Johnson Outdoors Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended July 1, 2016, compared with periods ended July 3, 2015. Amounts below are in millions of dollars unless noted. The company makes seasonal outdoor recreation products for fishing, diving, paddling and camping; the third quarter is within its primary warm-weather selling season.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $139.3 | $140.9 | $358.8 | $344.8 |
| Gross profit | $59.3 | $58.8 | $147.6 | $138.0 |
| Gross margin | 42.6% | 41.7% | 41.1% | 40.0% |
| Operating profit | $13.6 | $16.4 | $27.8 | $16.7 |
| Net income | $6.8 | $10.0 | $15.6 | $9.4 |
| Diluted EPS, Class A and B | $0.68 | $1.00 | $1.56 | $0.95 |
| Operating cash flow | Not separately provided | Not separately provided | $26.9 | $(2.0) |
- Quarterly sales declined 1%; nine-month sales rose 4%. Quarterly operating profit and net income fell, while nine-month operating profit and net income increased.
- Quarterly operating expenses rose to $45.7 million, including a $6.2 million Diving goodwill impairment. About $4.6 million lower legal expense partly offset that charge. Nine-month operating expenses declined to $119.8 million, primarily reflecting about $10 million lower legal expense, partly offset by impairment and higher volume-related costs.
- Quarterly and nine-month results benefited from gross-margin improvement. Management cited favorable product mix and pricing in the quarter, and lower material costs, pricing, mix and production-volume variances year to date.
- Effective tax rates were 50.7% for the quarter and 44.2% year to date, up from 37.9% and 40.9%. The principal factor was no tax benefit for the non-deductible portion of the goodwill impairment.
Segments and material changes
- Marine Electronics: Sales increased 2% in Q3 and 9% year to date. Management attributed growth to new products, particularly Humminbird HELIX fishfinders. Segment operating profit rose to $20.0 million for the quarter and $42.9 million year to date.
- Outdoor Equipment: Sales fell 15% in Q3 and 9% year to date. Jetboil growth did not offset weaker tent sales, including reduced government orders, consumer-market declines and lost distribution. Segment operating profit also declined.
- Watercraft: Sales declined 1% in Q3 but increased 4% year to date, with recreation and fishing kayaks supporting year-to-date growth.
- Diving: Sales fell 5% in Q3 and 6% year to date. Management cited product availability and sharply lower Middle East sales amid regional political instability. The segment reported operating losses of $6.2 million in Q3 and $8.8 million year to date, including the impairment charge.
Liquidity, debt and cash flows
- At July 1, cash and cash equivalents were $75.6 million; total debt was $7.4 million, leaving net cash of $68.2 million. The debt-to-total-capitalization ratio was 3%. No revolving credit borrowings were outstanding.
- Current assets were $221.1 million and current liabilities $81.2 million; the resulting current ratio was approximately 2.7. Cash increased $6.4 million during the first nine months.
- Nine-month operating cash flow was $26.9 million, versus cash used of $2.0 million in the prior-year period. Investing used $17.5 million, including $8.9 million for acquisitions and $8.6 million of net capital expenditures. Financing used $2.9 million, including $2.4 million of dividends paid.
- The revolving facility permits up to $90 million of borrowing, subject to terms and a $60 million seasonal limit from June 30 through October 31; it expires in September 2018. Term loans totaled $7.2 million, bear a 5.5% rate and mature in 2029. The filing describes financial covenants and restrictions on debt, acquisitions and shareholder payments.
- About $46.2 million of cash was held in foreign taxing jurisdictions. Contractual obligations totaled $85.2 million, including $51.1 million of open purchase orders and $23.5 million of operating lease obligations.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management cautions that seasonal results are not necessarily indicative of the full fiscal year.
- In Q3, the company recorded a $6.2 million Level 3 goodwill impairment, reducing Diving reporting-unit goodwill to zero. Management cited sustained sales weakness, unfavorable operating margins, geopolitical and economic factors, and insufficient acceptance of new products. Further impairment could result if business units miss short-term revenue or gross-margin goals.
- The company acquired SeaBear, a diving-technology business, and Northport Systems, a marine cartography and digital-solutions business. Aggregate cash consideration was $8.9 million; purchase-price allocations remained preliminary.
- Key stated risks include discretionary consumer spending, weather, foreign exchange, raw-material costs and availability, customer collections, acquisition integration, litigation, covenant compliance, and future goodwill or long-lived-asset write-downs. The filing reported no material change to previously disclosed risk factors.
- Patent disputes with Garmin were dismissed with prejudice following a confidential settlement agreement dated May 5, 2016; settlement terms were not disclosed. Management stated pending litigation was not expected to materially adversely affect the company.
- Disclosure controls were assessed as effective; the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Marine Electronics growth and improved gross margins continue, and whether Outdoor Equipment and Diving sales stabilize.
- Whether Diving’s deteriorating outlook creates further impairment risk, given goodwill was written down to zero and the valuation relied on management assumptions.
- How much of the year-to-date earnings and cash-flow improvement is sustainable versus attributable to lower legal expenses, seasonal working-capital movements and other non-recurring items.
- Acquisition integration, final purchase-price allocations, and any claims against acquisition escrow accounts.
- Liquidity and covenant headroom through the seasonal borrowing period, alongside open purchase-order and lease commitments.
- Tax examinations and uncertain tax positions; the filing anticipated approximately $0.4 million of fiscal 2016 tax expense related to uncertain positions and $0.2 million of related interest.