Annual Statements Open main menu

COLUMBIA SPORTSWEAR CO - Quarter Report: 2019 September (Form 10-Q)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 September 30, 2019
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from_______to_______    
Commission file number 0-23939
 _____________________________
COLUMBIA SPORTSWEAR COMPANY
(Exact name of registrant as specified in its charter) 
Oregon
 
93-0498284
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
14375 Northwest Science Park Drive
Portland, Oregon 97229
(Address of principal executive offices and zip code)
(503) 985-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each
exchange on which registered
Common stock
 
COLM
 
The Nasdaq Stock Market LLC
_____________________________________
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  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
Accelerated Filer
¨
Non-accelerated Filer
¨  
Smaller Reporting Company
¨
Emerging Growth Company
¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
The number of shares of Common Stock outstanding on October 25, 2019 was 67,525,997.


Table of Contents

COLUMBIA SPORTSWEAR COMPANY
SEPTEMBER 30, 2019

TABLE OF CONTENTS
Item
 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.
 



Table of Contents

PART I—FINANCIAL INFORMATION
Item 1.    FINANCIAL STATEMENTS
COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
September 30,
2019
 
December 31,
2018
 
September 30,
2018
ASSETS
 
 
 
 
 
Current Assets:
 
 
 
 
 
Cash and cash equivalents (Note 16)
$
239,311

 
$
437,825

 
$
182,175

Restricted cash (Note 17)

 
13,970

 
13,970

Short-term investments (Note 16)
1,477

 
262,802

 
269,313

Accounts receivable, net of allowance of $9,672, $11,051, and $9,176, respectively
646,414

 
449,382

 
552,442

Inventories
717,396

 
521,827

 
617,194

Prepaid expenses and other current assets
94,253

 
79,500

 
77,763

Total current assets
1,698,851

 
1,765,306

 
1,712,857

Property, plant and equipment, at cost, net of accumulated depreciation of $515,300, $489,354, and $483,857, respectively
349,302

 
291,596

 
284,744

Operating lease right-of-use assets (Note 8)
389,558

 

 

Intangible assets, net (Note 5)
124,340

 
126,575

 
127,320

Goodwill
68,594

 
68,594

 
68,594

Deferred income taxes
80,193

 
78,155

 
68,913

Other non-current assets
40,242

 
38,495

 
36,911

Total assets
$
2,751,080

 
$
2,368,721

 
$
2,299,339

LIABILITIES AND EQUITY
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
Short-term borrowings (Note 6)
$

 
$

 
$
8,311

Accounts payable
201,806

 
274,435

 
237,344

Accrued liabilities (Note 7)
279,932

 
275,684

 
255,682

Operating lease liabilities (Note 8)
62,756

 

 

Income taxes payable
13,653

 
22,763

 
8,247

Total current liabilities
558,147

 
572,882

 
509,584

Non-current operating lease liabilities (Note 8)
366,515

 

 

Income taxes payable
48,619

 
50,791

 
62,090

Deferred income taxes
7,711

 
9,521

 
13

Other long-term liabilities
22,982

 
45,214

 
46,056

Total liabilities
1,003,974

 
678,408

 
617,743

Commitments and contingencies (Note 9)

 

 

Columbia Sportswear Company Shareholders' Equity:
 
 
 
 

Preferred stock; 10,000 shares authorized; none issued and outstanding

 

 

Common stock (no par value); 250,000 shares authorized; 67,562, 68,246, and 69,270, issued and outstanding, respectively (Note 10)

 

 
210

Retained earnings
1,754,379

 
1,677,920

 
1,669,390

Accumulated other comprehensive loss (Note 13)
(7,273
)
 
(4,063
)
 
(4,235
)
Total Columbia Sportswear Company shareholders' equity
1,747,106

 
1,673,857

 
1,665,365

Non-controlling interest (Note 4)

 
16,456

 
16,231

Total equity
1,747,106

 
1,690,313

 
1,681,596

Total liabilities and equity
$
2,751,080

 
$
2,368,721

 
$
2,299,339

See accompanying notes to condensed consolidated financial statements.

1

Table of Contents

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
906,793

 
$
795,801

 
$
2,087,611

 
$
1,884,728

Cost of sales
460,098

 
412,098

 
1,050,596

 
972,966

Gross profit
446,695

 
383,703

 
1,037,015

 
911,762

Selling, general and administrative expenses
299,249

 
259,267

 
791,767

 
724,827

Net licensing income
4,569

 
4,708

 
11,090

 
11,279

Income from operations
152,015

 
129,144

 
256,338

 
198,214

Interest income, net
1,399

 
2,524

 
7,370

 
7,748

Other non-operating income (expense), net
(563
)
 
736

 
915

 
372

Income before income tax
152,851

 
132,404

 
264,623

 
206,334

Income tax expense
(33,593
)
 
(30,029
)
 
(48,159
)
 
(44,735
)
Net income
119,258

 
102,375

 
216,464

 
161,599

Net income attributable to non-controlling interest

 
2,223

 

 
6,603

Net income attributable to Columbia Sportswear Company
$
119,258

 
$
100,152

 
$
216,464

 
$
154,996

Earnings per share attributable to Columbia Sportswear Company (Note 12):
 
 
 
 
 
 
 
Basic
$
1.76

 
$
1.44

 
$
3.19

 
$
2.22

Diluted
$
1.75

 
$
1.42

 
$
3.15

 
$
2.19

Weighted average shares outstanding (Note 12):
 
 
 
 
 
 
 
Basic
67,593

 
69,589

 
67,935

 
69,895

Diluted
68,180

 
70,357

 
68,620

 
70,685

See accompanying notes to condensed consolidated financial statements.


2

Table of Contents

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
119,258

 
$
102,375

 
$
216,464

 
$
161,599

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized holding gains (losses) on available-for-sale securities, net

 
(162
)
 
56

 
(158
)
Unrealized gains on derivative transactions (net of tax effects of $(801), $(1,062), $(369), and $(6,036), respectively)
2,414

 
2,896

 
1,866

 
18,542

Foreign currency translation adjustments (net of tax effects of $1,560, $(39), $2,447 and $1,780, respectively)
(8,389
)
 
(562
)
 
(5,033
)
 
(12,565
)
Other comprehensive income (loss)
(5,975
)
 
2,172

 
(3,111
)
 
5,819

Comprehensive income
113,283

 
104,547

 
213,353

 
167,418

Comprehensive income attributable to non-controlling interest

 
2,256

 

 
7,255

Comprehensive income attributable to Columbia Sportswear Company
$
113,283

 
$
102,291

 
$
213,353

 
$
160,163

See accompanying notes to condensed consolidated financial statements.


3

Table of Contents

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
216,464

 
$
161,599

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation, amortization, and non-cash lease expense
88,775

 
43,544

Loss on disposal or impairment of property, plant, and equipment
4,866

 
1,979

Deferred income taxes
(3,157
)
 
2,103

Stock-based compensation
13,159

 
10,247

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(199,416
)
 
(125,433
)
Inventories
(198,999
)
 
(188,544
)
Prepaid expenses and other current assets
(12,596
)
 
(7,968
)
Other assets
(3,981
)
 
(9,782
)
Accounts payable
(65,191
)
 
(14,263
)
Accrued liabilities
6,497

 
38,193

Income taxes payable
(11,286
)
 
(7,200
)
Operating lease assets and liabilities
(39,010
)
 

Other liabilities
5,716

 
(2,541
)
Net cash used in operating activities
(198,159
)
 
(98,066
)
Cash flows from investing activities:
 
 
 
Purchases of short-term investments
(181,257
)
 
(426,278
)
Sales and maturities of short-term investments
445,501

 
252,727

Capital expenditures
(104,527
)
 
(45,189
)
Proceeds from sale of property, plant, and equipment

 
18

Net cash provided by (used in) investing activities
159,717

 
(218,722
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
74,053

 
36,051

Repayments on credit facilities
(74,053
)
 
(27,740
)
Proceeds from issuance of common stock related to stock-based compensation
17,687

 
16,508

Tax payments related to stock-based compensation
(5,739
)
 
(4,221
)
Repurchase of common stock
(116,239
)
 
(107,222
)
Purchase of non-controlling interest
(17,880
)
 

Cash dividends paid
(48,917
)
 
(46,160
)
Cash dividends paid to non-controlling interest

 
(19,949
)
Net cash used in financing activities
(171,088
)
 
(152,733
)
Net effect of exchange rate changes on cash
(2,954
)
 
(7,500
)
Net decrease in cash, cash equivalents and restricted cash
(212,484
)
 
(477,021
)
Cash, cash equivalents and restricted cash, beginning of period
451,795

 
673,166

Cash, cash equivalents and restricted cash, end of period
$
239,311

 
$
196,145

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
73,413

 
$
47,041

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Property, plant and equipment acquired through increase in liabilities
$
11,638

 
$
7,380

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30, 2019
 
 
Columbia Sportswear Company Shareholders' Equity
 
 
 
 
 
 
Common Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Non-Controlling Interest
 
Total
 
Shares
Outstanding
 
Amount
BALANCE, JUNE 30, 2019
 
67,586

 
$
100

 
$
1,656,392

 
$
(1,298
)
 
$

 
$
1,655,194

Net income
 

 

 
119,258

 

 

 
119,258

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains on derivative transactions, net
 

 

 

 
2,414

 

 
2,414

Foreign currency translation adjustment, net
 

 

 

 
(8,389
)
 

 
(8,389
)
Cash dividends ($0.24 per share)
 

 

 
(16,231
)
 

 

 
(16,231
)
Issuance of common stock related to stock-based compensation, net
 
135

 
6,251

 

 

 

 
6,251

Stock-based compensation expense
 

 
4,378

 

 

 

 
4,378

Repurchase of common stock
 
(159
)
 
(10,729
)
 
(5,040
)
 

 

 
(15,769
)
BALANCE, SEPTEMBER 30, 2019
 
67,562

 
$

 
$
1,754,379

 
$
(7,273
)
 
$

 
$
1,747,106

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
 
Columbia Sportswear Company Shareholders' Equity
 
 
 
 
 
 
Common Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Non-Controlling Interest
 
Total
 
Shares
Outstanding
 
Amount
BALANCE, JUNE 30, 2018
 
69,988

 
$
23,162

 
$
1,623,612

 
$
(6,374
)
 
$
13,975

 
$
1,654,375

Net income
 

 

 
100,152

 

 
2,223

 
102,375

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding losses on available-for-sale securities, net
 

 

 

 
(162
)
 

 
(162
)
Unrealized holding gains on derivative transactions, net
 

 

 

 
2,352

 
544

 
2,896

Foreign currency translation adjustment, net
 

 

 

 
(51
)
 
(511
)
 
(562
)
Cash dividends ($0.22 per share)
 

 

 
(15,304
)
 

 

 
(15,304
)
Issuance of common stock related to stock-based compensation, net
 
42

 
1,446

 

 

 

 
1,446

Stock-based compensation expense
 

 
3,648

 

 

 

 
3,648

Repurchase of common stock
 
(760
)
 
(28,046
)
 
(39,070
)
 

 

 
(67,116
)
BALANCE, SEPTEMBER 30, 2018
 
69,270

 
$
210

 
$
1,669,390

 
$
(4,235
)
 
$
16,231

 
$
1,681,596

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share amounts)
(Unaudited)
 
 
Nine months ended September 30, 2019
 
 
Columbia Sportswear Company Shareholders' Equity
 
 
 
 
 
 
Common Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Non-Controlling Interest
 
Total
 
Shares
Outstanding
 
Amount
BALANCE, DECEMBER 31, 2018
 
68,246

 
$

 
$
1,677,920

 
$
(4,063
)
 
$
16,456

 
$
1,690,313

Net income
 

 

 
216,464

 

 

 
216,464

Purchase of non-controlling interest
 

 

 

 
(99
)
 
(16,456
)
 
(16,555
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains on available-for-sale securities, net
 

 

 

 
56

 

 
56

Unrealized holding gains on derivative transactions, net
 

 

 

 
1,866

 

 
1,866

Foreign currency translation adjustment, net
 

 

 

 
(5,033
)
 

 
(5,033
)
Cash dividends ($0.72 per share)
 

 

 
(48,917
)
 

 

 
(48,917
)
Issuance of common stock related to stock-based compensation, net
 
507

 
11,948

 

 

 

 
11,948

Stock-based compensation expense
 

 
13,159

 

 

 

 
13,159

Repurchase of common stock
 
(1,191
)
 
(25,107
)
 
(91,088
)
 

 

 
(116,195
)
BALANCE, SEPTEMBER 30, 2019
 
67,562

 
$

 
$
1,754,379

 
$
(7,273
)
 
$

 
$
1,747,106

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
 
Columbia Sportswear Company Shareholders' Equity
 
 
 
 
 
 
Common Stock
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Non-Controlling Interest
 
Total
 
Shares
Outstanding
 
Amount
BALANCE, DECEMBER 31, 2017
 
69,995

 
$
45,829

 
$
1,585,009

 
$
(8,887
)
 
$
30,308

 
$
1,652,259

Net income
 

 

 
154,996

 

 
6,603

 
161,599

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding losses on available-for-sale securities, net
 

 

 

 
(158
)
 

 
(158
)
Unrealized holding gains on derivative transactions, net
 

 

 

 
17,472

 
1,070

 
18,542

Foreign currency translation adjustment, net
 

 

 

 
(12,147
)
 
(418
)
 
(12,565
)
Dividends to non-controlling interest
 

 

 

 

 
(21,332
)
 
(21,332
)
Adoption of new accounting standards
 

 

 
14,615

 
(515
)
 

 
14,100

Cash dividends ($0.66 per share)
 

 

 
(46,160
)
 

 

 
(46,160
)
Issuance of common stock related to stock-based compensation, net
 
535

 
12,286

 

 

 

 
12,286

Stock-based compensation expense
 

 
10,247

 

 

 

 
10,247

Repurchase of common stock
 
(1,260
)
 
(68,152
)
 
(39,070
)
 

 

 
(107,222
)
BALANCE, SEPTEMBER 30, 2018
 
69,270

 
$
210

 
$
1,669,390

 
$
(4,235
)
 
$
16,231

 
$
1,681,596

See accompanying notes to condensed consolidated financial statements.


6

Table of Contents

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—BASIS OF PRESENTATION AND ORGANIZATION
The accompanying condensed consolidated financial statements have been prepared by the management of Columbia Sportswear Company (together with its wholly owned subsidiaries and entities in which it maintains a controlling financial interest, the "Company") and in the opinion of management include all normal recurring material adjustments necessary to present fairly the Company's financial position as of September 30, 2019, December 31, 2018 and September 30, 2018, and the results of operations for the three and nine months ended September 30, 2019 and 2018, and cash flows for the nine months ended September 30, 2019 and 2018. The December 31, 2018 financial information was derived from the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. A significant part of the Company's business is of a seasonal nature; therefore, results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of results to be expected for other quarterly periods or for the full year.
In accordance with the Disclosure Modernization and Simplification final rule issued by the Securities and Exchange Commission ("SEC") and effective for the Company beginning in the first quarter of 2019, a reconciliation of the changes of shareholders' equity is presented for all periods for which the results of operations are presented.
Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. The Company, however, believes that the disclosures contained in this report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934 for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Columbia Sportswear Company, its wholly owned subsidiaries and entities in which it maintains a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates and assumptions. Some of these more significant estimates relate to revenue recognition, including sales returns and claims from customers, allowance for doubtful accounts, provisions for potential excess, slow-moving and closeout inventories, product warranty, long-lived and intangible assets, goodwill, income taxes, and stock-based compensation.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except as disclosed below and in Note 8, pertaining to our adoption of new accounting pronouncements, there have been no significant changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Recently Adopted Accounting Pronouncements
On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The adoption of this provision did not have a material effect on the Company's financial position, results of operations or cash flows.
On January 1, 2019, the Company adopted ASU No. 2016-02, Leases ("ASC 842"), which increased transparency and comparability among organizations by recognizing right-of-use ("ROU") assets and lease liabilities on the balance sheet for most leases previously classified as operating leases. The updated guidance and subsequent clarifications require disclosures to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
The Company adopted this standard utilizing the modified retrospective approach. The comparative prior period information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company has elected to adopt the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. The Company did not elect the practical expedient to use hindsight for leases existing at adoption date.

7

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


The adoption of ASC 842 resulted in the recognition of ROU assets of $352.7 million, with corresponding lease liabilities of $387.1 million. As a result of adopting the standard, $34.4 million of pre-existing liabilities for deferred rent and various lease incentives were reclassified as a component of the ROU assets. At adoption, the measurement of the lease liabilities utilized the remaining minimum rental payments as defined under the previous accounting standard and the incremental borrowing rate as of January 1, 2019.
The adoption of ASC 842 did not materially impact the Condensed Consolidated Statements of Operations. Also, the adoption of ASC 842 had no material impact on operating, investing or financing cash flows in the Condensed Consolidated Statements of Cash Flows. See Note 8 for additional disclosure regarding the adoption of the new standard.
The following table presents the effect of the adoption of ASC 842 on our Condensed Consolidated Balance Sheets as of January 1, 2019:
 
 
January 1, 2019
(in thousands)
 
December 31, 2018
 
Adjustments due to ASC 842
 
January 1, 2019
Operating lease right-of-use assets
 
$

 
$
352,679

 
$
352,679

Total assets
 
2,368,721

 
352,679

 
2,721,400

Accrued liabilities
 
275,684

 
(3,346
)
 
272,338

Operating lease liabilities
 

 
57,207

 
57,207

Current liabilities
 
572,882

 
53,861

 
626,743

Non-current operating lease liabilities
 

 
329,865

 
329,865

Other long-term liabilities
 
45,214

 
(31,047
)
 
14,167

Total liabilities
 
678,408

 
352,679

 
1,031,087

Total liabilities and equity
 
2,368,721

 
352,679

 
2,721,400


Recent Accounting Pronouncements Not Yet Adopted
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), which clarifies certain aspects of accounting for implementation costs incurred in a cloud computing arrangement ("CCA") that is a service contract. Under the ASU, an entity would expense costs incurred in the preliminary-project and post-implementation-operation stages. The entity would also capitalize certain costs incurred during the application-development stage, as well as certain costs related to enhancements. The ASU does not change the accounting for the service component of a CCA. This standard is effective beginning in the first quarter of 2020, with early adoption permitted. The Company is planning to adopt the standard using the prospective method and is currently evaluating the impact this accounting standard will have on the Company's financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Under this guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. This standard is effective beginning in the first quarter of 2020, with early adoption permitted. The impact of the new standard will depend on the specific facts and circumstances of future individual goodwill impairments, if any.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Subsequently, the FASB has issued amendments to clarify the codification, in addition to also clarifying the implementation dates and the items that fall within the scope of this pronouncement. The pronouncement changes the impairment model for most financial assets and will require the use of an "expected loss" model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This standard is effective beginning in the first quarter of 2020. The adoption of ASU 2016-13 is not expected to have a material effect on the Company's financial position, results of operations or cash flows.
NOTE 3—REVENUES
Disaggregated Revenue
As disclosed below in Note 14, the Company has aggregated its operating segments into four geographic segments: the United States, Latin America and Asia Pacific ("LAAP"), Europe, Middle East and Africa ("EMEA"), and Canada.

8

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


The following tables disaggregate the Company's operating segment Net sales by product category and sales channel, which the Company believes provide a meaningful depiction of how the nature, timing, and uncertainty of Net sales are affected by economic factors:
 
 
Three Months Ended September 30, 2019
(in thousands)
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category net sales
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
459,633

 
$
93,486

 
$
66,058

 
$
65,532

 
$
684,709

Footwear
 
121,630

 
29,760

 
38,345

 
32,349

 
222,084

Total
 
$
581,263

 
$
123,246

 
$
104,403

 
$
97,881

 
$
906,793

Sales channel net sales
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
396,275

 
$
77,934

 
$
91,329

 
$
86,993

 
$
652,531

Direct-to-consumer
 
184,988

 
45,312

 
13,074

 
10,888

 
254,262

Total
 
$
581,263

 
$
123,246

 
$
104,403

 
$
97,881

 
$
906,793

 
 
Three Months Ended September 30, 2018
(in thousands)
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category net sales
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
406,474

 
$
92,869

 
$
63,950

 
$
54,294

 
$
617,587

Footwear
 
89,687

 
25,510

 
36,401

 
26,616

 
178,214

Total
 
$
496,161

 
$
118,379

 
$
100,351

 
$
80,910

 
$
795,801

Sales channel net sales
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
320,102

 
$
72,121

 
$
87,434

 
$
70,099

 
$
549,756

Direct-to-consumer
 
176,059

 
46,258

 
12,917

 
10,811

 
246,045

Total
 
$
496,161

 
$
118,379

 
$
100,351

 
$
80,910

 
$
795,801


 
 
Nine months ended September 30, 2019
(in thousands)
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category net sales
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
1,081,942

 
$
267,919

 
$
183,168

 
$
109,909

 
$
1,642,938

Footwear
 
227,072

 
89,800

 
84,110

 
43,691

 
444,673

Total
 
$
1,309,014

 
$
357,719

 
$
267,278

 
$
153,600

 
$
2,087,611

Sales channel net sales
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
756,558

 
$
200,083

 
$
231,219

 
$
124,119

 
$
1,311,979

Direct-to-consumer
 
552,456

 
157,636

 
36,059

 
29,481

 
775,632

Total
 
$
1,309,014

 
$
357,719

 
$
267,278

 
$
153,600

 
$
2,087,611

 
 
Nine Months Ended September 30, 2018
(in thousands)
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category net sales
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
970,194

 
$
263,849

 
$
168,306

 
$
99,854

 
$
1,502,203

Footwear
 
168,981

 
86,983

 
88,806

 
37,755

 
382,525

Total
 
$
1,139,175

 
$
350,832

 
$
257,112

 
$
137,609

 
$
1,884,728

Sales channel net sales
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
636,108

 
$
192,967

 
$
223,018

 
$
109,324

 
$
1,161,417

Direct-to-consumer
 
503,067

 
157,865

 
34,094

 
28,285

 
723,311

Total
 
$
1,139,175

 
$
350,832

 
$
257,112

 
$
137,609

 
$
1,884,728


9

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


During the fourth quarter of 2018, the Company determined that it had understated wholesale and overstated direct-to-consumer ("DTC") net sales by $5.0 million and $11.5 million in the LAAP segment for the three and nine months ended September 30, 2018, respectively, with no effect on LAAP segment total net sales. The Company assessed the significance of the misclassifications and concluded that they were not material to any prior periods. As a result, the LAAP segment wholesale and DTC net sales for the three and nine months ended September 30, 2018 in the table above have been revised from amounts previously reported to correct the misclassifications. These corrections had no effect on the Company's Condensed Consolidated Statements of Operations.
Performance Obligations
For the three and nine months ended September 30, 2019 and 2018, Net sales recognized from performance obligations related to prior periods was not material. Net sales expected to be recognized in any future period related to remaining performance obligations are not material.
Contract Balances
As of September 30, 2019, December 31, 2018 and September 30, 2018, contract liabilities recorded as Accrued liabilities on the Condensed Consolidated Balance Sheets, which consisted of obligations associated with our gift card and customer loyalty programs, were not material.
NOTE 4—NON-CONTROLLING INTEREST
Prior to January 2, 2019, the Company owned a 60% controlling interest in a joint venture formed with Swire Resources Limited ("Swire") to support the development and operation of the Company's business in China. The accounts of the joint venture were included in the condensed consolidated financial statements. Swire's share of net income from the joint venture was included in Net income attributable to non-controlling interest in the Condensed Consolidated Statements of Operations and the non-controlling equity interest in this entity was included in total equity as Non-controlling interest in the Condensed Consolidated Balance Sheets.
In September 2018, the Company and Swire entered into an Equity Interest Transfer Agreement ("EITA"), under which the Company committed to buy out the 40% non-controlling interest in the joint venture. On January 2, 2019, the Company closed the buyout. As a result of the buyout, the 2019 condensed consolidated financial statements of the Company do not separately reflect amounts related to the non-controlling interest. See Note 17 for additional information regarding the various terms and conditions and resulting related-party transactions associated with the buyout.
NOTE 5—INTANGIBLE ASSETS, NET
The following table summarizes the Company's identifiable Intangible assets, net balance:
(in thousands)
 
September 30,
2019
 
December 31,
2018
 
September 30,
2018
Intangible assets subject to amortization:
 
 
 
 
 
 
Patents and purchased technology
 
$
14,198

 
$
14,198

 
$
14,198

Customer relationships
 
23,000

 
23,000

 
23,000

Gross carrying amount
 
37,198

 
37,198

 
37,198

Accumulated amortization:
 
 
 
 
 
 
Patents and purchased technology
 
(12,979
)
 
(11,981
)
 
(11,649
)
Customer relationships
 
(15,300
)
 
(14,063
)
 
(13,650
)
Total accumulated amortization
 
(28,279
)
 
(26,044
)
 
(25,299
)
Net carrying amount
 
8,919

 
11,154

 
11,899

Intangible assets not subject to amortization
 
115,421

 
115,421

 
115,421

Intangible assets, net
 
$
124,340

 
$
126,575

 
$
127,320


Amortization expense for intangible assets subject to amortization was $0.7 million for each of the three months ended September 30, 2019 and 2018 and was $2.2 million for each of the nine months ended September 30, 2019 and 2018.

10

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Annual amortization expense is estimated to be as follows for the years 2019 through 2023:
(in thousands)
 
2019
$
2,980

2020
2,537

2021
1,650

2022
1,650

2023
1,650


NOTE 6—SHORT-TERM BORROWINGS AND CREDIT LINES
The Company had an unsecured, committed revolving line of credit agreement, maturing on July 1, 2021, with monthly variable commitments available for funding that, as of March 31, 2019, averaged $100.0 million over the course of a calendar year. At December 31, 2018 and September 30, 2018, the Company was in compliance with all associated covenants, and there was no balance outstanding under this line of credit. In April 2019, the Company amended and restated its unsecured, committed revolving line of credit agreement to reduce the monthly variable commitments available for funding to an average of $50.0 million over the course of a calendar year. The maturity date of this amended and restated agreement is August 1, 2023. Interest, payable monthly, continues to be based on the Company's applicable funded debt ratio, which could range from USD LIBOR plus 87.5 basis points to USD LIBOR plus 162.5 basis points. The amended and restated agreement requires the Company to comply with certain financial covenants covering the Company's funded debt ratio and interest coverage ratio, and eliminates the previous requirements that covered net income, fixed coverage ratio and borrowing basis. If the Company is in default, it is prohibited from paying dividends or repurchasing common stock. At September 30, 2019, the Company was in compliance with all associated covenants, and there was no balance outstanding under this line of credit.
The Company's European subsidiary has available two separate unsecured and uncommitted lines of credit guaranteed by the Company providing for borrowing up to a maximum of €25.8 million and €5.0 million, respectively (combined approximately US$33.7 million), at September 30, 2019. The line of credit with a maximum borrowing of €5.0 million accrues interest based on the Euro Overnight Index Average plus 75 basis points. During the first quarter of 2019, the interest rate on the line of credit with a maximum borrowing of €25.8 million was modified to accrue interest based on the European Central Bank refinancing rate plus 75.0 basis points. There was no balance outstanding under either of these lines of credit at September 30, 2019, December 31, 2018 and September 30, 2018.
Except as disclosed above, there have been no significant changes to the Company's short-term borrowing and credit lines as described in Note 9 in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
NOTE 7—PRODUCT WARRANTY
Some of the Company's products carry assurance-type limited warranty provisions for defects in quality and workmanship. A warranty reserve is established at the time of sale to cover estimated costs based on the Company's history of warranty repairs, replacements and refunds and is recorded in Cost of sales in the Condensed Consolidated Statements of Operations. The warranty reserve is included in Accrued liabilities in the Condensed Consolidated Balance Sheets.
A reconciliation of product warranties is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
 
$
13,186

 
$
11,857

 
$
13,186

 
$
12,339

Provision for warranty claims
 
645

 
555

 
3,140

 
2,997

Warranty claims
 
(440
)
 
(378
)
 
(2,899
)
 
(3,088
)
Other
 
(180
)
 
50

 
(216
)
 
(164
)
Balance at end of period
 
$
13,211

 
$
12,084

 
$
13,211

 
$
12,084


NOTE 8—LEASES
The Company leases, among other things, retail space, office space, warehouse facilities, storage space, vehicles, and equipment. Generally, the base lease terms are between 5 and 10 years. Certain lease agreements contain scheduled rent escalation clauses and others include rental payments adjusted periodically depending on an index or rate. Certain retail space lease agreements provide for additional rents based on a percentage of annual sales in excess of stipulated minimums ("percentage rent"). Certain lease agreements require the Company to pay real estate taxes, insurance, common area maintenance, and other costs, collectively referred to as operating costs, in addition to base rent.

11

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Certain lease agreements also contain lease incentives, such as tenant improvement allowances and rent holidays. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The exercise of lease renewal options is generally at the Company's sole discretion. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company determines if an arrangement is or contains a lease at contract inception. The Company recognizes a ROU asset and a lease liability at the lease commencement date. The lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date. Key estimates and judgments include how the Company determines (1) the discount rate it uses to discount the unpaid lease payments to present value, (2) the lease term and (3) lease payments.
ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, the Company generally uses its incremental borrowing rate as the discount rate for the lease. The Company's incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because the Company does not generally borrow on a collateralized basis, it uses quoted interest rates obtained from financial institutions as an input to derive an appropriate incremental borrowing rate, adjusted for the amount of the lease payments, the lease term and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease.
The Company's lease contracts may include options to extend the lease following the initial term or terminate the lease prior to the end of the initial term. In most instances, at the commencement of the leases, the Company has determined that it is not reasonably certain to exercise either of these options; accordingly, these options are generally not considered in determining the initial lease term. At the renewal of an expiring lease, the Company reassesses options in the contract that it is reasonably certain to exercise in its measurement of lease term.
For lease agreements entered into or reassessed after the adoption of ASC 842, the Company has elected the practical expedient to account for the lease and non-lease components as a single lease component. Therefore, for those leases, the lease payments used to measure the lease liability include all of the fixed consideration in the contract.
Variable lease payments associated with the Company's leases are recognized upon occurrence of the event, activity, or circumstance in the lease agreement on which those payments are assessed. Variable lease payments are presented in the Company's Condensed Consolidated Statements of Operations in the same line item as expense arising from fixed lease payments.
Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The components of lease cost for the three and nine months ended September 30, 2019 were as follows:
(in thousands)
 
Three Months Ended
 
Nine Months Ended
Operating lease cost
 
$
20,072

 
$
57,592

Variable lease cost
 
12,676

 
38,572

Short term lease cost
 
3,442

 
5,614

 
 
$
36,190

 
$
101,778

Supplemental cash flow information related to leases for the nine months ended September 30, 2019 is as follows:
(in thousands)
 
 
Cash paid for amounts included in the measurement of operating lease liabilities
 
$
56,843

Operating lease liabilities arising from obtaining ROU assets (1)
 
$
467,075

(1) Includes amount initially capitalized in conjunction with the adoption of ASC 842.
Amounts disclosed for lease liabilities arising from obtaining ROU assets include amounts added to the carrying amount of lease liabilities resulting from lease modifications and reassessments.
Supplemental balance sheet information related to leases as of September 30, 2019 is as follows:
Weighted average remaining lease term
 
6.99 years

Weighted average discount rate
 
3.89
%



12

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


As of September 30, 2019, future maturities of lease liabilities are as follows:
(in thousands)
 
 
2019
 
$
20,119

2020
 
76,258

2021
 
68,625

2022
 
63,532

2023
 
58,579

Thereafter
 
212,496

Total lease payments
 
499,609

Less: imputed interest
 
(70,338
)
Total lease liabilities
 
429,271

Less: current obligations
 
(62,756
)
Long-term lease obligations
 
$
366,515


As of September 30, 2019, the Company has additional operating lease commitments that have not yet commenced of $13.6 million. These leases will commence in 2019 and 2020 with lease terms of 1 to 11 years.
Disclosures related to periods prior to adoption of ASC 842
Information on rent expense for the three and nine months ended September 30, 2018 was as follows:
(in thousands)
 
Three Months Ended
 
Nine Months Ended
Rent expense included in SG&A expense
 
$
32,058

 
$
96,370

Rent expense included in Cost of sales
 
448

 
1,257

 
 
$
32,506

 
$
97,627


Future minimum payments determined under the previous accounting standards for all lease obligations, including rent escalation clauses and committed leases that had not yet commenced, at December 31, 2018, were as follows:
(in thousands)
 
 
2019
 
$
72,280

2020
 
65,379

2021
 
57,460

2022
 
52,607

2023
 
47,837

Thereafter
 
155,897

 
 
$
451,460


NOTE 9—COMMITMENTS AND CONTINGENCIES
Inventory Purchase Obligations
Inventory purchase obligations consist of open production purchase orders and other commitments for raw materials and sourced apparel, footwear, accessories, and equipment. At September 30, 2019, inventory purchase obligations were $356.5 million.
Litigation
The Company is a party to various legal claims, actions and complaints from time to time. Although the ultimate resolution of legal proceedings cannot be predicted with certainty, management believes that disposition of these matters will not have a material adverse effect on the Company's condensed consolidated financial statements.

13

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


NOTE 10—SHAREHOLDERS' EQUITY
Shares of the Company's common stock may be repurchased in the open market or through privately negotiated transactions, subject to market conditions. The repurchase program does not obligate the Company to acquire any specific number of shares or to acquire shares over any specified period of time. Shares repurchased generally settle subsequent to their trade date. During the three and nine months ended September 30, 2019, the Company repurchased an aggregate of $15.8 million and $116.2 million, respectively, of common stock under the stock repurchase plan authorized by the Company's Board of Directors. During the three and nine months ended September 30, 2018, the Company repurchased an aggregate of $67.1 million and $107.2 million, respectively, of common stock under the stock repurchase plan.
NOTE 11—STOCK-BASED COMPENSATION
The Company's stock incentive plan allows for grants of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units and other stock-based or cash-based awards. See Note 16 in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for additional information concerning its stock-based compensation.
Stock-based compensation expense consisted of the following:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Stock options
 
$
1,509

 
$
1,277

 
$
4,600

 
$
3,571

Restricted stock units
 
2,869

 
2,371

 
8,559

 
6,676

Total
 
$
4,378

 
$
3,648

 
$
13,159

 
$
10,247


Stock Options
During the nine months ended September 30, 2019, the Company granted a total of 394,730 stock options at a weighted average grant date fair value of $22.53. At September 30, 2019, unrecognized costs related to outstanding stock options totaled $11.6 million, before any related tax benefit. The unrecognized costs related to stock options are amortized over the related vesting period using the straight-line attribution method. Unrecognized costs related to stock options at September 30, 2019 are expected to be recognized over a weighted average period of 2.39 years.
Restricted Stock Units
During the nine months ended September 30, 2019, the Company granted 169,134 restricted stock units at an estimated average grant date fair value of $95.47. At September 30, 2019, unrecognized costs related to outstanding restricted stock units totaled $21.8 million, before any related tax benefit. The unrecognized costs related to restricted stock units are being amortized over the related vesting period using the straight-line attribution method. These unrecognized costs at September 30, 2019 are expected to be recognized over a weighted average period of 2.30 years.
NOTE 12—EARNINGS PER SHARE
Earnings per share ("EPS") is presented on both a basic and diluted basis. Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if outstanding securities or other contracts to issue common stock were exercised or converted into common stock.
A reconciliation of common shares used in the denominator for computing basic and diluted EPS is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share amounts)
 
2019
 
2018
 
2019
 
2018
Weighted average shares of common stock outstanding, used in computing basic earnings per share
 
67,593

 
69,589

 
67,935

 
69,895

Effect of dilutive stock options and restricted stock units
 
587

 
768

 
685

 
790

Weighted average shares of common stock outstanding, used in computing diluted earnings per share
 
68,180

 
70,357

 
68,620

 
70,685

Earnings per share of common stock attributable to Columbia Sportswear Company:
 
 
 
 
 
 
 
 
Basic
 
$
1.76

 
$
1.44

 
$
3.19

 
$
2.22

Diluted
 
$
1.75

 
$
1.42

 
$
3.15

 
$
2.19



14

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Stock options, service-based restricted stock units, and performance-based restricted stock representing 440,993 and 240,357 shares of common stock for the three months ended September 30, 2019 and 2018, respectively, and 378,617 and 349,381 shares of common stock for the nine months ended September 30, 2019 and 2018, respectively, were outstanding but were excluded from the computation of diluted EPS because their effect would be anti-dilutive under the treasury stock method, or because the shares were subject to performance conditions that had not been met.
NOTE 13—ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss, net of applicable taxes, reported on the Company's Condensed Consolidated Balance Sheets consists of unrealized holding gains and losses on available-for-sale securities, unrealized gains and losses on certain derivative transactions and foreign currency translation adjustments.
The following table sets forth the changes in accumulated other comprehensive loss attributable to Columbia Sportswear Company, net of tax, for the three months ended September 30, 2019:
(in thousands)
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at June 30, 2019
 
$
(4
)
 
$
11,317

 
$
(12,611
)
 
$
(1,298
)
Other comprehensive income (loss) before reclassifications
 

 
6,315

 
(8,389
)
 
(2,074
)
Amounts reclassified from accumulated other comprehensive loss
 

 
(3,901
)
 

 
(3,901
)
Net other comprehensive income (loss) income during the period
 

 
2,414

 
(8,389
)
 
(5,975
)
Balance at September 30, 2019
 
$
(4
)
 
$
13,731

 
$
(21,000
)
 
$
(7,273
)
The following table sets forth the changes in accumulated other comprehensive loss attributable to Columbia Sportswear Company, net of tax, for the three months ended September 30, 2018:
(in thousands)
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at June 30, 2018
 
$

 
$
3,889

 
$
(10,263
)
 
$
(6,374
)
Other comprehensive income (loss) before reclassifications
 
(162
)
 
541

 
(51
)
 
328

Amounts reclassified from accumulated other comprehensive loss
 

 
1,811

 

 
1,811

Net other comprehensive income (loss) during the period
 
(162
)
 
2,352

 
(51
)
 
2,139

Balance at September 30, 2018
 
$
(162
)
 
$
6,241

 
$
(10,314
)
 
$
(4,235
)
The following table sets forth the changes in accumulated other comprehensive loss attributable to Columbia Sportswear Company, net of tax, for the nine months ended September 30, 2019:
(in thousands)
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2018
 
$
(60
)
 
$
11,964

 
$
(15,967
)
 
$
(4,063
)
Other comprehensive income (loss) before reclassifications
 
56

 
9,119

 
(5,033
)
 
4,142

Amounts reclassified from accumulated other comprehensive loss
 

 
(7,253
)
 

 
(7,253
)
Net other comprehensive income (loss) during the period
 
56

 
1,866

 
(5,033
)
 
(3,111
)
Purchase of non-controlling interest
 

 
(99
)
 

 
(99
)
Balance at September 30, 2019
 
$
(4
)
 
$
13,731

 
$
(21,000
)
 
$
(7,273
)


15

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


The following table sets forth the changes in accumulated other comprehensive loss attributable to Columbia Sportswear Company, net of tax, for the nine months ended September 30, 2018:
 
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2017
 
$
(4
)
 
$
(10,716
)
 
$
1,833

 
$
(8,887
)
Other comprehensive income (loss) before reclassifications
 
(158
)
 
16,088

 
(12,147
)
 
3,783

Amounts reclassified from accumulated other comprehensive loss
 

 
1,384

 

 
1,384

Net other comprehensive income (loss) during the period
 
(158
)
 
17,472

 
(12,147
)
 
5,167

Adoption of ASU 2017-12
 

 
(515
)
 

 
(515
)
Balance at September 30, 2018
 
$
(162
)
 
$
6,241

 
$
(10,314
)
 
$
(4,235
)

NOTE 14—SEGMENT INFORMATION
The Company has aggregated its operating segments into four reportable geographic segments: the United States, LAAP, EMEA, and Canada, which are reflective of the Company's internal organization, management and oversight structure. Each geographic segment operates predominantly in one industry: the design, development, marketing and distribution of outdoor and active lifestyle apparel, footwear, accessories, and equipment. Intersegment net sales and intersegment profits, which are recorded at a negotiated mark-up and eliminated in consolidation, are not material. Unallocated corporate expenses consist of expenses incurred by centrally-managed departments, including global information systems, finance, human resources and legal, executive compensation, unallocated benefit program expense, and other miscellaneous costs.
The geographic distribution of the Company's Net sales and Income from operations in the Condensed Consolidated Statements of Operations are summarized in the following table for the three and nine months ended September 30, 2019 and 2018.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Net sales to unrelated entities:
 
 
 
 
 
 
 
 
United States
 
$
581,263

 
$
496,161

 
$
1,309,014

 
$
1,139,175

LAAP
 
123,246

 
118,379

 
357,719

 
350,832

EMEA
 
104,403

 
100,351

 
267,278

 
257,112

Canada
 
97,881

 
80,910

 
153,600

 
137,609

 
 
$
906,793

 
$
795,801

 
$
2,087,611

 
$
1,884,728

Segment income from operations:
 
 
 
 
 
 
 
 
United States
 
$
156,190

 
$
125,862

 
$
298,366

 
$
243,332

LAAP
 
17,081

 
17,183

 
53,822

 
51,548

EMEA
 
18,162

 
14,782

 
36,905

 
26,328

Canada
 
27,024

 
17,944

 
30,417

 
21,236

Total segment income from operations
 
218,457

 
175,771

 
419,510

 
342,444

Unallocated corporate expenses
 
(66,442
)
 
(46,627
)
 
(163,172
)
 
(144,230
)
Interest income, net
 
1,399

 
2,524

 
7,370

 
7,748

Other non-operating income (expense)
 
(563
)
 
736

 
915

 
372

Income before income taxes
 
$
152,851

 
$
132,404

 
$
264,623

 
$
206,334


During the fourth quarter of 2018, the Company revised its methodology for allocating certain expenses to its reportable segments to better reflect how management reviews financial information and makes operating decisions. As a result, prior year balances for segment income from operations for each reportable segment, and unallocated corporate expenses in the table above have been reclassified to conform with the current year's presentation.
In addition, during the fourth quarter of 2018, the Company determined that it had incorrectly allocated certain amounts of operating income to its United States segment, resulting in the overstatement of both total segment income from operations and unallocated corporate expenses by $4.5 million and $10.8 million for the three and nine months ended September 30, 2018, respectively. The Company assessed the significance of the misclassifications and concluded that they were not material to any prior periods. As a result, the United States and total segment income

16

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


from operations as well as unallocated corporate expenses for the three and nine months ended September 30, 2018 in the table above have been revised from amounts previously reported to correct the misclassifications. These corrections had no effect on the Company's Condensed Consolidated Statements of Operations.
Concentrations
No single customer that accounted for 10% or more of Accounts receivable, net of allowance on the Condensed Consolidated Balance Sheets as of September 30, 2019 or 2018. The Company had one customer that accounted for 11.6% of Accounts receivable, net of allowance as of December 31, 2018. No single customer accounted for 10% or more of Net sales in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 or 2018.
NOTE 15—FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In the normal course of business, the Company's financial position, results of operations and cash flows are routinely subject to a variety of risks. These risks include risks associated with financial markets, primarily currency exchange rate risk and, to a lesser extent, interest rate risk and equity market risk. The Company regularly assesses these risks and has established policies and business practices designed to mitigate them. The Company does not engage in speculative trading in any financial market.
The Company actively manages the risk of changes in functional currency equivalent cash flows resulting from anticipated non-functional currency denominated purchases and sales. Subsidiaries that use European euros, Canadian dollars, Japanese yen, Chinese renminbi, or Korean won as their functional currency are primarily exposed to changes in functional currency equivalent cash flows from anticipated U.S. dollar inventory purchases. Subsidiaries that use U.S. dollars and euros as their functional currency also have non-functional currency denominated sales for which the Company hedges the Canadian dollar and Great British pound. The Company manages these risks by using currency forward contracts formally designated and effective as cash flow hedges. Hedge effectiveness is generally determined by evaluating the ability of a hedging instrument's cumulative change in fair value to offset the cumulative change in the present value of expected cash flows on the underlying exposures. For forward contracts, prior to June 2019, the time value components ("forward points") were excluded from the determination of hedge effectiveness and included in current period Cost of sales for hedges of anticipated U.S. dollar inventory purchases and in Net sales for hedges of anticipated non-functional currency denominated sales on a straight-line basis over the life of the contract. Effective June 2019, the forward points are now included in the fair value of the cash flow hedge on a prospective basis. These costs or benefits will be included in Accumulated other comprehensive income until the underlying hedge transaction is recognized in either Net sales or Cost of sales, at which time, the forward points will also be recognized as a component of Net income. Hedge ineffectiveness was not material during the three and nine months ended September 30, 2019 and 2018.
The Company also uses currency forward contracts not formally designated as hedges to manage the consolidated currency exchange rate risk associated with the remeasurement of non-functional currency denominated monetary assets and liabilities by subsidiaries that use U.S. dollars, euros, Canadian dollars, yen, won, or renminbi as their functional currency. Non-functional currency denominated monetary assets and liabilities consist primarily of cash and cash equivalents, short-term investments, receivables, payables, deferred income taxes, and intercompany loans. The gains and losses generated on these currency forward contracts not formally designated as hedges are expected to be largely offset in Other non-operating income (expense), net by the gains and losses generated from the remeasurement of the non-functional currency denominated monetary assets and liabilities.
The following table presents the gross notional amount of outstanding derivative instruments: 
(in thousands)
 
September 30,
2019
 
December 31,
2018
 
September 30,
2018
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
Currency forward contracts
 
$
412,041

 
$
399,348

 
$
434,738

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
Currency forward contracts
 
235,945

 
379,701

 
289,772


At September 30, 2019, $11.9 million of deferred net gains on both outstanding and matured derivatives recorded in Other comprehensive income are expected to be reclassified to Net income during the next twelve months as a result of underlying hedged transactions also being recorded in Net sales or Cost of sales in the Condensed Consolidated Statements of Operations. Actual amounts ultimately reclassified to Net sales or Cost of sales in the Condensed Consolidated Statements of Comprehensive Income are dependent on U.S. dollar exchange rates in effect against the euro, renminbi, Canadian dollar, and yen when outstanding derivative contracts mature.
At September 30, 2019, the Company's derivative contracts had a remaining maturity of less than four years. The maximum net exposure to any single counterparty, which is generally limited to the aggregate unrealized gain of all contracts with that counterparty, was less than $7.0 million at September 30, 2019. All of the Company's derivative counterparties have credit ratings that are investment grade or higher. The Company is a party to master netting arrangements that contain features that allow counterparties to net settle amounts arising from multiple

17

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


separate derivative transactions or net settle amounts arising from multiple separate derivative transactions or net settle in the case of certain triggering events such as a bankruptcy or major default of one of the counterparties to the transaction. The Company has not pledged assets or posted collateral as a requirement for entering into or maintaining derivative positions.
The following table presents the balance sheet classification and fair value of derivative instruments:
(in thousands)
 
Balance Sheet Classification
 
September 30,
2019
 
December 31,
2018
 
September 30,
2018
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
$
16,603

 
$
11,818

 
$
7,262

Currency forward contracts
 
Other non-current assets
 
4,830

 
9,922

 
7,963

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
201

 
47

 
584

Currency forward contracts
 
Other long-term liabilities
 
109

 
1

 

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
1,857

 
1,797

 
865

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
320

 
970

 
154

The following table presents the statement of operations effect and classification of derivative instruments:
 
 
Statement of
Operations
Classification
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
 
2019
 
2018
 
2019
 
2018
Currency Forward and Option Contracts:
 
 
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain recognized in other comprehensive income (loss), net of tax
 
 
$
6,315

 
$
866

 
$
9,119

 
$
16,493

Gain reclassified from accumulated other comprehensive loss to income for the effective portion
 
Net sales
 
172

 
17

 
282

 
41

Gain (loss) reclassified from accumulated other comprehensive loss to income for the effective portion
 
Cost of sales
 
5,087

 
(4,192
)
 
7,208

 
(7,796
)
Gain (loss) recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Net sales
 

 
4

 
(31
)
 
16

Gain recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Cost of sales
 

 
1,637

 
2,380

 
5,458

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain recognized in income
 
Other non-operating income (expense), net
 
1,855

 
372

 
1,281

 
2,606



18

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


NOTE 16—FAIR VALUE MEASURES
Certain assets and liabilities are reported at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, under a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
Level 1 — observable inputs such as quoted prices for identical assets or liabilities in active liquid markets;
Level 2 — inputs, other than the quoted market prices in active markets, that are observable, either directly or indirectly; or observable market prices in markets with insufficient volume or infrequent transactions; and
Level 3 — unobservable inputs for which there is little or no market data available, that require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 were as follows:
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
72,941

 
$

 
$

 
$
72,941

Other short-term investments:
 
 
 
 
 
 
 
 
Mutual fund shares
 
1,477

 

 

 
1,477

Other current assets:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 

 
18,460

 

 
18,460

Other non-current assets:
 
 
 
 
 
 
 
 
Money market funds
 
1,528

 

 

 
1,528

Mutual fund shares
 
11,362

 

 

 
11,362

Derivative financial instruments (Note 15)
 

 
4,830

 

 
4,830

Total assets measured at fair value
 
$
87,308

 
$
23,290

 
$

 
$
110,598

Liabilities:
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 
$

 
$
521

 
$

 
$
521

Other long-term liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 

 
109

 

 
109

Total liabilities measured at fair value
 
$

 
$
630

 
$

 
$
630

(1) Investments have remaining maturities of less than one year.

19

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 were as follows:
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
122,237

 
$

 
$

 
$
122,237

U.S. Government treasury bills
 

 
39,952

 

 
39,952

Available-for-sale short-term investments (1)
 
 
 
 
 
 
 
 
U.S. Government treasury bills
 

 
261,602

 

 
261,602

Other short-term investments:
 
 
 
 
 
 
 
 
Mutual fund shares
 
1,200

 

 

 
1,200

Other current assets:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 

 
13,615

 

 
13,615

Other non-current assets:
 
 
 
 
 
 
 
 
Money market funds
 
869

 

 

 
869

Mutual fund shares
 
8,606

 

 

 
8,606

Derivative financial instruments (Note 15)
 

 
9,922

 

 
9,922

Total assets measured at fair value
 
$
132,912

 
$
325,091

 
$

 
$
458,003

Liabilities:
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 
$

 
$
1,017

 
$

 
$
1,017

Other long-term liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 

 
1

 

 
1

Total liabilities measured at fair value
 
$

 
$
1,018

 
$

 
$
1,018

(1) Investments have remaining maturities of less than one year.
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 were as follows:
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
70,573

 
$

 
$

 
$
70,573

Available-for-sale short-term investments (1):
 
 
 
 
 
 
 
 
U.S. Government treasury bills
 

 
267,861

 

 
267,861

Other short-term investments:
 
 
 
 
 
 
 
 
Mutual funds shares
 
1,452

 

 

 
1,452

Other current assets:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 

 
8,127

 

 
8,127

Other non-current assets:
 
 
 
 
 
 
 
 
Mutual fund shares
 
9,950

 

 

 
9,950

Derivative financial instruments (Note 15)
 

 
7,963

 

 
7,963

Total assets measured at fair value
 
$
81,975

 
$
283,951

 
$

 
$
365,926

Liabilities:
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
Derivative financial instruments (Note 15)
 
$

 
$
738

 
$

 
$
738

Total liabilities measured at fair value
 
$

 
$
738

 
$

 
$
738


(1) Investments have remaining maturities of less than one year.
Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from inputs, other than quoted market prices in active markets, which are directly or indirectly observable in the marketplace and quoted prices in markets with limited volume or infrequent transactions.

20

Table of Contents
COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)


Non-recurring Fair Value Measurements
There were no material assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2019, December 31, 2018 or September 30, 2018.
NOTE 17—RELATED PARTY TRANSACTIONS
As described in Note 4, prior to January 2, 2019, the Company owned a 60% controlling interest in a joint venture formed with Swire, which was a related party. The joint venture arrangement involved Transition Services Agreements ("TSAs") with Swire, under which Swire provided administrative and information technology services to the joint venture. The fees incurred for these services by the joint venture were immaterial during the three and nine months ended September 30, 2018. In addition, the joint venture paid Swire sourcing fees related to the purchase of certain inventory. These sourcing fees were capitalized into Inventories and charged to Cost of sales as the inventories were sold.
In addition to the transactions described above, Swire is also a third-party distributor of the Company's brands in certain regions outside of mainland China and purchases products from the Company under the Company's third-party distributor terms and pricing.
The China joint venture declared a cash dividend of RMB341.3 million (approximately US$53.3 million) in June 2018 to stockholders of record as of June 14, 2018 and paid the dividend in the third quarter of 2018. The dividend paid to Swire was RMB136.5 million (approximately US$21.3 million at the date of declaration, which equated to approximately US$20.0 million on the date of payment). The dividend paid to the Company of $32.0 million was eliminated in consolidation. In addition, in September 2018, the Company and Swire entered into an EITA, under which the Company committed to buy out the 40% non-controlling interest in the joint venture. The buyout was subject to various terms and conditions. As part of the buyout arrangement, in September 2018 the Company placed $14.0 million in an escrow account as a portion of the funds needed to complete the buyout in early 2019. The escrow amount was shown as Restricted cash on the Condensed Consolidated Balance Sheets at December 31, 2018 and September 30, 2018.
On January 2, 2019, the buyout transaction closed, and Swire was no longer considered to be a related party. Pursuant to the terms of the buyout arrangement, the escrow balance of $14.0 million was paid to Swire. In April 2019, the Company remitted a final payment of $3.9 million to Swire, based on the final outcome of certain accounting estimates associated with the China joint venture. As a result of the buyout, beginning in 2019, the condensed consolidated financial statements of the Company do not separately reflect amounts related to the non-controlling interest.
NOTE 18—INCOME TAXES
For the three months ended September 30, 2019 and 2018, the effective income tax rates were 22.0% and 22.7%, respectively. For the nine months ended September 30, 2019 and 2018, the effective income tax rates were 18.2% and 21.7%, respectively. The effective income tax rate for the nine months ended September 30, 2019 was impacted by discrete items, primarily the passage of a Swiss tax reform package in May 2019, which resulted in a $6.6 million second-quarter tax benefit related to the revaluation of the Company’s Swiss deferred tax assets at a higher rate.

21

Table of Contents

Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements include any statements related to our expectations regarding future performance or market position, including any statements regarding anticipated sales, gross margins and operating margins across markets or segments, profitability and the effect of specified factors on profitability for 2019, expenses, sourcing costs, effects of unseasonable weather on our results of operations, inventory levels, investments in our business and strategic priorities and the expected timing and effects of such investments, including investments in and implementation of our information technology ("IT") systems, intellectual property, other disputes, our DTC businesses, including planned store additions, access to raw materials and factory capacity, financing, and working capital requirements and resources, planned capital expenditures, ability to meet our liquidity needs, plans to pay future cash dividends to our shareholders and the funding of such dividends, effects of the Tax Cuts and Jobs Act (the "TCJA") and the adoption of new accounting standards, income tax rates and pre-tax income, results of any tax audit, and our exposure to market risk associated with interest rates and foreign currency exchange rates.
These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors may cause actual results to differ materially from projected results in forward-looking statements, including the risks described in Part II, Item 1A, Risk Factors in this quarterly report. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.
Our Business
As one of the largest outdoor and active lifestyle apparel and footwear companies in the world, we design, develop, market, and distribute outdoor and active lifestyle apparel, footwear, accessories, and equipment primarily under the Columbia, SOREL, Mountain Hardwear, and prAna brands. Our products are sold through a mix of wholesale distribution channels, our own DTC businesses and independent international distributors. In addition, we license some of our trademarks across a range of apparel, footwear, accessories, equipment, and home products.
The popularity of outdoor activities and active lifestyles, changing design trends, consumer adoption of innovative performance technologies, variations in seasonal weather, and the availability and desirability of competitor alternatives affect consumer desire for our products. Therefore, we seek to drive, anticipate and respond to trends and shifts in consumer preferences by developing new products with innovative performance features and designs, creating persuasive and memorable marketing communications to generate consumer awareness, demand and retention, and adjusting the mix, price points and selling channels of available product offerings. Failure to anticipate or respond to consumer needs and preferences in a timely and adequate manner could have a material adverse effect on our sales and profitability.
Seasonality and Variability of Business
Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. In 2018, approximately 60% of our net sales and approximately 80% of our operating income were realized in the second half of the year, illustrating our dependence upon sales results in the second half of the year, as well as the less seasonal nature of our operating costs. Due to the earlier shipment of Fall 2019 wholesale orders in the third quarter of 2019, we expect a shift of profitability, with a greater portion of the second half of 2019 financial results moving into the third quarter from the fourth quarter compared to the second half of 2018.
We generally solicit orders from wholesale customers and independent international distributors for the fall and spring seasons based on seasonal ordering deadlines that we establish to aid our efforts to plan manufacturing volumes to meet demand. We typically ship the majority of our advance spring season orders to customers beginning in January and continuing through June. Similarly, we typically ship the majority of our advance fall season orders to customers beginning in July and continuing through December. Generally, orders are subject to cancellation prior to the date of shipment.
Results of operations in any period should not be considered indicative of the results to be expected for any future period, particularly in light of persistent volatility in global economic and geopolitical conditions and volatility of foreign currency exchange rates which, when combined with seasonal weather patterns and inflationary or volatile sourcing costs, reduce the predictability of our business.
Business Outlook
The global business climate presents us with a great deal of uncertainty, making it difficult to predict future results. Consistent with the historical seasonality of the business, we anticipate 2019 profitability to be heavily concentrated in the second half of the year. Factors that could significantly affect our full year 2019 financial results include:
Growth, performance and profitability of our global DTC operations;
Unseasonable weather conditions or other unforeseen factors affecting consumer demand and the resulting effect on cancellations of advance wholesale and distributor orders, sales returns, customer accommodations, replenishment orders and reorders, DTC sales, changes in mix and volume of full price sales in relation to promotional and closeout product sales, and suppressed customer and end-consumer demand in subsequent seasons;

22

Table of Contents

Our ability to effectively manage inventory, including liquidating excess inventory timely and profitably through wholesale closeouts and DTC outlet stores;
Difficult economic, geopolitical and competitive environments in certain key markets globally, coupled with increasing global economic uncertainty;
Impacts of recent changes to, further changes to, and uncertainty surrounding tariffs or international trade policy;
The implementation and stability of our global DTC and e-commerce platforms and continued optimization of our enterprise resource planning platform;
Execution of our strategic initiatives and related business process and system changes across our business, including our supply chain, as well as other capability development;
The financial value capture associated with and resulting from Project CONNECT;
Economic and industry trends affecting consumer traffic and spending in brick and mortar retail channels, which have created uncertainty regarding the long-term financial health of certain of our wholesale customers, and, in certain cases, may require the cancellation of customer shipments and/or increased credit exposure associated with any such shipments;
The effects of changes in foreign currency exchange rates on net sales, gross margin, operating income, and net income;
Net sales growth and profitability contributed by our LAAP businesses, in particular, China, which has softened due to competitive pressures and elevated dealer inventory levels;
Performance of our Mountain Hardwear brand as we work to re-invigorate that brand in the marketplace;
Performance of our prAna brand as we work to maintain the brand's premium positioning and raise brand awareness in order to drive long-term profitable sales growth;
Impacts resulting from additional guidance about and implementation of the TCJA enacted in 2017; and
Accelerated investment in and execution of demand creation, DTC infrastructure and other strategic priorities and initiatives.
These factors and others may have a material effect on our financial condition, results of operations or cash flows, particularly with respect to quarterly comparisons.
Strategic Priorities
As part of our commitment to driving sustainable and profitable growth and relentless improvement, we remain focused on investment in our strategic priorities, including:
Driving brand awareness and sales growth through increased, focused demand creation investments;
Enhancing consumer experience and digital capabilities in all of our channels and geographies;
Expanding and improving global DTC operations with supporting processes and systems; and
Investing in our people and optimizing our organization across our portfolio of brands.
Ultimately, we expect our investments to enable market share capture across our brand portfolio, expand gross margin, improve selling, general and administrative ("SG&A") expense efficiency, and drive improved operating margin.
Consumer-First Platform ("C1")
During 2017, we commenced investment in our C1 initiative, which encompasses the global retail platform and IT systems to support the growth and continued development of our omnichannel capabilities. The objective of this initiative is consistent with our strategic priorities to deliver an enhanced consumer experience and to modernize and standardize our processes and systems to enable us to better anticipate and deliver against the needs of our consumers. In the quarter ended September 30, 2019, we rolled out the C1 platform to 140 of our stores in North America, including all Columbia, SOREL and Mountain Hardwear stores.
Experience First ("X1")
During 2018, we commenced investment in our X1 initiative, which is designed to enhance our e-commerce systems to take advantage of the changes in consumer browsing and purchasing behavior towards mobile devices. It encompasses reimplementation of our e-commerce platforms to offer improved search, browsing, checkout, loyalty, and customer care experiences for mobile shoppers.
We are working toward a phased implementation of X1. In the quarter ended June 30, 2019, we implemented X1 across 10 countries in Europe-direct and for the prAna brand in the U.S. We expect the North America implementation to continue in 2020 for the Columbia, SOREL and Mountain Hardwear brands.

23

Table of Contents

Project CONNECT
During 2017, we initiated Project CONNECT, aimed at aligning our resources to accelerate execution on our strategic priorities, including initiatives to drive net sales, capture cost of sales efficiencies, generate SG&A expense savings, and improve our marketing effectiveness. Efficiencies within cost of sales have created a meaningful benefit to product margin driven by assortment optimization, design-to-value initiatives and DTC pricing and markdown optimization. The financial benefits from these initiatives are reflected in our 2019 financial results. As we realize these benefits in 2018 and 2019, we are reallocating resources to our strategic priorities, including incremental demand creation spending, and other investments to drive growth across our brands and distribution channels. We anticipate sustaining the financial benefits driven from Project CONNECT, but do not expect the continued level of incremental improvement in the Company's gross margin in 2020.

24

Table of Contents

Results of Operations
The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with the condensed consolidated financial statements and accompanying Notes that appear in Part I, Item 1, Financial Statements in this quarterly report. All references to quarters relate to the quarter ended September 30 of the particular year.
To supplement financial information reported in accordance with accounting principles generally accepted in the United States ("GAAP"), we disclose constant-currency net sales information, which is a non-GAAP financial measure, to provide a framework to assess how the business performed excluding the effects of changes in the exchange rates used to translate net sales generated in foreign currencies into U.S. dollars. Management believes that this non-GAAP financial measure reflects an additional and useful way of viewing an aspect of our operations that, when viewed in conjunction with our GAAP results, provides a more comprehensive understanding of our business and operations. In particular, investors may find the non-GAAP measures useful by reviewing our net sales results without the volatility in foreign currency exchange rates. This non-GAAP financial measure also facilitates management's internal comparisons to our historical net sales results and comparisons to competitors' net sales results. Constant-currency financial measures should be viewed in addition to, and not in lieu of or superior to, our financial measures calculated in accordance with GAAP. The following discussion includes references to constant-currency net sales, and we provide a reconciliation of this non-GAAP measure to the most directly comparable financial measure calculated in accordance with GAAP below.
Highlights of the Third Quarter of 2019
Net sales increased $111.0 million, or 14%, to $906.8 million from $795.8 million in the third quarter of 2018.
Income from operations increased $22.9 million, or 18%, to $152.0 million from $129.1 million in the third quarter of 2018.
Net income attributable to Columbia Sportswear Company increased $19.1 million, or 19%, to $119.3 million, or $1.75 per diluted share, from $100.2 million, or $1.42 per diluted share, in the third quarter of 2018.
The following table sets forth, for the periods indicated, the percentage relationship to net sales of specified items in our Condensed Consolidated Statements of Operations:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
50.7

 
51.8

 
50.3

 
51.6

Gross profit
49.3

 
48.2

 
49.7

 
48.4

Selling, general and administrative expenses
33.0

 
32.6

 
37.9

 
38.5

Net licensing income
0.5

 
0.6

 
0.5

 
0.6

Income from operations
16.8

 
16.2

 
12.3

 
10.5

Interest income, net
0.2

 
0.3

 
0.4

 
0.4

Other non-operating income (expense), net
(0.1
)
 
0.1

 

 

Income before income tax
16.9

 
16.6

 
12.7

 
10.9

Income tax expense
(3.7
)
 
(3.7
)
 
(2.3
)
 
(2.3
)
Net income
13.2

 
12.9

 
10.4

 
8.6

Net income attributable to non-controlling interest

 
0.3

 

 
0.4

Net income attributable to Columbia Sportswear Company
13.2
 %
 
12.6
 %
 
10.4
 %
 
8.2
 %

25

Table of Contents

Results of Operations Consolidated
Quarter Ended September 30, 2019 Compared to Quarter Ended September 30, 2018
Net Sales: Consolidated net sales increased $111.0 million, or 14% (15% constant-currency), to $906.8 million for the third quarter of 2019 from $795.8 million for the comparable period in 2018.
Sales by Brand
Net sales by brand are summarized in the following table:
 
 
Three Months Ended September 30,
 
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
(In millions, except for percentage changes)
 
2019
 
Translation
 
2019(1)
 
2018
 
% Change
 
% Change
Columbia
 
$
729.5

 
$
5.6

 
$
735.1

 
$
640.9

 
14%
 
15%
SOREL
 
116.1

 
1.1

 
117.2

 
91.2

 
27%
 
29%
prAna
 
38.5

 
0.1

 
38.6

 
39.9

 
(4)%
 
(3)%
Mountain Hardwear
 
22.7

 
(0.1
)
 
22.6

 
23.0

 
(1)%
 
(2)%
Other
 

 

 

 
0.8

 
(100)%
 
(100)%
 
 
$
906.8

 
$
6.7

 
$
913.5

 
$
795.8

 
14%
 
15%
(1) Constant-currency net sales information is a non-GAAP financial measure that excludes the effect of changes in foreign currency exchange rates against the U.S. dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into U.S. dollars at the average exchange rates that were in effect during the comparable period of the prior year.
Columbia brand net sales increased $88.6 million, or 14% (15% constant-currency), to $729.5 million, led by increased net sales primarily in the U.S. wholesale business, followed by Canada and the U.S. DTC businesses. Results included increased net sales across all product categories.
SOREL brand net sales increased $24.9 million, or 27% (29% constant-currency), to $116.1 million, driven primarily by increased net sales in the U.S. wholesale and Canada businesses.
prAna brand net sales decreased $1.4 million, or 4% (3% constant-currency), to $38.5 million.
Mountain Hardwear brand net sales decreased $0.3 million, or 1% (2% constant-currency), to $22.7 million.
Sales by Product Category
Net sales by product category are summarized in the following table:
 
 
Three Months Ended September 30,
 
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
(In millions, except for percentage changes)
 
2019
 
Translation
 
2019(1)
 
2018
 
% Change
 
% Change
Apparel, Accessories and Equipment
 
$
684.7

 
$
4.5

 
$
689.2

 
$
617.6

 
11%
 
12%
Footwear
 
222.1

 
2.2

 
224.3

 
178.2

 
25%
 
26%
 
 
$
906.8

 
$
6.7

 
$
913.5

 
$
795.8

 
14%
 
15%
Apparel, accessories and equipment net sales increased $67.1 million, or 11% (12% constant-currency), to $684.7 million. Increased apparel, accessories and equipment net sales were driven by net sales growth led by the U.S. wholesale business, followed by Canada and U.S. DTC businesses. The increase in apparel, accessories and equipment net sales was concentrated in the Columbia brand.
Footwear net sales increased $43.9 million, or 25% (26% constant-currency), to $222.1 million. Increased footwear net sales were driven by sales growth in across all regions, primarily in the U.S. and Canada, and was led by the SOREL brand, followed by the Columbia brand.

26

Table of Contents

Sales by Channel
Net sales by channel are summarized in the following table:
 
 
Three Months Ended September 30,
 
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
(In millions, except for percentage changes)
 
2019
 
Translation
 
2019(1)
 
2018(2)
 
% Change
 
% Change
Wholesale
 
$
652.6

 
$
5.3

 
$
657.9

 
$
549.8

 
19%
 
20%
DTC
 
254.2

 
1.4

 
255.6

 
246.0

 
3%
 
4%
 
 
$
906.8

 
$
6.7

 
$
913.5

 
$
795.8

 
14%
 
15%
(2) Prior year channel net sales have been revised from amounts previously reported. See Note 3 to the condensed consolidated financial statements for additional discussion.
Wholesale channel net sales increased $102.8 million, or 19% (20% constant-currency), to $652.6 million, driven by increased net sales across all regions, primarily in the U.S. and Canada.
DTC channel net sales increased $8.2 million, or 3% (4% constant-currency), to $254.2 million, driven by increased net sales in the U.S. The DTC channel faced a difficult comparison to the third quarter of 2018, which increased 23% from the third quarter of 2017, primarily due to net sales increases in the U.S.
Gross Profit: Gross profit as a percentage of net sales increased to 49.3% in the third quarter of 2019 from 48.2% for the comparable period in 2018. Gross profit expansion was primarily due to:
A favorable impact from Project CONNECT benefits, including our design-to-value, assortment optimization and manufacturing efficiency initiatives; partially offset by
A lower DTC net sales mix, which generally carries a higher gross margin; and
A higher proportion of closeout product net sales.
Our gross profit may not be comparable to other companies in our industry because some of these companies may include all of the costs related to their distribution network in cost of sales while we, like many others, include these expenses as a component of SG&A expense.
Selling, General and Administrative Expense: SG&A expense includes all costs associated with our design, merchandising, marketing, distribution, and corporate functions, including related depreciation and amortization.
SG&A expense increased $40.0 million, or 15%, to $299.2 million, or 33.0% of net sales, for the third quarter of 2019, from $259.3 million, or 32.6% of net sales, for the comparable period in 2018.
The SG&A expense increase was primarily due to:
Increased expenses to support our expanding global DTC operations;
Increased personnel costs to support business growth and strategic projects;
Increased IT spending, including our C1 and X1 initiatives;
Increased demand creation spending; and
The non-recurrence of an insurance claim recovered in the third quarter of 2018.
Income from Operations: Income from operations increased $22.9 million, or 18%, to $152.0 million in the third quarter of 2019 from $129.1 million for the comparable period in 2018. Income from operations as a percentage of net sales increased to 16.8% in the third quarter of 2019, compared to 16.2% in the comparable period in 2018.
Income Tax Expense: Income tax expense increased $3.6 million to $33.6 million for the third quarter of 2019, from $30.0 million for the comparable period in 2018. Our effective income tax rate was 22.0% for the third quarter of 2019, compared to 22.7% for the same period in 2018.
Net Income Attributable to Columbia Sportswear Company: Net income increased $19.1 million, or 19%, to $119.3 million, or $1.75 per diluted share, for the third quarter of 2019 from $100.2 million, or $1.42 per diluted share, for the comparable period in 2018, which included $3.3 million, net of tax, of benefit in connection with an insurance claim, $1.5 million of incremental tax expense related to the TCJA and $0.9 million, net of tax, of Project CONNECT program expenses and discrete costs. The third quarter of 2019 net income includes the benefit of full ownership of our China business, which became a wholly owned subsidiary effective January 2019. In the third quarter of 2018, the non-controlling interest share of net income was $2.2 million, or $0.03 per diluted share.

27


Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
Net Sales: Consolidated net sales increased $202.9 million, or 11% (12% constant-currency), to $2,087.6 million for the nine months ended September 30, 2019, from $1,884.7 million for the comparable period in 2018.
Sales by Brand
Net sales by brand are summarized in the following table:
 
 
Nine Months Ended September 30,
 
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
(In millions, except for percentage changes)
 
2019
 
Translation
 
2019
 
2018
 
% Change
 
% Change
Columbia
 
$
1,736.6

 
$
22.4

 
$
1,759.0

 
$
1,564.5

 
11%
 
12%
SOREL
 
170.7

 
1.7

 
172.4

 
133.4

 
28%
 
29%
prAna
 
118.4

 
0.1

 
118.5

 
120.3

 
(2)%
 
(1)%
Mountain Hardwear
 
61.9

 
0.5

 
62.4

 
63.4

 
(2)%
 
(2)%
Other
 

 

 

 
3.1

 
(100)%
 
(100)%
 
 
$
2,087.6

 
$
24.7

 
$
2,112.3

 
$
1,884.7

 
11%
 
12%
Columbia brand net sales increased $172.1 million, or 11% (12% constant-currency), to $1,736.6 million for the nine months ended September 30, 2019 from $1,564.5 million for the comparable period in 2018, led by increased net sales in the U.S. wholesale and DTC businesses, as well as increased net sales across all product categories.
SOREL brand net sales increased $37.3 million, or 28% (29% constant-currency), to $170.7 million for the nine months ended September 30, 2019 from $133.4 million for the comparable period in 2018, primarily driven by net sales growth in the U.S. wholesale, the U.S. DTC and Canada businesses.
prAna brand net sales decreased $1.9 million, or 2% (1% constant-currency), to $118.4 million.
Mountain Hardwear brand net sales decreased $1.5 million, or 2%, to $61.9 million.
Sales by Product Category
Net sales by product category are summarized in the following table:
 
 
Nine Months Ended September 30,
 
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
(In millions, except for percentage changes)
 
2019
 
Translation
 
2019
 
2018
 
% Change
 
% Change
Apparel, Accessories and Equipment
 
$
1,642.9

 
$
17.4

 
$
1,660.3

 
$
1,502.2

 
9%
 
11%
Footwear
 
444.7

 
7.3

 
452.0

 
382.5

 
16%
 
18%
 
 
$
2,087.6

 
$
24.7

 
$
2,112.3

 
$
1,884.7

 
11%
 
12%
Apparel, accessories and equipment net sales increased $140.7 million, or 9% (11% constant-currency), to $1,642.9 million. Increased apparel, accessories and equipment net sales were driven by sales growth from the U.S. businesses, as well as increased net sales in the Canada, EMEA distributor, Europe-direct, and Japan businesses. The increase in apparel, accessories and equipment net sales was concentrated in the Columbia brand.
Footwear net sales increased $62.2 million, or 16% (18% constant-currency), to $444.7 million. Increased footwear net sales were led by sales growth in the U.S. wholesale business, followed by the U.S. DTC and Canada businesses, partially offset by decreased net sales in the EMEA distributor business. The increase in footwear net sales was led by the SOREL brand, followed by the Columbia brand.

28


Sales by Channel
Net sales by channel are summarized in the following table:
 
 
Nine Months Ended September 30,
 
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
(In millions, except for percentage changes)
 
2019
 
Translation
 
2019
 
2018
 
% Change
 
% Change
Wholesale
 
$
1,312.0

 
$
16.4

 
$
1,328.4

 
$
1,161.4

 
13%
 
14%
DTC
 
775.6

 
8.3

 
783.9

 
723.3

 
7%
 
8%
 
 
$
2,087.6

 
$
24.7

 
$
2,112.3

 
$
1,884.7

 
11%
 
12%
Wholesale channel net sales increased $150.6 million, or 13% (14% constant-currency), to $1,312.0 million, driven by increased net sales across all regions, led by the U.S.
DTC channel net sales increased $52.3 million, or 7% (8% constant-currency), to $775.6 million, primarily due to increased net sales in the U.S.
Gross Profit: Gross profit, as a percentage of net sales, increased to 49.7% in the nine months ended September 30, 2019, from 48.4% for the comparable period in 2018, primarily due to a favorable impact from Project CONNECT benefits, including our design-to-value, assortment optimization and manufacturing efficiency initiatives.
Selling, General and Administrative Expense: SG&A expense increased $66.9 million, or 9%, to $791.8 million, or 37.9% of net sales, for the nine months ended September 30, 2019, from $724.8 million, or 38.5% of net sales, for the comparable period in 2018.
The SG&A expense increase was primarily due to:
Increased expenses to support our expanding global DTC operations;
Increased personnel costs to support business growth and strategic projects;
Increased IT spending, including our C1 and X1 initiatives;
Increased demand creation spending; and
The non-recurrence of an insurance claim recovered in the third quarter of 2018; partially offset by
The non-recurrence of Project CONNECT program expenses and discrete costs; and
The impact of weakening foreign currencies relative to the U.S. dollar.
Income from Operations: Income from operations increased $58.1 million, or 29%, to $256.3 million for the nine months ended September 30, 2019 from $198.2 million for the comparable period in 2018. Income from operations as a percentage of net sales increased to 12.3% for the nine months ended September 30, 2019, compared to 10.5% in the comparable period in 2018.
Income Tax Expense: Income tax expense increased $3.4 million to $48.2 million for the nine months ended September 30, 2019 from $44.7 million for the comparable period in 2018. Our effective income tax rate decreased to 18.2% for the nine months ended September 30, 2019 from 21.7% for the same period in 2018. The effective income tax rate for the nine months ended September 30, 2019 was impacted by the passage of a Swiss tax reform package in the second quarter of 2019, which resulted in a $6.6 million tax benefit related to the revaluation of our Swiss deferred tax assets at a higher rate.
Net Income Attributable to Columbia Sportswear Company: Net income increased $61.5 million, or 40%, to $216.5 million, or $3.15 per diluted share, for the nine months ended September 30, 2019 from $155.0 million, or $2.19 per diluted share, for the comparable period in 2018, which included $10.7 million, net of tax, of Project CONNECT program expense and discrete costs, $3.3 million, net of tax, of benefit in connection with an insurance claim and $2.7 million of incremental income tax expense related to the TCJA. Net income for the nine months ended September 30, 2019 includes the benefit of full ownership of our China business, which became a wholly owned subsidiary effective January 2019. In the comparable period of 2018, the non-controlling interest share of net income was $6.6 million or $0.09 per diluted share.

29

Table of Contents

Results of Operations — Segment
Quarter Ended September 30, 2019 Compared to Quarter Ended September 30, 2018
Net Sales by Geographic Region: Net sales by geographic region are summarized in the following table:
 
 
Three Months Ended September 30,
 
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
(In millions, except for percentage changes)
 
2019
 
Translation
 
2018(1)
 
2018
 
% Change
 
% Change(1)
United States
 
$
581.3

 
$

 
$
581.3

 
$
496.2

 
17%
 
17%
LAAP
 
123.2

 
1.7

 
124.9

 
118.4

 
4%
 
5%
EMEA
 
104.4

 
4.1

 
108.5

 
100.3

 
4%
 
8%
Canada
 
97.9

 
0.9

 
98.8

 
80.9

 
21%
 
22%
 
 
$
906.8

 
$
6.7

 
$
913.5

 
$
795.8

 
14%
 
15%
(1) Constant-currency net sales information is a non-GAAP financial measure that excludes the effect of changes in foreign currency exchange rates against the U.S. dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into U.S. dollars at the average exchange rates that were in effect during the comparable period of the prior year.
U.S. net sales increased $85.1 million, or 17%, to $581.3 million for the third quarter of 2019 from $496.2 million for the comparable period in 2018. U.S. net sales increased in both our wholesale and DTC businesses. The net sales increase in our wholesale business was driven by the shipment of higher Fall 2019 advance orders, a greater portion of Fall 2019 shipments falling into the third quarter of 2019 compared to Fall 2018 shipments in the third quarter of 2018, favorable net reorder and cancellation rates, and higher replenishment sales. The net sales increase in our DTC business was led by increased net sales from our retail stores, followed by our e-commerce business.
LAAP region net sales increased $4.8 million, or 4% (5% constant-currency), to $123.2 million for the third quarter of 2019 from $118.4 million for the comparable period in 2018. The net sales increase in the LAAP region was driven by our LAAP distributor and Japan businesses, partially offset by a net sales decrease in our China business, while Korea net sales remained relatively flat.
EMEA region net sales increased $4.1 million, or 4% (8% constant-currency), to $104.4 million for the third quarter of 2019 from $100.3 million for the comparable period in 2018. Net sales increased in our Europe-direct business, primarily driven by a greater portion of Fall 2019 shipments falling into the third quarter of 2019 compared to Fall 2018 shipments for the third quarter of 2018, higher closeout sales and, to a lesser extent, DTC sales growth. Net sales increased in our EMEA distributor business, primarily driven by increased Fall 2019 shipments.
Canada net sales increased $17.0 million, or 21% (22% constant-currency), to $97.9 million for the third quarter of 2019 from $80.9 million for the comparable period in 2018. The net sales increase in Canada was primarily driven by increased net sales in our wholesale business and a greater portion of Fall 2019 shipments falling into the third quarter of 2019 compared to Fall 2018 shipments for the third quarter of 2018.
Segment Income from Operations: Segment income from operations includes net sales, cost of sales, SG&A expenses, and net licensing income for each of our four reportable geographic segments. Income from operations as a percentage of net sales in the U.S. is typically higher than the other segments due to scale efficiencies associated with the larger base of net sales in the U.S. and incremental licensing income compared to other segments.
We anticipate this trend to continue until other segments achieve scale efficiencies from higher levels of net sales volume relative to the fixed cost structure necessary to operate the business. The EMEA segment, in particular, has realized lower operating margins compared to other segments due to a relatively higher fixed cost structure associated with our supply chain and administrative functions, compared to net sales. As net sales increase in the EMEA segment, we would anticipate an improvement in the operating income margin of that segment. The following table presents segment income from operations for each reportable segment for the three months ended September 30:
 
 
Three Months Ended September 30,
(In millions, except for percentage changes)
 
2019
 
2018(1)
 
Change ($)
 
Change (%)
United States
 
$
156.2

 
$
125.9

 
30.3
 
24
 %
LAAP
 
17.1

 
17.2

 
(0.1)
 
(1
)%
EMEA
 
18.2

 
14.8

 
3.4
 
23
 %
Canada
 
27.0

 
17.9

 
9.1
 
51
 %
Total segment income from operations
 
$
218.5

 
$
175.8

 
42.7
 
24
 %
(1) Prior year segment income from operations has been revised from amounts previously reported. See Note 14 to the condensed consolidated financial statements for additional discussion.
Segment income from operations in the U.S. increase$30.3 million to $156.2 million, or 26.9% of net sales, for the third quarter of 2019 from $125.9 million, or 25.4% of net sales, for the comparable period in 2018. The increase in income from operations was driven by net sales growth

30

Table of Contents

from both the wholesale and DTC businesses, combined with improved gross margin reflecting financial benefits from Project CONNECT. U.S. SG&A expense decreased as a percentage of net sales to 23.1% of net sales for the third quarter of 2019 compared to 23.7% for the same period in 2018.
Segment income from operations in the LAAP region decrease$0.1 million to $17.1 million, or 13.9% of net sales, for the third quarter of 2019 from $17.2 million, or 14.5% of net sales, for the comparable period in 2018.
Segment income from operations in the EMEA region increase$3.4 million to $18.2 million, or 17.4% of net sales, for the third quarter of 2019 from $14.8 million, or 14.7% of net sales, for the comparable period in 2018. The increase in income from operations resulted from increases in net sales in our Europe-direct and EMEA distributor businesses, combined with improved gross margin, reflecting financial benefits from Project CONNECT.
Segment income from operations in Canada increased $9.1 million to $27.0 million, or 27.6% of net sales, for the third quarter of 2019 from $17.9 million, or 22.2% of net sales, for the comparable period in 2018. The increase in income from operations resulted from increases in net sales driven by our Canada wholesale business, combined with improved gross margin, reflecting financial benefits from Project CONNECT.
Unallocated corporate expenses increased by $19.8 million to $66.4 million for the third quarter of 2019 from $46.6 million for the comparable period in 2018. The increase of unallocated corporate expenses was primarily driven by increased personnel costs and project-related expenses to support ongoing IT system implementations.
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
Net Sales by Geographic Region: Net sales by geographic region are summarized in the following table:
 
 
Nine Months Ended September 30,
 
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
(In millions, except for percentage changes)
 
2019
 
Translation
 
2018(1)
 
2018
 
% Change
 
% Change(1)
United States
 
$
1,309.0

 
$

 
$
1,309.0

 
$
1,139.2

 
15%
 
15%
LAAP
 
357.7

 
9.9

 
367.6

 
350.8

 
2%
 
5%
EMEA
 
267.3

 
10.8

 
278.1

 
257.1

 
4%
 
8%
Canada
 
153.6

 
4.0

 
157.6

 
137.6

 
12%
 
15%
 
 
$
2,087.6

 
$
24.7

 
$
2,112.3

 
$
1,884.7

 
11%
 
12%
(1) Constant-currency net sales information is a non-GAAP financial measure, which excludes the effect of changes in foreign currency exchange rates against the U.S. dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into U.S. dollars at the average exchange rates that were in effect during the comparable period of the prior year.
U.S. net sales increased $169.8 million, or 15%, to $1,309.0 million for the nine months ended September 30, 2019 from $1,139.2 million for the comparable period in 2018. The U.S. net sales increase was led by our wholesale business, followed by our DTC business. The net sales increase in our wholesale business was driven by the Columbia and SOREL brands. The net sales increase in our DTC business was led by increased net sales from our retail stores, followed by increased net sales from our e-commerce business.
LAAP region net sales increased $6.9 million, or 2% (5% constant-currency), to $357.7 million for the nine months ended September 30, 2019 from $350.8 million for the comparable period in 2018. The net sales increase in the LAAP region was driven by increased net sales in our Japan and LAAP distributor businesses, partially offset by decreased net sales in our China business.
EMEA region net sales increased $10.2 million, or 4% (8% constant-currency), to $267.3 million for the nine months ended September 30, 2019 from $257.1 million for the comparable period in 2018. The net sales increase in the EMEA region was driven by our EMEA distributor business and a slight increase in net sales in our Europe-direct business. The net sales increase in our EMEA distributor business was driven by sales growth to our Russia-based distributor and increased shipments of Fall 2019 orders.
Canada net sales increased $16.0 million, or 12% (15% constant-currency), to $153.6 million for the nine months ended September 30, 2019 from $137.6 million for the comparable period in 2018. The net sales increase in Canada was driven primarily by a net sales increase in our wholesale business, as well as a net sales increase in our DTC business.

31

Table of Contents

Segment Income from Operations: The following table presents segment income from operations for each reportable segment for the nine months ended September 30:
 
 
Nine Months Ended September 30,
(In millions, except for percentage changes)
 
2019
 
2018(1)
 
Change ($)
 
Change (%)
United States
 
$
298.4

 
$
243.3

 
55.1
 
23
%
LAAP
 
53.8

 
51.6

 
2.2
 
4
%
EMEA
 
36.9

 
26.3

 
10.6
 
40
%
Canada
 
30.4

 
21.2

 
9.2
 
43
%
Total segment income from operations
 
$
419.5

 
$
342.4

 
77.1
 
23
%
(1) Prior year segment income from operations has been revised from amounts previously reported. See Note 14 to the condensed consolidated financial statements for additional discussion.
Segment income from operations in the U.S. increase$55.1 million to $298.4 million, or 22.8% of net sales, for the nine months ended September 30, 2019 from $243.3 million, or 21.4% of net sales, for the comparable period in 2018. The increase in income from operations was driven by net sales growth from both the wholesale and DTC businesses, combined with increased gross margins largely driven by financial benefits from Project CONNECT. U.S. SG&A expenses as a percentage of net sales decreased to 27.4% of net sales for the nine months ended September 30, 2019 compared to 27.8% for the same period in 2018.
Segment income from operations in the LAAP region increase$2.2 million to $53.8 million, or 15.0% of net sales, for the nine months ended September 30, 2019 from $51.6 million, or 14.7% of net sales, for the comparable period in 2018. The increase in LAAP region operating income was driven by increased net sales in our Japan and LAAP distributor businesses, partially offset by decreased net sales in China. Gross margin improvement, reflecting financial benefits from Project CONNECT, also contributed to LAAP region operating income growth.
Segment income from operations in the EMEA region increase$10.6 million to $36.9 million, or 13.8% of net sales, for the nine months ended September 30, 2019 from $26.3 million, or 10.2% of net sales, for the comparable period in 2018. The increase in EMEA region operating income was driven primarily by increased net sales in our EMEA distributor business, as well as gross margin improvement, reflecting financial benefits from Project CONNECT. EMEA region SG&A expense as a percentage of net sales decreased to 29.0% for the nine months ended September 30, 2019 compared to 29.5% for the same period in 2018.
Segment income from operations in Canada increase$9.2 million to $30.4 million, or 19.8% of net sales, for the nine months ended September 30, 2019 from $21.2 million, or 15.4% of net sales, for the comparable period in 2018. The increase in Canada operating income was driven by increased net sales in our wholesale and DTC businesses, as well as gross margin improvement, including financial benefits from Project CONNECT.
Unallocated corporate expenses increased by $18.9 million to $163.2 million for the nine months ended September 30, 2019 from $144.2 million for the comparable period in 2018. The increase of unallocated corporate expenses resulted primarily from increased personnel costs and project-related expenses to support ongoing IT system implementations.
Liquidity and Capital Resources
At September 30, 2019, we had total cash and cash equivalents of $239.3 million, compared to $437.8 million at December 31, 2018 and $182.2 million at September 30, 2018. In addition, we had short-term investments of $1.5 million at September 30, 2019, compared to $262.8 million at December 31, 2018 and $269.3 million at September 30, 2018.
Net cash used in operating activities was $198.2 million for the nine months ended September 30, 2019, compared to $98.1 million for the same period in 2018. The increase in net cash used in operating activities was primarily driven by an increase in accounts receivable primarily due to increased shipments of fall season advance orders and a greater portion of Fall 2019 shipments falling into the third quarter, as well as a decrease in accounts payable resulting from the earlier receipt and payment of inventory purchases compared to the same period in 2018.
Net cash provided by investing activities was $159.7 million for the nine months ended September 30, 2019, compared to net cash used in investing activities of $218.7 million for the comparable period in 2018. For the 2019 period, net cash provided by investing activities consisted primarily of $264.2 million of net sales and maturities of short-term investments, partially offset by $104.5 million for capital expenditures. For the same period in 2018, net cash used in investing activities primarily consisted of $173.6 million of net purchases of short-term investments and $45.2 million for capital expenditures. The increase in cash used in capital expenditures was primarily related to the expansion of our corporate headquarters and investments in our global DTC operations and technology systems.

32

Table of Contents

Net cash used in financing activities was $171.1 million for the nine months ended September 30, 2019, compared to $152.7 million for the comparable period in 2018. For the 2019 period, net cash used in financing activities primarily consisted of repurchases of common stock of $116.2 million, dividend payments to Company shareholders of $48.9 million, and $17.9 million related to the purchase of the non-controlling interest in our China joint venture. For the same period in 2018, net cash used in financing activities primarily consisted of repurchases of common stock of $107.2 million and dividend payments to Company shareholders of $46.2 million and to the non-controlling interest in our China joint venture of RMB136.5 million (approximately $19.9 million).
Short-term borrowings and credit lines
We have an unsecured, committed revolving line of credit available to fund our domestic working capital requirements. Monthly variable commitments available for funding average $50.0 million over the course of a calendar year. We had no balance outstanding under this line of credit, and we were in compliance with all associated covenants at September 30, 2019. Internationally, our subsidiaries have operating lines of credit in place guaranteed by the parent company with a combined credit limit of approximately $106.1 million at September 30, 2019. At September 30, 2019, no balance was outstanding under these subsidiary lines of credit. Refer to Note 6 to the condensed consolidated financial statements for additional discussion.
Our primary ongoing funding requirements are for working capital and capital expenditures, including facilities expansions at our corporate headquarters, investment in our DTC operations, including new stores and remodels, and investment in IT systems and other enabling capabilities to support our strategic priorities. We anticipate 2019 capital expenditures of approximately $130 million to $140 million. We expect to fund our future capital expenditures with existing cash, operating cash flows and credit facilities. If the need arises, we may seek additional funding. Our ability to obtain additional financing will depend on many factors, including prevailing market conditions, our financial condition and our ability to negotiate favorable terms and conditions. Financing may not be available on terms that are acceptable or favorable to us, if at all.
Our operations are affected by seasonal trends typical in the outdoor apparel industry and have historically resulted in higher sales and profits in the third and fourth calendar quarters. This pattern has resulted primarily from the timing of shipments of fall season products to wholesale customers and proportionally higher sales in our DTC operations in the fourth quarter, combined with an expense base that is more consistent throughout the year. Our cash, cash equivalents and short-term investments balances have generally been at their lowest level at the end of the third quarter and increase during the fourth quarter from collection of wholesale business receivables and fourth-quarter DTC sales. We believe that our liquidity requirements for at least the next 12 months will be adequately covered by existing cash, cash provided by operations and existing short-term borrowing arrangements. We plan to fund future cash dividends and share repurchases with cash generated from operating activities.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make various estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting policies referred to in Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2018 have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results may differ from the estimates we use in applying these critical accounting policies. We base our ongoing estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances. Some of these critical accounting policies affect working capital account balances, including the policy for revenue recognition and related sales returns and claims from customers, the allowance for doubtful accounts, the provision for potential excess, slow-moving and closeout inventories, product warranty, income taxes, and stock-based compensation.
Management regularly discusses with our audit committee each of our critical accounting estimates, the development and selection of these accounting estimates, and the disclosure about each estimate in this quarterly report. These discussions typically occur at our quarterly audit committee meetings and include the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation.
Except as disclosed in Note 2 and Note 8 to the condensed consolidated financial statements, pertaining to our adoption of new accounting pronouncements, there have been no significant changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements Not Yet Adopted" in Note 2 to the condensed consolidated financial statements.

33

Table of Contents

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has not been any material change in the market risk disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 4.    CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have evaluated, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
We continue to focus on several transformation initiatives to improve our business processes and systems. These are long-term initiatives, which we believe will enhance our internal controls over financial reporting due to increased automation and further integration of related processes. We will continue to monitor our internal control over financial reporting for effectiveness throughout our transformation.
In the quarter ended September 30, 2019, we concluded the deployment of a new retail platform to our North America stores as part of the C1 initiative. We also completed implementation of a new human resources information system. These initiatives involve changes to the processes that constitute our internal control over financial reporting. We have taken steps to monitor and maintain appropriate internal control over financial reporting during these projects and will continue to evaluate these controls for effectiveness.
There have not been any other changes in our internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



34

Table of Contents

PART II—OTHER INFORMATION
Item 1.    LEGAL PROCEEDINGS
We are involved in litigation and various legal matters arising in the normal course of business, including matters related to employment, retail, intellectual property, contractual agreements, and various regulatory compliance activities. We have considered facts related to legal and regulatory matters and opinions of counsel handling these matters, and do not believe the ultimate resolution of these proceedings will have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A.    RISK FACTORS
In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, results of operations, or cash flows may be materially adversely affected by these and other risks. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations. The following risk factors include changes to and supersede the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
We May Be Unable to Execute Our Business Strategies
Our business strategies aim to achieve sustainable, profitable growth by creating innovative products at competitive prices, focusing on product design, utilizing innovations to differentiate our brands from competitors, working to ensure that our products are sold through strong distribution partners capable of effectively presenting our brands to consumers, increasing the impact of consumer communications to drive demand for our brands and sell-through of our products, making sure our products are merchandised and displayed appropriately in retail environments, expanding our presence in key markets around the world, and continuing to build brand-enhancing DTC businesses. We intend to pursue these strategies across our portfolio of brands, product categories and geographic markets. Our failure to successfully implement our business strategies could have a material adverse effect on our financial condition, results of operations or cash flows.
To implement our business strategies and related initiatives, we must continue to, among other things, modify and fund various aspects of our business, execute effective change management, effectively prioritize our strategies and initiatives, including maintenance and enhancement of our information technology systems and supply chain operations to improve efficiencies, and attract, retain and manage qualified personnel. These efforts, coupled with a continuous focus on expense discipline, place increasing strain on internal resources, and we may have operating difficulties as a result. For example, in support of our business strategies, we are making significant investments in our business processes and information technology systems that require significant management attention and corporate resources. This may make it increasingly difficult to pursue other strategic opportunities. Our business strategies involve many risks and uncertainties that, if not managed effectively, may have a material adverse effect on our financial condition, results of operations or cash flows.
Our business strategies and related initiatives generally involve increased expenditures, which could cause our operating margin to decline if we are unable to offset our increased spending with increased sales or gross profit or comparable reductions in other operating costs. If our sales or gross profit decline or fail to grow as planned, and we fail to sufficiently leverage our operating expenses, including costs associated with certain strategies and major initiatives requiring significant commitment, which may be difficult to reduce, our profitability will decline. This could result in a decision to delay, reduce, modify, or terminate certain business strategies and initiatives, which could limit our ability to invest in and grow our business and could have a material adverse effect on our financial condition, results of operations or cash flows.
Initiatives to Upgrade Our Business Processes and Information Technology Systems Involve Many Risks Which Could Result in, Among Other Things, Business Interruptions and Higher Costs
We regularly implement business process improvement and information technology initiatives intended to optimize our operational and financial performance. Our current initiatives include investment in our information technology systems to support the growth and expansion of our DTC businesses, for example our C1 and X1 initiatives, as well as continued optimization of and upgrades to our integrated enterprise resource planning software solutions and other complementary information technology systems, which support our supply chain, product design and development processes, corporate administrative functions, go-to-market strategies, DTC strategies and operations, and business reporting and analytics. Implementation of and upgrades to these solutions and systems are highly dependent on the coordination of numerous employees, contractors and software and system providers. The interdependence of these solutions and systems is a significant risk to the successful completion of these initiatives, and the failure of any aspect could have a material adverse effect on the functionality of our overall information technology systems. We may experience difficulties as we transition to these new or upgraded systems and processes, including loss or corruption of data, delayed shipments, excess inventory, interruptions of DTC operations, decreases in productivity as our personnel implement and become familiar with new systems, increased costs, and lost revenues. In addition, transitioning to these new or upgraded systems requires significant capital investments and personnel resources. Difficulties in implementing or operating new or upgraded information systems or significant system failures, including system outages, delayed implementation and loss of system availability, could disrupt our operations and have a material adverse effect on our financial condition, results of operations or cash flows.
These implementations have a pervasive effect on our business processes and information systems across a significant portion of our operations. As a result, we are undergoing significant changes in our operational processes and internal controls as our implementations progress, which

35

Table of Contents

in turn require significant change management, including training of and testing by our personnel. If we are unable to successfully manage these changes as we implement these systems, including harmonizing our systems, data, processes, and reporting analytics, our ability to conduct, manage and control routine business functions could be negatively affected and significant disruptions to our business could occur. In addition, we could incur material unanticipated expenses, including additional costs of implementation or costs of conducting business. Furthermore, time spent by personnel related to these implementations may have an adverse effect on the overall availability to focus on our business operations and other ongoing projects. These risks could result in significant business disruptions or divert management's attention from key strategic initiatives and have a material adverse effect on our financial condition, results of operations or cash flows.
We Rely on Information Technology Systems, Some of Which Are Highly Customized
Our business is increasingly reliant on information technology. Information technology systems are used across our supply chain and retail operations, from design to distribution and sales, and are used as a method of communication among employees, with our subsidiaries and offices overseas and with our customers, vendors and retail stores. We rely on our information systems to allocate resources, pay vendors, collect from customers, process transactions, manage product data, develop demand and supply plans, forecast and report operating results, and meet regulatory requirements. In addition, as a result of our information technology initiatives, we are relying more heavily on third-party, cloud-based solution vendors for key elements of our technology infrastructure, which systems, as any, are vulnerable to damage or interruption and are out of our direct control. As a result, any disruption to these systems, including the loss or corruption of data and information, could have a material adverse effect on our ability to operate our business and our financial condition, results of operations or cash flows.
Our legacy product development, retail and other systems, on which we continue to manage a substantial portion of our business activities, are highly customized. As a result, the availability of internal and external resources with the expertise to maintain these systems is limited. Our legacy systems, including aged systems in our LAAP business, may not support desired functionality for our operations and may inhibit our ability to operate efficiently, which could have an adverse effect on our financial condition, results of operations or cash flows. As we continue to transition from our legacy systems and implement new systems, certain functionality and information from our legacy systems, including that of third party systems that interface with our legacy systems, may not be fully compatible with the new systems, which could have a material adverse effect on our financial condition, results of operations or cash flows.
A Security Breach of Our or Our Third Parties' Systems, Exposure of Personal or Confidential Information or Increased Government Regulation Relating to Handling of Personal Data, Could, Among Other Things, Disrupt Our Operations or Cause Us to Incur Substantial Costs or Negatively Affect Our Reputation
We and many of our third parties, such as vendors, manage and maintain various types of proprietary information and sensitive and confidential data relating to our business, such as personally identifiable information of our consumers, our employees, and our business partners, as well as credit card information in certain instances. Our information technology systems, or those of certain key vendors or other third parties on which we rely, are subject to an increasing threat of continually evolving cybersecurity risks. A breach in the security of our or their systems could result in business disruptions or reputational damage, which could have a material adverse effect on our financial condition, results of operations or cash flows. Unauthorized parties may attempt to gain access to these systems or information through fraud or other means of deceiving our employees or third-party service providers. Hardware, software or applications we develop or obtain from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly changing and evolving, and may be difficult to anticipate or detect for long periods of time. We have implemented and regularly review and update processes and procedures to protect against unauthorized access to or use of secured data and to prevent data loss. However, the ever-evolving threats mean we and our third parties must continually evaluate and adapt our systems and processes, and there is no guarantee that these efforts will be adequate to safeguard against all data security breaches or misuses of data. For example, in 2017, we reported the discovery of a cybersecurity incident involving our prAna.com e-commerce website, for which a number of responsive actions were taken, including notification of potentially affected prAna consumers.
In addition, any future breaches of our security measures, or the accidental loss, inadvertent disclosure or unapproved or non-compliant dissemination of proprietary information, personal information, or other sensitive and confidential data about us, our customers, our consumers, our suppliers, or our employees, could expose us, our customers, our consumers, our suppliers, our employees, or other individuals that may be affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation, or otherwise harm our business and could have a material adverse effect on our financial condition, results of operations or cash flows. In addition, as the regulatory environment related to information security, data collection and use and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs or liabilities. For example, the European Union's General Data Protection Regulation (“GDPR”), which became effective May 25, 2018, establishes additional requirements regarding the handling of personal data, including its use, protection and the ability of persons whose data is stored to exercise certain individual rights with respect to their personal data. The GDPR calls for privacy and process enhancements, accompanied by a commitment of resources and other expenditures in support of compliance. Violations of the GDPR could result in significant penalties. More recently, California passed the California Consumer Privacy Act ("CCPA"), which goes into effect in January 2020 and provides broad rights with respect to the collection and use of covered individuals' personal information by businesses. The CCPA further expands the privacy policy and process enhancements and commitment of resources in support of compliance with California's regulatory requirements. Other states have proposed

36

Table of Contents

similar regulations and there is ongoing discussion of federal regulation, any of which may impose different or additional data privacy and data protection requirements.
We Depend on Contract Manufacturers
Our products are manufactured by contract manufacturers worldwide. Although we enter into purchase order commitments with these contract manufacturers each season, we generally do not maintain long-term manufacturing commitments with them, and various factors could interfere with our ability to source our products. Without long-term or reserve commitments, there is no assurance that we will be able to secure adequate or timely production capacity or favorable pricing if growth or product demand differs from our forecasts. Contract manufacturers may fail to perform as expected, or our competitors may obtain production capacities that effectively limit or eliminate the availability of these resources to us. Adverse developments in trade or political relations with China or other countries where we source our products are increasingly likely to impact our ability to source product from such locations, as well as require us to source product from countries with which we have had limited or no historical sourcing activities. If a contract manufacturer fails to ship orders in a timely manner or to meet our standards or if we are unable to obtain necessary capacities, we could experience supply disruptions that would hinder our ability to satisfy demand through our DTC businesses, and we may miss delivery deadlines or incur additional costs, which may cause our wholesale or distributor customers to cancel their orders, refuse to accept deliveries or demand a reduction in purchase prices, any of which could have a material adverse effect on our financial condition, results of operations or cash flows.
Reliance on contract manufacturers also creates quality control risks. Contract manufacturers may need to use sub-contracted manufacturers to fulfill demand and these manufacturers may have less experience producing our products or possess lower overall capabilities, which could result in compromised quality of our products. A failure in our quality control program, or a failure of our contract manufacturers or their contractors to meet our quality control standards, may result in diminished product quality, which in turn could result in increased order cancellations, price concessions and returns, decreased consumer demand for our products, non-compliance with our product standards or regulatory requirements, or product recalls (or other regulatory actions), any of which may have a material adverse effect on our financial condition, results of operations or cash flows.
We also have license agreements that permit unaffiliated parties to manufacture or contract to manufacture products using our trademarks. We impose standards of manufacturing practices on our contract manufacturers and licensees for the benefit of workers and require compliance with our restricted substances list and product safety and other applicable environmental, health and safety laws. We also require our contract manufacturers and licensees to impose these practices, standards and laws on their contractors. If a contract manufacturer, licensee or subcontractor violates labor or other laws or engages in practices that are not generally accepted as safe or ethical, the manufacturer, licensee or subcontractor or its respective employees may suffer serious injury due to industrial accidents, the manufacturer may suffer disruptions to its operations due to work stoppages or employee protests, and we may experience production disruptions, lost sales or significant negative publicity that could result in long-term damage to our reputation. In some circumstances, parties may assert that we are liable for our independent manufacturers', licensees' or subcontractors' labor and operational practices, which could have a material adverse effect on our brand image and our financial condition, results of operations or cash flows, particularly if such assertions are successful.
We May Be Adversely Affected by Volatility in Global Production and Transportation Costs and Capacity
Our product costs are subject to substantial fluctuation based on:
Availability and quality of raw materials;
The prices of oil, leather, natural down, cotton, and other raw materials whose prices are determined by global commodity markets and can be very volatile;
Changes in labor markets and wage rates paid by our independent factory partners, which are often mandated by governments in the countries where our products are manufactured, for example in China and Vietnam;
Disruption to and capacity constraints within shipping and transportation channels utilized to bring our products to market;
Interest rates and currency exchange rates;
Availability of skilled labor and production capacity at contract manufacturers; and
General economic conditions.
Prolonged periods of inflationary pressure on some or all input costs will result in increased costs to produce our products that may result in reduced gross profit or necessitate price increases for our products that could adversely affect consumer demand for our products.
In addition, many of our products are manufactured outside of our principal sales markets, which requires these products to be consolidated and transported by third parties, sometimes over large geographical distances. Shortages in ocean, land or air freight capacity and volatile fuel costs can result in rapidly changing transportation costs or an inability to transport our products in a timely manner. Similarly, disruption to shipping and transportation channels due to labor disputes could cause us to rely more heavily on alternative modes of transportation to achieve timely delivery to our customers, resulting in significantly higher freight costs. Because we price our products in advance and changes in transportation and other costs may be difficult to predict, we may not be able to pass all or any portion of these higher costs on to our customers or adjust our pricing structure in a timely manner in order to remain competitive, either of which could have a material adverse effect on our financial condition, results of operations or cash flows.

37

Table of Contents

We May Be Adversely Affected by Volatile Economic Conditions
We are a consumer products company and are highly dependent on consumer discretionary spending and retail traffic patterns. Purchasing patterns of our customers can vary year to year as they attempt to forecast and match their seasonal advance orders, in-season replenishment and at-once orders to eventual seasonal consumer demand. In addition, as we have expanded our DTC businesses, we have increased our direct exposure to the risks associated with volatile and unpredictable consumer discretionary spending patterns. Consumer discretionary spending behavior is inherently unpredictable and consumer demand for our products may not reach our sales targets, or may decline, especially during periods of heightened economic uncertainty in our key markets. Our sensitivity to economic cycles and any related fluctuation in consumer demand may have a material adverse effect on our financial condition, results of operations or cash flows.
We May Be Adversely Affected by the Financial Health of Our Customers
In recent periods, economic uncertainty and shifts in consumer purchasing patterns in our key markets have had an adverse effect on the financial health of our customers, some of whom have reduced their store fleet, filed or may file for protection under bankruptcy laws, restructured, or ceased operations. We extend credit to our customers based on an assessment of the customer's financial condition, generally without requiring collateral. To assist in the scheduling of production and the shipping of seasonal products, we offer customers discounts for placing advance orders. We face increased risk of order reduction and cancellation and reduced availability of credit insurance coverage when dealing with financially ailing retailers or retailers struggling with economic uncertainty. Some of our significant wholesale customers have liquidated or reorganized, while others have had financial difficulties in the past or have experienced tightened credit markets, sales declines and reduced profitability, which have had an adverse effect on our business. Future customer liquidations or reorganizations could have a material adverse effect on our financial condition, results of operations or cash flows. In addition, we may choose to limit our credit risk by reducing our level of business with customers experiencing financial difficulties and may not be able to replace those revenues with other customers or through our DTC businesses within a reasonable period, which could have a material adverse effect on our financial condition, results of operations or cash flows.
We May Be Adversely Affected by Retailer Consolidation
When our wholesale customers combine their operations through mergers, acquisitions or other transactions, their consolidated order volume may decrease while their bargaining power and the competitive threat they pose by marketing products under their own private labels may increase. Some of our significant customers have consolidated their operations in the past, which in turn has had a negative effect on our business. Future customer consolidations could have a material adverse effect on our financial condition, results of operations or cash flows.
We May Be Adversely Affected by Global Credit Market Conditions
Economic downturns and economic uncertainty generally affect global credit markets. Our vendors, customers and other participants in our supply chain may require access to credit markets in order to do business. Credit market conditions may slow our collection efforts as customers find it more difficult to obtain necessary financing, leading to higher than normal accounts receivable. This could result in greater expense associated with collection efforts and increased bad debt expense. Credit conditions may impair our vendors' ability to finance the purchase of raw materials or general working capital needs to support our production requirements, resulting in a delay or non-receipt of inventory shipments during key seasons.
Historically, we have limited our reliance on debt to finance our working capital, capital expenditures and investing activity requirements. We expect to fund our future capital expenditures with existing cash, expected operating cash flows and credit facilities, but, if the need arises to finance additional expenditures, we may need to seek additional funding. Our ability to obtain additional financing will depend on many factors, including prevailing market conditions, our financial condition and our ability to negotiate favorable terms and conditions. Financing may not be available on terms that are acceptable or favorable to us, if at all.
We May Be Adversely Affected by Currency Exchange Rate Fluctuations
We derive a significant portion of our net sales from markets outside the United States, which are comprised of sales to wholesale customers and directly to consumers by our entities in Europe, Korea, Japan, China, and Canada and sales to independent international distributors who operate within the EMEA and LAAP regions. Sales and related operational expenses of our foreign entities, as well as their respective assets and liabilities, are denominated in currencies other than the U.S. dollar and translated into U.S. dollars for periodic reporting purposes using the exchange rates in effect during each period. If the U.S. dollar strengthens against the foreign entity's functional currency, translated revenues and expenses will decline on a relative basis.
The majority of our purchases of finished goods inventory from contract manufacturers are denominated in U.S. dollars, including purchases by our foreign entities. The cost of these products may be affected by relative changes in the value of the local currencies of these entities in relation to the U.S. dollar and in relation to the local currencies of our manufacturing vendors. In order to facilitate solicitation of advance orders from wholesale customers and distributors for the spring and fall seasons, we establish local-currency-denominated wholesale and retail price lists in each of our foreign entities approximately six to nine months prior to U.S. dollar-denominated seasonal inventory purchases. As a result, our consolidated results are directly exposed to transactional foreign currency exchange risk to the extent that the U.S. dollar strengthens during the six to nine months between when we establish seasonal local-currency prices and when we purchase inventory.

38

Table of Contents

We employ several tactics in an effort to mitigate this transactional currency risk, including the use of currency forward and option contracts. We may also implement local-currency wholesale and retail price increases in our foreign direct markets in an effort to mitigate the effects of currency exchange rate fluctuations on inventory costs. There is no assurance that our use of currency forward and option contracts and implementation of price increases, in combination with other tactics, will succeed in fully mitigating the negative effects of adverse foreign currency exchange rate fluctuations on the cost of our finished goods in a given period or that price increases will be accepted by our wholesale customers, distributors or consumers. Our gross margins are adversely affected whenever we are not able to offset the full extent of finished goods cost increases caused by adverse fluctuations in foreign currency exchange rates.
We enter into foreign currency forward exchange contracts to manage currency exposures for monetary assets and liabilities denominated in a currency other than an entity’s functional currency. As a result, any foreign currency remeasurement gains and losses recorded in other income (expense) are generally offset with gains and losses on the foreign currency forward exchange contracts in the same reporting period.
In addition to the direct currency exchange rate exposures described above, our business is indirectly exposed to currency exchange rate risks. For example, all of the EMEA and LAAP distributors to whom we sell purchase their inventory from us in U.S. dollars. Weakening of a distributor's functional currency relative to the U.S. dollar makes it more expensive for it to purchase finished goods inventory from us. In order to make those purchases and pay us on a timely basis, our distributors must exchange sufficient quantities of their functional currency for U.S. dollars through the financial markets. Some of our distributors have experienced periods during which they have been unable to obtain U.S. dollars in sufficient amounts to complete their purchase of finished goods inventory or to pay amounts owed for past purchases. Although each distributor bears the full risk of fluctuations in the value of its currency against the U.S. dollar, our business can be indirectly affected when adverse fluctuations cause a distributor to cancel portions of prior advance orders or significantly reduce its future purchases or both. In addition, price increases that our distributors implement in an effort to offset higher product costs may make our products less price-competitive in those markets and reduce consumer demand for our products.
Currency exchange rate fluctuations may also create indirect risk to our business by disrupting the business of independent finished goods manufacturers from which we purchase our products. When their functional currencies weaken in relation to other currencies, the raw materials they purchase on global commodities markets become more expensive and more difficult to finance. Although each manufacturer bears the full risk of fluctuations in the value of its currency against other currencies, our business can be indirectly affected when adverse fluctuations cause a manufacturer to raise the prices of goods it produces for us, disrupt the manufacturer's ability to purchase the necessary raw materials on a timely basis or disrupt the manufacturer's ability to function as an ongoing business.
Primarily for each of the reasons described above, currency fluctuations and disruptions in currency exchange markets may have a material adverse effect on our financial condition, results of operations or cash flows.
Our Orders from Customers Are Subject to Cancellation
We do not have long-term contracts with any of our wholesale customers. We do have contracts with our independent international distributors; however, although these contracts may have annual purchase minimums which must be met in order to retain distribution rights, the distributors are not otherwise obligated to purchase product. Sales to our wholesale customers and distributors are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling. We consider the timing of delivery dates in our wholesale customer orders when we forecast our sales and earnings for future periods. If any of our major customers, including distributors, experience a significant downturn in business or fail to remain committed to our products or brands, these customers could postpone, reduce, cancel, or discontinue purchases from us. As a result, we could experience a decline in sales or gross profit, write-downs of excess inventory, increased discounts, extended credit terms to our customers, or uncollectable accounts receivable, which could have a material adverse effect on our financial condition, results of operations or cash flows.
We May Not Realize Returns on Our Investments in Our DTC Businesses
In recent years, our DTC businesses have grown substantially, and we anticipate continued growth in the future. Accordingly, we continue to make significant investments in our online platforms and physical retail locations, including the investment in our global retail platform, information technology system upgrades, entering into or renewing long-term store leases, constructing leasehold improvements, purchasing fixtures and equipment, and investing in inventory and personnel. Since many of the costs of our DTC businesses are fixed, we may be unable to reduce expenses in order to avoid losses or negative cash flows if we have insufficient sales. Our DTC businesses are dependent upon our ability to operate in an increasingly complex and evolving marketplace and the results of these businesses are highly dependent on retail traffic patterns in our physical locations and on our online platforms where our products are sold, as well as the spending patterns of our consumers. If we are unable to effectively navigate the DTC marketplace, including, among other things, enhancing our consumer experience and digital capabilities in order to provide a competitive online and in-store shopping environment, or to effectively anticipate and respond to consumer buying patterns and expectations, our ability to generate sales through our DTC businesses may be adversely affected, which in turn could have a material adverse effect on our financial condition, results of operations or cash flows.
Labor costs and labor-related benefits are primary components in the cost of our retail operations and are affected by various federal, state and foreign laws governing matters such as minimum wage rates, overtime compensation and other requirements. For example, we have seen significant political pressure and legislative actions to increase the minimum wage rate in many of the jurisdictions within which our stores are located. If we are unable to operate profitable stores or if we close stores, we may experience significant reductions in sales and income or

39

Table of Contents

incur significant write-downs of inventory, severance costs, lease termination costs, impairment losses on long-lived assets, or loss of working capital, which could have a material adverse effect on our financial condition, results of operations or cash flows.
In addition, from time to time we license the right to operate retail stores for our brands to third parties, primarily to our independent international distributors. We provide training to support these stores and set operational standards. However, these third parties may not operate the stores in a manner consistent with our standards, which could cause reputational damage to our brands or harm these third parties' sales and as a result harm our financial condition, results of operations or cash flows.
Our Results of Operations Could Be Materially Harmed If We Are Unable to Accurately Match Supply Forecast with Consumer Demand for Our Products
Many factors may significantly affect demand for our products, including, among other things, economic conditions, fashion trends, the financial condition of our independent international distributors and wholesale customers, consumer and customer preferences, and weather, making it difficult to accurately forecast demand for our products and our future results of operations. To minimize our purchasing costs, the time necessary to fill customer and consumer orders and the risk of non-delivery, we place a significant amount of orders for our products with contract manufacturers, based on forecast demand for our DTC business, prior to receiving orders from our independent distributors and wholesale customers, and we maintain an inventory of various products that we anticipate will be in greatest demand. In addition, customers are generally allowed to cancel orders prior to shipment.
Factors that could affect our ability to accurately forecast demand for our products include:
Unseasonable weather conditions;
Our reliance, for certain demand and supply planning functions, on manual processes and judgments that are subject to human error;
Consumer acceptance of our products or changes in consumer preference and demand for products of our competitors, which could increase pressure on our product development cycle;
Unanticipated changes in general market conditions or other factors, which may result in lower advance orders from wholesale customers and distributors, cancellations of advance orders or a reduction or increase in the rate of reorders placed by customers; and
Weak economic conditions or consumer confidence, which could reduce demand for discretionary items, such as our products.
In some cases, we may produce quantities of product that exceed actual demand, which could result in higher inventory levels that we may need to liquidate at discounted prices. During periods of unseasonable weather conditions, weak economic conditions, unfavorable currency fluctuations, or unfavorable geopolitical conditions in key markets, we may experience a significant increase in the volume of order cancellations by our customers, including cancellations resulting from the bankruptcy, liquidation or contraction of some customers' operations. We may not be able to sell all of the products we have ordered from contract manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices through our owned outlet stores or third-party liquidation channels, which could have a material adverse effect on our brand image, financial condition, results of operations, or cash flows.
Conversely, if we underestimate demand for our products or if our contract manufacturers are unable to supply products when we need them, we may experience inventory shortages. Inventory shortages may prevent us from fulfilling customer orders, delay shipments to customers, negatively affect customer and consumer relationships, result in increased costs to expedite production and delivery, and diminish our ability to build brand loyalty. Shipments delayed due to limited factory capacity, transportation disruption or limited transportation capacity, port disruption or other factors could result in order cancellations by our customers, which could have a material adverse effect on our financial condition, results of operations or cash flows.
We Face Risks Associated with Consumer Preferences and Fashion Trends
Changes in consumer preferences, consumer purchasing behavior, consumer interest in outdoor activities, and fashion trends may have a material adverse effect on our business. We also face risks because our success depends on our and our customers' abilities to anticipate consumer preferences and buying patterns, including the growth of e-commerce off-price retailing and online comparison shopping, and respond to changes in a timely manner. Lead times for many of our products may make it more difficult for us to respond rapidly to new or changing product trends or consumer preferences. In addition, our decisions about product designs often are made far in advance of consumer acceptance. Although we try to manage our inventory risk by soliciting advance order commitments from customers, we generally place a significant portion of our seasonal production orders with our contract manufacturers before we have received all of a season's advance orders from customers, and orders may be canceled by customers before shipment. If we or our customers fail to anticipate and respond to consumer preferences or fail to respond in a timely manner or if we or our customers are unable to effectively navigate a transforming retail marketplace, we could suffer reputational damage to our brands and we may experience lower sales, excess inventories and lower profit margins in current and future periods, any of which could have a material adverse effect on our financial condition, results of operations or cash flows.

40

Table of Contents

We May Be Adversely Affected by Weather Conditions, Including Global Climate Change Trends
Our business is adversely affected by unseasonable weather conditions. A significant portion of the sales of our products is dependent in part on the weather and likely to decline in years in which weather conditions do not stimulate demand for our products. Periods of unseasonably warm weather in the fall or winter or unseasonably cold weather in the spring and summer may have a material adverse effect on our financial condition, results of operations or cash flows. Unintended inventory accumulation by our customers resulting from unseasonable weather in one season generally negatively affects orders in future seasons, which may have a material adverse effect on our financial condition, results of operations or cash flows.
A significant portion of our business is highly dependent on cold-weather seasons and patterns to generate consumer demand for our cold-weather apparel and footwear. Consumer demand for our cold-weather products may be negatively affected to the extent global weather patterns trend warmer, reducing typical patterns of cold-weather events or increasing weather volatility, which could have a material adverse effect on our financial condition, results of operations or cash flows.
Acquisitions Are Subject to Many Risks
From time to time, we may pursue growth through strategic acquisitions of assets or companies. Acquisitions are subject to many risks, including potential loss of significant customers or key personnel of the acquired business as a result of the change in ownership, difficulty integrating the operations of the acquired business or achieving targeted efficiencies, the incurrence of substantial costs and expenses related to the acquisition effort, and diversion of management's attention from other aspects of our business operations. For example, we may face integration challenges as we continue to fully integrate the operations of our prAna subsidiary acquired in May 2014.
Acquisitions may also cause us to incur debt or result in dilutive issuances of our equity securities. Our acquisitions may cause large one-time expenses or create goodwill or other intangible assets that could result in significant impairment charges in the future. We also make various estimates and assumptions in order to determine purchase price allocation and estimate the fair value of assets acquired and liabilities assumed. If our estimates or assumptions used to value these assets and liabilities vary from actual or future projected results, we may be exposed to losses, including impairment losses, that could be material.
We do not provide any assurance that we will be able to successfully integrate the operations of any acquired businesses into our operations or achieve the expected benefits of any acquisitions. The failure to successfully integrate newly acquired businesses or achieve the expected benefits of strategic acquisitions in the future could have an adverse effect on our financial condition, results of operations or cash flows. We may not complete a potential acquisition for a variety of reasons, but we may nonetheless incur material costs in the preliminary stages of evaluating and pursuing such an acquisition that we cannot recover.
Global Regulation and Economic and Political Conditions, as well as Potential Changes in Regulations, Legislation and Government Policy, May Negatively Affect Our Business
We are subject to risks generally associated with doing business internationally. These risks include the burden of complying with, and unexpected changes to, foreign and domestic laws and regulations, such as anti-corruption regulations and sanctions regimes, the effects of fiscal and political crises and political and economic disputes, changes in diverse consumer preferences, foreign currency exchange rate fluctuations, managing a diverse and widespread workforce, political unrest, terrorist acts, military operations, disruptions or delays in shipments, disease outbreaks, natural disasters, and changes in economic conditions in countries in which we manufacture or sell products. These factors, among others, may affect our ability to sell products in certain markets, our ability to collect accounts receivable, our ability to manufacture products or procure materials, and our cost of doing business.
For example, in the past, political and economic turmoil in certain South American distributor markets have resulted in currency and import restrictions, limiting our ability to sell products in some countries in this region. Also, Russia constitutes a significant portion of our non-U.S. sales and operating income and a significant change in conditions in that market has had an adverse effect on our results of operations in the past. The United Kingdom's June 23, 2016 referendum, in which voters approved its exit from the European Union (commonly referred to as "Brexit"), has created economic uncertainty and volatility in currency exchange rates, and the potential adverse effects of changes to the legal and regulatory framework that apply to the United Kingdom and its relationship with the European Union, and the associated effects on our European operations, are unknown. If any of these or other factors make the conduct of business in a particular country, or region, undesirable or impractical, our business may be materially and adversely affected.
In the U.S., the current administration has publicly supported trade proposals, including recently established tariffs and proposed tariffs on U.S. products imported from China, modifications to international trade policy, and other changes that may affect U.S. trade relations with other countries. Whether any future changes will occur and what impact they may have on U.S. international trade relationships is unknown. However, any such changes may adversely affect our business and may require us to significantly modify our current business practices or may otherwise materially and adversely affect our business.
In addition, many of our imported products are subject to duties, tariffs or other import limitations that affect the cost and quantity of various types of goods imported into the United States and other markets. Any country in which our products are produced or sold may eliminate, adjust or impose new import limitations, duties, anti-dumping penalties, or other charges or restrictions, any of which could have a material adverse effect on our financial condition, results of operations or cash flows.

41

Table of Contents

We May Have Additional Tax Liabilities or Experience Increased Volatility in Our Effective Tax Rate
As a global company, we determine our income tax liability in various tax jurisdictions based on an analysis and interpretation of local tax laws and regulations. This analysis requires a significant amount of judgment and estimation and is often based on various assumptions about the future actions of the local tax authorities. These determinations are the subject of periodic domestic and foreign tax audits. Although we accrue for uncertain tax positions, our accruals may be insufficient to satisfy unfavorable findings. Unfavorable audit findings and tax rulings may result in payment of taxes, fines and penalties for prior periods and higher tax rates in future periods, which may have a material adverse effect on our financial condition, results of operations or cash flows. 
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "TCJA"). The TCJA made broad and complex changes to the U.S. tax code. Implementation of the TCJA legislation required us to record incremental provisional tax expense in 2017 and 2018, which significantly increased our 2017 effective tax rate and increased our 2018 effective tax rate. In addition, the TCJA may also materially affect our 2019 effective tax rate and our financial condition, results of operations or cash flows. The actual amounts may differ from our provisional estimates due to, among other factors, a change in interpretation of the applicable revisions to the U.S. tax code and related tax accounting guidance, changes in assumptions made in developing these estimates, and regulatory guidance that may be issued with respect to the applicable revisions to the U.S. tax code, and state tax implications.
Other changes in the tax laws of the jurisdictions where we do business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense, could result in a material increase in our tax expense. For example, changes in the tax laws of foreign jurisdictions could arise as a result of the Base Erosion and Profit Shifting project undertaken by the Organization for Economic Co-operation and Development ("OECD"). The OECD, which represents a coalition of member countries, has recommended changes to numerous long-standing tax principles. As these changes are adopted by countries, tax uncertainty could increase and may adversely affect our provision for income taxes.
We Operate in Highly Competitive Markets
The markets for apparel, footwear, accessories, and equipment are highly competitive, as are the markets for our licensed products. In each of our geographic markets, we face significant competition from global and regional branded apparel, footwear, accessories, and equipment companies, including competition from companies with significantly greater resources than ours.
Retailers who are our customers often pose our most significant competitive threat by designing and marketing apparel, footwear, accessories, and equipment under their own private labels. For example, in the United States and Europe, several of our largest customers have developed significant private label brands that compete directly with our products. These retailers have assumed an increasing degree of inventory risk in their private label products and, as a result, may first cancel advance orders with us in order to manage their own inventory levels downward during periods of unseasonable weather or weak economic cycles. As our DTC businesses grow, we also experience direct competition from retailers that are our customers, some of which primarily operate e-commerce operations and employ aggressive pricing strategies. We also compete with other companies for the production capacity of contract manufacturers from which we source our products and for import capacity. Many of our competitors are significantly larger than we are and have substantially greater financial, distribution, marketing, and other resources, more stable manufacturing resources and greater brand strength than we have. In addition, when our competitors combine operations through mergers, acquisitions or other transactions, their competitive strengths may increase.
Increased competition may result in reduced access to production capacity, challenges in obtaining favorable locations for our retail stores, reductions in display areas in retail locations, reductions in sales, or reductions in our profit margins, any of which may have a material adverse effect on our financial condition, results of operations or cash flows.
We Rely on Innovation to Compete in the Market for Our Products
To distinguish our products in the marketplace and achieve commercial success, we rely on product innovations, including new or exclusive technologies, inventive and appealing design or other differentiating features. Although we are committed to designing innovative and functional products that deliver relevant performance benefits to consumers, who participate in a wide range of competitive and recreational outdoor activities, if we fail to introduce technical innovation in our products that address consumers' performance expectations, we could suffer reputational damage to our brands and demand for our products could decline.
As we strive to achieve product innovations, we face a greater risk of inadvertent infringements of third-party rights or compliance issues with regulations applicable to products with technical features or components. In addition, technical innovations often involve more complex manufacturing processes, which may lead to higher instances of quality issues, and if we experience problems with the quality of our products, we may incur substantial expense to address the problems and any associated product risks. Failure to successfully bring to market innovations in our product lines could have a material adverse effect on our financial condition, results of operations or cash flows.
Our Success Depends on Our Use and Protection of Intellectual Property Rights
Our registered and common law trademarks and our patented or patent-pending designs and technologies have significant value and are important to our ability to differentiate our products from those of our competitors and to create and sustain demand for our products. We also place significant value on our trade dress and the overall appearance and image of our products. We regularly discover products that are counterfeit reproductions of our products or that otherwise infringe on our proprietary rights. Counterfeiting activities typically increase as brand

42

Table of Contents

recognition increases, especially in markets outside the United States. Increased instances of counterfeit manufacture and sales may adversely affect our sales and the reputation of our brands and result in a shift of consumer preference away from our products. The actions we take to establish and protect trademarks and other proprietary rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violations of proprietary rights. In markets outside of the United States, it may be more difficult for us to establish our proprietary rights and to successfully challenge use of those rights by other parties. We also license our proprietary rights to third parties. We could suffer reputational damage to our brands if we fail to choose appropriate licensees and licensed product categories. In addition to our own intellectual property rights, many of the intellectual property rights in the technology, fabrics and processes used to manufacture our products are generally owned or controlled by our suppliers and are generally not unique to us. In those cases, we may not be able to adequately protect our products or differentiate their performance characteristics and fabrications from those of our competitors. The management of our intellectual property portfolio may affect the strength of our brands, which may in turn have a material adverse effect on our financial condition, results of operations or cash flows.
Although we have not been materially inhibited from selling products in connection with patent, trademark and trade dress disputes, as we focus on innovation in our product lines, extend our brands into new product categories and expand the geographic scope of our marketing, we may become subject to litigation based on allegations of infringement or other improper use of intellectual property rights of third parties, including third party trademark, copyright and patent rights. An increasing number of our products include technologies or designs for which we have obtained or applied for patent protection. Failure to successfully obtain and maintain patents on these innovations could negatively affect our ability to market and sell our products. Litigation is often necessary to defend against claims of infringement or to enforce and protect our intellectual property rights. As we utilize e-commerce and social media to a greater degree in our sales and marketing efforts, we face an increasing risk of patent infringement claims from non-operating entities and others covering broad functional aspects of internet operations. Intellectual property litigation may be costly and may divert management's attention from the operation of our business. Adverse determinations in any litigation may result in the loss of our proprietary rights, subject us to significant liabilities or require us to seek licenses from third parties, which may not be available on commercially reasonable terms, if at all. Any of these outcomes may have a material adverse effect on our financial condition, results of operations or cash flows.
In addition, as we continue to operate globally, expand the geographic scope of our business, and adopt new technologies and product categories, intellectual property disputes may increase, making it more expensive and challenging to establish and protect our intellectual property rights and to defend against claims of infringement by others, which could have a material adverse effect on our financial condition, results of operations or cash flows.
Our Success Depends on Our Distribution Facilities and Third-Party Logistics Providers
Our ability to meet customer expectations, manage inventory, complete sales, and achieve objectives for operating efficiencies depends on the proper operation of our existing distribution facilities, as well as the facilities of third-party logistics companies, the development or expansion of additional distribution capabilities and services, and the timely performance of services by third parties, including those involved in shipping product to and from our distribution facilities. In the United States, we rely primarily on our distribution centers in Portland, Oregon and Robards, Kentucky, as well as third-party logistics companies; in Canada, we rely primarily on our distribution facility in London, Ontario; in Europe, we rely primarily on our distribution center in Cambrai, France; in Japan, Korea and China, we rely primarily on third-party logistics companies near Tokyo, Seoul and Shanghai, respectively.
Our primary distribution facilities in the United States, France and Canada are highly automated, which means that their operations are complicated and may be subject to a number of risks related to computer viruses, the proper operation of software and hardware, electronic or power interruptions, and other system failures. Risks associated with upgrading or expanding these facilities may significantly disrupt or increase the cost of our operations. For example, in addition to supporting our traditional wholesale business, our existing distribution facilities have been modified to enable them to also support our DTC businesses in the United States, Canada and Europe. Failure to successfully maintain and update these modifications could disrupt our wholesale and e-commerce shipments and may have a material adverse effect on our financial condition, results of operations or cash flows.
The fixed costs associated with owning, operating and maintaining these large, highly automated distribution centers during a period of economic weakness or declining sales can result in lower operating efficiencies, financial deleverage and potential impairment in the recorded value of distribution assets. This fixed cost structure may make it difficult for us to maintain profitability if sales volumes decline for an extended period of time and could have a material adverse effect on our financial condition, results of operations or cash flows.
Our distribution facilities may also be interrupted by fire or natural disasters, such as earthquakes, floods or damaging winds. While we do maintain property and business interruption insurance for these facilities, it may not be adequate to reimburse us in amounts adequate to offset the adverse effects that may be caused by significant disruptions in our distribution facilities, and this could have a material adverse effect on our financial condition, results of operations or cash flows.
Our Investment Securities May Be Adversely Affected by Market Conditions
Our investment portfolio is subject to a number of risks and uncertainties. Changes in market conditions, such as those that accompany an economic downturn or economic uncertainty, may negatively affect the value and liquidity of our investment portfolio, perhaps significantly. Our

43

Table of Contents

ability to find diversified investments that are both safe and liquid and that provide a reasonable return may be impaired, potentially resulting in lower interest income, less diversification, longer investment maturities, or other-than-temporary impairments.
We May Be Adversely Affected by Labor Disruptions, Changes in Labor Laws and Other Labor Issues
Our business depends on our ability to source and distribute products in a timely manner. While a majority of our own operations are not subject to organized labor agreements, our relationship with our Cambrai distribution center employees is governed by French law, which includes a formal representation of employees by a Works Council and the application of a collective bargaining agreement. Labor matters at contract manufacturers where our goods are produced, shipping ports, transportation carriers, retail stores, or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes, or other disruptions during our peak manufacturing, shipping and selling seasons. For example, work slowdowns and stoppages at ports on the west coast of the United States have, in the past, resulted in product delays and increased costs. Labor disruptions may have a material adverse effect on our business, potentially resulting in canceled orders by customers, unanticipated inventory accumulation and reduced revenues and earnings.
Our ability to meet our labor needs at our distribution centers, retail stores, corporate headquarters, and regional subsidiaries, including our ability to find qualified employees while controlling wage and related labor costs, is generally subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force of the markets in which our operations are located, unemployment levels within those markets, prevailing and minimum wage rates, changing demographics, health and other insurance costs, and adoption of new or revised employment and labor laws and regulations. For example, we have increased costs resulting from competitive pressures and as a result of local increases in minimum wage rates in jurisdictions where we operate, and our contract manufacturers may face similar pressures and regulations. If we are unable to locate, attract or retain qualified employees, our ability to source, distribute and sell products in a timely and cost-effective manner may be negatively affected, which could have a material adverse effect on our financial condition, results of operations or cash flows.
We Depend on Key Suppliers
Some of the materials that we use may be available from only one source or a very limited number of sources. For example, some specialty fabrics are manufactured to our specification by one source or a few sources, and a single vendor supplies the majority of the zippers used in our products. From time to time, we have difficulty satisfying our raw material and finished goods requirements. Although we believe that we can identify and qualify additional contract manufacturers to produce these materials as necessary, there are no guarantees that additional contract manufacturers will be available. In addition, depending on the timing, any changes in sources or materials may result in increased costs or production delays, which may have a material adverse effect on our financial condition, results of operations or cash flows.
We Depend on Key Personnel
Our future success will depend in part on the continued service of key personnel and our ability to attract, retain and develop key talent. We face intense competition for these individuals worldwide, and there is a significant concentration of well-funded apparel and footwear competitors near our headquarters in Portland, Oregon. We may not be able to attract qualified new employees or retain existing employees, which may have a material adverse effect on our financial condition, results of operations or cash flows.
Our Business Is Affected by Seasonality
Our business is affected by the general seasonal trends common to the outdoor industry. Our products are marketed on a seasonal basis and our annual net sales are weighted heavily toward the fall/winter season, while our operating expenses are more equally distributed throughout the year. As a result, the majority, and sometimes all, of our operating profits are generated in the second half of the year. The expansion of our DTC businesses has increased the proportion of sales and profits that we generate in the fourth calendar quarter. This seasonality, along with other factors that are beyond our control and that are discussed elsewhere in this section, may adversely affect our business and cause our results of operations to fluctuate. As a result, our profitability may be materially affected if management is not able to timely adjust expenses in reaction to adverse events such as unfavorable weather, weak consumer spending patterns or unanticipated levels of order cancellations. Results of operations in any period should not be considered indicative of the results to be expected for any future period.
Our Products Are Subject to Increasing Product Regulations and We Face Risks of Product Liability and Warranty Claims
Our products are subject to increasingly stringent and complex domestic and foreign product labeling and performance and safety standards, laws and other regulations. These requirements could result in greater expense associated with compliance efforts, and failure to comply with these regulations could result in a delay, non-delivery, recall, or destruction of inventory shipments during key seasons or in other financial penalties. Significant or continuing noncompliance with these standards and laws could disrupt our business and harm our reputation and, as a result, could have a material adverse effect on our financial condition, results of operations or cash flows.
Our products are used in outdoor activities, sometimes in severe conditions. Product recalls or product liability claims resulting from the failure, or alleged failure, of our products could have a material adverse effect on the reputation of our brands, our financial condition, results of operations or cash flows. Most of our products carry limited warranties for defects in quality and workmanship. We maintain a warranty reserve for estimated

44

Table of Contents

future warranty claims, but the actual costs of servicing future warranty claims may exceed the reserve, which may also have a material adverse effect on our financial condition, results of operations or cash flows.
Our Common Stock Price May Be Volatile
The price of our common stock has fluctuated substantially since our initial public offering. Our common stock is traded on the NASDAQ Global Select Market. Factors such as general market conditions, actions by institutional investors to rapidly accumulate or divest of a substantial number of our shares, fluctuations in financial results, variances from financial market expectations, changes in earnings estimates or recommendations by analysts, or announcements by us or our competitors may cause the market price of our common stock to fluctuate, perhaps substantially.
Insiders Control a Majority of Our Common Stock and May Sell Shares
Five related shareholders, Gertrude Boyle, Sarah A. Bany, Timothy P. Boyle, Joseph P. Boyle, and Molly Boyle, have historically controlled a majority of our common stock. Following Gertrude Boyle's death, Sarah A. Bany is serving as trustee of the Gertrude Boyle Trust, which holds the shares that were beneficially owned by Gertrude Boyle. As a result, if acting together, Sarah A. Bany, Timothy P. Boyle, Joseph P. Boyle, and Molly Boyle can effectively control matters requiring shareholder approval without the cooperation of other shareholders. Shares held by these shareholders, including shares held by Gertrude Boyle's trust, are available for resale, subject to the requirements of, and the rules under, the Securities Act of 1933 and the Securities Exchange Act of 1934. The sale or the prospect of the sale of a substantial number of these shares may have an adverse effect on the market price of our common stock.


45

Table of Contents

Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Period
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2019 through July 31, 2019
67,500

 
$
102.80

 
67,500

 
$
228,973,000

August 1, 2019 through August 31, 2019
47,800

 
96.70

 
47,800

 
224,351,000

September 1, 2019 through September 30, 2019
43,412

 
96.94

 
43,412

 
220,143,000

Total
158,712

 
$
99.36

 
158,712

 
$
220,143,000

(1) Since the inception of the Company's stock repurchase plan, our Board of Directors has authorized the repurchase of $1.10 billion of our common stock. As of September 30, 2019, we had repurchased 25.2 million shares under this program at an aggregate purchase price of $879.9 million. Shares of our common stock may be purchased in the open market or through privately negotiated transactions, subject to market conditions. The repurchase program does not obligate us to acquire any specific number of shares or to acquire shares over any specified period of time.

Item 5.    OTHER INFORMATION
On November 1, 2019, the Company entered into a Tax Differential on Supplemental Wages Agreement with Franco Fogliato (the “Fogliato Tax Agreement”) to ensure that Mr. Fogliato’s burden for certain trailing tax liabilities resulting from his relocation to the U.S. will remain at a similar level as if he were employed solely in Switzerland. The Fogliato Tax Agreement provides for (i) tax preparation services in years in which trailing tax liabilities are incurred by Mr. Fogliato and (ii) the payment of tax differential payment(s) in an amount up to $100,000 per taxable year based on a calculation performed by KPMG US LLP (or a different tax advisor as chosen by the Company), with any amount over $100,000 being subject to the discretion of the Compensation Committee of the Board of Directors of the Company. A tax differential payment in the amount of $74,201 shall be paid to Mr. Fogliato for the taxable year 2018, pursuant to the terms of the Fogliato Tax Agreement. The Fogliato Tax Agreement, and any responsibilities of the Company thereunder, shall terminate on the earlier of (i) the date that Mr. Fogliato has no trailing tax liabilities outstanding and all trailing benefits are vested, exercised or expired or (ii) the date Mr. Fogliato’s employment with the Company is terminated for any reason.

46

Table of Contents

Item 6.    EXHIBITS
(a)
Exhibits
+
10.1
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101
INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
 
101
SCH XBRL Taxonomy Extension Schema Document
 
 
 
 
101
CAL XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
101
DEF XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
101
LAB XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
101
PRE XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
+
Management Contract or Compensatory Plan


47

Table of Contents

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
November 7, 2019
 
/s/ JIM A. SWANSON
 
 
Jim A. Swanson
 
 
Senior Vice President, Chief Financial Officer
 
 
(Duly Authorized Officer and Principal Financial and Accounting Officer)


48