foxf-20201002

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 001-36040

Fox Factory Holding Corp.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

26-1647258

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

6634 Hwy 53, Braselton GA 30517

(Address of Principal Executive Offices) (Zip Code)

(831) 274-6500

(Registrant’s Telephone Number, Including Area Code)


Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share	FOXF	The NASDAQ Stock Market LLC
		(NASDAQ Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Emerging growth company

☐

Non-accelerated filer

☐

Smaller reporting company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 6, 2020, there were 41,715,243 shares of the registrant’s common stock outstanding.

Fox Factory Holding Corp.

FORM 10-Q

Table of Contents


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of October 2, 2020 and January 3, 2020	1
	Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended October 2, 2020 and September 27, 2019	3
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended October 2, 2020 and September 27, 2019	4
	Unaudited Condensed Consolidated Statements of Stockholders' Equity and Redeemable Non-controlling Interest for the Three and Nine Months Ended October 2, 2020 and September 27, 2019	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 2, 2020 and September 27, 2019	7
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	58
Signatures		59

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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FOX FACTORY HOLDING CORP.

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

(unaudited)


	As of		As of
	October 2,		January 3
	2020		2020

	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	278,246	$	43,736
Accounts receivable (net of allowances of $837 and $810 at October 2, 2020 and January 3, 2020, respectively)	114,097		91,632
Inventory	135,687		128,505
Prepaids and other current assets	31,605		17,940
Total current assets	559,635		281,813
Property, plant and equipment, net	156,819		108,379
Lease right-of-use assets	25,695		17,472
Deferred tax assets	18,525		25,725
Goodwill	287,113		93,527
Intangibles, net	209,590		81,949
Other assets	3,149		451
Total assets	$	1,260,526	$	609,316
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	101,439	$	55,144
Accrued expenses	61,393		35,744
Reserve for uncertain tax positions	1,055		925
Current portion of long-term debt	10,000		—
Total current liabilities	173,887		91,813
Line of credit	—		68,000
Long-term debt, less current portion	379,242		—
Other liabilities	23,470		11,584

Total liabilities	576,599		171,397
Commitments and contingencies (Refer to Note 9 - Commitments and Contingencies)
Redeemable non-controlling interest	—		15,719
Stockholders’ equity
Preferred stock, $0.001 par value — 10,000 authorized and no shares issued or outstanding as of October 2, 2020 and January 3, 2020	—		—
Common stock, $0.001 par value — 90,000 authorized; 42,601 shares issued and 41,712 outstanding as of October 2, 2020; 39,448 shares issued and 38,559 outstanding as of January 3, 2020	42		39
Additional paid-in capital	334,486		123,274
Treasury stock, at cost; 890 common shares as of October 2, 2020 and January 3, 2020	(13,754)		(13,754)
Accumulated other comprehensive (loss) income	(32)		150
Retained earnings	363,185		312,491
Total stockholders’ equity	683,927		422,200
Total liabilities, redeemable non-controlling interest and stockholders’ equity	$	1,260,526	$	609,316

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FOX FACTORY HOLDING CORP.

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)


	For the three months ended				For the nine months ended
	October 2,		September 27,		October 2,		September 27,
	2020		2019		2020		2019
Sales	$	260,700	$	211,317	$	628,163	$	565,139
Cost of sales	171,226		141,500		422,088		382,045
Gross profit	89,474		69,817		206,075		183,094
Operating expenses:
Sales and marketing	13,667		11,660		38,291		32,186
Research and development	8,514		8,376		24,779		23,442
General and administrative	16,463		12,727		53,443		36,065
Amortization of purchased intangibles	5,277		1,694		13,084		4,751

Total operating expenses	43,921		34,457		129,597		96,444
Income from operations	45,553		35,360		76,478		86,650
Other expense, net:
Interest expense	2,291		748		7,030		2,582
Other (income) expense	(189)		(37)		(57)		532
Other expense, net	2,102		711		6,973		3,114
Income before income taxes	43,451		34,649		69,505		83,536
Provision for income taxes	5,431		4,473		9,555		11,596
Net income	38,020		30,176		59,950		71,940
Less: net income attributable to non-controlling interest	—		689		1,072		1,429
Net income attributable to FOX stockholders	$	38,020	$	29,487	$	58,878	$	70,511
Earnings per share:
Basic	$	0.91	$	0.77	$	1.48	$	1.84
Diluted	$	0.90	$	0.75	$	1.46	$	1.80
Weighted-average shares used to compute earnings per share:
Basic	41,616		38,451		39,726		38,259
Diluted	42,206		39,174		40,314		39,151

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FOX FACTORY HOLDING CORP.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)


	For the three months ended				For the nine months ended
	October 2,		September 27,		October 2,		September 27,
	2020		2019		2020		2019
Net income	$	38,020	$	30,176	$	59,950	$	71,940
Other comprehensive (loss) income
Interest rate swap, net of tax effects	(801)		—		(801)		—
Foreign currency translation adjustments, net of tax effects	636		(352)		619		(197)
Other comprehensive (loss) income	(165)		(352)		(182)		(197)
Comprehensive income	37,855		29,824		59,768		71,743
Less: comprehensive income attributable to non-controlling interest	—		689		1,072		1,429
Comprehensive income attributable to FOX stockholders	$	37,855	$	29,135	$	58,696	$	70,314

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FOX FACTORY HOLDING CORP.

Condensed Consolidated Statements of Stockholders' Equity and Redeemable Non-controlling Interest

(in thousands)

(unaudited)


	Common Stock			Treasury			Additional paid-in capital		Accumulated other comprehensive (loss) income		Retained earnings		Total stockholders' equity		Redeemable non-controlling interest
	Shares	Amount		Shares	Amount

Balance - December 28, 2018	38,881	$	38	890	$	(13,754)	$	116,019	$	(784)	$	219,686	$	321,205	$	14,282
Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding	180	—		—	—		(1,229)		—		—		(1,229)		—



Stock-based compensation expense	—	—		—	—		1,729		—		—		1,729		—
Other comprehensive (loss) income	—	—		—	—		—		(159)		—		(159)		—
Adoption of new accounting standard, net of taxes	—	—		—	—		—		—		(228)		(228)		—
Net income	—	—		—	—		—		—		18,103		18,103		299
Balance - March 29, 2019	39,061	$	38	890	$	(13,754)	$	116,519	$	(943)	$	237,561	$	339,421	$	14,581
Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding	115	—		—	—		(2,264)		—		—		(2,264)		—
Issuance of stock for business acquisition	98	—		—	—		7,167		—		—		7,167		—


Stock-based compensation expense	—	—		—	—		1,621		—		—		1,621		—
Other comprehensive (loss) income	—	—		—	—		—		314		—		314		—
Net income	—			—	—		—		—		22,921		22,921		441
Balance - June 28, 2019	39,274	$	38	890	$	(13,754)	$	123,043	$	(629)	$	260,482	$	369,180	$	15,022
Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding	140	—		—	—		(3,300)		—		—		(3,300)		—



Stock-based compensation expense	—	—		—	—		1,605		—		—		1,605		—
Other comprehensive (loss) income	—	—		—	—		—		(352)		—		(352)		—
Net income	—	—		—	—		—		—		29,487		29,487		689
Balance - September 27, 2019	39,414	$	38	890	$	(13,754)	$	121,348	$	(981)	$	289,969	$	396,620	$	15,711

The accompanying notes are an integral part of these consolidated statements.

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FOX FACTORY HOLDING CORP.

Condensed Consolidated Statements of Stockholders' Equity and Redeemable Non-controlling Interest

(in thousands)

(unaudited)


	Common Stock			Treasury			Additional paid-in capital		Accumulated other comprehensive (loss) income		Retained earnings		Total stockholders' equity		Redeemable non-controlling interest
	Shares	Amount		Shares	Amount

Balance - January 3, 2020	39,448	$	39	890	$	(13,754)	$	123,274	$	150	$	312,491	$	422,200	$	15,719
Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding	45	—		—	—		(2,047)		—		—		(2,047)		—
Stock awards issued for business acquisition	—	—		—	—		322		—		—		322


Stock-based compensation expense	—	—		—	—		1,921		—		—		1,921		—
Other comprehensive (loss) income	—	—		—	—		—		(940)		—		(940)		—

Net income	—	—		—	—		—		—		8,250		8,250		488
Balance - April 3, 2020	39,493	$	39	890	$	(13,754)	$	123,470	$	(790)	$	320,741	$	429,706	$	16,207
Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding	74	—		—	—		(2,301)		—		—		(2,301)		—
Issuance of common stock, net	2,760	2		—	—		198,234		—		—		198,236		—



Adjustment to the fair value of non-controlling interest	—	—		—	—		—		—		(8,184)		(8,184)		8,184
Stock-based compensation expense	—	—		—	—		2,076		—		—		2,076		—
Other comprehensive (loss) income	—	—		—	—		—		923		—		923		—

Net income	—			—	—		—		—		12,608		12,608		584
Balance - July 3, 2020	42,327	$	41	890	$	(13,754)	$	321,479	$	133	$	325,165	$	633,064	$	24,975
Issuance of common stock under equity compensation plans, net of shares repurchased for income tax withholding	138	1		—	—		(254)		—		—		(253)		—

Redeemable non-controlling interest	136	—		—	—		11,169		—		—		11,169		(24,975)

Stock-based compensation expense	—	—		—	—		2,092		—		—		2,092		—
Other comprehensive (loss) income	—	—		—	—		—		(165)		—		(165)		—

Net income	—	—		—	—		—		—		38,020		38,020		—
Balance - October 2, 2020	42,601	$	42	890	$	(13,754)	$	334,486	$	(32)	$	363,185	$	683,927	$	—

The accompanying notes are an integral part of these consolidated statements.

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FOX FACTORY HOLDING CORP.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	For the nine months ended
	October 2, 2020		September 27, 2019
OPERATING ACTIVITIES:
Net income	$	59,950	$	71,940
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	24,762		12,821


Stock-based compensation	6,360		4,955



Deferred taxes and uncertain tax positions	(11,857)		(5,503)
Amortization of loan fees	1,129		146

Loss on extinguishment of debt	—		516
Changes in operating assets and liabilities, net of effects of acquisition of business:
Accounts receivable	(12,610)		(28,257)
Inventory	(579)		(20,339)
Income taxes	3,218		(7,339)
Prepaids and other assets	(14,737)		(7,577)
Accounts payable	36,712		9,797
Accrued expenses and other liabilities	7,453		(236)

Net cash provided by operating activities	99,801		30,924
INVESTING ACTIVITIES:
Purchases of property and equipment	(45,983)		(25,903)
Acquisition of businesses, net of cash acquired	(329,176)		(6,804)
Acquisition of other assets	(250)		—


Net cash used in investing activities	(375,409)		(32,707)
FINANCING ACTIVITIES:
Proceeds from line of credit	204,131		67,500
Payments on line of credit	(272,131)		(52,053)

Proceeds from issuance of debt, net of origination fees of $7,615	392,385		—
Repayment of debt	(5,000)		(2,813)

Installment on purchase of non-controlling interest	(3,000)		—
Proceeds from sale of common stock, net	198,236		—
Repurchases from stock compensation program, net	(4,602)		(6,793)

Net cash provided by financing activities	510,019		5,841
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	99		(37)
CHANGE IN CASH AND CASH EQUIVALENTS	234,510		4,021
CASH AND CASH EQUIVALENTS—Beginning of period	43,736		27,958
CASH AND CASH EQUIVALENTS—End of period	$	278,246	$	31,979

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FOX FACTORY HOLDING CORP.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	For the nine months ended
SUPPLEMENTAL CASH FLOW INFORMATION:	October 2, 2020		September 27, 2019
Cash paid during the period for:
Income taxes	$	17,484	$	24,402
Cash paid for interest, net of capitalized interest	$	5,946	$	1,971
Cash paid for amounts included in the measurement of lease liabilities	$	5,267	$	4,476
Non-cash operating activities:
Refinancing of the Second Amended and Restated Credit Facility	$	—	$	88,875
Right-of-use assets obtained in exchange for lease obligations	$	12,293	$	8,565
Acquisition of business in exchange for equity	$	—	$	7,167
Non-cash investing activities:
Capital expenditures included in accounts payable	$	6,530	$	868
Acquisition of non-controlling interest in exchange for equity and installment payments	$	21,975	$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

1. Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies - Fox Factory Holding Corp. (the "Company") designs, engineers, manufactures, and markets performance-defining products and systems for customers worldwide. Our premium brand, performance-defining products and systems are used primarily for bicycles ("bikes"), side-by-side vehicles ("Side-by-Sides"), on-road vehicles with and without off-road capabilities, off-road vehicles and trucks, all-terrain vehicles ("ATVs"), snowmobiles, specialty vehicles and applications, motorcycles and commercial trucks. Some of our products are specifically designed and marketed to the leading cycling and powered vehicle original equipment manufacturers ("OEMs"), while others are distributed to consumers through a global network of dealers and distributors.

Throughout this Form 10-Q, unless stated otherwise or as the context otherwise requires, the "Company," "FOX," "Fox Factory," "we," "us," "our," and "ours" refer to Fox Factory Holding Corp. and its operating subsidiaries on a consolidated basis.

Basis of Presentation - The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States of America ("U.S." or "United States") and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended January 3, 2020 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 3, 2020. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal and recurring nature, that are necessary for a fair presentation of financial results for the interim periods presented. Operating results for any quarter are not necessarily indicative of the results for the full fiscal year.

The Company operates on a 52-53 week fiscal calendar. For 2020 and 2019, the Company's fiscal year will end or has ended on January 1, 2021 and January 3, 2020, respectively. The twelve month periods ended January 1, 2021 and January 3, 2020, will include or have included 52 and 53 weeks, respectively. The three and nine month periods ended October 2, 2020 and September 27, 2019 each included 13 weeks and 39 weeks, respectively.

Principles of Consolidation - These condensed consolidated financial statements include the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Summary of Significant Accounting Policies - There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended January 3, 2020, as filed with the SEC on March 3, 2020 that have had a material impact on our condensed consolidated financial statements and related notes.

Revenue Recognition - Revenues are generated from the sale of performance-defining products and systems to customers worldwide. The Company’s performance-defining products and systems are solutions that improve performance of powered vehicles and bikes. Powered vehicles include Side-by-Sides, on-road vehicles with off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, and motorcycles.

Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product to a customer, generally at the time of shipment. Contracts are generally in the form of purchase orders and are governed by standard terms and conditions. For larger OEMs, the Company may also enter into master agreements. Revenues exclude sales tax.

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

Provisions for discounts, rebates, sales incentives, returns, and other adjustments are generally provided for in the period the related sales are recorded, based on management’s assessment of historical trends and projection of future results. Certain pricing provisions that provide the customer with future discounts are considered a material right. Such material rights result in the deferral of revenue that are recognized when the rights are exercised by the customer. Measuring the material rights requires judgments including forecasts of future sales and product mix. At January 3, 2020, the balance of deferred revenue related to pricing provisions was $172 which was recognized as revenue during the nine months ended October 2, 2020.

Segments - The Company has determined that it has a single operating and reportable segment. The Company considers an operating segment to be a component of the Company for which separate financial information is available, that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

Use of Estimates - The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from management’s estimates.

Certain Significant Risks and Uncertainties - The Company is subject to those risks common in manufacturing-driven markets, including, but not limited to, competitive forces, dependence on key personnel, customer demand for its products, the successful protection of its proprietary technologies, compliance with government regulations, and the possibility of not being able to obtain additional financing when needed. Additionally, the Company has been impacted by the recent coronavirus (“COVID-19”) pandemic. The global outbreak of COVID-19 has negatively affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. The Company’s manufacturing facilities in North America have been affected by local and state “shelter-in-place” orders including the temporary suspension of non-essential operations in certain facilities. The Company took actions to manage costs during this time by enacting temporary executive pay cuts and furloughs, curtailing non-essential capital expenditures, and reducing expenses. Despite the Company’s efforts to manage and remedy these impacts to the Company, the ultimate impact and the extent to which the COVID-19 pandemic will continue to affect the business, results of operation and financial condition is difficult to predict and depends on numerous evolving factors outside of the Company’s control, including: the duration and scope of the pandemic; government, social, business and other actions that have been and will be taken in response to the pandemic; and the effect of the pandemic on short and long-term general economic conditions.

Fair Value Measurements and Financial Instruments - The Financial Accounting Standards Board ("FASB") has issued Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures, that requires the valuation of assets and liabilities required or permitted to be either recorded or disclosed at fair value based on hierarchy of available inputs as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The carrying amounts of the Company's financial instruments, including cash, receivables, accounts payable, and accrued liabilities approximate their fair values due to their short-term nature. Amounts owed under the Company's First Amended and Restated Credit Facility (as defined in Note 8 - Debt below) approximate fair value due to the variable interest rate features embedded in both the line of credit and the term debt.

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

Recent Accounting Pronouncements - In February 2016, the FASB issued accounting standards update ("ASU") 2016-02, Leases, which supersedes the existing guidance for lease accounting. To meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases, this ASU requires lessees to recognize most leases on the balance sheet as right-of-use assets and lease liabilities.

The Company adopted this guidance as of the beginning of the first quarter of fiscal year 2019, with a cumulative effect adjustment to the opening balance of retained earnings at December 28, 2018 with no restatement of comparative periods’ financial information ("current-period adjustment method"). Additionally, the Company adopted this guidance using practical expedients with respect to the assessment of embedded leases, lease classification, and initial indirect costs for expired and existing leases. The Company also elected the practical expedient related to treating lease and non-lease components as a single lease component for all of its leases and elected a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the right-of-use assets and lease liabilities. The Company did not use the hindsight practical expedient to adopt this guidance. The Company recorded a cumulative effect adjustment of $13,637 to operating lease right-of-use assets, $13,937 to operating lease liabilities, and $300 gross ($228 net of taxes) to the opening balance of the Company's retained earnings to reflect the cumulative effect of the adoption of the standard. This standard did not have a material impact on our consolidated income statements.

In June 2016, the FASB issue ASU 2016-13, Financial Instruments: Credit Losses, which adds an impairment model that is based on expected losses rather than incurred losses. Under this standard, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The Company adopted ASU 2016-13 effective in the first quarter of fiscal year 2020 using the aging method, which calculates the allowance based on how long a receivable has been outstanding, taking into account the historical credit loss rate and adjusting for both current conditions and forecasts of economic conditions into that expected credit loss rate. The adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which clarifies the presentation of certain transactions, including but not limited to contingent consideration payments made after a business combination and debt prepayment and extinguishment costs in the cash flow statement. The Company adopted ASU 2016-15 effective in the first quarter of fiscal year 2019. The adoption of ASU 2016-15 did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements of fair value measurements in Topic 820. This standard is effective for fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-13 effective in the first quarter of fiscal year 2020. The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other: Internal-Use Software, which helps simplify how entities evaluate the accounting for costs paid by a customer in a cloud computing arrangement that is a service contract. This standard is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company adopted ASU 2018-15 effective in the first quarter of fiscal year 2020. The adoption of ASU 2018-15 did not have a material impact on the Company's consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which helps simplify how entities account for income taxes by removing various exceptions related to the recognition of deferred tax liabilities and updating other tax computation requirements. This standard is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Facilitation of Effects of Reference Rate Reform on Financial Reporting, which was created in response to concerns about structural risks of interbank offered rates ("IBORs") and the risk of cessation of the London Interbank Offered Rate ("LIBOR"). This standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This standard is effective for all entities as of March 12, 2020 through December 31, 2022. The Company adopted ASU 2020-04 effective in the first quarter of fiscal year 2020. The adoption of ASU 2020-04 did not have a material impact on the Company's consolidated financial statements.

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

2. Revenues

The following table summarizes total sales by product category:


	For the three months ended				For the nine months ended
	October 2, 2020		September 27, 2019		October 2, 2020		September 27, 2019
Powered Vehicles	$	153,031	$	130,022	$	372,081	$	341,976
Specialty Sports	107,669		81,295		256,082		223,163
Total sales	$	260,700	$	211,317	$	628,163	$	565,139

The following table summarizes total sales by sales channel:


	For the three months ended				For the nine months ended
	October 2, 2020		September 27, 2019		October 2, 2020		September 27, 2019
OEM	$	143,687	$	131,678	$	335,295	$	349,504
Aftermarket	117,013		79,639		292,868		215,635
Total sales	$	260,700	$	211,317	$	628,163	$	565,139

The following table summarizes total sales generated by geographic location of the customer:


	For the three months ended				For the nine months ended
	October 2, 2020		September 27, 2019		October 2, 2020		September 27, 2019
North America	$	175,486	$	142,624	$	423,078	$	383,414
Asia	41,609		37,521		97,872		88,888
Europe	41,004		29,024		101,223		87,074
Rest of the world	2,601		2,148		5,990		5,763
Total sales	$	260,700	$	211,317	$	628,163	$	565,139

3. Inventory

Inventory consisted of the following:


	October 2,		January 3
	2020		2020
Raw materials	$	90,674	$	87,779
Work-in-process	11,656		7,075
Finished goods	33,357		33,651
Total inventory	$	135,687	$	128,505

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

4. Prepaids and Other Current Assets

Prepaids and other current assets consisted of the following:


	October 2,		January 3
	2020		2020
Prepaid chassis deposits	$	12,424	$	6,701
Advanced payments and prepaid contracts	8,374		5,774
Current portion of acquisition-related compensation held in escrow	4,765		—
Other current assets	6,042		5,465
Total	$	31,605	$	17,940

5. Property, Plant and Equipment, net

Property, plant and equipment, net consisted of the following:


	October 2,		January 3
	2020		2020
Building and building improvements	$	74,434	$	42,343
Information systems, office equipment and furniture	13,241		10,102
Internal-use computer software	19,370		16,860
Land	8,171		5,414
Leasehold improvements	13,082		13,841
Machinery and manufacturing equipment	76,564		57,331
Transportation equipment	5,933		5,006
Total	210,795		150,897
Less: accumulated depreciation and amortization	(53,976)		(42,518)
Property, plant and equipment, net	$	156,819	$	108,379

The Company’s long-lived assets by geographic location are as follows:


	October 2,		January 3
	2020		2020
United States	$	142,369	$	100,508
International	14,450		7,871
Total long-lived assets	$	156,819	$	108,379

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

6. Leases

The Company has operating lease agreements for administrative, research and development, manufacturing, and sales and marketing facilities. These leases have remaining lease terms ranging from 1 to 8 years, some of which include options to extend the lease term for up to 5 years, and some of which include options to terminate the leases within 1 year. Certain leases are subject to annual escalations as specified in the lease agreements. The Company considered these options in determining the lease term used to establish its right-of-use assets and lease liabilities. These lease agreements do not contain any material residual value guarantees or material restrictive covenants.

As most of the Company's leases do not provide an interest rate, the Company used the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The weighted-average remaining lease term for the Company's operating leases was 4.71 years and the weighted-average incremental borrowing rate was 3.24% as of October 2, 2020.

Operating lease costs consisted of the following:


	For the three months ended				For the nine months ended
	October 2, 2020		September 27, 2019		October 2, 2020		September 27, 2019
Operating lease cost	$	1,835	$	1,581	$	5,209	$	4,550
Other lease costs (1)	214		338		733		763
Total	$	2,049	$	1,919	$	5,942	$	5,313

(1) Includes short-term leases and variable lease costs. The Company elected a policy permitting leases with an original lease term of less than one year to be excluded from the right-of-use assets and lease liabilities.

Supplemental balance sheet information related to the Company's operating leases is as follows:


	Balance Sheet Classification	October 2, 2020
Operating lease right-of-use assets	Lease right-of-use assets	$	25,695
Current lease liabilities	Accrued expenses	$	6,518
Non-current lease liabilities	Other liabilities	$	18,832

Maturities of lease liabilities by fiscal year for the Company's operating leases are as follows:


For fiscal year	Total future payments
2020 (excluding the 9 months ended October 2, 2020)	$	1,856
2021	7,109
2022	5,807
2023	4,705
2024	3,031
Thereafter	4,875
Total lease payments	27,383
Less: imputed interest	(2,033)
Present value of lease liabilities	25,350
Less: current portion	(6,518)
Lease liabilities less current portion	$	18,832

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

7. Accrued Expenses

Accrued expenses consisted of the following:


	October 2,		January 3
	2020		2020
Payroll and related expenses	$	17,442	$	14,595

Current portion of lease liabilities	6,518		6,242
Warranty	9,485		5,649

Income tax payable	9,573		4,295
Current portion of non-controlling interest buyout liability	7,206		—
Other accrued expenses	11,169		4,963
Total	$	61,393	$	35,744

Activity related to warranties is as follows:


	For the three months ended				For the nine months ended
	October 2, 2020		September 27, 2019		October 2, 2020		September 27, 2019
Beginning warranty liability	$	8,915	$	6,208	$	5,649	$	6,433
Charge to cost of sales	2,181		1,054		4,987		3,204
Fair value of warranty assumed in acquisition	—		—		3,158		100
Costs incurred	(1,611)		(1,116)		(4,309)		(3,591)
Ending warranty liability	$	9,485	$	6,146	$	9,485	$	6,146

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

8. Debt

Former Second Amended and Restated Credit Facility

In August 2013, the Company entered into a credit facility with SunTrust Bank, N.A. and other named lenders, which was periodically amended and restated (the "Second Amended and Restated Credit Facility"). The Company paid off the Second Amended and Restated Credit Facility in June 2019 upon entering into the new credit facility with Bank of America, N.A. ("Bank of America").

First Amended and Restated Credit Facility

In June 2019, the Company entered into a credit facility with Bank of America and other named lenders, which was amended and restated on March 11, 2020 and June 19, 2020 (as most recently amended and restated as the "First Amended and Restated Credit Facility"). The First Amended and Restated Credit Facility, which matures on March 11, 2025, provides a senior secured revolving line of credit with a borrowing capacity of $250,000 and a term loan of $400,000. The term loan is subject to quarterly amortization payments.

The Company paid $7,615 in debt issuance costs, of which $6,458 were allocated to the term debt and $1,157 were allocated to the line of credit. Additionally, the Company had $434 of remaining unamortized debt issuance costs. The Company expensed $277 of the remaining unamortized debt issuance costs, which are included in other expense, net in the condensed consolidated statements of income for the nine months ended October 2, 2020. The remaining $157 were allocated to the line of credit. Loan fees allocated to the term debt will be amortized using the interest method and loan fees allocated to the line of credit will be amortized on a straight-line basis over the term of the First Amended and Restated Credit Facility.

The First Amended and Restated Credit Facility provides for interest at a rate either based on the London Interbank Offered Rate, or LIBOR, plus a margin ranging from 1.00% to 2.25%, with a floor rate of 0.50%, or based on the base rate offered by Bank of America plus a margin ranging from 0.00% to 1.25%. At October 2, 2020, the one-month LIBOR and prime rates were 0.14% and 3.25%, respectively. At October 2, 2020, our weighted-average interest rate on outstanding borrowing was 1.87%. The First Amended and Restated Credit Facility is secured by substantially all of the Company’s assets, restricts the Company's ability to make certain payments and engage in certain transactions, and requires that the Company satisfy customary financial ratios. The Company was in compliance with the covenants as of October 2, 2020.

In August 2020, the Company entered into an interest rate swap agreement to hedge the variability of cash flows in interest payments associated with $200,000 of its variable rate term debt. Refer to Note 10 - Derivatives and Hedging for further details of this agreement.

The First Amended and Restated Credit Facility permits up to $25,000 of the aggregate revolving commitment to be used by the Company for issuance of letters of credit, of which $15,000 was outstanding at October 2, 2020.

The following table summarizes the line of credit under the First Amended and Restated Credit Facility:


	October 2,
	2020
Amount outstanding	$	—
Standby letters of credit	15,000
Available borrowing capacity	235,000
Total borrowing capacity	$	250,000
Maturity date	March 11, 2025

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

As of October 2, 2020, future principal payments for long-term debt, including the current portion, as summarized as follows:


	October 2,
	2020
For fiscal year
2020 (remaining three months)	$	2,500
2021	10,000
2022	17,500
2023	20,000
2024	20,000
Thereafter	325,000
Total	395,000
Debt issuance cost	(5,758)
Long-term debt, net of issuance cost	389,242
Less: current portion	(10,000)
Long-term debt less current portion	$	379,242

9. Commitments and Contingencies

Indemnification Agreements - In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, services to be provided by the Company or intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with directors and certain officers and employees that will require the Company, among other things, to indemnify them against certain liabilities that may arise due to their status or service as directors, officers or employees. While the outcome of these matters cannot be predicted with certainty, the Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on the Company’s results of operations, financial position or liquidity.

Legal Proceedings - A lawsuit was filed on December 17, 2015 by SRAM Corporation (“SRAM”) in the U.S. District Court, Northern District of Illinois, against the Company’s wholly-owned subsidiary, RFE Canada Holding Corp. (“RFE Canada”). The lawsuit alleges patent infringement of U.S. Patent number 9,182,027 ("027 Patent") and violation of the Lanham Act. SRAM filed a second lawsuit in the same court against RFE Canada on May 16, 2016, alleging patent infringement of U.S Patent number 9,291,250 ("'250 Patent"). The Company believes that the lawsuits are without merit and intends vigorously to defend itself. As such, the Company has filed, before the U. S. Patent and Trademark Appeals Board ("PTAB"), for Interparties Reviews ("IPR") of the '027 Patent and separately the same for the '250 Patent. In April 2018, the PTAB issued opinions in the ‘027 Patent petition cases stating that the Company has not shown the claims of the ‘027 Patent to be obvious. Regarding the PTAB ‘027 opinions, the Company has filed an Appeal to the Court of Appeals for the Federal Circuit ("CAFC"). The CAFC found in favor of the Company and has vacated and remanded all of the PTAB findings with the exception of their finding that the ‘027 patent met the prima facia test for obviousness, which was affirmed. The CAFC has declined to rehear the case and has issued the final remand order sending the case back to the PTAB. SRAM filed ‘027 writ of certiorari before the Supreme Court of the United States, the writ of certiorari was denied and the case is before the PTAB on remand. The PTAB has issued an opinion in the ‘250 Patent case stating that the Company has not shown the claims of the ‘250 Patent to be obvious. The Company has appealed that PTAB opinion to the CAFC and the CAFC has affirmed the PTAB opinion. The U.S. District Court, Northern District of Illinois, has again stayed the SRAM lawsuits against the Company pending outcome of the remanded ‘027 PTAB issue.

In a separate action, the Company filed a lawsuit on January 29, 2016 in the U.S. District Court, Northern District of California against SRAM. That lawsuit alleges SRAM’s infringement of two separate Company owned patents, specifically U.S. Patent numbers 6,135,434 and 6,557,674. The Company filed a second lawsuit on July 1, 2016 in the U.S. District Court, Northern District of California against SRAM alleging infringement of the Company’s U.S. Patent numbers 8,226,172 and 8,974,009. These lawsuits have been moved to U.S. District Court, District of Colorado and are otherwise proceeding.

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

Due to the inherent uncertainties of litigation, the Company is not able to predict either the outcome or a range of reasonably possible losses, if any, at this time. Accordingly, no amounts have been recorded in the consolidated financial statements for the settlement of these matters. Were an unfavorable ruling to occur, or if factors indicate that a loss is probable and reasonably estimable, the Company's business, financial condition or results of operations could be materially and adversely affected. The Company is involved in other legal matters that arise in the ordinary course of business. Based on information currently available, management does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's financial condition, results of operations or cash flows.

Other Commitments - On November 30, 2017, the Company through FF US Holding Corp., acquired the assets of Flagship, Inc. d/b/a Tuscany and issued a 20% interest in FF US Holding Corp. to Flagship, Inc. A stockholders' agreement with Flagship, Inc. provided the Company with a call option (the "Call Option") to acquire the remaining 20% of FF US Holding Corp. at any time from November 30, 2019 through November 30, 2024 at a value that approximates fair market value. On July 22, 2020, the Company exercised the Call Option and, pursuant to a stock purchase agreement with Flagship, Inc., the Company purchased the remaining 20% interest for $24,975 payable in a combination of stock and cash. The cash portion will be settled in quarterly installment payments through July 2022, which amount to $6,556, $4,550 and $2,700 in 2020, 2021 and 2022, respectively. The Company paid $3,000 during the nine months ended October 2, 2020. The stock portion of 136 shares held in escrow will be released quarterly starting January 2021 through July 2022. The exercise of the Call Option effectively canceled the put option held by Flagship, Inc.

Other Contingencies - On June 21, 2018, the U.S. Supreme Court (the “Court”) decided South Dakota v. Wayfair, Inc., et al., holding that internet retailers do not have to maintain a physical presence in a state in order to be required to collect the state’s sales and use tax. As a result of the Court’s decision, most states enacted legislation to require sellers who meet economic nexus thresholds to register, collect and remit sales and use taxes on transactions with out-of-state customers. The Company believes that it is possible that it will incur a liability for uncollected sales tax on some portion of its e-commerce sales through October 2, 2020. Based on information currently available, any retroactively imposed liability is not expected to be material to the Company’s results of operations or financial position because direct end-user sales in states where the Company is not registered comprise a small portion of total revenues.

10. Derivatives and Hedging

On August 17, 2020 the Company entered into a Swap to mitigate the cash flow risk associated with changes in interest rates on $200,000 of its variable rate debt. Refer to Note 8 - Debt for further details of the Company's variable rate debt. The Swap matures on March 11, 2025. The Company pays a base fixed rate of 0.73% and in return receives the greater of (1) 1-month LIBOR, or (2) 0.50%. The Company accounts for interest rate swap contracts in accordance with ASC 815, Derivatives and Hedging, which requires all derivatives, including derivatives designated as accounting hedges, to be recorded on the balance sheet at fair value. The swap has been designated and accounted for as a cash flow hedge of the forecasted interest payments on the Company’s debt. As long as the swap continues to be a highly effective hedge of the designated interest rate risk, changes in the fair value of the swap are recorded in accumulated other comprehensive income (loss), a component of equity. Any ineffective portion of a change in the fair value of a hedge is recorded in earnings.

The fair value of the Swap on October 2, 2020 was a liability of $1,038. Refer to Note 11 - Fair Value Measurement s and Finan cial Instruments for information on determining the fair value. The liability is included in other liabilities in the consolidated balance sheets. At both the inception of the Swap and at October 2, 2020, the interest rate swap was considered highly effective and accordingly, the $1,038 change in fair value incurred from inception was deferred and recorded in other comprehensive income (loss), net of taxes. As required under ASC 815, the Swap’s effectiveness will be assessed on a quarterly basis.

The Company’s derivative counterparty is an investment grade financial institution. The Company does not have any collateral arrangements with its derivative counterparty and the derivative contract does not contain credit risk related contingent features.

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

11. Fair Value Measurements and Financial Instruments

The following table presents the Company's hierarchy for its assets, liabilities and redeemable non-controlling interest measured at fair value on a recurring basis as of the following periods:


	October 2, 2020								January 3, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Liabilities:
Credit Facility	$	—	$	389,242	$	—	$	389,242	$	—	$	68,000	$	—	$	68,000
Interest Rate Swap	—		1,038		—		1,038		—		—		—		—
Non-controlling interest subject to put provisions	—		—		—		—		—		—		15,719		15,719
Total liabilities measured at fair value	$	—	$	390,280	$	—	$	390,280	$	—	$	68,000	$	15,719	$	83,719

There were no transfers of assets or liabilities between Level 1, Level 2, and Level 3 categories of the fair value hierarchy during the three and nine month period ended October 2, 2020.

The Company used Level 2 inputs to determine the fair value of its First Amended and Restated Credit Facility. The Company believes the carrying amount of its First Amended and Restated Credit Facility approximates the fair value at October 2, 2020 because, while subject to a minimum LIBOR floor rate, the interest rate approximates current market rates of debt with similar terms and comparable credit risk.

On August 17, 2020 the Company entered into an interest rate swap agreement to mitigate the cash flow risk associated with changes in interest rates on its variable rate debt. Refer to N ote 10 - Derivatives and Hedging for additional details of the agreement. In accordance with ASC 815, Derivatives and Hedging Interest rate swap contract is recognized as an asset or liability on the consolidated balance sheets and is measured at fair value. The fair value was calculated utilizing Level 2 inputs.

On July 22, 2020, the Company, pursuant to a stock purchase agreement with Flagship, Inc., dated as of the same date, purchased the remaining 20% interest of FF US Holding Corp. for $24,975 payable in a combination of stock and cash. Refer to Note 9 - Commitments and Contingencies for additional details of this agreement. Prior to the consummation of the stock purchase, the non-controlling interest was measured at fair value using Level 3 inputs.

The following table provides a reconciliation of the beginning and ending balances for the Company's redeemable non-controlling interest:


	Redeemable Non-Controlling Interest (Level 3 measurement)
Balance at January 3, 2020	$	15,719
Net income attributable to non-controlling interest	1,072
Change in fair value	8,184
Purchase of non-controlling interest	(24,975)
Balance at October 2, 2020	$	—

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

12. Stockholders' Equity

Secondary Stock Offerings

In June 2020, the Company completed a secondary offering whereby it sold 2,760 shares of its common stock at a price of $76.00 per share for gross proceeds of $209,760. The net proceeds to the Company after underwriters' discounts and commissions of $11,015 and $511 of offering costs was $198,234. The total shares sold included 360 shares that were sold in connection with the underwriters' option to purchase additional shares. This offering was made pursuant to the Company's registration statement on Form S-3.

Equity Incentive Plans

The following table summarizes the allocation of stock-based compensation in the accompanying consolidated statements of income:


	For the three months ended				For the nine months ended
	October 2, 2020		September 27, 2019		October 2, 2020		September 27, 2019
Cost of sales	$	191	$	107	$	467	350
Sales and marketing	173		136		490		375
Research and development	184		198		603		518
General and administrative	1,815		1,164		4,800		3,712
Total	$	2,363	$	1,605	$	6,360	4,955

The following table summarizes the activity for the Company's unvested restricted stock units ("RSU") for the nine months ended October 2, 2020:


	Unvested RSUs
	Number of shares outstanding	Weighted-average grant date fair value
Unvested at January 3, 2020	427	$	44.98
Granted	257	$	47.08
Canceled	(10)	$	47.97
Vested	(217)	$	37.18
Unvested at October 2, 2020	457	$	49.81

As of October 2, 2020, the Company had approximately $19,447 of unrecognized stock-based compensation expense related to RSUs, which will be recognized over the remaining weighted-average vesting period of approximately 2.74 years.

During the nine months ended October 2, 2020, 120 shares of common stock were issued due to the exercise of stock options and no options to purchase common stock expired or were forfeited. As of October 2, 2020, stock-based compensation expense related to stock options has been fully recognized.

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

13. Income Taxes


	For the three months ended						For the nine months ended
	October 2, 2020			September 27, 2019			October 2, 2020			September 27, 2019
Provision for income taxes	$	5,431		$	4,473		$	9,555		$	11,596
Effective tax rates	12.5		%	12.9		%	13.7		%	13.9		%

For the three and nine months ended October 2, 2020, the difference between the Company's effective tax rate and the 21% federal statutory rate resulted primarily from lower foreign tax rates, a lower tax rate on foreign derived intangible income, research and development credits, realization of foreign tax credits, and $3,107 and $3,793 in excess benefits related to stock-based compensation, respectively. For the three months ended April 3, 2020, the Company benefited from a negotiated reduction of Switzerland withholding tax on prior year earnings. These benefits were partially offset by state taxes, global low-tax intangible income tax and non-deductible expenses.

For the three and nine months ended September 27, 2019, the difference between the Company's effective tax rate and the 21% federal statutory rate resulted primarily from lower foreign tax rates, lower effective federal rates on foreign derived intangible income, research and development credits, and $1,873 and $5,508 in excess benefits related to stock-based compensation, respectively. In the three months ended September 27, 2019, the Company refined its 2019 estimated deduction for foreign derived intangible income, resulting in a 4% benefit to the effective tax rate. These benefits were partially offset by state taxes, foreign withholding taxes and the impact of non-deductible expenses.

We do not expect the results from any ongoing income tax audit to have a material impact on our consolidated financial condition, results of operations, or cash flows.

14. Related Party Transactions

On May 3, 2019, the Company acquired substantially all of the assets of Air Ride Technologies, Inc., d/b/a Ridetech, which has a building lease for its manufacturing and offices in Jasper, Indiana. The building is owned by a former owner of Ridetech, who is now an employee of the Company. The lease is effective through April 1, 2024, with monthly rent payments of $16. Rent expense under this lease was $48 and $144 for the three and nine months ended October 2, 2020.

On March 11, 2020, the Company acquired 100% of the issued and outstanding stock of SCA Performance Holdings, Inc. ("SCA"), which has a building lease for its manufacturing and offices in Trussville, Alabama. The building is owned by a former owner of SCA, who is now an employee of the Company. The lease is effective through April 13, 2028, with monthly rent payments of $28. Rent expense under this lease was $84 and $196 for the three and nine months ended October 2, 2020. Refer to Note 15 - Acquisitions for further details of this acquisition.

On July 22, 2020 the Company, pursuant to a stock purchase agreement with Flagship, Inc., purchased the remaining 20% interest of FF US Holding Corp. for $24,975 payable in a combination of stock and cash. The cash portion will be settled in quarterly installment payments through July 2022. Refer to Note 9 - Commitments and Contingencies for additional details of this agreement.

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

15. Acquisitions

On March 11, 2020, the Company, through Fox Factory, Inc., acquired 100% of the issued and outstanding stock of SCA Performance Holdings, Inc. ("SCA") from Southern Rocky Holdings, LLC for $329,531, net of cash acquired and exclusive of vehicle inventory. SCA is a leading OEM authorized specialty vehicle manufacturer for light duty trucks and SUVs with headquarters in Trussville, Alabama. SCA operates under three aftermarket brands: SCA Performance, Rocky Ridge Trucks, and Rocky Mountain Truckworks. The Company believes the acquisition will be complementary to FOX’s Tuscany business, expanding its North American geographic manufacturing footprint and broadening its product offering in a growing segment of the automotive industry. This transaction was accounted for as a business combination.

The Company also agreed to an additional $10,589 of contingent retention incentives for key SCA management, of which $9,283 is cash and $1,306 is stock, to be held in escrow and payable over the next two years. The Company recognized $1,429 and $2,921 in costs associated with such retention incentives during the three and nine months ended October 2, 2020. Additionally, the Company paid $1,750 in transaction compensation to key SCA management concurrently with the closing.

The purchase price of SCA has been preliminarily allocated to the assets acquired and liabilities assumed based on their estimated respective fair values as of March 11, 2020 with the excess purchase price allocated to goodwill. The Company’s allocation of the purchase price to the net tangible and intangible assets acquired and liabilities assumed is as follows:


Acquisition consideration
Cash consideration	$	329,209
Non-cash consideration	322
Total consideration at closing	$	329,531

Fair market values
Other current assets	$	15,227
Property, plant and equipment	8,953
Lease right-of-use assets	4,027
Customer relationships	129,000
Trademarks and brand	11,500
Goodwill	193,544
Total assets acquired	$	362,251

Accounts payable and accrued expenses	$	9,454
Lease liabilities	4,027
Deferred taxes	19,239
Total liabilities assumed	32,720
Purchase price allocation	$	329,531

The Company incurred $10,582 of acquisition costs in conjunction with the SCA acquisition, including $1,750 of transaction compensation during the nine months ended October 2, 2020 and $602 of transaction costs during the three months ended January 3, 2020. These costs are classified as general and administrative expenses in the accompanying condensed consolidated statements of income. Additional debt issuance costs of $6,622 were incurred in association with financing the transaction and will be amortized over the term of the First Amended and Restated Credit Facility. Refer to Note 8 - Debt for further details.

The primary areas of the preliminary purchase price allocations that have not been finalized relate to the finalization of working capital and the valuation of real estate, intangible assets and related deferred tax liabilities. Upon completion of the fair value assessment, the Company anticipates that the ultimate intangible assets may differ from the preliminary assessment outlined above. Any change in the finalization of working capital will reduce or increase the cash consideration. Any changes to the preliminary estimates of the fair value of the real estate and intangible assets will be adjusted to goodwill during the measurement period, with subsequent changes in estimates recorded in the statement of operations.

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FOX FACTORY HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share amounts)

(unaudited)

The preliminarily values assigned to the identifiable intangible assets were determined by discounting the estimated future cash flows associated with these assets to their present value. The goodwill of $193,544 reflects the strategic fit of SCA with the Company’s operations. The Company will amortize the acquired customer relationships assets over their expected useful lives of 5-10 years. Trademarks, brand names and goodwill are expected to have an indefinite life, and will be subject to impairment testing. The goodwill is not deductible for income tax purposes. SCA previously purchased intangibles in asset acquisitions with a remaining net tax basis approximating $77,989, which the Company may deduct for income tax purposes.

The following unaudited pro forma financial information shows the combined results of operations of the Company and SCA, as if the acquisition had occurred as of the beginning of the periods presented. The pro forma results include the effects of the amortization of purchased intangible assets and acquired inventory valuation step-up, interest expense on the term debt secured to finance the acquisition, and the net tax benefit of the above adjustments calculated at the statutory federal tax rate of 21%. SCA was operated as a C Corporation for federal taxation purposes. A pro forma adjustment has been made to reflect the income taxes that would have been recorded at the federal statutory rate based on SCA’s net income. The pro forma results for the nine months ended October 2, 2020 exclude transaction costs associated with the acquisition and the results for the nine months ended September 27, 2019 have been adjusted to include these charges. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisition taken place in the periods noted below.


	For the nine months ended
	October 2, 2020		September 27, 2019
Pro forma sales	$	647,512	$	632,848
Pro forma net income attributable to FOX stockholders	$	66,684	$	57,432
Pro forma basic earnings per share	$	1.68	$	1.50
Pro forma diluted earnings per share	$	1.65	$	1.47

Total SCA revenues included in the condensed consolidated statements of income	$	49,868
Total SCA pre-tax income included in the condensed consolidated statements of income	$	2,950

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2020, as filed with the U.S. Securities and Exchange Commission ("SEC") on March 3, 2020, and our other reports and registration statements that we file with the SEC from time to time. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section included in Part II, Item 1A.

Unless the context otherwise requires, the terms “FOX,” the “Company,” “we,” “us,” and “our” in this Quarterly Report on Form 10-Q refer to Fox Factory Holding Corp. and its operating subsidiaries on a consolidated basis.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements, which are subject to the “safe harbor” created by Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We may make forward-looking statements in our SEC filings, press releases, news articles, earnings presentations and when we are speaking on behalf of the Company. Forward-looking statements generally relate to future events or our future financial or operating performance that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements because they contain words such as “may,” “might,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “likely,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to numerous risks and uncertainties, including but not limited to risks related to:

•the spread of highly infectious or contagious disease, such as COVID-19, could cause severe disruptions in the U.S. and global economy, which could in turn disrupt the business activities and operations of our customers, as well as our businesses and operations;

•our ability to develop new and innovative products in our current end-markets;

•our ability to leverage our technologies and brand to expand into new categories and end-markets;

•our ability to increase our aftermarket penetration;

•our ability to accelerate international growth;

•our exposure to exchange rate fluctuations;

•the loss of key customers;

•our ability to improve operating and supply chain efficiencies;

•our ability to enforce our intellectual property rights;

•our future financial performance, including our sales, cost of sales, gross profit or gross margins, operating expenses, ability to generate positive cash flow and ability to maintain our profitability;

•our ability to maintain our premium brand image and high-performance products;

•our ability to maintain relationships with the professional athletes and race teams we sponsor;

•our ability to selectively add additional dealers and distributors in certain geographic markets;

•the growth of the markets in which we compete, our expectations regarding consumer preferences and our ability to respond to changes in consumer preferences;

•changes in demand for performance-defining products;

•the loss of key personnel, management and skilled engineers;

•our ability to successfully identify, evaluate and manage potential or completed acquisitions and to benefit from such acquisitions;

•the outcome of pending litigation;

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•our ability to adapt to the impact of certain changes in tax laws;

•changes in the relative proportion of profit earned in the numerous jurisdictions in which we do business and in tax legislation, case law and other authoritative guidance in those jurisdictions;

•product recalls and product liability claims; and

•future economic or market conditions.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects and the outcomes of any of the events described in any forward-looking statements are subject to risks, uncertainties, and other factors. In addition to the risks, uncertainties and other factors discussed above and elsewhere in this Quarterly Report on Form 10-Q, the risks, uncertainties and other factors expressed or implied in Part I, Item 1A. "Risk Factors" of our 2019 Annual Report on Form 10-K, as filed with the SEC on March 3, 2020, could cause or contribute to actual results differing materially from those set forth in any forward-looking statement. Moreover, we operate in a very competitive and challenging environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur. Actual results, events, or circumstances could differ materially from those contemplated by, set forth in, or underlying any forward-looking statements. For all of these forward-looking statements, we claim the protection of the safe harbor for forward-looking statements in Section 27A of the Securities Act and Section 21E of the Exchange Act.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

Recent Developments

Acquisition of SCA Performance, Inc.

On March 11, 2020, we, through Fox Factory, Inc., acquired 100% of the issued and outstanding stock of SCA Performance Holdings, Inc. ("SCA") from Southern Rocky Holdings, LLC for $329.5 million, net of cash acquired and exclusive of vehicle inventory. SCA is a leading OEM authorized specialty vehicle manufacturer for light duty trucks and SUVs with headquarters in Trussville, Alabama.

In connection with the acquisition, we also agreed to an additional $10.6 million of contingent retention incentives for key SCA management, to be held in escrow and payable over the next two years in a combination of cash and stock. Additionally, we paid $1.8 million in transaction compensation to key SCA management concurrently with the closing.

Secondary Stock Offering

In June 2020, we completed a secondary offering selling 2.8 million shares of common stock at a price of $76.00 per share for gross proceeds of $209.8 million. The net proceeds to us after underwriters' discounts and commissions of $11.0 million and $0.5 million of offering costs was $198.2 million. The total shares sold included 0.4 million shares that were sold in connection with the underwriters' option to purchase additional shares. This offering was made pursuant to our registration statement on Form S-3.

Purchase of Non-controlling Interest

On July 22, 2020, we, pursuant to a stock purchase agreement with Flagship, Inc., dated as of the same date, purchased the remaining 20% interest of FF US Holding Corp. for $25.0 million payable in a combination of stock and cash. Refer to Note 9 - Commitments and Contingencies for additional details of this agreement.

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Critical Accounting Policies and Estimates

Beginning in the first quarter of fiscal year 2019, the Company adopted Accounting Standards Update No. 2016-02, Leases. See Note 1 - Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further details of this update.

As a result of the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJA" or "Tax Act") in December 2017, we believe that it is more likely than not that a portion of our foreign tax credits will not be realizable before their expiration and therefore provided a partial valuation allowance of $6.8 million against that tax asset. We reassess our projections and assumptions regarding the realization of our foreign tax credits periodically as changes in our business and tax regulations occur. To the extent such a valuation allowance is established or reduced in a period, we reflect the change with a corresponding increase or decrease of our income tax provision in our consolidated statements of income. There have been no material changes in the valuation allowance for foreign tax credits for the three and nine month periods ended October 2, 2020 or September 27, 2019.

There have been no other changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended January 3, 2020, as filed with the SEC on March 3, 2020, that have had a material impact on our condensed consolidated financial statements and related notes.

Recent Accounting Pronouncements

See Note 1 - Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further details regarding this topic.

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Results of Operations

The table below summarizes our results of operations:


	For the three months ended				For the nine months ended
(in thousands)	October 2, 2020		September 27, 2019		October 2, 2020		September 27, 2019
Sales	$	260,700	$	211,317	$	628,163	$	565,139
Cost of sales	171,226		141,500		422,088		382,045
Gross profit	89,474		69,817		206,075		183,094
Operating expenses:
Sales and marketing	13,667		11,660		38,291		32,186
Research and development	8,514		8,376		24,779		23,442
General and administrative	16,463		12,727		53,443		36,065
Amortization of purchased intangibles	5,277		1,694		13,084		4,751

Total operating expenses	43,921		34,457		129,597		96,444
Income from operations	45,553		35,360		76,478		86,650
Other expense, net:
Interest expense	2,291		748		7,030		2,582
Other (income) expense	(189)		(37)		(57)		532
Other expense, net	2,102		711		6,973		3,114
Income before income taxes	43,451		34,649		69,505		83,536
Provision for income taxes	5,431		4,473		9,555		11,596
Net income	38,020		30,176		59,950		71,940
Less: net income attributable to non-controlling interest	—		689		1,072		1,429
Net income attributable to FOX stockholders	$	38,020	$	29,487	$	58,878	$	70,511

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The following table sets forth selected statement of income data as a percentage of sales for the periods indicated:


	For the three months ended				For the nine months ended
	October 2, 2020		September 27, 2019		October 2, 2020		September 27, 2019
Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	65.7		67.0		67.2		67.6
Gross profit	34.3		33.0		32.8		32.4
Operating expenses:
Sales and marketing	5.2		5.5		6.1		5.7
Research and development	3.3		4.0		3.9		4.1
General and administrative	6.3		6.0		8.5		6.4
Amortization of purchased intangibles	2.0		0.8		2.1		0.8

Total operating expenses	16.8		16.3		20.6		17.1
Income from operations	17.5		16.7		12.2		15.3
Other expense, net:
Interest expense	0.9		0.4		1.1		0.5
Other (income) expense	(0.1)		—		—		0.1
Other expense, net	0.8		0.3		1.1		0.6
Income before income taxes	16.7		16.4		11.1		14.8
Provision for income taxes	2.1		2.1		1.5		2.1
Net income	14.6		14.3		9.5		12.7
Less: net income attributable to non-controlling interest	—		0.3		0.2		0.3
Net income attributable to FOX stockholders	14.6	%	14.0	%	9.4	%	12.5	%

*Percentages may not foot due to rounding.

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Three months ended October 2, 2020 compared to three months ended September 27, 2019

Sales


	For the three months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Powered Vehicle products	$	153.0	$	130.0	$	23.0	17.7	%
Specialty Sports products	107.7		81.3		26.4		32.4
Total sales	$	260.7	$	211.3	$	49.4	23.4	%

Total sales for the three months ended October 2, 2020 increased approximately $49.4 million, or 23.4%, compared to the three months ended September 27, 2019. Powered Vehicle product sales increased by $23.0 million, or 17.7%, primarily due to the impact of our SCA subsidiary, which was acquired in March 2020. Additionally, Specialty Sports product sales increased by $26.4 million, or 32.4%, primarily due to increased demand in both the OEM and aftermarket channels.

Cost of sales


	For the three months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Cost of sales	$	171.2	$	141.5	$	29.7	21.0	%

Cost of sales for the three months ended October 2, 2020 increased approximately $29.7 million, or 21.0%, compared to the three months ended September 27, 2019. The increase in cost of sales was primarily due to the 23.4% increase in sales in the same period, as well as certain business factors affecting gross margin which are discussed below.

For the three months ended October 2, 2020, our gross margin increased 130 basis points to 34.3% compared to 33.0% for the three months ended September 27, 2019. The increase in gross margin was primarily due to favorable product and channel mix including the impact of the SCA acquisition.

Operating expenses


	For the three months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Operating expenses:
Sales and marketing	$	13.7	$	11.7	$	2.0	17.1	%
Research and development	8.5		8.4		0.1		1.2
General and administrative	16.4		12.7		3.7		29.1
Amortization of purchased intangibles	5.3		1.7		3.6		211.8

Total operating expenses	$	43.9	$	34.5	$	9.4	27.2	%

Total operating expenses for the three months ended October 2, 2020 were $43.9 million compared to $34.5 million for the three months ended September 27, 2019. When expressed as a percentage of total sales, total operating expenses increased to 16.8% of total sales for the three months ended October 2, 2020 compared to 16.3% of total sales in the three months ended September 27, 2019. The increase in operating expenses is primarily due to SCA related costs, including acquisition costs, operating costs and amortization expense.

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Within operating expenses, our sales and marketing expenses increased approximately $2.0 million primarily due to $2.4 million of costs associated with our SCA subsidiary, partially offset by reduced spending on trade shows and race events. Research and development costs increased approximately $0.1 million. General and administrative expenses increased by approximately $3.7 million resulting from various factors including SCA acquisition-related compensation costs of approximately $1.3 million and the inclusion of SCA operating costs of $1.9 million as well as higher headcount costs as we expand our administrative support functions. These increases were partially offset by decreases in various other costs.

Amortization of purchased intangibles for the three months ended October 2, 2020 increased by approximately $3.6 million as compared to the three months ended September 27, 2019. The increase is primarily due to the amortization of intangible assets obtained through our acquisition of SCA.

Income from operations


	For the three months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Income from operations	$	45.6	$	35.4	$	10.2	28.8	%

As a result of the factors discussed above, income from operations for the three months ended October 2, 2020 increased approximately $10.2 million, or 28.8%, compared to income from operations for the three months ended September 27, 2019.

Other expense, net


	For the three months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Other expense, net:
Interest expense	$	2.3	$	0.7	$	1.6	228.6	%
Other (income) expense	(0.2)		—		(0.2)		NA
Other expense, net	$	2.1	$	0.7	$	1.4	200.0	%

Other expense, net for the three months ended October 2, 2020 increased by $1.4 million to $2.1 million compared to $0.7 million for the three months ended September 27, 2019. The increase in other expense, net is primarily due to interest expense on additional borrowings in connection with our March 2020 acquisition of SCA.

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Income taxes


	For the three months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Provision for income taxes	$	5.4	$	4.5	$	0.9	20.0	%

The effective tax rates were 12.5% and 12.9% for the three months ended October 2, 2020 and September 27, 2019, respectively.

For the three months ended October 2, 2020, the difference between our effective tax rate of 12.5% and the 21% federal statutory rate resulted primarily from lower foreign tax rates, a lower tax rate on foreign derived intangible income, research and development credits, realization of foreign tax credits, and $3.1 million of excess tax benefit related to stock based compensation. These benefits were partially offset by state taxes, global low-tax intangible income tax and non-deductible expenses.

For the three months ended September 27, 2019, the difference between our effective tax rate of 12.9% and the 21% federal statutory rate resulted primarily from lower foreign tax rates, lower effective federal rates on foreign derived intangible income, research and development credits, and $1.9 million of excess benefits related to stock-based compensation. These benefits were partially offset by state taxes, foreign withholding taxes and the impact of non-deductible expenses.

The effective tax rate for the three months ended October 2, 2020 decreased as compared to the same period in 2019 primarily as a result of excess stock based compensation deductions, an increase in foreign derived intangible income, and realization of foreign tax credit, partially offset by an increase in global low-tax intangible income tax and nondeductible expenses.

Net income


	For the three months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Net income	$	38.0	$	30.2	$	7.8	25.8	%

As a result of the factors described above, our net income increased $7.8 million, or 25.8%, to $38.0 million in the three months ended October 2, 2020 from $30.2 million for the three months ended September 27, 2019.

Nine months ended October 2, 2020 compared to nine months ended September 27, 2019

Sales


	For the nine months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Powered Vehicle products	$	372.1	$	342.0	$	30.1	8.8	%
Specialty Sports products	256.1		223.1		33.0		14.8
Total sales	$	628.2	$	565.1	$	63.1	11.2	%

Total sales for the nine months ended October 2, 2020 increased approximately $63.1 million, or 11.2%, compared to the nine months ended September 27, 2019. Powered Vehicle product sales increased by $30.1 million, or 8.8%, primarily due to the SCA acquisition and strength in the aftermarket channel, partially offset by impacts of the COVID-19 pandemic on our OEM customers. Additionally, Specialty Sports product sales increased by $33.0 million, or 14.8%, primarily due to increased demand in both the OEM and aftermarket channels.

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Cost of sales


	For the nine months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Cost of sales	$	422.1	$	382.0	$	40.1	10.5	%

Cost of sales for the nine months ended October 2, 2020 increased approximately $40.1 million, or 10.5%, compared to the nine months ended September 27, 2019. The increase in cost of sales was primarily due to the 11.2% increase in sales during the same period.

For the nine months ended October 2, 2020, our gross margin increased 40 basis points to 32.8% compared to 32.4% for the nine months ended September 27, 2019. The increase in year-to-date gross margin was primarily due to the impact of the SCA acquisition and a change in product and channel mix partially offset by incremental cost due to government mandated closures in response to the COVID-19 pandemic.

Operating expenses


	For the nine months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Operating expenses:
Sales and marketing	$	38.3	$	32.2	$	6.1	18.9	%
Research and development	24.8		23.4		1.4		6.0
General and administrative	53.4		36.1		17.3		47.9
Amortization of purchased intangibles	13.1		4.7		8.4		178.7

Total operating expenses	$	129.6	$	96.4	$	33.2	34.4	%

Total operating expenses for the nine months ended October 2, 2020 were $129.6 million compared to $96.4 million for the nine months ended September 27, 2019. When expressed as a percentage of total sales, total operating expenses increased to 20.6% of total sales for the nine months ended October 2, 2020 compared to 17.1% of total sales in the nine months ended September 27, 2019. The increase in operating expenses is primarily due to SCA related costs, including acquisition-related costs, operating costs and amortization expense, partially offset by reductions in various other expenses.

Within operating expenses, our sales and marketing expenses increased approximately $6.1 million primarily due to costs related to SCA of $5.8 million and higher personnel and commission expenses of $2.5 million, which were partially offset by reduced spending on trade shows and race events. Research and development costs increased approximately $1.4 million primarily due to personnel investments and facility-related expense related to the Company's expanding Technology Center in Georgia, partially offset by reductions in other various expenses. General and administrative expenses increased by approximately $17.3 million resulting from various factors including acquisition-related costs of approximately $12.9 million and the inclusion of SCA operating costs of $4.0 million, as well as increases in various other costs as the Company expands its administrative support functions.

Amortization of purchased intangibles for the nine months ended October 2, 2020 increased by approximately $8.4 million as compared to the nine months ended September 27, 2019. The increase is primarily due to the amortization of intangible assets obtained through our acquisition of SCA.

Income from operations


	For the nine months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Income from operations	$	76.5	$	86.7	$	(10.2)	(11.8)	%

As a result of the factors discussed above, income from operations for the nine months ended October 2, 2020 decreased approximately $10.2 million, or 11.8%, compared to income from operations for the nine months ended September 27, 2019.

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Other expense, net


	For the nine months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Other expense, net:
Interest expense	$	7.0	$	2.6	$	4.4	169.2	%
Other (income) expense	(0.1)		0.5		(0.6)		(120.0)
Other expense, net	$	6.9	$	3.1	$	3.8	122.6	%

Other expense, net for the nine months ended October 2, 2020 increased by $3.8 million to $6.9 million compared to $3.1 million for the nine months ended September 27, 2019. The increase in other expense, net is primarily due to additional interest expense incurred on additional borrowings in connection with the Company's acquisition of SCA in March 2020.

Income taxes


	For the nine months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Provision for income taxes	$	9.6	$	11.6	$	(2.0)	(17.2)	%

The effective tax rates were 13.7% and 13.9% for the nine months ended October 2, 2020 and September 27, 2019, respectively.

For the nine months ended October 2, 2020, the difference between our effective tax rate of 13.7% and the 21% federal statutory rate resulted primarily from lower foreign tax rates, a lower tax rate on foreign derived intangible income, research and development credits, a negotiated reduction of Switzerland withholding tax on prior year earnings, realization of foreign tax credits, and $3.8 million from excess tax benefits related to stock-based compensation. These benefits were partially offset by state taxes, global low-tax intangible income tax and non-deductible expenses.

For the nine months ended September 27, 2019, the difference between our effective tax rate of 13.9% and the 21% federal statutory rate resulted primarily from lower foreign tax rates, lower effective federal rates on foreign derived intangible income, research and development credits, and $5.5 million of excess benefits related to stock-based compensation. These benefits were partially offset by state taxes, foreign withholding taxes and the impact of non-deductible expenses.

The effective tax rate for the nine months ended October 2, 2020 decreased as compared to the same period in 2019 primarily as a result of an increase in foreign derived intangible income, realization of foreign tax credits, and a negotiated reduction of Switzerland withholding tax on prior year earnings partially offset by a decrease in excess stock based compensation deductions and increase in nondeductible expenses.

Net income


	For the nine months ended
(in millions)	October 2, 2020		September 27, 2019		Change ($)		Change (%)
Net income	$	60.0	$	71.9	$	(11.9)	(16.6)	%

As a result of the factors described above, our net income decreased $11.9 million, or 16.6%, to $60.0 million in the nine months ended October 2, 2020 from $71.9 million for the nine months ended September 27, 2019.

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Liquidity and Capital Resources

Our primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. Historically, we have generally financed our liquidity needs with operating cash flows, borrowings under our credit facilities and the issuance of common stock. These sources of liquidity may be impacted by various factors, including demand for our products, impacts of the COVID-19 pandemic, investments made by us in acquired businesses, our plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology. A summary of our operating, investing and financing activities are shown in the following table:


	For the nine months ended
(in thousands)	October 2, 2020		September 27, 2019
Net cash provided by operating activities	$	99,801	$	30,924
Net cash used in investing activities	(375,409)		(32,707)
Net cash provided by financing activities	510,019		5,841
Effect of exchange rate changes on cash and cash equivalents	99		(37)
Change in cash and cash equivalents	$	234,510	$	4,021

Operating activities

Cash provided by operating activities consists of net income, adjusted for certain non-cash items, primarily depreciation and amortization, stock-based compensation, changes in deferred income taxes and uncertain tax positions, and net cash invested in working capital.

In the nine months ended October 2, 2020, net cash provided by operating activities was $99.8 million and consisted of net income of $60.0 million, plus non-cash items totaling $20.4 million and less changes in operating assets and liabilities totaling $19.5 million. Non-cash items and other adjustments consisted of depreciation and amortization of $24.8 million, stock-based compensation of $6.4 million, and amortization of loan fees of $1.1 million, offset by a $11.9 million change in deferred taxes and uncertain tax positions.

Our investment in operating assets and liabilities is a result of increased prepaids and other current assets of $14.7 million, accounts receivable of $12.6 million, and inventory of $0.6 million, offset by increases in accounts payable of $36.7 million, increases in accrued expenses of $7.5 million, and income taxes of $3.2 million. The change in prepaids and other current assets is primarily due to deposits on chassis and acquisition-related compensation payments held in escrow, both related to our recently acquired SCA subsidiary. The changes in inventory, accounts receivable, and accounts payable reflect seasonality as well as timing of vendor payments. The changes in accrued expenses and income taxes are primarily attributable to the timing of rebate payments and the timing of tax payments, respectively.

In the nine months ended September 27, 2019, net cash provided by operating activities was $30.9 million and consisted of net income of $71.9 million, plus non-cash items totaling $13.0 million and less changes in operating assets and liabilities totaling $54.0 million. Non-cash items and other adjustments consisted of depreciation and amortization of $13.0 million, stock-based compensation of $5.0 million, and loss on the extinguishment of debt of $0.5 million, offset by a $5.5 million change in deferred taxes and uncertain tax positions. Our investment in operating assets and liabilities is a result of increases in accounts receivable of $28.3 million, inventory of $20.3 million, and prepaids and other assets of $7.6 million, and decreases in accrued expenses of $0.2 million and income taxes of $7.4 million, partially offset by an increase in accounts payable of $9.8 million. The changes in inventory, accounts payable, accrued expenses, accounts receivable and prepaids and other assets are primarily due to seasonal impacts on working capital. The decrease in income taxes payable is primarily due to the timing of estimated tax payments and refunds.

Investing activities

Cash used in investing activities primarily relates to strategic acquisitions of businesses and other assets and investments in our manufacturing and general infrastructure through the procurement of property and equipment.

In the nine months ended October 2, 2020 and September 27, 2019, net cash used in investing activities was $375.4 million and $32.7 million, respectively. Investing activities for the nine months ended October 2, 2020 consisted of $329.2 million of cash consideration for our acquisition of SCA, $46.0 million of property and equipment additions and $0.3 million of acquisition of other assets. Our investing activities for the nine months ended September 27, 2019 consisted of $25.9 million of property and equipment additions and $6.8 million of cash consideration for our acquisition of Ridetech.

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Financing activities

Cash provided by financing activities primarily relates to various forms of debt and equity instruments used to finance our business.

In the nine months ended October 2, 2020, net cash provided by financing activities was $510.0 million, which consisted of $392.4 million in proceeds, net of issuance costs, from our First Amended and Restated Credit Facility, which was amended and restated in connection with our acquisition of SCA, partially offset by net payments of $68.0 million on our line of credit and payments on our term debt of $5.0 million. In addition, we received $198.2 million from our June 2020 issuance of common stock. These inflows were partially offset by $4.6 million to repurchase shares of our common stock as part of our stock-based compensation program and $3.0 million in installment payments related to the purchase of the Tuscany non-controlling interest. Refer to Note 9 - Commitments and Contingencies for additional details.

In the nine months ended September 27, 2019, net cash provided by financing activities was $5.8 million, which consisted of $67.5 million in proceeds from our line of credit, partially offset by $52.1 million paid on our line of credit and $2.8 million paid on our term debt. In addition, we paid $6.8 million to repurchase shares of our common stock, net of proceeds from the exercise of stock options, as part of our stock-based compensation program.

Former Second Amended and Restated Credit Facility

First Amended and Restated Credit Facility

In June 2019, the Company entered into a credit facility with Bank of America and other named lenders, which was amended and restated on March 11, 2020 and June 19, 2020 (as most recently amended and restated as the "First Amended and Restated Credit Facility"). The First Amended and Restated Credit Facility, which matures on March 11, 2025, provides a senior secured revolving line of credit with a borrowing capacity of $250.0 million and a term loan of $400.0 million. The term loan is subject to quarterly amortization payments.

The Company paid $7.6 million in debt issuance costs, of which $6.5 million were allocated to the term debt and $1.2 million were allocated to the line of credit. Additionally, the Company had $0.4 million of remaining unamortized debt issuance costs. The Company expensed $0.3 million of the remaining unamortized debt issuance costs, which are included in other expense, net on the condensed consolidated statements of income for the six months ended October 2, 2020 and the remaining $0.2 million were allocated to the line of credit. All loan fees allocated to the term debt will be amortized using the interest method and all loan fees allocated to the line of credit will be amortized on a straight-line basis over the term of the First Amended and Restated Credit Facility.

The First Amended and Restated Credit Facility provides for interest at a rate either based on the London Interbank Offered Rate, or LIBOR, plus a margin ranging from 1.00% to 2.25%, or based on the base rate offered by Bank of America plus a margin ranging from 0.00% to 1.25% with a floor rate of 0.50%. At October 2, 2020, the one-month LIBOR and prime rates were 0.14% and 3.25%, respectively. At October 2, 2020, our weighted-average interest rate on outstanding borrowing was 1.87%. The First Amended and Restated Credit Facility is secured by substantially all of the Company’s assets, restricts the Company's ability to make certain payments and engage in certain transactions, and requires that the Company satisfy customary financial ratios. The Company was in compliance with the covenants as of October 2, 2020.

Hall County, Georgia Project - Phase 1

As previously announced on October 31, 2018, the Company is expanding its manufacturing and operations capacity and relocating the Company’s headquarters to Hall County, Georgia. The Company plans to invest approximately $55.9 million in capital expenditures and employ up to 800 personnel over the next five years, dependent on market and general economic conditions in Georgia. The first phase of the project was completed in August 2020 at a cost of approximately $47.3 million. The Company currently estimates that the second phase of the project will be completed in late 2021. The amount of any such capital expenditures is subject to change depending on the circumstances and the scope of the project.

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Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

Inflation

Historically, inflation has not had a material effect on our results of operations. However, significant increases in inflation, particularly those related to wages and increases in the cost of raw materials, could have an adverse impact on our business, financial condition and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are subject to the risk of fluctuating interest rates in the normal course of business. Our major market risk relates to our secured debt. Substantially all of our assets secure our revolving credit facility and term loan. The interest rates applicable to our revolving credit facility and term loans fluctuate with the Bank of America prime rate and LIBOR rates. There was no outstanding amount in borrowings under our revolving credit facility and $395.0 million outstanding on our term loans as of October 2, 2020. See Note 8 - Debt for additional information regarding our revolving credit facility and term loan.

During the third quarter of fiscal year 2020, we entered into an interest rate swap contract with a fixed notional amount of $200.0 million through maturity related to the borrowings outstanding under our term debt. Through the use of the interest rate swap, we fixed the basis on which we pay interest on approximately 50% of our variable rate debt. We use derivative instruments solely to reduce the financial impact of these risks and do not use derivative instruments for speculative purposes. Refer to Note 11 – Fair Value Measurements and Financial Instruments for further details of this instrument.

Aside from the above, there have been no material changes to the disclosures discussed in the section “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended January 3, 2020, as filed with the SEC on March 3, 2020.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management, under the direction and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of October 2, 2020. Based on the evaluation of our disclosure controls and procedures as of October 2, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Interim Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

A lawsuit was filed on December 17, 2015 by SRAM Corporation (“SRAM”) in the U.S. District Court, Northern District of Illinois, against the Company’s wholly-owned subsidiary, RFE Canada Holding Corp. (“RFE Canada”). The lawsuit alleges patent infringement of U.S. Patent number 9,182,027 ("027 Patent") and violation of the Lanham Act. SRAM filed a second lawsuit in the same court against RFE Canada on May 16, 2016, alleging patent infringement of U.S Patent number 9,291,250 ("'250 Patent"). The Company believes that the lawsuits are without merit and intends vigorously to defend itself. As such, the Company has filed, before the U. S. Patent and Trademark Appeals Board ("PTAB"), for Interparties Reviews ("IPR") of the '027 Patent and separately the same for the '250 Patent. In April 2018, the PTAB issued opinions in the ‘027 Patent petition cases stating that the Company has not shown the claims of the ‘027 Patent to be obvious. Regarding the PTAB ‘027 opinions, the Company has filed an Appeal to the Court of Appeals for the Federal Circuit ("CAFC"). The CAFC found in favor of the Company and has vacated and remanded all of the PTAB findings with the exception of their finding that the ‘027 patent met the prima facia test for obviousness, which was affirmed. The CAFC has declined to rehear the case and has issued the final remand order sending the case back to the PTAB. SRAM filed ‘027 appeal cert before the Supreme Court of the United States, cert was denied and that case is before the PTAB on remand. The PTAB has issued an opinion in the ‘250 Patent case stating that the Company has not shown the claims of the ‘250 Patent to be obvious. The Company has appealed that PTAB opinion to the CAFC and the CAFC has affirmed the PTAB opinion.

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ITEM 1A. RISK FACTORS

Our business, financial condition, operating results and prospects could be materially and adversely affected by various risks and uncertainties that are described herein. In addition to the risks and uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, you should carefully consider the risks and uncertainties described below. If any of these risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline.

Risks related to our business

Our business, financial condition and results of operations have been and may continue to be adversely affected by global public health epidemics or pandemics, including the recent COVID-19 pandemic.

We face various risks related to public health issues, including epidemics, pandemics, and other outbreaks, including the recent coronavirus (“COVID-19”) pandemic. The global outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020. The impact of the COVID-19 pandemic, including changes in consumer behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.

These government-mandated closures, “shelter-in-place” directives, or an outbreak among, or quarantine of, the employees in any of our facilities, have caused and could continue cause significant interruptions to, or temporary closures of our operations. These impacts include, but are not limited to:

•Significant reductions in demand or significant future volatility in demand for one or more of our products, which may be caused by, among other things: the temporary inability of consumers to purchase our products due to illness, quarantine or other travel restrictions, store closures, or financial hardship, shifts in demand away from one or more of our more discretionary or higher priced products, supply chain and shipping constraints, reduced options for marketing and promotion of products or other restrictions in connection with the COVID-19 pandemic; if prolonged, such impacts can further increase the difficulty of operating our business, including accurately planning and forecasting, planning for operations and may adversely impact our results;

•Inability to meet our current or future demand due to disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements such as raw materials, truck chassis, or other components, transportation, workforce, or other manufacturing and distribution capability;

•Failure of third parties on which we rely, including our suppliers, contract manufacturers, distributors, contractors, commercial banks, and external business partners, to meet their obligations to the Company or to timely meet those obligations, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties and may adversely impact our operations;

•Significant changes in the political conditions in markets in which we manufacture, sell or distribute our products, including additional or expanded quarantines, governmental or regulatory actions, closures or other restrictions that further limit or close our operating and manufacturing facilities, restrict our employees’ ability to travel or perform necessary business functions, restrict or prevent consumers from having access to our products, or otherwise prevent our third-party partners, dealers, suppliers, or customers from sufficiently staffing operations, including operations necessary for the production, distribution, sale, and support of our products, which could adversely impact our results;

•Increased difficulty in determining the fair value of the Company’s goodwill and other assets for accounting purposes given the level of judgment and estimation that is inherently higher in the current environment considering the uncertainty created by the COVID-19 pandemic, which could result in estimates and assumptions made in valuing goodwill and other Company assets proving to be inaccurate in the future.

These impacts have had and could continue to have a negative effect on our business, financial condition, results of operations and cash flows, as well as the trading price of our securities. Furthermore, the COVID-19 pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates, interest rates, and liquidity. The recent volatility in capital markets has also increased the cost of capital and adversely impacted access to capital.

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We have modified, and might further modify, our business practices in response to the COVID-19 pandemic, related third-party responses, including from government authorities and our suppliers, customers and distributors, and the economic and social ramifications of the disease and societal responses across the markets in which the Company operates. Despite our efforts to manage and remedy these impacts to the Company, the ultimate impact and the extent to which the COVID-19 pandemic will continue to affect our business, results of operation and financial condition is difficult to predict and depends on numerous evolving factors outside our control including: the duration and scope of the pandemic; government, social, business and other actions that have been and will be taken in response to the pandemic; and the effect of the pandemic on short- and long-term general economic conditions.

If we are unable to continue to enhance existing products and develop, manufacture and market new products that respond to consumer needs and preferences and achieve market acceptance, we may experience a decrease in demand for our products, and our business and financial results could suffer.

Our growth strategy involves the continuous development of innovative performance-defining products. We may not be able to compete as effectively with our competitors, and ultimately satisfy the needs and preferences of our customers and the end users of our products, unless we can continue to enhance existing products and develop new, innovative products in the global markets in which we compete. In addition, we must continuously compete for not only end users who purchase our products through the dealers and distributors who are our customers, but also for the OEMs, which incorporate our products into their bikes and powered vehicles. These OEMs regularly evaluate our products against those of our competitors to determine if they are allowing the OEMs to achieve higher sales and market share on a cost-effective basis. Should one or more of our OEM customers determine that they could achieve overall better financial results by incorporating a competitor’s new or existing product, they would likely do so, which could harm our business, financial condition or results of operations.

Product development requires significant financial, technological and other resources. While we expended approximately $31.8 million, $25.8 million, and $20.2 million for our research and development efforts in 2019, 2018 and 2017, respectively, there can be no assurance that this level of investment in research and development will be sufficient in the future to maintain our competitive advantage in product innovation, which could cause our business, financial condition or results of operations to suffer.

Product improvements and new product introductions require significant planning, design, development and testing at the technological, product and manufacturing process levels, and we may experience unanticipated delays in our introduction of product improvements or new products. Our competitors’ new products may beat our products to market, be more effective and/or less expensive than our products, obtain better market acceptance or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful sales or profits for us relative to our expectations. In addition, one of our competitors could develop an unforeseen and entirely new product or technology that renders our products less desirable or obsolete, which could negatively affect our business, financial condition or results of operations.

We face intense competition in all product lines, including from some competitors that may have greater financial and marketing resources. Failure to compete effectively against competitors would negatively impact our business and operating results.

The industries in which we operate are highly competitive. We compete with a number of other manufacturers that produce and sell performance-defining products to OEMs and aftermarket dealers and distributors, including OEMs that produce their own lines of products for their own use. Our continued success depends on our ability to continue to compete effectively against our competitors, some of which have significantly greater financial, marketing and other resources than we have. In addition, several of our competitors offer broader product lines to OEMs, which they may sell in connection with suspension products as part of a package offering. In the future, our competitors may be able to maintain and grow brand strength and market share more effectively or quickly than we do by anticipating the course of market developments more accurately than we do, developing products that are superior to our products, creating manufacturing or distribution capabilities that are superior to ours, producing similar products at a lower cost than we can or adapting more quickly than we do to new technologies or evolving regulatory, industry or customer requirements, among other possibilities. In addition, we may encounter increased competition if our current competitors broaden their product offerings by beginning to produce additional types of performance-defining products or through competitor consolidations. We could also face competition from well-capitalized entrants into these product markets, as well as aggressive pricing tactics by other manufacturers trying to gain market share. As a result, our products may not be able to compete successfully with our competitors’ products, which could negatively affect our business, financial condition or results of operations.

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Our business is sensitive to economic conditions that impact consumer spending. Our performance-defining products, and the bike and powered vehicles into which they are incorporated, are discretionary purchases and may be adversely impacted by changes in the economy.

Our business depends substantially on global economic and market conditions. In particular, we believe that currently a significant majority of the end users of our products live in the United States and countries in Europe. These areas have historically experienced recessions, disruptions in banking and/or financial systems, economic weakness and uncertainty. In addition, our products are recreational in nature and are generally discretionary purchases by consumers. Consumers are usually more willing to make discretionary purchases during periods of favorable general economic conditions and high consumer confidence. Discretionary spending may also be affected by many other factors, including interest rates, the availability of consumer credit, taxes and consumer confidence in future economic conditions. During periods of unfavorable economic conditions, or periods when other negative market factors exist, consumer discretionary spending is typically reduced, which in turn could reduce our product sales and have a negative effect on our business, financial condition or results of operations.

There could also be a number of secondary effects resulting from an economic downturn, such as insolvency of our suppliers resulting in product delays, an inability of our OEM and distributor and dealer customers to obtain credit to finance purchases of our products, customers delaying payment to us for the purchase of our products due to financial hardship or an increase in bad debt expense. Any of these effects could negatively affect our business, financial condition or results of operations.

If we are unable to maintain our premium brand image, our business may suffer.

OEMs dealers and distributors select our products in part because of the premium brand reputation we hold with them and our end users. Therefore, our success depends on our ability to maintain and build the image of our brands. We have focused on building our brands through producing products or acquiring businesses that produce products that we believe are innovative, high in performance and highly reliable. In addition, our brands benefit from our strong relationships with our OEM customers and dealers and distributors and through marketing programs aimed at bike and powered vehicle enthusiasts in various media and other channels. For example, we sponsor a number of professional athletes and professional race teams. In order to continue to enhance our brand image, we will need to maintain our position in the performance-defining products industry and continue to provide high-quality products and services. In addition, we will need to continue to invest in sponsorships, marketing and public relations.

There can be no assurance, however, that we will be able to maintain or enhance the strength of our brands in the future. Our brands could be adversely impacted by, among other things:

•failure to develop new products that are innovative, performance-oriented, and reliable;

•internal product quality control issues;

•product quality issues on the bikes and powered vehicles on which our products are installed;

•product recalls;

•high profile component failures (such as a component failure during a race on a mountain bike ridden by an athlete that we sponsor);

•negative publicity regarding our sponsored athletes;

•high profile injury or death to one of our sponsored athletes;

•inconsistent uses of our brand and our other intellectual property assets, as well as failure to protect our intellectual property; and

•changes in consumer trends and perceptions.

Any adverse impact on our brand could in turn negatively affect our business, financial condition or results of operations.

Our growth in the powered vehicle category is dependent upon our continued ability to expand our product sales into powered vehicles that require performance-defining products and the continued expansion of the market for these powered vehicles.

Our growth in the powered vehicle category is in part attributable to the expansion of the market for powered vehicles that require performance-defining products. Such market growth includes the creation of new classes of vehicles that can benefit from our products, such as trucks that are up-fitted with products to enhance their off-road capability, and our ability to create products for these vehicles. Additionally, with our acquisitions of SCA Performance and Tuscany, a growing portion of our sales are expected to be generated from providing up-fitting solutions. In the event these markets stopped expanding or contracted due to economic factors, changes in consumer preferences or other reasons, or we are unsuccessful in creating new products for these markets or other competitors successfully enter into these markets, we may fail to achieve future growth or our sales could decrease, and our business, financial condition or results of operations could be negatively affected.

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A significant portion of our sales are highly dependent on the demand for high-end bikes and a material decline in the demand for these bikes or their suspension components could have a material adverse effect on our business or results of operations.

During 2019, approximately 40% of our sales were generated from the sale of bike products. Part of our success has been attributable to the growth in the high-end bike industry, including increases in average retail sales prices, as better-performing product designs and technologies have been incorporated into these products. If the popularity of high-end or premium-priced bikes does not increase or declines, the number of bike enthusiasts seeking such bikes or premium-priced suspension products, wheels, cranks and other specialty components for their bikes does not increase or declines, or the average price point of these bikes declines, we may fail to achieve future growth or our sales could decrease, and our business, financial condition or results of operations could be negatively affected. In addition, if current bike enthusiasts stop purchasing our products due to changes in preferences, we may fail to achieve future growth or our sales could be decreased, and our business, financial condition or results of operations could be negatively affected.

Changes in our customer, channel and product mix could place demands that are more rigorous on our infrastructure and cause our profitability percentages to fluctuate.

We may experience changes in our customer, channel and product mix time to time as a result of changes in demands from existing customers due to shifts in their products and markets. Additionally, the Company may pursue new customers and markets. Such changes in customers, channel and product mix could place demands that are more rigorous on our infrastructure and supply chain and could result in changes to our profitability and profitability percentages. If customers begin to require more lower-margin products from us and fewer higher-margin products, or place demands on our performance that increase our costs, our business, results of operations and financial condition may suffer.

A disruption in the operations of our facilities, or delays in our planned expansion of certain facilities, could have a negative effect on our business, financial condition or results of operations.

During 2017, we completed the process of moving all of the manufacturing of our bike suspension component products to our facility in Taichung, Taiwan. In connection with this move, we are utilizing, and expect to continue to use, suppliers who are located closer to our facility in Taichung, Taiwan for a number of materials and components. With the transition of our entire bike suspension component manufacturing to Taichung, Taiwan, we converted the Watsonville manufacturing facility to be a powered vehicle suspension products manufacturing location exclusively.

In addition, we are currently constructing an approximately 336,000 square foot state-of-the-art facility in Hall County, Georgia to diversify our manufacturing platform and provide additional long-term capacity to support growth in our Powered Vehicles Group. In the future, we may move additional manufacturing operations as we re-balance existing facilities or expand to new manufacturing locations. As a result, we have incurred, and expect to continue to incur, costs associated with some duplication of facilities, equipment and personnel, the amount of which could vary materially from our projections. Significant construction delays or other unforeseen difficulties in our Georgia expansion project and future expansion projects, whatever the cause, could have a material adverse effect on our business, customer relationships, financial condition, operating results, cash flow, and liquidity.

Equipment failures, delays in deliveries or catastrophic loss at any of our facilities could lead to production or service disruptions, curtailments or shutdowns. In the event of a stoppage in production or a slowdown in production due to high employee turnover or a labor dispute at any of our facilities, even if only temporary, or if we experience delays as a result of events that are beyond our control, delivery times to our customers could be severely affected. If there was a manufacturing disruption in any of our manufacturing facilities, we might be unable to meet product delivery requirements and our business, financial condition or results of operations could be negatively affected, even if the disruption was covered in whole or in part by our business interruption insurance. Any significant delay in deliveries to our customers could lead to increased returns or cancellations, expose us to damage claims from our customers or damage our brand and, in turn, negatively affect our business, financial condition or results of operations.

Work stoppages or other disruptions at seaports could adversely affect our operating results.

A significant portion of our goods move through ports on the Western Coast of the United States. We have a global supply chain and we import products from our third-party vendors as well as our Fox Taiwan facility into the United States largely through ports on the West Coast. Dockworkers, none of whom are our employees, must offload freight from ships arriving at West Coast ports. We do not control the activities of these employees or seaports and we could suffer supply chain disruptions due to any disputes, capacity shortages, slowdowns or shutdowns that may occur, as was experienced in February 2015, in relation to certain West Coast ports. While the West Coast ports labor agreement has been extended until July 2022, the 2015 strike lasted longer than we forecasted, and any similar labor dispute in the future could potentially have a negative effect on both our financial condition and results of operations. Furthermore, the ongoing coronavirus pandemic has only increased uncertainty for global supply chains.

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Our business depends substantially on our ability to attract and retain experienced and qualified talent, including our senior management team.

We are dependent upon the contributions, talent and leadership of our senior management team, particularly our Chief Executive Officer, Michael C. Dennison. We do not have a "key person" life insurance policy on Mr. Dennison or any other key employees. We believe that the top ten members of our senior management team are key to establishing our focus and executing our corporate strategies as they have extensive knowledge of our systems and processes. Given our senior management team’s knowledge of our industry and the limited number of direct competitors in the industry, we believe that it could be difficult to find replacements should any of the members of our senior management team leave.

We could also be adversely affected if we fail to attract and retain talent throughout our organization. For instance, we rely on skilled and well-trained engineers for the design and production of our products, as well as in our research and development functions. Competition for such individuals is intense, particularly in California where several of our facilities are located. Our inability to attract or retain qualified employees in our design, production or research and development functions or elsewhere in our Company could result in diminished quality of our products and delinquent production schedules or impede our ability to develop new products. Our failure to adequately address any of these issues could have a material adverse effect on our business, operating results and financial condition.

We may not be able to sustain our past growth or successfully implement our growth strategy, which may have a negative effect on our business, financial condition or results of operations.

We grew our sales from approximately $619.2 million in 2018 to approximately $751.0 million in 2019. This growth rate may be unsustainable. Our future growth will depend upon various factors, including the strength of the image of our brands, our ability to continue to produce innovative performance-defining products, consumer acceptance of our products, competitive conditions in the marketplace, our ability to make strategic acquisitions, the growth in emerging markets for products requiring high-end suspension products and, in general, the continued growth of the high-end bike and powered vehicle markets into which we sell our products. Our beliefs regarding the future growth of markets for high-end suspension products are based largely on qualitative judgments and limited sources and may not be reliable. If we are unable to sustain our past growth or successfully implement our growth strategy, our business, financial condition or results of operations could be negatively affected.

The professional athletes and race teams who use our products are an important aspect of the image of our brands. The loss of the support of professional athletes for our products or the inability to attract new professional athletes may harm our business.

If current or future professional athletes and race teams do not use our products, our brands could lose value and our sales could decline. While our sponsorship agreements typically restrict our sponsored athletes and race teams from promoting, endorsing or using competitors’ products that compete directly within our product categories during the term of the sponsorship agreements, we do not typically have long-term contracts with any of the athletes or race teams whom we sponsor.

If we are unable to maintain our current relationships with these professional athletes and race teams, these professional athletes and race teams are no longer popular, our sponsored athletes and race teams fail to have success or we are unable to continue to attract the endorsement of new professional athletes and race teams in the future, the value of our brands and our sales could decline.

We depend on our relationships with dealers and distributors and their ability to sell and service our products. Any disruption in these relationships could harm our sales.

We sell our aftermarket products to dealers and distributors, and we depend on their willingness and ability to market and sell our products to consumers and provide customer and product service as needed. We also rely on our dealers and distributors to be knowledgeable about our products and their features. If we are not able to educate our dealers and distributors so that they may effectively sell our products as part of a positive buying experience, or if they fail to implement effective retail sales initiatives, focus selling efforts on our competitors’ products, reduce the quantity of our products that they sell or reduce their operations due to financial difficulties or otherwise, our brand and business could suffer.

We do not control our dealers or distributors and many of our contracts allow these entities to offer our competitors’ products. Our competitors may incentivize our dealers and distributors to favor their products. In addition, we do not have long-term contracts with a majority of our dealers and distributors, and our dealers and distributors are not obligated to purchase specified amounts of our products. In fact, the majority of our dealers and distributors buy from us on a purchase order basis. Consequently, with little or no notice, many of these dealers and distributors may terminate their relationships with us or materially reduce their purchases of our products. If we were to lose one or more of our dealers or distributors, we would need to obtain a new dealer or distributor to cover the particular location or product line, which may not be possible on favorable terms or at all.

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Alternatively, we could use our own sales force to replace such a dealer or distributor, but expanding our sales force into new locations takes a significant amount of time and resources and may not be successful. Further, many of our international distribution contracts contain exclusivity arrangements, which may prevent us from replacing or supplementing our current distributors under certain circumstances.

We are a supplier in the high-end bike and powered vehicles markets, and our business is dependent in large part on the orders we receive from our OEM customers and from their success.

As a supplier to OEM customers, we are dependent in large part on the success of the business of our OEM customers. Model year changes by our OEM customers or production disruptions or hiatuses may adversely impact our sales or cause our sales to vary from quarter to quarter. In addition, losses in market share individually or a decline in the overall market of our OEM customers or the discontinuance by our OEM customers of their products which incorporate our products could negatively impact our business, financial condition or results of operations.

A relatively small number of customers account for a substantial portion of our sales. The loss of all or a substantial portion of our sales to any of these customers, whether through the temporary or permanent discontinuation of their products which incorporate our products or otherwise, or the loss of market share by these customers could have a material adverse impact on us and our results of operations.

Sales attributable to our five largest OEM customers, which can vary from year to year, collectively accounted for approximately 32% of our sales in fiscal years 2019, 2018 and 2017. The loss of all or a substantial portion of our sales to any of these OEM customers, whether through the temporary or permanent discontinuation of their products which incorporate our products or otherwise, or the loss of market share by these customers could have a material adverse impact on our business, financial condition or results of operations.

In particular, sales to Ford, a powered vehicles OEM, accounted for approximately 11%, 8% and 8% in 2019, 2018 and 2017, respectively. In the event that Ford were to experience manufacturing or other problems, including disruptions related to COVID-19, or were to fail to pay us, it could have a material impact on our business, financial condition or results of operations.

Currency exchange rate fluctuations could impact gross margins and expenses.

Foreign currency fluctuations could in the future have an adverse effect on our business, financial condition or results of operations. We sell our products inside and outside of the United States primarily in U.S. Dollars and New Taiwan Dollars. However, some of the OEMs purchasing products from us sell their products in Europe and other foreign markets using the Euro and other foreign currencies. As a result, as the U.S. Dollar appreciates against these foreign currencies, our products will become relatively more expensive for these OEMs. Accordingly, competitive products that our OEM customers can purchase in other currencies may become more attractive and we could lose sales as these OEMs seek to replace our products with cheaper alternatives. In addition, should the U.S. Dollar depreciate significantly, this could have the effect of decreasing our gross margins and adversely impact our business, financial condition or results of operations.

With a majority of our manufacturing operations for our bike products occurring in Taiwan, a percentage of our sales and expenses are denominated in the New Taiwan Dollar. Should the New Taiwan Dollar appreciate against the U.S. Dollar, this could have the effect of decreasing our sales, increasing our expenses, and decreasing our profitability.

Additionally, certain of our operations take place in Canada and a percentage of our sales and expenses are denominated in Canadian Dollars. Our operating profitability could be negatively impacted as a result of changes in the exchange rate between the U.S. Dollar and the Canadian Dollar.

Our international operations are exposed to risks associated with conducting business globally.

As a result of our international presence, we are exposed to increased risks inherent in conducting business outside of the United States. In addition to foreign currency risks, these risks include:

•difficulty in transporting materials internationally, including labor disputes at West Coast ports, which handle a large amount of our products;

•increased difficulty in protecting our intellectual property rights and trade secrets;

•changes in tax laws and the interpretation of those laws;

•exposure to local economic conditions;

•unexpected government action or changes in legal or regulatory requirements;

•geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war and other political uncertainty;

•changes in tariffs, quotas, trade barriers and other similar restrictions on sales;

•the effects of any anti-American sentiments on our brands or sales of our products;

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•increased difficulty in ensuring compliance by employees, agents and contractors with our policies as well as with the laws of multiple jurisdictions, including but not limited to the U.S. Foreign Corrupt Practices Act, local international environmental, health and safety laws, and increasingly complex regulations relating to the conduct of international commerce;

•increased difficulty in controlling and monitoring foreign operations from the United States, including increased difficulty in identifying and recruiting qualified personnel for our foreign operations; and

•increased difficulty in staffing and managing foreign operations or international sales.

An adverse change in any of these conditions could have a negative effect upon our business, financial condition or results of operations.

U.S. policies related to global trade and tariffs could have a material adverse effect on our results of operations.

The current domestic and international political environment, including existing and potential changes to U.S. policies related to global trade and tariffs, have resulted in uncertainty surrounding the future state of the global economy. In 2018, the U.S. imposed tariffs of 25 percent on steel and 10 percent on aluminum, with only a handful of countries exempt from the increase. Since the beginning of the Trump Administration, the United States and China have imposed a variety of tariffs on most goods traded between the two countries, though a January 2020 trade deal has lessened the threat of further escalation. The United States has imposed tariffs on products from the European Union as a result of a dispute at the World Trade Organization. The European Union was recently authorized to impose similar tariffs on products from the United States. Plans by the United States to impose tariffs on global imports of automobiles and auto parts appear to be on hold for now. While we have limited exposure to implemented tariffs at this time, any expansion in the types of tariffs implemented has the potential to negatively impact our supply chain costs as well as the operating performance of our customers, thus negatively affecting our sales, gross margin and operating performance. Additionally, there is a risk that the U.S. tariffs on imports could be met with additional retaliatory tariffs on U.S. produced exports and that the broader trade uncertainty could intensify. This has the potential to significantly impact global trade and economic conditions in many of the regions where we do business and have a material adverse effect on our results of operations.

Our sales could be adversely impacted by the disruption or cessation of sales by other bike component manufacturers or if other bike component manufacturers enter into the specialty bike component market.

Most of the bikes incorporating our suspension products also use products and components manufactured by other bike component manufacturers. If such component manufacturers were to cease selling their products and components on a standalone basis, their sales are disrupted, or their competitive market position or reputation is diminished, customers could migrate to competitors that sell complementary bike products that we do not sell. Moreover, such bike component manufacturers could begin manufacturing bike suspension products, wheels, or cranks, or bundle their bike components with suspension products, wheels or cranks manufactured by competitors. If any of the foregoing were to occur, our sales could decrease and our business, financial condition or results of operations could suffer.

We have been and may become subject to intellectual property disputes that could cause us to incur significant costs or pay significant damages or that could prohibit us from selling our products.

As we develop new products or attempt to use our brands in connection with new products, we seek to avoid infringing the valid patents and other intellectual property rights of our competitors. However, from time to time, third parties have alleged, or may allege in the future, that our products and/or trademarks infringe upon their proprietary rights. We will evaluate any such claims and, where appropriate, may obtain or seek to obtain licenses or other business arrangements. To date, there have been no significant interruptions in our business as a result of any claims of infringement, and we do not hold patent infringement insurance. Any claim, regardless of its merit, could be expensive, time consuming to defend and distract management from our business. Moreover, if our products or brands are found to infringe third-party intellectual property rights, we may be unable to obtain a license to use such technology or associated intellectual property rights on acceptable terms. A court determination that our brands, products or manufacturing processes infringe the intellectual property rights of others could result in significant liability and/or require us to make material changes to our products and/or manufacturing processes or preclude our ability to use certain brands. In most circumstances, we are not indemnified for our use of a licensor’s intellectual property, if such intellectual property is found to be infringing. Any of the foregoing results could cause us to redesign our products or defend legal actions, which could cause us to incur substantial costs that could negatively affect our business, financial condition or results of operations.

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If we are unable to enforce our intellectual property rights, our reputation and sales could be adversely affected.

Intellectual property is an important component of our business. We patent our proprietary technologies related to vehicle suspension and other products in the U.S. and various foreign patent offices. Additionally, we have registered or have applied for trademarks and service marks with the United States Patent and Trademark Office and a number of foreign countries, including the marks FOX®, FOX RACING SHOX®, RACE FACE® and REDEFINE YOUR LIMITS®, to be used with certain goods and services. When appropriate, we may from time to time assert our rights against those who infringe on our patents, trademarks, trade dress, or other intellectual property. However, we may not be successful in enforcing our patents or asserting trademark, trade name or trade dress protection with respect to our brand names and our product designs, and third parties may seek to oppose or challenge our patents or trademark registrations. Further, these legal efforts may not be successful in reducing sales of suspension products by those infringing. In addition, our pending patent applications may not result in the issuance of patents, and even issued patents may be contested, circumvented or invalidated and may not provide us with proprietary protection or competitive advantages. If our efforts to develop and enforce our intellectual property are unsuccessful, or if a third party misappropriates our rights, this may adversely affect our business, financial condition or results of operations. Additionally, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States, and it may be more difficult for us to successfully challenge the use of our proprietary rights by other parties in these countries. Furthermore, other competitors may be able to successfully produce products that imitate certain of our products without infringing upon any of our patents, trademarks or trade dress. The failure to prevent or limit infringements and imitations could have a permanent negative impact on the pricing of our products or reduce our product sales and product margins, even if we are ultimately successful in limiting the distribution of a product that infringes our rights, which in turn may affect our business, financial condition or results of operations.

Although we enter into non-disclosure agreements with employees, OEMs, distributors and others to protect our confidential information and trade secrets, we may be unable to prevent such parties from breaching these agreements with us and using our intellectual property in an unauthorized manner. If our efforts to protect our intellectual property are unsuccessful, or if a third party misappropriates our rights, our business may be adversely affected. Defending our intellectual property rights can be very expensive and time consuming, and there is no assurance that we will be successful.

If we inaccurately forecast demand for our products, we may manufacture insufficient or excess quantities or our manufacturing costs could increase, which could adversely affect our business.

We plan our manufacturing capacity based upon the forecasted demand for our products. In the OEM channel, our forecasts are based in large part on the number of our product specifications for new bikes and powered vehicles and on projections from our OEM customers. In the aftermarket channel, our forecasts are based partially on discussions with our dealers and distributors as well as our own assessment of markets. If we incorrectly forecast demand, we may incur capacity issues in our manufacturing plant and supply chain, increased material costs, increased freight costs, additional overtime, and costs associated with excess inventory, all of which in turn adversely impact our cost of sales and our gross margin. Economic weakness and uncertainty in the United States, Europe and other countries may make accurate forecasting particularly challenging.

In the future, if actual demand for our products exceeds forecasted demand, the margins on our incremental sales in excess of anticipated sales may be lower due to temporary higher costs, which could result in a decrease in our overall margins. While we generally manufacture our products upon receipt of customer orders, if actual demand is less than the forecasted demand for our products and we have already manufactured the products or committed to purchase materials in support of forecasted demand, we could be forced to hold excess inventories. In short, either excess or insufficient production due to inaccurate forecasting could have a negative effect on our business, financial condition or results of operations.

Product recalls, and significant product repair and/or replacement due to product warranty costs and claims have had, and in the future, could have, a material adverse impact on our business.

Unless otherwise required by law, we generally provide a limited warranty for our products for a one or two-year period beginning on: (i) in the case of OEM sales, the date the bike or powered vehicle is purchased from an authorized OEM where our product is incorporated as original equipment on the purchased bike or powered vehicle; or (ii) in the case of aftermarket sales, the date the product is originally purchased from an authorized dealer. From time to time, our customers may negotiate for longer or different warranty coverage. In the ordinary course of business, we incur warranty costs and reserve against such costs in our financial statements. However, there is a risk that a product could underperform and require us to adjust our warranty reserves or incur costs in excess of these reserves, which could adversely affect our results of operations.

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If any of our products are or are alleged to be defective, we may be required to participate in a recall involving such products. Our products and items where our product is incorporated as original equipment on the purchased item are subject to regulation by various agencies, including the NHTSA, the CPSC and similar state and international regulatory authorities. We have had in the past, and may have in the future, recalls (both voluntary and involuntary) of our products or of items that incorporate our products. For example, in October 2016, we initiated a voluntary recall of certain bicycle Float X2 shock absorber products. Most recently, in May 2017, we announced a voluntary recall of approximately 2,500 of FOX's Harley Davidson specific aftermarket motorcycle shock absorbers. In the case of OEM sales, each manufacturer has its own practices regarding product recalls and other product liability actions that could involve its suppliers. Additionally, as suppliers become more integrally involved in the design process and assume a greater role in the overall system design, OEMs could potentially look to us to share in the cost if faced with recalls and product liability claims.

Although we carry product liability and product recall insurance, no assurance can be made that such insurance will provide adequate coverage against any potential claims, such insurance is available in the appropriate markets or that we will be able to obtain such insurance on acceptable terms in the future. In addition to the direct costs related to these or other recalls, our aftermarket and OEM sales could be adversely affected if we do not have a ready replacement product for such recalled products. Such recall events could also adversely affect our brand image and have a negative effect on our relationships with our OEMs, sponsored athletes and race teams, or otherwise have a negative effect on our business, financial condition or results of operations.

An adverse determination in any material product liability claim against us could adversely affect our operating results or financial condition.

The use of our products by consumers, often under extreme conditions, exposes us to risks associated with product liability claims. If our products are defective or used incorrectly by our customers, bodily injury, property damage or other injury, including death, may result in, and could give rise to product liability claims against us, which could adversely affect our brand image or reputation. We have encountered product liability claims in the past and carry product liability insurance to help protect us against the costs of such claims, although our insurance may not be sufficient to cover all losses. Any losses that we may suffer from any product liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business, financial condition or results of operations.

Our credit facility places operating restrictions on us and creates default risks.

Our credit facility contains covenants that place restrictions on our operating activities. These covenants, among other things, limit our ability to:

•pay dividends or make distributions to our stockholders or redeem our stock;

•incur additional indebtedness or permit additional encumbrances on our assets; and

•make acquisitions or complete mergers or sales of assets, or engage in new businesses.

These restrictions may interfere with our ability to obtain financing or to engage in other business activities, which may have a material adverse effect on our business, financial condition or results of operations.

If we are unable to comply with the covenants contained in our credit facility, it could constitute an event of default and our lenders could declare all borrowings outstanding, together with accrued and unpaid interest, to be immediately due and payable. If we are unable to repay or otherwise refinance these borrowings when due, our lenders could sell the collateral securing our credit facility, which constitutes substantially all of our assets.

We will continue to have the ability to incur debt and our levels of debt may affect our operations and our ability to pay the principal of and interest on our debt.

In the future, we and our subsidiaries may be able to incur substantial additional debt from amendments to our credit facility with Bank of America and other named lenders (the "First Amended and Restated Credit Facility"), additional lending sources subject to the restrictions contained in the First Amended and Restated Credit Facility, or because of certain debt instruments we may issue.

As of October 2, 2020, we had $389.2 million of indebtedness and $235.0 million in revolving credit available to borrow under the First Amended and Credit Facility. Our ability to borrow under the First Amended and Restated Credit Facility fluctuates from time to time due to, among other factors, our borrowings under the First Amended and Restated Credit Facility.

Our indebtedness could be costly or have adverse consequences, such as:

•requiring us to dedicate a substantial portion of our cash flows from operations to payments on our debt;

•limiting our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt obligations and other general corporate requirements;

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•making us more vulnerable to adverse conditions in the general economy or our industry and to fluctuations in our operating results, including affecting our ability to comply with and maintain any financial tests and ratios required under our indebtedness;

•limiting our flexibility to engage in certain transactions or to plan for, or react to, changes in our business and industry;

•putting us at a disadvantage compared to competitors that have less relative and/or less restrictive debt; and

•subjecting us to additional restrictive financial and other covenants.

If we incur substantial additional indebtedness in the future, these higher levels of indebtedness may affect our ability to pay the principal of and interest on existing indebtedness and our creditworthiness generally.

Our outstanding indebtedness under the First Amended and Restated Credit Facility bears interest at a variable rate, which makes us more vulnerable to increases in interest rates and could cause our interest expense to increase and decrease cash available for operations and other purposes.

Borrowings under our First Amended and Restated Credit Facility bear interest on a variable rate, which increases and decreases based upon changes in the underlying interest rate and/or our leverage ratio. Any such increases in the interest rate or increases of our borrowings under the First Amended and Restated Credit Facility will increase our interest expense. Recent interest rates in the United States have been at historically low levels, and any increase in these rates would increase our interest expense and reduce our funds available for operations and other purposes. Although from time to time we may enter into agreements to hedge a portion of our interest rate exposure, such as the interest rate swap entered into in August 2020, these agreements may be costly and may not protect against all interest rate fluctuations. Accordingly, we may experience material increases in our interest expense as a result of increases in interest rate levels generally. Refer to Note 10- Derivatives and Hedging for additional information regarding the interest swap arrangement.

As of October 2, 2020, we had $395.0 million of indebtedness outstanding under the First Amended and Restated Credit Facility. Based on the $195.0 million of variable interest rate indebtedness that was outstanding as of October 2, 2020, after giving effect to our interest rate swap, a hypothetical 100 basis point increase in the interest rate would have resulted in an approximately $0.5 million increase in interest expense for the three months ended October 2, 2020. A hypothetical 100 basis point decrease in the interest rate would not impact interest expense given that the current borrowing rate reflects the floor rate of 0.5%.

We may incur losses on interest rate swap and hedging arrangement

We may periodically enter into agreements to reduce the risks associated with increases in interest rates, such as our August 2020 interest rate swap agreement. Although these agreements may partially protect against rising interest rates, they also may reduce the benefits to us if interest rates decline.

Changes in tax laws and regulations or other factors could cause our income tax obligations to increase, potentially reducing our net income and adversely affecting our cash flows.

We are subject to income tax requirements in various jurisdictions in the U.S and internationally. In preparing our financial statements, we provide for income taxes based on current tax laws and regulations and the estimated taxable income within each of these jurisdictions. Our income tax obligations may be higher due to numerous factors. Changes to tax laws or interpretations, modifications to the U.S. tax reform enacted in December 2017, revisions to estimates regarding our ability to utilize foreign tax credits, increases in applicable tax rates, and actions by tax authorities in jurisdictions in which we operate could have a material impact on our net income and cash flows.

We are subject to certain risks in our manufacturing and in the testing of our products.

As of October 2, 2020, we employed approximately 2,930 full-time employees worldwide, a large percentage of which work at our manufacturing facilities. Our business involves complex manufacturing processes that can be inherently dangerous. Although we employ safety procedures in the design and operation of our facilities, there is a risk that an accident or death could occur in one of our facilities. In addition, prior to the introduction of new products, our employees test the products under rigorous conditions, which involve the risk of injury or death. Any accident could result in manufacturing or product delays, which could negatively affect our business, financial condition or results of operations. The outcome of litigation is difficult to assess or quantify and the cost to defend litigation can be significant. As a result, the costs to defend any action or the potential liability resulting from any such accident or death or arising out of any other litigation, and any negative publicity associated therewith, could have a negative effect on our business, financial condition or results of operations.

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We are subject to extensive United States federal and state, foreign and international safety, environmental, employment practices and other government regulations that may require us to incur expenses or modify product offerings in order to maintain compliance with such regulation, which could have a negative effect on our business and results of operations.

We are subject to extensive laws and regulations relating to safety, environmental, and other laws and regulations promulgated by the United States federal and state governments, as well as foreign and international regulatory authorities. Although we believe that our products, policies and processes comply with applicable safety, environmental, and other standards and related regulations, future regulations may require additional safety standards that would require additional expenses and/or modification of product offerings in order to maintain such compliance. Failure to comply with applicable regulations could result in fines, increased expenses to modify our products and harm to our reputation, all of which could have an adverse effect on our business, financial condition or results of operations.

Moreover, certain of our product offerings require us to comply with the rules and regulations of various standards of standard-setting organizations, such as the CPSC, the NHTSA, and the European Committee for Standardization ("CEN"). Failure to comply with the requirements of such organizations could result in the loss of certain customer contracts, fines and penalties, or both, which could have an adverse effect on our business, financial condition or results of operations.

Unpredictability in the adoption, implementation and enforcement of increasingly stringent emission standards by multiple jurisdictions could adversely affect our business.

Certain of our products are subject to extensive statutory and regulatory requirements governing emission and noise, including standards imposed by the EPA, the EU, state regulatory agencies (such as the CARB) and other regulatory agencies around the world. We have made, and continue to make, capital and research expenditures to ensure our certain of our products comply with these emission standards. Developing products to meet numerous changing government regulatory requirements, with different implementation timelines and emission requirements, makes developing products efficiently for multiple markets complicated and could result in additional costs that may be difficult to recover in certain markets. In some cases, we may be required to develop new products to comply with new regulations, particularly those relating to air emissions. The successful development and introduction of new and enhanced products in order to comply with new regulatory requirements are subject to other risks, such as delays in product development, cost over-runs and unanticipated technical and manufacturing difficulties.

In addition to these risks, the nature and timing of government implementation and enforcement of increasingly stringent emission standards is unpredictable. Any delays in implementation or enforcement could result in the products we developed or modified to comply with these standards becoming unnecessary or becoming necessary later than expected, which in turn could delay, diminish or eliminate the expected return and may adversely affect our business.

Increasing focus on environmental, social and governance responsibility may impose additional costs on us and expose us to new risks.

Regulators, stockholders and other interested constituencies have focused increasingly on the environmental, social and governance practices of companies. Our customers may require us to implement environmental, social or governance responsibility procedures or standards before they will continue to do business with us. Additionally, we may face reputational challenges in the event our environmental, social or governance responsibility procedures or standards do not meet the standards set by certain constituencies. The occurrence of any of the foregoing could have a material adverse effect on the price of our shares and our business, financial condition and results of operations.

Climate change and related regulatory responses may adversely impact our business.

There is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. Changes in weather patterns and an increased frequency, intensity and duration of extreme weather conditions could, among other things, disrupt the operation of our supply chain, since our bike suspension manufacturing is entirely located in Taiwan, which is prone to typhoons, increase our product costs and impact the types and amounts of products that consumers purchase, since the majority of our products are used in outdoor recreation. As a result, the effects of climate change could have a long-term adverse impact on our business and results of operations.

In many of the countries in which we operate, governmental bodies are increasingly enacting legislation and regulations in response to the potential impacts of climate change. These laws and regulations, which may be mandatory, have the potential to impact our operations directly or indirectly as a result of required compliance by our suppliers and us. In addition, we may choose to take voluntary steps to mitigate our impact on climate change. As a result, we may experience increases in energy, production, transportation and raw material costs, capital expenditures or insurance premiums and deductibles. Inconsistency of legislation and regulations among jurisdictions may also affect the costs of compliance with such laws and regulations. Any assessment of the potential impact of future climate change legislation, regulations or industry standards, as well as any international treaties and accords, is uncertain given the scope of potential regulatory change in the countries in which we operate.

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We are subject to employment practice laws and regulations, and, as such, are exposed to litigation risks.

We are subject to extensive laws and regulations relating employment practices, including wage and hour, wrongful termination and discrimination. Complying with such laws and regulations, and defending against allegations of our failure to comply (including meritless allegations), can be expensive and time consuming. We believe that our policies and processes comply with applicable employment standards and related regulations; however, we are subject to risks of litigation by employees and others that might involve allegations of illegal, unfair or inconsistent employment practices, including wage and hour violations and employment discrimination, misclassification of independent contractors as employees, wrongful termination and other concerns, which could require additional expenditures.

We are subject to environmental laws and regulation and potential exposure for environmental costs and liabilities.

Our operations, facilities and properties are subject to a variety of foreign, federal, state and local laws and regulations relating to health, safety and the protection of the environment. These environmental laws and regulations include those relating to the use, generation, storage, handling, transportation, treatment and disposal of solid and hazardous materials and wastes, emissions to air, discharges to waters and the investigation and remediation of contamination. Many of these laws impose strict, retroactive, joint and several liability upon owners and operators of properties, including with respect to environmental matters that occurred prior to the time the party became an owner or operator. In addition, we may have liability with respect to third party sites to which we send waste for disposal. Failure to comply with such laws and regulations can result in significant fines, penalties, costs, liabilities or restrictions on operations that could negatively affect our business, financial condition or results of operations. From time to time, we have been involved in administrative or legal proceedings relating to environmental, health or safety matters and have incurred expenditures relating to such matters in the past.

We believe that our operations are in substantial compliance with applicable environmental laws and regulations. However, additional environmental issues relating to presently known or unknown matters could give rise to currently unanticipated investigation, assessment or expenditures. Compliance with laws or regulations that are more stringent, as well as different interpretations of existing laws, more vigorous enforcement by regulators or unanticipated events, could require additional expenditures that may materially affect our business, financial condition or results of operations.

Federal, state, local, foreign and international laws and regulations relating to land-use, and noise and air pollution may have a negative impact on our future sales and results of operations.

The products in our powered vehicles line are used in vehicles that are subject to numerous federal, state, local, foreign and international laws and regulations relating to noise and air pollution. Powered vehicles, and even bikes, have become subject to laws and regulations prohibiting their use on certain lands and trails. For example, in San Mateo County, California, mountain bikes are not allowed on county trails, and ATV and Side-by-Side riding is not allowed in Zion National Park, among many other national and state parks. In addition, recreational snowmobiling has been restricted in some national parks and federal lands in Canada, the United States and other countries. If more of these laws and regulations are passed and the users of our products lose convenient locations to ride their mountain bikes and powered vehicles, our sales could decrease and our business, financial condition or results of operations could suffer.

Fuel shortages, or high prices for fuel, could have a negative effect on the use of powered vehicles that use our products.

Gasoline or diesel fuel is required for the operation of the powered vehicles that use our products. There can be no assurance that the supply of these fuels will continue uninterrupted, that rationing will not be imposed or that the price of or tax on these petroleum products will not significantly increase in the future. Future shortages of gasoline and diesel fuel and substantial increases in the price of fuel could have a material adverse effect on our powered vehicle product category, which could have a negative effect on our business, financial condition or results of operations.

We do not control our suppliers, OEMs, other customers or partners, or require them to comply with a formal code of conduct, and actions that they might take could harm our reputation and sales.

We do not control our suppliers, OEMs, other customers or partners, or their labor, environmental or other practices. A violation of labor, environmental, intellectual property or other laws by our suppliers, OEMs, other customers or partners, or a failure of these parties to follow generally accepted ethical business practices, could create negative publicity and harm our reputation. In addition, we may be required to seek alternative suppliers or partners if these violations or failures were to occur. We do not inspect or audit compliance of our suppliers, OEMs, customers or partners with these laws or practices, and we do not require our suppliers, OEMs, customers or partners to comply with a formal code of conduct. Any conduct or actions that our suppliers could take could reduce demand for our products, harm our ability to meet demand or harm our reputation, brand image, business, financial condition or results of operations.

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We depend on a limited number of suppliers for our materials and component parts for some of our products, and the loss of any of these suppliers or an increase in cost of raw materials could harm our business.

We depend on a limited number of suppliers for certain components. If our current suppliers, in particular the minority of those that are "single-source" suppliers, are unable to timely fulfill orders, or if we are required to transition to other suppliers, we could experience significant production delays or disruption to our business. We define a single-source supplier as a supplier from which we purchase all of a particular raw material or input used in our manufacturing operations, although other suppliers are available from which to purchase the same raw material or input or an equivalent substitute. We do not maintain long-term supply contracts with any of our suppliers and instead purchase these components on a purchase order basis. As a result, we cannot force any supplier to sell us the necessary components we use in creating our products and we could face significant supply disruptions should they refuse to do so. As the majority of our bike component manufacturing occurs in Taiwan, we could experience difficulties locating qualified suppliers geographically located closer to these facilities. Furthermore, such suppliers could experience difficulties in providing us with some or all of the materials we require, which could result in disruptions in our manufacturing operations. Our business, financial condition or results of operations could be materially and adversely impacted if we experience difficulties with our suppliers or manufacturing delays caused by our suppliers, whether in connection with our manufacturing operations in the United States or in Taiwan.

We also purchase various raw materials in order to manufacture our products. The main commodity items purchased for production include aluminum, magnesium, steel and carbon. Historically, price fluctuations for these components and raw materials have not had a material impact on our business. In the future, however, if we experience material increases in the price of components or raw materials and are unable to pass on those increases to our customers, or there are shortages in the availability of such component parts or raw materials, it could negatively affect our business, financial condition or results of operations.

In addition to our various single-source suppliers, we also rely on one "sole-source" supplier, Miyaki Corporation, or Miyaki. We define a sole-source supplier as a supplier of a raw material or input for which there is no other supplier of the same product or an equivalent substitute. Miyaki is the exclusive producer of the Kashima coating for our suspension component tubes. As part of our agreement with Miyaki, we have been granted the exclusive right to use the trademark "KASHIMACOAT" on products comprising the aluminum finished parts for suspension components (e.g., tubes) and on related sales and marketing material worldwide, subject to certain exclusions. Although we believe we could obtain other coatings of comparable utility from other sources if necessary, we could no longer obtain this specific Kashima coating or use the trademark "KASHIMACOAT" if Miyaki were to stop supplying us with this coating. The need to replace the Kashima coating could temporarily disrupt our business and harm our business, financial condition or results of operations.

Regulations related to conflict minerals may force us to continue to incur additional expenses and otherwise adversely impact our business.

The SEC rules regarding disclosure of the use of tin, tantalum, tungsten and gold, known as conflict minerals, in products manufactured by public companies require ongoing due diligence to determine whether such minerals originated from the Democratic Republic of Congo ("DRC"), or an adjoining country and whether such minerals helped finance the armed conflict in the DRC. As a public company, we are required to comply with the reporting obligations annually. There are costs associated with complying with these disclosure requirements, including costs to determine the origin of conflict minerals in our products. The effect of such rules on customer, supplier and/or consumer behavior could adversely affect the sourcing, supply and pricing of materials used in our products. As a result, we may also incur costs with respect to potential changes to products, processes or sources of supply. We may face disqualification as a supplier for customers and reputational challenges if our due diligence procedures do not enable us to verify the origins for all conflict minerals used in our products or to determine if such conflict minerals are conflict-free. Accordingly, these rules could have a material adverse effect on our business, results of operations or financial condition.

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We may incur higher employee costs in the future.

We are subject to government-mandated wage and benefit laws and regulations in many varying countries and jurisdictions. For example, the State of California, where a substantial number of our employees are located, has passed legislation designed to raise the statewide minimum wage gradually until it reaches $15.00 per hour in 2022. Under the California law, signed on April 4, 2016, the minimum wage increased to $11.00 per hour effective January 1, 2018, and will gradually increase each calendar year through January 1, 2022, when it will reach $15.00 per hour. As we expand internationally, we are also subject to applicable laws in each such jurisdiction. Increases in the mandated wage in any or all of the jurisdictions in which we operate could subject us to increased costs, thereby impacting our business, financial condition, or results of operations.

We maintain a self-insured healthcare plan for our employees based in the United States. We have insurance coverage in place for individual claims above a specified amount in any year. Inflation in healthcare costs, as well as additional costs we may incur as a result of current or future federal or state healthcare legislation and regulations, could significantly increase our employee healthcare costs in the future. Continued increases in our employee costs could adversely affect our earnings, financial condition and liquidity.

We rely on increasingly complex information systems for management of our manufacturing, distribution, sales and other functions. If our information systems fail to perform these functions adequately or if we experience an interruption in our operations, our business could suffer.

All of our major operations, including manufacturing, distribution, sales and accounting, are dependent upon our complex information systems. Our information systems are vulnerable to damage or interruption from, among other things:

•earthquake, fire, flood, hurricane and other natural disasters;

•power loss, computer systems failure, internet and telecommunications or data network failure; and

•hackers, computer viruses, software bugs or glitches.

Any damage or significant disruption in the operation of such systems or the failure of our information systems to perform as expected could disrupt our operations, reduce our efficiency, delay our fulfillment of customer orders or require significant unanticipated expenditures to correct, and thereby have a negative effect on our business, financial condition or results of operations.

In 2015, we began the process of implementing a global enterprise resource planning system ("ERP"). The pilot phase of the new ERP was completed in fiscal year 2016 and additional phases were completed in 2018 and 2019. Remaining operations will be phased in over the next few fiscal years. ERP implementations are complex and time-consuming projects that involve substantial expenditures on system software and implementation activities. ERP implementations also require transformation of business and financial processes in order to reap the benefits of the ERP system. Any such transformation involves risks inherent in the conversion to a new computer system, including loss of information and potential disruption to our normal operations. Our business and results of operations may be adversely affected if we experience operating problems or cost overruns during the ERP implementation process, or if the ERP system and the associated process changes do not give rise to the benefits that we expect.

Additionally, if we do not effectively implement the ERP system as planned or the system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected.

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We could be negatively impacted by cybersecurity attacks.

We use a variety of information technology systems in the ordinary course of business, which are potentially vulnerable to unauthorized access, computer viruses and cyber-attacks, including cyber-attacks to our information technology infrastructure and attempts by others to gain access to our propriety or sensitive information, and ranging from individual attempts to advanced persistent threats. The procedures and controls we use to monitor these threats and mitigate our exposure may not be sufficient to prevent cybersecurity incidents. The results of these incidents could include misstated financial data, theft of trade secrets or other intellectual property, liability for disclosure of confidential customer, supplier or employee information, increased costs arising from the implementation of additional security protective measures, litigation and reputational damage, which could materially adversely affect our financial condition, business or results of operations. Any remedial costs or other liabilities related to cybersecurity incidents may not be fully insured or indemnified by other means.

Additionally, security breaches could result in a violation of applicable U.S. and international privacy and other laws and subject us to governmental investigations and proceedings, which could result in our exposure to material civil or criminal liability. For example, the European Union adopted a new regulation that became effective in May 2018, called the General Data Protection Regulation (“GDPR”). GDPR requires companies to meet new requirements regarding the handling of personal data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. Similarly, the California Consumer Privacy Act (“CCPA”), which took effect on January 1, 2020, imposes additional obligations on businesses to make new disclosures about data collection, use, and sharing practices and affords consumers new rights with respect to their data. It also provides a new private right of action for data breaches. Failure to meet GDPR and CCPA requirements could result in financial penalties.

Our vendors’ and commercial partners’ information technology systems may fail or suffer security breaches, which could result in a material disruption of our operations.

Despite the implementation of security measures, the information technology systems of our vendors or commercial partners are vulnerable to damage from computer viruses, unauthorized access, natural disasters, and electrical failures. Such events could cause disruptions in our operations. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data, or inappropriate disclosure of confidential or propriety information, we could be subject to litigation and reputational harm, which could materially adversely affect our financial condition, business or results of operations.

We retain certain personal information about individuals and are subject to various privacy and consumer protection laws.

We collect personal information for various purposes and through various methods, including from third parties and directly from consumers through our website, at events and sales, and via telephone and email. Certain individuals may object to the processing of this data, request the deletion of this data, or opt out of the sharing of this data, any of which may negatively impact our ability to provide effective customer service or otherwise impact our operations. Collection and use of personal information in conducting our business may be subject to federal and/or state laws and regulations in the United States and foreign jurisdictions including, in particular, various jurisdictions in Europe, and such laws and regulations may restrict our processing of such personal information and may hinder our ability to attract new customers or market to existing customers. We may incur significant expenses to comply with privacy, consumer protection, and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.

Our vendors and any potential commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.

Our vendors and any potential commercial partners expose us to the risk of fraud or other misconduct. Misconduct by these parties could include intentional, reckless, and/or negligent conduct or disclosure of unauthorized activities to us that violate federal and/or state data privacy, security, and consumer protection laws and regulations in the United States and abroad. Such misconduct could result in regulatory sanctions and cause serious harm to our reputation.

Our operations may be impaired if our information technology systems fail to perform adequately or if they are the subject of a data breach or cyber-attack.

Information technology systems are critically important to operating our business. We rely on information technology systems to manage business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of any of the information technology systems to perform as anticipated could disrupt our business and could result in transaction errors, processing inefficiencies and the loss of sales and customers, which could materially adversely affect our business, financial condition, or results of operations.

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We have grown and may continue to grow in the future through acquisitions. Growth by acquisitions involves risks and we may not be able to effectively integrate businesses we acquire or we may not be able to identify or consummate any future acquisitions on favorable terms, or at all.

We have completed several acquisitions over the past several years, including our most recent acquisition of SCA in March 2020. Additionally, we intend to selectively evaluate additional acquisitions in the future. Any acquisitions that we have made and might make are subject to various risks and uncertainties and could have a negative impact on our business, financial condition or results of operations. These risks include the inability to integrate effectively the operations, products, technologies and personnel of the acquired companies (some of which may be spread out in different geographic regions), the inability to achieve anticipated cost savings or operating synergies, the earn-outs we may contractually obligate ourselves to pay, and the risk we may not be able to effectively manage our operations at an increased scale of operations resulting from such acquisitions. In the event we do complete acquisitions in the future, such acquisitions could affect our cash flows and net income as we expend funds, increase indebtedness and incur additional expenses in connection with pursuing acquisitions. We may also issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments. We may not be able to identify or consummate any future acquisitions on favorable terms, or at all.

Our operating results are subject to quarterly variations in our sales, which could make our operating results difficult to predict and could adversely affect the price of our common stock.

We have experienced, and expect to continue to experience, substantial quarterly variations in our sales and net income. Our quarterly results of operations fluctuate, in some cases significantly, as a result of a variety of other factors, including, among other things:

•the timing of new product releases or other significant announcements by us or our competitors;

•new advertising initiatives;

•fluctuations in raw materials and component costs; and

•changes in our practices with respect to building inventory.

As a result of these quarterly fluctuations, comparisons of our operating results between different quarters within a single year are not necessarily meaningful and may not be accurate indicators of our future performance. Any future quarterly fluctuations that we report may differ from the expectations of market analysts and investors, which could cause the price of our common stock to fluctuate significantly. We also believe that the seasonal nature of our business may have been overshadowed throughout the past few years due to the rapid growth in sales we have experienced during those periods.

Our beliefs regarding the future growth of the performance-defining product market are supported by qualitative data and limited sources and may not be reliable. A reduction or lack of continued growth in the popularity of high-end bikes, bikes or powered vehicles or in the number of consumers who are willing to pay premium prices for well-designed, performance-oriented equipment in the markets in which we sell our products could adversely affect our product sales and profits, financial condition or results of operations.

We generate virtually all of our revenues from sales of performance-defining products. Our beliefs regarding the outlook of the performance-defining product market come from qualitative data and limited sources, which may not be reliable. If our beliefs regarding the opportunities in the market for our products are incorrect or the number of consumers who we believe are willing to pay premium prices for well-designed, performance-oriented equipment in the markets in which we sell our products does not increase, or declines, we may fail to achieve future growth and our business, financial condition or results of operations could be negatively affected.

Failure of our internal control over financial reporting could adversely affect our business and financial results.

Our management is responsible for establishing and maintaining effective internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the "Sarbanes-Oxley Act"). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. The identification of a material weakness could indicate a lack of controls adequate to generate accurate financial statements that, in turn, could cause a loss of investor confidence and decline in the market price of our common stock. We cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods or maintain all of the controls necessary for continued compliance. Likewise, we cannot assure you that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.

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Risks related to ownership of our common stock

The trading price of our common stock may be volatile, and you might not be able to sell your shares at or above the price you pay for the shares.

The trading price of our common stock could be volatile, and you could lose all or part of your investment in our common stock. Since our IPO in 2013, our stock price has fluctuated between $113.41 and $13.35 per share and such volatility may continue in the future. Factors affecting the trading price of our common stock could include:

•variations in our operating results or those of our competitors;

•new product or other significant announcements by us or our competitors;

•changes in our product mix;

•changes in consumer preferences;

•fluctuations in currency exchange rates;

•the gain or loss of significant customers;

•recruitment or departure of key personnel;

•changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;

•changes in general economic conditions as well as conditions affecting our industry in particular; and

•sales of our common stock by us, our significant stockholders or our directors or executive officers.

In addition, in recent years, the stock market has experienced significant price fluctuations. Fluctuations in the stock market generally or with respect to companies in our industry could cause the trading price of our common stock to fluctuate for reasons unrelated to our business, operating results or financial condition. Further, some companies that have had volatile market prices for their securities have had securities class actions filed against them. A lawsuit filed against us, regardless of its merits or outcome, could cause us to incur substantial costs and could divert management’s attention.

Future issuances and sales of our shares, or the perception that such sales may occur, could cause our stock price to decline.

The issuance of additional shares of our common stock could dilute the ownership interest of our common stockholders and could depress the market price of shares of our common stock.

Our Amended and Restated Certificate of Incorporation authorizes us to issue 90,000,000 shares of common stock, 41,711,588 of which shares were outstanding as of October 2, 2020. In the future, we may issue additional shares of common stock or other equity or debt securities convertible into common stock in connection with financings, acquisitions, registration statements or otherwise.

After our IPO in 2013, we filed a registration statement under the Securities Act to register shares of our common stock that we may issue under our equity plans. As a result, all such shares can be freely sold in the public market upon issuance, subject to any vesting or contractual lock-up agreements.

We also have a number of institutional stockholders that own significant blocks of our common stock. If one or more of these stockholders were to sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing price of shares of our common stock could be negatively affected.

If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about our business or us. If one or more of the analysts who covers us downgrades our stock or publishes unfavorable research about our business or our industry, our stock price would likely decline. If one or more of these analysts ceases coverage of our Company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

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Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our Company.

Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws (together, our "Charter Documents"), as well as Delaware law, contain provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Among other things, these provisions:

•authorize the issuance of "blank check" preferred stock that could be issued by our Board of Directors to discourage a takeover attempt;

•establish a classified Board of Directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;

•require that directors be removed from office only for cause;

•provide that vacancies on our Board of Directors, including newly created directorships, may be filled only by a majority vote of directors then in office;

•provide that no action be taken by stockholders by written consent;

•provide that special meetings of our stockholders may be called only by our Board of Directors, our Chairperson of the Board of Directors, our Lead Director (if we do not have a Chairperson or the Chairperson is disabled), our Chief Executive Officer or our President (in the absence of a Chief Executive Officer);

•require supermajority stockholder voting for our stockholders to effect certain amendments to our Charter Documents; and

•establish advance notice requirements for nominations for elections to our Board of Directors or for proposing other matters that can be acted upon by stockholders at stockholder meetings.

In addition, we are subject to Section 203 of the General Corporation Law of the State of Delaware ("DGCL"), which generally prohibits a Delaware corporation from engaging in a broad range of business combinations with a stockholder owning 15% or more of such corporation’s outstanding voting stock for a period of three years following the date on which such stockholder became an "interested" stockholder. In order for us to consummate a business combination with an interested stockholder within three years of the date on which the stockholder became interested, either: (i) the business combination or the transaction that resulted in the stockholder becoming interested must be approved by our Board of Directors prior to the date the stockholder became interested; (ii) the interested stockholder must own at least 85% of our outstanding voting stock at the time the transaction commences (excluding voting stock owned by directors who are also officers and certain employee stock plans); or (iii) the business combination must be approved by our Board of Directors and authorized by at least two-thirds of our stockholders (excluding the interested stockholder) at a special or annual meeting (not by written consent). This provision could have the effect of delaying or preventing a change in control, whether or not it is desired by or beneficial to our stockholders. Any delay or prevention of a change in control transaction or changes in our Board of Directors and management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then-current market price for their shares of our common stock.

Our Amended and Restated Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our Amended and Restated Certificate of Incorporation provides that, with certain limited exceptions, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of our Company owed to us or our stockholders; (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our Charter Documents; (iv) any action to interpret, apply, enforce or determine the validity of our Charter Documents; or (v) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock is deemed to have received notice of and consented to the foregoing provisions. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find this choice of forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table contains the details related to the repurchase of common stock based on the date of trade during the quarter ended October 2, 2020:


Period	Total Number of Shares Purchased (1)	Weighted-average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
7/4 -8/7	9,603	$	89.00	—
8/8 - 9/4	—	$	—	—
9/5 - 10/2	226	$	80.94	—
Total	9,829	$	88.81	—

(1) Shares acquired from holders of restricted stock unit awards to satisfy tax-withholding obligations.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File No.

Filing Date

Filed or Furnished Herewith

3.1

Amended and Restated Certificate of Incorporation

10-Q

001-36040

September 19, 2013

3.2

Amended and Restated Bylaws

10-Q

001-36040

September 19, 2013

10.1†

Employment Agreement, by and between Fox Factory Holding Corp. and Scott Humphrey, dated August 4, 2020.

8-K

001-36040

August 5, 2020

10.2 †

Amendment to the Amended and Restated Employment Agreement, by and between Fox Factory Holding Corp. and Michael C. Dennison, dated August 5, 2020.

8-K

001-36040

August 10, 2020

10.3 †

Amendment to the Amended and Restated Employment Agreement, by and between Fox Factory, Inc. and Richard T. Winters, dated August 5, 2020.

8-K

001-36040

August 10, 2020

10.4 †

Amendment to the Amended and Restated Employment Agreement, by and between Fox Factory, Inc. and Christopher J. Tutton, dated August 5, 2020.

8-K

001-36040

August 10, 2020

10.5 †

Employment Agreement by and between Fox Factory, Inc. and Richard T. Winters, dated June 29, 2019.

8-K

001-36040

August 10, 2020

31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended

31.2

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended

32.1*

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended

101.INS

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover page formatted as Inline XBRL and contained in Exhibit 101

† Management contract or compensatory plan.

* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	FOX FACTORY HOLDING CORP.

	By:	/s/ Scott R. Humphrey
November 10, 2020		Scott R. Humphrey, Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)