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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

OR

  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.
 
       
   
1
       
   
2
       
   
3
       
   
4
       
   
5
       
   
6
       
 
Item 2.
20
       
 
Item 3.
25
       
 
Item 4.
26
       
PART II
OTHER INFORMATION
 
     
 
Item 1.
26
       
 
Item 1A.
26
       
 
Item 6.
26
       
   
27
       
   
27


Index

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.

- 1 -

Index

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.

- 2 -

Index

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.

- 3 -

Index

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.

- 4 -

Index

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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Index

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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Index

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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Index

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
 
 
8
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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JOHNSON OUTDOORS INC.


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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JOHNSON OUTDOORS INC.


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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JOHNSON OUTDOORS INC.


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.
 
15
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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JOHNSON OUTDOORS INC.


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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Index

JOHNSON OUTDOORS INC.


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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JOHNSON OUTDOORS INC.


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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JOHNSON OUTDOORS INC.


18
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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JOHNSON OUTDOORS INC.


     
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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JOHNSON OUTDOORS INC.


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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JOHNSON OUTDOORS INC.


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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JOHNSON OUTDOORS INC.


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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JOHNSON OUTDOORS INC.


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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JOHNSON OUTDOORS INC.


The Company’s cash flows from operating, investing and financing activities, as presented in the Company’s accompanying Condensed Consolidated Statements of Cash Flows, are summarized in the following table:

   
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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JOHNSON OUTDOORS INC.


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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JOHNSON OUTDOORS INC.


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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JOHNSON OUTDOORS INC.


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