NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
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(1)
|
THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(a)
|
The Company and Basis of Presentation
|
Skechers U.S.A., Inc. and subsidiaries (the “Company”) designs, develops, markets and distributes footwear. The Company operates 449 domestic and 196 international retail stores and an e-commerce business as of December 31, 2017.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States. Significant areas requiring the use of estimates relate primarily to revenue recognition, allowance for bad debts, returns, sales allowances and customer chargebacks, inventory write-downs, valuation of intangibles and long-lived assets, litigation reserves and valuation of deferred income taxes. Actual results could differ materially from those estimates.
The Company recognizes revenue on wholesale sales when products are shipped and the customer takes title and assumes risk of loss, collection of the relevant receivable is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. This generally occurs at time of shipment. Related costs paid to third-party shipping companies are recorded as a cost of sales. Generally, wholesale customers do not have the right to return goods, however, the Company periodically decides to accept returns or provide customers with credits. Allowances for estimated returns, discounts, doubtful accounts and chargebacks are provided for when related revenue is recorded. The Company generates retail revenues primarily from the sale of footwear to customers at retail locations or through websites. For in-store sales, the Company recognizes revenue at the point of sale. For sales made through websites, the Company recognizes revenue upon shipment to the customer which is when the customer obtains control of the promised good. Sales and value added taxes collected from e-commerce or retail customers are excluded from reported revenues.
Royalty income is earned from licensing arrangements. Upon signing a new licensing agreement, the Company receives up-front fees, which are generally characterized as prepaid royalties. These fees are initially deferred and recognized as revenue as earned. The first calculated royalty payment is based on actual sales of the licensed product or, in some cases, minimum royalty payments. Typically, at each quarter-end, the Company receives correspondence from licensees indicating actual sales for the period, which is used to calculate and accrue the related royalties currently receivable based on the terms of the agreement.
|
(d)
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Business Segment Information
|
The Company’s operations and segments are organized along its distribution channels and consist of the following: domestic wholesale, international wholesale, and retail, which includes e-commerce sales. Information regarding these segments is summarized in Note 18 – Segment and Geographic Reporting.
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(e)
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Noncontrolling Interests
|
The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products throughout Asia and the Middle East or to construct the Company’s domestic distribution facility. These joint ventures are variable interest entities (“VIE”)’s under Accounting Standards Codification (“ASC”) 810-10-15-14. The Company’s determination of the primary beneficiary of a VIE considers all relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. The Company has determined that it is the primary beneficiary for these VIE’s because the Company has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance; and (b) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity, or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Accordingly, the Company includes the assets and liabilities and results of operations of these entities in its consolidated financial statements, even though the Company may not hold a majority equity interest. There have been no changes
53
during 2017 in the accounti
ng treatment or characterization of any previously identified VIE. The Company continues to reassess these relationships quarterly. The assets of these joint ventures are restricted in that they are not available for general business use outside the contex
t of such joint ventures. The holders of the liabilities of each joint venture have no recourse to the Company. The Company does not have a variable interest in any unconsolidated VIEs.
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(f)
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Fair Value of Financial Instruments
|
The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, investments, accounts receivable, accounts payable and accrued expenses, approximate fair value due to the relatively short maturity of such instruments.
The carrying amount of the Company’s long-term borrowings are considered Level 2 liabilities, which approximates fair value, based upon current rates and terms available to the Company for similar debt.
As of August 12, 2015, the Company entered into an interest rate swap agreement concurrent with refinancing its domestic distribution center construction loan (see Note 6, Derivative Instruments). The fair value of the interest rate swap was determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipt was based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with U.S. GAAP, credit valuation adjustments were incorporated to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. The majority of the inputs used to value the interest rate swap were within Level 2 of the fair value hierarchy. As of December 31, 2017, the interest rate swap was a Level 2 derivative and was classified as other long-term liabilities in the Company’s consolidated balance sheets.
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(g)
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Cash and Cash Equivalents
|
Cash and cash equivalents include deposits with initial terms of less than three months. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
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(h)
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Allowance for Bad Debts, Returns, Sales Allowances and Customer Chargebacks
|
The Company provides a reserve, charged against revenue and its receivables, for estimated losses that may result from its customers’ inability to pay. To minimize the likelihood of uncollectability, customers’ credit-worthiness is reviewed and adjusted periodically in accordance with external credit reporting services, financial statements issued by the customer and the Company’s experience with the account. When a customer’s account becomes significantly past due, the Company generally places a hold on the account and discontinues further shipments to that customer, minimizing further risk of loss. The Company determines the amount of the reserve by analyzing known uncollectible accounts, aged receivables, economic conditions in the customers’ countries or industries, historical losses and its customers’ credit-worthiness. Amounts later determined and specifically identified to be uncollectible are charged against this reserve. Allowance for returns, sales allowances and
customer chargebacks are recorded against revenue. Allowances for bad debts are recorded to general and administrative expenses. Retail and e-commerce receivables represent amounts due from credit card companies and are generally collected within a few days of the purchase. As such, the Company has determined that no allowance for doubtful accounts is necessary.
The Company also reserves for potential disputed amounts or chargebacks from its customers. The Company’s chargeback reserve is based on a collectability percentage calculated using factors such as historical trends, current economic conditions, and nature of the chargeback receivables. The Company also reserves for potential sales returns and allowances based on historical trends.
The likelihood of a material loss on an uncollectible account would be mainly dependent on deterioration in the overall economic conditions in a particular country or environment. Reserves are fully provided for all probable losses of this nature. For receivables that are not specifically identified as high-risk, the Company provides a reserve based upon its historical loss rate as a percentage of sales.
Inventories, principally finished goods, are stated at the lower of cost (based on the first-in, first-out method) or market (net realizable value). Cost includes shipping and handling fees and costs, which are subsequently expensed to cost of sales. The Company provides for estimated losses from obsolete or slow-moving inventories, and writes down the cost of inventory at the time such determinations are made. Reserves are estimated based on inventory on hand, historical sales activity, industry trends, the retail environment, and the expected net realizable value. The net realizable value is determined using estimated sales prices of similar inventory through off-price or discount store channels.
54
I
n July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No
2015-11, “
Inventory (Topic 330): Simplifying the Measurement of Inventory
” (“ASU 2015-11”). ASU 2015-11 requires that inventory within the scope of this standard be measured at the lower of cost and net realizable value. Net realizable value is the estima
ted selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using first-in, first-out or average cost. Effective January 1, 2017, t
he Company adopted ASU 2015-11. The adoption of ASU 2015-11 did not have a material impact on the Company’s consolidated financial statements.
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(j)
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Property, Plant and Equipment
|
Depreciation and amortization of property, plant and equipment is computed using the straight-line method, which based on the following estimated useful lives:
Buildings
|
|
20 years
|
Building improvements
|
|
10 years
|
Furniture, fixtures and equipment
|
|
5 to 20 years
|
Leasehold improvements
|
|
Useful life or remaining lease term,
whichever is shorter
|
Property, plant and equipment subject to depreciation and amortization is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company reviews both quantitative and qualitative factors to assess whether a triggering event occurred. The Company reviews all stores for impairment annually or more frequently if events or changes in circumstances require it. The Company prepares a summary of store cash flows from its retail stores to assess potential impairment of the fixed assets and leasehold improvements. Stores with negative cash flows which have been open in excess of 24 months are then reviewed in detail to determine whether impairment exists. Recoverability of assets or asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. The Company did not record impairment charges during the years ended December 31, 2017, 2016 or 2015.
The Company accounts for income taxes in accordance with ASC 740-10, which requires that the Company recognize deferred tax liabilities for taxable temporary differences and deferred tax assets for deductible temporary differences and operating loss carry‑forwards using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit or expense is recognized as a result of changes in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all of any deferred tax assets will not be realized.
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(l)
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Foreign Currency Translation
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In accordance with ASC 830-30,
certain international operations use the respective local currencies as their functional currency, while other international operations use the U.S. Dollar as their functional currency. The Company considers the U.S. dollar as its reporting currency. The Company operates internationally through several foreign subsidiaries. Skechers S.a.r.l. located in Switzerland, operates with a functional currency of the U.S. dollar. Translation adjustments for subsidiaries where the functional currency is its local currency are included in other comprehensive income. Foreign currency transaction gains (losses) resulting from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are reported in earnings. Assets and liabilities of the foreign operations denominated in local currencies are translated at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the weighted average rate of exchange during the period. Translations of intercompany loans of a long-term investment nature are included as a component of translation adjustment in other comprehensive income.
Comprehensive income is presented in the consolidated statements of comprehensive income. Comprehensive income consists of net earnings, foreign currency translation adjustments, and income attributable to non-controlling interests.
Advertising costs are expensed in the period in which the advertisements are first run, or over the life of the endorsement contract. Advertising expense for the years ended December 31, 2017, 2016 and 2015 was approximately $260.4 million, $213.1 million and $188.1 million, respectively. Prepaid advertising costs were $8.6 million and $9.8 million at December 31, 2017, and 2016, respectively. Prepaid amounts outstanding at December 31, 2017 and 2016 represent the unamortized portion of endorsement contracts, advertising in trade publications and media productions created, but not run, as of December 31, 2017 and 2016, respectively.
55
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(o)
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Product Design and Development Costs
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The Company charges all product design and development costs to general and administrative expenses, when incurred. Product design and development costs aggregated approximately $18.8 million, $13.6 million, and $11.2 million during the years ended December 31, 2017, 2016 and 2015, respectively.
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(p)
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Warehouse and Distribution Costs
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The Company’s distribution network-related costs are included in general and administrative expenses and are not allocated to specific segments. The expenses related to its distribution network, including the functions of purchasing, receiving, inspecting, allocating, warehousing and packaging of its products totaled $219.6 million, $187.3 million and $167.3 million for 2017, 2016 and 2015, respectively.
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(q)
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Recent Accounting Pronouncements
|
In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016‑16, “
Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
.” The standard requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs. The standard will become effective for the Company’s annual and interim reporting periods beginning January 1, 2018 and will require any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings under a modified retrospective approach. Early adoption is permitted.
The Company will adopt
ASU 2016-16
in the first quarter of 2018 and
does not expect that the adoption of this ASU will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “
Leases (Topic 842)
” (“ASU 2016-02”). The new standard requires lessees to recognize most leases on the balance sheet, which will increase lessees’ reported assets and liabilities. ASU 2016-02 is effective for the Company’s annual and interim reporting periods beginning January 1, 2019. ASU 2016-02 mandates a modified retrospective transition method. The Company is currently assessing the impact of the new standard on its consolidated financial statements, but anticipates an increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases, such as real estate leases for corporate headquarters, administrative offices, retail stores, showrooms, and distribution facilities, as well as additional disclosure on all our lease obligations. The income statement recognition of lease expense is not expected to materially change from the current methodology.
In May 2014, the FASB issued ASU No. 2014-09 “
Revenue from Contracts with Customers
,” which amended the FASB Accounting Standards Codification (“ASC”) and created a new Topic ASC 606, “
Revenue from Contracts with Customers
” (“ASC 606”). This amendment prescribes that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The amendment supersedes the revenue recognition requirements in ASC Topic 605, “
Revenue Recognition
,” and most industry-specific guidance throughout the Industry Topics of the Codification. For the Company’s annual and interim reporting periods the mandatory adoption date of ASC 606 is January 1, 2018, and there will be two methods of adoption allowed, either a full retrospective adoption or a modified retrospective adoption. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to the first quarter of 2018. In March 2016, April 2016, May 2016, and December 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20, respectively, as clarifications to ASU 2014-09. ASU 2016‑08 clarifies how to identify the unit of accounting for the principal versus agent evaluation, how to apply the control principle to certain types of arrangements, such as service transactions, and reframed the indicators in the guidance to focus on evidence that an entity is acting as a principal rather than as an agent. ASU 2016-10 clarifies the existing guidance on identifying performance obligations and licensing implementation. ASU 2016-12 adds practical expedients related to the transition for contract modifications and further defines a completed contract, clarifies the objective of the collectability assessment and how revenue is recognized if collectability is not probable, and when non-cash considerations should be measured. ASU 2016-20 corrects or improves guidance in thirteen narrow focus aspects of the guidance. The effective dates for these ASUs are the same as the effective date for ASU No. 2014-09, for the Company’s annual and interim periods beginning January 1, 2018.
These ASU’s also require enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows.
The Company will adopt the new revenue standards in the first quarter of 2018 using the modified retrospective method. The Company has completed the assessment of the impact of these ASUs on its consolidated financial statements and does not expect that the adoption of these ASUs will have a material impact on its consolidated financial statements.
56
|
(2)
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment at December 31, 2017 and 2016 is summarized as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
Land
|
|
$
|
83,163
|
|
|
$
|
83,163
|
|
Buildings and improvements
|
|
|
208,351
|
|
|
|
207,665
|
|
Furniture, fixtures and equipment
|
|
|
330,644
|
|
|
|
297,540
|
|
Leasehold improvements
|
|
|
357,920
|
|
|
|
289,847
|
|
Total property, plant and equipment
|
|
|
980,078
|
|
|
|
878,215
|
|
Less accumulated depreciation and amortization
|
|
|
438,477
|
|
|
|
383,742
|
|
Property, plant and equipment, net
|
|
$
|
541,601
|
|
|
$
|
494,473
|
|
Accrued expenses at December 31, 2017 and 2016 are summarized as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
Accrued inventory purchases
|
|
$
|
20,509
|
|
|
$
|
48,087
|
|
Accrued payroll and taxes
|
|
|
61,693
|
|
|
|
45,337
|
|
Accrued expenses
|
|
$
|
82,202
|
|
|
$
|
93,424
|
|
|
(4)
|
LINE OF CREDIT AND SHORT-TERM BORROWINGS
|
On June 30, 2015, the Company entered into a $250.0 million loan and security agreement, subject to increase by up to $100.0 million, (the “Credit Agreement”), with the following lenders: Bank of America, N.A., MUFG Union Bank, N.A. and HSBC Bank USA, National Association. The Credit Agreement matures on June 30, 2020. The Credit Agreement replaces the credit agreement dated June 30, 2009, which expired on June 30, 2015. The Credit Agreement permits the Company and certain of its subsidiaries to borrow based on a percentage of eligible accounts receivable plus the sum of (a) the lesser of (i) a percentage of eligible inventory to be sold at wholesale and (ii) a percentage of net orderly liquidation value of eligible inventory to be sold at wholesale, plus (b) the lesser of (i) a percentage of the value of eligible inventory to be sold at retail and (ii) a percentage of net orderly liquidation value of eligible inventory to be sold at retail, plus (c) the lesser of (i) a percentage of the value of eligible in-transit inventory and (ii) a percentage of the net orderly liquidation value of eligible in-transit inventory. Borrowings bear interest at the Company’s election based on (a) LIBOR or (b) the greater of (i) the Prime Rate, (ii) the Federal Funds Rate plus 0.5% and (iii) LIBOR for a 30-day period plus 1.0%, in each case, plus an applicable margin based on the average daily principal balance of revolving loans available under the Credit Agreement. The Company pays a monthly unused line of credit fee of 0.25%, payable on the first day of each month in arrears, which is based on the average daily principal balance of outstanding revolving loans and undrawn amounts of letters of credit outstanding during such month. The Credit Agreement further provides for a limit on the issuance of letters of credit to a maximum of $100.0 million. The Credit Agreement contains customary affirmative and negative covenants for secured credit facilities of this type, including covenants that will limit the ability of the Company and its subsidiaries to, among other things, incur debt, grant liens, make certain acquisitions, dispose of assets, effect a change of control of the Company, make certain restricted payments including certain dividends and stock redemptions, make certain investments or loans, enter into certain transactions with affiliates and certain prohibited uses of proceeds. The Credit Agreement also requires compliance with a minimum fixed-charge coverage ratio if Availability drops below 10% of the Revolver Commitments (as such terms are defined in the Credit Agreement) until the date when no event of default has existed and Availability has been over 10% for 30 consecutive days. The Company paid closing and arrangement fees of $1.1 million on this facility, which are included in Other Assets in the consolidated balance sheets, and are being amortized to interest expense over the five-year life of the facility. As of December 31, 2017 and December 31, 2016, there was $0.1 million outstanding under the Company’s credit facilities, classified as short-term borrowings in the Company’s consolidated balance sheets. The remaining balance in short-term borrowings as of December 31, 2017 is related to the Company’s joint venture in India.
57
Long-term borrowings at December 31, 2017 and 2016 are as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
Note payable to banks, due in monthly installments of $302.0
(includes principal and interest), variable-rate interest at
3.57% per annum, secured by property, balloon payment of
$62,843 due August 2020
|
|
$
|
66,604
|
|
|
$
|
68,059
|
|
Note payable to Luen Thai Enterprise, Ltd., balloon payment
of $5,745 due January 2021
|
|
|
5,745
|
|
|
|
—
|
|
Note payable to TCF Equipment Finance, Inc., due in monthly
installments of $30.5 (includes principal and interest), fixed-
rate interest at 5.24% per annum, due July 2019
|
|
|
555
|
|
|
|
883
|
|
Subtotal
|
|
|
72,904
|
|
|
|
68,942
|
|
Less current installments
|
|
|
1,801
|
|
|
|
1,783
|
|
Total long-term borrowings
|
|
$
|
71,103
|
|
|
$
|
67,159
|
|
The aggregate maturities of long-term borrowings at December 31, 2017 are as follows (in thousands):
2018
|
|
$
|
1,801
|
|
2019
|
|
|
1,666
|
|
2020
|
|
|
63,692
|
|
2021
|
|
|
5,745
|
|
|
|
$
|
72,904
|
|
The Company’s long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions.
On April 30, 2010, HF Logistics-SKX, LLC (the “JV”)
,
through a wholly-owned subsidiary of the JV (“HF
-
T1”), entered into a construction loan agreement with Bank of America, N.A. as administrative agent and as a lender, and Raymond James Bank, FSB, as a lender (collectively, the "Construction Loan Agreement"), pursuant to which the JV obtained a loan of up to $55.0 million used for construction of the project on certain property (the "Original Loan"). On November 16, 2012, HF-T1 executed a modification to the Construction Loan Agreement (the "Modification"), which added OneWest Bank, FSB as a lender, increased the borrowings under the Original Loan to $80.0 million and extended the maturity date of the Original Loan to October 30, 2015. On August 11, 2015, the JV, through HF-T1, entered into an amended and restated loan agreement with Bank of America, N.A., as administrative agent and as a lender, and CIT Bank, N.A. (formerly known as OneWest Bank, FSB) and Raymond James Bank, N.A., as lenders (collectively, the "Amended Loan Agreement"), which amends and restates in its entirety the Construction Loan Agreement and the Modification.
As of the date of the Amended Loan Agreement, the outstanding principal balance of the Original Loan was $77.3 million. In connection with this refinancing of the Original Loan, the JV, the Company and HF Logistics (“HF”) agreed that the Company would make an additional capital contribution of $38.7 million to the JV, through HF-T1, to make a payment on the Original Loan based on the Company’s 50% equity interest in the JV. The payment equaled the Company’s 50% share of the outstanding principal balance of the Original Loan. Under the Amended Loan Agreement, the parties agreed that the lenders would loan $70.0 million to HF-T1 (the "New Loan"). The New Loan is being used by the JV, through HF-T1, to (i) refinance all amounts owed on the Original Loan after taking into account the payment described above, (ii) pay $0.9 million in accrued interest, loan fees and other closing costs associated with the New Loan and (iii) make a distribution of $31.3 million less the amounts described in clause (ii) to HF. Pursuant to the Amended Loan Agreement, the interest rate on the New Loan is the LIBOR Daily Floating Rate (as defined in the Amended Loan Agreement) plus a margin of 2%. The maturity date of the New Loan is August 12, 2020, which HF-T1 has one option to extend by an additional 24 months, or until August 12, 2022, upon payment of a fee and satisfaction of certain customary conditions. On August 11, 2015, HF-T1 and Bank of America, N.A. entered into an ISDA master agreement (together with the schedule related thereto, the "Swap Agreement") to govern derivative and/or hedging transactions that HF-T1 concurrently entered into with Bank of America, N.A. Pursuant to the Swap Agreement, on August 14, 2015, HF-T1 entered into a confirmation of swap transactions (the "Interest Rate Swap") with Bank of America, N.A. The Interest Rate Swap has an effective date of August 12, 2015 and a maturity date of August 12, 2022, subject to early termination at the option of HF-T1, commencing on August 1, 2020. The Interest Rate Swap fixes the effective interest rate on the New Loan at 4.08% per annum. Pursuant to the terms of the JV, HF Logistics is responsible for the related interest expense on the New Loan, and any amounts related to the Swap Agreement. The full amount of interest expense related to the New Loan has been included in the Company’s consolidated statements of equity within non-controlling interests. The
58
Amended Loan Agreement and the Swap Agreement are subject to customary covenants
and events of default. Bank of America, N.A. also acts as a lender and syndication agent under the Credit Agreement dated June 30, 2015 (see Note 6, Derivative Instruments).
The Company is in compliance with its non-financial covenants, including any cros
s default provisions, and financial covenants of its short-term and long-term borrowings as of December 31, 2017.
|
(6)
|
DERIVATIVE INSTRUMENTS
|
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, the Company used an interest rate swap as part of its interest rate risk management strategy. The Company’s interest rate swap involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. On August 12, 2015, in connection with refinancing its domestic distribution center loan, described in Note 5 above, the Company entered into a variable-to-fixed interest rate swap agreement with Bank of America, N.A., to hedge the cash flows on the Company’s $70.0 million variable rate debt. As of December 31, 2017, the swap agreement has an aggregate notional amount of $66.6 million and a maturity date of August 12, 2022, subject to early termination commencing on August 1, 2020 at the option of HF Logistics-SKX T1, LLC (“HF-T1”), a wholly-owned subsidiary of the Company’s joint venture HF Logistics-SKX, LLC (the “JV”). Under the terms of the swap agreement, the Company will pay a weighted-average fixed rate of 2.08% on the $66.6 million notional amount and receive payments from the counterparty based on the 30-day LIBOR rate. The rate swap agreement utilized by the Company effectively modifies its exposure to interest rate risk by converting the Company’s floating-rate debt to a fixed-rate of 4.08% for the life of the loan thus reducing the impact of interest-rate changes on future interest expense. Pursuant to the terms of the JV, HF Logistics is responsible for any amounts related to the Swap Agreement.
By utilizing an interest rate swap, the Company is exposed to credit-related losses in the event that the counterparty fails to perform under the terms of the derivative contract. To mitigate this risk, the Company enters into derivative contracts with major financial institutions based upon credit ratings and other factors. The Company continually assesses the creditworthiness of its counterparties. As of December 31, 2017, all counterparties to the interest rate swap had performed in accordance with their contractual obligations.
|
(7)
|
OTHER LONG-TERM LIABILITIES
|
Other long-term liabilities at December 31, 2017 and 2016 are as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
Other long term liabilities
|
|
$
|
19,059
|
|
|
$
|
13,862
|
|
Income taxes payable
|
|
|
99,200
|
|
|
|
4,993
|
|
|
|
$
|
118,259
|
|
|
$
|
18,855
|
|
|
(8)
|
COMMITMENTS AND CONTINGENCIES
|
The Company leases facilities under operating lease agreements expiring through November 1, 2031. The Company pays taxes, maintenance and insurance in addition to the lease obligations. Leases may provide for renewal options and rent escalations tied to either increases in the lessor’s operating expenses, fluctuations in the consumer price index in the relevant geographical area, or a percentage of gross sales in excess of a base annual rent. The Company also leases certain equipment and automobiles under operating lease agreements expiring at various dates through May 1, 2021. Rent expense for the years ended December 31, 2017, 2016 and 2015 approximated $223.7 million, $171.0 million and $137.8 million, respectively.
Minimum lease payments, which take into account escalation clauses, are recognized on a straight-line basis over the minimum lease term. Reimbursements for leasehold improvements are recorded as liabilities and are amortized as a reduction to rent expense over the lease term. Lease concessions, usually a free rent period, are considered in the calculation of the minimum lease payments for the minimum lease term.
59
Future minimum lease payments under noncancellable leases at December 31, 2017 are as follows (in thousands):
|
|
OPERATING
LEASES
|
|
Year ending December 31:
|
|
|
|
|
2018
|
|
$
|
238,665
|
|
2019
|
|
|
208,292
|
|
2020
|
|
|
188,397
|
|
2021
|
|
|
167,634
|
|
2022
|
|
|
160,057
|
|
Thereafter
|
|
|
586,063
|
|
|
|
$
|
1,549,108
|
|
|
(b)
|
Product and Other Financing
|
The Company finances production activities in part through the use of interest-bearing open purchase arrangements with certain of its international manufacturers. These arrangements currently bear interest at rates between 0.0% and 0.5% for 30- to 60-day financing. The amounts outstanding under these arrangements at December 31, 2017 and 2016 were $177.4 million and $260.7 million, respectively, which are included in accounts payable in the accompanying consolidated balance sheets. Interest expense incurred by the Company under these arrangements amounted to $4.8 million in 2017, $4.4 million in 2016, and $5.4 million in 2015. The Company has open purchase commitments with its foreign manufacturers at December 31, 2017 of $943.4 million, which are not included in the accompanying 2017 consolidated balance sheet.
The Company recognizes legal expense in connection with loss contingencies as incurred.
Personal Injury Lawsuits Involving Shape-ups
— As previously reported, on February 20, 2011, Skechers U.S.A., Inc., Skechers U.S.A., Inc. II and Skechers Fitness Group were named as defendants in a lawsuit that alleged, among other things, that Shape-ups were defective and unreasonably dangerous, negligently designed and/or manufactured, and did not conform to representations made by the Company, and that the Company failed to provide adequate warnings of alleged risks associated with Shape-ups. Other personal injury lawsuits involving Shape-ups (some on behalf of multiple plaintiffs) subsequently were filed in various courts, alleging varying injuries but employing similar legal theories and asserting similar claims to those made in the first case, as well as claims for breach of express and implied warranties, loss of consortium, and fraud. Although there are variations in the relief sought, the plaintiffs generally seek compensatory and/or economic damages, exemplary and/or punitive damages, and attorneys’ fees and costs. As detailed below, the Company is named as a defendant in one currently active, pending case.
On December 19, 2011, the Judicial Panel on Multidistrict Litigation issued an order establishing a multidistrict litigation (“MDL”) proceeding in the United States District Court for the Western District of Kentucky entitled
In re Skechers Toning Shoe Products Liability Litigation,
case no. 11-md-02308-TBR. Since 2011, a total of 1,235 personal injury cases have been filed in or transferred to the MDL proceeding. The Company has resolved 1,766 personal injury claims in the MDL proceedings, comprised of 1,154 that were filed as formal actions and 612 that were submitted by plaintiff fact sheets. The Company has also settled another 13 claims in principle—8 filed cases and 5 claims submitted by plaintiff fact sheets—either directly or pursuant to a global settlement program that has been approved by the claimants’ attorneys (described in greater detail below). Further, 72 cases in the MDL proceeding have been dismissed either voluntarily or on motions by the Company and 40 unfiled claims submitted by plaintiff fact sheet have been abandoned. Between the consummated settlements and cases subject to the settlement program, all but one of the personal injury cases pending in the MDL have been or are expected to be resolved. Fact discovery in that case has been completed and a court-ordered mediation is scheduled in March 2018. No trial date has been set.
Skechers U.S.A., Inc., Skechers U.S.A., Inc. II and Skechers Fitness Group also have been named as defendants in a total of 72 personal injury actions filed in various Superior Courts of the State of California that were brought on behalf of 920 individual plaintiffs (360 of whom also submitted MDL court-approved questionnaires for mediation purposes in the MDL proceeding). Of those cases, 68 were originally filed in the Superior Court for the County of Los Angeles (the “LASC cases”). On August 20, 2014, the Judicial Council of California granted a petition by the Company to coordinate all personal injury actions filed in California that relate to Shape-ups with the LASC cases (collectively, the “LASC Coordinated Cases”). On October 6, 2014, three cases that had been pending in other counties were transferred to and coordinated with the LASC Coordinated Cases. On April 17, 2015, an additional case was transferred to and coordinated with the LASC Coordinated Cases.
60
Fifty-seven actions brought on behalf of a total of 647 plaintiffs have been settled and fully dismissed in the LASC Coordinated Cases. Twelve
actions have been partially dismissed, with the claims of 224 plaintiffs in those actions having been fully resolved and dismissed. The claim of one other plaintiff from these partially settled multi-plaintiff lawsuits has been settled in principle and sh
ould be dismissed in the short term. One single-plaintiff lawsuit and the claims of 28 additional plaintiffs in multi-plaintiff lawsuits have been dismissed entirely, either voluntarily or on motion by the Company. The claims of 21 additional persons have
been dismissed in part, either voluntarily or on motions by the Company.
Fourteen cases—two single-plaintiff actions and 12 partially dismissed, multi-plaintiff actions—remain pending in the LASC Coordinated Cases. The two single-plaintiff cases have been settled in principle and should be dismissed in the short term. With respect to the 12 multi-plaintiff actions, the claims of only 17 individual plaintiffs remain. Skechers has moved to dismiss the claims of 16 of those 17 individual plaintiffs for violation of court orders and failure to prosecute their claims, and anticipates bringing a similar motion relating to the last individual plaintiff in the near future. No discovery has been taken in any of those actions and no trial dates have been set. If the two settlements are consummated and the 17 individual plaintiffs’ claims are dismissed for failure to prosecute, then there will be no more claims pending LASC Coordinated Cases.
In other state courts, a total of 12 personal injury actions (some on behalf of numerous plaintiffs) have been filed that have not been removed to federal court and transferred to the MDL. All of those actions have been resolved and dismissed.
With respect to the global settlement programs referenced above, the personal injury cases in the MDL and LASC Coordinated Cases and in other state courts were largely solicited and handled by the same plaintiffs law firms. Accordingly, mediations to discuss potential resolution of the various lawsuits brought by these firms were held on May 18, June 18, and July 24, 2015. At the conclusion of those mediations, the parties reached an agreement in principle on a global settlement program that is expected to resolve all or substantially all of the claims by persons represented by those firms. A master settlement agreement was executed as of March 24, 2016 and the parties are in the process of completing individual settlements. To the extent that the settlements with individual claimants are not finalized or otherwise consummated such that the litigation proceeds, it is too early to predict the outcome of any case, whether adverse results in any single case or in the aggregate would have a material adverse impact on our operations or financial position, and whether insurance coverage will be adequate to cover any losses. The settlements have been reached for business purposes in order to end the distraction of litigation, and the Company continues to believe it has meritorious defenses and intends to defend any remaining cases vigorously. In addition, it is too early to predict whether there will be future personal injury cases filed which are not covered by the global settlement program, whether adverse results in any single case or in the aggregate would have a material adverse impact on the Company’s operations or financial position, and whether insurance coverage will be available and/or adequate to cover any losses.
In accordance with U.S. GAAP, the Company records a liability in its consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings are inherently difficult to predict, particularly when the matters are in the procedural stages or with unspecified or indeterminate claims for damages, potential penalties, or fines. Accordingly, the Company cannot determine the final amount, if any, of its liability beyond the amount accrued in the consolidated financial statements as of December 31, 2017, nor is it possible to estimate what litigation-related costs will be in the future; however, the Company believes that the likelihood that claims related to litigation would result in a material loss to the Company, either individually or in the aggregate, is remote.
The authorized capital stock of the Company consists of 500 million shares of Class A Common Stock, par value $.001 per share, 75 million shares of Class B Common Stock, par value $.001 per share, and 10 million shares of preferred stock, par value $.001 per share.
During 2017, no Class B Common Stock was converted to Class A Common Stock. During 2016 and 2015, certain Class B stockholders converted 1,733,270 shares and 5,131,296 shares, respectively, of Class B Common Stock to Class A Common Stock (see Note 11 – Earnings Per Share).
61
|
(10)
|
NONCONTROLLI
NG INTERESTS
|
The following VIEs are consolidated into the Company’s consolidated financial statements and the carrying amounts and classification of assets and liabilities were as follows (in thousands):
HF Logistics-SKX, LLC
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Current assets
|
|
$
|
1,540
|
|
|
$
|
2,006
|
|
Non-current assets
|
|
|
103,407
|
|
|
|
108,668
|
|
Total assets
|
|
$
|
104,947
|
|
|
$
|
110,674
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
2,718
|
|
|
$
|
2,469
|
|
Non-current liabilities
|
|
|
66,367
|
|
|
|
68,168
|
|
Total liabilities
|
|
$
|
69,085
|
|
|
$
|
70,637
|
|
|
Distribution joint ventures
(1)
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Current assets
|
|
$
|
389,687
|
|
|
$
|
289,227
|
|
Non-current assets
|
|
|
90,972
|
|
|
|
49,229
|
|
Total assets
|
|
$
|
480,659
|
|
|
$
|
338,456
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
188,700
|
|
|
$
|
132,518
|
|
Non-current liabilities
|
|
|
9,201
|
|
|
|
2,214
|
|
Total liabilities
|
|
$
|
197,901
|
|
|
$
|
134,732
|
|
(1)
Distribution joint ventures include Skechers Limited (Israel), Skechers China Limited, Skechers Korea Limited, Skechers Southeast Asia Limited, Skechers (Thailand) Limited, Skechers Retail India Private Limited, and Skechers South Asia Private Limited.
The following is a summary of net earnings attributable to, distributions to and contributions from non-controlling interests (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net earnings attributable to non-controlling
Interests
|
|
$
|
55,914
|
|
|
$
|
41,866
|
|
|
$
|
29,135
|
|
Distributions to:
|
|
|
|
|
|
|
|
|
|
|
|
|
HF Logistics-SKX, LLC
|
|
|
3,787
|
|
|
|
4,091
|
|
|
|
38,092
|
|
Skechers China Limited
|
|
|
20,620
|
|
|
|
11,922
|
|
|
|
450
|
|
Skechers Southeast Asia Limited
|
|
|
1,347
|
|
|
|
1,280
|
|
|
|
—
|
|
Skechers Hong Kong Limited
|
|
|
199
|
|
|
|
451
|
|
|
|
—
|
|
Contributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
India distribution joint ventures
|
|
|
—
|
|
|
|
2,943
|
|
|
|
2,273
|
|
Skechers Korea Co., Ltd.
|
|
|
—
|
|
|
|
8,273
|
|
|
|
—
|
|
Skechers Footwear Ltd. (Israel)
|
|
|
46
|
|
|
|
2,764
|
|
|
|
—
|
|
Basic earnings per share represents net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share, in addition to the weighted average determined for basic earnings per share, includes potential dilutive common shares using the treasury stock method.
The Company has two classes of issued and outstanding common stock; Class A Common Stock and Class B Common Stock. Holders of Class A Common Stock and holders of Class B Common Stock have substantially identical rights, including rights with respect to any declared dividends or distributions of cash or property, and the right to receive proceeds on liquidation or dissolution of the Company after payment of the Company’s indebtedness. The two classes have different voting rights, with holders of Class A Common Stock entitled to one vote per share while holders of Class B Common Stock are entitled to ten votes per share on all matters submitted to a vote of stockholders. The Company uses the two-class method for calculating net earnings per share. Basic and diluted
62
net earnings per share of Class A Common Stock and Class B Common Stock are identical. The shares of Class B Common Stock are convertible at any time
at the option of the holder into shares of Class A Common Stock on a share-for-share basis. In addition, shares of Class B Common Stock will be automatically converted into a like number of shares of Class A Common Stock upon transfer to any person or ent
ity who is not a permitted transferee.
The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating earnings per share (in thousands):
Basic earnings per share
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net earnings attributable to Skechers U.S.A., Inc.
|
|
$
|
179,190
|
|
|
$
|
243,493
|
|
|
$
|
231,912
|
|
Weighted average common shares outstanding
|
|
|
155,651
|
|
|
|
154,169
|
|
|
|
152,847
|
|
Basic earnings per share attributable to
Skechers U.S.A., Inc.
|
|
$
|
1.15
|
|
|
$
|
1.58
|
|
|
$
|
1.52
|
|
Diluted earnings per share
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net earnings attributable to Skechers U.S.A., Inc.
|
|
$
|
179,190
|
|
|
$
|
243,493
|
|
|
$
|
231,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
155,651
|
|
|
|
154,169
|
|
|
|
152,847
|
|
Dilutive effect of nonvested shares
|
|
|
872
|
|
|
|
915
|
|
|
|
1,353
|
|
Weighted average common shares outstanding
|
|
|
156,523
|
|
|
|
155,084
|
|
|
|
154,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to
Skechers U.S.A., Inc.
|
|
$
|
1.14
|
|
|
$
|
1.57
|
|
|
$
|
1.50
|
|
There were 116,762 and 346,912 shares excluded from the computation of diluted earnings per share for the year ended December 31, 2017 and 2016, respectively because they are anti-dilutive. There were no shares excluded from the computation of diluted earnings per share for the year ended December 31, 2015.
On April 16, 2007, the Company’s Board of Directors adopted the 2007 Incentive Award Plan (the “2007 Plan”), which became effective upon approval by the Company’s stockholders on May 24, 2007 and expired pursuant to its terms on May 24, 2017.
On April 17, 2017, the Company’s Board of Directors adopted the 2017 Incentive Award Plan (the “2017 Plan”), which became effective upon approval by the Company’s stockholders on May 23, 2017. The 2017 Plan replaced and superseded in its entirety the 2007 Plan. A total of 10,000,000 shares of Class A Common Stock are reserved for issuance under the 2017 Plan, which provides for grants of ISOs, non-qualified stock options, restricted stock and various other types of equity awards as described in the plan to the employees, consultants and directors of the Company and its subsidiaries. The 2017 Plan is administered by the Company’s Board of Directors with respect to awards to non-employee directors and by the Company’s Compensation Committee with respect to other eligible participants.
63
A summary of the status and changes of nonvested shares related to the 2007 Plan
and the 2017 Plan,
as of and for the year ended December 31, 2017 is presented below:
|
|
SHARES
|
|
|
WEIGHTED-AVERAGE
GRANT-DATE FAIR VALUE
|
|
Nonvested at January 1, 2015
|
|
|
3,791,499
|
|
|
$
|
14.46
|
|
Granted
|
|
|
40,500
|
|
|
|
29.83
|
|
Vested/Released
|
|
|
(1,106,499
|
)
|
|
|
11.81
|
|
Nonvested at December 31, 2015
|
|
|
2,725,500
|
|
|
|
15.77
|
|
Granted
|
|
|
1,444,000
|
|
|
|
31.69
|
|
Vested/Released
|
|
|
(1,108,336
|
)
|
|
|
12.32
|
|
Cancelled
|
|
|
(18,000
|
)
|
|
|
17.81
|
|
Nonvested at December 31, 2016
|
|
|
3,043,164
|
|
|
|
24.57
|
|
Granted
|
|
|
495,600
|
|
|
|
24.69
|
|
Vested/Released
|
|
|
(1,157,207
|
)
|
|
|
20.73
|
|
Cancelled
|
|
|
(78,000
|
)
|
|
|
32.62
|
|
Nonvested at December 31, 2017
|
|
|
2,303,557
|
|
|
|
26.25
|
|
As of December 31, 2017, a total of 9,888,500 shares remain available for grant as equity awards under the 2017 Plan.
The Company recognized in the consolidated statements of earnings compensation expense of $28.9 million, $23.1 million and $18.3 million for grants under its stock compensation plans for the years ended December 31, 2017, 2016, and 2015. Related excess income tax benefits of $4.7 million, and $8.0 million
for grants under its stock compensation plans for the years ended December 31,
2016, and 2015, respectively, were recorded in additional paid-in capital and $2.6 million of excess tax benefits for the year ended December 31, 2017 was recorded in the statement of earnings. Nonvested shares generally vest over a graded vesting schedule from one to four years from the date of grant. There was $39.6 million of unrecognized compensation cost related to nonvested common shares as of December 31, 2017, which is expected to be recognized over a weighted average period of 2.1 years. The total fair value of shares vested during the year ended December 31, 2017 and 2016 was $24.0 million and $13.7 million, respectively.
In March 2016, the FASB issued ASU No. 2016-09,
“Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
(“ASU 2016-09”). The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.
As of January 1, 2017, the calculation of diluted weighted average shares outstanding was changed prospectively to no longer include excess tax benefits as assumed proceeds. This change did not have a material impact on the Company’s calculation of diluted earnings per share.
Additionally, this ASU requires the recognition of excess tax benefits and deficiencies as income tax benefits or expenses in the income statement rather than to additional paid-in capital, which has been applied on a prospective basis to settlements of share-based payment awards occurring on or after January 1, 2017. The Company adopted ASU 2016-09 effective January 1, 2017. The Company recorded a $2.6 million excess tax benefit in the consolidated statement of earnings for the year ended December 31, 2017.
On April 17, 2017, the Company’s Board of Directors adopted the 2018 Employee Stock Purchase Plan (the “2018 ESPP”), which the Company’s stockholders approved on May 23, 2017. The 2018 ESPP will replace the Company’s current employee stock purchase plan, the Skechers U.S.A., Inc. 2008 Employee Stock Purchase Plan (the “2008 ESPP”), which expired pursuant to its terms on January 1, 2018. The 2018 Employee Stock Purchase Plan provides eligible employees of the Company and its subsidiaries with the opportunity to purchase shares of the Company’s Class A Common Stock at a purchase price equal to 85% of the Class A Common Stock’s fair market value on the first trading day or last trading day of each purchase period, whichever is lower. The 2018 ESPP generally provides for two six-month purchase periods every twelve months: June 1 through November 30 and December 1 through May 31, except that the initial purchase period under the 2018 ESPP will have a duration of five months, commencing on January 1, 2018 and ending on May 31, 2018. Eligible employees participating in the 2018 ESPP for a purchase period will be able to invest up to 15% of their compensation through payroll deductions during each purchase period. A total of 5,000,000 shares of Class A Common Stock will be available for sale under the 2018 ESPP.
During 2017, 2016 and 2015, 240,000 shares, 220,844 shares and 223,892 shares were issued under the 2008 ESPP for which the Company received approximately $5.5 million, $5.1 million and $4.3 million, respectively.
64
The provisions for income tax expense (benefit) were as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
110,448
|
|
|
$
|
45,258
|
|
|
$
|
45,095
|
|
Deferred
|
|
|
3,768
|
|
|
|
(3,961
|
)
|
|
|
2,774
|
|
Total federal
|
|
|
114,216
|
|
|
|
41,297
|
|
|
|
47,869
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
2,747
|
|
|
|
3,406
|
|
|
|
2,506
|
|
Deferred
|
|
|
(3,356
|
)
|
|
|
(49
|
)
|
|
|
1,798
|
|
Total state
|
|
|
(609
|
)
|
|
|
3,357
|
|
|
|
4,304
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
40,147
|
|
|
|
31,046
|
|
|
|
21,204
|
|
Deferred
|
|
|
(4,598
|
)
|
|
|
(1,575
|
)
|
|
|
(927
|
)
|
Total foreign
|
|
|
35,549
|
|
|
|
29,471
|
|
|
|
20,277
|
|
Total income taxes (benefit)
|
|
$
|
149,156
|
|
|
$
|
74,125
|
|
|
$
|
72,450
|
|
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affected the Company’s financial results for the year ended December 31, 2017, including, but not limited to: (1) requiring a one-time Transition Tax (payable over eight years) on certain unrepatriated earnings of foreign subsidiaries; (2) a future reduction of the U.S. federal corporate tax rate from 35% to 21% that reduces the current value of the Company’s deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”); and (3) bonus depreciation that allows for full expensing of qualified property place in service after September 27, 2017. In addition, the Tax Act establishes new tax laws that will affect the Company’s financial results for the year ending December 31, 2018, including, but not limited to: (1) a reduction of the U.S. federal corporate tax rate from 35% to 21%; (2) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (3) a new provision designed to tax global intangible low-taxed income (“GILTI”); (4) limitations on the deductibility of certain executive compensation; and (5) limitations on the use of Federal Tax Credit (“FTC’s”) to reduce the U.S. income tax liability.
The SEC staff issued Staff Accounting Bulletin 118, (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740 (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with its initial analysis of the impact of the Tax Act, the Company recorded a provisional one-time net tax expense of $99.9 million for the year-ended December 31, 2017. This net tax expense primarily consists of the $1.9 million net tax impact to the Company’s DTA’s from the corporate rate reduction and a net expense for the Transition Tax of $98.0 million. For various reasons that are discussed more fully below, the Company has not completed the accounting for the income tax effects of certain elements of the Tax Act. If the Company were able to make reasonable estimates of the effects of elements for which the analysis is not yet complete, the Company recorded provisional adjustments.
The Company’s accounting for the following elements of the Tax Act is provisional. However, the Company was able to make reasonable estimates of certain effects and, therefore, recorded the following provisional adjustments:
Transition Tax
: The Transition Tax is a one-time tax on previously untaxed current and accumulated earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax liability of $98.0 million. However, during the measurement period the Company will continue to gather additional information to more precisely compute the amount of the Transition Tax.
65
Reduction of U.S. federal corporate tax rate
: The Tax Act reduces the corporate tax rate from 35% to 21%, effective January 1, 2018. As a result, the Company recorded a provisional decrease in value of its net DTAs of $1.9 million, with a corresponding net adjustment to deferred income tax expense of $1.9 million for the year ended December 31, 2017. While the Company was able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, the Company’s calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.
Cost recovery
: While the Company has completed most of the computations necessary and is in the process of completing a final inventory of its 2017 expenditures that qualify for immediate expensing, the Company recorded a decrease in its current income tax payable of approximately $5.9 million based on the Company’s provisional estimates related to the additional federal expense allowed as a result of the Tax Act. In addition, the Company recorded a corresponding increase in its DTLs of approximately $3.5 million, which is less than the $5.9 million liability amount due to the reduction in the corporate tax rate from 35% to 21%, effective January 1, 2018. The $2.4 million net benefit from the reduction in the future tax rate is included in the $1.9 million decrease in value of the net DTAs discussed above.
The Company’s provision for income tax expense (benefit) and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign earnings (loss) before income taxes. In the non-U.S. jurisdictions in which the Company has operations, the applicable statutory rates are generally significantly lower than in the U.S., ranging from 0% to 34%. The Company’s provision for income tax expense (benefit) was calculated using the applicable statutory rate for each jurisdiction applied to the Company’s pre-tax earnings (loss) in each jurisdiction, while the Company’s effective tax rate is calculated by dividing income tax expense (benefit) by earnings before income taxes.
The Company’s earnings (loss) before income taxes and income tax expense (benefit) for 2017, 2016 and 2015 are as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Income tax jurisdiction
|
|
Earnings (loss)
before income
taxes
|
|
|
Income tax
expense
|
|
|
Earnings (loss)
before income
taxes
|
|
|
Income tax
expense
|
|
|
Earnings (loss)
before income
taxes
|
|
|
Income tax
expense
|
|
United States
(1)
|
|
$
|
25,628
|
|
|
$
|
113,607
|
|
|
$
|
105,589
|
|
|
$
|
44,654
|
|
|
$
|
136,726
|
|
|
$
|
52,173
|
|
Peoples Republic of China (“China”)
|
|
|
95,668
|
|
|
|
12,971
|
|
|
|
72,584
|
|
|
|
11,720
|
|
|
|
49,027
|
|
|
|
11,084
|
|
Jersey
(2)
|
|
|
198,048
|
|
|
|
—
|
|
|
|
146,880
|
|
|
|
—
|
|
|
|
123,721
|
|
|
|
—
|
|
Non-benefited loss operations
(3)
|
|
|
(17,350
|
)
|
|
|
3,306
|
|
|
|
(16,189
|
)
|
|
|
12
|
|
|
|
(16,719
|
)
|
|
|
164
|
|
Other jurisdictions
(4)
|
|
|
82,266
|
|
|
|
19,272
|
|
|
|
50,620
|
|
|
|
17,739
|
|
|
|
40,742
|
|
|
|
9,029
|
|
Earnings before income taxes
|
|
$
|
384,260
|
|
|
$
|
149,156
|
|
|
$
|
359,484
|
|
|
$
|
74,125
|
|
|
$
|
333,497
|
|
|
$
|
72,450
|
|
Effective tax rate
(5)
|
|
|
|
|
|
|
38.8
|
%
|
|
|
|
|
|
|
20.6
|
%
|
|
|
|
|
|
|
21.7
|
%
|
(1)
|
United States income tax expense for 2017 includes a provisional one-time $99.9 million tax expense related to the enactment of the United States Tax Cuts & Jobs Act on December 22, 2017.
|
(2)
Jersey does not assess income tax on corporate net earnings.
(3)
|
Consists of entities in the following tax jurisdictions where no tax benefit is recognized in the period being reported because of the provision of offsetting valuation allowances: Brazil, India, Israel, Japan, Macau, Panama and South Korea.
|
(4)
|
Consists of entities in the following tax jurisdictions, each of which comprises not more than 5% of consolidated earnings (loss) before taxes in the period being reported: Albania, Austria, Belgium, Bosnia & Herzegovina, Canada, Chile, Colombia, Costa Rica, France, Germany, Hong Kong, Hungary, India, Italy, Kosovo, Macedonia, Malaysia, Montenegro, Netherlands, Panama, Peru, Poland, Portugal, Romania, Serbia, Singapore, Spain, Switzerland, Thailand, Vietnam, and the United Kingdom.
|
(5)
|
The effective tax rate is calculated by dividing income tax expense by earnings before income taxes
.
|
For 2017, the effective tax rate was lower than the U.S. federal and state combined statutory rate of approximately 39%, primarily because of earnings from foreign operations in jurisdictions imposing either lower tax rates on corporate earnings or no corporate income tax. During 2017, as reflected in the table above, earnings (loss) before income taxes in the U.S. were $
25.6
million, with income tax expense of $
113.6
million, which is an average rate of
443
%. The U.S. tax expense includes a provisional one-time tax expense of $99.9 million related to the enactment of the U.S. Tax Cuts & Jobs Act on December 22, 2017. Earnings (loss) before income taxes in non-U.S. jurisdictions were $
358.6
million, with an aggregate income tax expense of $
35.5
million, which is an
66
average rate of
9.9
%. Combined, this results in consolidated earnings before income taxes for the year of $
384.3
million, and consolidated income tax expense for the period of $
149.2
million, resulting in an effective tax rate of
38.
8
%. For 2017, of the $
358.6
million in earnings before income tax earned outside the U.S., $
198.0
million was earned in Jersey, which does not impose a tax on corporate earnings. In Jersey, earnings before income taxes
increase
d by $
51.1
million, or
35
%,
to $
198.0
million in 2017 from $
146.9
million in
2016
. This
increase
was primarily attributable to the Company experiencing an increase of $
435.6
million in net sales in the “Other international” geographic area for
2017
(see Note 18 – Segment and Geograp
hic Reporting), which resulted in a significant
increase
in earnings before income taxes in Jersey from royalties and commissions under the terms of inter-subsidiary agreements. Due to the scalability of our operations,
increase
s in net sales in the “Other
international” geographic area from
2016 to 2017
resulted in a disproportionately greater
increase
in earnings before income taxes in Jersey. In addition, there were foreign losses of $
17.4
million for which no tax benefit was recognized during the year
ended
December 31, 2017
because of the provision of offsetting valuation allowances, but in which $3.3 million in nonrefundable withholding and other taxes were paid. Individually, none of the other foreign jurisdictions included in “Other jurisdictions” i
n the table above had earnings greater than 5% of the Company’s consolidated earnings (loss) before taxes in any of the years shown. Unremitted earnings of non-U.S. subsidiaries for which no tax has been provided are expected to be reinvested outside of th
e U.S. indefinitely. Such earnings could become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends.
As of December 31, 2017, the Company had approximately $736.4 million in cash and cash equivalents, of which $391.6 million, or 53.2%, was held outside the U.S. Of the $391.6 million held by the Company’s non-U.S. subsidiaries, approximately $227.5 million is available for repatriation to the U.S. without incurring U.S. income taxes and applicable non-U.S. income and withholding taxes in excess of the amounts accrued in the Company’s consolidated financial statements as of December 31, 2017.
The Company’s cash and cash equivalents held in the U.S. and cash provided from operations are sufficient to meet the Company’s liquidity needs in the U.S. for the next twelve months and the Company does not expect to repatriate any of the funds presently designated as indefinitely reinvested outside the U.S. However, in anticipation of the needs of the Company’s share repurchase program and the need to provide payment of the Company’s provisional Transition Tax liability, the Company plans to begin the repatriation of certain funds held outside the U.S. for which tax has been fully provided as of December 31, 2017. Because of the need for cash for operating capital and continued overseas expansion, the Company also does not foresee the need for any of its foreign subsidiaries to distribute funds up to an intermediate foreign parent company in any form of taxable dividend. Under current applicable tax laws, if the Company chooses to repatriate some or all of the funds the Company has designated as indefinitely reinvested outside the U.S., the amount repatriated would not be subject to U.S. income taxes but may be subject to applicable non‑U.S. income and withholding taxes. As of December 31, 2017, U.S. income taxes have been provided but non-U.S. income taxes have not been provided on cumulative total earnings of $178.8 million. As of December 31, 2016, U.S. and non-U.S. income taxes have not been provided on cumulative total earnings of $699.6 million.
Income taxes differ from the statutory tax rates as applied to earnings before income taxes as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Expected income tax expense
|
|
$
|
134,491
|
|
|
$
|
125,819
|
|
|
$
|
116,724
|
|
State income tax, net of federal benefit
|
|
|
297
|
|
|
|
2,335
|
|
|
|
2,011
|
|
Rate differential on foreign income
|
|
|
(95,565
|
)
|
|
|
(58,508
|
)
|
|
|
(44,541
|
)
|
Change in unrecognized tax benefits
|
|
|
1,449
|
|
|
|
135
|
|
|
|
(2,233
|
)
|
Non-deductible expenses
|
|
|
4,451
|
|
|
|
2,330
|
|
|
|
(350
|
)
|
Excess tax benefit on share based compensation
|
|
|
(2,571
|
)
|
|
|
—
|
|
|
|
—
|
|
U.S. tax rate change
|
|
|
1,923
|
|
|
|
—
|
|
|
|
—
|
|
U.S. transition tax
|
|
|
98,015
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
(1,120
|
)
|
|
|
575
|
|
|
|
285
|
|
Change in valuation allowance
|
|
|
7,786
|
|
|
|
1,439
|
|
|
|
554
|
|
Total provision (benefit) for income taxes
|
|
$
|
149,156
|
|
|
$
|
74,125
|
|
|
$
|
72,450
|
|
Effective tax rate
|
|
|
38.8
|
%
|
|
|
20.6
|
%
|
|
|
21.7
|
%
|
67
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016
are presented below (in thousands):
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory adjustments
|
|
$
|
5,375
|
|
|
$
|
6,985
|
|
Accrued expenses
|
|
|
33,984
|
|
|
|
29,094
|
|
Allowances for bad debts and chargebacks
|
|
|
3,470
|
|
|
|
4,837
|
|
Loss carryforwards
|
|
|
24,308
|
|
|
|
20,891
|
|
Business credit carryforward
|
|
|
6,562
|
|
|
|
5,031
|
|
Share-based compensation
|
|
|
4,154
|
|
|
|
5,993
|
|
Valuation allowance
|
|
|
(27,313
|
)
|
|
|
(19,527
|
)
|
Total deferred tax assets
|
|
|
50,540
|
|
|
|
53,304
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
5,709
|
|
|
|
8,422
|
|
Depreciation on property, plant and equipment
|
|
|
15,069
|
|
|
|
19,251
|
|
Total deferred tax liabilities
|
|
|
20,778
|
|
|
|
27,673
|
|
Net deferred tax assets
|
|
$
|
29,762
|
|
|
$
|
25,631
|
|
The $7.8 million increase in the valuation allowance primarily relates to current year net operating losses in certain foreign non-benefited loss jurisdictions as discussed above. The Company believes it is more likely than not that the results of future operations in the remaining jurisdictions will generate sufficient taxable income to realize its net deferred tax assets.
State tax credit and net operating loss carry-forward amounts remaining as of December 31, 2017 were $6.6 million and $31.3 million, respectively. State tax credit and net operating loss carry-forward amounts remaining as of December 31, 2016 were $
5.0
million and $
31.7
million, respectively. These tax credit and net operating loss carry-forward amounts do not begin to expire until
2032
and
2025
, respectively. As of December 31, 2017 and 2016, no valuation allowance against the related deferred tax asset have been recorded for these credit and loss and credit carry-forwards as it is believed the carry-forwards will be fully utilized in reducing future taxable income.
As of December 31, 2017 and 2016, the Company had combined foreign net operating loss carry-forwards available to reduce future taxable income of approximately $94.9 million and $
69.4
million, respectively. Some of these net operating losses expire beginning in 2018; however others can be carried forward indefinitely. As of December 31, 2017 and 2016, valuation allowances of $21.4 million and $
16.7
million, respectively, had been recorded against the related deferred tax assets for those loss carry-forwards that are not more likely than not to be fully utilized in reducing future taxable income.
The balance of unrecognized tax benefits included in prepaid expenses in the consolidated balance sheets increased by $0.8 million during the year. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
6,608
|
|
|
$
|
6,143
|
|
Additions for current year tax positions
|
|
|
1,154
|
|
|
|
1,069
|
|
Additions for prior year tax positions
|
|
|
—
|
|
|
|
138
|
|
Reductions for prior year tax positions
|
|
|
(26
|
)
|
|
|
—
|
|
Settlement of uncertain tax positions
|
|
|
—
|
|
|
|
(616
|
)
|
Reductions related to lapse of statute of limitations
|
|
|
(355
|
)
|
|
|
(126
|
)
|
Ending balance
|
|
$
|
7,381
|
|
|
$
|
6,608
|
|
If recognized, $1.6 million of unrecognized tax benefits would be recorded as a reduction in income tax expense.
Estimated interest and penalties related to the underpayment of income taxes are classified as a component of income tax expense and totaled $0.5 million, $
0.4
million, and $
0.6
million for the years ended December 31, 2017, 2016, and 2015, respectively. Accrued interest and penalties were $1.5 million and $
1.1
million as of December 31, 2017 and 2016, respectively.
The amount of income taxes the Company pays is subject to ongoing audits by taxing jurisdictions around the world. The Company’s estimate of the potential outcome of any uncertain tax position is subject to its assessment of relevant risks, facts, and
68
circumstances existing at that time. The Company believes that it has adequately provided for these matters. However, the Company’s future results may include favorable or unfavorable adjustments to its estimates in the period the audits are re
solved, which may impact the Company’s effective tax rate.
As of December 31, 2017, the Company’s tax filings are generally subject to examination in the U.S. and most foreign jurisdictions for years ending on or after December 31,
2013
, and in several Asian and European tax jurisdictions for years ending on or after December 31,
2007
. During the year, the Company reduced the balance of 2017 and prior year unrecognized tax benefits by $0.4 million as a result of expiring statutes. It is reasonably possible that certain domestic and foreign statutes will expire during the next twelve months which would reduce the balance of 2017 and prior year unrecognized tax benefits by $0.5 million.
The Company is currently under examination by a number of states and certain foreign jurisdictions. During the year ended December 31, 2017, there was no reduction in the balance of 2017 and prior year unrecognized tax benefits due to settlements of examinations. It is reasonably possible that certain federal, state and foreign examinations could be settled during the next twelve months which would reduce the balance of 2017 and prior year unrecognized tax benefits by $0.9 million.
|
(14)
|
EMPLOYEE BENEFIT PLAN
|
The Company has a 401(k) profit sharing plan covering all employees who are 21 years of age and have completed six months of service. Employees may contribute up to 15.0% of annual compensation. Company contributions to the plan are discretionary and vest over a six year period. The Company made a contribution of $1.6 million to the plan for the year ended December 31, 2017. The Company did not make a contribution to the plan for the years ended December 31, 2016 and 2015, respectively.
In May 2013, the Company established the Skechers U.S.A., Inc. Deferred Compensation Plan (the “Plan”), which allows eligible employees to defer compensation up to a maximum amount to a future date on a nonqualified basis. The Plan provides for the Company to make discretionary contributions to participating employees, which will be determined by the Company’s Compensation Committee. The Company made a contribution of $0.2 million to the plan for the year ended December 31, 2017. The Company did not make a contribution to the plan for the year ended December 31, 2016 or 2015, respectively. The value of the deferred compensation is recognized based on the fair value of the participants’ accounts as determined monthly. The Company has established a rabbi trust (the “Trust”) as a reserve for the benefits payable under the Plan. The assets of the Trust and deferred liabilities are presented in the Company’s consolidated balance sheets.
|
(15)
|
BUSINESS AND CREDIT CONCENTRATIONS
|
The Company generates a significant portion of its sales in the United States; however, several of its products are sold into various foreign countries, which subject the Company to the risks of doing business abroad. In addition, the Company operates in the footwear industry, which is impacted by the general economy, and its business depends on the general economic environment and levels of consumer spending. Changes in the marketplace may significantly affect the Company’s estimates and its performance. The Company performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable, which generally do not require collateral from customers, amounted to $206.1 million and $169.4 million before allowances for bad debts and sales returns, and chargebacks at December 31, 2017 and 2016, respectively. Foreign accounts receivable, which are generally collateralized by letters of credit, amounted to $251.0 million and $199.1 million before allowance for bad debts, sales returns, and chargebacks at December 31, 2017 and 2016, respectively. International net sales amounted to $2.109 billion, $1.643 billion and $1.271 billion for the years ended December 31, 2017, 2016 and 2015, respectively. The Company’s credit losses charged to expense for the years ended December 31, 2017, 2016 and 2015 were $12.8 million, $12.7 million and $5.2 million, respectively. In addition, the Company recorded sales return expense for the years ended December 31, 2017, 2016 and 2015 were $5.6 million, $16.9 million and $2.3 million, respectively.
Assets located outside the United States consist primarily of cash, accounts receivable, inventory, property, plant and equipment, and other assets. Net assets held outside the United States were $1.273 billion and $1.060 billion at December 31, 2017 and 2016, respectively.
During 2017, 2016 and 2015, no customer accounted for 10.0% or more of net sales. No customer accounted for more than 10% of net trade receivables at December 31, 2017 or 2016. During 2017, 2016 and 2015, net sales to the five largest customers were approximately 10.5%, 11.3% and 14.6%, respectively.
69
The Company’s top five manufacturers produced the following for the years ended December 31, 2017, 2016 and 2015, respectively:
|
|
Percentage of Total Production
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Manufacturer #1
|
|
|
17.9
|
%
|
|
|
22.9
|
%
|
|
|
31.5
|
%
|
Manufacturer #2
|
|
|
11.1
|
%
|
|
|
10.1
|
%
|
|
|
9.1
|
%
|
Manufacturer #3
|
|
|
8.8
|
%
|
|
|
8.8
|
%
|
|
|
7.3
|
%
|
Manufacturer #4
|
|
|
5.4
|
%
|
|
|
4.9
|
%
|
|
|
5.0
|
%
|
Manufacturer #5
|
|
|
4.3
|
%
|
|
|
4.3
|
%
|
|
|
3.6
|
%
|
|
|
|
47.5
|
%
|
|
|
51.0
|
%
|
|
|
56.5
|
%
|
The majority of the Company’s products are produced in China and Vietnam. The Company’s operations are subject to the customary risks of doing business abroad, including but not limited to currency fluctuations and revaluations, custom duties and related fees, various import controls and other monetary barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. The Company believes it has acted to reduce these risks by diversifying manufacturing among various factories. To date, these business risks have not had a material adverse impact on the Company’s operations.
|
(16)
|
RELATED PARTY TRANSACTIONS
|
The Company paid approximately $172,000, $111,000, and $180,000 during 2017, 2016 and 2015, respectively, to the Manhattan Inn Operating Company, LLC (“MIOC”) for lodging, food and events, including the Company’s 2015 holiday party at the Shade Hotel in Manhattan Beach, which is owned and operated by MIOC. Michael Greenberg, President and a director of the Company, owns a 12% beneficial ownership interest in MIOC, and three other officers, directors and senior vice presidents of the Company own in aggregate an additional 5% beneficial ownership in MIOC. The Company had no outstanding accounts receivable or payable with MIOC, the Shade Hotel in Manhattan Beach at December 31, 2017 or 2016.
The Company paid approximately $201,000 and $110,000 during 2017 and 2016 to the
Redondo Beach Hospitality Company, LLC
(“RBHC”) for lodging, food and events, including the Company’s 2017 and 2016 holiday party at the Shade Hotel in Redondo Beach, which is owned and operated by RBHC. Michael Greenberg, President and a director of the Company, owns a 5% beneficial ownership interest in RBHC, and three other officers, directors and senior vice presidents of the Company own in aggregate an additional 3% beneficial ownership in RBHC. The Company had no outstanding accounts receivable or payable with RBHC or the Shade Hotel in Redondo Beach, at December 31, 2017 or 2016.
On July 29,
2010, the Company formed the Skechers Foundation (the “Foundation”), which is a 501(c)(3) non-profit entity that does not have any shareholders or members. The Foundation is not a subsidiary of, and is not otherwise affiliated with the Company, and the Company does not have a financial interest in the Foundation. However, two officers and directors of the Company, Michael Greenberg, the Company’s President, and David Weinberg, the Company’s Chief Operating Officer are also officers and directors of the Foundation. During the year ended December 31, 2017 and 2016, the Company made contributions of $1.0 million to the Foundation in each period. During the year ended December 31, 2015 the Company did not make any contributions to the Foundation.
The Company had receivables from officers and employees of $1.0 million and $0.8 million at December 31, 2017 and 2016, respectively. These amounts relate to travel advances, incidental personal purchases on Company-issued credit cards and employee loans. These receivables are short-term and are expected to be repaid within a reasonable period of time. The Company had no other significant transactions with or payables to officers, directors or significant stockholders of the Company.
The Company has evaluated events subsequent to December 31, 2017, to assess the need for potential recognition or disclosure in this filing. Based on this evaluation, it was determined that no subsequent events occurred that require recognition in the consolidated financial statements.
70
|
(
1
8)
|
SEGMENT AND GEOGRAPHIC REPORTING
|
The Company has three reportable segments–domestic wholesale sales, international wholesale sales, and retail sales, which includes e-commerce sales. Management evaluates segment performance based primarily on net sales and gross margins. All other costs and expenses of the Company are analyzed on an aggregate basis, and these costs are not allocated to the Company’s segments. Net sales, gross margins and identifiable assets for the domestic wholesale, international wholesale, and retail segments on a combined basis were as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
1,249,287
|
|
|
$
|
1,199,832
|
|
|
$
|
1,219,779
|
|
International wholesale
|
|
|
1,729,906
|
|
|
|
1,391,235
|
|
|
|
1,094,395
|
|
Retail
|
|
|
1,184,967
|
|
|
|
972,244
|
|
|
|
833,149
|
|
Total
|
|
$
|
4,164,160
|
|
|
$
|
3,563,311
|
|
|
$
|
3,147,323
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
464,609
|
|
|
$
|
454,088
|
|
|
$
|
471,104
|
|
International wholesale
|
|
|
786,675
|
|
|
|
616,110
|
|
|
|
454,665
|
|
Retail
|
|
|
687,605
|
|
|
|
564,398
|
|
|
|
498,239
|
|
Total
|
|
$
|
1,938,889
|
|
|
$
|
1,634,596
|
|
|
$
|
1,424,008
|
|
|
|
2017
|
|
|
2016
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
1,259,119
|
|
|
$
|
1,161,719
|
|
International wholesale
|
|
|
1,116,928
|
|
|
|
954,874
|
|
Retail
|
|
|
359,035
|
|
|
|
277,077
|
|
Total
|
|
$
|
2,735,082
|
|
|
$
|
2,393,670
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Additions to property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
20,055
|
|
|
$
|
33,677
|
|
|
$
|
38,080
|
|
International wholesale
|
|
|
47,410
|
|
|
|
44,286
|
|
|
|
37,909
|
|
Retail
|
|
|
68,511
|
|
|
|
41,508
|
|
|
|
42,155
|
|
Total
|
|
$
|
135,976
|
|
|
$
|
119,471
|
|
|
$
|
118,144
|
|
71
Geographic Information
The following summarizes the Company’s operations in different geographic areas as of and for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net Sales
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,055,475
|
|
|
$
|
1,920,051
|
|
|
$
|
1,876,201
|
|
Canada
|
|
|
160,367
|
|
|
|
130,555
|
|
|
|
103,268
|
|
Other international
(2)
|
|
|
1,948,318
|
|
|
|
1,512,705
|
|
|
|
1,167,854
|
|
Total
|
|
$
|
4,164,160
|
|
|
$
|
3,563,311
|
|
|
$
|
3,147,323
|
|
|
|
2017
|
|
|
2016
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
382,426
|
|
|
$
|
374,459
|
|
Canada
|
|
|
9,888
|
|
|
|
10,410
|
|
Other international
(2)
|
|
|
149,287
|
|
|
|
109,604
|
|
Total
|
|
$
|
541,601
|
|
|
$
|
494,473
|
|
(1)
|
The Company has subsidiaries in Asia, Central America, Europe, the Middle East, North America, and South America that generate net sales within those respective countries and in some cases the neighboring regions. The Company has joint ventures in Asia that generate net sales from those countries. The Company also has a subsidiary in Switzerland that generates net sales from that country in addition to net sales to distributors located in numerous non-European countries. External net sales are attributable to geographic regions based on the location of each of the Company’s subsidiaries. A subsidiary may earn revenue from external net sales and external royalties, or from inter-subsidiary net sales, royalties, fees and commissions provided in accordance with certain inter-subsidiary agreements. The resulting earnings of each subsidiary in its respective country are recognized under each respective country’s tax code. Inter-subsidiary revenues and expenses subsequently are eliminated in the Company’s consolidated financial statements and are not included as part of the external net sales reported in different geographic areas.
|
(2)
|
Other international consists of Asia, Central America, Europe, the Middle East, and South America.
|
In response to the State Department’s trade restrictions with Sudan and Syria, we do not authorize or permit any distribution or sales of our product in these countries, and we are not aware of any current or past distribution or sales of our product in Sudan or Syria.
72
|
(19)
|
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
Summarized unaudited financial data are as follows (in thousands, except per share data):
2017
|
|
MARCH 31
|
|
|
JUNE 30
|
|
|
SEPTEMBER 30
|
|
|
DECEMBER 31
(1)
|
|
Net sales
|
|
$
|
1,072,808
|
|
|
$
|
1,025,934
|
|
|
$
|
1,094,829
|
|
|
$
|
970,589
|
|
Gross profit
|
|
|
476,498
|
|
|
|
488,321
|
|
|
|
519,987
|
|
|
|
454,083
|
|
Net earnings (loss)
|
|
|
106,635
|
|
|
|
73,400
|
|
|
|
106,830
|
|
|
|
(51,761
|
)
|
Net earnings (loss) attributable to Skechers U.S.A., Inc.
|
|
|
93,995
|
|
|
|
59,535
|
|
|
|
92,310
|
|
|
|
(66,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.61
|
|
|
|
0.38
|
|
|
|
0.59
|
|
|
|
(0.43
|
)
|
Diluted
|
|
|
0.60
|
|
|
|
0.38
|
|
|
|
0.59
|
|
|
|
(0.43
|
)
|
(1)
|
Fourth quarter 2017
net earnings (loss)
includes a provisional one-time tax expense of $99.9 million recorded for our initial analysis of the impact of the Tax Act.
|
2016
|
|
MARCH 31
|
|
|
JUNE 30
|
|
|
SEPTEMBER 30
|
|
|
DECEMBER 31
|
|
Net sales
|
|
$
|
978,794
|
|
|
$
|
877,810
|
|
|
$
|
942,417
|
|
|
$
|
764,290
|
|
Gross profit
|
|
|
432,152
|
|
|
|
416,254
|
|
|
|
429,978
|
|
|
|
356,212
|
|
Net earnings
|
|
|
109,639
|
|
|
|
84,009
|
|
|
|
76,542
|
|
|
|
15,169
|
|
Net earnings attributable to Skechers U.S.A., Inc.
|
|
|
97,612
|
|
|
|
74,107
|
|
|
|
65,110
|
|
|
|
6,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.63
|
|
|
|
0.48
|
|
|
|
0.42
|
|
|
|
0.04
|
|
Diluted
|
|
|
0.63
|
|
|
|
0.48
|
|
|
|
0.42
|
|
|
|
0.04
|
|
73