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 March 31, December 30, 2023 2022 Assets Current assets: Cash and cash equivalents $ 91,892 $ 145,250 Accounts receivable (net of allowances of $ 789 and $ 443 at March 31, 2023 and December 30, 2022, respectively) 195,313 200,440 Inventory 379,892 350,620 Prepaids and other current assets 214,572 101,364 Total current assets 881,669 797,674 Property, plant and equipment, net 210,304 202,215 Lease right-of-use assets 58,029 48,096 Deferred tax assets 56,739 57,339 Goodwill 380,906 323,978 Intangibles, net 226,083 178,980 Other assets 10,702 10,054 Total assets $ 1,824,432 $ 1,618,336 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 135,331 $ 131,160 Accrued expenses 118,305 127,729 Total current liabilities 253,636 258,889 Line of credit 360,000 200,000 Other liabilities 46,549 38,061 Total liabilities 660,185 496,950 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 March 31, 2023 and December 30, 2022 — — Common stock, $ 0.001 par value — 90,000 authorized; 43,193 shares issued and 42,303 outstanding as of March 31, 2023; 43,160 shares issued and 42,270 outstanding as of December 30, 2022 42 42 Additional paid-in capital 359,785 356,239 Treasury stock, at cost; 890 common shares as of March 31, 2023 and December 30, 2022 ( 13,754 ) ( 13,754 ) Accumulated other comprehensive income 12,330 14,782 Retained earnings 805,844 764,077 Total stockholders’ equity 1,164,247 1,121,386 Total liabilities and stockholders’ equity $ 1,824,432 $ 1,618,336 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 March 31, April 1, 2023 2022 Sales $ 399,851 $ 377,977 Cost of sales 266,553 257,717 Gross profit 133,298 120,260 Operating expenses: Sales and marketing 23,669 22,589 Research and development 15,282 12,642 General and administrative 33,761 25,567 Amortization of purchased intangibles 5,896 5,307 Total operating expenses 78,608 66,105 Income from operations 54,690 54,155 Interest and other expense, net: Interest expense 3,521 1,977 Other expense, net 24 1,692 Interest and other expense, net 3,545 3,669 Income before income taxes 51,145 50,486 Provision for income taxes 9,378 2,436 Net income $ 41,767 $ 48,050 Earnings per share: Basic $ 0.99 $ 1.14 Diluted $ 0.98 $ 1.13 Weighted-average shares used to compute earnings per share: Basic 42,298 42,144 Diluted 42,496 42,381 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 March 31, April 1, 2023 2022 Net income $ 41,767 $ 48,050 Other comprehensive (loss) income Interest rate swap, net of tax effects ( 3,063 ) 5,811 Foreign currency translation adjustments, net of tax effects 611 ( 1,068 ) Other comprehensive (loss) income ( 2,452 ) 4,743 Comprehensive income $ 39,315 $ 52,793 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 - 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 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 loss Retained earnings Total stockholders' equity Shares Amount Shares Amount Balance - December 30, 2022 43,160 $ 42 890 $ ( 13,754 ) $ 356,239 $ 14,782 $ 764,077 $ 1,121,386 Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding 33 — — — ( 2,155 ) — — ( 2,155 ) Stock-based compensation expense — — — — 5,701 — 5,701 Other comprehensive loss — — — — — ( 2,452 ) — ( 2,452 ) Net income — — — — — — 41,767 41,767 Balance - March 31, 2023 43,193 $ 42 890 $ ( 13,754 ) $ 359,785 $ 12,330 $ 805,844 $ 1,164,247 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 three months ended March 31, 2023 April 1, 2022 OPERATING ACTIVITIES: Net income $ 41,767 $ 48,050 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,315 11,897 Stock-based compensation 5,701 3,029 Amortization of loan fees 226 402 Amortization of deferred gains on prior swap settlements ( 1,063 ) ( 22 ) Amortization of inventory fair value step-up 3,064 — Deferred taxes 51 ( 10,083 ) Changes in operating assets and liabilities: Accounts receivable 9,350 ( 37,781 ) Inventory ( 8,588 ) ( 37,467 ) Income taxes ( 3,973 ) ( 4,982 ) Prepaids and other assets ( 112,220 ) ( 171,286 ) Accounts payable ( 6,684 ) 58,639 Accrued expenses and other liabilities ( 7,781 ) ( 3,521 ) Net cash used in operating activities ( 66,835 ) ( 143,125 ) INVESTING ACTIVITIES: Acquisitions of businesses ( 130,918 ) — Acquisition of other assets ( 2,300 ) — Purchases of property and equipment ( 11,118 ) ( 8,191 ) Net cash used in investing activities ( 144,336 ) ( 8,191 ) FINANCING ACTIVITIES: Proceeds from line of credit 190,000 109,336 Payments on line of credit ( 30,000 ) ( 66,484 ) Repayment of term debt — ( 2,500 ) Installment on purchase of non-controlling interest — ( 900 ) Repurchases from stock compensation program, net ( 2,156 ) ( 820 ) Net cash provided by financing activities 157,844 38,632 EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ( 31 ) 1,770 CHANGE IN CASH AND CASH EQUIVALENTS ( 53,358 ) ( 110,914 ) CASH AND CASH EQUIVALENTS—Beginning of period 145,250 179,686 CASH AND CASH EQUIVALENTS—End of period $ 91,892 $ 68,772 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 three months ended SUPPLEMENTAL CASH FLOW INFORMATION: March 31, 2023 April 1, 2022 Cash paid during the period for: Income taxes $ 13,460 $ 17,441 Cash paid for interest, net of capitalized interest $ 5,145 $ 1,619 Cash paid for amounts included in the measurement of lease liabilities $ 2,764 $ 2,713 Non-cash operating activities: Right-of-use assets obtained in exchange for lease obligations $ 12,743 $ 7,619 Non-cash investing and financing activities: Capital expenditures included in accounts payable $ 2,388 $ 4,406 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, and specialty vehicles and applications. 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 30, 2022 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 23, 2023. 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 2023 and 2022, the Company's fiscal year will end or has ended on December 29, 2023 and December 30, 2022, respectively. The twelve month periods ended December 29, 2023 and December 30, 2022, will include or have included 52 weeks. The three month periods ended March 31, 2023 and April 1, 2022 each included 13 weeks. Principles of Consolidation - These condensed consolidated financial statements include the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Summary of Significant Accounting Policies - There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 30, 2022, as filed with the SEC on February 23, 2023 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. Sales tax and other similar taxes are excluded from revenues. Revenues generated from upfit packages generally do not include the vehicle chassis, as the Company is not the principal in this arrangement and the automotive dealer purchases the chassis directly from the OEM. The Company is required to place a deposit on all vehicle chassis that the dealer purchases directly from the OEM, however that deposit is refunded when the chassis is sold through to the end customer. 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 three months ended April 1, 2022 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; 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 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 sufficient information to allow a user of the financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. The guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. These amendments will be applied retrospectively to each period in which a balance sheet is presented, except for the disclosure of rollforward information, which will be applied prospectively. The Company adopted the interim disclosure requirements, as applicable, during the first quarter of 2023 and will adopt the annual disclosure requirements, except for the annual rollforward, in our 2023 Annual Report on Form 10-K. The Company expects to adopt the annual rollforward requirement in our 2024 Annual Report on Form 10-K. Refer to the "Bailment Pool Arrangements" section within Note 9 - Commitments and Contingencies for further details of this adoption. 2. Revenues The following table summarizes total sales by product category: For the three months ended March 31, 2023 April 1, 2022 Powered Vehicles $ 280,964 $ 208,107 Specialty Sports 118,887 169,870 Total sales $ 399,851 $ 377,977 The following table summarizes total sales by sales channel: For the three months ended March 31, 2023 April 1, 2022 OEM $ 217,661 $ 201,265 Aftermarket 182,190 176,712 Total sales $ 399,851 $ 377,977 12 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) The following table summarizes total sales generated by geographic location of the customer: For the three months ended March 31, 2023 April 1, 2022 North America $ 291,910 $ 233,959 Asia 42,128 60,017 Europe 61,197 78,534 Rest of the world 4,616 5,467 Total sales $ 399,851 $ 377,977 3. Inventory Inventory consisted of the following: March 31, December 30, 2023 2022 Raw materials $ 259,346 $ 247,441 Work-in-process 10,380 9,959 Finished goods 110,166 93,220 Total inventory $ 379,892 $ 350,620 4. Prepaids and Other Current Assets Prepaids and other current assets consisted of the following: March 31, December 30, 2023 2022 Prepaid chassis deposits $ 178,421 $ 74,013 Advanced payments and prepaid contracts 24,025 13,598 Other current assets 12,126 13,753 Total $ 214,572 $ 101,364 13 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 5. Property, Plant and Equipment, net Property, plant and equipment, net consisted of the following: March 31, December 30, 2023 2022 Building and building improvements $ 74,061 $ 73,594 Information systems, office equipment and furniture 24,252 21,655 Internal-use computer software 31,491 30,290 Land and land improvements 14,499 14,493 Leasehold improvements 22,846 20,078 Machinery and manufacturing equipment 129,438 122,748 Transportation equipment 14,065 12,450 Total property, plant and equipment 310,652 295,308 Less: accumulated depreciation and amortization ( 100,348 ) ( 93,093 ) Total property, plant and equipment, net $ 210,304 $ 202,215 The Company’s long-lived assets by geographic location are as follows: March 31, December 30, 2023 2022 United States $ 174,901 $ 166,544 International 35,403 35,671 Total long-lived assets $ 210,304 $ 202,215 14 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 6. Leases The Company has operating lease agreements for administrative, research and development, manufacturing, and sales and marketing facilities. These leases have remaining lease terms ranging from one to eleven years , some of which include options to extend the lease term for up to eleven 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 6 years and the weighted-average incremental borrowing rate was 2.67 % as of March 31, 2023. Operating lease costs consisted of the following: For the three months ended March 31, 2023 April 1, 2022 Operating lease cost $ 3,098 $ 2,823 Other lease costs (1) 1,055 718 Total lease costs $ 4,153 $ 3,541 (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 March 31, 2023 Operating lease right-of-use assets Lease right-of-use assets $ 58,029 Current lease liabilities Accrued expenses $ 11,940 Non-current lease liabilities Other liabilities $ 45,798 Maturities of lease liabilities by fiscal year for the Company's operating leases are as follows: For fiscal year Total future payments 2023 (remaining nine months) $ 10,015 2024 13,078 2025 10,169 2026 8,522 2027 5,342 Thereafter 16,060 Total lease payments 63,186 Less: imputed interest ( 5,448 ) Present value of lease liabilities 57,738 Less: current portion ( 11,940 ) Lease liabilities less current portion $ 45,798 15 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 7. Accrued Expenses Accrued expenses consisted of the following: March 31, December 30, 2023 2022 Payroll and related expenses $ 26,037 $ 38,193 Current portion of lease liabilities 11,940 10,314 Warranty 18,224 17,071 Income tax payable 36,786 40,701 Accrued sales rebate 10,225 8,693 Other accrued expenses 15,093 12,757 Total $ 118,305 $ 127,729 Activity related to warranties is as follows: For the three months ended March 31, 2023 April 1, 2022 Beginning warranty liability $ 17,071 $ 15,510 Charge to cost of sales 3,626 3,127 Fair value of warranty assumed in acquisition 100 — Costs incurred ( 2,573 ) ( 2,644 ) Ending warranty liability $ 18,224 $ 15,993 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. 16 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 March 31, 2023, the one-month SOFR and three-month SOFR rates were 4.63 % and 4.51 %, respectively. At March 31, 2023, our weighted-average interest rate on outstanding borrowing was 5.38 %. 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 March 31, 2023. The following table summarizes the line of credit under the 2022 Credit Facility: March 31, December 30, 2023 2022 Amount outstanding $ 360,000 $ 200,000 Available borrowing capacity 290,000 $ 450,000 Total borrowing capacity $ 650,000 $ 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 the 2022 Swap Agreement. 17 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, either individually or in the aggregate, will have a material adverse effect on the Company's financial condition, results of operations or cash flows. Bailment Pool Arrangements - The Company has relationships with several OEM partners, including General Motors ("GM"), Ford Motor Company ("Ford"), and Chrysler to obtain truck chassis. For Chrysler chassis purchases, the Company pays a cash deposit upon transfer of the chassis to the Company’s premises, and records the chassis within prepaids and other current assets on the Consolidated Balance Sheet until the chassis is transferred to the dealer customer’s floorplan, at which time the cash deposit is returned to the Company. For GM and Ford, the Company has entered into floorplan financing agreements with the OEM. The Company receives an allocation of chassis and pays interest expense on the allocated value of trucks based on the duration of time they are on the Company’s premises. Bailment ends when the vehicle is sold to an authorized dealer, or upon authorized return of the vehicle to the manufacturer. The Company does not pay a cash deposit to obtain GM and Ford chassis, and accordingly it does not recognize an asset or a liability related to these chassis. Interest payments made to manufacturer-affiliated finance companies are classified as operating activities in the Consolidated Statements of Cash Flows. At March 31, 2023, the Company had utilized $ 10,470 out of a maximum of $ 26,200 of Ford allocation and $ 37,881 out of a maximum of $ 100,000 GM allocation. The company paid $ 1,401 of interest expense related to chassis on hand, and received interest credits from Chrysler of $ 426 resulting in net floorplan interest expense of $ 975 . 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 during the three months ended April 1, 2022. The Company had no remaining liability as of March 31, 2023. The stock portion of 136 shares were released from escrow on a quarterly basis starting January 2021 through July 2022. The Company released 19 shares of stock during the three months ended April 1, 2022. The Company had no remaining shares to be released as of March 31, 2023. The exercise of the Call Option effectively canceled the put option held by Flagship, Inc. 18 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 London Interbank Offered Rate ("LIBOR") or SOFR over the lives of the agreements without an exchange of the underlying principal amounts. As of March 31, 2023 and December 30, 2022, the Company had the following interest rate swap contracts: March 31, 2023 December 30, 2022 Effective Date Termination Date Notional Amount Unrealized Gain in AOCI Unrealized Gain in AOCI September 2, 2020 June 11, 2021 $ 200,000 $ 168 $ 189 July 2, 2021 April 5, 2022 $ 200,000 8,138 9,180 April 5, 2022 April 5, 2027 $ 100,000 3,659 5,087 Total $ 11,965 $ 14,456 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 effective portion of derivative instruments designated as cash flow hedges recognized in accumulated other comprehensive income for the three months ended March 31, 2023 and April 1, 2022 were a loss of $ 3,063 and a gain of $ 5,811 , respectively. Over the next twelve months, the Company expects to recognize $ 3,256 of the $ 11,965 of unrealized gains included in accumulated other comprehensive income related to the interest rate swap contracts. 19 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 11. Fair Value Measurements and Financial Instruments The following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the following periods: March 31, 2023 December 30, 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Interest Rate Swap $ — $ 3,659 $ — $ 3,659 $ — $ 5,087 $ — $ 5,087 Total assets measured at fair value $ — $ 3,659 $ — $ 3,659 $ — $ 5,087 $ — $ 5,087 There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 categories of the fair value hierarchy during the three month period ended March 31, 2023. 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 March 31, 2023 April 1, 2022 Cost of sales $ 242 $ 178 Sales and marketing 287 226 Research and development 240 228 General and administrative 4,932 2,397 Total $ 5,701 $ 3,029 The following table summarizes the activity for the Company's unvested RSUs for the three months ended March 31, 2023: Unvested RSUs Number of shares outstanding Weighted-average grant date fair value Unvested at December 30, 2022 297 $ 87.05 Granted 41 $ 119.13 Canceled ( 9 ) $ 88.24 Vested ( 26 ) $ 120.82 Unvested at March 31, 2023 304 $ 88.44 As of March 31, 2023, the Company had approximately $ 18,712 of unrecognized stock-based compensation expense related to RSUs, which will be recognized over the remaining weighted-average vesting period of approximately 1.91 years. During the three months ended March 31, 2023, 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 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. The following table summarizes the activity for the Company's unvested PSUs for the three months ended March 31, 2023: Unvested PSUs Number of shares outstanding Weighted-average grant date fair value Unvested at December 30, 2022 48 $ 126.69 Granted 38 $ 119.02 Unvested at March 31, 2023 86 $ 123.29 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 $ 14,891 assuming achievement at the maximum level. The unrecognized stock-based compensation expense is expected to be recognized over a weighted average period of 2.08 years. 21 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 13. Income Taxes For the three months ended March 31, 2023 April 1, 2022 Provision for income taxes $ 9,378 $ 2,436 Effective tax rates 18.3 % 4.8 % For the three months ended March 31, 2023, the difference between the Company's effective tax rate of 18.3 % and the 21 % federal statutory rate resulted primarily due to a lower tax rate on foreign derived intangible income. This benefit was partially offset by state and foreign withholding taxes. For the three months ended April 1, 2022, the difference between the Company's effective tax rate of 4.8 % and the 21% federal statutory rate resulted primarily from the impact of U.S. tax regulations published by the U.S. Treasury and Internal Revenue Service on January 4, 2022. These regulations limited 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. This benefit was partially offset by state taxes and other nondeductible 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 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 was an employee of the Company. The Company purchased approximately $ 211 and $ 281 of parts and vehicles and sold approximately $ 132 and $ 457 of upfit packages to the dealership during the three months ended March 31, 2023 and April 1, 2022, respectively. The Company had $ 54 and $ 17 in accounts payable and $ 78 and $ 27 in accounts receivable as of March 31, 2023 and April 1, 2022 respectively, related to this dealership. As of March 31, 2023, the employee is no longer employed with the Company. 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. 22 Table of Contents FOX FACTORY HOLDING CORP. Notes to Condensed Consolidated Financial Statements (in thousands, except per share amounts) (unaudited ) 15. Acquisitions On February 17, 2023 the Company entered into a Securities Purchase Agreement with CWH Holdco, LLC (“CWH”), CWH Blocker Corp., (“Blocker”), Thompson Street Capital Partners V, L.P., and each other member of CWH to purchase all of the outstanding equity of Blocker, and thereafter Blocker acquired all of the outstanding equity interest of CWH. CWH is the parent company of Custom Wheel House, LLC ("Custom Wheel House"). Custom Wheel House is a designer, marketer, and distributor of high-performance wheels, performance off-road tires, and accessories, including the premier flagship brand Method Race Wheels. The Company believes that this acquisition will be complementary to its upfitting businesses and will help to expand its product offerings. The total purchase price of $ 130,918 , net of cash acquired, was allocated to net assets of $ 21,001 , identified intangible assets of $ 53,000 , and goodwill of $ 56,917 . This acquisition was financed through a combination of cash on hand and the Company's existing 2022 Credit Facility. The Company's valuation is preliminary and subject to the Company's validation of the valuation of intangible assets, related deferred taxes, and finalization of working capital adjustments. The Company expects to amortize the acquired trade name, customer relationship and core technology assets over their expected useful lives that range between two and seven years. The acquired goodwill represents the value of combining operations of Custom Wheel House and the Company, and is expected to be partially deductible for tax purposes. The results of operations for Custom Wheel House have been included in the Company's Consolidated Statements of Income since the closing date of the acquisition on March 3, 2023. The total revenue and net loss from operations included since the date of acquisition through March 31, 2023 amounted to $ 6,937 and $ 2,039 , respectively. This purchase was accounted for as a business combination. 23 Table of Contents