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 July 1, 2022 and July 2, 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 - 21 - Index JOHNSON OUTDOORS INC. • 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 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 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, 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 and other factors impacting climate change legislation. 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) - 22 - Index JOHNSON OUTDOORS INC. The COVID-19 pandemic drove consumer desire to engage in socially distant and safe activities outdoors. As a result, increased participation in fishing, camping, watercraft recreation also increased demand for our products across Company segments beginning in fiscal 2020, and continuing into the first three quarters of fiscal 2022. As global travel restrictions also eased, we experienced increased participation and resulting increased product demand in the Diving segment beginning in fiscal 2021 and continuing into the first three quarters of fiscal 2022. In addition to this increase in demand for Company products, COVID-19 and the resulting macroeconomic dynamics have also caused widely-documented supply chain and logistics disruptions across industries. Specifically, the adverse supply chain and logistics constraints and disruptions have impacted the timing, sourcing, availability and cost of certain raw materials and components that are necessary to manufacture our outdoor recreation products, especially in our fishing segment due to the electronic components used in those products. Because certain electronic components that are necessary for manufacturing our higher volume products in that segment have been the most impacted by the supply chain and logistics disruptions, there has been limited availability of those materials and components, as well as increased pricing on such components. The Company has attempted to mitigate these disruptions by purchasing significantly higher levels of certain raw material and component inventory as they have been available, in many cases at higher price points than what was historically paid, to enable the Company to complete finished product orders as soon as the missing raw material and component inventory items become available. Nonetheless, continuing shortages have impacted the fishing segment’s ability to complete products for shipping, which has ultimately resulted in decreased sales volumes in the fishing segment over the same periods in the prior year, despite continued strong demand for the products, as evidenced by outstanding orders. Additionally, the Company’s buying actions have subsequently resulted in decreased margins and the Company carrying significantly higher levels of inventory for a number of its materials, components and products at the end of each of the first three fiscal quarters of 2022. Though the Company continues to believe the inventory that it has built and which exists on its balance sheet is useable and saleable in the ordinary course of business, it continues to monitor the current reserve balances for obsolete and excess inventory. However, any changes in consumer demand for the Company's outdoor recreation products, changes in economic conditions, or changes in customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances in the future. Because the Company expects that these same supply chain and logistics disruptions will continue through the end of fiscal 2022, the Company remains focused on evaluating and pursuing additional options (beyond building inventory) to meet the continued strong demand for its products. Nonetheless, these supply chain and logistics disruptions remain fluid and will likely adversely impact the cost of goods sold for future sales of product for the remainder of fiscal 2022 and/or adversely impact the Company’s ability to fill all 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 $203,819 for the third quarter of fiscal 2022 decreased $9,749, or 5%, from the same period in the prior year. While consumer and customer demand for the Company's products remains solid as evidenced by outstanding order volumes, sales volumes have been negatively impacted by product availability and supply chain disruptions, particularly in Fishing, the Company's largest segment, as described above. This sales volume decrease and the lower gross margins resulting from higher costs of sales were the primary drivers of the $14,300 decrease in operating profit over the prior year quarter. 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. Due to the timing of the COVID-19 outbreak, the Company's traditional seasonal sales pacing, where our heaviest sales volumes typically occurred during our second and third fiscal quarters, shifted during fiscal 2020. See “Coronavirus (COVID-19)” above for additional information regarding the impact of COVID-19. - 23 - Index JOHNSON OUTDOORS INC. 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 Nine Months Ended July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021 Net sales: Fishing $ 136,565 $ 155,348 $ 374,244 $ 442,363 Camping 23,479 17,757 56,780 44,195 Watercraft Recreation 21,872 19,873 59,481 50,094 Diving 22,201 20,680 56,886 48,981 Other / Eliminations (298) (90) (425) (242) Total $ 203,819 $ 213,568 $ 546,966 $ 585,391 Operating profit (loss): Fishing $ 16,553 $ 39,390 $ 44,166 $ 107,553 Camping 4,998 4,305 12,867 10,075 Watercraft Recreation 2,893 3,446 7,588 7,329 Diving 2,412 1,978 4,074 384 Other / Eliminations (3,057) (11,020) (15,707) (27,649) Total $ 23,799 $ 38,099 $ 52,988 $ 97,692 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 Third months ended July 1, 2022 were $203,819, a decrease of $9,749, or 5%, compared to $213,568 for the Third months ended July 2, 2021. 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. Net sales for the Third months ended July 1, 2022 for the Fishing business were $136,565, a decrease of $18,783, or 12%, from $155,348 during the third fiscal quarter of the prior year. While customer and consumer demand remains solid, the decrease in Fishing sales was driven by significant supply chain disruptions and the resulting unavailability of certain necessary components (especially as it relates to electronic components) experienced in the current year quarter, which impacted the ability to complete product build and fill customer orders. Specifically, due to the technical and electronic nature of the product categories, the fishing segment has been the most susceptible to the previously discussed supply chain issues, as discussed in “Coronavirus (COVID-19)” above. Net sales for the Camping business were $23,479 for the third quarter of the current fiscal year, an increase of $5,722, or 32%, from the prior year net sales during the same period of $17,757 due to increased sales of Jetboil and Eureka! consumer camping products. These higher levels of sales over the prior year period were due to continued strong participation in outdoor recreation activities. - 24 - Index JOHNSON OUTDOORS INC. Net sales for the third quarter of fiscal 2022 for the Watercraft Recreation business were $21,872, an increase of $1,999, or 10%, compared to $19,873 in the prior year same period. Continued strong demand for the segment's Sportsman line and successful pedal product offerings drove the increase over the prior year quarter. Net sales for Diving, our most global business, for the third quarter of fiscal 2022 were $22,201, an increase of $1,521 or 7% versus $20,680 for the Third months ended July 2, 2021. As several regions around the world have re-opened, sales volumes have increased along with the increase in tourism, partially offset by an unfavorable foreign currency translation impact on sales in this segment of approximately 5% versus the prior year quarter. For the nine months ended July 1, 2022, consolidated net sales of $546,966 decreased $38,425 or 7% compared to $585,391 for the nine months ended July 2, 2021. Foreign currency translation had an unfavorable 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 nine months ended July 1, 2022 for the Fishing business were $374,244, a decrease of $68,119, or 15% from $442,363 during the same period of the prior year. The decrease over the prior year to date period was driven mainly by the previously discussed logistics and supply chain disruptions which adversely impacted our ability to satisfy customer demand for product orders. Net sales for the Camping business were $56,780 for the nine months ended July 1, 2022, an increase of $12,585, or 28%, from the prior year net sales during the same period of $44,195. 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 nine months ended July 1, 2022 for the Watercraft Recreation business were $59,481, an increase of $9,387, or 19%, compared to $50,094 in the prior year same period. Increased demand as a result of increased participation in watercraft recreation drove the overall increase over the prior year to date period. Diving net sales were $56,886 for the nine months ended July 1, 2022 versus $48,981 for the nine months ended July 2, 2021, an increase of $7,905, or 16%. The sales increase between periods was largely due to increased demand for our products as the global tourism industry has started to recover following the removal of many travel restrictions imposed in the prior year as a result of the COVID-19 pandemic. The impact of increased sales volumes was offset in part by the unfavorable effect of foreign currency translation of approximately 4% versus the prior year to date period. Cost of Sales Despite the decrease in sales between quarters noted above, cost of sales for the Third months ended July 1, 2022 of $130,310 increased $14,253 compared to $116,057 for the Third months ended July 2, 2021. The increase year over year was driven primarily by significant increases in materials costs. The Company continues to manage disruptions in its supply chain to ensure the availability of necessary components, parts and other raw materials, in some cases at significantly higher price points than what was historically paid, to try to meet sales demand for our products across our segments. For the nine months ended July 1, 2022, cost of sales was $344,241 compared to $319,596 in the same period of the prior year. The increase year over year was primarily driven by increased material and inbound freight costs in the current year versus the prior year. Gross Profit Margin For the Third months ended July 1, 2022, gross profit as a percentage of net sales was 36.1% compared to 45.7% in the Third month period ended July 2, 2021. While the Company has implemented price increases across product lines, these actions were not enough to offset the negative gross profit impact of raw material and component cost increases noted above as well as reduced overhead absorption. For the nine months ended July 1, 2022, gross profit as a percentage of net sales was 37.1% compared to 45.4% in the prior nine month period. As noted above, the Company has implemented price increases across product lines, but they have not outweighed the negative gross profit impact of cost increases and reduced overhead absorption noted above. Operating Expenses Operating expenses were $49,710 for the Third months ended July 1, 2022, compared to $59,412 for the Third months ended July 2, 2021. The decrease of $9,702 was primarily due to the impact of lower sales volume-driven expenses, as well as lower variable and deferred compensation expense, between quarters. Unfavorable market conditions on the Company's deferred - 25 - Index JOHNSON OUTDOORS INC. compensation plan assets resulted in approximately $5,300 of lower deferred compensation expense in the current year quarter as compared to the prior year quarter, which was entirely offset by a loss in Other Expense (Income), net related to marking these deferred compensation plan assets to market. Operating expenses were $149,737 for the nine months ended April 2, 2021, compared to $168,103 for the nine months ended July 2, 2021. The decrease of $18,366 was primarily due to the impact of lower sales volume-driven expenses, as well as lower variable and deferred compensation expense, between periods. Unfavorable market conditions on the Company's deferred compensation plan assets resulted in approximately $10,000 of lower 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 loss in Other Expense (Income), net related to marking these deferred compensation plan assets to market. Operating Profit Operating profit on a consolidated basis for the Third month period ended July 1, 2022 was $23,799, compared to an operating profit of $38,099 in the third quarter of the prior fiscal year. Lower sales volumes and reduced gross margins as discussed above were the primary drivers of the decrease in operating profit between quarters. Operating profit on a consolidated basis for the nine months ended July 1, 2022 was $52,988, compared to an operating profit of $97,692 in the prior year to date period. The decrease year over year was driven primarily by lower sales volumes and reduced gross margins as discussed above. Interest Interest expense was $30 and $35 for the Third months ended July 1, 2022 and July 2, 2021, respectively. Interest expense was $117 for the nine months ended July 1, 2022 compared to $102 for the nine months ended July 2, 2021. Interest income for the Third month periods ended July 1, 2022 and July 2, 2021 was $144 and $76, respectively. Interest income was $339 for the nine months ended July 1, 2022 compared to $238 for the nine months ended July 2, 2021. Other Expense (Income), net Other expense was $4,669 for the Third months ended July 1, 2022 compared to other income of $934 in the prior year period. Net investment losses on the assets related to the Company’s non-qualified deferred compensation plan were $3,741 in the Third month period ended July 1, 2022 compared to net investment gains and earnings of $1,550 in the Third month period ended July 2, 2021. The change year over year in the investment value of these assets was offset by the decrease in deferred compensation expense included in the Company's Operating expenses during the same periods. For the Third months ended July 1, 2022, foreign currency exchange losses were $807 compared to $220 for the Third months ended July 2, 2021. For the nine months ended July 1, 2022, other expense was $6,167 compared to other income of $4,567 in the nine months ended July 2, 2021. Net investment losses on the assets related to the Company’s non-qualified deferred compensation plan in the nine months ended July 1, 2022 were $4,443, compared to net investment gains and earnings of $5,554 in the nine months ended July 2, 2021. Foreign currency exchange losses were $1,320 for the nine months ended July 1, 2022, compared to $99 for the nine months ended July 2, 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 and nine month periods ended July 1, 2022 were 26.8% and 25.9%, respectively, compared to 26.4% and 25.3% in the corresponding periods of the prior year. Net Income Net income for the three months ended July 1, 2022 was $14,082, or $1.38 per diluted common class A and B share, compared to net income of $28,774, or $2.83 per diluted common class A and B share, for the third quarter of the prior fiscal year. Net income for the nine months ended July 1, 2022 was $34,838, or $3.42 per diluted common class A and B share, compared to net income of $76,455, or $7.53 per diluted common class A and B share, for the nine months ended July 2, 2021. Liquidity and Financial Condition - 26 - Index JOHNSON OUTDOORS INC. Cash and cash equivalents totaled $117,567 as of July 1, 2022, compared to cash and cash equivalents of $249,016 as of July 2, 2021. The decrease in cash year over year was due primarily to the Company's decision 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 shortages during this fiscal year. The Company’s debt to total capitalization ratio was 0% as of July 1, 2022 and July 2, 2021. The Company’s total debt balance was $0 as of each of July 1, 2022 and July 2, 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 $103,244 as of July 1, 2022, an increase of $8,494 compared to $94,750 as of July 2, 2021. The increase is consistent with increased sales volumes in three of the operating segments year over year. Receivables balances in the Fishing segment remained consistent with the prior year. Inventories were $250,956 as of July 1, 2022, an increase of $120,214, compared to $130,742 as of July 2, 2021. As noted above, the increase in our inventory balances over the prior year period is primarily due to increased raw material and other component purchases, in many instances at higher costs, in an effort to meet increased demand for products in the current year period. Accounts payable were $50,780 at July 1, 2022 compared to $54,991 as of July 2, 2021. 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) July 1, 2022 July 2, 2021 Cash (used for) provided by: Operating activities $ (86,413) $ 57,611 Investing activities (25,150) (15,468) Financing activities (9,214) (6,792) Effect of foreign currency rate changes on cash (2,104) 1,228 (Decrease) increase in cash and cash equivalents $ (122,881) $ 36,579 Operating Activities Cash used for operations totaled $86,413 for the nine months ended July 1, 2022 compared to cash provided by operations of $57,611 during the corresponding period of the prior fiscal year. The increase in cash used for operations over the prior year nine month period was due primarily to the Company's decision to build and procure certain raw material and component inventory in its attempt to mitigate against shortages in meeting product demand. Lower net income in the current year to date period also contributed to the change between periods. Depreciation and amortization charges were $10,434 for the nine month period ended July 1, 2022 compared to $10,015 for the corresponding period of the prior year. Investing Activities Cash used for investing activities totaled $25,150 for the nine months ended July 1, 2022 compared to $15,468 for the corresponding period of the prior fiscal year. Cash usage for capital expenditures totaled $25,162 for the current year nine month period and $15,481 for the prior year period. The increase in capital expenditures in the current year period is primarily related to the expansion of Fishing facilities to accommodate additional production. Any additional capital expenditures in fiscal 2022 are expected to be funded by working capital. Financing Activities Cash used for financing activities totaled $9,214 for the nine months ended July 1, 2022 compared to $6,792 for the nine month period ended July 2, 2021 and represents the payment of dividends and purchase of treasury stock. The Company had no debt during either quarter ended July 1, 2022 and July 2, 2021. See Note 11 "Indebtedness" to the accompanying Condensed Consolidated Financial Statements for additional information on our credit facilities. As of July 1, 2022 the Company held approximately $52,208 of cash and cash equivalents in bank accounts in foreign taxing jurisdictions. Contractual Obligations and Off Balance Sheet Arrangements - 27 - Index JOHNSON OUTDOORS INC. 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 July 1, 2022. 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 $173 and $181 as of July 1, 2022 and July 2, 2021, respectively. The Company anticipates making contributions of $22 to its defined benefit pension plan 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 nine months ended July 1, 2022.