2022, Russia commenced a military invasion of Ukraine, and the ensuing conflict has created disruption in the region and around the world. In addition, in response to this invasion, the United States and several European and Asian countries instated sanctions against Russia. The impact of the Russia invasion of Ukraine on the global economy, energy supplies and raw materials is uncertain but may prove to negatively impact the Company’s business and operations. 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). 11 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) The carrying amounts of the Company's financial instruments, including cash, receivables, accounts payable, accrued liabilities and line of credit approximate their fair values due to their short-term nature. Amounts owed under the Company's Prior Credit Facility (as defined in Note 8 - Debt below) approximated fair value due to the variable interest rate features embedded in the term debt. Recent Accounting Pronouncements - In December 2019, the FASB issued Accounting Standards Update ("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 to ensure consistency by including disclosure guidance in the appropriate Disclosure Section. This guidance includes an option for an entity to provide certain information either on the face of the financial statements or in the notes. ASU 2020-10 amends the Codification to include this language in the appropriate disclosure section. 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. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Under ASU 2021-08, an acquirer must recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. The Company adopted this guidance in the first quarter of 2022. This adoption did not have a material impact on our financial statements. In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405): Disclosure of Supplier Finance Program Obligations. Under ASU 2022-04, the buyer in a supplier finance program is required to disclose information about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each annual period, and a description of where in the financial statements outstanding amounts are presented. The guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. The Company will adopt this guidance in the first quarter of 2023. This adoption is not expected to have a material impact on our financial statements. 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 nine months ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Powered Vehicles $ 235,196 $ 187,998 $ 672,335 $ 540,164 Specialty Sports 173,972 159,437 521,515 416,571 Total sales $ 409,168 $ 347,435 $ 1,193,850 $ 956,735 The following table summarizes total sales by sales channel: For the three months ended For the nine months ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 OEM $ 238,078 $ 198,782 $ 662,453 $ 522,809 Aftermarket 171,090 148,653 531,397 433,926 Total sales $ 409,168 $ 347,435 $ 1,193,850 $ 956,735 The following table summarizes total sales generated by geographic location of the customer: For the three months ended For the nine months ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 North America $ 255,424 $ 210,623 $ 746,566 $ 608,800 Asia 66,875 65,873 188,704 177,974 Europe 82,299 65,141 242,373 157,698 Rest of the world 4,570 5,798 16,207 12,263 Total sales $ 409,168 $ 347,435 $ 1,193,850 $ 956,735 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 September 30, 2022 for contracts with a duration of more than one year was approximately $743, all of which is expected to be recognized during fiscal years 2023 to 2025. 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: September 30, December 31, 2022 2021 Raw materials $ 250,029 $ 200,460 Work-in-process 12,192 7,539 Finished goods 92,002 71,838 Total inventory $ 354,223 $ 279,837 4. Prepaids and Other Current Assets Prepaids and other current assets consisted of the following: September 30, December 31, 2022 2021 Prepaid chassis deposits $ 145,482 $ 98,618 Advanced payments and prepaid contracts 15,085 14,024 Other current assets 14,793 10,465 Total $ 175,360 $ 123,107 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: September 30, December 31, 2022 2021 Building and building improvements $ 72,670 $ 72,088 Information systems, office equipment and furniture 24,561 20,988 Internal-use computer software 26,285 25,700 Land and land improvements 14,463 15,663 Leasehold improvements 18,219 22,835 Machinery and manufacturing equipment 117,365 106,628 Transportation equipment 12,260 7,372 Total 285,823 271,274 Less: accumulated depreciation and amortization ( 86,255 ) ( 79,271 ) Property, plant and equipment, net $ 199,568 $ 192,003 At the end of March 2022, the Company retired approximately $6,717 in assets that were fully depreciated in response to the shutdown of our Watsonville, California facility. The Company’s long-lived assets by geographic location are as follows: September 30, December 31, 2022 2021 United States $ 167,206 $ 161,451 International 32,362 30,552 Total long-lived assets $ 199,568 $ 192,003 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 one to ten years , some of which include options to extend the lease term for up to ten years , and some of which include options to terminate the leases within one 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 5.12 years and the weighted-average incremental borrowing rate was 2.15 % as of September 30, 2022. Operating lease costs consisted of the following: For the three months ended For the nine months ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Operating lease cost $ 2,689 $ 2,387 $ 8,344 $ 6,440 Other lease costs (1) 799 339 2,789 961 Total $ 3,488 $ 2,726 $ 11,133 $ 7,401 (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 September 30, 2022 Operating lease right-of-use assets Lease right-of-use assets $ 41,524 Current lease liabilities Accrued expenses $ 9,807 Non-current lease liabilities Other liabilities $ 30,727 Maturities of lease liabilities by fiscal year for the Company's operating leases are as follows: For fiscal year Total future payments 2022 (remaining three months) $ 2,636 2023 10,452 2024 9,097 2025 6,859 2026 5,158 Thereafter 8,588 Total lease payments 42,790 Less: imputed interest ( 2,256 ) Present value of lease liabilities 40,534 Less: current portion ( 9,807 ) Lease liabilities less current portion $ 30,727 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: September 30, December 31, 2022 2021 Payroll and related expenses $ 35,953 $ 32,968 Current portion of lease liabilities 9,807 9,095 Warranty 16,241 15,510 Income tax payable 37,686 34,845 Accrued sales rebate 17,808 8,568 Current portion of non-controlling interest buyout liability — 2,700 Other accrued expenses 15,937 8,692 Total $ 133,432 $ 112,378 Activity related to warranties is as follows: For the three months ended For the nine months ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Beginning warranty liability $ 16,088 $ 13,650 $ 15,510 $ 9,835 Charge to cost of sales 2,812 4,422 8,261 11,753 Fair value of warranty assumed in acquisition — — — 150 Costs incurred ( 2,659 ) ( 2,523 ) ( 7,530 ) ( 6,189 ) Ending warranty liability $ 16,241 $ 15,549 $ 16,241 $ 15,549 8. Debt Prior Credit Facility In June 2019, the Company entered into a credit facility with Bank of America and other named lenders, which was 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, the "Prior Credit Facility"). The Prior Credit Facility (which was terminated on April 5, 2022 and replaced with the 2022 Credit Facility (as discussed below)), would have matured on March 11, 2025, and provided a senior secured revolving line of credit with a borrowing capacity of $250,000 and a term loan of $ 400,000 . The term loan was subject to quarterly amortization payments. 2022 Credit Facility On April 5, 2022, the Company entered into a new credit agreement with Wells Fargo Bank, National Association, and other named lenders (the "2022 Credit Facility"), and concurrently repaid in full and terminated the Prior Credit Facility. The 2022 Credit Facility, which matures on April 5, 2027, provides for revolving loans, swingline loans and letters of credit up to an aggregate amount of $ 650,000 . On April 5, 2022, the Company borrowed $ 475,000 under the 2022 Credit Facility, which was used to repay all outstanding amounts owed under the Prior Credit Facility and for general corporate purposes. Future advances under the 2022 Credit Facility will be used to finance working capital, capital expenditures and other general corporate purposes of the Company. To the extent not previously paid, all then-outstanding amounts under the 2022 Credit Facility are due and payable on the maturity date. 17 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) The Company paid $ 1,980 in debt issuance costs in connection with the 2022 Credit Facility, which were allocated to the line of credit and amortized on a straight-line basis over the term of the facility. Additionally, the Company had $ 4,473 of remaining unamortized debt issuance costs related to the Prior Credit Facility. The Company expensed $1,927 of the remaining unamortized debt issuance costs and allocated $2,546 to the 2022 Credit Facility. The Company may borrow, prepay and re-borrow principal under the 2022 Credit Facility during its term. Advances under the 2022 Credit Facility can be either Adjusted Term Secured Overnight Financing Rate ("SOFR") loans or base rate loans. SOFR rate revolving loans bear interest on the outstanding principal amount thereof for each interest period at a rate per annum equal to Term SOFR for such calculation plus 0.10 % plus a margin ranging from 1.00 % to 2.00 %. Base rate revolving loans bear interest on the outstanding principal amount thereof at a rate per annum equal to the highest of (i) Federal Funds Rate plus 0.50 %, (ii) the rate of interest in effect for such day as publicly announced from time to time by the lender as its “prime rate”, and (iii) Adjusted Term SOFR rate for a one-month tenor plus 1.00 %, subject to the interest rate floors set forth therein, plus a margin ranging from 0.00 % to 1.00 %. At September 30, 2022, the one-month SOFR and three-month SOFR rates were 2.47 % and 2.13%, respectively. At September 30, 2022, our weighted-average interest rate on outstanding borrowing was 3.72 %. The 2022 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 September 30, 2022. The following table summarizes the line of credit under the 2022 Credit Facility: September 30, 2022 Amount outstanding $ 325,000 Standby letters of credit — Available borrowing capacity 325,000 Total borrowing capacity $ 650,000 Maturity date April 5, 2027 On June 11, 2021, the Company entered into a swap agreement (the "2021 Swap Agreement") to obtain a more favorable interest rate and to manage interest rate risk exposure. On April 5, 2022, the Company terminated its 2021 Swap Agreement and entered into a new interest rate swap agreement (the "2022 Swap Agreement"). Through the 2022 Swap Agreement, the Company hedges the variability of cash flows in interest payments associated with $ 100,000 of its variable rate debt. Refer to Note 10 - Derivatives and Hedging for further details of this agreement. 18 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 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 - From time to time, the Company is involved in legal proceedings that arise in the ordinary course of business. Although the Company cannot assure the outcome of any such legal proceedings, based on information currently available, management does not believe that the ultimate resolution of any pending 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 was settled in quarterly installment payments beginning in July 2020 through July 2022, which amounted to $ 6,556 , $ 4,550 and $ 2,700 in 2020, 2021 and 2022, respectively. The Company paid $ 900 and $2,700 during the three and nine months ended September 30, 2022 and $ 900 and $3,650 during the three and nine months ended October 1, 2021, respectively. The Company had no remaining liability as of September 30, 2022. The stock portion of 136 shares were released from escrow on a quarterly basis starting January 2021 through July 2022. The Company released 19 and 58 shares of stock during the three and nine months ended September 30, 2022 and 19 and 58 shares of stock during the three and nine months ended October 1, 2021, respectively. The Company had no remaining shares to be released as of September 30, 2022. The exercise of the Call Option effectively canceled the put option held by Flagship, Inc. 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 London Interbank Offered Rate ("LIBOR") or SOFR over the lives of the agreements without an exchange of the underlying principal amounts. As of September 30, 2022 and December 31, 2021, the Company had the following interest rate swap contracts: September 30, 2022 December 31, 2021 Effective Date Termination Date Notional Amount Unrealized Gain in AOCI Unrealized Gain in AOCI September 2, 2020 June 11, 2021 $ 200,000 $ 211 $ 276 July 2, 2021 April 5, 2022 $ 200,000 10,221 3,583 April 5, 2022 April 5, 2027 $100,000 5,396 — Total $ 15,828 $ 3,859 19 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) On June 11, 2021, the Company terminated its existing swap agreement (the "2020 Swap Agreement") and entered into an interest rate swap agreement (the "2021 Swap Agreement") with a notional amount of $ 200,000 . On April 5, 2022, the Company terminated its 2021 Swap Agreement and entered into a new interest rate swap agreement (the "2022 Swap Agreement") with a notional amount of $ 100,000 . The terminated 2020 and 2021 Swap Agreements resulted in unrealized gains of $ 324 and $ 12,270 , respectively, at the termination dates 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 2022 Swap Agreement has a maturity date of April 5, 2027 and is indexed to a three-month Term SOFR (as defined in the 2022 Swap Agreement). The 2022 Swap Agreement met the criteria as a cash flow hedge under ASC 815, Derivatives and Hedging ("ASC 815"), and is recorded to other assets or other liabilities on the Condensed Consolidated Balance Sheets. 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, will be recorded in accumulated other comprehensive income, a component of equity, and are expected to be reclassified into interest expense on the Condensed Consolidated Statements of Income when the forecasted transactions affect earnings. As required under ASC 815, the interest rate swap contracts’ effectiveness will be assessed on a quarterly basis using a quantitative regression analysis. The gains and losses, net of tax, related to the derivative instruments designated as cash flow hedges recognized in accumulated other comprehensive income for the three and nine months ended September 30, 2022 were a gain of $ 2,563 and $ 9,296 , respectively; and for the three and nine months ended October 1, 2021 were a loss of $ 45 and a gain of $ 1,575 , respectively. Over the next twelve months, the Company expects to recognize $ 3,256 of the $ 15,828 of unrealized gains included in accumulated other comprehensive income related to the interest rate swap contracts. 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: September 30, 2022 December 31, 2021 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Interest Rate Swap $ — $ 5,396 $ — $ 5,396 $ — $ 3,583 $ — $ 3,583 Total assets measured at fair value $ — $ 5,396 $ — $ 5,396 $ — $ 3,583 $ — $ 3,583 Liabilities: Prior Credit Facility $ — $ — $ — $ — $ — $ 378,453 $ — $ 378,453 Total liabilities measured at fair value $ — $ — $ — $ — $ — $ 378,453 $ — $ 378,453 There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 categories of the fair value hierarchy during the three and nine month period ended September 30, 2022. As of December 31, 2021, the carrying amount of the principal under the Company’s Prior Credit Facility approximated fair value because it had a variable interest rate that reflected market changes in interest rates and changes in the Company’s net leverage ratio. The Prior Credit Facility was terminated on April 5, 2022 and replaced with the revolving 2022 Credit Facility. On June 11, 2021, the Company entered into the 2021 Swap Agreement to mitigate the cash flow risk associated with changes in interest rates on its variable rate debt. On April 5, 2022, the Company terminated its 2021 Swap Agreement and entered into the 2022 Swap Agreement. Refer to N ote 10 - Derivatives and Hedging for additional details of the agreement. In accordance with ASC 815, 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. 20 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 12. Stockholders' Equity 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 nine months ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Cost of sales $ 292 $ 203 $ 701 $ 514 Sales and marketing 227 215 680 580 Research and development 215 244 705 669 General and administrative 3,555 3,324 9,293 8,091 Total $ 4,289 $ 3,986 $ 11,379 $ 9,854 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 nine months ended October 1, 2021 upon the issuance of the underlying restricted stock units ("RSUs"). The following table summarizes the activity for the Company's unvested RSUs for the nine months ended September 30, 2022: Unvested RSUs Number of shares outstanding Weighted-average grant date fair value Unvested at December 31, 2021 338 $ 76.30 Granted 142 $ 95.33 Canceled ( 16 ) $ 78.24 Vested ( 162 ) $ 73.11 Unvested at September 30, 2022 302 $ 86.88 As of September 30, 2022, the Company had approximately $ 20,719 of unrecognized stock-based compensation expense related to RSUs, which will be recognized over the remaining weighted-average vesting period of approximately 1.96 years. During the nine months ended September 30, 2022, 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 Company considered it probable that the performance goals would be achieved, therefore the fair value of PSUs is calculated based on the stock price on the date of grant. 21 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) The following table summarizes the activity for the Company's unvested PSUs for the nine months ended September 30, 2022: Unvested PSUs Number of shares outstanding Weighted-average grant date fair value Unvested at December 31, 2021 29 $ 141.46 Granted 37 $ 120.90 Canceled (4) $ 126.73 Unvested at September 30, 2022 62 $ 130.14 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 $ 8,797 assuming achievement at the maximum level. The unrecognized stock-based compensation expense is expected to be recognized over a weighted average period of 1.83 years. For the nine months ended September 30, 2022, the Company had 153 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 nine months ended September 30, 2022, 33 shares of common stock were issued due to the exercise of stock options. As of September 30, 2022, stock-based compensation expense related to stock options has been fully recognized and there are no outstanding options to purchase common stock. 22 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 13. Income Taxes For the three months ended For the nine months ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Provision for income taxes $ 13,365 $ 9,764 $ 28,265 $ 20,538 Effective tax rates 20.8 % 18.2 % 15.7 % 14.0 % For the three months ended September 30, 2022, the difference between the Company's effective tax rate of 20.8 % and the 21 % federal statutory rate resulted primarily from a lower tax rate on foreign derived intangible income, partially offset by withholding and state taxes. For the nine months ended September 30, 2022, 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, and the impact of the recently finalized U.S. tax regulations published by the U.S. Treasury and Internal Revenue Service on January 4, 2022. These regulations limit the amount of newly generated foreign taxes that are creditable against U.S. income taxes, which resulted in a release of the Company’s valuation allowance against foreign tax credits due to the Company's ability to use foreign tax credit carryforwards that had previously been reserved against. These benefits were partially offset by withholding and state taxes. For the three months ended October 1, 2021, the difference between the Company's effective tax rate of 18.2 % 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 state taxes, an increase in the valuation allowance for foreign tax credits and non-deductible expenses. For the nine months ended October 1, 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 a benefit resulting from 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. 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. On August 16, 2022, the Inflation Reduction Act (the “IRA”) was signed into law in the U.S. Among other changes, the IRA introduced a corporate minimum tax on certain corporations with average adjusted financial statement income over a three-tax year period in excess of $1.0 billion and an excise tax on certain stock repurchases by certain covered corporations for taxable years beginning after December 31, 2022 and several tax incentives to promote clean energy. Based on our current analysis and pending future guidance to be issued by the U.S. Treasury and Internal Revenue Service, we do not believe these provisions will have a material impact on our consolidated financial statements. 14. Related Party Transactions 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 $ 469 and $1,089 of parts and vehicles and sold approximately $ 130 and $840 of upfit packages to the dealership during the three and nine months ended September 30, 2022, respectively. The Company purchased approximately $ 392 and $856 of parts and vehicles and sold approximately $ 217 and $467 of upfit packages to the dealership during the three and nine months ended October 1, 2021, respectively. The Company had $ 24 and $ 49 in accounts payable and accounts receivable as of September 30, 2022, respectively, and $ 123 and $ 57 in accounts payable and accounts receivable as of October 1, 2021, respectively, related to this dealership. 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 was settled in quarterly installment payments through July 2022. Refer to Note 9 - Commitments and Contingencies for additional details of this agreement. 23 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 15. Acquisitions 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. 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, d/b/a Outside Van ("Outside Van") a custom van conversion company. The total purchase price of $ 15,275 , net of cash acquired, was allocated to the net liabilities assumed of $ 1,057 , identifiable intangible assets of $ 5,560 and goodwill acquired of $ 10,772 , based on their respective fair values as of May 25, 2021, with the excess purchase price allocated to goodwill. The Company will amortize the acquired customer relationship and trade name assets over their expected useful lives of one and ten years, respectively. This purchase was accounted for as a business combination and was not material to the Company's financial statements. On December 30, 2021, the Company, through its wholly owned subsidiary, Shock Therapy Suspension, Inc., acquired substantially all the assets of Shock Therapy LLC ("STS"), for $ 36,834 , net of cash acquired. STS is a premier suspension tuning company in the off-road industry, with headquarters in Phoenix, Arizona. The purchase price of STS is allocated to the net assets assumed of $ 5,244 , identifiable intangible assets of $ 7,086 and goodwill acquired of $ 24,504 , based on their respective fair values as of December 30, 2021. The Company will amortize the acquired non-compete and trade name assets over their expected useful lives of five and ten years, respectively. The acquired goodwill represents the value of combining operations of STS and the company and is expected to be deductible for tax purposes. This purchase was accounted for as a business combination and was not material to the Company's financial statements. 24 Table of Contents