FOX Factory Holding Corp. — Form 10-K Summary
Business context and reporting period
Fox Factory designs, manufactures and sells premium performance products, primarily suspension systems and components, for powered vehicles and specialty sports, including bicycles. This filing covers fiscal 2019, ended January 3, 2020, rather than 2018 Q4 as indicated in the request metadata. Fiscal 2019 had 53 weeks; fiscal 2018 had 52 weeks, which affects comparability. The filing also presents unaudited quarterly results, including the quarter ended January 3, 2020.
Powered Vehicles generated 60% of fiscal 2019 sales and Specialty Sports 40%. Sales were 63% to OEM customers and 37% through the aftermarket channel. North America accounted for 67% of sales and international markets 33%.
Financial results and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Sales | $751.0 million | $619.2 million | +21.3% |
| Gross profit / margin | $242.7 million / 32.3% | $205.5 million / 33.2% | Margin down 0.9 percentage point |
| Operating income / margin | $112.8 million / 15.0% | $94.5 million / 15.3% | Income +19.4% |
| Net income | $94.5 million | $85.4 million | +10.7% |
| Net income attributable to FOX stockholders | $93.0 million | $84.0 million | +10.7% |
| Diluted EPS | $2.38 | $2.16 | +10.2% |
| Operating cash flow | $74.8 million | $65.4 million | +$9.4 million |
| Capital expenditures | $53.5 million | $30.2 million | +$23.3 million |
Sales growth reflected Powered Vehicles growth of 33.8%, including Ridetech, and Specialty Sports growth of 6.3%. Management attributed lower gross margin chiefly to customer and product mix, with larger North American OEMs representing a greater sales share, and manufacturing and supply-chain inefficiencies amid unexpectedly strong demand. Operating expenses rose 17.0% but declined to 17.3% of sales from 17.9%.
Operating cash flow increased, although working capital absorbed cash, including $17.0 million for inventory and $12.1 million for receivables. Cash used in investing was $60.3 million, including $53.5 million of property and equipment additions and $6.8 million of cash consideration for Ridetech. Cash and cash equivalents were $43.7 million, working capital was $190.0 million, and total debt was $68.0 million at year-end. The new senior secured revolving facility has a $250.0 million commitment, $177.0 million available to borrow, and matures June 3, 2024; the company reported covenant compliance. Debt bears variable rates, and a 100-basis-point rate change would have changed annual interest expense by about $0.7 million.
Material changes and unusual items
- Fiscal 2019 sales increased $131.8 million. Powered Vehicles rose to 60% of sales from 54% in fiscal 2018, while Specialty Sports fell to 40% from 46%.
- Fox acquired substantially all Ridetech assets in May 2019 for approximately $14.0 million, funded with $6.8 million cash and $7.2 million of newly issued shares. Ridetech contributed approximately 1% of company sales in fiscal 2019.
- The company refinanced its prior credit facility in June 2019 and reported a $0.5 million loss on debt extinguishment.
- The effective tax rate was 13.0%, compared with 6.1% in fiscal 2018. The prior year included a $9.8 million tax benefit from resolution of an uncertain tax position related to the 2008 Compass acquisition. Fiscal 2019 tax expense also included benefits related to foreign-derived income and stock-based compensation. Foreign tax credit realizability remains an estimate-sensitive issue.
- The company adopted lease accounting in fiscal 2019, recording $17.5 million in operating lease right-of-use assets and $17.8 million in lease liabilities. It stated that the change did not materially affect the income statement.
- Fiscal 2019 Q4 sales were $185.9 million, operating income $26.2 million, and net income attributable to FOX stockholders $22.5 million. The filing’s fiscal calendar and seasonal patterns should be considered in quarter-to-quarter comparisons.
Outlook, risks and contingencies
No numerical revenue or earnings guidance is provided. Management stated that cash on hand, operating cash flow and credit-facility availability should be sufficient to fund operations for the twelve months following the filing. Its strategy emphasizes new products, aftermarket and international growth, operational efficiency and selective acquisitions. A 336,000-square-foot Georgia facility was under construction; the company expected the first phase to be completed in 2020 and disclosed an estimated design-and-construction commitment of approximately $36.5 million.
After year-end, Fox agreed to acquire SCA Performance Holdings for $328 million, exclusive of vehicle inventory, with closing expected late in the first quarter of fiscal 2020. The company expected to finance the transaction through an expanded syndicated credit facility and also agreed to up to $13 million in contingent, performance-based retention incentives. This planned acquisition represents a material financing and integration consideration.
- Customer and product concentration: Ford represented approximately 11% of fiscal 2019 sales; the five largest OEM customers collectively represented about 32%. Sales to the ten largest OEMs were about 44%.
- Demand, margin and supply risks: discretionary consumer spending, OEM production and orders, seasonality, product mix, forecasting, manufacturing capacity, and dependence on suppliers—including an exclusive Kashima coating supplier—could affect results.
- Legal and product risks: SRAM patent and trademark litigation remains ongoing; the company said it could not estimate a loss range and recorded no settlement amounts. Product recalls, warranties and liability claims are additional risks; two voluntary recalls were initiated during the prior three years.
- Other exposures include foreign exchange, tariffs and trade uncertainty, variable-rate debt, tax-credit realizability, and possible supply-chain disruption. The filing also noted uncertainty about the effects of a health epidemic reported in late 2019.
- The former CFO resigned effective November 1, 2019; John Blocher was interim CFO at filing. Management reported effective disclosure controls and internal control over financial reporting, but excluded Ridetech from its internal-control assessment while evaluating the acquired business’s control environment.
Important facts for investors to verify
- Whether margins recover as the company addresses higher-than-expected demand and manufacturing and supply-chain inefficiencies.
- How much of growth reflects underlying demand versus acquisitions, and whether the 53-week year affects comparisons.
- The funding terms, incremental debt, closing status and integration performance of the planned SCA acquisition.
- Cash conversion and working-capital needs, capital spending for the Georgia facility, and remaining borrowing capacity under the credit facility.
- Developments in SRAM litigation, foreign tax-credit utilization and valuation allowances, and the Ridetech internal-control assessment.