Fox Factory Reports MTB Sales Grew 2.3 Percent in Q4

Fox Factory Holding Corp.'s mountain biking sales grew just 2.3 percent in the fourth quarter, but the company's CEO said he expects growth to accelerate when the company begins shipping a new fork later this year.

“We believe our Factory Series 36 all-mountain suspension fork has been very well received by our customers and the trade media, which gives us confidence that we are positioned to see improvements in our mountain bike business when our model year 2016 products begin shipping in volume,” said Fox CEO Larry L. Enterline.

Enterline also warned the labor dispute that slowed West Coast ports will have a bigger impact in the first quarter of 2015.

The Scotts Valley, CA manufacturer of suspension products reported reported total sales of $74.1 million for the fourth quarter ended Dec. 31, 2014, an increase of 13.6 percent from sales of $65.3 million in the fourth quarter of fiscal 2013. The increase reflects 34.0 percent growth in sales of powered vehicle products and 2.3 percent increase in sales of mountain bike products. The growth in powered vehicle product sales was primarily driven by increases in side-by-side, truck, and on-road motorcycle sales.

Gross margin was 29.6 percent for the fourth quarter of fiscal 2014, a 90 basis point increase from gross margin of 28.7 percent in the fourth quarter of fiscal 2013. The improvement in gross margin reflects the company's successful execution of its operational initiatives targeted at improving manufacturing and supply chain efficiencies, as well as continued execution of its product design for manufacturability program.

Total operating expenses were $17.7 million, or 23.9 percent of sales, for the fourth quarter of fiscal 2014, compared to $10.9 million, or 16.7 percent of sales, in the fourth quarter of the prior fiscal year. The increase in operating expenses was primarily due to the inclusion of Sport Truck USA, Inc.'s (“Sport Truck”) operating expenses in the company's consolidated results, acquisition and integration costs, investments in infrastructure, brand and technology to support future growth, and higher stock-based compensation expense. Fourth quarter of fiscal 2014 operating expenses include a $2.8 million fair value adjustment of contingent consideration and acquisition related compensation primarily related to the company's contingent consideration liability arising from the acquisition of Sport Truck.

Operating income was $4.2 million for the fourth quarter of fiscal 2014, compared to operating income of $7.8 million in the fourth quarter of fiscal 2013.

Net income in the fourth quarter of fiscal 2014 was $2.9 million, a decrease of 41.5 percent compared to $4.9 million in the fourth quarter of the prior fiscal year. Earnings per diluted share for the fourth quarter of fiscal 2014 was $0.08, compared to $0.13 in the fourth quarter of fiscal 2013.

Operating income and net income were both negatively impacted by the aforementioned acquisition related expenses and adjustment of contingent consideration liability.

Non-GAAP adjusted net income in the fourth quarter of fiscal 2014 was $6.6 million, an increase of 12.1 percent compared to $5.9 million in the fourth quarter of the prior fiscal year. Non-GAAP adjusted earnings per diluted share for the fourth quarter of fiscal 2014 was $0.18 compared to $0.16 in the fourth quarter of fiscal 2013 on 0.3 million higher diluted shares outstanding. 

Adjusted EBITDA in the fourth quarter of fiscal 2014 was $12.1 million, compared to $10.8 million in the fourth quarter of fiscal 2013. Adjusted EBITDA margin in the fourth quarter of fiscal 2014 was 16.4 percent, compared to 16.6 percent in the fourth quarter of fiscal 2013.

Balance Sheet Highlights
As of Dec. 31, 2014, the company had cash and cash equivalents of $4.2 million. Total debt was $50.0 million, compared to $8.0 million as of Dec. 31, 2013. The increase in debt is due to borrowings for the company's acquisition of Sport Truck and Race Face/Easton Cycling. Inventory was $59.2 million as of Dec. 31, 2014, compared to $42.8 million as of Dec. 31, 2013. The increase is primarily due to the inclusion of Sport Truck and Race Face/Easton Cycling inventory. As of Dec. 31, 2014, accounts receivable and accounts payable were $39.2 million and $30.4 million, respectively, compared to Dec. 31, 2013 balances of $33.8 million and $24.3 million, respectively.

Fiscal 2015 Guidance
The company's business has been impacted by the labor slowdown and significant backlog at West Coast ports causing certain operational inefficiencies. The company expects uncertainties related to the timing of receipt of parts shipments will affect 2015 sales and profitability and its ability to accurately forecast financial results. As a result, the company is widening the guidance range historically provided.

For the first quarter of fiscal 2015, the company expects sales in the range of $58 million to $64 million and non-GAAP adjusted earnings per diluted share in the range of $0.05 to $0.10.

For the fiscal year 2015, the company expects sales in the range of $333 million to $357 million and non-GAAP adjusted earnings per diluted share in the range of $0.88 to $1.00 based on approximately 38 million weighted average diluted shares outstanding.

Non-GAAP adjusted earnings per diluted share exclude the following items net of applicable tax: amortization of purchased intangibles, contingent consideration valuation adjustment and certain acquisition related adjustments and expenses.