Johnson Outdoors Inc. — Q2 FY2018 Form 10-Q
Business context and period. Global outdoor-recreation products manufacturer operating in Fishing, Camping, Watercraft Recreation and Diving. This unaudited filing covers the three and six months ended March 30, 2018; comparisons are to the periods ended March 31, 2017. Results are seasonal, and management cautions that interim performance is not necessarily indicative of full-year results. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | First half FY2018 | First half FY2017 |
|---|---|---|---|---|
| Net sales | $165.8 | $149.8 | $282.4 | $243.5 |
| Gross profit | $74.2 | $64.9 | $123.0 | $101.5 |
| Gross margin | 44.8% | 43.3% | 43.6% | 41.7% |
| Operating profit | $26.0 | $20.5 | $33.0 | $20.9 |
| Net income | $21.6 | $14.0 | $21.9 | $18.0 |
| Diluted EPS | $2.15 | $1.39 | $2.18 | $1.80 |
Q2 sales rose 11% year over year, led by record Fishing sales volumes and strong new-product performance. Operating profit increased $5.5 million. Gross-margin improvement reflected favorable product mix and lower inventory reserves. First-half sales grew 16%; operating profit growth reflected higher volume and margin improvement, partly offset by higher operating expenses.
Segment performance, Q2: Fishing sales rose 19% to $125.5 million and operating profit increased to $30.8 million. Camping sales fell 11% to $10.1 million, with operating profit of $0.3 million; the decline reflected the Silva brand divestiture and lower military tent sales. Watercraft Recreation sales fell 28% to $10.8 million, and the segment recorded a $0.2 million operating loss, primarily due to a weaker kayak market and lost distribution tied to retail consolidation. Diving sales rose 7% to $19.4 million, with foreign currency translation accounting for most of the increase.
Cash flow, liquidity and debt: First-half operating cash use was $47.4 million, versus $46.2 million a year earlier, largely reflecting seasonal working-capital needs, including receivables and inventory. Investing activities provided $37.0 million, including $46.6 million from liquidating short-term investments; capital expenditures were $10.9 million, primarily for a global systems upgrade and digital transformation. Cash declined $12.7 million to $51.1 million. The company reported no debt at March 30, 2018, versus $5.0 million a year earlier, and a 0% debt-to-capitalization ratio. Its unsecured revolver provides up to $75 million, with a conditional $50 million accordion feature, and matures November 15, 2022. Current assets were $272.3 million and current liabilities $99.9 million.
Dividends declared increased to $0.12 per Class A share and $0.11 per Class B share for Q2, from $0.09 and $0.08, respectively, in the prior-year quarter.
Material changes, outlook and risks
- Tax Act: First-half income tax expense included a provisional $6.8 million charge ($3.2 million transition tax and $3.6 million deferred-tax impact). The first-half effective tax rate was 42.1%, versus 17.3% a year earlier; Q2 rates were 26.6% and 36.1%, respectively. The company had not completed its Tax Act accounting and said estimates could change. It calculated a 24.5% U.S. federal statutory rate for FY2018 and expected 21% for subsequent fiscal years.
- Other income and unusual items: Q2 other income included a $2.35 million currency-translation gain from the substantial liquidation of a Japanese subsidiary and an approximately $1.2 million gain on the sale of Camping trademarks. Currency gains and investment-related items also affected reported results.
- Operating costs and investment: Operating expenses rose to $48.2 million in Q2 and $90.0 million in the first half, reflecting volume-related expenses, headcount, discretionary compensation and, year to date, digital-initiative professional services. Capital spending increased for systems and digital projects.
- Concentration and commitments: One customer represented approximately $30.5 million of Q2 sales and $49.3 million of first-half sales across three segments. Open purchase orders were $77.1 million, all scheduled within one year; total contractual obligations were $98.8 million, including operating leases.
- Risks and contingencies: Management cites discretionary consumer spending, weather, foreign exchange, interest rates, commodity and raw-material costs, supply-chain disruptions, customer payment risk, competition and possible goodwill or long-lived-asset impairment. About 15% of first-half revenue was denominated in foreign currencies; no FX forward contracts were held at period end. Management said pending litigation was not expected to have a material adverse effect; Italy was undergoing tax examinations. No material risk-factor changes were reported.
- Guidance: The filing provides no specific full-year sales or earnings guidance. Management notes seasonal variability and says any additional FY2018 capital expenditures are expected to be funded from working capital.
Key facts for investors to verify
- Whether Fishing growth and new-product momentum continue, and whether Camping and Watercraft Recreation stabilize.
- How much reported profit growth is attributable to operating performance versus the Japanese currency-translation gain, trademark-sale gain and other investment or currency items.
- Final Tax Act accounting, including transition-tax and deferred-tax estimates, and the resulting effective tax rate.
- Seasonal working-capital conversion, receivables and inventory levels, and the funding needs implied by purchase orders and planned capital spending.
- Customer concentration, retail-distribution changes, and compliance with the revolver’s leverage and interest-coverage covenants.