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 December 31, 2021 and January 1, 2021. 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 1, 2021 which was filed with the Securities and Exchange Commission on December 10, 2021. 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 10, 2021 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, suppliers and various aspects of our operations; the - 19 - Index JOHNSON OUTDOORS INC. 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 or components 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, or the demand for those same raw materials and components by third parties, that are 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 traditional seasonal pacing, where our heaviest sales volumes typically occurred during our second and third fiscal quarters, shifted during fiscal 2020 and fiscal 2021. During those years, increased participation in fishing, camping and watercraft recreation and related demand for our products, largely driven by consumer desire to engage in socially distant and safe activities outdoors as a reaction to the COVID-19 pandemic led to increased sales volumes across all Company segments. This demand continued into the first quarter of fiscal 2022. In addition to this significant increase in demand for Company products during fiscal 2021 and into the first quarter of fiscal 2022, COVID-19 has also caused widely-documented supply chain and logistics disruptions across industries, including those in which we operate, which have been exacerbated during the latter half of fiscal 2021 and into fiscal 2022 due to the higher demand for our outdoor recreation products and associated inventory replenishment actions of our customers. These adverse supply chain and logistics constraints and disruptions have impacted the timing, sourcing, availability and cost of raw materials and components that are necessary to manufacture our outdoor recreation products. During the fourth quarter of fiscal 2021, certain of the Company's component suppliers and logistical service providers experienced disruptions, resulting in supply shortages across all of our segments for certain materials and components that are necessary to produce our products. Moreover, during the first quarter of fiscal 2022, the Fishing segment was significantly impacted by these supply chain and logistical infrastructure disruptions, resulting in decreased sales volumes in that segment over the same quarter in the prior year. As a result of these disruptions, the Company has taken certain preliminary actions to attempt to meet the continued strong consumer demand for its products to continue to fulfill product orders. These actions include building and procuring numerous categories of inventory (in some cases at significantly higher price points than what was historically paid) to mitigate against potential shortages during fiscal 2022 in certain of its materials and components that are necessary to manufacture Company products. These buying actions have subsequently resulted in decreased margins and in the Company carrying significantly higher levels of inventory for a number of its materials, components and products at the end of the first fiscal quarter of 2022. Because the Company expects that these same supply chain and logistics disruptions will continue throughout fiscal 2022, the Company remains focused on evaluating and pursuing additional options (beyond building inventory) to meet the continued - 20 - Index JOHNSON OUTDOORS INC. strong consumer demand for its products. Nonetheless, these supply chain and logistics disruptions remain fluid and will likely impact the cost of goods sold for future sales of product or the Company’s ability to fill all customer demand for its products, especially given the volatility and changing circumstances brought on by the COVID-19 pandemic and its impact on the global supply chain and logistics infrastructure. Highlights Net sales of $153,524 for the first quarter of fiscal 2022 decreased $12,143, or 7%, from the same period in the prior year. While consumer demand remains strong, sales volumes have been negatively impacted by product availability and supply chain disruptions, particularly in Fishing, the Company's largest segment. This sales volume decrease and lower gross margins resulting from higher costs of sales were the primary drivers of the $9,797 decrease 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 and 2021 which changes are expected to continue to evolve over the remainder of fiscal 2022. Fiscal Year 2021 2020 2019 Quarter Ended Net Sales Operating Profit Net Sales Operating Profit Net Sales Operating Profit December 22 % 22 % 22 % 10 % 19 % 9 % March 27 % 32 % 27 % 45 % 32 % 43 % June 29 % 34 % 23 % 17 % 31 % 43 % September 22 % 12 % 28 % 28 % 18 % 5 % 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 December 31, 2021 January 1, 2021 Net sales: Fishing $ 108,356 $ 126,999 Camping 14,134 12,194 Watercraft Recreation 14,600 12,443 Diving 16,491 14,093 Other / Eliminations (57) (62) Total $ 153,524 $ 165,667 Operating profit (loss): Fishing $ 16,292 $ 27,763 Camping 2,750 2,808 Watercraft Recreation 1,531 1,069 Diving 453 (341) Other / Eliminations (7,266) (7,742) Total $ 13,760 $ 23,557 - 21 - Index JOHNSON OUTDOORS INC. 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 December 31, 2021 were $153,524, a decrease of $12,143, or 7%, compared to $165,667 for the three months ended January 1, 2021. Foreign currency translation had virtually no impact on current year first quarter net sales compared to the prior year's first quarter net sales. Net sales for the three months ended December 31, 2021 for the Fishing business were $108,356, a decrease of $18,643, or 15%, from $126,999 during the first fiscal quarter of the prior year. While demand remains strong, the decrease was driven by significant supply chain disruptions and the resulting unavailability of components experienced in the first fiscal quarter of 2022, which limited the Company's ability to fill all product orders. Net sales for the Camping business were $14,134 for the first quarter of the current fiscal year, an increase of $1,940, or 16%, from the prior year net sales during the same period of $12,194 due to increased sales of military tents as well as for Jetboil and Eureka! consumer camping products evidencing the continued strong participation in outdoor recreation activities by the public. Net sales for the first quarter of fiscal 2022 for the Watercraft Recreation business were $14,600, an increase of $2,157, or 17%, compared to $12,443 in the prior year same period. Continued strong demand for the segment's Sportsman line and successful pedal and motorized product offerings drove the increase over the prior year quarter. Net sales for Diving, our most global business, for the first quarter of fiscal 2022 were $16,491, an increase of $2,398 or 17% versus $14,093 for the three months ended January 1, 2021. In the prior year first quarter, demand was severely deflated due to the effects of COVID-19 which caused the closure of destination travel locations and resulted in lower tourism activities. Sales volumes have increased in this segment as markets in several regions around the world have begun to recover. The increase in sales volumes was partially offset by an unfavorable foreign currency translation impact on sales in this segment of approximately 2% versus the prior year quarter. Cost of Sales Cost of sales for the three months ended December 31, 2021 was $92,893 compared to $90,637 for the three months ended January 1, 2021. The increase year over year was driven primarily by increases in costs, specifically increased materials costs and increased inbound freight costs, as the Company continues to manage disruptions in its supply chain to ensure the availability of necessary components, parts and other raw materials across our segments to try to meet sales demand for our products. Gross Profit Margin For the three months ended December 31, 2021, gross profit as a percentage of net sales was 39.5% compared to 45.3% in the three month period ended January 1, 2021. While the Company has taken price increases across its operating segments, they were not enough to offset the negative gross profit impact associated with the cost increases noted above. Operating Expenses Operating expenses were $46,871 for the three months ended December 31, 2021, compared to $51,473 for the three months ended January 1, 2021. The decrease of $4,602 was primarily due to the impact of lower sales volume-driven expenses as total expenses remained consistent as a percent of net sales year over year. Operating Profit Operating profit on a consolidated basis for the three month period ended December 31, 2021 was $13,760, compared to an operating profit of $23,557 in the first quarter of the prior fiscal year. Lower sales volumes and the other factors discussed above were the primary drivers of the decrease in operating profit between quarters. Interest Interest expense was $38 and $32 for the three months ended December 31, 2021 and January 1, 2021, respectively. Interest income for the three month periods ended December 31, 2021 and January 1, 2021 was $93 and $82, respectively. - 22 - Index JOHNSON OUTDOORS INC. Other Income, net Other income was $774 for the three months ended December 31, 2021 compared to $2,404 in the prior year period. Investment gains and earnings on the assets related to the Company’s non-qualified deferred compensation plan were $1,344 in the three month period ended December 31, 2021 compared to $2,737 in the three month period ended January 1, 2021. The change 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 December 31, 2021, foreign currency exchange losses were $366 compared to $96 for the three months ended January 1, 2021. 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 December 31, 2021 was 25.6% compared to 23.7% in the corresponding period of the prior year. The key factor impacting the effective tax rate was the favorable impact from an intra-entity transfer of assets other than inventory reported in the prior year period. Net Income Net income for the three months ended December 31, 2021 was $10,856, or $1.07 per diluted common class A and B share, compared to net income of $19,847, or $1.96 per diluted common class A and B share, for the first quarter of the prior fiscal year. Liquidity and Financial Condition Cash and cash equivalents totaled $167,473 as of December 31, 2021, compared to cash and cash equivalents of $195,923 as of January 1, 2021. The decrease in cash year over year was due primarily to the Company's action to build and procure numerous categories of inventory (in some cases at significantly higher prices than was historically paid) in an attempt to mitigate against potential supply chain shortages during this fiscal year. The Company’s debt to total capitalization ratio was 0% as of December 31, 2021 and January 1, 2021. The Company’s total debt balance was $0 as of each of December 31, 2021 and January 1, 2021. 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 $86,689 as of December 31, 2021, a decrease of $10,697 compared to $97,386 as of January 1, 2021. The decrease is consistent with decreased sales volumes year over year. Inventories were $217,431 as of December 31, 2021, an increase of $102,582, compared to $114,849 as of January 1, 2021. As noted above, the increase in our inventory balances 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 in the event that the current supply chain and logistics infrastructure disruptions continue as expected during fiscal 2022. Accounts payable were $59,241 at December 31, 2021 compared to $44,908 as of January 1, 2021, 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: Three months ended (thousands) December 31, 2021 January 1, 2021 Cash provided by (used for): Operating activities $ (62,773) $ (11,238) Investing activities (6,244) (4,388) Financing activities (3,466) (2,589) Effect of foreign currency rate changes on cash (492) 1,701 Decrease in cash and cash equivalents $ (72,975) $ (16,514) Operating Activities - 23 - Index JOHNSON OUTDOORS INC. Cash used for operations totaled $62,773 for the three months ended December 31, 2021 compared to $11,238 during the corresponding period of the prior fiscal year. The increase in cash used for operations over the prior year three month period was due primarily to the Company's decision to build and procure inventory in its attempt to mitigate against shortages, all as described in greater detail above. Depreciation and amortization charges were $3,492 for the three month period ended December 31, 2021 compared to $3,493 for the corresponding period of the prior year. Investing Activities Cash used for investing activities totaled $6,244 for the three months ended December 31, 2021 compared to $4,388 for the corresponding period of the prior fiscal year. Cash usage for capital expenditures totaled $6,244 for the current year three month period and $4,390 for the prior year period. Any additional capital expenditures in fiscal 2022 are expected to be funded by working capital. Financing Activities Cash used for financing activities totaled $3,466 for the three months ended December 31, 2021 compared to $2,589 for the three month period ended January 1, 2021 and represents the payment of dividends and purchase of treasury stock. The Company had no debt during either quarter ended December 31, 2021 and January 1, 2021. See Note 11 "Indebtedness" to the accompanying Condensed Consolidated Financial Statements for additional information on our credit facilities. As of December 31, 2021 the Company held approximately $55,434 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 December 31, 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 December 31, 2021 and January 1, 2021, respectively. The Company anticipates making contributions of $71 to its defined benefit pension plans during the remainder of fiscal 2022. 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 1, 2021 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 10, 2021. There were no significant changes to the Company’s critical accounting policies and estimates during the three months ended December 31, 2021.