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 month periods ended January 1, 2021 and December 27, 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 - 19 - Index JOHNSON OUTDOORS INC. 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 October 2, 2020 which was filed with the Securities and Exchange Commission on December 11, 2020. 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 11, 2020, 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 which has affected, and may continue to affect, market and economic conditions, and the timing, pricing and continued availability of raw materials and components from our supply chain, 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 the COVID-19 outbreak, the Company's fiscal 2020 first quarter was not impacted by the pandemic. The Company began seeing the impacts of the pandemic during the second fiscal quarter of 2020, which continued through the remainder of fiscal year 2020 and into the fiscal 2021 first quarter. - 20 - Index JOHNSON OUTDOORS INC. Due to the unique aspects of this pandemic and the various government prescriptions for the general public to maintain social distancing and avoid activities involving large crowds or being in confined spaces with others to mitigate the spread of the virus, the warm weather outdoor recreation industry has benefited from increased participation in outdoor recreation activities. As consumers took advantage of being outdoors, the Company has seen an increase in demand for many of its warm weather outdoor recreational products. As a result, each of our Fishing, Camping and Watercraft Recreation segments experienced increased sales volumes in the first quarter of the current fiscal year versus the prior period. Our customers’ inventory levels, were drawn down during the past fiscal year as consumers purchased related products, and accordingly, we experienced strong orders from our customers in the fiscal 2021 first quarter to fill their pipelines in anticipation of the fiscal 2021 warm-weather recreational season. Managing the supply chain, and ensuring the availability of components, parts and other raw materials across our segments will be essential to meeting this increased demand. The Company continues to monitor and strategically plan for the longer-term impacts from the COVID-19 pandemic on demand for the Company's products, as well as the impact on its supply chain, including with respect to the timely availability of raw materials and other components that get incorporated into the Company's end products. Nonetheless because the Company has product offerings in several segments that allow consumers to engage in socially distant and relatively pandemic-safe activities outdoors year round, the Company continues to promote and encourage the use of its products as outdoor recreational options for the public in light of the continued COVID-19 health crisis. Moreover, the Company continues to strategically evaluate and leverage the increased demand for many of its products by making disciplined investments for future, long-term growth in spite of the ongoing COVID-19 pandemic. Highlights Net sales of $165,667 for the first quarter of fiscal 2021 increased $37,613, or 29%, from the same period in the prior year, reflecting increased sales volumes across all businesses, except Diving, mainly attributable to increased participation in outdoor recreation activities as a result of social distancing and other indoor activity restrictions related to the COVID-19 pandemic. Additionally, we have seen our customers replenish their inventory levels of our products to meet expected demand for the Fiscal 2021 warm-weather outdoor recreational season. This sales volume increase was the primary driver of the increase of $16,756 in operating profit over the prior year quarter. Seasonality The Company’s business is seasonal in nature. The first fiscal quarter traditionally falls prior to 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 changes to the Company’s seasonality for fiscal 2020 which changes may continue to evolve in fiscal 2021. Fiscal Year 2020 2019 2018 Quarter Ended Net Sales Operating Profit Net Sales Operating Profit Net Sales Operating Profit December 22 % 10 % 19 % 9 % 21 % 11 % March 27 % 45 % 32 % 43 % 31 % 41 % June 23 % 17 % 31 % 43 % 31 % 51 % September 28 % 28 % 18 % 5 % 17 % -3 % 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: - 21 - Index JOHNSON OUTDOORS INC. Three Months Ended January 1, 2021 December 27, 2019 Net sales: Fishing $ 126,999 $ 99,278 Camping 12,194 7,514 Watercraft Recreation 12,443 4,809 Diving 14,093 16,459 Other / Eliminations (62) (6) Total $ 165,667 $ 128,054 Operating profit (loss): Fishing $ 27,763 $ 15,018 Camping 2,808 66 Watercraft Recreation 1,069 (1,563) Diving (341) 205 Other / Eliminations (7,742) (6,925) Total $ 23,557 $ 6,801 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 January 1, 2021 were $165,667, an increase of $37,613, or 29%, compared to $128,054 for the three months ended December 27, 2019. Foreign currency translation had a favorable impact of less than 1% on current year first quarter net sales compared to the prior year's first quarter net sales. Net sales for the three months ended January 1, 2021 for the Fishing business were $126,999, an increase of $27,721, or 28%, from $99,278 during the first fiscal quarter of the prior year. The increase over the prior year quarter was driven by increased participation in outdoor recreation, principally as a result of the effect of COVID-19 on consumer recreation and leisure choices, resulting in higher demand across all product lines in the current year quarter. Net sales for the Camping business were $12,194 for the first quarter of the current fiscal year, an increase of $4,680, or 62%, from the prior year net sales during the same period of $7,514. Increased sales of consumer tents, commercial tents and Jetboil products as a result of increased participation in outdoor recreation activities drove the increase. Net sales for the first quarter of fiscal 2021 for the Watercraft Recreation business were $12,443, an increase of $7,634, or 159%, compared to $4,809 in the prior year same period. New product success and increased demand throughout the quarter drove the overall increase over the prior year quarter. As noted above, as consumers took on greater interest in outdoor activities due to the COVID-19 pandemic, demand for many of our outdoor recreation products in our fishing, camping and watercraft recreation segments increased beyond the normal seasonal selling period. This resulted in our inventory levels, as well as the inventory levels for many of our customers, being depleted, which subsequently resulted in continued strong demand for our customers to fill their pipeline and stock inventory of our products in these three business segments in anticipation of the 2021 warm-weather recreational season. All of these actions resulted in strong demand for our products in these segments which generated the favorable quarter over quarter sales comparison. Net sales for Diving, our most global business, were $14,093 for the three months ended January 1, 2021 versus $16,459 for the three months ended December 27, 2019, a decrease of $2,366, or 14%. The decrease is largely due to the effects of COVID-19 on demand as a result of the continued closure of destination travel locations and lower tourism activities, which more than offset a favorable foreign currency translation impact on sales in this segment of approximately 4% versus the prior year quarter. Due to the timing of the COVID-19 pandemic upon our business, our results for the prior year first quarter were not impacted by COVID-19. - 22 - Index JOHNSON OUTDOORS INC. Cost of Sales Cost of sales for the three months ended January 1, 2021 was $90,637 compared to $74,442 for the three months ended December 27, 2019. The increase year over year was driven primarily by increases in variable costs due to the higher sales volume in the current year quarter over the prior year quarter. Gross Profit Margin For the three months ended January 1, 2021, gross profit as a percentage of net sales was 45.3% compared to 41.9% in the three month period ended December 27, 2019. The improvement year over year was due primarily to product mix and increased efficiencies between periods, which more than offset $700 of higher tariff costs year over year. At current expected rates, 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 2021 gross profit of approximately $7 million, compared to approximately $3.5 million during the full previous fiscal year. The expiration of tariff exclusions that the Company secured in prior periods, combined with the application of new tariffs on a broader assortment of goods, is driving the expected year over year increase in tariff costs. Operating Expenses Operating expenses were $51,473 for the three months ended January 1, 2021 compared to $46,811 for the three months ended December 27, 2019. The increase of $4,662 was primarily due to the impact of higher sales and sales volume driven expenses, as well as higher deferred compensation expense between quarters. Favorable market conditions on the Company's deferred compensation plan assets resulted in approximately $1,400 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, net related to marking these deferred compensation plan assets to market. Operating Profit Operating profit on a consolidated basis for the three month period ended January 1, 2021 was $23,557 compared to an operating profit of $6,801 in the first quarter of the prior fiscal year. Higher sales volumes and the other factors discussed above were the primary drivers of the increase in operating profit between quarters. Interest For the three months ended January 1, 2021, interest expense was $32 compared to $35 in the three months ended December 27, 2019. Interest income for the three month periods ended January 1, 2021 and December 27, 2019 was $82 and $655, respectively. The decrease in interest income year over year was mainly driven by the decrease in interest rates in fiscal 2021 versus the corresponding period of fiscal 2020. Other Income, net Other income was $2,404 for the three months ended January 1, 2021 compared to $1,168 in the prior year period. Investment gains and earnings on the assets related to the Company’s non-qualified deferred compensation plan were $2,737 in the three month period ended January 1, 2021 compared to $1,324 in the three month period ended December 27, 2019. The 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 January 1, 2021, foreign currency exchange losses were $96 compared to $33 for the three months ended December 27, 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 month period ended January 1, 2021 was 23.7% compared to 25.1% in the corresponding period of the prior year. The key factor impacting the effective tax rate for the three months ended January 1, 2021 was a current period income tax benefit of an intra-entity transfer of an asset other than inventory. Net Income Net income for the three months ended January 1, 2021 was $19,847, or $1.96 per diluted common class A and B share, compared to net income of $6,430, or $0.64 per diluted common class A and B share, for the first quarter of the prior fiscal - 23 - Index JOHNSON OUTDOORS INC. year. The increase in net income between quarters was driven by the increased sales demand for many of the Company’s products between quarters and the other factors described above. Liquidity and Financial Condition Cash and cash equivalents totaled $195,923 as of January 1, 2021, compared to cash and cash equivalents of $138,257 as of December 27, 2019. The increase in cash year over year was due primarily to increased operating profits earned over the prior year quarter. The Company’s debt to total capitalization ratio was 0% as of January 1, 2021 and December 27, 2019. The Company’s total debt balance was $0 as of each of January 1, 2021 and December 27, 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 $97,386 as of January 1, 2021, an increase of $19,137 compared to $78,249 as of December 27, 2019. The increase is consistent with increased sales volumes year over year. Inventories were $114,849 as of January 1, 2021, an increase of $10,964, compared to $103,885 as of December 27, 2019. The increase over the prior year period is due to increased raw material and other component purchases in an effort to meet increased demand for products in the current year period. Accounts payable were $44,908 at January 1, 2021 compared to $35,384 as of December 27, 2019, which increase corresponded with the increase in inventory balances between quarters. 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: Three months ended (thousands) January 1, 2021 December 27, 2019 Cash provided by (used for): Operating activities $ (11,238) $ (29,088) Investing activities (4,388) (3,307) Financing activities (2,589) (2,149) Effect of foreign currency rate changes on cash 1,701 419 Decrease in cash and cash equivalents $ (16,514) $ (34,125) Operating Activities Cash used for operations totaled $11,238 for the three months ended January 1, 2021 compared to $29,088 during the corresponding period of the prior fiscal year. The decrease in cash used for operations over the prior year three month period was due primarily to increased net income between periods, as well as changes in working capital balances between quarters. Depreciation and amortization charges were $3,493 for the three month period ended January 1, 2021 compared to $3,432 for the corresponding period of the prior year. Investing Activities Cash used for investing activities totaled $4,388 for the three months ended January 1, 2021 compared to cash used for investing activities of $3,307 for the corresponding period of the prior fiscal year. Cash usage for capital expenditures totaled $4,390 for the current year three month period and $3,307 for the prior year period. Any additional capital expenditures in fiscal 2021 are expected to be funded by working capital. Financing Activities Cash used for financing activities totaled $2,589 for the three months ended January 1, 2021 compared to $2,149 for the three month period ended December 27, 2019 and represents the payment of dividends and purchase of treasury stock. The Company had no debt during either quarter ended January 1, 2021 and December 27, 2019. See Note 11 "Indebtedness" to the accompanying Condensed Consolidated Financial Statements for additional information on our credit facilities. As of January 1, 2021 the Company held approximately $48,609 of cash and cash equivalents in bank accounts in foreign taxing jurisdictions. Contractual Obligations and Off Balance Sheet Arrangements - 24 - Index JOHNSON OUTDOORS INC. 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 January 1, 2021. Total Less than 1 year 2-3 years 4-5 years After 5 years Operating lease obligations $ 46,248 $ 6,508 $ 9,935 $ 8,293 $ 21,512 Open purchase orders 134,066 134,066 — — — Contractually obligated interest payments 211 84 127 — — Total contractual obligations $ 180,525 $ 140,658 $ 10,062 $ 8,293 $ 21,512 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 $181 as of January 1, 2021 and December 27, 2019, respectively. The Company anticipates making contributions of $128 to its defined benefit pension plans during the remainder of fiscal 2021. 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 October 2, 2020 in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Critical Accounting Estimates”, which was filed with the Securities and Exchange Commission on December 11, 2020. There were no significant changes to the Company’s critical accounting policies and estimates during the three months ended January 1, 2021.