Compass Diversified Rewarded with Rich Valuation in Fox Factory IPO

Fox Factory Holding Corp., which makes premium suspension systems for mountain bikes and off-road vehicles, went public Thursday at about $18.25 a share, or a 20 percent premium to its initial offering price. After rising past $19, the stock, which trades under the symbol FOXF, closed Friday at $18.50.

That values the company in excess of $600 million, or well north of two times projected revenues and 10 times projected adjusted EBITDA.

Fox Factory shareholders offered 8.57 million shares of common stock to the public, including 5.71 million shares owned by Compass Diversified Holdings Inc., which specializes in acquiring control of and growing and profitable middle market companies. CODI, which acquired a control of Fox Factory in 2008 for $80 million, expects to raise between $127.5 and $142.5 million from the IPO through both its stock sales and repayment of debt by Fox Factory. It retains a 56.8 percent stake in the company.

“This IPO represents a major milestone for our company, as Fox is the first subsidiary in CODI's seven-year history to be public,” said CODI CEO Alan Offenberg

Offenberg said he intends to invest the cash in CODI’s six other portfolio companies, which include CamelBak, ErgoBaby and Liberty Safe. He is also on the hunt for acquisitions, but noted that the abundance of cheap debt and cash laden strategic buyers are pushing up valuations for high-quality companies.

Earnings figures released by CODI on the eve of the IPO show Fox Factory’s sales grew 15.8 percent to $70.3 million in the three months ended June 30. Net sales of mountain bike and motor vehicle components increased 17.7 percent and 12.3 percent respectively. OEMs boosted their purchases of Fox components by 15.2 percent to $54.5 million compared with the second quarter of 2012.

Gross margin increased 190 basis points (bps) to 29.0 percent primarily due to cost cutting initiatives. SG&A expense increased approximately 7.3 percent to $8.8 million, or 12.5 percent of net sales, down 90 bps from a year earlier. Income from operations soared 54 percent to $10.1 million higher sales and better gross margin more than offset higher costs.

At Liberty Safe sales surged 41.8 percent to $9.4 million compared to the year earlier quarter as consumers snapped up gun safes to secure their growing stores of firearms and ammunition. Sales through gun dealers rose 43.6 percent to $13.5 million, while sales to non-dealers such as Lowe’s, reached $18.4 million, up 40.5 percent. Liberty attributed the increase in non-dealer sales to expansions by Liberty’s two largest non-dealer accounts, which do not sell any other brand of gun safe.

Liberty attributed overall demand rising gun purchases fueled by concerns of more restrictive gun laws, increased availability of safes and non-dealer price increases.

Gross margin declined 90 bps to 24.7 percent as increased sales of lower margin imported safes and increased labor costs associated with a second manufacturing shift at the company’s U.S. factory more than offset non-dealer price increases.

Income from operations increased $1.7 million compared to the same period in 2012.

At Camelbak, net sales declined 22.1 percent to $34.5 million, compared to the same period in 2012 due largely to the termination in the first quarter of a contract with the U.S. Marines. Declines in sales of Hydration Systems ($9.1 million), Accessories ($1.3 million) and Gloves ($1.4 million) were offset in part by higher sales of Bottles ($1.5 million).

Rainy weather also likely caused some customers to postpone purchases of recreational hydration products and accessories. Sales of Hydration Systems and Bottles rose to 86 percent of gross sales compared to 84 percent for the same period in 2012, while Military sales dropped to 27 percent compared to 38 percent. International sales grew five points to 19 percent of sales.
 
Gross margin dropped 390 bps to 43.4 percent due primarily to a less favorable sales mix in Hydration Systems.

SG&A expense decreased $900,000, but still rose 350 bps to 25.1 percent of net sales. Income from operations dropped $5.0 million to $3.9 million, while EBITDA fell 29 percent.