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 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 direct-to-consumer ("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. Business Environment and Trends Changes in Consumer Spending Ability and Preferences | In 2021, we believe government stimulus and unemployment benefits increased consumers’ discretionary spending ability. 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. In the second quarter of 2022, we believe U.S. inflationary pressures, rising interest rates and recession fears began to weigh on consumers. As a result, we have experienced and expect to continue to experience a reduction of consumer's discretionary spending. Increased Inflationary Pressures | Inflationary pressures, including increased inbound freight costs, impacted our results in the first half 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. Strengthening U.S. Dollar | The rapid strengthening of the U.S. dollar relative to major foreign currencies unfavorably impacted our first half of 2022 results. The expected continued impact of foreign currency translation is anticipated to reduce 2022 net sales growth and profitability. Changing Geopolitical Environment | The macro-geopolitical environment changed rapidly as a result of the invasion of Ukraine by Russian forces in the first quarter of 2022. 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. We paused taking new orders from this distributor for Russia, Ukraine, and Belarus following the invasion. However, prior to the conflict, we had already taken Fall 2022 orders from this distributor under its contract, certain of which we plan to fulfill. The impact of the invasion is being felt not only in our relationship with this distributor, but also increased political tensions throughout the globe. These political tensions have the potential to manifest themselves in certain regions where we directly operate. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 21 Table of Contents Increased Freight Charges | In the first half of 2022, we experienced elevated ocean freight charges as a result of an imbalance of supply and demand for steamship and ocean container capacity. We expect our ocean freight charges to moderate in the latter part of 2022. However, the imbalance in the marketplace persists and we expect ocean freight costs to remain elevated compared to historical norms until this imbalance is remedied. Additionally, elevated 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. As a result of these supply chain disruptions, we received Fall 2021 and Spring 2022 inventory later than expected, and expect to receive Fall 2022 inventory later than originally planned. For most of the second quarter of 2022, government efforts to control the spread of COVID-19 in China disrupted our distribution center's operations, which resulted in an inability to fulfill e-commerce, wholesale and owned DTC stores orders in China. Excluding disruptions from government efforts to control the spread of COVID-19 as well as potential risks associated with the International Longshore and Warehouse Union negotiations, we expect supply chain inbound transit times to continue to modestly improve by late 2022. However, we continue to anticipate longer than historical inbound 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. Excess Inventory Across the Marketplace | Strong consumer demand in 2021 and the first half of 2022 coupled with ongoing supply chain constraints resulted in a shortage of inventory in the marketplace. By the end of the second quarter of 2022, the arrival of long-delayed orders at retailers and a slowing of consumer demand resulted in excess inventory in the marketplace. With higher marketplace inventories and a rapidly changing economic environment, retailers are rationalizing their inventory needs. As a result, we experienced an increase in order cancellations for Spring 2022 orders. Because we expect marketplace inventories to remain elevated and order cancellations to continue, we are adjusting future inventory purchases and plan to utilize our outlet stores to sell a significant portion of our excess inventory. Increased U.S. Distribution Center Capacity Pressure | Elevated inventory levels combined with uneven flow of inventory receipts and shipments is resulting in storage and process capacity pressures within our U.S. distribution centers. We expect these pressures to be particularly acute as we move Fall 2022 inventory into the marketplace. As a result of these expected pressures, our operations may be less efficient, and we expect to incur additional labor, outside storage and other costs. 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. Changes in Direct-to-Consumer Store Traffic | For the first half of 2022, the majority of our stores remained open in all major markets except China. For most of the second quarter of 2022, government efforts to control the spread of COVID-19 impacted many of our stores in China. Overall, our global store retail traffic trends continued to improve, with our U.S. retail store traffic recovering to pre-pandemic levels in the first half of 2022. Our U.S. consumer traffic softened in the latter part of the second quarter of 2022. We expect store traffic to remain uneven across our store fleet. Changes in Promotional Environment | In the first half of 2022, we operated in a low promotional environment and experienced fewer sales returns and customer accommodations than historically experienced. With elevated marketplace inventory, we anticipate the promotional environment and trading terms to become less favorable. 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. 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 COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 22 Table of Contents 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 Part I, Item 1 of this Quarterly Report on Form 10-Q. All references to quarters relate to the quarter ended June 30 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. Results of Operations — Consolidated 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 June 30, Six Months Ended June 30, (in millions, except for percentage of net sales and per share amounts) 2022 2021 2022 2021 Net sales $ 578.1 100.0 % $ 566.4 100.0 % $ 1,339.6 100.0 % $ 1,192.0 100.0 % Cost of sales 293.9 50.8 273.9 48.4 677.0 50.5 578.1 48.5 Gross profit 284.2 49.2 292.5 51.6 662.6 49.5 613.9 51.5 Selling, general and administrative expenses 281.3 48.7 261.8 46.2 580.3 43.3 516.2 43.3 Net licensing income 5.9 1.0 4.3 0.8 10.1 0.7 7.8 0.6 Operating income 8.8 1.5 35.0 6.2 92.4 6.9 105.5 8.8 Interest income, net 0.5 0.2 0.6 0.1 0.9 0.1 0.9 0.2 Other non-operating expense, net (1.5) (0.3) (0.3) (0.1) (1.4) (0.1) (0.6) (0.1) Income before income tax 7.8 1.4 35.3 6.2 91.9 6.9 105.8 8.9 Income tax benefit (expense) (0.6) (0.2) 5.4 1.0 (17.9) (1.4) (9.2) (0.8) Net income $ 7.2 1.2 % $ 40.7 7.2 % $ 74.0 5.5 % $ 96.6 8.1 % Diluted earnings per share $ 0.11 $ 0.61 $ 1.16 $ 1.44 COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 23 Table of Contents Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 Net Sales. Net sales by brand, product category and channel are summarized in the following table: Three Months Ended June 30, (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 $ 485.9 $ 11.6 $ 497.5 $ 484.3 —% 3% SOREL 28.7 0.3 29.0 23.1 24% 26% prAna 40.7 — 40.7 39.7 3% 3% Mountain Hardwear 22.8 0.2 23.0 19.3 18% 19% Total $ 578.1 $ 12.1 $ 590.2 $ 566.4 2% 4% Product Category Net Sales: Apparel, Accessories and Equipment $ 468.4 $ 8.3 $ 476.7 $ 453.1 3% 5% Footwear 109.7 3.8 113.5 113.3 (3)% —% Total $ 578.1 $ 12.1 $ 590.2 $ 566.4 2% 4% Channel Net Sales: Wholesale $ 299.9 $ 5.6 $ 305.5 $ 302.3 (1)% 1% DTC 278.2 6.5 284.7 264.1 5% 8% Total $ 578.1 $ 12.1 $ 590.2 $ 566.4 2% 4% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. Overall, our global net sales increase reflected higher consumer demand in most markets and shipments of higher Spring 2022 wholesale orders. This increase was tempered by the curtailment of shipments to our Russia-based distributor, temporary store closures as a result of government efforts to control the spread of COVID-19 in China, and supply chain disruptions that resulted in lower-than-expected wholesale shipments, and the unfavorable impact of changes in foreign currency exchange rates. Our global DTC e-commence business decreased 5% and represented 15% of our global net sales for the second quarter of 2022, compared to growth of 5% and represented 16% 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 June 30, (in millions, except for percentages and basis points) 2022 2021 Change Gross profit $ 284.2 $ 292.5 $ (8.3) (3) % Gross margin 49.2 % 51.6 % -240 bps Gross margin contracted primarily due to the following factors: • an approximate 310 bps decrease related to elevated inbound freight costs; and • decreased channel profitability due to the net effect of lower wholesale margins and higher DTC margins; partially offset by • favorable channel and regional net sales shifts primarily due to a lower mix of EMEA distributor sales which typically carry a lower margin; and • favorable foreign currency exchange hedging impacts. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 24 Table of Contents Lower wholesale margins discussed above were primarily driven by input cost pressure and increased customer accommodations, partially offset by a higher proportion of full price versus off price sales and price increases. Higher DTC margins discussed above were primarily driven by lower promotional levels and price increases, partially offset by input cost pressures. 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 June 30, (in millions, except for percentages and basis points) 2022 2021 Change Selling, general and administrative expenses $ 281.3 $ 261.8 $ 19.5 7 % Selling, general and administrative expenses as percent of net sales 48.7 % 46.2 % 250 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: • higher personnel expenses, reflecting increased headcount to support business growth, as well as annual merit and other wage rate increases; and • increased demand creation, including higher spending with sales growth and incremental strategic investments; partially offset by • lower incentive compensation, reflecting favorable year-over-year changes in accrued incentive compensation. Income Tax Benefit (Expense). Income tax benefit (expense) and the related effective income tax rate are summarized in the following table: Three Months Ended June 30, (in millions, except for percentages) 2022 2021 Change Income tax benefit (expense) $ (0.6) $ 5.4 $ 6.0 (111) % Effective income tax rate 8.6 % (15.3) % Our effective income tax rates for the three months ended June 30, 2022 and 2021 were impacted by discrete tax items, which lowered the effective income tax rate each period. Our effective income tax rate for the three months ended June 30, 2022 includes a non-recurring benefit related to foreign currency loss resulting from an intercompany transaction. Our effective income tax rate for the three months ended June 30, 2021 includes a non-recurring decrease in accrued foreign withholding taxes. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 25 Table of Contents Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 Net Sales. Net sales by brand, product category and channel are summarized in the following table: Six Months Ended June 30, (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 $ 1,129.7 $ 22.3 $ 1,152.0 $ 1,011.7 12% 14% SOREL 92.3 0.7 93.0 69.4 33% 34% prAna 73.4 — 73.4 71.2 3% 3% Mountain Hardwear 44.2 0.4 44.6 39.7 11% 12% Total $ 1,339.6 $ 23.4 $ 1,363.0 $ 1,192.0 12% 14% Product Category Net Sales: Apparel, Accessories and Equipment $ 1,034.3 $ 16.0 $ 1,050.3 $ 922.0 12% 14% Footwear 305.3 7.4 312.7 270.0 13% 16% Total $ 1,339.6 $ 23.4 $ 1,363.0 $ 1,192.0 12% 14% Channel Net Sales: Wholesale $ 708.1 $ 11.4 $ 719.5 $ 637.7 11% 13% DTC 631.5 12.0 643.5 554.3 14% 16% Total $ 1,339.6 $ 23.4 $ 1,363.0 $ 1,192.0 12% 14% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. Overall, our global net sales increase reflected high consumer demand and shipments of higher Spring 2022 wholesale orders. In addition, Columbia and SOREL brand net sales benefited from favorable late season cold weather product sales in the first quarter of 2022. Our global net sales increase was tempered by the curtailment of shipments to our Russia-based distributor, temporary store closures due government efforts to control the spread of COVID-19 in China, supply chain disruptions, and unfavorable impact of changes in foreign currency exchange rates. Our global DTC e-commence business grew 10% and represented 18% of our global net sales for the first six months ended June 30, 2022, compared to growth of 21% and represented 18% of global net sales for the comparable period in 2021. Gross Profit. Gross profit is summarized in the following table: Six Months Ended June 30, (in millions, except for percentages and basis points) 2022 2021 Change Gross profit $ 662.6 $ 613.9 $ 48.7 8 % Gross margin 49.5 % 51.5 % -200 bps Gross margin contracted primarily due to the following factors: • an approximate 270 bps decrease related to elevated inbound freight costs; partially offset by • increased channel profitability due to the net effect of higher DTC margins and lower wholesale margins; • favorable channel net sales shifts primarily due to a lower mix of EMEA distributor sales which typically carry a lower margin; and • favorable foreign currency exchange hedging impacts. Higher DTC margins discussed above were primarily driven by lower promotional levels and price increases, partially offset by higher input cost pressure. Lower wholesale margins discussed above were primarily driven by higher footwear sales mix and input cost pressure, partially offset by a higher proportion of full price versus off price sales and price increases. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 26 Table of Contents Selling, General and Administrative Expenses. SG&A expenses is summarized in the following table: Six Months Ended June 30, (in millions, except for percentages and basis points) 2022 2021 Change Selling, general and administrative expenses $ 580.3 $ 516.2 $ 64.1 12 % Selling, general and administrative expenses as percent of net sales 43.3 % 43.3 % 0 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: • higher personnel expenses of $17.3 million, reflecting increased headcount to support business growth, as well as annual merit and other wage rate increases; and • increased demand creation, including higher spending with sales growth and incremental strategic investment spend. Income Tax Expense. Income tax expense and the related effective income tax rate are summarized in the following table: Six Months Ended June 30, (in millions, except for percentages) 2022 2021 Change Income tax expense $ (17.9) $ (9.2) $ 8.7 95 % Effective income tax rate 19.5 % 8.7 % Our effective income tax rates for the six months ended June 30, 2022 and 2021 were impacted by discrete tax items, which lowered the effective tax rate in each period. Our effective income tax rate for the six months ended June 30, 2022 includes a non-recurring benefit related to the finalization of the U.S. and foreign audits and a non-recurring benefit related to foreign currency loss resulting from an intercompany transaction. Our effective income tax rate for the six months ended June 30, 2021 includes a non-recurring benefit related to common stock benefits and a decrease in accrued foreign withholding taxes. Results of Operations — Segment 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. Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 Net sales by geographic segment are summarized in the following table: Three Months Ended June 30, (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. $ 412.5 $ — $ 412.5 $ 379.1 9% 9% LAAP 72.8 7.1 79.9 78.0 (7)% 2% EMEA 57.6 4.1 61.7 88.5 (35)% (30)% Canada 35.2 0.9 36.1 20.8 69% 74% $ 578.1 $ 12.1 $ 590.2 $ 566.4 2% 4% (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 | 27 Table of Contents Operating income (loss) for each reportable segment and unallocated corporate expenses are summarized in the following table: Three Months Ended June 30, (in millions) 2022 2021 Change U.S. $ 67.3 $ 82.1 $ (14.8) LAAP (3.1) (1.0) (2.1) EMEA (1.0) 11.5 (12.5) Canada 3.5 0.6 2.9 Total segment operating income 66.7 93.2 (26.5) Unallocated corporate expenses (57.9) (58.2) 0.3 Operating income $ 8.8 $ 35.0 $ (26.2) U.S. U.S. operating income decreased $14.8 million to $67.3 million, or 16.3% of net sales, for the second quarter of 2022 from $82.1 million, or 21.6% of net sales, for the comparable period in 2021. The decrease was driven primarily by increased net sales, which were more than offset by decreased gross margin and increased SG&A expenses. U.S. net sales increased $33.4 million, or 9%, for the second 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 and Mountain Hardwear brands. Increased U.S. wholesale net sales were driven by shipment of higher Spring 2022 wholesale orders. U.S. DTC net sales increased primarily from net sales growth generated from retail stores. As of June 30, 2022, our U.S. business operated 147 retail stores, compared to 136 stores as of June 30, 2021. Gross margin contraction was primarily the result of higher inbound freight costs. SG&A expenses increased as a percentage of net sales to 34.1% for the second quarter of 2022 compared to 32.7% for the same period in 2021, primarily driven by higher personnel expenses. LAAP LAAP operating loss of $3.1 million, or (4.2)% of net sales, for the second quarter of 2022 compared to an operating loss of $1.0 million, or (1.3)% of net sales, for the same period in 2021. The increased loss was driven primarily by decreased net sales. LAAP net sales decreased $5.2 million, or 7% (increased 2% constant-currency), for the second quarter of 2022, compared to the same period in 2021. LAAP net sales decreased primarily in our China business, due to government efforts to control the spread of COVID-19 which resulted in temporary store closures and an inability to fulfill e-commerce, wholesale, and owned DTC stores orders. This decrease was partially offset by increased net sales in our Japan, Korea and LAAP distributor businesses. LAAP SG&A expense increased as a percentage of net sales to 61.4% for the second quarter of 2022 compared to 58.4% for the same period in 2021. EMEA EMEA operating loss of $1.0 million, or (1.8)% of net sales, for the second quarter of 2022 decreased $12.5 million from operating income of $11.5 million, or 13.0% of net sales, for the comparable period in 2021. The decrease was driven primarily by decreased net sales. EMEA net sales decreased $30.9 million, or 35% (30% constant-currency), for the second quarter of 2022, compared to the same period in 2021, driven by decreased net sales in our EMEA distributor business, partially offset by increased net sales in our Europe-direct business. EMEA distributor net sales decreased primarily due to the curtailment of shipments to our Russia-based distributor. Europe-direct net sales increased primarily due to higher consumer demand. EMEA SG&A expense increased as a percentage of net sales to 44.5% for the second quarter of 2022 compared to 27.9% in 2021, driven by unfavorable impacts from decreased net sales and fixed operating expenses. Canada Canada operating income increased $2.9 million to $3.5 million, or 10.0% of net sales, for the second quarter of 2022 from $0.6 million, or 3.0% of net sales, for the comparable period in 2021. The increase primarily resulted from increased net sales. Canada net sales increased $14.4 million, or 69% (74% constant-currency), for the second quarter of 2022, compared to the same period in 2021, primarily driven by increased net sales in our Canada wholesale and DTC businesses. Canada SG&A expense decreased as a percentage of net sales to 34.9% for the second quarter of 2022 compared to 44.2% for the same period in 2021, driven by leveraging of fixed operating expenses. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 28 Table of Contents Unallocated corporate expenses decreased by $0.3 million to $57.9 million in 2022, from $58.2 million in 2021. Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 Net sales by geographic segment are summarized in the following table: Six Months Ended June 30, (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. $ 914.4 $ — $ 914.4 $ 787.7 16% 16% LAAP 194.5 12.6 207.1 190.0 2% 9% EMEA 152.3 9.8 162.1 159.3 (4)% 2% Canada 78.4 1.0 79.4 55.0 43% 44% $ 1,339.6 $ 23.4 $ 1,363.0 $ 1,192.0 12% 14% (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 segment and unallocated corporate expenses are summarized in the following table: Six Months Ended June 30, (in millions) 2022 2021 Change U.S. $ 180.5 $ 181.7 $ (1.2) LAAP 9.9 8.7 1.2 EMEA 15.5 21.6 (6.1) Canada 11.7 6.9 4.8 Total segment operating income 217.6 218.9 (1.3) Unallocated corporate expenses (125.2) (113.4) (11.8) Operating income $ 92.4 $ 105.5 $ (13.1) U.S. U.S. operating income decreased $1.2 million to $180.5 million, or 19.7% of net sales, for the six months ended June 30, 2022 from $181.7 million, or, 23.1% of net sales, for the comparable period in 2021. The decrease was driven primarily by increased net sales, which were more than offset by decreased gross margin and increased SG&A expenses. U.S. net sales increased $126.7 million, or 16%, for the six months ended June 30, 2022, compared to the same period in 2021. U.S. net sales increased across all channels, product categories and brands, led by increased net sales for our Columbia brand. Increased U.S. wholesale net sales were driven by increased consumer demand and shipment of higher Spring 2022 orders. U.S. DTC net sales increased from net sales growth generated from our retail stores and e-commerce business. As of June 30, 2022, our U.S. business operated 147 retail stores, compared to 136 stores as of June 30, 2021. Gross margin contraction was primarily the result of higher inbound freight costs. SG&A expenses increased slightly as a percentage of net sales to 30.5% for the six months ended June 30, 2022 compared to 30.1% for the same period in 2021. LAAP LAAP operating income increased $1.2 million to $9.9 million, or 5.1% of net sales, for the six months ended June 30, 2022 from $8.7 million, or 4.6% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales. LAAP net sales increased $4.5 million, or 2% (9% constant-currency), for the six months ended June 30, 2022, compared to the same period in 2021, primarily in our LAAP distributor, Japan and Korea businesses. This increase was offset by decreased net sales in China primarily due to government efforts to control the spread of COVID-19 in the second quarter of 2022 which resulted in temporary store closures and an inability to fulfill e-commerce, wholesale and owned DTC stores orders. LAAP SG&A expense were flat as a percentage of net sales to 52.1% for the six months ended June 30, 2022 compared to 52.1% for the same period in 2021. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 29 Table of Contents EMEA EMEA operating income decreased $6.1 million to $15.5 million, or 10.2% of net sales, for the six months ended June 30, 2022 from $21.6 million, or 13.6% of net sales, for the comparable period in 2021. The decrease was driven primarily by decreased net sales. EMEA net sales decreased $7.0 million, or 4% (increased 2% constant-currency), for the six months ended June 30, 2022, compared to the same period in 2021, driven by decreased net sales in our EMEA distributor business, partially offset by increased net sales in our Europe-direct business. EMEA distributor net sales decreased primarily due to the curtailment of shipments to our Russia-based distributor. Europe-direct net sales increased primarily due to higher consumer demand. EMEA SG&A expense increased as a percentage of net sales to 33.2% for the six months ended June 30, 2022 compared to 29.3% in 2021. Canada Canada operating income increased $4.8 million to $11.7 million, or 14.9% of net sales, for the six months ended June 30, 2022 from $6.9 million, or 12.5% 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 $23.4 million, or 43% (44% constant-currency), for the six months ended June 30, 2022, compared to the same period in 2021, primarily driven by increased net sales in our Canada wholesale and DTC businesses. Canada SG&A expense decreased as a percentage of net sales to 31.4% for the six months ended June 30, 2022, compared to 35.7% for the same period in 2021, driven by leveraging of fixed operating expenses. Unallocated corporate expenses increased by $11.8 million to $125.2 million for the six months ended June 30, 2022 from $113.4 million for the same period 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 $915 million in total liquidity as of June 30, 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. Cash Flow Activities Cash flows are summarized in the following table: Six Months Ended June 30, (in millions) 2022 2021 Change Net cash provided by (used in): Operating activities $ (112.7) $ 117.2 $ (229.9) Investing activities 101.9 (11.2) 113.1 Financing activities (325.3) (74.0) (251.3) Net effect of exchange rate changes on cash (14.2) (2.9) (11.3) Net increase (decrease) in cash and cash equivalents $ (350.3) $ 29.1 $ (379.4) The change in cash flows used in operating activities was driven by a $227.0 million increase in cash used in changes in assets and liabilities and a $2.9 million decrease in cash provided by net income and non-cash adjustments. The most significant comparative changes included Inventories, net, and to a lesser extent, Accrued liabilities, Accounts payable, and Prepaid expenses and other current assets. The $208.5 million increase in cash used in Inventories, net was driven by an increase in inventory purchases in anticipation of sale growth, which was tempered by the curtailment of shipments to our Russia-based distributor, temporary store closures as a result of government efforts to control the spread of COVID-19, and the softening of U.S. consumer demand in the latter part of the second quarter of 2022. The $37.1 million increase in cash used in Accrued liabilities was primarily driven by changes in accruals for compensation as well as taxes other COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 30 Table of Contents than income tax, partially offset by changes in accruals for import duties. The decrease of $23.3 million in cash provided by Accounts payable primarily reflects the effects of lower accruals globally. These amounts are partially offset by the $25.0 million decrease in cash used in Prepaid expenses and other current assets, which was primarily driven by changes in prepaid income taxes. Net cash provided by investing activities was $101.9 million for the six months ended June 30, 2022, compared to net cash used in investing activities of $11.2 million for the same period in 2021. For the 2022 period, net cash provided by investing activities consisted of $130.9 million in net sales and maturities of short-term investments, partially offset by $29.0 million for capital expenditures. For the 2021 period, net cash used in investing activities consisted of $12.4 million for capital expenditures, partially offset by $1.2 million in sales and maturities of short-term investments. Net cash used in financing activities was $325.3 million for the six months ended June 30, 2022 compared to $74.0 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 $287.4 million and dividend payments to our shareholders of $37.9 million. For the 2021 period, net cash used in financing activities primarily consisted of repurchases of common stock of $54.5 million and dividend payments to our shareholders of $34.5 million, partially offset by net proceeds from the issuance of common stock related to share-based compensation of $14.8 million. Sources of Liquidity Cash and cash equivalents and short-term investments As of June 30, 2022, we had cash and cash equivalents of $413.1 million and short-term investments of $1.1 million, compared to $763.4 million and $131.1 million, respectively, as of December 31, 2021 and $819.8 million and $1.1 million, respectively, as of June 30, 2021. Domestic Credit Facility At the time of this filing, we have available an unsecured, committed revolving credit facility, which provides for borrowings up to $500.0 million . This credit facility matures on July 12, 2027. Interest, payable monthly, is based on the Company's option of either SOFR 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 SOFR plus 1.00%. The applicable margin for SOFR loans will range from 1.00% to 1.50% based on the Company’s funded debt ratio. The applicable margin for base rate loans will range from 0.00% to 0.50% based on the Company’s funded debt ratio. The Domestic Credit Agreement requires the Company to comply with a financial covenant to maintain a certain funded debt ratio. In addition, the Domestic Credit Agreement 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 the amount of certain payments, including dividends and share buybacks in the event the Company's funded debt ratio is greater than a set amount. Refer to Note 4 in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding the domestic credit facility. International Credit Facilities Our European subsidiary has available an unsecured, committed line of credit, which is guaranteed by the Company and provides for borrowings up to €4.4 million (approximately US$4.6 million). Borrowings accrue interest at a base rate plus 75 basis points. In addition, collectively, our international subsidiaries have available approximately US$106.2 million in unsecured and uncommitted lines of credit and overdraft facilities. As of June 30, 2022, there was no balance outstanding under our international subsidiaries' lines of credit and overdraft facilities. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 31 Table of Contents 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. As our cash and cash equivalents and short-term investments balances are generally at their lowest levels at the end of the third quarter, we expect to use borrowings from our domestic credit facility in the third quarter of 2022 to meet our short-term cash needs prior to the fourth quarter cash collection of wholesale business receivables and fourth quarter DTC sales. 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 collection 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. As of June 30, 2022, our inventory balance increased to $962.9 million, compared to $645.4 million and $676.0 million as of December 31, 2021 and June 30, 2021, respectively. This inventory growth reflects increased inventory purchases in anticipation of sales growth for our Spring and Fall 2022 merchandise and lower than normal inventory levels at the same time last year. In addition, inventory growth was impacted by lower than initially expected net sales for the six months ended June 30, 2022 due to a combination of factors, including lower EMEA distributor shipments, the impact of government efforts to control the spread of COVID-19 in China and softening of consumer demand in the U.S. Because we continue to anticipate higher inventory levels, we are adjusting future inventory purchases and planning to more heavily utilize our outlet stores to sell excess merchandise. 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 since 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 were $654.4 million as of June 30, 2022, compared to $656.5 million and $538.8 million as of December 31, 2021 and June 30, 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 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 COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 32 Table of Contents 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 Part I, 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.