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, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from_______to_______            
Commission file number 0-23939
 _____________________________
COLUMBIA SPORTSWEAR COMPANY
(Exact name of registrant as specified in its charter) 
Oregon
 
93-0498284
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
14375 Northwest Science Park Drive
Portland, Oregon
 
97229
(Address of principal executive offices)
 
(Zip Code)
(503) 985-4000
(Registrant’s telephone number, including area code)
_____________________________________
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
The number of shares of Common Stock outstanding on October 21, 2016 was 69,799,352.



COLUMBIA SPORTSWEAR COMPANY
SEPTEMBER 30, 2016
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,
2016
 
December 31,
2015
 
September 30,
2015
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
219,189

 
$
369,770

 
$
173,410

Short-term investments
 
467

 
629

 
629

Accounts receivable, net of allowance of $8,519, $9,928 and $9,043, respectively
 
486,236

 
371,953

 
529,844

Inventories
 
588,021

 
473,637

 
546,685

Deferred income taxes
 

 

 
62,888

Prepaid expenses and other current assets
 
33,514

 
33,400

 
35,140

Total current assets
 
1,327,427

 
1,249,389

 
1,348,596

Property, plant and equipment, at cost, net of accumulated depreciation of $403,244, $363,278 and $354,273, respectively
 
285,514

 
291,687

 
294,926

Intangible assets, net (Note 4)
 
134,724

 
138,584

 
139,871

Goodwill
 
68,594

 
68,594

 
68,594

Deferred income taxes
 
79,934

 
76,181

 
2,972

Other non-current assets
 
25,622

 
21,718

 
21,917

Total assets
 
$
1,921,815

 
$
1,846,153

 
$
1,876,876

LIABILITIES AND EQUITY
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
Short-term borrowings
 
$
20

 
$
1,940

 
$
21,045

Accounts payable
 
136,667

 
217,230

 
170,168

Accrued liabilities (Note 5)
 
166,496

 
141,862

 
163,897

Income taxes payable
 
29,332

 
5,038

 
30,515

Deferred income taxes
 

 

 
126

Total current liabilities
 
332,515

 
366,070

 
385,751

Note payable to related party (Note 13)
 
14,629

 
15,030

 
15,356

Other long-term liabilities
 
43,066

 
40,172

 
38,625

Income taxes payable
 
10,724

 
8,839

 
11,256

Deferred income taxes
 
229

 
229

 
4,364

Total liabilities
 
401,163

 
430,340

 
455,352

Commitments and contingencies (Note 11)
 

 

 

Columbia Sportswear Company Shareholders’ Equity:
 
 
 
 
 

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

 

 

Common stock (no par value); 250,000 shares authorized; 69,792, 69,277, and 70,376, issued and outstanding, respectively (Note 8)
 
49,091

 
34,776

 
86,869

Retained earnings
 
1,457,495

 
1,385,860

 
1,334,390

Accumulated other comprehensive loss (Note 7)
 
(6,934
)
 
(20,836
)
 
(14,862
)
Total Columbia Sportswear Company shareholders’ equity
 
1,499,652

 
1,399,800

 
1,406,397

Non-controlling interest (Note 3)
 
21,000

 
16,013

 
15,127

Total equity
 
1,520,652

 
1,415,813

 
1,421,524

Total liabilities and equity
 
$
1,921,815

 
$
1,846,153

 
$
1,876,876

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,
 
2016
 
2015
 
2016
 
2015
Net sales
$
745,714

 
$
767,550

 
$
1,659,595

 
$
1,626,766

Cost of sales
400,002

 
411,090

 
886,922

 
870,214

Gross profit
345,712

 
356,460

 
772,673

 
756,552

Selling, general and administrative expenses
224,497

 
226,778

 
622,843

 
594,782

Net licensing income
2,415

 
2,587

 
6,279

 
5,659

Income from operations
123,630

 
132,269

 
156,109

 
167,429

Interest income, net
393

 
309

 
1,576

 
1,260

Interest expense on note payable to related party (Note 13)
(253
)
 
(275
)
 
(779
)
 
(827
)
Other non-operating expense
(620
)
 
(1,558
)
 
(736
)
 
(3,287
)
Income before income tax
123,150

 
130,745

 
156,170

 
164,575

Income tax expense
(36,598
)
 
(37,805
)
 
(43,297
)
 
(49,520
)
Net income
86,552

 
92,940

 
112,873

 
115,055

Net income attributable to non-controlling interest
2,967

 
1,879

 
5,690

 
4,068

Net income attributable to Columbia Sportswear Company
$
83,585

 
$
91,061

 
$
107,183

 
$
110,987

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

 
 
 
 
Basic
$
1.20

 
$
1.29

 
$
1.54

 
$
1.58

Diluted
1.18

 
1.28

 
1.52

 
1.56

Cash dividends per share
$
0.17

 
$
0.15

 
$
0.51

 
$
0.45

Weighted average shares outstanding (Note 8):
 
 
 
 
 
 
 
Basic
69,761

 
70,338

 
69,632

 
70,253

Diluted
70,630

 
71,239

 
70,586

 
71,201

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,
 
2016
 
2015
 
2016
 
2015
Net income
$
86,552

 
$
92,940

 
$
112,873

 
$
115,055

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized holding losses on available-for-sale securities (net of tax benefit of $0, $0, $0 and $3, respectively)
(4
)
 
(4
)
 
(2
)
 
(6
)
Unrealized gains (losses) on derivative transactions (net of tax effect of ($200), ($990), $3,360 and ($1,279), respectively)
399

 
(6,667
)
 
(9,025
)
 
(4,947
)
Foreign currency translation adjustments (net of tax benefit (expense) of ($123), ($448), ($306) and $622, respectively)
3,390

 
(12,206
)
 
22,226

 
(26,314
)
Other comprehensive income (loss)
3,785

 
(18,877
)
 
13,199

 
(31,267
)
Comprehensive income
90,337

 
74,063

 
126,072

 
83,788

Comprehensive income attributable to non-controlling interest
2,913

 
1,281

 
4,987

 
3,496

Comprehensive income attributable to Columbia Sportswear Company
$
87,424

 
$
72,782

 
$
121,085

 
$
80,292

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,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
112,873

 
$
115,055

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
44,478

 
41,921

Loss on disposal and impairment of property, plant, and equipment
3,646

 
679

Deferred income taxes
927

 
3,181

Stock-based compensation
8,454

 
8,731

Excess tax benefit from employee stock plans

 
(7,642
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(106,906
)
 
(195,018
)
Inventories
(103,475
)
 
(173,444
)
Prepaid expenses and other current assets
429

 
2,762

Other assets
(2,552
)
 
(2,676
)
Accounts payable
(82,590
)
 
(41,327
)
Accrued liabilities
10,999

 
16,747

Income taxes payable
26,045

 
16,799

Other liabilities
2,505

 
3,367

Net cash used in operating activities
(85,167
)
 
(210,865
)
Cash flows from investing activities:
 
 
 
Purchases of short-term investments
(21,263
)
 
(38,208
)
Sales of short-term investments
21,263

 
64,980

Capital expenditures
(35,588
)
 
(47,796
)
Proceeds from sale of property, plant, and equipment
52

 
126

Net cash used in investing activities
(35,536
)
 
(20,898
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
59,277

 
36,519

Repayments on credit facilities
(61,197
)
 
(15,343
)
Proceeds from issuance of common stock under employee stock plans
10,742

 
16,901

Tax payments related to restricted stock unit issuances
(4,870
)
 
(4,633
)
Excess tax benefit from employee stock plans

 
7,642

Repurchase of common stock
(11
)
 
(14,525
)
Cash dividends paid
(35,548
)
 
(31,667
)
Net cash used in financing activities
(31,607
)
 
(5,106
)
Net effect of exchange rate changes on cash
1,729

 
(3,279
)
Net decrease in cash and cash equivalents
(150,581
)
 
(240,148
)
Cash and cash equivalents, beginning of period
369,770

 
413,558

Cash and cash equivalents, end of period
$
219,189

 
$
173,410

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
14,601

 
$
26,413

Cash paid during the period for interest on note payable to related party
792

 
834

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Capital expenditures incurred but not yet paid
$
3,656

 
$
9,150

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, 2016 and 2015, and the results of operations and cash flows for the three and nine months ended September 30, 2016 and 2015. The December 31, 2015 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, 2015. 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, 2016 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 ("generally accepted accounting principles") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company, however, believes that the disclosures contained in this report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934 for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Columbia Sportswear Company, its wholly owned subsidiaries and entities in which it maintains a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates and assumptions. Some of these more significant estimates relate to revenue recognition, including sales returns and miscellaneous claims from customers, allowance for doubtful accounts, excess, slow-moving and closeout inventories, product warranty, long-lived and intangible assets, goodwill, income taxes and stock-based compensation.
Changes Affecting Comparability
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17, Balance Sheet Classification of Deferred Taxes: Topic 740, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The Company early-adopted ASU 2015-17 effective December 31, 2015 on a prospective basis. Therefore, prior periods have not been adjusted to reflect this guidance. If the Company had retrospectively adopted this guidance, the effects on September 30, 2015 balances would have been a $62,888,000 decrease in current deferred tax assets, a $62,922,000 increase in long-term deferred tax assets, a $126,000 decrease in current deferred tax liabilities and a $160,000 increase in long-term deferred tax liabilities.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting: Topic 718, which simplifies how several aspects of share-based payments are accounted for and presented in the financial statements. The Company elected to early-adopt ASU 2016-09 with an effective date of January 1, 2016. Under previous guidance, excess tax benefits and deficiencies from stock-based compensation arrangements were recorded in equity when the awards vested or were settled. ASU 2016-09 requires prospective recognition of excess tax benefits and deficiencies in the income statement, resulting in the recognition of excess tax benefits of $465,000 and $4,940,000 in income tax expense, rather than in paid-in capital, for the three and nine months ended September 30, 2016, respectively.
In addition, under ASU 2016-09, excess income tax benefits from stock-based compensation arrangements are classified as cash flow from operations, rather than as cash flow from financing activities. The Company has elected to apply the cash flow

6




classification guidance of ASU 2016-09 prospectively, resulting in an increase to operating cash flow of $4,973,000 for the nine months ended September 30, 2016; the prior year period has not been adjusted.
The Company has elected to continue to estimate the number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.
ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares, resulting in an increase in diluted weighted average shares outstanding of 227,047 and 243,002 shares for the three and nine months ended September 30, 2016, respectively.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, except as described in Note 1 under Changes affecting comparability.
Impairment of Long-lived Assets
Long-lived assets are amortized over their estimated useful lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. In these cases, the Company estimates the future undiscounted cash flows to be derived from the asset or asset group to determine whether a potential impairment exists. If the sum of the estimated undiscounted cash flows is less than the carrying value of the asset, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the estimated fair value of the asset. Impairment charges for long-lived assets are included in selling, general and administrative ("SG&A") expense and were $3,258,000 for the nine months ended September 30, 2016. These charges were recorded in the United States segment for certain underperforming retail stores. There were no such charges for the three months ended September 30, 2016 or the nine months ended September 30, 2015.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The FASB continues to clarify this guidance and most recently issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU No. 2016-10, Identifying Performance Obligations and Licensing, and ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, which have the same effective date as ASU 2014-09. These new standards will become effective beginning in the first quarter of 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. The Company has not yet selected a transition method and continues to evaluate the expected impacts on the Company's financial position, results of operations or cash flows.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, an update to their accounting guidance related to the recognition and measurement of certain financial instruments. This new standard requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and also updates certain presentation and disclosure requirements. This standard is effective beginning in the first quarter of 2018 with early adoption permitted. The adoption of ASU 2016-01 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 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 those leases previously classified as operating leases. The new standard will become effective beginning with the first quarter of 2019 using a modified retrospective approach and early adoption is permitted. The Company expects that this standard will have a material impact on its consolidated balance sheet and is currently evaluating the impact.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments: Credit Losses Topic 326: Measurement of Credit Losses on Financial Instruments. The pronouncement changes the impairment model for most financial assets, and will require the use of an "expected loss" model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This standard is effective beginning in the first quarter of 2020. The adoption of ASU 2016-13 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Effective December 31, 2015, the Company adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes: Topic 740. See Changes affecting comparability under Note 1.

7

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

Effective January 1, 2016, the Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting: Topic 718. See Changes affecting comparability under Note 1.
NOTE 3—NON-CONTROLLING INTEREST
The Company owns a 60% controlling interest in a joint venture formed with Swire Resources, Limited ("Swire") to support the development and operation of the Company's business in China. The joint venture began operations on January 1, 2014. 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, 2016 and 2015. 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, 2016 and 2015, and December 31, 2015.
The following table presents the changes in Columbia Sportswear Company shareholders' equity and non-controlling interest for the nine months ended September 30, 2016 (in thousands, except per share amounts):
 
 
Columbia Sportswear Company
 
Non-Controlling Interest
 
Total
Balance at December 31, 2015
 
$
1,399,800

 
$
16,013

 
$
1,415,813

Net income
 
107,183

 
5,690

 
112,873

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

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

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

 
(756
)
 
22,226

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

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

 

 
5,872

Stock-based compensation expense
 
8,454

 

 
8,454

Repurchase of common stock
 
(11
)
 

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

 
$
21,000

 
$
1,520,652

The following table presents the changes in Columbia Sportswear Company shareholders' equity and non-controlling interest for the nine months ended September 30, 2015 (in thousands, except per share amounts):
 
 
Columbia Sportswear Company
 
Non-Controlling Interest
 
Total
Balance at December 31, 2014
 
$
1,343,603

 
$
11,631

 
$
1,355,234

Net income
 
110,987

 
4,068

 
115,055

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Unrealized holding losses on available-for-sale securities
 
(6
)
 

 
(6
)
Derivative holding losses
 
(4,947
)
 

 
(4,947
)
Foreign currency translation adjustments
 
(25,742
)
 
(572
)
 
(26,314
)
Cash dividends ($0.45 per share)
 
(31,667
)
 

 
(31,667
)
Issuance of common stock under employee stock plans, net
 
12,268

 

 
12,268

Tax adjustment from stock plans
 
7,695

 

 
7,695

Stock-based compensation expense
 
8,731

 

 
8,731

Repurchase of common stock
 
(14,525
)
 

 
(14,525
)
Balance at September 30, 2015
 
$
1,406,397

 
$
15,127

 
$
1,421,524

NOTE 4—INTANGIBLE ASSETS, NET

8

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

Intangible assets that are determined to have finite lives include patents, purchased technology and customer relationships and are amortized over their estimated useful lives, which range from approximately 3 to 10 years, and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. Goodwill and intangible assets with indefinite useful lives, including trademarks and trade names, are not amortized but are periodically evaluated for impairment.
Intangible Assets
The following table summarizes the Company’s identifiable intangible assets (in thousands):
 
September 30,
2016
 
December 31,
2015
 
September 30,
2015
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
(8,989
)
 
(7,992
)
 
(7,659
)
Customer relationships
(8,906
)
 
(6,043
)
 
(5,089
)
Total accumulated amortization
(17,895
)
 
(14,035
)
 
(12,748
)
Net carrying amount
19,303

 
23,163

 
24,450

Intangible assets not subject to amortization
115,421

 
115,421

 
115,421

Intangible assets, net
$
134,724

 
$
138,584

 
$
139,871

Amortization expense for intangible assets subject to amortization was $1,287,000 for both the three months ended September 30, 2016 and 2015, and was $3,860,000 for both the nine months ended September 30, 2016 and 2015.
Annual amortization expense is estimated to be as follows for the years 2016-2020 (in thousands):
2016
$
5,147

2017
3,883

2018
2,980

2019
2,980

2020
2,537

NOTE 5—PRODUCT WARRANTY
Some of the Company’s products carry limited warranty provisions for defects in quality and workmanship. A warranty reserve is established at the time of sale to cover estimated costs based on the Company’s history of warranty repairs and replacements and is recorded in cost of sales. The warranty reserve is included in accrued liabilities in the Condensed Consolidated Balance Sheets.
A reconciliation of product warranties is as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Balance at beginning of period
$
11,653

 
$
10,966

 
$
11,487

 
$
11,148

Provision for warranty claims
922

 
921

 
3,360

 
3,246

Warranty claims
(462
)
 
(478
)
 
(2,894
)
 
(2,711
)
Other
76

 
(138
)
 
236

 
(412
)
Balance at end of period
$
12,189

 
$
11,271

 
$
12,189

 
$
11,271


9

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

NOTE 6—STOCK-BASED COMPENSATION
The Company’s Stock Incentive Plan (the "Plan") allows for grants of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units and other stock-based or cash-based awards. The majority of all stock options and restricted stock unit grants outstanding under the Plan were granted in the first quarter of each fiscal year. Stock compensation is recognized based on an estimated number of awards that are expected to vest.
Stock-based compensation expense consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Stock options
$
1,008

 
$
898

 
$
2,989

 
$
2,727

Restricted stock units
1,993

 
1,894

 
5,465

 
6,004

Total
$
3,001

 
$
2,792

 
$
8,454

 
$
8,731

Stock Options
The Company estimates the fair value of stock options using the Black-Scholes model. Key inputs and assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected stock price volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term and the Company’s expected annual dividend yield.
The following table presents the weighted average assumptions for stock options granted in the periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Expected option term
4.37 years
 
4.37 years
 
4.63 years
 
4.60 years
Expected stock price volatility
29.34%
 
29.37%
 
29.80%
 
26.56%
Risk-free interest rate
0.94%
 
1.27%
 
1.17%
 
1.20%
Expected annual dividend yield
1.17%
 
0.84%
 
1.20%
 
1.26%
Weighted average grant date fair value
$13.12
 
$17.12
 
$13.38
 
$10.36
During the nine months ended September 30, 2016 and 2015, the Company granted a total of 428,500 and 499,240 stock options, respectively. At September 30, 2016, unrecognized costs related to outstanding stock options totaled approximately $7,866,000, 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, 2016 are expected to be recognized over a weighted average period of 2.34 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,
 
2016
 
2015
 
2016
 
2015
Vesting period
4.01 years
 
4.00 years
 
3.83 years
 
3.82 years
Expected annual dividend yield
1.17%
 
0.93%
 
1.16%
 
1.14%
Estimated average grant date fair value per restricted stock unit
$55.43
 
$62.53
 
$55.94
 
$51.09
During the nine months ended September 30, 2016 and 2015, the Company granted 190,119 and 195,873 restricted stock units, respectively. At September 30, 2016, unrecognized costs related to outstanding restricted stock units totaled approximately $14,739,000, before any related tax benefit. The unrecognized costs related to restricted stock units are being amortized over the

10

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

related vesting period using the straight-line attribution method. These unrecognized costs at September 30, 2016 are expected to be recognized over a weighted average period of 2.18 years.
NOTE 7—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (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, 2016 (in thousands):
 
Unrealized losses on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at June 30, 2016
$

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

 
3,174

Amounts reclassified from other comprehensive income

 
665

 

 
665

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

 
3,497

 
3,839

Balance at September 30, 2016
$
(4
)
 
$
(2,991
)
 
$
(3,939
)
 
$
(6,934
)
The following table sets forth the changes in accumulated other comprehensive income (loss) attributable to Columbia Sportswear Company, net of tax, for the three months ended September 30, 2015 (in thousands):
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at June 30, 2015
$
2

 
$
10,715

 
$
(7,300
)
 
$
3,417

Other comprehensive income (loss) before reclassifications
(4
)
 
789

 
(11,608
)
 
(10,823
)
Amounts reclassified from other comprehensive income

 
(7,456
)
 

 
(7,456
)
Net other comprehensive loss during the period
(4
)
 
(6,667
)
 
(11,608
)
 
(18,279
)
Balance at September 30, 2015
$
(2
)
 
$
4,048

 
$
(18,908
)
 
$
(14,862
)
The following table sets forth the changes in accumulated other comprehensive loss attributable to Columbia Sportswear Company, net of tax, for the nine months ended September 30, 2016 (in thousands):
 
Unrealized losses on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2015
$
(2
)
 
$
6,087

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

 
14,736

Amounts reclassified from other comprehensive income

 
(834
)
 

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

 
13,902

Balance at September 30, 2016
$
(4
)
 
$
(2,991
)
 
$
(3,939
)
 
$
(6,934
)

11

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

The following table sets forth the changes in accumulated other comprehensive income (loss) attributable to Columbia Sportswear Company, net of tax, for the nine months ended September 30, 2015 (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, 2014
$
4

 
$
8,995

 
$
6,834

 
$
15,833

Other comprehensive income (loss) before reclassifications
(6
)
 
5,629

 
(25,742
)
 
(20,119
)
Amounts reclassified from other comprehensive income

 
(10,576
)
 

 
(10,576
)
Net other comprehensive loss during the period
(6
)
 
(4,947
)
 
(25,742
)
 
(30,695
)
Balance at September 30, 2015
$
(2
)
 
$
4,048

 
$
(18,908
)
 
$
(14,862
)
All reclassification adjustments related to derivative transactions are recorded in cost of sales in the Condensed Consolidated Statements of Operations. See Note 10 for further information regarding derivative instrument reclassification adjustments.
NOTE 8—EARNINGS PER SHARE
Earnings per share ("EPS") is presented on both a basic and diluted basis. Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if outstanding securities or other contracts to issue common stock were exercised or converted into common stock.
The Company early-adopted ASU 2016-09 on a prospective basis, effective January 1, 2016, which resulted in additional diluted weighted average shares of 227,047 and 243,002 for the three and nine months ended September 30, 2016. See Note 1 under Changes affecting comparability for further discussion.
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,
 
2016
 
2015
 
2016
 
2015
Weighted average shares of common stock outstanding, used in computing basic earnings per share
69,761

 
70,338

 
69,632

 
70,253

Effect of dilutive stock options and restricted stock units
869

 
901

 
954

 
948

Weighted average shares of common stock outstanding, used in computing diluted earnings per share
70,630

 
71,239

 
70,586

 
71,201

Earnings per share of common stock attributable to Columbia Sportswear Company:
 
 
 
 
 
 
 
Basic
$
1.20

 
$
1.29

 
$
1.54

 
$
1.58

Diluted
1.18

 
1.28

 
1.52

 
1.56

 
Stock options and service-based restricted stock units representing 575,541 and 192,652 shares of common stock for the three months ended September 30, 2016 and 2015, respectively, and 506,437 and 141,844 shares of common stock for the nine months ended September 30, 2016 and 2015, respectively, were outstanding but were excluded from the computation of diluted EPS as a result of applying the treasury stock method. In addition, performance-based restricted stock units representing 71,243 and 122,857 shares of common stock for the three months ended September 30, 2016 and 2015, respectively, and 68,897 and 123,075 shares of common stock for the nine months ended September 30, 2016 and 2015, 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.


12

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

Common Stock Repurchase Plan
Since the inception of the Company’s stock repurchase plan in 2004 through September 30, 2016, the Company’s Board of Directors has authorized the repurchase of $700,000,000 of the Company’s common stock. Shares of the Company’s common stock may be purchased in the open market or through privately negotiated transactions, subject to market conditions. The repurchase program does not obligate the Company to acquire any specific number of shares or to acquire shares over any specified period of time. As of September 30, 2016, the Company had repurchased 20,992,940 shares under this program at an aggregate purchase price of approximately $526,522,000. During the nine months ended September 30, 2016, the Company repurchased 200 shares of the Company's common stock at an aggregate purchase price of $11,000. During the nine months ended September 30, 2015, the Company repurchased 258,874 shares of the Company's common stock at an aggregate purchase price of $14,525,000.
NOTE 9—SEGMENT INFORMATION
The Company has aggregated its operating segments into four geographic segments: (1) United States, (2) Latin America and Asia Pacific ("LAAP"), (3) Europe, Middle East and Africa ("EMEA") and (4) Canada, which are reflective of the Company’s internal organization, management and oversight structure. Each geographic segment operates predominantly in one industry: the design, development, marketing and distribution of outdoor and active lifestyle apparel, footwear, accessories and equipment. Intersegment net sales and intersegment profits, which are recorded at a negotiated mark-up and eliminated in consolidation, are not material. Unallocated corporate expenses consist of expenses incurred by centrally-managed departments, including global information systems, finance and legal, executive compensation, unallocated benefit program expense and other miscellaneous costs.
The geographic distribution of the Company’s net sales and income from operations are summarized in the following table (in thousands) for the three and nine months ended September 30, 2016 and 2015.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net sales to unrelated entities:
 
 
 
 
 
 
 
United States
$
484,758

 
$
513,148

 
$
1,049,779

 
$
1,008,940

LAAP
112,718

 
109,407

 
301,777

 
319,537

EMEA
73,062

 
67,295

 
183,436

 
175,025

Canada
75,176

 
77,700

 
124,603

 
123,264

 
$
745,714

 
$
767,550

 
$
1,659,595

 
$
1,626,766

Segment income from operations:
 
 
 
 
 
 
 
United States
$
138,682

 
$
148,062

 
$
226,661

 
$
223,586

LAAP
17,698

 
14,967

 
37,196

 
38,894

EMEA
6,599

 
7,828

 
7,963

 
11,308

Canada
13,548

 
16,563

 
14,234

 
19,352

Total segment income from operations
176,527

 
187,420

 
286,054

 
293,140

Unallocated corporate expenses
(52,897
)
 
(55,151
)
 
(129,945
)
 
(125,711
)
Interest income, net
393

 
309

 
1,576

 
1,260

Interest expense on note payable to related party
(253
)
 
(275
)
 
(779
)
 
(827
)
Other non-operating expense
(620
)
 
(1,558
)
 
(736
)
 
(3,287
)
Income before income taxes
$
123,150

 
$
130,745

 
$
156,170

 
$
164,575

NOTE 10—FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In the normal course of business, the Company’s financial position, results of operations and cash flows are routinely subject to a variety of risks. These risks include risks associated with financial markets, primarily currency exchange rate risk and, to a lesser extent, interest rate risk and equity market risk. The Company regularly assesses these risks and has established policies and business practices designed to mitigate them. The Company does not engage in speculative trading in any financial market.
The Company actively manages the risk of changes in functional currency equivalent cash flows resulting from anticipated non-functional currency denominated purchases and sales. Subsidiaries that use European euros, Canadian dollars, Japanese yen, Chinese renminbi or Korean won as their functional currency are primarily exposed to changes in functional currency equivalent

13

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

cash flows from anticipated U.S. dollar inventory purchases. The Company's prAna subsidiary uses U.S. dollars as its functional currency and is exposed to anticipated Canadian dollar denominated sales. The Company manages these risks by using currency forward and option contracts formally designated and effective as cash flow hedges. Hedge effectiveness is generally determined by evaluating the ability of a hedging instrument’s cumulative change in fair value to offset the cumulative change in the present value of expected cash flows on the underlying exposures. For forward contracts, the change in fair value attributable to changes in forward points is excluded from the determination of hedge effectiveness and included in current period cost of sales for hedges of anticipated U.S. dollar inventory purchases and in net sales for hedges of anticipated Canadian dollar sales. For option contracts, the change in fair value attributable to changes in time value are excluded from the assessment of hedge effectiveness and included in current period cost of sales. Hedge ineffectiveness was not material during the three and nine months ended September 30, 2016 and 2015.
 
The Company also uses currency forward contracts not formally designated as hedges to manage the consolidated currency exchange rate risk associated with the remeasurement of non-functional currency denominated monetary assets and liabilities by subsidiaries that use U.S. dollars, euros, Swiss francs, Canadian dollars, yen, won or Chinese renminbi as their functional currency. Non-functional currency denominated monetary assets and liabilities consist primarily of cash and cash equivalents, short-term investments, receivables, payables and intercompany loans. The gains and losses generated on these currency forward contracts not formally designated as hedges are expected to be largely offset in other non-operating expense, net by the gains and losses generated from the remeasurement of the non-functional currency denominated monetary assets and liabilities.
The following table presents the gross notional amount of outstanding derivative instruments (in thousands): 
 
September 30,
2016
 
December 31,
2015
 
September 30,
2015
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
$
204,000

 
$
161,000

 
$
133,500

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
189,159

 
113,195

 
81,000

At September 30, 2016, approximately $3,130,000 of deferred net losses on both designated and dedesignated cash flow hedges accumulated in other comprehensive income are expected to be reclassified to net income during the next twelve months as a result of underlying hedged transactions also being recorded in net income. Actual amounts ultimately reclassified to net income are dependent on U.S. dollar exchange rates in effect against the European euro, Chinese renminbi, Canadian dollar and Japanese yen when outstanding derivative contracts mature.
At September 30, 2016, 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 $1,000,000 at September 30, 2016. 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. Finally, the Company has not pledged assets or posted collateral as a requirement for entering into or maintaining derivative positions.

14

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

The following table presents the balance sheet classification and fair value of derivative instruments (in thousands):
 
 
Balance Sheet Classification
 
September 30,
2016
 
December 31,
2015
 
September 30,
2015
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
$
1,880

 
$
5,394

 
$
2,101

Currency forward contracts
 
Other non-current assets
 
344

 
566

 
309

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
3,295

 
224

 
170

Currency forward contracts
 
Other long-term liabilities
 
559

 

 

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
99

 
1,328

 
391

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
850

 
1,693

 
489


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

15

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

 
 
Statement of
Operations
Classification
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2016
 
2015
 
2016
 
2015
Currency Forward and Option Contracts:
 
 
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income or loss
 
 
$
(266
)
 
$
789

 
$
(8,191
)
 
$
5,629

Gain (loss) reclassified from accumulated other comprehensive income or loss to income for the effective portion
 
Net sales
 
(46
)
 
187

 
115

 
187

Gain (loss) reclassified from accumulated other comprehensive income or loss to income for the effective portion
 
Cost of sales
 
(784
)
 
8,878

 
821

 
12,825

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

 

 
(81
)
 

Gain (loss) recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Net sales
 
(4
)
 
(3
)
 
1

 
(20
)
Gain (loss) recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Cost of sales
 
143

 
84

 
1,105

 
(126
)
Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) recognized in income
 
Other non-operating expense
 
(444
)
 
260

 
(3,885
)
 
2,840

NOTE 11—COMMITMENTS AND CONTINGENCIES
Inventory Purchase Obligations
Inventory purchase obligations consist of open production purchase orders and other commitments for raw materials and sourced apparel, footwear, accessories and equipment. At September 30, 2016, inventory purchase obligations were $282,129,000.
Litigation
The Company is a party to various legal claims, actions and complaints from time to time. Although the ultimate resolution of legal proceedings cannot be predicted with certainty, management believes that disposition of these matters will not have a material adverse effect on the Company’s consolidated financial statements.
NOTE 12—FAIR VALUE MEASURES
Certain assets and liabilities are reported at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, under a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
Level 1 — observable inputs such as quoted prices for identical assets or liabilities in active liquid markets;
Level 2 — inputs, other than the quoted market prices in active markets, that are observable, either directly or indirectly; or observable market prices in markets with insufficient volume and/or infrequent transactions; and
Level 3 — unobservable inputs for which there is little or no market data available, that require the reporting entity to develop its own assumptions.

16

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, 2016 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
96,994

 
$

 
$

 
$
96,994

Time deposits
42,248

 

 

 
42,248

Other short-term investments:
 
 
 
 
 
 
 
Mutual fund shares
467

 

 

 
467

Other current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)

 
1,979

 

 
1,979

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

 
344

 

 
344

Mutual fund shares
8,245

 

 

 
8,245

Total assets measured at fair value
$
147,954

 
$
2,323

 
$

 
$
150,277

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

 
$
4,145

 
$

 
$
4,145

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

 
559

 

 
559

Total liabilities measured at fair value
$

 
$
4,704

 
$

 
$
4,704

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
114,247

 
$

 
$

 
$
114,247

Time deposits
63,327

 

 

 
63,327

Other short-term investments:
 
 
 
 
 
 
 
Mutual fund shares
629

 

 

 
629

Other current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)

 
6,722

 

 
6,722

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

 
566

 

 
566

Mutual fund shares
6,887

 

 

 
6,887

Total assets measured at fair value
$
185,090

 
$
7,288

 
$

 
$
192,378

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

 
$
1,917

 
$

 
$
1,917

Total liabilities measured at fair value
$

 
$
1,917

 
$

 
$
1,917


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 September 30, 2015 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
82,137

 
$

 
$

 
$
82,137

Time deposits
23,600

 

 

 
23,600

Other short-term investments:
 
 
 
 
 
 
 
Mutual funds shares
629

 

 

 
629

Other current assets:
 
 
 
 
 
 
 
Derivative financial instruments (Note 10)

 
2,492

 

 
2,492

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

 
309

 

 
309

Mutual fund shares
6,596

 

 

 
6,596

Total assets measured at fair value
$
112,962

 
$
2,801

 
$

 
$
115,763

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

 
$
659

 
$

 
$
659

Total liabilities measured at fair value
$

 
$
659

 
$

 
$
659

 
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, 2016, December 31, 2015 or September 30, 2015.
NOTE 13—RELATED PARTY TRANSACTIONS
The Company owns a 60% controlling interest in a joint venture formed with Swire, which is a related party. The joint venture arrangement involves Transition Services Agreements ("TSAs") with Swire, under which Swire provides administrative and information technology services to the joint venture. The Company continues to reduce its costs under the TSAs as it internalizes the back-office functions and related personnel, and begins to transition the joint venture's systems to the Company's platform. The joint venture incurred service fees, valued under the TSAs at Swire's cost, of $765,000 and $1,225,000 during the three months ended September 30, 2016 and 2015, respectively, and $2,660,000 and $5,099,000 during the nine months ended September 30, 2016 and 2015, respectively. These fees are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. In addition, the joint venture pays Swire sourcing fees related to the purchase of certain inventory. These sourcing fees are capitalized into inventories and charged to cost of sales as the inventories are sold. The Company did not incur these sourcing fees for the three months ended September 30, 2016. The Company incurred $73,000 of these sourcing fees for the three months ended September 30, 2015. The Company incurred $61,000 and $362,000 of these sourcing fees for the nine months ended September 30, 2016 and 2015, respectively.
In 2014, both the Company and Swire funded long-term loans to the joint venture. The Company's loan has been eliminated in consolidation, while the Swire loan is reflected as note payable to related party in the Condensed Consolidated Balance Sheet as of September 30, 2016 and 2015 and December 31, 2015. The note with Swire, in the principal amount of RMB 97,600,000 (US $14,629,000 at September 30, 2016), matures on December 31, 2018 and bears interest at a fixed annual rate of 7%. Interest expense related to this note was $253,000 and $275,000 for the three months ended September 30, 2016 and 2015, respectively, and $779,000 and $827,000 for the nine months ended September 30, 2016 and 2015, respectively.
As of September 30, 2016 and 2015, and December 31, 2015, net payables to Swire for service fees, interest expense and miscellaneous expenses totaled $948,000, $2,995,000 and $1,472,000, respectively, and were included in accounts payable in the Condensed Consolidated Balance Sheets.

18

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

In addition to the transactions described above, Swire is also a third-party distributor of the Company's brands in certain regions outside of mainland China and purchases products from the Company under the Company's normal third-party distributor terms and pricing.

19


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 2016, 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, intellectual property disputes, our direct-to-consumer channels and other capital expenditures, including planned store additions, access to raw materials and factory capacity, financing and working capital requirements and resources, income tax rates and pre-tax income, and our exposure to market risk associated with interest rates and foreign currency exchange rates.
These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors may cause actual results to differ materially from those projected in forward-looking statements, including the risks described below in Part II, Item 1A, Risk Factors. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.
Our Business
As one of the largest outdoor and active lifestyle apparel and footwear companies in the world, we design, source, market and distribute active outdoor and lifestyle apparel, footwear, accessories and equipment primarily under the Columbia, Mountain Hardwear, SOREL and prAna brands. Our products are sold through a mix of wholesale distribution channels, our own direct-to-consumer channels and independent distributors. In addition, we license some of our trademarks across a range of apparel, footwear, accessories and equipment.
The popularity of outdoor activities, changing design trends, consumer adoption of innovative performance technologies, variations in seasonal weather, and the availability and desirability of competitor alternatives affect consumer desire for our products. Therefore, we seek to drive, anticipate and respond to trends and shifts in consumer preferences by adjusting our product offerings, developing new products with innovative performance features and designs and creating persuasive and memorable marketing communications and consumer experiences to generate consumer awareness, demand and retention. Failure to anticipate or respond to consumer needs and preferences in a timely and adequate manner could have a material adverse effect on our sales and profitability.
Seasonality and Variability of Business
Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. The expansion of our direct-to-consumer operations has increased the proportion of sales, profits and cash flows that we generate in the fourth calendar quarter. As a result, our sales and profits tend to be highest in the third and fourth calendar quarters. In 2015, approximately 60% of our net sales and approximately 90% of our profitability were realized in the second half of the year, illustrating our dependence upon sales results in the second half of the year, as well as the less seasonal nature of our operating costs.
We generally solicit orders from wholesale customers and independent distributors for the fall and spring seasons based on seasonal ordering deadlines that we establish to aid our efforts to plan manufacturing volumes to meet demand. We typically ship the majority of our advance fall season orders to customers beginning in July and continuing through December. Similarly, we typically ship the majority of our advance spring season orders to customers beginning in January and continuing through June. Generally, orders are subject to cancellation prior to the date of shipment.
Results of operations in any period should not be considered indicative of the results to be expected for any future period, particularly in light of persistent volatility of global economic and geopolitical conditions and volatility of foreign currency exchange rates which, when combined with seasonal weather patterns and inflationary or volatile input costs, reduce the predictability of our business.
Business Outlook
The global business climate continues to present us with a great deal of uncertainty, making it difficult to predict future results. Consistent with the historical seasonality of the business, we anticipate 2016 profitability to be heavily concentrated in the second half of the year. Factors that could significantly affect our full year 2016 financial results include:
Performance and profitability of our owned brick-and-mortar stores and e-commerce direct-to-consumer sales globally;

20


Unseasonable weather conditions or other unforeseen factors affecting consumer demand and the resulting effect on cancellations of advance wholesale orders, sales returns, wholesale customer accommodations, replenishment orders and reorders, direct-to-consumer sales, changes in mix and volume of full price sales in relation to promotional and closeout product sales and suppressed wholesale and end-consumer demand in subsequent seasons;
Industry trends affecting consumer traffic and spending in brick and mortar retail channels, which are creating uncertainty regarding the long-term financial health of several of our U.S. wholesale customers, including some who have recently initiated restructuring activities, bankruptcy proceedings or liquidation;
Difficult economic and/or competitive environments in certain key markets within our Europe, Middle East and Africa ("EMEA") and Latin America and Asia Pacific ("LAAP") regions, in particular, Russia and Korea;
Continued recovery and sales growth contributed by our Europe direct business;
The transactional effects of changes in foreign currency exchange rates on sales, gross margin, operating income and net income; and
Performance of our Mountain Hardwear business as we work to re-establish that brand in the marketplace.
These factors and others may have a material effect on our financial condition, results of operations or cash flows, particularly with respect to quarterly comparisons.
We are continuing to invest in our multi-year global enterprise resource planning ("ERP") implementation. To date, we have implemented our new ERP system in our North American operations and international distributor businesses, excluding prAna, as well as the majority of our global supply chain operations.
We remain focused on driving sustainable, profitable sales growth by providing innovative, stylish products at accessible prices, nurturing stronger emotional connections with consumers through compelling marketing communications, transforming our global supply chain and information technology platforms and effectively managing inventory and other working capital assets.
Results of Operations
The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying Notes that appear elsewhere in this quarterly report. 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. All references to quarters relate to the quarter ended September 30 of the particular year.
Highlights of the Third Quarter of 2016

Net sales for the third quarter of 2016 decreased $21.9 million, or 3% (3% constant-currency), to $745.7 million from $767.6 million for the third quarter of 2015.
Net income attributable to Columbia Sportswear Company decreased $7.5 million, or 8%, for the third quarter of 2016 to $83.6 million, or $1.18 per diluted share, compared to net income of $91.1 million, or $1.28 per diluted share, for the third quarter of 2015.
We paid a quarterly cash dividend of $0.17 per share, or $11.9 million, in the third quarter of 2016.
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:

21


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
53.6

 
53.6

 
53.4

 
53.5

Gross profit
46.4

 
46.4

 
46.6

 
46.5

Selling, general and administrative expenses
30.1

 
29.5

 
37.5

 
36.6

Net licensing income
0.3

 
0.3

 
0.3

 
0.4

Income from operations
16.6

 
17.2

 
9.4

 
10.3

Interest income, net

 

 
0.1

 

Interest expense on note payable to related party

 

 
(0.1
)
 

Other non-operating expense
(0.1
)
 
(0.2
)
 

 
(0.2
)
Income before income tax
16.5

 
17.0

 
9.4

 
10.1

Income tax expense
(4.9
)
 
(4.9
)
 
(2.6
)
 
(3.0
)
Net income
11.6

 
12.1

 
6.8

 
7.1

Net income attributable to non-controlling interest
0.4

 
0.2

 
0.3

 
0.3

Net income attributable to Columbia Sportswear Company
11.2
 %
 
11.9
 %
 
6.5
 %
 
6.8
 %
Quarter Ended September 30, 2016 Compared to Quarter Ended September 30, 2015
Net Sales: Consolidated net sales decreased $21.9 million, or 3% (3% constant-currency), to $745.7 million for the third quarter of 2016 from $767.6 million for the comparable period in 2015.
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
 
2016
 
Translation
 
2016(1)
 
2015
 
% Change
 
% Change(1)
 
(In millions, except for percentage changes)
United States
$
484.8

 
$

 
$
484.8

 
$
513.1

 
(6)%
 
(6)%
LAAP
112.7

 
(2.5
)
 
110.2

 
109.4

 
3%
 
1%
EMEA
73.0

 
(0.1
)
 
72.9

 
67.4

 
8%
 
8%
Canada
75.2

 
0.3

 
75.5

 
77.7

 
(3)%
 
(3)%
 
$
745.7

 
$
(2.3
)
 
$
743.4

 
$
767.6

 
(3)%
 
(3)%
(1) Constant-currency net sales information is a non-GAAP financial measure, which excludes the effect of changes in foreign currency exchange rates against the U.S. dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into U.S. dollars at the average exchange rates that were in effect during the comparable period of the prior year.
Net sales in the United States decreased $28.3 million, or 6%, to $484.8 million for the third quarter of 2016 from $513.1 million for the comparable period in 2015. The net sales decrease in the United States was concentrated in the Columbia brand, followed by the Mountain Hardwear brand, partially offset by a net sales increase in the SOREL and prAna brands. The United States net sales decrease was led by a decrease in net sales in our wholesale business, partially offset by a net sales increase in our direct-to-consumer business. The net sales decrease in our wholesale business was driven by the combined effects of a shift in the timing of shipments of fall 2016 advance orders from the third quarter into the fourth quarter of 2016 compared to the same period last year, when a larger amount of fall 2015 advance orders shipped in the third quarter compared to the fourth quarter, as well as the impact of U.S. wholesale customer bankruptcies during 2016. The net sales increase in our direct-to-consumer business was led by increased net sales from our retail stores, followed by increased e-commerce net sales. At September 30, 2016, we operated 115 retail stores, compared with 102 retail stores at September 30, 2015.
Net sales in the LAAP region increased $3.3 million, or 3% (1% in constant-currency), to $112.7 million for the third quarter of 2016 from $109.4 million for the comparable period in 2015. The net sales increase in the LAAP region was concentrated in the Columbia brand, partially offset by a net sales decrease in the Mountain Hardwear brand. The LAAP net sales increase was

22


concentrated in Japan and China, partially offset by net sales decreases in Korea and our LAAP distributor business. The net sales increase in Japan was driven by the positive effects of foreign currency exchange rates, which offset a net sales decrease in local currency. The net sales increase in China was concentrated in the Columbia brand. The net sales decrease in Korea reflected changing consumer preferences away from the outdoor category of merchandise that has resulted in industry-wide excess inventory in that country. The net sales decrease in our LAAP distributor business was due to decreased fall 2016 advance orders.
Net sales in the EMEA region increased $5.6 million, or 8% (8% constant-currency), to $73.0 million for the third quarter of 2016 from $67.4 million for the comparable period in 2015. The EMEA net sales increase consisted of net sales increases across all brands. The EMEA net sales increase consisted of a net sales increase in our EMEA direct business, driven by net sales increases in the Columbia and SOREL brands, partially offset by a net sales decrease in our EMEA distributor business, reflecting a decline in net sales to our Russia distributor as it continues to adapt its business to macroeconomic challenges in that region.
Net sales in Canada decreased $2.5 million, or 3% (3% constant-currency), to $75.2 million for the third quarter of 2016 from $77.7 million for the comparable period in 2015. The decrease in net sales in Canada was led by the SOREL brand, followed by the prAna brand, partially offset by net sales increases in the Columbia and Mountain Hardwear brands. The net sales decrease in Canada reflected a net sales decrease in our wholesale business, partially offset by a net sales increase in our direct-to-consumer 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
 
2016
 
Translation
 
2016
 
2015
 
% Change
 
% Change
 
(In millions, except for percentage changes)
Columbia
$
587.3

 
$
(1.8
)
 
$
585.5

 
$
609.7

 
(4)%
 
(4)%
SOREL
87.6

 
(0.3
)
 
87.3

 
86.2

 
2%
 
1%
prAna
38.1

 

 
38.1

 
34.4

 
11%
 
11%
Mountain Hardwear
30.5

 
(0.2
)
 
30.3

 
34.8

 
(12)%
 
(13)%
Other
2.2

 

 
2.2

 
2.5

 
(12)%
 
(12)%
 
$
745.7

 
$
(2.3
)
 
$
743.4

 
$
767.6

 
(3)%
 
(3)%
The net sales decrease in the third quarter of 2016 compared to the third quarter of 2015 was led by a net sales decrease in the Columbia brand, followed by the Mountain Hardwear brand, partially offset by net sales increases in the prAna and SOREL brands. The Columbia brand net sales decrease consisted of a net sales decrease in the United States, partially offset by increases in the LAAP region, the EMEA region and Canada.
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
 
2016
 
Translation
 
2016
 
2015
 
% Change
 
% Change
 
(In millions, except for percentage changes)
Apparel, Accessories and Equipment
$
574.1

 
$
(1.7
)
 
$
572.4

 
$
596.1

 
(4)%
 
(4)%
Footwear
171.6

 
(0.6
)