Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended
June 30, 2010
or
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the
transition period from
to
Commission File No. 000-51754
Crocs, Inc.
(Exact name of registrant as specified in its charter)
Delaware
|
|
20-2164234
|
(State
or other jurisdiction of
incorporation or organization)
|
|
(I.R.S.
Employer
Identification No.)
|
6328 Monarch Park Place, Niwot Colorado 80503
(Address of registrants principal executive offices)
(303) 848-7000
(Registrants telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act:
Large
accelerated filer
o
|
|
Accelerated
filer
x
|
|
|
|
Non-accelerated
filer
o
(Do not check if a smaller reporting company)
|
|
Smaller
reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
o
No
x
As
of July 31, 2010, Crocs, Inc. had 86,630,707 shares of its $0.001 par
value common stock outstanding.
Table of
Contents
Crocs, Inc.
Form 10-Q
Quarter Ended June 30, 2010
Table of Contents
2
Table of
Contents
PART IFINANCIAL
INFORMATION
ITEM 1.
Financial Statements
CROCS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Revenues
|
|
$
|
228,046
|
|
$
|
197,722
|
|
$
|
394,898
|
|
$
|
332,614
|
|
Cost
of sales
|
|
96,127
|
|
96,610
|
|
176,275
|
|
181,771
|
|
Gross
profit
|
|
131,919
|
|
101,112
|
|
218,623
|
|
150,843
|
|
Selling,
general and administrative expenses
|
|
94,047
|
|
94,606
|
|
168,825
|
|
163,395
|
|
Foreign
currency transaction losses (gains), net
|
|
(1,129
|
)
|
(3,623
|
)
|
(1,421
|
)
|
(214
|
)
|
Restructuring
charges
|
|
|
|
5,915
|
|
2,539
|
|
5,953
|
|
Impairment
charges
|
|
|
|
23,655
|
|
141
|
|
23,724
|
|
Charitable
contributions
|
|
275
|
|
5,078
|
|
418
|
|
5,119
|
|
Income
(loss) from operations
|
|
38,726
|
|
(24,519
|
)
|
48,121
|
|
(47,134
|
)
|
Interest
expense
|
|
163
|
|
562
|
|
292
|
|
1,257
|
|
Gain
on charitable contribution
|
|
(32
|
)
|
(2,024
|
)
|
(116
|
)
|
(2,024
|
)
|
Other
expense (income), net
|
|
(291
|
)
|
(343
|
)
|
(50
|
)
|
(1,446
|
)
|
Income
(loss) before income taxes
|
|
38,886
|
|
(22,714
|
)
|
47,995
|
|
(44,921
|
)
|
Income
tax expense
|
|
6,602
|
|
7,567
|
|
9,994
|
|
7,777
|
|
Net
income (loss)
|
|
$
|
32,284
|
|
$
|
(30,281
|
)
|
$
|
38,001
|
|
$
|
(52,698
|
)
|
Net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.38
|
|
$
|
(0.36
|
)
|
$
|
0.44
|
|
$
|
(0.62
|
)
|
Diluted
|
|
$
|
0.37
|
|
$
|
(0.36
|
)
|
$
|
0.43
|
|
$
|
(0.62
|
)
|
See notes to condensed consolidated financial statements.
3
Table of
Contents
CROCS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
|
|
June 30, 2010
|
|
December 31, 2009
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
96,867
|
|
$
|
77,343
|
|
Restricted
cash
|
|
590
|
|
1,144
|
|
Accounts
receivable, net
|
|
93,974
|
|
50,458
|
|
Inventories
|
|
113,553
|
|
93,329
|
|
Deferred
tax assets, net
|
|
7,569
|
|
7,358
|
|
Income
tax receivable
|
|
11,297
|
|
8,611
|
|
Other
receivables
|
|
11,715
|
|
16,140
|
|
Prepaid
expenses and other current assets
|
|
14,277
|
|
12,871
|
|
Total
current assets
|
|
349,842
|
|
267,254
|
|
Property
and equipment, net
|
|
66,731
|
|
71,084
|
|
Restricted
cash
|
|
1,466
|
|
1,506
|
|
Intangible
assets, net
|
|
41,335
|
|
35,984
|
|
Deferred
tax assets, net
|
|
17,403
|
|
18,479
|
|
Marketable
securities
|
|
5,444
|
|
866
|
|
Other
assets
|
|
14,832
|
|
14,565
|
|
Total
assets
|
|
$
|
497,053
|
|
$
|
409,738
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
51,841
|
|
$
|
23,434
|
|
Accrued
expenses and other current liabilities
|
|
58,544
|
|
53,589
|
|
Accrued
restructuring charges
|
|
3,977
|
|
2,616
|
|
Income
taxes payable
|
|
20,120
|
|
6,377
|
|
Note
payable, current portion of long-term debt and capital lease obligations
|
|
1,556
|
|
640
|
|
Total
current liabilities
|
|
136,038
|
|
86,656
|
|
Long
term debt and capital lease obligations
|
|
1,434
|
|
912
|
|
Deferred
tax liabilities, net
|
|
1,867
|
|
2,192
|
|
Long
term restructuring
|
|
103
|
|
520
|
|
Other
liabilities
|
|
31,803
|
|
31,838
|
|
Total
liabilities
|
|
171,245
|
|
122,118
|
|
Commitments
and contingencies (note 15)
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
Common
shares, par value $0.001 per share; 250,000,000 shares authorized, 87,079,451
and 86,482,574 shares issued and outstanding, respectively, at June 30,
2010 and 86,224,760 and 85,659,581 shares issued and outstanding,
respectively, at December 31, 2009
|
|
87
|
|
85
|
|
Treasury
stock, at cost, 596,877 and 565,179 shares, respectively
|
|
(24,963
|
)
|
(25,260
|
)
|
Additional
paid-in capital
|
|
272,146
|
|
266,472
|
|
Retained
earnings
|
|
60,156
|
|
22,155
|
|
Accumulated
other comprehensive income
|
|
18,382
|
|
24,168
|
|
Total
stockholders equity
|
|
325,808
|
|
287,620
|
|
Total
liabilities and stockholders equity
|
|
$
|
497,053
|
|
$
|
409,738
|
|
See notes to condensed consolidated financial statements.
4
Table of
Contents
CROCS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(U
naudited)
|
|
For the Six Months
Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
38,001
|
|
$
|
(52,698
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
17,610
|
|
19,177
|
|
Loss
(gain) on disposal of fixed assets
|
|
796
|
|
(753
|
)
|
Unrealized
gain on foreign exchange rates
|
|
(3,309
|
)
|
(10,729
|
)
|
Deferred
income taxes
|
|
1,089
|
|
1,342
|
|
Asset
impairment
|
|
133
|
|
23,656
|
|
Inventory
write down
|
|
|
|
2,568
|
|
Charitable
contributions
|
|
435
|
|
5,075
|
|
Gain
on charitable contributions
|
|
(124
|
)
|
(2,024
|
)
|
Non-cash
restructuring charges
|
|
196
|
|
1,768
|
|
Share-based
compensation
|
|
3,870
|
|
23,419
|
|
Bad
debt expense
|
|
1,653
|
|
1,263
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
(46,659
|
)
|
(31,650
|
)
|
Income
tax receivable
|
|
(3,480
|
)
|
23,130
|
|
Inventories
|
|
(23,255
|
)
|
25,944
|
|
Prepaid
expenses and other assets
|
|
1,304
|
|
(5,889
|
)
|
Accounts
payable
|
|
30,063
|
|
225
|
|
Accrued
restructuring charges
|
|
1,745
|
|
4,644
|
|
Accrued
expenses and other liabilities
|
|
19,768
|
|
(2,351
|
)
|
Cash
provided by operating activities
|
|
39,836
|
|
26,117
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
Cash
paid for purchases of property and equipment
|
|
(13,281
|
)
|
(6,024
|
)
|
Proceeds
from disposal of property and equipment
|
|
937
|
|
1,108
|
|
Cash
paid for intangible assets
|
|
(6,985
|
)
|
(2,450
|
)
|
Purchases
of marketable securities
|
|
(5,482
|
)
|
|
|
Maturities
of marketable securities
|
|
1,701
|
|
|
|
Restricted
cash
|
|
299
|
|
264
|
|
Cash
used in investing activities
|
|
(22,811
|
)
|
(7,102
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
Proceeds
from note payable
|
|
18,400
|
|
|
|
Repayment
of note payable and capital lease obligations
|
|
(19,054
|
)
|
(5,130
|
)
|
Repurchase
of stock for stock option exercise tax withholding
|
|
(421
|
)
|
|
|
Exercise
of stock options
|
|
2,341
|
|
227
|
|
Cash
provided by (used in) financing activities
|
|
1,266
|
|
(4,903
|
)
|
Effect
of exchange rate changes on cash
|
|
1,233
|
|
11,700
|
|
Net
increase in cash and cash equivalents
|
|
19,524
|
|
25,812
|
|
Cash
and cash equivalentsbeginning of period
|
|
77,343
|
|
51,665
|
|
Cash
and cash equivalentsend of period
|
|
$
|
96,867
|
|
$
|
77,477
|
|
Supplemental
disclosure of cash flow informationcash paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
284
|
|
$
|
1,233
|
|
Income
taxes
|
|
$
|
6,674
|
|
$
|
6,745
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
Assets
acquired through capital leases
|
|
$
|
2,089
|
|
$
|
1,024
|
|
See notes to condensed consolidated financial statements.
5
Table of
Contents
CROCS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Crocs, Inc.
and its subsidiaries (collectively, we, us, or the Company) are engaged
in the design, manufacture, worldwide marketing and brand management of
footwear made for men, women and children.
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States (GAAP) for interim financial information and with the rules and
regulations for reporting on Form 10-Q. Accordingly, these statements do
not include all of the information and disclosures required by GAAP or
Securities and Exchange Commission (SEC) rules and regulations for
complete financial statements. In the opinion of management, these financial
statements reflect all adjustments considered necessary for a fair presentation
of the results for the interim periods presented. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These
statements should be read in conjunction with the consolidated financial
statements and footnotes included in our Annual Report on Form 10-K for
the year ended December 31, 2009 (the 2009 Form 10-K). The
accounting policies used in preparing these unaudited condensed consolidated
financial statements are the same as those described in Note 2 to the
consolidated financial statements in the 2009 Form 10-K.
Certain
reclassifications have been made to prior year amounts to conform to current
year presentation as follows: Foreign
currency transaction losses (gains), net have been reclassified from selling,
general, and administrative expenses and are now reported separately. There was
no change to the Companys loss from continuing operations as a result of these
reclassifications. Marketable securities
of a long-term nature have been reclassified from long-term other assets and
are now reported separately.
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Management believes that the estimates,
judgments and assumptions made when accounting for items and matters such as,
but not limited to, the allowance for doubtful accounts, returns and discounts;
impairment assessments and charges; recoverability of assets (including
deferred tax assets); uncertain tax positions; share-based compensation
expense; fair value of acquired intangibles; assessment of lower of cost or
market on inventory; useful lives assigned to long-lived assets; depreciation;
and provisions for contingencies; are reasonable based on information available
at the time they are made. These estimates, judgments and assumptions can affect
the reported amounts of assets and liabilities as of the date of the
consolidated financial statements as well as the reported amounts of revenue
and expenses during the periods presented. Management also makes estimates in
our assessments of potential losses in relation to threatened or pending legal
and tax matters. See Note 18Legal Proceedings. Actual results could materially
differ from these estimates. For matters not related to income taxes, if a loss
is considered probable and the amount can be reasonably estimated, the Company
recognizes an expense for the estimated loss. If there is the potential to
recover a portion of the estimated loss from a third party, the Company makes a
separate assessment of recoverability and reduces the estimated loss if
recovery is also deemed probable.
Change in Accounting Principle
Effective
January 1, 2010, the Company changed its inventory valuation method for
all inventories from the first-in, first-out (FIFO) cost method to the moving
average cost method, which approximates FIFO. The Company believes the
change to the moving average cost method is preferable under the circumstances
because the moving average methodology results in better alignment with the
physical flow of inventory than the FIFO methodology, it is calculated by our
inventory information system, which incorporates automated controls, and is
also the method management uses when preparing budgets, reviewing actual and
forecasted financial information, as well as the method used in determining incentive
management compensation. The moving average cost results in substantially
the same results of operations per period.
6
Table of
Contents
Financial
statements for periods ending on or before December 31, 2009 have not been
retroactively adjusted due to immateriality. The impact of the change for the
three and six month period ended June 30, 2010 is also immaterial.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2009-17,
Improvements
to Financial Reporting by Enterprises Involved with Variable Interest Entities
.
The amendments in ASU 2009-17 replace the quantitative-based risks-and-rewards
calculation for determining which reporting entity, if any, has a controlling
financial interest in a variable interest entity with an approach focused on
identifying which reporting entity has (1) the power to direct the
activities of a variable interest entity that most significantly affect the
entitys economic performance and (2) the obligation to absorb losses of,
or the right to receive benefits from, the entity. The ASU also requires additional
disclosures about a reporting entitys involvement with variable interest
entities and about any significant changes in risk exposure as a result of that
involvement. The Company adopted the guidance at the beginning of 2010 and such
adoption did not have a material impact on the Companys unaudited condensed
financial statements. See Note 14
Variable Interest Entities.
3. INVENTORIES
Inventories
by major classification are as follows (in thousands):
|
|
June 30,
2010
|
|
December 31,
2009
|
|
Finished
goods
|
|
$
|
107,363
|
|
$
|
88,775
|
|
Work-in-progress
|
|
215
|
|
220
|
|
Raw
materials
|
|
5,975
|
|
4,334
|
|
Net
Inventory
|
|
$
|
113,553
|
|
$
|
93,329
|
|
4. PROPERTY
AND EQUIPMENT
Property
and equipment includes the following (in thousands):
|
|
June 30,
2010
|
|
December 31,
2009
|
|
Machinery
and equipment
|
|
$
|
85,059
|
|
$
|
82,733
|
|
Leasehold
improvements
|
|
42,509
|
|
38,436
|
|
Subtotal
|
|
127,568
|
|
121,169
|
|
Less:
Accumulated depreciation
|
|
(60,837
|
)
|
(50,085
|
)
|
Property
and equipment, net
|
|
$
|
66,731
|
|
$
|
71,084
|
|
5. INTANGIBLE ASSETS
The
following table summarizes the Companys identifiable intangible assets as of June 30,
2010 and December 31, 2009 (in thousands):
|
|
June 30, 2010
|
|
December 31, 2009
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents,
copyrights, and trademarks
|
|
$
|
5,631
|
|
$
|
1,655
|
|
$
|
3,976
|
|
$
|
5,673
|
|
$
|
1,396
|
|
$
|
4,277
|
|
Customer
relationships
|
|
5,633
|
|
4,947
|
|
686
|
|
5,928
|
|
4,912
|
|
1,016
|
|
Core
technology
|
|
4,618
|
|
4,618
|
|
|
|
4,614
|
|
4,614
|
|
|
|
Non-competition
agreement
|
|
636
|
|
636
|
|
|
|
636
|
|
594
|
|
42
|
|
Capitalized
software
|
|
47,129
|
|
10,456
|
|
36,673
|
|
38,884
|
|
8,235
|
|
30,649
|
|
Total
Intangible assets
|
|
$
|
63,647
|
|
$
|
22,312
|
|
$
|
41,335
|
|
$
|
55,735
|
|
$
|
19,751
|
|
$
|
35,984
|
|
7
Table of
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For
amortizable intangible assets denominated in a foreign currency, the Company
translates the gross asset and accumulated amortization at the balance sheet
rate and records amortization expense using the weighted average rate of
exchange for the applicable period causing a difference. This difference between the recorded
amortization expense and the change in accumulated amortization is reflected in
the accumulated other comprehensive income line item on the Companys unaudited
condensed consolidated balance sheets.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities include the following (in thousands):
|
|
June 30,
2010
|
|
December 31,
2009
|
|
Accrued
compensation and benefits
|
|
$
|
16,941
|
|
$
|
21,007
|
|
Fulfillment
and freight and duties
|
|
10,298
|
|
10,765
|
|
Professional
services
|
|
5,152
|
|
4,329
|
|
Sales/Use
and VAT taxes payable
|
|
7,171
|
|
4,330
|
|
Other
|
|
18,982
|
|
13,158
|
|
|
|
$
|
58,544
|
|
$
|
53,589
|
|
7. RESTRUCTURING ACTIVITIES
During
the three months ended June 30, 2010, the Company incurred $1.3 million in
restructuring expenses reflected in cost of sales, resulting from a change in
estimates related to lease termination costs for distribution facilities in
North America and Europe. These
facilities were closed pursuant to cost-savings initiatives undertaken by the
Company in 2008 and 2009. During the six
months ended June 30, 2010, in addition to the restructuring expenses
discussed above, the Company incurred an additional $2.5 million in
restructuring expenses reflected in income from operations, primarily
consisting of severance pay and additional stock-based compensation related to
the retirement of the Companys former Chief Executive Officer. See further discussion in Note 11 Stock-
Based Compensation.
Restructuring
charges, for the six months ended June 30, 2010, were recorded by segment as follows: $1.0
million in the Americas segment; $0.8 million in the Europe segment; and $2.0
million in the Corporate and other group.
Restructuring
charges are included in the following line items: accrued restructuring charges
and long-term restructuring in the Companys unaudited condensed consolidated
balance sheets and cost of sales and restructuring charges on the Companys
unaudited condensed consolidated statements of operations.
The
following table details the changes in the restructuring accruals during the
six months ended June 30, 2010 (in thousands):
Description
|
|
Year Ended
December 31,
2009
|
|
Additions
|
|
Cash
Payments
|
|
Adjustments
|
|
Six Months
Ended
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
benefits
|
|
$
|
516
|
|
$
|
1,847
|
|
$
|
(534
|
)
|
$
|
(58
|
)
|
$
|
1,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease exit costs
|
|
2,233
|
|
1,754
|
|
(1,509
|
)
|
(169
|
)
|
2,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
restructuring costs
|
|
387
|
|
|
|
(391
|
)
|
4
|
|
|
|
|
|
$
|
3,136
|
|
$
|
3,601
|
|
$
|
(2,434
|
)
|
$
|
(223
|
)
|
$
|
4,080
|
|
8
Table of
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8.
FAIR VALUE MEASUREMENTS
The
Company performs fair value measurements in accordance with the guidance
provided by fair value standards. The fair value standards define fair value as
the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and
liabilities required to be recorded at fair value, the Company considers the
principal or most advantageous market in which it would transact and considers
assumptions that market participants would use when pricing the asset or
liability, such as inherent risk, transfer restrictions, and risk of
nonperformance.
The
fair value standards establish a fair value hierarchy that requires an entity
to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. A financial instruments categorization
within the fair value hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. The fair value standards establish
three levels of inputs that may be used to measure fair value:
·
Level 1
Quoted prices for identical instruments in active markets.
·
Level 2
Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active and
model-derived valuations, in which all significant inputs are observable in
active market.
·
Level 3
Unobservable inputs in which there is little or no market data, which require
the reporting entity to develop its own assumptions.
A
summary of the Companys financial assets and liabilities measured at fair
value on a recurring basis as of June 30, 2010 is as follows (in
thousands):
|
|
Fair Value
as of
June 30, 2010
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance Sheet Classification
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
5,444
|
|
|
|
$
|
5,444
|
|
|
|
Marketable
securities
|
|
Foreign currency contracts
|
|
|
|
|
|
|
|
|
|
Other
current assets and other long-term assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,444
|
|
$
|
|
|
$
|
5,444
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
Foreign
currency contracts
|
|
$
|
119
|
|
$
|
|
|
$
|
119
|
|
$
|
|
|
Accrued
liabilities and other long-term liabilities
|
|
Marketable
securities consist of certificates of deposit with maturities greater than
three months and up to three years at the time of purchase. These securities
are carried at fair value and are held at financial institutions.
The
Company did not have any derivative instruments as of December 31, 2009.
Foreign Currency
Sales
in foreign countries, as well as certain expenses related to those sales, are
transacted in currencies other than our reporting currency, the U.S. dollar.
The Companys foreign currency exchange rate risk is primarily limited to the
Japanese Yen and the Euro. The Company may, from time to time, employ
derivative financial instruments to manage our exposure to fluctuations in
foreign currency rates or enter into forward currency exchange contracts to
hedge its net investment and intercompany payable or receivable balances in
foreign operations. The Company did not have any material outstanding foreign
currency related financial instruments at June 30, 2010 and December 31,
2009.
9. RISK
MANAGEMENT AND DERIVATIVES
The
Company is exposed to certain risks relating to its ongoing business
operations. The primary risk managed by using derivative instruments is foreign
currency exchange rate risk. Forward contracts on various foreign currencies
are entered into to manage the foreign currency exchange rate risk on
forecasted revenue and inventory purchases denominated
9
Table of
Contents
in
foreign currencies. Other forward foreign exchange contracts are entered into
to hedge against changes in the functional currency value of monetary assets
and liabilities denominated in a non functional currency.
Accounting
standards for derivative instruments and hedging activities requires the
Company to recognize all of its derivative instruments as either assets or
liabilities in its condensed unaudited consolidated balance sheet at fair
value. The accounting for changes in the fair value of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship. At June 30, 2010 the Company did not designate any of our
derivatives as hedges and, therefore, all changes in fair value are reflected
in our results of operations.
The
following table presents the fair values of derivative instruments included
within the unaudited condensed consolidated balance sheet as of June 30,
2010 is as follows (in thousands):
Liability
Derivatives
|
|
June 30, 2010
|
|
Balance Sheet Location
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Foreign currency exchange forwards
|
|
$
|
119
|
|
Accrued
liabilities
|
|
|
|
|
|
|
|
|
The
Company did not have any derivative instruments as of December 31, 2009.
The
following tables present the amounts affecting the unaudited condensed
consolidated statements of operations for the three and six month periods ended
June 30, 2010 (in thousands):
Amount
of Loss (Gain) Recognized in Income on Derivatives
|
|
Three months ended
June 30, 2010
|
|
Six months ended
June 30, 2010
|
|
Location of Loss (Gain) Recognized in
Income on Derivatives
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign currency exchange forwards
|
|
$
|
119
|
|
$
|
119
|
|
Other
expense (income), net
|
|
|
|
|
|
|
|
|
|
|
|
The
Company did not have any derivative instruments during the three and six months
ended June 30, 2009.
Foreign Currency Exchange Forwards
The
following table summarizes the Companys outstanding foreign currency exchange
forward contracts at June 30, 2010 (in thousands):
Currency Purchased Forward
|
|
Currency Sold Forward
|
|
Maturity Date
|
|
Peso
|
2,570
|
|
$
|
200
|
|
July 2010
|
|
$
|
1,210
|
|
|
1,000
|
|
July 2010
|
|
$
|
2,922
|
|
£
|
2,000
|
|
July 2010
|
|
$
|
2,000
|
|
¥
|
180,000
|
|
July 2010
|
|
|
|
|
|
|
|
|
|
|
10.
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes
payable and capital lease obligations consist of the following (in thousands):
10
Table of
Contents
|
|
June 30,
2010
|
|
December 31,
2009
|
|
Capital Lease Obligations: Certain Capitalized
Software at 9.97% weighted average interest, due through 2012
|
|
$
|
2,802
|
|
$
|
1,329
|
|
|
|
|
|
|
|
Capital Lease Obligations: Certain Equipment at
8.8% weighted average interest, due through 2014
|
|
188
|
|
223
|
|
Total notes payable and capital lease obligations
|
|
$
|
2,990
|
|
$
|
1,552
|
|
Capital Leases
The Company holds various
capital leases for certain equipment with a gross value of $0.4 million, which
is depreciated using the straight-line method over its useful life. Depreciation of equipment under capitalized
leases is included in cost of sales and selling, general and administrative
expenses line items on the Companys unaudited condensed consolidated
statements of operations. Certain
software acquired under various capital leases for a gross value of $3.6
million is classified as capitalized software and amortized using the straight-line
method over the useful life.
Amortization of capitalized software under capitalized leases is
included in the cost of sales and selling, general and administrative expenses
line items on the Companys unaudited condensed consolidated statements of
operations.
Notes Payable
On
September 25, 2009, the Company entered into a Revolving Credit and
Security Agreement (the Credit Agreement) with PNC Bank, N.A. (PNC), which
matures on September 25, 2012. The
Credit Agreement provides for an asset-backed revolving credit facility of up
to $30 million in total, which includes a $17.5 million sublimit for borrowings
against the Companys eligible inventory, a $2 million sublimit for borrowings
against the Companys eligible inventory in-transit, and a $4 million sublimit
for letters of credit. The total
borrowings available under the Credit Agreement at any given time are subject
to customary reserves and reductions to the extent the Companys asset
borrowing base changes. Borrowings under
the Credit Agreement are secured by all of the assets of the Company, including
all receivables, equipment, general intangibles, inventory, investment
property, subsidiary stock and leasehold interests. The Credit Agreement requires the Company to
prepay borrowings under the Credit Agreement in the event of certain
dispositions of property.
With
respect to domestic rate loans, principal amounts outstanding under the Credit
Agreement bear interest at a two percent (2%) premium over a rate that is the
greater of either (i) PNCs published reference rate, (ii) the
Federal Funds Open Rate (as defined in the Credit Agreement) in effect on such
day plus one half of one percent (0.5%) or, (iii) the sum of the daily
LIBOR rate and one percent (1.0%).
Eurodollar denominated principal amounts outstanding under the Credit
Agreement bear interest at the sum of three and one half percent (3.50%)
premium over a rate that is the greater of (i) the Eurodollar rate, or (ii) one
and one half percent (1.50%) with respect to Eurodollar loans, as
applicable. The Credit Agreement
requires monthly interest payments with respect to domestic rate loans and at
the end of each period with respect to Eurodollar rate loans.
The Credit Agreement
contains certain customary restrictive and financial covenants. The
Company was in compliance with these financial covenants as of June 30,
2010.
As
of June 30, 2010 and December 31, 2009, the Company had no
outstanding borrowings under the Credit Agreement and at June 30, 2010 had
issued and outstanding letters of credit of $1.0 million which were
reserved against the borrowing base.
11. STOCK-BASED COMPENSATION
Options
granted generally vest ratably over four years with the first year vesting on a
cliff basis followed by monthly vesting for the remaining three years. Compensation expense is recognized ratably
over the four-year vesting period.
Stock-based compensation expense recognized, including options and
non-vested shares, was $2.2 million and $3.9 million in the three and six
months ended June 30, 2010, respectively.
For the three and six months ended June 30, 2009,
11
Table of Contents
stock-based compensation
expense, including options and non-vested shares, was $19.4 million and
$25.1 million. Stock-based compensation
is recognized in the cost of sales and selling, general and administrative
expenses line item in the Companys unaudited condensed statement of
operations.
Stock Options
A
summary of stock option activity for the three and six months ended June 30,
2010 is as follows:
|
|
Three Months Ended June 30, 2010
|
|
Six Months Ended June 30, 2010
|
|
Options
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at March 31, 2010 and December 31, 2009, respectively
|
|
7,054,554
|
|
$
|
7.82
|
|
7,755,254
|
|
$
|
7.67
|
|
Granted
|
|
100,000
|
|
$
|
10.70
|
|
149,750
|
|
$
|
9.58
|
|
Exercised
|
|
(575,447
|
)
|
$
|
3.04
|
|
(876,730
|
)
|
$
|
2.67
|
|
Forfeited
or expired
|
|
(228,771
|
)
|
$
|
18.21
|
|
(677,938
|
)
|
$
|
12.15
|
|
Outstanding
at June 30, 2010
|
|
6,350,336
|
|
$
|
7.93
|
|
6,350,336
|
|
$
|
7.93
|
|
Restricted Stock Awards
A
summary of restricted stock award activity for the three and six months ended June 30,
2010 is as follows:
|
|
Three Months Ended June 30, 2010
|
|
Six Months Ended June 30, 2010
|
|
Non-
vested
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested
at March 31, 2010 and December 31, 2009, respectively
|
|
839,298
|
|
$
|
3.04
|
|
1,322,240
|
|
$
|
3.04
|
|
Granted
|
|
218,357
|
|
$
|
11.31
|
|
218,357
|
|
$
|
11.31
|
|
Vested
|
|
(250,803
|
)
|
$
|
10.66
|
|
(508,411
|
)
|
$
|
9.82
|
|
Forfeited
or expired
|
|
|
|
|
|
(225,334
|
)
|
$
|
1.34
|
|
Non-vested
at June 30, 2010
|
|
806,852
|
|
$
|
4.92
|
|
806,852
|
|
$
|
4.92
|
|
Separation Agreement.
On March 31, 2010, the
Company entered into a separation agreement with its former Chief Executive
Officer. Pursuant to the separation
agreement, the vesting of options to purchase 100,000 shares of Company common
stock, which were exercised, and 100,000 shares of restricted stock were
accelerated as of March 31, 2010.
Additionally, pursuant to the terms of the separation agreement, the
Companys former Chief Executive Officer forfeited options to purchase 200,000
shares of Company common stock and 200,000 shares of restricted stock. The Company recorded an insignificant amount
to restructuring charges related to the acceleration of the vesting of these
options and restricted stock awards.
12
. INCOME TAXES
During the three months
ended June 30, 2010, the Company recognized an income tax expense of $6.6
million on pre-tax income of $38.9 million, representing an effective income
tax rate of 17.0% compared to an income tax expense of $7.6 million on a
pre-tax loss of $22.7 million, representing an effective income tax rate of
(33.3%) for the three months ended June 30, 2009. During the six months ended June 30,
2010, the Company recognized an income tax expense of $10.0 million on a
pre-tax income of $48.0 million, representing an effective income tax rate of
20.8% compared to an income tax expense of $7.8 million on a pre-tax loss of
$44.9 million, representing an effective income tax rate of (17.3%) for the six
months ended June 30, 2009. The
change in effective tax rate is primarily the result of the Company
restructuring its international
12
Table of Contents
operations, cost sharing
arrangements and release of valuation allowances related to net operating
losses in various international entities.
The Company had unrecognized tax benefits of $29.2 million at January 1,
2010 and $29.5 million at June 30, 2010.
13. EARNINGS (LOSS) PER SHARE
Basic income (loss) per
share (EPS) is computed by dividing net income (loss) by the weighted average
number of shares outstanding for the period.
Diluted EPS reflects the potential dilution from securities that could
share in the earnings of the Company.
Anti-dilutive securities are excluded from diluted EPS. The Company has a small number of participating
securities and consequently is computing basic income (loss) per share by
dividing net income or loss attributable to common stockholders by the weighted
average common shares outstanding during the period.
EPS
for the three and six months ended June 30, 2010 and 2009 is as follows
(in thousands, except share and per share data):
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
32,284
|
|
$
|
(30,281
|
)
|
$
|
38,001
|
|
$
|
(52,698
|
)
|
Income
allocated to participating securities
|
|
(303
|
)
|
|
|
(358
|
)
|
|
|
Net income (loss) attributable to common
stockholders basic
|
|
$
|
31,981
|
|
$
|
(30,281
|
)
|
$
|
37,643
|
|
$
|
(52,698
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding basic
|
|
85,179,948
|
|
84,882,241
|
|
84,834,756
|
|
84,638,783
|
|
Dilutive
effect of stock options
|
|
1,552,295
|
|
|
|
1,771,269
|
|
|
|
Dilutive
effect of unvested shares
|
|
806,852
|
|
|
|
806,852
|
|
|
|
Weighted
average common shares outstanding - diluted
|
|
87,539,095
|
|
84,882,241
|
|
87,412,877
|
|
84,638,783
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.38
|
|
$
|
(0.36
|
)
|
$
|
0.44
|
|
$
|
(0.62
|
)
|
Diluted
|
|
$
|
0.37
|
|
$
|
(0.36
|
)
|
$
|
0.43
|
|
$
|
(0.62
|
)
|
For
all periods presented above, there were options outstanding which could
potentially dilute basic EPS in the future but were not included in diluted
income (loss) per share as their effect would have been anti-dilutive. Due to the Companys net loss for the three
and six months ended June 30, 2009, the dilutive effect of stock options
and unvested restricted stock awards were not included in the computation of
diluted EPS, as their inclusion would have been anti-dilutive. During 2009 the Company had participating
securities that were not allocated net loss nor included in the computation of
diluted EPS due to the Companys net loss for the three and six months ended June 30,
2009. The weighted average exercise
price per share of the options that were anti-dilutive was $13.77 for both the
three and six months ended June 30, 2010, and $5.65 and $10.84 for the
three and six months ended June 30, 2009, respectively. The total number of anti-dilutive options was
3,093,432 for both the three and six months ended June 30, 2010, and
4,869,628 for both the three and six months ended June 30, 2009.
14. VARIABLE INTEREST ENTITIES
In
2007, the Company established a relationship with Shanghai Shengyiguan
Trade, Ltd Co (ST) for the purpose of serving as a distributor of the
Companys products in the Peoples Republic of China. The Company has
determined that ST is a variable interest entity for which it is the primary
beneficiary and there are no other non-controlling interests. The Company
currently controls all business activities and absorbs substantially all of the
expected residual returns and substantially all of the expected losses of ST
based on agreements with ST. The Company determined that it is the primary
beneficiary of ST by virtue of its variable interest in the equity of ST. All
voting rights have been assigned to the Company and there is a transfer
agreement between ST and the Company under which all of the equity, assets, and
liabilities are to be
13
Table of Contents
transferred to the Company
at the Companys sole discretion, subject to certain conditions. Accordingly,
the Companys consolidation of ST does not reflect a non-controlling interest.
The
Company did not provide material financial support during the six months ended June 30,
2010 for the funding of STs operations. The condensed consolidated financial
statements include $5.8 million in total assets as of June 30, 2010,
primarily consisting of cash, inventory and receivables, partially offset by
$0.2 million in liabilities as of June 30, 2010, primarily consisting of
accounts payable and accrued expenses, excluding liabilities related to the
support provided by the Company. ST
carries cash assets which are restricted to the extent that the monetary laws
of the Peoples Republic of China may limit the Companys ability to utilize STs
cash.
15. COMMITMENTS AND CONTINGENCIES
On July 26, 2005, the
Company entered into an amended and restated four-year supply agreement with
Finproject S.P.A., the former majority owner of Crocs Canada, pursuant to which
the Company has the exclusive right to purchase the material for the
manufacture of finished shoe products, except for certain current customer
dealings (including boot manufacturers). The supply agreement was extended
through June 30, 2010, and provides that the Company meet minimum purchase
requirements to maintain exclusivity throughout the term of the agreement. The
pricing is to be agreed upon each quarter and fluctuates based on order volume,
currency fluctuations, and raw material prices.
The Company is currently in negotiations to extend the supply
agreement. The Company guarantees the
payment to one of its raw material suppliers for purchases of material used by
one of its third-party manufactures of finished shoe products. The maximum
potential amount of future payments the Company could be required to make under
the guarantee is 2.1 million (approximately $2.6 million at June 30,
2010). The Company evaluates the estimated loss for the guarantee under ASC
Topic 450,
Contingencies,
and Topic 460,
Guarantees
. The
Company considers such factors as the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the amount of loss.
The Company has recourse as a matter of common law. To date, the Company has
not made any payments under the guarantee and, as of June 30, 2010, has
not recorded a liability related to the guarantee in its unaudited condensed
consolidated financial statements, as the Company does not believe the
potential obligation under this guarantee is material.
The
Company leases space for certain of its offices, warehouses, vehicles and
equipment under leases expiring at various dates through 2026. Certain leases
also contain rent escalation clauses (step rents) that require additional
rental amounts in the later years of the term. Rent expense for leases with
step rents is recognized on a straight-line basis over the minimum lease term.
Step rents, tenant improvement allowances, rent holidays and other items are
factored into the minimum lease payment and recognized on a straight-line basis
over the minimum lease term. Deferred
rent is included in the unaudited condensed consolidated balance sheets in the
accrued expenses and other current liabilities line item.
The
Company indemnifies certain of its vendors and its directors and executive
officers for specified claims. To date, the Company has not paid or been
required to defend any indemnification claims, and accordingly, has not accrued
any amounts for its indemnification obligations.
The
Company has other various immaterial commitments and contingencies that are not
discussed above.
16. OPERATING SEGMENTS AND RELATED INFORMATION
The
Company operates in the consumer products industry internationally in which the
Company principally designs, manufactures, markets and sells its branded
footwear for men, women and children.
During 2009, the Company changed the information that was presented to
the chief operating decision maker and has restated its revenues, depreciation
and amortization, operating income and assets by segment as shown below. The Company identifies its reportable
segments as those geographic regions that represent 10% or more of its revenue,
operating income (as defined below), or total assets. The Company has three reportable segments:
Americas, Europe and Asia. All of the reportable segments derive their revenue
from the sale of footwear, apparel and accessories. The Company evaluates performance and makes
decisions about allocating resources to its operating segments based on
financial measures such as revenue and operating income.
Operating
income is the primary measure used by the Companys chief operating decision
maker to evaluate segment operating performance and to decide how to allocate
resources to segments. Operating income
is defined as operating income before asset impairment charges and
restructuring charges. The Company
evaluates the performance of its segments based primarily on the results of the
segment without allocating corporate expenses, or indirect general,
administrative and
14
Table of
Contents
other
expenses. The corporate and other
category includes (i) Ocean Minded, (ii) Colorado Footwear CV, and (iii) corporate
category, which maintains corporate costs such as stock-based compensation,
research and development, brand marketing, legal expenses, depreciation on
global long-lived assets such as molds, tooling, IT systems, and other
global costs that are not allocated to the regions.
Segment
profits or losses include adjustments to eliminate intercompany profit or
losses on intercompany sales. Segment
assets include the elimination of any intersegment profits or losses in
inventory and the elimination of intercompany receivables. Segment assets, primarily in the Americas
segment, include certain long-lived assets that are depreciated in the
corporate category due to their global functionality. Negative assets within the Corporate and
other category primarily include eliminations of investments made from the
Americas segment in the other reportable segments. Net revenues as shown below represent sales
to external customers for each segment.
|
|
Three Months
Ended June 30
|
|
Six Months
Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
103,473
|
|
$
|
84,128
|
|
$
|
175,623
|
|
$
|
150,540
|
|
Europe
|
|
34,556
|
|
32,224
|
|
72,498
|
|
60,496
|
|
Asia
|
|
88,681
|
|
79,968
|
|
143,351
|
|
118,966
|
|
Total segments
|
|
226,710
|
|
196,320
|
|
391,472
|
|
330,002
|
|
Corporate and other
|
|
1,336
|
|
1,402
|
|
3,426
|
|
2,612
|
|
Total consolidated revenues
|
|
$
|
228,046
|
|
$
|
197,722
|
|
$
|
394,898
|
|
$
|
332,614
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
23,423
|
|
$
|
5,697
|
|
$
|
34,657
|
|
$
|
7,923
|
|
Europe
|
|
8,049
|
|
11,241
|
|
17,675
|
|
12,224
|
|
Asia
|
|
31,742
|
|
33,708
|
|
44,278
|
|
29,877
|
|
Total segments
|
|
63,214
|
|
50,646
|
|
96,610
|
|
50,024
|
|
SG&A restructuring
|
|
|
|
(5,915
|
)
|
(2,539
|
)
|
(5,953
|
)
|
Asset impairment
|
|
|
|
(23,655
|
)
|
(141
|
)
|
(23,724
|
)
|
Corporate and other
|
|
(24,488
|
)
|
(45,595
|
)
|
(45,809
|
)
|
(67,481
|
)
|
Total consolidated operating income (loss)
|
|
38,726
|
|
(24,519
|
)
|
48,121
|
|
(47,134
|
)
|
Interest expense
|
|
163
|
|
562
|
|
292
|
|
1,257
|
|
Gain on charitable contributions
|
|
(32
|
)
|
(2,024
|
)
|
(116
|
)
|
(2,024
|
)
|
Other expense (income), net
|
|
(291
|
)
|
(343
|
)
|
(50
|
)
|
(1,446
|
)
|
Income (loss) before income taxes
|
|
$
|
38,886
|
|
$
|
(22,714
|
)
|
$
|
47,995
|
|
$
|
(44,921
|
)
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
2,406
|
|
$
|
2,048
|
|
$
|
4,591
|
|
$
|
4,524
|
|
Europe
|
|
680
|
|
1,717
|
|
1,453
|
|
3,280
|
|
Asia
|
|
1,358
|
|
902
|
|
2,943
|
|
1,722
|
|
Total segments
|
|
4,444
|
|
4,667
|
|
8,987
|
|
9,526
|
|
Corporate and other
|
|
4,367
|
|
5,006
|
|
8,623
|
|
9,651
|
|
Total consolidated depreciation and amortization
|
|
$
|
8,811
|
|
$
|
9,673
|
|
$
|
17,610
|
|
$
|
19,177
|
|
|
|
June 30, 2010
|
|
December 31, 2009
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
Americas
|
|
$
|
241,646
|
|
$
|
277,454
|
|
Europe
|
|
63,919
|
|
66,838
|
|
Asia
|
|
73,983
|
|
151,052
|
|
Total segments
|
|
379,548
|
|
495,344
|
|
Corporate and other
|
|
117,505
|
|
(85,606
|
)
|
Total consolidated assets
|
|
$
|
497,053
|
|
$
|
409,738
|
|
15
Table of
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17. COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss) for the three and six months ended June 30, 2010 and 2009
was as follows (in thousands):
|
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net
income (loss)
|
|
$
|
32,284
|
|
$
|
(30,281
|
)
|
$
|
38,001
|
|
$
|
(52,698
|
)
|
Foreign
currency translation
|
|
(4,087
|
)
|
6,236
|
|
(5,786
|
)
|
2,306
|
|
Comprehensive
income (loss)
|
|
$
|
28,197
|
|
$
|
(24,045
|
)
|
$
|
32,215
|
|
$
|
(50,392
|
)
|
18.
LEGAL PROCEEDINGS
On
March 31, 2006, the Company filed a complaint with the International Trade
Commission (ITC) against Acme Ex-Im, Inc., Australia Unlimited, Inc.,
Chengs Enterprises, Inc., Collective Licensing International, LLC, D.
Myers & Sons, Inc., Double Diamond Distribution, Ltd.,
Effervescent, Inc., Gen-X Sports, Inc., Holey Soles Holdings, Ltd., Inter-Pacific
Trading Corporation, and Shaka Holdings, Inc., alleging patent and trade
dress infringement and seeking an exclusion order banning the importation and
sale of infringing products. On August 10, 2006, the Company filed a
motion to voluntarily remove its trade dress claim from the investigation to
focus on the patent claims. The Companys motion was granted by Order No. 20
on August 24, 2006. The utility and design patents asserted in the
complaint were issued to the Company on February 7, 2006 and March 28,
2006 respectively, by the United States Patent and Trademark Office. The ITC
has issued final determinations terminating Shaka Holdings, Inc., Inter-Pacific
Trading Corporation, Acme Ex-Im, Inc., D. Myers & Sons, Inc.,
Australia Unlimited, Inc. and Gen-X Sports, Inc. from the ITC
investigation No. 337-TA-567 on the basis of settlement and Chengs
Enterprises, Inc. on the suspension of accused activities. The ITC
Administrative Law Judge (ALJ) issued an Initial Determination of
non-infringement related to one of the patents at issue. The Company filed a
petition with the Commission to review this determination. The Commission
granted the Companys petition and on February 15, 2007, after briefing by
the parties, the Commission vacated the ALJs determination of non-infringement
with respect to the remaining respondents and remanded it to the ALJ for
further proceedings consistent with the Commissions order. In light of the
Commissions Order, the procedural schedule and hearing date were reset
pursuant to Order No. 38. A trial was held before the ALJ from September 7
to 14, 2007. The ALJ issued an Initial Determination on April 11, 2008
with a finding of no violation, finding infringement of the utility patent by
certain accused products, but also finding that the utility patent was invalid
as obvious. The ALJ also found that the design patent was valid, but not
infringed by the accused products. The Company filed a Petition for Review of
the Initial Determination which was due on April 24, 2008. On June 18,
2008, the Commission issued a Notice that it would review the ALJs findings in
the Initial Determination with respect to the determination of non-infringement
of the design patent and the determination of invalidity of the utility patent.
On July 25, 2008, the Commission issued a Notice of its decision to
terminate the Investigation with a finding of no violation as to either patent.
The Company filed a Petition for Review of the decision with the United States
Court of Appeals for the Federal Circuit on September 22, 2008, and filed
its initial brief on January 21, 2009. Briefing before the Federal Circuit
was completed in April 2009 and oral arguments were heard on July 10,
2009. On October 4, 2009, the Company and Collective Licensing
International, LLC reached a settlement. Collective Licensing International,
LLC agreed to cease and desist infringing on the Companys patents and to pay
the Company certain monetary damages, which was recorded upon receipt. On February 24,
2010, the Federal Circuit found that the Commission erred in finding that the
utility patent was obvious and reversed the Commissions determination of
non-infringement of the design patent.
On April 12, 2010, one of the remaining parties, Effervescent, Inc.,
filed a request for a panel or en banc hearing with the Federal Circuit of the February 24,
2010 decision to which the Company responded on April 28, 2010. The Federal Circuit denied the petition on May 20,
2010 and the matter has been remanded to the ITC. On July 6, 2010, the Commission ordered
the matter to be assigned to an ALJ for a determination on enforceability.
On
April 3, 2006, the Company filed a complaint in the U.S. District Court
for the District of Colorado alleging patent and trade dress infringement and
seeking injunctive relief against Acme EX-IM, Inc., Australia Unlimited, Inc.,
Chengs Enterprises, Inc., Collective Licensing International, LLC, D.
Myers & Sons, Inc., Double Diamond Distribution, Ltd.,
Effervescent, Inc., Gen-X Sports, Inc., Holey Soles Holdings, Ltd, Inter-Pacific
Trading Corporation, Shaka Holdings,
16
Table of Contents
Inc., and Does 1-10 based
upon certain utility and design patents that were issued to the Company on February 7,
2006 and March 28, 2006 respectively, by the United States Patent and
Trademark Office. Consent judgments have been entered against Shaka Holdings, Inc., Interpacific
Trading Corporation and Acme Ex-Im, Inc. The Company entered into a
settlement with Australia Unlimited, and filed a stipulation for dismissal of
all claims and counterclaims on January 25, 2007. The Company has entered
into a settlement agreement with D. Myers & Sons and obtained a
consent judgment in connection therewith on May 23, 2007. On June 11,
2009, the Company filed a Notice of Voluntary Dismissal of Gen-X Sports, Inc.
on the basis of settlement and on November 4, 2009, the Company filed a
Notice of Voluntary Dismissal with prejudice of Collective Licensing
International, LLC on the basis of settlement. This action has been stayed
pending resolution in the ITC Proceeding, Investigation No. 337
TA-567.
The
Company and certain current and former officers and directors have been named
as defendants in complaints filed by investors in the United States District
Court for the District of Colorado. The first complaint was filed in November 2007;
several other complaints were filed shortly thereafter. These actions were
consolidated and, in September 2008, the Court appointed a lead plaintiff
and counsel. An amended consolidated complaint was filed in December 2008.
The amended complaint purports to state claims under Section 10(b), 20(a),
and 20A of the Exchange Act on behalf of a class of all persons who purchased
the Companys stock between April 2, 2007 and April 14, 2008 (the Class Period).
The amended complaint alleges that, during the Class Period, defendants
made false and misleading public statements about the Company and its business
and prospects and that, as a result, the market price of the Companys stock
was artificially inflated. The amended complaint also claims that certain
current and former officers and directors traded in the Companys stock on the
basis of material non-public information. The amended complaint seeks
compensatory damages on behalf of the alleged class in an unspecified amount,
interest, and an award of attorneys fees and costs of litigation. The Company
believes the claims lack merit and intends to defend the action vigorously.
Motions to dismiss are currently pending with the Court. On November 11,
2009, presiding Judge Blackburn recused himself because a relative of a member
of his staff held a substantial position in Crocs stock. The clerks office has transferred the case
to Judge Brimmer. As a result, the
timing for a ruling on any motion to dismiss is uncertain. Due to the inherent
uncertainties of litigation and because the litigation is at a preliminary
stage, the Company cannot at this time accurately predict the ultimate outcome
of the matter.
On
December 8, 2009, Columbia Sportswear Company (Columbia) filed an
Amended Complaint adding the Company as a defendant in a case between Columbia
and Brian P. OBoyle and 1 Pen. Inc. in the Multnomah County Circuit Court in
the State of Oregon. Columbia asserted claims against the Company for
misappropriation of trade secrets, aiding and abetting breach of fiduciary
duty, intentional interference with contract, injunctive relief, disgorgement
and an accounting. The Amended Complaint sought damages in an unspecified
amount, return of patent rights, reasonable attorneys fees and costs and
expenses against the Company. The Company and Columbia settled all issues
between them and Columbia dismissed with prejudice all claims against the
Company in exchange for certain monetary and other considerations.
Although
the Company is subject to other litigation from time to time in the ordinary
course of business, including employment, intellectual property and product
liability claims, the Company is not party to any other pending legal
proceedings that the Company believes will have a material adverse impact on
its business.
17
Table of
Contents
ITEM 2.
Managements Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. In addition, we may make other written and oral communications from
time to time that contain such statements. Forward-looking statements include
statements as to industry trends and our future expectations and other matters
that do not relate strictly to historical facts and are based on certain
assumptions of our management. These statements are often identified by the use
of words such as may, will, expect, believe, anticipate, intend, could,
estimate, or continue, and similar expressions or variations. These
statements are based on the beliefs and assumptions of our management based on
information currently available to us. Such forward-looking statements are
subject to risks, uncertainties and other factors that could cause actual
results to differ materially from future results expressed or implied by such
forward-looking statements. This Item 2, Managements Discussion and Analysis
of Financial Condition and Results of Operations contains forward-looking
statements. Important factors that could cause actual results to differ
materially from the forward-looking statements include, among others, the risks
described in the section entitled Risk Factors under Item 1A in our
Annual Report on Form 10-K for the year ended December 31, 2009 and
subsequent filings with the Securities and Exchange Commission. We caution the reader to carefully consider
such factors. Furthermore, such forward-looking statements speak only as of the
date of this report. We undertake no obligation to update any forward-looking
statements to reflect events or circumstances after the date of such
statements.
Overview
We are a designer, manufacturer, distributor, worldwide marketer and
brand manager of footwear for men, women and children. We strive to be the global leader in molded
footwear design and development. We
design, manufacture and sell a broad product offering that provides new and
exciting molded footwear products that feature fun, comfort and functionality.
Our products include footwear and accessories that utilize our proprietary
closed cell-resin, called Croslite. Our
Croslite material is unique in that it enables us to produce an innovative,
lightweight, non-marking, and odor-resistant shoe. Certain shoes made with the Croslite material
have been certified by U.S. Ergonomics to reduce peak pressure on the foot,
reduce muscular fatigue while standing and walking and to relieve the musculoskeletal
system.
Since
the initial introduction and popularity of our Beach and Crocs Classic designs,
we have expanded our Croslite products to include a variety of new styles and
products and have extended our product reach through the acquisition of brand
platforms such as Jibbitz, LLC (Jibbitz) and Ocean Minded, Inc. (Ocean
Minded). We intend to continue
branching out into other types of footwear, bringing a unique and original
perspective to the consumer in styles that may be unexpected from Crocs. In part, we believe this will help us to
continue to build a stable year-round business as we look to offer more
winter-oriented styles.
Our
marketing efforts surround specific product launches and employ a fully
integrated approach utilizing a variety of media outlets, including print and
online media and television. Our
marketing efforts strive to drive business to both our wholesale partners and
our company-operated retail and internet stores, ensuring that our presentation
and story are first class and drive purchasing at the point of sale.
We currently sell our Crocs-branded products throughout the U.S. and in
more than 100 countries. We sell our
products through domestic and international retailers and distributors and
directly to end-user consumers through our webstores, Company-operated retail
stores, outlets and kiosks. The broad appeal of our footwear has allowed us to
market our products to a wide range of distribution channels, including
department stores and traditional footwear retailers as well as a variety of
specialty and independent retail channels.
Presentation of Operating
Segments
We
have three operating segments: Americas, Europe and Asia. All of the reportable segments derive their
revenue from the sale of footwear, apparel and accessories. We evaluate performance and make decisions
about allocating resources to our operating segments based on financial
measures such as revenue and operating income.
We evaluate the performance of our segments based primarily on the
results of the segment without allocating corporate expenses or indirect
general, administrative and other expenses.
The corporate and other category includes (i) Ocean Minded, (ii) Colorado
Footwear CV, and (iii) corporate category, which maintains corporate costs
such as stock-based compensation, research and development,
18
Table of
Contents
brand
marketing, legal expenses, depreciation on global long-lived assets such as
molds, tooling, IT systems, and other global costs that are not allocated
to the regions. Segment profits or
losses include adjustments to eliminate intercompany profit or losses on
intercompany sales. Net revenues in the
discussion that follows represent sales to external customers for each segment.
Recent Events
During
the three months ended June 30, 2010, revenues increased 15.3%, or $30.3
million, compared to the three months ended June 30, 2009 as a result of stronger
sales in each of our geographic operating segments. Our diluted earnings per share for the second
quarter of 2010 improved to $0.37 diluted earnings per share compared to the
second quarter of 2009, when we reported a net loss per diluted share of
($0.36). We believe these financial
improvements are a reflection of our 2009 cost savings initiatives described
below, an increased marketing presence and an improved global economic climate.
During 2009, we
undertook various cost savings initiatives in an effort to better align our
cost structure with revenue. These cost
savings initiatives included the consolidation of our global distribution
centers; reduction of warehouse space; impairments of certain assets we no
longer intended to utilize, including molds, tooling, equipment and other
assets; reduction in future stock-based compensation expense as a result of a
tender offer; and reduction in our global workforce. In addition, during 2009, we executed against
a plan to dispose of excess discontinued and impaired product inventories. Much of this product had been written down to
a level that we considered realizable; however, we were able to sell this
product at prices substantially higher than what we had previously
estimated. Accordingly, the net effect
of these sales was accretive to our gross profit and revenue in 2009. In the second quarter of 2010, sales of
discontinued and impaired product were at more normal levels given seasonality
and historical fluctuations in our business.
General
Revenues
are recorded when products are shipped and the customer takes title and assumes
risk of loss, collection of related receivables are probable, persuasive
evidence of an arrangement exists, and the sales price is fixed or
determinable. Title passes on shipment or on receipt by the customer depending
on the country of the sale and the agreement with the customer. Allowances for
estimated returns and discounts are recognized when related revenue is
recorded. Because we use both internal manufacturing and contract with third
parties to manufacture our products, our cost of sales represents our costs to
manufacture products in our Company-operated facilities, including raw
materials costs and all direct overhead expenses related to production, as well
as the cost to purchase finished products from our third-party manufacturers
and costs to transport these products to our facilities, inclusive of all
warehouse and outbound freight and duties expenses. Cost of sales also includes
depreciation and amortization of manufacturing assets such as molds and
tooling. Our selling, general and administrative expense consists primarily of
wages and related payroll and employee benefit costs for selling, marketing and
administrative employees, unrealized gains or losses on foreign currency
exchange, all non-product retail-related expenses (including rent and
depreciation) and professional fees, facility expenses, bank charges and
non-cash charges for share-based compensation. Selling, general and
administrative expenses also include depreciation and amortization related to
non-product, non-manufacturing assets such as our global information systems.
Results of Operations
Comparison of the Three Months Ended June 30, 2010 and
2009
|
|
Three Months Ended June 30,
|
|
Change
|
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
|
(amounts
in thousands, except per share data)
|
|
|
|
Revenues
|
|
$
|
228,046
|
|
$
|
197,722
|
|
$
|
30,324
|
|
15.3
|
%
|
Cost
of sales
|
|
96,127
|
|
96,610
|
|
(483
|
)
|
(0.5
|
)%
|
Gross
profit
|
|
131,919
|
|
101,112
|
|
30,807
|
|
30.5
|
%
|
Selling,
general and administrative expenses
|
|
94,047
|
|
94,606
|
|
(559
|
)
|
(0.6
|
)%
|
Foreign
currency transaction losses (gains), net
|
|
(1,129
|
)
|
(3,623
|
)
|
2,494
|
|
68.8
|
%
|
Restructuring
charges
|
|
|
|
5,915
|
|
(5,915
|
)
|
N/M
|
|
Impairment
charges
|
|
|
|
23,655
|
|
(23,655
|
)
|
N/M
|
|
Charitable
contributions
|
|
275
|
|
5,078
|
|
(4,803
|
)
|
(94.6
|
)%
|
Income
(loss) from operations
|
|
38,726
|
|
(24,519
|
)
|
63,245
|
|
257.9
|
%
|
Interest
expense
|
|
163
|
|
562
|
|
(399
|
)
|
(71
|
)%
|
Other,
net
|
|
(323
|
)
|
(2,367
|
)
|
2,044
|
|
86.4
|
%
|
Income
(loss) before income taxes
|
|
38,886
|
|
(22,714
|
)
|
61,600
|
|
271.2
|
%
|
Income
tax expense
|
|
6,602
|
|
7,567
|
|
(965
|
)
|
(12.8
|
)%
|
Net
income (loss)
|
|
$
|
32,284
|
|
$
|
(30,281
|
)
|
$
|
62,565
|
|
206.6
|
%
|
Net
income (loss) per diluted share
|
|
$
|
0.37
|
|
$
|
(0.36
|
)
|
$
|
0.73
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
57.8
|
%
|
51.1
|
%
|
|
|
|
|
Operating
margin
|
|
17.0
|
%
|
(12.4
|
)%
|
|
|
|
|
19
Table of
Contents
N/M
Not meaningful
Revenues
Revenues
increased $30.3 million to $228.0 million in the three months ended June 30,
2010, compared to the three months ended June 30, 2009. Total unit sales
of footwear products increased by 5.1% and average selling price per pair of
shoes increased $1.96 during the three months ended June 30, 2010 compared
to the same period in 2009, as shown in the table below. During the three months ended June 30,
2009, we sold $23.7 million in end of life and impaired products as we disposed
of excess and impaired inventory as described above in Recent Events. The following table sets forth revenue by
channel and by region as well as other revenue information for the second
quarter of 2010 and 2009:
|
|
Three months ended June 30,
|
|
Change
|
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
|
(in millions, except average selling price)
|
|
|
|
Wholesale channel revenue
|
|
$
|
140.0
|
|
$
|
125.0
|
|
$
|
15.0
|
|
12.0
|
%
|
Retail channel revenue
|
|
66.4
|
|
55.3
|
|
11.1
|
|
20.1
|
%
|
Internet channel revenue
|
|
21.6
|
|
17.4
|
|
4.2
|
|
24.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Americas revenue (includes Corporate)
|
|
$
|
104.8
|
|
$
|
85.5
|
|
$
|
19.3
|
|
22.6
|
%
|
Asia revenue
|
|
88.6
|
|
80.0
|
|
8.6
|
|
10.8
|
%
|
Europe revenue
|
|
34.6
|
|
32.2
|
|
2.4
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Footwear unit sales
|
|
12.3
|
|
11.7
|
|
0.6
|
|
5.1
|
%
|
Average selling price
|
|
$
|
17.76
|
|
$
|
15.80
|
|
$
|
1.96
|
|
12.4
|
%
|
Revenue
from our wholesale channel grew in the three months ended June 30, 2010
compared to the three months ended June 30, 2009, particularly in the
Americas and in Asia. We believe the
revenue increase in this channel is due to improved economic conditions and
efforts made in 2009 and 2010 to improve our wholesale customer relationships. Additionally, we believe that heightened
brand awareness, a result of fully-integrated marketing campaigns during the
quarter (described previously in Overview), has positively impacted
sell-through for our wholesale customers.
Revenue
from our company-operated retail locations increased 20.1% in the three months
ended June 30, 2010 compared to the same period in the previous year,
driven by the opening of 53 new company-operated retail locations year over
year. We plan to close certain kiosks
and open more branded stores in the future.
The table below sets forth information about the number of
company-operated retail locations as June 30, 2010 and 2009:
|
|
As of
June 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Company-operated retail locations - Total
|
|
363
|
|
310
|
|
53
|
|
Type:
|
|
|
|
|
|
|
|
Crocs Kiosk/Store in Store
|
|
185
|
|
188
|
|
(3
|
)
|
Crocs Retail Stores
|
|
110
|
|
76
|
|
34
|
|
Crocs Outlet Stores
|
|
68
|
|
46
|
|
22
|
|
|
|
|
|
|
|
|
|
Geography:
|
|
|
|
|
|
|
|
Americas company-operated retail locations
|
|
188
|
|
166
|
|
22
|
|
Asia company-operated retail locations
|
|
155
|
|
123
|
|
32
|
|
Europe company-operated retail locations
|
|
20
|
|
21
|
|
(1
|
)
|
20
Table of
Contents
The
increase in revenue from our internet channel was driven by increased sales in
our Europe segment, resulting from the addition of local language internet
sites for France, Germany, Spain and Italy as well as increased demand for our
products overall. These increases were
partially offset by revenue declines from our internet channel in Asia where we
saw a drop in demand due to prolonged cold weather and an increase in imitation
products in the region, particularly in Japan.
Revenue
from our combined consumer-direct sales channels, defined as our retail and
internet channels, increased from 36.8% for the three months ended June 30,
2009 to 38.6% of revenue in the three months ended June 30, 2010. As these channels become a larger portion of
our business, we expect to see some improvements in total revenue and gross
margin as we have traditionally been able to achieve a higher average selling
price in this channel.
The
majority of our revenues during the three months ended June 30, 2010 were
attributable to our non-classic footwear models. Our classic models and core products (defined
below) have become a smaller portion of our total revenue in recent quarters.
Sales of our classic models, core products and new 2010 footwear products as a
percentage of our total unit sales is presented in the table below:
|
|
Three Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Classic models (Beach and Crocs Classic)
|
|
11.9
|
%
|
15.8
|
%
|
Core products(1)
|
|
21.3
|
%
|
30.1
|
%
|
New 2010 footwear products
|
|
23.7
|
%
|
N/A
|
|
(1) Core
products includes Classic models, Kids Crocs Classic, Athens, Kids Athens, Mary
Jane, Girls Mary Jane, Mammoth and Kids Mammoth.
Average
foreign currency exchange rates during the three months ended June 30,
2010 increased revenue by $5.7 million as compared to the three months
ended June 30, 2009. We expect that
sales in international markets in foreign currencies will continue to represent
a substantial portion of our overall revenues. Accordingly, changes in foreign
currency exchange rates could materially affect our overall revenues or the
comparability of those revenues from period to period as a result of
translating our financial statements into our reporting currency, the U.S.
dollar.
Americas Segment - Revenue.
Our revenues from the Americas segment
increased 23.1%, or $19.4 million, in the three months ended June 30, 2010
compared to the three months ended June 30, 2009, primarily driven by
revenue growth in all channels (wholesale, retail and internet). Second quarter revenue from company-operated
retail locations in the Americas increased 35.2%, or $10.3 million, to $39.6
million in 2010 compared to 2009 as we opened 22 additional company-operated
retail locations in the region. We
continue to execute against plans to grow revenue in the U.S. wholesale channel
which include, but are not limited to, investments in cooperative advertising
and merchandising assistance for select locations at our largest U.S. wholesale
accounts.
Asia Segment - Revenue.
Our revenues in Asia increased 10.8%, or $8.6
million, in the three months ended June 30, 2010 compared to the three months
ended June 30, 2009 driven by continued strong demand in our Asia
wholesale channel and favorable variances in foreign currency exchange rates,
partially offset by a decline in internet revenue as discussed above. Revenue from company-operated retail
locations in Asia increased 1.3%, or $0.3 million, to $22.7 million in the
three months ended June 30, 2010 compared to the three months ended June 30,
2009. The number of company-operated
retail locations in the region increased by 32 year over year. Revenue growth from our company-operated
retail locations was negatively affected by a prolonged cold weather season in
parts of the region and an increase in imitation products in Japan.
Europe Segment - Revenue.
Our revenues in Europe increased 7.5%, or $2.4
million, to $34.6 million in the three months ended June 30, 2010 from
$32.2 million for the same period in 2009 driven by increases across all
revenue channels in the region. Revenue
from company-operated retail locations was $4.1 million in the three months
ended June 30, 2010 versus $3.5 million for the three months ended June 30,
2009 and our company-operated retail locations decreased by 1.
21
Table of
Contents
Gross profit.
We
achieved an increase in our gross profit, from $101.1 million to $131.9
million, and gross margin, from 51.1% to 57.8%, for the three months ended June 30,
2010 as compared to the three months ended June 30, 2009. The increase is primarily attributable to
favorable shifts in product mix toward higher margin products as well as
restructuring charges of $5.3 million recognized during the second quarter of
2009 as we closed and consolidated our distribution space in North America and
Europe. Additionally, we continue to
execute against our strategy to increase shipments made directly from the
factories to our wholesale customers and our retail channel. These factory-direct shipments lower our
distribution cost and, as factory-direct shipment volume increased, we began to
realize benefits from this program in the second quarter of 2010. Offsetting this increase was the accretive
effect of impaired unit sales that took place during the second quarter of 2009
as discussed in Recent Events. The net
effect of these sales during the second quarter of 2009 was $25.3 million. Our
consumer-direct (internet and retail) channels, which typically yield higher
margins than our wholesale channel, stayed flat as a percentage of revenue.
Average
foreign currency exchange rates during the three months ended June 30,
2010 increased our gross profit by $3.5 million as compared to the three month
period ended June 30, 2009. We
expect that sales at subsidiary companies with functional currencies other than
the U.S. dollar will continue to generate a substantial portion of our overall
gross profit. Accordingly, changes in
foreign currency exchange rates could materially affect our overall gross
profit or the comparability of our gross profit from period to period as a
result of translating our financial statements into our reporting currency, the
U.S. dollar.
Selling, general and administrative expenses and
foreign currency transaction losses (gains)
. Selling, general and administrative expense
decreased 0.6% in the three months ended June 30, 2010 compared to the
same period in 2009, driven primarily by a decrease in stock compensation
expense of $14.0 million, $13.3 million of which was due to the acceleration of
stock-based compensation expense in the second quarter of 2009 related to
options purchased in our tender offer.
The decrease in stock-based compensation expense was offset by an
increase in $11.5 million in selling, general and administrative expenses including:
salaries expense, rent and building costs as a result of our continued
expansion of our retail selling channel, and marketing expense for media and
agency costs related to our spring marketing campaign. Selling, general and
administrative expenses for the three months ended June 30, 2010 were
favorably impacted by a net gain on changes in currency exchange rates for
transactions denominated, and settled or to be settled, in a currency other
than the functional currency of $1.1 million compared to a net gain on changes
in currency exchange rates of $3.6 million for the three months ended June 30,
2009.
Average foreign currency exchange rates used to
translate expenses from our functional currencies to our reporting currency,
the U.S. dollar, during the three months ended June 30, 2010 increased
selling, general and administrative expenses by approximately $0.7 million as
compared to the three months ended June 30, 2009.
Restructuring charges
. We recorded $1.3 million in restructuring
charges in the three months ended June 30, 2010, all of which was recorded
to cost of sales. These restructuring
charges consisted primarily of a change in estimate of our original accruals
for lease termination costs for our distribution facilities in North America
and Europe.
For
the three months ended June 30, 2009, we recorded a combined $11.2 million
in restructuring charges, of which $5.3 million was included in costs of sales
and $5.9 million was included within operating income. These charges consisted of:
·
$4.1 million in costs associated with the
consolidation of our warehousing, distribution and office space worldwide;
·
$2.2 million in severance costs;
·
$1.1 million related to the release from
further obligations under the earn-out provisions of our acquisition of Bite,
LLC; and
·
$3.8 million in other restructuring charges.
Impairment charges.
During the
three months ended June 30, 2009, we recorded $23.7 million in impairment charges. These charges consisted of:
·
$16.6 million related to the write-off of
obsolete molds, tooling, manufacturing and distribution equipment, sales and
marketing assets and other distribution and manufacturing assets, primarily
associated with the consolidation of warehouse and distribution space;
22
Table of
Contents
·
$6.5 million related to the write-off of
capitalized software, patents, trade names and other intangible assets that we
no longer intend to utilize; and
·
$0.6 million related to the write-off of
other smaller items.
Income (Loss) from Operations.
During the
three months ended June 30, 2010, we generated income from operations of
$38.7 million compared to a loss from operations of $24.5 million for the three
months ended June 30, 2009, for the reasons stated above. The following table summarizes operating
income (loss) by segment for the three months ended June 30, 2010 and 2009
(in thousands):
|
|
Three Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Operating Income:
|
|
|
|
|
|
Americas
|
|
$
|
23,423
|
|
$
|
5,697
|
|
Europe
|
|
8,049
|
|
11,241
|
|
Asia
|
|
31,742
|
|
33,708
|
|
Total segments
|
|
63,214
|
|
50,646
|
|
SG&A Restructuring
|
|
|
|
(5,915
|
)
|
Asset Impairment
|
|
|
|
(23,655
|
)
|
Corporate
and other
|
|
(24,488
|
)
|
(45,595
|
)
|
|
|
|
|
|
|
Total
consolidated operating income (loss)
|
|
$
|
38,726
|
|
$
|
(24,519
|
)
|
Segments Operating Margin.
When compared to the three months ended June 30,
2009, we experienced improved operating income in our Americas operating
segment during the three months ended June 30, 2010 driven by increased
revenue and operational improvements resulting from cost savings initiatives
undertaken in 2009. The decline in our
Europe segment during the three months ended June 30, 2010, when compared
to the three months ended June 30, 2009, was primarily driven by
restructuring charges recorded to cost of sales related to the change in
estimate for lease termination costs at our distribution facility in Europe and
the accretive effect of impaired unit sales that took place during the second
quarter of 2009 as discussed in Recent Events. The decrease in our Asia segment operating
margin in the three months ended June 30, 2010, when compared to the same
period in 2009, was primarily attributable to increased costs associated with
the expansion of our retail selling channel, as discussed previously.
Interest expense
.
Interest expense decreased $0.4 million to $0.2 million in the three
months ended June 30, 2010 compared to $0.6 million in the three months
ended June 30, 2009. This decline
was driven by lower borrowings under our current asset-backed credit facility
during the second quarter of 2010 compared with borrowings under our revolving
credit facility during second quarter of 2009.
Income tax expense
. During the three months ended June 30,
2010, we recognized an income tax expense of $6.6 million on pre-tax income of
$38.9 million, compared to income tax expense of $7.6 million on pre-tax loss
of $22.7 million for the three months ended June 30, 2009. The effective tax rate was 17.0% during the
three months ended June 30, 2010.
The change in effective tax rate is primarily the result of the Company
restructuring its international operations, cost sharing arrangements and
release of valuation allowances related to net operating losses in various
international entities.
23
Table of Contents
Comparison of the Six Months Ended June 30, 2010 and
2009
|
|
Six Months Ended June 30,
|
|
Change
|
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
|
(amounts
in thousands, except per share data)
|
|
|
|
Revenues
|
|
$
|
394,898
|
|
$
|
332,614
|
|
$
|
62,284
|
|
18.7
|
%
|
Cost
of sales
|
|
176,275
|
|
181,771
|
|
(5,496
|
)
|
(3.0
|
)%
|
Gross
profit
|
|
218,623
|
|
150,843
|
|
67,780
|
|
44.9
|
%
|
Selling,
general and administrative expenses
|
|
168,825
|
|
163,395
|
|
5,430
|
|
3.3
|
%
|
Foreign
currency transaction losses (gains), net
|
|
(1,421
|
)
|
(214
|
)
|
(1,207
|
)
|
(564
|
)%
|
Restructuring
charges
|
|
2,539
|
|
5,953
|
|
(3,414
|
)
|
(57.3
|
)%
|
Impairment
charges
|
|
141
|
|
23,724
|
|
(23,583
|
)
|
(99.4
|
)%
|
Charitable
contributions
|
|
418
|
|
5,119
|
|
(4,701
|
)
|
(91.8
|
)%
|
Income
(loss) from operations
|
|
48,121
|
|
(47,134
|
)
|
95,255
|
|
202.1
|
%
|
Interest
expense
|
|
292
|
|
1,257
|
|
(965
|
)
|
(76.8
|
)%
|
Other,
net
|
|
(166
|
)
|
(3,470
|
)
|
3,304
|
|
95.2
|
%
|
Income
(loss) before income taxes
|
|
47,995
|
|
(44,921
|
)
|
92,916
|
|
206.8
|
%
|
Income
tax expense
|
|
9,994
|
|
7,777
|
|
2,217
|
|
28.5
|
%
|
Net
income (loss)
|
|
$
|
38,001
|
|
$
|
(52,698
|
)
|
$
|
90,699
|
|
172.1
|
%
|
Net
income (loss) per diluted share
|
|
$
|
0.43
|
|
$
|
(0.62
|
)
|
$
|
1.05
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
55.4
|
%
|
45.4
|
%
|
|
|
|
|
Operating
margin
|
|
12.2
|
%
|
(14.2
|
)%
|
|
|
|
|
N/M
Not meaningful
Revenues
. For the six
months ended June 30, 2010, revenues increased $62.3 million to $394.9
million as compared to the six months ended June 30, 2009. Total unit
sales of footwear products increased to 22.1 million units, a 2.0 million unit
increase from the same period in 2009.
Average selling price per unit of footwear for the six months ended was
$17.16, as noted in the table below. During the six months ended June 30,
2009, we sold $43.0 million in end of life and impaired products as we disposed
of this inventory as described above in Recent Events. The following table sets forth revenue by
channel and by region as well as other revenue information for the first half
of 2010 and 2009:
|
|
Six months ended June 30,
|
|
Change
|
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
|
(in millions, except average selling price)
|
|
|
|
Wholesale channel revenue
|
|
$
|
260.2
|
|
$
|
220.3
|
|
$
|
39.9
|
|
18.1
|
%
|
Retail channel revenue
|
|
100.8
|
|
83.2
|
|
17.6
|
|
21.2
|
%
|
Internet channel revenue
|
|
33.9
|
|
29.1
|
|
4.8
|
|
16.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Americas revenue (includes Corporate)
|
|
$
|
179.0
|
|
$
|
153.1
|
|
$
|
25.9
|
|
16.9
|
%
|
Asia revenue
|
|
143.4
|
|
119.0
|
|
24.4
|
|
20.5
|
%
|
Europe revenue
|
|
72.5
|
|
60.5
|
|
12.0
|
|
19.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Footwear unit sales
|
|
22.1
|
|
20.1
|
|
2.0
|
|
10.0
|
%
|
Average selling price
|
|
$
|
17.16
|
|
$
|
15.51
|
|
$
|
1.65
|
|
10.6
|
%
|
Revenue
from our wholesale channel was stronger globally in the first quarter of 2010
and gained momentum in the second quarter of 2010, as compared to the same
period in 2009, particularly in Asia and the Americas. We believe the increase
to be largely the result of improved economic conditions, continuing efforts
made to improve our wholesale customer relationships and market acceptance of
our new spring/summer products.
Our
company-operated retail locations experienced a 21.2% increase in revenues for
the six months ended June 30, 2010 compared to the same period in the
previous year. This growth was driven by
the expanded availability of product to our retail customer due to the increase
in retail locations year over year (see table above), where we can better
merchandise the full breadth and depth of our product line.
The
increase in revenue from our internet channel was driven by increased sales in
our Europe segment, resulting from the
addition of local language internet sites in France, Germany, Spain and Italy
and increased demand for our products overall.
These increases were partially offset by revenue declines from our
internet channels in Asia due to the factors noted above.
Revenue
from our combined consumer-direct sales channels, defined as our retail and
internet channels, increased from 33.8% for the six months ended June 30,
2009 to 34.1% of revenue in the six months ended June 30, 2010. As these
24
Table of
Contents
channels
become a larger portion of our business, we expect to see some improvements in
total revenue and gross margin as we have traditionally been able to achieve a
higher average selling price in this channel.
Average
foreign currency exchange rates during the six months ended June 30, 2010
contributed $14.9 million to our revenues as compared to the six months
ended June 30, 2009. We expect that
sales in international markets in foreign currencies will continue to represent
a substantial portion of our overall revenues. Accordingly, changes in foreign
currency exchange rates could materially affect our overall revenues or the
comparability of those revenues from period to period as a result of
translating our financial statements into our reporting currency, the U.S.
dollar.
Americas Segment - Revenue.
Our revenues from the Americas segment
increased 16.7%, or $25.1 million, in the six months ended June 30, 2010
compared to the six months ended June 30, 2009, as a result of increased
revenue in all channels. The increase in revenues in this segment was driven by
volume and price improvements in our retail and wholesale channels. Revenue from Company-operated retail
locations in the Americas increased 31.7%, or $14.7 million, to $61.1 million
for the six months ended June 30, 2010 compared to the six months ended June 30,
2009. Our company-operated retail
locations in the Americas increased by 22 year over year. We continue to execute against plans to grow
revenue in the U.S. wholesale channel as discussed above.
Asia Segment - Revenue.
Our revenues in Asia increased 20.5%, or
$24.4 million, during the six months ended June 30, 2010 compared to the
six months ended June 30, 2009 as a result of continued strong demand in
our Asia wholesale channel and price improvements in our retail channel,
partially offset by a
decline in
internet revenue. Revenue from
company-operated retail locations in Asia increased 6.0%, or $1.9 million, to
$33.7 million in the six months ended June 30, 2010 compared to the six
months ended June 30, 2009.
Company-operated retail locations in our Asia region grew by 32 year
over year. Revenue growth from our
company-operated retail locations was negatively affected by a prolonged cold
weather season in parts of the region and a rise in imitation products in
Japan.
Europe Segment - Revenue.
Our revenues in Europe increased 19.8%, or
$12.0 million, to $72.5 million in the six months ended June 30, 2010
compared to the six months ended June 30, 2009. The increase was driven by growth across all
selling channels in the region. Revenue
from company-operated retail locations increased $0.9 million or 18.0% to $5.9
million in the six months ended June 30, 2010 compared to the six months
ended June 30, 2009.
Gross profit
.
Increases in gross profit, from $150.8 million to $218.6 million, and gross
margin, from 45.4% to 55.4%, for the six months ended June 30, 2010
compared to the six months ended June 30, 2009 were attributable to
favorable shifts in product mix and volumes. Additionally, we continue to
execute against our strategy to increase shipments made directly from the
factories to our wholesale customers and our retail channel. These factory-direct shipments lower our
distribution cost and, as factory-direct shipment volume increased, we began to
realize benefits from this program in the first half of 2010. The increase is also attributable to
restructuring charges of $5.3 million, recognized in the second quarter of
2009, as we closed and consolidated our distribution space in North America and
Europe.
Average
foreign currency exchange rates during the six months ended June 30, 2010
increased our gross profit by $8.2 million as compared to the six months ended June 30,
2009. We expect that sales at subsidiary
companies with functional currencies other than the U.S. dollar will continue
to generate a substantial portion of our overall gross profit. Accordingly, changes in foreign currency
exchange rates could materially affect our overall gross profit or the
comparability of our gross profit from period to period as a result of
translating our financial statements into our reporting currency, the U.S.
dollar.
Selling, general and administrative expenses and
foreign currency transaction losses (gains)
. Selling, general and administrative expense
increased $5.4 million or 3.3% in the six months ended June 30, 2010
compared to the six months ended June 30, 2009. The increase is primarily due to an increase
of $18.0 million in marketing expense for media and agency costs related to our
spring marketing campaign, salaries expense, and rent and other retail-related
costs largely driven by the continued expansion of our retail selling
channel. Offsetting these increases was
a $16.2 million decline in stock-based compensation, $13.3 million of which was
due to the acceleration of stock-based compensation expense from our 2009
tender offer. Selling, general and
administrative expenses for the six months ended June 30, 2010 were
favorably impacted by a net gain on changes in currency exchange rates for
transactions denominated, and settled or to be settled, in a currency other
than the functional currency of $1.4 million compared to a net gain on changes
in currency exchange rates of $0.2 million for the six months ended June 30,
2009.
Changes in the average foreign currency exchange
rates used to translate expenses from our functional currencies to our reporting
currency, the U.S. dollar, from the first half of 2009 to the same period in
2010 increased selling, general and administrative expenses by approximately
$2.8 million.
25
Table of
Contents
Restructuring charges
. We recorded $3.8 million in restructuring
charges in the six months ended June 30, 2010, of which $1.3 million was
recorded to cost of sales. These
restructuring charges consisted of $2.0 million in severance costs related to
the departure of our former Chief Executive Officer, John Duerden, during the
first quarter of 2010 as well as $1.8 million which was related to a change in
estimate of our original accruals for lease termination costs for our Canadian
office, closed in 2008, and our distribution facilities in North America and
Europe.
For
the six months ended June 30, 2009, we recorded a combined $11.2 million
in restructuring charges, of which $5.3 million was included in costs of sales
and $5.9 million was included within operating income. These charges consisted of:
·
$4.1 million in costs associated with the
consolidation of our warehousing, distribution and office space worldwide;
·
$2.2 million in severance costs;
·
$1.1 million related to the release from
further obligations under the earn-out provisions of our acquisition of Bite,
LLC; and
·
$3.8 million in other restructuring charges.
Impairment charges.
During the
three months ended June 30, 2009, we recorded $23.7 million in impairment charges. These charges consisted of:
·
$16.6 million related to the write-off of
obsolete molds, tooling, manufacturing and distribution equipment, sales and
marketing assets and other distribution and manufacturing assets, primarily
associated with the consolidation of warehouse and distribution space;
·
$6.5 million related to the write-off of
capitalized software, patents, trade names and other intangible assets that we
no longer intend to utilize; and
·
$0.6 million related to the write-off of
other smaller items.
Income (Loss) from Operations.
We generated
income from operations of $48.1 million for the first six months of 2010
compared to a loss from operations of $47.1 million for the six months ended June 30,
2009, for the reasons stated above. The
following table summarizes operating income (loss) by segment for the six
months ended June 30, 2010 and 2009 (in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
2009
|
|
Operating Income:
|
|
|
|
|
|
Americas
|
|
$
|
34,657
|
|
$
|
7,923
|
|
Europe
|
|
17,675
|
|
12,224
|
|
Asia
|
|
44,278
|
|
29,877
|
|
Total segments
|
|
96,610
|
|
50,024
|
|
SG&A Restructuring
|
|
(2,539
|
)
|
(5,953
|
)
|
Asset Impairment
|
|
(141
|
)
|
(23,724
|
)
|
Corporate and other
|
|
(45,809
|
)
|
(67,481
|
)
|
Total consolidated operating income (loss)
|
|
48,121
|
|
(47,134
|
)
|
|
|
|
|
|
|
|
|
Segments Operating Margin.
We experienced higher operating income in
each of our operating segments during the six months ended June 30, 2010
compared to the first six months ended June 30, 2009. These improvements were driven by increased
revenue in each of our segments compared to the first six months of 2009 as
well as cost savings initiatives undertaken in 2009, as discussed in Recent
Events.
Interest expense
.
Interest expense decreased $1.0 million to $0.3 million in the six
months ended June 30, 2010 compared to $1.3 million in the six months
ended June 30, 2009. This decline
was driven by lower borrowings under our current asset-backed credit facility
in the first six months of 2010 compared with borrowings under our revolving
credit facility during the first six months of 2009.
Income tax expense
. During the six months ended June 30,
2010, we recognized an income tax expense of $10 million on
26
Table of Contents
pre-tax income of $48
million, compared to income tax expense of $7.8 million on pre-tax loss of
$44.9 million for the six months ended June 30, 2009. The effective tax rate was 20.8% for the six
months ended June 30, 2010. The
change in effective tax rate is primarily the result of the Company
restructuring its international operations, cost sharing arrangements and
release of valuation allowances related to net operating losses in various
international entities.
Liquidity
and Capital Resources
At
June 30, 2010, we had $96.9 million in cash and cash equivalents. We
anticipate that cash flows from operations will be sufficient to meet the
ongoing needs of our business for the next 12 months. In order to provide additional liquidity in
the future and to help support our strategic goals, we also have an
asset-backed revolving line of credit, which provides us with up to $30 million
in borrowings. We entered into this Revolving Credit and Security Agreement
with PNC Bank, N.A. (the Credit Agreement), on September 25, 2009. The Credit Agreement matures on September 25,
2012 and provides for borrowings of up to $30 million in total, which includes
a $17.5 million sublimit for borrowings against our eligible inventory, a $2
million sublimit for borrowings against our eligible inventory in-transit, and
a $4 million sublimit for letters of credit.
The total borrowings available under the Credit Agreement at any given
time are subject to customary reserves and reductions to the extent our asset
borrowing base changes. Borrowings under
the Credit Agreement are secured by all of our assets, including all
receivables, equipment, general intangibles, inventory, investment property,
subsidiary stock and leasehold interests.
The Credit Agreement requires us to prepay borrowings under the Credit
Agreement in the event of certain dispositions of property.
With
respect to domestic rate loans, principal amounts outstanding under the Credit
Agreement bear interest at a two percent (2%) premium over a rate that is the
greater of either (i) PNCs published reference rate, (ii) the
Federal Funds Open Rate (as defined in the Credit Agreement) in effect on such
day plus one half of one percent (0.5%) or, (iii) the sum of the daily
LIBOR rate and one percent (1.0%).
Eurodollar denominated principal amounts outstanding under the Credit
Agreement bear interest at the sum of three and one half percent (3.50%)
premium over a rate that is the greater of (i) the Eurodollar rate, or (ii) one
and one half percent (1.50%) with respect to Eurodollar loans, as
applicable. The Credit Agreement
requires monthly interest payments with respect to domestic rate loans and at
the end of each period with respect to Eurodollar rate loans.
As
of June 30, 2010, we had no outstanding borrowings under the Credit
Agreement and were in compliance with
financial covenants under the Credit Agreement. Additional future
financing may be necessary; however, due to current macroeconomic conditions
and their affect on the global credit markets, there can be no assurance that
we will be able to secure additional debt or equity financing on terms
acceptable to us or at all.
Our accounts receivable balance as of June 30,
2010 was $94.0 million, an increase of $26.9 million compared to the balance as
of June 30, 2009. The increase in
accounts receivable was driven by higher sales in the second quarter of 2010
when compared to the second quarter of 2009.
Days sales outstanding increased from 30.9 days at June 30, 2009 to
37.5 days at June 30, 2010. This
increase was largely the result of product shipments late in the second quarter
of 2010. Compared to December 31,
2009, our accounts receivable balance increased $43.5 million. This increase is primarily attributable to
the increase in revenues during the second quarter of 2010 when compared to the
three months ended December 31, 2009.
We are a global business with operations in many
different countries, which requires cash accounts to be held in various
different currencies. The global market has recently experienced many
fluctuations in foreign currency exchange rates which impacts our results of
operations and cash positions. The
future fluctuations in foreign currencies may have a material impact on our
cash flows and capital resources. Cash
balances held in foreign countries have additional restrictions and covenants
associated with them, which adds increased strains on our liquidity and ability
to timely access and transfer cash balances between entities.
We consider unremitted earnings of subsidiaries
operating outside of the U.S. to be indefinitely reinvested and it is not our
current intent to change this position.
However,
most of the cash held outside of the U.S. could be
repatriated to the U.S., but under current law, would be subject to U.S.
federal and state income taxes, less applicable foreign tax credits. In some
countries, repatriation of certain foreign balances is restricted by local laws
and could have adverse tax consequences if we were to move the cash to another
country. Certain countries, including
China, have monetary laws which may limit our ability to utilize cash resources
in those countries for operations in other countries. These limitations may affect our ability to
fully utilize our cash resources for needs in the U.S. or other countries and
may adversely affect our liquidity. As
of June
27
Table of
Contents
30,
2010, we held $84.4 million of our total $96.9 million in cash in international
locations. This cash is primarily used
for the ongoing operations of the business in the locations in which the cash
is held. Of the $84.4 million, $28.0
million could potentially be restricted, as described above. If the remaining $56.4 million were to be
repatriated to the U.S., we would be required to pay approximately $2.8 million
in international withholding taxes with no offsetting credit. We believe that we have sufficient U.S. net
operating losses (NOLs) to absorb any future increases to U.S. net income
(and therefore, U.S. federal income tax) brought about by potential cash
repatriation. There are full valuation
allowances on the NOLs that would be released to result in no tax effect or
cash tax payments for the U.S. if we were to repatriate $53.6 million in cash
to the U.S. as of June 30, 2010.
We have entered into various operating leases that
require cash payments on a specified schedule.
Over the next five years we will make payments of $119.2 million related
to our operating leases. We plan to
continue to enter into operating leases related to our retail stores. We also continue to evaluate cost reduction
opportunities. Our evaluation of cost
reduction opportunities will include an evaluation of contracts for
sponsorships, operating lease contracts and other contracts that require future
minimum payments resulting in fixed operating costs. Any changes to these contracts may require
early termination fees or other charges that could result in significant cash
expenditures.
Our
inventories increased to $113.6 million at June 30, 2010 from
$93.3 million as of December 31, 2009 largely driven by seasonality
as we prepared for our peak selling season.
During the three and six months ended June 30,
2010 and 2009, we had net capital expenditures of $11.0 million and $18.8
million and $9.7 million and $14.1 million, respectively.
We will continue to make
ongoing capital investments in molds and other tooling equipment related to
manufacturing new products and footwear styles as well as those related to
opening additional retail stores. We continue to evaluate our software needs
and may continue to spend on upgrades or improvements to current systems or may
implement new systems as our business needs require.
Seasonality
Due to the seasonal nature of our product, which is more heavily
focused on footwear styles suitable for warm weather, revenues generated during our first and
fourth quarters are typically less than revenues generated during our second
and third quarters, when the northern hemisphere is experiencing warmer
weather. We intend to continue branching
out into other types of footwear, including offering more winter-oriented
styles, and this product expansion may help us mitigate some of this
seasonality in the future. Our quarterly
results of operations may fluctuate significantly as a result of a variety of
other factors, including the timing of new model introductions or general
economic or consumer conditions.
Accordingly, results of operations and cash flows for any one quarter
are not necessarily indicative of results to be expected for any other quarter
or for any other year.
Critical
Accounting Policies and Estimates
For
a discussion of accounting policies that we consider critical to our business
operations and understanding of our results of operations, and that affect the
more significant judgments and estimates used in the preparation of our
unaudited condensed consolidated financial statements, see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
OperationsCritical Accounting Policies contained in our annual report on Form 10-K
for the year ended December 31, 2009 and incorporated by reference herein.
Significant
Accounting Policies and Estimates
For
a discussion of accounting policies that we consider significant to our
business operations and understanding of our results of operations, see Note 2
Summary of Significant Accounting Policies to our consolidated financial
statements contained in our annual report on Form 10-K for the year ended December 31,
2009 and incorporated by reference herein.
Effective
January 1, 2010, we changed our inventory valuation method for all
inventories from the first-in, first-out (FIFO) cost method to the moving
average cost method, which approximates FIFO. We believe the change to
the moving average cost method is preferable under the circumstances because
the moving average methodology results in better alignment with the physical
flow of inventory than the FIFO methodology, it is calculated by our inventory
information system, which incorporates automated controls, and is also the
method management uses when preparing budgets, reviewing actual and forecasted
financial information, as well as the method used in determining incentive management
compensation. The moving average cost results substantially in the same
results of operations per period. As
such, financial statements for periods ending on or before December 31,
2009 have not been retroactively adjusted due to immateriality. The impact of
the
28
Table of Contents
change for the three month
and six month period ended June 30, 2010 is also immaterial. We do not believe the change will have a
significant impact on our financial statements in the future.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
Credit and Interest Rate Risk
We
are exposed to interest rate risk to the extent that interest rates change due
to inflation or other factors. This exposure is directly related to our normal
operating and funding activities. As
previously discussed, on September 25, 2009, we entered into the Credit
Agreement with PNC for an asset-backed revolving credit facility which provides
for borrowings of up to $30.0 million in total, subject to certain
restrictions. With respect to domestic rate loans, principal amounts
outstanding under the Credit Agreement will bear interest at a two percent (2%)
premium over a rate that is the greater of either (i) PNCs published
reference rate, (ii) the Federal Funds Open Rate (as defined in the Credit
Agreement) in effect on such day plus one half of one percent (0.5%), or (iii) the
sum of the daily LIBOR rate and one percent (1.0%). Eurodollar denominated principal amounts
outstanding under the Credit Agreement will bear interest at the sum of three
and one half percent (3.50%) premium over a rate that is the greater of (i) the
Eurodollar rate, or (ii) one and one half percent (1.50%) with respect to
Eurodollar loans, as applicable. The
Credit Agreement requires monthly interest payments with respect to domestic
rate loans and at the end of each period with respect to Eurodollar rate
loans. Since we currently have no
outstanding borrowings as of June 30, 2010 under the Credit Agreement, a
change in prevailing interest rates in the near term will not materially affect
our overall results.
We
earned interest income of $0.3 million on our cash and cash equivalents during
the three months ended June 30, 2010.
Currently, our sensitivity to market fluctuations in interest rates is
not material to our overall results.
Foreign Currency Exchange Risk
We
have significant revenues from foreign sales in recent periods. While the majority of expenses attributable
to our foreign operations are paid in the functional currency of the country in
which such operations are conducted, we pay the majority of our overseas
third-party manufacturers in U.S. dollars. Our ability to sell our products in
foreign markets and the U.S. dollar value of the sales made in foreign
currencies can be significantly influenced by foreign currency
fluctuations. We are primarily exposed
to changes in exchange rates for the Japanese Yen and the Euro. In the event our foreign sales and purchases
increase and are denominated in currencies other than the U.S. dollar, our
operating results may be affected by fluctuations in the exchange rate of
currencies we receive for such sales. We engage in foreign exchange hedging
contracts to reduce our transactional exposure to changes in exchange rates and
to hedge specific commitments and anticipated transactions but not for
speculative or trading purposes. These
foreign exchange hedging contracts are accounted for as derivatives designated
as non hedging instruments in accordance with accounting standards for
derivatives and hedging. The fair value
of these instruments at June 30, 2010 and December 31, 2009 were $0.1
million and $0 in liabilities, respectively.
The change in the value of these instruments is immediately recognized
in earnings. The impact of such
instruments is included in other expense (income), net.
ITEM 4.
Controls and Procedures
Evaluation of Disclosure Controls and
Procedures
Under
the supervision of and with the participation of our senior management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of the end of the period covered by
this quarterly report (the Evaluation Date). Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that as of the
Evaluation Date, our disclosure controls and procedures were effective, such
that the information relating to us, including our consolidated subsidiaries,
required to be disclosed in our Securities and Exchange Commission (SEC)
reports (i) is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Changes in Internal Control over Financial
Reporting
There
have been no changes to our internal control over financial reporting during
the three months ended June 30, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
29
Table of Contents
PART IIOTHER
INFORMATION
ITEM 1. Legal
Proceedings
On
March 31, 2006, the Company filed a complaint with the International
Trading Commission (ITC) against Acme Ex-Im, Inc., Australia
Unlimited, Inc., Chengs Enterprises, Inc., Collective Licensing
International, LLC, D. Myers & Sons, Inc., Double Diamond
Distribution, Ltd., Effervescent, Inc., Gen-X Sports, Inc.,
Holey Soles Holdings, Ltd., Inter-Pacific Trading Corporation, and
Shaka Holdings, Inc., alleging patent and trade dress infringement and
seeking an exclusion order banning the importation and sale of infringing
products. On August 10, 2006, the Company filed a motion to voluntarily
remove its trade dress claim from the investigation to focus on the patent
claims. The Companys motion was granted by Order No. 20 on August 24,
2006. The utility and design patents asserted in the complaint were issued to
the Company on February 7, 2006 and March 28, 2006 respectively, by
the United States Patent and Trademark Office. The ITC has issued final
determinations terminating Shaka Holdings, Inc., Inter-Pacific
Trading Corporation, Acme Ex-Im, Inc., D. Myers &
Sons, Inc., Australia Unlimited, Inc. and Gen-X Sports, Inc.
from the ITC investigation No. 337-TA-567 on the basis of settlement and
Chengs Enterprises, Inc. on the suspension of accused activities. The ITC
Administrative Law Judge (ALJ) issued an Initial Determination of
non-infringement related to one of the patents at issue. The Company filed a
petition with the Commission to review this determination. The Commission granted
the Companys petition and on February 15, 2007, after briefing by the
parties, the Commission vacated the ALJs determination of non-infringement
with respect to the remaining respondents and remanded it to the ALJ for
further proceedings consistent with the Commissions order. In light of the
Commissions Order, the procedural schedule and hearing date were reset
pursuant to Order No. 38. A trial was held before the ALJ from
September 7 to 14, 2007. The ALJ issued an Initial Determination on April 11,
2008 with a finding of no violation, finding infringement of the utility patent
by certain accused products, but also finding that the utility patent was
invalid as obvious. The ALJ also found that the design patent was valid, but
not infringed by the accused products. The Company filed a Petition for Review
of the Initial Determination which was due on April 24, 2008. On
June 18, 2008, the Commission issued a Notice that it would review the ALJs
findings in the Initial Determination with respect to the determination of
non-infringement of the design patent and the determination of invalidity of
the utility patent. On July 25, 2008, the Commission issued a Notice of
its decision to terminate the Investigation with a finding of no violation as
to either patent. Crocs filed a Petition for Review of the decision with the
United States Court of Appeals for the Federal Circuit on September 22,
2008, and filed its initial brief on January 21, 2009. Briefing before the
Federal Circuit was completed in April 2009 and oral arguments were heard
on July 10, 2009. On October 4, 2009, the Company and Collective
Licensing International, LLC reached a settlement. Collective Licensing
International, LLC agreed to cease and desist infringing on the Companys
patents and to pay the Company certain monetary damages, which was recorded
upon receipt. On February 24, 2010, the Federal Circuit found that the
Commission erred in finding that the utility patent was obvious and reversed
the Commissions determination of non-infringement of the design patent. The
case has been remanded back to the Commission for a determination of
infringement of the utility patent and any appropriate remedies. On April 12, 2010, one of the remaining
parties, Effervescent, Inc., filed a request for a panel or en banc
hearing with the Federal Circuit of the February 24, 2010 decision, to
which the Company responded on April 28, 2010. The Federal Circuit denied
the petition on May 20, 2010 and the matter has been remanded to the
ITC. On July 6, 2010, the Commission ordered the matter to
be assigned to an ALJ for a determination on enforceability.
On
December 8, 2009, Columbia Sportswear Company (Columbia) filed an
Amended Complaint adding the Company as a defendant in a case between Columbia
and Brian P. OBoyle and 1 Pen. Inc. in the Multnomah County Circuit Court in
the State of Oregon. Columbia asserted claims against the Company for
misappropriation of trade secrets, aiding and abetting breach of fiduciary
duty, intentional interference with contract, injunctive relief, disgorgement
and an accounting. The Amended Complaint sought damages in an unspecified
amount, return of patent rights, reasonable attorneys fees and costs and
expenses against the Company. The Company and Columbia settled all issues
between them and Columbia dismissed with prejudice all claims against the
Company in exchange for certain monetary and other considerations.
The
Company is subject to other litigation from time to time in the ordinary course
of business, including employment, intellectual property and product liability
claims, the Company is not party to any other pending legal proceedings that
the Company believes will have a material adverse impact on its business.
30
Table of Contents
ITEM 1A. Risk
Factors
There
have been no material changes to the risk factors contained in our Annual
Report on Form 10-K for the year ended December 31, 2009.
ITEM 2. Unregistered
Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
|
|
Total
Number
of Shares
(or Units)
Purchased
|
|
Average
Price
Paid per
Share
(or Unit)
|
|
Total Number
of Shares
(or Units)
Purchased as
Part of
Publicly
Announced
Plans or
Programs
|
|
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs (2)
|
|
April 1,
2010April 30, 2010
|
|
|
|
|
|
|
|
5,476,000
|
|
May 1,
2010May 31, 2010
|
|
|
|
|
|
|
|
5,476,000
|
|
June 1,
2010June 30, 2010
|
|
15,674
|
(1)
|
$
|
11.80
|
|
|
|
5,476,000
|
|
Total
|
|
15,674
|
|
$
|
11.80
|
|
|
|
5,476,000
|
|
(1)
On November 13, 2009,
the Compensation Committee of our Board of Directors approved withhold to
cover as a tax payment method for vesting of restricted stock awards for our
named executive officers. Pursuant to an election for withhold to cover
made on June 15, 2010 by one of our named executive officers, which was
outside of a publicly-announced repurchase plan, 15,674 shares were withheld at
an average price paid per share of $11.80.
(2)
On November 1, 2007 and
April 14, 2008, our Board of Directors approved an authorization to
repurchase up to one million shares and five million shares, respectively, of
our common stock. As of June 30,
2010, 5,476,000 shares remained available for repurchase under our share
repurchase authorization. Share
repurchases under this authorization may be made in the open market or in
privately negotiated transactions. The
repurchase authorization does not have an expiration date and does not oblige
us to acquire any particular amount of our common stock. The repurchase authorization maybe be
modified, suspended or discontinued at any time.
ITEM 6. Exhibits.
Exhibit List
Exhibit
Number
|
|
Description
|
3.1**
|
|
Restated Certificate of
Incorporation of Crocs, Inc.
|
|
|
|
3.2**
|
|
Amended and Restated
Bylaws of Crocs, Inc.
|
|
|
|
4.1*
|
|
Specimen common stock
certificate.
|
|
|
|
10.1
|
|
Employment Agreement dated
May 18, 2009 by and between Crocs, Inc. and Daniel Hart
|
|
|
|
31.1
|
|
Certification of the Chief
Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act.
|
|
|
|
31.2
|
|
Certification of the Chief
Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act.
|
31
Table of Contents
32
|
|
Certification of the Chief
Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act.
|
*
Incorporated
herein by reference to Crocs, Inc.s Registration Statement on
Form S-1, filed on August 15, 2005 (File No. 333-127526).
**
Incorporated by
reference to Crocs, Inc.s Registration Statement on Form S-8, filed
on March 9, 2006 (File No. 333-132312).
Filed herewith.
32
Table of
Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
CROCS, INC.
|
|
|
|
Date:
August 5, 2010
|
By:
|
/s/ Russell C. Hammer
|
|
|
Name:
|
Russell C. Hammer
|
|
|
Title:
|
Chief
Financial Officer, Senior Vice PresidentFinance and Treasurer
|
33
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