10-K: Fox Factory Holding Corp. Reports Fiscal Year 2023 Results Amidst Market Shifts

Fox Factory Holding Corp. experienced a decrease in net sales for fiscal year 2023, driven by a decline in specialty sports, while powered vehicles and aftermarket applications saw growth.

Summary

• Fox Factory Holding Corp. reported a decrease in net sales of approximately 8.6% for fiscal year 2023, totaling $1.46 billion, compared to $1.6 billion in the previous year.
• The decline was primarily due to a 42.8% decrease in net sales within the Specialty Sports Group, which was partially offset by the inclusion of $16.8 million in net sales from the Marucci subsidiary acquired in November 2023.
• The Powered Vehicle Group saw a 21.2% increase in net sales, while the Aftermarket Applications Group experienced a 59.7% increase, mainly attributed to the inclusion of $65.6 million in net sales from the Custom Wheel House subsidiary acquired in March 2023.
• Gross margin decreased to 31.7% in fiscal year 2023 from 33.2% in fiscal year 2022, primarily due to a shift in product line mix and amortization of acquired inventory valuation markups.
• Operating expenses increased by 7.1% to $304.7 million, driven by higher sales and marketing and general and administrative expenses, partially offset by a decrease in research and development expenses.
• Net income for fiscal year 2023 decreased by 41.2% to $120.8 million, compared to $205.3 million in the previous year.
• The company had approximately $30.7 million in firm backlog orders at December 29, 2023, a significant decrease from $116.7 million at December 30, 2022, due to normalization of supply chain issues and realignment of production forecasts.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with some positive aspects like strategic acquisitions and growth in certain segments, but the overall financial results show a significant decline in net sales and net income, leading to a negative sentiment.

Positives

• The Powered Vehicle Group and Aftermarket Applications Group experienced significant growth in net sales.
• The company completed strategic acquisitions of Custom Wheel House and Marucci Sports, expanding its product offerings and market reach.
• The company has a broad aftermarket distribution network of thousands of retail dealers and distributors worldwide.
• The company has an experienced management team and a strong track record of innovation and new product introductions.

Negatives

• Net sales decreased by 8.6% year-over-year.
• Specialty Sports Group net sales declined significantly by 42.8%.
• Gross margin decreased to 31.7% from 33.2% in the previous year.
• Net income decreased by 41.2% to $120.8 million.
• The company experienced a significant decrease in backlog orders from $116.7 million to $30.7 million.

Risks

• The company is exposed to risks associated with international geopolitical conflicts, including tensions between Taiwan and China, the Russian invasion of Ukraine, and the Israel-Palestine conflict.
• The company depends on a limited number of suppliers for materials and component parts, which could lead to supply chain disruptions or increased costs.
• The company faces intense competition in all product lines, including from some competitors that have greater financial and marketing resources.
• The company's performance-defining products are discretionary purchases and may be adversely impacted by changes in the economy.
• The company's 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 effects of the COVID-19 pandemic.
• The company's business depends substantially on its ability to maintain its premium brand image and to attract and retain experienced and qualified talent.
• The company's international operations are exposed to risks associated with conducting business globally, including currency exchange rate fluctuations and policies related to global trade and tariffs.
• The company is subject to extensive U.S. federal and state, foreign and international safety, environmental, employment practices, and other government regulations.
• The company is subject to legal proceedings, which could have a negative effect on its business and results of operations if the outcomes of these proceedings are adverse.

Future Outlook

The company intends to continue to develop and introduce new and innovative products, expand into new categories and end-markets, and increase its aftermarket penetration and international growth.

Management Comments

• The company expects these acquisitions to expand its North American geographic manufacturing footprint and broaden its product offerings in the automotive and sport industries.
• The company believes there is opportunity to expand its total available market by broadening its acquisition focus to include a more diverse range of performance products that add to or improve our customers enjoyment of their activities of choice.
• The company also believes that its passionate customer base has a desire for other types of performance products beyond those that attach to a vehicle or bike.

Industry Context

The company operates in the competitive markets for performance-defining products used in bikes, powered vehicles, and baseball equipment. The company's results reflect the impact of market shifts, supply chain normalization, and strategic acquisitions.

Comparison to Industry Standards

• The company competes with several large companies and numerous small companies that provide branded and unbranded products across many of its product lines.
• In the off-road and specialty vehicle suspension components market, competitors include ThyssenKrupp Bilstein Suspension GmbH, King Shock Technology, Inc., Icon Vehicle Dynamics, Sway-A-Way, Pro Comp USA Suspension, and Rancho (Tenneco).
• In the bike suspension components market, competitors include RockShox (a subsidiary of SRAM Corp.), X-Fusion Shox, Manitou, SR Suntour, DT Swiss, Cane Creek Cycling, DVO Suspension, Bos-Mountain Bike Suspensions, and hlins Racing AB.
• In the baseball and softball gear and equipment market, competitors include Easton (under the Easton and Rawlings brands) and Wilson Sporting Goods Company (under the Wilson, DeMarini, Louisville Slugger, and Evoshield brands), and numerous smaller wood bat specific brands.

Legal Proceedings

• On February 20, 2024, a class action lawsuit was filed against the company and certain of its current and former officers alleging violations of federal securities laws.

Related Party Transactions

• The company has building leases for its office facilities in California with the former owner of Custom Wheel House, who is now an employee of the company.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net sales and net income.
• Employees may be affected by changes in the company's operations and strategic direction.
• Customers may benefit from the company's expanded product offerings and improved technologies.
• Suppliers may be impacted by changes in the company's supply chain and production forecasts.
• Creditors may be affected by the company's financial performance and debt levels.

Next Steps

• The company intends to continue to develop and introduce new and innovative products in current end-markets.
• The company intends to leverage technology and brand to expand into new categories and end-markets.
• The company intends to opportunistically expand its business platform through acquisitions.
• The company intends to increase its aftermarket penetration.
• The company intends to accelerate international growth.
• The company intends to improve operating and supply chain efficiencies.

Key Dates

Keywords

performance-defining products, suspension systems, powered vehicles, aftermarket applications, specialty sports, OEM, net sales, gross margin, operating expenses, net income, acquisitions, backlog, supply chain, intellectual property, product development