FOX FACTORY HOLDING CORP 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited condensed consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the U.S. Securities and Exchange Commission ("SEC") on February 24, 2022, and our other reports and registration statements that we file with the SEC from time to time. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section included in Part II, Item 1A. Unless the context otherwise requires, the terms “FOX,” the “Company,” “we,” “us,” and “our” in this Quarterly Report on Form 10-Q refer to Fox Factory Holding Corp. and its operating subsidiaries on a consolidated basis. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q includes forward-looking statements, which are subject to the “safe harbor” created by Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We may make forward-looking statements in our SEC filings, press releases, news articles, earnings presentations and when we are speaking on behalf of the Company. Forward-looking statements generally relate to future events or our future financial or operating performance that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements because they contain words such as “may,” “might,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “likely,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to numerous risks and uncertainties, including but not limited to risks related to: • the spread of highly infectious or contagious disease, such as COVID-19, could cause severe disruptions in the U.S. and global economy, which could in turn disrupt the business activities and operations of our customers, as well as our businesses and operations; • changes in general economic conditions, including market and macro-economic disruptions resulting from escalating tensions between China and Taiwan, the Russian invasion of Ukraine or due to growing inflation or higher interest rates; • our dependency on a limited number of suppliers for materials, product parts, and vehicle chassis could lead to an increase in material costs, disruptions in our supply chain, or reputational costs; • our ability to develop new and innovative products in our current end-markets; • our ability to leverage our technologies and brand to expand into new categories and end-markets; • our ability to increase our aftermarket penetration; • our ability to accelerate international growth; • our exposure to exchange rate fluctuations; • the loss of key customers; • our ability to improve operating and supply chain efficiencies; • our ability to enforce our intellectual property rights; • our future financial performance, including our sales, cost of sales, gross profit or gross margins, operating expenses, ability to generate positive cash flow and ability to maintain our profitability; • our ability to maintain our premium brand image and high-performance products; • our ability to maintain relationships with the professional athletes and race teams we sponsor; • our ability to selectively add additional dealers and distributors in certain geographic markets; • the growth of the markets in which we compete, our expectations regarding consumer preferences and our ability to respond to changes in consumer preferences; • changes in demand for performance-defining products; 25 Table of Contents • the loss of key personnel, management and skilled engineers; • our ability to successfully identify, evaluate and manage potential or completed acquisitions and to benefit from such acquisitions; • the outcome of pending litigation; • future disruptions in the operations of our manufacturing facilities; • our ability to adapt our business model to mitigate the impact of certain changes in tax laws; • changes in the relative proportion of profit earned in the numerous jurisdictions in which we do business and in tax legislation, case law and other authoritative guidance in those jurisdictions; • product recalls and product liability claims; and • future economic or market conditions. You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects and the outcomes of any of the events described in any forward-looking statements are subject to risks, uncertainties, and other factors. In addition to the risks, uncertainties and other factors discussed above and elsewhere in this Quarterly Report on Form 10-Q, the risks, uncertainties and other factors expressed or implied in Part I, Item 1A. "Risk Factors" of our 2021 Annual Report on Form 10-K, as filed with the SEC on February 24, 2022, could cause or contribute to actual results differing materially from those set forth in any forward-looking statement. Moreover, we operate in a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur. Actual results, events, or circumstances could differ materially from those contemplated by, set forth in, or underlying any forward-looking statements. For all of these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements in Section 27A of the Securities Act and Section 21E of the Exchange Act. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. Critical Accounting Policies and Estimates In the first quarter of 2022, final tax regulations regarding foreign tax credits (“FTC”) were published in the Federal Register. These final FTC regulations apply to foreign taxes paid or accrued in taxable years beginning on or after December 28, 2021. The new regulations narrow the definition of withholding taxes that are eligible for an FTC by imposing a new source-based jurisdictional nexus or “attribution” requirement. The application of these final FTC regulations makes it more likely than not that all of our foreign tax credits will be realizable before their expiration, therefore the Company released its partial valuation allowance of $9.2 million in the first quarter of 2022. There have been no other changes to the critical accounting policies and estimates 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. Recent Accounting Pronouncements See Note 1 - Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further details regarding this topic. 26 Table of Contents Results of Operations The table below summarizes our results of operations: For the three months ended For the nine months ended (in thousands) September 30, 2022 October 1, 2021 September 30, 2022 October 1, 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 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 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 27 Table of Contents The following table sets forth selected statement of income data as a percentage of sales for the periods indicated: For the three months ended For the nine months ended September 30, 2022 October 1, 2021 September 30, 2022 October 1, 2021 Sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 66.5 66.6 66.5 66.0 Gross profit 33.5 33.4 33.5 34.0 Operating expenses: Sales and marketing 5.7 5.0 5.9 5.5 Research and development 3.4 3.5 3.4 3.5 General and administrative 7.1 7.4 7.0 7.3 Amortization of purchased intangibles 1.3 1.5 1.4 1.6 Total operating expenses 17.6 17.5 17.6 17.9 Income from operations 16.0 15.9 15.9 16.1 Interest and other expense, net: Interest expense 0.7 0.5 0.5 0.7 Other (income) expense, net (0.4) (0.1) 0.3 0.1 Interest and other expense, net 0.3 0.5 0.8 0.8 Income before income taxes 15.7 15.4 15.1 15.3 Provision for income taxes 3.3 2.8 2.4 2.1 Net income 12.4 % 12.6 % 12.8 % 13.2 % *Percentages may not foot due to rounding. 28 Table of Contents Three months ended September 30, 2022 compared to three months ended October 1, 2021 Sales For the three months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Powered Vehicle products $ 235.2 $ 188.0 $ 47.2 25.1 % Specialty Sports products 174.0 159.4 14.6 9.1 Total sales $ 409.2 $ 347.4 $ 61.8 17.8 % Total sales for the three months ended September 30, 2022 increased approximately $61.8 million, or 17.8%, compared to the three months ended October 1, 2021. Powered Vehicle product sales increased by $47.2 million, or 25.1%, due to strong performance in our upfitting product lines and increased demand in the OEM channel. Specialty Sports product sales increased by $14.6 million, or 9.1%, driven by continued strong demand in the OEM channel. Cost of sales For the three months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Cost of sales $ 271.9 $ 231.4 $ 40.5 17.5 % Cost of sales for the three months ended September 30, 2022 increased approximately $40.5 million, or 17.5%, compared to the three months ended October 1, 2021. The increase in cost of sales was primarily due to the 17.8% increase in sales in the same period, as well as certain business factors affecting gross margin, which are discussed below. For the three months ended September 30, 2022, our gross margin increased 10 basis points to 33.5% compared to 33.4% for the three months ended October 1, 2021. The increase in gross margin was primarily due to favorable product mix and improved factory efficiencies at our Gainesville, Georgia facility. Operating expenses For the three months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Operating expenses: Sales and marketing $ 23.5 $ 17.5 $ 6.0 34.3 % Research and development 14.0 12.3 1.7 13.8 General and administrative 29.1 25.7 3.4 13.2 Amortization of purchased intangibles 5.3 5.3 — — Total operating expenses $ 71.9 $ 60.8 $ 11.1 18.3 % Total operating expenses for the three months ended September 30, 2022 were $71.9 million compared to $60.8 million for the three months ended October 1, 2021. The increase in operating expenses is primarily due to higher employee related costs, insurance and facility-related expenses, commission costs and professional fees. Within operating expenses, sales and marketing expenses increased approximately $6.0 million primarily due to higher commissions of $2.9 million and employee related costs of $1.6 million, as well as increases in various other costs. Research and development costs increased approximately $1.7 million primarily due to personnel investments to support future growth and product innovation. General and administrative expenses increased by approximately $3.4 million due to higher employee related costs of $1.7 million, professional fees of $1.0 million, as well as increases in insurance and facility-related expenses of $0.7 million. 29 Table of Contents Income from operations For the three months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Income from operations $ 65.4 $ 55.2 $ 10.2 18.5 % As a result of the factors discussed above, income from operations for the three months ended September 30, 2022 increased approximately $10.2 million, or 18.5%, compared to income from operations for the three months ended October 1, 2021. Interest and other (income) expense, net For the three months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Interest and other (income) expense, net: Interest expense $ 2.7 $ 1.8 $ 0.9 50.0 % Other (income) expense, net (1.4) (0.2) (1.2) 600.0 % Interest and other (income) expense, net $ 1.3 $ 1.6 $ (0.3) (18.8) % Interest and other (income) expense, net for the three months ended September 30, 2022 decreased by $0.3 million to $1.3 million compared to $1.6 million for the three months ended October 1, 2021. Other (income) expense, net increased $1.2 million primarily due to a gain from the sale of a land asset in the third quarter of 2022, partially offset by increased losses on foreign currency transactions. Interest expense increased by $0.9 million due to higher interest rates. Income taxes For the three months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Provision for income taxes $ 13.4 $ 9.8 $ 3.6 36.7 % The effective tax rates were 20.8% and 18.2% for the three month periods ended September 30, 2022 and October 1, 2021, respectively. 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 three months ended October 1, 2021, the difference between our 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. Net income For the three months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Net income $ 50.8 $ 43.8 $ 7.0 16.0 % As a result of the factors described above, our net income increased $7.0 million, or 16.0%, to $50.8 million in the three months ended September 30, 2022 from $43.8 million for the three months ended October 1, 2021. 30 Table of Contents Nine months ended September 30, 2022 compared to nine months ended October 1, 2021 Sales For the nine months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Powered Vehicle products $ 672.3 $ 540.2 $ 132.1 24.5 % Specialty Sports products 521.5 416.6 104.9 25.2 Total sales $ 1,193.8 $ 956.8 $ 237.0 24.8 % Total sales for the nine months ended September 30, 2022 increased approximately $237.0 million, or 24.8%, compared to the nine months ended October 1, 2021. Specialty Sports product sales increased by $104.9 million, or 25.2%, due to continued strong demand in the OEM channel. Powered Vehicle product sales increased by $132.1 million, or 24.5%, due to strong performance in our upfitting product lines and increased demand in the OEM channel. Cost of sales For the nine months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Cost of sales $ 793.4 $ 631.7 $ 161.7 25.6 % Cost of sales for the nine months ended September 30, 2022 increased approximately $161.7 million, or 25.6%, compared to the nine months ended October 1, 2021. The increase in cost of sales was primarily due to the 24.8% increase in sales in the same period, as well as certain business factors affecting gross margin, which are discussed below. For the nine months ended September 30, 2022, our gross margin decreased 50 basis points to 33.5% compared to 34.0% for the nine months ended October 1, 2021. The decrease in gross margin was primarily driven by continued increases in supply chain related costs, including increased prices for raw materials. Additionally, the completion of the planned shutdown of our Watsonville, California facility and transition of those production lines resulted in inefficiencies as we ramp up our Gainesville, Georgia facility. Operating expenses For the nine months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Operating expenses: Sales and marketing $ 70.3 $ 52.2 $ 18.1 34.7 % Research and development 40.8 33.4 7.4 22.2 General and administrative 83.2 70.2 13.0 18.5 Amortization of purchased intangibles 16.2 15.4 0.8 5.2 Total operating expenses $ 210.5 $ 171.2 $ 39.3 23.0 % Total operating expenses for the nine months ended September 30, 2022 were $210.5 million compared to $171.2 million for the nine months ended October 1, 2021. The increase in operating expenses is primarily due to higher employee related costs, insurance and facility-related expenses and commissions costs, partially offset by lower acquisition related compensation. 31 Table of Contents Within operating expenses, sales and marketing expenses increased approximately $18.1 million primarily due to higher commissions of $7.9 million, employee related costs of $5.4 million, and marketing expenses of $4.2 million. Research and development costs increased approximately $7.4 million primarily due to personnel investments to support future growth and product innovation. General and administrative expenses increased by approximately $13.0 million due to higher employee related costs of $5.2 million, insurance and facility-related costs of $4.3 million, and professional fees of $4.0 million, which were partially offset by lower acquisition related compensation and other related costs. Income from operations For the nine months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Income from operations $ 190.0 $ 153.8 $ 36.2 23.5 % As a result of the factors discussed above, income from operations for the nine months ended September 30, 2022 increased approximately $36.2 million, or 23.5%, compared to income from operations for the nine months ended October 1, 2021. Interest and other (income) expense, net For the nine months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Interest and other (income) expense, net: Interest expense $ 6.3 $ 6.3 $ — — % Other (income) expense, net 3.1 0.9 2.2 244.4 % Interest and other (income) expense, net $ 9.4 $ 7.2 $ 2.2 30.6 % Interest and other expense, net for the nine months ended September 30, 2022 increased by $2.2 million to $9.4 million compared to $7.2 million for the nine months ended October 1, 2021. The increase in other expense, net is primarily due to $1.9 million of unamortized loan fees that were written off in the second quarter of fiscal year 2022, as well as losses on foreign currency transactions, partially offset by the sale of a land asset in the third quarter of 2022. Income taxes For the nine months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Provision for income taxes $ 28.3 $ 20.5 $ 7.8 38.0 % The effective tax rates were 15.7% and 14.0% for the nine month periods ended September 30, 2022 and October 1, 2021, respectively. For the nine months ended September 30, 2022, the difference between the Company's effective tax rate of 15.7% 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 nine months ended October 1, 2021, the difference between our effective tax rate of 14.0% 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. 32 Table of Contents Net income For the nine months ended (in millions) September 30, 2022 October 1, 2021 Change ($) Change (%) Net income $ 152.3 $ 126.1 $ 26.2 20.8 % As a result of the factors described above, our net income increased $26.2 million, or 20.8%, to $152.3 million in the nine months ended September 30, 2022 from $126.1 million for the nine months ended October 1, 2021. Liquidity and Capital Resources Our primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. Historically, we have generally financed our liquidity needs with operating cash flows, borrowings under our Prior Credit Facility and our 2022 Credit Facility, and the issuance of common stock. These sources of liquidity may be impacted by various factors, including demand for our products, impacts of the COVID-19 pandemic, investments made by us in acquired businesses, our plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology. As of September 30, 2022, we held $55.6 million of our $153.1 million of cash and cash equivalents in accounts of our subsidiaries outside of the U.S., which we may repatriate. We manage our foreign cash, intercompany payables and intercompany debt to provide a foreign currency hedge against U.S. dollar-denominated trade receivable balances held by our Taiwan location. A summary of our operating, investing and financing activities is shown in the following table: For the nine months ended (in thousands) September 30, 2022 October 1, 2021 Net cash provided by operating activities $ 57,035 $ 148,983 Net cash used in investing activities (32,379) (55,559) 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 We expect that cash on hand, cash flow from operations and availability under our 2022 Credit Facility will be sufficient to fund our operations during the next 12 months from the date of this Form 10-Q and beyond. Operating activities Cash provided by operating activities consists of net income, adjusted for certain non-cash items, primarily depreciation and amortization, stock-based compensation, the write off of unamortized loan origination fees, amortization of loan fees, amortization of deferred gains on swap agreements, gains received from disposals of property, plant and equipment, changes in deferred income taxes and uncertain tax positions, and net cash invested in working capital. In the nine months ended September 30, 2022, net cash provided by operating activities was $57.0 million and consisted of net income of $152.3 million, plus non-cash items totaling $34.5 million, offset by changes in operating assets and liabilities totaling $129.8 million. Non-cash items and other adjustments consisted of depreciation and amortization of $36.8 million, stock-based compensation of $11.4 million, the write off of unamortized loan origination fees of $1.9 million, the amortization of loan fees of $0.9 million, partially offset by a $12.5 million change in deferred taxes, the amortization of deferred gains on swap agreements of $2.1 million and gains of $1.8 million received from the disposals of property, plant and equipment. 33 Table of Contents Our investment in operating assets and liabilities is a result of increases in inventory of $84.8 million, accounts receivable of $60.0 million, and prepaids and other assets of $55.0 million, partially offset by an increase in accounts payable of $43.4 million, accrued expenses and other liabilities of $22.4 million and income taxes payable of $4.2 million. The change in inventory is due to several factors, including receipt of long lead time items that had been delayed, higher levels of safety stock to mitigate uncertainty and the result of normal growth to meet anticipated demand. The changes in accounts receivable and accounts payable reflect business growth and the timing of vendor payments. The change in prepaids and other assets is due to increased chassis deposits to secure supply for our upfitting business for the remainder of the year. The change in accrued expenses and other liabilities and income taxes is due to increases in sales rebates, compensation related accruals and income taxes payables, as well as normal business growth and the timing of such payments. In the nine months ended October 1, 2021, net cash provided by operating activities was $149.0 million and consisted of net income of $126.1 million, plus non-cash items totaling $42.1 million, offset by changes in operating assets and liabilities totaling $19.2 million. Non-cash items and other adjustments consisted of depreciation and amortization of $31.9 million, stock-based compensation of $9.9 million, amortization of loan fees of $1.2 million, and gains of $0.4 million received from the disposals of property, plant and equipment, partially offset by a $1.2 million change in deferred taxes and uncertain tax positions, and amortization of deferred gains on swap agreements of $0.1 million. Our investment in operating assets and liabilities is a result of increased inventory of $116.8 million, and accounts receivable of $37.9 million, partially offset by increases in accounts payable of $66.1 million, accrued expenses and other liabilities of $25.9 million, and income taxes of $8.3 million and a decrease in prepaids and other assets of $35.2 million. The changes in inventory and accounts payable are primarily due to additional raw materials purchased to mitigate risks associated with supply chain uncertainty. The change in accounts receivable reflects business growth. The changes in accrued expenses and other liabilities and income taxes reflect higher compensation related accruals, warranty reserves, sales rebates and income taxes payable due to both business growth, as well as the timing of such payments. The change in prepaids and other assets are primarily due to a decrease in deposits on chassis. Investing activities Cash used in investing activities primarily relates to investments in our manufacturing and general infrastructure through the procurement of property and equipment and strategic acquisitions of businesses and other assets. In the nine months ended September 30, 2022 and October 1, 2021, net cash used in investing activities consisted of $32.4 million and $55.6 million, respectively. Investing activities for the nine months ended September 30, 2022 consisted of $35.6 million of property and equipment additions, partially offset by proceeds from the sale of property and equipment of $3.2 million. Investing activities for the nine months ended October 1, 2021 consisted of $40.0 million of property and equipment additions and $15.7 million of cash consideration for our purchases of Outside Van and Sola Sport Pty Ltd, partially offset by $0.1 million in proceeds from the sale of property and equipment. Financing activities Cash used in financing activities primarily relate to various forms of debt and equity instruments used to finance our business. In the nine months ended September 30, 2022, net cash used in financing activities was $54.0 million, and consisted of the repayment of our term debt upon the refinancing of our Prior Credit Facility of $382.5 million, payments made on our line of credit of $259.3 million, payments of $4.1 million to repurchase shares of our common stock, net of proceeds from our stock-based compensation program, and $2.7 million in installment payments related to the purchase of the Tuscany non-controlling interest. These changes were partially offset by net proceeds from our 2022 Credit Facility of $582.4 million, which was used to refinance our Prior Credit Facility, and proceeds from the termination of our 2021 Swap Agreement of $12.3 million. In the nine months ended October 1, 2021, net cash used in financing activities was $20.0 million, which consisted of payments on our term debt of $10.0 million, payments of $6.6 million to repurchase shares of our common stock, net of proceeds from the exercise of stock options, $3.7 million in installment payments related to the purchase of the Tuscany non-controlling interest, partially offset by $0.3 million in proceeds received from the termination of our 2020 Swap Agreement. 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 $250.0 million and a term loan of $400.0 million. The term loan was subject to quarterly amortization payments. 34 Table of Contents 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 $650.0 million. The Company paid $2.0 million 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 $4.5 million of remaining unamortized debt issuance costs related to the Prior Credit Facility. The Company expensed $1.9 million of the remaining unamortized debt issuance costs and allocated $2.5 million 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 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. Material Cash Requirements There have been no material changes to the information in our material cash requirements related to commitments or contractual obligations from those reported 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. Inflation Historically, inflation has not had a material effect on our results of operations. However, we have recently experienced a rise in raw material costs, supply constraints, labor availability issues and logistical cost increases and our expectation is that these impacts will continue throughout 2022 and into 2023. While we are currently taking actions to mitigate these impacts, should these actions be unsuccessful or should such costs exceed what we can effectively mitigate, our business, financial condition and results of operations could be adversely impacted. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the disclosures discussed in the section “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 24, 2022. 35 Table of Contents