Johnson Outdoors Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 27, 2013, compared with the three months ended December 28, 2012. Amounts are in U.S. dollars; financial amounts are shown in millions unless stated otherwise. The company makes seasonal outdoor recreation products for fishing, diving, paddling and camping. It cautions that this seasonally weak quarter is not necessarily indicative of full-year results.
Financial results
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $79.1 | $87.3 |
| Gross profit / gross margin | $29.9 / 37.8% | $33.8 / 38.7% |
| Operating income (loss) | $(2.9) | $1.5 |
| Net income (loss) | $(2.2) | $0.2 |
| Diluted EPS | $(0.22) | $0.02 |
| Cash used for operating activities | $(35.4) | $(22.7) |
Sales fell 9% year over year. Gross margin declined 0.9 percentage points; management cited competitive pricing, modest input-cost increases and production below optimal capacity. Operating expenses rose $0.5 million to $32.8 million. Lower gross profit drove the move to an operating loss; lower interest expense and improved other income partly offset the decline. The effective tax rate was 24.9%, versus 59.5%; the company recorded a $0.7 million tax benefit.
Segments and material changes
- Marine Electronics: Sales declined 10% to $48.2 million, primarily because of significant prior-year pre-season shipments and the timing of current-year new-product shipments. Operating profit fell to $2.3 million from $4.7 million.
- Outdoor Equipment: Sales were nearly flat at $8.4 million; operating loss was $0.2 million versus $0.2 million of profit. Lower military-tent sales offset incremental Jetboil sales.
- Watercraft: Sales declined 20% to $5.4 million, partly due to lost international sales following restructuring. Operating loss was $1.6 million, slightly improved from $1.7 million.
- Diving: Sales declined 6% to $17.3 million; operating profit fell to $0.1 million from $0.7 million. Management cited delayed new-product shipments and challenging European conditions.
Management attributed the consolidated sales decline to delayed new-product shipments and challenging economic conditions across segments. Other income was $0.2 million, compared with other expense of $0.5 million, largely reflecting higher rabbi-trust investment gains; foreign-exchange losses also decreased.
Cash, debt and liquidity
- Cash was $45.9 million at quarter-end, down $9.8 million during the quarter. Cash used in operations was $35.4 million, driven principally by seasonal working-capital needs, including a $19.0 million increase in receivables and an $11.3 million increase in inventory.
- Capital expenditures were $3.4 million. Financing provided $28.7 million, including $30.2 million of net revolving-credit borrowings; the company also paid $0.7 million in dividends and repurchased $0.6 million of shares.
- Total debt was $38.4 million, versus $39.5 million a year earlier and $8.3 million at September 27, 2013. The quarter-end balance included $30.2 million on the revolver. Management reported cash net of debt of $7.5 million and a debt-to-total-capitalization ratio of 17%.
- Current assets were $211.2 million and current liabilities $60.4 million. The $90 million revolving facility expires in 2018; its rate was approximately 1.4%. The company reported compliance with applicable requirements in this filing, but the facility includes leverage and interest-coverage covenants and limits certain dividends and repurchases.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided. Management said additional FY2014 capital expenditures, beyond the $3.4 million incurred, are expected to be funded from working capital or existing credit facilities. It expects to contribute $0.4 million to defined-benefit pension plans through fiscal year-end. The business’s primary selling season falls in the second and third fiscal quarters; the filing stresses that first-quarter results are not predictive of the full year.
- Risks include consumer demand and economic conditions, weather, shipment timing, raw-material costs and availability, foreign-currency and interest-rate changes, customer collections, acquisition integration, covenant compliance, and possible goodwill or intangible-asset impairment. Approximately 21% of quarterly revenue was denominated in foreign currencies; the company had no foreign-currency forwards or interest-rate swaps at quarter-end and was unhedged on floating-rate debt.
- The company is evaluating potential indemnity claims against Jetboil sellers; it could not estimate their amount. Approximately $3.2 million of the $15.4 million purchase price was placed in escrow, with any remaining balance due for release after the 15-month period, net of pending claims.
- Management did not expect pending litigation to have a material adverse effect. An Italian tax examination was ongoing; the company anticipated approximately $0.35 million of FY2014 tax expense related to uncertain tax positions and projected $0.10 million of accrued interest.
- Contractual obligations totaled $133.5 million, including $71.4 million of open purchase orders and $18.3 million of operating leases. The company reported no other off-balance-sheet arrangements.
Important facts for investors to verify
- Whether delayed product shipments reverse in subsequent quarters, particularly in Marine Electronics and Diving.
- Whether new-product inventory converts to sales and operating cash flow, and whether margin pressure and below-capacity production persist.
- Revolver availability, covenant headroom and the company’s ability to manage seasonal working-capital needs; also clarify the availability and practical use of cash held in foreign jurisdictions.
- The outcome and potential value of the Jetboil indemnity claims and the Italian tax examination.
- Progress against restructuring-related settlements and any indicators requiring an interim goodwill or intangible-asset impairment test.