# JOHNSON OUTDOORS INC (JOUT) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from JOHNSON OUTDOORS INC's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/788329/000114036124049014/jout-20240927.htm Accession: 0001140361-24-049014 Filing date: 2024-12-11 Report date: 2024-09-27 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/JOUT/ All MD&A years: /company/JOUT/mda/ Previous year: /company/JOUT/mda/fy2023/ (FY 2023) Next year: /company/JOUT/mda/fy2025/ (FY 2025) 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 17 Table of Contents 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 $55,262 decrease in operating profit in fiscal 2024 from fiscal 2023. Results of Operations Summary consolidated financial results from continuing operations for the fiscal years presented were as follows: [[GREPCENT_TABLE]] [["(thousands, except per share data)","2024","","2023","","2022"],["Net sales","$","592,846","","","$","663,844","","","$","743,355"],["Gross profit","200,980","","","244,087","","","271,332"],["Operating expenses","244,502","","","232,347","","","205,022"],["Operating (loss) profit","(43,522)","","","11,740","","","66,310"],["Interest income, net","(4,692)","","","(4,391)","","","(654)"],["Other (income) expense, net","(8,968)","","","(9,693)","","","8,076"],["Income tax (benefit) expense","(3,329)","","","6,290","","","14,397"],["Net (loss) income","(26,533)","","","19,534","","","44,491"]] [[/GREPCENT_TABLE]] 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: [[GREPCENT_TABLE]] [["","2024","","2023","","2022"],["Net sales:"],["Fishing","$","452,341","","","$","492,927","","","$","526,582"],["Camping","37,835","","","45,322","","","70,355"],["Watercraft Recreation","28,816","","","40,768","","","67,940"],["Diving","73,628","","","85,069","","","78,874"],["Other / Eliminations","226","","","(242)","","","(396)"],["","$","592,846","","","$","663,844","","","$","743,355"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","2024","","2023","","2022"],["Operating profit (loss):"],["Fishing","$","(6,598)","","","$","41,325","","","$","65,433"],["Camping","3,848","","","457","","","13,415"],["Watercraft Recreation","(4,336)","","","(1,777)","","","6,173"],["Diving","(1,244)","","","6,092","","","4,705"],["Other / Eliminations","(35,192)","","","(34,357)","","","(23,416)"],["","$","(43,522)","","","$","11,740","","","$","66,310"]] [[/GREPCENT_TABLE]] 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. 18 Table of Contents 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 19 Table of Contents 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. 20 Table of Contents 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 21 Table of Contents 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 $4.37 per diluted common share, in fiscal 2022 based on the factors discussed above. Financial Condition, Liquidity and Capital Resources The Company believes its existing balances of cash and cash equivalents will be sufficient to satisfy its working capital needs, capital asset purchase requirements, outstanding commitments and other liquidity requirements associated with its existing operations over the next twelve months. The Company currently anticipates the cash used for future dividends will come from its current cash and cash generated from ongoing operating activities. The Company considers all short-term investments in interest-bearing bank accounts, and all securities and other instruments with an original maturity of three months or less, to be equivalent to cash. Short-term investments consist of marketable securities, with original maturities greater than three months but less than one year, and long-term investments consist of marketable securities with original maturities greater than one year, with the primary objective of minimizing the potential risk of principal loss. The Company’s investment policy generally requires securities to be investment grade. The Company’s cash flows from operating, investing and financing activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized in the following table: 22 Table of Contents [[GREPCENT_TABLE]] [["","Year Ended"],["(thousands)","September 27 2024","","September 29 2023","","September 30 2022"],["Cash provided by (used for):"],["Operating activities","$","40,984","","","$","41,713","","","$","(62,144)"],["Investing activities","5,034","","","(48,374)","","","(31,678)"],["Financing activities","(13,695)","","","(12,732)","","","(12,233)"],["Effect of foreign currency rate changes on cash","1,321","","","1,444","","","(4,590)"],["Increase (decrease) in cash and cash equivalents","$","33,644","","","$","(17,949)","","","$","(110,645)"]] [[/GREPCENT_TABLE]] Operating Activities The following table sets forth the Company’s working capital position at the end of each of the years shown: [[GREPCENT_TABLE]] [["(thousands, except share data)","September 27 2024","","September 29 2023"],["Current assets","$","428,728","","","$","458,656"],["Current liabilities","90,444","","","104,006"],["Working capital","$","338,284","","","$","354,650"],["Current ratio","4.7:1","","4.4:1"]] [[/GREPCENT_TABLE]] 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. 23 Table of Contents 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 24 Table of Contents 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. 25 Table of Contents 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.