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. On September 22, 2022, we refined our long-term growth strategy. We are investing in our strategic priorities to: • accelerate profitable growth; • create iconic products that are differentiated, functional and innovative; • drive brand engagement through increased, focused demand creation investments; • enhance consumer experiences by investing in capabilities to delight and retain consumers; • amplify marketplace excellence , with digitally-led, omni-channel, global distribution; and • empower talent that is driven by our core values through a diverse and inclusive workplace. 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. Beginning in the second quarter of 2022, we believe U.S. inflationary pressures, rising interest rates and recession fears are weighing on the market. As a result, we expect consumer discretionary spending will come under increasing pressure over the next several months. Increased Inflationary Pressures | Inflationary pressures, including inbound freight, raw materials, labor and product input costs, impacted our results in the first nine months of 2022. We implemented product price increases for our Spring 2022 season and, to a greater extent, for our Fall 2022 season. 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. Although price increases are not expected to offset gross margin pressure in 2022, we are beginning to experience lower inbound freight costs which will benefit gross margin over time. As inbound freight costs subside and begin to offset inflationary cost pressures, including raw materials and labor, we expect lower product price increases in 2023. Strengthening U.S. Dollar | The rapid strengthening of the U.S. dollar relative to major foreign currencies unfavorably impacted our results in the first nine months of 2022. The impact of unfavorable foreign currency translation is anticipated to continue to reduce 2022 net sales growth and profitability. We anticipate this trend to continue into 2023, impacting both the translation of our earnings as well as our foreign currency hedging of inventory purchases and non-functional currency sales. 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 planned to and did fulfill in the third quarter of 2022. The impact of the invasion is being felt not only in COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 21 Table of Contents 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. Increased Freight Charges | In the first nine months of 2022, we experienced elevated ocean freight charges as a result of an imbalance of supply and demand for steamship and ocean container capacity. As a result, these costs have had a substantially unfavorable impact on our gross margin. More recently, we began to experience declines in ocean freight charges. We anticipate this shift in trend to continue for the remainder of 2022 and into 2023, and to benefit gross margin over time. We capitalize the cost of inbound freight into inventory, which creates a lag from the period in which we experience the decline in these charges and the subsequent impact to gross margin. Additionally, elevated oil prices continue to result 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 product. As a result of these and other supply chain disruptions, we received Fall 2021, Spring 2022 and Fall 2022 inventory later than expected. 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. In July 2022, certain disruptions from these government efforts eased. 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. Looking forward to the Spring 2023 product season, we expect inventory production and logistics transit times to improve markedly and be more in-line with our historical experience, assuming no material downturn in port and railroad labor relations. 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 and continue to expect increased order cancellations for Spring 2022 and Fall 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 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 began to experience these pressures as we started moving 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 for the remainder of 2022 resulting from the continued competition for talent. Changes in Direct-to-Consumer Store Traffic | For the first nine months 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. In the third quarter of 2022, the easing of shutdowns as a result of China's zero-COVID policies improved consumer demand, favorably impacting the performance 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 nine months 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 we have historically. In the third quarter of 2022, an increase in promotional activity began to unfavorably impact our DTC product margins compared to the same period from prior year in which promotions were exceptionally low. With elevated marketplace inventory, we anticipate the promotional environment and less favorable trading terms to continue. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 22 Table of Contents 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 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 September 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. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 23 Table of Contents 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 September 30, Nine Months Ended September 30, (in millions, except for percentage of net sales and per share amounts) 2022 2021 2022 2021 Net sales $ 955.0 100.0 % $ 804.7 100.0 % $ 2,294.6 100.0 % $ 1,996.7 100.0 % Cost of sales 496.5 52.0 396.3 49.3 1,173.5 51.1 974.4 48.8 Gross profit 458.5 48.0 408.4 50.7 1,121.1 48.9 1,022.3 51.2 Selling, general and administrative expenses 319.0 33.4 280.1 34.8 899.3 39.2 796.3 39.9 Net licensing income 5.8 0.6 5.2 0.7 15.9 0.7 12.9 0.7 Operating income 145.3 15.2 133.5 16.6 237.7 10.4 238.9 12.0 Interest income, net 0.8 0.1 0.2 — 1.7 0.1 1.1 — Other non-operating income (expense), net (0.3) — 0.2 — (1.7) (0.1) (0.4) — Income before income tax 145.8 15.3 133.9 16.6 237.7 10.4 239.6 12.0 Income tax expense (34.0) (3.6) (33.3) (4.1) (51.9) (2.3) (42.5) (2.1) Net income $ 111.8 11.7 % $ 100.6 12.5 % $ 185.8 8.1 % $ 197.1 9.9 % Diluted earnings per share $ 1.80 $ 1.52 $ 2.94 $ 2.96 Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 Net Sales. Net sales by brand, product category and channel are summarized in the following table: Three Months Ended September 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 $ 773.3 $ 26.6 $ 799.9 $ 651.5 19% 23% SOREL 112.4 2.6 115.0 88.1 28% 31% prAna 37.4 — 37.4 36.4 3% 3% Mountain Hardwear 31.9 0.4 32.3 28.7 11% 13% Total $ 955.0 $ 29.6 $ 984.6 $ 804.7 19% 22% Product Category Net Sales: Apparel, Accessories and Equipment $ 726.3 $ 21.2 $ 747.5 $ 621.1 17% 20% Footwear 228.7 8.4 237.1 183.6 25% 29% Total $ 955.0 $ 29.6 $ 984.6 $ 804.7 19% 22% Channel Net Sales: Wholesale $ 645.1 $ 20.4 $ 665.5 $ 518.2 24% 28% DTC 309.9 9.2 319.1 286.5 8% 11% Total $ 955.0 $ 29.6 $ 984.6 $ 804.7 19% 22% (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 | 24 Table of Contents Overall, our global net sales increase reflected earlier shipment of higher Fall 2022 wholesale orders compared to shipment of Fall 2021 orders and higher consumer demand in our DTC business. This increase was tempered by later than historical shipping patterns for Fall 2022 shipments, as well as unfavorable impacts from changes in foreign currency exchange rates. Our global DTC e-commence business increased 9% and represented 11% of our global net sales for the third quarter of 2022, compared to growth of 6% and represented 11% 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 September 30, (in millions, except for percentages and basis points) 2022 2021 Change Gross profit $ 458.5 $ 408.4 $ 50.1 12 % Gross margin 48.0 % 50.7 % -270 bps Gross margin contracted primarily due to the following factors: • an approximate 210 bps decrease related to elevated inbound freight costs; • unfavorable channel and regional net sales shifts primarily due to a higher mix of wholesale sales, largely driven by higher distributor sales, which typically carry a lower margin compared to DTC sales; and • unfavorable year-over-year changes in inventory provisions; partially offset by • increased channel profitability due to the net effect of higher wholesale margins and, to a lesser extent, lower DTC margins. Higher wholesale margins discussed above were primarily driven by price increases and a higher proportion of full price versus off price sales, partially offset by input cost pressure. Lower DTC margins discussed above were primarily driven by increased promotional activity. 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 September 30, (in millions, except for percentages and basis points) 2022 2021 Change Selling, general and administrative expenses $ 319.0 $ 280.1 $ 38.9 14 % Selling, general and administrative expenses as percent of net sales 33.4 % 34.8 % -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 strategies. Factors primarily contributing to the increase of SG&A expenses included: • higher personnel expenses of $13.3 million, reflecting increased headcount to support business growth, as well as annual merit and other wage rate increases; • increased demand creation, including higher spending with sales growth; and • higher global retail expenses associated with sales growth and new stores; partially offset by • lower incentive compensation expense, reflecting lower expectation of year-end incentive compensation compared to last year. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 25 Table of Contents Income Tax Expense. Income tax expense and the related effective income tax rate are summarized in the following table: Three Months Ended September 30, (in millions, except for percentages) 2022 2021 Change Income tax expense $ (34.0) $ (33.3) $ 0.7 2 % Effective income tax rate 23.3 % 24.9 % Our effective income tax rate for the three months ended September 30, 2022 was impacted by discrete tax items, which lowered the effective income tax rate for the period. For the three months ended September 30, 2022 , our effective income tax rate was primarily impacted by a non-recurring benefit related to a decrease in accrued foreign withholding taxes. For the three months ended September 30, 2021, impacts to our effective income tax rate from discrete tax items were immaterial. Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 Net Sales. Net sales by brand, product category and channel are summarized in the following table: Nine Months Ended September 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 $ 1,903.0 $ 48.9 $ 1,951.9 $ 1,663.2 14% 17% SOREL 204.7 3.3 208.0 157.5 30% 32% prAna 110.8 — 110.8 107.6 3% 3% Mountain Hardwear 76.1 0.8 76.9 68.4 11% 12% Total $ 2,294.6 $ 53.0 $ 2,347.6 $ 1,996.7 15% 18% Product Category Net Sales: Apparel, Accessories and Equipment $ 1,760.6 $ 37.2 $ 1,797.8 $ 1,543.1 14% 17% Footwear 534.0 15.8 549.8 453.6 18% 21% Total $ 2,294.6 $ 53.0 $ 2,347.6 $ 1,996.7 15% 18% Channel Net Sales: Wholesale $ 1,353.2 $ 31.8 $ 1,385.0 $ 1,155.9 17% 20% DTC 941.4 21.2 962.6 840.8 12% 14% Total $ 2,294.6 $ 53.0 $ 2,347.6 $ 1,996.7 15% 18% (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 earlier shipment of higher Spring 2022 and Fall 2022 wholesale orders and higher consumer demand in our DTC business. 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 temporary store closures due to government efforts to control the spread of COVID-19 in China, supply chain disruptions, and unfavorable impacts from changes in foreign currency exchange rates. Our global DTC e-commence business grew 10% and represented 15% of our global net sales for the first nine months of 2022, compared to growth of 16% and represented 15% of global net sales for the comparable period in 2021. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 26 Table of Contents Gross Profit. Gross profit is summarized in the following table: Nine Months Ended September 30, (in millions, except for percentages and basis points) 2022 2021 Change Gross profit $ 1,121.1 $ 1,022.3 $ 98.8 10 % Gross margin 48.9 % 51.2 % -230 bps Gross margin contracted primarily due to the following factors: • an approximate 300 bps decrease related to elevated inbound freight costs; partially offset by • increased channel profitability due to higher DTC and wholesale margins. Higher DTC margins discussed above were primarily driven by lower promotional levels, particularly in the first half of 2022. Higher wholesale margins discussed above were primarily driven by price increases and a higher proportion of full price versus off price sales, partially offset by input cost pressure. Selling, General and Administrative Expenses. SG&A expenses is summarized in the following table: Nine Months Ended September 30, (in millions, except for percentages and basis points) 2022 2021 Change Selling, general and administrative expenses $ 899.3 $ 796.3 $ 103.0 13 % Selling, general and administrative expenses as percent of net sales 39.2 % 39.9 % -70 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 strategies. Factors primarily contributing to the increase of SG&A expenses included: • higher personnel expenses of $30.6 million, reflecting increased headcount to support business growth, as well as annual merit and other wage rate increases; • increased demand creation of $20.7 million, including higher spending with sales growth; and • higher global retail expenses associated with sales growth and new stores. Income Tax Expense. Income tax expense and the related effective income tax rate are summarized in the following table: Nine Months Ended September 30, (in millions, except for percentages) 2022 2021 Change Income tax expense $ (51.9) $ (42.5) $ 9.4 22 % Effective income tax rate 21.9 % 17.7 % Our effective income tax rates for the nine months ended September 30, 2022 and 2021 were impacted by discrete tax items, which lowered the effective income tax rate in each period. For the nine months ended September 30, 2022 , our effective income tax rate was primarily impacted by a non-recurring benefit related to the finalization of the U.S. and foreign audits, a non-recurring benefit related to a decrease in accrued foreign withholding taxes and a non-recurring benefit related to foreign currency loss resulting from an intercompany transaction. For the nine months ended September 30, 2021, our effective income tax rate was primarily impacted by a decrease in accrued foreign withholding taxes and a non-recurring benefit related to common stock benefits. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 27 Table of Contents 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 September 30, 2022 Compared to Three Months Ended September 30, 2021 Net sales by geographic segment are summarized in the following table: Three Months Ended September 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. $ 607.0 $ — $ 607.0 $ 510.5 19% 19% LAAP 115.4 12.0 127.4 102.7 12% 24% EMEA 153.5 14.8 168.3 109.2 41% 54% Canada 79.1 2.8 81.9 82.3 (4)% —% $ 955.0 $ 29.6 $ 984.6 $ 804.7 19% 22% (1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information. Operating income (loss) for each reportable segment and unallocated corporate expenses are summarized in the following table: Three Months Ended September 30, (in millions) 2022 2021 Change U.S. $ 145.3 $ 139.1 $ 6.2 LAAP 11.8 7.6 4.2 EMEA 35.6 26.2 9.4 Canada 20.2 22.8 (2.6) Total segment operating income 212.9 195.7 17.2 Unallocated corporate expenses (67.6) (62.2) (5.4) Operating income $ 145.3 $ 133.5 $ 11.8 U.S. U.S. operating income increased $6.2 million to $145.3 million, or 23.9% of net sales, for the third quarter of 2022 from $139.1 million, or 27.2% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales, partially offset by decreased gross margin. U.S. net sales increased $96.5 million, or 19%, for the third quarter of 2022, compared to the same period in 2021. U.S. net sales increased across all channels, product categories and brands, largely driven by increased wholesale net sales for our Columbia and SOREL brands. Increased U.S. wholesale net sales were driven by earlier shipment of higher Fall 2022 orders compared to shipment of Fall 2021 orders. U.S. DTC net sales increased primarily from net sales growth generated from retail stores and, to a lesser extent, our e-commerce business. As of September 30, 2022 , our U.S. business operated 148 retail stores, compared to 138 stores as of September 30, 2021. SG&A expenses increased as a percentage of net sales to 25.9% for the third quarter of 2022 compared to 25.2% for the same period in 2021. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 28 Table of Contents LAAP LAAP operating income increased $4.2 million to $11.8 million, or 10.2% of net sales, for the third quarter of 2022 from $7.6 million, or 7.4% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales and SG&A expense leverage. LAAP net sales increased $12.7 million, or 12% (24% constant-currency), for the third quarter of 2022, compared to the same period in 2021, primarily in our LAAP distributor business. LAAP net sales increased due to earlier shipment of higher Fall 2022 orders compared to shipment of Fall 2021 orders and higher consumer demand as we lapped prior year provincial and government mandated restrictions to prevent the spread of COVID-19. These increases were offset by unfavorable impacts from changes in foreign currency rates. LAAP SG&A expenses decreased as a percentage of net sales to 40.9% for the third quarter of 2022 compared to 46.9% for the same period in 2021, primarily driven by demand creation, personnel and retail expenses. EMEA EMEA operating income increased $9.4 million to $35.6 million, or 23.2% of net sales, for the third quarter of 2022 from $26.2 million, or 24.0% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales and SG&A expense leverage. EMEA net sales increased $44.3 million, or 41% (54% constant-currency), for the third quarter of 2022, compared to the same period in 2021, driven by increased net sales in our EMEA distributor business and, to a lesser extent, our Europe-direct business. EMEA distributor net sales increased primarily due to the later shipment of Fall 2022 orders to our Russia-based distributor business, under pre-existing contractual obligations. Europe-direct net sales increased primarily due to higher consumer demand, partially offset by unfavorable impacts from changes in foreign currency rates. EMEA SG&A expense decreased as a percentage of net sales to 19.7% for the third quarter of 2022 compared to 22.6% in 2021. Canada Canada operating income decreased $2.6 million to $20.2 million, or 25.6% of net sales, for the third quarter of 2022 from $22.8 million, or 27.8% of net sales, for the comparable period in 2021. The decrease primarily resulted from decreased net sales. Canada net sales decreased $3.2 million, or 4% (flat constant-currency), for the third quarter of 2022, compared to the same period in 2021. The decrease in Canada net sales was primarily driven by unfavorable impacts from changes in foreign currency rates and decreased net sales related to later shipment of Fall 2022 orders compared to shipments of Fall 2021 orders in our Canada wholesale business, partially offset by increased net sales in our Canada DTC business. Canada SG&A expense increased as a percentage of net sales to 21.1% for the third quarter of 2022 compared to 20.1% for the same period in 2021. Unallocated corporate expenses increased by $5.4 million to $67.6 million in 2022, from $62.2 million in 2021. Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 Net sales by geographic segment are summarized in the following table: Nine Months Ended September 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. $ 1,521.4 $ — $ 1,521.4 $ 1,298.2 17% 17% LAAP 309.9 24.6 334.5 292.7 6% 14% EMEA 305.8 24.6 330.4 268.5 14% 23% Canada 157.5 3.8 161.3 137.3 15% 17% $ 2,294.6 $ 53.0 $ 2,347.6 $ 1,996.7 15% 18% (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 | 29 Table of Contents Operating income for each reportable segment and unallocated corporate expenses are summarized in the following table: Nine Months Ended September 30, (in millions) 2022 2021 Change U.S. $ 325.8 $ 320.8 $ 5.0 LAAP 21.7 16.3 5.4 EMEA 51.0 47.8 3.2 Canada 31.9 29.7 2.2 Total segment operating income 430.4 414.6 15.8 Unallocated corporate expenses (192.7) (175.7) (17.0) Operating income $ 237.7 $ 238.9 $ (1.2) U.S. U.S. operating income increased $5.0 million to $325.8 million, or 21.4% of net sales, for the nine months ended September 30, 2022 from $320.8 million, or, 24.7% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales, partially offset by decreased gross margin. U.S. net sales increased $223.2 million, or 17%, for the nine months ended September 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 and SOREL brands. Increased U.S. wholesale net sales were driven by increased consumer demand and shipment of higher Spring 2022 and Fall 2022 orders compared to shipment of 2021 season orders. U.S. DTC net sales increased from net sales growth generated from our retail stores and e-commerce business. As of September 30, 2022 , our U.S. business operated 148 retail stores, compared to 138 stores as of September 30, 2021. SG&A expenses increased as a percentage of net sales to 28.7% for the nine months ended September 30, 2022 compared to 28.2% for the same period in 2021. LAAP LAAP operating income increased $5.4 million to $21.7 million, or 7.0% of net sales, for the nine months ended September 30, 2022 from $16.3 million, or 5.6% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales. LAAP net sales increased $17.2 million, or 6% (14% constant-currency), for the nine months ended September 30, 2022, compared to the same period in 2021, primarily in our LAAP distributor business and, to a lesser extent, our Japan and Korea businesses. This increase was primarily driven by earlier shipment of higher Fall 2022 orders compared to shipment of Fall 2021 orders and higher consumer demand as we lapped prior year provincial mandated restrictions to prevent the spread of COVID-19. These increases were offset by unfavorable impacts from changes in foreign currency rates and government efforts to control the spread of COVID-19 in China the second quarter of 2022. LAAP SG&A expense decreased as a percentage of net sales to 47.9% for the nine months ended September 30, 2022 compared to 50.3% for the same period in 2021. EMEA EMEA operating income increased $3.2 million to $51.0 million, or 16.7% of net sales, for the nine months ended September 30, 2022 from $47.8 million, or 17.8% of net sales, for the comparable period in 2021. The increase was driven primarily by increased net sales. EMEA net sales increased $37.3 million, or 14% (increased 23% constant-currency), for the nine months ended September 30, 2022, compared to the same period in 2021, driven by increased net sales in our Europe-direct and EMEA distributor businesses. Europe-direct net sales increased primarily due to higher consumer demand, partially offset by unfavorable impacts from changes in foreign currency rates. EMEA distributor net sales increased primarily due to higher shipments of Fall 2022 orders compared to shipment of Fall 2021 orders. EMEA SG&A expenses decreased as a percentage of net sales to 26.4% for the nine months ended September 30, 2022 compared to 26.6% in 2021. Canada Canada operating income increased $2.2 million to $31.9 million, or 20.3% of net sales, for the nine months ended September 30, 2022 from $29.7 million, or 21.6% of net sales, for the comparable period in 2021. The increase primarily resulted from increased net sales. Canada net sales increased $20.2 million, or 15% (17% constant-currency), for the nine months ended September 30, 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 26.2% for the nine months ended September 30, 2022, compared to 26.3% for the same period in 2021. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 30 Table of Contents Unallocated corporate expenses increased by $17.0 million to $192.7 million for the nine months ended September 30, 2022 from $175.7 million for the same period in 2021, largely driven by higher personnel expenses and technology related expenses, partially offset by lower incentive compensation. LIQUIDITY AND CAPITAL RESOURCES Including cash, cash equivalents, short-term investments and available committed credit lines, we had approximately $665 million in total liquidity as of September 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 just prior to the start of the U.S. holiday season 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: Nine Months Ended September 30, (in millions) 2022 2021 Change Net cash provided by (used in): Operating activities $ (328.1) $ (15.6) $ (312.5) Investing activities 88.5 (19.2) 107.7 Financing activities (339.7) (151.4) (188.3) Net effect of exchange rate changes on cash (24.9) (5.0) (19.9) Net decrease in cash and cash equivalents $ (604.2) $ (191.2) $ (413.0) The change in cash flows used in operating activities was driven by a $324.6 million increase in cash used in changes in assets and liabilities, partially offset by a $12.1 million increase in cash provided by net income and non-cash adjustments. The most significant comparative changes included Inventories, net, and to a lesser extent, Accounts receivable, net , Accrued liabilities , and Accounts payable . The $269.4 million increase in cash used in Inventories, net was driven by an increase in inventory purchases in anticipation of sales growth, temporary store closures due to government efforts to control the spread of COVID-19 in China and supply chain disruptions, resulting in higher than initially planned order cancellations. The $84.8 million increase in cash used in Accounts receivable, net was primarily driven by growth in wholesale sales, partially offset by an increase in collections. The $43.2 million increase in cash used in Accrued liabilities was primarily driven by changes in accruals for incentive compensation. These amounts were partially offset by the $41.9 million increase in cash provided by Accounts payable primarily resulting from the effects of higher in-transit inventory. Net cash provided by investing activities was $88.5 million for the nine months ended September 30, 2022, compared to net cash used in investing activities of $19.2 million for the same period in 2021. For the 2022 period, net cash provided by investing activities consisted of $131.0 million in net sales and maturities of short-term investments, partially offset by $42.5 million in cash used for capital expenditures. For the 2021 period, net cash used in investing activities consisted of $20.4 million for capital expenditures, partially offset by $1.2 million in cash provided by sales and maturities of short-term investments. Net cash used in financing activities was $339.7 million for the nine months ended September 30, 2022 compared to $151.4 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 $56.6 million. For the 2021 period, net cash used in financing activities primarily consisted of repurchases of common stock of $118.6 million and dividend payments to our shareholders of $51.7 million, partially offset by net proceeds from the issuance of common stock related to share-based compensation of $18.6 million. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 31 Table of Contents Sources of Liquidity Cash and cash equivalents and short-term investments As of September 30, 2022, we had cash and cash equivalents of $159.2 million and short-term investments of $1.0 million, compared to $763.4 million and $131.1 million, respectively, as of December 31, 2021 and $599.5 million and $1.1 million, respectively, as of September 30, 2021. Domestic Credit Facility 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. As of September 30, 2022, we had available an unsecured, committed revolving credit facility, which provides for borrowings up to $500.0 million. We were in compliance with all associated covenants and there was no balance outstanding under the facility. In October 2022, we borrowed $25 million from the domestic credit facility. These borrowings accrue interest at a rate of 4.14% per annum. We plan to repay these borrowings in the fourth quarter of 2022. International Credit Facility As of September 30, 2022, our European subsidiary had available an unsecured, committed line of credit, which is guaranteed by the Company and provides for borrowings up to €4.4 million (approximately US$4.3 million). There was no balance outstanding under the facility. Other Sources As of September 30, 2022, collectively, our international subsidiaries had unsecured, uncommitted lines of credit, credit facilities and overdraft facilities, providing for borrowings up to approximately US$102.4 million. There was €4.5 million (approximately US$4.4 million) of borrowings outstanding under an overdraft facility utilized by our European subsidiary, which was guaranteed by the Company. These borrowings accrued interest at a rate of 3.75% per annum and were repaid in October 2022. In October 2022, we borrowed €15.0 million (approximately US$15.0 million) from an unsecured, uncommitted credit facility utilized by our European subsidiary, which is guaranteed by the Company. These borrowings accrue interest at a rate of 2.10% per annum. We plan to repay these borrowings in the fourth quarter of 2022. 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 just prior to the start of the U.S. holiday season, we borrowed $25 million from our domestic credit facility in October 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 September 30, 2022, our inventory balance increased to $1,056.9 million, compared to $645.4 million and $720.9 million as of December 31, 2021 and September 30, 2021, respectively. Late inventory receipts and slower consumer demand have resulted in greater than anticipated order cancellations and higher inventory levels. We believe older season inventories represent a manageable portion of our total inventory mix. To align inventory levels more closely with anticipated demand, we are adjusting future inventory purchases and utilizing our outlet stores to sell excess merchandise. We expect inventory to remain elevated for the next several quarters as we balance reducing inventory levels with maintaining profitability. We have planned 2022 capital expenditures of approximately $80 to $90 million. This includes investments in our DTC operations, including new stores, and digital and supply chain capabilities to support our strategic priorities. 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 COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 32 Table of Contents 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 at least 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 $435.5 million as of September 30, 2022, compared to $656.5 million and $542.8 million as of December 31, 2021 and September 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 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 on Form 10-Q. 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. COLUMBIA SPORTSWEAR COMPANY | 2022 FORM 10-Q | 33 Table of Contents 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.