Johnson Outdoors Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2018, ended June 29, 2018. Comparisons are to the three and nine months ended June 30, 2017. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $170.8 | $155.3 | $453.1 | $398.8 |
| Gross profit | $79.3 | $70.6 | $202.3 | $172.1 |
| Gross margin | 46.5% | 45.5% | 44.7% | 43.2% |
| Operating profit | $32.0 | $24.7 | $65.0 | $45.7 |
| Net income | $23.8 | $16.6 | $45.6 | $34.6 |
| Diluted EPS | $2.37 | $1.65 | $4.54 | $3.45 |
Quarterly sales rose 10% and operating profit increased $7.2 million; nine-month sales rose 14% and operating profit increased $19.3 million. Management attributed the improvement primarily to higher sales volume and favorable product mix. Net income rose 44% in the quarter and 32% year to date.
Segments: Fishing led growth: sales increased 17% in Q3 to $121.9 million and 22% year to date to $336.3 million, driven by new products. Camping sales rose 15% in Q3 but 2% year to date. Watercraft Recreation sales fell 18% in Q3 and 24% year to date amid a weaker kayak market and lost retail distribution. Diving sales fell 6% in Q3 but rose 5% year to date.
Cash flow and liquidity: Operating cash flow for the first nine months was $37.0 million, versus $25.9 million a year earlier. Investing activities provided $8.3 million, mainly reflecting net proceeds from reduced short-term investments; capital expenditures were $14.7 million, up from $8.1 million. Financing activities used $3.8 million, including $3.2 million of dividends paid. Cash and cash equivalents were $104.3 million and short-term investments were $25.0 million at quarter-end, totaling $129.3 million. Accounts receivable was $80.9 million and inventory was $77.3 million.
Debt: The company reported no debt at June 29, 2018. Its unsecured revolving facility provides up to $75 million of borrowing capacity, with a potential $50 million increase subject to lender approval and conditions. The facility expires November 15, 2022 and includes leverage and interest-coverage covenants.
Material changes and unusual items
- Fishing growth drove the period’s stronger results; Watercraft Recreation remained a notable area of weakness.
- Operating expenses rose to $47.4 million in Q3 and $137.3 million year to date, reflecting sales-related costs and, year to date, increased headcount, discretionary compensation, warranty costs and digital-initiative professional services.
- The Tax Act resulted in a provisional $6.8 million tax expense for the nine-month period, including a $3.2 million transition-tax estimate and a $3.6 million net deferred-tax impact. The nine-month effective tax rate was 34.4%, versus 27.0%; Q3’s rate was 25.2%, versus 35.2%. Management said its Tax Act accounting remained incomplete and estimates could change.
- Other income for the first nine months included a $2.3 million gain from liquidation of a Japanese subsidiary and approximately $1.2 million from selling certain Camping trademarks. The Japanese-related gain was recorded in other income, not sales.
- Capital spending increased for a planned global systems upgrade and digital transformation. The company said any additional fiscal 2018 expenditures were expected to be funded by working capital.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management cautioned that seasonal results through June are not necessarily indicative of full-year results; the third quarter is within the primary selling season for warm-weather products. The company was assessing possible effects of newly announced U.S. tariffs on component and supply costs and related profitability.
Disclosed risks include changing consumer demand, trade policy and tariffs, raw-material costs and availability, foreign exchange movements, customer credit and retail consolidation, supply-chain disruptions, weather, execution of growth and digital strategies, and possible goodwill or other asset impairments. Approximately 15% of nine-month revenue was denominated in currencies other than the U.S. dollar; the company held no foreign-exchange forward contracts at quarter-end. Management stated pending legal matters were not expected to have a material adverse effect. Contractual obligations totaled $87.0 million, including $66.8 million in open purchase orders; the company reported no other off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Fishing’s new-product momentum continues and offsets weakness in Watercraft Recreation and any further distribution losses.
- The eventual cost and earnings effects of tariffs, raw-material changes, and supply-chain conditions.
- Final Tax Act accounting and the resulting effective tax rate, including any jurisdictional conformity changes or tax examinations.
- Whether elevated receivables and seasonal working-capital needs convert to cash as expected, alongside higher capital expenditures and purchase commitments.
- Whether the company maintains its no-debt position while complying with the revolving facility’s covenants; the filing states that no debt was outstanding at quarter-end.