Johnson Outdoors Inc. — Q3 FY2023 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2023; comparisons are with the quarter and nine months ended July 1, 2022, unless otherwise noted. Dollar amounts below are in millions.
Business context and results
Johnson Outdoors manufactures branded outdoor recreation products for fishing, camping, watercraft recreation and diving. The third quarter is typically part of its primary warm-weather selling season. Management cautions that seasonality and uncertain consumer demand mean interim results are not necessarily indicative of full-year results.
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $187.0 | $203.8 | $567.5 | $547.0 |
| Gross profit | $77.6 | $73.5 | $215.7 | $202.7 |
| Gross margin | 41.5% | 36.1% | 38.0% | 37.1% |
| Operating expenses | $60.1 | $49.7 | $181.4 | $149.7 |
| Operating profit | $17.4 | $23.8 | $34.3 | $53.0 |
| Net income | $14.8 | $14.1 | $35.5 | $34.8 |
| Diluted EPS | $1.44 | $1.38 | $3.47 | $3.42 |
For the nine months, operating cash flow was $45.2, versus cash used of $86.4 in the prior-year period. Investing activities used $45.1, including $40.7 of investment purchases, partly offset by $15.0 of proceeds from the tent-product sale; capital expenditures were $19.4. Financing activities used $9.6, primarily for dividends and treasury-stock purchases. Cash and cash equivalents ended at $122.6.
Material changes and liquidity
- Quarterly sales fell 8%, while nine-month sales rose 4%. Q3 Fishing sales increased 1%; Camping declined 50%, Watercraft Recreation declined 28%, and Diving was approximately flat. Year-to-date Fishing and Diving sales increased 15% and 8%, respectively, while Camping and Watercraft Recreation fell 35% and 36%.
- Management attributed weaker Camping and Watercraft Recreation demand to declines from pandemic-era elevated participation and demand. Fishing’s year-to-date growth reflected improved component availability and price increases; Diving benefited from the recovery in global tourism.
- Quarterly gross margin improved 5.4 percentage points, driven by price increases and lower freight and certain material costs. Operating expenses rose 21% in the quarter, including higher warranty, marketing and deferred-compensation expense; operating profit consequently declined.
- Nine-month operating profit declined despite higher sales, mainly because of increased operating expenses, including warranty, marketing, compensation and professional-services costs. Net income increased slightly, supported by other income and higher interest income.
- At June 30, cash and cash equivalents plus short- and long-term investments totaled $163.3; the company separately cited cash, cash equivalents and short-term investments of $149.2. There was no debt outstanding. The unsecured revolving facility provides up to $75.0, with a lender-approved accordion option of up to $50.0; it expires July 15, 2026. Lease liabilities totaled $54.7.
- Inventories were $235.1, down from $251.0 at July 1, 2022. The year-to-date operating cash-flow improvement was primarily attributed to lower inventory purchases than in the prior-year period.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue, earnings or margin guidance. Management says the economic environment and consumer purchasing actions remain highly uncertain and cannot be predicted.
- In the second quarter, the company sold its Military and Commercial Tent product lines for $15.0; after a working-capital true-up, the recorded net gain was approximately $6.6. The sale did not include the Eureka! brand or consumer/recreational camping business. The gain contributed to nine-month other income.
- Deferred-compensation plan asset gains and losses affect both other income/expense and operating expenses; management said the related expense increases were offset by investment gains in the periods discussed. These items affect comparisons and should be distinguished from underlying operating performance.
- Risks cited include changing consumer confidence and discretionary spending, lower outdoor-recreation participation, supply-chain and component availability, input costs, foreign exchange and interest rates, competition, customer creditworthiness, litigation, and potential goodwill or long-lived-asset impairments. Management reported no material change in risk factors from the prior Form 10-K and no pending litigation believed likely to have a material adverse effect.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand and sales stabilize in Camping and Watercraft Recreation after the post-pandemic declines.
- Whether improved gross margins persist as freight and material costs, pricing and product mix change.
- How much earnings and operating cash flow rely on the tent-sale gain, investment gains and deferred-compensation mark-to-market effects.
- Inventory composition and sell-through, given the shift toward finished goods and the continuing uncertainty in consumer demand.
- Availability and covenant terms of the revolving facility, and the company’s ability to fund lease commitments, capital expenditures and dividends without borrowing.