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EXCEL - IDEA: XBRL DOCUMENT - COLUMBIA SPORTSWEAR COFinancial_Report.xls
EX-32.2 - SECTION 1350 CERTIFICATION OF THOMAS B. CUSICK, SENIOR VICE PRESIDENT AND CHIE - COLUMBIA SPORTSWEAR COcolm-2014930x10qxexhibit322.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF TIMOTHY P. BOYLE, PRESIDENT AND CHIEF EXECUTIVE OF - COLUMBIA SPORTSWEAR COcolm-2014930x10qxexhibit321.htm
EX-31.1 - RULE 13A-14(A) CERTIFICATION OF TIMOTHY P. BOYLE, PRESIDENT AND CHIEF EXECUTIVE - COLUMBIA SPORTSWEAR COcolm-2014930x10qxexhibit311.htm
EX-31.2 - RULE 13A-14(A) CERTIFICATION OF THOMAS B. CUSICK, SENIOR VICE PRESIDENT AND CHIE - COLUMBIA SPORTSWEAR COcolm-2014930x10qxexhibit312.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________
FORM 10-Q
____________________________
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
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)
 
(Zip Code)
(503) 985-4000
(Registrant’s telephone number, including area code)
_____________________________________
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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
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 24, 2014 was 69,686,802.



COLUMBIA SPORTSWEAR COMPANY
SEPTEMBER 30, 2014
INDEX TO FORM 10-Q
 
 
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


PART I. FINANCIAL INFORMATION
Item 1 – FINANCIAL STATEMENTS
COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
185,247

 
$
437,489

 
$
274,160

Short-term investments
 
537

 
91,755

 
29,049

Accounts receivable, net of allowance of $7,778, $8,282 and $8,731, respectively
 
458,844

 
306,878

 
378,032

Inventories, net (Note 5)
 
494,795

 
329,228

 
410,111

Deferred income taxes
 
50,710

 
52,041

 
50,342

Prepaid expenses and other current assets
 
42,916

 
33,081

 
38,514

Total current assets
 
1,233,049

 
1,250,472

 
1,180,208

Property, plant and equipment, at cost, net of accumulated depreciation of $346,929, $326,380 and $322,161, respectively
 
289,480

 
279,373

 
280,682

Intangible assets, net (Notes 3, 6)
 
146,184

 
36,288

 
36,620

Goodwill (Notes 3, 6)
 
68,594

 
14,438

 
14,438

Other non-current assets
 
24,570

 
25,017

 
22,354

Total assets
 
$
1,761,877

 
$
1,605,588

 
$
1,534,302

LIABILITIES AND EQUITY
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
Short-term borrowings
 
$
2,185

 
$

 
$

Accounts payable
 
218,804

 
173,557

 
141,755

Accrued liabilities (Note 7)
 
140,660

 
120,397

 
119,654

Income taxes payable
 
18,922

 
7,251

 
9,257

Deferred income taxes
 
39

 
49

 
67

Total current liabilities
 
380,610

 
301,254

 
270,733

Note payable to related party (Note 15)
 
15,897

 

 

Income taxes payable
 
5,196

 
13,984

 
14,355

Deferred income taxes
 
218

 
7,959

 
1,849

Other long-term liabilities
 
33,421

 
29,527

 
27,643

Total liabilities
 
435,342

 
352,724

 
314,580

Commitments and contingencies (Note 13)
 

 

 

Columbia Sportswear Company Shareholders’ Equity:
 
 
 
 
 
 
Preferred stock; 10,000 shares authorized; none issued and outstanding
 

 

 

Common stock (no par value); 250,000 shares authorized; 70,047, 69,190 and 68,956 issued and outstanding, respectively (Note 10)
 
79,029

 
52,325

 
44,371

Retained earnings
 
1,209,934

 
1,157,733

 
1,129,636

Accumulated other comprehensive income (Note 9)
 
27,096

 
35,360

 
37,905

Total Columbia Sportswear Company shareholders’ equity
 
1,316,059

 
1,245,418

 
1,211,912

Non-controlling interest (Note 4)
 
10,476

 
7,446

 
7,810

Total equity
 
1,326,535

 
1,252,864

 
1,219,722

Total liabilities and equity
 
$
1,761,877

 
$
1,605,588

 
$
1,534,302

See accompanying notes to condensed consolidated financial statements.

2


COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
675,296

 
$
523,084

 
$
1,423,626

 
$
1,151,886

Cost of sales
 
368,515

 
290,735

 
775,734

 
645,949

Gross profit
 
306,781

 
232,349

 
647,892

 
505,937

Selling, general and administrative expenses
 
210,659

 
162,951

 
536,214

 
437,789

Net licensing income
 
2,160

 
7,501

 
5,066

 
11,482

Income from operations
 
98,282

 
76,899

 
116,744

 
79,630

Interest income, net
 
238

 
56

 
861

 
403

Interest expense on note payable to related party
 
(282
)
 

 
(769
)
 

Other non-operating income (expense)
 
666

 
417

 
161

 
(686
)
Income before income tax
 
98,904

 
77,372

 
116,997

 
79,347

Income tax expense
 
(30,972
)
 
(22,822
)
 
(32,127
)
 
(22,025
)
Net income
 
67,932

 
54,550

 
84,870

 
57,322

Net income (loss) attributable to non-controlling interest
 
2,288

 
(36
)
 
3,300

 
(289
)
Net income attributable to Columbia Sportswear Company
 
$
65,644

 
$
54,586

 
$
81,570

 
$
57,611

Earnings per share attributable to Columbia Sportswear Company (Note 10):
 
 
 

 
 
 
 
Basic
 
$
0.94

 
$
0.79

 
$
1.17

 
$
0.84

Diluted
 
0.93

 
0.79

 
1.15

 
0.83

Cash dividends per share
 
$
0.14

 
$
0.11

 
$
0.42

 
$
0.33

Weighted average shares outstanding (Note 10):
 
 
 
 
 
 
 
 
Basic
 
70,093

 
68,904

 
69,811

 
68,650

Diluted
 
70,818

 
69,506

 
70,693

 
69,280

See accompanying notes to condensed consolidated financial statements.


3


COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
67,932

 
$
54,550

 
$
84,870

 
$
57,322

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized holding gains (losses) on available-for-sale securities (net of tax expense of $1, $0, $2 and $4, respectively)

 
(9
)
 
4

 
7

Unrealized gains (losses) on derivative transactions (net of tax benefit (expense) of ($924), $1,372, ($183), and $223, respectively)
5,098

 
(3,204
)
 
4,289

 
(1,606
)
Foreign currency translation adjustments (net of tax benefit (expense) of $590, ($308), $613 and ($210), respectively)
(15,883
)
 
11,114

 
(12,827
)
 
(7,060
)
Other comprehensive income (loss)
(10,785
)
 
7,901

 
(8,534
)
 
(8,659
)
Comprehensive income
57,147

 
62,451

 
76,336

 
48,663

Comprehensive income (loss) attributable to non-controlling interest
2,482

 
(15
)
 
3,030

 
(190
)
Comprehensive income attributable to Columbia Sportswear Company
$
54,665

 
$
62,466

 
$
73,306

 
$
48,853

See accompanying notes to condensed consolidated financial statements.


4


COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
84,870

 
$
57,322

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
38,625

 
30,337

Loss on disposal or impairment of property, plant, and equipment
350

 
370

Deferred income taxes
82

 
2,173

Stock-based compensation
8,136

 
6,532

Excess tax benefit from employee stock plans
(4,029
)
 
(1,083
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(139,578
)
 
(43,712
)
Inventories
(163,874
)
 
(46,795
)
Prepaid expenses and other current assets
(7,990
)
 
114

Other assets
303

 
330

Accounts payable
44,775

 
(1,521
)
Accrued liabilities
23,957

 
11,654

Income taxes payable
1,846

 
7,530

Other liabilities
3,998

 
472

Net cash provided by (used in) operating activities
(108,529
)
 
23,723

Cash flows from investing activities:
 
 
 
Acquisition of business, net of cash acquired
(188,467
)
 

Purchases of short-term investments
(21,471
)
 
(61,286
)
Sales of short-term investments
112,895

 
77,166

Capital expenditures
(42,843
)
 
(49,157
)
Proceeds from sale of property, plant, and equipment
58

 
49

Net cash used in investing activities
(139,828
)
 
(33,228
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
15,287

 
36,896

Repayments on credit facilities
(12,999
)
 
(37,052
)
Proceeds from issuance of common stock under employee stock plans
19,293

 
14,199

Tax payments related to restricted stock unit issuances
(2,969
)
 
(2,144
)
Excess tax benefit from employee stock plans
4,029

 
1,083

Repurchase of common stock
(7
)
 

Proceeds from note payable to related party
16,072

 

Capital contribution from non-controlling interest

 
8,000

Cash dividends paid
(29,369
)
 
(22,665
)
Net cash provided by (used in) financing activities
9,337

 
(1,683
)
Net effect of exchange rate changes on cash
(13,222
)
 
(5,433
)
Net decrease in cash and cash equivalents
(252,242
)
 
(16,621
)
Cash and cash equivalents, beginning of period
437,489

 
290,781

Cash and cash equivalents, end of period
$
185,247

 
$
274,160

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
28,040

 
$
7,867

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Capital expenditures incurred but not yet paid
$
5,796

 
$
1,259

Repurchase of common stock not yet paid
1,950

 

See accompanying notes to condensed consolidated financial statements.

5


COLUMBIA SPORTSWEAR COMPANY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—BASIS OF PRESENTATION AND ORGANIZATION
The accompanying unaudited 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, 2014 and 2013, the results of operations for the three and nine months ended September 30, 2014 and 2013 and cash flows for the nine months ended September 30, 2014 and 2013. The December 31, 2013 financial information was derived from the Company’s audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. 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, 2014 are not necessarily indicative of results to be expected for the full year.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. 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 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
On September 26, 2014, the Company completed a two-for-one stock split paid in the form of a 100% stock dividend. All references made to share or per share amounts in the accompanying condensed consolidated financial statements and notes thereto have been retroactively adjusted to reflect the stock split.
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 generally accepted accounting principles 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 miscellaneous claims from customers, allowance for doubtful accounts, 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
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, 2013.
Recent Accounting Pronouncements:
In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This ASU provides clarification regarding the release of any cumulative translation adjustment when the parent ceases to have a controlling financial interest in a business or group of assets held within a foreign entity. The amendment is effective on a prospective basis for interim and annual periods beginning after December 15, 2013. The Company adopted the new guidance as of January 1, 2014. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations or cash flows.

6


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



In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This accounting standard is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact this accounting standard will have on the Company's financial position, results of operations or cash flows.
NOTE 3—BUSINESS ACQUISITION
On May 30, 2014, the Company purchased 100% of the equity interest in prAna Living LLC (“prAna”) for $188,467,000 net of acquired cash of $4,946,000. PrAna is a lifestyle apparel brand sold through approximately 1,400 select specialty and online retailers across North America, as well as through five company-owned retail stores, an e-commerce site and direct-mail catalogs. The acquisition of prAna strengthens and diversifies the Company's brand portfolio and generally offsets some of the more seasonal sales effects found within existing Columbia brands. The acquisition was funded with cash on hand.
PrAna contributed net sales of $33,655,000 and net loss, including amortization of acquired assets, of $443,000 to the Company from May 31, 2014 to September 30, 2014. In addition, the Company incurred transaction costs of $3,382,000 during the nine months ended September 30, 2014. These acquisition and integration costs are included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2014.
Purchase price allocation
Acquired assets and liabilities were recorded at estimated fair value as of the acquisition date. The excess of the purchase price over the estimated fair value of identifiable net assets resulted in the recognition of goodwill of $54,156,000, all of which was assigned to the United States segment, and is attributable to future growth opportunities and any intangible assets that did not qualify for separate recognition. The goodwill is expected to be deductible for tax purposes.
The following table summarizes the preliminary estimated fair value of the net assets acquired and liabilities assumed and measurement period adjustments since May 30, 2014, the acquisition date (in thousands):
 
 
Initial valuation at May 30, 2014
 
Measurement period adjustments
 
Adjusted preliminary valuation at September 30, 2014
Cash
 
$
4,946

 
$

 
$
4,946

Accounts receivable
 
10,021

 

 
10,021

Inventories
 
9,641

 

 
9,641

Other current assets
 
2,229

 
302

 
2,531

Property, plant and equipment
 
5,192

 

 
5,192

Acquired intangible assets

114,500

 

 
114,500

Other non-current assets
 
258

 

 
258

     Total assets acquired

146,787

 
302

 
147,089

 
 
 
 
 
 
 
Accounts payable
 
2,803

 

 
2,803

Other current liabilities
 
5,390

 
(361
)
 
5,029

     Total liabilities assumed

8,193

 
(361
)
 
7,832

 
 
 
 
 
 
 
Net identifiable assets acquired

138,594

 
663

 
139,257

Goodwill

54,819

 
(663
)
 
54,156

Net assets acquired
 
$
193,413

 
$

 
$
193,413

The allocation of the purchase price is preliminary and is based upon valuation information available and estimates and assumptions made at September 30, 2014. The Company is still in the process of verifying data and finalizing information related

7


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



to the valuation and recording of property, plant and equipment, identified intangible assets, accrued liabilities and the resulting effects on the amount of recognized goodwill.
The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of May 30, 2014, the acquisition date (in thousands, except for estimated useful lives, in years):
 
 
Estimated fair value
 
Estimated useful life, in years
Trade name
 
$
88,000

 
Indefinite
Customer relationships
 
23,000

 
3-10 years
Order backlog
 
3,500

 
Less than 1 year
Total
 
$
114,500

 
 
At the time of acquisition, the value of acquired inventory was increased by $1,600,000 based on its estimated fair value. This valuation adjustment was charged to cost of sales in the second and third quarters of 2014.
Summary of Unaudited Pro forma Information
The following table reflects the unaudited pro forma consolidated results of operations for the periods presented, as though the acquisition of prAna had occurred on January 1, 2013 (in thousands):
 
 
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
675,296

 
$
546,676

 
$
1,467,059

 
$
1,218,100

Net income attributable to Columbia Sportswear Company
 
67,492

 
56,175

 
89,146

 
58,765

Earnings per share attributable to Columbia Sportswear Company:
 
 
 
 
 
 
 
 
Basic
 
$
0.96

 
$
0.82

 
$
1.28

 
$
0.86

Diluted
 
0.95

 
0.81

 
1.26

 
0.85

The unaudited pro forma financial information is presented for illustrative purposes only and is not indicative of the results of operations that would have been realized if the acquisition had been completed on the date indicated, nor is it indicative of future operating results. The unaudited pro forma consolidated net income includes differences in the amount and timing of amortization of acquired intangible assets and the fair value adjustment for acquired inventory. As a result, under the assumed pro forma acquisition date of January 1, 2013, net income for the nine months ended September 30, 2014 and 2013 includes pre-tax purchase accounting amortization of $2,863,000 and $7,963,000, respectively. The pro forma net income attributable to the Company excludes nonrecurring transaction costs of $3,382,000. The pro forma results also do not include, among other items, the effects of anticipated synergies from combining the two companies or differences in the combined Company's operating cost structure.
NOTE 4—NON-CONTROLLING INTEREST
The Company owns 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 joint venture was in a formation and start-up phase during 2013 and began operations on January 1, 2014. The accounts of the joint venture are included in the Condensed Consolidated Balance Sheets as of September 30, 2014 and 2013, and December 31, 2013. Swire's share of net income (loss) from the joint venture is included in Net income (loss) attributable to non-controlling interest in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013. The non-controlling equity interest in this entity is included in total equity as Non-controlling interest on the Condensed Consolidated Balance Sheets as of September 30, 2014 and 2013, and December 31, 2013.
The following table presents the changes in Columbia Sportswear Company shareholders' equity and non-controlling interest for the nine months ended September 30, 2014 (in thousands, except per share amounts):

8


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



 
 
Columbia Sportswear Company
 
Non-Controlling Interest
 
Total
Balance at December 31, 2013
 
$
1,245,418

 
$
7,446

 
$
1,252,864

Net income
 
81,570

 
3,300

 
84,870

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Unrealized holding gains on available-for-sale securities
 
4

 

 
4

Derivative holding losses
 
4,289

 

 
4,289

Foreign currency translation adjustments
 
(12,557
)
 
(270
)
 
(12,827
)
Cash dividends ($0.42 per share)
 
(29,369
)
 

 
(29,369
)
Issuance of common stock under employee stock plans, net
 
16,324

 

 
16,324

Tax adjustment from stock plans
 
4,201

 

 
4,201

Stock-based compensation expense
 
8,136

 

 
8,136

Repurchase of common stock
 
(1,957
)
 

 
(1,957
)
Balance at September 30, 2014
 
$
1,316,059

 
$
10,476

 
$
1,326,535

The following table presents the changes in Columbia Sportswear Company shareholders' equity and non-controlling interest for the nine months ended September 30, 2013 (in thousands, except per share amounts):
 
 
Columbia Sportswear Company
 
Non-Controlling Interest
 
Total
Balance at December 31, 2012
 
$
1,166,167

 
$

 
$
1,166,167

Net income (loss)
 
57,611

 
(289
)
 
57,322

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Unrealized holding gains on available-for-sale securities
 
7

 

 
7

Derivative holding gains
 
(1,606
)
 

 
(1,606
)
Foreign currency translation adjustments
 
(7,159
)
 
99

 
(7,060
)
Cash dividends ($0.33 per share)
 
(22,665
)
 

 
(22,665
)
Issuance of common stock under employee stock plans, net
 
12,055

 

 
12,055

Capital contribution from non-controlling interest
 

 
8,000

 
8,000

Tax adjustment from stock plans
 
970

 

 
970

Stock-based compensation expense
 
6,532

 

 
6,532

Balance at September 30, 2013
 
$
1,211,912

 
$
7,810

 
$
1,219,722


NOTE 5—INVENTORIES, NET
Inventories are carried at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company periodically reviews its inventory for excess, closeout and slow moving items and makes provisions as necessary to properly reflect inventory value.
Inventories, net, consisted of the following (in thousands):
 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
Raw materials
$
1,366

 
$
1,130

 
$
941

Work in process
549

 
1,203

 
1,271

Finished goods
492,880

 
326,895

 
407,899

 
$
494,795

 
$
329,228

 
$
410,111


9


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



NOTE 6—INTANGIBLE ASSETS, NET AND GOODWILL
Intangible assets that are determined to have finite lives include patents, purchased technology, customer relationships and order backlog and are amortized over their estimated useful lives, which range from less than one year to approximately 10 years, and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. Goodwill and intangible assets with indefinite useful lives, including trademarks and trade names, are not amortized but are periodically evaluated for impairment.
Intangible assets
The following table summarizes the Company’s identifiable intangible assets balance (in thousands):
 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
Intangible assets subject to amortization:
 
 
 
 
 
Patents and purchased technology
$
14,198

 
$
14,198

 
$
14,198

Customer relationships
23,000

 

 

Order backlog
3,500

 

 

Gross carrying amount
40,698

 
14,198

 
14,198

Accumulated amortization:
 
 
 
 
 
Patents and purchased technology
(6,329
)
 
(5,331
)
 
(4,999
)
Customer relationships
(1,272
)
 

 

Order backlog
(2,334
)
 

 

Total accumulated amortization
(9,935
)
 
(5,331
)
 
(4,999
)
Net carrying amount
30,763

 
8,867

 
9,199

Intangible assets not subject to amortization
115,421

 
27,421

 
27,421

Intangible assets, net
$
146,184

 
$
36,288

 
$
36,620

Amortization expense for intangible assets subject to amortization was $3,037,000 and $332,000 for the three months ended September 30, 2014 and 2013, respectively, and was $4,604,000 and $998,000 for the nine months ended September 30, 2014 and 2013, respectively. Annual amortization expense is estimated to be $7,056,000 in 2014, $5,147,000 in 2015 and 2016, $3,883,000 in 2017 and $2,980,000 in 2018.
Goodwill
Goodwill was $68,594,000 at September 30, 2014, and $14,438,000 at December 31, 2013 and September 30, 2013. During the nine months ended September 30, 2014, goodwill increased $54,156,000, net of a remeasurement period adjustment of $663,000, related to the prAna acquisition (see Note 3).
NOTE 7—PRODUCT WARRANTY
Some of the Company’s products carry 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 and replacements and is recorded in cost of sales. The warranty reserve is included in Accrued liabilities in the Condensed Consolidated Balance Sheets.
A reconciliation of product warranties is as follows (in thousands):

10


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



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
10,680

 
$
9,665

 
$
10,768

 
$
10,209

Provision for warranty claims
1,088

 
1,154

 
3,242

 
3,938

Warranty claims
(542
)
 
(806
)
 
(2,807
)
 
(3,976
)
Other
(244
)
 
126

 
(221
)
 
(32
)
Balance at end of period
$
10,982

 
$
10,139

 
$
10,982

 
$
10,139

NOTE 8—STOCK-BASED COMPENSATION
The Company’s Stock Incentive Plan (the “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. The majority of all stock options and restricted stock unit grants outstanding under the Plan were granted in the first quarter of each fiscal year.
Stock-based compensation expense consisted of the following (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Stock options
 
$
909

 
$
873

 
$
2,652

 
$
2,583

Restricted stock units
 
2,019

 
1,377

 
5,484

 
3,949

Total
 
$
2,928

 
$
2,250

 
$
8,136

 
$
6,532

Stock Options
The Company estimates the fair value of stock options using the Black-Scholes model. Key inputs and assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected stock price volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield.
The following table presents the weighted average assumptions for stock options granted in the periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Expected option term
4.41 years
 
4.49 years
 
4.70 years
 
4.71 years
Expected stock price volatility
27.24%
 
26.87%
 
27.65%
 
30.63%
Risk-free interest rate
1.32%
 
1.01%
 
1.22%
 
0.70%
Expected annual dividend yield
1.49%
 
1.38%
 
1.34%
 
1.62%
Weighted average grant date fair value
$7.84
 
$6.52
 
$8.72
 
$6.17
During the nine months ended September 30, 2014 and 2013, the Company granted a total of 493,630 and 684,716 stock options, respectively. At September 30, 2014, unrecognized costs related to outstanding stock options totaled approximately $6,553,000, 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, 2014 are expected to be recognized over a weighted average period of 2.35 years.
Restricted Stock Units
The Company estimates the fair value of service-based and performance-based restricted stock units using the Black-Scholes model. Key inputs and assumptions used to estimate the fair value of restricted stock units include the vesting period, expected annual dividend yield and closing price of the Company’s common stock on the date of grant.
 The following table presents the weighted average assumptions for restricted stock units granted in the periods:

11


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



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Vesting period
4.01 years
 
4.01 years
 
3.83 years
 
3.93 years
Expected annual dividend yield
1.49%
 
1.38%
 
1.33%
 
1.59%
Estimated average grant date fair value per restricted stock unit
$35.47
 
$30.14
 
$39.02
 
$25.99
During the nine months ended September 30, 2014 and 2013, the Company granted 268,499 and 295,180 restricted stock units, respectively. At September 30, 2014, unrecognized costs related to outstanding restricted stock units totaled approximately $14,714,000, 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, 2014 are expected to be recognized over a weighted average period of 2.35 years.
NOTE 9—ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income, 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 income attributable to Columbia Sportswear Company, net of tax, for the three months ended September 30, 2014 (in thousands):
 
 
Unrealized losses on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at June 30, 2014
 
$
(2
)
 
$
435

 
$
37,642

 
$
38,075

Other comprehensive income (loss) before reclassifications
 

 
5,404

 
(16,077
)
 
(10,673
)
Amounts reclassified from other comprehensive income
 

 
(306
)
 

 
(306
)
Net other comprehensive income (loss) during the period
 

 
5,098

 
(16,077
)
 
(10,979
)
Balance at September 30, 2014
 
$
(2
)
 
$
5,533

 
$
21,565

 
$
27,096

The following table sets forth the changes in accumulated other comprehensive income attributable to Columbia Sportswear Company, net of tax, for the three months ended September 30, 2013 (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, 2013
 
$
7

 
$
4,103

 
$
25,915

 
$
30,025

Other comprehensive income (loss) before reclassifications
 
(9
)
 
(951
)
 
11,093

 
10,133

Amounts reclassified from other comprehensive income
 

 
(2,253
)
 

 
(2,253
)
Net other comprehensive income (loss) during the period
 
(9
)
 
(3,204
)
 
11,093

 
7,880

Balance at September 30, 2013
 
$
(2
)
 
$
899

 
$
37,008

 
$
37,905

The following table sets forth the changes in accumulated other comprehensive income attributable to Columbia Sportswear Company, net of tax, for the nine months ended September 30, 2014 (in thousands):

12


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



 
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2013
 
$
(6
)
 
$
1,244

 
$
34,122

 
$
35,360

Other comprehensive income (loss) before reclassifications
 
4

 
5,474

 
(12,557
)
 
(7,079
)
Amounts reclassified from other comprehensive income
 

 
(1,185
)
 

 
(1,185
)
Net other comprehensive income (loss) during the period
 
4

 
4,289

 
(12,557
)
 
(8,264
)
Balance at September 30, 2014
 
$
(2
)
 
$
5,533

 
$
21,565

 
$
27,096

The following table sets forth the changes in accumulated other comprehensive income attributable to Columbia Sportswear Company, net of tax, for the nine months ended September 30, 2013 (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, 2012
 
$
(9
)
 
$
2,505

 
$
44,167

 
$
46,663

Other comprehensive income (loss) before reclassifications
 
7

 
1,929

 
(7,159
)
 
(5,223
)
Amounts reclassified from other comprehensive income
 

 
(3,535
)
 

 
(3,535
)
Net other comprehensive income (loss) during the period
 
7

 
(1,606
)
 
(7,159
)
 
(8,758
)
Balance at September 30, 2013
 
$
(2
)
 
$
899

 
$
37,008

 
$
37,905

All reclassification adjustments related to derivative transactions are recorded in Cost of sales on the Condensed Consolidated Statements of Operations. See Note 12 for further information regarding derivative instrument reclassification adjustments.
NOTE 10—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. For the calculation of diluted EPS, the basic weighted average number of shares is increased by the dilutive effect of stock options and restricted stock units determined using the treasury stock method.
A reconciliation of common shares used in the denominator for computing basic and diluted EPS is as follows (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Weighted average shares of common stock outstanding, used in computing basic earnings per share
70,093

 
68,904

 
69,811

 
68,650

Effect of dilutive stock options and restricted stock units
725

 
602

 
882

 
630

Weighted average shares of common stock outstanding, used in computing diluted earnings per share
70,818

 
69,506

 
70,693

 
69,280

Earnings per share of common stock attributable to Columbia Sportswear Company:
 
 
 
 
 
 
 
Basic
$
0.94

 
$
0.79

 
$
1.17

 
$
0.84

Diluted
0.93

 
0.79

 
1.15

 
0.83

 
Stock options and service-based restricted stock units representing 467,288 and 787,986 shares of common stock for the three months ended September 30, 2014 and 2013, respectively, and 380,716 and 1,172,440 shares of common stock for the nine months ended September 30, 2014 and 2013, respectively, were outstanding but were excluded from the computation of diluted

13


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



EPS because their effect would be anti-dilutive as a result of applying the treasury stock method. In addition, performance-based restricted stock units representing 140,596 and 21,120 shares of common stock for the three months ended September 30, 2014 and 2013, respectively, and 107,347 and 21,120 shares of common stock for the nine months ended September 30, 2014 and 2013, respectively, were outstanding but were excluded from the computation of diluted EPS because these shares were subject to performance conditions that had not been met.
Since the inception of the Company’s stock repurchase plan in 2004 through September 30, 2014, the Company’s Board of Directors has authorized the repurchase of $500,000,000 of the Company’s common stock. Shares of the Company’s common stock may be purchased 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. As of September 30, 2014, the Company had repurchased 19,241,156 shares under this program at an aggregate purchase price of approximately $443,400,000. During the nine months ended September 30, 2014, the Company repurchased 54,600 shares of the Company's common stock at an aggregate purchase price of $1,957,000, including $1,950,000 not yet settled. During the nine months ended September 30, 2013, the Company did not repurchase any shares of the Company's common stock.
NOTE 11—SEGMENT INFORMATION
The Company operates in four geographic segments: (1) United States, (2) Latin America and Asia Pacific ("LAAP"), (3) Europe, Middle East and Africa (“EMEA”) and (4) 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 and legal, executive compensation, unallocated benefit program expense and other miscellaneous costs.
In the first quarter of 2014, the Company reclassified its segment reporting to reflect changes in its internal management and oversight structure. Certain marketing, product creation and administrative costs incurred by the Company’s corporate offices, previously included in the United States segment, have been allocated to other geographic regions based on relevant operational metrics. Other such costs not directly or indirectly allocable to regional segments are now shown below as unallocated corporate expenses. Prior year amounts have been adjusted to match current year presentation.

14


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



The geographic distribution of the Company’s net sales and income from operations are summarized in the following table (in thousands) for the three and nine months ended September 30, 2014 and 2013.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net sales to unrelated entities:
 
 
 
 
 
 
 
United States
$
406,172

 
$
323,120

 
$
793,729

 
$
663,407

LAAP
123,538

 
71,968

 
336,451

 
236,297

EMEA
78,846

 
78,102

 
190,935

 
172,056

Canada
66,740

 
49,894

 
102,511

 
80,126

 
$
675,296

 
$
523,084

 
$
1,423,626

 
$
1,151,886

Segment income from operations:
 
 
 
 
 
 
 
United States
$
100,771

 
$
73,571

 
$
147,307

 
$
104,533

LAAP
19,259

 
11,975

 
45,746

 
33,889

EMEA
8,406

 
10,215

 
10,677

 
3,084

Canada
14,200

 
9,919

 
13,815

 
9,372

Total segment income from operations
142,636

 
105,680

 
217,545

 
150,878

Unallocated corporate expenses
(44,354
)
 
(28,781
)
 
(100,801
)
 
(71,248
)
Interest income, net
238

 
56

 
861

 
403

Interest expense on note payable to related party
(282
)
 

 
(769
)
 

Other non-operating income (expense)
666

 
417

 
161

 
(686
)
Income before income taxes
$
98,904

 
$
77,372

 
$
116,997

 
$
79,347

NOTE 12—FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In the normal course of business, the Company’s financial position and results of operations 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 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 as their functional currency are primarily exposed to anticipated Canadian dollar denominated sales. The Company manages these risks by using currency forward contracts formally designated and effective as cash flow hedges. Hedge effectiveness is 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, the change in fair value attributable to changes in forward points is excluded from the determination of hedge effectiveness and included in current cost of sales for hedges of anticipated U.S. dollar inventory purchases and in net sales for hedges of anticipated Canadian dollar sales. Hedge ineffectiveness was not material during the three and nine months ended September 30, 2014 and 2013.
 
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 European euros, Canadian dollars, Japanese yen, Korean won or Chinese renminbi as their functional currency. Non-functional currency denominated monetary assets and liabilities consist primarily of cash and cash equivalents, short-term investments, payables 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): 

15


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



 
September 30,
2014
 
December 31,
2013
 
September 30,
2013
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
$
103,000

 
$
99,000

 
$
84,500

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
62,837

 
109,000

 
65,900

At September 30, 2014, approximately $5,202,000 of deferred net gains on both outstanding and matured derivatives accumulated 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 income. Actual amounts ultimately reclassified to net income are dependent on U.S. dollar exchange rates in effect against the European euro, Canadian dollar, Japanese yen and Korean won when outstanding derivative contracts mature.
At September 30, 2014, the Company’s derivative contracts had a remaining maturity of less than two years. All the counterparties to these transactions had both long-term and short-term investment grade credit ratings and as a result, the Company does not require collateral to facilitate transactions. 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 $3,000,000 at September 30, 2014. The Company is a party to master netting arrangements that contain features that allow counterparties to 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. Finally, 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,
2014
 
December 31,
2013
 
September 30,
2013
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
$
5,986

 
$
1,936

 
$
1,526

Currency forward contracts
 
Other non-current assets
 

 
24

 

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 

 
872

 
573

Currency forward contracts
 
Other long-term liabilities
 

 
95

 

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
2,708

 
2,956

 
403

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 

 
280

 
26


The following table presents the statement of operations effect and classification of derivative instruments (in thousands):

16


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



 
 
Statement of
Operations
Classification
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2014
 
2013
 
2014
 
2013
Currency Forward Contracts:
 
 
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income or loss
 
 
$
5,404

 
$
(951
)
 
$
5,474

 
$
1,929

Gain reclassified from accumulated other comprehensive income or loss to income for the effective portion
 
Cost of sales
 
556

 
3,217

 
2,055

 
4,843

Loss recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Net sales
 
(13
)
 

 
(13
)
 

Gain (loss) recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Cost of sales
 
(120
)
 
8

 
(328
)
 
(37
)
Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain recognized in income
 
Other non-operating income (expense)
 
5,368

 
137

 
3,397

 
6,149

NOTE 13—COMMITMENTS AND CONTINGENCIES
Operating Leases
Future minimum operating lease payments for the remaining terms of the leases, including rent escalation clauses, were $341,668,000 and $275,687,000 at September 30, 2014 and December 31, 2013, respectively. In addition, the Company is obligated for percentage rent, real estate taxes, insurance, common area maintenance and other periodic costs under the lease agreements.
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, 2014, inventory purchase obligations were $312,599,000.
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 consolidated financial statements.
NOTE 14—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 and/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 at September 30, 2014 are as follows (in thousands):

17


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



 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
79,266

 
$

 
$

 
$
79,266

Time deposits
25,167

 

 

 
25,167

Short-term investments
 
 
 
 
 
 
 
Mutual fund shares
537

 

 

 
537

Other current assets
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)

 
8,694

 

 
8,694

Other non-current assets
 
 
 
 
 
 
 
Mutual fund shares
5,247

 

 

 
5,247

Total assets measured at fair value
$
110,217

 
$
8,694

 
$

 
$
118,911

Assets and liabilities measured at fair value on a recurring basis at December 31, 2013 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
175,624

 
$

 
$

 
$
175,624

Time deposits
25,111

 
9,526

 

 
34,637

Certificates of deposit

 
735

 

 
735

Reverse repurchase agreements

 
45,000

 

 
45,000

U.S. Government-backed municipal bonds

 
9,898

 

 
9,898

Available-for-sale short-term investments (1)
 
 
 
 
 
 
 
Short-term municipal bond fund
15,004

 

 

 
15,004

Certificates of deposit

 
9,546

 

 
9,546

Variable-rate demand notes

 
52,105

 

 
52,105

U.S. Government-backed municipal bonds

 
14,764

 

 
14,764

Other short-term investments
 
 
 
 
 
 
 
Mutual fund shares
336

 

 

 
336

Other current assets
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)

 
4,892

 

 
4,892

Non-current assets
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)

 
24

 

 
24

Mutual fund shares
4,855

 

 

 
4,855

Total assets measured at fair value
$
220,930

 
$
146,490

 
$

 
$
367,420

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
$

 
$
1,152

 
$

 
$
1,152

Other long-term liabilities
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)

 
95

 

 
95

Total liabilities measured at fair value
$

 
$
1,247

 
$

 
$
1,247


18


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



Assets and liabilities measured at fair value on a recurring basis at September 30, 2013 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
153,382

 
$

 
$

 
$
153,382

Time deposits
25,092

 

 

 
25,092

U.S. Government-backed repurchase agreements

 
25,000

 

 
25,000

U.S. Government-backed municipal bonds

 
3,218

 

 
3,218

Available-for-sale short-term investments (1)
 
 
 
 
 
 
 
Certificates of deposit

 
1,470

 

 
1,470

Variable-rate demand notes

 
27,320

 

 
27,320

Other short-term investments
 
 
 
 
 
 
 
Mutual funds shares
259

 

 

 
259

Other current assets
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)

 
1,929

 

 
1,929

Other non-current assets
 
 
 
 
 
 
 
Mutual fund shares
4,560

 

 

 
4,560

Total assets measured at fair value
$
183,293

 
$
58,937

 
$

 
$
242,230

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
$

 
$
599

 
$

 
$
599

Total liabilities measured at fair value
$

 
$
599

 
$

 
$
599

 
(1) 
Investments have remaining maturities greater than three months but less than two years and are available for use in current operations.
 
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, that are directly or indirectly observable in the marketplace and quoted prices in markets with limited volume or infrequent transactions.
Non-recurring fair value measurements:
During the fourth quarter of 2013, the Company recorded an impairment in its EMEA segment for its European distribution center in Cambrai, France, writing the assets down to their estimated fair value of $19,300,000. Significant factors and estimates used in the evaluation and fair value determination include management's plans for future operations, recent operating results, projected cash flows and third-party valuation estimates. This nonrecurring fair value measurement was developed using significant unobservable inputs (Level 3). Third-party valuation estimates were developed using local market data for sales transactions of similar facilities.
There were no material assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2014 or 2013.
NOTE 15—RELATED PARTY TRANSACTIONS
On January 1, 2014, the Company commenced operations of a majority-owned joint venture in mainland China. Upon commencement, the joint venture entered into Transition Services Agreements ("TSAs") with Swire, the non-controlling shareholder in the joint venture, under which Swire renders administrative and information technology services and operates certain retail stores on behalf of the joint venture. The joint venture incurred service fees, valued under the TSAs at Swire's cost, of $2,194,000 and $7,075,000 during the three and nine months ended September 30, 2014, respectively. These fees are included in Selling, general and administrative expenses on the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2014. In addition, the joint venture pays Swire sourcing fees related to the purchase of certain inventory.

19


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



These sourcing fees are capitalized into Inventories and charged to Cost of sales as the inventories are sold. For the three and nine months ended September 30, 2014, the joint venture incurred sourcing fees of $81,000 and $374,000, respectively.
During the three months ended March 31, 2014, both the Company and Swire funded long-term loans to the joint venture. The Company's loan has been eliminated in consolidation, while the Swire loan is reflected as Note payable to related party on the Condensed Consolidated Balance Sheet as of September 30, 2014. The note with Swire, in the principal amount of 97,600,000 RMB (US$15,897,000), matures on December 31, 2018 and bears interest at a fixed annual rate of 7%. Interest expense related to this note was $282,000 and $769,000 for the three and nine months ended September 30, 2014, respectively.
As of September 30, 2014, payables to Swire for service fees and interest expense totaled $4,062,000 and were included in Accounts payable on the Condensed Consolidated Balance Sheets.
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 normal third-party distributor terms and pricing.

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Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements. 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, including from the operations of our China joint venture and prAna subsidiary, profitability and the effect of specified factors on profitability for 2014, expenses, input costs, effects of unseasonable weather on our results of operations, inventory levels, investments in our business, investments in and implementation of our information technology systems, our direct-to-consumer channels and other capital expenditures, reclassification of deferred net gains, access to raw materials and factory capacity, financing and working capital requirements and resources, tax rates and pre-tax income, the effect of any legal proceedings in which we may be involved, 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 those projected in forward-looking statements, including the risks described below in Part II, Item 1A, Risk Factors. 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, source, market and distribute active outdoor and lifestyle apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel, prAna and Montrail brands. Our products are sold through a mix of wholesale distribution channels, independent distributors, and our own direct-to-consumer channels. In addition, we license some of our trademarks across a range of apparel, footwear, accessories and equipment.
The popularity of outdoor activities, active lifestyles, weather, changing design trends, consumer adoption of innovative performance technologies 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 adjusting the mix and price points of available product offerings, developing new products with innovative performance features and designs, and creating persuasive and memorable marketing communications to generate consumer awareness, demand and retention. 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.
Business Developments
On January 1, 2014 we commenced operations of a majority-owned joint venture in mainland China with Swire Resources Limited ("Swire"). As a 60% majority-owned entity, the joint venture's operations are included in our consolidated financial results.
On May 30, 2014, we purchased 100% of the equity interest in prAna Living LLC (“prAna”) for $188.5 million, net of acquired cash. PrAna is a lifestyle apparel brand sold through approximately 1,400 select specialty and online retailers across North America, as well as through five company-owned retail stores, an e-commerce site and direct-mail catalogs. The acquisition of prAna strengthens and diversifies our brand portfolio and generally offsets some of the more seasonal sales effects found within our existing Columbia brands. The acquisition was funded with cash on hand.
Business Outlook
Our business is affected by the general seasonal trends common to the industry and is heavily dependent upon 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. The expansion of our direct-to-consumer operations has increased the proportion of sales, profits and cash flows that we generate in the fourth calendar quarter. As a result, our sales and profits tend to be highest in the third and fourth calendar quarters. In 2013, approximately 63 percent of our net sales and nearly all of our profitability 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.
We generally solicit orders from wholesale customers and independent 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 fall season orders to customers beginning in July and continuing through December. Similarly, the

21


majority of our advance spring season orders ship to customers beginning in January and continuing through June. 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 of global economic and geopolitical conditions. Sales of our products are subject to substantial cyclical fluctuation, the effects of unseasonable weather conditions, the relative popularity of competitors' brands, and the continued popularity of outdoor and active lifestyles in key markets. Volatile economic and geopolitical environments in key markets, seasonal weather patterns and inflationary or volatile input costs reduce the predictability of our business.
We expect 2014 profitability to be affected by the following major factors:
Incremental sales, operating costs and profits from our new China joint venture;
Financial effects from our acquisition of prAna on May 30, 2014, including transaction costs and incorporation of prAna operating results and purchase accounting amortization into our financial results;
Continued growth and increased investment in our global direct-to-consumer businesses;
Renewed growth in our wholesale businesses;
Increased demand creation costs; and
Incremental depreciation expense, training and post go-live support costs related to our United States enterprise resource planning ("ERP") system implementation, as well as ongoing project costs in connection with the next phase of our global ERP system initiative.
Consistent with the historical seasonality of the business, we anticipate 2014 profitability to be heavily concentrated in the second half of the year.
We implemented our new ERP system in the United States in early April 2014 which, when combined with our Canadian operation, brings our North American wholesale business and the majority of our global supply chain operations onto our new platform. The next planned phase of our global ERP system initiative is to transition our global distributor business to our new ERP system in 2015.
Factors that could significantly affect our full year 2014 outlook include:
Unseasonable weather conditions or other unforeseen factors affecting consumer demand and the resulting effect on order cancellations, sales returns, customer accommodations, reorders, direct-to-consumer sales and suppressed demand in subsequent seasons;
Macroeconomic trends affecting consumer traffic and spending in brick and mortar retail channels;
The rate of new store expansion and performance of our existing stores and e-commerce sites in our global direct-to-consumer operations;
Changes in mix and volume of full price sales in relation to closeout product sales and promotional sales activity;
Production capacity constraints and associated risks, including timely delivery, quality and non-compliance;
Costs and business interruption risks related to our supply chain and information technology infrastructure investments and projects, including our multi-year global ERP system implementation;
Our ability to effectively manage operating costs;
Continued political and economic uncertainty, which is creating headwinds in key global markets; and
Fluctuating currency exchange rates.
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.
We remain focused on driving sustainable, profitable sales growth by providing innovative products at accessible prices, transforming our global supply chain and information technology platforms, managing inventory, and nurturing stronger emotional connections with consumers through compelling marketing communications.
Results of Operations

22


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 elsewhere in this quarterly report. All references to quarters relate to the quarter ended September 30th of the particular year.
Highlights of the Third Quarter of 2014

Net sales for the third quarter of 2014 increased $152.2 million, or 29%, to $675.3 million from $523.1 million for the third quarter of 2013. Changes in foreign currency exchange rates compared with the third quarter of 2013 negatively affected the consolidated net sales comparison by less than one percentage point.
Net income attributable to Columbia Sportswear Company for the third quarter of 2014 increased 20% to $65.6 million, or $0.93 per diluted share, compared to net income of $54.6 million, or $0.79