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 March 31, 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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
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 April 20, 2018 was 70,005,333.



COLUMBIA SPORTSWEAR COMPANY
MARCH 31, 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)
 
 
March 31,
2018
 
December 31,
2017
 
March 31,
2017
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
717,216

 
$
673,166

 
$
556,006

Short-term investments
 
90,978

 
94,983

 
34,470

Accounts receivable, net of allowance of $7,696, $9,043, $7,726 and respectively
 
316,415

 
364,862

 
260,456

Inventories
 
405,971

 
457,927

 
398,842

Prepaid expenses and other current assets
 
72,788

 
58,559

 
40,863

Total current assets
 
1,603,368

 
1,649,497

 
1,290,637

Property, plant and equipment, at cost, net of accumulated depreciation of $467,047, $455,811 and $421,809, respectively
 
281,213

 
281,394

 
279,730

Intangible assets, net (Note 5)
 
128,810

 
129,555

 
132,151

Goodwill
 
68,594

 
68,594

 
68,594

Deferred income taxes
 
77,043

 
56,804

 
90,109

Other non-current assets
 
29,656

 
27,058

 
26,853

Total assets
 
$
2,188,684

 
$
2,212,902

 
$
1,888,074

LIABILITIES AND EQUITY
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
Accounts payable
 
167,328

 
252,301

 
95,253

Accrued liabilities (Note 6)
 
206,145

 
182,228

 
126,866

Income taxes payable
 
10,261

 
19,107

 
5,798

Total current liabilities
 
383,734

 
453,636

 
227,917

Note payable to related party (Note 14)
 

 

 
14,171

Other long-term liabilities
 
51,888

 
48,735

 
42,872

Income taxes payable
 
61,538

 
58,104

 
10,948

Deferred income taxes
 
171

 
168

 
149

Total liabilities
 
497,331

 
560,643

 
296,057

Commitments and contingencies (Note 12)
 

 

 

Columbia Sportswear Company Shareholders' Equity:
 
 
 
 
 

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

 

 

Common stock (no par value); 125,000 shares authorized; 70,113, 69,995, and 69,634, issued and outstanding, respectively (Note 9)
 
36,190

 
45,829

 
28,020

Retained earnings
 
1,629,279

 
1,585,009

 
1,553,143

Accumulated other comprehensive loss (Note 8)
 
(8,949
)
 
(8,887
)
 
(12,892
)
Total Columbia Sportswear Company shareholders' equity
 
1,656,520

 
1,621,951

 
1,568,271

Non-controlling interest (Note 4)
 
34,833

 
30,308

 
23,746

Total equity
 
1,691,353

 
1,652,259

 
1,592,017

Total liabilities and equity
 
$
2,188,684

 
$
2,212,902

 
$
1,888,074

See accompanying notes to condensed consolidated financial statements.

2


COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended March 31,
 
2018
 
2017
Net sales
$
607,308

 
$
543,793

Cost of sales
307,870

 
285,326

Gross profit
299,438

 
258,467

Selling, general and administrative expenses
243,368

 
212,815

Net licensing income
3,251

 
2,353

Income from operations
59,321

 
48,005

Interest income, net
2,296

 
955

Interest expense on note payable to related party (Note 14)

 
(249
)
Other non-operating expense, net
(268
)
 
(53
)
Income before income tax
61,349

 
48,658

Income tax expense
(12,620
)
 
(9,773
)
Net income
48,729

 
38,885

Net income attributable to non-controlling interest
3,622

 
2,879

Net income attributable to Columbia Sportswear Company
$
45,107

 
$
36,006

Earnings per share attributable to Columbia Sportswear Company (Note 9):
 
 

Basic
$
0.64

 
$
0.52

Diluted
$
0.64

 
$
0.51

Cash dividends per share
$
0.22

 
$
0.18

Weighted average shares outstanding (Note 9):
 
 
 
Basic
70,080

 
69,606

Diluted
70,843

 
70,414

See accompanying notes to condensed consolidated financial statements.


3


COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Net income
48,729

 
$
38,885

Other comprehensive income:
 
 
 
Unrealized holding gains on available-for-sale securities
4

 
4

Unrealized losses on derivative transactions (net of tax effects of $1,385 and $880, respectively)
(4,907
)
 
(1,605
)
Foreign currency translation adjustments (net of tax effects of ($1,544) and ($91), respectively)
6,259

 
11,502

Other comprehensive income
1,356

 
9,901

Comprehensive income
50,085

 
48,786

Comprehensive income attributable to non-controlling interest
4,525

 
3,055

Comprehensive income attributable to Columbia Sportswear Company
$
45,560

 
$
45,731

See accompanying notes to condensed consolidated financial statements.


4


COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
48,729

 
$
38,885

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,536

 
14,940

Loss on disposal and impairment of property, plant, and equipment
20

 
160

Deferred income taxes
3,252

 
4,426

Stock-based compensation
3,113

 
2,941

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
115,414

 
76,619

Inventories
32,133

 
94,487

Prepaid expenses and other current assets
(1,912
)
 
(2,139
)
Other assets
(2,340
)
 
1,336

Accounts payable
(87,492
)
 
(122,824
)
Accrued liabilities
(45,000
)
 
(18,961
)
Income taxes payable
(6,038
)
 
(1,738
)
Other liabilities
2,937

 
97

Net cash provided by operating activities
77,352

 
88,229

Cash flows from investing activities:
 
 
 
Purchases of short-term investments
(33,178
)
 
(33,813
)
Sales of short-term investments
37,121

 

Capital expenditures
(12,290
)
 
(11,275
)
Proceeds from sale of property, plant, and equipment
19

 
27

Net cash used in investing activities
(8,328
)
 
(45,061
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities

 
400

Repayments on credit facilities

 
(400
)
Proceeds from issuance of common stock under employee stock plans
9,380

 
7,791

Tax payments related to restricted stock unit issuances
(4,033
)
 
(3,513
)
Repurchase of common stock
(18,099
)
 
(33,000
)
Cash dividends paid
(15,452
)
 
(12,499
)
Net cash used in financing activities
(28,204
)
 
(41,221
)
Net effect of exchange rate changes on cash
3,230

 
2,670

Net increase in cash and cash equivalents
44,050

 
4,617

Cash and cash equivalents, beginning of period
673,166

 
551,389

Cash and cash equivalents, end of period
$
717,216

 
$
556,006

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
24,510

 
$
12,951

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

 
253

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Capital expenditures incurred but not yet paid
$
4,000

 
$
4,206

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 March 31, 2018 and 2017, and the results of operations and cash flows for the three months ended March 31, 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 months ended March 31, 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 supersedes most current revenue recognition guidance. 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 Company does not anticipate a material effect on the Company's financial position, results of operations or cash flows due to the adoption of this standard.
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):
 
 
March 31, 2018
 
 
As Reported
 
Effect of Standard
 
Balances Without Adoption of ASC 606

Accounts receivable, net
 
$
316,415

 
$
56,768

 
$
259,647

Inventories
 
405,971

 
(18,175
)
 
424,146

Prepaid expenses and other current assets
 
72,788

 
18,175

 
54,613

Total current assets
 
1,603,368

 
56,768

 
1,546,600

Total assets
 
2,188,684

 
56,768

 
2,131,916

Accrued liabilities
 
206,145

 
56,768

 
149,377

Total current liabilities
 
383,734

 
56,768

 
326,966

Total liabilities
 
497,331

 
56,768

 
440,563

Total liabilities and equity
 
$
2,188,684

 
$
56,768

 
$
2,131,916

 
 
Three Months Ended
March 31, 2018
 
 
As Reported
 
Effect of Standard
 
Balances Without Adoption of ASC 606

Net sales
 
$
607,308

 
$
8,257

 
$
599,051

Gross profit
 
299,438

 
8,257

 
291,181

Selling, general and administrative expenses

 
$
243,368

 
$
8,257

 
$
235,111

Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for most leases previously classified as operating leases. The Company will adopt the new standard on January 1, 2019. The ASU is required to be applied using a modified retrospective approach at the beginning of the earliest period presented, with optional practical expedients. However, the FASB recently proposed an optional transition alternative, currently subject to approval, which would allow for application of the guidance at the beginning of the period in which it is adopted, rather than at the beginning of the earliest comparative period presented.
The Company is currently evaluating the impact of this guidance, including reviewing the standard's provisions and gathering and analyzing data to support further evaluation of real estate and non-real estate leases and identifying arrangements that may contain embedded leases. 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. 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 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.

8

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

NOTE 3—REVENUES
Disaggregated Revenue
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 March 31, 2018
 
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category revenues
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
313,326

 
$
96,380

 
$
47,475

 
$
32,778

 
$
489,959

Footwear
 
49,518

 
35,189

 
24,300

 
8,342

 
117,349

Total
 
$
362,844

 
$
131,569

 
$
71,775

 
$
41,120

 
$
607,308

 
 
 
 
 
 
 
 
 
 
 
Sales channel revenues
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
186,840

 
$
68,187

 
$
57,581

 
$
31,331

 
$
343,939

Direct-to-consumer
 
176,004

 
63,382

 
14,194

 
9,789

 
263,369

Total
 
$
362,844

 
$
131,569

 
$
71,775

 
$
41,120

 
$
607,308

 
 
Three Months Ended March 31, 2017
 
 
United States
 
LAAP
 
EMEA
 
Canada
 
Total
Product category revenues
 
 
 
 
 
 
 
 
 
 
Apparel, Accessories and Equipment
 
$
286,743

 
$
86,769

 
$
36,829

 
$
29,738

 
$
440,079

Footwear
 
46,441

 
31,575

 
18,505

 
7,193

 
103,714

Total
 
$
333,184

 
$
118,344

 
$
55,334

 
$
36,931

 
$
543,793

 
 
 
 
 
 
 
 
 
 
 
Sales channel revenues
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
182,996

 
$
69,220

 
$
46,485

 
$
30,149

 
$
328,850

Direct-to-consumer
 
150,188

 
49,124

 
8,849

 
6,782

 
214,943

Total
 
$
333,184

 
$
118,344

 
$
55,334

 
$
36,931

 
$
543,793

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 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 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 all shipping and handling activities as fulfillment costs, and as such recognize the costs for these activities within SG&A expenses at the time related revenue is recognized. Shipping and handling fees billed to customers are recorded as revenue.

9

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

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 months ended March 31, 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.
Contract Balances
As of March 31, 2018, contract liabilities recorded on the Condensed Consolidated Balance Sheets, which were comprised 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 months ended March 31, 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 March 31, 2018 and 2017, and December 31, 2017.
The following table presents the changes in Columbia Sportswear Company shareholders' equity and non-controlling interest for the three months ended March 31, 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
 
45,107

 
3,622

 
48,729

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

 

 
4

Derivative holding losses
 
(4,570
)
 
(337
)
 
(4,907
)
Foreign currency translation adjustments
 
5,019

 
1,240

 
6,259

Cash dividends ($0.22 per share)
 
(15,452
)
 

 
(15,452
)
Issuance of common stock under employee stock plans, net
 
5,347

 

 
5,347

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

 

 
14,100

Stock-based compensation expense
 
3,113

 

 
3,113

Repurchase of common stock
 
(18,099
)
 

 
(18,099
)
Balance at March 31, 2018
 
$
1,656,520

 
$
34,833

 
$
1,691,353

The following table presents the changes in Columbia Sportswear Company shareholders' equity and non-controlling interest for the three months ended March 31, 2017 (in thousands, except per share amounts):

10

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
 
36,006

 
2,879

 
38,885

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

 

 
4

Derivative holding losses
 
(1,527
)
 
(78
)
 
(1,605
)
Foreign currency translation adjustments
 
11,248

 
254

 
11,502

Cash dividends ($0.18 per share)
 
(12,499
)
 

 
(12,499
)
Issuance of common stock under employee stock plans, net
 
4,278

 

 
4,278

Stock-based compensation expense
 
2,941

 

 
2,941

Repurchase of common stock
 
(33,000
)
 

 
(33,000
)
Balance at March 31, 2017
 
$
1,568,271

 
$
23,746

 
$
1,592,017

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):
 
March 31,
2018
 
December 31,
2017
 
March 31,
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
(10,984
)
 
(10,651
)
 
(9,654
)
Customer relationships
(12,825
)
 
(12,413
)
 
(10,814
)
Total accumulated amortization
(23,809
)
 
(23,064
)
 
(20,468
)
Net carrying amount
13,389

 
14,134

 
16,730

Intangible assets not subject to amortization
115,421

 
115,421

 
115,421

Intangible assets, net
$
128,810

 
$
129,555

 
$
132,151

Amortization expense for intangible assets subject to amortization was $745,000 and $1,287,000 for the three months ended March 31, 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


11

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


NOTE 6—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 March 31,
 
2018
 
2017
Balance at beginning of period
$
12,339

 
$
11,455

Provision for warranty claims
1,248

 
1,200

Warranty claims
(1,589
)
 
(1,299
)
Other
68

 
147

Balance at end of period
$
12,066

 
$
11,503

NOTE 7—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 March 31,
 
2018
 
2017
Stock options
$
1,072

 
$
1,004

Restricted stock units
2,041

 
1,937

Total
$
3,113

 
$
2,941

Stock Options
The Company estimates the fair value of stock options using the Black-Scholes model. Key inputs and assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected stock price volatility of the Company's stock over the option's expected term, the risk-free interest rate over the option's expected term and the Company's expected annual dividend yield.
The following table presents the weighted average assumptions for stock options granted in the periods:
 
Three Months Ended March 31,
 
2018
 
2017
Expected option term
4.31 years
 
4.34 years
Expected stock price volatility
28.48%
 
28.95%
Risk-free interest rate
2.43%
 
1.70%
Expected annual dividend yield
1.17%
 
1.30%
Weighted average grant date fair value
$18.10
 
$12.73
During the three months ended March 31, 2018 and 2017, the Company granted a total of 361,135 and 455,342 stock options, respectively. At March 31, 2018, unrecognized costs related to outstanding stock options totaled approximately $11,624,000, 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 March 31, 2018 are expected to be recognized over a weighted average period of 2.93 years.
Restricted Stock Units

12

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

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 March 31,
 
2018
 
2017
Vesting period
4.00 years
 
3.91 years
Expected annual dividend yield
1.16%
 
1.31%
Estimated average grant date fair value per restricted stock unit
$71.99
 
$52.40
During the three months ended March 31, 2018 and 2017, the Company granted 165,235 and 233,175 restricted stock units, respectively. At March 31, 2018, unrecognized costs related to outstanding restricted stock units totaled approximately $21,960,000, 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 March 31, 2018 are expected to be recognized over a weighted average period of 2.93 years.
NOTE 8—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 March 31, 2018 (in thousands):
 
Unrealized losses on available-for-sale securities
 
Unrealized holding losses on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2017
$
(4
)
 
$
(10,716
)
 
$
1,833

 
$
(8,887
)
Other comprehensive income (loss) before reclassifications
4

 
(4,582
)
 
5,019

 
441

Amounts reclassified from other comprehensive income

 
12

 

 
12

Net other comprehensive income (loss) during the period
4

 
(4,570
)
 
5,019

 
453

Adoption of ASU 2017-12 (Note 2)

 
(515
)
 

 
(515
)
Balance at March 31, 2018
$

 
$
(15,801
)
 
$
6,852

 
$
(8,949
)
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 March 31, 2017 (in thousands):
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2016
$
(4
)
 
$
6,773

 
$
(29,386
)
 
$
(22,617
)
Other comprehensive income (loss) before reclassifications
4

 
(1,438
)
 
11,248

 
9,814

Amounts reclassified from other comprehensive income

 
(89
)
 

 
(89
)
Net other comprehensive income (loss) during the period
4

 
(1,527
)
 
11,248

 
9,725

Balance at March 31, 2017
$

 
$
5,246

 
$
(18,138
)
 
$
(12,892
)
NOTE 9—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.

13

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 March 31,
 
2018
 
2017
Weighted average shares of common stock outstanding, used in computing basic earnings per share
70,080

 
69,606

Effect of dilutive stock options and restricted stock units
763

 
808

Weighted average shares of common stock outstanding, used in computing diluted earnings per share
70,843

 
70,414

Earnings per share of common stock attributable to Columbia Sportswear Company:
 
 
 
Basic
$
0.64

 
$
0.52

Diluted
$
0.64

 
$
0.51

 
Stock options and service-based restricted stock units representing 205,991 and 760,003 shares of common stock for the three months ended March 31, 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 21,164 and 42,524 shares of common stock for the three months ended March 31, 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 March 31, 2018, the Company's Board of Directors has authorized the repurchase of $700,000,000 of the Company's common stock. Shares of the Company's common stock may be purchased in the open market or through privately negotiated transactions, subject to market conditions. The repurchase program does not obligate the Company to acquire any specific number of shares or to acquire shares over any specified period of time. As of March 31, 2018, the Company had repurchased 21,893,532 shares under this program at an aggregate purchase price of approximately $580,163,000. During the three months ended March 31, 2018, the Company repurchased 235,497 shares of the Company's common stock at an aggregate purchase price of $18,099,000. During the three months ended March 31, 2017, the Company repurchased 616,152 shares of the Company's common stock at an aggregate purchase price of $33,000,000.
NOTE 10—SEGMENT INFORMATION
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. 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.

14

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

The geographic distribution of the Company's net sales and income from operations are summarized in the following table (in thousands) for the three months ended March 31, 2018 and 2017.
 
Three Months Ended March 31,
 
2018
 
2017
Net sales to unrelated entities:
 
 
 
United States
$
362,844

 
$
333,184

LAAP
131,569

 
118,344

EMEA
71,775

 
55,334

Canada
41,120

 
36,931

 
$
607,308

 
$
543,793

Segment income from operations:
 
 
 
United States
$
74,387

 
$
62,642

LAAP
21,739

 
19,808

EMEA
7,142

 
1,324

Canada
6,543

 
5,827

Total segment income from operations
109,811

 
89,601

Unallocated corporate expenses
(50,490
)
 
(41,596
)
Interest income, net
2,296

 
955

Interest expense on note payable to related party

 
(249
)
Other non-operating expense
(268
)
 
(53
)
Income before income taxes
$
61,349

 
$
48,658

NOTE 11—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.  For option contracts, the change in fair value attributable to changes in time value are excluded from the assessment of hedge effectiveness and included in current period cost of sales. Hedge ineffectiveness was not material during the three months ended March 31, 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 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, 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.

15

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

The following table presents the gross notional amount of outstanding derivative instruments (in thousands): 
 
March 31,
2018
 
December 31,
2017
 
March 31,
2017
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
$
584,107

 
$
448,448

 
$
233,500

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
234,579

 
231,161

 
168,361

At March 31, 2018, approximately $12,381,000 of deferred net losses on both outstanding and matured derivatives accumulated in other comprehensive income are expected to be reclassified to net income during the next twelve months as a result of underlying hedged transactions also being recorded in net income. Actual amounts ultimately reclassified to net income are dependent on U.S. dollar exchange rates in effect against the euro, renminbi, Canadian dollar, and yen when outstanding derivative contracts mature.
At March 31, 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 $2,000,000 at March 31, 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
 
March 31,
2018
 
December 31,
2017
 
March 31,
2017
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
$
998

 
$
1,648

 
$
6,347

Currency forward contracts
 
Other non-current assets
 
2,492

 
335

 
1,619

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
11,017

 
9,336

 
134

Currency forward contracts
 
Other long-term liabilities
 
7,294

 
3,820

 

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
1,121

 
683

 
292

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
355

 
1,229

 
220



16

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 March 31,
 
 
 
2018
 
2017
Currency Forward and Option Contracts:
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
Loss recognized in other comprehensive income or loss, net of tax
 
 
$
(5,232
)
 
$
(1,438
)
Gain reclassified from accumulated other comprehensive income or loss to income for the effective portion
 
Net sales
 
5

 
144

Gain (loss) reclassified from accumulated other comprehensive income or loss to income for the effective portion
 
Cost of sales
 
(2,206
)
 
54

Gain recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Net sales
 
6

 
3

Gain recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Cost of sales
 
1,925

 
794

Derivative instruments not designated as cash flow hedges:
 
 
 
 
Loss recognized in income
 
Other non-operating expense
 
(602
)
 
(1,688
)
NOTE 12—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 March 31, 2018, inventory purchase obligations were $614,918,000.
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 13—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.

17

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

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
380,136

 
$

 
$

 
$
380,136

Time deposits
55,825

 

 

 
55,825

U.S. Government treasury bills

 
34,983

 

 
34,983

U.S. Government-backed municipal bonds

 
4,879

 

 
4,879

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

 
89,567

 

 
89,567

Other short-term investments:
 
 
 
 
 
 
 
Mutual fund shares
1,411

 

 

 
1,411

Other current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)

 
2,119

 

 
2,119

Other non-current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)

 
2,492

 

 
2,492

Mutual fund shares
8,679

 

 

 
8,679

Total assets measured at fair value
$
446,051

 
$
134,040

 
$

 
$
580,091

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)
$

 
$
11,372

 
$

 
$
11,372

Other long-term liabilities:
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)

 
7,294

 

 
7,294

Total liabilities measured at fair value
$

 
$
18,666

 
$

 
$
18,666


18

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

Assets and liabilities measured at fair value on a recurring basis as of December 31, 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

Other short-term investments:
 
 
 
 
 
 
 
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 11)

 
2,331

 

 
2,331

Other non-current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)

 
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 11)
$

 
$
10,565

 
$

 
$
10,565

Other long-term liabilities
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)

 
3,820

 

 
3,820

Total liabilities measured at fair value
$

 
$
14,385

 
$

 
$
14,385


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 March 31, 2017 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
246,245

 
$

 
$

 
$
246,245

Time deposits
90,927

 

 

 
90,927

U.S. Government-backed municipal bonds

 
64,189

 

 
64,189

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

 
33,817

 

 
33,817

Other short-term investments:
 
 
 
 
 
 
 
Mutual funds shares
653

 

 

 
653

Other current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)

 
6,639

 

 
6,639

Other non-current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)

 
1,619

 

 
1,619

Mutual fund shares
8,443

 

 

 
8,443

Total assets measured at fair value
$
346,268

 
$
106,264

 
$

 
$
452,532

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)
$

 
$
354

 
$

 
$
354

Other long-term liabilities
 
 
 
 
 
 
 
Derivative financial instruments (Note 11)

 

 

 

Total liabilities measured at fair value
$

 
$
354

 
$

 
$
354


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

Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from inputs, other than quoted market prices in active markets, which are directly or indirectly observable in the marketplace and quoted prices in markets with limited volume or infrequent transactions.
Non-recurring Fair Value Measurements
There were no material assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2018, December 31, 2017 or March 31, 2017.
NOTE 14—RELATED PARTY TRANSACTIONS
The Company owns a 60% controlling interest in a joint venture formed with Swire, which is a related party. The joint venture arrangement involves Transition Services Agreements ("TSAs") with Swire, under which Swire provides administrative and information technology services to the joint venture. The Company continues to reduce its costs under the TSAs as it internalizes the back-office functions and related personnel, including the transition of the joint venture's systems to the Company's platform in the second quarter of 2017. The joint venture incurred service fees, valued under the TSAs at Swire's cost, of $71,000 and $516,000 during the three months ended March 31, 2018 and 2017, respectively. These fees are included in SG&A expenses in the Condensed Consolidated Statements of Operations.
In 2014, both the Company and Swire funded long-term loans to the joint venture. The Company's loan has been eliminated in consolidation, while the Swire loan is reflected as a Note payable to related party in the Condensed Consolidated Balance Sheets as of March 31, 2017. In June 2017, the Company repaid these loans, including the note with Swire in the principal amount of RMB 97,600,000 (USD 14,171,000), and as such, the balance on the Condensed Consolidated Balance Sheets is zero at March 31, 2018. The Company did not incur interest expense related to this note for the three months ended March 31, 2018. Interest expense related to this note was $249,000 for the three months ended March 31, 2017.

20

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

As of March 31, 2018 and 2017, and December 31, 2017, net payables to Swire for service fees, interest expense and miscellaneous expenses totaled $156,000, $1,139,000 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.
In April 2018, the Company announced its intent to buy out the remaining 40% non-controlling interest in the joint venture under the terms of the initial agreement. The buy out is subject to various terms and conditions, including regulatory approval in China, and is expected to be complete in early 2019.

21


Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements. Forward-looking statements include any statements related to our expectations regarding future performance or market position, including any statements regarding anticipated sales, gross margins and operating margins across markets, profitability and the effect of specified factors on profitability for 2018, expenses, sourcing costs, effects of unseasonable weather on our results of operations, inventory levels, investments in our business, investments in and implementation of our information technology systems, our operating model assessment referred to as Project CONNECT, intellectual property disputes, our DTC channels and other capital expenditures, including planned store additions, access to raw materials and factory capacity, financing and working capital requirements and resources, effects of the Tax Cuts and Jobs Act ("TCJA"), income tax rates and pre-tax income, our intended buyout of the remaining 40% non-controlling interest in our China joint venture, 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 channels 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;

22


Industry trends affecting consumer traffic and spending in brick and mortar retail channels, which are creating uncertainty regarding the long-term financial health of several of our U.S. wholesale customers;
The effects of changes in foreign currency exchange rates on sales, gross margin, operating income, and net income;
Difficult economic and competitive environments in certain key markets within the LAAP region, in particular, Korea;
Continued sales growth and profitability contributed by our EMEA region;
Performance of our Mountain Hardwear business as we work to re-invigorate that 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;
Changes in tariffs or international trade policy;
Accelerated investment and execution of demand creation, DTC systems infrastructure and other strategic priorities; and
The implementation of our global DTC and enterprise resource planning ("ERP") platforms.
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 all brands, expand gross margin, improve SG&A expense efficiency, and drive improved operating margin.
Consumer-First Platform ("C1")
During the second quarter of 2017, we commenced investment in our C1 initiative, which encompasses the global retail platform and 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 in the first half of 2019.
Ongoing Global ERP Implementation
We are continuing to invest in our multi-year global ERP implementation, which has been executed in the majority of our operations to date. We plan to transition our Europe-direct business onto the system in mid-2018, at which point we will have completed the major phases of our global rollout.
Experience First ("X1")
We have also made the decision to launch a new initiative, X1. This initiative within our DTC operations 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 an upgrade of our e-commerce platforms to offer improved search, browsing, checkout, loyalty, and customer care experiences for mobile shoppers, and is expected to be implemented 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
Project CONNECT is a comprehensive assessment of the company's operating model aimed at aligning our resources to accelerate execution on our strategic priorities. Project CONNECT includes initiatives to drive revenue, capture cost of sales efficiencies, generate SG&A expense savings, and improve our marketing effectiveness. During the second half of 2017, the company began implementation of operational improvements throughout the business.

23



A few of the first initiatives to be implemented include e-commerce optimization, indirect procurement, marketing effectiveness, and refining the promotional cadence in DTC. We will continue to implement other initiatives as implementation plans are more fully developed, particularly those pertaining to product creation, such as assortment optimization and intensifying our emphasis on designing products with the features and functions that consumers value most.
As these improvements begin to be 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.
We are beginning to see financial benefits from these initiatives and recent progress gives us increasing confidence that we can generate more meaningful financial value capture in 2019.
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 March 31 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 other non-GAAP financial measures in our first quarter 2018 financial results and updated 2018 financial outlook earnings release, located in the investor relations section of our website at http://investor.columbia.com/results.cfm. 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 First Quarter of 2018

Net sales increased $63.5 million, or 12%, to $607.3 million from $543.8 million in the first 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 increases in first quarter 2018 net sales and SG&A expenses include $8.3 million of incremental net sales and corresponding expenses resulting from this change in classification.
Net income attributable to Columbia Sportswear Company increased $9.1 million, or 25%, to $45.1 million, or $0.64 per diluted share, including Project CONNECT program expenses and discrete costs of approximately $8.4 million, net of tax, or $0.12 per diluted share, and incremental tax expense related to the TCJA of $1.0 million, or $0.01 per diluted share, compared to net income of $36.0 million, or $0.51 per diluted share, in the first quarter of 2017, which included Project CONNECT program expenses and discrete costs of approximately $0.9 million, net of tax, or $0.01 per diluted share.
We paid a quarterly cash dividend of $0.22 per share, or $15.5 million, in the first quarter of 2018.
The following table sets forth, for the periods indicated, the percentage relationship to net sales of specified items in our Condensed Consolidated Statements of Operations:

24


 
Three Months Ended March 31,
 
2018
 
2017
Net sales
100.0

 
100.0

Cost of sales
50.7

 
52.5

Gross profit
49.3

 
47.5

Selling, general and administrative expenses
40.1

 
39.1

Net licensing income
0.6

 
0.4

Income from operations
9.8

 
8.8

Interest income, net
0.3

 
0.1

Income before income tax
10.1

 
8.9

Income tax expense
(2.1
)
 
(1.8
)
Net income
8.0

 
7.1

Net income attributable to non-controlling interest
0.6

 
0.5

Net income attributable to Columbia Sportswear Company
7.4
 %
 
6.6
 %
Quarter Ended March 31, 2018 Compared to Quarter Ended March 31, 2017
Net Sales: Consolidated net sales increased $63.5 million, or 12% (8% constant-currency), to $607.3 million for the first quarter of 2018, from $543.8 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 first quarter 2018 net sales and SG&A expenses include $8.3 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 March 31,
 
 
 
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
$
362.8

 
$

 
$
362.8

 
$
333.2

 
9%
 
9%
LAAP
131.6

 
(7.5
)
 
124.1

 
118.3

 
11%
 
5%
EMEA
71.8

 
(8.2
)
 
63.6

 
55.4

 
30%
 
15%
Canada
41.1

 
(2.0
)
 
39.1

 
36.9

 
11%
 
6%
 
$
607.3

 
$
(17.7
)
 
$
589.6

 
$
543.8

 
12%
 
8%
(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 $29.6 million, or 9%, to $362.8 million for the first quarter of 2018 from $333.2 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. At March 31, 2018, we operated 130 retail stores, compared with 120 retail stores at March 31, 2017. The net sales increase in our wholesale business was led by the Columbia and prAna brands and reflected increased Spring 2018 advanced orders.
Net sales in the LAAP region increased $13.3 million, or 11% (5% constant-currency), to $131.6 million for the first quarter of 2018, from $118.3 million for the comparable period in 2017. Excluding the $8.3 million net sales increase, associated with the adoption of ASC 606, as described above, the net sales increase in the LAAP region was driven by the positive effect of changes in foreign currency exchange rates and increases in Japan DTC and China e-commerce net sales, partially offset by net sales decreases in our LAAP distributor business and China wholesale. The net sales decrease in our LAAP distributor business reflected a shift in timing of decreased Spring 2018 advance wholesale orders from the first quarter of 2018 into the fourth quarter of 2017. The decrease in China wholesale net sales was attributed to a timing shift of accelerated Spring 2017 product shipments into the first quarter of 2017 in advance of the ERP go-live that occurred in the second quarter of 2017.

25


Net sales in the EMEA region increased $16.4 million, or 30% (15% constant-currency), to $71.8 million for the first quarter of 2018 from $55.4 million for the comparable period in 2017. The net sales increase in the EMEA region was led by our Europe-direct business, followed by a slight net sales increase in our EMEA distributor business. The net sales increase in our Europe-direct business was driven by increased wholesale net sales, including Spring 2018 advance orders, followed by increased DTC net sales.
Net sales in Canada increased $4.2 million, or 11% (6% constant-currency), to $41.1 million for the first quarter of 2018 from $36.9 million for the comparable period in 2017. The net sales increase in Canada was led by a net sales increase in our DTC business, followed by a net sales increase in our wholesale business.
Sales by Brand
Net sales by brand are summarized in the following table:
 
Three Months Ended March 31,
 
 
 
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
$
508.8

 
$
(16.1
)
 
$
492.7

 
$
449.1

 
13%
 
10%
SOREL
30.8

 
(0.9
)
 
29.9

 
27.2

 
13%
 
10%
prAna
42.3

 

 
42.3

 
38.7