FOX FACTORY HOLDING CORP.

(FOXF)
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FOX FACTORY HOLDING CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/05/2022 | 04:31pm EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes thereto included elsewhere
in this Quarterly Report on Form 10-Q and with our audited condensed
consolidated financial statements and related notes included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with
the U.S. Securities and Exchange Commission ("SEC") on February 24, 2022, and
our other reports and registration statements that we file with the SEC from
time to time. In addition to historical condensed consolidated financial
information, the following discussion contains forward-looking statements that
reflect our plans, estimates, and beliefs. Our actual results could differ
materially from those discussed below. Factors that could cause or contribute to
these differences include those discussed below and elsewhere in this Quarterly
Report on Form 10-Q, particularly in the "Risk Factors" section included in Part
II, Item 1A.

Unless the context otherwise requires, the terms "FOX," the "Company," "we," "us," and "our" in this Quarterly Report on Form 10-Q refer to Fox Factory Holding Corp. and its operating subsidiaries on a consolidated basis.

Cautionary Note Regarding Forward-Looking Statements


This Quarterly Report on Form 10-Q includes forward-looking statements, which
are subject to the "safe harbor" created by Section 27A of the Securities Act of
1933, as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). We may make
forward-looking statements in our SEC filings, press releases, news articles,
earnings presentations and when we are speaking on behalf of the Company.
Forward-looking statements generally relate to future events or our future
financial or operating performance that involve substantial risks and
uncertainties. In some cases, you can identify forward-looking statements
because they contain words such as "may," "might," "will," "would," "should,"
"expect," "plan," "anticipate," "could," "intend," "target," "project,"
"contemplate," "believe," "estimate," "predict," "likely," "potential" or
"continue" or the negative of these words or other similar terms or expressions
that concern our expectations, strategy, plans or intentions. Forward-looking
statements contained in this Quarterly Report on Form 10-Q are subject to
numerous risks and uncertainties, including but not limited to risks related to:

•the spread of highly infectious or contagious disease, such as COVID-19, could
cause severe disruptions in the U.S. and global economy, which could in turn
disrupt the business activities and operations of our customers, as well as our
businesses and operations;

•changes in general economic conditions, including market and macro-economic disruptions resulting from the Russian invasion of Ukraine;


•our dependency on a limited number of suppliers for materials, product parts,
and vehicle chassis could lead to an increase in material costs, disruptions in
our supply chain, or reputational costs;

•our ability to develop new and innovative products in our current end-markets;

•our ability to leverage our technologies and brand to expand into new categories and end-markets;

•our ability to increase our aftermarket penetration;

•our ability to accelerate international growth;

•our exposure to exchange rate fluctuations;

•the loss of key customers;

•our ability to improve operating and supply chain efficiencies;

•our ability to enforce our intellectual property rights;


•our future financial performance, including our sales, cost of sales, gross
profit or gross margins, operating expenses, ability to generate positive cash
flow and ability to maintain our profitability;

•our ability to maintain our premium brand image and high-performance products;

•our ability to maintain relationships with the professional athletes and race teams we sponsor;

•our ability to selectively add additional dealers and distributors in certain geographic markets;

•the growth of the markets in which we compete, our expectations regarding consumer preferences and our ability to respond to changes in consumer preferences;

•changes in demand for performance-defining products;

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•the loss of key personnel, management and skilled engineers;

•our ability to successfully identify, evaluate and manage potential or completed acquisitions and to benefit from such acquisitions;

•the outcome of pending litigation;

•future disruptions in the operations of our manufacturing facilities;

•our ability to adapt our business model to mitigate the impact of certain changes in tax laws;

•changes in the relative proportion of profit earned in the numerous jurisdictions in which we do business and in tax legislation, case law and other authoritative guidance in those jurisdictions;

•product recalls and product liability claims; and

•future economic or market conditions.


You should not rely upon forward-looking statements as predictions of future
events. We have based the forward-looking statements contained in this Quarterly
Report on Form 10-Q primarily on our current expectations and projections about
future events and trends that we believe may affect our business, financial
condition, results of operations, and prospects and the outcomes of any of the
events described in any forward-looking statements are subject to risks,
uncertainties, and other factors. In addition to the risks, uncertainties and
other factors discussed above and elsewhere in this Quarterly Report on Form
10-Q, the risks, uncertainties and other factors expressed or implied in Part I,
Item 1A. "Risk Factors" of our 2021 Annual Report on Form 10-K, as filed with
the SEC on February 24, 2022, could cause or contribute to actual results
differing materially from those set forth in any forward-looking statement.
Moreover, we operate in a very competitive and challenging environment. New
risks and uncertainties emerge from time to time, and it is not possible for us
to predict all risks and uncertainties that could have an impact on the
forward-looking statements contained in this Quarterly Report on Form 10-Q. We
cannot assure you that the results, events, and circumstances reflected in the
forward-looking statements will be achieved or occur. Actual results, events, or
circumstances could differ materially from those contemplated by, set forth in,
or underlying any forward-looking statements. For all of these forward-looking
statements, we claim the protection of the safe harbor for forward-looking
statements in Section 27A of the Securities Act and Section 21E of the Exchange
Act.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate
only to events as of the date on which the statements are made. We undertake no
obligation to update any forward-looking statements made in this Quarterly
Report on Form 10-Q to reflect events or circumstances after the date of this
Quarterly Report on Form 10-Q or to reflect new information or the occurrence of
unanticipated events, except as required by law. We may not actually achieve the
plans, intentions, or expectations disclosed in our forward-looking statements
and you should not place undue reliance on our forward-looking statements. Our
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments we may make.


Critical Accounting Policies and Estimates


In the first quarter of 2022, final tax regulations regarding foreign tax
credits ("FTC") were published in the Federal Register. These final FTC
regulations apply to foreign taxes paid or accrued in taxable years beginning on
or after December 28, 2021. The new regulations narrow the definition of
withholding taxes that are eligible for an FTC by imposing a new source-based
jurisdictional nexus or "attribution" requirement. The application of these
final FTC regulations makes it more likely than not that all of our foreign tax
credits will be realizable before their expiration, therefore the Company
released its partial valuation allowance of $9.2 million in the first quarter of
2022.

There have been no other changes to the critical accounting policies and
estimates described in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2021, as filed with the SEC on February 24, 2022, that have had a
material impact on our condensed consolidated financial statements and related
notes.


Recent Accounting Pronouncements


See   Note 1 - Description of the Business, Basis of Presentation, and Summary
of Significant Accounting Policies   to the accompanying notes to unaudited
condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q for further details regarding this topic.



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Results of Operations

The table below summarizes our results of operations:

                                                  For the three months ended
(in thousands)                                April 1, 2022           April 2, 2021
Sales                                    $      377,977              $      281,136
Cost of sales                                   257,717                     183,212
Gross profit                                    120,260                      97,924
Operating expenses:
Sales and marketing                              22,589                      16,858
Research and development                         12,642                       9,876
General and administrative                       25,567                      20,369
Amortization of purchased intangibles             5,307                       4,965

Total operating expenses                         66,105                      52,068
Income from operations                           54,155                      45,856
Interest and other expense, net:
Interest expense                                  1,977                     

2,904

Other expense, net                                1,692                     

959

Interest and other expense, net                   3,669                       3,863
Income before income taxes                       50,486                      41,993
Provision for income taxes                        2,436                       4,007
Net income                               $       48,050              $       37,986




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The following table sets forth selected statement of income data as a percentage of sales for the periods indicated:

                                                   For the three months ended
                                                April 1, 2022            April 2, 2021
Sales                                                       100.0  %           100.0  %
Cost of sales                                                68.2               65.2
Gross profit                                                 31.8               34.8
Operating expenses:
Sales and marketing                                           6.0                6.0
Research and development                                      3.3                3.5
General and administrative                                    6.8                7.2
Amortization of purchased intangibles                         1.4                1.8

Total operating expenses                                     17.5               18.5
Income from operations                                       14.3               16.3
Interest and other expense, net:
Interest expense                                              0.5           

1.0

Other expense, net                                            0.4           

0.3

Interest and other expense, net                               1.0           

1.4

Income before income taxes                                   13.4           

14.9

Provision for income taxes                                    0.6                1.4
Net income                                                   12.7  %            13.5  %

*Percentages may not foot due to rounding.

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Three months ended April 1, 2022 compared to three months ended April 2, 2021

Sales
                                                   For the three months ended
(in millions)                                 April 1, 2022           April 2, 2021           Change ($)              Change (%)
Powered Vehicle products                    $        208.1          $        162.7          $      45.4                        27.9  %
Specialty Sports products                            169.9                   118.4                 51.5                        43.5
Total sales                                 $        378.0          $        281.1          $      96.9                        34.4  %

Total sales for the three months ended April 1, 2022 increased approximately $96.9 million, or 34.4%, compared to the three months ended April 2, 2021. Specialty Sports product sales increased by $51.5 million, or 43.5%, due to continued strong demand in both the OEM and aftermarket channels. Powered Vehicle product sales increased by $45.4 million, or 27.9%, due to strong performance in our upfitting product lines.

Cost of sales

                             For the three months ended
(in millions)            April 1, 2022             April 2, 2021       Change ($)       Change (%)
Cost of sales     $        257.7                  $        183.2      $      74.5           40.7  %


Cost of sales for the three months ended April 1, 2022 increased approximately
$74.5 million, or 40.7%, compared to the three months ended April 2, 2021. The
increase in cost of sales was primarily due to the 34.4% increase in sales in
the same period, as well as certain business factors affecting gross margin,
which are discussed below.

For the three months ended April 1, 2022, our gross margin decreased 300 basis
points to 31.8% compared to 34.8% for the three months ended April 2, 2021. The
decrease in gross margin was primarily driven by continued increases in supply
chain related costs, including increased prices for raw materials and freight.
Additionally, the completion of the planned shutdown of our Watsonville,
California facility and transition of those production lines resulted in
inefficiencies as we ramp up our Gainesville, Georgia facility.

Operating expenses
                                                 For the three months ended
(in millions)                               April 1, 2022           April 2, 2021           Change ($)              Change (%)
Operating expenses:
Sales and marketing                       $         22.6          $         16.9          $       5.7                        33.7  %
Research and development                            12.6                     9.9                  2.7                        27.3
General and administrative                          25.6                    20.4                  5.2                        25.5
Amortization of purchased intangibles                5.3                     4.9                  0.4                         8.2

Total operating expenses                  $         66.1          $         52.1          $      14.0                        26.9  %


Total operating expenses for the three months ended April 1, 2022 were $66.1
million compared to $52.1 million for the three months ended April 2, 2021. The
increase in operating expenses is primarily due to higher employee related
costs, higher commission costs, and higher insurance and facility-related
expenses. When expressed as a percentage of total sales, total operating
expenses were 17.5% for the three months ended April 1, 2022, a decrease of 100
basis points, compared to 18.5% of total sales in the three months ended
April 2, 2021.


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Within operating expenses, sales and marketing expenses increased approximately
$5.7 million primarily due to higher commissions and marketing related expenses.
Research and development costs increased approximately $2.7 million primarily
due to personnel investments to support future growth and product innovation.
General and administrative expenses increased by approximately $5.2 million due
to higher employee related costs of $2.1 million, higher insurance and facility
related costs of $2.2 million, as well as increases in various other costs.

Income from operations

                                                        For the three months ended
(in millions)                                      April 1, 2022           April 2, 2021          Change ($)              Change (%)
Income from operations                           $         54.2          $         45.9          $      8.3                        18.1  %


As a result of the factors discussed above, income from operations for the three months ended April 1, 2022 increased approximately $8.3 million, or 18.1%, compared to income from operations for the three months ended April 2, 2021.

Interest and other expense, net

                                              For the three months ended
(in millions)                            April 1, 2022           April 2, 2021           Change ($)              Change (%)
Interest and other expense, net:
Interest expense                       $          2.0          $          2.9          $      (0.9)                      (31.0) %
Other expense, net                                1.7                     1.0                  0.7                        70.0  %

Interest and other expense, net $ 3.7 $ 3.9 $ (0.2)

                       (5.1) %


Interest and other expense, net for the three months ended April 1, 2022
decreased by $0.2 million to $3.7 million compared to $3.9 million for the three
months ended April 2, 2021.

Income taxes
                                              For the three months ended
(in millions)                            April 1, 2022           April 2, 2021           Change ($)              Change (%)
Provision for income taxes             $          2.4          $          4.0          $      (1.6)                      (40.0) %

The effective tax rates were 4.8% and 9.5% for the three month periods ended April 1, 2022 and April 2, 2021, respectively.


For the three months ended April 1, 2022, the difference between the Company's
effective tax rate of 4.8% and the 21% federal statutory rate resulted primarily
from the impact of the recently finalized U.S. tax regulations published by the
U.S Treasury and Internal Revenue Service on January 4, 2022. These regulations
limit the amount of newly generated foreign taxes that are creditable against
U.S income taxes which resulted in a release of the Company's valuation
allowance against foreign tax credits due to the Company's ability to use
foreign tax credit carryforwards that had previously been reserved against. This
benefit was partially offset by state taxes and other nondeductible expenses.

For the three months ended April 2, 2021, the difference between our effective
tax rate of 9.5% and the 21% federal statutory rate resulted primarily from
windfall on stock-based compensation, the recognition of uncertain tax positions
due to the conclusion of an audit and a lower tax rate on foreign-derived
intangible income. These benefits were partially offset by an increase in the
valuation allowance for foreign tax credits, state taxes and nondeductible
expenses.


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Net income
                              For the three months ended
(in millions)             April 1, 2022              April 2, 2021       Change ($)       Change (%)
Net income        $         48.1                    $         38.0      $      10.1           26.6  %

As a result of the factors described above, our net income increased $10.1 million, or 26.6%, to $48.1 million in the three months ended April 1, 2022 from $38.0 million for the three months ended April 2, 2021.

Liquidity and Capital Resources


Our primary cash needs are to support working capital, capital expenditures,
acquisitions, and debt repayments. Historically, we have generally financed our
liquidity needs with operating cash flows, borrowings under our Prior Credit
Facility and the issuance of common stock. These sources of liquidity may be
impacted by various factors, including demand for our products, impacts of the
COVID-19 pandemic, investments made by us in acquired businesses, our plant and
equipment and other capital expenditures, and expenditures on general
infrastructure and information technology.

As of April 1, 2022, we held $43.8 million of our $68.8 million of cash and cash
equivalents in accounts of our subsidiaries outside of the U.S., which we may
repatriate. We manage our foreign cash, intercompany payables and intercompany
debt to provide a foreign currency hedge against U.S. dollar-denominated trade
receivable balances held by our Taiwan location.

A summary of our operating, investing and financing activities is shown in the
following table:

                                                                        For the three months ended
(in thousands)                                                    April 1, 2022            April 2, 2021
Net cash (used in) provided by operating activities             $      (143,124)         $       66,028
Net cash used in investing activities                                    (8,191)                (16,885)
Net cash provided by (used in) financing activities                      38,632                  (3,752)
Effect of exchange rate changes on cash and cash equivalents              1,770                     316
Change in cash and cash equivalents                             $      

(110,913) $ 45,707



We expect that cash on hand, cash flow from operations and availability under
our 2022 Credit Facility will be sufficient to fund our operations during the
next 12 months from the date of this Form 10-Q and beyond.

Operating activities


Cash used in or provided by operating activities consists of net income,
adjusted for certain non-cash items, primarily depreciation and amortization,
stock-based compensation, changes in deferred income taxes and uncertain tax
positions, amortization of loan fees and net cash invested in working capital.

In the three months ended April 1, 2022, net cash used in operating activities
was $143.1 million and consisted of net income of $48.1 million, plus non-cash
items totaling $5.2 million, offset by changes in operating assets and
liabilities totaling $196.4 million. Non-cash items and other adjustments
consisted of depreciation and amortization of $11.9 million, stock-based
compensation of $3.0 million, and amortization of loan fees of $0.4 million,
offset by a $10.1 million change in deferred taxes.

Our investment in operating assets and liabilities is a result of increases in
prepaids and other assets of $171.3 million, accounts receivable of $37.7
million, inventory of $37.5 million, and decreases in income taxes of $5.0
million and accrued expenses of $3.5 million, partially offset by an increase in
accounts payable of $58.6 million. The change in prepaids and other assets is
due to increased chassis deposits to secure supply for our upfitting business
for the remainder of the year. The change in inventory is due to additional raw
materials purchases to mitigate risks associated with supply chain uncertainty.
The changes in accounts receivable and accounts payable reflect business growth
and the timing of vendor payments. The changes in accrued expenses and income
taxes reflect lower compensation related accruals and income taxes payable due
to business growth and the timing of such payments.


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In the three months ended April 2, 2021, net cash provided by operating
activities was $66.1 million and consisted of net income of $38.0 million, plus
non-cash items totaling $12.6 million and changes in operating assets and
liabilities totaling $15.5 million. Non-cash items and other adjustments
consisted of depreciation and amortization of $10.1 million, stock-based
compensation of $2.5 million, and amortization of loan fees of $0.4 million,
offset by a $0.4 million change in deferred taxes and uncertain tax positions.
Our investment in operating assets and liabilities is a result of increased
inventory of $40.1 million, and accounts receivable of $16.6 million, offset by
a decrease in prepaids and other current assets of $33.3 million, and increases
in accounts payable of $33.7 million, accrued expenses of $2.9 million, and
income taxes of $2.3 million. The decrease in prepaids and other current assets
is primarily due to timing of chassis deposits at our SCA and Tuscany
subsidiaries. The changes in inventory, accounts receivable, and accounts
payable reflect business growth. The changes in accrued expenses and income
taxes are primarily attributable to the timing of rebate payments and the timing
of tax payments, respectively.

Investing activities

Cash used in investing activities primarily relates to investments in our manufacturing and general infrastructure through the procurement of property and equipment.

In the three months ended April 1, 2022 and April 2, 2021, net cash used in investing activities consisted of $8.2 million and $16.9 million in property and equipment additions, respectively.

Financing activities

Cash provided by or used in financing activities primarily relate to various forms of debt and equity instruments used to finance our business.


In the three months ended April 1, 2022, net cash used in financing activities
was $38.6 million, which consisted of net proceeds from our Prior Credit
Facility of $42.9 million, which were partially offset by payments on our term
debt of $2.5 million, $0.9 million in installment payments related to the
purchase of the Tuscany non-controlling interest and payments of $0.8 million to
repurchase shares of our common stock, net of proceeds from our stock-based
compensation program. Refer to   Note 9 - Commitments and Contingencies   for
additional information on our purchase of the Tuscany non-controlling interest.

In the three months ended April 2, 2021, net cash used in financing activities
was $3.8 million, which consisted of payments on our term debt of $2.5 million
and $1.9 million in installment payments related to the purchase of the Tuscany
non-controlling interest. These outflows were partially offset by $0.6 million
in net proceeds received as part of our stock-based compensation program.

Prior Credit Facility


The Prior Credit Facility (which was terminated on April 5, 2022 and replaced
with the 2022 Credit Facility (as discussed below)), would have matured on March
11, 2025, and provided 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 was 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. Additionally, the Company had $0.4 million of remaining unamortized debt
issuance costs. The Company expensed $0.3 million of the remaining unamortized
debt issuance costs. The remaining $0.2 million were allocated to the line of
credit. Loan fees allocated to the term debt were amortized using the interest
method and loan fees allocated to the line of credit were amortized on a
straight-line basis over the term of the Prior Credit Facility.

The Prior Credit Facility provided for interest at a rate either based on the
London Interbank Offered Rate ("LIBOR"), plus a margin ranging from 1.00% to
2.25%, with a floor rate of 0.00%, or based on the base rate offered by Bank of
America plus a margin ranging from 0.00% to 1.25%. At April 1, 2022, the
one-month LIBOR and prime rates were 0.44% and 3.50%, respectively. At April 1,
2022, our weighted-average interest rate on outstanding borrowing was 1.68%. The
Prior Credit Facility was secured by substantially all of the Company's assets,
restricted the Company's ability to make certain payments and engage in certain
transactions, and required that the Company satisfy customary financial ratios.
The Company was in compliance with the covenants as of April 1, 2022.

2022 Credit Facility


On April 5, 2022, the Company entered into the a new credit agreement with Wells
Fargo Bank, National Association, and other named lenders (the "2022 Credit
Facility"), and concurrently repaid in full and terminated the Prior Credit
Facility. The 2022 Credit Facility, which matures on April 5, 2027, provides for
revolving loans, swingline loans and letters of credit up to an aggregate amount
of $650.0 million. Refer to   Note 16 - Subsequent Events   for further details
of the 2022 Credit Facility.


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Material Cash Requirements


There have been no material changes to the information on our material cash
requirements material cash requirements related to commitments or contractual
obligations from those reported in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2021, as filed with the SEC on February 24, 2022.


Inflation


Historically, inflation has not had a material effect on our results of
operations. However, we have recently experienced a rise in raw material costs,
supply constraints, labor availability issues and logistical cost increases and
our expectation is that these impacts will continue throughout 2022. While we
are currently taking actions to mitigate these impacts, should these actions be
unsuccessful or should such costs exceed what we can effectively mitigate, our
business, financial condition and results of operations could be adversely
impacted.

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