Johnson Outdoors Inc. — Fiscal 2019 First Quarter
Reporting period: Three months ended December 28, 2018; comparison is the three months ended December 29, 2017. Amounts are in thousands except per-share data. Johnson Outdoors makes seasonal outdoor recreation products for fishing, camping, watercraft recreation and diving. Management cautions that first-quarter results are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $104,440 | $116,579 | Down 10% |
| Gross profit | $44,319 | $48,811 | Down 9% |
| Gross margin | 42.4% | 41.9% | Up 0.5 percentage point |
| Operating profit | $5,978 | $7,037 | Down 15% |
| Profit before income taxes | $4,331 | $8,324 | Down 48% |
| Net income | $3,521 | $235 | Up from prior year |
| Diluted EPS | $0.35 | $0.02 | Up from prior year |
| Cash used for operating activities | $39,195 | $23,941 | Greater use of cash |
Net income increased mainly because the prior-year quarter included a $6,763 provisional tax expense from the Tax Cuts and Jobs Act. The effective tax rate was 18.7%, versus 97.2% a year earlier. The current-quarter rate also reflected a $524 tax benefit from equity compensation. Other expense was $2,150, compared with other income of $1,157, principally reflecting $2,277 of investment losses on deferred-compensation plan assets; related compensation expense was lower.
Segment performance and material changes
- Fishing: Sales fell 11% to $78,797, primarily from timing of new-product releases and shipments. Segment operating profit declined to $11,422 from $14,065.
- Diving: Sales fell 11% to $15,538, reflecting weaker Asian markets, closure of the Japan entity and unfavorable currency translation. Operating loss widened to $707 from $385.
- Camping: Sales were essentially flat at $5,820; operating loss narrowed to $686 from $724.
- Watercraft Recreation: Sales were essentially flat at $4,325; operating loss widened to $1,492 from $1,144, with challenging market conditions cited.
Gross margin improved mainly from favorable product mix. Operating expenses declined $3,433 to $38,341, partly because market-related losses on deferred-compensation assets reduced associated compensation expense, as well as lower sales-volume-related expenses. Tariffs on certain imports from China increased cost of sales by approximately $700 year over year.
Cash, debt and liquidity
Cash and cash equivalents were $72,076 at quarter-end, down from $121,877 at September 28, 2018. Short-term investments were $32,138; combined cash and short-term investments totaled $104,214, compared with $78,319 a year earlier. The quarter’s $49,801 decrease in cash reflected seasonal working-capital needs, including inventory investment. Operating cash use was $39,195; investing cash use was $7,505, including $4,081 of capital expenditures; financing cash use was $2,091, including dividends and treasury-stock purchases.
The company had no debt at quarter-end and reported a 0% debt-to-capitalization ratio. Its unsecured revolving facility provides up to $75,000, with a lender-approved accordion feature of up to an additional $50,000; the facility includes leverage and interest-coverage covenants. Inventory was $116,278, up $25,417 from the year-earlier quarter, partly because purchases were advanced in anticipation of tariffs. Approximately $36,044 of cash and cash equivalents was held in foreign tax jurisdictions.
Outlook, risks and unusual items
- No specific sales or earnings guidance is provided. Management says additional fiscal 2019 capital expenditures, if any, are expected to be funded by working capital.
- Seasonality is significant: the first quarter precedes the primary selling season for warm-weather products. Management says quarterly results should not be taken as a full-year forecast.
- Key stated risks include consumer demand and economic conditions, trade policy and tariffs, foreign exchange and commodity costs, raw-material availability and supply-chain disruption, customer credit, weather, litigation, and execution of strategic initiatives and acquisitions.
- The company had no foreign-currency forward contracts at quarter-end; approximately 13% of quarterly revenue was denominated in currencies other than the U.S. dollar.
- The company had not chosen an accounting policy for GILTI deferred taxes and said it could not yet reasonably estimate certain tax consequences of potential distributions from foreign subsidiaries. Tax examinations were ongoing in Germany and Italy.
- Management did not believe pending litigation would materially adversely affect financial condition, results, liquidity or cash flows. It reported no material changes to previously disclosed risk factors.
Facts investors should verify
- Whether the sales declines in Fishing and Diving persist or reflect timing and market-specific factors.
- Whether elevated inventory and tariff-related purchases convert into sales and cash, and the extent of future tariff costs.
- How recurring operating performance compares with reported net income, given the prior-year tax charge and current-quarter deferred-compensation investment losses.
- Available liquidity under the revolver, covenant headroom, and cash that may be constrained by its location in foreign jurisdictions.
- Any subsequent developments in GILTI and foreign-subsidiary tax exposure, as well as the German and Italian tax examinations.