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 June 28, 2024 and June 30, 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. - 21 - 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 $172,472 for the third quarter of fiscal 2024 decreased $14,575, or 8%, from the same period in the prior year. The decrease between quarterly periods was primarily due to ongoing market challenges in many of the Company's product categories, as well as increasing competitive pressure, which resulted in weaker demand and revenue across all segments of the Company's outdoor recreation products. Unfavorable overhead absorption due to the lower sales volumes and product mix also contributed to a 5.7 point decline in gross margin in the current year quarter versus the prior year quarter. Additionally, a 4% - 22 - Index JOHNSON OUTDOORS INC. increase in operating expenses, which was mainly due to increased advertising and promotional spending between quarterly periods, contributed to a $17,949 decrease in operating profit from 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. 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 Nine Months Ended June 28, 2024 June 30, 2023 June 28, 2024 June 30, 2023 Net sales: Fishing $ 130,537 $ 137,460 $ 379,637 $ 430,842 Camping 10,927 11,658 27,360 36,996 Watercraft Recreation 11,070 15,726 25,611 38,274 Diving 19,861 22,227 54,263 61,594 Other / Corporate / Eliminations 77 (24) 101 (207) Total $ 172,472 $ 187,047 $ 486,972 $ 567,499 Operating profit (loss): Fishing $ 5,258 $ 18,665 $ 24,214 $ 51,358 Camping 1,474 2,039 3,541 4,863 Watercraft Recreation 557 1,483 (2,007) 1,637 Diving 898 2,733 22 4,190 Other / Corporate / Eliminations (8,693) (7,477) (26,483) (27,743) Total $ (506) $ 17,443 $ (713) $ 34,305 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 June 28, 2024 were $172,472, a decrease of $14,575, or 8%, compared to $187,047 for the three months ended June 30, 2023. Foreign currency translation had a negligible impact on current year third quarter net sales compared to the prior year's third quarter net sales. Net sales for the three months ended June 28, 2024 for the Fishing business were $130,537, a decrease of $6,923, or 5%, from $137,460 during the third fiscal quarter of the prior year. Softer consumer demand in the market for outdoor recreation products in the current year quarter combined with increased competitive pressure in the Fishing market has contributed to the sales decline between quarters. - 23 - Index JOHNSON OUTDOORS INC. Net sales for the Camping business were $10,927 for the third quarter of the current fiscal year, a decrease of $731, or 6%, from the prior year net sales during the same period of $11,658. The decrease is mainly attributable to declines in overal consumer demand for products in this market. Net sales for the third quarter of fiscal 2024 for the Watercraft Recreation business were $11,070, a decrease of $4,656, or 30%, compared to $15,726 in the prior year same period. Sales in this segment were negatively affected by continuing decreased demand in the overall watercraft market compared to the prior year quarter. Net sales for Diving for the third quarter of fiscal 2024 were $19,861, which declined $2,366, or 11%, compared to net sales of $22,227 for the three months ended June 30, 2023. The decline in sales over the prior year quarter was driven primarily by softening market demand across all geographic regions. Foreign currency translation had an unfavorable impact of less than 1% on sales in this segment versus the prior year quarter. For the nine months ended June 28, 2024, consolidated net sales of $486,972 decreased $80,527, or 14%, compared to $567,499 for the nine months ended June 30, 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 nine months ended June 28, 2024 for the Fishing business were $379,637, a decrease of $51,205, or 12%, from $430,842 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. Net sales for the Camping business were $27,360 for the nine months ended June 28, 2024, a decrease of $9,636, or 26%, from the prior year net sales during the same period of $36,996. 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 for camping products. Net sales for the nine months ended June 28, 2024 for the Watercraft Recreation business were $25,611, a decrease of $12,663, or 33%, compared to $38,274 in the prior year same period. The company was impacted by reductions in demand in the overall watercraft market, resulting in decreased sales over the prior year. Diving net sales were $54,263 for the nine months ended June 28, 2024, versus $61,594 for the same period of the prior year, a decrease of $7,331 or 12% due to soft market demand across all geographic regions. Foreign currency translation had a favorable impact of less than 1% on sales in this segment versus the prior year. Cost of Sales Cost of sales for the three months ended June 28, 2024 of $110,650 increased $1,190 compared to $109,460 for the three months ended June 30, 2023. Despite a decrease in sales volumes between quarters, the mix of products sold led to increases in certain material costs, resulting in increased cost of sales between quarters. For the nine months ended June 28, 2024, cost of sales was $310,865 compared to $351,798 in the same period of the prior year. The decrease year over year was driven primarily by decreased sales volumes between periods. Gross Profit Margin For the three months ended June 28, 2024, gross profit as a percentage of net sales was 35.8% compared to 41.5% in the three month period ended June 30, 2023. The decline in gross profit percentage over the prior year quarter was primarily due to unfavorable overhead absorption as a result of lower sales volumes and changes in product mix toward lower margin products between quarters. For the nine months ended June 28, 2024, gross profit as a percentage of sales was 36.2% compared to 38.0% in the prior nine month period. Unfavorable overhead absorption on lower sales volumes and changes in product mix were the primary drivers of the decrease in gross profit percentage between year to date periods. Operating Expenses Operating expenses were $62,328 for the three months ended June 28, 2024, compared to $60,144 for the three months ended June 30, 2023. The increase of $2,184 was primarily due to increased advertising and promotional spending between quarters, partially offset by the impact of lower sales volumes. - 24 - Index JOHNSON OUTDOORS INC. Operating expenses were $176,820 for the nine months ended June 28, 2024, compared to $181,396 for the nine months ended June 30, 2023. The decrease of $4,576 was primarily due to lower sales volumes between quarters, as well as lower incentive compensation and professional services expense, partially offset by increased advertising and promotional spending. Operating Profit Operating loss on a consolidated basis for the three month period ended June 28, 2024 was $506, compared to operating profit of $17,443 in the third quarter of the prior fiscal year. As discussed above, the decrease in operating profit between quarters is driven by lower sales volumes and increased promotional spending over the prior year quarter. Operating loss on a consolidated basis for the nine month period ended June 28, 2024 was $713, compared to operating profit of $34,305 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 Interest expense was $37 and $39 for the three months ended June 28, 2024 and June 30, 2023, respectively. Interest expense was $115 and $114 for the nine months ended June 28, 2024 and June 30, 2023, respectively. Interest income was $1,123 and $1,244 for the three months ended June 28, 2024 and June 30, 2023, respectively. Interest income was $3,178 and $2,806 for the nine months ended June 28, 2024 and June 30, 2023, respectively. Other Expense (Income), net Other income was $327 for the three months ended June 28, 2024 compared to $1,174 in the prior year period. The main driver of the $847 decrease over the prior year quarter was a $888 decrease 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 June 28, 2024, foreign currency exchange losses were $28 compared to $76 for the three months ended June 30, 2023. For the nine months ended June 28, 2024, other income was $7,468 compared to $10,939 in the nine months ended June 30, 2023. The main drivers of the $3,471 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 nine months ended June 28, 2024 were $5,463, compared to $4,159 in the prior year to date period. Foreign currency exchange losses were $173 compared to gains of $155 for the nine months ended June 28, 2024 and June 30, 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 month period ended June 28, 2024 was a benefit of 78.8%, due to the decline in profit before taxes and geographic mix of profits and losses. For the nine month period ended June 28, 2024 the effective tax rate was 21.2%. The effective tax rates were 25.3% and 25.9% in the corresponding periods of the prior year. Net Income Net income for the three months ended June 28, 2024 was $1,622, or $0.16 per diluted common class A and B share, compared to net income of $14,801, or $1.44 per diluted common class A and B share, for the third quarter of the prior fiscal year. Net income for the nine months ended June 28, 2024 was $7,733, or $0.75 per diluted common class A and B share, compared to net income of $35,541, or $3.47 per diluted common class A and B share for the nine months ended June 30, 2023. Liquidity and Financial Condition Cash and cash equivalents and short term investments totaled $148,369 as of June 28, 2024, compared to $149,247 as of June 30, 2023. The Company’s debt to total capitalization ratio was 0% as of June 28, 2024 and June 30, 2023. The Company’s total debt balance was $0 as of each of June 28, 2024 and June 30, 2023. See “Note 11 – Indebtedness” in the notes to the Company’s accompanying condensed consolidated financial statements for further discussion. - 25 - Index JOHNSON OUTDOORS INC. Accounts receivable, net of allowance for credit losses, were $79,593 as of June 28, 2024, a decrease of $15,051 compared to $94,644 as of June 30, 2023. The decrease is consistent with the decreased sales volumes year over year. Inventories were $223,160 as of June 28, 2024, a decrease of $11,909, compared to $235,069 as of June 30, 2023. Accounts payable were $43,153 at June 28, 2024 compared to $45,728 as of June 30, 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: Nine months ended (thousands) June 28, 2024 June 30, 2023 Cash (used for) provided by: Operating activities $ 21,899 $ 45,210 Investing activities 3,225 (45,133) Financing activities (10,136) (9,591) Effect of foreign currency rate changes on cash (19) 2,307 Increase (decrease) in cash and cash equivalents $ 14,969 $ (7,207) Operating Activities Cash provided by operations totaled $21,899 for the nine months ended June 28, 2024 compared to $45,210 during the corresponding period of the prior fiscal year. The decrease in cash provided by operations over the prior year nine month period was due primarily to lower income on decreased sales volumes between quarters. Depreciation and amortization charges were $14,799 for the nine month period ended June 28, 2024 compared to $11,815 for the corresponding period of the prior year. Investing Activities Cash provided by investing activities totaled $3,225 for the nine months ended June 28, 2024 compared to cash used for investing activities of $45,133 for the corresponding period of the prior fiscal year. Current year cash provided by investing activities reflects maturity of investments of $19,650, as well as proceeds of $2,244 related to the sale of fixed assets, which predominantly consisted of the sale of a building, as discussed above, partially offset by purchases of investments of $2,220. The prior year period included purchases of investments of $40,696, offset in part by proceeds of $14,990 related to the divestiture of the Military and Commercial Tents product lines, previously discussed. Capital expenditures were $16,449 in the nine months ended June 28, 2024, compared to $19,427 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 $10,136 for the nine months ended June 28, 2024 compared to $9,591 for the nine month period ended June 30, 2023 and represents the payment of dividends and purchase of treasury stock. The Company had no debt during either nine month period ended June 28, 2024 and June 30, 2023. See Note 11 "Indebtedness" to the accompanying Condensed Consolidated Financial Statements for additional information on our credit facilities. As of June 28, 2024 the Company held approximately $54,960 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 June 28, 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 $78 as of June 28, 2024 and June 30, 2023, respectively. - 26 - Index JOHNSON OUTDOORS INC. 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 nine months ended June 28, 2024.