Here's How Johnson Outdoors Fared During FY 2014

Summary

• Bad weather and asset impairments impacted Johnson Outdoors’ top and bottom line results.
• Lower capital expenditures made up for it on the free cash flow front.
• Johnson Outdoors’ excellent balance sheet should help it through tough times.

On Dec. 5, Johnson Outdoors (NASDAQ: NASDAQ:JOUT), a company that makes and sells recreational products used in fishing, paddling, hiking, and camping came out with its FY 2014 earnings announcement and 10-k. Overall, the company saw some lousy performance last year. Let's take a look to see what's going on with it.

Weather affected top line results

Johnson Outdoors' overall revenue declined 0.25% for its FY 2014 which the company attributed to unusually cold weather. However, the company more than made up for it in the second half of the year. This goes to show that people don't want to do recreation out in the cold and this should be taken into consideration when weighing these types of investments. Net Income declined 53% last year. Shipping delays as well as weak demand in the diving segment contributed heavily to the gross profit decline. One-time items such as the write down of "certain intangible assets" in its Jetboil business impacted operating income contributing to the heavy decline in net income.

Free cash flow expanded

Free cash flow expanded 56% in Johnson Outdoors' FY 2014. Operating cash flow increased 11%, getting a partial boost from accounts receivable and a lower inventory. Also the backing out of impairment losses contributed to greater operating cash flow balance. Moreover, capital expenditures declined 19% year-over-year and had disposal of plant, property, and equipment of $1.4 million which was absent in the previous year. Personally, I would like to see an increase in net income give a boost to free cash flow rather than impairment accruals, inventory reduction and collection of receipts on already booked sales from customers.

Excellent balance sheet

Johnson Outdoors is one of the few companies that I have researched that meets my strict balance sheet criteria. The company possesses $70.8 million in cash which equates to 36% of stockholder's equity. I like to see a company with cash amounting to 20% or more of stockholder's equity. This company should easily get through the rough patches outlined above. It can self-finance innovation, acquisitions and dividend increases.

The company harbors $7.4 million in long-term debt which only equates to 4% of stockholder's equity. This means that profit choking interest expense will be kept to a minimum. I like to see companies with long-term debt amounting to 50% or less of stockholder's equity. Johnson Outdoors' operating income exceeded interest expense by 21 times in its FY 2014. The rule of thumb for safety here lies at five times or more.

Dividend sustainability

Johnson Outdoors paid out $3 million in dividends during FY 2014. This equates to a very sustainable 14% of free cash flow. I always like to see companies pay out 50% or less of their free cash flow in dividends so they can use some of the free cash flow for other things. Currently the company pays shareholders $0.30 per share per year and yields 1% annually.

Looking ahead

This company obviously had a rough year with rough weather and sour assets. However, these represent temporary conditions that a company can move past. Johnson Outdoors' excellent balance sheet means that this company merits a place on your watch list. However, I am currently bearish on the company due to its high P/E ratio of 30 which compares unfavorably to the S&P 500's P/E of 19 and Johnson Outdoors' five year average of 7. Investors may want to wait for a steep correction and for an improvement in the top and bottom lines before buying.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.