Crocs, Inc.: Form 10-Q for the period ended Jun 30, 2013

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends, our future expectations and other matters that do not relate strictly to historical facts and are based on certain assumptions of our management. These statements are often identified by the use of words such as “may,” “strive,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Further, these statements are based on the beliefs and assumptions of our management based on information currently available. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, the risks described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2012 and subsequent filings with the Securities and Exchange Commission. We caution the reader to carefully consider such factors. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Business Overview

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

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

We currently sell our Crocs-branded products globally through domestic and international retailers and distributors. We also sell our products directly to consumers through our company-operated retail stores, outlets, kiosks and webstores. The broad appeal of our footwear has allowed us to market our products to a wide range of distribution channels, including department stores and traditional footwear retailers as well as a variety of specialty and independent retail channels.

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

Financial Highlights

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

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

• Revenues increased $32.9 million, or 9.9%, to $363.8 million for the quarter-ended June 30, 2013 and increased $72.7 million, or 12.1%, to $675.5 million in the first six months of 2013 compared to the same periods in 2012. Revenue growth was driven by increased sales volume through our classic and new product styles as we continue to transform Crocs brand awareness into an all-season footwear brand.
• Gross profit increased $4.8 million, or 2.4%, to $200.9 million for the quarter-ended June 30, 2013 and increased $25.8 million, or 7.6%, to $366.7 million in the first six months of 2013 compared to the same periods in 2012. Gross margin percentage decreased 410 basis points for the quarter-ended June 30, 2013 and decreased 230 basis points in the first six months of 2013 compared to the same periods in 2012 as we increase product input costs through the expansion of our product line, which utilizes more expensive material such as textile fabric and leather. In addition, we experienced a decrease in average footwear selling price which can be attributed to lower than anticipated at-once wholesale revenue and increased discount activity late in the second quarter of 2013 reflecting our intentions to sell through inventory. Partially offsetting this decrease in gross margin were positive impacts on gross margin including higher footwear units sales across the globe and increased supply chain and manufacturing efficiency resulting in decreased expenses related to fulfillment, freight and duties, direct labor and overhead costs as a percentage of revenues. We continue to push the industry standard in gross margins through operational efficiency and continued focus on product design and innovation.
• Selling, general, and administrative expenses increased $25.5 million, or 20.5%, to $150.2 million for the quarter-ended June 30, 2013, and increased $49.4 million, or 21.6%, to $278.4 million in the first six months of 2013 compared to the same periods in 2012. Selling, general, and administrative expenses will continue to increase as we increase global headcount while retaining and rewarding our current employees, increase marketing spend, increase our global retail presence and make strategic purchases to improve the operational efficiency of the Company. In addition, during the quarter-and year-ended June 30, 2013, we experienced a one-time net expense of $6.1 million related to the resolution of a statutory tax audit in Brazil and $1.6 million and $3.5 million, respectively, related to our enterprise resource planning (“ERP”) system implementation, which include non-cash accelerated depreciation and cash expenses for program management, training and other non-capitalized costs.
• Net income decreased $26.2 million, or 42.5%, to $35.4 million for the quarter-ended June 30, 2013 and decreased $25.6 million, or 28.4%, to $64.3 million in the first six months of 2013 compared to the same periods in 2012 driving our diluted earnings per share from $0.68 to $0.40 and from $0.99 to $0.72, respectively. This decrease was primarily the result of decreases in both gross margins and operating margins, which were driven by increased cost of sales as we expand our product line and increased selling, general and administrative costs related to our retail expansion, the implementation of our ERP system and a one-time net expense of $6.1 million related to the resolution of a statutory tax audit in Brazil.
• As expected in the first half of the year, our wholesale business out-performed our consumer-direct business as customers increase inventories for the spring and summer months. We continued to expand our retail channel through the net addition of 91 stores year-over-year in anticipation of further brand recognition and an opportunity to present new and classic product lines.
• We continue to fund the implementation of our customized and fully integrated operations, accounting, and finance ERP system, which is expected to launch in the first half of 2014. The introduction of the new ERP to our current environment will allow for seamless, high-quality, and compliant data across the Company. As of June 30, 2013, total costs to date related to the ERP implementation were $18.7 million, of which $16.0 million was capitalized and $2.7 million was expensed. We currently have $9.8 million in outstanding borrowings related to the ERP under a Master Installment Payment Agreement (“Master IPA”) with PNC Equipment Finance, LLC (“PNC”).
• During the second the quarter of 2013, we did not repurchase any shares of our common stock under our publicly announced repurchase plan. Through the first half of 2013, we repurchased approximately 0.8 million shares at an average price of $14.99 per share for a total value of $12.5 million, excluding related commission charges.

Remaining 2013 Outlook

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

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

(1) We receive a significant portion of orders as preseason orders, generally four to six months prior to shipment date. We provide customers with price incentives to participate in such preseason programs to enable us to better plan our production schedule, inventory and shipping needs. Unfulfilled customer orders as of any date are referred to as backlog and represent orders scheduled to be shipped at a future date. Backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule and the timing of product shipments. Further, the mix of future and immediate delivery orders can vary significantly period over period. Due to these factors and since the unfulfilled orders can be canceled at any time prior to shipment by our customers, backlog may not be a reliable measure of future sales and comparisons of backlog from period to period may be misleading. In addition, our historical cancellation experience may not be indicative of future cancellation rates. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of these orders will be fulfilled within the current year.

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

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

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

Results of Operations

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

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

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

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

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

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

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

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The table below sets forth our comparable store sales growth by reportable operating segment for the three months ended June 30, 2013 as compared to the same period in 2012:

(1) Comparable store status is determined on a monthly basis. Comparable store sales begin in the thirteenth month of a store’s operation. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening. Comparable store sales growth is calculated on a currency neutral basis using historical annual average currency rates.

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

Gross profit. During the three months ended June 30, 2013, gross profit increased $4.8 million, or 2.4%, compared to the same period in 2012, which was primarily attributable to a 15.8% increase in unit sales volume partially offset by a 3.6% decrease in average footwear selling price. Gross margin percentage decreased 410 basis points compared to the same period in 2012 as we increase product input costs through the expansion of our product line, which utilizes more expensive material such as textile fabric and leather. In addition, we experienced a decrease in average footwear selling price which can be attributed to lower than anticipated at-once wholesale revenue and increased discount activity late in the second quarter of 2013 reflecting our intentions to sell through inventory. Partially offsetting this decrease in gross margin were positive impacts on gross margin including higher footwear units sales across the globe and increased supply chain and manufacturing efficiency resulting in decreased expenses related to fulfillment, freight and duties, direct labor and overhead costs as a percentage of revenues. We continue to push the industry standard in gross margins through operational efficiency and continued focus on product design and innovation.

Impact on Gross Profit due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues and costs of sales from our functional currencies to our reporting currency during the three months ended June 30, 2013 decreased our gross profit by $4.8 million compared to the same period in 2012.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $25.5 million, or 20.5%, during the three months ended June 30, 2013 compared to the same period in 2012 primarily due to:

(i) an increase of $6.6 million in rent and building related costs, which is almost entirely related to our retail channel expansion as we continue to increase the number of company-operated retail stores;

(ii) an increase of $6.4 million in professional service expenses related to various increases in consulting fees, outside services and contract labor, of which $0.2 million is related to our ERP implementation as we utilize the expertise of outside consultants;

(iii) an increase of $6.3 million in salaries and related costs including variable and share-based compensation, of which $3.1 million is related to our retail channel expansion as we increase headcount and compensation in relation to this project;

(iv) a one-time net expense of $6.1 million related to the resolution of a statutory tax audit in Brazil;

(v) an increase of $2.2 million in marketing expenses, including increased spending on advertising and promotional activity as we continue to make investments in our marketing efforts; and

(vi) the remaining difference is primarily a result of $2.1 million of net decreases in other selling, general, and administrative expenses as we continue to be conscious of operating expenses throughout the Company.

As a percentage of revenues, selling, general and administrative expenses increased 9.6%, or 360 basis points, to 41.3% during the three months ended June 30, 2013 compared to the same period in 2012 as we continue to capitalize on our revenue growth by utilizing earnings to increase our global retail presence, utilize state-of-the-art marketing techniques to expand our global brand and update our information technology for a streamlined business approach.

Impact on Selling, General, and Administrative Expenses due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate expenses from our functional currencies to our reporting currency during the three months ended June 30, 2013, increased selling, general and administrative expenses by approximately $1.9 million as compared to the same period in 2012.

Asset Impairments. During the three months ended June 30, 2013 and 2012, we recorded $0.2 million and $0.1 million, respectively, in asset impairments related to certain underperforming domestic stores in the Americas segment that were unlikely to generate sufficient cash flows to fully recover the value of the stores’ assets over the remaining economic life of those assets. We will continue to evaluate all of our retail stores for indicators of impairment.

Foreign Currency Transaction (Gains)/Losses. The line item entitled “Foreign currency transaction (gains)/losses, net” is comprised of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. During the three months ended June 30, 2013, losses on foreign currency transactions increased $2.4 million, or 150.0%, compared to the same period in 2012. This increase is primarily related to a $7.4 million net increase in foreign currency related losses as compared to the same period in 2012 associated with the re-measurement of monetary assets and liabilities in certain non-functional currencies as the U.S. dollar strengthened against those currencies. This difference was partially offset by a $5.0 million net increase in gains as compared to the same period in 2012 associated with our ability to hedge foreign currency fluctuations through undesignated forward instruments.

Income tax expense. During the three months ended June 30, 2013, income tax expense increased $2.0 million, or 16.3%, resulting in a 12.1% increase in effective tax rate compared to the same period in 2012, as a result of a shift of profits from lower tax jurisdictions to higher tax jurisdictions, losses recorded in tax jurisdictions for which no tax benefits are being recorded, and true-ups between accrued taxes and amounts included on statutory tax filings. Our effective tax rate of 28.8% for the three months ended June 30, 2013 differs from the federal U.S. statutory rate primarily because of differences between income tax rates between U.S. and foreign jurisdictions.

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

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

Revenues. During the six months ended June 30, 2013, revenues increased $72.7 million, or 12.1%, compared to the same period in 2012, primarily due to an increase of 3.9 million, or 14.0%, in global footwear unit sales partially offset by a decrease of $0.07 per unit, or 0.3 %, in average footwear selling price. For the six months ended June 30, 2013, revenues from our wholesale channel increased $42.4 million, or 11.2%, compared to the same period in 2012, which was primarily driven by increased wholesale sales in Americas, Asia Pacific and Europe partially offset by a decrease in wholesale sales in Japan. Revenues from our retail channel increased $30.3 million, or 17.5%, compared to the same period in 2012, primarily driven by strong demand in all four reportable segments as well as continued growth of our retail presence by opening 38 company-operated stores (net of store closures) during the six months ended June 30, 2013. We also continue to close certain kiosks as branded stores allow us to better merchandise the full breadth and depth of our product line. Revenues from our internet channel remained flat compared to the same period in 2012.

Impact on Revenues due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues from our functional currencies to our reporting currency during the six months ended June 30, 2013 decreased our revenues by $13.9 million compared to the same period in 2012. The majority of this decrease was related to the decrease in value of the Japanese Yen compared to the U.S. Dollar due to the political and macroeconomic environments in Japan.

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

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

The table below sets forth our comparable store sales growth by reportable operating segment for the six months ended June 30, 2013 as compared to the same period in 2012:

(1) Comparable store status is determined on a monthly basis. Comparable store sales begin in the thirteenth month of a store’s operation. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening. Comparable store sales growth is calculated on a currency neutral basis using historical annual average currency rates.

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

Gross profit. During the six months ended June 30, 2013, gross profit increased $25.8 million, or 7.6%, compared to the same period in 2012, which was primarily attributable to a 14.0% increase in unit sales volume partially offset by a 0.3% decrease in average footwear selling price. Gross margin percentage decreased 230 basis points compared to the same period last year as we increase product input costs through the expansion of our product line, which utilizes more expensive material such as textile fabric and leather. In addition, we experienced a decrease in average footwear selling price which can be attributed to lower than anticipated at-once wholesale revenue and increased discount activity late in the second quarter of 2013 reflecting our intentions to sell through inventory. Partially offsetting this decrease in gross margin were positive impacts on gross margin through higher footwear units sales across the globe and increased supply chain and manufacturing efficiency resulting in decreased expenses related to fulfillment, freight and duties, direct labor and overhead costs as a percentage of revenues. We continue to push the industry standard in gross margins through operational efficiency and continued focus on product design and innovation.

Impact on Gross Profit due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues and costs of sales from our functional currencies to our reporting currency during the six months ended June 30, 2013 decreased our gross profit by $7.6 million compared to the same period in 2012.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $49.4 million, or 21.6%, during the six months ended June 30, 2013 compared to the same period in 2012 primarily due to:

(i) an increase of $15.5 million in salaries and related costs including variable and share-based compensation, of which $6.5 million is related to our retail channel expansion as we increase headcount and compensation in relation to this project;

(ii) an increase of $13.8 million in rent and building related costs, of which $13.3 million is related to our retail channel expansion as we continue to increase the number of company operated retail stores;

(iii) an increase of $12.1 million in professional service expenses related to various increases in consulting fees, outside services and contract labor, of which $0.3 million is related to our ERP implementation as we utilize the expertise of outside consultants;

(iv) a one-time net expense of $6.1 million related to the resolution of a statutory tax audit in Brazil;

(v) an increase of $4.9 million in marketing expenses, including increased spending on advertising and promotional activity as we continue to make investments in our marketing efforts; and

(vi) the remaining difference is primarily a result of $3.0 million of net decreases in other selling, general, and administrative expenses as we continue to be conscious of operating expenses throughout the Company.

As a percentage of revenues, selling, general and administrative expenses increased 8.4%, or 320 basis points, to 41.2% during the six months ended June 30, 2013 compared to the same period in 2012 as we continue to capitalize on our revenue growth by utilizing earnings to increase our global retail presence, utilize state-of-the-art marketing techniques to expand our global brand and update our information technology for a streamlined business approach.

Impact on Selling, General, and Administrative Expenses due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate expenses from our functional currencies to our reporting currency during the six months ended June 30, 2013, increased selling, general and administrative expenses by approximately $0.2 million as compared to the same period in 2012.

Asset Impairments. During the six months ended June 30, 2013 and 2012, we recorded $0.2 million and $0.8 million, respectively, in asset impairments related to certain underperforming domestic stores in the Americas segment that were unlikely to generate sufficient cash flows to fully recover the value of the stores’ assets over the remaining economic life of those assets. We will continue to evaluate all of our retail stores for indicators of impairment.

Foreign Currency Transaction Losses. The line item entitled “Foreign currency transaction losses, net” is comprised of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. During the six months ended June 30, 2013, losses on foreign currency transactions increased $0.8 million, or 28.9%, compared to the same period in 2012. This increase is primarily related to a $13.6 million net increase in foreign currency related losses as compared to the same period in 2012 associated with the re-measurement of monetary assets and liabilities in certain non-functional currencies as the U.S. dollar strengthened against those currencies. This difference was partially offset by a $12.8 million net increase in gains as compared to the same period in 2012 associated with our ability to hedge foreign currency fluctuations through undesignated forward instruments.

Income tax expense. During the six months ended June 30, 2013, income tax expense increased $0.5 million, or 2.5%, resulting in a 6.0% increase in effective tax rate compared to the same period in 2012, as a result of a shift of profits from lower tax jurisdictions to higher tax jurisdictions, losses recorded in tax jurisdictions for which no tax benefits are being recorded, and true-ups between accrued taxes and amounts included on statutory tax filings. Our effective tax rate of 24.2% for the six months ended June 30, 2013 differs from the federal U.S. statutory rate primarily because of differences between income tax rates between U.S. and foreign jurisdictions.

Presentation of Reportable Segments

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

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

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

The primary financial measure utilized by the CODM to evaluate performance and allocate resources is segment operating income. Segment performance evaluation is based primarily on segment results without allocating corporate expenses, or indirect general, administrative and other expenses. Segment profits or losses of our reportable operating segments include adjustments to eliminate intersegment profit or losses on intersegment sales. As such, reconciling items for segment operating income represent unallocated corporate and other expenses as well as intersegment eliminations. Segment assets consist of cash and cash equivalents, accounts receivable and inventory as these balances are regularly reviewed by the CODM.

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

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

(1) During the three months ended June 30, 2013, operating losses of Other businesses increased $2.7 million compared to the same period in 2012, primarily due to a $2.7 million decrease in gross margin.

(2) Includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, depreciation on corporate and other assets not allocated to operating segments and costs of the same nature of certain corporate holding companies. For the three months ended June 30, 2013, Unallocated corporate and other expenses increased $6.8 million compared to the same period in 2012, primarily due to a $7.2 million increase in selling, general and administrative costs due to higher corporate headcount and increased professional services, partially offset by a $0.4 increase in gross margin due to allocation of costs.

(3) Please refer to our Results of Operations to reconcile total consolidated operating income to net income as segment information does not have an effect on values below total consolidated operating income.

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

Americas Operating Segment. During the three months ended June 30, 2013, revenues from the Americas segment increased $11.6 million, or 8.7%, compared to the same period in 2012, driven by a 14.4% increase in footwear units sold. This increase was partially offset by a 2.8% decrease in average footwear selling price and a $0.5 million unfavorable impact from foreign currency fluctuations driven by weakening of the Brazilian Real and Canadian Dollar against the U.S. Dollar. Revenue growth for the region was realized primarily in the wholesale channel which increased $6.7 million, or 10.8%, and in the retail channel which increased $6.1 million, or 11.1%. These channel revenue increases reflect our continued growth through key wholesale partners and disciplined expansion of retail stores as we opened four company-operated stores (net of store closures) during the three months ended June 30, 2013. These increases were partially offset by our internet channel which decreased $1.2 million, or 6.7%. This decrease was attributable to decreased internet traffic and conversion rates in the second quarter of 2013. Segment operating income decreased $8.0 million, or 25.9%, driven mainly by a decrease in segment gross margin of 9.3%, or 520 basis points, a $3.6 million unfavorable impact from foreign currency fluctuations and a $6.9 million, or 15.7%, increase in selling, general and administrative expenses as a result of the continued expansion of our retail channel, increased marketing efforts, and a one-time net expense of $6.1 million related to the resolution of a statutory tax audit in Brazil. This decrease in operating income was partially offset by the revenue increases noted above.

Asia Pacific Operating Segment. During the three months ended June 30, 2013, revenues from the Asia Pacific segment increased $20.2 million, or 22.1%, compared to the same period in 2012, driven by a 24.9% increase in footwear units sold and a $1.6 million favorable impact from foreign currency fluctuations driven by strengthening of the Chinese Yen, South African Rand and the South Korean Won against the U.S. Dollar. This increase was partially offset by a 1.5% decrease in average footwear selling price. Revenue growth for the region was realized in all three channels as we retained strong support from our wholesale channel customers, continued to focus on disciplined expansion of our retail channel as we opened eleven company-operated stores (net of store closures) during the three months ended June 30, 2013 and have seen benefits from new, consumer-friendly webstores in various countries through our internet channel. Wholesale channel revenue increased $13.1 million, or 24.1%, and consumer-direct channel revenue increased $7.1 million, or 19.0%. Segment operating income increased $6.1 million, or 20.7%, driven mainly by the revenue increases noted above and a $0.7 million favorable impact from foreign currency fluctuations, which was partially offset by a decrease in segment gross margin of 1.6%, or 110 basis points and a $5.7 million, or 19.5%, increase in selling, general and administrative expenses resulting from the continued expansion of our retail channel and increased marketing efforts.

Japan Operating Segment. During the three months ended June 30, 2013, revenues from the Japan segment decreased $9.8 million, or 17.7%, compared to the same period in 2012, driven by a 16.8% decrease in average footwear selling price and a $10.4 million unfavorable impact from foreign currency fluctuations due to recent decreases in value of the Japanese Yen to the U.S. Dollar stemming from political and macroeconomic changes in the region. These decreases were partially offset by a 1.4% increase in footwear units sold. Wholesale channel revenue decreased $8.3 million, or 21.1%, retail revenue decreased $1.0 million, or 7.7%, and internet channel revenue decreased $0.4 million, or 17.6%. These decreases in revenue were mainly due to a soft wholesale market and slow sell-through of inventory as a result of macroeconomic declines. Despite current macroeconomic conditions in Japan, we continue to expand our retail channel in the region as we opened three company-operated stores (net of store closures) during the three months ended June 30, 2013 in anticipation of an economic recovery. Segment operating income decreased $9.0 million, or 34.1%, driven mainly by the revenue decreases noted above, a decrease in segment gross margin of 9.4%, or 640 basis points and a $4.0 million unfavorable impact from foreign currency fluctuations. This decrease was slightly offset by a $0.4 million, or 3.9%, decrease in selling, general and administrative expenses.

Europe Operating Segment. During the three months ended June 30, 2013, revenues from the Europe segment increased $10.7 million, or 21.7%, compared to the same period in 2012, driven by a 20.3% increase in footwear units sold, a 1.2% increase in average footwear selling price and a $0.9 million favorable impact from foreign currency fluctuations. Revenue growth for the region was realized in all three channels as we continued the optimization of key wholesale partners and disciplined expansion of our retail channel as we opened ten company-operated stores (net of store closures) during the three months ended June 30, 2013. Retail channel revenue increased $8.9 million, or 97.0%, wholesale channel revenue increased $1.3 million, or 3.9%, and internet channel revenue increased $0.6 million, or 7.8%. Segment operating income decreased $0.4 million, or 3.7%, driven mainly by an decrease in segment gross margin of 0.7%, or 40 basis points, and a $6.2 million, or 40.1%, increase in selling, general and administrative expenses resulting primarily from increased headcount and building expenses related to the large expansion of our retail channel in the

European segment. This decrease in operating income was partially offset by the revenue increases noted above and a $0.2 million favorable impact from foreign currency fluctuations.

Comparison of the Six Months Ended June 30, 2013 and 2012 by Segment

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

(1) During the six months ended June 30, 2013, operating losses of Other businesses increased $3.7 million compared to the same period in 2012, primarily due to a $3.5 million decrease in gross margin and a $0.2 million increase in selling, general and administrative expenses.

(2) Includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, depreciation on corporate and other assets not allocated to operating segments and costs of the same nature of certain corporate holding companies. For the six months ended June 30, 2013, Unallocated corporate and other expenses increased $11.2 million compared to the same period in 2012, primarily due to a $12.6 million increase in selling, general and administrative costs due to higher corporate headcount and increased professional services, partially offset by a $1.4 increase in gross margin due to allocation of costs.

(3) Please refer to our Results of Operations to reconcile total consolidated operating income to net income as segment information does not have an effect on values below total consolidated operating income.

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

Americas Operating Segment. During the six months ended June 30, 2013, revenues from the Americas segment increased $23.8 million, or 9.4%, compared to the same period in 2012, driven by a 9.1% increase in footwear units sold and a 2.5% increase in average footwear selling price. These increases were partially offset by a $1.5 million unfavorable impact from foreign currency fluctuations driven by weakening of the Brazilian Real and Canadian Dollar against the U.S. Dollar. Revenue growth for the region was realized primarily in the wholesale channel which increased $19.3 million, or 14.7%, and in the retail channel which increased $6.4 million, or 7.1%. These channel revenue increases reflect our continued growth through wholesale partners and disciplined expansion of retail stores as we opened eight company-operated stores (net of store closures) during the six months ended June 30, 2013. These increases were partially offset by our internet channel which decreased $1.9 million, or 6.5%. This decrease was attributable to decreased internet traffic and conversion rates in the first half of 2013. Segment operating income decreased $5.9 million, or 11.8%, driven mainly by a decrease in segment gross margin of 5.3%, or 280 basis points, a $3.5 million unfavorable impact from foreign currency fluctuations and a $11.3 million, or 13.7%, increase in selling, general and administrative expenses as a result of the continued expansion of our retail channel, increased marketing efforts, and a one-time net expense of $6.1 million related to the resolution of a statutory tax audit in Brazil. This decrease in operating income was partially offset by the revenue increases noted above.

Asia Pacific Operating Segment. During the six months ended June 30, 2013, revenues from the Asia Pacific segment increased $43.0 million, or 27.0%, compared to the same period in 2012, driven by a 25.2% increase in footwear units sold, a 2.1% increase in average footwear selling price and a $2.2 million favorable impact from foreign currency fluctuations driven by strengthening of the Chinese Yen, South African Rand and the South Korean Won against the U.S. Dollar. Revenue growth for the region was realized in all three channels as we retained strong support from our wholesale channel customers, continued to focus on disciplined expansion of our retail channel as we opened five company-operated stores (net of store closures) during the six months ended June 30, 2013 and have seen benefits from new, consumer-friendly webstores in various countries through our internet channel. Wholesale channel revenue increased $31.6 million, or 30.0%, and our consumer-direct revenue increased $11.4 million, or 21.2%. Segment operating income increased $15.3 million, or 32.3%, driven mainly by the revenue increases noted above and a $1.0 million favorable impact from foreign currency fluctuations, which was partially offset by a decrease in segment gross margin of 0.9%, or 60 basis points, and a $10.4 million, or 20.0%, increase in selling, general and administrative expenses resulting from the continued expansion of our retail channel and increased marketing efforts.

Japan Operating Segment. During the six months ended June 30, 2013, revenues from the Japan segment decreased $13.8 million, or 15.4%, compared to the same period in 2012, driven by a 18.6% decrease in average footwear selling price and a $15.4 million unfavorable impact from foreign currency fluctuations due to recent decreases in value of the Japanese Yen to the U.S. Dollar stemming from political and macroeconomic changes in the region. These decreases were partially offset by a 5.6% increase in footwear units sold. Revenue decreases were realized primarily in the wholesale channel which decreased $13.6 million, or 20.2%, and the internet channel which decreased $0.2 million, or 4.8%. These decreases were mainly due to a soft wholesale market and slow sell-through of inventory as a result of macroeconomic declines. Despite current macroeconomic conditions in Japan, our retail channel revenues remained flat year-over-year and we continue to expand our retail channel in the region as we opened nine company-operated stores (net of store closures) during the six months ended June 30, 2013 in anticipation of an economic recovery. Segment operating income decreased $15.6 million, or 38.5%, driven mainly by the revenue decreases noted above, a decrease in segment gross margin of 11.8%, or 780 basis points, a $5.2 million unfavorable impact from foreign currency fluctuations and a $0.6 million, or 3.3%, increase in selling, general and administrative expenses.

Europe Operating Segment. During the six months ended June 30, 2013, revenues from the Europe segment increased $19.7 million, or 19.4%, compared to the same period in 2012, driven by a 18.5% increase in footwear units sold, a 0.7% increase in average footwear selling price and a $0.7 million favorable impact from foreign currency fluctuations. Revenue growth for the region was realized in all three channels as we continued optimization of key wholesale partners and disciplined expansion of our retail channel as we opened 16 company-operated stores (net of store closures) during the six months ended June 30, 2013. Retail channel revenue increased $14.1 million, or 103.8%, wholesale channel revenue increased $5.2 million, or 6.9%, and internet channel revenue increased $0.4 million, or 3.4%. Segment operating income decreased $1.9 million, or 7.1%, driven mainly by a $14.3 million, or 50.7%, increase in selling, general and administrative expenses resulting primarily from increased headcount and building expenses related to the large expansion of our retail channel in the European segment. This decrease in operating income was partially offset by the revenue increases noted above and an increase in segment gross margin of 2.9%, or 150 basis points.

Non-GAAP Financial Measures

In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present current period results below in ‘adjusted net income’, which is a non-GAAP financial measure. Adjusted net income excludes the impact of new enterprise resource planning system (“ERP”) implementation expenses, a one-time net expense related to the resolution of a statutory tax audit in Brazil and accelerated depreciation and amortization of our current ERP system.

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

Management uses adjusted net income and constant currency figures to assist in comparing business trends from period to period on a consistent basis without regard to the impact of non-recurring items and foreign exchange rate fluctuations and in communications with the board of directors, shareholders, analysts and investors concerning our financial performance. We believe that these non-GAAP measures are used by, and are useful to, investors and other users of our financial statements in evaluating operating performance by providing better comparability between reporting periods because they provide an additional tool to evaluate our performance without regard to foreign currency fluctuations and non-recurring items that may not be indicative of overall business trends. They also provide a better baseline for analyzing trends in our operations. We do not suggest that investors should consider these non-GAAP measures in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP.

The following table is a reconciliation of our net income, the most directly comparable U.S. GAAP measure, to non-GAAP adjusted net income:

(1) This proforma adjustment in the GAAP to Non-GAAP reconciliations above represents expenses related to the implementation of a new ERP system.

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

(3) This proforma adjustment in this GAAP to Non-GAAP reconciliation represents the add-back of accelerated depreciation and amortization on tangible and intangible items related to our current ERP system and supporting platforms that will no longer be utilized once the implementation of a new ERP is complete.

Liquidity and Capital Resources

Cash and cash equivalents at June 30, 2013 decreased 1.7% to $289.4 million compared to $294.3 million at December 31, 2012. The cash and cash equivalents balance has fluctuated throughout the year as we actively managed cash outflows with cash inflows. Cash outflows consist of strategic reinvestments of excess cash into the business, including $31.5 million in net capital spending primarily related to our ERP implementation and global retail expansion and a $12.5 million repurchase of treasury stock associated with board authorized repurchases (further discussed below). Cash inflows were primarily sourced from active operational management including inventory level management and accounts receivable collections.

We anticipate that cash flows from operations will be sufficient to meet the ongoing needs of our business for the next twelve months. In order to provide additional liquidity in the future and to help support our strategic goals, we also have a revolving credit facility with a syndicate of lenders, including PNC Bank, National Association (“PNC”), which currently provides us with up to $100.0 million in borrowing capacity and matures in December 2017, as well as the ability to finance portions of our ERP implementation through PNC Equipment Finance, LLC (“PNC Equipment”), both of which are further discussed below. Additional future financing may be necessary and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all.

Stock Repurchase Authorization

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

Revolving Credit Facility

We currently have a revolving credit facility (as amended, the “Credit Agreement”) with PNC and a syndicate of lenders that allows us to draw up to $100.0 million on credit bearing interest at a variable rate and can be increased to $125.0 million, subject to certain conditions. 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. 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) PNC’s 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 also gives us the ability to make stock repurchases up to $150.0 million per year and acquisitions up to $100.0 million per year. Borrowings under the Credit Agreement are secured by a pledge of all of our assets including all receivables, equipment, general intangibles, inventory, investment property, subsidiary stock and intellectual property. The Credit Agreement contains a covenant in which we must maintain an unrestricted cash balance of at least $100.0 million, subject to limitations.

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

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

Long-term Debt Agreement

We have entered into a Master Installment Payment Agreement (“Master IPA”) with PNC Equipment in which PNC Equipment will finance our purchase of software and services, which may include but are not limited to third party costs to design, install and implement software systems, and associated hardware described in the schedules defined within the Master IPA. This agreement was entered into to finance the recent implementation of a new ERP system which began in October 2012 and is estimated to continue through early 2014. The terms of the agreement allow for multiple notes to be issued at fixed interest rates and payment terms based on the amount borrowed and timing of activity throughout the implementation of the ERP.

As of June 30, 2013, we had $9.8 million of long-term debt outstanding under the Master IPA through three separately executed notes. The notes bear interest rates ranging from 2.45% to 2.79% with maturities ranging from September 2016 to March 2017. As of December 31, 2012, we had $6.6 million of long-term debt outstanding under the Master IPA through one executed note with an interest rate of 2.63% with maturity on September 2016. Interest rates and payment terms are subject to changes as further financing occurs under the Master IPA.

Working Capital

As of June 30, 2013, accounts receivable increased $70.0 million, or 75.8%, to $162.3 million when compared to December 31, 2012, primarily due to higher revenues in the second quarter of 2013 compared to the fourth quarter of 2012, which is primarily the result of seasonality. This increase was partially offset by increased efficiency in our accounts receivable and collections departments. Inventories decreased $4.0 million, or 2.5%, to $160.8 million as of June 30, 2013 when compared to December 31, 2012, primarily due to improved inventory management.

Capital Assets

During the three and six months ended June 30, 2013, net capital expenditures acquired, inclusive of intangible assets, increased to $16.0 million and $32.5 million, respectively, compared to $11.1 million and $20.5 million, respectively, during the same periods in 2012 primarily due to the capitalization of our ERP implementation costs and retail expansion.

We have entered into various operating leases that require cash payments on a specified schedule. Over the next five years we are committed to make payments of approximately $288.6 million related to our operating leases. We plan to continue to enter into operating leases related to our retail stores. We also continue to evaluate cost reduction opportunities. Our evaluation of cost reduction opportunities will include an evaluation of contracts for sponsorships, operating lease contracts and other contracts that require future minimum payments resulting in fixed operating costs. Any changes to these contracts may require early termination fees or other charges that could result in significant cash expenditures.

Repatriation of Cash

As we are a global business, we have cash balances which are located in various countries and are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries have additional restrictions and covenants associated with them which adds increased strains on our liquidity and ability to timely access and transfer cash balances between entities.

We generally consider unremitted earnings of subsidiaries operating outside of the U.S. to be indefinitely reinvested and it is not our current intent to change this position with the exception of the expected repatriation of up to approximately $13.6 million in cash that was previously accrued for as a repatriation of 2010 foreign subsidiary earnings and approximately $25.0 million of 2012 foreign subsidiary earnings. Most of the cash balances held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal and state income taxes less applicable foreign tax credits. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. Certain countries, including China, have monetary laws which may limit our ability to utilize cash resources in those countries for operations in other countries. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and could adversely affect our liquidity. As of June 30, 2013, we held $275.2 million of our total $289.4 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the $275.2 million, $83.3 million could potentially be restricted, as described above. If the remaining $191.8 million were to be immediately repatriated to the U.S., we would be required to pay approximately $39.0 million in taxes that were not previously provided for in our consolidated statement of operations.

Contractual Obligations

In February 2011, we renewed and amended our supply agreement with Finproject S.r.l. which provides us the exclusive right to purchase certain raw materials used to manufacture our products. The agreement also provides that we meet minimum purchase requirements to maintain exclusivity throughout the term of the agreement, which expires December 31, 2014. Historically, the minimum purchase requirements have not been onerous and we do not expect them to become onerous in the future. Depending on the material purchased, pricing is either based on contracted price or is subject to quarterly reviews and fluctuates based on order volume, currency fluctuations and raw material prices. Pursuant to the agreement, we guarantee the payment for certain third-party manufacturer purchases of these raw materials up to a maximum potential amount of €3.5 million (approximately $4.6 million as of June 30, 2013), through a letter of credit that was issued to Finproject S.r.l.

The following table summarizes aggregate information about our significant contractual cash obligations as of June 30, 2013:

(1) Our operating lease obligations consist of retail stores, offices, warehouses, vehicles, and equipment expiring at various dates through 2033. This balance represents the minimum cash commitment under contract to various third-parties for operating lease obligations including the effect of rent escalation clauses and deferred rent. This balance does not include certain contingent rent clauses that may require additional rental amounts based on sales volume, inventories, etc. as these amounts are not determinable for future periods.

(2) Our inventory purchase obligations with third party manufacturers consist of open purchase orders for footwear products and includes $6.8 million in purchase commitments with certain third-party manufacturers for yet-to-be-received finished product where title passes to us upon receipt. All purchase obligations with third party manufacturers are expected to be paid within one year.

(3) Other contracts consist of various agreements with third-party providers primarily for IT renovation and maintenance in our Niwot, CO facility and global accounting services.

(4) Our estimated liability for uncertain tax positions are unrecognized tax benefits taken in our income tax return that would reduce our effective tax rate, if recognized.

(5) We have entered into an agreement with PNC to finance the purchase of software and services related to a new ERP system installation, which began in October 2012 and is estimated to continue through early 2014. Our current debt obligations consist of three separate notes issued under the agreement, which are due between September 2016 and March 2017. We will continue to finance the ERP implementation on an as needed basis through this agreement.

(6) Our minimum licensing royalties consist of usage-based payments for the right to use various licenses, trademarks and copyrights in the production of our footwear, apparel and accessories. Royalty obligations are based on minimum guarantees under contract; however, may include additional royalty obligations based on sales volume that are not determinable for future periods.

(7) Our capital lease obligations consist of office equipment expiring at various dates through 2016. This balance represents the minimum cash commitment under contract to various third-parties for capital lease obligations.

(8) Amounts include anticipated interest payments.

Off-Balance Sheet Arrangements

We had no material off balance sheet arrangements as of June 30, 2013.

Seasonality

Due to the seasonal nature of our footwear which is more heavily focused on styles suitable for warm weather, revenues generated during our first and fourth quarters are typically less than revenues generated during our second and third quarters, when the northern hemisphere is experiencing warmer weather. We continue to expand our product line to include more winter-oriented styles to mitigate some of the seasonality of our revenues. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new model introductions or general economic or consumer conditions. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any other year.

Critical Accounting Policies and Estimates

For a discussion of accounting policies that we consider critical to our business operations and understanding of our results of operations, and that affect the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” contained in our Annual Report on Form 10-K for the year ended December 31, 2012 and incorporated by reference herein.

Interest Rate Risk

Our exposure to market risk includes interest rate fluctuations in connection with our revolving credit facility. Borrowings under the revolving credit facility 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) PNC’s 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. Borrowings under the revolving credit facility are therefore subject to risk based upon prevailing market interest rates. Interest rates fluctuate as a result of many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.

During the six months ended June 30, 2013, the maximum daily amount borrowed under the revolving credit facility was $5.0 million and the average daily amount of borrowings outstanding was $0.3 million. As of June 30, 2013, there were no borrowings outstanding under the revolving credit facility.

If the prevailing market interest rates relative to these borrowings increased by 10% during the three and six months ended June 30, 2013, our interest expense would not have increased materially. Fluctuations in the prevailing market interest rates earned on our cash and cash equivalents and restricted cash balances during the three and six months ended June 30, 2013 would have had a $0.1 million impact on the condensed consolidated statements of income.

Foreign Currency Exchange Risk

As a global company, we have significant revenues and costs denominated in currencies other than the U.S. dollar. We pay the majority of expenses attributable to our foreign operations in the functional currency of the country in which such operations are conducted and pay the majority of our overseas third-party manufacturers in U.S. dollars. Our ability to sell our products in foreign markets and the U.S. dollar value of the sales made in foreign currencies can be significantly influenced by foreign currency fluctuations. Fluctuations in the value of foreign currencies relative to the U.S. dollar could result in downward price pressure for our products and increase losses from currency exchange rates. An increase of 1% in value of the U.S. dollar relative to foreign currencies would have decreased income before taxes during the three and six months ended June 30, 2013, excluding the impact of foreign currency contracts, by approximately $1.5 million and $2.0 million, respectively. The volatility of the applicable exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy. In the event our foreign sales and purchases increase and are denominated in currencies other than the U.S. dollar, our operating results may be affected by fluctuations in the exchange rate of currencies we receive for such sales. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a discussion of the impact of foreign exchange rate variances experienced during the three and six months ended June 30, 2013 and 2012.

The following table summarizes the notional amounts of the outstanding foreign currency exchange contracts at June 30, 2013 and December 31, 2012. The notional amounts of the derivative financial instruments shown below are denominated in their U.S. dollar equivalents and represent the amount of all contracts of the foreign currency specified. These notional values do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the foreign currency exchange risks.

Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of June 30, 2013 (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the Evaluation Date, our disclosure controls and procedures were effective, such that the information relating to us, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes to our internal control over financial reporting during the three months ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2012.