Johnson Outdoors - 10-Q quarterly report FY

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

For the quarterly period ended April 1, 2005

 

 

 

 

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes [ X ]  No [   ]

 

As of April 15, 2005, 7,639,668 shares of Class A common stock and 1,221,715 shares of Class B common stock of the Registrant were outstanding.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

 

The consolidated financial statements included herein are unaudited. In the opinion of management, these statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Johnson Outdoors Inc. and subsidiaries (the Company) as of April 1, 2005 and the results of operations for the three and six months ended April 1, 2005 and cash flows for the six months ended April 1, 2005. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 2004.

 

Because of seasonal and other factors, the results of operations for the three and six months ended April 1, 2005 are not necessarily indicative of the results to be expected for the full year.

 

All monetary amounts, other than share and per share amounts, are stated in thousands.

 

 

The following table sets forth the computation of basic and diluted earnings per common share:

 

 

 

 

The Company’s current equity incentive plans provide for the issuance of options to acquire shares of Class A common stock by key executives and non-employee directors. All stock options have been granted with an exercise price equal to the fair market value on the date of grant and become exercisable over periods of one to four years from the date of grant. Stock options generally have a term of 10 years. The current plans also allow for the issuance of restricted stock or stock appreciation rights in lieu of options. Grants of restricted shares are not significant in any year presented.

 

The Company's employees’ stock purchase plan provides for the issuance of Class A common stock at a purchase price of not less than 85% of the fair market value at the date of grant. Shares available for purchase by employees under this plan were 33,957 at April 1, 2005. No common stock has been issued under this plan to date during the six months ended April 1, 2005.

 

A summary of stock option activity related to the Company’s plans is as follows:

 

 

 

The Company adopted a phantom stock plan during fiscal 2003. Under this plan, certain employees earn cash bonus awards based upon the performance of the Company’s Class A common stock. No phantom stock has been issued under this plan to date during the six months ended April 1, 2005.

 

The components of net periodic benefit cost related to Company administered benefit plans for the three and six months ended April 1, 2005 and April 2, 2004, respectively, were as follows.

 

 5       Restructuring

 

On July 27, 2004 the Company announced plans to outsource manufacturing then being undertaken at its Grand Rapids, Michigan facility, and to shift production from Mansonville, Canada to its Old Town, Maine operation, as part of the Company's on-going efforts to increase efficiency and improve profitability of its Watercraft business unit. The Company ceased manufacturing operations at the Michigan and Canadian locations in September 2004. Consistent with prior disclosures, costs and charges associated with these plans are estimated at $3.1 million and will be incurred across fiscal years 2004 and 2005. The decision resulted in the reduction of 71 positions across the two locations.

 

Total charges incurred in the three and six months ended April 1, 2005 were $44 and $507, respectively. Charges consisted of the following major categories of costs: one-time employee termination benefits of $(2) and $335, respectively, and other costs primarily related to disposal of equipment of $46 and $172, respectively. These charges are included in the “Administrative management, finance and information systems” and “Cost of sales” lines in the Consolidated Statement of Operations.

 

A summary of charges, payments and accruals for the six months ended April 1, 2005 in connection with the restructuring plans are as follows:

 

 

 

The provision for income taxes includes deferred taxes and is based upon estimated annual effective tax rates in the tax jurisdictions in which the Company operates. The effective tax rate for the three and six months ended April 1, 2005 was impacted by expenses recognized related to the buy-out proposal, subject to a final determination regarding the deductibility of these costs, and not benefiting certain losses of foreign subsidiaries.

 

 

Inventories at the end of the respective periods consist of the following:

 

 

 

 

 

Comprehensive income (loss) includes net income and changes in shareholders’ equity from non-owner sources. For the Company, the difference between net income and comprehensive income is due to cumulative foreign currency translation adjustments. Strengthening of the Euro, Swiss franc, Canadian dollar and other worldwide currencies against the U.S. dollar created the translation adjustment income for the three months and six months ended April 1, 2005.

 

Comprehensive income (loss) for the respective periods consists of the following:

 

 

The Company conducts its worldwide operations through separate global business units, each of which represents major product lines. Operations are conducted in the United States and various foreign countries, primarily in Europe, Canada and the Pacific Basin. The Company’s Outdoor Equipment business recognized net sales to the United States military which totaled approximately 11.2% and 14.3% of the total Company net sales during the three months ended April 1, 2005 and April 2, 2004, respectively, and 14.8% and 16.5% of the total Company net sales during the six months ended April 1, 2005 and April 2, 2004, respectively.

 

Net sales and operating profit include both sales to customers, as reported in the Company's consolidated statements of operations, and interunit transfers, which are priced to recover cost plus an appropriate profit margin. Total assets are those assets used in the Company's operations in each business unit at the end of the periods presented.

 

A summary of the Company’s operations by business unit is presented below:

 

 

The Company is subject to various legal actions and proceedings in the normal course of business, including those related to product liability and environmental matters. The Company is insured against loss for certain of these matters. Although litigation is subject to many uncertainties and the ultimate exposure with respect to these matters cannot be ascertained, management does not believe the final outcome of any pending litigation will have a material adverse effect on the financial condition, results of operations, liquidity or cash flows of the Company.

 

 

On October 28, 2004, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with JO Acquisition Corp., an entity established by members of the family of the late Samuel C. Johnson, including Helen P. Johnson-Leipold, Chairman and Chief Executive Officer of the Company. Under the terms of the merger proposed by the Merger Agreement (the “Merger”), public shareholders of the Company would have received $20.10 per share in cash, and the members of the Johnson family would have acquired 100% ownership of the Company.

 

The Merger was subject to a number of conditions contained in the Merger Agreement, including shareholder approval of the Merger Agreement. On March 22, 2005, a special meeting of the shareholders of the Company was held in order to vote upon a proposal to approve the Merger Agreement. The required shareholder vote was not obtained at such meeting and the Merger Agreement was terminated on March 31, 2005 by the Company and the Purchaser pursuant to the terms of the Merger Agreement. The termination of the Merger Agreement did not result in the imposition of any penalties on the Company.

 

 

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 1, 2005 and April 2, 2004. 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 1, 2004.

 

 

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; unanticipated issues related to the Company’s military tent business; 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; 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 Buy-Out transaction. 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.

 

 

The Company has registered the following trademarks which are used in this Form 10-Q: Minn Kota®; Humminbird®; and Eureka!®.

 

 

The Company designs, manufactures and markets top-quality outdoor recreational products for the whole family. Through a combination of innovative products, strong marketing and distribution, the Company seeks to set itself apart from the competition. Its subsidiaries comprise a network that promotes entrepreneurialism and leverages best practices and synergies, following the strategic vision set by executive management and approved by the Company’s Board of Directors.

 

 

 

Watercraft business net sales declined 1.1% and 1.9% in the three months and six months ended April 1, 2005, respectively, due to the discontinued sales of certain low margin products that had accounted for net sales of $1.4 million and $1.5 million for the three months and six months ended April 2, 2004, respectively. In July 2004, the Company began a $3.1 million restructuring plan to increase efficiency and improve profitability of this business. This effort is intended to make Watercraft leaner, yet more flexible, more focused, and more competitive going forward. It should make the Watercraft business better prepared to deliver financial performance equal to the strength of the Company’s brands.

 

The Diving business’ net sales include $0.6 million and $1.6 million of favorable currency translation during the three months and six months ended April 1, 2005, respectively. This partially offsets declines in net sales compared to the same periods of last year. Continued soft market conditions in Europe and Asia and the delayed introduction of new products drove much of the decline. Profits declined with lower net sales and were also negatively affected by unfavorable volume-related manufacturing variances, lower margins on close-out product sales and unfavorable impact of changes in currency exchange rates. Continued investment is needed to support better performance by the Company’s Diving business.

 

Debt-to-total capitalization stands at 23% at the end of the quarter, well below historical levels. Compared to prior year levels, the increases in trade receivables and inventories primarily reflect the addition of Techsonic and the impact of currency fluctuation in the Company's foreign operations.

Due to the seasonality of the Company’s businesses, second quarter results are not expected to be indicative of the Company's average quarterly results for fiscal 2005 because the second quarter falls within the Company’s primary selling period, which 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.

 

Net sales on a consolidated basis for the three months ended April 1, 2005 totaled $106.2 million, an increase of 11.1% or $10.6 million, compared to $95.6 million in the three months ended April 2, 2004. The Company acquired Techsonic on May 5, 2004. Net sales for the Techsonic business for the three months ended April 1, 2005 were $15.8 million. Foreign currency translations favorably impacted quarterly sales by $1.0 million in the second quarter of fiscal 2005. The Marine Electronics business sales increased $15.3 million, or 47.9%, to $47.1 million, including the addition of the Techsonic business noted above. Sales for the Outdoor Equipment business decreased $3.3 million, or 13.6%, to $20.9 million as a result of declining military tent sales and the conclusion of a two-year test program of Eureka! in the mass channel. The Watercraft business sales decreased $0.7 million, or 3.6%, to $19.0 million due to the discontinued sales of certain low margin products that accounted for $1.4 million in net sales in the same period last year. The Diving business sales decreased $0.8 million, or 4.0%, to $19.2 million, despite favorable currency translations totaling $0.6 million resulting from the strengthening of the Euro and Swiss Franc against the U.S. Dollar. The declines in the Diving business are the result of continued market softness and delayed new product launches due to implementation of the Company’s new enhanced design validation process. Diving’s sales were also negatively impacted by actions taken to eliminate sales through undesirable channels, including E-bay sellers and grey market traders.

 

Net sales for the six months ended April 1, 2005 increased $22.6 million, or 14.3%, to $181.2 million, compared to $158.5 million in the six months ended April 2, 2004. This increase included net sales for the Techsonic business for the six months ended April 1, 2005 of $24.8 million. Additionally, foreign currency translations favorably impacted year-to-date sales by $2.3 million. The Marine Electronics business sales increased $25.1 million, or 50.3%, to $75.0 million due primarily to the addition of the Techsonic business. Sales for the Outdoor Equipment business decreased $0.3 million, or 0.3%, to $39.7 million mainly as a result of the conclusion of a two-year test program of Eureka! in the mass channel. The Watercraft business sales decreased $1.1 million, or 3.3%, to $31.1 million mainly as a result of discontinued product sales which were $1.5 million last year-to-date. The Diving business sales decreased $1.4 million, or 3.8%, to $35.6 million. The Diving business volume decrease was offset by the strengthening of the Euro and Swiss Franc against the U.S. Dollar.

 

Gross profit as a percentage of sales was 43.1% for the three months ended April 1, 2005 compared to 44.2% in the corresponding period in the prior year. The overall gross margin rate was negatively affected by the addition of the Techsonic business, where gross margin rates are below the Company’s overall gross margin rate. Declines in margins in the Diving and Outdoor Equipment businesses also contributed to the lower rate in the quarter. The Diving business margins have declined from the prior year as a result of lower volumes from continued market softness, unfavorable volume-related manufacturing variances, and lower pricing on close-out product sales. Margins in the Watercraft business improved over the prior year as operational improvements take effect.

 

Operating expenses for the quarter were $37.4 million, up $3.8 million or 11.3% from the same period in fiscal 2004, due primarily to the addition of the Techsonic business, which added $3.6 million in operating expenses. The increased spending also included $1.0 million of expenses related to the buyout proposal, compared to $0.3 million in the second quarter of fiscal 2004. Year-to-date operating expenses were $67.7 million, up $8.5 million or 14.4% from the same period in fiscal 2004. The Techsonic business added $6.1 million in additional operating expenses and the buy-out proposal costs further contributed $2.0 million year-to-date in additional operating expenses, compared to $0.3 million in the prior year-to-date. Unfavorable currency translations also affected year-to-year comparisons of operating expenses.

 

The Company recognized operating profit of $8.4 million for the three months ended April 1, 2005 compared to an operating profit of $8.7 million for the corresponding period of the prior year. For the six months ended April 1, 2005 operating profit was $8.3 million compared to operating profit for the same period in the prior year of $10.0 million.

 

Interest expense totaled $1.1 million for the three months ended April 1, 2005, which remained relatively flat when compared to the corresponding period of the prior year. Interest expense totaled $2.3 million for the six months ended April 1, 2005 compared to $2.4 million for the corresponding period of the prior year. In the current year, the Company benefited from scheduled reductions in overall debt, but had higher effective interest rates as rate swaps that benefited last year expired.

 

Interest income declined to $0.1 million and $0.2 million, respectively, for the three and six months ended April 1, 2005, as cash balances and market rates on short-term cash investments declined. Other income for the quarter included $0.6 million in favorable currency exchange rate gains.

 

The Company’s effective tax rate for the three and six months ended April 1, 2005 was 40.6% and 46.5%, respectively, compared to 37.2% and 37.3%, respectively, for the corresponding periods of the prior year. The effective tax rate in the current year was impacted by the non-deductibility of certain expenses related to the buy-out proposal and not benefiting certain losses with foreign subsidiaries.

 

Net income for the three months ended April 1, 2005 was $4.7 million, or $0.54 per diluted share, compared to $4.8 million, or $0.55 per diluted share, for the corresponding period of the prior year.

 

Net income for the six months ended April 1, 2005 was $3.7 million, or $0.42 per diluted share, compared to $5.0 million, or $0.57 per diluted share, for the corresponding period of the prior year.

 

 

On October 28, 2004, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with JO Acquisition Corp., an entity established by members of the family of the late Samuel C. Johnson, including Helen P. Johnson-Leipold, Chairman and Chief Executive Officer of the Company. Under the terms of the merger proposed by the Merger Agreement (the “Merger”), public shareholders of the Company would have received $20.10 per share in cash, and the members of the Johnson family would have acquired 100% ownership of the Company.

 

The Merger was subject to a number of conditions contained in the Merger Agreement, including shareholder approval of the Merger Agreement. On March 22, 2005, a special meeting of the shareholders of the Company was held in order to vote upon a proposal to approve the Merger Agreement. The required shareholder vote was not obtained at such meeting and the Merger Agreement was terminated on March 31, 2005 by the Company and the Purchaser pursuant to the terms of the Merger Agreement. The termination of the Merger Agreement did not result in the imposition of any penalties on the Company.

 

 

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 of 2005, the Company is heavily invested in operating assets to support the its selling season, which is strongest in the second and third quarters of the Company’s fiscal year.

 

The Company's debt to total capitalization ratio has declined to 23% as of April 1, 2005 from 30% as of April 2, 2004, further strengthening the Company's liquidity and strategic flexibility.

 

 

Cash flows used for operations totaled $41.5 million for the six months ended April 1, 2005 compared with $42.2 million used for operations for the corresponding period of the prior year.

 

Accounts receivable increased $38.8 million for the six months ended April 1, 2005, compared to an increase of $36.6 million in the prior year period. Inventories increased by $8.2 million for the six months ended April 1, 2005 compared to an increase of $16.2 million in the prior year period. The reduced inventory build up in the current year is primarily related to a decline in the inventory on hand to support the Military business, as the Military sales are expected to drop by up to 40% in fiscal 2005 as current contracts and emergency orders come to an end. The Company believes it is producing products at levels adequate to meet expected customer demand.

Accounts payable and accrued liabilities increased $0.3 million for the six months ended April 1, 2005 versus a decrease of $3.5 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 $5.0 million for the six months ended April 1, 2005 and $3.9 million for the corresponding period of the prior year.

 

 

Cash used for investing activities, consisting solely of expenditures for property, plant and equipment, totaled $3.0 million for the six months ended April 1, 2005 versus $3.2 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 2005, 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 $15.4 million for the three months ended April 1, 2005 and $8.0 million for the corresponding period of the prior year. The Company made principal payments on senior notes and other long-term debt of $16.2 million and $9.5, respectively, million during the first quarters of fiscal years 2005 and 2004.

 

On October 29, 2004, the Company entered into a new $30.0 million unsecured revolving credit facility agreement expiring in October 2005. This agreement is expected to provide adequate funding for the Company’s operations during that period. The Company had no borrowings outstanding on its revolving credit facilities as of April 1, 2005

 

 

The Company has obligations and commitments to make future payments under debt agreements and operating leases. The following schedule details these obligations at April 1, 2005.

 

 

The Company also utilizes letters of credit for trade financing purposes. Letters of credit outstanding at April 1, 2005 total $2.5 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, losses, 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 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 2004 or the first two quarters of fiscal 2005.

 

 

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 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 and earnings before income taxes from a 100 basis point movement in interest rates on all debt outstanding at April 1, 2005:

 

The Company has outstanding $50.8 million in unsecured senior notes as of April 1, 2005. The senior notes bear interest rates that range from 7.15% to 7.82% and are to be repaid through December 2008. The fair market value of the Company’s unsecured senior notes was $55.5 million as of April 1, 2005.

 

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 unamortized gain related to the 1998 and 2001 instruments was $0.2 million as of April 1, 2005.

 

The Company has experienced inflationary pressures during 2004 and 2005 on energy, metals and resins. 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.

 

 

 

 

 

 

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.”

 

 

 

 

 

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.