Business context and reporting period
Johnson Outdoors Inc. filed this unaudited Form 10-Q for the quarter ended June 27, 2014, its fiscal third quarter, and for the first nine months of fiscal 2014. The company sells seasonal outdoor recreation products across Marine Electronics, Outdoor Equipment, Watercraft and Diving. Amounts below are in USD millions unless otherwise noted.
Financial performance and position
| Metric | Three months ended June 27, 2014 | Three months ended June 28, 2013 | Nine months ended June 27, 2014 | Nine months ended June 28, 2013 |
|---|---|---|---|---|
| Net sales | $137.1 | $129.8 | $340.5 | $349.1 |
| Gross profit | $55.8 | $54.3 | $134.6 | $142.2 |
| Gross margin | 40.7% | 41.9% | 39.5% | 40.7% |
| Operating profit | $9.3 | $16.1 | $18.0 | $30.3 |
| Net income, per financial statements | $4.7 | $13.7 | $9.9 | $22.8 |
| Diluted EPS | $0.40 | $1.37 | $0.70 | $2.30 |
Operating margin was approximately 6.8% for the quarter and 5.3% year to date. The quarter’s Class A basic EPS was $0.48 and Class B basic EPS was $0.43. The company declared dividends of $0.08 per Class A share and $0.07 per Class B share in the quarter; no dividends were declared in the comparable 2013 periods.
- Cash flow: Nine-month operating cash flow was $6.8, versus $2.5 a year earlier. Investing used $8.5, including $9.8 of capital expenditures; financing used $3.1. Cash decreased $3.6 to $52.1.
- Liquidity and debt: At June 27, cash was $52.1 and total debt was $7.9, giving cash net of debt of $44.2. The company reported a 4% debt-to-total-capitalization ratio. Current assets were $216.0 and current liabilities $72.4. The $90 revolving facility had no balance outstanding; seasonal borrowing is capped at $60.0 from June 30 through October 31.
- Working capital: Accounts receivable were $80.0, up $4.1 from June 2013, principally reflecting higher third-quarter sales. Inventory was $71.5, down $3.7 year over year.
Material changes versus the prior comparable period
- Quarterly sales rose 6%, which management attributed largely to customer orders shifting into the quarter after harsh winter weather delayed activity earlier in the fiscal year. Nine-month sales fell 2.5%.
- Quarterly operating profit fell to $9.3 from $16.1; nine-month operating profit declined to $18.0 from $30.3. Lower gross margins, impairment charges and higher operating expenses weighed on results.
- Outdoor Equipment recorded an $8.5 impairment charge: $6.5 for Jetboil-related goodwill and $2.0 for a tradename. The goodwill impairment measurement remained an estimate pending valuation work. The tradename’s fair value was reduced to $3.4.
- Quarterly results included a favorable $1.6 cash recovery from the Jetboil indemnity escrow, recorded in administrative expense. The claim was resolved and no further acquisition claims were pending.
- Effective tax rates increased to 53.5% for the quarter and 46.1% year to date, from 12.0% and 21.7%. Management cited the impairment’s lack of tax benefit, prior-year tax benefits that did not recur, and differences in tax jurisdictions.
Outlook, commentary and risks
The filing gives no specific sales, earnings or margin guidance. Management cautioned that seasonal results for the quarter and year to date are not necessarily indicative of full-year performance. It expected remaining restructuring liabilities to be settled by fiscal year-end and anticipated $0.2 of pension contributions through fiscal 2014.
Management cited delayed new-product shipments, challenging economic and diving-market conditions, lower-than-optimal production capacity, competitive pricing strategies and Watercraft international sales lost following restructuring. Risks include consumer spending, weather, customer collections, foreign exchange, interest rates, commodity and raw-material costs, acquisition integration, potential further asset impairments, litigation and compliance with debt covenants. About 18% of year-to-date revenue was denominated in foreign currencies; the company had no currency forwards or interest-rate swaps and was unhedged against floating-rate debt exposure. Approximately $47.5 of cash was held in foreign tax jurisdictions.
The company stated that pending litigation was not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; no material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- Resolve a material inconsistency in the MD&A: it reports quarterly net income of $10.105 million, while the financial statements report $4.698 million; $10.105 million is the statement’s income before tax. The MD&A also gives diluted EPS of $0.40, consistent with the statements, so the net-income narrative appears inconsistent.
- Review the final goodwill impairment valuation: the $6.475 million charge was expressly provisional, and the filing says its measurement had not been finalized.
- Assess whether the quarterly sales recovery was a timing shift or sustained demand, given lower year-to-date sales and the stated seasonal pattern.
- Monitor the elevated effective tax rate, valuation allowances, tax examinations in Italy and Germany, and the concentration of cash in foreign tax jurisdictions.
- Check ongoing liquidity, seasonal working-capital needs and compliance with credit-facility covenants, including the seasonal borrowing cap and restrictions on dividends and repurchases.