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 March 29, 2024 and March 31, 2023. 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. 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 - 20 - Index JOHNSON OUTDOORS INC. 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 $175,856 for the second quarter of fiscal 2024 decreased $26,259, or 13%, from the same period in the prior year. The decrease between quarterly periods generally stemmed from a continued challenging market in the current year, along with increased competitive pressure, resulting in weaker revenue for the Company's outdoor recreation products across all segments. Unfavorable overhead absorption due to the lower sales volumes contributed to a 2.4 point decline in gross margin in the current year quarter versus the prior year quarter. A 4% decrease in operating expenses between quarterly periods was not enough to overcome the decline in sales volume and gross margin between periods, causing a $11,643 decrease in operating profit from 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. 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: - 21 - Index JOHNSON OUTDOORS INC. Three Months Ended Six Months Ended March 29, 2024 March 31, 2023 March 29, 2024 March 31, 2023 Net sales: Fishing $ 138,608 $ 155,341 $ 249,100 $ 293,382 Camping 10,520 13,725 16,433 25,338 Watercraft Recreation 9,728 12,890 14,541 22,548 Diving 16,924 20,308 34,402 39,367 Other / Corporate / Eliminations 76 (149) 24 (183) Total $ 175,856 $ 202,115 $ 314,500 $ 380,452 Operating profit (loss): Fishing $ 7,427 $ 17,121 $ 18,956 $ 32,693 Camping 1,709 2,071 2,067 2,824 Watercraft Recreation (486) 569 (2,564) 154 Diving (298) 1,444 (876) 1,457 Other / Corporate / Eliminations (8,605) (9,815) (17,790) (20,266) Total $ (253) $ 11,390 $ (207) $ 16,862 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 March 29, 2024 were $175,856, a decrease of $26,259, or 13%, compared to $202,115 for the three months ended March 31, 2023. Foreign currency translation had a negligible impact on current year second quarter net sales compared to the prior year's second quarter net sales. Net sales for the three months ended March 29, 2024 for the Fishing business were $138,608, a decrease of $16,733, or 11%, from $155,341 during the second fiscal quarter of the prior year. The prior year quarter reflected customer replenishment of inventory levels coming off the peak of pandemic-driven consumer demand. As consumer demand has continued to soften in the current year quarter, customers are conservatively managing their inventory levels in anticipation of the prime retail sales season. Additionally, the Fishing business is experiencing increased competitive pressure, further contributing to the decrease between quarters. Net sales for the Camping business were $10,520 for the second quarter of the current fiscal year, a decrease of $3,205, or 23%, from the prior year net sales during the same period of $13,725. Approximately $1,900 of the decrease from the prior year quarter was related to the previously reported divestiture of the Military and Commercial Tents product lines of its Camping business during the second quarter of fiscal 2023, and the remainder due primarily to general declines in consumer demand in this market. Net sales for the second quarter of fiscal 2024 for the Watercraft Recreation business were $9,728, a decrease of $3,162, or 25%, compared to $12,890 in the prior year same period. Reduced demand in the overall watercraft market adversely impacted the Company's sales in this segment versus the prior year. Net sales for Diving, our most global business, for the second quarter of fiscal 2024 were $16,924, which declined $3,384, or 17%, compared to net sales of $20,308 for the three months ended March 31, 2023. Soft market demand across all geographic regions drove the decline over the prior year quarter. Foreign currency translation had a favorable impact of less than 1% on sales in this segment versus the prior year quarter. For the six months ended March 29, 2024, consolidated net sales of $314,500 decreased $65,952, or 17%, compared to $380,452 for the six months ended March 31, 2023. Foreign currency translation had an insignificant impact on net sales of the current year to date period versus the prior year to date period. Net sales for the six months ended March 29, 2024 for the Fishing business were $249,100, a decrease of $44,282, or 15%, from $293,382 during the same period of the prior year. As noted above for the quarter, a continued challenging market and competitive pressures resulted in lower sales compared to the prior year to date period. - 22 - Index JOHNSON OUTDOORS INC. Net sales for the Camping business were $16,433 for the six months ended March 29, 2024, a decrease of $8,905, or 35%, from the prior year net sales during the same period of $25,338. Approximately $4,500 of the decrease from the prior year quarter was related to the previously reported divestiture of the Military and Commercial Tents product lines of its Camping business during the second quarter of fiscal 2023, with the remainder due primarily to general declines in the market. Net sales for the six months ended March 29, 2024 for the Watercraft Recreation business were $14,541, a decrease of $8,007, or 36%, compared to $22,548 in the prior year same period, due to reductions in demand in the overall watercraft market over the prior year. Diving net sales were $34,402 for the six months ended March 29, 2024, versus $39,367 for the same period of the prior year, a decrease of $4,965 or 13% due to soft market demand across all geographic regions. Foreign currency translation had a favorable impact of approximately 2% on sales in this segment versus the prior year. Cost of Sales Cost of sales for the three months ended March 29, 2024 of $114,425 decreased $12,355 compared to $126,780 for the three months ended March 31, 2023. The decrease year over year was driven primarily by decreased sales volumes between quarters. For the six months ended March 29, 2024, cost of sales was $200,215 compared to $242,338 in the same period of the prior year. The decrease year over year was driven primarily by decreased sales volumes as well as decreases in the costs of certain materials between year to date periods. Gross Profit Margin For the three months ended March 29, 2024, gross profit as a percentage of net sales was 34.9% compared to 37.3% in the three month period ended March 31, 2023. The decline in gross profit percentage between quarters was primarily due to unfavorable overhead absorption as a result of lower sales volumes, as well as promotional price reductions between quarters. For the six months ended March 29, 2024, gross profit as a percentage of sales was 36.3% compared to 36.3% in the prior six month period. Lower costs of certain materials and components and reduced overhead spending offset unfavorable overhead absorption on lower sales volumes, which contributed to the gross profit percentage remaining flat between quarters. Operating Expenses Operating expenses were $61,684 for the three months ended March 29, 2024, compared to $63,945 for the three months ended March 31, 2023. The decrease of $2,261 was primarily due to lower sales volumes between quarters, as well as lower incentive compensation and professional services expense, partially offset by increased promotional spending between quarters. Operating expenses were $114,492 for the six months ended March 29, 2024, compared to $121,252 for the six months ended March 31, 2023. The decrease of $6,760 was primarily due to lower sales volumes between quarters, as well as lower incentive compensation and professional services expense, partially offset by increased promotional spending and more favorable market conditions on the Company's deferred compensation plan assets, which resulted in approximately $2,200 of higher deferred compensation expense recorded in the Company's Corporate segment in the current year to date period as compared to the prior year to date period. 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 loss on a consolidated basis for the three month period ended March 29, 2024 was $253, compared to operating profit of $11,390 in the second quarter of the prior fiscal year. As discussed above, lower sales volumes in the current year quarter was the primary driver of the decrease in operating profit between quarters. Operating loss on a consolidated basis for the six month period ended March 29, 2024 was $207, compared to operating profit of $16,862 in the prior year to date period. Lower sales volumes in the current year quarter was the primary driver of the decrease in operating profit between year to date periods. Interest - 23 - Index JOHNSON OUTDOORS INC. Interest expense was $40 and $38 for the three months ended March 29, 2024 and March 31, 2023, respectively. Interest expense was $78 and $75 for the six months ended March 29, 2024 and March 31, 2023, respectively. Interest income was $857 and $735 for the three months ended March 29, 2024 and March 31, 2023, respectively. Interest income was $2,055 and $1,562 for the six months ended March 29, 2024 and March 31, 2023, respectively. Other Expense (Income), net Other income was $2,448 for the three months ended March 29, 2024 compared to $7,861 in the prior year period. The main drivers of the $5,413 decrease over the prior year quarter were a gain of approximately $6,640 on the sale of the Military and Commercial tents product lines in the prior year quarter, partially offset by a $871 increase in net investment gains and earnings on the assets related to the Company’s non-qualified deferred compensation plan in the current quarter over the prior year quarter. For the three months ended March 29, 2024, foreign currency exchange gains were $46 compared to losses of $46 for the three months ended March 31, 2023. For the six months ended March 29, 2024, other income was $7,141 compared to $9,765 in the six months ended March 31, 2023. The main drivers of the $2,624 decrease over the prior year period were the gain on the sale of the Military and Commercial Tents product lines of approximately $6,640 recorded in the prior year period, partially offset by a gain on the sale of a building of approximately $1,900 in the current period. Additionally, net investment gains and earnings on the assets related to the Company's non-qualified deferred compensation plan in the six months ended March 29, 2024 were $5,017, compared to $2,824 in the prior year to date period. Foreign currency exchange losses were $145 compared to gains of $230 for the six months ended March 29, 2024 and March 31, 2023, respectively. 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 March 29, 2024 were 28.4% and 31.4%, respectively, compared to 25.5% and 26.2% in the corresponding periods of the prior year. Net Income Net income for the three months ended March 29, 2024 was $2,156, or $0.21 per diluted common class A and B share, compared to net income of $14,861, or $1.45 per diluted common class A and B share, for the second quarter of the prior fiscal year. Net income for the six months ended March 29, 2024 was $6,111, or $0.59 per diluted common class A and B share, compared to net income of $20,740, or $2.02 per diluted common class A and B share for the six months ended March 31, 2023. Liquidity and Financial Condition Cash and cash equivalents and short term investments totaled $84,270 as of March 29, 2024, compared to $107,648 as of March 31, 2023. The Company’s debt to total capitalization ratio was 0% as of March 29, 2024 and March 31, 2023. The Company’s total debt balance was $0 as of each of March 29, 2024 and March 31, 2023. 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 $129,345 as of March 29, 2024, a decrease of $15,255 compared to $144,600 as of March 31, 2023. The decrease is consistent with the decreased sales volumes year over year. Inventories were $249,201 as of March 29, 2024, an increase of $12,530, compared to $236,671 as of March 31, 2023. 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 $50,374 at March 29, 2024 compared to $51,855 as of March 31, 2023. 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: - 24 - Index JOHNSON OUTDOORS INC. Six months ended (thousands) March 29, 2024 March 31, 2023 Cash (used for) provided by: Operating activities $ (51,764) $ (18,095) Investing activities 7,031 992 Financing activities (6,945) (6,710) Effect of foreign currency rate changes on cash 180 1,658 Decrease in cash and cash equivalents $ (51,498) $ (22,155) Operating Activities Cash used for operations totaled $51,764 for the six months ended March 29, 2024 compared to $18,095 during the corresponding period of the prior fiscal year. The increase in cash used for operations over the prior year six month period was due primarily to decreased sales volumes and higher inventory purchases between quarters. Depreciation and amortization charges were $9,949 for the six month period ended March 29, 2024 compared to $7,829 for the corresponding period of the prior year. Investing Activities Cash provided by investing activities totaled $7,031 for the six months ended March 29, 2024 compared to $992 for the corresponding period of the prior fiscal year. Current year cash provided by investing activities reflects maturity of investments of $15,000, as well as proceeds of $2,234 related to the sale of fixed assets, which predominantly consisted of the sale of a building, as discussed above. The prior year period included proceeds of $14,990 related to the divestiture of the Military and Commercial Tents product lines, previously discussed. Capital expenditures were $10,203 in the six months ended March 29, 2024, compared to $13,998 in the prior year to date period which included investments in expansion of Fishing facilities to accommodate additional production. Any additional capital expenditures in fiscal 2024 are expected to be funded by working capital. Financing Activities Cash used for financing activities totaled $6,945 for the six months ended March 29, 2024 compared to $6,710 for the six month period ended March 31, 2023 and represents the payment of dividends and purchase of treasury stock. The Company had no debt during either six month period ended March 29, 2024 and March 31, 2023. See Note 11 "Indebtedness" to the accompanying Condensed Consolidated Financial Statements for additional information on our credit facilities. As of March 29, 2024 the Company held approximately $44,024 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 March 29, 2024. 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 March 29, 2024 and March 31, 2023, 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 six months ended March 29, 2024. - 25 - Index JOHNSON OUTDOORS INC.