Fox Factory Holding Corp. — Form 10-Q Summary
Period: Quarter ended July 3, 2020; the filing also reports the six months ended July 3, 2020, compared with the periods ended June 28, 2019. The request metadata says “2019 Q2,” but the filing itself is for 2020 Q2.
Business context and performance
Fox designs, manufactures and markets performance products for bicycles and powered vehicles. It reports one operating segment. Results reflect the COVID-19 disruption and the March 2020 acquisition of SCA Performance, a specialty truck and SUV upfitter.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $183.1m | $192.1m | $367.5m | $353.8m |
| Gross profit / margin | $60.0m / 32.8% | $62.2m / 32.4% | $116.6m / 31.7% | $113.3m / 32.0% |
| Operating income / margin | $19.4m / 10.6% | $29.5m / 15.3% | $30.9m / 8.4% | $51.3m / 14.5% |
| Net income attributable to FOX stockholders | $12.6m | $22.9m | $20.9m | $41.0m |
| Diluted EPS | $0.32 | $0.59 | $0.53 | $1.05 |
| Operating cash flow | Six-month amount: $5.7m | Prior six-month amount: $20.4m |
Q2 sales fell 4.7% year over year: Powered Vehicle sales declined 14.5%, partly offset by 10.0% growth in Specialty Sports. For the first half, sales rose 3.9%, with SCA and aftermarket sales contributing to Powered Vehicle growth. Q2 aftermarket sales were $95.2m versus $74.8m a year earlier, while OEM sales were $87.9m versus $117.3m.
Financial position, cash flow and material changes
- At July 3, 2020, cash was $218.0m, compared with $43.7m at January 3, 2020. Current assets were $500.2m and current liabilities $118.2m.
- Reported debt carrying value was $406.4m, comprising $15.0m drawn on the revolver and $391.4m of term debt net of issuance costs. The facility provides a $250m revolver and a $400m term loan, matures in March 2025, and had $220m of available revolver capacity. The weighted-average borrowing rate was 2.05%; the company said it was covenant-compliant.
- First-half operating cash flow was $5.7m; investing cash outflow was $362.0m, including $329.2m for SCA and $32.8m of capital expenditures. Financing provided $530.8m, including $392.4m of net debt proceeds and $198.2m of net proceeds from a June stock issuance.
- SCA was acquired for $329.5m, net of cash acquired and excluding vehicle inventory. Preliminary purchase accounting included $192.2m of goodwill and $140.5m of customer relationships, trademarks and brand assets. SCA contributed $26.6m of sales and $0.3m of pretax income during the period.
- The June equity offering issued 2.76m shares at $76 per share, generating $198.2m net proceeds. Total shares outstanding were approximately 41.4m at July 3.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue, earnings or margin guidance. Management said COVID-19’s continuing impact was difficult to predict, citing shutdowns, supply-chain disruption, changing demand and economic uncertainty. The company temporarily reduced executive pay, furloughed employees, curtailed nonessential capital spending and reduced expenses.
- Q2 gross margin improved 40 basis points year over year, attributed to SCA, mix and supply-chain efficiencies, partly offset by higher factory costs, including COVID-related costs. First-half gross margin declined 30 basis points, primarily due to factory costs during mandated closures.
- Operating income and earnings declined despite first-half sales growth, reflecting substantially higher operating expenses, SCA acquisition and operating costs, acquired-intangible amortization, and increased interest expense from acquisition-related borrowing.
- The company expected its approximately 336,000-square-foot Gainesville-area facility to be completed around August 2020. A construction agreement was expected to cost approximately $36.5m; the broader Hall County project was estimated at approximately $50m over five years, subject to change and economic conditions.
- On July 22, after quarter-end, Fox agreed to acquire the remaining 20% of its Tuscany subsidiary for $25.0m in a combination of cash and stock, with cash installments through July 2022.
- SRAM patent litigation remained unresolved; Fox said it could not estimate a possible loss and had recorded no liability. The company also identified potential uncollected e-commerce sales tax, which it did not expect to be material. Its debt is variable-rate and secured by substantially all assets.
Most important facts for investors to verify
- How much of future sales and earnings depends on SCA, and whether its integration and preliminary purchase-price allocation change.
- Whether COVID-19 effects on OEM production, aftermarket demand, manufacturing costs and cash conversion persist or reverse.
- Debt repayment, interest-rate exposure, covenant headroom and the use of the substantial cash balance and revolving capacity.
- Facility completion, total project spending and expected operating benefits.
- Developments in SRAM litigation and the completed purchase of Tuscany’s remaining non-controlling interest.