STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements – Unaudited
March 31, 2020
($ in thousands except share and per share data)
The Company's level 3 balance consists of contingent consideration related to acquisitions. The changes in the Company's level 3 liabilities for the periods ended March 31, 2020 and December 31, 2019 are as follows:
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Balance at January 1,
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Payments
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Acquisitions
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Adjustments (1)
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Balance at
March 31,
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2020
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Liabilities:
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Contingent consideration
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$
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9,124
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—
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—
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(2,684)
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$
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6,440
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Balance at January 1,
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Payments
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Acquisitions
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Adjustments (2)
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Balance at December 31,
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2019
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Liabilities:
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Contingent consideration
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$
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3,000
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—
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9,124
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(3,000)
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$
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9,124
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(1) Amount was an adjustment of $2,684 to the preliminary purchase accounting of GREATS Brand, Inc.
(2) Amount was a benefit of $3,000 to operating expenses related to the Schwartz and Benjamin acquisition.
At March 31, 2020, the liability for potential contingent consideration was $1,670 in connection with the August 9, 2019 acquisition of GREATS Brand, Inc. Pursuant to the terms of an earn-out provision contained in the equity purchase agreement, between the Company and the sellers of GREATS Brand, Inc., earn-out payments are based on EBITA performance. The fair value of the contingent payments was estimated using the present value of the payments based on management’s projections of the financial results of GREATS Brand, Inc. during the earn-out period, utilizing a discount rate of 12.5%.
At March 31, 2020, the liability for potential contingent consideration was $4,770 in connection with the August 12, 2019 acquisition of B.B. Dakota, Inc. Pursuant to the terms of an earn-out provision contained in the equity purchase agreement, between the Company and the sellers of B.B. Dakota, Inc., earn-out payments are based on EBITDA performance. The fair value of the contingent payments was estimated using the present value of the payments based on management’s projections of the financial results of B.B. Dakota, Inc. during the earn-out period, utilizing a discount rate of 19.5%.
The Company recorded a liability for potential contingent consideration in connection with the January 30, 2017 acquisition of Schwartz & Benjamin. The fair value of the contingent payments was estimated using the present value of the payments based on management’s projections of the financial results of Schwartz & Benjamin during the earn-out period. An earn-out payment in the aggregate amount of $7,000 was paid to the sellers of Schwartz & Benjamin in the first quarter of 2018, leaving a remaining balance of $3,000 at December 31, 2018. In the first quarter of 2019, the Company reversed the $3,000 balance, because it did not have to be paid due to the termination of the Kate Spade license agreement held by Schwartz & Benjamin as of December 31, 2019.
The fair value of trademarks are measured on a non-recurring basis using Level 3 inputs, including forecasted cash flows, discount rates and implied royalty rates. During the first quarter, Cejon, GREATS and Jocelyn trademarks with an aggregate carrying amount of $40,598 were written down to their fair values of $31,080, resulting in a pre-tax impairment charge of $9,518. Of the $9,518 impairment charge, $9,062 and $456 were recorded in impairment of intangibles in the Wholesale Accessories/apparel and Retail segments, respectively.
The fair values of right-of use lease assets and fixed assets related to Company-owned retail stores were determined using Level 3 inputs, including estimated discounted future cash flows associated with the assets using sales trends and market participant assumptions. During the current period, certain right-of-use lease assets with a carrying amount of $60,661 and certain property, plant and equipment with a carrying amount of $12,292 related to retail store fixed assets were written down to a fair value of $43,835 and $297, respectively, resulting in impairment charges of $28,821. The impairment charges were recorded in operating expenses in the Retail segment.
The carrying value of certain financial instruments such as accounts receivable, factor accounts receivable and accounts payable approximates their fair values due to the short-term nature of their underlying terms. The fair values of investments in marketable securities available for sale are determined by reference to publicly quoted prices in an active market. Fair value of the notes receivable held by the Company approximates their carrying value based upon their imputed or actual interest rate,
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements – Unaudited
March 31, 2020
($ in thousands except share and per share data)
which approximates applicable current market interest rates. Some assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived assets that have been reduced to fair value when impaired. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
Note I – Leases
During the first quarter 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet. The Company adopted the standard using the modified retrospective approach with an effective date as of January 1, 2019. Upon adoption, the Company recorded $194,100 for right-of-use asset and $209,000 for lease liabilities.
The Company elected the package of three practical expedients. As such, the Company did not reassess whether expired or existing contracts are or contain a lease and did not need to reassess the lease classifications or reassess the initial direct costs associated with expired or existing leases. The Company did not elect the hindsight practical expedient and the land easement practical expedient, neither of which are applicable to the Company. In addition, the Company has elected to take the practical expedient to not separate lease and non-lease components for all asset classes.
The Company leases office space, sample production space, warehouses, showrooms, storage and retail stores under operating leases. The Company’s portfolio of leases is primarily related to real estate and since most of its leases do not provide a readily determinable implicit rate, the Company estimated its incremental borrowing rate to discount the lease payments based on information available at lease commencement.
Lease Position
The table below presents the lease-related assets and liabilities recorded on the balance sheet as of March 31, 2020 and December 31, 2019:
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Classification on the Balance Sheet
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March 31, 2020
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December 31, 2019
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Assets
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Noncurrent (1) (2)
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Operating lease right-of-use asset
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$
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127,187
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$
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155,700
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Liabilities
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Current
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Operating leases - current portion
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$
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37,517
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$
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38,624
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Noncurrent
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Operating leases - long-term portion
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121,187
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133,172
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Total operating lease liabilities
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$
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158,704
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$
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171,796
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Weighted-average remaining lease term
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5.3 years
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5.5 years
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Weighted-average discount rate
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4.4
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%
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4.4
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%
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(1) During the first quarter of 2020, the Company recorded a pre-tax impairment charge related to the right-of-use assets of $16,826.
(2) During the third quarter of 2019, the Company recorded a pre-tax impairment charge related to the right-of-use assets of $1,883.
Lease Costs
The table below presents certain information related to lease costs during the three months ended March 31, 2020 and 2019:
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Three Months Ended March 31,
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2020
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2019
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Operating lease cost
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$
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11,383
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$
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11,357
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Short-term lease cost
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13
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7
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Less: sublease income
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201
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—
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Total lease cost
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$
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11,195
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$
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11,364
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STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements – Unaudited
March 31, 2020
($ in thousands except share and per share data)
Other Information
The table below presents supplemental cash flow information related to leases as of the three months ended March 31, 2020 and 2019:
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Three Months Ended March 31,
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2020
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2019
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Cash paid for amounts included in the measurement of lease liabilities
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Operating cash flows used for operating leases
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$
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11,545
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$
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11,521
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Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the lease liabilities recorded on the balance sheet as of March 31, 2020:
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2020 (remaining nine months)
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$
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33,599
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2021
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39,223
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2022
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30,487
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2023
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21,703
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2024
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18,008
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Thereafter
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35,504
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Total minimum lease payments
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178,524
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Less: interest
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19,820
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Present value of lease liabilities
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$
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158,704
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Note J – Impairment of Other Long-Lived assets
Property and equipment and lease-related right-of-use assets, along with other long-lived assets, are evaluated for impairment periodically whenever triggering events or indicators exist that the carrying values may not be fully recoverable. As a result of the COVID-19 pandemic, the Company experienced lower than projected revenues and identified indicators of impairment for certain stores. The Company performed undiscounted cash flow analyses over the long-lived assets of certain stores with impairment indicators and compared it to the carrying value of those assets. Based on these undiscounted cash flow analyses, the Company determined that certain long-lived assets had carrying values that exceeded their estimated undiscounted cash flows. Fair values of the long-lived assets are estimated using an income approach based on management’s forecast of future cash flows derived from continued retail operations and the fair value of individual operating lease assets determined using estimated market rental rates. Significant estimates are used in determining future cash flows of each store over its remaining lease term including our expectations of future projected cash flows which include revenues, operating expenses, and market conditions. An impairment loss is recorded if the carrying amount of the long-lived asset exceeds its fair value. As a result, the Company recognized a pre-tax charge of $16,826 for impairment of its right-of-use assets and a pre-tax charge of $11,995 for impairment of its store fixed assets for the three months ended March 31, 2020. The charges were recorded in operating expenses in the consolidated statements of operations.
The determination of estimated market rent used in the fair value estimate of the Company’s right-of-use assets included within the respective store long-lived assets requires significant management judgment. Changes in these estimates could have a significant impact on whether long-lived store assets should be further evaluated for impairment and could have a significant impact on the resulting impairment charge.
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements – Unaudited
March 31, 2020
($ in thousands except share and per share data)
Note K – Share Repurchase Program
The Company's Board of Directors authorized a share repurchase program (the “Share Repurchase Program”), effective as of January 1, 2004. The Share Repurchase Program does not have a fixed expiration or termination date and may be modified or terminated by the Board of Directors at any time. On several occasions, the Board of Directors has increased the amount authorized for repurchase of the Company's common stock. Most recently, on April 24, 2019, the Board of Directors approved the extension of the Company's Share Repurchase Program for up to $200,000 in repurchases of the Company's common stock, which includes the amount remaining under the prior authorization. The Share Repurchase Program permits the Company to effect repurchases from time to time through a combination of open market repurchases or in privately negotiated transactions at such prices and times as are determined to be in the best interest of the Company. During the three months ended March 31, 2020, an aggregate of 769,526 shares of the Company's common stock were repurchased under the Share Repurchase Program, at a weighted average price per share of $32.97, for an aggregate purchase price of approximately $25,370, which includes the amount remaining under the prior authorization. As of March 31, 2020, approximately $111,590 remained available for future repurchases under the Share Repurchase Program. In the middle of March 2020, in response to the COVID-19 pandemic, as a precautionary measure the Company temporarily suspended the repurchase of the Company's common stock.
The Steven Madden, Ltd. 2019 Incentive Compensation Plan provides the Company with the right to deduct or withhold, or require employees to remit to the Company, an amount sufficient to satisfy any applicable tax withholding obligations applicable to stock-based compensation awards. To the extent permitted, employees may elect to satisfy all or part of such withholding obligations by tendering to the Company previously owned shares or by having the Company withhold shares having a fair market value equal to the employee's withholding tax obligation. During the three months ended March 31, 2020, an aggregate of 109,291 shares were withheld in connection with the settlement of vested restricted stock to satisfy tax-withholding requirements, at an average price per share of $34.49, for an aggregate purchase price of approximately $3,769.
Note L – Net Loss / Income Per Share of Common Stock
Basic net loss/income per share is based on the weighted average number of shares of common stock outstanding during the period, which does not include unvested restricted common stock subject to forfeiture of 4,565,000 shares for the period ended March 31, 2020, compared to 5,455,000 shares for the period ended March 31, 2019. Diluted net income per share reflects: (a) the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase shares of the Company’s common stock at the average market price during the period, and (b) the vesting of granted non-vested restricted stock awards for which the assumed proceeds upon vesting are deemed to be the amount of compensation cost not yet recognized attributable to future services using the treasury stock method, to the extent dilutive. The period ended March 31, 2020 resulted in a net loss therefore there was no difference in the weighted average number of common shares for basic and diluted loss per share as the effect of all potentially dilutive shares outstanding was anti-dilutive. For the three months ended March 31, 2020, options to purchase approximately 513,000 shares of common stock have been excluded from the calculation of diluted net income per share as compared to approximately 65,000 shares that were excluded for the three months ended March 31, 2019, as the result would have been anti-dilutive. For the three months ended March 31, 2020, 2,769,000 restricted shares were excluded from the calculation of diluted net (loss) per share, as the result would have been anti-dilutive. For the three months ended March 31, 2019, all unvested restricted stock awards were dilutive.
Note M – Income Taxes
The Company has historically calculated the provision for income taxes for interim reporting periods by applying an estimated annual effective tax rate for the full year to pre-tax income, excluding discrete items. This period, however, estimating an annual effective rate was not a reliable methodology due to COVID-19 implications on our projections of full-year pre-tax income and income tax expense. Since forecasting an annual effective tax rate under these circumstances would not provide a meaningful estimate, the Company believes that the actual year-to-date effective tax rate is the best estimate of the annual tax rate in accordance with U.S. GAAP.
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements – Unaudited
March 31, 2020
($ in thousands except share and per share data)
The Company’s provision for income taxes and effective tax rates for the three months ended March 31, 2020 and 2019 is presented in the following table:
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Three Months Ended March 31,
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2020
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2019
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(Loss)/income before provision for income taxes
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$
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(25,202)
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|
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$
|
45,852
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Income tax (benefit)/expense
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$
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(7,401)
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|
|
$
|
10,587
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Effective tax rate
|
29.4
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%
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|
23.1
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%
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The difference between the Company’s effective tax rates for the three months ended March 31, 2020 and 2019 is primarily due to the tax benefit from the 2020 pre-tax loss in jurisdictions with higher tax rates, and an increase in valuation allowances in various non-US jurisdictions.
The Company recognizes interest and penalties, if any, related to uncertain income tax positions in income tax expense. Accrued interest and penalties on unrecognized tax benefits, and interest and penalty expense are immaterial to the consolidated financial statements. Unrecognized tax benefits has not changed for the three months ended March 31, 2020.
The Company files income tax returns in the U.S. for federal, state, and local purposes, and in certain foreign jurisdictions. The Company's tax years 2017 through 2019 remain open to examination by most taxing authorities. During 2017, the U.S. Internal Revenue Service ("IRS") completed its audit of the Company's 2014 U.S. income tax return.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020, which includes significant corporate income tax and payroll tax provisions aimed at providing economic relief during this time. The Company expects to receive favorable cash flow benefits related to the employee retention credit, employer payroll tax deferral, and accelerated depreciation related to qualified improvement property. The Company will continue to assess the impact of the CARES Act and other COVID-19 related incentives.
Note N – Equity-Based Compensation
In February 2019, the Company's Board of Directors approved the Steven Madden, Ltd. 2019 Incentive Compensation Plan (the “2019 Plan”), under which non-qualified stock options, stock appreciation rights, performance shares, restricted stock, other stock-based awards and performance-based cash awards may be granted to employees, consultants and non-employee directors. The 2019 Plan is the successor to the Company's Amended and Restated 2006 Stock Incentive Plan, as amended (the "2006 Plan"), the term of which expired on April 6, 2019. The Company's stockholders approved the 2019 Plan at the Company's annual meeting of stockholders held on May 24, 2019.
The following table summarizes the number of shares of common stock authorized for issuance under the 2019 Plan, the number of stock-based awards granted (net of expired or cancelled awards) under the 2019 Plan and the number of shares of common stock available for the grant of stock-based awards under the 2019 Plan:
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Common stock authorized
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11,000,000
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Stock-based awards, including restricted stock and stock options granted, net of expired or cancelled awards
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(1,849,578)
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Common stock available for grant of stock-based awards as of March 31, 2020
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9,150,422
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Total equity-based compensation for the three months ended March 31, 2020 and 2019 is as follows:
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Three Months Ended March 31,
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2020
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2019
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Restricted stock
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$
|
4,864
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|
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$
|
4,617
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Stock options
|
822
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|
|
1,054
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Total
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$
|
5,686
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|
|
$
|
5,671
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|
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements – Unaudited
March 31, 2020
($ in thousands except share and per share data)
Equity-based compensation is included in operating expenses on the Company’s Condensed Consolidated Statements of Income.
Stock Options
Cash proceeds and intrinsic values related to total stock options exercised during the three months ended March 31, 2020 and 2019 are as follows:
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Three Months Ended March 31,
|
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|
2020
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2019
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|
Proceeds from stock options exercised
|
$
|
874
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|
|
$
|
722
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|
|
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Intrinsic value of stock options exercised
|
$
|
737
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|
|
$
|
329
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During the three months ended March 31, 2020, options to purchase approximately 388,479 shares of common stock with a weighted average exercise price of $26.04 vested. During the three months ended March 31, 2019, options to purchase approximately 403,687 shares of common stock with a weighted average exercise price of $26.52 vested. As of March 31, 2020, there were unvested options relating to 1,042,871 shares of common stock outstanding with a total of $4,539 of unrecognized compensation cost and an average vesting period of 2.2 years.
The Company uses the Black-Scholes-Merton option-pricing model to estimate the fair value of options granted, which requires several assumptions. The expected term of the options represents the estimated period of time until exercise and is based on the historical experience of similar awards. Expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield is based on the Company's annualized dividend per share amount divided by the Company's stock price. The following weighted average assumptions were used for stock options granted during the three months ended March 31, 2020 and 2019:
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|
|
|
|
|
|
|
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|
|
|
|
|
|
2020
|
|
2019
|
Volatility
|
|
33.9% to 37.6%
|
|
32.4% to 33.4%
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Risk free interest rate
|
|
0.5% to 1.6%
|
|
2.4% to 2.5%
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Expected life in years
|
|
3.0 to 5.0
|
|
3.0 to 5.0
|
Dividend yield
|
|
1.5%
|
|
1.7%
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Weighted average fair value
|
|
$10.22
|
|
$7.88
|
Activity relating to stock options granted under the Company’s plans during the three months ended March 31, 2020 is as follows:
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|
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|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
Outstanding at January 1, 2020
|
|
2,802,000
|
|
|
$
|
26.85
|
|
|
|
|
|
Granted
|
|
274,000
|
|
|
42.65
|
|
|
|
|
|
Exercised
|
|
(48,000)
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|
|
20.55
|
|
|
|
|
|
Forfeited
|
|
(14,000)
|
|
|
32.02
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
3,014,000
|
|
|
$
|
28.36
|
|
|
4.1 years
|
|
$
|
136
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|
Exercisable at March 31, 2020
|
|
1,970,000
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|
|
$
|
26.98
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|
|
3.7 years
|
|
$
|
131
|
|
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements – Unaudited
March 31, 2020
($ in thousands except share and per share data)
Restricted Stock
The following table summarizes restricted stock activity during the three months ended March 31, 2020 and 2019:
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|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
|
|
|
Number of Shares
|
|
Weighted Average Fair Value at Grant Date
|
|
Number of Shares
|
|
Weighted Average Fair Value at Grant Date
|
Outstanding at January 1,
|
|
4,427,000
|
|
|
$
|
19.84
|
|
|
5,135,000
|
|
|
$
|
18.42
|
|
Granted
|
|
366,000
|
|
|
34.69
|
|
|
518,000
|
|
|
32.45
|
|
Vested
|
|
(219,000)
|
|
|
27.15
|
|
|
(187,000)
|
|
|
25.09
|
|
Forfeited
|
|
(9,000)
|
|
|
32.84
|
|
|
(11,000)
|
|
|
28.19
|
|
Outstanding at March 31,
|
|
4,565,000
|
|
|
$
|
20.66
|
|
|
5,455,000
|
|
|
$
|
19.48
|
|
As of March 31, 2020, the Company had $61,286 of total unrecognized compensation cost related to restricted stock awards granted under the 2019 Plan and the 2006 Plan. This cost is expected to be recognized over a weighted average period of 3.9 years. The Company determines the fair value of its restricted stock awards based on the market price of its common stock on the date of grant.
As of March 31, 2020, the Company's founder and Creative and Design Chief, Mr. Madden, had unvested options to purchase 562,500 shares of the Company's common stock and 3,347,390 restricted shares of the Company's common stock.
Note O – Goodwill and Intangible Assets
The following is a summary of the carrying amount of goodwill by reporting unit as of March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
|
|
|
|
Net Carrying Amount
|
|
|
Footwear
|
|
Accessories/ Apparel
|
|
Retail
|
|
|
Balance at January 1, 2020
|
|
$
|
91,572
|
|
|
$
|
62,688
|
|
|
$
|
17,089
|
|
|
$
|
171,349
|
|
|
|
|
|
|
|
|
|
|
Purchase accounting adjustment
|
|
—
|
|
|
—
|
|
|
(2,591)
|
|
|
(2,591)
|
|
Translation and other
|
|
(1,670)
|
|
|
—
|
|
|
(1,233)
|
|
|
(2,903)
|
|
Balance at March 31, 2020
|
|
$
|
89,902
|
|
|
$
|
62,688
|
|
|
$
|
13,265
|
|
|
$
|
165,855
|
|
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements – Unaudited
March 31, 2020
($ in thousands except share and per share data)
The following table details identifiable intangible assets as of March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Lives
|
|
Cost Basis
|
|
Accumulated Amortization (1)
|
|
Impairment (2)
|
|
Net Carrying Amount
|
Trade names
|
|
6–10 years
|
|
$
|
8,770
|
|
|
$
|
8,770
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Customer relationships
|
|
10–20 years
|
|
38,980
|
|
|
20,559
|
|
|
—
|
|
|
18,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,750
|
|
|
29,329
|
|
|
—
|
|
|
18,421
|
|
Re-acquired right
|
|
indefinite
|
|
35,200
|
|
|
10,462
|
|
|
—
|
|
|
24,738
|
|
Trademarks
|
|
indefinite
|
|
115,481
|
|
|
125
|
|
|
9,518
|
|
|
105,838
|
|
|
|
|
|
$
|
198,431
|
|
|
$
|
39,916
|
|
|
$
|
9,518
|
|
|
$
|
148,997
|
|
(1) Includes the effect of foreign currency translation related primarily to the movements of the Canadian dollar and Mexican peso in relation to the U.S. dollar.
(2) Impairment charges of $8,615, $456 and $447 were recorded in the first quarter of 2020 related to the Company's Cejon, GREATS and Jocelyn trademarks, respectively. As a result of the COVID-19 pandemic and decline in the macroeconomic environment, the Company performed an interim impairment analysis as of March 31, 2020 that resulted in $9,518 of impairment charges.
The Company evaluates its goodwill and intangible assets for indicators of impairment at least annually in the third quarter of each year or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Given the substantial reduction in sales and the reduced cash flow projections as a result of the COVID-19 pandemic, the Company determined that impairment indicators were present and that an impairment assessment was warranted for goodwill and indefinite-lived intangible assets. As a result, the Company performed an interim assessment of goodwill, assigned to its reporting units using a quantitative approach as of March 31, 2020 and an interim assessment of indefinite-lived intangible assets using a quantitative approach as of March 31, 2020. In conducting the interim goodwill assessment, the estimated fair values of the Company's reporting units were determined using discounted cash flows and market comparisons. Based on the results of the impairment assessment, the Company concluded that the fair values of its reporting units significantly exceeded their respective carrying values and therefore no goodwill impairment charges were recorded. In evaluating indefinite-lived intangible assets, estimated fair values were determined using discounted cash flows and supported comparable royalty rates. Based on the results of the quantitative impairment assessment, the Company concluded that the fair values of certain trademarks were below their respective carrying values, which resulted in $9,518 of impairment charges.
The amortization of intangible assets amounted to $891 for the three months ended March 31, 2020, compared to $1,334 for the three months ended March 31, 2019 and is included in operating expenses in the Company's Condensed Consolidated Statements of Income. The estimated future amortization expense for intangibles as of March 31, 2020 is as follows:
|
|
|
|
|
|
2020 (remaining nine months)
|
$
|
2,063
|
|
2021
|
2,163
|
|
2022
|
1,743
|
|
2023
|
1,743
|
|
2024
|
1,743
|
|
Thereafter
|
8,966
|
|
Total
|
$
|
18,421
|
|
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements – Unaudited
March 31, 2020
($ in thousands except share and per share data)
Note P – Derivative Instruments
The Company uses derivative instruments, specifically, forward foreign exchange contracts, to manage the risk associated with the volatility of future cash flows. The foreign exchange contracts are used to mitigate the impact of exchange rate fluctuations on certain forecasted purchases of inventory and are designated as cash flow hedging instruments. As of March 31, 2020, the fair value of the Company's foreign currency derivatives, which is included on the Condensed Consolidated Balance Sheets in other assets, was $1,325. As of March 31, 2020, $1,178 of gains related to cash flow hedges are recorded in accumulated other comprehensive income, before tax, and are expected to be recognized in earnings at the same time the hedged items affect earnings. As of March 31, 2019, $488 of gains related to cash flow hedges were recorded in accumulated other comprehensive income, before tax. As of March 31, 2020, the Company's hedging activities were considered ineffective due to COVID-19 and, thus, gains of $176 related to ineffectiveness from hedging activities were recognized in the Condensed Consolidated Statements of (Loss) /Income.
Note Q – Commitments, Contingencies and Other
Future Minimum Royalty and Advertising Payments:
The Company has minimum commitments related to the Company’s license agreements. The Company sources, distributes, advertises and sells pursuant to its exclusive license agreements with unaffiliated licensors. Royalty amounts under the license agreements are generally based on a stipulated percentage of sales, although most of these agreements contain provisions for the payment of minimum annual royalty amounts. The license agreements have various terms and some have additional renewal options, provided that minimum sales levels and certain other conditions are achieved. As of March 31, 2020 the Company had future minimum royalty and advertising payments of $12,350.
Legal Proceedings:
The Company has been named as a defendant in certain lawsuits in the normal course of business. In the opinion of management, after consulting with legal counsel, the liabilities, if any, resulting from these matters should not have a material effect on the Company's financial position or results of operations. It is the policy of management to disclose the amount or range of reasonably possible losses in excess of recorded amounts or cash flows.
Note R – Operating Segment Information
The Company operates the following business segments: Wholesale Footwear, Wholesale Accessories/Apparel, Retail, First Cost and Licensing. The Wholesale Footwear segment, through sales to department stores, mid-tier retailers, mass market merchants, online retailers and specialty stores, derives revenue, both domestically and internationally, from sales of branded and private label women’s, men’s, girls’ and children’s footwear. The Wholesale Accessories/Apparel segment, which includes branded and private label handbags, apparel, belts and small leather goods as well as cold weather and selected other fashion accessories, derives revenue, both domestically and internationally, from sales to department stores, mid-tier retailers, mass market merchants, online retailers and specialty stores. Our Wholesale Footwear and Wholesale Accessories/Apparel segments, through revenue from certain territories within Asia, Europe, North America (excluding the United States) and Africa and, under special distribution arrangements, in various other territories within Australia, the Middle East, India, South and Central America and New Zealand and pursuant to a partnership agreement in Singapore. The Retail segment, through the operation of Company-owned retail stores in the United States, Canada and Mexico, our joint ventures in South Africa, China, Taiwan and Israel and the Company’s websites, derives revenue from sales of branded women’s, men’s and children’s footwear, accessories, apparel and licensed products to consumers. The First Cost segment represents activities of a subsidiary that earns commissions and design fees for serving as a buying agent of footwear products to mass-market merchandisers, mid-tier department stores and other retailers with respect to their purchase of footwear. In the Licensing segment, the Company generates revenue by licensing its Steve Madden®, Steven by Steve Madden® and Madden Girl® trademarks and other trademark rights for use in connection with the manufacture, marketing and sale of eyewear, outerwear, hosiery, activewear, sleepwear, jewelry, watches, hair accessories, umbrellas, bedding, luggage and fragrance. In addition, this segment licenses the Betsey Johnson® trademark for use in connection with the manufacture, marketing and sale of women's and children's apparel, hosiery, outerwear, sleepwear, activewear, jewelry, watches, bedding, luggage, umbrellas and household goods. The Licensing segment also licenses the Dolce Vita® trademark for use in connection with the manufacture, marketing and sale of swimwear.
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements – Unaudited
March 31, 2020
($ in thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended,
|
|
Wholesale Footwear
|
|
Wholesale Accessories/Apparel
|
|
Total Wholesale
|
|
Retail
|
|
First Cost
|
|
Licensing
|
|
Consolidated
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
235,069
|
|
|
$
|
67,672
|
|
|
$
|
302,741
|
|
|
$
|
52,943
|
|
|
$
|
1,250
|
|
|
|
$
|
2,234
|
|
|
$
|
359,168
|
|
Gross profit
|
|
79,784
|
|
|
18,512
|
|
|
98,296
|
|
|
31,684
|
|
|
1,250
|
|
|
|
2,234
|
|
|
133,464
|
|
Income/(loss) from operations
|
|
29,091
|
|
|
(10,621)
|
|
|
18,470
|
|
|
(45,803)
|
|
|
148
|
|
|
937
|
|
|
(26,248)
|
|
Segment assets
|
|
$
|
823,419
|
|
|
$
|
113,100
|
|
|
936,519
|
|
|
186,383
|
|
|
16,561
|
|
|
6,441
|
|
|
1,145,904
|
|
Capital expenditures
|
|
|
|
|
|
$
|
2,650
|
|
|
$
|
651
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,301
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
276,587
|
|
|
$
|
71,507
|
|
|
$
|
348,094
|
|
|
$
|
62,846
|
|
|
$
|
2,358
|
|
|
|
$
|
2,490
|
|
|
$
|
415,788
|
|
Gross profit
|
|
98,322
|
|
|
21,916
|
|
|
120,238
|
|
|
36,759
|
|
|
2,358
|
|
|
|
2,490
|
|
|
161,845
|
|
Income/(loss) from operations
|
|
48,272
|
|
|
4,867
|
|
|
53,139
|
|
|
(9,706)
|
|
|
(416)
|
|
|
1,643
|
|
|
44,660
|
|
Segment assets
|
|
$
|
837,947
|
|
|
$
|
84,485
|
|
|
922,432
|
|
|
254,479
|
|
|
25,579
|
|
|
7,264
|
|
|
1,209,754
|
|
Capital expenditures
|
|
|
|
|
|
$
|
1,692
|
|
|
$
|
1,707
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
Domestic (a)
|
|
$
|
317,937
|
|
|
$
|
368,433
|
|
|
|
|
|
International
|
|
41,231
|
|
|
47,355
|
|
|
|
|
|
Total
|
|
$
|
359,168
|
|
|
$
|
415,788
|
|
|
|
|
|
(a) Includes revenues of $68,325 for the three months ended March 31, 2020 and $77,116 for the comparable period in 2019 related to sales to U.S. customers where the title is transferred outside the U.S. and the sale is recorded by our international entities.
|
|
|
|
|
|
|
|
|
Note S – Recent Accounting Pronouncements
Recently Adopted
In August 2018, the FASB issued Accounting Standards Update No. 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” This new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective January 1, 2020 and did not have any significant impact on the Company’s financial position or results of operations.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This new guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective January 1, 2020 and did not have any significant impact on the Company’s financial position or results of operations.
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements – Unaudited
March 31, 2020
($ in thousands except share and per share data)
In June 2016, the FASB issued Accounting Standards Update 2016-13 ("ASU 2016-13"), "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective January 1, 2020 and did not have any significant impact on the Company’s financial position or results of operations.