JOHNSON OUTDOORS INC - Quarter Report: 2019 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 27, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission file number 0-16255

JOHNSON OUTDOORS INC.

(Exact name of Registrant as specified in its charter)

Wisconsin		39-1536083
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

555 Main Street, Racine, Wisconsin 53403

(Address of principal executive offices)

(262) 631-6600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Class A Common Stock, $.05 par value per share	JOUT	NASDAQ Global Select Market ^SM

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act: Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of January 24, 2020, 8,858,611 shares of Class A and 1,211,602 shares of Class B common stock of the Registrant were outstanding.

JOHNSON OUTDOORS INC.

Index			Page No.

PART I	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Condensed Consolidated Statements of Operations - Three months ended December 27, 2019 and December 28, 2018	1

		Condensed Consolidated Statements of Comprehensive Income - Three months ended December 27, 2019 and December 28, 2018	2

		Condensed Consolidated Balance Sheets - December 27, 2019, September 27, 2019 and December 28, 2018	3

		Condensed Consolidated Statements of Shareholders’ Equity - Three months ended December 27, 2019 and December 28, 2018	4

		Condensed Consolidated Statements of Cash Flows - Three months ended December 27, 2019 and December 28, 2018	5

		Notes to Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25

	Item 4.	Controls and Procedures	26

PART II	OTHER INFORMATION

	Item 1.	Legal Proceedings	26

	Item 1A.	Risk Factors	26

	Item 6.	Exhibits	26

		Signatures	27

		Exhibit Index	27

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JOHNSON OUTDOORS INC.

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended
(thousands, except per share data)	December 27, 2019			December 28, 2018
Net sales	$	128,054		$	104,440
Cost of sales		74,442			60,121
Gross profit		53,612			44,319
Operating expenses:
Marketing and selling		29,305			24,693
Administrative management, finance and information systems		11,975			8,387
Research and development		5,531			5,261
Total operating expenses		46,811			38,341
Operating profit		6,801			5,978
Interest income		(655	)		(540	)
Interest expense		35			37
Other (income) expense, net		(1,168	)		2,150
Profit before income taxes		8,589			4,331
Income tax expense		2,159			810
Net income	$	6,430		$	3,521

Weighted average common shares - Basic:
Class A		8,800			8,753
Class B		1,212			1,212
Participating securities		27			43
Weighted average common shares - Dilutive		10,039			10,008
Net income per common share - Basic:
Class A	$	0.65		$	0.36
Class B	$	0.59		$	0.32
Net income per common share - Diluted:
Class A	$	0.64		$	0.35
Class B	$	0.64		$	0.35

The accompanying notes are an integral part of the condensed consolidated financial statements.

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JOHNSON OUTDOORS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

	Three Months Ended
(thousands)	December 27, 2019		December 28, 2018
Net income	$	6,430	$	3,521
Other comprehensive income (loss):
Foreign currency translation:
Foreign currency translation		700		(1,700	)
Defined benefit pension plan:
Change in pension plans, net of tax of $21 and $33, respectively		61		105
Total other comprehensive income (loss)		761		(1,595	)
Total comprehensive income	$	7,191	$	1,926

The accompanying notes are an integral part of the condensed consolidated financial statements.

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JOHNSON OUTDOORS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(thousands, except share data)	December 27, 2019			September 27, 2019			December 28, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	138,257		$	172,382		$	72,076
Short term investments		—			—			32,138
Accounts receivable, net		78,249			44,508			55,558
Inventories		103,885			94,298			116,278
Other current assets		9,735			11,340			6,008
Total current assets		330,126			322,528			282,058
Property, plant and equipment, net of accumulated depreciation of $146,453, $143,028 and $133,958, respectively		59,629			59,499			56,650
Right of use assets		40,302			—			—
Deferred income taxes		11,456			11,449			11,678
Goodwill		11,193			11,186			11,164
Other intangible assets, net		11,128			11,374			12,047
Other assets		22,289			20,408			17,517
Total assets	$	486,123		$	436,444		$	391,114
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	35,384		$	30,392		$	41,820
Current lease liability		5,835			—			—
Accrued liabilities:
Salaries, wages and benefits		13,767			20,554			13,146
Accrued warranty		10,443			9,190			9,021
Income taxes payable		9,598			7,512			6,299
Accrued discounts and returns		8,146			7,503			7,508
Accrued customer programs		3,819			4,440			3,741
Other		8,269			8,275			7,559
Total current liabilities		95,261			87,866			89,094
Non-current lease liability		35,133			—			—
Deferred income taxes		1,657			1,638			1,672
Retirement benefits		1,001			942			1,913
Deferred compensation liability		21,009			19,092			16,015
Other liabilities		1,823			2,372			2,853
Total liabilities		155,884			111,910			111,547
Shareholders’ equity:
Common stock:
Class A shares issued and outstanding: 8,858,611, 8,834,169 and 8,825,790, respectively		443			443			442
Class B shares issued and outstanding: 1,211,602, 1,211,602 and 1,211,602, respectively		61			61			61
Capital in excess of par value		76,523			75,856			73,968
Retained earnings		253,114			248,377			204,965
Accumulated other comprehensive income		2,319			1,558			1,892
Treasury stock at cost, shares of Class A common stock: 36,354, 29,225 and 29,225, respectively		(2,221	)		(1,761	)		(1,761	)
Total shareholders’ equity		330,239			324,534			279,567
Total liabilities and shareholders’ equity	$	486,123		$	436,444		$	391,114

The accompanying notes are an integral part of the condensed consolidated financial statements.

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JOHNSON OUTDOORS INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)

Three Months Ended December 28, 2018
(thousands except for shares)	Shares			Common Stock		Capital in Excess of Par Value			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)
BALANCE AT SEPTEMBER 28, 2018		9,999,046		$	503	$	75,025		$	202,828		$	(2,646	)	$	3,487
Net income		—			—		—			3,521			—			—
Dividends declared		—			—		—			(1,384	)		—			—
Award of non-vested shares		48,236			—		(1,593	)		—			1,593			—
Stock-based compensation		—			—		536			—			—			—
Currency translation adjustment		—			—		—			—			—			(1,700	)
Change in pension plans, net of tax of $33		—			—		—			—			—			105
Purchase of treasury stock at cost		(9,890	)		—		—			—			(708	)		—
BALANCE AT DECEMBER 28, 2018		10,037,392			503		73,968			204,965			(1,761	)		1,892

Three Months Ended December 27, 2019
(thousands except for shares)	Shares			Common Stock		Capital in Excess of Par Value		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)
BALANCE AT SEPTEMBER 27, 2019		10,045,771		$	504	$	75,856	$	248,377		$	(1,761	)	$	1,558
Net income		—			—		—		6,430			—			—
Dividends declared		—			—		—		(1,693	)		—			—
Award of non-vested shares		31,571			—		—		—			—			—
Stock-based compensation		—			—		667		—			—			—
Currency translation adjustment		—			—		—		—			—			700
Change in pension plans, net of tax of $21		—			—		—		—			—			61
Purchase of treasury stock at cost		(7,129	)		—		—		—			(460	)		—
BALANCE AT DECEMBER 27, 2019		10,070,213			504		76,523		253,114			(2,221	)		2,319

The accompanying notes are an integral part of the condensed consolidated financial statements.

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JOHNSON OUTDOORS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended
(thousands)	December 27, 2019			December 28, 2018
CASH USED FOR OPERATING ACTIVITIES
Net income	$	6,430		$	3,521
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation		3,176			3,090
Amortization of intangible assets		256			259
Amortization of deferred financing costs		7			7
Stock based compensation		667			536
Loss on disposal of productive assets		—			25
Deferred income taxes		—			47
Change in operating assets and liabilities:
Accounts receivable, net		(33,616	)		(15,001	)
Inventories, net		(9,298	)		(27,930	)
Accounts payable and accrued liabilities		2,090			(3,298	)
Other current assets		1,619			(677	)
Other long-term liabilities		(412	)		179
Other, net		(7	)		47
		(29,088	)		(39,195	)
CASH USED FOR INVESTING ACTIVITIES
Purchase of short-term investments		—			(7,124	)
Proceeds from sale of short-term investments		—			3,700
Capital expenditures		(3,307	)		(4,081	)
		(3,307	)		(7,505	)
CASH USED FOR FINANCING ACTIVITIES
Dividends paid		(1,689	)		(1,384	)
Purchases of treasury stock		(460	)		(708	)
		(2,149	)		(2,092	)
Effect of foreign currency rate changes on cash		419			(1,009	)
Decrease in cash and cash equivalents		(34,125	)		(49,801	)
CASH AND CASH EQUIVALENTS
Beginning of period		172,382			121,877
End of period	$	138,257		$	72,076

Supplemental Disclosure:
Non-cash treasury stock activity	$	—		$	1,593
Cash paid for taxes		123			247
Cash paid for interest		30			31

The accompanying notes are an integral part of the condensed consolidated financial statements.

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JOHNSON OUTDOORS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1	BASIS OF PRESENTATION

The condensed consolidated financial statements included herein are unaudited. In the opinion of management, these statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Johnson Outdoors Inc. and subsidiaries (collectively, the “Company”) as of December 27, 2019 and December 28, 2018, and their results of operations for the three month periods then ended and cash flows for the three month periods then ended. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2019 which was filed with the Securities and Exchange Commission on December 6, 2019.

Due to seasonal variations and other factors, the results of operations for the three months ended December 27, 2019 are not necessarily indicative of the results to be expected for the Company’s full 2020 fiscal year. See “Seasonality” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein for additional information.

The Company considers all short-term investments in interest-bearing accounts and all securities and other instruments with an original maturity of three months or less, to be equivalent to cash. Cash equivalents are stated at cost which approximates market value. Short-term investments consist of certificates of deposit with original maturities greater than three months but less than one year.

All monetary amounts, other than share and per share amounts, are stated in thousands.

2	ACCOUNTS RECEIVABLE

Accounts receivable are stated net of allowances for doubtful accounts of $3,062, $2,550 and $1,327 as of December 27, 2019, September 27, 2019 and December 28, 2018, respectively. The increase in net accounts receivable to $78,249 as of December 27, 2019 from $44,508 as of September 27, 2019 is attributable to the seasonal nature of the Company’s business and the resulting increases in sales volumes between periods. The determination of the allowance for doubtful accounts is based on a combination of factors. In circumstances where specific collection concerns about a receivable exist, a reserve is established to value the affected account receivable at an amount the Company believes will be collected. For all other customers, the Company recognizes allowances for doubtful accounts based on historical experience of bad debts as a percent of accounts receivable outstanding for each business segment. Uncollectible accounts are written off against the allowance for doubtful accounts after collection efforts have been exhausted. The Company typically does not require collateral on its accounts receivable.

3	EARNINGS PER SHARE (“EPS”)

Net income or loss per share of Class A common stock and Class B common stock is computed using the two-class method. Grants of restricted stock which receive non-forfeitable dividends are classified as participating securities and are required to be included as part of the basic weighted average share calculation under the two-class method.

Holders of Class A common stock are entitled to cash dividends equal to 110% of all dividends declared and paid on each share of Class B common stock. The Company grants shares of unvested restricted stock in the form of Class A shares, which carry the same distribution rights as the Class A common stock described above. As such, the undistributed earnings for each period are allocated to each class of common stock based on the proportionate share of the amount of cash dividends that each such class is entitled to receive.

Basic EPS

Basic net income or loss per share is computed by dividing net income or loss allocated to Class A common stock and Class B common stock by the weighted-average number of shares of Class A common stock and Class B common stock outstanding, respectively. In periods with cumulative year to date net income and undistributed income, the undistributed income for each period is allocated to each class of common stock based on the proportionate share of the amount of cash dividends that each such class is entitled to receive. In periods where there is a cumulative year to date net loss or no undistributed income because distributions through dividends exceed net income, Class B shares are treated as anti-dilutive and, therefore, net losses are allocated equally on a per share basis among all participating securities.

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JOHNSON OUTDOORS INC.

For the three month periods ended December 27, 2019 and December 28, 2018, basic income per share for the Class A and Class B shares has been presented using the two class method and reflects the allocation of undistributed income described above.

Diluted EPS

Diluted net income per share is computed by dividing allocated net income by the weighted-average number of common shares outstanding, adjusted for the effect of dilutive stock options, restricted stock units (“stock units” or “units”) and non-vested restricted stock. Anti-dilutive stock options, units and non-vested stock are excluded from the calculation of diluted EPS. The computation of diluted net income per share of Class A common stock assumes that Class B common stock is converted into Class A common stock. Therefore, diluted net income per share is the same for both Class A and Class B common shares. In periods where the Company reports a net loss, the effect of anti-dilutive stock options and units is excluded and diluted loss per share is equal to basic loss per share for both classes of stock.

For the three month periods ended December 27, 2019 and December 28, 2018, diluted net income per share reflects the effect of dilutive stock units and assumes the conversion of Class B common stock into Class A common stock.

Non-vested stock that could potentially dilute earnings per share in the future which were not included in the fully diluted computation because they would have been anti-dilutive totaled 40,312 and 38,562 for the three months ended December 27, 2019 and December 28, 2018, respectively. There were no stock options outstanding and no stock units that could potentially dilute earnings per share in the future for either of the three month periods ended December 27, 2019 and December 28, 2018.

Dividends per share

Dividends per share for the three month periods ended December 27, 2019 and December 28, 2018 were as follows:

	Three Months Ended
	December 27, 2019		December 28, 2018
Dividends declared per common share:
Class A	$	0.17	$	0.14
Class B	$	0.15	$	0.13

4	STOCK-BASED COMPENSATION AND STOCK OWNERSHIP PLANS

The Company’s current stock ownership plans allow for issuance of stock options to acquire shares of Class A common stock by key executives and non-employee directors. Current plans also allow for issuance of shares of restricted stock, restricted stock units or stock appreciation rights in lieu of stock options.

Under the Company’s 2012 Non-Employee Director Stock Ownership Plan (the only plan where shares currently remain available for future equity incentive awards) there were a total of 492,411 shares of the Company’s Class A common stock available for future grant to key executives and non-employee directors at December 27, 2019. As of December 13, 2019, shares of the Company’s Class A common stock are no longer eligible for issuance as future equity incentive awards to key employees under the Company’s 2010 Long-Term Stock Incentive Plan. Any outstanding awards under the Company’s 2010 Long-Term Stock Incentive Plan as of the December 13, 2019 termination date will continue to remain outstanding and be subject to the terms of such plan and any award agreement entered into by the Company with the participant. The Company has adopted the Johnson Outdoors Inc. 2020 Long-Term Stock Incentive Plan, subject to approval of this plan by the shareholders of the Company at the annual meeting of shareholders on February 27, 2020. The 2020 Long-Term Stock Incentive Plan authorizes up to 500,000 shares of the Company’s Class A common stock for issuance as awards to key employees under this new plan.

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JOHNSON OUTDOORS INC.

Non-vested Stock

All shares of non-vested restricted stock awarded by the Company have been granted in the form of shares of Class A common stock at their fair market value on the date of grant and vest within one year from the date of grant for stock granted to directors and four years from the date of grant for stock granted to officers and employees. The fair value at date of grant is based on the number of shares granted and the average of the Company’s high and low Class A common stock price on the date of grant or, if the Company’s Class A shares did not trade on the date of grant, the average of the Company’s high and low Class A common stock price on the last preceding date on which the Company’s Class A shares traded.

A summary of non-vested stock activity for the three months ended December 27, 2019 related to the Company’s stock ownership plans is as follows:

	Shares			Weighted Average Grant Price
Non-vested stock at September 27, 2019		41,608		$	51.78
Non-vested stock grants		9,457			64.51
Restricted stock vested		(12,885	)		27.75
Non-vested stock at December 27, 2019		38,180			63.04

Non-vested stock grantees may elect to reimburse the Company for withholding taxes due as a result of the vesting of shares by tendering a portion of the vested shares back to the Company. Shares tendered back to the Company were 4,054 and 3,381 during the three month periods ended December 27, 2019 and December 28, 2018, respectively.

Stock compensation expense, net of forfeitures, related to non-vested stock was $240 and $116 for the three month periods ended December 27, 2019 and December 28, 2018, respectively. Unrecognized compensation cost related to non-vested stock as of December 27, 2019 was $1,367, which amount will be amortized to expense through November 2022 or adjusted for changes in future estimated or actual forfeitures.

The fair value of restricted stock vested during the three month periods ended December 27, 2019 and December 28, 2018 was $839 and $1,237, respectively.

Restricted Stock Units

All restricted stock units (RSUs) awarded by the Company have been granted in the form of units payable in shares of Class A common stock upon vesting. The units are valued at the fair market value of a share of Class A common stock on the date of grant and vest within one year from the date of grant for RSUs granted to directors and three years from the date of grant for RSUs granted to employees. The fair value at the date of grant is based on the number of units granted and the average of the Company’s high and low Class A common stock trading price on the date of grant or, if the Company’s Class A shares did not trade on the date of grant, the average of the Company’s high and low Class A common stock trading price on the last preceding date on which the Company’s Class A shares traded.

A summary of RSU activity for the three months ended December 27, 2019 follows:

	Number of RSUs			Weighted Average Grant Price
RSUs at September 27, 2019		58,708		$	62.13
RSUs granted		27,517			64.51
RSUs vested		(18,094	)		43.12
RSUs at December 27, 2019		68,131			68.14

Stock compensation expense, net of forfeitures, related to RSUs was $420 and $402 for the three months ended December 27, 2019 and December 28, 2018, respectively. Unrecognized compensation cost related to non-vested RSUs as of December 27, 2019 was $2,986, which amount will be amortized to expense through September 2021 or adjusted for changes in future estimated or actual forfeitures.

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JOHNSON OUTDOORS INC.

RSU grantees may elect to reimburse the Company for withholding taxes due as a result of the vesting of units and issuance of unrestricted shares of Class A common stock by tendering a portion of such unrestricted shares back to the Company. Shares tendered back to the Company were 3,075 and 6,509 during the three month periods ended December 27, 2019 and December 28, 2018, respectively.

The fair value of restricted stock units recognized as a tax deduction during the three month periods ended December 27, 2019 and December 28, 2018 was $1,426 and $2,944, respectively.

Compensation expense related to units earned by employees (as opposed to grants to outside directors) is based upon the attainment of certain Company financial goals related to cumulative net sales and cumulative operating profit over a three-year performance period. Awards are only paid if at least 80% of the target levels are met and maximum payouts are made if 120% or more of target levels are achieved. The payouts for achievement at the threshold levels of performance are equal to 50% of the target award amount. The payouts for achievement at maximum levels of performance are equal to 150% of the target award amount. To the extent earned, awards are issued in shares of Company Class A common stock after the end of the three-year performance period.

Employees’ Stock Purchase Plan

The Company’s shareholders have adopted the Johnson Outdoors Inc. 2009 Employees’ Stock Purchase Plan, which was most recently amended on March 2, 2017, and which provides for the issuance of shares of Class A common stock at a purchase price of not less than 85% of the fair market value of such shares on the date of grant or on the date of purchase, whichever is lower.

During the three month period ended December 27, 2019, the Company issued 0 shares of Class A common stock and recognized $7 of expense in connection with the Employees’ Stock Purchase Plan. During the three month period ended December 28, 2018, the Company issued 0 shares of Class A common stock and recognized $18 of expense in connection with the Plan.

5	PENSION PLANS

The Company has non-contributory defined benefit pension plans covering certain of its U.S. employees. Retirement benefits are generally provided based on the employees’ years of service and average earnings. Normal retirement age is 65, with provisions for earlier retirement.

The Company made contributions of $44 and $45 to its pension plans for the three months ended December 27, 2019 and December 28, 2018, respectively.

The components of net periodic benefit cost related to Company sponsored defined benefit plans for the three month periods ended December 27, 2019 and December 28, 2018 were as follows:

	Three Months Ended
	December 27, 2019		December 28, 2018
Components of net periodic benefit cost:
Service cost	$	—	$	—
Interest on projected benefit obligation		276		265
Less estimated return on plan assets		214		191
Amortization of unrecognized losses		82		138
Net periodic benefit cost	$	144	$	212

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JOHNSON OUTDOORS INC.

6	INCOME TAXES

For the three months ended December 27, 2019 and December 28, 2018, the Company’s earnings before income taxes, income tax expense and effective income tax rate were as follows:

	Three Months Ended
(thousands, except tax rate data)	December 27, 2019			December 28, 2018
Profit before income taxes	$	8,589		$	4,331
Income tax expense		2,159			810
Effective income tax rate		25.1	%		18.7	%

The key factor impacting the effective tax rate for the three months ended December 27, 2019 was the net excess tax benefits related to share-based compensation, which were lower in the current period compared to the prior year period.

The impact of the Company’s operations in jurisdictions where a valuation allowance is assessed is removed from the overall effective tax rate methodology and recorded directly based on year to date results for the year for which no tax expense or benefit can be recognized. The significant tax jurisdictions that have a valuation allowance for the periods ended December 27, 2019 and December 28, 2018 were:

December 27, 2019	December 28, 2018
France	France
Indonesia	Indonesia
Switzerland	Switzerland

The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with the applicable authoritative guidance on accounting for income taxes. As a result, the Company may adjust the reserves for unrecognized tax benefits due to the impact of changes in its assumptions or as a result of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities and lapses of statutes of limitation. The Company’s 2020 fiscal year tax expense is anticipated to be unchanged related to uncertain income tax positions.

In accordance with its accounting policy, the Company recognizes accrued interest and penalties related to unrecognized benefits as a component of income tax expense. The Company is projecting accrued interest of $100 related to uncertain income tax positions for the fiscal year ending October 2, 2020.

The Company files income tax returns, including returns for its subsidiaries, with federal, state, local and foreign taxing jurisdictions. As of the date of this report, the following tax years remain open to examination by the respective significant tax jurisdictions:

Jurisdiction	Fiscal Years
United States	2016-2019
Canada	2015-2019
France	2016-2019
Germany	2017-2019
Italy	2018-2019
Switzerland	2009-2019

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JOHNSON OUTDOORS INC.

7	INVENTORIES

Inventories at the end of the respective periods consisted of the following:

	December 27, 2019		September 27, 2019		December 28, 2018
Raw materials	$	47,208	$	45,168	$	54,527
Work in process		463		152		328
Finished goods		56,214		48,978		61,423
	$	103,885	$	94,298	$	116,278

GOODWILL

The changes in goodwill during the three months ended December 27, 2019 and December 28, 2018 were as follows:

	December 27, 2019		December 28, 2018
Balance at beginning of period	$	11,186	$	11,199
Amount attributable to movements in foreign currency rates		7		(35	)
Balance at end of period	$	11,193	$	11,164

The Company evaluates the carrying value of goodwill for a reporting unit on an annual basis or more frequently when events and circumstances warrant such an evaluation. In conducting this analysis, the Company uses the income approach to compare the reporting unit’s carrying value to its indicated fair value. Fair value is determined primarily by using a discounted cash flow methodology that requires considerable management judgment and long-term assumptions and is considered a Level 3 (unobservable) fair value determination in the fair value hierarchy (see Note 13) below.

9	WARRANTIES

The Company provides warranties on certain of its products as they are sold. The following table summarizes the Company’s warranty activity for the three months ended December 27, 2019 and December 28, 2018.

	December 27, 2019		December 28, 2018
Balance at beginning of period	$	9,190	$	8,499
Expense accruals for warranties issued during the period		3,335		2,195
Less current period warranty claims paid		2,082		1,673
Balance at end of period	$	10,443	$	9,021

10	CONTINGENCIES

The Company is subject to various legal actions and proceedings in the normal course of business, including those related to commercial disputes, product liability, intellectual property and regulatory matters. The Company is insured against loss for certain of these matters. Although litigation is subject to many uncertainties and the ultimate exposure with respect to these matters cannot be ascertained, management does not believe the final outcome of any pending litigation will have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.

11	INDEBTEDNESS

The Company had no debt outstanding at December 27, 2019, September 27, 2019, or December 28, 2018.

Revolvers

The Company and certain of its subsidiaries have entered into an unsecured credit facility with PNC Bank National Association and Associated Bank, N.A. (“the Lending Group”). This credit facility consists of a $75 million Revolving Credit Facility 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 “Credit Agreement” or “Revolver”). The 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 Credit Agreement and subject to the approval of the lenders.

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The interest rate on the Revolver is based on LIBOR plus an applicable margin, which margin resets each quarter. The applicable margin ranges from 1.00% to 1.75% and is dependent on the Company’s leverage ratio for the trailing twelve month period. The interest rates on the Revolver at December 27, 2019 and December 28, 2018 were approximately 2.8% and 3.5%, respectively.

The Credit Agreement restricts the Company’s ability to incur additional debt, includes maximum leverage ratio and minimum interest coverage ratio covenants and is unsecured.

Other Borrowings

The Company had no unsecured revolving credit facilities at its foreign subsidiaries as of December 27, 2019 or December 28, 2018. The Company utilizes letters of credit primarily as security for the payment of future claims under its workers’ compensation insurance, which totaled approximately $181 and $279 as of December 27, 2019 and December 28, 2018, respectively.

12	DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The following disclosures describe the Company’s objectives in using derivative instruments, the business purpose or context for using derivative instruments, and how the Company believes the use of derivative instruments helps achieve the stated objectives. In addition, the following disclosures describe the effects of the Company’s use of derivative instruments and hedging activities on its financial statements.

Foreign Exchange Risk

The Company has significant foreign operations, for which the functional currencies are denominated primarily in euros, Swiss francs, Hong Kong dollars 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 12% of the Company’s revenues for the three month period ended December 27, 2019 were denominated in currencies other than the U.S. dollar. Approximately 6% were denominated in euros, approximately 3% were denominated in Canadian dollars and approximately 1% were denominated in Hong Kong dollars, with the remaining revenues denominated in various other foreign currencies. Changes in foreign currency exchange rates can cause the Company to experience 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 27, 2019 and December 28, 2018, the Company held no foreign currency forward contracts.

13	FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy has been established based on three levels of inputs, of which the first two are considered observable and the last unobservable.

•	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.

•

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 27, 2019, September 27, 2019 and December 28, 2018 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.

Valuation Techniques

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. These assets are included in “Other assets” in the Company’s Condensed Consolidated Balance Sheets, and the mark to market adjustments on the assets are recorded in “Other expense (income), net” in the accompanying Condensed Consolidated Statements of Operations. The offsetting deferred compensation liability is also reported at fair value as “Deferred compensation liability” 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.

The following table summarizes the Company’s financial assets measured at fair value as of December 27, 2019:

	Level 1		Level 2		Level 3		Total
Assets:
Rabbi trust assets	$	20,978	$	—	$	—	$	20,978

The following table summarizes the Company’s financial assets measured at fair value as of September 27, 2019:

	Level 1		Level 2		Level 3		Total
Assets:
Rabbi trust assets	$	19,092	$	—	$	—	$	19,092

The following table summarizes the Company’s financial assets measured at fair value as of December 28, 2018:

	Level 1		Level 2		Level 3		Total
Assets:
Rabbi trust assets	$	15,982	$	—	$	—	$	15,982

The effect of changes in the fair value of financial instruments on the accompanying Condensed Consolidated Statements of Operations for the three month periods ended December 27, 2019 and December 28, 2018 was:

		Three Months Ended
	Location of (income) loss recognized in Statement of Operations	December 27, 2019			December 28, 2018
Rabbi trust assets	Other (income) expense, net	$	(1,192	)	$	2,277

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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 27, 2019 or December 28, 2018.

14	NEW ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). In July 2018, the FASB also issued ASU 2018-10 Codification Improvements to Topic 842, Leases and ASU 2018-11 Leases (Topic 842) Targeted Improvements. In February 2019, the FASB also issued ASU 2019-01 Leases (Topic 842): Codification Improvements. This ASU and the updates to this ASU require organizations to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about leasing arrangements. This guidance is effective for the Company in the first quarter of fiscal year 2020, and may be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements with certain practical expedients available. The Company adopted the provisions of these ASU’s using the modified retrospective approach at the beginning of the first quarter of fiscal 2020, coinciding with the standard’s effective date. The additional disclosures required by the ASU and its updates are included in Note 18 “Leases” of these Notes to the Condensed Consolidated Financial Statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220), which allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. ASU No. 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The ASU allows for early adoption in any interim period after issuance of the update. The Company early adopted the ASU in the second quarter of fiscal 2019, and elected not to make this optional reclassification.

Recently issued accounting pronouncements

In August 2018, the FASB issued ASU 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans (Topic 715), which modifies the disclosure requirements for employers that sponsor defined pension or postretirement plans. The amendments in this guidance are effective for fiscal years ending after December 15, 2020, with early adoption permitted. The Company is currently evaluating the potential impact of this guidance on its disclosures.

REVENUES

Adoption of Topic 606

In the first quarter of fiscal 2019, the Company adopted ASU 2014-09 and all subsequent ASUs that modified accounting standards Topic 606 using the modified retrospective adoption method. Upon adoption, the Company recorded a right to returns asset of $763 and a corresponding increase in the accrued return liability, resulting in an accrued returns liability of $2,725. Other than as discussed above, the adoption of this new revenue standard did not have an impact on the Company’s consolidated financial statements, and the timing and amount of its revenue recognition remained substantially unchanged under this new guidance.

Revenue recognition

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our goods at a point in time based on shipping terms and transfer of title. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. The amount of consideration received can vary, primarily because of customer incentive or rebate arrangements. The Company estimates variable consideration based on the expected value of total consideration to which customers are likely to be entitled based on historical experience and projected market expectations. Included in the estimate is an assessment as to whether any variable consideration is constrained. Revenue estimates are adjusted at the earlier of a change in the expected value of consideration or when the consideration becomes fixed. For all contracts with customers, the Company has not adjusted the promised amount of consideration for the effects of a significant financing component as the period between the transfer of the promised goods and the customer’s payment is expected to be one year or less. Sales are made on normal and customary short-term credit terms, generally ranging from 30 to 90 days, or upon delivery of point of sale transactions. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

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The Company enters into contractual arrangements with customers in the form of individual customer orders which specify the goods, quantity, pricing, and associated order terms. The Company does not have contracts which are satisfied over time. Due to the nature of these contracts, no significant judgment exists in relation to the identification of the customer contract, satisfaction of the performance obligation, or transaction price. The Company expenses incremental costs of obtaining a contract due to the short-term nature of the contracts.

Estimated costs of returns, allowances and discounts, based on historic experience, are accrued as a reduction to sales when revenue is recognized. The Company provides customers the right to return eligible products under certain circumstances. At December 27, 2019, the right to returns asset was $1,112 and the accrued returns liability was $3,394. The Company also offers assurance-type warranties relating to its products sold to end customers that continue to be accounted for under ASC 460 Guarantees.

The Company generally accounts for shipping and handling activities as a fulfillment activity, consistent with the timing of revenue recognition; that is, when a customer takes control of the transferred goods. In the event that a customer were to take control of a product upon or after shipment, the Company has made an accounting policy election to treat such shipping and handling activities as a fulfillment cost. Shipping and handling fees billed to customers are included in “Net Sales,” and shipping and handling costs are recognized within “Marketing and selling expenses” in the same period the related revenue is recognized.

The Company has a wide variety of seasonal, outdoor recreation products used primarily for fishing from a boat, diving, paddling, hiking and camping, that are sold to a variety of customers in multiple end markets. While there are multiple products sold, the nature of products are similar in terms of the nature of the revenue recognition policies.

See Note 16 for required disclosures of disaggregated revenue.

16	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 27, 2019, combined net sales to two customers of the Company’s Fishing, Camping and Watercraft Recreation segments represented approximately $32,321 of the Company’s consolidated revenues. During the three month period ended December 28, 2018, combined net sales to two customers of the Company’s Fishing, Camping and Watercraft Recreation segments represented approximately $31,876 of the Company’s consolidated revenues.

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.

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

	Three Months Ended
	December 27, 2019			December 28, 2018			September 27, 2019
Net sales:
Fishing:
Unaffiliated customers	$	99,193		$	78,707
Interunit transfers		85			90
Camping:
Unaffiliated customers		7,505			5,814
Interunit transfers		9			6
Watercraft Recreation:
Unaffiliated customers		4,803			4,319
Interunit transfers		6			6
Diving
Unaffiliated customers		16,458			15,529
Interunit transfers		1			9
Other / Corporate		95			70
Eliminations		(101	)		(110	)
Total	$	128,054		$	104,440
Operating profit (loss):
Fishing	$	15,018		$	11,422
Camping		66			(686	)
Watercraft Recreation		(1,563	)		(1,492	)
Diving		205			(707	)
Other / Corporate		(6,925	)		(2,559	)
	$	6,801		$	5,978
Total assets (end of period):
Fishing	$	216,783		$	174,412		$153,926
Camping		32,815			31,788		31,525
Watercraft Recreation		20,611			19,218		14,436
Diving		64,799			54,597		57,682
Other / Corporate		151,115			111,099		178,875
	$	486,123		$	391,114		$436,444

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17	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in Accumulated Other Comprehensive Income (“AOCI”) by component, net of tax, for the three months ended December 27, 2019 were as follows:

	Foreign Currency Translation Adjustment		Unamortized Loss on Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (Loss)
Balance at September 27, 2019	$	4,790	$	(3,232	)	$	1,558
Other comprehensive income before reclassifications		700		—			700
Amounts reclassified from accumulated other comprehensive income		—		82			82
Tax effects		—		(21	)		(21	)
Balance at December 27, 2019	$	5,490	$	(3,171	)	$	2,319

The changes in AOCI by component, net of tax, for the three months ended December 28, 2018 were as follows:

	Foreign Currency Translation Adjustment			Unamortized Loss on Defined Benefit Pension Plans			Accumulated Other Comprehensive Income (Loss)
Balance at September 28, 2018	$	7,796		$	(4,309	)	$	3,487
Other comprehensive loss before reclassifications		(1,700	)		—			(1,700	)
Amounts reclassified from accumulated other comprehensive income		—			138			138
Tax effects		—			(33	)		(33	)
Balance at December 28, 2018	$	6,096		$	(4,204	)	$	1,892

The reclassifications out of AOCI for the three months ended December 27, 2019 were as follows:

				Statement of Operations Presentation
Unamortized loss on defined benefit pension plans:
Amortization of loss	$	82		Other income and expense
Tax effects		(21	)	Income tax expense
Total reclassifications for the period	$	61

The reclassifications out of AOCI for the three months ended December 28, 2018 were as follows:

				Statement of Operations Presentation
Unamortized loss on defined benefit pension plans:
Amortization of loss	$	138		Other income and expense
Tax effects		(33	)	Income tax expense
Total reclassifications for the period	$	105

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LEASES

Adoption of Topic 842

On September 28, 2019, the Company adopted ASU 2016-02 and all subsequent ASUs that modified accounting standards Topic 842 using a modified retrospective adoption method, in which right-of-use (“ROU”) assets and lease liabilities are recognized in the condensed consolidated balance sheets. Under the effective date transition method, financial results reported in periods prior to fiscal year 2020 are unchanged. The Company also elected the package of practical expedients permitted under the standard, which does not require reassessment of prior conclusions related to contracts containing a lease, lease classification and initial direct lease costs. As an ongoing accounting policy election, the Company will exclude short-term leases (terms of 12 months or less) from the balance sheet presentation and will account for non-lease and lease components in a contract as a single lease component for most asset classes. All leases in which the Company is the lessee are classified as operating leases, and the Company does not have any finance leases or sublease agreements. Additionally, the Company does not have any leases in which it is the lessor.

The adoption of the new standard had a significant impact on the Company’s condensed consolidated balance sheet due to the recognition of approximately $41 million of lease liabilities with corresponding ROU assets for operating leases. The new standard did not have a significant impact on the condensed consolidated statements of operations or cash flows, and did not impact our debt covenant compliance under our current credit agreements.

The Company determines if an arrangement is a lease at inception. The Company leases certain facilities and machinery and equipment under long-term, non-cancelable operating leases. As of December 27, 2019, the Company had approximately 200 leases, with remaining terms ranging from less than one year to 15 years. Some of the leases contain variable payment terms, such as payments based on fluctuations in the Consumer Price Index (CPI). Some leases also contain options to extend or terminate the lease. To the extent the Company is reasonably certain to exercise these options, they have been considered in the calculation of the ROU assets and lease liabilities. Under current lease agreements, there are no residual value guarantees or restrictive lease covenants. In calculating the ROU assets and lease liabilities, several assumptions and judgments are made, including whether a contract is or contains a lease under the new definition, and the determination of the discount rate, which is assumed to be the incremental borrowing rate. The incremental borrowing rate is derived from information available at the lease commencement date based on lease length and location.

As of December 27, 2019, the components of lease expense recognized in the condensed consolidated statements of operations were as follows:

	Three months ended December 27, 2019
Lease Cost
Operating lease costs	$	1,776
Short-term lease costs		483
Variable leases costs		43
Total lease cost	$	2,302

Included in the amounts in the table above, was rent expense to related parties of $246 for the quarter ended December 27, 2019.

As of December 27, 2019, the Company did not have any finance leases. There were no significant new leases entered into during the quarter ended December 27, 2019. Supplemental balance sheet, cash flow, and other information related to operating leases was as follows:

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	Three months ended December 27, 2019
Operating leases:

Operating lease ROU assets	$	40,302

Current operating leases liabilities		5,835
Non-current operating lease liabilities		35,133
Total operating lease liabilities	$	40,968

Weighted average remaining lease term (in years)		10.67

Weighted average discount rate		2.83	%

Cash paid for amounts included in the measurement of lease liabilities	$	1,571

Future minimum rental commitments under non-cancelable operating leases with an initial lease term in excess of one year at December 27, 2019 were as follows:

Year	Related parties included in total			Total
Remainder of 2020	$	781		$	6,286
2021		1,067			6,184
2022		179			3,895
2023		—			3,362
2024		—			3,362
Thereafter		—			23,322
Total undiscounted lease payments		2,027			46,411
Less: Imputed interest		(38	)		(5,443	)
Total net lease liability	$	1,989		$	40,968

As of December 27, 2019, the Company did not have any additional significant operating leases commitments that have not yet commenced.

Disclosures related to periods prior to adoption of Topic 842

Rental expense under all leases was $2,274 for the three months ended December 28, 2018. Rent expense to related parties was $249 for the three months ended December 28, 2018.

Future minimum rent commitments under non-cancelable operating leases with an initial lease term in excess of one year at December 28, 2018 were as follows:

Year	Related parties included in total		Total
2019	$	755	$	5,792
2020		1,036		7,187
2021		1,067		5,835
2022		179		3,719
2023		—		2,517
Thereafter		—		24,832
Total	$	3,037	$	49,882

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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 27, 2019 and December 28, 2018. All monetary amounts, other than share and per share amounts, are stated in thousands.

Our MD&A is presented in the following sections:

•	Forward Looking Statements

•	Trademarks

•

Overview

•	Results of Operations

•	Liquidity and Financial Condition

•	Contractual Obligations and Off Balance Sheet Arrangements

•	Critical Accounting Policies and Estimates

This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and related notes that immediately precede this section, as well as the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2019 which was filed with the Securities and Exchange Commission on December 6, 2019.

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 6, 2019 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 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 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®.

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Overview

The Company is a leading global manufacturer and marketer of branded seasonal outdoor recreation products used primarily for fishing, diving, paddling and camping. The Company’s portfolio of well-known consumer brands has attained leading market positions due to continuous innovation, marketing excellence, product performance and quality. The Company’s values and culture support innovation in all areas, promoting and leveraging best practices and synergies within and across its subsidiaries to advance the Company’s strategic vision set by executive management and approved by the Company’s Board of Directors. The Company is controlled by Helen P. Johnson-Leipold, the Company’s Chairman and Chief Executive Officer, members of her family and related entities.

Highlights

Net sales of $128,054 for the first quarter of fiscal 2020 increased $23,614, or 23%, from the same period in the prior year, reflecting increased sales volumes across all businesses. This sales volume increase, partially offset by additional deferred compensation costs related to marking the deferred compensation plan’s assets to market, was the primary driver of an increase of $823 in operating profit over the prior year quarter.

Seasonality

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.

	Fiscal Year
	2019						2018						2017
Quarter Ended	Net Sales			Operating Profit			Net Sales			Operating Profit			Net Sales			Operating Profit
December		19	%		9	%		21	%		11	%		19	%		1	%
March		32	%		43	%		31	%		41	%		30	%		45	%
June		31	%		43	%		31	%		51	%		32	%		54	%
September		18	%		5	%		17	%		-3	%		19	%		—	%
		100	%		100	%		100	%		100	%		100	%		100	%

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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 27, 2019			December 28, 2018
Net sales:
Fishing	$	99,278		$	78,797
Camping		7,514			5,820
Watercraft Recreation		4,809			4,325
Diving		16,459			15,538
Other / Eliminations		(6	)		(40	)
Total	$	128,054		$	104,440
Operating profit (loss):
Fishing	$	15,018		$	11,422
Camping		66			(686	)
Watercraft Recreation		(1,563	)		(1,492	)
Diving		205			(707	)
Other / Eliminations		(6,925	)		(2,559	)
Total	$	6,801		$	5,978

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 December 27, 2019 were $128,054, an increase of $23,614, or 23%, compared to $104,440 for the three months ended December 28, 2018. Foreign currency translation had an unfavorable impact of less than 1% on current year first quarter net sales compared to the prior year’s first quarter net sales.

Net sales for the three months ended December 27, 2019 for the Fishing business were $99,278, an increase of $20,481, or 26%, from $78,797 during the first fiscal quarter of the prior year. Availability of new products in the current year drove much of the growth over the prior year quarter.

Net sales for the Camping business were $7,514 for the first quarter of the current fiscal year, an increase of $1,694, or 29%, from the prior year net sales during the same period of $5,820. Increased sales volume across both Jetboil and Eureka was the primary driver of growth.

Net sales for the first quarter of fiscal 2020 for the Watercraft Recreation business were $4,809, an increase of $484, or 11%, compared to $4,325 in the prior year same period. The increase was mainly driven by success of new products.

Diving net sales were $16,459 for the three months ended December 27, 2019 versus $15,538 for the three months ended December 28, 2018, an increase of $921, or 6%. The increase is largely due to growth in Europe, partially offset by foreign currency translation unfavorably impacting sales in this segment by approximately 2% versus the prior year quarter.

Cost of Sales

Cost of sales for the three months ended December 27, 2019 was $74,442 compared to $60,121 for the three months ended December 28, 2018. The increase year over year was driven primarily by higher sales volume in the current year quarter over the prior year quarter. Additionally, tariffs on the import of certain components and other supplies from China increased the cost of sales in the current year quarter by approximately $800 over the prior year three month period.

The Company anticipates an aggregate negative impact of Section 301 tariffs on China sourced goods on the Company’s fiscal 2020 operating profit of approximately $4 to $5 million.

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Gross Profit Margin

For the three months ended December 27, 2019, gross profit as a percentage of net sales was 41.9% compared to 42.4% in the three month period ended December 28, 2018. The slight decline in margin was due primarily to the impact of the additional tariffs noted above which were not in effect during our fiscal first quarter of 2019.

Operating Expenses

Operating expenses were $46,811 for the three months ended December 27, 2019 compared to $38,341 for the three months ended December 28, 2018. The increase of $8,470 was partially due to higher sales volume related expenses between quarters. Additionally, the impact of favorable market conditions on the Company’s deferred compensation plan assets resulted in approximately $3,400 of higher deferred compensation expense in the current year quarter and an offsetting gain in Other Income related to marking the assets to market.

Operating Profit

Operating profit on a consolidated basis for the three month period ended December 27, 2019 was $6,801 compared to an operating profit of $5,978 in the first quarter of the prior fiscal year. The increase year over year was driven primarily by the increased sales volume and the other factors noted above.

Interest

For the three months ended December 27, 2019, interest expense was $35 compared to $37 in the three months ended December 28, 2018. Interest income for the three month periods ended December 27, 2019 and December 28, 2018 was $655 and $540, respectively. The increase in interest income year over year was mainly driven by the increase in interest earnings on increased balances of interest bearing cash in fiscal 2020 versus the corresponding periods of fiscal 2019.

Other (Income) Expense, net

Other income was $1,168 for the three months ended December 27, 2019 compared to other expense of $2,150 in the prior year period. For the three months ended December 27, 2019, foreign currency exchange losses were $33 compared to gains of $165 for the three months ended December 28, 2018. Investment gains and earnings on the assets related to the Company’s non-qualified deferred compensation plan were $1,324 in the three month period ended December 27, 2019 compared to investment losses of $2,122 in the three month period ended December 28, 2018. This $3,446 increase year over year in investment gains is offset by the deferred compensation expense included in the Company’s Operating expenses.

Income Tax Expense

The Company’s provision for income taxes is based upon estimated annual effective tax rates in the tax jurisdictions in which the Company operates. The effective tax rate for the three month period ended December 27, 2019 was 25.1% compared to 18.7% in the corresponding period of the prior year. The key factor impacting the effective tax rate for the three months ended December 27, 2019 was the net excess tax benefits related to share-based compensation, which were lower in the current period compared to the prior year period.

Net Income

Net income for the three months ended December 27, 2019 was $6,430, or $0.64 per diluted common class A and B share, compared to net income of $3,521, or $0.35 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 totaled $138,257 as of December 27, 2019, compared to cash and cash equivalents of $104,214 as of December 28, 2018. The Company’s debt to total capitalization ratio was 0% as of December 27, 2019 and December 28, 2018. The Company’s total debt balance was $0 as of each of December 27, 2019 and December 28, 2018. 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 $78,249 as of December 27, 2019, an increase of $22,691 compared to $55,558 as of December 28, 2018. The increase year over year was consistent with increased sales volumes between the same periods. Inventories, net of inventory reserves, were $103,885 as of December 27, 2019, a decrease of $12,393, compared to $116,278 as of December 28, 2018. The decrease over the prior year period is due, in part, to pulling forward certain purchases in anticipation of the implementation of further Section 301 tariffs on China sourced goods in the prior year. Accounts payable were $35,384 at December 27, 2019 compared to $41,820 as of December 28, 2018, which decreased consistent with the decrease in inventories.

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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 27, 2019			December 28, 2018
Cash used for:
Operating activities	$	(29,088	)	$	(39,195	)
Investing activities		(3,307	)		(7,505	)
Financing activities		(2,149	)		(2,092	)
Effect of foreign currency rate changes on cash		419			(1,009	)
Decrease in cash and cash equivalents	$	(34,125	)	$	(49,801	)

Operating Activities

Cash used for operations totaled $29,088 for the three months ended December 27, 2019 compared to $39,195 during the corresponding period of the prior fiscal year. The decrease in cash used for operations over the prior year three month period was due primarily to the increase in net income between periods, as well as changes between periods in working capital. Depreciation and amortization charges were $3,432 for the three month period ended December 27, 2019 compared to $3,349 for the corresponding period of the prior year.

Investing Activities

Cash used for investing activities totaled $3,307 for the three months ended December 27, 2019 compared to $7,505 for the corresponding period of the prior fiscal year. Cash used in the prior year period reflected increased investment in short-term investments versus cash in that period. Cash usage for capital expenditures totaled $3,307 for the current year three month period and $4,081 for the prior year period. Any additional capital expenditures in fiscal 2020 are expected to be funded by working capital.

Financing Activities

Cash used for financing activities totaled $2,149 for the three months ended December 27, 2019 compared to $2,092 for the three month period ended December 28, 2018 and represents the payment of dividends and purchase of treasury stock. The Company had no debt during either quarter ended December 27, 2019 and December 28, 2018. See Note 11 “Indebtedness” to the accompanying Condensed Consolidated Financial Statements for additional information on our credit facilities.

As of December 27, 2019 the Company held approximately $39,317 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 27, 2019.

	Total		Less than 1 year		2-3 years		4-5 years		After 5 years
Operating lease obligations	$	46,411	$	6,286	$	10,079	$	6,724	$	23,322
Open purchase orders		91,164		91,164		—		—		—
Contractually obligated interest payments		323		84		225		14		—
Total contractual obligations	$	137,898	$	97,534	$	10,304	$	6,738	$	23,322

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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 $279 as of December 27, 2019 and December 28, 2018, respectively.

The Company anticipates making contributions of $128 to its defined benefit pension plans during the remainder of fiscal 2020.

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 27, 2019 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 27, 2019.

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, 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 12% of the Company’s revenues for the three month period ended December 27, 2019 were denominated in currencies other than the U.S. dollar. Approximately 6% were denominated in euros, approximately 3% in Canadian dollars and approximately 1% 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 27, 2019 and December 28, 2018, 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 if 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.

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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 6, 2019.

Item 6.

Exhibits

See Exhibit Index to this Form 10-Q report.

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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.

	JOHNSON OUTDOORS INC.
Signatures Dated: January 31, 2020
	/s/ Helen P. Johnson-Leipold
	Helen P. Johnson-Leipold
	Chairman and Chief Executive Officer
	(Principal Executive Officer)

	/s/ David W. Johnson
	David W. Johnson
	Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

Exhibit Index to Quarterly Report on Form 10-Q

Exhibit Number	Description

3.1	Articles of Incorporation of the Company as amended through February 17, 2000. (Filed as Exhibit 3.1(a) to the Company’s Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference.)

3.2	Bylaws of the Company as amended and restated through December 6, 2010. (Filed as Exhibit 3.2 to the Company’s Form 10-K for the year ended October 1, 2010 and incorporated herein by reference.)

31.1	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 ⁽¹⁾	Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following materials from Johnson Outdoors Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 2019 formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Income; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Shareholders’ Equity and (vi) Notes to Condensed Consolidated Financial Statements.

⁽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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