Fox Factory Holding Corp.'s sales slowed as expected in the first quarter ended March 31 due to a shift in shipments of its suspension products to mountain bike manufacturers.
"We are pleased to report that our first quarter results were towards the high end of our expectations and represent a solid start to the fiscal year," stated Larry L. Enterline, FOX's Chief Executive Officer. "Sales for our powered vehicle products continue to perform well, underscoring the continued demand for our premium products, particularly in the aftermarket. While our mountain bike sales in the first quarter were impacted by product shipped in the fourth quarter of last year in order to meet the early 2014 schedules of our customers ahead of our routine, end-of-year production shutdown, we are encouraged by the positive response and enthusiasm to our model year 2015 mountain bike suspension product lineup. We expect this category to continue to positively contribute to our long-term growth."
Mr. Enterline continued, "On March 31, 2014, we completed the asset acquisition of Sport Truck USA, Inc. which expands our powered vehicle business and effectively complements our ride dynamics product portfolio. Based on our year-to-date results and positive outlook for the remainder of the year, we are re-affirming our fiscal 2014 guidance. We believe that we are well positioned to continue to benefit from strong industry dynamics, including continued consumer demand for our high performance products, as well as continuing to execute on our multi-faceted growth strategy."
Sales for the first quarter of fiscal 2014 were $56.1 million, an increase of 2.2 percent from sales of $54.9 million in the first quarter of fiscal 2013. The increase reflects 14.1 percent growth in sales of powered vehicle products, partially offset by an anticipated decrease of 4.4 percent in sales of mountain bike products. As previously announced, the decline in mountain bike sales was primarily due to the planned shut-down of the Company's factory in January, which resulted in a sales shift from the first quarter of 2014 to the fourth quarter of 2013.
Gross margin was 30.3 percent for the first quarter of fiscal 2014, a 170 basis point increase from gross margin of 28.6 percent in the first quarter of fiscal 2013. The improvement in gross margin reflects the Company's successful execution of its cost improvement initiatives targeted at improving factory and supply chain efficiencies, as well as continued execution of our overall product design for manufacturability program.
Total operating expenses were $12.3 million, or 21.9 percent of sales, for the first quarter of fiscal 2014, compared to $9.7 million, or 17.6 percent of sales, in the first quarter of the prior fiscal year. The increase in operating expenses was primarily due to transaction related expenses incurred in connection with the acquisition of Sport Truck USA, Inc. ("Sport Truck") and additional costs to improve infrastructure necessary for supporting future growth and public company requirements. Operating income was $4.7 million for the first quarter of fiscal 2014, compared to operating income of $6.1 million in the first quarter of fiscal 2013.
Net income in the first quarter of fiscal 2014 was $2.9 million, compared to $3.5 million in the first quarter of the prior fiscal year. Earnings per diluted share for the first quarter of fiscal 2014 was $0.08 compared to $0.10 earnings per diluted share in the first quarter of fiscal 2013.
Non-GAAP adjusted net income in the first quarter of fiscal 2014 was $4.4 million, compared to non-GAAP adjusted net income of $4.6 million in the first quarter of the prior fiscal year. Non-GAAP adjusted earnings per diluted share for the first quarter of fiscal 2014 was $0.12 compared to non-GAAP adjusted earnings per diluted share of $0.13 in the first quarter of fiscal 2013. A reconciliation of non-GAAP adjusted net income to the GAAP measure net income and the calculation of non-GAAP adjusted earnings per share are provided at the end of this press release.
Adjusted EBITDA in the first quarter of fiscal 2014 was $8.6 million, compared to $8.8 million in the first quarter of fiscal 2013. Adjusted EBITDA margin in the first quarter of fiscal 2014 was 15.4 percent, compared to 16.0 percent in the first quarter of fiscal 2013. Balance sheet As of March 31, 2014, the Company had cash and cash equivalents of $2.0 million. Total debt was $50.0 million, compared to $8.0 million as of Dec. 31, 2013. The increase in debt is due to debt issued for the Company's acquisition of Sport Truck. Inventory was $58.4 million as of March 31, 2014, compared to $42.8 million as of Dec. 31, 2013; the increase in inventory is primarily due to the addition of Sport Truck's inventory acquired on March 31, 2014 along with normal growth due to the seasonality of the product cycle in preparation for the peak selling season. As of March 31, 2014, accounts receivable and accounts payable were $30.7 million and $26.7 million, respectively, compared to $33.8 million and $24.3 million as of Dec. 31, 2013, respectively. The changes in both accounts receivable and accounts payable are primarily driven by the normal seasonality of the Company's business and the acquisition of Sport Truck.
Company acquisitions
On March 31, 2014, the Company completed the acquisition of the net assets of Sport Truck, a full service, globally recognized distributor of aftermarket suspension solutions. Sport Truck primarily designs, markets, and distributes high quality lift kit solutions primarily through its brands, BDS Suspension and Zone Offroad Products. FOX acquired the assets of Sport Truck for approximately $40.9 million in cash, which is subject to further working capital adjustments, in accordance with the asset purchase agreement. The transaction was financed with debt and includes a potential earn-out opportunity of up to a maximum of $29.3 million payable over the next three years contingent upon the achievement of certain performance-based financial targets. The transaction is expected to be slightly accretive to FOX's full year fiscal 2104 earnings excluding transaction related costs with the majority of the financial benefit to be realized in full year fiscal 2015 and beyond.
Fiscal 2014 guidance
For the fiscal 2014 second quarter the Company expects sales in the range of $81 million to $85 million and non-GAAP adjusted earnings per diluted share in the range of $0.23 to $0.28.
For the fiscal year 2014 the Company reaffirmed its fiscal year 2014 guidance previously provided on April 1, 2014, which includes the Sport Truck acquisition. The Company expects net sales in the range of $300 million to $320 million and non-GAAP adjusted earnings per diluted share in the range of $0.85 to $0.95 based on 38 to 39 million weighted average diluted shares outstanding.
Non-GAAP adjusted earnings per diluted share exclude the following items net of tax: amortization of purchased intangibles, acquisition related expenses, and management fees.
Fox Factory Holding Corp.
Condensed Consolidated Statements of Income
(in thousands, except share and per share data)
(unaudited)
For the three months ended March 31, 2014 2013 Sales $ 56,108 $ 54,878 Cost of sales 39,091 39,163 Gross profit 17,017 15,715 Operating expenses: Sales and marketing 3,844 3,284 Research and development 3,135 2,355 General and administrative 3,930 2,673 Amortization of purchased intangibles 1,361 1,341 Total operating expenses 12,270 9,653 Income from operations 4,747 6,062 Other expense, net: Interest expense 110 957 Other income, net (32) (34) Other expense, net 78 923 Income before income taxes 4,669 5,139 Provision for income taxes 1,728 1,590 Net income $ 2,941 $ 3,549 Earnings per share: Basic $ 0.08 $ 0.11 Diluted $ 0.08 $ 0.10
