JOHNSON OUTDOORS INC. Unless otherwise stated, all monetary amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations, other than per share amounts, are stated in thousands.
Executive Overview
The Company designs, manufactures and markets high quality recreational products for the outdoor enthusiast. Through a combination of innovative products, strong marketing, a talented and passionate workforce and efficient distribution, the Company seeks to set itself apart from the competition in its markets. Its subsidiaries operate as a network that promotes innovation and leverages best practices and synergies, following the strategic vision set by executive management and approved by the Company's Board of Directors.
Coronavirus (COVID-19)
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Table of Contents The COVID-19 pandemic drove consumer desire to engage in socially distant and safe activities outdoors. As a result, increased participation in Fishing, Camping and Watercraft Recreation also increased demand for our products across Company segments beginning in fiscal 2020 and continuing throughout 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 through 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 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 most impacted by the supply chain and logistics disruptions, there has been limited availability of those materials and components, as well as increased pricing and inflationary pressures on such components when they have become available, all of which impacted our margins during fiscal 2022. 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, shortages throughout fiscal 2022 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 prior year, despite continued demand for our Fishing 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 fiscal 2022. Though the Company continues to believe the inventory that it has built and which exists on its balance sheet is useable and salable 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 supply chain disruptions, as well as inflationary pricing conditions for raw materials and components necessary to manufacture product, will continue into fiscal 2023, the Company remains focused on evaluating and pursuing additional options (beyond building inventory) to meet the demand for its products. During fiscal 2023 the Company expects to closely monitor customer demand and proactively manage its higher than normal inventory levels. Nonetheless, these supply chain and logistics disruptions and inflationary pricing conditions remain fluid and will likely adversely impact the cost of goods sold for future sales of product.
Highlights
The Company's fiscal 2022 and 2021 each comprised 52 weeks, whereas the fiscal
year ended
Results of Operations
Summary consolidated financial results from continuing operations for the fiscal years presented were as follows:
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(thousands, except per share data) 2022 2021 2020 Net sales$ 743,355 $ 751,651 $ 594,209 Gross profit 271,332 334,125 264,993 Operating expenses 205,022 222,842 193,923 Operating profit 66,310 111,283 71,070 Interest income, net (654) (221) (1,270) Other income, net 8,076 (1,418) (1,362) Income tax expense 14,397 29,541 18,469 Net income 44,491 83,381 55,233 The Company's internal and external sales and operating profit (loss) by business segment for each of the three most recent completed fiscal years were as follows: 2022 2021 2020 Net sales: Fishing$ 526,582 $ 553,000 $ 449,878 Camping 70,355 62,921 41,592 Watercraft Recreation 67,940 66,603 41,857 Diving 78,874 69,447 60,873 Other / Eliminations (396) (320) 9$ 743,355 $ 751,651 $ 594,209 2022 2021 2020 Operating profit (loss): Fishing$ 65,433 $ 122,490 $ 95,884 Camping 13,415 14,025 4,406 Watercraft Recreation 6,173 9,173 (329) Diving 4,705 1,530 (2,576) Other / Eliminations (23,416) (35,935) (26,315)$ 66,310 $ 111,283 $ 71,070
See Note 13 to the Consolidated Financial Statements included elsewhere in this report for the definition of segment net sales and operating profit.
Fiscal 2022 vs. Fiscal 2021
Net sales in fiscal 2022 decreased by 1% to
Net sales for the Fishing business decreased by
Camping net sales increased
Net sales in the Watercraft Recreation business increased
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Diving net sales increased
Cost of Sales
Cost of sales was
Gross Profit
Gross profit of
Gross profit in the Fishing business decreased by
Camping gross profit increased by
Gross profit in the Watercraft Recreation segment decreased by
The
Operating Expenses
Operating expenses decreased from the prior year by
Operating expenses for the Fishing segment decreased by
Camping operating expenses increased by
In the Watercraft Recreation segment, operating expenses increased
Operating expenses for the Diving business increased by
The Company's fiscal 2022 general corporate expenses of
Operating Results
The Company's operating profit was
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expenses. Operating profit for the Diving business increased by
Other Income and Expenses
Interest expense of
Pretax Income and Income Taxes
The Company realized pretax income of
Net Income
The Company recognized net income of
Fiscal 2021 vs. Fiscal 2020
Net sales in 2021 increased by 26% to
Net sales for the Fishing business increased by
Camping net sales increased
Net sales in the Watercraft Recreation business increased
Diving net sales increased
Cost of Sales
Cost of sales was
Gross Profit
Gross profit of
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Gross profit in the Fishing business in fiscal 2021 increased by
Camping gross profit increased by
Gross profit in the Watercraft Recreation segment increased by
The
Operating Expenses
Operating expenses increased in fiscal 2021 from fiscal 2020 by
Operating expenses for the Fishing segment increased by
Camping operating expenses increased by
In the Watercraft Recreation segment, operating expenses increased
Operating expenses for the Diving business increased by
The Company's 2021 general corporate expenses of
Operating Results
The Company's operating profit was
Other Income and Expenses
Interest expense in fiscal 2021 of
Pretax Income and Income Taxes
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Net Income
The Company recognized net income of
Financial Condition, Liquidity and Capital Resources
The Company believes its existing balances of cash and cash equivalents will be sufficient to satisfy its working capital needs, capital asset purchase requirements, outstanding commitments and other liquidity requirements associated with its existing operations over the next twelve months. The Company currently anticipates the cash used for future dividends will come from its current cash and cash generated from ongoing operating activities.
The Company considers all short-term investments in interest-bearing bank accounts, and all securities and other instruments with an original maturity of three months or less, to be equivalent to cash. Short-term investments in prior years consisted of certificates of deposit, with original maturities greater than three months but less than one year, with the primary objective of minimizing the potential risk of principal loss. The Company's investment policy generally requires securities to be investment grade.
The Company's cash flows from operating, investing and financing activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized in the following table:
Year Ended
September 30 October 1 October 2
(thousands) 2022 2021 2020
Cash (used for) provided by :
Operating activities $ (62,144) $ 58,318 $ 61,493
Investing activities (31,678) (21,381) (15,587)
Financing activities (12,233) (9,033) (7,107)
Effect of foreign currency rate changes on cash (4,590) 107 1,256
(Decrease) increase in cash and cash equivalents
Operating Activities
The following table sets forth the Company's working capital position at the end of each of the years shown:
September 30 October 1
(thousands, except share data) 2022 2021
Current assets $ 480,316 $ 491,264
Current liabilities 114,713 137,570
Working capital $ 365,603 $ 353,694
Current ratio 4.2:1 3.6:1
Cash flows used for operations in fiscal 2022 totaled
Depreciation and amortization charges were
Investing Activities
Cash flows used for investing activities were
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Financing Activities
Cash flows used for financing activities totaled
Contractual Obligations and Off Balance Sheet Arrangements
The Company has contractual obligations and commitments to make future payments
under its 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 year ended
The Company utilizes letters of credit primarily as security for the payment of
future claims under its workers' compensation insurance. Letters of credit
outstanding at
The Company has no other off-balance sheet arrangements.
Market Risk Management
Coronavirus outbreak
As disclosed in our prior filings with the
Foreign Exchange Risk
The Company has significant foreign operations, for which the functional
currencies are denominated primarily in euros, Swiss francs,
Interest Rate Risk
The Company operates in a seasonal business and experiences significant fluctuations in operating cash flow as working capital needs increase in advance of the Company's primary selling and cash generation season, and decline as accounts receivable are collected and cash is accumulated.
Commodities
Certain components used in the Company's products are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancellable supply contracts. Primary commodity price exposures include costs associated with metals, resins and packaging materials.
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Impact of Inflation
The Company anticipates that changing costs of basic raw materials (including due to inflationary conditions in the economy) may impact future operating costs and, accordingly, the prices of its products. The Company is involved in continuing programs to mitigate the impact of cost increases through changes in product design and identification of sourcing and manufacturing efficiencies. Price increases and, in certain situations, price decreases are implemented for individual products, when appropriate.
The Company's results of operations and financial condition are presented based on historical cost.
Critical Accounting Estimates
The Company's management discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Management has discussed these policies with the Audit Committee of the Company's Board of Directors.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are estimated by the individual operating companies based on estimates of losses related to customer accounts receivable balances. Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances.
Inventories
The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management's judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory reserves are estimated by the individual operating companies using standard quantitative measures based on criteria established by the Company. The Company also considers current forecast plans, as well as market and industry conditions in establishing reserve levels. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances.
Deferred Taxes
The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.
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In assessing the recoverability of the Company's goodwill, the Company estimates the fair value of the businesses to which the goodwill relates. Fair value is estimated using a discounted cash flow analysis. If the fair value of a reporting unit exceeds its net book value, no impairment exists. When fair value is less than the carrying value of the net assets and related goodwill, an impairment charge is recognized based on the excess of carrying amount over its fair value. The Company did not recognize any goodwill impairment charges in 2022, 2021 or 2020.
The discounted cash flow analysis used to estimate fair value requires a number of key estimates and assumptions. The Company estimates the future cash flows of the reporting units based on historical and forecasted revenues and operating costs and applies a discount rate to the estimated future cash flows for purposes of the valuation. This discount rate is based on the estimated weighted average cost of capital, which includes certain assumptions made by management such as market capital structure, market betas, the risk-free rate of return and the estimated costs of borrowing. Changes in these key estimates and assumptions, or in other assumptions used in this process, could materially affect our impairment analysis in a given year.
In assessing the recoverability of the Company's other indefinite lived intangible assets, the Company estimates the fair value of the various intangible assets. The fair value of trademarks and patents is estimated using the relief from royalty method. If the fair value of an intangible asset exceeds its net book value, no impairment exists. When fair value is less than the carrying value of the intangible asset, an impairment loss is recognized for the amount of the difference.
A number of factors, many of which the Company has no ability to control, could affect its financial condition, operating results and business prospects and could cause actual results to differ from the estimates and assumptions that the Company uses in preparing its financial statements. These factors include: a prolonged global economic crisis, a significant decrease in demand for the Company's products, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator and successful efforts by the Company's competitors to gain market share.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances, such as unplanned negative cash flow indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future undiscounted cash flows expected to be generated by the asset group. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Application of alternative assumptions, such as changes in the estimate of future cash flows, could produce significantly different results. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.
Warranties
The Company accrues a warranty reserve for estimated costs to provide warranty services. Warranty reserves are estimated using standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations.
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