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EX-31.1 - EXHIBIT 31.1 - FOX FACTORY HOLDING CORPfoxf2015-09x3010xqex311.htm
EX-31.2 - EXHIBIT 31.2 - FOX FACTORY HOLDING CORPfoxf2015-09x3010xqex312.htm
EX-32.1 - EXHIBIT 32.1 - FOX FACTORY HOLDING CORPfoxf2015-09x3010xqex321.htm
EX-10.1 - EXHIBIT 10.1 LETTER OF AGREEMENT DATED 11.4.2015 - FOX FACTORY HOLDING CORPex101letterofagreementdate.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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.)
 
 
915 Disc Drive
Scotts Valley, CA
95066
(Address of Principal Executive Offices)
(Zip Code)
(831) 274-6500
(Registrant’s Telephone Number, Including Area Code)
 
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 31, 2015, there were 36,975,511 shares of the Registrant’s common stock outstanding.
 



Fox Factory Holding Corp.
FORM 10-Q
Table of Contents
 
 
 
Page 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014
 
Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOX FACTORY HOLDING CORP.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
 
As of
 
As of
 
September 30,
 
December 31,
 
2015
 
2014
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,100

 
$
4,212

Accounts receivable (net of allowances of $531 and $348 at September 30, 2015 and December 31, 2014, respectively)
57,137

 
39,221

Inventory
78,292

 
59,191

Prepaids and other current assets
11,383

 
6,257

Deferred tax assets
8,238

 
4,298

Total current assets
160,150

 
113,179

Property, plant and equipment, net
24,644

 
19,759

Goodwill
57,705

 
58,745

Intangibles, net
62,033

 
65,184

Other assets
1,063

 
1,570

Total assets
$
305,595

 
$
258,437

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
49,374

 
$
30,371

Accrued expenses
22,444

 
12,128

Reserve for uncertain tax positions
8,208

 
7,785

Current portion of long-term debt
2,837

 
2,837

Current portion of contingent consideration
6,950

 
7,704

Total current liabilities
89,813

 
60,825

Line of credit
12,000

 

Long-term debt, less current portion
45,035

 
47,163

Deferred rent
710

 
681

Deferred tax liabilities
7,152

 
7,414

Contingent consideration, less current portion
6,300

 
13,548

Total liabilities
161,010

 
129,631

Commitments and contingencies (Note 7)

 

Stockholders’ equity
 
 
 
Preferred stock, $0.001 par value—10,000 authorized and no shares issued or outstanding as of September 30, 2015 and December 31, 2014

 

Common stock, $0.001 par value—90,000 authorized; 37,366 shares issued and 36,976 outstanding as of September 30, 2015; 37,117 shares issued and 37,078 outstanding as of December 31, 2014
37

 
37

Additional paid-in capital
95,478

 
97,006

Accumulated other comprehensive loss
(1,223
)
 
(406
)
Retained earnings
50,293

 
32,169

Total stockholders’ equity
144,585

 
128,806

Total liabilities and stockholders’ equity
$
305,595

 
$
258,437

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

1


FOX FACTORY HOLDING CORP.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(Unaudited)


 
 
For the three months 
 ended September 30,
 
For the nine months 
 ended September 30,
 
2015
 
2014
 
2015
 
2014
Sales
$
106,171

 
$
90,148

 
$
271,130

 
$
232,630

Cost of sales
71,385

 
61,601

 
187,693

 
160,113

Gross profit
34,786

 
28,547

 
83,437

 
72,517

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
5,981

 
5,282

 
17,418

 
14,244

Research and development
4,641

 
3,468

 
12,201

 
10,228

General and administrative
5,932

 
4,218

 
15,428

 
12,826

Amortization of purchased intangibles
2,756

 
1,684

 
6,435

 
4,719

Fair value adjustment of contingent consideration and acquisition related compensation
1,655

 
(16
)
 
6,058

 
106

Total operating expenses
20,965

 
14,636

 
57,540

 
42,123

Income from operations
13,821

 
13,911

 
25,897

 
30,394

Other expense, net:
 
 
 
 
 
 
 
Interest expense
422

 
291

 
1,166

 
722

Other (income) expense, net
(182
)
 
1

 
(195
)
 
(156
)
Other expense, net
240

 
292

 
971

 
566

Income before income taxes
13,581

 
13,619

 
24,926

 
29,828

Provision for income taxes
2,990

 
3,328

 
6,802

 
5,015

Net income
$
10,591

 
$
10,291

 
$
18,124

 
$
24,813

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.29

 
$
0.28

 
$
0.49

 
$
0.68

Diluted
$
0.28

 
$
0.27

 
$
0.48

 
$
0.66

Weighted average shares used to compute earnings per share:
 
 
 
 
 
 
 
Basic
36,991

 
36,904

 
36,988

 
36,658

Diluted
37,855

 
37,853

 
37,874

 
37,773

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

2


FOX FACTORY HOLDING CORP.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(Unaudited) 
 
For the three months 
 ended September 30,
 
For the nine months 
 ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
10,591

 
$
10,291

 
$
18,124

 
$
24,813

Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax effects
(755
)
 
(138
)
 
(817
)
 
(129
)
Other comprehensive loss
(755
)
 
(138
)
 
(817
)
 
(129
)
Comprehensive income
$
9,836

 
$
10,153

 
$
17,307

 
$
24,684

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

3


FOX FACTORY HOLDING CORP.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
For the nine months 
 ended September 30,
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
Net income
$
18,124

 
$
24,813

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,710

 
7,073

Cost of goods on acquired inventory step up
812

 
737

Provision for doubtful accounts
40

 
17

Stock-based compensation
3,685

 
2,965

Excess tax benefit from exercise of stock options
(401
)
 
(3,046
)
(Gain) loss on disposal of property and equipment
(64
)
 
2

Deferred taxes
(3,431
)
 
(3,322
)
Amortization of loan fees
149

 
134

Change in fair value of contingent consideration
(148
)
 
(137
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(19,109
)
 
(5,305
)
Inventory
(21,939
)
 
(4,595
)
Income taxes payable
2,445

 
1,479

Prepaids and other assets
(4,846
)
 
(2,685
)
Accounts payable
19,254

 
330

Accrued expenses
8,777

 
447

Deferred rent
29

 
(180
)
Net cash provided by operating activities
13,087

 
18,727

INVESTING ACTIVITIES:
 
 
 
Acquisition of businesses
(765
)
 
(40,770
)
Purchases of property and equipment
(8,161
)
 
(3,717
)
Acquisition of other assets

 
(1,401
)
Proceeds from sale of property and equipment
127

 
106

Net cash used in investing activities
(8,799
)
 
(45,782
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from line of credit
34,000

 
15,000

Payments on line of credit
(22,000
)
 
(23,000
)
Payment of contingent consideration liability
(7,854
)
 

Proceeds from issuance of debt, net of origination fees of $278

 
49,722

Repurchase of common stock
(5,236
)
 

Repayment of debt
(2,128
)
 
(19,250
)
Proceeds (repurchases) from stock compensation, net
(378
)
 
1,830

Excess tax benefit from exercise of stock options
401

 
3,046

Net cash (used in) provided by financing activities
(3,195
)
 
27,348

 
 
 
 

4


EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(205
)
 
(39
)
CHANGE IN CASH AND CASH EQUIVALENTS
888

 
254

CASH AND CASH EQUIVALENTS—Beginning of period
4,212

 
1,683

CASH AND CASH EQUIVALENTS—End of period
$
5,100

 
$
1,937

 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes
$
8,322

 
$
6,791

Interest
$
1,009

 
$
586

Non-cash investing and financing activities:
 
 
 
Contingent consideration - acquisition of Sport Truck USA, Inc.
$

 
$
19,035

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

5


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 and manufactures performance ride dynamics products primarily for bicycles, side-by-side vehicles, on-road and off-road vehicles and trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles. The Company acts both as a tier one supplier to leading action sports original equipment manufacturers and provides aftermarket products to retailers 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 wholly owned 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 in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. 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 year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K as filed with the SEC. In management’s opinion, the unaudited interim 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 the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.
Initial Public Offering- On August 13, 2013, the Company completed the initial public offering (“IPO”) of its common stock pursuant to a registration statement on Form S-1. In the IPO, the Company sold 2,857 shares of common stock and the selling stockholders sold a total of 7,000 shares of common stock (including the shares sold pursuant to the exercise of the option granted to the underwriters) at an initial public offering price to the public of $15.00 per share. The Company received net proceeds from the IPO of approximately $36,122 from its sale of 2,857 shares of common stock after deducting underwriting discounts, commissions and offering expenses. The Company did not receive any proceeds from the sale of shares by the selling stockholders. The Company used the net proceeds it received to pay down related party debt. In July 2014, certain selling stockholders completed a secondary offering of the Company's common stock.
Principles of Consolidation- These condensed consolidated financial statements include the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Summary of Significant Accounting Policies - Self-Insurance. Since January 2015, the Company has been partially self-insured for its U.S. employee health and welfare benefits.  The Company’s liability for self-insurance is based on claims filed and an estimate of claims incurred but not yet reported. The Company considers a number of factors, including historical claims information, when determining the amount of the accrual. Costs related to the administration of the plan and related claims are expensed as incurred. The Company has third-party insurance coverage to limit exposure for individually significant claims.  The estimate for claims incurred as of September 30, 2015 is $462 and is recorded within accrued expenses on the condensed consolidated balance sheets. 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 December 31, 2014 that have had a material impact on our condensed consolidated financial statements and related notes.

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.

6

FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)



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.
Recent Accounting Pronouncements- In May 2014, the Financial Accounting Standards Board ("FASB") and International Accounting Standards Board issued their converged standard on revenue recognition, Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers". This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Transfer of control is not the same as transfer of risks and rewards, as it is considered in current guidance. We will apply the new guidance to determine whether revenue should be recognized over time or at a point in time. This standard will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted after December 15, 2016. The Company can choose to apply this standard retrospectively for each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of the initial application in retained earnings. The Company has not yet developed an expectation of the impact that adoption will have on its consolidated financial statements.

Reclassifications- We have reclassified certain prior period amounts within our condensed consolidated balance sheet for the year ended December 31, 2014, the condensed consolidated statements of income for the three and nine months ended September 30, 2014, and the condensed consolidated statement of cash flows for the nine months ended September 30, 2014 to conform to our current year presentation.

2. Inventory
Inventory consisted of the following:
 
As of  
 September 30,
 
As of  
 December 31,
 
2015
 
2014
Raw materials
$
53,167

 
$
39,655

Work-in-process
2,547

 
1,568

Finished goods
22,578

 
17,968

Total inventory
$
78,292

 
$
59,191


7

FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)


3. Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
 
As of  
 September 30,
 
As of  
 December 31,
 
2015
 
2014
Machinery and manufacturing equipment
$
21,666

 
$
17,739

Information systems, office equipment and furniture
8,429

 
5,297

Transportation equipment
2,150

 
2,041

Building and land
3,469

 
3,469

Leasehold improvements
6,671

 
5,971

Total
42,385

 
34,517

Less: accumulated depreciation and amortization
(17,741
)
 
(14,758
)
Property, plant and equipment, net
$
24,644

 
$
19,759


4. Intangibles, net
Intangible assets, excluding goodwill, are comprised of the following:
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Weighted
average life
(years)
September 30, 2015:
 
 
 
 
 
 
 
Customer relationships
$
39,016

 
$
(12,080
)
 
$
26,936

 
13
Core technology
32,900

 
(31,484
)
 
1,416

 
8
Other
1,335

 
(814
)
 
521

 
4
Total
73,251

 
(44,378
)
 
28,873

 
 
Trademarks and brands, not subject to amortization
 
 
 
 
33,160

 
 
Total
 
 
 
 
$
62,033

 
 
December 31, 2014:
 
 
 
 
 
 
 
Customer relationships
$
36,555

 
$
(9,144
)
 
$
27,411

 
13
Core technology
33,700

 
(28,438
)
 
5,262

 
8
Other
835

 
(394
)
 
441

 
5
Total
71,090

 
(37,976
)
 
33,114

 
 
Trademarks and brands, not subject to amortization
 
 
 
 
32,070

 
 
Total
 
 
 
 
$
65,184

 
 
 
For the three months 
 ended September 30,
 
For the nine months 
 ended September 30,
 
2015
 
2014
 
2015
 
2014
Amortization of intangibles
$
2,756

 
$
1,684

 
$
6,435

 
$
4,719



8

FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

Future amortization expense for finite-lived intangibles as of September 30, 2015 is as follows:
For the years ending December 31,
Amortization Expense
2015 (remaining three months)
$
2,087

2016
2,889

2017
2,675

2018
2,675

2019
2,608

Thereafter
15,939

Total expected future amortization
$
28,873

Goodwill activity consisted of the following:
 
Balance as of December 31, 2014
$
58,745

Acquisitions
567

Purchase accounting adjustments - Refer to Note 13, Acquisitions
(1,395
)
Currency translation and other adjustments
(212
)
Balance as of September 30, 2015
$
57,705



5. Accrued Expenses
Accrued expenses consisted of the following:
 
As of  
 September 30,
 
As of  
 December 31,
 
2015
 
2014
Payroll and related expenses
$
7,126

 
$
5,352

Management earn-out
6,124

 
274

Warranty
4,180

 
4,215

Income tax payable
2,960

 
1,405

Other accrued expenses
2,054

 
882

Total
$
22,444

 
$
12,128

Activity related to warranties is as follows:
 
For the three months 
 ended September 30,
 
For the nine months 
 ended September 30,
 
2015
 
2014
 
2015
 
2014
Beginning warranty liability
$
4,324

 
$
3,880

 
$
4,215

 
$
3,857

Charge to cost of sales
430

 
1,160

 
1,532

 
2,877

Fair value of warranty assumed in acquisition

 

 

 
192

Costs incurred
(574
)
 
(667
)
 
(1,567
)
 
(2,553
)
Ending warranty liability
$
4,180

 
$
4,373

 
$
4,180

 
$
4,373


9

FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)


6. Debt
Amended and Restated 2013 Credit Facility
In August 2013, the Company entered into a credit facility with Sun Trust Bank and other named lenders (the "2013 Credit Facility"). The 2013 Credit Facility provided a revolving line of credit. On March 31, 2014, the Company amended and restated the 2013 Credit Facility (the “Amended and Restated 2013 Credit Facility”). The Amended and Restated 2013 Credit Facility provided a maturing secured term loan in the principal amount of $50,000, (the "Term Loan"), subject to quarterly amortization payments, and extended the term of the 2013 Credit Facility through March 31, 2019. The proceeds of the Term Loan were used, in part, to fund the acquisition of Sport Truck USA, Inc. ("Sport Truck") and to pay down the revolving line of credit provided under the 2013 Credit Facility. On December 12, 2014, the Company entered into the First Amendment to the Amended and Restated 2013 Credit Facility (the "First Amendment"). The First Amendment increased the Term Loan principal amount by $30,000 to a total of $56,750, subject to quarterly amortization payments, and extended the maturity of the Amended and Restated 2013 Credit Facility through December 12, 2019. The additional proceeds of the Term Loan made available through the First Amendment were used to partially fund the acquisition of Race Face Performance Products, Inc. and Easton Cycling (together "Race Face/Easton"). On May 29, 2015 the Company entered into a Second Amendment to the Amended and Restated 2013 Credit Facility solely to revise the definition of "Continuing Director" contained therein.
The Amended and Restated 2013 Credit Facility provides for interest at either a rate based on the London Interbank Offered Rate, or LIBOR, plus a margin ranging from 1.50% to 2.50%, or based on the prime rate offered by SunTrust Bank plus a margin ranging from 0.50% to 1.50%. At September 30, 2015, the one month LIBOR and prime rates were 0.20% and 3.25%, respectively. The Amended and Restated 2013 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 also requires that the Company satisfy customary financial ratios. The Company was in compliance with the covenants as of September 30, 2015.
The following table summarizes the line of credit under the Amended and Restated 2013 Credit Facility:
 
As of  
 September 30,
 
2015
Amount outstanding
$
12,000

Available borrowing capacity
$
48,000

Maximum borrowing capacity
$
60,000

Interest rate at September 30, 2015
1.95
%
Maturity date
December 12, 2019
 
 
As of September 30, 2015, future principal payments for long-term debt, including the current portion, are summarized as follows:
Fiscal Year
 
2015 (remaining three months)
$
710

2016
2,837

2017
4,256

2018
4,256

2019
35,813

Total
47,872

Less: current portion
(2,837
)
Long-term debt less current portion
$
45,035


10

FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

7. Commitments and Contingencies
Operating Leases—The Company has operating lease agreements for administrative, research and development, manufacturing and sales and marketing facilities and equipment that expire at various dates. The Company recognizes rent expense on a straight-line basis over the lease term and records the difference between cash rent payments and the recognition of rent expense as a deferred rent liability.
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 by reason of 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.

Other Commitments—As of September 30, 2015, in connection with the acquisition of businesses, the Company has agreed to pay up to $35,693 in additional consideration and acquisition related compensation through 2017, contingent upon the achievement of certain financial performance goals and in some cases continued employment through 2016. A portion of the obligation is denominated in Canadian dollars. See Note 9 - Fair Value Measurements and Note 13 - Acquisitions. No other material contractual obligation has changed since the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 2, 2015.


8. Stockholders' Equity
Share Repurchase Program
On November 3, 2014, the Company's Board of Directors authorized the repurchase of up to an aggregate of $40,000 in shares of our common stock under our stock repurchase program. Shares of common stock repurchased under this program are deemed issued but not outstanding. During the nine months ended September 30, 2015, the Company repurchased 351 shares for a total of $5,236. Since the inception of the program, the Company has repurchased 390 shares for a total of $5,807. At September 30, 2015, $34,193 remains available for repurchase under this plan. The repurchase program will expire on December 31, 2015 unless extended by the Company's Board of Directors.
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 September 30,
 
For the nine months 
 ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
Cost of sales
25

 
12

 
55

 
32

 
Sales and marketing
113

 
79

 
321

 
196

 
Research and development
54

 
22

 
126

 
54

 
General and administrative
1,081

 
930

 
3,183

 
2,683

 
Total
$
1,273

 
$
1,043

 
$
3,685

 
$
2,965

 


11

FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

The following table summarizes the activity for the Company's unvested restricted stock units ("RSU") for the nine months ended September 30, 2015.
 
Unvested RSUs
 
Number of shares outstanding
 
Weighted-average grant date fair value
Unvested at December 31, 2014
780

 
$
17.30

Granted
246

 
$
16.60

Forfeited
(2
)
 
$
17.12

Vested
(230
)
 
$
17.36

Unvested at September 30, 2015
794

 
$
17.07


During the nine months ended September 30, 2015 and 2014, 53 and 581 shares of common stock, respectively, were issued due to the exercise of stock options, resulting in proceeds to the Company of approximately $170 and $2,493, respectively.  There were no stock options granted or forfeited during the nine months ended September 30, 2015. There were no options granted and there were 58 options forfeited during the nine months ended September 30, 2014.

As of September 30, 2015, the Company had approximately $12,174 of unrecognized stock-based compensation expense related to RSUs, which will be recognized over the remaining weighted-average vesting period of approximately 2.63 years. Additionally, as of September 30, 2015, the Company had approximately $436 of unrecognized stock-based compensation expense related to stock options, which will be recognized over the remaining weighted-average vesting period of approximately 1.72 years.

9. Fair Value Measurements
The FASB's Accounting Standards Codification 820, "Fair Value Measurements and Disclosures" 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).
As of September 30, 2015, the carrying amount of the principal under the Company’s Amended and Restated 2013 Credit Facility approximates fair value because it has a variable interest rate that reflects market changes in interest rates and changes in the Company’s net leverage ratio. As of September 30, 2015, the Company used Level 2 inputs to determine the fair value of its Amended and Restated 2013 Credit Facility.
The Company measured its contingent consideration liability arising from the acquisition of Sport Truck using Level 3 unobservable inputs (see Note 13 - Acquisitions). The fair value of the contingent consideration liability associated with the achievement of adjusted EBITDA targets is estimated at each balance sheet date by applying a Black-Scholes model to the Company's most recent financial projection.  The unobservable inputs to the valuation model that have the most significant effect on the estimated fair value of the Company's contingent consideration liability are the projected financial results, the probabilities that actual results will exceed the projection and the volatility surrounding the expected results.  The Company estimated the probabilities of actual results exceeding the projection during various years of the earn-out at values ranging from 70% to 75% as of September 30, 2015, compared to an overall estimate of 75% for all annual periods at the acquisition date. Additionally, volatility was measured at 35% as of September 30, 2015, compared to 41% at the acquisition date. The change in fair value is recorded as a component of

12

FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

fair value adjustment of contingent consideration and acquisition related compensation in the accompanying condensed consolidated statements of income for the three and nine months ended September 30, 2015.

The following table provides a reconciliation of the beginning and ending balances for the Company's contingent consideration liability measured at fair value using Level 3 inputs:
 
Contingent consideration liability (level 3 measurement)
Balance at December 31, 2014
$
21,252

Change in fair value
(148
)
Payment of contingent liability
(7,854
)
Balance at September 30, 2015
$
13,250


10. Income Taxes
 
For the three months 
 ended September 30,
 
For the nine months 
 ended September 30,
 
2015
 
2014
 
2015
 
2014
Provision for income taxes
$
2,990

 
$
3,328

 
$
6,802

 
$
5,015

Effective tax rates
22.0
%
 
24.4
%
 
27.3
%
 
16.8
%

For the three and nine months ended September 30, 2015, the difference between the Company's effective tax rate and the 35% federal statutory rate resulted primarily from the reversal of certain tax reserves as a result of the expiration of the statute of limitation in certain tax jurisdictions, as well as from the benefit from domestic production activity deduction and tax credits. These benefits were partially offset by state taxes.

For the three and nine months ended September 30, 2014, the difference between the Company's effective tax rate and the 35% federal statutory rate resulted primarily from a second quarter discrete tax benefit of $3,848, or $0.10 per basic and fully diluted share related to the reapportionment of income amongst the jurisdictions where the Company does business. The Company periodically evaluates opportunities to enhance tax efficiencies and to minimize tax liabilities through operating, legal and administrative strategies. The reapportionment benefit relates to tax years 2009 through 2013 and resulted from the Company's examination of evolving laws, existing court cases, and its business practices. The tax benefit includes the impact of a reduction in the rate used to measure the Company's net deferred tax liability and unrecognized tax benefit. The benefit was accounted for as a change in estimate. Additionally, for the three and nine months ended September 30, 2014, the effective tax rate benefited
from the expiration of the statute of limitations in certain jurisdictions and from the domestic production activity deduction. These income tax benefits were partially offset by state taxes.

As of September 30, 2015, the Company had $8,208 of unrecognized tax benefits, of which approximately $7,420, if recognized, would favorably impact the effective tax rate. The Company regularly engages in discussions and negotiations with tax authorities regarding tax matters in various jurisdictions. The Company believes it is reasonably possible that certain federal, foreign, and state tax matters may be concluded in the next 12 months. Specific positions that may be resolved include issues involving the deductibility of amortization and depreciation deductions which were incurred as a result of the acquisition of the Company in 2008. The Company estimates that it is reasonably possible that the unrecognized tax benefits at September 30, 2015 could be reduced by approximately $1,298 in the next twelve months.

The Company's federal tax returns for 2011 forward are subject to examination by tax authorities.  The Company’s 2011 and 2012 state tax returns are currently under examination by the California Franchise Tax Board, and 2009 and 2013 forward California tax returns are subject to future examination. 


13

FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

11. Earnings Per Share
Basic earnings per share ("EPS") amounts are computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted EPS amounts are computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. Potentially dilutive common shares include shares issuable upon the exercise of outstanding stock options and vesting of restricted stock units, which are reflected in diluted earnings per share by application of the treasury stock method.
The following table presents the calculation of basic and diluted earnings per share:
 
For the three months 
 ended September 30,
 
For the nine months 
 ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
10,591

 
$
10,291

 
$
18,124

 
$
24,813

Weighted average shares used to compute basic earnings per share
36,991

 
36,904

 
36,988

 
36,658

Dilutive effect of employee stock plans
864

 
949

 
886

 
1,115

Weighted average shares used to compute diluted earnings per share
37,855

 
37,853

 
37,874

 
37,773

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.29

 
$
0.28

 
$
0.49

 
$
0.68

Diluted
$
0.28

 
$
0.27

 
$
0.48

 
$
0.66

The Company did not exclude any potentially dilutive shares from the calculation of diluted earnings per share for the three and nine months ended September 30, 2015 and 2014, as none of these shares would have been antidilutive.

12. Segments
The Company has determined that it has a single operating and reportable segment. The Company considers operating segments to be components of the Company in 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.
The following table summarizes total sales generated by geographic location of the customer:
 
For the three months 
 ended September 30,
 
For the nine months 
 ended September 30,
 
2015
 
2014
 
2015
 
2014
United States
$
45,579

 
$
36,647

 
$
118,934

 
$
99,823

Asia
30,427

 
23,996

 
79,162

 
63,426

Europe
22,755

 
23,521

 
52,281

 
54,751

Rest of the world
7,410

 
5,984

 
20,753

 
14,630

Total sales
$
106,171

 
$
90,148

 
$
271,130

 
$
232,630


14

FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

The Company’s long-lived assets by geographic location are as follows:
 
As of  
 September 30,
 
As of  
 December 31,
 
2015
 
2014
United States
$
21,893

 
$
16,579

International
2,751

 
3,180

Total long-lived assets
$
24,644

 
$
19,759


The following table summarizes total sales by product category:
 
For the three months 
 ended September 30,
 
For the nine months 
 ended September 30,
 
2015
 
2014
 
2015
 
2014
Bikes
$
61,490

 
$
52,850

 
$
158,668

 
$
136,190

Power vehicles
44,681

 
37,298

 
112,462

 
96,440

Total sales
$
106,171

 
$
90,148

 
$
271,130

 
$
232,630



13. Acquisitions
Sport Truck, USA, Inc.
On March 31, 2014, the Company acquired certain assets and assumed certain liabilities of Sport Truck. The transaction was accounted for as a business combination. The Company paid cash of $40,770, plus the effective settlement of trade receivables in the amount of $473. In addition, certain members of Sport Truck’s executive management team agreed to refund up to $1,432 of the proceeds from the sale, on a graduated basis, if they terminate employment prior to March 31, 2017. As a result, such payments have been excluded from the acquisition consideration, and will be recognized as compensation expense over the expected three year service period. In the three and nine months ended September 30, 2015, the Company recognized $118 and $358 of acquisition related compensation expense, respectively, related to the arrangement, which is recorded as a component of fair value adjustment of contingent consideration and acquisition related compensation in the accompanying condensed consolidated statements of income. As of September 30, 2015, prepaid compensation of $476 and $233 is included in prepaids and other current assets and other assets, respectively, in the accompanying condensed consolidated balance sheet.
The Company agreed to total contingent consideration of up to $29,295 upon achievement of adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") targets of the acquired business through 2016, subject to adjustments defined in the asset purchase agreement. Performance compared to the targets is measured annually over a three year period, and payment of the contingent consideration will be made upon final determination of the adjusted EBITDA for each year. The estimated acquisition date fair value of the contingent consideration was $19,035, based on a Black-Scholes model, and is included in the computation of total consideration. As of September 30, 2015, $7,854 of contingent consideration has been paid under this arrangement. See Note 9 - Fair Value Measurements.

15

FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)

The Company’s allocation of the purchase price to the net tangible and intangible assets acquired and liabilities assumed is as follows:
Fair market values
 
Tangible assets acquired and liabilities assumed
$
13,046

Intangible assets
35,270

Goodwill
11,962

Total
$
60,278

The 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 $11,962 reflects the strategic fit of Sport Truck with the Company’s operations. Sport Truck is well-aligned with the Company’s mission of improving vehicle performance, delivering best in-class service, and entering into strategic and adjacent markets. The Company will amortize the acquired customer relationships asset over its expected useful life of 15 years. Trademarks, brand names and goodwill are expected to have an indefinite life, and will be subject to impairment testing. The goodwill is expected to be deductible for income tax purposes.
The Company incurred $157 and $1,402 of transaction costs in conjunction with the Sport Truck acquisition for the three and nine months ended September 30, 2014, and $0 and $34 for the three and nine months ended September 30, 2015, respectively which is included in general and administrative expense in the accompanying condensed consolidated statements of income.
Race Face Performance and Easton Cycling Businesses
On December 12, 2014, the Company acquired certain assets and assumed certain liabilities of Race Face/Easton, which was engaged in the design, manufacture, and global distribution of performance mountain and road bike wheels and other performance cycling components including cranks, bars, stems, and seat posts. In connection with the acquisition, the Company paid approximately $29,857. The acquisition was financed with debt and includes a potential earn-out opportunity of up to a maximum of CAD $19,500, or approximately $14,543 US dollars at the exchange rate in effect at September 30, 2015, contingent upon continued employment and the achievement of certain performance-based financial targets through October 2016. In the three and nine months ended September 30, 2015, the Company recognized $1,737 and $5,848, respectively, of acquisition related compensation related to the earn-out opportunity, which is recorded as a component of fair value adjustment of contingent consideration and acquisition related compensation in the accompanying condensed consolidated statements of income. The Company incurred $105 and $645 of acquisition related costs in conjunction with the Race Face/Easton acquisition for the three and nine months ended September 30, 2015, respectively, which is included in general and administrative expense in the accompanying condensed consolidated statements of income.
The allocation of the purchase price to the assets acquired and liabilities assumed is preliminary, subject to the Company's completion of its intangible valuation procedures, with the assistance of specialists. During the three months ended September 30, 2015, the Company refined its estimate based on preliminary valuation, resulting in an adjustment to goodwill of $1,395. Goodwill acquired is expected to be deductible for income tax purposes.

14. Related Party Agreement
In September 2014, the Company entered into an agreement with Compass Group Diversified Holdings, LLC ("Compass") to assist with compliance requirements pursuant to the Sarbanes-Oxley Act of 2002, as amended. Compass purchased a controlling interest in the Company in January, 2008, and beneficially owned approximately 40.9% of our outstanding common stock at September 30, 2015. Fees for services provided under this arrangement are estimated to be approximately $100 annually. The agreement will terminate on March 31, 2016 unless terminated earlier by either party.

Fox Factory, Inc. has a triple-net building lease for its manufacturing and office facilities in Watsonville, California. The building is owned by Robert Fox, a founder and minority stockholder of the Company. The term of the lease ends June 30, 2018, with monthly rental payments, which are adjusted annually for a cost-of-living increase based upon the consumer price index. Payments made under this lease were $301 and $903 for the three and nine months ended September 30, 2015, respectively, and $293 and $879 for the three and nine months ended September 30, 2014, respectively.

16

FOX FACTORY HOLDING CORP.
Notes to Condensed Consolidated Financial Statements - continued
(in thousands, except per share amounts)
(unaudited)


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 year ended December 31, 2014, as filed with the Securities and Exchange Commission ("SEC") on March 2, 2015 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 wholly owned operating subsidiaries, on a consolidated basis.
Cautionary Note Regarding Forward-Looking Statements
This quarterly report includes forward-looking statements, which are subject to the “safe harbor” created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. 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 which 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:
 
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 ability to improve operating and supply chain efficiencies;
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 transition of the majority of our mountain bike manufacturing operations to Taiwan and our expectations related to such transition;
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 high-end suspension and ride dynamics products;
our ability to successfully identify, evaluate and manage potential acquisitions and to benefit from such acquisitions; and
future economic or market conditions.

17


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 discussed in Item 1A, "Risk Factors" of Part I of our 2014 Annual Report on Form 10-K filed with the SEC on March 2, 2015 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 of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
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.
Critical Accounting Policies and Estimates
Self-Insurance. Since January 2015, the Company has been partially self-insured for its U.S. employee health and welfare benefits. The Company’s liability for self-insurance is based on claims filed and an estimate of claims incurred but not yet reported. The Company considers a number of factors, including historical claims information, when determining the accrual. Costs related to the administration of the plan and related claims are expensed as incurred. The Company has third-party insurance coverage to limit exposure for individually significant claims. There have been no other material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates included in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 2, 2015.

Recent Accounting Pronouncements

See Note 1 to the accompanying notes to unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Seasonality
Our business is seasonal. In each of the last three fiscal years, our quarterly sales have been the lowest in the first quarter and the highest during our third quarter of the year. We believe this seasonality is due to the delivery of new products.


18


Results of Operations
The table below summarizes our results of operations:
 
For the three months 
 ended September 30,
 
For the nine months 
 ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Sales
$
106,171

 
$
90,148

 
$
271,130

 
$
232,630

Cost of sales
71,385

 
61,601

 
187,693

 
160,113

Gross profit
34,786

 
28,547

 
83,437

 
72,517

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
5,981

 
5,282

 
17,418

 
14,244

Research and development
4,641

 
3,468

 
12,201

 
10,228

General and administrative
5,932

 
4,218

 
15,428

 
12,826

Amortization of purchased intangibles
2,756

 
1,684

 
6,435

 
4,719

Fair value adjustment of contingent consideration and acquisition related compensation
1,655

 
(16
)
 
6,058

 
106

Total operating expenses
20,965

 
14,636

 
57,540

 
42,123

Income from operations
13,821

 
13,911

 
25,897

 
30,394

Other expense, net:
 
 
 
 
 
 
 
Interest expense
422

 
291

 
1,166

 
722

Other expense (income), net
(182
)
 
1

 
(195
)
 
(156
)
Other expense, net
240

 
292

 
971

 
566

Income before income taxes
13,581

 
13,619

 
24,926

 
29,828

Provision for income taxes
2,990

 
3,328

 
6,802

 
5,015

Net income
$
10,591

 
$
10,291

 
$
18,124

 
$
24,813

The following table sets forth selected statement of income data as a percentage of sales for the periods indicated:
 
For the three months 
 ended September 30,
 
For the nine months 
 ended September 30,
 
2015
 
2014
 
2015
 
2014
Sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
67.2

 
68.3

 
69.2

 
68.8

Gross profit
32.8

 
31.7

 
30.8

 
31.2

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
5.6

 
5.9

 
6.4

 
6.1

Research and development
4.4

 
3.8

 
4.5

 
4.4

General and administrative
5.6

 
4.7

 
5.7

 
5.5

Amortization of purchased intangibles
2.6

 
1.9

 
2.4

 
2.0

Fair value adjustment of contingent consideration and acquisition related compensation
1.6

 

 
2.2

 

Total operating expenses
19.8

 
16.3

 
21.2

 
18.0

Income from operations
13.0

 
15.4

 
9.6

 
13.2

Other expense, net:
 
 
 
 
 
 
 
Interest expense
0.4

 
0.3

 
0.4

 
0.3

Other income, net
(0.2
)
 

 
(0.1
)
 
(0.1
)
Other expense, net
0.2

 
0.3

 
0.3

 
0.2

Income before income taxes
12.8

 
15.1

 
9.3

 
13.0

Provision for income taxes
2.8

 
3.7

 
2.5

 
2.2

Net income
10.0
 %
 
11.4
 %
 
6.8
 %
 
10.8
 %

19


Three months ended September 30, 2015 compared to three months ended September 30, 2014
Sales
 
For the three months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Bikes
$
61.5

 
$
52.9

 
$
8.6

 
16.3
%
Power Vehicles
44.7

 
37.3

 
7.4

 
19.8

Total sales
$
106.2

 
$
90.2

 
$
16.0

 
17.7
%
Sales for the three months ended September 30, 2015 increased approximately $16.0 million, or 17.7%, compared to the same period in 2014. The sales increase reflects a 16.3% increase in bike products and a 19.8% increase in powered vehicle products for the three months ended September 30, 2015 compared to the same prior year period. The increase in bike product sales was primarily due to the inclusion of Race Face/Easton's sales. The increase in sales of powered vehicle products was due to higher OEM sales as compared to the previous period.
Cost of sales
 
For the three months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Cost of sales
$
71.4

 
$
61.6

 
$
9.8

 
15.9
%
Cost of sales for the three months ended September 30, 2015 increased approximately $9.8 million, or 15.9%, compared to the same period in 2014. The increase in cost of sales was driven primarily by an increase in product sales.
For the three months ended September 30, 2015 our gross margin was 32.8% compared to 31.7% for the same period in 2014. The increase in our gross profit margin was attributable primarily to improved efficiencies, effects of purchase accounting adjustments, and cost savings gained from our ongoing transition of bike product manufacturing to Taiwan, partially offset by changes in product and customer mix.
Operating expenses
 
For the three months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
$
6.0

 
$
5.3

 
$
0.7

 
13.2
%
Research and development
4.6

 
3.5

 
1.1

 
31.4

General and administrative
5.9

 
4.2

 
1.7

 
40.5

Amortization of purchased intangibles
2.8

 
1.7

 
1.1

 
64.7

Fair value adjustment of contingent consideration and acquisition related compensation
1.7

 

 
1.7

 

Total operating expenses
$
21.0

 
$
14.7

 
$
6.3

 
42.9
%
Total operating expenses for the three months ended September 30, 2015 increased approximately $6.3 million, or 42.9%, over the same period in 2014. When expressed as a percentage of sales, operating expenses increased to 19.8% of sales for the three months ended September 30, 2015 compared to 16.3% of sales in the same period in 2014. The increase was due primarily to the inclusion of Race Face/Easton's operating expenses, including acquisition related compensation and amortization expense, within our consolidated results for the three months ended September 30, 2015, as well as spending to support the growth of the business and brand.


20


Within operating expenses, our sales and marketing expenses increased approximately $0.7 million attributable primarily to Race Face/Easton. Research and Development increased approximately $1.1 million due to $0.5 incurred at Race Face/Easton as well as investments in our mountain bike and power vehicle product lines aimed at new products and technologies to maintain our premium position in the marketplace and pursue new markets. General and administrative expenses increased approximately $1.7 million, due to the inclusion of $0.4 million of Race Face/Easton's expenses, inclusion of $0.3 million of expenses related to our ERP program, increase of $0.8 million in payroll and related costs, including stock compensation, as well as nominal changes in various other general and administrative categories.
Amortization of purchased intangible assets in the three months ended September 30, 2015 increased by approximately $1.1 million, as a result of our acquisition of Race Face/Easton.
During the three months ended September 30, 2015, we incurred $1.7 million in acquisition related compensation in connection with management earn-out arrangements.
Income from operations
 
For the three months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Income from operations
$
13.8

 
$
13.9

 
$
(0.1
)
 
(0.7
)%
As a result of the factors discussed above, income from operations for the three months ended September 30, 2015 decreased approximately $0.1 million, or 0.7%, compared to income from operations in the same period in 2014.
Other expense, net
 
For the three months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Other expense, net:
 
 
 
 
 
 
 
Interest expense
$
0.4

 
$
0.3

 
$
0.1

 
33.3
 %
Other income, net
(0.2
)
 

 
(0.2
)
 
NA

Other expense, net
$
0.2

 
$
0.3

 
$
(0.1
)
 
(33.3
)%
Other expense, net for the three months ended September 30, 2015 decreased by approximately $0.1 million to $0.2 million in the three months ended September 30, 2015, compared to $0.3 million in the same period in 2014. Interest expense increased in the three months ended September 30, 2015 by $0.1 million due to additional borrowings. Other income, net increased by $0.2 million due to gains on foreign currency transactions.
Income taxes
 
For the three months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Provision for income taxes
$
3.0

 
$
3.3

 
$
(0.3
)
 
(9.1
)%
The effective tax rates were 22.0% and 24.4% for the three months ended September 30, 2015 and September 30, 2014, respectively. For the three months ended September 30, 2015, the difference between the Company's effective tax rate and the 35% federal statutory rate resulted primarily from the reversal of certain tax reserves as a result of the expiration of the statute of limitation in certain tax jurisdictions, as well as from the benefit from domestic production activity deduction and tax credits. These benefits were partially offset by state taxes. For the three months ended September 30, 2014, the difference between the Company's effective tax rate and the 35% federal statutory rate resulted primarily from the expiration of the statute of limitations that allowed us to release a liability for unrecognized tax benefits relating to the uncertainty of amortization and depreciation expenses which were a result of Compass’ acquisition of us in 2008, the domestic production activity deduction. These benefits were partially offset by state taxes.

21


Net income
 
For the three months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Net income
$
10.6

 
$
10.3

 
$
0.3

 
2.9
%
As a result of the factors described above, our net income increased $0.3 million, or 2.9%, to $10.6 million in the three months ended September 30, 2015 from $10.3 million for the same period in 2014.
Nine months ended September 30, 2015 compared to nine months ended September 30, 2014
Sales
 
For the nine months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Bikes
$
158.7

 
$
136.2

 
$
22.5

 
16.5
%
Power Vehicles
112.5

 
96.4

 
16.1

 
16.7

Total sales
$
271.2

 
$
232.6

 
$
38.6

 
16.6
%
Sales for the nine months ended September 30, 2015 increased approximately $38.6 million, or 16.6%, compared to the same period in 2014. The sales increase reflects a 16.5% increase in bike products and 16.7% growth in powered vehicle products for the nine months ended September 30, 2015 compared to the same prior year period. The increase in bike product sales was attributable to the inclusion of Race Face/Easton's sales, which was partially offset by a decrease in mountain bike suspension sales due to various factors including an increased competitive environment in certain bike product categories. The increase in sales of powered vehicle products was primarily due to the acquisition of Sport Truck as well as an increase in power sport product sales, partially offset by decreases in off-road product sales as a result of model year change-over in the Ford Raptor program.
Cost of sales
 
For the nine months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Cost of sales
$
187.7

 
$
160.1

 
$
27.6

 
17.2
%
Cost of sales for the nine months ended September 30, 2015 increased approximately $27.6 million, or 17.2%, compared to the same period in 2014. The increase in cost of sales was driven primarily by an increase in product sales, as well as certain business factors affecting gross margin which are discussed below.
For the nine months ended September 30, 2015 our gross margin was 30.8% compared to 31.2% for the same period in 2014. The 0.4% decrease in our gross profit margin was attributable primarily to costs incurred in the first quarter of 2015 related to the West Coast port slowdown with the balance attributable to changes in product and customer mix as well as investments made to align our U.S production capacity with anticipated power vehicle demand.

22


Operating expenses
 
For the nine months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
$
17.4

 
$
14.2

 
$
3.2

 
22.5
%
Research and development
12.2

 
10.2

 
2.0

 
19.6

General and administrative
15.4

 
12.8

 
2.6

 
20.3

Amortization of purchased intangibles
6.4

 
4.7

 
1.7

 
36.2

Fair value adjustment of contingent consideration and acquisition related compensation
6.1

 
0.1

 
6.0

 
6,000.0

Total operating expenses
$
57.5

 
$
42.0

 
$
15.5

 
36.9
%
Total operating expenses for the nine months ended September 30, 2015 increased approximately $15.5 million, or 36.9%, over the same period in 2014. When expressed as a percentage of sales, operating expenses increased to 21.2% of sales for the nine months ended September 30, 2015 compared to 18.0% of sales in the same period in 2014. The increase was due primarily to the inclusion of Sport Truck's and Race Face/Easton's operating expenses, including acquisition related expenses, within our consolidated results for the nine months ended September 30, 2015.
Within operating expenses, our sales and marketing expense increases were primarily due to the inclusion of $2.4 million of Sport Truck's and Race Face/Easton's expenses, with the balance attributable primarily to increases in race support, events, and sponsorships to promote our brand. Our research and development expense increased in the nine months ended September 30, 2015 due to $1.3 million of expense incurred at Sport Truck and Race Face/Easton, as well as investments of $0.7 million in research and development for our existing mountain bike and power vehicle product lines. Our general and administrative expense increased in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 due to $1.7 million of expense incurred at Sport Truck and Race Face/Easton, $0.5 million in higher stock compensation expense, $0.4 million related to our ERP initiative, and nominal increases in various other general and administrative expenses. The aforementioned increases were offset by reductions of $0.5 million and $0.2 million in acquisition costs and offering expenses, respectively.
Amortization of purchased intangible assets in the nine months ended September 30, 2015 increased by approximately $1.7 million, primarily as a result of our recent acquisitions.
During the nine months ended September 30, 2015, we incurred $6.1 million in acquisition related compensation in connection with the recent acquisitions, primarily resulting from management earn-out expenses.
Income from operations
 
For the nine months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Income from operations
$
25.9

 
$
30.4

 
$
(4.5
)
 
(14.8
)%
As a result of the factors discussed above, income from operations for the nine months ended September 30, 2015 decreased approximately $4.5 million, or 14.8%, compared to income from operations in the same period in 2014.

23


Other expense, net
 
For the nine months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Other expense, net:
 
 
 
 
 
 
 
Interest expense
1.2

 
0.7

 
$
0.5

 
71.4
%
Other income, net
(0.2
)
 
(0.2
)
 

 
%
Other expense, net
$
1.0

 
$
0.5

 
$
0.5

 
100.0
%
Other expense, net for the nine months ended September 30, 2015 increased by approximately $0.5 million to $1.0 million in the nine months ended September 30, 2015, compared to $0.5 million in the same period in 2014. Interest expense increased in the nine months ended September 30, 2015 by $0.5 million due to additional borrowings used primarily to fund acquisitions.
Income taxes
 
For the nine months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Provision for income taxes
$
6.8

 
$
5.0

 
$
1.8

 
36.0
%
The effective tax rates were 27.3% and 16.8% for the nine months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015, the difference between our effective rate and the 35% federal statutory rate resulted primarily from the reversal of certain tax reserves as a result of the expiration of the statute of limitation in certain tax jurisdictions, as well as from the benefit from domestic production activity deduction and tax credits. These benefits were partially offset by state taxes. For the nine months months ended September 30, 2014, the difference between our effective rate and the 35% federal statutory rate resulted primarily from the $3.8 million reapportionment benefit. Additionally, our 2014 effective tax rate was benefited as a result of the domestic production activity deduction. These income tax benefits were partially offset by 2014 state taxes.
Net income
 
For the nine months 
 ended September 30,
 
 
 
 
(in millions)
2015
 
2014
 
Change ($)
 
Change (%)
Net income
$
18.1

 
$
24.8

 
$
(6.7
)
 
(27.0
)%
As a result of the factors described above, our net income decreased $6.7 million, or 27.0%, to $18.1 million in the nine months ended September 30, 2015 from $24.8 million for the same period in 2014.

Liquidity and Capital Resources
Our primary cash needs are to support working capital, acquisitions, debt payments, and capital expenditures. We have generally financed our historical liquidity needs with operating cash flows and borrowings under our credit facilities. These sources of liquidity may be impacted by various factors, including demand for our products, investments made by us in acquired businesses, our plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.

24


A summary of our operating, investing and financing activities are shown in the following table:
 
For the nine months 
 ended September 30,
(in thousands)
2015
 
2014
Net cash provided by operating activities
$
13,087

 
$
18,727

Net cash used in investing activities
(8,799
)
 
(45,782
)
Net cash (used in) provided by financing activities
(3,195
)
 
27,348

Effect of exchange rate changes on cash
(205
)
 
(39
)
Increase in cash and cash equivalents
$
888

 
$
254

Operating activities
Cash provided by operating activities consists of net income, adjusted for certain non-cash items primarily, depreciation and amortization, stock-based compensation including related excess tax benefits, changes in deferred income taxes, and recognition of acquired inventory step up adjustments, offset by net cash invested in working capital.
In the nine months ended September 30, 2015, cash provided by operating activities was $13.1 million and consisted of net income of $18.1 million plus non-cash items totaling $10.4 million less changes in operating assets and liabilities totaling $15.4 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $9.7 million, stock-based compensation of $3.7 million, and cost of goods on acquired inventory step up of $0.8 million, which was partially offset by a change in deferred taxes of $3.4 million. Our investment in operating assets and liabilities is a result of an increase in inventory and accounts receivable of $21.9 million and $19.1 million, respectively, offset by an increase in accounts payable of $19.3 million. The increase in accounts receivable reflects higher sales in the third quarter. The increase in inventory and corresponding increase in accounts payable are due to seasonality and to support increased sales. In the nine months ended September 30, 2015, our prepaid and other current assets increased by $4.8 million primarily due to timing of income tax receivables and value added tax (VAT) refunds. Further, our accrued expenses increased $8.8 million due primarily to accruals for acquisition related earn out expense, and our income tax payable increased $2.4 million due to receipt of a one-time tax benefit in the prior year.

In the nine months ended September 30, 2014, cash provided by operating activities was $18.7 million and consisted of net income of $24.8 million plus non-cash items totaling $4.6 million less changes in operating assets and liabilities and other adjustments
totaling $10.5 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $7.1 million and stock-based compensation of $3.0 million, offset by a change in deferred taxes of $3.3 million an excess tax benefit from the exercise of stock options of $3.0 million . Cash invested in operating assets and liabilities is a result of increases in accounts receivable, inventory and prepaid expenses and other assets of $5.3 million, $4.6 million, and $2.7 million, respectively,
partially offset by an increase in income taxes payable of $1.5 million. Our working capital investment is driven by normal growth of our business. Additionally, the increase in prepaid expenses and other current assets resulted primarily from prepaid compensation expense related to amounts paid for Sport Truck and renewal payments made under our corporate insurance programs.
Investing activities
Cash used in investing activities relates to strategic acquisitions of businesses and investments in our manufacturing and general infrastructure through the procurement of property and equipment.
In the nine months ended September 30, 2015, cash used in investing activities was $8.8 million which consisted of $8.2 million in purchases of property and equipment as well as $0.8 million in consideration paid for our acquisition of a supplier to our Sport Truck subsidiary in the first quarter of 2015. Our purchases of property and equipment include $1.9 million related to a new global enterprise resource planning (ERP) which we expect to phase in over the next few fiscal years.
In the nine months ended September 30, 2014, cash used in investing activities was $45.8 million, which included $40.8 million paid for the asset acquisition of Sport Truck and $1.4 million in consideration paid for other assets. Additionally, we invested $3.7 million in property and equipment.
Financing activities
Cash provided by (used in) financing activities primarily relates to changes in our capital structure, including the various forms of debt and equity instruments used to finance our business.

25


In the nine months ended September 30, 2015, net cash used in financing activities was $3.2 million, which consisted primarily of net borrowings of $12.0 million under our line of credit, offset by a payment of $7.9 million in contingent consideration related to our 2014 acquisition of Sport Truck. Additionally, we paid $5.2 million to repurchase our common stock under the buyback program authorized in 2014, and made repayments of $2.1 million of term debt under the 2013 Amended and Restated Credit Facility.
In the nine months ended September 30, 2014, net cash provided by financing activities was $27.3 million, which consisted primarily of proceeds from issuance of debt of $49.7 million net of origination fees, and net repayments of $19.3 million and $8.0 million of term debt and revolving credit, respectively, all under the 2013 Amended and Restated Credit Facility. Additionally, $4.9 million was provided by the exercise of stock options.
 
Amended and Restated 2013 Credit Facility
In August 2013, we entered into the 2013 Credit Facility with Sun Trust Bank and other named lenders. The 2013 Credit Facility provided a revolving line of credit. On March 31, 2014, in connection with our asset purchase of Sport Truck, we amended and restated the 2013 Credit Facility. The Amended and Restated 2013 Credit Facility provided a maturing secured Term Loan in the principal amount of $50.0 million, subject to quarterly amortization payments, and extended the term of the 2013 Credit Facility through March 31, 2019. The proceeds of the Term Loan were used, in part, to fund the acquisition of Sport Truck and to pay down the revolving line of credit provided under the 2013 Credit Facility. On December 12, 2014, we amended the existing Amended and Restated 2013 Credit Facility. The First Amendment increased the Term Loan principal amount by $30.0 million to a total of $56.8 million, subject to quarterly amortization payments, and extended the maturity of the Amended and Restated 2013 Credit Facility through December 12, 2019. The additional proceeds of the Term Loan made available through the First Amendment were used to partially fund the acquisition of Race Face/Easton. On May 29, 2015 the Company entered into a Second Amendment to the Amended and Restated 2013 Credit Facility solely to revise the definition of "Continuing Director" contained therein.
The Amended and Restated 2013 Credit Facility is secured by substantially all of our assets, restricts our ability to make certain payments and engage in certain transactions, and also requires that we satisfy customary financial ratios, including a fixed charge coverage ratio of not less than 1.5:1.0 and a leverage ratio of not greater than 2.75:1.0, both ratios calculated as defined in the Amended and Restated 2013 Credit Facility. We were in compliance with the covenants as of September 30, 2015.

Other Commitments

Other than the payment of $7.9 million in contingent consideration made in April 2015 related to our 2014 acquisition of Sport Truck, no other material contractual obligation has changed since the Company's Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 2, 2015.
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.

26



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
There have been no material changes in 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 December 31, 2014 and filed with the SEC on March 2, 2015.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
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 September 30, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are 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, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2015.
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 Rule 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.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and 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 controls 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.

27


PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we are involved in legal proceedings incidental to our business, in particular intellectual property related disputes, product liability claims, as well as other litigation of a non-material nature in the ordinary course of business. In accordance with ASC 450, "Contingencies", we have not accrued for material loss contingencies relating to any legal proceedings because we believe that, although unfavorable outcomes in proceedings may be possible, they are not considered by our management to be probable and reasonably estimable. We believe that the outcome of any such pending matters, either individually or in the aggregate, will not have a material impact on our business or financial condition.
ITEM 1A. RISK FACTORS
Our business, financial condition, operating results and prospects could be materially and adversely affected by various risks and uncertainties. In addition to the risks and uncertainties discussed elsewhere, you should carefully consider the risks and uncertainties described below. If any of the 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
If we are unable to continue to enhance existing products and develop 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 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 not only for 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 $13.6 million, $10.4 million and $9.7 million for our research and development efforts in 2014, 2013 and 2012, 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 ride dynamics industry is highly competitive. We compete with a number of other manufacturers that produce and sell ride dynamics 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. Also, 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 ride dynamics products or through competitor consolidations. We could also face competition from well-capitalized entrants into the performance suspension and ride dynamics product market, 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.

28


Our business is sensitive to economic conditions that impact consumer spending. Our suspension and ride dynamics 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 are either in the process of recovering from recession or, in some cases, are still struggling with recession, disruption 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, strength of local currencies, 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.
Our products are selected by both OEMs and dealers and distributors 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 benefits 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 suspension and ride dynamics products industry and continue to provide high quality products and services. Also, 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, high-performance 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.

29


A significant portion of our sales are highly dependent on the demand for high-end bikes and their suspension components 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 2014, approximately 58% of our sales were generated from the sale of suspension products for high-end bikes. 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.
Our growth in the powered vehicle category is dependent upon our continued ability to expand our product sales into powered vehicles that require performance suspension 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 suspension products. Such market growth includes the creation of new classes of vehicles that need our products, such as Side-by-Sides, and our ability to create products for these vehicles. In the event these markets stopped expanding or contracted, 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.
A disruption in the operations of our manufacturing facilities, including any disruption in connection with moving a majority of the manufacturing of our bike suspension component products to our facility in Taiwan, could have a negative effect on our business, financial condition or results of operations.
We are in the process of transitioning the majority of our bike suspension component product manufacturing operations to our bike suspension component facility in Taichung, Taiwan. We contemplate that this transition will continue through 2015, at which time we anticipate that the majority of the manufacturing of our bike suspension component products will be completed in Taiwan. During our transition process, we will incur some duplication of facilities, equipment and personnel, the amount of which could vary materially from our projections. Also, the transition process could cause manufacturing problems and give rise to execution risks, including disruptions to employees, negative impact on employee morale and retention, delays in recognizing efficiencies or increased costs of manufacturing, and adverse impacts on our product quality and delivery times. In addition, we could encounter unforeseen difficulties resulting from the distance and time zone differences between our main operations in California and our Taiwan manufacturing facilities.
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 U.S. largely through ports on the West Coast. Freight arriving at West Coast ports must be offloaded from ships by longshoremen, none of whom are our employees. 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 which may occur as was experienced on the weekend of February 7-8, 2015, where West Coast ports were shut down as a result of a labor dispute. The ongoing labor dispute then led to an additional port shutdown for four days between February 12, 2015 and February 16, 2015. While the West Coast ports labor dispute ended with a five year agreement, it lasted longer than we forecasted and negatively affected our operating results. Any similarly occurring labor dispute could potentially have a negative effect on both our current period and future period operating results.

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Our business depends substantially on the continuing efforts of our senior management, and our business may be severely disrupted if we lose their services.
We are heavily dependent upon the contributions, talent and leadership of our senior management team, particularly our Chief Executive Officer, Larry L. Enterline. We do not have a "key person" life insurance policy on Mr. Enterline or any other key employees. We believe that the top twelve 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 the suspension products 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. Our inability to find suitable replacements for any of the members of our senior management team could negatively affect our business, financial condition or results of operations.
We depend on skilled engineers to develop and create our products, and the failure to attract and retain such individuals could adversely affect our business.
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 Silicon Valley near where our headquarters 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, impede our ability to develop new products and harm our business, financial condition or results of operations.
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 $272.7 million in 2013 to approximately $306.7 million in 2014. 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 suspension and ride dynamics products, consumer acceptance of our products, competitive conditions in the marketplace, 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 our products are not used by current or future professional athletes and race teams, 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, if these professional athletes and race teams are no longer popular, if our sponsored athletes and race teams fail to have success or if 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.

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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. 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 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. For example, if our bike producing OEM customers reduce production of their high-end bikes, their orders to us for our products would in turn be reduced, which could negatively affect 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 34%, 42% and 40% of our sales in 2014, 2013 and 2012, respectively. 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.
We refer to the branded bike OEMs that use our products throughout this document as "our customers," "our OEM customers" or "our bike OEM customers". Branded bike OEMs often use contract manufacturers to manufacture and assemble their bikes. As a result, even though we typically negotiate price and volume requirements directly with our bike OEM customers, it is the contract manufacturers that frequently place the purchase orders with us and are responsible for paying us (rather than the branded bike OEMs). Giant is an OEM and contract manufacturer used by certain of our bike OEM customers. Sales to Giant accounted for approximately 14%, 17% and 13% of our sales in 2014, 2013 and 2012, respectively. In the event Giant were to experience manufacturing or other problems, or were to fail to pay us, it could have a material adverse impact on our business, financial condition or results of operations.
Currency exchange rate fluctuations could impact gross margins and expenses, in particular, potential acquisition related expenses related to the Race Face/Easton acquisition.
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. 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, with the acquisition of Race Face/Easton, certain of our operations take place in Canada and a percentage of our sales and expenses are denominated in Canadian dollars. The acquisition also included approximately $14.5 million of earn-out compensation contingently payable, 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.

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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;
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.
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 utilize products and components manufactured by other bike component manufacturers. If such component manufacturers were to cease selling their products and components on a stand-alone basis, their sales are disrupted, or their competitive market position or reputation is diminished, customers could migrate to competitors that sell complementary bike products which 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 utilize 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, and we could incur substantial costs to, redesign our products or defend legal actions, and such costs 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 utilized 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. We may not, however, 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 which 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 this may adversely affect our business. 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 and additional overtime, 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 we could experience higher than expected warranty costs if we become aware of an underperforming product. For example, in 2012 we increased our reserve and included additional costs of approximately $1.8 million to reflect the costs of repairing or replacing certain dampers in our suspension products and experienced other related costs of approximately $1.0 million. We may in the future encounter similar situations and be forced to make other adjustments to our warranty reserves or incur costs in excess of these reserves which could adversely affect our results of operations.

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We may also be required to or voluntarily participate in recalls involving our products or components if any prove to be defective. For example, during calendar year 2013, we initiated a voluntary recall of certain model year 2013 32 and 34 Evolution Series suspension forks having 120 mm - 160 mm of travel with certain dampers manufactured by us between March 1, 2012 and November 30, 2012. In addition to the direct costs related to this or other recalls we may be forced to undertake in the future, such events could 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 and 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 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 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 Amended and Restated 2013 Credit Facility places operating restrictions on us and creates default risks.
The Amended and Restated 2013 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 Amended and Restated 2013 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 facilities, which constitutes substantially all of our assets.
Our outstanding indebtedness under our secured 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.
In connection with our purchase of the business of Sport Truck in March 2014, we entered into the Amended and Restated 2013 Credit Facility, which provided a maturing secured Term Loan in the principal amount of $50.0 million. On December 12, 2014, in connection with the acquisition of Race Face/Easton, the Company entered into the First Amendment to the Amended and Restated 2013 Credit Facility. The First Amendment increased the Term Loan by the principal amount of $30.0 million to a total of $56.8 million, subject to quarterly amortization payments, and extended the maturity of the Amended and Restated Credit Facility through December 12, 2019. Borrowings under our Amended and Restated 2013 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 Amended and Restated 2013 Credit Facility will increase our interest expense.
As of September 30, 2015, we had $59.9 million of indebtedness, bearing interest at a variable rate, outstanding under the Amended and Restated 2013 Credit Facility. 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, 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. Based on the $59.9 million of variable interest rate indebtedness that was outstanding as of September 30, 2015, a hypothetical 100 basis point increase or decrease in the interest rate would have resulted in an approximately $0.4 million change to our interest expense for the nine months ended September 30, 2015.

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We are subject to certain risks in our manufacturing and in the testing of our products.
As of September 30, 2015, we employed approximately 1,500 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. Also, 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.
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 mod