FORM 10‑Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
July 01, 2023
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
YETI Holdings, Inc.
Delaware |
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(State or other jurisdiction of |
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incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(512) 394‑9384
Unchanged
(Former name, former address and former fiscal year, if changed since last report)
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common stock, par value $0.01 | YETI | New York Stock Exchange | ||||||||||||
Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||
| Emerging growth company | ☐ | ||||||||||||||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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These forward-looking statements are made based upon detailed assumptions and reflect management’s current expectations and beliefs. While we believe that these assumptions underlying the forward-looking statements are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect actual results.
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September 29, December 30, 2018 2017 ASSETS Current assets Cash $ 52,100 $ 53,650 Accounts receivable, net 61,915 67,152 Inventory 157,669 175,098 Prepaid expenses and other current assets 12,957 7,134 Total current assets 284,641 303,034 Property and equipment, net 72,405 73,783 Goodwill 54,293 54,293 Intangible assets, net 81,113 74,302 Deferred income taxes 9,088 10,004 Deferred charges and other assets 1,052 1,011 Total assets $ 502,592 $ 516,427 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities Accounts payable $ 76,851 $ 40,342 Accrued expenses and other current liabilities 44,674 45,862 Taxes payable 6,185 12,280 Accrued payroll and related costs 11,201 6,364 Current maturities of long‑term debt 47,050 47,050 Total current liabilities 185,961 151,898 Long-term debt, net of current portion 340,743 428,632 Other liabilities 13,047 12,128 Total liabilities 539,751 592,658 Commitments and contingencies Equity Common stock, par value $0.01; 400,000 shares authorized; 81,147 and 81,535 shares outstanding at September 29, 2018 and December 30, 2017, respectively 811 815 Additional paid‑in capital 227,159 219,095 Accumulated deficit (265,113) (296,184) Accumulated other comprehensive (loss) income (16) 43 Total stockholders’ deficit (37,159) (76,231) Total liabilities and stockholders’ equity $ 502,592 $ 516,427 See July 1,
2023December 31,
2022ASSETS Current assets Cash $ 223,136 $ 234,741 Accounts receivable, net 131,599 79,446 Inventory 321,955 371,412 Prepaid expenses and other current assets 45,234 33,321 Total current assets 721,924 718,920 Property and equipment, net 131,809 124,587 Operating lease right-of-use assets 57,659 55,406 Goodwill 54,293 54,293 Intangible assets, net 110,929 99,429 Other assets 8,825 24,130 Total assets $ 1,085,439 $ 1,076,765 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 143,435 $ 140,818 Accrued expenses and other current liabilities 162,170 211,399 Taxes payable 6,199 15,289 Accrued payroll and related costs 15,170 4,847 Current operating lease liabilities 11,775 12,076 Current maturities of long-term debt 6,167 24,611 Total current liabilities 344,916 409,040 Long-term debt, net of current portion 81,106 71,741 Operating lease liabilities, non-current 57,269 55,649 Other liabilities 14,942 13,858 Total liabilities 498,233 550,288 Commitments and contingencies (Note 10) Stockholders’ Equity Common stock, par value $0.01; 600,000 shares authorized; 88,407 and 86,730 shares issued and outstanding at July 1, 2023, respectively, and 88,108 and 86,431 shares issued and outstanding at December 31, 2022, respectively 884 881 Treasury stock, at cost; 1,677 shares (100,025) (100,025) Preferred stock, par value $0.01; 30,000 shares authorized; no shares issued or outstanding — — Additional paid-in capital 371,348 357,490 Retained earnings 317,186 268,551 Accumulated other comprehensive income (2,187) (420) Total stockholders’ equity 587,206 526,477 Total liabilities and stockholders’ equity $ 1,085,439 $ 1,076,765 accompanying notesNotes to the unaudited consolidated financial statements
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||
| Net sales | $ | 402,563 | $ | 420,042 | $ | 705,359 | $ | 713,670 | |||||||||||||||
| Cost of goods sold | 187,725 | 200,943 | 328,651 | 339,711 | |||||||||||||||||||
| Gross profit | 214,838 | 219,099 | 376,708 | 373,959 | |||||||||||||||||||
| Selling, general, and administrative expenses | 164,507 | 150,753 | 311,279 | 272,323 | |||||||||||||||||||
| Operating income | 50,331 | 68,346 | 65,429 | 101,636 | |||||||||||||||||||
| Interest expense, net | (731) | (960) | (1,325) | (1,726) | |||||||||||||||||||
| Other income (expense) | 1,244 | (5,823) | 1,250 | (4,921) | |||||||||||||||||||
| Income before income taxes | 50,844 | 61,563 | 65,354 | 94,989 | |||||||||||||||||||
| Income tax expense | (12,773) | (15,311) | (16,719) | (23,078) | |||||||||||||||||||
| Net income | $ | 38,071 | $ | 46,252 | $ | 48,635 | $ | 71,911 | |||||||||||||||
| Net income per share | |||||||||||||||||||||||
| Basic | $ | 0.44 | $ | 0.54 | $ | 0.56 | $ | 0.83 | |||||||||||||||
| Diluted | $ | 0.44 | $ | 0.53 | $ | 0.56 | $ | 0.82 | |||||||||||||||
| Weighted-average common shares outstanding | |||||||||||||||||||||||
| Basic | 86,677 | 86,165 | 86,603 | 86,766 | |||||||||||||||||||
| Diluted | 87,196 | 86,860 | 87,141 | 87,542 | |||||||||||||||||||
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 29, |
| September 30, |
| September 29, |
| September 30, | ||||
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| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Net sales |
| $ | 196,109 |
| $ | 183,032 |
| $ | 537,654 |
| $ | 437,140 |
Cost of goods sold |
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| 98,568 |
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| 100,840 |
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| 282,354 |
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| 235,662 |
Gross profit |
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| 97,541 |
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| 82,192 |
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| 255,300 |
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| 201,478 |
Selling, general, and administrative expenses |
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| 69,417 |
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| 57,473 |
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| 190,746 |
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| 161,381 |
Operating income |
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| 28,124 |
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| 24,719 |
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| 64,554 |
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| 40,097 |
Interest expense |
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| (7,755) |
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| (8,351) |
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| (24,474) |
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| (23,961) |
Other (expense) income |
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| (214) |
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| 111 |
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| (325) |
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| 1,261 |
Income before income taxes |
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| 20,155 |
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| 16,479 |
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| 39,755 |
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| 17,397 |
Income tax expense |
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| (3,125) |
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| (5,208) |
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| (7,161) |
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| (5,970) |
Net income |
| $ | 17,030 |
| $ | 11,271 |
| $ | 32,594 |
| $ | 11,427 |
Net income per share |
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Basic |
| $ | 0.21 |
| $ | 0.14 |
| $ | 0.40 |
| $ | 0.14 |
Diluted |
| $ | 0.21 |
| $ | 0.14 |
| $ | 0.39 |
| $ | 0.14 |
Weighted average common shares outstanding |
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Basic |
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| 81,147 |
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| 81,479 |
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| 81,238 |
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| 81,460 |
Diluted |
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| 82,924 |
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| 82,988 |
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| 82,946 |
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| 83,015 |
See accompanying notesNotes to the unaudited consolidated financial statements
YETI HOLDINGS, INC.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||
| Net income | $ | 38,071 | $ | 46,252 | $ | 48,635 | $ | 71,911 | |||||||||||||||
| Other comprehensive (loss) income | |||||||||||||||||||||||
| Foreign currency translation adjustments | (1,570) | 1,775 | (1,767) | 1,211 | |||||||||||||||||||
| Total comprehensive income | $ | 36,501 | $ | 48,027 | $ | 46,868 | $ | 73,122 | |||||||||||||||
| Three Months Ended July 1, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 1, 2023 | 88,316 | $ | 883 | $ | 363,205 | (1,677) | $ | (100,025) | $ | 279,115 | $ | (617) | $ | 542,561 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 7,338 | — | — | — | — | 7,338 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans | 94 | 1 | 893 | — | — | — | — | 894 | |||||||||||||||||||||||||||||||||||||||
| Common stock withheld related to net share settlement of stock-based compensation | (3) | — | (88) | — | — | — | — | (88) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | (1,570) | (1,570) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 38,071 | — | 38,071 | |||||||||||||||||||||||||||||||||||||||
| Balance, July 1, 2023 | 88,407 | $ | 884 | $ | 371,348 | (1,677) | $ | (100,025) | $ | 317,186 | $ | (2,187) | $ | 587,206 | |||||||||||||||||||||||||||||||||
| Three Months Ended July 2, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, April 2, 2022 | 87,836 | $ | 878 | $ | 341,208 | (1,677) | $ | (100,025) | $ | 204,517 | $ | (211) | $ | 446,367 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 5,467 | — | — | — | — | 5,467 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans | 15 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | 1,775 | 1,775 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 46,252 | — | 46,252 | |||||||||||||||||||||||||||||||||||||||
| Balance, July 2, 2022 | 87,851 | $ | 878 | $ | 346,675 | (1,677) | $ | (100,025) | $ | 250,769 | $ | 1,564 | $ | 499,861 | |||||||||||||||||||||||||||||||||
| Six Months Ended July 1, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 88,108 | $ | 881 | $ | 357,490 | (1,677) | (100,025) | $ | 268,551 | $ | (420) | $ | 526,477 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 14,113 | — | — | — | — | 14,113 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans | 346 | 3 | 1,570 | — | — | — | — | 1,573 | |||||||||||||||||||||||||||||||||||||||
| Common stock withheld related to net share settlement of stock-based compensation | (47) | — | (1,825) | — | — | — | — | (1,825) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (1,767) | (1,767) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 48,635 | — | 48,635 | |||||||||||||||||||||||||||||||||||||||
| Balance, July 1, 2023 | 88,407 | $ | 884 | $ | 371,348 | (1,677) | $ | (100,025) | $ | 317,186 | $ | (2,187) | $ | 587,206 | |||||||||||||||||||||||||||||||||
| Six Months Ended July 2, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | 87,727 | $ | 877 | $ | 337,735 | — | — | $ | 178,858 | $ | 353 | $ | 517,823 | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 10,221 | — | — | — | — | 10,221 | |||||||||||||||||||||||||||||||||||||||
| Common stock issued under employee benefit plans | 143 | 1 | (1) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Common stock withheld related to net share settlement of stock-based compensation | (19) | — | (1,280) | — | — | — | — | (1,280) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (1,677) | (100,025) | — | — | (100,025) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | 1,211 | 1,211 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 71,911 | — | 71,911 | |||||||||||||||||||||||||||||||||||||||
| Balance, July 2, 2022 | 87,851 | $ | 878 | $ | 346,675 | (1,677) | $ | (100,025) | $ | 250,769 | $ | 1,564 | $ | 499,861 | |||||||||||||||||||||||||||||||||
| Six Months Ended | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net income | $ | 48,635 | $ | 71,911 | |||||||
| Adjustments to reconcile net income to cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 23,197 | 18,489 | |||||||||
| Amortization of deferred financing fees | 276 | 310 | |||||||||
| Stock-based compensation | 14,113 | 10,221 | |||||||||
| Deferred income taxes | 15,309 | 344 | |||||||||
| Loss on modification and extinguishment of debt | 330 | — | |||||||||
| Product recalls | 8,538 | — | |||||||||
| Other | (2,792) | 3,723 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (51,941) | 15,542 | |||||||||
| Inventory | 48,830 | (174,289) | |||||||||
| Other current assets | (11,468) | (10,260) | |||||||||
| Accounts payable and accrued expenses | (54,109) | (13,100) | |||||||||
| Taxes payable | (9,112) | 2,544 | |||||||||
| Other | (1,025) | 1 | |||||||||
| Net cash provided by (used in) operating activities | 28,781 | (74,564) | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Purchases of property and equipment | (25,068) | (26,022) | |||||||||
| Additions of intangibles, net | (6,849) | (5,803) | |||||||||
| Net cash used in investing activities | (31,917) | (31,825) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
| Repayments of long-term debt | (5,625) | (11,250) | |||||||||
| Payments of deferred financing fees | (2,824) | — | |||||||||
| Taxes paid in connection with employee stock transactions | (1,825) | (1,280) | |||||||||
| Proceeds from employee stock transactions | 1,573 | — | |||||||||
| Finance lease principal payment | (1,236) | (1,212) | |||||||||
| Repurchase of common stock | — | (100,025) | |||||||||
| Net cash used in financing activities | (9,937) | (113,767) | |||||||||
| Effect of exchange rate changes on cash | 1,468 | (39) | |||||||||
| Net decrease in cash | (11,605) | (220,195) | |||||||||
| Cash, beginning of period | 234,741 | 312,189 | |||||||||
| Cash, end of period | $ | 223,136 | $ | 91,994 | |||||||
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands)
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 29, |
| September 30, |
| September 29, |
| September 30, | ||||
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| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Net income |
| $ | 17,030 |
| $ | 11,271 |
| $ | 32,594 |
| $ | 11,427 |
Other comprehensive (loss) income |
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Foreign currency translation adjustments |
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| (2) |
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| 34 |
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| (59) |
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| 51 |
Total comprehensive income |
| $ | 17,028 |
| $ | 11,305 |
| $ | 32,535 |
| $ | 11,478 |
See accompanying notes to the unaudited consolidated financial statements
3
YETI Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Deficit
(Unaudited)
(In thousands)
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| Accumulated |
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| Additional |
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| Other |
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| Total | |||
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| Common Stock |
| Paid-In |
| Accumulated |
| Comprehensive |
| Noncontrolling |
| Stockholders’ | ||||||||
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| Shares |
| Amount |
| Capital |
| Deficit |
| Income (Loss) |
| Interest |
| Deficit | ||||||
Balance, December 31, 2016 |
| 81,437 |
| $ | 814 |
| $ | 211,474 |
| $ | (309,575) |
| $ | — |
| $ | 2,186 |
| $ | (95,101) |
Stock-based compensation |
| — |
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| — |
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| 9,186 |
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| — |
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| — |
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| — |
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| 9,186 |
Exercise of options |
| 156 |
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| 1 |
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| 98 |
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| — |
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| — |
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| — |
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| 99 |
Taxes paid in connection with exercise of stock options |
| (58) |
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| — |
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| (2,018) |
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| — |
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| — |
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| — |
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| (2,018) |
Adjustments related to the acquisition of Rambler On |
| — |
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| — |
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| (3,852) |
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| (1,980) |
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| — |
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| — |
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| (5,832) |
Acquisition of noncontrolling interest |
| — |
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| — |
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| — |
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| 2,186 |
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| — |
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| (2,186) |
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| — |
Dividends |
| — |
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| — |
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| — |
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| (1,572) |
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| — |
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| — |
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| (1,572) |
Other comprehensive income |
| — |
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| — |
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| — |
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| — |
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| 51 |
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| — |
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| 51 |
Net income |
| — |
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| — |
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| — |
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| 11,427 |
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| — |
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| — |
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| 11,427 |
Balance, September 30, 2017 |
| 81,535 |
| $ | 815 |
| $ | 214,888 |
| $ | (299,514) |
| $ | 51 |
| $ | — |
| $ | (83,760) |
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Balance, December 30, 2017 |
| 81,535 |
| $ | 815 |
| $ | 219,095 |
| $ | (296,184) |
| $ | 43 |
| $ | — |
| $ | (76,231) |
Stock-based compensation |
| — |
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| — |
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| 10,031 |
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| — |
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| — |
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| — |
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| 10,031 |
Exercise of options |
| 11 |
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| — |
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| 53 |
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| — |
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| — |
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| — |
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| 53 |
Taxes paid in connection with exercise of stock options |
| (2) |
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| — |
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| (57) |
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| — |
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| — |
|
| — |
|
| (57) |
Repurchase of Company stock |
| (397) |
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| (4) |
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| (1,963) |
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| — |
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| — |
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| — |
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| (1,967) |
Dividends |
| — |
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| — |
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| — |
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| (1,523) |
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| — |
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| — |
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| (1,523) |
Other comprehensive loss |
| — |
|
| — |
|
| — |
|
| — |
|
| (59) |
|
| — |
|
| (59) |
Net income |
| — |
|
| — |
|
| — |
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| 32,594 |
|
| — |
|
| — |
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| 32,594 |
Balance, September 29, 2018 |
| 81,147 |
| $ | 811 |
| $ | 227,159 |
| $ | (265,113) |
| $ | (16) |
| $ | — |
| $ | (37,159) |
See accompanying notes to the unaudited consolidated financial statements
4
YETI Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||
|
| September 29, |
| September 30, | ||
|
| 2018 |
| 2017 | ||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
Net income |
| $ | 32,594 |
|
| 11,427 |
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 18,218 |
|
| 15,171 |
Amortization of deferred loan costs |
|
| 2,774 |
|
| 1,661 |
Stock‑based compensation |
|
| 10,031 |
|
| 9,186 |
Deferred income taxes |
|
| 916 |
|
| 13,410 |
Impairment of long‑lived assets |
|
| 598 |
|
| — |
Gain on disposal of long‑lived assets |
|
| (20) |
|
| — |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Accounts receivable, net |
|
| 5,197 |
|
| (29,676) |
Inventory |
|
| 17,373 |
|
| 18,950 |
Income tax receivable |
|
| — |
|
| (257) |
Other current assets |
|
| (3,104) |
|
| 14,436 |
Accounts payable and accrued expenses |
|
| 39,261 |
|
| 13,234 |
Taxes payable |
|
| (6,099) |
|
| (6,907) |
Other |
|
| 1,095 |
|
| 10,484 |
Net cash provided by operating activities |
|
| 118,834 |
|
| 71,119 |
Cash Flows from Investing Activities: |
|
|
|
|
|
|
Additions to property and equipment |
|
| (13,339) |
|
| (40,470) |
(Additions) reductions to intangible assets, net |
|
| (10,752) |
|
| 4,968 |
Changes in notes receivables |
|
| — |
|
| 596 |
Cash paid to Rambler On for acquisition |
|
| — |
|
| (2,000) |
Proceeds from sale of long‑lived assets |
|
| 165 |
|
| — |
Net cash used in investing activities |
|
| (23,926) |
|
| (36,906) |
Cash Flows from Financing Activities: |
|
|
|
|
|
|
Changes in revolving line of credit |
|
| — |
|
| 20,000 |
Repayments of long‑term debt |
|
| (90,663) |
|
| (34,163) |
Payments of deferred financing fees |
|
| — |
|
| (1,957) |
Cash paid for repurchase of common stock |
|
| (1,967) |
|
| — |
Proceeds from employee stock transactions |
|
| 53 |
|
| 99 |
Taxes paid in connection with exercise of stock options |
|
| (57) |
|
| (2,018) |
Dividends |
|
| (2,523) |
|
| (2,812) |
Payments of offering costs |
|
| (1,315) |
|
| — |
Net cash used in financing activities |
|
| (96,472) |
|
| (20,851) |
Effect of exchange rate changes on cash |
|
| 14 |
|
| 83 |
Net change in cash |
|
| (1,550) |
|
| 13,445 |
Cash, beginning of period |
|
| 53,650 |
|
| 21,291 |
Cash, end of period |
| $ | 52,100 |
| $ | 34,736 |
See accompanying notes to the unaudited consolidated financial statements
5
YETI Holdings, Inc.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Organization and Significant Accounting Policies
Organization and Business
YETI Holdings, Inc. acquired the operations of YETI Coolers, LLC (“YETI Coolers”) on June 15, 2012. We are headquartered in Austin, Texas, and areis a global designer, marketer,retailer, and distributor of premiuminnovative outdoor products. From coolers and drinkware to bags and apparel, YETI products forare built to meet the unique and varying needs of diverse outdoor and recreation market which are sold underpursuits, whether in the YETI® brand.remote wilderness, at the beach, or anywhere life takes you. We sell our products tothrough our wholesale channel, including independent retailers, national, and nationalregional accounts across a wide variety of end user markets, as well as through our direct‑to‑consumerdirect-to-consumer (“DTC”) channel, (“DTC”)primarily on YETI.com, country and region-specific YETI websites, YETI Authorized on the Amazon Marketplace, our corporate sales program, and our retail stores. We operate in the U.S., primarily our e‑commerce presence.
In addition to YETI Coolers, YETICanada, Australia, Pty Ltd, YETI Canada Limited, YETINew Zealand, Europe, Hong Kong, Limited,China, Singapore, and YETI Outdoor Products Company Limited were established and consolidated as wholly‑owned foreign entities in January 2017, February 2017, March 2017, and June 2017, respectively. Furthermore, YETI’s exclusive customization partner, Rambler On was previously consolidated as a VIE since August 2016, and on May 15, 2017, YETI Custom Drinkware, LLC (“YCD”) acquired the assets and liabilities of Rambler On. We consolidate YCD as a wholly‑owned subsidiary.
Japan.
Initial Public Offering
On October 24, 2018, the Company completed its initial public offering (the "IPO") of 16,000,000 shares of our common stock, including 2,500,000 shares of our common stock sold by the Company and 13,500,000 shares of our common stock sold by selling stockholders. The underwriters were also granted an option to purchase up to an additional 2,400,000 shares from the selling stockholders, at the public offering price, less the underwriting discount, for 30 days after October 24, 2018. The shares were sold at the IPO price of $18.00 per share for net proceeds of $42.4 million to the Company, after deducting underwriting discounts and commissions of $2.6 million. The Company did not receive any proceeds from the sale of shares of common stock by the selling stockholders. Additionally, offering costs incurred by the Company are expected to total approximately $4.4 million.
Thethese unaudited consolidated financial statements includeand notes thereto.
We operate on a “52‑53 week”52- or 53-week fiscal year endingthat ends on the Saturday closest in proximity to December 31, such that each quarterly period will be 13 weeks in length, except during a 53‑week53-week year when the fourth quarter will be 14 weeks. Our fiscal year ending December 30, 2023 (“2023”) is a 52-week period. The first quarter of our fiscal year 2023 ended on April 1, 2023, the second quarter ended on July 1, 2023, and the third quarter ends on September 30, 2023. Our fiscal year ended December 31, 2022 (“2022”) was a 52-week period. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years and the associated quarters, months, and periods of those fiscal years. The unaudited condensed consolidated financial results presented herein represent the three and ninesix months ended September 29, 2018July 1, 2023 and September 30, 2017.
6
Stock Split
On October 12, 2018,Accounts Receivable
unsalable inventory. See Note 10 for further discussion of our voluntary recalls.
|
| |
|
| |
|
|
On July 2018,have a material impact on our consolidated financial statements.
| July 1, 2023 | December 31, 2022 | ||||||||||
| Accounts receivable, net | $ | 131,599 | $ | 79,446 | |||||||
| Contract liabilities | $ | (18,274) | $ | (7,702) | |||||||
7
Disaggregation of Revenue
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
July 1, 2023(1) | July 2, 2022 | July 1, 2023(1) | July 2, 2022 | ||||||||||||||||||||
| Net Sales by Channel | |||||||||||||||||||||||
| Wholesale | $ | 176,175 | $ | 195,195 | $ | 312,004 | $ | 332,861 | |||||||||||||||
| Direct-to-consumer | 226,388 | 224,847 | 393,355 | 380,809 | |||||||||||||||||||
| Total net sales | $ | 402,563 | $ | 420,042 | $ | 705,359 | $ | 713,670 | |||||||||||||||
| Net Sales by Category | |||||||||||||||||||||||
| Coolers & Equipment | $ | 156,610 | $ | 193,415 | $ | 260,964 | $ | 296,373 | |||||||||||||||
| Drinkware | 233,417 | 216,070 | 423,704 | 400,068 | |||||||||||||||||||
| Other | 12,536 | 10,557 | 20,691 | 17,229 | |||||||||||||||||||
| Total net sales | $ | 402,563 | $ | 420,042 | $ | 705,359 | $ | 713,670 | |||||||||||||||
| Net Sales by Geographic Region | |||||||||||||||||||||||
| United States | $ | 345,888 | $ | 371,918 | $ | 598,874 | $ | 628,171 | |||||||||||||||
| International | 56,675 | 48,124 | 106,485 | 85,499 | |||||||||||||||||||
| Total net sales | $ | 402,563 | $ | 420,042 | $ | 705,359 | $ | 713,670 | |||||||||||||||
Note 2—Share Data
The number of common shares outstanding totaled 81.1 million and 81.5 million at September 29, 2018 and December 30, 2017,gross sales, respectively. Basic income per share is computed by dividing income available to common stockholders by the weighted‑average number of common shares outstanding during the period. Diluted income per share includes the additional effect of all potentially dilutive securities, which includes dilutive share options granted under stock‑based compensation plans.
A reconciliation of shares for basic and diluted net income per share is set forth below (in thousands, except per share data):
|
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|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 29, |
| September 30, |
| September 29, |
| September 30, | ||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Net income |
| $ | 17,030 |
| $ | 11,271 |
| $ | 32,594 |
| $ | 11,427 |
Weighted average common shares outstanding—basic |
|
| 81,147 |
|
| 81,479 |
|
| 81,238 |
|
| 81,460 |
Effect of dilutive securities |
|
| 1,777 |
|
| 1,509 |
|
| 1,708 |
|
| 1,555 |
Weighted average common shares outstanding—diluted |
|
| 82,924 |
|
| 82,988 |
|
| 82,946 |
|
| 83,015 |
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.21 |
| $ | 0.14 |
| $ | 0.40 |
| $ | 0.14 |
Diluted |
| $ | 0.21 |
| $ | 0.14 |
| $ | 0.39 |
| $ | 0.14 |
Effects of potentially dilutive securities are presented only in periods in which they are dilutive. Stock options representing 0.1 million and 0.2 million shares of common stock were outstanding forFor both the three and ninesix months ended September 29, 2018July 2, 2022, our largest single customer represented approximately 12% of gross sales.
| July 1, 2023 | December 31, 2022 | ||||||||||
| Prepaid expenses | $ | 24,568 | $ | 18,149 | |||||||
| Prepaid taxes | 16,779 | 10,222 | |||||||||
| Other | 3,887 | 4,950 | |||||||||
| Total prepaid expenses and other current assets | $ | 45,234 | $ | 33,321 | |||||||
| July 1, 2023 | December 31, 2022 | ||||||||||
Product recall reserves(1) | $ | 42,939 | $ | 94,807 | |||||||
| Accrued freight and other operating expenses | 29,973 | 56,354 | |||||||||
| Contract liabilities | 18,274 | 7,702 | |||||||||
| Customer discounts, allowances, and returns | 9,649 | 9,948 | |||||||||
| Advertising and marketing | 20,007 | 11,547 | |||||||||
| Warranty reserve | 9,614 | 9,996 | |||||||||
| Interest payable | 174 | 941 | |||||||||
| Accrued capital expenditures | 1,994 | 895 | |||||||||
| Other | 29,546 | 19,209 | |||||||||
| Total accrued expenses and other current liabilities | $ | 162,170 | $ | 211,399 | |||||||
| July 1, 2023 | December 31, 2022 | ||||||||||
| Term Loan A, due 2028 | $ | 84,375 | $ | 90,000 | |||||||
| Finance lease debt | 6,072 | 7,309 | |||||||||
| Total debt | 90,447 | 97,309 | |||||||||
| Current maturities of long-term debt | (4,219) | (22,500) | |||||||||
| Current maturities of finance lease debt | (1,948) | (2,111) | |||||||||
| Total long-term debt | 84,280 | 72,698 | |||||||||
| Unamortized deferred financing fees | (3,174) | (957) | |||||||||
| Total long-term debt, net | $ | 81,106 | $ | 71,741 | |||||||
Note 3—Repurchase of Common Stock
On March 5, 2018, we purchased 0.4 million sharesprincipal amounts of our common stock at $4.95 per share from one of our stockholders. The purchase price was below our current market valuedebt obligations, excluding finance lease obligations, for the next five years and did not trigger the requirements of ASC 505‑30‑20‑2, “Allocation of Repurchase Price to Other Elements of the Repurchase Transaction.” We accounted for this purchase using the par value method, and subsequently retired these shares.
8
Note 4—Property and Equipment
Property and equipmentin total consisted of the following (in thousands):
|
|
|
|
|
|
|
|
| September 29, |
| December 30, | ||
|
| 2018 |
| 2017 | ||
Production molds and tooling |
| $ | 43,378 |
| $ | 41,188 |
Furniture, fixtures, and equipment |
|
| 6,571 |
|
| 5,590 |
Computers and software |
|
| 36,097 |
|
| 28,774 |
Leasehold improvements |
|
| 27,606 |
|
| 26,154 |
Property and equipment—gross |
|
| 113,652 |
|
| 101,706 |
Accumulated depreciation |
|
| (41,247) |
|
| (27,923) |
Property and equipment—net |
| $ | 72,405 |
| $ | 73,783 |
For
| Amount | |||||
| 2023 | 2,109 | ||||
| 2024 | 4,219 | ||||
| 2025 | 4,219 | ||||
| 2026 | 4,219 | ||||
| 2027 | 4,219 | ||||
| 2028 | 65,390 | ||||
| Total | $ | 84,375 | |||
Note 5—Intangible Assets
The following is a summary of our intangible assets as of September 29, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross |
|
|
|
| Net |
|
| ||
|
| Carrying |
| Accumulated |
| Carrying |
| Useful | |||
|
| Amount |
| Amortization |
| Amount |
| Life | |||
Tradename |
| $ | 31,363 |
| $ | — |
| $ | 31,363 |
| Indefinite |
Customer relationships |
|
| 42,205 |
|
| (24,151) |
|
| 18,054 |
| 11 years |
Trademarks |
|
| 13,663 |
|
| (2,360) |
|
| 11,303 |
| 6 - 30 years |
Trade dress |
|
| 14,832 |
|
| — |
|
| 14,832 |
| Indefinite |
Patents |
|
| 5,090 |
|
| (404) |
|
| 4,686 |
| 4 - 25 years |
Non-compete agreements |
|
| 2,815 |
|
| (2,815) |
|
| — |
| 5 years |
Other intangibles |
|
| 1,021 |
|
| (146) |
|
| 875 |
| 15 years |
Total intangible assets |
| $ | 110,989 |
| $ | (29,876) |
| $ | 81,113 |
|
|
The following is a summary of our intangible assets as of December 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross |
|
|
|
| Net |
|
| ||
|
| Carrying |
| Accumulated |
| Carrying |
| Useful | |||
|
| Amount |
| Amortization |
| Amount |
| Life | |||
Tradename |
| $ | 31,363 |
| $ | — |
| $ | 31,363 |
| Indefinite |
Customer relationships |
|
| 42,205 |
|
| (21,273) |
|
| 20,932 |
| 11 years |
Trademarks |
|
| 10,627 |
|
| (1,494) |
|
| 9,133 |
| 6 - 30 years |
Trade dress |
|
| 8,336 |
|
| — |
|
| 8,336 |
| Indefinite |
Patents |
|
| 3,868 |
|
| (256) |
|
| 3,612 |
| 4 - 25 years |
Non-compete agreements |
|
| 2,815 |
|
| (2,815) |
|
| — |
| 5 years |
Other intangibles |
|
| 1,024 |
|
| (98) |
|
| 926 |
| 15 years |
Total intangible assets |
| $ | 100,238 |
| $ | (25,936) |
| $ | 74,302 |
|
|
For the three months ended September 29, 2018 and September 30, 2017, amortization expense totaled $1.4 million and $1.2 million, respectively. Amortization expense totaled $3.9 million and $4.1 million for the nine months ended September 29, 2018 and 2017, respectively.
In February 2017, a binding settlement was reached in the United States District Court related to lawsuits brought by the Company against RTIC Coolers. Under thematerial terms of the agreement, RTIC Coolers was requiredCredit Facility substantially unchanged, with the exception of certain changes to make a financial payment toimplement the Company; to cease salesreplacement of all products subject to the lawsuit—this includes hard‑sided coolers, soft‑sided
9
coolers, and Drinkware; and to redesign all products in question. In accordance with our policy on intangible assets, amounts received under the settlement agreement were credited against the carrying value of the related intangible asset.
Note 6—Long‑term Debt
Long‑term debt consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
| September 29, |
| December 30, | ||
|
| 2018 |
| 2017 | ||
Term Loan A, due 2021 |
| $ | 344,875 |
| $ | 378,250 |
Term Loan B, due 2022 |
|
| 47,637 |
|
| 103,425 |
Debt owed to Rambler On |
|
| 1,500 |
|
| 3,000 |
Total debt |
|
| 394,012 |
|
| 484,675 |
Current maturities of long‑term debt |
|
| (47,050) |
|
| (47,050) |
Total long‑term debt |
|
| 346,962 |
|
| 437,625 |
Unamortized deferred financing fees |
|
| (6,219) |
|
| (8,993) |
Total long‑term debt, net |
| $ | 340,743 |
| $ | 428,632 |
Per the terms of the Rambler On purchase agreement (see Note 9), the Company issued Rambler On an unsecured promissory note on May 16, 2017 for the principal amount of $3.0 million with a term of two years (payable 50% on the first anniversary and 50% on the second anniversary with 5% interest). As of September 29, 2018,June 22, 2023, we had $1.5 million outstanding and classified as short‑term debt.
As of September 29, 2018, we had issued $20.0 million in letters of credit with a 4.0% annual fee to supplement our supply chain finance program. While our issuance of letters of credit does not increase our borrowings outstanding under our revolving credit facility, it does reduce the amount available.
As of September 29, 2018, we were in compliance with all covenants underfurther amended the Credit Facility, which governs ourextended the maturity date of both the term loan (the “Term Loan A”) and the revolving credit facility (the “Revolving Credit Facility”) from December 17, 2024 to June 22, 2028; refinanced and replaced the existing Term Loan A in full with a new $84.4 million Term Loan A; and increased the commitments under the Revolving Credit Facility from $150.0 million to $300.0 million. As a result of the amendment, we recognized a $0.3 million loss on modification and extinguishment of debt and we capitalized $2.8 million of new lender and third-party fees in the second quarter of 2023.
Note 7—Income Taxes
the Revolving Credit Facility bear interest at Term SOFR or the Alternate Base Rate (each as defined in the Credit Agreement) plus an applicable rate ranging from 1.75% to 2.50% for Term SOFR-based loans and from 0.75% to 1.50% for Alternate Base Rate-based loans, depending upon our total Net Leverage Ratio (as defined in the Credit Agreement).
July 2, 2022.
were $7.9 million as of July 1, 2023 and $23.2 million as of December 31, 2022, which is presented in other assets on our unaudited condensed consolidated balance sheet.
Note 8—Stock‑Based Compensation
We have an incentive plan, the 2012 Plan, which provides for upaward stock-based compensation to 8.8 million shares of authorized stock to be awarded as stock options, in the form of incentive stock options or nonqualified stock options, or restricted stock units
10
(“RSUs”). The exercise price of options grantedemployees and directors under the 20122018 Equity and Incentive Compensation Plan is equal to the estimated fair market value of our common stock at the date of grant. The fair value of RSUs granted under the plan is equal to the estimated fair market value of our common stock on the date of grant. Forfeitures are recorded as they occur, and compensation expense previously recognized for an award that(“2018 Plan”), which was forfeited is reversed in the period of the forfeiture.
We estimate the fair value of stock options on the date of grant using a Black‑Scholes option‑pricing valuation model, which uses the expected option term, stock price volatility, and the risk‑free interest rate. At the time that the outstanding awards were granted, there was no active market for our common shares, and as such, volatility was estimated in accordance with Accounting Standards Codification 718 Compensation—Stock Compensation (“ASC 718”), using the historical closing values of comparable publicly held entities. The expected option term assumption reflects the period for which we believe the option will remain outstanding. This assumption is based upon the historical and expected behavior of our employees and may vary based upon the behavior of different groups of employees. The risk‑free interest rate reflects the U.S. Treasury yield curve for a similar instrument with the same expected term in effect at the time of the grant.
On June 20 and 29, 2018,adopted by our Board of Directors approved the grant of an aggregate of 1,407,583 RSUs to various employees and directors, which approvals became effective on June 23 and July 2, 2018, respectively. Of the aggregate RSUs approved on June 20 and 29, 2018, 9,160 RSUs were cancelled prior to issuance. On August 22, 2018 our Board of Directors approved the grant of 27,480 RSUs to one employee, which approval became effective on August 25, 2018. As of September 29, 2018, 1,425,903 RSUs had been granted, 1,410,718 RSUs were outstanding, and 15,185 had been forfeited under the 2012 Plan. The RSUs vest upon the occurrence of a change of control and the achievement of certain EBITDA targets for calendar years 2018 and 2019, provided that if a change of control occurs prior to the date on which our Board of Directors certifies that the applicable EBITDA target has been achieved, all RSUs that have not already been forfeited will become nonforfeitable and shares of our common stock will be delivered to the applicable grantee within 30 days of the RSUs becoming nonforfeitable. 385,241 of those RSUs were granted as replacement awards in exchange for 104,411 out‑of‑the‑money stock options which were cancelled. The concurrent cancellation and replacement was a modification for accounting purposes, which GAAP requires continued recognition of the cancelled awards’ fair value plus the recognition of the new awards’ fair value for any awards likely to vest. Any incremental compensation cost resulting from the modification will not be recognized prior to the consummation of a change in control as GAAP deems satisfaction of a change in control contingency to be unlikely.
We recognized $2.9 million and $2.7 million for the three months ended September 29, 2018 and September 30, 2017, respectively, of compensation expense in the accompanying consolidated statements of operations. For the nine months ended September 29, 2018 and September 30, 2017 we recognized $10.0 million and $9.2 million, respectively, of compensation expense in the accompanying consolidated statements of operations. As of September 29, 2018, total unrecognized compensation expense for unvested options totaled $9.8 million, and will be recognized over the next three years. As of September 29, 2018, total unrecognized compensation expense for unvested RSUs totaled $44.8 million, and will be recognized upon consummation of a change in control.
Note 9—Variable Interest Entities and Acquisition of Assets and Liabilities
In July 2016, we entered into a secured promissory note with our exclusive Drinkware customization partner, Rambler On, to assist them with the acquisition of new equipment as they expanded their operations. Under the terms of the note, we advanced to Rambler On up to $7.0 million for the acquisition of new equipment. The advancement period of the note ran through May 2017, at which time the note balance would convert to a 5 year note with principal and interest due monthly. The note accrued interest at 5.0%, was scheduled to mature in July 2022, and was secured by all the assets of Rambler On.
Additionally, in November 2016, we converted a portion of our accounts receivable from Rambler On’s account receivable into a secured promissory note of $7.7 million. This note accrued interest at 5.0% with interest payments due monthly. The secured promissory note was scheduled to mature in November 2017.
In 2016, we determined we held a variable interest in Rambler On based on our assessment that Rambler On did not have sufficient resources to carry out its principal activities without our support. We examined specific criteria and
11
determined that we are the primary beneficiary of the VIE and therefore were required to consolidate Rambler On; however, we had no obligation to provide financial support to Rambler On.
On May 16, 2017, an agreement was entered into by Rambler On and YCD, whereby YCD acquired substantially all assets and liabilities of Rambler On for $6.0 million. We paid the consideration for the acquisition by making a cash payment to Rambler On of $2.0 million on the closing in May 2017 and subsequently paying $0.9 million following the determination of the final assets sold as part of the acquisition in October 2017. In addition, we issued a promissory note to Rambler On for a principal amount of $3.0 million with a two‑year term and bearing interest at 5% per annum, payable in two equal installments on May 16, 2018 and May 16, 2019. As part of the acquisition, all of the notes outstanding prior to May 16, 2017 between the Company and Rambler On were forgiven.
We consolidated Rambler On effective August 1, 2016, and YCD effective May 16, 2017; therefore, the financial results of Rambler On and YCD have been included in our consolidated financial statements since those dates. All intercompany balances have been eliminated since fiscal year-end 2016.
Note 10—Related‑Party Agreements
We have entered into a management services agreement with Cortec Group Fund V, L.P. and its affiliates (“Cortec”), our majority stockholder, that provides for a management fee to be based on 1.0% of total sales, not to exceed $0.8 million annually, plus certain out‑of‑pocket expenses. During each of the nine months ended September 29, 2018 and September 30, 2017, we incurred fees and out‑of‑pocket expenses under this agreement totaling approximately $0.8 million, which were included in selling, general, and administrative expenses. We incurred no expense for these management fees during the three months ended September 29, 2018 and September 30, 2017. This agreement was terminated on October 24, 2018 and no further payments are due to Cortec.
We lease warehouse and office facilities under various operating leases. One warehouse facility is leased from an entity owned by our Founders, Roy and Ryan Seiders. The lease, which is month to month and can be cancelled upon 30 days written notice, requires monthly payments of $8,700 and is included in selling, general, and administrative expenses.
Note 11—Commitments and Contingencies
In August 2018, we entered into two new operating leases for space to be used for two new retail locations. One lease agreement is for a first floor and basement of a building in Chicago, Illinois, with an exterior footprint of approximately 5,538 square feet. The term of the lease is 120 months, and the monthly payments over the lease term are approximately $45,000. The second lease agreement is for a building in Charleston, South Carolina, totaling approximately 5,039 square feet. The term of the lease is 120 months, and the monthly payments over the lease term are approximately $28,000.
In August 2018, we sublet 29,881 square feet of our Austin, Texas headquarters to a third party. The lease term is approximately 6 years and expires on July 31, 2024. The monthly receipts over the lease term are approximately $72,000.
There were no other significant changes to the contractual obligations reported in our most recent annual audited consolidated financial statements for the year ended December 30, 2017 other than those which occur in the normal course of business.
We are subject to various claims and legal actions that arise in the ordinary course of business. Management believes that the final disposition of such matters will not have a material adverse effect on our financial position, results of operations, or cash flows.
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Note 12—Subsequent Events
On October 12, 2018, the Board of Directors approved a 0.397‑for‑1 reverse stock split, that occurred prior to the completion of our IPO. All share and per share data have been retroactively adjusted to give effect to the reverse stock split (see Note 1).
Oninitial public offering in October 12, 2018, the Board of Directors approved an increase in our authorized capital stock of 200.0 million shares of common stock and 30.0 million shares of preferred stock, which occurred prior to the completion of our IPO. No shares were issued in connection with the increase in authorized capital stock.
On October 24, 2018, the Company completed the IPO of its common stock (see Note 1).
In October 2018, the Board adopted the 2018 Equity Incentive Plan (the "2018 Plan") and ceased granting awards under the 2012 Plan.2018. The 2018 Plan became effective in connection withreplaced the IPO. The Company reserved 4,764,000 shares of its common stock for issuance under the 2018 Plan.2012 Equity and Performance Incentive Plan (“2012 Plan”), as amended and restated on June 20, 2018. Any remaining shares available for issuance under the 2012 Plan as of the date of our IPO effectiveness dateinitial public offering in October 2018 are not available for future issuance. However, shares subject to stock awards granted under the 2012 Plan (i)(a) that expire or terminate without being exercised (ii)or (b) that are forfeited under an award, or (iii) that are transferred, surrendered, or relinquished upon the payment of any exercise price by the transfer to us of our common stock or upon satisfaction of any withholding amount, return to the 2018 PlanPlan.
On October 24, 2018, in connection withdata):
| Stock Options | Performance-Based Restricted Stock Awards and Units | Restricted Stock Units, Restricted Stock Awards, and Deferred Stock Units | |||||||||||||||||||||||||||||||||||||||||||||
| Number of Options | Weighted Average Exercise Price | Number of PBRSs and PRSUs | Weighted Average Grant Date Fair Value | Number of RSUs, RSAs, and DSUs | Weighted Average Grant Date Fair Value | ||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | 642 | $ | 20.10 | 233 | $ | 53.63 | 812 | $ | 51.28 | ||||||||||||||||||||||||||||||||||||||
| Granted | — | — | 279 | 38.59 | 938 | 38.85 | |||||||||||||||||||||||||||||||||||||||||
| Exercised/released | (64) | 24.41 | (99) | 32.84 | (183) | 53.91 | |||||||||||||||||||||||||||||||||||||||||
| Forfeited/expired | — | — | (16) | 64.98 | (81) | 49.79 | |||||||||||||||||||||||||||||||||||||||||
| Balance, July 1, 2023 | 578 | $ | 19.62 | 397 | $ | 47.79 | 1,486 | $ | 43.19 | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | ||||||||||||||||||||
| Net income | $ | 38,071 | $ | 46,252 | $ | 48,635 | $ | 71,911 | |||||||||||||||
| Weighted-average common shares outstanding—basic | 86,677 | 86,165 | 86,603 | 86,766 | |||||||||||||||||||
| Effect of dilutive securities | 519 | 695 | 538 | 776 | |||||||||||||||||||
| Weighted-average common shares outstanding—diluted | 87,196 | 86,860 | 87,141 | 87,542 | |||||||||||||||||||
| Earnings per share | |||||||||||||||||||||||
| Basic | $ | 0.44 | $ | 0.54 | $ | 0.56 | $ | 0.83 | |||||||||||||||
| Diluted | $ | 0.44 | $ | 0.53 | $ | 0.56 | $ | 0.82 | |||||||||||||||
In addition, two non-employee directors serving ondiluted earnings per share, because their effect would be anti-dilutive. For the three and six months ended July 2, 2022, outstanding stock-based awards representing 0.5 million and 0.3 million shares of common stock, respectively, were excluded from the calculation of diluted earnings per share, because their effect would be anti-dilutive.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 1, 2023 | July 1, 2023 | ||||||||||||||||||||||
Decrease to net sales(1) | $ | (24,490) | $ | (24,506) | |||||||||||||||||||
Decrease to cost of goods sold(2) | 5,052 | 6,305 | |||||||||||||||||||||
| Decrease to gross profit | (19,438) | (18,201) | |||||||||||||||||||||
Decrease to selling, general and administrative expenses(3) | 10,716 | 10,549 | |||||||||||||||||||||
| Decrease to income before income taxes | $ | (8,722) | $ | (7,652) | |||||||||||||||||||
| July 1, 2023 | |||||
| Balance, January 1, 2023 | $ | 94,807 | |||
| Actual product refunds, replacements and recall-related costs | (38,246) | ||||
Gift card issuances(1) | (22,137) | ||||
| Reserve adjustment | 8,515 | ||||
| Balance, July 1, 2023 | 42,939 | ||||
On November 28, 2018, the underwriters exercised, in part, their option to purchase an additional 918,830 shares of common stock at the public offering price of $18.00 per share, less the underwriting discount, from selling stockholders. The Company did not receive any proceedsultimate impact from the sale of shares by selling stockholders.
On November 29, 2018, we made voluntary principal payments on our term loan A and term loan B in the amount of $2.4 million and $47.6 million, respectively, using the net proceedsrecalls may differ materially from our IPOestimates, and additional cash on hand. After the voluntary debt payments, we had outstanding borrowingsmay harm our business, financial condition, and results of $342.5 millionoperations. See Part I, Item 1A “Risk Factors - Risks Related to Our Business, Operations and $0 under our term loan A and term loan B, respectively.
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Components of Our Results of We discuss the net sales of our products in our two primary categories: Coolers & Equipment and Drinkware. We calculate gross margin as gross profit divided by net sales. administrative expenses. related notes. The following table sets forth selected statement of operations data, and their corresponding percentage of net sales, for the periods Three Months Ended Nine Months Ended (dollars in thousands) September 29, 2018 September 30, 2017 September 29, 2018 September 30, 2017 Statement of Operations Net sales $ 196,109 100 % $ 183,032 100 % $ 537,654 100 % $ 437,140 100 % Cost of goods sold 98,568 50 % 100,840 55 % 282,354 53 % 235,662 54 % Gross profit 97,541 50 % 82,192 45 % 255,300 47 % 201,478 46 % Selling, general, and administrative expenses 69,417 35 % 57,473 31 % 190,746 35 % 161,381 37 % Operating income 28,124 14 % 24,719 14 % 64,554 12 % 40,097 9 % Interest expense (7,755) 4 % (8,351) 5 % (24,474) 5 % (23,961) 5 % Other (expense) income (214) 0 % 111 0 % (325) 0 % 1,261 0 % Income before income taxes 20,155 10 % 16,479 9 % 39,755 7 % 17,397 4 % Income tax expense (3,125) 2 % (5,208) 3 % (7,161) 1 % (5,970) 1 % Net income $ 17,030 9 % $ 11,271 6 % $ 32,594 6 % $ 11,427 3 % Adjusted Operating Income(1) 31,682 16 % 24,552 13 % 78,324 15 % 47,895 11 % Adjusted Net Income(1) 20,188 10 % 11,164 6 % 43,641 8 % 16,431 4 % Adjusted EBITDA(1) $ 38,415 20 % $ 30,478 17 % $ 96,831 18 % $ 64,327 15 % Three Months Ended July 1, 2023 and July 2, 2022 Three Months Ended September 29, September 30, Change (dollars in millions) 2018 2017 $ % Net sales $ 196.1 $ 183.0 $ 13.1 7 % Net sales in our two primary product categories were as follows: Three Months Ended September 29, September 30, Change (dollars in millions) 2018 2017 $ % Gross profit $ 97.5 $ 82.2 $ 15.3 19 % Gross margin (Gross profit as a % of net sales) 49.7 % 44.9 % Three Months Ended September 29, September 30, Change (dollars in millions) 2018 2017 $ % Selling, general, and administrative expenses $ 69.4 $ 57.5 $ 11.9 21 % SG&A as a % of net sales 35.4 % 31.4 % Nine Months Ended September 29, September 30, Change (dollars in millions) 2018 2017 $ % Net sales $ 537.7 $ 437.1 $ 100.5 23 % Net sales in our two primary product categories were as follows: Nine Months Ended September 29, September 30, Change (dollars in millions) 2018 2017 $ % Gross profit $ 255.3 $ 201.5 $ 53.8 27 % Gross margin (Gross profit as a % of net sales) 47.5 % 46.1 % •higher customization costs, which unfavorably impacted gross margin by 20 Selling, General, and Administrative Expenses Nine Months Ended September 29, September 30, Change (dollars in millions) 2018 2017 $ % Selling, general, and administrative expenses $ 190.7 $ 161.4 $ 29.4 18 % SG&A as a % of net sales 35.5 % 36.9 % 2, 2022. forward‑lookingforward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward‑lookingforward-looking statements as a result of many factors, including those discussed under “Riskdescribed in more detail in Part I “Item 1A. Risk Factors” and elsewhereincluded in this Quarterly Report on Form 10-Q. See also “Forward-Looking“Cautionary Statement Regarding Forward-Looking Statements” immediately prior to Part I, Item I in this Quarterly Report on Form 10-Q. Some of the numbers included herein have been rounded for the convenience of presentation.Executive SummaryWe are marketer, retailer, and distributor of a varietyinnovative outdoor products. From coolers and drinkware to bags and apparel, YETI products are built to meet the unique and varying needs of innovative, branded, premium products to a wide‑ranging customer base. Our brand promise is to ensure each YETI product delivers exceptional performance and durability in any environment,diverse outdoor pursuits, whether in the remote wilderness, at the beach, or anywhere else life takes you. By consistently delivering high‑performinghigh-performing, exceptional products, we have built a strong following of engaged brand loyalists throughout the United States, Canada, Australia, and elsewhere,world, ranging from serious outdoor enthusiasts to individuals who simply value products of uncompromising quality and design. Our relationship with customers continuesWe have an unwavering commitment to thriveoutdoor and deepen asrecreation communities, and we are relentless in our pursuit of building superior products for people to confidently enjoy life outdoors and beyond.resultbalanced omni-channel platform, consisting of our innovative new product introductions, expansionwholesale and enhancementdirect-to-consumer (“DTC”) channels. In our wholesale channel, we sell our products through select national and regional accounts and an assemblage of existing product families, and multifaceted branding activities.Our marketing strategy has been instrumental in driving sales and building equity in the YETI brand. We have become a trusted and preferred brand to experts and serious enthusiasts in an expanding range of outdoor pursuits. Their brand advocacy, combined with our various marketing efforts, has broadened our appeal to a larger consumer population. We produce original short films and distribute them through our content‑rich website, active social media presence, and email subscriber base. We maintain a large and active roster of YETI Ambassadors, a diverse group of men and womenindependent retail partners throughout the United States, Canada, Australia, New Zealand, Europe, and Japan, among others. We carefully evaluate and select international markets, comprised of world‑class anglers, hunters, rodeo cowboys, barbecue pitmasters, surfers,retail partners that have an image and outdoor adventurers who embody our brand. We also directly engageapproach that are consistent with our current and target customers by sponsoring and participating in a variety of events, including sportsman shows, outdoor festivals, rodeos, music and film festivals, barbecue competitions, fishing tournaments, and retailer events. We believe our innovative consumer engagement reinforces the authenticity and aspirational nature of ourpremium brand and products across our expanding customer base.We bring our products to market through a diverse and powerful omni‑channel strategy, comprised of our select group ofpricing. Our domestic national and independent retail partners and our direct-to-consumer (“DTC”) channel. Within our wholesale channel, our national retail partnersregional specialty retailers include Dick’s Sporting Goods, REI, Academy Sports + Outdoors, Bass Pro Shops, Ace Hardware, and Ace Hardware. Our network of independent retail partners includes outdoor specialty, hardware, and farm and ranch supply stores. OurScheels. We sell our products in our DTC channel is comprised ofto customers on YETI.com, YETIcustomshop.com,country and region specific YETI websites, and YETI Authorized on the Amazon Marketplace, as well as in our retail stores. Additionally, we offer customized products with licensed trademarks and original artwork through our corporate sales program and at YETI.com. Our corporate sales program offers customized products to corporate customers for a wide-range of events and activities, and in certain instances may also offer products to re-sell.flagship storefirst ever cast iron skillet, and continued to expand our seasonal colorways.Austin, Texas. Our DTC channel provides authentic, differentiated brand experiences, customer engagement,collaboration with the CPSC. During the second quarter of 2023, we began processing recall returns and expedited customer feedback, enhancing the product development cycle while providing diverse avenues for growth.From 2013claims and based on such experience and trends, we reevaluated our assumptions and adjusted our estimated recall expense reserve. These trends included higher than anticipated elections to 2016, yearly net sales were $89.9 million, $147.7 million, $468.9 million, and $818.9 million, respectively, representing a CAGR of 109% for the three-year period. Beginningreceive gift cards in late 2016 and throughout 2017, we were affected by a confluence of internal and external factors that adversely impacted our growth and profitability, resulting in a decrease of net sales to $639.2 million for 2017. Driven by strong customer demand and a shortagelieu of product replacement remedies, variations in 2015, retailers aggressively stockedindividual product participation rates, and lower logistics costs than previously estimated. As a result, we updated our products during 2016,prior recall reserve assumptions, which led to excess inventory inincreased the estimated recall expense reserve by $8.5 million. However, the overall consumer recall participation rate has remained consistent with our wholesale channel and drove many of our retail partners to reduce purchases inexpectations.2017. During this period,2023, we recorded the following impacts as a result of the recall reserve adjustments and other incurred costs:a challenging wholesale marketplace generally, notably the delayed mergerstop sale of Bass Pro Shopsthe affected products. We have developed solutions to address the potential safety concern of the affected products and Cabela’s, which slowed ordering, negative trendsintend to re-introduce and sell the redesigned products in the U.S. retailfourth quarter of 2023. However, there are a number of factors that could impact our ability to resume sales at that time and our estimate of the date for sales of the redesigned products to resume may change. including several retailer bankruptcies, and the repositioning by a major retail partner towards “every day low prices” and private label products at the expense of our premium products. Additionally, we settled several lawsuits that we had initiated against competitors in which we alleged they were infringing onoperate. Consistent across many industries, we experienced inflationary pressures and supply chain challenges, including port congestion, container and labor shortages, which resulted in longer transit times, higher distribution, logistics, and product input costs. As a result, we experienced decreased profitability and delayed product availability for certain products in 2022. However, in the second half of 2022, these inflationary pressures and supply chain challenges began returning to pre-pandemic levels, and we began to experience lower inbound freight rates. This resulted in an improvement to our intellectual property across our range of products. While these settlements were favorable to14YETI over the long‑term,gross margin during the first half of 2017 they resulted2023 compared to the prior year period. We expect to see improvements in competitors being allowed to liquidateour gross margin for the disputed inventory at low prices.In responseremainder of 2023 due to these events,improvements in the macroeconomic environment.immediately implemented several initiativescontinue to see strong demand for our products.made investments that by year‑end 2017 had reduced retailerfinancial results in the future. We will continue to monitor and, company inventory levels to targeted levels, enhanced liquidity, reinvigorated growth, and better positioned YETI for long‑term success. These key initiatives included:
if necessary, mitigate the effects of the macroeconomic environment on our business.·implementing a series of pricing actions, which stimulated demand and re‑balanced existing inventory held by our customers, while, at the same time, allowing us to retain our premium positioning in the market;·introducing new products in existing product families, specifically an expanded line of Hopper soft coolers, new colorways, sizes, and accessories for Rambler drinkware, and limited‑edition Hard Cooler and Drinkware products;·growing our DTC business by increasing our digital marketing investment, re‑platforming YETI.com, increasing our presence on the Amazon Marketplace, and further developing our customer and corporate customization business through the acquisition of Rambler On;·focusing on and diversifying our independent dealer base with retail partners committed to our long‑term growth, including culling approximately 1,100 underperforming retailers;
General·increasing our engagement with Dick’s Sporting Goods, consistent with its market position as the largest sporting goods retailer in the United States;·rationalizing our manufacturing supplier base, which resulted in greater manufacturing capacity and lower product costs;·strengthening our team by adding several key executives and increasing our employee count from 269 at the end of 2015 to 507 at the end of 2017, including material investments in our new product development staff; and·investing in enhanced information systems, including new enterprise resource planning, or ERP, customer relationship management, or CRM, and business improvement systems, which provide us with the technological infrastructure necessary to support our global operations and future growth.These initiatives enabled us to successfully expand our customer base, both demographically and geographically, enhance existing product lines, accelerate new product innovation, and improve customer service. Furthermore, despite the challenges during 2017, our brand remained strong and YETI awareness continued to grow. Today, we operate a more balanced omni‑channel distribution model, anchored by a stronger and more diversified retailer network and more powerful DTC platform, with a wider range of products. As a result, we believe that we are better positioned to achieve sustainable long‑term growth.Results of OperationsOperations. OperationsWe believe that our net sales include a seasonal component. In our wholesale and DTC channels, we expect our net sales to be highest in our second and fourth quarters, with the first quarter generating the lowest sales. We expect this seasonality will continue to be a factor in our results of operations.15TheOur Coolers & Equipment category includes hard coolers, soft coolers, bags, outdoor equipment, products, and various accessories to these core productscargo, as well as accessories and replacement parts. Likewise,parts for these products. Our Drinkware accessories are included in the Drinkware category.category is primarily composed of our stainless-steel drinkware products and related accessories. In addition, theour Other category is primarily YETI ICE, YETI logo teecomprised of ice substitutes and YETI-branded gear, such as shirts, hats, and other miscellaneous products. As a result of our more balanced omni‑channel distribution model and wider range of products, we expect our net sales will continue to increase while our net sales growth rate may moderate.third‑partythird-party contract manufacturers, inbound freight and duties, product quality testing and inspection costs, depreciation onexpense of our molds, tooling, and equipment, that we own, and ourthe cost of customizing Drinkware products.GrossOur DTC channel generally generates higher gross margin in our DTC sales channel is generally higher than that on sales in our wholesale channel. We anticipate that our DTC net sales may grow at a faster rate than our net sales in our wholesale channel. If so,channel due to differentiated pricing between these channels.if we are able to realize greater economies of scale, we would expect a favorable impact to aggregate gross margin over time. This favorable anticipated gross margin impact may not be realized or may be offset by other unfavorable gross margin factors. Additionally, any new products that we develop, or our planned expansion into new geographies, may impact our future gross margin.&A&A”) expenses consist primarily of marketing costs, employee compensation and benefits costs, costs of our outsourced warehousing and logistics operations, costs of operating on third‑third party DTC marketplaces, professional fees and services, cost of non‑cash stock‑basednon-cash stock-based compensation, cost of product shipment to our customers, depreciation and amortization expense, and general corporate infrastructure expenses. We anticipate thatOur variable expenses, including outbound freight, online marketplace fees, third-party logistics fees, and credit card processing fees, will vary as they are dependent on our sales volume and our channel mix. Our DTC channel variable SG&A will increase in the future based on our plans to increase staff levels, open additional retail stores, expand marketing activities, and bear additional costs as a public company, but to decreaseare generally higher as a percentage of net sales over time. In particular, we intend to openthan our wholesale channel distribution costs.company store for employees in the fourth quarter of 2018 and additional retail stores in 2019.Change in Fiscal Year and Reporting Calendar. Effective January 1, 2017, we converted our52- or 53-week fiscal year-end from a calendar year ending December 31 to a “52‑53 week” year endingthat ends on the Saturday closest in proximity to December 31, such that each quarterly period will be 13 weeks in length, except during a 53‑week53-week year when the fourth quarter will be 14 weeks. This did not haveOur fiscal year ending December 30, 2023 (“2023”) is a material effect52-week period. The first quarter of our fiscal year 2023 ended on April 1, 2023, the second quarter ended on July 1, 2023, and the third quarter ends on September 30, 2023. Our fiscal year ended December 31, 2022 (“2022”) was a 52-week period. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years and the associated quarters, months, and periods of those fiscal years. The unaudited condensed consolidated financial results presented herein represent the three and six months ended July 1, 2023 and July 2, 2022.therefore, we did not retrospectively adjust our financial statements.16Statement of Operations Dataindicated. The discussion below should be readindicated (dollars in conjunction withthousands):Three Months Ended Six Months Ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Statement of Operations Net sales $ 402,563 100 % $ 420,042 100 % $ 705,359 100 % $ 713,670 100 % Cost of goods sold 187,725 47 % 200,943 48 % 328,651 47 % 339,711 48 % Gross profit 214,838 53 % 219,099 52 % 376,708 53 % 373,959 52 % Selling, general, and administrative expenses 164,507 41 % 150,753 36 % 311,279 44 % 272,323 38 % Operating income 50,331 13 % 68,346 16 % 65,429 9 % 101,636 14 % Interest expense (731) — % (960) — % (1,325) — % (1,726) — % Other income (expense) 1,244 — % (5,823) 1 % 1,250 — % (4,921) 1 % Income before income taxes 50,844 13 % 61,563 15 % 65,354 9 % 94,989 13 % Income tax expense (12,773) 3 % (15,311) 4 % (16,719) 2 % (23,078) 3 % Net income $ 38,071 9 % $ 46,252 11 % $ 48,635 7 % $ 71,911 10 % following table and our unaudited financial statements, and related notes:(1)For the definitions of Adjusted Operating Income, Adjusted Net Income, Adjusted EBITDA and a reconciliation of such measures to operating income, net income, and net income, respectively, see “Non-GAAP Financial Measures” below.September 29, 2018 Compared to September 30, 2017Three Months Ended July 1,
2023July 2,
2022Change (dollars in thousands) $ % Net sales $ 402,563 $ 420,042 $ (17,479) (4) % Gross profit $ 214,838 $ 219,099 $ (4,261) (2) % Gross margin (Gross profit as a % of net sales) 53.4 % 52.2 % 120 basis points Selling, general, and administrative expenses $ 164,507 $ 150,753 $ 13,754 9 % SG&A as a % of net sales 40.9 % 35.9 % 500 basis points increased $13.1decreased $17.5 million, or 7%4%, to $196.1$402.6 million for the three months ended September 29, 2018July 1, 2023, compared to $183.0$420.0 million for the three months ended September 30, 2017. This increase was drivenJuly 2, 2022. Net sales for the three months ended July 1, 2023 were unfavorably impacted by $24.5 million due to a recall reserve adjustment (as discussed above). Excluding the unfavorable recall reserve adjustment, net sales increased $7.0 million, or 2%, primarily due to growth acrossin our DTC channel. Net sales in our wholesale channel decreased slightly by $0.1 million, or 0%, to $125.0 million for the three months ended September 29, 2018. The wholesaleJuly 1, 2023, include $12.5 million of sales related to gift card redemptions in connection with recall remedies. Our results have also been materially adversely impacted by the stop sale of certain soft coolers included in the recalls initiated during the first quarter of 2023. decrease was driven by lower Coolers & Equipment net sales increased $1.5 million, or 1%, to $226.4 million, compared to $224.8 million in the prior year quarter, mainly due to growth in Drinkware, partially offset by an increase$8.1 million due to the recall reserve adjustment (as discussed above). Excluding the $8.1 million impact of the recall reserve adjustment, DTC channel net sales increased $9.7 million, or 4%, primarily due to growth in Drinkware, sales. The decreasepartially offset by a decline in Coolers & Equipment mainly driven by the stop sale related to the recalls. DTC channel mix was 56% in the second quarter of 2023 compared to 54% in the second quarter of 2022.wasdecreased $19.0 million, or 10%, to $176.2 million, compared to $195.2 million in the same period last year, and were unfavorably impacted by $16.4 million due to the recall reserve adjustment (as discussed above). Excluding the $16.4 million impact of the recall reserve adjustment, wholesale channel net sales decreased $2.7 million, or 1%, primarily driven by a prior year non-recurring disposition of certain prior generation, excess end‑of‑life soft cooler inventories through a peripheral bulk sales channel during the three months ended September 30, 2017. The increasedecline in Drinkware net sales in our wholesale channel was a result of replenishment orders from our retail partners caused by strong product sell‑through, sales of new products, and additional colorways for existing products. Net sales through our DTC channel increased by $13.2 million, or 23%, to $71.2 million for the three months ended September 29, 2018. DTC net sales increased across both Coolers & Equipment andmainly due to the stop sale of the products affected by the recalls, partially offset by Drinkware but most significantly in Drinkware. DTC sales were driven by an increase in customer purchases on our website, YETI.com, and YETI Authorized on the Amazon Marketplace, as well as increased consumer and corporate customized Drinkware, primarily from YETIcustomshop.com.growth.17·Coolers & Equipment net sales decreased by $16.2 million, or 16%, to $86.7 million for the three months ended September 29, 2018 compared to $102.9 million for the three months ended September 30, 2017. The decrease was driven by disposition of certain prior generation, excess end‑of‑life soft cooler inventories through a peripheral bulk sales channel during the three months ended September 30, 2017, which was not repeated. While Coolers & Equipment net sales decreased overall, it benefitted from the expansion of our soft cooler products, as well as the introduction of several storage, transport, and outdoor living products.· increased by $28.3 million, or 37%, to $104.0 million for the three months ended September 29, 2018 compared to $75.8 million for the three months ended September 30, 2017. Drinkware net sales benefitted from the expansion of our Drinkware product line, new Drinkware accessories, and the introduction of new Drinkware colorways.Gross ProfitGross profit increased $15.3by $17.3 million, or 8%, to $233.4 million, compared to $216.1 million in the prior year quarter, reflecting the strong demand for Rambler bottles, the introductions of our new Yonder bottles, Rambler straw lid mugs, our new beverage bucket, and new seasonal colorways.$97.5$156.6 million, compared to $193.4 million in the same period last year, and were unfavorably impacted by $24.5 million due to the recall reserve adjustment (as discussed above). Excluding the $24.5 million unfavorable impact of the recall reserve adjustment, Coolers & Equipment adjusted sales decreased $12.3 million, or 6%, primarily due to the stop sale of the products affected by the recalls. These impacts were partially offset by strong performance in hard coolers, soft coolers not impacted by the recalls, and cargo.September 29, 2018July 1, 2023, compared to $82.2$150.8 million for the three months ended September 30, 2017. Gross margin increased 480 basis points for the three months ended September 29, 2018 to 49.7% from 44.9% for the three months ended September 30, 2017. The increase in gross margin was primarily driven by:·cost improvements across our product portfolio, which favorably impacted gross margin by approximately 270 basis points;·disposition of certain prior generation, excess end‑of‑life soft cooler inventories through a peripheral bulk sales channel at a low gross margin during the prior period, which increased gross margin by approximately 160 basis points;·leveraging fixed costs on higher net sales, which favorably impacted gross margin by approximately 150 basis points;·charges incurred in the prior period for inventory reserves that were not repeated in the current year, which favorably impacted gross margin by approximately 140 basis points; and·increased higher margin DTC channel sales, which favorably impacted gross margin by approximately 110 basis points.These increases in gross margin in the three months ended September 29, 2018 were partially offset by the unfavorable impact of:·price reductions on select hard cooler and soft cooler products in the second half of 2017 and in 2018 to reposition these products in the market to create pricing space for planned new product introductions, which reduced gross margin by approximately 340 basis points.18Selling, General, and Administrative ExpensesSG&A expenses increased by $11.9 million, or 21%, to $69.4 million for the three months ended September 29, 2018 compared to $57.5 million for the three months ended September 30, 2017.July 2, 2022. As a percentage of net sales, SG&A expenses increased 400500 basis points to 35.4%40.9% for the three months ended September 29, 2018.July 1, 2023 from 35.9% for the three months ended July 2, 2022, which was partly driven by deleverage due to the impact of the stop sale and the recall reserve adjustment on our net sales growth, as discussed above. The increase in SG&A expenses was primarily driven mainly by increasesby:the following: employee wages and benefits of $4.9 million due to increased headcount and incentive compensation; professional fees of $4.2 million; facility and utilityvariable expenses of $1.0 million; outbound freight expense$3.5 million (increasing SG&A as a percent of $0.8 million; credit card processing feesnet sales by 140 basis points) comprised of:$0.8 million;$20.9 million (increasing SG&A as a percent of net sales by 630 basis points) comprised of:property taxes of $0.6. These SG&A increasesinvestments in headcount to support future growth, marketing expenses, and warehousing costs; which were partially offset byreductionfavorable $10.7 million impact related to the recall reserve adjustment, as discussed above (decreasing SG&A as a percent of $0.6 million in marketing expenses.Non‑Operatingnet sales by 270 basis points).$7.8$0.7 million for the three months ended September 29, 2018July 1, 2023, compared to $8.4$1.0 million for the three months ended September 30, 2017. TheJuly 2, 2022. This decrease was primarily driven by higher interest income, partially offset by an increase in interest expense was primarily due to decreased balanceshigher interest rates on our Credit Facility (as defined below) on which the interest expense is calculated. See further discussion of our Credit Facility in “—Liquidity and Capital Resources” below.Income tax expenseoutstanding long-term debt.$3.1$1.2 million for the three months ended September 29, 2018July 1, 2023, compared to $5.2other expense of $5.8 million for the three months ended September 30, 2017.July 2, 2022. The effective tax ratechange in other income was due to foreign currency gains on intercompany balances for the three months ended September 29, 2018 was 16% compared to 32%July 1, 2023 versus foreign currency losses on intercompany balances for the three months ended September 30, 2017.July 2, 2022.and thewas due to lower income before income taxes. The effective tax rate for each of the three months ended July 1, 2023 and July 2, 2022 was 25%.Six Months Ended Change July 1,
2023July 2,
2022(dollars in thousands) $ % Net sales $ 705,359 $ 713,670 $ (8,311) (1) % Gross profit $ 376,708 $ 373,959 $ 2,749 1 % Gross margin (Gross profit as a % of net sales) 53.4 % 52.4 % 100 basis points Selling, general, and administrative expenses $ 311,279 $ 272,323 $ 38,956 14 % SG&A as a % of net sales 44.1 % 38.2 % 590 basis points reduction$8.1 million unfavorable impact related to the recall reserve adjustment. Excluding the $8.1 million impact of the recall reserve adjustment, DTC channel net sales increased $20.7 million, or 5%, primarily due to growth in both Drinkware and Coolers & Equipment. DTC channel mix was 56% in the U.S. corporate income tax rate from 35%first six months of 2023 compared to 21%53% in the first six months of 2022.enacted as partto $312.0 million, compared to $332.9 million in the same period last year, and were unfavorably impacted by $16.4 million due to the recall reserve adjustment (as discussed above). Excluding the $16.4 million impact of the Act, and the revaluation of deferred tax assets for state income taxes.Nine Months Ended September 29, 2018 Compared to September 30, 2017Net SalesNet sales increased $100.5 million, or 23%, to $537.7 million for the nine months ended September 29, 2018 compared to $437.1 million for the nine months ended September 30, 2017. This increase was driven by growth across both our wholesale and DTC channels. Net sales in our wholesale channel increased $42.0 million, or 13%, to $360.7 million for the nine months ended September 29, 2018. The growth in ourrecall reserve adjustment, wholesale channel net sales wasdecreased $4.5 million, or 1%, primarily driven by increased Drinkware sales, partially offset by decreased Coolers & Equipment net sales. The decreasea decline in Coolers & Equipment net sales was drivendue to the stop sale of the products affected by disposition of certain prior generation, excess end‑of‑life soft cooler inventories through a peripheral bulk sales channel during the nine months ended September 30, 2017. Overall, wholesale channel net sales grew as a result of replenishment orders from our retail partners causedrecalls, partially offset by strong product sell‑through, sales of new products, and additional colorways for existing products. Net sales through our DTC channel increased by $58.6 million, or 49%, to $176.9 million for the nine months ended September 29, 2018. DTC sales increased across all categories, but most significantly in Drinkware. DTC sales were driven by an increase in customer purchases on our website, YETI.com, and YETI Authorized on the Amazon Marketplace, as well as increased consumer and corporate customized Drinkware and hard cooler sales, primarily from YETIcustomshop.com.19·Coolers & Equipment net sales increased by $10.8 million, or 5%, to $240.0 million for the nine months ended September 29, 2018 compared to $229.2 million for the nine months ended September 30, 2017. Coolers & Equipment net sales benefitted from a continued increase in hard cooler sales and the expansion of our soft cooler products, as well as the introduction of several storage, transport, and outdoor living products.· increased by $86.3 million, or 44%, to $280.7 million for the nine months ended September 29, 2018 compared to $194.4 million for the nine months ended September 30, 2017. Drinkware net sales benefitted from the expansion of our Drinkware product line, new Drinkware accessories, and the introduction of new Drinkware colorways.Gross ProfitGross profit increased $53.8by $23.6 million, or 27%6%, to $255.3$423.7 million, for the nine months ended September 29, 2018 compared to $201.5$400.1 million for the nine months ended September 30, 2017. Gross margin increased 140 basis points for the nine months ended September 29, 2018 to 47.5% from 46.1% for the nine months ended September 30, 2017. The increase in gross margin was primarily driven by:·cost improvements across our product portfolio, which favorably impacted gross margin by approximately 150 basis points;·increased higher margin DTC channel sales, which favorably impacted gross margin by approximately 140 basis points;·charges incurred in the prior period for inventory reserves that was not repeated in the current year, which favorably impacted gross margin by approximately 90 basis points; ·charges incurred in the prior period for price protection related to our first-generation Hopper, which favorably impacted gross margin by approximately 80 basis points;·leveraging fixed costs on higher net sales, which favorably impacted gross margin by approximately 70 basis points; and·disposition of certain prior generation, excess end‑of‑life soft cooler inventories through a peripheral bulk sales channel at a low gross margin during the prior period, which increased gross margin by approximately 30 basis points.These increases in gross margin in the nine months ended September 29, 2018prior year period, reflecting the strong demand for Rambler bottles, the introductions of our new Yonder bottles, Rambler straw lid mugs, our new beverage bucket, and new seasonal colorways.of:·price reductions on select hard cooler, soft cooler, and Drinkware products in the second half of 2017 and in 2018 to reposition these products in the market to create pricing space for planned new product introductions, which reduced gross margin by approximately 420 basis points.
•other impacts, which unfavorably impacted gross margin by 50 basis points.$29.4$39.0 million, or 18%14%, to $190.7$311.3 million for the ninesix months ended September 29, 2018July 1, 2023 compared to $161.4$272.3 million for the ninesix months ended September 30, 2017.July 2, 2022. As a percentage of net sales, SG&A decreased 140expenses increased by 590 basis points to 35.5%44.1% for the ninesix months ended September 29, 2018.July 1, 2023 compared to 38.2% for the six months ended July 2, 2022, which was partly driven by deleverage due to the impact of the stop sale and the recall reserve adjustment on our net sales growth, as discussed above. The increase in SG&A expenses was primarily driven mainlyby:increases in the following: employee wages and benefits of $11.7 million due to increased headcount and incentive compensation;170 basis points) comprised of:of $5.4 million; professional fees of $4.1 million; warehousing and logistics and outbound freight expense of $4.0 million; information technologyfreight;$2.8 million; property taxes$38.6 million (increasing SG&A as a percent of $1.8 million; depreciationnet sales by 570 basis points) comprised of:amortization of $1.7 million; credit card processing fees of $1.7 million;investments in headcount to support future growth, warehousing costs, marketing expenses, and facility and utility costs of $1.1 million; fees associated with sales through a peripheral bulk sales channel of $0.9 million; non‑cash stock‑based compensation expense of $0.8 million; and travel and entertainment expenses of $0.5 million. These SG&A increasescosts; which were partially offset byreductionfavorable $10.5 million impact related to the recall reserve adjustment, as discussed above (decreasing SG&A as a percent of $7.0 million in marketing expenses.Non‑Operatingnet sales by 150 basis points).$24.5$1.3 million for the ninesix months ended September 29, 2018July 1, 2023, compared to $24.0$1.7 million for the ninesix months ended September 30, 2017.July 2, 2022. The decrease was primarily driven by higher interest income, partially offset by an increase in interest expense was primarily due to increased amortizationhigher interest rates on our outstanding long-term debt.deferred financing fees$4.9 million for the six months ended July 2, 2022. The change in connection withother income was due to foreign currency gains on intercompany balances for the amendment to our Credit Facilitysix months ended July 1, 2023 versus foreign currency losses on intercompany balances for the three months ended July 15, 2017. See further discussion of our Credit Facility in “—Liquidity and Capital Resources” below.$7.2$16.7 million for the ninesix months ended September 29, 2018July 1, 2023, compared to $6.0$23.1 million for the ninesix months ended September 30, 2017.July 2, 2022. The increasedecrease in income tax expense is due to higherlower income before income taxes. The effective tax rate for the ninesix months ended September 29, 2018July 1, 2023 was 18%26%, compared to 34%24% for the ninesix months ended September 30, 2017.July 2, 2022. The decrease in thehigher effective tax rate was primarily due to the reductionan unfavorable tax impact related to stock-based compensation in the U.S. corporate income tax rate from 35% to 21%, enacted as part of the Act, and the revaluation of deferred tax assets for state income taxes.Non‑GAAP Financial MeasuresAdjusted Operating Income and Adjusted Net Income are defined as operating income and net income adjusted for non-cash stock-based compensation expense, asset impairment charges, investments in new retail locations and international market expansion, transition to Cortec majority ownership, transition to the ongoing senior management team, and transition to a public company, and, in the case of Adjusted Net Income, also adjusted for early extinguishment of debt and the tax impact of such adjustments. Adjusted EBITDA is defined as net income before interest expense, income tax expense, depreciation and amortization expense, non-cash stock-based compensation expense, early extinguishment of debt, asset impairment charges, investments in new retail locations and international market expansion, transition to Cortec majority ownership, transition to the ongoing senior management team, and transition to a public company. The expenses incurred related to these transitional events include: management fees and contingent consideration related to the transition to Cortec majority ownership; severance, recruiting, and relocation costs related to the transition to our ongoing senior management team; consulting fees, recruiting fees, salaries and travel costs related to members of our Board of Directors, fees associated with Sarbanes-Oxley Act compliance, and incremental audit and legal fees in connection with our transition to a public company. All of these transitional costs are reported in selling, general, and administrative, or SG&A, expenses.Adjusted Operating Income, Adjusted Net Income, and Adjusted EBITDA are not defined under GAAP and may not be comparable to similarly titled measures reported by other entities. We use these non-GAAP measures, along with GAAP measures, as a measure of profitability. These measures help us compare our performance to other companies by removing the impact of our capital structure; the effect of operating in different tax jurisdictions; the impact of our asset21
base, which can vary depending on the book value of assets and methods used to compute depreciation and amortization; the effect of non-cash stock-based compensation expense, which can vary based on plan design, share price, share price volatility, and the expected lives of equity instruments granted; as well as certain expenses related to what we believe are events of a transitional nature. We also disclose Adjusted Operating Income, Adjusted Net Income, and Adjusted EBITDA as a percentage of net sales to provide a measure of relative profitability.
We believe these non-GAAP measures, when reviewed in conjunction with GAAP financial measures, and not in isolation or as substitutes for analysis of our results of operations under GAAP, are useful to investors as they are widely used measures of performance and the adjustments we make to these non-GAAP measures provide investors further insight into our profitability and additional perspectives in comparing our performance to other companies and in comparing our performance over time on a consistent basis. Adjusted Operating Income, Adjusted Net Income, and Adjusted EBITDA have limitations as profitability measures in that they do not include the effect of non-cash stock-based compensation expense, the effect of asset impairments, the effect of investments in new retail locations and international market expansion, and the impact of certain expenses related to transitional events that are settled in cash. Adjusted EBITDA has limitations as a profitability measures in that it does not include interest expense on our debts, our provisions for income taxes, and the effect of our expenditures for capital assets and certain intangible assets. Because of these limitations, we rely primarily on our GAAP results.
In the future, we may incur expenses similar to those for which adjustments are made in calculating Adjusted Operating Income, Adjusted Net Income, and Adjusted EBITDA. Our presentation of these non-GAAP measures should not be construed as a basis to infer that our future results will be unaffected by extraordinary, unusual, or non-recurring items.
22
The following table reconciles operating income to Adjusted Operating Income, net income to Adjusted Net Income, and net income to Adjusted EBITDA for the periods presented.
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| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 29, |
| September 30, |
| September 29, |
| September 30, |
| ||||
(dollars in thousands) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
Operating income |
| $ | 28,124 |
| $ | 24,719 |
| $ | 64,554 |
| $ | 40,097 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock-based compensation expense(a)(b) |
|
| 2,923 |
|
| 2,678 |
|
| 10,031 |
|
| 9,186 |
|
Investments in new retail locations and international market expansion(a)(d) |
|
| 52 |
|
| — |
|
| 292 |
|
| — |
|
Transition to Cortec majority ownership(a)(e) |
|
| — |
|
| — |
|
| 750 |
|
| 750 |
|
Transition to the ongoing senior management team(a)(f) |
|
| 350 |
|
| 90 |
|
| 1,694 |
|
| 90 |
|
Transition to a public company(a)(g) |
|
| 233 |
|
| (2,935) |
|
| 1,003 |
|
| (2,228) |
|
Adjusted Operating Income |
| $ | 31,682 |
| $ | 24,552 |
| $ | 78,324 |
| $ | 47,895 |
|
Net income |
| $ | 17,030 |
| $ | 11,271 |
| $ | 32,594 |
| $ | 11,427 |
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Adjustments: |
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Non-cash stock-based compensation expense(a)(b) |
|
| 2,923 |
|
| 2,678 |
|
| 10,031 |
|
| 9,186 |
|
Early extinguishment of debt(c) |
|
| 614 |
|
| — |
|
| 614 |
|
| — |
|
Investments in new retail locations and international market expansion(a)(d) |
|
| 52 |
|
| — |
|
| 292 |
|
| — |
|
Transition to Cortec majority ownership(a)(e) |
|
| — |
|
| — |
|
| 750 |
|
| 750 |
|
Transition to the ongoing senior management team(a)(f) |
|
| 350 |
|
| 90 |
|
| 1,694 |
|
| 90 |
|
Transition to a public company(a)(g) |
|
| 233 |
|
| (2,935) |
|
| 1,003 |
|
| (2,228) |
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Tax impact of adjusting items(h) |
|
| (1,014) |
|
| 60 |
|
| (3,337) |
|
| (2,794) |
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Adjusted Net Income |
| $ | 20,188 |
| $ | 11,164 |
| $ | 43,641 |
| $ | 16,431 |
|
Net income |
| $ | 17,030 |
| $ | 11,271 |
| $ | 32,594 |
| $ | 11,427 |
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Adjustments: |
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Interest expense |
|
| 7,755 |
|
| 8,351 |
|
| 24,474 |
|
| 23,961 |
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Income tax expense |
|
| 3,125 |
|
| 5,208 |
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| 7,161 |
|
| 5,970 |
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Depreciation and amortization expense(i) |
|
| 6,333 |
|
| 5,815 |
|
| 18,218 |
|
| 15,171 |
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Non-cash stock-based compensation expense(a)(b) |
|
| 2,923 |
|
| 2,678 |
|
| 10,031 |
|
| 9,186 |
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Early extinguishment of debt(c) |
|
| 614 |
|
| — |
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| 614 |
|
| — |
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Investments in new retail locations and international market expansion(a)(d) |
|
| 52 |
|
| — |
|
| 292 |
|
| — |
|
Transition to Cortec majority ownership(a)(e) |
|
| — |
|
| — |
|
| 750 |
|
| 750 |
|
Transition to the ongoing senior management team(a)(f) |
|
| 350 |
|
| 90 |
|
| 1,694 |
|
| 90 |
|
Transition to a public company(a)(g) |
|
| 233 |
|
| (2,935) |
|
| 1,003 |
|
| (2,228) |
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Adjusted EBITDA |
| $ | 38,415 |
| $ | 30,478 |
| $ | 96,831 |
| $ | 64,327 |
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Net sales |
| $ | 196,109 |
| $ | 183,032 |
| $ | 537,654 |
| $ | 437,140 |
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Net income as a % of net sales |
|
| 8.7 | % |
| 6.2 | % |
| 6.1 | % |
| 2.6 | % |
Adjusted operating income as a % of net sales |
|
| 16.2 | % |
| 13.4 | % |
| 14.6 | % |
| 11.0 | % |
Adjusted net income as a % of net sales |
|
| 10.3 | % |
| 6.1 | % |
| 8.1 | % |
| 3.8 | % |
Adjusted EBITDA as a % of net sales |
|
| 19.6 | % |
| 16.7 | % |
| 18.0 | % |
| 14.7 | % |
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Liquidity and Capital Resources
Historically, our
At September 29, 2018, we had $52.1 million in cash on hand, no outstanding borrowings under our revolving credit facility, and $80.0 million available for borrowing under our revolving credit facility. At September 30, 2017 we had $34.7 million in cash on hand, $40.0 million in outstanding borrowings under our revolving credit facility, and $60.0 million available for borrowing under our revolving credit facility.
On October 24, 2018, the Company completed its initial public offering (the "IPO") of 16,000,000 shares of our common stock, including 2,500,000 shares of our common stock sold by the Company and 13,500,000 shares of our common stock sold by selling stockholders. The underwriters were also granted an option to purchase up to an additional 2,400,000 shares from the selling stockholders, at the public offering price, less the underwriting discount, for 30 days after October 24, 2018. The shares were sold at the IPO price of $18.00 per share for net proceeds of $42.4 million to the Company, after deducting underwriting discounts and commissions of $2.6 million. The Company did not receive any proceeds from the sale of shares of common stock by the selling stockholders. Offering costs incurred by the Company are expected to total approximately $4.4 million. On November 29, 2018, we made voluntary principal payments on our term loan A and term loan B in the amount of $2.4 million and $47.6 million, respectively, using the net proceeds from our IPO and additional cash on hand. After the voluntary debt payments, we had outstanding borrowings of $342.5 million and $0 under our term loan A and term loan B, respectively.
The recent changes in our working capital requirements generally reflect the growth in our business. Although we cannot predict with certainty all of our particular short‑term cash uses or the timing or amount of cash requirements, to operate and grow our business, weRevolving Credit Facility. We believe that our availablecurrent operating performance, operating plan, our strong cash on hand, along with amountsposition, and borrowings available under our Revolving Credit Facility, will be sufficient to satisfy our foreseeable liquidity needs and capital expenditure requirements for at least the next twelve months. However, the continued growth
24
Cash Flows
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| Nine Months Ended | ||||
|
| September 29, |
| September 30, | ||
(dollars in thousands) |
| 2018 |
| 2017 | ||
Cash flows provided by (used in): |
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Operating activities |
| $ | 118,834 |
| $ | 71,119 |
Investing activities |
|
| (23,926) |
|
| (36,906) |
Financing activities |
|
| (96,472) |
|
| (20,851) |
Operating activities
Our cash flow from operating activities consists primarily of net income adjusted for certain non‑cash items. Adjustments to net income for non‑cash items include depreciation and amortization, amortization of deferred loan costs, stock‑based compensation, deferred income taxes, impairment of long-lived assets, and gain on disposal of long-lived assets. In addition, our operating cash flows include the effect of changes in operating assets and liabilities, principally inventory, accounts receivable, income taxes, prepaid expenses, deposits and other assets, accounts payable, and accrued expenses.
Net cash provided by operating activities was $118.8 million in the nine months ended September 29, 2018, compared to $71.1 million in the nine months ended September 30, 2017. The increase in net cash provided by operating activities was due to changes in accounts receivable, which increased operating cash flow by $34.9 million, primarily driven by an increased mix of DTC sales, which have shorter collection terms; and an increase in net income, after adjusting for non-cash items, of $14.3 million.
Investing activities
Cash used in investing activities was $23.9$223.1 million and $36.9$153.9 million inof working capital (excluding cash), and $300.0 million of borrowings available under the nine months ended September 29, 2018 and September 30, 2017, respectively. The decrease in net cash used in investing activities was primarily due to lower capital expenditures in fiscal 2018 compared to fiscal 2017 due to significant cash outflows we incurred in fiscal 2017 for the implementation of ERP and CRM systems; partially offset by higher cash outflows in fiscal 2018 for intangible assets due to increased spend on trade dress and trademark assets and higher cash inflows in fiscal 2017 related to settlement payments from litigation matters.
Financing activities
Cash used in financing activities was $96.5 million and $20.9 million in the nine months ended September 29, 2018 and September 30, 2017, respectively. The increase in net cash used in financing activities was primarily due to increased voluntary payments of long-term debt in the nine months ended September 29, 2018 and increased borrowings on our revolving credit facility in the nine months ended September 30, 2017.
Revolving Credit Facility.
On May 19, 2016, we entered into a Credit Agreement with certain lenders and Bank of America, N.A. as administrative agent (as amended, the “Credit Facility”). The
$84.4 million Term Loan A.
25
At September 29, 2018,July 1, 2023, we had $392.5$84.4 million principal amount of indebtedness outstanding under Term Loan A under the Credit Facility excluding debt issuance costs. At December 30, 2017, we had $481.7 millionand no outstanding borrowings under the Credit Facility, excluding debt issuance costs.
Revolving Credit Facility
Facility. The revolving credit facility, which matures May 19, 2021, allows us to borrow up to $100.0 million, including the ability to issue up to $20.0 million in letters of credit. While our issuance of letters of credit does not increase ourweighted average interest rate for borrowings outstanding under our revolving credit facility, it does reduce the amount available. As of December 30, 2017 and September 29, 2018, we had no borrowings outstanding under the revolving credit facility. As of September 29, 2018, we had issued $20.0 million in letters of credit with a 4.0% annual fee to supplement our supply chain finance program.
Term Loan A
The term loan A is a $445.0 million term loan facility, maturing on May 19, 2021. Principal payments of $11.1 million are due quarterly with was 6.50% during the entire unpaid balance due at maturity. As of September 29, 2018, we had $344.9 million outstanding under term loan A, excluding debt issuance costs.
Term Loan B
The term loan B is a $105.0 million term loan facility, maturing on May 19, 2022. Principal payments of $0.3 million are due quarterly with the entire unpaid balance due at maturity. As of September 29, 2018, we had $47.6 million outstanding under term loan B, excluding debt issuance costs.
Other Terms of the Credit Facility
We may request incremental term loans, incremental equivalent debt, or revolving commitment increases (we refer to each as an Incremental Increase) of amounts of not more than $125.0 million in total plus an additional amount if our total secured net leverage ratio (as defined in the Credit Facility) is equal to or less than 2.50 to 1.00. In the event that any lenders fund any of the Incremental Increases, the terms and provisions of each Incremental Increase, including the interest rate, shall be determined by us and the lenders, but in no event shall the terms and provisions, when taken as a whole and subject to certain exceptions, of the applicable Incremental Increase, be more favorable to any lender providing any portion of such Incremental Increase than the terms and provisions of the loans provided under the revolving credit facility, the term loan A, and the term loan B, as applicable.
The Credit Facility is (a) jointly and severally guaranteed by YETI Coolers and YCD, our wholly owned subsidiaries, and any future subsidiaries that execute a joinder to the guaranty and collateral agreement (together, the “Guarantors”) and (b) secured by a first priority lien on substantially all of our and the Guarantors’ assets, subject to certain customary exceptions.
three months ended July 1, 2023.
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In addition, the Credit Facility, contains customary financial and non‑financial covenants limiting, among other things, mergers and acquisitions; investments, loans, and advances; affiliate transactions; changes to capital structure andor the business; additional indebtedness; additional liens; the paymentoccurrence of dividends; and the sale of assets, in each case, subject to certain customary exceptions. The Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, defaults under other material debt, events of
26
bankruptcy and insolvency, failure of any guaranty or security document supporting the Credit Facility to be in full force and effect, and a change of control, could result in an event of default and an acceleration of our business. Weobligations under the Credit Facility or other indebtedness that we may incur in the future. At July 1, 2023, we were in compliance with all covenants and expect to remain in compliance with all covenants under the Credit FacilityFacility.
Contractual Obligations. Therethe maturity date of the Term Loan A, there have been no material changes in our material cash requirements for contractual and other obligations, including capital expenditures, as disclosed under “Material Cash Requirements” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (“SEC”).
| Six Months Ended | |||||||||||
| July 1, 2023 | July 2, 2022 | ||||||||||
| Cash flows provided by (used in): | |||||||||||
| Operating activities | $ | 28,781 | $ | (74,564) | |||||||
| Investing activities | (31,917) | (31,825) | |||||||||
| Financing activities | (9,937) | (113,767) | |||||||||
and Estimates
A discussion of the accounting policies that management considers critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results is included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures Based on July 1, 2023. individuals or groups of persons or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements in our public reports due to error or fraud may occur and not be detected. operations. Any new products that we develop and market may not generate sufficient revenues to recoup their development, production, marketing, selling and other costs. If we fail to accurately forecast customer demand, including relating to our expected growth, we may experience excess inventory levels or a shortage of product to deliver to our customers. Failure to accurately forecast our results of operations and growth rate could also cause us to make poor operating decisions and we may not be able to adjust in a timely manner. Consequently, actual results could be materially lower than anticipated. Even if the markets in which we compete expand, we cannot assure you that our business will grow at similar rates, if at all. competitive advantages, including longer operating histories, ability to leverage their sales efforts and marketing expenditures across a broader portfolio of products, global product distribution, larger and broader retailer bases, more established relationships with a larger number of suppliers and manufacturing partners, greater brand recognition, larger or more effective brand ambassador and endorsement relationships, greater financial strength, larger research and development teams, larger marketing budgets, and more distribution and other resources than we do. Some of our competitors may aggressively discount their products or offer other attractive sales terms in order to gain market share, which could result in pricing pressures, reduced profit margins, or lost market share. If we are not able to overcome these potential competitive challenges, effectively market our current and future products, and otherwise compete effectively against our current or potential competitors, our prospects, results of operations, and financial condition could be harmed. results of operations. the capability and resources to produce our products to our specifications in sufficient volume and satisfy our service and quality control standards. In addition, our manufacturers may raise prices in the future, which would increase our costs and harm our margins. Any of these risks could harm our ability to deliver our products on time, or at all, damage our reputation and our relationships with our retail partners and customers, and increase our product costs thereby reducing our margins. business. cargo, adversely affected. our gross margins and our ability to meet customer demand. As a result of Russia’s invasion of Ukraine in March 2022, the United States and other governments have implemented coordinated sanctions, seizures of assets, and export-control measure packages. These measures, and the global response to the invasion, have resulted in increased oil prices and logistics costs, and may negatively impact the prices of our raw materials we use to manufacture our products. If we are unable to successfully mitigate a significant portion of these product cost increases or fluctuations, our results of operations could be harmed. products or product expansions relative to competing products; (d) failure to obtain shelf space from our retail partners; (e) new, well-received product introductions by competitors; harm; (g) delays or defaults on our retail partners’ payment obligations to us; (h) store closures, decreased foot traffic, or other adverse effects resulting from public health crises; and (i) economic conditions, including levels of consumer discretionary spending, which may be impacted by rising inflation, unemployment and interest rates. Furthermore, any adverse change in our relationship with Amazon, including restrictions on the ability to offer products on the Amazon Marketplace or termination of the relationship, could adversely affect our continued DTC channel growth, our business, and results of operations. •our ability to properly assess the potential profitability and payback period of potential new If our independent suppliers and manufacturing partners do not comply with ethical business practices or with applicable laws and regulations, our reputation, business, and results of operations risks that may result in higher operating costs or the inability to process payments, either of which could harm our business, financial condition and results of operations. successful; our limited operating experience and limited brand recognition in new markets may make it more difficult to execute our expansion strategy and cause our business and growth to suffer. countries and practical difficulties of enforcing rights abroad; (j) compliance with anti-bribery, anti-corruption, sanctions, and anti-money laundering laws, such as the FCPA, the Bribery Act, and OFAC regulations, by us, our employees, and our business partners; (k) currency exchange rate fluctuations and related effects on our results of operations; (l) economic weakness, including inflation, or political instability in foreign economies and markets; (m) compliance with tax, employment, immigration, and labor laws for employees living or traveling abroad; (n) workforce uncertainty in countries where labor unrest is more common than in the United States; (o) business interruptions resulting from geopolitical actions, including war and terrorism, the United States Consumer Products Safety Act of 1972, as amended by the Consumer Product Safety Improvement Act of 2008, which empowers the Consumer Products Safety Commission (“CPSC”) to exclude from the market products that are found to be unsafe or hazardous, and similar laws under foreign jurisdictions. Although we extensively and rigorously test new and enhanced products, there can be no assurance we will be able to detect, prevent, or fix all defects. As a result, these types of claims could have a material adverse effect on our business, results of operations, and financial condition. future at rates we consider reasonable and commercially justifiable, and insurance may not continue to be available on terms as favorable as our current arrangements. The occurrence of a significant uninsured claim or a claim in excess of the insurance coverage limits maintained by us could harm our business, results of operations, and financial condition. ” Tax Matters growth, and we may need to raise additional capital, which may not be available on terms acceptable to us or at all. Our indebtedness may limit our ability to invest in the ongoing needs of our business and if we are unable to comply with the covenants in our current Credit Facility, our liquidity and results of operations could be harmed. The Credit Facility places certain limitations on our ability to incur additional indebtedness. However, subject to the qualifications and exceptions in the Credit Facility, we may incur substantial additional indebtedness under that facility. The Credit Facility also places certain limitations on our ability to enter into certain types of transactions, financing arrangements and investments, to make certain changes to our capital structure, and to guarantee certain indebtedness, among other things. The Credit Facility also places certain restrictions on the payment of dividends and distributions and certain management fees. These restrictions limit or prohibit, among other things, and in each case, subject to certain customary exceptions, our ability to: (a) pay dividends on, redeem or repurchase our stock, or make other distributions; (b) incur or guarantee additional indebtedness; (c) sell stock in our subsidiaries; (d) create or incur liens; (e) make acquisitions or investments; (f) transfer or sell certain assets or merge or consolidate with or into other companies; (g) make certain payments or prepayments of indebtedness subordinated to our obligations under the Credit Facility; and (h) enter into certain transactions with our affiliates. If our goodwill, other intangible assets, or fixed assets become impaired, we may be required to record a charge to our earnings. stockholder activism. We may be subject to In any future acquisitions, we may not be able to successfully integrate acquired personnel, operations, and technologies, or effectively manage the combined business following the acquisition. We also may not achieve the anticipated benefits from future acquisitions due to a number of factors, including: (a) an inability to integrate or benefit from acquisitions in a profitable manner; (b) unanticipated costs or liabilities associated with the acquisition; (c) the incurrence of acquisition-related costs; (d) the diversion of YETI Holdings, Dated: By: /s/ Matthew J. Reintjes Dated: By: /s/ (Principal Financial Officer and Principal Accounting Officer)into our primarymarket risk exposures or management of market risksrisk from those disclosed in our the Final Prospectus under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures About Market Risk.”Risk included under Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2022.We are subject to the periodic reporting requirements ofor (“Exchange Act. We haveAct”)) are designed our disclosure controls and procedures to provide reasonable assuranceensure that information we discloserequired to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms of the Securities and Exchange Commission, or the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officerChief Executive Officer and principal financial officer,Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures. Disclosure controls and procedures, no matter how well‑conceived and operated, can provide reasonable, but not absolute, assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.27thethis evaluation, of our disclosure controls and procedures as of September 29, 2018, our Chief Executive Officer and Chief Financial Officer have concluded that as a result of material weaknesses in our internal control over financial reporting as described below, our disclosure controls and procedures were not effective as of September 29, 2018.preparation of our financial statements for 2017, we identified material weaknesses in our internal control over financial reporting. Under standards established by the Public Company Accounting Oversight Board, a material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.The material weaknesses related to IT general controls weaknesses in managing access and change in our significant financial systems; and failure to properly detect and analyze issues in the accounting system related to inventory valuation.We have implemented measures designed to improve our internal control over financial reporting to address the underlying causes of these material weaknesses, including:·completing a significant number of the identified required remediation activities within a comprehensive IT general controls remediation plan for our SAP environment to improve general controls; and·initiating weekly inventory reconciliation activities to allow for more timely identification of inventory adjustments and errors.We continue to work on other remediation initiatives including:·documenting and implementing revised delegation of authority and transaction approval policies;·addressing remaining remediation activities within our SAP environment and across our other financially significant IT systems; and·working closely with our third‑party logistics provider on improvements to their inventory tracking activities and reporting processes.In accordance with the provisions of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we and our independent registered public accounting firm were not required to, and did not, perform an evaluation of our internal control over financial reporting as of December 30, 2017 in accordance with the provisions of Section 404 of the Sarbanes‑Oxley Act. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses.Other than the changes intended to remediate the material weaknesses described above,quarter ended July 1, 2023, there were no changes in our internal control over financial reporting during the three months ended September 29, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.mistake.mistake or fraud. Additionally, controls can be circumvented by28proceedings. Although no assurance can be given, we do notproceedings, some of which are covered by insurance. We believe that anyour existing claims and proceedings, and the probability of our currently pending proceedingslosses relating to such contingencies, will not have a material adverse effect on our consolidated financial condition, cash flows, orposition, results of operations.operations, or cash flows.include, but are not limited to, those material risks describedand uncertainties discussed below each of which may be relevant to an investment decision. You should carefully considerupdate and supersede the risks and uncertainties described below, together with allpreviously disclosed in Part I, Itemthe other information contained in this Quarterlyour Annual Report on Form 10-Q, including, but not limited10-K for the year ended December 31, 2022, which was filed with the SEC on February 27, 2023.Other than the addition of a risk factor regarding risks related to the section titled “Management's Discussionour environmental, social and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes, before deciding whether to invest in shares of our common stock. The following description of risk factors includes anygovernance goals, there have been no material changes to the risks and supersedes the description of, risk factors associated with the Company’s businessuncertainties previously disclosed in the Company’s registration Statementsuch Annual Report on Form S-1 (Registration No. 333-227578) under the heading “Risk Factors.” The10-K. of the Company can be affected by a number of factors,risks and uncertainties, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’sour actual results of operations and financial condition and operating results to vary materially from past, or from anticipated future, results of operations and financial condition,condition. The risks discussed below are not the only ones facing our business but do represent those risks that we believe are material to us. Additional risks and operating results. Any of these factors, in wholeuncertainties not presently known to us or in part, could materially andthat we currently deem immaterial may also adversely affect the Company’s business, financial condition, operating results, and stock price. If any of the following risks or other risks actually occur, our business, financial condition operatingand results and future prospects could be materially harmed. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.The following discussion of risk factors contains forward-looking statements. Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.turn,passion for the outdoors. To sustain long-term growth, we must continue to successfully promote our products to consumers who align with the values of our brand, as well as to individuals who simply value products of uncompromising quality and design. Our ability to execute our marketing and growth strategy depends on many factors, such as the quality, design, performance, functionality, and durability of our products, the image of our e-commerce platform and retail partner floor spaces, our communication activities, including advertising, social media, and public relations, and our management of the customer experience, including direct interfaces through customer service. Maintaining, promoting, and positioning our brand are important to expanding our customer base and will depend largely on the success of our marketing and merchandising efforts and our ability to provide consistent, high qualityhigh-quality customer experiences.intendhave made, and we expect that we will continue to make, substantialsignificant investments in these areaspromoting our products and attracting new customers, including through the use of corporate partnerships, YETI Ambassadors, traditional, digital, and social media, originalorder to maintain and enhance our brand,sponsorship of, community events. Marketing campaigns can be expensive and such investments may not be successful.result in the cost-effective acquisition of customers. Ineffective marketing, ongoing and sustained promotional activities, negative publicity, product diversion to unauthorized distribution channels, product or manufacturing defects, counterfeit products, unfair labor practices, and failure to protect the intellectual property rights in our brand are some of the potential threats to the strength of our brand, and those and other factors could rapidly and severely diminish customer confidence in us. Furthermore, these factors could cause our customers to lose the personal connection they feel with the YETI brand. We believeActions taken by individuals that maintaining and29enhancingwe partner with, such as YETI ambassadors, influencers or our associates, that fail to represent our brand in a manner consistent with our brand image, whether through our social media platforms or their own, could also harm our brand reputation and materially impact our business. Further, as our brand becomes more widely known, future marketing campaigns may not attract new customers at the same rate as past campaigns. Inflation and rising product costs may also affect our ability to provide products in our current marketsa cost-effective manner and inhinder us from attracting new markets where we have limited brand recognition is important to expanding our customer base.customers. If we are unable to maintainattract new customers, or enhance our brandfail to do so in current or new markets,a cost-effective manner, our growth strategycould be slower than we expect and results of operationsour business could be harmed.developmarket new products, our business may be harmed.products.products on a timely basis to respond to new and evolving consumer preferences. The success of our new and enhanced products depends on many factors, including anticipating consumer preferences, finding innovative solutions to consumer problems, differentiating our products from those of our competitors, and maintaining the strength of our brand. The design and development of our products is costly, and we typically have several products in development at the same time. Problems in the design or quality of our products, or delays in product introduction, may harm our brand, business, financial condition, and results of operations.results of operationsgrowth rate and growth rate.We may not be able to accuratelydemand for our products.results of operations and growth rate.manufacturers before firm orders are placed by our customers. Forecasts may beare particularly challenging as we expand into new markets and geographies, and develop and market new products.products, and face further uncertainty related to the current market conditions, including uncertainty related to interest rates, inflation rates, and geopolitical events. Our historical sales, expense levels, and profitability may not be an appropriate basis for forecasting future results.In addition, in connection with operating as a public company, we will incur significant additional legal, accounting, and other expenses that we did not incur as a private company. If our sales do not increase at a sufficient rate to offset these increases in our operating expenses, our profitability may decline in future periods.ContinuedFuture rapid growth may increase the strain on our resources, and we could experience operating difficulties, including difficulties in sourcing, logistics, recruiting, maintaining internal controls, marketing, designing innovative products, and meeting consumer needs. If we do not adapt to meet these evolving challenges, the strength of our brand may erode, the quality of our products may suffer, we may not be able to deliver products on a timely basis to our customers, and our corporate culture may be harmed.Our marketing strategy of associating our brand and products with activities rooted in passion for the outdoors may not be successful with existing and future customers.We believe that we have been successful in marketing our products by associating our brand and products with activities rooted in passion for the outdoors. To sustain long-term growth, we must continue to successfully promote our products to consumers who identify with or aspire to these activities, as well as to individuals who simply value products of uncompromising quality and design. If we fail to continue to successfully market and sell our products to our existing customers or expand our customer base, our sales could decline, or we may be unable to grow our business.30If we fail to attract new customers, or fail to do so in a cost-effective manner, we may not be able to increase sales.Our success depends, in part, on our ability to attract customers in a cost-effective manner. In order to expand our customer base, we must appeal to and attract customers ranging from serious outdoor enthusiasts to individuals who simply value products of uncompromising quality and design. We have made, and we expect that we will continue to make, significant investments in attracting new customers, including through the use of YETI Ambassadors, traditional, digital, and social media, original YETI films, and participation in, and sponsorship of, community events. Marketing campaigns can be expensive and may not result in the cost-effective acquisition of customers. Further, as our brand becomes more widely known, future marketing campaigns may not attract new customers at the same rate as past campaigns. If we are unable to attract new customers, our business will be harmed.intoin international markets, including Canada, Australia, Europe, Japan, and China.Japan. In these markets, we may face challenges that are different from those we currently encounter, including competitive, merchandising, distribution, hiring, and other difficulties. We may also encounter difficulties in attracting customers due to a lack of consumer familiarity with or acceptance of our brand, or a resistance to paying for premium products, particularly in international markets. We continue to evaluate marketing efforts and other strategies to expand the customer base for our products. In addition, although we are investing in sales and marketing activities to further penetrate newer regions, including expansion of our dedicated sales force, we cannot assure you that we will be successful. If we are not successful, our business and results of operations may be harmed.Our net sales and profits depend on the level of consumer spending for our products, which is sensitive to general economic conditions and other factors.Our products are discretionary items for customers. Therefore, the success of our business depends significantly on economic factors and trends in consumer spending. There are a number of factors that influence consumer spending, including actual and perceived economic conditions, consumer confidence, disposable consumer income, consumer credit availability, unemployment, and tax rates in the markets where we sell our products. Consumers also have discretion as to where to spend their disposable income and may choose to purchase other items or services if we do not continue to provide authentic, compelling, and high-quality products at appropriate price points. As global economic conditions continue to be volatile and economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to declines. Any of these factors could harm discretionary consumer spending, resulting in a reduction in demand for our premium products, decreased prices, and harm to our business and results of operations.cooler,coolers, drinkware, and other products, including our bags, storage,cargo, and outdoor lifestyle products and accessories. Competition in these product markets is based on a number of factors including product quality, performance, durability, styling, brand image and recognition, and price. We believe that we are one of the market leaders in both the U.S. premium cooler and U.S. premium stainless steelstainless-steel drinkware markets. We believe that we have been able to compete successfully largely on the basis of our brand, superior design capabilities, and product development, as well as on the breadth of our independent retailers, national, and regional retail partners, and growing DTC channel. Our competitors may be able to develop and market higher quality products that compete with our products, sell their products for lower prices, adapt to changes in consumers'consumers’ needs and preferences more quickly, devote greater resources to the design, sourcing, distribution, marketing, and sale of their products, or generate greater brand recognition than us. In addition, as we expand into new product categories, we have faced, and will continue to face, different and, in some cases, more formidable competition. We believe many of our competitors and potential competitors have significant31Competitorsattemptedbecome increasingly technologically savvy and will likely continue to attempt to imitate our productsexpect a seamless omni-channel experience regardless of whether they are shopping in stores or online. Innovation by existing or new competitors could alter the competitive landscape by improving the customer experience and technology.heightening customer expectations or by transforming other aspects of their business through new technologies. If we are unable to protectdevelop and continuously improve our technologies, the efforts of which typically require significant capital investments, we may not be able to provide a convenient and consistent experience to our customers, which could negatively affect our ability to compete with other retailers and could result in diminished loyalty to our brands, which could adversely impact our business.preserveinvalidation of our patents, trademarks, copyrights, trade dress, trade secrets, or other intellectual property or proprietary rights may cause significant damage to our brand image and proprietary rights,harm our business may be harmed.manufacturers.manufacturers, typically through a series of purchase orders. Manufacturers may breach our agreements with them, including purchase orders, and we may not be able to enforce our rights under these agreements or may incur significant costs attempting to do so. We therefore face the risk that these third-party contract manufacturers may not produce and deliver our products in adequate quantities, on a timely basis or at all.all, or that they will fail to comply with our quality standards. We have experienced, and will likely continue to experience, operational difficulties with our manufacturers. These difficulties include reductions in the availability of production capacity, errors in complying with product specifications and regulatory and customer requirements, insufficient quality control, failures to meet production deadlines, failure to achieve our product quality standards, increases in costs of materials, and manufacturing or other business interruptions. The ability of our manufacturers to effectively satisfy our production requirements could also be impacted by manufacturer financial difficulty or damage to their operations caused by fire, terrorist attack, riots, natural disaster, public health emergencies, or other events. The failure of any manufacturer to perform to our expectations could result in supply shortages or delays for certain products and harm our business. If we experience significantly increased demand, or if we need to replace an existing manufacturer due to lack of performance, we may be unable to supplement or replace our manufacturing capacity on a timely basis or on terms that are acceptable to us, which may increase our costs, reduce our margins, and harm our ability to deliver our products on time. For certain of our products, it may take a32Dallas, Texas.Memphis, Tennessee, and Salt Lake City, Utah. Our reliance on a singleonly two geographical locationlocations for our domestic distribution centers makes us more vulnerable to natural disasters, weather-related disruptions, accidents, system failures, public health emergencies, or other unforeseen events that could delay or impair our ability to fulfill retailer orders and/or ship merchandise purchased on our website, which could harm our sales.restrictionsrestrictions. Global events may also impact the import of our products. For example, as a result of Russia’s invasion of Ukraine in March 2022, the United States and other governments implemented coordinated sanctions, seizures of assets, and export-control measure packages. These measures, and the global response to the invasion, resulted in increased fuel prices. Although we do not do business in Ukraine, downstream effects of the conflict resulted in higher fuels costs, which resulted in higher costs to deliver products, which harmed our profitability in 2022. Although such increased prices began improving in the United States. second half of 2022, a worsening of the impact from Russia's invasion of Ukraine could negatively affect us.could harmadversely impacts our gross margins. Failure to procure our products from our third-party contract manufacturers and deliver merchandise to our retail partners and DTC channels in a timely, effective, and economically viable manner could reduce our sales and gross margins, damage our brand, and harm our business.We also rely on the timely and free flow of goods through open and operational ports from our suppliers and manufacturers. Labor disputes or disruptions at ports, our common carriers, or our suppliers or manufacturers could create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes, or other disruptions during periods of significant importing or manufacturing, potentially resulting in delayed or cancelled orders by customers, unanticipated inventory accumulation or shortages, and harm to our business, results of operations, and financial condition.Accordingly, we are subject Failure to the risks, including labor disputes, union organizing activity, inclement weather, and increased transportation costs, associated withprocure our products from our third-party contract manufacturers'manufacturers and carriers' abilitydeliver merchandise to provide productsour retail partners and services to meetDTC channel in a timely, effective, and economically viable manner could reduce our requirements. In addition, if the cost of fuel rises, the cost to deliver products may rise, which couldsales and gross margins, damage our brand, and harm our profitability.and supplier concentrations.our hard coolers, soft coolers, Drinkware, bags, and outdoor living and pet products our two largest manufacturers comprised approximately 80%78%, 89%, 69%, 82%, and 87%, respectively, of our production volume during 2017. the six months ended July 1, 2023.For each of our soft coolers, our two largest suppliers comprised over 94% of our production volume during 2017. For our33and bags, one suppliermanufacturer accounted for all of ourthe production volume of each product during 2017. For our Drinkware products, our two largest suppliers comprised approximately 90% of our production volume during 2017.the six months ended July 1, 2023. As a result of this concentration in our supply chain, our or suppliers were to experience significant disruption affecting the price, quality, availability, or timely delivery of products. Our manufacturers could also be acquired by our competitors and may become our direct competitors, thus limiting or eliminating our access to manufacturing capacity. The partial or complete loss of theseour key manufacturers, or suppliers, or a significant adverse change in our relationship with any of these manufacturers, or suppliers, could result in lost sales, added costs, and distribution delays that could harm our business and customer relationships.We rely oncombinationprice increase for certain of purchase ordersour products effective in 2022. Our ability to maintain prices or effectively implement price increases, including our price increases in 2022, may be affected by several factors, including pricing pressure due to intense competition in the retail industry, effectiveness of our marketing programs, the continuing growth of our brand, general economic conditions, and supply contracts with our suppliers and manufacturers. Some of these relationships are not exclusive, which means that these suppliers and manufacturers could produce similar productschanges in consumer demand. During challenging economic times, consumers may be less willing or able to pay a price premium for our competitors.We rely on a combination of purchase ordersbranded products and supply contracts with our suppliers and manufacturers. With all of our suppliers and manufacturers, we face the risk that they may failshift purchases to produce and deliver supplieslower-priced or our products on a timely basis, other value offerings, making it more difficult for us to maintain prices and/or at all, or comply with our quality standards.effectively implement price increases. In addition, our suppliers and manufacturers may raise prices in the future, which would increase our costs and harm our margins. Even those suppliers and manufacturers with whom we have supply contracts may breach these agreements, and we may not be able to enforce our rights under these agreements or may incur significant costs attempting to do so. As a result, we cannot predict with certainty our ability to obtain supplies and finished products in adequate quantities, of required quality and at acceptable prices from our suppliers and manufacturers in the future. Any one of these risks could harm our ability to deliver our products on time, or at all, damage our reputation and our relationships with our retail partners and customers, anddistributors may pressure us to rescind price increases we have announced or already implemented, whether through a change in list price or increased promotional activity. If we cannot maintain prices or effectively implement price increases for our products, or must increase promotional activity, our margins may be adversely affected. Furthermore, price increases generally result in volume losses, as consumers purchase fewer units. If such losses are greater than expected or if we lose distribution due to a price increase, our product costs thereby reducing our margins.In addition, except in somebusiness, financial condition and results of the situations where we have a supply contract, our arrangements with our manufacturersoperations may be materially and suppliers are not exclusive. As a result, our suppliers or manufacturers could produce similar products for our competitors, some of which could potentially purchase products in significantly greater volume. Further, while certain of our long-term contracts stipulate contractual exclusivity, those suppliers or manufacturers could choose to breach our agreements and work with our competitors. Our competitors could enter into restrictive or exclusive arrangements with our manufacturers or suppliers that could impair or eliminate our access to manufacturing capacity or supplies. Our manufacturers or suppliers could also be acquired by our competitors, and may become our direct competitors, thus limiting or eliminating our access to supplies or manufacturing capacity.stainless steel,stainless-steel, polyester fabric, zippers, and other plastic materials and coatings, as well as manufacturing equipment and molds, may fluctuate significantly. Increasing demand, supply constraints, and inflation have resulted in shortages and higher costs for the production of some of our products. In addition, the cost of labor at our third-party contract manufacturers could increase significantly. For example, manufacturers in China have experienced increased costs in recent years due to shortages of labor and fluctuations of the Chinese Yuanyuan in relation to the U.S. dollar. Additionally, the cost of logistics and transportation fluctuates in large part due to the price of oil.oil and available capacity. Any fluctuations in the cost and availability of any of our raw materials or other sourcing or transportation costs related to our raw materials or products could harm34politicalpublic health risks associated with international trade and those markets.Italy,the Philippines, Vietnam, Taiwan, Poland, Mexico, Thailand, and Malaysia. In addition, we have other key third-party manufacturing partners in Mexico and the Philippines.Italy. Our reliance on suppliers and manufacturers in foreign markets creates risks inherent in doing business in foreign jurisdictions, including: (a) the burdens of complying with a variety of foreign laws and regulations, including trade and labor restrictions and laws relating to the importation and taxation of goods; (b) weaker protection for intellectual property and other legal rights than in the United States, and practical difficulties in enforcing intellectual property and other rights outside of the United States; (c) compliance with U.S. and foreign laws relating to foreign operations, including the U.S. Foreign Corrupt Practices Act or FCPA,(“FCPA”), the UK Bribery Act 2010 or the (“Bribery Act,Act”), regulations of the U.S. Office of Foreign Assets Controls or OFAC,(“OFAC”), and U.S. anti-money laundering regulations, which respectively prohibit U.S. companies from making improper payments to foreign officials for the purpose of obtaining or retaining business, operating in certain countries, or maintaining business relationships with certain restricted parties as well as engaging in other corrupt and illegal practices; (d) economic and political instability and acts of terrorism in the countries where our suppliers are located; (e) public health crises, such as pandemics and epidemics, in the countries where our suppliers and manufacturers are located; (f) transportation interruptions or increases in transportation costs; and (f)(g) the imposition of tariffs or non-tariff barriers on components and products that we import into the United States or other markets. WeFurther, we cannot assure you that our directors, officers, employees, representatives, manufacturers, or suppliers have not engaged and will not engage in conduct for which we may be held responsible, nor can we assure you that our manufacturers, suppliers, or other business partners have not engaged and will not engage in conduct that could materially harm their ability to perform their contractual obligations to us or even result in our being held liable for such conduct. Violations of the FCPA, the Bribery Act, OFAC restrictions, or other export control, anti-corruption, anti-money laundering, and anti-terrorism laws or regulations may result in severe criminal or civil sanctions,penalties, and we may be subject to other related liabilities, which could harm our business, financial condition, cash flows, and results of operations.IfThe Trump Administration has putplace tariffsthe U.S. and other trade restrictions and signaled that itcountries or may additionally alterimpact the cost of such products. To maximize opportunities, we rely on free trade agreements and terms betweenother supply chain initiatives, and, as a result, we are subject to government regulations and restrictions with respect to our cross-border activity. For example, we have historically received benefits from duty-free imports on certain products from certain countries pursuant to the United StatesGlobal System of Preferences (“GSP”) program. The GSP program expired on December 31, 2020, resulting in additional duties and China,negatively impacting gross margin. YETI expects the European Union, Canada,GSP program to be renewed and Mexico, among others,made retroactive; however if this does not occur, it will continue to have a negative impact on our expected results. Additionally, we are subject to government regulations relating to importation activities, including limitingrelated to U.S. Customs and Border Protection (“CBP”) withhold release orders. The imposition of taxes, duties and quotas, the withdrawal from or material modification to trade agreements, and/or imposing tariffs on imports from such countries. In addition, China, the European Union, Canada, and Mexico, among others, have either threatened or put into place retaliatory tariffs of their own. If tariffs or other restrictions are placed on foreign imports, including on anyif CBP detains shipments of our products manufactured overseas for sale in the United States, or any related counter-measures are taken by other countries,goods pursuant to a withhold release order could have a material adverse effect on our business, and results of operations may be materially harmed.Theseand financial condition.products.products, particularly our Drinkware. In such a case, there can be no assurance that we will be able to shift manufacturing and supply agreements to non-impacted countries, including the United States, to reduce the effects of the tariffs. As a result, we may suffer margin erosion or be required to raise our prices, which may result in the loss of customers, negatively impact our results of operations, or otherwise harm our business. In addition, the imposition of tariffs on products that we export to international markets could make such products more expensive compared to those of our competitors if we pass related additional costs on to our customers, which may also result in the loss of customers, negatively impact our results of operations, or otherwise harm our business.For 2017, 37% If these retail partners cease to promote or carry our current products or choose not to promote or carry new products that we develop, our brand as well as our results of operations and financial condition could be harmed.netproducts through national, regional, and independent retail partners. Twelve percent of our gross sales were made to independent retail partners. partners for both 2021 and 2022, respectively. For both 2021 and 2022, one national retail partner accounted for approximately 10% and 11% of our gross sales, respectively. Because we are a premium brand, our sales depend, in part, on retail partners effectively displaying our products, including providing attractive space and point of purchase displays in their stores, and training their sales personnel to sell our products. If our retail partners reduce or terminate those activities, we may experience reduced sales of our products, resulting in lower gross margins, which would harm our results of operations. Our relationships with these retail partners are important to the authenticity of our brand and the marketing programs we continue to deploy. Our failure to maintain these relationships with our retail partners or financial difficulties experienced by these retail partners could harm our business.35and (f) damage to our relationships with independent retail partners due to brand or reputational harm.We depend on our retail partners to display and present our products to customers, and our failure to maintain and further develop our relationships with our retail partners could harm our business.We sell a significant amount of our products through knowledgeable national, regional, and independent retail partners. Our retail partners service customers by stocking and displaying our products, explaining our product attributes, and sharing our brand story. Our relationships with these retail partners are important to the authenticity of our brand and the marketing programs we continue to deploy. Our failure to maintain these relationships with our retail partners or financial difficulties experienced by these retail partners could harm our business.We have key relationships with national retail partners. For 2017, one retail partner accounted for approximately 14% of our total sales. If we lose any of our key retail partners or any key retail partner reduces its purchases of our existing or new products or its number of stores or operations or promotes products of our competitors over ours, our sales would be harmed. Because we are a premium brand, our sales depend, in part, on retail partners effectively displaying our products, including providing attractive space and point of purchase displays in their stores, and training their sales personnel to sell our products. If our retail partners reduce or terminate those activities, we may experience reduced sales of our products, resulting in lower gross margins, which would harm our results of operations.2017,2022, our DTC channel accounted for 30%58% of our net sales, and our sales through the Amazon Marketplace represented approximately 13% of our net sales. Part of our growth strategy involves increasing sales through our DTC e-commerce channel. However, we have limited operating experience executing the retail component of this strategy. The level of customer traffic and volume of customer purchases through our websitecountry and region-specific YETI websites or other e-commerce initiatives are substantially dependent on our ability to provide a content-rich and user-friendly website, a hassle-free customer experience, sufficient product availability, and reliable, timely delivery of our products. If we are unable to maintain and increase customers'customers’ use of our website, allocate sufficient product to our website, and increase any sales through our website, our continued DTC channel growth, our business, and results of operations could be harmed.operate our online stores inhave a limited number of countriescountry and region-specific YETI websites and are planning to expand our e-commerce platform to others. These countries may impose different and evolving laws governing the operation and marketing of e-commerce websites, as well as the collection, storage, and use of information on customers interacting with those websites. We may incur additional costs and operational challenges in complying with these laws, and differences in these laws may cause us to operate our business differently, and less effectively, in different territories. If so, we may incur additional costs and may not fully realize the investment in our international expansion.in the futurecontinue to expand our existing DTC channel by opening new retail stores. We intend to open additionalcurrently operate fourteen retail stores in 2019.across eight states. Our ability to open new retail stores in a timely manner and operate them profitably depends on a number of factors, many of which are beyond our control, including:·our ability to manage the financial and operational aspects of our retail growth strategy, including making appropriate investments in our software systems, information technology, and operational infrastructure;·our ability to identify suitable locations, including our ability to gather and assess demographic and marketing data to accurately determine customer demand for our products in the locations we select;36
•our ability to identify suitable locations, including our ability to gather and assess demographic and marketing data to accurately determine customer demand for our products in the locations we select;·our ability to negotiate favorable lease agreements;· retail store locations;·the availability of financing on favorable terms;·our ability to secure required governmental permits and approvals and our ability to effectively comply with state and local employment and labor laws, rules, and regulations;·our ability to hire and train skilled store operating personnel, especially management personnel;·the availability of construction materials and labor and the absence of significant construction delays or cost overruns;·our ability to provide a satisfactory mix of merchandise that is responsive to the needs of our customers living in the areas where new retail stores are established;·our ability to establish a supplier and distribution network able to supply new retail stores with inventory in a timely manner;·our competitors, or our retail partners, building or leasing stores near our retail stores or in locations we have identified as targets for a new retail store;·customer demand for our products; and·general economic and business conditions affecting consumer confidence and spending and the overall strength of our business.We currently have only one retail store locations;therefore,approvals and our ability to effectively comply with state and local employment and labor laws, rules, and regulations; For example, we may not be able to implement our retail store strategy, achieve desired net sales growth, and payback periods or maintain consistent levels of profitability in our retail stores. In order to pursue our retail store strategy, we will be required to expend significant cash resources prior to generating any sales in these stores. We may not generate sufficient sales from these stores to justify these expenses, which could harm our business and profitability. The substantial management time and resources, which any future retail store expansion strategy may require, could also result in disruption to our existing business operations, which may decrease our net sales and profitability.37wouldcould be harmed.customers'customers’ willingness to purchase our products depend in part on our suppliers'suppliers’, manufacturers'manufacturers’, and retail partners'partners’ compliance with ethical employment practices, such as with respect to child labor, wages and benefits, forced labor, discrimination, safe and healthy working conditions, and with all legal and regulatory requirements relating to the conduct of their businesses. We do not exercise control over our suppliers, manufacturers, and retail partners and cannot guarantee their compliance with ethical and lawful business practices. If our suppliers, manufacturers, or retail partners fail to comply with applicable laws, regulations, safety codes, employment practices, human rights standards, quality standards, environmental standards, production practices, or other obligations, norms, or ethical standards, our reputation and brand image could be harmed, and we could be exposed to litigation and additional costs that would harm our business, reputation, and results of operations.risks.Our future success depends on the continuing efforts of our management and key employees, and on our ability to attract and retain highly skilled personnel and senior management.We depend on the talents and continued efforts of our senior management and key employees. The loss of members of our management or key employees may disrupt our business and harm our results of operations. Furthermore, our ability to manage further expansion will require us to continue to attract, motivate, and retain additional qualified personnel. Competition for this type of personnel is intense, and we may not be successful in attracting, integrating, and retaining the personnel required to grow and operate our business effectively. There can be no assurance that our current management team, or any new members of our management team, will be able to successfully execute our business and operating strategies.successful.Japan, and China,Japan, is one of our key long-term strategies for the future growth of our business. There are, however, significant costs and risks inherent in selling our products in international markets, including: (a) failure to effectively translate and establish our core brand identity, particularly in markets with a less establishedless-established heritage of outdoor and recreational activities; (b) time and difficulty in building a widespread network of retail partners; (c) increased shipping and distribution costs, which could increase our expenses and reduce our margins; (d) potentially lower margins in some regions; (e) longer collection cycles in some regions; (f) increased competition from local providers of similar products; (g) compliance with foreign laws and regulations, including taxes and duties, and enhanced privacy laws, rules, and regulations, and product liability laws, rules, and regulations, particularly in the European Union;Union and Japan; (h) establishing and maintaining effective internal controls at foreign locations and the associated increased costs; (i) increased counterfeiting and the uncertainty of protection for intellectual property rights in some38or natural disasters, including earthquakes, typhoons, floods, and fires;fires, public health emergencies, including the outbreak of a pandemic or other public health crisis; (p) the imposition of tariffs on products that we import into international markets that could make such products more expensive compared to those of our competitors; (q) that our ability to expand internationally could be impacted by the intellectual property rights of third parties that conflict with or are superior to ours; and (r) other costs and risks of doing business internationally.currentfinancial results and future productsgrowth have been, and could in the future be, harmed by currency exchange rate fluctuations.experience quality problemsalso be disrupted by currency exchange rate fluctuations by making their purchases of raw materials more expensive and more difficult to finance. As a result, foreign currency exchange rate fluctuations may adversely impact our results of operations.timetaking, actions that could harm our operations or require us to time that can result in negative publicity, litigation, product recalls,pay substantial amounts of money, harming our financial condition and warranty claims,results of operations. Additionally, defending against these lawsuits and proceedings may be necessary, which could result in decreased salessubstantial costs and operating margin,diversion of management’s attention and resources, harming our business, financial condition, and results of operations. Any pending or future legal or regulatory proceedings and audits could harm our business, financial condition, and results of operations.our brand.DefectsUnder certain circumstances, the CPSC, and other relevant global regulatory authorities, could require us to repurchase or recall one or more of our products. Additionally, laws regulating consumer products exist in materialsstates and some cities, as well as other countries in which we sell our products, and more restrictive laws and regulations may be adopted in the future. Any repurchase or components can unexpectedly interfere with the products' intended userecall of our products, monetary judgment, fine or other penalty could be costly and safety and damagedamaging to our reputation. FailureIf we were required to detect, prevent,remove, or fix defectswe voluntarily removed, our products from the market, our reputation could result in a varietybe tarnished and we may have large quantities of consequences, including a greater number of product returns than expected from customers and our retail partners, litigation, product recalls, and credit claims, among others, whichfinished products that we could harm our sales and results of operations. Thenot sell. Furthermore, the occurrence of real or perceived quality problems orany material defects in our current and future products could expose us to product recalls,liability for warranty or other claims. claims in excess of our current reserves, and if our warranty reserves are inadequate to cover future warranty claims on our products, our financial condition and operating results may be harmed.addition, any negative publicity or lawsuits filed against us relatedJanuary 2023, we notified the CPSC of a potential safety concern regarding the magnet-lined closures of our Hopper® M30 Soft Cooler, Hopper® M20 Soft Backpack Cooler, and SideKick Dry gear case (the “affected products”) and initiated a global stop sale of the affected products. In February 2023, we proposed a voluntary recall of the affected products to the perceived qualityCPSC and safetyother relevant global regulatory authorities. In March 2023, we announced separate, voluntary recalls of ourthe affected products couldin collaboration with the CPSC. The global stop sale of the affected products and voluntary recalls has subjected and will continue to subject us to substantial costs, including, but not limited to, product recall remedies, legal and advisory fees, and recall-related logistics costs. These actions may also result in adverse publicity, harm our brand and decrease demanddivert management’s attention and resources from our operations. As the voluntary recalls have commenced, we have made certain adjustments to our estimates regarding the impact of the voluntary recalls. Actual costs related to the global stop sale and voluntary recalls of the affected products may vary from our estimates, which are primarily based on expected consumer participation rates and the estimated costs of the consumer’s elected remedy in the proposed voluntary recall and may have further negative effects on our business. Any of these events or claims could harm our reputation, business, financial condition and results of operations. If we are unable to develop a product solution for the potential safety concern regarding the affected products, we may not be able to sell the redesigned products for a significant period of time, if ever, and may face substantial costs associated with the development of such features and implementation of the recalls.storms.storms, and our third-party contract manufacturers ship most of our products to our distribution centers in Memphis, Tennessee, and Salt Lake City, Utah, which are susceptible to floods, earthquakes and wildfires. In addition, the facilities of our suppliers and where our manufacturers produce our products are located in parts of Asia that frequently experience typhoons and earthquakes. Facilities of third-party logistics providers located in other countries that warehouse and distribute our finished products internationally also face local extreme weather conditions. Acts of terrorism and public health crises could also cause disruptions in our or our suppliers'suppliers’, manufacturers'manufacturers’, and logistics providers'providers’ businesses or the economy as a whole. For example, the COVID-19 pandemic contributed significantly to global supply chain issues, with restrictions and limitations on related activities causing disruption and delay. These disruptions and delays strained certain domestic and international supply chains, which affected the flow or availability of certain of our products. We may not have sufficient protection or recovery plans in some circumstances, such as natural disasters affecting Texas or other locations where we have operations or store significant inventory. Our servers mayare also be vulnerable to computer viruses, criminal acts, denial-of-service attacks, ransomware, and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, or loss of critical data. As we rely heavily on our information technology and communications systems and the Internet to conduct our business and provide high-quality customer service, these disruptions could harm our ability to run our business and either directly or indirectly disrupt our suppliers'suppliers’ or manufacturers'manufacturers’ businesses, which could harm our business, results of operations, and financial condition. Any such disruptions to our third-party contract manufacturers could have similar effect.39
We believe that our sales include a seasonal component. Historically, we have experienced our net sales to be highest in our second and fourth quarters, with the first quarter generating the lowest sales. However, we expect the stop sale of the products related to the voluntary recalls to impact our traditional seasonal patterns in 2023, with net sales to be highest in the fourth quarter. We expect that this seasonality will continue to be a factor in our results of operations and sales.customers'customers’ personal information may include names, addresses, phone numbers, email addresses, payment card data, and payment account information, as well as other information. Due to the volume and sensitivity of the personal information and data we manage, the security features of our information systems are critical.Ifmeasures, someor systems, or reveal confidential information. There have been media reports regarding increased cyber-security threats and potential breaches because of the increase in numbers of individuals working from home. Additionally, external events, like the conflict between Russia and Ukraine, can increase the likelihood of cybersecurity attacks. Cyberthreats are constantly evolving, increasing the difficulty of detecting and successfully defending against them.are managed by third parties, are breached or fail, unauthorized persons may be able to access sensitive customer data, including payment card data.could harm our results of operations. If we or our independent service providers or business partners experience a breach of systems compromisingthat compromises our customers'customers’ sensitive data, our brand could be harmed, sales of our products could decrease, and we could be exposed to losses, litigation, or regulatory proceedings. Depending on the nature of the information compromised, we may also have obligations to notify users, law enforcement, or payment companies about the incident and may need to provide some form of remedy, such as refunds, for the individuals affected by the incident.As we expand internationally, we will be subject to additional rules, many of which, such as the European Union's General Data Protection Regulation, are significantly more stringent than those in the United States. Privacy laws, rules, and regulations are constantly evolving in the United States and abroad and may be inconsistent from one jurisdiction to another. For example, in December 2020, the State of California enacted the California Privacy Rights Act, or CPRA, which becomes effective on January 1, 2023, and substantially amends and expands the current California Consumer Privacy Act bringing the California regulations more in line with the European Union’s General Data Protection Regulation, or GDPR. Further, as we expand internationally, we are subject to additional privacy rules, such as the GDPR, many of which are significantly more stringent than those in the United States. Complying with these evolving obligations is costly, and any failure to comply could give rise to unwanted media attention and other negative publicity, damage our customer and consumer relationships and reputation, and result in lost sales, fines, or lawsuits, and may harm our business and results of operations.Any material disruption or breach of our information technology systems or those of third-party partners could materially damage our customerbusiness partner relationships, and subject us to significant reputational, financial, legal, and operational consequences.We depend on our information technology systems, as well as those of third parties, to design and develop new products, operate our website, host and manage our services, store data, process transactions, respond to user inquiries, and manage inventory and our supply chain as well as to conduct and manage other activities. Any material disruption or slowdown of our systems or those of third parties that we depend upon, including a disruption or slowdown caused by our failure to successfully manage significant increases in user volume or successfully upgrade our or their systems, system failures, viruses, ransomware, security breaches, or other causes, could cause information, including data related to orders, to be lost or delayed, which could result in delays in the delivery of products to retailers and customers or lost sales, which could reduce demand for our products, harm our brand and reputation, and cause our sales to decline. If changes in technology cause our information systems, or those of third parties that we depend upon, to become obsolete, or if our or their information systems are inadequate to handle our growth, particularly as we increase sales through our DTC channel, we could damage our customer and business partner relationships and our business and results of operations could be harmed.growth.to further invest in our sales and marketing efforts. If our business does not generate sufficient cash flow from operations to fund these activities and sufficient funds are not otherwise available from our current or future credit facility, we may need additional equity or debt financing. The global economy, including the financial and credit markets, has recently experienced extreme volatility and disruptions, including severely diminished liquidity and credit availability, increases in inflation rates, rising interest rates, declines in consumer confidence, declines in economic growth, and uncertainty about stability, all of which may impact our ability to obtain financing. If such financing is not available to us on satisfactory terms, our ability to operate and expand our business or to respond to competitive pressures wouldcould be harmed. Moreover, if we raise additional capital by issuing equity securities or securities convertible into equity securities, yourthe ownership of our existing stockholders may be diluted. AnyThe holders of new securities may also have rights, preferences or privileges which are senior to those of existing holders of common stock. In addition, any indebtedness we incur may subject us to covenants that restrict our operations and will require interest and principal payments that wouldcould create additional cash demands and financial risk for us.40On May 19, 2016, we entered into the Credit Facility. September 29, 2018,July 1, 2023, we had $392.5$84.4 million principal amount of indebtedness outstanding under the Credit Facility (as defined in Part I, Item 2. “Management’s Discussion and $1.5 million outstanding under our promissory note with Rambler On.Analysis of Financial Condition and Results of Operations—Business Overview” of this Report). The Credit Facility is jointly and severally guaranteed by certain of our wholly-owned material subsidiaries, including YETI Coolers, LLC, which we refer to as YETI Coolers, and YETI Custom Drinkware LLC, which we refer to as YCD, and any of our future subsidiaries that become guarantors, together, which we refer to as the Guarantors, and is also secured by a first priorityfirst-priority lien on substantially all of our assets and the assets of the Guarantors, in each case subject to certain customary exceptions. We may, from time to time, incur additional indebtedness under the Credit Facility.it:
have less indebtedness.·requires us to utilize a portion of our cash flow from operations to make payments on our indebtedness, reducing the availability of our cash flow to fund working capital, capital expenditures, development activity, return capital to our stockholders, and other general corporate purposes;·increases our vulnerability to adverse economic or industry conditions;·limits our flexibility in planning for, or reacting to, changes in our business or markets;·makes us more vulnerable to increases in interest rates, as borrowings under the Credit Facility bear interest at variable rates;·limits our ability to obtain additional financing in the future for working capital or other purposes; and·could place us at a competitive disadvantage compared to our competitors that have less indebtedness.41In connection with our preparation of our financial statements, we identified material weaknesses in our internal control over financial reporting. Any failure to maintain effective internal control over financial reporting could harm us.Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. During the preparation of our financial statements for 2017, we identified material weaknesses in our internal control over financial reporting. The material weaknesses related to IT general controls weaknesses in managing access and change in our significant financial systems; and failure to properly detect and analyze issues in the accounting system related to inventory valuation. Under standards established by the PCAOB, a deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or personnel, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. The PCAOB defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented, or detected and corrected, on a timely basis. The PCAOB defines a significant deficiency as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a registrant's financial reporting.We have implemented measures designed to improve our internal control over financial reporting to address the underlying causes of these material weaknesses. See "Item 4 – Controls and Procedures" for more information.In accordance with the provisions of the JOBS Act, we and our independent registered public accounting firm were not required to, and did not, perform an evaluation of our internal control over financial reporting as of December 30, 2017, in accordance with the provisions of Section 404 of the Sarbanes-Oxley Act. Accordingly, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses.Additional material weaknesses or significant deficiencies may be identified in the future. If we identify such issues or if we are unable to produce accurate and timely financial statements, our stock price may decline, and we may be unable to maintain compliance with the NYSE listing standards.Our results of operations are subject to seasonal and quarterly variations, which could cause the price of our common stock to decline.We believe that our sales include a seasonal component. We expect our net sales to be highest in our second and fourth quarters, with the first quarter generating the lowest sales. To date, however, it has been difficult to accurately analyze this seasonality due to fluctuations in our sales. In addition, due to our more recent, and therefore more limited experience, with bags, storage, and outdoor lifestyle products and accessories, we are continuing to analyze the seasonality of these products. We expect that this seasonality will continue to be a factor in our results of operations and sales.Our annual and quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including, among other things, the timing of the introduction of and advertising for our new products and those of our competitors and changes in our product mix. Variations in weather conditions may also harm our quarterly results of operations. In addition, we may not be able to adjust our spending in a timely manner to compensate for any unexpected shortfall in our sales. As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our results of operations between different quarters within a single fiscal year, or the same quarters of different fiscal years, are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of our future performance. In the event that any seasonal or quarterly fluctuations in our net sales and results of operations result in our failure to meet our forecasts or the forecasts of the research analysts that may cover us in the future, the market price of our common stock could fluctuate or decline.42become involvedbe the target of strategic transactions, which could divert our management’s attention and otherwise disrupt our operations and adversely affect our business.legaladverse publicity or regulatory proceedingsinformation leaks, and audits.Our business requires compliance with many laws and regulations, including labor and employment, salescould increase our expenses.taxes, customs, and consumer protection laws and ordinances that regulate retailers generally and/or govern the importation, promotion, and saleforms of merchandise, and the operation of stores and warehouse facilities. Failure to comply with these laws and regulations could subject us to lawsuits and other proceedings, and could also lead to damage awards, fines, and penalties. We may become involved in a number of legal proceedings and audits, including government and agency investigations, and consumer, employment, tort, and other litigation. The outcome of some of these legal proceedings, audits, and other contingencies could require us to take, or refrain from taking, actions that could harm our operations or require us to pay substantial amounts of money, harming our financial condition and results of operations. Additionally, defending against these lawsuits and proceedings may be necessary, which could result in substantial costs and diversion of management's attention and resources, harming our business, financial condition, and results of operations. Any pending or future legal or regulatory proceedings and audits could harm our business, financial condition, and results of operations.liability ifsuch actions or proposals from stockholders or others that may not align with our business strategies or the interests of our other stockholders. If such a campaign or proposal were to be made against us, we infringe upon the intellectual property rights of third parties.Third parties may sue us for alleged infringement of their proprietary rights. The party claiming infringement might have greater resources than we do to pursue its claims, and we could be forced towould likely incur substantial costs, such as legal fees and devote significant managementexpenses, and divert management’s and our Board’s attention and resources from our businesses and strategic plans. Stockholder activists may also seek to defend againstinvolve themselves in the governance, strategic direction and operations of our business through stockholder proposals, which could create perceived uncertainties or concerns as to our future operating environment, legislative environment, strategy, direction, or leadership. Any such litigation, even ifuncertainties or concerns could result in the claims are meritless and even if we ultimately prevail. If the party claiming infringement were to prevail, we could be forced to modify or discontinue our products, pay significant damages, or enter into expensive royalty or licensing arrangements with the prevailing party. In addition, any payments we are required to make, and any injunction we are required to comply with as a resultloss of such infringement, couldpotential business opportunities, harm our reputationbusiness and financial relationships, and harm our ability to attract or retain investors, customers and employees. Actions of activist stockholders may also cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. We may also be the target of short sellers who engage in negative publicity campaigns that may use selective information that may be presented out of context or that may misrepresent facts and circumstances. Any of the foregoing could adversely affect our business and operating results.management'smanagement’s attention, result in dilution to our stockholders, and otherwise disrupt our operations and harm our results of operations.43 management'sbusiness'business’ key employees; or (f) the issuance of dilutive equity securities, the incurrence of debt, or the use of cash to fund such acquisitions.We may betargetCompany’s Chief Financial Officer, adopted a 10b5-1 trading plan (the “Trading Plan”). The Trading Plan is intended to satisfy the affirmative defense of strategic transactions.Other companies may seek to acquire us or enter into other strategic transactions. We will consider, discuss, and negotiate such transactions as we deem appropriate.Rule 10b5-1(c) under the Exchange Act. The considerationTrading Plan provides for the potential sale of such transactions, even if not consummated, could divert management's attention from other business matters, result in adverse publicity or information leaks, and could increase our expenses.We are subject to many hazards and operational risks that can disrupt our business, some of which may not be insured or fully covered by insurance.Our operations are subject to many hazards and operational risks inherent to our business, including: (a) general business risks; (b) product liability; (c) product recall; and (d) damage to third parties, our infrastructure, or properties caused by fires, floods and other natural disasters, power losses, telecommunications failures, terrorist attacks, human errors, and similar events.Our insurance coverage may be inadequate to cover our liabilities related to such hazards or operational risks. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable, and insurance may not continue to be available on terms as favorable as our current arrangements. The occurrence of a significant uninsured claim, or a claim in excess2,460 shares of the insurance coverage limits maintained by us could harm our business, resultsCompany’s common stock commencing August 30, 2023.operations, and financial condition.Recently enacted tax reform legislation could have an adverse impact on us.Recently enacted tax reform legislation has made substantial changes to U.S. tax law, including a reduction in the corporate income tax rate, a limitation on deductibility of interest expense, and the allowance of immediate expensing of capital expenditures. We expect this legislation to have significant effects on us, some of which may be adverse. The magnitude of the impact on future years remains uncertain at this time and is subject to any other regulatory or administrative developments, including any regulations or other guidance promulgated by the U.S. Internal Revenue Service,May 31, 2024 or the IRS. We continue to work with our tax advisors to determine the full impact that this legislation will have on us.Wedate all shares are subject to credit risk.We are exposed to credit risk primarily on our accounts receivable. We provide credit to our retail partners in the ordinary course of our business and perform ongoing credit evaluations. While we believe that our exposure to concentrations of credit risk with respect to trade receivables is mitigated by our large retail partner base, and we make allowances for doubtful accounts, we nevertheless run the risk of our retail partners not being able to meet their payment obligations, particularly in a future economic downturn. If a material number of our retail partners were not able to meet their payment obligations, our results of operations could be harmed.44Risks Related to Ownership of Our Common StockOur directors, executive officers, and significant stockholders have substantial control over us and could delay or prevent a change in corporate control.Cortec is our largest stockholder, owning 53.4% of the total voting power of our common stock. In addition, pursuant to a voting agreement we have entered into with Cortec and certain other stockholders (the “Voting Agreement”), Cortec controls more than 50% of the total voting power of our common stock with respect to the election of our directors. Our directors, executive officers, and other holders of more than 5% of our common stock, together with their affiliates, will own, in the aggregate, 78.3% of our outstanding common stock. As a result, these stockholders, acting together or in some cases individually, have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, these stockholders, acting together or in some cases individually, have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might decrease the market price of our common stock by:·delaying, deferring, or preventing a change in control of the company;·impeding a merger, consolidation, takeover, or other business combination involving us; or·discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the company.We are a controlled company within the meaning of the NYSE listing standards and, as a result, will rely on exemptions from certain requirements that provide protection to stockholders of other companies.Pursuant to the Voting Agreement, Cortec controls more than 50% of the total voting power of our common stock with respect to the election of our directors and we are considered a controlled company under the NYSE listing standards. As a controlled company, certain exemptions under the NYSE listing standards exempt us from the obligation to comply with certain NYSE corporate governance requirements, including the requirements:·that a majority of our Board of Directors consist of independent directors, as defined under the NYSE listing standards;·that we have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities; and·that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities.Our Board of Directors consists of seven directors, comprised of our CEO, Roy Seiders, one of our Founders, two outside directors, and three directors selected by Cortec. In addition, Cortec has the right to have one of its representatives serve as Chairman of our Board of Directors and Chair of our nominating and governance committee, as well as the right to select nominees for our Board of Directors, in each case subject to a phase-out period based on Cortec's future share ownership. Accordingly, as long as we are a controlled company, holders of our common stock may not have the same protections afforded to stockholders of companies that must comply with all of the NYSE listing standards.Our stock price may be volatile or may decline, including due to factors beyond our control, resulting in substantial losses for investors.The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:·actual or anticipated fluctuations in our results of operations;45·the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;·failure of securities analysts to maintain coverage of our company, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;·ratings changes by any securities analysts who follow our company;·sales or potential sales of shares by our stockholders, or the filing of a registration statement for these sales;·adverse market reaction to any indebtedness we may incur or equity we may issue in the future;·announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;·publication of adverse research reports about us, our industry, or individual companies within our industry;·publicity related to problems in our manufacturing or the real or perceived quality of our products, as well as the failure to timely launch new products that gain market acceptance;·changes in operating performance and stock market valuations of our competitors;·price and volume fluctuations in the overall stock market, including as a result of trends in the United States or global economy;·any major change in our Board of Directors or management;·lawsuits threatened or filed against us or negative results of any lawsuits;·security breaches or cyberattacks;·legislation or regulation of our business;·loss of key personnel;·new products introduced by us or our competitors;·the perceived or real impact of events that harm our direct competitors;·developments with respect to our trademarks, patents, or proprietary rights;·general market conditions; and·other events or factors, including those resulting from war, incidents of terrorism, or responses to these events, which could be unrelated to us or outside of our control.In addition, stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies in our industry, as well as those of newly public companies. In the past, stockholders of other public companies have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert46resources and the attention of management from our business, and harm our business, results of operations, financial condition, reputation, and cash flows.We are an emerging growth company and the reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.We are an "emerging growth company" as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised financial accounting standards until such time as those standards apply to private companies. We intend to take advantage of the extended transition period for adopting new or revised financial statements under the JOBS Act as an emerging growth company.For as long as we continue to be an emerging growth company, we may also take advantage of other exemptions from certain reporting requirements that are applicable to other public companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, exemption from any rules that may be adopted by the PCAOB requiring mandatory audit firm rotations or a supplement to the auditor's report on financial statements, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute arrangements, and reduced financial reporting requirements. Investors may find our common stock less attractive because we will rely on these exemptions, which could result in a less active trading market for our common stock, increased price fluctuation, and a decrease in the trading price of our common stock.We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates is at least $700 million as of the last business day of our most recently completed second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period, or (iv) the end of the fiscal year in which the fifth anniversary of the IPO occurs.Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management, and limit the market price of our common stock.Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change in control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:·provide that our Board of Directors is classified into three classes of directors;·prohibit stockholders from taking action by written consent from and after the date that Cortec beneficially owns less than 35% of our outstanding shares of common stock;·provide that stockholders may remove directors only for cause after the date that Cortec beneficially owns less than 35% of our outstanding common stock and only with the approval of holders of at least 66 2/3% of our then outstanding common stock;·provide that the authorized number of directors may be changed only by resolution of the Board of Directors;·provide that all vacancies, including newly created directorships, may, except as otherwise required by law or as set forth in the stockholders agreement we have entered into with Cortec and certain other stockholders, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;·provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a stockholder's notice;47·restrict the forum for certain litigation against us to Delaware;·do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election);·provide that special meetings of our stockholders may be called only by the Chairman of the Board of Directors, our CEO, or the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors;·provide that stockholders will be permitted to amend our amended and restated bylaws only upon receiving at least 66 2/3% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class; and·provide that certain provisions of our amended and restated certificate of incorporation may only be amended upon receiving at least 66 2/3% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote, voting together as a single class.These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, we have opted out of the provisions of Section 203 of the General Corporation Law of the State of Delaware, or DGCL, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any "interested" stockholder for a period of three years following the date on which the stockholder became an "interested" stockholder. However, our amended and restated certificate of incorporation provides substantially the same limitations as are set forth in Section 203 but also provides that Cortec and its affiliates and any of their direct or indirect transferees and any group as to which such persons are a party do not constitute "interested stockholders" for purposes of this provision.We do not intend to pay dividends for the foreseeable future.Other than the Special Dividend, we have not declared or paid any dividends on our common stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our Board of Directors may deem relevant. In addition, the Credit Facility precludes our and our subsidiaries' ability to, among other things, pay dividends or make any other distribution or payment on account of our common stock, subject to certain exceptions. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.YETI Holdings, Inc. is a holding company with no operations of its own and, as such, it depends on its subsidiaries for cash to fund its operations and expenses, including future dividend payments, if any.As a holding company, our principal source of cash flow is distributions from our subsidiaries. Therefore, our ability to fund and conduct our business, service our debt, and pay dividends, if any, depends on the ability of our subsidiaries to generate sufficient cash flow to make upstream cash distributions to us. Our subsidiaries are separate legal entities, and although they are wholly owned and controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends, or otherwise. The ability of our subsidiaries to distribute cash to us is also be subject to, among other things, restrictions that may be contained in our subsidiary agreements (as entered into from time to time), availability of sufficient funds in such subsidiaries and applicable laws and regulatory restrictions. Claims of any creditors of our subsidiaries generally have priority as to the assets of such subsidiaries over our claims and claims of our creditors and stockholders. To the extent the ability of our subsidiaries to distribute dividends or other payments to us is limited in any way, our ability to fund and conduct our business, service our debt, and pay dividends, if any, could be harmed.48Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Recent Sales of Unregistered SecuritiesFrom July 1, 2018 through September 29, 2018, one employee was granted 27,480 RSUs. These RSUs were granted pursuant to the 2012 Plan in a transaction exempt from registration under Rule 701 of the Securities Act.Use of Proceeds from Registered SecuritiesIn October 2018, we completed our IPO of 16,000,000 shares of our common stock, including 2,500,000 shares of our common stock sold by the Company and 13,500,000 shares of our common stock sold by selling stockholders. The offer and sale of all of the shares in our IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-227578), which was declared effective by the SEC on October 24, 2018. The shares were sold at the IPO price of $18.00 per share, resulting in net proceeds to the Company of $42.4 million, after deducting underwriting discounts and commissions of $2.6 million. We did not receive any proceeds from the sale of shares of our common stock by the selling stockholders. Additionally, offering costs incurred by us are expected to total approximately $4.4 million. On November 29, 2018, we used the proceeds plus additional cash on hand to repay $50.0 million of outstanding borrowings under the Credit Facility. The managing underwriters of our IPO were Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC, and Jefferies LLC. No payments were made by us to directors, officers or persons owning 10% or more of our common stock or to their associates, or to our affiliates, other than payments in the ordinary course of business to officers for salaries and to non-employee directors pursuant to our director compensation policy.All documents referenced below have been filed pursuant to the Securities Exchange Act of 1934 by YETI Holdings, Inc., file number 001-38713, unless otherwise indicated.4910.5*10.6*10.7*31.131.232.1101.INSXBRL Instance Document101.SCHXBRL Taxonomy Extension Schema Document101.CALXBRL Taxonomy Extension Calculation Linkbase Document101.DEFXBRL Taxonomy Extension Definition Linkbase Document101.LABXBRL Taxonomy Extension Label Linkbase Document101.PRE104* Cover Page Interactive Data File (embedded within the Exhibit 101 Inline XBRL Taxonomy Extension Presentation Linkbase Documentdocument)Indicates a management contract or compensation plan or arrangement.Filed herewith.50INC.December 6, 2018Name: Matthew J. ReintjesTitle: President and Chief Executive Officer, Director
(Principal Executive Officer)December 6, 2018Paul C. CarboneName: Paul C. CarboneMichael J. McMullen Title: Senior Vice President, and Chief Financial Officer and Treasurer 51