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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-14429

SKECHERS U.S.A., INC.

(Exact name of registrant as specified in its charter)

 

 Delaware

 

95-4376145

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

228 Manhattan Beach Blvd.

Manhattan Beach, California

 

90266

(Address of Principal Executive Office)

 

(Zip Code)

 

(310) 318-3100

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol

 

Name of each exchange on which registered

Class A Common Stock, par value $0.001 per share

 

SKX

 

New York Stock Exchange

 

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 No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

As of April 30, 2021, 134,172,217 shares of the registrant’s Class A Common Stock, $0.001 par value per share, were outstanding.

As of April 30, 2021, 20,949,425 shares of the registrant’s Class B Common Stock, $0.001 par value per share, were outstanding.

 

 

 

 


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements:

 

 

Condensed Consolidated Balance Sheets (Unaudited)

3

 

Condensed Consolidated Statements of Earnings (Unaudited)

4

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

5

 

Condensed Consolidated Statements of Equity (Unaudited)

6

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

7

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

 

Item 4.

Controls and Procedures

19

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

20

 

Item 1A.

Risk Factors

20

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

 

Item 3.

Defaults Upon Senior Securities

20

 

Item 4.

Mine Safety Disclosures

20

 

Item 5.

Other Information

20

Item 6.

Exhibits

21

 

Signatures

22

 

 

 

 

2


 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

As of March 31,

 

 

As of December 31,

 

(in thousands, except par values)

 

2021

 

 

2020

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,284,540

 

 

$

1,370,826

 

Short-term investments

 

 

106,028

 

 

 

100,767

 

Trade accounts receivable, less allowances of $47,468 and $48,562

 

 

798,836

 

 

 

619,800

 

Other receivables

 

 

70,758

 

 

 

69,222

 

Total receivables

 

 

869,594

 

 

 

689,022

 

Inventory

 

 

1,067,437

 

 

 

1,016,774

 

Prepaid expenses and other current assets

 

 

137,138

 

 

 

166,962

 

Total current assets ($920,986 and $862,954 related to VIEs)

 

 

3,464,737

 

 

 

3,344,351

 

Property, plant and equipment, net

 

 

992,512

 

 

 

935,441

 

Operating lease right-of-use assets

 

 

1,159,339

 

 

 

1,171,521

 

Deferred tax assets

 

 

63,339

 

 

 

63,884

 

Long-term investments

 

 

124,379

 

 

 

108,412

 

Goodwill

 

 

93,497

 

 

 

93,497

 

Other assets, net

 

 

87,763

 

 

 

95,263

 

Total non-current assets ($686,035 and $682,068 related to VIEs)

 

 

2,520,829

 

 

 

2,468,018

 

TOTAL ASSETS

 

$

5,985,566

 

 

$

5,812,369

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current installments of long-term borrowings

 

$

60,942

 

 

$

52,250

 

Short-term borrowings

 

 

1,138

 

 

 

3,297

 

Accounts payable

 

 

807,949

 

 

 

744,077

 

Operating lease liabilities

 

 

217,241

 

 

 

204,370

 

Accrued expenses

 

 

184,109

 

 

 

208,712

 

Total current liabilities ($544,355 and $526,466 related to VIEs)

 

 

1,271,379

 

 

 

1,212,706

 

Long-term borrowings, excluding current installments

 

 

717,595

 

 

 

679,415

 

Long-term operating lease liabilities

 

 

1,039,763

 

 

 

1,065,069

 

Deferred tax liabilities

 

 

10,835

 

 

 

11,439

 

Other long-term liabilities

 

 

114,448

 

 

 

118,077

 

Total non-current liabilities ($385,807 and $365,235 related to VIEs)

 

 

1,882,641

 

 

 

1,874,000

 

Total liabilities

 

 

3,154,020

 

 

 

3,086,706

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred Stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

Class A Common Stock, $0.001 par value; 500,000 shares authorized;

   134,172 and 133,618 shares issued and outstanding

 

 

134

 

 

 

134

 

Class B Common Stock, $0.001 par value; 75,000 shares authorized;

   20,949 and 21,016 shares issued and outstanding

 

 

21

 

 

 

21

 

Additional paid-in capital

 

 

377,350

 

 

 

372,165

 

Accumulated other comprehensive loss

 

 

(36,349

)

 

 

(27,285

)

Retained earnings

 

 

2,234,973

 

 

 

2,136,400

 

Skechers U.S.A., Inc. equity

 

 

2,576,129

 

 

 

2,481,435

 

Noncontrolling interests

 

 

255,417

 

 

 

244,228

 

Total stockholders' equity

 

 

2,831,546

 

 

 

2,725,663

 

TOTAL LIABILITIES AND EQUITY

 

$

5,985,566

 

 

$

5,812,369

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(in thousands, except per share data)

 

2021

 

 

2020

 

Sales

 

$

1,428,418

 

 

$

1,242,345

 

Cost of sales

 

 

748,796

 

 

 

694,677

 

Gross profit

 

 

679,622

 

 

 

547,668

 

Royalty income

 

 

6,037

 

 

 

5,248

 

 

 

 

685,659

 

 

 

552,916

 

Operating expenses

 

 

 

 

 

 

 

 

Selling

 

 

85,296

 

 

 

74,055

 

General and administrative

 

 

442,695

 

 

 

434,051

 

Selling, general and administrative

 

 

527,991

 

 

 

508,106

 

Earnings from operations

 

 

157,668

 

 

 

44,810

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest income

 

 

796

 

 

 

2,307

 

Interest expense

 

 

(4,113

)

 

 

(1,999

)

Other, net

 

 

(10,857

)

 

 

3,471

 

Total other income (expense)

 

 

(14,174

)

 

 

3,779

 

Earnings before income tax expense

 

 

143,494

 

 

 

48,589

 

Income tax expense

 

 

28,985

 

 

 

7,429

 

Net earnings

 

 

114,509

 

 

 

41,160

 

Less: Net earnings (loss) attributable to noncontrolling interests

 

 

15,936

 

 

 

(7,941

)

Net earnings attributable to Skechers U.S.A., Inc.

 

$

98,573

 

 

$

49,101

 

Net earnings per share attributable to Skechers U.S.A., Inc.

 

 

 

 

 

 

 

 

Basic

 

$

0.64

 

 

$

0.32

 

Diluted

 

$

0.63

 

 

$

0.32

 

Weighted-average shares used in calculating net earnings per share

   attributable to Skechers U.S.A, Inc.

 

 

 

 

 

 

 

 

Basic

 

 

154,818

 

 

 

153,555

 

Diluted

 

 

155,936

 

 

 

154,652

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended March 31,

 

(in thousands)

2021

 

 

2020

 

Net earnings

 

$

114,509

 

 

$

41,160

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

Loss on foreign currency translation adjustment

 

 

(12,505

)

 

 

(29,764

)

Comprehensive income

 

 

102,004

 

 

 

11,396

 

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

 

12,495

 

 

 

(14,879

)

Comprehensive income attributable to Skechers U.S.A., Inc.

 

$

89,509

 

 

$

26,275

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

 

 

SHARES

 

 

AMOUNT

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLASS A

 

 

CLASS B

 

 

CLASS A

 

 

CLASS B

 

 

ADDITIONAL

 

 

OTHER

 

 

 

 

 

 

SKECHERS

 

 

NON

 

 

TOTAL

 

 

 

COMMON

 

 

COMMON

 

 

COMMON

 

 

COMMON

 

 

PAID-IN

 

 

COMPREHENSIVE

 

 

RETAINED

 

 

U.S.A., INC.

 

 

CONTROLLING

 

 

STOCKHOLDERS'

 

(in thousands)

 

STOCK

 

 

STOCK

 

 

STOCK

 

 

STOCK

 

 

CAPITAL

 

 

LOSS

 

 

EARNINGS

 

 

EQUITY

 

 

INTEREST

 

 

EQUITY

 

Balance at December 31, 2020

 

 

133,618

 

 

 

21,016

 

 

$

134

 

 

$

21

 

 

$

372,165

 

 

$

(27,285

)

 

$

2,136,400

 

 

$

2,481,435

 

 

$

244,228

 

 

$

2,725,663

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

98,573

 

 

 

98,573

 

 

 

15,936

 

 

 

114,509

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,064

)

 

 

 

 

 

(9,064

)

 

 

(3,441

)

 

 

(12,505

)

Contribution from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

14

 

Purchase of noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,856

)

 

 

 

 

 

 

 

 

(6,856

)

 

 

(3,072

)

 

 

(9,928

)

Net unrealized gain on derivative contract

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,752

 

 

 

1,752

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,041

 

 

 

 

 

 

 

 

 

12,041

 

 

 

 

 

 

12,041

 

Shares issued under the incentive award plan

 

 

487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Class B Common Stock into Class A

   Common Stock

 

 

67

 

 

 

(67

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2021

 

 

134,172

 

 

 

20,949

 

 

$

134

 

 

$

21

 

 

$

377,350

 

 

$

(36,349

)

 

$

2,234,973

 

 

$

2,576,129

 

 

$

255,417

 

 

$

2,831,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

 

131,071

 

 

 

22,408

 

 

$

131

 

 

$

22

 

 

$

306,669

 

 

$

(29,993

)

 

$

2,037,836

 

 

$

2,314,665

 

 

$

221,442

 

 

$

2,536,107

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49,101

 

 

 

49,101

 

 

 

(7,941

)

 

 

41,160

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,826

)

 

 

 

 

 

(22,826

)

 

 

(6,938

)

 

 

(29,764

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,865

)

 

 

(14,865

)

Noncontrolling interest of acquired businesses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49,045

 

 

 

49,045

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,441

 

 

 

 

 

 

 

 

 

12,441

 

 

 

 

 

 

12,441

 

Shares issued under the incentive award plan

 

 

376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares redeemed for employee tax withholdings

 

 

(171

)

 

 

 

 

 

 

 

 

 

 

 

(5,659

)

 

 

 

 

 

 

 

 

(5,659

)

 

 

 

 

 

(5,659

)

Balance at March 31, 2020

 

 

131,276

 

 

 

22,408

 

 

$

131

 

 

$

22

 

 

$

313,451

 

 

$

(52,819

)

 

$

2,086,937

 

 

$

2,347,722

 

 

$

240,743

 

 

$

2,588,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


 

 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Three Months Ended March 31,

 

(in thousands)

 

2021

 

 

2020

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net earnings

 

$

114,509

 

 

$

41,160

 

Adjustments to reconcile net earnings to net cash from operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

33,008

 

 

 

39,559

 

Provision for bad debts and returns

 

 

7,348

 

 

 

26,277

 

Stock compensation

 

 

12,041

 

 

 

12,441

 

Deferred income taxes

 

 

(446

)

 

 

(4,885

)

Net settlement gain

 

 

 

 

 

(13,877

)

Net foreign currency adjustments

 

 

6,015

 

 

 

6,513

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Receivables

 

 

(196,331

)

 

 

(187,786

)

Inventory

 

 

(57,392

)

 

 

77,539

 

Other assets

 

 

29,705

 

 

 

29,733

 

Accounts payable

 

 

69,184

 

 

 

(141,815

)

Other liabilities

 

 

(31,415

)

 

 

(19,840

)

Net cash used in operating activities

 

 

(13,774

)

 

 

(134,981

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(84,237

)

 

 

(74,887

)

Purchases of investments

 

 

(71,132

)

 

 

(43,788

)

Proceeds from sales and maturities of investments

 

 

49,905

 

 

 

42,418

 

Net cash used in investing activities

 

 

(105,464

)

 

 

(76,257

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repayments on long-term borrowings

 

 

(46

)

 

 

(107

)

Proceeds from long-term borrowings

 

 

46,918

 

 

 

570,767

 

Proceeds from (repayments on) short-term borrowings, net

 

 

(2,159

)

 

 

7,912

 

Payments for employee taxes related to stock compensation

 

 

 

 

 

(5,659

)

Purchase of noncontrolling interest

 

 

(9,928

)

 

 

 

Contributions from noncontrolling interests

 

 

14

 

 

 

 

Distributions to noncontrolling interests

 

 

 

 

 

(14,865

)

Net cash provided by financing activities

 

 

34,799

 

 

 

558,048

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,847

)

 

 

(12,920

)

Net change in cash and cash equivalents

 

 

(86,286

)

 

 

333,890

 

Cash and cash equivalents at beginning of the period

 

 

1,370,826

 

 

 

824,876

 

Cash and cash equivalents at end of the period

 

$

1,284,540

 

 

$

1,158,766

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the period for

 

 

 

 

 

 

 

 

Interest

 

$

3,992

 

 

$

2,000

 

Income taxes, net

 

 

18,291

 

 

 

13,044

 

Non-cash transactions

 

 

 

 

 

 

 

 

ROU assets exchanged for lease liabilities

 

 

42,143

 

 

 

9,581

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7


 

 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)

GENERAL

Basis of Presentation

The accompanying unaudited 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 (“GAAP”), for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S‑X. In the opinion of management, all normal adjustments and accruals considered necessary to provide a fair statement of the results of operations for the interim periods presented have been included. The December 31, 2020 balance sheet data was derived from audited financial statements; however, the accompanying notes to condensed consolidated financial statements do not include all of the annual disclosures required under GAAP and should be read in conjunction with the Company’s 2020 Annual Report on Form 10-K.

As previously disclosed in the Company’s 2020 Annual Report on Form 10-K, the duration and magnitude of the COVID-19 pandemic remains uncertain. The COVID-19 pandemic has had and may continue to have a significant impact on the Company’s consolidated results of operations, financial position and cash flows.

Noncontrolling Interests

The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products throughout Mexico, Asia and the Middle East or to construct the Company’s domestic distribution facility. These joint ventures are variable interest entities (“VIE”), and the Company is considered the primary beneficiary. This determination is based on the relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. Specifically, the Company has both of the following characteristics: (a) the power to direct the activities of the entity 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. The assets and liabilities and results of operations of these entities are included in the Company’s condensed consolidated financial statements, even though the Company may not hold a majority equity interest.

In March 2021, the minority interest related to the Hong Kong joint venture was purchased for $10.0 million. Other than the change in the Company’s ownership of the Hong Kong entity, which continues to be included in the Company’s condensed consolidated financial statements, there have been no changes during 2021 in the accounting treatment or characterization of any previously identified variable interest entities. The Company continues to reassess these relationships quarterly. The assets of these joint ventures are restricted, as 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value hierarchy as defined by applicable accounting standards prioritizes the use of inputs used in valuation techniques into the following three levels:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data.

 

Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity’s own assumptions.

The Company’s Level 1 investments primarily include money market funds and U.S. Treasury securities; Level 2 investments primarily include corporate notes and bonds, asset-backed securities, U.S. Agency securities, and actively traded mutual funds; and the Company does not currently have any Level 3 assets or liabilities. The Company has one Level 2 derivative instrument which is an interest rate swap related to the refinancing of its U.S. distribution center (see Note 4 – Financial Commitments) classified as other long-term liabilities. 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. 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 carrying amount of receivables, payables and other amounts arising out of the normal course of business 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 on current rates and terms available to the Company for similar debt.

8


 

DERIVATIVE INSTRUMENTS

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, the Company uses an interest rate swap as part of its interest rate risk management strategy. The Company’s interest rate swap, designated as a cash flow hedge, involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. By utilizing an interest rate swap, the Company is exposed to credit-related losses in the event that the counterparty fails to perform under the terms of the derivative contract. To mitigate this risk, the Company enters into derivative contracts with major financial institutions based upon credit ratings and other factors. The Company continually assesses the creditworthiness of its counterparties. As of March 31, 2021, all counterparties to the interest rate swap had performed in accordance with their contractual obligations.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, (“ASU 2019-12”). ASU 2019-12 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 Company adopted ASU 2019-12 on January 1, 2021, and the adoption did not 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, as amended and supplemented by subsequent ASUs (collectively, “ASU 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 borrowing instruments, which use LIBOR as a reference rate, and is effective immediately, but is only available through December 31, 2022. The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.

(2)

CASH, CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS

The following tables show the Company’s cash, cash equivalents, short-term and long-term investments by significant investment category:

 

 

 

As of March 31, 2021

 

(in thousands)

 

Adjusted Cost

 

 

Fair Value

 

 

Cash and Cash Equivalents

 

 

Short-Term Investments

 

 

Long-Term Investments

 

Cash

 

$

866,621

 

 

$

866,621

 

 

$

866,621

 

 

$

 

 

$

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

417,919

 

 

 

417,919

 

 

 

417,919

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

22,551

 

 

 

22,551

 

 

 

 

 

 

8,362

 

 

 

14,189

 

Total level 1

 

 

440,470

 

 

 

440,470

 

 

 

417,919

 

 

 

8,362

 

 

 

14,189

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes and bonds

 

 

138,507

 

 

 

138,507

 

 

 

 

 

 

93,422

 

 

 

45,085

 

Asset-backed securities

 

 

25,831