UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
For the quarterly period ended April 2, 2004
For the transition period from _________ to _________
Commission file number 0-16255
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of April 14, 2004, 7,553,084 shares of Class A and 1,222,297 shares of Class B common stock of the Registrant were outstanding.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS (unaudited)
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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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The following discussion includes comments and analysis relating to the results of operations and financial condition of Johnson Outdoors Inc. and its subsidiaries (the Company) for the three and six months ended April 2, 2004 and March 28, 2003. This discussion should be read in conjunction with the consolidated financial statements and related notes that immediately precede this section, as well as the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2003.
Certain matters discussed in this Form 10-Q are “forward-looking statements,” and the Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of those safe harbor provisions. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as the Company “expects,” “believes” or other words of similar meaning. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include changes in consumer spending patterns; the Company’s success in implementing its strategic plan, including its focus on innovation; actions of companies that compete with the Company; the Company’s success in managing inventory; movements in foreign currencies or interest rates; unanticipated issues related to the Company’s Military tent business; the success of suppliers and customers; the ability of the Company to deploy its capital successfully; unanticipated outcomes related to outstanding litigation matters; and adverse weather conditions. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
The Company is a leading global outdoor recreation company that turns ideas into adventure with innovative, top-quality products. The Company designs, manufactures and markets a portfolio of consumer-preferred brands across four categories: Motors, Outdoor Equipment, Watercraft and Diving. Johnson Outdoors’ familiar brands include, among others: Minn Kota® motors; Eureka!® tents; Old Town® canoes and kayaks; Ocean Kayak™, Necky™ and Dimension® kayaks; and SCUBAPRO®, SnorkelPro and UWATEC® dive equipment. As of April 30, 2004, the Company had 24 locations around the world, and employed 1,400 people. The Company reported annual sales of $315.9 million in fiscal 2003.
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The Company’s primary focus is innovation — meeting consumer needs with breakthrough products that stand apart from the competition and advance the Company’s strong brand names. Its subsidiaries are organized in a network that is intended to promote entrepreneurialism and leverage best practices and synergies, following the strategic vision set by senior managers and approved by the Company’s Board of Directors.
The Company’s primary selling period takes place in its second and third fiscal quarters. The table below sets forth a historical view of the Company’s seasonality.
The Company’s sales and operating earnings by segment are summarized as follows:
See Note 10 in the notes to the consolidated financial statements for the definition of segment net sales and operating profits.
Net sales on a consolidated basis for the three months ended April 2, 2004 totaled $95.6 million, an increase of 14.8% or $12.3 million, compared to $83.3 million in the three months ended March 28, 2003. Foreign currency translations favorably impacted quarterly sales by $2.6 million. Three of the Company’s business units had sales growth over the prior year. The Motors business sales increased $4.6 million, or 16.7%, to $31.9 million as a result of sales of new products as well as continued distribution channel expansion. Sales for the Outdoor Equipment business increased $5.4 million, or 28.6%, to $24.2 million. Military sales in the current fiscal year accounted for this growth. The Company does not necessarily expect the same level of growth in Military sales in future years. The Watercraft business sales declined $0.2 million, or 1.3%, to $19.7 million. The Diving business sales increased $2.3 million, or 13.4%, to $20.0 million helped primarily by the strengthening of the Euro against the U.S. Dollar.
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Net sales for the six months ended April 2, 2004 totaled $158.5 million, an increase of 14.7% or $20.3 million, compared to $138.2 million in the six months ended March 28, 2003. Foreign currency translations favorably impacted year-to-date sales by $5.2 million. All four of the Company’s business units had sales growth over the prior year. The Motors business sales increased $7.6 million, or 17.8%, to $49.9 million as a result of sales of new products as well as continued distribution channel expansion. Sales for the Outdoor Equipment business increased $9.3 million, or 30.2%, to $40.0 million mainly as a result of strength in Military sales. The Watercraft business sales increased $0.2 million, or 0.9%, to $32.1 million. The Diving business sales increased $2.8 million, or 8.3%, to $37.0 million, helped primarily by the strengthening of the Euro against the U.S. Dollar.
Relative to the U.S. dollar, the average values of most currencies of the countries in which the Company has operations were higher for the three months and six months ended April 2, 2004 as compared to the corresponding period of the prior year. The Diving business in particular was favorably impacted by foreign currency movements. The favorable impact of foreign currency movements on Companywide net sales was 3.1% and 3.5% for the three and six months ended April 2, 2004
Gross profit as a percentage of sales was 44.2% for the three months ended April 2, 2004 compared to 43.5% in the corresponding period in the prior year. Margins in the Motors and Diving businesses were improved over the prior year, while the Outdoor Equipment margins declined as expected on lower margin Military contracts and Watercraft business saw margins decline 2.3 percentage points due to continued operational efficiency issues, including unfavorable labor variances and unfavorable absorption variances.
The Motors business improved margins by 7.7 percentage points over the year ago quarter primarily from new products and product mix. The Diving business improved margins by 4.3 percentage points over the year ago quarter, primarily through manufacturing efficiencies and currency gains.
Gross profit as a percentage of sales was 43.7% for the six months ended April 2, 2004 compared to 43.3% in the corresponding period in the prior year. Margin improvements in the Motors and Diving businesses helped to offset declines in margins in the Outdoor Equipment and Watercraft businesses.
The Company recognized operating profit of $8.7 million for the three months ended April 2, 2004 compared to an operating profit of $6.1 million for the corresponding period of the prior year.
Operating profit improved when compared to the prior year. For the six months ended April 2, 2004 operating profit was $10.0 million compared to operating profit in the prior year period of $6.3 million. Higher sales in the Motors and Outdoor Equipment businesses and gross profit improvements in the Motors and Diving businesses drove the increase in operating profits. Watercraft operating profit was substantially below prior year, due to soft market conditions and operating inefficiencies.
Interest expense totaled $1.1 million for the three months ended April 2, 2004 compared to $1.3 million for the corresponding period of the prior year. In the current year, the Company benefited from scheduled reductions in overall debt. Interest expense totaled $2.4 million for the six months ended April 2, 2004 compared to $2.7 million for the corresponding period of the prior year.
Foreign currency gains (losses) realized from transactions were ($0.1) million for both the three and six months ended April 2, 2004 and $2.7 and $3.0 million in the corresponding periods of the prior year.
The Company’s effective tax rate for the six months ended April 2, 2004 was 37.3%, compared to 39.4% for the corresponding period of the prior year, primarily due to the geographic mix of earnings.
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Net income for the three months ended April 2, 2004 was $4.8 million, or $0.55 per diluted share, compared to $4.3 million, or $0.50 per diluted share, for the corresponding period of the prior year.
Net income for the six months ended April 2, 2004 was $5.0 million, or $0.57 per diluted share, compared to $4.0 million, or $0.47 per diluted share, for the corresponding period of the prior year.
On February 20, 2004, the Company received a nonbinding proposal to acquire outstanding shares of Class A and Class B common stock of the Company for a cash price of $18.00 per share. The proposal is from Samuel C. Johnson (majority shareholder and director of the Company) and Helen P. Johnson-Leipold (Chairman and Chief Executive Officer and director of the Company) and pertains to all shares of the Company not already owned by them, any member of their family or entities controlled by them.
According to the proposal, the intent is to return full ownership in the Company to the Johnson family, and for all other holders of outstanding common stock to receive cash for their shares, through a negotiated merger transaction. The proposal also states that Mr. Johnson and Ms. Johnson–Leipold have no interest in selling their shares and will not support an alternative transaction. The proposal further states that no changes are anticipated in the Company’s current business as a result of the proposed transaction.
In response to the proposal, the Board of Directors of the Company has appointed a special committee of independent directors to evaluate the proposal on behalf of the Company. The members of the special committee are Thomas F. Pyle, Jr., Terry E. London and John M. Fahey, Jr. The special committee has retained its own independent financial and legal advisors. The special committee is currently evaluating the proposal.
On May 5, 2004, the Company acquired all of the outstanding common stock of Techsonic Industries, Inc. and certain other assets from the parent company of Techsonic Industries, Inc., Teleflex Incorporated. The transaction was funded using existing cash on hand and short-term borrowings. The initial purchase price was approximately $28.0 million and is subject to a post-closing working capital adjustment. Techsonic Industries Inc. is a manufacturer and marketer of underwater sonar and GPS technology equipment. Techsonic Industries will be consolidated with the Company’s Motors segment. The Motors segment will be renamed the Marine Electronics Group and will be reported as such for the quarter ending July 2, 2004.
The Company will file additional information pertaining to the acquisition of Techsonic Industries, Inc. as required on Form 8-K.
On May 14, 2004, the Company received $1.7 million under the terms of a confidential settlement agreement with a former employee. This amount will be recorded in the Company’s third quarter. Additional consideration of up to $0.3 million may be received and will be recorded in the period in which it occurs.
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The Company’s cash flow from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, is summarized in the following table:
As of the end of the Company’s second fiscal quarter, it is heavily invested in operating assets to support the Company’s selling season, which is strongest in the second and third quarters of the Company’s fiscal year.
The Company’s debt to equity ratio has declined to 30% as of April 2, 2004 from 36% as of March 28, 2003, reflective of further strengthening the Company’s liquidity and strategic flexibility.
Cash flows used for operations totaled $42.2 million for the six months ended April 2, 2004 compared with $51.6 million used for operations for the corresponding period of the prior year.
Accounts receivable increased $36.6 million for the six months ended April 2, 2004, compared to an increase of $30.2 million in the year ago period. Inventories increased by $16.2 million for the six months ended April 2, 2004 compared to an increase of $18.9 million in the prior year period. The inventory build in the current year is primarily related to a build-up of products for the Diving business and timing of Military tent orders in the Outdoor Equipment business. The Company believes it is producing products at levels adequate to meet expected customer demand.
Accounts payable and accrued liabilities increased $3.5 million for the six months ended April 2, 2004 versus a decrease of $5.4 million for the corresponding period of the prior year. This change is due to the timing of the settlement of short term accrued obligations.
Depreciation and amortization charges were $3.9 million for the six months ended April 2, 2004 and $4.0 million for the corresponding period of the prior year.
Cash used for investing activities, consisting solely of expenditures for property, plant and equipment, totaled $3.2 million for the six months ended April 2, 2004 versus $3.4 million for the corresponding period of the prior year. The Company’s recurring investments are made primarily for tooling for new products and enhancements. In 2004, capitalized expenditures are anticipated to be in line with prior year levels. These expenditures are expected to be funded by working capital or existing credit facilities.
Cash flows used for financing activities totaled $8.0 million for the six months ended April 2, 2004 and $7.4 million for the corresponding period of the prior year. The Company made principal payments on senior notes and other long-term debt of $9.5 million and $8.0 million in November 2003 and 2002, respectively.
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In addition to cash generated by operating activities, the Company has access to existing financing sources, including its $70.0 million unsecured revolving credit facility. This facility expires in August 2004. The Company expects to pursue a renewal of this facility. At April 2, 2004, the Company had no outstanding borrowings on this credit agreement.
The Company has obligations and commitments to make future payments under debt and operating leases. The following schedule details these obligations at April 2, 2004.
(1) Excludes fair value adjustment of hedged debt.
The Company also utilizes letters of credit for trade financing purposes. Letters of credit outstanding at April 2, 2004 total $1.9 million.
The Company has no off-balance sheet arrangements.
The Company is exposed to market risk stemming from changes in foreign exchange rates, interest rates and, to a lesser extent, commodity prices. Changes in these factors could cause fluctuations in earnings and cash flows. The Company may reduce exposure to certain of these market risks by entering into hedging transactions authorized under Company policies that place controls on these activities. Hedging transactions involve the use of a variety of derivative financial instruments. Derivatives are used only where there is an underlying exposure, not for trading or speculative purposes.
The Company has significant foreign operations, for which the functional currencies are denominated primarily in Euros, Swiss francs, Japanese yen and Canadian dollars. As the values of the currencies of the foreign countries in which the Company has operations increase or decrease relative to the U.S. Dollar, the sales, expenses, profits, assets and liabilities of the Company’s foreign operations, as reported in the Company’s consolidated financial statements, increase or decrease, accordingly. The Company has in the past mitigated a portion of the fluctuations in certain foreign currencies through the purchase of foreign currency swaps, forward contracts and options to hedge known commitments, primarily for purchases of inventory and other assets denominated in foreign currencies; however, no such transactions were entered into during fiscal 2003 or the first two quarters of fiscal 2004.
The Company’s debt structure and interest rate risk are managed through the use of fixed and floating rate debt. The Company’s primary exposure is to United States interest rates. The Company also periodically enters into interest rate swaps, caps or collars to hedge its exposure and lower financing costs.
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Certain components used in the Company’s products are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancelable supply contracts. Primary commodity price exposures are metals, plastics and packaging materials.
The estimates that follow are intended to measure the maximum potential fair value or earnings the Company could lose in one year from adverse changes in market interest rates under normal market conditions. The calculations are not intended to represent actual losses in fair value or earnings that the Company expects to incur. The estimates do not consider favorable changes in market rates. The table below presents the estimated maximum potential one year loss in fair value of debt and earnings before income taxes from a 100 basis point movement in interest rates on the senior notes outstanding at April 2, 2004:
The Company has outstanding $67.0 million in unsecured senior notes as of April 2, 2004. The senior notes have interest rates that range from 6.98% to 7.82% and principal payments through December 2008. The fair market value of the Company’s fixed rate debt was $75.2 million as of April 2, 2004.
The Company has entered into interest rate swap agreements on a portion of its senior notes. As of April 2, 2004, the notional amount of the swaps was $4.2 million. The swap agreements effectively reduced interest rates to a range of 4.55% to 3.90% on the notional amounts. The swap agreements expire in fiscal year 2005. The fair market value of the Company’s swap agreements was less than $0.1 million as of April 2, 2004.
On November 6, 2003, the Company terminated the swap instruments relating to the 1998 and 2001 debt instruments. The Company realized gains on the 1998 and 2001 instruments of $0.2 million and $0.7 million, respectively. The gains are being amortized as a reduction in interest expense over the remaining life of the underlying debt instruments.
The Company has not been significantly impacted by inflationary pressures over the last several years. The Company anticipates that changing costs of basic raw materials may impact future operating costs and, accordingly, the prices of its products. The Company is involved in continuing programs to mitigate the impact of cost increases through changes in product design and identification of sourcing and manufacturing efficiencies. Price increases and, in certain situations, price decreases are implemented for individual products, when appropriate.
The Company’s critical accounting policies are identified in the Company’s Annual Report on Form 10-K for the fiscal year ending October 3, 2003 in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Critical Accounting Policies and Estimates.” There were no significant changes to the Company’s critical accounting policies during the three and six months ended April 2, 2004.
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Information with respect to this item is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Market Risk Management.”
On February 21, 2003, the Competition Department of the European Commission initiated formal proceedings in a case concerning certain provisions in the former distribution arrangements of the Company’s European SCUBAPRO UWATEC subsidiaries. On January 29, 2004, the Commission notified the Company of its decision to close the file without taking any further action.
At the Company’s reconvened Annual Meeting held on March 9, 2004, the shareholders voted to elect the following individuals as directors for terms that expire at the next annual meeting:
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At the Company’s reconvened Annual Meeting held on March 9, 2004, the shareholders voted to approve proposals related to the Company’s stock plans as set forth below:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Exhibit Number Description