Business context and reporting period
Johnson Outdoors Inc. designs, manufactures and markets outdoor recreation products across Fishing, Camping, Watercraft Recreation and Diving, including Minn Kota, Humminbird, Old Town, Eureka!, Jetboil and SCUBAPRO. This Form 10-K covers the 52-week fiscal year ended September 28, 2018. The filing also reports fourth-quarter results; amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Net sales | $544.3 | $490.6 | Up 11% |
| Gross profit / margin | $241.9 / 44.4% | $210.9 / 43.0% | Margin up 1.4 percentage points |
| Operating profit / margin | $63.0 / 11.6% | $45.6 / 9.3% | Operating profit up 38% |
| Income before taxes | $68.1 | $48.2 | Up 41% |
| Income tax expense / effective rate | $27.4 / 40.3% | $13.1 / 27.1% | FY2018 includes tax-reform effects |
| Net income | $40.7 | $35.2 | Up 16% |
| Diluted EPS | $4.05 | $3.51 | Up 15% |
| Cash from operations | $63.4 | $46.4 | Up $17.0 |
| Capital expenditures | $19.2 | $11.6 | — |
| Cash and cash equivalents | $121.9 | $63.8 | At fiscal year-end |
| Short-term investments | $28.7 | $46.6 | At fiscal year-end |
| Total debt | $0 | $0 | No outstanding debt |
Operating cash flow less capital expenditures was approximately $44.2 million in FY2018. Working capital was $192.9 million, versus $156.8 million a year earlier; the current ratio was 3.1:1, compared with 2.9:1. The company has an unsecured revolving facility of up to $75 million, plus a conditional $50 million accordion feature, expiring November 2022. The filing states it expects existing cash and investments, together with operating cash generation, to cover anticipated needs for the next 12 months.
FY2018 quarterly sales were $116.6 million, $165.8 million, $170.8 million and $91.1 million, respectively. Fourth-quarter operating loss was $2.0 million and net loss was $5.0 million, compared with a $0.1 million operating loss and $0.6 million net income in FY2017’s fourth quarter. The business is seasonal, with sales and profitability generally strongest in the second and third fiscal quarters.
Material changes versus the prior comparable period
- Fishing sales rose 19% to $391.1 million; segment operating profit increased to $83.7 million from $58.7 million, driven by new products, higher volume and operating efficiencies.
- Watercraft Recreation sales fell 25% to $36.3 million, and the segment moved to a $1.6 million operating loss from $2.9 million of profit. Management cited a weakened paddling market and lost distribution associated with retail consolidation.
- Diving sales increased 3% to $78.9 million and operating profit rose to $2.8 million. New-product sales and favorable currency effects partly offset the closure of the company’s Japan subsidiary.
- Camping sales were essentially flat at $37.8 million; operating profit decreased slightly to $1.9 million. Consumer-product growth was offset in part by the sale of Silva North America trademark rights.
- Gross margin improved as sales volume and product mix strengthened, particularly in Fishing. Operating expenses increased $13.5 million, including higher volume-related costs, digital investment and compensation.
- Cash from operations increased, while capital expenditures rose $7.5 million. The company reported no outstanding debt in either FY2018 or FY2017.
Outlook, commentary, risks and unusual items
- Tariffs: Management estimated recently implemented tariffs would reduce FY2019 operating profit by approximately $6 million to $9 million, net of mitigation efforts identified to date. The filing provides no broader numerical sales or earnings guidance.
- Tax reform: FY2018 income tax expense includes provisional effects of the U.S. Tax Cuts and Jobs Act. The filing gives inconsistent totals: MD&A cites $8.456 million, while the tax note reports $8.386 million, including a $3.414 million transition tax and $4.972 million deferred-tax remeasurement. The company said its accounting was provisional and expected to complete it by the first quarter of FY2019.
- Growth and execution: Management emphasized product innovation, digital marketing, strategic growth platforms, cost management and working-capital management. Results remain sensitive to consumer demand and the success of new products.
- Market and operating risks: Key risks include discretionary-spending weakness, adverse weather, competition and retailer consolidation, raw-material and labor costs, supply-chain constraints, foreign exchange, and international trade and tariff changes. Approximately 16% of FY2018 revenue was denominated in currencies other than the U.S. dollar.
- Customer concentration: Sales to one customer across the Fishing, Camping and Watercraft Recreation segments totaled approximately $90.6 million in FY2018, about 17% of consolidated sales.
- Commitments and contingencies: Contractual obligations totaled $142.6 million, including $52.2 million of operating lease obligations and $90.5 million of open purchase orders. The company reported no litigation it considered material and stated pending litigation was not expected to have a material adverse effect. It also disclosed tax examinations in Italy and Germany and $8.8 million of unrecognized tax benefits.
- Other notable items: The company recorded $2.0 million of transaction currency gains and $1.7 million of market gains and dividends on deferred-compensation plan assets in FY2018 other income; the deferred-compensation asset gains are generally offset by compensation expense. No goodwill impairment was recorded in FY2018; a $6.2 million Diving goodwill impairment was recorded in FY2016.
Most important facts for investors to verify
- Reconcile the conflicting FY2018 Tax Act provisional expense disclosures ($8.456 million in MD&A versus $8.386 million in the tax note), and track any final adjustments and FY2019 tax effects.
- Assess whether the estimated $6 million to $9 million FY2019 tariff headwind is mitigated, passed through to customers or reflected in margins.
- Monitor Fishing growth and margins against the sharp decline and operating loss in Watercraft Recreation, including the effects of retailer consolidation and distribution changes.
- Review the fourth-quarter loss and seasonal working-capital requirements alongside inventory, cash conversion and the company’s continued ability to fund operations without borrowing.
- Evaluate customer concentration, open purchase orders and the company’s exposure to supplier capacity, raw-material costs, foreign exchange and consumer discretionary spending.