Johnson Outdoors Inc. — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended March 29, 2013. The company makes seasonal outdoor recreation products for fishing, diving, paddling and camping. Unless stated otherwise, amounts below are USD millions.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Net sales | $132.1 | $128.7 | $219.4 | $208.9 |
| Gross profit / margin | $54.1 / 40.9% | $50.5 / 39.3% | $87.9 / 40.1% | $81.6 / 39.1% |
| Operating profit | $12.6 | $14.0 | $14.2 | $10.3 |
| Net income | $8.9 | $7.3 | $9.2 | $4.3 |
| Diluted EPS, Class A and B | $0.90 | $0.74 | $0.93 | $0.44 |
Q2 sales increased 3%; first-half sales increased 5%. Q2 operating profit declined despite higher gross profit, principally because the prior-year quarter included a $3.5 million insurance settlement recorded as an operating expense reduction, while current-year R&D and Jetboil expenses increased. First-half operating profit improved 38%. Effective tax rates fell to 31.6% for Q2 and 32.8% year to date, from 45.1% and 57.4%, respectively, supporting higher net income.
Cash flow, debt and liquidity
- Six-month operating cash flow was negative $46.5 million, nearly unchanged from negative $46.8 million. Working-capital use—especially receivables and inventory—largely offset increased earnings.
- Investing cash outflow was $21.5 million, including $15.4 million for the Jetboil acquisition and $6.1 million of capital expenditures. Financing provided $50.9 million, primarily from $52.0 million of revolving-credit borrowings. Cash declined $18.5 million to $40.4 million.
- At March 29, total debt was $60.6 million, including $52.0 million of revolver borrowings; cash netted against debt was $40.4 million, giving net debt of $20.2 million. Management reported net debt of $21.8 million a year earlier and debt-to-total-capitalization of 25%, versus 23%.
- Revolver capacity was up to $75 million, with approximately $21.5 million remaining available. Revolver borrowings bore approximately 2.50% interest; term loans bore 5.25%. Revolvers mature in November 2014 and include financial covenants and a seasonal paydown requirement. Cash and cash equivalents included approximately $33.7 million held in foreign tax jurisdictions.
- Current assets were $248.0 million and current liabilities $132.5 million. Receivables were $109.2 million and inventories $85.2 million. The filing attributes the large receivables increase from fiscal year-end to seasonality.
Business changes and segment results
- Marine Electronics led growth: Q2 sales rose 9% to $87.8 million and operating profit increased to $15.6 million from $12.3 million. Management cited demand for i-Pilot Link, distributor sales and pre-season shipment timing.
- Outdoor Equipment Q2 sales increased 7% to $10.1 million, mainly due to Jetboil, but the segment recorded a $0.3 million operating loss versus $0.8 million profit. Jetboil contributed $4.3 million in sales and $0.1 million in operating profit from acquisition through March 29.
- Watercraft Q2 sales fell 19% to $13.8 million and the segment recorded a $0.5 million operating loss. The filing cites cold-weather delayed season, lower sales of low-margin products, and disruption from the UK distributor transition.
- Diving Q2 sales fell 6% to $20.8 million and operating profit declined to $1.4 million from $1.7 million; management cited weaker demand in southern Europe and the U.S. and adverse currency effects.
- Jetboil was acquired November 14, 2012 for $15.4 million, funded with cash and credit facilities. Purchase accounting remained provisional; $3.2 million was placed in escrow for potential indemnity claims. The company expects expanded distribution and growth, but did not provide quantified acquisition targets.
- The Watercraft restructuring, announced in 2012, involves European distribution changes, consolidation of U.S. operations in Old Town, Maine, and approximately 24 eliminated positions. Estimated total cost is $2.35 million; $0.77 million remained accrued at quarter-end, and completion was expected within six months.
Outlook, risks and unusual items
The filing gives no specific revenue, earnings or margin guidance. Management cautions that seasonal interim results are not necessarily indicative of full-year results; the second and third fiscal quarters are the primary selling season. The company expects remaining fiscal 2013 capital expenditures to be funded through working capital or existing credit facilities and anticipates $0.81 million of pension contributions through September 27, 2013.
Key risks cited include consumer spending and weather, execution of growth initiatives and acquisition integration, customer collections, covenant compliance, foreign-exchange and interest-rate movements, commodity costs and supply availability, litigation, and possible goodwill or long-lived-asset impairment. The company had no interest-rate swaps and was unhedged on floating-rate debt; foreign-currency forwards covered some exposures. Approximately 19% of first-half revenue was denominated in foreign currencies.
Other items to note: foreign-currency translation reduced Q2 comprehensive income by $3.3 million; the company continued to pursue uncertain additional insurance recoveries related to the 2011 Binghamton flood (a $0.3 million receivable was recorded). Management said pending litigation was not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether seasonal working-capital needs and the $52.0 million revolver balance can be managed while meeting the required seasonal paydown and other covenants.
- Whether Marine Electronics growth and margin improvement persist, and whether Watercraft sales recover following weather and distribution disruptions.
- Jetboil’s contribution, integration progress and final purchase-price allocation, including the status of the indemnity escrow.
- Progress and remaining costs of the Watercraft restructuring, as well as the timing and amount of any further flood-insurance recoveries.
- Tax-rate sustainability given deferred-tax valuation allowances, uncertain tax positions and ongoing tax examinations.