Deckers Outdoor Corp: Form 10-Q for the period ended Dec 31, 2017

The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K for the fiscal year ended March 31, 2017, filed with the Securities and Exchange Commission (SEC) on May 30, 2017 (2017 Annual Report).

This section contains forward-looking statements that are based on our current expectations and reflect our plans, estimates, and anticipated future financial performance. These statements involve numerous risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those set forth in the sections entitled “Risk Factors” in Part II, Item 1A and “Cautionary Note Regarding Forward-Looking Statements” of this Quarterly Report on Form 10-Q.

References to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries.

UGG® (UGG), Teva® (Teva), Sanuk® (Sanuk), Hoka One One® (Hoka), Koolaburra® by UGG (Koolaburra), Ahnu® (Ahnu) and UGGpureTM are some of our trademarks. Other trademarks or trade names appearing elsewhere in this section are the property of their respective owners. Solely for convenience, the trademarks and trade names herein are referred to without the ® and™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for store and country counts, defined periods, ratios, and share data.

Overview

We are a global leader in designing, marketing, and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We market our products primarily under five proprietary brands: UGG, Koolaburra, Hoka, Teva, and Sanuk.

We sell our products through quality domestic and international retailers, international distributors and directly to our end-user consumers both domestically and internationally through our Direct-to-Consumer (DTC) business, which is comprised of our retail stores and E-Commerce websites. Independent third parties manufacture all of our products.

Recent Developments

Restructuring Plan. In February 2016, we announced the implementation of a multi-year restructuring plan which is designed to realign our brands, optimize our retail store fleet, and consolidate our management and operations.

As part of this restructuring plan, and in furtherance of our Omni-Channel strategy, we realigned our brands across two groups: Fashion Lifestyle and Performance Lifestyle. The Fashion Lifestyle group includes the UGG and Koolaburra brands. The Performance Lifestyle group includes the Teva, Sanuk and Hoka brands.

During calendar year 2017, we began to leverage elements, including particular styles, of the Ahnu brand under the Teva brand. Effective as of the beginning of fiscal year 2018, operations for the Ahnu brand were discontinued and all styles are sold under the Teva brand. Results for the former Ahnu brand are now reported in the Teva brand wholesale reportable operating segment instead of the other brands wholesale reportable operating segment, as presented in the comparative prior period.

We believe our retail stores remain an important component of our Omni-Channel strategy; however, in light of the recent and continuing changes in the retail environment, we also believe it is prudent to further reduce our global brick and mortar footprint. We expect to continue to reduce our retail footprint. Accordingly, we anticipate generating future cost savings associated with changes in our retail presence. We are continually evolving our retail store strategy to align with our long-term objectives, and we currently believe that the optimal target worldwide retail store count is approximately 125 owned stores. We anticipate closing stores or converting stores to partner retail stores in our wholesale channel to reach our target store count. The majority of our remaining store closures are expected to occur as store leases expire rather than incurring potentially significant lease termination fees. However, the actual number of owned stores as of any particular date is subject to uncertainty as a result of numerous factors, including, but not limited to, the actual and projected costs associated with closing or converting stores, the actual and estimated results of operations of each store and our DTC business generally, and continuing changes in consumer buying behaviors and the retail environment.

In connection with our restructuring plan, we have closed 27 retail stores as of December 31, 2017, and consolidated our brand operations and corporate headquarters. We have incurred total restructuring charges of $55,324 through December 31, 2017, with $149 and $1,667 of restructuring charges recorded in selling, general and administrative (SG&A) expense in the condensed consolidated statements of comprehensive income during the three and nine months ended December 31, 2017, respectively. We currently do not anticipate incurring material restructuring charges in future periods, though reduction of our owned retail stores remains a focus.

As a result of the implementation of this restructuring plan, we expect to realize an annualized SG&A expense reduction in the condensed consolidated statements of comprehensive income totaling approximately $85,000 by March 31, 2020. The SG&A savings are expected to be primarily derived from reductions in payroll and related benefits, depreciation and amortization, rent and occupancy costs for retail stores and offices, as well as reductions in other operating costs.

As of December 31, 2017, we realized approximately $45,000 of annualized SG&A expense savings out of the anticipated $85,000 of savings from our restructuring plan. The realized SG&A expense savings by reportable operating segment is set forth as follows:

We expect to realize approximately $40,000 of additional annualized SG&A expense reductions from our restructuring plan. The additional SG&A savings are expected to be primarily derived from further reductions in payroll and related benefits, depreciation and amortization, rent and occupancy expense, and other operating costs related to the termination of retail store leases and the conversion of certain of our foreign owned retail stores to partner retail stores. These additional savings are expected to primarily impact the DTC reportable operating segment and to be fully realized by fiscal year end 2020. However, both the amount and timing of the actual savings we may achieve as a result of the restructuring plan are uncertain based upon numerous factors, including, but not limited to, the timing of lease terminations and store closures, the actual costs associated with closing or converting stores and the timing of the realization of those costs, and the actual and estimated results of operations of each store.

Refer to Note 2, "Restructuring," of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding our restructuring plan.

Operating Profit Improvement Plan. In addition to the approximate $85,000 of gross annualized SG&A expense savings expected from the implementation of our restructuring plan, we also expect that our other transformation initiatives announced in February 2017 will contribute approximately $65,000 of cost of sales and additional SG&A expense improvements, for a total anticipated annual gross cost savings of approximately $150,000. Cost of sales improvements are expected to result from reducing product development cycle times, optimizing material yields, consolidating our factory base, and continuing to move product manufacturing outside of China. Further reductions in SG&A expenses are expected to result from lower corporate infrastructure costs, process improvement efficiencies, and reduced unallocated indirect spend.

The cost of sales improvements are expected to impact each of the reportable operating segments (excluding unallocated overhead costs) in an amount that is generally proportionate with the net sales generated by that reportable operating segment as a percentage of our total net sales. We have achieved approximately 80% of the expected cost of sales improvements as of December 31, 2017. The remaining annualized costs of sales and additional SG&A expense improvements are expected to be realized by fiscal year end 2020.

We expect that the approximately $150,000 of annual gross cost savings will help contribute approximately $100,000 of net annualized operating profit improvement (after reinvestment in marketing and other growth driving initiatives) by fiscal year end 2020. However, both the amount and timing of the actual operating profit improvements we may achieve as a result of these transformation initiatives are uncertain based upon numerous factors, including, but not limited to, the timing and success of certain production and inventory control improvements, the costs associated with improving and transitioning manufacturing operations, and the net impact of certain costs savings initiatives on our operating profit.

Stock Repurchase Program. During the three months ended December 31, 2017, our Board of Directors authorized a new $335,000 stock repurchase program. Upon approval of the new repurchase program, combined with the $65,294 remaining approved amount from our January 2015 stock repurchase program, we had the authority to repurchase up to an aggregate total of $400,294 of our common stock. As of December 31, 2017, the aggregate remaining approved amount was $375,607. Our repurchase programs do not obligate us to acquire any particular amount of common stock and may be suspended at any time at our discretion.

Cash Repatriation. As of December 31, 2017, we had approximately $399,137 of cash and cash equivalents domiciled outside the United States (US). As a result of the recently enacted US H.R.1 on December 22, 2017, also known as the Tax Cuts and Jobs Act (referred to herein as the "Tax Reform Act"), our related foreign earnings are now subject to US federal income tax in transition to a territorial tax regime. If these cash and cash equivalents are repatriated, the amount could be subject to additional foreign withholding and state income taxes. In response to the new regulation, management is authorized to repatriate up to $250,000 of cash and cash equivalents before the end of the fiscal year ending March 31, 2018, with the remainder of available cash and cash equivalents currently expected to be used for ongoing foreign operations. Concurrently, we are re-evaluating our capital allocation strategy and considering further opportunities to put this cash to use in a way that will profitably grow our business and drive stockholder value, including utilizing our current stock repurchase programs. Our cash repatriation strategy and tax related provisional estimates may be impacted by a number of additional considerations, including, but not limited to, the state level income tax impacts of the Tax Reform Act, clarifications of or changes to the Tax Reform Act including the issuance of final regulations, additional accounting or regulatory guidance, our ongoing analysis which may result in changes to various assumptions underlying the estimates, and our actual earnings for the fiscal year ending March 31, 2018. For further details regarding the impacts of the Tax Reform Act during the quarter ended December 31, 2017, refer to Note 5, "Income Taxes," of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Trends Impacting our Overall Business

Our business, and the industry in which we operate, continues to be impacted by several important trends:

• Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. Even though we continue to expand our product lines and create more year-round styles for our brands, the effect of favorable or unfavorable weather on our aggregate sales and operating results may continue to be significant. We believe our net sales were positively impacted by weather conditions during the quarter ended December 31, 2017, especially in the US northeast.
• We believe there has been a meaningful shift in the way consumers shop for products and make purchasing decisions. In particular, brick and mortar retail stores are experiencing significant and prolonged decreases in consumer traffic as customers continue to migrate to shopping online. This shift is impacting the performance of both our DTC business and of our wholesale customers.
• In light of the shift in consumer shopping behavior, we are seeking to optimize our brick and mortar retail footprint. In pursuing store closures, we have been impacted by costs to exit lease agreements, employee termination costs, retail store fixed asset impairments, and other closure costs. We expect this trend to continue as we further evaluate and optimize our retail fleet. In some cases, we may choose to keep retail stores open until the lease term expires rather than incurring potentially significant lease termination fees.
• We expect that our E-Commerce business will be a driver of long-term growth, although we expect that the year-over-year growth rate will decline over time as the size of our E-Commerce business increases.
• We believe that the continued enhancement of our Omni-Channel capabilities enable us to increasingly engage existing and prospective consumers in a more connected environment and expose them to our brands. In particular, we are working towards a segmented channel and product distribution

approach with the goal of continuing to reduce the number of distribution points within the domestic markets to elevate distribution among select customers, and enhancing our distribution footprint within the European and Asian markets, including through the use of partner retail stores.

• We believe consumers are buying product closer to the particular wearing occasion (buy now, wear now), which tends to shorten the purchasing windows for weather-dependent product. Not only does this trend impact our DTC business, we believe it is also impacting the purchasing behavior of our large wholesale customers. In particular, these customers appear to be shortening their purchasing windows as a way to address the evolving behavior of retail consumers and to manage their own product inventory.
• Foreign currency exchange rate fluctuations have significantly increased the value of the US dollar compared to most major foreign currencies over the past couple of years. While we seek to hedge some of the risks associated with foreign currency exchange rate fluctuations, these changes are largely outside of our control. We expect these changes will continue to impact the demand for our products and our operating results.

Segment Overview

UGG Brand

The UGG brand has been one of the most iconic and recognized brands in the global footwear industry which highlights our successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world, the UGG brand has proven to be a highly resilient line of premium footwear with expanded product offerings and a growing global audience that attracts women, men, and children.

We believe demand for UGG brand products will continue to be driven by the following:

• High consumer brand loyalty due to delivering quality and luxuriously comfortable UGG footwear.
• Evolution of our Classics business through the introduction of products such as the Classic Slim, the Classic Luxe, the Classic Street, and the Classic II.
• Diversification of our UGG product lines, including women's spring and summer, men's, and lifestyle offerings. We believe that the evolution of the UGG brand and our strategy of product diversification will help decrease our reliance on sheepskin and mitigate the impacts of seasonality.
• Continued enhancement of our Omni-Channel and digital capabilities to enable us to better engage existing and prospective consumers and expose them to our brands.

Teva Brand

For over 30 years, the Teva brand has fueled the expression of freedom. The Teva brand pioneered the sport sandal category in 1984 and now is a leader within the sport sandal and modern outdoor lifestyle categories.

Sanuk Brand

The Sanuk brand was founded almost 20 years ago, and from its origins in the Southern California surf culture, has emerged into a brand with an expanding fan base and presence in the relaxed casual shoe and sandal categories. The Sanuk brand’s use of unexpected materials and unconventional constructions, combined with its fun and playful branding, has contributed to the brand’s identity and growth since its inception and led to successful products such as the Yoga Mat sandal collection and the SIDEWALK SURFERS.

Other Brands

Our other brands consist of the Hoka and Koolaburra brands. The Hoka brand is a line of running footwear that offers maximal cushioning with minimal weight and is designed for runners of all capacities. The Hoka brand is quickly becoming a top brand in the domestic run specialty channel and has received strong word-of-mouth marketing that has fueled both domestic and international sales growth. The Koolaburra brand is a line of fashion casual footwear using sheepskin and other plush materials.

Direct-to-Consumer

Our DTC business is comprised of our retail stores and E-Commerce websites. As a result of our evolving Omni-Channel strategy, we believe that our retail stores and websites are intertwined and dependent on one another. We believe that many consumers interact with both our brick and mortar stores and our websites before making purchase decisions. In addition, in December 2016 we introduced UGG Closet, our limited E-Commerce outlet channel offering.

Our retail stores are predominantly UGG brand concept stores and UGG brand outlet stores. Through our outlet stores, we sell some of our discontinued styles from prior seasons, full price in-line products, as well as products made specifically for the outlet stores. At December 31, 2017, we had a total of 168 retail stores worldwide, which includes 101 concept stores and 67 outlet stores. During the nine months ended December 31, 2017, we opened six concept and four outlet stores, closed one concept store, and converted one owned outlet store to a partner retail store. Included in the total count of retail stores worldwide are concession stores, which are concept stores that are operated by us within a department or other store, which we lease from the store owner by paying a percentage of concession store sales. In certain countries, such as China, we rely on partner retail stores, which are branded stores that are wholly-owned and operated by third parties and not included in the total count of retail stores worldwide. Upon conversion to, or the opening of, partner retail stores, each of these stores become wholly-owned and operated by third parties. Sales made through partner retail stores are included in our UGG brand wholesale reportable operating segment.

Our E-Commerce business provides us with an opportunity to communicate a consistent brand message to customers that is in line with our brands' promises, drives awareness of key brand initiatives, offers targeted information to specific consumer demographics, and drives consumers to our retail stores. At December 31, 2017, we operate our E-Commerce business through an aggregate of 22 Company-owned websites in nine different countries.

Use of Non-GAAP Measures

In order to provide a framework for assessing how our underlying businesses performed during the relevant periods, excluding the effect of foreign currency exchange rate fluctuations, throughout this Quarterly Report on Form 10-Q we provide certain financial information on a “constant currency basis,” which is in addition to the financial measures calculated and presented in accordance with accounting principles generally accepted in the United States (US GAAP). In order to calculate our constant currency information, we calculate the current period financial information using the foreign currency exchange rates that were in effect during the previous comparable period, excluding the effects of foreign currency exchange rate hedges and re-measurements. We believe that evaluating certain financial and operating measures on a constant currency basis is important as it facilitates comparison of our current financial performance to our historical financial performance, excluding the impact of foreign currency exchange rate fluctuations that are not indicative of our core operating results and are largely outside of our control. Constant currency measures should not be considered in isolation as an alternative to US dollar measures that reflect current period exchange rates or to other financial measures presented in accordance with US GAAP.

We report comparable DTC sales on a constant currency basis for combined retail stores and E-Commerce businesses that were open throughout the reporting period in both the current year and prior year. There may be variations in the way that we calculate comparable DTC sales as compared to some of our competitors and other retailers. As a result, information included in this Quarterly Report on Form 10-Q regarding our comparable DTC sales may not be directly comparable to similar data made available by our competitors or other retailers.

Results of Operations

Three Months Ended December 31, 2017 Compared to Three Months Ended December 31, 2016

The following table summarizes our results of operations:

Net Sales. The following table summarizes our net sales by location and our net sales by brand and channel:

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The increase in net sales was largely due to higher UGG and other brand wholesale and overall DTC sales. During the three months ended December 31, 2017, we experienced an increase in pairs sold to 10,800 compared to 10,200 during the prior period. On a constant currency basis, net sales increased 6.3% during the three months ended December 31, 2017 compared to the prior period.

Wholesale net sales of our UGG brand increased primarily due to a higher volume of pairs sold as well as a slight increase in weighted-average selling price per pair (WASPP). The increase in volume of pairs sold was approximately $21,000, driven by higher international sales. The increase in WASPP was approximately $1,000, driven by fewer closeout sales. Further, we experienced approximately $2,000 in additional apparel and home goods sales compared to the prior period. On a constant currency basis, wholesale net sales of our UGG brand increased 7.5% during the three months ended December 31, 2017 compared to the prior period.

Wholesale net sales of our Teva brand increased primarily due to a higher WASPP of approximately $3,000, primarily attributable to changes in product mix, as well as an increase in volume of pairs sold of approximately $1,000, driven by higher international distributor business sales.

Wholesale net sales of our Sanuk brand remained relatively flat due to an increase in WASPP, offset by a lower volume of pairs sold.

Wholesale net sales of our other brands increased primarily due to a higher volume of pairs sold, slightly offset by a decrease in WASPP. The increase in the volume of pairs sold was approximately $15,000, primarily driven by the growth of the Hoka brand. The decrease in WASPP was approximately $2,000, primarily attributable to changes in channel mix due to higher Hoka distributor business sales as well as changes in product mix.

DTC net sales increased 2.7% compared to the prior period, largely due to growth in our E-Commerce business. The increase in total DTC net sales was primarily due to a higher volume of pairs sold of approximately $21,000, partially offset by a decrease in WASPP. The decrease in WASPP of approximately $16,000 was due to higher discounted sales through UGG Closet, our limited E-Commerce outlet channel offering, as well as changes in retail store product mix. Further, we experienced an increase in UGG brand apparel and home good sales of approximately $5,000 compared to the prior period. On a constant currency basis, DTC net sales increased 1.4% during the three months ended December 31, 2017 compared to the prior period.

Comparable DTC net sales for the 13 weeks ended December 31, 2017 increased 1.7% on a constant currency basis compared to the same period in fiscal year 2017. The increase in comparable DTC net sales was due to growth in E-Commerce, partially offset by a decline in sales at our retail stores.

International sales, which are included in the reportable operating segment sales presented above, increased by 14.0%. International sales represented 38.1% and 35.6% of total net sales for the three months ended December 31, 2017 and 2016, respectively. The increase in international sales was primarily due to higher sales for the UGG and Hoka brands in Europe and Asia. On a constant currency basis, international sales increased 10.1% during the three months ended December 31, 2017 compared to the prior period.

Gross Profit. Gross margin was 52.2% for the three months ended December 31, 2017 compared to 50.5% for the three months ended December 31, 2016. The increase in gross margin was primarily driven by lower input costs as we execute our supply chain initiatives through our operating profit improvement plan, a higher proportion of full-priced selling, as well as favorable foreign currency fluctuations compared to the prior period.

Selling, General and Administrative Expenses. The decrease in SG&A expenses during the three months ended December 31, 2017 compared to the three months ended December 31, 2016 was primarily due to:

• significantly decreased impairment and depreciation costs of approximately $124,000, including the recording of an impairment charge for the Sanuk brand wholesale reportable operating segment goodwill and patent in the amount of approximately $118,000, as well as retail store impairments and closure-related expenses, incurred in the prior period;
• increased payroll costs of approximately $20,500, primarily due to higher performance-based compensation and long-term incentive compensation costs of approximately $19,000, as well as costs for our in-house converted sales team;
• increased other operating expenses of approximately $7,500, primarily driven by higher professional and consulting service costs associated with our proxy contest and related legal matters incurred during the quarter;
• increased advertising, promotion, and other operating expenses of approximately $6,600, primarily driven by the strategic realignment of UGG marketing expenses with peak sales periods;
• decreased commission expenses of approximately $5,700, largely driven by the conversion of sales agent agreements to an in-house sales team in the prior period;
• increased warehouse related expenses of approximately $3,000, primarily due to new North American third party logistic provider costs and higher warehouse costs in Europe in the current period;
• decreased foreign currency losses of approximately $3,000 due to favorable exchange rates for European and Asian currencies, partially offset by higher realized losses on hedging instruments on foreign currency exchange rate forward contracts compared to the prior period;
• decreased bad debt expense of approximately $2,800, primarily attributable to the release of reserves for prior period customer past due accounts; and
• decreased rent and occupancy expenses of approximately $1,700, primarily due to fewer retail stores and related costs, including restructuring charges for lease termination costs incurred in the prior period.

Income from Operations. The following table summarizes operating income (loss) from operations by reportable operating segment with a reconciliation to the condensed consolidated statements of comprehensive income:

The increase in total income from operations primarily resulted from higher sales at higher gross margins, as well as lower overall SG&A expenses, primarily driven by approximately $124,000 of impairment and restructuring charges incurred in the prior period, as described above.

The increase in income from operations of UGG brand wholesale was due to higher sales at higher gross margins.

The increase in income from operations of Teva brand wholesale was due to higher sales at higher gross margins.

The increase in income from operations of Sanuk brand wholesale was primarily due to impairment charges for goodwill and long-lived assets incurred in the prior period, as well as sales at higher gross margins in the current period.

The increase in income from operations of other brands wholesale was due to higher Hoka brand sales, partially offset by higher SG&A expenses, primarily driven by higher variable selling and marketing expenses.

The increase in income from operations of DTC was primarily due to higher sales in our E-Commerce business at slightly higher gross margins as well as lower SG&A expenses, primarily driven by lower restructuring charges for retail stores compared to the prior period.

The increase in unallocated overhead costs was primarily due to higher performance-based compensation, professional and consulting services costs, as well as warehouse and third party logistic provider costs, partially offset by favorable fluctuations in European and Asian exchange rates for various foreign currencies. The increase in performance-based compensation reflects management's determination that it is probable that the performance criteria associated with certain compensatory awards will be achieved as compared to the prior period. The increase in professional and consulting service costs is driven by higher costs associated with our proxy contest and related legal matters compared to the prior period. The increase in warehouse costs, compared to the prior period, was driven by the re-allocation of European warehouse costs from the wholesale channel to unallocated overhead costs based on a determination that the warehouses support multiple reportable operating segments as well as a new North American third party logistics provider.

Refer to Note 12, "Reportable Operating Segments," of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of our reportable operating segments.

Other Expense, Net. The decrease in total other expense, net, was primarily due to a decrease in interest expense as a result of lower average balances outstanding under our revolving credit facilities during the three months ended December 31, 2017 compared to the prior period.

Income Taxes. Income taxes for interim periods are computed using an estimated effective tax rate that is expected to be applicable for the full fiscal year. The estimated tax rate is subject to ongoing review and evaluation by management and can vary from quarter to quarter. The income tax expense and the effective income tax rates were as follows:

The change in the effective tax rate was primarily due to the enactment of the Tax Reform Act. Of the total income tax expense recorded during the three months ended December 31, 2017, approximately $13,400 was recorded for the re-measurement of our deferred tax assets in the condensed consolidated statements of comprehensive income. We also recorded provisional estimates for deemed repatriation of foreign earnings, including discrete tax impacts of approximately $52,800 as well as an impact through the consolidated annual effective tax rate of $8,639. These provisional estimates were offset by a benefit of $2,819 recorded through the consolidated annual effective tax rate due to the reduction of the US federal income tax rate from 35% to 31.5%. For further details regarding the impacts of the Tax Reform Act during the three months ended December 31, 2017, refer to Note 5, "Income Taxes," of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Refer to the section above entitled "Recent Developments" for further information regarding our cash repatriation strategy.

Our effective tax rate was further impacted by the change in the jurisdictional mix of expected worldwide income before income taxes in the current period, as well as the discrete tax impact of the goodwill impairment charges recorded during the quarter ended December 31, 2016. The change in jurisdictional mix was primarily related to larger improvements in foreign income before income taxes relative to worldwide income before income taxes compared to the prior period.

Foreign income before income taxes was $95,053 and $44,887 and worldwide income before income taxes was $193,053 and $50,887 during the three months ended December 31, 2017 and 2016, respectively. The increase in foreign income before income taxes was primarily due to an increase in foreign sales and the reduction of foreign operating expenses during the three months ended December 31, 2017 compared to the prior period. The decrease in foreign income before income taxes as a percentage of worldwide income before taxes was primarily due to the Sanuk brand goodwill and patent impairment charges recorded during the prior period as well as lower domestic operating expenses during the three months ended December 31, 2017 compared to the prior period.

Net Income. Our net income increased primarily due to higher sales and gross margins, as well as lower SG&A expenses primarily driven by lower impairment and restructuring charges, described above, partially offset by higher income tax expense driven by the enactment of the Tax Reform Act. Our net income per share increased due to higher net income and lower weighted average common shares outstanding.

Other Comprehensive Income. Other comprehensive income increased due to lower unrealized hedging instrument losses on foreign currency exchange rate forward contracts as well as higher foreign currency translation gains driven by changes in our net asset position and European and Asian exchange rates during the three months ended December 31, 2017 compared to the prior period.

Results of Operations

Nine Months Ended December 31, 2017 Compared to Nine Months Ended December 31, 2016

The following table summarizes our results of operations:

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Net Sales. The following table summarizes our net sales by location and our net sales by brand and channel:

The increase in net sales was primarily due to higher UGG, Teva and other brands wholesale and overall DTC sales, partially offset by lower Sanuk brand wholesale sales. During the nine months ended December 31, 2017, we experienced an increase in pairs sold to 23,800 compared to 22,900 during the prior period. On a constant currency basis, net sales increased 5.9% during the nine months ended December 31, 2017 compared to the prior period.

Wholesale net sales of our UGG brand increased primarily due to a higher volume of pairs sold, offset by a decrease in WASPP. The increase in the volume of pairs sold was approximately $38,000, mostly attributable to higher international sales. The decrease in WASPP was approximately $17,000, primarily attributable to changes in product mix, partially offset by fewer domestic closeout sales. Further, we experienced approximately $4,000 in additional apparel and home goods sales compared to the prior period. On a constant currency basis, wholesale net sales of our UGG brand increased 4.0% during the nine months ended December 31, 2017 compared to the prior period.

Wholesale net sales of our Teva brand increased due to higher WASPP of approximately $9,000 and an increase in volume of pairs sold of approximately $2,000, mostly due to changes in product mix and fewer closeout sales.

Wholesale net sales of our Sanuk brand decreased primarily due to a lower volume of pairs sold, partially offset by an increase in WASPP. The decrease in the volume of pairs sold was approximately $7,000, mostly due to a reduction in international distribution as well as fewer domestic closeout sales. The increase in WASPP was approximately $4,000, primarily attributable to changes in product mix as well as fewer domestic closeout sales at higher prices.

Wholesale net sales of our other brands increased primarily due to a higher volume of pairs sold, slightly offset by a decrease in WASPP. The increase in the volume of pairs sold was approximately $32,000, primarily driven by the growth of the Hoka brand. The decrease in WASPP was approximately $5,000, mostly attributable to changes in channel mix due to higher Hoka distributor business sales as well as changes in product mix.

DTC net sales increased 4.3% compared to the prior period, largely due to growth in our E-Commerce business. The increase in total DTC net sales was primarily due to a higher volume of pairs sold of approximately $44,000, partially offset by a decrease in WASPP of approximately $30,000. The decrease in WASPP was due to higher discounted sales through UGG Closet, our limited E-Commerce outlet channel offering, as well as changes in product mix in our retail stores. Further, we experienced an increase in UGG brand apparel and home good sales of approximately $8,000 compared to the prior period. On a constant currency basis, DTC net sales increased 3.7% during the nine months ended December 31, 2017 compared to the prior period.

Comparable DTC net sales for the 39 weeks ended December 31, 2017 increased 3.9% on a constant currency basis compared to the same period in fiscal year 2017. The increase in comparable DTC net sales was primarily due to growth in E-Commerce, partially offset by a decline in sales at our retail stores.

International sales, which are included in the reportable operating segment sales presented above, increased by 13.4%. International sales represented 38.4% and 35.9% of worldwide net sales for the nine months ended December 31, 2017 and 2016, respectively. The increase in international sales was primarily due to higher sales for the UGG and Hoka brands in Europe and Asia. On a constant currency basis, international sales increased 11.4% during the nine months ended December 31, 2017 compared to the prior period.

Gross Profit. Gross margin was 49.2% for the nine months ended December 31, 2017 compared to 47.6% for the nine months ended December 31, 2016. The increase in gross margin was primarily driven by lower input costs as we execute our supply chain initiatives through our operating profit improvement plan as well as a higher proportion of full-priced selling compared to the prior period.

Selling, General and Administrative Expenses. The decrease in SG&A expenses during the nine months ended December 31, 2017 compared to the nine months ended December 31, 2016 was primarily due to:

• significantly decreased impairment and depreciation costs of approximately $125,000, including the recording of an impairment charge for the Sanuk brand wholesale reportable operating segment goodwill and patent in the amount of approximately $118,000, as well as retail store impairments and closure related expenses, incurred in the prior period;
• increased payroll costs of approximately $26,000, primarily due to higher performance-based compensation and long-term incentive compensation costs of approximately $21,000, as well as costs for our in-house converted sales team;
• decreased commission expenses of approximately $11,900, largely driven by the conversion of sales agent agreements to an in-house sales team in the prior period;
• increased professional and consulting costs of approximately $7,900, primarily driven by costs associated with our proxy contest and related legal matters incurred during the current period;
• decreased foreign currency losses of approximately $4,900 due to favorable exchange rates for European and Asian currencies, partially offset by higher realized losses on hedging instruments on foreign currency exchange rate forward contracts compared to the prior period;
• increased warehouse related expenses of approximately $4,400 due to new North American third party logistics provider costs and higher warehouse costs in Asia in the current period;
• decreased other operating expenses of approximately $4,400, primarily driven by lower general supply and overhead expenses primarily driven by cost savings initiatives compared to the prior period;
• decreased rent and occupancy expenses of approximately $4,100, primarily due to fewer retail stores and related costs, including restructuring charges for lease termination costs incurred in the prior period;
• increased bad debt expense of approximately $1,200, primarily attributable to the recent payment history on an unsettled customer account in the current period; and
• decreased advertising and promotion and other operating expenses of approximately $1,100, primarily driven by the timing of expenses compared to the prior period as well as cost savings initiatives.

Income from Operations. The following table summarizes operating income from operations by reportable operating segment with a reconciliation to the condensed consolidated statements of comprehensive income:

The increase in total income from operations primarily resulted from higher sales at higher gross margins, as well as lower overall SG&A expenses, primarily driven by approximately $125,000 of impairment and restructuring charges incurred in the prior period, as described above.

The increase in income from operations of UGG brand wholesale was due to higher sales at higher gross margins as well as lower SG&A expenses, primarily driven by lower selling and marketing costs.

The increase in income from operations of Teva brand wholesale was due to higher sales at higher gross margins.

The increase in income from operations of Sanuk brand wholesale was primarily due to impairment charges for goodwill and long-lived assets incurred in the prior period as well as sales at higher gross margins.

The increase in income from operations of other brands wholesale was primarily due to higher Hoka brand sales, partially offset by higher SG&A expenses driven by higher selling and marketing costs.

The increase in income from operations of DTC was primarily due to higher sales in our E-Commerce business at higher gross margins as well as lower overall SG&A expenses driven by lower restructuring charges for retail stores compared to the prior period.

The increase in unallocated overhead costs was primarily due to higher performance-based compensation, professional and consulting service costs, as well as warehouse and third party logistic provider costs, partially offset by favorable fluctuations in European and Asian exchange rates for various foreign currencies. The increase in performance-based compensation reflects management's determination that it is probable that the performance criteria associated with certain compensatory awards will be achieved as compared to the prior period. The increase in professional and consulting service costs is driven by higher costs associated with our proxy contest and related legal matters compared to the prior period. The increase in warehouse costs, compared to the prior period, was driven by the re-allocation of European warehouse costs from the wholesale channel to unallocated overhead costs based on a determination that the warehouses support multiple reportable operating segments as well as a new North American third party logistics provider.

Refer to Note 12, "Reportable Operating Segments," of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of our reportable operating segments.

Other Expense, Net. The decrease in total other expense, net, was primarily due to a decrease in interest expense as a result of lower average balances outstanding under our revolving credit facilities, as well as higher interest income on higher average cash balances during the nine months ended December 31, 2017 compared to the prior period.

Income Taxes. Income taxes for interim periods are computed using an estimated effective tax rate that is expected to be applicable for the full fiscal year. The estimated tax rate is subject to ongoing review and evaluation by management and can vary from quarter to quarter. The income tax expense and the effective income tax rates were as follows:

The change in the effective tax rate was primarily due to the enactment of the Tax Reform Act. Of the total income tax expense recorded during the nine months ended December 31, 2017, approximately $13,400 was recorded for the re-measurement of our deferred tax assets in the condensed consolidated statements of comprehensive income. We also recorded provisional estimates for deemed repatriation of foreign earnings, including discrete tax impacts of approximately $52,800 as well as an impact through the consolidated annual effective tax rate of $8,639. These provisional estimates were offset by a benefit of $2,819 recorded through the consolidated annual effective tax rate due to the reduction of the US federal income tax rate from 35% to 31.5%. For further details regarding the impacts of the Tax Reform Act during the nine months ended December 31, 2017, refer to Note 5, "Income Taxes," of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Refer to the section above entitled "Recent Developments" for further information regarding our cash repatriation strategy.

Our effective tax rate was further impacted by the change in the jurisdictional mix of expected worldwide income before income taxes in the current period, as well as the discrete tax impact of the goodwill impairment charges recorded during the quarter ended December 31, 2016. The change in jurisdictional mix was primarily related to larger improvements in foreign income before income taxes relative to worldwide income before income taxes compared to the prior period.

Foreign income before income taxes was $133,826 and $44,153 and worldwide income before income taxes was $202,787 and $24,478 during the nine months ended December 31, 2017 and 2016, respectively. The increase in foreign income before income taxes was primarily due to an increase in foreign sales and lower foreign operating expenses during the nine months ended December 31, 2017 compared to the prior period. The decrease in foreign income before income taxes as a percentage of worldwide income before taxes was primarily due to the Sanuk brand goodwill and patent impairment charges recorded during the nine months ended December 31, 2016 in addition to improvements in domestic operating expenses during the nine months ended December 31, 2017.

Net Income. Our net income increased primarily due to higher sales and gross margins as well as lower SG&A expenses primarily driven by lower impairment and restructuring charges, described above, partially offset by higher income tax expense driven by the enactment of the Tax Reform Act. Our net income per share increased due to higher net income and lower weighted average common shares outstanding.

Other Comprehensive Income. Other comprehensive income increased due to higher foreign currency translation gains driven by changes in our net asset position and in European and Asian exchange rates, partially offset by higher unrealized hedging losses on foreign currency exchange rate forward contracts during the nine months ended December 31, 2017 compared to the prior period.

Liquidity and Capital Resources

Liquidity

We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash generated from operations, and the borrowing capacity available under our revolving credit facilities, as needed.

Our cash flow cycle includes the purchase of, or deposits for, raw materials, the purchase of inventories, the subsequent sale of the inventories, and the eventual collection of the resulting accounts receivable. As a result, our working capital requirements begin when we purchase, or make deposits on, raw materials and inventories and continue until we ultimately collect the resulting receivables. The seasonality of our UGG brand business requires us to build fall and winter inventories in the quarters ending June 30th and September 30th to support sales for the UGG brand’s major selling seasons, which historically occur during the quarters ending September 30th and December 31st; whereas the Teva and Sanuk brands build inventory levels beginning in the quarters ending December 31st and March 31st in anticipation of the spring selling season that occurs in the quarters ending March 31st and June 30th. Given the seasonality of our business, our working capital requirements fluctuate significantly throughout the year. The cash required to fund these working capital fluctuations has historically been provided using our cash balances, cash from ongoing operating activities and borrowings under our credit agreements.

We believe that our cash and cash equivalents balances, cash generated from operations, and available borrowings under our revolving credit facilities, as governed by our Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, National Association (as amended, Domestic Credit Facility), our revolving credit facility in China (as amended, China Credit Facility), and our revolving credit facility in Japan (Japan Credit Facility) will provide sufficient liquidity to enable us to meet our working capital requirements for at least the next 12 months.

As of December 31, 2017, we had approximately $399,137 of cash and cash equivalents domiciled outside the US. In response to the enactment of the Tax Reform Act, management is authorized to repatriate up to $250,000 of cash and cash equivalents before the end of the fiscal year ending March 31, 2018, with the remainder of available cash and cash equivalents currently expected to be used for ongoing foreign operations. Our current cash repatriation strategy will further enhance our liquidity position and provide us with additional flexibility to re-evaluate our capital allocation strategy. However, if these cash and cash equivalents are repatriated the amount could be subject to additional foreign withholding and state income taxes.

Further, risks and uncertainties that could impact our liquidity include the following:

• our worldwide sales, profit margin, the perception of our brands among retail consumers and wholesale customers;
• our ability to respond to changes in consumer preferences;
• our ability to collect our receivables in a timely manner;
• our ability to effectively manage our inventories;
• our ability to respond to ongoing changes in the retail environment;
• unexpected changes in weather conditions; and
• the timing and amount of any additional tax liabilities relating to the Tax Reform Act, including our intent to repatriate our foreign cash balances, among others.

Furthermore, we may require additional cash resources due to changing business conditions, economic recession, or other future developments including any investments or acquisitions we may decide to pursue. If our existing sources of liquidity are insufficient to satisfy our cash requirements, we may seek to borrow under our existing borrowing arrangements, seek new borrowing arrangements, or sell additional debt or equity securities. The sale of convertible debt or equity securities could result in additional dilution to our stockholders, and equity securities may have rights or preferences that are superior to those of our existing stockholders. The incurrence of additional indebtedness would result in additional debt service obligations that could result in operating and financial covenants that would restrict our operations and could further encumber our assets. In addition, there can be no assurance that any additional financing will be available on acceptable terms, if at all. Although there are no other material present understandings, commitments or agreements with respect to the acquisition of any other businesses, we may evaluate acquisitions of other businesses or brands.

Refer to the section above entitled "Recent Developments" for further information regarding available cash repatriation that impacts our expectation of our capital allocation strategy, cash flow generating capabilities and the impact to our liquidity.

Capital Resources

Domestic Credit Facility. As of December 31, 2017, we had no outstanding balance and available borrowings of $399,451 under our Domestic Credit Facility. The Domestic Credit Facility is a five-year, $400,000 secured revolving credit facility. At February 9, 2018, we had no outstanding balance and available borrowings of $399,451 under our Domestic Credit Facility.

China Credit Facility. As of December 31, 2017, we had no outstanding balance and available borrowings of $46,065 under our China Credit Facility. At February 9, 2018, we had no outstanding balance and available borrowings of $46,065 under our China Credit Facility.

Japan Credit Facility. As of December 31, 2017, we had no outstanding balance and available borrowings of approximately $48,817 under our Japan Credit Facility. At February 9, 2018, we had no outstanding balance and available borrowings of $48,817 under our Japan Credit Facility.

Mortgage. As of December 31, 2017, we had an outstanding principal balance under the mortgage secured by our corporate headquarters property of $32,227. The loan will mature and require a balloon payment in the amount of $23,700 on July 1, 2029 in addition to any then-outstanding balance.

Debt Covenants. At December 31, 2017, we were in compliance with all debt covenants under our borrowing arrangements and we remain in compliance at February 9, 2018.

Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable," of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information about our revolving credit facilities.

Cash Flows

The following table summarizes our cash flows:

Operating Activities. Our primary source of liquidity is net cash provided by operating activities, which is primarily driven by our net income or loss, other cash receipts and expenditure adjustments and changes in working capital.

The increase in net cash provided by operating activities during the nine months ended December 31, 2017 compared to the prior period was due to an increase in net income of $72,365 to $93,779, primarily adjusted for depreciation and amortization, deferred tax expense and stock-based compensation. The change in deferred tax expense resulted from the re-measurement of deferred tax assets due to the enactment of the Tax Reform Act. Operating assets and liabilities were positively impacted by $84,752, primarily resulting from changes in trade accounts payable, accrued expenses, income taxes payable and long-term liabilities, partially offset by changes in accounts receivable and net inventories. The changes in accounts receivable, trade accounts payable and accrued expenses are primarily due to timing differences compared to the prior period. The changes in income tax payable and long-term liabilities, which includes long-term taxes payable, was driven by the enactment of the Tax Reform Act, specifically from the deemed repatriation of foreign earnings. The increase in net inventories is primarily due to the Hoka and UGG brands to support business growth.

Inventory turnover increased to 2.3 times during the trailing twelve months ended December 31, 2017 compared to 2.2 times during the twelve months ended December 31, 2016 due to lower average inventory levels and higher costs of sales for the trailing twelve month comparative periods. Wholesale channel accounts receivable turnover remained flat at 5.8 times during the trailing twelve months ended December 31, 2017 and 2016.

Investing Activities. The decrease in net cash used in investing activities during the nine months ended December 31, 2017 compared to the prior period was due to lower capital expenditures for property and equipment primarily driven by lower expenditures on real property acquisitions, retail stores and showrooms, as well as and IT infrastructure and improvements, partially offset by higher warehouse build-out costs associated with the expansion of our warehouse and distribution center located in Moreno Valley, California.

At December 31, 2017, we had approximately $11,700 of material commitments for future capital expenditures, primarily related to the build out and expansion of the warehouse and distribution center located in Moreno Valley,

California. We estimate that the remaining capital expenditures for fiscal year 2018 will range from approximately $17,000 to $18,000. We anticipate these expenditures will primarily relate to the build-out of our global warehouse and distribution center facilities, and purchases for IT infrastructure and system improvements. However, the actual amount of our future capital expenditures may differ significantly from this estimate depending on the timing of facility build-outs, as well as unforeseen needs to replace existing assets and the timing of other expenditures.

Financing Activities. The decrease in net cash used in financing activities during the nine months ended December 31, 2017 compared to the prior period was primarily due to lower net borrowings and repayments of short-term borrowings and the final Sanuk brand contingent consideration payment made in the prior period, partially offset by larger share repurchases compared to the prior period. During the nine months ended December 31, 2017, we made repurchases of shares under our stock repurchase programs for $24,687 compared to $12,572 in the prior period. During the nine months ended December 31, 2016, we made the final Sanuk contingent consideration payment in the amount of $19,784.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

Refer to Note 7, "Commitments and Contingencies," of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information relating to our operating leases, purchase obligations, capital expenditures, and other contractual obligations and commitments.

Critical Accounting Policies and Estimates

Management must make certain estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes thereto, based upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable, but actual results could differ materially from these estimates. There have been no material changes to our critical accounting policies since those reported in our 2017 Annual Report.

Refer to Note 1, "General," of our condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding the impact of recent accounting pronouncements.

Commodity Price Risk. We purchase certain materials that are affected by commodity prices, the most significant of which is sheepskin. The supply of sheepskin used in certain UGG brand products is in high demand and there are a limited number of suppliers able to meet our expectations for the quantity and quality of sheepskin required. While there have historically been significant changes in the price of sheepskin, the price of sheepskin has stabilized in recent years. We use purchasing contracts, pricing arrangements, and refundable deposits to attempt to manage price volatility as an alternative to hedging commodity prices. The purchasing contracts and pricing arrangements we use may result in purchase obligations, which are not reflected in our condensed consolidated balance sheets. In the event of significant commodity cost increases, we will likely not be able to adjust our selling prices sufficiently to eliminate the impact of such increases on our margins.

Foreign Currency Exchange Rate Risk. We face market risk to the extent that foreign currency exchange rate fluctuations affect our foreign assets, liabilities, revenues and expenses. We hedge certain foreign currency exchange rate risk from existing assets and liabilities. Other than changes in the amount of sales, expenses, and financial positions denominated in foreign currencies, we do not believe that there has been a material change in the nature of our primary market risk exposures, including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss. There has been recent increased volatility with respect to the exchange rates between US dollars and both British Pounds and Euros. This increased volatility may be due in part to tax, importation and other policies being contemplated by the US government, the withdrawal by the United Kingdom from the European Union (commonly referred to as Brexit) and other global economic and political issues. We do not know whether this level of volatility will increase or decrease in the future. At February 9, 2018, we are not aware of any factors that are expected to result in a material change in the general nature of our primary market risk exposure.

As of December 31, 2017, the total notional value of foreign currency exchange rate forward contracts was $62,549 and the fair value of these financial instruments, in the amount of $130 and $2,221, were recorded in other current assets and other current liabilities, respectively, in the condensed consolidated balance sheets. As of December 31, 2017, a hypothetical 10.0% foreign currency exchange rate fluctuation would have caused the fair value of our financial instruments to increase or decrease by approximately $1,000. Sensitivity analyses do not consider the actions we may take to mitigate our exposure to changes, nor do they consider the effect such hypothetical changes may have on overall economic activity. As our international operations grow and we increase purchases and sales in foreign currencies, we will continue to evaluate our hedging policy and may utilize additional derivative instruments, as needed, to hedge our foreign currency exchange rate risk. We do not use foreign currency exchange rate forward contracts for trading purposes. Subsequent to December 31, 2017, we entered into Designated Derivative Contracts with a notional value totaling $90,091, which are expected to mature over the next 15 months and no Non-Designated Derivative Contracts. Refer to Note 9, "Foreign Currency Exchange Rate Contracts and Hedging," of our condensed consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for further information on our foreign currency exchange rate forward contracts.

Although the majority of our sales and inventory purchases are denominated in US currency, these sales and inventory purchases may be impacted by fluctuations in the exchange rates between the US dollar and local currencies in the international markets where our products are sold and manufactured. Our foreign currency exchange rate risk is generated primarily from our European and Asian operations. Approximately $282,119, or 34.8%, and $491,547, or 32.7%, of our total net sales for the three and nine months ended December 31, 2017, respectively, and $255,126, or 33.6%, and $435,659, or 30.7%, for the three and nine months ended December 31, 2016, respectively, were denominated in foreign currencies. As we hold more cash and other monetary assets and liabilities in foreign currencies, we are exposed to financial statement transaction gains and losses as a result of remeasuring the financial positions held in foreign currencies into US dollars for subsidiaries that are US-dollar functional and also from remeasuring the financial positions held in US dollars and foreign currencies into the functional currency of subsidiaries that are non-US-dollar functional. We re-measure monetary assets and liabilities denominated in foreign currencies into US dollars using the exchange rate as of the end of the reporting period. In addition, certain of our foreign subsidiaries’ local currencies are their designated functional currencies, and we translate those subsidiaries’ assets and liabilities into US dollars using the exchange rates as of the end of the reporting period, which results in financial statement translation gains and losses recognized in other comprehensive income (loss). Foreign currency exchange rate fluctuations affect our reported profits and can distort comparisons from year to year. In addition, if the US dollar strengthens, it may result in increased pricing pressure on our foreign distributors.

Interest Rate Risk. Our market risk exposure with respect to financial instruments is tied to changes in the prime rate, the federal funds effective rate, and the London Interbank Offered Rate (LIBOR). Our Domestic Credit Facility, at our election, provides for interest on outstanding borrowings at interest rates tied to adjusted LIBOR or the Alternative Base Rate (ABR), and is variable based on our total adjusted leverage ratio each quarter. The ABR is defined as the rate per annum equal to the greater of (1) the prime rate, (2) the federal funds effective rate plus 0.50%, and (3) adjusted LIBOR for a one-month interest period plus 1.50%. As of December 31, 2017, the effective LIBOR and ABR rates were 3.06% and 5.00%, respectively. Our China Credit Facility provides for interest on outstanding borrowings at 115.0% multiplied by the People’s Bank of China market rate, which was 4.35%, and the total effective interest rate was 5.00% as of December 31, 2017. Our Japan Credit Facility provides for interest on outstanding borrowings at an interest rate based on the Tokyo Interbank Offered Rate for three months plus 0.40%, and the total interest rate was 0.45% as of December 31, 2017.

A hypothetical 1.0% increase in interest rates under each of the three revolving credit facility agreements would have resulted in an aggregate increase to interest expense of approximately $500 for the nine months ended December 31, 2017. Refer to Note 6, "Revolving Credit Facilities and Mortgage Payable," of our condensed consolidated financial statements in Part I, Item I of this Quarterly Report on Form 10-Q for further information about our revolving credit facilities.

a) Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (as amended, the Exchange Act)) which are designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours is designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We carried out an evaluation, under the supervision and with the participation of management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2017.

b) Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

c) Principal Executive Officer and Principal Financial and Accounting Officer Certifications

The certifications of our Principal Executive Officer and Principal Financial and Accounting Officer required by Rule 13a-14(a) of the Exchange Act are filed herewith as Exhibit 31.1 and Exhibit 31.2, and furnished as Exhibit 32, to this Quarterly Report on Form 10-Q. This Part I, Item 4, should be read in conjunction with such certifications for a more complete understanding of the topics presented.

PART II. OTHER INFORMATION

References within Part II, to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries.

Unless otherwise specifically indicated, all amounts in Part II are expressed in thousands, except for share data.

An investment in our common stock involves risks. Before making an investment decision, you should carefully consider all of the information of this Quarterly Report on Form 10-Q, including in the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Quarterly Report on Form 10-Q, as well as our condensed consolidated financial statements and the accompanying notes thereto. In addition, you should carefully consider the risks and uncertainties described in the section entitled “Risk Factors” in Part I, Item 1A of our 2017 Annual Report, as well as in our other public filings with the SEC. If any of the identified risks are realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that case, the trading price of our common stock may decline, and you could lose all or part of your investment. In addition, other risks of which we are currently unaware, or which we do not currently view as material, could have a material adverse effect on our business, financial condition, operating results and prospects.

During the quarter ended December 31, 2017, there were no material changes to the risks and uncertainties described in the section entitled "Risk Factors" in Part 1, Item 1A of our 2017 Annual Report.