FOX Factory Holding Corp. — Form 10-Q summary
Period clarification: Although the request metadata says “2019 Q3,” this filing covers the quarter and nine months ended October 2, 2020, compared with periods ended September 27, 2019. Figures below are in millions of dollars, except per-share amounts and percentages.
Business context and reporting period
FOX designs, manufactures and markets performance products for bicycles, powered vehicles and related specialty applications. It reports one operating segment. The quarter and year-to-date periods each comprised 13 and 39 weeks, respectively.
A major change in the period was the March 2020 acquisition of SCA Performance, an OEM-authorized specialty vehicle manufacturer, for approximately $329.5 million. SCA contributed $49.9 million of sales and $3.0 million of pretax income in the nine-month results.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $260.7 | $211.3 | $628.2 | $565.1 |
| Gross profit / margin | $89.5 / 34.3% | $69.8 / 33.0% | $206.1 / 32.8% | $183.1 / 32.4% |
| Operating income / margin | $45.6 / 17.5% | $35.4 / 16.7% | $76.5 / 12.2% | $86.7 / 15.3% |
| Net income attributable to FOX stockholders | $38.0 | $29.5 | $58.9 | $70.5 |
| Diluted EPS | $0.90 | $0.75 | $1.46 | $1.80 |
| Operating cash flow | — | $99.8 | $30.9 |
- Quarterly sales grew 23.4%; FOX attributed growth to SCA in powered vehicles and higher demand in Specialty Sports across OEM and aftermarket channels. Quarterly net income attributable to FOX stockholders rose about 29%.
- Nine-month sales rose 11.2%, but operating income fell 11.8% and net income fell 16.6%. Higher acquisition-related expenses, SCA operating costs, purchased-intangible amortization and interest expense more than offset sales growth.
- Nine-month operating cash flow was $99.8 million. Capital expenditures were $46.0 million, implying operating cash flow less capital expenditures of approximately $53.8 million. Investing cash outflow was $375.4 million, mainly for SCA and capital expenditures.
- At October 2, cash was $278.2 million. Debt principal outstanding was $395.0 million; the balance-sheet carrying amount, net of issuance costs, was $389.2 million. The $250.0 million revolving facility had no borrowings, $15.0 million of letters of credit and $235.0 million of available capacity. The company reported compliance with debt covenants.
- Current assets were $559.6 million and current liabilities $173.9 million. The current ratio was approximately 3.2x. The cash balance reflects, in part, $198.2 million of net proceeds from a June stock offering and debt financing associated with SCA.
Material changes and management commentary
- Aftermarket sales increased to $117.0 million in Q3 from $79.6 million; OEM sales increased to $143.7 million from $131.7 million. For the nine months, aftermarket sales rose to $292.9 million, while OEM sales declined to $335.3 million from $349.5 million. Management cited pandemic effects on OEM customers alongside stronger aftermarket demand.
- Q3 gross margin improved by 130 basis points, mainly from favorable product and channel mix, including SCA. Nine-month gross margin improved by 40 basis points, with mix and SCA benefits partly offset by costs associated with COVID-related government closures.
- The company bought the remaining 20% of FF US Holding Corp. (Tuscany) for $25.0 million in a combination of stock and cash; cash installments continue through July 2022.
- Management reported that the first phase of its Hall County, Georgia expansion was completed in August 2020 at a cost of approximately $47.3 million. The second phase was then expected to finish in late 2021. The broader project was planned at approximately $55.9 million, subject to change.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management cautioned that COVID-19’s continuing effects on demand, operations, supply chains and the economy were difficult to predict.
Risks, contingencies and unusual items
- COVID-19 had affected manufacturing through local restrictions and facility suspensions. The filing identifies uncertainty around future demand, component and chassis availability, suppliers, shipping, and operating conditions.
- Variable-rate debt creates interest-rate exposure. FOX entered a swap covering $200.0 million of term debt through March 2025; approximately $195.0 million remained exposed to variable rates after the swap. The company estimated a 100-basis-point rate increase would add about $0.5 million of quarterly interest expense at the period-end debt level.
- SRAM patent and Lanham Act litigation remained unresolved; the company recorded no loss provision because the outcome and any reasonably possible loss could not be estimated. An adverse ruling could materially affect the company. FOX also has patent claims against SRAM.
- The SCA purchase-price allocation remained preliminary, including valuations of real estate, intangible assets and related deferred taxes. The filing also notes contingent SCA management retention incentives of $10.6 million payable over two years.
- Management considered any potential retroactive uncollected sales-tax liability from e-commerce sales not expected to be material. It also stated that other ordinary-course legal matters were not expected to have a material adverse effect.
- Disclosure controls were assessed as effective at a reasonable-assurance level, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of sales growth and future profitability comes from SCA versus organic demand, and whether acquisition synergies offset added amortization, operating and financing costs.
- Whether the sharp year-to-date divergence between sales growth and lower operating income and net income persists, including the trend in acquisition-related expenses and margins.
- Cash conversion and working-capital trends, given the period’s receivables, prepaid expenses and accounts-payable movements, as well as planned capital spending.
- Debt repayment capacity, covenant headroom, interest-rate exposure and the remaining cash installments for the Tuscany interest purchase.
- Developments in COVID-19-related demand and supply constraints, the SCA purchase-price allocation, and the pending SRAM litigation.