COLUMBIA SPORTSWEAR COMPANY 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", Item 1, Item 1A, and Item 8 of this Annual Report on Form 10-K. In addition, refer to Item 7 in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for our discussion and analysis comparing financial condition and results of operations from 2020 to 2019.
OVERVIEW
We connect active people with their passions. We are a global leader in designing, developing, marketing, and distributing outdoor, active and everyday lifestyle products. We manage these products in two categories: apparel, accessories, and equipment products and footwear products. We provide our products through our four well-known brands,Columbia , SOREL,Mountain Hardwear , and prAna. Apparel, accessories, and equipment products are provided by ourColumbia ,Mountain Hardwear and prAna brands. Footwear products are provided by ourColumbia and SOREL brands. We sell our products in approximately 90 countries and operate in four geographic segments:U.S. , LAAP, EMEA, andCanada .COLUMBIA SPORTSWEAR COMPANY | 2021 FORM 10-K | 21 --------------------------------------------------------------------------------
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We are committed to driving sustainable and profitable long-term growth and investing in our strategic priorities to:
•drive brand awareness and sales growth through increased, focused demand creation investments;
•enhance consumer experience and digital capabilities in all of our channels and geographies;
•expand and improve global DTC operations with supporting processes and systems; and
•invest in our people and optimize our organization across our portfolio of brands.
Ultimately, we expect our investments to enable market share capture across our brand portfolio, expand gross margin, improve selling, general and administrative expense efficiency, and drive improved operating margin over the long-term.
Business Environment and Trends
Increased Outdoor Participation by Consumers | The COVID-19 pandemic drew a record number of individuals inthe United States to spend an increased amount of time outside, including participating in outdoor recreational activities. While outdoor participation rates may not be maintained, we believe that our addressable consumer base worldwide has been expanded and expect outdoor participation to remain elevated in comparison to pre-pandemic levels. Casualization of the Apparel and Footwear Market | During the COVID-19 pandemic, we saw a move to casualization by consumers. Our products provide comfort and function in diverse environments. We believe we have benefited from this trend and expect it to continue to be a tailwind moving forward. Decreased Promotional Environment | In 2021, we operated in an extremely low promotional environment and experienced fewer order cancellations, sales returns and customer accommodations than historically experienced. We expect these trends to remain favorable in early 2022 and expect a gradual return to a more normalized promotional environment and a potential transition towards more normalized trading terms. For 2022, we do not expect these metrics to return to levels experienced in 2019 and prior years. Lean Inventory Across the Marketplace | Consumer demand accelerated in 2021 resulting in lower inventory in the marketplace. Lower marketplace inventories contributed to a full price selling environment resulting in lower promotional activity and higher gross margins for our business in 2021. Given ongoing supply chain disruptions and the imbalance between global supply and demand, we expect marketplace inventories to remain low until supply chain constraints ease and retailers are able to replenish diminished inventory levels. Changes in Consumer Spending Ability and Preferences | We believe government stimulus and unemployment benefits increased consumers' discretionary spending ability in 2021 and 2020. In addition, we believe the limited ability to travel, attend entertainment-based experiences or purchase certain services increased consumers' savings levels. As we move into 2022, we expect these tailwinds to diminish. However, we expect growth in wages will enable consumer spending, to the extent it more than offsets inflationary pressures. Decreased Direct-to-Consumer Store Traffic | During 2021, the majority of our stores remained open. At varying times during the year, government efforts to control the spread of COVID-19 impacted our stores in various regions. Our stores inEurope andCanada were impacted by these government efforts for most of the first quarter and at varying times in the second quarter of 2021. Declared states of emergency impacted our stores inJapan in the first, second and third quarters. Our stores inChina were also impacted by these government efforts at varying times during 2021. Overall, our store retail traffic trends improved during 2021, but remained below pre-pandemic levels. Certain stores in tourist-dependent locations continue to be impacted by limited international tourism. While store traffic is improving, we expect it to continue to remain uneven across our store fleet by region, depending on regional impacts of the virus and government efforts. Increased Ocean Freight Charges | In 2021, we experienced elevated ocean freight charges as a result of an imbalance of supply and demand for steamship and ocean container capacity and changes in our ocean freight sourcing practices. We expect our ocean freight charges to be reduced in the latter part of 2022. However, the imbalance in the marketplace persists and ocean freight costs will remain elevated compared to historical norms. Later Inventory Receipts | During the third quarter of 2021, government mandated factory closures inVietnam disrupted our manufacturing partners' operations and impacted production of Fall 2021 and Spring 2022 product. Factories inVietnam began to reopen as ofOctober 1, 2021 at less than full capacity. In addition, port congestion and shortages in transportation and labor further slowed the transportation of our inventory. As a result of these supply chain disruptions, we received Fall 2021 inventory later than expected and anticipate similar delays for Spring 2022 inventory. We do not expect the supply chain to normalize in 2022 and continue to anticipate later than expected inventory receipts and shipments to our wholesale customers and inventory available for our DTC businesses in 2022, resulting in impacts to future net sales and gross margin.COLUMBIA SPORTSWEAR COMPANY | 2021 FORM 10-K | 22 --------------------------------------------------------------------------------
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Manufacturing Capacity Constraints | In 2021, we experienced footwear manufacturing capacity constraints which prevented us from securing footwear product to meet demand. Although we are growing footwear manufacturing capacity in 2022, we again expect demand to outstrip capacity due to anticipated footwear sales growth rates. We anticipate being able to meet footwear demand with appropriate supply in 2023. Continued Labor Shortages | We have and continue to experienceU.S. labor shortages, affecting our ability to staff and operate ourU.S. distribution centers, retail stores and consumer call centers, as well as find qualified employees for our corporate offices and regional subsidiaries. In addition, labor costs have risen recently as a result of competition to attract and retain qualified talent in an environment in which there is low unemployment and strong demand for employees. We anticipate these rising costs and labor shortages to continue in 2022. Increased Inflationary Pressures | Inflationary pressures, including increased inbound freight costs, impacted our results in 2021. In addition to increased inbound freight costs, we expect increased product input costs, including higher wages and raw materials costs, to impact our results in 2022. We are implementing product price increases beginning with our Spring 2022 season and, to a greater extent, our Fall 2022 season to mitigate these higher costs, to the extent possible, while attempting to minimize potential risks of dampening consumer demand. Price increases varied by market and product category. In theU.S. , on average, we increased pricing by a mid-single digit percent for our Spring 2022 product line and a high-single to low-double-digit percent for our Fall 2022 product line. We do not expect planned price increases will fully offset gross margin pressure, particularly the effect of increased ocean freight costs. Looking beyond 2022, we anticipate ocean freight and raw material cost inflation will be transitory, while wage inflation will be more permanent. Changing Consumer Expectations | Consumer behavior continues to fluctuate. Consumer expectations and the related competitive pressures have increased and continue to increase related to various aspects of our e-commerce business, including speed of product delivery, shipping charges, return privileges and other evolving expectations. We maintain and continue to make substantial investments in information systems, processes and personnel to support our ongoing demand planning efforts to provide forecasting of optimal inventory to meet customer and consumer demands. Seasonality | Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis, and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. In 2021, over 60% of our net sales and over 75% of our operating income were realized in the second half of the year. RESULTS OF OPERATIONS The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with Item 8 of this Annual Report on Form 10-K. All references to years relate to the fiscal year endedDecember 31 .
Non-GAAP Financial Measure
To supplement financial information reported in accordance with accounting principles generally accepted inthe 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 againstthe United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period intoUnited 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.
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Results of Operations - Consolidated Year EndedDecember 31, 2021 Compared to Year EndedDecember 31, 2020
The following table presents the items in our Consolidated Statements of Operations, both in dollars and as a percentage of net sales:
Year Ended December 31,
(in millions, except for percentage of net
sales and per share amounts) 2021 2020
Net sales $ 3,126.4 100.0 % $ 2,501.6 100.0 %
Cost of sales 1,513.9 48.4 % 1,277.7 51.1 %
Gross profit 1,612.5 51.6 % 1,223.9 48.9 %
Selling, general and administrative
expenses 1,180.3 37.8 % 1,098.9 43.9 %
Net licensing income 18.3 0.6 % 12.0 0.5 %
Operating income 450.5 14.4 % 137.0 5.5 %
Interest income, net 1.4 - % 0.4 - %
Other non-operating income (expense), net (0.4) - % 2.1 0.1 %
Income before income tax 451.5 14.4 % 139.5 5.6 %
Income tax expense (97.4) (3.1) % (31.5) (1.3) %
Net income $ 354.1 11.3 % $ 108.0 4.3 %
Diluted earnings per share $ 5.33 $ 1.62
Year Ended December 31,
Reported Adjust for Foreign Constant-currency Reported Reported Constant-currency
(in millions, except for Net Sales Currency Net Sales Net Sales Net Sales Net Sales
percentages) 2021 Translation 2021 (1) 2020 % Change % Change(1)
Brand Net Sales :
Columbia $ 2,557.4 $ (26.4) $ 2,531.0 $ 1,996.9 28% 27%
SOREL 320.9 (2.4) 318.5 293.5 9% 9%
prAna 141.9 - 141.9 131.6 8% 8%
Mountain Hardwear 106.2 (0.5) 105.7 79.6 33% 33%
Total $ 3,126.4 $ (29.3) $ 3,097.1 $ 2,501.6 25% 24%
Product Category Net Sales :
Apparel, Accessories and
Equipment $ 2,389.2 $ (20.3) $ 2,368.9 $ 1,867.6 28% 27%
Footwear 737.2 (9.0) 728.2 634.0 16% 15%
Total $ 3,126.4 $ (29.3) $ 3,097.1 $ 2,501.6 25% 24%
Channel Net Sales:
Wholesale $ 1,660.4 $ (19.5) $ 1,640.9 $ 1,403.3 18% 17%
DTC 1,466.0 (9.8) 1,456.2 1,098.3 33% 33%
Total $ 3,126.4 $ (29.3) $ 3,097.1 $ 2,501.6 25% 24%
(1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information.
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Overall, our global net sales increase reflects the higher consumer demand and economic recovery from the ongoing COVID-19 pandemic. This increase was constrained by supply chain disruptions that limited factory capacities for footwear products and resulted in later inventory receipts and lower than expected wholesale shipments.
Net sales increased across all regions, primarily driven by increased Columbia
brand net sales which benefited from robust consumer demand, lapping of 2020 DTC
store closures, and increased orders from wholesale customers following lower
sales volumes in 2020 due to order cancellations in response to the COVID-19
pandemic. During 2021, our global DTC e-commerce business grew 20% and
represented 18% of our global net sales, including fourth quarter 2021 growth of
25% year-over-year and represented 23% of our global net sales. In 2020, our
global DTC e-commerce business grew 39% and represented 19% of global net sales.
Gross Profit. Our gross profit may not be comparable to other companies in our
industry as some companies may include all costs related to their distribution
network in Cost of sales, while we include these expenses in SG&A expense. Gross
profit is summarized in the following table:
Year Ended December 31,
(in millions, except for percentages and basis
points) 2021 2020 Change
Gross profit $ 1,612.5 $ 1,223.9 $ 388.6 32 %
Gross margin 51.6 % 48.9 % 270 bps
Gross profit as a percentage of net sales expanded primarily due to:
•an approximate 230 bps increase in channel profitability substantially due to higher DTC product margins reflecting lower promotional levels and, to a lesser extent, higher wholesale product margin driven by strong retail sell-through performance resulting in a higher proportion of full price vs off price sales mix and lower customer accommodations, partially offset by unfavorable impacts from higher inbound freight costs due to supply chain constraints; and
•favorable impacts from lower year-over-year inventory provisions.
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:
Year Ended December 31,
(in millions, except for percentages and basis
points) 2021 2020 Change
Selling, general and administrative expenses
7 %
Selling, general and administrative expenses as
percent of net sales 37.8 % 43.9 % -610 bps
The SG&A expenses increase was primarily due to expenses incurred to support the
growth of our business and its recovery from the COVID-19 impacts from 2020.
During 2021, we spent approximately 5.9% of our net sales for demand creation,
compared to 5.7% in 2020. In addition, depreciation and amortization included in
SG&A expenses totaled $55.5 million , compared to $63.0 million in 2020.
Factors contributing to the increase of SG&A expenses included:
•higher global retail expenses of
•increased demand creation spend of
•higher personnel expenses of
•higher incentive compensation of
•higher professional fees and insurance; partially offset by
•decreased retail impairments and store closures charges of$37.4 million , reflecting the non-recurrence of prior year retail impairments and store closure charges of$28.8 million and the 2021 benefit of$8.6 million from the completion of lease terminations and settlements related to certain of those closures; •decreased bad debt expenses of$29.7 million , which primarily reflected the non-recurrence of a 2020 bad debt expense increase of$19.7 million resulting from the COVID-19 pandemic;COLUMBIA SPORTSWEAR COMPANY | 2021 FORM 10-K | 25
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•the non-recurrence of prior year expenses of
•the non-recurrence of prior year prAna brand trademark impairment charge of
Income Tax Expense. Income tax expense and the related effective income tax rate is summarized in the following table:
Year Ended December 31,
(in millions, except for percentages) 2021 2020 Change Income tax expense$ (97.4) $ (31.5) $ (65.9) 209 % Effective income tax rate 21.6 % 22.6 % Our effective income tax rates for the years endedDecember 31, 2021 and 2020 were impacted by discrete tax items, which lowered the effective tax rate each year. Our effective income tax rate for the year endedDecember 31, 2021 decreased, compared to 2020, primarily due to the non-recurring benefit of a decrease in accrued foreign withholding taxes as well as the change in mix of book income or loss among jurisdictions. Results of Operations - Segment Year EndedDecember 31, 2021 Compared to Year EndedDecember 31, 2020 Segment income from operations includes net sales, cost of sales, SG&A expense, and net licensing income for each of our four reportable geographic segments. Income from operations as a percentage of net sales in theU.S. is typically higher than the other segments primarily due to scale efficiencies associated with the larger base of net sales in theU.S. and, to a lesser extent, incremental licensing income.
We anticipate this trend to continue until other segments achieve scale efficiencies from higher levels of net sales volume relative to the fixed cost structure necessary to operate the business.
Net sales by geographic segment are summarized in the following table:
Year Ended December 31,
Reported Adjust for Foreign Constant-currency Reported Reported Constant-currency
(in millions, except for Net Sales Currency Net Sales Net Sales Net Sales Net Sales
percentage changes) 2021 Translation 2021 (1) 2020 % Change % Change(1)
U.S. $ 2,060.3 $ - $ 2,060.3 $ 1,603.8 28% 28%
LAAP 465.5 (7.5) 458.0 424.5 10% 8%
EMEA 382.1 (9.0) 373.1 298.9 28% 25%
Canada 218.5 (12.8) 205.7 174.4 25% 18%
$ 3,126.4 $ (29.3) $ 3,097.1 $ 2,501.6 25% 24%
(1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information.
Operating income for each reportable segments and unallocated corporate expenses are summarized in the following table:
Year Ended December 31,
(in millions) 2021 2020 Change
U.S. $ 536.5 $ 250.5 $ 286.0
LAAP 42.0 35.9 6.1
EMEA 65.5 31.2 34.3
Canada 52.7 37.6 15.1Total segment operating income 696.7 355.2 341.5 Unallocated corporate expenses (246.2) (218.2) (28.0) Operating income
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Unless otherwise noted below, segment net sales and operating income within all regions increased due to higher consumer demand and the recovery from the COVID-19 pandemic impacts from 2020. In 2020, unfavorable COVID-19 pandemic impacts led to economic lockdowns, including temporary store closures and lower consumer demand.U.S. U.S. income from operations increased$286.0 million to$536.5 million , or 26.0% of net sales, in 2021 from$250.5 million , or 15.6% of net sales, in 2020. The increase was driven primarily by increased net sales, increased gross margins, and the non-recurrence of prior year retail impairments and store closure charges of$28.8 million and the 2021 benefit of$8.6 million from settlements related to those closures.U.S. net sales increased$456.5 million , or 28% in 2021 compared to$1,603.8 million in 2020.U.S. net sales increased in our DTC and wholesale businesses.U.S DTC net sales increased largely from net sales growth generated from retail stores, and to a lesser extent, our e-commerce business. AtDecember 31, 2021 , ourU.S. business operated 142 retail stores, compared to 132 stores atDecember 31, 2020 . SG&A expenses decreased as a percentage of net sales to 26.7% in 2021 compared to 33.8% in 2020 largely due to the impact of net sales increases, and the non-recurrence of prior year retail impairments, other store closure charges and COVID-19 related expenses. LAAP. LAAP income from operations increased$6.1 million to$42.0 million , or 9.0% of net sales, in 2021 from$35.9 million , or 8.5% of net sales, in 2020. The increase was driven primarily by increased net sales combined with increased gross margin. LAAP net sales increased$41.0 million , or 10% (8% constant-currency) in 2021 compared to$424.5 million in 2020, driven largely by increased net sales in ourChina business, and to a lesser extent, ourKorea business, partially offset by decreased net sales in our LAAP distributors andJapan businesses. LAAP SG&A expense increased as a percentage of net sales to 48.3% in 2021 compared to 45.7% in 2020 largely due to incremental demand creation expense, partially offset by the impact of net sales increases. EMEA. EMEA income from operations increased$34.3 million to$65.5 million , or 17.1% of net sales, in 2021 from$31.2 million , or 10.4% of net sales, in 2020. The increase was driven primarily by increased net sales combined with increased gross margin. EMEA net sales increased$83.2 million , or 28% (25% constant-currency) in 2021 compared to$298.9 million in 2020. EMEA net sales increased primarily in ourEurope -direct business, followed by our EMEA distributor business. EMEA SG&A expense decreased as a percentage of net sales to 28.0% in 2021 compared to 33.4% in 2020 largely due to the impact of net sales increases and the non-recurrence of prior year COVID-19 related expenses.Canada .Canada income from operations increased$15.1 million to$52.7 million , or 24.1% of net sales, in 2021 from$37.6 million , or 21.6% of net sales, in 2020. The increase primarily resulted from increased net sales combined with increased gross margin.Canada net sales increased$44.1 million , or 25% (18% constant-currency) in 2021 compared to$174.4 million in 2020, primarily driven by increased net sales in ourCanada wholesale business, followed by ourCanada DTC businesses. Canada SG&A expense decreased as a percentage of net sales to 24.0% in 2021 compared to 25.6% for 2020 largely due to the impact of net sales increases and the non-recurrence of prior year COVID-19 related expenses. Unallocated corporate expenses increased by$28.0 million to$246.2 million in 2021, from$218.2 million in 2020, largely driven by higher incentive compensation and personnel expenses, partially offset by the non-recurrence of the 2020 prAna brand trademark impairment charge of$17.5 million .
LIQUIDITY AND CAPITAL RESOURCES
Including cash, cash equivalents, short-term investments and available committed and uncommitted credit lines, we had more than$1.5 billion in total liquidity atDecember 31, 2021 . Our liquidity may be affected by the general seasonal trends common to the industry. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. Our cash and cash equivalents and short-term investments balances generally are at their lowest level at the end of the third quarter and increase during the fourth quarter from collection of wholesale business receivables and fourth quarter DTC sales.COLUMBIA SPORTSWEAR COMPANY | 2021 FORM 10-K | 27
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Cash Flow Activities
Cash flows from continuing operations are summarized in the following table:
Year Ended December 31,
(in millions) 2021 2020 Change
Cash and cash equivalents $ 763.4 $ 790.7 $ (27.3)
Net cash provided by (used in):
Operating activities $ 354.4 $ 276.1 $ 78.3
Investing activities (163.8) (27.2) (136.6)
Financing activities (210.9) (151.7) (59.2)
Net effect of exchange rate changes on cash (7.0)
7.5 (14.5)
Net increase (decrease) in cash and cash equivalents
The change in cash flows provided by operating activities was driven by a$157.8 million increase in net income and non-cash adjustments, partially offset by a$79.5 million increase in cash used in changes in assets and liabilities. The most significant comparative changes included Inventories, net, Accounts payable, Accrued liabilities, Prepaid expenses and other current assets, Accounts receivable, and Operating lease assets and liabilities. The$165.1 million increase in cash used in Inventories, net was mainly driven by an increase in inventory purchases reflecting strong consumer demand. The$124.8 million increase in cash provided by Accounts payable primarily reflects the effects of higher receipts of inventory in the fourth quarter of 2021 compared to the fourth quarter of 2020 due to stronger customer demand and increased in-transit inventory. The$118.6 million increase in cash provided by Accrued liabilities was primarily driven by changes in accruals for incentive compensation as well as DTC return liabilities. The$58.6 million increase in cash used in Prepaid expenses and other assets was primarily driven by changes in inventory prepayments andU.S. prepaid income taxes. The$54.5 million increase in cash used in Accounts receivable was driven by higher wholesale net sales, partially offset by higher collections in 2021. The$33.1 million increase in cash used in Operating lease assets and liabilities was primarily due to payment of deferred rents and lease termination fees. Net cash used in investing activities was$163.8 million for 2021 compared to$27.2 million for 2020. For 2021, net cash used in investing activities consisted of$129.1 million in net purchases of short-term investments and$34.7 million for capital expenditures. For 2020, net cash used in investing activities primarily consisted of$28.8 million for capital expenditures. Net cash used in financing activities was$210.9 million for the 2021 compared to$151.7 million for 2020. For 2021, net cash used in financing activities primarily consisted of repurchases of common stock of$165.4 million and dividend payments to our shareholders of$68.6 million , partially offset by net proceeds from the issuance of common stock related to stock-based compensation of$23.0 million . For 2020, net cash used in financing activities primarily consisted of repurchases of common stock of$132.9 million and dividend payments to our shareholders of$17.2 million .
Sources of Liquidity
Cash and cash equivalents and short-term investments
AtDecember 31, 2021 , we had cash and cash equivalents of$763.4 million and short-term investments of$131.1 million , compared to$790.7 million and$1.2 million , respectively, atDecember 31, 2020 .
Domestic Credit Facility
We have available an unsecured, committed revolving credit facility that provides for funding up to$500.0 million . This credit agreement matures onDecember 30, 2025 . Interest, payable monthly, is based on the Company's option of either LIBOR plus an applicable margin or a base rate. Base rate is defined as the highest of the following, plus an applicable margin:
•the administrative agent's prime rate;
•the higher of the federal funds rate or the overnight bank funding rate set by
the
•the one-month LIBOR plus 1.00%.
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This credit agreement requires the Company to comply with certain financial covenants covering the Company's funded debt ratio and asset coverage ratio. The credit agreement also includes customary covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness and liens, engage in mergers, acquisitions and dispositions, and engage in transactions with affiliates, as well as restrict certain payments, including dividends and share buybacks. AtDecember 31, 2021 , there was no balance outstanding under our credit facility. At the time of this filing, we are in compliance with all financial covenants necessary as a condition for borrowing under theColumbia Sportswear Company credit agreement.
International Credit Facilities
Our European subsidiary has available an unsecured, committed line of credit, which is guaranteed by the Company and provides for borrowing up to €4.4 million (approximatelyUS$5.0 million ). Borrowings accrue interest at a base rate plus 75 basis points.
In addition, collectively, our international subsidiaries have available
approximately
At
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 domestic credit facility.
Our working capital management goals include maintaining an optimal level of inventory necessary to deliver goods on time to our customers and our retail stores to satisfy end consumer demand, alleviating manufacturing capacity constraints, and driving efficiencies to minimize the cycle time from the purchase of inventory from our suppliers to the collections of accounts receivable balances from our customers. We maintain and continue to make substantial investments in information systems, processes and personnel to support our ongoing demand planning efforts to meet our working capital management goals. We have planned 2022 capital expenditures of approximately$80 to$100 million . This includes investments in our digital and supply chain capabilities to support our strategic priorities and our DTC operations, including new stores. Our actual planned capital expenditures may differ from the planned amounts depending on factors such as the timing of system implementations and new store openings and related construction as well as the availability of capital assets from suppliers.
Our long-term goal is to maintain a strong balance sheet and a disciplined approach to capital allocation. Dependent upon market conditions and our strategic priorities, our capital allocation approach includes:
•investing in organic growth opportunities to drive long-term profitable growth;
•returning 40% of free cash flow to shareholders through dividends and share repurchases; and
•considering opportunistic mergers and acquisitions.
Free cash flow is a non-GAAP financial measure. Free cash flow is calculated by reducing net cash flow from operating activities by capital expenditures. Management believes free cash flow provides investors with an important perspective on the cash available for shareholders and acquisitions after making the capital investments required to support ongoing business operations and long-term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures as it excludes certain mandatory expenditures. Management uses free cash flow as a measure to assess both business performance and overall liquidity.
Other cash commitments
Our non-current Income taxes payable on the Consolidated Balance Sheet atDecember 31, 2021 includes approximately$13.7 million of net unrecognized tax benefits. We are uncertain about whether or when these amounts may be settled. Refer to Note 10 in Item 8 of this Annual Report on Form 10-K for additional information.COLUMBIA SPORTSWEAR COMPANY | 2021 FORM 10-K | 29
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The following table presents our estimated significant contractual commitments that will require use of funds:
Year ended December 31,
(in millions) 2022 2023 2024 2025 2026 Thereafter Total
Inventory purchase
obligations $ 656.5 $ - $ - $ - $ - $ - $ 656.5
Operating lease obligations
(1) 78.2 72.5 65.7 55.8 49.1 106.3 427.6
TCJA transition tax
obligations (2) 4.2 8.0 10.6 13.3 - - 36.1
(1) Refer to Operating Leases in Note 9 in Item 8 of this Annual Report on Form
10-K.
(2) Refer to Income Taxes in Note 10 in Item 8 of this Annual Report on Form
10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make various estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities. Refer to Note 2 in Item 8 of this Annual Report on Form 10-K for additional information regarding the significant accounting policies and methods used in the preparation of our consolidated financial statements. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results may differ from the estimates we use in applying these critical accounting policies and estimates. We base our ongoing estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances. Our critical accounting policies and estimates relate to 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. Management regularly discusses with our audit committee each of our critical accounting estimates, the development and selection of these accounting estimates, and the disclosure about each estimate in this annual report. These discussions typically occur at our quarterly audit committee meetings and include the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation.
Sales Reserves
The amount of consideration we receive and recognize as Net sales across both wholesale and DTC channels varies with changes in sales returns and other accommodations and incentives we offer to our customers. When we give our customers the right to return products or provide other accommodations such as chargebacks and markdowns, we estimate the expected sales returns and miscellaneous claims from customers and record sales reserves to reduce Net sales. AtDecember 31, 2021 , our sales related reserves were$99.0 million compared to$83.2 million atDecember 31, 2020 . The most significant variable affecting these reserve balances is net sales levels. As a percent of Net sales, the sales reserves balances were 3.2% atDecember 31, 2021 compared to 3.3% atDecember 31, 2020 . The reserve for returns from customers or consumers is the most susceptible to estimation uncertainty. These estimates are based on 1) historical rates of product returns and claims; and 2) events and circumstances that indicate changes to such historical rates, such as our customers' net inventory positions and their anticipated sell-through rates. However, actual returns and claims in any future period are inherently uncertain and thus may differ from the estimates. As a result, we adjust our estimates of revenue at the earlier of when the most likely amount of consideration we expect to receive changes or when the amount of consideration becomes fixed. If actual or expected future returns and claims are significantly different than the sales reserve established, we record an adjustment to Net sales in the period in which such determination was made.
Allowance for Uncollectible Accounts Receivable
We make ongoing estimates of the collectability of our accounts receivable and
maintain an allowance for estimated credit losses resulting from the inability
of our customers to make required payments. The allowance represents the current
estimate of lifetime expected credit losses over the remaining duration of
existing accounts receivable considering current market conditions and
supportable forecasts when appropriate. In determining the amount of the
allowance, we consider our historical level of credit losses, as well as our
judgments about the creditworthiness of customers based on ongoing credit
evaluations. We analyze specific customer accounts, including aged receivables,
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customer concentrations, credit insurance coverage, standby letters of credit, and other forms of collateral, current economic trends, and changes in customer payment terms. Our allowance for uncollectible accounts receivable decreased to$8.9 million atDecember 31, 2021 compared to$21.8 million atDecember 31, 2020 . The balance atDecember 31, 2021 compared to the prior year reflects an improving credit environment with wholesale customers during 2021 and economic recovery of the retail sector through the ongoing COVID-19 pandemic. Continued uncertainty in credit and market conditions may slow our collection efforts if customers experience difficulty accessing credit and paying their obligations, leading to higher than normal accounts receivable and increased bad debt risk. Because future changes in the financial stability of our customers is difficult to estimate, actual future losses from uncollectible accounts may differ from our estimates and may have a material effect on our financial position, results of operations or cash flows. If the financial condition of our customers deteriorates and results in their inability to make payments, a larger allowance may be required. If we determine that a smaller or larger allowance is appropriate, we will record an adjustment to SG&A expense in the period in which we make such a determination.
Excess, Close-Out and Slow-Moving Inventory
We make ongoing estimates of potential excess, close-out or slow-moving inventory. We evaluate our inventory on hand to identify excess, close-out or slow-moving inventory by contemplating our 1) purchase commitments; 2), sales forecasts; 3) historical liquidation experience; and 4) the level of inventory from current and prior seasons that remains unsold and establish provisions as necessary to properly reflect inventory value at the lower of cost or net realizable value. Provisions are established when necessary in the period in which we make such a determination. AtDecember 31, 2021 , our inventory reserve offset gross inventory by$19.9 million compared to$29.5 million atDecember 31, 2020 . Although Inventories, net increased 16% fromDecember 31, 2020 toDecember 31, 2021 , the level of estimated excess inventory atDecember 31, 2021 declined reflecting strong consumer demand resulting in a lower inventory reserve.
Impairment of Long-Lived Assets, Intangible Assets and
Long-lived assets, which include property, plant and equipment, lease
right-of-use ("ROU") assets, capitalized implementation costs for cloud
computing arrangements, and intangible assets with finite lives are measured for
impairment only when events or circumstances indicate the carrying value may not
be recoverable. Our retail fleet longlived assets are evaluated at the retail
location level. Events that result in an impairment review of a retail location
include plans to close a retail location or a significant decrease in the
operating results of the retail location. When such an indicator occurs, we
evaluate retail location longlived assets for impairment by comparing the
undiscounted future cash flow expected to be generated by the location to the
location longlived asset's carrying amount. If the carrying amount of an asset
exceeds the estimated undiscounted future cash flow, an analysis is performed to
estimate the fair value of the asset. An impairment is recorded if the fair
value of the retail location longlived asset is less than the carrying amount.
During 2021 we tested certain long-lived assets consisting of property, plant,
and equipment and lease ROU assets for impairment at certain underperforming
retail locations. For the year ended December 31, 2021 , impairment charges from
underperforming retail stores were not material. Further declines in projected
future performance may adversely affect the recovery of retail locations assets.
For the year ended December 31, 2020 , impairment charges from underperforming
retail stores were $7.0 million for lease ROU assets and $5.0 million for
property, plant and equipment.
We review and test our intangible assets with indefinite lives and goodwill for
impairment in the fourth quarter of each year and when events or changes in
circumstances indicate that the carrying amount of such assets may be impaired.
Our intangible assets with indefinite lives consist of trademarks and trade
names. Substantially all of our goodwill is recorded in the U.S. segment and
impairment testing for goodwill is performed at the reporting unit level. Our
2021 impairment tests of intangible assets with indefinite lives and goodwill
indicated the fair value of all reporting units and intangible assets with
indefinite lives exceeded their respective carrying values.
In the impairment tests for trademarks and trade names, we compare the estimated
fair value of each asset to its carrying amount. The fair values of trademarks
and trade names are estimated using a relief from royalty method under the
income approach. If the carrying amount of a trademark or trade name exceeds its
estimated fair value, we calculate impairment as the excess of carrying amount
over the estimate of fair value. At December 31, 2021 , the carrying value of
indefinite-lived intangible assets was $97.9 million , of which $70.5 million was
attributed to prAna's trademark. In our 2021 impairment test, the fair value of
prAna's trademark exceeded its carrying value by approximately 26% as of the
measurement date and, therefore, no impairment was recognized. As part of our
evaluation, we performed sensitivity analysis on the trademark impairment model.
A 10% decrease in estimated net sales for each of the next five years did not
cause the fair value of the trademark to decline below its carrying value.
Separately, a 100 basis point increase in the assumed discount rate did not
cause the fair value of the trademark to decline below its carrying value. In
2020, our impairment test of prAna's trademark resulted in a $17.5 million
impairment charge.
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In the impairment test for goodwill, we compare the estimated fair value of the reporting unit with the carrying amount of that reporting unit. If the carrying amount of the reporting unit exceeds its estimated fair value, we calculate an impairment as the excess of carrying amount over the estimate of fair value. We estimate the fair value of our reporting units using a combination of discounted cash flow analysis and market-based valuation methods, as appropriate. Key assumptions used in the discounted cash flow models are cash flow projections and the discount rate. Cash flow projections are developed in part from our annual planning process. The discount rate is the estimated weighted-average costs of capital of the reporting unit from a market-participant perspective. When we include market-based valuation methods to estimate fair value of our reporting units, we utilize market multiples for guideline public companies. The goodwill balance was$68.6 million atDecember 31, 2021 , of which$54.2 million was allocated to the prAna reporting unit. In our 2021 impairment test, the fair value of the prAna reporting unit exceeded its carrying value by approximately 39% as of the measurement date and, therefore, no impairment was recognized. Our impairment tests and related fair value estimates are based on a number of factors, including assumptions and estimates for projected sales, income, cash flows, discount rates, market-based multiples, and other operating performance measures. Changes in estimates or the application of alternative assumptions could produce significantly different results. These assumptions and estimates may change in the future due to changes in economic conditions, changes in our ability to meet sales and profitability objectives or changes in our business operations or strategic direction.
Income Taxes
We make assumptions, judgments and estimates to determine our current provision for income taxes, our deferred tax assets and liabilities and our uncertain tax positions. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for Income tax expense in our Consolidated Statements of Operations. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could cause our current assumptions, judgments and estimates of recoverable net deferred tax assets to be inaccurate. Changes in any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, which could materially affect our financial position, results of operations or cash flows. Our assumptions, judgement and estimates relative to uncertain tax positions take into account whether a tax position is more likely than not to be sustained upon examination by the relevant taxing authority based on the technical merits of the position and the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant taxing authority. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly affect the amounts provided for Income tax expense in our Consolidated Statements of Operations. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. As the calendar year progresses, we periodically refine our estimate based on actual events and earnings by jurisdiction. This ongoing estimation process can result in changes to our expected effective tax rate for the full calendar year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that our year-to-date provision equals our expected annual effective tax rate.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 in Item 8 of this Annual Report on Form 10-K.
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