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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2014

 

or

 

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

 

For the transition period from        to       

 

Commission File No. 000-51754

 


 

CROCS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

20-2164234
(I.R.S. Employer
Identification No.)

 

7477 East Dry Creek Parkway, Niwot, Colorado 80503

(Address, including zip code, of registrant’s principal executive offices)

 

(303) 848-7000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o (do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

As of October 24, 2014, Crocs, Inc. had 82,496,973 shares of its $0.001 par value common stock outstanding.

 

 

 



Table of Contents

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends, our future expectations and other matters that do not relate strictly to historical facts and are based on certain assumptions of our management. These statements, which express management’s current views concerning future events or results, use words like “anticipate,” “assume,” “ believe,” “continue,” “estimate,” “expect,” “future,” “intend,” “plan,” “project,” “strive,” and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will,” “would” and similar expressions or variations. Forward-looking statements are subject to risks, uncertainties and other factors which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, those described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2013 and subsequent filings with the Securities and Exchange Commission. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

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Table of Contents

 

Crocs, Inc.

Form 10-Q

Quarter Ended September 30, 2014

Table of Contents

 

PART I — Financial Information

 

Item 1.

Financial Statements

1

 

Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2014 and 2013

1

 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013

2

 

Unaudited Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013

3

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

4

 

Notes to Unaudited Condensed Consolidated Financial Statements

5

Item 2.

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

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

46

 

 

 

PART II — Other Information

 

 

 

 

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 6.

Exhibits

49

Signatures

 

50

 

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Table of Contents

 

PART I — Financial Information

 

ITEM 1. Financial Statements

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

($ thousands, except per share data)

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

302,401

 

$

288,524

 

$

991,750

 

$

964,007

 

Cost of sales

 

146,801

 

134,943

 

475,323

 

443,710

 

Restructuring charges (Note 6)

 

583

 

 

2,612

 

 

Gross profit

 

155,017

 

153,581

 

513,815

 

520,297

 

Selling, general and administrative expenses

 

143,719

 

135,674

 

434,244

 

414,119

 

Restructuring charges (Note 6)

 

7,585

 

 

13,895

 

 

Asset impairment charges (Note 3)

 

2,600

 

 

5,830

 

202

 

Income from operations

 

1,113

 

17,907

 

59,846

 

105,976

 

Foreign currency transaction losses, net

 

1,290

 

1,043

 

4,278

 

4,457

 

Interest income

 

(424

)

(853

)

(1,304

)

(1,676

)

Interest expense

 

366

 

44

 

685

 

519

 

Other (income) expense, net

 

(217

)

13

 

(388

)

180

 

Income before income taxes

 

98

 

17,660

 

56,575

 

102,496

 

Income tax (benefit) expense

 

(15,669

)

4,624

 

8,407

 

25,143

 

Net income

 

$

15,767

 

$

13,036

 

$

48,168

 

$

77,353

 

Dividends on Series A convertible preferred shares (Note 13)

 

3,067

 

 

8,233

 

 

Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature (Note 13)

 

691

 

 

2,030

 

 

Net income attributable to common stockholders

 

$

12,009

 

$

13,036

 

$

37,905

 

$

77,353

 

Net income per common share (Note 12):

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

$

0.15

 

$

0.38

 

$

0.88

 

Diluted

 

$

0.12

 

$

0.15

 

$

0.37

 

$

0.87

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1



Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

($ thousands)

 

2014

 

2013

 

2014

 

2013

 

Net income

 

$

15,767

 

$

13,036

 

$

48,168

 

$

77,353

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

(18,891

)

6,030

 

(19,650

)

(4,537

)

Reclassification of cumulative foreign exchange translation adjustments to net income, net of tax of $0, $0, $0 and $(3), respectively

 

 

 

 

299

 

Total comprehensive income (loss)

 

$

(3,124

)

$

19,066

 

$

28,518

 

$

73,115

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

 

 

 

September 30,

 

December 31,

 

($ thousands, except number of shares)

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

350,371

 

$

317,144

 

Accounts receivable, net of allowances of $21,001 and $10,513, respectively

 

158,664

 

104,405

 

Inventories

 

202,819

 

162,341

 

Deferred tax assets, net

 

4,278

 

4,440

 

Income tax receivable

 

19,677

 

10,630

 

Other receivables

 

17,196

 

11,942

 

Prepaid expenses and other current assets

 

36,717

 

29,175

 

Total current assets

 

789,722

 

640,077

 

Property and equipment, net

 

73,575

 

86,971

 

Intangible assets, net

 

89,599

 

72,315

 

Goodwill

 

2,235

 

2,507

 

Deferred tax assets, net

 

17,581

 

19,628

 

Other assets

 

34,220

 

53,661

 

Total assets

 

$

1,006,932

 

$

875,159

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

66,133

 

$

57,450

 

Accrued expenses and other current liabilities

 

105,142

 

97,111

 

Deferred tax liabilities, net

 

11,129

 

11,199

 

Accrued restructuring

 

3,435

 

 

Income taxes payable

 

29,218

 

15,992

 

Current portion of long-term borrowings and capital lease obligations

 

5,259

 

5,176

 

Total current liabilities

 

220,316

 

186,928

 

Long-term income tax payable

 

14,632

 

36,616

 

Long-term borrowings and capital lease obligations

 

7,714

 

11,670

 

Long-term accrued restructuring

 

310

 

 

 

Other liabilities

 

15,685

 

15,201

 

Total liabilities

 

258,657

 

250,415

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

Series A convertible preferred stock, par value $0.001 per share, 200,000 shares issued and outstanding, redemption amount and liquidation preference of $203,067 and $0 at September 30, 2014 and December 31, 2013, respectively (Note 13)

 

171,973

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $0.001 per share, 5,000,000 shares authorized, none outstanding

 

 

 

Common stock, par value $0.001 per share, 250,000,000 shares authorized, 92,282,045 and 82,964,597 shares issued and outstanding, respectively, at September 30, 2014 and 91,662,656 and 88,450,203 shares issued and outstanding, respectively, at December 31, 2013

 

93

 

92

 

Treasury stock, at cost, 9,317,448 and 3,212,453 shares, respectively

 

(144,898

)

(55,964

)

Additional paid-in capital

 

343,768

 

321,532

 

Retained earnings

 

382,337

 

344,432

 

Accumulated other comprehensive income

 

(4,998

)

14,652

 

Total stockholders’ equity

 

576,302

 

624,744

 

Total liabilities, commitments and contingencies and stockholders’ equity

 

$

1,006,932

 

$

875,159

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

($ thousands)

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

48,168

 

$

77,353

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

31,344

 

31,167

 

Unrealized (gain) loss on foreign exchange, net

 

(9,019

)

761

 

Asset impairment charges

 

5,830

 

202

 

Provision for doubtful accounts, net

 

9,129

 

1,420

 

Share-based compensation

 

10,473

 

9,987

 

Inventory write-down charges

 

896

 

 

Non-cash restructuring charges

 

4,064

 

 

Other non-cash items

 

(170

)

865

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(67,358

)

(31,783

)

Inventories

 

(49,544

)

(15,030

)

Prepaid expenses and other assets

 

5,073

 

(8,645

)

Accounts payable

 

10,152

 

2,388

 

Accrued expenses and other liabilities

 

8,981

 

20,755

 

Accrued restructuring

 

3,745

 

 

Income taxes

 

(17,059

)

4,869

 

Cash provided by (used in) operating activities

 

(5,295

)

94,309

 

Cash flows from investing activities:

 

 

 

 

 

Cash paid for purchases of property and equipment

 

(13,891

)

(30,753

)

Proceeds from disposal of property and equipment

 

174

 

551

 

Cash paid for intangible assets

 

(29,457

)

(22,665

)

Restricted cash

 

(1,655

)

(1,187

)

Cash used in investing activities

 

(44,829

)

(54,054

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from preferred stock offering, net of issuance costs of $15.8 million and $0.0 million, respectively

 

182,220

 

 

Dividends paid

 

(5,166

)

 

Proceeds from bank borrowings

 

 

18,568

 

Repayment of bank borrowings and capital lease obligations

 

(3,872

)

(11,654

)

Deferred debt issuance costs

 

(75

)

 

Issuances of common stock

 

1,300

 

2,017

 

Purchase of treasury stock

 

(90,093

)

(12,533

)

Repurchase of common stock for tax withholding

 

(787

)

(256

)

Cash provided by (used in) financing activities

 

83,527

 

(3,858

)

Effect of exchange rate changes on cash

 

(176

)

1,746

 

Net increase in cash and cash equivalents

 

33,227

 

38,143

 

Cash and cash equivalents—beginning of period

 

317,144

 

294,348

 

Cash and cash equivalents—end of period

 

$

350,371

 

$

332,491

 

Supplemental disclosure of cash flow information—cash paid during the period for:

 

 

 

 

 

Interest

 

$

358

 

$

719

 

Income taxes

 

$

30,114

 

$

17,134

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Assets acquired under capitalized leases

 

$

 

$

61

 

Accrued purchases of property and equipment

 

663

 

2,493

 

Accrued purchases of intangibles

 

6,050

 

209

 

Accrued dividends

 

3,067

 

 

Accretion of dividend equivalents

 

$

2,030

 

$

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. GENERAL

 

Organization

 

Crocs, Inc. and its subsidiaries (collectively the “Company,” “we,” “our” or “us”) are engaged in the design, development, manufacturing, marketing and distribution of footwear, apparel and accessories for men, women and children.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. The condensed consolidated balance sheet as of December 31, 2013 was derived from the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”). Accordingly, these statements do not include all of the information and disclosures required by GAAP or SEC rules and regulations for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting solely of normal recurring matters) considered necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

 

Reclassifications

 

Certain prior period amounts on the condensed consolidated financial statements have been reclassified to conform to current period presentation. We segregated $2.0 million in restructuring charges recorded to cost of sales on the condensed consolidated statements of income and inventory write-down charges on the condensed consolidated statements of cash flows during the three months ended June 30, 2014 to the restructuring charges line item in cost of sales on the condensed consolidated statements of income during the nine months ended September 30, 2014. In addition, we reclassified $0.2 million of asset impairment charges recorded to other non-cash items on the condensed consolidated statements of cash flows during the nine months ended September 30, 2013 to the asset impairment charges line item on the condensed consolidated statements of cash flows during the nine months ended September 30, 2013 to conform to the current year presentation. These reclassifications had no effect on income from operations or cash provided by (used in) operating activities.

 

Summary of Significant Accounting Policies

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in the 2013 Form 10-K. The accounting policies used in preparing these unaudited condensed consolidated financial statements are the same as those described in Note 1 — Organization & Summary of Significant Accounting Policies to the consolidated financial statements in the 2013 Form 10-K.

 

Earnings per share - Basic and diluted earnings per common share (“EPS”) is presented using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividend rights and participation rights in undistributed earnings. Under the two-class method, EPS is computed by dividing the sum of distributed and undistributed earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. A participating security is a security that may participate in undistributed earnings with common stock had those earnings been distributed in any form. Our recently issued Series A convertible preferred stock (“Series A preferred stock”) represents participating securities as holders of the Series A preferred stock are entitled to receive any and all dividends declared or paid on common stock on an as-converted basis. In addition, shares of our non-vested restricted stock awards are considered participating securities as they represent unvested share-based payment awards containing non-forfeitable rights to dividends. As such, these participating securities must be included in the computation of EPS pursuant to the two-class method on a pro-rata, as-converted basis. Diluted EPS reflects the potential dilution from securities that could share in our earnings. In addition, the dilutive effect of each participating security is calculated using the more dilutive of the two-class method described above, which assumes that the securities remain in their current form, or the if-converted method, which assumes conversion to common stock as of the beginning of the reporting date. Anti-dilutive securities are excluded from diluted EPS. See Note 12—Earnings Per Share for further discussion.

 

Beneficial conversion feature — The issuance of our Series A preferred stock generated a beneficial conversion feature, which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. We recognized the beneficial conversion feature by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the Series A preferred stock. We are accreting the discount over eight years from the date of issuance through the redemption date.

 

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Table of Contents

 

Accretion expense will be recognized as dividend equivalents over the eight year period utilizing the effective interest method.

 

Recently Adopted Accounting Standards

 

Discontinued Operations

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08: Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the definition of a discontinued operation in ASC 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued operations criteria. The FASB issued the ASU to provide more decision-useful information and to make it more difficult for a disposal transaction to qualify as a discontinued operation. Under the previous guidance, the results of operations of a component of an entity were classified as a discontinued operation if all of the following conditions were met:

 

·                  The component has been disposed of or is classified as held for sale.

·                  The operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction.

·                  The entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.

 

The new guidance eliminates the second and third criteria above and instead requires discontinued operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The ASU also expands the scope of ASC 205-20 to disposals of equity method investments and businesses that, upon initial acquisition, qualify as held for sale. In addition, the ASU requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the statement of financial position. Before these amendments, ASC 205-20 neither required nor prohibited such presentation. Regarding the statement of cash flows, an entity must disclose, in all periods presented, either (1) operating and investing cash flows or (2) depreciation and amortization, capital expenditures, and significant operating and investing noncash items related to the discontinued operation. This presentation requirement represents a significant change from previous guidance. This ASU is effective prospectively for all disposals or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. The adoption of this pronouncement did not have a material impact to the Company’s consolidated financial statements.

 

Recently Issued Accounting Standards

 

Going Concern

 

On August 27, 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how reporting entities must disclose going concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements (or within one year after the date on which the financial statements are available to be issued, when applicable). Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern.

 

The FASB believes that requiring management to perform the assessment will enhance the timeliness, clarity and consistency of related disclosures and improve convergence with IFRSs (which emphasize management’s responsibility for performing the going concern assessment). However, the time horizon for the assessment (look-forward period) and the disclosure thresholds under U.S. GAAP and IFRSs will continue to differ. This ASU is effective for annual periods ending after December 16, 2016, and interim periods thereafter; early adoption is permitted. The Company does not believe that this pronouncement will have a material impact to the Company’s consolidated financial statements.

 

Share-Based Payment

 

On June 19, 2014, the FASB issued ASU 2014-12 in response to the EITF consensus on Issue 13-D. The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. This ASU is effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015. The Company does not believe that this pronouncement will have a material impact to the Company’s consolidated financial statements.

 

Revenue Recognition

 

In May 2014, the FASB issued their final standard on revenue from contracts with customers. The standard, issued as ASU No. 2014-09: Revenue from Contracts with Customers (Topic 606) by the FASB, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In applying the revenue model to contracts within its scope, an entity:

 

· Identifies the contract(s) with a customer (Step 1)

· Identifies the performance obligations in the contract (Step 2)

· Determines the transaction price (Step 3)

· Allocates the transaction price to the performance obligations in the contract (Step 4)

· Recognizes revenue when (or as) the entity satisfies a performance obligation (Step 5)

 

The ASU applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. Certain of the ASU’s provisions also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (e.g., sales of property, plant, and equipment, real estate or intangible assets). Existing accounting guidance applicable to these transfers has been amended or superseded. Compared with current U.S. GAAP, the ASU also requires significantly expanded disclosures about revenue recognition.

 

The ASU is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early application is not permitted. The Company is currently evaluating the impact that this pronouncement will have on the Company’s consolidated financial statements.

 

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Table of Contents

 

2. INVENTORIES

 

The following table summarizes inventories by major classification as of September 30, 2014 and December 31, 2013:

 

($ thousands)

 

September 30, 2014

 

December 31, 2013

 

Finished goods

 

$

197,213

 

$

154,272

 

Work-in-progress

 

289

 

685

 

Raw materials

 

5,317

 

7,384

 

Inventories

 

$

202,819

 

$

162,341

 

 

Inventory Write-down

 

During the three and nine months ended September 30, 2014, we recorded $1.5 million and $3.5 million, respectively, of inventory write-down charges related to obsolete inventory with a market value lower than cost, of which $0.6 million and $2.6 million, respectively, have been reported to restructuring charges, with the remaining amounts reported in cost of sales in the condensed consolidated statements of income. These charges were related to certain obsolete footwear in our Americas operating segment as well as Corporate.

 

3. PROPERTY & EQUIPMENT

 

The following table summarizes property and equipment by major classification as of September 30, 2014 and December 31, 2013:

 

 

 

September 30,

 

December 31,

 

($ thousands)

 

2014

 

2013

 

Machinery and equipment

 

$

52,737

 

$

52,003

 

Leasehold improvements

 

97,697

 

93,235

 

Furniture, fixtures and other

 

26,396

 

23,653

 

Construction-in-progress

 

4,012

 

16,231

 

Property and equipment, gross (1)

 

180,842

 

185,122

 

Less: Accumulated depreciation (2)

 

(107,267

)

(98,151

)

Property and equipment, net

 

$

73,575

 

$

86,971

 

 


(1)     Includes $0.1 million and $0.1 million of certain equipment held under capital leases and classified as equipment as of September 30, 2014 and December 31, 2013, respectively.

(2)         Includes $0.1 million and $0.1 million of accumulated depreciation related to certain equipment held under capital leases as of September 30, 2014 and December 31, 2013, respectively, which are depreciated using the straight-line method over the lease term.

 

During the three months ended September 30, 2014 and 2013, we recorded $6.4 million and $6.2 million, respectively, in depreciation expense of which $0.5 million and $0.7 million, respectively, was recorded in cost of sales, with the remaining amounts recorded in selling, general and administrative expenses in the condensed consolidated statements of income.

 

During the nine months ended September 30, 2014 and 2013, we recorded $18.1 million and $18.2 million, respectively, in depreciation expense of which $1.4 million and $2.3 million, respectively, was recorded in cost of sales, with the remaining amounts recorded in selling, general and administrative expenses in the condensed consolidated statements of income.

 

Asset Impairments

 

We periodically evaluate all of our long-lived assets for impairment when events or circumstances would indicate the carrying value of a long-lived asset may not be fully recoverable. The following table summarizes retail asset impairment charges by reportable operating segment for the three and nine months ended September 30, 2014 and 2013 related to certain underperforming stores that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over the remaining economic life of those assets:

 

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Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

($ thousands, except store count data)

 

Impairment
charge

 

Number of
stores

 

Impairment
charge

 

Number of
stores

 

Impairment
charge

 

Number of
stores

 

Impairment
charge

 

Number of
stores

 

Americas

 

$

1,994

 

10

 

$

 

 

$

3,238

 

26

 

$

202

 

1

 

Asia Pacific

 

372

 

2

 

 

 

817

 

14

 

 

 

Japan

 

 

 

 

 

 

 

 

 

Europe

 

234

 

8

 

 

 

1,775

 

17

 

 

 

Asset impairment charges

 

$

2,600

 

20

 

$

 

 

$

5,830

 

57

 

$

202

 

1

 

 

4. GOODWILL & INTANGIBLE ASSETS

 

The following table summarizes the goodwill and identifiable intangible assets as of September 30, 2014 and December 31, 2013:

 

 

 

September 30, 2014

 

December 31, 2013

 

($ thousands)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Capitalized software

 

$

149,303

(1)

$

(62,001

)(2)

$

87,302

 

$

118,940

(1)

$

(49,665

)(2)

$

69,275

 

Customer relationships

 

6,589

 

(6,389

)

200

 

6,878

 

(6,439

)

439

 

Patents, copyrights, and trademarks

 

6,530

 

(4,847

)

1,683

 

6,501

 

(4,272

)

2,229

 

Core technology

 

4,337

 

(4,337

)

 

4,548

 

(4,548

)

 

Other

 

701

 

(637

)

64

 

983

 

(709

)

274

 

Total finite lived intangible assets

 

167,460

 

(78,211

)

89,249

 

137,850

 

(65,633

)

72,217

 

Indefinite lived intangible assets

 

350

 

 

350

 

97

 

 

97

 

Goodwill

 

2,235

 

 

2,235

 

2,508

 

 

2,508

 

Goodwill and intangible assets

 

$

170,045

 

$

(78,211

)

$

91,834

 

$

140,455

 

$

(65,633

)

$

74,822

 

 


(1)         Includes $4.1 million of software held under a capital lease classified as capitalized software as of September 30, 2014 and December 31, 2013.

(2)         Includes $2.4 million and $1.9 million of accumulated amortization of software held under a capital lease as of September 30, 2014 and December 31, 2013, respectively, which is amortized using the straight-line method over the useful life.

 

During the three months ended September 30, 2014 and 2013, amortization expense recorded for intangible assets with finite lives was $4.2 million and $4.4 million, respectively, of which $1.6 million and $1.6 million, respectively, was recorded in cost of sales, with the remaining amounts recorded in selling, general and administrative expenses in the condensed consolidated statements of income.

 

During the nine months ended September 30, 2014 and 2013, amortization expense recorded for intangible assets with finite lives was $13.2 million and $13.0 million, respectively, of which $4.7 million and $4.7 million, respectively, was recorded in cost of sales, with the remaining amounts recorded in selling, general and administrative expenses in the condensed consolidated statements of income.

 

The following table summarizes estimated future annual amortization of intangible assets as of September 30, 2014:

 

 

 

Amortization

 

Fiscal years ending December 31,

 

($ thousands)

 

Remainder of 2014

 

$

2,936

 

2015

 

18,400

 

2016

 

16,649

 

2017

 

12,303

 

2018

 

10,725

 

Thereafter

 

28,236

 

Total

 

$

89,249

 

 

5. ACCRUED EXPENSES & OTHER CURRENT LIABILITIES

 

The following table summarizes accrued expenses and other current liabilities as of September 30, 2014 and December 31, 2013:

 

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September 30,

 

December 31,

 

($ thousands)

 

2014

 

2013

 

Accrued compensation and benefits

 

$

29,399

 

$

26,903

 

Professional services

 

17,939

 

14,128

 

Fulfillment, freight and duties

 

15,839

 

12,565

 

Sales/use and VAT tax payable

 

13,558

 

9,142

 

Accrued rent and occupancy

 

9,512

 

12,198

 

Customer deposits

 

3,964

 

6,940

 

Dividend payable

 

3,067

 

 

Accrued legal liabilities

 

1,191

 

8,722

 

Other (1)

 

10,673

 

6,513

 

Total accrued expenses and other current liabilities

 

$

105,142

 

$

97,111

 

 


(1)         The amounts in ‘Other’ consist of various accrued expenses and no individual item accounted for more than 5% of the total balance at September 30, 2014 or December 31, 2013.

 

6. RESTRUCTURING ACTIVITIES

 

Restructuring

 

On July 21, 2014, we announced strategic plans for long-term improvement and growth of the business. These plans comprise four key initiatives including: (1) streamlining the global product and marketing portfolio, (2) reducing direct investment in smaller geographic markets, (3) creating a more efficient organizational structure including reducing duplicative and excess overhead which will also enhance the decision making process, and (4) closing or converting approximately 75 to 100 retail locations around the world. The initial effects of these plans were incurred in the first quarter of 2014 and are expected to continue through 2015. The Company recorded restructuring charges of $8.2 million and $16.5 million during the three and nine months ended September 30, 2014, respectively. We are unable in good faith to determine the type of costs we will incur in connection with this strategic restructuring plan or to estimate the total amount or range of amounts expected to be incurred in connection with this plan for each major type of cost associated with this strategic restructuring plan.

 

The following table summarizes our restructuring activity during the three and nine months ended September 30, 2014:

 

 

 

Three Months Ended

 

Nine Months Ended

 

($ thousands)

 

September 30, 2014

 

September 30, 2014

 

Severance costs

 

$

5,358

 

$

9,811

 

Lease / contract exit and related costs

 

1,034

 

2,212

 

Other (1)

 

1,776

 

4,484

 

Total restructuring charges

 

$

8,168

 

$

16,507

 

 


(1)         The amounts in ‘Other’ consist of various asset impairment charges prompted by the aforementioned restructuring plan, legal fees and facility maintenance fees.

 

The following table summarizes our total restructuring charges incurred during the three and nine months ended September 30, 2014 as well as charges incurred to date by reportable segment:

 

 

 

Three Months Ended

 

Nine Months Ended

 

($ thousands)

 

September 30, 2014

 

September 30, 2014

 

Americas

 

$

2,058

 

$

3,282

 

Asia Pacific

 

3,191

 

3,584

 

Europe

 

400

 

1,382

 

Corporate

 

2,519

 

8,259

 

Total restructuring charges

 

$

8,168

 

$

16,507

 

 

The following table summarizes our accrued restructuring balance and associated activity from December 31, 2013 through September 30, 2014:

 

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Accrued

 

 

 

 

 

 

 

Accrued

 

 

 

restructuring as of

 

 

 

 

 

 

 

restructuring as of

 

($ thousands)

 

December 31, 2013

 

Additions

 

Cash payments

 

Adjustments (1)

 

September 30, 2014

 

Severance

 

$

 

$

9,806

 

$

(7,092

)

$

(2

)

$

2,712

 

Lease / contract exit and related costs

 

 

2,255

 

(1,335

)

(37

)

883

 

Other

 

 

337

 

(182

)

(5

)

150

 

Total accrued restructuring

 

$

 

$

12,398

 

$

(8,609

)

$

(44

)

$

3,745

 

 


(1)         Adjustments relate to differences resulting from the translation of the liability balance at the balance sheet rate and restructuring expense translated at the weighted-average rate of exchange for the applicable period.

 

Retail Store Closings

 

As mentioned above, the Company plans to close 75 to 100 retail locations around the globe. As such, we expect to incur certain exit costs specific to store closures including operating lease termination costs, rent obligations for leased facilities, net of expected sublease income, and other expenses in association with this plan. During the three and nine months ended September 30, 2014, we closed 26 and 36 company-operated retail locations, respectively, which were not scheduled to close until future periods and were selected for closure by management based on historical and projected profitability levels, relocation plans, and other factors. As of September 30, 2014, we recorded a liability of approximately $1.1 million related to these locations in accrued restructuring on the condensed consolidated balance sheet. The calculation of accrued store closing reserves primarily includes future minimum lease payments from the date of closure to the end of the remaining lease term, net of contractual or estimated sublease income. We record the liability at fair value in the period in which the store is closed.

 

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7. FAIR VALUE MEASUREMENTS

 

Recurring Fair Value Measurements

 

The following tables summarize the financial instruments required to be measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013:

 

 

 

Fair Value as of September 30, 2014

 

 

 

 

 

Quoted prices in

 

Significant

 

 

 

 

 

 

 

 

 

active markets

 

other

 

Significant

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

 

assets or liabilities

 

inputs

 

inputs

 

 

 

 

 

($ thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Balance Sheet Classification

 

Cash equivalents

 

$

108,148

 

$

 

$

 

$

108,148

 

Cash and cash equivalents and other current assets

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

$

 

$

493

 

$

 

$

493

 

Prepaid expenses and other current assets

 

 

 

 

Fair Value as of December 31, 2013

 

 

 

 

 

Quoted prices in

 

Significant

 

 

 

 

 

 

 

 

 

active markets

 

other

 

Significant

 

 

 

 

 

 

 

for identical

 

observable

 

unobservable

 

 

 

 

 

 

 

assets or liabilities

 

inputs

 

inputs

 

 

 

 

 

($ thousands)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Balance Sheet Classification

 

Cash equivalents

 

$

37,870

 

$

 

$

 

$

37,870

 

Cash and cash equivalents and other current assets

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

13,501

 

 

13,501

 

Prepaid expenses and other current assets and other assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

$

 

$

984

 

$

 

$

984

 

Accrued expense and other current liabilities

 

 

Non-Recurring Fair Value Measurements

 

The majority of our non-financial instrument assets, which include inventories, property and equipment and intangible assets, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment and the carrying value is not recoverable, the carrying value would be adjusted to the lower of its cost or fair value and an impairment charge would be recorded.

 

8. DERIVATIVE FINANCIAL INSTRUMENTS

 

We transact business in various foreign countries and are therefore exposed to foreign currency exchange rate risk inherent in revenues, costs, and monetary assets and liabilities denominated in non-functional currencies. We have entered into foreign currency exchange forward contracts and currency swap derivative instruments to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities, and of future cash flows caused by changes in foreign currency exchange rates. We do not designate these derivative instruments as hedging instruments under the accounting standards for derivatives and hedging. Accordingly, these instruments are recorded at fair value as a derivative asset or liability on the balance sheet with their corresponding change in fair value recognized in ‘Foreign currency transaction losses, net’ in our condensed consolidated statements of income. For purposes of the condensed consolidated statements of cash flows, we classify the cash flows at settlement from undesignated instruments in the same category as the cash flows from the related hedged items, generally within ‘Cash provided by (used in) operating activities’. See Note 7 — Fair Value Measurements for further details regarding the fair values of the corresponding derivative assets and liabilities.

 

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The following table summarizes the notional amounts of the outstanding foreign currency exchange contracts at September 30, 2014 and December 31, 2013. The notional amounts of the derivative financial instruments shown below are denominated in their United States (“U.S.”) Dollar equivalents and represent the amount of all contracts of the foreign currency specified. These notional values do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the foreign currency exchange risks.

 

 

 

September 30,

 

December 31,

 

($ thousands)

 

2014

 

2013

 

Foreign currency exchange forward contracts by currency:

 

 

 

 

 

Euro

 

$

34,253

 

$

38,577

 

Singapore Dollar

 

32,424

 

28,225

 

British Pound Sterling

 

18,426

 

15,487

 

Mexican Peso

 

11,321

 

18,350

 

Australian Dollar

 

6,736

 

4,941

 

Chinese Yuan Renminbi

 

5,421

 

 

South African Rand

 

5,158

 

3,076

 

Japanese Yen

 

5,148

 

68,707

 

New Taiwan Dollar

 

3,978

 

3,463

 

South Korean Won

 

3,888

 

12,100

 

Canadian Dollar

 

3,536

 

3,428

 

Indian Rupee

 

2,925

 

2,150

 

Hong Kong Dollar

 

2,451

 

1,844

 

Swedish Krona

 

2,071

 

1,615

 

Russian Ruble

 

1,025

 

17,588

 

Norwegian Krone

 

814

 

 

New Zealand Dollar

 

704

 

943

 

Total notional value, net

 

$

140,279

 

$

220,494

 

 

 

 

 

 

 

Latest maturity date

 

October 2014

 

December 2015

 

 

The following table presents the amounts affecting the condensed consolidated statements of income from derivative instruments for the three and nine months ended September 30, 2014 and 2013:

 

 

 

Three Months Ended September
30,

 

Nine Months Ended September
30,

 

Location of (Gain) Loss Recognized in Income

 

($ thousands)

 

2014

 

2013

 

2014

 

2013

 

on Derivatives

 

Foreign currency exchange forwards

 

$

(2,497

)

$

2,588

 

$

2,711

 

$

(8,064

)

Foreign currency transaction losses, net

 

 

The account foreign currency transaction losses, net on the condensed consolidated statements of income includes both realized and unrealized gains/losses from underlying foreign currency activity and derivative contracts. These gains and losses are reported on a net basis.

 

For the three months ended September 30, 2014, the net losses recognized of $1.3 million recorded on the condensed consolidated statements of income is comprised of a $3.8 million net loss associated with exposure from day-to-day business transactions in various foreign currencies partially offset by the $2.5 million net gain, noted in the table above, which is associated with our derivative instruments. For the nine months ended September 30, 2014, the net losses recognized of $4.3 million recorded on the condensed consolidated statements of income is comprised of the $2.7 million net loss, noted in the table above, which is associated with our derivative instruments and a $1.6 million net loss associated with exposure from day-to-day business transactions in various foreign currencies.

 

For the three months ended September 30, 2013, the net loss recognized of $1.0 million recorded on the condensed consolidated statements of income is comprised of a $2.6 million net loss, noted in the table above, which is associated with our derivative instruments partially offset by a $1.6 million net gain associated with exposure from day-to-day business transactions in various foreign currencies. For the nine months ended September 30, 2013, the net loss recognized of $4.5 million recorded on the condensed consolidated statements of income is comprised of a $12.6 million net loss associated with exposure from day-to-day business

 

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Table of Contents

 

transactions in various foreign currencies partially offset by a $8.1 million net gain, noted in the table above, which is associated with our derivative instruments.

 

9. REVOLVING CREDIT FACILITY & BANK BORROWINGS

 

Revolving Credit Facility

 

On December 16, 2011, we entered into an Amended and Restated Credit Agreement (as amended, the “Credit Agreement”) with the lenders named therein and PNC Bank, National Association (“PNC”), as a lender and administrative agent for the lenders. The Credit Agreement enables us to borrow up to $100.0 million, with the ability to increase commitments to up to $125.0 million, subject to certain conditions, and is currently set to mature in December 2017. The Credit Agreement is available for working capital, capital expenditures, permitted acquisitions, reimbursement of drawings under letters of credit, and permitted dividends, distributions, purchases, redemptions and retirements of equity interests. Borrowings under the Credit Agreement are secured by all of our assets.

 

On September 26, 2014, we entered into the Fifth Amendment to Amended and Restated Credit Agreement (the “Fifth Amendment”), pursuant to which certain terms of the Credit Agreement were amended. The Fifth Amendment primarily (i) extends the minimum fixed charge coverage ratio of 1.15 to 1.00 through the second quarter of 2015 and will return to 1.25 to 1.00 for each quarter thereafter, and (ii) amends certain definitions of the financial covenants to become more favorable to us.

 

As of September 30, 2014 and December 31, 2013, we had no outstanding borrowings under the Credit Agreement. As of September 30, 2014 and December 31, 2013, we had issued and outstanding letters of credit of $8.2 million and $7.2 million, respectively, which were reserved against the borrowing base under the terms of the Credit Agreement. As of September 30, 2014, we were in compliance with all restrictive and financial covenants under the Credit Agreement.

 

Long-term Bank Borrowings

 

On December 10, 2012, we entered into a Master Installment Payment Agreement (“Master IPA”) with PNC in which PNC finances our purchase of software and services, which may include but are not limited to third party costs to design, install and implement software systems, and associated hardware described in the schedules defined within the Master IPA. The Master IPA was entered into to finance our implementation of a new enterprise resource planning (“ERP”) system, which began in October 2012 and is estimated to continue through early 2015. The terms of each note payable under the Master IPA consist of variable interest rates and payment terms based on amounts borrowed and timing of activity throughout the implementation of the ERP system.

 

As of September 30, 2014 and December 31, 2013, we had $12.9 million and $16.8 million, respectively, of debt outstanding under five separate notes payable under the Master IPA, of which $5.2 million and $5.1 million, respectively, represent current installments. As of September 30, 2014, the notes bear interest rates ranging from 2.45% to 2.79% and maturities ranging from September 2016 to September 2017. As this debt arrangement relates solely to the construction and implementation of an ERP system for use by the Company, all interest expense incurred under the arrangement has been capitalized to the condensed consolidated balance sheets until the assets are ready for intended use and will be amortized over the useful life of the software upon that date.

 

During the three and nine months ended September 30, 2014, we capitalized $0.1 million and $0.3 million, respectively, in interest expense related to this debt arrangement to the condensed consolidated balance sheets. During the three and nine months ended September 30, 2013, we did not capitalize any interest expense related to this debt arrangement.

 

The aggregate maturities of long-term bank borrowings at September 30, 2014 are as follows (in thousands):

 

Fiscal years ending December 31,

 

 

 

Remainder of 2014

 

$

1,296

 

2015

 

5,271

 

2016

 

4,765

 

2017

 

1,610

 

2018

 

 

Thereafter

 

 

Total principal debt maturities

 

$

12,942

 

 

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10. STOCK-BASED COMPENSATION

 

Stock-based compensation expense is recognized on a straight-line basis over the applicable vesting period. During the three months ended September 30, 2014 and 2013, we recorded $2.0 million and $3.0 million, respectively, of stock-based compensation expense, of which $0.0 million and $0.5 million, respectively, related to the implementation of our ERP system, was capitalized to intangible assets on the condensed consolidated balance sheets. During the nine months ended September 30, 2014 and 2013, $10.5 million and $10.5 million, respectively, of stock-based compensation expense was recorded, of which $0.1 million and $0.5 million, respectively, related to the implementation of our ERP system, was capitalized to intangible assets on the condensed consolidated balance sheets.

 

Stock Options

 

Options granted generally vest over four years with the first year vesting on a cliff basis followed by monthly vesting for the remaining three years.

 

The following table summarizes the stock option activity for the three and nine months ended September 30, 2014 and 2013:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Options

 

Options

 

Weighted
Average
Exercise
Price

 

Options

 

Weighted
Average 
Exercise 
Price

 

Options

 

Weighted 
Average 
Exercise 
Price

 

Options

 

Weighted 
Average 
Exercise 
Price

 

Outstanding at June 30, 2014 and 2013, respectively, and December 31, 2013 and 2012, respectively

 

1,875,480

 

$

14.01

 

2,370,085

 

$

13.42

 

2,105,152

 

$

13.34

 

2,621,686

 

$

13.03

 

Granted

 

35,000

 

16.06

 

10,000

 

13.52

 

69,000

 

15.66

 

167,000

 

15.75

 

Exercised

 

(64,294

)

5.68

 

(87,730

)

6.59

 

(255,353

)

5.09

 

(291,820

)

6.91

 

Forfeited or expired

 

(94,751

)

21.27

 

(63,089

)

20.18

 

(167,364

)

20.41

 

(267,600

)

17.59

 

Outstanding at September 30

 

1,751,435

 

$

13.96

 

2,229,266

 

$

13.50

 

1,751,435

 

$

13.96

 

2,229,266

 

$

13.50

 

 

Restricted Stock Awards and Units

 

From time to time, we grant restricted stock awards (“RSA”) and restricted stock units (“RSU”) to our employees. RSAs and RSUs generally vest over three or four years depending on the terms of the grant. Unvested RSAs have the same rights as those of common shares including voting rights and non-forfeitable dividend rights. However, ownership of unvested RSAs cannot be transferred until they are vested. An unvested RSU is a contractual right to receive a share of common stock only upon its vesting. RSUs have dividend equivalent rights which accrue over the term of the award and are paid if and when the RSUs vest, but they have no voting rights.

 

We typically grant time-based RSUs and performance-based RSUs. Time-based RSUs are typically granted on an annual basis to certain non-executive employees and vest in three annual installments on a straight-line basis beginning one year after the grant date. During the three months ended September 30, 2014 and 2013, the board of directors did not approve the grant of a material amount of time-based RSUs to non-executives. During the nine months ended September 30, 2014 and 2013, the board of directors approved 0.3 million and 0.4 million, respectively, grants of time-based RSUs to non-executives.

 

Performance-based RSUs are typically granted on an annual basis to executives and consist of a time-based and performance-based component. During the three months ended September 30, 2014 and 2013, the board of directors did not approve any grants of RSUs to executives as part of a performance incentive program. During the nine months ended September 30, 2014 and 2013, the board of directors approved the grant of an aggregate of 1.0 million and 0.7 million, respectively, of RSUs to executives as part of a performance incentive program.

 

During the three months ended September 30, 2014 and 2013, we recorded $1.6 million and $2.2 million, respectively, of stock-based compensation expense related to RSUs. During the nine months ended September 30, 2014 and 2013, we recorded $8.1 million of stock-based compensation expense related to RSUs. The following represents the current vesting schedule of performance-based RSUs:

 

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Performance Vested RSUs (50% of Award)

Time Vested RSUs 
(50% of Award)

 

Performance Goals 
(weighted equally)

 

Potential Award

 

Further Time Vesting

Vest in 3 annual installments beginning one year after the date of grant

 

Achievement of at least 70% of a one-year cumulative earnings per share performance goal.

 

Achievement of at least 90% of 2014 revenue target.

 

Executive may earn from 50% to 200% of the target number of RSUs based on the level of achievement of the performance goal.

 

Earned RSUs vest 50% upon satisfaction of performance goal and 50% one year later.

 

The following table summarizes the RSA activity for the three and nine months ended September 30, 2014 and 2013:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Restricted Stock Awards

 

Shares

 

Weighted 
Average 
Grant Date 
Fair Value

 

Shares

 

Weighted 
Average 
Grant Date 
Fair Value

 

Shares

 

Weighted 
Average 
Grant Date 
Fair Value

 

Shares

 

Weighted 
Average 
Grant Date 
Fair Value

 

Outstanding at June 30, 2014 and 2013, respectively, and December 31, 2013 and 2012, respectively

 

14,973

 

$

15.61

 

288,087

 

$

13.32

 

210,490

 

$

13.43

 

355,509

 

$

13.37

 

Granted

 

 

 

 

 

 

9,973

 

15.04

 

21,590

 

16.56

 

Vested (1)

 

(2,492

)

15.04

 

(5,396

)

16.56

 

(65,927

)

15.03

 

(83,608

)

14.70

 

Forfeited or expired

 

(2,500

)

16.75

 

(15,000

)

14.34

 

(144,555

)

12.67

 

(25,800

)

13.57

 

Outstanding at September 30

 

9,981

 

$

15.47

 

267,691

 

$

13.20

 

9,981

 

$

15.47

 

267,691

 

$

13.20

 

 


(1)         The RSAs vested during the three and nine months ended September 30, 2014 and 2013 consisted entirely of time-based awards.

 

The following table summarizes the RSU activity for the three and nine months ended September 30, 2014 and 2013:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Restricted Stock Units

 

Units

 

Weighted 
Average 
Grant Date 
Fair Value

 

Units

 

Weighted 
Average 
Grant Date 
Fair Value

 

Units

 

Weighted 
Average 
Grant Date 
Fair Value

 

Units

 

Weighted 
Average 
Grant Date 
Fair Value

 

Outstanding at June 30, 2014 and 2013, respectively, and December 31, 2013 and 2012, respectively

 

2,377,221

 

$

15.93

 

2,456,014

 

$

16.72

 

1,965,667

 

$

16.50

 

1,414,661

 

$

20.61

 

Granted

 

44,000

 

15.40

 

26,500

 

13.52

 

1,665,493

 

16.22

 

1,589,614

 

15.01

 

Vested (1)

 

(16,165

)

20.79

 

(8,231

)

24.17

 

(504,054

)

17.90

 

(295,215

)

22.32

 

Forfeited or expired

 

(186,840

)

15.95

 

(90,285

)

18.08

 

(908,890

)

16.70

 

(325,062

)

21.10

 

Outstanding at September 30

 

2,218,216

 

$

15.89

 

2,383,998

 

$

16.59

 

2,218,216

 

$

15.89

 

2,383,998

 

$

16.59

 

 

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(1)         The RSUs vested during the three months ended September 30, 2014 and 2013 consisted entirely of time-based awards. The RSUs vested during the nine months ended September 30, 2014 consisted of 473,108 of time-based awards and 30,946 of performance-based awards. The RSUs vested during the nine months ended September 30, 2013 consisted of 242,927 of time-based awards and 52,288 of performance-based awards.

 

11. INCOME TAXES

 

During the three months ended September 30, 2014, we recognized an income tax benefit of $15.7 million on pre-tax income of $0.1 million compared to an income tax expense of $4.6 million on pre-tax income of $17.7 million. During the nine months ended September 30, 2014, we recognized an income tax expense of $8.4 million on pre-tax income of $56.6 million compared to an income tax expense of $25.1 million on pre-tax income of $102.5 million.

 

The decrease in effective tax rate, compared to the same period in 2013, is primarily due to the release of approximately $10.6 million of unrecognized tax benefits as a result of settling the Company’s audit with the Internal Revenue Service.  Our effective tax rates for all periods presented also differ from the federal U.S. statutory rate due to differences between income tax rates between U.S. and foreign jurisdictions and due to tax amounts recognized discretely in the quarter. We had unrecognized tax benefits of $12.2 million at September 30, 2014 and $31.6 million at December 31, 2013.

 

12. EARNINGS PER SHARE

 

The following table illustrates the basic and diluted EPS computations for the three and nine months ended September 30, 2014 and 2013:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

($ thousands)

 

2014

 

2013

 

2014

 

2013

 

Numerator

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

12,009

 

$

13,036

 

$

37,905

 

$

77,353

 

Less: adjustment for income allocated to participating securities

 

(1,684

)

(41

)

(5,229

)

(276

)

Net income attributable to common stockholders - basic and diluted

 

$

10,325

 

$

12,995

 

$

32,676

 

$

77,077

 

Denominator

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

84,659

 

88,109

 

86,582

 

87,919

 

Plus: dilutive effect of stock options and unvested restricted stock units

 

778

 

799

 

1,137

 

971

 

Weighted average common shares outstanding - diluted

 

85,437

 

88,908

 

87,719

 

88,890

 

Net income attributable per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.12

 

$

0.15

 

$

0.38

 

$

0.88

 

Diluted

 

$

0.12

 

$

0.15

 

$

0.37

 

$

0.87

 

 

For the three months ended September 30, 2014 and 2013, approximately 0.8 million and 1.4 million, respectively, options and RSUs in total were not included in the calculation of diluted EPS as their effect would have been anti-dilutive. For the nine months ended September 30, 2014 and 2013, approximately 1.1 million and 1.4 million, respectively, options and RSUs in total were not included in the calculation of diluted EPS as their effect would have been anti-dilutive.

 

In addition to the antidilutive effects of options and RSUs, we did not assume the conversion of the Series A preferred stock into common shares for purposes of calculating diluted EPS as the effects would have been anti-dilutive. If converted, as of September 30, 2014, the Series A preferred stock would represent approximately 14.3% of our common stock outstanding or 13.8 million additional common shares. See Note 13 — Series A Preferred Stock for further details regarding the preferred share offering.

 

Stock Repurchase Plan Authorizations

 

We continue to evaluate options to maximize the returns on our cash and maintain an appropriate capital structure, including, among other alternatives, repurchases of our common stock. Subject to certain restrictions on repurchases under our revolving credit facility, we are authorized to repurchase up to $350.0 million of our common stock. The number, price, structure and timing of the repurchases, if any, will be at our sole discretion and future repurchases will be evaluated by us depending on market conditions, liquidity needs and other factors. Share repurchases may be made in the open market or in privately negotiated transactions. The

 

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repurchase authorization does not have an expiration date and does not oblige us to acquire any particular amount of our common stock. The board of directors may suspend, modify or terminate the repurchase program at any time without prior notice.

 

During the three months ended September 30, 2014, we repurchased approximately 2.9 million shares at a weighted average price of $14.74 per share for an aggregate price of approximately $43.0 million excluding related commission charges under our publicly-announced repurchase plan. During the nine months ended September 30, 2014, we repurchased approximately 6.1 million shares at a weighted average price of $14.76 per share for an aggregate price of approximately $89.9 million excluding related commission charges under our publicly-announced repurchase plan.

 

Since September 30, 2014, we have repurchased approximately 0.5 million shares at a weighted average price of $12.15 per share for an aggregate price of approximately $5.7 million excluding related commission charges under our publicly-announced repurchase plan.

 

13. SERIES A PREFERRED STOCK

 

On January 27, 2014, we issued to Blackstone Capital Partners VI L.P. (“Blackstone”), and certain of its permitted transferees (together with Blackstone, the “Blackstone Purchasers”), 200,000 shares of our Series A preferred stock for an aggregate purchase price of $198.0 million, or $990 per share, pursuant to an Investment Agreement between us and Blackstone, dated December 28, 2013 (as amended, the “Investment Agreement”). In connection with the issuance of the Series A preferred stock (the “Closing”), we received proceeds of $182.2 million after deducting the issuance discount of $2.0 million and direct and incremental expenses of $15.8 million including financial advisory fees, closing costs, legal expenses and other offering-related expenses.

 

Participation Rights and Dividends

 

The Series A preferred stock ranks senior to our common stock with respect to dividend rights and rights on liquidation, winding-up and dissolution. The Series A preferred stock has a stated value of $1,000 per share, and holders of Series A preferred stock are entitled to cumulative dividends payable quarterly in cash at a rate of 6% per annum. If we fail to make timely dividend payments, the dividend rate will increase to 8% per annum until such time as all accrued but unpaid dividends have been paid in full. Holders of Series A preferred stock are entitled to receive dividends declared or paid on our common stock and are entitled to vote together with the holders of our common stock as a single class, in each case, on an as-converted basis. As of September 30, 2014, we have accrued dividends of $3.1 million on the condensed consolidated balance sheets, which were paid in cash to Blackstone on October 1, 2014. Holders of Series A preferred stock have certain limited special approval rights, including with respect to the issuance of pari passu or senior equity securities of the Company.

 

Conversion Features

 

The Series A preferred stock is convertible at the option of the holders at any time after the Closing into shares of common stock at an implied conversion price of $14.50 per share, subject to adjustment. At our election, all or a portion of the Series A preferred stock will be convertible into the relevant number of shares of common stock on or after the third anniversary of the Closing, if the closing price of the common stock equals or exceeds $29.00 for 20 consecutive trading days. The Series A preferred stock is convertible into 13,793,100 shares of our common stock based on the conversion rate in place as of September 30, 2014. The conversion rate is subject to the following customary anti-dilution and other adjustments:

 

1)             The occurrence of common stock dividends or distributions, stock splits or combinations, and equity reclassifications.

2)             The distribution of rights, options, or warrants to all holders of common stock entitling them to purchase shares of common stock at a price per share that is less than the closing price of the Company’s common stock.

3)             Pursuant to a tender offer or exchange offer to purchase outstanding shares of common stock for consideration valued at an amount greater than the closing price of the Company’s common stock.

4)             If the Company distributes evidences of its indebtedness, assets, other property or securities or rights, options or warrants to acquire its Capital Stock.

5)             If the Company has any stockholder rights plan in effect with respect to the common stock on the date of conversion, upon conversion of the Series A preferred stock, the holder will also receive (in addition to the common stock pursuant to the conversion) the rights under such rights plan, unless those rights (a) become exercisable before the conversion of the Series A preferred stock, or (b) are separated from the common stock (each a “Trigger Event”).  Upon the occurrence of a Trigger Event, the Series A preferred stock conversion rate will be adjusted in accordance with 1) or 2) described above.

6)             If the Company issues shares of common stock (or other instruments convertible into common stock) for valuable consideration, the conversion price is adjusted if (a) the offering price is less than the conversion price and (b) if the offering is at a price less than the fair market value of the Company’s common stock on the date of issuance.

 

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Redemption Features

 

At any time after the eighth anniversary of the Closing, we will have the right to redeem and the holders of the Series A preferred stock will have the right to require us to repurchase, all or any portion of the Series A preferred stock at 100% of the stated value thereof plus all accrued but unpaid dividends. Upon certain change of control events involving us, the holders can require us to repurchase the Series A preferred stock at 101% of the stated value thereof plus all accrued but unpaid dividends.

 

In accordance with FASB ASC Topic 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securities, redemption features which are not solely within the control of the issuer are required to be presented outside of permanent equity on the condensed consolidated balance sheets. Under the Investment Agreement and as noted above, the holder has the option to redeem the Series A preferred stock any time after January 27, 2022 or upon a change in control. As such, the Series A preferred stock is presented in temporary or mezzanine equity on the condensed consolidated balance sheets and will be accreted up to the stated redemption value of $203.0 million using an appropriate accretion method over a redemption period of eight years, as this represents the earliest probable date at which the Series A preferred stock will become redeemable.

 

14. COMMITMENTS & CONTINGENCIES

 

Rental Commitments and Contingencies

 

We rent space for certain of our retail stores, offices, warehouses, vehicles, and equipment under operating leases expiring at various dates through 2033. Certain leases contain rent escalation clauses (step rents) that require additional rental amounts in the later years of the term. Rent expense for leases with step rents or rent holidays is recognized on a straight-line basis over the lease term. Deferred rent is included in the condensed consolidated balance sheets in accrued expenses and other current liabilities.

 

The following table summarizes the composition of rent expense under operating leases for the three and nine months ended September 30, 2014 and 2013 (in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Minimum rentals (1)

 

$

26,629

 

$

26,047

 

$

82,307

 

$

75,093

 

Contingent rentals

 

4,952

 

5,596

 

14,635

 

15,240

 

Less: Sublease rentals

 

(261

)

(158

)

(736

)

(469

)

Total rent expense

 

$

31,320

 

$

31,485

 

$

96,206

 

$

89,864

 

 


(1)         Minimum rentals include all lease payments as well as fixed and variable common area maintenance (“CAM”), parking and storage fees, which were approximately $2.3 million and $2.5 million during the three months ended September 30, 2014 and 2013, respectively, and $7.3 million and $7.4 million during the nine months ended September 30, 2014 and 2013, respectively.

 

Purchase Commitments

 

As of September 30, 2014, we had purchase commitments with certain third party manufacturers for $165.7 million.

 

15. OPERATING SEGMENTS & GEOGRAPHIC INFORMATION

 

We have four reportable operating segments based on the geographic nature of our operations: Americas, Asia Pacific, Japan and Europe. We also have an “Other businesses” category which aggregates insignificant operating segments that do not meet the reportable threshold and represent manufacturing operations located in Mexico, Italy and Asia. The composition of our reportable operating segments is consistent with that used by our Chief Operating Decision Maker (“CODM”) to evaluate performance and allocate resources.

 

Each of our reportable operating segments derives its revenues from the sale of footwear, apparel and accessories to external customers as well as intersegment sales. Revenues of the “Other businesses” category are primarily made up of intersegment sales. The remaining revenues for the “Other businesses” represent non-footwear product sales to external customers. Intersegment sales are not included in the measurement of segment operating income or regularly reviewed by the CODM and are eliminated when deriving total consolidated revenues.

 

The primary financial measure utilized by the CODM to evaluate performance and allocate resources is segment operating income. Segment performance evaluation is based primarily on segment results without allocating corporate expenses, or indirect general,

 

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administrative and other expenses. Segment profits or losses of our reportable operating segments include adjustments to eliminate intersegment profit or losses on intersegment sales. As such, reconciling items for segment operating income represent unallocated corporate and other expenses as well as intersegment eliminations. Segment assets consist of cash and cash equivalents, accounts receivable and inventory as these balances are regularly reviewed by the CODM.

 

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The following table sets forth information related to our reportable operating business segments during the three and nine months ended September 30, 2014 and 2013:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

($ thousands)

 

2014

 

2013

 

2014

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

Americas

 

$

127,475

 

$

116,194

 

$

386,163

 

$

391,878

 

Asia Pacific

 

78,327

 

79,406

 

301,678

 

281,695

 

Japan

 

35,519

 

38,984

 

105,764

 

114,815

 

Europe

 

60,645

 

53,903

 

197,538

 

175,419

 

Total segment revenues

 

301,966

 

288,487

 

991,143

 

963,807

 

Other businesses

 

435

 

37

 

607

 

200

 

Total consolidated revenues

 

$

302,401

 

$

288,524

 

$

991,750

 

$

964,007

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Americas

 

$

15,094

 

$

17,969

 

$

53,451

 

$

61,787

 

Asia Pacific

 

4,384

 

13,690

 

65,962

 

76,478

 

Japan

 

9,091

 

11,656

 

29,421

 

36,679

 

Europe

 

9,689

 

6,860

 

29,254

 

31,188

 

Total segment operating income

 

38,258

 

50,175

 

178,088

 

206,132

 

Reconciliation of total segment operating income to income before income taxes:

 

 

 

 

 

 

 

 

 

Other businesses

 

(5,405

)

(5,495

)

(13,750

)

(14,907

)

Intersegment eliminations

 

15

 

15

 

45

 

45

 

Unallocated corporate and other (1)

 

(31,755

)

(26,788

)

(104,537

)

(85,294

)

Total consolidated operating income

 

1,113

 

17,907

 

59,846

 

105,976

 

Foreign currency transaction losses, net

 

1,290

 

1,043

 

4,278

 

4,457

 

Interest income

 

(424

)

(853

)

(1,304

)

(1,676

)

Interest expense

 

366

 

44

 

685

 

519

 

Other (income) expense, net

 

(217

)

13

 

(388

)

180

 

Income before income taxes

 

$

98

 

$

17,660

 

$

56,575

 

$

102,496

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Americas

 

$

3,439

 

$

2,690

 

$

9,126

 

$

7,663

 

Asia Pacific

 

1,219

 

1,244

 

4,094

 

3,722

 

Japan

 

458

 

346

 

1,161

 

1,122

 

Europe

 

1,011

 

1,367

 

2,825

 

3,798

 

Total segment depreciation and amortization

 

6,127

 

5,647

 

17,206

 

16,305

 

Other businesses

 

1,857

 

2,045

 

5,591

 

6,285

 

Unallocated corporate and other (1)

 

2,609

 

2,953

 

8,547

 

8,577

 

Total consolidated depreciation and amortization

 

$

10,593

 

$

10,645

 

$

31,344

 

$

31,167

 

 


(1)         Includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, depreciation and amortization of corporate and other assets not allocated to operating segments and costs of the same nature related to certain corporate holding companies.

 

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Table of Contents

 

The following table sets forth asset information related to our reportable operating business segments as of September 30, 2014 and December 31, 2013:

 

 

 

September 30,

 

December 31,

 

($ thousands)

 

2014

 

2013

 

Assets:

 

 

 

 

 

Americas

 

$

174,999

 

$

139,855

 

Asia Pacific

 

196,795

 

177,343

 

Japan

 

45,825

 

51,155

 

Europe

 

198,945

 

137,701

 

Total segment current assets

 

616,564

 

506,054

 

Other businesses

 

14,481

 

14,093

 

Unallocated corporate and other(1) 

 

80,809

 

63,743

 

Deferred tax assets, net

 

4,278

 

4,440

 

Income tax receivable

 

19,677

 

10,630

 

Other receivables

 

17,196

 

11,942

 

Prepaid expenses and other current assets

 

36,717

 

29,175

 

Total current assets

 

789,722

 

640,077

 

Property and equipment, net

 

73,575

 

86,971

 

Intangible assets, net

 

89,599

 

72,315

 

Goodwill

 

2,235

 

2,507

 

Deferred tax assets, net

 

17,581

 

19,628

 

Other assets

 

34,220

 

53,661

 

Total consolidated assets

 

$

1,006,932

 

$

875,159

 

 


(1)         Corporate assets primarily consist of cash and equivalents which increased predominately due to net cash proceeds from our investment with Blackstone. See Note 13 — Series A Preferred Stock for further details regarding the preferred share offering.

 

16. LEGAL PROCEEDINGS

 

We and certain current and former officers and directors were named as defendants in complaints filed by investors in the United States District Court for the District of Colorado. The first complaint was filed in November 2007 and several other complaints were filed shortly thereafter. These actions were consolidated and, in September 2008, the district court appointed a lead plaintiff and counsel. An amended consolidated complaint was filed in December 2008. The amended complaint purported to state claims under Sections 10(b), 20(a), and 20A of the Exchange Act on behalf of a class of all persons who purchased our common stock between April 2, 2007 and April 14, 2008 (the “Class Period”). The amended complaint also added our independent auditor as a defendant. The amended complaint alleged that, during the Class Period, the defendants made false and misleading public statements about us and our business and prospects and, as a result, the market price of our common stock was artificially inflated. The amended complaint also claimed that certain current and former officers and directors traded in our common stock on the basis of material non-public information. The amended complaint sought compensatory damages on behalf of the alleged class in an unspecified amount, including interest, and also sought attorneys’ fees and costs of litigation. On February 28, 2011, the District Court granted motions to dismiss filed by the defendants and dismissed all claims. A final judgment was thereafter entered. Plaintiffs subsequently appealed to the United States Court of Appeals for the Tenth Circuit. We and those current and former officers and directors named as defendants entered into a Stipulation of Settlement with the plaintiffs to resolve all claims asserted against us by the plaintiffs on behalf of the putative class. Our independent auditor was not a party to the Stipulation of Settlement. The Stipulation of Settlement received preliminary approval from the District Court on August 28, 2013. On September 18, 2014, the District Court entered an order of final approval of the settlement and, on September 19, 2014, the District Court entered final judgment dismissing the action against us and those current and former officers and directors named as defendants in its entirety with prejudice. The full settlement amount has been, or will be, paid by our insurers. The full settlement amount has been paid by our insurers.  Since no notice of appeal was filed during the appeal period, the settlement will become final on or about October 30, 2014.

 

We are currently subject to an audit by U.S. Customs & Border Protection (“CBP”) in respect of the period from 2006 to 2010. In October 2013, CBP issued a revised final audit report. In that report CBP projects that unpaid duties totaling approximately $12.4 million are due for the period under review (a reduction from $14.3 million in the preliminary draft report issued in 2012). We have responded that these projections are erroneous and provided arguments that demonstrate the amount due in connection with this matter is considerably less than the projection. It is not possible at this time to predict whether our arguments will be successful in eliminating or reducing the amount in dispute. CBP has stated that the final report will recommend collection of the duties due. At

 

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this time, it is not possible to determine precisely when a notice of claim will be received from CBP, but currently we anticipate a notice of claim could be received sometime in the first quarter of 2015. Likewise, it is not possible to predict with any certainty whether CBP will seek to assert a claim for penalties in addition to any unpaid duties, but such an assertion is a possibility.

 

Mexico’s Federal Tax Authority (“SAT”) audited the period from January 2006 to July 2011. There were two phases to the audit, the first for capital equipment and finished goods and the second for raw materials. The first phase was completed and no major discrepancies were noted by the SAT. On January 9, 2013, Crocs received a notice for the second phase in which the SAT issued a tax assessment (taxes and penalties) of roughly 280.0 million pesos (approximately $22.0 million) based on the value of all of Crocs’ imported raw materials during the audit period. We believe that the proposed penalty amount is unfounded and without merit. With the help of local counsel we filed an appeal by the deadline of March 15, 2013. We have argued that the amount due in connection with the matter, if any, is substantially less than that proposed by the SAT. In connection with the appeal, the SAT required us to post an appeal surety bond in the amount of roughly 321.0 million pesos (approximately $26.0 million), which amount reflects estimated additional penalties and interest if we are not successful on our appeal. This amount will be adjusted on an annual basis. We expect it to take between two and three years for resolution of this matter in the Mexican courts. It is not possible at this time to predict the outcome of this matter or reasonably estimate any potential loss.

 

As of September 30, 2014, we have accrued a total of $4.2 million relating to these litigation matters and other disputes. We estimate that the ultimate resolution of these litigation matters and other disputes could result in a loss that is reasonably possible between $0.0 million and $9.6 million in the aggregate, in excess of the amount accrued.

 

Although we are subject to other litigation from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we are not party to any other pending legal proceedings that we believe would reasonably have a material adverse impact on our business, financial position, results of operations or cash flows.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Business Overview

 

We are a designer, developer, manufacturer, worldwide marketer and distributor of casual lifestyle footwear, apparel and accessories for men, women and children. We strive to be the global leader in the sale of molded footwear featuring fun, comfort, color and functionality. Our products include footwear and accessories that utilize our proprietary closed cell-resin, called Croslite. The use of this unique material enables us to produce innovative, lightweight, non-marking, and odor-resistant footwear. We currently sell our products in more than 90 countries through domestic and international retailers and distributors and directly to end-user consumers through our company-operated retail stores, outlets, kiosks and webstores.

 

Since the initial introduction and popularity of the Beach and Crocs Classic designs, we have expanded our Croslite products to include a variety of new styles and products and have further extended our product reach through the acquisition of brand platforms. Going forward, we intend to focus our footwear product lines on our core molded footwear heritage, as well as develop innovative casual footwear platforms. We intend to streamline our product portfolio, eliminate non-core product development and explore strategic alternatives for non-core brands.

 

The broad appeal of our footwear has allowed us to market our products to a wide range of distribution channels, including department stores and traditional footwear retailers as well as a variety of specialty and independent retail channels. We intend to drive cohesive global brand positioning from region-to-region and year-to-year to create a clearer and consistent product portfolio and message, resulting in a more powerful consumer connection to the brand. This strategy will be accomplished through developing powerful product stories supported with effective, consistent and clear marketing.

 

As a global company, we have significant revenues and costs denominated in currencies other than the U.S. Dollar. Sales in international markets in foreign currencies are expected to continue to represent a substantial portion of our revenues. Likewise, we expect that our subsidiaries with functional currencies other than the U.S. Dollar will continue to represent a substantial portion of our overall gross margin and related expenses. Accordingly, changes in foreign currency exchange rates could materially affect revenues and costs or the comparability of revenues and costs from period to period as a result of translating our financial statements into our reporting currency.

 

Use of Non-GAAP Financial Measures

 

In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present current period “adjusted selling, general and administrative expenses”, which is a non-GAAP financial measure, within this Management’s Discussion and Analysis. Adjusted results exclude the impact of items that management believes affect the comparability or underlying business trends in our condensed consolidated financial statements in the periods presented.

 

We also present certain information related to our current period results of operations in this Item 2 through “constant currency”, which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable segments under U.S. GAAP. Constant currency represents current period results that have been restated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.

 

Management uses adjusted results to assist in comparing business trends from period to period on a consistent basis without regard to the impact of non-GAAP adjustments in communications with the board of directors, stockholders, analysts and investors concerning our financial performance. We believe that these non-GAAP measures are used by, and are useful to, investors and other users of our financial statements in evaluating operating performance by providing better comparability between reporting periods because they provide an additional tool to evaluate our performance without regard to non-GAAP adjustments that may not be indicative of overall business trends. They also provide a better baseline for analyzing trends in our operations. We do not suggest that investors should consider these non-GAAP measures in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. Please refer to our ‘Results of Operations’ within this section for a reconciliation of adjusted selling, general and administrative expenses to GAAP selling, general and administrative expenses.

 

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Financial Highlights

 

During the three months ended September 30, 2014, we experienced revenue growth of 4.8%. Despite unfavorable exchange rates driven by a stronger U.S. Dollar, we experienced strong revenue results in our Europe wholesale channel. In addition, our Americas segment experienced growth in all three revenue channels, specifically a 17.6% and 12.8% increase in wholesale and internet channels, respectively. We experienced difficulty in our Asia Pacific segment primarily due to decreased performance in our China business as a result of distributor inventory levels and sell through. On a constant-currency basis, our Japan segment experienced a slight decline as macroeconomic turmoil continues to present challenges for the business as we saw the lingering decline of Japanese Yen decrease quarter-over-quarter revenues by almost $1.7 million and operating income by $0.2 million.

 

Globally, we are focused on expanding and improving current relationships with wholesale partners and experienced 7.7% aggregate wholesale growth, specifically 22.9% in our Europe and 17.6% in our Americas segment. We experienced a $0.9 million, or 0.7%, increase in retail channel revenues primarily through the addition of 11 global retail locations (net of store closures) since September 30, 2013 partially offset by a 4.5% decrease in comparable store sales compared to prior year.

 

The following are the more significant developments in our businesses during the three months ended September 30, 2014:

 

·                  Revenues increased $13.9 million, or 4.8%, to $302.4 million compared to the same period in 2013. Revenue growth was predominately driven by a 10.6% increase in global footwear unit sales partially offset by a 4.4% decrease in global average footwear unit selling price.

·                  Gross profit increased $1.4 million, or 0.9%, to $155.0 million and gross margin percentage decreased 190 basis points to 51.3% compared to the same period in 2013. The decline in gross margin percentage is primarily driven by the evolution of our product assortment and is consistent with our product strategy. As we expand our product lines, product mix shifts into styles that may utilize more expensive materials such as textile fabric and leather compared to the traditional clog. In addition, we experienced sales volume difficulty in our China market leading to decreased gross margins as average margins in China are typically higher than the global average.

·                  Selling, general and administrative expenses increased $8.0 million, or 5.9%, to $143.7 million compared to the same period in 2013. Selling, general and administrative expenses increased predominately due to an increase of $5.2 million in bad debt expense primarily related to delayed payments from distributors in China and Southeast Asia. In addition, we experienced an increase of $2.6 million in expenses that we believe to be non-indicative of our underlying business trends including reorganizational charges as a result of transition activities, additional operating expenses related to our ERP implementation and charges related to litigation settlements.

·                  We incurred $8.2 million in restructuring charges as a result of our strategic plans for long-term improvement and growth of the business. These charges included severance costs related to executive management and employees, retail store closure costs and a write-down of obsolete inventory related to an exited business line.

·                  We incurred $2.6 million in retail asset impairment charges related to certain underperforming retail locations in our Americas, Europe and Asia Pacific segments that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over their remaining economic life.