Edgar Filing: Crocs, Inc.

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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, 2013

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 25, 2013, Crocs, Inc. had 91,592,995 shares of its $0.001 par value common stock outstanding.

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Crocs, Inc.

Form 10-Q

Quarter Ended June 30, 2013

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PART I — Financial Information
Item 1.	Financial Statements	2
	Unaudited Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2013 and 2012	2
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012	3
	Unaudited Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39

PART II — Other Information
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6.	Exhibits	42
Signatures		43

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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)	2013			2012			2013			2012
Revenues	$	363,827		$	330,942		$	675,483		$	602,740
Cost of sales	162,960			134,857			308,767			261,856
Gross profit	200,867			196,085			366,716			340,884
Selling, general and administrative expenses	150,246			124,718			278,445			229,009
Asset impairment	202			106			202			819
Income from operations	50,419			71,261			88,069			111,056
Foreign currency transaction (gains) losses, net	814			(1,627		)	3,414			2,649
Interest income	(517		)	(549		)	(823		)	(907		)
Interest expense	266			132			475			179
Other (income) expense, net	195			(520		)	167			(761		)
Income before income taxes	49,661			73,825			84,836			109,896
Income tax expense	14,305			12,301			20,519			20,026
Net income	$	35,356		$	61,524		$	64,317		$	89,870
Net income per common share (Note 11):
Basic	$	0.40		$	0.68		$	0.73		$	1.00
Diluted	$	0.40		$	0.68		$	0.72		$	0.99

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

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
($ thousands)	2013			2012			2013			2012
Net income	$	35,356		$	61,524		$	64,317		$	89,870
Other comprehensive income (loss):
Foreign currency translation	(6,250		)	(11,523		)	(10,567		)	(4,445		)
Reclassification of cumulative foreign exchange translation adjustments to net income, net of tax of $0, $0, $(3), and $7, respectively	—			—			299			(658		)
Total comprehensive income	$	29,106		$	50,001		$	54,049		$	84,767

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

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 31,
($ thousands, except number of shares)	2013			2012
ASSETS
Current assets:
Cash and cash equivalents	$	289,354		$	294,348
Accounts receivable, net of allowances of $16,918 and $13,315, respectively	162,263			92,278
Inventories	160,763			164,804
Deferred tax assets, net	5,628			6,284
Income tax receivable	12,307			5,613
Other receivables	17,293			24,821
Prepaid expenses and other current assets	31,051			24,967
Total current assets	678,659			613,115
Property and equipment, net	88,770			82,241
Intangible assets, net	64,082			59,931
Deferred tax assets, net	33,283			34,112
Other assets	54,167			40,239
Total assets	$	918,961		$	829,638

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	76,666		$	63,976
Accrued expenses and other current liabilities	90,963			81,371
Deferred tax liabilities, net	2,388			2,405
Income taxes payable	25,363			8,147
Current portion of long-term borrowings and capital lease obligations	3,031			2,039
Total current liabilities	198,411			157,938
Long term income tax payable	32,129			36,343
Long-term borrowings and capital lease obligations	6,899			4,596
Other liabilities	13,913			13,361
Total liabilities	251,352			212,238

Commitments and contingencies (Note 12)
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, 91,565,533 and 88,345,143 shares issued and outstanding, respectively, at June 30, 2013 and 91,047,297 and 88,662,845 shares issued and outstanding, respectively, at December 31, 2012	92			91
Treasury stock, at cost, 3,220,390 and 2,384,452 shares, respectively	(56,343		)	(44,214		)
Additional paid-in capital	316,111			307,823
Retained earnings	398,329			334,012
Accumulated other comprehensive income	9,420			19,688
Total stockholders’ equity	667,609			617,400
Total liabilities and stockholders’ equity	$	918,961		$	829,638

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

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
($ thousands)	2013			2012
Cash flows from operating activities:
Net income	$	64,317		$	89,870
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,522			17,257
Unrealized loss on foreign exchange, net	1,392			4,892
Provision for doubtful accounts, net	1,340			1,563
Share-based compensation	7,540			6,129
Other non-cash items	935			1,197
Changes in operating assets and liabilities:
Accounts receivable	(75,124		)	(50,762		)
Inventories	(923		)	(38,163		)
Prepaid expenses and other assets	(13,460		)	(16,115		)
Accounts payable	12,385			(545		)
Accrued expenses and other liabilities	12,551			17,552
Income taxes	6,266			16,847
Cash provided by operating activities	37,741			49,722
Cash flows from investing activities:
Cash paid for purchases of property and equipment	(19,676		)	(16,312		)
Proceeds from disposal of property and equipment	545			319
Cash paid for intangible assets	(11,833		)	(4,501		)
Restricted cash	(1,295		)	(654		)
Cash used in investing activities	(32,259		)	(21,148		)
Cash flows from financing activities:
Proceeds from bank borrowings	14,572			89,505
Repayment of bank borrowings and capital lease obligations	(11,334		)	(90,578		)
Issuances of common stock	1,439			1,531
Purchase of treasury stock	(12,533		)	—
Repurchase of common stock for tax withholding	(256		)	(493		)
Cash used in financing activities	(8,112		)	(35		)
Effect of exchange rate changes on cash	(2,364		)	(7,299		)
Net decrease in cash and cash equivalents	(4,994		)	21,240
Cash and cash equivalents—beginning of period	294,348			257,587
Cash and cash equivalents—end of period	$	289,354		$	278,827
Supplemental disclosure of cash flow information—cash paid during the period for:
Interest	$	525		$	273
Income taxes	$	10,658		$	10,551
Supplemental disclosure of non-cash, investing, and financing activities:
Assets acquired under capitalized leases	$	61		$	—
Accrued purchases of property and equipment	$	2,715		$	1,762
Accrued purchases of intangibles	$	1,803		$	397

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

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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 & Summary of Significant Accounting Policies - 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. 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.

These statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 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 and Summary of Significant Accounting Policies” to the consolidated financial statements in the 2012 Form 10-K.

Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management believes that the estimates, judgments and assumptions made when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts, sales returns and discounts, impairment assessments and charges, recoverability of assets (including deferred tax assets), uncertain tax positions, share-based compensation expense, useful lives assigned to long-lived assets, depreciation and provisions for contingencies are reasonable based on information available at the time they are made. Management also makes estimates in the assessments of potential losses in relation to threatened or pending legal and tax matters (see Note 12 — “Commitments & Contingencies” and Note 14 — “Legal Proceedings”). Actual results could materially differ from these estimates. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense for the estimated loss.

Noncontrolling Interests - As of June 30, 2013, all of our subsidiaries were, in substance, wholly owned.

Accumulated Other Comprehensive Income - Activity within our accumulated other comprehensive income (“AOCI”) balance consists solely of gains and losses resulting from the translation of foreign subsidiary financial statements to our reporting currency. Foreign currency translation resulting in changes to other comprehensive income and related reclassification adjustments are presented net of tax effects on the condensed consolidated statements of other comprehensive income. Foreign currency reclassification adjustments are included within the line item entitled ‘Foreign currency transaction gains (losses), net’ on the condensed consolidated statements of income.

Recently Adopted Accounting Standards

In March 2013, the FASB issued ASU No. 2013-05 Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU No. 2013-05”). This pronouncement provides clarification around the release of any cumulative translation adjustment related to when the parent ceases to have controlling financial interest in a business or group of assets held within a foreign entity. This pronouncement was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2013. The Company adopted the provisions of ASU No. 2013-05 for its fiscal year beginning January 1, 2013. The provisions of ASU No. 2013-05 did not have a material impact on to the Company’s condensed consolidated financial statements.

Recently Issued Accounting Standards

In July 2013, the FASB issued ASU No. 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU No. 2013-11”). This pronouncement provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This pronouncement is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2013. The Company will adopt the provisions of ASU No. 2013-11

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on January 1, 2014. We do not anticipate the provisions of ASU No. 2013-11 to have a material impact on to the Company’s condensed consolidated financial statements.

2. INVENTORIES

The following table summarizes inventories by major classification as of June 30, 2013 and December 31, 2012:

($ thousands)	June 30, 2013		December 31, 2012
Finished goods	$	149,045	$	155,833
Work-in-progress	720		911
Raw materials	10,998		8,060
Inventories	$	160,763	$	164,804

3. PROPERTY & EQUIPMENT

The following table summarizes property and equipment by major classification as of June 30, 2013 and December 31, 2012:

	June 30,			December 31,
($ thousands)	2013			2012
Machinery and equipment	$	70,704		$	68,713
Leasehold improvements	96,530			88,653
Furniture, fixtures and other	23,872			20,827
Construction-in-progress	9,465			8,766
Property and equipment, gross (1)	200,571			186,959
Less: Accumulated depreciation (2)	(111,801		)	(104,718		)
Property and equipment, net	$	88,770		$	82,241

(1) Includes $0.2 million and $0.1 million of certain equipment held under capital leases and classified as equipment as of June 30, 2013 and December 31, 2012, 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, 2013 and December 31, 2012, respectively, which are depreciated using the straight-line method over the lease term.

During the three months ended June 30, 2013 and 2012, we recorded $5.9 million and $6.0 million, respectively, in depreciation expense of which $0.8 million and $1.1 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, 2013 and 2012, we recorded $12.0 million and $11.5 million, respectively, in depreciation expense of which $1.6 million and $2.6 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.

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. During the three and six months ended June 30, 2013, we recorded $0.2 million of asset impairment charges related to certain underperforming domestic stores in the Americas segment 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. During the three and six months ended June 30, 2012, we recorded $0.1 million and $0.8 million, respectively, of asset impairment charges related to certain underperforming domestic stores in the Americas segment that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over the remaining economic life of those assets.

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4. GOODWILL & INTANGIBLE ASSETS

The following table summarizes the goodwill and identifiable intangible assets as of June 30, 2013 and December 31, 2012:

	June 30, 2013								December 31, 2012
($ thousands)	Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Capitalized software	$	99,339	(1)	$	(41,774	)(2)	$	57,565	$	87,426	(1)	$	(33,933	)(2)	$	53,493
Customer relationships	6,858			(6,193		)	665		7,145			(6,222		)	923
Patents, copyrights, and trademarks	6,428			(3,852		)	2,576		6,161			(3,522		)	2,639
Core technology	4,622			(4,622		)	—		4,856			(4,856		)	—
Other	1,485			(1,002		)	483		670			(636		)	34
Total finite lived intangible assets	118,732			(57,443		)	61,289		106,258			(49,169		)	57,089
Indefinite lived intangible assets	102			—			102		113			—			113
Goodwill	2,691			—			2,691		2,729			—			2,729
Intangible assets	$	121,525		$	(57,443	)	$	64,082	$	109,100		$	(49,169	)	$	59,931

(1) Includes $4.1 million of software held under a capital lease classified as capitalized software as of June 30, 2013 and December 31, 2012.

(2) Includes $1.6 million and $1.3 million of accumulated amortization of software held under a capital lease as of June 30, 2013 and December 31, 2012, respectively, which is amortized using the straight-line method over the useful life.

During the three months ended June 30, 2013 and 2012, amortization expense recorded for intangible assets with finite lives was $4.4 million and $3.0 million, respectively, of which $1.6 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, 2013 and 2012, amortization expense recorded for intangible assets with finite lives was $8.5 million and $5.8 million, respectively, of which $3.2 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.

The following table summarizes estimated future annual amortization of intangible assets as of June 30, 2013:

	Amortization
Fiscal years ending December 31,	($ thousands)
Remainder of 2013	$	10,995
2014	11,243
2015	11,130
2016	11,091
2017	10,895
Thereafter	5,935
Total	$	61,289

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5. ACCRUED EXPENSES & OTHER CURRENT LIABILITIES

The following table summarizes accrued expenses and other current liabilities as of June 30, 2013 and December 31, 2012:

	June 30,		December 31,
($ thousands)	2013		2012
Accrued compensation and benefits	$	22,789	$	19,714
Professional services	16,370		13,588
Sales/use and VAT tax payable	15,982		12,444
Fulfillment, freight and duties	15,414		8,621
Accrued rent and occupancy	11,291		10,226
Entrusted loan payable(1)	—		7,943
Other(2)	9,117		8,835
Total accrued expenses and other current liabilities	$	90,963	$	81,371

(1) A corresponding entrusted loan receivable of $7.9 million is recorded in ‘Prepaid expenses and other current assets’ as of December 31, 2012 as amounts are related to our subsidiaries in China. The entrusted loan was paid in full during the second quarter of 2013 and as such, the entrusted loan payable, and corresponding receivable, was removed from the balance sheet as of June 30, 2013.

(2) 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, 2013 or December 31, 2012.

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6. 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, 2013 and December 31, 2012:

	Fair Value as of June 30, 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	$	79,837	$	—	$	—	$	79,837	Cash and cash equivalents
Derivative assets:
Foreign currency contracts	—		14,879		—		14,879		Prepaid expenses and other current assets and other assets

Derivative liabilities:
Foreign currency contracts	$	—	$	295	$	—	$	295	Accrued expense and other current liabilities

	Fair Value as of December 31, 2012
	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	$	14,800	$	—	$	—	$	14,800	Cash and cash equivalents
Derivative assets:
Foreign currency contracts	—		5,548		—		5,548		Prepaid expenses and other current assets and other assets

Derivative liabilities:
Foreign currency contracts	$	—	$	295	$	—	$	295	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.

7. 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 (gains) losses, net’ in our condensed

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consolidated statements of income. For purposes of the condensed consolidated statement 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 6 — “Fair Value Measurements” for further details regarding the fair values of the corresponding derivative assets and liabilities.

The following table summarizes the notional amounts of the outstanding foreign currency exchange contracts at June 30, 2013 and December 31, 2012. The notional amounts of the derivative financial instruments shown below are denominated in their 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)	2013		2012
Foreign currency exchange forward contracts by currency:
Japanese Yen	$	117,250	$	112,500
Pound Sterling	15,945		8,742
Mexican Peso	15,007		11,400
Singapore Dollar	9,000		—
Euro	4,854		5,159
Australian Dollar	4,271		4,178
Russian Ruble	4,036		—
Swedish Krona	1,989		—
New Zealand Dollar	1,756		1,137
South African Rand	1,741		—
Hong Kong Dollar	902		—
Total notional value, net	$	176,751	$	143,116

Latest maturity date	December 2015		December 2015

The following table presents the amounts affecting the consolidated statements of income from derivative instruments for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,					Six Months Ended June 30,					Location of (Gain) Loss Recognized in Income
($ thousands)	2013			2012		2013			2012		on Derivatives
Derivatives not designated as hedging instruments:
Foreign currency exchange forwards(1)	$	(710	)	$	4,287	$	(10,651	)	$	2,184	Foreign currency transaction (gains) losses, net

(1) For the three and six months ended June 30, 2013, the net gains of $0.7 million and $10.7 million, respectively, associated with our foreign currency exchange forwards were offset by net unrealized and realized losses resulting from foreign currency transactions of $1.5 million and $14.1 million, respectively, resulting in net foreign currency transaction losses of $0.8 million and $3.4 million, respectively. For the three months ended June 30, 2012, the net loss of $4.3 million associated with our foreign currency exchange forwards was offset by net unrealized and realized gains resulting from foreign currency transactions of $5.9 million resulting in a net foreign currency transaction gain of $1.6 million. For the six months ended June 30, 2012, the net loss of $2.2 million associated with our foreign currency exchange forwards and net loss of $0.4 million associated with net unrealized and realized gains resulting from foreign currency transactions resulting in a net foreign currency transaction loss of $2.6 million.

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8. BANK BORROWINGS & CAPITAL LEASE OBLIGATIONS

Bank borrowings and capital lease obligations as of June 30, 2013 and December 31, 2012 consist of the following:

	June 30,		December 31,
($ thousands)	2013		2012
Bank borrowings(1)	$	9,834	$	6,582
Capital lease obligations for equipment bearing interest rates ranging from 5.3% to 73.3% and maturities through 2016	96		53
Total bank borrowings and capital lease obligations	$	9,930	$	6,635

(1) Bank borrowings represent the outstanding debt balance related to three separate notes payable issued by PNC Equipment Finance, LLC (“PNC”) related to our ERP implementation. The first note payable was issued on December 10, 2012 for software licenses and support with a face value of $6.6 million due September 2016 with fixed quarterly payments of $0.4 million, including stated interest at 2.63%. The second note payable was issued on March 25, 2013 for software maintenance and consulting services with a face value of $3.1 million due September 2016 with fixed quarterly payments of $0.2 million, including stated interest at 2.45%. The third note payable was issued on June 25, 2013 for software maintenance and consulting services with a face value of $2.4 million due March 2017 with fixed quarterly payments of $0.2 million, including stated interest at 2.79%.

Revolving Credit Facility

On June 12, 2013, we entered into a Second Amendment to Amended and Restated Credit Agreement (the “Second Amendment”) with the lenders named therein and PNC Bank, National Association (“PNC”), as a lender and administrative agent for the lenders, pursuant to which certain terms of the Amended and Restated Credit Agreement (as amended, the “Credit Agreement”) dated December 16, 2011, were amended. The Second Amendment, among other things, amends certain restrictive covenants to be more favorable to the Company, including the leverage ratio.

As of June 30, 2013 and December 31, 2012, we had no outstanding borrowings under the Credit Agreement. As of June 30, 2013 and December 31, 2012, we had issued and outstanding letters of credit of $7.0 million and $6.4 million, respectively, which were reserved against the borrowing base under the terms of the Credit Agreement. As of June 30, 2013, we were in compliance with all restrictive financial and other covenants under the Credit Agreement.

9. SHARE-BASED COMPENSATION

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. Restricted stock awards (“RSA”) and restricted stock units (“RSU”) granted generally vest over three or four years depending on the terms of the grant. Share-based compensation expense is recognized on a straight-line basis over the applicable vesting period and is recognized in the ‘Cost of sales’ and ‘Selling, general and administrative expenses’ line items in the condensed consolidated statements of income. During the three months ended June 30, 2013 and 2012, $4.0 million and $4.0 million, respectively, of share-based compensation expense was recorded of which $0.2 million and $0.6 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, 2013 and 2012, $7.5 million and $6.1 million, respectively, of share-based compensation expense was recorded of which $0.1 million and $1.0 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.

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Stock Options

The following table summarizes the stock option activity for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,								Six Months Ended June 30,
	2013				2012				2013				2012
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, 2013 and 2012, respectively, and December 31, 2012 and 2011, respectively	2,540,677		$	13.24	3,150,144		$	12.07	2,621,686		$	13.03	3,331,031		$	11.91
Granted	77,500		16.52		72,500		16.16		157,000		15.90		113,900		17.17
Exercised	(106,781	)	7.82		(179,250	)	4.88		(204,090	)	7.05		(285,444	)	5.36
Forfeited or expired	(141,311	)	16.00		(68,781	)	17.63		(204,511	)	16.81		(184,874	)	16.20
Outstanding at June 30	2,370,085		$	13.42	2,974,613		$	12.48	2,370,085		$	13.42	2,974,613		$	12.48

Restricted Stock Awards and Units

From time to time, we grant RSAs and RSUs to our employees. 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.

During the three months ended June 30, 2013 and 2012, the Board of Directors approved RSU grants of 0.2 million and an immaterial amount of shares, respectively, of which immaterial amounts were granted to certain executives as part of our performance incentive program. During the six months ended June 30, 2013 and 2012, the Board of Directors approved RSU grants of 1.6 million and 0.9 million, respectively, of which 0.7 million and 0.4 million, respectively, were granted to certain executives as part of our performance incentive program. Half of these performance incentive program grants vest ratably on each of the first three anniversaries of the grant date; 25% will vest upon achievement of certain performance metrics; and the remaining 25% will vest one year from the date upon which certain performance metrics are achieved. If actual performance metrics exceed the targeted performance metrics by a predetermined amount, the executives are eligible to receive up to 200% of the performance-based portion of their award. During the three months ended June 30, 2013 and 2012, $3.0 million and $2.1 million, respectively, of share-based compensation expense related to RSUs were recorded. During the six months ended June 30, 2013 and 2012, $6.0 million and $3.3 million, respectively, of share-based compensation expense related to RSUs were recorded.

The following table summarizes the RSA activity for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,								Six Months Ended June 30,
	2013				2012				2013				2012
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, 2013 and 2012, respectively, and December 31, 2012 and 2011, respectively	327,503		$	13.22	518,346		$	12.00	355,509		$	13.37	571,175		$	11.87
Granted	21,590		16.56		18,813		16.48		21,590		16.56		18,813		16.48
Vested	(61,006	)	12.68		(144,499	)	8.48		(78,212	)	14.57		(179,478	)	8.71
Forfeited or expired	—		—		(9,250	)	12.51		(10,800	)	12.51		(27,100	)	12.51
Outstanding at June 30	288,087		$	13.32	383,410		$	13.53	288,087		$	13.32	383,410		$	13.53

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The following table summarizes the RSU activity for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,								Six Months Ended June 30,
	2013				2012				2013				2012
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, 2013 and 2012, respectively, and December 31, 2012 and 2011, respectively	2,449,544		$	17.06	1,576,561		$	21.28	1,414,661		$	20.61	711,980		$	23.43
Granted	157,097		15.88		13,500		16.10		1,563,114		15.04		888,559		19.42
Vested	(92,297	)	25.35		(105,241	)	24.48		(286,984	)	22.53		(105,241	)	24.48
Forfeited or expired	(58,330	)	16.89		(19,105	)	21.82		(234,777	)	22.27		(29,583	)	21.27
Outstanding at June 30	2,456,014		$	16.72	1,465,715		$	21.00	2,456,014		$	16.72	1,465,715		$	21.00

10. INCOME TAXES

During the three months ended June 30, 2013, we recognized an income tax expense of $14.3 million on pre-tax income of $49.7 million, representing an effective income tax benefit rate of 28.8% compared to an income tax expense of $12.3 million on pre-tax income of $73.8 million, representing an effective income tax rate of 16.7% for the same period in 2012. During the six months ended June 30, 2013, we recognized an income tax expense of $20.5 million on pre-tax income of $84.8 million, representing an effective income tax benefit rate of 24.2% compared to an income tax expense of $20.0 million on pre-tax income of $109.9 million, representing an effective income tax rate of 18.2% for the same period in 2012.

The increase in effective tax rate compared to the same period in 2012 is primarily the result of a shift of profits from lower tax jurisdictions to higher tax jurisdictions, losses recorded in tax jurisdictions for which no tax benefits are being recorded, and true-ups between accrued taxes and amounts included on statutory tax filings. 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. We had unrecognized tax benefits of $27.9 million at June 30, 2013 and $31.9 million at December 31, 2012.

11. EARNINGS PER SHARE

The following table illustrates the basic and diluted earnings per share (“EPS”) computations for the three and six months ended June 30, 2013 and 2012.

	Three Months Ended June 30,						Six Months Ended June 30,
($ thousands, except share and per share data)	2013			2012			2013			2012
Numerator
Net income attributable to common stockholders	$	35,356		$	61,524		$	64,317		$	89,870
Less: income allocated to participating securities	(127		)	(330		)	(243		)	(514		)
Net income attributable to common stockholders - basic and diluted	$	35,229		$	61,194		$	64,074		$	89,356
Denominator
Weighted average common shares outstanding - basic	87,864,761			89,519,166			87,822,911			89,412,872
Plus: dilutive effect of stock options and unvested restricted stock units	972,367			1,094,430			945,162			1,137,091
Weighted average common shares outstanding - diluted	88,837,128			90,613,596			88,768,073			90,549,963
Net income attributable per common share:
Basic	$	0.40		$	0.68		$	0.73		$	1.00
Diluted	$	0.40		$	0.68		$	0.72		$	0.99

For the three and six months ended June 30, 2013, approximately 1.5 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. For the three and six months ended June 30, 2012, approximately 1.5 million and 1.3 million, respectively, options and RSUs in total were not included in the calculation of diluted EPS as their effect would have been anti-dilutive.

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We continue to evaluate options to maximize the returns on our cash and maintain an appropriate capital structure, including, among other alternatives, repurchases of our common stock. Subject to certain restrictions on repurchases under our revolving credit facility, we have authorization to repurchase up to 6.0 million shares of our common stock under previous board authorizations. For the three months ended June 30, 2013, we did not repurchase any shares associated with a publicly-announced repurchase plan. For the six months ended June 30, 2013, we repurchased approximately 0.8 million shares at an average price of $14.99 for an aggregate price of approximately $12.5 million excluding related commission charges, under a publicly-announced repurchase plan. As of June 30, 2013, we had approximately 2.8 million shares available for repurchase under our repurchase authorization. The number, price and timing of repurchases, if any, will be at our sole discretion and future repurchases will be evaluated depending on market conditions, liquidity needs and other factors.

12. 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, 2013 and 2012 (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Minimum rentals	$	24,776		$	20,444		$	49,044		$	39,721
Contingent rentals	7,148			6,569			9,644			8,746
Less: Sublease rentals	(156		)	(224		)	(310		)	(441		)
Total rent expense	$	31,768		$	26,789		$	58,378		$	48,026

Purchase Commitments

As of June 30, 2013, we had purchase commitments with certain third party manufacturers for $98.4 million, of which $6.8 million was for yet-to-be-received finished product where title passes to us upon receipt. As of December 31, 2012, we had purchase commitments with certain third party manufacturers for $152.8 million, of which $5.9 million was for yet-to-be-received finished product where title passes to us upon receipt.

Government Tax Audits

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

In April 2013, the State of Sao Paulo, Brazil government (“Brazil”) assessed sales taxes, interest and penalties for the period April 2009 to May 2011. We had previously tendered these taxes using Brazil obligations purchased at a discount from third parties. On May 22, 2013, we applied for amnesty in order to receive a significant reduction in penalties and interest, agreed to amend our 2009 through 2012 tax returns to remove the Brazil obligations, and agreed to settle the assessment in cash to Brazil. In June 2013, cash payment was made to Brazil, in full satisfaction of the Brazil assessment. Brazil is making court-ordered payments to holders of the Brazil obligations along with accrued interest. The Company anticipates that the Brazil obligations (plus accrued interest) will be paid by Brazil in accordance with the court-orders. The Company is carrying the Brazil obligations at the original discounted cost to the Company and intends to hold the Brazil obligations until paid by Brazil. The net impact of the above is a $6.1 million charge to operating income, and the carrying balance of the Brazil obligations in investments is $3.5 million.

The Company is currently undergoing a tax audit in Canada. We recently received an economic report on certain transfer pricing items from the Canadian tax authorities. While the audit is in its preliminary stages, we believe the results of the economic report to be overstated and intend to assert that any amount due to the Canadian tax authorities is substantially less than reflected in the economic report provided. We expect the resolution of this matter to be long term in nature if assessments and appeals are necessary. We intend to defend our position through litigation if necessary, however, the final outcome of tax audits and related litigation, including the assessment of potentially significant penalties and interest, is inherently uncertain and could be materially different than that reflected in our historical income tax provisions and accruals and could have a material adverse impact on our financial position, results of operations or cash flows.

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13. OPERATING SEGMENTS & GEOGRAPHIC INFORMATION

During the first quarter of 2013, we adjusted our operating segment structure for internal reports reviewed by the chief operating decision maker (“CODM”) by presenting Japan separate from the Asia Pacific segment. This change was made due to recurring amounts of substantial business activity as well as the macroeconomic environment within Japan, which resulted in the need for a regular review of Japan operating results by management and the CODM in order to better evaluate performance and allocate resources for the consolidated business. Segment information for all periods presented has been reclassified to conform to the fiscal 2013 presentation.

As a result of the changes discussed above, 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 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.

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The following table sets forth information related to our reportable operating business segments during the three and six months ended June 30, 2013 and 2012:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
($ thousands)	2013			2012			2013			2012
Revenues:
Americas	$	146,255		$	134,611		$	275,684		$	251,918
Asia Pacific	111,832			91,625			202,289			159,276
Japan	45,472			55,232			75,831			89,605
Europe	60,170			49,427			121,516			101,769
Total segment revenues	363,729			330,895			675,320			602,568
Other businesses	98			47			163			172
Total consolidated revenues	$	363,827		$	330,942		$	675,483		$	602,740

Operating income:
Americas(1)	$	23,005		$	31,038		$	43,818		$	49,689
Asia Pacific	35,685			29,569			62,788			47,474
Japan	17,463			26,511			25,023			40,667
Europe	11,657			12,103			24,328			26,201
Total segment operating income	87,810			99,221			155,957			164,031
Reconciliation of total segment operating income to income before income taxes:
Other businesses	(5,535		)	(2,875		)	(9,412		)	(5,731		)
Intersegment eliminations	15			15			30			39
Unallocated corporate and other(2)	(31,871		)	(25,100		)	(58,506		)	(47,283		)
Total consolidated operating income	50,419			71,261			88,069			111,056
Foreign currency transaction (gains) losses, net	814			(1,627		)	3,414			2,649
Interest income	(517		)	(549		)	(823		)	(907		)
Interest expense	266			132			475			179
Other (income) expense, net	195			(520		)	167			(761		)
Income before income taxes	$	49,661		$	73,825		$	84,836		$	109,896

Depreciation and amortization:
Americas	$	2,431		$	2,948		$	4,973		$	5,183
Asia Pacific	1,200			994			2,478			2,303
Japan	375			481			776			899
Europe	1,281			685			2,431			1,292
Total segment depreciation and amortization	5,287			5,108			10,658			9,677
Other businesses	2,123			1,517			4,240			3,061
Unallocated corporate and other(2)	2,848			2,279			5,624			4,519
Total consolidated depreciation and amortization	$	10,258		$	8,904		$	20,522		$	17,257

(1) Includes $0.2 million for each of the three and six months ended June 30, 2013 and $0.1 million and $0.8 million for each of the three and six months ended June 30, 2012, respectively, of asset impairment charges related to certain underperforming retail locations.

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

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The following table sets forth asset information related to our reportable operating business segments as of June 30, 2013 and December 31, 2012:

	June 30,		December 31,
($ thousands)	2013		2012
Assets:
Americas	$	141,117	$	143,236
Asia Pacific	219,299		170,426
Japan	89,515		111,785
Europe	121,076		85,756
Total segment current assets	571,007		511,203
Other businesses	19,536		14,489
Unallocated corporate and other(1)	21,837		25,738
Deferred tax assets, net	5,628		6,284
Income tax receivable	12,307		5,613
Other receivables	17,293		24,821
Prepaid expenses and other current assets	31,051		24,967
Total current assets	678,659		613,115
Property and equipment, net	88,770		82,241
Intangible assets, net	64,082		59,931
Deferred tax assets, net	33,283		34,112
Other assets	54,167		40,239
Total consolidated assets	$	918,961	$	829,638

(1) Corporate assets primarily consist of cash and equivalents.

14. 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 Section 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 is subject to customary conditions, including preliminary court approval, and final court approval following notice to shareholders. 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 alleges 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 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 believe that the trial judge erred in his findings and subsequently appealed the

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judgment. On October 30, 2012, the Court of Appeal handed down its judgment confirming the trial judge’s findings. We submitted a request to the Supreme Court seeking permission to appeal. On April 24, 2013 the Supreme Court declined to grant permission to appeal. Given that this phase of the proceedings only pertains to liability, there have been no findings in relation to the amount of compensation or damages other than with respect to legal fees. Under English law, the prevailing party is entitled to reimbursement of reasonable legal fees incurred in the proceedings. We expect that Spectrum will now request to move to the damages phase via a case management conference, during which the Court will provide instructions and schedules leading up to the trial on damages. Spectrum has not quantified its claim for compensation and damages and the amount will be assessed later in the proceedings. A judgment on damages could take up to 12 months.

We are currently subject to an audit by U.S. Customs & Border Protection (“CBP”) in respect of the period from 2006 to 2010. CBP issued a draft audit report to which we filed comments and objections. We believe that a final report (and notice of a formal claim) will not be issued until sometime in the second half of 2013. CBP has provided us with preliminary projections and a draft audit report that reflect unpaid duties totaling approximately $14.3 million during the period under review. 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 preliminary projection. CBP is currently reviewing this response. It is not possible at this time to predict whether our arguments will be successful in eliminating or reducing the amount in dispute. Likewise, it is not possible to predict whether CBP may seek to assert a claim for penalties in addition to any loss of revenue claim.

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. We filed an appeal in March 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, 2013, we have accrued a total of $5.9 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 and $10.4 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 will have a material adverse impact on our business, financial position, results of operations or cash flows.

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

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 are often identified by the use of words such as “may,” “strive,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Further, these statements are based on the beliefs and assumptions of our management based on information currently available. Such forward-looking statements are subject to risks, uncertainties and other factors that could 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, the risks described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2012 and subsequent filings with the Securities and Exchange Commission. We caution the reader to carefully consider such factors. 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.

Business Overview

We are a designer, manufacturer, distributor, worldwide marketer and brand manager of innovative casual lifestyle footwear, apparel and accessories for men, women and children. We strive to be the global leader in molded footwear design and development. We design, manufacture and sell a broad product offering that provides new and exciting molded footwear products that feature comfort, fun, color and functionality. Our products include footwear and accessories that utilize our proprietary closed cell-resin, called Croslite. Our Croslite material is unique in that it enables us to produce an innovative, lightweight, non-marking, and odor-resistant shoe.

Since the initial introduction and popularity of our Beach and Crocs Classic designs, we have expanded our Croslite products to include a variety of new styles and products and have extended our product reach through the acquisition of brand platforms such as Jibbitz and Ocean Minded. We intend to continue to expand the breadth of our footwear product lines, bringing a unique and original perspective to the consumer in styles that may be unexpected from Crocs. We believe this will help us to continue to build a stable year-round business as we move towards becoming a four-season brand.

We currently sell our Crocs-branded products globally through domestic and international retailers and distributors. We also sell our products directly to consumers through our company-operated retail stores, outlets, kiosks and webstores. 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.

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 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.

Financial Highlights

Our business continues to experience positive results, which reflects the global reach of the Crocs brand and the success of our new spring/summer collections, including the Huarache, Beach Line Boat and Retro collections, combined with the ongoing strength of our core product line-up. Results for the first half of the year reflect increases in year-over-year global revenues driven by balanced international growth. Globally, our direct-to-consumer channel continues to be a key component of our success and grew nearly 20% on a constant currency basis, with positive same-store sales in Asia Pacific, Americas and Europe. Wholesale revenues were higher globally on a year-over-year basis; however, margins in this channel, particularly in the Americas and Europe, were down due to lower than anticipated late season at-once revenue and increased promotional activity late in the second quarter. On a regional basis, our Asia Pacific region remains a key component of the business and fundamental driver of our growth strategy as all channels in the region continue to exceed expectations. Challenges in the year have included continued weakness in consumer spending in the United States, Europe and Japan, compounded by colder than normal temperatures in the United States and Europe.

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The following are the more significant developments in our businesses during the three and six months ended June 30, 2013:

· Revenues increased $32.9 million, or 9.9%, to $363.8 million for the quarter-ended June 30, 2013 and increased $72.7 million, or 12.1%, to $675.5 million in the first six months of 2013 compared to the same periods in 2012. Revenue growth was driven by increased sales volume through our classic and new product styles as we continue to transform Crocs brand awareness into an all-season footwear brand.

· Gross profit increased $4.8 million, or 2.4%, to $200.9 million for the quarter-ended June 30, 2013 and increased $25.8 million, or 7.6%, to $366.7 million in the first six months of 2013 compared to the same periods in 2012. Gross margin percentage decreased 410 basis points for the quarter-ended June 30, 2013 and decreased 230 basis points in the first six months of 2013 compared to the same periods in 2012 as we increase product input costs through the expansion of our product line, which utilizes more expensive material such as textile fabric and leather. In addition, we experienced a decrease in average footwear selling price which can be attributed to lower than anticipated at-once wholesale revenue and increased discount activity late in the second quarter of 2013 reflecting our intentions to sell through inventory. Partially offsetting this decrease in gross margin were positive impacts on gross margin including higher footwear units sales across the globe and increased supply chain and manufacturing efficiency resulting in decreased expenses related to fulfillment, freight and duties, direct labor and overhead costs as a percentage of revenues. We continue to push the industry standard in gross margins through operational efficiency and continued focus on product design and innovation.

· Selling, general, and administrative expenses increased $25.5 million, or 20.5%, to $150.2 million for the quarter-ended June 30, 2013, and increased $49.4 million, or 21.6%, to $278.4 million in the first six months of 2013 compared to the same periods in 2012. Selling, general, and administrative expenses will continue to increase as we increase global headcount while retaining and rewarding our current employees, increase marketing spend, increase our global retail presence and make strategic purchases to improve the operational efficiency of the Company. In addition, during the quarter-and year-ended June 30, 2013, we experienced a one-time net expense of $6.1 million related to the resolution of a statutory tax audit in Brazil and $1.6 million and $3.5 million, respectively, related to our enterprise resource planning (“ERP”) system implementation, which include non-cash accelerated depreciation and cash expenses for program management, training and other non-capitalized costs.

· Net income decreased $26.2 million, or 42.5%, to $35.4 million for the quarter-ended June 30, 2013 and decreased $25.6 million, or 28.4%, to $64.3 million in the first six months of 2013 compared to the same periods in 2012 driving our diluted earnings per share from $0.68 to $0.40 and from $0.99 to $0.72, respectively. This decrease was primarily the result of decreases in both gross margins and operating margins, which were driven by increased cost of sales as we expand our product line and increased selling, general and administrative costs related to our retail expansion, the implementation of our ERP system and a one-time net expense of $6.1 million related to the resolution of a statutory tax audit in Brazil.

· As expected in the first half of the year, our wholesale business out-performed our consumer-direct business as customers increase inventories for the spring and summer months. We continued to expand our retail channel through the net addition of 91 stores year-over-year in anticipation of further brand recognition and an opportunity to present new and classic product lines.

· We continue to fund the implementation of our customized and fully integrated operations, accounting, and finance ERP system, which is expected to launch in the first half of 2014. The introduction of the new ERP to our current environment will allow for seamless, high-quality, and compliant data across the Company. As of June 30, 2013, total costs to date related to the ERP implementation were $18.7 million, of which $16.0 million was capitalized and $2.7 million was expensed. We currently have $9.8 million in outstanding borrowings related to the ERP under a Master Installment Payment Agreement (“Master IPA”) with PNC Equipment Finance, LLC (“PNC”).

· During the second the quarter of 2013, we did not repurchase any shares of our common stock under our publicly announced repurchase plan. Through the first half of 2013, we repurchased approximately 0.8 million shares at an average price of $14.99 per share for a total value of $12.5 million, excluding related commission charges.

Remaining 2013 Outlook

In the remainder of 2013, we expect to expand on the positive trends set in the first half of the year as the summer months come to an end and the fall and winter months approach. We plan to open approximately 25 more retail stores across the globe by the end of the year, including our state-of-the-art, three-story flagship store which will be located in the heart of New York City. In addition, we plan to expand our wholesale operations with our key partners to attract new customers and retain loyalists through popular wholesale outlets through visual merchandising and product-driven expansion.

The following table summarizes wholesale backlog sales by reportable operating segment as of June 30, 2013 and 2012:

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	June 30,
($ thousands)	2013		2012
Americas	$	58,628	$	68,613
Asia Pacific	53,430		50,459
Japan	28,748		32,265
Europe	20,230		21,249
Total backlog (1)	$	161,036	$	172,586

(1) We receive a significant portion of orders as preseason orders, generally four to six months prior to shipment date. We provide customers with price incentives to participate in such preseason programs to enable us to better plan our production schedule, inventory and shipping needs. Unfulfilled customer orders as of any date are referred to as backlog and represent orders scheduled to be shipped at a future date. 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. Due to these factors and since the unfulfilled orders can be canceled at any time prior to shipment by our customers, backlog may not be a reliable measure of future sales 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. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of these orders will be fulfilled within the current year.

We have 2-3 product launch phases anticipated throughout the remainder of 2013 which will emphasize the growth of the brand and promote year-round sustainability. We continue to be an industry leader in gross margins as we expand our retail doors and product lines with a focus on comfort, style and color.

In addition, we have implemented several investment strategies that we believe will drive revenue growth while improving the operational and technological efficiency of the business. We remain in the testing and development phase of our ERP implementation, which we currently expect to reduce our 2013 earnings per share by $0.08 to $0.10 per diluted share. This implementation represents the beginning of a transformational change intended to improve our operational efficiency as we adapt as a global company. We have begun and plan on continuing to improve the metrics of our retail stores by focusing on high traffic, outlet locations with an emphasis on increased size and visibility as well as the increase our marketing efforts through advertising and promotional sales to attract customers and retain loyalists.

As noted above, backed by our strong balance sheet, we intend to continue to manage and invest in the business for the long-term by expanding our direct-to-consumer channel. With the onset of more seasonable weather in June, we noticed a strong rebound in our direct-to-consumer channel, which led to positive comparable store growth during the quarter.

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Results of Operations

Comparison of the Three Months Ended June 30, 2013 and 2012

	Three Months Ended June 30,						Change
($ thousands, except per share data and average footwear selling price)	2013			2012			$			%
Revenues	$	363,827		$	330,942		$	32,885		9.9	%
Cost of sales	162,960			134,857			28,103			20.8
Gross profit	200,867			196,085			4,782			2.4
Selling, general and administrative expenses	150,246			124,718			25,528			20.5
Asset impairments	202			106			96			90.6
Income from operations	50,419			71,261			(20,842		)	(29.2	)
Foreign currency transaction (gains) losses, net	814			(1,627		)	2,441			(150.0	)
Interest income	(517		)	(549		)	32			(5.8	)
Interest expense	266			132			134			101.5
Other (income) expense, net	195			(520		)	715			(137.5	)
Income before income taxes	49,661			73,825			(24,164		)	(32.7	)
Income tax expense	14,305			12,301			2,004			16.3
Net income	$	35,356		$	61,524		$	(26,168	)	(42.5	)%

Net income per common share:
Basic	$	0.40		$	0.68		$	(0.28	)	(41.0	)%
Diluted	$	0.40		$	0.68		$	(0.28	)	(41.6	)%
Gross margin	55.2		%	59.3		%	(410		)bps	(6.9	)%
Operating margin	13.9		%	21.5		%	(760		)bps	(35.3	)%
Footwear unit sales	16,286			14,060			2,226			15.8	%
Average footwear selling price	$	21.65		$	22.46		$	(0.81	)	(3.6	)%

Revenues. During the three months ended June 30, 2013, revenues increased $32.9 million, or 9.9%, compared to the same period in 2012, primarily due to an increase of 2.2 million, or 15.8%, in global footwear unit sales partially offset by a decrease of $0.81 per unit, or 3.6%, in average footwear selling price. For the three months ended June 30, 2013, revenues from our wholesale channel increased $12.8 million, or 6.8%, compared to the same period in 2012, which was primarily driven by increased wholesale sales in Americas, Asia Pacific and Europe partially offset by a decrease in wholesale sales in Japan. Revenues from our retail channel increased $19.8 million, or 17.6%, compared to the same period in 2012, primarily driven by increased demand in Americas, Asia Pacific and Europe partially offset by a decrease in Japan as well as the continued growth of our retail presence by opening 28 company-operated stores (net of store closures) during the three months ended June 30, 2013. We also continue to close certain kiosks as branded stores allow us to better merchandise the full breadth and depth of our product line. Revenues from our internet channel increased $0.2 million, or 0.8%, compared to the same period in 2012.

Impact on Revenues due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues from our functional currencies to our reporting currency during the three months ended June 30, 2013 decreased our revenues by $8.4 million compared to the same period in 2012. The majority of this decrease was related to the decrease in value of the Japanese Yen compared to the U.S. Dollar due to the political and macroeconomic environment in Japan.

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The following table summarizes our total revenue by channel for the three months ended June 30, 2013 and 2012:

	Three Months Ended June 30,				Change					Constant Currency Change(1)
($ thousands)	2013		2012		$			%		$			%
Channel revenues:
Wholesale:
Americas	$	69,089	$	62,369	$	6,720		10.8	%	$	7,041		11.3	%
Asia Pacific	67,383		54,285		13,098			24.1		12,080			22.3
Japan	31,053		39,335		(8,282		)	(21.1	)	(1,228		)	(3.1	)
Europe	33,742		32,490		1,252			3.9		623			1.9
Other businesses	98		47		51			108.5		44			93.6
Total Wholesale	201,365		188,526		12,839			6.8		18,560			9.8
Consumer-direct:
Retail:
Americas	61,041		54,952		6,089			11.1		6,243			11.4
Asia Pacific	40,871		35,002		5,869			16.8		5,375			15.4
Japan	12,327		13,357		(1,030		)	(7.7	)	1,844			13.8
Europe	18,050		9,163		8,887			97.0		8,814			96.2
Total Retail	132,289		112,474		19,815			17.6		22,276			19.8
Internet:
Americas	16,125		17,290		(1,165		)	(6.7	)	(1,140		)	(6.6	)
Asia Pacific	3,578		2,338		1,240			53.0		1,166			49.9
Japan	2,092		2,540		(448		)	(17.6	)	35			1.4
Europe	8,378		7,774		604			7.8		411			5.3
Total Internet	30,173		29,942		231			0.8		472			1.6
Total revenues:	$	363,827	$	330,942	$	32,885		9.9	%	$	41,308		12.5	%

(1) Reflects quarter over quarter change as if the current period results were in “constant currency,” which is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for more information.

The table below illustrates the overall growth in the number of our company-operated retail locations by type of store and reportable operating segment as of June 30, 2013 and 2012:

	June 30,				June 30,
Company-operated retail locations:	2012	Opened	Closed		2013
Type:
Kiosk/Store in Store	153	30	(58	)	125
Retail Stores	220	108	(23	)	305
Outlet Stores	111	39	(5	)	145
Total	484	177	(86	)	575
Operating segment:
Americas	197	45	(35	)	207
Asia Pacific	201	52	(47	)	206
Japan	32