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 30, 2022, as filed with the U.S. Securities and Exchange Commission ("SEC") on February 23, 2023, 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; 24 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 2022 Annual Report on Form 10-K, as filed with the SEC on February 23, 2023, 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 There have been no changes to the critical accounting policies and estimates 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. 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. 25 Table of Contents Results of Operations The table below summarizes our results of operations: For the three months ended (in thousands) March 31, 2023 April 1, 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 26 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 March 31, 2023 April 1, 2022 Sales 100.0 % 100.0 % Cost of sales 66.7 68.2 Gross profit 33.3 31.8 Operating expenses: Sales and marketing 5.9 6.0 Research and development 3.8 3.3 General and administrative 8.4 6.8 Amortization of purchased intangibles 1.5 1.4 Total operating expenses 19.7 17.5 Income from operations 13.7 14.3 Interest and other expense, net: Interest expense 0.9 0.5 Other expense, net — 0.4 Interest and other expense, net 0.9 1.0 Income before income taxes 12.8 13.4 Provision for income taxes 2.3 0.6 Net income 10.4 % 12.7 % *Percentages may not foot due to rounding. 27 Table of Contents Three months ended March 31, 2023 compared to three months ended April 1, 2022 Sales For the three months ended (in millions) March 31, 2023 April 1, 2022 Change ($) Change (%) Powered Vehicle products $ 281.0 $ 208.1 $ 72.9 35.0 % Specialty Sports products 118.9 169.9 (51.0) (30.0) Total sales $ 399.9 $ 378.0 $ 21.9 5.8 % Total sales for the three months ended March 31, 2023 increased approximately $21.9 million, or 5.8%, compared to the three months ended April 1, 2022. Powered Vehicle product sales increased by $72.9 million, or 35.0%, due to increased demand in the OEM channel and strong performance in our upfitting product lines. Specialty Sports product sales decreased by $51.0 million, or 30.0%, driven by a return to seasonality and pre-pandemic market conditions. Cost of sales For the three months ended (in millions) March 31, 2023 April 1, 2022 Change ($) Change (%) Cost of sales $ 266.6 $ 257.7 $ 8.9 3.5 % Cost of sales for the three months ended March 31, 2023 increased approximately $8.9 million, or 3.5%, compared to the three months ended April 1, 2022. The increase in cost of sales was primarily due to the 5.8% increase in sales in the same period, as well as certain business factors affecting gross margin, which are discussed below. For the three months ended March 31, 2023, our gross margin increased 150 basis points to 33.3% compared to 31.8% for the three months ended April 1, 2022. The increase in gross margin was primarily due to lower materials and other related costs, increased efficiencies at our North American facilities and strong performance in our upfitting product lines. Operating expenses For the three months ended (in millions) March 31, 2023 April 1, 2022 Change ($) Change (%) Operating expenses: Sales and marketing $ 23.7 $ 22.6 $ 1.1 4.9 % Research and development 15.3 12.6 2.7 21.4 General and administrative 33.7 25.6 8.1 31.6 Amortization of purchased intangibles 5.9 5.3 0.6 11.3 Total operating expenses $ 78.6 $ 66.1 $ 12.5 18.9 % Total operating expenses for the three months ended March 31, 2023 were $78.6 million compared to $66.1 million for the three months ended April 1, 2022. The increase in operating expenses is primarily due to higher employee benefits related costs, legal and professional fees, and insurance and facility-related expenses, partially offset by lower acquisition-related compensation and various other costs. Within operating expenses, sales and marketing expenses increased approximately $1.1 million primarily due to higher commission costs. Research and development costs increased approximately $2.7 million primarily due to personnel investments to support future growth and product innovation. General and administrative expenses increased by approximately $8.1 million due to higher employee headcount and benefits-related costs of $6.2 million, legal and professional fees of $2.5 million, insurance and facilities related expenses of $2.0 million, partially offset by lower acquisition-related compensation and other costs of $2.6 million. 28 Table of Contents Income from operations For the three months ended (in millions) March 31, 2023 April 1, 2022 Change ($) Change (%) Income from operations $ 54.7 $ 54.2 $ 0.5 0.9 % As a result of the factors discussed above, income from operations for the three months ended March 31, 2023 increased approximately $0.5 million, or 0.9%, compared to income from operations for the three months ended April 1, 2022. Interest and other (income) expense, net For the three months ended (in millions) March 31, 2023 April 1, 2022 Change ($) Change (%) Interest and other expense, net: Interest expense $ 3.5 $ 2.0 $ 1.5 75.0 % Other expense, net — 1.7 (1.7) (100.0) Interest and other expense, net $ 3.5 $ 3.7 $ (0.2) (5.4) % Interest and other expense, net for the three months ended March 31, 2023 decreased by $0.2 million to $3.5 million compared to $3.7 million for the three months ended April 1, 2022. Other expense, net decreased $1.7 million primarily due lower losses on foreign currency transactions. Interest expense increased by $1.5 million due to higher outstanding borrowings on our line of credit used to finance our purchase of Custom Wheel House, which occurred in February 2023, as well as higher interest rates. Income taxes For the three months ended (in millions) March 31, 2023 April 1, 2022 Change ($) Change (%) Provision for income taxes $ 9.4 $ 2.4 $ 7.0 291.7 % The effective tax rates were 18.3% and 4.8% for the three month periods ended March 31, 2023 and April 1, 2022, respectively. 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 our 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 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. This benefit was partially offset by state taxes and other nondeductible expenses. Net income For the three months ended (in millions) March 31, 2023 April 1, 2022 Change ($) Change (%) Net income $ 41.8 $ 48.1 $ (6.3) (13.1) % As a result of the factors described above, our net income decreased $6.3 million, or 13.1%, to $41.8 million in the three months ended March 31, 2023 from $48.1 million for the three months ended April 1, 2022. 29 Table of Contents 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, 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 March 31, 2023, we held $45.7 million of our $91.9 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 three months ended (in thousands) March 31, 2023 April 1, 2022 Net cash used in operating activities $ (66,835) $ (143,125) Net cash used in investing activities (144,336) (8,191) 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) 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 used in 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, amortization of inventory fair value step-up, 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 three months ended March 31, 2023, net cash used in operating activities was $66.8 million and consisted of net income of $41.8 million, plus non-cash items totaling $21.3 million, offset by changes in operating assets and liabilities totaling $129.9 million. Non-cash items and other adjustments consisted of depreciation and amortization of $13.3 million, stock-based compensation of $5.7 million, the amortization of inventory fair value step-up of $3.1 million, the amortization of loan fees of $0.2 million, and a $0.1 million change in deferred taxes, partially offset by the amortization of deferred gains on swap agreements of $1.1 million. Our investment in operating assets and liabilities is a result of increases in prepaids and other assets of $112.2 million, inventory of $8.6 million, and decreases in accrued expenses and other liabilities of $7.8 million, accounts payable of $6.7 million and income taxes payable of $4.0 million, partially offset by a decrease in accounts receivable of $9.4 million. The change in prepaids and other assets is primarily due to a higher supply of chassis as we ramp up to meet current year production needs for our upfitting product line. The increase in inventory is primarily due to our recent acquisition of Custom Wheel House in February 2023. The change in accrued expenses and other liabilities is primarily due to payments made for compensation and tax related accruals in the first quarter. The changes in accounts payable and account receivable reflect the timing of customer collections and vendor payments. 30 Table of Contents In the three months ended April 1, 2022, net cash used in operating activities was $143.1 million and consisted of net income of $48.1 million, plus non-cash items totaling $5.1 million, offset by changes in operating assets and liabilities totaling $196.3 million. Non-cash items and other adjustments consisted of depreciation and amortization of $11.9 million, stock-based compensation of $3.0 million, and amortization of loan fees of $0.4 million, offset by a $10.1 million change in deferred taxes and the amortization of deferred gains on swap agreements of $0.1 million. Our investment in operating assets and liabilities is a result of increases in prepaids and other assets of $171.3 million, accounts receivable of $37.6 million, inventory of $37.5 million, and decreases in income taxes of $5.0 million and accrued expenses of $3.5 million, partially offset by an increase in accounts payable of $58.6 million. 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 inventory is due to additional raw materials purchases to mitigate risks associated with supply chain uncertainty. The changes in accounts receivable and accounts payable reflect business growth and the timing of vendor payments. The changes in accrued expenses and income taxes reflect lower compensation related accruals and income taxes payable due to business growth and the timing of such payments. 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 three months ended March 31, 2023 and April 1, 2022, net cash used in investing activities consisted of $144.3 million and $8.2 million, respectively. Investing activities for the three months ended March 31, 2023 consisted of $130.9 million of cash consideration for our purchase of Custom Wheel House, $11.1 million of property and equipment additions and $2.3 million in cash consideration for our purchase of other assets. Investing activities for the three months ended April 1, 2022 consisted of $8.2 million of property and equipment additions. Financing activities Cash provided by financing activities primarily relate to various forms of debt and equity instruments used to finance our business. In the three months ended March 31, 2023, net cash provided by financing activities was $157.8 million, and consisted of the net proceeds from our 2022 Credit Facility of $160.0 million that were used to finance our purchase of Custom Wheel House, partially offset by payments of $2.2 million to repurchase shares of our common stock from our stock-based compensation program. In the three months ended April 1, 2022, net cash provided by financing activities was $38.6 million, which consisted of net proceeds from our Prior Credit Facility of $42.9 million, which were partially offset by payments on our term debt of $2.5 million, $0.9 million in installment payments related to the purchase of the Tuscany non-controlling interest and payments of $0.8 million to repurchase shares of our common stock, net of proceeds from our stock-based compensation program. Refer to Note 9 - Commitments and Contingencies for additional information on our purchase of the Tuscany non-controlling interest. 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. 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. On April 5, 2022, the Company borrowed $475.0 million 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. 31 Table of Contents 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 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. 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 30, 2022, as filed with the SEC on February 23, 2023. Inflation Historically, inflation has not had a material effect on our results of operations. However, significant increases in inflation, particularly those related to wages and increases in the cost of raw materials could have an adverse impact on our business, financial condition and results of operations. 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 30, 2022, as filed with the SEC on February 23, 2023. 32 Table of Contents