Fox Factory Holding Corp (FOXF) 2013 Q4 法說會逐字稿

Greetings, and welcome to the Fox Factory Holding Corp fourth-quarter and full-year 2013 earnings call.

(Operator Instructions ).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your speaker, Mr. David Haugen, General Counsel for Fox Factory Holding. Thank you, Mr. Haugen, you may begin.

Thank you. Good afternoon, and welcome to Fox Factory's fourth-quarter and FY13 earnings conference call.

On the call today are Larry Enterline, Chief Executive Officer; Mario Galasso, President, Business Divisions; and Zvi Glasman, Chief Financial Officer. By now everyone should have access to the fourth-quarter and FY13 earnings release, which went out today at approximately 4.05 PM 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 would 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 achievements 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, annual report on form 10-K, 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, with 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. 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. And 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 fourth-quarter and full-year 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 in more detail and discuss our guidance. After that, we will open up the call for any questions that you may have.

Our results are in line with our pre-announcement and reflect the strong financial performance for both the fourth quarter and full year. Fox continued to benefit from demand for our high-performance mountain bike and powered vehicle products, which enabled us to report fourth-quarter sales of $65.3 million, an increase of 15.3% versus the prior-year period. Sales were aided by a few customer pull-ins at quarter end, amounting to approximately $3 million. This shift in timing is not an in usual in our business.

In addition to strong sales, we are also very pleased to report a 540 basis point improvement in our gross margin, 320 of which were one-time and 220 basis points reflects our successful execution on initiatives designed to improve operating efficiency. This solid sales and margin growth enabled us to deliver earnings per diluted share of $0.13 in the fourth quarter.

For the full year 2013, we achieved net sales of $272.7 million, a 15.6% year-over-year increase. Our full-year gross margin improved 280 basis points and EBITDA margin increased 290 basis points. 160 basis points in each of these was attributable to our improvements in operating efficiencies.

The meaningful improvements in operating efficiencies that we made throughout 2013 have enhanced the foundation of our business and we believe we still have room for further margin improvement as we go forward. As we begin 2014, we're well-positioned to build off our positive momentum from last year and deliver strong results. We believe industry dynamics continue to favor our product categories in premium mountain bike and powered vehicles.

This, along with a shifting consumer preference towards higher-performance products, portend well for future. Our focus continues to be on the same key strategic initiatives and growth plans that we have previously discussed. I'd like to take a few minutes to provide an update on these.

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. We continue to introduce products with a regular cadence and our OEM customers and end user customers are consistently pleased with our products.

This is particularly true for our model year 2015 bike products. In addition to increasing our sales with OEM partners, we are also focused on expanding our after-market-specific products and services to existing vehicle platforms.

Last week, we announced that we entered into a definitive agreement to acquire the assets of Sport Truck USA. We are very excited about this acquisition, which expands our powered vehicle business. Sport Truck is a full-service, globally recognized distributer, primarily of its own branded after-market suspension solutions. Sport Truck also designs, markets, and distributes high-quality lift kit solutions through their brands BDF Suspension and Zone Offroad Products.

Similar to Fox, Sport Truck is a premium brand that is well recognized in the suspension industry. Lift kits are an adjacent market for us and these products integrate with our shocks. It's a great addition to our wide dynamics product portfolio as it both increases the aesthetic appeal of the vehicles as well as improves their ride performance. Lifted vehicles have increased in popularity in US and we believe this is a great opportunity for us to capitalize on this trend.

There are many reasons why we're excited about this acquisition. Sport Truck is headquartered in Michigan and this acquisition opens a new Fox facility in the Midwest. They have a lean and efficient proven business model with a dealer-friendly e-commerce engine. To give you an idea of their scale, in 2013 Sport Truck generated approximately $34 million in un-audited net sales and adjusted EBITDA of approximately $7 million.

The transaction is expected to be slightly accretive to Fox's full-year FY14 earnings before one-time transaction costs, with the majority of the financial benefit to be realized in full-year FY15. We believe that we will benefit from synergies in marketing, including the opportunity pro-brand, as well synergies in distribution and supply chain operations with Sport Truck.

Additionally we are excited to work even closer with the Sport Truck engineering team to optimize the shock performance within these packages. We are pleased that the key management from Sport Truck is staying on board and joining in the Fox team. Zvi will review some of the financial details of the acquisition during his remarks.

This acquisition of Sport Truck is an example of our execution on our goal of increasing our penetration into existing vehicle categories, as well as our execution on another key initiative of growing our business by entering new product categories, as lift kit solutions were not previously part of our product portfolio. Looking ahead, we have a reputation as a leader in ride dynamics and we believe that our technologies have potential applications in other 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 in either North America or Europe, and we believe there are a very good market opportunity in Asia and Latin America. 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.

In the fourth quarter, we previously announced the acquisition of our third-party German distributor and service center, Toxoholics. Thus far we have been very pleased with the performance of this acquisition, which provides us with proven infrastructure in the European market for Fox products. We have already seen benefits in improving customer service and customer relations in Europe. This is a great baseline as we look for further expansion opportunities across Europe.

And lastly, we continue to focus on opportunities to improve our operating and supply-chain efficiencies. We are very pleased with the improvements in gross margin and improved operating efficiencies we achieved last fiscal year, but, as I stated earlier, we believe there's room for further improvement, including higher margins and accelerated profitability in future years. We are making steady progress with moving bike production to Taiwan and we remain on track to complete the move by the end of 2015.

In 2013, over 750,000 sub-assemblies were manufactured out of this facility. Once completed, we believe this will enable us to reduce our lead time with the Taiwan-based manufacturers who are building the majority of high-end mountain bikes.

Before I turn the call over to Mario, I want to briefly discuss our announcement last month of our expanded executive management team. We are now over six months into operating our business as a public company and we believe it is appropriate to realign our key management personnel in order to streamline our operations and position ourselves to better support our expanding business. We appointed Mario Galasso to President, which is a newly created position that reflects his growing responsibilities. John Bolton was promoted to serve as head of the newly created Department of Strategic Business Development as its Senior Vice President.

Bill Katherman has been promoted to Senior Vice President, Global Operations, and will oversee all of our production-related resources worldwide. Also, John Blocher has been promoted from Corporate Controller to Vice President and Corporate Controller, reflecting his expanded responsibilities following our listing as a publicly traded company. We look forward to their future contributions and I want to think the entire Fox team for their hard work and dedication.

In summary, we are pleased with the momentum of our business as we begin 2014. Following our recent acquisitions and strong organic growth, we are well-positioned to deliver another great year.

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

Thank you, Larry and good afternoon, everyone. As Larry stated, we are pleased with the momentum we are caring into 2014. During my remarks, I would like to discuss some of our recent business and industry highlights, as well as our current divisional initiatives driving short- and long-term growth.

I will begin with mountain bike. We just wrapped up our annual international distributor meeting. Every year, we bring in our distributors to corporate headquarters to get them ready for the new model year selling season. This meeting was one of the best in recent history, based on the direct feedback and enthusiasm they had on our model year 2015 lineup. This echoes the positive reactions by our OEMs as we continue to wrap up spec season with them.

We've also been able to gather initial feedback of our model year 2015 from the media by letting them ride early model year 2015 product introduced to them under the umbrella of our racing applications development products, or RAD for short. Our RAD efforts continually improved product performance and features throughout the course of the race season, ultimately ending up integrated into the following model line up in some way. These efforts have resulted in favorable editorial worldwide.

As we discussed on prior calls and while out on the road, e-bikes, mainly power-assist mountain and commuter or city bikes, are quickly gaining traction in the marketplace. Our first play in this segment is with pedal-assist mountain bikes where our products are already perfectly suited. As we sit currently, one of our 2013 top 20 OEM bike customers revenues will be coming exclusively by way of power-assist mountain bikes. Leveraging our relevance from the mountain bike platform into the larger commuter-oriented market will require us to develop a unique product offering. Market research is underway to determine the correct feature set for these products.

We are also developing products aimed at one price point lower than the $2,000 and above market we currently address. We have communicated previously we define the premium mountain bike segment as $1,500 and above. The development activities underway will address the $1,500 to $2000 mountain bike price point we currently have little participation in. We are targeting contribution from these efforts in 2015 at the soonest to 2016 at the latest, with our model year 2016 and model year 2017 respectively.

In model year 2013, we released our first adjustable height seatpost, the D.O.S.S. The D.O.S.S has been essentially an after-market product due to its feature-rich, high price point. Our fork and shock product lines are positioned in evolution, performance, and factory families, with factory being our highest end-product positioners.

At some price point and above, and at some travel and above, we believe all mountain bikes will come with some form of ride-height adjustable seat post. We are the process of developing evolution performance and factory-level seatposts to be offered with our forks and shocks to make sure that there is a Fox solution for the fork, shock and seatpost ride dynamics triangle.

Wheel sizes continue to be a hot industry topic. 27.5-inch wheels are being more rapidly adapted than the 29-inch wheel was and is displacing the last 26- inch wheel strongholds in the longer travel segments, including and up to downhill applications. We see these as a positive dynamic for bike sales going forward. In the short-term, however, there's a little confusion on which product is best suited for particular consumers and riding styles, as well as dealer inventory concerns to support all three wheel sizes in terms of tubes and tires, et cetera until there is a clear wheel size winner, or until the wheel size share of market settles out.

On the competitive race front, enduro racing is now become a mainstream focus, with dedicated race teams and industry attention. Traditionally, the bike industry competitive outlets have been cross-country and downhill racing. These forms of racing require very specific types of bikes that are polar opposites in features and capability.

The majority of mountain bike sales are generated in travels and feature sets in between the cross country and downhill fringes. Enduro racing provides a competitive outlet for the type of bike most of us normally own and ride, and our experience would tell us racing spawns equipment sales and we see this happening currently with an industry focused on enduro-racing oriented bicycles and complimentary products.

Another wonderful industry dynamic is mountain bike racing at the high school level. More and more high schools and regions are developing teams and leagues. More than 10 states in the US have leagues currently. This dynamic gives non-ball-sport kids a competitive and healthy outlet, creates some percentage of mountain bikers for life, and draws families into the sport. We support this dynamic with both local and regional sponsorship.

As we've said in previous communications, we have not modeled share gain into our growth projection for bike, although we think there they're still gains to be made. Model year 2015 appears to fit within our bike thesis with what we believe to be approximately 75% of the way through the specking cycle. Discussions with a cross section of our top OE customers and the larger third-party manufacturers to the industry indicate cautious optimism for 2014 for the industry as a whole.

The premium mountain bike segment we participate in is a subset of overall industry dynamics and in recent years, we believe has bucked overall industry trends by demonstrating growth in the faith of overall industry headwinds. We believe that this will continue in 2014, albeit at a slower pace.

Information on overall industry inventory positions remain widely varying. Third-party manufacturers have experienced an uptick in tailing model year 2014 orders and a strong orders for the strong model year 2015, especially for high-end carbon fiber products. So while we would communicate there may be regional, OE specific, or segment pockets of inventory concerns, there does not appear to be an overall inventory position challenge to a strong model year 2015 start.

Now I will move onto our powered vehicles. Since our last earnings call, we have made several non-deal investor visits, during which time we communicated upcoming opportunities, initiatives and industry dynamics we have in front of us. I will now provide a brief update on some of those.

As side-by-side vehicles gain capability, with increased wheel travel and horsepower, it plays to our competitive strengths. We've launched our internal bypass to the side-by-side market via the aftermarket. You remember this is the proprietary technology that allows the Ford Raptor to be as capable as it is off-road while still passing road-going regulations.

In a side-by-side environment, internal bypass allows the vehicle to be compliant and comfortable on repetitive bumps with unprecedented bottom-out resistance and control. These are normally competing demands, and while volumes are low, we've sold out of the initial sets of side-by-side internal bypass shocks at almost $5,000 per vehicle and have sold through our next production run.

Though we can't front run our customers news, we can tell our listeners today we have made progress securing business in sections of our current customers' product portfolios we had previously not been included on, making forward -- making great progress in our initiative to round out our participation across our customers' portfolios. Last week, we completed the manufacturing site product process audit documentation for three new powered vehicle OEMs, and though we can't discuss the customers or vehicle types themselves, and while we have not officially been awarded the business, we can tell you getting to the site audit stage is one would should not be taken if the customer was not strongly considering Fox.

In mid-2013, we launched our circle track shop program. Circle track is a type of car racing on both dirt and asphalt tracks, encompassing a host of vehicle types, classes, and configurations. We chose to participate initially in the dirt-modified and asphalt-modified classes as these classes exercise a large halo effect on the balance of the participants.

2013 was our first year, and while not starting until July, we had 82 race starts that garnered 18 wins, 57 top-five finishes, and 76 top-10 finishes. We also won three marquee events -- World Finals in Charlotte, North Carolina, the Eastern States 100 and 200 in Orange County New York, and Super Dirt Week at the Syracuse New York Fairgrounds.

We sold out of our first production run of shocks and in 2014 we will expand our production capacity for these types of shocks and will increase the number of classes and vehicle types we offer products for. We consistently took drivers and teams from competitors like Bilstein and improved the race results for those teams and drivers who made the switch to Fox. The R&D and driver feedback we get on the track influences our efforts in the street performance world, were we've just launched our front strut solutions for late-model Mustang and Camero applications.

On the military front, last fall we the received positive news of the government awarding General Dynamics ordnance and tactical systems, the GMV 1.1 vehicle, which we were involved with in development stages. This is significant for us because prior to that, we primarily been part of retrofit upgrade programs, so the GMV 1.1 legitimized Fox as an OEM vehicle development partner.

This was reinforced with the recent contract award to Oregon Iron Works to manufacture the newest U S Navy SEAL boat, known as the Combat Craft Medium. This is a state-of-the-art boat utilizing Fox float air shocks on all seats. The JLTV program is in the latter stages of testing and recently completed over 12,000 durability miles, with zero failures on Fox shocks. JLTV production is scheduled next year for the first 410 vehicles. Final vehicle and manufacturer selection has not yet occurred.

I will conclude with a word on our branding and marketing activities. Our race program continues to help us evolve our products, as evidenced by the early enthusiasm for the model year 2015 mountain bike product line and the traction we are getting with our circle track presence.

We provided some excellent cross-sport content to Transworld Motocross. This led this leading motocross publication to get -- dedicate the whole March issue to the crossover participation they believe their readership has for mountain biking and off-road motorcycle riding. Further, as a result of the feedback they've received on this content, they've also decided to dedicate at least four pages monthly to mountain bike content.

In conclusion, we are celebrating 40 years of redefining ride dynamics. Bob Fox designed and produced his first motocross air shock in 1974 to get more out of his personal bike and gain a competitive advantage. Two short years later, Kent Howerton won the 500 cc National Motocross Championship on Fox air shocks.

Over the last 40 years, Fox has continued Bob's legacy by redefining ride dynamics for mountain bikes, side-by-side, on-road and off-road vehicles and trucks, ATVs, snowmobiles and motorcycles. We will be weaving this story throughout our marketing efforts during 2014 in what we are calling our then and now theme.

With that, I would like to turn the call over to Zvi Glasman, our CFO, to review our financial results. Zvi?

Thank you, Mario. Good afternoon, everyone.

I'll focus primarily on our fourth-quarter financial results, the Sport Truck acquisition, and 2014 guidance during my remarks today. Sales for the fourth quarter 2013 were $65.3 million, an increase of 15.3% versus sales of $56.6 million in the fourth quarter of 2012. Our year-over-year growth in the fourth quarter reflects improvement in both of our product categories.

Sales of mountain bike products increased 14.2% compared to the fourth quarter of last year and sales of powered vehicle products increased 17.3% over Q4 of last year. As Larry stated, our fourth-quarter revenue includes approximately $3 million that was pulled in from the first quarter of 2014.

Gross margin was 28.7% for the fourth quarter of 2013, a 540 basis point increase from gross margin of 23.3% in the prior-year period. Approximately 220 basis points of the improvement in gross margin relates to our successful execution of initiatives designed to improve operating efficiencies and the remaining 320 basis points is largely due to additional warranty and other related costs incurred in the fourth quarter of 2012 to upgrade certain dampers contained in the Company's suspension products, which costs did not re-occur in 2013.

Total operating expenses were $10.9 million, or 16.7% of net sales, in the fourth quarter of 2013 compared to $9.1 million, or 16.2% of net sales in the fourth quarter of the prior-year. Within operating expenses, our sales and marketing expenses increased to $3.8 million in the fourth quarter of 2013 compared to $3.3 million in the same period of 2012. The increase was due largely to increased personnel expenses and increased costs resulting in the recent acquisition of our German distributer to support the Company's sales growth.

Research and development expense increased to $3 million in the fourth quarter of this year compared to $2.5 million in FY12, due largely to increased personnel and product development related expenses. Investment in R&D is a critical component of our business, and while investment may fluctuate in certain years and quarters depending on timing, product developments and other factors, we expect that we will general continue to invest at historical levels, expressed as a percentage of sales.

Our general and administrative expense in the fourth quarter 2013 was $2.8 million compared to $2 million in the prior-year period. The increase was largely comprised of increased personnel expenses, including stock-based compensation, as we strengthened our infrastructure to support the Company's growth and to meet the requirements of being a public company.

Our net income in the fourth quarter of 2013 was $4.9 million, an increase of 174.9% compared to $1.8 million in the prior-year period. Earnings per diluted share for the fourth quarter of 2013 was $0.13 calculated on 37.6 million weighted average diluted shares outstanding, compared to $0.05 calculated on 34 million weighted average diluted shares outstanding in the fourth quarter of 2012.

Non-GAAP adjusted net income was $5.9 million, an increase of 118.4% compared to non-GAAP adjusted net income of $2.7 million in the fourth quarter of the prior year. Non-GAAP adjusted earnings per diluted share for the fourth quarter of 2013 was $0.16, compared to non-GAAP adjusted earnings per diluted share of $0.08 in the fourth quarter of 2012.

We believe non-GAAP adjusted net income is a useful metric that better reflects the performs 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 the press release issued today. You'll also find a reconciliation of adjusted EBITDA for the GAAP measure net income in our earnings release today as well.

In the fourth quarter of 2013, adjusted EBITDA was $10.8 million, a 68.1% increase compared to $6.4 million in the same quarter last year. Adjusted EBITDA margin increased 520 basis points to 16.6% compared to 11.4% in the prior-year quarter. This margin improvement reflects the afore-mentioned damper upgrade costs and the operating efficiencies that Larry discussed. We remain focused on continuing to improve our margins as we execute our initiatives in coming quarters.

Turning briefly to our results in the full year 2013, our full-year sales increased 15.6% to $272.7 million. Again, this growth reflects higher sales for both mountain bike and powered vehicle products. Adjusted EBITDA increased 37.9% to $49.6 million in 2013, compared to $36 million in the prior year. Adjusted EBITDA margin improved 290 basis points to 18.2% compared to 15.3% in FY12.

Now, focusing on our balance sheet, as of December 31, 2013 we had cash on hand of $1.7 million and total debt outstanding was $8 million compared to $59.3 million of debt outstanding as of December 31, 2012. Inventory was $42.8 million as of December 31, 2013 compared $34.3 million as of December 31, 2012.

Accounts receivable was $33.8 million as of December 31, 2013 as compared to $25.2 million as of December 31, 2012. Accounts payable was $24.3 million as of December 31, 2013 as compared to $19.6 million as of December 31, 2012. The drivers of the changes in inventory, accounts receivable, and accounts payable are the increased level of business in 2013 versus 2012 and the timing of our annual year-end production shutdown and the transition of a portion of our bike manufacturing to Taiwan.

Turning to our Sports Truck acquisition, as we previously announced, we've signed a purchase agreement to acquire the Sports Truck business for approximately $44 million. The acquisition is structured is an asset purchase, which will allow us to realize significant tax benefits, thereby reducing our effective purchase price.

The transaction is being financed with debt and includes a potential earn-out opportunity of up to $29.3 million, payable over the next three years, contingent upon the achievement of certain performance-based financial targets. The transaction is subject to approval by the employee stock ownership plan, shareholders of Sports Truck and customary closing conditions. It is expected to close later this month.

While our guidance will not be updated to reflect the effect of the acquisition until transaction closing, I wanted to share some financial details about Sport Truck and the transaction. We expect this transaction to be accretive on a GAAP and non-GAAP basis, excluding transaction cost in 2014.

Based on unaudited financial statements in 2013, Sport Truck generated approximately $34 million of sales and adjusted EBITDA of approximately $7 million, which equates to an adjusted EBITDA margin of approximately 20%. The Company has had good growth historically and we believe it will continue to grow at a rate consistent with our powered vehicle business going forth.

Other items to note -- Sport Truck is currently the largest distributer of our aftermarket commercial truck products. Accordingly, sales from us to them will be eliminated in consolidation going forward. The profit will be realized upon the ultimate sale to the end customer, so there is no negative impact on profit but we will loose a little bit of sales in consolidation.

Some housekeeping notes in terms of accounting for the transaction: transaction costs expected in 2014 include legal, accounting and professional costs, reduction of profit and finished good inventory in accordance with GAAP and other acquisition costs required to be expensed in accordance with GAAP. We will incur amortization of intangibles; however, until the transaction closed and we have conduct a formal valuation, the amount of intangible amortization cannot be determined with certainty.

Finally, our view or outlook. We are reaffirming our guidance which we provided on February 3 of 2014. Our guidance excludes the impact of Sports Truck acquisition and excludes related Q1 transaction costs of approximately $0.02 per diluted share, net of tax. We expect additional transaction costs subsequent to Q1 which will be considered in our updated guidance after we close the transaction.

As I mentioned earlier, excluding transaction costs we expect the transaction to be slightly accretive in 2014, with the majority of the financial benefits to be realized in 2015. We plan on updating our guidance to fully reflect Sport Truck upon the consummation of the transaction, which we expect to occur by the end of March.

Larry?

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

(Operator Instructions)

John Anderson, William Blair.

Operator, I think we may have an issue.

Can you hear me?

I can hear you now.

Okay, I'm sorry. Good afternoon, guys.

Good afternoon, John. How are you.

Alive and well.

That's always good to hear.

Congratulations to you on a strong finish to the year and congratulations, Mario, on the recent personnel announcement.

Thank you.

I guess I wanted to ask first about the 2014 outlook. I understand you're reaffirming the outlook that you provided a few weeks ago.

The growth in 2013 on the top line was quite balanced across your mountain bike and powered vehicle businesses and I'm wondering if there's any kind of color or direction you can give us on how you're thinking about that growth by segment in 2014?

Yes, John. Let me give a little bit of an overview and I'll let Zvi comment on some of the detail.

I think as we look at 2014, and again, obviously, this excludes Sport Truck, but that I think in powered vehicles, you know we are somewhat challenged by this large OEM that's taking a production hiatus around midyear, and absent that, I think we see the rest of the business kind of growing normally and consistent with historical trends.

I think bike, we've been a little guarded I think since last fall when we started hearing, I think, mixed messages, and I think as Mario commented a little bit, I think depending on who you talk to, you get different stories. On balance, we believe that premium mountain bike will continue to do better than bike overall. We're obviously hoping that it continues at the rate it's gone over the last three or four years, but I think we are anticipating that, that problem is a little bit slower.

Okay.

Does that help give you little bit of color to that?

Yes, it does. I guess in terms of the 2015 model year on mountain bikes, I think you mentioned you are most of the way through the model year discussions, but could you update us on where you are in that process? And, I guess, I know you've talked about assuming that you're not going to gain share, but at this point in the process do you think there's a potential that you do gain share or is it, at this part, about maintaining what you have?

Yes, John, this is Mario.

We mentioned during the call, about 75% of the way through. I will tell you that with our larger needle-moving customers we are probably a little bit further along than that. And with some of the folks that we don't see as often, we are a little bit behind that. Most recently we had the type-A bike show. This was last week and that's where we hit that type of customer. So we think we will be really wrapping up here within the next probably 2 to 4 weeks.

In terms of share gain or maintenance, we will tell you that, historically, we've experienced both share gains and losses across the various types of mountain bikes, which range from cross-country trail, all-mountain, enduro and downhill, and historically have gained more than we've lost and we think our long-term thesis supports that, though we will tell you then in 2014, as we discussed in the call, we are probably more in share maintenance mode than any meaningful share gains.

Okay. That's helpful.

One more on mountain bike. You gave us some more clarity, thank you, on the move into, I guess, $1,500 to $2,000 price point. Can you talk a little bit more about what you're doing internally to support that? Are these completely redesigned products?

And secondarily, is that a move that you can make and maintain kind of the profitability and the margin structure of that business in moving into that segment?

Yes, this is Mario again.

That's a great question because we could be in that category, in that price point right now if we wanted to reduce our price and gang up our margins, which we don't want to do in and of itself, but then because that product that currently exists at a higher price point would not be differentiated at all except by price.

We would also dilute its placement in higher price points in the market. It's a design, supply and manufacture process exercise so that we can profitably be in that $1,500 to $2,000 price point with a product that is distinct from the products that was above it.

Okay, thanks. That's helpful.

One last one for Zvi, maybe. Zvi, do you have a preliminary view on CapEx for 2014 in D&A?

We would tell you that the CapEx is going to be probably a little higher than you're seeing in previous years. First, just generally speaking, I would say $5 million to $7 million would be a range. And the reason I'd agree to a wider range is in conjunction with the acquisition we're going to do. There is some CapEx that we are going to need to undertake to the facilities.

Okay. Thanks a lot, guys. I'll get back in the queue.

Thank you.

Craig Kennison, Robert W Baird.

Thank you for taking my question as well. Mario, if I could start with you on the inventory front, it sounds like there are pockets of concern but also areas where you feel comfortable. In aggregate, do you believe dealers will be maintaining inventory levels or maybe slightly destocking. And then, will the e-bikes be a potential tool to offset any sort of destocking impact?

Okay. This is Mario.

I think the dealers are in pretty good shape, Craig, overall. One of our concerns, as Larry said, we kind of had pause after the trade shows and we were starting to hear the same types of things that you were hearing, and others on the call, about inventory position. Whether that a road bike or BMX bikes or mountain bikes, it doesn't really matter if the dealer isn't a position to order our products, right? Whatever it is that's hanging them up is hanging them up.

We've talked to the factories, we've talked to our large OEMs, and we've talked to our smaller kind of trend-setting OEMs, and they all seem to be consistent in their feedback that there isn't anything in the way of a strong model year 2015 start. And I think probably the leading indicator on that is that the main manufacturers in Taiwan are getting orders -- getting uptick in orders for the 2014 model year, which is really tailing off at this point, so I think that's a good sign that there isn't a backup in 2014 and that there is a reasonable outlook that 2015 can start strongly.

I think for the e-bike, and particularly the mountain bike e-bike, that's the newest, kind of the newest power assist bike onto the market. The computer bike and the city bike power assist bike has been around for a while. We believe is that's up to as much as 1 million units in Europe. That's not where we're starting.

First, we're starting with mountain bikes, where our products are ready well-positioned to be a part of that dynamic. It admittedly is much smaller than the bigger commuter e-bike opportunity. I think that's an opportunity for dealers that is above and beyond anything that they might have right now. It's kind of a new opportunity for them and I think it's almost being treated separate from non-power assist inventory challenges or inventory shortages.

I would follow up to that with any of the regional or spotty mountain bike inventory that we've heard about is in and around the 26-inch wheel. We are also consistently hearing that it's pretty hard to move the 26-inch wheel bike at any point in the channel and that anything 27.5 is selling very well, which is exciting but it does strand some 26-inch wheel bikes.

Thank you, that's helpful.

Zvi, if I could ask you a question on margin guidance. Clearly, you support the further margin expansion this year. Could you talk about the top two or three drivers to that margin expansion?

The drivers continue to be the ones that we've execute on so far. First of all, Taiwan has been a drag on our margins of about 100 basis points this year. We think that actually flips the other way this year so we will break even.

We have our Tiger team, which is looking at company processes stem to stern. Included within that is looking at designing out costs and designing for manufacturability. That covers a pretty wide swath, and we think that we are on track to obtain our margin improvement goals of a couple hundred basis points a year for at least 2014 and 2015.

Thanks. And then Larry, I apologize if I missed it on Taiwan here, the phone went out, but could you address where you are at with respect to the transition in Taiwan and what the progress you've made in terms of actual production?

Let me just comment a little bit more on that, Craig.

I did mention that last year we did approximately 750,000 sub-assemblies out of our facility in Taichung. We delivered the first finished forks to customers in January and so we started ramping there. We are still in the early stages of the volume ramp but what I can tell you it's every week it's increasing and that will continue to increase between now and early fall, when we expect to have the 80% to 85% of fork production coming out of that facility.

Early returns are good. I think we're very pleased with the quality coming off and so I'm, again, cautiously optimistic. Our team has done at a good job of executing.

I think part of this move was globalizing our systems such that we can handle that kind of business, or if you think about it, we went from a company shipping out of basically one location to now a company shipping of a several and a lot of volume on of an international location. We had quite a bit of work done on our systems, and I would tell you part of this ramp-up is making sure not that we can build it and ship it but can actually count it as a goes out the door.

We are going about that, I think, in a fairly organized, methodical fashion, such that we don't disappoint customers. But early returns are good.

That's great. Thank you.

Sean Naughton, Piper Jaffray.

Good afternoon, and thanks for taking the question. Just a quick one first on the $3 million of sales pulled forward in the quarter. Was that a bike segment or was that a powered vehicle segment pulling?

Sean, it's in both businesses and again I think it's something we continue to talk about in that it's not unusual in our business. I think we pointed out this time, this $3 million was pretty well identified as a result of our scheduling around production shut down.

Okay. And then, I guess when you look at -- maybe this is for Zvi, when you look at the range, kind of potential outcomes on the top line for 2014, it's a pretty wide range to start the year. Is it fair to characterize that wide range that maybe accounts for some of the potential new contract wins that Mario was discussing, or would those be incremental to the current top line range that you guided to for 2014?

Yes. I'll comment and I'll let Zvi give you some particular feedback maybe on the exact numbers.

I would tell you, that range -- the width of that range is relative compared to which chair you're in, Sean. It probably looks a lot wider to you than it does to me.

I think we've tried to encompass in that range a variety of contractual outcomes that we see in the business and results that we can reasonably forecast. I don't think there's anything -- we don't anticipate anything unusual in that range, either up or down, obviously.

And I would say that customer wins that Mario talks about, they generally, the development cycle with some of these large OEMs does not generally result with material revenue in a current fiscal year. You could get a bluebird but generally we are talking about things that are going to have a revenue consequence next year and beyond.

Okay. And then I guess just following up on that, where is the potential for -- where is the potential do think for something for upside in the business? Is it, you know, better end market sales, OEM pulling forward? I'm assuming that those are things that could potentially lead to you being at the upper end of that range versus the lower end of the top line guidance.

You know, I think as we said, 2014 we have a challenge because of that previously mentioned OEM going dark for a period. But I would say that we could have upsides that would get us towards the top of the range.

Frankly, just by better consumer reactions to some OEM initiatives, I think would be one. Certainly, we would like to see, optimistically, the markets lifting more than we projected, I think would be helpful.

The one thing I would point out in this guidance, there is no major contribution from the military, large military programs. The only thing we put in the guidance are the programs we know were on, things like Humvee retrofit and JLTV, which would be more than likely revenue next year. There's nothing forecast for those.

Got it. And then just the last question on the SG&A initiatives you described. Maybe just walk through where you are on some of those. You touched a little bit on the Tiger team question a minute ago, but where are you on those initiatives and does executing some of these transactions make some of that leverage potentially a little bit more difficult to gain some of those synergies?

Our initiatives are not on the SG&A line, our initiatives are on gross margin. We have told and have been guiding people, while there is an opportunity for some SG&A leverage, we are not banking on it, we are planning on reinvesting at historical levels.

We are deep into the gross margin improvement efforts. We have dedicated team looking at things such as globalization. You can probably appreciate from Larry's comments, before you move your manufacturing to other parts of the world you have to reevaluate processes that are optimized.

Our globalization initiatives really touch many of the processes of this company. We have a dedicated team and then we have cross functional teams from the various disciplines working with them and focusing on the various efforts to improve margin. And we think we are well into it, and we think we've demonstrated some success this year and feel optimistic about our ability to continue execute.

Okay. That's helpful. Thank you.

And you, Sean.

Thank you. Mike Swartz, SunTrust.

Just wanted to touch on maybe the Sport Truck USA acquisition, just a little more color on that in terms of the seasonality of that business. Is it similar to kind of your core power sports business right now, or is there anything different about it in terms of just revenue recognition?

It's similar in terms of seasonality. Some things to keep in mind with this acquisition are, first of all, we sell to Sport Truck. They are our customer so those sales will of course be eliminated in consolidation. Second of all, we sell to competitors of Sports Truck so there will be some cannibalization of sales. Third of all, obviously in conjunction with the acquisition there's the integration efforts. While it's not huge integration efforts, there's always going to be some integration efforts related to that.

It's not a super seasonal business. It has been growing well and so some of the growth it probably masked the seasonality a little bit as well.

That's helpful. Any color you can provide on how much of the revenue comes from the lift kit versus suspension. Is that the right way to think about it?

The way to think about it is the lift kits include within them suspension. Maybe Mario can describe one of these lift kits.

So the lift kit is a subset of the suspension and the shock is a subset of the suspension, so, as we've talked about in the past, Mike, we are interested -- we get interested in things where the potential company's product line, combined with our product line, results in a one plus one equals three type of scenario, and that's what we're looking at.

But their products combined with our products are the suspension. They may sell them their kit individually, and then they also sell their kit with our shock.

Okay. That's very helpful.

And you didn't provide any color, there is no way to back into how much of revenue -- Sorry.

Mike, when we close the transaction we're going to come out with guidance, which will encompass the things that Zvi mentioned.

That's fair enough.

Yes. I think we want to get it closed and then we will come out with revising our guidance that will encompass both Sport Truck's revenue and contribution.

Okay. Thank you, and just to follow-up I think on some of the new potential OEM partnerships on the powered vehicle side. I guess what -- understanding that the revenue from those may not come through until maybe 2015, 2016, what have you, but when would you expect to know the outcome of the process?

This is Mario.

We would expect to know in the three that I cited earlier, we would expect to know the outcome of that process within 2014.

Okay.

But as Zvi said, we wouldn't have expect have anything unless they really pulled something forward or surprised us. We wouldn't expect any contribution to be until 2015 at the earliest.

Okay, great, thank you.

(Operator Instructions )

Larry Solo, CJS Securities.

Just a few follow-ups. On the bike side, you mentioned you guys have been somewhat guarded since the fall. Now that you're sort of through with 70%, 75% of the model year 2015, has that come -- sounds like things are going well, is that a little bit ahead of your expectations? If there is any gauge before hand? Any color that would be great.

This is Mario, Larry.

We have been guarded, as we have said. I would say, and I think we said it today, we are cautiously optimistic. Based on questions from yourselves and other callers, we've gone and done a fair amount of diligence to vet out any of the concerns that have been voiced to us and that's the process that we've gone through, through the fall and we think that the end result of that vetting process is cautious optimism.

I think from the bike selling season I think, Mario, it's safe to say that, while we have pluses and minuses like we typically do, I think it's within the range of our expectation. I don't think there's any great surprise to come out for us.

For us in the spec positions, that's true and then together with what feels like a better inventory position than we would have predicted coming out of the fall trade shows.

Got you. ( multiple speakers ).

I would say the rhetoric, Larry, I think today is a lot better than it was four months ago.

Got you, got you. So obviously, cautious optimism. I realize this is so much semantics, but cautious optimism is better than guarded optimism if you will, or just guarded.

Yes. We've revised off the critical list.

Exactly. And on the power side, the large OEM that you're assuming is down on a hiatus for about 12 months, beginning in the middle of the year. Have you gotten any confirmation from them, any more clarity on this, or are you just sort of assuming going with what you have been building in for the last 12 months or so.

I think we've gotten a lot more clarity on when they are going out. I think it's less clear on when it's coming back and how it's coming back.

Again, that's probably a little bit fuzzier in our minds. We built in our original models coming back toward the tail end of next year. It could go beyond that. I think that's the part that we have less clarity on today.

And obviously that doesn't interfere with your 2014 outlook.

Switching gears real fast, of the Sport Truck and a couple of follow-ups. Is the amount of shocks -- maybe not going to give a dollar amount, but is it fair to say that the shocks that they're incorporating in their kits are the majority of those your shocks or other competitors as well?

I think it depends. They have their super-premium part of the brands, in those cases, largely Fox. And as you go down their offerings then we don't appear at all in the bottom part of their offerings right now.

Okay, and that's like if there would be some opportunities there as well.

Lastly, it sounds like you haven't given historical growth specifically, but it's fair to say this is been a double-digit grower? It's sort of in line with that your other powered vehicles are growing and you expect that to continue going forward?

It's fair to say that we project to grow at the same rate as the powered vehicle business, which would be a solid double-digit grower, after taking effect of the fact that you loose the sales and consolidation. A little bit of cannibalization after this first year.

What Zvi is saying, Larry, is supported by their historical performance.

Maybe just -- you sort of listed out probably about a few points of synergies and whatnot, maybe you could just sort of -- 50,000 -- what really excites you most about this acquisition?

You know I think, Larry, as a think about it, this thing is, if you look at our ride dynamics filter that we look at the world through, this thing is square dead center. It's a great strategic acquisition. It has direct adjacency to what we do.

There is synergy and engineering and optimum package for customer. We're excited about that. I think we see a lot of opportunity to co-market, co-brand. There's synergy in distribution -- you picked up a point, it's not lost on us we don't sell all of the shocks that they consume today. We would like to work with them, obviously, to increase that.

I think on the backend of the business, these guys have a great e-commerce engine. They sell very much on premium customer service. We like that. It plays well into our brand position.

But on the backend, I think we see some opportunities in the supply chain as we look at potential common suppliers, we look at increased volumes that can help both of our cost, things of that nature.

This is one of the few -- and I always knock on wood when I say these things, but from the time we started looking at this category, which is obviously quite a while ago, to we started looking at this company, we obviously announced the transaction last week. I'm more excited now than I was when we started this. I just think there is a lot of potential for this combination in the marketplace.

Were these guys looking to sell themselves? Was there some kind of competitive process or do you have any color on that?

You know, it wasn't an auction process. I think they went out and talked to a variety of people.

They are employee-owned so I think they had the luxury of kind of deciding what life they wanted to have going forward. I think they are, obviously, familiar with Fox and I think when they came to our door, which they did contact us, from then it was a negotiated transaction.

Got it. Okay, great. Appreciate it. Thanks.

[Molly Iraki], Stifel Nicolaus.

Hi, guys, this is Molly in for Jim today. I just wanted to ask you guys a couple of questions. I know the call is running a little long. First, on your inventory and receivable growth, I understand what you discussed earlier about the increase in 2013 business, timing of the shutdown and the transition of the bike manufacturing. I was wondering if any of those could be classified as one-time, and if so, what would your growth in both inventories and receivables have looked like?

Let's start with inventory. Once we get through the transition to Taiwan you would expect a reduction of inventory from historical levels. Until that point, while they were producing in both Taiwan and in the US over the next few years, first with forks and then with shocks, you are going to have a higher inventory level than what you've seen historically.

We also bought Toxoholics we don't have Toxoholics reflected in our results for sales for the whole year, but we do have their inventory as of the end of the year, so that's included.

And, lastly as to the timing of the shutdown, yes, we're not sure when we're going to shut down in 2014. That gets decided later in the year so that could effect it as well.

As to sales or AR, just the timing of the orders, which tend to fluctuate depending on the customer mix, the channel mix, et cetera, the business mix, the timing of the orders in addition and when we have the sales and addition to the customer pull ins, right, because that $3 million got pulled in at the end of December, which would typically happen in January. Some of those factors drove it. We would tell you that are accounts receivable is extremely healthy. This is a business that very rarely has write-offs. In the six years I've been with the Company we've never had write-offs over $100,000. So it is really timing related and mix related.

Okay. Thank you for the color.

And then, kind of going to the press release that came out at the time of the acquisition, you guys had mentioned that you're going to finance the acquisition with debt, and looking at the amount outstanding on your facility from third quarter to now it looks like that's come down. However, I think that still would make you a little limited on your available capacity. Are you planning on increasing it or is there another way of sourcing the deal that you are expecting?

As part of our initial facility, we had a accordion feature with our loan. It is our plan to convert the revolver to term debt and to have the same amount of capacity.

We have more than enough capacity after we amend our agreement with our lenders. We've obviously gotten indications from our lenders and our willingness to close and so forth. After this transaction has closed, we will continue to have borrowing capacity. The business will have extremely low leverage after the transaction has closed as well.

We touched on this. We typically have very low debt at the end of the year and in Q1 it would come down further and we would have the normal seasonal debt as the working capital increases and, absent this transaction, we would've had cash in our balance sheet at the end of 2014. With this transaction, we have a modest amount of debt, leverage under a half by the end of 2014, as a percentage of trailing EBITDA.

Okay, and then in terms of the interest rate on the credit facility -- I believe it's LIBOR plus 1.5 to 2.5. Do you expect that to be about the same, or will that go up?

We expect the interest rate to be identical. We have a grid. Depending on our leverage ratio, we expect to still be at the bottom part of the grid, and so I think, depending on what you assume for LIBOR, it will be under 3% interest rate if LIBOR stays where it's at right now.

Okay. All right, great.

And then my last question is, you guys had discussed earlier on the call that you were pleased with the Toxoholics acquisition. Just was wondering if you could discuss any of the learnings that you've had further and also when we could see maybe material expansion in that region, if there's anything in the near-term?

Yes. I think, Molly, the Toxoholics acquisition was not so much for financial reasons, it's strategic in terms of us gaining control of our destiny and servicing customers in Europe, which is obviously a lot -- large market for us. I think with Toxoholic, we acquired a lot of expertise in terms of prosecuting that service related and shipping product to dealers kinds of knowledge in the region. It came with the acquisition.

I think we've just been pleased with the way they have executed. I think combination with working directly with them, which you couldn't do as a readily when they were a third-party distributor in terms of our joint ability to go out there and get close to customers and satisfy the marketplace and run programs for dealers and things of that nature. I just think it's been a very good story for us.

Okay. Great. Thank you very much.

Thank you.

Thank you. There are no further questions at this time. I will turn the floor back to Larry Enterline for closing comments.

Thank you, operator. Thank you all for your questions and your 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 the hard work of our great group of enthusiastic employees, all keys to our continued success. Thank you, and have a good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.