Fox Factory Holding Corp. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 29, 2023, not 2022 Q3. It compares the three- and nine-month periods with those ended September 30, 2022. Unless noted otherwise, dollar amounts below are in millions.
Business context and reporting period
Fox Factory designs, manufactures, and sells performance products for bicycles, powered vehicles, and specialty applications. It reports one operating and reportable segment. The quarter included the Custom Wheel House business, acquired in March 2023.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $331.1 | $409.2 | $1,131.7 | $1,193.9 |
| Gross profit / margin | $107.2 / 32.4% | $137.3 / 33.5% | $372.6 / 32.9% | $400.5 / 33.5% |
| Operating income / margin | $41.4 / 12.5% | $65.4 / 16.0% | $148.8 / 13.2% | $190.0 / 15.9% |
| Net income | $35.3 | $50.8 | $116.8 | $152.3 |
| Diluted EPS | $0.83 | $1.20 | $2.75 | $3.59 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $126.7 | $57.0 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $32.0 | $35.6 |
Q3 sales fell 19.1% year over year; nine-month sales declined 5.2%. Q3 operating income decreased 36.7% and net income decreased 30.5%. For the nine months, operating income fell 21.7% and net income fell 23.3%. Higher interest expense reflected higher rates: $3.5 million for Q3 and $11.4 million year to date, versus $2.7 million and $6.3 million in the comparable periods. Effective tax rates were 9.0% for Q3 and 15.2% year to date, including benefits from R&D tax credits and foreign-derived intangible income.
Q3 sales by product group were Powered Vehicles $123.1 million, Aftermarket Applications $136.0 million, and Specialty Sports $72.0 million. OEM sales were $155.6 million and aftermarket sales were $175.5 million.
Financial position and liquidity
At September 29, 2023, cash was $90.6 million, total current assets were $737.2 million, and current liabilities were $191.7 million. The company had $190.0 million outstanding under its $650.0 million revolving credit facility, leaving $460.0 million of available borrowing capacity. The facility matures April 5, 2027; the weighted-average borrowing rate was 5.31%, and the company reported compliance with its covenants. The facility is secured by substantially all company assets.
Nine-month operating cash flow was $126.7 million, investing cash outflow was $165.4 million, and financing cash outflow was $16.2 million. Cash declined $54.6 million from year-end 2022. Investing outflows included $130.9 million for Custom Wheel House and $32.0 million of property and equipment purchases. Management stated that cash on hand, operating cash flow, and facility availability should be sufficient for operations over the next 12 months and beyond.
Material changes and management commentary
- Specialty Sports sales declined 58.6% in Q3 and 43.3% year to date, primarily because of elevated inventory across sales channels.
- Powered Vehicles sales rose 12.4% in Q3 and 35.4% year to date, mainly on stronger OEM demand, partly offset by the UAW strike.
- Aftermarket Applications sales grew 8.2% in Q3 and 15.5% year to date, benefiting from Custom Wheel House and, year to date, strong upfitting performance.
- Management attributed lower gross margins to product mix and, for the nine-month period, acquired-inventory fair-value step-up amortization. Q3 margin was also affected by costs of retaining skilled workers as production slowed during the UAW strike; North American facility efficiencies partly offset these pressures.
- The UAW strike began September 15, 2023, affected Q3 sales, and was expected to continue affecting results as OEM customers recovered.
- Custom Wheel House contributed $46.0 million of revenue and a $5.3 million operating loss from acquisition through the nine-month period; its Q3 contribution was $19.3 million of revenue and $1.3 million of operating income.
Outlook, subsequent events, and risks
The filing provides no specific full-year revenue or earnings guidance. Management’s liquidity outlook is described above. On November 1, 2023, Fox agreed to acquire Marucci’s parent company at an enterprise value of $572 million, subject to adjustments and closing conditions; closing was expected in Q4 2023. The company also obtained a commitment for a term loan of up to $400 million and a delayed-draw term loan of up to $200 million, contingent on customary conditions including the transaction closing. The same date, the board authorized a share repurchase plan of up to $300 million through November 1, 2028; repurchases are discretionary.
Principal disclosed risks include discretionary consumer demand, elevated channel inventory, customer and supplier concentration, the UAW strike and other operational disruptions, dependence on chassis and selected suppliers, Taiwan-related geopolitical and supply-chain exposure, inflation and variable-rate debt, foreign exchange movements, product liability and warranty claims, and acquisition integration and financing. Management said pending legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective at the reasonable-assurance level, with no material change in internal control over financial reporting reported.
Investor facts to verify
- Whether elevated Specialty Sports channel inventories are normalizing and how that affects subsequent-period orders and margins.
- The duration and financial effects of the UAW strike and OEM production recovery.
- Custom Wheel House integration, operating performance, and final purchase-price allocation.
- Final Marucci transaction terms, closing status, acquisition financing, and resulting leverage and interest costs.
- Use of the $300 million repurchase authorization alongside acquisition funding and liquidity needs.
- Future cash conversion, gross-margin recovery, and sensitivity to higher interest rates under the variable-rate credit facility.