Business context and reporting period
Fox Factory Holding Corp. designs, manufactures and sells performance products for bikes, powered vehicles and related applications. This filing is a Form 10-Q for the quarter ended June 30, 2023, covering 13-week and 26-week periods. Although the request metadata labels the period “2022 Q2,” the filing itself reports 2023 Q2 and compares it with the periods ended July 1, 2022.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $400.7M | $406.7M | $800.6M | $784.7M |
| Gross profit / margin | $132.0M / 32.9% | $142.9M / 35.1% | $265.3M / 33.1% | $263.2M / 33.5% |
| Operating income / margin | $52.8M / 13.2% | $70.5M / 17.3% | $107.5M / 13.4% | $124.6M / 15.9% |
| Net income | $39.7M | $53.5M | $81.5M | $101.5M |
| Diluted EPS | $0.94 | $1.26 | $1.92 | $2.40 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $(3.3)M | $(85.4)M |
- Q2 net sales declined 1.5% year over year; first-half sales rose 2.0%. Q2 net income fell 25.8%, and first-half net income fell 19.7%.
- For the first half, cash used in investing was $156.5M, including $130.9M for the Custom Wheel House acquisition and $23.2M in property and equipment purchases. Financing activities provided $119.8M. Cash declined $39.8M to $105.4M.
- At June 30, 2023, revolving debt was $325.0M, up from $200.0M at December 30, 2022; another $325.0M was available under the $650.0M facility, which matures in 2027. The weighted-average borrowing rate was 5.56%. The company reported compliance with facility covenants.
- Cash and cash equivalents were $105.4M; $44.9M was held at non-U.S. subsidiaries. The company said cash on hand, operating cash flow and facility availability should fund operations for the next 12 months and beyond.
Material changes versus comparable periods
- Q2 Powered Vehicles Group sales increased 32.6% to $140.2M and Aftermarket Applications Group sales increased 26.2% to $155.6M. Specialty Sports Group sales decreased 41.0% to $104.9M, which management attributed to elevated inventory across channels.
- First-half sales growth in Powered Vehicles and Aftermarket Applications was offset in part by a 35.6% decline in Specialty Sports. Q2 OEM sales were $197.3M versus $223.1M; aftermarket sales were $203.5M versus $183.6M.
- Q2 gross margin fell 220 basis points; first-half gross margin fell 40 basis points. Management cited acquired-inventory valuation markup amortization and product mix, partly offset by improved North American facility efficiencies.
- Operating expenses rose 9.2% in Q2 and 13.9% in the first half. Increases reflected Custom Wheel House costs and acquired-intangible amortization, as well as higher headcount, facility expansion and research and development spending.
- Interest expense increased with higher interest rates: to $4.4M in Q2 from $1.7M, and to $7.9M in the first half from $3.7M.
Outlook, commentary, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management stated that available cash, expected operating cash flow and borrowing capacity should be sufficient for the next 12 months and beyond.
- Operating cash use in the first half was driven mainly by a $112.2M increase in prepaids and other assets, primarily chassis carried for upfitting production, and lower accounts payable. Accounts receivable and inventory reductions partly offset these uses.
- The March 2023 Custom Wheel House acquisition, including Method Race Wheels, was funded through the credit facility. Purchase accounting remains preliminary. Custom Wheel House reported Q2 revenue of $19.7M and an operating net loss of $4.5M; first-half revenue was $26.7M and operating net loss was $6.5M.
- First-half cost of sales included $8.9M of amortization of acquired inventory fair-value step-up. Acquisition-related transaction costs were $0.9M for the first half.
- Key disclosed risks include discretionary consumer demand, elevated channel inventory, supplier and vehicle-chassis availability, concentration of bike manufacturing in Taiwan and geopolitical tensions involving China and Taiwan, inflation and interest rates, foreign exchange, customer concentration, product quality and warranty claims, and acquisition integration. Variable-rate debt exposes the company to higher interest expense; the filing estimates a 100-basis-point rate change would change quarterly interest expense by approximately $0.6M after the interest-rate swap.
- Management said pending legal matters and ongoing tax audits were not expected to have a material adverse effect. Disclosure controls were assessed as effective at a reasonable-assurance level, with no material change to internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether elevated channel inventory continues to constrain Specialty Sports Group demand and whether reported inventory levels are consistent with channel conditions.
- The final Custom Wheel House purchase-price allocation, integration progress and path toward profitability.
- Whether chassis deposits and other working-capital needs continue to weigh on operating cash flow.
- Debt levels, borrowing costs, available revolver capacity and ongoing covenant compliance as interest rates and cash requirements change.
- Whether gross-margin pressure from product mix and acquisition-related inventory valuation effects abates, and whether operating-expense growth produces expected returns.
- Exposure to supply-chain disruption, particularly Taiwan-related risks and availability of key components and chassis.