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 September 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 October 29, 2010, Crocs, Inc. had 87,248,154 shares of its $0.001
par value common stock outstanding.
Table
of Contents
PART IFINANCIAL
INFORMATION
ITEM 1.
Financial Statements
CROCS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Revenues
|
|
$
|
215,605
|
|
$
|
177,141
|
|
$
|
610,503
|
|
$
|
509,756
|
|
Cost
of sales
|
|
96,797
|
|
87,291
|
|
273,072
|
|
269,115
|
|
Gross
profit
|
|
118,808
|
|
89,850
|
|
337,431
|
|
240,641
|
|
Selling,
general and administrative expenses
|
|
92,192
|
|
77,995
|
|
261,017
|
|
240,654
|
|
Foreign
currency transaction gains, net
|
|
(908
|
)
|
(1,032
|
)
|
(2,329
|
)
|
(1,247
|
)
|
Restructuring
charges
|
|
|
|
17
|
|
2,539
|
|
5,916
|
|
Impairment
charges
|
|
|
|
1,722
|
|
141
|
|
25,447
|
|
Charitable
contributions
|
|
78
|
|
2,178
|
|
496
|
|
7,296
|
|
Income
(loss) from operations
|
|
27,446
|
|
8,970
|
|
75,567
|
|
(37,425
|
)
|
Interest
expense
|
|
153
|
|
155
|
|
445
|
|
1,412
|
|
Gain
on charitable contribution
|
|
(19
|
)
|
(810
|
)
|
(135
|
)
|
(2,833
|
)
|
Other
expense (income), net
|
|
137
|
|
(125
|
)
|
87
|
|
(833
|
)
|
Income
(loss) before income taxes
|
|
27,175
|
|
9,750
|
|
75,170
|
|
(35,171
|
)
|
Income
tax expense (benefit)
|
|
2,179
|
|
(12,318
|
)
|
12,173
|
|
(4,541
|
)
|
Net
income (loss)
|
|
$
|
24,996
|
|
$
|
22,068
|
|
$
|
62,997
|
|
$
|
(30,630
|
)
|
Net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
$
|
0.26
|
|
$
|
0.73
|
|
$
|
(0.36
|
)
|
Diluted
|
|
$
|
0.28
|
|
$
|
0.25
|
|
$
|
0.72
|
|
$
|
(0.36
|
)
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
Table
of Contents
CROCS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
|
|
September 30, 2010
|
|
December 31, 2009
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
143,057
|
|
$
|
77,343
|
|
Restricted
cash
|
|
577
|
|
1,144
|
|
Accounts
receivable, net
|
|
81,303
|
|
50,458
|
|
Inventories
|
|
142,531
|
|
93,329
|
|
Deferred
tax assets, net
|
|
7,973
|
|
7,358
|
|
Income
tax receivable
|
|
9,597
|
|
8,611
|
|
Other
receivables
|
|
11,008
|
|
16,140
|
|
Prepaid
expenses and other current assets
|
|
13,699
|
|
12,871
|
|
Total
current assets
|
|
409,745
|
|
267,254
|
|
Property
and equipment, net
|
|
65,882
|
|
71,084
|
|
Restricted
cash
|
|
1,675
|
|
1,506
|
|
Intangible
assets, net
|
|
42,416
|
|
35,984
|
|
Deferred
tax assets, net
|
|
18,859
|
|
18,479
|
|
Marketable
securities
|
|
1,040
|
|
866
|
|
Other
assets
|
|
15,054
|
|
14,565
|
|
Total
assets
|
|
$
|
554,671
|
|
$
|
409,738
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts
payable
|
|
$
|
66,763
|
|
$
|
23,434
|
|
Accrued
expenses and other current liabilities
|
|
65,216
|
|
53,589
|
|
Accrued
restructuring charges
|
|
1,844
|
|
2,616
|
|
Income
taxes payable
|
|
18,188
|
|
6,377
|
|
Note
payable, current portion of long-term debt and capital lease obligations
|
|
1,861
|
|
640
|
|
Total
current liabilities
|
|
153,872
|
|
86,656
|
|
Long
term debt and capital lease obligations
|
|
1,235
|
|
912
|
|
Deferred
tax liabilities, net
|
|
2,085
|
|
2,192
|
|
Long
term restructuring
|
|
|
|
520
|
|
Other
liabilities
|
|
32,532
|
|
31,838
|
|
Total
liabilities
|
|
189,724
|
|
122,118
|
|
Commitments
and contingencies (Note 15)
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
Common
shares, par value $0.001 per share; 250,000,000 shares authorized, 87,705,254
and 87,136,697 shares issued and outstanding, respectively, at
September 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, 568,557 and 565,179 shares, respectively
|
|
(23,610
|
)
|
(25,260
|
)
|
Additional
paid-in capital
|
|
273,418
|
|
266,472
|
|
Retained
earnings
|
|
85,152
|
|
22,155
|
|
Accumulated
other comprehensive income
|
|
29,900
|
|
24,168
|
|
Total
stockholders equity
|
|
364,947
|
|
287,620
|
|
Total
liabilities and stockholders equity
|
|
$
|
554,671
|
|
$
|
409,738
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
Table
of Contents
CROCS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U
naudited)
(In thousands)
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
62,997
|
|
$
|
(30,630
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
26,704
|
|
28,585
|
|
Loss
(gain) on disposal of fixed assets
|
|
905
|
|
(819
|
)
|
Unrealized
gain on foreign exchange transactions
|
|
(1,183
|
)
|
(11,327
|
)
|
Deferred
income taxes
|
|
(307
|
)
|
864
|
|
Asset
impairment
|
|
133
|
|
25,387
|
|
Inventory
write down
|
|
|
|
2,568
|
|
Charitable
contributions
|
|
512
|
|
7,261
|
|
Gain
on charitable contributions
|
|
(143
|
)
|
(2,828
|
)
|
Non-cash
restructuring charges
|
|
196
|
|
1,768
|
|
Share-based
compensation
|
|
5,511
|
|
24,860
|
|
Bad
debt expense
|
|
2,608
|
|
836
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
(30,876
|
)
|
(28,561
|
)
|
Income
tax receivable
|
|
(431
|
)
|
31,433
|
|
Inventories
|
|
(48,674
|
)
|
24,250
|
|
Prepaid
expenses and other assets
|
|
3,088
|
|
(12,214
|
)
|
Accounts
payable
|
|
44,169
|
|
(1,372
|
)
|
Accrued
restructuring charges
|
|
(1,324
|
)
|
1,809
|
|
Accrued
expenses and other liabilities
|
|
24,003
|
|
(13,897
|
)
|
Cash
provided by operating activities
|
|
87,888
|
|
47,973
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
Cash
paid for purchases of property and equipment
|
|
(19,654
|
)
|
(13,792
|
)
|
Proceeds
from disposal of property and equipment
|
|
1,014
|
|
2,065
|
|
Cash
paid for intangible assets
|
|
(9,217
|
)
|
(5,366
|
)
|
Purchases
of marketable securities
|
|
(5,585
|
)
|
|
|
Maturities
of marketable securities
|
|
6,283
|
|
|
|
Change
in restricted cash
|
|
335
|
|
316
|
|
Cash
used in investing activities
|
|
(26,824
|
)
|
(16,777
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
Proceeds
from note payable
|
|
27,100
|
|
293
|
|
Repayment
of note payable and capital lease obligations
|
|
(28,173
|
)
|
(22,630
|
)
|
Debt
issuance costs
|
|
|
|
(458
|
)
|
Repurchase
of stock for stock option exercise tax withholding
|
|
(421
|
)
|
|
|
Exercise
of stock options
|
|
3,311
|
|
1,023
|
|
Cash
provided by (used in) financing activities
|
|
1,817
|
|
(21,772
|
)
|
Effect
of exchange rate changes on cash
|
|
2,833
|
|
14,932
|
|
Net
increase in cash and cash equivalents
|
|
65,714
|
|
24,356
|
|
Cash
and cash equivalentsbeginning of period
|
|
77,343
|
|
51,665
|
|
Cash
and cash equivalentsend of period
|
|
$
|
143,057
|
|
$
|
76,021
|
|
Supplemental
disclosure of cash flow informationcash paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
425
|
|
$
|
1,380
|
|
Income
taxes
|
|
$
|
9,289
|
|
$
|
11,158
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
Assets
acquired through capital leases
|
|
$
|
2,606
|
|
$
|
1,760
|
|
Accrued
purchases of property, plant and equipment
|
|
$
|
1,255
|
|
$
|
1,333
|
|
Accrued
purchases of intangibles
|
|
$
|
1,118
|
|
$
|
1,702
|
|
The accompanying notes are an integral part of these unaudited
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, apparel and accessories 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 (consisting solely of normal recurring matters) 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 the Companys 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 Summary of Significant
Accounting Policies 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. Net foreign currency transaction gains have been
reclassified from selling, general, and administrative expenses and are now
reported separately. Marketable securities of a long-term nature have been reclassified
from long-term other assets and are now reported separately. There was no
change to the Companys income (loss) from continuing operations as a result of
these reclassifications.
The
preparation of financial statements in conformity with GAAP requires management
to make estimates, judgments 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, the fair value of acquired
intangibles, the 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.
Management also makes estimates in the assessments of potential losses in
relation to threatened or pending legal and tax matters. See Note 18 Legal
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 because it 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 it is the method management uses when preparing budgets,
reviewing actual and forecasted financial information and determining incentive
management compensation. The moving average cost method results in
substantially the same results of operations in each reporting period.
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 nine month periods ended September 30, 2010 was
also immaterial.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In
January 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2010-06,
Improving
Disclosures About Fair Value Measurement,
which amends the
disclosure requirements related to recurring and non-recurring fair value
measurements. The guidance requires additional disclosures about the different
classes of assets and liabilities measured at fair value, the valuation
techniques and inputs used, the activity in Level 3 fair value measurements,
and the transfers
6
Table of
Contents
between
Levels 1, 2, and 3 of the fair value measurement hierarchy. The Company adopted
this guidance at the beginning of 2010 with the exception of the disclosure
requirements relating to purchases, sales, issuances and settlements of Level 3
assets and liabilities, which will be effective beginning January 1, 2011.
As this guidance only requires expanded disclosures, its adoption did not and
will not impact the unaudited condensed consolidated financial statements. See
Note 8 Fair Value Measurements.
In
December 2009, the FASB issued 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 with no material impact on the unaudited condensed consolidated
financial statements. See Note 14 Variable Interest Entities.
3. INVENTORIES
Inventories by major
classification are as follows (in thousands):
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Finished
goods
|
|
$
|
133,110
|
|
$
|
88,775
|
|
Work-in-progress
|
|
203
|
|
220
|
|
Raw
materials
|
|
9,218
|
|
4,334
|
|
Net
Inventory
|
|
$
|
142,531
|
|
$
|
93,329
|
|
4. PROPERTY
AND EQUIPMENT
Property and equipment
includes the following (in thousands):
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Machinery
and equipment
|
|
$
|
86,277
|
|
$
|
82,733
|
|
Leasehold
improvements
|
|
46,132
|
|
38,436
|
|
Subtotal
|
|
132,409
|
|
121,169
|
|
Less:
accumulated depreciation
|
|
(66,527
|
)
|
(50,085
|
)
|
Property
and equipment, net
|
|
$
|
65,882
|
|
$
|
71,084
|
|
5. INTANGIBLE ASSETS
The following table
summarizes the Companys identifiable intangible assets (in thousands).
|
|
September 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
|
|
$
|
5,622
|
|
$
|
1,810
|
|
$
|
3,812
|
|
$
|
5,673
|
|
$
|
1,396
|
|
$
|
4,277
|
|
Customer
relationships
|
|
5,806
|
|
5,226
|
|
580
|
|
5,928
|
|
4,912
|
|
1,016
|
|
Core
technology
|
|
4,690
|
|
4,690
|
|
|
|
4,614
|
|
4,614
|
|
|
|
Non-competition
agreement
|
|
636
|
|
636
|
|
|
|
636
|
|
594
|
|
42
|
|
Capitalized
software
|
|
50,071
|
|
12,047
|
|
38,024
|
|
38,884
|
|
8,235
|
|
30,649
|
|
Total
intangible assets
|
|
$
|
66,825
|
|
$
|
24,409
|
|
$
|
42,416
|
|
$
|
55,735
|
|
$
|
19,751
|
|
$
|
35,984
|
|
For amortizable intangible
assets denominated in a foreign currency, the Company translates the gross
asset and accumulated amortization at the applicable period end exchange rate
and records amortization expense using the weighted average exchange rate for
the
7
Table of Contents
applicable period. The difference between the two is recorded in
accumulated other comprehensive income line item in 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):
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Accrued
compensation and benefits
|
|
$
|
21,897
|
|
$
|
21,007
|
|
Fulfillment
and freight and duties
|
|
9,941
|
|
10,765
|
|
Professional
services
|
|
6,063
|
|
4,329
|
|
Sales/Use
and VAT taxes payable
|
|
7,285
|
|
4,330
|
|
Other
|
|
20,030
|
|
13,158
|
|
Total
accrued expenses and other current liabilities
|
|
$
|
65,216
|
|
$
|
53,589
|
|
7. RESTRUCTURING ACTIVITIES
During
the year ended December 31, 2008, the Company announced its decision to
restructure its operations, which included the closure of its Canadian and
Brazilian manufacturing facilities and the consolidation of Canadian
distribution activities into existing North American operations. As of September 30, 2010, the Company
has recorded $9.1 million in restructuring and exit costs in connection with
these activities and does not expect to incur additional related costs in the
future.
During
the year ended December 31, 2009, the Company pursued further
restructuring efforts and made certain organizational changes in order to
better align costs with revenues which included the closure of various
warehouses and office buildings as well as the settlement and termination of
contracts prior to term. As of September 30,
2010, the Company has recorded $16.0 million in restructuring and exit costs in
connection with these activities and does not expect to incur additional
related costs in the future.
During
the nine months ended September 30, 2010, the Company recorded
restructuring charges of $1.9 million, of which $1.4 million is reflected in
cost of sales. These charges are primarily related to a change in the estimate
in lease termination costs associated with the closure of distribution
facilities in North America and Europe, pursuant to the cost savings
initiatives undertaken by the Company in 2008 and 2009, as discussed above. During the nine months ended September 30,
2010, the Company also recorded $2.0 million in restructuring expenses
reflected in income from operations, primarily consisting of severance pay and
additional stock-based compensation related to the departure of the Companys
former Chief Executive Officer. See Note 11 Stock-Based Compensation.
Restructuring
charges for the nine months ended September 30, 2010 were recorded by
segment as follows: $1.0 million in the Americas segment; $0.9 million in the
Europe segment; and $2.0 million in the Corporate and other group. As of September 30,
2010, restructuring charges were recorded by segment as follows: $15.9 million
in the Americas segment; $4.3 million in the Europe segment; $0.4 million in
the Asia segment; and $6.5 million in the Corporate and other group.
Restructuring
charges are included in the following line items: cost of sales and
restructuring charges on the Companys unaudited condensed consolidated
statements of operations. The following table summarizes the changes in the
restructuring accruals during the nine months ended September 30, 2010 (in
thousands).
Description
|
|
As of
December 31,
2009
|
|
Additions
|
|
Cash
Payments
|
|
Adjustments(1)
|
|
As of
September 30, 2010
|
|
Termination
benefits
|
|
$
|
516
|
|
$
|
1,853
|
|
$
|
(2,304
|
)
|
$
|
(65
|
)
|
$
|
|
|
Operating
lease exit costs
|
|
2,233
|
|
1,840
|
(2)
|
(2,299
|
)
|
70
|
(2)
|
1,844
|
|
Other
restructuring costs
|
|
387
|
|
|
|
(391
|
)
|
4
|
|
|
|
|
|
$
|
3,136
|
|
$
|
3,693
|
|
$
|
(4,994
|
)
|
$
|
9
|
|
$
|
1,844
|
|
(1)
Adjustments
relate primarily to differences resulting from the translation of the liability
balance at the rate of exchange at the balance sheet date and restructuring
expense translated at the weighted average rate of exchange for the applicable
period.
(2)
Includes $0.5
million in lease exit costs associated with the closure of the Canadian
facilities and $1.4 million in lease exit costs associated with the cost
savings programs initiated in 2009.
8
Table of
Contents
8.
FAIR VALUE MEASUREMENTS
Fair
value is defined by GAAP 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 non-performance.
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 markets; and
·
Level 3
unobservable inputs for which there is little or no market data, which require
the reporting entity to develop its own assumptions.
Financial
Instruments
The
following table summarizes the Companys financial assets and liabilities
required to be measured at fair value on a recurring basis as of
September 30, 2010 and December 31, 2009 (in thousands).
|
|
Fair Value as of
September 30, 2010
|
|
Fair Value as of
December 31, 2009
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Balance Sheet Classification
|
|
Assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
|
|
$
|
1,040
|
|
$
|
|
|
$
|
|
|
$
|
866
|
|
$
|
|
|
Marketable securities(1)
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets and other long-term assets
|
|
Total Assets
|
|
$
|
|
|
$
|
1,040
|
|
$
|
|
|
$
|
|
|
$
|
866
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency contracts
|
|
$
|
|
|
$
|
23
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Accrued liabilities and other long-term liabilities
|
|
(1)
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
fair values of the Companys derivative instruments are determined using a
discounted cash flow valuation model. The significant inputs used in the model
are readily available in public markets or can be derived from observable
market transactions, and therefore, have been classified as Level 2. These
inputs include the applicable exchange rates and forward rates, and discount
rates based on the prevailing LIBOR deposit rates.
The Companys other
financial instruments including debt are not required to be carried at fair
value. The carrying value of these financial instruments, including cash
equivalents, accounts receivable, accounts payable and accrued liabilities,
approximate fair value due to their short maturities. Based on borrowing rates
currently available to the Company, with similar terms, the carrying values of
capital lease obligations and the line of credit approximate their fair values.
Non-Financial
Instruments
The
majority of the Companys non-financial instruments, which include inventories,
property, plant and equipment and intangible assets are not required to be
carried at fair value on a recurring basis. However, if certain triggering
events occur (or at least annually) such that a non-financial instrument is
required to be evaluated for impairment, a resulting asset impairment would
require that the non-financial instrument be recorded at the lower of cost or
its fair value. Fair values of property, plant and equipment and indefinite
lived intangibles are primarily determined using an income approach with inputs
that are mainly unobservable (Level 3), such as expected future cash flows.
During the three and nine months ended September 30, 2010, the Company
recorded $0 and $0.1 million,
9
Table of
Contents
respectively,
in impairment charges related to its property, plant and equipment. During the
three and nine months ended September 30, 2009, the Company recorded $1.7
million and $25.4 million, respectively, in impairment charges primarily
related to the write-off of obsolete long-lived assets associated with the
consolidation of warehouse and distribution space, as well as the write-off of
certain intangible assets that the Company no longer intended to utilize.
9.
DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of
business, the Companys financial results are impacted by currency rate
movements in foreign currency denominated assets, liabilities and cash flows as
it makes a portion of its purchases and sales in local currencies. The Company
may, from time to time, employ derivative financial instruments to manage its
exposure to fluctuations in foreign currency rates such as forward currency
exchange contracts to hedge its net investment and intercompany payable or
receivable balances in foreign operations and to manage the foreign currency
exchange rate risk on forecasted revenue and inventory purchases denominated 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. These derivative
financial instruments are viewed as risk management tools and are not used for
trading or speculative purposes.
The
Company recognizes all derivative financial instruments as either assets or
liabilities in the unaudited condensed consolidated balance sheets and measures
those instruments at fair value using Level 2 inputs (see Note 8 Fair Value
Measurements). 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. During the nine months ended September 30, 2010, the
Company did not designate any of its derivatives as hedges and, therefore, all
changes in fair value are reflected in the Companys results of operations. The
Company did not have any derivative instruments during the three and nine
months ended September 30, 2009. The following tables present the amounts
affecting the unaudited condensed consolidated statements of operations for the
three and nine months ended September 30, 2010 (in thousands).
|
|
Three months ended
September 30, 2010
|
|
Nine months ended
September 30, 2010
|
|
Location of Loss (Gain) Recognized
In Income on Derivatives
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign currency exchange forwards
|
|
$
|
(96
|
)
|
$
|
23
|
|
Other expense (income), net
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the Companys outstanding foreign currency exchange
forward contracts at September 30, 2010 (in thousands). The Company had no
outstanding foreign currency related financial instruments at December 31,
2009.
Currency Purchased Forward
|
|
Currency Sold Forward
|
|
Maturity Date
|
MXP
|
|
7,937
|
|
USD
|
|
600
|
|
October 2010
|
USD
|
|
1,454
|
|
GBP
|
|
950
|
|
October 2010
|
USD
|
|
2,000
|
|
JPY
|
|
166,980
|
|
October 2010
|
USD
|
|
2,000
|
|
JPY
|
|
167,600
|
|
November 2010
|
10.
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes Payable
On
September 30, 2010, the Company amended its Revolving Credit and Security
Agreement (the Credit Agreement) with PNC Bank, N.A. (PNC), originally
dated September 25, 2009. Based on
the amended terms, the Credit Agreement provides for an asset-backed revolving
credit facility of up to $30.0 million in total, which includes a $20.0 million
sublimit for borrowings against the Companys eligible inventory, a $2 million
sublimit for borrowings against the Companys eligible inventory in-transit,
and a $10 million sublimit for letters of credit, and matures on September 24,
2014. Total borrowings available under the credit facility at any given time
are subject to customary reserves and reductions to the extent the Companys
asset borrowing base changes. Borrowings under the credit facility are secured
by all of the Companys assets, 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 bear interest at
1.5% plus 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 0.5% or, (iii) the sum of the daily LIBOR rate and
1.0%. Eurodollar denominated principal amounts outstanding bear interest at
3.0% plus the Eurodollar rate (as defined in the Credit Agreement). The Credit Agreement
requires monthly interest payments with respect to domestic rate loans and at
the end of
10
Table of
Contents
each
interest 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 September 30, 2010.
As
of September 30, 2010 and December 31, 2009, the Company had no
outstanding borrowings under the Credit Agreement and at September 30,
2010, had issued and outstanding letters of credit of $1.0 million which
were reserved against the borrowing base.
Capital
Leases
The Company holds various
capital leases for certain equipment with a gross carrying value of $0.4
million, which is depreciated using the straight-line method over the economic
life of the leased equipment. 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 with a gross carrying value of $4.5 million is classified as capitalized
software and amortized using the straight-line method over the economic 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 and capital lease obligations consist of the following (in thousands):
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Capital Lease Obligations (for certain capitalized
software) bearing interest rates ranging from 8.7% to 12.4% and maturities
through 2013
|
|
$
|
2,922
|
|
$
|
1,329
|
|
|
|
|
|
|
|
Capital Lease Obligations (for certain equipment)
bearing interest at 8.8% and maturities through 2014
|
|
174
|
|
223
|
|
Total notes payable and capital lease obligations
|
|
$
|
3,096
|
|
$
|
1,552
|
|
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. Restricted stock
awards and restricted stock units granted generally vest ratably over three
years. Stock-based compensation expense is recognized ratably over the
applicable vesting period and is recognized in the cost of sales and selling,
general and administrative expense line items in the Companys unaudited
condensed consolidated statements of operations. During the three and nine
months ended September 30, 2010, $1.6 million and $5.5 million,
respectively, of stock-based compensation expense was recorded. During the
three and nine months ended September 30, 2009, $1.5 million and
$26.6 million, respectively, of stock-based compensation was recorded.
During the three and nine
months ended September 30, 2010, 0.3 million and 1.7 million shares of
common stock, respectively, were issued related to stock option exercises and
vested shares of restricted stock. During the year ended December 31,
2009, 1.4 million shares of common stock were issued related to stock option
exercises and vested shares of restricted stock.
Stock Options
A summary of stock option
activity for the three and nine months ended September 30, 2010 and 2009
is as follows:
|
|
Three Months Ended September 30, 2010
|
|
Nine Months Ended September 30, 2010
|
|
Options
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at June 30, 2010 and
December 31, 2009, respectively
|
|
6,350,336
|
|
$
|
7.93
|
|
7,755,254
|
|
$
|
7.67
|
|
Granted
|
|
100,000
|
|
|
12.51
|
|
249,750
|
|
|
10.75
|
|
Exercised
|
|
(251,590
|
)
|
|
3.85
|
|
(1,128,320
|
)
|
|
2.93
|
|
Forfeited
or expired
|
|
(118,247
|
)
|
|
9.45
|
|
(796,185
|
)
|
|
11.75
|
|
Outstanding
at September 30, 2010
|
|
6,080,499
|
|
$
|
8.14
|
|
6,080,499
|
|
$
|
8.14
|
|
11
Table of
Contents
|
|
Three Months Ended September 30, 2009
|
|
Nine Months Ended September 30, 2009
|
|
Options
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Shares
|
|
Weighted
Average
Exercise Price
|
|
Outstanding
at June 30, 2009 and
December 31, 2008, respectively
|
|
8,064,057
|
|
$
|
8.25
|
|
7,582,511
|
(1)
|
$
|
10.56
|
|
Granted
|
|
10,000
|
|
|
6.26
|
|
1,663,000
|
|
|
1.88
|
|
Exercised
|
|
(261,914
|
)
|
|
3.04
|
|
(463,587
|
)
|
|
2.12
|
|
Forfeited
or expired
|
|
(515,985
|
)
|
|
18.93
|
|
(1,485,766
|
)
|
|
17.62
|
|
Outstanding
at September 30, 2009
|
|
7,296,158
|
|
$
|
7.68
|
|
7,296,158
|
|
$
|
7.68
|
|
(1) Includes a reduction of 2,315,951
options representing options repurchased by the Company as a result of the
April 2009 tender offer.
Restricted Stock Shares
and Units
From time to time, the
Company grants restricted stock units to certain employees located outside of
the United States. The number of restricted stock units granted to employees
during both the three and nine months ended September 30, 2010 was 0.1
million. No restricted stock units were issued during the same periods in 2009.
During 2010, the Companys
board of directors approved grants of shares and units of the Companys
restricted stock to certain executives and non-executives. Half of such
restricted stock awards and units vest ratably on each of the first four
anniversaries of the grant date and the remaining half vest on a cliff basis on
the fourth anniversary of the grant date, provided that certain corporate
performance metrics are achieved. During the three and nine months ended September 30,
2010, 0.5 and 0.7 million shares and units of restricted stock, respectively,
were granted under this program.
A summary of the Companys
total restricted stock share activity for the three and nine months ended
September 30, 2010 and 2009 is as follows:
|
|
Three Months Ended September 30, 2010
|
|
Nine Months Ended September 30, 2010
|
|
Restricted Stock Shares
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested
at June 30, 2010 and
December 31, 2009, respectively
|
|
806,852
|
|
$
|
5.02
|
|
1,322,240
|
|
$
|
3.04
|
|
Granted
|
|
419,200
|
|
|
12.51
|
|
637,557
|
|
|
12.10
|
|
Vested
|
|
(29,068
|
)
|
|
13.02
|
|
(537,479
|
)
|
|
10.03
|
|
Forfeited
or expired
|
|
(16,667
|
)
|
1.14
|
|
(242,001
|
)
|
|
1.33
|
|
Non-vested
at September 30, 2010
|
|
1,180,317
|
|
$
|
7.67
|
|
1,180,317
|
|
$
|
7.67
|
|
|
|
Three Months Ended September 30, 2009
|
|
Nine Months Ended September 30, 2009
|
|
Restricted Stock Shares
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested
at June 30, 2009 and
December 31, 2008, respectively
|
|
1,787,204
|
|
$
|
2.62
|
|
939,000
|
|
$
|
3.87
|
|
Granted
|
|
30,000
|
|
|
6.26
|
|
1,282,110
|
|
|
2.43
|
|
Vested
|
|
(149,859
|
)
|
|
4.97
|
|
(513,765
|
)
|
|
3.35
|
|
Forfeited
or expired
|
|
(21,000
|
)
|
1.14
|
|
(61,000
|
)
|
|
4.60
|
|
Non-vested
at September 30, 2009
|
|
1,646,345
|
|
$
|
2.78
|
|
1,646,345
|
|
$
|
2.78
|
|
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
Table of Contents
12
. INCOME TAXES
During the three months
ended September 30, 2010, the Company recognized an income tax expense of
$2.2 million on pre-tax income of $27.2 million, representing an effective
income tax rate of 8.0% compared to an income tax benefit of $12.3 million on pre-tax
income of $9.8 million, representing an effective income tax rate of (126.2%)
for the same period in 2009. During the nine months ended September 30,
2010, the Company recognized an income tax expense of $12.2 million on pre-tax
income of $75.2 million, representing an effective income tax rate of 16.2%
compared to an income tax benefit of $4.5 million on a pre-tax loss of $35.2
million, representing an effective income tax rate of (12.8%) for the same
period in 2009. The change in effective tax rate is primarily the result of a
one-time $3.0 million tax benefit recognized in the third quarter of 2010 due
to a change in an international tax treaty which reduces certain taxes for
which accruals have previously been made, a $14.4 million one-time tax benefit
recognized in the third quarter of 2009 related to the Companys restructuring
of its international operations to streamline and simplify its business
operations, and changes in the mix of profitability in foreign jurisdictions
where the Company is taxable. The Company had unrecognized tax benefits of $29.9
million at September 30, 2010 and $29.2 million at December 31, 2009.
13. EARNINGS (LOSS) PER SHARE
For all periods presented,
basic and diluted earnings (loss) per common share (EPS) is presented using
the two-class method, which is an earnings allocation formula that determines
earnings per share for common stock and any participating securities according
to dividends rights and participation rights in undistributed earnings. Under
the two-class method, EPS is computed by dividing the sum of distributed and
undistributed earnings (loss) attributable to common stockholders by the
weighted average number of shares of common stock outstanding during the
period.
A participating security is
an unvested share-based payment award containing non-forfeitable rights to
dividends and must be included in the computation of earnings per share
pursuant to the two-class method. Shares
of the Companys non-vested restricted stock awards and units are considered
participating securities.
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 following table sets
forth EPS for the three and nine months ended September 30, 2010 and 2009
(in thousands, except share and per share data).
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
24,996
|
|
$
|
22,068
|
|
$
|
62,997
|
|
$
|
(30,630
|
)
|
Income
allocated to participating securities
|
|
(323
|
)
|
|
|
(724
|
)
|
|
|
Net income (loss) attributable to common
stockholders basic
|
|
$
|
24,673
|
|
$
|
22,068
|
|
$
|
62,273
|
|
$
|
(30,630
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding basic
|
|
85,787,809
|
|
85,514,385
|
|
85,155,931
|
|
84,933,858
|
|
Dilutive
effect of stock options
|
|
1,554,207
|
|
1,964,933
|
|
1,878,645
|
|
|
|
Weighted
average common shares outstanding - diluted
|
|
87,342,016
|
|
87,479,318
|
|
87,034,576
|
|
84,933,858
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
$
|
0.26
|
|
$
|
0.73
|
|
$
|
(0.36
|
)
|
Diluted
|
|
$
|
0.28
|
|
$
|
0.25
|
|
$
|
0.72
|
|
$
|
(0.36
|
)
|
For all periods presented
above, there were certain outstanding share based payments which could
potentially dilute basic EPS in the future which 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 nine months ended September 30, 2009, the
Company had participating securities that were not allocated net loss and the
dilutive effect of stock options were not included in the computation of
diluted EPS, since they would have an anti-dilutive effect.
For both the three and nine
months ended September 30, 2010, 3.1 million options, which could
potentially dilute basic EPS in the future, were not included in diluted income
(loss) per share as their effect would have been anti-dilutive. For the three
and nine months ended September 30, 2009, 8.0 million and 5.4 million
options, respectively, were anti-dilutive. The weighted average exercise price
per share of the options that were anti-dilutive was $13.70 and $13.72 for the
three and nine months ended September 30, 2010, respectively, and $6.34
and $5.97 for the three and nine months ended September 30, 2009,
respectively.
13
Table of Contents
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. 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 transferred to the Company at the Companys sole discretion, subject to
certain conditions.
The
unaudited condensed consolidated financial statements include $7.1 million
in total assets as of September 30, 2010, primarily consisting of cash,
inventory and receivables, partially offset by $0.3 million in liabilities as
of September 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 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 automatically renews for one-year
terms 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 guarantees the
payment to one of its raw material suppliers for purchases of material used by
one of its third-party manufacturers 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 $2.9 million at
September 30, 2010). The Company evaluates the estimated loss for the
guarantee under Accounting Standards Codification 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
September 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 reimburses the officers and directors
that are subject to the securities class action filed in 2007 for the defense
costs relating to such action, which are partially or fully offset by insurance
that covers these expenditures. 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, apparel and accessories 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.
14
Table of
Contents
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
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. Net
revenues as shown below represent sales to external customers for each segment.
|
|
Three Months
Ended September 30
|
|
Nine Months
Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
103,540
|
|
$
|
78,638
|
|
$
|
279,163
|
|
$
|
229,178
|
|
Europe
|
|
32,597
|
|
29,854
|
|
105,095
|
|
90,350
|
|
Asia
|
|
79,053
|
|
68,013
|
|
222,404
|
|
186,979
|
|
Total segments
|
|
215,190
|
|
176,505
|
|
606,662
|
|
506,507
|
|
Corporate and other
|
|
415
|
|
636
|
|
3,841
|
|
3,249
|
|
Total consolidated revenues
|
|
$
|
215,605
|
|
$
|
177,141
|
|
$
|
610,503
|
|
$
|
509,756
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
22,256
|
|
$
|
8,355
|
|
$
|
56,913
|
|
$
|
16,148
|
|
Europe
|
|
4,813
|
|
2,974
|
|
22,488
|
|
16,054
|
|
Asia
|
|
23,792
|
|
20,028
|
|
68,070
|
|
49,867
|
|
Total segments
|
|
50,861
|
|
31,357
|
|
147,471
|
|
82,069
|
|
SG&A restructuring
|
|
|
|
(17
|
)
|
(2,539
|
)
|
(5,916
|
)
|
Asset impairment
|
|
|
|
(1,722
|
)
|
(141
|
)
|
(25,447
|
)
|
Corporate and other
|
|
(23,415
|
)
|
(20,648
|
)
|
(69,224
|
)
|
(88,131
|
)
|
Total consolidated operating income (loss)
|
|
27,446
|
|
8,970
|
|
75,567
|
|
(37,425
|
)
|
Interest expense
|
|
153
|
|
155
|
|
445
|
|
1,412
|
|
Gain on charitable contributions
|
|
(19
|
)
|
(810
|
)
|
(135
|
)
|
(2,833
|
)
|
Other expense (income), net
|
|
137
|
|
(125
|
)
|
87
|
|
(833
|
)
|
Income (loss) before income taxes
|
|
$
|
27,175
|
|
$
|
9,750
|
|
$
|
75,170
|
|
$
|
(35,171
|
)
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
2,446
|
|
$
|
3,773
|
|
$
|
7,037
|
|
$
|
8,297
|
|
Europe
|
|
625
|
|
1,036
|
|
2,078
|
|
2,757
|
|
Asia
|
|
1,411
|
|
1,870
|
|
4,354
|
|
5,149
|
|
Total segments
|
|
4,482
|
|
6,679
|
|
13,469
|
|
16,203
|
|
Corporate and other
|
|
4,612
|
|
2,729
|
|
13,235
|
|
12,382
|
|
Total consolidated depreciation and amortization
|
|
$
|
9,094
|
|
$
|
9,408
|
|
$
|
26,704
|
|
$
|
28,585
|
|
15
Table of Contents
The following table
summarizes our consolidated assets by operating segment as of September 30,
2010 and December 31, 2009. Segment
assets include the elimination of any intersegment profits or losses in
inventory and the elimination of intercompany receivables and loans.
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
|
(in thousands)
|
|
Assets:
|
|
|
|
|
|
Americas
|
|
$
|
263,503
|
|
$
|
277,454
|
|
Europe
|
|
71,404
|
|
66,838
|
|
Asia
|
|
222,374
|
|
151,052
|
|
Total segments
|
|
557,281
|
|
495,344
|
|
Corporate and other(1) (2)
|
|
(2,610
|
)
|
(85,606
|
)
|
Total consolidated assets
|
|
$
|
554,671
|
|
$
|
409,738
|
|
(1)
At December 31,
2009, $45.8 million of assets with global functionality were included in the
Americas segment assets which were included in the Corporate and other category
assets at September 30, 2010.
(2)
Negative assets
within the Corporate and other category primarily include eliminations of
investments made from the Americas segment in the other reportable segments.
17. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss)
for the three and nine months ended September 30, 2010 and 2009 was as
follows (in thousands):
|
|
Three Months
Ended September 30,
|
|
Nine Months
Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net
income (loss)
|
|
$
|
24,996
|
|
$
|
22,068
|
|
$
|
62,997
|
|
$
|
(30,630
|
)
|
Foreign
currency translation
|
|
12,522
|
|
6,390
|
|
6,736
|
|
8,696
|
|
Reclassification
of cumulative foreign exchange translation adjustments to net income(1)
|
|
(1,004
|
)
|
|
|
(1,004
|
)
|
|
|
Comprehensive
income (loss)
|
|
$
|
36,514
|
|
$
|
28,458
|
|
$
|
68,729
|
|
$
|
(21,934
|
)
|
(1)
Amounts
represent realized gains recognized on payments of intercompany balances
denominated in foreign currencies for which collection had not been previously
planned or anticipated.
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
16
Table of Contents
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 August 26,
2010, the ALJ determined that the evidentiary record need not be reopened and
that the remand would proceed based on the prior submissions of the parties.
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. On July 29,
2010, 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 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)
and includes the companys independent auditor as a defendant. 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. 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.
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.
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.
17
Table
of Contents
Business
Overview
We are a designer, manufacturer, distributor, worldwide marketer and
brand manager of footwear, apparel and accessories 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.
Financial Highlights
During
the three months ended September 30, 2010, revenues increased 21.7%, or
$38.5 million, compared to the same period in 2009, as a result of stronger
sales in each of our geographic operating segments. Diluted earnings per share
for the third quarter of 2010 improved to $0.28 compared to $0.25 during the
same period in 2009. We believe these financial improvements are a result of
improved global economic conditions, an increased marketing presence, and the
impact of our cost savings initiatives as described below.
The following items impacted
our operating results for the three and nine months ended September 30,
2010 and 2009, and should be considered in evaluating the comparability of such
results.
·
During 2009, we
continued to implement various cost savings initiatives, which were initiated
in 2008, so as 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.
·
During 2009, we
also continued to implement a plan, which was initiated in 2008, 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 third quarter of 2010, sales of
discontinued and impaired product were at more normal levels given seasonality
and historical fluctuations in our business.
Recent Events
On September 30, 2010,
we entered into the Second Amendment to the Revolving Credit and Security
Agreement with PNC Bank, N.A. (PNC), to amend certain provisions of the
Revolving Credit and Security Agreement dated as of September 25, 2009 and
amended as of October 14, 2009 (the Credit Agreement). The amendment to
the Credit Agreement, among other things, (i) extended the maturity date
from September 24, 2012 to September 24, 2014, (ii) decreased
the revolving interest rate by 0.5% for both domestic and Eurodollar rate
loans, (iii) removed the interest rate floor on Eurodollar rate loans, (iv) increased
the sublimit for borrowings against eligible inventory from $17.5 million to
$20 million, (v) increased the letter of credit sublimit from $4 million
to $10 million, (vi) decreased letter of credit fees from 3.5% to 2.5%,
and (vii) amended certain restrictive covenants and events of default to be
more favorable to us.
18
Table of Contents
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, 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.
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, 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 segment revenues in
the discussion that follows represent sales to external customers for each
segment.
Results of Operations
Comparison of the Three Months Ended September 30, 2010
and 2009
|
|
Three Months Ended September 30,
|
|
Change
|
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
|
(amounts in thousands, except per share data)
|
|
|
|
Revenues
|
|
$
|
215,605
|
|
$
|
177,141
|
|
$
|
38,464
|
|
21.7
|
%
|
Cost
of sales
|
|
96,797
|
|
87,291
|
|
9,506
|
|
10.9
|
%
|
Gross
profit
|
|
118,808
|
|
89,850
|
|
28,958
|
|
32.2
|
%
|
Selling,
general and administrative expenses
|
|
92,192
|
|
77,995
|
|
14,197
|
|
18.2
|
%
|
Foreign
currency transaction gains, net
|
|
(908
|
)
|
(1,032
|
)
|
124
|
|
12.0
|
%
|
Restructuring
charges
|
|
|
|
17
|
|
(17
|
)
|
N/M
|
|
Impairment
charges
|
|
|
|
1,722
|
|
(1,722
|
)
|
N/M
|
|
Charitable
contributions
|
|
78
|
|
2,178
|
|
(2,100
|
)
|
(96.4
|
)%
|
Income
from operations
|
|
27,446
|
|
8,970
|
|
18,476
|
|
206.0
|
%
|
Interest
expense
|
|
153
|
|
155
|
|
(2
|
)
|
(1.3
|
)%
|
Other,
net
|
|
118
|
|
(935
|
)
|
1,053
|
|
112.6
|
%
|
Income
before income taxes
|
|
27,175
|
|
9,750
|
|
17,425
|
|
178.7
|
%
|
Income
tax expense (benefit)
|
|
2,179
|
|
(12,318
|
)
|
14,497
|
|
117.7
|
%
|
Net
income
|
|
$
|
24,996
|
|
$
|
22,068
|
|
$
|
2,928
|
|
13.3
|
%
|
Net
income (loss) per basic share
|
|
$
|
0.29
|
|
$
|
0.26
|
|
$
|
0.03
|
|
N/M
|
|
Net
income (loss) per diluted share
|
|
$
|
0.28
|
|
$
|
0.25
|
|
$
|
0.03
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
55.1
|
%
|
50.7
|
%
|
|
|
|
|
Operating
margin
|
|
12.7
|
%
|
5.1
|
%
|
|
|
|
|
N/M
Not meaningful
19
Table of
Contents
Revenues
. Revenues increased $38.5 million, or 21.7%,
during the three months ended September 30, 2010 compared to the same
period in 2009, primarily due to a 17.9% increase in unit sales and a 3.1%
increase in average selling price per pair of shoes, as shown in the table
below. During the three months ended September 30, 2009, we sold $11.5
million in end of life and impaired products as we disposed of excess and
impaired inventory, (see Financial Highlights). The following table sets
forth revenue by channel and by region as well as other revenue information for
the third quarter of 2010 and 2009.
|
|
Three months ended September 30,
|
|
Change
|
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
|
(in millions, except average selling price)
|
|
|
|
Wholesale channel revenue
|
|
$
|
123.9
|
|
$
|
107.1
|
|
$
|
16.8
|
|
15.7
|
%
|
Retail channel revenue
|
|
72.5
|
|
53.9
|
|
18.6
|
|
34.5
|
%
|
Internet channel revenue
|
|
19.2
|
|
16.1
|
|
3.1
|
|
19.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Americas revenue (includes Corporate)
|
|
$
|
104.0
|
|
$
|
79.3
|
|
$
|
24.7
|
|
31.1
|
%
|
Asia revenue
|
|
79.0
|
|
68.0
|
|
11.0
|
|
16.2
|
%
|
Europe revenue
|
|
32.6
|
|
29.9
|
|
2.7
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Footwear unit sales
|
|
11.2
|
|
9.5
|
|
1.7
|
|
17.9
|
%
|
Average selling price
|
|
$
|
18.23
|
|
$
|
17.69
|
|
$
|
0.54
|
|
3.1
|
%
|
During
the three months ended September 30, 2010, revenues from our wholesale
channel grew by $16.8 million, or 15.7%, compared to the same period in 2009,
particularly in the Americas and in Asia, primarily due to improvements in the
global economy, our efforts to improve our wholesale customer relationships,
market acceptance and growth of our new product line and heightened brand
awareness resulting from fully-integrated marketing campaigns during the third
quarter of 2009 (see Business Overview).
Revenues
from our company-operated retail locations increased $18.6 million, or 34.5%,
in the three months ended September 30, 2010 compared to the same period
in 2009, which was primarily driven by the opening of 44 new company-operated
retail locations since September 30, 2009. During the three months ended September 30,
2010, we continued to implement our plan to close certain kiosks and open more
branded stores where we can better merchandise the full breadth and depth of
our product line. The table below sets forth information about the number of
company-operated retail locations as of September 30, 2010 and 2009.
|
|
As of September 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Company-operated retail locations - Total
|
|
354
|
|
310
|
|
44
|
|
|
|
|
|
|
|
|
|
Type:
|
|
|
|
|
|
|
|
Crocs Kiosk/Store in Store
|
|
165
|
|
178
|
|
(13
|
)
|
Crocs Retail Stores
|
|
120
|
|
83
|
|
37
|
|
Crocs Outlet Stores
|
|
69
|
|
49
|
|
20
|
|
|
|
|
|
|
|
|
|
Geography:
|
|
|
|
|
|
|
|
Americas
|
|
181
|
|
162
|
|
19
|
|
Asia
|
|
151
|
|
131
|
|
20
|
|
Europe
|
|
22
|
|
17
|
|
5
|
|
Revenues
from our internet channel increased by $3.1 million, or 19.3%, during the three
months ended September 30, 2010 compared to the same period in 2009,
primarily due to increased sales in our Europe segment resulting from the
addition of local language internet sites for France, Germany, Spain and Italy
and continued strengthening in consumer demand.
Revenues
from our combined consumer-direct sales channels, defined as our retail and
internet channels, increased from 39.5% of total revenues for the three months
ended September 30, 2009 to 42.5% of total revenues for the three months
ended September 30, 2010. As consumer-direct channel sales continue to
grow as a percentage of our total sales, we expect to see improvements in total
revenue and gross margin since these channels have historically achieved higher
average selling prices than the wholesale channel.
Revenues
from non-classic footwear models continued to make up the majority of our
revenues during the three months ended September 30, 2010, as our classic
models and core products (defined below) have become a smaller portion of our
total revenue in recent quarters. The following table sets forth sales of our
classic models, core products and new footwear products as a percentage of our
total unit sales.
20
Table of
Contents
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
Classic models (Beach and Crocs Classic)
|
|
10.4
|
%
|
15.7
|
%
|
Core products(1)
|
|
17.9
|
%
|
34.7
|
%
|
New footwear products
|
|
31.2
|
%
|
27.0
|
%
|
(1)
Core products include 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
September 30, 2010 increased revenue by $2.2 million as compared to
the three months ended September 30, 2009. Sales in international markets
in foreign currencies are expected to 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 Revenues.
Revenues
from the Americas segment increased $24.9 million, or 31.7%, during the three
months ended September 30, 2010 compared to the same period in 2009,
driven by revenue growth in all regional channels. Revenues from
company-operated retail locations increased $12.2 million, or 38.9%, to $43.6
million as the number of company-operated retail locations in the region
increased by 19. Regional wholesale channel revenues increased $11.9 million,
or 33%, to $48.2 million primarily due to increased demand resulting from
continued investments in cooperative advertising and merchandising assistance
for select locations at our largest U.S. wholesale accounts.
Asia
Segment Revenues.
Revenues
from the Asia segment increased $11.0 million, or 16.2%, during the three
months ended September 30, 2010 compared to the same period in 2009,
driven by revenue growth in all regional channels. Revenues from
company-operated retail locations increased $5.6 million, or 29.9%, to $24.3 as
the number of company-operated retail locations in the region increased by 20.
Regional wholesale channel revenues increased $5.1 million, or 10.7%, to $52.5
million primarily due to a higher average selling price.
Europe Segment
Revenues.
Revenues in
Europe increased $2.7 million, or 9.0%, during the three months ended
September 30, 2010 compared to the same period in 2009, which was largely
driven by an increase of $2.3 million or 88.4% in internet channel revenues
resulting from the addition of local language internet sites for France,
Germany, Spain and Italy, as previously mentioned.
Gross profit.
During the three months ended September 30, 2010, gross profit
increased $28.9 million, or 32.2%, to $118.8 million compared to the same
period in 2009. Gross margin increased 440 basis points to 55.1% during the
three months ended September 30, 2010 compared to the same period in 2009.
These increases are primarily attributable to an increase of 17.9% in unit
sales, favorable shifts in product mix (consumer-direct channels) toward higher
margin products and lower distribution costs as we continue to increase direct
shipments from the factories to our wholesale customers and retail channel.
Offsetting these increases was the accretive effect of impaired unit sales that
took place during the second quarter of 2009 as discussed in Financial
Highlights. The net effect of these sales during the third quarter of 2009 was
$9.6 million.
Average
foreign currency exchange rates during the three months ended
September 30, 2010 increased our gross profit by $2.3 million as compared
to the three month period ended September 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 $14.2 million or 18.2% during the three months ended
September 30, 2010 compared to the same period in 2009, primarily due an
increase of $7.2 million in salaries, recruiting, rent and building costs
resulting from the continued expansion of our retail selling channel, an increase
of $4.0 million in marketing, media and agency costs related to our fall
holiday marketing campaign, and an increase of $1.5 million of bad debt expense
primarily related to our Asia operating segment.
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 September 30, 2010 decreased
selling, general and administrative expenses by approximately $1.0 million as
compared to the same period in 2009.
21
Table of
Contents
Impairment charges.
No impairment charges were
recorded during the three months ended September 30, 2010 compared to $1.7
million in impairment charges recorded during the same period in 2009. The
third quarter 2009 impairment charges consisted of:
·
$0.9 million related to the write-off of
capitalized software, patents, trade names and other intangible assets that we
no longer intended to utilize;
·
$0.5 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; and
·
$0.3 million related to the write-off of
other smaller items.
The
following table summarizes operating income by segment for the three months
ended September 30, 2010 and 2009 (in thousands).
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
Operating Income:
|
|
|
|
|
|
Americas
|
|
$
|
22,256
|
|
$
|
8,355
|
|
Europe
|
|
4,813
|
|
2,974
|
|
Asia
|
|
23,792
|
|
20,028
|
|
Total segments
|
|
50,861
|
|
31,357
|
|
SG&A Restructuring
|
|
|
|
(17
|
)
|
Asset Impairment
|
|
|
|
(1,722
|
)
|
Corporate
and other
|
|
(23,415
|
)
|
(20,648
|
)
|
|
|
|
|
|
|
Total
consolidated operating income
|
|
$
|
27,446
|
|
8,970
|
|
|
|
|
|
|
|
|
|
Segments Operating Margin.
Total segment operating income increased
$19.5 million, or 62.2%, during the three months ended September 30, 2010
compared to the same period in 2009, primarily due to higher revenues in each
of our operating segments and the impact of cost savings initiatives, (see Financial
Highlights), which were partially offset by the increased costs resulting from the continued expansion of our retail
selling channel, increased costs related to our fully-integrated
marketing campaigns, increased bad
debt expense and the accretive effect of impaired unit sales that took
place during 2009. (See discussions above).
Income tax expense
. During the three months ended
September 30, 2010, we recognized an income tax expense of $2.2 million on
pre-tax income of $27.2 million, representing an effective income tax rate of
8.0% during the three months ended September 30, 2010, compared to an
income tax benefit of $12.3 million on a pre-tax income of $9.8 million,
representing an effective income tax rate of (126.2%) during the same period in
2009. The change in effective tax rate is primarily the result of a one-time
$3.0 million tax benefit recognized in the third quarter of 2010 due to a
change in an international tax treaty which reduces certain taxes for which
accruals have previously been made, a $14.4 million one-time tax benefit
recognized in the third quarter of 2009 related to the Companys restructuring
of its international operations to streamline and simplify its business
operations and changes in the mix of profitability in foreign jurisdictions
where the Company is taxable.
22
Table of
Contents
Comparison of the Nine Months Ended September 30, 2010
and 2009
|
|
Nine Months Ended September 30,
|
|
Change
|
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
|
(amounts in thousands, except per share data)
|
|
|
|
Revenues
|
|
$
|
610,503
|
|
$
|
509,756
|
|
$
|
100,747
|
|
19.8
|
%
|
Cost
of sales
|
|
273,072
|
|
269,115
|
|
3,957
|
|
1.5
|
%
|
Gross
profit
|
|
337,431
|
|
240,641
|
|
96,790
|
|
40.2
|
%
|
Selling,
general and administrative expenses
|
|
261,017
|
|
240,654
|
|
20,363
|
|
8.5
|
%
|
Foreign
currency transaction gains, net
|
|
(2,329
|
)
|
(1,247
|
)
|
(1,082
|
)
|
(86.8
|
)%
|
Restructuring
charges
|
|
2,539
|
|
5,916
|
|
(3,377
|
)
|
(57.1
|
)%
|
Impairment
charges
|
|
141
|
|
25,447
|
|
(25,306
|
)
|
(99.4
|
)%
|
Charitable
contributions
|
|
496
|
|
7,296
|
|
(6,800
|
)
|
(93.2
|
)%
|
Income
(loss) from operations
|
|
75,567
|
|
(37,425
|
)
|
112,992
|
|
301.9
|
%
|
Interest
expense
|
|
445
|
|
1,412
|
|
(967
|
)
|
(68.5
|
)%
|
Other,
net
|
|
(48
|
)
|
(3,666
|
)
|
3,618
|
|
98.7
|
%
|
Income
(loss) before income taxes
|
|
75,170
|
|
(35,171
|
)
|
110,341
|
|
313.7
|
%
|
Income
tax expense
|
|
12,173
|
|
(4,541
|
)
|
16,714
|
|
368.1
|
%
|
Net
income (loss)
|
|
$
|
62,997
|
|
$
|
(30,630
|
)
|
$
|
93,627
|
|
305.7
|
%
|
Net
income (loss) per basic share
|
|
$
|
0.73
|
|
$
|
(0.36
|
)
|
$
|
1.09
|
|
N/M
|
|
Net
income (loss) per diluted share
|
|
$
|
0.72
|
|
$
|
(0.36
|
)
|
$
|
1.08
|
|
N/M
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
55.3
|
%
|
47.2
|
%
|
|
|
|
|
Operating
margin
|
|
12.4
|
%
|
(7.3
|
)%
|
|
|
|
|
N/M
Not meaningful
Revenues
. Revenues increased $100.7 million, or 19.8%,
during the nine months ended September 30, 2010 compared to the same
period in 2009, primarily due to a 12.5% increase in unit sales and an 8.1%
increase in average selling price per pair of shoes, as shown in the table
below. During the nine months ended September 30, 2009, we sold $54.5
million in end of life and impaired products as we disposed of excess and
impaired inventory as described above in Financial Highlights. The following
table sets forth revenue by channel and by region as well as other revenue
information for the nine months ended September 30, 2010 and 2009.
|
|
Nine months ended September 30,
|
|
Change
|
|
|
|
2010
|
|
2009
|
|
$
|
|
%
|
|
|
|
(in millions, except average selling price)
|
|
|
|
Wholesale channel revenue
|
|
$
|
384.1
|
|
$
|
327.5
|
|
$
|
56.6
|
|
17.3
|
%
|
Retail channel revenue
|
|
173.3
|
|
137.1
|
|
36.2
|
|
26.4
|
%
|
Internet channel revenue
|
|
53.1
|
|
45.2
|
|
7.9
|
|
17.5
|
%
|
|
|
|
|
|
|
|
|
|
|
Americas revenue (includes Corporate)
|
|
$
|
283.0
|
|
$
|
232.4
|
|
$
|
50.6
|
|
21.8
|
%
|
Asia revenue
|
|
222.4
|
|
187.0
|
|
35.4
|
|
18.9
|
%
|
Europe revenue
|
|
105.1
|
|
90.4
|
|
14.7
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Footwear unit sales
|
|
33.3
|
|
29.6
|
|
3.7
|
|
12.5
|
%
|
Average selling price
|
|
$
|
17.52
|
|
$
|
16.21
|
|
$
|
1.31
|
|
8.1
|
%
|
During
the nine months ended September 30, 2010, revenues from our wholesale
channel grew by $56.6 million, or 17.3%, compared to the same period in 2009,
particularly in the Americas and Asia, as demand for product continued to grow
resulting from a stronger global economy, on-going efforts made to improve our
wholesale customer relationships and market acceptance of our new product line.
Revenues
from our company-operated retail locations increased $36.2 million, or 26.4%,
during the nine months ended September 30, 2010 compared to the same
period in 2009, which was driven by the expanded availability of product to our
retail customer due to the increase in retail locations (see table above),
where we can better merchandise the full breadth and depth of our product line
and improved pricing.
Revenues
from our internet channel increased by $7.9 million, or 17.5%, primarily due to
increased sales in our Europe segment, resulting from the addition of local
language internet sites for France, Germany, Spain and Italy as well as
stronger consumer demand.
23
Table of
Contents
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.
Revenues
from our combined consumer-direct sales channels increased to 37.1% of revenue
during the nine months ended September 30, 2010 compared to 35.8% during
the same period in 2009. As consumer-direct channel sales continue to grow as a
percentage of our total sales, we expect to realize growth in total revenues
and gross margin since these channels have historically achieved higher average
selling prices than the wholesale channel.
Revenues
from non-classic footwear models continued to make up the majority of our
revenues during the nine months ended September 30, 2010, as our classic
models and core products (defined below) have become a smaller portion of our
total revenue in recent quarters. The following table sets forth sales of our
classic models, core products and new footwear products as a percentage of our
total unit sales.
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
Classic models (Beach and Crocs Classic)
|
|
10.3
|
%
|
17.0
|
%
|
Core products(1)
|
|
20.2
|
%
|
34.9
|
%
|
New footwear products
|
|
30.8
|
%
|
12.8
|
%
|
(2)
Core products include Classic models, Kids
Crocs Classic, Athens, Kids Athens, Mary Jane, Girls Mary Jane, Mammoth and
Kids Mammoth.
Average
foreign currency exchange rates during the nine months ended September 30,
2010 contributed $17.1 million to our revenues as compared to the nine
months ended September 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 Revenues.
Revenues
from the Americas segment increased $50.0 million, or 21.8%, during the nine
months ended September 30, 2010 compared the same period in 2009, as a
result of increased revenue in all channels. Revenues from company-operated
retail locations in the region grew $27.0 million, or 34.7%, to $104.7 million
for the nine months ended September 30, 2010 compared to the same period
in 2009 primarily due to increased unit sales resulting from an increase in the
number of company-operated retail locations in the region, as discussed above,
and price improvements. Regional wholesale revenues grew $22.0 million, or
18.2%, to $143.1 million for the nine months ended September 30, 2010
compared to the same period in 2009 primarily due to increased unit sales.
Asia
Segment Revenues.
Revenues in
Asia increased $35.4 million, or 18.9%, during the nine months ended
September 30, 2010 compared to the same period in 2009, due to increased
wholesale and retail channel revenues. Regional wholesale channel revenues
increased by $28.2 million, or 21.6%, primarily due to continued strong demand
and improved pricing. Regional revenues from company-operated retail locations
increased $7.6 million, or 15.0%, to $58.1 million during the nine months ended
September 30, 2010 compared to the same period in 2009, due to price
improvements and an increase of company-operated retail locations in the
region, as discussed above. Regional retail revenue growth was negatively affected
by a prolonged cold weather season in parts of the region and a rise in
imitation products in Japan.
Europe
Segment Revenues.
Revenues in
Europe increased $14.7 million, or 16.3%, during the nine months ended
September 30, 2010 compared to the same period in 2009 which was driven by
growth in all sales channels. Regional internet channel revenues increased by
$6.7 million to $12.3 million during the nine months ended September 30,
2010, which was more than twice the internet channel revenues earned during the
same period in 2009, primarily due to the addition of local language internet
sites for France, Germany, Spain and Italy, as previously mentioned. Wholesale
channel revenues increased $6.4 million, or 8.4%, to $82.3 million during the
nine months ended September 30, 2010 compared to the same period in 2009,
due to increased demand.
Gross profit.
During the nine months ended September 30, 2010 gross profit
increased $96.8 million, or 40.2%, to $337.4 million compared to the same
period in 2009. Gross margin increased 810 basis points to 55.3% during the
nine months ended September 30, 2010 compared to the same period in 2009.
These increases are primarily attributable to an increase of 12.5% in sales
volume and favorable shifts in product mix (consumer-direct channels) toward
higher margin products. Additionally, we
continue to implement 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 strategy in
2010. The increase is also attributable to a decrease of $4.4 million in
restructuring charges due to higher 2009 restructuring costs associated with
the closures and consolidation our distribution spaces in the Americas and
Europe segments.
24
Table
of Contents
Offsetting these increases was the accretive effect
of impaired unit sales that took place during the second quarter of 2009 as
discussed in Financial Highlights. The net effect of these sales during the
first nine months of 2009 was $41.6 million.
Average
foreign currency exchange rates during the nine months ended September 30,
2010 increased our gross profit by $10.5 million
compared to the same period in 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 $20.4 million, or 8.5%, in the nine months ended September 30,
2010 compared to the same period in 2009, primarily due to an increase of
approximately $20.1 million in salaries, rent and other retail-related costs
largely driven by the expansion of our retail selling channel and an increase
of approximately $12.9 million in costs related to our 2010 marketing campaign.
Offsetting these cost increases was an increase of $1.1 million in net gains on
changes in currency exchange rates for transactions denominated, and settled or
to be settled, in a currency other than the functional currency, and a decline
of $16.0 million in stock-based compensation, $13.3 million of which was
due to the acceleration of stock-based compensation expense from our 2009
tender offer during the nine months ended September 30, 2010 compared to
the same period in 2009.
Average foreign currency exchange rates used to
translate expenses from our functional currencies to our reporting currency,
the U.S. dollar, during the nine months ended September 30, 2010 increased
selling, general and administrative expenses by approximately $1.9 million as
compared to the same period in 2009.
Restructuring
charges
. We recorded $3.9 million in
restructuring charges in the nine months ended September 30, 2010, of
which $1.4 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 $1.9 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 nine months ended September 30, 2009, we recorded a combined $11.7
million in restructuring charges, of which $5.8 million was included in costs
of sales. These charges consisted of:
·
$4.2 million in costs associated with the
consolidation of our warehousing, distribution and office space worldwide;
·
$2.7 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
·
$3.7 million in other restructuring charges.
Impairment charges.
During the nine months ended
September, 30, 2010, we recorded $0.1 million in impairment charges compared to
$25.4 million in impairment charges recording during the same period in 2009.
The 2009 charges consisted of:
·
$17.0 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;
·
$7.5 million related to the write-off of
capitalized software, patents, trade names and other intangible assets that we
no longer intended to utilize; and
·
$0.9 million related to the write-off of
other smaller items.
25
Table of
Contents
The
following table summarizes operating income (loss) by segment for the nine
months ended September 30, 2010 and 2009 (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
Operating Income:
|
|
|
|
|
|
Americas
|
|
$
|
56,913
|
|
$
|
16,148
|
|
Europe
|
|
22,488
|
|
16,054
|
|
Asia
|
|
68,070
|
|
49,867
|
|
Total segments
|
|
147,471
|
|
82,069
|
|
SG&A Restructuring
|
|
(2,539
|
)
|
(5,916
|
)
|
Asset Impairment
|
|
(141
|
)
|
(25,447
|
)
|
Corporate and other
|
|
(69,224
|
)
|
(88,131
|
)
|
Total consolidated operating income (loss)
|
|
75,567
|
|
(37,425
|
)
|
|
|
|
|
|
|
|
|
Segments Operating Margin.
Total segment operating income increased $65.4
million, or 79.7%, during the nine months ended September 30, 2010
compared to the same period in 2009, primarily due to increased revenue in each
of our operating segments, a decrease of $4.4 million in restructuring charges
and the impact of our cost savings initiatives (see Financial Highlights).
These increases were partially offset by the
accretive effect of impaired unit sales that took place during 2009, and
increased costs related to the expansion of our retail selling channel and our
2010 fully-integrated marketing campaign, as previously discussed.
Interest expense
.
Interest expense decreased $1.0 million, or 68.5%, during the nine
months ended September 30, 2010 compared to same period in 2009 primarily
due to lower borrowing rates and borrowing balances under our current
asset-backed credit facility.
Income tax expense
. During the nine months ended
September 30, 2010, we recognized an income tax expense of $12.2 million
on a pre-tax income of $75.2 million, representing an effective income tax rate
of 16.2% compared to an income tax benefit of $4.5 million on a pre-tax loss of
$35.2 million, representing an effective income tax rate of (12.8%) for the
same period in 2009. The change in effective tax rate is primarily the result
of a one-time $3.0 million tax benefit recognized in the third quarter of 2010
due to a change in an international tax treaty which reduces certain taxes for
which accruals have previously been made, a $14.4 million one-time tax benefit
recognized in the third quarter of 2009 related to the Companys restructuring
of its international operations to streamline and simplify its business
operations, and changes in the mix of profitability in foreign jurisdictions
where the Company is taxable.
Liquidity
and Capital Resources
At September 30, 2010,
we had $143.1 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 credit facility with PNC (see discussion below), which
provides us with up to $30.0 million in borrowings and matures on September 24,
2014. 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.
Credit Facility
On
September 30, 2010, we amended our Revolving Credit and Security Agreement
with PNC, originally dated September 25, 2009. Based on the amended terms,
the Credit Agreement provides for an asset-backed revolving credit facility of
up to $30.0 million in total, which includes a $20.0 million sublimit for
borrowings against our eligible inventory, a $2 million sublimit for borrowings
against our eligible inventory in-transit, and a $10 million sublimit for
letters of credit, and matures on September 24, 2014. Total borrowings
available under the facility at any given time are subject to customary
reserves and reductions to the extent our asset borrowing base changes.
Borrowings under the facility are secured by all of our assets including all receivables,
equipment, general intangibles, inventory, investment property, subsidiary
stock and leasehold interests. The terms of the Credit Agreement require us to
prepay borrowings in the event of certain dispositions of property. With
respect to domestic rate loans, principal amounts outstanding bear interest at
1.5% plus the greater of either (i) PNCs published reference rate,
(ii) the Federal Funds Open Rate (as defined in the credit facility) in
effect on such day plus 0.5% or, (iii) the sum of the daily LIBOR rate and
1.0%. Eurodollar denominated principal amounts outstanding bear interest at
3.0% plus the Eurodollar rate (as defined in the credit facility). The Credit
Agreement requires monthly interest payments with respect to domestic rate loans
and at the end of each interest period with respect to Eurodollar rate loans
and contains certain customary restrictive and financial covenants. We were in compliance with these financial
covenants as of September 30, 2010. As of September 30, 2010
and December 31, 2009, we had no outstanding borrowings under the credit
facility. At September 30, 2010, we had issued and outstanding letters of
credit of $1.0 million which were reserved against the borrowing base.
26
Table of
Contents
Working
Capital and Cash Flow
Our accounts receivable balance as of
September 30, 2010 was $81.3 million, an increase of $30.8 million when
compared to the balance as of December 31, 2009. The increase in accounts
receivable between December 31, 2009 and September 30, 2010 was
largely the result of seasonality and higher sales in the third quarter of 2010
compared to the fourth quarter of 2009. Days sales outstanding remained
relatively flat at 34.7 at September 30, 2010 compared to 34.1 at December 31,
2009.
We are a global business with operations in many
different countries, which requires cash accounts to be held in various
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 September 30,
2010, we held $137.6 million of our total $143.1 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 $137.6
million, $35.8 million could potentially be restricted, as described above. If
the remaining $101.8 million were to be repatriated to the U.S., we would be
required to pay approximately $6.7 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 up to the lesser of the total U.S. NOL balances or the current
foreign subsidiaries earnings. 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. up to the aforementioned limitation.
We have entered into various operating leases that
require cash payments on a specified schedule. Over the next five years we are
committed to make payments of approximately $130.2 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 $142.5 million at September 30, 2010 from $93.3
million at December 31, 2009, which was primarily driven by growth
associated with the addition of 37 new retail locations; the addition of
component raw material inventory, as we continue to manufacture more of our
hybrid product which provides savings on costs incurred with importing these
products from China; and a significant increase in order backlog.
During the three and nine months ended
September 30, 2010 and 2009, we had net capital expenditures of $7.3
million and $26.1 million and $6.1 million and $18.3 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.
27
Table of
Contents
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 change for the three month and
nine month period ended September 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 its normal
operating and funding activities. As previously discussed, the principal
amounts outstanding under the revolving credit facility with PNC, which
provides for borrowings of up to $30.0 million in total, bear interest at 1.5%
per annum plus the greater of either (i) PNCs published reference rate,
(ii) the Federal Funds Open Rate (as defined in the credit facility) in
effect on such day plus 0.5% or, (iii) the sum of the daily LIBOR rate and
1.0% with respect to domestic rate loans, and 3.0% plus the Eurodollar rate (as
defined in the credit facility) with respect to outstanding Eurodollar
denominated principal amounts. The credit facility requires monthly interest
payments with respect to domestic rate loans and at the end of each interest
period with respect to Eurodollar rate loans. Since we currently have no
outstanding borrowings as of September 30, 2010 under the revolving credit
facility, a change in prevailing interest rates in the near term will not
materially affect our overall results.
We
earned interest income of $0.2 million and $0.4 million on our cash and cash
equivalents and marketable securities during the three and nine months ended
September 30, 2010, respectively. During the three and nine months ended
September 30, 2009, we earned interest income of $0.1 million and $0.5
million, respectively, on our cash and cash equivalents and marketable
securities. During the nine months ended September 30, 2010 and 2009, our
sensitivity to market fluctuations in interest rates was not material to its
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 may be significantly influenced by foreign currency
fluctuations. We are primarily exposed to changes in exchange rates for the
British pound, the Japanese yen, the Mexican peso 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 forward contracts to reduce our transactional
exposure to changes in foreign exchange rates and to hedge specific commitments
and anticipated transactions and not for speculative or trading purposes. These
foreign exchange forward contracts are accounted for as derivatives designated
as non-hedging instruments in accordance with accounting standards for
derivatives. The fair values of these instruments at September 30, 2010
and December 31, 2009 were not material. 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.
28
Table of Contents
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 September 30, 2010 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
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 August 26, 2010, the ALJ determined
that the evidentiary record need not be reopened and that the remand would
proceed based on the prior submissions of the parties.
29
Table of Contents
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. On July 29,
2010, 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.
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 6. Exhibits.
Exhibit List
Exhibit
Number
|
|
Description
|
3.1
|
|
Restated Certificate of
Incorporation of Crocs, Inc. (incorporated herein by reference to
Exhibit 4.1 to Crocs, Inc.s Registration Statement on
Form S-8, filed on March 9, 2006 (File No. 333-132312).
|
|
|
|
3.1
|
|
Certificate of Amendment
to the Restated Certificate of Incorporate of Crocs, Inc. (incorporated
herein by reference to Exhibit 3.1 to Crocs, Inc.s Current Report
on Form 8-K, filed on July 12, 2007).
|
|
|
|
3.2
|
|
Amended and Restated
Bylaws of Crocs, Inc. (incorporated herein by reference to
Exhibit 4.2 to Crocs, Inc.s Registration Statement on
Form S-8, filed on March 9, 2006 (File No. 333-132312).
|
|
|
|
4.1
|
|
Specimen common stock
certificate(incorporated herein by reference to Exhibit 4.2 to
Crocs, Inc.s Amendment No. 4 to Registration Statement on
Form S-1, filed on January 19, 2006 (File No. 333-127526).
|
|
|
|
10.1
|
|
Second Amendment to
Revolving Credit and Security Agreement, dated as of September 30, 2010,
among Crocs, Inc., Crocs Retail, Inc., Crocs Online, Inc.,
Ocean Minded, Inc., Jibbitz, LLC, Bite, Inc. and PNC Bank, National
Association (incorporated herein by reference to Exhibit 10.1 to
Crocs, Inc.s Current Report on Form 8-K, filed on October 4,
2010).
|
|
|
|
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.
|
|
|
|
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.
|
Filed herewith.
30
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: November 4,
2010
|
By:
|
/s/ Russell C. Hammer
|
|
|
Name:
|
Russell C. Hammer
|
|
|
Title:
|
Chief
Financial Officer, Senior Vice PresidentFinance and Treasurer
|
31
Crocs (NASDAQ:CROX)
Historical Stock Chart
From Jun 2024 to Jul 2024
Crocs (NASDAQ:CROX)
Historical Stock Chart
From Jul 2023 to Jul 2024