NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 and 2018
|
(1)
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
BASIS OF PRESENTATION
Skechers U.S.A., Inc. and subsidiaries (the “Company”) designs, develops, markets and distributes footwear. The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the consolidated financial statements in prior years to conform to the current year presentation.
EFFECTS OF THE COVID-19 PANDEMIC ON THE COMPANY’S BUSINESS
In March 2020, the Company temporarily closed its stores around the world and temporarily furloughed a meaningful portion of its hourly employees. The Company began reopening its stores in April 2020, and as of December 31, 2020, over 90% of the Company-owned retail stores have reopened. The Company continues to monitor and react to the COVID-19 pandemic, including conforming to local governments and global health organizations’ guidance, implementing global travel restrictions, and implementing “work from home” measures for many of its employees. The Company is actively monitoring and assessing the rapidly emerging government policies and economic stimulus responses to the COVID-19 pandemic around the world.
Although the Company has reopened the majority of its worldwide retail stores, the economic impact of the COVID-19 pandemic continues to negatively affect the Company’s results of operations. Many of the reopened retail stores continue to have temporarily reduced operating hours and less foot traffic, which has resulted in lower sales. Additionally, the reopening of stores and corporate offices required the Company to implement safety protocols, facilitate social distancing, enhance cleaning and sanitation activities, and provide masks and gloves to all employees. These safety processes and procedures have increased our costs to operate for the foreseeable future. Given the unprecedented impact the COVID-19 pandemic has had, the Company is unable to forecast consumer demand and store productivity. Whether and how quickly customers may resume shopping, and the effect of the pandemic on consumer behavior and spending patterns remains highly uncertain. The Company expects customer demand to be suppressed in the near term. In addition, it is possible that there will be an increase in the number of COVID-19 cases in the future, which could require the Company’s stores to close again and negatively impact the Company’s sales.
As the COVID-19 pandemic is complex and rapidly evolving, the Company’s plans as described above may change. The Company expects that the ongoing impact of the COVID-19 pandemic and the resulting economic disruption may have a material adverse effect on its consolidated results of operations, financial position, and cash flows beyond fiscal year 2020.
USE OF ESTIMATES
The Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. Significant areas requiring the use of estimates relate primarily to revenue recognition, allowance for bad debts, returns, sales allowances and customer chargebacks, inventory write-downs, valuation of intangibles and long-lived assets, goodwill, litigation reserves and valuation of deferred income taxes. Actual results could differ materially from those estimates.
BUSINESS SEGMENT INFORMATION
The Company’s operations and segments are organized along its distribution channels and consist of the following: Domestic Wholesale, International Wholesale, and Direct-to-Consumer. Information regarding these segments is summarized in Note 13 – Segment and Geographic Information.
REVENUE RECOGNITION
The Company derives income from the sale of footwear and royalties earned from licensing the Skechers brand. The Company recognizes sales revenue, net of estimated returns and excluding sales and value added taxes. Revenue is recognized at point of sale or upon shipment, the point in time where control transfers to the customer.
For North America, goods are shipped free on board (“FOB”) shipping point directly from the Company’s U.S. distribution center. For international wholesale customers, product is shipped FOB shipping point: (i) directly from the Company’s European distribution center; (ii) to third-party distribution centers in Central America, South America and Asia; or (iii) directly from third-party manufacturers to other international customers. For distributor sales, product is generally delivered directly from independent factories to third-party distribution centers or to distributors’ freight forwarders on a free named carrier basis. Wholesale sales are recognized upon shipment. Related costs paid to third-party shipping companies are recorded as cost of sales and are accounted for as a
38
fulfillment cost. Direct-to-consumer revenues are primarily generated from sales to customers at the Company’s retail stores recognized at the point of sale and sales made through its websites recognized upon shipment.
The Company earns royalty income from symbolic licensing arrangements in which third parties sell product with the Company’s brand. 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 individual agreement terms and correspondence with its licensees regarding actual sales.
ALLOWANCE FOR BAD DEBTS, RETURNS, SALES ALLOWANCES AND CUSTOMER CHARGEBACKS
The Company provides a reserve, charged against revenue and its receivables, for estimated losses that may result from its customers’ inability to pay. To minimize the likelihood of uncollectibility, customers’ credit-worthiness is reviewed and adjusted periodically in accordance with external credit reporting services, financial statements issued by the customer and the Company’s experience with the customer’s account. The Company determines the amount of the reserve by analyzing known uncollectible accounts, aged receivables, economic conditions in the customers’ countries or industries, historical losses and its customers’ credit-worthiness. Amounts later determined and specifically identified to be uncollectible are charged against this reserve. Allowances for bad debts are recorded to general and administrative expenses. Direct-to-consumer receivables represent amounts due from credit card companies and are generally collected within a few days of the purchase. The Company typically extends credit terms to its wholesale customers based on their creditworthiness and generally does not receive advance payments. Generally, wholesale customers do not have the right to return goods, however, the Company periodically decides to accept returns or provide customers with credits.
Sales and cost of sales are reduced by an estimate of customer merchandise returns, which is calculated based on historical experience. The Company also reserves for potential disputed amounts or chargebacks from its customers. The Company’s chargeback reserve is based on a collectability percentage calculated using factors such as historical trends, current economic conditions and nature of the chargeback.
WAREHOUSE AND DISTRIBUTION COSTS
The Company’s distribution network-related costs are included in general and administrative expenses. Distribution expenses, including the functions of purchasing, receiving, inspecting, allocating, warehousing and packaging product totaled $315.8 million, $276.4 million and $249.6 million for 2020, 2019 and 2018.
PRODUCT DESIGN AND DEVELOPMENT COSTS
The Company charges product design and development costs to general and administrative expenses. Aggregate product design and development costs were approximately $17.9 million, $16.8 million, and $18.5 million during the years ended December 31, 2020, 2019 and 2018.
ADVERTISING
Advertising costs are expensed in the period in which an advertisement first runs, or over the life of an endorsement contract. Advertising expense for the years ended December 31, 2020, 2019 and 2018 was approximately $248.7 million, $297.1 million and $278.4 million. Prepaid advertising costs were $3.8 million and $6.4 million at December 31, 2020 and 2019. Prepaid amounts represent the unamortized portion of endorsement contracts, advertising in trade publications and media productions created, but not run.
INCOME TAXES
The Company recognizes deferred tax liabilities for taxable temporary differences and deferred tax assets for deductible temporary differences and operating loss carry‑forwards using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit or expense is recognized as a result of changes in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all of any deferred tax assets will not be realized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include deposits with initial terms of less than three months. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
INVESTMENTS
Investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments.
39
INVENTORY
Inventory, principally finished goods, is stated at the lower of cost (based on the first-in, first-out method) or net realizable value. Cost includes shipping and handling fees and product cost, which are subsequently expensed to cost of sales. The Company provides for estimated losses from obsolete or slow-moving inventory 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.
BUSINESS COMBINATIONS
Business acquisitions are accounted for under the acquisition method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Purchased intangible assets with finite lives are amortized over their estimated useful lives. The purchase price allocation is subject to adjustment until the Company has completed its analysis within the measurement period.
In the first quarter of 2019, we purchased the minority interest in our India joint-venture for $82.9 million, which made our India joint-venture entity a wholly-owned subsidiary.
On April 1, 2019, the Company purchased a 60% interest in Manhattan SKMX, S. de R.L. de C.V. (“Skechers Mexico”), for total cash consideration of $120.6 million, net of cash acquired. Skechers Mexico is a joint venture operating and generating sales in Mexico. As a result of this purchase, Skechers Mexico became a majority-owned subsidiary and its results are consolidated in the consolidated financial statements beginning April 1, 2019. The Company completed its purchase price allocation during the first quarter of 2020. The total purchase consideration was allocated to the assets acquired of $248.7 million and liabilities assumed of $47.3 million based on their estimated fair values. The change to the provisional amounts resulted in a $22.1 million increase to goodwill, a $49.1 million increase to intangible assets and a $17.1 million increase to deferred tax liabilities. Additionally, the change to the provisional amounts resulted in a $13.9 million gain on reacquired rights and an increase in amortization expense and accumulated amortization of $7.0 million, of which $5.2 million relates to the prior year and an $8.0 million increase in inventory, of which $6.0 million relates to the prior year. The prior year amounts were not material to amortization expense or cost of sales within the consolidated statements of earnings for the year ended December 31, 2019. Acquisition-related costs of $0.9 million, associated with the acquisition, were expensed as incurred and included in general and administrative expenses in the condensed consolidated statement of earnings. The pro forma and actual results of operations for this acquisition have not been presented because they are not material.
GOODWILL
As of December 31, 2020, the Company had $93.5 million of goodwill with $91.9 million allocated to International Wholesale and $1.6 million to Domestic Wholesale. Goodwill is not amortized but is tested at least annually in the fourth quarter for impairment or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
INTANGIBLE ASSETS
The Company has amortizable intangible assets consisting of reacquired rights with a gross carrying value of $49.1 million and accumulated amortization of $12.1 million as of December 31, 2020. Purchased intangible assets with finite lives are amortized over their estimated useful lives. In addition to purchase price adjustments, amortization expense related to amortizable intangible assets was $6.9 million for the year ended December 31, 2020. Future amortization expense related to amortizable intangible assets will be approximately $6.9 million per year for the each of the years 2021 through 2025. The weighted-average amortization period for amortizable reacquired rights is 7 years.
NONCONTROLLING INTERESTS
The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products throughout Mexico, Asia and the Middle East or to construct the Company’s domestic distribution facility. These joint ventures are variable interest entities (“VIE”), and the Company is considered the primary beneficiary. This determination is based on the relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. Specifically, the Company has both of the following characteristics: (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance; and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE, or the right to receive benefits from the entity that could potentially be significant to the VIE. The assets and liabilities and results of operations of these entities are included in the Company’s consolidated financial statements, even though the Company may not hold a majority equity interest. There have been no changes during 2020 in the accounting treatment or characterization of any previously identified VIE. The Company continues to reassess these relationships quarterly. The assets of these joint ventures are restricted, as they are not available for general business use outside the context of such joint ventures. The holders of the liabilities of each joint venture have no recourse to the Company.
40
FOREIGN CURRENCY TRANSLATION
The Company’s reporting currency is the U.S. dollar. Certain international operations use the respective local currency as their functional currency, while others use the U.S. dollar as their functional currency. Translation adjustments for subsidiaries with non-U.S. dollar functional currencies are included in other comprehensive income. Foreign currency transaction gains (losses), resulting from exchange rate fluctuations, on transactions denominated in a currency other than the functional currency are reported in earnings. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated at the balance sheet date exchange rate. Net income (loss) and cash flow items are translated at the weighted-average exchange rates during the period. Translations of intercompany loans of a long-term investment nature are included as a component of translation adjustment in other comprehensive income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value hierarchy as defined by applicable accounting standards prioritizes the use of inputs used in valuation techniques into the following three levels:
|
•
|
Level 1: Quoted market prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data.
|
|
•
|
Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity’s own assumptions.
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The Company’s Level 1 investments primarily include money market funds and U.S. Treasury securities; Level 2 investments primarily include corporate notes and bonds, asset-backed securities, U.S. Agency securities, and actively traded mutual funds; and the Company does not currently have any Level 3 assets or liabilities. The Company has one Level 2 derivative instrument which is an interest rate swap related to the refinancing of its U.S. distribution center (see Note 6 – Financial Commitments) classified as other long-term liabilities. The fair value of the interest rate swap was determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipt was based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Credit valuation adjustments were incorporated to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
The carrying amount of receivables, payables and other amounts arising out of the normal course of business approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based on current rates and terms available to the Company for similar debt.
DERIVATIVE INSTRUMENTS
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, the Company uses an interest rate swap as part of its interest rate risk management strategy. The Company’s interest rate swap, designated as a cash flow hedge, involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. By utilizing an interest rate swap, the Company is exposed to credit-related losses in the event that the counterparty fails to perform under the terms of the derivative contract. To mitigate this risk, the Company enters into derivative contracts with major financial institutions based upon credit ratings and other factors. The Company continually assesses the creditworthiness of its counterparties. As of December 31, 2020, all counterparties to the interest rate swap had performed in accordance with their contractual obligations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument,” (“ASU 2016-13”) which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments; including, trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses. The Company adopted ASU 2016-03 on January 1, 2020, and the adoption of this ASU did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU 2018-13”) which modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The Company adopted ASU 2018-13 on January 1, 2020, and the adoption of this ASU did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 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 ASC 350-40 to determine which costs to capitalize as assets or expense as incurred. The guidance in ASC 350-40 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. The Company adopted ASU 2018-15 on January 1, 2020, and the adoption of this ASU did not have a material impact on its consolidated financial statements.
41
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general income tax accounting methodology including an exception for the recognition of a deferred tax liability when a foreign subsidiary becomes an equity method investment and an exception for interim periods showing operating losses in excess of anticipated operating losses for the year. The amendment also reduces the complexity surrounding franchise tax recognition; the step up in the tax basis of goodwill in conjunction with business combinations; and the accounting for the effect of changes in tax laws enacted during interim periods. The amendments in this update are effective for the Company for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, as amended and supplemented by subsequent ASUs (collectively, “ASU 2020-04”), which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for borrowing instruments, which use LIBOR as a reference rate, and is effective immediately, but is only available through December 31, 2022. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
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(2)
|
CASH, CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS
|
The following tables show the Company’s cash, cash equivalents, short-term and long-term investments by significant investment category:
|
|
As of December 31, 2020
|
|
(in thousands)
|
|
Adjusted Cost
|
|
|
Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Short-Term Investments
|
|
|
Long-Term Investments
|
|
Cash
|
|
$
|
946,961
|
|
|
$
|
946,961
|
|
|
$
|
946,961
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
423,865
|
|
|
|
423,865
|
|
|
|
423,865
|
|
|
|
—
|
|
|
|
—
|
|
U.S. Treasury securities
|
|
|
21,146
|
|
|
|
21,146
|
|
|
|
—
|
|
|
|
8,067
|
|
|
|
13,079
|
|
Total level 1
|
|
|
445,011
|
|
|
|
445,011
|
|
|
|
423,865
|
|
|
|
8,067
|
|
|
|
13,079
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
|
117,253
|
|
|
|
117,253
|
|
|
|
—
|
|
|
|
83,521
|
|
|
|
33,732
|
|
Asset-backed securities
|
|
|
28,253
|
|
|
|
28,253
|
|
|
|
—
|
|
|
|
5,498
|
|
|
|
22,755
|
|
U.S. Agency securities
|
|
|
3,681
|
|
|
|
3,681
|
|
|
|
—
|
|
|
|
3,681
|
|
|
|
—
|
|
Mutual funds
|
|
|
38,846
|
|
|
|
38,846
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,846
|
|
Total level 2
|
|
|
188,033
|
|
|
|
188,033
|
|
|
|
—
|
|
|
|
92,700
|
|
|
|
95,333
|
|
TOTAL
|
|
$
|
1,580,005
|
|
|
$
|
1,580,005
|
|
|
$
|
1,370,826
|
|
|
$
|
100,767
|
|
|
$
|
108,412
|
|
|
|
As of December 31, 2019
|
|
(in thousands)
|
|
Adjusted Cost
|
|
|
Fair Value
|
|
|
Cash and Cash Equivalents
|
|
|
Short-Term Investments
|
|
|
Long-Term Investments
|
|
Cash
|
|
$
|
662,355
|
|
|
$
|
662,355
|
|
|
$
|
662,355
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
162,521
|
|
|
|
162,521
|
|
|
|
162,521
|
|
|
|
—
|
|
|
|
—
|
|
U.S. Treasury securities
|
|
|
9,686
|
|
|
|
9,686
|
|
|
|
—
|
|
|
|
1,679
|
|
|
|
8,007
|
|
Total level 1
|
|
|
172,207
|
|
|
|
172,207
|
|
|
|
162,521
|
|
|
|
1,679
|
|
|
|
8,007
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds
|
|
|
132,431
|
|
|
|
132,431
|
|
|
|
—
|
|
|
|
104,130
|
|
|
|
28,301
|
|
Asset-backed securities
|
|
|
23,614
|
|
|
|
23,614
|
|
|
|
—
|
|
|
|
263
|
|
|
|
23,351
|
|
U.S. Agency securities
|
|
|
12,352
|
|
|
|
12,352
|
|
|
|
—
|
|
|
|
5,965
|
|
|
|
6,387
|
|
Mutual funds
|
|
|
28,543
|
|
|
|
28,543
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,543
|
|
Total level 2
|
|
|
196,940
|
|
|
|
196,940
|
|
|
|
-
|
|
|
|
110,358
|
|
|
|
86,582
|
|
TOTAL
|
|
$
|
1,031,502
|
|
|
$
|
1,031,502
|
|
|
$
|
824,876
|
|
|
$
|
112,037
|
|
|
$
|
94,589
|
|
The Company’s investments consist of U.S. Treasury securities, corporate notes and bonds, asset-backed securities and U.S. Agency securities, which the Company has the intent and ability to hold to maturity and therefore are classified as held-to-maturity. The Company holds mutual funds in its deferred compensation plan which are classified as trading securities.
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
42
less than two years. The Company minimizes the potential risk of principal loss by investing in highly-rated securities and limiting the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio.
When evaluating an investment for its current expected credit losses, the Company reviews factors such as historical experience with defaults, losses, credit ratings, term, market sector and macroeconomic trends, including current conditions and forecasts to the extent they are reasonable and supportable.
The Company regularly enters into non-cancellable operating leases for retail stores, distribution facilities, offices, showrooms and automobiles. Retail stores typically have initial terms ranging from 5 to 10 years and other real estate or facility leases may have initial lease terms of up to 20 years. In connection with the adoption of ASC 842, Leases, beginning with the first quarter of 2019, the Company’s leases are recorded as operating lease right-of-use (“ROU”) assets and operating leases liabilities. Operating lease liabilities are recognized based on the present value of the fixed portion of lease payments over the lease term at the commencement date. Net present value is calculated using an incremental borrowing rate based on a combination of market-based factors, such as market quoted forward yield curves and Company specific factors, such as lease size and duration. Many of the Company’s real estate leases include options to extend and are included in the lease obligations when considered reasonably certain. ROU assets are recognized based on operating lease liabilities reduced by lease incentives and initial direct costs incurred. Fixed lease cost is recognized on a straight-line basis over the lease term.
The Company’s real estate leases may also require additional payments for percentage rent, real estate taxes, or other occupancy-related costs. Percentage rent, a variable cost, is recognized in the consolidated financial statements when incurred and is based on the specific terms in the lease agreement. Real estate taxes and other occupancy-related costs are non-lease components.
Operating lease cost and other information:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Fixed lease cost
|
|
$
|
266,105
|
|
|
$
|
246,296
|
|
Variable lease cost
|
|
|
3,455
|
|
|
|
13,104
|
|
Operating cash flows used for leases
|
|
|
257,775
|
|
|
|
264,424
|
|
ROU assets exchanged for lease liabilities upon adoption of ASC 842
|
|
|
—
|
|
|
|
1,035,062
|
|
ROU assets exchanged for lease liabilities
|
|
|
318,713
|
|
|
|
122,078
|
|
Weighted-average remaining lease term
|
|
4.31 years
|
|
|
4.66 years
|
|
Weighted-average discount rate
|
|
|
3.67
|
%
|
|
|
4.20
|
%
|
The following table presents future lease payments as of December 31, 2020:
Year (in thousands)
|
|
Operating Leases
|
|
2021
|
|
$
|
254,674
|
|
2022
|
|
|
226,841
|
|
2023
|
|
|
202,515
|
|
2024
|
|
|
186,135
|
|
2025
|
|
|
167,501
|
|
Thereafter
|
|
|
400,261
|
|
Total lease payments
|
|
$
|
1,437,927
|
|
Less: Imputed interest
|
|
|
(168,488
|
)
|
Operating lease liabilities
|
|
$
|
1,269,439
|
|
As of December 31, 2020, the Company has operating leases, primarily for new retail stores, that have not yet commenced which will generate additional ROU assets of $14.9 million. Rent expense for the year ended 2018 was $257.6 million.
43
|
(4)
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment is summarized as follows:
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Land
|
|
$
|
95,712
|
|
|
$
|
90,862
|
|
Buildings and improvements
|
|
|
531,059
|
|
|
|
349,066
|
|
Furniture, fixtures and equipment
|
|
|
485,349
|
|
|
|
454,837
|
|
Leasehold improvements
|
|
|
506,459
|
|
|
|
453,805
|
|
Total property, plant and equipment
|
|
|
1,618,579
|
|
|
|
1,348,570
|
|
Less accumulated depreciation and amortization
|
|
|
683,138
|
|
|
|
609,645
|
|
Property, plant and equipment, net
|
|
$
|
935,441
|
|
|
$
|
738,925
|
|
Depreciation expense for the year ended December 31, 2020 was $115.5 million as calculated using the straight-line method, which is based on the following estimated useful lives:
Buildings
|
|
20 years
|
Building improvements
|
|
10 years
|
Furniture, fixtures and equipment
|
|
5 to 20 years
|
Leasehold improvements
|
|
Shorter of useful life or remaining lease term
|
The Company reviews all stores for impairment annually or when facts and circumstances indicate that the carrying values may be impaired. The Company performs an evaluation of recoverability by comparing the carrying values of the net assets to their related projected undiscounted future cash flows, in addition to other quantitative and qualitative analyses. The Company did not record material impairment charges during the years ended December 31, 2020, 2019 or 2018.
Accrued expenses at December 31, 2020 and 2019 are summarized as follows:
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Accrued payroll, taxes, and other
|
|
$
|
104,004
|
|
|
$
|
92,264
|
|
Return reserve liability
|
|
|
77,219
|
|
|
|
69,048
|
|
Accrued inventory purchases
|
|
|
27,489
|
|
|
|
48,923
|
|
Accrued expenses
|
|
$
|
208,712
|
|
|
$
|
210,235
|
|
|
(6)
|
FINANCIAL COMMITMENTS
|
The Company had $38.7 million and $3.8 million of outstanding letters of credit as of December 31, 2020 and December 31, 2019, and approximately $3.3 million and $5.8 million in short-term borrowings as of December 31, 2020 and December 31, 2019.
Long-term borrowings were as follows:
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Revolving Credit Facility
|
|
$
|
452,500
|
|
|
$
|
—
|
|
HF-T1 Distribution Center Loan
|
|
|
129,505
|
|
|
|
63,692
|
|
HF-T2 Distribution Center Construction Loan
|
|
|
22,169
|
|
|
|
—
|
|
China Distribution Center Construction Loan
|
|
|
77,501
|
|
|
|
48,791
|
|
China Operational Loans
|
|
|
48,743
|
|
|
|
2,541
|
|
Other
|
|
|
1,247
|
|
|
|
393
|
|
Subtotal
|
|
|
731,665
|
|
|
|
115,417
|
|
Less: Current installments
|
|
|
(52,250
|
)
|
|
|
(66,234
|
)
|
Total long-term borrowings
|
|
$
|
679,415
|
|
|
$
|
49,183
|
|
Revolving Credit Facility
On November 21, 2019, the Company entered into a $500.0 million senior unsecured revolving credit facility, which matures on November 21, 2024 (the “2019 Credit Agreement”), with Bank of America, N.A., as administrative agent and joint lead arranger,
44
HSBC Bank USA, N.A. and JPMorgan Chase Bank, N.A., as joint lead arrangers, and other lenders. The 2019 Credit Agreement may be increased by up to $250.0 million under certain conditions and provides for the issuance of letters of credit and swingline loans up to a maximum of $100.0 million and $25.0 million. The Company may use the proceeds from the 2019 Credit Agreement for working capital and other lawful corporate purposes. Borrowings on the 2019 Credit Agreement’s revolving credit facility and letters of credit bear interest, at the Company’s option, at a rate equal to (a) LIBOR plus an applicable margin between 1.125% and 1.625% based upon the Company’s Total Adjusted Net Leverage Ratio (as defined in the 2019 Credit Agreement) or (b) a base rate (defined as the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the Bank of America prime rate and (iii) LIBOR plus 1.00%) plus an applicable margin between 0.125% and 0.625% based upon the Company’s Total Adjusted Net Leverage Ratio. The weighted-average annual interest rate on borrowings under the 2019 Credit Agreement was approximately 1.53% during the year ended December 31, 2020. The 2019 Credit Agreement contains certain customary affirmative and negative covenants and events of default for credit facilities of this type.
The 2019 Credit Agreement requires the Company to maintain a maximum Total Adjusted Net Leverage Ratio of 3.75:1, except in the event of an acquisition in which case the ratio may be increased at the Company’s election to 4.25:1 for the quarter in which such acquisition occurs and for the next three quarters thereafter.
As of December 31, 2020, there was $47.5 million available under the Company’s 2019 Credit Agreement. As of December 31, 2019, the entire $500 million was available, and the Company had not utilized the 2019 Credit Agreement for letters of credit. The Company was in compliance with the financial covenants under the 2019 Credit Agreement as of December 31, 2020.
HF-T1 Distribution Center Loan
On August 11, 2015, the Company’s joint venture with HF Logistics I, LLC (“HF”), HF Logistics-SKX, LLC (the “JV”), through a wholly-owned subsidiary of the JV (“HF-T1”), entered into an amended and restated construction loan agreement with Bank of America, N.A., as administrative agent and as a lender, and CIT Bank, N.A. and Raymond James Bank, N.A., as lenders (collectively, the “Amended Construction Loan Agreement”). Under the Amended Construction Loan Agreement, the parties agreed that the lenders would loan $70 million to HF-T1 (the “2015 Loan”) at an interest rate per annum of LIBOR Daily Floating Rate (as defined therein) plus a margin of 2%. On March 18, 2020, HF-T1 entered into an amendment to the 2015 Loan (the “2020 Amendment”) that increased the borrowings under the 2015 Loan to $129.5 million and extended the maturity date of the 2015 Loan to March 18, 2025 (the “HF-T1 2020 Loan”). The proceeds of the 2020 Amendment were used by the JV to (i) refinance all amounts owed on the 2015 Loan, (ii) pay $1.0 million in accrued interest, loan fees and other closing costs associated with the 2020 Amendment and (iii) make a distribution of $64.4 million to HF. Pursuant to the 2020 Amendment, the interest rate per annum on the HF-T1 2020 Loan is the LIBOR Daily Floating Rate (as defined therein) plus a margin of 1.75%.
On August 11, 2015, HF-T1 and Bank of America, N.A. also entered into an ISDA master agreement (together with the schedule related thereto, the “Swap Agreement”) to govern derivative and/or hedging transactions that HF-T1 concurrently entered into with Bank of America, N.A. The Company’s objective in using the Swap Agreement is to stabilize interest expense and manage exposure to interest rate volatility. Pursuant to the Swap Agreement, on August 14, 2015, HF-T1 entered into a confirmation of swap transactions (the “Interest Rate Swap”) with Bank of America, N.A. The Interest Rate Swap had an effective date of August 12, 2015 and a maturity date of August 12, 2022, subject to early termination at the option of HF-T1, commencing on August 1, 2020. On March 18, 2020, HF-T1 and Bank of America, N.A. executed an amendment to the Swap Agreement (the “Swap Agreement Amendment”) to extend the maturity date of the Interest Rate Swap to March 18, 2025. The Swap Agreement Amendment fixes the effective interest rate on the HF-T1 2020 Loan at 2.55% per annum. The 2020 Amendment and the Swap Agreement Amendment are subject to customary covenants and events of default. Bank of America, N.A. also acts as a lender and syndication agent under the Company’s 2019 Credit Agreement.
The Interest Rate Swap involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of December 31, 2020, the Interest Rate Swap had an aggregate notional amount of $129.5 million. Under the terms of the Swap Agreement Amendment, the Company will pay a weighted-average fixed rate of 0.795% on the notional amount and receive payments from the counterparty based on the 30-day LIBOR rate, effectively modifying the Company’s exposure to interest rate risk by converting floating-rate debt to a fixed rate of 4.08%. By using a derivative instrument, the Company is exposed to credit-related losses in the event that the counterparty fails to perform under the terms of the contract. To mitigate this risk, the Company enters into derivative contracts with major financial institutions based upon credit ratings and other factors. The Company continually assesses the creditworthiness of its counterparties. As of December 31, 2020, all counterparties to the Interest Rate Swap had performed in accordance with their contractual obligations.
HF-T2 Distribution Center Construction Loan
On April 3, 2020, the JV, through HF Logistics-SKX T2, LLC, a wholly-owned subsidiary of the JV (“HF-T2”), entered into a construction loan agreement with Bank of America, N.A. as administrative agent and lender (collectively, the “2020 Construction Loan Agreement”), pursuant to which the JV obtained a loan of up to $73.0 million used to expand the U.S. distribution center (the “HF-T2 2020 Construction Loan”). Under the 2020 Construction Loan Agreement, the interest rate per annum on the HF-T2 2020 Construction Loan is LIBOR Daily Floating Rate (as defined therein) plus a margin of 190 basis points, reducing to 175 basis points
45
upon substantial completion of the construction and certain other conditions being satisfied. The weighted-average annual interest rate on borrowings under the 2020 Construction Loan Agreement was approximately 2.05% during the year ended December 31, 2020. The maturity date of the HF-T2 2020 Construction Loan is April 3, 2025. The obligations of the JV under the 2020 Construction Loan Agreement are guaranteed by TGD Holdings I, LLC, which is an affiliate of HF.
China Distribution Center Construction Loan
On September 29, 2018, through its Taicang subsidiary (“TC Subsidiary”), the Company entered into a 700 million yuan loan agreement with China Construction Bank Corporation (“the China DC Loan”) to finance the construction of the Company’s distribution center in China. Interest is paid quarterly. The interest rate floats and is calculated at a reference rate provided by the People’s Bank of China. The interest rate at December 31, 2020 was 4.28% and may increase or decrease over the life of the loan, and will be evaluated every 12 months. The principal of the loan will be repaid in semi-annual installments, beginning in 2021, of variable amounts as specified in the China DC Loan. The China DC Loan contains customary affirmative and negative covenants for secured credit facilities of this type. The China DC Loan matures on September 28, 2023. The obligations of the TC Subsidiary under the China DC Loan are jointly and severally guaranteed by the Company’s Chinese joint venture.
China Operational Loans
The Company has entered certain secured credit facilities to support the operations of its Chinese joint venture. The balance of working capital loans at December 31, 2020 was approximately $30.1 million with interest rates ranging from 1.75% to 3.92% per annum, payable at terms agreed by the lender. The balance of loans related to a corporate office building in Shanghai was approximately $18.6 million with interest at 4.28% per annum, payable at terms agreed by the lender. There was no amount outstanding on these credit facilities at December 31, 2019.
The following table presents the future principal payments required under the Company’s debt obligations, discussed above:
Year (in thousands)
|
|
Maturities
|
|
2021
|
|
$
|
52,250
|
|
2022
|
|
|
29,026
|
|
2023
|
|
|
33,962
|
|
2024
|
|
|
452,500
|
|
2025
|
|
|
163,927
|
|
|
|
$
|
731,665
|
|
|
(7)
|
COMMITMENTS AND CONTINGENCIES
|
PRODUCT AND OTHER FINANCING
The Company finances production activities in part through the use of interest-bearing open purchase arrangements with certain of its international manufacturers. These arrangements currently bear interest at rates between 0.0% and 0.4% for 30- to 60-day financing. The amounts included in accounts payable and outstanding under these arrangements were $210.1 million and $214.7 million at December 31, 2020 and 2019. Interest expense incurred by the Company under these arrangements totaled $7.4 million in 2020, $7.9 million in 2019, and $3.3 million in 2018. The Company has open purchase commitments with its foreign manufacturers of $1.1 billion and warehouse and equipment and corporate construction contracts of $583.2 million for the expansion of its distribution centers and corporate headquarters, which are not included in the consolidated balance sheets at December 31, 2020.
LITIGATION
The Company recognizes legal expense in connection with loss contingencies as incurred.
In accordance with GAAP, the Company records a liability in its 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 consolidated financial statements as of December 31, 2020, nor is it possible to estimate what litigation-related costs will be in the future; however, the Company believes that the likelihood that claims related to litigation would result in a material loss to the Company, either individually or in the aggregate, is remote.
46
|
(8)
|
STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION
|
COMMON STOCK
The authorized capital stock of the Company consists of 500 million shares of Class A Common Stock, par value $0.001 per share (“Class A Common Stock”), 75 million shares of Class B Common Stock, par value $0.001 per share (“Class B Common Stock”), and 10 million shares of Preferred Stock, par value $0.001 per share.
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 (EPS). Basic and diluted net EPS 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.
During the years ended December 31, 2020, 2019 and 2018 certain Class B stockholders converted 1,391,670, 1,575,509 and 561,876 shares, respectively, of Class B Common Stock to Class A Common Stock.
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 could purchase shares of its Class A Common Stock, for an aggregate repurchase price not to exceed $150.0 million. The Share Repurchase Program expired on February 6, 2021 at which time share repurchase authorizations of $20.0 million had not been executed.
The following table provides a summary of the Company’s Class A Common Stock repurchase activities:
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Shares repurchased
|
|
|
—
|
|
|
|
968,724
|
|
|
|
3,656,277
|
|
Average cost per share
|
|
$
|
—
|
|
|
$
|
30.99
|
|
|
$
|
27.34
|
|
Total cost of shares repurchased (in thousands):
|
|
$
|
—
|
|
|
$
|
30,019
|
|
|
$
|
99,977
|
|
INCENTIVE AWARD PLAN
As approved by the Company’s stockholders on May 23, 2017, the 2017 Incentive Award Plan (the “2017 Plan”), replaced and superseded the 2007 Incentive Award Plan adopted on May 24, 2007 (the “2007 Plan,” together with the 2017 Plan, the “Plans”). A total of 10,000,000 shares of Class A Common Stock were 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. 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. As of December 31, 2020, a total of 5,737,050 shares remain available for grant as equity awards under the 2017 Plan.
47
A summary of the status and changes of nonvested shares related to the Plans is presented below:
|
|
Shares
|
|
|
Weighted-Average Grant-Date Fair Value
|
|
Unvested at January 1, 2018
|
|
|
2,303,557
|
|
|
|
26.25
|
|
Granted
|
|
|
1,811,000
|
|
|
|
38.05
|
|
Vested/Released
|
|
|
(1,018,283
|
)
|
|
|
21.91
|
|
Cancelled
|
|
|
(127,333
|
)
|
|
|
29.71
|
|
Unvested at December 31, 2018
|
|
|
2,968,941
|
|
|
|
34.79
|
|
Granted
|
|
|
1,603,000
|
|
|
|
28.45
|
|
Vested/Released
|
|
|
(1,116,868
|
)
|
|
|
32.46
|
|
Cancelled
|
|
|
(28,250
|
)
|
|
|
39.40
|
|
Unvested at December 31, 2019
|
|
|
3,426,823
|
|
|
|
32.55
|
|
Granted
|
|
|
1,569,300
|
|
|
|
37.45
|
|
Vested/Released
|
|
|
(1,093,500
|
)
|
|
|
32.64
|
|
Cancelled
|
|
|
(790,600
|
)
|
|
|
32.23
|
|
Unvested at December 31, 2020
|
|
|
3,112,023
|
|
|
|
35.06
|
|
The Company recognized, as part of general and administrative, compensation expense of $65.2 million, $41.1 million and $30.5 million for grants under the Plans for the years ended December 31, 2020, 2019, and 2018. Related excess income tax benefits (expenses), recorded in the consolidated statements of earnings, for the years ended December 31, 2020, 2019 and 2018, were $(0.7) million, $0.3 million, and $1.6 million. Included in compensation expense recognized in 2020 is an $18.2 million non-cash charge related to the cancellation of 750,000 unvested shares as a result of a legal settlement. Nonvested shares generally vest over a graded vesting schedule from one to four years from the date of grant. For grants that have a service requirement, the Company accounts for forfeitures upon occurrence, rather than estimating the probability of forfeiture at the date of grant. Accordingly, the Company recognizes the full grant-date fair value of these awards on a straight-line basis throughout the requisite service period, reversing any expense if, and only if, there is a forfeiture. There was $75.6 million of unrecognized compensation cost related to nonvested common shares as of December 31, 2020, which is expected to be recognized over a weighted-average period of 1.9 years. The total fair value of shares vested during the years ended December 31, 2020, 2019 and 2018 was $41.6 million, $36.3 million and $22.3 million.
The Company determines the fair value of restricted stock awards and any performance-related components based on the closing market price of the Company’s common stock on the date of grant. For share-based awards that have a performance-based vesting requirement, the Company evaluates the probability of achieving the performance criteria throughout the performance period and will adjust share-based compensation expense if it estimates that the achievement of the performance criteria is not probable. Certain performance-based awards contain market condition components which are valued on the date of grant using a Monte Carlo simulation model. The fair value of such awards is expensed ratably over the performance period and is not adjusted for actual achievement. Included in the table above are two tranches of performance-based awards granted on December 30, 2020 which vest at the end of a three-year performance period. The first tranche includes 125,000 shares with a market condition tied to the Company’s total shareholder return in relation to its peer companies, valued at $49.78 per share, and the second tranche includes 125,000 shares with a performance condition tied to annual EPS growth, valued at $36.02 per share. The ultimate payout of performance awards is determined at the end of the performance period and can vary from zero to 200% based on actual results.
STOCK PURCHASE PLAN
As approved by the Company’s stockholders on May 23, 2017, the 2018 Employee Stock Purchase Plan (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. A total of 5,000,000 shares of Class A Common Stock are available for sale under the 2018 ESPP. The 2018 ESPP provides eligible employees of the Company and its subsidiaries the opportunity to purchase shares of the Company’s Class A Common Stock at a purchase price equal to 85% of the fair market value on the first trading day or last trading day of each purchase period, whichever is lower. Eligible employees can invest up to 15% of their compensation through payroll deductions during each purchase period. 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 the Black-Scholes valuation model.
Under the 2018 ESPP, the Company received approximately $5.9 million, $6.2 million and $5.3 million, and issued 232,904, 260,630 and 221,889 shares, respectively, for the years ended December 31, 2020, 2019 and 2018.
48
Basic EPS and diluted EPS are calculated by dividing net earnings by the following: for basic EPS, the weighted-average number of common shares outstanding for the period; and for diluted EPS, the sum of the weighted-average number of both outstanding common shares and potentially dilutive common shares using the treasury stock method.
The calculation of EPS is as follows:
|
|
Year Ended December 31,
|
|
(in thousands, except per share data)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net earnings attributable to Skechers U.S.A., Inc.
|
|
$
|
98,564
|
|
|
$
|
346,560
|
|
|
$
|
301,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic
|
|
|
154,184
|
|
|
|
153,392
|
|
|
|
155,815
|
|
Dilutive effect of nonvested shares
|
|
|
710
|
|
|
|
759
|
|
|
|
635
|
|
Weighted-average common shares outstanding, diluted
|
|
|
154,894
|
|
|
|
154,151
|
|
|
|
156,450
|
|
Anti-dilutive common shares excluded above
|
|
|
69,060
|
|
|
|
10,838
|
|
|
|
352,169
|
|
Net earnings attributable to Skechers U.S.A., Inc. per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.64
|
|
|
$
|
2.26
|
|
|
$
|
1.93
|
|
Diluted
|
|
$
|
0.64
|
|
|
$
|
2.25
|
|
|
$
|
1.92
|
|
The Company’s earnings (loss) before income tax expense consists of the following:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
U.S. operations
|
|
|
(112,671
|
)
|
|
|
4,999
|
|
|
|
16,597
|
|
Foreign operations
|
|
|
267,400
|
|
|
|
511,006
|
|
|
|
415,287
|
|
Earnings before income taxes
|
|
|
154,729
|
|
|
|
516,005
|
|
|
|
431,884
|
|
The provision for income tax consists of the following:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(30,094
|
)
|
|
$
|
22,899
|
|
|
$
|
11,379
|
|
Deferred
|
|
|
(2,208
|
)
|
|
|
(3,583
|
)
|
|
|
(3,971
|
)
|
Total federal
|
|
|
(32,302
|
)
|
|
|
19,316
|
|
|
|
7,408
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
3,841
|
|
|
|
6,384
|
|
|
|
5,408
|
|
Deferred
|
|
|
(3,070
|
)
|
|
|
(813
|
)
|
|
|
(1,316
|
)
|
Total state
|
|
|
771
|
|
|
|
5,571
|
|
|
|
4,092
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
56,530
|
|
|
|
66,656
|
|
|
|
53,071
|
|
Deferred
|
|
|
(16,497
|
)
|
|
|
(2,790
|
)
|
|
|
(3,960
|
)
|
Total foreign
|
|
|
40,033
|
|
|
|
63,866
|
|
|
|
49,111
|
|
Total income tax expense
|
|
$
|
8,502
|
|
|
$
|
88,753
|
|
|
$
|
60,611
|
|
49
Income taxes differ from the statutory tax rates as applied to earnings before income taxes as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Expected income tax expense
|
|
$
|
32,493
|
|
|
$
|
108,361
|
|
|
$
|
90,696
|
|
State income tax, net of federal benefit
|
|
|
(2,394
|
)
|
|
|
1,278
|
|
|
|
3,051
|
|
Rate differential on foreign income
|
|
|
(27,426
|
)
|
|
|
(43,327
|
)
|
|
|
(40,065
|
)
|
Change in unrecognized tax benefits
|
|
|
6,084
|
|
|
|
2,739
|
|
|
|
820
|
|
Non-deductible compensation
|
|
|
7,119
|
|
|
|
7,126
|
|
|
|
6,269
|
|
Tax credits
|
|
|
(6,312
|
)
|
|
|
(3,264
|
)
|
|
|
(2,539
|
)
|
Excess tax (benefit) on stock compensation
|
|
|
703
|
|
|
|
(251
|
)
|
|
|
(1,557
|
)
|
Benefits provided by the CARES Act
|
|
|
(15,863
|
)
|
|
|
—
|
|
|
|
—
|
|
Non-deductible share cancellation
|
|
|
4,048
|
|
|
|
—
|
|
|
|
—
|
|
U.S. transition tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,963
|
)
|
U.S. tax on foreign earnings
|
|
|
—
|
|
|
|
9,786
|
|
|
|
9,956
|
|
Other
|
|
|
(463
|
)
|
|
|
3,440
|
|
|
|
2,077
|
|
Change in valuation allowance
|
|
|
10,513
|
|
|
|
2,865
|
|
|
|
2,866
|
|
Income tax expense
|
|
$
|
8,502
|
|
|
$
|
88,753
|
|
|
$
|
60,611
|
|
Effective tax rate
|
|
|
5.5
|
%
|
|
|
17.2
|
%
|
|
|
14.0
|
%
|
The Company’s provision for income tax expense (benefit) 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 non-U.S. jurisdictions in which the Company has operations, the applicable statutory rates are generally lower than in the U.S., ranging from 0.0% to 34.0%. The Company’s provision for income tax expense (benefit) was calculated using the applicable rate for each jurisdiction applied to the Company’s pre-tax earnings (loss) with application of transfer pricing considerations in each jurisdiction, while the Company’s effective tax rate is calculated by dividing income tax expense (benefit) by earnings before income taxes. For 2020, the effective tax rate was lower than the U.S. federal and state combined statutory rate of approximately 25%, primarily because of earnings from foreign operations in jurisdictions imposing either lower tax rates on corporate earnings or no corporate income tax. Additionally, the 2020 effective tax rate reflects the favorable impact of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, enacted on March 27, 2020. Due to changes in the ownership structure of the Company’s international operations that took effect in December 2020, the Company realized a $15.9 million tax benefit related to the net operating loss carryback provisions of the CARES Act. The Company also received a $4.8 million reduction in payroll taxes as a result of the Employee Retention Credit provisions of the CARES Act.
The Company is subject to a tax on global intangible low-taxed income (“GILTI”). GILTI taxes foreign income in excess of a deemed return on tangible assets of foreign corporations and is treated as a period cost.
The tax effects of temporary differences giving rise to deferred tax assets and liabilities are presented below:
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory adjustments
|
|
$
|
5,788
|
|
|
$
|
6,954
|
|
Accrued expenses
|
|
|
59,266
|
|
|
|
50,847
|
|
Allowances for bad debts and chargebacks
|
|
|
5,820
|
|
|
|
4,809
|
|
Loss carryforwards
|
|
|
34,396
|
|
|
|
28,605
|
|
Business credit carryforward
|
|
|
13,130
|
|
|
|
8,262
|
|
Share-based compensation
|
|
|
5,194
|
|
|
|
4,521
|
|
Operating lease liabilities
|
|
|
305,261
|
|
|
|
261,984
|
|
Valuation allowance
|
|
|
(43,557
|
)
|
|
|
(33,044
|
)
|
Total deferred tax assets
|
|
|
385,298
|
|
|
|
332,938
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
8,076
|
|
|
|
5,586
|
|
Right-of-use assets
|
|
|
305,231
|
|
|
|
261,984
|
|
Depreciation on property, plant and equipment
|
|
|
19,546
|
|
|
|
16,602
|
|
Total deferred tax liabilities
|
|
|
332,853
|
|
|
|
284,172
|
|
Net deferred tax assets
|
|
$
|
52,445
|
|
|
$
|
48,766
|
|
At December 31, 2020, combined foreign net operating loss carry-forwards were approximately $109.5 million, of which $0.1 million expire in 2021 and $27.4 million can be carried forward indefinitely. A valuation allowance of $26.5 million is recorded for the amount which is not likely to be fully utilized. The $10.5 million increase in the valuation allowance primarily relates to increases in deferred tax assets in certain foreign non-benefited loss jurisdictions.
50
State tax credit and net operating loss carry-forwards at December 31, 2020 were $10.8 million and $53.4 million. These tax credit and net operating loss carry-forward amounts begin to expire in 2024 and 2026. No valuation allowance has been recorded, as the Company believes they will be fully utilized.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
10,566
|
|
|
$
|
7,975
|
|
Additions for current year tax positions
|
|
|
9,804
|
|
|
|
1,795
|
|
Additions for prior year tax positions
|
|
|
2,735
|
|
|
|
1,638
|
|
Reductions related to lapse of statute of limitations
|
|
|
(1,594
|
)
|
|
|
(842
|
)
|
Ending balance
|
|
$
|
21,511
|
|
|
$
|
10,566
|
|
Current unrecognized tax benefits are recorded as a reduction in prepaid expense and included in tax expense when recorded. Long-term unrecognized tax benefits are recorded as an increase in long-term taxes payable with a portion included in tax expense and a portion recorded as a reduction in deferred tax liabilities when recorded. If recognized, $17.9 million of unrecognized tax benefits would be recorded as a reduction in income tax expense, and $3.6 million would be recorded as an increase in deferred tax liabilities.
The amount of income taxes the Company pays is subject to ongoing audits by taxing jurisdictions around the world. The Company’s estimate of the potential outcome of any uncertain tax position is subject to its assessment of relevant risks, facts, and circumstances existing at that time. The Company believes that it has adequately provided for these matters. However, the Company’s future results may include favorable or unfavorable adjustments to its estimates in the period the audits are resolved, which may impact the Company’s effective tax rate.
The Company estimates interest and penalties related to income tax matters which are included in income tax expense. Amounts were $0.3 million, $0.4 million, and $0.2 million for the years ended December 31, 2020, 2019, and 2018. Accrued interest and penalties were $2.4 million and $2.1 million as of December 31, 2020 and 2019.
As of December 31, 2020, the Company’s tax filings are generally subject to examination in the U.S. and most foreign jurisdictions for years ending on or after December 31, 2016, and in several Asian and European tax jurisdictions for years ending on or after December 31, 2010. During the year, the Company reduced the balance of unrecognized tax benefits by $1.6 million as a result of expiring statutes and there was no reduction in the balance of unrecognized tax benefits from the settlement of domestic and foreign audits. It is reasonably possible that certain domestic and foreign statutes will expire, and certain domestic and foreign audits will be settled during the next twelve months which would reduce the balance of 2020 and prior year unrecognized tax benefits by $1.3 million and $2.6 million.
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, the Company may repatriate certain funds held outside the U.S. for which all applicable U.S. and non-U.S. tax has been fully provided as of December 31, 2020. 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 its 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 chooses to repatriate some or all of the funds the Company has designated as indefinitely reinvested outside the U.S., the amount repatriated would not be subject to federal income tax but may be subject to applicable non-U.S. income and withholding taxes, and to certain state income taxes. In addition to certain tax restrictions, our joint venture in China has limitations on its distribution of earnings, as local law currently requires it to maintain $18.8 million of its earnings in a statutory reserve.
|
(11)
|
EMPLOYEE BENEFIT PLANS
|
The Company has a 401(k) profit sharing plan covering employees who are 21 years of age and have completed six months of service. Company contributions to the plan are discretionary and vest over a six year period. The Company made contributions of $2.8 million, $2.4 million, and $2.3 million to the plan for the years ended December 31, 2020, 2019, and 2018.
The Skechers U.S.A., Inc. Deferred Compensation Plan (the “Plan”) allows eligible employees to defer compensation up to a maximum amount to a future date on a nonqualified basis. The Plan provides for the Company to make discretionary contributions to participating employees as determined by the Company’s Compensation Committee. Contributions were $0.3 million for the year ended December 31, 2020, and $0.1 million for each of the years ended December 31, 2019 and 2018. Deferred compensation is recognized based on the fair value of the participants’ accounts.
51
|
(12)
|
RELATED PARTY TRANSACTIONS
|
The Skechers Foundation (the “Foundation”) is a 501(c)(3) non-profit entity and not a subsidiary or otherwise affiliated with the Company. 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 years ended December 31, 2020, 2019, and 2018, the Company made contributions of $2.3 million, $1.0 million, and $1.0 million to the Foundation in each year.
The Company had receivables from officers and employees of $1.0 million and $0.8 million at December 31, 2020 and 2019. These amounts relate to travel advances, incidental personal purchases on Company-issued credit cards and employee loans. These receivables are short-term and are expected to be repaid within a reasonable period of time. The Company had no other significant transactions with or payables to officers, directors or significant stockholders of the Company.
|
(13)
|
SEGMENT AND GEOGRAPHIC INFORMATION
|
The Company has three reportable segments – Domestic Wholesale, International Wholesale and Direct-to-Consumer. Management evaluates segment performance based primarily on sales and gross margin. All other costs and expenses of the Company are analyzed on an aggregate basis and not allocated to the segments. Sales, gross profit and identifiable assets for the Company’s segments were as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Wholesale
|
|
$
|
1,126,564
|
|
|
$
|
1,247,550
|
|
|
$
|
1,259,615
|
|
International Wholesale
|
|
|
2,257,846
|
|
|
|
2,462,632
|
|
|
|
2,054,770
|
|
Direct-to-Consumer
|
|
|
1,213,004
|
|
|
|
1,509,869
|
|
|
|
1,327,683
|
|
Total
|
|
$
|
4,597,414
|
|
|
$
|
5,220,051
|
|
|
$
|
4,642,068
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Wholesale
|
|
$
|
431,603
|
|
|
$
|
457,944
|
|
|
$
|
468,340
|
|
International Wholesale
|
|
|
1,023,183
|
|
|
|
1,133,573
|
|
|
|
976,739
|
|
Direct-to-Consumer
|
|
|
734,995
|
|
|
|
899,640
|
|
|
|
778,526
|
|
Total
|
|
$
|
2,189,781
|
|
|
$
|
2,491,157
|
|
|
$
|
2,223,605
|
|
Additions to property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Wholesale
|
|
$
|
129,165
|
|
|
$
|
75,037
|
|
|
$
|
29,717
|
|
International Wholesale
|
|
|
120,983
|
|
|
|
109,205
|
|
|
|
63,316
|
|
Direct-to-Consumer
|
|
|
59,768
|
|
|
|
51,869
|
|
|
|
50,003
|
|
Total
|
|
$
|
309,916
|
|
|
$
|
236,111
|
|
|
$
|
143,036
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
Domestic Wholesale
|
|
$
|
1,945,681
|
|
|
$
|
1,472,323
|
|
International Wholesale
|
|
|
2,436,568
|
|
|
|
2,100,042
|
|
Direct-to-Consumer
|
|
|
1,430,120
|
|
|
|
1,320,578
|
|
Total
|
|
$
|
5,812,369
|
|
|
$
|
4,892,943
|
|
The following summarizes the Company’s operations in different geographic areas:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Sales (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,913,409
|
|
|
$
|
2,197,391
|
|
|
$
|
2,128,100
|
|
International
|
|
|
2,684,005
|
|
|
|
3,022,660
|
|
|
|
2,513,968
|
|
Total
|
|
$
|
4,597,414
|
|
|
$
|
5,220,051
|
|
|
$
|
4,642,068
|
|
52
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Property, plant and equipment, net (1)
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
535,648
|
|
|
$
|
439,132
|
|
International
|
|
|
399,793
|
|
|
|
299,793
|
|
Total
|
|
$
|
935,441
|
|
|
$
|
738,925
|
|
(1)
|
During the years ended December 31, 2020, 2019 and 2018, sales in China were $924.5 million, $850.0 million and $744.0 million. Property, plant and equipment, net in China was $241.6 million and $146.1 million at December 31, 2020 and 2019.
|
During the years ended December 31, 2020, 2019 and 2018, sales to the five largest customers were approximately 8.8%, 9.6% and 10.4%.
The majority of the Company’s products are produced in China and Vietnam. The Company diversifies manufacturing among various factories to reduce risk.
The Company’s top five manufacturers produced the following:
|
|
Percentage of Total Production
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Manufacturer #1
|
|
|
21.0
|
%
|
|
|
16.0
|
%
|
|
|
12.8
|
%
|
Manufacturer #2
|
|
|
6.2
|
%
|
|
|
7.3
|
%
|
|
|
10.1
|
%
|
Manufacturer #3
|
|
|
5.8
|
%
|
|
|
7.2
|
%
|
|
|
8.6
|
%
|
Manufacturer #4
|
|
|
4.9
|
%
|
|
|
5.1
|
%
|
|
|
5.4
|
%
|
Manufacturer #5
|
|
|
4.2
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
|
42.1
|
%
|
|
|
40.6
|
%
|
|
|
41.9
|
%
|
Assets located outside the U.S. consist primarily of cash, accounts receivable, inventory, property, plant and equipment, and operating lease ROU assets. Net assets held outside the U.S. were $3.1 billion and $2.6 billion at December 31, 2020 and 2019, respectively.
The Company performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable generally do not require collateral. Foreign accounts receivable are generally collateralized by letters of credit. The Company’s credit losses charged to expense for the years ended December 31, 2020, 2019 and 2018 were $19.0 million, $31.6 million and $8.0 million.
The Company’s accounts receivables, excluding the allowance for bad debts, sales returns and chargebacks, in different geographic areas are summarized as follows:
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Domestic Accounts Receivable
|
|
$
|
230,546
|
|
|
$
|
228,533
|
|
Foreign Accounts Receivable
|
|
|
437,816
|
|
|
|
440,876
|
|
|
(14)
|
SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
The operating results for any quarter are not necessarily indicative of results for any future period. Summarized financial data are as follows:
Year Ended December 31, 2020
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
(in thousands, except per share data)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Sales
|
|
$
|
1,242,345
|
|
|
$
|
729,472
|
|
|
$
|
1,300,886
|
|
|
$
|
1,324,711
|
|
Gross profit
|
|
|
547,668
|
|
|
|
368,566
|
|
|
|
625,121
|
|
|
|
648,426
|
|
Net earnings (loss)
|
|
|
41,160
|
|
|
|
(55,217
|
)
|
|
|
82,110
|
|
|
|
78,172
|
|
Net earnings (loss) attributable to Skechers U.S.A., Inc.
|
|
|
49,101
|
|
|
|
(68,097
|
)
|
|
|
64,278
|
|
|
|
53,282
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
|
$
|
(0.44
|
)
|
|
$
|
0.42
|
|
|
$
|
0.34
|
|
Diluted
|
|
$
|
0.32
|
|
|
$
|
(0.44
|
)
|
|
$
|
0.41
|
|
|
$
|
0.34
|
|
53
Year Ended December 31, 2019
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
(in thousands, except per share data)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Sales
|
|
$
|
1,276,756
|
|
|
$
|
1,258,565
|
|
|
$
|
1,353,998
|
|
|
$
|
1,330,732
|
|
Gross profit
|
|
|
590,509
|
|
|
|
609,835
|
|
|
|
653,064
|
|
|
|
637,748
|
|
Net earnings
|
|
|
131,019
|
|
|
|
91,998
|
|
|
|
121,734
|
|
|
|
82,501
|
|
Net earnings attributable to Skechers U.S.A., Inc.
|
|
|
108,758
|
|
|
|
75,180
|
|
|
|
103,090
|
|
|
|
59,532
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.71
|
|
|
$
|
0.49
|
|
|
$
|
0.67
|
|
|
$
|
0.39
|
|
Diluted
|
|
$
|
0.71
|
|
|
$
|
0.49
|
|
|
$
|
0.67
|
|
|
$
|
0.39
|
|
54