Business context and reporting period
Johnson Outdoors Inc. filed this unaudited Form 10-Q for the fiscal second quarter and six months ended April 3, 2015. The company makes seasonal outdoor recreation products for fishing, diving, paddling and camping. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise noted.
Results are seasonal: the second quarter falls within the primary selling season for warm-weather products, so interim results are not necessarily indicative of the full fiscal year.
Financial performance and condition
| Metric | Fiscal Q2 2015 | Fiscal Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $133.1 | $124.3 | $203.9 | $203.4 |
| Gross profit | $51.9 | $48.8 | $79.3 | $78.8 |
| Gross margin | 39.0% | 39.3% | 38.9% | 38.7% |
| Operating expenses | $44.3 | $37.3 | $79.0 | $70.1 |
| Operating profit | $7.6 | $11.5 | $0.3 | $8.6 |
| Net income (loss) | $3.6 | $7.4 | $(0.5) | $5.2 |
| Diluted EPS | $0.36 | $0.74 | $(0.06) | $0.52 |
At April 3, 2015, cash was $48.9 million, total debt $55.7 million, and net debt $6.8 million. The reported debt-to-total-capitalization ratio was 23%, versus 20% a year earlier. Current assets were $253.9 million and current liabilities $76.3 million. Receivables were $110.8 million and inventory $79.8 million.
For the six months, operating cash outflow was $57.8 million, investing cash outflow $4.2 million, and financing cash inflow $45.7 million. Cash declined $21.9 million to $48.9 million. Operating cash use primarily reflected seasonal working-capital growth, including increased receivables and inventory. Capital expenditures were $4.2 million. The company held approximately $48.0 million of cash in foreign taxing jurisdictions.
Material changes versus prior comparable periods
- Quarterly sales rose 7%, despite a 2% unfavorable currency-translation impact; year-to-date sales were nearly flat, with a 2% unfavorable currency impact.
- Quarterly operating profit fell $3.9 million and six-month operating profit fell $8.3 million. Management identified patent-litigation legal costs as the primary driver: approximately $2.9 million in Q2 and $5.4 million year to date.
- Marine Electronics quarterly sales increased 9%, largely on Minn Kota growth, while segment operating profit declined. Year-to-date Marine Electronics sales rose 2%; growth in Minn Kota offset Humminbird declines related to prior-year promotions and competitive pricing.
- Quarterly Outdoor Equipment sales increased 11%, partly due to order timing; year-to-date sales fell 4%, principally due to lower government tent sales. Watercraft sales increased in both comparison periods, while Diving sales declined, affected by unfavorable currency translation.
- Six-month net income shifted to a $0.5 million loss from $5.2 million income. Foreign-currency translation reduced other comprehensive income by $8.7 million year to date.
Outlook, risks and unusual items
- The company estimated less than $2.0 million of additional patent-litigation expense in fiscal Q3 2015. It provided no broader numerical sales or earnings guidance in the filing.
- Management expected approximately $0.5 million of fiscal 2015 expense related to uncertain income-tax positions and projected $0.15 million of accrued interest related to those positions. The company was undergoing tax examinations in Italy and Germany.
- The effective tax rate was 46.5% for Q2 2015 versus 34.0% a year earlier; the year-to-date rate was negative 426.9%, which management said was not meaningful given the small pretax loss. Foreign losses in jurisdictions with valuation allowances and additional state tax expense affected the rate.
- The company and its Marine Electronics subsidiary pursued Garmin in an ITC patent-infringement case involving side-scan sonar products; the ITC held an evidentiary hearing April 6–9, after quarter-end. A related federal court case was agreed in principle to be stayed pending the ITC outcome. Management stated that pending litigation generally was not expected to have a material adverse effect, but the patent matter has incurred significant costs.
- Risks highlighted include seasonal working-capital needs, customer payment risk, foreign exchange, floating-rate debt, commodity and raw-material costs, weather, covenant compliance, litigation, and possible goodwill or long-lived-asset impairment. The company had no currency forwards or interest-rate swaps and was unhedged on floating-rate debt.
- The revolving facility allows up to $90.0 million, with a seasonal borrowing limit of $60.0 million from June 30 through October 31; $48.1 million was drawn at quarter-end. Debt covenants include leverage and interest-coverage requirements. Management said expected additional fiscal 2015 capital expenditures would be funded from working capital or existing credit facilities.
Important facts for investors to verify
- Track the amount and duration of patent-litigation costs and the ITC outcome, including any effect on product sales or imports.
- Assess whether receivables convert to cash as seasonal sales are collected, and whether operating cash use and revolver borrowings recede after the selling season.
- Monitor segment margins and whether Marine Electronics profitability recovers despite higher expenses and currency pressure.
- Review debt covenant headroom, seasonal revolver availability, and the exposure created by floating interest rates.
- Check subsequent filings for tax-examination developments, uncertain-tax-position charges, and changes in foreign-currency impacts.