Johnson Outdoors Inc. — Q2 2014 Form 10-Q
Business context and period. The filing covers the fiscal quarter and six months ended March 28, 2014. Johnson Outdoors makes seasonal outdoor recreation products for fishing, diving, paddling and camping. The second and third fiscal quarters are generally its primary selling season; results for the first half are not necessarily indicative of full-year results.
Financial performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $124.3 | $132.1 | $203.4 | $219.4 |
| Gross profit | $48.8 | $54.1 | $78.8 | $87.9 |
| Gross margin | 39.3% | 40.9% | 38.7% | 40.1% |
| Operating profit | $11.5 | $12.6 | $8.6 | $14.2 |
| Net income | $7.4 | $8.9 | $5.2 | $9.2 |
| Diluted EPS | $0.67 | $0.90 | $0.30 | $0.93 |
| Operating cash flow | Not provided by quarter | $(41.9) | $(46.5) | |
| Capital expenditures | Not provided by quarter | $6.7 | $6.1 |
Q2 sales declined 6%; first-half sales declined 7%. First-half operating profit fell 39% year over year. Lower operating expenses partly offset lower sales, while gross margin weakened in both periods.
Liquidity, debt and other metrics
- At March 28, cash and cash equivalents were $48.7 million, total debt was $50.2 million and net debt was $1.5 million. Debt to total capitalization was 20%, versus 25% a year earlier.
- Cash declined $7.0 million from September 27, 2013. First-half operating cash use was driven largely by working-capital needs, including a $54.8 million increase in accounts receivable and an $8.7 million increase in inventories in the cash flow statement.
- Cash was $48.7 million versus $40.4 million a year earlier. Approximately $41.8 million was held in bank accounts in foreign tax jurisdictions.
- The revolving credit facility allows borrowings up to $90 million, subject to its terms, with a $60 million seasonal borrowing limit from June 30 through October 31. Revolver borrowings were $42.0 million; its rate was approximately 1.4%. Term loans carried a 5.25% rate.
- Contractual obligations totaled $129.5 million, including $56.4 million of open purchase orders and $16.6 million of operating lease obligations. The company anticipated $0.365 million of pension contributions through fiscal year-end.
Material changes and segment performance
- Management attributed the sales decline primarily to harsh winter weather shifting customer order timing, delayed new-product shipments and challenging economic conditions.
- Marine Electronics sales declined 7% in Q2 and 8% for the first half, mainly reflecting product shipment timing and prior-year pre-season shipments.
- Outdoor Equipment sales rose 9% in Q2 and 4% year to date, supported by military tent sales. The segment returned to operating profit in both periods.
- Watercraft sales declined 4% in Q2 and 9% year to date, primarily due to lost international sales following restructuring. The segment remained loss-making.
- Diving sales declined 11% in Q2 and 9% year to date, reflecting delayed product shipments and weak economies in key markets.
- Gross margin pressure reflected pricing strategies intended to strengthen competitiveness and production below optimal capacity. Operating expense reductions reflected lower incentive compensation, volume-related costs, restructuring costs and, year to date, warranty expense.
Outlook, risks and contingencies
The filing gives no specific revenue or earnings guidance. Management emphasized seasonality and cautioned that interim results are not necessarily indicative of the full fiscal year. Risks identified include consumer demand and economic conditions, weather, product and shipment timing, raw-material costs and availability, foreign exchange and interest rates, customer payment risk, acquisition integration, goodwill impairment, litigation and compliance with debt covenants.
- Jetboil claim: The company filed an indemnity claim against the sellers in February 2014 relating to the 2012 acquisition. A portion of the purchase price, approximately $3.2 million, had been placed in escrow; the potential recovery, if any, could not be estimated. The remaining escrow, net of recovery, is to be released to the sellers if the claim is unsuccessful.
- Taxes: The effective tax rate was 37.2% for the first half, versus 32.8% a year earlier. Management cited losses in jurisdictions with deferred-tax valuation allowances and the prior-year research and development tax credit. An Italian tax examination was ongoing.
- Market exposure: About 18% of first-half revenue was denominated in foreign currencies. The company held no foreign-currency forward contracts or interest-rate swaps at quarter-end and was unhedged on floating-rate debt.
- Legal and restructuring matters: Management did not expect pending litigation to have a material adverse effect. The previously announced Watercraft restructuring was completed in fiscal 2013; $0.181 million of related liabilities remained at quarter-end, expected to be settled by fiscal year-end.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether weather-related order shifts and delayed product shipments reverse in subsequent quarters, especially in Marine Electronics and Diving.
- Whether gross margins recover as production capacity normalizes and pricing strategies affect sales and profitability.
- The outcome and potential recovery from the pending Jetboil indemnity claim.
- Seasonal working-capital requirements, cash availability (including the location of foreign-held cash), revolver usage and covenant compliance.
- Foreign-exchange, floating-rate debt and tax exposures, including the Italian examination and valuation allowances.