UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
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 |
|
20-2164234 |
7477 East Dry Creek Parkway, Niwot, Colorado 80503
(Address, including zip code, of registrants principal executive offices)
(303) 848-7000
(Registrants 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 Exchange Act). Yes o No x
As of October 30, 2015, Crocs, Inc. had 73,659,154 shares of its $0.001 par value common stock outstanding.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends, our future expectations and other matters that do not relate strictly to historical facts and are based on certain assumptions of our management. These statements, which express managements current views concerning future events or results, use words like anticipate, assume, believe, continue, estimate, expect, future, intend, plan, project, strive, and future or conditional tense verbs like could, may, might, should, will, would and similar expressions or variations. Forward-looking statements are subject to risks, uncertainties and other factors which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, those described in the section entitled Risk Factors under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2014 and subsequent filings with the Securities and Exchange Commission. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Crocs, Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 2015
PART I Financial Information
CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
($ thousands, except per share data)
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues |
|
$ |
274,088 |
|
$ |
302,401 |
|
$ |
881,952 |
|
$ |
991,750 |
|
Cost of sales |
|
153,267 |
|
146,801 |
|
443,891 |
|
475,323 |
| ||||
Restructuring charges (Note 6) |
|
|
|
583 |
|
|
|
2,612 |
| ||||
Gross profit |
|
120,821 |
|
155,017 |
|
438,061 |
|
513,815 |
| ||||
Selling, general and administrative expenses |
|
135,110 |
|
143,719 |
|
429,815 |
|
434,244 |
| ||||
Restructuring charges (Note 6) |
|
981 |
|
7,585 |
|
7,454 |
|
13,895 |
| ||||
Asset impairment charges (Note 2) |
|
5,460 |
|
2,600 |
|
7,535 |
|
5,830 |
| ||||
Income (loss) from operations |
|
(20,730 |
) |
1,113 |
|
(6,743 |
) |
59,846 |
| ||||
Foreign currency transaction loss, net |
|
(2,908 |
) |
(1,290 |
) |
(2,631 |
) |
(4,278 |
) | ||||
Interest income |
|
268 |
|
424 |
|
752 |
|
1,304 |
| ||||
Interest expense |
|
(171 |
) |
(366 |
) |
(650 |
) |
(685 |
) | ||||
Other income (loss), net |
|
405 |
|
217 |
|
(6 |
) |
388 |
| ||||
Income (loss) before income taxes |
|
(23,136 |
) |
98 |
|
(9,278 |
) |
56,575 |
| ||||
Income tax benefit (expense) |
|
(888 |
) |
15,669 |
|
(3,745 |
) |
(8,407 |
) | ||||
Net income (loss) |
|
$ |
(24,024 |
) |
$ |
15,767 |
|
$ |
(13,023 |
) |
$ |
48,168 |
|
|
|
|
|
|
|
|
|
|
| ||||
Dividends on Series A convertible preferred stock (Note 13) |
|
(3,000 |
) |
(3,067 |
) |
(8,833 |
) |
(8,233 |
) | ||||
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature (Note 13) |
|
(752 |
) |
(691 |
) |
(2,209 |
) |
(2,030 |
) | ||||
Net income (loss) attributable to common stockholders |
|
$ |
(27,776 |
) |
$ |
12,009 |
|
$ |
(24,065 |
) |
$ |
37,905 |
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) per common share (Note 12): |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
(0.37 |
) |
$ |
0.12 |
|
$ |
(0.32 |
) |
$ |
0.38 |
|
Diluted |
|
$ |
(0.37 |
) |
$ |
0.12 |
|
$ |
(0.32 |
) |
$ |
0.37 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
($ thousands)
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
|
$ |
(24,024 |
) |
$ |
15,767 |
|
$ |
(13,023 |
) |
$ |
48,168 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation loss, net |
|
(11,739 |
) |
(18,891 |
) |
(29,306 |
) |
(19,650 |
) | ||||
Total comprehensive income (loss) |
|
$ |
(35,763 |
) |
$ |
(3,124 |
) |
$ |
(42,329 |
) |
$ |
28,518 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ thousands, except number of shares)
|
|
September 30, |
|
December 31, |
| ||
|
|
2015 |
|
2014 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
168,466 |
|
$ |
267,512 |
|
Accounts receivable, net of allowances of $55,178 and $32,392, respectively (Note 2) |
|
117,767 |
|
101,217 |
| ||
Inventories (Note 3) |
|
190,819 |
|
171,012 |
| ||
Deferred tax assets, net |
|
3,855 |
|
4,190 |
| ||
Income tax receivable |
|
16,933 |
|
9,332 |
| ||
Other receivables |
|
11,508 |
|
11,989 |
| ||
Prepaid expenses and other assets |
|
29,782 |
|
30,156 |
| ||
Total current assets |
|
539,130 |
|
595,408 |
| ||
Property and equipment, net (Note 2, 7) |
|
50,188 |
|
68,288 |
| ||
Intangible assets, net |
|
87,420 |
|
97,337 |
| ||
Goodwill |
|
2,030 |
|
2,044 |
| ||
Deferred tax assets, net |
|
19,570 |
|
17,886 |
| ||
Other assets |
|
23,587 |
|
25,968 |
| ||
Total assets |
|
$ |
721,925 |
|
$ |
806,931 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
|
$ |
79,160 |
|
$ |
42,923 |
|
Accrued expenses and other liabilities (Note 5) |
|
85,394 |
|
80,216 |
| ||
Deferred tax liabilities, net |
|
11,675 |
|
11,869 |
| ||
Accrued restructuring (Note 6) |
|
2,420 |
|
4,511 |
| ||
Income taxes payable |
|
10,558 |
|
9,078 |
| ||
Current portion of long-term borrowings and capital lease obligations |
|
5,383 |
|
5,288 |
| ||
Total current liabilities |
|
194,590 |
|
153,885 |
| ||
Long-term income tax payable |
|
4,335 |
|
8,843 |
| ||
Long-term borrowings and capital lease obligations |
|
2,350 |
|
6,381 |
| ||
Long-term accrued restructuring (Note 6) |
|
237 |
|
348 |
| ||
Other liabilities |
|
12,430 |
|
12,277 |
| ||
Total liabilities |
|
213,942 |
|
181,734 |
| ||
Commitments and contingencies (Note 14) |
|
|
|
|
| ||
Series A convertible preferred stock, par value $0.001 per share, 1,000,000 shares authorized, 200,000 shares issued and outstanding, redemption amount and liquidation preference of $203,000 and $203,067 as of September 30, 2015 and December 31, 2014, respectively (Note 13) |
|
174,888 |
|
172,679 |
| ||
|
|
|
|
|
| ||
Stockholders equity: |
|
|
|
|
| ||
Preferred stock, par value $0.001 per share, 4,000,000 shares authorized, none outstanding |
|
|
|
|
| ||
Common stock, par value $0.001 per share, 250,000,000 shares authorized, 92,666,222 and 73,634,604 shares issued and outstanding, respectively, as of September 30, 2015 and 92,325,201 and 78,516,566 shares issued and outstanding, respectively, as of December 31, 2014 |
|
93 |
|
92 |
| ||
Treasury stock, at cost, 19,331,618 and 13,808,635 shares as of September 30, 2015 and December 31, 2014, respectively |
|
(273,915 |
) |
(200,424 |
) | ||
Additional paid-in capital |
|
353,174 |
|
345,732 |
| ||
Retained earnings |
|
301,401 |
|
325,470 |
| ||
Accumulated other comprehensive loss |
|
(47,658 |
) |
(18,352 |
) | ||
Total stockholders equity |
|
333,095 |
|
452,518 |
| ||
Total liabilities, commitments and contingencies and stockholders equity |
|
$ |
721,925 |
|
$ |
806,931 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ thousands)
|
|
Nine Months Ended September 30, |
| ||||
|
|
2015 |
|
2014 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income (loss) |
|
$ |
(13,023 |
) |
$ |
48,168 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
|
28,019 |
|
31,344 |
| ||
Unrealized (gain) loss on foreign exchange, net |
|
(99 |
) |
(9,019 |
) | ||
Asset impairment charges |
|
7,535 |
|
5,830 |
| ||
Provision for doubtful accounts, net |
|
25,258 |
|
9,129 |
| ||
Share-based compensation |
|
8,886 |
|
10,473 |
| ||
Inventory write-down charges |
|
|
|
896 |
| ||
Non-cash restructuring charges |
|
|
|
4,064 |
| ||
Other non-cash items |
|
416 |
|
(170 |
) | ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable, net of allowances |
|
(48,092 |
) |
(67,358 |
) | ||
Inventories |
|
(27,713 |
) |
(49,544 |
) | ||
Prepaid expenses and other assets |
|
(321 |
) |
5,073 |
| ||
Accounts payable |
|
38,864 |
|
10,152 |
| ||
Accrued expenses and other liabilities |
|
4,855 |
|
8,981 |
| ||
Accrued restructuring |
|
(2,019 |
) |
3,745 |
| ||
Income taxes |
|
(15,626 |
) |
(17,059 |
) | ||
Cash provided by (used in) operating activities |
|
6,940 |
|
(5,295 |
) | ||
Cash flows from investing activities: |
|
|
|
|
| ||
Cash paid for purchases of property and equipment |
|
(4,235 |
) |
(13,891 |
) | ||
Proceeds from disposal of property and equipment |
|
|
|
174 |
| ||
Cash paid for intangible assets |
|
(7,572 |
) |
(29,457 |
) | ||
Change in restricted cash |
|
11 |
|
(1,655 |
) | ||
Cash used in investing activities |
|
(11,796 |
) |
(44,829 |
) | ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds from preferred stock offering, net of issuance costs of $0.0 million and $15.8 million, respectively |
|
|
|
182,220 |
| ||
Dividends - Series A preferred stock |
|
(8,900 |
) |
(5,166 |
) | ||
Repayment of bank borrowings and capital lease obligations |
|
(3,957 |
) |
(3,872 |
) | ||
Deferred debt issuance costs |
|
(94 |
) |
(75 |
) | ||
Issuances of common stock |
|
1,255 |
|
1,300 |
| ||
Purchase of treasury stock, net of issuances |
|
(75,928 |
) |
(90,093 |
) | ||
Repurchase of common stock for tax withholding |
|
(261 |
) |
(787 |
) | ||
Cash provided by (used in) financing activities |
|
(87,885 |
) |
83,527 |
| ||
Effect of exchange rate changes on cash |
|
(6,305 |
) |
(176 |
) | ||
Net increase (decrease) in cash and cash equivalents |
|
(99,046 |
) |
33,227 |
| ||
Cash and cash equivalents - beginning of period |
|
267,512 |
|
317,144 |
| ||
Cash and cash equivalents - end of period |
|
$ |
168,466 |
|
$ |
350,371 |
|
Supplemental disclosure of cash flow information - cash paid during the period for: |
|
|
|
|
| ||
Interest, net of capitalized interest |
|
$ |
688 |
|
$ |
358 |
|
Income taxes |
|
$ |
17,668 |
|
$ |
30,114 |
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
| ||
Accrued purchases of property and equipment |
|
$ |
761 |
|
$ |
663 |
|
Accrued purchases of intangibles |
|
$ |
|
|
$ |
6,050 |
|
Accrued dividends |
|
$ |
3,000 |
|
$ |
3,067 |
|
Accretion of dividend equivalents |
|
$ |
2,209 |
|
$ |
2,030 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CROCS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION & BASIS OF PRESENTATION
Organization
Crocs, Inc. and its subsidiaries (collectively the Company, Crocs, 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. Accordingly, these financial statements do not include all information required for complete financial statements. In the opinion of management, these condensed consolidated financial statements reflect all adjustments (consisting solely of normal recurring matters) considered necessary for a fair statement of the results for the interim periods presented. The accompanying unaudited condensed consolidated financial statements and these notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014. The results of operations for any interim period are not necessarily indicative of results for the full year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reporting amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Estimates and assumptions are used in accounting for, among other things, the valuation of acquisition-related assets and liabilities, allowances for uncollectable accounts, taxes and related valuation allowances, loss contingencies, fair value measurements, impairment assessments, useful lives of long-lived assets and share-based compensation. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
Debt Issuance Costs
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03: Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 requires retrospective adoption and will be effective for Crocs beginning in the first quarter of 2016. Early adoption is permitted. Crocs does not expect this pronouncement will have a material impact on the condensed consolidated financial statements.
Share-Based Payments
In June 2014, the FASB issued ASU 2014-12 in response to the EITF consensus on Issue 13-D. The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense related to an award for which transfer to the employee is contingent on the entitys satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. This ASU is effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015. The Company is currently evaluating the impact that this pronouncement will have on its condensed 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. ASU 2014-09 becomes effective for reporting periods (including interim periods) beginning after December 15, 2017. Early application is permitted for reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect transition method. Crocs is currently
evaluating the impact that this pronouncement will have on the condensed consolidated financial statements. Crocs has not yet selected a transition method or determined the effect of the standard on financial reporting once the standard is effective.
Inventory
In July 2015, the FASB issued ASU No. 2015-11: Simplifying the Measurement of Inventory, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Specifically, this standard eliminates the need to determine and consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. This standard is effective prospectively beginning January 1, 2017, with early adoption permitted. The Company is currently evaluating the impact that this pronouncement will have on its condensed consolidated financial statements.
Other new pronouncements issued but not effective until after September 30, 2015 are not expected to have a material impact on the Companys financial position, results of operations or cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. The Companys Series A convertible preferred stock (Series A preferred stock) issued in 2014 represents participating securities as holders of the Series A preferred stock are entitled to receive any and all dividends declared or paid on common stock on an as-converted basis. In addition, shares of the Companys non-vested restricted stock and restricted stock unit 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 the Companys earnings. In addition, the dilutive effect of each participating security, if any, is calculated using the more dilutive of the two-class method described above. This method 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 12Earnings Per Share for further discussion.
Asset Impairments
Crocs periodically evaluates all of its long-lived assets for impairment when events or circumstances would indicate the carrying value of a long-lived asset may not be fully recoverable. The following table summarizes retail asset impairment charges by reportable operating segment for the three and nine months ended September 30, 2015 and 2014 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 or lease terms of those assets:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||||||||||
|
|
Impairment |
|
Number of |
|
Impairment |
|
Number of |
|
Impairment |
|
Number of |
|
Impairment |
|
Number of |
| ||||
|
|
(in thousands, except store count data) |
| ||||||||||||||||||
Americas |
|
$ |
5,024 |
|
15 |
|
$ |
1,994 |
|
10 |
|
$ |
5,710 |
|
18 |
|
$ |
3,238 |
|
26 |
|
Asia Pacific |
|
103 |
|
4 |
|
372 |
|
2 |
|
618 |
|
12 |
|
817 |
|
14 |
| ||||
Europe |
|
333 |
|
7 |
|
234 |
|
8 |
|
1,207 |
|
13 |
|
1,775 |
|
17 |
| ||||
Total asset impairment |
|
$ |
5,460 |
|
26 |
|
$ |
2,600 |
|
20 |
|
$ |
7,535 |
|
43 |
|
$ |
5,830 |
|
57 |
|
Depreciation
During the three months ended September 30, 2015 and 2014, Crocs recorded $4.0 million and $6.4 million, respectively, in depreciation expense of which $0.4 million and $0.5 million, respectively, was recorded in Cost of sales, with the remaining amounts recorded in Selling, general and administrative expenses on the condensed consolidated statements of operations. During the nine months ended September 30, 2015 and 2014, Crocs recorded $13.0 million and $18.1 million, respectively, in depreciation expense of which $1.4 million for both periods was recorded in Cost of sales, with the remaining amounts recorded in Selling, general and administrative expenses on the condensed consolidated statements of operations. As of September 30, 2015 and December 31, 2014, accumulated depreciation was $106.4 million and $99.8 million, respectively.
Accounts Receivable
Accounts receivable represent amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, and do not bear interest. We use our best estimate to determine the required allowance for doubtful accounts based on a variety of factors including the length of time receivables are past due, economic trends and conditions affecting our customer base and historical collection experience. Specific provisions are recorded for individual receivables when we become aware of a customers inability to meet its financial obligations.
In the third quarter of 2015, we had multiple China distributors default on their payment obligations. As a result, we reassessed the collectability of our accounts receivable balances for our China operations, and we concluded a significant increase in our allowance
for doubtful accounts was required. Accordingly, we have increased our China allowance for doubtful accounts by an additional $18.9 million, resulting in total allowances in China of $40.3 million and $21.1 million as of September 30, 2015 and December 31, 2014, respectively. Our net accounts receivable balance for our China operations as of September 30, 2015 and December 31, 2014 is $4.6 million and $18.6 million, respectively.
The changes in the allowance for doubtful accounts, inclusive of unapplied rebate reserves, and reserves for sale returns and allowances for the three months ended September 30, 2015, and 2014, are as follows:
Consolidated reserves and allowances
|
|
Three Months Ended September 30, |
| ||||||||||||||||||||||
|
|
2015 |
|
2014 |
| ||||||||||||||||||||
|
|
Allowance |
|
Reserve for |
|
Reserve for |
|
Total |
|
Allowance |
|
Reserve for |
|
Reserve for |
|
Total |
| ||||||||
|
|
(in thousands) |
| ||||||||||||||||||||||
Beginning balance at June 30, |
|
$ |
(19,020 |
) |
$ |
(12,482 |
) |
$ |
(11,192 |
) |
$ |
(42,694 |
) |
$ |
(6,381 |
) |
$ |
(10,107 |
) |
$ |
(4,349 |
) |
$ |
(20,837 |
) |
Reduction in revenue |
|
|
|
(17,245 |
) |
(2,863 |
) |
(20,108 |
) |
|
|
(18,011 |
) |
(2,672 |
) |
(20,683 |
) | ||||||||
Expense |
|
(19,747 |
) |
|
|
|
|
(19,747 |
) |
(5,436 |
) |
|
|
|
|
(5,436 |
) | ||||||||
Recoveries, applied amounts, and write-offs |
|
1,210 |
|
20,018 |
|
6,143 |
|
27,371 |
|
884 |
|
22,587 |
|
2,484 |
|
25,955 |
| ||||||||
Ending balance at September 30, |
|
$ |
(37,557 |
) |
$ |
(9,709 |
) |
$ |
(7,912 |
) |
$ |
(55,178 |
) |
$ |
(10,933 |
) |
$ |
(5,531 |
) |
$ |
(4,537 |
) |
$ |
(21,001 |
) |
The changes in the allowance for doubtful accounts, inclusive of unapplied rebate reserves, and reserves for sale returns and allowances related to our China operations for the three months ended September 30, 2015, and 2014, are as follows:
China reserves and allowances
|
|
Three Months Ended September 30, |
| ||||||||||||||||||||||
|
|
2015 |
|
2014 |
| ||||||||||||||||||||
|
|
Allowance |
|
Reserve for |
|
Reserve for |
|
Total |
|
Allowance |
|
Reserve for |
|
Reserve for |
|
Total |
| ||||||||
|
|
(in thousands) |
| ||||||||||||||||||||||
Beginning balance at June 30, |
|
$ |
(12,302 |
) |
$ |
(4,176 |
) |
$ |
(7,481 |
) |
$ |
(23,959 |
) |
$ |
(1,445 |
) |
$ |
(577 |
) |
$ |
(3,762 |
) |
$ |
(5,784 |
) |
Reduction in revenue |
|
|
|
(632 |
) |
(553 |
) |
(1,185 |
) |
|
|
(846 |
) |
(1,218 |
) |
(2,064 |
) | ||||||||
Expense |
|
(18,931 |
) |
|
|
|
|
(18,931 |
) |
(3,263 |
) |
|
|
|
|
(3,263 |
) | ||||||||
Recoveries, applied amounts, and write-offs |
|
297 |
|
1,596 |
|
1,924 |
|
3,817 |
|
|
|
1,105 |
|
2,860 |
|
3,965 |
| ||||||||
Ending balance at September 30, |
|
$ |
(30,936 |
) |
$ |
(3,212 |
) |
$ |
(6,110 |
) |
$ |
(40,258 |
) |
$ |
(4,708 |
) |
$ |
(318 |
) |
$ |
(2,120 |
) |
$ |
(7,146 |
) |
The changes in the allowance for doubtful accounts, inclusive of unapplied rebate reserves, and reserves for sale returns and allowances for the nine months ended September 30, 2015, and 2014, are as follows:
Consolidated reserves and allowances
|
|
Nine Months Ended September 30, |
| ||||||||||||||||||||||
|
|
2015 |
|
2014 |
| ||||||||||||||||||||
|
|
Allowance |
|
Reserve for |
|
Reserve for |
|
Total |
|
Allowance |
|
Reserve for |
|
Reserve for |
|
Total |
| ||||||||
|
|
(in thousands) |
| ||||||||||||||||||||||
Beginning balance at December 31, |
|
$ |
(13,609 |
) |
$ |
(7,214 |
) |
$ |
(11,569 |
) |
$ |
(32,392 |
) |
$ |
(3,656 |
) |
$ |
(5,410 |
) |
$ |
(1,447 |
) |
$ |
(10,513 |
) |
Reduction in revenue |
|
|
|
(52,435 |
) |
(10,414 |
) |
(62,849 |
) |
|
|
(50,981 |
) |
(13,011 |
) |
(63,992 |
) | ||||||||
Expense |
|
(25,495 |
) |
|
|
|
|
(25,495 |
) |
(9,276 |
) |
|
|
|
|
(9,276 |
) | ||||||||
Recoveries, applied amounts, and write-offs |
|
1,547 |
|
49,940 |
|
14,071 |
|
65,558 |
|
1,999 |
|
50,860 |
|
9,921 |
|
62,780 |
| ||||||||
Ending balance at September 30, |
|
$ |
(37,557 |
) |
$ |
(9,709 |
) |
$ |
(7,912 |
) |
$ |
(55,178 |
) |
$ |
(10,933 |
) |
$ |
(5,531 |
) |
$ |
(4,537 |
) |
$ |
(21,001 |
) |
The changes in the allowance for doubtful accounts, inclusive of unapplied rebate reserves, and reserves for sale returns and allowances related to our China operations for the nine months ended September 30, 2015, and 2014, are as follows:
China reserves and allowances
|
|
Nine Months Ended September 30, |
| ||||||||||||||||||||||
|
|
2015 |
|
2014 |
| ||||||||||||||||||||
|
|
Allowance |
|
Reserve for |
|
Reserve for |
|
Total |
|
Allowance |
|
Reserve for |
|
Reserve for |
|
Total |
| ||||||||
|
|
(in thousands) |
| ||||||||||||||||||||||
Beginning balance at December 31, |
|
$ |
(8,440 |
) |
$ |
(4,043 |
) |
$ |
(8,623 |
) |
$ |
(21,106 |
) |
$ |
(24 |
) |
$ |
(225 |
) |
$ |
(1,051 |
) |
$ |
(1,300 |
) |
Reduction in revenue |
|
|
|
(5,780 |
) |
(3,479 |
) |
(9,259 |
) |
|
|
(2,331 |
) |
(8,588 |
) |
(10,919 |
) | ||||||||
Expense |
|
(22,925 |
) |
|
|
|
|
(22,925 |
) |
(4,684 |
) |
|
|
|
|
(4,684 |
) | ||||||||
Recoveries, applied amounts, and write-offs |
|
429 |
|
6,611 |
|
5,992 |
|
13,032 |
|
|
|
2,238 |
|
7,519 |
|
9,757 |
| ||||||||
Ending balance at September 30, |
|
$ |
(30,936 |
) |
$ |
(3,212 |
) |
$ |
(6,110 |
) |
$ |
(40,258 |
) |
$ |
(4,708 |
) |
$ |
(318 |
) |
$ |
(2,120 |
) |
$ |
(7,146 |
) |
As of September 30, 2015 and December 31, 2014, our China operations accounted for $ 44.9 million and $39.7 million, respectively, of our total gross accounts receivable balances, of which $41.2 million and $36.9 million, respectively, was past due in China. As of September 30, 2015 and December 31, 2014, our China operations had total accounts receivable reserves of $40.3 million and $21.1 million, respectively, associated with these receivables.
3. INVENTORIES
The following table summarizes inventories by major classification as of September 30, 2015 and December 31, 2014:
|
|
September 30, |
|
December 31, |
| ||
|
|
2015 |
|
2014 |
| ||
|
|
(in thousands) |
| ||||
Finished goods |
|
$ |
185,652 |
|
$ |
167,515 |
|
Work-in-progress |
|
519 |
|
703 |
| ||
Raw materials |
|
4,648 |
|
2,794 |
| ||
Total inventories |
|
$ |
190,819 |
|
$ |
171,012 |
|
4. GOODWILL & INTANGIBLE ASSETS
The following table summarizes the goodwill and identifiable intangible assets as of September 30, 2015, and December 31, 2014:
|
|
September 30, 2015 |
|
December 31, 2014 |
| ||||||||||||||
|
|
Gross |
|
Accumulated |
|
Net Carrying |
|
Gross |
|
Accumulated |
|
Net Carrying |
| ||||||
|
|
(in thousands) |
| ||||||||||||||||
Capitalized software |
|
$ |
166,774 |
(1) |
$ |
(81,406 |
)(2) |
$ |
85,368 |
|
$ |
157,615 |
(1) |
$ |
(62,591 |
)(2) |
$ |
95,024 |
|
Customer relationships |
|
4,846 |
|
(4,846 |
) |
|
|
5,945 |
|
(5,798 |
) |
147 |
| ||||||
Patents, copyrights, and trademarks |
|
6,674 |
|
(5,054 |
) |
1,620 |
|
6,702 |
|
(4,931 |
) |
1,771 |
| ||||||
Core technology |
|
4,170 |
|
(4,170 |
) |
|
|
4,170 |
|
(4,170 |
) |
|
| ||||||
Other |
|
243 |
|
(111 |
) |
132 |
|
698 |
|
(636 |
) |
62 |
| ||||||
Total finite lived intangible assets |
|
182,707 |
|
(95,587 |
) |
87,120 |
|
175,130 |
|
(78,126 |
) |
97,004 |
| ||||||
Indefinite lived intangible assets (3) |
|
300 |
|
|
|
300 |
|
333 |
|
|
|
333 |
| ||||||
Goodwill (3) |
|
2,030 |
|
|
|
2,030 |
|
2,044 |
|
|
|
2,044 |
| ||||||
Goodwill and intangible assets |
|
$ |
185,037 |
|
$ |
(95,587 |
) |
$ |
89,450 |
|
$ |
177,507 |
|
$ |
(78,126 |
) |
$ |
99,381 |
|
(1) Includes $4.1 million of software held under a capital lease classified as capitalized software as of both September 30, 2015, and December 31, 2014.
(2) Includes $2.9 million and $2.5 million of accumulated amortization of software held under a capital lease as of September 30, 2015, and December 31, 2014, respectively, and is amortized using the straight-line method over the useful life.
(3) Change in goodwill and indefinite lived intangible assets relate entirely to foreign currency translation.
The following table summarizes estimated future annual amortization of intangible assets as of September 30, 2015:
|
|
Amortization |
| |
Fiscal years ending December 31, |
|
(in thousands) |
| |
2015 (remainder of year) |
|
$ |
5,451 |
|
2016 |
|
18,620 |
| |
2017 |
|
16,901 |
| |
2018 |
|
14,449 |
| |
2019 |
|
12,524 |
| |
Thereafter |
|
19,175 |
| |
Total |
|
$ |
87,120 |
|
During the three months ended September 30, 2015, and 2014, amortization expense recorded for intangible assets with finite lives was $4.9 million and $4.2 million, respectively, of which $1.4 million and $1.6 million, respectively, was recorded in Cost of sales, with the remaining amounts recorded in Selling, general and administrative expenses on the condensed consolidated statements of operations. During the nine months ended September 30, 2015 and 2014, amortization expense recorded for intangible assets with finite lives was $15.0 million and $13.2 million, respectively, of which $4.5 million and $4.7 million, respectively, was recorded in Cost of sales, with the remaining amounts recorded in Selling, general and administrative expenses on the condensed consolidated statements of operations. As of September 30, 2015 and December 31, 2014, accumulated amortization was $95.6 million and $78.1 million, respectively.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table summarizes accrued expenses and other current liabilities as of September 30, 2015 and December 31, 2014:
|
|
September 30, |
|
December 31, |
| ||
|
|
2015 |
|
2014 |
| ||
|
|
(in thousands) |
| ||||
Fulfillment, freight and duties |
|
$ |
19,371 |
|
$ |
12,110 |
|
Accrued compensation and benefits |
|
19,008 |
|
23,824 |
| ||
Professional services |
|
14,563 |
|
16,212 |
| ||
Accrued rent and occupancy |
|
8,935 |
|
9,675 |
| ||
Sales/use and VAT tax payable |
|
5,694 |
|
5,897 |
| ||
Deferred revenue and royalties payable |
|
4,479 |
|
2,005 |
| ||
Customer deposits |
|
3,531 |
|
3,075 |
| ||
Dividend payable |
|
3,000 |
|
3,067 |
| ||
Accrued legal liabilities |
|
2,935 |
|
2,150 |
| ||
Other (1) |
|
3,878 |
|
2,201 |
| ||
Total accrued expenses and other current liabilities |
|
$ |
85,394 |
|
$ |
80,216 |
|
(1) The amounts in Other consist of various accrued expenses, of which no individual item accounted for more than 5% of the total balance as of September 30, 2015 or December 31, 2014.
6. RESTRUCTURING ACTIVITIES
Restructuring
On July 21, 2014, Crocs 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 by reducing excess overhead and enhancing the decision making process, and (4) closing or converting retail locations around the world. The initial effects of these plans were incurred in 2014 and are continuing throughout 2015. Crocs recorded restructuring charges of $1.0 million and $7.5 million during the three and nine month periods ended September 30, 2015, respectively. During 2015, Crocs currently estimates restructuring costs related to store closures and changes in organizational structure of approximately $8.0 million to $12.0 million, but the Company can make no assurance that actual costs will not differ.
The following table summarizes the restructuring activity during the three and nine months ended September 30, 2015 and 2014:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
(in thousands) |
| ||||||||||
Severance costs |
|
$ |
128 |
|
$ |
5,358 |
|
$ |
4,101 |
|
$ |
9,811 |
|
Lease / contract exit and related costs |
|
848 |
|
1,034 |
|
2,765 |
|
2,212 |
| ||||
Other (1) |
|
5 |
|
1,776 |
|
588 |
|
4,484 |
| ||||
Total restructuring charges |
|
$ |
981 |
|
$ |
8,168 |
|
$ |
7,454 |
|
$ |
16,507 |
|
(1) The amounts in Other consist of various asset and inventory impairment charges prompted by the aforementioned restructuring plan, legal fees and facility maintenance fees.
The following table summarizes the Companys restructuring activity during the three and nine months ended September 30, 2015 and 2014 by reportable segment:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
(in thousands) |
| ||||||||||
Americas |
|
$ |
50 |
|
$ |
2,058 |
|
$ |
506 |
|
$ |
3,282 |
|
Asia Pacific |
|
100 |
|
3,191 |
|
3,140 |
|
3,584 |
| ||||
Europe |
|
831 |
|
400 |
|
2,356 |
|
1,382 |
| ||||
Corporate |
|
|
|
2,519 |
|
1,452 |
|
8,259 |
| ||||
Total restructuring charges |
|
$ |
981 |
|
$ |
8,168 |
|
$ |
7,454 |
|
$ |
16,507 |
|
The following table summarizes the Companys accrued restructuring balance and associated activity from December 31, 2014 through September 30, 2015:
|
|
December 31, |
|
Additions |
|
Cash Payments |
|
September 30, |
| ||||
|
|
(in thousands) |
| ||||||||||
Severance costs |
|
$ |
3,154 |
|
$ |
4,101 |
|
$ |
(6,230 |
) |
$ |
1,025 |
|
Lease/ contract exit and related costs |
|
1,401 |
|
2,765 |
|
(3,088 |
) |
1,078 |
| ||||
Other (1) |
|
304 |
|
588 |
|
(338 |
) |
554 |
| ||||
Total restructuring charges |
|
$ |
4,859 |
|
$ |
7,454 |
|
$ |
(9,656 |
) |
$ |
2,657 |
|
(1) Includes expenses related to exiting stores and legal fees.
Retail Store Closings
As mentioned above, the Company plans to close additional retail locations around the globe. As such, Crocs expects to incur certain exit costs specific to store closures including operating lease termination costs, rent obligations for leased facilities, net of expected sublease income, and other expenses in association with this plan. During the three and nine month periods ended September 30, 2015,
Crocs closed 2 and 18 company-operated retail locations that were identified in the initial restructuring plan, respectively. These locations were selected for closure by management based on historical and projected profitability levels, relocation plans, and other factors. As of September 30, 2015 and December 31, 2014, Crocs had a liability of approximately $2.7 million and $4.9 million, respectively, related to locations to be closed and other reductions in workforce 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. Crocs records the liability at fair value in the period the store is closed.
7. FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
GAAP provides for a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.
As of September 30, 2015 and December 31, 2014, our assets subject to fair value measurements consisted solely of cash equivalents of $15.3 million and $23.3 million, respectively, which are Level 1 assets.
Non-Recurring Fair Value Measurements
The majority of the Companys non-financial instruments, 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. During the three months ended September 30, 2015 and 2014, Crocs recorded $5.5 million and $2.6 million, respectively, in impairment charges associated with the Companys retail locations. During the nine months ended September 30, 2015 and 2014, Crocs recorded $7.5 million and $5.8 million, respectively, in impairment charges associated with the Companys retail locations.
8. DERIVATIVE FINANCIAL INSTRUMENTS
Crocs transacts business in various foreign countries and is therefore exposed to foreign currency exchange rate risk inherent in revenues, costs, and monetary assets and liabilities denominated in non-functional currencies. In general, Crocs enters 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. As these derivative instruments do not qualify as hedging instruments under the accounting standards for derivatives and hedging, they 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 loss, net in the condensed consolidated statements of operations. For purposes of the cash flow statement, Crocs classifies the cash flows from derivative instruments 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.
The following table summarizes the notional amounts of the outstanding foreign currency exchange contracts as of September 30, 2015 and December 31, 2014. 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 the Companys exposure to the foreign currency exchange risks.
|
|
September 30, |
|
December 31, |
| ||
|
|
2015 |
|
2014 |
| ||
|
|
(in thousands) |
| ||||
Foreign currency exchange forward contracts by currency: |
|
|
|
|
| ||
Japanese Yen |
|
$ |
96,015 |
|
$ |
44,533 |
|
Singapore Dollar |
|
62,325 |
|
61,887 |
| ||
British Pound Sterling |
|
20,372 |
|
17,230 |
| ||
Euro |
|
16,902 |
|
134,755 |
| ||
South Korean Won |
|
11,795 |
|
14,590 |
| ||
Mexican Peso |
|
9,823 |
|
13,180 |
| ||
South African Rand |
|
6,481 |
|
4,355 |
| ||
Australian Dollar |
|
5,935 |
|
7,913 |
| ||
Indian Rupee |
|
5,144 |
|
3,356 |
| ||
New Taiwan Dollar |
|
3,410 |
|
3,229 |
| ||
Swedish Krona |
|
2,552 |
|
1,918 |
| ||
Brazilian Real |
|
1,910 |
|
|
| ||
Canadian Dollar |
|
1,237 |
|
3,005 |
| ||
Russian Ruble |
|
781 |
|
1,838 |
| ||
Hong Kong Dollar |
|
676 |
|
814 |
| ||
Norwegian Krone |
|
560 |
|
917 |
| ||
New Zealand Dollar |
|
|
|
743 |
| ||
Chinese Yuan Renminbi |
|
|
|
5,376 |
| ||
Total notional value, net |
|
$ |
245,918 |
|
$ |
319,639 |
|
|
|
|
|
|
| ||
Latest maturity date |
|
November 2015 |
|
January 2015 |
|
The following table presents the amounts affecting the condensed consolidated statements of operations from derivative instruments and exposure from day-to-day business transactions in various foreign currencies for the three and nine months ended September 30, 2015 and 2014:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
(in thousands) |
| ||||||||||
Foreign currency gain (loss) |
|
$ |
(288 |
) |
$ |
(3,787 |
) |
$ |
4,332 |
|
$ |
(1,567 |
) |
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
| ||||
Foreign currency exchange forwards |
|
(2,620 |
) |
2,497 |
|
(6,963 |
) |
(2,711 |
) | ||||
Foreign currency transaction loss, net |
|
$ |
(2,908 |
) |
$ |
(1,290 |
) |
$ |
(2,631 |
) |
$ |
(4,278 |
) |
The line Foreign currency transaction loss, net on the condensed consolidated statements of operations 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.
9. REVOLVING CREDIT FACILITY & BANK BORROWINGS
Senior Revolving Credit Facility
On September 25, 2009, Crocs entered into a Revolving Credit and Security 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.
On April 2, 2015, Crocs entered into the Sixth Amendment to Amended and Restated Credit Agreement (the Sixth Amendment) pursuant to which certain terms of the Credit Agreement were amended. The Sixth Amendment primarily amended certain definitions of the financial covenants to be more favorable to Crocs including (i) setting the minimum fixed charge coverage ratio to 1.00 to 1.00 through December 31, 2015, 1.15 to 1.00 through March 31, 2016 and 1.25 to 1.00 for each quarter thereafter, (ii) setting the leverage ratio to 4.00 to 1.00 through March 31, 2016 and 3.75 to 1.00 for each quarter thereafter and (iii) reducing the Companys global cash requirement from $100 million to $50 million.
On September 1, 2015, the Company entered into the Eighth Amendment to Amended and Restated Credit Agreement (the Eighth Amendment) pursuant to which certain terms of the Credit Agreement were amended. The Eighth Amendment primarily amended certain definitions of the financial covenants to become more favorable to the Company including (i) increasing the exclusion of cash and non-cash charges from the EBITDAR calculation to up to $85.0 million, not to exceed $65.0 million with respect to cash charges, (ii) setting the minimum fixed charge coverage ratio to 0.95 to 1.00 for the period ended September 30, 2015, (iii) allowing up to $40.0 million in stock repurchases to be made during the quarter ended September 30, 2015, (iv) suspending stock repurchases if the fixed charge coverage ratio is less than 1.00 to 1.00, and (v) eliminating the administrative agent basket through December 31, 2015.
The Credit Agreement enables Crocs to borrow up to $100.0 million, with the ability to increase commitments to $125.0 million subject to certain conditions, and is currently set to mature in December 2017. The Credit Agreement is available for working capital, capital expenditures, permitted acquisitions, reimbursement of drawings under letters of credit, and permitted dividends, distributions, purchases, redemptions and retirements of equity interests. Borrowings under the Credit Agreement are secured by all of the Companys assets including all receivables, equipment, general intangibles, inventory, investment property, subsidiary stock and intellectual property. Borrowings under the Credit Agreement bear interest at a variable rate. For domestic rate loans, the interest rate is equal to the highest of (i) the daily federal funds open rate as quoted by ICAP North America, Inc. plus 0.5%, (ii) PNCs prime rate and (iii) a daily LIBOR rate plus 1.0%, in each case there is an additional margin ranging from 0.25% to 1.00% based on certain conditions. For LIBOR rate loans, the interest rate is equal to a LIBOR rate plus a margin ranging from 1.25% to 2.00% based on certain conditions. The Credit Agreement requires monthly interest payments with respect to domestic rate loans and at the end of each interest period with respect to LIBOR rate loans. The Credit Agreement further provides for a limit on the issuance of letters of credit to a maximum of $20.0 million. The Credit Agreement contains provisions requiring Crocs to maintain compliance with certain restrictive and financial covenants.
As of September 30, 2015 and December 31, 2014, the Company had no outstanding borrowings under the Credit Agreement. As of September 30, 2015 and December 31, 2014, the Company had outstanding letters of credit of $1.5 million and $1.8 million, respectively, which were reserved against the borrowing base under the terms of the Credit Agreement. As of September 30, 2015, the Company was not in compliance with the fixed charge coverage ratio and the leverage ratio under the Credit Agreement. On November 3, 2015, the Company entered into the Ninth Amendment to Amended and Restated Credit Agreement pursuant to which the Company received a waiver from the lenders of the financial covenant violations as of September 30, 2015 and the Credit Agreement was amended to allow for up to $15.0 million in stock repurchases in the fourth quarter of 2015. The Company anticipates it will be in compliance with its covenants as of December 31, 2015, however, there can be no assurance that the Company will be in compliance at that date.
Asia Pacific Revolving Credit Facility
On August 28, 2015, a Crocs subsidiary entered into a revolving credit facility agreement with HSBC Bank (China) Company Limited, Shanghai Branch (HSBC) as the lender. The revolving credit facility enables Crocs to borrow uncommitted dual currency revolving loan facilities up to RMB 40.0 million, or the USD equivalent, and import facilities up to RMB 60.0 million, or the USD equivalent, however, the total combined facility amount may not exceed an aggregate facility limit of RMB 60.0 million. This revolving credit facility supports possible future net working capital needs in China. For loans denominated in USD, the interest rate is 2.1% per annum plus LIBOR for three months or any other period as may be determined by HSBC at the end of each interest period. For loans denominated in RMB, interest equals the one year benchmark lending rate effective on the loan drawdown date set forth by the Peoples Bank of China with a 10% mark-up and is payable on the maturity date of the related loan. The revolving credit facility is guaranteed by Crocs, Inc. and certain accounts receivables in China are pledged as security under the revolving credit facility. The revolving credit facility contains provisions requiring Crocs to maintain compliance with certain restrictive covenants and as of September 30, 2015, Crocs was in compliance with all relevant covenants. As of September 30, 2015, Crocs had no outstanding borrowings under the revolving credit facility.
Long-Term Bank Borrowings
On December 10, 2012, Crocs entered into a Master Installment Payment Agreement (Master IPA) with PNC in which PNC financed the Companys recent implementation of a new enterprise resource planning (ERP) system, which began in October 2012 and was substantially completed in early 2015. The terms of each note payable, under the Master IPA, consist of a fixed interest rate and payment terms based on the amount borrowed and the timing of activity throughout the implementation of the ERP system. The Master IPA is subject to cross-default, cross-termination, and is co-terminous with the Credit Agreement. As discussed above, as of September 30, 2015, the Company was not in compliance with the fixed charge coverage ratio and the leverage ratio under the Credit Agreement. On November 3, 2015, the Company received a waiver from the lenders of the financial covenant violations as of September 30, 2015. The Company anticipates it will be in compliance with its covenants as of December 31, 2015.
As of September 30, 2015 and December 31, 2014, Crocs had $7.7 million and $11.6 million, respectively, of debt outstanding under five separate notes payable, of which $5.4 million and $5.3 million, respectively, represents current installments. As of September 30, 2015, 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 entity, interest expense was capitalized to the condensed consolidated balance sheets until the assets were placed into service on January 1, 2015. During the three and nine months ended September 30, 2015, no interest was capitalized. During the three and nine months ended September 30, 2014, Crocs capitalized $0.1 million and $0.3 million, respectively, in interest expense related to this debt arrangement. Interest rates and payment terms are subject to change as further financing occurs under the Master IPA.
The components of the Companys consolidated debt and capital lease obligations are as follows:
|
|
September 30, 2015 |
|
|
| ||||||||||
|
|
|
|
Unused Borrowing Capacity (2) |
|
Carrying Value (3) |
| ||||||||
|
|
Weighted Average |
|
Borrowing |
|
U.S. $ |
|
September 30, |
|
December 31, |
| ||||
|
|
(in thousands) |
| ||||||||||||
Debt obligations |
|
|
|
|
|
|
|
|
|
|
| ||||
Senior revolving credit facility |
|
LIBOR plus 1.25% - 2.00% |
|
$ |
100,000 |
|
$ |
100,000 |
|
$ |
|
|
$ |
|
|
Asia Pacific revolving credit facility |
|
LIBOR plus 2.10% |
|
RMB |
60,000 |
|
9,438 |
|
|
|
|
| |||
Long-Term bank borrowings |
|
2.63% |
|
|
|
|
|
7,705 |
|
11,646 |
| ||||
Total debt obligations |
|
|
|
|
|
109,438 |
|
7,705 |
|
11,646 |
| ||||
Capital lease obligations |
|
|
|
|
|
|
|
28 |
|
23 |
| ||||
Total debt and capital lease obligations |
|
|
|
|
|
|
|
$ |
7,733 |
|
$ |
11,669 |
| ||
Current maturities |
|
|
|
|
|
|
|
$ |
5,383 |
|
$ |
5,288 |
| ||
Long-term debt and capital lease obligations |
|
|
|
|
|
|
|
$ |
2,350 |
|
$ |
6,381 |
| ||
(1) Carrying value represents the weighted average interest rate in effect at September 30, 2015 for all borrowings outstanding pursuant to each debt instrument, including any applicable margin. The interest rates presented represent stated rates and do not include the impact of the derivative instruments, deferred financing costs, original issue premiums or discounts and commitment fees, all of which affect our overall cost of borrowing.
(2) Unused borrowing capacity represents the maximum available under the applicable facility at September 30, 2015 without regard to covenant compliance calculations or other conditions precedent to borrowing.
(3) As the interest rate of each of our credit agreements is variable, typically based on the daily LIBOR rates plus and additional margin, the estimated fair value of each of our debt instruments approximates its carrying value.
The maturities of the Companys debt obligations as of September 30, 2015 are presented below:
|
|
September 30, |
| |
|
|
(in thousands) |
| |
Maturities of debt and capital lease obligations |
|
|
| |
2015 (remainder of year) |
|
$ |
1,337 |
|
2016 |
|
4,774 |
| |
2017 |
|
1,614 |
| |
Thereafter |
|
8 |
| |
Total debt maturities |
|
$ |
7,733 |
|
Current portion |
|
$ |
5,383 |
|
Noncurrent portion |
|
$ |
2,350 |
|
As of September 30, 2015 and December 31, 2014, the fair value of the Companys debt instruments approximates their reported carrying amounts.
10. STOCK-BASED COMPENSATION
Stock-based compensation expense is based on the grant date fair value and is recognized on a straight-line basis over the applicable vesting period. During the three months ended September 30, 2015 and 2014, Crocs recorded $2.4 million and $2.0 million, respectively, of pre-tax stock-based compensation expense, of which $2.3 million and $1.8 million, respectively, is included in selling, general and administrative expense, and $0.1 million and $0.2 million, respectively, is included in cost of sales on the condensed consolidated statements of operations.
During the nine months ended September 30, 2015 and 2014, Crocs recorded $8.9 million and $10.5 million, respectively, of pre-tax stock-based compensation expense, of which $8.5 million and $9.9 million, respectively, is included in selling, general and administrative expense, and $0.4 million and $0.6 million, respectively, is included in cost of sales on the condensed consolidated statements of operations. During the nine months ended September 30, 2015 and 2014, Crocs capitalized $0.0 million and $0.1 million, respectively, as intangible assets on the condensed consolidated balance sheets related to the implementation of the Companys ERP system.
Stock Option Activity
A summary of Crocs stock option activity as of and for the three and nine months ended September 30, 2015 is presented below:
|
|
Stock Options |
|
Weighted Average |
| |
Outstanding as of June 30, 2015 |
|
1,495,938 |
|
$ |
13.55 |
|
Granted |
|
|
|
$ |
|
|
Exercised |
|
(44,337 |
) |
$ |
6.67 |
|
Forfeited or expired |
|
(29,192 |
) |
$ |
19.79 |
|
Outstanding as of September 30, 2015 |
|
1,422,409 |
|
$ |
13.64 |
|
|
|
Stock Options |
|
Weighted Average |
| |
Outstanding as of December 31, 2014 |
|
1,696,130 |
|
$ |
13.52 |
|
Granted |
|
35,000 |
|
$ |
13.52 |
|
Exercised |
|
(190,675 |
) |
$ |
6.58 |
|
Forfeited or expired |
|
(118,046 |
) |
$ |
23.22 |
|
Outstanding as of September 30, 2015 |
|
1,422,409 |
|
$ |
13.64 |
|
As of September 30, 2015, there was $0.8 million of unrecognized compensation expense related to stock options. The expense is expected to be amortized over a weighted average period of 2.68 years.
Restricted Stock Awards and Units Activity
A summary of the Companys Restricted Stock Award (RSA) and Restricted Stock Unit (RSU) activity as of and for the three and nine months ended September 30, 2015 is presented below:
|
|
Restricted Stock |
|
Weighted |
|
Restricted Stock |
|
Weighted |
| ||
|
|
Awards |
|
Grant Date |
|
Units |
|
Grant Date |
| ||
|
|
(RSAs) |
|
Fair Value |
|
(RSUs) |
|
Fair Value |
| ||
Unvested at June 30, 2015 |
|
15,987 |
|
$ |
15.01 |
|
3,387,553 |
|
$ |
11.20 |
|
Granted |
|
|
|
$ |
|
|
100,650 |
|
$ |
14.74 |
|
Vested |
|
(3,996 |
) |
$ |
15.01 |
|
(29,500 |
) |
$ |
15.62 |
|
Forfeited or expired |
|
|
|
$ |
|
|
(190,035 |
) |
$ |
12.76 |
|
Unvested at September 30, 2015 |
|
11,991 |
|
$ |
15.01 |
|
3,268,668 |
|
$ |
11.18 |
|
|
|
Restricted Stock |
|
Weighted |
|
Restricted Stock |
|
Weighted |
| ||
|
|
Awards |
|
Grant Date |
|
Units |
|
Grant Date |
| ||
|
|
(RSAs) |
|
Fair Value |
|
(RSUs) |
|
Fair Value |
| ||
Unvested at December 31, 2014 |
|
7,488 |
|
$ |
15.61 |
|
1,997,471 |
|
$ |
15.78 |
|
Granted |
|
15,987 |
|
$ |
15.01 |
|
2,644,126 |
|
$ |
10.35 |
|
Vested |
|
(11,484 |
) |
$ |
15.40 |
|
(463,028 |
) |
$ |
16.39 |
|
Forfeited or expired |
|
|
|
$ |
|
|
(909,901 |
) |
$ |
14.78 |
|
Unvested at September 30, 2015 |
|
11,991 |
|
$ |
15.01 |
|
3,268,668 |
|
$ |
11.18 |
|
The total grant date fair value of RSAs vested during the three months ended September 30, 2015 and 2014 was $0.1 million and $0.0 million, respectively. The total grant date fair value of RSAs vested during the nine months ended September 30, 2015 and 2014 was $0.2 million and $1.0 million, respectively. As of September 30, 2015, Crocs had $0.2 million of total unrecognized stock-based compensation expense related to non-vested restricted stock awards, net of expected forfeitures, all of which was related to time-based awards. As of September 30, 2015, the unvested RSAs are expected to be amortized over the remaining weighted average period of 0.69 years.
The total grant date fair value of RSUs vested during the three months ended September 30, 2015 and 2014 was $0.5 million and $0.3 million, respectively. The total grant date fair value of RSUs vested during the nine months ended September 30, 2015 and 2014 was $7.6 million and $9.0 million, respectively. As of September 30, 2015, Crocs had $17.3 million of total unrecognized stock-based compensation expense related to unvested restricted stock units, net of expected forfeitures, of which $9.7 million is related to time-based awards and $7.6 million is related to performance-based awards. As of September 30, 2015, the unvested RSUs are expected to be amortized over the remaining weighted average period of 1.93 years, which consists of a remaining weighted average period of 1.99 years related to performance-based awards and a remaining weighted average period of 1.85 years related to time-based awards.
Appointment of Interim CFO
On September 7, 2015, Jeffrey J. Lasher resigned as Senior Vice President - Finance and Chief Financial Officer of Crocs. His resignation was effective October 1, 2015 and he will remain employed to provide transition services to the Company through November 7, 2015. On September 7, 2015, the Company appointed Mike Smith as Interim Chief Financial Officer, effective October 1, 2015. In connection with his appointment as Interim Chief Financial Officer, Mr. Smith was granted a RSU award representing the right to receive 10,000 shares of the Companys common stock. The RSUs will vest in three equal annual installments beginning on the first anniversary of the grant date, subject to Mr. Smiths continued employment with the Company through each vesting date.
Appointment of CFO
On November 4, 2015, the board of directors of the Company (the Board) appointed Carrie Teffner as Executive Vice President and Chief Financial Officer, effective December 16, 2015. In connection with her appointment, Ms. Teffner will resign as a member of the Board prior to her start date with the Company. She will serve as the Companys principal financial officer and principal accounting officer. Mike Smith will no longer serve as Interim Chief Financial Officer on her start date.
Upon the commencement of her employment, Ms. Teffner will be granted a time-vesting RSU award representing the right to receive shares of the Companys common stock equal to $1,000,000, based on a 30-day weighted-average stock price as of the date Ms. Teffners appointment was publicly announced. The RSUs will vest in three annual installments beginning on the first anniversary of her start date, subject to her continued employment with the Company as of each vesting date.
In addition, Ms. Teffner will be granted a performance-vesting RSU award, representing the right to receive shares of the Companys common stock equal to $1,000,000, based on a 30-day weighted-average stock price as of the date Ms. Teffners appointment was publicly announced. The RSUs will vest based on the achievement of certain share price levels on or before the fourth anniversary of her start date, subject to continued employment with the Company.
11. INCOME TAXES
During the three months ended September 30, 2015, the Company recognized income tax expense of $0.9 million on a pre-tax loss of $23.1 million. For the same period in 2014, the Company recognized income tax benefit of $15.7 million on pre-tax income of $0.1 million. During the nine months ended September 30, 2015, the Company recognized income tax expense of $3.7 million on a pre-tax loss of $9.3 million. For the same period in 2014, the Company recognized income tax expense of $8.4 million on pre-tax income of $56.6 million.
The change in income tax expense, compared to the same period in 2014, is primarily due to an increase in losses in various jurisdictions for which tax benefits were unable to be recognized as management has determined that it is not more likely than not that we will be able to utilize the tax losses. The Companys effective income tax rate, for all periods presented, differs from the federal U.S. statutory rate due to differences in income tax rates between U.S. and foreign jurisdictions as well as tax amounts recognized discretely during the quarter. As of September 30, 2015 and September 30, 2014, the Company had unrecognized tax benefits of $4.3 million and $12.2 million, respectively.
12. EARNINGS PER SHARE
The following table illustrates the basic and diluted EPS computations for the three and nine months ended September 30, 2015 and 2014:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
(in thousands) |
| ||||||||||
Numerator |
|
|
|
|
|
|
|
|
| ||||
Net income (loss) attributable to common stockholders |
|
$ |
(27,776 |
) |
$ |
12,009 |
|
$ |
(24,065 |
) |
$ |
37,905 |
|
Less: adjustment for income allocated to participating securities |
|
|
|
(1,684 |
) |
|
|
(5,229 |
) | ||||
Net income (loss) attributable to common stockholders - basic and diluted |
|
$ |
(27,776 |
) |
$ |
10,325 |
|
$ |
(24,065 |
) |
$ |
32,676 |
|
Denominator |
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding - basic |
|
74,322 |
|
84,659 |
|
76,318 |
|
86,582 |
| ||||
Plus: dilutive effect of stock options and unvested restricted stock units |
|
|
|
778 |
|
|
|
1,137 |
| ||||
Weighted average common shares outstanding - diluted |
|
74,322 |
|
85,437 |
|
76,318 |
|
87,719 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss attributable per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
(0.37 |
) |
$ |
0.12 |
|
$ |
(0.32 |
) |
$ |
0.38 |
|
Diluted |
|
$ |
(0.37 |
) |
$ |
0.12 |
|
$ |
(0.32 |
) |
$ |
0.37 |
|
Diluted EPS is calculated using the two-class method for options and RSUs and the if-converted method for series A preferred stock. Approximately 2.2 million and 0.8 million options and RSUs, for the three months ended September 30, 2015 and 2014, respectively, and approximately 2.4 million and 1.1 million options and RSUs for the nine months ended September 30, 2015 and 2014 were excluded in the calculation of diluted EPS under the two-class method because the effect would be anti-dilutive. The Series A preferred shares were excluded in the calculation of diluted EPS under the if-converted method because the effect would be anti-dilutive. If converted, Series A preferred stock would represent approximately 15.8% of the Companys common stock outstanding or 13.8 million additional common shares, as of September 30, 2015. See Note 13 Series A Preferred Stock for further details regarding the preferred share offering.
Stock Repurchase Plan Authorizations
Crocs continues to evaluate options to maximize the returns on its cash and maintain an appropriate capital structure, including, among other alternatives, repurchases of common stock. On December 26, 2013, Crocs board of directors (the Board) approved the repurchase of up to $350.0 million of the Companys common stock. The number, price, structure and timing of the repurchases will be at the Companys sole discretion and future repurchases will be evaluated by the Company 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 obligate Crocs to acquire any particular amount of its common stock. The Board may suspend, modify or terminate the repurchase program at any time without prior notice.
During the three months ended September 30, 2015, Crocs repurchased approximately 2.3 million shares at a weighted average price of $14.50 per share for an aggregate price of approximately $33.1 million, excluding related commission charges, under the publicly-announced repurchase plan. During the nine months ended September 30, 2015, Crocs repurchased approximately 5.6 million shares at a weighted average price of $13.64 per share for an aggregate price of approximately $75.8 million, excluding related commission charges, under the publicly-announced repurchase plan.
During the three months ended September 30, 2014, Crocs repurchased approximately 2.9 million shares at a weighted average price of $14.74 for an aggregate price of approximately $43.0 million, excluding related commission charges, under the publicly-announced repurchase plan. During the nine months ended September 30, 2014, Crocs repurchased approximately 6.1 million shares at a weighted average price of $14.76 for an aggregate price of approximately $89.9 million, excluding related commission charges, under the publicly-announced repurchase plan.
As of September 30, 2015, subject to certain restrictions on repurchases under the Companys revolving credit facility, Crocs had $128.6 million remaining under the repurchase authorizations.
13. SERIES A PREFERRED STOCK
On January 27, 2014, Crocs issued 200,000 shares of Series A preferred stock to Blackstone Capital Partners VI L.P. (Blackstone) and certain of its permitted transferees, for an aggregate purchase price of $198.0 million, or $990 per share, pursuant to an Investment Agreement between Crocs and Blackstone, dated December 28, 2013. In connection with the issuance of the Series A preferred stock, Crocs 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. As of September 30, 2015 and December 31, 2014, Crocs had accrued dividends of $3.0 million and $3.1 million, respectively, on the condensed consolidated balance sheets, which were paid in cash to holders of the Series A preferred stock on October 1, 2015 and January 2, 2015, respectively.
14. COMMITMENTS AND CONTINGENCIES
Rental Commitments and Contingencies
Crocs rents space for its 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 beginning on the lease inception date. Deferred rent is included in the condensed consolidated balance sheets in Accrued expenses and other current liabilities.
The following table summarizes the composition of rent expense under operating leases for the three and nine months ended September 30, 2015 and 2014:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
(in thousands) |
| ||||||||||
Minimum rentals (1) |
|
$ |
23,323 |
|
$ |
26,629 |
|
$ |
73,181 |
|
$ |
82,307 |
|
Contingent rentals |
|
4,166 |
|
4,952 |
|
12,171 |
|
14,635 |
| ||||
Less: Sublease rentals |
|
(58 |
) |
(261 |
) |
(176 |
) |
(736 |
) | ||||
Total rent expense |
|
$ |
27,431 |
|
$ |
31,320 |
|
$ |
85,176 |
|
$ |
96,206 |
|
(1) Minimum rentals include all lease payments as well as fixed and variable common area maintenance, parking and storage fees, which were approximately $2.3 million during both the three months ended September 30, 2015 and 2014, respectively, and $7.0 million and $7.3 million during the nine months ended September 30, 2015 and 2014, respectively.
Purchase Commitments
As of September 30, 2015 and December 31, 2014, Crocs had firm purchase commitments with certain third-party manufacturers of $147.2 million and $202.3 million, respectively.
15. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION
During 2014, Crocs had four reportable operating segments based on the geographic nature of the Companys operations: Americas, Asia Pacific, Japan and Europe. Crocs Other businesses category aggregates insignificant operating segments that do not meet the reportable segment threshold and includes manufacturing operations located in Mexico, Italy and Asia. The composition of the Companys reportable operating segments is consistent with that used by Crocs chief operating decision maker, (CODM) to evaluate performance and allocate resources.
Subsequent to December 31, 2014, Crocs internal reports reviewed by the CODM began consolidating Japan into the Asia Pacific segment. This change aligned the Companys internal reporting to its new strategic model and management structure, as Japan and Asia Pacific are now managed and analyzed as one operating segment by management and the CODM. Accordingly, Crocs now has three reportable segments for 2015 as well as the Other Businesses category and prior period segment results have been reclassified to reflect this change.
Each of the 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 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.
Segment performance is evaluated based on segment results without allocating corporate expenses, or indirect general, administrative and other expenses. Segment profits or losses include adjustments to eliminate intersegment sales. As such, reconciling items for segment operating income represent unallocated corporate and other expenses as well as intersegment eliminations. The CODM evaluates the performance of Crocs segments based on gross margin and direct operating profit excluding unallocated amounts. The CODM is not regularly provided information on segment assets, nor is such information considered when evaluating the performance of the segments. Additionally, there was no material change in the amounts or methodology of assets allocated to segments, other than the inclusion of assets allocated to the Japan segment now included in the Asia Pacific segment.
The following tables set forth information related to Crocs reportable operating business segments as of and for the three and nine months ended September 30, 2015 and 2014:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
| ||||
|
|
(in thousands) |
| ||||||||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Americas |
|
$ |
124,669 |
|
$ |
127,475 |
|
$ |
373,557 |
|
$ |
386,163 |
|
Asia Pacific |
|
98,879 |
|
113,846 |
|
348,211 |
|
407,442 |
| ||||
Europe |
|
50,122 |
|
60,645 |
|
159,214 |
|
197,538 |
| ||||
Total segment revenues |
|
273,670 |
|
301,966 |
|
880,982 |
|
991,143 |
| ||||
Other businesses |
|
418 |
|
435 |
|
970 |
|
607 |
| ||||
Total consolidated revenues |
|
$ |
274,088 |
|
$ |
302,401 |
|
$ |
881,952 |
|
$ |
991,750 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income: |
|
|
|
|
|
|
|
|
| ||||
Americas |
|
$ |
11,734 |
|
$ |
15,094 |
|
$ |
48,884 |
|
$ |
53,451 |
|
Asia Pacific |
|
178 |
|
13,475 |
|
58,775 |
|
95,383 |
| ||||
Europe |
|
3,834 |
|
9,689 |
|
18,177 |
|
29,254 |
| ||||
Total segment operating income |
|
15,746 |
|
38,258 |
|
125,836 |
|
178,088 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Reconciliation of total segment operating income to income before income taxes: |
|
|
|
|
|
|
|
|
| ||||
Other businesses |
|
(6,549 |
) |
(5,405 |
) |
(18,843 |
) |
(13,750 |
) | ||||
Intersegment eliminations |
|
|
|
15 |
|
|
|
45 |
| ||||
Unallocated corporate and other (1) |
|
(29,927 |
) |
(31,755 |
) |
(113,736 |
) |
(104,537 |
) | ||||
Total consolidated operating income (loss) |
|
(20,730 |
) |
1,113 |
|
(6,743 |
) |
59,846 |
| ||||
Foreign currency transaction loss, net |
|
(2,908 |
) |
(1,290 |
) |
(2,631 |
) |
(4,278 |
) | ||||
Interest income |
|
268 |
|
424 |
|
752 |
|
1,304 |
| ||||
Interest expense |
|
(171 |
) |
(366 |
) |
(650 |
) |
(685 |
) | ||||
Other income (expense), net |
|
405 |
|
217 |
|
(6 |
) |
388 |
| ||||
Income (loss) before income taxes |
|
$ |
(23,136 |
) |
$ |
98 |
|
$ |
(9,278 |
) |
$ |
56,575 |
|
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization: |
|
|
|
|
|
|
|
|
| ||||
Americas |
|
$ |
1,825 |
|
$ |
3,439 |
|
$ |
5,749 |
|
$ |
9,126 |
|
Asia Pacific |
|
1,010 |
|
1,677 |
|
3,351 |
|
5,255 |
| ||||
Europe |
|
443 |
|
1,011 |
|
1,889 |
|
2,825 |
| ||||
Total segment depreciation and amortization |
|
3,278 |
|
6,127 |
|
10,989 |
|
17,206 |
| ||||
Other businesses |
|
1,869 |
|
1,857 |
|
5,919 |
|
5,591 |
| ||||
Unallocated corporate and other (1) |
|
3,765 |
|
2,609 |
|
11,111 |
|
8,547 |
| ||||
Total consolidated depreciation and amortization |
|
$ |
8,912 |
|
$ |
10,593 |
|
$ |
28,019 |
|
$ |
31,344 |
|
(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, restructuring, depreciation and amortization of corporate and other assets not allocated to operating segments.
16. LEGAL PROCEEDINGS
The Company is 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 the final audit report. In that report CBP projects that unpaid duties totaling approximately $12.4 million are due for the period under review and recommends collection of the duties due. Crocs 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. Additionally, on December 12, 2014, Crocs made an offer to settle CBPs potential claims and tendered $3.5 million. At this time, it is not possible to determine how long it will take CBP to evaluate the offer or to predict whether the offer will be accepted. Likewise, if a settlement cannot be reached, 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.
Mexicos Federal Tax Authority (SAT) has audited the Companys records regarding imports and exports during 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. Crocs believes that the proposed penalty amount is unfounded and without merit. With the help of local counsel Crocs filed an appeal by the deadline of March 15, 2013. Crocs has 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 Crocs 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 the Company is not successful on its appeal. On November 27, 2014, the Superior Chamber of the Federal Tax Court ruled in favor of Crocs and annulled the tax assessment and the corresponding penalty. The SAT filed its appeal of the decision in Crocs favor on February 25, 2015. On June 24, 2015, the Circuit Court rejected SAT´s appeal, and thus, confirmed the favorable decision issued to Crocs by the Federal Tax Court. On August 6, 2015, the Circuit Court entered its final written order in favor of Crocs and this matter is now considered closed and the bond commitment has been released.
Crocs is currently subject to an audit by the Brazilian Federal Tax Authorities related to imports of footwear from China between 2010 and 2014. On January 13, 2015, Crocs was notified about the issuance of assessments totaling approximately $3.7 million for the period January 2010 through May 2011. Crocs has disputed these assessments and asserted defenses to the claims. On February 25, 2015, Crocs received additional assessments totaling approximately $8.4 million related to the remainder of the audit period. Crocs has also disputed these assessments and asserted defenses to these claims, which also included requesting an interpretation from the trade authorities of whether certain Crocs footwear models are included in the scope of the application of anti-dumping duties on footwear from China. It is anticipated that this matter will take up to several years to be resolved. It is not possible at this time to predict the outcome of this matter.
On August 8, 2014, a purported class action lawsuit was filed in California State Court against a Crocs subsidiary, Crocs Retail, LLC (Zaydenberg v. Crocs Retail, LLC, Case No. BC554214). The lawsuit alleged various employment law violations related to overtime, meal and break periods, minimum wage, timely payment of wages, wage statements, payroll records and business expenses. Crocs filed an answer on February 6, 2015, denying the allegations and asserting several defenses. On June 3, 2015, a second purported class action lawsuit was filed in California State Court against Crocs Retail, LLC (Christopher S. Duree and Richard Morely v. Crocs, Inc., Case No. BC583875), making substantially the same allegations as in the Zaydenberg lawsuit. The parties attended a mediation on June 26, 2015, and reached a settlement for $1.5 million, which will release the claims in both lawsuits. On September 4, 2015, the Court granted preliminary approval of the settlement and set the final approval hearing for December 14, 2015.
As of September 30, 2015, Crocs estimates 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 $6.7 million in aggregate, of which $5.2 million has been accrued and is reported in the balance sheet in line Accrued expenses and other liabilities.
Although Crocs is subject to other litigation from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, Crocs is not party to any other pending legal proceedings that Crocs believes would reasonably have a material adverse impact on its business, financial position, results of operations or cash flows.
ITEM 2. Managements 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, as well as casual lifestyle footwear that use a range of materials. Our Croslite 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, web stores and kiosks.
Since the initial introduction of our popular 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 are focusing on our core molded footwear heritage, as well as developing innovative new casual lifestyle footwear. By streamlining the product portfolio and reducing non-core product development, we believe that we can realize our strategy of generating a more powerful consumer connection to our brand and products.
The broad appeal of our footwear has allowed us to market our products to a wide range of distribution channels, including family footwear stores, department stores, sporting goods stores and traditional footwear retailers as well as a variety of specialty and independent retail channels and via the internet. We intend to drive cohesive global brand positioning from region to region and year to year to create a clearer and more consistent product portfolio and message. This strategy will be accomplished through developing powerful product stories supported by effective and consistent global marketing campaigns. Finally, we intend to increase our working market spend, a term we define as funds that put marketing messages in front of consumers.
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 can materially affect both revenues and costs as well as the comparability of revenues and costs from period to period as a result of the impact of foreign currency translation adjustments.
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 (GAAP), we present current period adjusted selling, general and administrative expenses, which is a non-GAAP financial measure, within Managements Discussion and Analysis of Financial Condition and Results of Operation (MD&A). 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 MD&A 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 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 non-GAAP basis in communications with the board of directors (the Board), stockholders, analysts and investors concerning our financial performance. We believe that these non-GAAP measures are useful to investors and other users of our condensed consolidated financial statements as an additional tool to evaluate our performance. We believe they also provide a useful baseline for analyzing trends in our operations. Investors should not consider these non-GAAP measures in isolation from, or as a substitute for, financial information prepared in accordance with 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 September 7, 2015, Jeffrey J. Lasher resigned as Senior Vice President - Finance and Chief Financial Officer of Crocs. His resignation was effective October 1, 2015 and he will remain employed to provide transition services to the Company through November 7, 2015. On September 7, 2015, the Company appointed Mike Smith as Interim Chief Financial Officer, effective October 1, 2015.
On November 4, 2015, Carrie Teffner was appointed as Executive Vice President and Chief Financial Officer of the Company, effective December 16, 2015. In connection with her appointment, Ms. Teffner will resign as a member of the Board prior to her start date with the Company. She will serve as the Companys principal financial officer and principal accounting officer. Mike Smith will no longer serve as Interim Chief Financial Officer on her start date.
Financial Highlights
During the three months ended September 30, 2015, revenue declined 9.4% compared to the same period in 2014. The decrease in revenue is due to the net impact of (i) a $26.0 million, or 8.6%, decrease due to foreign currency exchange rate adjustments associated with a strong U.S. Dollar, (ii) a $19.6 million, or 6.5%, increase associated with higher sales volumes, (iii) a $11.6 million, or 3.9%, decrease associated with a lower average sales price, and (iv) a $10.3 million, or 3.4%, decrease associated with store closures.
The following are additional significant developments in our businesses during the three months ended September 30, 2015:
· During the three months ended September 30, 2015, we sold 14.5 million pairs of shoes worldwide, an increase of 8.8% compared to the same period in the prior year.
· During the three months ended September 30, 2015, gross margin was 44.1%, which decreased 718 basis points compared to the same period in the prior year. This is the result of the combined impact of a lower average sales price and the negative impact of foreign currency fluctuations. The average sales price decline is related to additional discounts provided, especially on discontinued products and styles.
· Selling, general and administrative (SG&A) expenses decreased $8.6 million, or 6.0%, during the three months ended September 30, 2015 compared to the same period in 2014. This change was driven primarily by a net impact of a $13.7 million increase in bad debt expense, largely associated with our Asia Pacific operations relating to China, which was more than offset by an $11.2 million decrease related to foreign currency translation, a $6.4 million decrease associated with store closures, and a $4.7 million decrease in other administrative expenses.
· During the three months ended September 30, 2015, our bad debt expense was $19.0 million compared to $5.3 million in the same period in the prior year. Of this amount, our China operations within our Asia Pacific segment accounted for $18.9 million of our bad debt expense for the three months ended September 30, 2015 and $3.3 million in the same period in the prior year. The decline in collections is associated with deteriorating macro-economic conditions in China resulting in declining customer demand and deteriorating working capital position of our distributors.
· During the three months ended September 30, 2015, we had continued progress on our strategic objectives announced in 2014. We incurred $1.0 million in restructuring charges as a result of our strategic plans for long-term improvement and growth of the business. These charges primarily related to severance costs, lease termination and other exit related costs. We also incurred $0.7 million related to the launch of our enterprise resource planning (ERP) system.
· During the three months ended September 30, 2015, we incurred $5.5 million in retail asset impairment charges related to certain underperforming retail locations, primarily in our Americas segment, that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores assets over their remaining economic life.
· We repurchased approximately 2.3 million shares at an average price of $14.50 per share for a total value of $33.1 million, excluding related commission charges. As of September 30, 2015, we have remaining repurchase authorizations for up to $128.6 million.
Future Outlook
During 2014, we announced strategic plans for long-term improvement and growth of the business. These plans comprised four key initiatives including (1) streamlining the global product and marketing portfolio, (2) reducing direct in