Business context and reporting period
Johnson Outdoors Inc. designs, manufactures and markets seasonal outdoor recreation products for fishing, diving, paddling and camping. This unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2011, ended July 1, 2011; comparisons are with the periods ended July 2, 2010. Amounts below are in millions unless stated otherwise. The company cautions that seasonal results are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $122.5 | $124.0 | $330.0 | $307.3 |
| Gross profit | $50.5 | $51.5 | $134.1 | $123.2 |
| Gross margin | 41.3% | 41.5% | 40.6% | 40.1% |
| Operating profit | $11.8 | $13.4 | $21.9 | $17.9 |
| Net income | $8.1 | $10.4 | $15.4 | $12.4 |
| Diluted earnings per share | $0.83 | $1.09 | $1.58 | $1.30 |
| Interest expense | $1.0 | $1.4 | $2.8 | $4.0 |
Quarterly sales declined 1% reported and 4% excluding currency effects. Operating profit fell $1.6 million, reflecting a slight gross-margin decline and $0.6 million higher operating expenses. For the nine months, sales rose 7% and operating profit increased $4.0 million. Reported results benefited from favorable currency translation, particularly in diving; currency translation added $4.3 million to year-to-date sales.
Quarterly segment trends were mixed: marine electronics sales rose 4%, diving rose 15%, outdoor equipment fell 28%, and watercraft fell 11%. Year to date, marine electronics sales increased 18%, diving 8%, while outdoor equipment decreased 16% and watercraft 10%. Management attributed marine electronics growth to Minn Kota and Humminbird products, including new sonar offerings; outdoor equipment weakness primarily reflected lower military tent shipments amid federal budget uncertainty, and watercraft weakness reflected soft demand.
Cash, debt and liquidity
- Cash was $30.3 million at July 1, 2011; total debt was $22.7 million, leaving net cash of approximately $7.7 million. Debt was $31.9 million and the company had net debt of $6.4 million a year earlier. Debt to total capitalization declined to 13% from 20%.
- Revolver borrowings were $7.6 million, with approximately $43.6 million of remaining availability. The revolvers mature in November 2014 and carry an approximately 2.5% rate at quarter-end. Borrowings are subject to asset-based availability, financial covenants and seasonal pay-down requirements.
- Operating activities used $1.0 million in the first nine months, versus $2.8 million provided in the prior-year period. Higher earnings were outweighed by bonus and profit-sharing payments and working-capital investment. Capital expenditures were $6.0 million, compared with $5.7 million.
- Current assets were $192.7 million and current liabilities $74.8 million at July 1, 2011. Receivables were $80.9 million and inventory $73.7 million; inventory was up $11.4 million year over year, partly due to currency and marine-electronics growth.
Outlook, risks and notable items
- The filing provides no specific full-year earnings or sales guidance. Management emphasizes seasonal variability; the third quarter is within the primary selling season.
- Management cited risks including discretionary consumer spending, weather, raw-material costs and availability, foreign-exchange and interest-rate movements, working-capital execution, competition, litigation, and compliance with lender covenants. The company was unhedged against interest-rate risk on floating-rate debt at quarter-end.
- The company recorded a $0.3 million impairment on part of its Ferndale, Washington manufacturing facility, which it expected to sell within 12 months. It also reclassified $1.2 million of debt to current maturities, collateralized by property held for sale.
- Tax results included a $5.4 million reduction in the valuation allowance during the nine-month period, predominantly against U.S. deferred tax assets; the company still maintained a $33.5 million cumulative valuation allowance for the U.S. and certain foreign jurisdictions. Realization depends on future results and forecasts.
- On July 11, 2011, after quarter-end, the company announced an approximately $4.0 million purchase of Waypoint Technologies assets, including Lake Master, funded with cash and credit facilities. Purchase-price allocation remained to be completed.
- The company is pursuing insurance recovery for a prior $4.4 million Confluence settlement plus approximately $1.1 million of litigation costs; recovery is uncertain and no receivable was recorded. Management does not expect other pending litigation to materially affect the company, but notes outcomes are uncertain.
Most important facts for investors to verify
- Whether marine-electronics growth can offset continued weakness in outdoor equipment and watercraft, and how currency-adjusted sales develop.
- Working-capital needs, operating cash conversion, revolver availability and compliance with seasonal pay-down and other credit covenants.
- Whether the deferred-tax valuation allowance can be reduced further based on sustained earnings and the recoverability of deferred tax assets.
- The final Waypoint purchase-price allocation, integration and contribution, alongside the timing and outcome of the Ferndale property sale.
- Any developments in the Confluence insurance-recovery litigation and other claims that could affect earnings or cash flow.