Fox(FOXF) - 2018 Q4 - Annual Report

PART I Business Fox Factory Holding Corp. designs and markets performance products for bicycles and powered vehicles, utilizing a dual-channel strategy and focusing on innovation - The company designs, engineers, manufactures, and markets performance-defining products for bikes, side-by-side vehicles, on-road and off-road vehicles, ATVs, snowmobiles, and motorcycles[13] - The company's growth strategy focuses on developing innovative products, expanding into new markets (e.g., military, RVs), opportunistically acquiring complementary businesses, increasing aftermarket penetration, and accelerating international growth[28][29][30] Sales by Product Category (2016-2018) | Product Category | 2018 Sales % | 2017 Sales % | 2016 Sales % | | :--- | :--- | :--- | :--- | | Powered Vehicles | 54% | 48% | 44% | | Specialty Sports (Bike) | 46% | 52% | 56% | Sales by Channel and Customer Concentration (2018) | Metric | Value | Year | | :--- | :--- | :--- | | Sales to OEMs | 60% | 2018 | | Sales to Aftermarket | 40% | 2018 | | Sales to 10 Largest OEMs | ~43% | 2018 | - The company relocated its corporate headquarters to Braselton, Georgia in 2018 and purchased a 23-acre site in Hall County, Georgia for a new manufacturing facility expected to be completed in early 2020 to support the Powered Vehicles Group[66] - Firm backlog orders increased to $72.9 million as of December 28, 2018, up from $45.6 million at the end of 2017, driven by business growth and changes in order placement seasonality[67] Risk Factors The company faces significant business, operational, market, financial, and legal risks, including competition, supply chain, and currency fluctuations - Business and Operational Risks: The company faces risks from its inability to innovate, intense competition, disruptions in facility operations (including the move to Taiwan and expansion in Georgia), reliance on key management, and dependence on OEM customers and aftermarket dealers[83][86][95] - Market and Economic Risks: The business is sensitive to economic conditions impacting discretionary consumer spending. A significant portion of sales (46% in 2018) depends on the high-end bike market. The company is also exposed to risks from US trade policies and tariffs, which could impact supply chain costs and sales[87][92][114] - Financial and Tax Risks: The company is exposed to currency exchange rate fluctuations (USD, NTD, CAD). The Second Amended and Restated Credit Facility imposes operating restrictions and default risks. Unanticipated changes in tax laws, such as the 2017 TCJA, could affect financial performance[108][125][134] - Product and Legal Risks: The company is subject to risks from product recalls, warranty claims, and product liability litigation. It also faces potential intellectual property disputes that could be costly or prohibit the sale of products[116][121][122] - Supply Chain Risks: The company depends on a limited number of suppliers for certain components, including a sole-source supplier (Miyaki Corporation for Kashima coating), making it vulnerable to supply disruptions[152][155] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[186] Properties As of December 28, 2018, the company occupied approximately 846,502 square feet of facility space worldwide, with most in the United States Facility Space as of Dec 28, 2018 (Square Feet) | Type | United States | Other Countries | Total | | :--- | :--- | :--- | :--- | | Leased facilities | 412,691 | 200,052 | 612,743 | | Owned facilities | 233,759 | — | 233,759 | | Total | 646,450 | 200,052 | 846,502 | - Key operations are located in California, Michigan, Indiana, Taiwan, and Canada, with sales and service offices in the U.S. and Europe[188] Legal Proceedings The company is involved in ongoing patent infringement litigation with SRAM Corporation, with both parties filing lawsuits and countersuits - SRAM Corporation filed two lawsuits against the company's subsidiary RFE Canada, alleging patent infringement of U.S. Patent numbers 9,182,027 and 9,291,250[190] - The company filed two lawsuits against SRAM, alleging infringement of U.S. Patent numbers 6,135,434, 6,557,674, 8,226,172, and 8,974,009[191] - Due to the uncertainties of litigation, the company cannot predict the outcome or a range of reasonably possible losses, and no amounts have been recorded in the financial statements for these matters[192] Mine Safety Disclosures This item is not applicable to the company - Not applicable[194] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, and it has not paid cash dividends, instead repurchasing shares for tax obligations - The company's common stock is listed on the NASDAQ Global Select Market under the symbol 'FOXF'[196] Quarterly Stock Price Range (2018) | Quarter Ended | High ($) | Low ($) | | :--- | :--- | :--- | | March 30, 2018 | 40.20 | 34.35 | | June 29, 2018 | 47.40 | 33.25 | | September 28, 2018 | 72.10 | 47.75 | | December 28, 2018 | 75.17 | 50.66 | - The company did not declare or pay any dividends in 2018 and 2017. Future dividend decisions are at the discretion of the Board of Directors and are limited by covenants in the company's credit facility[200] - In the three months ended December 28, 2018, the company repurchased 1,258 shares at a weighted average price of $58.53 per share, primarily to satisfy tax withholding obligations for employee equity awards[206] Selected Financial Data This section presents selected consolidated financial data for the last five fiscal years, showing consistent growth in sales and net income Selected Consolidated Statement of Income Data (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Sales | $619,225 | $475,633 | $403,077 | | Gross profit | $205,496 | $154,490 | $126,388 | | Income from operations | $94,532 | $67,041 | $45,541 | | Net income attributable to FOX stockholders | $84,040 | $43,128 | $35,675 | | Diluted EPS | $2.16 | $1.11 | $0.94 | Selected Consolidated Balance Sheet Data (in thousands) | Metric | As of Dec 28, 2018 | As of Dec 29, 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $27,958 | $35,947 | | Working capital | $135,162 | $116,702 | | Total assets | $485,254 | $428,286 | | Total debt, including current portion | $59,426 | $98,643 | | Total stockholders' equity | $321,205 | $234,835 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting strong sales growth, improved margins, liquidity, and critical accounting policies Results of Operations In fiscal 2018, sales grew 30.2% to $619.2 million, driven by strong product segment growth and improved gross margin, while net income more than doubled due to a lower tax rate Financial Performance Comparison: 2018 vs. 2017 (in millions) | Metric | 2018 | 2017 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Sales | $619.2 | $475.6 | $143.6 | 30.2% | | Gross Profit | $205.5 | $154.5 | $51.0 | 33.0% | | Income from Operations | $94.5 | $67.0 | $27.5 | 41.0% | | Net Income | $85.4 | $43.2 | $42.2 | 97.7% | - The 2018 sales increase was driven by 46.5% growth in Powered Vehicle products and 14.9% growth in Specialty Sports products, with the Powered Vehicle growth benefiting from the inclusion of the Tuscany acquisition[247] - Gross margin increased to 33.2% in 2018 from 32.5% in 2017, primarily due to increased operating leverage on higher sales volume and improved manufacturing efficiencies[249] - The effective tax rate dropped to 6.1% in 2018 from 32.8% in 2017. The decrease was mainly due to the lower U.S. corporate tax rate, a $9.8 million benefit from resolving an uncertain tax position, and the non-recurrence of one-time TCJA transition expenses from 2017[254][255] Liquidity and Capital Resources The company's liquidity is primarily from operations and its credit facility, with net cash from operations at $65.4 million in 2018 and reduced total debt Summary of Cash Flows (in thousands) | Activity | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $65,392 | $48,172 | $38,845 | | Net cash used in investing activities | $(30,203) | $(70,456) | $(12,222) | | Net cash (used in) provided by financing activities | $(43,431) | $22,007 | $1,830 | - As of December 28, 2018, the company had $59.4 million of total debt outstanding and $95.0 million available for borrowing under its Second Amended and Restated Credit Facility, which matures in May 2021[287][470] Contractual Obligations as of Dec 28, 2018 (in thousands) | Obligation Type | Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term borrowings | $59,687 | $7,031 | $52,656 | $— | $— | | Operating lease obligations | $19,233 | $5,781 | $8,591 | $2,784 | $2,077 | | Purchase obligations and other | $3,016 | $3,016 | $— | $— | $— | | Total | $81,936 | $15,828 | $61,247 | $2,784 | $2,077 | Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant estimates, including revenue recognition, goodwill impairment, income taxes, and warranty reserves - Key critical accounting policies involve significant management estimates and judgments[293] - Revenue Recognition: Involves estimating provisions for discounts, rebates, and returns. The adoption of ASC 606 in 2018 required deferral of revenue for certain material rights provided to customers[295] - Goodwill and Intangible Assets: Goodwill is tested for impairment annually at the reporting unit level. The 2018 test resulted in no impairment[299][300] - Income Taxes: Requires assessing the realizability of deferred tax assets and establishing valuation allowances. The TCJA significantly impacted this area, leading to a $6.0 million valuation allowance against foreign tax credits in 2017. In 2018, a favorable IRS closing agreement resolved uncertainty around prior acquisition-related deductions, resulting in a $9.8 million tax benefit[305][310] - Warranty: The company accrues for estimated warranty costs based on historical product failure rates and costs. The warranty liability was $6.4 million as of December 28, 2018[303][463] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate fluctuations on variable-rate debt, foreign currency exchange rates, and trade receivable credit risk - Interest Rate Risk: The company is exposed to interest rate risk on its $59.4 million of variable-rate debt. A hypothetical 100 basis point (1%) increase in interest rates would have changed 2018 interest expense by approximately $0.6 million[329] - Exchange Rate Risk: The company has exposure to fluctuations in the Euro, New Taiwanese Dollar, and Canadian Dollar. Most sales are denominated in U.S. Dollars, but a growing portion of activities are in foreign currencies[330] - Credit Risk: Risk is concentrated in trade receivables from a number of significant customers. The company manages this by performing ongoing credit evaluations[331] Financial Statements and Supplementary Data This section indicates that the company's audited consolidated financial statements and the independent auditor's report are included in Part IV - The company's financial statements and the report of the independent registered public accounting firm are included in Part IV of this Annual Report on Form 10-K[333] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any accounting principles or financial disclosure matters - None[334] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 28, 2018 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 28, 2018[336] - Management concluded that its internal control over financial reporting was effective as of December 28, 2018, based on the COSO 2013 framework[366] - There were no changes in internal control over financial reporting during the fourth quarter of 2018 that materially affected, or are reasonably likely to materially affect, these controls[339] Other Information The company reports no other information for this item - None[341] PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Certain Relationships Information for Items 10 through 14 is incorporated by reference from the company's Definitive Proxy Statement for the 2019 Annual Meeting - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's Definitive Proxy Statement for the 2019 Annual Meeting of Stockholders[343][344][345] PART IV Exhibits, Financial Statement Schedules This section contains the company's consolidated financial statements for fiscal years 2016-2018, along with management's and auditor's reports Consolidated Financial Statements The audited consolidated financial statements present the company's financial position and results for the three years ended December 28, 2018, with an unqualified opinion Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 28, 2018 | Dec 29, 2017 | | :--- | :--- | :--- | | Total Current Assets | $231,947 | $199,903 | | Total Assets | $485,254 | $425,241 | | Total Current Liabilities | $96,785 | $83,201 | | Total Liabilities | $149,767 | $177,451 | | Total Stockholders' Equity | $321,205 | $234,835 | Consolidated Income Statement Highlights (in thousands) | Account | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Sales | $619,225 | $475,633 | $403,077 | | Gross Profit | $205,496 | $154,490 | $126,388 | | Income from Operations | $94,532 | $67,041 | $45,541 | | Net Income Attributable to Fox Stockholders | $84,040 | $43,128 | $35,675 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, including revenue recognition, debt, goodwill, income taxes, and the Tuscany acquisition - The company adopted ASC 606 (Revenue from Contracts with Customers) in fiscal 2018, resulting in a cumulative effect adjustment of $0.3 million net of taxes to retained earnings[321] Sales by Product Category (in thousands) | Category | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Power Vehicle Group | $337,284 | $230,255 | $176,391 | | Specialty Sports Group | $281,941 | $245,378 | $226,686 | - As of Dec 28, 2018, the company had $59.7 million in long-term borrowings under its Second Amended and Restated Credit Facility, with $95 million of available borrowing capacity[468][470] - In 2018, the company finalized the purchase price allocation for the Tuscany acquisition, resulting in goodwill of $30.4 million and identifiable intangible assets of $35.1 million[538][541] - The effective tax rate for 2018 was 6.1%, significantly lower than the 21% federal statutory rate, primarily due to a $9.8 million benefit from the resolution of an uncertain tax position, excess stock-based compensation deductions, and foreign derived income benefits[256][507]