UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
For the quarterly period ended July 2, 2004
For the transition period from _________ to _________
Commission file number 0-16255
JOHNSON OUTDOORS INC.(Exact name of Registrant as specified in its charter)
555 Main Street, Racine, Wisconsin 53403 (Address of principal executive offices)
(262) 631-6600(Registrant’s telephone number, including area code)
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 August 4, 2004, 7,582,498 shares of Class A and 1,221,715 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 nine months ended July 2, 2004 and June 27, 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 outsourcing certain manufacturing processes; unanticipated outcomes related to outstanding litigation matters; adverse weather conditions; and unanticipated events related to the going private proposal. 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. The Company assumes no obligation, and disclaims any obligation, to update such forward-looking statements to reflect subsequent events or circumstances.
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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: Marine Electronics (formerly known as Motors), Outdoor Equipment, Watercraft and Diving. The Company’s familiar brands include, among others: Minn Kota® motors; Humminbird® fishfinders, Eureka!® tents; Old Town® canoes and kayaks; Ocean Kayak™, Necky™ and Dimension® kayaks; and SCUBAPRO®, SnorkelPro and UWATEC® dive equipment. As of July 31, 2004, the Company had 26 locations around the world, and employed approximately 1,500 people. The Company reported annual sales of $315.9 million in fiscal 2003.
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 11 in the notes to the consolidated financial statements for the definition of segment net sales and operating profits.
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Net sales for the three months ended July 2, 2004 totaled $121.2 million, an increase of $12.6 million, or 11.6%, compared to $108.5 million in the three months ended June 27, 2003. Foreign currency translation favorably impacted quarterly sales by $1.5 million. Two of the Company’s business units had sales growth over the prior year period. The Marine Electronics business sales increased $13.2 million, or 44.3%, to $43.1 million. This increase is the result of several factors: the addition of the Techsonic business, as completed May 5, 2004, which added $7.8 million to sales; sales of new products; and continued distribution channel expansion. The Company does not expect the same level of growth in the Marine Electronics business in future periods. Sales for the Outdoor Equipment business increased $2.1 million, or 8.2%, to $27.2 million. Increased Military sales in the current fiscal year accounted for this growth. The Company expects Military tent sales to return to lower historical levels in fiscal year 2005. The Watercraft business sales declined $2.5 million, or 8.0%, to $29.0 million. Declines in the Watercraft business resulted from excess capacities and a soft consumer market. The Diving business sales decreased $0.2 million, or 0.9%, to $22.2 million, aided by a $1.2 million favorable currency impact. Declines in the Diving business were due to continued weakness in the global economy and travel. These declines were offset in part by a $1.2 million favorable currency impact related to the strengthening of the Euro against the U.S. Dollar.
Net sales for the nine months ended July 2, 2004 totaled $279.7 million, an increase of $33.0 million, or 13.4%, compared to $246.7 million in the nine months ended June 27, 2003. Foreign currency translations favorably impacted year-to-date sales by $6.7 million. Three of the Company’s business units had sales growth over the prior year period. The Marine Electronics business sales increased $20.8 million, or 28.8%, to $93.0 million. This increase is the result of several factors: the addition of the Techsonic business, as completed May 5, 2004, which added $7.8 million to sales; sales of new products; and continued distribution channel expansion. The Company does not expect the same level of growth in the Marine Electronics business in future periods. Sales for the Outdoor Equipment business increased $11.7 million, or 21.0%, to $67.2 million mainly as a result of strength in Military sales. The Company expects Military tent sales to return to lower historical levels in fiscal year 2005. The Watercraft business sales decreased $2.3 million, or 3.6%, to $61.2 million due to a continuing soft consumer market. The Diving business sales increased $2.6 million, or 4.7%, to $59.2 million, helped by $5.1 million in favorable currency impact related to strengthening of the Euro against the U.S. Dollar.
Gross profit as a percentage of net sales was 41.4% for the three months ended July 2, 2004 compared to 40.1% in the corresponding period in the prior year. Margins in the Diving and Watercraft businesses improved over the prior year, while the Outdoor Equipment margins declined as expected on lower margin Military contracts. The Marine Electronics business saw margins decline as the margins for the Minn Kota business were flat and margins for the newly acquired Humminbird business were lower than the historical margins for the Minn Kota business. The Diving business improved margins significantly over the prior period, mainly due to the negative accounting impact of the Company recording a charge of $2.8 million related to the recall of a dive computer during the quarter ended June 27, 2003, versus the positive accounting impact of the Company reversing costs of $0.7 million related to this accrual during the quarter ended July 2, 2004.
Gross profit as a percentage of sales was 42.7% for the nine months ended July 2, 2004 compared to 41.9% in the corresponding period in the prior year. Margin improvements in the Marine Electronics and Diving businesses helped to offset declines in margins in the Outdoor Equipment and Watercraft businesses.
The Company recognized operating profit of $13.7 million for the three months ended July 2, 2004 compared to an operating profit of $8.9 million for the corresponding period of the prior year. Operating profit improvements in the Marine Electronics business stem from continued strong sales in the Minn Kota brand and the addition of the Humminbird brand, which contributed $0.5 million to operating profit. The Outdoor Equipment business improvements were driven by increased military sales. Improvements in Diving operating profit result from one time items recorded in the third quarter of each year, including proceeds of $2.0 million from the settlement of a lawsuit with a former employee received in 2004 and the accounting impact of charges related to the recall of a dive computer. During the third quarter ended June 27, 2003, the Diving business recorded a charge of $2.8 million related to a dive computer recall and then during the quarter ended July 2, 2004 the Diving business recorded a gain of $0.7 million resulting from the final accounting to reverse excess reserves related to the aforementioned dive computer recall. Watercraft operating profit declined due to a continuing soft consumer market and operational inefficiencies. Operating profit in fiscal 2004 was also negatively impacted by expenses recorded at the Company’s corporate location related to the on-going review of a proposal to acquire the outstanding public shares of the Company.
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For the nine months ended July 2, 2004, operating profit increased when compared to the prior year period at $23.7 million versus $15.2 million. In addition to items noted in the preceding paragraph, overall higher sales in the Marine Electronics and Outdoor Equipment businesses drove the increase in operating profit. While operating profit for the Diving business was higher on a year-to-date basis, this increase is driven by one time items in both fiscal years and favorable currency impacts. Watercraft operating profit declined due to a continuing soft consumer market and operational inefficiencies.
Interest expense totaled $1.3 million for the three months ended July 2, 2004, even with the corresponding period of the prior year. Interest expense totaled $3.7 million for the nine months ended July 2, 2004 compared to $4.0 million for the corresponding period of the prior year. In the current year, the Company benefited from reductions in overall debt.
Foreign currency gains (losses) realized from transactions were $(0.2) and $(0.3) million for the three and nine months ended July 2, 2004 and $0.5 and $3.0 million in the corresponding periods of the prior year.
The Company’s effective tax rate for the nine months ended July 2, 2004 was 38.4%, compared to 39.5% for the corresponding period of the prior year, primarily due to the geographic mix of earnings.
Net income for the three months ended July 2, 2004 was $7.5 million, or $0.85 per diluted share, compared to $5.1 million, or $0.59 per diluted share, for the corresponding period of the prior year.
Net income for the nine months ended July 2, 2004 was $12.4 million, or $1.42 per diluted share, compared to $9.0 million, or $1.06 per diluted share, for the corresponding period of the prior year.
On February 20, 2004, the Company received a nonbinding proposal to acquire outstanding public shares of Class A and Class B common stock of the Company for a cash price of $18.00 per share. The proposal was 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 pertained to all shares of the Company not already owned by them, any member of their family or entities controlled by them. Although Mr. Johnson died on May 22, 2004, the proposal has not been withdrawn.
The Board of Directors of the Company 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 is continuing to evaluate the proposal.
On July 27, 2004, the Company announced plans to outsource manufacturing at its Grand Rapids, Michigan facility, and to shift production from Mansonville, Canada to its Old Town, Maine operation. Costs and charges associated with these plans are estimated at $3.0 million, which are expected to be incurred beginning in the Company’s fourth quarter of fiscal 2004 and continuing in to its fiscal 2005 year.
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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 third 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 29% as of July 2, 2004 from 35% as of June 27, 2003.
Cash flows used for operations totaled $9.4 million for the nine months ended July 2, 2004 compared with $30.2 million used for operations for the corresponding period of the prior year.
Accounts receivable increased $29.3 million for the nine months ended July 2, 2004, compared to an increase of $33.4 million in the year ago period. Inventories increased by $4.0 million for the nine months ended July 2, 2004 compared to an increase of $7.0 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 $4.9 million for the nine months ended July 2, 2004 versus a decrease of $3.1 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 $6.3 million for the nine months ended July 2, 2004 and $5.8 million for the corresponding period of the prior year.
Cash used for investing activities, included expenditures for property, plant and equipment, totaling $4.8 million for the nine months ended July 2, 2004 versus $5.6 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 fiscal 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.
On May 5, 2004, the Company acquired Techsonic Industries, Inc. and certain other intellectual property assets for approximately $28.0 million. The final purchase price was subject to a working capital adjustment, the allocation of which has not yet been finalized.
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Cash flows used for financing activities totaled $7.9 million for the nine months ended July 2, 2004 and $7.3 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 $8.1 million during fiscal years 2004 and 2003.
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, which was initially set to expire in August 2004, but has been extended for three additional months to November 2004. The Company expects to pursue a renewal of this facility. At July 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 July 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 July 2, 2004 total $1.8 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 three quarters of fiscal 2004.
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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.
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 July 2, 2004:
The Company has outstanding $67.0 million in unsecured senior notes as of July 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 $71.6 million as of July 2, 2004.
The Company has entered into interest rate swap agreements on a portion of its senior notes. As of July 2, 2004, the notional amount of the swaps was $4.2 million. The swap agreements effectively reduced interest rates to a range of 5.21% to 4.56% 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 July 2, 2004.
On November 6, 2003, the Company terminated the swap instruments relating to certain 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 through October 2005.
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 nine months ended July 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.”
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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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