Chris Baker Chris.Baker@ttu.edu Jake Coursey Jake.Coursey@ttu.edu Ryan Hays Ryan.Hays@ttu.edu James Stokes James.W.Stokes@ttu.edu Mashay White D.white@ttu.edu

Table of Contents 

Executive 

Summary…………………………………………………………………

……...3 

Industry 

Analysis……………………………………………………………………

………8 

Five Forces 

Model………………………………………………………………………

…..9 

Value Chain 

Analysis……………………………………………………………………

..15 

Firm Competitive 

Analysis…………………………………………………………….17 

Accounting 

Analysis……………………………………………………………………

...20 

Quality of 

Executive Summary

Investment Recommendation: Overvalued, Sell, 6/1/2007 COLM—NYSE (6/1/07): $68.81 52 week range: $42.85-70.93 Revenue (3/31-2007): $289,640,000 Market Capitalization: $2.5 Bil Shares Outstanding: 36,300,000 3-month Avgerage Daily Trading Volume: 206,306 Percent Institutional Ownership: 39.00% Book Value per Share: $20.9 ROE: 16.56% ROA: 12.71% Cost of Capital est. R2 Beta Ke Estimated 1.83 13.99 3-Month .24 1.833 5-Month .241 1.833 2-Year .243 1.834 5-Year .244 1.835 10-Year .245 1.837 Kd: 6.68% WACC: 12.14% Altman z-Score 2002 2003 2004 2005 2006 6.13 6.25 6.28 5.52 6.08

EPS Forecast 2007 2008 2009 2010 2011 3.32 3.35 3.39 3.42 3.45 Ratio Comparison COLM TBL VFC Trailing P/E 18.75 15.89 19.37 Forward P/E 19.12 15.98 19.6 PEG 2.41 1.71 1.76 P/B 2.97 9.95 3.21 Valuation Estimates Actual Price (6/1/07): Ratio Based Valuations Trailing P/E 60.91 Forward P/E 59.98 PEG 43.70 P/B 70.82 P/EBITDA 43.45 P/FCF 46.15 EV/EBITDA 77.46 Intrinsic Valuations Actual Free Cash Flows 40.87 Residual Income 20.89 LR ROE 22.90 AEG 16.12

Recommendation- Overvalued, Sell Industry Analysis Columbia Sportswear Company (COLM) is a U.S. company that

manufactures and distributes outerwear and sportswear. “Founded in 1938,

Columbia Sportswear Company has grown to one of the world’s largest

outerwear brands and the leading seller of skiwear in the United States.”

(www.columbia.com) Their products are grouped into five categories—(1)

outerwear, (2) sportswear, (3) footwear, (4) related accessories, and (5)

equipment. Columbia distributes its products to over 72 countries and 13,800

retailers worldwide. Its headquarters is located in Portland, Oregon, and they

currently employ over 2,800 workers. Columbia’s long-term goal is to “capitalize

on global market opportunities for each of [their] key product categories.”

Columbia Sportswear competes in the textile-apparel clothing industry. Its

main competitors are Timberland Co., VC Corp., Quicksilver, and Wolverine. This

industry is highly competitive, especially since Columbia’s competitors are larger

companies, allowing them greater resources, and thus being able to achieve

more recognition for their products. Entry into this industry is stagnant, and in

order to grow, companies are forced to take market share away from other

existing firms. With existing economies of scale, it is difficult for firms to enter

into this industry. The differentiation of products must be the central focus if a

firm wants to gain market share, and in this industry where switching costs are

low, a firm’s ability to differentiate itself could mean the difference between

succeeding and failing. With there being several companies that provide similar

products like Columbia, customers can easily choose to buy from these

competitors.

5

Accounting Analysis

Analyzing the accounting policies of a firm is very important in analyzing

the overall value of the firm. Once the key success factors of a firm are

determined through the five forces model an analyst must determine how the

accounting of the firm relates to the key success factors. Firms are allowed a

certain degree of flexibility through Generally Accepted Accounting Principles

(GAAP).

Goodwill and intangible assets with indefinite useful lives are not

amortized but instead are measured for impairment at least annually or when

events indicate that an impairment exists. The Company reviews and tests its

goodwill and intangible assets with indefinite useful lives 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. The Company

has determined that its long-lived assets at December 31, 2006 and 2005 were

not impaired. However, the Company conducted a review of intangible assets

with finite lives in conjunction with its annual impairment review of goodwill and

indefinite-lived intangible assets during the fourth quarter of 2006.

Advertising costs are expensed as incurred and are included in selling,

general and administrative expenses. Total advertising expense, including

cooperative advertising costs, was $56,813,000, $51,145,000 and $47,300,000

for the years ended December 31, 2006, 2005 and 2004, respectively. Columbia

sells most of its products in wholesale stores. To ensure that it does not lose

any ground to its competitors they have developed a cooperative advertising

cost. Cooperative advertising costs are included in expenses because the

Company receives an identifiable benefit in exchange for the cost, the

advertising may be obtained from a party other than the customer, and the fair

value of the advertising benefit can be reasonably estimated. Cooperative

advertising costs were $16,942,000, $12,228,000 and $12,132,000 for the years

ended December 31, 2006, 2005 and 2004, respectively.

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Throughout Columbia’s 10K there is not a high level of disclosure when it

comes to these areas of accounting flexibility. The footnotes that are supposed

to clearly explain any unclear information were not very clear in the disclosure of

inventory valuation and operating leases. Columbia’s ratio diagnostics did not

show any potential “red flags”. Overall, they seem to be operating efficiently and

leading the industry.

Ratio Analysis

Columbia was analyzed using ratios that measured profitability, liquidity,

and capital structure. This analysis helped us form many valid conclusions about

the company. First of all, Columbia’s profitability ratios demonstrated that the

company was up to par with the industry. Asset Turnover and Net Profit Margin,

amongst other ratios, show the company to be keeping pace with its

competitors. Columbia has been moderately efficient in deriving profit from

assets. Now with respect to liquidity, Columbia is the industry leader. Its

current ratio, for example, is twice as large as many of those of its competitors.

Columbia has been deemed highly liquid from our analysis. Finally, after

assessing such measures as the debt to equity ratio, our analysis has found the

company to be an industry leader once again. As it turns out, Columbia is a

largely debt free company. With scores ranging from a high of .34 in 2001 to

.24 in 2006, the company is not financed through debt.

After analyzing historical numbers and these ratios, we were able to

accurately forecast the next ten years of company financials. The forecasts are

derived from core manipulation of larger accounts such as Sales on the Income

Statement and Current Assets from the Balance Sheet. Assuming steady growth

in these, as well as other areas, allowed the forecasting to take place. However,

any dramatic shift over the period ten years, which is may be probable, would

lead to an expected discrepancy between forecasted and actual numbers. This

can only be expected since the longer the forecasted time period, the more

probability of shifts in the industry and the economy as a whole.

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Evaluation Analysis Fundamental to every company valuation are the intrinsic valuation

models. All outside investors base their decision on the share price because

everything within a company can be seen in its share price. After evaluating the

industry, accounting policies, ratio analysis, and forecasts, it is now very crucial

to verify if the published share price is fairly valued, overvalued, or undervalued.

We can determine this information by five different valuation models: Discounted

dividends, residual income, long run return on equity, free cash flow, and

abnormal earnings growth. Each of the different intrinsic valuation models has a

varying degree of explanatory power when dealing with the stock price. Intrinsic

valuation models are more opinionated, because they take into accounting our

own estimations of the next ten years of financial statements. In almost all of

our valuation methods we came to the conclusion that Columbia Sportswear is

somewhat overvalued.

In this section we also performed an Altman Z-Score credit risk analysis. A

score of 1.8 or below makes you a high credit risk, while a score of 2.67 or

above establishes you as a credit worthy company. Over the past five years,

Columbia has stayed fairly constant with their scores, with little increases or

decreases. Columbia’s Z-Scores are well above 3, so the odds of Columbia having

to file for bankruptcy is minimal. The Z-Score and intrinsic valuations will be

discussed in more detail later on in the report.

8

Industry Analysis

Company Overview Columbia Sportswear Company (COLM) is a U.S. company that manufactures and

distributes outerwear and sportswear. “Founded in 1938, Columbia Sportswear

Company™ has grown from a small family-owned hat distributorship to one of

the world's largest outerwear brands and the leading seller of skiwear in the

United States.” (www.columbia.com) Columbia is the “#1 US skiwear seller and

one of the world's biggest outerwear makers. Columbia also makes leather

outerwear, sportswear, Sorel brand boots, and other rugged footwear, as well as

accessories such as gloves and caps.” (http://www.hoover.com) Their products

are grouped into 5 categories—(1) outerwear, (2) sportswear, (3) footwear, (4)

related accessories, and (5) equipment. Columbia Sportswear distributes its

products to over 72 countries and 13,800 retailers worldwide. There are also

eight factory outlet stores that Columbia Sportswear operates. With its

headquarters still in Portland, Oregon, the company currently has over 2,800

employees. The companies “brands has grown to include Montrail, Mountain

Hardwear, Pacific Trail, and Sorel.” (www.columbia.com) As of the end of 2006,

Columbia’s sales were $1,217.7 million, with an 11.4% one-year sales growth.

Columbia’s long-term goal is to “capitalize on global market opportunities for

each of [their] key product categories”.

2002 2003 2004 2005 2006

ASSETS (mill) $ 460.48 783.77 949.4 970.8 1027.4

SALES (mill) $ 816.3 951.8 1095.3 1155.8 1287.7

STOCK PRICE $ 44.42 54.5 59.61 47.73 70.3

SALES GROWTH 4.7% 16.6% 15.1% 5.5% 11.4%

9

Columbia Sportswear competes in the textile-apparel clothing industry. Its

competitors in this industry are Timberland Co. (TBL), The Northface, Inc. (VF

Corp.) (privately held), Marmot Mountain Ltd. (privately held), Patagonia Corp.

(privately held), Helly Hansen A/S (privately held), Merrell (privately held), and

Carhartt (privately held). Of the 427.02 billion revenues in this industry,

Columbia makes up 1.32 billion of revenues. $752 million net sales come from

the United States alone, $199.2 million from Europe, and $120.2 million net sales

from Canada. Net sales from Other International, including Japan and Korea and

international distributor markets worldwide, totaled $216.3 million.

Industry Overview and Analysis “The markets for outerwear, sportswear, footwear, related accessories, and

equipment are highly competitive…” (2006 10-K). Many of Columbia’s

competitors are larger companies, allowing them greater resources, and

ultimately achieving more recognition for their products. To be successful,

Columbia must understand its industry. Using the five forces model will help do

this, showing: rivalries among existing firms, possible threats of new entrants,

threats from substitute products, buyers bargaining power, and suppliers

bargaining power.

Five Forces Model

The Five Forces Model is a tool used to gauge the potential profitability of

a given industry. Its’ dynamics allow for much more in depth analysis of an

industry in opposition to those of the outdated SWOT analysis. The model

investigates factors affecting the industry competition level, as well as the

bargaining power possessed by firms and customers alike.

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Rivalry Amongst Existing Products

Industry Growth

The growth rate of an industry is directly correlated to the success of new

entrants. Entry into a stagnant industry, such as the industry inhabited by

Columbia, requires taking market share away from existing companies in order to

grow. Since this industry does not concentrate on price competition, the

differentiation of its products must be the central focus in order to gain market

share. The apparel industry is quick to shift trends and emulate what others

may be doing to separate themselves from the pack. This pushes companies to

attempt to find a way to cut costs somewhere along production or distribution

lines. With competitors such as The North Face, Timberland, Nike, and

Patagonia, the industry is thick many strong companies. All of whom are fighting

for their share.

Concentration

The concentration is a market refers to the number and relative size of all

firms involved. This far too great of a concentration in the apparel market for

companies to collude and avoid destructive price competition. Columbia is a

prime example of the market segmentation in the apparel market. Columbia

produces products that range from price competitive merchandise to highly

differentiated specialized gear. This wide range of products allows Columbia to

Five Forces Model

Rivalry Against Existing Firms High

Threat of New Entrants High

Threat of Substitute Goods High

Bargaining Power of Buyers High

Bargaining Power of Suppliers Low

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have products in low price retailers such as Wal-Mart, as well as, in specialty

shops across the United States and Europe. This diversity will allow Columbia to

consistently continue to increase market share in a sluggish industry.

Differentiation and Switching Cost

In the apparel market, the ability of a company to differentiate their

product from that of their competitors could be the difference between success

and failure. This is very apparent in an industry where switching costs of the

customer are so low. The product similarity allows customers to switch between

clothing choices on a whim. The differentiation starts with brand recognition and

product quality. The consumer will be much more willing to purchase a product

based upon quality and not price, when they trust the name. Columbia

specializes in reliable, quality sportswear. The brand loyalty is gained by

producing a superior product. The added money spent on research and

development and investment into the brand image, attracts those customers who

are not shopping on the basis of price.

Ratio of Fixed to Variable Cost

The ratio of fixed to variable cost has a large effect upon the final price of

the final goods. Columbia has always been weary of debt financing. They have

preferred to accumulate enough assets in order to finance a new endeavor. This

is evident in the fact that they own all of their distribution plants within the

United States as well as every foreign plant minus the Strathroy Ontario

property. Columbia has also made strides in order to cut prices at the front end

of production. This has allowed variable costs of production to shrink. These

choices have allowed Columbia to keep the ratio of fixed to variable cost

relatively low compared to its competitors.

Threat of New Entrants

An industry that begins to earn above average profits will inevitably be

attractive for outsiders looking in on its success. The possibility of new entrants

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can greatly affect the industry even before they enter the market for themselves.

The apparel industry has a large possibility of the emergence of these new firms

attempting to capitalize on abnormal profits. However, there exist many barriers

that may prevent their assimilation into the industry.

Economies of Scale

With an existing economy of scale already in place, it is difficult for firms

that do not already exist within the apparel market to join. The learning

economy inherent within this industry creates a problem. The firms “face the

choice of having either to invest in a large capacity which might not be utilized

right away or to enter with less than optimum capacity” (Palepu 2-3). The

unavoidable initial loss is a very large deterrent to new firms. Columbia, The

North Face, Nike, Patagonia, and Timberland hold the lion’s share of the market.

A new arrival would have to match these companies market share in order to

prosper in the industry. Another barrier is the brand recognition that the

newcomer would have to match. A new entrant would need to focus on a price

competitive strategy in order to maximize chances of success.

First Mover Advantage

This is an advantage that has arisen as the first entrants into the industry

realize a much easier ascension to the abnormal profit plateau than the industry

laggards. The first industry entrants realize a myriad of benefits at their feet. As

the first entrants, they may be able to set the industry standards; thereby

customizing the industry, to their business and its optimal performance levels.

The first movers may also enjoy exclusive production rights if the government

regulates the industry. The laggards will find it difficult to join the industry if

these advantages hold true. Columbia was the first to offer the Interchange

System, which revolutionized the ski jacket industry. The product allows the

owner to remove the inner lining of a ski jacket as needed on warmer days. The

industry soon followed suit emulating the design, but not before Columbia had

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gained new customer loyalties.

Access to Channels of Distribution and Relationships

In an economy of scope, it is extremely likely that many of the viable and

most consistent distribution channels will be in use by firms already existing in

the economy. New firms may find it difficult to obtain the necessary materials,

as well as, the optimal means to disburse them. The relationships developed

from past business are also a powerful barrier. Columbia operates fifteen

distribution centers worldwide that allow their customers to enjoy flexible

delivery options as well as deter new entrants into the industry.

Threat of Substitute Products

The final element of competition in the retail sportswear industry is the

threat of substitute products. There are many different types and varieties of

threats in the industry. Customers may choose to spend their leisure time doing

other activities or playing other sports. There are also many well established

brand names in the market with loyal customers.

There are many competitors in the sportswear industry. There are several

companies that provide similar products at comparable prices. Product

reputation and brand recognition are the two main success factors to get ahead

in the industry. This causes companies to focus on product quality to gain a

strong reputation for reliable products. Selection of brands by the consumer is

largely based on previous experience with companies or brand name reputation.

The customers in the sportswear industry are very conscious of product quality

and performance. This gives innovative companies an advantage. The leading

companies in this industry such as Columbia and Timberland are always working

on better technology. These factors cause price to not be an issue in the

industry because consumers are willing to pay higher prices for better quality

products.

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Most customers in the industry are very brand loyal. The only reason that

a customer may switch to a different company would be if another brand did not

perform as desired. This causes a risk to the customer of using products that

they do not have any prior experience with. This problem causes companies in

the sportswear industry to have very strict product testing to ensure that all

products are at the desired quality level.

The threat of substitute products is high in the sportswear industry. With

the customer’s main focus in the industry being quality, firms concentrate on

innovative ideas and product quality to set them apart. Customers have low

switching costs, and most firms in the industry have comparable prices.

Bargaining Power of Buyers

The bargaining power of buyers is determined by price sensitivity and

relative bargaining power.

The majority of the customer base is concerned with the quality of the

product. Since sportswear products are used in rugged and sometimes extreme

conditions, the quality is the most important factor to the consumer. This means

that they will pay a higher price for greater and proven quality. Lower cost

providers with slightly less comparable quality do not have the ability to obtain

customers. Buyers do have great bargaining power relative to quality. If a

product is not proven or does not perform, the customer will change to a

different company. With most of the high quality producers having comparable

prices, the consumer’s switching costs are low. This forces Columbia and its

competitors to uphold their strong brand reputation in all items produced.

Bargaining Power of Suppliers

The bargaining power of suppliers in the apparel industry market is low. Raw

materials are the main supplies used to make the majority of the industry’s

products. These materials can be purchased from anywhere in the world for the

cheapest price. These products are turned into high quality goods based on the

15

design and the technology that the company possesses. Most of the finished

products used by the industry are composed of many different raw materials

combined to make the finished product. Companies use many different suppliers

at a lower volume per supplier to ensure their bargaining power. Companies in

the sportswear industry will look for the materials to make their product at the

lowest price. Since there is very little differentiation of raw materials suppliers

have very low bargaining power.

Value Chain Analysis

Classifying the Apparel Industry

The apparel industry is made up of many competitors offering similar

products that are driven by brand name and customer loyalty. Companies in this

industry need to focus on areas that are valued by customers to become unique

compared to the competition. The ability of the consumer to switch between

products with little or no additional cost forces companies like Columbia

Sportswear to significantly focus their strategies on product differentiation to

obtain market share.

Factors to Success

Companies in the apparel industry can increase their market share and be

successful by focusing on differentiation strategies such as product innovation

with research and development, and by investing in product quality, product

variety, and their brand name/image.

Brand Name and Brand Image

A company needs to focus on developing effective marketing strategies to

obtain market share in the apparel industry. Creative and informative ad

campaigns can increase awareness as can product placement in movies.

Switching costs are low in the apparel industry so consumers must possess some

type of loyalty to the brand. In order to efficiently allocate funds toward

16

increasing brand name and image, proper market research and analysis must be

conducted. Increasing brand name and image serves the purpose of

differentiating the company from its competitors and increasing market share.

Superior Product Quality and Variety

The quality of a product can differentiate a company from its competitors

by creating a dependable product that differentiates itself from the rest. Using

different techniques and materials will create more value for the consumer and

increase brand image. In order to compete in the apparel industry a firm must

market more than one product. Increasing product variety will differentiate a

firm from its competitors. A company can increase their product variety by

researching the types of products that are used with current products the

company markets. Increases in product quality will enhance brand image and

amplify customer loyalty base. Product variety will attract different types of

consumers and create a competitive advantage among others in the industry.

Product Innovation with Research and Development

Key advances in the apparel industry set apart companies from the rest.

Advances in different technologies that make jackets more effective at insulating

and fabrics more resistant to water is what differentiate companies in the

outdoor industry. By being the first to develop a new product, a company

increases their brand identification, customer base, and product variety.

In order to continuously gain market share in the apparel industry, companies

must properly fund their research and development department. Consumers

want the ‘latest and greatest’ in apparel and new product developments are the

only way to meet the consumer’s demand in this area. New and improved

products will differentiate a company from others in the industry. Companies

can use research and development departments to improve the quality and

durability of current products. This can help create a positive brand image and

increase a company’s customer loyalty base. An increase in market share can be

17

obtained by developing new products that separate the company from its

competition.

Firm Competitive Advantage Analysis

In this section of the industry analysis, we will be looking at ways in which

Columbia Sportswear utilizes the key success factors that we defined in the value

chain analysis. We have given strategies that create value in this particular

industry, but it is now crucial to evaluate Columbia in order to see if they are

excelling in these crucial areas.

Brand Image

Brand Image plays a large part in Columbia Sportswear’s competitive

strategy. Columbia happens to rank as one of the largest outerwear companies

in the world. During 2005, the company distributed its products to approximately

12,000 retailers in over 70 companies in order to expose their name to the

typical outdoor enthusiast consumer. In, 1999 Columbia introduced a strategy to

build “brand awareness” by licensing their trademarks across a range of product

categories that complement their current offering. In 2006, the company

licensed their brands in eighteen product categories, including socks,

performance base layer, leather outerwear and accessories, camping gear,

eyewear, home furnishings, and bicycles. Columbia has also improved their

brand image by engaging in an extensive, advertising, marketing, and promotion

campaign. This not only renowned, but award winning campaign uses a “Tested

Tough Theme” in order to promote the brand message of product durability and

comfortableness. Columbia Sportswear Company and Nissan Europe SAS

announced a joint branding effort aimed at building brand awareness throughout

Europe. The two companies have joined forces to launch the Nissan X-TRAIL

Columbia Edition. A series of events, marketing promotions, and advertising will

promote the X-TRAIL across 21 countries.

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Like many other companies, Columbia uses a variety of different media

outlets in order to get their brand name exposed to the consumers. The use of

the internet has been very beneficial recently and will continue to be the

foremost way of advertising. Columbia’s website educates millions of consumers

about its products and conveniently directs them to retailers. The use of special

promotion and out going email specials have been successful at keeping the

customers connected with the brand. (Columbia 10k, The Street.com,

autochannell.com)

Product Quality As we stated earlier, Columbia and every other clothing companies put a

lot of focus on Brand image. Many consumers in the clothing industry will

purchase strictly on brand image such as Ralph Lauren, which basically produces

the same product as Tommy Hilfiger. Columbia aims to draw customers by not

only its brand image, but its superior product quality. Since outerwear is the

company’s most established product category, their products are designed to be

“tough” and protect the wearer from inclement weather in everyday use and in

outdoor activities. These activities include skiing, snowboarding, hiking, hunting

and fishing. The company set the benchmark by producing many jackets that

incorporate the popular Columbia Interchange System. This system features 3 or

4 jackets in one design which typically combine a durable, nylon outer shell with

a removable, zip-out liner. This will provide the wearer with a jacket for all

seasons and weather conditions.

Recently, Columbia has its expanded its resources in order to create

quality products by purchasing other brands. The company produces technically

advances tents and sleeping systems through its Mountain Gear brand. In early

2006, the company acquired most of the assets of Montrail, Inc. for $15,000,000

plus assumptions of liabilities. Being a “premium” outdoor footwear brand,

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Montrail produces high performance trail running, hiking, and climbing footwear.

In March of 2006, Columbia acquired Pacific Trail which also deals with “high-

end” out door equipment. It is important to take notice that Columbia is not only

creating high quality equipment, they are acquiring brands that already have a

well known reputation for superior quality. This is evidence that shows Columbia

is right in line with one of our key success factors listed above. (Columbia 10k,

Street.com)

Research & Development

When analyzing this company and its industry, we found that Research

and Development is a very crucial element in the Key Success factors. It is in this

portion of the competitive analysis where we see a possible issue. As stated

earlier, Columbia Sportswear is a company that prides itself with differentiation

and superior quality. They were the first to implement the interchangeable jacket

system and produce many styles of “technical design” products, but our analyst

team can not seem to find any sort of concrete information with regards to R&D.

We tirelessly read through the 10K, looked at a variety of statements, and used

many search engines, but can not find any clear information on the company

procedures involving R&D. We have come to the conclusion that Columbia must

have some sort of R&D because they have developed many innovative products,

but they do not perform the proper disclosures to receive a clear picture. Despite

the success of the company in brand image and quality, we see a potential red

flag in R&D and have little knowledge of how it manipulates Columbia’s future.

20

Accounting Analysis The accounting analysis of a firm consists of six steps. First, the analyst

must identify the key accounting policies. Key accounting policies are risk and

value estimates that an analyst uses to ensure the firm is properly valued. The

next step is to assess the possible accounting flexibility that is allowed within the

Generally Accepted Accounting Practices (GAAP). Once the accounting flexibility

is evaluated for the firm, it is compared to its competitors within a specified

industry. An analyst then assesses the quality of disclosure to see how

transparent the company’s financial statements really are. During this analysis

inconsistencies may appear. These are described as “red flags” and need further

investigation. Once “red flags” are identified, flexibility is assessed, and

transparency is disclosed. Any distortions in the financials must be recast to get

an accurate figure.

Key Accounting Policies

Columbia follows the Generally Accepted Accounting Policies (GAAP) rules.

However, there is still some room left by GAAP for flexible accounting policies.

By analyzing the key accounting policies and decisions used by the firm, we can

analyze how well they disclose their true actions through their financial

statements. Columbia bases their estimates on historical data and other factors

that they have determined appropriate. These policies and estimates are

determined at the quarterly audit committee meetings held by the company.

Columbia goes to great lengths to ensure that their allowance for doubtful

accounts is as accurate as possible. They make ongoing estimates throughout

the year to maintain accuracy. They determine the amount of the allowance

using historical level of credit losses and making judgments about the

creditworthiness of customers based on ongoing credit evaluations. They analyze

specific customer accounts, customer concentrations, credit insurance coverage,

current economic trends, and changes in customer payment terms. (Columbia

21

10-K 2007) If the forecasts turn out to be inaccurate an adjustment is made to

Selling, General, and Administrative Expense in the period realized to identify the

estimation error. The firm implements this policy to benefit investors as well.

They are trying to make their financial statements as accurate as possible by

going above and beyond what is required to determine bad debt estimates.

They are also trying to predict the future as best as possible in order not to have

any unexpected losses.

Advertising costs are expensed as incurred and are included in selling,

general and administrative expenses. Through cooperative advertising programs,

the Company reimburses its wholesale customers for some of their costs of

advertising the Company’s products based on various criteria, including the value

of purchases from the Company and various advertising specifications.

Cooperative advertising costs are included in expenses because the Company

receives an identifiable benefit in exchange for the cost, the advertising may be

obtained from a party other than the customer, and the fair value of the

advertising benefit can be reasonably estimated. (Columbia 10-K) Advertising is

crucial to the brand image. Columbia knows that they are one of the most

innovative companies and the industry with one of the best products. The bulk

of Columbia’s products are sold in retail stores containing competitor’s brands as

well. This policy shows how Columbia deals with the advertising costs and

ensures that their products are given a direct advantage to the customers.

Accounting Flexibility

All companies are regulated by GAAP, but managers can substantially

influence how informative the firm’s financial statements are to outside onlookers

by the amount of flexibility allowed in accounting methods. The important key in

accounting flexibility is how the manager chooses to use it in order to portray the

firm’s desired financial picture.

Previously in the industry analysis we discussed the importance of R&D to

Columbia and companies in the high end sportswear industry. As stated earlier,

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we had difficulty finding any information in the company’s financial report on

how they account for these factors. We do know however, that research and

development is a very vital aspect of Columbia because they really campaign on

their innovative dual layer clothing. We do know, however that managers have

no accounting choices on how R&D is reported. Therefore, R&D is expensed as

incurred and is included in cost of goods sold. The lack of accounting flexibility in

reporting research and developments prevents managers from matching R&D

expenses to financial benefits derived from those activities.

We also discussed in the industry analysis, brand name and image play a

major role in the success of top clothing companies and help create Goodwill.

The increasingly importance of these intangible assets has lead to the creation of

the Statement of Financial Accounting Standards No. 142, “Goodwill and other

Intangible Assets.” This defines the proper methods of accounting for goodwill

and other intangible assets. This standard says that Goodwill and intangible

assets with indefinite useful lives are not amortized, but instead should be

measured for impairment annually, and the existing impairment be written off.

Even though companies like Columbia abide heavily by this standard, the

methods used in order to account for intangibles can leave a lot of room for

mistakes. The annual impairment is an estimate reached by the firm’s

management and can regularly lead to an intentional or unintentional error in

estimation.

Firms are also allowed a great deal of flexibility when accounting for some

of its leases. Columbia does choose to use capital leases but its important to

note that they can choose whether to record these transactions as operating

leases or capital leases. If the firm chooses to uses operating leases, they can

receive the benefits of expensing the lease payments; however, the firm is not

allowed to book the operating lease as an asset. The downside to this is that

they can never receive depreciation and amortization benefits. If the firm

chooses to book the items as capital leases, it can receive all the benefits of

actually owning the assets. A finance lease effectively allows a firm to finance the

23

purchase of an asset, even if, strictly speaking, the firm never acquires the asset.

They can depreciate the assets however they choose and amortize the loan

payments. This method is widely practiced by companies in order to show a very

clear picture of the firm, and how it looks in the future.

The key accounting policies at Columbia lack flexibility in some areas and

allow for it in others. Flexibility in accounting is imperative to any firm’s success.

For accounting to be effective GAAP must be rigid to standardize reporting from

one firm to the next, while allowing enough flexibility for firms to choose the best

suited policies to account for and disclose a variety of financial information.

ACTUAL ACCOUNTING STRATEGY

Companies use a variety of strategies that will best suit them, and these

strategies can be conservative, aggressive, or can be a combination of the two.

Conservative accounting is the practice of omitting or understating book values

such as assets on the balance sheet, while aggressive accounting is using

manipulation to temporarily increase income.

Of the five principal properties used by Columbia, they own all but the

Canadian Operation located in Strathroy, Ontario. Their lease expires in

December 2011, and has to be assumed to be an operating lease, though no

actual mention of is made. The 10-K only mentions operating leases, divided in

to non-related parties and related party, in their estimation of their future

contractual commitments, and are not reflected on the consolidated balance

sheet under GAAP.

Year ending December 31,

2007 2008 2009 2010 2011 Thereafter Total Operating leases :

Non-related parties 8,598 6,588 3,924 2,712 1,628 9,132 32,582Related party 499 499 499 499 499 — 2,495

Columbia Sportswear is continuously making estimates of inventory and

product warranty costs. Columbia uses lower cost of market method, where the

company can “identify excess inventory, and evaluate purchase commitments,

24

sales forecasts, and historical experience, and make provisions as necessary to

properly reflect inventory value at the lower of cost or estimated market value.”

When determining what amounts need to be set aside for warranty costs, they

look at past seasons claim rates, current economic trends, and historical costs to

“replace, repair or refund original sale.” If a larger or smaller warranty cost is

needed, then changes are made in the period of determination. Since there is

the possibility that these warranty estimates are being overvalued, we could

conclude that they are being conservative in their accounting. Here is a summary

of past season accrued warranties:

2006 2005 2004 Balance at beginning of period $ 9,907 $ 9,140 $ 8,642 Charged to costs and expenses 4,804 4,178 3,375 Claims settled (3,549) (3,411) (2,877 ) Balance at end of period $ 11,162 $ 9,907 $ 9,140

After analyzing the firm’s accounting strategies, overall they look to be

both a conservative and aggressive firm. They seem to make decisions based on

the companies needs at the time. Compared to its competitors like Timberland

and VF Corp., they don’t disclose as much about their company and procedures.

Timberland mentions its inventory valuation, FIFO, its property, plan, and

equipment depreciation method using straight-line, and also the periodic

evaluation of its long-lived assets and goodwill.

Quality of Disclosure

Qualitative

The quality or level of disclosure in a firm’s financial statements can be

interpreted as a reflection of the manager’s honesty and intent. Well

documented and disclosed financial statements can instill trust in an investor and

provide crucial information for analysts.

25

In comparison to other firms in the apparel industry, Columbia Sportswear

sets the benchmark on disclosure quality. Columbia Sportswear adequately

describes factors affecting their industry and themselves. They also provide

information concerning their competition, contractual obligations, sales growth,

performance, and geographical sales data. With reference to other firms in the

apparel industry, Columbia Sportswear outperforms in the area of disclosure

quality.

Columbia Sportswear does business across the globe and has distribution

or operating centers in the United States, Canada, and Europe. This causes their

net sales and income to be affected by changes in exchange rates. Columbia

Sportswear does an excellent job disclosing the effects of exchange rate

fluctuations in each of the countries they operate in (see appendix 1-1). This

level of disclosure helps Columbia Sportswear and outsiders to the company

measure sales growth as a whole and within different geographical locations.

Columbia Sportswear provides details on all of its contractual obligations

and payment schedules in its annual 10-k reports. They provide estimates of

future payments associated with long-term debt and lease agreements.

Columbia Sportswear does not list lease obligations on their balance sheet but

currently leases one facility in Canada and provides costs associated with the

lease in a disclosure in their annual 10-k report. During 2006, Columbia

Sportswear repaid nearly 98% of their long-term debt obligations. They

provided information as to how the debt was paid and remaining long-term debt

in disclosure statements in their 10-k report.

With regards to current performance, Columbia Sportswear adequately

describes in their 10-k report certain reasons relating to a 1.6% drop in gross

profit due to increased competition and other strategies related to differentiation

such as promotional campaigns for brand image. However, they also noted

inefficiencies in their 2006 product line and did not go into any detail. They

provided that a reduction of products being sold with lower gross profits partially

offset the effects of the decrease in gross profit.

26

Quantitative

In addition to qualitative analysis, quantitative analysis helps to form a

better understanding of the overall transparency of a firm’s financial statements.

A firm’s core level of sales and expense manipulation can be measured by using

financial ratios associated with quantitative analysis. In the following section,

the financial statements of Columbia Sportswear and four of its competitors is

compared to form an understanding of any manipulation that may have been

used when reporting their financials.

27

Core Sales Manipulation Diagnostics

Several diagnostics exist that help to detect possible manipulation

associated with a firms sales. Firms have the ability to participate in aggressive

revenue recognition practices that can distort their financials and make them less

transparent. They can also underestimate bad debts and sales returns which

lead to higher sales. These practices can severely affect financial transparency

which is why sales manipulation diagnostics use ratios to bring out potential red

flags and distortion in a firm’s financials. We compiled several ratios using

Columbia’s financial statements over the last five years and compared them with

the ratios of their direct competitors. Significant differences with the industry

and volatility could be a sign of accounting distortion and can help to develop a

more transparent picture of Columbia’s financials.

28

Net Sales/Cash From Sales

This diagnostic measures the amount of cash that is collected from sales. A high

ratio could signify that a firm is recognizing revenues that shouldn’t be

recognized. This was the practice of companies like Enron and WorldCom, they

would record future revenues as current sales and severely distorted their

financials. When a company is aggressively recognizing revenues,

underestimating sales returns or bad debts they will have a large amount of

sales but little cash to support those sales. This is why a high net sales/cash

from sales ratio would be a possible red flag. Of course there could be

legitimate reasons for an increasing ratio, this is why we compare the ratios of

other firms and use ratios over a five year period.

Columbia has an average ratio of about 1.27; this means that for every dollar of

sales they collect around 80 cents. Because 80 to 90 cents per dollar is the

average cash collection among the industry, there is no reason to suspect

Columbia is manipulating their sales.

29

Net Sales/Net Accounts Receivable

If a company has an unusually high net sales/cash from sales ratio then it is

necessary to find out what could be the cause. If a company is overstating their

sales then the net sales/cash from sales ratio would be increasing and the net

sales/net accounts receivable ratio will be decreasing. This happens because the

exaggerated sales are not a true representative of the receivables and while

sales increase and receivables remain constant, the ratio drops. If it is suspected

that a company is exaggerating their sales due to a high net sales/cash from

sales ratio, then the net sales/net accounts receivable ratio should be higher in

comparison to previous years in order to account for the increase in sales. If this

isn’t the case, then the firm may be manipulating their sales.

Columbia has maintained a relatively low net sales/net accounts

receivable ratio when compared to their competitors. You can see their ratio is

increasing; this relates to their decreasing net sales/cash from sales ratio and

could signify that Columbia is collecting more cash from their receivables.

Because of this, there is no reason to suspect that Columbia is manipulating

sales.

30

Net Sales/Inventory

This diagnostic is similar to net sales/accounts receivable in the fact that it can

provide clues pointing to sales manipulation. If a company is showing increasing

sales then you would expect that their inventories will reflect these sales.

Significant increases in sales along with a decrease in net sales/inventory could

signify that a firm is channel stuffing or manipulating their sales by overloading

their customers with inventory they can’t sell and marking it as revenue even

though the inventory will eventually be returned.

The firms in the industry all appear to be following the same downward

trend. This isn’t necessarily a cause for concern; it could signify a decrease in

sales or an accumulation of inventory. Because Columbia is following right in line

with the entire industry, there is no reason to believe any sales manipulation is

occurring on their behalf.

After analyzing and comparing the ratio’s of Columbia and their competitors, we

find no reason at all to suspect that Columbia is participating in any manipulation

31

of their sales. This helps to increase our confidence that Columbia’s quality of

disclosure is high.

Core Expense Manipulation Diagnostics

GAAP makes it very difficult for companies to manipulate cash through

accounting practices. This is why companies may choose to manipulate their

expenses in order give the appearance of increased earnings. Companies may

also choose to inflate expenses in order to appear profitable in future periods.

These practices distort the transparency of financial statements and can severely

impact the quality of firm’s disclosure. To discover if a firm is manipulating their

expenses, one must compare changes in assets with changes in operating

income. In order to do this, several ratios must be analyzed and compared

among the industry over several years just as we did with the sales manipulation

ratios.

32

Asset Turnover

This ratio measures a firm’s revenue relative to their assets. Changes in asset

turnover could be a cause for concern. When a firm is manipulating expenses,

their profit margins and asset turnover ratio will be moving in the opposite

direction of each other (Penman, 2004). This occurs because income is

increasing due to lower expenses but sales are the same. Because sales are the

same, as assets increase the ratio of sales to assets gets smaller. So, increasing

profit margins accompanied by decreasing sales to assets and vice versa, can

indicate expense manipulation.

The majority of the industry appears to have experienced several years of

decreasing asset turnover. Because this was an industry wide occurrence, it is

safe to assume decreased demand contributed to the overall decline in asset

turnover. However, recently the majority of firms in the industry have had

increasing asset turnover ratios. This follows suit with the overall recent

increases in sales among firms in the industry. Because of these observations,

there is no reason to believe Columbia is manipulating their expenses.

33

Cash Flow from Operations/Operating Income

Companies can also manipulate expenses by over or understating

depreciation/amortization and working capital accruals. Firms can erroneously

inflate or deflate their operating income by increasing or decreasing the amounts

they charge to these accruals. Changes in this ratio from year to year could

signify expense manipulation.

There appears to be a bit of volatility with regards to the CFFO/OI ratio in

the industry. However, the volatility is experienced by all firms and is not an

isolated event distinguishable by an individual firm. This volatility could be the

result of changes in income from year to year and is not an indication of any

expense manipulation on the part of Columbia.

34

CFFO/NOA

This ratio, like the previous CFFO/OI, looks at possible expense manipulation

with regards to accruals like prepaid expenses, and payables. The main indicator

in this ratio is a change in the average net operating assets over the years.

With the exception of Quicksilver, the industry appears to be following the

same trend with regards to this ratio. There hasn’t been much change year by

year in the industry average CFFO/NOA. This signifies that there is no cause for

concern with respect to expense manipulation and Columbia.

After analyzing and comparing ratios of Columbia and its competitors. We

believe it is safe to say that Columbia’s quality of disclosure is high and its

financial statements are transparent. There appears to be no sign of expense or

sales manipulation.

35

Potential Red Flags

When analyzing the Columbia Company’s financial statements, it helpful to

attempt to find areas of potential accounting flexibility and possible earnings

management. The company follows very conservative accounting guidelines

when compiling their financial statements. The areas of flexibility where they

managers have the ability to manipulate earnings do not seem to have been

altered in any fashion. After looking through the company’s financials it seems

apparent that there have been no earnings manipulations. For example, one

way for managers to boost up their profits is to delay the writing down of current

assets. This is most relevant in industries where receivables and inventories are

key success factors. Columbia’s industry is one in which these balances are very

telling of a company’s success.

2006 2005 2004 2003 Days in Inventory 103.87 104.12 101.21 90.36 *Source: Columbia 10-k s filed from 2006 to 2002

An increase in the number of days in inventory, without a decrease in sales,

would lead an analyst to believe that the company may have failed to write down

their inventories. As you can see, the average number days in inventory has

settled at a mark of just above one hundred over the past three years. This

consistency speaks to Columbia’s constant growth.

A warranty reserve is established at the point of sale at a historical cost of the

company’s repairs and replacements of goods. This warranty adds the value of

the products produced. The estimation of this warranty cost is an opportunity

for management to manipulate earnings. The historical warranty reserve data is

listed below.

36

2006 2005 2004

Balance at beginning of period $ 9,907 $ 9,140 $ 8,642

Charged to costs and expenses 4,804 4,178 3,375

Claims settled (3,549 ) (3,411 ) (2,877)

Balance at end of period $ 11,162 $ 9,907 $ 9,140

*Source: Columbia 10k

This is another example of the consistency within the Columbia financial

documents. Their warranty expense estimates have historically been over what

the actual expenses incurred were. The remaining balance has been carried over

into the next year, yet the new year’s estimation has not changed. On January

26, 2006, the Company acquired substantially all of the assets of Montrail for

cash consideration of $15,000,000 plus the assumption of certain liabilities. The

financial data of the acquisition is listed below: Cash $ 23 Accounts receivable 1,778 Inventory 6,878 Prepaids and other assets 112 Property, plant and equipment 597 Intangible assets 12,139 Total assets acquired 21,527 Accounts payable and accrued liabilities 694 Note payable 5,833 Total liabilities assumed 6,527 Net assets acquired $ 15,000 *Source: Columbia 10k

Intangible assets acquired from Montrail consisted of $10,000,000 for

trademarks, $939,000 for goodwill, $700,000 for a patent and $500,000 for

order backlog. The $11,200,000 of purchase price allocated to the trademark,

patent and order backlog was determined by management, based in part on a

third party appraisal using established valuation techniques. The majority of the

purchase seems to be tied up in intangible rather than tangible goods. The

pricing estimations that were made before the purchase must be accurate. The

red flag raised here is the goodwill priced into the acquisition. The

37

overstatement of goodwill could lead to the overstatement of assets on the

balance sheet.

Potential red flags can be easily found through ratio diagnostics. After further

analysis, Columbia seems to have everything in order. All of the diagnostics are

on par, if not leading; the industry. However after digging further into the

financial statements, we have found one potential red flag that has caught our

eye. Columbia owns all of its distribution plants except for the facility in Canada.

This facility is listed under an operating lease which is not reflected on the

balance sheet in accordance to GAAP. Columbia has total current and future

obligations to this lease agreement of near thirty five million dollars to be paid

off by 2011. These “off the balance sheet” activities might normally shift the

ratios. However, the 35 million dollar number does not significantly change any

of the diagnostics because the number is very small in comparison to the rest of

the account balances.

Undo Accounting Distortions

As stated before, the conservatism of Columbia’s accounting practices

have led to zero apparent management manipulations to the company’s financial

documents. The one glaring red flag, of one operating lease, was not

detrimental to the overall position or diagnostics. Columbia is committed to their

key accounting policies by staying conservative in their accounting choices and

providing truthful and transparent financial documents.

38

Financial Analysis

Introduction

A financial analysis is done by computing a variety of ratios using the

financial statements. “The goal of a financial analysis is to use financial data to

evaluate the current performance of a firm and to asses its sustainability”

(Palepu, Healy and Bernard). The ratios used are divided into three sections:

Liquidity, Profitability and Capital Structure. We have included four of Columbia’s

competitors to not only show how the firm compares to them, but also to give an

overall look at the industry’s performance.

Liquidity Ratios

“Liquidity refers to the cash equivalence of assets and the firm’s ability to

maintain sufficient near-cash resources to meet its obligations in a timely

manner.” (Ratio Analysis). In other words, does the firm have the ability to pay?

Current Ratios

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2002 2003 2004 2005 2006

ColumbiaTimberlandVFCQuicksilverWolverine

The current ratio is a simple calculation of current assets over current

liabilities. This ratio attempts to measure the firm’s ability to repay its current

liabilities. Most firms want a current ratio equal to one, or even possibly a little

39

higher, because this means the firm has the ability to cover its liabilities. For

example, take Columbia’s 2006 ratio of 4.01. This means that for ever $1 of a

liability that is due, the firm has 4.01 of current asset resources on hand to cover

that $1. Compared to its competitors, Columbia for the most part has a higher

ratio. Overall, the industry’s current ratios have been declining, which possibly

means the firm’s liquidity will be affected.

Quick Asset Ratio

0.000.501.001.502.002.503.003.504.004.50

2002 2003 2004 2005 2006

ColumbiaTimberlandVFCQuicksilverWolverine

The quick asset ratio determines the firm’s ability to cover its current

liabilities from liquid assets, and assumes that the firm’s accounts receivables are

liquid. (Palepu, Healy, Bernard). To compute the ratio, we take the cash,

marketable securities (ST investments), and accounts receivable and divide by

the firms current liabilities. A comparison of the industry shows that Columbia,

along with Quicksilver, has a higher ability to compensate for their liabilities. But

at the same time they are a lot less stable than their competitors, with the quick

drop from 2004 to 2005.

40

Accounts Receivable Turnover

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2002 2003 2004 2005 2006

ColumbiaTimberlandVFCQuicksilverWolverine

The accounts receivables turnover is calculated by taking the firm’s sales

over its accounts receivables. Accounts receivables turnover, inventory turnover,

and working capital turnover are all operating efficiency ratios, which hopes to

show that liquidity improves. There seems to be a wide range among the

industry, with Columbia pretty much in the middle of the pack, but at the same

time are slowly decreasing.

41

The day’s sales outstanding shows how long it will take to recover these

receivable amounts. By taking 365 over the accounts receivable turnover, we can

figure out the days it will take. VFC and Timberland are shown at having less

days overall of outstanding sales, but Wolverine is shown at having a decline

which means that the firm has been able to recover their money faster.

42

Inventory Turnover

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2002 2003 2004 2005 2006

ColumbiaTimberlandVFCQuicksilverWolverine

Inventory turnover is a common ratio performed in order to measure a

firm’s ability to move inventory. It is very important to understand that the

quicker that a company is able to turn their inventory over, the more efficient

they are. As shown in the chart above, Columbia is running right about average

when compared to the other companies in its industry. Some may perceive this

as a bit on the negative side and that Columbia may be over stocking its

inventories. The slightly decreasing inventory turnover from 2002 seems to be

leveling off and functioning well in relation to the industry.

43

The day’s supply of inventory is calculated by dividing the inventory ratio into

365 days. As Columbia’s inventory ratio dropped from 2002 to 2006, its days

supple of inventory increased by about 4.5% to 4.53 days more. With the overall

industry average of 94.12 days, Timberland is easily under that average, while

the remainder firms generally exceeding the average.

44

The cash to cash cycle takes the days sales outstanding (DSO) and added

to days supply of inventory (DSI). This shows how long it takes to collect on

sales from the time money is spent on producing a product, how long the

product is kept in inventory, to its sale, and finally to the collection of accounts

receivable. On the whole, Timberland does the best at taking the least time to

collect on their sales. Columbia looks to be about at the industry average, with a

general increase in its number of cash to cash days.

45

Working Capital Turnover

0.00

1.00

2.00

3.00

4.00

5.00

6.00

1 2 3 4 5

ColumbiaTimberlandVFCQuicksilverWolverine

Working capital is a ratio performed in order to measure how efficient the

firm is at turning working capital into sales. This measurement in very important

because it shows the connection between money used to fund operations, and

the sales being generated from it. Columbia can be shown in the chart as

performing well below the rest of the industry competitors. It important however

to note that since 2003 Columbia’s, working capital turnover has not only

remained consistent, it has started to increase toward the industry norm due to

the companies notable increase in sales from year to year.

Profitability Ratios

Profitability ratios are used to determine efficiently a company can control

their expenses. Control of these expenses will lead to a healthy company and

happy shareholders. If the product can be produced an ever improving level of

efficiency, the company can see an ever improving level of profitability.

46

Gross Profit Margin

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

2002 2003 2004 2005 2006

ColumbiaTimberlandVFCQuicksilverWolverine

The industry standard for gross profit margins seems to have converged

around the 40% region. Columbia needs become more efficient in their

production if they wish to improve this number. There is little concern about

these figures since the Columbia numbers are at par with industry average. The

textile industry is very reliant on production cost control. The ability to more

closely controls these costs would allow Columbia a great advantage in the

industry.

47

Net Profit Margin

-4.00%

-2.00%0.00%

2.00%

4.00%6.00%

8.00%

10.00%12.00%

14.00%

2002 2003 2004 2005 2006

ColumbiaTimberlandVFCQuicksilverWolverine

Columbia’s net profit margins have seen a decline over the past few years.

However, the decline has been industry wide. This has allowed Columbia to

remain above the industry standard. The company is the most profitable in

terms of sales in the industry. The company has shown a great ability to retain a

large percentage of their sales.

48

Operating Profit Margin

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2002 2003 2004 2005 2006

ColumbiaTimberlandVFCQuicksilverWolverine

Alone, the declining profit margin of the company would cause

some concern over an inability to control costs. However when you broaden the

scope and examine the entire industry, a trend emerges. There have been

consistent declines in operating profit margin across the entire industry. VF

company has managed to obtain consistent numbers in defiance of this trend.

Columbia must continue to control the operating costs in order to not fall behind

its competitors.

49

Asset Turnover

0.00

0.50

1.00

1.50

2.00

2.50

2002 2003 2004 2005 2006

ColumbiaTimberlandVFCQuicksilverWolverine

This ratio shows that Columbia has not been able to produce above

industry sales numbers per dollars of assets. The company has an apparent

inability to be as productive with its assets in comparison with the industry. This

raises some concerns over the companies ability to manage its assets.

50

Return on Assets

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

1 2 3 4 5

ColumbiaTimberlandVFCQuicksilverWolverine

Return on Assets shows the relationship of how a one dollar increase in

total assets will affect net income. This operating efficiency ratio is influenced by

net profit margin and asset turnover. Columbia has been among the top firms in

the industry with respect to return on assets over the past five years. However,

the firm has had a steady decline over the period analyzed. This is not a

concern because the entire industry is moving toward a similar level of asset

return. There have only been a few outlying numbers in this ratio over the

period, therefore those numbers are not relevant in analyzing the industry and

its movement.

51

Return on Equity

-10.00%-5.00%0.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%

2002 2003 2004 2005 2006

ColumbiaTimberlandVFCQuicksilverWolverine

Return on Equity measures the profitability of a firm with respect to their

owner’s equity. Profit margin, asset turnover, and the relationship between total

debt and owner’s equity are influential to the return on equity. This ration

analysis also has a very similar trend of all firms migrating towards the same

rate. This has caused a slight decrease in Columbia’s overall percentage as other

firms have grown in size and become bigger influences in the industry.

Columbia’s profitability with respect to this ration is average in the industry.

Capital Structure Analysis

The Capital Structure ratios analyze the financing activities used by a

company to acquire assets. This section consists of three ratios. The Debt to

Equity ratio compares the amount of the firm financed by debt to the amount

financed by equity. The Times Interest Earned shows the number of days of

operations that are needed to fund interest expenses from financing activities.

The Debt Service Margin shows the coverage of long term debt by operating

cash flow. This section will analyze Columbia’s capital structure compared to the

industry.

52

Debt to Equity Ratio

0.00

0.50

1.00

1.50

2.00

2.50

2002 2003 2004 2005 2006

ColumbiaTimberlandVFCQuicksilverWolverine

The Debt to Equity ratio analyzes the amount of debt used for financing to

the amount of equity used for financing activities. This ratio shows the credit

risk of a firm. Columbia has been the industry leader and well below the average

over the past five years. This ratio is consistent with Columbia’s policy of having

as little debt as possible. This ratio shows that Columbia has very little risk of

going bankrupt due to their almost exclusive equity financing. Columbia has

much less risk in this area than the industry.

53

The ability of a firm to be able pay their interest expenses before

accounting for taxes is measured using the times interest earned ratio. This

ratio divides the net income before taxes and interest by interest expenses.

Ideally, firms want to have a high times interest earned ratio because this means

they either have low debt or high earnings. Overall, the industry has a very low

times interest earned ratio. This means that the majority of the industry does

not have a very large sum of income to cover their interest expenses. Columbia

on the other hand is a relatively debtless company so any interest expenses they

accrue are easily covered by their income as you can see from the graph. This

puts Columbia at an advantage relative to its competitors in the industry that

have a relatively low times interest earned ratio.

54

The amount of income provided from operations needed to pay for certain

payments is measured using the debt service margin ratio. This ratio “measures

the adequacy of cash provided by operations to cover required annual

installment payments on the principal amount of long-term liabilities” (Ratio

Analysis). The industry as a whole is very volatile in this area. In 2004 and

2005, Columbia sportswear used a significant amount of their operating income

to retire long-term debt. This caused their ratio to dip to near zero levels.

Recent activity shows the majority of firms in this industry trending downward

while Columbia is heading up. This is favorable for Columbia but not for the

industry. This could be the result of the industry acquiring more debt as a

whole, or experiencing decreases in income.

55

IGR/SGR Analysis

The internal growth rate (IGR) is the maximum rate of growth a given

company is able to achieve without outside sources of funding

(investorwords.com). Sustainable growth rate (SGR) of a firm is the maximum

rate of growth in sales that can be achieved, given the firm's profitability, asset

utilization, and desired dividend payout and debt (financial leverage) ratios

(referenceforbusiness.com). The formulas for IGR and SGR are as follows: IGR=

ROA (1-Divedend Payout %), and SGR= IGR (1+ Debt/Equity). This chart shows

Columbia’s IGR and SGR over the past five years.

The only dividends paid out over the past five years were in 2006, with it being

.14. Therefore the past years IGR is simply its return on assets (ROA). Because

they don’t pay dividends as often or as much as its competitors they can have a

higher IGR, and since IGR is directly related to a firms sustainable growth rate,

Columbia will also sustain a higher SGR that its competitors.

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Forecasting Financial Statements

By forecasting Columbia’s balance sheet, income statement, and cash flows, we

can get an idea of where this company might be in the next ten years. Using

actual financial statements from the past six years and relating those figures to

the company’s continued efficiency, we were able to forecast out to what

Columbia might possibly look like in the year 2016.

Sales Growth

Columbia Sportswear has averaged a 12% growth rate over the past six

years. However, this number can be deceiving. They have experienced some

volatility in their sales growth over the previous six years, with an overall trend

heading downward. The industry as a whole is converging downward with

regards to their net profit, operating, and gross profit margins. By taking this

information into account, it is logical to access that a 12% sales growth rate for

Columbia would be erroneous. A number of analysts in the industry currently

estimate the revenues of Columbia to lie within $1.44 and $1.57 billion for an

overall growth between 8 and 11 percent.

During the most recent quarter (1st 2007) Columbia beat analyst opinions

by 4.74% with an increase in first quarter revenues of 11.14%. Columbia is

experiencing growth in their fishing related product line (www.thesreet.com) and

is increasing their revenue guidance from $1.37 to $1.4 billion for the current

fiscal year (10-Q Report). We believe revenues for Columbia will increase over

the next two quarters driven mainly from their fishing line increases. However,

there has been a backlog of inventories in European distribution centers due to

weather related slowdowns (www.bizjournal.com). This should take away from

the currently increasing revenues that have already reached the cumulative

revenue growth for 2006. By taking into account Columbia’s currently increasing

revenues of over 11%, overall average analyst consensus about revenue growth

being between 8 and 11 percent, the industry’s downward profit trend, and the

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possibility of slower growth in European markets, we believe 10.15% to be an

appropriate sales growth percentage for the next three years (2007-2009). This

percentage is lower than the previous year because we believe the overall

downward trend of the industry is a strong indicator of slowing growth and

currently increasing revenues will be offset by the downward trend.

Beginning in 2010, we believe average sales growth will decrease to

9.5%. The reason we believe this is because of the historical volatility in

Columbia’s sales growth. Historically, Columbia has seen several years of high

sales growth followed by drastic dips which bring their sales growth average

down. Decreasing the average sales growth percentage will help to account for

this volatility and reflects the downward trend the industry is currently

experiencing.

Cost of Sales

Over the past six years Columbia has experienced an upward trending

cost of sales. Currently, the average cost of sales over the past six years has

been 55% with the most recent year being 58%. All of Columbia’s direct

competitors have experienced decreasing net, operating, and gross profit

margins. The gross profit margin industry average over the last six years has

been converging towards around 56%. This is evidence of increasing cost of

sales which is why we believe cost of sales for Columbia to be up one percent

from 58% to 59% in 2007. In our opinion, the industry is trending towards this

percentage and we believe a sideways trend will occur once the majority of firms

in the industry are at this percentage. We believe this because a sideways trend

is already observable for companies that have been at this level over the

previous years.

Net Income

The average cost of sales among Columbia and its competitors has

steadily been on the rise in recent years. Columbia has seen an average

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increase of 12.1% to their cost of sales over the past five years. This has

contributed an industry wide decrease in gross and net profit margins. It

appears that the industry is converging to a gross profit percentage of 40%. We

believe this level of 40% will be sustained for several years forward due to the

fact other companies have been hovering at this level for past years and firms in

the industry are converging to this level. Increasing cost of sales and decreasing

profit margins have led us to believe future net income growth will be

significantly lower than the current average of 11.17%. Because cost of sales

have been climbing and profits declining over several years, we believe a future

growth estimate of 8.5% will be a better predictor of almost certain declines in

income over the next three years and average growth thereafter.

Balance Sheet

Columbia’s balance sheet of forecasted financials was derived by analysis

of core company growth rates. The asset growth was attained by looking at

historical growth of the company’s total assets. After that growth rate was

determined, we looked at the historical percentage of current assets to total

assets and attained the current assets from that ratio. The accounts receivable

and inventories forecasts were attained in a similar fashion.

In order to arrive at an adequate growth rate for total assets, we had to

analyze Columbia’s history of asset turnover and forecast sales. Over the past

five years Columbia has had an average asset turnover of 1.3. Our forecasts

estimate sales to be growing at an average rate of 10.15% over the next three

years and 9.5% thereafter. With respect to this growth, and Columbia’s average

asset turnover ratio of 1.3, we believe an average asset growth of 10% will

appropriately facilitate an average asset turnover of 1.25 over the next ten years.

Columbia has significantly eliminated their debt over the past three years

and now they have no long term debt and their notes payable only consist of

1.8% of their liabilities. It was because of this that we decided to forecast the

future notes payable for Columbia at 1% of total liabilities.

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We then decided to use the total assets numbers attained before for the

total liabilities and equity. The total equity was then determined using the

growth rate of the previous three years. This growth rate was used to forecast

the entire ten year period. To determine total liabilities, the difference was taken

between total liabilities and equity and total equity. As mentioned earlier,

Columbia has considerably cut their liabilities by eliminating all of their long term

debt. We took this into account when forecasting the total liabilities by not

putting as much weight in the growth change in liabilities of the year they

eliminated all of their long term debt. We did this because their liabilities had

been increasing until they paid off their long term debt, and in that year the

growth was significantly negative. We do not believe that future liability growth

will be negative.

Statement of Cash Flows

In order to forecast the statement of cash flows we first looked at the

future growth of operating income that we forecasted for Columbia’s income

statement. The company saw a steady increase in operating income from 2001

until 2005 which was due to the large increase in cash flow from operations from

2001 to 2002 by increasing well over 100%. By taking this into account, we used

a more conservative assumption in order to forecast at 22%. We were able to

forecast future operating cash flows by using the net income forecast from the

income statement and our CFFO estimation. The average percentage of

depreciation and amortization as related to the CFFO on the common size

statement of cash flows was used to determine its increasing trend for the next

ten years.

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Cost of Capital Estimation

Cost of Capital is a key component in effectively valuing a firm. The cost of

capital involves the weighted average cost of capital (WACC), the cost of equity

(ke), and the cost of debt (kd). We determined the cost of debt to be 6.68%,

being 4.34% after tax. Since Columbia had paid of its long term debt at the end

of year 2005, the only current debt they had was in Other Liabilities at $295 (in

thousands0. We used the interest rate using stlouisfed.com for monthly senior

promissory notes. We also determined the value weighted rate for Columbia to

be .96 %. Using the liabilities, we took the percentage values of each liability

item over total liabilities, multiplying each of those by their respective interest

rates. For notes payables, their stated bank interest rate was 8.25% for

borrowing, minus 1.95% to 2.05% per annum, as stated in the balance sheets

notes of their 2006 10-K. 8.25% was also used the companies accounts payable,

with that being the bank borrowing rate. As stated earlier, their long term debt

interest rate was 6.68%, for both current long term debt and long term and

other liabilities. Each value is added together and averaged giving the value

weighted rate of .96%.

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Determining Cost of Debt (Kd):

Short-Term Liabilities Principal

% of Total Liabilites

Interest Rate

Value Weighted

Rate Liabilities Current Liabilities: Notes Payable 3,624 1.84% 6.20% 0.114%Accounts Payable 88,107 44.80% 8.25% 3.696%Accrued liabilities 64,379 32.73% Deferred income taxes 948 Income taxes payable 31,523 16.03% Current portion of LT debt 159 0.08% 6.68% 0.0054%

Total Current Liabilites 188,740 95.97% LT debt and other liabilites 136 0.07% 6.68% 0.0046%Deffered income taxes 7,794

Total Liabilities 196,670 Weighted Average 0.0096

Cost of Equity

Our cost of equity was calculated through a multiple step process. We ran a

regression analysis using our dividends, S&P 500, and the St. Louis Federal

Reserve’s Treasury Bill interest rates information. Our risk-free rate was stated in

the 10-K as being 4.80%, and market risk premium of .05. With this information,

numerous regression series were run, giving us the most accurate cost of equity.

We were also provided with various risk coefficients, as well as possible betas to

compare against the published beta of 1.84%.

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Regression Analysis

3-Month Beta R2 72 months 1.4895 0.185560 months 1.1373 0.216148 months 1.2235 0.135236 months 1.8335 0.240224 months 1.9172 0.2314

6-Month

Beta R2 72 months 1.4902 0.185660 months 1.1385 0.216648 months 1.2234 0.135536 months 1.8335 0.240724 months 1.9173 0.2318

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2-Year Beta R2 72 months 1.4866 0.185360 months 1.1389 0.217648 months 1.2316 0.137936 months 1.8339 0.242524 months 1.9142 0.2316

5-Year

Beta R2 72 months 1.483 0.184860 months 1.1373 0.217448 months 1.242 0.139936 months 1.8351 0.243824 months 1.9153 0.2321

10-Year Beta R2 72 months 1.4819 0.184560 months 1.1359 0.216948 months 1.2483 0.141136 months 1.8366 0.244724 months 1.9172 0.2324

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From these regression models we determined our beta to be 1.83%, which we

feel, when compared to the published beta of 1.84%, is fairly valued. Five

regression series were produced: 3-month, 6-month, 2-year, 5-year, and 10-

year. The betas provided from each regression model are not stable, while the

R2 is more regular on an overall effect. Our cost of equity was calculated to be

13.95%. Our beta of 1.83% comes from the 36-month regression was chosen

because the R2 was the highest illustrative power given. As you can see from the

yield curve, our R2 is highest at .2447 in the 10-year regression. It could be

concluded that investing could be done a long-term commitment, instead of, for

example, using the 3-month R2 where one would want to invest for three months

and then pull out.

Yield Curve

0.2370.2380.2390.24

0.2410.2420.2430.2440.2450.246

'3 Month 6 Month 2 Year 5 Year 10 year

Cost of Equity Formula

Ke= risk free rate + beta (market risk premium)

Ke= 4.80% + 1.83% (.05)

Ke=13.95%

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WACC (Weighted Average Cost of Capital) Estimation

WACC= Value of Equity (Ke) + Value of Debt (Kd)

Value of Firm Value of Firm

WACC= 578,457 (.1395) + 196,670 (.668)

775,127 775,127

WACC=12.14%

Columbia’s cost of debt, 6.68%, which is the overall rate of long-term liabilities

and debt. The value of Columbia’s debt is $196,670, is the total current liabilities

added to long term liabilities. The cost of equity, 13.95%, is what we estimated

from performing the regression analysis. Based on Columbia’s market price and

common number of shares outstanding of $578,457, their value of equity was

calculated. By using all these figures, Columbia’s WACC is computed. A tax rate

of 33.6% was used, as this is the actual provision for income taxes rate used

(10-K, pg.57). By means of these stated values, Columbia’s estimated WACC is

estimated to be 12.14% and 11.17% after tax.

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Analysis of Valuation

In analyzing the firm’s valuation, we will be able to estimate whether the firm is

undervalued, overvalued or fairly valued. We have used many methods to value

the price of stock, the first of which is the Method of Comparables. The Method

of Comparables uses recent data for the firm, as well as that of its competitors

and overall industry. Although easy to apply, this method uses averages, so our

calculations become less reliable when compared to other methods that will be

used.

Since the Method of Comparables is less accurate, we will also use the more

popular intrinsic valuation models as well. These models include: Discounted

Dividends, Discounted Free-Cash Flows, the Residual Income Method, the

Residual Income Perpetuity (aka Long Run Residual Income), and the Abnormal

Earnings Approach. All of these will use the WACC and the Ke that we calculated

earlier.

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Method of Comparables

When analyzing a firm it is important to understand where they have been

and where they are going relative to their peers. Comparing each competitor

individually and developing an industry average for different ratios can help to

form an estimated price per share for Columbia Sportswear. The method of

comparables derives a price per share for a company based on the average of its

competitors in the industry.

Summary of Comparables

Method Price Forward P/E $59.98 Trailing P/E $60.91 Price to Book $70.82 P.E.G. $43.70 Price/EBITDA $43.45 Price/FCF $46.15 Enterprise Value/EBITDA $52.87 Forward P/E Ratio

PPS EPS P/E Industry Avg

COLM Share Price

COLM 68.02 3.32 19.12 18.07 $59.98 TBL 26.68 1.67 15.98 VFC 93.87 4.79 19.60 WWW 28.31 1.52 18.63 ZQK 14.33 0.54 26.54

The forward price to earnings ratio is computed by taking a company’s

current share price and dividing it by their earnings per share. A relatively low

P/E ratio could mean that a firm has room for future growth as a high ratio could

mean that the company may not experience significant future growth. When we

computed the average of Columbia’s competitors we excluded Quicksilver (ZQK)

from the industry average. We considered Quicksilver to be an outlier relative to

the other competitors because their low EPS caused their P/E ratio to be

significantly higher than their competitors. By multiplying Columbia’s earnings

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per share by the industry average a share price of $59.98 is observed. This price

is significantly lower than the current market price of Columbia as of June 20,

2007. The 12% difference between market price ($68.02) and price relative to

the industry ($59.98) shows that Columbia is overvalued using this method of

comparables.

Trailing P/E Ratio

PPS EPS P/E Industry Avg

COLM Share Price

COLM $63.57 3.39 18.75 17.97 $60.91 TBL $35.05 2.21 15.89 VFC $54.80 2.83 19.37 WWW $22.06 1.18 18.64 ZQK $14.50 0.57 25.66

The trailing price to earnings ratio is computed the same way as the

forward P/E ratio with one exception. The trailing P/E is computed using an EPS

value and share price from one year ago. The industry average is used to

determine the share price for Columbia by multiplying the industry average

trailing P/E (17.97) by Columbia’s trailing EPS. As with the forward P/E method,

we excluded Quicksilver (ZQR) from the industry average. This method of

comparables shows that Columbia is slightly overvalued.

Price to Book Ratio

PPS BPS B/P Industry Avg

COLM Share Price

COLM $68.02 22.90 2.97 3.09 $70.82 TBL $26.68 9.05 2.95 VFC $93.87 29.42 3.21 WWW $28.31 9.06 3.12 ZQK $14.33 7.56 1.9

The price to book (B/P) ratio is computed by dividing the firm’s current

share price by the value of equity on the firm’s books. A low B/P ratio could

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signify that a company is undervalued or that there is something fundamentally

wrong with the firm (www.investopedia.com). Once again, we excluded

Quicksilver (ZQK) from the industry average because their P/B ratio is

significantly lower than the others being compared. We then multiplied the

industry average B/P ratio by the current share price of Columbia to get a price

of $70.82 which suggests that Columbia is slightly undervalued.

P.E.G. Ratio PPS EPS PEG Industry

Avg COLM Share Price

COLM $68.02 3.32 2.41 1.55 $43.70 TBL $26.68 1.67 1.71 VFC $93.87 4.79 1.76 WWW $28.31 1.52 1.22 ZQK $14.33 0.54 1.52

The P.E.G. ratio helps to provide an understanding of a firm’s future

growth relative to the price of a firm’s stock and their earnings per share. By

comparing a firm’s P.E.G. ratio with competitors and the overall average of direct

competitors, a method of valuation can be observed. According to the industry

average P.E.G ratio, shares of Columbia Sportswear are trading for a higher

value than they are worth when compared with their direct competitors. A

higher P.E.G. ratio is understood to mean that the company is overvalued or that

the firm is ‘expensive’ (www.investopedia.com). The P.E.G. ratio puts a value on

expected earnings growth and can therefore be misleading due to errors in

forecasting.

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Price to EBITDA PPS EBITDAPS P/EBITDA Industry

Avg COLM Share Price

COLM $68.02 4.85 14.02 8.96 $43.45 TBL $26.68 3.28 8.13 VFC $93.87 9.07 10.35 WWW $28.31 2.83 10.00 ZQK $14.33 1.95 7.35

This method computes a firm’s price relative to its earnings before

interest, taxes, depreciation, and amortization (EBITDA). The market value of a

firm’s equity, debt, and securities is divided by their earnings before interest,

taxes, depreciation and amortization. This multiple is helpful in industries with

high costs of capital for infrastructure and long gestation periods (Stern School of

Business). Columbia has a relatively higher multiple than its peers, which is why

Columbia’s share price is considered significantly overvalued in comparison with

their direct competitors.

Price to Free Cash Flows

PPS FCF P/FCF Industry Avg

COLM Share Price

COLM $68.02 2.09 32.55 22.08 $46.15 TBL $26.68 1.22 21.87 VFC $93.87 2.01 46.70 WWW $28.31 1.27 22.29 ZQK $14.33 -1.41 -10.16

A firm can show positive net earnings and still be unable to pay their

debts (www.msn.com), this is why it is important to measure the cash flows

from operations relative to their share price and the multiples of their direct

competitors. It is generally accepted that a lower P/FCF multiple signifies that a

firm is potentially undervalued. This is certainly not the case with Columbia, the

industry average P/FCF multiple is 22.08 while Columbia’s is 32.55. In

comparison with the industry, Columbia’s share price is significantly overvalued.

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Enterprise Value to EBITDA PPS EV EBITDA EV/EBITDA Industry

Avg COLM Share Price

COLM $68.02 $2,446,620,000 $179,773,000 13.61 10.54 $52.87 TBL $26.68 $1,470,000,000 $203,550,000 7.22 VFC $93.87 $11,300,000,000 $1,010,000,000 11.19 WWW $28.31 $1,500,000,000 $154,390,000 9.72 ZQK $14.33 $2,600,000,000 $242,880,000 10.70

This multiple looks at a firm as a potential acquirer would

(www.investopedia.com). A low ratio is understood to signify that a firm might

be undervalued. This multiple ignores the effects of taxes, interest, and

depreciation by not including them in the firm’s earnings (EBITDA). A firm’s

enterprise value is computed by adding a firm’s market cap with debt and

subtracting total cash and cash equivalents. When comparing Columbia’s

enterprise value/EBITDA relative to the industry average, we observed that

Columbia’s share price would be considered significantly overvalued at $68.02

compared to $52.87 when computed with the industry average.

Intrinsic Valuation Models

Discounted Dividends Approach The first model that will be discussed in our intrinsic valuation methods

will be the discounted dividends approach. In this model we will figure in

dividends paid, and also the projected dividends to be paid. This model was

difficult to predict because Columbia has just recently started paying dividends.

So far they have only paid out a dividend of 14 cents per share three times,

starting November of 06. We concluded that Columbia will pay out a dividends

per share of .56 every year and kept that rate constant due to the lake of

historical forecasting information. We have 10 years of dividends forecasted out

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and used the discount rate the discount them back and find a proper valuation

according to this valuation model. We then used a perpetuity figure at the end of

the model, because we assume that dividends will paid out indefinitely, also

discounted back to present year dollars. We have created different scenarios of

different possibilities of cost and equity and growth rate. We believe that the

middle price of $11.11 is the closest to our valuation, but with a small

adjustment of cost of equity or growth rate percentage, a price can change very

easily. You can see our sensitivity analysis below in which the prices in read

indicated overvalued and the green indicates undervalued.

0 0.02 0.04 0.05 0.060.05 45.04 72.27 208.4 N/A -199.99

0.075 25.8 33.81 50.98 69.86 113.920.125 11.87 13.54 15.16 16 18.98

0.14 9.94 11.11 12.76 13.86 15.230.225 4.47 4.69 4.96 5.12 5.30.275 3.2 3.3 3.42 3.49 3.56

Over valued (<90%) 61.21 Under Valued (>110%) 68.02

Free Cash Flows Valuation

To start the model of FCF we needed the FCF of Columbia, the weighted

average cost of capital, and the growth rate of the perpetuity. The FCF was

found by taking the forecasted amounts we did for ten years of Cash Flow from

Operations, and subtracting from it the Cash Flow from Investing. We then used

our WACC of 0.1213 as the discount factor and found our present value factor to

multiply times the ten years of FCF, bringing each one back to January 1, 2007.

The sum of these, $1,758,589,974, was our Present Value (PV) of annual cash

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flows. The perpetuity was then found by forecasting the year 2016 FCF, which

was then divided by the WACC minus the growth rate. That value was then

discounted back to PV by multiplying it by the present value factor in year ten.

We then added the PV of annual cash flows and the PV of the perpetuity, and

subtracted the book value of liabilities to give us the value of Columbia’s equity.

The value of equity is then divided by the number of shares to give us our

intrinsic share price.

0.06 0.065 0.07 0.075 0.08 0.08 $197.52 $252.08 $361.19 $688.52 N/A

0.1 $94.77 $104.50 $117.47 $135.64 $162.88 0.1213 $56.83 $60.09 $63.99 $68.72 $74.60

0.14 $39.08 $40.66 $42.48 $44.57 $47.02 0.16 $26.74 $27.58 $28.52 $29.57 $30.74

Overvalued $61.22

Fairly Valued within 10%

Undervalued $74.82

When looking at the sensitivity analysis, it seems that Columbia is falling

into all sections of overvalued, undervalued, and fairly valued. But the reason

there are such high numbers comes from the perpetuity continually growing. So

those intrinsic valuations that make Columbia look undervalued are irrelevant.

The prices that are fairly valued shows Columbia would need to have a 12.13%

WACC along with 7-8% growth. This analysis shows Columbia to be fairly

valued. There are fairly equal prices of under and overvalued so the overall

conclusion is that Columbia is fairly valued.

Residual Income

Residual income provides the most accurate viewpoint of a firms intrinsic

share price. The RI model differs from the free cash flows and dividend discount

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because RI uses the Book value of equity as the base value. The use of BVE

proves why the Residual Income model is the most accurate, because it links

together both accounting and financial theory. In this RI model you must analyze

the series of residual incomes for the coming ten years and then discount these

items back to the present day. After finding the book value of the firm by taking

an average, we found the ending book value of equity. This was acquired by

combining book value of equity and earnings per share and subtracting dividends

per share. We found normal income by multiplying our estimated cost of equity

by the beginning book value of equity. This produced the Normal Income.

Earnings per share minus Normal Income gives you your Residual Income.

-0.09 -0.04 0.01 0.06 0.11 0.14 $16.54 $15.93 $14.83 $12.36 $1.50 0.16 $13.67 $13.03 $11.97 $9.85 $3.49 0.18 $11.46 $1.86 $9.90 $8.15 $3.90 0.20 $9.70 $9.16 $8.33 $6.90 $3.89 0.22 $8.29 $7.80 $7.09 $5.93 $3.72

Overvalued $61.22

Fairly Valued within +/- 10%

Undervalued $74.82

From this point, a sensitivity analysis was constructed in order to

determine various growth rates and costs of equity needed to try and yield share

prices comparable to Columbia’s share price. As you can see, we used negative

growth rates in the perpetuity for our sensitivity analysis. This sensitivity

analysis shows Columbia sportswear to be severely overvalued. At our current

estimations of Ke and perpetuity growth rates, the model has the equity valued

at $12.36. An increase in estimated cost of capital only sees a decrease in the

value of the equity.

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A similar model shows the same picture. The value derived from long run

Return on Equity residual income model points out the stark differences between

the current market price and the company’s intrinsic value. At our current

estimations of Ke and ROE, the model gives the value of $10.22.

Long-Run Residual ROE

Another model that can be used to intrinsically value a company is the

Long-Run Return on Equity model. T find this you take the book value per share

and multiply it times 1 plus your ROE minus your cost of equity divided by your

cost of equity minus your growth rate. The value derived for growth is derived

directly from the changes in book value of equity on a year to year basis. Using

our average ROE cost of equity, and growth rate we derived at an intrinsic share

value of $22.90. This sensitivity analysis only further proves that Columbia

Sportswear is overvalued.

ROE 0.09 0.10 0.11 0.12 0.13 0.14 9.12 12.17 13.69 18.25 21.29 0.16 7.31 9.74 12.18 14.62 17.05

Ke 0.18 6.13 8.18 10.22 12.27 14.31 0.2 5.29 7.06 8.82 10.59 12.35 0.22 4.66 6.22 7.77 9.33 10.88 Overvalued 61.22

Fairlyvalued within +/- 10%

Undervalued 74.82

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Growth 0.06 0.065 0.07 0.075 0.08 0.09 9.12 8.11 6.96 5.62 4.06 0.1 12.17 11.36 10.44 9.37 8.13

ROE 0.11 15.21 14.61 13.92 13.12 12.19 0.12 18.25 17.85 17.40 16.87 16.26 0.13 21.29 21.10 20.88 20.62 20.32 Overvalued 61.22

Fairlyvalued within +/- 10%

Undervalued 74.82

Abnormal Earnings Growth

In order to derive abnormal earnings growth, the “normal” earnings,

which are the earnings from the previous year multiplied by the cost of equity,

must be subtracted from the cumulative dividend income. The cumulative

dividend income is the current year’s dividends paid multiplied by the cost of

capital and added to earnings. The result is the annual abnormal earnings. If

the abnormal earnings is positive then the firm beat their “benchmark” or

“normal” earnings.

Growth 0.06 0.065 0.07 0.075 0.08 0.1395 13.69 12.98 12.18 11.25 10.16 0.16 10.96 10.26 9.47 8.60 7.61

Ke 0.18 9.20 8.53 7.81 7.01 6.13 0.2 7.94 7.32 6.65 5.93 5.15 0.22 7.00 6.42 5.80 5.15 4.44 Overvalued 61.22

Fairlyvalued within +/- 10%

Undervalued 74.82

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To find the intrinsic value of Columbia Sportswear, we took the total

present value of their AEG over ten years, added it to the core earnings for the

forecasted year, and then added the present value of perpetuity earnings to get

the total value of the core perpetuity earnings. The core perpetuity earnings was

then divided by the cost of equity to arrive at the firm’s intrinsic share price. To

account for the five months already passed at the time of the valuation, the

intrinsic value was brought forward five months.

We arrived at the present value of perpetuity earnings by taking the AEG

from the tenth year and dividing it by the cost of equity minus a negative ten

percent growth rate. We used a negative growth rate in order to bring the

perpetuity closer to zero over time because the growth will not be positive

indefinitely and forecasted growth trends indicate future growth to be negative.

We then took the present value of this number by multiplying it by the present

value factor.

After performing the above calculations we arrived at an intrinsic share

price of $16.12 at June 1st, 2007. This value is considerably lower than the

current share price of $68.02 and signifies that Columbia Sportswear is

overvalued. According to our sensitivity analysis below, Columbia must reduce

their cost of equity 12% to 2% in order to be fairly valued at a negative five

percent growth rate.

-0.05 -0.15 -0.25 -0.35 -0.45 -0.550.02 $71.91 $104.16 $112.52 $116.36 $118.57 $120.000.04 $42.05 $53.27 $56.75 $58.45 $59.45 $60.110.07 $27.07 $31.22 $32.78 $33.60 $34.10 $34.44

0.1 $20.23 $22.28 $23.15 $23.64 $23.95 $24.170.1395 $15.27 $16.27 $16.76 $17.05 $17.24 $17.37

Undervalued >61.22 Overvalued <$74.82 Fairly-Valued +/- 10%

78

Credit Risk Analysis

The ability to predict bankruptcy can also be measured. By using the Altman Z-

Score for predicting bankruptcy, a firm’s financial well-being can be measured, as

well as determining the probability of a firm going bankrupt within the next two

years. The Z-Score model is often accurate in determining if a company will go

bankrupt. It uses five financial ratios the help predict the likelihood of entering

bankruptcy. The formula is as follows:

Z= 1.2 (net working capital/total assets)

+ 1.4 (retained earnings/total assets)

+ 3.3 (EBIT/total assets)

+ 0.6 (market value of equity/book value of total liabilities

+ 1.0 (sales/total assets)

If the score is 3 of higher the probability of entering bankruptcy is not likely, and

a score of 1.8 or less is more likely. A score between 1.8 and 3 is considered a

gray area. Probabilities of bankruptcy within the above ranges are 95% for one

year, and 70% within two years. So, obviously a higher score is more desirable.

(valuebasedmanagement.com)

Our Z-scores were determined to be:

2002 2003 2004 2005 20066.126302 6.251399 6.279068 5.517328 6.081777

Over the past five years, the Z-Score has stayed fairly constant with their scores,

with little increases or decreases. Our Z-Scores are well above 3, so the odds of

79

Columbia having to file for bankruptcy is minimal. This also means that Columbia

will be allowed better interest rates for future borrowings.

Analyst Recommendation The models we used earlier in this draft are the methods we used to value

Columbia Sportswear. We performed all the models to the best of our ability, in

the area that the valuation was possible with the available information. After

completing the tedious task of running the valuation models, it is our belief that

we have a much better understanding of Columbia and the sportswear industry

as a whole. By using our theoretical valuation models, and using our own

estimations for the next ten years, we were able to see the overvalued price per

share of Columbia. All of our models with the exclusion of the Free Cash Flows

portray the company as being overvalued.

In order to determine the average stock price we agreed that our two

most accurate models were residual income and the abnormal earnings growth

model. From the two models we strongly took into consideration we calculated

on average, the value of the firm to be $16.81, versus the observed share price

of $68.02. This is a very clear indication that Columbia sportswear is overvalued

and that shareholders should sell the stock immediately. The models we used

produced values that were within the most logical pricing range, making the

decision of which to use very straight forward.

It is important to note that that the models we used we were done with a

great bit of care and attention, but we are always at risk for human error within

our calculations. Estimation is a very pivotal part of the valuation process, so it

can create an even great margin of error. However, the time and effort we have

put into our analysis leads us to believe that we have accurately valued Columbia

Sportswear Company, and we stand by our results.

Appendix

Consolidated Income Statement (In Thousands) Consolidated Income Statement (In Thousands) ACTUAL FORCASTED

2001 2002 2003 2004 2005 2006 Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Net sales $779,581 $816,319 $951,786 $1,095,307 $1,155,791 $1,287,672 10.15% $1,418,371 $1,562,335 $1,720,912 $1,884,399 $2,063,417 $2,259,442 $2,474,089 $2,709,127 $2,966,494 $3,248,311Cost of sales $422,430 $437,782 $511,101 $597,373 $652,036 $746,617 58.00% $822,655 $906,154 $998,129 $1,092,951 $1,196,782 $1,310,476 $1,434,971 $1,571,294 $1,720,567 $1,884,020Gross profit $357,151 $378,537 $440,685 $497,934 $503,755 $541,055 42.00% $595,716 $656,181 $722,783 $791,448 $866,635 $948,965 $1,039,117 $1,137,833 $1,245,927 $1,364,291Selling, general, and administrative $208,970 $216,085 $252,307 $290,538 $322,197 $366,768 28.00% $397,144 $437,454 $481,855 $527,632 $577,757 $632,644 $692,745 $758,556 $830,618 $909,527Net licensing income ($533) ($1,223) ($1,811) ($4,032) ($4,408) ($5,486)Income from operations $148,181 $163,675 $190,189 $211,428 $185,966 $179,773 14.50% $205,664 $226,539 $249,532 $273,238 $299,195 $327,619 $358,743 $392,823 $430,142 $471,005Interest income ($1,712) ($2,790) ($2,107) ($4,052) ($6,381) ($6,773)Interest expense $4,280 $2,436 $1,627 $559 $1,492 $1,211Income before income tax $145,613 $164,029 $190,669 $214,921 $190,855 $185,335 0.16% $226,939 $249,974 $275,346 $301,504 $330,147 $361,511 $395,854 $433,460 $474,639 $519,730Income tax expense (Note 10) $56,789 $61,511 $70,548 $76,297 $60,119 $62,317 5.25% $74,464 $82,023 $90,348 $98,931 $108,329 $118,621 $129,890 $142,229 $155,741 $170,536Net income $88,824 $102,518 $120,121 $138,624 $130,736 $123,018 8.50% $120,562 $132,799 $146,278 $160,174 $175,390 $192,053 $210,298 $230,276 $252,152 $276,106

ACTUAL FORCASTED 2001 2002 2003 2004 2005 2006 Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sales Growth Percent 4.71% 16.59% 15.08% 5.52% 11.41% 10.15% 10.15% 10.15% 10.15% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50% 9.50%Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of sales 54.19% 53.63% 53.70% 54.54% 56.41% 57.98% 58% 58% 58% 58% 58% 58% 58% 58% 58% 58% 58%Gross profit 45.81% 46.37% 46.30% 45.46% 43.59% 42.02% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00%Selling, general, and administrative 26.81% 26.47% 26.51% 26.53% 27.88% 28.48% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00%Net licensing income -0.07% -0.15% -0.19% -0.37% -0.38% -0.43%Income from operations 19.01% 20.05% 19.98% 19.30% 16.09% 13.96% 14.50% 14.50% 14.50% 14.50% 14.50% 14.50% 14.50% 14.50% 14.50% 14.50% 14.50%Interest income -0.22% -0.34% -0.22% -0.37% -0.55% -0.53%Interest expense 0.55% 0.30% 0.17% 0.05% 0.13% 0.09% 0.00%Income before income tax 18.68% 20.09% 20.03% 19.62% 16.51% 14.39% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16% 0.16%Income tax expense (Note 10) 7.28% 7.54% 7.41% 6.97% 5.20% 4.84% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25% 5.25%Net income 11.39% 12.56% 12.62% 12.66% 11.31% 9.55% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%

Consolidated Balance Sheet (In Thousands)ACTUAL FORCASTED

Current Assets: 2001 2002 2003 2004 2005 2006 Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Cash and cash equivalents $79,082 $194,670 $264,585 $130,023 $101,091 $64,880 9.25% 114,706 $126,177 $138,794 $152,674 $167,941 $184,735 $203,209 $223,530 $245,883 $270,471Accounts receivable, net (Note 2) $155,252 $154,099 $206,024 $267,653 $284,029 $285,942 28.00% 316,431 $348,074 $382,881 $421,170 $463,286 $509,615 $560,577 $616,634 $678,298 $746,127Inventories, net (Note 4) $114,889 $94,862 $126,808 $165,426 $185,870 $212,323 18.00% 203,420 $223,762 $246,138 $270,752 $297,827 $327,610 $360,371 $396,408 $436,049 $479,653Deferred tax asset (Note 10) $13,691 $108,400 $17,442 $22,190 $21,674 $26,740 2.35% 26,558 $29,213 $32,135 $35,348 $38,883 $42,771 $47,048 $51,753 $56,929 $62,621Prepaid expenses and other current assets $3,847 $6,006 $6,028 $10,536 $11,387 $12,713 1.20% 13,561 $14,917 $16,409 $18,050 $19,855 $21,841 $24,025 $26,427 $29,070 $31,977Total current assets $366,761 $460,477 $620,887 $756,033 $763,126 $757,768 75.00% 847,583 $932,341 $1,025,575 $1,128,133 $1,240,946 $1,365,040 $1,501,544 $1,651,699 $1,816,869 $1,998,556Property, plant, and equipment, net (Note 5) $100,672 $124,515 $126,247 $155,013 $165,752 $199,426 18.00% 203,420 $223,762 $246,138 $270,752 $297,827 $327,610 $360,371 $396,408 $436,049 $479,653Intangibles and other assets (Note 2) $7,534 $7,825 $24,475 $26,241 $26,103 $52,681 3.75% 42,379 $46,617 $51,279 $56,407 $62,047 $68,252 $75,077 $82,585 $90,843 $99,928Goodwill (Note 2) 0 $0 $12,157 $12,157 $12,659 $17,498 1.50% 16,952 $18,647 $20,512 $22,563 $24,819 $27,301 $30,031 $33,034 $36,337 $39,971Total assets $474,967 $592,817 $783,766 $949,444 $967,640 $1,027,373 10.00% 1,130,110 $1,243,121 $1,367,433 $1,504,177 $1,654,594 $1,820,054 $2,002,059 $2,202,265 $2,422,492 $2,664,741 LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Notes payable (Note 6) $24,905 $9,835 $0 $0 $39,727 $3,624 1.00% $2,163 $2,380 $2,649 $2,948 $3,282 $3,653 $4,066 $4,526 $5,038 $5,608Accounts payable $32,068 $49,370 $62,432 $78,309 $82,838 $88,107 42.90% $92,809 $102,089 $113,636 $126,488 $140,794 $156,718 $174,442 $194,172 $216,132 $240,577Accrued liabilities (Note 7) $34,054 $35,146 $43,789 $49,789 $54,932 $64,379 29.31% $63,408 $69,749 $77,638 $86,419 $96,193 $107,072 $119,182 $132,661 $147,665 $164,366Deferred Income Taxes $1,763 $1,416 $948Income taxes payable $0 $8,069 $11,819 $23,110 $31,523Current portion of long-term debt (Note 8) $4,775 $4,498 $4,596 $5,216 $7,152 $159Total current liabilities $95,802 $98,849 $118,886 $146,896 $209,175 $188,740 91.00% $196,867 $216,553 $241,046 $268,308 $298,653 $332,431 $370,029 $411,879 $458,463 $510,315Long-term debt (Note 8) $25,047 $20,636 $16,335 $12,636 $7,414 $136Deferred tax liability (Note 10) $729 $613 $7,716 $9,662 $8,261 $7,794Total liabilities $121,578 $120,098 $142,937 $169,194 $224,850 $196,670 10.00% $216,337 $237,971 $264,885 $294,844 $328,191 $365,309 $406,625 $452,615 $503,805 $560,786Commitments and contingencies (Note 12)Shareholders Equity:Preferred stock; 10,000 shares authorized; none $0 $0 $0 $0 $0issued and outstandingCommon stock; 125,000 shares authorized; 40,253 and $149,473 $159,996 $182,188 $164,317 $13,104 $24,37039,737 issued and outstanding (Note 9)Retained earnings $212,725 $315,243 $435,364 $573,988 $704,724 $771,939 87.12% $872,291 $1,005,089 $1,107,106 $1,217,816 $1,376,132 $1,555,030 $1,757,184 $1,985,618 $2,243,748 $2,535,435Accumulated other comprehensive income (loss) (Note ($6,763) ($1,156) $23,277 $41,945 $24,962 $34,39415)Unearned portion of restricted stock issued for ($2,046) ($1,364) $0future services (Note 14)Total shareholders equity $353,389 $472,719 $640,829 $780,250 $742,790 $830,703 19.00% $988,537 $1,176,359 $1,399,867 $1,665,841 $1,982,351 $2,358,998 $2,807,207 $3,340,577 $3,975,286 $4,730,591Total liabilities and shareholders equity

Consolidated Balance Sheet (In Thousands) Consolidated Balance Sheet (In Thousands) ACTUAL FORCASTED Current Assets: 2001 2002 2003 2004 2005 2006 Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Cash and cash equivalents 16.65% 32.84% 33.76% 13.69% 10.45% 6.32% 10.15% 9.25% 9.25% 9.25% 9.25% 9.25% 9.25% 9.25% 9.25% 9.25% 9.25%Accounts receivable, net (Note 2) 32.69% 25.99% 26.29% 28.19% 29.35% 27.83% 27.53% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00% 28.00%Inventories, net (Note 4) 24.19% 16.00% 16.18% 17.42% 19.21% 20.67% 17.90% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%Deferred tax asset (Note 10) 2.88% 18.29% 2.23% 2.34% 2.24% 2.60% 2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.35% 2.35%Prepaid expenses and other current assets 0.81% 1.01% 0.77% 1.11% 1.18% 1.24% 1.17% 1.20% 1.20% 1.20% 1.20% 1.20% 1.20% 1.20% 1.20% 1.20% 1.20%Total current assets 77.22% 77.68% 79.22% 79.63% 78.86% 73.76% 77.87% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00%Property, plant, and equipment, net (Note 5) 21.20% 21.00% 16.11% 16.33% 17.13% 19.41% 17.24% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00% 18.00%Intangibles and other assets (Note 2) 1.59% 1.32% 3.12% 2.76% 2.70% 5.13% 3.43% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75% 3.75%Goodwill (Note 2) 0.00% 0.00% 1.55% 1.28% 1.31% 1.70% 1.46% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Total Asset Growth 24.81% 32.21% 21.14% 1.92% 6.17% 17.25% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Notes payable (Note 6) 20.48% 8.19% 0.00% 0.00% 17.67% 1.84% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%Accounts payable 26.38% 41.11% 43.68% 46.28% 36.84% 44.80% 42.90% 42.71% 41.81% 43.05% 42.62% 42.55% 42.51% 42.68% 42.59% 42.58% 42.59%Accrued liabilities (Note 7) 28.01% 29.26% 30.64% 29.43% 24.43% 32.73% 29.31% 28.97% 28.86% 29.97% 29.28% 29.27% 29.35% 29.47% 29.34% 29.36% 29.38%Deferred Income Taxes 0.00% 0.00% 0.00% 1.04% 0.63% 0.48%Income taxes payable 0.00% 0.00% 5.65% 6.99% 10.28% 16.03%Current portion of long-term debt (Note 8) 3.93% 3.75% 3.22% 3.08% 3.18% 0.08%Total current liabilities 78.80% 82.31% 83.17% 86.82% 93.03% 95.97% 91.94% 93.65% 93.85% 93.15% 93.55% 93.51% 93.40% 93.49% 93.47% 93.45% 93.47%Long-term debt (Note 8) 20.60% 17.18% 11.43% 7.47% 3.30% 0.07%Deferred tax liability (Note 10) 0.60% 0.51% 5.40% 5.71% 3.67% 3.96%Total liabilities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Total liabilities Growth -1.22% 19.02% 18.37% 32.89% -12.53% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%

Commitments and contingencies (Note 12) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Shareholders Equity: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Preferred stock; 10,000 shares authorized; none 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%issued and outstanding 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Common stock; 125,000 shares authorized; 40,253 and 42.30% 33.85% 28.43% 21.06% 1.76% 2.93%39,737 issued and outstanding (Note 9) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Retained earnings 60.20% 66.69% 67.94% 73.56% 94.88% 92.93% 88.24% 85.44% 79.09% 73.11% 69.42% 65.92% 62.60% 59.44% 56.44% 53.60%Accumulated other comprehensive income (loss) (Note -1.91% -0.24% 3.63% 5.38% 3.36% 4.14%15) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Unearned portion of restricted stock issued for -0.58% -0.29% 0.00% 0.00% 0.00% 0.00%future services (Note 14) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total shareholders equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Consolidated Statement of Cash Flows (In Thousands) Consolidated Statement of Cash Flows (In Thousands) ACTUAL FORCASTED

2001 2002 2003 2004 2005 2006 Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Net income $88,824 $102,518 $120,121 $138,624 $130,736 $123,018 65.00% $124,590 $152,000 $185,439 $226,236 $276,008 $336,730 $410,810 $501,189 $611,450 $745,969Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization $16,741 $18,685 $23,065 $18,628 $23,546 $23,547 13.00% $24,917.96 $30,399.92 $37,087.90 $45,247.23 $55,201.63 $67,345.98 $82,162.10 $100,237.76 $122,290.07 $149,193.88Amortization of Unearned Income $682 $682 $0Loss on disposal of property, plant, and equipment $140 $165 $268 $541 $284 $705Deferred income tax provision ($2,075) $2,895 ($4,002) ($2,584) ($1,385) ($5,674)Stock-based compensation $0 $0 $10,120Tax benefit from employee stock plans $7,514 $2,749 $7,455 $6,828 $4,634 $4,147Excess tax benefit from employee stock plans $0 $0 ($2,148)Other $0 $0 $302Net cash provided by operating activities $68,276 $168,551 $121,099 $93,698 $135,217 $157,112 22.00% $191,677 $233,846 $285,292 $348,056 $424,628 $518,046 $632,016 $771,060 $940,693 $1,147,645Cash provided by (used in) investing activities:Purchases of short-term investments ($421,300) ($672,415) ($679,195) ($223,820) ($346,615)Sales of short-term investments $341,600 $640,465 $679,440 $224,950 $350,520Capital expenditures ($39,727) ($38,023) ($17,118) ($44,490) ($36,542) ($50,909)Acquisitions, net of cash acquired $0 ($1,631) ($35,377)Proceeds from sale of licenses $0 $0 $1,700Proceeds from sale of property, plant, and $64 $52 $103 $40 $68 $106equipmentNet cash used in investing activities ($39,663) ($117,671) ($78,830) ($43,635) ($37,526) ($81,134)

Consolidated Statement of Cash Flows (In Thousands)

ACTUAL FORCASTED Consolidated Statement of Cash Flows (In Thousands) 2001 2002 2003 2004 2005 2006 Assume 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Net income 130.10% 60.82% 99.19% 147.95% 96.69% 78.30% 65.00% 65.00% 65.00% 65.00% 65.00% 65.00% 65.00% 65.00% 65.00% 65.00% 65.00%Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization 24.52% 11.09% 19.05% 19.88% 17.41% 14.99% 13.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%Amortization of Unearned Income 1.00% 0.40% 0.00% 0.00% 0.00% 0.00%Loss on disposal of property, plant, and equipment 0.21% 0.10% 0.22% 0.58% 0.21% 0.45%Deferred income tax provision -3.04% 1.72% -3.30% -2.76% -1.02% -3.61%Stock-based compensation 0.00% 0.00% 0.00% 0.00% 0.00% 6.44%Tax benefit from employee stock plans 11.01% 1.63% 6.16% 7.29% 3.43% 2.64%Excess tax benefit from employee stock plans 0.00% 0.00% 0.00% 0.00% 0.00% -1.37%Other 0.00% 0.00% 0.00% 0.00% 0.00% 0.19%Net cash provided by operating activities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cash provided by (used in) investing activities:Purchases of short-term investments 0.00% -249.95% -555.26% -724.88% -165.53% -220.62%Sales of short-term investments 0.00% 202.67% 528.88% 725.14% 166.36% 223.10%Capital expenditures -58.19% -22.56% -14.14% -47.48% -27.02% -32.40%Acquisitions, net of cash acquired 0.00% 0.00% 0.00% 0.00% -1.21% -22.52%Proceeds from sale of licenses 0.00% 0.00% 0.00% 0.00% 0.00% 1.08%Proceeds from sale of property, plant, and equipment 0.09% 0.03% 0.09% 0.04% 0.05% 0.07%Net cash used in investing activities -58.09% -69.81% -65.10% -46.57% -27.75% -51.64%Change in CFFO 1.47 -0.28 -0.23 0.44 0.16CFFO/SALES 0.09 0.21 0.13 0.09 0.12 0.12CCFO/Gross profit 0.19 0.45 0.27 0.19 0.27 0.29CFFO/operating income 0.46 1.03 0.64 0.44 0.73 0.87CFFO/net income 0.77 1.64 1.01 0.68 1.03 1.28

0.877577885

Discounted Dividends Valuation WACC(BT) 0.1213 Kd 0.068 Ke 0.1395

0 1 2 3 4 5 6 7 8 9 102007 2008 2009 2010 2011 2012 2013 2014 2015 2016

EPS (Earnings Per Share) $120,561,510 $132,798,503 $146,277,552 $160,173,919 $175,390,441 $192,052,533 $210,297,524 $230,275,789 $252,151,989 $276,106,427DPS (Dividends Per Share) $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000BPS (Book Value Equity per Share) $830,703,000 $946,238,510 $1,074,011,014 $1,215,262,565 $1,370,410,484 $1,540,774,925 $1,727,801,459 $1,933,072,982 $2,158,322,771 $2,405,448,760

PV Factor 0.8776 0.7701 0.6759 0.5931 0.5205 0.4568 0.4009 0.3518 0.3087PV Dividends Year by Year 4410706 3870738 3396874 2981022 2616079 2295813 2014755 1768104 1551649Total PV of Annual Dividends 24905741Continuing (Terminal) Value Perpetuity 3473036823.01PV of Terminal Value Perpetuity 1072211405 0 0.02 0.04 0.05 0.06Estimated Price per Share 30.24 0.05 45.04 72.27 208.4 N/A -199.99Implied share price (06/01/07) 31.93 0.075 25.8 33.81 50.98 69.86 113.92Observed Share Price 68.02 0.125 11.87 13.54 15.16 16 18.98Initial Cost of Equity (You Derive) 0.1395 0.14 9.94 11.11 12.76 13.86 15.23Perpetuity Growth Rate (g) 0.06 0.225 4.47 4.69 4.96 5.12 5.3

0.275 3.2 3.3 3.42 3.49 3.56

Over valued (<90%) 61.21Under Valued (>110%) 68.02

Free Cash Flows Valuation WACC(BT) 0.1213 Kd 0.068 Ke 0.1395

0 1 2 3 4 5 6 7 8 9 102007 2008 2009 2010 2011 2012 2013 2014 2015 2016

EPS (Earnings Per Share) $120,561,510 $132,798,503 $146,277,552 $160,173,919 $175,390,441 $192,052,533 $210,297,524 $230,275,789 $252,151,989 $276,106,427DPS (Dividends Per Share) $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000BPS (Book Value Equity per Share) $830,703,000 $946,238,510 $1,074,011,014 $1,215,262,565 $1,370,410,484 $1,540,774,925 $1,727,801,459 $1,933,072,982 $2,158,322,771 $2,405,448,760Cash From Operations $191,676,640 $233,845,501 $285,291,511 $348,055,643 $424,627,885 $518,046,020 $632,016,144 $771,059,696 $940,692,829 $1,147,645,251Cash Investments 91,032,348 102,138,294 114,599,166 128,580,265 144,267,057 161,867,638 181,615,490 203,772,579 228,632,834 256,526,040Book Value of Debt and Preferred Stock $1,027,373,000 $100,644,292 $131,707,206 $170,692,345 $219,475,379 $280,360,828 $356,178,382 $450,400,654 $567,287,116 $712,059,994 $891,119,211

Annual Free Cash Flow $100,644,292 $131,707,206 $170,692,345 $219,475,379 $280,360,828 $356,178,382 $450,400,654 $567,287,116 $712,059,994 $891,119,211PV Factor 0.891821992 0.795346466 0.70930747 0.632576001 0.564145189 0.503117087 0.448690883 0.400152397 0.356864708 0.318259795PV of Free Cash Flows 89756793.01 104752861.1 121073355.1 138834857.4 158164212.4 179199429.8 202090667.1 227001299.3 254109082 283607417.3Total PV of Annual Free Cash Flows $1,758,589,974 0.723Continuing (Terminal) Value Perpetuity 2,114,806,595 PV of Terminal Value Perpetuity $673,057,913 0.277 0.06 0.065 0.07 0.075 0.08Value of Firm $2,431,647,887 1.000 0.08 $197.52 $252.08 $361.19 $688.52 N/ABook Value of Liabilities $1,027,373,000 0.1 $94.77 $104.50 $117.47 $135.64 $162.88Estimated Market Value of Equity $1,404,274,887 0.1213 $56.86 $60.09 $63.99 $68.72 $74.60Number of Shares 36,283,012 0.14 $39.08 $40.66 $42.48 $44.57 $47.02Estimated Price per Share (end of 2006) $38.70 0.16 $26.74 $27.58 $28.52 $29.57 $30.74Estimated Price per Share (June 1st, 2007) 40.87Observed Share Price $68.02 Overvalued $61.22Initial WACC 0.1213 Fairly Valued within 10%Perpetuity Growth Rate (g) 0 Undervalued $74.82

Residual Income Valuation WACC(BT) 0.1213 Kd 0.068 Ke 0.1395

830,703,0000 1 2 3 4 5 6 7 8 9 10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Earnings $120,561,510 $132,798,503 $146,277,552 $160,173,919 $175,390,441 $192,052,533 $210,297,524 $230,275,789 $252,151,989 $276,106,427Dividends Paid $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000Book Value of Equity $830,703,000 $946,238,510 $1,074,011,014 $1,215,262,565 $1,370,410,484 $1,540,774,925 $1,727,801,459 $1,933,072,982 $2,158,322,771 $2,405,448,760

Actual EPS $120,561,510 $132,798,503 $146,277,552 $160,173,919 $175,390,441 $192,052,533 $210,297,524 $230,275,789 $252,151,989 $276,106,427"Normal" (Benchmark) Earnings $115,883,069 $132,000,272 $149,824,536 $169,529,128 $191,172,263 $214,938,102 $241,028,303 $269,663,681 $301,086,027 $335,560,102Residual Income (Annual) $4,678,442 $798,231 -$3,546,985 -$9,355,209 -$15,781,821 -$22,885,569 -$30,730,780 -$39,387,892 -$48,934,038 -$59,453,675 -$59,453,675PV Factor 0.8776 0.7701 0.6759 0.5931 0.5205 0.4568 0.4009 0.3518 0.3087 0.2709PV of Annual Residual Income $4,105,697 $614,752 -$2,397,267 -$5,548,763 -$8,214,582 -$10,453,837 -$12,318,938 -$13,856,326 -$15,107,134 -$16,107,769

Total PV of Annual Residual Income -2.1852 -12.47%Continuing (Terminal) Value Perpetuity -426191215.29PV of Terminal Value Perpetuity -3.18 -18.16% Growth RateInitial Book Value of Equity 22.90 130.62% 0.00 0.03 0.06 0.09 0.12Estimated Price per Share (end of 2006) $17.53 100.00% 0.14 19.67 19.28 18.61 17.14 11.23Implied Share Price $18.51 0.16 15.64 15.08 14.18 12.52 8.36Observed Share Price $68.02 Ke 0.18 12.64 12.06 11.19 9.74 6.84Initial Cost of Equity (You Derive) 0.1395 0.20 10.35 9.81 9.04 7.85 5.77Perpetuity Growth Rate (g) 0 0.22 8.57 8.09 7.43 6.47 4.93

Long Run Return on Equity Valuation

Book Value of Equity 22.90Long Run Return on Equity 12.9%Long Run Growth Rate in Equity 0.06Cost of Equity 0.1395

Estimated Price per Share (end of 2006)

Observed Share Price $68.02

WACC(AT) 0.09 Kd 0.06 Ke 0.17

0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Earnings 120561510 132798503 146277552 160173919 175390441 192052533 210297524 230275789 252151989 276106427Dividends Paid 5026000 5026000 5026000 5026000 5026000 5026000 5026000 5026000 5026000 5026000Book Value of Equity 830703000 946238510 1074011014 1215262565 1370410484 1540774925 1727801459 1933072982 2158322771 2405448760

ROE 14.5% 14.0% 13.6% 13.2% 12.8% 12.5% 12.2% 11.9% 11.7%BVE % G 13.9% 13.5% 13.2% 12.8% 12.4% 12.1% 11.9% 11.7% 11.4%

ROE0.09 0.10 0.11 0.12 0.13

0.14 38.64 35.78 32.92 30.06 27.19p= bv(1+(Roe-ke)/(ke-g) 0.16 40.08 37.79 35.50 33.21 30.92

Ke 0.18 41.03 39.12 37.21 35.30 33.400.06 0.2 41.71 40.08 38.44 36.80 35.17

0.22 42.22 40.79 39.36 37.93 36.50

Abnormal Earnings Growth

WACC(AT) 0.09 Kd 0.06 Ke 0.1395

0 1 2 3 4 5 6 7 8 9 102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Beginning BVE $830,703,000 $946,238,510 $1,074,011,014 $1,215,262,565 $1,370,410,484 $1,540,774,925 $1,727,801,459 $1,933,072,982 $2,158,322,771 $2,405,448,760Earnings $120,561,510 $132,798,503 $146,277,552 $160,173,919 $175,390,441 $192,052,533 $210,297,524 $230,275,789 $252,151,989 $276,106,427Dividends $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000 $5,026,000Ending BVE $830,703,000 $946,238,510 $1,074,011,014 $1,215,262,565 $1,370,410,484 $1,540,774,925 $1,727,801,459 $1,933,072,982 $2,158,322,771 $2,405,448,760 $2,676,529,187

Forecast Earnings $132,798,503 $146,277,552 $160,173,919 $175,390,441 $192,052,533 $210,297,524 $230,275,789 $252,151,989Drip Income $701,127 $701,127 $701,127 $701,127 $701,127 $701,127 $701,127 $701,127Cumulative Dividend Income $133,499,630 $146,978,679 $160,875,046 $176,091,568 $192,753,660 $210,998,651 $230,976,916 $252,853,116"Normal" Annual Income (Benchmark) $137,379,841 $151,323,895 $166,683,270 $182,518,181 $199,857,408 $218,843,862 $239,634,028 $262,399,261Annual AEG Adjustment -$3,880,210 -$4,345,216 -$5,808,224 -$6,426,612 -$7,103,748 -$7,845,211 -$8,657,113 -$9,546,146 -$10,519,636PV Factor 0.88 0.77 0.68 0.59 0.52 0.46 0.40 0.35PV year by year AEG -$3,405,187 -$3,346,438 -$3,925,549 -$3,811,753 -$3,697,566 -$3,583,593 -$3,470,346 -$3,358,253Total PV of AEG -$28,598,684Core Earnings $120,561,510Core Value Perpetuity Earnings -$19,528,860 -55512593.61Total Adjusted T+1 Perpetutity $72,433,967Capitalization Rate 0.1395Intrinsic Share Price 12/31/2006 $14.31Intrinsic Share Price 06/01/07 $15.11Observed Share Price $68.02 -0.05 -0.15 -0.25 -0.35 -0.45 -0.55Growth Rate -0.05 0.02 $71.91 $104.16 $112.52 $116.36 $118.57 $120.00

0.04 $42.05 $53.27 $56.75 $58.45 $59.45 $60.110.07 $27.07 $31.22 $32.78 $33.60 $34.10 $34.440.1 $20.23 $22.28 $23.15 $23.64 $23.95 $24.17

0.1395 $15.27 $16.27 $16.76 $17.05 $17.24 $17.37

Undervalued >61.22Overvalued <$74.82Fairly-Valued +/- 10%

3 Month Regression

70 month

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.443612867

R Square 0.196792375 Adjusted R Square 0.185479592 Standard Error 0.110936831

Observations 73

ANOVA

df SS MS F Significance

F

Regression 1 0.214087005 0.214087 17.395575 8.463E-05

Residual 71 0.873795616 0.012307

Total 72 1.087882621

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.011326902 0.012991787 0.871851 0.3862284 -0.014578 0.0372318 -0.014578 0.0372318

X Variable 1 1.489522787 0.357131168 4.1708003 8.463E-05 0.7774235 2.2016221 0.7774235 2.2016221

92

60 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.478664325

R Square 0.229119536 Adjusted R Square 0.216053766 Standard Error 0.072547993

Observations 61

ANOVA

df SS MS F Significance

F

Regression 1 0.092294943 0.0922949 17.535861 9.536E-05

Residual 59 0.31052947 0.0052632

Total 60 0.402824413

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.00870209 0.009356574 0.9300509 0.3561346 -0.0100204 0.0274246 -

0.0100204 0.0274246

X Variable 1 1.137298574 0.271588232 4.1875841 9.536E-05 0.5938518 1.6807454 0.5938518 1.6807454

93

48 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.391414582

R Square 0.153205375 Adjusted R Square 0.135188468 Standard Error 0.063431801

Observations 49

ANOVA

df SS MS F Significance

F

Regression 1 0.034214316 0.0342143 8.5034227 0.0054178

Residual 47 0.189108892 0.0040236

Total 48 0.223323207

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept -5.95065E-

05 0.009700643 -

0.0061343 0.9951315 -0.0195747 0.0194557 -

0.0195747 0.0194557

X Variable 1 1.223535417 0.419584717 2.9160629 0.0054178 0.3794399 2.067631 0.3794399 2.067631

94

36 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.511214912

R Square 0.261340686 Adjusted R Square 0.240236135 Standard Error 0.064010918

Observations 37

ANOVA

df SS MS F Significance

F

Regression 1 0.050738662 0.0507387 12.383143 0.0012228

Residual 35 0.143408918 0.0040974

Total 36 0.194147579

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept -

0.000845105 0.010971097 -

0.0770301 0.9390382 -0.0231176 0.0214274 -

0.0231176 0.0214274

X Variable 1 1.833471524 0.521025192 3.518969 0.0012228 0.7757342 2.8912089 0.7757342 2.8912089

95

24 Months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.513270918

R Square 0.263447035 Adjusted R Square 0.231422993 Standard Error 0.062500788

Observations 25

ANOVA

df SS MS F Significance

F

Regression 1 0.032135729 0.0321357 8.2265392 0.0086898

Residual 23 0.089846016 0.0039063

Total 24 0.121981745

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.007264502 0.013524127 0.5371512 0.596322 -0.0207123 0.0352413 -

0.0207123 0.0352413

X Variable 1 1.917181886 0.668428151 2.8681944 0.0086898 0.5344329 3.2999309 0.5344329 3.2999309

96

6 Month Regression

SUMMARY OUTPUT

72 months

Regression Statistics

Multiple R 0.443782

5

R Square 0.196942

9 Adjusted R Square

0.1856322

Standard Error

0.1109264

Observations 73

ANOVA

df SS MS F Significan

ce F

Regression 1 0.21425

08 0.21425

08 17.4121

44 8.404E-

05

Residual 71 0.87363

19 0.01230

47

Total 72 1.08788

26

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.011489 0.01298

93 0.88449

92 0.37941

24

-0.014410

9 0.03738

89

-0.01441

09 0.03738

89 X Variable 1

1.4902095

0.3571258

4.1727861

8.404E-05

0.7781209

2.202298

0.7781209

2.202298

97

60 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.479204

3

R Square 0.229636

8 Adjusted R Square

0.2165798

Standard Error

0.0725237

Observations 61

ANOVA

df SS MS F Significan

ce F

Regression 1 0.09250

33 0.09250

33 17.5872

47 9.34E-05

Residual 59 0.31032

11 0.00525

97

Total 60 0.40282

44

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.008835

4 0.00934

95 0.94500

83 0.34850

88 -

0.009873 0.02754

37

-0.00987

3 0.02754

37 X Variable 1 1.138464

0.2714691

4.1937152 9.34E-05

0.5952557

1.6816724

0.5952557

1.6816724

98

48 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.391815

6

R Square 0.153519

5 Adjusted R Square

0.1355093

Standard Error 0.06342 Observations 49

ANOVA

df SS MS F Significan

ce F

Regression 1 0.03428

45 0.03428

45 8.52401

94 0.005366

3

Residual 47 0.18903

87 0.00402

21

Total 48 0.22332

32

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.000117

7 0.00967

61 0.01216

37 0.99034

65

-0.019348

1 0.01958

35

-0.01934

81 0.01958

35 X Variable 1

1.2234175

0.4190371

2.9195923

0.0053663

0.3804236

2.0664114

0.3804236

2.0664114

99

36 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.511685

7

R Square 0.261822

3 Adjusted R Square

0.2407315

Standard Error 0.06399 Observations 37

ANOVA

df SS MS F Significan

ce F

Regression 1 0.05083

22 0.05083

22 12.4140

58 0.001208

Residual 35 0.14331

54 0.00409

47

Total 36 0.19414

76

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

-0.000530

7 0.01094

18

-0.04850

6 0.96158

88

-0.022743

9 0.02168

24

-0.02274

39 0.02168

24 X Variable 1

1.8334525

0.5203706

3.5233588

0.001208

0.7770439

2.889861

0.7770439

2.889861

100

24 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.513586

7

R Square 0.263771

3 Adjusted R Square

0.2317614

Standard Error 0.062487 Observations 25

ANOVA

df SS MS F Significan

ce F

Regression 1 0.03217

53 0.03217

53 8.24029

26 0.008641

7

Residual 23 0.08980

65 0.00390

46

Total 24 0.12198

17

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.007533

6 0.01348

45 0.55868

46 0.58177

61

-0.020361

2 0.03542

83

-0.02036

12 0.03542

83 X Variable 1

1.9172644

0.6678989

2.870591

0.0086417

0.5356104

3.2989185

0.5356104

3.2989185

101

2 Year Regression

SUMMARY OUTPUT

72 months

Regression Statistics

Multiple R 0.443415

5

R Square 0.196617

3 Adjusted R Square 0.185302 Standard Error

0.1109489

Observations 73

ANOVA

df SS MS F Significan

ce F

Regression 1 0.21389

65 0.21389

65 17.3763

12 8.532E-

05

Residual 71 0.87398

61 0.01230

97

Total 72 1.08788

26

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.012046 0.01298

84 0.92744

27 0.35683

89

-0.013852

2 0.03794

43

-0.01385

22 0.03794

43 X Variable 1

1.4865626

0.3566189

4.1684903

8.532E-05

0.7754846

2.1976405

0.7754846

2.1976405

102

60 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.480244

9

R Square 0.230635

1 Adjusted R Square 0.217595 Standard Error

0.0724766

Observations 61

ANOVA

df SS MS F Significan

ce F

Regression 1 0.09290

55 0.09290

55 17.6866

31 8.972E-

05

Residual 59 0.30991

9 0.00525

29

Total 60 0.40282

44

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.009179

2 0.00933

4 0.98341

38 0.32941

95

-0.009498

1 0.02785

65

-0.00949

81 0.02785

65 X Variable 1

1.1388935

0.2708074

4.2055476

8.972E-05

0.5970091

1.6807779

0.5970091

1.6807779

103

48 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.394735

4

R Square 0.155816 Adjusted R Square

0.1378547

Standard Error

0.0633339

Observations 49

ANOVA

df SS MS F Significan

ce F

Regression 1 0.03479

73 0.03479

73 8.67506

7 0.005003

9

Residual 47 0.18852

59 0.00401

12

Total 48 0.22332

32

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.000359

8 0.00962

58 0.03737

81 0.97034

18

-0.019004

9 0.01972

44

-0.01900

49 0.01972

44 X Variable 1

1.2315578

0.4181368

2.9453467

0.0050039

0.3903751

2.0727404

0.3903751

2.0727404

104

36 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.513365

9

R Square 0.263544

6 Adjusted R Square 0.242503 Standard Error

0.0639154

Observations 37

ANOVA

df SS MS F Significan

ce F

Regression 1 0.05116

65 0.05116

65 12.5249

42 0.001156

4

Residual 35 0.14298

1 0.00408

52

Total 36 0.19414

76

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

-0.000262

2 0.01090

58

-0.02404

09 0.98095

65

-0.022402

1 0.02187

78

-0.02240

21 0.02187

78 X Variable 1

1.8339392

0.5181996

3.5390594

0.0011564

0.7819381

2.8859403

0.7819381

2.8859403

105

24 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.513441

2

R Square 0.263621

9 Adjusted R Square

0.2316054

Standard Error

0.0624934

Observations 25

ANOVA

df SS MS F Significan

ce F

Regression 1 0.03215

71 0.03215

71 8.23395

36 0.008663

8

Residual 23 0.08982

47 0.00390

54

Total 24 0.12198

17

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.007439 0.01349

88 0.55108

7 0.58688

81

-0.020485

4 0.03536

34

-0.02048

54 0.03536

34 X Variable 1

1.9141673

0.6670766

2.8694866

0.0086638

0.5342143

3.2941204

0.5342143

3.2941204

106

5 Year Regression

SUMMARY OUTPUT

72 months

Regression Statistics

Multiple R 0.442835

1

R Square 0.196102

9 Adjusted R Square

0.1847804

Standard Error

0.1109844

Observations 73

ANOVA

df SS MS F Significan

ce F

Regression 1 0.21333

7 0.21333

7 17.3197

64 8.739E-

05

Residual 71 0.87454

57 0.01231

75

Total 72 1.08788

26

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.012913 0.01298

99 0.99407

94 0.32356

01

-0.012988

1 0.03881

41

-0.01298

81 0.03881

41 X Variable 1

1.4830003

0.3563447

4.161702

8.739E-05

0.7724692

2.1935314

0.7724692

2.1935314

107

60 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.480028

5

R Square 0.230427

4 Adjusted R Square

0.2173838

Standard Error

0.0724864

Observations 61

ANOVA

df SS MS F Significan

ce F

Regression 1 0.09282

18 0.09282

18 17.6659

3 9.048E-

05

Residual 59 0.31000

26 0.00525

43

Total 60 0.40282

44

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.009782

8 0.00932

09 1.04954

52 0.29820

75

-0.008868

4 0.02843

39

-0.00886

84 0.02843

39 X Variable 1

1.1373236

0.2705925

4.2030857

9.048E-05

0.5958692

1.678778

0.5958692

1.678778

108

48 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.397312

2

R Square 0.157857 Adjusted R Square 0.139939 Standard Error

0.0632573

Observations 49

ANOVA

df SS MS F Significan

ce F

Regression 1 0.03525

31 0.03525

31 8.80999

65 0.004702

Residual 47 0.18807

01 0.00400

15

Total 48 0.22332

32

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.000789

7 0.00955

87 0.08261

67 0.93450

72 -0.01844 0.02001

94 -0.01844 0.02001

94 X Variable 1

1.2419767

0.4184327

2.9681638

0.004702

0.4001988

2.0837547

0.4001988

2.0837547

109

36 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.514588

8

R Square 0.264801

6 Adjusted R Square 0.243796 Standard Error

0.0638608

Observations 37

ANOVA

df SS MS F Significan

ce F

Regression 1 0.05141

06 0.05141

06 12.6061

99 0.001120

1

Residual 35 0.14273

7 0.00407

82

Total 36 0.19414

76

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 7.559E-

05 0.01086

96 0.00695

42 0.99449

09

-0.021990

9 0.02214

21

-0.02199

09 0.02214

21 X Variable 1

1.8350948

0.5168523

3.5505209

0.0011201

0.7858289

2.8843607

0.7858289

2.8843607

110

24 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.513864

3

R Square 0.264056

5 Adjusted R Square 0.232059 Standard Error

0.0624749

Observations 25

ANOVA

df SS MS F Significan

ce F

Regression 1 0.03221

01 0.03221

01 8.25240

05 0.008599

6

Residual 23 0.08977

17 0.00390

31

Total 24 0.12198

17

Coefficien

ts Standard

Error t Stat P-value Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.007385

3 0.01350

03 0.54704

56 0.58961

64

-0.020542

2 0.03531

27

-0.02054

22 0.03531

27 X Variable 1

1.9152668

0.6667133

2.8726992

0.0085996

0.5360652

3.2944684

0.5360652

3.2944684

111

10 Year Regression

SUMMARY OUTPUT

72 months

Regression Statistics

Multiple R 0.4425299

R Square 0.1958327 Adjusted R Square 0.1845064 Standard Error 0.1110031

Observations 73

ANOVA

df SS MS F Significance

F

Regression 1 0.213043 0.213043 17.290087 8.849E-05

Residual 71 0.8748396 0.0123217

Total 72 1.0878826

Coefficients Standard

Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.013598 0.0129923 1.0466175 0.2988261 -0.012308 0.0395039 -0.012308 0.0395039

X Variable 1 1.4819007 0.3563859 4.1581351 8.849E-05 0.7712874 2.192514 0.7712874 2.192514

112

60 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.479531

R Square 0.22995 Adjusted R Square 0.2168983 Standard Error 0.0725089

Observations 61

ANOVA

df SS MS F Significance

F

Regression 1 0.0926295 0.0926295 17.618402 9.223E-05

Residual 59 0.3101949 0.0052575

Total 60 0.4028244

Coefficients Standard

Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.0103089 0.0093131 1.1069222 0.2728203 -0.0083266 0.0289445 -

0.0083266 0.0289445

X Variable 1 1.1358712 0.2706112 4.197428 9.223E-05 0.5943793 1.677363 0.5943793 1.677363

113

48 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.3987042

R Square 0.158965 Adjusted R Square 0.1410707 Standard Error 0.0632157

Observations 49

ANOVA

df SS MS F Significance

F

Regression 1 0.0355006 0.0355006 8.883526 0.0045456

Residual 47 0.1878226 0.0039962

Total 48 0.2233232

Coefficients Standard

Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.0012181 0.0095032 0.1281758 0.8985568 -0.0178999 0.020336 -

0.0178999 0.020336

X Variable 1 1.2483435 0.4188335 2.9805245 0.0045456 0.4057592 2.0909278 0.4057592 2.0909278

114

36 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.5154046

R Square 0.2656419 Adjusted R Square 0.2446603 Standard Error 0.0638243

Observations 37

ANOVA

df SS MS F Significance

F

Regression 1 0.0515737 0.0515737 12.660674 0.0010964

Residual 35 0.1425738 0.0040735

Total 36 0.1941476

Coefficients Standard

Error t Stat P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.0004756 0.0108337 0.0439015 0.9652325 -0.021518 0.0224692 -0.021518 0.0224692

X Variable 1 1.8366087 0.5161646 3.5581842 0.0010964 0.7887389 2.8844786 0.7887389 2.8844786

115

24 months

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.5142091

R Square 0.264411 Adjusted R Square 0.2324288 Standard Error 0.0624599

Observations 25

ANOVA MS

df SS 0.0322533 F Significance

F

Regression 1 0.0322533 0.0039012 8.2674591 0.0085475

Residual 23 0.0897284

Total 24 0.1219817

t Stat

Coefficients Standard

Error 0.5571803 P-value Lower 95% Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 0.0075104 0.0134793 2.875319 0.5827865 -0.0203737 0.0353945 -

0.0203737 0.0353945

X Variable 1 1.9171986 0.6667777 0.0085475 0.5378638 3.2965333 0.5378638 3.2965333

116

Net Sales/Cash from Sales

2002 2003 2004 2005 2006 COLM 1.23 1.28 1.32 1.34 1.28 TBL 1.13 1.1 1.12 1.12 1.15 VFC 1.13 1.14 1.17 1.14 1.15 WWW 1.23 1.2 1.18 1.17 1.15 ZQK 1.31 1.3 1.29 1.51 1.44

Net Sales/Accounts Receivable

2002 2003 2004 2005 2006 COLM 5.3 4.62 4.09 4.02 4.5 TBL 9.01 10.73 9.68 9.27 7.67 VFC 8.65 8.21 6.85 8.25 7.58 WWW 5.29 6.05 6.56 6.75 7.48 ZQK 4.19 4.34 4.5 2.97 3.27

Net Sales/Inventory

2002 2003 2004 2005 2006 COLM 8.61 7.51 6.62 6.22 6.06 TBL 9.73 11.22 11.69 9.37 8.39 VFC 6.12 5.58 5.29 6.2 6.41 WWW 4.89 5.39 5.42 6.58 6.2 ZQK 7.36 6.66 7.05 4.61 5.55

Asset Turnover

2002 2003 2004 2005 2006 COLM 1.72 1.61 1.4 1.22 1.33 TBL 2.36 2.49 2.34 2.07 1.99 VFC 1.32 1.49 1.21 1.12 1.19 WWW 1.52 1.67 1.67 1.66 1.82 ZQK 1.68 2.16 1.79 1.8 1.09

CFFO/OI

2002 2003 2004 2005 2006 COLM 1.64 1.01 0.68 1.03 1.28 TBL 1.45 1.69 1.21 1.11 1.05 VFC 1.56 1.4 1.53 1.11 0.92 WWW 1.52 1.98 1.29 1.61 1.29 ZQK 2 0.63 1.6 -0.01 -0.09

117

CFFO/NOA

2002 2003 2004 2005 2006 COLM 0.28 0.15 0.10 0.14 0.15 TBL 0.26 0.31 0.24 0.23 0.13 VFC 0.21 0.19 0.2 0.3 0.14 WWW 0.39 0.43 0.41 0.44 0.39 ZQK 1.05 0.37 1.06 -0.006 -0.03

Accounts Receivable Turnover

2001 2002 2003 2004 2005 2006 Columbia 5.02 5.30 7.51 6.62 6.22 6.06

Timberland 8.92 9.01 10.73 9.68 9.27 7.67 VFC 9.13 8.65 8.22 6.85 8.25 7.58

Quicksilver 3.98 4.19 4.34 4.50 2.97 3.27 Wolverine 4.73 5.29 6.05 6.56 6.75 7.48

Current Ratios

2001 2002 2003 2004 2005 2006

Columbia 3.83 4.66 5.22 5.15 3.65 4.01 Timberland 3.16 2.84 2.74 2.87 2.53 2.36

VFC 2.50 2.37 2.80 1.73 2.05 2.54 Quicksilver 1.85 2.20 2.95 2.53 1.66 1.74 Wolverine 4.89 4.53 4.51 3.91 4.04 4.01

Quick Asset Ratios

2001 2002 2003 2004 2005 2006

Columbia 2.63 3.70 4.16 4.02 2.75 2.89 Timberland 3.19 1.75 1.86 2.05 1.57 1.43

VFC 1.11 1.24 1.46 0.90 0.84 1.14 Quicksilver 2.63 3.7 4.16 4.02 2.73 2.89 Wolverine 2.65 2.42 2.59 2.25 2.49 2.49

118

Days Sales Outstanding

DAYS 2001 2002 2003 2004 2005 2006

Columbia 72.69 68.90 48.63 55.13 58.70 60.18 Timberland 40.94 40.49 34.02 37.71 39.36 47.59

VFC 39.99 42.21 44.43 53.26 44.22 48.14 Quicksilver 91.68 87.04 84.01 81.03 122.87 111.49

Wolverine 77.22 68.97 60.31 55.63 54.05 48.78

Inventory Turnover 2001 2002 2003 2004 2005 2006

Columbia 3.68 4.61 4.03 3.61 3.51 3.52 Timberland 5.21 5.49 6.00 5.93 4.72 4.42

VFC 4.04 3.92 3.50 3.15 3.56 3.67 Quicksilver 3.56 4.37 3.70 3.83 2.52 3.01 Wolverine 2.62 3.04 3.41 3.38 4.06 3.80

Days Supply of Inventory

DAYS 2001 2002 2003 204 2005 2006

Columbia 99.27 79.09 90.56 101.08 104.05 103.80 Timberland 70.03 66.43 60.82 61.50 77.34 82.58

VFC 90.26 93.16 104.38 115.80 102.41 99.49 Quicksilver 102.57 83.49 98.66 95.18 145.05 121.37 Wolverine 139.56 119.89 107.04 108.08 89.80 96.03

119

Columbia 2001 2002 2003 2004 2005 2006

DSI 99.18 79.18 90.57 101.11 103.99 103.69 DSO 72.71 68.87 79.00 89.24 90.80 81.11

Cash to Cash Cycle 171.89 148.05 169.57 190.35 194.79 184.80

Timberland 2001 2002 2003 2004 2005 2006

DSI 70.06 66.43 60.82 61.5 77.34 82.58 DSO 40.92 40.49 34.02 37.71 39.36 47.59

Cash to Cash Cycle 110.98 106.92 124.84 99.21 116.7 130.17

VFC 2001 2002 2003 2004 2005 2006 DSI 90.26 93.16 104.38 115.8 102.41 99.49 DSO 39.99 42.21 44.43 53.26 44.22 48.14

Cash to Cash Cycle 130.25 135.37 148.81 169.06 146.63 147.63

Quicksilver 2001 202 2003 2004 2005 2006 DSI 102.53 83.52 98.65 95.30 144.84 121.26 DSO 91.71 87.11 84.1 81.11 122.9 111.62

Cash to Cash Cycle 194.24 170.63 182.75 176.41 267.74 232.88

Wolverine 2001 2002 2003 2004 2005 2006 DSI 139.31 120.07 107.04 107.99 89.9 96.05 DSO 77.17 69 60.33 55.64 54.07 48.8

Cash to Cash Cycle 216.48 189.06 167.37 163.63 143.98 144.85

120

Working Capital Turnover

2001 2002 2003 2004 2005 2006

Columbia 2.88 2.26 1.90 1.80 2.09 2.26 Timberland 4.7 4.16 3.92 3.55 4.21 4.28

VFC 4.29 4.24 3.67 5.12 4.60 3.93 Quicksilver 4.69 4.40 3.40 3.69 3.88 4.15 Wolverine 2.48 2.92 2.95 3.09 3.35 3.13

Gross Profit Margin 2001 2002 2003 2004 2005 2006

Columbia 45.81% 46.37% 46.30% 45.46% 43.59% 42.02% Timberland 44.00% 43.52% 46.53% 49.25% 49.62% 47.34%

VFC 32.87% 35.99% 37.35% 40.44% 42.51% 42.72% Quicksilver 38.33% 40.59% 44.44% 45.63% 45.40% 45.78% Wolverine 35.70% 37.43% 36.74% 37.72% 38.19% 38.67%

Operating Profit Margin 2001 2002 2003 2004 2005 2006

Columbia 19% 20.05% 19.98% 19.30% 16.09% 13.96% Timberland 14% 11.66% 13.73% 15.58% 15.67% 10.19%

VFC 9% 12.23% 12.38% 12.90% 13.76% 13.46% Quicksilver 11.23% 14.33% 13.53% 14.30% 7.79% Wolverine 9.51% 10.30% 10.02% 10.48%

Net Profit Margin

2001 2002 2003 2004 2005 2006

Columbia 11% 12.56% 12.62% 12.66% 11.31% 9.55% Timberland 9% 7.99% 8.78% 10.18% 10.51% 6.79%

VFC 3% -3.04% 7.64% 9.22% 9.08% 8.69% Quicksilver 6.06% 8.29% 8.35% 8.46% 3.94% Wolverine 5.79% 6.65% 7.33%

121

Return on Assets

2001 2002 2003 2004 2005 2006

Columbia 21.58% 20.26% 17.69% 13.77% 12.71% Timberland 18.85% 21.88% 23.79% 21.73% 13.50%

VFC -3.77% 11.36% 11.18% 10.13% 16.12% Quicksilver 8.98% 12.99% 11.49% 10.81% 4.31% Wolverine 8.81% 10.11% 11.11% 11.64% 13.35%

Return on Equity

2001 2002 2003 2004 2005 2006

Columbia 29.01% 25.41% 21.63% 16.76% 16.56% Timberland 26.48% 31.62% 35.64% 32.18% 20.15%

VFC -7.31% 24.00% 24.33% 20.16% 19.00% Quicksilver 17.36% 21.44% 18.22% 18.21% 12.69% Wolverine 12.81% 14.57% 15.33% 16.25% 18.09%

Debt to Equity Ratio

2001 2002 2003 2004 2005 2006

Columbia 0.34 0.25 0.22 0.22 0.30 0.24 Timberland 0.40 0.44 0.50 0.48 0.50 0.50

VFC 0.94 1.11 1.18 0.99 0.84 0.67 Quicksilver 0.93 0.65 0.59 0.68 1.93 1.76 Wolverine 0.45 0.44 0.38 0.40 0.36 0.33

Times Interest Earned

2001 2002 2003 2004 2005 2006 Columbia 67.19 116.90 378.23 124.64 148.45

Timberland 157.04 177.38 326.62 #### #### VFC -8.72 -10.51 -8.74 -10.88 -14.43

Quicksilver 8.07 12.23 20.65 8.25 3.62 Wolverine 3.33 3.45 3.31 2.89 3.10

122

Columbia's Operating Efficiency

2001 2002 2003 2004 2005 2006

Sales 100% 100% 100% 100% 100% 100%

Cost of Goods Sold 54% 54% 54% 55% 56% 58% Gross Profit Margin 46% 46% 46% 45% 44% 42%

GSA Expenses (Op Expense Ratio) 27% 26% 27% 27% 28% 28%

Income from Operations 19% 20% 20% 19% 16% 14%

Interest Expense 0.5% 0.3% 0.2% 0.1% 0.1% 0.1%

Income before Taxes 19% 20% 20% 20% 17% 14%

Income Tax Expense 7% 8% 7% 7% 5% 5%

Net Income 11% 13% 13% 13% 11% 10% General Reference Items Sales 5% 17% 15% 6% 11%Net Income 15% 17% 15% -6% -6%Net Income to Sales 11% 13% 13% 13% 11% 10%

123

Timberland's Operating Efficiency

2001 2002 2003 2004 2005 2006 Sales 100% 100% 100% 100% 100% 100%

Cost of Goods Sold 56% 56% 53% 51% 50% 53% Gross Profit Margin 44% 44% 47% 49% 50% 47%

GSA Expenses (Op Exp Ratio) 5% 6% 6% 7% 7% 8%

Income from Operations 14% 12% 14% 16% 16% 10%

Interest Expense 0.1% 0.1% 0.1% 0.0% 0.0% 0.0%

Income before Taxes 14% 12% 14% 16% 16% 10%

Income Tax Expense 5% 4% 5% 6% 5% 4%

Net Income 9% 8% 9% 10% 11% 7% General Reference Items Sales 1% 13% 12% 4% 0%Net Income -11% 24% 30% 8% -35%Net Income to Sales 9% 8% 9% 10% 11% 7%

124

VFC's Operating Efficiency

2001 2002 2003 2004 2005 2006

Sales 100% 100% 100% 100% 100% 100%

Cost of Goods Sold 67% 64% 63% 60% 57% 57% Gross Profit Margin 33% 36% 37% 40% 43% 43%

GSA Expenses (Op Exp Ratio) 24% 24% 26% 29% 30% 31%

Income from Operations 9% 12% 12% 13% 14% 13%

Interest Expense -1.8% -1.4% -1.2% -1.5% -1.3% -0.9%

Income before Taxes 7% 11% 11% 12% 13% 13%

Income Tax Expense 29% 4% 4% 4% 4% 4%

Net Income 3% -3% 8% 9% 1% 9% General Reference Items Sales -3% 2% -1% 8% 10%Net Income 19% 7% 5%Net Income to Sales 3% -3% 8% 9% 9% 9%

125

Quicksilver's Operating Efficiency

2001 2002 2003 2004 2005 2006 Sales 100% 100% 100% 100% 100% 100%

Cost of Goods Sold 62% 59% 56% 54% 55% 54% Gross Profit Margin 38% 41% 44% 46% 45% 46%

GSA Expenses (Op Exp Ratio) 29% 31% 34% 35% 35% 38%

Income from Operations 9% 10% 10% 10% 10% 8%

Interest Expense 1.8% 1.2% 0.8% 0.5% 1.2% 2.2%

Income before Taxes 7% 9% 9% 10% 9% 6%

Income Tax Expense 3% 3% 3% 3% 3% 2%

Net Income 5% 5% 6% 6% 6% 4% General Reference Items Sales 14% 38% 142% -25% 33%Net Income 34% 56% 39% 32% -13%Net Income to Sales 5% 5% 6% 3% 6% 4%

126

Wolverine's Operating Efficiency

2001 2002 2003 2004 2005 2006 Sales 100% 100% 100% 100% 100% 100%

Cost of Goods Sold 64% 62% 63% 62% 62% 61% Gross Profit Margin 36% 38% 37% 38% 38% 39%

GSA Expenses (Op Exp Ratio) 36% 38% 37% 38% 38% 39%

Income from Operations 25% 25% 28% 28% 28% 28%

Interest Expense 10.4% 12.5% 9.0% 10.1% 10.7% 10.8%

Income before Taxes 1% 1% 1% 0% 0% 0%

Income Tax Expense 9% 12% 8% 10% 10% 11%

Net Income 3% 3% 3% 3% 3% 3% General Reference Items Sales 15% 7% 12% 7% 8%Net Income 6% 12% 23% 13% 12%Net Income to Sales 6% 6% 6% 7% 7% 7%

127

References

http://www.columbia.com

http://www.hoovers.com

http://www.thestreet.com

http://www.autochannel.com

2002-2006 Columbia Sportswear Annual 10-k Report

2002-2006 Timberland Annual 10-k Report

2002-2006 VF Corp Annual 10-k Report

2002-2006 Quicksilver Annual 10-k Report

2002-2006 Wolverine Worldwide Annual 10-k Report

Business Analysis and Valuation (Palepu, Healy, Bernard)

http://www.investopedia.com

Financial Statement Analysis and Security Valuation (Stephen H. Penman)