COLUMBIA SPORTSWEAR CO 10-Q

ITEM 2. 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 "Special Note Regarding Forward Looking Statements", Part I, Item 1 and Part II, Item 1A of this Quarterly Report on Form 10-Q. In addition, refer to Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2021 for our discussion and analysis comparing financial condition and results of operations from 2021 to 2020. OVERVIEW We connect active people with their passions. We are a global leader in designing, developing, marketing, and distributing outdoor, active and everyday lifestyle products. We manage these products in two categories: apparel, accessories, and equipment products and footwear products. We provide our products through our four well-known brands: Columbia, SOREL, Mountain Hardwear, and prAna. Apparel, accessories, and equipment products are provided by our Columbia, Mountain Hardwear and prAna brands. Footwear products are provided by our Columbia and SOREL brands. We sell our products in approximately 90 countries and operate in four geographic segments: U.S., LAAP, EMEA, and Canada. 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. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 17 Table of Contents Notes to Condensed Consolidated Financial Statements (Unaudited) 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. Business Environment and Trends Increased Outdoor Participation by Consumers | The COVID-19 pandemic drew a record number of individuals in the United States to spend an increased amount of time outside, including participating in outdoor recreational activities. While outdoor participation rates may not be maintained, we believe that our addressable consumer base worldwide has been expanded and expect outdoor participation to remain elevated in comparison to pre-pandemic levels. Casualization of the Apparel and Footwear Market | During the COVID-19 pandemic, we saw a move to casualization by consumers. Our products provide comfort and function in diverse environments. We believe we have benefited from this trend and expect it to continue to be a tailwind moving forward. Decreased Promotional Environment | In the first quarter of 2022, we operated in a low promotional environment and experienced fewer order cancellations, sales returns and customer accommodations than historically experienced. We expect these trends to remain favorable in early 2022 and expect a gradual return to a more normalized promotional environment and transition towards more normalized trading terms. For 2022, we do not expect these metrics to return to levels experienced in 2019 and prior years. Lean Inventory Across the Marketplace | Consumer demand acceleration coupled with supply chain constraints in 2021 resulted in lower inventory in the marketplace at the start of 2022. Given ongoing supply chain disruptions and the imbalance between global supply and demand, we expect marketplace inventories to remain low until supply chain constraints ease. In addition, retailers may choose to carry less inventory than pre-pandemic levels and instead rely on replenishments, to the extent possible. Changes in Consumer Spending Ability and Preferences | We believe government stimulus and unemployment benefits increased consumers’ discretionary spending ability in 2021 and 2020. In addition, we believe we benefited as consumers shifted from service-based to product-based spending due to their limited ability to travel, attend entertainment-based experiences or purchase certain services. For 2022, we have experienced and expect to continue to experience a reduction of these tailwinds. Decreased Direct-to-Consumer Store Traffic | For the first quarter of 2022, the majority of our stores remained open. At varying times, government efforts to control the spread of COVID-19 impacted our stores in China. Overall, our global store retail traffic trends continue to improve, with our U.S. retail store traffic recovering to pre-pandemic levels in the first quarter of 2022. While store traffic is improving, we expect it to continue to remain uneven across our store fleet by region, depending on regional impacts of the virus and government efforts. Increased Freight Charges | In the first quarter of 2022, we experienced elevated ocean freight charges as a result of an imbalance of supply and demand for steamship and ocean container capacity and changes in our ocean freight sourcing practices. We expect our ocean freight charges to be reduced in the latter part of 2022. However, the imbalance in the marketplace persists and ocean freight costs will remain elevated compared to historical norms. Additionally, recent increases in oil prices have resulted in fuel surcharges from certain of our freight carriers that deliver product to our retail stores and to consumers. Later Inventory Receipts | During the third quarter of 2021, several weeks of government mandated factory closures in Vietnam disrupted our manufacturing partners' operations and impacted production of Fall 2021 and Spring 2022 product. In addition, port congestion and shortages in transportation and labor further slowed the transportation of our inventory. As a result of these supply chain disruptions, we received Fall 2021 inventory later than expected, and continue to receive Spring 2022 inventory later than originally planned. We expect the supply chain transit time to modestly improve by late 2022. However, we continue to anticipate longer than historical transit times for inventory receipts and shipments to our wholesale customers and inventory available for our DTC businesses in 2022, potentially resulting in impacts to future net sales and gross margin. Manufacturing Capacity Constraints | In 2021, we experienced footwear manufacturing capacity constraints which prevented us from securing footwear product to fully meet demand. Although we are growing footwear manufacturing capacity in 2022, we again expect demand to outstrip capacity due to anticipated footwear sales growth rates. We anticipate being able to meet footwear demand with appropriate supply in 2023. Continued Labor Shortages | Labor shortages continue to be prevalent in the U.S. and labor costs have risen in an effort to compete for employees. We have made certain wage adjustments in an effort to be more competitive in the current environment and have diminished the effects of current labor shortages on our operations at this time. However, we anticipate rising costs and labor shortages to continue in 2022 resulting from the continued competition for talent. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 18 Table of Contents Notes to Condensed Consolidated Financial Statements (Unaudited) Increased Inflationary Pressures | Inflationary pressures, including increased inbound freight costs, impacted our results in the first quarter of 2022. In addition to increased inbound freight costs, we expect increased product input costs, including higher wages and raw materials costs, to impact our results throughout 2022. We implemented product price increases for our Spring 2022 season and, to a greater extent, for our Fall 2022 season. We do not expect planned price increases will fully offset gross margin pressure, particularly the effect of increased inbound freight costs. Price increases varied by market and product category. In the U.S., on average, we increased pricing by a mid-single digit percent for our Spring 2022 product line and by a high-single to low-double-digit percent for our Fall 2022 product line. Over time, we anticipate ocean freight and raw material cost inflation will moderate, while wage inflation will be more permanent. Changing Geopolitical Environment | The macro-geopolitical environment has rapidly changed as a result of the invasion of Ukraine by Russian forces. We do not have any direct operations in Russia and historically have operated in that market through a contract with a third-party international distributor on an advance order basis. As a result of the conflict in Ukraine, we paused taking any new orders from this distributor. The impact of the invasion is being felt not only in our relationship with our third-party international distributor, but also in political relationships throughout the globe. These political tensions have the potential to manifest themselves in certain regions where we directly operate. Changing Consumer Expectations | Consumer behavior continues to fluctuate. Consumer expectations and the related competitive pressures have increased and continue to increase relative to various aspects of our e-commerce business, including speed of product delivery, shipping charges, return privileges and other evolving expectations. We maintain and continue to make substantial investments in information systems, processes and personnel to support our ongoing demand planning efforts to provide forecasting of optimal inventory to meet customer and consumer demands. Seasonality | 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 2021, over 60% of our net sales and over 75% of our operating income were realized in the second half of the year. RESULTS OF OPERATIONS The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with Item 1 of this Quarterly Report on Form 10-Q. All references to quarters relate to the quarter ended March 31 of that particular year. Non-GAAP Financial Measure 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 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. 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. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 19 Table of Contents Notes to Condensed Consolidated Financial Statements (Unaudited) Results of Operations — Consolidated Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 The following table presents the items in our unaudited Condensed Consolidated Statements of Operations, both in dollars and as a percentage of net sales: Three Months Ended March 31, (in millions, except for percentage of net sales and per share amounts) 2022 2021 Net sales $ 761.5 100.0 % $ 625.6 100.0 % Cost of sales 383.1 50.3 % 304.2 48.6 % Gross profit 378.4 49.7 % 321.4 51.4 % Selling, general and administrative expenses 299.1 39.3 % 254.4 40.7 % Net licensing income 4.4 0.6 % 3.5 0.6 % Operating income 83.7 11.0 % 70.5 11.3 % Interest income, net 0.4 — % 0.3 — % Other non-operating income (expense), net — — % (0.3) — % Income before income tax 84.1 11.0 % 70.5 11.3 % Income tax expense (17.3) (2.2) % (14.6) (2.4) % Net income $ 66.8 8.8 % $ 55.9 8.9 % Diluted earnings per share $ 1.03 $ 0.84 Net Sales. Net sales by brand, product category and channel are summarized in the following table: Three Months Ended March 31, (in millions, except for percentages) Reported Net Sales 2022 Adjust for Foreign Currency Translation Constant-currency Net Sales 2022 (1) Reported Net Sales 2021 Reported Net Sales % Change Constant-currency Net Sales % Change (1) Brand Net Sales: Columbia $ 643.8 $ 10.7 $ 654.5 $ 527.4 22% 24% SOREL 63.6 0.4 64.0 46.3 37% 38% prAna 32.7 — 32.7 31.5 4% 4% Mountain Hardwear 21.4 0.2 21.6 20.4 5% 6% Total $ 761.5 $ 11.3 $ 772.8 $ 625.6 22% 24% Product Category Net Sales: Apparel, Accessories and Equipment $ 565.9 $ 7.7 $ 573.6 $ 468.9 21% 22% Footwear 195.6 3.6 199.2 156.7 25% 27% Total $ 761.5 $ 11.3 $ 772.8 $ 625.6 22% 24% Channel Net Sales: Wholesale $ 408.2 $ 5.8 $ 414.0 $ 335.4 22% 23% DTC 353.3 5.5 358.8 290.2 22% 24% Total $ 761.5 $ 11.3 $ 772.8 $ 625.6 22% 24% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 20 Table of Contents Notes to Condensed Consolidated Financial Statements (Unaudited) Overall, our global net sales increase reflects shipments of higher Spring 2022 orders and DTC growth, partially constrained by supply chain disruptions that resulted in lower-than-expected wholesale shipments. In addition, Columbia and SOREL brand net sales benefited from favorable late season cold weather product sales, as well as improved manufacturing partner capacities that contributed to increased footwear net sales. Our global DTC e-commence business grew 21% and represented 20% of our global net sales for the first quarter of 2022, compared to growth of 35% and represented 20% of global net sales for the comparable period in 2021. 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 expenses . Gross profit is summarized in the following table: Three Months Ended March 31, (in millions, except for percentages and basis points) 2022 2021 Change Gross profit $ 378.4 $ 321.4 $ 57.0 18 % Gross margin 49.7 % 51.4 % -170 bps Gross margin contracted primarily due to the following factors: • an approximate 240 bps decrease related to supply chain capacity constraints that resulted in higher inbound freight costs; • unfavorable year-over-year changes in inventory provisions, as first quarter 2022 inventory reserves reflected less of a decline compared to first quarter 2021, largely due to incremental inventory reserves established in 2020 resulting from the heightened risk related to the COVID-19 pandemic; and • unfavorable regional net sales shifts; partially offset by • increased channel profitability due to higher DTC product margins driven by lower promotional levels, partially offset by lower wholesale margins which reflected the net impact of higher footwear sales mix, input cost pressure, price increases and a higher proportion of full price vs off price sales. Selling, General and Administrative Expenses. SG&A expenses includes all costs associated with our design, merchandising, marketing, distribution, and corporate functions, including related depreciation and amortization. SG&A expenses is summarized in the following table: Three Months Ended March 31, (in millions, except for percentages and basis points) 2022 2021 Change Selling, general and administrative expenses $ 299.1 $ 254.4 $ 44.7 18 % Selling, general and administrative expenses as percent of net sales 39.3 % 40.7 % -140 bps The SG&A expenses increase was primarily due to expenses incurred to support the growth of our business and investments to drive our brand-led consumer-focused strategy. Factors primarily contributing to the increase of SG&A expenses included: • increased demand creation spend of $10.1 million, including higher spending with sales growth and incremental strategic investment spend; • higher global retail expenses associated with sales growth and new stores; • higher personnel expenses, reflecting increased headcount to support business growth, as well as annual merit and other wage rate increases; and • unfavorable year-over-year changes in bad debt provisions, as first quarter 2022 bad debt reserves reflected less of a decline compared to first quarter 2021, largely due to incremental bad debt reserves established in 2020 resulting from the heightened accounts receivable risk related to the COVID-19 pandemic. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 21 Table of Contents Notes to Condensed Consolidated Financial Statements (Unaudited) Income Tax Expense. Income tax expense and the related effective income tax rate is summarized in the following table: Three Months Ended March 31, (in millions, except for percentages) 2022 2021 Change Income tax expense $ (17.3) $ (14.6) $ 2.7 18 % Effective income tax rate 20.5 % 20.7 % Our effective income tax rates for the three months ended March 31, 2022 and 2021 were impacted by discrete tax items, which lowered the effective tax rate each period. Our effective income tax rate for the three months ended March 31, 2022 includes the non-recurring benefit related to the finalization of U.S. and foreign audits. Our effective income tax rate for the three months ended March 31, 2021 includes a non-recurring benefit related to common stock benefits. Results of Operations — Segment Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 Segment operating income includes net sales, cost of sales, SG&A expenses, and net licensing income for each of our four reportable geographic segments. Operating income as a percentage of net sales in the U.S. is typically higher than the other segments primarily due to scale efficiencies associated with the larger base of net sales in the U.S. and, to a lesser extent, incremental licensing income. 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: Three Months Ended March 31, (in millions, except for percentage changes) Reported Net Sales 2022 Adjust for Foreign Currency Translation Constant-currency Net Sales 2022 (1) Reported Net Sales 2021 Reported Net Sales % Change Constant-currency Net Sales % Change (1) U.S. $ 501.9 $ — $ 501.9 $ 408.6 23% 23% LAAP 121.7 5.5 127.2 112.0 9% 14% EMEA 94.7 5.7 100.4 70.8 34% 42% Canada 43.2 0.1 43.3 34.2 26% 27% $ 761.5 $ 11.3 $ 772.8 $ 625.6 22% 24% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. Operating income for each reportable segments and unallocated corporate expenses are summarized in the following table: Three Months Ended March 31, (in millions) 2022 2021 Change U.S. $ 113.2 $ 99.7 $ 13.5 LAAP 13.0 9.7 3.3 EMEA 16.5 10.1 6.4 Canada 8.1 6.2 1.9 Total segment operating income 150.8 125.7 25.1 Unallocated corporate expenses (67.1) (55.2) (11.9) Operating income $ 83.7 $ 70.5 $ 13.2 COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 22 Table of Contents Notes to Condensed Consolidated Financial Statements (Unaudited) U.S. U.S. operating income increased $13.5 million to $113.2 million, or 22.5% of net sales, for the first quarter of 2022 from $99.7 million, or, 24.4% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales partially offset by contracted gross margin. U.S. net sales increased $93.3 million, or 23%, for the first quarter of 2022, compared to the same period in 2021. U.S. net sales increased across all channels and product categories, largely driven by increased net sales for our Columbia brand and, to a lesser extent, our SOREL brand. Increased U.S. wholesale net sales were driven by increased consumer demand, shipment of higher Spring 2022 orders and favorable late season cold weather product sales. U.S DTC net sales increased from net sales growth generated from our e-commerce business and retail stores. As of March 31, 2022, our U.S. business operated 143 retail stores, compared to 132 stores as of March 31, 2021. SG&A expenses decreased slightly as a percentage of net sales to 27.5% for the first quarter of 2022 compared to 27.7% for the same period in 2021. LAAP LAAP operating income increased $3.3 million to $13.0 million, or 10.7% of net sales, for the first quarter of 2022 from $9.7 million, or 8.7% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales combined with increased gross margin. LAAP net sales increased $9.7 million, or 9% (14% constant-currency), for the first quarter of 2022, compared to the same period in 2021, led by increased net sales in our LAAP distributor business, followed by our Korea, Japan and China businesses. LAAP SG&A expense decreased as a percentage of net sales to 46.6% for the first quarter of 2022 compared to 47.7% for the same period in 2021. EMEA EMEA operating income increased $6.4 million to $16.5 million, or 17.4% of net sales, for the first quarter of 2022 from $10.1 million, or 14.2% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales, partially offset by decreased gross margin. EMEA net sales increased $23.9 million, or 34% (42% constant-currency), for the first quarter of 2022, compared to the same period in 2021. EMEA net sales increased primarily in our Europe-direct business, and to a lesser extent our EMEA distributor business. EMEA SG&A expense decreased as a percentage of net sales to 26.3% for the first quarter of 2022 compared to 31.1% in 2021, driven by leveraging of fixed operating expenses. Canada Canada operating income increased $1.9 million to $8.1 million, or 18.9% of net sales, for the first quarter of 2022 from $6.2 million, or 18.2% of net sales, for the comparable period in 2021. The increase primarily resulted from increased net sales partially offset by decreased gross margin. Canada net sales increased $9.0 million, or 26% (27% constant-currency), for the first quarter of 2022, compared to the same period in 2021, primarily driven by increased net sales in our Canada DTC and wholesale businesses. Canada SG&A expense decreased as a percentage of net sales to 28.5% for the first quarter of 2022 compared to 30.6% for the same period in 2021 driven by leveraging of fixed operating expenses. Unallocated corporate expenses increased by $11.9 million to $67.1 million in 2022, from $55.2 million in 2021, largely driven by higher personnel expenses and technology related expenses. LIQUIDITY AND CAPITAL RESOURCES Including cash, cash equivalents, short-term investments and available committed credit lines, we had over $1 billion in total liquidity as of March 31, 2022. Our liquidity may be 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 and 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. This trough cash position is impacted by the amount of product we order from our contract manufacturers in anticipation of customer demand and is more heavily impacted in advance of periods of expected high demand. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 23 Table of Contents Notes to Condensed Consolidated Financial Statements (Unaudited) Cash Flow Activities Cash flows are summarized in the following table: Three Months Ended March 31, (in millions) 2022 2021 Change Net cash provided by (used in): Operating activities $ (33.8) $ 110.9 $ (144.7) Investing activities (56.8) (2.8) (54.0) Financing activities (237.9) (19.9) (218.0) Net effect of exchange rate changes on cash 0.3 (5.3) 5.6 Net increase (decrease) in cash and cash equivalents $ (328.2) $ 82.9 $ (411.1) The change in cash flows used in operating activities was driven by a $160.5 million increase in cash used in changes in assets and liabilities, partially offset by a $15.8 million increase in net income and non-cash adjustments. The most significant comparative changes included Inventories, net, Accrued liabilities, Accounts receivable, net and Accounts payable. The $96.2 million increase in cash used in Inventories, net was mainly driven by an increase in inventory purchases, reflecting strong consumer demand and increased wholesale customer orders. The $54.1 million increase in cash used in Accrued liabilities was primarily driven by changes in accruals for compensation as well as taxes. The $36.6 million decrease in cash provided by Accounts receivable, net was driven by higher wholesale net sales, partially offset by higher collections of accounts receivable. The decrease of $20.4 million in cash used in Accounts payable primarily reflects the effects of higher in-transit inventory and higher accruals. Net cash used in investing activities was $56.8 million for the three months ended March 31, 2022 compared to $2.8 million for the same period in 2021. For the 2022 period, net cash used in investing activities consisted of $43.9 million in net purchases of short-term investments and $12.9 million for capital expenditures. For the 2021 period, net cash used in investing activities primarily consisted of $3.9 million for capital expenditures, offset by $1.1 million in sales of short-term investments. Net cash used in financing activities was $237.9 million for the three months ended March 31, 2022 compared to $19.9 million for the same period in 2021. For the 2022 period, net cash used in financing activities primarily consisted of repurchases of common stock of $217.3 million and dividend payments to our shareholders of $19.2 million. For the 2021 period, net cash used in financing activities primarily consisted of dividend payments to our shareholders of $17.3 million and repurchases of common stock of $11.2 million, partially offset by proceeds from issuance of common stock related to share-based compensation of $13.8 million. Sources of Liquidity Cash and cash equivalents and short-term investments As of March 31, 2022, we had cash and cash equivalents of $435.2 million and short-term investments of $175.0 million, compared to $763.4 million and $131.1 million, respectively, as of December 31, 2021 and $873.6 million and $0.9 million, respectively, as of March 31, 2021. Domestic Credit Facility We have available an unsecured, committed revolving credit facility that provides for funding up to $500.0 million. This credit agreement matures on December 30, 2025. Interest, payable monthly, is based on the Company's option of either LIBOR plus an applicable margin or a base rate. Base rate is defined as the highest of the following, plus an applicable margin: • the administrative agent's prime rate; • the higher of the federal funds rate or the overnight bank funding rate set by the Federal Reserve Bank of New York, plus 0.50%; or • the one-month LIBOR plus 1.00%. This credit agreement requires the Company to comply with certain financial covenants covering the Company's funded debt ratio and asset coverage ratio. The credit agreement also includes customary covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness and liens, engage in mergers, acquisitions and dispositions, and engage in transactions with affiliates, as well as restrict certain payments, including dividends and share buybacks. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 24 Table of Contents Notes to Condensed Consolidated Financial Statements (Unaudited) As of March 31, 2022, there was no balance outstanding under our credit facility. At the time of this filing, we are in compliance with all financial covenants necessary as a condition for borrowing under the credit agreement. International Credit Facilities Our European subsidiary has available an unsecured, committed line of credit, which is guaranteed by the Company and provides for borrowing up to €4.4 million (approximately US$4.9 million). Borrowings accrue interest at a base rate plus 75 basis points. In addition, collectively, our international subsidiaries have available approximately US$110.7 million in unsecured and uncommitted lines of credit and overdraft facilities. As of March 31, 2022, there was no balance outstanding under our international subsidiaries' lines of credit and overdraft facilities. Capital Requirements Our expected short-term and long-term cash needs are primarily for working capital and capital expenditures. We expect to meet these short-term and long-term cash needs primarily with cash flows from operations and, if needed, borrowings from our existing credit facilities. Our working capital management goals include maintaining an optimal level of inventory necessary to deliver goods on time to our customers and our retail stores to satisfy end consumer demand, alleviating manufacturing capacity constraints, and driving efficiencies to minimize the cycle time from the purchase of inventory from our suppliers to the collections of accounts receivable balances from our customers. Inventory balances may be elevated in advance of periods of expected high demand. We maintain and continue to make substantial investments in information systems, processes and personnel to support our ongoing demand planning efforts to meet our working capital management goals. We have planned 2022 capital expenditures of approximately $80 to $100 million. This includes investments in our digital and supply chain capabilities to support our strategic priorities and our DTC operations, including new stores. Our actual capital expenditures may differ from the planned amounts depending on factors such as the timing of system implementations and new store openings and related construction as well as the availability of capital assets from suppliers. Our long-term goal is to maintain a strong balance sheet and a disciplined approach to capital allocation. Dependent upon market conditions and our strategic priorities, our capital allocation approach includes: • investing in organic growth opportunities to drive long-term profitable growth; • returning 40% of free cash flow to shareholders through dividends and share repurchases; and • considering opportunistic mergers and acquisitions. Free cash flow is a non-GAAP financial measure. Free cash flow is calculated by reducing net cash flow from operating activities by capital expenditures. Management believes free cash flow provides investors with an important perspective on the cash available for shareholders and acquisitions after making the capital investments required to support ongoing business operations and long-term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures as it excludes certain mandatory expenditures. Management uses free cash flow as a measure to assess both business performance and overall liquidity. Other cash commitments Our inventory purchase obligations increased to $876.3 million as of March 31, 2022, compared to $656.5 million and $635.8 million as of December 31, 2021 and March 31, 2021, respectively. There have been no other significant changes to our other cash commitments as described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of our financial condition and results of operations are based on our unaudited 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 COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 25 Table of Contents Notes to Condensed Consolidated Financial Statements (Unaudited) and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting for sales reserves, allowance for uncollectible accounts receivable, excess, close-out and slow-moving inventory, impairment of long-lived assets, intangible assets and goodwill, and income taxes 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 and estimates. We base our ongoing estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances. Refer to Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information regarding our critical accounting policies and estimates. 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. There have been no significant changes to the Company's significant accounting policies described at Note 2 in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021. RECENT ACCOUNTING PRONOUNCEMENTS Refer to Note 1 in Item 1 of this Quarterly Report on Form 10-Q. 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, 2021.