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EX-32.2 - SECTION 1350 CERTIFICATION OF JIM A. SWANSON, SVP & CFO - COLUMBIA SPORTSWEAR COcolm-2017930x10qxexhibit322.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF TIMOTHY P. BOYLE, PRESIDENT & CEO - COLUMBIA SPORTSWEAR COcolm-2017930x10qxexhibit321.htm
EX-31.2 - RULE 13A-14(A) CERTIFICATION OF JIM A. SWANSON, SVP & CFO - COLUMBIA SPORTSWEAR COcolm-2017930x10qxexhibit312.htm
EX-31.1 - RULE 13A-14(A) CERTIFICATION OF TIMOTHY P. BOYLE, PRESIDENT & CEO - COLUMBIA SPORTSWEAR COcolm-2017930x10qxexhibit311.htm
EX-10.1 - EMPLOYMENT OFFER LETTER BETWEEN COLUMBIA SPORTSWEAR COMPANY AND FRANCO FOGLIATO - COLUMBIA SPORTSWEAR COcolm-2017930x10qxexhibit101.htm
 
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, 2017
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, 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
o  (Do not check if a smaller reporting company)
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 20, 2017 was 69,876,493.



COLUMBIA SPORTSWEAR COMPANY
SEPTEMBER 30, 2017
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,
2017
 
December 31,
2016
 
September 30,
2016
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
411,805

 
$
551,389

 
$
219,189

Short-term investments
 
18,469

 
472

 
467

Accounts receivable, net of allowance of $10,789, $8,556 and $8,519, respectively
 
466,852

 
333,678

 
486,236

Inventories
 
558,558

 
487,997

 
588,021

Prepaid expenses and other current assets
 
36,113

 
38,487

 
33,514

Total current assets
 
1,491,797

 
1,412,023

 
1,327,427

Property, plant and equipment, at cost, net of accumulated depreciation of $450,079, $408,676 and $403,244, respectively
 
285,582

 
279,650

 
285,514

Intangible assets, net (Note 4)
 
130,300

 
133,438

 
134,724

Goodwill
 
68,594

 
68,594

 
68,594

Deferred income taxes
 
98,062

 
92,494

 
79,934

Other non-current assets
 
26,479

 
27,695

 
25,622

Total assets
 
$
2,100,814

 
$
2,013,894

 
$
1,921,815

LIABILITIES AND EQUITY
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
Short-term borrowings
 
$

 
$

 
$
20

Accounts payable
 
190,634

 
215,048

 
136,667

Accrued liabilities (Note 5)
 
170,909

 
142,158

 
166,496

Income taxes payable
 
22,921

 
5,645

 
29,332

Total current liabilities
 
384,464

 
362,851

 
332,515

Note payable to related party (Note 13)
 

 
14,053

 
14,629

Other long-term liabilities
 
47,129

 
42,622

 
43,066

Income taxes payable
 
10,647

 
12,710

 
10,724

Deferred income taxes
 
154

 
147

 
229

Total liabilities
 
442,394

 
432,383

 
401,163

Commitments and contingencies (Note 11)
 

 

 

Columbia Sportswear Company Shareholders' Equity:
 
 
 
 
 

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

 

 

Common stock (no par value); 250,000 shares authorized; 69,863, 69,873, and 69,792, issued and outstanding, respectively (Note 8)
 
39,007

 
53,801

 
49,091

Retained earnings
 
1,604,214

 
1,529,636

 
1,457,495

Accumulated other comprehensive loss (Note 7)
 
(13,929
)
 
(22,617
)
 
(6,934
)
Total Columbia Sportswear Company shareholders' equity
 
1,629,292

 
1,560,820

 
1,499,652

Non-controlling interest (Note 3)
 
29,128

 
20,691

 
21,000

Total equity
 
1,658,420

 
1,581,511

 
1,520,652

Total liabilities and equity
 
$
2,100,814

 
$
2,013,894

 
$
1,921,815

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,
 
2017
 
2016
 
2017
 
2016
Net sales
$
747,367

 
$
745,714

 
$
1,690,064

 
$
1,659,595

Cost of sales
398,177

 
400,002

 
901,545

 
886,922

Gross profit
349,190

 
345,712

 
788,519

 
772,673

Selling, general and administrative expenses
230,446

 
224,497

 
643,859

 
622,843

Net licensing income
4,143

 
2,415

 
8,947

 
6,279

Income from operations
122,887

 
123,630

 
153,607

 
156,109

Interest income, net
1,035

 
393

 
3,240

 
1,576

Interest expense on note payable to related party (Note 13)

 
(253
)
 
(429
)
 
(779
)
Other non-operating income (expense), net
(104
)
 
(620
)
 
203

 
(736
)
Income before income tax
123,818

 
123,150

 
156,621

 
156,170

Income tax expense
(32,716
)
 
(36,598
)
 
(37,950
)
 
(43,297
)
Net income
91,102

 
86,552

 
118,671

 
112,873

Net income attributable to non-controlling interest
3,378

 
2,967

 
6,476

 
5,690

Net income attributable to Columbia Sportswear Company
$
87,724

 
$
83,585

 
$
112,195

 
$
107,183

Earnings per share attributable to Columbia Sportswear Company (Note 8):
 
 

 
 
 
 
Basic
$
1.26

 
$
1.20

 
$
1.61

 
$
1.54

Diluted
$
1.25

 
$
1.18

 
$
1.59

 
$
1.52

Cash dividends per share
$
0.18

 
$
0.17

 
$
0.54

 
$
0.51

Weighted average shares outstanding (Note 8):
 
 
 
 
 
 
 
Basic
69,815

 
69,761

 
69,698

 
69,632

Diluted
70,389

 
70,630

 
70,390

 
70,586

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,
 
2017
 
2016
 
2017
 
2016
Net income
$
91,102

 
$
86,552

 
$
118,671

 
$
112,873

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

 
(4
)
 

 
(2
)
Unrealized gains (losses) on derivative transactions (net of tax effects of $3,953, ($200), $8,194 and $3,360, respectively)
(8,606
)
 
399

 
(16,368
)
 
(9,025
)
Foreign currency translation adjustments (net of tax effects of ($20), ($123), ($18) and ($306), respectively)
8,333

 
3,390

 
27,017

 
22,226

Other comprehensive income (loss)
(273
)
 
3,785

 
10,649

 
13,199

Comprehensive income
90,829

 
90,337

 
129,320

 
126,072

Comprehensive income attributable to non-controlling interest
3,738

 
2,913

 
8,437

 
4,987

Comprehensive income attributable to Columbia Sportswear Company
$
87,091

 
$
87,424

 
$
120,883

 
$
121,085

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,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
118,671

 
$
112,873

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
44,660

 
44,478

Loss on disposal and impairment of property, plant, and equipment
970

 
3,646

Deferred income taxes
3,871

 
927

Stock-based compensation
8,277

 
8,454

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(127,003
)
 
(106,906
)
Inventories
(56,576
)
 
(103,475
)
Prepaid expenses and other current assets
2,959

 
429

Other assets
1,567

 
(2,552
)
Accounts payable
(30,716
)
 
(82,590
)
Accrued liabilities
1,595

 
10,999

Income taxes payable
15,063

 
26,045

Other liabilities
4,231

 
2,505

Net cash used in operating activities
(12,431
)
 
(85,167
)
Cash flows from investing activities:
 
 
 
Purchases of short-term investments
(50,697
)
 
(21,263
)
Sales of short-term investments
32,878

 
21,263

Capital expenditures
(41,791
)
 
(35,588
)
Proceeds from sale of property, plant, and equipment
239

 
52

Net cash used in investing activities
(59,371
)
 
(35,536
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
3,374

 
59,277

Repayments on credit facilities
(3,374
)
 
(61,197
)
Proceeds from issuance of common stock under employee stock plans
16,056

 
10,742

Tax payments related to restricted stock unit issuances
(3,585
)
 
(4,870
)
Repurchase of common stock
(35,542
)
 
(11
)
Cash dividends paid
(37,617
)
 
(35,548
)
Payment of related party note payable
(14,236
)
 

Net cash used in financing activities
(74,924
)
 
(31,607
)
Net effect of exchange rate changes on cash
7,142

 
1,729

Net decrease in cash and cash equivalents
(139,584
)
 
(150,581
)
Cash and cash equivalents, beginning of period
551,389

 
369,770

Cash and cash equivalents, end of period
$
411,805

 
$
219,189

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
25,282

 
$
14,601

Cash paid during the period for interest on note payable to related party
685

 
792

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Capital expenditures incurred but not yet paid
$
3,682

 
$
3,656

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, 2017 and 2016, and the results of operations and cash flows for the three and nine months ended September 30, 2017 and 2016. The December 31, 2016 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, 2016. 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, 2017 are not necessarily indicative of results to be expected for other quarterly periods or 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 ("GAAP") 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, 2016.
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 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, 2016.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers Topic 606, outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. The updated guidance, and subsequent clarifications, require an entity to recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the guidance requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company expects to adopt the standard on January 1, 2018, utilizing the modified retrospective approach, with the cumulative effect of initially applying the new standard recognized in retained earnings at the date of adoption.
The results of the Company's ongoing assessments have determined that the standard will primarily impact the following areas: fees paid to or retained by third parties in conjunction with certain concession-based retail arrangements, historically comprising approximately 2% of net sales, will be classified as a component of selling, general and administrative expenses; wholesale sales returns reserves, estimated chargebacks and markdowns, and other provisions for customer refunds will be presented as accrued liabilities rather than netted within accounts receivable; and the estimated cost of inventory associated with sales returns reserves will be presented within other current assets rather than inventories. The Company expects the timing of revenue recognition

6

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

for its significant revenue streams to remain substantially unchanged, with no material impact to net sales. The Company will continue its assessments as it finalizes the evaluation of any changes to existing processes, accounting policies and disclosures.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, an update to its accounting guidance related to the recognition and measurement of certain financial instruments. This standard requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and also updates certain presentation and disclosure requirements. This standard is effective beginning in the first quarter of 2018 with early adoption permitted. The adoption of ASU 2016-01 is not expected to have a material impact on the Company's financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for most leases previously classified as operating leases. This standard is effective beginning in the first quarter of 2019, with early adoption permitted. The Company is evaluating the impact of this guidance and expects the adoption will result in a material increase in the assets and liabilities on the Company's consolidated balance sheets and is not expected to have a material impact on the Company's consolidated statements of operations.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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 impact on the Company's financial position, results of operations or cash flows.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, which requires the recognition of the income tax effects of an intra-entity transfer of an asset, other than inventory, when the transfer occurs, eliminating an exception under current GAAP in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. Income tax effects of intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party. This standard is effective beginning in the first quarter of 2018, and the Company plans to apply the required modified retrospective approach with a cumulative-effect adjustment to retained earnings of certain previously deferred tax benefits. The Company anticipates the adoption of this standard will result in increased volatility in its future effective income tax rate.
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 2019, with early adoption permitted. The Company is evaluating the impact and expects the adoption of ASU 2017-04 to affect the amount and timing of future goodwill impairment charges, if any.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which simplifies the application of hedge accounting guidance to better portray the economic results of risk management activities in the financial statements. The guidance aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The Company expects to early adopt the standard utilizing the required modified retrospective transition method on January 1, 2018. The adoption of ASU 2017-12 is not expected to have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 3—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 accounts of the joint venture are included in the condensed consolidated financial statements. Swire's share of net income from the joint venture is included in net income attributable to non-controlling interest in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30,

7

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

2017 and 2016. The 40% non-controlling equity interest in this entity is included in total equity as non-controlling interest in the Condensed Consolidated Balance Sheets as of September 30, 2017 and 2016, and December 31, 2016.
The following table presents the changes in Columbia Sportswear Company shareholders' equity and non-controlling interest for the nine months ended September 30, 2017 (in thousands, except per share amounts):
 
 
Columbia Sportswear Company
 
Non-Controlling Interest
 
Total
Balance at December 31, 2016
 
$
1,560,820

 
$
20,691

 
$
1,581,511

Net income
 
112,195

 
6,476

 
118,671

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Derivative holding losses
 
(15,993
)
 
(375
)
 
(16,368
)
Foreign currency translation adjustments
 
24,681

 
2,336

 
27,017

Cash dividends ($0.54 per share)
 
(37,617
)
 

 
(37,617
)
Issuance of common stock under employee stock plans, net
 
12,471

 

 
12,471

Stock-based compensation expense
 
8,277

 

 
8,277

Repurchase of common stock
 
(35,542
)
 

 
(35,542
)
Balance at September 30, 2017
 
$
1,629,292

 
$
29,128

 
$
1,658,420

The following table presents the changes in Columbia Sportswear Company shareholders' equity and non-controlling interest for the nine months ended September 30, 2016 (in thousands, except per share amounts):
 
 
Columbia Sportswear Company
 
Non-Controlling Interest
 
Total
Balance at December 31, 2015
 
$
1,399,800

 
$
16,013

 
$
1,415,813

Net income
 
107,183

 
5,690

 
112,873

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Unrealized holding losses on available-for-sale securities
 
(2
)
 

 
(2
)
Derivative holding gains (losses)
 
(9,078
)
 
53

 
(9,025
)
Foreign currency translation adjustments
 
22,982

 
(756
)
 
22,226

Cash dividends ($0.51 per share)
 
(35,548
)
 

 
(35,548
)
Issuance of common stock under employee stock plans, net
 
5,872

 

 
5,872

Stock-based compensation expense
 
8,454

 

 
8,454

Repurchase of common stock
 
(11
)
 

 
(11
)
Balance at September 30, 2016
 
$
1,499,652

 
$
21,000

 
$
1,520,652

NOTE 4—INTANGIBLE ASSETS, NET
Intangible assets that are determined to have finite lives include patents, purchased technology and customer relationships and are amortized over their estimated useful lives, which range from approximately 3 to 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.

8

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

Intangible Assets
The following table summarizes the Company's identifiable intangible assets (in thousands):
 
September 30,
2017
 
December 31,
2016
 
September 30,
2016
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
(10,319
)
 
(9,321
)
 
(8,989
)
Customer relationships
(12,000
)
 
(9,860
)
 
(8,906
)
Total accumulated amortization
(22,319
)
 
(19,181
)
 
(17,895
)
Net carrying amount
14,879

 
18,017

 
19,303

Intangible assets not subject to amortization
115,421

 
115,421

 
115,421

Intangible assets, net
$
130,300

 
$
133,438

 
$
134,724

Amortization expense for intangible assets subject to amortization was $745,000 and $1,287,000 for the three months ended September 30, 2017 and 2016, respectively, and was $3,138,000 and $3,860,000 for the nine months ended September 30, 2017 and 2016, respectively.
Annual amortization expense is estimated to be as follows for the years 2017-2021 (in thousands):
2017
$
3,883

2018
2,980

2019
2,980

2020
2,537

2021
1,650

NOTE 5—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, replacements and refunds 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):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
11,213

 
$
11,653

 
$
11,455

 
$
11,487

Provision for warranty claims
1,373

 
922

 
3,304

 
3,360

Warranty claims
(877
)
 
(462
)
 
(3,365
)
 
(2,894
)
Other
108

 
76

 
423

 
236

Balance at end of period
$
11,817

 
$
12,189

 
$
11,817

 
$
12,189


9

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

NOTE 6—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 compensation is recognized based on an estimated number of awards that are expected to vest.
Stock-based compensation expense consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Stock options
$
834

 
$
1,008

 
$
2,843

 
$
2,989

Restricted stock units
1,724

 
1,993

 
5,434

 
5,465

Total
$
2,558

 
$
3,001

 
$
8,277

 
$
8,454

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,
 
2017
 
2016
 
2017
 
2016
Expected option term
4.35 years
 
4.37 years
 
4.54 years
 
4.63 years
Expected stock price volatility
28.79%
 
29.34%
 
28.91%
 
29.80%
Risk-free interest rate
1.68%
 
0.94%
 
1.72%
 
1.17%
Expected annual dividend yield
1.23%
 
1.17%
 
1.30%
 
1.20%
Weighted average grant date fair value
$13.47
 
$13.12
 
$13.03
 
$13.38
During the nine months ended September 30, 2017 and 2016, the Company granted a total of 528,477 and 428,500 stock options, respectively. At September 30, 2017, unrecognized costs related to outstanding stock options totaled approximately $7,927,000, 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, 2017 are expected to be recognized over a weighted average period of 2.56 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:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Vesting period
4.03 years
 
4.01 years
 
3.87 years
 
3.83 years
Expected annual dividend yield
1.23%
 
1.17%
 
1.30%
 
1.16%
Estimated average grant date fair value per restricted stock unit
$55.61
 
$55.43
 
$52.65
 
$55.94
During the nine months ended September 30, 2017 and 2016, the Company granted 255,032 and 190,119 restricted stock units, respectively. At September 30, 2017, unrecognized costs related to outstanding restricted stock units totaled approximately $15,852,000, before any related tax benefit. The unrecognized costs related to restricted stock units are being amortized over the

10

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

related vesting period using the straight-line attribution method. These unrecognized costs at September 30, 2017 are expected to be recognized over a weighted average period of 2.47 years.
NOTE 7—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, 2017 (in thousands):
 
Unrealized losses on available-for-sale securities
 
Unrealized holding losses on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at June 30, 2017
$
(4
)
 
$
(794
)
 
$
(12,498
)
 
$
(13,296
)
Other comprehensive income (loss) before reclassifications

 
(7,391
)
 
7,793

 
402

Amounts reclassified from other comprehensive income

 
(1,035
)
 

 
(1,035
)
Net other comprehensive income (loss) during the period

 
(8,426
)
 
7,793

 
(633
)
Balance at September 30, 2017
$
(4
)
 
$
(9,220
)
 
$
(4,705
)
 
$
(13,929
)
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, 2016 (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, 2016
$

 
$
(3,337
)
 
$
(7,436
)
 
$
(10,773
)
Other comprehensive income (loss) before reclassifications
(4
)
 
(319
)
 
3,497

 
3,174

Amounts reclassified from other comprehensive income

 
665

 

 
665

Net other comprehensive income (loss) during the period
(4
)
 
346

 
3,497

 
3,839

Balance at September 30, 2016
$
(4
)
 
$
(2,991
)
 
$
(3,939
)
 
$
(6,934
)
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, 2017 (in thousands):
 
Unrealized losses on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2016
$
(4
)
 
$
6,773

 
$
(29,386
)
 
$
(22,617
)
Other comprehensive income (loss) before reclassifications

 
(14,366
)
 
24,681

 
10,315

Amounts reclassified from other comprehensive income

 
(1,627
)
 

 
(1,627
)
Net other comprehensive income (loss) during the period

 
(15,993
)
 
24,681

 
8,688

Balance at September 30, 2017
$
(4
)
 
$
(9,220
)
 
$
(4,705
)
 
$
(13,929
)

11

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, 2016 (in thousands):
 
Unrealized losses on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2015
$
(2
)
 
$
6,087

 
$
(26,921
)
 
$
(20,836
)
Other comprehensive income (loss) before reclassifications
(2
)
 
(8,244
)
 
22,982

 
14,736

Amounts reclassified from other comprehensive income

 
(834
)
 

 
(834
)
Net other comprehensive income (loss) during the period
(2
)
 
(9,078
)
 
22,982

 
13,902

Balance at September 30, 2016
$
(4
)
 
$
(2,991
)
 
$
(3,939
)
 
$
(6,934
)
NOTE 8—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 (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Weighted average shares of common stock outstanding, used in computing basic earnings per share
69,815

 
69,761

 
69,698

 
69,632

Effect of dilutive stock options and restricted stock units
574

 
869

 
692

 
954

Weighted average shares of common stock outstanding, used in computing diluted earnings per share
70,389

 
70,630

 
70,390

 
70,586

Earnings per share of common stock attributable to Columbia Sportswear Company:
 
 
 
 
 
 
 
Basic
$
1.26

 
$
1.20

 
$
1.61

 
$
1.54

Diluted
$
1.25

 
$
1.18

 
$
1.59

 
$
1.52

 
Stock options and service-based restricted stock units representing 931,524 and 575,541 shares of common stock for the three months ended September 30, 2017 and 2016, respectively and 887,508 and 506,437 shares of common stock for the nine months ended September 30, 2017 and 2016, respectively, were outstanding but were excluded from the computation of diluted 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 36,589 and 71,243 shares of common stock for the three months ended September 30, 2017 and 2016, respectively, and 43,292 and 68,897 shares of common stock for the nine months ended September 30, 2017 and 2016, 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.

Common Stock Repurchase Plan
Since the inception of the Company's stock repurchase plan in 2004 through September 30, 2017, the Company's Board of Directors has authorized the repurchase of $700,000,000 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, 2017, the Company had repurchased 21,658,035 shares under this program at an aggregate purchase price of approximately $562,064,000. During the nine months ended September 30, 2017, the Company repurchased 665,095 shares of the Company's common stock at an aggregate purchase price of $35,542,000. During the nine months ended September 30, 2016, the Company did not repurchase any shares of the Company's common stock.

12

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

NOTE 9—SEGMENT INFORMATION
The Company has aggregated its operating segments into 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.
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, 2017 and 2016.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net sales to unrelated entities:
 
 
 
 
 
 
 
United States
$
455,970

 
$
484,758

 
$
1,027,350

 
$
1,049,779

LAAP
122,996

 
112,718

 
320,807

 
301,777

EMEA
87,522

 
73,062

 
210,248

 
183,436

Canada
80,879

 
75,176

 
131,659

 
124,603

 
$
747,367

 
$
745,714

 
$
1,690,064

 
$
1,659,595

Segment income from operations:
 
 
 
 
 
 
 
United States
$
117,901

 
$
138,682

 
$
202,857

 
$
226,661

LAAP
21,583

 
17,698

 
44,894

 
37,196

EMEA
10,212

 
6,599

 
11,688

 
7,963

Canada
18,971

 
13,548

 
22,235

 
14,234

Total segment income from operations
168,667

 
176,527

 
281,674

 
286,054

Unallocated corporate expenses
(45,780
)
 
(52,897
)
 
(128,067
)
 
(129,945
)
Interest income, net
1,035

 
393

 
3,240

 
1,576

Interest expense on note payable to related party

 
(253
)
 
(429
)
 
(779
)
Other non-operating income (expense)
(104
)
 
(620
)
 
203

 
(736
)
Income before income taxes
$
123,818

 
$
123,150

 
$
156,621

 
$
156,170

NOTE 10—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. The Company's prAna subsidiary uses U.S. dollars as its functional currency and is exposed to anticipated Canadian dollar denominated sales. The Company manages these risks by using currency forward and option 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, the change in fair value attributable to changes in forward points is 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 Canadian dollar sales. For option contracts, the change in fair value attributable to changes in time value are excluded from the assessment of hedge effectiveness and included in current period cost of sales. Hedge ineffectiveness was not material during the three and nine months ended September 30, 2017 and 2016.
 

13

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

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, Swiss francs, 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, 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 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,
2017
 
December 31,
2016
 
September 30,
2016
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
$
390,500

 
$
206,000

 
$
204,000

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
181,045

 
184,940

 
189,159

At September 30, 2017, approximately $8,670,000 of deferred net losses 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 euro, renminbi, Canadian dollar, and yen when outstanding derivative contracts mature.
At September 30, 2017, the Company's derivative contracts had a remaining maturity of less than two 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 $3,000,000 at September 30, 2017. All of the Company's derivative counterparties have investment grade credit ratings. 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. 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,
2017
 
December 31,
2016
 
September 30,
2016
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
$
1,930

 
$
9,805

 
$
1,880

Currency forward contracts
 
Other non-current assets
 
509

 
1,969

 
344

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
10,152

 
106

 
3,295

Currency forward contracts
 
Other long-term liabilities
 
3,048

 

 
559

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
959

 
1,361

 
99

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
407

 
180

 
850



14

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

The following table presents the statement of operations effect and classification of derivative instruments (in thousands):
 
 
Statement of
Operations
Classification
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
2017
 
2016
Currency Forward and Option Contracts:
 
 
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Loss recognized in other comprehensive income or loss, net of tax
 
 
$
(7,535
)
 
$
(266
)
 
$
(14,510
)
 
$
(8,191
)
Gain (loss) reclassified from accumulated other comprehensive income or loss to income for the effective portion
 
Net sales
 

 
(46
)
 
144

 
115

Gain (loss) reclassified from accumulated other comprehensive income or loss to income for the effective portion
 
Cost of sales
 
1,549

 
(784
)
 
2,500

 
821

Loss reclassified from accumulated other comprehensive income or loss to income as a result of cash flow hedge discontinuance
 
Cost of sales
 

 

 

 
(81
)
Loss reclassified from accumulated other comprehensive income or loss to income as a result of cash flow hedge discontinuance
 
Other non-operating expense
 
(178
)
 

 
(178
)
 

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

 
(4
)
 
5

 
1

Gain recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Cost of sales
 
1,203

 
143

 
2,489

 
1,105

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Loss recognized in income
 
Other non-operating expense
 
(634
)
 
(444
)
 
(4,045
)
 
(3,885
)
NOTE 11—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, 2017, inventory purchase obligations were $300,430,000.
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 12—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;

15

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

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, 2017 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
236,909

 
$

 
$

 
$
236,909

Time deposits
52,719

 

 

 
52,719

U.S. Government-backed municipal bonds

 
3,072

 

 
3,072

Available-for-sale short-term investments (1):
 
 
 
 
 
 
 
U.S. Government-backed municipal bonds

 
16,828

 

 
16,828

Other short-term investments:
 
 
 
 
 
 
 
Mutual fund shares
1,641

 

 

 
1,641

Other current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)

 
2,889

 

 
2,889

Other non-current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)

 
509

 

 
509

Mutual fund shares
8,772

 

 

 
8,772

Total assets measured at fair value
$
300,041

 
$
23,298

 
$

 
$
323,339

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)
$

 
$
10,559

 
$

 
$
10,559

Other long-term liabilities:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)

 
3,048

 

 
3,048

Total liabilities measured at fair value
$

 
$
13,607

 
$

 
$
13,607

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
299,769

 
$

 
$

 
$
299,769

Time deposits
73,127

 

 

 
73,127

Other short-term investments:
 
 
 
 
 
 
 
Mutual fund shares
472

 

 

 
472

Other current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)

 
11,166

 

 
11,166

Other non-current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)

 
1,969

 

 
1,969

Mutual fund shares
8,411

 

 

 
8,411

Total assets measured at fair value
$
381,779

 
$
13,135

 
$

 
$
394,914

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)
$

 
$
286

 
$

 
$
286

Total liabilities measured at fair value
$

 
$
286

 
$

 
$
286

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 are as follows (in

16

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

thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
96,994

 
$

 
$

 
$
96,994

Time deposits
42,248

 

 

 
42,248

Other short-term investments:
 
 
 
 
 
 
 
Mutual funds shares
467

 

 

 
467

Other current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)

 
1,979

 

 
1,979

Other non-current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)

 
344

 

 
344

Mutual fund shares
8,245

 

 

 
8,245

Total assets measured at fair value
$
147,954

 
$
2,323

 
$

 
$
150,277

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)
$

 
$
4,145

 
$

 
$
4,145

Other long-term liabilities
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)

 
559

 

 
559

Total liabilities measured at fair value
$

 
$
4,704

 
$

 
$
4,704


(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.
Non-recurring Fair Value Measurements
There were no material assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2017, December 31, 2016 or September 30, 2016.
NOTE 13—RELATED PARTY TRANSACTIONS
The Company owns a 60% controlling interest in a joint venture formed with Swire, which is a related party. The joint venture arrangement involves Transition Services Agreements ("TSAs") with Swire, under which Swire provides administrative and information technology services to the joint venture. The Company continues to reduce its costs under the TSAs as it internalizes the back-office functions and related personnel, including the transition of the joint venture's systems to the Company's platform in the second quarter of 2017. The joint venture incurred service fees, valued under the TSAs at Swire's cost, of $90,000 and $765,000 during the three months ended September 30, 2017 and 2016, respectively and $935,000 and $2,660,000 during the nine months ended September 30, 2017 and 2016, respectively. These fees are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. In addition, the joint venture pays Swire sourcing fees related to the purchase of certain inventory. These sourcing fees are capitalized into inventories and charged to cost of sales as the inventories are sold. The Company incurred sourcing fees of $6,000 for the three months ended September 30, 2017. The Company did not incur these sourcing fees for the three months ended September 30, 2016. The Company incurred sourcing fees of $11,000 and $61,000, for the nine months ended September 30, 2017 and 2016, respectively.
In 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 a note payable to related party in the Condensed Consolidated Balance Sheets as of December 31, 2016 and September 30, 2016. In June 2017, the Company repaid these loans, including the note with Swire in the principal amount of RMB 97,600,000 (USD 14,236,000), and as such, the balance on the Condensed Consolidated Balance Sheets is zero at September 30, 2017. The Company did not incur interest expense related to this note for the three months ended

17

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

September 30, 2017. Interest expense related to this note was $253,000 for the three months ended September 30, 2016, and $429,000 and $779,000 for the nine months ended September 30, 2017 and 2016, respectively.
As of September 30, 2017 and 2016, and December 31, 2016, net payables to Swire for service fees, interest expense and miscellaneous expenses totaled $87,000, $948,000 and $707,000, respectively, and were included in accounts payable in 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 standard third-party distributor terms and pricing.

18


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, profitability and the effect of specified factors on profitability for 2017, expenses, sourcing 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 operating model assessment, referred to as Project CONNECT, intellectual property disputes, our direct-to-consumer channels, and other capital expenditures, including planned store additions, access to raw materials and factory capacity, financing and working capital requirements and resources, income tax rates and pre-tax income, 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 outdoor and active lifestyle apparel, footwear, accessories, and equipment primarily under the Columbia, SOREL, prAna, and Mountain Hardwear brands. Our products are sold through a mix of wholesale distribution channels, our own direct-to-consumer channels and independent international distributors. In addition, we license some of our trademarks across a range of apparel, footwear, accessories, and equipment.
The popularity of outdoor activities, 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 and shopping patterns by adjusting our product offerings and selling channels, 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.
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 2016, approximately 60% of our net sales and approximately 90% of our profitability was 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. The expansion of our direct-to-consumer channels has increased the proportion of sales, profits and cash flows that we generate in the second half of the year, particularly in the fourth quarter.
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 continues to present us with a great deal of uncertainty, making it difficult to predict future results. Consistent with the historical seasonality of the business, we anticipate 2017 profitability to be heavily concentrated in the second half of the year. Factors that could significantly affect our full year 2017 financial results include:
Performance and profitability of our owned brick-and-mortar stores and e-commerce direct-to-consumer sales globally;

19


Unseasonable weather conditions or other unforeseen factors affecting consumer demand and the resulting effect on cancellations of advance wholesale orders, sales returns, wholesale customer accommodations, replenishment orders and reorders, direct-to-consumer sales, changes in mix and volume of full price sales in relation to promotional and closeout product sales, and suppressed wholesale and end-consumer demand in subsequent seasons;
Industry trends affecting consumer traffic and spending in brick and mortar retail channels, which are creating uncertainty regarding the long-term financial health of several of our U.S. wholesale customers, including some who have recently closed stores, or initiated restructuring activities, bankruptcy proceedings or liquidation;
Difficult economic and competitive environments in certain key markets within our Latin America and Asia Pacific ("LAAP") region, in particular, Korea;
Continued sales growth and profitability contributed by our EMEA region, particularly our European wholesale and direct-to-consumer businesses;
The effects of changes in foreign currency exchange rates on sales, gross margin, operating income, and net income;
A reduction in the rate of net sales growth of our prAna business;
Performance of our Mountain Hardwear business as we work to re-invigorate that brand in the marketplace; and
The financial impact of activities associated with and resulting from Project CONNECT.
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.
During the second quarter of 2017, we commenced an initiative to invest in a global retail platform ("GRP"), which encompasses the IT systems infrastructure to support the growth and expansion of our direct-to-consumer businesses. The objective of this initiative is to deliver an improved 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. This GRP initiative is currently in the design phase with planned regional implementations beginning in the first half of 2019.
In addition, we are continuing to invest in our ongoing multi-year global enterprise resource planning ("ERP") implementation, which has been executed in the majority of our operations to date. During the second quarter of 2017, we implemented the ERP system in our China joint venture and plan to transition our European wholesale and direct-to-consumer businesses onto the system in mid-2018.
During the first quarter of 2017, we commenced a thorough assessment of our operating model, referred to as Project CONNECT, to ensure that the business is aligned and organized to successfully execute our strategic plan. We completed the operational assessment phase earlier this year, which resulted in modifications to the company’s operating model and executive organization structure to align with our strategies in being a brand-led and consumer focused organization. During the third quarter, additional analysis was conducted to begin implementing operational improvements throughout the business, which are intended to streamline and improve the effectiveness of certain processes leading to sales growth, gross margin enhancement and selling, general and administrative ("SG&A") expense efficiency. As these anticipated improvements are implemented over the next two to three years and with the goal of continuing to drive sustainable and profitable growth, we intend to reallocate resources to strategic priorities including incremental demand creation spending and other investments to drive growth across our distribution channels. We anticipate providing further updates as the project progresses.
We remain focused on driving sustainable and profitable sales growth by providing innovative, stylish products at accessible prices through effective sales channels, nurturing stronger emotional connections with consumers through compelling marketing communications, transforming our global supply chain and information technology platforms, and effectively managing inventory and other working capital assets.
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 elsewhere 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

20


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.
Highlights of the Third Quarter of 2017

Net sales for the third quarter of 2017 increased $1.7 million, or less than 1%, to $747.4 million from $745.7 million for the third quarter of 2016.
Net income attributable to Columbia Sportswear Company increased $4.1 million, or 5%, for the third quarter of 2017 to $87.7 million, or $1.25 per diluted share, including program expenses and discrete costs of approximately $2.1 million net of tax, or $0.03 per diluted share, related to Project CONNECT, compared to net income of $83.6 million, or $1.18 per diluted share, for the third quarter of 2016.
We paid a quarterly cash dividend of $0.18 per share, or $12.6 million, in the third quarter of 2017.
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,
 
2017
 
2016
 
2017
 
2016
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
53.3

 
53.6

 
53.3

 
53.4

Gross profit
46.7

 
46.4

 
46.7

 
46.6

Selling, general and administrative expenses
30.8

 
30.1

 
38.1

 
37.5

Net licensing income
0.5

 
0.3

 
0.5

 
0.3

Income from operations
16.4

 
16.6

 
9.1

 
9.4

Interest income, net
0.2

 

 
0.2

 
0.1

Interest expense on note payable to related party

 

 

 
(0.1
)
Other non-operating income (expense)

 
(0.1
)
 

 

Income before income tax
16.6

 
16.5

 
9.3

 
9.4

Income tax expense
(4.4
)
 
(4.9
)
 
(2.3
)
 
(2.6
)
Net income
12.2

 
11.6

 
7.0

 
6.8

Net income attributable to non-controlling interest
0.5

 
0.4

 
0.4

 
0.3

Net income attributable to Columbia Sportswear Company
11.7
 %
 
11.2
 %
 
6.6
 %
 
6.5
 %
Quarter Ended September 30, 2017 Compared to Quarter Ended September 30, 2016
Net Sales: Consolidated net sales increased $1.7 million, or less than one percent, to $747.4 million for the third quarter of 2017 from $745.7 million for the comparable period in 2016.

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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
 
2017
 
Translation
 
2017(1)
 
2016
 
% Change
 
% Change(1)
 
(In millions, except for percentage changes)
United States
$
456.0

 
$

 
$
456.0

 
$
484.8

 
(6)%
 
(6)%
LAAP
123.0

 
2.6

 
125.6

 
112.7

 
9%
 
11%
EMEA
87.5

 
(3.4
)
 
84.1

 
73.0

 
20%
 
15%
Canada
80.9

 
(2.6
)
 
78.3

 
75.2

 
8%
 
4%
 
$
747.4

 
$
(3.4
)
 
$
744.0

 
$
745.7

 
—%
 
—%
(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.
Net sales in the United States decreased $28.8 million, or 6%, to $456.0 million for the third quarter of 2017 from $484.8 million for the comparable period in 2016. The U.S. net sales decrease consisted of a decrease in net sales in our wholesale business across all brands, partially offset by a net sales increase in our direct-to-consumer business. The net sales decrease in our wholesale business resulted primarily from a shift in the timing of shipments of reduced wholesale advance orders from the third quarter into the fourth quarter of 2017 and the comparative effects of sales to U.S. wholesale customers who have gone through bankruptcies, liquidations and store closures. The net sales increase in our direct-to-consumer business was led by increased net sales from our retail stores, followed by increased e-commerce net sales. At September 30, 2017, we operated 127 retail stores, compared with 115 retail stores at September 30, 2016.
Net sales in the LAAP region increased $10.3 million, or 9% (11% constant-currency), to $123.0 million for the third quarter of 2017 from $112.7 million for the comparable period in 2016. The net sales increase in the LAAP region was concentrated in the Columbia brand and was driven by net sales increases in our LAAP distributor business, China and Korea, partially offset by a net sales decrease in Japan. The net sales increase in our LAAP distributor business was driven by a shift in timing of shipments of increased fall 2017 advance orders from the second quarter of 2017 into the third quarter of 2017. The net sales increase in China primarily reflected increased digital wholesale and e-commerce net sales. The increase in net sales in Korea was driven by the opening of additional wholesale accounts, partially offset by a decrease in direct-to-consumer net sales reflecting continued business weakness amid the promotional nature of the outdoor sector in that country. These increases were partially offset by a net sales decrease in Japan, which was negatively affected by changes in foreign currency exchange rates.
Net sales in the EMEA region increased $14.5 million, or 20% (15% constant-currency), to $87.5 million for the third quarter of 2017 from $73.0 million for the comparable period in 2016. The net sales increase in the EMEA region was concentrated in the Columbia and SOREL brands, and was led by our European wholesale and direct-to-consumer businesses, followed by increased net sales to our EMEA distributors. The net sales increase in our European wholesale and direct-to-consumer businesses was driven by increased fall 2017 advance wholesale orders and increased retail store and e-commerce net sales. The net sales increase to our EMEA distributors was driven by increased fall 2017 advance order shipments to our Russian distributor.
Net sales in Canada increased $5.7 million, or 8% (4% constant-currency), to $80.9 million for the third quarter of 2017 from $75.2 million for the comparable period in 2016. The increase in net sales in Canada was driven by a net sales increase in the Columbia brand, followed by the SOREL brand, and was positively affected by changes in foreign currency exchange rates.

22


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
 
2017
 
Translation