Johnson Outdoors Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended March 27, 2020. Amounts below are in millions except per-share data. Johnson Outdoors makes seasonal outdoor recreation products for fishing, camping, watercraft recreation and diving; results are not necessarily indicative of the full fiscal year.
Financial highlights
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $163.1 | $177.7 | $291.1 | $282.1 |
| Gross profit / margin | $75.1 / 46.1% | $79.1 / 44.5% | $128.7 / 44.2% | $123.4 / 43.8% |
| Operating profit | $31.8 | $27.8 | $38.6 | $33.8 |
| Net income | $20.4 | $21.9 | $26.8 | $25.4 |
| Diluted EPS | $2.02 | $2.18 | $2.66 | $2.53 |
Second-quarter operating margin was approximately 19.5%, versus 15.7% a year earlier. The effective tax rate was 28.2% for Q2 and 27.5% year to date, compared with 27.0% and 25.9%, respectively.
Cash, debt and liquidity: Cash and cash equivalents were $131.3 at March 27, 2020, versus $68.2 a year earlier and $172.4 at September 27, 2019. The company had no debt outstanding. It had a $75.0 million unsecured revolving credit facility, with a potential $50.0 million accordion subject to lender approval and conditions. Current assets were $353.3 and current liabilities $102.6. Adoption of lease accounting resulted in $39.4 of lease liabilities ($5.8 current and $33.6 non-current).
Cash flow, six months: Operating activities used $29.0, compared with $69.9 used in the prior-year period. Investing activities used $7.8, including $7.8 of capital expenditures; financing activities used $3.8, principally dividends and treasury-stock purchases. Cash declined $41.1 during the period. The company declared dividends of $0.17 per Class A share and $0.16 per Class B share for Q2.
Changes versus prior comparable periods
- Q2 sales declined 8%, reflecting lower volumes across businesses amid COVID-19 disruption. Year-to-date sales rose 3%, primarily on Fishing and Camping growth in the first half.
- Q2 gross margin improved 1.6 percentage points, primarily due to pricing. Year-to-date margin increased 0.4 points, with pricing and efficiency gains more than offsetting higher tariffs.
- Q2 operating profit increased despite lower sales, as operating expenses fell $7.9. Lower deferred-compensation expense and lower incentive compensation were key contributors.
- Q2 net income declined because the operating improvement was more than offset by a $3.9 other expense, versus $1.9 of other income a year earlier. The main driver was investment losses on deferred-compensation plan assets, substantially offset by lower related compensation expense.
- Year-to-date net income and diluted EPS increased. Other expense rose to $2.7 from $0.3, mainly due to deferred-compensation investment losses and foreign-currency losses.
- By Q2, Fishing sales were down 3% year over year; Camping down 7%; Watercraft Recreation down 38%; and Diving down 29%. Diving was particularly affected by disruption to travel and tourism in Asia-Pacific and Europe.
Outlook, risks and unusual items
- COVID-19: Management said the primary selling season had been disrupted and expected fiscal Q3 to be significantly affected. After quarter-end, the company reported significant demand declines, supply-chain and logistics constraints, and production facilities that were closed or operating at reduced levels. The full-year and longer-term financial impact could not be reasonably estimated and could be material.
- Management cited more than $130 million in quarter-end cash, no debt and access to the revolver as resources to manage the pandemic; it also described focused cost cutting and disciplined investment. No quantified earnings or sales guidance was provided.
- The company withdrew prior estimates of the full-year operating-profit impact of Section 301 tariffs because of pandemic-related disruption and uncertainty. Tariff expense was approximately $0.9 million higher year to date than in the prior-year period.
- Other key risks include changing consumer demand and discretionary spending, supplier/customer and supply-chain disruption, foreign exchange, raw-material costs, customer collections, competition, and potential goodwill or long-lived-asset impairment. About 11% of first-half revenue was denominated in foreign currencies; no currency forward contracts were held at quarter-end.
- Open purchase orders totaled $73.0 million, and undiscounted operating lease commitments totaled $44.2 million. Management said pending litigation was not expected to have a material adverse effect. No other off-balance-sheet arrangements were reported.
- In Q2 the company reversed previously recorded RSU compensation expense for certain awards because performance conditions were not expected to be met under current market conditions. Lease standard adoption added approximately $41 million of lease assets and liabilities but did not materially affect earnings, cash flows or covenant compliance.
Important facts for investors to verify
- Whether Q3 and subsequent-period sales, production and distribution recover as COVID-19 restrictions and operational disruptions change.
- Whether cash conversion improves: first-half operating cash flow remained negative, with working capital, particularly receivables and inventory, driving cash use.
- Whether the Q2 operating-profit improvement is sustainable apart from lower incentive and deferred-compensation expenses and related market-value offsets.
- Segment performance, especially continued weakness in Watercraft Recreation and Diving, and the concentration of sales: two customers represented approximately $48.7 million of Q2 sales and $81.0 million year to date.
- Availability and terms of the revolver if needed, alongside lease obligations, purchase commitments, tariff exposure and customer credit risk.