Johnson Outdoors Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended December 30, 2011, compared with the three months ended December 31, 2010. Amounts below are in millions of dollars unless otherwise noted. The company makes seasonal outdoor recreation products for fishing, diving, paddling and camping; first-quarter results are typically its weakest and are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $80.2 | $78.7 |
| Gross profit / margin | $31.1 / 38.8% | $30.7 / 39.0% |
| Operating expenses | $34.8 | $32.0 |
| Operating loss | $(3.7) | $(1.3) |
| Net loss | $(2.9) | $(1.2) |
| Loss per share, basic and diluted | $(0.30) | $(0.13) |
| Cash used for operating activities | $(32.0) | $(23.1) |
Sales increased 2%; gross margin slipped 0.2 percentage points. Higher operating costs and lower margins in several businesses drove the larger operating loss. The effective tax rate was 5.1%, versus 42.5%; the company recorded a $0.2 tax benefit on its pretax loss, primarily reflecting unavailable tax benefits in jurisdictions with valuation allowances. The prior-year rate benefited from an alternative-minimum-tax recovery election.
Business trends and material changes
- Marine Electronics: Sales rose 11% to $47.8 million, led by Humminbird side- and down-imaging products; segment operating profit increased to $2.1 million from $0.4 million.
- Outdoor Equipment: Sales fell 40% to $6.3 million, primarily due to a 66% decline in military tent sales associated with U.S. federal spending cuts. The segment recorded a $0.3 million operating loss.
- Watercraft: Sales rose 23% to $7.5 million, supported in part by year-end close-outs; the operating loss widened to $2.5 million.
- Diving: Sales decreased 4% to $18.7 million amid weakness in southern Europe; the segment shifted from $1.1 million operating profit to a $0.1 million loss.
Operating expenses increased $2.8 million, including higher volume-related costs, $0.8 million of severance, $0.4 million of additional legal expense and a $0.3 million donation of an unused building. Foreign-exchange movements contributed $0.7 million of gains, while forward contracts generated $0.2 million of losses; other income also included gains on deferred-compensation plan assets.
Liquidity, debt and cash flow
Cash was $29.1 million at quarter-end. Current assets were $188.3 million and current liabilities $81.7 million (approximately 2.3 times current coverage). Total debt was $34.0 million, versus $47.2 million a year earlier; net debt was $4.9 million, versus $14.1 million. Debt to total capitalization was 18%, down from 27% year over year.
Operating cash outflow increased to $32.0 million, mainly reflecting the seasonal build in receivables and inventory and a decrease in accounts payable. Investing cash outflow was $0.8 million, including $2.0 million of property and equipment additions and $1.2 million of property-sale proceeds. Financing provided $19.2 million, including $22.1 million of net revolving-credit borrowings; the company repaid $3.1 million of long-term debt, including $2.9 million following a property sale.
Revolver borrowings were $22.1 million, with approximately $28.5 million of remaining availability under facilities maturing in November 2014. The borrowing rate was approximately 2.75%. The facilities include financial covenants and restrictions on dividends, additional debt and certain acquisitions or divestitures. The company was unhedged for interest-rate risk on floating-rate debt; $0.7 million of deferred swap losses remained in accumulated other comprehensive income and was expected to be amortized to interest expense over the next 12 months.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management notes first-quarter seasonality; additional FY2012 capital expenditures were expected to be funded from working capital or existing credit facilities.
- The company anticipated $0.8 million of pension-plan contributions through September 28, 2012, and projected approximately $0.3 million of FY2012 income-tax expense related to uncertain tax positions, plus $0.1 million of accrued interest.
- Flooding at the Binghamton, New York facility in September 2011 caused cumulative cleanup, repair and related costs of $2.9 million. The company had received $2.2 million of insurance reimbursements and recorded a $0.4 million receivable; further recoveries were uncertain and not estimated.
- Management said ordinary-course litigation was not expected to materially affect the company. Recovery of a $4.4 million settlement and approximately $1.3 million of related litigation costs from insurers remains in litigation; no receivable was recorded because the outcome could not be estimated.
- Key stated risks include consumer demand and economic conditions, execution of growth and cost plans, working-capital management, credit-covenant compliance, customer collections, foreign exchange, interest rates, commodity and raw-material costs, adverse weather, litigation and potential asset impairments.
Important facts for investors to verify
- Whether Marine Electronics growth can offset continuing weakness in military tents and other seasonal businesses.
- Whether operating expenses and margins improve after the seasonally weak first quarter.
- Revolver availability, covenant headroom and the required seasonal paydown as working-capital needs change.
- Collections on receivables, inventory levels and operating cash flow through the primary selling season.
- Amounts and timing of additional flood-insurance recoveries, and the outcome of the insurer litigation and tax examinations.