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 30, 2022 and December 31, 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 September 30, 2022 which was filed with the Securities and Exchange Commission on December 9, 2022. - 17 - Index JOHNSON OUTDOORS INC. 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 9, 2022 and the following: changes in economic conditions, consumer confidence levels and discretionary spending patterns in key markets; uncertainties stemming from political instability (and its impact on the economies in jurisdictions where the Company has operations); 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, 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 including related to shortages in procuring necessary raw materials and components to manufacture and produce such 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) The COVID-19 pandemic drove consumer desire to engage in socially distant and safe activities outdoors. As a result, increased participation in outdoor recreation also increased demand for our products across many of our Company segments. Beginning in fiscal 2023, however, we are beginning to see a reduction in consumer demand across some of our segments. - 18 - Index JOHNSON OUTDOORS INC. COVID-19 and the resulting macroeconomic dynamics have also caused widely-documented supply chain and logistics disruptions across industries, as well as inflationary pressures (especially as it relates to raw material and purchased component prices). These factors have impacted the timing, sourcing, availability and cost of raw materials and components that are necessary to manufacture our products, all of which adversely impacted our margins and inventory levels during fiscal 2022 and into the first quarter of fiscal 2023. During the first quarter of fiscal 2023, however, we experienced some improvement in the availability of certain components necessary for manufacturing our products, specifically in the Fishing segment. Because the Company expects that supply chain and logistics disruptions and inflationary pricing conditions will continue throughout fiscal 2023, the Company remains focused on evaluating and pursuing additional options (beyond building inventory) to meet the demand for its products, including related to evaluating options to improve margins such as implementing customer price increases. Nonetheless, these factors remain fluid and will likely adversely impact the cost of goods sold for future sales of product. Highlights Net sales of $178,337 for the first quarter of fiscal 2023 increased $24,813, or 16%, from the same period in the prior year. While sales increased overall, the increased cost of goods sold associated with higher inventory costs resulting from component availability and continued supply chain disruptions, as described above, have resulted in lower gross margins. Furthermore, higher operating expenses helped drive the $8,288 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. 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. Fiscal Year 2022 2021 2020 Quarter Ended Net Sales Operating Profit Net Sales Operating Profit Net Sales Operating Profit December 21 % 21 % 22 % 22 % 22 % 10 % March 26 % 23 % 27 % 32 % 27 % 45 % June 27 % 36 % 29 % 34 % 23 % 17 % September 26 % 20 % 22 % 12 % 28 % 28 % 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: - 19 - Index JOHNSON OUTDOORS INC. Three Months Ended December 30, 2022 December 31, 2021 Net sales: Fishing $ 138,041 $ 108,356 Camping 11,613 14,134 Watercraft Recreation 9,658 14,600 Diving 19,059 16,491 Other / Eliminations (34) (57) Total $ 178,337 $ 153,524 Operating profit (loss): Fishing $ 15,572 $ 16,292 Camping 753 2,750 Watercraft Recreation (415) 1,531 Diving 13 453 Other / Eliminations (10,451) (7,266) Total $ 5,472 $ 13,760 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 30, 2022 were $178,337, an increase of $24,813, or 16%, compared to $153,524 for the three months ended December 31, 2021. Foreign currency translation had an unfavorable impact of approximately 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 December 30, 2022 for the Fishing business were $138,041, an increase of $29,685, or 27%, from $108,356 during the first fiscal quarter of the prior year. The increase in sales over the prior year quarter is primarily attributable to increased supply and component availability versus the prior year quarter, resulting in our ability to fill more orders with distributors and retail partners, as well as price increases. Net sales for the Camping business were $11,613 for the first quarter of the current fiscal year, a decrease of $2,521, or 18%, from the prior year net sales during the same period of $14,134 due to decreased sales of Jetboil and Eureka! consumer camping products, as consumer demand declined from the increased levels seen during the pandemic. Net sales for the first quarter of fiscal 2023 for the Watercraft Recreation business were $9,658, a decrease of $4,942, or 34%, compared to $14,600 in the prior year same period. Reductions in consumer demand from the elevated levels seen during the pandemic drove the decline from the prior year. Net sales for Diving, our most global business, for the first quarter of fiscal 2023 were $19,059, an increase of $2,568 or 16% versus $16,491 for the three months ended December 31, 2021. As destination travel has rebounded, 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 6% versus the prior year quarter. Cost of Sales Cost of sales for the three months ended December 30, 2022 of $115,558 increased $22,665 compared to $92,893 for the three months ended December 31, 2021. The increase year over year was driven in part by increased sales volumes. Additionally, while the Company began to see some relief in freight and material costs during the quarter, the cost of components, parts and other raw materials in inventory, in some cases at significantly higher price points than what was historically paid, also contributed to the increase over the prior year. Gross Profit Margin - 20 - Index JOHNSON OUTDOORS INC. For the three months ended December 30, 2022, gross profit as a percentage of net sales was 35.2% compared to 39.5% in the three month period ended December 31, 2021. While the Company had increased sales volumes and has implemented price increases across product lines, these actions were not enough to offset the higher costs of inventory between quarters, as discussed above. Operating Expenses Operating expenses were $57,307 for the three months ended December 30, 2022, compared to $46,871 for the three months ended December 31, 2021. The increase of $10,436 was primarily due to the impact of higher sales volume-driven expenses, as well as higher compensation, health insurance and professional services costs between quarters. Operating Profit Operating profit on a consolidated basis for the three month period ended December 30, 2022 was $5,472, compared to an operating profit of $13,760 in the first quarter of the prior fiscal year. Higher operating expenses and a drop in gross profit, as discussed above, were the primary drivers of the decrease in operating profit between quarters. Interest Interest expense was $37 and $38 for the three months ended December 30, 2022 and December 31, 2021, respectively. Interest income was $827 for the three months ended December 30, 2022 compared to $93 for the three months ended December 31, 2021 due to an increase in interest rates between quarters. Other Expense (Income), net Other income was $1,904 for the three months ended December 30, 2022 compared to $774 in the prior year period. Net investment gains and earnings on the assets related to the Company’s non-qualified deferred compensation plan were $1,535 in the three month period ended December 30, 2022 compared to $1,334 in the three month period ended December 31, 2021. For the three months ended December 30, 2022, foreign currency exchange gains were $276 compared to losses of $366 for the three months ended December 31, 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 30, 2022 was 28.0%, compared to 25.6% in the corresponding period of the prior year. Net Income Net income for the three months ended December 30, 2022 was $5,879, or $0.57 per diluted common class A and B share, compared to net income of $10,856, or $1.07 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 $103,422 as of December 30, 2022, compared to cash and cash equivalents of $167,473 as of December 31, 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 since the prior year first quarter. The Company’s debt to total capitalization ratio was 0% as of December 30, 2022 and December 31, 2021. The Company’s total debt balance was $0 as of each of December 30, 2022 and December 31, 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 $120,553 as of December 30, 2022, an increase of $33,864 compared to $86,689 as of December 31, 2021. The increase is consistent with increased sales volumes year over year. Inventories were $251,525 as of December 30, 2022, an increase of $34,094, compared to $217,431 as of December 31, 2021. As noted above, the increase in our inventory balances over the prior year period is primarily due to increased purchases since then, in many instances at higher costs, in an attempt to build inventory with the goal of mitigating and/or preparing for a continuing disruption of the supply chain. Accounts payable were $57,058 at December 30, 2022 compared to $59,241 as of December 31, 2021. - 21 - Index JOHNSON OUTDOORS INC. 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 30, 2022 December 31, 2021 Cash (used for) provided by: Operating activities $ (17,570) $ (62,773) Investing activities (6,649) (6,244) Financing activities (3,570) (3,466) Effect of foreign currency rate changes on cash 1,408 (492) Decrease in cash and cash equivalents $ (26,381) $ (72,975) Operating Activities Cash used for operations totaled $17,570 for the three months ended December 30, 2022 compared to $62,773 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 higher inventory purchases in the prior year period, due 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. Depreciation and amortization charges were $3,763 for the three month period ended December 30, 2022 compared to $3,492 for the corresponding period of the prior year. Investing Activities Cash used for investing activities totaled $6,649 for the three months ended December 30, 2022 compared to $6,244 for the corresponding period of the prior fiscal year, which was all related to capital expenditures. Any additional capital expenditures in fiscal 2023 are expected to be funded by working capital. Financing Activities Cash used for financing activities totaled $3,570 for the three months ended December 30, 2022 compared to $3,466 for the three month period ended December 31, 2021 and represents the payment of dividends and purchase of treasury stock. The Company had no debt during either quarter ended December 30, 2022 and December 31, 2021. See Note 11 "Indebtedness" to the accompanying Condensed Consolidated Financial Statements for additional information on our credit facilities. As of December 30, 2022 the Company held approximately $46,959 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 30, 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 December 30, 2022 and December 31, 2021, respectively. The Company has no other off-balance sheet arrangements. Critical Accounting Policies and Estimates The Company’s critical accounting policies and estimates are identified in the Company’s Annual Report on Form 10-K for the fiscal year ending September 30, 2022 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 - 22 - Index JOHNSON OUTDOORS INC. on December 9, 2022. There were no significant changes to the Company’s critical accounting policies and estimates during the three months ended December 30, 2022.