Johnson Outdoors Inc. — Form 10-Q summary
Reporting period: Third quarter and first nine months of fiscal 2012, ended June 29, 2012. Comparisons are with the periods ended July 1, 2011. The company makes seasonal outdoor recreation products for fishing, diving, paddling and camping; its primary selling season is the second and third fiscal quarters. Dollar amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $128.595 | $122.481 | $337.497 | $330.045 |
| Gross profit / margin | $54.247 / 42.2% | $50.528 / 41.3% | $135.875 / 40.3% | $134.141 / 40.6% |
| Operating profit | $14.222 | $11.810 | $24.484 | $21.899 |
| Income before taxes | $14.044 | $9.106 | $24.220 | $17.042 |
| Income tax expense | $5.049 | $0.988 | $10.886 | $1.675 |
| Net income | $8.995 | $8.118 | $13.334 | $15.367 |
| Diluted EPS, Class A and B | $0.91 | $0.83 | $1.35 | $1.58 |
- Revenue and segments: Q3 sales rose 5%; nine-month sales rose 2%. Marine Electronics increased 9% for the quarter and 7% year to date, supported by Minn Kota, Humminbird and product innovation. Outdoor Equipment rose 8% in Q3 but fell 13% year to date, primarily due to lower U.S. military tent demand. Watercraft sales were slightly higher, partly from low-margin retail orders. Diving sales declined 5% in Q3 and 2% year to date, with foreign exchange weighing on results.
- Profitability: Q3 gross margin improved on volume efficiencies, Diving price increases and prior-year Marine Electronics inventory reserves. Nine-month margin slipped because of lower-margin product mix. Operating profit improved in both periods. Nine-month net income and diluted EPS fell despite higher operating profit, chiefly reflecting substantially higher income tax expense.
- Cash flow: Nine-month operating cash flow was $7.005 versus cash used of $1.027 a year earlier; management attributed the improvement significantly to the decrease in deferred tax assets. Investing cash outflow was $7.722, including $8.930 of capital expenditures and $1.208 of property-sale proceeds. Financing cash outflow was $2.233. Cash decreased $5.769 during the nine months to $38.745.
- Liquidity and debt: At June 29, cash was $38.745 and total debt was $12.476, or net cash of $26.269. Total debt was $22.671 at the prior-year comparable date; the debt-to-total-capitalization ratio was 7%, down from 13%. Revolver availability was approximately $46.1. Current assets were $196.732 and current liabilities $73.295. Approximately $30.3 of cash was held in foreign taxing jurisdictions.
Material changes and unusual items
- The nine-month results include a $3.5 insurance settlement recovery related to an intellectual-property dispute, recorded in operating expenses. This benefited reported operating profit.
- The company reported restructuring and related costs in Watercraft; management cited $1.246 of Q3 costs. The restructuring accrual on the balance sheet was $0.888 at June 29. The plan, announced July 11, 2012, includes European sales/distribution changes, closure of French and U.K. sales offices and a Bellingham, Washington facility, and approximately 28 job eliminations. Expected total cost is about $2.2, completion is expected within 12 months, and annual savings of about $2.0 are targeted by the end of fiscal 2014.
- A $0.609 pre-tax trademark impairment in Marine Electronics reduced the trademark’s fair value to zero.
- The effective tax rate increased to 36.0% for Q3 and 44.9% year to date, from 10.8% and 9.8%. The company cited the end of a U.S. valuation allowance, foreign losses for which no tax benefit was recognized, and a prior-year benefit from recovering alternative minimum taxes.
- Other income/expense was volatile: foreign currency exchange gains were $0.952 in Q3 and $0.843 year to date, while forward contracts recorded losses of $0.304 and $0.316, respectively. The stronger U.S. dollar also drove a $5.682 nine-month currency translation loss in comprehensive income.
Outlook, risks and contingencies
The filing provides no specific consolidated sales or earnings guidance. Management expects the restructuring to cost approximately $2.2 and target annual savings of approximately $2.0 by the end of fiscal 2014. Further capital expenditures in fiscal 2012 are expected to be funded through working capital or existing credit facilities. Results are seasonal and the reported interim periods are not necessarily indicative of full-year results.
Key risks cited include consumer demand and economic conditions, execution of the strategic plan, working-capital management, compliance with lender covenants, customer collections, foreign exchange, interest rates and commodity costs, raw-material supply, weather, litigation, and possible goodwill or other asset impairments. Revolver covenants restrict certain dividends, borrowing, acquisitions and divestitures and include fixed-charge coverage, net worth, EBITDA, capital expenditure and seasonal paydown requirements. The company was undergoing tax examinations in the Netherlands and Japan; examinations in Canada, Italy and the U.S. concluded during Q3 without material changes. Flood-related insurance recovery remained under negotiation; the amount, if any, was not estimable. Management said pending litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- How much of nine-month operating profit reflects the $3.5 insurance recovery, restructuring costs and $0.609 impairment, and whether planned savings are achieved.
- Whether Marine Electronics growth continues and whether Outdoor Equipment and Diving recover from year-to-date declines.
- How the higher effective tax rate, deferred tax asset realizability and open foreign tax examinations affect future earnings and cash taxes.
- Seasonal cash needs, revolver availability and covenant compliance, including the required annual seasonal paydown.
- Any further proceeds from flood-related insurance claims and any impairment indicators for goodwill or other long-lived assets.