Johnson Outdoors Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016 (52 weeks); comparable FY2015 ended October 2, 2015 (52 weeks). The filing also reports the September 2016 fiscal fourth quarter. Dollar amounts below are in millions unless stated otherwise.
Business context and financial performance
Johnson Outdoors designs, manufactures and markets outdoor recreation products across Marine Electronics, Outdoor Equipment, Watercraft and Diving. Its brands include Minn Kota, Humminbird, Eureka!, Jetboil, Old Town and SCUBAPRO. Results are seasonal, with sales and profitability generally strongest in the second and third fiscal quarters.
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $433.7 | $430.5 | Up 1% |
| Gross profit / margin | $176.5 / 40.7% | $171.7 / 39.9% | Margin up 0.8 percentage points |
| Operating profit / margin | $22.9 / 5.3% | $17.9 / 4.1% | Up 28% |
| Income before taxes | $23.7 | $15.8 | Up |
| Income tax expense / effective rate | $10.2 / 42.9% | $5.1 / 32.6% | Rate increased |
| Net income | $13.5 | $10.6 | Up 27% |
| Diluted earnings per share | $1.34 | $1.06 | Up |
| Cash from operating activities | $43.4 | $18.1 | Up |
| Capital expenditures | $11.7 | $10.4 | Up |
FY2016 fourth quarter: Net sales were $74.9 million versus $85.7 million a year earlier. The company recorded an operating loss of $4.9 million and net loss of $2.1 million, compared with operating profit of $1.1 million and net income of $1.2 million in Q4 FY2015. The filing attributes the seasonal pattern to customer buying and inventory cycles.
Segments and material changes
- Marine Electronics: Sales rose 5% to $274.9 million, driven by new Minn Kota and Humminbird products. Segment operating profit was $43.1 million versus $26.1 million; the year-over-year improvement included approximately $9.9 million lower net legal expense. Excluding that legal-cost change, segment operating profit was approximately $7.1 million higher.
- Outdoor Equipment: Sales fell 16% to $40.0 million as tent sales declined; Jetboil growth was insufficient to offset the decline. Operating profit decreased to $2.1 million from $3.8 million.
- Watercraft: Sales increased 3% to $50.4 million. Operating profit rose to $3.3 million from $1.6 million, supported by volume and lower resin costs.
- Diving: Sales declined 4% to $69.1 million amid Middle East instability, European pricing pressure, a dive-computer product recall and unfavorable currency effects. Segment operating loss was $9.4 million, including a $6.2 million goodwill impairment; FY2015 segment operating profit was $0.9 million.
Consolidated cost of sales declined to 59.3% of sales from 60.1%, reflecting process improvements and lower Watercraft resin costs. Operating expenses were broadly flat, as lower legal expense largely offset the Diving goodwill impairment and other costs. Other income was $1.4 million, compared with other expense of $1.3 million in FY2015, including favorable currency and deferred-compensation investment effects.
Cash, liquidity and debt
- Cash and cash equivalents were $87.3 million at September 30, 2016, up $18.1 million year over year. Approximately $53.7 million was held in foreign jurisdictions.
- Working capital was $134.3 million and the current ratio was 3:1, according to MD&A; the filing reports both as $139.8 million and 3:1, respectively, for FY2015. The balance-sheet presentation reflects retrospective deferred-tax classification changes, so verify the comparable working-capital basis.
- Total debt was $7.4 million, with no revolver borrowings at year-end; debt was 3% of total capitalization. The revolving facility provided up to $90 million, subject to terms, covenants and seasonal borrowing limits.
- On October 14, 2016, after fiscal year-end, the company repaid $7.068 million of term loans and incurred a 3% prepayment penalty.
- Operating cash flow benefited substantially from a reduction in inventory. Investing cash outflow was $20.7 million, including $9.2 million for acquisitions and $11.7 million of capital expenditures.
Outlook, risks and unusual items
The filing gives no quantified revenue, earnings or cash-flow guidance. Management cites innovation, product development, marketing and operational efficiencies as strategic priorities. Forward-looking outcomes remain subject to consumer discretionary spending and economic conditions, seasonality and weather, competition and retailer consolidation, product acceptance and recalls, raw-material and supply-chain constraints, foreign-exchange movements, acquisition integration, and the ability to meet credit-agreement covenants.
- The $6.2 million Diving goodwill impairment followed weaker projections associated with sustained sales and margin pressure, geopolitical and economic factors, and limited consumer acceptance of new products. The Diving reporting unit’s remaining goodwill was reduced to zero.
- The company acquired SeaBear, an underwater-instrumentation developer, and Northport Systems, a marine-cartography and data-solutions business, for a combined $9.2 million. Acquisition integration, performance and contingent or escrow arrangements warrant monitoring.
- A confidential settlement with Garmin led to dismissal with prejudice of the related ITC and court cases in May 2016. The filing does not disclose settlement terms.
- The effective tax rate rose to 42.9%, including a tax impact associated with goodwill impairment and valuation allowances for deferred tax assets in Austria and Indonesia.
- Defined-benefit pension plans were underfunded by $11.7 million at year-end, versus $9.2 million a year earlier. The company anticipated $0.7 million of contributions through September 2017.
- The Johnson Family held approximately 77% of voting power. Dividend payments and repurchases are subject to credit-agreement limits; the annual aggregate limit is $10 million.
Most important facts for investors to verify
- Whether Marine Electronics’ sales and earnings momentum can continue, and how much of its FY2016 profit increase came from lower legal expense rather than ongoing operations.
- Whether Diving stabilizes after the goodwill write-off, recall, sales declines and operating loss, and whether further impairment or restructuring costs arise.
- The quality and repeatability of FY2016 operating cash flow, particularly the contribution from inventory reductions, and the company’s seasonal working-capital needs.
- The post-year-end term-loan repayment, prepayment penalty and resulting cash, interest-cost and covenant position; confirm current revolver availability and facility terms.
- The effects of the tax valuation allowance, foreign cash and planned repatriation, as well as the status of tax examinations and uncertain tax positions.
- Acquisition performance and integration, including SeaBear and Northport’s contribution to sales, margins and innovation.
- Quarterly results and liquidity against the company’s pronounced seasonal pattern; confirm the FY2015 working-capital comparison on a consistent balance-sheet basis.