FOX Factory Holding Corp. — Form 10-Q Summary
Period clarification: The request metadata says “2020 Q3,” but the supplied filing is for the 13 weeks and nine months ended October 1, 2021, with comparisons to periods ended October 2, 2020. The filing was signed November 4, 2021. Amounts below are in U.S. dollars; financial-statement figures are in millions unless stated otherwise.
Business context and reporting period
FOX designs, manufactures and sells performance products for bicycles and powered vehicles, including upfitting solutions. It reports one operating and reportable segment. Third-quarter and nine-month periods each comprised 13 and 39 weeks, respectively.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $347.4 | $260.7 | $956.7 | $628.2 |
| Gross profit / margin | $116.0 / 33.4% | $89.5 / 34.3% | $325.0 / 34.0% | $206.1 / 32.8% |
| Operating income / margin | $55.2 / 15.9% | $45.6 / 17.5% | $153.8 / 16.1% | $76.5 / 12.2% |
| Net income | $43.8 | $38.0 | $126.1 | $60.0 |
| Diluted EPS | $1.03 | $0.90 | $2.98 | $1.46 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $149.3 | $99.8 |
- Third-quarter sales rose 33.3% year over year; net income increased 15.3%. Powered Vehicle sales grew 22.8%, and Specialty Sports sales grew 48.1%.
- Nine-month sales increased 52.3% and net income more than doubled. Management attributed growth to demand, upfitting performance, a full nine months of SCA revenue, and comparison with prior-year COVID-related OEM shutdowns.
- Q3 gross margin fell 90 basis points, primarily from higher raw-material and freight costs. Nine-month gross margin improved 120 basis points, helped by volume, product and channel mix, and lower pandemic-related costs versus the prior year.
- Cash and cash equivalents were $319.3 at October 1, 2021, up from $245.8 at January 1, 2021. Working capital included a substantial inventory build: inventory increased to $246.2 from $127.1, partly reflecting precautionary raw-material purchases amid supply uncertainty.
- Debt was $380.6 net of issuance costs, including $15.0 current debt; no revolver borrowings were outstanding. The company had $235.0 of available revolver capacity after $15.0 of letters of credit. The facility matures March 2025; the reported weighted-average borrowing rate was 1.30%. FOX was in covenant compliance.
Material changes and notable items
- Q3 operating expenses grew 38.3%, faster than sales, and increased to 17.5% of sales from 16.8%. Management cited employee and commission costs and investment in administrative support. Nine-month operating expenses were 17.9% of sales versus 20.6% a year earlier, reflecting operating leverage and lower acquisition and litigation costs.
- Nine-month investing cash outflow was $55.6, including $40.0 of capital expenditures and $15.6 for Outside Van and Sola Sport acquisitions. The prior-year investing outflow of $375.4 included the SCA acquisition.
- Outside Van was acquired in May 2021 for $15.1 net of cash acquired; purchase-price allocation remained preliminary. Sola Sport assets were also acquired in May for $0.5. Neither acquisition was material to the financial statements, according to the filing.
- The company reported $191.2 of remaining performance obligations for contracts with durations over one year, expected to be recognized in fiscal years 2022 and 2023; the increase from the prior quarter reflected model-year release timing.
Outlook, risks and contingencies
- The filing provides no quantitative revenue, earnings or margin guidance. Management expected raw-material cost increases, supply constraints, labor availability issues and logistics-cost increases to continue into Q4 2021; mitigation efforts may not fully offset their effects.
- COVID-19 and related supply-chain disruptions remain uncertain risks. FOX also cited dependence on limited suppliers and vehicle-chassis availability, port congestion, discretionary consumer demand, OEM/customer concentration, foreign exchange, and potential labor and facility disruptions.
- The credit facility carries variable-rate exposure, although a swap hedges $200.0 of term debt. Management estimated that a 100-basis-point rate move would change quarterly interest expense by approximately $0.5, after the swap.
- SRAM patent litigation remains unresolved. The PTAB found all claims of one asserted patent obvious, but FOX had not shown the claims of another patent obvious; related proceedings continue. No litigation loss was recorded because outcomes and any loss range could not be estimated.
- Management considered any potential retroactive sales-tax liability from e-commerce sales in unregistered states not expected to be material. The filing also discusses a $7.2 foreign-tax-credit valuation allowance, increased by $3.6 in the first half of 2021; there was no Q3 change.
Most important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2021, not Q3 2020.
- Assess whether supply-chain, freight and raw-material pressures continued beyond Q4 2021 and how they affected gross margins and inventory.
- Track demand and mix across Powered Vehicles and Specialty Sports, OEM and aftermarket channels, and the contribution and integration of acquired businesses.
- Review cash conversion and working-capital requirements, especially the elevated inventory balance, alongside capital expenditure and debt repayment needs.
- Monitor the SRAM litigation, interest-rate exposure and credit-facility covenant position, as well as developments in the foreign-tax-credit valuation allowance.