COLM-2014.6.30-10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________
FORM 10-Q
____________________________
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934
For the transition period from_______to_______            
Commission file number 0-23939
 _____________________________
COLUMBIA SPORTSWEAR COMPANY
(Exact name of registrant as specified in its charter) 
Oregon
 
93-0498284
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
14375 Northwest Science Park Drive
Portland, Oregon
 
97229
(Address of principal executive offices)
 
(Zip Code)
(503) 985-4000
(Registrant’s telephone number, including area code)
_____________________________________
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
The number of shares of Common Stock outstanding on July 25, 2014 was 35,043,513.


COLUMBIA SPORTSWEAR COMPANY
JUNE 30, 2014
INDEX TO FORM 10-Q
 
 
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1

PART I. FINANCIAL INFORMATION
Item 1 – FINANCIAL STATEMENTS
COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
367,165

 
$
437,489

 
$
340,428

Short-term investments
 
27,238

 
91,755

 
90,181

Accounts receivable, net of allowance of $6,977, $8,282 and $7,566, respectively
 
204,527

 
306,878

 
180,937

Inventories, net (Note 5)
 
456,448

 
329,228

 
423,765

Deferred income taxes
 
52,202

 
52,041

 
47,884

Prepaid expenses and other current assets
 
42,551

 
33,081

 
47,074

Total current assets
 
1,150,131

 
1,250,472

 
1,130,269

Property, plant and equipment, at cost, net of accumulated depreciation of $345,153, $326,380 and $310,934, respectively
 
291,270

 
279,373

 
273,016

Intangible assets, net (Notes 3, 6)
 
149,221

 
36,288

 
36,952

Goodwill (Notes 3, 6)
 
69,257

 
14,438

 
14,438

Other non-current assets
 
25,412

 
25,017

 
22,359

Total assets
 
$
1,685,291

 
$
1,605,588

 
$
1,477,034

LIABILITIES AND EQUITY
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
Accounts payable
 
$
239,906

 
$
173,557

 
$
185,984

Accrued liabilities (Note 7)
 
104,332

 
120,397

 
84,878

Income taxes payable
 
3,315

 
7,251

 
3,895

Deferred income taxes
 
66

 
49

 
18

Total current liabilities
 
347,619

 
301,254

 
274,775

Note payable to related party (Note 15)
 
15,734

 
—

 
—

Income taxes payable
 
4,373

 
13,984

 
13,205

Deferred income taxes
 
8,261

 
7,959

 
1,778

Other long-term liabilities
 
31,339

 
29,527

 
27,820

Total liabilities
 
407,326

 
352,724

 
317,578

Commitments and contingencies (Note 13)
 

 

 

Columbia Sportswear Company Shareholders’ Equity:
 
 
 
 
 
 
Preferred stock; 10,000 shares authorized; none issued and outstanding
 
—

 
—

 
—

Common stock (no par value); 125,000 shares authorized; 35,040, 34,595 and 34,409 issued and outstanding, respectively (Note 10)
 
77,793

 
52,325

 
38,972

Retained earnings
 
1,154,103

 
1,157,733

 
1,082,634

Accumulated other comprehensive income (Note 9)
 
38,075

 
35,360

 
30,025

Total Columbia Sportswear Company shareholders’ equity
 
1,269,971

 
1,245,418

 
1,151,631

Non-controlling interest (Note 4)
 
7,994

 
7,446

 
7,825

Total equity
 
1,277,965

 
1,252,864

 
1,159,456

Total liabilities and equity
 
$
1,685,291

 
$
1,605,588

 
$
1,477,034

See accompanying notes to condensed consolidated financial statements.

2

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
324,246

 
$
280,495

 
$
748,330

 
$
628,802

Cost of sales
 
180,221

 
160,211

 
407,219

 
355,214

Gross profit
 
144,025

 
120,284

 
341,111

 
273,588

Selling, general and administrative expenses
 
162,196

 
131,935

 
325,555

 
274,838

Net licensing income
 
1,182

 
1,654

 
2,906

 
3,981

Income (loss) from operations
 
(16,989
)
 
(9,997
)
 
18,462

 
2,731

Interest income, net
 
384

 
215

 
623

 
347

Interest expense on note payable to related party
 
(277
)
 
—

 
(487
)
 
—

Other non-operating expense
 
(149
)
 
(473
)
 
(505
)
 
(1,103
)
Income (loss) before income tax
 
(17,031
)
 
(10,255
)
 
18,093

 
1,975

Income tax benefit (expense)
 
10,293

 
2,925

 
(1,155
)
 
797

Net income (loss)
 
(6,738
)
 
(7,330
)
 
16,938

 
2,772

Net income (loss) attributable to non-controlling interest
 
(409
)
 
(253
)
 
1,012

 
(253
)
Net income (loss) attributable to Columbia Sportswear Company
 
$
(6,329
)
 
$
(7,077
)
 
$
15,926

 
$
3,025

Earnings (loss) per share attributable to Columbia Sportswear Company (Note 10):
 
 
 

 
 
 
 
Basic
 
$
(0.18
)
 
$
(0.21
)
 
$
0.46

 
$
0.09

Diluted
 
(0.18
)
 
(0.21
)
 
0.45

 
0.09

Weighted average shares outstanding (Note 10):
 
 
 
 
 
 
 
 
Basic
 
34,958

 
34,353

 
34,834

 
34,260

Diluted
 
34,958

 
34,353

 
35,301

 
34,561

See accompanying notes to condensed consolidated financial statements.


3

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss)
 
$
(6,738
)
 
$
(7,330
)
 
$
16,938

 
$
2,772

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized holding gains on available-for-sale securities (net of tax benefit (expense) of $1, ($1), ($1) and ($4), respectively)
 
3

 
7

 
4

 
16

Unrealized gains (losses) on derivative transactions (net of tax benefit (expense) of $638, ($599), $741, and ($1,149), respectively)
 
(1,037
)
 
168

 
(809
)
 
1,598

Foreign currency translation adjustments (net of tax benefit (expense) of $30, ($137), $23 and $98, respectively)
 
8,934

 
(5,517
)
 
3,056

 
(18,174
)
Other comprehensive income (loss)
 
7,900

 
(5,342
)
 
2,251

 
(16,560
)
Comprehensive income (loss)
 
1,162

 
(12,672
)
 
19,189

 
(13,788
)
Comprehensive income (loss) attributable to non-controlling interest
 
(375
)
 
(175
)
 
548

 
(175
)
Comprehensive income (loss) attributable to Columbia Sportswear Company
 
$
1,537

 
$
(12,497
)
 
$
18,641

 
$
(13,613
)
See accompanying notes to condensed consolidated financial statements.


4

COLUMBIA SPORTSWEAR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
16,938

 
$
2,772

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
23,234

 
19,891

Loss on disposal or impairment of property, plant, and equipment
229

 
299

Deferred income taxes
5,601

 
3,185

Stock-based compensation
5,208

 
4,282

Excess tax benefit from employee stock plans
(3,951
)
 
(925
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
112,340

 
153,383

Inventories
(114,716
)
 
(60,449
)
Prepaid expenses and other current assets
(7,357
)
 
(8,446
)
Other assets
297

 
116

Accounts payable
60,089

 
40,078

Accrued liabilities
(23,095
)
 
(20,150
)
Income taxes payable
(13,596
)
 
1,017

Other liabilities
1,733

 
650

Net cash provided by operating activities
62,954

 
135,703

Cash flows from investing activities:
 
 
 
Acquisition of business, net of cash acquired
(188,467
)
 
—

Purchases of short-term investments
(21,471
)
 
(61,286
)
Sales of short-term investments
86,206

 
16,437

Capital expenditures
(24,964
)
 
(31,502
)
Proceeds from sale of property, plant, and equipment
16

 
45

Net cash used in investing activities
(148,680
)
 
(76,306
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facilities
1,045

 
4,075

Repayments on credit facilities
(1,045
)
 
(4,231
)
Proceeds from issuance of common stock under employee stock plans
19,017

 
11,050

Tax payments related to restricted stock unit issuances
(2,881
)
 
(2,019
)
Excess tax benefit from employee stock plans
3,951

 
925

Proceeds from note payable to related party
16,072

 
—

Capital contribution from non-controlling interest
—

 
8,000

Cash dividends paid
(19,556
)
 
(15,081
)
Net cash provided by financing activities
16,603

 
2,719

Net effect of exchange rate changes on cash
(1,201
)
 
(12,469
)
Net increase (decrease) in cash and cash equivalents
(70,324
)
 
49,647

Cash and cash equivalents, beginning of period
437,489

 
290,781

Cash and cash equivalents, end of period
$
367,165

 
$
340,428

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for income taxes
$
21,842

 
$
3,058

Supplemental disclosures of non-cash investing activities:
 
 
 
Capital expenditures incurred but not yet paid
$
8,145

 
$
3,885

See accompanying notes to condensed consolidated financial statements.

5

COLUMBIA SPORTSWEAR COMPANY


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—BASIS OF PRESENTATION AND ORGANIZATION
The accompanying unaudited condensed consolidated financial statements have been prepared by the management of Columbia Sportswear Company (together with its wholly owned subsidiaries and entities in which it maintains a controlling financial interest, the “Company”) and in the opinion of management include all normal recurring material adjustments necessary to present fairly the Company’s financial position as of June 30, 2014 and 2013, the results of operations for the three and six months ended June 30, 2014 and 2013 and cash flows for the six months ended June 30, 2014 and 2013. The December 31, 2013 financial information was derived from the Company’s audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. A significant part of the Company’s business is of a seasonal nature; therefore, results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of results to be expected for the full year.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company, however, believes that the disclosures contained in this report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934 for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Principles of consolidation:
The condensed consolidated financial statements include the accounts of Columbia Sportswear Company, its wholly owned subsidiaries and entities in which it maintains a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
Estimates and assumptions:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates and assumptions. Some of these more significant estimates relate to revenue recognition, including sales returns and miscellaneous claims from customers, allowance for doubtful accounts, excess, slow-moving and closeout inventories, product warranty, long-lived and intangible assets, income taxes and stock-based compensation.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes to the Company’s significant accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Recent Accounting Pronouncements:
In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This ASU provides clarification regarding the release of any cumulative translation adjustment when the parent ceases to have a controlling financial interest in a business or group of assets held within a foreign entity. The amendment is effective on a prospective basis for interim and annual periods beginning after December 15, 2013. The Company adopted the new guidance as of January 1, 2014. The adoption of this standard did not have a material effect on the Company’s financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This accounting standard is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Early adoption is not permitted. The Company

6

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



is currently evaluating the impact this accounting standard will have on the Company's financial position, results of operations or cash flows.
NOTE 3—BUSINESS ACQUISITION
On May 30, 2014, the Company purchased 100% of the equity interest in prAna Living LLC (“prAna”) for $188,467,000 net of acquired cash of $4,946,000. PrAna is a lifestyle apparel brand sold through approximately 1,400 select specialty and online retailers across North America, as well as through five company-owned retail stores, an e-commerce site and direct-mail catalogs. The acquisition of prAna strengthens and diversifies the Company's brand portfolio and generally offsets some of the more seasonal sales effects found within existing Columbia brands. The acquisition was funded with cash on hand.
PrAna contributed net sales of $5,547,000 and net loss, including amortization of acquired assets, of $1,065,000 to the Company from May 31, 2014 to June 30, 2014. In addition, the Company incurred transaction costs of $3,374,000 during the three and six months ended June 30, 2014. These acquisition and integration costs are included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014.
Purchase price allocation
Acquired assets and liabilities were recorded at estimated fair value as of the acquisition date. The excess of the purchase price over the estimated fair value of identifiable net assets resulted in the recognition of goodwill of $54,819,000, all of which was assigned to the United States segment, and is attributable to future growth opportunities and any intangible assets that did not qualify for separate recognition. The goodwill is expected to be deductible for tax purposes.
The following table summarizes the preliminary estimated fair value of the net assets acquired and liabilities assumed as of May 30, 2014, the acquisition date (in thousands):
 
 
May 30, 2014
Cash
 
$
4,946

Accounts receivable
 
10,021

Inventories
 
9,641

Other current assets
 
2,229

Property, plant and equipment
 
5,192

Acquired intangible assets

114,500

Other non-current assets
 
258

     Total assets acquired

146,787

 
 
 
Accounts payable
 
2,803

Other current liabilities
 
5,390

     Total liabilities assumed

8,193

 
 
 
Net identifiable assets acquired

138,594

Goodwill

54,819

Net assets acquired
 
$
193,413

The allocation of the purchase price is preliminary and is based upon valuation information available and estimates and assumptions made at June 30, 2014. The Company is still in the process of verifying data and finalizing information related to the valuation and recording of accounts receivable, inventories, property, plant and equipment, identified intangible assets, accrued liabilities and the resulting effects on the amount of recognized goodwill.
The following table sets forth the components of identifiable intangible assets and their estimated useful lives as of May 30, 2014, the acquisition date (in thousands, except for estimated useful lives, in years):

7

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



 
 
Estimated fair value
 
Estimated useful life, in years
Trade name
 
$
88,000

 
Indefinite
Customer relationships
 
23,000

 
3-10 years
Order backlog
 
3,500

 
Less than 1 year
Total
 
$
114,500

 
 
Summary of Unaudited Pro forma Information
The following table reflects the unaudited pro forma consolidated results of operations for the periods presented, as though the acquisition of prAna had occurred on January 1, 2013 (in thousands):
 
 
(Unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
337,328

 
$
296,518

 
$
791,763

 
$
671,424

Net income (loss) attributable to Columbia Sportswear Company
 
(3,675
)
 
(8,405
)
 
21,691

 
2,590

Earnings (loss) per share attributable to Columbia Sportswear Company:
 
 
 
 
 
 
 
 
Basic
 
$
(0.11
)
 
$
(0.24
)
 
$
0.62

 
$
0.08

Diluted
 
(0.11
)
 
(0.24
)
 
0.61

 
0.07

The unaudited pro forma financial information is presented for illustrative purposes only and is not indicative of the results of operations that would have been realized if the acquisition had been completed on the date indicated, nor is it indicative of future operating results. The unaudited pro forma consolidated net income (loss) includes differences in the amount and timing of amortization of acquired intangible assets and the fair value adjustment for acquired inventory. As a result, under the assumed pro forma acquisition date of January 1, 2013, net income for the six months ended June 30, 2014 and 2013 includes pre-tax purchase accounting amortization of $1,908,000 and $7,008,000, respectively. The pro forma net income (loss) attributable to the Company excludes nonrecurring transaction costs of $3,374,000. The pro forma results also do not include, among other items, the effects of anticipated synergies from combining the two companies or differences in the combined Company's operating cost structure.
NOTE 4—NON-CONTROLLING INTEREST
The Company owns a 60% controlling interest in a joint venture formed with Swire Resources, Limited ("Swire") to support the development and operation of the Company's business in China. The joint venture was in a formation and start-up phase during 2013 and began operations on January 1, 2014. The accounts of the joint venture are included in the Condensed Consolidated Balance Sheets as of June 30, 2014 and 2013, and December 31, 2013. Swire's share of net income (loss) from the joint venture is included in Net income (loss) attributable to non-controlling interest in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013. The non-controlling equity interest in this entity is included in total equity as Non-controlling interest on the Condensed Consolidated Balance Sheets as of June 30, 2014 and 2013, and December 31, 2013.
The following table presents the changes in Columbia Sportswear Company shareholders' equity and non-controlling interest for the six months ended June 30, 2014 (in thousands):

8

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



 
 
Columbia Sportswear Company
 
Non-Controlling Interest
 
Total
Balance at December 31, 2013
 
$
1,245,418

 
$
7,446

 
$
1,252,864

Net income
 
15,926

 
1,012

 
16,938

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Unrealized holding gains on available-for-sale securities
 
4

 
—

 
4

Derivative holding losses
 
(809
)
 
—

 
(809
)
Foreign currency translation adjustments
 
3,520

 
(464
)
 
3,056

Cash dividends ($0.56 per share)
 
(19,556
)
 
—

 
(19,556
)
Issuance of common stock under employee stock plans, net
 
16,136

 
—

 
16,136

Tax adjustment from stock plans
 
4,124

 
—

 
4,124

Stock-based compensation expense
 
5,208

 
—

 
5,208

Balance at June 30, 2014
 
$
1,269,971

 
$
7,994

 
$
1,277,965

The following table presents the changes in Columbia Sportswear Company shareholders' equity and non-controlling interest for the six months ended June 30, 2013 (in thousands):
 
 
Columbia Sportswear Company
 
Non-Controlling Interest
 
Total
Balance at December 31, 2012
 
$
1,166,167

 
$
—

 
$
1,166,167

Net income (loss)
 
3,025

 
(253
)
 
2,772

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Unrealized holding gains on available-for-sale securities
 
16

 
—

 
16

Derivative holding gains
 
1,598

 
—

 
1,598

Foreign currency translation adjustments
 
(18,252
)
 
78

 
(18,174
)
Cash dividends ($0.44 per share)
 
(15,081
)
 
—

 
(15,081
)
Issuance of common stock under employee stock plans, net
 
9,031

 
—

 
9,031

Capital contribution from non-controlling interest
 
—

 
8,000

 
8,000

Tax adjustment from stock plans
 
845

 
—

 
845

Stock-based compensation expense
 
4,282

 
—

 
4,282

Balance at June 30, 2013
 
$
1,151,631

 
$
7,825

 
$
1,159,456


NOTE 5—INVENTORIES, NET
Inventories are carried at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company periodically reviews its inventory for excess, closeout and slow moving items and makes provisions as necessary to properly reflect inventory value.
Inventories, net, consisted of the following (in thousands):
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Raw materials
$
2,031

 
$
1,130

 
$
1,347

Work in process
524

 
1,203

 
1,478

Finished goods
453,893

 
326,895

 
420,940

 
$
456,448

 
$
329,228

 
$
423,765

NOTE 6—INTANGIBLE ASSETS, NET AND GOODWILL

9

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



Intangible assets that are determined to have finite lives include patents, purchased technology, customer relationships and order backlog and are amortized over their estimated useful lives, which range from less than one year to approximately 10 years, and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. Goodwill and intangible assets with indefinite useful lives, including trademarks and trade names, are not amortized but are periodically evaluated for impairment.
Intangible assets
The following table summarizes the Company’s identifiable intangible assets balance (in thousands):
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Intangible assets subject to amortization:
 
 
 
 
 
Patents and purchased technology
$
14,198

 
$
14,198

 
$
14,198

Customer relationships
23,000

 
—

 
—

Order backlog
3,500

 
—

 
—

Gross carrying amount
40,698

 
14,198

 
14,198

Accumulated amortization:
 
 
 
 
 
Patents and purchased technology
(5,997
)
 
(5,331
)
 
(4,667
)
Customer relationships
(318
)
 
—

 
—

Order backlog
(583
)
 
—

 
—

Total accumulated amortization
(6,898
)
 
(5,331
)
 
(4,667
)
Net carrying amount
33,800

 
8,867

 
9,531

Intangible assets not subject to amortization
115,421

 
27,421

 
27,421

Intangible assets, net
$
149,221

 
$
36,288

 
$
36,952

Amortization expense for intangible assets subject to amortization was $1,234,000 and $333,000 for the three months ended June 30, 2014 and 2013, respectively, and was $1,567,000 and $665,000 for the six months ended June 30, 2014 and 2013, respectively. Annual amortization expense is estimated to be $7,056,000 in 2014, $5,147,000 in 2015 and 2016, $3,883,000 in 2017 and $2,980,000 in 2018.
Goodwill
Goodwill was $69,257,000 at June 30, 2014, and $14,438,000 at December 31, 2013 and June 30, 2013. The change in goodwill is related to the acquisition of prAna on May 30, 2014 (see Note 3).
NOTE 7—PRODUCT WARRANTY
Some of the Company’s products carry limited warranty provisions for defects in quality and workmanship. A warranty reserve is established at the time of sale to cover estimated costs based on the Company’s history of warranty repairs and replacements and is recorded in cost of sales. The warranty reserve is included in Accrued liabilities in the Condensed Consolidated Balance Sheets.
A reconciliation of product warranties is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
10,652

 
$
9,683

 
$
10,768

 
$
10,209

Provision for warranty claims
673

 
1,269

 
2,154

 
2,784

Warranty claims
(736
)
 
(1,236
)
 
(2,265
)
 
(3,170
)
Other
91

 
(51
)
 
23

 
(158
)
Balance at end of period
$
10,680

 
$
9,665

 
$
10,680

 
$
9,665


10

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



NOTE 8—STOCK-BASED COMPENSATION
The Company’s Stock Incentive Plan (the “Plan”) allows for grants of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units and other stock-based or cash-based awards. The majority of all stock options and restricted stock unit grants outstanding under the Plan were granted in the first quarter of each fiscal year.
Stock-based compensation expense consisted of the following (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Stock options
 
$
862

 
$
883

 
$
1,743

 
$
1,710

Restricted stock units
 
1,769

 
1,449

 
3,465

 
2,572

Total
 
$
2,631

 
$
2,332

 
$
5,208

 
$
4,282

Stock Options
The Company estimates the fair value of stock options using the Black-Scholes model. Key inputs and assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected stock price volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield.
The following table presents the weighted average assumptions for stock options granted in the periods:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Expected option term
7.82 years
 
7.02 years
 
4.71 years
 
4.72 years
Expected stock price volatility
28.63%
 
28.54%
 
27.67%
 
30.80%
Risk-free interest rate
2.29%
 
1.55%
 
1.21%
 
0.69%
Expected annual dividend yield
1.33%
 
1.44%
 
1.33%
 
1.63%
Weighted average grant date fair value
$25.54
 
$16.45
 
$17.52
 
$12.31
During the six months ended June 30, 2014 and 2013, the Company granted a total of 236,288 and 327,979 stock options, respectively. At June 30, 2014, unrecognized costs related to outstanding stock options totaled approximately $7,208,000, before any related tax benefit. The unrecognized costs related to stock options are amortized over the related vesting period using the straight-line attribution method. Unrecognized costs related to stock options at June 30, 2014 are expected to be recognized over a weighted average period of 2.58 years.
Restricted Stock Units
The Company estimates the fair value of service-based and performance-based restricted stock units using the Black-Scholes model. Key inputs and assumptions used to estimate the fair value of restricted stock units include the vesting period, expected annual dividend yield and closing price of the Company’s common stock on the date of grant.
 The following table presents the weighted average assumptions for restricted stock units granted in the periods:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Vesting period
3.56 years
 
3.07 years
 
3.83 years
 
3.93 years
Expected annual dividend yield
1.34%
 
1.44%
 
1.33%
 
1.60%
Estimated average grant date fair value per restricted stock unit
$79.82
 
$58.67
 
$78.16
 
$51.78
During the six months ended June 30, 2014 and 2013, the Company granted 131,921 and 144,477 restricted stock units, respectively. At June 30, 2014, unrecognized costs related to outstanding restricted stock units totaled approximately $16,168,000, before any related tax benefit. The unrecognized costs related to restricted stock units are being amortized over the related vesting

11

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



period using the straight-line attribution method. These unrecognized costs at June 30, 2014 are expected to be recognized over a weighted average period of 2.58 years.
NOTE 9—ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income, net of applicable taxes, reported on the Company’s Condensed Consolidated Balance Sheets consists of unrealized holding gains and losses on available-for-sale securities, unrealized gains and losses on certain derivative transactions and foreign currency translation adjustments.
The following table sets forth the changes in accumulated other comprehensive income attributable to Columbia Sportswear Company, net of tax, for the three months ended June 30, 2014 (in thousands):
 
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at March 31, 2014
 
$
(5
)
 
$
1,472

 
$
28,742

 
$
30,209

Other comprehensive income (loss) before reclassifications
 
3

 
(634
)
 
8,900

 
8,269

Amounts reclassified from other comprehensive income
 
—

 
(403
)
 
—

 
(403
)
Net other comprehensive income (loss) during the period
 
3

 
(1,037
)
 
8,900

 
7,866

Balance at June 30, 2014
 
$
(2
)
 
$
435

 
$
37,642

 
$
38,075

The following table sets forth the changes in accumulated other comprehensive income attributable to Columbia Sportswear Company, net of tax, for the three months ended June 30, 2013 (in thousands):
 
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at March 31, 2013
 
$
—

 
$
3,935

 
$
31,510

 
$
35,445

Other comprehensive income (loss) before reclassifications
 
7

 
727

 
(5,595
)
 
(4,861
)
Amounts reclassified from other comprehensive income
 
—

 
(559
)
 
—

 
(559
)
Net other comprehensive income (loss) during the period
 
7

 
168

 
(5,595
)
 
(5,420
)
Balance at June 30, 2013
 
$
7

 
$
4,103

 
$
25,915

 
$
30,025

The following table sets forth the changes in accumulated other comprehensive income attributable to Columbia Sportswear Company, net of tax, for the six months ended June 30, 2014 (in thousands):
 
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2013
 
$
(6
)
 
$
1,244

 
$
34,122

 
$
35,360

Other comprehensive income before reclassifications
 
4

 
70

 
3,520

 
3,594

Amounts reclassified from other comprehensive income
 
—

 
(879
)
 
—

 
(879
)
Net other comprehensive income (loss) during the period
 
4

 
(809
)
 
3,520

 
2,715

Balance at June 30, 2014
 
$
(2
)
 
$
435

 
$
37,642

 
$
38,075

The following table sets forth the changes in accumulated other comprehensive income attributable to Columbia Sportswear Company, net of tax, for the six months ended June 30, 2013 (in thousands):

12

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



 
 
Unrealized gains (losses) on available-for-sale securities
 
Unrealized holding gains (losses) on derivative transactions
 
Foreign currency translation adjustments
 
Total
Balance at December 31, 2012
 
$
(9
)
 
$
2,505

 
$
44,167

 
$
46,663

Other comprehensive income (loss) before reclassifications
 
16

 
2,880

 
(18,252
)
 
(15,356
)
Amounts reclassified from other comprehensive income
 
—

 
(1,282
)
 
—

 
(1,282
)
Net other comprehensive income (loss) during the period
 
16

 
1,598

 
(18,252
)
 
(16,638
)
Balance at June 30, 2013
 
$
7

 
$
4,103

 
$
25,915

 
$
30,025

All reclassification adjustments related to derivative transactions are recorded in Cost of sales on the Condensed Consolidated Statements of Operations. See Note 12 for further information regarding derivative instrument reclassification adjustments.
NOTE 10—EARNINGS PER SHARE
Earnings per share (“EPS”) is presented on both a basic and diluted basis. Basic EPS is based on the weighted average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if outstanding securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted EPS, the basic weighted average number of shares is increased by the dilutive effect of stock options and restricted stock units determined using the treasury stock method.
A reconciliation of common shares used in the denominator for computing basic and diluted EPS is as follows (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Weighted average shares of common stock outstanding, used in computing basic earnings per share
34,958

 
34,353

 
34,834

 
34,260

Effect of dilutive stock options and restricted stock units
—

 
—

 
467

 
301

Weighted average shares of common stock outstanding, used in computing diluted earnings per share
34,958

 
34,353

 
35,301

 
34,561

Earnings (loss) per share of common stock attributable to Columbia Sportswear Company:
 
 
 
 
 
 
 
Basic
$
(0.18
)
 
$
(0.21
)
 
$
0.46

 
$
0.09

Diluted
(0.18
)
 
(0.21
)
 
0.45

 
0.09

 
Stock options and service-based restricted stock units representing 1,754,376 and 2,120,277 shares of common stock for the three months ended June 30, 2014 and 2013, respectively, were outstanding but were excluded from the computation of diluted EPS because their effect would be anti-dilutive due to a net loss in the period. Stock options and service-based restricted stock units representing 168,356 and 626,608 shares of common stock for the six months ended June 30, 2014 and 2013, respectively, were outstanding but were excluded from the computation of diluted EPS because their effect would be anti-dilutive as a result of applying the treasury stock method. In addition, performance-based restricted stock units representing 47,692 and 13,484 shares of common stock for the three months ended June 30, 2014 and 2013, respectively, and 39,373 and 13,484 shares of common stock for the six months ended June 30, 2014 and 2013, respectively, were outstanding but were excluded from the computation of diluted EPS because these shares were subject to performance conditions that had not been met.
Since the inception of the Company’s stock repurchase plan in 2004 through June 30, 2014, the Company’s Board of Directors has authorized the repurchase of $500,000,000 of the Company’s common stock. Shares of the Company’s common stock may be purchased in the open market or through privately negotiated transactions, subject to market conditions. The repurchase program does not obligate the Company to acquire any specific number of shares or to acquire shares over any specified period of time. As of June 30, 2014, the Company had repurchased 9,593,278 shares under this program at an aggregate purchase price of approximately $441,443,000. During the six months ended June 30, 2014 and 2013, the Company did not repurchase any shares of the Company's common stock.

13

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



NOTE 11—SEGMENT INFORMATION
The Company operates in four geographic segments: (1) United States, (2) Latin America and Asia Pacific ("LAAP"), (3) Europe, Middle East and Africa (“EMEA”) and (4) Canada, which are reflective of the Company’s internal organization, management, and oversight structure. Each geographic segment operates predominantly in one industry: the design, development, marketing and distribution of active outdoor apparel, footwear, accessories and equipment. Intersegment net sales and intersegment profits, which are recorded at a negotiated mark-up and eliminated in consolidation, are not material. Unallocated corporate expenses consist of expenses incurred by centrally-managed departments, including global information systems, finance and legal, executive compensation, unallocated benefit program expense and other miscellaneous costs.
In the first quarter of 2014, the Company reclassified its segment reporting to reflect changes in its internal management and oversight structure. Certain marketing, product creation and administrative costs incurred by the Company’s corporate offices, previously included in the United States segment, have been allocated to other geographic regions based on relevant operational metrics. Other such costs not directly or indirectly allocable to regional segments are now shown below as unallocated corporate expenses. Prior year amounts have been adjusted to match current year presentation.
The geographic distribution of the Company’s net sales and income (loss) from operations are summarized in the following table (in thousands) for the three and six months ended June 30, 2014 and 2013.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net sales to unrelated entities:
 
 
 
 
 
 
 
United States
$
146,368

 
$
139,789

 
$
387,557

 
$
340,287

LAAP
96,100

 
81,283

 
212,913

 
164,329

EMEA
72,949

 
53,034

 
112,089

 
93,954

Canada
8,829

 
6,389

 
35,771

 
30,232

 
$
324,246

 
$
280,495

 
$
748,330

 
$
628,802

Segment income (loss) from operations:
 
 
 
 
 
 
 
United States
$
2,365

 
$
5,415

 
$
46,536

 
$
30,962

LAAP
9,253

 
10,558

 
26,487

 
21,914

EMEA
5,797

 
(1,558
)
 
2,271

 
(7,131
)
Canada
(3,784
)
 
(4,050
)
 
(385
)
 
(547
)
Total segment income from operations
13,631

 
10,365

 
74,909

 
45,198

Unallocated corporate expenses
(30,620
)
 
(20,362
)
 
(56,447
)
 
(42,467
)
Interest income, net
384

 
215

 
623

 
347

Interest expense on note payable to related party
(277
)
 
—

 
(487
)
 
—

Other non-operating expense
(149
)
 
(473
)
 
(505
)
 
(1,103
)
Income (loss) before income taxes
$
(17,031
)
 
$
(10,255
)
 
$
18,093

 
$
1,975

Concentrations
The Company had one customer in its EMEA segment that accounted for approximately 16.7% of consolidated accounts receivable at June 30, 2014. The Company had two customers, one in its EMEA segment and one North American customer included in its United States and Canada segments, that accounted for approximately 12.4% and 11.2%, respectively, of consolidated accounts receivable at June 30, 2013. No single customer accounted for 10% or more of consolidated accounts receivable at December 31, 2013. The Company had one customer in its EMEA segment that accounted for approximately 12.1% and 10.4% of consolidated revenues for the three months ended June 30, 2014 and 2013, respectively. No customer accounted for 10% or more of consolidated revenues for the six months ended June 30, 2014 or 2013.
NOTE 12—FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In the normal course of business, the Company’s financial position and results of operations are routinely subject to a variety of risks. These risks include risks associated with financial markets, primarily currency exchange rate risk, and, to a lesser extent,

14

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



interest rate risk and equity market risk. The Company regularly assesses these risks and has established policies and business practices designed to mitigate them. The Company does not engage in speculative trading in any financial market.
The Company actively manages the risk of changes in functional currency equivalent cash flows resulting from anticipated U.S. dollar denominated inventory purchases by subsidiaries that use European euros, Canadian dollars, Japanese yen or Korean won as their functional currency. The Company manages this risk by using currency forward contracts formally designated and effective as cash flow hedges. Hedge effectiveness is determined by evaluating the ability of a hedging instrument’s cumulative change in fair value to offset the cumulative change in the present value of expected cash flows on the underlying exposures. For forward contracts, the change in fair value attributable to changes in forward points are excluded from the determination of hedge effectiveness and included in current cost of sales. Hedge ineffectiveness was not material during the three and six months ended June 30, 2014 and 2013.
 
The Company also uses currency forward contracts not formally designated as hedges to manage the consolidated currency exchange rate risk associated with the remeasurement of non-functional currency denominated monetary assets and liabilities by subsidiaries that use European euros, Canadian dollars, Japanese yen, Korean won or Chinese renminbi as their functional currency. Non-functional currency denominated monetary assets and liabilities consist primarily of cash and cash equivalents, short-term investments, payables and intercompany loans. The gains and losses generated on these currency forward contracts not formally designated as hedges are expected to be largely offset in other non-operating income (expense), net by the gains and losses generated from the remeasurement of the non-functional currency denominated monetary assets and liabilities.
The following table presents the gross notional amount of outstanding derivative instruments (in thousands): 
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
$
127,000

 
$
99,000

 
$
71,500

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
Currency forward contracts
63,500

 
109,000

 
77,000

At June 30, 2014, approximately $522,000 of deferred net gains on both outstanding and matured derivatives accumulated in other comprehensive income are expected to be reclassified to net income during the next twelve months as a result of underlying hedged transactions also being recorded in net income. Actual amounts ultimately reclassified to net income are dependent on U.S. dollar exchange rates in effect against the European euro, Canadian dollar, Japanese yen and Korean won when outstanding derivative contracts mature.
At June 30, 2014, the Company’s derivative contracts had a remaining maturity of approximately two years or less. All the counterparties to these transactions had both long-term and short-term investment grade credit ratings and as a result, the Company does not require collateral to facilitate transactions. The maximum net exposure to any single counterparty, which is generally limited to the aggregate unrealized gain of all contracts with that counterparty, was less than $1,000,000 at June 30, 2014. The Company does not hold derivatives featuring credit-related contingent terms. In addition, the Company is not a party to any derivative master agreement featuring credit-related contingent terms. Finally, the Company has not pledged assets or posted collateral as a requirement for entering into or maintaining derivative positions.
The following table presents the balance sheet classification and fair value of derivative instruments (in thousands):

15

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



 
 
Balance Sheet Classification
 
June 30,
2014
 
December 31,
2013
 
June 30,
2013
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
$
986

 
$
1,936

 
$
2,516

Currency forward contracts
 
Other non-current assets
 
155

 
24

 
343

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
1,081

 
872

 
262

Currency forward contracts
 
Other long-term liabilities
 
12

 
95

 
—

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
302

 
2,956

 
1,855

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
650

 
280

 
460


The following table presents the statement of operations effect and classification of derivative instruments (in thousands):
 
 
Statement of
Operations
Classification
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
2014
 
2013
 
2014
 
2013
Currency Forward Contracts:
 
 
 
 
 
 
 
 
 
 
Derivative instruments designated
as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income or loss
 
—
 
$
(634
)
 
$
727

 
$
70

 
$
2,880

Gain reclassified from accumulated other comprehensive income or loss to income for the effective portion
 
Cost of sales
 
690

 
766

 
1,499

 
1,626

Loss recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Cost of sales
 
(186
)
 
(2
)
 
(208
)
 
(45
)
Derivative instruments not designated
as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) recognized in income
 
Other non-operating expense
 
(506
)
 
2,663

 
(1,971
)
 
6,012

NOTE 13—COMMITMENTS AND CONTINGENCIES
Operating Leases
Future minimum operating lease payments for the remainder of the lives of the leases, including rent escalation clauses and stores that were not yet open, were $305,671,000 and $275,687,000 at June 30, 2014 and December 31, 2013, respectively. Operating lease obligations do not include percentage rent, real estate taxes, insurance, common area maintenance and other costs for which the Company is obligated.
Inventory Purchase Obligations
Inventory purchase obligations consist of open production purchase orders and other commitments for raw materials and sourced apparel, footwear, accessories and equipment. At June 30, 2014, inventory purchase obligations were $400,933,000.

16

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



Litigation
The Company is a party to various legal claims, actions and complaints from time to time. Although the ultimate resolution of legal proceedings cannot be predicted with certainty, management believes that disposition of these matters will not have a material adverse effect on the Company’s consolidated financial statements.
NOTE 14—FAIR VALUE MEASURES
Certain assets and liabilities are reported at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, under a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
Level 1 –
observable inputs such as quoted prices for identical assets or liabilities in active liquid markets;
Level 2 –
inputs, other than the quoted market prices in active markets, that are observable, either directly or indirectly; or observable market prices in markets with insufficient volume and/or infrequent transactions; and
Level 3 –
unobservable inputs for which there is little or no market data available, that require the reporting entity to
develop its own assumptions.
Assets and liabilities measured at fair value on a recurring basis at June 30, 2014 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
147,953

 
$
—

 
$
—

 
$
147,953

Time deposits
25,148

 
14,824

 
—

 
39,972

Reverse repurchase agreements
—

 
40,000

 
—

 
40,000

Available-for-sale short-term investments (1)
 
 
 
 
 
 
 
Certificates of deposit
—

 
3,429

 
—

 
3,429

Variable-rate demand notes
—

 
18,675

 
—

 
18,675

U.S. Government-backed municipal bonds
—

 
4,584

 
—

 
4,584

Other short-term investments
 
 
 
 
 
 
 
Mutual fund shares
550

 
—

 
—

 
550

Other current assets
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
—

 
1,288

 
—

 
1,288

Other non-current assets
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
—

 
155

 
—

 
155

Mutual fund shares
5,749

 
—

 
—

 
5,749

Total assets measured at fair value
$
179,400

 
$
82,955

 
$
—

 
$
262,355

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
$
—

 
$
1,731

 
$
—

 
$
1,731

Other long-term liabilities
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
—

 
12

 
—

 
12

Total liabilities measured at fair value
$
—

 
$
1,743

 
$
—

 
$
1,743


17

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



Assets and liabilities measured at fair value on a recurring basis at December 31, 2013 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
175,624

 
$
—

 
$
—

 
$
175,624

Time deposits
25,111

 
9,526

 
—

 
34,637

Certificates of deposit
—

 
735

 
—

 
735

Reverse repurchase agreements
—

 
45,000

 
—

 
45,000

U.S. Government-backed municipal bonds
—

 
9,898

 
—

 
9,898

Available-for-sale short-term investments (1)
 
 
 
 
 
 
 
Short-term municipal bond fund
15,004

 
—

 
—

 
15,004

Certificates of deposit
—

 
9,546

 
—

 
9,546

Variable-rate demand notes
—

 
52,105

 
—

 
52,105

U.S. Government-backed municipal bonds
—

 
14,764

 
—

 
14,764

Other short-term investments
 
 
 
 
 
 
 
Mutual fund shares
336

 
—

 
—

 
336

Other current assets
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
—

 
4,892

 
—

 
4,892

Non-current assets
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
—

 
24

 
—

 
24

Mutual fund shares
4,855

 
—

 
—

 
4,855

Total assets measured at fair value
$
220,930

 
$
146,490

 
$
—

 
$
367,420

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
$
—

 
$
1,152

 
$
—

 
$
1,152

Other long-term liabilities
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
—

 
95

 
—

 
95

Total liabilities measured at fair value
$
—

 
$
1,247

 
$
—

 
$
1,247


18

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



Assets and liabilities measured at fair value on a recurring basis at June 30, 2013 are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
186,245

 
$
—

 
$
—

 
$
186,245

Time deposits
25,073

 
16,637

 
—

 
41,710

U.S. Government-backed municipal bonds
—

 
40,741

 
—

 
40,741

Available-for-sale short-term investments (1)
 
 
 
 
 
 
 
Certificates of deposit
—

 
4,905

 
—

 
4,905

Variable-rate demand notes
—

 
56,615

 
—

 
56,615

U.S. Government-backed municipal bonds
—

 
28,004

 
—

 
28,004

Other short-term investments
 
 
 
 
 
 
 
Mutual funds shares
657

 
—

 
—

 
657

Other current assets
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
—

 
4,371

 
—

 
4,371

Other non-current assets
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
—

 
343

 
—

 
343

Mutual fund shares
4,181

 
—

 
—

 
4,181

Total assets measured at fair value
$
216,156

 
$
151,616

 
$
—

 
$
367,772

Liabilities:
 
 
 
 
 
 
 
Accrued liabilities
 
 
 
 
 
 
 
Derivative financial instruments (Note 12)
$
—

 
$
722

 
$
—

 
$
722

Total liabilities measured at fair value
$
—

 
$
722

 
$
—

 
$
722

 
(1) 
Investments have remaining maturities greater than three months but less than two years and are available for use in current operations.
 
Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from inputs, other than quoted market prices in active markets, that are directly or indirectly observable in the marketplace and quoted prices in markets with limited volume or infrequent transactions.
Non-recurring fair value measurements:
During the fourth quarter of 2013, the Company recorded an impairment in its EMEA segment for its European distribution center in Cambrai, France, writing the assets down to their estimated fair value of $19,300,000. Significant factors and estimates used in the evaluation and fair value determination include management's plans for future operations, recent operating results, projected cash flows and third-party valuation estimates. This nonrecurring fair value measurement was developed using significant unobservable inputs (Level 3). Third-party valuation estimates were developed using local market data for sales transactions of similar facilities.
There were no material assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2014 or 2013.
NOTE 15—RELATED PARTY TRANSACTIONS
On January 1, 2014, the Company's previously announced majority-owned joint venture in mainland China commenced operations. Upon commencement, the joint venture entered into Transition Services Agreements ("TSAs") with Swire, the non-controlling shareholder in the joint venture, under which Swire renders administrative and IT services and operates certain retail stores on behalf of the joint venture. The joint venture incurred service fees, valued under the TSAs at Swire's cost, of $2,173,000 and $4,880,000 during the three and six months ended June 30, 2014, respectively. These fees are included in Selling, general and administrative expenses on the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2014. In addition, the joint venture pays Swire sourcing fees related to the purchase of certain inventory. These sourcing fees are

19

COLUMBIA SPORTSWEAR COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)



capitalized into Inventories and charged to Cost of sales as the inventories are sold. For the three and six months ended June 30, 2014, the joint venture incurred sourcing fees of $8,000 and $293,000, respectively.
During the three months ended March 31, 2014, both the Company and Swire funded long-term loans to the joint venture. The Company's loan has been eliminated in consolidation, while the Swire loan is reflected as Note payable to related party on the Condensed Consolidated Balance Sheet as of June 30, 2014. The note with Swire, in the principal amount of 97,600,000 RMB (US$15,734,000), matures on December 31, 2018 and bears interest at a fixed annual rate of 7%. Interest expense related to this note was $277,000 and $487,000 for the three and six months ended June 30, 2014, respectively.
As of June 30, 2014, payables to Swire for service fees and interest expense totaled $5,044,000 and were included in Accounts payable on the Condensed Consolidated Balance Sheets.
In addition to the transactions described above, Swire is also a third-party distributor of the Company's brands in certain regions outside of mainland China and purchases products from the Company under the Company's normal third-party distributor terms and pricing.
NOTE 16—SUBSEQUENT EVENT
On July 24, 2014, the Company announced that its Board of Directors authorized a two-for-one split of the Company's common stock. The split will be paid in the form of a 100% stock dividend, payable on September 26, 2014 to shareholders of record on September 8, 2014.

20

Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report contains forward-looking statements. Forward-looking statements include any statements related to our expectations regarding future performance or market position, including any statements regarding anticipated sales, gross margins and operating margins across markets, including from the operation of our China joint venture, profitability, expenses, input costs and cost containment measures, effects of unseasonable weather on our results of operations, inventory levels, investments in our business, investments in and implementation of our information technology systems, our direct-to-consumer channels and other capital expenditures, reclassification of deferred net gains, access to raw materials and factory capacity, financing and working capital requirements and resources, tax rates and pre-tax income, and our exposure to market risk associated with interest rates and foreign currency exchange rates.
These forward-looking statements, and others we make from time to time, are subject to a number of risks and uncertainties. Many factors may cause actual results to differ materially from those projected in forward-looking statements, including the risks described below in Part II, Item 1A, Risk Factors. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.
Our Business
As one of the largest outdoor apparel and footwear companies in the world, we design, source, market and distribute active outdoor and lifestyle apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel, Montrail and prAna brands. Our products are sold through a mix of wholesale distribution channels, independent distributors, and our own direct-to-consumer channels. In addition, we license some of our trademarks across a range of apparel, footwear, accessories and equipment.
The popularity of outdoor activities, weather, changing design trends, consumer adoption of innovative performance technologies and the availability and desirability of competitor alternatives affect consumer desire for our products. Therefore, we seek to drive, anticipate and respond to trends and shifts in consumer preferences by adjusting the mix and price points of available product offerings, developing new products with innovative performance features and designs, and creating persuasive and memorable marketing communications to generate consumer awareness, demand and retention. Failure to anticipate or respond to consumer needs and preferences in a timely and adequate manner could have a material adverse effect on our sales and profitability.
Acquisition
On May 30, 2014, we purchased 100% of the equity interest in prAna Living LLC (“prAna”) for $188.5 million, net of acquired cash. PrAna is a lifestyle apparel brand sold through approximately 1,400 select specialty and online retailers across North America, as well as through five company-owned retail stores, an e-commerce site and direct-mail catalogs. The acquisition of prAna strengthens and diversifies our brand portfolio and generally offsets some of the more seasonal sales effects found within our existing Columbia brands. The acquisition was funded with cash on hand.
Business Outlook
Our business is affected by the general seasonal trends common to the industry and is heavily dependent upon seasonal weather and discretionary consumer 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. The expansion of our direct-to-consumer operations has increased the proportion of sales and profits that we generate in the fourth calendar quarter. As a result, our sales and profits tend to be highest in the third and fourth calendar quarters. In 2013, approximately 63 percent of our net sales and nearly all of our profitability were realized in the second half of the year, illustrating our dependence upon sales results in the second half of the year, as well as the less seasonal nature of our operating costs.
We generally solicit orders from wholesale customers and independent distributors for the fall and spring seasons based on seasonal ordering deadlines that we establish to aid our efforts to plan manufacturing volumes to meet demand. We typically ship the majority of our advance fall season orders to wholesale customers and independent distributors beginning in July and continuing through December. Similarly, the majority of our advance spring season orders ship to wholesale customers and independent distributors beginning in January and continuing through June. Generally, orders are subject to cancellation prior to the date of shipment.
Results of operations in any period should not be considered indicative of the results to be expected for any future period, particularly in light of persistent volatility of global economic conditions. Sales of our products are subject to substantial cyclical fluctuation, the effects of unseasonable weather conditions, the relative popularity of competitors' brands, and the continued

21

popularity of outdoor and active lifestyles in key markets. Volatile economic environments in key markets, seasonal weather patterns and inflationary or volatile input costs reduce the predictability of our business.
We expect 2014 profitability to be affected by the following major factors:
•
Incremental sales, operating costs and profits from our new China joint venture;
•
Financial effects from our acquisition of prAna on May 30, 2014, including transaction costs and incorporation of prAna operating results and purchase accounting amortization into our financial results.
•
Continued growth and increased investment in our global direct-to-consumer businesses;
•
Renewed growth in our wholesale businesses;
•
Increased demand creation costs; and
•
Incremental depreciation expense, training and post go-live support costs related to our United States enterprise resource planning ("ERP") system implementation, as well as ongoing project costs in connection with the next phase of our global ERP system initiative.
Consistent with the historical seasonality of the business, we anticipate 2014 profitability to be heavily concentrated in the second half of the year.
We implemented our new ERP system in the United States in early April 2014 which, when combined with our Canadian operation, brings our North American wholesale business and the majority of our global supply chain operations onto our new platform. The next planned phase of our global ERP system initiative is to transition our global distributor business to our new ERP system in 2015.
On January 1, 2014 our previously announced joint venture in mainland China with Swire Resources Limited ("Swire") commenced operations. As a 60% majority-owned entity, the joint venture's operations are included in our consolidated financial results.
Factors that could significantly affect our full year 2014 outlook include:
•
Unseasonable weather conditions or other unforeseen factors affecting consumer demand and the resulting effect on order cancellations, sales returns, customer accommodations, reorders, direct-to-consumer sales and suppressed demand in subsequent seasons;
•
Changes in mix and volume of full price sales in relation to closeout product sales and promotional sales activity;
•
Production capacity constraints and associated risks, including timely delivery, quality and non-compliance;
•
Costs and business interruption risks related to our supply chain and information technology infrastructure investments and projects, including our multi-year global ERP system implementation;
•
Our ability to effectively manage operating costs;
•
Continued political and economic uncertainty, which is creating headwinds in key global markets, particularly in Europe where we have ongoing efforts to revitalize the Columbia brand and in South America with respect to import restrictions and currency constraints in key distributor markets;
•
The rate of new store expansion and performance of our existing stores and e-commerce sites in our global direct-to-consumer operations;
•
Changes in consumer spending activity; and
•
Fluctuating currency exchange rates.
These factors and others may have a material effect on our financial condition, results of operations or cash flows, particularly with respect to quarterly comparisons.
We remain focused on driving sustainable, profitable sales growth by providing innovative products at accessible prices, transforming our global supply chain, including information technology, managing inventory, and nurturing stronger emotional connections with consumers through compelling marketing communications.
Results of Operations

22

The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with the Condensed Consolidated Financial Statements and accompanying Notes that appear elsewhere in this quarterly report. All references to quarters relate to the quarter ended June 30th of the particular year.
Highlights of the Second Quarter of 2014

•
Net sales for the second quarter of 2014 increased $43.7 million, or 16%, to $324.2 million from $280.5 million for the second quarter of 2013. Changes in foreign currency exchange rates compared with the second quarter of 2013 negatively affected the consolidated net sales comparison by less than one percentage point.
•
Net loss attributable to Columbia Sportswear Company for the second quarter of 2014 decreased 11% to $6.3 million, or $0.18 per diluted share, compared to a net loss of $7.1 million, or $0.21 per diluted share, for the second quarter of 2013. The second quarter 2014 net loss included a non-recurring tax benefit of $5.6 million, or $0.16 per diluted share, and the effects of one-time acquisition costs, purchase accounting amortization, and integration costs related to the acquisition of prAna, totaling approximately $2.9 million net of tax, or $0.08 per diluted share.
•
We paid a quarterly cash dividend of $0.28 per share, or $9.8 million, in the second quarter of 2014.
The following table sets forth, for the periods indicated, the percentage relationship to net sales of specified items in our Condensed Consolidated Statements of Operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
55.6

 
57.1

 
54.4

 
56.5

Gross profit
44.4

 
42.9

 
45.6

 
43.5

Selling, general and administrative expenses
50.0

 
47.0

 
43.5

 
43.7

Net licensing income
0.4

 
0.5

 
0.4

 
0.6

Income (loss) from operations
(5.2
)
 
(3.6
)
 
2.5

 
0.4

Interest income, net
0.1

 
0.1

 
0.1

 
0.1

Interest expense on note payable to related party
(0.1
)
 
—

 
(0.1
)
 
—

Other non-operating expense
(0.1
)
 
(0.2
)
 
(0.1
)
 
(0.2
)
Income (loss) before income tax
(5.3
)