Description

DESCRIPTION

Johnson Outdoors Inc. designs, manufactures and markets top-quality outdoor recreational products in four businesses: Diving, Watercraft, Outdoor Equipment and Marine Electronics (the Marine Electronics business was known as the Motors business prior to July 2, 2004). In FY 2004, the company did $355.2 million in sales.

The Company is controlled by the family of the late billionaire Samuel C. Johnson, and is the only publicly traded company among the family's holdings. The four Johnson family companies, all based in Racine Wisconsin, together have more than 26,000 employees and more than $8 billion in sales.

A brief description of the Company’s four business units (from 10-K) is below –

Diving (22.54% of 2004 sales) - The Company manufactures and distributes technical underwater diving products, which it sells under the SCUBAPRO and UWATEC names. The Company markets a full line of underwater diving and snorkeling gear, including regulators, stabilizing jackets, dive computers, tanks, depth gauges, masks, fins, snorkels, diving electronics and other accessories.

Watercraft (21.2%) – This segment manufactures and markets kayaks, canoes, paddles, oars, recreational sailboats, personal flotation devices and small thermoformed recreational boats under the brand names Old Town , Carlisle Paddles , Ocean Kayak, Pacific Kayak , Canoe Sports, Necky , Escape , Extrasport , Waterquest and Dimension .

The Company’s kayaks, canoes and accessories are sold primarily to specialty stores and marine dealers, sporting goods stores and catalog and mail order houses such as L. L. Bean®, in the U.S. and Europe. The Company manufactures its Watercraft products in three locations in the U.S. and one in New Zealand. The Company is also active in Europe with most of the brands noted above.

Outdoor Equipment (25.37%) - The products sold by the Company’s Outdoor Equipment business include Eureka! military, commercial and consumer tents and backpacks and Silva field compasses. Eureka! consumer tents and packs compete primarily in the mid- to high-price range and are sold in the U.S. and Canada through independent sales representatives, primarily to sporting goods stores, catalog and mail order houses and camping and backpacking specialty stores.

Marine Electronics (30.77%) - The Company manufactures, under its Minn Kota brand, battery powered motors used on fishing boats and other boats for quiet trolling power or primary propulsion. The Company’s Minn Kota motors and related accessories are sold in the U.S., Canada, Europe and the Pacific Basin through large retail store chains such as Wal-Mart, catalogs such as Bass Pro Shops and Cabelas, sporting goods specialty stores, marine distributors, and original equipment manufacturers.

RECENT EVENTS

a) Military tent sales (part of Outdoor Equipment business) - During 2004 and 2003, sales to the U.S. military accounted for 15.7% and 13.4% of total Company net sales, respectively or about $50 million annually. Military tent sales are expected to drop 40% to 50% in fiscal 2005 due to the drying up of Military contracts. The company, along with other tent manufacturers is lobbying DoD to release funds to generate more sales. But in the absence of a war or conflict (which drives the buying pattern), there is little expectation of tent sales picking up. On May 27, the Company was awarded a $15.9 million urgent need military contract. This contract is expected to slow the decline in military tent sales and will be filled over the eight month period following the award date.

Note, however, that a new military contract, announced in early September caused the stock to jump up 20%. The contract includes three other vendors (including JOUT) and has a potential payout of a maximum $120 million. No orders have been placed yet, nor does the contract specify any order amounts to be placed with individual vendors. Nevertheless, this contract represents significant option value as a wildcard.

b)Techsonic acquisition - On May 5, 2004, the Company acquired Techsonic Industries, Inc. (Techsonic) for approximately $28.2 million. This acquisition added the popular Humminbird ® brand to the Company’s Marine Electronics business (the Marine Electronics business was known as the Motors business prior to July 2, 2004).

Management has made a very wise acquisition. Consider the 3 quarter numbers –
Sales = $31.4 million
Operating profit = $1.29 million
D&A = 12 % of $18.78 (ppe + goodwill + trademarks allocated to Techsonic)
= $2.2 million
Or 3 quarter EBITDA = $3.49 million against a purchase price of $28.2 million.

This division should not only slow the decline in net sales due to Military tents, but is also a high growth market for JOUT in the future.

c) Watercraft restructuring – Watercraft segment sales have declined from $82.8 million in 2000 to $75 million in 2004. This has been primarily due to excess capacity.

In July 2004, the Company began a restructuring plan to increase efficiency and improve profitability of this business. This effort is intended to make the Watercraft business leaner going forward. The Company announced plans to outsource manufacturing of its Grand Rapids, Michigan facility, and to shift production from Mansonville, Canada to its Old Town, Maine operation. The Company ceased manufacturing operations at both locations in September 2004. Costs and charges associated with these plans were estimated at $3.1 million, $2.4 million of which were included in Operating Expenses for 2004.

In addition, they have released innovative new products (like the Hydrolite Kayaks targetted at female and baby boomer consumer groups). As a result, Watercraft business net sales improved 7.8% and 2.0% in the three and nine months ended July 1, 2005, respectively. As well, margins have improved over the prior year.

As the turnaround get underway, the company does not expect any more restructuring charges in this segment. Long term, Watercraft could reach EBIT margins seen in 2000 (11%) which would add approximately $10 million to total company EBIT.

d) Failed going private transaction – In Feb 2004, the family announced that it wanted to take the company private by buying non-family-owned shares for $18. Billionaire Samuel Johnson, who died last May of cancer, has said that he regretted going public with Johnson Outdoors.

Shareholders complained that the price was too low. The family increased the offer to $20.10, but it was rejected by a vote of minority, non-family shareholders in March 2005.

Dolphin Limited Partnership, which holds a 4% stake in the company, subsequently offered to acquire 1.5 million shares of the company's authorized but un-issued Class B shares at $21, then raised the bid to $21.75. The later offer was 15% above the market price at the time but was rejected by the company.

(The Company’s Class A common stock is traded on The NASDAQ under the symbol: JOUT. The Class B stock (not traded) is convertible into shares of Class A common stock on a share for share basis. Holders of Class A common stock are entitled to elect 25% of the members of the Board of Directors and holders of Class B common stock are entitled to elect the remaining directors. At November 1, 2004, the Johnson Family held approximately 46% of the Class A stock, approximately 96% of the Class B stock and therefore approximately 77% of the voting power of both classes of common stock taken as a whole.)


FINANCIALS
At a recent price of $16.76, the market cap is $150 million and EV is $150.5 million. TTM EBITDA is $28.9 million (=$15.5 million EBIT + $2.5 million of merger costs included in opex but will not be present going forward + $0.4 non-cash equity compensation + $0.9 of Watercraft restructuring expenses).

The company is hence trading at a EV/EBITDA of 5.2.

OTHER FACTORS
As a result of their focus on improving Working Capital, Management improved Inventory DSO to 103 days in the Q3 2005, versus 108 days in Q3 204. Additionally, the company made good progress in inventory reduction in the Diving and Watercraft businesses. Management will continue to focus on this area which should help in generating cash.

Dolphin, acting as an activist shareholder, has suggested further initiatives to management to increase shareholder value/share price – a Dutch Auction Tender offer for 1 million shares at $19-21, a stock split to increase liquidity or a dividend.

That’s it. We have a stock trading at a low multiple (5.7), with a turnaround underway in one of the segments, a failed buyout offer by management 20% above the current price, an activist shareholder and a wildcard in the form of possible DoD contracts.

RISK FACTORS
a) Military tent sale declines are more pronounced than expected.
b) Watercraft turnaround fails
c) Takeunder by management or a third party.
d) Economic recession – since the company makes recreational products, any slowdown in the economy will hit sales.

Catalyst

a) Watercraft turnaround succeeds
b) Share buybacks.
c) DoD contracts for military tents are approved