See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019 and 2018
(Unaudited)
Basis of Presentation
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, 2018.
The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2019.
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.
8
As of August 12, 2015, the Comp
any entered into an interest rate swap agreement concurrent with refinancing its domestic distribution cent
er construction loan (see Note 4
). The fair value of the interest rate swap was determined using the market standard methodology of netting the disco
unted 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. GA
AP, 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 r
ate swap were within Level 2 of the fair value hierarchy. As of
March 31, 2019
and
December 31, 2018
, the interest rate swap was a Level 2 derivative and
was classified as other long-term liabilities in the Company’s
condensed
consolidated balance sheet
s
.
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 our other international customers. For our distributor sales, the goods are generally delivered directly from the independent factories to third-party distribution centers or to our 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 retail revenues primarily from the sale of footwear to customers at retail locations or through the Company’s websites. For our in-store sales, the Company recognizes revenue at the point of sale. For sales made through our websites, we recognize revenue upon shipment to the customer which is when the customer obtains control of the promised good. Sales and value added taxes collected from e-commerce or retail 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 our 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 e-commerce 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 no allowance for doubtful accounts for retail and e-commerce sales is necessary.
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.
9
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, 2019 and December 31, 2018, the Company’s sales returns liability totaled $75.0 million and $67.3 million, respectively, and was included in accrued expenses in the condensed consolidated balance sheets.
Accounting Standards Adopted in 2019
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02,
Leases
(“ASU 2016-02”), to enhance the transparency and comparability of financial reporting related to leasing arrangements. Subsequently, the FASB issued various amendments to ASU 2016-02 (collectively with ASU 2016-02 “ASC 842”). The company adopted ASC 842 on January 1, 2019, using the optional transition method and also elected to use the 'package of practical expedients', which permits the company to treat conclusions about lease identification, lease classification and initial direct costs as fixed. Therefore, the company will not apply the standard to the comparative periods presented in the company condensed consolidated financial statements. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic lease methodology under ASC 840,
Leases.
The company elected the practical expedient that permits the company not to recognize right-of-use assets and related liabilities that arise from short-term leases with terms of less than twelve months. As a result of the new lease standard operating leases are required to be recognized on the balance sheet as right-of-use (“ROU”) assets and operating lease liabilities. Disclosure requirements have been enhanced with the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases.
The standard did not have an impact on debt-covenant compliance under the Company's current debt agreements because it is a result of a change in accounting principle.
See Note 3 - Leases for additional information regarding the accounting for leases.
In February 2018, the FASB issued ASU No. 2018-02,
“Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,”
(“ASU 2018-02”). The standard permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company has elected not to reclassify the income tax effects of the 2017 Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for the Company’s annual and interim reporting periods beginning December 15, 2018, with early adoption permitted.
The Company adopted ASU 2018-02 on January 1, 2019 and the adoption of this ASU did not have a material impact on its condensed consolidated financial statements.
Recent Accounting Pronouncements
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 is currently evaluating the impact of ASU 2018-13; 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 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 is currently evaluating the impact of ASU 2018-15; 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.
10
(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 and classified as trading securities, U.S. Treasury securities, corporate notes and bonds, asset-backed securities and U.S. Agency securities, that 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, 2019 and December 31, 2018 (in thousands):
|
|
March 31, 2019
|
|
|
|
Adjusted Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Short-Term Investments
|
|
|
Long-Term Investments
|
|
Cash
|
|
$
|
527,116
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
527,116
|
|
|
$
|
527,116
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
160,382
|
|
|
|
-
|
|
|
|
-
|
|
|
|
160,382
|
|
|
|
160,382
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Treasury securities
|
|
|
9,994
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,994
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,994
|
|
Total level 1
|
|
|
170,376
|
|
|
|
-
|
|
|
|
-
|
|
|
|
170,376
|
|
|
|
160,382
|
|
|
|
-
|
|
|
|
9,994
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Corporate notes and bonds
|
|
|
124,409
|
|
|
|
-
|
|
|
|
-
|
|
|
|
124,409
|
|
|
|
-
|
|
|
|
88,656
|
|
|
|
35,753
|
|
Asset-backed securities
|
|
|
23,387
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,387
|
|
|
|
-
|
|
|
|
2,370
|
|
|
|
21,017
|
|
U.S. Agency securities
|
|
|
12,598
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,598
|
|
|
|
-
|
|
|
|
5,361
|
|
|
|
7,237
|
|
Mutual funds
|
|
|
21,905
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,905
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,905
|
|
Total level 2
|
|
|
182,299
|
|
|
|
-
|
|
|
|
-
|
|
|
|
182,299
|
|
|
|
-
|
|
|
|
96,387
|
|
|
|
85,912
|
|
TOTAL
|
|
$
|
879,791
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
879,791
|
|
|
$
|
687,498
|
|
|
$
|
96,387
|
|
|
$
|
95,906
|
|
|
|
December 31, 2018
|
|
|
|
Adjusted Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Short-Term Investments
|
|
|
Long-Term Investments
|
|
Cash
|
|
$
|
713,624
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
713,624
|
|
|
$
|
713,624
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
158,613
|
|
|
|
-
|
|
|
|
-
|
|
|
|
158,613
|
|
|
|
158,613
|
|
|
|
-
|
|
|
|
-
|
|
U.S. Treasury securities
|
|
|
6,955
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,955
|
|
|
|
-
|
|
|
|
4,979
|
|
|
|
1,976
|
|
Total level 1
|
|
|
165,568
|
|
|
|
-
|
|
|
|
-
|
|
|
|
165,568
|
|
|
|
158,613
|
|
|
|
4,979
|
|
|
|
1,976
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Corporate notes and bonds
|
|
|
132,280
|
|
|
|
-
|
|
|
|
-
|
|
|
|
132,280
|
|
|
|
-
|
|
|
|
88,412
|
|
|
|
43,868
|
|
Asset-backed securities
|
|
|
23,310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,310
|
|
|
|
-
|
|
|
|
2,115
|
|
|
|
21,195
|
|
U.S. Agency securities
|
|
|
10,272
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,272
|
|
|
|
-
|
|
|
|
4,523
|
|
|
|
5,749
|
|
Mutual funds
|
|
|
20,957
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,957
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,957
|
|
Total level 2
|
|
|
186,819
|
|
|
|
-
|
|
|
|
-
|
|
|
|
186,819
|
|
|
|
-
|
|
|
|
95,050
|
|
|
|
91,769
|
|
TOTAL
|
|
$
|
1,066,011
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,066,011
|
|
|
$
|
872,237
|
|
|
$
|
100,029
|
|
|
$
|
93,745
|
|
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 typically 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 other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. As of March 31, 2019, the Company does not consider any of its investments to be other-than-temporarily impaired.
11
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, 2019. 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 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, 2019, current liabilities related to operating leases were $170.8 million.
The future minimum obligations under operating leases in effect as of December 31, 2018 having a noncancelable term in excess of one year as determined prior to the adoption of ASU 842 are as follows (in thousands):
|
|
December 31, 2018
|
|
2019
|
|
$
|
251,711
|
|
2020
|
|
|
228,716
|
|
2021
|
|
|
203,979
|
|
2022
|
|
|
178,850
|
|
2023
|
|
|
181,227
|
|
Thereafter
|
|
|
596,901
|
|
|
|
$
|
1,641,384
|
|
|
|
|
|
|
Operating lease cost and other information (in thousands):
|
|
March 31, 2019
|
|
Fixed lease cost
|
|
$
|
54,502
|
|
Variable lease cost
|
|
$
|
6,632
|
|
Operating cash flows used for leases
|
|
$
|
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
|
|
$
|
11,473
|
|
Weighted-average remaining lease term
|
|
5.19 years
|
|
Weighted-average discount rate
|
|
4.24%
|
|
12
The maturities of lease liabilities were as follows (in thousands):
|
|
March 31, 2019
|
|
2019 remaining months
|
|
$
|
159,976
|
|
2020
|
|
|
195,178
|
|
2021
|
|
|
170,852
|
|
2022
|
|
|
150,198
|
|
2023
|
|
|
138,191
|
|
Thereafter
|
|
|
458,860
|
|
Total lease payments
|
|
|
1,273,255
|
|
Less: Imputed interest
|
|
|
(226,720
|
)
|
|
|
$
|
1,046,535
|
|
|
|
|
|
|
As of March 31, 2019, 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 $7.5 million. These operating leases will commence in 2019 with lease terms ranging from 1 year to 10 years.
(
4
)
|
LINE OF CREDIT, SHORT-TERM AND LONG-TERM BORROWINGS
|
The Company had $3.2 million
of outstanding letters of credit as of March 31, 2019 and December 31, 2018, and approximately $15.0 million and $7.2 million in short-term borrowings as of March 31, 2019 and December 31, 2018, respectively.
Long-term borrowings at March 31, 2019 and December 31, 2018 are as follows (in thousands):
|
|
2019
|
|
|
2018
|
|
Note payable to banks, due in monthly installments of $348
(includes principal and interest), variable-rate interest at
4.24% per annum, secured by property, balloon payment of
$62,843 due August 2020
|
|
$
|
64,784
|
|
|
$
|
65,148
|
|
Note payable to Luen Thai Enterprise, Ltd., balloon payment
of $5,795 due January 2021
|
|
|
5,795
|
|
|
|
5,800
|
|
Note payable to TCF Equipment Finance, Inc., due in monthly
installments of $31 (includes principal and interest), fixed-
rate interest at 5.24% per annum, due July 2019
|
|
|
121
|
|
|
|
211
|
|
Loan from HF Logistics-SKX, T2, LLC
|
|
|
2,150
|
|
|
|
-
|
|
Loan payable to a bank, variable-rate interest at 4.28% per
annum, due September 2023
|
|
|
22,481
|
|
|
|
18,626
|
|
Subtotal
|
|
|
95,331
|
|
|
|
89,785
|
|
Less: current installments
|
|
|
1,576
|
|
|
|
1,666
|
|
Total long-term borrowings
|
|
$
|
93,755
|
|
|
$
|
88,119
|
|
The Company’s long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions. The Company is in compliance with the covenants of its long-term borrowings as of March 31, 2019.
On October 24, 2018, through our Chinese joint-venture, we entered into a $17.5 million loan agreement with The Hongkong and Shanghai Banking Corporation Limited (the “China Loan Agreement”). The China Loan Agreement allows for partial drawdown. Interest will be paid at one, two or three months, depending on the period of the drawdown. The interest rate will be based upon the London Interbank Offered Rate (“LIBOR”) plus 1.2% per annum. As specified in the China Loan Agreement, the principal of the loan will be repayable by fifteen equal quarterly installments of $437,550, commencing fifteen months after drawdown plus a final installment of $10,937,500. The loan has a term of 5 years. The China Loan Agreement contains customary affirmative and negative covenants for secured credit facilities of this type. The obligations of our Chinese joint-venture under the China Loan Agreement are jointly and severally guaranteed by the Company and Luen Thai Enterprises Ltd. There was no amount outstanding as of March 31, 2019.
13
On October 19,
2018,
through a
subsidiary of our Chinese joint-
venture (“the TC Subsidiary”)
, the Company entered into a 50
million yuan revolving loan agreement with China Construction Bank Corporation (“the China DC Revolving Loan Agreement”). The proceeds from the China DC Revolving Loan Agreement will be used to finance the construction and operation of the Company’s dist
ribution center in China.
Interest will be paid quarterly. The interest rate will be based upon the prime rate from the People’s Bank of China less a discount. As specified in the China DC Revolving Loan Agreement, the entire principal balance of the loa
n will be repaid when the China DC Revolving Loan Agreement matures on October 18, 2019. The TC Subsidiary has the option to extend the China DC Revolving Agreement, conditioned upon the satisfaction of certain terms. The China DC Revolving Loan Agreement
contains customary affirmative and negative covenants for secured credit facilities of this type, including covenants that will limit the ability of the TC Subsidiary, to among other things, allow external investment to be added, pledge assets, issue debt
with priority over the China DC Revolving Loan Agreement, and adjust the capital stock structure of the TC Subsidiary. The obligations of the TC Subsidiary under the China DC Revolving Loan Agreement are jointly and severally
guaranteed by our Chinese joi
nt-
venture.
T
here
wa
s no amount outstanding as of
March 31, 2019
.
On September 29, 2018, through a subsidiary of the Company’s Chinese joint-venture (“the 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 will be used to finance the construction of the Company’s distribution center in China. Interest will be paid quarterly. The interest rate was 4.28% at March 31, 2019 which will float and be calculated at a reference rate provided by the People’s Bank of China. The interest rate 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 Subsidiary. The China DC Loan Agreement matures on September 28, 2023. The obligations of the Subsidiary under the China DC Loan Agreement are jointly and severally guaranteed by the Company’s Chinese joint-venture. As of March 31, 2019 there was $22.5 million outstanding under this credit facility, which is classified as long-term borrowings in the Company’s condensed consolidated balance sheets.
On September 20, 2018, through two subsidiaries of our Chinese joint-venture (the “SGZ and SSH Subsidiaries”), we entered into a 125 million yuan revolving loan agreement with HSBC Bank (China) Company Limited, Guangzhou Branch (the “Revolving Loan Agreement”). The Revolving Loan Agreement is comprised of two tranches: a 125 million yuan revolving loan facility and a 15 million yuan non-financial bank guarantee facility. The proceeds from the Revolving Loan Agreement will be used to finance the SGZ and SSH Subsidiaries’ working capital requirements. Interest will be paid at one, two or three months, depending on the term of each loan. The interest rate will be equal to 100% of the applicable People’s Bank of China (“PBOC”) Benchmark Lending Rate, provided that if the PBOC Benchmark Lending Rate changes during the term of a loan, the applicable interest rate for that loan will not change until the next rollover date of that loan (if any). The Revolving Loan Agreement contains customary affirmative and negative covenants for secured credit facilities of this type, including covenants that limit the ability of the joint-venture to, among other things, allow external investment to be added, pledge assets and issue debt with priority over the Revolving Loan Agreement. The term of each loan will be one, three or six months or such other period as agreed by the lender. The term of a loan, including any extension or rollover, shall not exceed twelve months. The obligations of the Subsidiary under the Revolving Loan Agreement are guaranteed by the Company, Luen Thai Enterprises Ltd., Skechers Guangzhou Co., Ltd and Skechers Trading (Shanghai) Co Ltd. There was no amount outstanding as of March 31, 2019.
On June 30, 2015, the Company entered into a $250.0 million loan and security agreement, subject to increase by up to $100.0 million, (the “Credit Agreement”), with the following lenders: Bank of America, N.A., MUFG Union Bank, N.A. and HSBC Bank USA, National Association. The Credit Agreement matures on June 30, 2020. The Credit Agreement permits the Company and certain of its subsidiaries to borrow based on a percentage of eligible accounts receivable plus the sum of (a) the lesser of (i) a percentage of eligible inventory to be sold at wholesale and (ii) a percentage of net orderly liquidation value of eligible inventory to be sold at wholesale, plus (b) the lesser of (i) a percentage of the value of eligible inventory to be sold at retail and (ii) a percentage of net orderly liquidation value of eligible inventory to be sold at retail, plus (c) the lesser of (i) a percentage of the value of eligible in-transit inventory and (ii) a percentage of the net orderly liquidation value of eligible in-transit inventory. Borrowings bear interest at the Company’s election based on (a) LIBOR or (b) the greater of (i) the Prime Rate, (ii) the Federal Funds Rate plus 0.5% and (iii) LIBOR for a 30-day period plus 1.0%, in each case, plus an applicable margin based on the average daily principal balance of revolving loans available under the Credit Agreement. The Company pays a monthly unused line of credit fee of 0.25%, payable on the first day of each month in arrears, which is based on the average daily principal balance of outstanding revolving loans and undrawn amounts of letters of credit outstanding during such month. The Credit Agreement further provides for a limit on the issuance of letters of credit to a maximum of $100.0 million. The Credit Agreement contains customary affirmative and negative covenants for secured credit facilities of this type, including covenants that will 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 Credit Agreement also requires compliance with a minimum
14
fixed-charge coverage ratio if Availability drops below 10% o
f the Revolver Commitments (as such terms are defined in the Credit Agreement) until the date when no event of default has existed and Availability has been over 10% for 30 consecutive days. The Company paid closing and arrangement fees of $1.1 million on
this facility which are included in other assets in the condensed consolidated balance sheets, and are being amortized to interest expense over the five-year life of the facility. As of
March 31, 2019
and
December 31, 2018
, there was $
0.1
million out
standing under the Company’s credit facilities, classified as short-term borrowings in the Company’s condensed consolidated balance sheets. The remaining balance in short-term borrowings, as of
March 31, 2019
, is related to the Company’s international oper
ations.
On April 30, 2010, HF Logistics-SKX, LLC (the “JV”), through its subsidiary 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 the project on certain property (the "Original Loan"). On November 16, 2012, HF-T1 executed a modification to the Construction Loan Agreement (the "Modification"), which added OneWest Bank, FSB as a lender, and increased the borrowings under the Original Loan to $80.0 million and extended the maturity date of the Original 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 amends and restates in its entirety the Construction Loan Agreement and the Modification.
As of the date of the Amended Loan Agreement, the outstanding principal balance of the Original Loan was $77.3 million. In connection with this refinancing of the Original Loan, the JV, the Company and its joint-venture partner HF Logistics (“HF”) agreed that the Company would make an additional capital contribution of $38.7 million to the JV, through HF-T1, to make a prepayment on the Original Loan based on the Company’s 50% equity interest in the JV. The prepayment equaled the Company’s 50% share of the outstanding principal balance of the Original Loan. Under the Amended Loan Agreement, the parties agreed that the lenders would loan $70.0 million to HF-T1 (the "New Loan"). The New Loan was used by the JV, through HF-T1, to (i) refinance all amounts owed on the Original Loan after taking into account the prepayment described above, (ii) pay $0.9 million in accrued interest, loan fees and other closing costs associated with the New Loan and (iii) make a distribution of $31.3 million less the amounts described in clause (ii) to HF. Pursuant to the Amended Loan Agreement, the interest rate on the New Loan is the LIBOR Daily Floating Rate (as defined in the Amended Loan Agreement) plus a margin of 2%. The maturity date of the New Loan is August 12, 2020, which HF-T1 has one option to extend by an additional 24 months, or until August 12, 2022, upon payment of a fee and satisfaction of certain customary conditions. On August 11, 2015, HF-T1 and Bank of America, N.A. 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 has 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. The Interest Rate Swap fixes the effective interest rate of the New Loan at 4.08% per annum. Pursuant to the terms of the JV, HF is responsible for the related interest expense payments on the New Loan, and any amounts related to the Swap Agreement. The full amount of interest expense paid related to the New Loan has been included in non-controlling interests in the condensed consolidated balance sheets. The Amended Loan Agreement and the Swap Agreement are subject to customary covenants and events of default. Bank of America, N.A. also acts as a lender and syndication agent under the Credit Agreement dated June 30, 2015.
(
5
)
|
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 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. With the exception of the India joint-vneture becoming a wholly owned subsidiary, there have been no changes during 2019 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.
15
The following VIEs are consolidated into the Company’s condensed consolidated financial statements and the car
rying amounts and classification of assets and liabilities were as follows (in thousands):
HF Logistics
(1)
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Current assets
|
|
$
|
9,344
|
|
|
$
|
2,121
|
|
Non-current assets
|
|
|
106,758
|
|
|
|
98,148
|
|
Total assets
|
|
$
|
116,102
|
|
|
$
|
100,269
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
3,096
|
|
|
$
|
2,738
|
|
Non-current liabilities
|
|
|
66,488
|
|
|
|
64,702
|
|
Total liabilities
|
|
$
|
69,584
|
|
|
$
|
67,440
|
|
|
|
|
|
|
|
|
|
|
Product distribution joint ventures
(2)
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Current assets
|
|
$
|
544,153
|
|
|
$
|
540,768
|
|
Non-current assets
|
|
|
202,839
|
|
|
|
128,250
|
|
Total assets
|
|
$
|
746,992
|
|
|
$
|
669,018
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
233,712
|
|
|
$
|
294,640
|
|
Non-current liabilities
|
|
|
80,048
|
|
|
|
26,444
|
|
Total liabilities
|
|
$
|
313,760
|
|
|
$
|
321,084
|
|
(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, and Skechers (Thailand) Limited
|
The following is a summary of net earnings attributable to, distributions to and contributions from non-controlling interests (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Net earnings attributable to non-controlling interests
|
|
$
|
22,261
|
|
|
$
|
19,606
|
|
|
Distributions to:
|
|
|
|
|
|
|
|
|
|
HF Logistics-SKX, LLC
|
|
|
1,014
|
|
|
|
1,327
|
|
|
Skechers China Limited
|
|
|
—
|
|
|
|
3,110
|
|
|
Skechers South Asia Private Limited
|
|
|
11,629
|
|
|
|
—
|
|
|
Contributions from:
|
|
|
|
|
|
|
|
|
|
HF Logistics-SKX, T2, LLC
|
|
|
7,565
|
|
|
|
—
|
|
|
(
6
)
|
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. As of March 31, 2019, there was $35.0 million remaining to repurchase shares under the Share Repurchase Program. 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, as amended, 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.
16
The following table provides a summary of the Company’s stock repurchase activities during the
three months ended March 31, 2019
and 2018
:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Shares repurchased
|
|
|
457,951
|
|
|
|
75,991
|
|
Average cost per share
|
|
|
32.77
|
|
|
|
39.47
|
|
Total cost of shares repurchased (in thousands):
|
|
$
|
15,009
|
|
|
$
|
3,000
|
|
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
|
|
2019
|
|
|
2018
|
|
Net earnings attributable to Skechers U.S.A., Inc.
|
|
$
|
108,758
|
|
|
$
|
117,652
|
|
Weighted average common shares outstanding
|
|
|
153,480
|
|
|
|
156,433
|
|
Basic earnings per share attributable to
Skechers U.S.A., Inc.
|
|
$
|
0.71
|
|
|
$
|
0.75
|
|
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
|
|
2019
|
|
|
2018
|
|
Net earnings attributable to Skechers U.S.A., Inc.
|
|
$
|
108,758
|
|
|
$
|
117,652
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
153,480
|
|
|
|
156,433
|
|
Dilutive effect of nonvested shares
|
|
|
654
|
|
|
|
1,197
|
|
Weighted average common shares outstanding
|
|
|
154,134
|
|
|
|
157,630
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share attributable to
Skechers U.S.A., Inc.
|
|
$
|
0.71
|
|
|
$
|
0.75
|
|
There were 540,612 and 190,364 shares excluded from the computation of diluted earnings per share for the three months ended March 31, 2019 and 2018, respectively because they are anti-dilutive.
17
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 $8.9 million and $8.7 million for the three months ended March 31, 2019 and 2018, respectively. 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. During the three months ended March 31, 2018, the Company redeemed 212,930 shares of Class A Common Stock for $8.7 million to satisfy employee tax withholding requirements.
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, 2019 is presented below:
|
|
Shares
|
|
|
Weighted Average Grant-Date Fair Value
|
|
Nonvested at December 31, 2018
|
|
|
2,968,941
|
|
|
$
|
34.79
|
|
Granted
|
|
|
1,463,000
|
|
|
|
27.78
|
|
Vested
|
|
|
(377,500
|
)
|
|
|
33.50
|
|
Nonvested at March 31, 2019
|
|
|
4,054,441
|
|
|
|
32.38
|
|
As of March 31, 2019, there was $108.2 million of unrecognized compensation cost related to nonvested common shares. The cost is expected to be amortized over a weighted average period of 2.7 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.
Income tax expense and the effective tax rate for the three months ended March 31, 2019 and 2018 were as follows (dollar amounts in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Income tax expense
|
|
$
|
31,724
|
|
|
$
|
14,621
|
|
Effective tax rate
|
|
|
19.5
|
%
|
|
|
9.6
|
%
|
18
The tax provisions for the
three months ended March 31, 2019
and
2018
were computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year. The Company estimates
its effective tax rate to be between
17.0%
to
20.0%
for
2019
.
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 34.6%, which is on average significantly lower than the U.S. federal and state combined statutory rate of approximately 24.9%.
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 if and 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, 2019 and 2018.
For the three months ended March 31, 2019, the increase in the effective tax rate as compared to the three months ended March 31, 2018 was primarily due to the negative impact of $2.9 million in discrete items in the three months ended March 31, 2019 as compared to the positive impact of $10.5 million in discrete items in the three months ended March 31, 2018.
As of March 31, 2019, the Company had approximately $687.5 million in cash and cash equivalents, of which $469.5 million, or 68.3%, was held outside the U.S. Of the $469.5 million held by the Company’s non-U.S. subsidiaries, approximately $212.8 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, 2019.
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. However, in anticipation of the needs of the Company’s share repurchase program and the need to provide payment of the Company’s provisional Transition Tax liability, the Company may repatriate certain funds held outside the U.S. for which U.S. federal and non-U.S. tax has been fully provided as of March 31, 2019. 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.
(1
0
)
|
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 $308.4 million and $213.7 million before allowances for bad debts, sales returns and chargebacks at March 31, 2019 and December 31, 2018, respectively. Foreign accounts receivable, which in some cases are collateralized by letters of credit, were $453.4 million and $313.8 million before allowance for bad debts, sales returns and chargebacks at March 31, 2019 and December 31, 2018, respectively. The Company’s credit losses attributable to write-offs for the three months ended March 31, 2019 and 2018 were $2.2 million and $2.0 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 $2.021 billion and $1.611 billion at March 31, 2019 and December 31, 2018, respectively.
19
The Company’s net sales to its five largest customers accounted for approximately
10.7%
and
10.8%
of total net sales for the
three months ended March 31, 2019
and
2018
, respectively.
The Company’s top five manufacturers produced the following, as a percentage of total production, for the three months ended March 31, 2019 and 2018:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Manufacturer #1
|
|
|
16.3
|
%
|
|
|
15.5
|
%
|
Manufacturer #2
|
|
|
9.3
|
%
|
|
|
11.9
|
%
|
Manufacturer #3
|
|
|
6.0
|
%
|
|
|
8.6
|
%
|
Manufacturer #4
|
|
|
5.1
|
%
|
|
|
6.9
|
%
|
Manufacturer #5
|
|
|
5.0
|
%
|
|
|
5.4
|
%
|
|
|
|
41.7
|
%
|
|
|
48.3
|
%
|
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, 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. To date, these business risks have not had a material adverse impact on the Company’s operations.
(1
1
)
|
SEGMENT AND GEOGRAPHIC REPORTING
|
The Company has three reportable segments – domestic wholesale sales, international wholesale sales, and retail sales, which includes e-commerce sales. Management evaluates segment performance based primarily on net 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. Net sales, gross margins, identifiable assets and additions to property and equipment for the domestic wholesale, international wholesale, retail sales segments on a combined basis were as follows (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
346,694
|
|
|
$
|
389,029
|
|
|
International wholesale
|
|
|
628,067
|
|
|
|
578,003
|
|
|
Retail
|
|
|
301,995
|
|
|
|
283,046
|
|
|
Total
|
|
$
|
1,276,756
|
|
|
$
|
1,250,078
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
126,451
|
|
|
$
|
142,143
|
|
|
International wholesale
|
|
|
288,728
|
|
|
|
279,362
|
|
|
Retail
|
|
|
175,330
|
|
|
|
161,599
|
|
|
Total
|
|
$
|
590,509
|
|
|
$
|
583,104
|
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
1,348,779
|
|
|
$
|
1,428,463
|
|
International wholesale
|
|
|
1,611,560
|
|
|
|
1,423,048
|
|
Retail
|
|
|
1,167,074
|
|
|
|
376,744
|
|
Total
|
|
$
|
4,127,413
|
|
|
$
|
3,228,255
|
|
20
|
|
Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Additions to property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
Domestic wholesale
|
|
$
|
7,734
|
|
|
$
|
11,375
|
|
|
International wholesale
|
|
|
21,992
|
|
|
|
10,938
|
|
|
Retail
|
|
|
8,418
|
|
|
|
12,151
|
|
|
Total
|
|
$
|
38,144
|
|
|
$
|
34,464
|
|
|
Geographic Information:
The following summarizes the Company’s operations in different geographic areas for the periods indicated (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Net Sales
(1)
:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
539,404
|
|
|
$
|
575,525
|
|
|
Canada
|
|
|
47,588
|
|
|
|
57,040
|
|
|
Other international
(2)
|
|
|
689,764
|
|
|
|
617,513
|
|
|
Total
|
|
$
|
1,276,756
|
|
|
$
|
1,250,078
|
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
United States
|
|
|
393,000
|
|
|
|
385,584
|
|
Canada
|
|
|
8,685
|
|
|
|
9,081
|
|
Other international
(2)
|
|
|
204,191
|
|
|
|
190,792
|
|
Total
|
|
$
|
605,876
|
|
|
$
|
585,457
|
|
(1)
|
The Company has subsidiaries in Asia, Central America, Europe, the Middle East, North America, and South America that generate net sales within those respective regions and in some cases the neighboring regions. The Company has joint-ventures in Asia that generate net sales from those regions. The Company also has a subsidiary in Switzerland that generates net sales from that country in addition to net sales to distributors located in numerous non-European countries. External net sales are attributable to geographic regions based on the location of each of the Company’s subsidiaries. A subsidiary may earn revenue from external net sales and external royalties, or from inter-subsidiary net 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 condensed consolidated financial statements and are not included as part of the external net sales reported in different geographic areas.
|
(2)
|
Other international includes Asia, 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.
21
(1
2
)
|
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, 2019, the Company made contributions of $250,000 to the Foundation. During the three months ended March 31, 2018, the Company did not make any contributions to the Foundation.
The Company has evaluated events subsequent to March 31, 2019, to assess the need for potential recognition or disclosure in this filing. Based on this evaluation, it was determined that no subsequent events occurred that require recognition in the condensed consolidated financial statements. In April 2019, the Company formed a joint-venture with its distributor in Mexico and made an initial investment of $104.0 million.
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, 2019, 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.
22