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 June 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 July 24, 2014, Crocs, Inc. had 85,264,822 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.

 

i



Table of Contents

 

Crocs, Inc.

Form 10-Q

Quarter Ended June 30, 2014

Table of Contents

 

PART I — Financial Information

 

Item 1.

Financial Statements

1

 

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

1

 

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

2

 

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

3

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 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

45

Item 4.

Controls and Procedures

47

 

 

 

PART II — Other Information

 

Item 1.

Legal Proceedings

48

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 5.

Other Information

49

Item 6.

Exhibits

51

Signatures

 

52

 

ii



Table of Contents

 

PART I — Financial Information

 

ITEM 1. Financial Statements

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

($ thousands, except per share data)

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

376,920

 

$

363,827

 

$

689,349

 

$

675,483

 

Cost of sales

 

174,349

 

162,960

 

330,551

 

308,767

 

Gross profit

 

202,571

 

200,867

 

358,798

 

366,716

 

Selling, general and administrative expenses

 

153,370

 

150,246

 

290,525

 

278,445

 

Restructuring charges (Note 6)

 

4,060

 

 

6,310

 

 

Asset impairment charges (Note 3)

 

3,230

 

202

 

3,230

 

202

 

Income from operations

 

41,911

 

50,419

 

58,733

 

88,069

 

Foreign currency transaction losses, net

 

220

 

814

 

2,988

 

3,414

 

Interest income

 

(403

)

(517

)

(880

)

(823

)

Interest expense

 

128

 

266

 

319

 

475

 

Other (income) expense, net

 

(30

)

195

 

(171

)

167

 

Income before income taxes

 

41,996

 

49,661

 

56,477

 

84,836

 

Income tax expense

 

18,719

 

14,305

 

24,076

 

20,519

 

Net income

 

$

23,277

 

$

35,356

 

$

32,401

 

$

64,317

 

Dividends on Series A convertible preferred shares (Note 13)

 

3,033

 

 

5,166

 

 

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

 

721

 

 

1,339

 

 

Net income attributable to common stockholders

 

$

19,523

 

$

35,356

 

$

25,896

 

$

64,317

 

Net income per common share (Note 12):

 

 

 

 

 

 

 

 

 

Basic

 

$

0.19

 

$

0.40

 

$

0.26

 

$

0.73

 

Diluted

 

$

0.19

 

$

0.40

 

$

0.25

 

$

0.72

 

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

($ thousands)

 

2014

 

2013

 

2014

 

2013

 

Net income

 

$

23,277

 

$

35,356

 

$

32,401

 

$

64,317

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

221

 

(6,250

)

(759

)

(10,567

)

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

 

 

 

 

299

 

Total comprehensive income

 

$

23,498

 

$

29,106

 

$

31,642

 

$

54,049

 

 

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

 

2



Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

June 30,

 

December 31,

 

($ thousands, except number of shares)

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

408,953

 

$

317,144

 

Accounts receivable, net of allowances of $20,837 and $10,513, respectively

 

195,902

 

104,405

 

Inventories

 

191,648

 

162,341

 

Deferred tax assets, net

 

4,587

 

4,440

 

Income tax receivable

 

14,426

 

10,630

 

Other receivables

 

17,295

 

11,942

 

Prepaid expenses and other current assets

 

37,923

 

29,175

 

Total current assets

 

870,734

 

640,077

 

Property and equipment, net

 

83,316

 

86,971

 

Intangible assets, net

 

85,747

 

72,132

 

Goodwill

 

2,479

 

2,690

 

Deferred tax assets, net

 

18,614

 

19,628

 

Other assets

 

40,983

 

53,661

 

Total assets

 

$

1,101,873

 

$

875,159

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

92,014

 

$

57,450

 

Accrued expenses and other current liabilities

 

110,100

 

97,111

 

Deferred tax liabilities, net

 

11,197

 

11,199

 

Accrued restructuring

 

3,839

 

 

Income taxes payable

 

32,576

 

15,992

 

Current portion of long-term borrowings and capital lease obligations

 

5,434

 

5,176

 

Total current liabilities

 

255,160

 

186,928

 

Long term income tax payable

 

25,744

 

36,616

 

Long-term borrowings and capital lease obligations

 

9,040

 

11,670

 

Other liabilities

 

16,745

 

15,201

 

Total liabilities

 

306,689

 

250,415

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

Series A convertible preferred shares, par value $0.001 per share, 200,000 shares issued and outstanding, redemption amount and liquidation preference of $203,033 and $0 at June 30, 2014 and December 31, 2013, respectively (Note 13)

 

171,282

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common shares, par value $0.001 per share, 250,000,000 shares authorized, 92,213,732 and 85,804,571 shares issued and outstanding, respectively, at June 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, 6,409,161 and 3,212,453 shares, respectively

 

(102,270

)

(55,964

)

Additional paid-in capital

 

341,858

 

321,532

 

Retained earnings

 

370,328

 

344,432

 

Accumulated other comprehensive income

 

13,893

 

14,652

 

Total stockholders’ equity

 

623,902

 

624,744

 

Total liabilities, commitments and contingencies and stockholders’ equity

 

$

1,101,873

 

$

875,159

 

 

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

 

3



Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Six Months Ended June 30,

 

($ thousands)

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

32,401

 

$

64,317

 

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

 

 

 

 

 

Depreciation and amortization

 

20,751

 

20,522

 

Unrealized (gain) loss on foreign exchange, net

 

(10,892

)

1,392

 

Asset impairment charges

 

3,230

 

202

 

Provision for doubtful accounts, net

 

3,867

 

1,340

 

Share-based compensation

 

8,331

 

7,540

 

Inventory write-down charges

 

2,029

 

 

Other non-cash items

 

732

 

733

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(94,840

)

(75,124

)

Inventories

 

(30,769

)

(923

)

Prepaid expenses and other assets

 

(563

)

(13,460

)

Accounts payable

 

34,015

 

12,385

 

Accrued expenses and other liabilities

 

7,760

 

12,551

 

Accrued restructuring

 

3,839

 

 

Income taxes

 

3,130

 

6,266

 

Cash provided by (used in) operating activities

 

(16,979

)

37,741

 

Cash flows from investing activities:

 

 

 

 

 

Cash paid for purchases of property and equipment

 

(11,376

)

(19,676

)

Proceeds from disposal of property and equipment

 

43

 

545

 

Cash paid for intangible assets

 

(18,944

)

(11,833

)

Restricted cash

 

(788

)

(1,295

)

Cash used in investing activities

 

(31,065

)

(32,259

)

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

 

(2,134

)

 

Proceeds from bank borrowings

 

 

14,572

 

Repayment of bank borrowings and capital lease obligations

 

(2,372

)

(11,334

)

Issuances of common stock

 

1,209

 

1,439

 

Purchase of treasury stock

 

(47,005

)

(12,533

)

Repurchase of common stock for tax withholding

 

(787

)

(256

)

Cash provided by (used in) financing activities

 

131,131

 

(8,112

)

Effect of exchange rate changes on cash

 

8,722

 

(2,364

)

Net increase (decrease) in cash and cash equivalents

 

91,809

 

(4,994

)

Cash and cash equivalents—beginning of period

 

317,144

 

294,348

 

Cash and cash equivalents—end of period

 

$

408,953

 

$

289,354

 

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

 

 

 

 

 

Interest

 

$

204

 

$

525

 

Income taxes

 

$

23,174

 

$

10,658

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Assets acquired under capitalized leases

 

$

 

$

61

 

Accrued purchases of property and equipment

 

3,577

 

2,715

 

Accrued purchases of intangibles

 

8,667

 

1,803

 

Accrued dividends

 

3,033

 

 

Accretion of dividend equivalents

 

$

1,339

 

$

 

 

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

 

4



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.

 

In the accompanying condensed consolidated balance sheets as of June 30, 2014, we recorded an out-of-period adjustment related to the calculation of a beneficial conversion feature associated with the issuance of the Series A convertible preferred stock (“Series A preferred stock”) on January 27, 2014. This adjustment was a non-cash adjustment and had no effect on operating income. The adjustment decreased the previously reported balance of the Series A preferred stock and increased the previously reported balance of additional paid-in capital by approximately $12.3 million. The adjustment did not have a material impact on our condensed consolidated statements of income for the three months ended March 31, 2014, and there was no impact on our condensed consolidated statements of comprehensive income or cash flows for the three months ended March 31, 2014.

 

Reclassifications

 

Certain prior period amounts on the condensed consolidated financial statements have been reclassified to conform to current period presentation. We segregated certain restructuring charges recorded to selling, general and administrative expenses on the condensed consolidated statements of income during the three months ended March 31, 2014 to the restructuring charges line item on the condensed consolidated statements of income during the six months ended June 30, 2014. In addition, we segregated certain accrued restructuring charges recorded to accrued expenses and other liabilities on the condensed consolidated balance sheets at March 31, 2014 and changes in accrued expenses and other liabilities on the condensed consolidated statements of cash flows for the three months ended March 31, 2014 to the accrued restructuring line item on the condensed consolidated balance sheets at June 30, 2014 and changes in accrued restructuring on the condensed consolidated statements of cash flows for the six months ended June 30, 2014. These reclassifications had no effect on income from operations, current liabilities or cash provided by (used in) operating activities.

 

Summary of Significant Accounting Policies

 

These 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 preferred stock represent 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

 

5



Table of Contents

 

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 common shares 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 will accrete the discount from the date of issuance through the redemption date of eight years following issuance. Accretion expense will be recognized as dividend equivalents over the eight year period utilizing the effective interest method.

 

Recently Issued 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 Company does not anticipate this pronouncement to 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)

 

6



Table of Contents

 

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.

 

2. INVENTORIES

 

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

 

($ thousands)

 

June 30, 2014

 

December 31, 2013

 

Finished goods

 

$

184,748

 

$

154,272

 

Work-in-progress

 

505

 

685

 

Raw materials

 

6,395

 

7,384

 

Inventories

 

$

191,648

 

$

162,341

 

 

Inventory Write-down

 

During the three months ended June 30, 2014, we recorded approximately $2.0 million of inventory write-down charges related to obsolete inventory with a market value lower than cost. These charges were related to certain obsolete footwear in the Other businesses segment and are reported in cost of sales in the condensed consolidated statements of income.

 

3. PROPERTY & EQUIPMENT

 

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

 

 

 

June 30,

 

December 31,

 

($ thousands)

 

2014

 

2013

 

Machinery and equipment

 

$

53,582

 

$

52,003

 

Leasehold improvements

 

102,615

 

93,235

 

Furniture, fixtures and other

 

26,164

 

23,653

 

Construction-in-progress

 

7,879

 

16,231

 

Property and equipment, gross (1)

 

190,240

 

185,122

 

Less: Accumulated depreciation (2)

 

(106,924

)

(98,151

)

Property and equipment, net

 

$

83,316

 

$

86,971

 

 


(1)              Includes $0.1 million and $0.1 million of certain equipment held under capital leases and classified as equipment as of June 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 June 30, 2014 and December 31, 2013, respectively, which are depreciated using the straight-line method over the lease term.

 

During the three months ended June 30, 2014 and 2013, we recorded $6.3 million and $5.9 million, respectively, in depreciation expense of which $0.4 million and $0.8 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 six months ended June 30, 2014 and 2013, we recorded $11.7 million and $12.0 million, respectively, in depreciation expense of which $0.9 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.

 

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

 

7



Table of Contents

 

operating segment for the three and six months ended June 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:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2014

 

June 30, 2013

 

June 30, 2014

 

June 30, 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

 

$

1,247

 

16

 

$

202

 

1

 

$

1,247

 

16

 

$

202

 

1

 

Asia Pacific

 

444

 

12

 

 

 

444

 

12

 

 

 

Japan

 

 

 

 

 

 

 

 

 

Europe

 

1,539

 

9

 

 

 

1,539

 

9

 

 

 

Asset impairment charges

 

$

3,230

 

37

 

$

202

 

1

 

$

3,230

 

37

 

$

202

 

1

 

 

4. GOODWILL & INTANGIBLE ASSETS

 

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

 

 

 

June 30, 2014

 

December 31, 2013

 

($ thousands)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Capitalized software

 

$

141,497

(1)

$

(58,258

)(2)

$

83,239

 

$

118,940

(1)

$

(49,665

)(2)

$

69,275

 

Customer relationships

 

6,828

 

(6,563

)

265

 

6,878

 

(6,439

)

439

 

Patents, copyrights, and trademarks

 

6,466

 

(4,668

)

1,798

 

6,501

 

(4,272

)

2,229

 

Core technology

 

4,539

 

(4,539

)

 

4,548

 

(4,548

)

 

Other

 

706

 

(636

)

70

 

983

 

(709

)

274

 

Total finite lived intangible assets

 

160,036

 

(74,664

)

85,372

 

137,850

 

(65,633

)

72,217

 

Indefinite lived intangible assets

 

375

 

 

375

 

97

 

 

97

 

Goodwill

 

2,479

 

 

2,479

 

2,508

 

 

2,508

 

Goodwill and intangible assets

 

$

162,890

 

$

(74,664

)

$

88,226

 

$

140,455

 

$

(65,633

)

$

74,822

 

 


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

(2)         Includes $2.2 million and $1.9 million of accumulated amortization of software held under a capital lease as of June 30, 2014 and December 31, 2013, respectively, which is amortized using the straight-line method over the useful life.

 

During the three months ended June 30, 2014 and 2013, amortization expense recorded for intangible assets with finite lives was $5.1 million and $4.4 million, respectively, of which $1.8 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 six months ended June 30, 2014 and 2013, amortization expense recorded for intangible assets with finite lives was $9.1 million and $8.5 million, respectively, of which $3.1 million and $3.2 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.

 

8



Table of Contents

 

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

 

 

 

Amortization

 

Fiscal years ending December 31,

 

($ thousands)

 

Remainder of 2014

 

$

11,170

 

2015

 

18,281

 

2016

 

11,742

 

2017

 

10,515

 

2018

 

8,679

 

Thereafter

 

24,985

 

Total

 

$

85,372

 

 

5. ACCRUED EXPENSES & OTHER CURRENT LIABILITIES

 

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

 

 

 

June 30,

 

December 31,

 

($ thousands)

 

2014

 

2013

 

Accrued compensation and benefits

 

$

25,652

 

$

26,903

 

Professional services

 

23,398

 

14,128

 

Fulfillment, freight and duties

 

17,482

 

12,565

 

Sales/use and VAT tax payable

 

16,771

 

9,142

 

Accrued rent and occupancy

 

12,473

 

12,198

 

Customer deposits

 

3,985

 

6,940

 

Dividend payable

 

3,033

 

 

Accrued legal liabilities

 

831

 

8,722

 

Other (1)

 

6,475

 

6,513

 

Total accrued expenses and other current liabilities

 

$

110,100

 

$

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 June 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 and second quarter of 2014 and are expected to continue for the next 18 months. As a result, the Company recorded restructuring charges of $4.1 million and $6.3 million during the three and six months ended June 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 summarized our restructuring activity during the three and six months ended June 30, 2014:

 

 

 

Three Months Ended

 

Six Months Ended

 

($ thousands)

 

June 30, 2014

 

June 30, 2014

 

Severance costs

 

$

2,869

 

$

4,453

 

Lease / contract exit and related costs

 

572

 

1,178

 

Other (1)

 

619

 

679

 

Total restructuring charges

 

$

4,060

 

$

6,310

 

 

9



Table of Contents

 


(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 six months ended June 30, 2014 as well as charges incurred to date by reportable segment:

 

 

 

Three Months Ended

 

Six Months Ended

 

($ thousands)

 

June 30, 2014

 

June 30, 2014

 

Americas

 

$

1,224

 

$

1,224

 

Asia Pacific

 

393

 

393

 

Japan

 

 

 

Europe

 

307

 

982

 

Unallocated corporate

 

2,136

 

3,711

 

Total restructuring charges

 

$

4,060

 

$

6,310

 

 

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

 

 

 

Accrued

 

 

 

 

 

 

 

Accrued

 

 

 

restructuring as of

 

 

 

 

 

 

 

restructuring as of

 

($ thousands)

 

December 31, 2013

 

Additions

 

Cash payments

 

Adjustments (1)

 

June 30, 2014

 

Severance

 

$

 

$

4,451

 

$

(1,410

)

$

1

 

$

3,042

 

Lease / contract exit and related costs

 

 

1,162

 

(403

)

(1

)

758

 

Other

 

 

148

 

(109

)

 

39

 

Total accrued restructuring

 

$

 

$

5,761

 

$

(1,922

)

$

 

$

3,839

 

 


(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 six months ended June 30, 2014, we closed eight and ten 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 June 30, 2014, we recorded a liability of approximately $0.5 million related to these locations in accrued restructuring on the condensed consolidated balance sheets. 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.

 

10



Table of Contents

 

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 June 30, 2014 and December 31, 2013:

 

 

 

Fair Value as of June 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

 

$

115,846

 

$

 

$

 

$

115,846

 

Cash and cash equivalents 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. As of June 30, 2014, we did not have derivative assets or liabilities on our condensed consolidated balance sheets as all derivative forward contracts described in the table below were entered into on June 30, 2014.

 

11



Table of Contents

 

The following table summarizes the notional amounts of the outstanding foreign currency exchange contracts at June 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.

 

 

 

June 30,

 

December 31,

 

($ thousands)

 

2014

 

2013

 

Foreign currency exchange forward contracts by currency:

 

 

 

 

 

British Pound Sterling

 

$

22,736

 

$

15,487

 

Japanese Yen

 

19,174

 

68,707

 

Singapore Dollar

 

16,391

 

28,225

 

Russian Ruble

 

15,632

 

17,588

 

Euro

 

12,228

 

38,577

 

Mexican Peso

 

7,974

 

18,350

 

Canadian Dollar

 

4,876

 

3,428

 

Australian Dollar

 

4,669

 

4,941

 

South Korean Won

 

4,210

 

12,100

 

Hong Kong Dollar

 

4,200

 

1,844

 

South African Rand

 

4,032

 

3,076

 

New Taiwan Dollar

 

3,317

 

3,463

 

Indian Rupee

 

2,991

 

2,150

 

Swedish Krona

 

2,559

 

1,615

 

New Zealand Dollar

 

928

 

943

 

Norwegian Krone

 

542

 

 

Total notional value, net

 

$

126,459

 

$

220,494

 

 

 

 

 

 

 

Latest maturity date

 

August 2014

 

December 2015

 

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Location of (Gain) Loss Recognized in Income

 

($ thousands)

 

2014

 

2013

 

2014

 

2013

 

on Derivatives

 

Foreign currency exchange forwards

 

$

3,370

 

$

(710

)

$

5,208

 

$

(10,651

)

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 and six months ended June 30, 2014, the net losses recognized of $0.2 million and $3.0 million, respectively, recorded on the condensed consolidated statements of income is comprised of net losses noted in the table above of $3.4 million and $5.2 million, respectively, associated with our derivative instruments partially offset by net gains of $3.2 million and $2.2 million, respectively, associated with exposure from day-to-day business transactions in various foreign currencies. For the three and six months ended June 30, 2013, the net losses recognized of $0.8 million and $3.4 million, respectively, recorded on the condensed consolidated statements of income is comprised of net losses $1.5 million and $14.1 million, respectively, associated with exposure from day-to-day business transactions in various foreign currencies partially offset by net gains noted  in the table above of $0.7 million and $10.7 million, respectively, 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

 

12



Table of Contents

 

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.

 

As of June 30, 2014 and December 31, 2013, we had no outstanding borrowings under the Credit Agreement. As of June 30, 2014 and December 31, 2013, we had issued and outstanding letters of credit of $7.4 million and $7.2 million, respectively, which were reserved against the borrowing base under the terms of the Credit Agreement. As of June 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 June 30, 2014 and December 31, 2013, we had $14.4 million and $16.8 million, respectively, of long-term debt outstanding under five separate notes payable under the Master IPA, of which $5.4 million and $5.1 million, respectively, represent current installments. As of June 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 six months ended June 30, 2014, we capitalized $0.1 million and $0.2 million, respectively, in interest expense related to this debt arrangement to the condensed consolidated balance sheets. During the three and six months ended June 30, 2013, we did not capitalize any interest expense related to this debt arrangement.

 

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

 

Fiscal years ending December 31,

 

 

 

Remainder of 2014

 

$

5,404

 

2015

 

5,340

 

2016

 

3,374

 

2017

 

313

 

2018

 

 

Thereafter

 

 

Total principal debt maturities

 

$

14,431

 

 

13



Table of Contents

 

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 June 30, 2014 and 2013, we recorded $3.8 million and $4.0 million, respectively, of stock-based compensation expense, of which $0.1 million and $0.0 million, respectively, related to the implementation of our ERP system, was capitalized to intangible assets on the condensed consolidated balance sheets. During the six months ended June 30, 2014 and 2013, $8.5 million and $7.5 million, respectively, of stock-based compensation expense was recorded, of which $0.2 million and $0.0 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 six months ended June 30, 2014 and 2013:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 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 March 31, 2014 and 2013, respectively, and December 31, 2013 and 2012, respectively

 

2,020,308

 

$

13.51

 

2,540,677

 

$

13.24

 

2,105,152

 

$

13.34

 

2,621,686

 

$

13.03

 

Granted

 

10,000

 

15.04

 

77,500

 

16.52

 

34,000

 

15.24

 

157,000

 

15.90

 

Exercised

 

(117,502

)

3.54

 

(106,781

)

7.82

 

(191,059

)

4.89

 

(204,090

)

7.05

 

Forfeited or expired

 

(37,326

)

20.44

 

(141,311

)

16.00

 

(72,613

)

19.29

 

(204,511

)

16.81

 

Outstanding at June 30

 

1,875,480

 

$

14.01

 

2,370,085

 

$

13.42

 

1,875,480

 

$

14.01

 

2,370,085

 

$

13.42

 

 

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 June 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 six months ended June 30, 2014 and 2013, the board of directors approved 0.3 million 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 June 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 six months ended June 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 June 30, 2014 and 2013, we recorded $2.8 million and $3.0 million, respectively, of stock-based compensation expense related to RSUs. During the six months ended June 30, 2014 and 2013, we recorded $6.5 million and $6.0 million, respectively, of stock-based compensation expense related to RSUs. The following represents the vesting schedule of performance-based RSUs granted in 2014:

 

14



Table of Contents

 

 

 

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 six months ended June 30, 2014 and 2013:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 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 March 31, 2014 and 2013, respectively, and December 31, 2013 and 2012, respectively

 

58,037

 

$

14.89

 

327,503

 

$

13.22

 

210,490

 

$

13.43

 

355,509

 

$

13.37

 

Granted

 

9,973

 

15.04

 

21,590

 

16.56

 

9,973

 

15.04

 

21,590

 

16.56

 

Vested (1)

 

(48,037

)

14.50

 

(61,006

)

12.68

 

(63,435

)

15.03

 

(78,212

)

14.57

 

Forfeited or expired

 

(5,000

)

16.75

 

 

 

(142,055

)

12.60

 

(10,800

)

12.51

 

Outstanding at June 30

 

14,973

 

$

15.61

 

288,087

 

$

13.32

 

14,973

 

$

15.61

 

288,087

 

$

13.32

 

 


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

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 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 March 31, 2014 and 2013, respectively, and December 31, 2013 and 2012, respectively

 

2,613,554

 

$

16.17

 

2,449,544

 

$

17.06

 

1,965,667

 

$

16.50

 

1,414,661

 

$

20.61

 

Granted

 

272,516

 

15.27

 

157,097

 

15.88

 

1,621,493

 

16.24

 

1,563,114

 

15.04

 

Vested (1)

 

(79,325

)

21.46

 

(92,297

)

25.35

 

(487,889

)

17.80

 

(286,984

)

22.53

 

Forfeited or expired

 

(429,524

)

15.90

 

(58,330

)

16.89

 

(722,050

)

16.89

 

(234,777

)

22.27

 

Outstanding at June 30

 

2,377,221

 

$

15.93

 

2,456,014

 

$

16.72

 

2,377,221

 

$

15.93

 

2,456,014

 

$

16.72

 

 

15



Table of Contents

 


(1)         The RSUs vested during the three months ended June 30, 2014 and 2013 consisted entirely of time-based awards. The RSUs vested during the six months ended June 30, 2014 consisted of 456,943 of time-based awards and 30,946 of performance-based awards. The RSUs vested during the six months ended June 30, 2013 consisted of 234,696 of time-based awards and 52,288 of performance-based awards.

 

Appointment of President

 

On May 13, 2014, the board of directors appointed Andrew Rees as President of the Company, effective June 9, 2014. Upon the commencement of his employment, Mr. Rees was granted a market-based RSU with a maximum value of $3.5 million, which shall vest based on the achievement of certain share price levels on or before the fourth anniversary of his start date, subject to continued employment with the Company. This grant represents the right to receive 0.2 million shares of the Company’s common stock based on the 30-day volume-weighted average price of $15.02 per share immediately prior to his appointment. Based on a Monte-Carlo valuation model, the fair value of the RSU was determined to be $2.3 million, or 65.7% of the grant price, which will be expensed on a straight-line basis over a derived service period of 1.788 years.

 

11. INCOME TAXES

 

During the three months ended June 30, 2014, we recognized an income tax expense of $18.7 million on pre-tax income of $42.0 million, representing an effective income tax expense rate of 44.6% compared to an income tax expense of $14.3 million on pre-tax income of $49.7 million, representing an effective income tax expense rate of 28.8% for the same period in 2013. During the six months ended June 30, 2014, we recognized an income tax expense of $24.1 million on pre-tax income of $56.5 million, representing an effective income tax expense rate of 42.6% compared to an income tax expense of $20.5 million on pre-tax income of $84.8 million, representing an effective income tax expense rate of 24.2% for the same period in 2013.

 

The increase in effective tax rate compared to the same period in 2013 is primarily the result of increased profitability in higher tax jurisdictions and losses recorded in tax jurisdictions for which no tax benefits are being recorded partially offset by tax benefits recognized during the quarter due to the release of certain unrecognized tax benefits as a result of settling the Company’s audit with the Canada Revenue Agency. 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 losses in tax jurisdictions for which no tax benefits are being recorded. We had unrecognized tax benefits of $23.0 million at June 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 six months ended June 30, 2014 and 2013:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

($ thousands)

 

2014

 

2013

 

2014

 

2013

 

Numerator

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

19,523

 

$

35,356

 

$

25,896

 

$

64,317

 

Less: adjustment for income allocated to participating securities

 

(2,683

)

(127

)

(3,543

)

(243

)

Net income attributable to common stockholders - basic and diluted

 

$

16,840

 

$

35,229

 

$

22,353

 

$

64,074

 

Denominator

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

86,887

 

87,865

 

87,559

 

87,823

 

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

 

912

 

972

 

1,314

 

945

 

Weighted average common shares outstanding - diluted

 

87,799

 

88,837

 

88,873

 

88,768

 

Net income attributable per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.19

 

$

0.40

 

$

0.26

 

$

0.73

 

Diluted

 

$

0.19

 

$

0.40

 

$

0.25

 

$

0.72

 

 

For the three months ended June 30, 2014 and 2013, approximately 0.9 million and 1.5 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 six months ended June 30, 2014 and 2013, approximately 0.9 million and 1.7 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 June 30, 2014,

 

16



Table of Contents

 

the Series A preferred stock would represent approximately 13.8% 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, in December 2013, the board of directors authorized the 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 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 June 30, 2014, we repurchased approximately 2.3 million shares at a weighted average price of $14.71 per share for an aggregate price of approximately $33.9 million excluding related commission charges under our publicly-announced repurchase plan. During the six months ended June 30, 2014, we repurchased approximately 3.2 million shares at a weighted average price of $14.77 per share for an aggregate price of approximately $46.9 million excluding related commission charges under our publicly-announced repurchase plan.

 

Since June 30, 2014, we have repurchased approximately 0.6 million shares at a weighted average price of $14.72 per share for an aggregate price of approximately $8.2 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 June 30, 2014, we had accrued dividends of $3.0 million on the condensed consolidated balance sheets, which were paid in cash to Blackstone on July 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 June 30, 2014. The conversion rate is subject to the following customary anti-dilution and other adjustments:

 

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

·                  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.

·                  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.

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

 

17



Table of Contents

 

·                  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.

·                  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.

 

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 six months ended June 30, 2014 and 2013 (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Minimum rentals (1)

 

$

28,110

 

$

24,776

 

$

55,649

 

$

49,044

 

Contingent rentals

 

7,261

 

7,148

 

9,684

 

9,644

 

Less: Sublease rentals

 

(243

)

(156

)

(447

)

(310

)

Total rent expense

 

$

35,128

 

$

31,768

 

$

64,886

 

$

58,378

 

 


(1)         Minimum rentals include all lease payments as well as fixed and variable common area maintenance (“CAM”), parking and storage fees, which were approximately $2.5 million during the three months ended June 30, 2014 and 2013, respectively, and $4.9 million during the six months ended June 30, 2014 and 2013, respectively.

 

Purchase Commitments

 

As of June 30, 2014, we had purchase commitments with certain third party manufacturers for $108.7 million.

 

Government Tax Audits

 

We are regularly subject to, and are currently undergoing, audits by tax authorities in the United States and several foreign jurisdictions for prior tax years.

 

In April 2014, we received a final notice of assessment on transfer pricing items from the Canadian tax authorities, which closed the ongoing audit of our Canada operations through 2011. The assessment, along with the estimated impact on certain Canadian provinces, was less than the amount of the uncertain tax benefits recorded, and therefore, resulted in a net tax benefit of approximately

 

18



Table of Contents

 

$2.3 million in the quarter ended June 30, 2014. We have paid the assessment, which included tax and interest for the tax periods through December 31, 2011.

 

See Note 16—Legal Proceedings for further details regarding potential loss contingencies related to government tax audits and other current legal proceedings.

 

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, 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.

 

19



Table of Contents

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

($ thousands)

 

2014

 

2013

 

2014

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

Americas

 

$

141,568

 

$

146,255

 

$

258,688

 

$

275,684

 

Asia Pacific

 

121,486

 

111,832

 

223,351

 

202,289

 

Japan

 

41,195

 

45,472

 

70,245

 

75,831

 

Europe

 

72,757

 

60,170

 

136,893

 

121,516

 

Total segment revenues

 

377,006

 

363,729

 

689,177

 

675,320

 

Other businesses

 

(86

)

98

 

172

 

163

 

Total consolidated revenues

 

$

376,920

 

$

363,827

 

$

689,349

 

$

675,483

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

 

 

Americas

 

$

24,920

 

$

23,005

 

$

38,357

 

$

43,818

 

Asia Pacific

 

33,895

 

35,685

 

61,578

 

62,788

 

Japan

 

13,868

 

17,463

 

20,330

 

25,023

 

Europe

 

12,026

 

11,657

 

19,565

 

24,328

 

Total segment operating income

 

84,709

 

87,810

 

139,830

 

155,957

 

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

 

 

 

 

 

 

 

 

 

Other businesses

 

(4,589

)

(5,535

)

(8,345

)

(9,412

)

Intersegment eliminations

 

15

 

15

 

30

 

30

 

Unallocated corporate and other (1)

 

(38,224

)

(31,871

)

(72,782

)

(58,506

)

Total consolidated operating income

 

41,911

 

50,419

 

58,733

 

88,069

 

Foreign currency transaction losses, net

 

220

 

814

 

2,988

 

3,414

 

Interest income

 

(403

)

(517

)

(880

)

(823

)

Interest expense

 

128

 

266

 

319

 

475

 

Other (income) expense, net

 

(30

)

195

 

(171

)

167

 

Income before income taxes

 

$

41,996

 

$

49,661

 

$

56,477

 

$

84,836

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Americas

 

$

3,239

 

$

2,431

 

$

5,687

 

$

4,973

 

Asia Pacific

 

1,469

 

1,200

 

2,875

 

2,478

 

Japan

 

369

 

375

 

703

 

776

 

Europe

 

912

 

1,281

 

1,814

 

2,431

 

Total segment depreciation and amortization

 

5,989

 

5,287

 

11,079

 

10,658

 

Other businesses

 

2,135

 

2,123

 

3,734

 

4,240

 

Unallocated corporate and other (1)

 

3,254

 

2,848

 

5,938

 

5,624

 

Total consolidated depreciation and amortization

 

$

11,378

 

$

10,258

 

$

20,751

 

$

20,522

 

 


(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.

 

20



Table of Contents

 

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

 

 

 

June 30,

 

December 31,

 

($ thousands)

 

2014

 

2013

 

Assets:

 

 

 

 

 

Americas

 

$

184,547

 

$

139,855

 

Asia Pacific

 

219,988

 

177,343

 

Japan

 

51,667

 

51,155

 

Europe

 

178,500

 

137,701

 

Total segment current assets

 

634,702

 

506,054

 

Other businesses

 

16,274

 

14,093

 

Unallocated corporate and other(1) 

 

145,527

 

63,743

 

Deferred tax assets, net

 

4,587

 

4,440

 

Income tax receivable

 

14,426

 

10,630

 

Other receivables

 

17,295

 

11,942

 

Prepaid expenses and other current assets

 

37,923

 

29,175

 

Total current assets

 

870,734

 

640,077

 

Property and equipment, net

 

83,316

 

86,971

 

Intangible assets, net

 

85,747

 

74,822

 

Goodwill

 

2,479

 

 

Deferred tax assets, net

 

18,614

 

19,628

 

Other assets

 

40,983

 

53,661

 

Total consolidated assets

 

$

1,101,873

 

$

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 have been 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 purports 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 alleges 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 claims that certain current and former officers and directors traded in our common stock on the basis of material non-public information. The amended complaint seeks compensatory damages on behalf of the alleged class in an unspecified amount, including interest, and also added 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 have entered into a Stipulation of Settlement with the plaintiffs that would, if approved by the United States District Court for the District of Colorado, resolve all claims asserted against us by the plaintiffs on behalf of the putative class, and plaintiffs’ appeal would be dismissed. Our independent auditor is not a party to the Stipulation of Settlement. The Stipulation of Settlement received preliminary approval from the District Court on August 28, 2013. It remains subject to customary conditions, including final court approval following notice to stockholders. On February 13, 2014 a final settlement hearing took place and the parties are awaiting a ruling in conjunction with the same. If the settlement becomes final, all amounts required by the settlement will be paid by our insurers. There can be no assurance that the settlement will be finally approved by the District Court, or that approval by the District Court will, if challenged, be upheld by the Tenth Circuit.

 

On October 27, 2010, Spectrum Agencies (“Spectrum”) filed suit against our subsidiary, Crocs Europe B.V. (“Crocs Europe”), in the High Court of Justice, Queen’s Bench Division, Royal Courts of Justice in London, United Kingdom (“UK”). Spectrum acted as an agent for Crocs products in the UK from 2005 until Crocs Europe terminated the relationship on July 3, 2008 due to Spectrum’s breach of its duty to act in good faith towards Crocs Europe. Spectrum alleged that Crocs Europe unlawfully terminated the agency relationship and failed to pay certain sales commissions. A trial on the liability, not quantum (compensation and damages), was held at

 

21



Table of Contents

 

the High Court in London from November 30, 2011 to December 5, 2011. On December 16, 2011, the High Court of Justice issued a judgment that found that although Spectrum’s actions were a breach of its duty to act in good faith towards Crocs Europe, the breach was not sufficiently severe to justify termination. We believed that the trial judge erred in his findings and subsequently appealed the judgment.  On October 30, 2012, the Court of Appeal handed down its judgment which confirmed the trial judge’s findings. We submitted a request to the Supreme Court seeking permission to appeal and on April 24, 2013, the Supreme Court declined our request.  To that date the legal proceedings had only addressed liability, so there had been no findings in relation to the amount of compensation or damages, other than with respect to legal fees. On May 12, 2014, the parties agreed to settle the matter for an amount within our accrual. The parties have entered into a Consent Decree filed with the Court and we have made payment pursuant to the settlement agreement. The Company considers this matter closed.

 

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 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 third quarter of 2014.  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 June 30, 2014, we have accrued a total of $3.7 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.

 

17. SUBSEQUENT EVENTS

 

On July 21, 2014, after a comprehensive strategic review of the Company’s business and operations globally, the Company announced a strategic plan for long-term improvement and growth of its business.  Under the plan, the Company expects, among other things, to (i) streamline its product portfolio, eliminate non-core product development and explore strategic alternatives for non-core brands, (ii) reorganize key business functions to improve efficiency and eliminate 183 global positions and (iii) close or convert approximately 75 to 100 Crocs branded retail stores around the world.  The actions associated with the plan are expected to be completed in the next 18 months. Pursuant to the announcement, on July 21, 2014, the Company incurred severance charges of approximately $2.9 million related to the termination of certain employees.

 

22



Table of Contents

 

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.

 

Recent Events

 

On May 13, 2014, the board of directors (the “Board”) of the Company appointed Andrew Rees as President of the Company with principal responsibilities for the Crocs brand, effective June 9, 2014. In addition, the Board appointed Mr. Rees as principal executive officer to serve until such time as the Board appoints a Chief Executive Officer of the Company.

 

23



Table of Contents

 

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 Crocs branded retail stores around the world.

 

Financial Highlights

 

During the three months ended June 30, 2014, we experienced revenue growth of 3.6%. We continued to experience strong revenue results in our Asia Pacific and Europe segments as market demand continues to grow through our wholesale and direct-to-consumer channels. Specifically, we experienced a 1.1% increase in comparable store sales in our Europe segment led by increased sales in Belgium, Russia and Spain. We experienced difficulty in our Americas segment as wholesale accounts remain lean on inventory and our retail channel remained flat despite an increase in retail locations primarily due to a 6.2% decrease in comparable store sales. On a constant-currency basis, our Japan segment experienced modest improvement; however, limited ability for growth in Japan due to 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 $1.6 million and operating income by $0.5 million.

 

Globally, we are focused on expanding and improving current relationships with wholesale partners; however, as mentioned above, wholesale accounts remain lean on inventory levels and at-once ordering. We experienced a $4.9 million, or 3.7%, increase in retail channel revenues primarily through the addition of 49 global retail locations (net of store closures) since June 30, 2013 partially offset by a 5.1% decrease in comparable store sales compared to prior year. As we continue to diversify our product line with new footwear brands such as the Stretch Sole and Busy Day and carryover products such as the Huarache and A-Leigh wedge, we are experiencing a reduction in clog sales as a percentage of revenues.

 

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

 

·                  Revenues increased $13.1 million, or 3.6%, to $376.9 million compared to the same period in 2013. Revenue growth was predominately driven by a 0.6% increase in global average footwear selling price realized through new and classic product expansion as well as a 3.6% increase in global footwear unit sales.

·                  Gross profit increased $1.7 million, or 0.8%, to $202.6 million and gross margin percentage decreased 150 basis points, or 2.7%, to 53.7% 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.

·                  Selling, general and administrative expenses increased $3.1 million, or 2.1%, to $153.4 million compared to the same period in 2013. Selling, general and administrative expenses increased due to the year-over-year global expansion of our retail channel and increased bad debt expense in our Asia Pacific segment as we are seeing slow payments from some of our wholesale accounts partially offset by cost savings in variable compensation. In addition, we experienced an increase of $0.3 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 $4.1 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 as well as retail store closure costs.

·                  We incurred $3.2 million in 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.

·                  Net income attributable to common stockholders decreased $15.8 million, or 44.8%, to $19.5 million compared to the same period in 2013 driving our diluted earnings per share from $0.40 to $0.19. This decrease is primarily attributable to the increase in certain infrequent expenses such as restructuring and asset impairment charges as well as dividends declared on our Series A preferred stock and dividend equivalents as a result of our recent investment from Blackstone Capital Partners VI L.P. (“Blackstone”), which contributed a decrease of $3.8 million in net income attributable to common stockholders or $0.04 in diluted earnings per share.

·                  We have halted our expansion of our retail channel locations and have begun to focus on the long-term profitability of current locations. We opened one global retail location in the second quarter 2014 (net of store closures) as compared to 28 global retail locations in the second quarter of 2013 (net of store closures). In addition, we closed an aggregate of eight locations in our Americas, Europe and Asia Pacific segments 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.

·                  We continue to fund the implementation of our customized and fully integrated operations, accounting, and finance ERP system. We recently launched the ERP in Australia and Japan with success and now expect the full implementation to launch globally in early 2015. We believe the introduction of the new ERP system to our current environment will allow for seamless and high-quality data across the Company. As of June 30, 2014, total costs to date related to the ERP

 

24



Table of Contents

 

implementation were $66.3 million, of which $54.4 million has been capitalized and $11.9 million has been expensed. As of June 30, 2014, we had $14.4 million in outstanding borrowings related to the ERP system under a Master Installment Payment Agreement (“Master IPA”) with PNC Equipment Finance, LLC (“PNC Equipment”).

·                  We repurchased approximately 2.3 million shares at a weighted average price of $14.71 per share for an aggregate price of approximately $33.9 million excluding related commission charges under our publicly-announced repurchase plan. As of June 30, 2014, we had approximately $303.1 million available for repurchase under our repurchase authorization. Since June 30, 2014, we have repurchased approximately 0.6 million shares at a weighted average price of $14.72 per share for an aggregate price of approximately $8.2 million excluding related commission charges under our publicly-announced repurchase plan.

 

Remaining 2014 Outlook

 

As mentioned above, we recently 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 Crocs branded retail stores around the world.

 

First, we intend to focus on our core molded footwear heritage, as well as develop innovative casual footwear platforms. We intend to streamline the product portfolio, eliminate non-core product development and will explore strategic alternatives for the non-core products and brands.  We expect more centralized product line control will also result in a reduction of the SKU proliferation that has occurred over the past few years, a more simplified and efficient supply chain and a reduction in overall product line costs and inventory levels.

 

Further, 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.  Finally, we intend to increase working market spend, defined as funds that put marketing messages in front of consumers, by approximately 50%, funded primarily from a reduction of marketing overhead.

 

Second, we intend to refine our business model around the world, prioritizing direct investment in larger-scale geographies to focus our resources on the biggest opportunities and moving away from direct investment in the retail and wholesale businesses in smaller markets and transferring significant commercial responsibilities to distributors and third-party agents.  These re-alignments are already underway in Brazil, Taiwan and other markets around the globe.  Further, we intend to expand engagement with leading wholesale accounts in select markets to drive sales growth, optimize product placement and enhance brand reputation

 

Third, we have reorganized key business functions to improve efficiency and have eliminated 185 global positions of which the majority occurred on July 21, 2014, reducing structural complexity, size and cost. In addition, we plan to open a Global Commercial Center in the Boston area in late 2014, housing key merchandising, marketing and retail executives. The Boston location was selected in order to attract experienced senior footwear and business development management talent. The Global Commercial Center in Boston will join the Product Creation and Global Shared Services Center in Niwot, Colorado, the cornerstone of support for Crocs’ global business. We intend to strengthen our Regional Commercial Centers in the Netherlands, Singapore and Japan with responsibility for managing Crocs’ global business.

 

Fourth, we plan to rationalize under-performing business units, in order to re-align cost-structure and place greater focus on assets and operations with higher profit potential. This action will enable us to gain greater strategic and economic leverage from our direct-to-consumer assets, including owned retail and e-commerce stores. We intend to close or convert approximately 75 to 100 company-owned retail locations around the world, with 18 stores already closed or converted to partner stores in the second quarter of 2014. The impact of these closures and conversions is expected to reduce annual revenue by approximately $35.0 to $50.0 million and reduce selling, general and administrative expenses by approximately $17.5 to $27.5 million, with an insignificant impact on future operating income. We intend to consolidate global company-operated e-commerce sites from 21 to 11.

 

Overall, we undertook a comprehensive strategic review of the business and its operations globally, and identified four key areas of opportunity in the business: products, geographies, organization and channels. These plans prioritize earnings growth and our focus on becoming the leading brand in casual lifestyle footwear.

 

25



Table of Contents

 

At June 30, 2014, our backlog was up approximately $45.1 million to $206.2 million. The following table summarizes wholesale backlog by reportable operating segment as of June 30, 2014 and 2013:

 

 

 

June 30,

 

($ thousands)

 

2014

 

2013

 

Americas

 

$

68,693

 

$

58,628

 

Asia Pacific

 

67,299

 

53,430

 

Japan

 

29,340

 

28,748

 

Europe

 

40,836

 

20,230

 

Total backlog (1)

 

$

206,168

 

$

161,036

 

 


(1)         We receive a significant portion of orders from our wholesale customers and distributors that remain unfilled as of any date and, at that point, represent orders scheduled to be shipped at a future date. We refer to these unfilled orders as backlog. While all orders in our backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled within one year. Backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule and the timing of product shipments. Further, the mix of future and immediate delivery orders can vary significantly period over period. Backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders and excludes potential sales in our retail and internet channels. Backlog also is affected by the timing of customers’ orders and product availability. Due to these factors and since the unfulfilled orders can be canceled at any time prior to shipment by our customers, we believe that backlog may be an imprecise indicator of future revenues that may be achieved in a fiscal period and comparisons of backlog from period to period may be misleading. In addition, our historical cancellation experience may not be indicative of future cancellation rates.

 

26



Table of Contents

 

Results of Operations

 

Comparison of the Three Months Ended June 30, 2014 and 2013

 

 

 

Three Months Ended June 30,

 

Change

 

($ thousands, except per share data and average footwear selling price)

 

2014

 

2013

 

$

 

%

 

Revenues

 

$

376,920

 

$

363,827

 

$

13,093

 

3.6

%

Cost of sales

 

174,349

 

162,960

 

11,389

 

7.0

 

Gross profit

 

202,571

 

200,867

 

1,704

 

0.8

 

Selling, general and administrative expenses

 

153,370

 

150,246

 

3,124

 

2.1

 

R