Fox Factory Holding Corp (FOXF) 2013 Q3 法說會逐字稿

Good day everyone, and welcome to the Fox Factory Holding Corporation's Third Quarter Fiscal Year 2013 Earnings Results Conference Call. This call is being recorded.

At this time, for opening remarks and introductions I would like to turn the conference over to David Haugen, General Counsel for Fox Factory. Mr. Haugen, please begin.

Thank you. Good afternoon, and welcome to Fox Factory's Third Quarter Fiscal Year 2013 Earnings Conference Call. On the call today are Larry Enterline, Chief Executive Officer; Mario Galasso, Senior Vice President, Business Divisions; and Zvi Glasman, Chief Financial Officer.

By now, everyone should have access to the third-quarter fiscal 2013 earnings release, which went out today at approximately 4 p.m. Eastern time. If you have not had a chance to review the release, it's available on the Investor Relations portion of our website at www.ridefox.com.

Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements, and Management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the Company's control. And can cause future results, performance, or achievements to differ significantly from the results, performance, or achievement expressed or implied by such forward-looking statements.

Important factors that could cause or contribute to such differences include risks detailed in the Company's earnings release, Form 10-Q, and prospectus filed with the Securities and Exchange Commission. Except as required by law, the Company undertakes no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events, or otherwise.

In addition, within our earnings release and in today's prepared remarks, non-GAAP adjusted net income, non-GAAP adjusted earnings per share, adjusted EBITDA, and adjusted EBITDA margin percent are reference. And it's important to note that these are non-GAAP financial measures. A reconciliation of these non-GAAP measures to their most directly comparable GAAP financial measures is included in the Company's press release, which has also been posted on our website.

With that, it's my pleasure to turn the call over to our CEO, Mr. Larry Enterline.

Thank you, David. Good afternoon everyone, and thank you for joining us today.

On today's call, I will provide a brief overview of our third-quarter results, and progress on our ongoing strategic initiatives. Mario will then discuss recent highlights from each of our businesses. Zvi will review the financial results for the quarter in more detail and discuss our guidance. After that, we will open up the call for any questions that you may have.

In the third quarter, Fox continued to benefit from demand for our high-performance mountain bike and powered vehicle products, which enabled us to report sales of $82.3 million, an increase of 12.9% versus the prior-year third quarter, and at the high end of our expectations. Sales were aided by a few customer pull-ins at quarter end, which is not unusual in our business. Our sales increase, combined with a 30.8% gross margin, an improvement of 320 basis points, enabled us to report earnings of $0.27 per diluted share, also at the high end of our guidance.

Our team continue to execute on our long-term strategy to improve our operating efficiencies across our global infrastructure, with operating margin expanding 290 basis points, and adjusted EBITDA margin 270 basis points higher, as compared to the prior-year period. We have identified several areas in our business for future margin improvement, which I will provide an update on in a moment. And we expect to continue to improve our gross and adjusted EBITDA margins as we go forward.

Importantly, we believe our business continues to benefit from positive industry dynamics. Over the past several years, we have seen consistent and steady growth for retail units sold for premium mountain bikes and powered vehicles. We have been and will continue to be in a position to capture our share of this market growth.

Within our markets, we continued to see a shift in consumer preference towards higher performance products, which is in line with our premium offerings. These results continue to give us confidence about our future growth prospects, given our established premium brand and strong OEM relationships, along with our track record of successful innovation.

Now I would like to take a few minutes to provide an update on our strategic initiatives and growth plans. First, we remain focused on increasing our penetration into existing vehicle categories, both through sales with our existing OEMs, as well as with new OEMs. At Fox, we continue to introduce new products with a regular cadence, which allows us to meet the evolving demand of OEMs and end-user customers. This has enabled us to build upon our existing technologies, and continue to expand and improve our products. In addition to increasing our sales with OEM partners, we continue to believe there is a robust opportunity for us to strategically expand our aftermarket-specific products and services to existing vehicle platforms.

Second, we have the opportunity to grow by entering new product categories. Fox has developed the reputation as a leader in ride dynamics, and we believe that our technologies have potential applications in end markets that we do not currently serve.

Third, we're focused on evaluating and capitalizing on opportunities to expand our international presence. The vast majority of our sales are to OEMs, dealers, and distributors located either in North America or Europe, and we believe there are very good market opportunities in Asia and Latin America.

Although we have historically grown organically, we mentioned on our IPO road show and on our last earnings call that should the right acquisition opportunity present itself, we would be open to growth via acquisition. Thus we announced today that post the close of the third quarter, we completed the acquisition of certain assets of our third-party German distributor and service center, Toxoholics. We believe that this acquisition provides us with an in-depth understanding of the European market, and importantly, Fox-specific products. It also offers an accelerated path for improving customer service and customer relations in Europe, and it provides opportunities for future expansion of our European operations and infrastructure.

Going forward, we believe that with our scale, Fox continues to have the ability to selectively evaluate potential acquisitions that could help us serve new markets. Long-term, we believe that there is an opportunity to capture the world's emerging middle-class consumption across geographies. Areas that we continue to focus on as potential attractive markets for our products include China, South Korea, Australia, Brazil, Argentina, and Chile.

Lastly, we continue to focus on opportunities to improve our operating and supply-chain efficiencies, which should lead to higher margins and accelerated profitability in future years. We are in the process of moving the majority of bike production to Taiwan, and we anticipate the move will be completed by the end of 2015. This transition is on track and going well, with nearly 700,000 sub-assemblies having been manufactured out of this facility in 2013.

Once completed, in addition to the margin expansion opportunities created by this initiative, we believe this will enable us to reduce our lead time to our Taiwan-based manufacturers for building the majority of high-end mountain bikes. In addition, this supports our ongoing globalization efforts, as we work to facilitate adding capacity in the future across other locations with customer lead time in mind, and of course increased operating efficiencies long term.

Before I turn the call over to Mario, I wanted to briefly touch on our voluntary recall of certain model-year 2013 suspension forks, which we previously announced. At Fox, our team consists of great athletes, weekend warriors, and enthusiasts of our mountain bike and powered vehicle products. Safety is paramount to all of us and our customers.

As a result, based on some of our own thorough product testing, we determined that a small percentage of the forks manufactured during a period in 2012 have the potential to fail under a specific set of circumstances. The forks affected by this recall were assembled in our Watsonville, California, facility. We initiated the recall in late October to assure that consumers impacted by this event have the opportunity to obtain a free damper upgrade that will resolve the concern. The recall does not involve any of Fox's current-model-year 2014 suspension forks.

As we mentioned in conjunction with this announcement, based on our current estimates, we believe the existing 2012 warranty reserve is adequate to cover the repair-related costs we expect to incur as a result of this recall. In addition, we believe that the miscellaneous other costs which we anticipate incurring as a result of the recall, and that cannot be charged against the warranty reserve, will not be material.

In summary, we are very pleased with the current position of our business. While there are several external variables we'd all continue to hear about in the news across the global economy that are outside our control, we are cognizant of them and the impacts they could have at any time on our business. However, we believe that with our premium established brand, a track record of successful product innovation, as well as our significant relationships with our major OEMs and an expanding global infrastructure, that Fox is well-positioned for long-term future growth.

With that overview, I would now like to turn the call over to Mario.

Thank you Larry, and good afternoon to everyone. To reiterate Larry's comment, the Fox brand is very well established across our key product categories, and well recognized by consumers. During my remarks, I would like to discuss some of our recent business and industry highlights, as well as initiatives that will help drive our business, both over the short and the long term.

To start, we are very proud of our recent milestones, and the performance of our race teams and athletes. On the mountain bike side, we capped off the race season at the World Championships in South Africa, with gold in men's and women's elite downhill, and junior men's downhill. For the season at both the world and national levels, Fox athletes took home 38 gravity wins, 17 cross-country wins, and 15 Enduro wins in 2013.

The model year 2015 step season is in full swing for our bike group. Our sales team, with engineering support, is out in the field working closely with product managers from our OEM customers to develop suspension solutions that enhance the ride dynamics of their product lineups. Manufacturing and operations is ramping up to produce next year's exciting product lineup.

Moving on to the powered vehicle side of things, we have some great things to share here, as well. As we speak, SEMA is going on in Las Vegas. SEMA is the premier automotive show, and last year more than 60,000 domestic and international buyers were in attendance. We are there in full force with our on- and off-road truck, side-by-side, circle track, and military offerings.

A new product category for us is circle track. Since debuting on the circle track race circuit with a win on July 13 of this year, we continued racking up the wins and gaining traction with racer adoption. To date we have taken first place 15 times, second place 15 times, and third place six times.

The World Finals are this weekend in Charlotte, North Carolina, where we will have 30 cars in the field on Fox, including reigning world champ Brett Hearn. Hearn just won the Eastern States 200 on October 27. The shock that has been garnering all this success went from concept to race-winning prototype in five weeks, and into production seven weeks after that first prototype. We registered our first sale on September 6.

Focusing on off-road for a moment, the Blue Water Desert Challenge is a two-day off-road race that took place on October 12 and 13. We took first place in the unlimited truck and unlimited open-wheel classes. Currently, our off-road race techs are getting our drivers prepped and tuned for the Baja 1000, coming up in late November.

The AUSA Military Show is held in Washington DC from October 21 through October 23. At this show, Fox's military products were represented on 17 vehicles, ranging from mine rollers, to vehicles in competition for the much-anticipated JLTV award, as well as the systems developed for the Humvee retrofit program. We're very proud to be the shock supplier for the Polaris MRZR two- and four-seat variants, as well as the General Dynamics GNV 1.1 vehicle, which were recently awarded the contracts in their respective vehicle categories.

Side-by-side continues to be our fastest growing powered vehicle segment. We recently launched a new 2.5 bore coil-over shock at the Sand Sports Super Show in Costa Mesa, California. On November 2, Ryan Piplic set a new side-by-side distance jump record of 155 feet, 8 inches, surpassing the old record of 129.5 feet earlier this year.

We are also prepping are side-by-side drivers to get ready for the Baja 1000. Last year, one of our long-time Fox employees took third place in the Baja 1000, with his team being the first to complete the race in an Arctic Cat Wildcat.

On the motorcycle front, the new Indian lineup as well received at Sturgis. We have spec on two of the three recently introduced Indian models. In the off-road motorcycle world, the Podium RC3 has helped our athletes take three Endurocross wins this season. At the recent international six-day Enduro, Taylor Robert took home an individual gold, and lead the US team to a second place, their best finish in 30 years.

We also won three championships in Europe, the 2013 European Supercross Championship, the 2013 French Motocross Championship, and the FIM Cross Country Rally's World Championship. We remain focused on these channels and our opportunities for future growth within them. With that, I would like to now turn the call over to Zvi Glasman, our CFO, to review our financial results. Zvi?

Thank you, Mario. Good afternoon, everyone. I will focus on our third-quarter financial results.

Sales for the third quarter of fiscal 2013 were $82.3 million, an increase of 12.9%, versus sales of $72.9 million in the third quarter of fiscal 2012. Sales of our products fall into two general categories, mountain bikes and powered vehicle products. Our year-over-year growth in the third quarter reflects improvement in both categories. Sales of mountain vehicle products, mountain bike products, increased 10.8% compared to the third quarter of last year, and sales on powered vehicle products increased 18.2% on a year-over-year basis.

Gross margin was 30.8% for the third quarter of fiscal 2013, a 320-basis-point improvement from gross margin of 27.6% in the prior-year period. Approximately 140 basis points of the improvement in gross margin relates to our successful execution of initiatives designed to improve operating efficiencies. And the remaining 180-basis-point improvement is largely due to additional warranty and other related costs incurred in the third quarter of 2012 to upgrade certain dampers contained in the Company's suspension projects, which costs did not re-occur in 2013.

Total operating expenses were $10.6 million, or 12.8% of sales, for the third quarter of fiscal 2013, compared to $9.1 million, or 12.5% of net sales, in the third quarter of the prior year. Also within operating expenses, our sales and marketing increased to $3.6 million in the third quarter of 2013, compared with $3.1 million in the prior-year period, due largely to personnel expenses, as we continue to spend at the point of attack to support the Company's sales growth.

Research and development expenses increased to $2.5 million in the third quarter of this year, compared to $2.4 million in fiscal 2012. Expenses were up $0.1 million due to higher personnel expenses, but down as a percentage of sales, due to timing of product development projects. The investment in R&D is a critical component of our business, and while our investment may fluctuate in certain years and quarters depending on timing of product developments and other factors, we expect that we will continue to generally invest at the historical levels, expressed as a percentage of sales.

Our general and administrative expenses in the third quarter of 2013 were $3.1 million, compared to $2.2 million in the prior-year period. The increase was largely comprised of increased personnel expenses, as we strengthened our infrastructure to support the Company's growth and the requirements of becoming a public Company.

Our net income in the third quarter of 2013 was $9.9 million, an increase of 81.5%, compared to $5.5 million in the prior-year period. Earnings per diluted share for the third quarter of fiscal 2013 was $0.27 per share, calculated on 36.4 million weighted average diluted shares outstanding, compared to $0.16 calculated on 33.7 million weighted average diluted shares outstanding in the third quarter of fiscal 2012.

Non-GAAP adjusted net income was $12.1 million, an increase of 94.2% compared to non-GAAP adjusted net income of $6.2 million in the third quarter of the prior year. Non-GAAP adjusted earnings per diluted share for the third quarter of fiscal 2013 was $0.33, compared to non-GAAP adjusted earnings per diluted share of $0.18 in the third quarter of fiscal 2012. We believe non-GAAP adjusted net income is a useful metric that better reflects the performance of our business on an ongoing basis. You'll find a reconciliation of non-GAAP adjusted net income to the GAAP measure net income, and the calculation of non-GAAP adjusted earnings per share, at the end of this press release issued today.

You will also find a reconciliation of adjusted EBITDA to the GAAP measure net income in our earnings release. In the third quarter of 2013, adjusted EBITDA was $17.3 million, a 29.8% increase, compared to $13.4 million in the same quarter last year.

Adjusted EBITDA margin increased 270 basis points to 21%, compared to 18.3% in the prior-year quarter. This margin improvement reflects our ability to leverage our operating platform and the aforementioned damper warranty issue. To reiterate Larry's comments, we remain focused on continuing to improve our margins as we execute our initiatives in the coming quarters.

Turning briefly to our results for the first nine months of 2013, our sales increased 15.7% in the first nine months of 2013 to $207.5 million. Again, this growth reflects higher sales for both mountain bike and powered vehicle products.

Adjusted EBITDA in the first nine months increased 31% to $38.7 million in the first nine months of fiscal 2013, compared to $29.6 million in the prior-year period. Adjusted EBITDA margin improved 2020 basis points to 18.7%, compared to 16.5% in the same period of fiscal 2012.

Now focusing on our balance sheet. As of September 30, 2013, we had cash on hand of $3.5 million, and total debt outstanding was $24.5 million. Inventory was $46.4 million as of September 30, 2013, compared with $34.3 million as of December 31, 2012.

Accounts receivable was $39.2 million as of September 30, 2013, as compared to $25.2 million as of December 31, 2012. Accounts payable with $22.4 million as of September 30, 2013, as compared to $19.6 million as of December 31, 2012. The change in inventory, accounts receivable, and accounts payable is due primarily to the increased level of business in 2013 versus 2012, and due to the seasonality of our business.

Finally, I will review our outlook. For the first quarter of fiscal 2013, we currently expect to generate sales in the range of $58 million to $62 million. We expect earnings per diluted share in the fourth quarter in the range of $0.08 to $0.12, based on 37.6 million diluted shares outstanding.

For the full year -- full fiscal year 2013, we continue to expect sales in the range of $266 million to $270 million, and earnings per diluted share of $0.63 to $0.67, based on 35.9 million diluted shares outstanding. Of course, a number of factors may cause our actual results to vary from these anticipated results.

As Larry mentioned, subsequent to the end of the third quarter we completed the acquisition of certain assets of our German-based distributor and service center by the name of Toxoholics. We will pay approximately $2.3 million in cash for the acquisition. As noted by Larry, the acquisition was done for strategic reasons, and will improve our customer service and customer relations in Europe. The acquisition is not expected to have a material impact on the financial results.

With that, I would now like to turn the call back over to Larry.

Thank you, Zvi. With that, we would like to open the call for questions. Operator?

(Operator Instructions)

Craig Kennison, Robert W. Baird.

Maybe Mario I would start with you. I know it's early, and you won't have a solid idea of where spec position will be until the new year. But can you give us just a directional feel with respect to spec position, and volume expectations as you have these conversations with your OEM customers?

Let's see, Craig. Thanks for the question.

As far as spec position goes, what this time of year includes getting together with our customers, riding new product anticipated to be produced in model year 2015, giving factoring tours, and in particular, taking people through our Taiwan plant. What's going on right now is bike week in Taiwan, where a lot of spec conversations start to happen.

We are also showcasing our new factory in Taiwan, which is going quite well. What I can say is the reception to that package of product, Taiwan conversation, and customer relationship is going quite well. It's early to have any hint on volumes at this point.

Thank you, and just a follow-up on that. Have they given any indication of their comfort in terms of inventory levels at the OEM or dealer level? Just wondering if we should be concerned at all about accumulating inventory?

Nothing that stands out to us. It's sort of typical, I would say for this time of year, given at least my involvement over the last several years.

Okay, great. Larry, if I could switch to Taiwan, it sounds like that's on track. What would you indicate, or what would you tell us would be key factors to consider in the next three to six months as milestones as you make progress there?

Craig, we are pleased with the way things are going. The fact that we've produced almost 700,000 sub-assemblies this year makes us feel pretty good about it. I think a couple things -- we've actually just got our first completed full fork off the initial pre-production that we are going to obviously be testing, just rolled off here, I guess about a week ago. We will be making the first production deliveries toward the end of this quarter, so that certainly would be a milestone.

I would say then as we get into next year, probably through about the midpoint of the year, maybe August, we will be in full-fork production, which means we will have about 80% to 85% of our forks being produced in our Taichung plant. I would say as we get through the spring we will be ramping that up and introducing models. Clearly the new model year introduction, as it occurs in the late April, May time frame, will be another key point to make sure we are on track.

The way we are doing this, I think as we've described to you before, it's not certainly risk-free, but we've tried to reduce the risk of opening that plant by being able to speed up or slow down that production. I would tell you in this past year we've actually been able to speed up the number of sub-assemblies. We got kind of ahead of that, and hopefully we see that same pace continue as we bring the forks into production.

If for some reason we see something that gives us pause, then we will keep producing here while we get that sorted out and get back on track over there. But I would say so far, so good.

That's very helpful. Thank you.

John Anderson, William Blair.

I wanted to start by asking a bigger-picture question on the mountain bike market. I'm looking at the sell-through data from external providers like BPSA.

I've seen a pretty consistent trend, broadly, that overall mountain bikes at lower price points, suspended mountain bikes, due to demand being somewhat soft, but at the same time quite strong at the $2,000 price point and above, which, when you recognize it's kind of where you play today. I was just wondering if you could talk a little bit more about that dynamic, and what you think is driving that, and how sustainable that is, in light of some softer end-demand at lower price points.

John, thanks for the question, this is Mario. I guess I would start by saying what you just described, we would agree with. I think the difference between some of the lower-priced stuff and the product that we participate in is that there's more innovation and excitement in the upper end. And that's where the enthusiast lives, and that enthusiast continues to spend. It's sort of a short answer, but I think that's what's going on.

I think, John, we tend to see probably a lot of the same things you do, and in terms of the strength of the upper end it seems to be solid. I think like a lot of things -- in fact, I think it's about this same time every year I get frightened when I read what's happening in the industry and then everything just always seems to be fine in our segment. I would say right now we don't see anything that would tell us that we are not in a normal situation there.

Terrific, that's helpful. Question on the guidance for the fourth quarter. The sales guidance implies a growth rate of about anywhere between 3% and 10% in the fourth quarter, somewhat slower than we saw in the third quarter.

Does that reflect any kind of pull-forward of shipments into the third quarter? I'm just trying to get a sense, or if you're seeing something in particular in the fourth quarter that we should be aware of?

I think it's important to say that because we're -- a large part of our sales go to OEM, the ordering pattern year -- between various years -- can vary. I wouldn't say it's a reflection of any sort of shift. You tend to see different dynamics in various years, depending on the OEMs' horizons and their inventory positions.

As Larry mentioned in his remarks, it's not uncommon for us to have some sales shift last couple days of one quarter into the other quarter, but that tends to be on the margins. Does that answer the question, John?

It does, that's helpful. I have one more.

I wanted to ask, if I could, a little bit more about the acquisition you made of your German distributor. Is that a distributor that served just Germany in that country, or was it a distributor that served continental Europe more broadly? Does this -- what kind of opportunities does this offer in terms of broadening your footprint, I guess, in that part of the world? Thanks.

Yes. Okay, John, this is Mario. I will speak to what Toxoholic's coverage was, and then maybe Larry can talk about the opportunities it affords us.

With our European distributors, they are generally set up to serve their national market, but Germany being a cornerstone market for the European mountain bike segment is very influential. We expect that we will be able to get a lot closer to the market and influence the market through working more closely with Toxoholics.

I would say, John, that this is an acquisition that's strategic for us. Toxoholics, obviously in a cornerstone market over there, a large distributor, primarily Fox. It just makes a lot of sense for us in terms of building our infrastructure over there, staying closer to our customers.

And this move is all about better serving our customers. It's obviously not a large financial-based acquisition. But it will help us build our infrastructure, stay close to customers, and I think that's going to benefit our business in Europe over the long haul.

Thanks, that's helpful. Congratulations on a nice quarter.

Thank you.

Sean Naughton, Piper Jaffrey.

A quick question on the follow-up on the Toxoholics acquisition. Is this -- it doesn't sound like this distributor was the sole distributor in Germany for all Fox products. Is there a fair assessment? This was just part of the revenue that was going in to Germany?

Toxoholics is the sole bike products distributor. We do some of our power sports and our powered vehicle products through a variety of distributors across Europe.

Also following up on that, what is the -- is there some significant sales up side in this transaction, or margin benefit that we could see potentially in 2014? Or it is relatively negligible at this point?

No, I think we would call the financial impact of this thing not material to us in 2014, Sean. I think the way to think about this, though, is we are clearly looking at better serving our customers, continuing to build our infrastructure as the business grows. This does help us accelerate a lot of things we would like to do, and we are obviously hoping that does positively impact sales in future periods. This transaction is really more about strategy in terms of laying out an infrastructure in Europe to better serve customers, as opposed to its a financial transaction that in and of itself has inherent benefits.

Understood, okay.

Having said that, Sean, we're not going to lose money doing it, either.

Sure, sure that's good. On the guidance for Q4, the revenue range there, how should we be thinking about, or how is the quarter shaping up for you in terms of mix between the products on the powered vehicles and the mountain biking? Are they growing at a relatively similar rate in Q4? Are there any mix changes within the revenue stream for the fourth quarter?

Yes. Let me start, Sean, and I will have Zvi comment a little bit on mix.

Our business as it shapes up is fairly predictable here as you get close in. I think if you look at our fourth-quarter guidance, and you look at how we have guided the year, it lines up very well. I think the only reason we have the spread we do is, as I've mentioned and Zvi commented on, you do get end-of-quarter activities where fairly significant pieces of business can either get pulled in or get pushed out.

We feel very good about the year. I would tell you it's probably shaping up about as it normally does. Anything on mix, Zvi?

I don't have the exact mix numbers in front of me. What I would tell you is the mix we're seeing in the quarter is not much different than we thought the mix would be when we looked at this some time back.

The bike business, as you know, tends to be -- all of our businesses have some seasonality, and Q4 is a low quarter -- is one of our lower quarters. It's going to be significantly lower than the $80 million we're coming off of, so you are going to see variations in mix quarter-over-quarter. I just don't have that except build-up in front of me right now. Inasmuch as we're not going to generally provide that level of guidance --

Nothing unusual.

Nothing unusual.

Okay. Lastly then, for any sort of up side -- and I think you just answered this, Larry -- is that the up side would really come whether or not you get potentially some pull-forward -- not pull-forward, but some orders that are potential right on the margin there for a couple of weeks one way or the other at the end of the quarter, were you could see some pull-in and some of that revenue could be recognized in Q4 versus Q1?

I think that's exactly right, Sean. In our business, again because of our nature of our large OEM customers, it's pretty well set now, with the exception that you just mentioned.

Okay. That's very helpful. Thanks a lot.

Jim Duffy, Stifel.

Nice quarter.

Thanks, Jim.

A few questions for you. I recognize the OE business drives better than 75% of the revenue, but can you speak about what you saw from after market business trends during the third quarter?

I think after market did about the same percentage, I think.

We were 83%, 17%, I think, in the quarter.

Yes, so we're right around there. We continue to look at the after market as an opportunity, because we commented on the IPO road show we would like to see that edge up a bit, and we've got programs in place. I would say nothing terribly unusual. We are probably within the band we would expect.

Okay. Then Larry I'm going to dig in a little bit on the what can be fluctuations between quarters. You mentioned in your prepared remarks some pull-forward of volumes. Should we think about that as a timing shift, or a pull-forward that's reflective of stronger end-market demand?

I think as you get to the end of a quarter, Jim, it's timing. As we look between quarters -- and again, you can -- as I'm sure you can appreciate, you can get to the last week and you can get a request to try to get something out that was going to ship in the next quarter. Or you can have something that because of logistics pushed out into the next week, and so it would go out of the quarter. I think it's mainly that.

Now I would also tell you, I wouldn't mind having things pulled in. If they pulled in every quarter from now to the end of time, that's probably not a bad thing. I think the way to think about it, though, is we're going to have fluctuations like that, that are kind of normal in this business, that come down to the last week or two, that are difficult to predict. That's kind of why we have the band around the guidance.

Got you, helpful. The last question, perhaps one from Mario, the side-by-side category growth's been phenomenal.

Momentum seems to continue to be strong. Can you look to the past as historical reference, other transformational vehicles like maybe four-wheelers or so forth? Do they provide a template for an adoption curve?

Is the question, Jim, that in our experience, have we seen a similar dynamic to side-by-sides, or --?

Yes. Is there period of phenomenal growth followed by a predictable period of moderating growth, followed by something else, or is there not any set adoption curve?

I don't know that there is a set adoption curve. One of the interesting things that happens with side-by-sides is they first were displacing ATVs, primarily on the utility side, because it's a more utilitarian vehicle. Now, as we start to get four-seaters and more wheel travel and higher horsepower, they start to displace what we would have thought of as typical off-road enthusiast vehicles. I'm not sure there's a real end in sight on this one.

All right. Great to hear. Thanks, guys.

(Operator Instructions)

Michael Swartz, SunTrust.

Good afternoon. I just wanted to get out of the way a question on guidance, and just to confirm that the guidance that you have is GAAP -- it's based on GAAP?

The guidance is GAAP.

Okay. Related to that, are there any kind of one-time transaction closing charges, whatever you want to call them for the Toxoholics acquisition that fall into the fourth quarter? If so, would they be material?

There may be some immaterial ones, and we've not factored them into the guidance. We don't know -- $0.01 or $0.02 max.

Yes, we wouldn't expect a lot.

Right.

But safe to say if there were, or whatever there, is you will call out when you report fourth quarter?

Correct. We think a better way to view our business is on our adjusted earnings, but the guidance we give is GAAP.

Right. Okay, that's helpful. Then I don't know, maybe this question is for Mario or Larry, just wanted to get into the transition we have seen to 27.5-inch wheels over the past year or two, and kind of maybe comparing it to what we saw when we originally went to 29 inches. How is that transition playing out? Is it playing out faster than you expected?

It's certainly happening faster than the 29-inch wheel transition happened. We prepared the product line so that we were prepared either way. I'm not sure that it's happening any faster or slower than we anticipated, but it's certainly happening faster than the 29-inch wheel adoption rate happened.

Will there be any additional tooling costs or anything of the sort related to the growth of the 27.5-inch market?

No. As I said, we've prepared the product line for 26, 27.5, and 29. Certainly in the middle 120, 140, on up through 160, 170 millimeters of travel.

At the fringes, in a cross-country bike that's going to be a 29er, and maybe some 27.5. In the downhill fringe, that's going to be a 26 with a 27.5 follow-on, probably not 29. We're prepared for the ebbs and flows within each of those categories.

Okay, great. Thanks for the color, guys.

Larry Solow, CJS Securities.

Good afternoon. Discuss the pricing environment? I know it's been sort of a -- over the years you haven't gotten much on price. I don't know if you've -- I believe there has been talk that maybe you can get better pricing on your products -- maybe not yet, but any thoughts on that, maybe going out into 2014, how it may impact things?

Larry, let me take it here, and I'll let Mario chime in. I think we're going into the bike model year, and again we are a premium price. I think we would look to get fair prices.

I wouldn't see certainly that prices in aggregate would come down in bike as we go into the next model year, probably edge up a bit in terms of all customers. That would be my expectation, but it's still early, right? We're out there hunting, as they say.

I think in powered vehicles, I think because of our technology position, that ASPs, if you will, my expectation is as we introduce new technologies that are relevant to our customers' perception of the performance of the vehicle, again we would be able to edge pricing on kind of a price-per-function basis up. Yes, I think from an overall environment, pricing environment question, I think it looks solid for us.

Okay. In terms of Taiwan, is it still sort of -- still a little bit of a drag on profitability, and as we head into 2014 maybe it turns neutral, and then 2015 and beyond we see some benefit?

It's still a drag, depending on the quarter, 75 to 100 basis points. We would tell you that in aggregate we've got a number of initiatives, and in aggregate we expect to get 200 basis points of improvements, roughly, next year. How Taiwan mixes into that depends, but obviously, eventually, not only is it going to be neutral, it's going to save us money. How much of that comes next year, I really don't want to get into right now.

Got it. Lastly, just anything material -- and I realize it's slow, but on the military side, anything you could speak of?

(Laughter) I think we were pleased, I think as Mario mentioned in his remarks, we did have a couple of wins there. Again, they're not earth shattering, but I think they keep telling us we are headed in the right direction.

I think like a lot of other folks, we're waiting to see where Humvee retrofit and JLTV, those two programs, come out; because those are the two big ones that we would, could potentially be involved with. I don't know, a lot of people have projections on when those things are going to get awarded, money's going to get spent. I'm not sure I'm going to believe it until I actually see something.

Right. Okay, great. Thanks, guys.

With that, I'm showing no further questions in queue. I'd like to turn it back to Larry Enterline, CEO, for any further complements.

Thank you, operator, and thank you, and thank you for your questions and interest in Fox. We look forward to continuing to execute our plans, and updating you on our progress as we go forward with these quarterly earnings calls. I'm also thankful for the support of our customers and suppliers, and as always, the great group of enthusiastic employees we have here at Fox. Thank you, and have a good day.

Thank you. Once again, thank you ladies and gentlemen for joining today's conference. You may now disconnect. Have a great day.