FOX FACTORY HOLDING CORP. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report in Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. You should review the "Risk Factors" and "Special Note Regarding Forward-Looking Statements" sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We design, engineer, manufacture and market performance-defining products and systems for customers worldwide. Our premium brand, performance-defining products and systems are used primarily on bikes, side-by-sides, on-road vehicles with and without off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, motorcycles and commercial trucks. Virtually all of our revenues were from our product sales; miscellaneous sources of revenue such as royalty income and service related repair work and the associated sale of parts represented less than 1% of our sales in each of the years endedDecember 31, 2021 ,January 1, 2021 andJanuary 3, 2020 .
We have determined that we operate in one reportable segment, which is the manufacturing, sale and service of performance-defining products. Our products fall into the following two categories:
•powered vehicles, including side-by-sides, certain on-road vehicles with and without off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications including military, motorcycles, and commercial trucks;
•specialty sports products, which consist primarily of bike suspension and component products.
In each of the years endedDecember 31, 2021 ,January 1, 2021 andJanuary 3, 2020 , approximately 55%, 59% and 60%, respectively, of our sales were attributable to sales of products for powered vehicles and approximately 45%, 41% and 40%, respectively, of our sales were attributable to sales of specialty sports products. Our North American sales totaled$811.3 million ,$593.3 million and$502.3 million , or 62%, 67% and 67% of our total sales in fiscal years 2021, 2020 and 2019, respectively. Our international sales totaled$487.8 million ,$297.3 million and$248.8 million , or 38%, 33% and 33% of our total sales in fiscal years 2021, 2020 and 2019, respectively. Sales attributable to countries outside theU.S. are based on shipment location. Our international sales, however, do not necessarily reflect the location of the end users of our products as many of our products are incorporated into bikes that are assembled at international locations and then shipped back to theU.S. We estimate, based on our internal projections, that approximately one-third of the end users of our bike products are located outside theU.S.
Opportunities, challenges and risks
We intend to focus on generating sales of our performance-defining products
through OEMs and in the aftermarket channel. To do this, we intend to continue
to develop and introduce new and innovative products in our current end-markets
and we intend to selectively develop products for applications and end-markets
in which we do not currently participate. Currently, the majority of our sales
are dependent on the demand for performance-defining products.
Our aftermarket distribution network currently consists of more than 5,000
retail dealers and distributors worldwide. To further penetrate the aftermarket
channel, we intend to selectively add additional dealers and distributors in
certain geographic markets, expand our internal sales force and strategically
increase the number of aftermarket specific products and services that we offer
for existing vehicle platforms. In addition, we believe international expansion
represents a significant opportunity for us and we intend to selectively
increase infrastructure investments and focus on identified geographic regions.
As a supplier to OEM customers, we are largely dependent on the success of the
business of our OEM customers. Model year changes by our OEM customers may
adversely impact our sales or cause our sales to vary from quarter to quarter.
Losses in market share or a decline in the overall market of our OEM customers
or the discontinuance by our OEM customers of their products that incorporate
our products could negatively impact our business and our results of operations.
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We recently completed the construction of an approximately 336,000 square foot state-of-the-art facility inHall County, Georgia (the "Hall County Facility") to diversify our manufacturing platform and provide additional long-term capacity to support growth in ourPowered Vehicles Group . TheHall County Facility is being used for manufacturing, warehousing, distribution and office space. We are currently transitioning out of ourWatsonville, California facility and relocating our powered vehicles suspension manufacturing to the Hall County Facility. From time to time, we have experienced, and may continue to experience, warranty costs and claims relating to our products. In the ordinary course of business, we reserve for such costs and claims in our financial statements. There is a risk, however, that in the future we will experience higher than expected warranty costs and claims, as well as other related costs. We intend to evaluate selective potential acquisition opportunities for performance-defining products and technologies that we believe will help us extend our performance-defining product platform. Any acquisitions that we might make are subject to various risks and uncertainties and could have a negative impact on our results of operations. In addition, we may contractually obligate ourselves to contingent consideration or acquisition related compensation payments in conjunction with such acquisitions, which could have a negative impact on our cash flow and results of operations. See Item 7. " Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual obligations and commitments " for additional information. Basis of presentation Composition of sales Sales from: •Product sales: consist of sales of performance-defining products and systems to customers worldwide. Sales are measured based on the consideration specified in a contract with a customer. We recognize sales when a performance obligation is satisfied by transferring control of a product to a customer, generally at the time of shipment. Contracts are generally in the form of purchase orders and are governed by standard terms and conditions. For larger OEMs, we may also enter into master agreements; and
•Shipping and handling fees: consists of shipping and handling fees billed to customers.
Net of:
•Rebates: consists of incentives we provide to customers based on sales of eligible products; and
•Sales returns allowances: consists of an estimate of our sales returns. This allowance is based upon estimates of the projected returns in future periods based on our experience with returns recorded in previous periods. Sales returns have not been significant to date. We attribute our past growth in sales predominantly to continued higher demand for on and off-road suspension products, acquisitions, and the success of our current product lines including new products within those lines.
Cost of sales
The cost of sales includes the cost of purchased parts and manufactured products (raw materials consumed, the cost to procure materials, labor costs, including wages, and employee benefits, and factory overhead to produce finished good products), including:
•the costs to inspect and repair products;
•shipping costs associated with inbound freight. These costs are capitalized as part of inventory and included in cost of sales as the inventory is sold;
•royalty expenses, including payments to certain parties for our use of licensed technology incorporated into our products;
•freight expenses incurred for certain shipments to customers;
•warranty costs associated with the repair or replacement of products under warranty; and
•reductions in the cost of inventory to its net realizable value, if required, for estimated excess, obsolescence or impaired balances.
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Gross profit/gross margin
Our gross profit equals our sales minus cost of sales. Our gross margin measures our gross profit as a percentage of sales.
Our gross margins fluctuate based on production volumes, product, customer and channel mix and overall supply chain and manufacturing efficiencies. Generally, we earn higher gross margins on our products sold to the aftermarket channel.
Operating expenses
Our operating expenses consist of the following:
•sales and marketing;
•research and development;
•general and administrative; and
•amortization of purchased intangibles.
Our sales and marketing expenses include costs related to our sales, customer service and marketing personnel, including their wages, employee benefits and related stock-based compensation, and occupancy related expenses. Other significant sales and marketing expenses include race support and sponsorships of events and athletes, advertising and promotions related to trade shows, travel and entertainment, commissions paid to outside sales representatives, promotional materials and products and our sales office costs. Our research and development expenses consist primarily of salaries and personnel costs, including wages, employee benefits and related stock-based compensation for our engineering, research and development teams, occupancy related expenses, fees for third party consultants, service fees, and expenses for prototype tooling and materials, travel, and supplies. We expense research and development costs as incurred and such costs are included as research and development expenses on our consolidated statements of income. Our general and administrative expenses include costs related to our executive, finance, legal, information technology, business development, human resources and administrative personnel, including wages, employee benefits and related stock-based compensation expenses. We record professional and contract service expenses, occupancy related expenses associated with corporate locations and equipment, and legal expenses in general and administrative expenses. Our amortization of purchased intangibles includes amortization over their respective useful lives of our purchased intangible assets, such as customer lists and our core technology. Our intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. No impairments of intangible assets were identified in the years endedDecember 31, 2021 ,January 1, 2021 andJanuary 3, 2020 .
Income from operations
We define income from operations as gross profit less our operating expenses. We use income from operations as an indicator of the profitability of our business and our ability to manage costs.
Interest and other expense, net
Interest expense consists of interest charged to us under our credit facility and changes related to our interest rate swap.
Other expense, net, consists of foreign currency transaction gains and losses, gains and losses on the disposal of fixed assets, and other miscellaneous items.
Income taxes
We are subject to income taxes in theU.S. (federal and state) and various other foreign jurisdictions. Our effective tax rate could be affected by numerous factors such as change in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, losses incurred in jurisdictions for which we are not able to realize related tax benefits, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework and other laws and accounting rules in various jurisdictions.
For the years ended
As of
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Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As ofDecember 31, 2021 , we recorded an additional valuation allowance of$2.1 million , as we anticipate that the Tax Cuts and Jobs Act (the "TCJA") will partially limit our ability to utilize our foreign tax credits. In the future, our effective tax rate could vary as we update our assessment of valuation allowances for our deferred tax assets, including those associated with credit carryforwards. It is reasonably possible that we could record a material adjustment to the valuation allowance in the next 12 months as we assess the progress and outcome of our plans to alter the generation and utilization of foreign tax credits. Stock-based compensation gives rise to deferred tax assets to the extent of the compensation expense recognized on non-qualified stock options that have not been exercised or expired and restricted stock awards that have not vested. As ofDecember 31, 2021 , our deferred tax assets included$2.3 million associated with stock-based compensation expense. The difference between the deferred tax asset and the actual tax deduction for stock-based compensation is recorded as a component of our income tax expense. Our effective tax rate will vary based on such differences. We are subject to examination of our income tax returns by theU.S. Internal Revenue Service ("IRS") and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our income tax liabilities and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax expense may become necessary. Any such adjustments could have a significant impact on our effective tax rate. 39
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Results of operations
The table below summarizes our results of operations for the fiscal years ended
For the fiscal years ended
December 31 January 1 January 3
(in thousands) 2021 2021 2020
Sales $ 1,299,064 $ 890,554 $ 751,020
Cost of sales 866,732 601,007 508,285
Gross profit 432,332 289,547 242,735
Operating expenses:
Sales and marketing 70,925 52,214 42,794
Research and development 46,567 34,292 31,789
General and administrative 97,241 71,309 48,999
Amortization of purchased intangibles 20,685 17,583 6,344
Total operating expenses 235,418 175,398 129,926
Income from operations 196,914 114,149 112,809
Interest and other expense, net:
Interest expense 8,162 9,294 3,173
Other expense, net 371 325 1,067
Total interest and other expense, net 8,533 9,619 4,240
Income before income taxes 188,381 104,530 108,569
Provision for income taxes 24,563 12,784 14,099
Net income 163,818 91,746 94,470
Less: net income attributable to non-controlling
interest - 1,072 1,437
Net income attributable to FOX stockholders $ 163,818 $ 90,674 $ 93,033
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The following table sets forth statement of income data as a percentage of sales
for the years indicated:
For the fiscal years ended
December 31 January 1 January 3
2021 2021 2020
Sales 100.0 % 100.0 % 100.0 %
Cost of sales 66.7 67.5 67.7
Gross profit 33.3 32.5 32.3
Operating expenses:
Sales and marketing 5.5 5.9 5.7
Research and development 3.6 3.9 4.2
General and administrative 7.5 8.0 6.5
Amortization of purchased intangibles 1.6 2.0 0.8
Total operating expenses 18.1 19.7 17.3
Income from operations 15.2 12.8 15.0
Interest and other expense, net:
Interest expense 0.6 1.0 0.4
Other expense, net - - 0.1
Interest and other expense, net 0.7 1.1 0.6
Income before income taxes 14.5 11.7 14.5
Provision for income taxes 1.9 1.4 1.9
Net income 12.6 10.3 12.6
Less: net income attributable to non-controlling
interest - 0.1 0.2
Net income attributable to FOX stockholders 12.6 % 10.2 % 12.4 %
*Percentages may not foot due to rounding.
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Fiscal year endedDecember 31, 2021 compared to fiscal year endedJanuary 1, 2021 Sales For the fiscal years ended (in millions) 2021 2020 Change ($) Change (%) Sales$ 1,299.1 $ 890.6 $ 408.5 45.9 % Sales for the year endedDecember 31, 2021 increased approximately$408.5 million , or 45.9%, compared to the year endedJanuary 1, 2021 . The sales increase reflects a 57.8% increase inSpecialty Sports products as well as a 37.5% growth in Powered Vehicle products for the year endedDecember 31, 2021 compared to the prior year. The increase inSpecialty Sports product sales reflects higher demand primarily in the OEM channel. The increase in Powered Vehicle product sales was primarily due to strong performance from our upfitting product lines, the inclusion of a full year of SCA's results and increased demand in the aftermarket channel. Cost of sales For the fiscal years ended (in millions) 2021 2020 Change ($) Change (%) Cost of sales$ 866.7 $ 601.0 $ 265.7 44.2 % Cost of sales for the year endedDecember 31, 2021 increased approximately$265.7 million , or 44.2%, compared to the year endedJanuary 1, 2021 . The increase in cost of sales was driven primarily by an increase in product sales, as well as certain business factors affecting gross margin, which are discussed below. For the year endedDecember 31, 2021 , our gross margin was 33.3% compared to 32.5% for the year endedJanuary 1, 2021 . The increase in gross margin for the fiscal year 2021 was primarily due to higher volume sales in ourSpecialty Sports Group and the strong performance of our upfitting product lines, as well as favorable product and channel mix. Additionally, our gross margin for the prior fiscal year period was negatively impacted by incremental costs related to the COVID-19 pandemic. Operating expenses For the fiscal years ended (in millions) 2021 2020 Change ($) Change (%) Operating expenses: Sales and marketing $ 70.9$ 52.2 $ 18.7 35.8 % Research and development 46.6 34.3 12.3 35.9 % General and administrative 97.2 71.3 25.9 36.3 % Amortization of purchased intangibles 20.7 17.6 3.1 17.6 % Total operating expenses$ 235.4 $ 175.4 $ 60.0 34.2 % Total operating expenses for the year endedDecember 31, 2021 increased approximately$60.0 million , or 34.2%, over the comparable period in 2020. When expressed as a percentage of sales, operating expenses decreased to 18.1% of sales for the year endedDecember 31, 2021 compared to 19.7% of sales in 2020. Within operating expenses, our sales and marketing expense increased by approximately$18.7 million primarily due to higher commissions of$11.8 million , higher employee related expenses of$1.5 million , and various others. Research and development expenses increased approximately$12.3 million primarily due to headcount investments to support future growth. General and administrative expenses increased approximately$25.9 million due to higher employee related costs of$18.0 million , as well as various other investments of$5.1 million as we continue to scale our administrative support functions to meet the demands of our growing business. These increases were partially offset by lower acquisition-related costs of$9.3 million , as well as lower patent litigation related expenses of$1.1 million . Amortization of purchased intangible assets for the year endedDecember 31, 2021 increased by approximately$3.1 million as compared to the year endedJanuary 1, 2021 , due to the amortization of SCA and Outside Van's intangible assets. 42
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Income from operations
For the fiscal years ended
(in millions) 2021 2020 Change ($) Change (%)
Income from operations $ 196.9 $ 114.1 $ 82.8 72.6 %
As a result of the factors discussed above, income from operations for the year
ended
Interest and other expense, net
For the fiscal years ended
(in millions) 2021 2020 Change ($) Change (%)
Interest and other expense, net:
Interest expense $ 8.2 $ 9.3 $ (1.1) (11.8) %
Other expense, net 0.3 0.3 - - %
Interest and other expense, net $ 8.5
$ (1.1) (11.5) % Interest and other expense, net for the year endedDecember 31, 2021 decreased by approximately$1.1 million to$8.5 million compared to$9.6 million for the year endedJanuary 1, 2021 . The decrease in interest and other expense, net is primarily due to lower interest rates and the pay down of our term loan. Income taxes For the fiscal years ended (in millions) 2021 2020 Change ($) Change (%) Provision for income taxes $ 24.6$ 12.8 $ 11.8 92.2 % Income tax expense for the year endedDecember 31, 2021 increased by approximately$11.8 million to$24.6 million compared to income tax expense of$12.8 million in the same period in 2020. The increase in expense resulted from the increase in pre-tax profit, partially offset by the benefit of a lower tax rate onU.S. foreign derived earnings.
The effective tax rates were 13.0% and 12.2% for the years ended
For the year endedDecember 31, 2021 , the difference between our effective tax rate and the 21% federal statutory rate resulted from a lower tax rate onU.S. foreign derived earnings and the benefit of excess stock based compensation deductions. For the year endedJanuary 1, 2021 , the difference between our effective tax rate and the 21% federal statutory rate resulted from the benefit of excess deductions on stock-based compensation and the benefit of a lower tax rate onU.S. foreign derived earnings. Net income For the fiscal years ended (in millions) 2021 2020 Change ($) Change (%) Net income$ 163.8 $ 91.7 $ 72.1 78.6 %
As a result of the factors described above, our net income increased
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Fiscal year endedJanuary 1, 2021 compared to fiscal year endedJanuary 3, 2020 Sales For the fiscal years ended (in millions) 2020 2019 Change ($) Change (%) Sales$ 890.6 $ 751.0 $ 139.6 18.6 % Sales for the year endedJanuary 1, 2021 increased approximately$139.6 million , or 18.6%, compared to the year endedJanuary 3, 2020 . The sales increase reflects a 22.4% increase inSpecialty Sports products as well as a 16.1% growth in Powered Vehicle products for the year endedJanuary 1, 2021 compared to the prior year. The increase inSpecialty Sports product sales reflects higher demand in both OEM and aftermarket channels. The increase in sales of Powered Vehicle product sales was primarily due to the inclusion of SCA's results. Cost of sales For the fiscal years ended (in millions) 2020 2019 Change ($) Change (%) Cost of sales$ 601.0 $ 508.3 $ 92.7 18.2 % Cost of sales for the year endedJanuary 1, 2021 increased approximately$92.7 million , or 18.2%, compared to the year endedJanuary 3, 2020 . The increase in cost of sales was driven primarily by an increase in product sales, as well as certain business factors affecting gross margin, which are discussed below. For the year endedJanuary 1, 2021 , our gross margin was 32.5% compared to 32.3% for the year endedJanuary 3, 2020 . The increase in gross margin was primarily due to the impact of the SCA acquisition and a favorable change in product and channel mix partially offset by incremental cost due to the COVID-19 pandemic as well as duplicate costs incurred as we transition our North American manufacturing operations. Operating expenses For the fiscal years ended (in millions) 2020 2019 Change ($) Change (%) Operating expenses: Sales and marketing $ 52.2$ 42.8 $ 9.4 22.0 % Research and development 34.3 31.8 2.5 7.9 % General and administrative 71.3 49.0 22.3 45.5 % Amortization of purchased intangibles 17.6 6.3 11.3 179.4 % Total operating expenses$ 175.4 $ 129.9 $ 45.5 35.0 % Total operating expenses for the year endedJanuary 1, 2021 increased approximately$45.5 million , or 35.0%, over the year endedJanuary 3, 2020 . When expressed as a percentage of sales, operating expenses increased to 19.7% of sales for the year endedJanuary 1, 2021 compared to 17.3% of sales in the year endedJanuary 3, 2020 . Within operating expenses, our sales and marketing expense increased by approximately$9.4 million primarily due to costs related to SCA of$8.5 million . Additionally, we incurred higher personnel and commission expenses of$2.8 million , which were partially offset by reduced spending on trade shows and race events. Research and development expenses increased approximately$2.5 million primarily due to headcount and facility-related expenses, partially offset by reductions in supplies, equipment, and other various expenses across our organization. General and administrative expenses increased approximately$22.3 million due to acquisition-related costs of approximately$14.1 million and the inclusion of SCA operating costs of$5.9 million , and higher headcount costs including incentive compensation, partially offset by lower patent-related legal costs. Amortization of purchased intangible assets for the year endedJanuary 1, 2021 increased by approximately$11.3 million as compared to the year endedJanuary 3, 2020 , due to the amortization of SCA's intangible assets. 44
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Income from operations
For the fiscal years ended
(in millions) 2020 2019 Change ($) Change (%)
Income from operations $ 114.1 $ 112.8 $ 1.3 1.2 %
As a result of the factors discussed above, income from operations for the year
ended January 1, 2021 increased approximately $1.3 million , or 1.2%, compared to
income from operations in the same period in the year ended January 3, 2020 .
Interest and other expense, net
For the fiscal years ended
(in millions) 2020 2019 Change ($) Change (%)
Interest and other expense, net:
Interest expense $ 9.3 $ 3.2 $ 6.1 190.6 %
Other expense, net 0.3 1.0 (0.7) (70.0) %
Interest and other expense, net $ 9.6
$ 5.4 128.6 % Interest and other expense, net for the year endedJanuary 1, 2021 increased by approximately$5.4 million to$9.6 million compared to$4.2 million for the year endedJanuary 3, 2020 . The increase in interest and other expense, net is primarily due to interest expense on additional borrowings in connection with our acquisition of SCA. Income taxes For the fiscal years ended (in millions) 2020 2019 Change ($) Change (%) Provision for income taxes $ 12.8$ 14.1 $ (1.3) (9.2) % Income tax expense for the year endedJanuary 1, 2021 decreased by approximately$1.3 million to$12.8 million compared to income tax expense of$14.1 million in the year endedJanuary 3, 2020 . The decrease in expense resulted from the decrease in pre-tax profit, as well as from the benefits of excess deductions on stock-based compensation and the benefit of a lower tax rate onU.S. foreign derived earnings.
The effective tax rates were 12.2% and 13.0% for the years ended
For the year endedJanuary 1, 2021 , the difference between our effective tax rate and the 21% federal statutory rate resulted from the decrease in pre-tax profit, as well as, the benefit of excess deductions on stock-based compensation and the benefit of a lower tax rate onU.S. foreign derived earnings. For the year endedJanuary 3, 2020 , the difference between our effective tax rate and the 21% federal statutory rate resulted primarily from the benefit of excess deductions on stock-based compensation, and the benefit of a lower tax rate onU.S. foreign derived earnings, partially offset by non-deductible executive compensation and state taxes. Net income For the fiscal years ended (in millions) 2020 2019 Change ($) Change (%) Net income $ 91.7$ 94.5 $ (2.8) (3.0) %
As a result of the factors described above, our net income decreased
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Liquidity and Capital Resources
Our primary cash needs are to support working capital, capital expenditures, acquisitions and acquisition-related compensation, and debt repayments. We have generally financed our historical needs with operating cash flows and borrowings under our credit facilities. These sources of liquidity may be impacted by various factors, including demand for our products, investments made by us in acquired businesses, our plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology. As ofDecember 31, 2021 , we held$44.5 million of our$179.7 million of cash and cash equivalents in accounts of our subsidiaries outside of theU.S. , which we may repatriate. We manage our foreign cash, intercompany payables and intercompany debt to provide a foreign currency hedge againstU.S. dollar-denominated trade receivable balances held by ourTaiwan location. A summary of our operating, investing and financing activities are shown in the following table: For the years ended December 31 January 1 January 3 (in thousands) 2021 2021 2020 Net cash provided by operating activities$ 65,290 $ 82,715 $ 74,830 Net cash used in investing activities (106,727) (388,525) (60,330) Net (used in) provided by financing activities (24,100) 506,722 859 Effect of exchange rate changes on cash and cash equivalents (541) 1,116 419
(Decrease) increase in cash and cash equivalents
We expect that cash on hand, cash flow from operations and availability under our credit facility will be sufficient to fund our operations during the next 12 months from the date of this Annual Report on Form 10-K and beyond.
Operating activities
Cash provided by operating activities primarily consists of net income, adjusted for certain non-cash items, primarily depreciation and amortization, stock-based compensation, and deferred income taxes, offset by net cash invested in working capital. In the fiscal year endedDecember 31, 2021 , cash provided by operating activities was$65.3 million and consisted of net income of$163.8 million plus non-cash items and other adjustments totaling$43.5 million less changes in operating assets and liabilities totaling$142.0 million . Non-cash items and other adjustments consisted primarily of depreciation and amortization of$45.1 million , stock-based compensation of$13.9 million , and amortization of loan fees of$1.6 million , offset by a$17.1 million change in deferred taxes. Cash invested in operating assets and liabilities is primarily the result of increases in inventory of$146.5 million , prepaids and other current assets of$34.2 million , and accounts receivable of$20.2 million , offset by increases in net income taxes payable of$26.8 million , accrued expenses of$21.8 million , and accounts payable of$10.3 million . The increase in inventory is primarily due to additional raw material purchases to mitigate risks associated with supply chain uncertainty and shortages on certain parts needed to complete a suspension kit, as well as a higher balance of finished goods due to the timing of shipments. The increase in prepaids and other current assets is the result of increased chassis deposits. The increases in net income taxes payable, accrued expenses, accounts receivable and accounts payable are the result of normal business growth and the timing of vendor and tax payments. In the fiscal year endedJanuary 1, 2021 , cash provided by operating activities was$82.7 million and consisted of net income of$91.7 million plus non-cash items and other adjustments totaling$30.0 million less changes in operating assets and liabilities totaling$39.0 million . Non-cash items and other adjustments consisted primarily of depreciation and amortization of$33.9 million , stock-based compensation of$8.6 million , and amortization of loan fees of$1.5 million , offset by a$14.1 million change in deferred taxes. Cash invested in operating assets and liabilities is primarily the result of increases in prepaids and other current assets of$66.4 million and accounts receivable of$18.8 million , partially offset by increases in accounts payable and accrued expenses of$25.9 million and$11.2 million , respectively, and a decrease in inventory of$7.9 million . The increase in prepaids and other current assets is primarily due to deposits on chassis and acquisition-related compensation payments held in escrow, both related to our acquired SCA subsidiary. The changes in inventory, accounts receivable, accounts payable and accrued expenses reflect business growth as well as timing of vendor payments. 46
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In the fiscal year endedJanuary 3, 2020 , cash provided by operating activities was$74.8 million and consisted of net income of$94.5 million plus non-cash items and other adjustments totaling$14.5 million less changes in operating assets and liabilities totaling$34.2 million . Non-cash items and other adjustments consisted primarily of depreciation and amortization of$17.7 million , stock-based compensation of$6.9 million , and loss on the extinguishment of debt of$0.5 million , offset by a$10.6 million change in deferred taxes. Cash invested in operating assets and liabilities is primarily the result of increases in inventory of$17.0 million , and accounts receivable of$12.1 million , decreases in net income taxes payable of$3.6 million and accrued expenses of$2.3 million , partially offset by a decrease in prepaids and other assets of$1.7 million . The changes in inventory, accounts receivable, accrued expenses and prepaids and other assets are primarily attributable to business growth and the impact of the acquisition ofAir Ride Technologies, Inc. , d/b/a Ridetech ("Ridetech"). The decrease in income taxes is primarily due to the timing of estimated tax payments and refunds.
Investing activities
Cash used in investing activities primarily relates to strategic acquisitions of businesses and other assets, and investments in our manufacturing and general infrastructure through the acquisition of property and equipment. In the fiscal year endedDecember 31, 2021 , cash used in investing activities was$106.7 million which primarily consisted of$54.8 million in property and equipment additions and$51.9 million of cash consideration for our acquisitions of Outside Van,Sola Sport and Shock Therapy. In the fiscal year endedJanuary 1, 2021 , cash used in investing activities was$388.5 million which primarily consisted of$331.5 million of cash consideration for our acquisition of SCA and$56.7 million in property and equipment additions. In the fiscal year endedJanuary 3, 2020 , cash used in investing activities was$60.3 million which primarily consisted of$53.5 million in property and equipment additions and$6.8 million of cash consideration for our acquisition of Ridetech. Financing activities
Cash used in or provided by financing activities primarily relates to changes in our capital structure, including the various forms of debt and equity instruments used to finance our business.
In the fiscal year endedDecember 31, 2021 , net cash used in financing activities was$24.1 million , which consisted primarily of$12.5 million in payments on our term debt,$7.1 million to repurchase shares of our common stock as part of our stock-based compensation program and$4.6 million in installment payments related to the purchase of theTuscany non-controlling interest. Refer to Note 12. " Commitments and Contingencies " for additional details. In the fiscal year endedJanuary 1, 2021 , net cash provided by financing activities was$506.7 million , which consisted primarily of$392.4 million in proceeds, net of issuance costs, from our Credit Facility, which was amended and restated in connection with our acquisition of SCA, partially offset by net payments of$68.0 million on our line of credit and payments on our term debt of$5.0 million . In addition, we received$198.2 million from ourJune 2020 issuance of common stock. These inflows were partially offset by$4.3 million to repurchase shares of our common stock as part of our stock-based compensation program and$6.6 million in installment payments related to the purchase of theTuscany non-controlling interest. Refer to Note 12. " Commitments and Contingencies " for additional details. In the fiscal year endedJanuary 3, 2020 , net cash provided by financing activities was$0.9 million , which consisted primarily of$7.7 million in net proceeds from our credit facility offset by$6.8 million in payments to repurchase shares to cover tax withholding related to the vesting of restricted stock awards, net of proceeds from the exercise of stock options.
Credit Facility
InJune 2019 , the Company entered into a credit facility withBank of America and other named lenders, which has been periodically amended and restated and/or amended. The credit facility was amended and restated onMarch 11, 2020 , and further amended onJune 19, 2020 ,June 11, 2021 andDecember 16, 2021 (as amended to date, the "Credit Facility"). The Credit Facility, which matures onMarch 11, 2025 , provides a senior secured revolving line of credit with a borrowing capacity of$250.0 million and a term loan of$400.0 million . The term loan is subject to quarterly amortization payments. The Company paid$7.6 million in debt issuance costs, of which$6.5 million were allocated to the term debt and$1.2 million were allocated to the line of credit. Loan fees allocated to the term debt will be amortized using the interest method and loan fees allocated to the line of credit will be amortized on a straight-line basis over the term of the Credit Facility. The Credit Facility provides for interest at a rate either based on theLondon Interbank Offered Rate, or LIBOR, plus a margin ranging from 1.00% to 2.25%, with a floor rate of 0.0%, or based on the base rate offered byBank of America plus a margin ranging from 0.00% to 1.25%. AtDecember 31, 2021 , the one-month LIBOR and prime rates were 0.10% and 3.25%, respectively. The Company utilizes an interest rate swap to manage the interest rate risk exposure associated with$200.0 million of its variable rate term debt. Refer to Note 11. " Derivatives and Hedging " for further details of this agreement. 47
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AtDecember 31, 2021 andJanuary 1, 2021 , our weighted average interest rates on outstanding borrowing were 1.31% and 1.62%, respectively. The Credit Facility is secured by substantially all of the Company's assets, restricts the Company's ability to make certain payments and engage in certain transactions, and requires that the Company satisfy customary financial ratios. The Company was in compliance with the covenants as ofDecember 31, 2021 .
Material Cash Requirements
As of
Less than 1 More than 5
Payments due by period Total year 1-3 years 4-5 years years
Long-term borrowings $ 382,500 $ 17,500
40,189 9,866 16,596 9,310 4,417
Purchase obligations and other 3,564 3,055 509 - -
Total $ 426,253 $ 30,421 $ 57,105 $ 334,310 $ 4,417
Seasonality
Certain portions of our business are seasonal; we believe this seasonality is
due to the delivery of new products. As we have diversified our product
offerings and our product launch cycles, seasonal fluctuations are becoming less
material.
Inflation
Historically, inflation has not had a material effect on our results of operations. However, significant increases in inflation, particularly those related to wages and increases in the cost of raw materials could have an adverse impact on our business, financial condition and results of operations.
Critical Accounting Policies and Estimates
We have adopted various accounting policies to prepare the consolidated financial statements in accordance withU.S. GAAP. Our significant accounting policies are described in Note 1. " Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies " of the Notes to Consolidated Financial Statements. Some of those significant accounting policies require us to make difficult, subjective, or complex judgments or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur may have a material impact on our financial condition or results of operations. The significant accounting policies that management believes are critical to the understanding and evaluating our reported financial results include the following: income taxes, inventory, warranty, goodwill and intangible assets, stock-based compensation, revenue recognition, provision for credit losses and fair value measurement. For further information see Note 1. " Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies " of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Critical Accounting Policies
Income taxes
We are subject to income taxes in theU.S. (federal and state) and foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The income tax effects of these differences are classified as long-term deferred tax assets and liabilities in our consolidated balance sheets. Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including but not limited to, historical operating results, forecasted earnings, estimates of future taxable income of a character necessary to realize the deferred asset, relative proportions of revenue and pre-tax income in the various domestic and jurisdictions in which we operate, and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods. 48
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Additionally, our judgments, assumptions, and estimates relative to the provision for income taxes take into account enacted tax laws, regulations, administrative practices, interpretations in various jurisdictions and possible outcomes of current and future audits conducted by tax authorities. Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, losses incurred in jurisdictions for which we are not able to realize related tax benefits, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework and other laws and accounting rules in various jurisdictions. We utilize a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We consider many factors when evaluating tax positions such as the closing of a tax audit, the refinement of estimates, and the expiration of a statute of limitations that may require periodic adjustments that impact our tax provision in our consolidated statements of income. Interest and penalties associated with income taxes are recorded as income tax expense. Refer to Note 15. " Income Taxes " for further details.
Inventories
Inventories are stated at the lower of actual cost (or standard cost which generally approximates actual costs on a first-in first-out basis) or net realizable value. Cost includes raw materials and inbound freight, as well as direct labor and manufacturing overhead for products we manufacture. Net realizable value is based on current replacement cost for raw materials and on a net realizable value for finished goods. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolete or impaired balances. We regularly monitor inventory quantities on hand and on order and record write-downs for excess and obsolete inventories based on our estimate of the demand for our products, potential obsolescence of technology, product life cycles, and when pricing trends or forecasts indicate that the carrying value of inventory exceeds our estimated selling price. These factors are affected by market and economic conditions, technology changes, and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on our gross margin. If inventory is written down, a new cost basis will be established that cannot be increased in future periods.
Warranty
Unless otherwise required by law, the Company generally offers limited warranties on its products for one to two years. We accrue estimated costs related to warranty activities as a component of cost of sales upon product shipment or when information becomes available indicating that an adjustment to the warranty reserves is appropriate. Management estimates are based upon historical and projected product failure rates and historical costs incurred in correcting product failures. The warranty reserve is assessed from time to time for adequacy and adjusted as necessary for specifically identified warranty exposures. Actual warranty expenses are charged against our estimated warranty liability when incurred. Factors that affect our liability include the number of units, historical and anticipated rates of warranty claims, and the cost per claim. An increase in warranty claims or the related costs associated with satisfying these warranty obligations could increase our cost of sales and negatively affect our operating results. Total accrued warranty liabilities were$15,510 and$9,835 as ofDecember 31, 2021 andJanuary 1, 2021 , respectively. Refer to Note 8. " Accrued Expense " for further details. 49
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Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. On an annual basis, the Company performs a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If the Company determines that the fair value of the reporting unit is less than its carrying amount, it will perform a quantitative analysis; otherwise, no further evaluation is necessary. For the quantitative impairment test, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company determines the fair value of the reporting unit based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company will recognize a loss equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. Impairments, if any, are charged directly to earnings. We completed our most recent annual impairment test in the third quarter of 2021 at which time we had a single reporting unit for purposes of assessing goodwill impairment. No impairment charges have been incurred to date.
Indefinite-lived intangible assets
Certain trademarks and trade names are considered to be indefinite life intangibles, and are not amortized but are subject to testing for impairment annually.
Finite-lived intangible assets
We assess the recoverability of identifiable finite-lived intangible assets whenever events or changes in circumstances indicate that an asset or asset group's carrying amount may be impaired. Impairment of certain finite-lived intangible assets, particularly customer relationships, certain trade names and core technology, is measured by comparing the carrying amount of the asset group to which the assets are assigned to the sum of the undiscounted estimated future cash flows the asset group is expected to generate. If the asset or asset group is considered to be impaired, the amount of such impairment would be measured by the difference between the carrying amount of the asset and its fair value.
Acquisition of certain identifiable definite-lived and indefinite-lived assets
In conjunction with an acquisition of a business, the Company records identifiable definite-lived and indefinite-lived intangible assets acquired at their respective fair values as of the date of acquisition. The estimates used in assessing the fair value for the assets acquired include projected future cash flows, associated discount rates used to calculate present value, asset life cycles, customer retention rates and royalty rates. The fair value calculated for indefinite-lived intangible assets such as certain trade names, in addition to intangible assets that are definite-lived such as customer relationships and other technology-based assets may change during the finalization of the purchase price allocation, due to the significant estimates used in determining their fair value. As a result, the Company may make adjustments to the provisional amounts recorded for certain items as part of the purchase price allocation subsequent to the acquisition, not to exceed one year after the acquisition date, until the purchase accounting allocation is finalized.
Stock-based compensation
The Company measures stock-based compensation for all stock-based awards,
including stock options and restricted stock units ("RSUs"), based on their
estimated fair values on the date of the grant and recognizes the stock-based
compensation cost for time-vested awards on a straight-line basis over the
requisite service period. For performance-based RSUs, the number of shares
ultimately expected to vest is estimated at each reporting date based on
management's expectations regarding the relevant performance criteria. To the
extent shares are expected to vest, the stock-based compensation cost is
recognized on a straight-line basis over the requisite service period.
Stock-based compensation was $13,914 , $8,618 and $6,864 for the fiscal years
ended December 31, 2021 , January 1, 2021 and January 3, 2020 , respectively.
Refer to Note 13. " Stockholders' Equity " for further details. The fair value
of each stock option granted is estimated using the Black-Scholes option-pricing
model. The Company does not estimate forfeitures in recognizing stock-based
compensation expense.
The determination of the grant date fair value of options using an option-pricing model is affected by our common stock fair value as well as assumptions including our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends.
Stock-based compensation expenses are classified in the statements of income
based on the department to which the related employee reports. Our stock-based
awards subsequent to our IPO have been comprised principally of restricted stock
unit awards.
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Revenue recognition
Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer, generally at the time of shipment. Contracts are generally in the form of purchase orders and are governed by standard terms and conditions. For larger OEMs, the Company may also enter into master agreements. Provisions for discounts, rebates, sales incentives, returns, and other adjustments are generally provided for in the period the related sales are recorded, based on management's assessment of historical trends and projection of future results. Accrued sales rebates were$8,568 and$4,471 as ofDecember 31, 2021 andJanuary 1, 2021 , respectively. Sales returns allowances have historically been immaterial to the financial statements. Certain pricing provisions that provide the customer with future discounts are considered a material right. Such material rights result in the deferral of revenue that are recognized when the rights are exercised by the customer. Measuring the material rights requires judgments including forecasts of future sales and product mix.
Allowance for credit losses
We record a provision for credit losses deemed not collectible using the aging method. The provision is based on how long a receivable has been outstanding, taking into account the historical credit loss rate and adjusting for both current conditions and forecasts of economic conditions into that expected credit loss rate. If circumstances change, such as higher-than-expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations, we estimate if the recoverability of the amounts due could be reduced by a material amount.
Fair value measurement and financial instruments
ASC 820, Fair Value Measurements and Disclosures, requires the valuation of assets and liabilities required or permitted to be either recorded or disclosed at fair value based on hierarchy of available inputs as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. We used Level 2 inputs to determine the fair value of our Credit Facility. The Company believes the carrying amount of its Credit Facility approximates the fair value atDecember 31, 2021 because the interest rate approximates current market rates of debt with similar terms and comparable credit risk. OnJune 11, 2021 the Company entered into an interest rate swap agreement to mitigate the cash flow risk associated with changes in interest rates on its variable rate debt. Refer to Note 11. " Derivatives and Hedging " for additional details of the agreement. In accordance with ASC 815, Derivatives and Hedging Interest rate swap contract is recognized as an asset or liability on the consolidated balance sheets and is measured at fair value. The fair value was calculated utilizing Level 2 inputs. OnJuly 22, 2020 , we, pursuant to a stock purchase agreement withFlagship, Inc. , dated as of the same date, purchased the remaining 20% interest ofFF US Holding Corp. for$24,975 payable in a combination of stock and cash. Refer to Note 12. " Commitments and Contingencies " for additional details of this agreement. Prior to the consummation of the stock purchase, the non-controlling interest was measured at fair value using Level 3 inputs. 51
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Recent Accounting Pronouncements
InDecember 2019 , the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which helps simplify how entities account for income taxes by removing various exceptions related to the recognition of deferred tax liabilities and updating other tax computation requirements. This standard is effective for fiscal years beginning afterDecember 15, 2020 and early adoption is permitted. The Company adopted ASU 2019-12 effective in the first quarter of fiscal year 2021. The adoption of ASU 2021-12 did not have a material impact on the Company's consolidated financial statements. InOctober 2020 , the FASB issued ASU 2020-10, Codification Improvements. The amendments in ASU 2020-10 contain improvements to the Codification to ensure consistency by including disclosure guidance in the appropriate Disclosure Section. This guidance includes an option for an entity to provide certain information either on the face of the financial statements or in the notes. The ASU also provides clarification to various codification topics to improve consistency in guidance application. The amendments are effective for interim and annual reporting periods in fiscal years beginning afterDecember 15, 2020 , with early adoption permitted. The Company adopted ASU 2020-10 effective in the first quarter of fiscal year 2021. The adoption of ASU 2020-10 did not have a material impact on the Company's condensed consolidated financial statements and related disclosures. InOctober 2021 , the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Under ASU 2021-08, an acquirer must recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The guidance is effective for interim and annual periods beginning afterDecember 15, 2022 , with early adoption permitted. The Company expects to early adopt this guidance in the first quarter of 2022. This adoption is not expected to have a material impact on our financial statements.
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