See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and 2019
(Unaudited)
Basis of Presentation
Reference in this quarterly report to “Sales” refer to Skechers’ net sales reported under generally accepted accounting principles in the United States. The accompanying condensed consolidated financial statements of Skechers U.S.A., Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S‑X. Accordingly, they do not include certain notes and financial presentations normally required under U.S. GAAP for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
COVID-19
As a result of the current outbreak of coronavirus disease (“COVID-19”), in January 2020, the Company began to experience business disruptions in Asia, including the temporary closure of stores in China and in surrounding areas, modified operating hours in certain stores that remained open, and a decline in store traffic. In late February 2020, the situation escalated as the scope of COVID-19 worsened beyond Asia, with Europe and the United States experiencing significant outbreaks. In March 2020, the COVID-19 outbreak was declared a National Public Health Emergency, in the United States, and also was declared to be a global pandemic by the World Health Organization. In response to COVID-19, certain governments have imposed travel restrictions and local statutory quarantines. The Company is monitoring and reacting to the COVID-19 situation on a daily basis, including conforming to local governments and global health organizations’ guidance, implementing global travel restrictions, and implementing “work from home” measures for many of its employees.
With the wellbeing of the Company’s customers, employees and business partners in mind, the Company temporarily closed its Company-operated stores in North America, Europe, India, Japan, South America, and Central America, effective beginning in the third week of March 2020, and expects a significant portion of these stores to remain closed for the foreseeable future. The majority of the Company’s stores in China and the surrounding regions have reopened, although many with temporarily reduced operating hours and less foot traffic. The Company plans to follow the guidance of local governments and health organizations as well as its own policies to determine when it can reopen all its stores worldwide. As the situation continues to evolve rapidly, the Company is not currently able to predict the exact timing of the remaining stores reopening, which we expect to occur on a country-by-country and location-by-location basis.
The Company is monitoring the impacts COVID-19 has had, and continues to have, on its global supply chain, including potential disruptions of product deliveries. The Company sources the majority of its merchandise outside of the U.S. through open purchase arrangements with independent contract manufacturers primarily located in China and Vietnam. In order to complete production, these vendors’ manufacturing factories are dependent on raw materials from vendors that are primarily located in Asia. The Company is collaborating with its independent contract manufactures to align existing inventory levels and production commitments with expected sales worldwide.
The Company entered this period of uncertainty with a healthy liquidity position and it took immediate, aggressive and prudent actions, including reevaluating all expenditures, including significant reductions in advertising spending, in order to enhance the Company’s ability to meet the business’ short-term liquidity needs, in order to best position the business for its key stakeholders, including the Company’s employees, customers and shareholders. As a precautionary measure, in March 2020, the Company borrowed $490 million on its unsecured revolving credit facility. The Company continues to partner with its vendors, landlords, and lenders to preserve liquidity and mitigate risk during this unprecedented outbreak. In addition, the Company is actively monitoring and assessing the rapidly emerging government policy and economic stimulus responses to COVID-19. The Company’s ecommerce operations remain open to serve the Company’s customers during this unprecedented period of store closures.
8
The current circumstances are dynamic and the impacts of COVID-19 on the Company’s business operations, including the duration and impact on overall consumer demand, cannot be reasonably estimated at this time. The Company anticipates COVID-19 will have a material adverse impact on its business, results of operations, financial condition and cash flows for the year ending December 31, 2020. As the COVID-19 pandemic is complex and rapidly evolving, the Company’s plans as described above may change.
Inventories
Inventories, principally finished goods, are stated at the lower of cost (based on the first-in, first-out method) or market (net realizable value). Cost includes shipping and handling fees and costs, which are subsequently expensed to cost of sales. The Company provides for estimated losses from obsolete or slow-moving inventories, and writes down the cost of inventory at the time such determinations are made. Reserves are estimated based on inventory on hand, historical sales activity, industry trends, the retail environment, and the expected net realizable value. The net realizable value is determined using estimated sales prices of similar inventory through off-price or discount store channels.
Fair Value of Financial Instruments
The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard established a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:
|
•
|
Level 1 – Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 non-derivative investments primarily include money market funds and U.S. Treasury securities.
|
|
•
|
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 non-derivative investments primarily include corporate notes and bonds, asset-backed securities, U.S. Agency securities, and actively traded mutual funds. The Company has one Level 2 derivative which is an interest rate swap related to the refinancing of its domestic distribution center (see below).
|
|
•
|
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. The Company currently does not have any Level 3 assets or liabilities.
|
The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, short-term investments, accounts receivable, long-term investments, accounts payable and accrued expenses approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the company for similar debt.
On August 12, 2015, the Company entered into an interest rate swap agreement concurrent with refinancing its domestic distribution center construction loan. On March 18, 2020, HF-T1 and Bank of America, N.A. also executed an amendment to the Swap Agreement (the “Swap Agreement Amendment”) to extend the maturity date of the Interest Rate Swap to March 18, 2025. The Swap Agreement Amendment fixes the effective interest rate on the 2020 Loan at 2.55% per annum. The 2020 Amendment and the Swap Agreement Amendment are subject to customary covenants and events of default. Bank of America, N.A. also acts as a lender and syndication agent under the Company’s unsecured revolving credit facility dated November 21, 2019. (see Note 5 – Short Term and Long Term Borrowings). The fair value of the interest rate swap was determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipt was based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with U.S. GAAP, credit valuation adjustments were incorporated to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. The majority of the inputs used to value the interest rate swap were within Level 2 of the fair value hierarchy. As of March 31, 2020, the interest rate swap was a Level 2 derivative and was classified as other long-term liabilities in the Company’s condensed consolidated balance sheets.
9
Use of Estimates
The preparation of the condensed consolidated financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
Revenue Recognition
In accordance with Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”), the Company recognizes revenue when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company derives income from the sale of footwear and royalties earned from licensing the Skechers brand. For North America, goods are shipped Free on Board (“FOB”) shipping point directly from the Company’s domestic distribution center in Rancho Belago, California. For international wholesale customers product is shipped FOB shipping point, (i) direct from the Company’s distribution center in Liege, Belgium, (ii) to third-party distribution centers in Central America, South America and Asia, (iii) directly from third-party manufacturers to other international customers. For distributor sales, the goods are generally delivered directly from the independent factories to third-party distribution centers or to distributors’ freight forwarders on a Free Named Carrier (“FCA”) basis. The Company recognizes revenue on wholesale sales upon shipment as that is when the customer obtains control of the promised goods. Related costs paid to third-party shipping companies are recorded as cost of sales and are accounted for as a fulfillment cost and not as a separate performance obligation. The Company generates direct-to-consumer revenues primarily from the sale of footwear to customers at retail locations or through the Company’s websites. For in-store sales, the Company recognizes revenue at the point of sale. For sales made through its websites, the Company recognizes revenue upon shipment to the customer which is when the customer obtains control of the promised good. Sales and value added taxes collected from direct-to-consumer customers are excluded from reported revenues.
The Company records accounts receivable at the time of shipment when the Company’s right to the consideration becomes unconditional. The Company typically extends credit terms to its wholesale customers based on their creditworthiness and generally does not receive advance payments. Generally, wholesale customers do not have the right to return goods, however, the Company periodically decides to accept returns or provide customers with credits. Allowances for estimated returns, discounts, doubtful accounts and chargebacks are provided for when related revenue is recorded. Retail and direct-to-consumer sales represent amounts due from credit card companies and are generally collected within a few days of the purchase. As such, the Company has determined that an allowance for doubtful accounts for retail and direct-to-consumer sales is not necessary.
10
The Company earns royalty income from its licensing arrangements which qualify as symbolic licenses rather than functional licenses. Upon signing a new licensing agreement, the Company receives up-front fees, which are generally characterized as prepaid royalties. These fees are initially deferred and recognized as revenue is earned (i.e., as licensed sales are reported to the Company or on a straight-line basis over the term of the agreement). The Company applies the sales-based royalty exception for the royalty income based on sales and recognizes revenue only when subsequent sales occur. The Company calculates and accrues estimated royalties based on the agreement terms and correspondence with the licensees regarding actual sales.
Judgments
The Company considered several factors in determining that control transfers to the customer upon shipment of products. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership at the time of shipment. The Company accrues a liability for product returns at the time of sale based on our historical experience. The Company also accrues amounts for goods expected to be returned in salable condition. As of March 31, 2020 and December 31, 2019, the Company’s sales returns liability totaled $104.3 million and $86.5 million, respectively, and was included in accrued expenses in the accompanying condensed consolidated balance sheets.
Business Combinations
Business acquisitions are accounted for under the acquisition method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Purchased intangible assets with finite lives are amortized over their estimated useful lives. Goodwill and intangible assets with indefinite lives are not amortized but are tested at least annually for impairment or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Fair value determinations require judgment and may involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples, among other items. In the second quarter of 2019, the Company purchased a 60% interest in Manhattan SKMX, de R.L. de C.V. (“Skechers Mexico”), for a total consideration of $120.6 million, net of cash acquired. Skechers Mexico is a joint venture that operates and generates sales in Mexico. As a result of this purchase, Skechers Mexico became a majority-owned subsidiary and the results are included in the condensed consolidated financial statements. The purchase price allocation was completed during the quarter ended March 31, 2020. Pro forma results of operations have not been presented because the effects of the acquisition were not material to the Company’s condensed consolidated financial statements.
Accounting Standards Adopted in 2020
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASU No. 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses, otherwise known as “CECL.” In addition, this guidance changes the recognition for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk and requires additional disclosures. The Company adopted ASU 2016-03 on January 1, 2020 and the adoption of this ASU did not have a material impact on its condensed consolidated financial statements.
11
In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,” (“ASU No. 2018-13”), which modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company adopted ASU 2018-13 on January 1, 2020 and the adoption of this ASU did not have a material impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,” (“ASU 2018-15”). ASU 2018-15 requires that issuers follow the internal-use software guidance in Accounting Standards Codification (ASC) 350-40 to determine which costs to capitalize as assets or expense as incurred. The ASC 350-40 guidance requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as they are incurred. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-15 on January 1, 2020 and the adoption of this ASU did not have a material impact on its condensed consolidated financial statements.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU no. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” (“ASU No. 2019-12”). The amendment removes certain exceptions to the general income tax accounting methodology including an exception for the recognition of a deferred tax liability when a foreign subsidiary becomes an equity method investment and an exception for interim periods showing operating losses in excess of anticipated operating losses for the year. The amendment also reduces the complexity surrounding franchise tax recognition; the step up in the tax basis of goodwill in conjunction with business combinations; and the accounting for the effect of changes in tax laws enacted during interim periods. The amendments in this update are effective for the Company for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU 2019-12; however, at the current time the Company does not expect that the adoption of this ASU will have a material impact on its condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” (“ASU No. 2020-04”), which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for our borrowing instruments, which use LIBOR as a reference rate, and is effective immediately, but is only available through December 31, 2022. The company is currently evaluating the impact of ASU 2020-04; however, at the current time the Company does not expect that the adoption of this ASU will have a material impact on its condensed consolidated financial statements.
(2)
|
CASH, CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS
|
The Company’s investments consist of mutual funds held in the Company’s deferred compensation plan which are classified as trading securities, U.S. Treasury securities, corporate notes and bonds, asset-backed securities and U.S. Agency securities, which the Company has the intent and ability to hold to maturity and therefore, are classified as held-to-maturity. The following tables show the Company’s cash, cash equivalents, short-term and long-term investments by significant investment category as of March 31, 2020 and December 31, 2019 (in thousands):
|
|
March 31, 2020
|
|
|
|
Adjusted Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Short-Term Investments
|
|
|
Long-Term Investments
|
|
Cash
|
|
$
|
846,649
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
846,649
|
|
|
$
|
846,649
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
312,117
|
|
|
|
-
|
|
|
|
-
|
|
|
|
312,117
|
|
|
|
312,117
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Treasury securities
|
|
|
13,950
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,950
|
|
|
|
-
|
|
|
|
4,771
|
|
|
|
9,179
|
|
Total level 1
|
|
|
326,067
|
|
|
|
-
|
|
|
|
-
|
|
|
|
326,067
|
|
|
|
312,117
|
|
|
|
4,771
|
|
|
|
9,179
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Corporate notes and bonds
|
|
|
131,902
|
|
|
|
-
|
|
|
|
-
|
|
|
|
131,902
|
|
|
|
-
|
|
|
|
114,583
|
|
|
|
17,319
|
|
Asset-backed securities
|
|
|
23,908
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,908
|
|
|
|
-
|
|
|
|
5,262
|
|
|
|
18,646
|
|
U.S. Agency securities
|
|
|
10,134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,134
|
|
|
|
-
|
|
|
|
6,042
|
|
|
|
4,092
|
|
Mutual funds
|
|
|
28,102
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,102
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,102
|
|
Total level 2
|
|
|
194,046
|
|
|
|
-
|
|
|
|
-
|
|
|
|
194,046
|
|
|
|
-
|
|
|
|
125,887
|
|
|
|
68,159
|
|
TOTAL
|
|
$
|
1,366,762
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,366,762
|
|
|
$
|
1,158,766
|
|
|
$
|
130,658
|
|
|
$
|
77,338
|
|
12
|
|
December 31, 2019
|
|
|
|
Adjusted Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Short-Term Investments
|
|
|
Long-Term Investments
|
|
Cash
|
|
$
|
662,355
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
662,355
|
|
|
$
|
662,355
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
162,521
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162,521
|
|
|
|
162,521
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Treasury securities
|
|
|
9,686
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,686
|
|
|
|
-
|
|
|
|
1,679
|
|
|
|
8,007
|
|
Total level 1
|
|
|
172,207
|
|
|
|
-
|
|
|
|
-
|
|
|
|
172,207
|
|
|
|
162,521
|
|
|
|
1,679
|
|
|
|
8,007
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
|
132,431
|
|
|
|
-
|
|
|
|
-
|
|
|
|
132,431
|
|
|
|
-
|
|
|
|
104,130
|
|
|
|
28,301
|
|
Asset-backed securities
|
|
|
23,614
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,614
|
|
|
|
-
|
|
|
|
263
|
|
|
|
23,351
|
|
U.S. Agency securities
|
|
|
12,352
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,352
|
|
|
|
-
|
|
|
|
5,965
|
|
|
|
6,387
|
|
Mutual funds
|
|
|
28,543
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,543
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,543
|
|
Total level 2
|
|
|
196,940
|
|
|
|
-
|
|
|
|
-
|
|
|
|
196,940
|
|
|
|
-
|
|
|
|
110,358
|
|
|
|
86,582
|
|
TOTAL
|
|
$
|
1,031,502
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,031,502
|
|
|
$
|
824,876
|
|
|
$
|
112,037
|
|
|
$
|
94,589
|
|
The Company may sell certain of its investments prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s long-term investments are less than two years. The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio.
When evaluating an investment for current expected credit losses, the Company reviews factors such as historical experience with defaults, losses, credit ratings, term, market sector and macroeconomic trends, including current conditions and forecasts to the extent they are reasonable and supportable. As of March 31, 2020, the current expected credit losses were not material to the Company’s condensed consolidated financial statements.
13
(3)
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
The Company evaluated the impairment of goodwill and other intangible assets. Based on the evaluation performed, no impairment loss was recorded for the goodwill and other intangible assets during the quarter ended March 31, 2020. As of March 31, 2020, the gross carrying amount of goodwill and other intangible assets was $138.1 million.
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Goodwill
|
|
|
|
|
|
|
|
|
Skechers Mexico
|
|
$
|
91,563
|
|
|
$
|
69,836
|
|
Others
|
|
|
1,934
|
|
|
|
1,576
|
|
Total goodwill
|
|
|
93,497
|
|
|
|
71,412
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets
|
|
|
|
|
|
|
|
|
Reacquired rights
|
|
|
46,100
|
|
|
|
641
|
|
Customer relationships and other acquisition related
|
|
|
5,478
|
|
|
|
—
|
|
Others
|
|
|
13,290
|
|
|
|
13,290
|
|
Total gross carrying amount
|
|
|
64,868
|
|
|
|
13,931
|
|
Less: Accumulated amortization
|
|
|
(20,291
|
)
|
|
|
(13,066
|
)
|
Total other intangible assets, net
|
|
|
44,577
|
|
|
|
865
|
|
Total
|
|
$
|
138,074
|
|
|
$
|
72,277
|
|
The expected future amortization expense for other intangible assets were as follows (in thousands):
|
|
March 31, 2020
|
|
2020 remaining months
|
|
$
|
5,154
|
|
2021
|
|
|
6,871
|
|
2022
|
|
|
6,871
|
|
2023
|
|
|
6,871
|
|
2024
|
|
|
6,871
|
|
Thereafter
|
|
|
11,939
|
|
Total
|
|
$
|
44,577
|
|
The Company determines if an arrangement is a lease at inception, and, if a lease, what type of lease it is. The Company regularly enters into non-cancellable operating leases for automobiles, retail stores, and real estate leases for offices, showrooms and distribution facilities. Most leases have fixed rental payments. Leases for retail stores typically have initial terms ranging from 5 to 10 years. Other real estate or facility leases may have initial lease terms of up to 20 years. These leases are included within operating lease ROU assets and liabilities on the Company’s condensed consolidated balance sheet as of March 31, 2020. The predominant asset for most real estate leases is the right to occupy the space which the Company has determined is the single lease component. Many of the Company’s real estate leases include options to extend or to terminate the lease that are not reasonably certain at the time of determining the expected lease term. In addition, the Company’s real estate leases may also require additional payments for real estate taxes and other occupancy-related costs. The Company considers renewal options and other occupancy-related costs which it considers as non-lease components. Percentage rent expense, which is specified in the lease agreement, is owed when sales at individual retail store locations exceed a base amount. Percentage rent expense is recognized in the condensed consolidated financial statements when incurred. Rent expense for leases having rent holidays, landlord incentives or scheduled rent increases is recorded on a straight-line basis over the earlier of the beginning of the lease term or when the Company takes possession or control of the leased premises. The amount of the excess straight-line rent expense over scheduled payments is recorded as an operating lease liability. Operating lease ROU assets and operating lease liabilities are recognized based upon the present value of the future lease payments over the lease term at the commencement date. Most of the Company’s leases do not provide an implicit borrowing rate. Therefore, the Company uses an estimated incremental borrowing rate based upon a combination of market-based factors, such as market quoted forward yield curves and Company specific factors, such as lease size and duration. The incremental borrowing rate is then used at the commencement date of the lease to determine the present value of future lease payments. The operating lease ROU asset also includes lease payments made and lease incentives and initial direct costs incurred. Lease expense for fixed lease payments is recognized on a straight-line basis over the lease term. As of March 31, 2020, current liabilities related to operating leases were $189.4 million.
14
Operating lease cost and other information (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Fixed lease cost
|
|
$
|
65,202
|
|
|
$
|
54,502
|
|
Variable lease cost
|
|
|
1,011
|
|
|
|
6,632
|
|
Operating cash flows used for leases
|
|
|
63,983
|
|
|
|
56,924
|
|
Noncash right-of-use assets recorded for lease liabilities:
|
|
|
|
|
|
|
|
|
For January 1 adoption of Topic 842
|
|
|
-
|
|
|
|
1,035,062
|
|
In exchange for new lease liabilities during the period
|
|
|
9,581
|
|
|
|
11,473
|
|
Weighted-average remaining lease term
|
|
4.61 years
|
|
|
5.19 years
|
|
Weighted-average discount rate
|
|
|
4.19
|
%
|
|
|
4.24
|
%
|
The maturities of lease liabilities were as follows (in thousands):
|
|
March 31, 2020
|
|
2020 remaining months
|
|
$
|
177,292
|
|
2021
|
|
|
213,036
|
|
2022
|
|
|
184,287
|
|
2023
|
|
|
164,704
|
|
2024
|
|
|
153,096
|
|
Thereafter
|
|
|
449,388
|
|
Total lease payments
|
|
|
1,341,803
|
|
Less: Imputed interest
|
|
|
(175,082
|
)
|
|
|
$
|
1,166,721
|
|
|
|
|
|
|
As of March 31, 2020, the Company has additional operating leases, primarily for new retail stores, that have not yet commenced which will generate additional right-of-use assets of $1.3 million. These operating leases will commence in 2020 with lease terms ranging from 1 year to 10 years.
(5)
|
SHORT-TERM AND LONG-TERM BORROWINGS
|
The Company had $3.8 million of outstanding letters of credit as of March 31, 2020 and December 31, 2019, and approximately $13.7 million and $5.8 million in short-term borrowings as of March 31, 2020 and December 31, 2019, respectively.
Long-term borrowings at March 31, 2020 and December 31, 2019 are as follows (in thousands):
|
|
2020
|
|
|
2019
|
|
Unsecured revolving credit facility, variable-rate interest at
1.875% per annum, due November 2024
|
|
$
|
490,000
|
|
|
$
|
—
|
|
Note payable to banks, interest only, variable-rate interest at
2.55% per annum, secured by property, balloon payment of
$129,505 due March 2025
|
|
|
129,505
|
|
|
|
63,692
|
|
Note payable to Luen Thai Enterprise, Ltd., balloon payment
of $287 due January 2021
|
|
|
287
|
|
|
|
393
|
|
Loan payable to a bank, variable-rate interest at 6.00% per
annum, due September 2023
|
|
|
49,284
|
|
|
|
48,791
|
|
Loan payable to a bank, variable-rate interest at 3.20% per
annum, due October 2023
|
|
|
17,002
|
|
|
|
2,541
|
|
Subtotal
|
|
|
686,078
|
|
|
|
115,417
|
|
Less: Current installments
|
|
|
(16,926)
|
|
|
|
(66,234
|
)
|
Total long-term borrowings
|
|
$
|
669,152
|
|
|
$
|
49,183
|
|
15
Unsecured Revolving Credit Facility
On November 21, 2019, the Company entered into a $500.0 million unsecured revolving credit facility, which matures on November 21, 2024 (the “2019 Credit Agreement”), with Bank of America, N.A., as administrative agent and joint lead arranger, HSBC Bank USA, N.A. and JPMorgan Chase Bank, N.A., as joint lead arrangers, and other lenders. The 2019 Credit Agreement replaced the Company’s then existing $250.0 million loan and security agreement dated June 30, 2015 with Bank of America, N.A., MUFG Union Bank, N.A. and HSBC Bank USA, National Association that was set to expire on June 30, 2020. The 2019 Credit Agreement may be increased by up to $250.0 million under certain conditions and provides for the issuance of letters of credit up to a maximum of $100.0 million and swingline loans up to a maximum of $25.0 million. The Company may use the proceeds from the 2019 Credit Agreement for working capital and other lawful corporate purposes. At the Company’s option, any loan (other than swingline loans) will bear interest at a rate equal to (a) LIBOR plus an applicable margin between 1.125% and 1.625% based upon the Company’s Total Adjusted Net Leverage Ratio (as defined in the 2019 Credit Agreement) or (b) a base rate (defined as the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the Bank of America prime rate and (iii) LIBOR plus 1.00%) plus an applicable margin between 0.125% and 0.625% based upon the Company’s Total Adjusted Net Leverage Ratio. Any swingline loan will bear interest at the base rate. The Company will pay a variable commitment fee of between 0.125% and 0.25% of the actual daily unused amount of each lender’s commitment, and will also pay a variable letter of credit fee of between 1.125% and 1.625% on the maximum amount available to be drawn under each issued and outstanding letter of credit, both of which are based upon the Company’s Total Adjusted Net Leverage Ratio. The 2019 Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including covenants that limit the ability of the Company and its subsidiaries to, among other things, incur debt, grant liens, make certain acquisitions, dispose of assets, effect a change of control of the Company, make certain restricted payments including certain dividends and stock redemptions, make certain investments or loans, enter into certain transactions with affiliates and certain prohibited uses of proceeds. The 2019 Credit Agreement also requires that the total adjusted net leverage ratio not exceed 3.75, except in the event of an acquisition in which case the ratio may be increased at the Company’s election to 4.25 for the quarter in which such acquisition occurs and for the next three quarters thereafter. As of March 31, 2020, the Company’s adjusted net leverage ratio was 1.05. The 2019 Credit Agreement provides for customary events of default including payment defaults, breaches of representations or warranties or covenants, cross defaults with certain other indebtedness to third parties, certain judgments/awards/orders, a change of control, bankruptcy and insolvency events, inability to pay debts, ERISA defaults, and invalidity or impairment of the 2019 Credit Agreement or any loan documentation related thereto, with, in certain circumstances, cure periods. Certain of the lenders party to the 2019 Credit Agreement, and their respective affiliates, have performed, and may in the future perform for the Company and the Company’s subsidiaries, various commercial banking, investment banking, underwriting and other financial advisory services, for which they have received, and will receive, customary fees and expenses. The Company paid origination, arrangement and legal fees of $1.6 million on the 2019 Credit Agreement, which are being amortized to interest expense over the five-year life of the facility. On March 19, 2020, as a precautionary measure to maximize liquidity and to increase available cash on hand, the Company borrowed $490.0 million on its unsecured revolving credit facility. The proceeds will be available to be used for working capital, general corporate or other purposes. As of March 31, 2020, there was $490.0 million outstanding under the 2019 Credit Agreement, which is classified as long-term borrowings in the Company’s condensed consolidated balance sheets. As of December 31, 2019, there was no amount outstanding under the 2019 Credit Agreement.
Construction Loans for U.S. Distribution Center
On April 30, 2010, the JV, through HF Logistics-SKX T1, LLC, a Delaware limited liability company and wholly-owned subsidiary of the JV (“HF-T1”), entered into a construction loan agreement with Bank of America, N.A. as administrative agent and as a lender, and Raymond James Bank, FSB, as a lender (collectively, the “Construction Loan Agreement”), pursuant to which the JV obtained a loan of up to $55.0 million used for construction of our U.S. distribution center (the “2010 Loan”). On November 16, 2012, HF-T1 executed an amendment to the Construction Loan Agreement (the “Amendment”), which added OneWest Bank, FSB as a lender, increased the borrowings under the 2010 Loan to $80.0 million and extended the maturity date of the 2010 Loan to October 30, 2015.
On August 11, 2015, the JV, through HF-T1, entered into an amended and restated loan agreement with Bank of America, N.A., as administrative agent and as a lender, and CIT Bank, N.A. (formerly known as OneWest Bank, FSB) and Raymond James Bank, N.A., as lenders (collectively, the “Amended Loan Agreement”), which amended and restated in its entirety the Construction Loan Agreement and the Amendment. Under the Amended Loan Agreement, the parties agreed that the lenders would loan $70.0 million to HF-T1 (the “2015 Loan”). Pursuant to the Amended Loan Agreement, the interest rate per annum on the 2015 Loan was LIBOR Daily Floating Rate (as defined therein) plus a margin of 2%. The maturity date of the 2015 Loan was August 12, 2020, subject to HF-T1 having an option to a 24-month extension upon payment of a fee and satisfaction of certain customary terms.
16
On August 11, 2015, HF-T1 and Bank of America, N.A. also entered into an ISDA master agreement (together with the schedule related thereto, the “Swap Agreement”) to govern derivative and/or hedging transactions that HF-T1 concurrently entered into with Bank of America, N.A. Pursuant to the Swap Agreement, on August 14, 2015, HF-T1 entered into a confirmation of swap transactions (the “Interest Rate Swap”) with Bank of America, N.A. The Interest Rate Swap had an effective date of August 12, 2015 and a maturity date of August 12, 2022, subject to early termination at the option of HF-T1, commencing on August 1, 2020.
On March 18, 2020, HF-T1 entered into an amendment to the Amended Loan Agreement with Bank of America, N.A., Raymond James Bank, N.A. and CIT Bank, N.A. (the “2020 Amendment”) that increased the borrowings under the 2015 Loan to $129.5 million and extended the maturity date of the 2015 Loan to March 18, 2025 (the “2020 Loan”). As of the date of the 2020 Amendment, the outstanding principal balance of the 2015 Loan was $63.3 million. The additional indebtedness of $66.2 million under the 2020 Amendment is being used by the JV through HF-T1 to (i) refinance all amounts owed on the 2015 Loan, (ii) pay $1.0 million in accrued interest, loan fees and other closing costs associated with the 2020 Amendment and (iii) make a distribution of $64.4 million to HF. Pursuant to the 2020 Amendment, the interest rate per annum on the 2020 Loan is the LIBOR Daily Floating Rate (as defined therein) plus a margin of 1.75%. The maturity date of the 2020 Loan is March 18, 2025. For additional information, see Note 17 – Subsequent Event.
On March 18, 2020, HF-T1 and Bank of America, N.A. also executed an amendment to the Swap Agreement (the “Swap Agreement Amendment”) to extend the maturity date of the Interest Rate Swap to March 18, 2025. The Swap Agreement Amendment fixes the effective interest rate on the 2020 Loan at 2.55% per annum. The 2020 Amendment and the Swap Agreement Amendment are subject to customary covenants and events of default. Bank of America, N.A. also acts as a lender and syndication agent under the Company’s credit agreement dated November 21, 2019.
Construction Loan for Distribution Center in China
On September 29, 2018, through the Taicang Subsidiary, the Company entered into a 700 million yuan loan agreement with China Construction Bank Corporation (“the China DC Loan Agreement”). The proceeds from the China DC Loan Agreement is being used to finance the construction of the Company’s distribution center in China. Interest is paid quarterly. The interest rate will float and be calculated at a reference rate provided by the People’s Bank of China. The interest rate at March 31, 2020 was 4.28% and may increase or decrease over the life of the loan, and will be evaluated every 12 months. The principal of the loan will be repaid in semi-annual installments, beginning in 2021, of variable amounts as specified in the China DC Loan Agreement. The China DC Loan Agreement contains customary affirmative and negative covenants for secured credit facilities of this type, including covenants that limit the ability of the Subsidiary to, among other things, allow external investment to be added, pledge assets, issue debt with priority over the China DC Loan Agreement, and adjust the capital stock structure of the TC Subsidiary. The China DC Loan Agreement matures on September 28, 2023. The obligations of the TC Subsidiary under the China DC Loan Agreement are jointly and severally guaranteed by the Company’s Chinese joint venture. As of March 31, 2020, there was $49.3 million outstanding under this credit facility, which is classified as long-term borrowings in the Company’s condensed consolidated balance sheets.
The Company’s short-term and long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions. The Company is in compliance with its non-financial covenants, including any cross-default provisions, and financial covenant of its short-term and long-term borrowings as of March 31, 2020.
17
(6)
|
NON-CONTROLLING INTERESTS
|
The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products or to construct the Company’s domestic distribution facility. These joint ventures are variable interest entities (“VIEs”) under ASC 810-10-15-14. The Company’s determination of the primary beneficiary of a VIE considers all relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. The Company has determined for its VIEs that the Company is the primary beneficiary because it has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Accordingly, the Company includes the assets and liabilities and results of operations of these entities in its condensed consolidated financial statements, even though the Company may not hold a majority equity interest. In April 2019, the Company acquired a 60% interest in a joint venture in Mexico. See Note 7 – Acquisition for additional information. In February 2019, the Company purchased the minority interest of its India joint-venture for $82.9 million, which made its India joint venture a wholly owned subsidiary. There have been no changes during 2020 in the accounting treatment or characterization of any previously identified VIE. The Company continues to reassess these relationships quarterly. The assets of these joint ventures are restricted in that they are not available for general business use outside the context of such joint ventures. The holders of the liabilities of each joint venture have no recourse to the Company. The Company does not have a variable interest in any unconsolidated VIEs.
The following VIEs are consolidated into the Company’s condensed consolidated financial statements and the carrying amounts and classification of assets and liabilities were as follows (in thousands):
HF Logistics (1)
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Current assets
|
|
$
|
62,302
|
|
|
$
|
5,297
|
|
Non-current assets
|
|
|
104,474
|
|
|
|
104,527
|
|
Total assets
|
|
$
|
166,776
|
|
|
$
|
109,824
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
922
|
|
|
$
|
64,600
|
|
Non-current liabilities
|
|
|
130,514
|
|
|
|
1,009
|
|
Total liabilities
|
|
$
|
131,436
|
|
|
$
|
65,609
|
|
|
|
|
|
|
|
|
|
|
Product distribution joint ventures (2)
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Current assets
|
|
$
|
691,277
|
|
|
$
|
747,668
|
|
Non-current assets
|
|
|
490,857
|
|
|
|
325,283
|
|
Total assets
|
|
$
|
1,182,134
|
|
|
$
|
1,072,951
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
436,941
|
|
|
$
|
430,282
|
|
Non-current liabilities
|
|
|
151,909
|
|
|
|
135,903
|
|
Total liabilities
|
|
$
|
588,850
|
|
|
$
|
566,185
|
|
(1)
|
Includes HF Logistics-SKX, LLC and HF Logistics-SKX, T2, LLC.
|
(2)
|
Distribution joint ventures include Skechers Footwear Ltd. (Israel), Skechers China Limited, Skechers Korea Limited, Skechers Southeast Asia Limited, Skechers (Thailand) Limited, and Manhattan SKMX, S. de R.L. de C.V. (Mexico).
|
The following is a summary of net earnings (loss) attributable to, distributions to and contributions from non-controlling interests (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net earnings (loss) attributable to non-controlling interests
|
|
$
|
(7,941
|
)
|
|
$
|
22,261
|
|
Distributions to:
|
|
|
|
|
|
|
|
|
HF Logistics-SKX, LLC
|
|
|
10,683
|
|
|
|
1,014
|
|
Skechers China Limited
|
|
|
4,182
|
|
|
|
—
|
|
Skechers South Asia Private Limited
|
|
|
—
|
|
|
|
11,629
|
|
Non-cash contributions from:
|
|
|
|
|
|
|
|
|
HF Logistics-SKX, LLC
|
|
|
—
|
|
|
|
7,565
|
|
Manhattan SKMX, S. de R.L. de C.V.
|
|
|
49,045
|
|
|
|
—
|
|
18
Mexico Joint Venture Acquisition
On April 1, 2019, the Company purchased a 60% interest in Manhattan SKMX, S. de R.L. de C.V. (“Skechers Mexico”) for a total consideration of $120.6 million, net of cash acquired. Skechers Mexico is a joint venture that operates and generates sales in Mexico. As a result of this purchase, Skechers Mexico became a majority-owned subsidiary of the Company and its results are consolidated in the Company’s condensed consolidated financial statements beginning April 1, 2019. The formation of the joint venture provides significant merchandising, supply chain and retail operations in Mexico. The Company completed the purchase price allocation during the quarter ended March 31, 2020. The change to the provisional amounts resulted in a $22.1 million increase to goodwill, a $49.1 million increase to intangible assets and a $17.1 million increase to deferred tax liabilities. Additionally, the change to the provisional amounts resulted in a $13.9 million gain on reacquired rights and an increase in amortization expense and accumulated amortization of $7.0 million, of which $5.2 million relates to the prior year and an $8.0 million increase in inventory, of which $6.0 million relates to the prior year. The prior year amounts were not material to amortization expense or cost of sales within the consolidated statements of earnings for the ended December 31, 2019. Acquisition-related costs of $0.9 million associated with the acquisition were expensed as incurred, and classified as part of general and administrative expenses in the condensed consolidated statement of earnings. Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company’s condensed consolidated financial statements.
The allocation of the total consideration has been recorded as follows (in thousands):
Cash
|
|
$
|
1,061
|
|
Accounts receivable
|
|
|
31,763
|
|
Inventory (1)
|
|
|
47,890
|
|
VAT receivable
|
|
|
12,658
|
|
Deferred tax assets
|
|
|
2,180
|
|
Property, plant, and equipment
|
|
|
12,531
|
|
Reacquired rights intangible assets (2)
|
|
|
46,100
|
|
Customer relationships intangible assets (2)
|
|
|
3,000
|
|
Goodwill
|
|
|
91,563
|
|
Total assets acquired
|
|
|
248,746
|
|
|
|
|
|
|
Accounts payable
|
|
|
25,454
|
|
VAT payable
|
|
|
4,721
|
|
Deferred tax liability
|
|
|
17,129
|
|
Total liabilities assumed
|
|
|
47,304
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
79,798
|
|
Total purchase price
|
|
$
|
121,644
|
|
(1)
|
Included a step-up to fair market adjustment of $8.0 million, which was amortized over a period of less than 12 months.
|
(2)
|
Reacquired rights will be amortized over 1 to 7 years, and customer relationships will be amortized over 10 years.
|
(8)
|
SHARE REPURCHASE PROGRAM
|
On February 6, 2018, the Company's Board of Directors authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which the Company may, from time to time, purchase shares of its Class A common stock, par value $0.001 per share (“Class A common stock”), for an aggregate repurchase price not to exceed $150.0 million. The Share Repurchase Program expires on February 6, 2021. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Act of 1934, subject to market conditions, applicable legal requirements and other relevant factors. The Share Repurchase Program does not obligate the Company to acquire any particular amount of shares of Class A common stock and the program may be suspended or discontinued at any time.
19
The following table provides a summary of the Company’s stock repurchase activities during the three months ended March 31, 2020 and 2019:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Shares repurchased
|
|
|
—
|
|
|
|
457,951
|
|
Average cost per share
|
|
$
|
—
|
|
|
$
|
32.77
|
|
Total cost of shares repurchased (in thousands):
|
|
$
|
—
|
|
|
$
|
15,009
|
|
Basic earnings per share represent net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share, in addition to the weighted average determined for basic earnings per share, includes potential dilutive common shares using the treasury stock method.
The Company has two classes of issued and outstanding common stock: Class A Common Stock and Class B Common Stock. Holders of Class A Common Stock and holders of Class B Common Stock have substantially identical rights, including rights with respect to any declared dividends or distributions of cash or property and the right to receive proceeds on liquidation or dissolution of the Company after payment of the Company’s indebtedness. The two classes have different voting rights, with holders of Class A Common Stock entitled to one vote per share while holders of Class B Common Stock are entitled to ten votes per share on all matters submitted to a vote of stockholders. The Company uses the two-class method for calculating net earnings per share. Basic and diluted net earnings per share of Class A Common Stock and Class B Common Stock are identical. The shares of Class B Common Stock are convertible at any time at the option of the holder into shares of Class A Common Stock on a share-for-share basis. In addition, shares of Class B Common Stock will be automatically converted into a like number of shares of Class A Common Stock upon transfer to any person or entity who is not a permitted transferee.
The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating basic earnings per share (in thousands, except per share amounts):
|
|
Three Months Ended March 31,
|
|
Basic earnings per share
|
|
2020
|
|
|
2019
|
|
Net earnings attributable to Skechers U.S.A., Inc.
|
|
$
|
49,101
|
|
|
$
|
108,758
|
|
Weighted average common shares outstanding
|
|
|
153,555
|
|
|
|
153,480
|
|
Basic earnings per share attributable to
Skechers U.S.A., Inc.
|
|
$
|
0.32
|
|
|
$
|
0.71
|
|
The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating diluted earnings per share (in thousands, except per share amounts):
|
|
Three Months Ended March 31,
|
|
Diluted earnings per share
|
|
2020
|
|
|
2019
|
|
Net earnings attributable to Skechers U.S.A., Inc.
|
|
$
|
49,101
|
|
|
$
|
108,758
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
153,555
|
|
|
|
153,480
|
|
Dilutive effect of nonvested shares
|
|
|
1,097
|
|
|
|
654
|
|
Weighted average common shares outstanding
|
|
|
154,652
|
|
|
|
154,134
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to
Skechers U.S.A., Inc.
|
|
$
|
0.32
|
|
|
$
|
0.71
|
|
There were 36,766 and 540,612 shares excluded from the computation of diluted earnings per share for the three ended March 31, 2020 and 2019, respectively because they are anti-dilutive.
20
On April 17, 2017, the Company’s Board of Directors adopted the 2017 Incentive Award Plan (the “2017 Plan”), which became effective upon approval by the Company’s stockholders on May 23, 2017. The 2017 Plan replaced and superseded in its entirety the 2007 Incentive Award Plan (the “2007 Plan”), which expired pursuant to its terms on May 24, 2017. A total of 10,000,000 shares of Class A Common Stock are reserved for issuance under the 2017 Plan, which provides for grants of ISOs, non-qualified stock options, restricted stock and various other types of equity awards as described in the plan to the employees, consultants and directors of the Company and its subsidiaries. The 2017 Plan is administered by the Company’s Board of Directors with respect to awards to non-employee directors and by the Company’s Compensation Committee with respect to other eligible participants.
For stock-based awards, the Company recognized compensation expense based on the grant date fair value. Share‑based compensation expense was $12.4 million and $8.9 million for the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, the Company redeemed 171,120 shares of Class A Common Stock for $5.7 million to satisfy employee tax withholding requirements. During the three months ended March 31, 2019, the Company redeemed 170,073 shares of Class A Common Stock for $5.8 million to satisfy employee tax withholding requirements, respectively.
A summary of the status and changes of the Company’s nonvested shares related to the 2007 Plan and the 2017 Plan as of and for the three months ended March 31, 2020 is presented below:
|
|
Shares
|
|
|
Weighted Average Grant-Date Fair Value
|
|
Nonvested at December 31, 2019
|
|
|
3,426,823
|
|
|
$
|
32.54
|
|
Granted
|
|
|
1,013,500
|
|
|
$
|
36.96
|
|
Vested
|
|
|
(376,501
|
)
|
|
$
|
34.06
|
|
Cancelled
|
|
|
(21,000
|
)
|
|
$
|
36.81
|
|
Nonvested at March 31, 2020
|
|
|
4,042,822
|
|
|
$
|
33.49
|
|
As of March 31, 2020, there was $106.3 million of unrecognized compensation cost related to nonvested common shares. The cost is expected to be amortized over a weighted average period of 2.4 years.
On April 17, 2017, the Company’s Board of Directors adopted the 2018 Employee Stock Purchase Plan (the “2018 ESPP”), which the Company’s stockholders approved on May 23, 2017. The 2018 ESPP replaced the Company’s previous employee stock purchase plan, the Skechers U.S.A., Inc. 2008 Employee Stock Purchase Plan (the “2008 ESPP”), which expired pursuant to its terms on January 1, 2018. The 2018 Employee Stock Purchase Plan provides eligible employees of the Company and its subsidiaries with the opportunity to purchase shares of the Company’s Class A Common Stock at a purchase price equal to 85% of the Class A Common Stock’s fair market value on the first trading day or last trading day of each purchase period, whichever is lower. The 2018 ESPP generally provides for two six-month purchase periods every twelve months: June 1 through November 30 and December 1 through May 31. Eligible employees participating in the 2018 ESPP will, for a purchase period, be able to invest up to 15% of their compensation through payroll deductions during each purchase period. A total of 5,000,000 shares of Class A Common Stock are available for issuance under the 2018 ESPP. The purchase price discount and the look-back feature cause the 2018 ESPP to be compensatory and the Company recognizes compensation expense which is computed using Black-Scholes options pricing model.
On March 27, 2020, the President signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. While we are able to take advantage of certain of these provisions, none had a material impact on our business, financial condition, results of operations, or liquidity for the quarter. We will continue to monitor the impact that the CARES Act may have on our business, financial condition, results of operations, or liquidity.
21
Income tax expense and the effective tax rate for the three months ended March 31, 2020 and 2019 were as follows (dollar amounts in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Income tax expense
|
|
$
|
7,429
|
|
|
$
|
31,724
|
|
Effective tax rate
|
|
|
15.3
|
%
|
|
|
19.5
|
%
|
The tax provisions for the three months ended March 31, 2020 and 2019 were computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year. The Company’s tax rate is subject to management’s quarterly review and revision, as necessary.
The Company’s provision for income tax expense and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign earnings (loss) before income taxes. In the foreign jurisdictions in which the Company has operations, the applicable statutory rates range from 0.0% to 34.0%, which is on average significantly lower than the U.S. federal and state combined statutory rate of approximately 25%.
Due to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017, the Company is subject to a tax on global intangible low-taxed income (“GILTI”). GILTI is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Companies subject to GILTI have the option to account for the GILTI tax as a period cost when incurred, or to recognize deferred taxes for temporary differences including outside basis differences expected to reverse as GILTI. The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in its effective tax rate calculation for the three months ended March 31, 2020 and 2019.
For the three months ended March 31, 2020, the decrease in the effective tax rate was primarily due to reduced negative impact of $0.7 million in discrete tax expense as compared to the negative impact of $2.9 million in discrete tax expense in the three months ended March 31, 2019.
As of March 31, 2020, the Company had approximately $1,158.8 million in cash and cash equivalents, of which $476.1 million, or 41%, was held outside the U.S. Of the $476.1 million held by the Company’s non-U.S. subsidiaries, approximately $204.7 million is available for repatriation to the U.S. without incurring U.S. federal income taxes and applicable non-U.S. income and withholding taxes in excess of the amounts accrued in the Company’s condensed consolidated financial statements as of March 31, 2020.
On July 27, 2015, the United States Tax Court issued a decision (the “Tax Court Decision”) in Altera Corp. v. Commissioner, which concluded that related parties in a cost sharing arrangement are not required to share expenses related to share-based compensation. The Tax Court Decision was appealed by the Commissioner to the Ninth Circuit Court of Appeals (the “Ninth Circuit”). On June 7, 2019, a three-judge panel from the Ninth Circuit issued an opinion (the “Altera Ninth Circuit Panel Opinion”) that reversed the Tax Court Decision. Based on the Altera Ninth Circuit Panel Opinion, the Company recorded a cumulative income tax expense of $1.5 million in the second quarter of 2019. On July 22, 2019, Altera requested a rehearing before the full Ninth Circuit, but the request was rejected on November 11, 2019. Altera subsequently appealed from the Ninth Circuit to the Supreme Court. As a result, the final outcome of the case is uncertain. If the Altera Ninth Circuit Panel Opinion is reversed, we would anticipate recording an income tax benefit at that time.
The Company’s cash and cash equivalents held in the U.S. and cash provided from operations are sufficient to meet the Company’s liquidity needs in the U.S. for the next twelve months The Company has provided for the tax impact of expected distributions from its joint venture in China as well as from its subsidiary in Chile to its intermediate parent company in Switzerland. Otherwise, because of the need for cash for operating capital and continued overseas expansion, the Company does not foresee the need for any of our other foreign subsidiaries to distribute funds up to an intermediate foreign parent company in any form of taxable dividend. Under current applicable tax laws, if the Company choses to repatriate some or all of the funds it has designated as indefinitely reinvested outside the U.S., the amount repatriated would not be subject to U.S. income taxes but may be subject to applicable non-U.S. income and withholding taxes, and to certain state income taxes.
22
(12)
|
BUSINESS AND CREDIT CONCENTRATIONS
|
The Company generates sales in the United States; however, several of its products are sold into various foreign countries, which subjects the Company to the risks of doing business abroad. In addition, the Company operates in the footwear industry, and its business depends on the general economic environment and levels of consumer spending. Changes in the marketplace may significantly affect management’s estimates and the Company’s performance. Management performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable, which generally do not require collateral from customers, were $309.9 million and $228.5 million before allowances for bad debts, sales returns and chargebacks at March 31, 2020 and December 31, 2019, respectively. Foreign accounts receivable, which in some cases are collateralized by letters of credit, were $514.1 million and $440.9 million before allowance for bad debts, sales returns and chargebacks at March 31, 2020 and December 31, 2019, respectively. The Company’s credit losses attributable to write-offs for the three months ended March 31, 2020 and 2019 were $1.5 million and $2.2 million, respectively.
Assets located outside the U.S. consist primarily of cash, accounts receivable, inventory, property, plant and equipment, and other assets. Net assets held outside the United States were $2,671.3 million and $2,643.8 million at March 31, 2020 and December 31, 2019, respectively.
The Company’s sales to its five largest customers accounted for approximately 11.4% and 10.7% of total sales for the three months ended March 31, 2020 and 2019, respectively.
The Company’s top five manufacturers produced the following, as a percentage of total production, for the three months ended March 31, 2020 and 2019:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Manufacturer #1
|
|
|
24.9
|
%
|
|
|
16.3
|
%
|
Manufacturer #2
|
|
|
7.5
|
%
|
|
|
9.3
|
%
|
Manufacturer #3
|
|
|
6.7
|
%
|
|
|
6.0
|
%
|
Manufacturer #4
|
|
|
3.9
|
%
|
|
|
5.1
|
%
|
Manufacturer #5
|
|
|
3.7
|
%
|
|
|
5.0
|
%
|
|
|
|
46.7
|
%
|
|
|
41.7
|
%
|
The majority of the Company’s products are produced in China and Vietnam. The Company’s operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations and revaluations, custom duties, tariffs and related fees, various import controls and other monetary barriers, restrictions on the transfer of funds, labor unrest and strikes, local disruptions and, in certain parts of the world, political instability. The Company believes it has acted to reduce these risks by diversifying manufacturing among various factories.
23
(13)
|
SEGMENT AND GEOGRAPHIC REPORTING
|
The Company has three reportable segments – domestic wholesale sales, international wholesale sales, and direct-to-consumer sales, which includes ecommerce sales. Management evaluates segment performance based primarily on sales and gross profit. All other costs and expenses of the Company are analyzed on an aggregate basis, and these costs are not allocated to the Company’s segments. Sales, gross margins, identifiable assets and additions to property and equipment for the domestic wholesale, international wholesale, direct-to-consumer sales segments on a combined basis were as follows (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Sales:
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
377,962
|
|
|
$
|
346,694
|
|
International wholesale
|
|
|
575,199
|
|
|
|
628,067
|
|
Direct-to-consumer
|
|
|
289,184
|
|
|
|
301,995
|
|
Total
|
|
$
|
1,242,345
|
|
|
$
|
1,276,756
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
145,277
|
|
|
$
|
126,451
|
|
International wholesale
|
|
|
240,475
|
|
|
|
288,728
|
|
Direct-to-consumer
|
|
|
161,916
|
|
|
|
175,330
|
|
Total
|
|
$
|
547,668
|
|
|
$
|
590,509
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
1,948,881
|
|
|
$
|
1,472,323
|
|
International wholesale
|
|
|
2,032,085
|
|
|
|
2,100,042
|
|
Direct-to-consumer
|
|
|
1,414,054
|
|
|
|
1,320,578
|
|
Total
|
|
$
|
5,395,020
|
|
|
$
|
4,892,943
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Additions to property, plant and equipment:
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
11,818
|
|
|
$
|
7,734
|
|
International wholesale
|
|
|
44,900
|
|
|
|
21,992
|
|
Direct-to-consumer
|
|
|
18,169
|
|
|
|
8,418
|
|
Total
|
|
$
|
74,887
|
|
|
$
|
38,144
|
|
24
Geographic Information:
The following summarizes the Company’s operations in different geographic areas for the periods indicated (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Sales (1):
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
555,174
|
|
|
$
|
539,404
|
|
Canada
|
|
|
45,955
|
|
|
|
47,588
|
|
Other international (2)
|
|
|
641,216
|
|
|
|
689,764
|
|
Total
|
|
$
|
1,242,345
|
|
|
$
|
1,276,756
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
449,611
|
|
|
$
|
439,132
|
|
Canada
|
|
|
6,770
|
|
|
|
7,286
|
|
Other international (2)
|
|
|
331,599
|
|
|
|
292,507
|
|
Total
|
|
$
|
787,980
|
|
|
$
|
738,925
|
|
(1)
|
The Company has subsidiaries in Asia, Central America, Europe, the Middle East, North America, and South America that generate sales within those respective countries and in some cases the neighboring regions. The Company has joint ventures in Asia, Mexico, and Israel that generate sales from those regions. The Company also has a subsidiary in Switzerland that generates sales from that country in addition to sales to distributors located in numerous non-European countries. External sales are attributable to geographic regions based on the location of each of the Company’s subsidiaries. A subsidiary may earn revenue from external sales and external royalties, or from inter-subsidiary sales, royalties, fees and commissions provided in accordance with certain inter-subsidiary agreements. The resulting earnings of each subsidiary in its respective country are recognized under each respective country’s tax code. Inter-subsidiary revenues and expenses subsequently are eliminated in the Company’s consolidated financial statements and are not included as part of the external sales reported in different geographic areas.
|
(2)
|
Other international consists of Asia, Mexico, Central America, Europe, the Middle East, and South America.
|
In response to the State Department’s trade restrictions with Sudan and Syria, the Company does not authorize or permit any distribution or sales of its product in these countries, and the Company is not aware of any current or past distribution or sales of our product in Sudan or Syria.
(14)
|
RELATED PARTY TRANSACTIONS
|
On July 29, 2010, the Company formed the Skechers Foundation (the “Foundation”), which is a 501(c)(3) non-profit entity that does not have any shareholders or members. The Foundation is not a subsidiary of, and is not otherwise affiliated with the Company, and the Company does not have a financial interest in the Foundation. However, two officers and directors of the Company, Michael Greenberg, the Company’s President, and David Weinberg, the Company’s Chief Operating Officer, are also officers and directors of the Foundation. During the three months ended March 31, 2020 and 2019, the Company made contributions of $500,000 and $250,000 to the Foundation, respectively.
In accordance with U.S. GAAP, the Company records a liability in its condensed consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings are inherently difficult to predict, particularly when the matters are in the procedural stages or with unspecified or indeterminate claims for damages, potential penalties, or fines. Accordingly, the Company cannot determine the final amount, if any, of its liability beyond the amount accrued in the condensed consolidated financial statements as of March 31, 2020, nor is it possible to estimate what litigation-related costs will be in the future; however, the Company believes that the likelihood that claims related to litigation would result in a material loss to the Company, either individually or in the aggregate, is remote.
25
COVID-19
As of the filing date of this report, many of our Company-owned retail stores globally have been impacted by temporary closures, reduced store hours or reduced traffic. The Company has seen, and expects to continue to see material reductions in sales as a result of COVID-19. In addition, these reductions in sales have not been offset by proportional decreases in expenses, as the Company continues to incur store occupancy costs such as operating lease costs, depreciation expense, and certain other costs such as compensation and administrative expenses, resulting in a negative effect on the relationship between the Company’s expenses and sales. The Company continues to take steps to manage the Company's resources conservatively by reducing and/or deferring capital expenditures, aligning inventory purchases with expected sales, reducing advertising expenditures, reducing compensation related costs, in part through employee furloughs, and reducing overall operating expenses to mitigate the adverse impact of the pandemic. The current circumstances are dynamic and the impacts of COVID-19 on the Company’s business operations, including the duration and impact on overall consumer demand, cannot be reasonably estimated at this time. The Company anticipates COVID-19 will have a material adverse impact on its business, results of operations, financial condition and cash flows for the year-ending December 31, 2020. As the COVID-19 pandemic is complex and rapidly evolving, the Company's plans may change. In addition, the Company could experience other material impacts as a result of COVID-19, including, but not limited to, charges from potential adjustments of the carrying amount of accounts receivable, inventory, goodwill, intangible assets, asset impairment charges, and deferred tax valuation allowances.
Construction Loan for U.S. Distribution Center
On April 3, 2020, the JV, through HF Logistics-SKX T2, LLC, a Delaware limited liability company and wholly-owned subsidiary of the JV (“HF-T2), we entered into a construction loan agreement with Bank of America, N.A. as administrative agent and lender (collectively, the “2020 Construction Loan Agreement”), pursuant to which the JV obtained a loan of up to $73.0 million used for construction to expand our U.S. distribution center (the “2020 Construction Loan”). Under the 2020 Construction Loan Agreement, the interest rate per annum on the 2020 Construction Loan is LIBOR Daily Floating Rate (as defined therein) plus a margin of 190 basis points, reducing to 175 basis points upon substantial completion of the construction and certain other conditions being satisfied. The maturity date of the 2020 Construction Loan is April 3, 2025. The obligations of the JV under the 2020 Construction Loan Agreement are guaranteed by TGD Holdings I, LLC, which is an affiliate of HF.
26