Columbia Sportswear Company: FY2013 Form 10-K Summary
Business context and reporting period
Columbia Sportswear designs, sources, markets and distributes outdoor apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel and Montrail brands. Products were sold in approximately 100 countries through wholesale, distributor, licensing and direct-to-consumer channels. The filing covers the fiscal year ended December 31, 2013; the supplied filing also includes unaudited fourth-quarter data.
Sales and profitability are highly seasonal: approximately 63% of 2013 sales and nearly all profitability occurred in the second half of the year. The company operates through four geographic segments: United States, Latin America and Asia Pacific, Europe, Middle East and Africa, and Canada.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $1,685.0 million | $1,669.6 million | Up 1% |
| Gross profit | $743.7 million | $716.4 million | Up 4% |
| Gross margin | 44.1% | 42.9% | Up 120 basis points |
| Income from operations | $131.8 million | $133.5 million | Down 1% |
| Operating margin | 7.8% | 8.0% | Down 20 basis points |
| Net income attributable to Columbia | $94.3 million | $99.9 million | Down 6% |
| Diluted EPS | $2.72 | $2.93 | Down 7% |
| Cash dividends per share | $0.91 | $0.88 | Up $0.03 |
| Cash flow from operations | $274.3 million | $148.7 million | Up $125.6 million |
2013 sales benefited from higher U.S. direct-to-consumer sales and colder late-year North American weather, partly offset by lower footwear sales and unfavorable foreign exchange. Apparel, accessories and equipment sales increased 2% to $1,374.6 million, while footwear sales decreased 4% to $310.4 million.
- United States sales: $971.3 million, up 3%.
- LAAP sales: $354.4 million, down 6%, including an approximately 7% foreign-exchange headwind.
- EMEA sales: $240.7 million, up 4%, aided by currency, but direct-business performance remained weak.
- Canada sales: $118.6 million, up 3% despite an approximately 4% foreign-exchange headwind.
- SG&A expense increased 5% to $625.7 million, or 37.1% of sales, driven by direct-to-consumer expansion, incentive compensation and impairment charges.
- Effective tax rate increased to 28.8% from 25.4%.
Cash, liquidity and capital structure
| Balance-sheet item | December 31, 2013 |
|---|---|
| Cash and cash equivalents | $437.5 million |
| Short-term investments | $91.8 million |
| Accounts receivable, net | $306.9 million |
| Inventories, net | $329.2 million |
| Total assets | $1,605.6 million |
| Total liabilities | $352.7 million |
| Total equity | $1,252.9 million |
| Outstanding borrowings under disclosed credit lines | None |
Capital expenditures were $69.4 million, primarily for the global ERP program, direct-to-consumer expansion and maintenance. Financing cash outflow was $4.7 million, including $31.3 million of dividends, partially offset by employee stock-plan proceeds and the China joint venture partner’s capital contribution.
The company had an undrawn $125.0 million unsecured committed domestic revolving credit facility and approximately $103.4 million of international operating lines, with no outstanding balances at year-end. Management expected existing cash, operating cash flow and available credit facilities to cover liquidity needs for at least the next 12 months.
Material changes versus prior comparable period
- Sales increased modestly, but net income declined because of higher operating expenses, a higher tax rate and an impairment charge.
- Gross margin expanded due to lower inventory provisions, more full-price wholesale sales, greater direct-to-consumer mix and less promotional activity.
- A $9.0 million impairment charge was recorded for the European distribution center; the filing identifies approximately $5.6 million of after-tax impact on net income, or $0.16 per diluted share.
- Operating cash flow increased substantially as inventory and accounts receivable declined and accounts payable and accrued liabilities increased.
- The company committed $12.0 million to a 60%-owned China joint venture with Swire; Swire contributed $8.0 million. The venture began operations January 1, 2014.
- China-related spring 2014 inventory sales, gross profit and licensing income were deferred. At year-end, $20.6 million of inventory was held by the joint venture and $4.9 million of related gross profit and licensing income was deferred.
- The company did not repurchase shares in 2013. Cumulative repurchases since 2004 totaled 9.6 million shares for approximately $441.4 million.
Outlook, risks and unusual items
Management did not provide a specific numerical 2014 sales or earnings forecast in the supplied text. It expected 2014 profitability to be heavily concentrated in the second half and identified potential contributions and costs from the China joint venture, direct-to-consumer expansion, renewed wholesale growth, increased demand-creation spending, and additional depreciation and support costs related to the U.S. ERP implementation scheduled for the second quarter.
- Key risks include unseasonable weather, discretionary consumer spending, order cancellations, inventory excess, changing consumer preferences and intense competition.
- International risks include currency volatility, European economic weakness, South American import and currency restrictions, tariffs and political or regulatory changes.
- Manufacturing is concentrated in Asia: China and Vietnam represented approximately 67% of apparel production and 99% of footwear production in 2013.
- The global ERP implementation could cause business interruptions, higher costs, shipment delays, data or control issues and temporary process inefficiencies.
- Approximately 34% of cash and short-term investments were held by foreign subsidiaries and were intended to remain indefinitely invested outside the United States. Foreign undistributed earnings totaled approximately $320.7 million, with an estimated unrecognized U.S. tax liability of $77.8 million if repatriated.
- Contractual commitments included $216.8 million of inventory purchase obligations and $275.7 million of operating lease commitments.
- Unrecognized tax benefits were $14.6 million at year-end; the filing states that the balance could change by up to $14.1 million within the following 12 months.
- Management reported no material adverse effect expected from pending litigation, and Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Verify the timing and financial contribution of the China joint venture, including recognition of deferred profit and licensing income.
- Monitor U.S. ERP implementation costs, depreciation, support expenses and any effect on controls or operations.
- Assess whether EMEA direct-business weakness and the European distribution-center impairment represent continuing issues.
- Reconcile inventory, accounts receivable and operating cash-flow trends, particularly given the seasonal business model.
- Review exposure to weather, foreign exchange, tariffs, customer cancellations and concentrated Asian manufacturing.
- Evaluate the effect of foreign cash reinvestment and uncertain tax positions on future liquidity and effective tax rates.
- Confirm that the reported $9.0 million impairment and $5.6 million after-tax earnings impact are appropriately excluded or considered in any adjusted earnings analysis.