Fox Factory

Aug 3, 2023

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(NASDAQ: FOXF) (“FOX” or the “Company”) today reported financial results for the second quarter ended June 30, 2023. “Strong sales growth in PVG and AAG coupled with continued efficiency gains in our North American facilities enabled us to deliver on net sales and to exceed our expectations on adjusted EBITDA and adjusted EBITDA Margin,” commented Mike Dennison, FOX’s Chief Executive Officer. “Our solid cash flow generation and strong balance sheet place us in a position of strength heading into the second half of the year as we advance our organic growth strategy, address softness in SSG and continue to evaluate various acquisition targets that would be accretive to our brands and our financial performance.” In the second quarter of fiscal year 2023, the Company realigned its Powered Vehicles Group into the Powered Vehicles Group (“PVG”) and the Aftermarket Applications Group (“AAG”) to be more aligned with the Company’s end customers and drive additional focus on product development. Net sales for the second quarter of fiscal 2023 were $400.7 million, a decrease of 1.5%, as compared to net sales of $406.7 million in the second quarter of fiscal 2022. This decrease reflects a 41.0% decrease in Specialty Sports Group (“SSG”) net sales, offset by a 32.6% and 26.2% increase in PVG and AAG net sales, respectively. The decrease in SSG net sales is driven by higher levels of inventory across various channels. The increase in PVG net sales is primarily due to strong demand in the original equipment manufacturer (“OEM”) channel. The increase in AAG net sales is primarily due to the inclusion of revenue from our Custom Wheel House subsidiary, which was acquired in March 2023, and strong performance in our upfitting product lines. Gross margin was 32.9% for the second quarter of fiscal 2023, a 220 basis point decrease from gross margin of 35.1% in the second quarter of fiscal 2022. The decrease in gross margin was primarily driven by amortization of an acquired inventory valuation markup and a shift in our product line mix, offset by increased efficiencies at our North American facilities. Adjusted gross margin, which excludes the effects of amortization of acquired inventory valuation markup, decreased 90 basis points to 34.4% from the same prior fiscal year period. Total operating expenses were $79.2 million, or 19.8% of net sales, for the second quarter of fiscal 2023, compared to $72.5 million, or 17.8% of net sales in the second quarter of fiscal 2022. Operating expenses increased by $6.7 million primarily due to the inclusion of Custom Wheel House operating expenses of $4.8 million and the amortization of intangibles obtained in our acquisition of Custom Wheel House. Adjusted operating expenses were $71.0 million, or 17.7% of net sales in the second quarter of fiscal 2023, compared to $66.5 million, or 16.3% of net sales, in the second quarter of the prior fiscal year. The Company’s effective tax rate was 16.9% in the second quarter of fiscal 2023, compared to 18.9% in the second quarter of fiscal 2022. The decrease in the Company’s effective tax rate was primarily due to the impact of recently finalized U.S. tax regulations, which resulted in the ability to use certain foreign tax credits. This was partially offset by a decreased benefit related to foreign derived intangible income. Net income in the second quarter of fiscal 2023 was $39.7 million, compared to $53.5 million in the second quarter of the prior fiscal year. Earnings per diluted share for the second quarter of fiscal 2023 was $0.94, compared to earnings per diluted share of $1.26 for the second quarter of fiscal 2022. Adjusted net income in the second quarter of fiscal 2023 was $51.4 million, or $1.21 of adjusted earnings per diluted share, compared to adjusted net income of $58.6 million, or $1.38 of adjusted earnings per diluted share, in the same period of the prior fiscal year. Adjusted EBITDA in the second quarter of fiscal 2023 was $79.4 million, compared to $88.1 million in the second quarter of fiscal 2022. Adjusted EBITDA margin in the second quarter of fiscal 2023 was 19.8%, compared to 21.7% in the second quarter of fiscal 2022. “Strong double digit EBITDA margins demonstrate the strength of our brands, product diversification and commitment to continuous improvement. Our operating model coupled with our strong balance sheet and cash flows sets us up well to achieve our growth goals,” Dennison concluded. First Six Months Fiscal 2023 Results Net sales for the six months ended June 30, 2023 were $800.6 million, an increase of 2.0% compared to the first six months in fiscal 2022. Net sales of PVG and AAG increased 48.4% and 19.3%, respectively, and net sales of SSG decreased 35.6% for the first six months of fiscal 2023 compared to the prior year fiscal period. The increase in PVG net sales is primarily due to strong demand in the OEM channel. The increase in AAG net sales is primarily due to the inclusion of revenue from our Custom Wheel House subsidiary, which was acquired in March 2023, and strong performance in our upfitting product lines. The decrease in SSG net sales is driven by higher levels of inventory across various channels. Gross margin was 33.1% in the first six months of fiscal 2023, a 40 basis point decrease, compared to gross margin of 33.5% in the first six months of fiscal 2022. The decrease in gross margin for the first six months of fiscal 2023 was primarily driven by amortization of an acquired inventory valuation markup and a shift in our product line mix, offset by increased efficiencies at our North American facilities. Adjusted gross margin, excluding the effects of the amortization of an acquired inventory valuation markup, was 34.3% in the first six months of fiscal 2023, a 50 basis point increase, compared to 33.8% in the first six months of fiscal 2022. Total operating expenses were $157.9 million, or 19.7% of net sales, for the first six months of fiscal 2023, compared to $138.6 million, or 17.7% of net sales in the first six months of fiscal 2022. Operating expenses increased by $19.3 million primarily due to the inclusion of Custom Wheel House operating expenses of $6.2 million, increases in headcount and benefits related costs, new U.S. facilities expansion costs and the amortization of intangibles obtained in our acquisition of Custom Wheel House. Adjusted operating expenses were $141.3 million, or 17.7% of net sales in the first six months of fiscal 2023, compared to $126.1 million, or 16.1% of net sales, in the first six months of the prior fiscal year. Net income in the first six months of fiscal 2023 was $81.5 million, compared to $101.5 million in the first six months of the prior fiscal year. Earnings per diluted share for the first six months of fiscal 2023 was $1.92, compared to $2.40 in the same period of fiscal 2022. Adjusted net income in the first six months of fiscal 2023 was $102.4 million, or $2.41 of adjusted earnings per diluted share, compared to $114.4 million, or $2.70 of adjusted earnings per diluted share in the same period of the prior fiscal year. Adjusted EBITDA decreased to $158.6 million in the first six months of fiscal 2023, compared to $159.9 million in the first six months of fiscal 2022. Adjusted EBITDA margin decreased to 19.8% in the first six months of fiscal 2023, compared to 20.4% in the first six months of fiscal 2022. Balance Sheet Highlights As of June 30, 2023, the Company had cash and cash equivalents of $105.4 million, compared to $145.3 million as of December 30, 2022. Inventory was $355.2 million as of June 30, 2023, compared to $350.6 million as of December 30, 2022. As of June 30, 2023, accounts receivable and accounts payable were $171.3 million and $99.3 million, respectively, compared to $200.4 million and $131.2 million, respectively, as of December 30, 2022. Prepaids and other current assets were $214.8 million as of June 30, 2023, compared to $101.4 million as of December 30, 2022. The decrease in cash and cash equivalents was primarily due to an increase in prepaids and other current assets driven by higher chassis deposits as we ramp up to meet current year demand, which is in line with our upfitting business cycle. Inventory increased by $4.6 million driven by the inclusion of $16.5 million of acquired inventory from Custom Wheel House, offset by the continuous improvement efforts to optimize inventory levels throughout the organization. The changes in accounts receivable and accounts payable reflect the timing of customer collections and vendor payments. Total debt was $325.0 million as of June 30, 2023, compared to $200.0 million as of December 30, 2022. During the first quarter of fiscal 2023, the Company incurred additional debt to support its working capital and the acquisition of Custom Wheel House, and subsequently, was able to pay down $35.0 million of the revolver borrowings. Fiscal 2023 Guidance For the third quarter of fiscal 2023, the Company expects net sales in the range of $390 million to $410 million and adjusted earnings per diluted share in the range of $1.00 to $1.20. For the fiscal year 2023, the Company expects net sales at the low end of $1,670 million to $1,700 million, adjusted earnings per diluted share at the low end of the range of $5.00 to $5.30, and a full year effective tax rate to be within the range of 15% to 18%. Adjusted earnings per diluted share exclude the following items net of applicable tax: amortization of purchased intangibles, litigation and settlement-related expenses, acquisition and integration-related expenses and strategic transformation costs. A quantitative reconciliation of adjusted earnings per diluted share for the third quarter and full fiscal year 2023 is not available without unreasonable efforts because management cannot predict, with sufficient certainty, all of the elements necessary to provide such a reconciliation. Conference Call & Webcast The Company will hold an investor conference call today at 4:30 p.m. Eastern Time (1:30 p.m. Pacific Time). The conference call dial-in number for North America listeners is (800) 343-4136, and international listeners may dial (203) 518-9843; the conference ID is FOXFQ223 or 36937223. Live audio of the conference call will be simultaneously webcast in the Investor Relations section of the Company’s website at http://www.ridefox.com. The webcast of the teleconference will be archived and available on the Company’s website. About Fox Factory Holding Corp. (NASDAQ: FOXF) Fox Factory Holding Corp. designs and manufactures performance-defining ride dynamics products primarily for bicycles, on-road and off-road vehicles and trucks, side-by-side vehicles, all-terrain vehicles, snowmobiles, specialty vehicles and applications, motorcycles, and commercial trucks. The Company is a direct supplier to leading powered vehicle OEMs. Additionally, the Company supplies top bicycle OEMs and their contract manufacturers, and provides aftermarket products to retailers and distributors. FOX is a registered trademark of Fox Factory, Inc. NASDAQ Global Select Market is a registered trademark of The NASDAQ OMX Group, Inc. All rights reserved. Non-GAAP Financial Measures In addition to reporting financial measures in accordance with generally accepted accounting principles (“GAAP”), FOX is including in this press release certain non-GAAP financial measures consisting of “adjusted gross profit,” “adjusted gross margin,” “adjusted operating expense,” “adjusted net income,” “adjusted earnings per diluted share,” “adjusted EBITDA,” and “adjusted EBITDA margin,” all of which are non-GAAP financial measures. FOX defines adjusted gross profit as gross profit adjusted for certain strategic transformation costs and the amortization of acquired inventory valuation markup. Adjusted gross margin is defined as adjusted gross profit divided by net sales. FOX defines adjusted operating expense as operating expense adjusted for amortization of purchased intangibles, litigation and settlement-related expenses, acquisition and integration-related expenses, and strategic transformation costs. FOX defines adjusted net income as net income adjusted for amortization of purchased intangibles, litigation and settlement-related expenses, acquisition and integration-related expenses, and strategic transformation costs, all net of applicable tax. These adjustments are more fully described in the tables included at the end of this press release. Adjusted earnings per diluted share is defined as adjusted net income divided by the weighted average number of diluted shares of common stock outstanding during the period. FOX defines adjusted EBITDA as net income adjusted for interest expense, net other expense, income taxes, amortization of purchased intangibles, depreciation, stock-based compensation, litigation and settlement related expenses, acquisition and integration-related expenses and strategic transformation costs that are more fully described in the tables included at the end of this press release. Adjusted EBITDA margin is defined as adjusted EBITDA divided by net sales. FOX includes these non-GAAP financial measures because it believes they allow investors to better understand and evaluate the Company’s core operating performance and trends. In particular, the exclusion of certain items in calculating the non-GAAP financial measures consisting of adjusted gross profit, adjusted operating expense, adjusted net income and adjusted EBITDA (and accordingly, adjusted gross margin, adjusted earnings per diluted share and adjusted EBITDA margin) can provide a useful measure for period-to-period comparisons of the Company’s core business. These non-GAAP financial measures have limitations as analytical tools, including the fact that such non-GAAP financial measures may not be comparable to similarly titled measures presented by other companies because other companies may calculate adjusted gross profit, adjusted gross margin, adjusted operating expense, adjusted net income, adjusted earnings per diluted share, adjusted EBITDA and adjusted EBITDA margin differently than FOX does. For more information regarding these non-GAAP financial measures, see the tables included at the end of this press release. FOX FACTORY HOLDING CORP.