Johnson Outdoors Inc. — Form 10-Q Summary
Business context and period. The filing covers the quarter and nine months ended June 28, 2013. Johnson Outdoors makes branded outdoor recreation products for fishing, camping, paddling and diving. Its business is seasonal, with the second and third fiscal quarters in its primary selling season; interim results are not necessarily indicative of full-year results.
Financial performance and position
Amounts below are in millions of dollars unless noted otherwise.
| Metric | Three months ended June 28, 2013 | Three months ended June 29, 2012 | Nine months ended June 28, 2013 | Nine months ended June 29, 2012 |
|---|---|---|---|---|
| Net sales | $129.8 | $128.6 | $349.1 | $337.5 |
| Gross profit | $54.3 | $54.2 | $142.2 | $135.9 |
| Gross margin | 41.9% | 42.2% | 40.7% | 40.3% |
| Operating profit | $16.1 | $14.2 | $30.3 | $24.5 |
| Net income | $13.7 | $9.0 | $22.8 | $13.3 |
| Diluted EPS | $1.37 | $0.91 | $2.30 | $1.35 |
- Cash flow: Nine-month operating cash flow was $2.5 million, versus $7.0 million a year earlier. Investing used $26.4 million, including $15.4 million for Jetboil and $10.9 million of capital expenditures. Financing provided $7.8 million. Cash declined $17.2 million to $41.7 million.
- Liquidity and debt: At June 28, cash was $41.7 million and total debt was $17.5 million; management reported cash net of debt of $24.2 million. Revolver borrowings were $9.0 million, with approximately $47.6 million of remaining availability. Total current assets were $203.5 million and current liabilities $76.7 million.
- Margins and expenses: Quarterly gross margin slipped 0.3 percentage points, attributed to pricing and promotional adjustments. Nine-month gross margin improved 0.4 points, mainly from Diving efficiencies and exiting some low-margin Watercraft channels. Nine-month interest expense fell to $1.1 million from $2.0 million.
Changes versus the prior comparable period
- Quarterly sales rose 1%; nine-month sales rose 3%. Quarterly net income increased to $13.7 million from $9.0 million, and nine-month net income rose to $22.8 million from $13.3 million. Lower tax expense contributed materially: the effective tax rate was 12.0% for the quarter and 21.7% year to date, versus 36.0% and 44.9%, respectively. Management attributed the reduction primarily to reversal of valuation allowances on foreign tax credits; the year-to-date comparison also reflects the retroactive R&D credit.
- Marine Electronics sales grew 5% in the quarter and 8% year to date, supported by new products, including i-Pilot Link. Outdoor Equipment sales grew 21% and 19%, respectively, primarily including Jetboil. Watercraft sales declined 14% in the quarter and 15% year to date; Diving sales declined 6% and 5%.
- Operating profit increased to $16.1 million in the quarter and $30.3 million year to date. The prior-year nine-month period included a $3.5 million insurance settlement benefit; the current period included flood-related insurance gains, including $0.8 million year to date.
- Cash net of debt decreased from $26.3 million at June 29, 2012 to $24.2 million. Total debt rose from $12.5 million to $17.5 million, while the debt-to-total-capitalization ratio increased from 7% to 8%.
Outlook, commentary, risks and unusual items
- No specific full-year sales or earnings guidance is provided in the filing. Management notes seasonality and says additional fiscal 2013 capital expenditures are expected to be funded through working capital or existing credit facilities.
- Jetboil was acquired on November 14, 2012 for $15.4 million, funded with cash and credit facilities. The company expects to expand Jetboil sales through its distribution network and sees potential benefits to other Outdoor Equipment brands. Jetboil contributed $7.7 million of sales and $0.4 million of operating profit from acquisition through June 28, 2013.
- A Watercraft restructuring involving European distribution changes, facility closures and approximately 24 eliminated positions was expected to cost about $2.65 million and be completed over the next three months. The remaining accrual was $0.65 million at quarter-end.
- Management identifies risks including economic and discretionary-spending changes, customer collections, execution of restructuring and acquisitions, credit-covenant compliance, foreign exchange, interest and commodity costs, raw-material availability, weather, litigation and potential goodwill or intangible-asset impairment. The company was unhedged against interest-rate risk on floating-rate debt; a 100-basis-point rate move was estimated to affect annual pretax income by up to $0.24 million.
- The company reported no material pending litigation exposure in management’s view and no material changes to the risk factors in its latest Form 10-K. It was undergoing an Italian tax examination for 2011; certain tax jurisdictions also retain open examination years.
Important facts for investors to verify
- Whether Marine Electronics growth and Jetboil’s contribution can offset continued weakness in Watercraft and Diving.
- Whether the lower effective tax rate, including the foreign tax-credit valuation-allowance reversal, is sustainable; the filing does not provide a clear recurring tax-rate outlook.
- Working-capital cash conversion: operating cash flow was only $2.5 million year to date despite higher earnings, with substantial cash use from receivables and inventory.
- Revolver availability, seasonal pay-down requirements and compliance with financial covenants as the seasonal working-capital cycle turns.
- Completion costs and execution of the Watercraft restructuring, and the expected operating benefits from integrating Jetboil.
- Exposure to foreign currencies, floating interest rates, raw-material prices and possible impairment of goodwill or intangible assets.