NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1
.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise noted in this report, any description of “the Company,” “Crocs,” “we,” “us,” or “our” includes Crocs, Inc. and its consolidated subsidiaries within our reportable operating segments and corporate operations. The Company is engaged in the design, development, manufacturing, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for men, women, and children. We strive to be the global leader in the sale of molded footwear characterized by functionality, comfort, color, and lightweight design. Our reportable operating segments include: the Americas, operating in North and South America; Asia Pacific, operating throughout Asia, Australia, New Zealand, Africa, and the Middle East; and Europe, operating throughout Western Europe, Eastern Europe, and Russia.
The accompanying unaudited condensed consolidated interim financial statements include the Company’s accounts and those of its wholly-owned subsidiaries, and reflect all adjustments which are necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such unaudited condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
These unaudited condensed consolidated interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2017
(“Annual Report”), and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes to the Audited Consolidated Financial Statements included in our Annual Report. Our accounting policies did not change during the
three months ended March 31, 2018
, other than for the change in accounting principle described in “Inventories” below and the new accounting pronouncements adopted as described in
Note 2 — Recent Accounting Pronouncements
.
Seasonality of Business
Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warm weather, revenues generated during our fourth quarter are typically less than revenues generated during our first three quarters, when the northern hemisphere is experiencing warmer weather. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new model introductions, general economic conditions, and consumer confidence. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of expected results for any other quarter or for any other year.
Transactions with Affiliates
The Company receives services from three subsidiaries of Blackstone Capital Partners VI L.P. (“Blackstone”). Blackstone and certain of its permitted transferees currently beneficially own all the outstanding shares of the Company’s Series A Convertible Preferred Stock, which is convertible into approximately
13,793,100
shares, or
16.8%
, of the Company’s common stock as of
March 31, 2018
. Blackstone also has the right to nominate two representatives to serve on the Company’s Board of Directors.
Certain Blackstone subsidiaries provide various services to the Company, including inventory count, cybersecurity and consulting, and workforce management services. The Company paid expenses of
$0.1 million
related to these services for each of the
three months ended March 31, 2018
and
2017
, which are reported in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of operations.
Restricted Cash
Restricted cash primarily consists of funds to secure certain retail store leases, certain customs requirements, and other contractual arrangements.
Inventories
Inventories are stated at the lower of cost or net realizable value. Effective January 1, 2018, the Company completed implementation of a new inventory costing system for approximately
95%
of its inventories. In connection with the implementation, the Company changed its method of inventory costing from a moving average cost method to a first-in-first-out method. The Company believes this change in accounting principle is preferable because it results in more precision and consistency in global and regional inventory costs, more efficient analysis and better matching of inventory costs with revenues, better matches the physical flow of inventories, and improves comparability with industry peers. The change from the Company’s former inventory cost method did not have a material effect on inventory or cost of sales, and, as a result, prior comparative financial statements have not been restated.
As of
March 31, 2018
and
December 31, 2017
, our finished goods inventories accounted for
97.5%
of our consolidated inventories, and the remaining balance consists of raw materials and work-in-process.
Marketing Expenses
Total marketing expenses inclusive of advertising, production, promotion, and agency expenses were
$15.5 million
and
$12.0 million
for the
three months ended March 31, 2018
and
2017
, respectively, and are reported in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of operations.
Prepaid advertising and promotional endorsement costs of
$4.5 million
and
$7.0 million
are included in ‘Prepaid expenses and other assets’ in the condensed consolidated balance sheets at
March 31, 2018
and
December 31, 2017
, respectively.
2
.
RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncement Adopted
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
In March 2018, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on the income tax accounting implications of the U.S. Tax Cuts and Job Act (“Tax Act”), addressing the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The guidance provides a measurement period for companies to evaluate the impacts of the Tax Act on their financial statements. This measurement period begins in the reporting period that includes the enactment date and ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements, and cannot exceed one year.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements for the three months ended March 31, 2018 and the year ended December 31, 2017, including provisional estimates for BEAT, GILTI, and Transition Tax. The U.S. Treasury Department, the Internal Revenue Service (“IRS”), and other standard-setting bodies may issue guidance on how the provisions of the Tax Act will be applied or otherwise administered that is different from our interpretation. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the IRS or other standard-setting bodies, we may make adjustments to the provisional amounts that could materially affect our financial position and results of operations as well as our effective tax rate in the period in which the adjustments are made. See
Note 10 — Income Taxes
for more information.
Stock Compensation Scope of Modification Accounting
In May 2017, the FASB issued authoritative guidance intended to clarify those changes to terms and conditions of stock-based compensation awards that are required to be accounted for as modifications of existing stock-based awards. The Company adopted this guidance as of January 1, 2018. The adoption did not have an impact on our consolidated financial position or results of operations.
Clarifying the Definition of a Business
In January 2017, the FASB issued authoritative guidance intended to clarify the definition of a business, for purposes of determining whether a business has been acquired or sold, and consequently whether transactions should be accounted for as acquisitions or disposals of a business or as acquisitions or disposals of assets. The Company adopted this guidance as of January 1, 2018. The adoption did not have an impact on our consolidated financial position or results of operations.
Statement of Cash Flows - Classification and Change in Restricted Cash
In August 2016, the FASB issued authoritative guidance intended to clarify how entities should classify certain cash receipts and cash payments in the statement of cash flows. In November 2016, the FASB issued additional guidance requiring that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts reported in the statement of cash flows. The guidance is applied retrospectively to all periods presented and is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. The Company adopted this guidance as of January 1, 2018. As a result of the adoption, the Company changed the presentation in its statements of cash flows for all periods presented.
Prepaid Stored-Value Products
In March 2016, the FASB issued guidance related to the recognition of breakage for certain prepaid stored-value products. The standard is effective for annual periods (including interim periods) beginning after December 15, 2017. The Company adopted this guidance as of January 1, 2018. The adoption did not have a significant impact on our consolidated financial position or results of operations.
Revenue Recognition
In May 2014, the FASB issued authoritative guidance related to revenue recognition from contracts with customers. On January 1, 2018, the Company adopted the guidance using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenues, gross margins or income from operations.
Substantially all of the Company’s revenues are recognized when control of product passes to customers when the products are shipped or delivered. Effective January 1, 2018, the Company changed its balance sheet presentation for expected product returns by reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns. The product return asset is reported within ‘Prepaid expenses and other assets’ in the condensed consolidated balance sheet. The returns liability and payments received from customers for future delivery of products are reported within ‘Accrued liabilities and other expenses’ in the condensed consolidated balance sheet.
The Company elected to account for shipping and handling costs associated with outbound freight after control of product passes to customers as fulfillment costs, which are expensed as incurred and included in ‘Cost of sales’ in our condensed consolidated statements of operations. There is no change to the Company’s comparative reporting of shipping and handling costs as a result of adoption.
The Company elected to expense incremental costs to obtain customer contracts, consisting primarily of commission incentives, when incurred and reports these costs within ‘Selling, general and administrative expenses’ in its condensed consolidated statement of operations. There is no change to the Company’s comparative reporting of incremental costs to obtain customer contracts as a result of adoption.
The impact of adoption on the January 1, 2018 consolidated balance sheet was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Impact of Adoption
(1)
|
|
January 1, 2018
|
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
83,518
|
|
|
$
|
1,801
|
|
|
$
|
85,319
|
|
Prepaid expenses and other assets
|
|
22,596
|
|
|
1,555
|
|
|
24,151
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
84,446
|
|
|
3,356
|
|
|
87,802
|
|
(1)
Prior to adoption, product return assets and return liabilities were reported within ‘Accounts receivable, net’, within the allowance for doubtful accounts. As of the adoption date, the product return assets were reclassified and reported as a component of ‘Prepaid expenses and other assets’, and return liabilities were reclassified to ‘Accrued expenses and other liabilities’ in the Company’s condensed consolidated balance sheet.
The impact of the new revenue recognition guidance on our condensed consolidated balance sheet as of
March 31, 2018
was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Balances Without Adoption
|
|
Effects of New Guidance
(1)
|
|
As Reported
|
|
|
(in thousands)
|
Assets:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
165,238
|
|
|
$
|
4,716
|
|
|
$
|
169,954
|
|
Prepaid expenses and other assets
|
|
18,937
|
|
|
3,044
|
|
|
21,981
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
77,688
|
|
|
7,760
|
|
|
85,448
|
|
(1)
The new revenue recognition guidance requires comparative disclosures of the effects of the new guidance on the Company’s condensed consolidated financial statements for all interim periods during the year of adoption. The new guidance did not have a significant effect on the Company’s condensed consolidated statement of operations for the three months ended
March 31, 2018
.
See
Note 8 — Revenues
for additional disclosures.
New Accounting Pronouncements Not Yet Adopted
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued authoritative guidance that permits reclassification of the income tax effects of the Tax Act on other accumulated comprehensive income (“AOCI”) to retained earnings. This guidance may be adopted retrospectively to each period (or periods) in which the income tax effects of the Tax Act related to items remaining in AOCI are recognized, or at the beginning of the period of adoption. The guidance becomes effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The Company does not expect adoption of this standard will have a significant impact on the Company’s consolidated financial statements.
Leases
In February 2016, the FASB issued authoritative guidance intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Additionally, this guidance will require disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The guidance will be applied under a modified retrospective transition approach. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted.
The Company will adopt this guidance effective January 1, 2019. In July 2017, the Company established an implementation team and engaged external advisers and solution providers to develop a multi-phase plan to assess the Company’s leasing arrangements, as well as any changes to accounting policies, processes or systems necessary to adopt the requirements of the new standard. The Company has entered into agreements to procure software and services for the adoption and has begun assessments of its lease agreements, system capabilities and requirements. The Company is evaluating the full impact this guidance will have on its consolidated financial statements, and expects that adoption will result in significant increases in lease-related assets and liabilities on its consolidated balance sheet.
Other Pronouncements
Other new pronouncements issued but not effective until after
March 31, 2018
are not expected to have a material impact on the Company’s condensed consolidated financial statements.
3
.
ACCRUED EXPENSES AND OTHER LIABILITIES
Amounts reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets were:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
|
(in thousands)
|
Accrued compensation and benefits
|
$
|
21,960
|
|
|
$
|
34,955
|
|
Professional services
|
10,082
|
|
|
10,835
|
|
Accrued rent and occupancy
|
8,907
|
|
|
8,535
|
|
Fulfillment, freight, and duties
|
13,311
|
|
|
6,921
|
|
Royalties payable and deferred revenue
|
5,822
|
|
|
6,193
|
|
Sales/use and value added taxes payable
|
5,623
|
|
|
3,509
|
|
Return liabilities
(1)
|
7,760
|
|
|
—
|
|
Other
(2)
|
11,983
|
|
|
13,498
|
|
Total accrued expenses and other liabilities
|
$
|
85,448
|
|
|
$
|
84,446
|
|
(1)
Return liabilities are presented within ‘Accrued expenses and other liabilities’ upon adoption of new authoritative guidance on revenue recognition effective January 1, 2018, as described in
Note 2 — Recent Accounting Pronouncements
.
(2)
Includes current liabilities of
$3.0 million
related to Series A preferred stock dividends at both
March 31, 2018
and
December 31, 2017
.
4
.
FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
All of the Company’s derivative instruments are classified as Level 2 and are reported in the condensed consolidated balance sheets within ‘Accrued expenses and other liabilities’ at
March 31, 2018
and
December 31, 2017
. The fair values of the Company’s derivative instruments were liabilities of
$0.1 million
and
$0.4 million
at
March 31, 2018
and
December 31, 2017
, respectively. See
Note 5 — Derivative Financial Instruments
for more information.
The carrying amounts of the Company’s cash, cash equivalents and restricted cash, accounts receivable, accounts payable, and current accrued expenses and other liabilities approximate their fair value as recorded due to the short-term maturity of these instruments.
The Company’s borrowing instruments are recorded at their carrying values in the condensed consolidated balance sheets, which may differ from their respective fair values. The fair values of the Company’s outstanding notes payable approximate their carrying values at
March 31, 2018
and
December 31, 2017
, based on interest rates currently available to the Company for similar borrowings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
(in thousands)
|
Borrowings and capital lease obligations
|
$
|
309
|
|
|
$
|
309
|
|
|
$
|
706
|
|
|
$
|
706
|
|
Non-Financial Assets and Liabilities
The Company’s non-financial assets, which primarily consist of property and equipment, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. The fair values of these assets are determined based on Level 3 measurements, including estimates of the amount and timing of future cash flows based upon historical experience, expected market conditions, and management’s plans. Impairment expense is reported in ‘Selling, general and administrative expenses’ in the Company’s condensed consolidated statements of operations. During the three months ended
March 31, 2018
, the Company recorded non-cash impairment expenses of
$0.6 million
and
$0.9 million
, respectively, to reduce the carrying values of certain retail store assets in the Asia Pacific segment and certain supply chain assets, included in ‘Other businesses,’ to their estimated fair values. The Company did not record impairment in the three months ended March 31, 2017.
5
.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company transacts business in various foreign countries and is therefore exposed to foreign currency exchange rate risk that impacts the reported U.S. Dollar amounts of revenues, costs, and certain foreign currency monetary assets and liabilities. In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in earnings caused by fluctuations in foreign exchange rates, the Company enters into forward contracts to buy and sell foreign currency. By policy, the Company does not enter into these contracts for trading purposes or speculation.
Counterparty default risk is considered low because the forward contracts that the Company enters into are over-the-counter instruments transacted with highly-rated financial institutions. The Company was not required to and did not post collateral as of
March 31, 2018
or
December 31, 2017
.
The Company’s derivative instruments are recorded at fair value as a derivative asset or liability in the condensed consolidated balance sheets. The Company reports derivative instruments with the same counterparty on a net basis when a master netting arrangement is in place. Changes in fair value are recognized within ‘Foreign currency gains, net’ in the condensed consolidated statements of operations. For the condensed consolidated statements of cash flows, the Company classifies cash flows from derivative instruments at settlement in the same category as the cash flows from the related hedged items within ‘Cash provided by (used in) operating activities.’
Results of Derivative Activities
The fair values of derivative assets and liabilities, net, all of which are classified as Level 2 and are reported within either ‘Prepaid expenses and other assets’ or ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
(in thousands)
|
Forward foreign currency exchange contracts
|
$
|
1,346
|
|
|
$
|
(1,469
|
)
|
|
$
|
1,241
|
|
|
$
|
(1,647
|
)
|
Netting of counterparty contracts
|
(1,346
|
)
|
|
1,346
|
|
|
(1,241
|
)
|
|
1,241
|
|
Foreign currency forward contract derivatives
|
$
|
—
|
|
|
$
|
(123
|
)
|
|
$
|
—
|
|
|
$
|
(406
|
)
|
The notional amounts of outstanding foreign currency forward exchange contracts presented below report the total U.S. Dollar equivalent position and the net contract fair values for each foreign currency position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Notional
|
|
Fair Value
|
|
Notional
|
|
Fair Value
|
|
(in thousands)
|
Singapore Dollar
|
$
|
45,297
|
|
|
$
|
(7
|
)
|
|
$
|
73,455
|
|
|
$
|
364
|
|
Euro
|
46,410
|
|
|
39
|
|
|
37,718
|
|
|
(122
|
)
|
Japanese Yen
|
38,076
|
|
|
(1,015
|
)
|
|
30,688
|
|
|
(89
|
)
|
South Korean Won
|
17,202
|
|
|
(182
|
)
|
|
15,888
|
|
|
(134
|
)
|
British Pound Sterling
|
11,023
|
|
|
—
|
|
|
13,233
|
|
|
80
|
|
Other currencies
|
68,094
|
|
|
1,042
|
|
|
53,698
|
|
|
(505
|
)
|
Total
|
$
|
226,102
|
|
|
$
|
(123
|
)
|
|
$
|
224,680
|
|
|
$
|
(406
|
)
|
|
|
|
|
|
|
|
|
Latest maturity date
|
April 2018
|
|
January 2018
|
Amounts reported in ‘Foreign currency gains, net’ in the condensed consolidated statements of operations include both realized and unrealized gains (losses) from foreign currency transactions and derivative contracts, and were:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Foreign currency transaction gains
|
$
|
1,051
|
|
|
$
|
3,211
|
|
Foreign currency forward exchange contracts gains (losses)
|
20
|
|
|
(2,935
|
)
|
Foreign currency gains, net
|
$
|
1,071
|
|
|
$
|
276
|
|
6
.
REVOLVING CREDIT FACILITIES AND BANK BORROWINGS
The Company’s borrowings consisted of:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
|
(in thousands)
|
Notes payable
|
$
|
266
|
|
|
$
|
662
|
|
Capital lease obligations
|
43
|
|
|
44
|
|
Total borrowings and capital lease obligations
|
309
|
|
|
706
|
|
Less: Current portion of borrowings and capital lease obligations
|
281
|
|
|
676
|
|
Total long-term capital lease obligations
|
$
|
28
|
|
|
$
|
30
|
|
Senior Revolving Credit Facility
In December 2011, the Company entered into a revolving credit facility (“the Facility”), pursuant to an Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association (“PNC”), as a lender and administrative agent for the lenders. The Credit Agreement, as amended, contains certain covenants that restrict certain actions by the Company, including limitations on: (i) stock repurchases to
$100.0 million
per year, subject to certain restrictions; and (ii) capital expenditures and commitments to
$50.0 million
per year. The Credit Agreement also permits intercompany loans of up to
$375.0 million
and requires the Company to meet certain financial covenant ratios that become effective when average outstanding borrowings under the Credit Agreement, including letters of credit, exceed the lesser of
$40.0 million
or
40%
of the total commitments during certain periods or if the outstanding borrowings exceed the borrowing base. If the financial covenant ratios are in effect, the Company must maintain a minimum fixed charge coverage ratio of
1.10
to 1.00, and a maximum leverage ratio of
2.00
to 1.00. As of
March 31, 2018
, the Company was in compliance with all financial covenants.
As of
March 31, 2018
, the total commitments available from the lenders under the Facility were
$100.0 million
. At
March 31, 2018
, the Company had
no
outstanding borrowings and $
0.6 million
in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As of
March 31, 2018
and
December 31, 2017
, the Company had $
99.4 million
of available borrowing capacity under the Facility.
Asia Revolving Credit Facilities
The Company’s revolving credit facility agreement with HSBC Bank (China) Company Limited, Shanghai Branch (“HSBC”), or the “HSBC Facility,” provides the Company uncommitted dual currency revolving loan facilities of up to
40.0 million
Chinese Renminbi (“RMB”), or
$6.4 million
, with a combined facility limit of RMB
60.0 million
, or
$9.6 million
. As of
March 31, 2018
and
December 31, 2017
, borrowings under the HSBC Facility remained suspended at the discretion of HSBC.
The Company’s revolving credit facility agreement with China Merchants Bank Company Limited, Shanghai Branch (the “CMBC Facility”), provides the Company a revolving loan facility of up to
30.0 million
RMB, or
$4.8 million
, subject to consent by the lender. The CMBC Facility will mature in
January 2019
. The CMBC Facility may be canceled or suspended at any time by either party. As of
March 31, 2018
, there were
no
borrowings outstanding on this credit facility.
Notes Payable
Notes payable incur interest at fixed rates ranging from
1.95%
to
2.83%
.
Maturities
The maturities of the Company’s debt and capital lease obligations were:
|
|
|
|
|
|
As of March 31, 2018
|
|
(in thousands)
|
2018 (remainder of year)
|
$
|
277
|
|
2019
|
14
|
|
2020
|
12
|
|
2021
|
6
|
|
Total principal debt maturities and capital lease obligations
|
309
|
|
Less: current portion
|
281
|
|
Non-current portion
|
$
|
28
|
|
7
.
COMMON STOCK REPURCHASE PROGRAM
For the
three months ended March 31, 2018
, the Company repurchased
1.4 million
shares of its common stock at a cost of
$20.1 million
, including commissions. During the
three months ended March 31, 2017
, the Company did not repurchase any of its common stock. As of
March 31, 2018
, the Company had remaining authorization to repurchase approximately
$198.8 million
of its common stock, subject to restrictions under its Credit Agreement.
8
.
REVENUES
The Company adopted authoritative guidance related to the recognition of revenue from contracts with customers effective January 1, 2018 using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented. See ‘Revenue Recognition’ in
Note 2 — Recent Accounting Pronouncements
for a discussion of the significant changes resulting from adoption of the guidance. The adoption of the guidance did not have a significant impact on revenues.
Revenues by reportable operating segment and by channel were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
Americas
|
|
Asia Pacific
|
|
Europe
|
|
Other Businesses
|
|
Total
|
|
|
(in thousands)
|
Wholesale
|
|
$
|
72,674
|
|
|
$
|
71,733
|
|
|
$
|
49,877
|
|
|
$
|
313
|
|
|
$
|
194,597
|
|
Retail
|
|
34,716
|
|
|
17,614
|
|
|
7,176
|
|
|
—
|
|
|
59,506
|
|
E-commerce
|
|
16,440
|
|
|
7,815
|
|
|
4,790
|
|
|
—
|
|
|
29,045
|
|
Total revenues
|
|
$
|
123,830
|
|
|
$
|
97,162
|
|
|
$
|
61,843
|
|
|
$
|
313
|
|
|
$
|
283,148
|
|
Revenues are recognized in the amount expected to be received in exchange when control of the products transfers to customers, and excludes various forms of promotions, which range from contractually-fixed percentage price reductions to sales returns, discounts, rebates, and other incentives that may vary in amount and must be estimated. Variable amounts are estimated based on an analysis of historical experience and adjusted as better estimates become available. During the
three months ended March 31, 2018
, the Company recognized an increase of
$0.8 million
to wholesale revenues due to changes in estimates related to products transferred to customers in prior periods. There were no changes to estimates in retail and e-commerce channels during the
three months ended March 31, 2018
.
The Company elected to exclude from revenues taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and concurrent with revenue-producing activities, and as a result there is no change in presentation from prior comparative periods.
The following is a description of our principal revenue-generating activities by distribution channel. The Company has three reportable operating segments and sells its products using three primary distribution channels. For more detailed information about reportable operating segments, see ‘
Note 13 — Operating Segments and Geographic Information
’.
Wholesale Channel
For the majority of wholesale customers, control transfers and revenues are recognized when the product is shipped or delivered from a manufacturing facility or distribution center to the wholesale customer. In certain cases, control of the product transfers and revenues are recognized when the customer receives the product at the designated delivery point. For certain customers, primarily in the Asia Pacific region, cash payment from customers is required in advance of delivery and revenues are recognized upon the later of cash receipt or delivery of the product. For a small number of customers in the Asia Pacific region, products are sold on consignment and revenues are recognized on a sell-through basis. Wholesale customers are invoiced when products are shipped or delivered.
The Company has arrangements that grant certain wholesale customers exclusive licenses, concurrent with the terms of the related distribution agreements, to use the Company’s intellectual property in exchange for a sales-based royalty. Sales-based royalty revenues are recognized over the terms of the related license agreements as sales are made by the wholesalers.
Retail Channel
The Company transfers control of products and recognizes revenues at retail stores at the point of sale, in exchange for cash or other payment, primarily debit or credit card. A portion of the transaction price charged to our customers is variable, primarily due to promotional discounts or allowances, and terms that permit retail customers to exchange or return products for a full refund within a limited period of time. When recognizing revenues, the amount of revenues associated with expected sales returns is estimated based on historical experience, and adjustments to our estimates are made when the most likely amount of consideration we expect to receive changes.
E-commerce Channel
In the e-commerce channel, the Company transfers control and recognizes revenues when the product is shipped from the distribution centers. Payment from customers is primarily through debit and credit card and is made at the time the customer order is shipped.
Similar to the retail channel, a portion of the amount of revenue is variable, primarily due to sales returns, discounts, and other promotional allowances offered to our customers. When recognizing revenues, the amount of revenues associated with expected sales returns is estimated based on historical experience, and adjustments are made when the most likely amount of consideration changes. Historically, the amount of revenues associated with product returns in the e-commerce channel has been higher than the retail channel.
Contract Liabilities
Contract liabilities consist of advance cash deposits received from wholesale customers to secure product orders in connection with seasonal selling seasons, and payments received in advance of delivery. As products are shipped and control transfers, the Company recognizes the deferred revenue in ‘Revenues’ in the condensed consolidated statement of operations. At January 1 and
March 31, 2018
,
$1.3 million
and
$2.1 million
, respectively, of deferred revenues associated with advance customer deposits were reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets. Deferred revenues of
$0.8 million
were recognized in revenues during the
three months ended March 31, 2018
. The remainder of deferred revenues at March 31, 2018 are expected to be recognized in revenues during the second quarter of 2018 as products are shipped or delivered.
Refund Liabilities
Refund liabilities, primarily associated with product sales returns, retrospective volume rebates, and early payment discounts are estimated based on an analysis of historical experience, and adjustments to revenues made when the most likely amount of consideration expected changes. At January 1 and
March 31, 2018
,
$3.4 million
and
$7.8 million
, respectively, of refund liabilities, primarily associated with product returns, were reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheet.
9
.
SHARE-BASED COMPENSATION
The Company’s share-based compensation awards are issued under the 2015 Equity Incentive Plan (“2015 Plan”) and two predecessor plans, the 2005 Equity Incentive Plan, and the 2007 Equity Incentive Plan (the “2007 Plan”). Any awards that expire or are forfeited under the 2007 Plan become available for issuance under the 2015 Plan. As of
March 31, 2018
,
2.2 million
shares
of common stock remained available for future issuance under all plans, subject to adjustment for future stock splits, stock dividends, and similar changes in capitalization.
Refer to Notes 1 and 10 of the Company’s Annual Report on Form 10-K for a detailed description of the Company’s share-based compensation awards, including information related to grant date fair value, vesting terms, performance, and other conditions.
Share-Based Compensation Expense
Pre-tax share-based compensation expense reported in the Company’s condensed consolidated statements of operations was:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Cost of sales
|
$
|
79
|
|
|
$
|
89
|
|
Selling, general and administrative expenses
|
2,595
|
|
|
2,522
|
|
Total share-based compensation expense
|
$
|
2,674
|
|
|
$
|
2,611
|
|
Stock Option Activity
Stock option activity during the
three months ended March 31, 2018
was:
|
|
|
|
|
Number of Options
|
|
(in thousands)
|
|
Outstanding December 31, 2017
|
541
|
|
Granted
|
—
|
|
Exercised
|
(26
|
)
|
Forfeited or expired
|
(11
|
)
|
Outstanding March 31, 2018
|
504
|
|
As of
March 31, 2018
, the Company had
$0.4 million
of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted average period of
2.06
years.
Restricted Stock Awards and Restricted Stock Units Activity
The Company grants time-based Restricted Stock Awards (“RSAs”) as well as time-based and performance-based Restricted Stock Units (“RSUs”). RSA and RSU activity during the
three months ended March 31, 2018
was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Restricted Stock Units
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
(in thousands, except fair value data)
|
Unvested at December 31, 2017
|
17
|
|
|
$
|
6.84
|
|
|
3,791
|
|
|
$
|
7.99
|
|
Granted
|
—
|
|
|
—
|
|
|
1,137
|
|
|
14.11
|
|
Vested
|
(8
|
)
|
|
6.84
|
|
|
(919
|
)
|
|
8.28
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(761
|
)
|
|
6.96
|
|
Unvested at March 31, 2018
|
9
|
|
|
$
|
6.84
|
|
|
3,248
|
|
|
$
|
10.64
|
|
As of
March 31, 2018
, unrecognized share-based compensation expense for RSAs was less than
$0.1 million
, which is expected to amortize over a remaining weighted average period of
0.18
years.
RSUs vested during the
three months ended March 31, 2018
consisted of
0.7 million
time-based awards and
0.3 million
performance-based awards. As of
March 31, 2018
, unrecognized share-based compensation expenses for time-based and performance-based
awards were
$12.6 million
and
$8.2 million
, respectively, and are expected to amortize over remaining weighted average period of
1.87
years and
2.73
years, respectively.
10
.
INCOME TAXES
U.S. Federal Income Tax Reform
The Tax Act resulted in a number of significant changes to U.S. federal income tax law for U.S. corporations. Most notably, the statutory U.S. federal corporate income tax rate was changed from 35% to 21% for corporations. In addition to the change in the corporate income tax rate, the Tax Act further introduced a number of other changes including a one-time transition tax via a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits; the introduction of a tax on Global Intangible Low-Taxed Income (“GILTI”) for tax years beginning after December 31, 2017; the limitation of deductible net interest to 30% of adjustable taxable income; the further limitation of the deductibility of share-based compensation of certain highly-compensated employees; the ability to elect to accelerate bonus depreciation on certain qualified assets; and the Base Erosion and Anti-Abuse Tax (“BEAT”).
Income tax expense and effective tax rates were:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
|
(in thousands, except effective tax rate)
|
Income before income taxes
|
$
|
27,212
|
|
|
$
|
15,948
|
|
Income tax expense
|
10,758
|
|
|
4,938
|
|
Effective tax rate
|
39.5
|
%
|
|
31.0
|
%
|
The increase in the effective tax rate for the three months ended
March 31, 2018
, compared to the same period in
2017
, is partially due to the impact of the GILTI provisions included in the Tax Act. The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in the effective tax rate calculation. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The increase in the effective tax rate is also due to operating losses in certain jurisdictions where the Company is unable to record tax benefits because it has determined that it is not more likely than not that such tax benefits will be realized, as well as an increase in profitability in certain jurisdictions for which tax expense is recorded. The Company’s effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions, the GILTI tax, as well as book losses in certain jurisdictions for which tax benefits cannot be recognized. There were no significant or unusual discrete tax items during the three months ended
March 31, 2018
. The Company had unrecognized tax benefits of
$6.2 million
at
March 31, 2018
and
December 31, 2017
, and the Company does not expect any significant changes in tax benefits in the next twelve months.
11
.
EARNINGS PER SHARE
Basic and diluted earnings per common share (“EPS”) for the
three months ended March 31, 2018
and
2017
were:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Numerator:
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
12,523
|
|
|
$
|
7,155
|
|
Less: Net income allocable to Series A convertible preferred stockholders
(1)
|
(2,094
|
)
|
|
(1,127
|
)
|
Adjusted net income available to common stockholders - basic and diluted
|
$
|
10,429
|
|
|
$
|
6,028
|
|
Denominator:
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
68,705
|
|
|
73,810
|
|
Plus: dilutive effect of stock options and unvested restricted stock units
|
2,963
|
|
|
751
|
|
Weighted average common shares outstanding - diluted
|
71,668
|
|
|
74,561
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
Basic
|
$
|
0.15
|
|
|
$
|
0.08
|
|
Diluted
|
$
|
0.15
|
|
|
$
|
0.08
|
|
(1)
Represents the amount which would have been paid to preferred stockholders in the event the Company had declared a dividend on its common stock.
For the
three months ended March 31, 2018
and
2017
,
0.4 million
and
0.8 million
options and restricted stock units, respectively, were excluded from the calculation of diluted EPS under the two-class method because the effect was anti-dilutive. If converted, Series A Preferred Stock would represent approximately
16.8%
of the Company’s common stock outstanding, or
13.8 million
additional common shares as of
March 31, 2018
.
12
.
COMMITMENTS AND CONTINGENCIES
Rental Commitments and Contingencies
The Company rents retail store, office and warehouse space, vehicles, and equipment under operating leases expiring at various dates through
2033
. Rent expense for leases with escalations or rent holidays is recognized on a straight-line basis over the lease term beginning on the lease inception date. Certain leases also provide for contingent rents, which are generally determined as a percent of sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when the Company determines that achieving the specified levels during the period is probable.
Future minimum lease payments under operating leases were:
|
|
|
|
|
|
As of
March 31, 2018
|
|
(in thousands)
|
2018 (remainder of year)
|
$
|
38,831
|
|
2019
|
36,087
|
|
2020
|
28,726
|
|
2021
|
22,914
|
|
2022
|
16,510
|
|
Thereafter
|
52,356
|
|
Total minimum lease payments
|
$
|
195,424
|
|
Minimum sublease rental income of $
0.2 million
under non-cancelable subleases, and contingent rentals are excluded from the commitment schedule.
Rent expense under operating leases was:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Minimum rentals
(1)
|
$
|
18,279
|
|
|
$
|
20,786
|
|
Contingent rentals
|
2,160
|
|
|
2,260
|
|
Less: Sublease rentals
|
(40
|
)
|
|
(37
|
)
|
Total rent expense
|
$
|
20,399
|
|
|
$
|
23,009
|
|
(1)
Minimum rentals include all lease payments as well as fixed and variable common area maintenance, parking, and storage fees, which were approximately
$2.3 million
and
$2.6 million
during the
three months ended March 31, 2018
and
2017
, respectively.
Purchase Commitments
Under the terms of an annual supply agreement, the Company guarantees payment for certain third-party manufacturer purchases of raw materials used in the manufacture of its products, up to a maximum of €
3.5 million
(approximately
$4.3 million
as of
March 31, 2018
).
As of
March 31, 2018
, the Company had purchase commitments to third-party manufacturers, primarily for materials and supplies used in the manufacture of the Company’s products, for an aggregate of $
110.2 million
.
Other
The Company is regularly subject to, and is currently undergoing, audits by various tax authorities in the United States and several foreign jurisdictions, including customs duties, import, and other taxes for prior tax years.
During its normal course of business, the Company may make certain indemnities, commitments, and guarantees under which it may be required to make payments. The Company cannot determine a range of estimated future payments and has not recorded any liability for indemnities, commitments, and guarantees in the accompanying condensed consolidated balance sheets.
See
Note 14 — Legal Proceedings
for further details regarding potential loss contingencies related to government tax audits and other current legal proceedings.
13
.
OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION
The Company has
three
reportable operating segments based on the geographic nature of its operations: Americas, Asia Pacific, and Europe. In addition, the ‘Other businesses’ category aggregates insignificant operating segments that do not meet the reportable segment threshold, including manufacturing operations located in Mexico and Italy, and corporate operations.
Each of the reportable operating segments derives its revenues from the sale of footwear and accessories to external customers. Revenues for ‘Other businesses’ include non-footwear product sales to external customers that are excluded from the measurement of segment operating revenues and income.
Segment performance is evaluated based on segment results without allocating corporate expenses, or indirect general, administrative, and other expenses. Segment profits or losses include adjustments to eliminate inter-segment sales. Reconciling items between segment income from operations and income from operations consist of other businesses and unallocated corporate and other expenses, as well as inter-segment eliminations. The following tables set forth information related to reportable operating segments:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
|
(in thousands)
|
Revenues:
|
|
|
|
Americas
|
$
|
123,830
|
|
|
$
|
117,722
|
|
Asia Pacific
|
97,162
|
|
|
98,344
|
|
Europe
|
61,843
|
|
|
51,651
|
|
Total segment revenues
|
282,835
|
|
|
267,717
|
|
Other businesses
|
313
|
|
|
190
|
|
Total consolidated revenues
|
$
|
283,148
|
|
|
$
|
267,907
|
|
Income from operations:
|
|
|
|
Americas
|
$
|
28,539
|
|
|
$
|
22,002
|
|
Asia Pacific
|
26,584
|
|
|
26,726
|
|
Europe
|
17,863
|
|
|
12,274
|
|
Total segment income from operations
|
72,986
|
|
|
61,002
|
|
Reconciliation of total segment income from operations to income before income taxes:
|
|
|
|
|
|
Other businesses
|
(10,934
|
)
|
|
(5,617
|
)
|
Unallocated corporate and other
|
(36,130
|
)
|
|
(39,803
|
)
|
Income from operations
|
25,922
|
|
|
15,582
|
|
Foreign currency gains, net
|
1,071
|
|
|
276
|
|
Interest income
|
279
|
|
|
150
|
|
Interest expense
|
(113
|
)
|
|
(184
|
)
|
Other income
|
53
|
|
|
124
|
|
Income before income taxes
|
$
|
27,212
|
|
|
$
|
15,948
|
|
Depreciation and amortization:
|
|
|
|
Americas
|
$
|
1,304
|
|
|
$
|
1,345
|
|
Asia Pacific
|
696
|
|
|
926
|
|
Europe
|
352
|
|
|
385
|
|
Total segment depreciation and amortization
|
2,352
|
|
|
2,656
|
|
Other businesses
|
1,524
|
|
|
1,746
|
|
Unallocated corporate and other
|
3,767
|
|
|
4,044
|
|
Total consolidated depreciation and amortization
|
$
|
7,643
|
|
|
$
|
8,446
|
|