# FOX FACTORY HOLDING CORP (FOXF) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FOX FACTORY HOLDING CORP's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1424929/000142492923000020/foxf-20221230.htm
Accession: 0001424929-23-000020
Filing date: 2023-02-23
Report date: 2022-12-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FOXF/
All MD&A years: /company/FOXF/mda/
Previous year: /company/FOXF/mda/fy2021/ (FY 2021)
Next year: /company/FOXF/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report in Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. You should review the "Risk Factors" and "Special Note Regarding Forward-Looking Statements" sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We design, engineer, manufacture and market performance-defining products and systems for customers worldwide. Our premium brand, performance-defining products and systems are used primarily on bikes, side-by-sides, on-road vehicles with and without off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, and specialty vehicles and applications. Virtually all of our revenues were from our product sales; miscellaneous sources of revenue such as royalty income and service related repair work and the associated sale of parts represented less than 1% of our sales in each of the years ended December 30, 2022, December 31, 2021 and January 1, 2021.

We have determined that we operate in one reportable segment, which is the manufacturing, sale and service of performance-defining products. Our products fall into the following two categories:

•powered vehicles, including side-by-sides, certain on-road vehicles with and without off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications, including military, motorcycles, and commercial trucks;

•specialty sports products, which consist primarily of bike suspension and component products.

In each of the years ended December 30, 2022, December 31, 2021 and January 1, 2021, approximately 58%, 55% and 59%, respectively, of our sales were attributable to sales of products for powered vehicles and approximately 42%, 45% and 41%, respectively, of our sales were attributable to sales of specialty sports products.

Our North American sales totaled $1,009.2 million, $811.3 million and $593.3 million, or 63%, 62% and 67% of our total sales in fiscal years 2022, 2021 and 2020, respectively. Our international sales totaled $593.3 million, $487.8 million and $297.3 million, or 37%, 38% and 33% of our total sales in fiscal years 2022, 2021 and 2020, respectively. Sales attributable to countries outside the U.S. are based on shipment location. Our international sales, however, do not necessarily reflect the location of the end users of our products as many of our products are incorporated into bikes that are assembled at international locations and then shipped back to the U.S. We estimate, based on our internal projections and assumptions, that approximately one-third of the end users of our bike products are located outside the U.S.

Opportunities, challenges and risks

We intend to focus on generating sales of our performance-defining products through OEMs and in the aftermarket channel. To do this, we intend to continue to develop and introduce new and innovative products in our current end-markets and we intend to selectively develop products for applications and end-markets in which we do not currently participate. Currently, the majority of our sales are dependent on the demand for performance-defining products.

Our aftermarket distribution network currently consists of more than 5,000 retail dealers and distributors worldwide. To further penetrate the aftermarket channel, we intend to selectively add additional dealers and distributors in certain geographic markets, expand our internal sales force and strategically increase the number of aftermarket specific products and services that we offer for existing vehicle platforms. In addition, we believe international expansion represents a significant opportunity for us and we intend to selectively increase infrastructure investments and focus on identified geographic regions.

As a supplier to OEM customers, we are largely dependent on the success of the business of our OEM customers. Model year changes by our OEM customers may adversely impact our sales or cause our sales to vary from quarter to quarter. Losses in market share or a decline in the overall market of our OEM customers or the discontinuance by our OEM customers of their products that incorporate our products could negatively impact our business and our results of operations.

37

Table of Contents

In the fourth quarter of 2021, we completed the construction of an approximately 336,000 square foot state-of-the-art facility in Hall County, Georgia (the "Gainesville Facility"), to diversify our manufacturing platform and provide additional long-term capacity to support growth in our Powered Vehicles Group. The Gainesville Facility is being used for manufacturing, warehousing, distribution and office space. Additionally, we completed the transition of our Watsonville Facility and relocation of our powered vehicles suspension manufacturing to the Gainesville Facility in the first quarter of 2022.

From time to time, we have experienced, and may continue to experience, warranty costs and claims relating to our products. In the ordinary course of business, we reserve for such costs and claims in our financial statements. There is a risk, however, that in the future we will experience higher than expected warranty costs and claims, as well as other related costs. Please read "Risks Related to Our Business and Operations - Product recalls, and significant product repair and/or replacement due to product warranty costs and claims have had, and in the future, could have, a material adverse impact on our business" within Item 1A. Risk Factors.

We intend to evaluate selective potential acquisition opportunities for performance-defining products and technologies that we believe will help us extend our performance-defining product platform. Any acquisitions that we might make are subject to various risks and uncertainties and could have a negative impact on our results of operations. In addition, we may contractually obligate ourselves to contingent consideration or acquisition related compensation payments in conjunction with such acquisitions, which could have a negative impact on our cash flow and results of operations. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Material Cash Requirements for additional information.

Basis of presentation

Composition of sales

Sales from:

•Product sales: consist of sales of performance-defining products and systems to customers worldwide. Sales are measured based on the consideration specified in a contract with a customer. We recognize sales when a performance obligation is satisfied by transferring control of a product to a customer, generally at the time of shipment. Contracts are generally in the form of purchase orders and are governed by standard terms and conditions. For larger OEMs, we may also enter into master agreements; and

•Shipping and handling fees: consists of shipping and handling fees billed to customers.

Net of:

•Rebates: consists of incentives we provide to customers based on sales of eligible products; and

•Sales returns allowances: consists of an estimate of our sales returns. This allowance is based upon estimates of the projected returns in future periods based on our experience with returns recorded in previous periods. Sales returns have not been significant to date; and

We attribute our past growth in sales predominantly to continued higher demand for on and off-road suspension products, acquisitions, and the success of our current product lines including new products within those lines.

Cost of sales

The cost of sales includes the cost of purchased parts and manufactured products (raw materials consumed, the cost to procure materials, labor costs, including wages, and employee benefits, and factory overhead to produce finished good products), including:

•the costs to inspect and repair products;

•shipping costs associated with inbound freight (such costs are capitalized as part of inventory and included in cost of sales as the inventory is sold);

•royalty expenses, including payments to certain parties for our use of licensed technology incorporated into our products;

•freight expenses incurred for certain shipments to customers;

•warranty costs associated with the repair or replacement of products under warranty; and

•reductions in the cost of inventory to its net realizable value, if required, for estimated excess, obsolescence or impaired balances.

38

Table of Contents

Gross profit/gross margin

Our gross profit equals our sales minus cost of sales. Our gross margin measures our gross profit as a percentage of sales.

Our gross margins fluctuate based on production volumes, product, customer and channel mix and overall supply chain and manufacturing efficiencies. Generally, we earn higher gross margins on our products sold to the aftermarket channel.

Operating expenses

Our operating expenses consist of the following:

•sales and marketing;

•research and development;

•general and administrative; and

•amortization of purchased intangibles.

Our sales and marketing expenses include costs related to our sales, customer service and marketing personnel, including their wages, employee benefits and related stock-based compensation, and occupancy related expenses. Other significant sales and marketing expenses include commissions paid to outside sales representatives, promotional materials and products, our sales office costs, race support and sponsorships of events and athletes, advertising and promotions related to trade shows, and travel and entertainment.

Our research and development expenses consist primarily of salaries and personnel costs, including wages, employee benefits and related stock-based compensation for our engineering, research and development teams, occupancy related expenses, fees for third party consultants, service fees, and expenses for prototype tooling and materials, travel, and supplies. We expense research and development costs as incurred and such costs are included as research and development expenses on our consolidated statements of income.

Our general and administrative expenses include costs related to our executive, finance, legal, information technology, business development, human resources and administrative personnel, including wages, employee benefits and related stock-based compensation expenses. We record professional and contract service expenses, occupancy related expenses associated with corporate locations and equipment, and legal expenses in general and administrative expenses.

Our amortization of purchased intangibles includes amortization over their respective useful lives of our purchased intangible assets, such as customer lists and our core technology. Our intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. No impairments of intangible assets were identified in the years ended December 30, 2022, December 31, 2021 and January 1, 2021.

Income from operations

We define income from operations as gross profit less our operating expenses. We use income from operations as an indicator of the profitability of our business and our ability to manage costs.

Interest and other expense, net

Interest expense consists of interest charged to us under our credit facility and changes related to our interest rate swap.

Other expense, net, consists of foreign currency transaction gains and losses, gains and losses on the disposal of fixed assets, and other miscellaneous items.

39

Table of Contents

 Income taxes

We are subject to income taxes in the U.S. (federal and state) and various other foreign jurisdictions. Our effective tax rate could be affected by numerous factors such as change in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, losses incurred in jurisdictions for which we are not able to realize related tax benefits, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework and other laws and accounting rules in various jurisdictions.

For the years ended December 30, 2022, December 31, 2021 and January 1, 2021, we had effective tax rates of 12.2%, 13.0% and 12.2%, respectively.

As of December 30, 2022, our deferred tax assets included foreign tax credits of approximately $47.8 million, which begin to expire in 2026 unless utilized.

Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of December 30, 2022, we reduced the valuation allowance against Foreign Tax Credits by $9.2 million. U.S. tax regulations proposed by the U.S. Treasury and Internal Revenue Service on November 22, 2022, which were early adopted by the Company, provided clarification to earlier guidance and resulted in the Company's ability to utilize certain foreign tax credits related to royalties. As a result, the Company determined a valuation allowance was not needed. In the future, our effective tax rate could vary as we update our assessment of valuation allowances for our deferred tax assets, including those associated with credit carryforwards. It is reasonably possible that we could record a material adjustment to the valuation allowance in the next 12 months.

We are subject to examination of our income tax returns by the U.S. Internal Revenue Service ("IRS") and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our income tax liabilities and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax expense may become necessary. Any such adjustments could have a significant impact on our effective tax rate.

40

Table of Contents

Results of operations

The table below summarizes our results of operations for the fiscal years ended December 30, 2022, December 31, 2021, and January 1, 2021:

[[GREPCENT_TABLE]]
[["","","","For the fiscal years ended"],["","","","","","December 30","","December 31","","January 1"],["(in thousands)","","","","","2022","","2021","","2021"],["Sales","","","","","$","1,602,491","","","$","1,299,064","","","$","890,554"],["Cost of sales","","","","","1,071,148","","","866,732","","","601,007"],["Gross profit","","","","","531,343","","","432,332","","","289,547"],["Operating expenses:"],["Sales and marketing","","","","","90,801","","","70,925","","","52,214"],["Research and development","","","","","56,205","","","46,567","","","34,292"],["General and administrative","","","","","116,103","","","97,241","","","71,309"],["Amortization of purchased intangibles","","","","","21,537","","","20,685","","","17,583"],["Total operating expenses","","","","","284,646","","","235,418","","","175,398"],["Income from operations","","","","","246,697","","","196,914","","","114,149"],["Interest and other expense, net:"],["Interest expense","","","","","8,939","","","8,162","","","9,294"],["Other expense, net","","","","","3,994","","","371","","","325"],["Total interest and other expense, net","","","","","12,933","","","8,533","","","9,619"],["Income before income taxes","","","","","233,764","","","188,381","","","104,530"],["Provision for income taxes","","","","","28,486","","","24,563","","","12,784"],["Net income","","","","","205,278","","","163,818","","","91,746"],["Less: net income attributable to non-controlling interest","","","","","\u2014","","","\u2014","","","1,072"],["Net income attributable to FOX stockholders","","","","","$","205,278","","","$","163,818","","","$","90,674"]]
[[/GREPCENT_TABLE]]

41

Table of Contents

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

[[GREPCENT_TABLE]]
[["","","","For the fiscal years ended"],["","","","","","December 30","","December 31","","January 1"],["","","","","","2022","","2021","","2021"],["Sales","","","","","100.0","%","","100.0","%","","100.0","%"],["Cost of sales","","","","","66.8","","","66.7","","","67.5"],["Gross profit","","","","","33.2","","","33.3","","","32.5"],["Operating expenses:"],["Sales and marketing","","","","","5.7","","","5.5","","","5.9"],["Research and development","","","","","3.5","","","3.6","","","3.9"],["General and administrative","","","","","7.2","","","7.5","","","8.0"],["Amortization of purchased intangibles","","","","","1.3","","","1.6","","","2.0"],["Total operating expenses","","","","","17.8","","","18.1","","","19.7"],["Income from operations","","","","","15.4","","","15.2","","","12.8"],["Interest and other expense, net:"],["Interest expense","","","","","0.6","","","0.6","","","1.0"],["Other expense, net","","","","","0.2","","","\u2014","","","\u2014"],["Interest and other expense, net","","","","","0.8","","","0.7","","","1.1"],["Income before income taxes","","","","","14.6","","","14.5","","","11.7"],["Provision for income taxes","","","","","1.8","","","1.9","","","1.4"],["Net income","","","","","12.8","","","12.6","","","10.3"],["Less: net income attributable to non-controlling interest","","","","","\u2014","","","\u2014","","","0.1"],["Net income attributable to FOX stockholders","","","","","12.8","%","","12.6","%","","10.2","%"]]
[[/GREPCENT_TABLE]]

*Percentages may not foot due to rounding.

42

Table of Contents

Fiscal year ended December 30, 2022 compared to fiscal year ended December 31, 2021

Sales

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2022","","2021","","Change ($)","Change (%)"],["Powered Vehicle products","$","921.5","","","$","720.0","","","$","201.5","","28.0","%"],["Specialty Sports products","681.0","","","579.0","","","102.0","","17.6"],["Total sales","$","1,602.5","","","$","1,299.0","","","$","303.5","","23.4","%"]]
[[/GREPCENT_TABLE]]

Sales for the year ended December 30, 2022 increased approximately $303.5 million, or 23.4%, compared to the year ended December 31, 2021. The sales increase reflects an increase of 28.0% and 17.6% in Powered Vehicle products and Specialty Sports products sales, respectively, for the year ended December 30, 2022 compared to the prior fiscal year. The increase in Powered Vehicle product sales was primarily due to strong performance from our upfitting product lines and increased demand in the OEM channel. The increase in Specialty Sports product sales reflects higher demand primarily in the OEM channel.

Cost of sales

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2022","","2021","","Change ($)","Change (%)"],["Cost of sales","$","1,071.1","","","$","866.7","","","$","204.4","","23.6","%"]]
[[/GREPCENT_TABLE]]

Cost of sales for the year ended December 30, 2022 increased approximately $204.4 million, or 23.6%, compared to the year ended December 31, 2021. The increase in cost of sales was driven primarily by an increase in product sales, as well as certain business factors affecting gross margin, which are discussed below.

For the year ended December 30, 2022, our gross margin was 33.2% compared to 33.3% for the year ended December 31, 2021. The decrease in gross margin for the fiscal year 2022 was primarily due to increases in factory overhead and materials costs, each of which were driven higher by inflation. Additionally, the completion of the planned shutdown of our Watsonville Facility and transition of those production lines resulted in inefficiencies in the first half of fiscal year 2022 as we ramped up our Gainesville Facility.

Operating expenses

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2022","","2021","","Change ($)","Change (%)"],["Operating expenses:"],["Sales and marketing","$","90.8","","","$","70.9","","","$","19.9","","28.1","%"],["Research and development","56.2","","","46.6","","","9.6","","20.6"],["General and administrative","116.1","","","97.2","","","18.9","","19.4"],["Amortization of purchased intangibles","21.5","","","20.7","","","0.8","","3.9"],["Total operating expenses","$","284.6","","","$","235.4","","","$","49.2","","20.9","%"]]
[[/GREPCENT_TABLE]]

Total operating expenses for the year ended December 30, 2022 increased approximately $49.2 million, or 20.9%, over the comparable period in 2021. When expressed as a percentage of sales, operating expenses decreased to 17.8% of sales for the year ended December 30, 2022, compared to 18.1% of sales for the fiscal year ended December 31, 2021.

Within operating expenses, our sales and marketing expense increased by approximately $19.9 million primarily due to higher commissions costs of $9.7 million, higher headcount and employee-benefit related costs of $5.8 million, higher marketing-related costs of $4.0 million and various others. Research and development expenses increased approximately $9.6 million primarily due to headcount investments to support future growth. General and administrative expenses increased approximately $18.9 million due to higher headcount and employee benefit-related costs of $11.7 million and higher insurance and facility-related costs of $11.1 million. These increases were partially offset by lower acquisition-related compensation and decreases in other miscellaneous costs.

Amortization of purchased intangible assets for the year ended December 30, 2022 increased by approximately $0.8 million as compared to the year ended December 31, 2021, primarily due to the amortization of Shock Therapy intangible assets.

43

Table of Contents

Income from operations

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2022","","2021","","Change ($)","Change (%)"],["Income from operations","$","246.7","","","$","196.9","","","$","49.8","","25.3","%"]]
[[/GREPCENT_TABLE]]

As a result of the factors discussed above, income from operations for the year ended December 30, 2022 increased approximately $49.8 million, or 25.3%, compared to the year ended December 31, 2021.

Interest and other expense, net

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2022","","2021","","Change ($)","Change (%)"],["Interest and other expense, net:"],["Interest expense","$","8.9","","","$","8.2","","","$","0.7","","8.5","%"],["Other expense, net","4.0","","","0.3","","","3.7","","1,233.3"],["Interest and other expense, net","$","12.9","","","$","8.5","","","$","4.4","","51.8","%"]]
[[/GREPCENT_TABLE]]

Interest and other expense, net for the year ended December 30, 2022 increased by approximately $4.4 million to $12.9 million, compared to $8.5 million for the year ended December 31, 2021. The increase in interest and other expense, net is primarily due to higher foreign currency losses, as well as increasing interest rates.

Income taxes

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2022","","2021","","Change ($)","Change (%)"],["Provision for income taxes","$","28.5","","","$","24.6","","","$","3.9","","15.9","%"]]
[[/GREPCENT_TABLE]]

Income tax expense for the year ended December 30, 2022 increased by approximately $3.9 million to $28.5 million compared to income tax expense of $24.6 million for the year ended December 31, 2021. The increase in expense resulted from an increase in pre-tax profit and decreased benefits from stock-based compensation deductions, partially offset by the release of the valuation allocation for foreign tax credits and the benefit of a lower tax rate on U.S. foreign derived earnings.

The effective tax rates were 12.2% and 13.0% for the years ended December 30, 2022 and December 31, 2021, respectively.

For the year ended December 30, 2022, the difference between our effective tax rate and the 21% federal statutory rate resulted from a lower tax rate on U.S. foreign derived earnings and the release of the valuation allocation for foreign tax credits, partially offset by other non-deductible expenses and state taxes.

For the year ended December 31, 2021, the difference between our effective tax rate and the 21% federal statutory rate resulted from a lower tax rate on U.S. foreign derived earnings and the benefit of excess stock based compensation deductions.

Net income

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2022","","2021","","Change ($)","Change (%)"],["Net income","$","205.3","","","$","163.8","","","$","41.5","","25.3","%"]]
[[/GREPCENT_TABLE]]

As a result of the factors described above, our net income increased $41.5 million, or 25.3%, to $205.3 million in the fiscal year ended December 30, 2022 from $163.8 million for the fiscal year ended December 31, 2021.

44

Table of Contents

Fiscal year ended December 31, 2021 compared to fiscal year ended January 1, 2021

Sales

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2021","","2020","","Change ($)","Change (%)"],["Sales","$","1,299.1","","","$","890.6","","","$","408.5","","45.9","%"]]
[[/GREPCENT_TABLE]]

Sales for the year ended December 31, 2021 increased approximately $408.5 million, or 45.9%, compared to the year ended January 1, 2021. The sales increase reflects a 57.8% increase in Specialty Sports products as well as a 37.5% growth in Powered Vehicle products for the year ended December 31, 2021 compared to the prior fiscal year. The increase in Specialty Sports product sales reflects higher demand primarily in the OEM channel. The increase in Powered Vehicle product sales was primarily due to strong performance from our upfitting product lines, the inclusion of a full year of SCA's results and increased demand in the aftermarket channel.

Cost of sales

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2021","","2020","","Change ($)","Change (%)"],["Cost of sales","$","866.7","","","$","601.0","","","$","265.7","","44.2","%"]]
[[/GREPCENT_TABLE]]

Cost of sales for the year ended December 31, 2021 increased approximately $265.7 million, or 44.2%, compared to the year ended January 1, 2021. The increase in cost of sales was driven primarily by an increase in product sales, as well as certain business factors affecting gross margin, which are discussed below.

For the year ended December 31, 2021, our gross margin was 33.3% compared to 32.5% for the year ended January 1, 2021. The increase in gross margin for the fiscal year 2021 was primarily due to higher volume sales in our Specialty Sports Group and the strong performance of our upfitting product lines, as well as favorable product and channel mix. Additionally, our gross margin for the prior fiscal year period was negatively impacted by incremental costs related to the COVID-19 pandemic.

Operating expenses

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2021","","2020","","Change ($)","Change (%)"],["Operating expenses:"],["Sales and marketing","$","70.9","","","$","52.2","","","$","18.7","","35.8","%"],["Research and development","46.6","","","34.3","","","12.3","","35.9"],["General and administrative","97.2","","","71.3","","","25.9","","36.3"],["Amortization of purchased intangibles","20.7","","","17.6","","","3.1","","17.6"],["Total operating expenses","$","235.4","","","$","175.4","","","$","60.0","","34.2","%"]]
[[/GREPCENT_TABLE]]

Total operating expenses for the year ended December 31, 2021 increased approximately $60.0 million, or 34.2%, over the comparable period in 2020. When expressed as a percentage of sales, operating expenses decreased to 18.1% of sales for the year ended December 31, 2021 compared to 19.7% of sales in 2020.

Within operating expenses, our sales and marketing expense increased by approximately $18.7 million primarily due to higher commissions of $11.8 million, higher employee related expenses of $1.5 million, and various other expenses. Research and development expenses increased approximately $12.3 million primarily due to headcount investments to support future growth. General and administrative expenses increased approximately $25.9 million due to higher employee related costs of $18.0 million, as well as various other investments of $5.1 million as we continue to scale our administrative support functions to meet the demands of our growing business. These increases were partially offset by lower acquisition-related costs of $9.3 million, as well as lower patent litigation related expenses of $1.1 million.

Amortization of purchased intangible assets for the year ended December 31, 2021 increased by approximately $3.1 million as compared to the year ended January 1, 2021, due to the amortization of SCA and Outside Van's intangible assets.

45

Table of Contents

 Income from operations

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2021","","2020","","Change ($)","Change (%)"],["Income from operations","$","196.9","","","$","114.1","","","$","82.8","","72.6","%"]]
[[/GREPCENT_TABLE]]

As a result of the factors discussed above, income from operations for the year ended December 31, 2021 increased approximately $82.8 million, or 72.6%, compared to income from operations in the year ended January 1, 2021.

Interest and other expense, net

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2021","","2020","","Change ($)","Change (%)"],["Interest and other expense, net:"],["Interest expense","$","8.2","","","$","9.3","","","$","(1.1)","","(11.8)","%"],["Other expense, net","0.3","","","0.3","","","\u2014","","\u2014"],["Interest and other expense, net","$","8.5","","","$","9.6","","","$","(1.1)","","(11.5)","%"]]
[[/GREPCENT_TABLE]]

Interest and other expense, net for the year ended December 31, 2021 decreased by approximately $1.1 million to $8.5 million, compared to $9.6 million for the year ended January 1, 2021. The decrease in interest and other expense, net is primarily due to lower interest rates and the pay down of our term loan.

Income taxes

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2021","","2020","","Change ($)","Change (%)"],["Provision for income taxes","$","24.6","","","$","12.8","","","$","11.8","","92.2","%"]]
[[/GREPCENT_TABLE]]

Income tax expense for the year ended December 31, 2021 increased by approximately $11.8 million to $24.6 million, compared to income tax expense of $12.8 million in the year ended January 1, 2021. The increase in expense resulted from the increase in pre-tax profit, partially offset by the benefit of a lower tax rate on U.S. foreign derived earnings.

The effective tax rates were 13.0% and 12.2% for the years ended December 31, 2021 and January 1, 2021, respectively.

For the year ended December 31, 2021, the difference between our effective tax rate and the 21% federal statutory rate resulted from a lower tax rate on U.S. foreign derived earnings and the benefit of excess stock based compensation deductions.

For the year ended January 1, 2021, the difference between our effective tax rate and the 21% federal statutory rate resulted from the benefit of excess deductions on stock-based compensation and the benefit of a lower tax rate on U.S. foreign derived earnings.

Net income

[[GREPCENT_TABLE]]
[["","For the fiscal years"],["(in millions)","2021","","2020","","Change ($)","Change (%)"],["Net income","$","163.8","","","$","91.7","","","$","72.1","","78.6","%"]]
[[/GREPCENT_TABLE]]

As a result of the factors described above, our net income increased $72.1 million, or 78.6%, to $163.8 million in the fiscal year ended December 31, 2021 from $91.7 million for the fiscal year ended January 1, 2021.

46

Table of Contents

Liquidity and Capital Resources

Our primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. Historically, we have generally financed our liquidity needs with operating cash flows, borrowings under our Prior Credit Facility and our 2022 Credit Facility, and the issuance of common stock. These sources of liquidity may be impacted by various factors, including demand for our products, impacts of the COVID-19 pandemic, investments made by us in acquired businesses, our plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.

As of December 30, 2022, we held $80.4 million of our $145.3 million of cash and cash equivalents in accounts of our subsidiaries outside of the U.S., which we may repatriate. We manage our foreign cash, intercompany payables and intercompany debt to provide a natural foreign currency hedge against U.S. dollar-denominated trade receivable balances held by our Taiwan location.

A summary of our operating, investing and financing activities are shown in the following table:

[[GREPCENT_TABLE]]
[["","For the years ended"],["","December 30","","December 31","","January 1"],["(in thousands)","2022","","2021","","2021"],["Net cash provided by operating activities","$","187,094","","","$","63,184","","","$","82,499"],["Net cash used in investing activities","(44,735)","","","(104,946)","","","(388,525)"],["Net cash (used in) provided by financing activities","(179,141)","","","(23,776)","","","506,722"],["Effect of exchange rate changes on cash and cash equivalents","2,346","","","(540)","","","1,332"],["(Decrease) increase in cash and cash equivalents","$","(34,436)","","","$","(66,078)","","","$","202,028"]]
[[/GREPCENT_TABLE]]

We expect that cash on hand, cash flow from operations and availability under our 2022 Credit Facility will be sufficient to fund our operations during the next 12 months from the date of this Annual Report on Form 10-K and beyond.

Operating activities

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

In the fiscal year ended December 30, 2022, cash provided by operating activities was $187.1 million and consisted of net income of $205.3 million plus non-cash items and other adjustments totaling $45.3 million, less changes in operating assets and liabilities totaling $63.5 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $49.2 million, stock-based compensation of $16.4 million, the write off of unamortized loan origination fees of $1.9 million, and the amortization of loan fees of $1.1 million, partially offset by a $18.4 million change in deferred taxes, the amortization of deferred gains on swap agreements of $3.2 million and gains of $1.7 million related to disposals of property, plant and equipment. Cash invested in operating assets and liabilities is primarily the result of increases in inventory of $78.5 million and accounts receivable of $64.0 million, partially offset by a decrease in prepaids and other current assets of $18.1 million, and increases in accounts payable of $40.5 million, accrued expenses of $11.7 million and income taxes payable of $8.7 million. The increase in inventory is due to several factors, including natural growth to meet anticipated demand, receipt of long lead time items that had been delayed, and higher levels of safety stock to mitigate supply chain uncertainty. The increases in accounts receivable, accounts payable and accrued expenses reflect normal business growth, as well as the timing of customer collections and vendor payments. The decrease in prepaids and other current assets is primarily due to a lower supply of chassis as we worked through the safety stock that we had secured at the end of 2021.

In the fiscal year ended December 31, 2021, cash provided by operating activities was $63.2 million and consisted of net income of $163.8 million plus non-cash items and other adjustments totaling $41.6 million, less changes in operating assets and liabilities totaling $142.2 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $43.4 million, stock-based compensation of $13.9 million, and amortization of loan fees of $1.6 million, offset by a $17.1 million change in deferred taxes and various others. Cash invested in operating assets and liabilities is primarily the result of increases in inventory of $146.5 million, prepaids and other current assets of $34.5 million, and accounts receivable of $20.2 million, offset by increases in net income taxes payable of $26.8 million, accrued expenses of $21.8 million, and accounts payable of $10.3 million. The increase in inventory is primarily due to additional raw material purchases to mitigate risks associated with supply chain uncertainty and shortages on certain parts needed to complete a suspension kit, as well as a higher balance of finished goods due to the timing of shipments. The increase in prepaids and other current assets is the result of increased chassis deposits. The increases in net income taxes payable, accrued expenses, accounts receivable and accounts payable are the result of normal business growth and the timing of vendor and tax payments.

47

Table of Contents

In the fiscal year ended January 1, 2021, cash provided by operating activities was $82.4 million and consisted of net income of $91.7 million plus non-cash items and other adjustments totaling $29.7 million, less changes in operating assets and liabilities totaling $39.1 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $33.9 million, stock-based compensation of $8.6 million, and amortization of loan fees of $1.5 million, offset by a $14.3 million change in deferred taxes. Cash invested in operating assets and liabilities is primarily the result of increases in prepaids and other current assets of $66.4 million and accounts receivable of $18.8 million, partially offset by increases in accounts payable and accrued expenses of $25.9 million and $11.2 million, respectively, an increase in income taxes payable of $1.2 million and a decrease in inventory of $7.8 million. The increase in prepaids and other current assets is primarily due to deposits on chassis and acquisition-related compensation payments held in escrow, both related to our acquired SCA subsidiary. The changes in inventory, accounts receivable, accounts payable and accrued expenses reflect business growth as well as timing of vendor payments.

Investing activities

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

In the fiscal year ended December 30, 2022, cash used in investing activities was $44.7 million, which primarily consisted of $43.7 million in property and equipment additions, $3.5 million in cash consideration for our purchase of intellectual property assets, and $0.7 million in cash consideration to finalize our acquisition of Shock Therapy, partially offset by $3.2 million in proceeds from the sale of property and equipment.

In the fiscal year ended December 31, 2021, cash used in investing activities was $104.9 million, which primarily consisted of $54.8 million in property and equipment additions and $51.9 million of cash consideration for our acquisitions of Outside Van, Sola Sport and Shock Therapy, partially offset by $1.8 million in proceeds for the sale of property and equipment.

In the fiscal year ended January 1, 2021, cash used in investing activities was $388.5 million, which primarily consisted of $331.5 million of cash consideration for our acquisition of SCA and $56.7 million in property and equipment additions.

Financing activities

Cash used in or provided by financing activities primarily relates to changes in our capital structure, including the various forms of debt and equity instruments used to finance our business.

In the fiscal year ended December 30, 2022, net cash used in financing activities was $179.1 million, which primarily consisted of $404.3 million in payments on our line of credit, $382.5 million in payments on our term debt, $4.3 million to repurchase shares of our common stock, net of proceeds from the exercise of stock options, as part of our stock-based compensation program and $2.7 million in installment payments related to the purchase of the Tuscany non-controlling interest. These changes were partially offset by net proceeds from our 2022 Credit Facility of $602.4 million, which was used to refinance our Prior Credit Facility, and proceeds from the termination of our 2021 Swap Agreement of $12.3 million.

In the fiscal year ended December 31, 2021, net cash used in financing activities was $23.8 million, which primarily consisted of $12.5 million in payments on our term debt, $7.0 million to repurchase shares of our common stock, net of proceeds from the exercise of stock options, as part of our stock-based compensation program and $4.6 million in installment payments related to the purchase of the Tuscany non-controlling interest, partially offset by $0.3 million in proceeds received from the termination of our 2020 Swap Agreement.

In the fiscal year ended January 1, 2021, net cash provided by financing activities was $506.7 million, which consisted primarily of $392.4 million in proceeds, net of issuance costs, from our Prior Credit Facility, which was amended and restated in connection with our acquisition of SCA, partially offset by net payments of $68.0 million on our line of credit and payments on our term debt of $5.0 million. In addition, we received $198.2 million from our June 2020 issuance of common stock. These inflows were partially offset by $4.3 million to repurchase shares of our common stock, net of proceeds from the exercise of stock options, as part of our stock-based compensation program and $6.6 million in installment payments related to the purchase of the Tuscany non-controlling interest.

Prior Credit Facility

In June 2019, the Company entered into a credit facility with Bank of America and other named lenders, which was periodically amended and restated and/or amended. The credit facility was amended and restated on March 11, 2020, and further amended on June 19, 2020, June 11, 2021 and December 16, 2021 (as amended, the "Prior Credit Facility"). The Prior Credit Facility (which was terminated on April 5, 2022 and replaced with the 2022 Credit Facility (as discussed below)), would have matured on March 11, 2025, and provided a senior secured revolving line of credit with a borrowing capacity of $250.0 million and a term loan of $400.0 million. The term loan was subject to quarterly amortization payments.

48

Table of Contents

2022 Credit Facility

On April 5, 2022, the Company entered into a new credit agreement with Wells Fargo Bank, National Association, and other named lenders (the "2022 Credit Facility"), and concurrently repaid in full and terminated the Prior Credit Facility. The 2022 Credit Facility, which matures on April 5, 2027, provides for revolving loans, swingline loans and letters of credit up to an aggregate amount of $650.0 million.

On April 5, 2022, the Company borrowed $475.0 million under the 2022 Credit Facility, which was used to repay all outstanding amounts owed under the Prior Credit Facility and for general corporate purposes. Future advances under the 2022 Credit Facility will be used to finance working capital, capital expenditures and other general corporate purposes of the Company. To the extent not previously paid, all then-outstanding amounts under the 2022 Credit Facility are due and payable on the maturity date.

The Company paid $2.0 million in debt issuance costs in connection with the 2022 Credit Facility, which were allocated to the line of credit and amortized on a straight-line basis over the term of the facility. Additionally, the Company had $4.5 million of remaining unamortized debt issuance costs related to the Prior Credit Facility. The Company expensed $1.9 million of the remaining unamortized debt issuance costs and allocated $2.5 million to the 2022 Credit Facility.

The Company may borrow, prepay and re-borrow principal under the 2022 Credit Facility during its term. Advances under the 2022 Credit Facility can be either Adjusted Term Secured Overnight Financing Rate ("SOFR") loans or base rate loans. SOFR rate revolving loans bear interest on the outstanding principal amount thereof for each interest period at a rate per annum equal to Term SOFR for such calculation plus 0.10% plus a margin ranging from 1.00% to 2.00%. Base rate revolving loans bear interest on the outstanding principal amount thereof at a rate per annum equal to the highest of (i) Federal Funds Rate plus 0.50%, (ii) the rate of interest in effect for such day as publicly announced from time to time by the administrative agent as its “prime rate”, and (iii) Adjusted Term SOFR rate for a one-month tenor plus 1.00%, subject to the interest rate floors set forth therein, plus a margin ranging from 0.00% to 1.00%. At December 30, 2022, the one-month SOFR and three-month SOFR rates were 4.06% and 3.62%, respectively. At December 30, 2022, our weighted-average interest rate on outstanding borrowing was 4.38%.

The 2022 Credit Facility is secured by substantially all of the Company’s assets, restricts the Company's ability to make certain payments and engage in certain transactions, and requires that the Company satisfy customary financial ratios. The Company was in compliance with the covenants as of December 30, 2022.

Material Cash Requirements

As of December 30, 2022, we had the following material cash requirements related to commitments or contractual obligations (in thousands):

[[GREPCENT_TABLE]]
[["Payments due by period","Total","","Less than 1 year","","1-3 years","","4-5 years","","More than 5 years"],["Long-term borrowings","$","200,000","","","$","\u2014","","","$","\u2014","","","$","200,000","","","$","\u2014"],["Operating lease obligations","51,073","","","11,376","","","18,603","","","11,445","","","9,649"],["Purchase obligations and other","3,357","","","3,357","","","\u2014","","","\u2014","","","\u2014"],["Total","$","254,430","","","$","14,733","","","$","18,603","","","$","211,445","","","$","9,649"]]
[[/GREPCENT_TABLE]]

Seasonality

Certain portions of our business are seasonal; we believe this seasonality is due to the delivery of new products. As we have diversified our product offerings and our product launch cycles, seasonal fluctuations are becoming less material.

Inflation

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

49

Table of Contents

Critical Accounting Policies and Estimates

We have adopted various accounting policies to prepare the consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are described in Note 1. Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. Some of those significant accounting policies require us to make difficult, subjective, or complex judgments or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur may have a material impact on our financial condition or results of operations. The significant accounting policies that management believes are critical to the understanding and evaluating our reported financial results include the following: income taxes, inventory, warranty, goodwill and intangible assets, stock-based compensation, revenue recognition, provision for credit losses and fair value measurement. For further information see Note 1. Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.

Critical Accounting Policies

Income taxes

We are subject to income taxes in the U.S. (federal and state) and foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The income tax effects of these differences are classified as long-term deferred tax assets and liabilities in our consolidated balance sheets.

Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including but not limited to, historical operating results, forecasted earnings, estimates of future taxable income of a character necessary to realize the deferred asset, relative proportions of revenue and pre-tax income in the various domestic and jurisdictions in which we operate, and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods.

Additionally, our judgments, assumptions, and estimates relative to the provision for income taxes take into account enacted tax laws, regulations, administrative practices, interpretations in various jurisdictions and possible outcomes of current and future audits conducted by tax authorities. Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, losses incurred in jurisdictions for which we are not able to realize related tax benefits, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework and other laws and accounting rules in various jurisdictions.

We utilize a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We consider many factors when evaluating tax positions such as the closing of a tax audit, the refinement of estimates, and the expiration of a statute of limitations that may require periodic adjustments that impact our tax provision in our consolidated statements of income. Interest and penalties associated with income taxes are recorded as income tax expense. Refer to Note 15. Income Taxes for further details.

50

Table of Contents

Inventories

Inventories are stated at the lower of actual cost (or standard cost which generally approximates actual costs on a first-in first-out basis) or net realizable value. Cost includes raw materials and inbound freight, as well as direct labor and manufacturing overhead for products we manufacture. Net realizable value is based on current replacement cost for raw materials and on a net realizable value for finished goods. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolete or impaired balances.

We regularly monitor inventory quantities on hand and on order and record write-downs for excess and obsolete inventories based on our estimate of the demand for our products, potential obsolescence of technology, product life cycles, and when pricing trends or forecasts indicate that the carrying value of inventory exceeds our estimated selling price. These factors are affected by market and economic conditions, technology changes, and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on our gross margin. If inventory is written down, a new cost basis will be established that cannot be increased in future periods.

Warranty

Unless otherwise required by law, the Company generally offers limited warranties on its products for one to two years. We accrue estimated costs related to warranty activities as a component of cost of sales upon product shipment or when information becomes available indicating that an adjustment to the warranty reserves is appropriate. Management estimates are based upon historical and projected product failure rates and historical costs incurred in correcting product failures. The warranty reserve is assessed from time to time for adequacy and adjusted as necessary for specifically identified warranty exposures. Actual warranty expenses are charged against our estimated warranty liability when incurred. Factors that affect our liability include the number of units, historical and anticipated rates of warranty claims, and the cost per claim. An increase in warranty claims or the related costs associated with satisfying these warranty obligations could increase our cost of sales and negatively affect our operating results. Total accrued warranty liabilities were approximately $17.1 million and $15.5 million as of December 30, 2022 and December 31, 2021, respectively. Refer to Note 8. Accrued Expenses for further details.

Goodwill, intangible assets and long-lived assets

Goodwill

Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. On an annual basis, the Company performs a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If the Company determines that the fair value of the reporting unit is less than its carrying amount, it will perform a quantitative analysis; otherwise, no further evaluation is necessary.

For the quantitative impairment test, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company determines the fair value of the reporting unit based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company will recognize a loss equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. Impairments, if any, are charged directly to earnings. We completed our most recent annual impairment test in the third quarter of 2022 at which time we had a single reporting unit for purposes of assessing goodwill impairment. No impairment charges have been incurred to date.

Indefinite-lived intangible assets

Certain trademarks and trade names are considered to be indefinite life intangibles, and are not amortized but are subject to testing for impairment annually.

Finite-lived intangible assets

We assess the recoverability of identifiable finite-lived intangible assets whenever events or changes in circumstances indicate that an asset or asset group’s carrying amount may be impaired. Impairment of certain finite-lived intangible assets, particularly customer relationships, certain trade names and core technology, is measured by comparing the carrying amount of the asset group to which the assets are assigned to the sum of the undiscounted estimated future cash flows the asset group is expected to generate. If the asset or asset group is considered to be impaired, the amount of such impairment would be measured by the difference between the carrying amount of the asset and its fair value. 

51

Table of Contents

Acquisition of certain identifiable definite-lived and indefinite-lived assets

In conjunction with an acquisition of a business, the Company records identifiable definite-lived and indefinite-lived intangible assets acquired at their respective fair values as of the date of acquisition. The estimates used in assessing the fair value for the assets acquired include projected future cash flows, associated discount rates used to calculate present value, asset life cycles, customer retention rates and royalty rates. The fair value calculated for indefinite-lived intangible assets such as certain trade names, in addition to intangible assets that are definite-lived such as customer relationships and other technology-based assets may change during the finalization of the purchase price allocation, due to the significant estimates used in determining their fair value. As a result, the Company may make adjustments to the provisional amounts recorded for certain items as part of the purchase price allocation subsequent to the acquisition, not to exceed one year after the acquisition date, until the purchase accounting allocation is finalized.

Stock-based compensation

The Company measures stock-based compensation for all stock-based awards, including stock options and restricted stock units ("RSUs"), based on their estimated fair values on the date of the grant and recognizes the stock-based compensation cost for time-vested awards on a straight-line basis over the requisite service period. For performance-based RSUs, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. To the extent shares are expected to vest, the stock-based compensation cost is recognized on a straight-line basis over the requisite service period. Stock-based compensation was $16.4 million, $13.9 million and $8.6 million for the fiscal years ended December 30, 2022, December 31, 2021 and January 1, 2021, respectively. Refer to Note 13. Stockholders’ Equity for further details. The fair value of each stock option granted is estimated using the Black-Scholes option-pricing model. The Company does not estimate forfeitures in recognizing stock-based compensation expense.

The determination of the grant date fair value of options using an option-pricing model is affected by our common stock fair value as well as assumptions including our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends.

Stock-based compensation expenses are classified in the statements of income based on the department to which the related employee reports. Our stock-based awards subsequent to our IPO have been comprised principally of restricted stock unit awards.

Revenue recognition

Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer, generally at the time of shipment. Contracts are generally in the form of purchase orders and are governed by standard terms and conditions. For larger OEMs, the Company may also enter into master agreements. Revenues generated from upfit packages generally do not include the vehicle chassis, as the Company is not the principal in this arrangement and the automotive dealer purchases the chassis directly from the OEM. The Company is required to place a deposit on all vehicle chassis that the dealer purchases directly from the OEM, however that deposit is refunded when the chassis is sold through to the end customer.

Provisions for discounts, rebates, sales incentives, returns, and other adjustments are generally provided for in the period the related sales are recorded, based on management’s assessment of historical trends and projection of future results. Accrued sales rebates were $8.7 million and $8.6 million as of December 30, 2022 and December 31, 2021, respectively. Sales returns allowances have historically been immaterial to the financial statements. Certain pricing provisions that provide the customer with future discounts are considered a material right. Such material rights result in the deferral of revenue that are recognized when the rights are exercised by the customer. Measuring the material rights requires judgments including forecasts of future sales and product mix.

Allowance for credit losses

We record a provision for credit losses deemed not collectible using the aging method. The provision is based on how long a receivable has been outstanding, taking into account the historical credit loss rate and adjusting for both current conditions and forecasts of economic conditions into that expected credit loss rate. If circumstances change, such as higher-than-expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations, we estimate if the recoverability of the amounts due could be reduced by a material amount.

52

Table of Contents

Fair value measurement and financial instruments

ASC 820, Fair Value Measurements and Disclosures, requires the valuation of assets and liabilities required or permitted to be either recorded or disclosed at fair value based on hierarchy of available inputs as follows:

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

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

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

We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk.

As of December 31, 2021, the carrying amount of the principal under the Company’s Prior Credit Facility approximated fair value because it had a variable interest rate that reflected market changes in interest rates and changes in the Company’s net leverage ratio. The Prior Credit Facility was terminated on April 5, 2022 and replaced with the revolving 2022 Credit Facility.

On June 11, 2021, the Company entered into an interest rate swap agreement (the "2021 Swap Agreement") to mitigate the cash flow risk associated with changes in interest rates on its variable rate debt. On April 5, 2022, the Company terminated its 2021 Swap Agreement and entered into a new interest rate swap agreement (the "2022 Swap Agreement"). Refer to Note 11. Derivatives and Hedging for additional details of the agreement. In accordance with ASC 815, an interest rate swap contract is recognized as an asset or liability on the Consolidated Balance Sheets and is measured at fair value. The fair value was calculated utilizing Level 2 inputs.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which helps simplify how entities account for income taxes by removing various exceptions related to the recognition of deferred tax liabilities and updating other tax computation requirements. This standard is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company adopted ASU 2019-12 effective in the first quarter of fiscal year 2021. The adoption of ASU 2021-12 did not have a material impact on the Company's consolidated financial statements.

In October 2020, the FASB issued ASU 2020-10, Codification Improvements. The amendments in ASU 2020-10 contain improvements to the Codification to ensure consistency by including disclosure guidance in the appropriate Disclosure Section. This guidance includes an option for an entity to provide certain information either on the face of the financial statements or in the notes. The ASU also provides clarification to various codification topics to improve consistency in guidance application. The amendments are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2020-10 effective in the first quarter of fiscal year 2021. The adoption of ASU 2020-10 did not have a material impact on the Company's consolidated financial statements and related disclosures.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Under ASU 2021-08, an acquirer must recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. The Company adopted this guidance in the first quarter of 2022. This adoption did not have a material impact on our financial statements.

53

Table of Contents

In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405): Disclosure of Supplier Finance Program Obligations. Under ASU 2022-04, the buyer in a supplier finance program is required to disclose sufficient information to allow a user of the financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. The guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. These amendments will be applied retrospectively to each period in which a balance sheet is presented, except for the disclosure of rollforward information, which will be applied prospectively. The Company expects to adopt the interim disclosure requirements as applicable during the first quarter of 2023 and the annual disclosure requirements, except for the annual rollforward, in the 2023 Annual Report on Form 10-K. The Company expects to adopt the annual rollforward requirement in the 2024 Annual Report on Form 10-K. The Company is currently evaluating ASU 2022-04 and assessing the impact this guidance will have on its consolidated financial statements and disclosures.