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2: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
11: R1 Cover HTML 75K
12: R2 Condensed Consolidated Balance Sheets HTML 131K
13: R3 Condensed Consolidated Balance Sheets HTML 44K
(Parenthetical)
14: R4 Condensed Consolidated Statements of Income HTML 121K
15: R5 Condensed Consolidated Statements of Comprehensive HTML 57K
Income
16: R6 Condensed Consolidated Statements of Stockholders' HTML 135K
Equity and Redeemable Non-controlling Interest
17: R7 Condensed Consolidated Statements of Cash Flows HTML 117K
18: R8 Description of the Business, Basis of Presentation HTML 39K
and Summary of Significant Accounting Policies
19: R9 Revenues HTML 61K
20: R10 Inventory HTML 29K
21: R11 Prepaids and Other Assets HTML 30K
22: R12 Property, Plant and Equipment, net HTML 42K
23: R13 Leases HTML 47K
24: R14 Accrued Expenses HTML 46K
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29: R19 Stockholders' Equity HTML 54K
30: R20 Income Taxes HTML 34K
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32: R22 Acquisitions HTML 31K
33: R23 Description of the Business, Basis of Presentation HTML 57K
and Summary of Significant Accounting Policies
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(Address of Principal Executive Offices) (Zip Code)
(i831)
i274-6500
(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
iCommon Stock, par value $0.001 per share
iFOXF
iThe
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. iYes☒ 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). iYes☒ 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Emerging growth company
i☐
Non-accelerated filer
☐
Smaller reporting company
i☐
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 i☐ No ☒
Unaudited Condensed Consolidated Statements of Stockholders' Equity and Redeemable Non-controlling Interest for the Three and Nine Months Ended October 1, 2021 and October 2, 2020
Preferred stock, $ii0.001/
par value — ii10,000/ authorized
and iiiino///
shares issued or outstanding as of October 1, 2021 and January 1, 2021
i—
i—
Common
stock, $ii0.001/ par value — ii90,000/
authorized; i42,994 shares issued and i42,104 outstanding as of October 1, 2021; i42,692
shares issued and i41,802 outstanding as of January 1, 2021
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)
1. iDescription
of the Business, Basis of Presentation, and Summary of Significant Accounting Policies - Fox Factory Holding Corp. (the "Company") designs, engineers, manufactures, and markets performance-defining products and systems for customers worldwide. Our premium brand, performance-defining products and systems are used primarily for bicycles ("bikes"), side-by-side vehicles ("Side-by-Sides"), on-road vehicles with and without off-road capabilities, off-road vehicles and trucks, all-terrain vehicles ("ATVs"), snowmobiles, specialty vehicles and applications, motorcycles and commercial trucks. Some of our products are specifically designed and marketed to the leading cycling and powered vehicle original equipment manufacturers ("OEMs"), while others are distributed to consumers through a global network of dealers 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.
iBasis 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 January 1, 2021 included in the Company’s Annual Report on Form 10-K,
as filed with the SEC on February 25, 2021. 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.
iPrinciples
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 - There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended January 1, 2021, as filed with the SEC on February 25, 2021 that have had a material impact on our condensed consolidated financial statements and related notes.
i
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 vehicles with off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, and motorcycles.
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. Sales tax and other similar taxes are excluded from revenues.
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 revenues that are recognized when the rights are exercised by the customer. Measuring the
material rights requires judgments including forecasts of future sales and product mix.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)
iSegments
-The Company has determined that it has a single operating and reportable segment: manufacturing, sale and service of performance-defining products. The Company considers operating segments to be components of the Company in 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.
iUse 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.
iCertain 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 government regulations, and the possibility of not being able to obtain additional financing when needed. Additionally, the Company has been impacted by the ongoing coronavirus (“COVID-19”) pandemic. The global outbreak of COVID-19 has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. Despite the Company’s efforts to manage and remedy these impacts to the Company, the ultimate impact and the extent to which
the COVID-19 pandemic will continue to affect the business, results of operation and financial condition is difficult to predict and depends on numerous evolving factors outside of the Company’s control, including: the duration and scope of the COVID-19 pandemic; government, social, business and other actions that have been and will be taken in response to the COVID-19 pandemic; increases in COVID-19 case counts; any additional waves of the virus, availability and ultimate efficacy of the vaccine on the new variants of the virus, including the Delta variant; and the effect of the COVID-19 pandemic on short- and long-term general economic conditions.
i
Fair
Value Measurements and Financial Instruments - The Financial Accounting Standards Board ("FASB") has issued Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures, that requires the valuation of assets and liabilities required or permitted to be either recorded or disclosed at fair value based on hierarchy of available inputs as follows:
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 amounts of the Company's financial instruments, including cash, receivables, accounts payable, and accrued liabilities approximate their fair values due to their short-term nature. Amounts owed under the Company's Credit Facility (as defined in Note 8 - Debt below) approximate fair value due to the variable interest rate features embedded in both the line of credit and the term debt.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)
i
Recent Accounting Pronouncements - In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which helps simplify how entities account for income taxes by
removing various exceptions related to the recognition of deferred tax liabilities and updating other tax computation requirements. This standard is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company adopted ASU 2019-12 effective in the first quarter of fiscal year 2021. The adoption of ASU 2019-12 did not have a material impact on the Company's condensed consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements. The amendments in ASU 2020-10 contain improvements to the Codification to ensure consistency by including disclosure guidance in the appropriate Disclosure Section. This guidance includes an option
for an entity to provide certain information either on the face of the financial statements or in the notes. ASU 2020-10 amends the Codification to include this language in the appropriate disclosure section. The ASU also provides clarification to various codification topics to improve consistency in guidance application. The amendments are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2020-10 effective in the first quarter of fiscal year 2021. The adoption of ASU 2020-10 did not have a material impact on the Company's condensed consolidated financial statements and related disclosures.
Remaining
performance obligations represent the transaction price of contracts, generally considered to be the customer's purchase order, for which work has not been performed or has been partially performed. The Company has elected to exclude disclosure of remaining performance obligations with an original expected duration of one year or less. Revenue expected to be recognized from remaining performance obligations as of October 1, 2021 for contracts with a duration of more than one year was approximately $i191,216,
all of which is expected to be recognized during fiscal years 2022 and 2023. The increase from prior quarter is due the timing of model year releases.
Information
systems, office equipment and furniture
i19,499
i14,176
Internal-use
computer software
i23,231
i19,853
Land
and land improvements
i15,429
i9,698
Leasehold
improvements
i18,810
i15,075
Machinery
and manufacturing equipment
i100,897
i81,281
Transportation
equipment
i6,729
i6,187
Total
i257,965
i222,023
Less:
accumulated depreciation and amortization
(i74,270)
(i58,735)
Property,
plant and equipment, net
$
i183,695
$
i163,288
/
During
the nine months ended October 1, 2021, the Company reclassified certain assets from buildings to land and land improvements to better depict the nature of the assets.
iThe Company’s long-lived assets by geographic location are as follows:
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)
6. iLeases
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 i1 to i10 years, some of which include options to extend the lease term for up to i5
years, and some of which include options to terminate the leases within i1 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 i5.09 years and the weighted-average incremental borrowing rate was i2.47%
as of October 1, 2021.
iOperating lease costs consisted of the following:
(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.
/
iSupplemental balance sheet information related to the
Company's operating leases is as follows:
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)
8. iDebt
Credit Facility
In June 2019, the
Company entered into a credit facility with Bank of America and other named lenders, which has been periodically amended and restated and/or amended. The credit facility was amended and restated on March 11, 2020, and further amended on June 19, 2020, and June 11, 2021 (as amended to date, the "Credit Facility"). The Credit Facility, which matures on March 11, 2025, provides a senior secured revolving line of credit with a borrowing capacity of $i250,000
and a term loan of $i400,000. The term loan is subject to quarterly amortization payments.
The Company paid $i7,615
in debt issuance costs, of which $i6,458 were allocated to the term debt and $i1,157 were allocated to the line of credit. Additionally, the
Company had $i434 of remaining unamortized debt issuance costs. The Company expensed $i277 of the remaining unamortized debt issuance costs, which are included
in interest and other expense, net in the Condensed Consolidated Statements of Income for the nine months ended October 2, 2020. The remaining $i157 were allocated to the line of credit. Loan fees allocated to the term debt will be amortized using the interest method and loan fees allocated to the line of credit will be 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 ("LIBOR"), plus
a margin ranging from i1.00% to i2.25%, with a floor rate of 0.00%, or based on the base rate offered by Bank of America plus a margin ranging from i0.00%
to i1.25%. At October 1, 2021, the one-month LIBOR and prime rates were i0.08% and i3.25%,
respectively. At October 1, 2021, our weighted-average interest rate on outstanding borrowing was i1.30%. 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 October 1, 2021.
On June 11, 2021, the Company terminated its existing swap agreement and entered into a new interest rate swap agreement to obtain a more favorable interest rate and to manage interest rate risk exposure, which was effective July 2, 2021. Through the interest rate swap agreement, the Company hedges the variability of cash flows in interest payments associated with $i200,000
of its variable rate term debt. Refer to Note 10 - Derivatives and Hedging for further details of this agreement.
The Credit Facility permits up to $i25,000 of the aggregate revolving commitment to be used by the Company for issuance of letters of credit, of which $i15,000
was outstanding at October 1, 2021.
i
The following table summarizes the line of credit under the Credit Facility:
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 by reason of 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 to vigorously
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 February 2021, the PTAB issued opinions in the 027 Patent petition cases stating that the Company has shown all of the claims of the 027 Patent to be obvious. The PTAB has also issued an opinion in the 250 Patent 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, in view of the 027 Patent PTAB process and opinion, stayed the SRAM lawsuits against the
Company.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)
Due to the inherent uncertainties of litigation, the Company is not able to predict either the outcomes or a range of reasonably possible losses, if any, at this time. Accordingly, no amounts
have been recorded in the condensed 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.
Other Commitments - On
November 30, 2017, the Company through FF US Holding Corp., acquired the assets of Flagship, Inc. d/b/a Tuscany and issued a 20% interest in FF US Holding Corp. to Flagship, Inc. A stockholders' agreement with Flagship, Inc. provided the Company with a call option (the "Call Option") to acquire the remaining i20%
of FF US Holding Corp. at any time from November 30, 2019 through November 30, 2024 at a value that approximates fair market value. On July 22, 2020, the Company exercised the Call Option and, pursuant to a stock purchase agreement with Flagship, Inc., the Company purchased the remaining i20%
interest for $i24,975 payable in a combination of stock and cash. The cash portion has been or will be settled in quarterly installment payments beginning in July 2020 through July 2022, which amount to $i6,556,
$i4,550 and $i2,700 in 2020, 2021 and 2022, respectively. The
Company paid $i900 and $i3,650 during the three and nine months ended
October 1, 2021, respectively. The stock portion of i136 shares held in escrow has been or will be released quarterly starting January 2021 through July 2022. The Company released i19
and i58 shares of stock during the three and nine months ended October 1, 2021, respectively. The exercise of the Call Option effectively canceled the put option held by Flagship, Inc.
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. As a result of the Court’s decision, most states enacted legislation to require sellers who meet economic nexus thresholds to register, collect and remit sales and use taxes on transactions with out-of-state customers. 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 October 1, 2021. Based on information currently available, 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.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)
10. iDerivatives
and Hedging
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. The Company utilizes interest rate swaps to limit its exposure to interest rate risk by converting a portion of its floating-rate debt to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest expense. Interest rate swaps involve the receipt of floating-rate amounts in exchange for fixed-rate interest payments based on the one-month LIBOR over the lives of the agreements without an exchange of the underlying principal amounts.
On
June 11, 2021, the Company terminated its existing swap agreement and entered into a new interest rate swap agreement with a notional amount of $i200,000. The terminated swap resulted in an unrealized gain of $i324
at the termination date that will continue to be accounted for in accumulated other comprehensive income and amortized into earnings over the term of the associated debt instrument.
The new swap agreement (the "Interest Rate Swap") has a maturity date of March 11, 2025 and is indexed to a one-month LIBOR with a fixed leg of i0.50%. The Interest Rate Swap met the criteria for cash flow hedges under ASC 815, Derivatives and Hedging, and is recorded in other assets on the Condensed Consolidated Balance Sheet.
Refer to Note 11 - Fair Value Measurements and Financial Instruments for additional information on determining the fair value. The unrealized gains or losses, after tax, are recorded in accumulated other comprehensive income, a component of equity, and are expected to be reclassified into interest expense on the Condensed Consolidated Statement of Income when the forecasted transactions affect earnings. As required under ASC 815, the Interest Rate Swap’s effectiveness will be assessed on a quarterly basis using a quantitative regression analysis.
The gains and losses, net of tax, related to the effective portion of derivative instruments designated as cash flow hedges recognized in accumulated other comprehensive income for the three and nine months ended October 1,
2021 were a loss of $i45 and a gain of $i1,575,
respectively. iiNo/
gains or losses were incurred for the three and nine months ended October 2, 2020.
Unrealized losses of $i864 included in accumulated other comprehensive income related to the Interest Rate Swap are expected to be recognized in interest expense over the next twelve months.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)
11. iFair Value Measurements and Financial Instruments
i
The
following table presents the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of the following periods:
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 October 1, 2021.
The Company used Level 2 inputs to determine the fair value of the Credit Facility. The Company believes the carrying amount of its Credit Facility approximates the fair value at October 1, 2021 because, while subject to a minimum LIBOR floor rate, the interest rate approximates current market rates of debt with similar terms and comparable credit risk.
On June 11, 2021, the
Company entered into an interest rate swap agreement to mitigate the cash flow risk associated with changes in interest rates on its variable rate debt. Refer to Note 10 - Derivatives and Hedging for additional details of the agreement. In accordance with ASC 815, Derivatives and Hedging, an interest rate swap contract is recognized as an asset or liability on the Condensed Consolidated Balance Sheets and is measured at fair value. The fair value was calculated utilizing Level 2 inputs.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)
12. iStockholders' Equity
Follow-on Stock Offerings
In
June 2020, the Company completed a follow-on offering whereby it sold i2,760 shares of its common stock at a price of $i76.00
per share for gross proceeds of $i209,760. The net proceeds to the Company were $i198,233
after underwriters' discounts and commissions of $i11,015 and offering costs of $i511. The total shares sold included i360
shares that were sold in connection with the underwriters' option to purchase additional shares. This offering was made pursuant to the Company's registration statement on Form S-3.
Equity Incentive Plans
i
The following table summarizes the allocation of stock-based compensation in the accompanying Condensed Consolidated Statements of Income:
As
of January 1, 2021, $i421 of stock-based compensation expense related to our executive bonus plan is included in Accrued Expenses on the Condensed Consolidated Balance Sheets. This amount was recognized as additional paid in capital during the nine months ended October 1, 2021 upon the issuance of the underlying restricted stock units.
i
The
following table summarizes the activity for the Company's unvested restricted stock units ("RSU") for the nine months ended October 1, 2021:
As
of October 1, 2021, the Company had approximately $i20,625 of unrecognized stock-based compensation expense related to RSUs, which will be recognized over the remaining weighted-average vesting period of approximately i2.22
years.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)
During the nine months ended October 1, 2021, the Company issued performance share units (“PSUs”) to certain executives that represent shares
potentially issuable in the future. Issuance is based upon the Company's performance, over a i2-i3
year performance period, on certain measures including return on invested capital and free cash flow. The PSUs vest only upon the achievement of the applicable performance goals for the performance period, and, depending on the actual achievement on the performance goals, the grantee may earn between i0% and i200%
of the target PSUs. The fair value of performance share units is calculated based on the stock price on the date of grant.
i
The following table summarizes the activity for the Company's unvested PSUs for the nine months ended October 1, 2021:
The
stock-based compensation expense recognized each period is dependent upon our estimate of the number of shares that will ultimately vest based on the achievement of certain performance conditions. Future stock-based compensation expense for unvested performance-based awards could reach a maximum of $i6,588 assuming achievement at the maximum level. The unrecognized
stock-based compensation expense is expected to be recognized over a weighted average period of i1.78 years.
For the nine months ended October 1, 2021, the Company had i3
unvested RSUs and PSUs outstanding which were excluded from the calculation of dilutive earnings per share because the effect would be anti-dilutive.
During the nine months ended October 1, 2021, i182 shares of common stock were issued due to the exercise of stock options and no options to purchase common stock expired or were forfeited. As of October 1, 2021, stock-based compensation expense related to
stock options has been fully recognized.
For
the three months ended October 1, 2021, the difference between the Company's effective tax rate and the i21% federal statutory rate resulted primarily from a lower tax rate on foreign-derived intangible income and a windfall of stock-based compensation. These benefits were partially offset by other non-deductible expenses and state taxes. For the nine months ended October 1,
2021, the difference between the Company’s effective tax rate and the i21% federal statutory rate resulted primarily from a lower tax rate on foreign-derived intangible income and a windfall on stock-based compensation. These benefits were partially offset by an increase in the valuation allowance for foreign tax credits and state taxes.
For the three months ended October 2,
2020, the difference between the Company's effective tax rate and the i21% federal statutory rate resulted primarily from lower foreign tax rates, a lower tax rate on foreign-derived intangible income, research and development credits, realization of foreign tax credits, and excess benefits related to stock-based compensation. These benefits were partially offset by state taxes, global low-tax intangible income and
non-deductible expenses. For the nine months ended October 2, 2020, the difference between the Company's effective tax rate and the i21% federal statutory rate resulted primarily from a lower tax rate on foreign-derived intangible income, research and development credits, a negotiated reduction of Switzerland's withholding tax on prior year earnings, and excess tax benefits
related to stock-based compensation. These benefits were partially offset by state taxes, global low-tax intangible income and non-deductible expenses.
We do not expect the results from any ongoing income tax audits to have a material impact on our consolidated financial condition, results of operations, or cash flows.
14. iRelated
Party Transactions
On May 3, 2019, the Company acquired substantially all of the assets of Air Ride Technologies, Inc., d/b/a Ridetech ("Ridetech"). Ridetech has a building lease for its manufacturing and office facilities in Jasper, Indiana. The buildings are owned by a former owner of Ridetech, who is now an employee of the Company. The lease is effective from May 1, 2019 through April 1, 2024, with monthly rent payments of $i16.
Rent expense under this lease was $i48 and $i144 for the three and nine months ended October 1, 2021, respectively.
On March
11, 2020, the Company acquired 100% of the issued and outstanding stock of SCA Performance Holdings, Inc. ("SCA"). The Company has transactions with an automotive dealership owned by a former owner of SCA, who is now an employee of the Company. The Company purchased approximately $i392
and $i856 of parts and vehicles and sold approximately $i217 and $i467
of upfit packages to the dealership during the three and nine months ended October 1, 2021, respectively. As of October 1, 2021, the Company had $i123 and $i57
in accounts payable and accounts receivable, respectively, related to this dealership. Refer to Note 15 - Acquisitions for further details of this acquisition.
On July 22, 2020the Company, pursuant to a stock purchase agreement with Flagship, Inc., purchased the remaining i20%
interest of FF US Holding Corp. for $i24,975 payable in a combination of stock and cash. The cash portion will be settled in quarterly installment payments through July 2022. Refer to Note 9 - Commitments and Contingencies for additional details of this agreement.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)
15. iAcquisitions
On March 11, 2020, the
Company, through Fox Factory, Inc., acquired i100% of the issued and outstanding stock of SCA from Southern Rocky Holdings, LLC for $i331,853,
net of cash acquired and exclusive of vehicle inventory. SCA is a leading OEM authorized specialty vehicle manufacturer for light duty trucks and SUVs with headquarters in Trussville, Alabama. SCA operates under three aftermarket brands: SCA Performance, Rocky Ridge Trucks, and Rocky Mountain Truckworks. This transaction was accounted for as a business combination.
The Company also agreed to an additional $i10,589 of contingent
retention incentives for key SCA management, of which $i9,283 is cash and $i1,306 is stock, to be held
in escrow and payable over the next two years. The Company recognized $i1,130 and $i3,550
in costs associated with such retention incentives during the three and nine months ended October 1, 2021, respectively.
i
The Company’s allocation of the purchase price to the net tangible and intangible assets acquired and liabilities assumed is as follows:
Fair
market values
Tangible assets acquired
$
i28,678
Liabilities assumed
(i32,479)
Intangible
assets
i139,900
Goodwill
i195,754
Total
$
i331,853
/
The
Company incurred $i10,582 of acquisition costs in conjunction with the SCA acquisition, including $i1,750
of transaction compensation, during the nine months ended October 2, 2020. These costs are classified as general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.
The values assigned to the identifiable intangible assets were determined by discounting the estimated future cash flows associated with these assets to their present value. The goodwill of $i195,754 reflects the strategic fit of SCA with the
Company’s operations. The Company will amortize the acquired customer relationships assets over their expected useful lives of i5-i10
years. Trademarks, brand names and goodwill are expected to have an indefinite life, and will be subject to impairment testing. The goodwill is not deductible for income tax purposes. SCA previously purchased intangibles in asset acquisitions with a remaining net tax basis approximating $i77,989, which the Company may deduct for income tax purposes.
On
May 25, 2021, the Company, through its wholly owned subsidiary, SCA Performance, Inc., acquired i100% of the issued and outstanding stock of Manifest Joy LLC, dba Outside Van ("Outside Van") for $i15,139,
net of cash acquired. Outside Van is a custom van conversion company that designs and custom engineers recreational vehicles with headquarters in Portland, Oregon. This purchase was accounted for as a business combination. The purchase price of Outside Van is allocated to the assets acquired and liabilities assumed based on their estimated respective fair values as of May 25, 2021, with the excess purchase price allocated to goodwill.
The allocation of the purchase price to the net liabilities assumed of $i1,057,
$i5,560 in identifiable intangible assets and goodwill acquired of $i10,636,
is preliminary and subject to the completion of the Company's validation of working capital, with the assistance of specialists. The acquisition was not material to the Company's financial statements.
On May 21, 2021, the Company, through its wholly owned subsidiary, Fox Factory Australia Pty Ltd., acquired substantially all the assets of Sola Sport Pty Ltd. for $i486.
The acquisition was not material to the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 January 1, 2021, as filed with the SEC on February 25, 2021, 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.
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;
•our ability to maintain our suppliers for materials, product parts and vehicle chassis without significant supply chain disruptions;
•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;
•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;
•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 2020 Annual Report on Form 10-K, as filed with the SEC on February 25, 2021, 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
As a result of the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJA" or "Tax Act") in December 2017, we believe that it is more likely than not that a portion of our foreign tax credits will not be realizable before their expiration and therefore have provided a partial valuation allowance of $7.2 million against that tax asset. We reassess our projections and assumptions regarding the realization of our foreign tax credits periodically as changes in our business and tax regulations occur. To the extent such a valuation allowance is established or reduced in a period, we reflect the change with a corresponding increase or decrease of our income tax
provision in our condensed consolidated financial statements. In the first and second quarters of 2021, the Company increased the forecast for additional revenue from Taiwan. The additional revenue is expected to generate foreign tax credits, that the Company believes will result in tax credits carried over from prior periods not to be realizable before their expiration. Therefore, the Company added $3.0 million and $0.6 million to the valuation allowance in the first and second quarters of 2021, respectively. There was no change to the valuation allowance in the third quarter of 2021.
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 January 1, 2021, as filed with the SEC on February 25, 2021, that have had a material impact on our condensed consolidated financial statements and related notes.
Total
sales for the three months ended October 1, 2021 increased approximately $86.7 million, or 33.3%, compared to the three months ended October 2, 2020. Powered Vehicle product sales increased by $35.0 million, or 22.8%, due to strong performance in our upfitting product lines and increased demand in both the original equipment manufacturer ("OEM") and aftermarket channels. Specialty Sports product sales increased by $51.7 million, or 48.1%, due to continued strong demand in the OEM channel.
Cost
of sales for the three months ended October 1, 2021 increased approximately $60.2 million, or 35.2%, compared to the three months ended October 2, 2020. The increase in cost of sales was primarily due to the 33.3% 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 October 1, 2021, our gross margin decreased 90 basis points to 33.4% compared to 34.3% for the three months ended October 2, 2020. The decrease in gross margin was primarily driven by supply chain related costs, including increased raw materials prices and higher freight costs.
Total operating expenses for the three months ended October 1, 2021 were $60.8 million compared to $43.9 million for the three months ended October 2, 2020. When expressed as a percentage of total sales, total operating expenses increased to 17.5% of total sales for
the three months ended October 1, 2021 compared to 16.8% of total sales in the three months ended October 2, 2020. The increase in operating expenses is primarily due to higher employee related costs, higher commission costs, and higher investments to right-size our administrative support functions.
Within operating expenses, our sales and marketing expenses increased approximately $3.8 million primarily due to higher commissions of $3.0 million. Research and development costs increased approximately $3.8 million primarily
due to personnel investments to support future growth and product innovation. General and administrative expenses increased by approximately $9.2 million due to higher employee related costs of $4.5 million, as well as increases in various other costs as we continue to expand our administrative support functions.
As
a result of the factors discussed above, income from operations for the three months ended October 1, 2021 increased approximately $9.6 million, or 21.1%, compared to income from operations for the three months ended October 2, 2020.
Interest and other expense, net for the three months ended October 1, 2021 decreased by $0.5 million to $1.6 million compared to $2.1 million for the three months ended October 2, 2020. The decrease in interest and other expense, net is primarily due to lower interest
rates.
The effective tax rate was 18.2% and 12.5% for the three month periods ended October 1,
2021 and October 2, 2020, respectively.
For the three months ended October 1, 2021, the difference between the Company's effective tax rate of 18.2% and the 21% federal statutory rate resulted primarily from a lower tax rate on foreign-derived intangible income and a windfall from stock-based compensation. These benefits were partially offset by other non-deductible expenses and state taxes.
For the three months ended October 2, 2020, the difference between our effective tax rate of 12.5% and the 21% federal statutory rate resulted primarily from lower foreign tax rates, a lower tax rate on foreign-derived intangible income, research and development
credits, realization of foreign tax credits, and excess benefits related to stock-based compensation. These benefits were partially offset by state taxes, global low-tax intangible income and non-deductible expenses.
As
a result of the factors described above, our net income increased $5.8 million, or 15.3%, to $43.8 million in the three months ended October 1, 2021 from $38.0 million for the three months ended October 2, 2020.
Total
sales for the nine months ended October 1, 2021 increased approximately $328.6 million, or 52.3%, compared to the nine months ended October 2, 2020. Powered Vehicle product sales increased by $168.1 million, or 45.2%, due to increased demand primarily in the aftermarket channel, including strong performance from our upfitting product lines, and the inclusion of a full nine months of revenues from our SCA subsidiary. Additionally, our prior year results were impacted by production shutdowns at a majority of our OEM partners due to the COVID-19 pandemic. Specialty Sports product sales increased by $160.5 million, or 62.7%, drive by increased demand primarily in the OEM channel.
Cost
of sales for the nine months ended October 1, 2021 increased approximately $209.6 million, or 49.7%, compared to the nine months ended October 2, 2020. The increase in cost of sales was primarily due to the 52.3% increase in sales in the same period, as well as certain business factors affecting gross margin, which are discussed below.
For the nine months ended October 1, 2021, our gross margin increased 120 basis points to 34.0% compared to 32.8% for the nine months ended October 2, 2020. The increase in gross margin was primarily due to higher volume sales in our Specialty Sports Group and the strong performance of our upfitting product lines, as well as favorable product and channel mix. Additionally, our gross margin for the
first nine months of the prior fiscal year period was negatively impacted by incremental costs related to the COVID-19 pandemic.
Total operating expenses for the nine months ended October 1, 2021 were $171.2 million compared to $129.6 million for the nine months ended October 2, 2020. When expressed as a percentage of total sales, total operating expenses decreased to 17.9% of total sales
for the nine months ended October 1, 2021 compared to 20.6% of total sales in the nine months ended October 2, 2020. The increase in operating expenses is primarily due to higher employee related costs, increases in various other costs as we continue to expand our administrative support functions, and the impact of a full nine months of SCA operating costs. These increases were partially offset by lower acquisition-related costs and lower patent litigation-related expenses.
Within operating expenses, our sales and marketing expenses increased approximately $13.9 million primarily due to commissions of $8.7 million, employee related expenses of $3.5 million, and various other expenses. Research and development costs increased approximately $8.6 million primarily due to personnel investments to support future growth and product
innovation. General and administrative expenses increased by approximately $16.8 million due to higher employee related costs of $15.5 million, as well as various other investments of $9.8 million as we continue to right-size our administrative support functions. These increases were partially offset by lower acquisition-related costs of $9.4 million and lower litigation expenses of $0.9 million.
Amortization of purchased intangibles for the nine months ended October 1, 2021 increased by approximately $2.3 million as compared to the nine months ended October 2, 2020. The increase is primarily due to the amortization of intangible assets obtained through our acquisitions of SCA and Outside Van.
As
a result of the factors discussed above, income from operations for the nine months ended October 1, 2021 increased approximately $77.3 million, or 101.0%, compared to income from operations for the nine months ended October 2, 2020.
Interest and other expense, net for the nine months ended October 1, 2021 increased by $0.3 million to $7.2 million compared to $6.9 million for the nine months ended October 2, 2020. The increase in interest and other expense, net is primarily due to higher foreign
exchange losses, partially offset by a decrease in interest expense due to the pay down of additional borrowings incurred in the prior year in connection with our March 2020 acquisition of SCA and lower interest rates.
The
effective tax rate was 14.0% and 13.7% for the nine months periods ended October 1, 2021 and October 2, 2020, respectively. For the nine months ended October 1, 2021, the difference between the Company's effective tax rate of 14.0% and the 21% federal statutory rate resulted primarily from a windfall on stock-based compensation 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 and state taxes.
For the nine months ended October 2, 2020, the difference between our effective tax rate of 13.7% and the 21% federal statutory rate resulted
primarily from a lower tax rate on foreign-derived intangible income, research and development credits, a negotiated reduction of Switzerland's withholding tax on prior year earnings, and excess tax benefits related to stock-based compensation. These benefits were partially offset by state taxes, global low-tax intangible income and non-deductible expenses.
As
a result of the factors described above, our net income increased $66.1 million, or 110.2%, to $126.1 million for the nine months ended October 1, 2021 from $60.0 million for the nine months ended October 2, 2020.
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 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. A summary of our operating, investing and financing activities is shown in the following table:
Net
cash (used in) provided by financing activities
(20,291)
510,019
Effect of exchange rate changes on cash and cash equivalents
168
99
Change in cash and cash equivalents
$
73,578
$
234,510
Operating
activities
Cash 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 nine months ended October 1, 2021, net cash provided by operating activities was $149.3 million and consisted of net income of $126.1 million, plus non-cash items totaling $42.2 million, offset by changes in operating assets and liabilities totaling $19.0 million. Non-cash items and other adjustments consisted of depreciation and amortization of $32.3 million, stock-based compensation of $9.9 million, and amortization of loan fees of $1.2 million, offset by a $1.2 million change in deferred taxes and uncertain tax positions.
Our
investment in operating assets and liabilities is a result of increased inventory of $116.8 million, and accounts receivable of $37.9 million, partially offset by increases in accounts payable of $66.1 million, accrued expenses of $25.9 million, and income taxes of $8.3 million and a decrease in prepaids and other assets of $35.4 million. The changes in inventory and accounts payable are primarily due to additional raw materials purchases to mitigate risks associated with supply chain uncertainty. The change in accounts receivable reflects business growth. The changes in accrued expenses and income taxes reflect higher compensation related accruals, warranty reserves, sales rebates and income taxes payable due to both business growth, as well as the timing of such payments. The change in prepaids and other assets are primarily due to a decrease in deposits on chassis.
In the nine months ended October
2, 2020, net cash provided by operating activities was $99.8 million and consisted of net income of $60.0 million, plus non-cash items totaling $20.4 million and less changes in operating assets and liabilities totaling $19.5 million. Non-cash items and other adjustments consisted of depreciation and amortization of $24.8 million, stock-based compensation of $6.4 million, and amortization of loan fees of $1.1 million, offset by a $11.9 million change in deferred taxes and uncertain tax positions. Our investment in operating assets and liabilities is a result of increased prepaids and other current assets of $14.7 million, accounts receivable of $12.6 million, and inventory of $0.6 million, offset by increases in accounts payable of $36.7 million, accrued expenses of $7.5 million, and income taxes of $3.2 million. The change in prepaids and other current assets is primarily due to deposits on chassis and acquisition-related compensation payments held in escrow, both
related to our SCA subsidiary acquisition in March 2020. The changes in inventory, accounts receivable, and accounts payable reflect seasonality as well as timing of vendor payments. 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 strategic acquisitions of businesses and other assets and investments in our manufacturing and general infrastructure through the procurement of property and equipment.
In the nine months ended October 1, 2021 and October 2, 2020, net cash used in investing activities was $55.6 million and $375.4 million, respectively. Investing activities
for the nine months ended October 1, 2021 consisted of $40.0 million of property and equipment additions and $15.6 million of cash consideration for our purchases of Outside Van and Sola Sport Pty Ltd. Our investing activities for the nine months ended October 2, 2020 consisted of $329.2 million of cash consideration for our acquisition of SCA, $46.0 million of property and equipment additions and $0.3 million of acquisition of other assets.
Cash used in or
provided by financing activities primarily relates to various forms of debt and equity instruments used to finance our business.
In the nine months ended October 1, 2021, net cash used in financing activities was $20.3 million, which consisted of payments of $6.6 million to repurchase shares of our common stock, net of proceeds from the exercise of stock options, payments on our term debt of $10.0 million, and $3.7 million in installment payments related to the purchase of the Tuscany non-controlling interest. Refer to Note 9 - Commitments and Contingencies for additional information on our purchase of the Tuscany non-controlling interest.
In the nine months ended October
2, 2020, net cash provided by financing activities was $510.0 million, which consisted of $392.4 million in proceeds, net of issuance costs, from our Credit Facility, which was amended and restated in connection with our acquisition of SCA, partially offset by net payments of $68.0 million on our line of credit and payments on our term debt of $5.0 million. In addition, we received $198.2 million from our June 2020 issuance of common stock. These inflows were partially offset by $4.6 million to repurchase shares of our common stock as part of our stock-based compensation program and $3.0 million in installment payments related to the purchase of the Tuscany non-controlling interest.
Credit Facility
In June 2019, the Company entered into a credit facility with Bank of America and other named
lenders, which was amended and restated on March 11, 2020, and further amended on June 19, 2020 and June 11, 2021 (as amended to date, the "Credit Facility"). The Credit Facility, which matures on March 11, 2025, provides 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 is 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, which are included in interest and other expense, net on the Condensed Consolidated Statements of Income for the nine months ended October 2, 2020. The remaining $0.2 million were allocated to the line of credit. All loan fees allocated to the term debt will be amortized using the interest method, and all loan fees allocated to the line of credit will be 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 ("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 October 1, 2021, the one-month LIBOR and prime rates were 0.08% and 3.25%, respectively. At October 1, 2021, our weighted-average interest rate on outstanding borrowing was 1.30%. 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 October 1, 2021.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
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 into the fourth quarter of 2021. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the disclosures discussed in the section “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year
ended January 1, 2021, as filed with the SEC on February 25, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our management, under the direction and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of October 1, 2021. Based on the evaluation of our disclosure controls and procedures as of October 1, 2021, our Chief Executive Officer and Chief
Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls
and procedures and internal controls over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include, but are not limited to, the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
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 to vigorously 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 February 2021, the PTAB issued opinions in the 027 Patent petition cases stating that the Company has shown all of the claims of the 027 Patent to be obvious. The PTAB has also issued an opinion in the 250 Patent 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, in view of the 027 Patent PTAB process and opinion, stayed the SRAM lawsuits against the Company.
Due to the inherent uncertainties of litigation, the Company is not able to predict either the outcomes or a range of reasonably possible losses, if any, at this time. Accordingly, no amounts have been recorded in the condensed 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.
Our business, financial condition, operating results and prospects could be materially and adversely affected by various risks and uncertainties that are described herein. In addition to the risks and uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties described below. If any of these risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline.
Summary of Risk Factors
The risks described below include, but are not limited to, the following:
Risks Related to Our Business and Operations
•our business,
financial condition and results of operations have been and may continue to be adversely affected by global public health epidemics or pandemics, including the ongoing COVID-19 pandemic;
•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;
•failure to effectively compete against competitors, enhance existing products or develop, manufacture and market new products that respond to consumer needs and preferences and achieve market acceptance could result in a decrease in demand for our products and negatively impact our business and financial results;
•our performance-defining products, and the bike and powered vehicles into
which they are incorporated, are discretionary purchases and may be adversely impacted by changes in the economy, a shrinking market for these powered vehicles, or a material decline in demand for the high-end bikes that make up a significant portion of our sales;
•changes in our customer, channel and product mix could place demands that are more rigorous on our infrastructure and cause our profitability percentages to fluctuate;
•a disruption in the operations of our facilities, such as work stoppages, or delays in our planned expansion of certain facilities, could have a negative effect on our business, financial condition or results of operations;
•our business depends substantially on our ability to attract and retain experienced and qualified talent, including our
senior management team;
•we may not be able to sustain our past growth or successfully implement our growth strategy, which may have a negative effect on our business, financial condition or results of operations;
•the loss of the support of professional athletes for our products, or the inability to attract new professional athletes or disruption in relationships with dealers and distributors may harm our business;
•our business is dependent in large part on the orders we receive from our OEM customers and from their success. The loss of all or a substantial portion of our sales to any of these customers could have a material adverse impact on us and our results of operations;
•our international operations
are exposed to risks associated with conducting business globally, including currency exchange rate fluctuations and policies related to global trade and tariffs;
•if we are unable to enforce our intellectual property rights, our reputation and sales could be adversely affected, while intellectual property disputes could lead to significant costs or the inability to sell products;
•if we inaccurately forecast demand for our products, we may manufacture insufficient or excess quantities or our manufacturing costs could increase, which could adversely affect our business;
•product recalls, and significant product repair and/or replacement due to product warranty costs and claims have had, and in the future, could have, a material adverse impact on our business;
•an
adverse determination in any material product liability claim against us could adversely affect our operating results or financial condition;
•we are subject to certain risks in our manufacturing and in the testing of our products;
•fuel shortages, or high prices for fuel, could have a negative effect on the use of powered vehicles that use our products;
•we rely on increasingly complex information systems for management of our manufacturing, distribution, sales
and other functions. If our information systems fail to perform these functions adequately, if we or our vendors or commercial partners experience an interruption in our operations, or if we are impacted by cybersecurity attacks, our business could suffer;
•we have grown and may continue to grow in the future through acquisitions, and we may not be able to effectively integrate businesses we acquire or we may not be able to identify or complete any future acquisitions on favorable terms, or at all;
•our operating results are subject to quarterly variations in our sales, which could make our operating results difficult to predict and could adversely affect the price of our common stock;
•growth in our sales and the mix of domestic versus export shipments from Taiwan could
cause additional foreign tax credits to not be realizable, potentially reducing our income and adversely affecting our cash flows;
Risks Related to Our Indebtedness and Liquidity
•our Credit Facility places operating restrictions on us and creates default risks, and the variable rate makes us more vulnerable to increases in interest rates;
•we will continue to have the ability to incur debt and our levels of debt may affect our operations and our ability to pay the principal of and interest on our debt;
•we may incur losses on interest rate swap and hedging arrangements;
Risks Related to Laws and Regulations
•changes
in tax laws and regulations or other factors could cause our income tax obligations to increase, potentially reducing our net income and adversely affecting our cash flows;
•we are subject to extensive U.S. federal and state, foreign and international safety, environmental, employment practices and other government regulations that may require us to incur expenses or modify product offerings in order to maintain compliance with such regulation, which could have a negative effect on our business and results of operations;
•unpredictability in increasingly stringent emission standards and increasing focus on environmental, social and governance responsibility, including climate change, may impose additional costs and new risks on us;
•we are subject to employment practice
laws and regulations, and, as such, are exposed to litigation risks, and we may incur higher employee costs in the future;
•we retain certain personal information about individuals and are subject to various privacy and consumer protection laws;
•our vendors and any potential commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements;
Risks Related to Ownership of Our Common Stock
•potential volatility in our trading price, publications by securities or industry analysts, and future issuances, sales, and the perception of such could cause our stock price and trading volume to decline;
•anti-takeover
provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our Company;
•our Amended and Restated Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees; and
General Risk Factors
•failure of our internal control over financial reporting could adversely affect our business
and financial results.
Our business, financial condition and results of operations have been and may continue to be adversely affected by global public health epidemics or pandemics, including the ongoing COVID-19 pandemic.
We face various risks related to public health issues, including epidemics, pandemics, and other outbreaks, including the ongoing coronavirus (“COVID-19”) pandemic. The global outbreak of COVID-19 was declared a pandemic
by the World Health Organization and a national emergency by the U.S. Government in March 2020 and has resulted in five million deaths worldwide, as of the date of filing this Quarterly Report, and it continues to spread in major markets in which we operate. The impact of the COVID-19 pandemic, including changes in consumer behavior, COVID-19 pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.
These
government-mandated closures, “shelter-in-place” directives, and an outbreak among, or quarantine of, the employees in any of our facilities, have caused and could continue to cause significant interruptions to, or temporary closures of our operations. These impacts include, but are not limited to:
•significant reductions in demand or significant future volatility in demand for one or more of our products, which may be caused by, among other things: the temporary inability of consumers to purchase our products due to illness, quarantine or other travel restrictions, store closures, financial hardship, shifts in demand away from one or more of our more discretionary or higher-priced products, supply chain and shipping constraints, reduced options for marketing and promotion of products or other restrictions in connection with the COVID-19 pandemic; if prolonged, such impacts can further increase
the difficulty of operating our business, including accurately planning and forecasting, planning for operations and may adversely impact our results;
•inability to meet our current or future demand due to disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements such as raw materials, truck chassis, or other components, transportation, workforce, or other manufacturing and distribution capability;
•failure of third parties on which we rely, including our suppliers, contract manufacturers, distributors, contractors, commercial banks, and external business partners, to meet their obligations to the
Company or to timely meet those obligations, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties and may adversely impact our operations;
•significant changes in the political conditions in markets in which we manufacture, sell or distribute our products, including additional or expanded quarantines, governmental or regulatory actions, closures or other restrictions that further limit or close our operating and manufacturing facilities, restrict our employees’ ability to travel or perform necessary business functions, restrict or prevent consumers from having access to our products, or otherwise prevent our third-party partners, dealers, suppliers, or customers from sufficiently staffing operations, including operations necessary for the production, distribution, sale, and support of our products, which could adversely impact
our results; and
•increased difficulty in determining the fair value of the Company’s goodwill and other assets for accounting purposes given the level of judgment and estimation that is inherently higher in the current environment considering the uncertainty created by the COVID-19 pandemic, which could result in estimates and assumptions made in valuing goodwill and other Company assets proving to be inaccurate in the future.
These impacts have had and could continue to have a negative effect on our business, financial condition, results of operations and cash flows, as well as the trading price of our securities. Furthermore, the COVID-19 pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth,
the proper functioning of financial and capital markets, foreign currency exchange rates, interest rates, and liquidity.
We have modified, and might further modify, our business practices in response to the COVID-19 pandemic, related third-party responses, including from government authorities and our suppliers, customers and distributors, and the economic and social ramifications of the disease and societal responses across the markets in which the Company operates. Despite our efforts to manage and remedy these impacts to the Company, the ultimate impact and the extent to which the COVID-19 pandemic will continue to affect our business, results of operation and financial condition is difficult to predict and depends on numerous evolving factors outside
our control including: the duration and scope of the COVID-19 pandemic; government, social, business and other actions that have been and will be taken in response to the COVID-19 pandemic; increases in COVID-19 case counts; any additional waves of the virus; availability and ultimate efficacy of the vaccine on new variants of the virus, including the Delta variant; and the effect of the COVID-19 pandemic on short- and long-term general economic conditions.
We depend on a limited number of suppliers for our materials and component parts for some of our products, and the loss of any of these suppliers or an increase in
cost of raw materials could harm our business.
We depend on a limited number of suppliers for certain components. If our current suppliers, in particular the minority of those that are "single-source" suppliers, are unable to timely fulfill orders, or if we are required to transition to other suppliers, we could experience significant production delays or disruption to our business. We define a single-source supplier as a supplier from which we purchase all of a particular raw material or input used in our manufacturing operations, although other suppliers are available from which to purchase the same raw material or input or an equivalent substitute. We do not maintain long-term supply contracts with any of our suppliers and instead purchase these components on a purchase order basis. As a result, we cannot force any supplier
to sell us the necessary components we use in creating our products and we could face significant supply disruptions should they refuse to do so. As the majority of our bike component manufacturing occurs in Taiwan, we could experience difficulties locating qualified suppliers geographically located closer to these facilities. Furthermore, such suppliers could experience difficulties in providing us with some or all of the materials we require, which could result in disruptions in our manufacturing operations. Our business, financial condition or results of operations could be materially and adversely impacted if we experience difficulties with our suppliers or manufacturing delays caused by our suppliers, whether in connection with our manufacturing operations in the U.S. or in Taiwan.
We also purchase various raw materials in order to manufacture our products. The main commodity items purchased for production include aluminum,
magnesium, steel and carbon. Historically, price fluctuations for these components and raw materials have not had a material impact on our business. In the future, however, if we experience material increases in the price of components or raw materials and are unable to pass on those increases to our customers, or there are shortages in the availability of such component parts or raw materials, it could negatively affect our business, financial condition or results of operations.
In addition to our various single-source suppliers, we also rely on one "sole-source" supplier, Miyaki Corporation, or Miyaki. We define a sole-source supplier as a supplier of a raw material or input for which there is no other supplier of the same product or an equivalent substitute. Miyaki is the exclusive producer of the Kashima coating for our suspension component tubes. As part of our agreement with Miyaki, we have been granted the exclusive
right to use the trademark "KASHIMACOAT" on products comprising the aluminum finished parts for suspension components (e.g., tubes) and on related sales and marketing material worldwide, subject to certain exclusions. Although we believe we could obtain other coatings of comparable utility from other sources if necessary, we could no longer obtain this specific Kashima coating or use the trademark "KASHIMACOAT" if Miyaki were to stop supplying us with this coating. The need to replace the Kashima coating could temporarily disrupt our business and harm our business, financial condition or results of operations.
We also have OEM partners that supply vehicle chassis used in our upfitting operations. An OEM may encounter difficulties and may be unable to deliver chassis according to our production needs, or an OEM may choose to discontinue supplying chassis for other reasons. Any interruption or discontinuation in
the availability of chassis may result in increased production costs, delays in the delivery of our products, and lost sales, which could have an adverse effect on our business and financial condition.
If we are unable to continue to enhance existing products and develop, manufacture and market new products that respond to consumer needs and preferences and achieve market acceptance, we may experience a decrease in demand for our products, and our business and financial results could suffer.
Our growth strategy involves the continuous development of innovative performance-defining products. We may not be able to compete as effectively with our competitors, and ultimately satisfy the needs and preferences of our customers and the end users of our products, unless we can continue to enhance existing products and develop new, innovative products in the global markets in which we compete.
In addition, we must continuously compete for not only end users who purchase our products through the dealers and distributors who are our customers, but also for the OEMs, which incorporate our products into their bikes and powered vehicles. These OEMs regularly evaluate our products against those of our competitors to determine if they are allowing the OEMs to achieve higher sales and market share on a cost-effective basis. Should one or more of our OEM customers determine that they could achieve overall better financial results by incorporating a competitor’s new or existing product, they would likely do so, which could harm our business, financial condition or results of operations.
Product development requires significant financial, technological and other resources. While we expended approximately $34.3 million, $31.8 million and $25.8 million for our research and development efforts in 2020, 2019 and 2018, respectively,
there can be no assurance that this level of investment in research and development will be sufficient in the future to maintain our competitive advantage in product innovation, which could cause our business, financial condition or results of operations to suffer.
Product improvements and new product introductions require significant planning, design, development and testing at the technological, product and manufacturing process levels, and we may experience unanticipated delays in our introduction of product improvements or new products. Our competitors’ new products may beat our products to market, be more effective
and/or less expensive than our products, obtain better market acceptance or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful sales or profits for us relative to our expectations. In addition, one of our competitors could develop an unforeseen and entirely new product or technology that renders our products less desirable or obsolete, which could negatively affect our business, financial condition or results of operations.
We face intense competition in all product lines, including from some competitors that may have greater financial and marketing resources. Failure to compete effectively against competitors would negatively impact our business and operating results.
The industries in which we operate are highly competitive. We compete with a number of other manufacturers that produce and sell performance-defining
products to OEMs and aftermarket dealers and distributors, including OEMs that produce their own lines of products for their own use. Our continued success depends on our ability to continue to compete effectively against our competitors, some of which have significantly greater financial, marketing and other resources than we have. In addition, several of our competitors offer broader product lines to OEMs, which they may sell in connection with suspension products as part of a package offering. In the future, our competitors may be able to maintain and grow brand strength and market share more effectively or quickly than we do by anticipating the course of market developments more accurately than we do, developing products that are superior to our products, creating manufacturing or distribution capabilities that are superior to ours, producing similar products at a lower cost than we can or adapting more quickly than we do to new technologies or evolving regulatory,
industry or customer requirements, among other possibilities. In addition, we may encounter increased competition if our current competitors broaden their product offerings by beginning to produce additional types of performance-defining products or through competitor consolidations. We could also face competition from well-capitalized entrants into these product markets, as well as aggressive pricing tactics by other manufacturers trying to gain market share. As a result, our products may not be able to compete successfully with our competitors’ products, which could negatively affect our business, financial condition or results of operations.
Our business is sensitive to economic conditions that impact consumer spending. Our performance-defining products, and the bike and powered vehicles into which they are incorporated, are discretionary purchases and may be adversely impacted by changes in the economy.
Our
business depends substantially on global economic and market conditions. In particular, we believe that currently a significant majority of the end users of our products live in the U.S. and countries in Europe. These areas have historically experienced recessions, disruptions in banking and/or financial systems, economic weakness and uncertainty. In addition, our products are recreational in nature and are generally discretionary purchases by consumers. Consumers are usually more willing to make discretionary purchases during periods of favorable general economic conditions and high consumer confidence. Discretionary spending may also be affected by many other factors, including interest rates, the availability of consumer credit, taxes and consumer confidence in future economic conditions. During periods of unfavorable economic conditions, or periods when other negative market factors exist, consumer discretionary spending is typically reduced, which in turn could
reduce our product sales and have a negative effect on our business, financial condition or results of operations.
There could also be a number of secondary effects resulting from an economic downturn, such as insolvency of our suppliers resulting in product delays, an inability of our OEM and distributor and dealer customers to obtain credit to finance purchases of our products, customers delaying payment to us for the purchase of our products due to financial hardship or an increase in bad debt expense. Any of these effects could negatively affect our business, financial condition or results of operations.
If we are unable to maintain our premium brand image, our business may suffer.
OEMs dealers and distributors select our products in part because of the premium brand reputation we hold with them and our end users. Therefore, our success
depends on our ability to maintain and build the image of our brands. We have focused on building our brands through producing products or acquiring businesses that produce products that we believe are innovative, high in performance and highly reliable. In addition, our brands benefit from our strong relationships with our OEM customers and dealers and distributors and through marketing programs aimed at bike and powered vehicle enthusiasts in various media and other channels. For example, we sponsor a number of professional athletes and professional race teams. In order to continue to enhance our brand image, we will need to maintain our position in the performance-defining products industry, continue to provide high-quality products and services, and preserve our reputation. The rising popularity of social media and other consumer-oriented technologies creates new risks and challenges that could cause damage to our brands and reputation. Social media platforms make
it easy for anyone to provide public feedback that can influence perceptions of our brands, and social media platforms can also accelerate and potentially amplify the scope of negative publicity.
There can be no assurance that we will be able to maintain or enhance the strength of our brands in the future. Our brands could be adversely impacted by, among other things:
•failure to develop new products that are innovative, performance-oriented, and reliable;
•internal product quality control
issues;
•product quality issues on the bikes and powered vehicles on which our products are installed;
•product recalls;
•high-profile component failures (such as a component failure during a race on a mountain bike ridden by an athlete that we sponsor);
•negative publicity regarding our brand or our sponsored athletes, which could be amplified on social media;
•high-profile injury or death to one of our sponsored athletes;
•inconsistent uses of our brand and our other intellectual property assets, as well as failure to protect our intellectual property;
•changes
in consumer trends and perceptions; and
•lack of investment in sponsorships, marketing and public relations.
Any adverse impact on our brand could in turn negatively affect our business, financial condition or results of operations.
Our growth in the powered vehicle category is dependent upon our continued ability to expand our product sales into powered vehicles that require performance-defining products and the continued expansion of the market for these powered vehicles.
Our growth in the powered vehicle category is in part attributable to the expansion of the market for powered vehicles that require performance-defining products. Such market growth includes the creation of new classes of vehicles that can benefit from our products, such as trucks that are up-fitted
with products to enhance their off-road capability, and our ability to create products for these vehicles. Additionally, with our acquisitions of SCA Performance, Tuscany and Outside Van, a growing portion of our sales are expected to be generated from providing up-fitting solutions. In the event these markets stop expanding or contract due to economic factors, changes in consumer preferences or other reasons, or we are unsuccessful in creating new products for these markets or other competitors successfully enter into these markets, we may fail to achieve future growth or our sales could decrease, and our business, financial condition or results of operations could be negatively affected.
A significant portion of our sales are highly dependent on the demand for high-end bikes and a material decline in the demand for these bikes or
their suspension components could have a material adverse effect on our business or results of operations.
During 2020, approximately 41% of our sales were generated from the sale of bike products. Part of our success has been attributable to the growth in the high-end bike industry, including increases in average retail sales prices, as better-performing product designs and technologies have been incorporated into these products. If the popularity of high-end or premium-priced bikes does not increase or declines, the number of bike enthusiasts seeking such bikes or premium-priced suspension products, wheels, cranks and other specialty components for their bikes does not increase or declines, or the average price point of these bikes declines, we may fail to achieve future growth or our sales could decrease, and our business, financial condition or results of operations could be negatively affected. In addition, if current
bike enthusiasts stop purchasing our products due to changes in preferences, we may fail to achieve future growth or our sales could be decreased, and our business, financial condition or results of operations could be negatively affected.
Changes in our customer, channel and product mix could place demands that are more rigorous on our infrastructure and cause our profitability percentages to fluctuate.
We may experience changes in our customer, channel and product mix from time to time as a result of changes in demands from existing customers due to shifts in their products and markets. Additionally, the Company may pursue new customers and markets. Such changes in customers, channel and product mix could place demands that are more rigorous on our infrastructure and supply chain and could result
in changes to our profitability and profitability percentages. If customers begin to require more lower-margin products from us and fewer higher-margin products, or place demands on our performance that increase our costs, our business, results of operations and financial condition may suffer.
A disruption in the operations of our facilities, or delays in our planned expansion of certain facilities, could have a negative effect on our business, financial condition or results of operations.
During 2017, we completed the process of moving all of the manufacturing of our bike suspension
component products to our facility in Taichung, Taiwan. In connection with this move, we are utilizing, and expect to continue to use, suppliers who are located closer to our facility in Taichung, Taiwan for a number of materials and components.
In 2020, we substantially completed the first phase of construction of an approximately 336,000 square foot state-of-the-art facility in Hall County, Georgia to diversify our manufacturing platform and provide additional long-term capacity to support growth in our Powered Vehicles Group. The first phase will be used for manufacturing, warehousing, distribution and office space. We are in the process of moving additional manufacturing operations as we re-balance existing facilities or expand to new manufacturing locations. As a result, we have incurred, and expect to continue to incur, costs associated with some duplication of facilities, equipment and personnel, the amount of which
could vary materially from our projections. Unforeseen difficulties in our Georgia expansion project and future expansion projects, whatever the cause, could have a material adverse effect on our business, customer relationships, financial condition, operating results, cash flow, and liquidity.
Equipment failures, delays in deliveries or catastrophic loss at any of our facilities could lead to production or service disruptions, curtailments or shutdowns. In the event of a stoppage in production or a slowdown in production due to high employee turnover or a labor dispute at any of our facilities, even if only temporary, or if we experience delays as a result of events that are beyond our control, delivery times to our customers could be severely affected. If there was a manufacturing disruption in any of our manufacturing facilities, we might be unable to meet product delivery requirements and our business, financial condition
or results of operations could be negatively affected, even if the disruption was covered in whole or in part by our business interruption insurance. Any significant delay in deliveries to our customers could lead to increased returns or cancellations, expose us to damage claims from our customers or damage our brand and, in turn, negatively affect our business, financial condition or results of operations.
Work stoppages or other disruptions at seaports could adversely affect our operating results.
A significant portion of our goods move through ports on the Western Coast of the U.S. We have a global supply chain and we import products from our third-party vendors as well as our Fox Taiwan facility into the U.S. largely through ports on the West Coast. Dockworkers, none of whom are our employees, must offload freight from ships arriving at West Coast ports. We do not control the
activities of these employees or seaports and we could suffer supply chain disruptions due to any disputes, capacity shortages, slowdowns or shutdowns that may occur, as was experienced in February 2015, in relation to certain West Coast ports. While the West Coast ports labor agreement has been extended until July 2022, the 2015 strike lasted longer than we forecasted, and any similar labor dispute in the future could potentially have a negative effect on both our financial condition and results of operations. Furthermore, the ongoing COVID-19 pandemic has only increased uncertainty for global supply chains, as port congestion and shipping container shortages have become exacerbated, which could adversely affect our operating results.
The proposed new regulation concerning mandatory COVID-19 vaccination of employees could have a material adverse impact on our business and results of operations.
On
September 9, 2021, President Biden announced a proposed new rule requiring all employers with at least 100 employees to ensure that their employees are fully vaccinated or require unvaccinated workers to get a negative test at least once a week. The Department of Labor’s Occupational Safety and Health Administration is drafting an emergency regulation to carry out this mandate, which is expected to take effect in the coming weeks. It remains unclear, among other things, if the vaccine mandate will apply to all employees or only to employees who work in the office, and how compliance will be documented.
It is currently not possible to predict with certainty the exact impact the new regulation would have on us. As a company with more than 100 employees, we would be required to mandate COVID-19 vaccination of our workforce or our unvaccinated employees would require weekly testing.
This may result in employee attrition, which could be material as a substantial number of our employees are based in states where vaccination rates are below the national average. If we were to lose employees, it could have an adverse effect on future revenues and costs, which could be material. Accordingly, the proposed new regulation when implemented could have a material adverse effect on our business and results of operations.
Our business depends substantially on our ability to attract and retain experienced and qualified talent, including our senior management team.
We
are dependent upon the contributions, talent and leadership of our senior management team, particularly our Chief Executive Officer, Michael C. Dennison. We do not have a "key person" life insurance policy on Mr. Dennison or any other key employees. We believe that the top nine members of our senior management team are key to establishing our focus and executing our corporate strategies as they have extensive knowledge of our systems and processes. Given our senior management team’s knowledge of our industry and the limited number of direct competitors in the industry, we believe that it could be difficult to find replacements should any of the members of our senior management team leave.
We could also be adversely affected if we fail to attract and retain talent throughout our organization. For instance, we rely on skilled and well-trained engineers for the design and production of our products, as well as in our research
and development functions. Competition for such individuals is intense, particularly in California and Georgia where several of our facilities are located. Our inability to attract or retain qualified employees in our design, production or research and development functions or elsewhere in our Company could result in diminished quality of our products and delinquent production schedules or impede our ability to develop new products. Our failure to adequately address any of these issues could have a material adverse effect on our business, operating results and financial condition.
We may not be able to sustain our past growth or successfully implement our growth strategy, which may have a negative effect on our business, financial condition or results of operations.
We grew our sales from approximately
$751.0 million in 2019 to approximately $890.6 million in 2020. This growth rate may be unsustainable. Our future growth will depend upon various factors, including the strength of the image of our brands, our ability to continue to produce innovative performance-defining products, consumer acceptance of our products, competitive conditions in the marketplace, our ability to make strategic acquisitions, the growth in emerging markets for products requiring high-end suspension products and, in general, the continued growth of the high-end bike and powered vehicle markets into which we sell our products. Our beliefs regarding the future growth of markets for high-end suspension products are based largely on qualitative judgments and limited sources and may not be reliable. If we are unable to sustain our past growth or successfully implement our growth strategy, our business, financial condition or results of operations could be negatively affected.
The
professional athletes and race teams who use our products are an important aspect of the image of our brands. The loss of the support of professional athletes for our products or the inability to attract new professional athletes may harm our business.
If current or future professional athletes and race teams do not use our products, our brands could lose value and our sales could decline. While our sponsorship agreements typically restrict our sponsored athletes and race teams from promoting, endorsing or using competitors’ products that compete directly within our product categories during the term of the sponsorship agreements, we do not typically have long-term contracts with any of the athletes or race teams whom we sponsor.
If we are unable to maintain our current relationships with these
professional athletes and race teams, these professional athletes and race teams are no longer popular, our sponsored athletes and race teams fail to have success or we are unable to continue to attract the endorsement of new professional athletes and race teams in the future, the value of our brands and our sales could decline.
We depend on our relationships with dealers and distributors and their ability to sell and service our products. Any disruption in these relationships could harm our sales.
We sell our aftermarket products to dealers and distributors, and we depend on their willingness and ability to market and sell our products to consumers and provide customer and product service as needed. We also rely on our dealers and distributors to be knowledgeable about our products and their features. If we are not able to educate our dealers and distributors so that they may effectively
sell our products as part of a positive buying experience, or if they fail to implement effective retail sales initiatives, focus selling efforts on our competitors’ products, reduce the quantity of our products that they sell or reduce their operations due to financial difficulties or otherwise, our brand and business could suffer.
We do not control our dealers or distributors, and many of our contracts allow these entities to offer our competitors’ products. Our competitors may incentivize our dealers and distributors to favor their products. In addition, we do not have long-term contracts with a majority of our dealers and distributors, and our dealers and distributors are not obligated to purchase specified amounts of our products. In fact,
the majority of our dealers and distributors buy from us on a purchase order basis. Consequently, with little or no notice, many of these dealers and distributors may terminate their relationships with us or materially reduce their purchases of our products. If we were to lose one or more of our dealers or distributors, we would need to obtain a new dealer or distributor to cover the particular location or product line, which may not be possible on favorable terms or at all.
Alternatively, we could use our own sales force to replace such a dealer or distributor, but expanding our sales force into new locations takes a
significant amount of time and resources and may not be successful. Further, many of our international distribution contracts contain exclusivity arrangements, which may prevent us from replacing or supplementing our current distributors under certain circumstances.
We are a supplier in the high-end bike and powered vehicles markets, and our business is dependent in large part on the orders we receive from our OEM customers and from their success.
As a supplier to OEM customers, we are dependent in large part on the success of the business of our OEM customers. Model year changes by our OEM customers or production disruptions or hiatuses may adversely impact our sales or cause our sales to vary from quarter to quarter. In addition, losses in market share individually or a decline in the overall
market of our OEM customers or the discontinuance by our OEM customers of their products which incorporate our products could negatively impact our business, financial condition or results of operations.
A relatively small number of customers account for a substantial portion of our sales. The loss of all or a substantial portion of our sales to any of these customers, whether through the temporary or permanent discontinuation of their products which incorporate our products or otherwise, or the loss of market share by these customers could have a material adverse impact on us and our results of operations.
Sales attributable to our five largest OEM customers, which can vary from year to year, collectively accounted for approximately 23%, 32%, and 32% of our sales in fiscal years 2020, 2019, and 2018. The loss of all or a substantial portion of our sales to any of these OEM customers,
whether through the temporary or permanent discontinuation of their products which incorporate our products or otherwise, the loss of market share by these customers, manufacturing or other problems, including disruptions related to COVID-19, could have a material impact on our business, financial condition or results of operations.
Currency exchange rate fluctuations could impact gross margins and expenses.
Foreign currency fluctuations could in the future have an adverse effect on our business, financial condition or results of operations. We sell our products inside and outside of the U.S. primarily in U.S. Dollars and New Taiwan Dollars. However, some of the OEMs purchasing products from us sell their products in Europe and other foreign markets using the Euro and other foreign currencies. As a result, as the U.S. Dollar appreciates against these foreign currencies, our products
will become relatively more expensive for these OEMs. Accordingly, competitive products that our OEM customers can purchase in other currencies may become more attractive, and we could lose sales as these OEMs seek to replace our products with cheaper alternatives. In addition, should the U.S. Dollar depreciate significantly, this could have the effect of decreasing our gross margins and adversely impact our business, financial condition or results of operations.
With a majority of our manufacturing operations for our bike products occurring in Taiwan, a percentage of our sales and expenses are denominated in the New Taiwan Dollar. Should the New Taiwan Dollar appreciate against the U.S. Dollar, this could have the effect of decreasing our sales, increasing our expenses, and decreasing our profitability.
Additionally, certain of our operations take place in Canada and a percentage
of our sales and expenses are denominated in Canadian Dollars. Our operating profitability could be negatively impacted as a result of changes in the exchange rate between the U.S. Dollar and the Canadian Dollar.
Our international operations are exposed to risks associated with conducting business globally.
As a result of our international presence, we are exposed to increased risks inherent in conducting business outside of the U.S. In addition to foreign currency risks, these risks include:
•difficulty in transporting materials internationally, including labor disputes at West Coast ports, which handle a large amount of our products;
•increased difficulty in protecting our intellectual property rights and trade secrets;
•changes
in tax laws and the interpretation of those laws;
•exposure to local economic conditions;
•unexpected government action or changes in legal or regulatory requirements;
•geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war and other political uncertainty;
•political, economic, or other actions from China could impact Taiwan and its economy, and may adversely affect our operations in Taiwan, our customers, and our supply chain;
•changes in tariffs, quotas, trade barriers and other similar restrictions on sales;
•the effects of
any anti-American sentiments on our brands or sales of our products;
•increased difficulty in ensuring compliance by employees, agents and contractors with our policies as well as with the laws of multiple jurisdictions, including but not limited to the U.S. Foreign Corrupt Practices Act, local international environmental, health and safety laws, and increasingly complex regulations relating to the conduct of international commerce;
•increased difficulty in controlling and monitoring foreign operations from the U.S., including increased
difficulty in identifying and recruiting qualified personnel for our foreign operations; and
•increased difficulty in staffing and managing foreign operations or international sales.
An adverse change in any of these conditions could have a negative effect upon our business, financial condition or results of operations.
Our sales could be adversely impacted by the disruption or cessation of sales by other bike component manufacturers or if other bike component manufacturers enter into the specialty bike component market.
Most of the bikes incorporating our suspension products also use products and components manufactured by other bike component manufacturers. If such component manufacturers were to cease selling their products and components on a standalone basis, their
sales are disrupted, or their competitive market position or reputation is diminished, customers could migrate to competitors that sell complementary bike products that we do not sell. Moreover, such bike component manufacturers could begin manufacturing bike suspension products, wheels, or cranks, or bundle their bike components with suspension products, wheels or cranks manufactured by competitors. If any of the foregoing were to occur, our sales could decrease and our business, financial condition or results of operations could suffer.
We have been and may become subject to intellectual property disputes that could cause us to incur significant costs or pay significant damages or that could prohibit us from selling our products.
As we develop new products or attempt to use our brands in connection with new products, we seek to avoid infringing the valid patents and other intellectual
property rights of our competitors. However, from time to time, third parties have alleged, or may allege in the future, that our products and/or trademarks infringe upon their proprietary rights. We will evaluate any such claims and, where appropriate, may obtain or seek to obtain licenses or other business arrangements. To date, there have been no significant interruptions in our business as a result of any claims of infringement, and we do not hold patent infringement insurance. Any claim, regardless of its merit, could be expensive, time consuming to defend and distract management from our business. Moreover, if our products or brands are found to infringe third-party intellectual property rights, we may be unable to obtain a license to use such technology or associated intellectual property rights on acceptable terms. A court determination that our brands, products or manufacturing processes infringe the intellectual property rights of others could result in significant
liability and/or require us to make material changes to our products and/or manufacturing processes or preclude our ability to use certain brands. In most circumstances, we are not indemnified for our use of a licensor’s intellectual property, if such intellectual property is found to be infringing. Any of the foregoing results could cause us to redesign our products or defend legal actions, which could cause us to incur substantial costs that could negatively affect our business, financial condition or results of operations.
If we are unable to enforce our intellectual property rights, our reputation and sales could be adversely affected.
Intellectual property is an important component of our business. We patent our proprietary technologies related to vehicle suspension and other products in the U.S. and various foreign
patent offices. Additionally, we have registered or have applied for trademarks and service marks with the U.S. Patent and Trademark Office and a number of foreign countries, including the marks FOX® and RACE FACE®, to be used with certain goods and services. When appropriate, we may from time to time assert our rights against those who infringe on our patents, trademarks, trade dress, or other intellectual property. However, we may not be successful in enforcing our patents or asserting trademark, trade name or trade dress protection with respect to our brand names and our product designs, and third parties may seek to oppose or challenge our patents or trademark registrations. Further, these legal efforts may not be successful in reducing sales of suspension products by those infringing. In addition, our pending patent applications may not result in the issuance of patents,
and even issued patents may be contested, circumvented or invalidated and may not provide us with proprietary protection or competitive advantages. If our efforts to develop and enforce our intellectual property are unsuccessful, or if a third party misappropriates our rights, this may adversely affect our business, financial condition or results of operations. Additionally, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the U.S., and it may be more difficult for us to successfully challenge the use of our proprietary rights by other parties in these countries. Furthermore, other competitors may be able to successfully produce products that imitate certain of our products without infringing upon any of our patents, trademarks or trade dress. The failure to prevent or limit infringements and imitations could have a permanent negative
impact on the pricing of our products or reduce our product sales and product margins, even if we are ultimately successful in limiting the distribution of a product that infringes our rights, which in turn may affect our business, financial condition or results of operations.
Although we enter into non-disclosure agreements with employees, OEMs, distributors and others to protect our confidential information and trade secrets, we may be unable to prevent such parties from breaching these agreements with us and using our intellectual property in an unauthorized manner. If our efforts to protect our intellectual property
are unsuccessful, or if a third party misappropriates our rights, our business may be adversely affected. Defending our intellectual property rights can be very expensive and time consuming, and there is no assurance that we will be successful.
If we inaccurately forecast demand for our products, we may manufacture insufficient or excess quantities or our manufacturing costs could increase, which could adversely affect our business.
We plan our manufacturing capacity based upon the forecasted demand for our products. In the OEM channel, our forecasts are based in large part on the number of our product specifications for new bikes and powered vehicles and on projections from our OEM customers. In the aftermarket channel, our forecasts are based partially on discussions with our dealers and distributors as well as our own assessment of markets. If we incorrectly forecast demand, we
may incur capacity issues in our manufacturing plant and supply chain, increased material costs, increased freight costs, additional overtime, and costs associated with excess inventory, all of which in turn adversely impact our cost of sales and our gross margin. Economic weakness and uncertainty in the U.S., Europe and other countries may make accurate forecasting particularly challenging.
In the future, if actual demand for our products exceeds forecasted demand, the margins on our incremental sales in excess of anticipated sales may be lower due to temporary higher costs, which could result in a decrease in our overall margins. While we generally manufacture our products upon receipt of customer orders, if actual demand is less than the forecasted demand for our products and we have already manufactured the products or committed to purchase materials in support of forecasted demand, we could be forced to hold excess inventories.
In short, either excess or insufficient production due to inaccurate forecasting could have a negative effect on our business, financial condition or results of operations.
Product recalls, and significant product repair and/or replacement due to product warranty costs and claims have had, and in the future, could have, a material adverse impact on our business.
Unless otherwise required by law, we generally provide a limited warranty for our products for a one or two-year period beginning on: (i) in the case of OEM sales, the date the bike or powered vehicle is purchased from an authorized OEM where our product is incorporated as original equipment on the purchased bike or powered vehicle; or (ii) in the case of aftermarket sales, the date the product is originally purchased from an authorized dealer. From time to time, our customers may negotiate for longer or different warranty
coverage. In the ordinary course of business, we incur warranty costs and reserve against such costs in our financial statements. However, there is a risk that a product could underperform and require us to adjust our warranty reserves or incur costs in excess of these reserves, which could adversely affect our results of operations.
If any of our products are or are alleged to be defective, we may be required to participate in a recall involving such products. Our products and items where our product are incorporated as original equipment on the purchased item are frequently subject to regulation by various agencies, including, for example, the National Highway Traffic Safety Administration ("NHTSA"), the Consumer Product Safety Commission ("CPSC") and/or similar state and international regulatory authorities. We have had in the past, and may have in the future, recalls (both voluntary and involuntary) of our
products or of items that incorporate our products. In the case of OEM sales, each manufacturer has its own practices regarding product recalls and other product liability actions that could involve its suppliers. Additionally, as suppliers become more integrally involved in the design process and assume a greater role in the overall system design, OEMs could potentially look to us to share in the cost if faced with recalls and product liability claims.
Although we carry product liability and product recall insurance, no assurance can be made that such insurance will provide adequate coverage against any potential claims, such insurance is available in the appropriate markets or that we will be able to obtain such insurance on acceptable terms in the future. In addition to the direct costs related to these or other recalls, our aftermarket and OEM sales could be adversely affected if we do not have a ready replacement product
for such recalled products. Such recall events could also adversely affect our brand image and have a negative effect on our relationships with our OEMs, sponsored athletes and race teams, or otherwise have a negative effect on our business, financial condition or results of operations.
An adverse determination in any material product liability claim against us could adversely affect our operating results or financial condition.
The use of our products by consumers, often under extreme conditions, exposes us to risks associated with product liability claims. If our products are defective or used incorrectly by our customers, bodily injury, property damage or other injury, including death, may result in, and could give rise to product liability claims against us, which could adversely affect our brand image or reputation. We have encountered product liability claims in the past and
carry product liability insurance to help protect us against the costs of such claims, although our insurance may not be sufficient to cover all losses. Any losses that we may suffer from any product liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business, financial condition or results of operations.
We are subject to certain risks in our manufacturing and in the testing of our products.
As of October 1, 2021,
we employed approximately 3,870 full-time employees worldwide, a large percentage of which work at our manufacturing facilities. Our business involves complex manufacturing processes that can be inherently dangerous. Although we employ safety procedures in the design and operation of our facilities, there is a risk that an accident or death could occur in one of our facilities. In addition, prior to the introduction of new products, our employees test the products under rigorous conditions, which involve the risk of injury or death. Any accident could result in manufacturing or product delays, which could negatively affect our business, financial condition or results of operations. The outcome of litigation is difficult to assess or quantify, and the cost to defend litigation can be significant. As a result, the costs to defend any action or the potential liability resulting from any such accident or death or arising out of any other litigation, and any negative publicity
associated therewith, could have a negative effect on our business, financial condition or results of operations.
Fuel shortages, or high prices for fuel, could have a negative effect on the use of powered vehicles that use our products.
Gasoline or diesel fuel is required for the operation of the powered vehicles that use our products. There can be no assurance that the supply of these fuels will continue uninterrupted, that rationing will not be imposed or that the price of or tax on these petroleum products will not significantly increase in the future. Future shortages of gasoline and diesel fuel and substantial increases in the price of fuel could have a material adverse effect on our powered vehicle product category, which could have a negative effect on our business, financial condition or results of operations.
We do not control
our suppliers, OEMs, other customers or partners, or require them to comply with a formal code of conduct, and actions that they might take could harm our reputation and sales.
We do not control our suppliers, OEMs, other customers or partners, or their labor, environmental or other practices. A violation of labor, environmental, intellectual property or other laws by our suppliers, OEMs, other customers or partners, or a failure of these parties to follow generally accepted ethical business practices, could create negative publicity and harm our reputation. In addition, we may be required to seek alternative suppliers or partners if these violations or failures were to occur. We do not inspect or audit compliance of our suppliers, OEMs, customers or partners with these laws or practices, and we do not require our suppliers, OEMs, customers or partners to comply with a formal code of conduct. Any conduct or actions that our
suppliers could take could reduce demand for our products, harm our ability to meet demand or harm our reputation, brand image, business, financial condition or results of operations.
We may incur higher employee costs in the future.
We are subject to government-mandated wage and benefit laws and regulations in many varying countries and jurisdictions. For example, the State of California, where a substantial number of our employees are located, has passed legislation designed to raise the statewide minimum wage gradually until it reaches $15.00 per hour in 2022. Under the California law, signed on April 4, 2016, the minimum wage increased to $11.00 per hour effective January 1, 2018, and will gradually increase each calendar year through January
1, 2022, when it will reach $15.00 per hour. Additionally, in 2021, the U.S. Congress is considering whether to pass national minimum wage legislation. As we expand internationally, we are also subject to applicable laws in each such jurisdiction. Increases in the mandated wage in any or all of the jurisdictions in which we operate could subject us to increased costs, thereby impacting our business, financial condition, or results of operations.
We maintain a self-insured healthcare plan for our employees based in the U.S. We have insurance coverage in place for individual claims above a specified amount in any year. Inflation in healthcare costs, as well as additional costs we may incur as a result of current or future federal or state healthcare legislation and regulations, could significantly increase our employee healthcare costs in the future. Continued increases in our employee costs could adversely affect our earnings,
financial condition and liquidity.
We rely on increasingly complex information systems for management of our manufacturing, distribution, sales and other functions. If our information systems fail to perform these functions adequately or if we experience an interruption in our operations, our business could suffer.
All of our major operations, including manufacturing, distribution, sales and accounting, are dependent upon our complex information systems. Our information systems are vulnerable to damage or interruption from, among other things:
• earthquake,
fire, flood, hurricane and other natural disasters;
• power loss, computer systems failure, internet and telecommunications or data network failure; and
• hackers, computer viruses, software bugs or glitches.
Any damage or significant disruption in the operation of such systems or the failure of our information systems to perform as expected could disrupt our operations, reduce our efficiency, delay our fulfillment of customer orders or require significant unanticipated expenditures to correct, and thereby have a negative effect on our business, financial condition or results of operations.
In 2015, we began the process of implementing a global enterprise resource planning system ("ERP"). The pilot phase of the new ERP was completed in fiscal year 2016 and additional phases were completed
in 2018 and 2019. ERP implementations are complex and time-consuming projects that involve substantial expenditures on system software and implementation activities. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system. Any such transformation involves risks inherent in the conversion to a new computer system, including loss of information and potential disruption to our normal operations. Our business and results of operations may be adversely affected if we experience operating problems or cost overruns during the ERP implementation process, or if the ERP system and the associated process changes do not give rise to the benefits that we expect.
Additionally, if we do not effectively implement the ERP system as planned or the system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely
affected.
We could be negatively impacted by cybersecurity attacks and are subject to evolving privacy laws in the U.S. and other jurisdictions that could adversely impact our business and require that we incur substantial costs.
We use a variety of information technology systems in the ordinary course of business, which are potentially vulnerable to unauthorized access, computer viruses and cyber-attacks, including cyber-attacks to our information technology infrastructure and attempts by others to gain access to our propriety or sensitive information, and ranging from individual attempts to advanced persistent threats. The procedures and controls we use to monitor these threats and mitigate our exposure may not be sufficient to prevent cybersecurity incidents. The results of these incidents could include misstated financial data, theft of trade secrets or other intellectual property,
liability for disclosure of confidential customer, supplier or employee information, increased costs arising from the implementation of additional security protective measures, litigation and reputational damage, which could materially adversely affect our financial condition, business or results of operations. Any remedial costs or other liabilities related to cybersecurity incidents may not be fully insured or indemnified by other means. Moreover, we or our third-party vendors or business partners may be more vulnerable to such attacks in remote work environments, which have increased in response to the COVID-19 pandemic.
Additionally, security breaches could result in a violation of applicable U.S. and international privacy and other laws and subject us to governmental investigations and proceedings, which could result in our exposure to material civil or criminal liability. For example, the European Union adopted a regulation
that became effective in May 2018, called the General Data Protection Regulation (“GDPR”). GDPR requires companies to meet new requirements regarding the handling of personal data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Similarly, the California Consumer Privacy Act (“CCPA”), which took effect on January 1, 2020, imposes additional obligations on businesses to make new disclosures about data collection, use, and sharing practices and affords consumers new rights with respect to their data. It also provides a new private right of action for data breaches. The CCPA has been amended several times, including by the California Privacy Rights Act (the "CPRA"), a California ballot initiative that passed in November 2020, and takes effect on January 1, 2023, which, among
other things, significantly modifies the CCPA, including by expanding consumers' rights with respect to certain personal information and creating a new state agency to oversee implementation and enforcement efforts. Failure to meet GDPR, CCPA and CPRA requirements could result in financial penalties. Furthermore, the CCPA and CPRA could mark the beginning of a trend toward more stringent privacy legislation in the U.S., as other states across the country are considering and proposing similar laws, and states like Virginia and Colorado have recently enacted CCPA-like laws to provide their respective residents with similar rights. Privacy laws, both domestically and internationally, are changing rapidly, including a discussion in Congress of a new federal data protection and privacy law, all of which may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment in resources for compliance programs, and result
in increased compliance costs and/or changes in business marketing practices and policies.
Our vendors’ and commercial partners’ information technology systems may fail or suffer security breaches, which could result in a material disruption of our operations.
Despite the implementation of security measures, the information technology systems of our vendors or commercial partners are vulnerable to damage from computer viruses, unauthorized access, natural disasters, and electrical failures. Such events could cause disruptions in our operations. To the extent that any disruption
or security breach were to result in a loss of, or damage to, our data, or inappropriate disclosure of confidential or propriety information, we could be subject to litigation and reputational harm, which could materially adversely affect our financial condition, business or results of operations.
We have grown and may continue to grow in the future through acquisitions. Growth by acquisitions involves risks, and we may not be able to effectively integrate businesses we acquire or we may not be able to identify or consummate any future acquisitions on favorable terms, or at all.
We have completed several acquisitions over the past several years, including our acquisition of SCA in March 2020. Additionally, we intend to selectively evaluate additional acquisitions in the future. Any acquisitions that we have made and might make are subject to various risks and uncertainties and could
have a negative impact on our business, financial condition or results of operations. These risks include the inability to integrate effectively the operations, products, technologies and personnel of the acquired companies (some of which may be spread out in different geographic regions), the inability to achieve anticipated cost savings or operating synergies, the earn-outs we may contractually obligate ourselves to pay, and the risk we may not be able to effectively manage our operations at an increased scale of operations resulting from such acquisitions. In the event we do complete acquisitions in the future, such acquisitions could affect our cash flows and net income as we expend funds, increase indebtedness and incur additional expenses in connection with pursuing acquisitions. We may also issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments. We may not be able to identify or consummate
any future acquisitions on favorable terms, or at all.
Our operating results are subject to quarterly variations in our sales, which could make our operating results difficult to predict and could adversely affect the price of our common stock.
We have experienced, and expect to continue to experience, substantial quarterly variations in our sales and net income. Our quarterly results of operations fluctuate, in some cases significantly, as a result of a variety of other factors, including, among other things:
• the timing of new product releases or other significant announcements by us or our competitors;
• new advertising initiatives;
• fluctuations in raw materials and component costs; and
• changes
in our practices with respect to building inventory.
As a result of these quarterly fluctuations, comparisons of our operating results between different quarters within a single year are not necessarily meaningful and may not be accurate indicators of our future performance. Any future quarterly fluctuations that we report may differ from the expectations of market analysts and investors, which could cause the price of our common stock to fluctuate significantly. We also believe that the seasonal nature of our business may have been overshadowed throughout the past few years due to the rapid growth in sales we have experienced during those periods.
Our beliefs regarding the future growth of the performance-defining product market are supported by qualitative data and limited sources and may not be reliable. A reduction or lack of continued growth in the popularity of high-end bikes,
bikes or powered vehicles or in the number of consumers who are willing to pay premium prices for well-designed, performance-oriented equipment in the markets in which we sell our products could adversely affect our product sales and profits, financial condition or results of operations.
We generate virtually all of our revenues from sales of performance-defining products. Our beliefs regarding the outlook of the performance-defining product market come from qualitative data and limited sources, which may not be reliable. If our beliefs regarding the opportunities in the market for our products are incorrect or the number of consumers who we believe are willing to pay premium prices for well-designed, performance-oriented equipment in the markets in which we sell our products does not increase, or declines, we may fail to achieve future growth and our business, financial condition or results of operations could be negatively
affected.
Our operations may be impaired if our information technology systems fail to perform adequately or if they are the subject of a data breach or cyber-attack.
Information technology systems are critically important to operating our business. We rely on information technology systems to manage business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of any of the information technology systems to perform as anticipated could disrupt our business and could result in transaction errors, processing inefficiencies and the loss of sales and customers, which could materially adversely affect our business, financial condition, or results of operations.
The Credit Facility places operating restrictions on us and creates default risks.
The Credit Facility with Bank of America and other named lenders contains covenants that place restrictions on our operating activities. These covenants, among other things, limit our ability to:
•pay dividends or make distributions to our stockholders or redeem our stock;
•incur additional indebtedness or permit additional encumbrances on our assets; and
•make acquisitions or complete mergers or sales of assets, or engage in new businesses.
These
restrictions may interfere with our ability to obtain financing or to engage in other business activities, which may have a material adverse effect on our business, financial condition or results of operations.
If we are unable to comply with the covenants contained in the Credit Facility, it could constitute an event of default and our lenders could declare all borrowings outstanding, together with accrued and unpaid interest, to be immediately due and payable. If we are unable to repay or otherwise refinance these borrowings when due, our lenders could sell the collateral securing the Credit Facility, which constitutes substantially all of our assets.
We will continue to have the ability to incur debt and our levels of debt may affect our operations and our ability to pay the principal of and interest on our debt.
In the future, we and
our subsidiaries may be able to incur substantial additional debt from amendments to the Credit Facility, additional lending sources subject to the restrictions contained in the Credit Facility, or because of certain debt instruments we may issue.
As of October 1, 2021, we had $380.6 million of indebtedness, and $235.0 million in revolving credit available to borrow under the Credit Facility. Our ability to borrow under the Credit Facility fluctuates from time to time due to, among other factors, our borrowings under the Credit Facility.
Our indebtedness could be costly or have adverse consequences, such as:
•requiring us to dedicate a substantial portion of our cash flows
from operations to payments on our debt;
•limiting our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt obligations and other general corporate requirements;
•making us more vulnerable to adverse conditions in the general economy or our industry and to fluctuations in our operating results, including affecting our ability to comply with and maintain any financial tests and ratios required under our indebtedness;
•limiting our flexibility to engage in certain transactions or to plan for, or react to, changes in our business and industry;
•putting us at a disadvantage compared to competitors that have less relative and/or less restrictive debt; and
•subjecting
us to additional restrictive financial and other covenants.
If we incur substantial additional indebtedness in the future, these higher levels of indebtedness may affect our ability to pay the principal of and interest on existing indebtedness and our creditworthiness generally.
Our outstanding indebtedness under the Credit Facility bears interest at a variable rate, which makes us more vulnerable to increases in interest rates and could cause our interest expense to increase and decrease cash available for operations and other purposes.
Borrowings under the Credit Facility bear interest on a variable rate, which increases and decreases based upon changes in the underlying interest rate and/or our leverage ratio. Any such increases in the interest rate or increases of our borrowings under the Credit Facility will increase our interest expense.
Recent interest rates in the U.S. have been at historically low levels, and any increase in these rates would increase our interest expense and reduce our funds available for operations and other purposes. Although from time to time we may enter into agreements to hedge a portion of our interest rate exposure, such as the interest rate swap entered into in August 2020, these agreements may be costly and may not protect against all interest rate fluctuations. Accordingly, we may experience material increases in our interest expense as a result of increases in interest rate levels generally. Refer to Note 10- Derivatives and Hedging for additional information regarding the interest rate swap arrangement.
As of October 1,
2021, we had $380.6 million of indebtedness outstanding under the Credit Facility. Based on the $180.6 million of variable interest rate indebtedness that was outstanding as of October 1, 2021, after giving effect to our interest rate swap, a hypothetical 100 basis point increase or decrease in the interest rate would have resulted in an approximately $0.5 million increase or decrease in interest expense for the three months ended October 1, 2021, respectively.
We may incur losses on interest rate swap and hedging
arrangements.
We may periodically enter into agreements to reduce the risks associated with increases in interest rates, such as our August 2020 interest rate swap agreement. Although these agreements may partially protect against rising interest rates, they also may reduce the benefits to us if interest rates decline.
RISKS RELATED TO LAWS AND REGULATIONS
Changes in tax laws and regulations or other factors could cause our income tax obligations to increase, potentially reducing our net income and adversely affecting our cash flows.
We are subject to income tax requirements in various jurisdictions in the U.S and internationally. In preparing our financial statements, we provide for income taxes based on current tax laws and regulations and the estimated taxable income within each of these jurisdictions.
Our income tax obligations may be higher due to numerous factors. Changes to tax laws or interpretations proposed by the current administration in the United States; modifications to the U.S. tax reform enacted in December 2017; revisions to estimates regarding our ability to utilize foreign tax credits, particularly increases in revenues generated in Taiwan or changes in the export potential from Taiwan; increases in applicable tax rates; and actions by tax authorities in jurisdictions in which we operate could have a material impact on our net income and cash flows.
We are subject to extensive U.S. federal and state, foreign and international safety, environmental, employment practices and other government regulations that may require us to incur expenses or modify product offerings in order to maintain compliance with such regulation, which could have a negative effect on our business and results of operations.
We
are subject to extensive laws and regulations relating to safety, environmental, and other laws and regulations promulgated by the U.S. federal and state governments, as well as foreign and international regulatory authorities. Although we believe that our products, policies and processes comply with applicable safety, environmental, and other standards and related regulations, future regulations may require additional safety standards that would require additional expenses and/or modification of product offerings in order to maintain such compliance. Failure to comply with applicable regulations could result in fines, increased expenses to modify our products and harm to our reputation, all of which could have an adverse effect on our business, financial condition or results of operations.
Moreover, certain of our product offerings require us to comply with the rules and regulations of various standards of standard-setting
organizations, such as the CPSC, the NHTSA, and the European Committee for Standardization ("CEN"). Failure to comply with the requirements of such organizations could result in the loss of certain customer contracts, fines and penalties, or both, which could have an adverse effect on our business, financial condition or results of operations.
Unpredictability in the adoption, implementation and enforcement of increasingly stringent emission standards by multiple jurisdictions could adversely affect our business.
Certain of our products are subject to extensive statutory and regulatory requirements governing emission and noise, including standards imposed by the Environmental Protection Agency, the European Union, state regulatory agencies (such as the California Air Resources Board)
and other regulatory agencies around the world. We have made, and continue to make, capital and research expenditures to ensure certain of our products comply with these emission standards. Developing products to meet numerous changing government regulatory requirements, with different implementation timelines and emission requirements, makes developing products efficiently for multiple markets complicated and could result in additional costs that may be difficult to recover in certain markets. In some cases, we may be required to develop new products to comply with new regulations, particularly those relating to air emissions. The successful development and introduction of new and enhanced products in order to comply with new regulatory requirements are subject to other risks, such as delays in product development, cost over-runs and unanticipated technical and manufacturing difficulties.
In addition to these risks, the nature
and timing of government implementation and enforcement of increasingly stringent emission standards is unpredictable. Any delays in implementation or enforcement could result in the products we developed or modified to comply with these standards becoming unnecessary or becoming necessary later than expected, which in turn could delay, diminish or eliminate the expected return and may adversely affect our business.
Increasing focus on environmental, social and governance responsibility may impose additional costs on us and expose us to new risks.
Regulators, stockholders and other interested constituencies have focused increasingly on the environmental, social and governance practices of companies. Our customers may require us to implement environmental, social or governance responsibility procedures or standards before they will continue to do business with us. Additionally, we
may face reputational challenges in the event our environmental, social or governance responsibility procedures or standards do not meet the standards set by certain constituencies. The occurrence of any of the foregoing could have a material adverse effect on the price of our shares and our business, financial condition and results of operations.
Climate change and related regulatory responses may adversely impact our business.
There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse
gases in the atmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Changes in weather patterns and an increased frequency, intensity and duration of extreme weather conditions could, among other things, disrupt the operation of our supply chain, since our bike suspension manufacturing is entirely located in Taiwan, which is prone to typhoons, increase our product costs and impact the types and amounts of products that consumers purchase, since the majority of our products are used in outdoor recreation. In addition, a number of our facilities are located in California, a state that frequently experiences earthquakes and wildfires. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.
In many of the countries in which we operate, governmental bodies are increasingly
enacting legislation and regulations in response to the potential impacts of climate change. For example, many nations have agreed to limit emissions of greenhouse gas pursuant to the United Nations Framework Convention on Climate Change, also known as the "Kyoto Protocol" and other initiatives. In December 2015, the U.S. and 194 other countries adopted the Paris Agreement, committing to work towards addressing climate change and agreeing to a monitoring and review process for greenhouse gas emissions. Although the U.S. withdrew from the Paris Agreement in November 2020, the U.S. officially rejoined the Paris Agreement in February 2021 following the change in Presidential administrations, and may in the future choose to join other international agreements targeting greenhouse gas emissions. In addition, in January 2021, President Biden issued an executive order directing all federal agencies to review and take action to address any federal regulations, orders,
guidance documents, policies, and any similar agency actions promulgated during the prior administration that may be inconsistent with the current administration's policies and to confront the climate crisis. President Biden also issued an executive order solely targeting climate change. The adoption of legislation or regulatory programs at the federal level or other government action to reduce emissions of greenhouse gases, could have the potential to impact our operations directly or indirectly as a result of required compliance by our suppliers and us. In addition, we may choose to take voluntary steps to mitigate our impact on climate change. As a result, we may experience increases in energy, production, transportation and raw material costs, capital expenditures or insurance premiums and deductibles. Inconsistency of legislation and regulations among jurisdictions may also affect the costs of compliance with such laws and regulations. Any assessment of the potential impact of
future climate change legislation, regulations or industry standards, as well as any international treaties and accords, is uncertain given the scope of potential regulatory change in the countries in which we operate.
We are subject to employment practice laws and regulations, and, as such, are exposed to litigation risks, and we may incur higher employee costs in the future.
We are subject to extensive laws and regulations relating to employment practices, including wage and hour, wrongful termination and discrimination. Complying with such laws and regulations, and defending against allegations of our failure to comply (including meritless allegations), can be expensive and time consuming. We believe that our policies and processes comply with applicable employment standards and related regulations; however, we are subject to risks of litigation by employees and others that might
involve allegations of illegal, unfair or inconsistent employment practices, including wage and hour violations and employment discrimination, misclassification of independent contractors as employees, wrongful termination and other concerns, which could require additional expenditures.
We are subject to environmental laws and regulation and potential exposure for environmental costs and liabilities.
Our operations, facilities and properties are subject to a variety of foreign, federal, state and local laws and regulations relating to health, safety and the protection of the environment. These environmental laws and regulations include those relating to the use, generation, storage, handling, transportation, treatment and disposal of solid and hazardous materials and wastes, emissions to air, discharges to waters and the investigation and remediation of contamination. Many of these
laws impose strict, retroactive, joint and several liability upon owners and operators of properties, including with respect to environmental matters that occurred prior to the time the party became an owner or operator. In addition, we may have liability with respect to third-party sites to which we send waste for disposal. Failure to comply with such laws and regulations can result in significant fines, penalties, costs, liabilities or restrictions on operations that could negatively affect our business, financial condition or results of operations. From time to time, we have been involved in administrative or legal proceedings relating to environmental, health or safety matters and have incurred expenditures relating to such matters in the past.
We believe that our operations are in substantial compliance with applicable environmental laws and regulations. However, additional environmental issues relating to presently known
or unknown matters could give rise to currently unanticipated investigation, assessment or expenditures. Compliance with laws or regulations that are more stringent, as well as different interpretations of existing laws, more vigorous enforcement by regulators or unanticipated events, could require additional expenditures that may materially affect our business, financial condition or results of operations.
Federal, state, local, foreign and international laws and regulations relating to environmental matters, land-use, and noise and air pollution may have a negative impact on our future sales and results of operations.
The
products in our powered vehicles line are used in vehicles that are subject to numerous federal, state, local, foreign and international laws and regulations relating to noise and air pollution. Powered vehicles, and even bikes, have become subject to laws and regulations prohibiting their use on certain lands and trails. For example, in San Mateo County, California, mountain bikes are not allowed on county trails, and ATV and Side-by-Side riding is not allowed in Zion National Park, among many other national and state parks. In addition, recreational snowmobiling has been restricted in some national parks and federal lands in Canada, the U.S. and other countries. If more of these laws and regulations are passed and the users of our products lose convenient locations to ride their mountain bikes and powered vehicles, our sales could decrease and our business, financial condition or results of operations could suffer.
Regulations
related to conflict minerals may force us to continue to incur additional expenses and otherwise adversely impact our business.
The SEC rules regarding disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, in products manufactured by public companies require ongoing due diligence to determine whether such minerals originated from the Democratic Republic of Congo ("DRC"), or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. As a public company, we are required to comply with the reporting obligations annually. There are costs associated with complying with these disclosure requirements, including costs to determine the origin of conflict minerals in our products. The effect of such rules on customer, supplier and/or consumer behavior could adversely affect the sourcing, supply and pricing of materials used in our products. As a result, we may
also incur costs with respect to potential changes to products, processes or sources of supply. We may face disqualification as a supplier for customers and reputational challenges if our due diligence procedures do not enable us to verify the origins for all conflict minerals used in our products or to determine if such conflict minerals are conflict-free. Accordingly, these rules could have a material adverse effect on our business, results of operations or financial condition.
We retain certain personal information about individuals and are subject to various privacy and consumer protection laws.
We collect personal information for various purposes and through various methods, including from third parties and directly from consumers through our website,
at events and sales, and via telephone and email. Certain individuals may object to the processing of this data, request the deletion of this data, or opt out of the sharing of this data, any of which may negatively impact our ability to provide effective customer service or otherwise impact our operations. Collection and use of personal information in conducting our business may be subject to federal and/or state laws and regulations in the U.S. and foreign jurisdictions including, in particular, various jurisdictions in Europe, and such laws and regulations may restrict our processing of such personal information and may hinder our ability to attract new customers or market to existing customers. We may incur significant expenses to comply with privacy, consumer protection, and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.
Our vendors and any potential commercial
partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.
Our vendors and any potential commercial partners expose us to the risk of fraud or other misconduct. Misconduct by these parties could include intentional, reckless, and/or negligent conduct or disclosure of unauthorized activities to us that violate federal and/or state data privacy, security, and consumer protection laws and regulations in the U.S. and abroad. Such misconduct could result in regulatory sanctions and cause serious harm to our reputation.
U.S. policies related to global trade and tariffs could have a material adverse effect on our results of operations.
The current domestic and international political environment, including existing and potential changes to U.S. policies related to global
trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy. In 2018, the U.S. imposed tariffs of 25 percent on steel and 10 percent on aluminum, with only a handful of countries exempt from the increase. Throughout the Trump Administration, the U.S. and China imposed a variety of tariffs on most goods traded between the two countries. The U.S. and the European Union also imposed tariffs on each other's products stemming from a dispute at the World Trade Organization related to aircraft. The Biden Administration and United States Congress have created significant uncertainty about their review of tariffs and future relationships between the United States and other countries with respect to regulations.
While we have limited exposure to implemented tariffs at this time, any expansion in the types of tariffs implemented has the potential to negatively impact our supply chain costs as well
as the operating performance of our customers, thus negatively affecting our sales, gross margin and operating performance. Additionally, there is a risk that continued U.S. tariffs on imports could be met with additional retaliatory tariffs on U.S. produced exports and that the broader trade uncertainty could intensify. This has the potential to significantly impact global trade and economic conditions in many of the regions where we do business and have a material adverse effect on our results of operations.
The trading price
of our common stock may be volatile, and you might not be able to sell your shares at or above the price you pay for the shares.
The trading price of our common stock could be volatile, and you could lose all or part of your investment in our common stock. Since our IPO in 2013, our stock price has fluctuated between $175.79 and $13.35 per share and such volatility may continue in the future. Factors affecting the trading price of our common stock could include:
•variations in our operating results or those of our competitors;
•new product or other significant announcements by us or our competitors;
•changes in our product mix;
•changes in consumer preferences;
•fluctuations
in currency exchange rates;
•the gain or loss of significant customers;
•recruitment or departure of key personnel;
•changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;
•changes in general economic conditions as well as conditions affecting our industry in particular; and
•sales of our common stock by us, our significant stockholders or our directors or executive officers.
In addition, in recent years, the stock market has experienced significant price fluctuations. Fluctuations in the stock market
generally or with respect to companies in our industry could cause the trading price of our common stock to fluctuate for reasons unrelated to our business, operating results or financial condition. Further, some companies that have had volatile market prices for their securities have had securities class actions filed against them. A lawsuit filed against us, regardless of its merits or outcome, could cause us to incur substantial costs and could divert management’s attention.
Future issuances and sales of our shares, or the perception that such sales may occur, could cause our stock price to decline.
The issuance of additional shares of our common stock, such as the follow-on offering of 2.8 million shares of common stock that we completed in June 2020, could dilute the ownership interest of our common stockholders and could depress the market price of shares of our common stock.
Our
Amended and Restated Certificate of Incorporation authorizes us to issue 90,000,000 shares of common stock, 42,103,983 of which shares were outstanding as of October 1, 2021. In the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with financings, acquisitions, registration statements or otherwise.
After our IPO in 2013, we filed a registration statement under the Securities Act to register shares of our common stock that we may issue under our equity plans. As a result, all such shares can be freely sold in the public market upon issuance, subject to any vesting or contractual lock-up agreements.
We also have a number of institutional stockholders that own significant
blocks of our common stock. If one or more of these stockholders were to sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing price of shares of our common stock could be negatively affected.
If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about our business or us. If one or more of the analysts who covers us downgrades our stock or publishes unfavorable research about our business or our industry, our stock price would likely decline. If one or more of these analysts ceases coverage of our Company
or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our Company.
Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws
(together, our "Charter Documents"), as well as Delaware law, contain provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Among other things, these provisions:
•authorize the issuance of "blank check" preferred stock that could be issued by our Board of Directors to discourage a takeover attempt;
•establish a classified Board of Directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;
•require that directors be removed from office only for cause;
•provide
that vacancies on our Board of Directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
•provide that no action be taken by stockholders by written consent;
•provide that special meetings of our stockholders may be called only by our Board of Directors, our Chairperson of the Board of Directors, our Lead Director (if we do not have a Chairperson or the Chairperson is disabled), our Chief Executive Officer or our President (in the absence of a Chief Executive Officer);
•require supermajority stockholder voting for our stockholders to effect certain amendments to our Charter Documents; and
•establish advance notice requirements for nominations
for elections to our Board of Directors or for proposing other matters that can be acted upon by stockholders at stockholder meetings.
In addition, we are subject to Section 203 of the General Corporation Law of the State of Delaware ("DGCL"), which generally prohibits a Delaware corporation from engaging in a broad range of business combinations with a stockholder owning 15% or more of such corporation’s outstanding voting stock for a period of three years following the date on which such stockholder became an "interested" stockholder. In order for us to consummate a business combination with an interested stockholder within three years of the date on which the stockholder became interested, either: (i) the business combination or the transaction that resulted in the stockholder becoming interested must be approved by our Board of Directors prior to the date the stockholder became interested; (ii) the interested
stockholder must own at least 85% of our outstanding voting stock at the time the transaction commences (excluding voting stock owned by directors who are also officers and certain employee stock plans); or (iii) the business combination must be approved by our Board of Directors and authorized by at least two-thirds of our stockholders (excluding the interested stockholder) at a special or annual meeting (not by written consent). This provision could have the effect of delaying or preventing a change in control, whether or not it is desired by or beneficial to our stockholders. Any delay or prevention of a change in control transaction or changes in our Board of Directors and management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares of our common stock.
Our Amended and Restated Certificate
of Incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our Amended and Restated Certificate of Incorporation provides that, with certain limited exceptions, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of our
Company owed to us or our stockholders; (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our Charter Documents; (iv) any action to interpret, apply, enforce or determine the validity of our Charter Documents; or (v) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings,
we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
Failure of our internal controls over financial reporting could adversely affect our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the "Sarbanes-Oxley Act"). Internal
control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. The identification of a material weakness could indicate a lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock. We cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods or maintain all of the controls necessary
for continued compliance. Likewise, we cannot assure you that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table contains the details related to the repurchase of common stock based on the date of trade during the quarter ended October 1, 2021:
Period
Total
Number of Shares Purchased (1)
Weighted-average Price Paid per Share
7/3 - 8/6
9,601
$
161.54
8/7 - 9/3
—
$
—
9/4
- 10/1
—
$
—
Total
9,601
$
161.54
(1) Shares
acquired from holders of restricted stock unit awards to satisfy tax-withholding obligations.
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended
X
101.INS
Inline
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Cover page
formatted as Inline XBRL and contained in Exhibit 101
* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
