Document
 
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, 2018
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  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨  (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 19, 2018 was 69,005,295.



COLUMBIA SPORTSWEAR COMPANY
SEPTEMBER 30, 2018
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,
2018
 
December 31,
2017
 
September 30,
2017
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
182,175

 
$
673,166

 
$
411,805

Restricted cash (Note 4)
 
13,970

 

 

Short-term investments
 
269,313

 
94,983

 
18,469

Accounts receivable, net of allowance of $9,176, $9,043, and $10,789, respectively
 
552,442

 
364,862

 
466,852

Inventories
 
617,194

 
457,927

 
558,558

Prepaid expenses and other current assets
 
77,763

 
58,559

 
36,113

Total current assets
 
1,712,857

 
1,649,497

 
1,491,797

Property, plant and equipment, at cost, net of accumulated depreciation of $483,857, $455,811, and $450,079, respectively
 
284,744

 
281,394

 
285,582

Intangible assets, net (Note 5)
 
127,320

 
129,555

 
130,300

Goodwill (Note 5)
 
68,594

 
68,594

 
68,594

Deferred income taxes
 
68,913

 
56,804

 
98,062

Other non-current assets
 
36,911

 
27,058

 
26,479

Total assets
 
$
2,299,339

 
$
2,212,902

 
$
2,100,814

LIABILITIES AND EQUITY
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
Short-term borrowings (Note 6)
 
$
8,311

 
$

 
$

Accounts payable
 
237,344

 
252,301

 
190,634

Accrued liabilities (Note 7)
 
255,682

 
182,228

 
170,909

Income taxes payable
 
8,247

 
19,107

 
22,921

Total current liabilities
 
509,584

 
453,636

 
384,464

Other long-term liabilities
 
46,056

 
48,735

 
47,129

Income taxes payable
 
62,090

 
58,104

 
10,647

Deferred income taxes
 
13

 
168

 
154

Total liabilities
 
617,743

 
560,643

 
442,394

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; 69,270, 69,995, and 69,863, issued and outstanding, respectively (Note 10)
 
210

 
45,829

 
39,007

Retained earnings
 
1,669,390

 
1,585,009

 
1,604,214

Accumulated other comprehensive loss (Note 9)
 
(4,235
)
 
(8,887
)
 
(13,929
)
Total Columbia Sportswear Company shareholders' equity
 
1,665,365

 
1,621,951

 
1,629,292

Non-controlling interest (Note 4)
 
16,231

 
30,308

 
29,128

Total equity
 
1,681,596

 
1,652,259

 
1,658,420

Total liabilities and equity
 
$
2,299,339

 
$
2,212,902

 
$
2,100,814

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,
 
2018
 
2017
 
2018
 
2017
Net sales
$
795,801

 
$
747,367

 
$
1,884,728

 
$
1,690,064

Cost of sales
412,098

 
398,177

 
972,966

 
901,545

Gross profit
383,703

 
349,190

 
911,762

 
788,519

Selling, general and administrative expenses
259,267

 
230,446

 
724,827

 
643,859

Net licensing income
4,708

 
4,143

 
11,279

 
8,947

Income from operations
129,144

 
122,887

 
198,214

 
153,607

Interest income, net
2,524

 
1,035

 
7,748

 
3,240

Interest expense on note payable to related party (Note 15)

 

 

 
(429
)
Other non-operating income (expense), net
736

 
(104
)
 
372

 
203

Income before income tax
132,404

 
123,818

 
206,334

 
156,621

Income tax expense
(30,029
)
 
(32,716
)
 
(44,735
)
 
(37,950
)
Net income
102,375

 
91,102

 
161,599

 
118,671

Net income attributable to non-controlling interest
2,223

 
3,378

 
6,603

 
6,476

Net income attributable to Columbia Sportswear Company
$
100,152

 
$
87,724

 
$
154,996

 
$
112,195

Earnings per share attributable to Columbia Sportswear Company (Note 10):
 
 
 
 
 
 
 
Basic
$
1.44

 
$
1.26

 
$
2.22

 
$
1.61

Diluted
$
1.42

 
$
1.25

 
$
2.19

 
$
1.59

Cash dividends per share
$
0.22

 
$
0.18

 
$
0.66

 
$
0.54

Weighted average shares outstanding (Note 10):
 
 
 
 
 
 
 
Basic
69,589

 
69,815

 
69,895

 
69,698

Diluted
70,357

 
70,389

 
70,685

 
70,390

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,
 
2018
 
2017
 
2018
 
2017
Net income
102,375

 
$
91,102

 
161,599

 
118,671

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized holding losses on available-for-sale securities, net
(162
)
 

 
(158
)
 

Unrealized gains (losses) on derivative transactions (net of tax effects of ($1,062), $3,953, ($6,036), and $8,194, respectively)
2,896

 
(8,606
)
 
18,542

 
(16,368
)
Foreign currency translation adjustments (net of tax effects of $(39), ($20), $1,780, and ($18), respectively)
(562
)
 
8,333

 
(12,565
)
 
27,017

Other comprehensive income (loss)
2,172

 
(273
)
 
5,819

 
10,649

Comprehensive income
104,547

 
90,829

 
167,418

 
129,320

Comprehensive income attributable to non-controlling interest
2,256

 
3,738

 
7,255

 
8,437

Comprehensive income attributable to Columbia Sportswear Company
$
102,291

 
$
87,091

 
$
160,163

 
$
120,883

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,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
161,599

 
$
118,671

Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
Depreciation and amortization
43,544

 
44,660

Loss on disposal and impairment of property, plant, and equipment
1,979

 
970

Deferred income taxes
2,103

 
3,871

Stock-based compensation
10,247

 
8,277

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(125,433
)
 
(127,003
)
Inventories
(188,544
)
 
(56,576
)
Prepaid expenses and other current assets
(7,968
)
 
2,959

Other assets
(9,782
)
 
1,567

Accounts payable
(14,263
)
 
(30,716
)
Accrued liabilities
38,193

 
1,595

Income taxes payable
(7,200
)
 
15,063

Other liabilities
(2,541
)
 
4,231

Net cash used in operating activities
(98,066
)
 
(12,431
)
Cash flows from investing activities:
 
 
 
Purchases of short-term investments
(426,278
)
 
(50,697
)
Sales of short-term investments
252,727

 
32,878

Capital expenditures
(45,189
)
 
(41,791
)
Proceeds from sale of property, plant, and equipment
18

 
239

Net cash used in investing activities
(218,722
)
 
(59,371
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
36,051

 
3,374

Repayments on credit facilities
(27,740
)
 
(3,374
)
Proceeds from issuance of common stock under employee stock plans
16,508

 
16,056

Tax payments related to restricted stock unit issuances
(4,221
)
 
(3,585
)
Repurchase of common stock
(107,222
)
 
(35,542
)
Cash dividends paid
(46,160
)
 
(37,617
)
Cash dividends paid to non-controlling interest
(19,949
)
 

Payment of related party note payable

 
(14,236
)
Net cash used in financing activities
(152,733
)
 
(74,924
)
Net effect of exchange rate changes on cash
(7,500
)
 
7,142

Net decrease in cash, cash equivalents and restricted cash
(477,021
)
 
(139,584
)
Cash, cash equivalents and restricted cash, beginning of period
673,166

 
551,389

Cash, cash equivalents and restricted cash, end of period
$
196,145

 
$
411,805

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes, net of refunds
$
47,041

 
$
25,282

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

 
685

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Capital expenditures incurred but not yet paid
$
7,380

 
$
3,682

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, 2018 and 2017, the results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. The December 31, 2017 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, 2017. 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, 2018 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, 2017.
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
Except as disclosed below and in Note 3, pertaining to our adoption of new accounting pronouncements, there have been no significant changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
Recently Adopted Accounting Pronouncements:
On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that superseded the previous revenue recognition guidance (Topic 605). The updated guidance, and subsequent clarifications, collectively referred to as ASC 606, 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 adopted this standard, utilizing the modified retrospective approach, with the cumulative effect of initially applying the new standard recognized in retained earnings. Accordingly, comparative prior period information has not been restated and continues to be reported under the accounting standards in effect for those periods.
In addition, the adoption of ASC 606 had the following effects: (1) fees paid to or retained by third parties in conjunction with certain concession-based retail arrangements in our Latin America and Asia Pacific ("LAAP") region, historically comprising approximately 2% of net sales, are now recognized as a component of selling, general and administrative ("SG&A") expenses; (2) wholesale sales returns reserves, estimated chargebacks and markdowns, and other provisions for customer refunds are now presented as accrued liabilities rather than netted within accounts receivable; and (3) the estimated cost of inventory associated with sales returns reserves are now presented within other current assets rather than inventories. The Company expects the timing of revenue recognition for its significant revenue streams to remain substantially unchanged, with no material effect on net sales. See the table below for the effect of the adoption of the standard on our Condensed Consolidated Balance Sheets as of January 1, 2018.

6

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

On January 1, 2018, the Company adopted 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 previous GAAP in which the tax effects of intra-entity asset transfers were 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. The Company adopted this standard effective January 1, 2018 by applying 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. See the table below for the effect of the adoption of the standard on our Condensed Consolidated Balance Sheets as of January 1, 2018.
On January 1, 2018, the Company early-adopted 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 the assessment of hedge effectiveness. The Company utilized the required modified retrospective transition method with the cumulative effect of initially applying the new standard recognized in retained earnings. See the table below for the effect of the adoption of the standard on our Condensed Consolidated Balance Sheets as of January 1, 2018.
On January 1, 2018, the Company adopted ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which 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. The adoption of this standard did not have a material effect on the Company's financial position, results of operations or cash flows.
The following table presents the effect of the adoption of ASC 606, ASU 2016-16 and ASU 2017-12 on our Condensed Consolidated Balance Sheets as of January 1, 2018 (in thousands):
 
 
January 1, 2018
 
 
December 31, 2017
 
Adjustments due to
ASC 606
 
Adjustments due to
ASU 2016-16
 
Adjustments due to
ASU 2017-12
 
January 1, 2018
Accounts receivable, net
 
$
364,862

 
$
64,519

 
$

 
$

 
$
429,381

Inventories
 
457,927

 
(24,037
)
 

 

 
433,890

Prepaid expenses and other current assets
 
58,559

 
24,037

 
(11,814
)
 

 
70,782

Total current assets
 
1,649,497

 
64,519

 
(11,814
)
 

 
1,702,202

Deferred income taxes
 
56,804

 
(519
)
 
23,484

 

 
79,769

Total assets
 
2,212,902

 
64,000

 
11,670

 

 
2,288,572

Accrued liabilities
 
182,228

 
61,340

 

 

 
243,568

Income taxes payable
 
19,107

 
230

 

 

 
19,337

Total current liabilities
 
453,636

 
61,570

 

 

 
515,206

Total liabilities
 
560,643

 
61,570

 

 

 
622,213

Retained earnings
 
1,585,009

 
2,430

 
11,670

 
515

 
1,599,624

Accumulated other comprehensive loss
 
(8,887
)
 

 

 
(515
)
 
(9,402
)
Total liabilities and equity
 
$
2,212,902

 
$
64,000

 
$
11,670

 
$

 
$
2,288,572


7

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

In accordance with the requirements of ASC 606, the effects of adoption of this standard on our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations were as follows (in thousands):
 
 
September 30, 2018
 
 
As Reported
 
Effect of Standard
 
Balances Without Adoption of ASC 606

Accounts receivable, net
 
$
552,442

 
$
59,921

 
$
492,521

Inventories
 
617,194

 
(16,012
)
 
633,206

Prepaid expenses and other current assets
 
77,763

 
16,012

 
61,751

Total current assets
 
1,712,857

 
59,921

 
1,652,936

Total assets
 
2,299,339

 
59,921

 
2,239,418

Accrued liabilities
 
255,682

 
59,921

 
195,761

Total current liabilities
 
509,584

 
59,921

 
449,663

Total liabilities
 
617,743

 
59,921

 
557,822

Total liabilities and equity
 
$
2,299,339

 
$
59,921

 
$
2,239,418

 
 
Three Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2018
 
 
As Reported
 
Effect of Standard
 
Balances Without Adoption of ASC 606

 
As Reported
 
Effect of Standard
 
Balances Without Adoption of ASC 606

Net sales
 
$
795,801

 
$
6,913

 
$
788,888

 
$
1,884,728

 
$
22,657

 
$
1,862,071

Gross profit
 
383,703

 
6,913

 
376,790

 
911,762

 
22,657

 
889,105

Selling, general and administrative expenses

 
$
259,267

 
$
6,913

 
$
252,354

 
$
724,827

 
$
22,657

 
$
702,170

Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842), 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. Subsequently, the FASB has issued amendments to clarify the codification or to correct unintended application of the new guidance. The new standard is required to be applied using a modified retrospective approach, with two adoption methods permissible: (1) apply the leases standard to each lease that existed at the beginning of the earliest comparative period presented in the financial statements or (2) apply the guidance to each lease that had commenced as of the beginning of the reporting period in which the entity first applies the new lease standard.
The Company will adopt the new standard on January 1, 2019 and anticipates applying the second modified retrospective method noted above. The Company is continuing to evaluate the impact of the guidance, including reviewing the standard's provisions, gathering and analyzing data to support further evaluation of real estate and non-real estate leases, identifying arrangements that may contain embedded leases and assessing practical expedients. The Company is also evaluating the impact of the new accounting standard on the Company's financial statement disclosures, systems, processes and controls. Based on these efforts, the Company expects the adoption will result in a material increase in the assets and liabilities on its Consolidated Balance Sheets and is not expected to have a material effect on the results of operations or cash flows.
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. Subsequently, the FASB issued an amendment to clarify the implementation dates and items that fall within the scope of this pronouncement. This standard is effective beginning in the first quarter of 2020. The adoption of ASU 2016-13 is not expected to have a material effect on the Company's financial position, results of operations or cash flows.
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

8

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

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 June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most requirements related to classification and measurement, applies to nonemployee share-based payment arrangements. This standard is effective beginning in the first quarter of 2019, with early adoption 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.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), which clarifies certain aspects of accounting for implementation costs incurred in a cloud computing arrangement ("CCA") that is a service contract. Under the ASU, an entity would expense costs incurred in the preliminary-project and post-implementation-operation stages. The entity would also capitalize certain costs incurred during the application-development stage, as well as certain costs related to enhancements. The ASU does not change the accounting for the service component of a CCA. This standard is effective beginning in the first quarter of 2020, with early adoption permitted. The Company is currently evaluating the impact this accounting standard will have on the Company's financial position, results of operations or cash flows.
NOTE 3—REVENUES
Disaggregated Revenue
As disclosed below in Note 11, the Company has aggregated its operating segments into four geographic segments: (1) United States, (2) LAAP, (3) Europe, Middle East and Africa ("EMEA") and (4) Canada, which are reflective of the Company's internal organization, management and oversight structure. The following tables disaggregate our operating segment revenue by product category and sales channel (in thousands), which we believe provides a meaningful depiction how the nature, timing, and uncertainty of revenues are affected by economic factors:
 
 
Three Months Ended September 30, 2018
 
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category revenues
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
406,474

 
$
92,869

 
$
63,950

 
$
54,294

 
$
617,587

Footwear
 
89,687

 
25,510

 
36,401

 
26,616

 
178,214

Total
 
$
496,161

 
$
118,379

 
$
100,351

 
$
80,910

 
$
795,801

Sales channel revenues
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
320,102

 
$
67,154

 
$
87,434

 
$
70,099

 
$
544,789

Direct-to-consumer
 
176,059

 
51,225

 
12,917

 
10,811

 
251,012

Total
 
$
496,161

 
$
118,379

 
$
100,351

 
$
80,910

 
$
795,801

 
 
Three Months Ended September 30, 2017
 
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category revenues
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
379,387

 
$
91,843

 
$
55,172

 
$
53,518

 
$
579,920

Footwear
 
76,583

 
31,153

 
32,350

 
27,361

 
167,447

Total
 
$
455,970

 
$
122,996

 
$
87,522

 
$
80,879

 
$
747,367

Sales channel revenues
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
310,607

 
$
82,148

 
$
78,126

 
$
72,875

 
$
543,756

Direct-to-consumer
 
145,363

 
40,848

 
9,396

 
8,004

 
203,611

Total
 
$
455,970

 
$
122,996

 
$
87,522

 
$
80,879

 
$
747,367


9

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

 
 
Nine Months Ended September 30, 2018
 
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category revenues
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
970,194

 
$
263,849

 
$
168,306

 
$
99,854

 
$
1,502,203

Footwear
 
168,981

 
86,983

 
88,806

 
37,755

 
382,525

Total
 
$
1,139,175

 
$
350,832

 
$
257,112

 
$
137,609

 
$
1,884,728

Sales channel revenues
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
636,108

 
$
181,487

 
$
223,018

 
$
109,324

 
$
1,149,937

Direct-to-consumer
 
503,067

 
169,345

 
34,094

 
28,285

 
734,791

Total
 
$
1,139,175

 
$
350,832

 
$
257,112

 
$
137,609

 
$
1,884,728

 
 
Nine Months Ended September 30, 2017
 
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category revenues
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
882,224

 
$
237,025

 
$
135,868

 
$
94,574

 
$
1,349,691

Footwear
 
145,126

 
83,782

 
74,380

 
37,085

 
340,373

Total
 
$
1,027,350

 
$
320,807

 
$
210,248

 
$
131,659

 
$
1,690,064

Sales channel revenues
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
601,789

 
$
184,912

 
$
186,745

 
$
110,720

 
$
1,084,166

Direct-to-consumer
 
425,561

 
135,895

 
23,503

 
20,939

 
605,898

Total
 
$
1,027,350

 
$
320,807

 
$
210,248

 
$
131,659

 
$
1,690,064

Accounting Policies
Revenues are recognized when our performance obligations are satisfied as evidenced by transfer of control of promised goods to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Within our wholesale channel, control generally transfers to the customer upon shipment to, or upon receipt by, the customer depending on the terms of sale with the customer. Within our direct-to-consumer ("DTC") channel, control generally transfers to the customer at the time of sale within our retail stores and concession-based arrangements and upon shipment to the customer with respect to e-commerce transactions.
The amount of consideration we receive and revenue we recognize across both wholesale and DTC channels varies with changes in sales returns and other accommodations and incentives we offer to our customers. When we give our customers the right to return products or provide other accommodations such as chargebacks and markdowns, we estimate the expected returns and claims based on historical rates as well as events and circumstances that indicate changes to historical rates of product returns and claims. We adjust our estimates of revenue at the earlier of when the most likely amount of consideration we expect to receive changes or when the amount of consideration becomes fixed.
Licensing income, which is presented separately as Net licensing income on the Condensed Consolidated Statements of Operations and represents less than 1% of total revenue, is recognized over time based on the greater of contractual minimum royalty guarantees and actual, or estimated, sales of licensed products by our licensees.
We expense sales commissions when incurred, which is generally at the time of sale, because the amortization period would have been one year or less. These costs are recorded within SG&A expenses.
We treat shipping and handling activities as fulfillment costs, and as such recognize the costs for these activities at the time related revenue is recognized. The majority of these costs are recorded as SG&A expenses, and the direct costs associated with shipping goods to customers and consumers are recorded as Costs of goods sold. Shipping and handling fees billed to customers are recorded as revenue.
Revenue recognized from contracts with customers is recorded net of sales taxes, value added taxes, or similar taxes that are collected on behalf of local taxing authorities.
Performance Obligations
For the three and nine months ended September 30, 2018, revenue recognized from performance obligations related to prior periods was not material. Revenue expected to be recognized in any future period related to remaining performance obligations is not material.

10

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

Contract Balances
As of September 30, 2018, contract liabilities recorded on the Condensed Consolidated Balance Sheets, which consisted of obligations associated with our gift card and customer loyalty programs, were not material.
NOTE 4—NON-CONTROLLING INTEREST
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, 2018 and 2017. 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, 2018 and 2017, and December 31, 2017.
In September 2018, the Company and Swire entered into an Equity Interest Transfer Agreement ("EITA"), in which the Company will buy out the 40% non-controlling interest in the joint venture. The buyout is subject to various terms and conditions, including regulatory approval in China and is expected to be completed in early 2019. As part of the buyout arrangement, the Company has placed approximately $13,970,000 in an escrow account as a portion of the funds needed to complete the buyout in 2019. These funds are included as Restricted cash in the Condensed Consolidated Balance Sheets at September 30, 2018. In addition, the China joint venture declared a dividend on June 14, 2018 of which Swire's share was approximately RMB136,539,000 (approximately US$21,332,000 at the date of declaration). The renminbi denominated dividend was paid in full in September 2018 and equated to approximately $19,949,000 on the date of payment.
The following table presents the changes in Columbia Sportswear Company shareholders' equity and non-controlling interest for the nine months ended September 30, 2018 (in thousands, except per share amounts):
 
 
Columbia Sportswear Company
 
Non-Controlling Interest
 
Total
Balance at December 31, 2017
 
$
1,621,951

 
$
30,308

 
$
1,652,259

Net income
 
154,996

 
6,603

 
161,599

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Unrealized holding losses on available-for-sale securities
 
(158
)
 

 
(158
)
Derivative holding gains
 
17,472

 
1,070

 
18,542

Foreign currency translation adjustments
 
(12,147
)
 
(418
)
 
(12,565
)
Cash dividends ($0.66 per share)
 
(46,160
)
 

 
(46,160
)
Dividends to non-controlling interest
 

 
(21,332
)
 
(21,332
)
Issuance of common stock under employee stock plans, net of tax
 
12,286

 

 
12,286

Adoption of new accounting pronouncements (Note 2)
 
14,100

 

 
14,100

Stock-based compensation expense
 
10,247

 

 
10,247

Repurchase of common stock
 
(107,222
)
 

 
(107,222
)
Balance at September 30, 2018
 
$
1,665,365

 
$
16,231

 
$
1,681,596

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):

11

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

 
 
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

NOTE 5—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 evaluated for impairment on an annual basis during the fourth quarter of our fiscal year or earlier if events or circumstances indicate the carrying value may be impaired.
Intangible Assets
The following table summarizes the Company's identifiable intangible assets (in thousands):
 
September 30,
2018
 
December 31,
2017
 
September 30,
2017
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
(11,649
)
 
(10,651
)
 
(10,319
)
Customer relationships
(13,650
)
 
(12,413
)
 
(12,000
)
Total accumulated amortization
(25,299
)
 
(23,064
)
 
(22,319
)
Net carrying amount
11,899

 
14,134

 
14,879

Intangible assets not subject to amortization
115,421

 
115,421

 
115,421

Intangible assets, net
$
127,320

 
$
129,555

 
$
130,300

Amortization expense for intangible assets subject to amortization was approximately $745,000 for the three months ended September 30, 2018 and 2017, respectively, and was approximately $2,235,000 and $3,138,000 for the nine months ended September 30, 2018 and 2017, respectively.
Annual amortization expense is estimated to be as follows for the years 2018 through 2022 (in thousands):
2018
$
2,980

2019
2,980

2020
2,537

2021
1,650

2022
1,650


12

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

NOTE 6—SHORT-TERM BORROWINGS AND CREDIT LINES
In the third quarter of 2018, the Company's China joint venture established an unsecured and uncommitted line of credit guaranteed by the Company providing for borrowings of advances or overdrafts up to a maximum of US$20,000,000 (RMB137,806,000), and is available at September 30, 2018. Once the line is drawn upon, the revolving line accrues interest on advances of RMB based on the People's Bank of China ("PBOC") base rate, advances of USD based on LIBOR +1.8% per annum or overdrafts of RMB based on 110% of the PBOC base rate. As of September 30, 2018, the balance outstanding on an advance of RMB was approximately RMB57,266,000 (approximately US$8,311,000).
Except as disclosed above, there have been no significant changes to the Company's short-term borrowing and credit lines as described in Note 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
NOTE 7—PRODUCT WARRANTY
Some of the Company's products carry assurance-type limited warranty provisions for defects in quality and workmanship. A warranty reserve is established at the time of sale to cover estimated costs based on the Company's history of warranty repairs, replacements and refunds and is recorded in cost of sales. 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,
 
2018
 
2017
 
2018
 
2017
Balance at beginning of period
$
11,857

 
$
11,213

 
$
12,339

 
$
11,455

Provision for warranty claims
555

 
1,373

 
2,997

 
3,304

Warranty claims
(378
)
 
(877
)
 
(3,088
)
 
(3,365
)
Other
50

 
108

 
(164
)
 
423

Balance at end of period
$
12,084

 
$
11,817

 
$
12,084

 
$
11,817

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 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,
 
2018
 
2017
 
2018
 
2017
Stock options
$
1,277

 
$
834

 
$
3,571

 
$
2,843

Restricted stock units
2,371

 
1,724

 
6,676

 
5,434

Total
$
3,648

 
$
2,558

 
$
10,247

 
$
8,277

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:

13

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Expected option term
4.30 years
 
4.35 years
 
4.49 years
 
4.54 years
Expected stock price volatility
27.75%
 
28.79%
 
28.41%
 
28.91%
Risk-free interest rate
2.81%
 
1.68%
 
2.47%
 
1.72%
Expected annual dividend yield
1.01%
 
1.23%
 
1.15%
 
1.30%
Weighted average grant date fair value
$21.37
 
$13.47
 
$18.80
 
$13.03
During the nine months ended September 30, 2018 and 2017, the Company granted a total of 397,667 and 528,477 stock options, respectively. At September 30, 2018, unrecognized costs related to outstanding stock options totaled approximately $9,828,000, 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, 2018 are expected to be recognized over a weighted average period of 2.47 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,
 
2018
 
2017
 
2018
 
2017
Vesting period
3.51 years
 
4.03 years
 
3.88 years
 
3.87 years
Expected annual dividend yield
1.01%
 
1.23%
 
1.15%
 
1.30%
Estimated average grant date fair value per restricted stock unit
$84.32
 
$55.61
 
$73.10
 
$52.65
During the nine months ended September 30, 2018 and 2017, the Company granted 178,761 and 255,032 restricted stock units, respectively. At September 30, 2018, unrecognized costs related to outstanding restricted stock units totaled approximately $17,905,000, 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, 2018 are expected to be recognized over a weighted average period of 2.45 years.
NOTE 9—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, 2018 (in thousands):
 
Unrealized losses on available-for-sale securities
 
Unrealized holding gains on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at June 30, 2018
$

 
$
3,889

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

 
(51
)
 
328

Amounts reclassified from other comprehensive income

 
1,811

 

 
1,811

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

 
(51
)
 
2,139

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

 
$
(10,314
)
 
$
(4,235
)

14

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 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 (loss) income before reclassifications

 
(7,391
)
 
7,793

 
402

Amounts reclassified from other comprehensive income

 
(1,035
)
 

 
(1,035
)
Net other comprehensive (loss) income 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 nine months ended September 30, 2018 (in thousands):
 
Unrealized losses on available-for-sale securities
 
Unrealized holding (losses) gains on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2017
$
(4
)
 
$
(10,716
)
 
$
1,833

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

 
(12,147
)
 
3,783

Amounts reclassified from other comprehensive income

 
1,384

 

 
1,384

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

 
(12,147
)
 
5,167

Adoption of ASU 2017-12 (Note 2)

 
(515
)
 

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

 
$
(10,314
)
 
$
(4,235
)
The following table sets forth the changes in accumulated other comprehensive loss attributable to Columbia Sportswear Company, net of tax, for the nine months ended September 30, 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 (loss) income before reclassifications

 
(14,366
)
 
24,681

 
10,315

Amounts reclassified from other comprehensive income

 
(1,627
)
 

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

 
(15,993
)
 
24,681

 
8,688

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

15

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

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,
 
2018
 
2017
 
2018
 
2017
Weighted average shares of common stock outstanding, used in computing basic earnings per share
69,589

 
69,815

 
69,895

 
69,698

Effect of dilutive stock options and restricted stock units
768

 
574

 
790

 
692

Weighted average shares of common stock outstanding, used in computing diluted earnings per share
70,357

 
70,389

 
70,685

 
70,390

Earnings per share of common stock attributable to Columbia Sportswear Company:
 
 
 
 
 
 
 
Basic
$
1.44

 
$
1.26

 
$
2.22

 
$
1.61

Diluted
$
1.42

 
$
1.25

 
$
2.19

 
$
1.59

 
Stock options and service-based restricted stock units representing 216,386 and 931,524 shares of common stock for the three months ended September 30, 2018 and 2017, 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. Stock options and service-based restricted stock units representing 325,410 and 887,508 shares of common stock for the nine months ended September 30, 2018 and 2017, 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 23,971 and 36,589 shares of common stock for the three months ended September 30, 2018 and 2017, respectively, and 23,971 and 43,292 shares of common stock for the nine months ended September 30, 2018 and 2017, 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, 2018, the Company's Board of Directors has authorized the repurchase of $900,000,000 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, 2018, the Company had repurchased 22,918,221 shares under this program at an aggregate purchase price of approximately $669,285,000. During the three and nine months ended September 30, 2018, the Company repurchased 759,896 and 1,260,186 shares of the Company's common stock at an aggregate purchase price of approximately $67,116,000 and $107,222,000, respectively. The Company did not repurchase shares of the Company's common stock for the three months ended September 30, 2017. 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 approximately $35,542,000.
NOTE 11—SEGMENT INFORMATION
The Company has aggregated its operating segments into four geographic segments: (1) United States, (2) LAAP, (3) 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.

16

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

The geographic distribution of the Company's Net sales and Income (loss) from operations in the Condensed Consolidated Statements of Operations are summarized in the following table (in thousands) for the three and nine months ended September 30, 2018 and 2017.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net sales to unrelated entities:
 
 
 
 
 
 
 
United States
$
496,161

 
$
455,970

 
$
1,139,175

 
$
1,027,350

LAAP
118,379

 
122,996

 
350,832

 
320,807

EMEA
100,351

 
87,522

 
257,112

 
210,248

Canada
80,910

 
80,879

 
137,609

 
131,659

 
$
795,801

 
$
747,367

 
$
1,884,728

 
$
1,690,064

Segment income from operations:
 
 
 
 
 
 
 
United States
$
123,522

 
$
117,901

 
$
237,341

 
$
202,857

LAAP
15,992

 
21,583

 
45,400

 
44,894

EMEA
15,130

 
10,212

 
27,687

 
11,688

Canada
17,611

 
18,971

 
21,606

 
22,235

Total segment income from operations
172,255

 
168,667

 
332,034

 
281,674

Unallocated corporate expenses
(43,111
)
 
(45,780
)
 
(133,820
)
 
(128,067
)
Interest income, net
2,524

 
1,035

 
7,748

 
3,240

Interest expense on note payable to related party

 

 

 
(429
)
Other non-operating income (expense)
736

 
(104
)
 
372

 
203

Income before income taxes
$
132,404

 
$
123,818

 
$
206,334

 
$
156,621

Concentrations
No single customer accounted for 10% or more of Accounts receivable, net of allowance as of September 30, 2018 and 2017. The Company had one customer that accounted for 12.3% of Accounts receivable, net of allowance as of December 31, 2017. No single customer accounted for 10% or more of Net sales in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 or 2017, or for the year ended December 31, 2017.
NOTE 12—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, forward points are excluded from the determination of hedge effectiveness and are 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 on a straight-line basis over the life of the contract. In each accounting period, any difference between the change in fair value of the forward points and the amount recognized in earnings on a straight-line basis is recognized in Other comprehensive income in the Condensed Consolidated Statements of Comprehensive Income.  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 in the Condensed Consolidated Statements of Operations. Hedge ineffectiveness was not material during the three and nine months ended September 30, 2018 and 2017.
 
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

17

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

U.S. dollars, euros, Canadian dollars, yen, won, or renminbi as their functional currency. Non-functional currency denominated monetary assets and liabilities consist primarily of cash and cash equivalents, short-term investments, receivables, payables, deferred income taxes, and intercompany loans. The gains and losses generated on these currency forward contracts not formally designated as hedges are expected to be largely offset in other non-operating 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,
2018
 
December 31,
2017
 
September 30,
2017
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
$
434,738

 
$
448,448

 
$
390,500

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
289,772

 
231,161

 
181,045

At September 30, 2018, approximately $3,247,000 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 in the Condensed Consolidated Statements of Comprehensive Income are dependent on U.S. dollar exchange rates in effect against the euro, renminbi, Canadian dollar, and yen when outstanding derivative contracts mature.
At September 30, 2018, the Company's derivative contracts had a remaining maturity of less than three 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 $5,000,000 at September 30, 2018. 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,
2018
 
December 31,
2017
 
September 30,
2017
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
$
7,262

 
$
1,648

 
$
1,930

Currency forward contracts
 
Other non-current assets
 
7,963

 
335

 
509

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
584

 
9,336

 
10,152

Currency forward contracts
 
Other long-term liabilities
 

 
3,820

 
3,048

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
865

 
683

 
959

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
154

 
1,229

 
407



18

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,
 
 
2018
 
2017
 
2018
 
2017
Currency Forward and Option Contracts:
 
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income or loss, net of tax
 
$
866

 
$
(7,535
)
 
$
16,493

 
$
(14,510
)
Gain reclassified from accumulated other comprehensive income or loss to income for the effective portion
Net sales
 
17

 

 
41

 
144

(Loss) gain reclassified from accumulated other comprehensive income or loss to income for the effective portion
Cost of sales
 
(4,192
)
 
1,549

 
(7,796
)
 
2,500

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 recognized in income for amount excluded from effectiveness testing and for the ineffective portion
Net sales
 
4

 

 
16

 
5

Gain recognized in income for amount excluded from effectiveness testing and for the ineffective portion
Cost of sales
 
1,637

 
1,203

 
5,458

 
2,489

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) recognized in income
Other non-operating expense
 
372

 
(634
)
 
2,606

 
(4,045
)
NOTE 13—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, 2018, inventory purchase obligations were approximately $333,670,000.
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 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.

19

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

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
70,573

 
$

 
$

 
$
70,573

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

 
267,861

 

 
267,861

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

 

 

 
1,452

Other current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)

 
8,127

 

 
8,127

Other non-current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)

 
7,963

 

 
7,963

Mutual fund shares
9,950

 

 

 
9,950

Total assets measured at fair value
$
81,975

 
$
283,951

 
$

 
$
365,926

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

 
$
738

 
$

 
$
738

Total liabilities measured at fair value
$

 
$
738

 
$

 
$
738


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

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
282,860

 
$

 
$

 
$
282,860

Time deposits
52,808

 

 

 
52,808

U.S. Government treasury bills

 
4,995

 

 
4,995

U.S. Government-backed municipal bonds

 
25,338

 

 
25,338

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

 
19,963

 

 
19,963

U.S. Government-backed municipal bonds

 
73,582

 

 
73,582

Other short-term investments:
 
 
 
 
 
 
 
Mutual fund shares
1,438

 

 

 
1,438

Other current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)

 
2,331

 

 
2,331

Non-current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)

 
335

 

 
335

Mutual fund shares
9,319

 

 

 
9,319

Total assets measured at fair value
$
346,425

 
$
126,544

 
$

 
$
472,969

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

 
$
10,565

 
$

 
$
10,565

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

 
3,820

 

 
3,820

Total liabilities measured at fair value
$

 
$
14,385

 
$

 
$
14,385


20

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


(1) Investments have remaining maturities of less than one year.
Assets and liabilities measured at fair value on a recurring basis as of September 30, 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 funds shares
1,641

 

 

 
1,641

Other current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)

 
2,889

 

 
2,889

Other non-current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)

 
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 12)
$

 
$
10,559

 
$

 
$
10,559

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

 
3,048

 

 
3,048

Total liabilities measured at fair value
$

 
$
13,607

 
$

 
$
13,607


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, 2018, December 31, 2017 or September 30, 2017.
NOTE 15—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 enterprise resource planning ("ERP") platform in the second quarter of 2017. The joint venture incurred service fees, valued under the TSAs at Swire's cost, of approximately $72,000 and $90,000 during the three months ended September 30, 2018 and 2017, respectively, and approximately $216,000 and $935,000 during the nine months ended September 30, 2018 and 2017, respectively. These fees are included in SG&A expenses in the Condensed Consolidated Statements of Operations.
As of September 30, 2018 and 2017, and December 31, 2017, net payables to Swire for service fees, interest expense and miscellaneous expenses totaled approximately $83,000, $87,000 and $89,000, 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.

21

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

The China joint venture declared a cash dividend of approximately RMB 341,347,000 (approximately US$53,330,000) in June 2018 to stockholders of record as of June 14, 2018 and paid such dividend in the third quarter of 2018. The Company's dividend share of approximately $31,998,000 was received in the third quarter and was eliminated in consolidation. In addition, in September 2018, the Company and Swire entered into an Equity Interest Transfer Agreement ("EITA"), in which the Company commits to buy out the 40% non-controlling interest in the joint venture. The buyout is subject to various terms and conditions, including regulatory approval in China and is expected to be completed in early 2019. As part of the buyout arrangement, the Company has placed approximately $13,970,000 in an escrow account as a portion of the funds needed to complete the buyout in 2019.

22


Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements include any statements related to our expectations regarding future performance or market position, including any statements regarding anticipated sales, gross margins and operating margins across markets, profitability and the effect of specified factors on profitability for 2018, expenses, sourcing costs, effects of unseasonable weather on our results of operations, inventory levels, investments in our business and implementations of our strategic priorities, investments in and implementation of our information technology and e-commerce systems, our operating model assessment referred to as Project CONNECT, intellectual property disputes, our DTC channels and other capital expenditures, including planned store additions, access to raw materials and factory capacity, financing and working capital requirements and resources, ability to meet our liquidity needs, effects of the Tax Cuts and Jobs Act ("TCJA"), income tax rates and pre-tax income, our intended buyout of the 40% non-controlling interest in our China joint venture, the effects of our adoption of recent accounting pronouncements, 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 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 DTC channels and independent international distributors. In addition, we license some of our trademarks across a range of apparel, footwear, accessories, equipment, and home products.
The popularity of outdoor activities and active lifestyles, changes in consumer buying patterns and behaviors, changing design trends, consumer adoption of innovative performance technologies, variations in seasonal weather, and the availability and desirability of competitor alternatives affect consumer desire for our products. Therefore, we seek to drive, anticipate and respond to trends and shifts in consumer preferences by developing new products with innovative performance features and designs, creating persuasive and memorable marketing communications to generate consumer awareness, demand and retention, and adjusting the mix, price points and selling channels of available product offerings. Failure to anticipate or respond to consumer needs and preferences in a timely and adequate manner could have a material adverse effect on our sales and profitability.
Seasonality and Variability of Business
Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. In 2017, approximately 60% of our net sales and approximately 90% of our operating income were realized in the second half of the year, illustrating our dependence upon sales results in the second half of the year, as well as the less seasonal nature of our operating costs. The expansion of our DTC businesses has increased the proportion of sales, profits and cash flows that we generate in the second half of the year.
We generally solicit orders from wholesale customers and independent international distributors for the fall and spring seasons based on seasonal ordering deadlines that we establish to aid our efforts to plan manufacturing volumes to meet demand. We typically ship the majority of our advance spring season orders to customers beginning in January and continuing through June. Similarly, we typically ship the majority of our advance fall season orders to customers beginning in July and continuing through December. Generally, orders are subject to cancellation prior to the date of shipment.
Results of operations in any period should not be considered indicative of the results to be expected for any future period, particularly in light of persistent volatility in global economic and geopolitical conditions and volatility of foreign currency exchange rates which, when combined with seasonal weather patterns and inflationary or volatile sourcing costs, reduce the predictability of our business.
Business Outlook
The global business climate presents us with a great deal of uncertainty, making it difficult to predict future results. Consistent with the historical seasonality of the business, we anticipate 2018 profitability to be heavily concentrated in the second half of the year. Factors that could significantly affect our full year 2018 financial results include:
Continued growth, performance and profitability of our global DTC operations;
Unseasonable weather conditions or other unforeseen factors affecting consumer demand and the resulting effect on cancellations of advance wholesale orders, sales returns, wholesale customer accommodations, replenishment orders and reorders, DTC sales, changes in mix and volume of full price sales in relation to promotional and closeout product sales, and suppressed wholesale and end-consumer demand in subsequent seasons;

23


Industry trends affecting consumer traffic and spending in brick and mortar retail channels, which have created uncertainty regarding the long-term financial health of certain of our U.S. wholesale customers;
The effects of changes in foreign currency exchange rates on sales, gross margin, operating income, and net income;
Difficult economic, geopolitical and competitive environments in certain key markets globally;
Continued sales growth and profitability contributed by our LAAP region businesses, in particular China;
Performance of our Mountain Hardwear brand as we work to re-invigorate the brand in the marketplace;
The financial impact of activities associated with and resulting from Project CONNECT;
Further refinement of our 2017 TCJA provisional income tax estimates;
Impacts of changes in and further changes to tariffs or international trade policy;
Accelerated investment in and execution of demand creation, DTC infrastructure and other strategic priorities; and
The implementation of our global DTC platform and continued optimization of our ERP platform.
These factors and others may have a material effect on our financial condition, results of operations or cash flows, particularly with respect to quarterly comparisons.
Strategic Priorities
As part of our commitment to driving sustainable and profitable growth and relentless improvement, we remain focused on investment in our strategic priorities, including:
Driving brand awareness and sales growth through increased, focused demand creation investments;
Enhancing consumer experience and digital capabilities in all of our channels and geographies;
Expanding and improving global DTC operations with supporting processes and systems; and
Investing in our people and optimizing our organization across our portfolio of brands.
Ultimately, we expect our investments to accelerate market share capture across our brand portfolio, expand gross margin, improve SG&A expense efficiency, and drive improved operating margin.
Ongoing Global ERP Implementation
With the implementation of our global ERP system in our Europe-direct business in June 2018, we have now substantially completed the major phases of this global rollout.
Consumer-First Platform ("C1")
During the second quarter of 2017, we commenced investment in our C1 initiative, which encompasses the global retail platform and Information Technology ("IT") systems infrastructure to support the growth and continued development of our omnichannel capabilities. The objective of this initiative is consistent with our strategic priorities to deliver an enhanced consumer experience, and to modernize and standardize our processes and systems to enable us to better anticipate and deliver against the needs of our consumers. This multi-year global initiative is currently in the build phase, targeting regional implementations beginning with North America in the first half of 2019.
Experience First ("X1")
During the first quarter of 2018, we commenced investment in our X1 initiative, which is designed to enhance our e-commerce systems to take advantage of the changes in consumer browsing and purchasing behavior towards mobile devices. It encompasses a reimplementation of our e-commerce platforms to offer improved search, browsing, checkout, loyalty, and customer care experiences for mobile shoppers. We are targeting regional implementations beginning with North America and EMEA in the first half of 2019. The project will be fully integrated with our C1 initiative and will be implemented across all of our brands.
Project CONNECT
During the second half of 2017, the Company initiated Project CONNECT, aimed at aligning our resources to accelerate execution on our strategic priorities and includes initiatives to drive revenue, capture cost of sales efficiencies, generate SG&A expense savings, and improve our marketing effectiveness. Project CONNECT initiatives are now part of our sustained go forward operational strategy.

24


We are realizing some financial benefits from these initiatives in 2018 and remain confident that we can generate more meaningful financial value capture in 2019 and beyond. As these improvements are realized, we intend to reallocate resources to our strategic priorities, including incremental demand creation spending and other investments to drive growth across our brands and distribution channels.
Results of Operations
The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying Notes that appear in Part I, Item 1 - Financial Statements of this quarterly report. All references to quarters relate to the quarter ended September 30 of the particular year.
To supplement financial information reported in accordance with accounting principles generally accepted in the United States ("GAAP"), we disclose constant-currency net sales information, which is a non-GAAP financial measure, to provide a framework to assess how the business performed excluding the effects of changes in the exchange rates used to translate net sales generated in foreign currencies into U.S. dollars. Management believes that this non-GAAP financial measure reflects an additional and useful way of viewing an aspect of our operations that, when viewed in conjunction with our GAAP results, provides a more comprehensive understanding of our business and operations. In particular, investors may find the non-GAAP measures useful by reviewing our net sales results without the volatility in foreign currency exchange rates.  This non-GAAP financial measure also facilitates management's internal comparisons to our historical net sales results and comparisons to competitors' net sales results. Constant-currency financial measures should be viewed in addition to, and not in lieu of or superior to, our financial measures calculated in accordance with GAAP. The following discussion includes references to constant-currency net sales, and we provide a reconciliation of this non-GAAP measure to the most directly comparable financial measure calculated in accordance with GAAP below.
Additionally, we reference certain other non-GAAP financial measures in our third quarter and first nine months of 2018 financial results and updated full year 2018 financial outlook earnings release, located in the investor relations section of our website at http://investor.columbia.com/results.cfm,which information is not part of this Quarterly Report on Form 10-Q. A reconciliation of these non-GAAP financial measures to comparable measures reported under GAAP can be found in the supplemental financial tables that accompany our earnings release, along with an explanation of management’s rationale for referencing these non-GAAP financial measures.
Highlights of the Third Quarter of 2018

Net sales for the third quarter of 2018 increased $48.4 million, or 6%, to $795.8 million from $747.4 million in the third quarter of 2017. With the adoption of ASC 606, certain concession fees within the LAAP region that were previously netted against net sales are now reported as SG&A expense beginning January 1, 2018. The increase in third quarter 2018 net sales and SG&A expenses include $6.9 million of incremental net sales and corresponding expenses resulting from this change in classification.
Net income attributable to Columbia Sportswear Company was $100.2 million, or $1.42 per diluted share, for the third quarter of 2018, including a benefit from the recovery of an insurance claim ("Insurance Recovery") of $3.3 million, net of tax, or $0.04 per diluted share, incremental tax expense related to the TCJA of $1.5 million, and Project CONNECT program expenses and discrete costs of approximately $0.9 million, net of tax, or $0.01 per diluted share, compared to a net income of $87.7 million, or $1.25 per diluted share, in the third quarter of 2017, which included Project CONNECT program expenses and discrete costs of approximately $2.1 million, net of tax, or $0.03 per diluted share.
We paid a quarterly cash dividend of $0.22 per share, or $15.3 million, in the third quarter of 2018.

25


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,
 
2018
 
2017
 
2018
 
2017
Net sales
100.0

 
100.0

 
100.0

 
100.0

Cost of sales
51.8

 
53.3

 
51.6

 
53.3

Gross profit
48.2

 
46.7

 
48.4

 
46.7

Selling, general and administrative expenses
32.6

 
30.8

 
38.5

 
38.1

Net licensing income
0.6

 
0.5

 
0.6

 
0.5

Income from operations
16.2

 
16.4

 
10.5

 
9.1

Interest income, net
0.3

 
0.2

 
0.4

 
0.2

Other non-operating income (expense), net
0.1

 

 

 

Income before income tax
16.6

 
16.6

 
10.9

 
9.3

Income tax expense
(3.7
)
 
(4.4
)
 
(2.3
)
 
(2.3
)
Net income
12.9

 
12.2

 
8.6

 
7.0

Net income attributable to non-controlling interest
0.3

 
0.5

 
0.4

 
0.4

Net income attributable to Columbia Sportswear Company
12.6
 %
 
11.7
 %
 
8.2
 %
 
6.6
 %
Quarter Ended September 30, 2018 Compared to Quarter Ended September 30, 2017
Net Sales: Consolidated net sales increased $48.4 million, or 6% (7% constant-currency), to $795.8 million for the third quarter of 2018, from $747.4 million for the comparable period in 2017. With the adoption of ASC 606, certain concession fees within the LAAP region that were previously netted against net sales are now reported as SG&A expense beginning January 1, 2018. The increases in third quarter 2018 net sales and SG&A expenses include $6.9 million of incremental net sales and corresponding expenses resulting from this change in classification.
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
 
2018
 
Translation
 
2018(1)
 
2017
 
% Change
 
% Change(1)
 
(In millions, except for percentage changes)
United States
$
496.2

 
$

 
$
496.2

 
$
456.0

 
9%
 
9%
LAAP
118.4

 
0.7

 
119.1

 
123.0

 
(4)%
 
(3)%
EMEA
100.3

 
0.7

 
101.0

 
87.5

 
15%
 
15%
Canada
80.9

 
2.7

 
83.6

 
80.9

 
—%
 
3%
 
$
795.8

 
$
4.1

 
$
799.9

 
$
747.4

 
6%
 
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 increased $40.2 million, or 9%, to $496.2 million for the third quarter of 2018 from $456.0 million for the comparable period in 2017. The U.S. net sales increase was driven by our DTC and wholesale businesses. The net sales increase in our DTC business was led by increased net sales from our retail stores, followed by increased net sales from our e-commerce business. At September 30, 2018, we operated 135 retail stores, compared with 127 retail stores at September 30, 2017. The net sales increase in our wholesale business was driven by net sales increases primarily across Columbia and SOREL brands, reflecting increased shipments of Fall 2018 advance orders, partially offset by lower closeout product net sales for the Mountain Hardwear brand.

26


Net sales in the LAAP region decreased $4.6 million, or 4% (3% constant-currency), to $118.4 million for the third quarter of 2018, from $123.0 million for the comparable period in 2017. The net sales decrease in the LAAP region was driven by decreased net sales in the LAAP distributor and China businesses. Net sales decreased in our LAAP distributor business resulted from a greater portion of Fall 2018 shipments falling into the second quarter of 2018 compared to a larger portion of Fall 2017 shipments occurring in the third quarter of 2017. Net sales decreased in China as a result of a decrease in net sales to a value channel customer and, to a lesser extent, decreased sales in our DTC business. As described in Note 2 to the Condensed Consolidated Financial Statements, the net sales decrease in the LAAP region included an offsetting net sales increase of $6.9 million associated with the adoption of ASC 606.
Net sales in the EMEA region increased $12.8 million, or 15%, to $100.3 million for the third quarter of 2018 from $87.5 million for the comparable period in 2017. The net sales increase in the EMEA region was led by our Europe-direct business. The net sales increase in our Europe-direct business was driven by increased net sales from the wholesale business, followed by our DTC business.
Net sales in Canada of $80.9 million for the third quarter of 2018 were flat (increase of 3% constant-currency) compared to the same period in 2017. The constant-currency net sales increase in Canada was driven by a net sales increase in our DTC business.
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
 
2018
 
Translation
 
2018
 
2017
 
% Change
 
% Change
 
(In millions, except for percentage changes)
Columbia
$
640.9

 
$
3.0

 
$
643.9

 
$
598.3

 
7%
 
8%
SOREL
91.2

 
1.0

 
92.2

 
81.7

 
12%
 
13%
prAna
39.9

 

 
39.9

 
36.8

 
8%
 
8%
Mountain Hardwear
23.0

 
0.1

 
23.1

 
29.4

 
(22)%
 
(21)%
Other
0.8

 

 
0.8

 
1.2

 
(33)%
 
(33)%
 
$
795.8

 
$
4.1

 
$
799.9

 
$
747.4

 
6%
 
7%
Columbia brand net sales increased $42.6 million, or 7% (8% constant-currency), to $640.9 million for the third quarter of 2018 from $598.3 million for the comparable period in 2017. The net sales increase was led by the U.S. DTC business, followed by the U.S. wholesale, Europe-direct, Korea, Japan, and Canada businesses, offset by net sales decreases in our LAAP distributors and China businesses. Results included increased net sales of apparel, accessories and equipment, as well as footwear.
SOREL brand net sales increased $9.5 million, or 12% (13% constant-currency), to $91.2 million for the third quarter of 2018 from $81.7 million for the comparable period in 2017, driven by net sales increases in our U.S. wholesale, Europe-direct and U.S. DTC businesses.
prAna brand net sales increased $3.1 million, or 8%, to $39.9 million for the third quarter of 2018 from $36.8 million for the comparable period in 2017, primarily driven by increased net sales in the U.S. DTC business.
Mountain Hardwear brand net sales decreased $6.4 million, or 22% (21% constant-currency), to $23.0 million for the third quarter of 2018 from $29.4 million for the comparable period in 2017, driven by a significant reduction in close-out sales compared to the third quarter of 2017, as well as the decision to exit the brand from the Korean market at the end of 2017.

27


Sales by Product Category
Net sales by product category are summarized in the following table:
 
Three Months Ended September 30,
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
 
2018
 
Translation
 
2018
 
2017
 
% Change
 
% Change
 
(In millions, except for percentage changes)
Apparel, Accessories and Equipment
$
617.6

 
$
2.7

 
$
620.3

 
$
580.0

 
6%
 
7%
Footwear
178.2

 
1.4

 
179.6

 
167.4

 
6%
 
7%
 
$
795.8

 
$
4.1

 
$
799.9

 
$
747.4

 
6%
 
7%
Net sales of apparel, accessories and equipment increased $37.6 million, or 6% (7% constant-currency), to $617.6 million for the third quarter of 2018 from $580.0 million for the comparable period in 2017. The apparel, accessories and equipment net sales increase was driven by net sales increases in the Columbia and prAna brands, partially offset by the net sales decrease in the Mountain Hardwear brand.
Net sales of footwear increased $10.8 million, or 6% (7% constant-currency), to $178.2 million for the third quarter of 2018 from $167.4 million for the comparable period in 2017 and was led by the SOREL brand, as well as a slight net sales increase in the Columbia brand.
Sales by Channel
 
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
 
2018
 
Translation
 
2018
 
2017
 
% Change
 
% Change
 
(In millions, except for percentage changes)
Wholesale
$
544.8

 
$
3.9

 
$
548.7

 
$
543.8

 
—%
 
1%
DTC
251.0

 
0.2

 
251.2

 
203.6

 
23%
 
23%
 
$
795.8

 
$
4.1

 
$
799.9

 
$
747.4

 
6%
 
7%

Net sales within the wholesale channel increased $1.0 million (1% constant-currency) to $544.8 million for the third quarter of 2018 from $543.8 million for the comparable period in 2017. The net sales increase in the wholesale channel was led by our U.S. wholesale and Europe-direct businesses, largely offset by net sales decreases in our LAAP distributor, China, Canada, and Japan businesses.

Net sales within the DTC channel increased $47.4 million, or 23%, to $251.0 million for the third quarter of 2018 from $203.6 million for the comparable period in 2017. The net sales increase in the DTC channel was led by net sales increases in the U.S., followed by net sales increases in Korea and Japan.
Gross Profit: Gross profit, as a percentage of net sales, increased to 48.2% for the third quarter of 2018, from 46.7% for the comparable period in 2017. Gross profit expansion was primarily due to:

An increase in net sales associated with the adoption of ASC 606, where certain concession fees within the LAAP region that were previously netted against net sales are now reported as SG&A expense;
A higher proportion of full price product sales, which carry a higher gross margin;
A higher DTC sales mix; and
A favorable effect from foreign currency hedge rates.

Our gross profit and SG&A expenses as a percentage of sales may not be comparable to that of other companies in our industry because some of these companies include costs related to both their distribution network and retail store occupancy in cost of sales while we, like many others, include these expenses as a component of SG&A expense.

Selling, General and Administrative Expense: SG&A expense includes all costs associated with design, merchandising, marketing, distribution, store occupancy, and corporate functions, including related depreciation and amortization.

28


SG&A expense increased $28.8 million, or 13%, to $259.3 million, or 32.6% of net sales, for the third quarter of 2018, including $6.9 million of expenses related to the adoption of ASC 606, a $4.3 million benefit related to the Insurance Recovery, and $1.2 million of program expenses and discrete costs related to Project CONNECT, from $230.4 million, or 30.8% of net sales, for the comparable period in 2017, which included program expenses and discrete costs of approximately $3.3 million related to Project CONNECT. The SG&A expense increase was primarily due to:

Increased expenses to support our expanding global DTC operations;
An increase in expenses associated with the adoption of ASC 606, where certain concession fees within the LAAP region that were previously netted against net sales are now reported as SG&A expense;
Increased demand creation spending; and
Increased incentive compensation expense;
Partially offset by
A decrease related to the Insurance Recovery benefit.

Depreciation and amortization included in SG&A expense totaled $14.3 million for the third quarter of 2018, compared to $14.5 million for the same period in 2017.
Income Tax Expense: Income tax expense was $30.0 million for the third quarter of 2018, compared to $32.7 million for the comparable period in 2017. Our effective income tax rate was 22.7% for the third quarter of 2018, compared to 26.4% for the same period in 2017. The decrease in our effective income tax rate was driven primarily by the reduction in the U.S. federal tax rate.
Net Income Attributable to Columbia Sportswear Company: Net income increased to $100.2 million, or $1.42 per diluted share, for the third quarter of 2018, including a $3.3 million, net of tax, or $0.04 per diluted share, benefit related to the Insurance Recovery, incremental tax expense related to the TCJA of $1.5 million, and Project CONNECT program expenses and discrete costs of approximately $0.9 million, net of tax, or $0.01 per diluted share, compared to net income of $87.7 million, or $1.25 per diluted share, for the comparable period in 2017, which included Project CONNECT program expenses and discrete costs of approximately $2.1 million, net of tax, or $0.03 per diluted share.
Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
Net Sales: Consolidated net sales increased $194.6 million, or 12% (10% constant-currency), to $1,884.7 million for the nine months ended September 30, 2018, from $1,690.1 million for the comparable period in 2017. With the adoption of ASC 606, certain concession fees within the LAAP region that were previously netted against net sales are now reported as SG&A expense beginning January 1, 2018. The increases in 2018 net sales and SG&A expenses include $22.7 million of incremental net sales and corresponding expenses resulting from this change in classification.
Sales by Geographic Region
Net sales by geographic region are summarized in the following table:
 
Nine Months Ended September 30,
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
 
2018
 
Translation
 
2018(1)
 
2017
 
% Change
 
% Change(1)
 
(In millions, except for percentage changes)
United States
$
1,139.2

 
$

 
$
1,139.2

 
$
1,027.4

 
11%
 
11%
LAAP
350.8

 
(10.5
)
 
340.3

 
320.8

 
9%
 
6%
EMEA
257.1

 
(10.8
)
 
246.3

 
210.2

 
22%
 
17%
Canada
137.6

 

 
137.6

 
131.7

 
4%
 
4%
 
$
1,884.7

 
$
(21.3
)
 
$
1,863.4

 
$
1,690.1

 
12%
 
10%
(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 increased $111.8 million, or 11%, to $1,139.2 million for the nine months ended September 30, 2018 from $1,027.4 million for the comparable period in 2017. The U.S. net sales increase was led by our DTC business, followed by our wholesale business. The net sales increase in our DTC business was led by increased net sales from our retail stores, followed by increased net sales from our e-commerce business. The net sales increase in our wholesale business was driven by the Columbia, prAna, and SOREL brands.

29


Net sales in the LAAP region increased $30.0 million, or 9% (6% constant-currency), to $350.8 million for the nine months ended September 30, 2018 from $320.8 million for the comparable period in 2017. As described in Note 2 to the Condensed Consolidated Financial Statements, the net sales increase in the LAAP region included $22.7 million of net sales associated with the adoption of ASC 606. The remaining net sales increase in the LAAP region was driven by increased net sales in Japan, China and Korea, partially offset by decreased net sales in our LAAP distributor business.
Net sales in the EMEA region increased $46.9 million, or 22% (17% constant-currency), to $257.1 million for the nine months ended September 30, 2018 from $210.2 million for the comparable period in 2017. The net sales increase in the EMEA region was led by our Europe-direct business, followed by our EMEA distributor business. The net sales increase in our Europe-direct business was led by increased wholesale net sales, followed by increased DTC net sales. The net sales increase in our EMEA distributor business was driven by increased Fall 2018 orders.
Net sales in Canada increased $5.9 million, or 4%, to $137.6 million for the nine months ended September 30, 2018 from $131.7 million for the comparable period in 2017. The net sales increase in Canada was driven by a net sales increase in our DTC business, offset by a net sales decrease in our wholesale business.
Sales by Brand
Net sales by brand are summarized in the following table:
 
Nine Months Ended September 30,
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
 
2018
 
Translation
 
2018
 
2017
 
% Change
 
% Change
 
(In millions, except for percentage changes)
Columbia
$
1,564.5

 
$
(20.2
)
 
$
1,544.3

 
$
1,387.9

 
13%
 
11%
SOREL
133.4

 
(0.2
)
 
133.2

 
114.9

 
16%
 
16%
prAna
120.3

 

 
120.3

 
110.5

 
9%
 
9%
Mountain Hardwear
63.4

 
(0.7
)
 
62.7

 
73.2

 
(13)%
 
(14)%
Other
3.1

 
(0.2
)
 
2.9

 
3.6

 
(14)%
 
(19)%
 
$
1,884.7

 
$
(21.3
)
 
$
1,863.4

 
$
1,690.1

 
12%
 
10%
Columbia brand net sales increased $176.6 million, or 13% (11% constant-currency), to $1,564.5 million for the nine months ended September 30, 2018 from $1,387.9 million for the comparable period in 2017, driven by net sales increases in most major markets. The net sales increase was led by our U.S. DTC business, followed by our U.S. wholesale, Europe-direct, Korea, EMEA distributor, and Japan businesses. Results included increased net sales of apparel, accessories and equipment, as well as footwear.
SOREL brand net sales increased $18.5 million, or 16%, to $133.4 million for the nine months ended September 30, 2018 from $114.9 million for the comparable period in 2017, driven by net sales increases in our Europe-direct, U.S. wholesale, U.S. DTC, and Japan businesses. The increased net sales were driven by favorable demand for SOREL's Spring 2018 product collection, as well as favorable demand for cold weather product during the first quarter.
prAna brand net sales increased $9.8 million, or 9%, to $120.3 million for the nine months ended September 30, 2018 from $110.5 million for the comparable period in 2017, driven by increased net sales in our U.S. DTC and wholesale businesses, partially offset by a net sales decrease in our Canada business.
Mountain Hardwear brand net sales decreased $9.8 million, or 13% (14% constant-currency), to $63.4 million for the nine months ended September 30, 2018 from $73.2 million for the comparable period in 2017, driven by decreased net sales in our U.S. wholesale and Korea businesses, partially offset by a net sales increase in Japan.

30


Sales by Product Category
Net sales by product category are summarized in the following table:
 
Nine Months Ended September 30,
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
 
2018
 
Translation
 
2018
 
2017
 
% Change
 
% Change
 
(In millions, except for percentage changes)
Apparel, Accessories and Equipment
$
1,502.2

 
$
(14.6
)
 
$
1,487.6

 
$
1,349.7

 
11%
 
10%
Footwear
382.5

 
(6.7
)
 
375.8

 
340.4

 
12%
 
10%
 
$
1,884.7

 
$
(21.3
)
 
$
1,863.4

 
$
1,690.1

 
12%
 
10%
Net sales of apparel, accessories and equipment increased $152.5 million, or 11% (10% constant-currency), to $1,502.2 million for the nine months ended September 30, 2018 from $1,349.7 million for the comparable period in 2017. The apparel, accessories and equipment net sales increase was led by the Columbia and prAna brands, partially offset by a net sales decrease in the Mountain Hardwear brand.
Net sales of footwear increased $42.1 million, or 12% (10% constant-currency), to $382.5 million for the nine months ended September 30, 2018 from $340.4 million for the comparable period in 2017 and was driven by net sales increases in the Columbia and SOREL brands.
Sales by Channel
 
Nine Months Ended September 30,
 
 
 
Adjust for
 
Constant-
 
 
 
 
 
Constant-
 
Reported
 
Foreign
 
currency
 
Reported
 
Reported
 
currency
 
Net Sales
 
Currency
 
Net Sales
 
Net Sales
 
Net Sales
 
Net Sales
 
2018
 
Translation
 
2018
 
2017
 
% Change
 
% Change
 
(In millions, except for percentage changes)
Wholesale
$
1,149.9

 
$
(11.9
)
 
$
1,138.0

 
$
1,084.2

 
6%
 
5%
DTC
734.8

 
(9.4
)
 
725.4

 
605.9

 
21%
 
20%
 
$
1,884.7

 
$
(21.3
)
 
$
1,863.4

 
$
1,690.1

 
12%
 
10%

Net sales within the wholesale channel increased $65.7 million, or 6% (5% constant-currency), to $1,149.9 million for the nine months ended September 30, 2018 from $1,084.2 million for the comparable period in 2017, primarily driven by net sales growth in the U.S. wholesale, Europe-direct and EMEA distributor businesses.

Net sales within the DTC channel increased $128.9 million, or 21% (20% constant-currency), to $734.8 million for the nine months ended September 30, 2018 from $605.9 million for the comparable period in 2017. The net sales increase in the DTC channel was primarily driven by net sales increases in the U.S., Japan and Korea.
Gross Profit: Gross profit, as a percentage of net sales, increased to 48.4% for the nine months ended September 30, 2018, from 46.7% for the comparable period in 2017. Gross profit expansion was primarily due to:

An increase in net sales associated with the adoption of ASC 606, where certain concession fees within the LAAP region that were previously netted against net sales are now reported as SG&A expense;
A higher proportion of full price product sales, which carry a higher gross margin;
Favorable effects from foreign currency hedge rates; and
A higher DTC sales mix.

Our gross profit and SG&A expenses as a percentage of sales may not be comparable to that of other companies in our industry because some of these companies include costs related to both their distribution network and retail store occupancy in cost of sales while we, like many others, include these expenses as a component of SG&A expense.

Selling, General and Administrative Expense: SG&A expense includes all costs associated with design, merchandising, marketing, distribution, store occupancy, and corporate functions, including related depreciation and amortization.


31


SG&A expense increased $81.0 million, or 12.6%, to $724.8 million, or 38.5% of net sales, for the nine months ended September 30, 2018, including $22.7 million related to the adoption of ASC 606, $14.1 million of program expenses and discrete costs of related to Project CONNECT, and $4.3 million benefit related to the Insurance Recovery, from $643.9 million, or 38.1% of net sales, for the comparable period in 2017, which included program expenses and discrete costs of approximately $8.6 million related to Project CONNECT. The SG&A expense increase was primarily due to:

Increased expenses to support our expanding global DTC operations;
An increase in expenses associated with the adoption of ASC 606, where certain concession fees within the LAAP region that were previously netted against net sales are now reported as SG&A expense;
Increased demand creation spending;
The unfavorable impact of the U.S. dollar relative to foreign currencies;
Increased incentive compensation expense; and
Program expenses and discrete costs related to Project CONNECT.

Depreciation and amortization included in SG&A expense totaled $42.9 million for the nine months ended September 30, 2018, compared to $44.0 million for the same period in 2017.
Income Tax Expense: Income tax expense increased to $44.7 million for the nine months ended September 30, 2018 from $38.0 million for the comparable period in 2017. Our effective income tax rate was 21.7% for the nine months ended September 30, 2018, compared to 24.2% for the same period in 2017. This decrease in our effective tax rate was driven primarily by the reduction in the U.S. federal tax, partially offset by approximately $2.7 million of incremental TCJA-related income tax expenses during the nine months ended September 30, 2018, resulting from the issuance of additional clarifying guidance which drove further refinement of our provisional estimates that were recorded in the fourth quarter of 2017, as well as a non-recurring tax benefit recorded in the first quarter of 2017.
Net Income Attributable to Columbia Sportswear Company: Net income increased $42.8 million, or 38.1%, to $155.0 million, or $2.19 per diluted share, for the nine months ended September 30, 2018, including Project CONNECT program expenses and discrete costs of approximately $10.7 million, net of tax, or $0.15 per diluted share, the benefit of $3.3 million, net of tax, or $0.04 per diluted share, related to the Insurance Recovery, and incremental tax expense related to the TCJA of $2.7 million, or $0.04 per diluted share, compared with $112.2 million, or $1.59 per diluted share, for the comparable period in 2017, which included Project CONNECT program expenses and discrete costs of approximately $5.5 million, net of tax, or $0.08 per diluted share.
Liquidity and Capital Resources
Our primary ongoing funding requirements are for working capital, investments associated with expansion of our global DTC capabilities and ongoing ERP and information technology systems implementations, including complementary systems, general corporate needs, strategic business initiatives, and the expansion of our global operations. At September 30, 2018, we had total cash and cash equivalents of $182.2 million, compared to $673.2 million at December 31, 2017 and $411.8 million at September 30, 2017. In addition, we had short-term investments of $269.3 million at September 30, 2018, compared to $95.0 million at December 31, 2017 and $18.5 million at September 30, 2017. As a result of the enactment of the TCJA and the resulting change to a territorial system of taxation, repatriation of cash and cash equivalents held by our foreign subsidiaries will no longer result in a significant tax cost.
Net cash used in operating activities was $98.1 million for the nine months ended September 30, 2018, compared to $12.4 million for the same period in 2017. The increase in cash used in operating activities was primarily driven by increased purchases of current season inventory, partially offset by higher net income during the nine months ended September 30, 2018 compared to the same period in 2017.
Net cash used in investing activities was $218.7 million for the nine months ended September 30, 2018, compared to $59.4 million for the comparable period in 2017. For the 2018 period, cash used in investing activities primarily consisted of $173.6 million of net purchases of short-term investments and $45.2 million for capital expenditures. For the same period in 2017, net cash used in investing activities primarily consisted of $41.8 million for capital expenditures and $17.8 million of net purchases of short-term investments.
Net cash used in financing activities was $152.7 million for the nine months ended September 30, 2018, compared to $74.9 million for the comparable period in 2017. For the 2018 period, net cash used in financing activities primarily consisted of repurchases of common stock of $107.2 million, dividend payments to Company shareholders of $46.2 million and to the non-controlling interest in our China joint venture of RMB136.5 million (approximately US$19.9 million), partially offset by net proceeds from stock plan activity of $12.3 million. For the same period in 2017, net cash used in financing activities primarily consisted of dividend payments of $37.6 million, repurchases of common stock of $35.5 million, and repayment of a related party note payable of $14.2 million, partially offset by net proceeds from stock plan activity of $12.5 million.

32


Short-term borrowings and credit lines
We have an unsecured, committed revolving line of credit available to fund our domestic working capital requirements. Monthly variable commitments available for funding average $100.0 million over the course of a calendar year. At September 30, 2018, no balance was outstanding under this line of credit. At September 30, 2018, we were in compliance with all associated covenants. Internationally, our subsidiaries have operating lines of credit in place guaranteed by the parent company with a combined credit limit of approximately $108.5 million at September 30, 2018. At September 30, 2018, approximately $8.3 million was outstanding under these subsidiary lines of credit. See Note 6 of the Notes to the Condensed Consolidated Financial Statements for additional discussion.
We expect to fund our future capital expenditures with existing cash, operating cash flows and credit facilities. If the need arises, we may seek additional funding. Our ability to obtain additional financing will depend on many factors, including prevailing market conditions, our financial condition and our ability to negotiate favorable terms and conditions. Financing may not be available on terms that are acceptable or favorable to us, if at all.
As described in Note 4 of the Notes to the Condensed Consolidated Financial Statements, we have entered into an agreement to buy out the 40% non-controlling interest in our China joint venture from Swire. At September 30, 2018, we had a total of $14.0 million in Restricted cash on the Condensed Consolidated Balance Sheet, held in an escrow account as a portion of the funds needed to complete the buyout in early 2019.
Our operations are affected by seasonal trends typical in the outdoor apparel industry and have historically resulted in higher sales and profits in the third and fourth calendar quarters. This pattern has resulted primarily from the timing of shipments of fall season products to wholesale customers and proportionally higher sales from our DTC operations in the fourth quarter, combined with an expense base that is more consistent throughout the year. We believe that our liquidity requirements for at least the next 12 months will be adequately covered by existing cash, cash provided by operations and existing short-term borrowing arrangements. We plan to fund future cash dividends and share repurchases with cash generated from operating activities.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make various estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting policies referred to in our Annual Report on Form 10-K for the year ended December 31, 2017 have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results may differ from the estimates we use in applying these critical accounting policies. We base our ongoing estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances. Some of these critical accounting policies affect working capital account balances, including the policy for revenue recognition and related sales returns and claims from customers, the allowance for doubtful accounts, the provision for potential excess, slow-moving and closeout inventories, product warranty, income taxes, and stock-based compensation.
Management regularly discusses with our audit committee each of our critical accounting estimates, the development and selection of these accounting estimates, and the disclosure about each estimate in Management's Discussion and Analysis of Financial Condition and Results of Operations. These discussions typically occur at our quarterly audit committee meetings and include the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation.
Except as disclosed in Note 2 and Note 3 of the Notes to the Condensed Consolidated Financial Statements, pertaining to our adoption of new accounting pronouncements, there have been no significant changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
Recent Accounting Pronouncements
See "Recent Accounting Pronouncements" in Note 2 of the Notes to the Condensed Consolidated Financial Statements.

33


Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has not been any material change in the market risk disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2017.
Item 4.    CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We have evaluated, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
We are implementing a global ERP system and complementary systems that support our operations and financial reporting. This implementation is occurring in phases globally over several years. With the most recent implementation in our Europe-direct operation in June 2018, we have now substantially completed the major phases of this global rollout. Each implementation phase involved change to the processes that constitute our internal control over financial reporting. We are taking steps to monitor and maintain appropriate internal control over financial reporting and will continue to evaluate these controls for effectiveness.
There were no other changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

34


PART II—OTHER INFORMATION
Item 1.    LEGAL PROCEEDINGS
We are involved in litigation and various legal matters arising in the normal course of business, including matters related to employment, retail, intellectual property, and various regulatory compliance activities. We have considered facts related to legal and regulatory matters and opinions of counsel handling these matters, and do not believe the ultimate resolution of these proceedings will have a material adverse effect on our financial position, results of operations or cash flows.
Item 1A.    RISK FACTORS
In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, results of operations, or cash flows may be materially adversely affected by these and other risks. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations. The following risk factors include changes to and supersede the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
We Face Many Challenges Executing Growth Strategies
Our business strategies aim to achieve sustainable, profitable growth by creating innovative products at competitive prices, focusing on product design, utilizing innovations to differentiate our brands from competitors, working to ensure that our products are sold through strong distribution partners capable of effectively presenting our brands to consumers, increasing the impact of consumer communications to drive demand for our brands and sell-through of our products, making sure our products are merchandised and displayed appropriately in retail environments, expanding our presence in key markets around the world, and continuing to build brand-enhancing DTC businesses. We intend to pursue these strategies across our portfolio of brands, product categories and geographic markets. Our failure to successfully implement our business strategies, including those identified in connection with the Company's operating model assessment, referred to as Project CONNECT, could have a material adverse effect on our financial condition, results of operations or cash flows.
To implement our business strategies and initiatives, we must continue to modify and fund various aspects of our business, to maintain and enhance our information systems and supply chain operations to improve efficiencies and to attract, retain and manage qualified personnel. These efforts, coupled with cost containment measures, place increasing strain on management, information technology, financial, product design, marketing, distribution, supply chain, and other resources, and we may have operating difficulties as a result. For example, in support of our business strategies, we are making significant investments in our business processes and information technology infrastructure that require significant management attention and corporate resources. These changes may make it increasingly difficult to pursue acquisitions or to adapt our information technology systems and business processes to integrate an acquired business. These integration challenges may also be present as we continue to fully integrate operations of prAna, which we acquired in May 2014. Our business strategies involve many risks and uncertainties that, if not managed effectively, may have a material adverse effect on our financial condition, results of operations or cash flows.
Our business strategies and related initiatives and increased expenditures could also cause our operating margin to decline if we are unable to offset our increased spending with increased sales or gross profit or comparable reductions in other operating costs. If our sales or gross profit decline or fail to grow as planned and we fail to sufficiently leverage our operating expenses, our profitability will decline. This could result in a decision to delay, reduce, modify, or terminate our business strategies and initiatives, which could limit our ability to invest in and grow our business and could have a material adverse effect on our financial condition, results of operations or cash flows.
Initiatives to Upgrade Our Business Processes and Information Technology Infrastructure Involve Many Risks Which Could Result in, Among Other Things, Business Interruptions and Higher Costs
We regularly implement business process improvement and information technology initiatives intended to optimize our operational and financial performance. Our current initiatives include investment in our information technology systems infrastructure to support the growth and expansion of our DTC businesses, as well as continued optimization of and upgrades to our integrated ERP software solutions and other complementary information technology systems, which support our supply chain, corporate administrative functions, go-to-market strategies and DTC strategies and operations. Implementation of and upgrades to these solutions and systems are highly dependent on coordination of numerous employees, contractors and software and system providers. The interdependence of these solutions and systems is a significant risk to the successful completion of these initiatives, and the failure of any one contractor or system could have a material adverse effect on the implementation of our overall information technology infrastructure. We may experience difficulties as we transition to these new or upgraded systems and processes, including loss or corruption of data, delayed shipments, interruptions of DTC operations, decreases in productivity as our personnel implement and become familiar with new systems, increased costs, and lost revenues. In addition, transitioning to these new or upgraded systems requires significant capital investments and personnel resources. Difficulties in implementing new or upgraded information systems or significant system failures, including system outages and loss of system availability, could disrupt our operations and have a material adverse effect on our financial condition, results of operations or cash flows.

35


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

36


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

37


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

38


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

39


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

40


retail marketplace, we could suffer reputational damage to our brands and we may experience lower sales, excess inventories and lower profit margins in current and future periods, any of which could have a material adverse effect on our financial condition, results of operations or cash flows.
We May Be Adversely Affected by Weather Conditions, Including Global Climate Change Trends
Our business is adversely affected by unseasonable weather conditions. A significant portion of the sales of our products is dependent in part on the weather and likely to decline in years in which weather conditions do not stimulate demand for our products. Periods of unseasonably warm weather in the fall or winter or unseasonably cold weather in the spring and summer may have a material adverse effect on our financial condition, results of operations or cash flows. Unintended inventory accumulation by our wholesale customers resulting from unseasonable weather in one season generally negatively affects orders in future seasons, which may have a material adverse effect on our financial condition, results of operations or cash flows.
A significant portion of our business is highly dependent on cold-weather seasons and patterns to generate consumer demand for our cold-weather apparel and footwear. Consumer demand for our cold-weather products may be negatively affected to the extent global weather patterns trend warmer, reducing typical patterns of cold-weather events or increasing weather volatility, which could have a material adverse effect on our financial condition, results of operations or cash flows.
Acquisitions Are Subject to Many Risks
From time to time, we may pursue growth through strategic acquisitions of assets or companies. Acquisitions, such as our acquisition of prAna in May 2014, are subject to many risks, including potential loss of significant customers or key personnel of the acquired business as a result of the change in ownership, difficulty integrating the operations of the acquired business or achieving targeted efficiencies, the incurrence of substantial costs and expenses related to the acquisition effort, and diversion of management's attention from other aspects of our business operations.
Acquisitions may also cause us to incur debt or result in dilutive issuances of our equity securities. Our acquisitions may cause large one-time expenses or create goodwill or other intangible assets that could result in significant impairment charges in the future. We also make various estimates and assumptions in order to determine purchase price allocation and estimate the fair value of assets acquired and liabilities assumed. If our estimates or assumptions used to value these assets and liabilities vary from actual or future projected results, we may be exposed to losses, including impairment losses, that could be material.
We do not provide any assurance that we will be able to successfully integrate the operations of any acquired businesses into our operations or achieve the expected benefits of any acquisitions. The failure to successfully integrate newly acquired businesses or achieve the expected benefits of strategic acquisitions in the future could have an adverse effect on our financial condition, results of operations or cash flows. We may not complete a potential acquisition for a variety of reasons, but we may nonetheless incur material costs in the preliminary stages of evaluating and pursuing such an acquisition that we cannot recover.
We May Not Realize All of the Anticipated Benefits of Our China Joint Venture or Complete the Buyout of the 40% Non-Controlling Interest
Effective January 2014, our joint venture in China with Swire, in which we hold a 60% interest, began operations. In April 2018, we announced our intention to buy out the 40% interest in the joint venture from Swire and in September 2018, we entered into an Equity Interest Transfer Agreement ("EITA") with Swire. The joint venture and completion of this buyout is subject to a number of risks and uncertainties. For example, while our joint venture partner continues to hold a 40% interest, it has protective voting rights with respect to specified major business decisions of the joint venture, and we may experience difficulty reaching agreement as to implementation of various changes to the joint venture's business. In addition, the buyout is subject to various conditions, including regulatory approval in China. For these reasons, or as a result of other factors, we may not realize all of the anticipated benefits of the joint venture or complete the buyout, and our results of operations could be adversely affected.
Global Regulation and Economic and Political Conditions, as well as Potential Changes in Regulations, Legislation and Government Policy, May Negatively Affect Our Business
We are subject to risks generally associated with doing business internationally. These risks include the effects of foreign and domestic laws and regulations, foreign or domestic government fiscal and political crises, political and economic disputes and sanctions, changes in diverse consumer preferences, foreign currency exchange rate fluctuations, managing a diverse and widespread workforce, political unrest, terrorist acts, military operations, disruptions or delays in shipments, disease outbreaks, natural disasters, and changes in economic conditions in countries in which we manufacture or sell products. These factors, among others, may affect our ability to sell products in certain markets, our ability to collect accounts receivable, our ability to manufacture products or procure materials, and our cost of doing business.

41


For example, in the past, political and economic turmoil in certain South American distributor markets have resulted in currency and import restrictions, limiting our ability to sell products in some countries in this region. Also, Russia constitutes a significant portion of our non-U.S. sales and operating income and a significant change in conditions in that market has had an adverse effect on our results of operations in the past. The United Kingdom's June 23, 2016 referendum, in which voters approved its exit from the European Union (commonly referred to as "Brexit"), has created economic uncertainty and volatility in currency exchange rates, and the potential adverse effects of changes to the legal and regulatory framework that apply to the United Kingdom and its relationship with the European Union, and the associated effects on our European operations, are unknown. If any of these or other factors make the conduct of business in a particular country, or region, undesirable or impractical, our business may be materially and adversely affected.
In the U.S., the current administration has publicly supported trade proposals, including recently established tariffs on U.S. products imported from China, modifications to international trade policy, and other changes that may affect U.S. trade relations with other countries, any of which may require us to significantly modify our current business practices or may otherwise materially and adversely affect our business.
In addition, many of our imported products are subject to duties, tariffs or other import limitations that affect the cost and quantity of various types of goods imported into the United States and other markets. Any country in which our products are produced or sold may eliminate, adjust or impose new import limitations, duties, anti-dumping penalties, or other charges or restrictions, any of which could have a material adverse effect on our financial condition, results of operations or cash flows.
We May Have Additional Tax Liabilities or Experience Increased Volatility in Our Effective Tax Rate
As a global company, we determine our income tax liability in various tax jurisdictions based on an analysis and interpretation of local tax laws and regulations. This analysis requires a significant amount of judgment and estimation and is often based on various assumptions about the future actions of the local tax authorities. These determinations are the subject of periodic domestic and foreign tax audits. Although we accrue for uncertain tax positions, our accruals may be insufficient to satisfy unfavorable findings. Unfavorable audit findings and tax rulings may result in payment of taxes, fines and penalties for prior periods and higher tax rates in future periods, which may have a material adverse effect on our financial condition, results of operations or cash flows. 
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the "TCJA").  The TCJA makes broad and complex changes to the U.S. tax code. Implementation of the TCJA legislation required us to record incremental provisional tax expense in 2017, which significantly increased our 2017 effective tax rate. In addition, the TCJA may also materially affect our 2018 effective tax rate and our financial condition, results of operations or cash flows. The actual amounts may differ from our provisional estimates due to, among other factors, a change in interpretation of the applicable revisions to the U.S. tax code and related tax accounting guidance, changes in assumptions made in developing these estimates, and regulatory guidance that may be issued with respect to the applicable revisions to the U.S. tax code, and state tax implications.
Other changes in the tax laws of the jurisdictions where we do business, including an increase in tax rates or an adverse change in the treatment of an item of income or expense, could result in a material increase in our tax expense. For example, changes in the tax laws of foreign jurisdictions could arise as a result of the Base Erosion and Profit Shifting (BEPS) project undertaken by the Organization for Economic Co-operation and Development (OECD). The OECD, which represents a coalition of member countries, has recommended changes to numerous long-standing tax principles. As these changes are adopted by countries, tax uncertainty could increase and may adversely affect our provision for income taxes.
We Operate in Highly Competitive Markets
The markets for apparel, footwear, accessories, and equipment are highly competitive, as are the markets for our licensed products. In each of our geographic markets, we face significant competition from global and regional branded apparel, footwear, accessories, and equipment companies, including competition from companies with significantly greater resources than ours.
Retailers who are our customers often pose our most significant competitive threat by designing and marketing apparel, footwear, accessories, and equipment under their own private labels. For example, in the United States and Europe, several of our largest customers have developed significant private label brands that compete directly with our products. These retailers have assumed an increasing degree of inventory risk in their private label products and, as a result, may first cancel advance orders with us in order to manage their own inventory levels downward during periods of unseasonable weather or weak economic cycles. As our DTC businesses grow, we also experience direct competition from retailers that are our customers, some of which primarily operate e-commerce operations and employ aggressive pricing strategies. We also compete with other companies for the production capacity of contract manufacturers from which we source our products and for import capacity. Many of our competitors are significantly larger than we are and have substantially greater financial, distribution, marketing, and other resources, more stable manufacturing resources and greater brand strength than we have. In addition, when our competitors combine operations through mergers, acquisitions or other transactions, their competitive strengths may increase.
Increased competition may result in reduced access to production capacity, challenges in obtaining favorable locations for our retail stores, reductions in display areas in retail locations, reductions in sales, or reductions in our profit margins, any of which may have a material adverse effect on our financial condition, results of operations or cash flows.

42


We Rely on Innovation to Compete in the Market for Our Products
To distinguish our products in the marketplace and achieve commercial success, we rely on product innovations, including new or exclusive technologies, inventive and appealing design or other differentiating features. Although we are committed to designing innovative and functional products that deliver relevant performance benefits to consumers, who participate in a wide range of competitive and recreational outdoor activities, if we fail to introduce technical innovation in our products that address consumers' performance expectations, we could suffer reputational damage to our brands and demand for our products could decline.
As we strive to achieve product innovations, we face a greater risk of inadvertent infringements of third party rights or compliance issues with regulations applicable to products with technical features or components. In addition, technical innovations often involve more complex manufacturing processes, which may lead to higher instances of quality issues, and if we experience problems with the quality of our products, we may incur substantial expense to address the problems and any associated product risks. Failure to successfully bring to market innovations in our product lines could have a material adverse effect on our financial condition, results of operations or cash flows.
Our Success Depends on Our Use and Protection of Intellectual Property Rights
Our registered and common law trademarks and our patented or patent-pending designs and technologies have significant value and are important to our ability to differentiate our products from those of our competitors and to create and sustain demand for our products. We also place significant value on our trade dress, and the overall appearance and image of our products. We regularly discover products that are counterfeit reproductions of our products or that otherwise infringe on our proprietary rights. Counterfeiting activities typically increase as brand recognition increases, especially in markets outside the United States. Increased instances of counterfeit manufacture and sales may adversely affect our sales and the reputation of our brands and result in a shift of consumer preference away from our products. The actions we take to establish and protect trademarks and other proprietary rights may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violations of proprietary rights. In markets outside of the United States, it may be more difficult for us to establish our proprietary rights and to successfully challenge use of those rights by other parties. We also license our proprietary rights to third parties. We could suffer reputational damage to our brands if we fail to choose appropriate licensees and licensed product categories. In addition to our own intellectual property rights, many of the intellectual property rights in the technology, fabrics and processes used to manufacture our products are generally owned or controlled by our suppliers and are generally not unique to us. In those cases, we may not be able to adequately protect our products or differentiate their performance characteristics and fabrications from those of our competitors. The management of our intellectual property portfolio may affect the strength of our brands, which may in turn have a material adverse effect on our financial condition, results of operations or cash flows.
Although we have not been materially inhibited from selling products in connection with patent, trademark and trade dress disputes, as we focus on innovation in our product lines, extend our brands into new product categories and expand the geographic scope of our marketing, we may become subject to litigation based on allegations of infringement or other improper use of intellectual property rights of third parties, including third party trademark, copyright and patent rights. An increasing number of our products include technologies or designs for which we have obtained or applied for patent protection. Failure to successfully obtain and maintain patents on these innovations could negatively affect our ability to market and sell our products. Litigation is often necessary to defend against claims of infringement or to enforce and protect our intellectual property rights. As we utilize e-commerce and social media to a greater degree in our sales and marketing efforts, we face an increasing risk of patent infringement claims from non-operating entities and others covering broad functional aspects of internet operations. Intellectual property litigation may be costly and may divert management's attention from the operation of our business. Adverse determinations in any litigation may result in the loss of our proprietary rights, subject us to significant liabilities or require us to seek licenses from third parties, which may not be available on commercially reasonable terms, if at all. Any of these outcomes may have a material adverse effect on our financial condition, results of operations or cash flows.
In addition, as we continue to operate globally, expand the geographic scope of our business, and adopt new technologies and product categories, intellectual property disputes may increase, making it more expensive and challenging to establish and protect our intellectual property rights and to defend against claims of infringement by others, which could have a material adverse effect on our financial condition, results of operations or cash flows.
Our Success Depends on Our Distribution Facilities
Our ability to meet customer expectations, manage inventory, complete sales, and achieve objectives for operating efficiencies depends on the proper operation of our existing distribution facilities, as well as the facilities of our third-party logistics companies, the development or expansion of additional distribution capabilities and services, such as the transition of value-added services functions from contract manufacturers to our distribution centers, and the timely performance of services by third parties, including those involved in shipping product to and from our distribution facilities. In the United States, we rely primarily on our distribution centers in Portland, Oregon and Robards, Kentucky; in Canada, we rely primarily on our distribution facility in London, Ontario; in Europe, we rely primarily on our distribution center in Cambrai, France; in Japan, Korea and China, we rely primarily on third-party logistics companies near Tokyo, Seoul, and Shanghai, respectively.

43


Our primary distribution facilities in the United States, France and Canada are highly automated, which means that their operations are complicated and may be subject to a number of risks related to computer viruses, the proper operation of software and hardware, electronic or power interruptions, and other system failures. Risks associated with upgrading or expanding these facilities may significantly disrupt or increase the cost of our operations. For example, in addition to supporting our traditional wholesale business, our existing distribution facilities have been modified to enable them to also support our DTC businesses in the United States, Canada and Europe. Failure to successfully maintain and update these modifications could disrupt our wholesale and e-commerce shipments and may have a material adverse effect on our financial condition, results of operations or cash flows.
The fixed costs associated with owning, operating and maintaining these large, highly automated distribution centers during a period of economic weakness or declining sales can result in lower operating efficiencies, financial deleverage and potential impairment in the recorded value of distribution assets. This has occurred in recent years in Europe, where our distribution center is underutilized. This fixed cost structure may make it difficult for us to achieve or maintain profitability if sales volumes decline for an extended period of time and could have a material adverse effect on our financial condition, results of operations or cash flows.
Our distribution facilities may also be interrupted by natural disasters, such as earthquakes, floods, damaging winds, or fires. We maintain business interruption insurance, but it may not adequately protect us from the adverse effect that may be caused by significant disruptions in our distribution facilities.
Our Investment Securities May Be Adversely Affected by Market Conditions
Our investment portfolio is subject to a number of risks and uncertainties. Changes in market conditions, such as those that accompany an economic downturn or economic uncertainty, may negatively affect the value and liquidity of our investment portfolio, perhaps significantly. Our ability to find diversified investments that are both safe and liquid and that provide a reasonable return may be impaired, potentially resulting in lower interest income, less diversification, longer investment maturities, or other-than-temporary impairments.
We May Be Adversely Affected by Labor Disruptions, Changes in Labor Laws and Other Labor Issues
Our business depends on our ability to source and distribute products in a timely manner. While a majority of our own operations are not subject to organized labor agreements, our relationship with our Cambrai distribution center employees is governed by French law, which includes a formal representation of employees by a Works Council and the application of a collective bargaining agreement. Labor disputes at contract manufacturers where our goods are produced, shipping ports, transportation carriers, retail stores, or distribution centers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes, or other disruptions during our peak manufacturing, shipping and selling seasons. For example, work slowdowns and stoppages at ports on the west coast of the United States have, in the past, resulted in product delays and increased costs. Labor disruptions may have a material adverse effect on our business, potentially resulting in canceled orders by customers, unanticipated inventory accumulation and reduced revenues and earnings.
Our ability to meet our labor needs at our distribution centers, retail stores, corporate headquarters, and regional subsidiaries, including our ability to find qualified employees while controlling wage and related labor costs, is generally subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force of the markets in which our operations are located, unemployment levels within those markets, prevailing and minimum wage rates, changing demographics, health and other insurance costs, and adoption of new or revised employment and labor laws and regulations. For example, we face the prospect of increased wages resulting from competitive pressures and as a result of local increases in minimum wage rates in jurisdictions where we operate. If we are unable to locate, attract or retain qualified employees, our ability to source, distribute and sell products in a timely and cost-effective manner may be negatively affected, which could have a material adverse effect on our financial condition, results of operations or cash flows.
We Depend on Key Suppliers
Some of the materials that we use may be available from only one source or a very limited number of sources. For example, some specialty fabrics are manufactured to our specification by one source or a few sources, and a single vendor supplies the majority of the zippers used in our products. From time to time, we have difficulty satisfying our raw material and finished goods requirements. Although we believe that we can identify and qualify additional contract manufacturers to produce these materials as necessary, there are no guarantees that additional contract manufacturers will be available. In addition, depending on the timing, any changes in sources or materials may result in increased costs or production delays, which may have a material adverse effect on our financial condition, results of operations or cash flows.
We Depend on Key Personnel
Our future success will depend in part on the continued service of key personnel and our ability to attract, retain and develop key managers, designers, sales and information technology professionals, and others. We face intense competition for these individuals worldwide, and there is a significant concentration of well-funded apparel and footwear competitors near our headquarters in Portland, Oregon. We may not be able to attract qualified new employees or retain existing employees, which may have a material adverse effect on our financial condition, results of operations or cash flows.

44


Our Business Is Affected by Seasonality
Our business is affected by the general seasonal trends common to the outdoor industry. Our products are marketed on a seasonal basis and our annual net sales are weighted heavily toward the fall/winter season, while our operating expenses are more equally distributed throughout the year. As a result, the majority, and sometimes all, of our operating profits are generated in the second half of the year. The expansion of our DTC businesses has increased the proportion of sales and profits that we generate in the fourth calendar quarter. This seasonality, along with other factors that are beyond our control and that are discussed elsewhere in this section, may adversely affect our business and cause our results of operations to fluctuate. As a result, our profitability may be materially affected if management is not able to timely adjust expenses in reaction to adverse events such as unfavorable weather, weak consumer spending patterns or unanticipated levels of order cancellations. Results of operations in any period should not be considered indicative of the results to be expected for any future period.
Our Products Are Subject to Increasing Product Regulations and We Face Risks of Product Liability and Warranty Claims
Our products are subject to increasingly stringent and complex domestic and foreign product labeling and performance and safety standards, laws and other regulations. These requirements could result in greater expense associated with compliance efforts, and failure to comply with these regulations could result in a delay, non-delivery, recall, or destruction of inventory shipments during key seasons or in other financial penalties. Significant or continuing noncompliance with these standards and laws could disrupt our business and harm our reputation and, as a result, could have a material adverse effect on our financial condition, results of operations or cash flows.
Our products are used in outdoor activities, sometimes in severe conditions. Product recalls or product liability claims resulting from the failure, or alleged failure, of our products could have a material adverse effect on the reputation of our brands, our financial condition, results of operations, or cash flows. Most of our products carry limited warranties for defects in quality and workmanship. We maintain a warranty reserve for estimated future warranty claims, but the actual costs of servicing future warranty claims may exceed the reserve, which may also have a material adverse effect on our financial condition, results of operations or cash flows.
Our Common Stock Price May Be Volatile
The price of our common stock has fluctuated substantially since our initial public offering. Our common stock is traded on the NASDAQ Global Select Market. Factors such as general market conditions, actions by institutional investors to rapidly accumulate or divest of a substantial number of our shares, fluctuations in financial results, variances from financial market expectations, changes in earnings estimates or recommendations by analysts, or announcements by us or our competitors may cause the market price of our common stock to fluctuate, perhaps substantially.
Insiders Control a Majority of Our Common Stock and May Sell Shares
Five related shareholders, Gertrude Boyle, Sarah Bany, Timothy Boyle, Joseph Boyle, and Molly Boyle, have historically controlled a majority of our common stock. As a result, if acting together, they can effectively control matters requiring shareholder approval without the cooperation of other shareholders. Shares held by these shareholders are available for resale, subject to the requirements of, and the rules under, the Securities Act of 1933 and the Securities Exchange Act of 1934. The sale or the prospect of the sale of a substantial number of these shares may have an adverse effect on the market price of our common stock.


45


Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Period
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2018 through July 31, 2018
329,570

 
$
86.89

 
329,570

 
$
69,196,000

August 1, 2018 through August 31, 2018
380,201

 
89.13

 
380,201

 
235,308,000

September 1, 2018 through September 30, 2018
50,125

 
91.64

 
50,125

 
230,715,000

Total
759,896

 
$
88.32

 
759,896

 
$
230,715,000

(1) In August 2018, our Board of Directors authorized an additional repurchase of $200,000,000 of our common stock. Since the inception of the Company's stock repurchase plan, our Board of Directors has authorized the repurchase of $900,000,000 of our common stock. As of September 30, 2018, we had repurchased 22,918,221 shares under this program at an aggregate purchase price of approximately $669,285,000. Shares of our common stock may be purchased in the open market or through privately negotiated transactions, subject to market conditions. The repurchase program does not obligate us to acquire any specific number of shares or to acquire shares over any specified period of time.
    

46


Item 6.    EXHIBITS
(a)
Exhibits
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101
INS XBRL Instance Document
 
 
 
 
101
SCH XBRL Taxonomy Extension Schema Document
 
 
 
 
101
CAL XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
101
DEF XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
101
LAB XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
101
PRE XBRL Taxonomy Extension Presentation Linkbase Document

47


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
COLUMBIA SPORTSWEAR COMPANY
November 1, 2018
 
/s/ JIM A. SWANSON
 
 
Jim A. Swanson
 
 
Senior Vice President, Chief Financial Officer
 
 
(Duly Authorized Officer and
Principal Financial and Accounting Officer)


48