Fox Factory Holding Corp. — Form 10-K Summary
Period clarification: The supplied filing is for the fiscal year ended December 28, 2018, not 2017 Q4. It includes quarterly data, including the quarter ended December 28, 2018.
Business context and reporting period
Fox Factory designs, manufactures and sells performance products, principally suspension systems and components, for bikes and powered vehicles. It reports one operating segment. Sales are made through OEM customers and the aftermarket channel. The fiscal year ended December 28, 2018; comparisons below are principally with the year ended December 29, 2017.
Key financial metrics
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Sales | $619.2 million | $475.6 million |
| Gross profit / margin | $205.5 million / 33.2% | $154.5 million / 32.5% |
| Operating income / margin | $94.5 million / 15.3% | $67.0 million / 14.1% |
| Net income attributable to FOX stockholders | $84.0 million | $43.1 million |
| Diluted EPS | $2.16 | $1.11 |
| Operating cash flow | $65.4 million | $48.2 million |
| Capital expenditures | $30.2 million | $16.9 million |
| Cash and cash equivalents | $28.0 million | $35.9 million |
| Total debt | $59.4 million | $98.6 million |
| Working capital | $135.2 million | $116.7 million |
FY 2018 cash flow from investing activities was negative $30.2 million; financing activities used $43.4 million, mainly reflecting net credit-facility repayments. The company reported $95.0 million of available revolving capacity and said cash, operating cash flow and credit availability should fund operations for the next 12 months. Debt is variable-rate; a 100-basis-point rate change would have changed annual interest expense by approximately $0.6 million.
In Q4 2018, sales were $156.8 million, operating income was $22.9 million, net income attributable to FOX stockholders was $20.1 million and diluted EPS was $0.52. Q4 2017 figures were $121.1 million, $16.1 million, $2.8 million and $0.07, respectively.
Material changes versus prior periods
- FY 2018 sales rose 30.2%. Powered Vehicles Group sales increased 46.5%, reflecting higher demand, OEM growth and Tuscany results; Specialty Sports Group sales increased 14.9%.
- Powered vehicle products represented 54% of 2018 sales, up from 48%; bike-related products represented 46%, down from 52%.
- Gross margin increased 0.7 percentage points, attributed mainly to higher-volume operating leverage and improved manufacturing efficiency. Operating expenses rose 27.0% in dollars but declined to 17.9% of sales from 18.3%.
- Net income nearly doubled, but the comparison was materially affected by tax items. FY 2018 tax expense included a $9.8 million benefit from resolving uncertain tax positions related to the 2008 Compass acquisition; the effective tax rate was 6.1%, versus 32.8% in 2017.
- Operating cash flow increased, although growth absorbed working capital: inventory rose $23.0 million and receivables rose $19.0 million. The company invested $30.2 million in property and equipment in 2018.
- Debt declined from $98.6 million to $59.4 million. The company also reported firm backlog of $72.9 million at year-end, versus $45.6 million a year earlier.
Outlook, risks, contingencies and unusual items
- No specific sales or earnings guidance is provided. Management expects liquidity to be adequate for the next 12 months and estimates a near- to medium-term annual effective tax rate of approximately 16%–19%, subject to tax-law interpretation, tax-credit utilization and geographic profit mix.
- Expansion plans include a new Hall County, Georgia facility, with its first phase expected in early 2020, and relocation of aftermarket bike distribution, sales and service operations to Reno, Nevada.
- Key risks include discretionary consumer demand and seasonality; competition and product innovation; customer concentration (the five largest OEM customers generated about 32% of sales); dependence on suppliers and Taiwan-based bike suspension manufacturing; tariffs, foreign exchange and supply-chain disruptions; product recalls and liability; and execution of facility and systems investments.
- SRAM patent and Lanham Act litigation, along with Fox’s patent claims against SRAM, remained ongoing. The company could not estimate a reasonably possible loss and recorded no litigation settlement amount; an adverse outcome could be material.
- Fox acquired an 80% interest in Tuscany in 2017. The remaining 20% is subject to call and put provisions; the put could require a fair-market-value purchase after November 2024 if the call has not been exercised.
- The company adopted the new revenue-recognition standard in 2018, recording a $0.3 million after-tax opening retained-earnings adjustment. It expected lease-standard adoption to add about $14.0 million of right-of-use assets and lease liabilities, without a material effect on earnings or cash flow.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- How much of profit and EPS growth reflects recurring operations versus the $9.8 million tax benefit and other tax-related effects.
- Whether powered-vehicle growth and elevated backlog convert into sustained sales and cash generation, particularly as working-capital needs increase.
- Customer and supplier concentration, tariff exposure, and resilience of the Taiwan-centered bike suspension supply chain.
- Progress, costs and returns from the Georgia facility and Reno relocation, alongside the planned lease-accounting balance-sheet increase.
- Developments in the SRAM litigation, Tuscany’s non-controlling-interest put provisions, and the company’s variable-rate debt and covenant capacity.