Columbia Sportswear Company — Q3 2012 Form 10-Q Summary
Reporting period: Quarterly period ended September 30, 2012; results are unaudited and presented for the three and nine months ended September 30, 2012, compared with the prior-year periods. The company designs, sources, markets and distributes outdoor apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel and Montrail brands. Results are highly seasonal, with sales and profitability weighted toward the second half of the year.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $545.0 million | $566.8 million | $1,168.5 million | $1,167.9 million |
| Gross profit | $243.7 million | $249.6 million | $509.5 million | $511.5 million |
| Gross margin | 44.7% | 44.0% | 43.6% | 43.8% |
| Income from operations | $87.8 million | $86.6 million | $82.4 million | $85.9 million |
| Operating margin | 16.1% | 15.3% | 7.1% | 7.4% |
| Net income | $64.4 million | $67.5 million | $60.4 million | $66.8 million |
| Diluted EPS | $1.88 | $1.98 | $1.77 | $1.95 |
| Cash dividends per share | $0.22 | $0.22 | $0.66 | $0.64 |
Balance Sheet and Liquidity
- Cash and cash equivalents were $94.2 million at September 30, 2012, compared with $241.0 million at December 31, 2011 and $87.9 million at September 30, 2011. Short-term investments were $2.1 million.
- Inventories increased to $475.7 million from $432.1 million at September 30, 2011 and $365.2 million at December 31, 2011, primarily reflecting seasonal inventory buildup.
- Total liabilities were $300.1 million and shareholders’ equity was $1.128 billion. Notes payable totaled $10.2 million, representing borrowings by the Korean subsidiary.
- The company had no borrowings under its $125.0 million unsecured, committed domestic revolving credit facility and remained in compliance with its covenants. International subsidiary credit lines totaled approximately $105.1 million, with $10.2 million outstanding.
- Approximately 43% of cash and short-term investments were held by foreign subsidiaries and were intended to remain reinvested outside the United States.
Cash Flow and Capital Allocation
- Net cash used in operating activities was $110.6 million for the first nine months of 2012, versus $142.0 million in the prior-year period. Working-capital outflows included $68.6 million from accounts receivable and $108.0 million from inventories.
- Net cash used in investing activities was $31.5 million, including $32.4 million of capital expenditures. The prior-year period generated $26.3 million of investing cash, mainly from sales of short-term investments.
- Net cash used in financing activities was $3.4 million, including $22.3 million of dividends, partly offset by $10.2 million of net credit-facility proceeds and $8.3 million of net stock-plan proceeds.
- The company paid a quarterly dividend of $7.5 million. It repurchased $0.2 million of common stock during the first nine months and had repurchased 9.6 million shares for approximately $441.4 million since the program began.
Material Changes Versus Prior Comparable Period
- Q3 sales: Decreased 4%, or $21.8 million. Foreign exchange reduced the comparison by approximately two percentage points.
- Geographic performance: United States sales increased 4% to $347.8 million and LAAP sales increased 16% to $84.7 million. EMEA sales fell 40% to $60.5 million and Canada sales fell 13% to $52.0 million.
- Product performance: Apparel, accessories and equipment sales declined 2% in Q3, while footwear declined 10%. Sorel sales decreased 15% in Q3; Columbia sales decreased 2%.
- Margins: Q3 gross margin expanded 70 basis points due to planned price increases, lower air freight and favorable currency hedge rates, partly offset by lower margins on excess inventory. Nine-month gross margin contracted 20 basis points because of promotional liquidation activity and a greater proportion of lower-margin distributor shipments.
- Expenses and profitability: Q3 SG&A declined 4% to $160.2 million, or 29.4% of sales, reflecting cost containment and favorable currency effects. Nine-month SG&A increased slightly to $437.9 million due to ERP implementation costs, restructuring charges and direct-to-consumer expansion.
- Taxes: The effective tax rate increased to 26.7% in Q3 and 27.1% for the first nine months, versus 22.4% and 23.4%, respectively, primarily due to geographic earnings mix and nonrecurring foreign tax credits recognized in 2011.
- Restructuring: The company recorded approximately $4.0 million of restructuring charges, primarily employee termination costs, during the first quarter. The nine-month net-of-tax impact was approximately $2.8 million, or $0.08 per diluted share.
Guidance, Outlook, Commentary and Risks
- Management stated that full-year 2012 net-sales growth compared with 2011 was expected to be limited by the unusually warm 2011/2012 winter and challenging economic conditions, particularly in Europe. No specific full-year sales or earnings guidance was provided.
- Management expected full-year SG&A to decrease slightly from 2011, supported by headcount reductions, reduced compensation and benefits increases, and lower travel, event and discretionary spending.
- The company expects to fund future capital expenditures with existing cash, operating cash flow and credit facilities and believes liquidity requirements for at least the next 12 months are adequately covered.
- On August 6, 2012, Columbia agreed with Swire Resources Limited to form a China joint venture, with Columbia holding a 60% interest. Operations were expected to begin January 1, 2014, subject to Chinese regulatory approval and other customary conditions.
- Key risks include weather-driven demand volatility, discretionary consumer spending, excess inventory and promotional markdowns, foreign-currency fluctuations, customer cancellations and retailer consolidation, international economic weakness, dependence on independent factories and suppliers, and transportation and input-cost volatility.
- The company is implementing a global ERP system over several years. The Canadian rollout began in April 2012; management identified potential risks involving implementation costs, business disruption, data migration and changes to internal controls.
- Inventory purchase obligations totaled $287.5 million at September 30, 2012. Product warranty reserves were $9.8 million, and management stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
- Currency forward contracts were used to hedge anticipated inventory purchases and other currency exposures. Approximately $3.6 million of deferred net derivative gains were expected to be reclassified into income during the following 12 months, subject to exchange rates and underlying transactions.
Investor Verification Items
- Verify the sustainability of the Q3 gross-margin improvement versus the nine-month margin decline, particularly the effects of excess-inventory markdowns, distributor mix and currency hedges.
- Monitor inventory growth, purchase commitments and future promotional activity given the $475.7 million inventory balance and $287.5 million of inventory purchase obligations.
- Assess whether EMEA and Canada sales stabilize after declines attributed to warm weather, retailer consolidation and weak economic conditions.
- Evaluate ERP implementation progress, related expenses and any effects on operational continuity or internal controls.
- Track cash generation, seasonal working-capital requirements and the use of international cash that management intends to reinvest outside the United States.
- Confirm regulatory approvals, capitalization, governance and expected financial effects of the proposed China joint venture.