Fox Factory Holding Corp. reported adjusted earnings in the third quarter rose 14.4 percent on a 2.3 percent revenue gain.

Third Quarter Fiscal 2016 Highlights

  • Sales increased 2.7 percent to $109.0 million compared to $106.2 million in the same period last fiscal year
  • Gross margin decreased 80 basis points to 32.0 percent compared to 32.8 percent in the same period last fiscal year. Non-GAAP gross margins decreased 40 basis points compared to the same period last fiscal year
  • Net income was $13.7 million, or 36 cents per diluted share, compared to $10.6 million, or 28 cents per diluted share, in the same period last fiscal year
  • Non-GAAP adjusted net income was $16.6 million, or 44 cents adjusted earnings per diluted share, compared to $14.5 million, or 38 cents adjusted earnings per diluted share in the same period last fiscal year
  • Adjusted EBITDA was $20.9 million, or 19.2 percent of sales, compared to $20.7 million, or 19.5 percent of sales in the same period last fiscal year

“The diversification of our end markets and product applications helped us put together another solid quarter,” stated Larry L. Enterline, Fox’s chief executive officer. “We benefited from growth across our powered vehicle products and are pleased with our bike products performance, particularly in the face of a challenging industry backdrop.  As we head into the fourth quarter, we are raising our fiscal year guidance as we expect to build upon our solid business momentum.”

Sales for the third quarter of fiscal 2016 were $109.0 million, an increase of 2.7 percent as compared to sales of $106.2 million in the third quarter of fiscal 2015. This increase reflects a 6.6 percent increase in sales of powered vehicle products and bike product sales which were relatively unchanged from the prior year period.  The increase in sales of powered vehicle products was primarily due to continued high demand for on and off-road suspension products.

Gross margin was 32.0 percent for the third quarter of fiscal 2016, an 80 basis point decrease from gross margin of 32.8 percent in the third quarter of fiscal 2015.  The decline in gross margin was primarily due to a shift in product and customer mix, higher acquisition related inventory costs in 2016, and the cost of the company’s recently announced voluntary product recall.  On a non-GAAP basis, which excludes the effects of acquisition related costs, gross margin decreased 40 basis points as compared to the third quarter of last year.

Total operating expenses were $19.8 million for the third quarter of fiscal 2016 compared to $21.0 million in the third quarter of the prior fiscal year.  The decrease in operating expenses is primarily a result of a reductions in amortization of certain purchased intangibles as well as fair value adjustment of contingent consideration and acquisition related compensation.  Partially offsetting this decrease was $0.8 million of expense associated with continuing patent litigation activities involving a bike industry competitor. The company remains confident in its position in these matters.  As a percentage of sales, operating expenses were 18.2 percent for the third quarter of fiscal 2016 compared to 19.7 percent in the third quarter of fiscal 2015.

Operating income was $15.1 million for the third quarter of fiscal 2016, compared to operating income of $13.8 million in the third quarter of fiscal 2015.

The effective tax rate was approximately 9 percent in the third quarter of 2016, compared to 22 percent in the third quarter of 2015.  The improvement in the effective tax rate was primarily due to the reorganization of the company’s foreign entities and permanent reinvestment of foreign earnings in jurisdictions with lower tax rates, and tax credits.  Additionally, excess benefits from the exercise of options and vesting of restricted stock awards contributed approximately 2 cents to adjusted earnings per diluted share.  While the company believes such benefits will be recurring in nature, the timing of option exercises is not within its control and is difficult to predict.  As such, the impact of option exercises was not included in third quarter guidance.

Net income in the third quarter of fiscal 2016 was $13.7 million, compared to $10.6 million in the third quarter of the prior fiscal year.  Earnings per diluted share for the third quarter of fiscal 2016 were 36 cents a share, compared to 28 cents in the third quarter of fiscal 2015.

Non-GAAP adjusted net income was $16.6 million, or 44 cents adjusted earnings per diluted share, compared to $14.5 million, or 38 cents adjusted earnings per diluted share in the same period of last fiscal year.

Adjusted EBITDA in the third quarter of fiscal 2016 was $20.9 million, compared to $20.7 million in the third quarter of fiscal 2015.  Adjusted EBITDA margin in the third quarter of fiscal 2016 was 19.2 percent, compared to 19.5 percent in the third quarter of fiscal 2015.

First Nine Months Fiscal Year 2016 Results
Sales for the nine months ended September 30, 2016, were $291.5 million, an increase of 7.5 percent compared to the same period in 2015.  Sales of powered vehicle and bike products increased 8.5 percent and 6.8 percent, respectively, for the first nine months of 2016 compared to the prior year period.

Gross margin was 31.7 percent in the first nine months of fiscal 2016, a 90 basis point increase, compared to gross margin of 30.8 percent in the first nine months of fiscal 2015. The year-to-date gross margin improved due to manufacturing efficiencies along with the non-recurrence of ramp up, reconfiguration and logistics costs associated with global production transition, the West Coast port slowdown during 2015, and lower acquisition related inventory costs.  On a non-GAAP basis, which excludes the effects of acquisition related costs, gross margin increased 60 basis points as compared to the first nine months of last year.

Net income in the first nine months of fiscal 2016 was $25.9 million, compared to $18.1 million in the first nine months of the prior year.  Earnings per diluted share for the first nine months of fiscal 2016 was 69 cents a share, compared to 48 cents a share in the same period of fiscal 2015.  Non-GAAP adjusted net income was $34.4 million, or 91 cents adjusted earnings per diluted share, compared to $28.7 million, or 76 cents adjusted earnings per diluted share in the same period of the prior fiscal year.

Adjusted EBITDA increased to $51.0 million in the first nine months of fiscal 2016, compared to $47.4 million in the first nine months of fiscal 2015.  Adjusted EBITDA margin was 17.5 percent in the first nine months of both fiscal 2016 and 2015.

Balance Sheet Highlights
As of September 30, 2016, the company had cash and cash equivalents of $15.7 million. Total debt was $72.6 million, compared to $47.9 million as of December 31, 2015.   Inventory was $78.1 million as of September 30, 2016, compared to $68.2 million as of December 31, 2015.  As of September 30, 2016, accounts receivable and accounts payable were $58.6 million and $41.0 million, respectively, compared to December 31, 2015 balances of $43.7 million and $32.1 million, respectively.  The changes in accounts receivable, inventory and accounts payable are primarily attributable to business growth and the company’s normal seasonality.

Fiscal 2016 Guidance
For the fourth quarter of fiscal 2016, the company expects sales in the range of $104 million to $110 million and non-GAAP adjusted earnings per diluted share in the range of 28 cents to 32 cents a share.

For the full fiscal year 2016, the company is raising its previous guidance and now expects sales in the range of $395.5 million to $401.5 million and non-GAAP adjusted earnings per diluted share in the range of $1.19 to $1.23.