Fox Factory: Acquisition Boosts Q3, Full Year Outlook

Fox Factory Holding Corp. reported sales of bike products increased 16.3 percent in the third quarter thanks largely to its Race Face/Easton acquisition and raised its guidance for the full year although it expects its pending acquisition of trademarks and other assets of the Marzocchi brand will shave a  penny from its fourth quarter earnings per share.

The California company reported a 19.8 percent increase in Powered Vehicle product sales drove total net sales up 17.8 percent to $106.2 million. The increase in sales of powered vehicle products was due to higher OEM sales as compared to the prior year, while the growth in bike product sales was due primarily to the inclusion of Race Face/Easton in December 2014.

Consolidated gross margin was 32.8 percent for the third quarter of fiscal 2015, a 110 basis point increase from gross margin of 31.7 percent in the third quarter of fiscal 2014. The increase in gross margin was due to changes in product and customer mix and improved efficiency, as well as cost savings from the company's ongoing transition of bike product production to Taiwan. Additionally, gross margin for the third quarter of 2015 and 2014 include certain purchase accounting adjustments associated with the company's acquisitions. Excluding the purchase accounting adjustments, non-GAAP gross margin for the third quarter of fiscal 2015 increased approximately 40 basis points as compared to the previous year.

Total operating expenses were $21.0 million for the third quarter of fiscal 2015 compared to $14.6 million in the third quarter of the prior fiscal year. As a percentage of sales, operating expenses increased from 16.2 percent in the third quarter of fiscal 2014 to 19.7 percent for the third quarter of fiscal 2015. The increase in operating expenses was primarily due to the inclusion of Race Face/Easton's operating expenses, including acquisition related expenses, within the company's consolidated results for the three months ended Sept. 30, 2015, as well as expenses to support the growth of the business and brand.

Operating income was $13.8 million for the third quarter of fiscal 2015, compared to operating income of $13.9 million in the third quarter of fiscal 2014.

Net income in the third quarter of fiscal 2015 was $10.6 million, compared to $10.3 million in the third quarter of the prior fiscal year. Earnings per diluted share for the third quarter of fiscal 2015 was $0.28, compared to $0.27 in the third quarter of fiscal 2014.

Non-GAAP adjusted net income was $14.5 million, or $0.38 adjusted earnings per diluted share, compared to $12.2 million, or $0.32 per diluted share in the same period last fiscal year. Reconciliations of net income to non-GAAP adjusted 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 third quarter of fiscal 2015 was $20.7 million, compared to $18.1 million in the third quarter of fiscal 2014. Adjusted EBITDA margin in the third quarter of fiscal 2015 was 19.5 percent, compared to 20.1 percent in the third quarter of fiscal 2014.

Balance Sheet Highlights
FOX ended the quarter with cash and cash equivalents of $5.1 million and total debt of $59.9 million, compared to $50.0 million as of Dec. 31, 2014. Inventory was valued at $78.3 million, up 32.3 percent from Dec. 31 2014.

Updated Guidance
For the fourth quarter of fiscal 2015, the company expects sales in the range of $87 million to $93 million and non-GAAP adjusted earnings per diluted share in the range of $0.21 to $0.25. The expected non-GAAP adjusted earnings per diluted share includes approximately a $0.01 operating loss associated with the pending acquisition of certain assets of Marzochhi, an Italian maker of forks and shocks for mountain biks. FOX expects to close that transaction in the fourth quarter of 2015.

For the fiscal year 2015, the company raised its guidance. The company now expects sales in the range of $358-to-$364 million and non-GAAP adjusted earnings per diluted share in the range of 97 cents to $1.01 versus prior guidance for sales of $347-to-$363 million and 91 cents to $1.00. Non-GAAP adjusted earnings per diluted share exclude amortization of purchased intangibles, certain acquisition related adjustments and expenses, contingent consideration valuation adjustment, and offering expenses net of applicable tax.