JOHNSON OUTDOORS INC quarterly report, Q2 FY2012

Johnson Outdoors Inc. — Q2 2012 Form 10-Q

Business context and reporting period. The company manufactures seasonal outdoor recreation products for fishing, diving, paddling and camping. This unaudited report covers the quarter and six months ended March 30, 2012; the comparable periods ended April 1, 2011. Results are seasonal and are not necessarily indicative of the full fiscal year.

Financial performance

Quarterly operating margin was approximately 10.9%, up from 8.9%; six-month operating margin was approximately 4.9%, roughly flat. The $3.5 million insurance settlement helped lift quarterly operating profit, while higher income tax expense weighed on net income. Effective tax rates were 45.1% for the quarter and 57.4% year to date, versus 15.9% and 8.6% in the prior-year periods.

Balance sheet, debt and liquidity

At March 30, 2012, cash was $29.6 million, total debt $51.5 million, and net debt $21.8 million. Revolver borrowings were $39.8 million, with approximately $31.2 million of remaining availability; the revolvers mature in November 2014 and carry an approximately 2.50% rate. Current assets were $233.8 million and current liabilities $115.2 million. Six-month cash declined $14.9 million to $29.6 million. Investing activities used $3.8 million, including $5.0 million in capital expenditures and $1.2 million in proceeds from a property sale; financing activities provided $36.7 million.

Changes, outlook and risks

• Marine Electronics sales rose 2% in the quarter and 5% year to date, supported by Minn Kota and Humminbird products. Outdoor Equipment sales fell 8% quarterly and 24% year to date, mainly due to weaker military tent demand. Watercraft quarterly sales declined 6%; Diving sales increased 2% quarterly but decreased 1% year to date.
• Gross margin fell due to unfavorable product mix and inventory reserves associated with restructuring in southern Europe. Year-to-date operating expenses also reflected higher bad-debt expense in southern Europe, health insurance and severance costs.
• Management gave no quantified revenue or earnings guidance. It noted that the second quarter is within the primary selling season and that full-year results may differ due to seasonality. Additional fiscal 2012 capital spending was expected to be funded from working capital or credit facilities.
• Key disclosed risks include consumer demand and economic conditions, military tent demand, foreign exchange and commodity movements, raw-material availability, customer collections, credit-covenant compliance, litigation, adverse weather and possible goodwill or other asset impairment. The company was unhedged for floating-rate debt exposure. It also maintained valuation allowances in certain foreign and U.S. tax jurisdictions and faced tax examinations, including an ongoing Japan audit.
• The company was still negotiating additional insurance recoveries related to the September 2011 Binghamton flood; the amount, if any, could not be estimated. It reported $3.0 million of cumulative related costs, $2.6 million of reimbursements and a $0.1 million receivable. Separately, the $3.5 million insurance settlement received in March 2012 resolved an older insurer claim.

Investor verification priorities

1. Assess whether gross-margin pressure and weakness in Outdoor Equipment, particularly military tent sales, persisted in later periods.
2. Verify the sustainability of earnings excluding the one-time $3.5 million settlement and the effects of the elevated tax rate.
3. Monitor seasonal working-capital cash needs, revolver utilization, remaining availability, and compliance with financial covenants and the required seasonal paydown.
4. Track collections and credit exposure in southern Europe, tax-audit outcomes, and any further flood-related insurance recoveries.