Johnson Outdoors Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 29, 2017, compared with the three months ended December 30, 2016. Unless noted otherwise, amounts below are in U.S. dollars and millions. Johnson Outdoors makes seasonal outdoor recreation products for fishing, camping, watercraft recreation and diving. The company cautions that its first-quarter results, which precede the primary selling season for warm-weather products, are not necessarily indicative of full-year results.
Financial performance
- Revenue: $116.6 million, up 24% from $93.7 million. Foreign currency translation contributed about 1% to consolidated sales growth.
- Profit and margins: Gross profit was $48.8 million; gross margin improved to 41.9% from 39.0%, mainly on favorable product mix and volume-related overhead efficiencies. Operating profit rose to $7.0 million from $0.5 million. Net income was $0.2 million, or $0.02 per diluted share, versus $4.1 million, or $0.40 per diluted share.
- Expenses and other items: Operating expenses increased to $41.8 million from $36.1 million, primarily due to sales-volume-related costs and digital initiatives. Other income was $1.2 million versus other expense of $0.1 million; current-quarter foreign-exchange and deferred-compensation investment gains contributed to other income.
- Tax: Income tax expense was $8.1 million, an effective rate of 97.2%. This included a provisional $6.4 million charge related to the 2017 U.S. Tax Act. The company had not completed its tax accounting and said estimates could change. The prior-year quarter included a roughly $4.2 million foreign-tax-credit benefit associated with repatriation of approximately $22 million.
- Cash flow: Operating activities used $23.9 million, versus $34.3 million used in the prior-year quarter. Investing activities provided $34.9 million, including approximately $41.3 million from sales of short-term investments, while capital expenditures were $6.5 million (up from $2.7 million). Financing activities used $1.7 million, primarily for dividends and treasury-stock purchases. Cash and cash equivalents increased $9.2 million to $73.0 million.
- Liquidity and debt: Cash and short-term investments totaled $78.3 million at quarter-end. Debt was zero, compared with $13.0 million at December 30, 2016. The company entered a new unsecured revolving facility with $75 million of capacity, plus a potential $50 million accordion subject to conditions and lender approval; it expires November 15, 2022 and includes leverage and interest-coverage covenants.
- Balance sheet and commitments: Current assets were $244.6 million and current liabilities $85.6 million. Inventories were $90.9 million, up $14.8 million year over year. Contractual obligations totaled $121.4 million, including $98.1 million of open purchase orders and $22.7 million of operating lease obligations.
Material changes and segment results
- Fishing: Sales rose 33% to $88.9 million; operating profit increased to $14.1 million from $7.2 million. Trolling motors and large-display HELIX fish finders drove growth. Management described sales volumes as record-setting.
- Camping: Sales increased 2% to $5.8 million, primarily on military tent sales; operating loss narrowed to $0.7 million.
- Watercraft Recreation: Sales declined 30% to $4.4 million due mainly to a weaker recreational kayak market; operating loss widened to $1.1 million.
- Diving: Sales increased 17% to $17.4 million, supported by new products and favorable currency translation; operating loss narrowed to $0.4 million.
- Consolidated operating profit improved by $6.6 million year over year, principally from higher sales volume and gross margin. The company also reported that one customer represented approximately $18.8 million of sales across Fishing, Camping and Watercraft Recreation, versus no customer exceeding 10% of sales in the prior-year quarter.
Outlook, risks and contingencies
- No specific full-year sales or earnings guidance is provided in the filing. Management notes that the first quarter is seasonally weak and cautions against extrapolating its results to the fiscal year.
- The Tax Act reduced the U.S. federal corporate tax rate to 21%; the company used a weighted statutory rate of 24.5% for fiscal 2018 and expected 21% in later fiscal years. The transition-tax and deferred-tax remeasurement amounts were provisional and could change with further analysis or guidance.
- The company anticipated $1.1 million of pension contributions during the remainder of fiscal 2018. It also planned global systems infrastructure upgrades; additional fiscal 2018 capital spending was expected to be funded from working capital.
- Key disclosed risks include consumer demand and discretionary spending, execution of growth and digital initiatives, customer payment ability, foreign exchange, interest rates and commodity costs, supply-chain disruption, weather, litigation, acquisition integration and potential goodwill or long-lived-asset impairment. About 15% of quarterly revenue was denominated in currencies other than the U.S. dollar; no foreign-currency forward contracts were held at quarter-end.
- Management did not believe pending litigation would have a material adverse effect. The company was undergoing an income-tax examination in Italy and disclosed uncertain tax positions and related projected interest and expense.
Important facts for investors to verify
- How the provisional $6.4 million Tax Act charge, including the $2.0 million transition-tax estimate and $4.4 million deferred-tax impact, changes as the company finalizes its calculations.
- Whether Fishing’s unusually strong growth and improved gross margin persist through the main selling season, and whether Watercraft Recreation’s weakness continues.
- How seasonal receivables, inventory, purchase commitments and operating cash use evolve as the selling season progresses.
- Capital spending for the systems upgrade, pension funding needs, and compliance with the new revolving facility’s financial covenants.
- Potential effects of foreign-exchange, commodity, supply-chain and customer-concentration risks on future results.