JOHNSON OUTDOORS INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) includes comments and analysis relating to the results of operations and financial condition of Johnson Outdoors Inc. and its subsidiaries (collectively, the “Company”) as of and for the three and nine month periods ended June 26, 2020 and June 28, 2019 . All monetary amounts, other than share and per share amounts, are stated in thousands. Our MD&A is presented in the following sections: • Forward Looking Statements • Trademarks • Overview • Results of Operations • Liquidity and Financial Condition • Contractual Obligations and Off Balance Sheet Arrangements • Critical Accounting Policies and Estimates This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related notes that immediately precede this section, as well as the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2019 which was filed with the Securities and Exchange Commission on December 6, 2019. Forward Looking Statements Certain matters discussed in this Form 10-Q are “forward-looking statements,” and the Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of those safe harbor provisions. These forward-looking statements can generally be identified as such because they include phrases such as the Company “expects,” “believes,” “anticipates,” “intends,” use of words such as “confident,” “could,” “may,” “planned,” “potential,” “should,” “will,” “would” or the negative of such words or other words of similar meaning. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include the matters described under the caption “Risk Factors” in Item 1A of the Company’s Form 10-K which was filed with the Securities and Exchange Commission on December 6, 2019, the update to such "Risk Factors" section in Part II, Item 1A in this Form 10-Q and the following: changes in economic conditions, consumer confidence levels and discretionary spending patterns in key markets; uncertainties stemming from changes in U.S. trade policies, tariffs, and the reaction of other countries to such changes; the global outbreaks of disease, such as the COVID-19 pandemic beginning in late 2019 and spreading across the globe in 2020, which has affected, and may continue to affect, - 21 - Index JOHNSON OUTDOORS INC. market and economic conditions, along with wide-ranging impacts on employees, customers and various aspects of our operations; the Company’s success in implementing its strategic plan, including its targeted sales growth platforms, innovation focus and its increasing digital presence; litigation costs related to actions of and disputes with third parties, including competitors; the Company’s continued success in its working capital management and cost-structure reductions; the Company’s success in integrating strategic acquisitions; the risk of future writedowns of goodwill or other long-lived assets; the ability of the Company’s customers to meet payment obligations; the impact of actions of the Company's competitors with respect to product development or enhancement or the introduction of new products into the Company's markets; movements in foreign currencies, interest rates or commodity costs; fluctuations in the prices of raw materials or the availability of raw materials used by the Company; any disruptions in the Company's supply chain as a result of material fluctuations in the Company's order volumes and requirements for raw materials and other components necessary to manufacture and produce the Company's products; the success of the Company’s suppliers and customers and the impact of any consolidation in the industries of the Company's suppliers and customers; the ability of the Company to deploy its capital successfully; unanticipated outcomes related to outsourcing certain manufacturing processes; unanticipated outcomes related to litigation matters; and adverse weather conditions. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this filing. The Company assumes no obligation, and disclaims any obligation, to update such forward-looking statements to reflect subsequent events or circumstances. Trademarks We have registered the following trademarks, among others, which may be used in this report: Minn Kota®, Cannon®, Humminbird®, Eureka!®, Jetboil®, Old Town®, Ocean Kayak®, Carlisle®, and SCUBAPRO®. Overview The Company is a leading global manufacturer and marketer of branded seasonal outdoor recreation products used primarily for fishing, diving, paddling and camping. The Company’s portfolio of well-known consumer brands has attained leading market positions due to continuous innovation, marketing excellence, product performance and quality. The Company’s values and culture support innovation in all areas, promoting and leveraging best practices and synergies within and across its subsidiaries to advance the Company’s strategic vision set by executive management and approved by the Company’s Board of Directors. The Company is controlled by Helen P. Johnson-Leipold, the Company’s Chairman and Chief Executive Officer, members of her family and related entities. Coronavirus (COVID-19) Due to the timing of COVID-19 outbreak, the Company's primary-selling season was interrupted resulting in a significant impact on sales volumes for the current year third fiscal quarter versus the prior year period Once stay at home restrictions were lifted later in the current year third quarter, the Company saw an increase in demand for many of its warm weather outdoor recreational products as consumers took advantage of being outdoors. Each of our Fishing, Camping and Watercraft Recreation segments experienced strong demand at the end of the current year third quarter. However, strong sales in the latter part of the third quarter were not enough to overcome the sales declines experienced at the start of the stay at home mandates instituted throughout the United States and the rest of the world. Due to the unique aspects of this pandemic and the various government prescriptions for the general public to maintain social distancing and other behaviors to mitigate the spread of the virus, the warm weather outdoor recreation season appears to have shifted. As a result, the longer-term impacts from the COVID-19 pandemic are highly uncertain and cannot be predicted. Nonetheless, the Company currently has no debt, has over $180,000 of cash reserves as of the June 26, 2020 quarter end and has access to $75,000 of revolver debt, through its current credit facilities if such additional funds are needed to be accessed for operations, all of which factors the Company believes will continue to help it through the COVID-19 pandemic. Moreover, the Company intends to continue to manage the impact of the COVID-19 pandemic through targeting disciplined investments for future growth. Highlights Net sales of $138,390 for the third quarter of fiscal 2020 decreased $37,863 , or 21% , from the same period in the prior year, reflecting decreased sales volumes across all businesses, except Watercraft Recreation, mainly attributable to the COVID-19 pandemic and its disruption to the business environment in Asia-Pacific, Europe, and the United States early in the quarter. This sales volume decrease was the primary driver of the decrease of $15,100 in operating profit over the prior year quarter. - 22 - Index JOHNSON OUTDOORS INC. Seasonality The Company’s business is seasonal in nature. The third fiscal quarter traditionally falls within the Company’s primary selling season for its warm-weather outdoor recreation products. The table below sets forth a historical view of the Company’s seasonality during the last three fiscal years. See “Coronavirus (COVID-19)” above for additional information of the impact of COVID-19 on the Company’s seasonality for fiscal 2020. Fiscal Year 2019 2018 2017 Quarter Ended Net Sales Operating Profit Net Sales Operating Profit Net Sales Operating Profit December 19 % 9 % 21 % 11 % 19 % 1 % March 32 % 43 % 31 % 41 % 30 % 45 % June 31 % 43 % 31 % 51 % 32 % 54 % September 18 % 5 % 17 % -3 % 19 % — % 100 % 100 % 100 % 100 % 100 % 100 % Results of Operations The Company’s net sales and operating profit (loss) by business segment for the periods shown below were as follows: Three Months Ended Nine Months Ended June 26, 2020 June 28, 2019 June 26, 2020 June 28, 2019 Net sales: Fishing $ 102,741 $ 128,196 $ 335,974 $ 345,222 Camping 9,665 14,728 26,028 30,077 Watercraft Recreation 15,267 13,010 26,140 27,186 Diving 10,696 20,243 41,416 55,866 Other / Eliminations 21 76 (30 ) 49 Total $ 138,390 $ 176,253 $ 429,528 $ 458,400 Operating profit (loss): Fishing $ 23,273 $ 29,672 $ 71,208 $ 75,684 Camping 828 2,315 1,603 2,048 Watercraft Recreation 1,181 380 (2,021 ) (1,628 ) Diving (2,595 ) 1,440 (3,202 ) 2,156 Other / Eliminations (9,758 ) (5,778 ) (16,064 ) (16,409 ) Total $ 12,929 $ 28,029 $ 51,524 $ 61,851 See “Note 16 – Segments of Business” of the notes to the accompanying Condensed Consolidated Financial Statements for the definition of segment net sales and operating profit. Net Sales Consolidated net sales for the three months ended June 26, 2020 were $138,390 , a decrease of $37,863 , or 21% , compared to $176,253 for the three months ended June 28, 2019 . As described above under “Coronavirus (COVID-19),” our comparative results between quarterly periods were heavily impacted by COVID-19 on our operations for our 2020 fiscal third quarter. Foreign currency translation had an unfavorable impact of less than 1% on current year third quarter net sales compared to the prior year's third quarter net sales. - 23 - Index JOHNSON OUTDOORS INC. Net sales for the three months ended June 26, 2020 for the Fishing business were $102,741 , a decrease of $25,455 , or 20% , from $128,196 during the third fiscal quarter of the prior year. Increased demand late in the current year quarter was not enough to overcome sales declines in April driven by COVID-19 shutdowns of our operations and those implemented by many retailers, as well as restrictions that consumers engage in essential activities only. Net sales for the Camping business were $9,665 for the third quarter of the current fiscal year, a decrease of $5,063 , or 34% , from the prior year net sales during the same period of $14,728 . The impact of COVID-19 on both production and demand drove the decrease over the prior year quarter. Net sales for the third quarter of fiscal 2020 for the Watercraft Recreation business were $15,267 , an increase of $2,257 , or 17% , compared to $13,010 in the prior year same period. Despite COVID-19 related shutdowns early in the fiscal 2020 third quarter, increased demand later in the quarter drove the overall increase over the prior year quarter. Net sales for Diving, our most global business, were $10,696 for the three months ended June 26, 2020 versus $20,243 for the three months ended June 28, 2019 , a decrease of $9,547 , or 47% . The decrease is largely due to the effects of COVID-19 on demand as a result of the closure of destination travel and tourism. In addition, foreign currency translation unfavorably impacted sales in this segment by approximately 1% versus the prior year quarter. For the nine months ended June 26, 2020 , consolidated net sales of $429,528 decreased $28,872 or 6% , compared to $458,400 for the nine months ended June 28, 2019 . Foreign currency translation had an unfavorable impact of less than 1% on net sales of the current year period compared to the prior year period. Again, similar to the results for the fiscal third quarter as noted above, our comparative results for the year to date period were heavily impacted by COVID-19 for fiscal 2020. Net sales for the nine months ended June 26, 2020 for the Fishing business were $335,974 , a decrease of $9,248 , or 3% , from $345,222 during the same period of the prior year. The impact of COVID-19 drove the overall decrease year over year. Net sales for the Camping business were $26,028 for the nine months ended June 26, 2020 , a decrease of $4,049 , or 13% , from the prior year net sales during the same period of $30,077 . The impact of COVID-19 drove the decrease over the prior year. Net sales for the nine months ended June 26, 2020 for the Watercraft Recreation business were $26,140 , a decrease of $1,046 , or 4% , compared to $27,186 in the prior year same period. The segment's strong third fiscal quarter was not enough to overcome the sales declines in the first two fiscal quarters versus the prior year. Diving net sales were $41,416 for the nine months ended June 26, 2020 versus $55,866 for the nine months ended June 28, 2019 , a decrease of $14,450 , or 26% . As explained earlier, the decrease is largely due to the impact of COVID-19 and the disruptions it caused on our operations during the current year to date period, as well as disruptions to global travel. In addition, foreign currency translation unfavorably impacted sales in this segment in the current year to date period by approximately 1% versus the prior year period. Cost of Sales Cost of sales for the three months ended June 26, 2020 was $75,828 compared to $96,528 for the three months ended June 28, 2019 . The decrease year over year was driven primarily by lower sales volume in the current year quarter over the prior year quarter. For the nine months ended June 26, 2020 , cost of sales was $238,222 compared to $255,227 in the same period of the prior year. The decrease year over year was primarily due to lower sales volume in the current year versus the prior year. Section 301 tariffs on the import of certain components and other supplies from China did not materially impact the comparability of results between the year to date periods, as they were generally consistent with those incurred in the prior year first nine months. Gross Profit Margin For the three months ended June 26, 2020 , gross profit as a percentage of net sales was 45.2% which was flat compared to 45.2% in the three month period ended June 28, 2019 . Reduced efficiencies related to COVID-19 shutdowns were offset by improved product mix and pricing between quarters. - 24 - Index JOHNSON OUTDOORS INC. For the nine months ended June 26, 2020 , gross profit as a percentage of net sales was relatively flat at 44.5% compared to 44.3% in the prior nine month period. Similar to the quarterly comparison, reduced efficiencies related to COVID-19 shutdowns were offset by improved product mix and pricing. The Company anticipates an aggregate negative impact of Section 301 tariffs on China sourced goods, net of mitigation actions, on the Company's full fiscal 2020 gross profit of approximately $3 to $4 million, compared to approximately $3 million during the full previous fiscal year. Operating Expenses Operating expenses were $49,633 for the three months ended June 26, 2020 compared to $51,696 for the three months ended June 28, 2019 . The decrease of $2,063 was primarily due to the impact of lower sales and sales volume driven expenses which were offset in part by higher employee compensation costs including deferred compensation expense. Favorable market conditions on the Company's deferred compensation plan assets resulted in approximately $2,100 of higher deferred compensation expense in the current year quarter as compared to the prior year quarter, which was entirely offset by a gain in Other (Income) Expense, net related to marking these deferred compensation plan assets to market. Operating expenses were $139,782 for the nine months ended June 26, 2020 compared to $141,322 for the nine months ended June 28, 2019 . The decrease was primarily due to decreased sales and sales volume related expenses year over year. On a year to date basis, deferred compensation expense was consistent with the prior year nine month period. Operating Profit Operating profit on a consolidated basis for the three month period ended June 26, 2020 was $12,929 compared to an operating profit of $28,029 in the third quarter of the prior fiscal year. Lower sales volumes due to COVID-19 and the other factors discussed above were the primary drivers of the decline. Operating profit on a consolidated basis for the nine months ended June 26, 2020 was $51,524 compared to an operating profit of $61,851 in the prior year to date period. The decrease year over year was driven primarily by lower sales volumes due to COVID-19. Interest For the three months ended June 26, 2020 , interest expense was $35 compared to $64 in the three months ended June 28, 2019 . Interest expense was $105 for the nine months ended June 26, 2020 compared to $137 for the nine months ended June 28, 2019 . Interest income for the three month periods ended June 26, 2020 and June 28, 2019 was $170 and $434 , respectively. For the nine months ended June 26, 2020 , interest income was $1,309 , compared to $1,291 for the nine months ended June 28, 2019 . The increase in interest income year over year was mainly driven by the increase in interest earnings on increased balances of interest bearing cash in fiscal 2020 versus the corresponding periods of fiscal 2019. Other (Income) Expense, net Other income was $2,493 for the three months ended June 26, 2020 compared to $493 in the prior year period. Investment gains and earnings on the assets related to the Company’s non-qualified deferred compensation plan were $2,791 in the three month period ended June 26, 2020 compared to $710 in the three month period ended June 28, 2019 . This $2,081 increase year over year in the investment value of these assets was offset by the deferred compensation expense included in the Company's Operating expenses during the same periods. For the three months ended June 26, 2020 , foreign currency exchange gains were $74 compared to losses of $194 for the three months ended June 28, 2019 . For the nine months ended June 26, 2020 , other expense was $205 compared to other income of $238 in the nine months ended June 28, 2019 . Net investment gains and earnings on the assets related to the Company's non-qualified deferred compensation plan were $648 in the nine month period ended June 26, 2020 , compared to $635 in the nine month period ended June 28, 2019 . Foreign currency losses were $224 for the nine months ended June 26, 2020 , compared to $18 in the nine months ended June 28, 2019 . Income Tax Expense The Company’s provision for income taxes is based upon estimated annual effective tax rates in the tax jurisdictions in which the Company operates. The effective tax rate for the three and nine month periods ended June 26, 2020 were 17.3% and 24.4% , respectively, compared to 23.6% and 24.9% in the corresponding periods of the prior year. The key factor impacting the - 25 - Index JOHNSON OUTDOORS INC. effective tax rate for the three and nine months ended June 26, 2020 was a decrease in reserves for unrecognized tax benefits from the expiration of statutes of limitations. Net Income Net income for the three months ended June 26, 2020 was $12,869 , or $1.27 per diluted common class A and B share, compared to net income of $22,066 , or $2.19 per diluted common class A and B share, for the third quarter of the prior fiscal year. Net income for the nine months ended June 26, 2020 was $39,686 , or $3.93 per diluted common class A and B share, compared to net income of $47,510 , or $4.72 per diluted common class A and B share, for the nine months ended June 28, 2019 . Liquidity and Financial Condition Cash and cash equivalents totaled $181,445 as of June 26, 2020 , compared to cash and cash equivalents of $148,968 as of June 28, 2019 . The increase in cash year over year was due primarily to operating profits earned since the end of the prior year to date period. The Company’s debt to total capitalization ratio was 0% as of June 26, 2020 and June 28, 2019 . The Company’s total debt balance was $0 as of each of June 26, 2020 and June 28, 2019 . See “Note 11 – Indebtedness” in the notes to the Company’s accompanying condensed consolidated financial statements for further discussion. Accounts receivable, net of allowance for doubtful accounts, were $82,577 as of June 26, 2020 , a decrease of $283 compared to $82,860 as of June 28, 2019 . Inventories were $94,218 as of June 26, 2020 , a decrease of $1,615 , compared to $95,833 as of June 28, 2019 . Accounts payable were $31,026 at June 26, 2020 compared to $37,190 as of June 28, 2019 . The Company’s cash flows from operating, investing and financing activities, as presented in the Company’s accompanying Condensed Consolidated Statements of Cash Flows, are summarized in the following table: Nine months ended (thousands) June 26, 2020 June 28, 2019 Cash provided by (used for): Operating activities $ 25,560 $ 15,620 Investing activities (11,340 ) 16,743 Financing activities (5,412 ) (4,794 ) Effect of foreign currency rate changes on cash 255 (478 ) Increase in cash and cash equivalents $ 9,063 $ 27,091 Operating Activities Cash provided by operations totaled $25,560 for the nine months ended June 26, 2020 compared to $15,620 during the corresponding period of the prior fiscal year. The increase in cash provided by operations over the prior year nine month period was due primarily to changes in working capital between periods, partially offset by lower net income. Depreciation and amortization charges were $11,489 for the nine month period ended June 26, 2020 compared to $10,377 for the corresponding period of the prior year. Investing Activities Cash used for investing activities totaled $11,340 for the nine months ended June 26, 2020 compared to cash provided by investing activities of $16,743 for the corresponding period of the prior fiscal year. Cash provided by investing activities in the prior year period reflected proceeds from the sale of short-term investments in that period. No such sales occurred in the current year nine month period. Cash usage for capital expenditures totaled $11,350 for the current year nine month period and $12,031 for the prior year period. Any additional capital expenditures in fiscal 2020 are expected to be funded by working capital. Financing Activities - 26 - Index JOHNSON OUTDOORS INC. Cash used for financing activities totaled $5,412 for the nine months ended June 26, 2020 compared to $4,794 for the nine month period ended June 28, 2019 and represents the payment of dividends and purchase of treasury stock. The Company had no debt during either quarter ended June 26, 2020 and June 28, 2019 . See Note 11 "Indebtedness" to the accompanying Condensed Consolidated Financial Statements for additional information on our credit facilities. As of June 26, 2020 the Company held approximately $37,005 of cash and cash equivalents in bank accounts in foreign taxing jurisdictions. Contractual Obligations and Off Balance Sheet Arrangements The Company has contractual obligations and commitments to make future payments including under operating leases and open purchase orders. The following schedule details these significant contractual obligations existing at June 26, 2020 . Total Less than 1 year 2-3 years 4-5 years After 5 years Operating lease obligations $ 42,921 $ 2,329 $ 10,391 $ 6,848 $ 23,353 Open purchase orders 70,332 70,332 — — — Contractually obligated interest payments 267 28 225 14 — Total contractual obligations $ 113,520 $ 72,689 $ 10,616 $ 6,862 $ 23,353 The Company utilizes letters of credit primarily as security for the payment of future claims under its workers compensation insurance. Letters of credit outstanding were approximately $181 and $279 as of June 26, 2020 and June 28, 2019 , respectively. The Company anticipates making contributions of $40 to its defined benefit pension plans during the remainder of fiscal 2020. The Company has no other off-balance sheet arrangements. Critical Accounting Policies and Estimates The Company’s critical accounting policies and estimates are identified in the Company’s Annual Report on Form 10-K for the fiscal year ending September 27, 2019 in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Critical Accounting Estimates.” There were no significant changes to the Company’s critical accounting policies and estimates during the nine months ended June 26, 2020 .