Johnson Outdoors Inc. — Q1 FY2017 10-Q
Reporting period: Three months ended December 30, 2016; comparable period ended January 1, 2016. Amounts below are in millions of dollars unless stated otherwise. The company makes seasonal outdoor recreation products. Management cautions that first-quarter results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $93.7 | $85.3 | +10% |
| Gross profit / margin | $36.6 / 39.0% | $33.3 / 39.0% | Margin unchanged |
| Operating income (loss) | $0.5 | ($0.9) | Improved $1.4 |
| Income (loss) before taxes | ($0.05) | ($0.5) | Improved |
| Income tax benefit (expense) | $4.1 benefit | $0.02 expense | Large tax benefit |
| Net income (loss) | $4.1 | ($0.5) | Turned profitable |
| Diluted EPS | $0.40 | ($0.05) | Improved |
Cost of sales rose with higher sales volume. Operating expenses increased $1.9 million, mainly from volume-related expenses and higher R&D spending. Interest expense increased to $0.5 million from $0.2 million, primarily due to deferred financing cost write-offs and the penalty for early repayment of term loans.
Segments and material changes
- Fishing: Sales increased 15% to $67.1 million; operating profit rose to $7.2 million from $5.7 million. Growth reflected new Minn Kota trolling motors and related systems.
- Camping: Sales declined 9% to $5.7 million; operating loss widened to $0.8 million from $0.2 million. Government tent sales were more than offset by lower Jetboil sales.
- Watercraft Recreation: Sales decreased 3% to $6.2 million; operating loss widened to $0.8 million from $0.5 million, primarily due to order timing.
- Diving: Sales increased 4% to $14.9 million; operating loss narrowed to $1.1 million from $1.9 million, helped by computer sales and the new HYDROS PRO product.
The company renamed its segments Fishing, Camping, and Watercraft Recreation; segment composition did not change. Consolidated sales growth was primarily driven by Fishing.
Cash flow, liquidity, and debt
- Operating cash flow was negative $34.3 million, compared with negative $33.6 million. Higher receivables and deferred-tax movements more than offset improved earnings.
- Investing cash outflow was $2.7 million, mainly capital expenditures; the prior-year quarter included $5.3 million of acquisition spending.
- Financing provided $4.1 million, including $12.7 million of revolving borrowings, offset by $7.1 million of term-loan repayments, dividends, and share repurchases.
- Cash declined $35.4 million during the quarter to $51.9 million. Cash net of debt was $38.9 million. Approximately $49.1 million of cash was held in foreign jurisdictions.
- Total debt was $13.0 million, versus $31.6 million a year earlier; the debt-to-total-capitalization ratio was 6%, versus 14%. The company repaid $7.1 million of 5.50% term loans in October 2016, incurring a 3% prepayment penalty, and borrowed $12.7 million under its revolving facility.
- The revolver provides up to $90 million, expires September 2018, and is subject to covenants, including leverage and interest-coverage requirements. Its rate was approximately 2.0% at quarter-end.
- Declared dividends were $0.09 per Class A share and $0.08 per Class B share, compared with $0.08 and $0.07, respectively, in the prior-year quarter.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management identifies seasonality, consumer spending, strategic execution, working-capital management, covenant compliance, acquisition integration, goodwill impairment, customer collections, foreign exchange, interest rates, raw-material costs, supply availability, litigation, and weather among factors that may affect results.
- Net income was substantially affected by a roughly $4.2 million foreign tax-credit benefit generated by repatriating approximately $22 million to the U.S. The company does not intend or foresee a need to repatriate remaining undistributed foreign earnings. The tax benefit drove a reported effective tax rate of approximately 9,113% on a small pretax loss; net income therefore does not reflect operating earnings alone.
- Other comprehensive loss was $3.7 million, primarily from foreign-currency translation, reducing accumulated other comprehensive income to a $1.3 million loss.
- Contractual obligations totaled $135.0 million, including $94.8 million of open purchase orders and $26.6 million of operating leases. The company anticipates $0.6 million of pension contributions for the remainder of FY2017.
- Management said pending legal matters were not expected to have a material adverse effect; the filing reports no material changes to previously disclosed risk factors. Goodwill impairment remains a potential risk if business units miss short-term revenue or gross-margin goals.
Important facts for investors to verify
- Whether Fishing’s product-driven growth continues and offsets weakness in Camping and Watercraft Recreation.
- How much reported earnings depend on the one-time tax benefit, and the company’s future tax rate and repatriation plans.
- Seasonal working-capital needs, cash conversion, and revolving-credit borrowing as the business approaches its primary selling season.
- Compliance with debt covenants and the effect of foreign exchange, raw-material costs, and potential goodwill impairment.