Fox Factory Holding Corp. — Form 10-Q Summary
Period and filing note: This is an unaudited quarterly report for the 13 weeks ended September 27, 2019, with nine-month results also presented. The request metadata says “2018 Q3,” but the filing itself is for 2019 Q3; the comparable quarter ended September 28, 2018. Financial figures below are in U.S. dollars.
Business context and results
Fox designs and manufactures performance products for bicycles and powered vehicles, selling through OEM and aftermarket channels. It reports one operating and reportable segment. Management attributed growth mainly to demand for on- and off-road suspension products and higher OEM sales.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $211.3 million | $175.8 million | $565.1 million | $462.4 million |
| Gross profit | $69.8 million | $60.5 million | $183.1 million | $154.5 million |
| Gross margin | 33.0% | 34.4% | 32.4% | 33.4% |
| Operating income | $35.4 million | $31.5 million | $86.7 million | $71.7 million |
| Net income attributable to FOX stockholders | $29.5 million | $24.3 million | $70.5 million | $63.9 million |
| Diluted EPS | $0.75 | $0.62 | $1.80 | $1.64 |
Financial position, cash flow and liquidity
- At September 27, 2019, cash was $32.0 million; accounts receivable were $106.8 million and inventory was $131.2 million. Total assets were $600.6 million and total stockholders’ equity was $396.6 million.
- Debt consisted of $73.0 million drawn under a new $250 million revolving credit facility; $5.0 million of letters of credit left $172.0 million of stated availability. The facility matures June 3, 2024, bears variable interest, and had a 3.15% weighted-average borrowing rate. Fox reported covenant compliance.
- For the first nine months, operating cash flow was $30.9 million, versus $60.8 million in the prior-year period. Capital expenditures were $25.9 million; acquisition cash outlay was $6.8 million. Cash increased $4.0 million to $32.0 million.
- Operating cash flow was weighed down by working-capital investment, including increases in receivables of $28.3 million and inventory of $20.3 million, plus a $7.6 million increase in prepaids and other assets. The prior-year cash flow also benefited from a substantial increase in accounts payable and a tax-audit-related item.
Changes versus comparable periods
- Q3 sales grew 20.2%; nine-month sales grew 22.2%. Powered Vehicles sales rose 37.0% in Q3 and 37.2% year to date, while Specialty Sports sales grew 0.5% and 4.7%, respectively.
- Q3 gross margin fell 140 basis points and nine-month margin fell 100 basis points. Management cited a mix shift toward larger North American OEMs and supply-chain and manufacturing inefficiencies amid higher-than-anticipated demand. Ridetech inventory valuation adjustments reduced gross profit by $0.6 million in Q3 and $1.1 million year to date.
- Q3 operating income increased 12.4%, below sales growth; nine-month operating income increased 20.9%. Operating expenses rose in dollars but declined as a share of sales over the nine-month period, partly reflecting lower patent-litigation expenses.
- Nine-month net income increased 10.6%, less than sales growth. The 2018 comparison included a $9.8 million one-time tax benefit from resolution of an IRS audit; effective tax rates were 13.9% in 2019 and 5.7% in 2018 for the nine-month periods.
Outlook, commentary and risks
- The filing provides no specific full-year revenue or earnings guidance. Fox expected the first phase of its Hall County, Georgia expansion to be completed in mid-2020, with approximately $39 million of planned first-phase capital expenditures; the broader project contemplated about $50 million of investment and up to 800 employees over five years, subject to market and economic conditions.
- In May 2019, Fox acquired substantially all assets of Ridetech for approximately $14.0 million, funded with $6.8 million cash and $7.2 million in newly issued shares. The acquisition was described as not material to the financial statements.
- Fox refinanced its former credit facility in June 2019. It recorded a $0.5 million loss on extinguishment of debt. The new facility is secured by substantially all company assets and contains financial and operating covenants.
- SRAM patent and Lanham Act litigation, as well as Fox’s patent claims against SRAM, remained active. The company said it could not estimate a probable loss range and recorded no litigation settlement amounts; an unfavorable outcome could materially affect results.
- Management cited risks including customer and product concentration, discretionary consumer demand, competition, supply-chain capacity, tariffs and foreign exchange, product quality and recalls, acquisition integration, and variable-rate debt. Fox also disclosed that CFO Zvi Glasman was expected to resign effective November 1, 2019; an interim replacement had been named, but no permanent successor was designated at the time of the filing.
Key facts for investors to verify
- Confirm the intended period: the supplied filing is 2019 Q3, not 2018 Q3.
- Track whether supply-chain and manufacturing inefficiencies ease and gross margin recovers, particularly as OEM mix and demand change.
- Assess working-capital conversion and whether receivables and inventory growth translate into cash generation.
- Monitor borrowing levels, variable interest costs, covenant headroom, and planned Georgia expansion spending.
- Follow the SRAM litigation, Ridetech integration, and the CFO succession process for material developments.