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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-36040
 
Fox Factory Holding Corp.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
26-1647258
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
6634 Hwy 53
Braselton
GA
30517
(Address of Principal Executive Offices)
(Zip Code)
(831) 274-6500
(Registrant’s Telephone Number, Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
FOXF
The NASDAQ Stock Market LLC
 
 
(NASDAQ Global Select Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Emerging growth company
Non-accelerated filer
Smaller reporting company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of October 28, 2019, there were 38,524,318 shares of the registrant’s common stock outstanding.
 



Fox Factory Holding Corp.
FORM 10-Q
Table of Contents
 
 
 
Page 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of September 27, 2019 and December 28, 2018
 
Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 27, 2019 and September 28, 2018
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 27, 2019 and September 28, 2018
 
Unaudited Condensed Consolidated Statements of Stockholders' Equity and Redeemable Non-controlling Interest for the Three and Nine Months Ended September 27, 2019 and September 28, 2018
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 27, 2019 and September 28, 2018
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
 
 
 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOX FACTORY HOLDING CORP.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
 
As of
 
As of
 
September 27,
 
December 28,
 
2019

2018
 
 
 
 
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
31,979

 
$
27,958

Accounts receivable (net of allowances of $1,036 and $600 at September 27, 2019 and December 28, 2018, respectively)
106,798

 
78,882

Inventory
131,228

 
107,140

Prepaids and other current assets
29,604

 
17,967

Total current assets
299,609

 
231,947

Property, plant and equipment, net
102,557

 
64,788

Deferred tax assets
20,837

 
15,328

Goodwill
93,515

 
88,850

Intangibles, net
83,575

 
83,974

Other assets
476

 
367

Total assets
$
600,569

 
$
485,254

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
64,853

 
$
55,086

Accrued expenses
36,559

 
33,607

Reserve for uncertain tax positions
1,187

 
1,169

Current portion of long-term debt

 
6,923

Total current liabilities
102,599

 
96,785

Line of credit
73,000

 

Long-term debt, less current portion

 
52,503

Other liabilities
12,639

 
479

Total liabilities
188,238

 
149,767

Commitments and contingencies (Refer to Note 8 - Commitments and Contingencies)

 

Redeemable non-controlling interest
15,711

 
14,282

Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value — 10,000 authorized and no shares issued or outstanding as of September 27, 2019 and December 28, 2018

 

Common stock, $0.001 par value — 90,000 authorized; 39,414 shares issued and 38,524 outstanding as of September 27, 2019; 38,881 shares issued and 37,991 outstanding as of December 28, 2018
38

 
38

Additional paid-in capital
121,348

 
116,019

Treasury stock, at cost; 890 common shares as of September 27, 2019 and December 28, 2018
(13,754
)
 
(13,754
)
Accumulated other comprehensive loss
(981
)
 
(784
)
Retained earnings
289,969

 
219,686

Total stockholders’ equity
396,620

 
321,205

Total liabilities, redeemable non-controlling interest and stockholders’ equity
$
600,569

 
$
485,254

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

Table of Contents

FOX FACTORY HOLDING CORP.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited) 
 
For the three months ended

For the nine months ended
 
September 27,

September 28,
 
September 27,

September 28,
 
2019

2018
 
2019

2018
Sales
$
211,317

 
$
175,798

 
$
565,139

 
$
462,415

Cost of sales
141,500

 
115,312

 
382,045

 
307,872

Gross profit
69,817

 
60,486

 
183,094

 
154,543

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
11,660

 
9,606

 
32,186

 
28,142

Research and development
8,376

 
6,765

 
23,442

 
19,019

General and administrative
12,727

 
11,164

 
36,065

 
31,137

Amortization of purchased intangibles
1,694

 
1,499

 
4,751

 
4,567

Total operating expenses
34,457

 
29,034

 
96,444

 
82,865

Income from operations
35,360

 
31,452

 
86,650

 
71,678

Other expense, net:
 
 
 
 
 
 
 
Interest expense
748

 
748

 
2,582

 
2,379

Other (income) expense
(37
)
 
180

 
532

 
380

Other expense, net
711

 
928

 
3,114

 
2,759

Income before income taxes
34,649

 
30,524

 
83,536

 
68,919

Provision for income taxes
4,473

 
5,788

 
11,596

 
3,919

Net income
30,176

 
24,736

 
71,940

 
65,000

Less: net income attributable to non-controlling interest
689

 
424

 
1,429

 
1,094

Net income attributable to FOX stockholders
$
29,487

 
$
24,312

 
$
70,511

 
$
63,906

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.77

 
$
0.64

 
$
1.84

 
$
1.69

Diluted
$
0.75

 
$
0.62

 
$
1.80

 
$
1.64

Weighted average shares used to compute earnings per share:
 
 
 
 
 
 
 
Basic
38,451

 
37,886

 
38,259

 
37,743

Diluted
39,174

 
39,052

 
39,151

 
38,913

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Table of Contents

FOX FACTORY HOLDING CORP.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited) 
 
For the three months ended
 
For the nine months ended
 
September 27,
 
September 28,
 
September 27,
 
September 28,
 
2019
 
2018
 
2019
 
2018
Net income
$
30,176

 
$
24,736

 
$
71,940

 
$
65,000

Other comprehensive (loss) income
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax effects
(352
)
 
401

 
(197
)
 
(452
)
Other comprehensive (loss) income
(352
)
 
401

 
(197
)
 
(452
)
Comprehensive income
29,824

 
25,137

 
71,743

 
64,548

Less: comprehensive income attributable to non-controlling interest
689

 
424

 
1,429

 
1,094

Comprehensive income attributable to FOX stockholders
$
29,135

 
$
24,713

 
$
70,314

 
$
63,454

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

FOX FACTORY HOLDING CORP.
Condensed Consolidated Statements of Stockholders' Equity and Redeemable Non-controlling Interest
(in thousands)
(unaudited)
 
Common Stock
 
Treasury
 
Additional paid-in capital
Accumulated other comprehensive (loss) income
 
Retained earnings
 
Total stockholders' equity
 
Redeemable non-controlling interest
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 29, 2017
38,497

 
$
38

 
890

 
$
(13,754
)
 
$
112,793

$
(168
)
 
$
135,926

 
$
234,835

 
$
12,955

Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding
49

 

 

 

 
(1,375
)

 

 
(1,375
)
 

Redeemable non-controlling interest

 

 

 

 


 
(1,011
)
 
(1,011
)
 
1,011

Stock-based compensation expense

 

 

 

 
2,046


 

 
2,046

 

Foreign currency translation adjustment

 

 

 

 

475

 

 
475

 

Adoption of new accounting standard, net of taxes

 

 

 

 


 
(281
)
 
(281
)
 

Net Income

 

 

 

 


 
21,224

 
21,224

 
226

Balance - March 30, 2018
38,546

 
$
38

 
890

 
$
(13,754
)
 
$
113,464

$
307

 
$
155,858

 
$
255,913


$
14,192

Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding
103

 

 

 

 
(2,657
)

 

 
(2,657
)
 

Redeemable non-controlling interest

 

 

 

 


 
448

 
448

 
(448
)
Stock-based compensation expense

 

 

 

 
1,785


 

 
1,785

 

Foreign currency translation adjustment

 

 

 

 

(1,328
)
 

 
(1,328
)
 

Net Income

 

 

 

 


 
18,369

 
18,369

 
444

Balance - June 29, 2018
38,649

 
$
38

 
890

 
$
(13,754
)
 
$
112,592

$
(1,021
)
 
$
174,675

 
$
272,530

 
$
14,188

Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding
229

 

 

 

 
(7
)

 

 
(7
)
 

Redeemable non-controlling interest

 

 

 

 


 
(240
)
 
(240
)
 
240

Stock-based compensation expense

 

 

 

 
1,818


 

 
1,818

 

Foreign currency translation adjustment

 

 

 

 

401

 

 
401

 

Net Income

 

 

 

 


 
24,312

 
24,312

 
424

Balance - September 28, 2018
38,878

 
$
38

 
890

 
$
(13,754
)
 
$
114,403

$
(620
)
 
$
198,747

 
$
298,814

 
$
14,852

The accompanying notes are an integral part of these consolidated statements.

4

Table of Contents


FOX FACTORY HOLDING CORP.
Condensed Consolidated Statements of Stockholders' Equity and Redeemable Non-controlling Interest
(in thousands)
(unaudited)
 
Common Stock
 
Treasury
 
Additional paid-in capital
Accumulated other comprehensive (loss) income
 
Retained earnings
 
Total stockholders' equity
 
Redeemable non-controlling interest
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance - December 28, 2018
38,881

 
$
38

 
890

 
$
(13,754
)
 
$
116,019

$
(784
)
 
$
219,686

 
$
321,205

 
$
14,282

Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding
180

 

 

 

 
(1,229
)

 

 
(1,229
)
 

Stock-based compensation expense

 

 

 

 
1,729


 

 
1,729

 

Foreign currency translation adjustment

 

 

 

 

(159
)
 

 
(159
)
 

Adoption of new accounting standard, net of taxes

 

 

 

 


 
(228
)
 
(228
)
 

Net Income

 

 

 

 


 
18,103

 
18,103

 
299

Balance - March 29, 2019
39,061

 
$
38

 
890

 
$
(13,754
)
 
$
116,519

$
(943
)
 
$
237,561

 
$
339,421

 
$
14,581

Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding
115

 

 

 

 
(2,264
)

 

 
(2,264
)
 

Issuance of stock for business acquisition
98

 

 

 

 
7,167


 

 
7,167

 

Stock-based compensation expense

 

 

 

 
1,621


 

 
1,621

 

Foreign currency translation adjustment

 

 

 

 

314

 

 
314

 

Adoption of new accounting standard, net of taxes

 

 

 

 


 
 
 

 

Net Income

 
 
 

 

 


 
22,921

 
22,921

 
441

Balance - June 28, 2019
39,274

 
$
38

 
890

 
$
(13,754
)
 
$
123,043

$
(629
)
 
$
260,482

 
$
369,180

 
$
15,022

Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding
140

 

 

 

 
(3,300
)

 

 
(3,300
)
 

Stock-based compensation expense

 

 

 

 
1,605


 

 
1,605

 

Foreign currency translation adjustment

 

 

 

 

(352
)
 

 
(352
)
 

Net Income

 

 

 

 


 
29,487

 
29,487

 
689

Balance - September 27, 2019
39,414

 
$
38

 
890

 
$
(13,754
)
 
$
121,348

$
(981
)
 
$
289,969

 
$
396,620

 
$
15,711

The accompanying notes are an integral part of these consolidated statements.


5

Table of Contents

FOX FACTORY HOLDING CORP.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
For the nine months ended
 
September 27, 2019
 
September 28, 2018
OPERATING ACTIVITIES:
 
 
 
Net income
$
71,940

 
$
65,000

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,967

 
10,911

Stock-based compensation
4,955

 
5,649

Deferred taxes and uncertain tax positions
(5,503
)
 
(12,258
)
Loss on extinguishment of debt
516

 

Changes in operating assets and liabilities, net of effects of acquisition of business:
 
 
 
Accounts receivable
(28,257
)
 
(24,760
)
Inventory
(20,339
)
 
(20,403
)
Income taxes
(7,339
)
 
(1,328
)
Prepaids and other assets
(7,577
)
 
80

Accounts payable
9,797

 
35,717

Accrued expenses and other liabilities
(236
)
 
2,144

Net cash provided by operating activities
30,924

 
60,752

INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(25,903
)
 
(20,412
)
Acquisition of businesses
(6,804
)
 

Net cash used in investing activities
(32,707
)
 
(20,412
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from line of credit
67,500

 

Payments on line of credit
(52,053
)
 
(35,585
)
Repayment of debt
(2,813
)
 
(3,750
)
Repurchases from stock compensation program, net
(6,793
)
 
(4,041
)
Net cash provided by (used in) financing activities
5,841

 
(43,376
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(37
)
 
(79
)
 
 
 
 
CHANGE IN CASH AND CASH EQUIVALENTS
4,021

 
(3,115
)
CASH AND CASH EQUIVALENTS—Beginning of period
27,958

 
35,947

CASH AND CASH EQUIVALENTS—End of period
$
31,979

 
$
32,832

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
24,402

 
$
17,664

Cash paid for interest, net of capitalized interest
$
1,971

 
$
2,223

Cash paid for amounts included in the measurement of lease liabilities
$
4,476

 
$

Non-cash operating activities:
 
 
 
Refinancing of the Second Amended and Restated Credit Facility
$
88,875

 
$

Right-of-use assets obtained in exchange for lease obligations
$
8,565

 
$

Acquisition of business in exchange for equity
$
7,167

 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Table of Contents


FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)

1. Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies - Fox Factory Holding Corp. (the "Company") designs and manufactures performance-defining products primarily for bicycles ("bikes"), side-by-side vehicles ("Side-by-Sides"), on-road and off-road vehicles and trucks, all-terrain vehicles or ATVs, snowmobiles, specialty vehicles and applications, motorcycles and commercial trucks. The Company is a direct supplier to leading power vehicle original equipment manufacturers ("OEMs") and provides aftermarket products to retailers, dealerships, and distributors. Additionally, the Company supplies top bicycle OEMs and their current contract manufacturers, and provides aftermarket products to retailers and distributors.
Throughout this Form 10-Q, unless stated otherwise or as the context otherwise requires, the "Company," "FOX," "Fox Factory," "we," "us," "our," and "ours" refer to Fox Factory Holding Corp. and its operating subsidiaries on a consolidated basis.
Basis of Presentation - The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America ("U.S." or "United States") and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 28, 2018 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 26, 2019. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for any quarter are not necessarily indicative of the results for the full fiscal year.
The Company operates on a 52-53 week fiscal calendar. For 2019 and 2018, the Company's fiscal year will end or has ended on January 3, 2020 and December 28, 2018, respectively. The twelve month periods ended January 3, 2020 and December 28, 2018, will include or have included 53 and 52 weeks, respectively. The three and nine month periods ended September 27, 2019 and September 28, 2018 each included 13 weeks and 39 weeks, respectively.
Principles of Consolidation - These condensed consolidated financial statements include the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Summary of Significant Accounting Policies - Beginning the first quarter of fiscal year 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases ("ASU 2016-02"). There have been no other changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 28, 2018, as filed with the SEC on February 26, 2019, that have had a material impact on our condensed consolidated financial statements and related notes.
Revenue Recognition - Revenues are generated from the sale of performance-defining products and systems to customers worldwide. The Company’s performance-defining products and systems are solutions that improve performance of powered vehicles and bikes. Powered vehicles include Side-by-Sides, on-road and off-road vehicles and trucks, all-terrain vehicles or ATVs, snowmobiles, specialty vehicles and applications, motorcycles and commercial trucks.
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 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, the Company may also enter into master agreements.

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Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

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. 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 subsequently recognized in the period that the customer utilizes the future discount. Measuring the material rights requires judgments including forecasts of future sales and product mix. At September 27, 2019, the balance of deferred revenue related to pricing provisions was $154. These amounts are expected to be recognized over the next 12 months. Revenues exclude sales tax.
Segments - The Company has determined that it has a single operating and reportable segment. The Company considers operating segments to be components of the Company for which separate financial information is available, that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.
Use of Estimates - The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from management’s estimates.
Certain Significant Risks and Uncertainties - The Company is subject to those risks common in manufacturing-driven markets, including, but not limited to, competitive forces, dependence on key personnel, customer demand for its products, the successful protection of its proprietary technologies, compliance with and the impact of government regulations including tariffs, and the possibility of not being able to obtain additional financing when needed.
Fair Value Measurements and Financial Instruments - The Company uses the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures, which requires the valuation of assets and liabilities subject to fair value measurements using a three tiered approach and fair value measurement be classified and disclosed by the Company in one of the following three categories:
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).
The carrying amount of the Company's financial instruments, including cash, receivables, accounts payable, and accrued liabilities approximate their fair values due to their short-term nature. The carrying amount of the Company's Credit Facility (as defined below) approximates its fair value, as the interest rate is set based on the movement of the underlying market rates.

8

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

Recent Accounting Pronouncements - In May 2014, the FASB and International Accounting Standards Board issued their converged standard on revenue recognition, ASU 2014-09, which was updated in December 2016 with the release of ASU 2016-20. This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The Company adopted this guidance as of the beginning of the first quarter of fiscal year 2018, using the modified retrospective implementation method. The Company applied the guidance to all open contracts at the date of initial application. The primary impact of adopting the standard resulted from certain pricing provisions within contracts that provide the customer with a material right. Under the new standard, revenue attributed to such pricing provisions is deferred and recognized when the right is exercised by the customer. During Q1 2018, the Company recorded a cumulative effect adjustment of $368 gross and $281 net of taxes, to the opening balance of retained earnings to reflect the cumulative effect of the adoption of the standard.
In February 2016, the FASB issued ASU 2016-02, Leases, which supersedes the existing guidance for lease accounting. To meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases, this ASU requires lessees to recognize most leases on the balance sheet as right-of-use assets and lease liabilities.
The Company adopted this guidance as of the beginning of the first quarter of fiscal year 2019, with a cumulative effect adjustment to the opening balance of retained earnings at December 28, 2018 with no restatement of comparative periods’ financial information ("current-period adjustment method"). Additionally, the Company adopted this guidance using practical expedients with respect to the assessment of embedded leases, lease classification, and initial indirect costs for expired and existing leases. The Company also elected the practical expedient related to treating lease and non-lease components as a single lease component for all of its leases and elected a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the right-of-use assets and lease liabilities. The Company did not use the hindsight practical expedient to adopt this guidance. The Company recorded a cumulative effect adjustment of $13,637 to operating lease right-of-use assets, $13,937 to operating lease liabilities, and $300 gross ($228 net of taxes) to the opening balance of the Company's retained earnings to reflect the cumulative effect of the adoption of the standard. This standard did not have a material impact on our consolidated income statements.
In June 2016, the FASB issue ASU 2016-13, Financial Instruments: Credit Losses, which adds an impairment model that is based on expected losses rather than incurred losses. Under this standard, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. This standard is effective for public companies for fiscal years beginning after December 15, 2019, including interim reporting periods within those years and early adoption is permitted. The Company is currently assessing the impact of this guidance.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which clarifies the presentation of certain transactions, including but not limited to contingent consideration payments made after a business combination and debt prepayment and extinguishment costs in the cash flow statement. The Company adopted ASU 2016-16 effective in the first quarter of fiscal year 2019. The adoption of ASU 2016-15 did not have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other: Internal-Use Software, which helps simplify how entities evaluate the accounting for costs paid by a customer in a cloud computing arrangement that is a service contract. This standard will be effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

9

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

2. Revenues
The following table summarizes total sales by product category:
 
For the three months ended
 
For the nine months ended
 
September 27, 2019

September 28, 2018
 
September 27, 2019

September 28, 2018
Powered Vehicles
$
130,022

 
$
94,891

 
$
341,976

 
$
249,272

Specialty Sports
81,295

 
80,907

 
223,163

 
213,143

Total sales
$
211,317

 
$
175,798

 
$
565,139

 
$
462,415


The following table summarizes total sales by sales channel:
 
For the three months ended
 
For the nine months ended
 
September 27, 2019
 
September 28, 2018
 
September 27, 2019

September 28, 2018
OEM
$
131,678

 
$
106,834

 
$
349,504

 
$
266,886

Aftermarket
79,639

 
68,964

 
215,635

 
195,529

Total sales
$
211,317

 
$
175,798

 
$
565,139

 
$
462,415


The following table summarizes total sales generated by geographic location of the customer:
 
For the three months ended
 
For the nine months ended
 
September 27, 2019
 
September 28, 2018
 
September 27, 2019
 
September 28, 2018
North America
$
142,624

 
$
108,140

 
$
383,414

 
$
289,875

Asia
37,521

 
34,058

 
88,888

 
86,228

Europe
29,024

 
28,351

 
87,074

 
77,759

Rest of the world
2,148

 
5,249

 
5,763

 
8,553

Total sales
$
211,317

 
$
175,798

 
$
565,139

 
$
462,415




3. Inventory
Inventory consisted of the following:
 
September 27,

December 28,
 
2019
 
2018
Raw materials
$
91,947

 
$
75,652

Work-in-process
10,822

 
5,880

Finished goods
28,459

 
25,608

Total inventory
$
131,228

 
$
107,140




10

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

4. Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following:
 
September 27,

December 28,
 
2019
 
2018
Machinery and manufacturing equipment
$
53,384

 
$
41,332

Leasehold improvements
11,618

 
10,386

Internal-use computer software
16,000

 
14,416

Lease right of use assets
18,632

 

Building and land
27,629

 
18,978

Information systems, office equipment and furniture
9,539

 
7,262

Transportation equipment
4,653

 
3,932

Total
141,455

 
96,306

Less: accumulated depreciation and amortization
(38,898
)
 
(31,518
)
Property, plant and equipment, net
$
102,557

 
$
64,788



The Company’s long-lived assets by geographic location are as follows:
 
September 27,
 
December 28,
 
2019
 
2018
United States
$
91,414

 
$
59,056

International
11,143

 
5,732

Total long-lived assets
$
102,557

 
$
64,788



5. Leases
The Company has operating lease agreements for administrative, research and development, manufacturing, and sales and marketing facilities. These leases have remaining lease terms ranging from 1 to 8 years, some of which include options to extend the lease term for up to 5 years, and some of which include options to terminate the leases within 1 year. Certain leases are subject to annual escalations as specified in the lease agreements. The Company considered these options in determining the lease term used to establish its right-of-use assets and lease liabilities. These lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As most of the Company's leases do not provide an interest rate, the Company used the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The weighted-average remaining lease term for the Company's operating leases was 4.48 and the weighted-average incremental borrowing rate was 3.75% as of September 27, 2019.

11

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

Operating lease costs consisted of the following:
 
For the three months ended
 
For the nine months ended
 
September 27, 2019
 
September 27, 2019
Operating lease cost
$
1,581

 
$
4,550

Other lease costs (1)
338

 
763

Total
$
1,919

 
$
5,313

 
 
 
 
(1) Includes short-term leases and variable lease costs. The Company elected a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the right-of-use assets and lease liabilities.
 
 

Lease costs for the three and nine months ended September 28, 2018 were $1,597 and $4,923, respectively.
Supplemental balance sheet information related to the Company's operating leases is as follows:
 
Balance Sheet Classification
 
September 27, 2019
Operating lease right-of-use assets
Property, plant and equipment
 
$
18,632

Current lease liabilities
Accrued expenses
 
$
6,373

Non-current lease liabilities
Other liabilities
 
$
12,639


Maturities of lease liabilities by fiscal year for the Company's operating leases are as follows:
For fiscal year
Total future payments
2019 (excluding the nine months ended September 27, 2019)
$
1,577

2020
6,169

2021
4,465

2022
2,890

2023
2,507

Thereafter
3,102

Total lease payments
20,710

Less: imputed interest
(1,698
)
Present value of lease liabilities
19,012

Less: current portion
(6,373
)
Lease liabilities less current portion
$
12,639




12

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

6. Accrued Expenses
Accrued expenses consisted of the following:
 
September 27,

December 28,
 
2019

2018
Payroll and related expenses
$
13,936

 
$
15,870

Current portion of lease liabilities
6,373

 

Warranty
6,146

 
6,433

Income tax payable
3,304

 
6,691

Other accrued expenses
6,800

 
4,613

Total
$
36,559

 
$
33,607



Activity related to warranties is as follows:
 
For the three months ended
 
For the nine months ended
 
September 27, 2019
 
September 28, 2018
 
September 27, 2019
 
September 28, 2018
Beginning warranty liability
$
6,208

 
$
6,142

 
$
6,433

 
$
6,481

Charge to cost of sales
1,054

 
1,587

 
3,204

 
3,418

Fair value of warranty assumed in acquisition

 

 
100

 

Costs incurred
(1,116
)
 
(1,307
)
 
(3,591
)
 
(3,477
)
Ending warranty liability
$
6,146

 
$
6,422

 
$
6,146

 
$
6,422




13

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

7. Debt
Former Second Amended and Restated Credit Facility
In August 2013, the Company entered into a credit facility with SunTrust Bank, N.A. and other named lenders, which was periodically amended and restated (the "Second Amended and Restated Credit Facility"). The Company paid off the Second Amended and Restated Credit Facility in June 2019 upon entering into the new Credit Facility with Bank of America, N.A. ("Bank of America"). The Company expensed $516 of remaining debt issuance costs, which are included in other expense, net on the Condensed Consolidated Statements of Income.
New Credit Facility
In June 2019, the Company entered into a credit facility with Bank of America and other named lenders (the "Credit Facility"). The Credit Facility, which matures on June 3, 2024, provides a senior secured revolving line of credit with a maximum borrowing capacity of $250,000. The Company paid $510 in loan costs that will be deferred and 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 the London Interbank Offered Rate, or LIBOR, plus a margin ranging from 1.00% to 1.50%, or based on the base rate offered by Bank of America plus a margin ranging from 0.00% to 0.50%. At September 27, 2019, the one-month LIBOR and prime rates were 2.03% and 5.00%, respectively. At September 27, 2019, our weighted average interest rate on outstanding borrowing was 3.15%. 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 of September 27, 2019.
The Credit Facility permits up to $15,000 of the aggregate revolving commitment to be used by the Company for issuance of letters of credit, of which $5,000 was outstanding at September 27, 2019.
The following table summarizes the line of credit under the Credit Facility:
 
September 27,
 
2019
Amount outstanding
$
73,000

Standby letter of credit
5,000

Available borrowing capacity
172,000

Total borrowing capacity
$
250,000

Maturity date
June 3, 2024



14

Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

8. Commitments and Contingencies
Indemnification Agreements - In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company or intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise due to their status or service as directors, officers or employees. While the outcome of these matters cannot be predicted with certainty, the Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on the Company’s results of operations, financial position or liquidity.
Legal Proceedings - A lawsuit was filed on December 17, 2015 by SRAM Corporation (“SRAM”) in the U.S. District Court, Northern District of Illinois, against the Company’s wholly-owned subsidiary, RFE Canada Holding Corp. (“RFE Canada”). The lawsuit alleges patent infringement of U.S. Patent number 9,182,027 ("'027 Patent") and violation of the Lanham Act. SRAM filed a second lawsuit in the same court against RFE Canada on May 16, 2016, alleging patent infringement of U.S Patent number 9,291,250 ("'250 Patent").  The Company believes that the lawsuits are without merit and intends vigorously to defend itself.  As such, the Company has filed, before the U. S. Patent and Trademark Appeals Board ("PTAB"), for Interparties Reviews ("IPR") of the '027 Patent and separately the same for the '250 Patent. In April 2018, the PTAB issued opinions in the ‘027 Patent petition cases stating that the Company has not shown the claims of the ‘027 Patent to be obvious. Regarding the PTAB ‘027 opinions, the Company has filed an Appeal to the Court of Appeals for the Federal Circuit. Regarding that appeal the Company has further moved the CAFC for remand of the ‘027 IPR to the PTAB. The PTAB has issued an opinion in the ‘250 Patent petition case stating that the Company has not shown the claims of the ‘250 Patent to be obvious.
In a separate action, the Company filed a lawsuit on January 29, 2016 in the U.S. District Court, Northern District of California against SRAM. That lawsuit alleges SRAM’s infringement of two separate Company owned patents, specifically U.S. Patent numbers 6,135,434 and 6,557,674. The Company filed a second lawsuit on July 1, 2016 in the U.S. District Court, Northern District of California against SRAM alleging infringement of the Company’s U.S. Patent numbers 8,226,172 and 8,974,009. These lawsuits have been moved to U.S. District Court, District of Colorado and are otherwise proceeding. The U.S. District Court, Northern District of Illinois, has lifted the stay of the SRAM lawsuits against the Company. The Company filed and SRAM filed lawsuits are now moving forward in the respective courts.

Due to the inherent uncertainties of litigation, the Company is not able to predict either the outcome or a range of reasonably possible losses, if any, at this time. Accordingly, no amounts have been recorded in the consolidated financial statements for the settlement of these matters. Were an unfavorable ruling to occur, or if factors indicate that a loss is probable and reasonably estimable, the Company's business, financial condition or results of operations could be materially and adversely affected. The Company is involved in other legal matters that arise in the ordinary course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's financial condition, results of operations or cash flows.

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Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

Other Commitments - On November 30, 2017, the Company through FF US Holding Corp. acquired an 80% interest in the business of Flagship, Inc. ("Tuscany"). The stockholders' agreement provides the Company with a call option (the "Call Option") to acquire the remaining 20% of Tuscany any time from November 30, 2019 through November 30, 2024 at a value that approximates fair market value. In addition, if the Call Option has not been exercised as of November 30, 2024, the non-controlling owners shall be entitled to exercise a put option on November 30, 2024 and for a 180-day period thereafter, which would require the Company to purchase all of the remaining shares held by the non-controlling owners at a price that approximates fair market value.
Other Contingencies - On June 21, 2018, the U.S. Supreme Court (the “Court”) decided South Dakota v. Wayfair, Inc., et al., holding that internet retailers do not have to maintain a physical presence in a state in order to be required to collect the state’s sales and use tax. Ultimately, the Court remanded the case to the South Dakota Supreme Court on the question of “whether some other principle in the Court’s Commerce Clause doctrine might invalidate the Act,” which may delay federal legislation on the issue. However, as a result of the Court’s decision, additional states may now begin requiring all remote sellers, primarily those engaged in e-commerce, to register, collect and remit sales and use taxes on transactions with in-state customers. Numerous states have either enacted legislation or informally indicated that they will not assert liability for uncollected taxes on a retroactive basis. Nevertheless, the Company believes that it is possible that it will incur a liability for uncollected sales tax on some portion of its e-commerce sales through September 27, 2019. Any retroactively imposed liability is not expected to be material to the Company’s results of operations or financial position because direct end-user sales in states where the Company is not registered comprise a small portion of total revenues.

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Table of Contents
FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

9. Fair Value Measurements and Financial Instruments
The following table presents the Company's hierarchy for its assets, liabilities and redeemable non-controlling interest measured at fair value on a recurring basis as of the following periods:
 
September 27, 2019
 
December 28, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Second Amended and Restated Credit facility
$

 
$

 
$

 
$

 
$

 
$
59,426

 
$

 
$
59,426

Non-controlling interest subject to put provisions

 

 
15,711

 
15,711

 

 

 
14,282

 
14,282

Total liabilities measured at fair value
$

 
$

 
$
15,711

 
$
15,711

 
$

 
$
59,426

 
$
14,282

 
$
73,708


There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 categories of the fair value hierarchy during the three and nine month period ended September 27, 2019.
The Company used Level 2 inputs to determine the fair value of its Second Amended and Restated Credit Facility. As of December 28, 2018, the carrying amount of the principal under the Company’s Second Amended and Restated Credit Facility approximated fair value because it had a variable interest rate that reflected market changes in interest rates and changes in the Company’s net leverage ratio. The Company paid off the Second Amended and Restated Credit Facility in June 2019 upon entering into the new revolving Credit Facility with Bank of America.
The Company has potential obligations to purchase the non-controlling interests held by third parties in the Tuscany subsidiary. These obligations are in the form of put provisions and are exercisable at the third-party owners' discretion within the specified periods outlined in the put provision within the Tuscany stockholders' agreement. If these put provisions were exercised, the Company would be required to purchase the third-party owners' non-controlling interests at the appraised fair value. The initial non-controlling interest value was implicit in the purchase price and is revalued each quarter, with the adjustment being recorded directly as a component of retained earnings. The methodology the Company uses to estimate the fair value of the non-controlling interests subject to these put provisions is based on an average multiple of earnings before income taxes, depreciation and amortization ("EBITDA"), taking into consideration historical earnings and other factors. The carrying value of the non-controlling interest as of September 27, 2019 has been adjusted to reflect the valuation floor, which represents the sum of the initial valuation and the cumulative net earnings attributable to the non-controlling interest. The estimated fair values of the non-controlling interests subject to put provisions can fluctuate and the implicit multiple of earnings at which these non-controlling interest obligations may ultimately be settled could vary significantly from our future estimates depending upon market conditions.
The following table provides a reconciliation of the beginning and ending balances for the Company's redeemable non-controlling interest measured at fair value using Level 3 inputs:
 
Redeemable Non-Controlling Interest (level 3 measurement)
Balance at December 28, 2018
$
14,282

Net income attributable to non-controlling interest
1,429

Balance at September 27, 2019