JOHNSON OUTDOORS INC (JOUT)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than per share amounts, are stated in thousands.

Executive Overview

The Company designs, manufactures and markets innovative, high quality recreational products for the outdoor enthusiast. Through a combination of innovative products, strong marketing, a talented and passionate workforce and efficient distribution, the Company seeks to set itself apart from the competition in its markets. Its subsidiaries operate as a network that promotes innovation and leverages best practices and synergies in the design, production and marketing of their recreational products, following the strategic vision set by executive management and approved by the Company’s Board of Directors.

Highlights

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The Company’s fiscal 2024 full-year revenues decreased by 11% from the prior year as market challenges continued, and competitive pressures increased, resulting in weaker demand and sales across all segments. Unfavorable overhead absorption due to the lower sales volumes, combined with adverse changes in product mix contributed to a 2.9 point decrease in gross margin year over year. In addition to the sales and gross margin declines, a 5% increase in operating expenses between years, driven mainly by a $11,173 write-off of goodwill, contributed to a $55,262 decrease in operating profit in fiscal 2024 from fiscal 2023.

Results of Operations

Summary consolidated financial results from continuing operations for the fiscal years presented were as follows:

The Company’s internal and external sales and operating profit (loss) by business segment for each of the three most recent completed fiscal years were as follows:

See Note 13 to the Consolidated Financial Statements included elsewhere in this report for the definition of segment net sales and operating profit.

Fiscal 2024 vs. Fiscal 2023

Net Sales

Net sales in fiscal 2024 decreased by 11% to $592,846 compared to $663,844 in fiscal 2023. Foreign currency exchange had a negligible impact on the current year’s sales versus the prior year.

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Net sales for the Fishing business decreased by $40,586, or 8% during fiscal 2024 from fiscal 2023.  Softer overall consumer demand and increased competitive pressure in the Fishing market contributed to the decline between years.

Camping net sales decreased $7,487, or 17%, in 2024 from 2023. Approximately $4,500 of the decrease in net sales from the prior year period was related to the previously disclosed sale of the Military and Commercial Tents product lines during the second fiscal quarter of 2023, with the remainder due primarily to general declines in market demand for camping products.

Net sales in the Watercraft Recreation business decreased $11,952, or 29% from the prior year. Sales in this segment were negatively affected by continuing decreased demand in the overall watercraft market compared to the prior year.

Diving net sales decreased $11,441, or 13%, year over year. The sales decrease was due to softening market demand across all geographic regions, partially offset by a favorable foreign currency translation impact on sales in this segment of approximately 1% in 2024 versus the prior year period.

Cost of Sales

Cost of sales was $391,866, or 66.1% of net sales, on a consolidated basis for fiscal 2024 compared to $419,757, or 63.2% of net sales, in the prior year. The decrease in total cost of sales dollars was consistent with the decrease in sales year over year. As a percentage of net sales, the increase cost of sales between years was driven primarily by the unfavorable absorption of fixed overhead costs as a result of lower sales volumes between periods.

Gross Profit

Gross profit of $200,980 was 33.9% of net sales on a consolidated basis for the year ended September 27, 2024 compared to $244,087, or 36.8% of net sales in the prior year.

Gross profit in the Fishing business decreased by $28,766 from the prior year due primarily to the 8% decrease in net sales year over year. While certain material and overhead costs improved year over year as a result of cost savings efforts, it was not enough to overcome unfavorable overhead absorption as a result of the reduced sales volumes between periods, and a product mix that contained lower margin products in the current year.

Camping gross profit decreased by $1,778 from 2023, mainly due to lower sales volumes than the prior year.

Gross profit in the Watercraft Recreation segment decreased by $5,531 from 2023, due primarily to lower sales volumes than the prior year and the lower absorption of fixed overhead related to such sales decrease.

The $6,935 decrease in gross profit in the Diving segment was largely due to sales volume decreases during fiscal 2024 as compared to the prior year.

Operating Expenses

Operating expenses increased from the prior year by $12,155 despite the decrease in sales volumes. Key drivers of the expense change are an $11,173 write off of goodwill in the current year, approximately $3,800 of higher deferred compensation costs between years, partially offset by lower incentive compensation and professional services expenses between years.

Operating expenses for the Fishing segment increased by $19,156 from fiscal 2023 levels.  The increase was due primarily to the $11,173 write off of goodwill in the current year, as well as approximately $11,000 higher advertising and promotional spend between years offset in part by lower warranty expense and lower sales volume related costs.

Camping operating expenses decreased by $5,169 from the prior year. In addition to decreased sales volume related costs between years, the prior year included expenses related to the Eureka! product exit of approximately $2,500.

In the Watercraft Recreation segment, operating expenses decreased $2,973 from their levels in fiscal 2023 due primarily to decreased sales volume related expenses in 2024.

Operating expenses for the Diving business increased by $401 year over year due primarily to severance expense and professional services expenses, partially offset by decreased sales volume related expenses between periods.

The Company's fiscal 2024 general corporate expenses of $35,503 increased $739 from $34,765 in fiscal 2023. More favorable market conditions on the Company's deferred compensation plan assets resulted in approximately $3,800 of higher deferred

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compensation expense during fiscal 2024 over the prior year, partially offset by lower incentive compensation and professional services expenses year over year. The deferred compensation expenses are entirely offset by a gain in "Other (income) expense, net" related to marking the plan assets to market.

Operating Results

The Company’s operating loss was $43,522 in fiscal 2024 compared to an operating profit of $11,740 in fiscal 2023.  Fishing operating profit decreased by $47,923 to a loss of $6,598 from the prior year due primarily to lower sales volumes between years, as well as increased operating expenses, as discussed above.  The operating profit for Camping was $3,848 compared to $457 in 2023 which increase was primarily a result of the lower operating expenses between periods.  The operating loss for the Watercraft Recreation business was $4,336 in fiscal 2024 compared to an operating loss of $1,777 in fiscal 2023 due to the changes in sales volumes between periods noted above.  The operating loss for the Diving business was $1,244 in fiscal 2024, down from an operating profit of $6,092 in fiscal 2023, due primarily to decreased sales volumes between periods.

Other Income and Expenses

Interest expense of $152 was flat as compared to the prior year expense of $152. Interest income of $4,844 increased slightly from prior year interest income of $4,543 due to the increase in deposit interest rates year over year, as well as increased cash and investment balances over the prior year.  Net other income of $8,968 in fiscal 2024 decreased from $9,693 in fiscal 2023.  The current year net other income included the gain on the sale of a building of approximately $1,900 and market earnings and dividend income of $7,049 on deferred compensation plan assets, partially offset by currency losses of $385. In the prior year, net other income included the gain on the sale of the Military and Commercial Tents product lines of approximately $6,560, and market earnings and dividends on the deferred compensation plan assets of $3,200, partially offset by $114 of currency losses.  The dividends and market gains and losses on deferred compensation plan assets recognized in the Consolidated Statement of Operations in “Other (income) expense, net” are offset as compensation expense in “Operating expenses.”

Pretax Income and Income Taxes

The Company realized a pretax loss of $29,862 in fiscal 2024 compared to income of $25,824 in fiscal 2023. The Company recorded income tax benefit of $3,329 in 2024, which equated to an effective tax rate of 11.1%, compared to tax expense of $6,290 in 2023, which equated to an effective tax rate of 24.4%.

Net Income (Loss)

The Company recognized net loss of $26,533, or $2.60 per diluted common share, in fiscal 2024 compared to net income of $19,534, or $1.90 per diluted common share, in fiscal 2023 based on the factors discussed above.

Fiscal 2023 vs. Fiscal 2022

Net Sales

Net sales in fiscal 2023 decreased by 11% to $663,844 compared to $743,355 in fiscal 2022. Foreign currency exchange had an unfavorable impact of less than 1% on 2023 sales versus fiscal 2022.

Net sales for the Fishing business decreased by $33,655, or 6% during fiscal 2023 from fiscal 2022.  The decrease from fiscal 2022 was primarily due to the following key factors: moderating demand during fiscal 2023 from record highs in the prior two fiscal years fueled by the impact of the pandemic; and the effect of customers more tightly managing their inventory levels as the Company transitioned its bow-mount trolling motor product lines.

Camping net sales decreased $25,033, or 36%, in 2023 from 2022, as demand significantly declined from the increased levels seen during the pandemic. Additionally, approximately $6,600 of the decrease in net sales from fiscal 2022 was related to the sale of the Military and Commercial Tents product lines during the second fiscal quarter of 2023. The Company sold these product lines to a third party in an asset sale for a purchase price of $14,990 which closed on March 17, 2023. The net book value of the assets and liabilities sold was approximately $8,350, resulting in a gain on sale of approximately $6,640, which was recorded in Other (income) expense, net in the Company’s accompanying Consolidated Statements of Operations. The purchase price and the net proceeds received by the Company related to this sale were subject to customary purchase price adjustment provisions and Company indemnity obligations set forth in the definitive purchase agreement. Accordingly, during the third and fourth fiscal quarter of fiscal 2023, working capital true-up and purchase price adjustments reduced the purchase price and the final net gain to approximately $6,560.

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Net sales in the Watercraft Recreation business decreased $27,172, or 40% as the overall market significantly declined from the elevated levels seen during the pandemic.

Diving net sales increased $6,195, or 8%, year over year. The sales increase was due to increased demand for our products as the global tourism industry continued to recover from the pandemic, as well as the impact of price increases, which were partially offset by an unfavorable foreign currency translation impact on sales in this segment of approximately 1% in 2023 versus fiscal 2022.

Cost of Sales

Cost of sales was $419,757, or 63.2% of net sales, on a consolidated basis for fiscal 2023 compared to $472,023, or 63.5% of net sales, in fiscal 2022. The decrease in cost of sales was relatively consistent with the decrease in sales year over year and improved slightly as a percentage of net sales as supply chain conditions improved and costs of materials and freight both came down.

Gross Profit

Gross profit of $244,087 was 36.8% of net sales on a consolidated basis for the year ended September 29, 2023 compared to $271,332, or 36.5% of net sales in fiscal 2022.

Gross profit in the Fishing business decreased by $7,685 from fiscal 2022 due primarily to the 6% decrease in net sales year over year. Although we experienced improved freight and materials costs over fiscal 2022, those cost savings were nearly offset by unfavorable overhead absorption on reduced sales volumes between periods.

Camping gross profit decreased by $12,120 from 2022, which was mainly attributable to decreased sales volumes as compared to 2022. Additionally, approximately $2,300 of increases in reserves for excess Eureka! tent inventory further brought down gross profit.

Gross profit in the Watercraft Recreation segment decreased by $11,388 from 2022, due primarily to lower sales volumes between years.

The $3,846 increase in gross profit in the Diving segment was due primarily to sales volume increases and pricing actions during fiscal 2023 as compared to fiscal 2022.

Operating Expenses

Operating expenses increased from fiscal 2022 by $27,325 despite the decrease in sales volumes due to investments in marketing and research & development and higher headcount and deferred compensation costs.

Operating expenses for the Fishing segment increased by $16,423 from fiscal 2022 levels.  The increase was due primarily to higher warranty expense and marketing spend between years, as well as strategic investments in additional research and development headcount in fiscal 2023, offset in part by lower sales volume-driven expenses.

Camping operating expenses increased by $838 from fiscal 2022 where increased expenses related to the Eureka! exit more than offset the decline in operating expenses resulting from decreased sales volume-driven expenses between years. During the fourth quarter of 2023, the Company decided to fully exit the Eureka! consumer product lines of the Camping business segment and focus solely on the Jetboil product line. As part of this exit, the Company committed to donating approximately $2,000 in excess Eureka! inventory to a non-profit organization and recognized the contribution expense in the fourth quarter of fiscal 2023. Additionally, the Company incurred costs related to the wind down of this Eureka! branded business which included accruing approximately $500 of exit costs.

In the Watercraft Recreation segment, operating expenses decreased $3,438 from their levels in fiscal 2022 due primarily to decreased sales volume related expenses in 2023.

Operating expenses for the Diving business increased by $2,460 year over year due primarily to increased sales volume related expenses and increased headcount and personnel-related costs between periods.

The Company's fiscal 2023 general corporate expenses of $34,765 increased $11,043 from $23,722 in fiscal 2022. More favorable market conditions on the Company's deferred compensation plan assets resulted in approximately $9,100 of higher

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deferred compensation expense during fiscal 2023 over fiscal 2022. The deferred compensation expenses were entirely offset by a gain in "Other (income) expense, net" related to marking the plan assets to market. Additionally, professional services costs increased approximately $2,800 year over year.

Operating Results

The Company’s operating profit was $11,740 in fiscal 2023 compared to an operating profit of $66,310 in fiscal 2022.  Fishing operating profit decreased by $24,108 to $41,325 from $65,433 in fiscal 2022 due primarily to lower sales volumes between years, as well as increased operating expenses, as discussed above.  The operating profit for Camping was $457 compared to $13,415 in 2022 which decrease was primarily a result of the lower sales volumes between periods.  The operating loss for the Watercraft Recreation business was $1,777 in fiscal 2023 compared to operating profit of $6,173 in fiscal 2022 due to the changes in sales volumes noted above.  Operating profit for the Diving business increased by $1,387 in fiscal 2023 from fiscal 2022, due primarily to increased sales volumes and improved margins.

Other Income and Expenses

Interest expense of $152 was flat as compared to the prior year expense of $153. Interest income of $4,543 increased from fiscal 2022 interest income of $807 due to the increase in deposit interest rates year over year, as well as increased cash and investment balances year over year.  Net other income of $9,693 in fiscal 2023 increased from net other expense of $8,076 in fiscal 2022.  Fiscal 2023 net other income included the gain on the sale of the Military and Commercial Tents product lines of approximately $6,560, and market earnings and dividend income of $3,200 on deferred compensation plan assets, partially offset by currency losses of $114. In fiscal 2022, net other expense included $5,878 of market losses net of dividends on the deferred compensation plan assets, as well as $1,741 of currency losses.  The dividends and market gains and losses on deferred compensation plan assets recognized in the Consolidated Statement of Operations in “Other (income) expense, net” are offset as compensation expense in “Operating expenses.”

Pretax Income and Income Taxes

The Company realized pretax income of $25,824 in fiscal 2023 compared to $58,888 in fiscal 2022. The Company recorded income tax expense of $6,290 in 2023, which equated to an effective tax rate of 24.4%, compared to $14,397 in 2022, which equated to an effective tax rate of 24.4%.

Net Income

The Company recognized net income of $19,534, or $1.90 per diluted common share, in fiscal 2023 compared to $44,491, or $4.37 per diluted common share, in fiscal 2022 based on the factors discussed above.

Financial Condition, Liquidity and Capital Resources

The Company believes its existing balances of cash and cash equivalents will be sufficient to satisfy its working capital needs, capital asset purchase requirements, outstanding commitments and other liquidity requirements associated with its existing operations over the next twelve months. The Company currently anticipates the cash used for future dividends will come from its current cash and cash generated from ongoing operating activities.

The Company considers all short-term investments in interest-bearing bank accounts, and all securities and other instruments with an original maturity of three months or less, to be equivalent to cash. Short-term investments consist of marketable securities, with original maturities greater than three months but less than one year, and long-term investments consist of marketable securities with original maturities greater than one year, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade.

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

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Operating Activities

The following table sets forth the Company’s working capital position at the end of each of the years shown:

Cash flows provided by operations in fiscal 2024 totaled $40,984, compared to $41,713 in fiscal 2023, and cash used for operations totaled $62,144 in fiscal 2022. Despite the net loss in fiscal 2024, cash flows provided by operations remained relatively consistent with fiscal 2023, as a result of managing inventory levels and reducing the inventory balance year over year. The substantial improvement in cash flows from operating activities between fiscal 2022 and 2023 was due to the Company's ability to fill more customer orders, as a result of improved supply chain conditions, which generated substantially more customer payments during fiscal 2023 versus fiscal 2022.

Depreciation and amortization charges were $19,608, $16,295 and $14,234 in fiscal 2024, 2023 and 2022, respectively.

Investing Activities

Cash flows provided by investing activities were $5,034 in fiscal 2024, and cash flows used for investing activities were $48,374, and $31,678 in fiscal 2023 and 2022, respectively. During fiscal 2024, the Company received proceeds from maturities of investments of $27,025, as well as proceeds of approximately $1,900 related to the sale of a building. During fiscal 2023, the Company purchased investments of $40,700. There were no sales or purchases of investments in fiscal 2022. In fiscal 2023, there was $14,990 of proceeds from selling the Military and Commercial Tent product lines. Expenditures for property, plant and equipment were $22,018, $22,668 and $31,690 in fiscal 2024, 2023 and 2022, respectively. In general, the Company’s ongoing capital expenditures are primarily related to tooling for new products, facilities investments and information systems improvements.

Financing Activities

Cash flows used for financing activities totaled $13,695 in fiscal 2024 compared to $12,732 and $12,233 in 2023 and 2022, respectively, and were primarily for the payment of dividends of $13,431 and $12,554 in 2024 and 2023, respectively. In 2022, dividend payments totaled $12,056.

Contractual Obligations and Off Balance Sheet Arrangements

The Company has contractual obligations and commitments to make future payments under its operating leases and open purchase orders.  There have been no changes outside of the ordinary course of business in the specified contractual obligations during the year ended September 27, 2024.

The Company utilizes letters of credit primarily as security for the payment of future claims under its workers’ compensation insurance. Letters of credit outstanding at September 27, 2024 and September 29, 2023 were $67 and $67, respectively, and were included in the Company’s total loan availability.  The Company had no unsecured revolving credit facilities at its foreign subsidiaries as of September 27, 2024 or September 29, 2023.

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The Company has no other off-balance sheet arrangements.

Market Risk Management

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 14% of the Company’s revenues for the fiscal year ended September 27, 2024 were denominated in currencies other than the U.S. dollar.  Approximately 6% were denominated in euros and approximately 6% were denominated in Canadian dollars, with the remaining 2% denominated in various other foreign currencies.  Changes in foreign currency exchange rates can cause unexpected financial losses or cash flow needs.

Interest Rate Risk

The Company operates in a seasonal business and experiences significant fluctuations in operating cash flow as working capital needs increase in advance of the Company’s primary selling and cash generation season, and decline as accounts receivable are collected and cash is accumulated.

Commodities

Certain components used in the Company’s products are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancellable supply contracts. Primary commodity price exposures include costs associated with metals, resins and packaging materials.

Impact of Inflation

The Company anticipates that changing costs of basic raw materials (including due to inflationary conditions in the economy) may impact future operating costs and, accordingly, the prices of its products. The Company is involved in continuing programs to mitigate the impact of cost increases through changes in product design and identification of sourcing and manufacturing efficiencies. Price increases and, in certain situations, price decreases are implemented for individual products, when appropriate.

The Company’s results of operations and financial condition are presented based on historical cost.

Critical Accounting Estimates

The Company’s management discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of its assets, liabilities, sales and expenses, and related footnote disclosures.  On an on-going basis, the Company evaluates its estimates for product returns, credit losses, inventories, long lived assets and goodwill, income taxes, warranty obligations, pensions and other post-retirement benefits, litigation and other subjective matters impacting the financial statements.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.  Management has discussed these policies with the Audit Committee of the Company’s Board of Directors.

Allowance for Credit Losses

Allowances for credit losses are estimated by the individual operating companies based on estimates of losses related to customer accounts receivable balances.  Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable

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balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances.

Inventories

The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management’s judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory reserves are estimated by the individual operating companies using standard quantitative measures based on criteria established by the Company. The Company also considers current forecast plans, as well as market and industry conditions in establishing reserve levels. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances.

Deferred Taxes

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.

Goodwill and Other Intangible Assets Impairment

Goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired.  Generally, annual impairment tests are performed by the Company in the fourth quarter of each fiscal year. Goodwill is tested for impairment at the reporting unit level.

In assessing the recoverability of the Company’s goodwill, the Company estimates the fair value of the reporting unit to which the goodwill relates.  Fair value of the reporting unit is estimated using a discounted cash flow model.  If the fair value of a reporting unit exceeds its carrying value, no impairment exists. When the fair value of the reporting unit is less than it's carrying value, an impairment charge is recognized based on the excess of carrying amount over its fair value, not to exceed the carrying value of the goodwill.  The Company recognized a goodwill impairment charge in the fourth quarter of fiscal 2024 of $11,173 in "Goodwill Impairment" in the accompanying Consolidated Statements of Operations in the Fishing segment, resulting in a full impairment of the Company's balance of goodwill. The Company did not recognize any goodwill impairment charges in 2023 or 2022. See Note 1, subheading "Goodwill", to the consolidated financial statements included elsewhere in this report for additional information.

The discounted cash flow model used to estimate fair value of reporting units requires a number of key estimates and assumptions.  The Company estimates the future cash flows of the reporting units based on historical and forecasted revenues and operating costs and applies a discount rate to the estimated future cash flows for purposes of the valuation.  This discount rate is based on the estimated weighted average cost of capital, which includes certain assumptions made by management such as market capital structure, market betas, the risk-free rate of return and the estimated costs of borrowing.  Changes in these key estimates and assumptions, or in other assumptions used in this process, could materially affect our impairment analysis in a given year.

In assessing the recoverability of the Company’s other indefinite lived intangible assets, the Company estimates the fair value of the various intangible assets.  The fair value of trademarks and patents is estimated using the relief from royalty method.  If the fair value of an intangible asset exceeds its carrying value, no impairment exists. When fair value is less than the carrying value of the intangible asset, an impairment loss is recognized for the amount of the difference, not to exceed the carrying value of the intangible asset.

A number of factors, many of which the Company has no ability to control, could affect its financial condition, operating results and business prospects and could cause actual results to differ from the estimates and assumptions that the Company uses in preparing its financial statements.  These factors include:  a prolonged global economic crisis, a significant decrease in demand for the Company’s products, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator and successful efforts by the Company’s competitors to gain market share.

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Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances, such as unplanned negative cash flow indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future undiscounted cash flows expected to be generated by the asset group. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Application of alternative assumptions, such as changes in the estimate of future cash flows, could produce significantly different results. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. During the fourth quarter of fiscal 2024, the Company determined that indicators of potential impairment of long-lived assets were present in the Watercraft and Fishing segments, and performed an analysis of future undiscounted cash flows, which exceeded the carrying value of the respective asset groups. Therefore, it was determined there was no impairment of any long-lived assets during fiscal 2024.

Warranties

The Company accrues a warranty reserve for estimated costs to provide warranty services. Warranty reserves are estimated using standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than per share amounts, are stated in thousands.

Executive Overview

The Company designs, manufactures and markets innovative, high quality recreational products for the outdoor enthusiast. Through a combination of innovative products, strong marketing, a talented and passionate workforce and efficient distribution, the Company seeks to set itself apart from the competition in its markets. Its subsidiaries operate as a network that promotes innovation and leverages best practices and synergies in the design, production and marketing of their recreational products, following the strategic vision set by executive management and approved by the Company’s Board of Directors.

Highlights

Fiscal 2023 saw a significant change in pacing of sales compared to fiscal 2022 and 2021 as seasonality fluctuations in the Company's business returned to more traditional pre-pandemic levels. During the last quarter of fiscal 2022, as supply chain restrictions eased, the Company filled a significant number of backlogged customer orders. As a result, the    fiscal 2023 fourth quarter comparisons show a significant reduction in sales versus the prior year fourth quarter. The Company’s fiscal 2023 full-year revenues decreased by 11% from the prior year as outdoor recreation markets continued to moderate after elevated pandemic-driven demand. The decrease in sales volumes and a 13% increase in operating expenses between years resulted in a $54,570 decrease in operating profit in fiscal 2023 from fiscal 2022.

Results of Operations

Summary consolidated financial results from continuing operations for the fiscal years presented were as follows:

The Company’s internal and external sales and operating profit (loss) by business segment for each of the three most recent completed fiscal years were as follows:

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See Note 13 to the Consolidated Financial Statements included elsewhere in this report for the definition of segment net sales and operating profit.

Fiscal 2023 vs. Fiscal 2022

Net Sales

Net sales in fiscal 2023 decreased by 11% to $663,844 compared to $743,355 in fiscal 2022. Foreign currency exchange had an unfavorable impact of less than 1% on the current year’s sales versus the prior year.

Net sales for the Fishing business decreased by $33,655, or 6% during fiscal 2023 from fiscal 2022.  The decrease from prior year is primarily due to the following key factors: moderating demand during fiscal 2023 from record highs in the prior two fiscal years fueled by the impact of the pandemic; and the effect of customers more tightly managing their inventory levels as the Company transitioned its bow-mount trolling motor product lines.

Camping net sales decreased $25,033, or 36%, in 2023 from 2022, as demand significantly declined from the increased levels seen during the pandemic. Additionally, approximately $6,600 of the decrease in net sales from the prior year period was related to the sale of the Military and Commercial Tents product lines during the second fiscal quarter of 2023. The Company sold these product lines to a third party in an asset sale for a purchase price of $14,990 which closed on March 17, 2023. The net book value of the assets and liabilities sold was approximately $8,350, resulting in a gain on sale of approximately $6,640, which is recorded in Other (income) expense, net in the Company’s accompanying Condensed Consolidated Statements of Operations. The purchase price and the net proceeds received by the Company related to this sale were subject to customary purchase price adjustment provisions and Company indemnity obligations set forth in the definitive purchase agreement. Accordingly, during the third and fourth fiscal quarter, working capital true-up and purchase price adjustments reduced the purchase price and the final net gain to approximately $6,560.

Net sales in the Watercraft Recreation business decreased $27,172, or 40% as the overall market significantly declined from the elevated levels seen during the pandemic.

Diving net sales increased $6,195, or 8%, year over year. The sales increase was due to increased demand for our products as the global tourism industry continued to recover from the pandemic, as well as the impact of price increases, which were partially offset by an unfavorable foreign currency translation impact on sales in this segment of approximately 1% in 2023 versus the prior year period.

Cost of Sales

Cost of sales was $419,757, or 63.2% of net sales, on a consolidated basis for fiscal 2023 compared to $472,023, or 63.5% of net sales, in the prior year. The decrease in cost of sales was relatively consistent with the decrease in sales year over year and improved slightly as a percentage of net sales as supply chain conditions improved and costs of materials and freight both came down.

Gross Profit

Gross profit of $244,087 was 36.8% of net sales on a consolidated basis for the year ended September 29, 2023 compared to $271,332, or 36.5% of net sales in the prior year.

Gross profit in the Fishing business decreased by $7,685 from the prior year due primarily to the 6% decrease in net sales year over year. Although we experienced improved freight and materials costs over the prior year, those cost savings were nearly offset by unfavorable overhead absorption on reduced sales volumes between periods.

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Camping gross profit decreased by $12,120 from 2022, which was mainly attributable to decreased sales volumes as compared to the prior year. Additionally, approximately $2,300 of increases in reserves for excess Eureka! tent inventory further brought down gross profit.

Gross profit in the Watercraft Recreation segment decreased by $11,388 from 2022, due primarily to lower sales volumes than the prior year.

The $3,846 increase in gross profit in the Diving segment was due primarily to sales volume increases and pricing actions during fiscal 2023 as compared to the prior year.

Operating Expenses

Operating expenses increased from the prior year by $27,325 despite the decrease in sales volumes due to investments in marketing and research & development and higher headcount and deferred compensation costs.

Operating expenses for the Fishing segment increased by $16,423 from fiscal 2022 levels.  The increase was due primarily to higher warranty expense and marketing spend between years, as well as strategic investments in additional research and development headcount in fiscal 2023, offset in part by lower sales volume-driven expenses.

Camping operating expenses increased by $838 from the prior year where increased expenses related to the Eureka! exit more than offset the decline in operating expenses resulting from decreased sales volume-driven expenses between years. During the fourth quarter of 2023, the Company decided to fully exit the Eureka! consumer product lines of the Camping business segment and focus solely on the Jetboil product line. As part of this exit, the Company committed to donating approximately $2,000 in excess Eureka! inventory to a non-profit organization and recognized the contribution expense in the fourth quarter of fiscal 2023. Additionally, the Company incurred costs related to the wind down of this Eureka! branded business which included accruing approximately $500 of exit costs. Other costs will be expensed as incurred and are not expected to be material.

In the Watercraft Recreation segment, operating expenses decreased $3,438 from their levels in fiscal 2022 due primarily to decreased sales volume related expenses in 2023.

Operating expenses for the Diving business increased by $2,460 year over year due primarily to increased sales volume related expenses and increased headcount and personnel-related costs between periods.

The Company's fiscal 2023 general corporate expenses of $34,765 increased $11,043 from $23,722 in fiscal 2022. More favorable market conditions on the Company's deferred compensation plan assets resulted in approximately $9,100 of higher deferred compensation expense during fiscal 2023 over the prior year. The deferred compensation expenses are entirely offset by a gain in "Other (income) expense, net" related to marking the plan assets to market. Additionally, professional services costs increased approximately $2,800 over the prior year.

Operating Results

The Company’s operating profit was $11,740 in fiscal 2023 compared to an operating profit of $66,310 in fiscal 2022.  Fishing operating profit decreased by $24,108 to $41,325 from $65,433 in the prior year due primarily to lower sales volumes between years, as well as increased operating expenses, as discussed above.  The operating profit for Camping was $457 compared to $13,415 in 2022 which decrease was primarily a result of the lower sales volumes between periods.  The operating loss for the Watercraft Recreation business was $1,777 in fiscal 2023 compared to operating profit of $6,173 in fiscal 2022 due to the changes in sales volumes noted above.  Operating profit for the Diving business increased by $1,387 in fiscal 2023 from fiscal 2022, due primarily to increased sales volumes and improved margins.

Other Income and Expenses

Interest expense of $152 was flat as compared to the prior year expense of $153. Interest income of $4,543 increased from prior year interest income of $807 due to the increase in deposit interest rates year over year, as well as increased cash and investment balances over the prior year.  Net other income of $9,693 in fiscal 2023 increased from net other expense of $8,076 in fiscal 2022.  The current year net other income included the gain on the sale of the Military and Commercial Tents product lines of approximately $6,560, and market earnings and dividend income of $3,200 on deferred compensation plan assets, partially offset by currency losses of $114. In the prior year, net other expense included $5,878 of market losses net of dividends on the deferred compensation plan assets, as well as $1,741 of currency losses.  The dividends and market gains and

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losses on deferred compensation plan assets recognized in the Consolidated Statement of Operations in “Other (income) expense, net” are offset as compensation expense in “Operating expenses.”

Pretax Income and Income Taxes

The Company realized pretax income of $25,824 in fiscal 2023 compared to $58,888 in fiscal 2022. The Company recorded income tax expense of $6,290 in 2023, which equated to an effective tax rate of 24.4%, compared to $14,397 in 2022, which equated to an effective tax rate of 24.4%.

Net Income

The Company recognized net income of $19,534, or $1.90 per diluted common share, in fiscal 2023 compared to $44,491, or $4.37 per diluted common share, in fiscal 2022 based on the factors discussed above.

Fiscal 2022 vs. Fiscal 2021

Net Sales

Net sales in fiscal 2022 decreased by 1% to $743,355 compared to $751,651 in fiscal 2021. Foreign currency exchange had an unfavorable impact of less than 1% on fiscal 2022 sales versus the prior year.

Net sales for the Fishing business decreased by $26,418, or 5% during fiscal 2022 from fiscal 2021.  While customer and consumer demand was strong, the decrease over fiscal 2021 was driven by significant supply chain disruptions and the resulting unavailability of certain necessary components (especially as it related to electronic components) experienced in fiscal 2022, which impacted the ability to complete product build and fill customer orders. Specifically, due to the technical and electronic nature of the product categories, the Fishing segment was most susceptible to the supply chain disruption issues, (including with respect to cost and availability of necessary materials and components) caused by the Coronavirus (COVID-19) pandemic.

Camping net sales increased $7,434, or 12%, in 2022 from 2021.  Increased sales of Eureka! and Jetboil products as a result of continued participation in outdoor recreation activities were the primary driver of the increase year over year.

Net sales in the Watercraft Recreation business increased $1,337, or 2%. Continued new product success drove the overall increase over fiscal 2021.

Diving net sales increased $9,427, or 14%, year over year. Fiscal 2021 sales were negatively impacted due to the negative effects of COVID-19 on demand due to restrictions in destination travel and tourism. As several regions around the world re-opened, sales volumes increased during fiscal 2022 along with the increase in tourism, partially offset by an unfavorable foreign currency translation impact on sales in these segment of approximately 4.5% in 2022 versus the fiscal 2021 period.

Cost of Sales

Cost of sales was $472,023, or 63.5% of net sales, on a consolidated basis for fiscal 2022 compared to $417,526, or 55.5% of net sales, in fiscal 2021.  Despite the decrease in sales over fiscal 2021, the increase in cost of sales was primarily driven by significant increases in materials costs between years. During fiscal 2022, the Company devoted significant effort to managing disruptions in its supply chain to ensure the availability of necessary components, parts and other raw materials, in some cases at significantly higher price points than what was historically paid, to try to meet sales demand for our products across segments.

Gross Profit

Gross profit of $271,332 was 36.5% of net sales on a consolidated basis for the year ended September 30, 2022 compared to $334,125, or 44.5% of net sales in fiscal 2021.

Gross profit in the Fishing business decreased by $66,217 from fiscal 2021 due primarily to the 5% decrease in net sales year over year, as well as significant increases in materials costs, as discussed above.

Camping gross profit increased by $1,857 from 2021 due primarily to increased sales volumes, pricing actions and a favorable mix of products sold in fiscal 2022 as compared to fiscal 2021.

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Gross profit in the Watercraft Recreation segment decreased by $2,525 from 2021, despite increased sales in 2022 versus fiscal 2021, primarily due to increased materials and freight costs.

The $4,169 increase in gross profit in the Diving segment was due primarily to increased sales volumes and pricing actions during fiscal 2022 as compared to fiscal 2021.

Operating Expenses

Operating expenses decreased from fiscal 2021 by $17,820.  The decrease was primarily due to the impact of overall lower sales volume-driven expenses, as well as lower variable and deferred compensation expense incurred in fiscal 2022 as compared to fiscal 2021.

Operating expenses for the Fishing segment decreased by $9,160 from fiscal 2021 levels.  The decrease was due primarily to lower sales volume related expenses between years.

Camping operating expenses increased by $2,467 from fiscal 2021 due primarily to increased sales volume related expenses and increased people costs.

In the Watercraft Recreation segment, operating expenses increased $475 from their levels in fiscal 2021 due primarily to increased sales volume related expenses in 2022.

Operating expenses for the Diving business increased by $993 year over year due primarily to increased sales volume related expenses between periods.

The Company's fiscal 2022 general corporate expenses of $23,722 decreased $12,595 from $36,317 in fiscal 2021. The year over year decrease reflected lower people costs, including $11,200 of lower deferred compensation expenses, as well as lower incentive compensation and lower health insurance costs from fiscal 2021.

Operating Results

The Company’s operating profit was $66,310 in fiscal 2022 compared to an operating profit of $111,283 in fiscal 2021.  Fishing operating profit decreased by $57,057 to $65,433 from $122,490 in fiscal 2021 due primarily to higher costs of goods and also lower sales volumes between years, stemming from supply chain disruptions, which were particularly acute in electronics.  The operating profit for Camping was $13,415 compared to $14,025 in 2021 which decrease was primarily a result of the higher operating expenses between periods.  The operating profit for the Watercraft Recreation business was $6,173 in fiscal 2022 compared to $9,173 in fiscal 2021 due to the factors noted above on changes in sales volumes and operating expenses.  Operating profit for the Diving business increased by $3,175 in fiscal 2022 from fiscal 2021, due primarily to increased sales volumes and pricing actions.

Other Income and Expenses

Interest expense of $153 was relatively flat as compared to fiscal 2021 expense of $145. Interest income of $807 increased from fiscal 2021 interest income of $366 due to the increase in deposit interest rates year over year.  Net other expense of $8,076 in fiscal 2022 decreased from net other income of $1,418 in fiscal 2021.  The fiscal 2022 net other expense included currency losses of $1,741 and market losses net of dividend income of $5,878 on deferred compensation plan assets. In fiscal 2021, net other income included $5,329 of market gains and dividends on the deferred compensation plan assets, partially offset by $215 of currency losses and pension termination expense of $2,526.  The dividends and market gains and losses on deferred compensation plan assets recognized in the Consolidated Statement of Operations in “Other expense (income), net” are offset as compensation expense in “Operating expenses.”

Pretax Income and Income Taxes

The Company realized pretax income of $58,888 in fiscal 2022 compared to $112,922 in fiscal 2021. The Company recorded income tax expense of $14,397 in 2022, which equated to an effective tax rate of 24.4%, compared to $29,541 in 2021, which equated to an effective tax rate of 26.2%.

Net Income

The Company recognized net income of $44,491, or $4.37 per diluted common share, in fiscal 2022 compared to $83,381, or $8.21 per diluted common share, in fiscal 2021 based on the factors discussed above.

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Financial Condition, Liquidity and Capital Resources

The Company believes its existing balances of cash and cash equivalents will be sufficient to satisfy its working capital needs, capital asset purchase requirements, outstanding commitments and other liquidity requirements associated with its existing operations over the next twelve months. The Company currently anticipates the cash used for future dividends will come from its current cash and cash generated from ongoing operating activities.

The Company considers all short-term investments in interest-bearing bank accounts, and all securities and other instruments with an original maturity of three months or less, to be equivalent to cash. Short-term investments consist of marketable securities, with original maturities greater than three months but less than one year, and long-term investments consist of marketable securities with original maturities greater than one year, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade.

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

Operating Activities

The following table sets forth the Company’s working capital position at the end of each of the years shown:

Cash flows provided by operations in fiscal 2023 totaled $41,713, cash flows used for operations totaled $62,144 in fiscal 2022, respectively, and cash provided by operations totaled $58,318 in fiscal 2021. During fiscal 2022, the Company was able to fill backlogged customer orders, which generated customer payments during fiscal 2023 that substantially improved cash flows from operating activities during the year. Notwithstanding such improvement in operating cash flows, the Company continues to focus on managing inventory levels.

Depreciation and amortization charges were $16,295, $14,234 and $13,401 in fiscal 2023, 2022 and 2021, respectively.

Investing Activities

Cash flows used for investing activities were $48,374, $31,678, and $21,381 in fiscal 2023, 2022, and 2021, respectively. During fiscal 2023, the Company purchased investments of $40,700. There were no sales or purchases of investments in fiscal 2022 or 2021. In fiscal 2023, there was $14,990 of proceeds from selling the Military and Commercial Tent product lines. Expenditures for property, plant and equipment were $22,668, $31,690 and $21,409 in fiscal 2023, 2022 and 2021, respectively. The decrease in these expenditures from the prior year was due primarily to additional capacity investments made in the prior year that did not recur in fiscal 2023. In general, the Company’s ongoing capital expenditures are primarily related to tooling for new products, facilities investments and information systems improvements.

Financing Activities

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Cash flows used for financing activities totaled $12,732 in fiscal 2023 compared to $12,233 and $9,033 in 2022 and 2021, respectively, and were primarily for the payment of dividends of $12,554 and $12,056 in 2023 and 2022, respectively. In 2021, dividend payments totaled $8,400.

Contractual Obligations and Off Balance Sheet Arrangements

The Company has contractual obligations and commitments to make future payments under its operating leases and open purchase orders.  There have been no changes outside of the ordinary course of business in the specified contractual obligations during the year ended September 29, 2023.

The Company utilizes letters of credit primarily as security for the payment of future claims under its workers’ compensation insurance. Letters of credit outstanding at September 29, 2023 and September 30, 2022 were $67 and $173, respectively, and were included in the Company’s total loan availability.  The Company had no unsecured revolving credit facilities at its foreign subsidiaries as of September 29, 2023 or September 30, 2022.

The Company has no other off-balance sheet arrangements.

Market Risk Management

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 14% of the Company’s revenues for the fiscal year ended September 29, 2023 were denominated in currencies other than the U.S. dollar.  Approximately 6% were denominated in euros and approximately 6% were denominated in Canadian dollars, with the remaining 2% denominated in various other foreign currencies.  Changes in foreign currency exchange rates can cause unexpected financial losses or cash flow needs.

Interest Rate Risk

The Company operates in a seasonal business and experiences significant fluctuations in operating cash flow as working capital needs increase in advance of the Company’s primary selling and cash generation season, and decline as accounts receivable are collected and cash is accumulated.

Commodities

Certain components used in the Company’s products are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancellable supply contracts. Primary commodity price exposures include costs associated with metals, resins and packaging materials.

Impact of Inflation

The Company anticipates that changing costs of basic raw materials (including due to inflationary conditions in the economy) may impact future operating costs and, accordingly, the prices of its products. The Company is involved in continuing programs to mitigate the impact of cost increases through changes in product design and identification of sourcing and manufacturing efficiencies. Price increases and, in certain situations, price decreases are implemented for individual products, when appropriate.

The Company’s results of operations and financial condition are presented based on historical cost.

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Critical Accounting Estimates

The Company’s management discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of its assets, liabilities, sales and expenses, and related footnote disclosures.  On an on-going basis, the Company evaluates its estimates for product returns, bad debts, inventories, long lived assets and goodwill, income taxes, warranty obligations, pensions and other post-retirement benefits, litigation and other subjective matters impacting the financial statements.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.  Management has discussed these policies with the Audit Committee of the Company’s Board of Directors.

Allowance for Doubtful Accounts

Allowances for doubtful accounts are estimated by the individual operating companies based on estimates of losses related to customer accounts receivable balances.  Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances.

Inventories

The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management’s judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory reserves are estimated by the individual operating companies using standard quantitative measures based on criteria established by the Company. The Company also considers current forecast plans, as well as market and industry conditions in establishing reserve levels. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances.

Deferred Taxes

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.

Goodwill and Other Intangible Assets Impairment

Goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired.  Generally, annual impairment tests are performed by the Company in the fourth quarter of each fiscal year.

In assessing the recoverability of the Company’s goodwill, the Company estimates the fair value of the businesses to which the goodwill relates.  Fair value is estimated using a discounted cash flow analysis.  If the fair value of a reporting unit exceeds its net book value, no impairment exists. When fair value is less than the carrying value of the net assets and related goodwill, an impairment charge is recognized based on the excess of carrying amount over its fair value.  The Company did not recognize any goodwill impairment charges in 2023, 2022 or 2021.

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The discounted cash flow analysis used to estimate fair value requires a number of key estimates and assumptions.  The Company estimates the future cash flows of the reporting units based on historical and forecasted revenues and operating costs and applies a discount rate to the estimated future cash flows for purposes of the valuation.  This discount rate is based on the estimated weighted average cost of capital, which includes certain assumptions made by management such as market capital structure, market betas, the risk-free rate of return and the estimated costs of borrowing.  Changes in these key estimates and assumptions, or in other assumptions used in this process, could materially affect our impairment analysis in a given year.

In assessing the recoverability of the Company’s other indefinite lived intangible assets, the Company estimates the fair value of the various intangible assets.  The fair value of trademarks and patents is estimated using the relief from royalty method.  If the fair value of an intangible asset exceeds its net book value, no impairment exists. When fair value is less than the carrying value of the intangible asset, an impairment loss is recognized for the amount of the difference.

A number of factors, many of which the Company has no ability to control, could affect its financial condition, operating results and business prospects and could cause actual results to differ from the estimates and assumptions that the Company uses in preparing its financial statements.  These factors include:  a prolonged global economic crisis, a significant decrease in demand for the Company’s products, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator and successful efforts by the Company’s competitors to gain market share.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances, such as unplanned negative cash flow indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future undiscounted cash flows expected to be generated by the asset group. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Application of alternative assumptions, such as changes in the estimate of future cash flows, could produce significantly different results. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.

Warranties

The Company accrues a warranty reserve for estimated costs to provide warranty services. Warranty reserves are estimated using standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than per share amounts, are stated in thousands.

Executive Overview

The Company designs, manufactures and markets high quality recreational products for the outdoor enthusiast. Through a combination of innovative products, strong marketing, a talented and passionate workforce and efficient distribution, the Company seeks to set itself apart from the competition in its markets. Its subsidiaries operate as a network that promotes innovation and leverages best practices and synergies, following the strategic vision set by executive management and approved by the Company’s Board of Directors.

Coronavirus (COVID-19)

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The COVID-19 pandemic drove consumer desire to engage in socially distant and safe activities outdoors. As a result, increased participation in Fishing, Camping and Watercraft Recreation also increased demand for our products across Company segments beginning in fiscal 2020 and continuing throughout fiscal 2022. As global travel restrictions also eased, we experienced increased participation and resulting increased product demand in the Diving segment beginning in fiscal 2021 and continuing through fiscal 2022.

In addition to this increase in demand for Company products, COVID-19 and the resulting macroeconomic dynamics have also caused widely-documented supply chain and logistics disruptions across industries. Specifically, the adverse supply chain and logistics constraints and disruptions have impacted the timing, sourcing, availability and cost of raw materials and components that are necessary to manufacture our outdoor recreation products, especially in our Fishing segment due to the electronic components used in those products. Because certain electronic components that are necessary for manufacturing our higher volume products in that segment have been most impacted by the supply chain and logistics disruptions, there has been limited availability of those materials and components, as well as increased pricing and inflationary pressures on such components when they have become available, all of which impacted our margins during fiscal 2022. The Company has attempted to mitigate these disruptions by purchasing significantly higher levels of certain raw material and component inventory as they have been available, in many cases at higher price points than what was historically paid, to enable the Company to complete finished product orders as soon as the missing raw material and component inventory items become available. Nonetheless, shortages throughout fiscal 2022 have impacted the Fishing segment's ability to complete products for shipping, which has ultimately resulted in decreased sales volumes in the Fishing segment over the prior year, despite continued demand for our Fishing products, as evidenced by outstanding orders.

Additionally, the Company's buying actions have subsequently resulted in decreased margins and the Company carrying significantly higher levels of inventory for a number of its materials, components and products at the end of fiscal 2022. Though the Company continues to believe the inventory that it has built and which exists on its balance sheet is useable and salable in the ordinary course of business, it continues to monitor the current reserve balances for obsolete and excess inventory. However, any changes in consumer demand for the Company's outdoor recreation products, changes in economic conditions, or changes in customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances in the future.

Because the Company expects that supply chain disruptions, as well as inflationary pricing conditions for raw materials and components necessary to manufacture product, will continue into fiscal 2023, the Company remains focused on evaluating and pursuing additional options (beyond building inventory) to meet the demand for its products. During fiscal 2023 the Company expects to closely monitor customer demand and proactively manage its higher than normal inventory levels. Nonetheless, these supply chain and logistics disruptions and inflationary pricing conditions remain fluid and will likely adversely impact the cost of goods sold for future sales of product.

Highlights

The Company's fiscal 2022 and 2021 each comprised 52 weeks, whereas the fiscal year ended October 2, 2020 comprised 53 weeks. The Company’s fiscal 2022 revenues decreased by 1% from the prior year. While consumer and customer demand for the Company's products remained strong throughout fiscal 2022 as evidenced by outstanding order volumes, sales volumes were negatively impacted by product availability caused by the supply chain disruptions described above, particularly in Fishing, the Company's largest segment. This sales volume decrease and lower gross margins resulting from higher costs of sales were the primary drivers of the $44,973 decrease in operating profit in fiscal 2022 over fiscal 2021.

Results of Operations

Summary consolidated financial results from continuing operations for the fiscal years presented were as follows:

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The Company’s internal and external sales and operating profit (loss) by business segment for each of the three most recent completed fiscal years were as follows:

See Note 13 to the Consolidated Financial Statements included elsewhere in this report for the definition of segment net sales and operating profit.

Fiscal 2022 vs. Fiscal 2021

Net Sales

Net sales in fiscal 2022 decreased by 1% to $743,355 compared to $751,651 in fiscal 2021. Foreign currency exchange had an unfavorable impact of less than 1% on the current year’s sales versus the prior year.

Net sales for the Fishing business decreased by $26,418, or 5% during fiscal 2022 from fiscal 2021.  While customer and consumer demand was strong, the decrease over the prior year was driven by significant supply chain disruptions and the resulting unavailability of certain necessary components (especially as it related to electronic components) experienced in the current year, which impacted the ability to complete product build and fill customer orders. Specifically, due to the technical and electronic nature of the product categories, the Fishing segment has been the most susceptible to the previously discussed supply chain issues, as discussed in "Coronavirus (COVID-19)" above.

Camping net sales increased $7,434, or 12%, in 2022 from 2021.  Increased sales of Eureka and Jetboil products as a result of continued participation in outdoor recreation activities were the primary driver of the increase year over year.

Net sales in the Watercraft Recreation business increased $1,337, or 2%. Continued new product success drove the overall increase over the prior year.

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Diving net sales increased $9,427, or 14%, year over year. Prior year sales were negatively impacted due to the negative effects of COVID-19 on demand due to restrictions in destination travel and tourism. As several regions around the world have re-opened, sales volumes have increased along with the increase in tourism, partially offset by an unfavorable foreign currency translation impact on sales in these segment of approximately 4.5% in 2022 versus the prior year period.

Cost of Sales

Cost of sales was $472,023, or 63.5% of net sales, on a consolidated basis for fiscal 2022 compared to $417,526, or 55.5% of net sales, in the prior year.  Despite the decrease in sales over the prior fiscal year, the increase in cost of sales was primarily driven by significant increases in materials costs between years. The Company continues to manage disruptions in its supply chain to ensure the availability of necessary components, parts and other raw materials, in some cases at significantly higher price points than what was historically paid, to try to meet sales demand for our products across segments.

Gross Profit

Gross profit of $271,332 was 36.5% of net sales on a consolidated basis for the year ended September 30, 2022 compared to $334,125, or 44.5% of net sales in the prior year.

Gross profit in the Fishing business decreased by $66,217 from the prior year due primarily to the 5% decrease in net sales year over year, as well as significant increases in materials costs, as discussed above.

Camping gross profit increased by $1,857 from 2021 due primarily to increased sales volumes, pricing actions and a favorable mix of products sold in the current year as compared to the prior year.

Gross profit in the Watercraft Recreation segment decreased by $2,525 from 2021, despite increased sales in 2022 versus the prior year, primarily due to increased materials and freight costs.

The $4,169 increase in gross profit in the Diving segment was due primarily to increased sales volumes and pricing actions during fiscal 2022 as compared to the prior year.

Operating Expenses

Operating expenses decreased from the prior year by $17,820.  The decrease was primarily due to the impact of overall lower sales volume-driven expenses, as well as lower variable and deferred compensation expense incurred in fiscal 2022 as compared to the prior fiscal year.

Operating expenses for the Fishing segment decreased by $9,160 from fiscal 2021 levels.  The decrease was due primarily to lower sales volume related expenses between years.

Camping operating expenses increased by $2,467 from the prior year due primarily to increased sales volume related expenses and increased people costs.

In the Watercraft Recreation segment, operating expenses increased $475 from their levels in fiscal 2021 due primarily to increased sales volume related expenses in 2022.

Operating expenses for the Diving business increased by $993 year over year due primarily to increased sales volume related expenses between periods.

The Company's fiscal 2022 general corporate expenses of $23,722 decreased $12,595 from $36,317 in fiscal 2021. The year over year decrease reflects lower people costs, including $11,200 of lower deferred compensation expenses, as well as lower incentive compensation and lower health insurance costs from the prior year.

Operating Results

The Company’s operating profit was $66,310 in fiscal 2022 compared to an operating profit of $111,283 in fiscal 2021.  Fishing operating profit decreased by $57,057 to $65,433 from $122,490 in the prior year due primarily to higher costs of goods and also lower sales volumes between years, stemming from supply chain disruptions, which were particularly acute in electronics.  The operating profit for Camping was $13,415 compared to $14,025 in 2021 which decrease was primarily a result of the higher operating expenses between periods.  The operating profit for the Watercraft Recreation business was $6,173 in fiscal 2022 compared to $9,173 in fiscal 2021 due to the factors noted above on changes in sales volumes and operating

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expenses.  Operating profit for the Diving business increased by $3,175 in fiscal 2022 from fiscal 2021, due primarily to increased sales volumes and pricing actions.

Other Income and Expenses

Interest expense of $153 was relatively flat as compared to the prior year expense of $145. Interest income of $807 increased from prior year interest income of $366 due to the increase in deposit interest rates year over year.  Net other expense of $8,076 in fiscal 2022 decreased from net other income of $1,418 in fiscal 2021.  The current year net other expense included currency losses of $1,741 and market losses net of dividend income of $5,878 on deferred compensation plan assets. In the prior year, net other income included $5,329 of market gains and dividends on the deferred compensation plan assets, partially offset by $215 of currency losses and pension termination expense of $2,526.  The dividends and market gains and losses on deferred compensation plan assets recognized in the Consolidated Statement of Operations in “Other expense (income), net” are offset as compensation expense in “Operating expenses.”

Pretax Income and Income Taxes

The Company realized pretax income of $58,888 in fiscal 2022 compared to $112,922 in fiscal 2021. The Company recorded income tax expense of $14,397 in 2022, which equated to an effective tax rate of 24.4%, compared to $29,541 in 2021, which equated to an effective tax rate of 26.2%.

Net Income

The Company recognized net income of $44,491, or $4.37 per diluted common share, in fiscal 2022 compared to $83,381, or $8.21 per diluted common share, in fiscal 2021 based on the factors discussed above.

Fiscal 2021 vs. Fiscal 2020

Net Sales

Net sales in 2021 increased by 26% to $751,651 compared to $594,209 in 2020. Foreign currency exchange had a favorable impact of less than 1%, on the fiscal 2021 sales versus the prior year.

Net sales for the Fishing business increased by $103,122, or 23% during 2021 from 2020.  The increase over fiscal 2020 was driven by continued new product success and increased participation in fishing, principally as a result of the effect of COVID-19 on consumer recreation and leisure choices, resulting in higher demand across all product lines in this segment.

Camping net sales increased $21,329, or 51%, in 2021 from 2020.  Increased sales of consumer tents and Jetboil products as a result of increased participation in outdoor recreation activities were the primary driver of the increase year over year.

Net sales in the Watercraft Recreation business increased $24,746, or 59% from 2020 to 2021. Increased demand as a result of increased participation in watercraft recreation activities during the COVID-19 pandemic, combined with new product success, drove the overall increase between years.

Diving net sales increased $8,574, or 14%, year over year. Fiscal 2020 sales were negatively impacted due to the effects of COVID-19 on demand globally due to restrictions in destination travel and tourism. As travel restrictions started to lift throughout fiscal 2021, tourism began to recover, resulting in increased demand and sales in this segment between years. In addition, foreign currency translation favorably impacted sales by approximately 3.3% in 2021 versus 2020.

Cost of Sales

Cost of sales was $417,526, or 55.5% of net sales, on a consolidated basis for fiscal 2021 compared to $329,216, or 55.4% of net sales, in fiscal 2020. Higher sales volumes between years were the primary driver of the increase in the cost of sales between periods. Favorable product mix and pricing between fiscal years offset the impact of approximately $7,200 of additional tariffs on Chinese goods and components during fiscal 2021, as well as increased freight costs over fiscal 2020.

Gross Profit

Gross profit of $334,125 was 44.5% of net sales on a consolidated basis for the year ended October 1, 2021 compared to $264,993, or 44.6% of net sales in fiscal 2020.

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Gross profit in the Fishing business in fiscal 2021 increased by $39,676 from fiscal 2020 due primarily to the 23% increase in net sales year over year. Favorable product mix and improved absorption of overhead costs during fiscal 2021 partially offset approximately $5,900 of additional tariff costs on Chinese sourced goods and components and higher freight costs incurred during fiscal 2021 versus fiscal 2020.

Camping gross profit increased by $11,497 from 2020 due primarily to increased sales volumes, pricing actions and a favorable mix of products sold in fiscal 2021 as compared to fiscal 2020.

Gross profit in the Watercraft Recreation segment increased by $12,289 from fiscal 2020 due primarily to increased sales volumes in fiscal 2021 versus the prior year and the resulting improvement in absorption of overhead costs.

The $5,463 increase in gross profit in the Diving segment was due primarily to increased sales volumes, pricing actions and favorable product mix during fiscal 2021 as compared to fiscal 2020.

Operating Expenses

Operating expenses increased in fiscal 2021 from fiscal 2020 by $28,919.  The increase was driven primarily by higher sales volume related costs incurred in fiscal 2021 as compared to the prior fiscal year. Additionally, increased headcount and compensation costs further increased expenses year over year.

Operating expenses for the Fishing segment increased by $13,069 from fiscal 2020 levels.  The increase was due primarily to higher sales volume related expenses, as well as increased people costs between years.

Camping operating expenses increased by $1,879 in fiscal 2021 from the prior year due primarily to increased sales volume related expenses.

In the Watercraft Recreation segment, operating expenses increased $2,787 in fiscal 2021 from their levels in fiscal 2020 due primarily to increased sales volume related expenses in 2021, partially offset by decreased spending rate on advertising and promotions.

Operating expenses for the Diving business increased by $1,357 year over year due primarily to increased sales volume related expenses, as well as increased people costs between periods.

The Company's 2021 general corporate expenses of $36,317 increased $9,827 from $26,490 in 2020. The year over year increase reflects higher people costs including $2,900 of higher deferred compensation expenses and higher health insurance costs over the prior year as well as higher professional services expense.

Operating Results

The Company’s operating profit was $111,283 in fiscal 2021 compared to an operating profit of $71,070 in fiscal 2020.  Fishing operating profit increased by $26,606 to $122,490 from $95,884 in the prior year due primarily to higher sales volumes between years.  The operating profit for Camping was $14,025 compared to $4,406 in 2020 which increase was also primarily a result of higher sales volumes between periods.  The operating profit for the Watercraft Recreation business was $9,173 in fiscal 2021 compared to a loss of $329 in fiscal 2020 due to the factors noted above on changes in sales volumes and operating expenses.  Operating profit for the Diving business increased by $4,106 in fiscal 2021 from fiscal 2020, due to recovery from the impact of COVID-19 and demand for our Diving products and the other factors discussed above.

Other Income and Expenses

Interest expense in fiscal 2021 of $145 was relatively flat as compared to the prior year expense of $143. Interest income of $366 decreased from fiscal 2020 year interest income of $1,413 due to the decrease in deposit interest rates year over year.  Net other income of $1,418 in fiscal 2021 increased slightly from net other income of $1,362 in fiscal 2020.  Fiscal 2021 net other income included currency losses of $215 and market gains and dividends of $5,329 on deferred compensation plan assets, partially offset by pension termination expense of $2,526. In fiscal 2020, net other income included $269 of currency losses and $2,454 of market gains and dividends on the deferred compensation plan assets.  The dividends and market gains and losses on deferred compensation plan assets recognized in the Consolidated Statement of Operations in “Other income, net” are offset as compensation expense in “Operating expenses.”

Pretax Income and Income Taxes

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The Company realized pretax income of $112,922 in fiscal 2021 compared to $73,702 in fiscal 2020. The Company recorded income tax expense of $29,541 in fiscal 2021, which equated to an effective tax rate of 26.2%, compared to $18,469 in fiscal 2020, which equated to an effective tax rate of 25.1%.

Net Income

The Company recognized net income of $83,381, or $8.21 per diluted common share, in fiscal 2021 compared to $55,233, or $5.47 per diluted common share, in fiscal 2020 based on the factors discussed above.

Financial Condition, Liquidity and Capital Resources

The Company believes its existing balances of cash and cash equivalents will be sufficient to satisfy its working capital needs, capital asset purchase requirements, outstanding commitments and other liquidity requirements associated with its existing operations over the next twelve months. The Company currently anticipates the cash used for future dividends will come from its current cash and cash generated from ongoing operating activities.

The Company considers all short-term investments in interest-bearing bank accounts, and all securities and other instruments with an original maturity of three months or less, to be equivalent to cash. Short-term investments in prior years consisted of certificates of deposit, with original maturities greater than three months but less than one year, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade.

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

Operating Activities

The following table sets forth the Company’s working capital position at the end of each of the years shown:

Cash flows used for operations in fiscal 2022 totaled $62,144, and cash provided by operations totaled $58,318 and $61,493 in fiscal 2021 and 2020, respectively. The change in operating cash flow from the prior year is due primarily to a decrease in net income, as well as increases in inventory levels and other working capital changes.

Depreciation and amortization charges were $14,234, $13,401 and $14,926 in fiscal 2022, 2021 and 2020, respectively.

Investing Activities

Cash flows used for investing activities were $31,678, $21,381, and $15,587 in fiscal 2022, 2021, and 2020, respectively. There were no sales or purchases of short-term investments in fiscal 2022, 2021 or 2020. Expenditures for property, plant and equipment were $31,690, $21,409 and $15,600 in fiscal 2022, 2021 and 2020, respectively. The increase from the prior year is due primarily to additional capacity investments made in the current year. In general, the Company’s ongoing capital expenditures are primarily related to tooling for new products, facilities investments and information systems improvements.

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Financing Activities

Cash flows used for financing activities totaled $12,233 in fiscal 2022 compared to $9,033 and $7,107 in 2021 and 2020, respectively, and were primarily for the payment of dividends of $12,056 and $8,400 in 2022 and 2021, respectively. In 2020, dividend payments totaled $6,773.

Contractual Obligations and Off Balance Sheet Arrangements

The Company has contractual obligations and commitments to make future payments under its operating leases and open purchase orders.  There have been no changes outside of the ordinary course of business in the specified contractual obligations during the year ended September 30, 2022.

The Company utilizes letters of credit primarily as security for the payment of future claims under its workers’ compensation insurance. Letters of credit outstanding at September 30, 2022 and October 1, 2021 were $173 and $181, respectively, and were included in the Company’s total loan availability.  The Company had no unsecured revolving credit facilities at its foreign subsidiaries as of September 30, 2022 or October 1, 2021.

The Company has no other off-balance sheet arrangements.

Market Risk Management

Coronavirus outbreak

As disclosed in our prior filings with the Securities and Exchange Commission and elsewhere herein, in December 2019, a new strain of coronavirus ("COVID-19"), began to spread globally, leaving no region or part of the world unaffected by the pandemic it has created. Governments and health authorities took measures to prevent the spread of this virus (including in certain cases requiring or recommending a vaccine or imposing testing requirements), all of which impacted the Company's business and operations. To the extent that COVID-19 continues to persist or recur, among other things, the ability of the Company’s suppliers to manufacture and deliver the products that it sells to the Company, the ability of the Company to manufacture and deliver its products to its customers, the Company's ability to display its products at trade shows and similar events, the Company's ability to conduct meetings with its customers and prospective customers, and, if a significant number of its employees at a particular facility or location were to contract coronavirus, the Company’s ability to conduct its day-to-day operations could be adversely impacted. The financial impact of the coronavirus pandemic on the Company will depend on future developments, including related to any supply chain disruptions, that the Company cannot reasonably predict or estimate at this time, but any of which could materially and adversely affect its results for an unknown but possibly extended period. See the section "Risk Factors" identified in Part I, Item 1A in this Form 10-K for more information.

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 13% of the Company’s revenues for the fiscal year ended September 30, 2022 were denominated in currencies other than the U.S. dollar.  Approximately 4% were denominated in euros and approximately 6% were denominated in Canadian dollars, with the remaining 3% denominated in various other foreign currencies.  Changes in foreign currency exchange rates can cause unexpected financial losses or cash flow needs.

Interest Rate Risk

The Company operates in a seasonal business and experiences significant fluctuations in operating cash flow as working capital needs increase in advance of the Company’s primary selling and cash generation season, and decline as accounts receivable are collected and cash is accumulated.

Commodities

Certain components used in the Company’s products are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancellable supply contracts. Primary commodity price exposures include costs associated with metals, resins and packaging materials.

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Impact of Inflation

The Company anticipates that changing costs of basic raw materials (including due to inflationary conditions in the economy) may impact future operating costs and, accordingly, the prices of its products. The Company is involved in continuing programs to mitigate the impact of cost increases through changes in product design and identification of sourcing and manufacturing efficiencies. Price increases and, in certain situations, price decreases are implemented for individual products, when appropriate.

The Company’s results of operations and financial condition are presented based on historical cost.

Critical Accounting Estimates

The Company’s management discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of its assets, liabilities, sales and expenses, and related footnote disclosures.  On an on-going basis, the Company evaluates its estimates for product returns, bad debts, inventories, long lived assets and goodwill, income taxes, warranty obligations, pensions and other post-retirement benefits, litigation and other subjective matters impacting the financial statements.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.  Management has discussed these policies with the Audit Committee of the Company’s Board of Directors.

Allowance for Doubtful Accounts

Allowances for doubtful accounts are estimated by the individual operating companies based on estimates of losses related to customer accounts receivable balances.  Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances.

Inventories

The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management’s judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory reserves are estimated by the individual operating companies using standard quantitative measures based on criteria established by the Company. The Company also considers current forecast plans, as well as market and industry conditions in establishing reserve levels. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances.

Deferred Taxes

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.

Goodwill and Other Intangible Assets Impairment

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Goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired.  Generally, annual impairment tests are performed by the Company in the fourth quarter of each fiscal year.

In assessing the recoverability of the Company’s goodwill, the Company estimates the fair value of the businesses to which the goodwill relates.  Fair value is estimated using a discounted cash flow analysis.  If the fair value of a reporting unit exceeds its net book value, no impairment exists. When fair value is less than the carrying value of the net assets and related goodwill, an impairment charge is recognized based on the excess of carrying amount over its fair value.  The Company did not recognize any goodwill impairment charges in 2022, 2021 or 2020.

The discounted cash flow analysis used to estimate fair value requires a number of key estimates and assumptions.  The Company estimates the future cash flows of the reporting units based on historical and forecasted revenues and operating costs and applies a discount rate to the estimated future cash flows for purposes of the valuation.  This discount rate is based on the estimated weighted average cost of capital, which includes certain assumptions made by management such as market capital structure, market betas, the risk-free rate of return and the estimated costs of borrowing.  Changes in these key estimates and assumptions, or in other assumptions used in this process, could materially affect our impairment analysis in a given year.

In assessing the recoverability of the Company’s other indefinite lived intangible assets, the Company estimates the fair value of the various intangible assets.  The fair value of trademarks and patents is estimated using the relief from royalty method.  If the fair value of an intangible asset exceeds its net book value, no impairment exists. When fair value is less than the carrying value of the intangible asset, an impairment loss is recognized for the amount of the difference.

A number of factors, many of which the Company has no ability to control, could affect its financial condition, operating results and business prospects and could cause actual results to differ from the estimates and assumptions that the Company uses in preparing its financial statements.  These factors include:  a prolonged global economic crisis, a significant decrease in demand for the Company’s products, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator and successful efforts by the Company’s competitors to gain market share.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances, such as unplanned negative cash flow indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future undiscounted cash flows expected to be generated by the asset group. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Application of alternative assumptions, such as changes in the estimate of future cash flows, could produce significantly different results. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.

Warranties

The Company accrues a warranty reserve for estimated costs to provide warranty services. Warranty reserves are estimated using standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise stated, all monetary amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, other than per share amounts, are stated in thousands.

Executive Overview

The Company designs, manufactures and markets high quality recreational products for the outdoor enthusiast. Through a combination of innovative products, strong marketing, a talented and passionate workforce and efficient distribution, the Company seeks to set itself apart from the competition in its markets. Its subsidiaries operate as a network that promotes innovation and leverages best practices and synergies, following the strategic vision set by executive management and approved by the Company’s Board of Directors.

Coronavirus (COVID-19)

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Due to the timing of the COVID-19 outbreak, the Company's primary-selling season during fiscal 2020 was interrupted resulting in a significant shift in sales volumes during the 2020 fiscal year toward the latter half of that fiscal year versus the 2019 fiscal year, where our heaviest sales volumes occurred during our second and third fiscal quarters. As stay at home restrictions were lifted, the Company saw an increase in demand for many of its warm weather outdoor recreational products later during fiscal 2020 as consumers took advantage of being outdoors. As a result, each of our Fishing, Camping and Watercraft Recreation segments experienced strong demand in the latter half of fiscal 2020. This demand continued into and throughout our fiscal 2021, resulting in increased sales volumes across all Company segments in fiscal 2021.

In addition to this significant increase in demand for Company products during fiscal 2021, COVID-19 has also caused widely-documented supply chain and logistics disruptions across industries, including those in which we operate, which have been exacerbated during the latter half of fiscal 2021 and into our fiscal 2022 due to the recent higher demand for our outdoor recreation products and associated inventory replenishment actions of our customers. These adverse supply chain constraints and disruptions have impacted the timing, sourcing, availability and cost of raw materials and components that are necessary to manufacture our outdoor recreation products. Specifically, during the fourth quarter of fiscal 2021, certain of the Company's component suppliers and logistical service providers experienced disruptions, resulting in supply shortages across all of our segments for certain materials and components that are necessary to produce our products. As a result of these disruptions, starting during the latter portion of fiscal 2021, the Company took action to closely monitor its supply chain in order to meet the continued strong consumer demand and to attempt to continue to fulfill orders. These actions included building and procuring numerous categories of inventory (in some cases at significantly higher price points than what was historically paid) to mitigate against potential shortages during fiscal 2022 in certain of its materials and components that are necessary to manufacture Company products. These buying actions have resulted in the Company carrying significantly higher levels of inventory for a number of its materials, components and products at the end of fiscal 2021.

Because the Company expects that these same supply chain disruptions will continue into fiscal 2022, the Company remains focused on evaluating and pursuing additional options (beyond building inventory) to manage its supply chain to meet the continued strong consumer demand for its products. Nonetheless, these supply chain disruptions remain fluid and will likely impact the cost of goods sold for future sales of product or the Company’s ability to fill all customer demand for its products, especially given the volatility and changing circumstances brought on by the COVID-19 pandemic.

Highlights

The Company's prior fiscal year ended October 2, 2020 comprised 53 weeks, whereas fiscal 2021 and 2019 each comprised 52 weeks. The additional week in fiscal 2020 increased net sales by less than 2% over the prior year. The Company’s fiscal 2021 revenues increased by 26% over the prior year, driven primarily by strong performance in the Fishing, Camping and Watercraft Recreation segments where the Company saw strong demand for its outdoor recreation products as a result of consumers recreating outdoors in light of COVID-19. Operating profit in 2021 increased $40,213, or 57%, over 2020.

Results of Operations

Summary consolidated financial results from continuing operations for the fiscal years presented were as follows:

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The Company’s internal and external sales and operating profit (loss) by business segment for each of the three most recent completed fiscal years were as follows:

See Note 13 to the Consolidated Financial Statements included elsewhere in this report for the definition of segment net sales and operating profit.

Fiscal 2021 vs. Fiscal 2020

Net Sales

Net sales in 2021 increased by 26% to $751,651 compared to $594,209 in 2020. Foreign currency exchange had a favorable impact of less than 1%, on the current year’s sales versus the prior year.

Net sales for the Fishing business increased by $103,122, or 23% during 2021 from 2020.  The increase over the prior year was driven by continued new product success and increased participation in fishing, principally as a result of the effect of COVID-19 on consumer recreation and leisure choices, resulting in higher demand across all product lines in this segment.

Camping net sales increased $21,329, or 51%, in 2021 from 2020.  Increased sales of consumer tents and Jetboil products as a result of increased participation in outdoor recreation activities were the primary driver of the increase year over year.

Net sales in the Watercraft Recreation business increased $24,746, or 59%. Increased demand as a result of increased participation in watercraft recreation activities during the COVID-19 pandemic, combined with new product success, drove the overall increase over the prior year.

Diving net sales increased $8,574, or 14%, year over year. Prior year sales were negatively impacted due to the effects of COVID-19 on demand globally due to restrictions in destination travel and tourism. As travel restrictions started to lift throughout fiscal 2021, tourism has begun to recover, resulting in increased demand and sales in this segment over the prior year. In addition, foreign currency translation favorably impacted sales by approximately 3.3% in 2021 versus the prior year period.

Cost of Sales

Cost of sales was $417,526, or 55.5% of net sales, on a consolidated basis for fiscal 2021 compared to $329,216, or 55.4% of net sales, in the prior year.  Higher sales volumes between years were the primary driver of the increase in the cost of sales between periods. Favorable product mix and pricing between fiscal years offset the impact of approximately $7,200 of additional tariffs on Chinese goods and components during fiscal 2021, as well as increased freight costs over the prior year.

Gross Profit

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Gross profit of $334,125 was 44.5% of net sales on a consolidated basis for the year ended October 1, 2021 compared to $264,993, or 44.6% of net sales in the prior year.

Gross profit in the Fishing business increased by $39,676 from the prior year due primarily to the 23% increase in net sales year over year. Favorable product mix and improved absorption of overhead costs during fiscal 2021 partially offset approximately $5,900 of additional tariff costs on Chinese sourced goods and components and higher freight costs incurred during fiscal 2021 versus fiscal 2020.

Camping gross profit increased by $11,497 from 2020 due primarily to increased sales volumes, pricing actions and a favorable mix of products sold in the current year as compared to the prior year.

Gross profit in the Watercraft Recreation segment increased by $12,289 from 2020 due primarily to increased sales volumes in 2021 versus the prior year and the resulting improvement in absorption of overhead costs.

The $5,463 increase in gross profit in the Diving segment was due primarily to increased sales volumes, pricing actions and favorable product mix during fiscal 2021 as compared to the prior year.

Operating Expenses

Operating expenses increased from the prior year by $28,919.  The increase was driven primarily by higher sales volume related costs incurred in fiscal 2021 as compared to the prior fiscal year. Additionally, increased headcount and compensation costs further increased expenses year over year.

Operating expenses for the Fishing segment increased by $13,069 from fiscal 2020 levels.  The increase was due primarily to higher sales volume related expenses, as well as increased people costs between years.

Camping operating expenses increased by $1,879 from the prior year due primarily to increased sales volume related expenses.

In the Watercraft Recreation segment, operating expenses increased $2,787 from their levels in fiscal 2020 due primarily to increased sales volume related expenses in 2021, partially offset by decreased spending rate on advertising and promotions.

Operating expenses for the Diving business increased by $1,357 year over year due primarily to increased sales volume related expenses, as well as increased people costs between periods.

The Company's 2021 general corporate expenses of $36,317 increased $9,827 from $26,490 in 2020. The year over year increase reflects higher people costs including $2,900 of higher deferred compensation expenses and higher health insurance costs over the prior year as well as higher professional services expense.

Operating Results

The Company’s operating profit was $111,283 in fiscal 2021 compared to an operating profit of $71,070 in fiscal 2020.  Fishing operating profit increased by $26,606 to $122,490 from $95,884 in the prior year due primarily to higher sales volumes between years.  The operating profit for Camping was $14,025 compared to $4,406 in 2020 which increase was also primarily a result of higher sales volumes between periods.  The operating profit for the Watercraft Recreation business was $9,173 in fiscal 2021 compared to a loss of $329 in fiscal 2020 due to the factors noted above on changes in sales volumes and operating expenses.  Operating profit for the Diving business increased by $4,106 in fiscal 2021 from fiscal 2020, due to recovery from the impact of COVID-19 and demand for our Diving products and the other factors discussed above.

Other Income and Expenses

Interest expense of $145 was relatively flat as compared to the prior year expense of $143. Interest income of $366 decreased from prior year interest income of $1,413 due to the decrease in deposit interest rates year over year.  Net other income of $1,418 in fiscal 2021 increased slightly from net other income of $1,362 in fiscal 2020.  The current year net other income included currency losses of $215 and market gains and dividends of $5,329 on deferred compensation plan assets, partially offset by pension termination expense of $2,526. In the prior year, net other income included $269 of currency losses and $2,454 of market gains and dividends on the deferred compensation plan assets.  The dividends and market gains and losses on deferred compensation plan assets recognized in the Consolidated Statement of Operations in “Other income, net” are offset as compensation expense in “Operating expenses.”

Pretax Income and Income Taxes

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The Company realized pretax income of $112,922 in fiscal 2021 compared to $73,702 in fiscal 2020. The Company recorded income tax expense of $29,541 in 2021, which equated to an effective tax rate of 26.2%, compared to $18,469 in 2020, which equated to an effective tax rate of 25.1%.

Net Income

The Company recognized net income of $83,381, or $8.21 per diluted common share, in fiscal 2021 compared to $55,233, or $5.47 per diluted common share, in fiscal 2020 based on the factors discussed above.

Fiscal 2020 vs. Fiscal 2019

Net Sales

Net sales in 2020 increased by 6% to $594,209 compared to $562,419 in 2019. The additional week in the fiscal year drove an increase in net sales of approximately 1.5% over fiscal 2019. Foreign currency exchange had a $651 unfavorable impact, less than 1%, on 2020 fiscal year’s sales versus 2019.

Net sales for the Fishing business increased by $37,757, or 9% during 2020 from 2019.  Increased demand late in fiscal 2020 was more than enough to overcome the impact of COVID-19 related restrictions and shutdowns earlier in 2020, resulting in the increase between years.

Camping net sales increased $1,213, or 3%, in 2020 from 2019.  Increased sales of consumer tents and Jetboil products as a result of increased participation in outdoor recreation activities were more than enough to overcome declines in military tent sales year over year.

Net sales in the Watercraft Recreation business increased $8,359, or 25% in 2020 from 2019. Despite COVID-19 related shutdowns early in fiscal 2020, increased demand later in the year drove the overall increase over 2019. See "Coronavirus (COVID-19)" above for more information regarding the impact the COVID-19 pandemic had on our fiscal 2020 sales.

Diving net sales decreased $15,433, or 20%, from 2020 to 2019. The decrease was largely due to the effects of COVID-19 on demand globally due to restrictions during 2020 in destination travel and tourism. In addition, foreign currency translation negatively impacted sales by approximately 1% in 2020 versus 2019.

Cost of Sales

Cost of sales was $329,216, or 55.4% of net sales, on a consolidated basis for fiscal 2020 compared to $312,663, or 55.6% of net sales, in the prior year.  Higher sales volumes between years were the primary driver of the increase in the cost of sales between periods. Additionally, the impact of approximately $2,000 of additional tariffs during fiscal 2020, which increased our cost of sales, on Chinese goods and components over the prior year was offset by favorable product mix and pricing between fiscal years.

Gross Profit

Gross profit of $264,993 was 44.6% of net sales on a consolidated basis for the year ended October 2, 2020 compared to $249,756, or 44.4% of net sales in fiscal 2019.

Gross profit in the Fishing business increased by $18,625 from 2019 to 2020 due primarily to the 9% increase in net sales year over year. The recovery of overpayments of excise taxes during fiscal 2020 more than offset approximately $1,000 of new tariff costs on Chinese sourced goods and components incurred during fiscal 2020.

Camping gross profit in fiscal 2020 increased by $1,321 from 2019 due primarily to increased sales volumes and a favorable mix of products sold in fiscal 2020 as compared to fiscal 2019.

Gross profit in the Watercraft Recreation segment increased in fiscal 2020 by $3,840 from 2019 due primarily to increased sales volumes in 2020 versus 2019 and the resulting improvement in absorption of overhead costs.

The $8,467 decrease in gross profit in the Diving segment from 2019 to 2020 was due primarily to decreased sales volumes during fiscal 2020 as compared to fiscal 2019.

Operating Expenses

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Operating expenses increased during fiscal 2020 from 2019 by $7,941.  The increase was driven primarily by higher sales volume related costs incurred in fiscal 2020 as compared to the fiscal 2019. Additionally, increased headcount and people costs further increased expenses year over year.

Operating expenses for the Fishing segment increased in fiscal 2020 by $6,832 from fiscal 2019 levels.  The increase was due primarily to higher sales volume related expenses between years and increased headcount related expenses incurred in fiscal 2020.

Camping operating expenses decreased in fiscal 2020 by $189 from 2019 due primarily to efforts to reduce spending in light of COVID-19 uncertainties during 2020, primarily as it related to travel, entertainment and advertising expenses.

In the Watercraft Recreation segment, fiscal 2020 operating expenses increased $1,347 from their levels in fiscal 2019 due primarily to increased sales volume related expenses in 2020.

Operating expenses for the Diving business decreased by $2,848 year over year due primarily to lower sales volume related expenses, as well as lower headcount related expenses between periods.

The Company's fiscal 2020 general corporate expenses of $26,490 increased $2,799 from $23,961 in 2019. The year over year increase primarily reflects $1,800 of higher deferred compensation expenses, as well as higher health insurance costs offset in part by decreased investment in marketing support between years.

Operating Results

The Company’s operating profit was $71,070 in fiscal 2020 compared to an operating profit of $63,774 in fiscal 2019.  Fishing operating profit increased by $11,792 to $95,884 in fiscal 2020 from $84,092 in fiscal 2019 due primarily to higher sales volumes between years.  The operating profit for Camping in fiscal 2020 was $4,406 compared to $2,896 in 2019 which increase was also primarily a result of higher sales volumes between periods.  The operating loss for the Watercraft Recreation business was $329 in fiscal 2020 compared to a loss of $2,822 in fiscal 2019 due to the factors noted above on changes in sales volumes and operating expenses.  Operating profit for the Diving business decreased by $5,619 in fiscal 2020 from fiscal 2019, due to the impact of COVID-19 and demand for our Diving products and the other factors discussed above.

Other Income and Expenses

Interest expense in fiscal 2020 of $143 declined slightly from 2019 expense of $172. Interest income in fiscal 2020 of $1,413 decreased from 2019 interest income of $2,109 due to declining interest rates in 2020.  Net other income of $1,362 in fiscal 2020 increased from net other income of $796 in fiscal 2019.  Fiscal 2020 net other income included currency losses of $269 and market gains and dividends of $2,454 on deferred compensation plan assets. In fiscal 2019, net other income included $645 of currency gains and $610 of market gains and dividends on the deferred compensation plan assets.  The dividends and market gains and losses on deferred compensation plan assets recognized in the Consolidated Statement of Operations in “Other income, net” are offset as compensation expense in “Operating expenses.”

Pretax Income and Income Taxes

The Company realized pretax income of $73,702 in fiscal 2020 compared to $66,507 in fiscal 2019. The Company recorded income tax expense of $18,469 in 2020, which equated to an effective tax rate of 25.1%, compared to $15,094 in 2019, which equated to an effective tax rate of 22.7%.

Net Income

The Company recognized net income of $55,233, or $5.47 per diluted common share, in fiscal 2020 compared to $51,413, or $5.11 per diluted common share, in fiscal 2019 based on the factors discussed above.

Financial Condition, Liquidity and Capital Resources

The Company believes its existing balances of cash, cash equivalents and short-term investments will be sufficient to satisfy its working capital needs, capital asset purchase requirements, outstanding commitments and other liquidity requirements associated with its existing operations over the next twelve months. The Company currently anticipates the cash used for future dividends will come from its current cash and cash generated from ongoing operating activities.

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The Company considers all short-term investments in interest-bearing bank accounts, and all securities and other instruments with an original maturity of three months or less, to be equivalent to cash. Short-term investments in prior years consisted of certificates of deposit, with original maturities greater than three months but less than one year, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade.

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

Operating Activities

The following table sets forth the Company’s working capital position at the end of each of the years shown:

Cash flows provided by operations totaled $58,318, $61,493 and $45,844 in fiscal 2021, 2020 and 2019, respectively. Cash flows provided by operations decreased slightly from the prior year despite an increase in net income due primarily to increases in inventory levels and other working capital changes.

Depreciation and amortization charges were $13,401, $14,926 and $13,964 in fiscal 2021, 2020 and 2019, respectively.

Investing Activities

Cash flows used for investing activities were $21,381 and $15,587 in fiscal 2021 and 2020, respectively, and cash flows provided by investing activities were $11,989 in 2019. There were no sales or purchases of short-term investments in fiscal 2021 or 2020, while proceeds from the sale of short-term investments in 2019 provided cash of $35,838, offset by purchases of $7,124. Expenditures for property, plant and equipment were $21,409, $15,600 and $16,786 in fiscal 2021, 2020 and 2019, respectively. In general, the Company’s ongoing capital expenditures are primarily related to tooling for new products, facilities investments and information systems improvements.

Financing Activities

Cash flows used for financing activities totaled $9,033 in fiscal 2021 compared to $7,107 and $6,186 in 2020 and 2019, respectively, and were primarily for the payment of dividends of $8,400 and $6,773 in 2021 and 2020, respectively. In 2019, dividend payments totaled $5,557.

Contractual Obligations and Off Balance Sheet Arrangements

The Company has contractual obligations and commitments to make future payments under its operating leases and open purchase orders.  There have been no changes outside of the ordinary course of business in the specified contractual obligations during the year ended October 1, 2021.

The Company utilizes letters of credit primarily as security for the payment of future claims under its workers’ compensation insurance. Letters of credit outstanding at October 1, 2021 and October 2, 2020 were $181 and $181, respectively, and were

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included in the Company’s total loan availability.  The Company had no unsecured revolving credit facilities at its foreign subsidiaries as of October 1, 2021 or October 2, 2020.

The Company anticipates making contributions of approximately $96 to its defined benefit pension plans through September 30, 2022.

The Company has no other off-balance sheet arrangements.

Market Risk Management

Coronavirus outbreak

As disclosed in our prior filings with the Securities and Exchange Commission and elsewhere herein, in December 2019, a new strain of coronavirus ("COVID-19"), began to spread globally, leaving no region or part of the world unaffected by the pandemic it has created. Governments and health authorities have been taking, and continue to take, measures to prevent the spread of this virus (including in certain cases requiring or recommending a vaccine or imposing testing requirements), but it is presently unknown to what extent they will be successful or the potential timing of these measures and their outcome and impact on the Company's business in the future. To the extent that COVID-19 continues to persist, among other things, the ability of the Company’s suppliers to manufacture and deliver the products that it sells to the Company, the ability of the Company to manufacture and deliver its products to its customers, the Company's ability to display its products at trade shows and similar events, the Company's ability to conduct meetings with its customers and prospective customers, and, if a significant number of its employees at a particular facility or location were to contract coronavirus, the Company’s ability to conduct its day-to-day operations could be adversely impacted. The financial impact of the coronavirus pandemic on the Company will depend on future developments, including related to any supply chain disruptions, that the Company cannot reasonably predict or estimate at this time, but any of which could materially and adversely affect its results for an unknown but possibly extended period. See the section "Risk Factors" identified in Part I, Item 1A in this Form 10-K for more information.

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 fiscal year ended October 1, 2021 were denominated in currencies other than the U.S. dollar.  Approximately 4% were denominated in euros and approximately 6% were denominated in Canadian dollars, with the remaining 2% denominated in various other foreign currencies.  Changes in foreign currency exchange rates can cause unexpected financial losses or cash flow needs.

Interest Rate Risk

The Company operates in a seasonal business and experiences significant fluctuations in operating cash flow as working capital needs increase in advance of the Company’s primary selling and cash generation season, and decline as accounts receivable are collected and cash is accumulated.

Commodities

Certain components used in the Company’s products are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancellable supply contracts. Primary commodity price exposures include costs associated with metals, resins and packaging materials.

Impact of Inflation

The Company anticipates that changing costs of basic raw materials may impact future operating costs and, accordingly, the prices of its products. The Company is involved in continuing programs to mitigate the impact of cost increases through changes in product design and identification of sourcing and manufacturing efficiencies. Price increases and, in certain situations, price decreases are implemented for individual products, when appropriate.

The Company’s results of operations and financial condition are presented based on historical cost.  The Company does not believe that inflation has significantly affected its results of operations.

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Critical Accounting Estimates

The Company’s management discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of its assets, liabilities, sales and expenses, and related footnote disclosures.  On an on-going basis, the Company evaluates its estimates for product returns, bad debts, inventories, long lived assets and goodwill, income taxes, warranty obligations, pensions and other post-retirement benefits, litigation and other subjective matters impacting the financial statements.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.  Management has discussed these policies with the Audit Committee of the Company’s Board of Directors.

Allowance for Doubtful Accounts

Allowances for doubtful accounts are estimated by the individual operating companies based on estimates of losses related to customer accounts receivable balances.  Estimates are developed by using standard quantitative measures based on historical losses, adjusting for current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates and any specific customer collection issues the Company identifies could have a favorable or unfavorable effect on required reserve balances.

Inventories

The Company values inventory at the lower of cost (determined using the first-in first-out method) or net realizable value. Management’s judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated or because the amount on hand is more than will be used to meet future needs. Inventory reserves are estimated by the individual operating companies using standard quantitative measures based on criteria established by the Company. The Company also considers current forecast plans, as well as market and industry conditions in establishing reserve levels. Though the Company considers these reserve balances to be adequate, changes in economic conditions, customer inventory levels or competitive conditions could have a favorable or unfavorable effect on required reserve balances.

Deferred Taxes

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.

Goodwill and Other Intangible Assets Impairment

Goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired.  Generally, annual impairment tests are performed by the Company in the fourth quarter of each fiscal year.

In assessing the recoverability of the Company’s goodwill, the Company estimates the fair value of the businesses to which the goodwill relates.  Fair value is estimated using a discounted cash flow analysis.  If the fair value of a reporting unit exceeds its net book value, no impairment exists. When fair value is less than the carrying value of the net assets and related goodwill, an impairment charge is recognized based on the excess of carrying amount over its fair value.  The Company did not recognize any goodwill impairment charges in 2021, 2020 or 2019.

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The discounted cash flow analysis used to estimate fair value requires a number of key estimates and assumptions.  The Company estimates the future cash flows of the reporting units based on historical and forecasted revenues and operating costs and applies a discount rate to the estimated future cash flows for purposes of the valuation.  This discount rate is based on the estimated weighted average cost of capital, which includes certain assumptions made by management such as market capital structure, market betas, the risk-free rate of return and the estimated costs of borrowing.  Changes in these key estimates and assumptions, or in other assumptions used in this process, could materially affect our impairment analysis in a given year.

In assessing the recoverability of the Company’s other indefinite lived intangible assets, the Company estimates the fair value of the various intangible assets.  The fair value of trademarks and patents is estimated using the relief from royalty method.  If the fair value of an intangible asset exceeds its net book value, no impairment exists. When fair value is less than the carrying value of the intangible asset, an impairment loss is recognized for the amount of the difference.

A number of factors, many of which the Company has no ability to control, could affect its financial condition, operating results and business prospects and could cause actual results to differ from the estimates and assumptions that the Company uses in preparing its financial statements.  These factors include:  a prolonged global economic crisis, a significant decrease in demand for the Company’s products, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator and successful efforts by the Company’s competitors to gain market share.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of

The Company evaluates long-lived assets for impairment whenever events or changes in circumstances, such as unplanned negative cash flow indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to future undiscounted cash flows expected to be generated by the asset group. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Application of alternative assumptions, such as changes in the estimate of future cash flows, could produce significantly different results. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.

Warranties

The Company accrues a warranty reserve for estimated costs to provide warranty services. Warranty reserves are estimated using standard quantitative measures based on criteria established by the Company. Estimates of costs to service its warranty obligations are based on historical experience, expectation of future conditions and known product issues. To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims, revisions to the estimated warranty reserve would be required. The Company engages in product quality programs and processes, including monitoring and evaluating the quality of its suppliers, to help minimize warranty obligations.