Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6 and Item 8 of this annual report. In addition, refer to Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2019 for our discussion and analysis comparing financial condition and results of operations from 2019 to 2018.
Our Business
We connect active people with their passions through our four well-known brands, Columbia, SOREL, Mountain Hardwear, and prAna, by designing, developing, marketing, and distributing our outdoor, active and everyday lifestyle apparel, footwear, accessories and equipment products to meet the diverse needs of our customers and consumers. We sell our products in approximately 90 countries and operate in four geographic segments: U.S., LAAP, EMEA, and Canada.
Our production cycle from the design to the delivery of our products requires significant inventory commitment. We begin designing and developing our seasonal product lines approximately 12 months prior to soliciting advance orders from our wholesale customers and approximately 18 months prior to the products' availability to consumers in retail stores. The majority of our advance orders are shipped to wholesale customers for spring season products beginning in January and continuing through June, and for fall season products to wholesale customers beginning in July and continuing through December. Subsequent to advance order placements, wholesale customers may request replenishment orders for various products as consumer demand increases. We estimate the volumes of the season's products to be purchased from our global suppliers by utilizing our forecasted wholesale customers orders, cancellations, reorders, and replenishment orders, forecasted demand from our DTC businesses, market trends, historical data, customer and sales feedback, and other factors. We also sell our products to consumers through our DTC businesses, which include our own network of branded and outlet retail stores, brand-specific e-commerce sites, and concession-based arrangements with third-parties at branded, outlet and shop-in-shop retail locations in the LAAP and EMEA regions.
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 2020, approximately 65% of our net sales and the majority of our operating income were realized in the second half of the year. Although impacts from the ongoing COVID-19 pandemic exacerbated seasonal net sales and profitability patterns, this still illustrates our dependence upon sales results in the second half of the year, as well as the less seasonal nature of our operating costs.
See Item 1 of this annual report for more information about our business.
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 and fourth quarter of 2020, while there were isolated temporary store closures from local regulations or safety concerns, the majority of our owned stores remained open. Government mandated lockdowns and restrictions impacted our store productivity in Europe throughout the fourth quarter 2020 and in Canada starting in December. Store productivity in several markets continue to be impacted by lockdowns and restrictions in the first quarter of 2021. 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.
In addition, we permanently closed 13 stores in the U.S. and one in Europe in 2020. We continue to evaluate our portfolio of stores on an ongoing basis and may close additional stores. We anticipate opening approximately 8 stores in the U.S. in 2021, primarily consisting of outlet stores. The number of store openings may increase as we finalize ongoing lease negotiations.
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Throughout 2020, our global DTC e-commerce business remained operational, supported by the employees in our distribution centers and call centers. During 2020, our DTC e-commerce business grew 39% year-over-year and represented 19% of our global net sales, including fourth quarter 2020 growth of 41% year-over-year and represented of 23% of our global net sales.
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 nearly $645 million of borrowing capacity, of which $505 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, combined with decreased variable operating expenses, lowered our 2020 SG&A expenses by more than $100 million compared to last year, before expenses related to the COVID-19 pandemic. 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 also have and continue to execute cost reduction and resource allocation actions that will impact our cost structure for 2021 and beyond. These actions have included optimization of freight expenses within cost of goods sold, the closure of certain retail stores, improvements in our retail store labor model, reductions in headcount, and other targeted expense reductions. We have and continue to execute these actions to ensure the business is structured for sustainable and profitable growth in the face of the evolving market landscape. Our expectations with regard to these cost containment and reduction actions are reflected in our business outlook.
See the Liquidity and Capital Resources section below for additional information.
Business Outlook
The ongoing business disruption and uncertainty surrounding the COVID-19 pandemic make it difficult to predict our future results. Consistent with the seasonality and variability of our business, we anticipate 2021 profitability to be heavily concentrated in the second half of the year. Business uncertainties and risks surrounding the ongoing pandemic may further exacerbate this seasonality.
Factors that could significantly affect our full year 2021 financial results include:
• lower consumer demand as a result of ongoing 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 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;
• port congestion and 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 pressure 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 close-out 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 close-out sales in our wholesale and DTC businesses;
• difficult economic, geopolitical and competitive environments in certain key markets globally, coupled with increasing global economic uncertainty; and
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• 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 improve global DTC operations with supporting processes and systems; and
• invest in our people and optimize our organization across our portfolio of brands.
Ultimately, we expect our investments to enable market share capture across our brand portfolio, expand gross margin, improve selling, general and administrative expense efficiency, and drive improved operating margin over the long-term.
Experience First ("X1")
In 2018, we commenced investment in our X1 initiative, which is designed to enhance our e-commerce systems to take advantage of the changes in consumer browsing and purchasing behavior towards mobile devices. It encompasses 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.
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Results of Operations
The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with Item 8 of this annual report. All references to years relate to the fiscal year ended December 31.
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 measure 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 Year Ended December 31, 2020
• Net sales decreased $540.9 million, or 18%, to $2,501.6 million, from $3,042.5 million in 2019.
• Gross profit as a percentage of net sales contracted to 48.9% from 49.8% in 2019.
• Income from operations decreased $258.0 million, or 65%, to $137.0 million from $395.0 million in 2019.
• Income tax expense decreased to $31.5 million from $74.9 million in 2019.
• Net income decreased $222.5 million, or 67%, to $108.0 million, or $1.62 per diluted share from net income of $330.5 million, or $4.83 per diluted share, in 2019.
• Operating cash flow decreased $9.4 million, or 3%, to $276.1 million, compared to $285.5 million in 2019.
• We paid cash dividends to shareholders totaling $17.2 million, or $0.26 per share.
The following table presents the items in our Consolidated Statements of Operations as a percentage of net sales:
Year Ended December 31,
2020 2019
Net sales 100.0 % 100.0 %
Cost of sales 51.1 50.2
Gross profit 48.9 49.8
Selling, general and administrative expenses 43.9 37.3
Net licensing income 0.5 0.5
Income from operations 5.5 13.0
Interest income, net — 0.2
Other non-operating income (expense), net 0.1 0.1
Income before income tax 5.6 13.3
Income tax expense (1.3) (2.4)
Net income 4.3 % 10.9 %
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Results of Operations — Consolidated
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Net Sales: Consolidated net sales decreased $540.9 million, or 18%, to $2,501.6 million in 2020 from $3,042.5 million in 2019. The decrease primarily reflects the negative impacts from the ongoing COVID-19 pandemic, resulting in temporary stores 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:
Year Ended December 31,
(in millions, except for percentage changes) Reported
Net Sales
2020
Adjust for Foreign Currency Translation Constant-currency
Net Sales
2020 (1)
Reported
Net Sales
2019
Reported
Net Sales
% Change Constant-currency
Net Sales
% Change (1)
Brand Net Sales:
Columbia $ 1,996.9 $ (7.0) $ 1,989.9 $ 2,487.7 (20)% (20)%
SOREL 293.5 (1.6) 291.9 314.2 (7)% (7)%
prAna 131.6 — 131.6 151.5 (13)% (13)%
Mountain Hardwear 79.6 (0.1) 79.5 89.1 (11)% (11)%
Total $ 2,501.6 $ (8.7) $ 2,492.9 $ 3,042.5 (18)% (18)%
Product Category Net Sales:
Apparel, Accessories and Equipment $ 1,867.6 $ (6.2) $ 1,861.4 $ 2,341.2 (20)% (20)%
Footwear 634.0 (2.5) 631.5 701.3 (10)% (10)%
Total $ 2,501.6 $ (8.7) $ 2,492.9 $ 3,042.5 (18)% (18)%
Channel Net Sales:
Wholesale $ 1,403.3 $ (5.2) $ 1,398.1 $ 1,782.8 (21)% (22)%
DTC 1,098.3 (3.5) 1,094.8 1,259.7 (13)% (13)%
Total $ 2,501.6 $ (8.7) $ 2,492.9 $ 3,042.5 (18)% (18)%
(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 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 exchange rates that were in effect during the comparable period of the prior year.
Gross Profit: Our gross profit may not be comparable to other companies in our industry as some companies may include all costs related to their distribution network in Cost of sales, while we include these expenses in SG&A expense .
Gross profit as a percentage of net sales contracted to 48.9% in 2020 from 49.8% in 2019, primarily reflecting:
• higher DTC freight costs; partially offset by
• favorable sales mix, resulting from a higher proportion of DTC e-commerce sales, which generally carry a higher gross margins; and
• higher DTC product margins, reflecting lower promotional activity.
Selling, General and Administrative Expenses: 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 $37.3 million, or 3%, to $1,098.9 million, or 43.9% of net sales, in 2020, from $1,136.2 million, or 37.3% of net sales, in 2019. During 2020, we spent approximately 5.7% of our net sales in demand creation, compared to 5.5% in 2019. Depreciation and amortization included in SG&A expense totaled $63.0 million in 2020, compared to $59.2 million in 2019.
The SG&A expense decrease was primarily due to:
• lower DTC expenses of $35.4 million, primarily resulting from lower personnel expenses due to store closures;
• decreased demand creation spend of $25.7 million;
• discretionary expenses associated with cost containment efforts; and
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• lower incentive compensation; partially offset by
• retail impairments and store closure charges of $28.8 million;
• increased bad debt expense of $19.7 million, reflecting heightened accounts receivable risk resulting from the ongoing COVID-19 pandemic; and
• prAna brand trademark impairment charge of $17.5 million.
In March 2020, we initiated numerous cost containment measures across the organization to mitigate the impacts of the COVID-19 pandemic on our business. See additional discussion of these measures in the Impacts of COVID-19 discussion above.
The $28.8 million of retail impairments and store closure charges discussed above include $16.5 million of accelerated amortization of lease right-of-use assets for stores that permanently closed during 2020 for which the related lease liabilities have not been extinguished as of December 31, 2020 due to ongoing negotiations with the landlords. We anticipate SG&A expense will benefit in 2021 as store closure negotiations are finalized and the related lease liabilities are settled, which we anticipate to partially offset the related store closure charges incurred in 2020.
Income from Operations: Income from operations decreased $258.0 million, or 65%, to $137.0 million, or 5.5% of net sales, in 2020, from $395.0 million, or 13.0% of net sales, in 2019.
Income Tax Expense : Income tax expense decreased to $31.5 million in 2020 from $74.9 million in 2019. Our effective income tax rate was 22.6% compared to 18.5% in 2019. Our effective income tax rate for 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 impacts 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 decreased $222.5 million, or 67%, to $108.0 million, or $1.62 per diluted share, in 2020, from $330.5 million, or $4.83 per diluted share, in 2019.
Results of Operations — Segment
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Segment income from operations includes net sales, cost of sales, SG&A expense, and net licensing income for each of our four reportable geographic segments. Income from operations as a percentage of net sales in the U.S. is typically 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.
We anticipate this trend to 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.
Net sales by geographic segment are summarized in the following table:
Year Ended December 31,
(in millions, except for percentage changes) Reported
Net Sales
2020
Adjust for Foreign Currency Translation Constant-currency
Net Sales
2020 (1)
Reported
Net Sales
2019
Reported
Net Sales
% Change Constant-currency
Net Sales
% Change (1)
U.S. $ 1,603.8 $ — $ 1,603.8 $ 1,943.0 (17)% (17)%
LAAP 424.5 (3.6) 420.9 529.3 (20)% (20)%
EMEA 298.9 (5.6) 293.3 367.1 (19)% (20)%
Canada 174.4 0.5 174.9 203.1 (14)% (14)%
$ 2,501.6 $ (8.7) $ 2,492.9 $ 3,042.5 (18)% (18)%
(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 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 exchange rates that were in effect during the comparable period of the prior year.
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Income from operations for each reportable segments and unallocated corporate expenses are summarized in the following table:
Year Ended December 31,
(in millions) 2020 2019 Change ($)
U.S. $ 250.5 $ 456.7 $ (206.2)
LAAP 35.9 80.1 (44.2)
EMEA 31.2 45.4 (14.2)
Canada 37.6 39.6 (2.0)
Total segment income from operations 355.2 621.8 (266.6)
Unallocated corporate expenses (218.2) (226.8) 8.6
Income from operations $ 137.0 $ 395.0 $ (258.0)
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, and increased bad debt expenses primarily resulting from the ongoing COVID-19 pandemic, compared to strong sales performance in 2019.
• U.S. income from operations decreased $206.2 million to $250.5 million, or 15.6% of net sales, in 2020 from $456.7 million, or 23.5% of net sales, in 2019. The decrease was driven primarily by decreased net sales combined with decreased gross margins, the majority of $28.8 million of retail impairments and other store closure charges, and COVID-19 related expenses, including catastrophic paid leave and furlough pay as well as severance and other pandemic related costs. U.S. net sales decreased $339.2 million, or 17% in 2020 compared to 2019. U.S. net sales decreased in our U.S. wholesale and DTC businesses, driven by decreased net sales from retail stores, partially offset by increased net sales from our e-commerce business. At December 31, 2020, U.S. business operated 132 retail stores, compared to 143 stores at December 31, 2019. SG&A expenses increased as a percentage of net sales to 33.8% in 2020 compared to 27.4% for 2019 largely due to the impact of revenue declines and the unfavorable impact of our fixed cost structure.
• LAAP income from operations decreased $44.2 million to $35.9 million, or 8.5% of net sales, in 2020 from $80.1 million, or 15.1% of net sales, in 2019. The decrease was driven primarily by decreased net sales combined with decreased gross margin. LAAP net sales decreased $104.8 million, or 20% in 2020 compared to 2019, primarily driven by decreased net sales in our China, Japan and Korea businesses, and to a lesser extent, our LAAP distributor business. LAAP SG&A expense increased as a percentage of net sales to 45.7% in 2020 compared to 40.7% for 2019 largely due to the impact of revenue declines and the unfavorable impact of our fixed cost structure.
• EMEA income from operations decreased $14.2 million to $31.2 million, or 10.4% of net sales, in 2020 from $45.4 million, or 12.4% of net sales, in 2019. The decrease was driven primarily by decreased net sales combined with decreased gross margin. EMEA net sales decreased $68.2 million, or 19% (20% constant-currency) in 2020 compared to 2019. EMEA net sales decreased primarily in our EMEA distributor business, followed by our Europe-direct business. EMEA SG&A expense increased as a percentage of net sales to 33.4% in 2020 compared to 29.9% for 2019 largely due to the impact of revenue declines and the unfavorable impact of our fixed cost structure.
• Canada income from operations decreased $2.0 million to $37.6 million, or 21.6% of net sales, in 2020 from $39.6 million, or 19.5% of net sales, in 2019. The decrease primarily resulted from decreased net sales partially offset by increased gross margin. Canada net sales decreased $28.7 million, or 14% in 2020 compared to 2019, primarily driven by a net sales decrease in our wholesale business. Canada SG&A expense were relatively flat as a percentage of net sales of 25.6% in 2020 compared to 25.5% for 2019.
Unallocated corporate expenses decreased by $8.6 million to $218.2 million in 2020, from $226.8 million in 2019. The decrease reflected cost containment actions implemented to mitigate unfavorable financial impacts resulting from the ongoing COVID-19 pandemic, partially offset by a prAna brand trademark impairment charge of $17.5 million
Liquidity and Capital Resources
At December 31, 2020, we had total cash and cash equivalents of $790.7 million, compared to $686.0 million at December 31, 2019. At December 31, 2020, we had approximately $505.4 million in committed borrowing availability. Including cash, cash equivalents, short-term investments and available committed and uncommitted credit lines, we had more than $1 billion in total liquidity at December 31, 2020. 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
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flows from operations.
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 7 in Item 8 of this annual report for additional information regarding our lines of credit and overdraft facilities in place. At December 31, 2020, we had a $500.0 million committed revolving line of credit available domestically under our credit agreement and, internationally, our subsidiaries had approximately $144.4 million in committed and uncommitted lines of credit and overdraft facilities in place, some of which were guaranteed by Columbia Sportswear Company. At December 31, 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 domestic credit agreement.
Cash flow activities
Net cash provided by operating activities was $276.1 million in 2020, compared to net cash provided by operating activities of $285.5 million in 2019. The change in operating cash flow was driven by a $161.9 million decrease in operating cash flow provided by net income and non-cash adjustments, partially offset by a $152.6 million decrease in cash used in changes in assets and liabilities. The most significant comparative changes included Inventories, net, Accrued liabilities, and Accounts receivable . The increase in cash provided by Inventories, net reflects the effect of lower inventory receipts. The increase in cash used by Accrued Liabilities was primarily driven by decreases in accruals for wholesale refund liabilities, wholesale and retail return liabilities, and incentive compensation. The increase in cash provided by Accounts Receivable was primarily driven by lower wholesale net sales in the fourth quarter of 2020.
Net cash used in investing activities was $27.2 million in 2020, compared to net cash provided by investing activities of $140.7 million in 2019. For 2020, net cash used in investing activities consisted $28.8 million for capital expenditures. For 2019, net cash provided by investing activities primarily consisted of $264.2 million in net sales and maturities of short-term investments, partially offset by $123.5 million for capital expenditures. The decrease in cash used for capital expenditures in 2020 was primarily due to capital preservation measures taken in light of the ongoing COVID-19 pandemic.
Net cash used in financing activities was $151.7 million in 2020, compared to net cash used in financing activities of $190.7 million in 2019. For 2020, net cash used in financing activities primarily consisted of the repurchase of common stock of $132.9 million and dividend payments to our shareholders of $17.2 million. For 2019, net cash used in financing activities primarily consisted of the repurchase of common stock of $121.7 million and dividend payments to our shareholders of $65.1 million and $17.9 million related to the purchase of the non-controlling interest in our China joint venture, partially offset by net proceeds of $14.0 million from the issuance of stock-based compensation. The decrease in dividend payments to our shareholders resulted from our Board of Directors suspension of quarterly dividends after the March 2020 dividend was paid as a part of a broader capital preservation effort during the ongoing COVID-19 pandemic.
Contractual obligations
The following table presents our estimated significant contractual commitments:
Year ended December 31,
(in thousands) 2021 2022 2023 2024 2025 Thereafter Total
Inventory purchase obligations
$ 305,716 $ — $ — $ — $ — $ — $ 305,716
Operating lease obligations (1)
92,756 73,936 66,328 58,726 51,134 130,429 473,309
TCJA transition tax obligations (2)
1,352 4,250 7,969 10,625 13,282 — 37,478
(1) Refer to Operating Leases in Note 9 in Item 8 of this annual report.
(2) Refer to Income Taxes in Note 10 in Item 8 of this annual report.
In addition, our non-current Income taxes payable on the Consolidated Balance Sheet at December 31, 2020 includes approximately $13.8 million of net unrecognized tax benefits; however, these are excluded from the table above because we are uncertain about whether or when these amounts may be settled. Refer to Note 10 in Item 8 of this annual report for additional information.
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Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make various estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting policies described below 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. Our critical accounting policies relate to revenue recognition, allowance for uncollectible accounts receivable, excess, close-out and slow-moving inventory, impairment of long-lived assets, intangible assets and goodwill, and income taxes.
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 annual 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.
Revenue Recognition
Revenues are recognized when our performance obligations are satisfied as evidenced by transfer of control of promised goods to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services. Within our wholesale channel, control generally transfers to the customer upon shipment to, or upon receipt by, the customer depending on the terms of sale with the customer. Within our DTC channel, control generally transfers to the customer at the time of sale within our retail stores and concession-based arrangements and upon shipment to the customer with respect to e-commerce transactions.
The amount of consideration we receive and recognize as Net sales across both wholesale and DTC channels varies with changes in sales returns and other accommodations and incentives we offer to our customers. When we give our customers the right to return products or provide other accommodations such as chargebacks and markdowns, we estimate the expected sales returns and miscellaneous claims from customers and record a sales reserve to reduce Net sales. These estimates are based on historical rates of product returns and claims, as well as events and circumstances that indicate changes to such historical rates. However, actual returns and claims in any future period are inherently uncertain and thus may differ from the estimates. As a result, we adjust our estimates of revenue at the earlier of when the most likely amount of consideration we expect to receive changes or when the amount of consideration becomes fixed. If actual or expected future returns and claims are significantly greater or lower than the sales reserve established, the Company records an adjustment to Net sales in the period in which it made such determination.
Licensing income, which is presented separately as Net licensing income on the Consolidated Statements of Operations and represents less than 1% of total revenue, is recognized over time based on the greater of contractual minimum royalty guarantees and actual, or estimated, sales of licensed products by our licensees.
We expense sales commissions when incurred, which is generally at the time of sale, because the amortization period would have been one year or less. These costs are recorded within SG&A expenses .
We treat shipping and handling activities as fulfillment costs, and as such, recognize the costs for these activities at the time related revenue is recognized. The majority of these costs are recorded as SG&A expenses , and the direct costs associated with shipping goods to customers and consumers are recorded as Costs of goods sold . Shipping and handling fees billed to customers are recorded as Net sales .
Revenue recognized from contracts with customers is recorded net of sales taxes, value added taxes, or similar taxes that are collected on behalf of local taxing authorities.
Allowance for Uncollectible Accounts Receivable
We make ongoing estimates of the collectability of our accounts receivable and maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. The allowance represents the current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable considering current market conditions and supportable forecasts when appropriate. In determining the amount of the allowance, we consider our historical level of credit losses, and we make judgments about the creditworthiness of customers based on ongoing credit evaluations. We analyze specific customer
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accounts, customer concentrations, credit insurance coverage, standby letters of credit, and other forms of collateral, current economic trends, and changes in customer payment terms. As a result of the COVID-19 pandemic, our allowance for uncollectible accounts receivable increased to $21.8 million as of December 31, 2020 from $8.9 million as of December 31, 2019. The balance as of December 31, 2020 reflects the ongoing risk in the retail sector as the COVID-19 pandemic continues to impact the global economy. Continued uncertainty in credit and market conditions may slow our collection efforts if customers experience difficulty accessing credit and paying their obligations, leading to higher than normal accounts receivable and increased bad debt expense. Because future changes in the financial stability of our customers is difficult to estimate, actual future losses from uncollectible accounts may differ from our estimates and may have a material effect on our consolidated financial position, results of operations or cash flows. If the financial condition of our customers deteriorates and results in their inability to make payments, a larger allowance may be required. If we determine that a smaller or larger allowance is appropriate, we will record an adjustment to SG&A expense in the period in which we make such a determination.
Excess, Close-Out and Slow Moving Inventory
We make ongoing estimates of potential excess, close-out or slow moving inventory. We evaluate our inventory on hand considering our purchase commitments, sales forecasts and historical liquidation experience to identify excess, close-out or slow moving inventory and make provisions as necessary to properly reflect inventory value at the lower of cost or net realizable value. Provisions are taken when necessary in the period in which we make such a determination.
Impairment of Long-Lived Assets, Intangible Assets and Goodwill
Long-lived assets, which include property, plant and equipment, lease right-of-use assets, capitalized implementation costs for cloud computing arrangements, and intangible assets with finite lives are measured for impairment only when events or circumstances indicate the carrying value may be impaired. We evaluate retail location long ‐ lived assets for impairment when events or changes in circumstances exist that may indicate that the carrying amounts of retail location long ‐ lived assets are no longer recoverable. Events that result in an impairment review include plans to close a retail location or a significant decrease in the operating results of the retail location. When such an indicator occurs, we evaluate retail location long ‐ lived assets for impairment by comparing the undiscounted future cash flow expected to be generated by the location to the location long ‐ lived asset’s carrying amount. If the carrying amount of an asset exceeds the estimated undiscounted future cash flow, an analysis is performed to estimate the fair value of the asset. An impairment is recorded if the fair value of the retail location long ‐ lived asset is less than the carrying amount. During 2020, as a result of lower consumer demand related to the COVID-19 pandemic, we tested certain retail location long-lived assets consisting of property, plant and equipment and lease right-of-use assets for impairment. For the year ended December 31, 2020, impairment charges from underperforming retail stores were $7.0 million for lease right-of-use assets and $4.5 million for property, plant and equipment. Further declines in projected future performance may adversely affect the recovery of retail locations assets.
We review and test our intangible assets with indefinite useful lives and goodwill for impairment in the fourth quarter of each year and when events or changes in circumstances indicate that the carrying amount of such assets may be impaired. Our intangible assets with indefinite lives consist of trademarks and trade names. Substantially all of our goodwill is recorded in the U.S. segment and impairment testing for goodwill is performed at the reporting unit level. In the impairment test for goodwill, we compare the estimated fair value of the reporting unit with the carrying amount of that reporting unit. If the carrying amount of the reporting unit exceeds its estimated fair value, we calculate an impairment as the excess of carrying amount over the estimate of fair value. We estimate the fair value of our reporting units using a combination of discounted cash flow analysis and market-based valuation methods, as appropriate. In the impairment tests for trademarks and trade names, we compare the estimated fair value of each asset to its carrying amount. The fair values of trademarks and trade names are estimated using a relief from royalty method under the income approach. If the carrying amount of a trademark or trade name exceeds its estimated fair value, we calculate impairment as the excess of carrying amount over the estimate of fair value. Key assumptions used in the discounted cash flow models are cash flow projections and the discount rate. Cash flow projections are developed in part from our annual planning process. The discount rate is the estimated weighted-average costs of capital of the reporting unit from a market-participant perspective. In the market-based valuation methods used to estimate the fair value of our reporting units, we utilize market multiples for guideline public companies.
In our 2020 impairment test, it was determined that the estimated fair value of the prAna brand’s trademark was impaired and we recognized a $17.5 million impairment charge for the year ended December 31, 2020 reducing the carrying value to $70.5 million. The decline in estimated fair value from the fourth-quarter 2019 impairment test reflects a lower estimated royalty rate and a decline in forecasted revenues. In the prAna reporting unit’s goodwill impairment test, the estimated fair value of the prAna reporting unit exceeded its carrying value by approximately 10%, and as such the reporting unit’s goodwill balance of $54.2 million was not impaired. As part of our evaluation, we performed sensitivity analysis on the goodwill impairment model. A 100 basis point increase in the assumed discount rate did not cause the fair value of the reporting unit to decline below its carrying value. Separately, 10% lower estimated net sales in each of the next five years did not cause the fair value of the reporting unit to decline below its carrying value. If
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the prAna brand's actual or projected future performance deteriorates from the projections considered in our 2020 tests, it is possible that further impairment charges would be required.
Our 2020 impairment tests of goodwill and intangible assets with indefinite lives indicated that the fair value of all other reporting units and intangible assets with indefinite lives exceeded their respective carrying values by at least 25%.
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, 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.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, we recognize Income tax expense for the amount of taxes payable or refundable for the current year and for the amount of deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. We make assumptions, judgments and estimates to determine our current provision for income taxes, our deferred tax assets and liabilities and our uncertain tax positions. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for Income tax expense in our Consolidated Statements of Operations. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could cause our current assumptions, judgments and estimates of recoverable net deferred tax assets to be inaccurate. Changes in any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, which could materially affect our financial position, results of operations or cash flows.
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. As the calendar year progresses, we periodically refine our estimate based on actual events and earnings by jurisdiction. This ongoing estimation process can result in changes to our expected effective tax rate for the full calendar year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that our year-to-date provision equals our expected annual effective tax rate.
Recent Accounting Pronouncements
Refer to Note 2 in Item 8 of this annual report.