Summary of COLUMBIA SPORTSWEAR CO

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This annual report, including Item 1 of Part I and Item 7 of Part II, 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 and operating margins across markets, distribution channels and product categories, access to raw materials and factory capacity, financing and working capital requirements and resources, establishment and operation of our joint venture in China, 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 above in Item 1A, Risk Factors. We do not undertake any duty either 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 apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel and Montrail 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 our Columbia trademarks across a range of apparel, footwear, accessories and equipment.
The popularity of outdoor activities, 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 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. Seasonality and Variability of Business
Our business is affected by the general seasonal trends common to the outdoor industry and is heavily dependent upon weather and discretionary consumer spending patterns. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the fall season, 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 2012, approximately 63 percent of our net sales and 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 in planning manufacturing volumes to meet demand for each of our selling seasons. We typically ship the majority of our advance fall season orders to wholesale customers and independent distributors beginning in June and continuing through November. Similarly, the majority of our advance spring season orders ship to wholesale customers and independent distributors beginning in December and continuing through May. 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 in 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 popularity of outdoor activities as part of an active lifestyle in key markets. Volatile economic environments in key markets, coupled with inflationary or volatile input costs, reduce the predictability of our business.

Business Outlook
The global business climate continues to present us with a great deal of uncertainty, making it more difficult to predict future results. Factors that could significantly affect our full year 2013 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 contrast with closeout product sales and promotional sales activity;

• Increased costs to support supply chain and information technology infrastructure investments and projects, including our multi-year global enterprise resource planning ("ERP") system implementation;

• Our ability to implement and maintain effective cost containment measures in order to limit the growth of selling, general and administrative ("SG&A") expenses to a rate comparable to or lower than sales growth;

• Continued economic uncertainty, which is creating headwinds in key global markets, particularly Europe as it relates to our EMEA direct business where we have ongoing efforts to elevate the Columbia brand;

• The rate of new store expansion in our direct-to-consumer operations;

• Changes in consumer spending activity, including consumer acceptance of increased prices of our products; and

• Fluctuating currency exchange rates.

Like other branded consumer product companies, our business is heavily dependent upon discretionary consumer spending patterns. Continuing high levels of unemployment and concerns about potential consumer price increases in our key markets continue to pose significant challenges and risks.
Our preliminary 2013 outlook assumes net sales comparable to 2012 net sales, including a decrease in sales in our North American wholesale channels resulting from cautious wholesale customer purchases following back-to-back mild winter weather in 2012 and 2011, largely offsetting anticipated expansion in our global direct-to-consumer channels and increased sales in the LAAP region. The combination of these assumptions leads us to anticipate 2013 operating margin ranging from 8.0 percent, comparable to the operating margin realized in 2012, to approximately 7.5 percent. We are continuing our cost containment measures with the goal of limiting SG&A expense as a percentage of net sales. Our previously announced joint venture in mainland China with Swire is expected to commence operations effective January 1, 2014, subject to regulatory approval in the People's Republic of China and other conditions customary in transactions of this size and type. During 2013, we will begin accounting for the transition to the joint venture from our current third-party distributor relationship with Swire. We expect to fund our approximately $50 million share of joint venture capitalization in 2013 and the early part of 2014. Our shipments of spring 2014 inventory for the China market, anticipated to begin in the fourth quarter of 2013, will be sold directly to the joint venture entity. The related sales, gross margin, and licensing income, which we would have recognized in the fourth quarter of 2013 under the distributor model, will be deferred and recognized in future periods as the joint venture sells that inventory to wholesale customers and consumers. Similarly, on or about December 31, 2013, Swire's inventory of fall 2013 and prior seasons will be transferred to the joint venture. We will defer 2013 profits related to the inventory transferred to the joint venture and recognize those profits as the inventory is sold by the joint venture in future periods. The actual amount of these profit eliminations and deferrals into future periods will be dependent upon the volume of spring 2014 shipments that occur in the fourth quarter of 2013 and the remaining balance of prior season inventory transferred to the joint venture. These adjustments are not currently included in our preliminary 2013 outlook. As these amounts become more predictable, we will refine our 2013 outlook as part of our regular quarterly disclosures.
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 firmly committed to:

• Creating innovative solutions that keep people warm or cool, dry and protected so they can enjoy the outdoors longer;

• Focusing on product design and utilizing our innovations to differentiate our brands from competitors;

• Seeking to sell our products through brand enhancing distribution partners around the world;

• Increasing the impact of consumer communications to drive demand for our brands and sell-through of our products;

• Making sure our products are merchandised and displayed appropriately in retail environments; and

• Continuing to build a brand-enhancing direct-to-consumer business.

Results of Operations
The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements and accompanying Notes that appear elsewhere in this annual report. All references to years relate to the calendar year ended December 31. Highlights of the Year Ended December 31, 2012
• Net sales decreased $24.4 million, or 1%, to $1,669.6 million in 2012 from $1,694.0 million in 2011. Changes in foreign currency exchange rates compared with 2011 negatively affected the consolidated net sales comparison by approximately one percentage point.

• Net income decreased 3% to $99.9 million in 2012 from $103.5 million in 2011, and diluted earnings per share decreased to $2.93 in 2012 compared to $3.03 in 2011.

• We paid cash dividends totaling $29.8 million, or $0.88 per share, in 2012.

The following table sets forth, for the periods indicated, the percentage relationship to net sales of specified items in our Consolidated Statements of Operations:

                                               Year Ended December 31,
                                              2012       2011       2010
Net sales                                   100.0  %   100.0  %   100.0  %
Cost of sales                                57.1       56.6       57.6
Gross profit                                 42.9       43.4       42.4
Selling, general and administrative expense  35.7       36.3       36.0
Net licensing income                          0.8        1.0        0.6
Income from operations                        8.0        8.1        7.0
Interest income, net                            -          -        0.1
Income before income tax                      8.0        8.1        7.1
Income tax expense                           (2.0 )     (2.0 )     (1.9 )
Net income                                    6.0  %     6.1  %     5.2  %

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Net Sales: Consolidated net sales decreased $24.4 million, or 1%, to $1,669.6 million in 2012 from $1,694.0 million in 2011. Changes in foreign currency exchange rates compared with 2011 negatively affected the net sales comparison by approximately one percentage point.
Sales by Geographic Region
Net sales by geographic region are summarized in the following table:

                               Year Ended December 31,
                             2012                     2011      % Change
                     (In millions, except for percentage changes)
United States $         946.7                      $   948.0       -%
LAAP                    377.6                          341.0      11%
EMEA                    230.6                          275.4     (16)%
Canada                  114.7                          129.6     (11)%
              $       1,669.6                      $ 1,694.0      (1)%

Net sales in the United States decreased $1.3 million, or less than 1%, to $946.7 million in 2012 from $948.0 million in 2011. The decrease in net sales in the United States consisted of a net sales decrease in our wholesale business across all brands and both product categories, partially offset by a net sales increase in our direct-to-consumer channel across all brands and both product categories. The decrease in net sales in our wholesale business was driven by unseasonably warm winter weather and general consumer caution, resulting in higher cancellations of advance orders and fewer reorders from wholesale customers. The increase in direct-to-consumer net sales was due to a greater number of retail stores operating during 2012 than 2011 and, to a lesser degree, increased sales from existing stores. At December 31, 2012, we operated 63 retail stores, compared with 51 at December 31, 2011.
Net sales in the LAAP region increased $36.6 million, or 11%, to $377.6 million in 2012 from $341.0 million in 2011. Changes in foreign currency exchange rates affected the LAAP net sales comparison by less than one percent. The net sales increase in the LAAP region was led by a net sales increase in apparel, accessories and equipment, followed by a net sales increase in footwear. The LAAP net sales increase was concentrated in the Columbia brand, followed by the Mountain Hardwear brand and the Sorel brand. The LAAP net sales increase was led by Japan, followed by Korea and our LAAP distributor business. The increase in Japan net sales was led by an increase in wholesale net sales, followed by an increase in direct-to-consumer net sales. The increase in Korea net sales was primarily due to a greater number of retail stores operating during 2012 than in 2011, partially offset by the negative effect of foreign currency exchange rates. Net sales to our LAAP distributors increased due to higher demand in key distributor markets, partially offset by a smaller percentage of spring 2013 advance orders shipping in the fourth quarter of 2012 compared to shipments of spring 2012 advance orders in the fourth quarter of 2011.
Net sales in the EMEA region decreased $44.8 million, or 16%, to $230.6 million in 2012 from $275.4 million in 2011. Changes in foreign currency exchange rates negatively affected the EMEA net sales comparison by approximately four percentage points. The decrease in net sales in the EMEA region was led by footwear, followed by apparel, accessories and equipment. The net sales decrease consisted of a net sales decrease in our EMEA direct business reflecting a decline in advance orders due to the effects of the unseasonably warm 2011/2012 winter and a challenging macroeconomic environment, which have hampered our ongoing efforts to revitalize the Columbia brand in key European markets. This decrease was partially offset by a net sales increase in our EMEA distributor business, partially due to higher demand in Russia.
Net sales in Canada decreased $14.9 million, or 11%, to $114.7 million in 2012 from $129.6 million in 2011. Changes in foreign currency exchange rates compared to 2011 affected the Canada net sales comparison by less than one percent. The decrease in net sales was led by apparel, accessories and equipment, followed by footwear, and was led by the Columbia brand, followed by the Sorel and Mountain Hardwear brands. The Canada net sales decrease was primarily a result of a decline in fall 2012 advance orders for Columbia brand products due to the unseasonably warm 2011/2012 winter and retailer consolidation in the region.

Sales by Product Category
Net sales by product category are summarized in the following table:

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                                                             Year Ended December 31,
                                                          2012             2011       % Change
                                                       (In millions, except for percentage
                                                                     changes)
Apparel, Accessories and Equipment                  $       1,347.0     $ 1,334.9        1%
Footwear                                                      322.6         359.1      (10)%
                                                    $       1,669.6     $ 1,694.0       (1)%

Net sales of apparel, accessories and equipment increased $12.1 million, or 1%, to $1,347.0 million in 2012 from $1,334.9 million in 2011. The increase in apparel, accessories and equipment net sales consisted of a net sales increase in the Columbia brand and was led by the LAAP region, followed by the United States, partially offset by net sales decreases in the EMEA region and Canada. The apparel, accessories and equipment net sales increase in the LAAP region was led by Japan, followed by Korea and our LAAP distributor business. The net sales increase in apparel, accessories and equipment in the United States consisted of a net sales increase in our direct-to-consumer business, partially offset by a net sales decrease in our wholesale business.
Net sales of footwear decreased $36.5 million, or 10%, to $322.6 million in 2012 from $359.1 million in 2011. The decrease in footwear net sales was led by the Sorel brand, followed by the Columbia brand. The footwear net sales decrease was led by the EMEA region, followed by the United States and Canada, partially offset by a net sales increase in the LAAP region. The footwear net sales decrease in the EMEA region was primarily concentrated in our EMEA direct business, and was led by the Sorel brand, followed by the Columbia brand. The net sales decrease in footwear in the United States consisted of a net sales decrease in our wholesale business, partially offset by a net sales increase in our direct-to-consumer business. The LAAP footwear net sales increase was led by our LAAP distributor business, followed by Japan and Korea, and was primarily concentrated in the Columbia brand, followed by the Sorel brand. Sales by Brand
Net sales by brand are summarized in the following table:

                                   Year Ended December 31,
                                 2012                     2011      % Change
                         (In millions, except for percentage changes)
Columbia          $       1,391.1                      $ 1,391.5       -%
Mountain Hardwear           141.5                          142.3      (1)%
Sorel                       127.0                          150.3     (16)%
Other                        10.0                            9.9       1%
                  $       1,669.6                      $ 1,694.0      (1)%

The net sales decrease in 2012 compared to 2011 primarily consisted of a net sales decrease in the Sorel brand which was unfavorably affected by mild winter weather in both 2011 and 2012 resulting in lower advance orders as well as higher order cancellations and fewer reorders of cold weather footwear from wholesale customers. The Sorel brand net sales decrease was concentrated in the EMEA region, followed by the United States and Canada, partially offset by a net sales increase in the LAAP region.
Gross Profit: Gross profit as a percentage of net sales decreased to 42.9% in 2012 from 43.4% in 2011. Gross margin contraction was primarily due to:
• Lower gross margins on increased promotional selling activities; and

• Higher product input costs;

partially offset by:
• Increased wholesale pricing;

• Lower airfreight costs; and

• Favorable foreign currency hedge rates.

Our gross profit may not be comparable to those of other companies in our industry because some of these companies include all of the costs related to their distribution network in cost of sales while we, like many others, include these expenses as a component of SG&A expense.
Selling, General and Administrative Expense: SG&A expense includes all costs associated with our design, merchandising, marketing, distribution and corporate functions, including related depreciation and amortization.
SG&A expense decreased $18.1 million, or 3%, to $596.6 million, or 35.7% of net sales, in 2012, from $614.7 million, or 36.3% of net sales, in 2011. The SG&A expense decrease was primarily due to:
• The favorable effect of foreign currency translation;

• Reduced advertising spend; and

• Lower variable selling costs;

partially offset by:
• The expansion of direct-to-consumer operations globally; and

• Higher expenses related to information technology initiatives, including our ongoing ERP implementation.

Depreciation and amortization included in SG&A expense totaled $39.9 million in 2012, compared to $42.9 million in 2011.
Net Licensing Income: Net licensing income decreased $2.0 million, or 13%, to $13.8 million in 2012 from $15.8 million in 2011. The decrease in net licensing income was primarily due to decreased licensing income from accessories in the United States and decreased licensing income in the LAAP region, resulting from a timing shift in distributor shipments from the fourth quarter of 2012 into the first quarter of 2013.
Interest Income, Net: Net interest income was $0.4 million in 2012, compared to $1.3 million in 2011. The decrease in interest income was primarily driven by lower average interest rates and lower average cash and investment balances during 2012 compared to 2011. Interest expense was nominal in both 2012 and 2011.
Income Tax Expense: Income tax expense decreased to $34.0 million in 2012 from $34.2 million in 2011. Our effective income tax rate increased to 25.4% from 24.8% in 2011, primarily due to changes in the geographic mix of income, partially offset by increased tax benefits from research and development credits and the resolution of uncertain tax positions.
Net Income: Net income decreased $3.6 million, or 3%, to $99.9 million in 2012 from $103.5 million in 2011. Diluted earnings per share was $2.93 in 2012 compared to $3.03 in 2011.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Net Sales: Consolidated net sales increased $210.5 million, or 14%, to $1,694.0 million in 2011 from $1,483.5 million in 2010. Net sales increased across all geographic regions, in each product category and across all major brands. Changes in foreign currency exchange rates compared with 2010 contributed approximately three percentage points of benefit to the consolidated net sales comparison.
Sales by Geographic Region
Net sales by geographic region are summarized in the following table:

                               Year Ended December 31,
                             2011                     2010      % Change
                     (In millions, except for percentage changes)
United States $         948.0                      $   881.0       8%
LAAP                    341.0                          263.4      29%
EMEA                    275.4                          222.4      24%
Canada                  129.6                          116.7      11%
              $       1,694.0                      $ 1,483.5      14%

Net sales in the United States increased $67.0 million, or 8%, to $948.0 million in 2011 from $881.0 million in 2010. The increase in net sales in the United States by product category was led by apparel, accessories and equipment, followed by a net sales increase in footwear. The net sales increase by brand was led by the Columbia brand, followed by the Sorel brand and the Mountain Hardwear brand. The net sales increase by channel was primarily driven by our direct-to-consumer business, followed by our wholesale business. The increase in net sales in our direct-to-consumer business was driven by strong comparable store sales growth, increased e-commerce sales and the net addition of two outlet stores.
Net sales in the LAAP region increased $77.6 million, or 29%, to $341.0 million in 2011 from $263.4 million in 2010. Changes in foreign currency exchange rates contributed six percentage points of benefit to the LAAP net sales comparison. The net sales increase in the LAAP region by product category was primarily driven by a net sales increase in apparel, accessories and equipment, followed by a net sales increase in footwear. The LAAP net sales increase was concentrated in the Columbia brand and was led by Korea, followed by Japan and our LAAP distributor business. The increase in Korea net sales was primarily due to increased sales from existing stores, a greater number of retail stores operating during 2011 and the favorable effect of foreign currency exchange rates. The increase in Japan net sales was primarily the result of the favorable effect of foreign currency exchange rates and increased wholesale net sales. Net sales to our LAAP distributors increased due to increased demand in key distributor markets coupled with a higher percentage of spring 2012 advance orders shipping in the fourth quarter compared to the spring 2011 season. Net sales in the EMEA region increased $53.0 million, or 24%, to $275.4 million in 2011 from $222.4 million in 2010. Changes in foreign currency exchange rates contributed four percentage points of benefit to the EMEA net sales comparison. The increase in net sales in the EMEA region by product category was led by footwear, followed by a net sales increase in apparel, accessories and equipment. The net sales increase by channel was led by our EMEA direct business, followed by our EMEA distributors. The increase in EMEA direct net sales was primarily driven by the Sorel brand, followed by the Columbia brand. Net sales in Canada increased $12.9 million, or 11%, to $129.6 million in 2011 from $116.7 million in 2010. Changes in foreign currency exchange rates compared to 2010 contributed six percentage points of benefit to the Canada net sales comparison. By product category, the increase in net sales was led by apparel, accessories and equipment, followed by a net sales increase in footwear. By brand, the increase in net sales was led by the Columbia brand, followed by the Sorel and Mountain Hardwear brands. The increase in net sales was concentrated in our wholesale business.
Sales by Product Category
Net sales by product category are summarized in the following table:

                                                               Year Ended December 31,
                                                            2011             2010       % Change
                                                         (In millions, except for percentage
                                                                       changes)
Apparel, Accessories and Equipment                    $       1,334.9     $ 1,213.3       10%
Footwear                                                        359.1         270.2       33%
                                                      $       1,694.0     $ 1,483.5       14%

Net sales of apparel, accessories and equipment increased $121.6 million, or . . .