Johnson Outdoors Inc. — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended April 1, 2016; comparisons are to periods ended April 3, 2015. Amounts below are in millions unless noted. The company manufactures branded outdoor recreation products for fishing, diving, paddling and camping. Results are seasonal; the second fiscal quarter is within the primary selling season, so interim results are not necessarily indicative of the full year.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $134.2 | $133.1 | $219.5 | $203.9 |
| Gross profit / margin | $55.0 / 41.0% | $51.9 / 39.0% | $88.3 / 40.2% | $79.3 / 38.9% |
| Operating profit | $15.1 | $7.6 | $14.2 | $0.3 |
| Net income (loss) | $9.3 | $3.6 | $8.8 | $(0.5) |
| Diluted EPS | $0.93 | $0.36 | $0.88 | $(0.06) |
Q2 sales increased 1%; first-half sales rose 8%. Management attributed improved gross margins to lower material costs, favorable product mix and production-volume variances; first-half margin also benefited from pricing actions. Prior-year legal costs and higher sales volumes were key drivers of improved operating profit. Q2 operating expenses fell $4.5 million, including about $2.9 million of prior-year patent-litigation costs that did not recur and about $1.4 million of lower warranty and promotional expenses.
Segment trends: Q2 Marine Electronics sales increased 2% and Watercraft sales increased 6%; Outdoor Equipment declined 5% and Diving declined 5%. For the first half, Marine Electronics grew 13% and Watercraft 9%, while Outdoor Equipment fell 3% and Diving fell 6%. Marine Electronics was the largest profit contributor. Diving reported operating losses of $0.7 million for Q2 and $2.6 million for the first half.
Cash flow, liquidity and debt
- Six-month operating cash use was $35.5 million, versus $57.8 million a year earlier, largely reflecting higher earnings and lower receivables. Investing used $10.9 million, including $5.3 million for the SeaBear acquisition and $5.6 million of capital expenditures. Financing provided $27.8 million, including $30.0 million of net revolver borrowings.
- Cash was $50.9 million and total debt $37.5 million at April 1, 2016, leaving net cash of $13.4 million. Debt-to-total-capitalization was 15%, versus 23% at April 3, 2015. Debt was primarily revolver borrowings ($30.0 million) and term loans; the revolver rate was about 1.7% and term-loan rate 5.5%.
- Current assets were $248.1 million and current liabilities $86.1 million. Receivables were $102.8 million and inventory $89.8 million; inventory was up $10.0 million year over year, largely to support higher Marine Electronics orders. Management noted the seasonal working-capital cycle. Cash included $43.5 million held in bank accounts in foreign tax jurisdictions.
- The revolving facility permits up to $90 million of borrowing, subject to conditions and a seasonal $60 million borrowing limit from June 30 through October 31. It expires September 2018 and includes financial covenants and restrictions on dividends and repurchases.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or EPS guidance. Management said additional fiscal 2016 capital expenditures were expected to be funded through working capital or existing credit facilities.
- Goodwill headroom for the Diving reporting unit was approximately 9% above carrying value after management reassessed projections amid lower-than-expected results, market dislocation and economic factors. The company warned that weaker sales or margins, product acceptance, customer trends, discount rates or growth assumptions could lead to a future impairment charge.
- Risks identified include discretionary consumer spending, weather, foreign exchange, commodity and raw-material costs, customer payment and supplier performance, execution of strategic initiatives and acquisitions, debt-covenant compliance, and litigation. About 15% of first-half revenue was denominated in foreign currencies; the company held no currency forward contracts.
- The SeaBear acquisition, completed October 27, 2015, cost approximately $5.3 million and was funded with cash and credit facilities. Purchase accounting remained provisional; $1.1 million was placed in escrow for potential indemnity claims or repayment of prior government grants. Acquisition transaction costs recognized in the first half were $0.3 million.
- The company’s patent dispute with Garmin resulted in ITC exclusion and cease-and-desist orders effective January 19, 2016; the company appealed certain findings. A confidential settlement agreement was entered into May 5, 2016, after quarter-end, and the cases are to be dismissed with prejudice. Management said pending litigation was not expected to materially harm financial condition, results, liquidity or cash flows.
- Management estimated approximately $0.4 million of fiscal 2016 tax expense related to uncertain tax positions and projected $0.2 million of related interest. Tax examinations were ongoing in Italy and Germany.
Key facts for investors to verify
- Whether Marine Electronics growth and improved gross margins continue, and whether Diving sales and profitability recover.
- Whether seasonal working-capital demands, including receivables and inventory, convert into operating cash as expected.
- Revolver utilization, covenant headroom and the approximately $30.4 million of scheduled debt maturities in fiscal 2018.
- Progress on SeaBear integration and final purchase-price allocation, including any escrow claims or grant-repayment exposure.
- Changes in Diving’s goodwill impairment headroom and the assumptions supporting its valuation.
- Effects of the Garmin settlement and any remaining litigation, tax-contingency or customer-concentration exposure; one customer represented approximately $22.5 million of first-half sales across three segments.