JOHNSON OUTDOORS INC - Quarter Report: 2017 December (Form 10-Q)

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JOHNSON OUTDOORS INC.

 

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JOHNSON OUTDOORS INC.

 

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JOHNSON OUTDOORS INC.

 

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JOHNSON OUTDOORS INC.

 

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JOHNSON OUTDOORS INC.

 

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JOHNSON OUTDOORS INC.

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JOHNSON OUTDOORS INC.

 

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JOHNSON OUTDOORS INC.

 

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JOHNSON OUTDOORS INC.

 

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JOHNSON OUTDOORS INC.

 

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JOHNSON OUTDOORS INC.

 

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Level 1 - Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets or liabilities.

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Level 2 - Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments.

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Level 3 - Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

The carrying amounts of cash, cash equivalents, short term investments, accounts receivable, and accounts payable approximated their fair values at December 29, 2017, September 29, 2017 and December 30, 2016 due to the short term maturities of these instruments. When indicators of impairment are present, the Company may be required to value certain long-lived assets such as property, plant, and equipment, and other intangibles at their fair value.

Rabbi Trust Assets

Rabbi trust assets are classified as trading securities and are comprised of marketable debt and equity securities that are marked to fair value based on unadjusted quoted prices in active markets.  The rabbi trust assets are used to fund amounts the Company owes to certain officers and other employees under the Company’s non-qualified deferred compensation plan.  The mark to market adjustments are recorded in “Other (income) expense, net” in the accompanying Condensed Consolidated Statements of Operations.  The offsetting deferred compensation liability is also reported at fair value and is included in "Other liabilities" in the Company's Condensed Consolidated Balance Sheets. Changes in the liability are recorded in "Administrative management, finance and information systems" expense in the accompanying Condensed Consolidated Statements of Operations.

Goodwill and Other Intangible Assets

In assessing the recoverability of the Company’s goodwill and other indefinite lived intangible assets, the Company estimates the future discounted cash flows of the businesses to which such goodwill and intangibles relate.  When estimated future discounted cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any.  In determining estimated future cash flows, the Company makes assumptions regarding anticipated financial position, future earnings, and other factors to determine the fair value of the respective assets.  This calculation is highly sensitive to changes in key assumptions and could result in a future impairment charge.  The Company will continue to evaluate whether circumstances and events have changed to the extent that they require the Company to conduct an interim test of goodwill.  In particular, if the Company’s business units do not achieve short term revenue and gross margin goals, an interim impairment test may be triggered which could result in a goodwill and indefinite lived intangible asset impairment charge in future periods.

The following table summarizes the Company’s financial assets measured at fair value as of December 29, 2017:

The following table summarizes the Company’s financial assets measured at fair value as of September 29, 2017:

 

The following table summarizes the Company’s financial assets measured at fair value as of December 30, 2016:

The effect of changes in the fair value of financial instruments on the Condensed Consolidated Statements of Operations for the three month periods ended December 29, 2017 and December 30, 2016 was:

There were no assets or liabilities measured at fair value on a non-recurring basis in periods subsequent to their initial recognition for either of the three month periods ended December 29, 2017 or December 30, 2016.

14	NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which supersedes existing revenue recognition requirements and provides a new comprehensive revenue recognition model.  The underlying principle of the new standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for those goods or services.  The Company has developed a project plan for the implementation of the new standard including a review of all revenue streams in each business segment to identify potential differences in the performance obligations, timing, measurement or presentation that would result from applying the new standard from the Company's current accounting policies and practices.  The Company is still in the process of determining the impact on the timing of revenue recognition and the allocation of revenue to the Company's goods and services across each of the revenue streams and business segments. The provisions are effective for the Company in the first quarter of fiscal 2019 and permit adoption under either the full retrospective approach (recognizing effects of the amended guidance in each prior reporting period presented) or the modified retrospective approach (recognizing the cumulative effect of adoption as an adjustment to retained earnings at the date of initial application).  The Company expects to adopt this standard by applying the modified retrospective approach but is still evaluating its method of adoption and the impact of this standard on its consolidated results of operations and financial position.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this update will increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effect of this standard on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The ASU includes provisions intended to simplify the measurement of inventory and to more clearly articulate the requirements for the measurement and disclosure of inventory. Under such provisions, an entity should measure inventory within the scope of this amendment at the lower of cost or net realizable value.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company adopted this standard at the beginning of the first quarter of fiscal 2018. The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements.

 

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU includes, among other provisions, one that will require presentation of the service cost component of net benefit cost in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of a subtotal of income from operations.  This amendment is effective for annual periods beginning after December 15, 2017 and the interim periods within those annual periods.  The Company has elected to adopt this accounting standard at the beginning of the first quarter of fiscal 2018. See Note 5 "Pension Plans" of these Notes to Condensed Consolidated Financial Statements for information regarding the effect of this new accounting standard.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The Company early adopted this ASU in the fourth quarter of fiscal 2017 in conjunction with its annual impairment test. The amendments in this ASU are to be applied on a prospective basis.  The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements.

 

15	SEGMENTS OF BUSINESS

The Company conducts its worldwide operations through separate business segments, each of which represents major product lines. Operations are conducted in the United States and various foreign countries, primarily in Europe, Canada and the Pacific Basin.  During the three month period ended December 29, 2017, combined net sales to one customer of the Company's Fishing, Camping and Watercraft Recreation segments represented approximately $18,826 of the Company's consolidated revenues.  During December 30, 2016 there was no single customer that represented more than 10% of the Company’s total net sales.

Net sales and operating profit include both sales to customers, as reported in the Company’s accompanying Condensed Consolidated Statements of Operations, and interunit transfers, which are priced to recover cost plus an appropriate profit margin. Total assets represent assets that are used in the Company’s operations in each business segment at the end of the periods presented.

 

A summary of the Company’s operations by business segment is presented below:

		Three Months Ended
		December 29, 2017				December 30, 2016				September 29, 2017
Net sales:
Fishing:
Unaffiliated customers		$	88,845			$	67,050
Interunit transfers			62				21
Camping:
Unaffiliated customers			5,837				5,728
Interunit transfers			9				7
Watercraft Recreation:
Unaffiliated customers			4,349				6,208
Interunit transfers			8				9
Diving
Unaffiliated customers			17,433				14,703
Interunit transfers			5				190
Other / Corporate			115				40
Eliminations			(84	)			(227	)
Total		$	116,579			$	93,729
Operating profit (loss):
Fishing		$	14,065			$	7,193
Camping			(724	)			(772	)
Watercraft Recreation			(1,144	)			(798	)
Diving			(385	)			(1,061	)
Other / Corporate			(4,775	)			(4,090	)
		$	7,037			$	472
Total assets (end of period):
Fishing		$	161,135			$	151,978		$	128,706
Camping			29,082				27,096			32,652
Watercraft Recreation			21,562				23,270			20,222
Diving			59,189				58,566			58,190
Other / Corporate			84,165				55,557			113,889
		$	355,133			$	316,467		$	353,659

 

16	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in Accumulated Other Comprehensive Income (“AOCI”) by component, net of tax, for the three months ended December 29, 2017 were as follows:

		Foreign Currency Translation Adjustment				Unamortized Loss on Defined Benefit Pension Plans				Accumulated Other Comprehensive Income (Loss)
Balance at September 29, 2017		$	11,179			$	(6,186	)		$	4,993
Other comprehensive income before reclassifications			(276	)			—				(276	)
Amounts reclassified from accumulated other comprehensive income			—				183				183
Tax effects			—				(44	)			(44	)
Balance at December 29, 2017		$	10,903			$	(6,047	)		$	4,856

 

The changes in AOCI by component, net of tax, for the three months ended December 30, 2016 were as follows:

 

		Foreign Currency Translation Adjustment				Unamortized Loss on Defined Benefit Pension Plans				Accumulated Other Comprehensive Income (Loss)
Balance at September 30, 2016		$	10,525			$	(8,171	)		$	2,354
Other comprehensive loss before reclassifications			(3,747	)			—				(3,747	)
Amounts reclassified from accumulated other comprehensive income			—				142				142
Tax effects			—				(54	)			(54	)
Balance at December 30, 2016		$	6,778			$	(8,083	)		$	(1,305	)

 

The reclassifications out of AOCI for the three months ended December 29, 2017 were as follows:

					Statement of Operations Presentation
Unamortized loss on defined benefit pension plans
Amortization of loss		$	183		Cost of sales / Operating expense
Tax effects			(44	)	Income tax expense
Total reclassifications for the period		$	139

 

The reclassifications out of AOCI for the three months ended December 30, 2016 were as follows:

					Statement of Operations Presentation
Unamortized loss on defined benefit pension plans:
Amortization of loss		$	142		Cost of sales / Operating expense
Tax effects			(54	)	Income tax expense
Total reclassifications for the period		$	88

 

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 month periods ended December 29, 2017 and December 30, 2016. All monetary amounts, other than share and per share amounts, are stated in thousands.

Our MD&A is presented in the following sections:

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Forward Looking Statements

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Trademarks

 

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Overview

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Results of Operations

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Liquidity and Financial Condition

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Contractual Obligations and Off Balance Sheet Arrangements

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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, 2017 which was filed with the Securities and Exchange Commission on December 8, 2017.

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 8, 2017 and the following:  changes in economic conditions, consumer confidence levels and discretionary spending patterns in key markets; 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; movements in foreign currencies, interest rates or commodity costs; fluctuations in the prices of raw materials or the availability of raw materials 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 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. 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.

Net sales of $116,579 for the first quarter of fiscal 2018 increased $22,850, or 24%, from the same period in the prior year reflecting record sales volumes in the Fishing business.  This sales volume increase was the primary driver of a $6,565 improvement in operating income over the prior year quarter.   Tax expense had a significant impact on net income in the current quarter as the Company recognized provisional expenses related to the enactment of the Tax Cuts and Jobs Act of 2017.

 

The Company’s business is seasonal in nature. The first fiscal quarter falls prior to 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.

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
		December 29, 2017				December 30, 2016
Net sales:
Fishing		$	88,907			$	67,071
Camping			5,846				5,735
Watercraft Recreation			4,357				6,217
Diving			17,438				14,893
Other / Eliminations			31				(187	)
Total		$	116,579			$	93,729
Operating profit (loss):
Fishing		$	14,065			$	7,193
Camping			(724	)			(772	)
Watercraft Recreation			(1,144	)			(798	)
Diving			(385	)			(1,061	)
Other / Eliminations			(4,775	)			(4,090	)
Total		$	7,037			$	472

 

See “Note 15 – Segments of Business” of the notes to the accompanying Condensed Consolidated Financial Statements for the definition of segment net sales and operating profit.

Consolidated net sales for the three months ended December 29, 2017 were $116,579 an increase of $22,850, or 24%, compared to $93,729 for the three months ended December 30, 2016.  Foreign currency translation had a favorable impact of 1% on current year first quarter sales compared to the prior year's first quarter.

 

Net sales for the three months ended December 29, 2017 for the Fishing business were $88,907, up $21,836, or 33%, from $67,071 during the first fiscal quarter of the prior year.  Sales of electric steer trolling motors, Ultrex trolling motors and large display HELIX series fish finders drove the growth over the prior year quarter.

Net sales for the Camping business were $5,846 for the first quarter of the current fiscal year, an increase of $111, or 2%, from the prior year net sales during the same period of $5,735.  Increased military tent sales during the current year quarter was the primary driver of the improvement.

Net sales for the first quarter of fiscal 2018 for the Watercraft Recreation business were $4,357, a decrease of $1,860, or 30%, compared to $6,217 in the prior year period due primarily to a weakened recreational kayak market.

Diving net sales were $17,438 for the three months ended December 29, 2017 versus $14,893 for the three months ended December 30, 2016, an increase of $2,545, or 17%.  The increase was driven by strong sales across all product segments due to successful new product introductions. Foreign currency translation impacted Diving’s first quarter sales favorably by 3.8% versus the prior year’s first fiscal quarter.

Cost of sales for the three months ended December 29, 2017 was $67,768 compared to $57,164 for the three months ended December 30, 2016.  The increase year over year was driven primarily by higher sales volume in the current period.

For the three months ended December 29, 2017, gross profit as a percentage of net sales was 41.9% compared to 39.0% in the three month period ended December 30, 2016.  Favorable product mix and overhead efficiencies driven by sales volume increases were the primary drivers of the increase year over year.

Operating expenses were $41,774 for the three months ended December 29, 2017 compared to $36,093 for the three months ended December 30, 2016.  The increase of $5,681 was primarily due to higher sales volume related expenses and increased costs associated with the Company's digital initiatives in the current year quarter.

Operating profit on a consolidated basis for the three month period ended December 29, 2017 was $7,037 compared to an operating profit of $472 in the first quarter of the prior fiscal year.   The improvement year over year was driven primarily by the increased sales volume between quarters and the other factors noted above.

For the three months ended December 29, 2017, interest expense was $72 compared to $486 in the three months ended December 30, 2016.  This decrease in interest expense was due to the decrease in interest bearing indebtedness for the current year period versus the prior fiscal year first quarter. Interest income for the three month periods ended December 29, 2017 and December 30, 2016 was $202  and $23, respectively. This increase was driven by interest earnings on short term investments and interest bearing cash in the first quarter of fiscal 2018 versus the corresponding period of fiscal 2017.

Other income was $1,157 for the three months ended December 29, 2017 compared to other expense of $54 in the prior year period.  For the three months ended December 29, 2017, foreign currency exchange gains were $394 compared to losses of $175 for the three months ended December 30, 2016.  Investment gains and earnings on the assets related to the Company’s non-qualified deferred compensation plan were $703 in the three month period ended December 29, 2017 compared to investment gains and earnings of $105 in the three month period ended December 30, 2016.

 

 

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 December 29, 2017 was 97.2% compared to 9113.3% in the corresponding period of the prior year.

The change in the Company’s effective tax rate for the three month period ended December 29, 2017 versus the prior year quarterly period was primarily due to the impact of a $6,433 provisional tax expense generated by the enactment of "An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018" (the "Tax Act") in the current period.  Additionally, in the prior year period, the tax rate was impacted by a foreign tax credit net tax benefit of roughly $4,200 generated by the repatriation of approximately $22,000 to the U.S. from foreign jurisdictions in that period.

The Tax Act, enacted on December 22, 2017, reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign-sourced earnings.  The impact from the permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective as of January 1, 2018.  When a U.S. federal tax rate change occurs during a fiscal year, taxpayers are required to compute a weighted daily average rate for the fiscal year of enactment and as a result the Company calculated a U.S. federal statutory income tax rate of 24.5% for the current fiscal year ending September 28, 2018.  The Company expects the U.S. federal statutory income tax rate to be 21% for fiscal years beginning after September 28, 2018.

At December 29, 2017, the Company has not completed its accounting for the tax effects of the Tax Act; however, within the calculation of the Company's annual effective tax rate, the Company has made a reasonable estimate of the one-time transition tax and effects on its existing deferred tax balances that may change as a result of future guidance, interpretation and rule-making from the Internal Revenue Service, the SEC and the FASB and/or various other taxing jurisdictions.  For example, the company anticipates that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.

Net income for the three months ended December 29, 2017 was $235, or $0.02 per diluted common class A and B share compared to net income of $4,056, or $0.40 per diluted common class A and B share, for the first quarter of the prior fiscal year.

Liquidity and Financial Condition

Cash and cash equivalents and short term investments totaled $78,319 as of December 29, 2017, compared to cash, net of debt, of $38,859 as of December 30, 2016.  The Company’s debt to total capitalization ratio was 0% as of December 29, 2017 and 6% as of December 30, 2016.  The Company’s total debt balance was $0 as of December 29, 2017 compared to $13,001 as of December 30, 2016.  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 $71,895 as of December 29, 2017, a decrease of $454 compared to $72,349 as of December 30, 2016.  Inventories, net of inventory reserves, were $90,861 as of December 29, 2017, an increase of $14,824, compared to $76,037 as of December 30, 2016.  Accounts payable were $37,893 at December 29, 2017 compared to $32,033 as of December 30, 2016.

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:

 

		Three Months Ended
(thousands)		December 29, 2017				December 30, 2016
Cash (used for) provided by:
Operating activities		$	(23,941	)		$	(34,326	)
Investing activities			34,945				(2,666	)
Financing activities			(1,721	)			4,077
Effect of foreign currency rate changes on cash			(87	)			(2,519	)
Increase (Decrease) in cash and cash equivalents		$	9,196			$	(35,434	)

 

 

Cash used for operations totaled $23,941 for the three months ended December 29, 2017 compared with cash used for operations of $34,326 during the corresponding period of the prior fiscal year.   The increase in profit before taxes and the non-cash tax expense impact of the enactment of the Tax Cuts and Jobs Act of 2017 was the primary driver of the decrease in cash used year over year.

Depreciation and amortization charges were $3,191 for the three month period ended December 29, 2017 compared to $3,123 for the corresponding period of the prior year.

Cash provided by investing activities totaled $34,945 for the three months ended December 29, 2017 compared to $2,666 of cash used for investing activities for the three months ended December 30, 2016.  The current year period reflects the sale of approximately $40,000 of short-term investments and the purchase of cash equivalents. Cash usage for capital expenditures totaled $6,454 for the current year quarter and $2,666 for the prior year.  The increase in expenditures in the current year period was primarily related to a planned global systems infrastructure upgrade. The Company’s recurring investments are made primarily for software development and tooling for new products and enhancements on existing products. Any additional expenditures in fiscal 2018 are expected to be funded by working capital.

Cash flows used for financing activities totaled $1,721 for the three months ended December 29, 2017 compared to cash flows provided by financing activities of $4,077 for the three month period ended December 30, 2016.  The year over year change was due primarily to net borrowings on the Company's revolving credit line offset in part by the repayment of term loans in the prior year period.

On October 24, 2016 the Company repaid its outstanding term loans with Ridgestone Bank totaling $7,068.  The early repayment of these loans resulted in payment of a 3% pre-payment penalty.  The Company’s term loans had a maturity date of September 29, 2029.   The interest rate in effect on the term loans was 5.50% at the date of repayment.

During the quarter ended December 29, 2017, the Company and certain of its subsidiaries entered into a new unsecured revolving credit facility with PNC Bank National Association and Associated Bank, N.A. ("the Lending Group").  This credit facility replaced the Company's previous revolving credit agreement dated September 16, 2013 and consists of an Amended and Restated Credit Agreement dated November 15, 2017 among the Company, certain of the Company’s subsidiaries, PNC Bank National Association, as lender and as administrative agent, and the other lender named therein (the “New Revolving Credit Agreement” or “New Revolver”).  The New Revolver has an expiration date of November 15, 2022 and provides for borrowing of up to an aggregate principal amount not to exceed $75,000 with a $50,000 accordion feature that gives the Company the option to increase the maximum financing availability (i.e., an aggregate borrowing amount of $125,000) subject to the conditions of the New Revolving Credit Agreement and subject to the approval of the lenders.  The New Revolving Credit Agreement restricts the Company's ability to incur additional debt and includes maximum leverage ratios and minimum interest coverage ratio covenants.

The interest rate on the New Revolver resets each quarter and is based on LIBOR plus an applicable margin.  The applicable margin on the New Revolver ranges from 1.00% to 1.75% and is dependent on the Company’s leverage ratio for the trailing twelve month period.  The interest rate on the Company's revolving credit agreement at December 29, 2017 and December 30, 2016 was approximately 2.5% and 2.0%, respectively.

As of December 29, 2017 the Company held approximately $36,069 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.  The following schedule details these significant contractual obligations existing at December 29, 2017.

 

		Total				Less than 1 year				2-3 years				4-5 years				After 5 years
Operating lease obligations		$	22,715			$	4,495			$	10,114			$	5,914			$	2,192
Open purchase orders			98,122				98,122				—				—				—
Contractually obligated interest payments			548				84				225				225				14
Total contractual obligations		$	121,385			$	102,701			$	10,339			$	6,139			$	2,206

 

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 $279 and $392 at December 29, 2017 and December 30, 2016, respectively.

The Company anticipates making contributions of $1,105 to its defined benefit pension plans during the remainder of fiscal 2018.

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, 2017 in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Critical Accounting Estimates.” There were no significant changes to the Company’s critical accounting policies and estimates during the three months ended December 29, 2017.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company’s exposure to market risk is limited to fluctuations in raw material commodity prices, interest rate fluctuations on borrowings under our secured credit facilities and foreign currency exchange rate risk associated with our foreign operations.  The Company does not utilize financial instruments for trading purposes.

Foreign Exchange Risk

The Company has significant foreign operations, for which the functional currencies are denominated primarily in euros, Swiss francs, Hong Kong dollars, Japanese yen and Canadian dollars. As the values of the currencies of the foreign countries in which the Company has operations increase or decrease relative to the U.S. dollar, the sales, expenses, profits, losses, assets and liabilities of the Company’s foreign operations, as reported in the Company’s consolidated financial statements, increase or decrease, accordingly. Approximately 15% of the Company’s revenues for the three month period ended December 29, 2017 were denominated in currencies other than the U.S. dollar. Approximately 7% were denominated in euros, approximately 5% in Canadian dollars and approximately 2% in Hong Kong dollars, with the remaining revenues denominated in various other foreign currencies. Changes in foreign currency exchange rates can cause unexpected financial losses or cash flow needs.  The Company may mitigate a portion of the fluctuations in certain foreign currencies through the use of foreign currency forward contracts.  Foreign currency forward contracts enable the Company to lock in the foreign currency exchange rate to be paid or received for a fixed amount of currency at a specified date in the future. The Company may use such foreign currency forward contracts to mitigate the risk associated with changes in foreign currency exchange rates on financial instruments and known commitments, including commitments for inventory purchases, denominated in foreign currencies. As of December 29, 2017 and December 30, 2016, the Company held no foreign currency forward contracts.

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 or debt is repaid.  The Company is subject to interest rate risk on its seasonal working capital needs when such needs are funded with short term floating rate debt.

 

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-cancelable supply contracts.  Primary commodity price exposures include costs associated with metals, resins and packaging materials.

Impact of Inflation

The Company anticipates that changing costs of basic raw materials 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.  The Company does not believe that inflation has significantly affected its results of operations.

Item 4.

Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective at reaching a level of reasonable assurance. It should be noted that in designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. The Company has designed its disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired control objectives.

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

In the normal course of business, the Company may be involved in various legal proceedings from time to time.  We do not believe we are currently involved in any claim or action the ultimate disposition of which would have a material adverse effect on our financial statements.

Item 1A.

Risk Factors

There have been no material changes to the risk factors disclosed in our Form 10-K as filed with the Securities and Exchange Commission on December 8, 2017 with the Securities and Exchange Commission.

Item 6.

Exhibits

See Exhibit Index to this Form 10-Q report.

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Exhibit Index to Quarterly Report on Form 10-Q

⁽¹⁾ This certification is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

 

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