NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1
.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise noted in this report, any description of the “Company,” “Crocs,” “we,” “us,” or “our” includes Crocs, Inc. and its consolidated subsidiaries within our reportable operating segments and corporate operations. The Company is engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for men, women, and children. We strive to be the global leader in the sale of molded footwear characterized by functionality, comfort, color, and lightweight design.
Our reportable operating segments include: the Americas, operating in North and South America; Asia Pacific, operating throughout Asia, Australia, and New Zealand; and Europe, Middle East, and Africa (“EMEA”), operating throughout Europe, Russia, the Middle East, and Africa. In the third quarter of 2018, certain revenues and expenses previously reported within the ‘Asia Pacific’ segment were shifted to the ‘EMEA’ segment. See
Note 14 — Operating Segments and Geographic Information
for additional information. The previously reported amounts for revenues and income from operations for the three months ended March 31, 2018 have been revised to conform to the current year presentation.
The accompanying unaudited condensed consolidated interim financial statements include the Company’s accounts and those of its wholly-owned subsidiaries, and reflect all adjustments which are necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such unaudited condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
These unaudited condensed consolidated interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2018
(“Annual Report”), and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes to the Audited Consolidated Financial Statements included in our Annual Report. Our accounting policies did not change during the
three months ended March 31, 2019
, other than for the new accounting pronouncements adopted as described in
Note 2 — Recent Accounting Pronouncements
and “Critical Accounting Policies and Estimates” within Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
in Part I of this Quarterly Report on Form 10-Q.
Reclassifications
In addition to the shift in certain revenues and expenses previously reported within the ‘Asia Pacific’ and ‘EMEA’ segments described above, the Company has reclassified certain amounts on the condensed consolidated statements of cash flows to conform to current period presentation.
Seasonality of Business
Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warm weather, revenues generated during our fourth quarter are typically less than revenues generated during our first three quarters, when the northern hemisphere is experiencing warmer weather. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new model introductions, general economic conditions, and consumer confidence. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of expected results for any other quarter or for any other year.
Transactions with Affiliates
The Company receives services from three subsidiaries of Blackstone Capital Partners VI L.P. (“Blackstone”). Blackstone and certain of its permitted transferees currently beneficially own
6,896,548
shares of the Company’s common stock as of
March 31, 2019
. Blackstone also
has the future right to designate for nomination one director to our Board, and currently has two designees serving on the Board.
Certain Blackstone subsidiaries provide various services to the Company, including inventory count services, cybersecurity and consulting, and workforce management services. The Company incurred expenses for services from these subsidiaries of
$0.7 million
and
$0.1 million
for the
three months ended March 31, 2019
and
2018
, respectively. Expenses related to these services are reported in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of operations.
2
.
RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncement Adopted
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that permits reclassification of the income tax effects of the U.S. Tax Cuts and Job Act (“Tax Act”) on accumulated other comprehensive income (“AOCI”) to retained earnings. This guidance may be adopted retrospectively to each period (or periods) in which the income tax effects of the Tax Act related to items remaining in AOCI are recognized, or at the beginning of the period of adoption. The guidance becomes effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. This guidance became effective during the first quarter of 2019; however, the Company did not elect to make the optional reclassification. Our policy is to release stranded tax effects from AOCI using either a specific identification approach or portfolio approach based on the nature of the underlying item.
Leases
In February 2016, the FASB issued authoritative guidance related to accounting for leases. On January 1, 2019, the Company adopted the guidance using the modified retrospective method applied as of the date of adoption. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented.
The Company has elected all of the available transition practical expedients, including the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company has elected not to apply ‘hindsight’ when adopting the standard for determining the reasonably certain lease term and in assessing impairments. The Company has elected the short-term lease exemption, which means the Company has not and will not recognize a right-of-use asset or liability for leases that qualify for the short-term exemption and will recognize those lease expenses on a straight-line basis over the lease term in its condensed consolidated statements of operations. Further, the Company has elected to combine lease and non-lease components for all of its leases.
Adoption of the new standard resulted in the recognition of right-of-use assets and liabilities of approximately
$176.1 million
and
$187.4 million
, respectively, as of January 1, 2019, with additional adjustments to ‘Prepaid expenses and other assets’ and ‘Accrued expenses and other liabilities’ and equity. As a result of the adoption of new lease accounting standards, the Company assessed the initial right-of-use assets for impairment and recorded non-cash impairments of
$0.2 million
within ‘Retained earnings’ in the Company’s condensed consolidated balance sheet during the three months ended
March 31, 2019
. The adoption of this guidance did not have a significant impact on the condensed consolidated statements of operations or cash flows.
New Accounting Pronouncements Not Yet Adopted
Implementation Costs Incurred in Cloud Computing Arrangements
In August 2018, the FASB issued authoritative guidance related to the treatment of implementation costs incurred in a hosting arrangement that is considered a service contract. This guidance becomes effective for annual reporting periods beginning after December 15, 2019, including interim periods within those periods, with early adoption permitted, and will be applied prospectively to all implementation costs incurred after the date of adoption. The Company does not expect this standard to have a material impact on its condensed consolidated financial statements.
Other Pronouncements
Other new pronouncements issued but not effective until after
March 31, 2019
are not expected to have a material impact on the Company’s condensed consolidated financial statements.
3
.
ACCRUED EXPENSES AND OTHER LIABILITIES
Amounts reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets were:
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
|
(in thousands)
|
Accrued compensation and benefits
|
$
|
21,427
|
|
|
$
|
43,970
|
|
Fulfillment, freight, and duties
|
15,983
|
|
|
12,234
|
|
Professional services
|
10,041
|
|
|
11,124
|
|
Accrued rent and occupancy
(1)
|
4,096
|
|
|
6,956
|
|
Return liabilities
|
7,957
|
|
|
6,429
|
|
Sales/use and value added taxes payable
|
8,174
|
|
|
5,601
|
|
Royalties payable and deferred revenue
|
3,663
|
|
|
3,356
|
|
Other
(2)
|
6,863
|
|
|
12,501
|
|
Total accrued expenses and other liabilities
|
$
|
78,204
|
|
|
$
|
102,171
|
|
(1)
At
March 31, 2019
, includes accrued rent and occupancy costs for leases with original terms of one year or less, which are excluded from recognition under the new lease accounting standards adopted as of January 1, 2019. See
Note 2 — Recent Accounting Pronouncements
for more information.
(2)
At
December 31, 2018
, includes accrued payments of
$3.0 million
to induce conversion of Series A Convertible Preferred Stock.
4
.
LEASES
The Company adopted authoritative guidance related to leases effective January 1, 2019 using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented. See ‘Leases’ in
Note 2 — Recent Accounting Pronouncements
for a discussion of the significant changes resulting from adoption of the guidance.
The Company’s lease portfolio consists primarily of real estate assets, which includes retail, warehouse, distribution center, and office spaces, under operating leases expiring at various dates through 2033. Leases with an original term of twelve months or less are not reported in the condensed consolidated balance sheet; expense for these short-term leases is recognized on a straight-line basis over the lease term.
Many leases include one or more options to renew, with renewal terms that if exercised by us, extend the lease term from
one
to
10
years. The exercise of these renewal options is at the Company’s discretion. When assessing the likelihood of a renewal or termination, the Company considers the significance of leasehold improvements, availability of alternative locations, and the cost of relocation or replacement, among other considerations. The depreciable lives of leasehold improvements are the shorter of the useful lives of the improvements or the expected lease term.
Due to the Company’s centralized treasury function, the Company utilizes a portfolio approach to discount its lease obligations. The Company assesses the expected lease term at lease inception and discounts the lease using a fully-secured annual incremental borrowing rate, adjusted for time value corresponding with the expected lease term.
Certain of our retail store leases include rental payments based upon a percentage of retail sales in excess of a minimum fixed rental. In some cases, there is no fixed minimum rental and the entire rental payment is based upon a percentage of sales. Certain of our warehouse leases have rental payments that vary based upon the volume of product placed in storage. In addition, certain leases include rental payments adjusted periodically for changes in price level indexes. We recognize expense for these types of payments as incurred and report them as variable lease expense.
Right-of-Use Assets and Operating Lease Liabilities
Amounts reported in the condensed consolidated balance sheet were:
|
|
|
|
|
|
March 31, 2019
|
|
(in thousands)
|
Assets:
|
|
Right-of-use assets
|
$
|
163,266
|
|
Liabilities:
|
|
Current operating lease liabilities
|
$
|
44,618
|
|
Long-term operating lease liabilities
|
125,055
|
|
Total operating lease liabilities
|
$
|
169,673
|
|
Lease Costs and Other Information
Lease-related costs reported in the Company’s condensed consolidated statement of operations were:
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
(in thousands)
|
Operating lease cost
|
$
|
14,930
|
|
Short-term lease cost
|
1,360
|
|
Variable lease cost
|
2,989
|
|
Total lease costs
|
$
|
19,279
|
|
Other information related to leases, including supplemental cash flow information, consists of:
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
(in thousands, except weighted average data)
|
Cash paid for operating leases
|
$
|
18,574
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
(1)
|
177,509
|
|
Weighted average remaining lease term (in years)
|
5.7
|
|
Weighted average discount rate
|
4.7
|
%
|
(1)
Includes
$176.1 million
for operating leases existing on January 1, 2019 and
$1.4 million
for operating leases that commenced in the first quarter of 2019.
Maturities
The maturities of the Company’s operating lease liabilities were:
|
|
|
|
|
|
As of
March 31, 2019
|
|
(in thousands)
|
2019 (remainder of year)
|
$
|
35,029
|
|
2020
|
44,645
|
|
2021
|
36,368
|
|
2022
|
24,461
|
|
2023
|
16,909
|
|
Thereafter
|
39,857
|
|
Total future minimum lease payments
|
197,269
|
|
Less: imputed interest
|
(27,596
|
)
|
Total operating lease liabilities
|
$
|
169,673
|
|
Leases that have not yet commenced
As of March 31, 2019, we had significant obligations for leases that have not yet commenced related to our new distribution center and office relocation projects. In the fourth quarter of 2018, the Company entered into a lease agreement for a new distribution center in Dayton, Ohio, which is expected to replace the Company’s existing facility in Ontario, California in 2019. The contractual commitment related to this lease, with payments beginning at the later of substantial completion of the building or July 2019 and continuing through 2030, is approximately
$25.4 million
, with expected total capital investments of approximately
$35 million
. In the first quarter of 2019, the Company entered into a lease for its new corporate headquarters and regional office in Broomfield, Colorado. The contractual commitment related to this lease, with payments beginning in March 2020 and continuing through August 2030, is approximately
$20.4 million
, with expected net capital investments totaling $
7.0 million
prior to lease commencement.
Comparative Information as Reported Under Previous Accounting Standards
The following comparative information is reported based upon previous accounting standards in effect for the periods presented.
Future minimum lease payments under operating leases were:
|
|
|
|
|
|
As of
December 31, 2018
|
|
(in thousands)
|
2019
|
$
|
42,455
|
|
2020
|
36,299
|
|
2021
|
29,714
|
|
2022
|
20,721
|
|
2023
|
15,334
|
|
Thereafter
|
54,149
|
|
Total minimum lease payments
(1)
|
$
|
198,672
|
|
(1)
Includes future minimum lease payments of
$25.4 million
related to the new distribution center in Dayton, Ohio.
Rent expense for operating leases was:
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
(in thousands)
|
Minimum rentals
(1)
|
$
|
18,239
|
|
Contingent rentals
|
2,160
|
|
Total rent expense
|
$
|
20,399
|
|
(1)
Minimum rentals include all lease payments as well as fixed and variable common area maintenance, parking, and storage fees, which were approximately
$2.3 million
in the three months ended March 31, 2018.
5
.
FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
All of the Company’s derivative instruments are classified as Level 2 of the fair value hierarchy and are reported in the condensed consolidated balance sheets within either ‘Prepaid expenses and other assets’ or ‘Accrued expenses and other liabilities’ at
March 31, 2019
and
December 31, 2018
. The fair values of the Company’s derivative instruments were an asset of
$0.1 million
and a liability of
$1.3 million
at
March 31, 2019
and
December 31, 2018
, respectively. See
Note 6 — Derivative Financial Instruments
for more information.
The carrying amounts of the Company’s cash, cash equivalents, and restricted cash, accounts receivable, accounts payable, and current accrued expenses and other liabilities approximate their fair value as recorded due to the short-term maturity of these instruments.
The Company’s borrowing instruments are recorded at their carrying values in the condensed consolidated balance sheets, which may differ from their respective fair values. The fair values of the Company’s outstanding borrowings approximate their carrying values at
March 31, 2019
and
December 31, 2018
, based on interest rates currently available to the Company for similar borrowings and were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
(in thousands)
|
Borrowings
|
$
|
215,000
|
|
|
$
|
215,000
|
|
|
$
|
120,000
|
|
|
$
|
120,000
|
|
Non-Financial Assets and Liabilities
The Company’s non-financial assets, which primarily consist of property and equipment, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. The fair values of these assets are determined based on Level 3 measurements, including estimates of the amount and timing of future cash flows based upon historical experience, expected market conditions, and management’s plans. Impairment expense is reported in ‘Selling, general and administrative expenses’ in the Company’s condensed consolidated statements of operations. During the
three
months ended
March 31, 2018
, the Company recorded non-cash impairment expenses of
$0.6 million
and
$0.9 million
, respectively, to reduce the carrying values of certain retail store assets in the Asia Pacific segment and certain supply chain assets, included in ‘Other businesses,’ to their estimated fair values.
6
.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company transacts business in various foreign countries and is therefore exposed to foreign currency exchange rate risk that impacts the reported U.S. Dollar amounts of revenues, expenses, and certain foreign currency monetary assets and liabilities. In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in earnings caused by fluctuations in foreign exchange rates, the Company enters into forward contracts to buy and sell foreign currency. By policy, the Company does not enter into these contracts for trading purposes or speculation.
Counterparty default risk is considered low because the forward contracts that the Company enters into are over-the-counter instruments transacted with highly-rated financial institutions. The Company was not required to and did not post collateral as of
March 31, 2019
or
December 31, 2018
.
The Company’s derivative instruments are recorded at fair value as a derivative asset or liability in the condensed consolidated balance sheets. The Company reports derivative instruments with the same counterparty on a net basis when a master netting arrangement is in place. Changes in fair value are recognized within ‘Foreign currency gains (losses), net’ in the condensed consolidated statements of operations. For the condensed consolidated statements of cash flows, the Company classifies cash flows from derivative instruments at settlement in the same category as the cash flows from the related hedged items within ‘Cash provided by operating activities.’
Results of Derivative Activities
The fair values of derivative assets and liabilities, net, all of which are classified as Level 2, reported within either ‘Prepaid expenses and other assets’ or ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
(in thousands)
|
Forward foreign currency exchange contracts
|
$
|
1,173
|
|
|
$
|
(1,123
|
)
|
|
$
|
943
|
|
|
$
|
(2,256
|
)
|
Netting of counterparty contracts
|
(1,123
|
)
|
|
1,123
|
|
|
(943
|
)
|
|
943
|
|
Foreign currency forward contract derivatives
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,313
|
)
|
The notional amounts of outstanding foreign currency forward exchange contracts presented below report the total U.S. Dollar equivalent position and the net contract fair values for each foreign currency position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Notional
|
|
Fair Value
|
|
Notional
|
|
Fair Value
|
|
(in thousands)
|
Euro
|
$
|
62,796
|
|
|
$
|
(16
|
)
|
|
$
|
34,959
|
|
|
$
|
(92
|
)
|
Singapore Dollar
|
38,274
|
|
|
(54
|
)
|
|
34,584
|
|
|
254
|
|
Japanese Yen
|
26,188
|
|
|
477
|
|
|
25,561
|
|
|
(178
|
)
|
British Pound Sterling
|
7,478
|
|
|
(111
|
)
|
|
22,185
|
|
|
183
|
|
South Korean Won
|
15,838
|
|
|
137
|
|
|
9,408
|
|
|
63
|
|
Other currencies
|
45,842
|
|
|
(383
|
)
|
|
67,885
|
|
|
(1,543
|
)
|
Total
|
$
|
196,416
|
|
|
$
|
50
|
|
|
$
|
194,582
|
|
|
$
|
(1,313
|
)
|
|
|
|
|
|
|
|
|
Latest maturity date
|
April 2019
|
|
January 2019
|
Amounts reported in ‘Foreign currency gains (losses), net’ in the condensed consolidated statements of operations include both realized and unrealized gains (losses) from foreign currency transactions and derivative contracts, and were:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
|
(in thousands)
|
Foreign currency transaction gains (losses)
|
$
|
(1,433
|
)
|
|
$
|
1,051
|
|
Foreign currency forward exchange contracts gains
|
216
|
|
|
20
|
|
Foreign currency gains (losses), net
|
$
|
(1,217
|
)
|
|
$
|
1,071
|
|
7
.
REVOLVING CREDIT FACILITIES AND BANK BORROWINGS
The Company’s borrowings were as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
|
(in thousands)
|
Revolving credit facilities
|
$
|
215,000
|
|
|
$
|
120,000
|
|
Less: Current portion of borrowings
|
—
|
|
|
—
|
|
Total long-term borrowings
|
$
|
215,000
|
|
|
$
|
120,000
|
|
Senior Revolving Credit Facility
In December 2011, the Company entered into a revolving credit facility (the “Facility”), pursuant to an Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association, as a lender and administrative agent for the lenders. The Credit Agreement contains certain covenants that restrict certain actions by the Company, including limitations on: (i) stock repurchases to an aggregate of
$250.0 million
per fiscal year, subject to certain restrictions; and (ii) capital expenditures and commitments to
$70.0 million
per year. The Credit Agreement also permits intercompany loans of up to
$375.0 million
and requires the Company to meet certain financial covenant ratios that become effective when average outstanding borrowings under the Credit Agreement, including letters of credit, exceed the lesser of
$40.0 million
or
40%
of the total commitments during certain periods or if the outstanding borrowings exceed the borrowing base. If the financial covenant ratios are in effect, the Company must maintain a minimum fixed charge coverage ratio of
1.10
to 1.00, and a maximum leverage ratio of (i)
3.00
to 1.00 at March 31, 2019, (ii)
2.75
to 1.00 at June 30, 2019, (iii)
2.50
to 1.00 at September 30, 2019 and the last day of each quarter thereafter. As of
March 31, 2019
, the Company was in compliance with all financial covenants under the Credit Agreement.
As of
March 31, 2019
, the total commitments available from the lenders under the Facility were
$300.0 million
. At
March 31, 2019
, the Company had
$215.0 million
in outstanding borrowings, which are due in
February 2021
, and $
4.6 million
in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As of
March 31, 2019
and
December 31, 2018
, the Company had $
80.4 million
and
$129.4 million
, respectively, of available borrowing capacity under the Facility.
The Company also has a revolving credit facility in Asia, under which the Company had
no
borrowings during the
three months ended March 31, 2019
and year ended
December 31, 2018
or borrowings outstanding at
March 31, 2019
and
December 31, 2018
.
8
.
COMMON STOCK REPURCHASE PROGRAM
The Company repurchased
2.1 million
shares of its common stock at a cost of
$53.5 million
, including commissions, and
1.4 million
shares of its common stock at a cost of
$20.1 million
, including commissions, during the
three months ended March 31, 2019
and
2018
, respectively. As of
March 31, 2019
, the Company had remaining authorization to repurchase approximately
$102.3 million
of its common stock, subject to restrictions under its Credit Agreement.
On May 5, 2019, the Board of Directors increased the repurchase authorization by up to an additional
$500.0 million
of the Company’s common stock. The repurchase program does not obligate the Company to acquire any particular amount of common stock and may be suspended at any time at the Company’s discretion.
9
.
REVENUES
Revenues by reportable operating segment and by channel were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
Americas
|
|
Asia Pacific
|
|
EMEA
|
|
Other Businesses
|
|
Total
|
|
|
(in thousands)
|
Wholesale
|
|
$
|
71,229
|
|
|
$
|
68,950
|
|
|
$
|
64,491
|
|
|
$
|
52
|
|
|
$
|
204,722
|
|
Retail
|
|
38,076
|
|
|
13,903
|
|
|
5,417
|
|
|
—
|
|
|
57,396
|
|
E-commerce
|
|
19,821
|
|
|
8,194
|
|
|
5,816
|
|
|
—
|
|
|
33,831
|
|
Total revenues
|
|
$
|
129,126
|
|
|
$
|
91,047
|
|
|
$
|
75,724
|
|
|
$
|
52
|
|
|
$
|
295,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
Americas
|
|
Asia Pacific
|
|
EMEA
|
|
Other Businesses
|
|
Total
|
|
|
(in thousands)
|
Wholesale
(1)
|
|
$
|
72,674
|
|
|
$
|
65,750
|
|
|
$
|
55,860
|
|
|
$
|
313
|
|
|
$
|
194,597
|
|
Retail
|
|
34,716
|
|
|
17,614
|
|
|
7,176
|
|
|
—
|
|
|
59,506
|
|
E-commerce
|
|
16,440
|
|
|
7,815
|
|
|
4,790
|
|
|
—
|
|
|
29,045
|
|
Total revenues
|
|
$
|
123,830
|
|
|
$
|
91,179
|
|
|
$
|
67,826
|
|
|
$
|
313
|
|
|
$
|
283,148
|
|
(1)
In the third quarter of 2018, certain revenues and expenses previously reported within the ‘Asia Pacific’ segment were shifted to the ‘EMEA’ segment. The previously reported amounts for wholesale revenues for the three months ended March 31, 2018 have been revised to conform to the current period presentation. See ‘Impacts of segment composition change’ table below for more information.
Impacts of segment composition change:
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
Increase (Decrease)
|
|
|
(in thousands)
|
Impacts on wholesale revenues:
|
|
|
Asia Pacific
|
|
$
|
(5,983
|
)
|
EMEA
|
|
5,983
|
|
During the
three months ended March 31, 2019
and
2018
, the Company recognized increases of less than
$0.1 million
and
$0.8 million
, respectively, to wholesale revenues due to changes in estimates related to products transferred to customers in prior periods. There were no changes to estimates for retail and e-commerce channel revenues during either of the
three months ended March 31, 2019
and
2018
.
Contract Liabilities
At
March 31, 2019
and
December 31, 2018
,
$1.1 million
and
$1.6 million
, respectively, of deferred revenues associated with advance customer deposits were reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets. Deferred revenues of
$1.2 million
and
$0.8 million
were recognized in revenues during the
three months ended March 31, 2019
and
2018
, respectively. The remainder of deferred revenues at
March 31, 2019
are expected to be recognized in revenues during the second quarter of 2019 as products are shipped or delivered.
Refund Liabilities
At
March 31, 2019
and
December 31, 2018
,
$8.0 million
and
$6.4 million
, respectively, of refund liabilities, primarily associated with product returns, were reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets.
10
.
SHARE-BASED COMPENSATION
The Company’s share-based compensation awards are issued under the 2015 Equity Incentive Plan (“2015 Plan”) and predecessor plan, the 2007 Equity Incentive Plan (the “2007 Plan”). Any awards that expire or are forfeited under the 2007 Plan become available for issuance under the 2015 Plan. As of
March 31, 2019
,
1.9 million
shares of common stock remained available for future issuance under the 2015 Plan, subject to adjustment for future stock splits, stock dividends, and similar changes in capitalization.
Share-Based Compensation Expense
Pre-tax share-based compensation expense reported in the Company’s condensed consolidated statements of operations was:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
|
(in thousands)
|
Cost of sales
|
$
|
88
|
|
|
$
|
79
|
|
Selling, general and administrative expenses
|
3,546
|
|
|
2,595
|
|
Total share-based compensation expense
|
$
|
3,634
|
|
|
$
|
2,674
|
|
Stock Option Activity
Stock option activity during the
three months ended March 31, 2019
was:
|
|
|
|
|
Number of Options
|
|
(in thousands)
|
|
Outstanding as of December 31, 2018
|
362
|
|
Granted
|
—
|
|
Exercised
|
(10
|
)
|
Forfeited or expired
|
—
|
|
Outstanding as of March 31, 2019
|
352
|
|
As of
March 31, 2019
, the Company had
$0.2 million
of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted average period of
1.2
years.
Restricted Stock Awards and Restricted Stock Units Activity
The Company grants service-condition restricted stock awards (“RSAs”) as well as service-condition, performance-condition, and market-condition restricted stock units (“RSUs”). RSA and RSU activity during the
three months ended March 31, 2019
was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards
|
|
Restricted Stock Units
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
(in thousands, except fair value data)
|
Unvested at December 31, 2018
|
6
|
|
|
$
|
18.61
|
|
|
2,752
|
|
|
$
|
11.58
|
|
Granted
|
2
|
|
|
28.50
|
|
|
745
|
|
|
25.38
|
|
Vested
|
(3
|
)
|
|
19.40
|
|
|
(874
|
)
|
|
9.74
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(348
|
)
|
|
12.81
|
|
Unvested at March 31, 2019
|
5
|
|
|
$
|
21.16
|
|
|
2,275
|
|
|
$
|
13.59
|
|
As of
March 31, 2019
, unrecognized share-based compensation expense for RSAs was
$0.1 million
, which is expected to amortize over a remaining weighted average period of
0.2
years.
RSUs vested during the
three months ended March 31, 2019
consisted of
0.5 million
service-condition awards and
0.4 million
performance- and market-condition awards. As of
March 31, 2019
, unrecognized share-based compensation expenses for service-condition awards were
$12.5 million
and for performance- and market-condition awards were
$10.6 million
, and are expected to amortize over remaining weighted average periods of
1.7
years and
2.7
years, respectively.
11
.
INCOME TAXES
Income tax expense and effective tax rates were:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
|
(in thousands, except effective tax rate)
|
Income before income taxes
|
$
|
30,329
|
|
|
$
|
27,212
|
|
Income tax expense
|
5,619
|
|
|
10,758
|
|
Effective tax rate
|
18.5
|
%
|
|
39.5
|
%
|
During the three months ended March 31, 2019, the decrease in the effective tax rate, compared to the same period in 2018, is due
to the relative mix of operating income and losses in jurisdictions with differing statutory tax rates and the increase in operating income in certain jurisdictions where the Company is unable to record tax benefits because it has determined that it is not more likely than not that such tax benefits will be realized. The Company’s effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions, as well as operating losses in certain jurisdictions for which tax benefits cannot be recognized. There were no significant or unusual discrete tax items during the three months ended March 31, 2019. The Company had unrecognized tax benefits of
$4.4 million
and
$4.5 million
at March 31, 2019 and December 31, 2018, respectively, and the Company does not expect any significant changes in tax benefits in the next twelve months.
Our tax rate is volatile and may increase or decrease with changes in, among other things, the amount of income or loss by jurisdiction, our ability to utilize net operating losses and foreign tax credits, changes in tax laws, and the movement of liabilities established pursuant to accounting guidance for uncertain tax positions as statutes of limitations expire, positions are effectively settled, or when additional information becomes available. There are proposed or pending tax law changes in various jurisdictions and other changes to regulatory environments in countries in which we do business that, if enacted, may have an impact on our effective tax rate.
12
.
EARNINGS PER SHARE
Basic and diluted earnings per common share (“EPS”) for the
three months ended March 31, 2019
and
2018
were:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
|
(in thousands, except per share data)
|
Numerator:
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
24,710
|
|
|
$
|
12,523
|
|
Less: Net income allocable to Series A Convertible Preferred stockholders
(1)
|
—
|
|
|
(2,094
|
)
|
Remaining net income available to common stockholders - basic and diluted
|
$
|
24,710
|
|
|
$
|
10,429
|
|
Denominator:
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
73,009
|
|
|
68,705
|
|
Plus: dilutive effect of stock options and unvested restricted stock units for both periods and Series A Convertible Preferred in 2018
|
1,866
|
|
|
2,963
|
|
Weighted average common shares outstanding - diluted
|
74,875
|
|
|
71,668
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
Basic
|
$
|
0.34
|
|
|
$
|
0.15
|
|
Diluted
|
$
|
0.33
|
|
|
$
|
0.15
|
|
(1)
Represents the amount which would have been paid to preferred stockholders in the event the Company had declared a dividend on its common stock.
No
options, RSUs, or PSUs were anti-dilutive for the three months ended March 31, 2019. For the three months ended March 31, 2018,
0.4 million
options, RSUs, or PSUs were excluded from the calculation of diluted EPS under the two-class method because the effect was anti-dilutive.
13
.
COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of
March 31, 2019
, the Company had purchase commitments to third-party manufacturers, primarily for materials and supplies used in the manufacture of the Company’s products, for an aggregate of $
150.6 million
.
Other
The Company is regularly subject to, and is currently undergoing, audits by various tax authorities in the United States and several foreign jurisdictions, including customs duties, import, and other taxes for prior tax years.
During its normal course of business, the Company may make certain indemnities, commitments, and guarantees under which it may be required to make payments. The Company cannot determine a range of estimated future payments and has not recorded any liability for indemnities, commitments, and guarantees in the accompanying condensed consolidated balance sheets.
See
Note 15 — Legal Proceedings
for further details regarding potential loss contingencies related to government tax audits and other current legal proceedings.
14. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION
The Company has
three
reportable operating segments based on the geographic nature of its operations: Americas, Asia Pacific, and EMEA. In addition, the ‘Other businesses’ category aggregates insignificant operating segments that do not meet the reportable segment threshold, including corporate operations and company-operated manufacturing facilities, which substantially ceased operations in the third quarter of 2018.
Each of the reportable operating segments derives its revenues from the sale of footwear and accessories to external customers. Revenues for ‘Other businesses’ include non-footwear and accessories product sales to external customers that are excluded from the measurement of segment operating revenues and income.
Segment performance is evaluated based on segment results without allocating corporate expenses, or indirect general, administrative, and other expenses. Segment profits or losses include adjustments to eliminate inter-segment sales. Reconciling items between segment income from operations and income from operations consist of other businesses and unallocated corporate and other expenses, as well as inter-segment eliminations. The following tables set forth information related to reportable operating segments:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
|
(in thousands)
|
Revenues:
|
|
|
|
Americas
|
$
|
129,126
|
|
|
$
|
123,830
|
|
Asia Pacific
(1)
|
91,047
|
|
|
91,179
|
|
EMEA
(1)
|
75,724
|
|
|
67,826
|
|
Total segment revenues
|
295,897
|
|
|
282,835
|
|
Other businesses
|
52
|
|
|
313
|
|
Total consolidated revenues
|
$
|
295,949
|
|
|
$
|
283,148
|
|
Income from operations:
|
|
|
|
Americas
|
$
|
33,609
|
|
|
$
|
28,539
|
|
Asia Pacific
(1)
|
26,681
|
|
|
24,108
|
|
EMEA
(1)
|
25,044
|
|
|
20,339
|
|
Total segment income from operations
|
85,334
|
|
|
72,986
|
|
Reconciliation of total segment income from operations to income before income taxes:
|
|
|
|
|
|
Other businesses
(2)
|
(16,337
|
)
|
|
(10,934
|
)
|
Unallocated corporate and other
(3)
|
(36,419
|
)
|
|
(36,130
|
)
|
Income from operations
|
32,578
|
|
|
25,922
|
|
Foreign currency gains (losses), net
|
(1,217
|
)
|
|
1,071
|
|
Interest income
|
195
|
|
|
279
|
|
Interest expense
|
(1,817
|
)
|
|
(113
|
)
|
Other income
|
590
|
|
|
53
|
|
Income before income taxes
|
$
|
30,329
|
|
|
$
|
27,212
|
|
Depreciation and amortization:
|
|
|
|
Americas
|
$
|
909
|
|
|
$
|
1,304
|
|
Asia Pacific
|
224
|
|
|
696
|
|
EMEA
|
221
|
|
|
352
|
|
Total segment depreciation and amortization
|
1,354
|
|
|
2,352
|
|
Other businesses
|
1,323
|
|
|
1,524
|
|
Unallocated corporate and other
|
3,459
|
|
|
3,767
|
|
Total consolidated depreciation and amortization
|
$
|
6,136
|
|
|
$
|
7,643
|
|
(1)
In the third quarter of 2018, certain revenues and expenses previously reported within the ‘Asia Pacific’ segment were shifted to the ‘EMEA’ segment. The previously reported amounts for revenues and income from operations for the three months ended March 31, 2018 have also been revised to conform to the current period presentation. See ‘Impacts of segment composition change’ table below for more information.
(2)
‘Other businesses’ expense increases are due primarily to higher distribution center costs related to increased volumes and timing of expenses.
(3)
Unallocated corporate and other includes corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, and depreciation and amortization of corporate and other assets not allocated to operating segments.
Impacts of segment composition change:
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2018
|
|
|
Increase (Decrease)
|
|
|
(in thousands)
|
Impacts on revenues:
|
|
|
Asia Pacific
|
|
$
|
(5,983
|
)
|
EMEA
|
|
5,983
|
|
Impacts on income from operations:
|
|
|
Asia Pacific
|
|
(2,476
|
)
|
EMEA
|
|
2,476
|
|
The following table sets forth asset information related to reportable operating segments as of the dates shown:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
(in thousands)
|
Long-lived assets:
|
|
|
|
Americas
|
$
|
134,931
|
|
|
$
|
12,977
|
|
Asia Pacific
|
22,137
|
|
|
1,831
|
|
EMEA
|
14,233
|
|
|
3,125
|
|
Total segment long-lived assets
|
171,301
|
|
|
17,933
|
|
Supply Chain
|
24,747
|
|
|
11,996
|
|
Corporate and other
|
43,395
|
|
|
39,586
|
|
Total long-lived assets
|
$
|
239,443
|
|
|
$
|
69,515
|
|
|
|
|
|
Total consolidated assets:
|
|
|
|
Americas
|
$
|
304,725
|
|
|
$
|
157,016
|
|
Asia Pacific
|
150,909
|
|
|
139,679
|
|
EMEA
|
97,830
|
|
|
66,021
|
|
Total segment assets
|
553,464
|
|
|
362,716
|
|
Supply Chain
|
45,447
|
|
|
31,108
|
|
Corporate and other
|
90,295
|
|
|
75,077
|
|
Total consolidated assets
|
$
|
689,206
|
|
|
$
|
468,901
|
|