Fox(FOXF) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's financial statements, including income, balance sheet, and cash flow, along with management's analysis and disclosures on market risk and controls Financial Statements For Q1 2019, Fox Factory reported a 24.6% sales increase to $161.7 million, with gross profit up but net income down due to a prior-year tax benefit Condensed Consolidated Statements of Income (Q1 2019 vs Q1 2018) | Metric | Q1 2019 (in thousands) | Q1 2018 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Sales | $161,700 | $129,792 | 24.6% | | Gross Profit | $51,057 | $41,644 | 22.6% | | Income from Operations | $21,819 | $15,952 | 36.8% | | Net Income | $18,402 | $21,450 | (14.2)% | | Diluted EPS | $0.46 | $0.55 | (16.4)% | Condensed Consolidated Balance Sheets | Metric | March 29, 2019 (in thousands) | Dec 28, 2018 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $271,183 | $231,947 | | Total Assets | $542,312 | $485,254 | | Total Current Liabilities | $113,696 | $96,785 | | Total Liabilities | $188,310 | $149,767 | | Total Stockholders' Equity | $339,421 | $321,205 | Condensed Consolidated Statements of Cash Flows (Q1 2019 vs Q1 2018) | Activity | Q1 2019 (in thousands) | Q1 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $8,745 | $10,965 | | Net cash used in investing activities | ($7,297) | ($3,975) | | Net cash provided by (used in) financing activities | $8,958 | ($20,878) | | Change in Cash and Cash Equivalents | $10,330 | ($13,714) | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail accounting policies, including a new lease standard adoption, revenue analysis, ongoing patent litigation, and a significant prior-year tax benefit - The company designs and manufactures performance products for bicycles, side-by-side vehicles, on-road vehicles with off-road capabilities, and other specialty vehicles, supplying both original equipment manufacturers (OEMs) and the aftermarket[21] Sales by Product Category (Q1 2019 vs Q1 2018) | Product Category | Q1 2019 Sales (in thousands) | Q1 2018 Sales (in thousands) | Growth (%) | | :--- | :--- | :--- | :--- | | Powered Vehicles | $96,708 | $72,133 | 34.1% | | Specialty Sports | $64,992 | $57,659 | 12.7% | | Total Sales | $161,700 | $129,792 | 24.6% | - The company adopted the new lease accounting standard ASU 2016-02 in Q1 2019, resulting in the recognition of $13.6 million in operating lease right-of-use assets and $13.9 million in operating lease liabilities on the balance sheet[40] - The company is engaged in patent infringement lawsuits with SRAM Corporation, both as a defendant and a plaintiff, believing the lawsuits against it are without merit and unable to predict the outcome or a range of possible losses[64][66][67] - The Q1 2018 effective tax rate included a one-time benefit of $9.8 million from the favorable conclusion of a 2015 U.S. IRS audit regarding the deductibility of amortization and depreciation[81][111] - On April 29, 2019, the Company entered into a definitive agreement to acquire substantially all assets of Air Ride Technologies, Inc. (dba RideTech) for approximately $14 million[87] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2019 sales growth to strong demand, while gross margin declined due to product mix and inefficiencies, and net income decreased due to a non-recurring tax benefit Sales Growth Analysis (Q1 2019 vs Q1 2018) | Product Category | Change ($ millions) | Change (%) | Key Driver | | :--- | :--- | :--- | :--- | | Powered Vehicle products | +$24.6 | 34.1% | Continued high demand for on and off-road suspension products and higher OEM sales | | Specialty Sports products | +$7.3 | 12.7% | Primarily driven by higher OEM sales | | Total Sales | +$31.9 | 24.6% | | - Gross margin decreased by 50 basis points to 31.6% due to a change in customer/product mix, supply chain inefficiencies from higher-than-expected demand, and costs from relocating aftermarket bike operations[103] - Operating expenses decreased as a percentage of sales to 18.0% from 19.8%, indicating operating leverage on higher sales volume, despite a dollar increase from investments in R&D and higher patent litigation expenses[104] - Net cash from operating activities decreased to $8.7 million from $11.0 million year-over-year, primarily due to a $17.0 million increase in inventory and a $4.9 million increase in accounts receivable to support sales growth[116][117] - The company's Second Amended and Restated Credit Facility provides a $100 million revolving line of credit and matures in May 2021, with $82.0 million available for borrowing as of March 29, 2019[123][62] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its market risk disclosures since the 2018 Annual Report on Form 10-K - There have been no material changes to the disclosures regarding market risk since the company's 2018 Annual Report on Form 10-K[128] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 29, 2019, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 29, 2019[131] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[132] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered sales of equity securities, and a list of exhibits Legal Proceedings The company is involved in ongoing patent infringement litigation with SRAM Corporation, defending against two lawsuits while also filing two against SRAM, believing the claims against it are without merit - The company's subsidiary, RFE Canada, is defending against two patent infringement lawsuits filed by SRAM Corporation[135] - The company has filed its own lawsuits against SRAM, alleging infringement of four separate company-owned patents[136] - Management believes the lawsuits against the company are without merit but cannot predict the outcome or a range of reasonably possible losses[137] Risk Factors The company faces risks including dependence on innovation, intense competition, economic sensitivity, reliance on key customers and suppliers, international operations, and potential product liability - The company's growth depends on its ability to continuously develop innovative products and enhance existing ones to meet consumer demand and compete effectively[140] - A small number of OEM customers account for a substantial portion of sales, with the top five representing approximately 32% of sales in fiscal 2018, making the loss of any a material adverse impact[164] - The company depends on a limited number of suppliers, including a sole-source supplier (Miyaki Corporation) for the proprietary Kashima coating, a key feature of its high-performance products[207][209] - Risks from international operations include currency exchange rate fluctuations, changes in trade policies and tariffs, and difficulties in managing a global supply chain and manufacturing footprint[168][169] - The company faces risks from product recalls and liability claims, which could result in significant costs and damage to its brand image, having conducted voluntary recalls in the past[178][179] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2019, the company repurchased 30,507 shares of common stock at a weighted average price of $63.43 per share to satisfy tax withholding obligations for restricted stock unit awards Common Stock Repurchases (Q1 2019) | Period | Total Shares Purchased | Weighted Average Price Paid per Share | | :--- | :--- | :--- | | 12/29/18 - 2/1/19 | — | $— | | 2/2/19 - 3/1/19 | 30,507 | $63.43 | | 3/2/19 - 3/29/19 | — | $— | | Total | 30,507 | $63.43 | - The shares were acquired from holders of restricted stock unit awards to satisfy tax withholding obligations[236] Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to employment agreements and certifications by the Principal Executive Officer and Principal Financial Officer - Filed exhibits include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[241] - Amendments to employment agreements for Tom Wittenschlaeger and Bill Katherman were filed[241]