COMMITMENTS AND CONTINGENCIES

6 Months Ended

Jul. 01, 2023

Commitments and Contingencies Disclosure [Abstract]

Claims and Legal Proceedings

We are involved in various claims and legal proceedings, some of which are covered by insurance. We believe that our existing claims and proceedings, and the potential losses relating to such contingencies, will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Product Recall Reserves

In January 2023, we notified the U.S. Consumer Product Safety Commission (“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 CPSC, and other relevant global regulatory authorities. Accordingly, we established a reserve for expected future returns and the estimated cost of recall remedies for consumers with affected products on our consolidated balance sheet as of December 31, 2022.

In March 2023, we announced separate, voluntary recalls of the affected products in collaboration with the CPSC. During the second quarter of 2023, we began processing claims and returns, and based on such experience and observed trends, we reevaluated our prior assumptions and adjusted our estimated product recall reserve. These trends included higher than anticipated elections by consumers to receive gift cards in lieu of product replacement remedies, variations in individual product participation rates, and lower logistics costs than previously estimated. As a result, we updated our prior recall reserve assumptions, which increased the estimated recall expense reserve by $8.5 million. However, the overall consumer recall participation rate has remained consistent with our expectations.

The product recalls, which includes the recall reserve adjustment and other incurred costs, had the following effect on our income before income taxes (in thousands):


	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)

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(1)Primarily reflects the unfavorable impact of the recall reserve adjustment related to higher estimated future recall remedies (i.e., estimated gift card elections). Of the total net sales impact, $8.1 million and $16.4 million was allocated to our DTC and wholesale channels, respectively, for the three and six months ended July 1, 2023. These amounts were allocated based on the historical channel sell-in basis of the affected products.

(2)Primarily reflects the favorable impact of the recall reserve adjustment related to lower estimated costs of future product replacement remedy elections and logistics costs for the three and six months ended July 1, 2023. The six months ended July 1, 2023 also includes a $1.3 million favorable impact related to an inventory reserve adjustment.

(3)Primarily reflects the favorable impact of the recall reserve adjustment related to lower estimated other recall-related costs, including logistics costs.

The reserve for the estimated product recall expenses is included within accrued expenses and other current liabilities on our consolidated balance sheets. Estimating the cost of recall remedies required significant judgment and is primarily based on i) expected consumer participation rates; and ii) the estimated costs of the consumer’s elected remedy in the recalls, including either the estimated cost of offered product replacements or the elections to receive gift cards, logistics costs, and other recall-related costs. We will reevaluate these assumptions each period, and the related reserves may be adjusted when factors indicate that the reserve is either not sufficient to cover or exceeds the estimated product recall expenses.

The following table summarizes the activity of the reserve for the estimated product recall expenses (in thousands):


	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

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(1)For the three and six months ended July 1, 2023, we recognized net sales of $12.5 million from redeemed recall-related gift cards. As of July 1, 2023, we had $9.6 million in unredeemed recall-related gift card liabilities, which are included in contract liabilities within accrued expenses and other current liabilities on our consolidated balance sheet.

The ultimate impact from the recalls may differ materially from our estimates, and may harm our business, financial condition, and results of operations. See Part I, Item 1A “Risk Factors - Risks Related to Our Business, Operations and Industry.”