UNITED STATES
SECURITIES 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)
| Wisconsin | 39-1536083 |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
| incorporation or organization) |
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.
| Index |
Page No. | ||
| PART I | FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements | ||
| Consolidated Statements of Operations - Three months | |||
| and nine months ended July 2, 2004 and June 27, 2003 | 1 | ||
| Consolidated Balance Sheets - July 2, 2004, October 3, | |||
| 2003 and June 27, 2003 | 2 | ||
| Consolidated Statements of Cash Flows - Nine months | |||
| ended July 2, 2004 and June 27, 2003 | 3 | ||
| Notes to Consolidated Financial Statements | 4 | ||
| Item 2. | Management's Discussion and Analysis of Financial | ||
| Condition and Results of Operations | 9 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 16 | |
| Item 4. | Controls and Procedures | 16 | |
PART II |
OTHER INFORMATION | ||
| Item 6. | Exhibits and Reports on Form 8-K | 16 | |
| Signatures | 17 | ||
| Exhibit Index | 18 | ||
CONSOLIDATED STATEMENTS
OF OPERATIONS
(unaudited)
| (thousands, except per share data) |
Three Months Ended |
Nine Months Ended | ||||||||||||
| July 2 2004 | June 27 2003 | July 2 2004 | June 27 2003 | |||||||||||
| Net sales | $ | 121,166 | $ | 108,546 | $ | 279,702 | $ | 246,706 | ||||||
| Cost of sales | 70,964 | 65,038 | 160,251 | 143,322 | ||||||||||
| Gross profit | 50,202 | 43,508 | 119,451 | 103,384 | ||||||||||
| Operating expenses: | ||||||||||||||
| Marketing and selling | 24,164 | 23,025 | 61,605 | 56,511 | ||||||||||
| Administrative management, finance and | ||||||||||||||
| information systems | 8,636 | 9,033 | 25,100 | 24,839 | ||||||||||
| Research and development | 2,617 | 1,575 | 6,272 | 4,738 | ||||||||||
| Amortization of intangibles | 82 | 58 | 255 | 222 | ||||||||||
| Profit sharing | 1,016 | 898 | 2,502 | 1,865 | ||||||||||
| Total operating expenses | 36,515 | 34,589 | 95,734 | 88,175 | ||||||||||
| Operating profit | 13,687 | 8,919 | 23,717 | 15,209 | ||||||||||
| Interest income | (47 | ) | (135 | ) | (300 | ) | (713 | ) | ||||||
| Interest expense | 1,284 | 1,326 | 3,721 | 4,036 | ||||||||||
| Other (income) expense, net | 149 | (644 | ) | 93 | (3,115 | ) | ||||||||
| Income before income taxes | 12,301 | 8,372 | 20,203 | 15,001 | ||||||||||
| Income tax expense | 4,810 | 3,312 | 7,755 | 5,924 | ||||||||||
| Net income | $ | 7,491 | $ | 5,060 | $ | 12,448 | $ | 9,007 | ||||||
| Basic Earnings Per Common Share | $ | 0.87 | $ | 0.60 | $ | 1.46 | $ | 1.08 | ||||||
| Diluted Earnings Per Common Share | $ | 0.85 | $ | 0.59 | $ | 1.42 | $ | 1.06 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
-1-
CONSOLIDATED BALANCE
SHEETS
(unaudited)
| (thousands, except share data) |
July 2 2004 | October 3 2003 | June 27 2003 | ||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and temporary cash investments | $ | 40,258 | $ | 88,910 | $ | 62,696 | |||||
| Accounts receivable, less allowance for doubtful | |||||||||||
| accounts of $4,276, $4,214 and $4,316, | |||||||||||
| respectively | 82,630 | 43,104 | 75,888 | ||||||||
| Inventories, net | 62,373 | 50,594 | 51,606 | ||||||||
| Deferred income taxes | 7,027 | 6,392 | 5,209 | ||||||||
| Other current assets | 4,985 | 6,135 | 5,190 | ||||||||
| Total current assets | 197,273 | 195,135 | 200,589 | ||||||||
| Property, plant and equipment, net | 38,007 | 31,023 | 30,520 | ||||||||
| Deferred income taxes | 18,681 | 18,637 | 19,478 | ||||||||
| Intangible assets, net | 40,667 | 29,573 | 29,459 | ||||||||
| Other assets | 3,032 | 3,289 | 2,960 | ||||||||
| Total assets | $ | 297,660 | $ | 277,657 | $ | 283,006 | |||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt and current maturities of long-term | |||||||||||
| debt | $ | 15,755 | $ | 9,587 | $ | 9,591 | |||||
| Accounts payable | 18,574 | 15,627 | 16,619 | ||||||||
| Accrued liabilities: | |||||||||||
| Salaries and wages | 10,980 | 8,899 | 8,029 | ||||||||
| Income taxes | 3,168 | 499 | 5,192 | ||||||||
| Other | 27,570 | 25,006 | 24,859 | ||||||||
| Total current liabilities | 76,047 | 59,618 | 64,290 | ||||||||
| Long-term debt, less current maturities | 51,318 | 67,886 | 68,444 | ||||||||
| Other liabilities | 6,608 | 5,959 | 5,651 | ||||||||
| Total liabilities | 133,973 | 133,463 | 138,385 | ||||||||
| Shareholders' equity: | |||||||||||
| Preferred stock: none issued | -- | -- | -- | ||||||||
| Common stock: | |||||||||||
| Class A shares issued: | |||||||||||
| July 2, 2004, 7,575,836; | |||||||||||
| October 3, 2003, 7,382,979; | |||||||||||
| June 27, 2003, 7,211,649 | 379 | 369 | 361 | ||||||||
| Class B shares issued (convertible into Class A): | |||||||||||
| July 2, 2004, 1,221,715; | |||||||||||
| October 3, 2003, 1,222,647; | |||||||||||
| June 27, 2003, 1,222,729 | 61 | 61 | 61 | ||||||||
| Capital in excess of par value | 52,278 | 50,093 | 48,476 | ||||||||
| Retained earnings | 105,956 | 93,510 | 97,165 | ||||||||
| Contingent compensation | (32 | ) | (20 | ) | (32 | ) | |||||
| Accumulated other comprehensive income (loss) | 5,045 | 181 | (1,410 | ) | |||||||
| Total shareholders' equity | 163,687 | 144,194 | 144,621 | ||||||||
| Total liabilities and shareholders' equity | $ | 297,660 | $ | 277,657 | $ | 283,006 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
-2-
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(unaudited)
| (thousands) |
Nine Months Ended | |||||||
| July 2 2004 | June 27 2003 | |||||||
| CASH USED FOR OPERATIONS | ||||||||
| Net income | $ | 12,448 | $ | 9,077 | ||||
| Adjustments to reconcile net income to net cash used for operating | ||||||||
| activities: | ||||||||
| Depreciation and amortization | 6,262 | 5,844 | ||||||
| Deferred income taxes | (693 | ) | (24 | ) | ||||
| Change in assets and liabilities: | ||||||||
| Accounts receivable, net | (29,314 | ) | (33,419 | ) | ||||
| Inventories, net | (3,990 | ) | (7,010 | ) | ||||
| Accounts payable and accrued liabilities | 4,947 | (3,067 | ) | |||||
| Other, net | 929 | (1,610 | ) | |||||
| (9,411 | ) | (30,209 | ) | |||||
| CASH USED FOR INVESTING ACTIVITIES | ||||||||
| Net assets of business acquired | (28,000 | ) | -- | |||||
| Net additions to property, plant and equipment | (4,758 | ) | (5,612 | ) | ||||
| (32,758 | ) | (5,612 | ) | |||||
| CASH USED FOR FINANCING ACTIVITIES | ||||||||
| Principal payments on senior notes and other long-term debt | (9,538 | ) | (8,071 | ) | ||||
| Common stock transactions | 1,660 | 806 | ||||||
| (7,878 | ) | (7,265 | ) | |||||
| Effect of foreign currency fluctuations | 1,395 | 4,952 | ||||||
| Decrease in cash and temporary cash investments | (48,652 | ) | (38,134 | ) | ||||
| CASH AND TEMPORARY CASH INVESTMENTS | ||||||||
| Beginning of period | 88,910 | 100,830 | ||||||
| End of period | $ | 40,258 | $ | 62,696 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
-3-
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
| 1 | Basis of Presentation |
| 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 its subsidiaries (the Company) as of July 2, 2004 and the results of operations for the three and nine months ended July 2, 2004 and cash flows for the nine months ended July 2, 2004. 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 3, 2003. |
| Because of seasonal and other factors, the results of operations for the three and nine months ended July 2, 2004 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. |
| Certain amounts as previously reported have been reclassified to conform to the current period presentation. |
| 2 | Earnings per Share |
| The following table sets forth the computation of basic and diluted earnings per common share: |
| Three Months Ended |
Nine Months Ended | |||||||||||||
| July 2 2004 | June 27 2003 | July 2 2004 | June 27 2003 | |||||||||||
| Net income for basic and diluted earnings | ||||||||||||||
| per share | $ | 7,491 | $ | 5,060 | $ | 12,448 | $ | 9,077 | ||||||
| Weighted average common shares | ||||||||||||||
| outstanding | 8,582,127 | 8,407,335 | 8,558,492 | 8,388,534 | ||||||||||
| Less nonvested restricted stock | (2,515 | ) | (4,830 | ) | (3,519 | ) | (5,560 | ) | ||||||
| Basic average common shares | 8,579,612 | 8,402,505 | 8,554,973 | 8,382,974 | ||||||||||
| Dilutive stock options and restricted stock | 215,335 | 176,618 | 211,127 | 161,757 | ||||||||||
| Diluted average common shares | 8,794,947 | 8,579,123 | 8,766,100 | 8,544,731 | ||||||||||
| Basic earnings per common share | $ | 0.87 | $ | 0.60 | $ | 1.46 | $ | 1.08 | ||||||
| Diluted earnings per common share | $ | 0.85 | $ | 0.59 | $ | 1.42 | $ | 1.06 | ||||||
| 3 | Stock-Based Compensation and Stock Ownership Plans |
| The Company accounts for its stock-based compensation plans under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The pro forma information below was determined using the fair value method based on provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, issued in December 2002. |
-4-
| Three Months Ended |
Nine Months Ended | |||||||||||||
| July 2 2004 | June 27 2003 | July 2 2004 | June 27 2003 | |||||||||||
| Net income | $ | 7,491 | $ | 5,060 | $ | 12,448 | $ | 9,077 | ||||||
| Total additional stock-based employee | ||||||||||||||
| compensation expense determined under fair | ||||||||||||||
| value method for all awards, net of tax | (62 | ) | (67 | ) | (102 | ) | (211 | ) | ||||||
| Pro forma net income | $ | 7,429 | $ | 4,993 | $ | 12,346 | $ | 8,866 | ||||||
| Basic earnings per common share | ||||||||||||||
| As reported | $ | 0.87 | $ | 0.60 | $ | 1.46 | $ | 1.08 | ||||||
| Pro forma | $ | 0.87 | $ | 0.59 | $ | 1.44 | $ | 1.06 | ||||||
| Diluted earnings per common share | ||||||||||||||
| As reported | $ | 0.85 | $ | 0.59 | $ | 1.42 | $ | 1.06 | ||||||
| Pro forma | $ | 0.85 | $ | 0.58 | $ | 1.41 | $ | 1.04 | ||||||
| The Company’s current stock ownership 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. During 2004, 2003 and 2002, 22,872, 9,585 and 10,378 shares, respectively, were issued under this plan. Shares available for purchase by employees under this plan were 33,957 at July 2, 2004. |
| A summary of stock option activity related to the Company’s plans is as follows: |
| Shares | Weighted Average Exercise Price | |||||||
| Outstanding at October 3, 2003 | 690,885 | $ 8.80 | ||||||
| Granted | 9,750 | 19.88 | ||||||
| Exercised | (165,540 | ) | 8.03 | |||||
| Cancelled | (30,334 | ) | 20.34 | |||||
| Outstanding at July 2, 2004 | 504,761 | $ 8.60 | ||||||
| Options to purchase 969,216 shares of Class A common stock with a weighted average exercise price of $9.07 per share were outstanding at June 27, 2003. |
| 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. |
| 4 | Acquisitions |
| On May 5, 2004, the Company acquired all of the issued and outstanding capital stock of Techsonic Industries, Inc. (Techsonic) and certain registered patents and trademarks used by Techsonic in its business of manufacturing and marketing underwater sonar and GPS technology equipment. Techsonic will continue its business and was added to the Company’s Motors segment. With this combination, the Company has renamed the Motors segment the “Marine Electronics Group.” The initial purchase price paid was approximately $28.0 million. The purchase price was subject to a working capital adjustment, which was completed in July 2004. The final allocation of the purchase price has not been finalized as of the date on which this report was filed. Pro-forma financial information related to the Techsonic acquisition is not required due to the immateriality of the transaction. |
-5-
| 5 | Pension Plans |
| The components of net periodic benefit cost related to Company administered benefit plans for the three and nine months ended July 2, 2004 and June 27, 2003 were as follows. |
| Three Months Ended |
Nine Months Ended | |||||||||||||
| July 2 2004 | June 27 2003 | July 2 2004 | June 27 2003 | |||||||||||
| Components of net periodic benefit cost: | ||||||||||||||
| Service cost | $ | 144 | $ | 116 | $ | 430 | $ | 348 | ||||||
| Interest on projected benefit obligation | 222 | 220 | 665 | 659 | ||||||||||
| Less estimated return on plan assets | (191 | ) | (169 | ) | (573 | ) | (507 | ) | ||||||
| Amortization of unrecognized: | ||||||||||||||
| Net loss | 20 | 3 | 61 | 8 | ||||||||||
| Prior service cost | 6 | 6 | 19 | 19 | ||||||||||
| Transition asset | (15 | ) | (18 | ) | (46 | ) | (53 | ) | ||||||
| Net amount recognized | $ | 186 | $ | 158 | $ | 556 | $ | 474 | ||||||
| 6 | New Accounting Pronouncements |
| In December 2003, the FASB issued the revised SFAS No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits (SFAS 132). The revised SFAS 132 retains the disclosures required by the original issuance of SFAS 132 and requires additional annual disclosures describing the types of plan assets, investment strategy, measurement date, plan obligations and cash flows. The Company will include the revised SFAS 132 annual disclosures in its Annual Report on Form 10-K for the fiscal year ending October 1, 2004. The revised SFAS 132 also requires additional interim period disclosures, including the components of net periodic benefit cost and changes in planned contributions. As required, the Company has included the applicable interim period disclosures of the revised SFAS 132 in this Quarterly Report on Form 10-Q. (See Note 5 to these financial statements.) |
| 7 | Income Taxes |
| 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. |
-6-
| 8 | Inventories |
| Inventories at the end of the respective periods consist of the following: |
| July 2 2004 | October 3 2003 | June 27 2003 | |||||||||
| Raw materials | $ | 29,050 | $ | 19,009 | $ | 20,467 | |||||
| Work in process | 2,213 | 2,065 | 1,678 | ||||||||
| Finished goods | 36,966 | 33,362 | 33,105 | ||||||||
| 68,229 | 54,436 | 55,250 | |||||||||
| Less reserves | 5,856 | 3,842 | 3,644 | ||||||||
| $ | 62,373 | $ | 50,594 | $ | 51,606 | ||||||
| 9 | Warranties |
| The Company provides for warranties of certain products as they are sold in accordance with SFAS No. 5, Accounting for Contingencies. The following table summarizes the warranty activity for the nine months ended July 2, 2004 and June 27, 2003. |
| 2004 | 2003 | |||||||
| Balance at beginning of fiscal period | $ | 3,270 | $ | 1,846 | ||||
| Expense accruals for warranties issued during the period | 2,182 | 1,951 | ||||||
| Less current period warranty claims paid | 2,074 | 1,518 | ||||||
| Balance at end of quarter | $ | 3,378 | $ | 2,279 | ||||
| 10 | Comprehensive Income |
| Comprehensive income 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 U.S. Dollar against the Euro created the translation adjustment income for the three months ended July 2, 2004. |
| Comprehensive income for the respective periods consists of the following: |
| Three Months Ended |
Nine Months Ended | |||||||||||||
| July 2 2004 | June 27 2003 | July 2 2004 | June 27 2003 | |||||||||||
| Net income | $ | 7,491 | $ | 5,060 | $ | 12,448 | $ | 9,077 | ||||||
| Translation adjustment | 1,843 | 3,202 | 4,864 | 10,511 | ||||||||||
| Comprehensive income | $ | 9,334 | $ | 8,262 | $ | 17,312 | $ | 19,588 | ||||||
-7-
| 11 | Segments of Business |
| 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 that aggregated approximately 10.7% and 11.5% of the Company’s total net sales during the three months ended July 2, 2004 and June 27, 2003, respectively, and 14.0% and 12.4% of the Company’s total net sales during the nine months ended July 2, 2004 and June 27, 2003, 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. Identifiable assets represent assets that are 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: |
| Three Months Ended |
Nine Months Ended | |||||||||||||
| July 2 2004 | June 27 2003 | July 2 2004 | June 27 2003 | |||||||||||
| Net sales: | ||||||||||||||
| Marine electronics: | ||||||||||||||
| Unaffiliated customers | $ | 42,984 | $ | 29,577 | $ | 92,580 | $ | 71,394 | ||||||
| Interunit transfers | 128 | 244 | 423 | 764 | ||||||||||
| Outdoor equipment: | ||||||||||||||
| Unaffiliated customers | 27,188 | 25,123 | 67,127 | 55,791 | ||||||||||
| Interunit transfers | 14 | 25 | 47 | 68 | ||||||||||
| Watercraft: | ||||||||||||||
| Unaffiliated customers | 28,542 | 31,253 | 60,387 | 62,586 | ||||||||||
| Interunit transfers | 487 | 304 | 775 | 829 | ||||||||||
| Diving: | ||||||||||||||
| Unaffiliated customers | 22,224 | 22,418 | 59,205 | 56,549 | ||||||||||
| Interunit transfers | 3 | 7 | 12 | 36 | ||||||||||
| Other | 238 | 175 | 403 | 386 | ||||||||||
| Eliminations | (642 | ) | (580 | ) | (1,257 | ) | (1,697 | ) | ||||||
| $ | 121,166 | $ | 108,546 | $ | 279,702 | $ | 246,706 | |||||||
| Operating profit (loss): | ||||||||||||||
| Marine electronics | $ | 8,445 | $ | 5,454 | $ | 19,001 | $ | 11,327 | ||||||
| Outdoor equipment | 4,760 | 4,416 | 11,692 | 8,855 | ||||||||||
| Watercraft | 639 | 1,759 | (4,934 | ) | (1,281 | ) | ||||||||
| Diving | 4,936 | 1,123 | 9,686 | 6,306 | ||||||||||
| Other | (5,093 | ) | (3,833 | ) | (11,727 | ) | (9,998 | ) | ||||||
| $ | 13,687 | $ | 8,919 | $ | 23,717 | $ | 15,209 | |||||||
| Total assets (end of period): | ||||||||||||||
| Marine electronics | $ | 65,347 | $ | 31,791 | ||||||||||
| Outdoor equipment | 33,455 | 30,669 | ||||||||||||
| Watercraft | 71,918 | 74,242 | ||||||||||||
| Diving | 94,934 | 97,548 | ||||||||||||
| Other | 32,006 | 48,756 | ||||||||||||
| $ | 297,660 | $ | 283,006 | |||||||||||
-8-
| 12 | Litigation |
| 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 December 22, 2003, the Company entered into a confidential settlement agreement with a former employee. Under the terms of the agreement the Company was entitled to receive up to $2.0 million. The funds related to the settlement were received during the three months ended July 2, 2004 and are reflected in the operating results of the Company. |
| 13 | Subsequent Events |
| 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 into its fiscal 2005 year. |
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.
-9-
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.
| Year Ended | ||||||||||||||
| October 3, 2003 | September 27, 2002 | |||||||||||||
| Quarter Ended |
Net Sales | Operating Profit (Loss) | Net Sales | Operating Profit (Loss) | ||||||||||
| December | 17 | % | 1 | % | 17 | % | 5 | % | ||||||
| March | 27 | 53 | 29 | 42 | ||||||||||
| June | 34 | 77 | 34 | 66 | ||||||||||
| September | 22 | (31 | ) | 20 | (13 | ) | ||||||||
| 100 | % | 100 | % | 100 | % | 100 | % | |||||||
The Company’s sales and operating earnings by segment are summarized as follows:
| (millions) |
Three Months Ended | Nine Months Ended | ||||||||||||
| July 2 2004 | June 27 2003 | July 2 2004 | June 27 2003 | |||||||||||
| Net sales: | ||||||||||||||
| Marine electronics | $ | 43.1 | $ | 29.8 | $ | 93.0 | $ | 72.2 | ||||||
| Outdoor equipment | 27.2 | 25.1 | 67.2 | 55.9 | ||||||||||
| Watercraft | 29.0 | 31.6 | 61.2 | 63.4 | ||||||||||
| Diving | 22.2 | 22.4 | 59.2 | 56.6 | ||||||||||
| Other/eliminations | (0.3 | ) | (0.4 | ) | (0.9 | ) | (1.4 | ) | ||||||
| Total | $ | 121.2 | $ | 108.5 | $ | 279.7 | $ | 246.7 | ||||||
| Operating profit: | ||||||||||||||
| Marine electronics | $ | 8.4 | $ | 5.5 | $ | 19.0 | $ | 11.3 | ||||||
| Outdoor equipment | 4.8 | 4.4 | 11.7 | 8.9 | ||||||||||
| Watercraft | 0.6 | 1.8 | (4.9 | ) | (1.3 | ) | ||||||||
| Diving | 4.9 | 1.1 | 9.7 | 6.3 | ||||||||||
| Other/eliminations | (5.0 | ) | (3.9 | ) | (11.8 | ) | (10.0 | ) | ||||||
| Total | $ | 13.7 | $ | 8.9 | $ | 23.7 | $ | 15.2 | ||||||
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:
| (millions) |
Nine Months Ended | |||||||
| July 2 2004 | June 27 2003 | |||||||
| Cash used for: | ||||||||
| Operating activities | $ | (9.4 | ) | $ | (30.2 | ) | ||
| Investing activities | (32.8 | ) | (5.6 | ) | ||||
| Financing activities | (7.9 | ) | (7.3 | ) | ||||
| Effect of exchange rate changes | 1.4 | 5.0 | ||||||
| Decrease in cash and temporary cash investments | $ | (48.7 | ) | $ | (38.1 | ) | ||
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.
-13-
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.
| (millions) |
Payment Due by Fiscal Years | ||||||||||||||||
| Total | Remaining 2004 | 2005/2006 | 2007/2008 | After 2008 | |||||||||||||
| Long-term debt (1) | $ | 67.1 | $ | 0.1 | $ | 29.2 | $ | 27.8 | $ | 10.0 | |||||||
| Operating lease obligations | 17.3 | 1.3 | 7.3 | 4.1 | 4.6 | ||||||||||||
| Outstanding purchase orders | 26.6 | 26.6 | -- | -- | -- | ||||||||||||
| Total contractual obligations | $ | 111.0 | $ | 28.0 | $ | 36.5 | $ | 31.9 | $ | 14.6 | |||||||
(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.
-14-
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:
| (millions) |
Estimated Impact on | |||||||
| Fair Value | Earnings Before Income Taxes | |||||||
| Interest rate instruments | $ 1.3 | $ 0.7 | ||||||
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.
-15-
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.”
| (a) | In accordance with Rule 13a–15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management carried out an evaluation, with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)). Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the date of such evaluation to ensure that material information relating to the Company (including consolidated subsidiaries) was made known to them by others within those entities, particularly during the period in which this Form 10-Q was being prepared. |
| (b) | There were no changes in internal control over financial reporting that occurred during the quarter ended July 2, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. |
| (a) | The following exhibits are filed as part of this Form 10-Q: |
| 31.1 | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (b) | Reports on Form 8-K: |
| On April 5, 2004, the Company filed a Current Report on Form 8-K, dated March 29, 2004, to reflect (under Item 4 of Form 8-K) the Company’s change in independent auditors for the Johnson Outdoors Retirement and Savings Plan. |
| On April 29, 2004, the Company filed a Current Report on Form 8-K, dated April 29, 2004, furnishing under Item 12, the Company’s earnings press release for the reporting period ended April 2, 2004. |
| On May 5, 2004, the Company filed a Current Report on Form 8-K, dated May 5, 2004, reporting under Item 2, the Company’s acquisition of all of the issued and outstanding capital stock of Techsonic Industries, Inc. |
| On May 26, 2004, the Company filed a Current Report on Form 8-K reporting under Item 9, the death of Samuel C. Johnson, a Director of Johnson Outdoors Inc. on May 22, 2004. |
-16-
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.
| JOHNSON OUTDOORS INC. | |
Signatures Dated: August 16, 2004 | |
| /s/ Helen P. Johnson-Leipold | |
| Helen P. Johnson-Leipold | |
| Chairman and Chief Executive Officer | |
| /s/ Paul A. Lehmann | |
| Paul A. Lehmann | |
| Vice President and Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
-17-
| Exhibit Number |
Description |
| 31.1 | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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