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 29, 2023 and December 30, 2022. 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 29, 2023 which was filed with the Securities and Exchange Commission on December 8, 2023. - 19 - 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 for the fiscal year ended September 29, 2023 which was filed with the Securities and Exchange Commission on December 8, 2023 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. Highlights Net sales of $138,644 for the first quarter of fiscal 2024 decreased $39,693, or 22%, from the same period in the prior year. The decrease between quarterly periods generally stemmed from a more challenging market in the current year, with softening consumer demand for the Company's outdoor recreation products across all segments, other than Diving. In the Diving segment, sales were generally flat when excluding the impacts of foreign currency translation. Despite the decrease in sales between quarters, material and freight cost reductions helped drive a 2.9 point improvement in gross margin in the current year - 20 - Index JOHNSON OUTDOORS INC. quarter versus the prior year quarter. Additionally, operating expenses decreased by 8% between quarters. However, these expense and cost improvements between quarterly periods were not enough to overcome the decline in sales volume, causing a $5,426 decrease in operating profit from 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. Fiscal Year 2023 2022 2021 Quarter Ended Net Sales Operating Profit Net Sales Operating Profit Net Sales Operating Profit December 27 % 47 % 21 % 21 % 22 % 22 % March 30 % 97 % 26 % 23 % 27 % 32 % June 28 % 149 % 27 % 36 % 29 % 34 % September 15 % -193 % 26 % 20 % 22 % 12 % 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 29, 2023 December 30, 2022 Net sales: Fishing $ 110,492 $ 138,041 Camping 5,913 11,613 Watercraft Recreation 4,813 9,658 Diving 17,478 19,059 Other / Corporate / Eliminations (52) (34) Total $ 138,644 $ 178,337 Operating profit (loss): Fishing $ 11,529 $ 15,572 Camping 358 753 Watercraft Recreation (2,078) (415) Diving (578) 13 Other / Corporate / Eliminations (9,185) (10,451) Total $ 46 $ 5,472 See “Note 17 – 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 29, 2023 were $138,644, a decrease of $39,693, or 22%, compared to $178,337 for the three months ended December 30, 2022. 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 29, 2023 for the Fishing business were $110,492, a decrease of $27,549, or 20%, from $138,041 during the first fiscal quarter of the prior year. In the prior year quarter, as supply chain constraints began to ease, higher sales volumes were fueled by customers replenishing their inventory levels, coming off the peak of pandemic- - 21 - Index JOHNSON OUTDOORS INC. driven consumer demand. As consumer demand has softened in the current year quarter, customers are tightly managing their inventory levels in anticipation of the prime retail sales season. Net sales for the Camping business were $5,913 for the first quarter of the current fiscal year, a decrease of $5,700, or 49%, from the prior year net sales during the same period of $11,613, due primarily to declines in the market. Additionally, approximately $2,600 of the decrease from the prior year quarter was related to the previously reported sale of the Military and Commercial Tents product lines of its Camping business during the second quarter of fiscal 2023. Net sales for the first quarter of fiscal 2024 for the Watercraft Recreation business were $4,813, a decrease of $4,845, or 50%, compared to $9,658 in the prior year same period. Reduced demand in the overall market drove the decline from the prior year. 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 Diving, our most global business, for the first quarter of fiscal 2024 were $17,478, which declined $1,581, or 8%, compared to net sales of $19,059 for the three months ended December 30, 2022. Foreign currency translation had an unfavorable impact of approximately 6% on sales in this segment versus the prior year quarter. Excluding the effect of foreign currency translation, the Company experienced modest declines in demand for Diving products between quarters. Cost of Sales Cost of sales for the three months ended December 29, 2023 of $85,790 decreased $29,768 compared to $115,558 for the three months ended December 30, 2022. The decrease year over year was driven primarily by decreased sales volumes, as well as decreased costs of certain materials and lower inbound freight between quarters. Gross Profit Margin For the three months ended December 29, 2023, gross profit as a percentage of net sales was 38.1% compared to 35.2% in the three month period ended December 30, 2022. The improvement in gross profit percentage between quarters was primarily due decreased costs of certain materials and lower inbound freight. Operating Expenses Operating expenses were $52,808 for the three months ended December 29, 2023, compared to $57,307 for the three months ended December 30, 2022. The decrease of $4,499 was primarily due to lower sales volumes between quarters, as well as lower professional services expense, partially offset by more favorable market conditions on the Company's deferred compensation plan assets, which resulted in approximately $1,300 of higher deferred compensation expense recorded in the Company's Corporate segment in the current year quarter as compared to the prior year quarter. This increase in expense 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 December 29, 2023 was $46, compared to $5,472 in the first quarter of the prior fiscal year. Lower sales volumes in the current year quarter, which were partially offset by lower cost of sales and operating expenses between quarters, all as discussed above, was the primary driver of the decrease in operating profit between quarters. Interest Interest expense was $38 and $37 for the three months ended December 29, 2023 and December 30, 2022, respectively. Interest income was $1,198 and $827 for the three months ended December 29, 2023 and December 30, 2022, respectively. The increase in interest income over the prior year periods was driven by increased interest rates, as well as increased investment or cash balances during the first fiscal quarter of 2024. Other Expense (Income), net Other income was $4,693 for the three months ended December 29, 2023 compared to $1,904 in the prior year period. The main drivers of the $2,789 increase over the prior year quarter were a gain of approximately $1,900 on the sale of a building during the current year quarter as well as the $1,300 increase in net investment gains and earnings on the assets related to the - 22 - Index JOHNSON OUTDOORS INC. Company’s non-qualified deferred compensation plan. For the three months ended December 29, 2023, foreign currency exchange losses were $191 compared to gains of $276 for the three months ended December 30, 2022. 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 periods ended December 29, 2023 and December 30, 2022, were 33.0% and 28.0%, respectively. Net Income Net income for the three months ended December 29, 2023 was $3,955, or $0.38 per diluted common class A and B share, compared to net income of $5,879, or $0.57 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 and short term investments totaled $109,555 as of December 29, 2023, compared to $103,422 as of December 30, 2022. The Company’s debt to total capitalization ratio was 0% as of December 29, 2023 and December 30, 2022. The Company’s total debt balance was $0 as of each of December 29, 2023 and December 30, 2022. 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 $83,043 as of December 29, 2023, a decrease of $37,510 compared to $120,553 as of December 30, 2022. The decrease is consistent with the decreased first quarter sales volumes year over year. Inventories were $267,321 as of December 29, 2023, an increase of $15,796, compared to $251,525 as of December 30, 2022. Lower replenishment volumes to the Company's customers and softening consumer demand resulted in elevated inventory levels, primarily in the Fishing segment. Accounts payable were $43,403 at December 29, 2023 compared to $57,058 as of December 30, 2022. 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 29, 2023 December 30, 2022 Cash (used for) provided by: Operating activities $ (33,687) $ (17,570) Investing activities 4,685 (6,649) Financing activities (3,588) (3,570) Effect of foreign currency rate changes on cash 1,197 1,408 Decrease in cash and cash equivalents $ (31,393) $ (26,381) Operating Activities Cash used for operations totaled $33,687 for the three months ended December 29, 2023 compared to $17,570 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 decreased sales volumes, higher inventory purchases, and other working capital changes that required greater usage of cash between quarters. Depreciation and amortization charges were $5,027 for the three month period ended December 29, 2023 compared to $3,763 for the corresponding period of the prior year. Investing Activities Cash provided by investing activities totaled $4,685 for the three months ended December 29, 2023 compared to cash used for investing activities of $6,649 for the corresponding period of the prior fiscal year. Capital expenditures were $5,004 in the three months ended December 29, 2023, compared to $6,649 in the prior year to date period which included investments in expansion of Fishing facilities to accommodate additional production. Current year cash provided by investing activities reflects maturity of investments of $7,500, as well as proceeds of $2,189 related to the sale of fixed assets, which predominantly - 23 - Index JOHNSON OUTDOORS INC. consisted of the sale of a building, as discussed above. Any additional capital expenditures in fiscal 2024 are expected to be funded by working capital. Financing Activities Cash used for financing activities totaled $3,588 for the three months ended December 29, 2023 compared to $3,570 for the three month period ended December 30, 2022 and represents the payment of dividends and purchase of treasury stock. The Company had no debt during either three month period ended December 29, 2023 and December 30, 2022. See Note 11 "Indebtedness" to the accompanying Condensed Consolidated Financial Statements for additional information on our credit facilities. As of December 29, 2023 the Company held approximately $42,442 of cash, cash equivalents and short-term investments 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 29, 2023. 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 $67 and $173 as of December 29, 2023 and December 30, 2022, 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 29, 2023 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 8, 2023. There were no significant changes to the Company’s critical accounting policies and estimates during the three months ended December 29, 2023.