UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
------------------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
COLUMBIA SPORTSWEAR COMPANY
(Exact name of registrant as specified in its charter)
Oregon 0-23939 93-0498284
- --------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File (IRS Employer
incorporation or organization) Number) Identification Number)
6600 North Baltimore Portland, Oregon 97203
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 286-3676
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
The number of shares of Common Stock outstanding on April 26, 1999, was
25,289,459.
COLUMBIA SPORTSWEAR COMPANY
MARCH 31, 1999
INDEX TO FORM 10-Q
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements - Columbia Sportswear Company (Unaudited)
Condensed Consolidated Balance Sheets ............................... 2
Condensed Consolidated Statements of Operations...................... 3
Condensed Consolidated Statements of Cash Flows...................... 4
Notes to Condensed Consolidated Financial Statements................. 5
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 7
PART II. OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K............................... 11
SIGNATURES ............................................................. 12
1
ITEM 1 - Financial Statements
COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31,1999 December 31,1998
------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 9,107 $ 6,777
Accounts receivable, net of allowance of $3,197 and
$3,395, respectively 79,729 105,967
Inventories (Note 2) 72,657 74,059
Income taxes receivable 2,565 -
Deferred tax asset (Note 3) 8,020 8,895
Prepaid expenses and other current assets 2,175 2,485
------------- -------------
Total current assets 174,253 198,183
Property, plant, and equipment, net 70,901 68,692
Intangibles and other assets 2,447 2,603
------------- -------------
Total assets $ 247,601 $ 269,478
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 14,566 $ 34,727
Accounts payable 38,950 37,514
Accrued liabilities 13,030 15,469
Income taxes payable - 767
Current portion of long-term debt 205 201
------------- -------------
Total current liabilities 66,751 88,678
Long-term debt 27,221 27,275
Deferred tax liability (Note 3) 3,641 4,111
------------- -------------
Total liabilities 97,613 120,064
Commitments and contingencies - -
Shareholders' Equity:
Preferred stock; 10,000 shares authorized; none
issued and outstanding - -
Common stock; 50,000 shares authorized; 25,282 and
25,267 issued and outstanding 125,137 124,990
Retained earnings 32,522 32,282
Accumulated other comprehensive income (3,532) (3,478)
Unearned portion of restricted stock issued for future
services (4,139) (4,380)
------------- -------------
Total shareholders' equity 149,988 149,414
------------- -------------
Total liabilities and shareholders' equity $ 247,601 $ 269,478
============= =============
See accompanying notes to condensed consolidated financial statements
2
COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
--------------------------------
1999 1998
-------------- --------------
Net sales $ 89,214 $ 74,938
Cost of sales 56,600 46,001
-------------- --------------
Gross profit 32,614 28,937
Selling, general, and administrative 31,588 28,330
-------------- --------------
Income from operations 1,026 607
Interest expense, net 626 438
-------------- --------------
Income before income tax 400 169
Income tax expense (benefit) (Note 3) 160 (1,932)
-------------- --------------
Net income (Note 5) $ 240 $ 2,101
============== ==============
Net income per share (Note 4):
Basic $ 0.01 $ 0.11
Diluted $ 0.01 $ 0.11
Weighted average shares outstanding :
Basic 25,282 19,175
Diluted 25,516 19,559
See accompanying notes to condensed consolidated financial statements
3
COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
---------------------------------
1999 1998
-------------- --------------
Cash Flows From Operating Activities:
Net income $ 240 $ 2,101
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,408 1,904
Non-cash compensation 241 242
Loss on disposal of property, plant, and equipment 16 44
Deferred income tax provision 405 (2,000)
Changes in operating assets and liabilities:
Accounts receivable 25,182 16,714
Inventories 929 (16,851)
Prepaid expenses and other current assets 280 (642)
Intangibles and other assets 40 (991)
Accounts payable 2,027 14,220
Accrued liabilities (2,345) (2,152)
Income taxes (3,355) (125)
-------------- --------------
Net cash provided by operating activities 26,068 12,464
-------------- --------------
Cash Flows From Investing Activities:
Additions to property, plant, and equipment (4,631) (13,287)
Proceeds from sale of property, plant, and equipment 11 94
-------------- --------------
Net cash used in investing activities (4,620) (13,193)
-------------- --------------
Cash Flows From Financing Activities:
Net borrowings (repayments) on notes payable (19,078) 8,727
Repayment on long-term debt (50) (38)
Proceeds from options exercised 147 -
Distributions paid to shareholders - (5,866)
-------------- --------------
Net cash provided by (used in) financing activities (18,981) 2,823
-------------- --------------
Net Effect of Exchange Rate Changes on Cash (137) 169
-------------- --------------
Net Increase in Cash and Cash Equivalents 2,330 2,263
Cash and Cash Equivalents, Beginning of Period 6,777 4,001
-------------- --------------
Cash and Cash Equivalents, End of Period $ 9,107 $ 6,264
============== ==============
See accompanying notes to condensed consolidated financial statements
4
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the management of Columbia Sportswear Company the ("Company") and in
the opinion of management contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's financial
position as of March 31, 1999, and the results of operations for the three
months ended March 31, 1999 and 1998 and cash flows for the three months ended
March 31, 1999 and 1998. It should be understood that accounting measurements at
interim dates inherently involve greater reliance on estimates than at year end.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
Certain reclassifications of amounts reported in the March 31, 1998 financial
statements have been made to conform to classifications used in the March 31,
1999 financial statements.
NOTE 2. INVENTORIES
Inventories consist of the following (in thousands):
March 31, 1999 December 31, 1998
-------------- -----------------
Raw materials $ 3,574 $ 4,071
Work in process 12,381 5,576
Finished goods 56,702 64,412
============== ==============
$ 72,657 $ 74,059
============== ==============
NOTE 3. INCOME TAXES
A reconciliation of the statutory U.S. federal tax provision and the Company's
reported tax provision for the three months ended March 31, 1999 is as follows:
Provision for federal income taxes at the statutory rate 35.0%
State and local income taxes, net of federal benefit 3.5
Non-U.S. income taxed at different rates 1.6
Other (0.1)
-----
Effective tax rate 40.0%
Prior to the Company's initial public offering completed on April 1, 1998, the
Company operated as an "S" corporation, and as a result was not subject to
federal or most state income taxes. In connection with the public offering, the
Company terminated its "S" corporation status. As a result, the Company is now
subject to federal and state income taxes. The Company recognized a
non-recurring, non-cash benefit of approximately $2 million to earnings in the
first quarter of 1998 to record deferred income taxes for the tax effect of
cumulative temporary differences between financial statement and income tax
bases of the Company's assets and liabilities.
5
NOTE 4. NET INCOME PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," requires dual presentation of basic and diluted earnings per share
("EPS"). Basic EPS is based on the weighted average number of common shares
outstanding. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
There were no adjustments to net income in computing diluted net income per
share for the three months ended March 31, 1999 and 1998. A reconciliation of
the common shares used in the denominator for computing basic and diluted net
income per share is as follows:
Three Months Ended
March 31,
------------------------
1999 1998
---------- ----------
Weighted average common shares outstanding, used in
computing basic net income per share 25,282 19,175
Effect of dilutive stock options 234 384
---------- ----------
Weighted-average common shares outstanding, used in
computing diluted net income per share 25,516 19,559
========== ==========
Net income per share of common stock:
Basic $ 0.01 $ 0.11
Diluted $ 0.01 $ 0.11
NOTE 5. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income". The schedule detailing the components of comprehensive income is as
follows:
Three Months Ended
March 31,
------------------------
1999 1998
---------- ----------
Net income $ 240 $ 2,101
Foreign currency translation adjustments (54) 493
---------- ---------
Comprehensive income $ 186 $ 2,594
========== =========
NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company is evaluating the
effect of this statement on its financial position and results of operations.
6
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
The statements in this report concerning certain expected future expenses as a
percentage of net sales, future financing and working capital requirements, and
the Year 2000 issue constitute forward - looking statements that are subject to
risks and uncertainties. Factors that could adversely affect selling, general
and administrative expense as a percentage of net sales include, but are not
limited to, increased competitive factors (including increased competition, new
product offerings by competitors and price pressures), unfavorable seasonal
differences in sales volume, changes in consumer preferences, as well as an
inability to increase sales to department stores or to open and operate new
concept shops on favorable terms. Other factors could include a failure to
manage growth effectively (including timely implementation of the Company's
enterprise system and expansion of its distribution center) and unavailability
of independent manufacturing, labor or supplies at reasonable prices. In
addition, unfavorable business conditions, disruptions in the outerwear,
sportswear and rugged footwear industries or changes in the general economy
could have adverse effects. Factors that could materially affect future
financing requirements include, but are not limited to, the ability to obtain
additional financing on acceptable terms. Factors that could materially affect
future working capital requirements include, but are not limited to, the
industry factors and general business conditions noted above. Factors that could
materially affect the Year 2000 issue include, but are not limited to,
unanticipated costs associated with any required modifications to the Company's
computer systems and associated software, failures of external systems of
suppliers, business partners or governmental agencies.
Results of Operations
The following table sets forth, for the periods indicated, selected Company
income statement data expressed as a percentage of net sales.
First Quarter Ended
-------------------
1999 1998
----- -----
Net sales 100.0% 100.0%
Cost of sales 63.4 61.4
Gross profit 36.6 38.6
Selling, general and administrative
expense 35.4 37.8
Income from operations 1.2 0.8
Interest expense, net 0.7 0.6
Income before income tax 0.5 0.2
Provision for income taxes 0.2 (2.6)
Net income 0.3% 2.8%
Three Months Ended March 31,1999 Compared to Three Months Ended March 31,1998
Net sales: Net sales increased 19.1% to $89.2 million for the three month period
ended March 31, 1999 from $74.9 million for the comparable period in 1998.
Domestic sales increased 5.5% to $63.3 million for the three month period ended
March 31, 1999 from $60.0 million for the comparable period in 1998. Net
international sales, excluding Canada, increased 79.8% to $18.7 million for the
three month period ended March 31, 1999 from $10.4 million for the comparable
period in 1998. Canadian sales increased 56.5% to $7.2 million for the three
month period ended March 31, 1999 from $4.6 million compared to the same period
in 1998. These increases were attributable to increased sales of spring
sportswear and footwear units primarily in Europe and Canada.
7
Gross Profit: Gross profit as a percentage of net sales was 36.6% for the three
months ended March 31, 1999 compared to 38.6% for the comparable period in 1998.
The decrease in gross margin was due to increased domestic sales of fall
close-out products and a higher portion of lower margin sportswear and footwear
sales during the three months ended March 31, 1999.
Selling, General and Administrative Expense: Selling, general, and
administrative expense increased 11.7% to $31.6 million for the three months
ended March 31, 1999 from $28.3 million for the comparable period in 1998,
primarily as a result of an increase in variable selling and operating expenses
to support the higher level of sales. As a percentage of sales, selling,
general, and administrative expenses decreased to 35.4% for the three months
ended March 31, 1999 from 37.8% for the comparable period in 1998, reflecting
the Company's emphasis in reducing operating costs in an effort to offset the
increase in depreciation expense as a result of investments in infrastructure.
Short-term, the Company believes that selling, general, and administrative
expenses as a percent of sales will increase as the remaining components of the
distribution center expansion and enterprise information system are capitalized
in the second quarter of 1999. The Company believes that in the longer term it
will be able to leverage selling, general, and administrative expense as a
percentage of sales as its international operations become more established and
its sportswear and footwear sales expand.
Interest Expense: Interest expense increased by 42.9% for the three months ended
March 31, 1999 from the comparable period in 1998. The increase was attributable
the issuance of long-term senior promissory notes in the third quarter of 1998
to finance the expansion of the domestic distribution center.
Segment Information
The Company operates in one industry segment: the design, production, marketing
and selling of active outdoor apparel, including outerwear, sportswear, rugged
footwear, and accessories. The geographic distribution of the Company's net
sales, income before income tax, and identifiable assets are summarized in the
following table (in thousands). Inter-geographic net sales, which are recorded
at a negotiated mark-up and eliminated in consolidation, are not material.
Quarter ended March 31,
1999 1998
------------- -------------
Net sales to unrelated entities:
United States $ 63,321 $ 59,961
Canada 7,192 4,553
Other International 18,701 10,424
------------- -------------
$ 89,214 $ 74,938
============= =============
Income before income tax:
United States $ 74 $ 976
Canada 1,276 74
Other International 125 (443)
Less interest and other income (expense)
and eliminations (1,075) (438)
------------- -------------
$ 400 $ 169
============= =============
March 31, December 31,
1999 1998
------------- -------------
Assets:
United States $ 230,032 $ 247,125
Canada 13,073 16,696
Other international 34,421 33,571
------------- -------------
Total identifiable assets 277,526 297,392
Eliminations (29,925) (27,914)
------------- -------------
Total assets $ 247,601 $ 269,478
============= =============
8
Seasonality of Business
Columbia's business is impacted by the general seasonal trends that are
characteristic of many companies in the outdoor apparel industry in which sales
and profits are highest in the third calendar quarter. The Company's products
are marketed on a seasonal basis, with a product mix weighted substantially
toward the fall season. Results of operations in any period should not be
considered indicative of the results to be expected for any future period. The
sale of the Company's products is subject to substantial cyclical fluctuation or
impact from unseasonal weather conditions. Sales tend to decline in periods of
recession or uncertainty regarding future economic prospects that affect
consumer spending, particularly on discretionary items. This cyclicality and any
related fluctuation in consumer demand could have a material adverse effect on
the Company's results of operations and financial condition.
Liquidity and Capital Resources
The Company's primary ongoing funding requirements are to finance working
capital and continued growth of the business. At March 31, 1999, the Company had
total cash equivalents of $9.1 million compared to $6.3 million at March 31,
1998. Cash provided by operating activities was $26.1 million for the three
months ended March 31, 1999 and $12.5 million for the comparable period in 1998.
This increase was primarily due to a decrease in accounts receivable which
provided additional working capital to fund the Company's first quarter
operations.
The Company's primary capital requirements are for working capital, investing
activities associated with expansion of its distribution center, systems
development and general corporate needs. Net cash used in investing activities
was $4.6 million for the three months ended March 31, 1999 and $13.2 million for
the comparable period in 1998.
Cash used in financing activities was $19.0 million for the three months ended
March 31, 1999 compared to cash provided by financing activities of $2.8 million
for the comparable period in 1998. The increase in net cash used in financing
activities was primarily due to repayments of short-term borrowings.
To fund its working capital requirements, the Company has available unsecured
revolving lines of credit with aggregate seasonal limits ranging from
approximately $105 to $145 million. As of March 31, 1999, $12.7 million was
outstanding under these lines of credit. Additionally, the Company maintains
credit agreements in order to provide the Company unsecured lines of credit with
a combined limit of approximately $105 million available as an import line of
credit for issuing documentary letters of credit.
In connection with current capital projects, the Company entered into a note
purchase agreement. Pursuant to the note purchase agreement, the Company issued
senior promissory notes in the aggregate principal amount of $25 million,
bearing an interest rate of 6.68% and maturing August 11, 2008. Proceeds from
the notes are being used to finance the expansion of the Company's distribution
center in Portland, Oregon. Up to an additional $15 million in shelf notes may
be issued under the note purchase agreement.
Year 2000 Compliance
The Company has made extensive efforts over the past several years to upgrade or
replace all enterprise level software and hardware platforms. A part of the
selection criteria for new software and hardware systems were global software
support and Year 2000 compliance. The Company is replacing its current
management information system with an enterprise system that integrates
9
Electronic Data Interchange (EDI) and inventory management capabilities. This
system, most aspects of which are already operational, coupled with a
state-of-the-art warehouse inventory management system, is expected to be fully
operational in the second quarter of 1999 and will address the Year 2000 issue
on all core Company business systems. These include, but are not limited to,
financial, manufacturing and inventory management, distribution, and sales order
processing applications. The Company has other ancillary systems such as sales
reporting, product development, retail, merchandising and design that are
scheduled to be modified as required to address Year 2000 issues in a timely
fashion. Desktop productivity systems, networking and communications are also
integral to the Company's operations and have been surveyed for Year 2000
compliance. Non-compliant components and software have been identified and are
scheduled for replacement or upgrade where necessary by mid-1999.
Non-information technology systems such as Company-owned manufacturing
equipment, office equipment and local office telephone systems are being
assessed for related Year 2000 risks. The Company conducts business with several
customers via EDI and will implement and test Year 2000 compliant standards and
software to help ensure uninterrupted service. The majority of the Company's
product sourcing is performed through independent manufacturers primarily in
Southeast Asia. Although analyses are underway, an initial review of these
facilities indicates that most operations and business processes are manual in
nature and, consequently, the Company does not expect the Year 2000 issue will
impact its ability to effectively source its products.
The Company's enterprise management information systems were implemented
primarily to improve its business processes rather than solely to address Year
2000 compliance issues. The costs associated with bringing the Company's
ancillary, desktop productivity, networking, communication and non-information
technology systems into Year 2000 compliance have been assessed and the Company
estimates that expenditures for the project will be approximately $0.9 million
for the year ended December 31, 1999, of which $0.1 million has been incurred as
of March 31, 1999, with costs being paid out of working capital. This estimate,
based on currently available information, will be updated as the Company
continues its assessment and proceeds with implementation and testing, and may
require further revision.
The Company has undergone what it believes is a reasonable and thorough review
of Year 2000 issues on its operations, liquidity and financial condition and
identified the related issues and risks. As a result of this review, the Company
believes no identified issues or reasonably foreseeable circumstances should
have a material effect on the Company.
The most reasonable likely issue facing the Company regarding Year 2000
compliance is the inability of purportedly compliant software or systems to
perform as intended. Although the Company does not have a comprehensive
contingency plan, it expects to apply its own resources and the resources of
system providers to solve these issues as they are identified. The Company will
continue to take appropriate measures to assure that its operating systems are
prepared for Year 2000 related issues. It should be understood that the Company
is reliant on many external parties and their related systems which could affect
the Company's ability to meet possible eventualities. Such external entities
include, but are not limited to, certain United States and foreign governmental
agencies, material suppliers, and product manufacturers as well as service
providers such as freight forwarders, transportation, and utilities companies.
In addition, the Company as well as these external entities are expecting that
the software and hardware put into place will perform all functions as expected.
Euro Currency Conversion
On January 1, 1999, the euro was adopted as the national currency of these
participating European Union ("EU") countries - Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.
The Company has committed resources to conduct risk assessments and to take
corrective actions, where required, to ensure that it is prepared for the
introduction of the euro. The Company is undertaking a review of the euro
implementation both in participating and non-participating EU countries where it
has operations. Progress regarding euro implementation is reported periodically
to management.
10
The Company has not experienced any significant operational disruptions to date
and does not expect the continued implementation of the euro to cause any
significant operational disruptions. In addition, the Company has not incurred
and does not expect to incur any significant costs from the continued
implementation of the euro, including any currency risk, which could materially
affect the Company's liquidity or capital resources.
PART II. OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement on Bank Transactions, dated January 28, 1999,
between The Hongkong and Shanghai Banking Corporation Limited
and Columbia Sportswear Japan, Inc., and related Continuing
Guarantee by the Registrant.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLUMBIA SPORTSWEAR COMPANY
Date: May 14, 1999 PATRICK D. ANDERSON
-----------------------------------------
Patrick D. Anderson
Chief Financial Officer and Authorized
Officer
12