Johnson Outdoors Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the fiscal third quarter and first nine months of fiscal 2015, ended July 3, 2015; comparisons are to the periods ended June 27, 2014. Johnson Outdoors makes seasonal outdoor recreation products for fishing, diving, paddling and camping. The third quarter falls in its primary warm-weather selling season. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $140.883 | $137.133 | $344.816 | $340.506 |
| Gross profit / margin | $58.752 / 41.7% | $55.819 / 40.7% | $138.022 / 40.0% | $134.594 / 39.5% |
| Operating profit | $16.421 | $9.332 | $16.713 | $17.970 |
| Net income | $9.997 | $4.698 | $9.449 | $9.909 |
| Diluted EPS | $1.00 | $0.47 | $0.95 | $0.98 |
- Q3 pretax profit was $16.101 million versus $10.105 million; the effective tax rate was 37.9% versus 53.5%. The company attributed the lower comparative-period tax rate primarily to the prior-year impairment charge receiving no tax benefit.
- For the first nine months, operating cash flow was negative $2.049 million, compared with positive $6.813 million a year earlier. Investing cash use was $6.592 million, mainly capital expenditures; financing cash use was $3.247 million. Cash declined $16.877 million to $53.916 million, including a $4.989 million adverse currency effect.
- At July 3, cash was $53.916 million and total debt was $7.520 million, giving reported net cash of $46.396 million. Debt-to-total-capitalization was 4%. Current assets were $224.307 million and current liabilities $84.626 million. Approximately $49.576 million of cash was held in foreign taxing jurisdictions.
- Compared with June 27, 2014, cash was up $1.777 million and debt down $0.396 million. Receivables were nearly flat at $79.663 million; inventory rose $6.822 million to $78.318 million, largely in Marine Electronics.
Material changes and segment trends
- Q3 sales rose 3% despite a 3% unfavorable currency impact. Marine Electronics sales increased 8%, primarily on Minn Kota growth; Outdoor Equipment and Watercraft each declined about 1%; Diving declined 9%, including an approximately 11% adverse currency impact.
- Nine-month sales increased 1%, despite a 2% unfavorable currency impact. Marine Electronics grew 4%; Outdoor Equipment declined 3% amid government tent supplier delays and order timing; Watercraft grew 1%; Diving declined 8%, with currency accounting for approximately 9% of its year-to-date sales headwind.
- Q3 operating profit improved by $7.089 million year over year, principally because the prior-year quarter included $8.475 million of goodwill and intangible impairment charges; the prior year also included a $1.6 million Jetboil indemnity-escrow recovery. Current-quarter legal costs partly offset the comparison. Nine-month operating profit fell $1.257 million.
- Patent-litigation expense related to the Garmin dispute was approximately $1.4 million in Q3 and $6.8 million year to date. The filing says prior-year impairment charges net of recoveries were approximately offset by current-year year-to-date legal expense.
Outlook, risks and contingencies
- The filing gives no specific revenue, earnings, or cash-flow guidance. Management cautions that seasonal interim results are not necessarily indicative of full-year results; September has historically been a weaker quarter.
- Management identified risks including consumer demand and economic conditions, execution of growth and innovation plans, working-capital management, lender covenant compliance, customer collections, foreign exchange, raw-material costs and availability, weather, litigation, and potential future asset impairments.
- The company reported no foreign-exchange forward contracts and no interest-rate swaps; floating-rate debt was unhedged. About 18% of nine-month revenue was denominated in currencies other than the U.S. dollar. Supplier delays affected government tent sales.
- An ITC administrative law judge ruled on July 13, 2015 that Garmin infringed one asserted patent and found all three asserted patents valid and enforceable. The ruling remained subject to ITC review; any import exclusion and cease-and-desist order depended on final adoption. The parallel district court case was stayed pending the ITC proceeding.
- Management did not expect pending litigation to materially harm financial condition, results, liquidity or cash flows. The company was undergoing tax examinations in Italy and Germany and anticipated about $0.5 million of fiscal 2015 tax expense related to uncertain tax positions, plus projected accrued interest of $0.15 million.
- Total contractual obligations were $86.953 million, including $58.272 million of open purchase orders and $17.981 million of operating leases. Management anticipated $0.159 million of pension contributions for the remainder of fiscal 2015. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether Marine Electronics growth and gross-margin gains continue, and whether Diving and Outdoor Equipment stabilize.
- Cash conversion and seasonal working-capital movements, particularly receivables, inventory and foreign-held cash.
- The amount and duration of Garmin-related legal costs, and the final ITC outcome and any effect on sales or competition.
- Whether the company maintains credit-facility covenant compliance and manages currency, input-cost and supplier risks.
- Potential tax examination outcomes and any future impairment triggers; management notes that missed short-term revenue or gross-margin goals could prompt an interim goodwill test.