COLUMBIA SPORTSWEAR CO 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This quarterly report contains forward-looking statements within the meaning of federal securities laws. Forward-looking statements include any statements related to our expectations regarding future performance or market position, including statements regarding consumer demand, capital outflows, operating expense, our ability to manage credit risk, sales volumes, inventory production and fulfillment, marketing strategies, income from operations, net sales, profitability, cash and our ability to meet our cash needs. Forward-looking statements often use words such as "will", "anticipate", "estimate", "expect", "should", "may", and other words and terms of similar meaning or reference future dates. Our expectations, beliefs and projections are expressed in good faith and are believed to have a reasonable basis; however, each forward-looking statement involves a number of risks and uncertainties, including those described in Part II, Item 1A, Risk Factors in this quarterly report. We caution that forward-looking statements are inherently less reliable than historical information. 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. New factors emerge from time to time and it is not possible for us to predict or assess the effects of all such factors or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Our Business As one of the largest outdoor, active and everyday lifestyle apparel and footwear companies in the world, we design, develop, market, and distribute outdoor, active and everyday lifestyle apparel, footwear, accessories, and equipment primarily under the Columbia, SOREL, Mountain Hardwear, and prAna brands. Our products are sold through a mix of wholesale distribution channels, our own direct-to-consumer ("DTC") businesses 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, 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. 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 2019, approximately 60% of our net sales and approximately 75% 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. 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. Impacts of COVID-19 COVID-19 was first identified in China in December 2019 and a global pandemic of respiratory disease caused by COVID-19 was declared by the World Health Organization in March 2020. In response to this pandemic, many regional and local governments worldwide implemented travel restrictions, business shutdowns or slowdowns, and shelter-in-place or stay-at-home orders. Lower consumer demand related to the COVID-19 pandemic began to impact our financial performance in China in late January, Korea and Japan in early February and North America and Europe in March, due to store closures, reduced operating hours and decreased retail traffic. In addition, many of our wholesale customers and international distributors experienced a similar timeline and closed stores or reduced operating hours, resulting in lower than expected sales, cancellation of orders and a slowing of receipt of shipments of our products. The vast majority of our stores closed due to the pandemic and reopened in China and Korea by late April and in the U.S., Europe, Japan, and Canada predominantly within the May and June timeframe. Throughout the third quarter 2020, while there were isolated temporary store closures from local regulations or safety concerns, the vast majority of our owned stores remained open. Overall, our store retail traffic trends remain well below prior year levels. We continue to restrict store capacity to accommodate social distancing measures, which is impacting the performance of our retail operations. Stores in destination locations and tourist-dependent markets remain some of the most severely impacted stores within our fleet. Throughout the first nine months of 2020, our global DTC e-commerce business remained operational, supported by the employees in our distribution centers and call centers. During the third quarter, our DTC e-commerce business grew 55% year-over-year and represented 12% 23 Table of Contents of our global net sales during the quarter. We anticipate our global e-commerce sales growth to remain high for the remainder of the year compared to 2019. While work has been done throughout the pandemic to mitigate its effect on our inventory supply, the combined effect of retail stores closures and the resulting decrease in consumer demand, as well as actions taken by our wholesale customers to preserve their capital and liquidity, caused higher than normal inventory levels. We received significant order cancellations during the first half of 2020, and, simultaneously, curtailed planned inventory purchases. Our unsold inventory as of September 30, 2020 was slightly elevated compared to September 2019. Nonetheless, it has declined sequentially compared to June 30, 2020. We anticipate profitably selling the remaining inventory in current and future seasons by leveraging our wholesale customers, DTC e-commerce platforms and stores, the majority of which are outlet stores. We expect earlier holiday marketing and promotional activities as retailers seek to mitigate social distancing and shipping capacity constraints to encourage consumers to stretch holiday shopping over a longer time period. The COVID-19 pandemic also impacted our distribution centers, call centers, retail stores, third-party manufacturing partners and other vendors, due to the effects of facility closures, reductions in operating hours, labor and equipment shortages, port congestion, and real time changes in operating procedures to comply with local government guidelines, while maintaining enhanced health and safety protocols. Our work-from-home policies continue in many regions, including the United States. In response to the uncertainty of the pandemic described above, we enhanced our liquidity position during the year by taking various actions, including: • increasing our total available committed and uncommitted credit lines and facilities to provide approximately $665 million of borrowing capacity, of which $530 million is committed and available; • suspending the quarterly dividend and share repurchases; and • reducing planned capital expenditures. We have initiated numerous cost containment measures across the organization, including lowering personnel related expenses, reducing demand creation spend, and minimizing discretionary expenditures. These measures reflect our effort to lower 2020 operating expenses by more than $100 million compared to last year, before expenses related to the COVID-19 pandemic. We are executing cost reduction and resource allocation actions that will impact our cost structure for 2021 and beyond. While certain of these cost containment actions will result in permanent expense reductions, a significant portion of these costs will likely return in 2021, including incentive compensation expense and certain discretionary expenses, such as travel costs. We are executing these actions to ensure the business is structured for sustainable and profitable growth in the face of the evolving market landscape. See the Liquidity and Capital Resources section below for additional information. Business Outlook The ongoing business disruption and uncertainty surrounding the pandemic makes it difficult to predict our future results. Although our financial performance has been impacted by the pandemic, we anticipate 2020 profitability to be heavily concentrated in the second half of the year. Absent further deterioration in trends due to the pandemic, we anticipate continued sequential improvement in our fundamental operating and financial performance in the fourth quarter. We anticipate sales volumes to remain below prior year levels in the fourth quarter. We expect future material financial impacts associated with the COVID-19 pandemic, including, but not limited to, lower global net sales, the delay of inventory production and fulfillment, and costs associated with the COVID-19 pandemic. Factors that could significantly affect our full year 2020 financial results include: • lower consumer demand as a result of effects from the COVID-19 pandemic and/or related governmental actions and regulations; • growth, performance and profitability of our global DTC operations, including depressed consumer traffic in our retail stores and recent elevated DTC e-commerce growth trends; • our ability to staff and operate our distribution centers to fulfill DTC e-commerce demand while providing a safe working environment with adequate social distancing and other safety precautions; • equipment and labor capacity of third-party logistics providers to service the demands of our business and the retail industry generally; • increasing consumer expectations and competitive pressures related to various aspects of our e-commerce business, including speed of product delivery, shipping charges, return privileges and other evolving expectations; • impairment of long-lived assets, operating lease right-of-use assets, intangible assets and/or goodwill; • unseasonable weather conditions or other unforeseen factors affecting consumer demand and the resulting effect on cancellations of advance wholesale and distributor orders, sales returns, 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 customer and end-consumer demand in subsequent seasons; • our ability to effectively manage our inventory, including liquidating excess inventory timely and profitably through closeout sales in our wholesale and DTC businesses, in a market with elevated inventory; 24 Table of Contents • the stability of our DTC e-commerce platforms and continued optimization of our North America retail information technology systems; • difficult economic, geopolitical and competitive environments in certain key markets globally, coupled with increasing global economic uncertainty; and • economic and industry trends affecting consumer traffic and spending in brick and mortar retail channels, which have created uncertainty regarding the long-term financial health of certain of our wholesale customers, and, in certain cases, may require cancellation of customer shipments and/or increased credit exposure associated with any such shipments. Strategic Priorities We are committed to driving sustainable and profitable long-term growth and investing in our strategic priorities to: • drive brand awareness and sales growth through increased, focused demand creation investments; • enhance consumer experience and digital capabilities in all of our channels and geographies; • expand and improving global DTC operations with supporting processes and systems; and • invest in our people and optimizing our organization across our portfolio of brands. Capital Allocation We are committed to maintaining a strong balance sheet in order to provide ourselves with maximum strategic flexibility and access to additional liquidity, if warranted. In response to the COVID-19 pandemic, we immediately shifted our capital allocation strategies to reduce capital outflows. As our business recovers from the pandemic and cash flows become more reliable and predictable, we will review our strategy to return value to shareholders. This includes management's review of resuming our share repurchase program and our Board of Directors' review of reinstating quarterly dividends. Experience First ("X1") During 2018, we commenced investment in our X1 initiative, which is designed to enhance our e-commerce systems to take advantage of the changes in consumer browsing and purchasing behaviors towards mobile devices. It encompasses re-implementation of our e-commerce platforms to offer improved search, browsing, checkout, mobile payment tenders, and customer care experiences for mobile shoppers. In 2019, we implemented X1 across 10 countries in Europe-Direct and for the prAna brand in the U.S. In the third quarter of 2020, we implemented X1 in North America for the Columbia, SOREL and Mountain Hardwear brands. Going forward, we are focused on optimizing the X1 platform. 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 in this quarterly report. All references to quarters relate to the quarter ended September 30 of the particular year. To supplement financial information reported in accordance with accounting principles generally accepted in the United States ("GAAP"), we disclose constant-currency net sales information, which is a non-GAAP financial measure, to provide a framework to assess how the business performed excluding the effects of changes in the exchange rates used to translate net sales generated in foreign currencies into United States 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. Highlights of the Third Quarter of 2020 Lower net sales and profitability in third quarter 2020 compared to third quarter 2019 primarily reflect the ongoing negative effects of the COVID-19 pandemic. • Net sales decreased $205.7 million, or 23%, to $701.1 million from $906.8 million in the third quarter of 2019. • Income from operations decreased $66.4 million , or 44%, to $85.6 million from $152.0 million in the third quarter of 2019. • Net income decreased $56.5 million, or 47%, to $62.8 million, or $0.94 per diluted share, from $119.3 million, or $1.75 per diluted share, in the third quarter of 2019. 25 Table of Contents The following table sets forth, for the periods indicated, the percentage relationship to net sales of specified items in our Condensed Consolidated Statements of Operations: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 51.1 50.7 52.0 50.3 Gross profit 48.9 49.3 48.0 49.7 Selling, general and administrative expenses 37.3 33.0 47.6 37.9 Net licensing income 0.6 0.5 0.4 0.5 Income from operations 12.2 16.8 0.8 12.3 Interest income (expense), net — 0.2 0.1 0.4 Other non-operating income (expense), net (0.1) (0.1) 0.1 — Income before income tax 12.1 16.9 1.0 12.7 Income tax expense (3.1) (3.7) (0.2) (2.3) Net income 9.0 % 13.2 % 0.8 % 10.4 % Results of Operations — Consolidated Quarter Ended September 30, 2020 Compared to Quarter Ended September 30, 2019 Net Sales: Consolidated net sales decreased $205.7 million, or 23%, to $701.1 million for the third quarter of 2020 from $906.8 million for the comparable period in 2019. The overall decrease primarily reflects the negative impacts from the ongoing COVID-19 pandemic. Net sales by brand, product category and channel are summarized in the following table: Three Months Ended September 30, Reported Net Sales Adjust for Foreign Currency Translation Constant-currency Net Sales Reported Net Sales Reported Net Sales Constant-currency Net Sales (In millions, except for percentage changes) 2020 2020 (1) 2019 % Change % Change (1) Brand Net Sales: Columbia $ 559.7 $ (3.3) $ 556.4 $ 729.5 (23)% (24)% SOREL 91.5 (0.5) 91.0 116.1 (21)% (22)% prAna 30.5 — 30.5 38.5 (21)% (21)% Mountain Hardwear 19.4 (0.1) 19.3 22.7 (15)% (15)% Total $ 701.1 $ (3.9) $ 697.2 $ 906.8 (23)% (23)% Product Category Net Sales: Apparel, Accessories and Equipment $ 510.2 $ (2.8) $ 507.4 $ 684.7 (25)% (26)% Footwear 190.9 (1.1) 189.8 222.1 (14)% (15)% Total $ 701.1 $ (3.9) $ 697.2 $ 906.8 (23)% (23)% Channel Net Sales: Wholesale $ 471.5 $ (3.2) $ 468.3 $ 652.6 (28)% (28)% DTC 229.6 (0.7) 228.9 254.2 (10)% (10)% Total $ 701.1 $ (3.9) $ 697.2 $ 906.8 (23)% (23)% (1) Constant-currency net sales information is a non-GAAP financial measure that excludes the effect of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the average exchange rates that were in effect during the comparable period of the prior year. Gross Profit: Gross profit as a percentage of net sales contracted to 48.9% in the third quarter of 2020 from 49.3% for the comparable period in 2019, primarily due to lower DTC product margins reflecting elevated promotional activity and freight costs. Our gross profit may not be comparable to other companies in our industry because some of these companies may include all of the costs related to their distribution network in cost of sales while we, like many others, include these expenses as a component of SG&A expense. 26 Table of Contents Selling, General and Administrative Expense : SG&A expense includes all costs associated with our design, merchandising, marketing, distribution and corporate functions, including related depreciation and amortization. SG&A expense decreased $38.1 million, or 13%, to $261.2 million, or 37.3% of net sales, for the third quarter of 2020, from $299.2 million, or 33.0% of net sales, for the comparable period in 2019, primarily reflecting: • decreased demand creation; • lower retail expenses, primarily resulting from lower personnel expenses; and • decreased information technology project-related expenses; partially offset by • other expenses related to the COVID-19 pandemic. In March 2020, we initiated numerous cost containment measures across the organization to mitigate the impacts of COVID-19 on our business. See additional discussion of these measures in the Impacts of COVID-19 discussion above. Income from Operations: Income from operations was $85.6 million, or 12.2% of net sales, in the third quarter of 2020 compared to income from operations of $152.0 million, or 16.8% of net sales, in the comparable period in 2019. Income Tax Expense: Income tax expense was $22.1 million for the third quarter of 2020, compared to $33.6 million for the comparable period in 2019. Our effective income tax rate was 26.1% for the third quarter of 2020, compared to 22.0% for the same period in 2019. Our effective tax rate increased compared to prior year primarily due to the change in mix of book income or loss among jurisdictions. Net Income: Net income was $62.8 million, or $0.94 per diluted share, for the third quarter of 2020 compared to $119.3 million, or $1.75 per diluted share, for the comparable period in 2019. 27 Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019 Net Sales: Consolidated net sales decreased $501.7 million, or 24%, to $1,585.9 million for the nine months ended September 30, 2020 from $2,087.6 million for the comparable period in 2019. The decrease primarily reflects the impact of the ongoing COVID-19 pandemic, resulting in temporary store closures, including our wholesale customers' stores, and lower consumer demand. Net sales decreased across all regions, brands and product categories, primarily in the U.S. wholesale, U.S. DTC and LAAP businesses. Net sales by brand, product category and channel are summarized in the following table: Nine Months Ended September 30, Reported Net Sales Adjust for Foreign Currency Translation Constant-currency Net Sales Reported Net Sales Reported Net Sales Constant-currency Net Sales (In millions, except for percentage changes) 2020 2020 (1) 2019 % Change % Change (1) Brand Net Sales: Columbia $ 1,297.2 $ 1.5 $ 1,298.7 $ 1,736.6 (25)% (25)% SOREL 143.5 (0.4) 143.1 170.7 (16)% (16)% prAna 94.7 — 94.7 118.4 (20)% (20)% Mountain Hardwear 50.5 0.1 50.6 61.9 (18)% (18)% Total $ 1,585.9 $ 1.2 $ 1,587.1 $ 2,087.6 (24)% (24)% Product Category Net Sales: Apparel, Accessories and Equipment $ 1,206.2 $ 0.8 $ 1,207.0 $ 1,642.9 (27)% (27)% Footwear 379.7 0.4 380.1 444.7 (15)% (15)% Total $ 1,585.9 $ 1.2 $ 1,587.1 $ 2,087.6 (24)% (24)% Channel Net Sales: Wholesale $ 957.3 $ (0.6) $ 956.7 $ 1,312.0 (27)% (27)% DTC 628.6 1.8 630.4 775.6 (19)% (19)% Total $ 1,585.9 $ 1.2 $ 1,587.1 $ 2,087.6 (24)% (24)% (1) Constant-currency net sales information is a non-GAAP financial measure that excludes the effect of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the average exchange rates that were in effect during the comparable period of the prior year. Gross Profit: Gross profit as a percentage of net sales, decreased to 48.0% in the nine months ended September 30, 2020, from 49.7% for the comparable period in 2019, primarily reflecting: • lower wholesale product margins resulting from higher close-out sales mix; and • lower DTC product margins, reflecting elevated promotional activity; partially offset by • favorable sales mix, resulting from a higher proportion of DTC e-commerce sales, which generally carry higher gross margins. Selling, General and Administrative Expense : SG&A expense decreased $36.1 million, or 4.6%, to $755.7 million, or 47.6% of net sales, for the nine months ended September 30, 2020, from $791.8 million, or 37.9% of net sales, for the comparable period in 2019, primarily reflecting: • lower retail expenses of $26.7 million, primarily resulting from lower personnel expenses due to store closures; • decreased demand creation of $22.0 million; • discretionary expenses associated with cost containment efforts; and • lower incentive compensation; partially offset by • increased bad debt expense of $24.7 million, reflecting heightened accounts receivable risk resulting from the ongoing COVID-19 pandemic; and • increased other expenses of $21.7 million related to the COVID-19 pandemic. In March 2020, we initiated numerous cost containment measures across the organization to mitigate the impacts of COVID-19 on our business. See additional discussion of these measures in the Impacts of COVID-19 discussion above. Income from Operations: Income from operations was $13.4 million, or 0.8% of net sales, for the nine months ended September 30, 2020 compared to income from operations of $256.3 million, or 12.3% of net sales for the comparable period in 2019. 28 Income Tax Expense: Income tax expense was $4.0 million for the nine months ended September 30, 2020 compared to $48.2 million for the comparable period in 2019. Our effective income tax rate was 24.8% for the nine months ended September 30, 2020 compared to 18.2% for the same prior year in 2019. Our effective income tax rate for the nine months ended September 30, 2020 increased compared to prior year primarily due to the change in mix of book income or loss among jurisdictions, as well as the favorable impact of the passage of a Swiss tax reform package on our effective income tax rate for the comparable period in 2019. Net Income: Net income was $12.3 million, or $0.18 per share, for the nine months ended September 30, 2020 compared to net income of $216.5 million, or $3.15 per diluted share, for the comparable period in 2019. Results of Operations — Segment Quarter Ended September 30, 2020 Compared to Quarter Ended September 30, 2019 Net 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 (In millions, except for percentage changes) 2020 Translation 2020 (1) 2019 % Change % Change (1) U.S. $ 445.6 $ — $ 445.6 $ 581.3 (23)% (23)% LAAP 90.9 (0.6) 90.3 123.2 (26)% (27)% EMEA 99.2 (3.6) 95.6 104.4 (5)% (8)% Canada 65.4 0.3 65.7 97.9 (33)% (33)% $ 701.1 $ (3.9) $ 697.2 $ 906.8 (23)% (23)% (1) Constant-currency net sales information is a non-GAAP financial measure that excludes the effect of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the average exchange rates that were in effect during the comparable period of the prior year. Unless otherwise noted below, lower net sales primarily reflects the ongoing negative effects of the COVID-19 pandemic compared to the same period in 2019. • U.S. net sales decreased $135.7 million, or 23%, to $445.6 million for the third quarter of 2020 from $581.3 million for the comparable period in 2019. The U.S. net sales decrease was driven primarily by lower net sales in the U.S. wholesale business, and, to a lesser extent, lower net sales in the U.S. DTC business. The net sales decrease in the U.S. DTC business was driven by decreased net sales from retail stores, partially offset by increased net sales from our e-commerce business. • LAAP region net sales decreased $32.3 million, or 26% (27% constant-currency), to $90.9 million for the third quarter of 2020 from $123.2 million for the comparable period in 2019. The net sales decrease in the LAAP region was primarily driven by decreased net sales in our China, Japan and LAAP distributor businesses, and to a lesser extent, decreased net sales in our Korea business. • EMEA region net sales decreased $5.2 million, or 5% ( 8% constant-currency), to $99.2 million for the third quarter of 2020 from $104.4 million for the comparable period in 2019. The net sales decrease in the EMEA region was driven by decreased net sales in our Europe-direct business, partially offset by increased net sales in our EMEA distributor business resulting from a greater portion of Fall 2020 shipments falling into the third quarter 2020 compared to Fall 2019 shipments in the prior year. • Canada net sales decreased $32.5 million, or 33%, to $65.4 million for the third quarter of 2020 from $97.9 million for the comparable period in 2019. The net sales decrease in Canada was primarily driven by decreased net sales in our wholesale business. Segment Income from Operations: Segment income from operations includes net sales, cost of sales, SG&A expenses, and net licensing income for each of our four reportable geographic segments. Typically, income from operations as a percentage of net sales in the U.S. is higher than the other segments due to scale efficiencies associated with the larger base of net sales in the U.S. and incremental licensing income compared to other segments. Generally, we anticipate this trend will continue until other segments achieve scale efficiencies from higher levels of net sales volume relative to the fixed cost structure necessary to operate the business. The EMEA segment, in particular, typically has realized lower operating margins compared to other segments due to a relatively higher fixed cost structure associated with our supply chain and administrative functions, compared to net sales. To the extent net sales increase in the EMEA segment, we would anticipate an improvement in the operating income margin of that segment. 29 Table of Contents The following table presents segment income from operations for each reportable segment: Three Months Ended September 30, (In millions, except for percentage changes) 2020 2019 Change ($) U.S. $ 96.6 $ 156.2 $ (59.6) LAAP 4.7 17.1 (12.4) EMEA 19.0 18.2 0.8 Canada 19.7 27.0 (7.3) Total segment income from operations 140.0 218.5 (78.5) Unallocated corporate expenses (54.4) (66.5) (12.1) Income from operations $ 85.6 $ 152.0 $ (66.4) Unless otherwise noted below, lower income from operations primarily reflects the ongoing negative effects of the COVID-19 pandemic compared to the same period in 2019. • U.S. income from operations of $96.6 million, or 21.7% of net sales, for the third quarter of 2020 decreased $59.6 million from $156.2 million, or 26.9% of net sales, for the comparable period in 2019. The decrease in operating income primarily reflects the fixed cost base of our U.S. operations coupled with a significant decline in sales due to the COVID-19 pandemic. Gross margin contracted due to increased promotional activity to drive consumer demand in our U.S. DTC business, primarily for U.S. retail stores. U.S. SG&A expense increased as a percentage of net sales to 28.5% for the third quarter of 2020, compared to 23.1% for the same period in 2019. U.S. SG&A expense for the third quarter of 2020 included COVID-19 related expenses. • LAAP income from operations of $4.7 million, or 5.2% of net sales, for the third quarter of 2020 decreased $12.4 million from $17.1 million, or 13.9% of net sales, for the comparable period in 2019. The decrease resulted from a decline in net sales primarily reflecting the impact of the COVID-19 pandemic and lower gross margin due to increased promotions and discounts to drive consumer demand and liquidate excess inventories. LAAP SG&A expense increased as a percentage of net sales to 46.6% for the third quarter of 2020 compared to 39.4% for the same period in 2019. • EMEA income from operations of $19.0 million, or 19.1% of net sales, for the third quarter of 2020 increased $0.8 million from $18.2 million, or 17.4% of net sales, for the comparable period in 2019. The increase was driven by increased gross margin due to favorable comparisons to last year and SG&A expense leverage. EMEA SG&A expense decreased as a percentage of net sales to 26.3% for the third quarter of 2020 compared to 27.6% for the same period of 2019. • Canada income from operations of $19.7 million, or 30.2% of net sales, for the third quarter of 2020 decreased $7.3 million from $27.0 million, or 27.6% of net sales, for the comparable period in 2019. The decrease was primarily driven by decreased wholesale net sales from order cancellations received earlier in the year, partially offset by increased gross margin. Canada SG&A expense increased as a percentage of net sales to 17.5% for the third quarter of 2020 compared to 16.9% for the same period of 2019. Unallocated corporate expenses decreased by $12.1 million to $54.4 million for the third quarter of 2020 from $66.5 million for the comparable period in 2019. Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 Net Sales by Geographic Region: Net sales by geographic region are summarized in the following table: Nine Months Ended September 30, Adjust for Constant- Constant- Reported Foreign currency Reported Reported currency Net Sales Currency Net Sales Net Sales Net Sales Net Sales (In millions, except for percentage changes) 2020 Translation 2020 (1) 2019 % Change % Change (1) U.S. $ 1,004.7 $ — $ 1,004.7 $ 1,309.0 (23)% (23)% LAAP 260.9 2.7 263.6 357.7 (27)% (26)% EMEA 213.3 (1.7) 211.6 267.3 (20)% (21)% Canada 107.0 0.2 107.2 153.6 (30)% (30)% $ 1,585.9 $ 1.2 $ 1,587.1 $ 2,087.6 (24)% (24)% (1) Constant-currency net sales information is a non-GAAP financial measure that excludes the effect of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the average exchange rates that were in effect during the comparable period of the prior year. Unless otherwise noted below, net sales decreases within all regions primarily reflect the impact of temporary store closures, including our wholesale customers' stores, and lower consumer demand resulting from the ongoing COVID-19 pandemic compared to the same period in 2019. 30 Table of Contents • U.S. net sales decreased $304.3 million, or 23%, to $1,004.7 million for the nine months ended September 30, 2020 from $1,309.0 million for the comparable period in 2019. U.S. net sales decreased in our U.S. wholesale and DTC businesses primarily reflecting the ongoing impacts from the COVID-19 pandemic, including actions taken to curtail purchases of Fall 2020 inventory and rationalize our Fall 2020 order book. The net sales decrease in the U.S. DTC business was driven by decreased net sales from retail stores, partially offset by increased net sales from our e-commerce business. • LAAP region net sales decreased $96.8 million, or 27% (26% constant-currency), to $260.9 million for the nine months ended September 30, 2020 from $357.7 million for the comparable period in 2019. The net sales decrease in the LAAP region was primarily driven by decreased net sales in our China and Japan businesses, and to a lesser extent, decreased net sales in the LAAP distributors and Korea businesses. • EMEA region net sales decreased $54.0 million , or 20% (21% constant-currency), to $213.3 million for the nine months ended September 30, 2020 from $267.3 million for the comparable period in 2019. The net sales decrease in the EMEA region was led by decreased net sales in our Europe-direct business, followed by our EMEA distributor business. • Canada net sales decreased $46.6 million, or 30%, to $107.0 million for the nine months ended September 30, 2020 from $153.6 million for the comparable period in 2019. The net sales decrease in Canada was primarily driven by decreased net sales in our wholesale business. Segment Income from Operations: The following table presents segment income from operations for each reportable segment: Nine Months Ended September 30, (In millions, except for percentage changes) 2020 2019 Change ($) U.S. $ 118.5 $ 298.4 $ (179.9) LAAP 8.7 53.8 (45.1) EMEA 19.0 36.9 (17.9) Canada 15.1 30.4 (15.3) Total segment income from operations 161.3 419.5 (258.2) Unallocated corporate expenses (147.9) (163.2) (15.3) Income from operations $ 13.4 $ 256.3 $ (242.9) Unless otherwise noted below, segment income from operations within all regions decreased due to the impact of temporary store closures, including our wholesale customers' stores, lower consumer demand, higher inventory reserves and increased bad debt expenses primarily resulting from the ongoing COVID-19 pandemic, compared to strong sales performance for the comparable period in 2019. • U.S. income from operations decreased $179.9 million to $118.5 million, or 11.8% of net sales, for the nine months ended September 30, 2020 from $298.4 million, or 22.8% of net sales, for the comparable period in 2019. The decrease was driven primarily by decreased net sales combined with decreased gross margin, increased provisions for uncollectible accounts receivable, and COVID-19 related expenses, including catastrophic paid leave and furlough pay as well as severance and other pandemic related costs. U.S. SG&A expense increased as a percentage of net sales to 37.3% for the nine months ended September 30, 2020 compared to 27.4% for the same period in 2019. • LAAP income from operations decreased $45.1 million to $8.7 million, or 3.3% of net sales, for the nine months ended September 30, 2020 from $53.8 million, or 15.0% of net sales, for the comparable period in 2019. The decrease primarily resulted from decreased net sales combined with decreased gross margin. LAAP SG&A expense increased as a percentage of net sales to 48.5% for the nine months ended September 30, 2020 compared to 40.4% for the same period in 2019. • EMEA income from operations of $19.0 million, or 8.9% of net sales, for the nine months ended September 30, 2020 decreased $17.9 million from $36.9 million, or 13.8% of net sales, for the comparable period in 2019. The decrease was driven by decreased net sales combined with decreased gross margin. EMEA SG&A expense increased as a percentage of net sales to 33.6% for the nine months ended September 30, 2020 compared to 29.0% for the same period of 2019. • Canada income from operations of $15.1 million, or 14.2% of net sales, for the nine months ended September 30, 2020 decreased $15.3 million from $30.4 million, or 19.8% of net sales, for the comparable period in 2019. The decrease primarily resulted from decreased net sales partially offset by increased gross margin. Canada SG&A expense increased as a percentage of net sales to 32.6% for the nine months ended September 30, 2020 compared to 24.4% for the same period of 2019. Unallocated corporate expenses decreased by $15.3 million to $147.9 million for the nine months ended September 30, 2020 from $163.2 million for the comparable period in 2019. Liquidity and Capital Resources At September 30, 2020, we had total cash and cash equivalents of $313.4 million, compared to $686.0 million at December 31, 2019 and $239.3 million at September 30, 2019. At September 30, 2020, we had approximately $530.2 million in committed borrowing availability. Including cash, cash equivalents, short-term investments and available committed and uncommitted credit lines, we had nearly $1 billion in total liquidity at September 30, 2020. As part of a broader capital preservation effort during the ongoing COVID-19 pandemic, in March 2020, 31 Table of Contents we suspended quarterly cash dividend payments and further share repurchases. Our Board of Directors will continue to evaluate when to reinstate future dividend distributions and management may resume share repurchases at any time, depending upon market conditions and our capital requirements. Our primary ongoing funding requirements are for working capital and capital expenditures. We expect to meet our cash needs for the next twelve months with cash and cash equivalents, short-term investments, borrowings under our committed and uncommitted lines of credit and facilities, additional borrowing capacity, access to capital markets, and cash flows from operations. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity. We continue to monitor the credit markets, as well as our business trends, to evaluate our potential needs. We have already taken key actions to mitigate the impact of the current economic crisis on our financial position with a focus on financial liquidity enhancements, capital preservation, cost containment measures, and inventory management. See "Impacts of COVID-19" above for additional discussion. Our business is affected by the general seasonal trends common to the industry. 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. Our cash, cash equivalents and short-term investments balances generally are at their lowest level at the end of the third quarter and increase during the fourth quarter from collection of wholesale business receivables and fourth quarter DTC sales. Short-term borrowings and credit lines Refer to Note 4 in Item 1 of this quarterly report for additional information regarding our lines of credit and overdraft facilities in place. At September 30, 2020, we had $525.0 million available domestically under our restated credit agreement and, internationally, our subsidiaries had approximately $140.3 million in committed and uncommitted lines of credit and overdraft facilities in place, which could be terminated at any time by either the applicable subsidiary or the banks, some of which were guaranteed by Columbia Sportswear Company. At September 30, 2020, there was no balance outstanding under these lines of credit and overdraft facilities. At the time of this filing, we are in compliance with all financial covenants necessary as a condition for borrowing under the restated credit agreement, as amended. Cash Flow Activities Net cash used in operating activities was $198.0 million for the nine months ended September 30, 2020, compared to net cash used in operating activities of $198.2 million for the same period in 2019. The change in operating cash flow was driven by a $154.6 million decrease in operating cash flow provided by net income and non-cash adjustments, offset by a $154.8 million decrease in cash used in changes in assets and liabilities. The most significant comparative changes included Accounts receivable , Accrued liabilities , and Inventories . The decrease in cash used in Accounts receivable was primarily driven by lower wholesale net sales in the third quarter of 2020 . The increase in cash used in Accrued liabilities was primarily driven by decreases in accruals for wholesale refund liabilities, wholesale and retail return liabilities, and incentive compensation. The decrease in cash used in Inventories reflects lower inventory receipts and the effect of an increase in the provision for excess, close-out or slow moving inventory. Net cash used in investing activities was $23.6 million for the nine months ended September 30, 2020, compared to net cash provided by investing activities of $159.7 million for the comparable period in 2019. For the 2020 period, net cash used in investing activities consisted primarily of $25.2 million of capital expenditures, partially offset by $1.6 million of net sales and maturities of short-term investments. For the same period in 2019, net cash provided by investing activities primarily consisted of $264.2 million of net sales and maturities of short-term investments, partially offset by $104.5 million of capital expenditures. The decrease in capital expenditures for the 2020 period compared to the same period in 2019 was due to lower planned 2020 capital expenditures as well as capital preservation measures taken in light of the ongoing COVID-19 pandemic. Net cash used in financing activities was $152.3 million for the nine months ended September 30, 2020, compared to net cash used in financing activities of $171.1 million for the comparable period in 2019. For the 2020 period, net cash used in financing activities primarily consisted of repurchases of common stock of $132.9 million, and dividend payments to our shareholders of $17.2 million. For the same period in 2019, net cash used in financing activities primarily consisted of repurchases of common stock of $116.2 million, dividend payments to our shareholders of $48.9 million, and $17.9 million related to the purchase of the non-controlling interest in our China joint venture. Contractual obligations Our inventory purchase obligations decreased to $224.2 million at September 30, 2020 compared to $337.2 million at December 31, 2019. There have been no other material changes to the estimated contractual commitments contained in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019. 32 Table of Contents Critical Accounting Policies and Estimates Management's discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make various estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting policies referred to in Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2019 have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results may differ from the estimates we use in applying these critical accounting policies. We base our ongoing estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances. Some of these critical accounting policies affect working capital account balances, including the policy for revenue recognition, allowance for uncollectible accounts receivable, excess, close-out and slow moving inventory, product warranty, impairment of long-lived assets, intangible assets and goodwill, income taxes, and stock-based compensation. Management regularly discusses with our audit committee each of our critical accounting estimates, the development and selection of these accounting estimates, and the disclosure about each estimate in this quarterly report. These discussions typically occur at our quarterly audit committee meetings and include the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation. Except as described below and disclosed in Note 1 in Item 1 of this quarterly report, 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, 2019. Impairment of Long-Lived Assets, Intangible Assets and Goodwill Long-lived assets, which include property, plant and equipment and intangible assets with finite lives, 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 the third quarter of 2020, we tested certain retail locations and their respective lease right-of-use assets for impairment. See Note 1 in Item 1 of this quarterly report for impairment charges recognized in 2020. Further declines in projected future performance or significant declines in market rents for retail spaces may adversely affect the recovery of retail locations assets. Our 2019 impairment tests of goodwill and intangible assets with indefinite lives indicated that the fair value of all reporting units and intangible assets with indefinite lives exceeded their respective carry values by more than 20%, except for the prAna brand's trademark. In the prAna brand impairment analysis, the estimated fair value of its trademark exceeded its carrying value by approximately 20%. Additionally, the estimated fair value of the prAna reporting unit exceeded its carrying value by more than 30%. As a result of the COVID-19 pandemic and a significant decline in projected net sales, the prAna brand's trademark and goodwill were tested for impairment as of March 31, 2020. While no impairment was indicated during the first quarter 2020 tests, the degree by which the fair value of the prAna reporting unit and trademark exceeded their respective carrying values declined from our 2019 impairment test. After performing both qualitative and quantitative analysis, including review of future long-term revenue and cash flow assumptions, we concluded a triggering event requiring the measurement of prAna brand's trademark and goodwill for impairment as of September 30, 2020 did not occur. If, due to the current level of uncertainty relating to the COVID-19 pandemic, the prAna brand's actual or projected future performance deteriorates from the projections considered in our first quarter 2020 tests, it is possible that an impairment charge would be required. Our impairment tests and related fair value estimates are based on a number of factors, including assumptions and estimates for projected sales, income, cash flows, discount rates, market-based multiples, remaining useful lives, and other operating performance measures. Changes in estimates or the application of alternative assumptions could produce significantly different results. These assumptions and estimates may change in the future due to changes in economic conditions, changes in our ability to meet sales and profitability objectives or changes in our business operations or strategic direction. Recent Accounting Pronouncements See "Recent Accounting Pronouncements Not Yet Adopted" in Note 1 in Item 1 of this quarterly report. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has not been any material change in the market risk disclosure contained in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2019. 33 Table of Contents