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 six month periods ended April 2, 2021 and March 27, 2020. 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 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 (as well as limitations on the availability of) 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. - 21 - Index JOHNSON OUTDOORS INC. 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) In March 2020, the World Health Organization announced the COVID-19 outbreak had become a world-wide pandemic. Various government mandates resulted in travel limitations and business and government shutdowns which had significant negative economic impacts around the world. The Company temporarily halted certain production operations at the end of the second fiscal quarter and beginning of the third fiscal quarter of 2020, and saw a significant decline in demand and sales volumes during that time. Although later during our 2020 third fiscal quarter, stay-at-home orders were lifted, 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 continued and, as a result, the outdoor recreation industry has benefited from increased participation. As consumers took advantage of being outdoors, the Company saw an increase in demand for many of its warm weather outdoor recreational products and each of our Fishing, Camping and Watercraft Recreation segments experienced increased sales volumes during most of the second half of fiscal 2020. As a result, our customers’ inventory levels were drawn down, and accordingly, we continued to experience strong orders from our customers during the first half of fiscal 2021 to fill their pipelines in anticipation of the warm-weather recreational season and to continue to satisfy strong customer demand for our products. As the Company looks forward to the second half of the year, managing supply chains, and ensuring the availability of certain finished goods, components, parts and other raw materials across our segments will be essential to continue to meet this expected continued strong demand for our products. Highlights Net sales of $206,156 for the second quarter of fiscal 2021 increased $43,072, or 26%, 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 $4,242 in operating profit over the prior year quarter. Seasonality The Company’s business is seasonal in nature. The second 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 changes to the Company’s seasonality for fiscal 2020 which changes have continued into fiscal 2021 and which changes are expected to continue to evolve over the remainder of fiscal 2021. - 22 - Index JOHNSON OUTDOORS INC. 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: Three Months Ended Six Months Ended April 2, 2021 March 27, 2020 April 2, 2021 March 27, 2020 Net sales: Fishing $ 160,016 $ 133,955 $ 287,015 $ 233,233 Camping 14,244 8,849 26,438 16,363 Watercraft Recreation 17,778 6,064 30,221 10,873 Diving 14,208 14,261 28,301 30,720 Other / Eliminations (90) (45) (152) (51) Total $ 206,156 $ 163,084 $ 371,823 $ 291,138 Operating profit (loss): Fishing $ 40,400 $ 32,917 $ 68,163 $ 47,935 Camping 2,962 709 5,770 775 Watercraft Recreation 2,814 (1,639) 3,883 (3,202) Diving (1,253) (812) (1,594) (607) Other / Eliminations (8,887) 619 (16,629) (6,306) Total $ 36,036 $ 31,794 $ 59,593 $ 38,595 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 April 2, 2021 were $206,156, an increase of $43,072, or 26%, compared to $163,084 for the three months ended March 27, 2020. Foreign currency translation had a favorable impact of less than 1% on current year second quarter net sales compared to the prior year's second quarter net sales. Net sales for the three months ended April 2, 2021 for the Fishing business were $160,016, an increase of $26,061, or 19%, from $133,955 during the second 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 which resulted in a significant increase in demand for our fishing products. The higher consumer demand resulted in our customers' desire to fill their pipeline and stock inventory of our products in anticipation of the 2021 warm-weather recreational season. Net sales for the Camping business were $14,244 for the second quarter of the current fiscal year, an increase of $5,395, or 61%, from the prior year net sales during the same period of $8,849. Increased sales of Jetboil and Eureka! consumer camping products as a result of increased participation in outdoor recreation activities described above were the primary drivers of the increase. - 23 - Index JOHNSON OUTDOORS INC. Net sales for the second quarter of fiscal 2021 for the Watercraft Recreation business were $17,778, an increase of $11,714, or 193%, compared to $6,064 in the prior year same period. COVID-19 related shutdowns unfavorably impacted both production and demand in the prior year period for this segment. During the current fiscal year second quarter, increased participation in outdoor recreation activities and successful offerings of products further drove the significant increase over the prior year quarter. Net sales for Diving, our most global business, were relatively flat quarter over quarter at $14,208 for the three months ended April 2, 2021 versus $14,261 for the three months ended March 27, 2020. A decrease in demand due to the effects of COVID-19 as a result of the continued closure of destination travel locations and lower tourism activities, was offset by a favorable foreign currency translation impact on sales in this segment of approximately 5% versus the prior year quarter. For the six months ended April 2, 2021, consolidated net sales of $371,823 increased $80,685 or 28% compared to $291,138 for the six months ended March 27, 2020. Foreign currency translation had a favorable impact of less than 1% on net sales of the current year to date period versus the prior year to date period. Net sales for the six months ended April 2, 2021 for the Fishing business were $287,015, an increase of $53,782, or 23% from $233,233 during the same period of the prior year. The increase over the prior year to date period 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 and increased customer orders to fill their pipelines in anticipation of the warm-weather recreational season in the current fiscal year to date period. Net sales for the Camping business were $26,438 for the six months ended April 2, 2021, an increase of $10,075, or 62%, from the prior year net sales during the same period of $16,363. Increased sales of Jetboil and Eureka! consumer camping products as a result of increased participation in outdoor recreation activities were the primary driver of the increase. Net sales for the six months ended April 2, 2021 for the Watercraft Recreation business were $30,221, an increase of $19,348, or 178%, compared to $10,873 in the prior year same period. Increased demand as a result of increased participation in watercraft recreation during the COVID-19 pandemic drove the overall increase over the prior year to date period. Diving net sales were $28,301 for the six months ended April 2, 2021 versus $30,720 for the six months ended March 27, 2020, a decrease of $2,419, or 8%. The sales decrease is largely due to the impact of COVID-19 and the resulting disruptions to the global tourism industry. The decrease in demand was offset in part by the favorable effect of foreign currency translation of 5% versus the prior year to date period. Cost of Sales Cost of sales for the three months ended April 2, 2021 was $112,902 compared to $87,952 for the three months ended March 27, 2020. 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. Furthermore, the Company incurred $1,400 of additional tariff costs versus the prior year quarter and experienced increased air freight costs as the Company continues to manage its supply chain to ensure the availability of necessary components, parts and other raw materials across our segments. For the six months ended April 2, 2021, cost of sales was $203,539 compared to $162,394 in the same period of the prior year. The increase year over year was primarily driven by increased sales volumes in the current year versus the prior year as described above. Gross Profit Margin For the three months ended April 2, 2021, gross profit as a percentage of net sales was 45.2% compared to 46.1% in the three month period ended March 27, 2020. The gross profit impact of cost increases noted above was nearly offset by increased sales volume related efficiencies and favorable product mix. For the six months ended April 2, 2021, gross profit as a percentage of net sales was 45.3% compared to 44.2% in the prior six month period, mainly due to pricing increases and increased sales volume efficiencies, which more than offset a $2,000 increase in tariffs over the prior year to date period. 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 $9 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 tariffs on a broader assortment of goods, as well as additional purchase volume are driving the expected year over year increase in tariff costs. - 24 - Index JOHNSON OUTDOORS INC. Operating Expenses Operating expenses were $57,218 for the three months ended April 2, 2021, compared to $43,338 for the three months ended March 27, 2020. The increase of $13,880 was primarily due to the impact of higher sales volume-driven expenses, as well as higher variable and deferred compensation expense between quarters. Favorable market conditions on the Company's deferred compensation plan assets resulted in approximately $4,700 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 $108,691 for the six months ended April 2, 2021, compared to $90,149 for the six months ended March 27, 2020. The increase of $18,542 was primarily due to the impact of higher sales volume-driven expenses, as well as higher variable and deferred compensation expense between periods. Favorable market conditions on the Company's deferred compensation plan assets resulted in approximately $6,100 of higher deferred compensation expense in the current year to date period as compared to the prior year to date period, which was entirely offset by a gain in Other (Income) Expense, 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 April 2, 2021 was $36,036, compared to an operating profit of $31,794 in the second 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. Operating profit on a consolidated basis for the six months ended April 2, 2021 was $59,593, compared to an operating profit of $38,595 in the prior year to date period. The improvement year over year was driven primarily by increased sales volumes as well as the other factors discussed above. Interest Interest expense remained flat at $35 for each of the three months ended April 2, 2021 and March 27, 2020. Interest expense was $67 for the six months ended April 2, 2021 compared to $70 for the six months ended March 27, 2020. Interest income for the three month periods ended April 2, 2021 and March 27, 2020 was $80 and $484, respectively. For the six months ended April 2, 2021, interest income was $162, compared to $1,139 for the six months ended March 27, 2020. 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 $1,229 for the three months ended April 2, 2021 compared to expense of $3,866 in the prior year period. Investment gains and earnings on the assets related to the Company’s non-qualified deferred compensation plan were $1,257 in the three month period ended April 2, 2021 compared to net investment losses of $3,468 in the three month period ended March 27, 2020. 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 April 2, 2021, foreign currency exchange gains were $217 compared to losses of $265 for the three months ended March 27, 2020. For the six months ended April 2, 2021, other income was $3,633 compared to expense of $2,698 in the six months ended March 27, 2020. Net investment gains and earnings on the assets related to the Company’s non-qualified deferred compensation plan in the six months ended April 2, 2021 were $3,994, compared to net investment losses of $2,144 in the six months ended March 27, 2020. Foreign currency exchange gains were $121 for the six months ended April 2, 2021, compared to losses of $297 for the six months ended March 27, 2020. 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 six month periods ended April 2, 2021 were 25.4% and 24.7%, respectively, compared to 28.2% and 27.5% in the corresponding periods of the prior year. The key factors impacting the effective tax rate for the six months ended April 2, 2021 were the net excess tax benefits related to share-based compensation and a current period income tax benefit of an intra-entity transfer of an asset other than inventory. - 25 - Index JOHNSON OUTDOORS INC. Net Income Net income for the three months ended April 2, 2021 was $27,834, or $2.74 per diluted common class A and B share, compared to net income of $20,387, or $2.02 per diluted common class A and B share, for the second quarter of the prior fiscal year. Net income for the six months ended April 2, 2021 was $47,681, or $4.70 per diluted common class A and B share, compared to net income of $26,817, or $2.66 per diluted common class A and B share, for the six months ended March 27, 2020. Liquidity and Financial Condition Cash and cash equivalents totaled $186,921 as of April 2, 2021, compared to cash and cash equivalents of $131,256 as of March 27, 2020. The increase in cash year over year was due primarily to increased operating profits earned over the prior year period. The Company’s debt to total capitalization ratio was 0% as of April 2, 2021 and March 27, 2020. The Company’s total debt balance was $0 as of each of April 2, 2021 and March 27, 2020. 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 $130,139 as of April 2, 2021, an increase of $23,510 compared to $106,629 as of March 27, 2020. The increase is consistent with increased sales volumes year over year. Inventories were $124,538 as of April 2, 2021, an increase of $16,858, compared to $107,680 as of March 27, 2020. The increase in inventory balance 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 $50,609 at April 2, 2021 compared to $36,349 as of March 27, 2020, which increase corresponded with the increase in inventory balances between periods. 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: Six months ended (thousands) April 2, 2021 March 27, 2020 Cash (used for) provided by: Operating activities $ (11,955) $ (28,991) Investing activities (9,822) (7,762) Financing activities (4,690) (3,842) Effect of foreign currency rate changes on cash 951 (531) Decrease in cash and cash equivalents $ (25,516) $ (41,126) Operating Activities Cash used for operations totaled $11,955 for the six months ended April 2, 2021 compared to $28,991 during the corresponding period of the prior fiscal year. The decrease in cash used for operations over the prior year six month period was due primarily to increased net income between periods, as well as changes in working capital balances between periods. Depreciation and amortization charges were $6,751 for the six month period ended April 2, 2021 compared to $6,796 for the corresponding period of the prior year. Investing Activities Cash used for investing activities totaled $9,822 for the six months ended April 2, 2021 compared to cash used for investing activities of $7,762 for the corresponding period of the prior fiscal year. Cash usage for capital expenditures totaled $9,828 for the current year six month period and $7,772 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 $4,690 for the six months ended April 2, 2021 compared to $3,842 for the six month period ended March 27, 2020 and represents the payment of dividends and purchase of treasury stock. The Company had no - 26 - Index JOHNSON OUTDOORS INC. debt during either quarter ended April 2, 2021 and March 27, 2020. See Note 11 "Indebtedness" to the accompanying Condensed Consolidated Financial Statements for additional information on our credit facilities. As of April 2, 2021 the Company held approximately $44,944 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. There have been no changes outside of the ordinary course of business in the specified contractual obligations during the quarter ended April 2, 2021. 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 April 2, 2021 and March 27, 2020, respectively. The Company anticipates making contributions of $83 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 six months ended April 2, 2021.