JOHNSON OUTDOORS INC Administration’s Dialogue and Evaluation of Monetary Situation and Outcomes of Operations (kind 10-Q)

0
39

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 April 1, 2022 and April 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
•Contractual Obligations and Off Balance Sheet Arrangements
•Critical Accounting Policies and Estimates
– 20 –
——————————————————————————–
Index JOHNSON OUTDOORS INC.

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)

Due to the timing of the COVID-19 outbreak, the Company’s traditional seasonal
pacing, where our heaviest sales volumes typically occurred during our second
and third fiscal quarters, shifted during fiscal 2020 and fiscal 2021. Increased
– 21 –
——————————————————————————–
Index JOHNSON OUTDOORS INC.

participation in fishing, camping, watercraft recreation and diving and related
demand for our products, largely driven by consumer desire to engage in socially
distant and safe activities outdoors as a reaction to the COVID-19 pandemic led
to increased sales volumes across all Company segments during fiscal 2021. This
strong demand continued into the first two quarters of fiscal 2022.

In addition to this significant increase in demand for Company products during
fiscal 2021 and fiscal 2022 to date, COVID-19 has also caused widely-documented
supply chain and logistics disruptions across industries, including those in
which we operate, which have been exacerbated by the higher demand for our
outdoor recreation products and associated inventory replenishment actions of
our customers. These adverse supply chain and logistics constraints and
disruptions have impacted the timing, sourcing, availability and cost of raw
materials and components that are necessary to manufacture our outdoor
recreation products. Certain of the Company’s component suppliers and logistical
service providers experienced disruptions, resulting in supply shortages across
all of our segments for certain materials and components that are necessary to
produce our products. Moreover, during the first two quarters of fiscal 2022,
the Fishing segment was significantly impacted by these supply chain and
logistical infrastructure disruptions, resulting in decreased sales volumes in
that segment over the same periods in the prior year. As a result of these
disruptions, the Company has taken certain actions to attempt to meet the
continued strong consumer demand for its products to continue to fulfill product
orders. These actions include building and procuring numerous categories of
inventory (in some cases at significantly higher price points than what was
historically paid) to mitigate against potential shortages during fiscal 2022 in
certain of its materials and components that are necessary to manufacture
Company products. These 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
two fiscal quarters of 2022.

Because the Company expects that these same supply chain and logistics
disruptions will continue throughout fiscal 2022, the Company remains focused on
evaluating and pursuing additional options (beyond building inventory) to meet
the continued strong consumer 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 customer 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 $189,623 for the second quarter of fiscal 2022 decreased $16,533,
or 8%, from the same period in the prior year. While consumer demand remains
strong, sales volumes have been negatively impacted by product availability and
supply chain disruptions, particularly in Fishing, the Company’s largest
segment. This sales volume decrease and lower gross margins resulting from
higher costs of sales were the primary drivers of the $20,607 decrease in
operating profit over 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.
See “Coronavirus (COVID-19)” above for additional information of the impact of
COVID-19 on changes to the Company’s seasonality for fiscal 2020 and 2021 which
changes are expected to continue to evolve over the remainder of fiscal 2022.

Fiscal Year
2021 2020 2019
Net Operating Net Operating Net Operating
Quarter Ended Sales Profit Sales Profit Sales 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

– 22 –
——————————————————————————–
Index JOHNSON OUTDOORS INC.

The Company’s net sales and operating profit (loss) by business segment for the
periods shown below were as follows:

Three Months Ended Six Months Ended
April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021
Net sales:
Fishing $ 129,323 $ 160,016 $ 237,679 $ 287,015
Camping 19,167 14,244 33,301 26,438
Watercraft Recreation 23,009 17,778 37,609 30,221
Diving 18,194 14,208 34,685 28,301
Other / Eliminations (70) (90) (127) (152)
Total $ 189,623 $ 206,156 $ 343,147 $ 371,823
Operating profit (loss):
Fishing $ 11,321 $ 40,400 $ 27,613 $ 68,163
Camping 5,119 2,962 7,869 5,770
Watercraft Recreation 3,164 2,814 4,695 3,883
Diving 1,209 (1,253) 1,662 (1,594)
Other / Eliminations (5,384) (8,887) (12,650) (16,629)
Total $ 15,429 $ 36,036 $ 29,189 $ 59,593

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 April 1, 2022 were $189,623, a
decrease of $16,533, or 8%, compared to $206,156 for the three months ended
April 2, 2021. Foreign currency translation had virtually no 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 April 1, 2022 for the Fishing business were
$129,323, a decrease of $30,693, or 19%, from $160,016 during the second fiscal
quarter of the prior year. While product demand remains strong, the decrease in
Fishing was driven by significant supply chain disruptions and the resulting
unavailability of components experienced in the current year quarter.

Net sales for the Camping business were $19,167 for the second quarter of the
current fiscal year, an increase of $4,923, or 35%, from the prior year net
sales during the same period of $14,244 due to increased sales of Jetboil and
Eureka! consumer camping products due to continued strong participation in
outdoor recreation activities.

Net sales for the second quarter of fiscal 2022 for the Watercraft Recreation
business were $23,009, an increase of $5,231, or 29%, compared to $17,778 in the
prior year same period. Continued strong demand for the segment’s Sportsman line
and successful pedal and motorized product offerings drove the increase over the
prior year quarter.

Net sales for Diving, our most global business, for the second quarter of fiscal
2022 were $18,194, an increase of $3,986 or 28% versus $14,208 for the three
months ended April 2, 2021. In the prior year second quarter, demand was
deflated due to the effects of COVID-19 which caused the closure of destination
travel locations and resulted in lower tourism activities that tend to generate
demand for our products in this segment. As several regions around the world
have re-opened, sales volumes have increased. Foreign currency translation had
an unfavorable impact on sales in this segment of approximately 2% versus the
prior year quarter.

For the six months ended April 1, 2022, consolidated net sales of $343,147
decreased $28,676 or 8% compared to $371,823 for the six months ended April 2,
2021. Foreign currency translation had virtually no 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 April 1, 2022 for the Fishing business were
$237,679, a decrease of $49,336, or 17% from $287,015 during the same period of
the prior year. The decrease over the prior year to date period was driven
mainly by the
– 23 –
——————————————————————————–
Index JOHNSON OUTDOORS INC.

previously discussed logistics and supply chain disruptions which adversely
impacted our ability to satisfy demand for product orders.

Net sales for the Camping business were $33,301 for the six months ended
April 1, 2022, an increase of $6,863, or 26%, from the prior year net sales
during the same period of $26,438. 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 six months ended April 1, 2022 for the Watercraft Recreation
business were $37,609, an increase of $7,388, or 24%, compared to $30,221 in the
prior year same period. Increased demand as a result of increased participation
in watercraft recreation during the COVID-19 pandemic drove the overall increase
over the prior year to date period.

Diving net sales were $34,685 for the six months ended April 1, 2022 versus
$28,301 for the six months ended April 2, 2021, an increase of $6,384, or 23%.
The sales increase was largely due to increased demand for our products as the
global tourism industry has started to recover. The impact of increased sales
volumes was offset in part by the unfavorable effect of foreign currency
translation of 3% versus the prior year to date period.

Cost of Sales

Cost of sales for the three months ended April 1, 2022 was $121,038 compared to
$112,902 for the three months ended April 2, 2021. The increase year over year
was driven primarily by increases in costs, specifically increased materials
costs and increased inbound freight costs, as the Company continues to manage
disruptions in its supply chain to ensure the availability of necessary
components, parts and other raw materials across our segments to try to meet
sales demand for our products.

For the six months ended April 1, 2022, cost of sales was $213,931 compared to
$203,539 in the same period of the prior year. The increase year over year was
primarily driven by increased costs in the current year versus the prior year as
described above.

Gross Profit Margin

For the three months ended April 1, 2022, gross profit as a percentage of net
sales was 36.2% compared to 45.2% in the three month period ended April 2, 2021.
While the Company has implemented price increases across product lines, they
were not enough to offset the negative gross profit impact of cost increases
noted above as well as reduced overhead absorption.

For the six months ended April 1, 2022, gross profit as a percentage of net
sales was 37.7% compared to 45.3% in the prior six month period. As noted above,
the Company has implemented price increases across product lines, but they have
not been significant enough to offset the negative gross profit impact of cost
increases and reduced overhead absorption noted above.

Operating Expenses

Operating expenses were $53,156 for the three months ended April 1, 2022,
compared to $57,218 for the three months ended April 2, 2021. The decrease of
$4,062 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 compensation plan assets
resulted in approximately $3,300 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 $100,027 for the six months ended April 2, 2021,
compared to $108,691 for the six months ended April 2, 2021. The decrease of
$8,664 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 $4,700 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 three month period ended
April 1, 2022 was $15,429, compared to an operating profit of $36,036 in the
second 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 six months ended April 1, 2022
was $29,189, compared to an operating profit of $59,593 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.
– 24 –
——————————————————————————–

Index JOHNSON OUTDOORS INC.

Interest

Interest expense was $49 and $35 for the three months ended April 1, 2022 and
April 2, 2021, respectively. Interest expense was $87 for the six months ended
April 1, 2022 compared to $67 for the six months ended April 2, 2021.

Interest income for the three month periods ended April 1, 2022 and April 2,
2021 was $102 and $80, respectively. Interest income was $195 for the six months
ended April 1, 2022 compared to $162 for the six months ended April 2, 2021.

Other Expense (Income), net

Other expense was $2,272 for the three months ended April 1, 2022 compared to
other income of $1,229 in the prior year period. Net investment losses on the
assets related to the Company’s non-qualified deferred compensation plan were
$2,046 in the three month period ended April 1, 2022 compared to net investment
gains and earnings of $1,257 in the three month period ended April 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 three months ended April 1, 2022,
foreign currency exchange losses were $146 compared to gains of $217 for the
three months ended April 2, 2021.

For the six months ended April 1, 2022, other expense was $1,498 compared to
other income of $3,633 in the six months ended April 2, 2021. Net investment
losses on the assets related to the Company’s non-qualified deferred
compensation plan in the six months ended April 1, 2022 were $702, compared to
net investment gains and earnings of $3,994 in the six months ended April 2,
2021. Foreign currency exchange losses were $513 for the six months ended
April 1, 2022, compared to gains of $121 for the six months ended April 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 six month periods ended April 1, 2022 were
25.1% and 25.3%, respectively, compared to 25.4% and 24.7% in the corresponding
periods of the prior year. A key factor impacting the effective tax rate for the
six months ended April 2, 2021 was the favorable impact from an intra-entity
transfer of assets other than inventory reported in the prior year period.

Net Income

Net income for the three months ended April 1, 2022 was $9,900, or $0.97 per
diluted common class A and B share, compared to net income of $27,834, or $2.74
per diluted common class A and B share, for the second quarter of the prior
fiscal year.

Net income for the six months ended April 1, 2022 was $20,756, or $2.04 per
diluted common class A and B share, compared to net income of $47,681, or $4.70
per diluted common class A and B share, for the six months ended April 2, 2021.

Liquidity and Financial Condition

Cash and cash equivalents totaled $113,186 as of April 1, 2022, compared to cash
and cash equivalents of $186,921 as of April 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 April 1, 2022 and April 2, 2021. The Company’s total debt
balance was $0 as of each of April 1, 2022 and April 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 $119,517 as of
April 1, 2022, a decrease of $10,622 compared to $130,139 as of April 2, 2021.
The decrease is consistent with decreased sales volumes year over year.
Inventories were $235,220 as of April 1, 2022, an increase of $110,682, compared
to $124,538 as of April 2, 2021. As noted above, the increase in our inventory
balances over the prior year period is due to increased raw material and other
component purchases, at higher costs, in an effort to meet increased demand for
products in the current year period. Accounts payable were $56,720 at April 1,
2022 compared to $50,609 as of April 2, 2021, which increase corresponded with
the increase in inventory balances between periods.

– 25 –
——————————————————————————–
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:

Six months ended
April 1, April 2,
(thousands) 2022 2021
Cash used for:
Operating activities $ (104,648) $ (11,955)
Investing activities (15,722) (9,822)
Financing activities (6,528) (4,690)

Effect of foreign currency rate changes on cash (364) 951
Decrease in cash and cash equivalents

$ (127,262) $ (25,516)

Operating Activities

Cash used for operations totaled $104,648 for the six months ended April 1, 2022
compared to $11,955 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 the Company’s decision to build and procure
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
increased use of cash between periods. Depreciation and amortization charges
were $6,914 for the six month period ended April 1, 2022 compared to $6,751 for
the corresponding period of the prior year.

Investing Activities

Cash used for investing activities totaled $15,722 for the six months ended
April 1, 2022 compared to $9,822 for the corresponding period of the prior
fiscal year. Cash usage for capital expenditures totaled $15,724 for the
current year six month period and $9,828 for the prior year period. The
increase in capital expenditures in the current year period is primarily related
to the expansion of the Fishing facility 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 $6,528 for the six months ended
April 1, 2022 compared to $4,690 for the six month period ended April 2, 2021
and represents the payment of dividends and purchase of treasury stock. The
Company had no debt during either quarter ended April 1, 2022 and April 2, 2021.
See Note 11 “Indebtedness” to the accompanying Condensed Consolidated Financial
Statements for additional information on our credit facilities.

As of April 1, 2022 the Company held approximately $52,895 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 April 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 $181 and $181 as of April 1, 2022 and April 2,
2021, respectively.

The Company anticipates making contributions of $46 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
– 26 –
——————————————————————————–
Index JOHNSON OUTDOORS INC.

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 six months ended April 1, 2022.

© Edgar Online, source Glimpses