Johnson Outdoors Inc. decision to double down on an expensive patent litigation battle with much larger Garmin Ltd caused its operating margins to tumble in the fiscal second quarter despite strong sales growth at three of its four business units.
The company reported operating profits tumbled by about a third in the fiscal second quarter ended April 3 even as revenue rose 7.1 percent to $133.1 million on strong performances at it Marine Electronics, Watercraft and Outdoor Gear units. Foreign currency translation had a 2 percent negative impact on revenue.
Sales grew 9 percent to $89.3 million at the flagship Marine Electronics unit thanks to strong sales of Minn Kota, although operating profit fell 19 percent as JOUT increased spending to defend patents and boost advertising.
Watercraft broke even on sales of $13.9 million, which were up 5.1 percent from a year ago thanks a strong response to new products.
Outdoor Gear profits rose 86.7 percent to $1.1 million on an 11 percent jump in sales, which reached $12.2 million. Operating margins surged 360 basis points to 8.8 percent thanks largely to Jetboil.
“Jetboil is having a great year and is showing a lot of growth and that's a high margin business,” said David Johnson.
Diving swung to a loss of -$369,000 from a profit of $605,000 a year earlier as sales slipped 2.9 percent due to unfavorable currency translation. Sales rose slightly in currency-neutral terms, although the important European market remains historically weak. JOUT expects to unveil a new strategic plan for the business later this year.
JOUT reported total gross profit declined 6.3 percent to $51.9 million, or 39.1 percent of net sales, down just 30 basis points from the fiscal second quarter ended March 29, 2014. The decline was due primarily to the negative impact of currency exchange rates, particularly on the Dive business, which has significant sales in Europe.
Operating margins tumbled about 38.7 percent, or 360 basis points, to 5.7 percent, however, as JOUT continued to spend aggressively on its lawsuit against Garmin, which it has sued for infringing patents on side imaging radar technology developed by Humminbird, which makes fish finders. Legal costs rose by $2.6 million in the quarter and $5.2 million in the six months ended April 3. Those expenses should fall steeply.
“This is unusually significant,” JOUT Chairman and CEO Helen Johnson-Leipold said of the litigation. “This patent is our side imaging, which is incredibly important to the company. This happens to be a very expensive but very important patent.”
VP and CFO David Johnson expects legal costs to fall substantially in the back half of the year.
JOUT also boosted spending on promotions at the flagship Marine Electronic unit by $1.4 million to support several product launches.
Net income reached $3.6 million, or 36 cents per diluted share, versus $7.4 million, or 67 cents in the year earlier quarter.
“Across the board it looks pretty good,” said Johnson-Leipold when asked about the outlook for the back half of the year.
