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

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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 July 1, 2022 and July 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
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•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
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)

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The COVID-19 pandemic drove consumer desire to engage in socially distant and
safe activities outdoors. As a result, increased participation in fishing,
camping, watercraft recreation also increased demand for our products across
Company segments beginning in fiscal 2020, and continuing into the first three
quarters of fiscal 2022. As global travel restrictions also eased, we
experienced increased participation and resulting increased product demand in
the Diving segment beginning in fiscal 2021 and continuing into the first three
quarters of fiscal 2022.

In addition to this increase in demand for Company products, COVID-19 and the
resulting macroeconomic dynamics have also caused widely-documented supply chain
and logistics disruptions across industries. Specifically, the adverse supply
chain and logistics constraints and disruptions have impacted the timing,
sourcing, availability and cost of certain raw materials and components that are
necessary to manufacture our outdoor recreation products, especially in our
fishing segment due to the electronic components used in those products. Because
certain electronic components that are necessary for manufacturing our higher
volume products in that segment have been the most impacted by the supply chain
and logistics disruptions, there has been limited availability of those
materials and components, as well as increased pricing on such components. The
Company has attempted to mitigate these disruptions by purchasing significantly
higher levels of certain raw material and component inventory as they have been
available, in many cases at higher price points than what was historically paid,
to enable the Company to complete finished product orders as soon as the missing
raw material and component inventory items become available. Nonetheless,
continuing shortages have impacted the fishing segment’s ability to complete
products for shipping, which has ultimately resulted in decreased sales volumes
in the fishing segment over the same periods in the prior year, despite
continued strong demand for the products, as evidenced by outstanding orders.

Additionally, the Company’s 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 three fiscal quarters of 2022. Though the Company continues to
believe the inventory that it has built and which exists on its balance sheet is
useable and saleable in the ordinary course of business, it continues to monitor
the current reserve balances for obsolete and excess inventory. However, any
changes in consumer demand for the Company’s outdoor recreation products,
changes in economic conditions, or changes in customer inventory levels or
competitive conditions could have a favorable or unfavorable effect on required
reserve balances in the future.

Because the Company expects that these same supply chain and logistics
disruptions will continue through the end of fiscal 2022, the Company remains
focused on evaluating and pursuing additional options (beyond building
inventory) to meet the continued strong 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 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 $203,819 for the third quarter of fiscal 2022 decreased $9,749, or
5%, from the same period in the prior year. While consumer and customer demand
for the Company’s products remains solid as evidenced by outstanding order
volumes, sales volumes have been negatively impacted by product availability and
supply chain disruptions, particularly in Fishing, the Company’s largest
segment, as described above. This sales volume decrease and the lower gross
margins resulting from higher costs of sales were the primary drivers of the
$14,300 decrease in operating profit over 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.
Due to the timing of the COVID-19 outbreak, the Company’s traditional seasonal
sales pacing, where our heaviest sales volumes typically occurred during our
second and third fiscal quarters, shifted during fiscal 2020. See “Coronavirus
(COVID-19)” above for additional information regarding the impact of COVID-19.

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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

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
July 1, 2022 July 2, 2021 July 1, 2022 July 2, 2021
Net sales:
Fishing $ 136,565 $ 155,348 $ 374,244 $ 442,363
Camping 23,479 17,757 56,780 44,195
Watercraft Recreation 21,872 19,873 59,481 50,094
Diving 22,201 20,680 56,886 48,981
Other / Eliminations (298) (90) (425) (242)
Total $ 203,819 $ 213,568 $ 546,966 $ 585,391
Operating profit (loss):
Fishing $ 16,553 $ 39,390 $ 44,166 $ 107,553
Camping 4,998 4,305 12,867 10,075
Watercraft Recreation 2,893 3,446 7,588 7,329
Diving 2,412 1,978 4,074 384
Other / Eliminations (3,057) (11,020) (15,707) (27,649)
Total $ 23,799 $ 38,099 $ 52,988 $ 97,692

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 Third months ended July 1, 2022 were $203,819, a
decrease of $9,749, or 5%, compared to $213,568 for the Third months ended
July 2, 2021. Foreign currency translation had an unfavorable impact of less
than 1% on current year third quarter net sales compared to the prior year’s
third quarter net sales.

Net sales for the Third months ended July 1, 2022 for the Fishing business were
$136,565, a decrease of $18,783, or 12%, from $155,348 during the third fiscal
quarter of the prior year. While customer and consumer demand remains solid, the
decrease in Fishing sales was driven by significant supply chain disruptions and
the resulting unavailability of certain necessary components (especially as it
relates to electronic components) experienced in the current year quarter, which
impacted the ability to complete product build and fill customer orders.
Specifically, due to the technical and electronic nature of the product
categories, the fishing segment has been the most susceptible to the previously
discussed supply chain issues, as discussed in “Coronavirus (COVID-19)” above.

Net sales for the Camping business were $23,479 for the third quarter of the
current fiscal year, an increase of $5,722, or 32%, from the prior year net
sales during the same period of $17,757 due to increased sales of Jetboil and
Eureka! consumer camping products. These higher levels of sales over the prior
year period were due to continued strong participation in outdoor recreation
activities.

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Net sales for the third quarter of fiscal 2022 for the Watercraft Recreation
business were $21,872, an increase of $1,999, or 10%, compared to $19,873 in the
prior year same period. Continued strong demand for the segment’s Sportsman line
and successful pedal product offerings drove the increase over the prior year
quarter.

Net sales for Diving, our most global business, for the third quarter of fiscal
2022 were $22,201, an increase of $1,521 or 7% versus $20,680 for the Third
months ended July 2, 2021. As several regions around the world have re-opened,
sales volumes have increased along with the increase in tourism, partially
offset by an unfavorable foreign currency translation impact on sales in this
segment of approximately 5% versus the prior year quarter.

For the nine months ended July 1, 2022, consolidated net sales of $546,966
decreased $38,425 or 7% compared to $585,391 for the nine months ended July 2,
2021. Foreign currency translation had an unfavorable impact of less than 1% on
net sales of the current year to date period versus the prior year to date
period.

Net sales for the nine months ended July 1, 2022 for the Fishing business were
$374,244, a decrease of $68,119, or 15% from $442,363 during the same period of
the prior year. The decrease over the prior year to date period was driven
mainly by the previously discussed logistics and supply chain disruptions which
adversely impacted our ability to satisfy customer demand for product orders.

Net sales for the Camping business were $56,780 for the nine months ended
July 1, 2022, an increase of $12,585, or 28%, from the prior year net sales
during the same period of $44,195. 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 nine months ended July 1, 2022 for the Watercraft Recreation
business were $59,481, an increase of $9,387, or 19%, compared to $50,094 in the
prior year same period. Increased demand as a result of increased participation
in watercraft recreation drove the overall increase over the prior year to date
period.

Diving net sales were $56,886 for the nine months ended July 1, 2022 versus
$48,981 for the nine months ended July 2, 2021, an increase of $7,905, or 16%.
The sales increase between periods was largely due to increased demand for our
products as the global tourism industry has started to recover following the
removal of many travel restrictions imposed in the prior year as a result of the
COVID-19 pandemic. The impact of increased sales volumes was offset in part by
the unfavorable effect of foreign currency translation of approximately 4%
versus the prior year to date period.

Cost of Sales

Despite the decrease in sales between quarters noted above, cost of sales for
the Third months ended July 1, 2022 of $130,310 increased $14,253 compared to
$116,057 for the Third months ended July 2, 2021. The increase year over year
was driven primarily by significant increases in materials costs. The Company
continues to manage disruptions in its supply chain to ensure the availability
of necessary components, parts and other raw materials, in some cases at
significantly higher price points than what was historically paid, to try to
meet sales demand for our products across our segments.

For the nine months ended July 1, 2022, cost of sales was $344,241 compared to
$319,596 in the same period of the prior year. The increase year over year was
primarily driven by increased material and inbound freight costs in the current
year versus the prior year.

Gross Profit Margin

For the Third months ended July 1, 2022, gross profit as a percentage of net
sales was 36.1% compared to 45.7% in the Third month period ended July 2, 2021.
While the Company has implemented price increases across product lines, these
actions were not enough to offset the negative gross profit impact of raw
material and component cost increases noted above as well as reduced overhead
absorption.

For the nine months ended July 1, 2022, gross profit as a percentage of net
sales was 37.1% compared to 45.4% in the prior nine month period. As noted
above, the Company has implemented price increases across product lines, but
they have not outweighed the negative gross profit impact of cost increases and
reduced overhead absorption noted above.

Operating Expenses

Operating expenses were $49,710 for the Third months ended July 1, 2022,
compared to $59,412 for the Third months ended July 2, 2021. The decrease of
$9,702 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

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compensation plan assets resulted in approximately $5,300 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 $149,737 for the nine months ended April 2, 2021,
compared to $168,103 for the nine months ended July 2, 2021. The decrease of
$18,366 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 $10,000 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 Third month period ended
July 1, 2022 was $23,799, compared to an operating profit of $38,099 in the
third 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 nine months ended July 1, 2022
was $52,988, compared to an operating profit of $97,692 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.

Interest

Interest expense was $30 and $35 for the Third months ended July 1, 2022 and
July 2, 2021, respectively. Interest expense was $117 for the nine months ended
July 1, 2022 compared to $102 for the nine months ended July 2, 2021.

Interest income for the Third month periods ended July 1, 2022 and July 2, 2021
was $144 and $76, respectively. Interest income was $339 for the nine months
ended July 1, 2022 compared to $238 for the nine months ended July 2, 2021.

Other Expense (Income), net

Other expense was $4,669 for the Third months ended July 1, 2022 compared to
other income of $934 in the prior year period. Net investment losses on the
assets related to the Company’s non-qualified deferred compensation plan were
$3,741 in the Third month period ended July 1, 2022 compared to net investment
gains and earnings of $1,550 in the Third month period ended July 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 Third months ended July 1, 2022,
foreign currency exchange losses were $807 compared to $220 for the Third months
ended July 2, 2021.

For the nine months ended July 1, 2022, other expense was $6,167 compared to
other income of $4,567 in the nine months ended July 2, 2021. Net investment
losses on the assets related to the Company’s non-qualified deferred
compensation plan in the nine months ended July 1, 2022 were $4,443, compared to
net investment gains and earnings of $5,554 in the nine months ended July 2,
2021. Foreign currency exchange losses were $1,320 for the nine months ended
July 1, 2022, compared to $99 for the nine months ended July 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 nine month periods ended July 1, 2022 were
26.8% and 25.9%, respectively, compared to 26.4% and 25.3% in the corresponding
periods of the prior year.

Net Income

Net income for the three months ended July 1, 2022 was $14,082, or $1.38 per
diluted common class A and B share, compared to net income of $28,774, or $2.83
per diluted common class A and B share, for the third quarter of the prior
fiscal year.

Net income for the nine months ended July 1, 2022 was $34,838, or $3.42 per
diluted common class A and B share, compared to net income of $76,455, or $7.53
per diluted common class A and B share, for the nine months ended July 2, 2021.

Liquidity and Financial Condition

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Cash and cash equivalents totaled $117,567 as of July 1, 2022, compared to cash
and cash equivalents of $249,016 as of July 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 July 1, 2022 and July 2, 2021. The Company’s total debt
balance was $0 as of each of July 1, 2022 and July 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 $103,244 as of
July 1, 2022, an increase of $8,494 compared to $94,750 as of July 2, 2021. The
increase is consistent with increased sales volumes in three of the operating
segments year over year. Receivables balances in the Fishing segment remained
consistent with the prior year. Inventories were $250,956 as of July 1, 2022, an
increase of $120,214, compared to $130,742 as of July 2, 2021. As noted above,
the increase in our inventory balances over the prior year period is primarily
due to increased raw material and other component purchases, in many instances
at higher costs, in an effort to meet increased demand for products in the
current year period. Accounts payable were $50,780 at July 1, 2022 compared to
$54,991 as of July 2, 2021.

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
July 1, July 2,
(thousands) 2022 2021
Cash (used for) provided by:
Operating activities $ (86,413) $ 57,611
Investing activities (25,150) (15,468)
Financing activities (9,214) (6,792)

Effect of foreign currency rate changes on cash (2,104) 1,228
(Decrease) increase in cash and cash equivalents $ (122,881) $ 36,579

Operating Activities

Cash used for operations totaled $86,413 for the nine months ended July 1, 2022
compared to cash provided by operations of $57,611 during the corresponding
period of the prior fiscal year. The increase in cash used for operations over
the prior year nine month period was due primarily to the Company’s decision to
build and procure certain raw material and component inventory in its attempt to
mitigate against shortages in meeting product demand. Lower net income in the
current year to date period also contributed to the change between periods.
Depreciation and amortization charges were $10,434 for the nine month period
ended July 1, 2022 compared to $10,015 for the corresponding period of the prior
year.

Investing Activities

Cash used for investing activities totaled $25,150 for the nine months ended
July 1, 2022 compared to $15,468 for the corresponding period of the prior
fiscal year. Cash usage for capital expenditures totaled $25,162 for the
current year nine month period and $15,481 for the prior year period. The
increase in capital expenditures in the current year period is primarily related
to the expansion of Fishing facilities 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 $9,214 for the nine months ended
July 1, 2022 compared to $6,792 for the nine month period ended July 2, 2021 and
represents the payment of dividends and purchase of treasury stock. The Company
had no debt during either quarter ended July 1, 2022 and July 2, 2021. See Note
11 “Indebtedness” to the accompanying Condensed Consolidated Financial
Statements for additional information on our credit facilities.

As of July 1, 2022 the Company held approximately $52,208 of cash and cash
equivalents in bank accounts in foreign taxing jurisdictions.

Contractual Obligations and Off Balance Sheet Arrangements

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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 July 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 $173 and $181 as of July 1, 2022 and July 2,
2021, respectively.

The Company anticipates making contributions of $22 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 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 nine months ended July 1, 2022.

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