# Crocs, Inc.: Form 10-Q for the period ended Mar 31, 2014

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-Q
- Filed: 2014-05-01
- Accepted by EDGAR: Apr 30, 2014, 21:10 ET
- Period: 2014-03-31
- Accession: 0001104659-14-032919
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000110465914032919/a14-9783_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000110465914032919/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-01-01 to 2014-03-31 | $312.4m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2014-01-01 to 2014-03-31 | $156.2m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2014-01-01 to 2014-03-31 | $156.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2014-01-01 to 2014-03-31 | $139.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2014-01-01 to 2014-03-31 | $16.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2014-01-01 to 2014-03-31 | $191.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2014-01-01 to 2014-03-31 | $5.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-01-01 to 2014-03-31 | $9.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.06 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.06 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-01-01 to 2014-03-31 | 89,539 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2014-01-01 to 2014-03-31 | −$62.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2014-01-01 to 2014-03-31 | $5.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2014-01-01 to 2014-03-31 | $13.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2014-03-31 | $411.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-03-31 | $880.5m | us-gaap:AssetsCurrent |
| Total assets | at 2014-03-31 | $1.11bn | us-gaap:Assets |
| Current liabilities | at 2014-03-31 | $241.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-03-31 | $304.4m | us-gaap:Liabilities |
| Long-term debt | at 2014-03-31 | $15.5m | us-gaap:LongTermDebt |
| Current portion of debt | at 2014-03-31 | $5.2m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2014-03-31 | $621.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 65,794 characters.

### Business Overview

We are a designer, developer, manufacturer, worldwide marketer and distributor of casual lifestyle footwear, apparel and accessories for men, women and children. We strive to be the global leader in the sale of molded footwear featuring fun, comfort, color and functionality. Our products include footwear and accessories that utilize our proprietary closed cell-resin, called Croslite. Our products include footwear and accessories that utilize our proprietary closed-cell resin, called Croslite. The use of this unique material enables us to produce innovative, lightweight, non-marking, and odor-resistant footwear. We currently sell our products in more than 90 countries through domestic and international retailers and distributors and directly to end-user consumers through our company-operated retail stores, outlets, kiosks and webstores.

Since the initial introduction and popularity of the Beach and Crocs Classic designs, we have expanded our Croslite products to include a variety of new styles and products and have further extended our product reach through the acquisition of brand platforms 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 toward becoming a four-season brand.

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. Our marketing efforts surround specific product launches and employ a fully integrated approach utilizing a variety of media outlets, including print and websites. Our marketing efforts drive business to both our wholesale partners and our company-operated retail and internet stores, ensuring that our presentation and story are first class and drive purchasing at the point of sale.

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 United States (“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.

### Recent Events

On January 27, 2014, we issued to Blackstone Capital Partners VI L.P. (“Blackstone”) and certain of its permitted transferees, 200,000 shares of our Series A Convertible Preferred Stock (“Series A preferred stock”) for an aggregate purchase price of $198.0 million, or $990 per share, pursuant to an Investment Agreement between us and Blackstone, dated December 28, 2013 (as amended, the “Investment Agreement”). In connection with the issuance of the Series A preferred stock (the “Closing”) and pursuant to the Investment Agreement, we paid Blackstone a closing fee of $2.0 million, reimbursed Blackstone’s transaction fees and expenses of approximately $4.0 million and incurred additional expenses of $9.8 million associated with the closing of the deal for net cash proceeds of $182.2 million. As of March 31, 2014, the Blackstone investment represents approximately 13.5% ownership of the Company on an as-converted basis. We believe this investment provides an opportunity to drive stockholder value and refine the strategic direction of the business.

### Financial Highlights

During the three months ended March 31, 2014, we continued to experience strong revenue and operating results in our Asia Pacific segment as market demand continues to exceed expectations. We also experienced steady revenue growth in our Europe segment despite sudden unfavorable exchange rates between the Russian Ruble and the U.S. Dollar initiated by political turmoil, which impacted segment revenues by approximately $0.8 million. Operating results for our Europe segment were down due to several factors including lower gross margins due to product mix and a charge of $1.4 million related to on-going litigation. Similar to other retailers, we experienced a difficult business environment in late March in our Americas and Europe segments primarily associated with the impact of the shift of the Easter holiday from March in 2013 into April in 2014. In addition, we continue to see challenges in our Americas wholesale market as accounts remain lean on inventory. We continue to face macroeconomic challenges in our Japan segment. On a constant-currency basis, our Japan segment performed stronger than prior year; however, limited ability for growth in Japan due to macroeconomic turmoil continues to present challenges for the business as we saw the lingering decline of Japanese Yen decrease year-over-year revenues by almost $2.9 million and operating income by $0.5 million.

Globally, we are focused on expanding and improving current relationships with wholesale partners; however, as mentioned above, wholesale accounts remaining lean on inventory levels coupled with conservative at-once ordering affected our first quarter results when compared to prior year. Despite the timing of the Easter holiday and difficult retail markets in certain areas around the globe, we experienced a $6.1 million, or 8.6%, increase in retail channel revenues on a constant currency basis primarily through the addition of 76 global retail locations (net of store closures) partially offset by a 1.5% decrease in comparable store sales compared to prior year. As we continue to diversify our product line with new footwear brands such as the Stretch Sole and Busy Day and carryover products such as the Huarache and A-Leigh wedge, we are experiencing a reduction in clog sales as a percentage of revenues. During the three months ended March 31, 2014, clog silhouettes represented approximately 42% of sales as compared to 47% in 2013. This decrease in clog sales and higher percentage of loafers and other non-fully molded casual footwear styles contributed to lower margins.

Following the closing of the Blackstone investment and the announcement of the resignation of our President and CEO, we have identified key areas of focus for the business going forward; however, we are entering a time of transition as we refocus our strategy on enhancing returns for stockholders and becoming the leading brand in casual lifestyle footwear. We believe the investment by Blackstone conveys a strong financial commitment in our brand and, coupled with our strong balance sheet, will enhance our long-term growth strategy.

The following are the more significant developments in our businesses during the three months ended March 31, 2014:

- Revenues increased $0.8 million, or 0.2%, to $312.4 million compared to 2013. Revenue growth was predominately driven by a global average selling price increase of 2.5% realized through new and classic product expansion.
- Gross profit decreased $9.6 million, or 5.8%, to $156.2 million and gross margin percentage decreased 320 basis points, or 6.0%, to 50.0% compared to 2013. The decline in gross margin percentage is primarily driven by the evolution of our product assortment and is consistent with our product strategy. As we expand our product lines, product mix shifts into styles that may utilize more expensive materials such as textile fabric and leather compared to the traditional clog.
- Selling, general and administrative expenses increased $11.2 million, or 8.7%, to $139.4 million compared to 2013. Selling, general and administrative expenses continued to rise as we increased fixed charges as a result of global retail expansion. In addition, we experienced an increase of $6.3 million in expenses that we believe to be non-indicative of our underlying business trends including restructuring charges as a result of transition activities, additional operating expenses related to our ERP implementation, charges related to on-going litigation and a liability for two accelerated store closures in Europe.
- Net income attributable to common stockholders decreased $22.6 million, or 78.0%, to $6.4 million compared to 2013 driving our diluted earnings per share from $0.33 to $0.06. This decrease is primarily attributable to the gross profit decrease and selling, general and administrative expenses increase mentioned above as well as dividends declared on our Series A preferred stock and dividend equivalents as a result of our recent investment from Blackstone, which contributed a decrease of $2.8 million in net income or $0.04 in diluted earnings per share.
- We have begun to slow our expansion of our retail channel locations and focus on the long-term profitability of current locations. We opened four global retail locations in the first quarter 2014 as compared to ten global retail locations in the first quarter of 2013. In January 2014, we opened our much anticipated three-story flagship location with approximately 4,500 square feet of selling space in a 13,600 square foot building located on 34th Street in New York. In addition, we closed two locations in our Europe segment which were not scheduled to close until future periods and were selected for closure by management based on historical and projected profitability levels, relocation plans, and other factors.
- We continue to fund the implementation of our customized and fully integrated operations, accounting, and finance ERP system, which is expected to launch globally in late 2014. The introduction of the new ERP system to our current environment will allow for seamless and high-quality data across the Company. As of March 31, 2014, total costs to date related to the ERP implementation were $52.4 million, of which $43.6 million was capitalized and $8.8 million was expensed. As of March 31, 2014, we had $15.5 million in outstanding borrowings related to the ERP system under a Master Installment Payment Agreement (“Master IPA”) with PNC Equipment Finance, LLC (“PNC Equipment”).
- We repurchased approximately 0.9 million shares at an average price of $14.94 per share for an aggregate price of approximately $13.0 million excluding related commission charges, under our publicly-announced repurchase plan. As of March 31, 2014, we had approximately $337.0 million available for repurchase under our repurchase authorization.

### Remaining 2014 Outlook

Given the recent events including the investment from Blackstone and the resignation of our CEO, we will undergo some strategic transitioning during the next fiscal year to refine our short-term and long-term growth strategies, which will include prioritizing earnings growth, and our focus on becoming the leading brand in casual lifestyle footwear. The investment by Blackstone is a vote of confidence in our company and our brand, and we anticipate both will benefit from Blackstone’s financial, consumer, retail and brand experience. Due to these recent events and additional changes expected in 2014, we expect an environment that is more challenging to predict the impact on our business, financial position and results of operations.

We began 2014 with a renewed sense of focus and an emphasis on delivering stockholder value. In April of 2014, we repurchased an additional 0.3 million shares; however, we intend to be patient, methodical and opportunistic in the execution of our buyback plan. In addition, we are excited about the early success of our new product launches for spring/summer, including the Stretch Sole and Busy Day, as well as carryover products such as the Huarache and A-Leigh wedge, which are proving more successful in their second seasons. Entering the second quarter, our backlog was up approximately $57.4 million to $350.3 million. The following table summarizes wholesale backlog by reportable operating segment as of March 31, 2014 and 2013:

| ($ thousands) | March 31, 2014 | 2013 |
| --- | ---: | ---: |
| Americas | $107,275 | $95,701 |
| Asia Pacific | 124,487 | 113,972 |
| Japan | 52,687 | 49,394 |
| Europe | 65,841 | 33,871 |
| Total backlog (1) | $350,290 | $292,938 |

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

We have implemented several investment strategies that we believe will drive revenue growth while improving the operational and technological efficiency of the business. In 2014, as we intend to increasingly focus on profitable growth and retail excellence, we will moderate the pace of our investments in new retail stores as well as consolidate some existing locations. We remain in the testing and development phase of our ERP system implementation. This implementation represents the beginning of a transformational change intended to improve our operational efficiency as we adapt as a global company. We expect to launch our new ERP system globally in late 2014.

Overall, the organization is focused on delivering stockholder value through our focus on casual lifestyle footwear sales and balancing long-term global growth between company-operated retail locations, partner store and multiband independent wholesale accounts and internet sites in local languages.

### Results of Operations

### Comparison of the Three Months Ended March 31, 2014 and 2013

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

|  | Three Months Ended March 31, 2014 | 2013 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $312,429 | $311,656 | $773 | 0.2% |
| Cost of sales | 156,202 | 145,807 | 10,395 | 7.1 |
| Gross profit | 156,227 | 165,849 | (9,622) | (5.8) |
| Selling, general and administrative expenses | 139,405 | 128,199 | 11,206 | 8.7 |
| Income from operations | 16,822 | 37,650 | (20,828) | (55.3) |
| Foreign currency transaction losses, net | 2,768 | 2,600 | 168 | 6.5 |
| Interest income | (477) | (306) | (171) | 55.9 |
| Interest expense | 191 | 209 | (18) | (8.6) |
| Other income, net | (141) | (28) | (113) | 403.6 |
| Income before income taxes | 14,481 | 35,175 | (20,694) | (58.8) |
| Income tax expense | 5,357 | 6,214 | (857) | (13.8) |
| Net income | 9,124 | 28,961 | (19,837) | (68.5) |
| Dividends on Series A convertible preferred shares | 2,133 | — | 2,133 | — |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | 618 | — | 618 | — |
| Net income attributable to common stockholders | $6,373 | $28,961 | $(22,588) | (78.0)% |
| Net income per common share: |  |  |  |  |
| Basic | $0.06 | $0.33 | $(0.27) | (81.1)% |
| Diluted | $0.06 | $0.33 | $(0.27) | (81.4)% |
| Gross margin | 50.0% | 53.2% | (320 )bps | (6.0)% |
| Operating margin | 5.4% | 12.1% | (670) bps | (55.4)% |
| Footwear unit sales | 14,981 | 15,291 | (310) | (2.0)% |
| Average footwear selling price | $20.39 | $19.89 | $0.50 | 2.5% |

23

***Revenues.*** During the three months ended March 31, 2014, revenues increased $0.8 million, or 0.2%, compared to the same period in 2013, primarily due to an increase of $0.50 per unit, or 2.5%, in average footwear selling price primarily driven by new product introductions and a product mix shift from clogs to non-clog styles. This increase was partially offset by a decrease of 0.3 million, or 2.0%, in global footwear unit sales.

For the three months ended March 31, 2014, revenues from our wholesale channel decreased $3.0 million, or 1.4%, compared to 2013, which was primarily driven by decreased wholesale demand in our Americas and Japan segments partially offset by increased wholesale sales in our Asia Pacific and Europe segments. Wholesale decreases were primarily driven by lower than anticipated at-once sales as a result of accounts remaining lean on inventory in our Americas segment and continued macroeconomic pressure leading to unfavorable exchange rates between the Japanese Yen and U.S. Dollar in our Japan segment.

For the three months ended March 31, 2014, revenues from our retail channel increased $4.5 million, or 6.3%, compared to 2013, which was primarily driven by our global retail expansion as we opened 76 company-operated stores (net of store closures) since March 31, 2013 partially offset by a 1.5% decrease in comparable store sales. Although we expanded our global retail presence in 2013, we have begun to and plan on continuing to moderate the pace of our retail expansion in 2014 with a focus on consolidating and enhancing the profitability of existing locations. This increase was driven by a global balance as we realized retail revenue growth in all four segments with key growth in our Asia Pacific and Europe markets. Although our retail channel grew in each of our geographical segments on a year-over-year basis, we experienced lower retail sales in our Americas and Europe segments driven by the shift of the Easter holiday from March in 2013 to April in 2014 and continue to see weakness in consumer spending in our Japan segment as lingering effects of recessionary traffic continues to impact retail markets.

For the three months ended March 31, 2014, revenues from our internet channel decreased $0.7 million, or 3.3%, compared to 2013, which was primarily driven by decreased internet sales in Americas and Japan partially offset by increased internet sales in Europe and Asia Pacific. Our internet sales totaled approximately 6.3% and 6.5% of our consolidated net sales in the three months ended March 31, 2014 and 2013, respectively. We continue to increase our online presence by adding new webstores worldwide enabling us to have increased access to our customers in a low cost, attractive manner and providing an opportunity to educate them about our products and brand.

***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 March 31, 2014 decreased our revenues by $3.9 million compared to 2013. The majority of this decrease was related to the decrease in value of the Japanese Yen, Brazilian Real and Russian Ruble compared to the U.S. Dollar partially offset by an increase in the Euro compared to the U.S. Dollar.

The following table summarizes our total revenue by channel for the three months ended March 31, 2014 and 2013:

| ($ thousands) Channel revenues: Wholesale: | Three Months Ended March 31, 2014 | 2013 | Change $% |  | Constant Currency Change(1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $70,175 | $81,604 | $(11,429) | (14.0)% | $(10,294) | (12.6)% |
| Asia Pacific | 77,997 | 69,554 | 8,443 | 12.1 | 8,888 | 12.8 |
| Japan | 21,047 | 22,527 | (1,480) | (6.6) | 536 | 2.4 |
| Europe | 47,780 | 46,533 | 1,247 | 2.7 | (325) | (0.7) |
| Other businesses | 258 | 65 | 193 | 296.9 | 166 | 255.4 |
| Total Wholesale | 217,257 | 220,283 | (3,026) | (1.4) | (1,029) | (0.5) |
| Consumer-direct: |  |  |  |  |  |  |
| Retail: |  |  |  |  |  |  |
| Americas | 36,581 | 35,904 | 677 | 1.9 | 1,089 | 3.0 |
| Asia Pacific | 22,119 | 19,597 | 2,522 | 12.9 | 3,007 | 15.3 |
| Japan | 6,130 | 5,901 | 229 | 3.9 | 930 | 15.8 |
| Europe | 10,730 | 9,689 | 1,041 | 10.7 | 1,085 | 11.2 |
| Total Retail | 75,560 | 71,091 | 4,469 | 6.3 | 6,111 | 8.6 |
| Internet: |  |  |  |  |  |  |
| Americas | 10,364 | 11,921 | (1,557) | (13.1) | (1,444) | (12.1) |
| Asia Pacific | 1,749 | 1,306 | 443 | 33.9 | 548 | 42.0 |
| Japan | 1,873 | 1,931 | (58) | (3.0) | 166 | 8.6 |
| Europe | 5,626 | 5,124 | 502 | 9.8 | 337 | 6.6 |
| Total Internet | 19,612 | 20,282 | (670) | (3.3) | (393) | (1.9) |
| Total revenues: | $312,429 | $311,656 | $773 | 0.2% | $4,689 | 1.5% |

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

The table below illustrates the overall growth in the number of our company-operated retail locations by type of store and reportable operating segment from December 31, 2012 to March 31, 2014:

| Company-operated retail locations: Type: | December 31, 2012 | Opened | Closed | March 31, 2013 | Opened | Closed | December 31, 2013 | Opened | Closed | March 31, 2014 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Kiosk/Store in Store | 121 | 6 | (11) | 116 | 17 | (11) | 122 | 2 | (4) | 120 |
| Retail Stores | 287 | 17 | (9) | 295 | 50 | (18) | 327 | 14 | (7) | 334 |
| Outlet Stores | 129 | 7 | — | 136 | 36 | (2) | 170 | 9 | (10) | 169 |
| Total | **537** | 30 | (20) | **547** | 103 | (31) | **619** | 25 | (21) | **623** |
| Operating segment: |  |  |  |  |  |  |  |  |  |  |
| Americas | 199 | 8 | (4) | 203 | 27 | (14) | 216 | 4 | (7) | 213 |
| Asia Pacific | 201 | 6 | (12) | 195 | 55 | (14) | 236 | 15 | (11) | 240 |
| Japan | 40 | 6 | — | 46 | 5 | (2) | 49 | 4 | (1) | 52 |
| Europe | 97 | 10 | (4) | 103 | 16 | (1) | 118 | 2 | (2) | 118 |
| Total | **537** | 30 | (20) | **547** | 103 | (31) | **619** | 25 | (21) | **623** |

25

The table below sets forth our comparable store sales by reportable operating segment for the year ended March 31, 2014 as compared to 2013:

| Comparable store sales (1) | Constant Currency Three Months Ended March 31, 2014(2) | Constant Currency Three Months Ended March 31, 2013(2) |
| --- | ---: | ---: |
| Americas | (5.0)% | (10.3)% |
| Asia Pacific | 4.5 | 7.3 |
| Japan | (0.1) | (5.8) |
| Europe | 0.6 | (7.3) |
| Global | (1.5)% | (5.2)% |

(1) Comparable store sales 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 March 31, 2014, gross profit decreased $9.6 million, or 5.8%, compared to 2013, which was primarily attributable to a $10.4 million, or 7.1%, increase in cost of sales, partially offset by the 0.2% increase in revenues as a result of higher average footwear selling prices. Gross margin percentage decreased 320 basis points compared to 2013. The decline in gross margin percentage is primarily driven by the evolution of our product assortment and is consistent with our product strategy. As we expand our product lines, product mix shifts into styles that may utilize more expensive materials such as textile fabric and leather compared to the traditional clog. In addition, we experienced increased duties and labor costs in order to meet product demand.

***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 March 31, 2014 decreased our gross profit by $1.7 million compared to 2013. The majority of this decrease was related to the decrease in value of the Japanese Yen, Brazilian Real and Russian Ruble compared to the U.S. Dollar partially offset by an increase in the Euro compared to the U.S. Dollar.

***Selling, General and Administrative Expenses.*** Selling, general and administrative expenses increased $11.2 million, or 8.7%, during the three months ended March 31, 2014 compared to 2013. The increase in selling, general and administrative expenses is primarily due to:

(i) an increase of $4.9 million, or 9.0%, related to the global expansion of our retail channel, in which we opened 76 company-operated stores (net of store closures) during the year. This increase includes $3.8 million of additional building expenses such as rent, maintenance fees and store closure costs, $1.3 million in additional labor expenses and $0.9 million in outside services partially offset by a decrease in miscellaneous expenses of $0.6 million;

(ii) an increase of $3.8 million, or 11.6%, related to non-retail labor charges which includes variable and stock compensation related to certain restructuring activities as well as severance package expenses primarily related to the resignation of our CEO;

(iii) an increase of $0.9 million, or 8.5%, related to non-retail professional expenses related to various litigation services, consulting fees, contract labor and other outside services. This increase includes $1.4 million of additional charges related to on-going litigation partially offset by a $0.5 million decrease in outside services; and

(iv) an increase of $0.7 million in non-retail marketing expenses, which was part of a company-wide initiative to increase advertising and agency services in order to help drive demand.

As a percentage of revenue, selling, general and administrative expenses increased 8.5%, or 350 basis points, to 44.6% during the three months ended March 31, 2014 compared to 2013.

***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 March 31, 2014, decreased selling, general and administrative expenses by approximately $1.6 million compared to 2013. The majority of this decrease was related to the decrease in value of the Japanese Yen, Brazilian Real and Russian Ruble compared to the U.S. Dollar partially offset by an increase in the Euro compared to the U.S. Dollar.

***Foreign Currency Transaction 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 March 31, 2014, losses on foreign currency transactions increased $0.2 million, or 6.5%, compared to 2013. This increase is primarily related to an $11.7 million decrease in net gains associated with our derivative instruments and our ability to hedge foreign currency fluctuations through undesignated forward instruments compared to 2013. This difference was partially offset by an $11.5 million decrease in net losses associated with exposure from day-to-day business transactions in various foreign currencies compared to 2013.

***Income tax expense.*** During the three months ended March 31, 2014, income tax expense decreased $0.9 million. Our effective tax rate increased 19.3% compared to the same period in 2013, as a result of increased profitability in higher tax jurisdictions and losses recorded in tax jurisdictions for which no tax benefits are being recorded. Our effective tax rate of 37.0% for the three months ended March 31, 2014 differs from the federal U.S. statutory rate primarily because of differences between income tax rates between U.S. and foreign jurisdictions and due to increased profitability in higher tax jurisdictions.

### Presentation of Reportable Segments

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

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

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

### Comparison of the Three Months Ended March 31, 2014 and 2013 by Segment

The following table sets forth information related to our reportable operating business segments for the three months ended March 31, 2014 and 2013:

| ($ thousands) Revenues: | Three Months Ended March 31, 2014 | 2013 | Change $% |  | Constant Currency Change (4) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $117,120 | $129,429 | $(12,309) | (9.5)% | $(10,649) | (8.2)% |
| Asia Pacific | 101,865 | 90,457 | 11,408 | 12.6 | 12,443 | 13.8 |
| Japan | 29,050 | 30,359 | (1,309) | (4.3) | 1,632 | 5.4 |
| Europe | 64,136 | 61,346 | 2,790 | 4.5 | 1,097 | 1.8 |
| Total segment revenues | 312,171 | 311,591 | 580 | 0.2 | 4,523 | 1.5 |
| Other businesses | 258 | 65 | 193 | 296.9 | 166 | 255.4 |
| Total consolidated revenues | $312,429 | $311,656 | $773 | 0.2% | $4,689 | 1.5% |
| Operating income (loss): |  |  |  |  |  |  |
| Americas | $13,437 | $20,813 | $(7,376) | (35.4)% | $(7,415) | (35.6)% |
| Asia Pacific | 27,683 | 27,103 | 580 | 2.1 | 574 | 2.1 |
| Japan | 6,462 | 7,560 | (1,098) | (14.5) | (574) | (7.6) |
| Europe | 7,539 | 12,671 | (5,132) | (40.5) | (5,477) | (43.2) |
| Total segment operating income | 55,121 | 68,147 | (13,026) | (19.1) | (12,892) | (18.9) |
| Other businesses(1) | (3,756) | (3,877) | 121 | (3.1) | 360 | (9.3) |
| Intersegment eliminations | 15 | 15 | — | 0.0 | — | — |
| Unallocated corporate and other(2) | (34,558) | (26,635) | (7,923) | 29.7 | (7,889) | 29.6 |
| Total consolidated operating income(3) | $16,822 | $37,650 | $(20,828) | (55.3)% | $(20,421) | (54.2)% |

(1) During the three months ended March 31, 2014, operating losses of Other businesses decreased $0.1 million compared to 2013, primarily due to a $0.3 million increase in gross margin partially offset by $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 three months ended March 31, 2014, Unallocated corporate and other expenses increased $7.9 million compared to the same period in 2013, primarily due to a $6.8 million increase in selling, general and administrative costs due to severance expenses, bonuses and consulting fees related to recent restructuring activities and our investment agreement with Blackstone as well as operating expenses related to the implementation of our ERP system.

(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 March 31, 2014, revenues from our Americas segment decreased $12.3 million, or 9.5%, compared to 2013 primarily due to an 11.4% decrease in footwear units sold and a $1.7 million unfavorable impact from foreign currency fluctuations driven by weakening of the Brazilian Real against the U.S. Dollar. This decrease was partially offset by a 2.1% increase in average footwear unit selling price. During the three months ended March 31, 2014, revenue declines for the region were realized primarily in the wholesale channel which decreased $11.4 million, or 14.0%, and in the internet channel which decreased $1.6 million, or 13.1% compared to 2013. The decrease in wholesale channel revenue was predominately driven by lower than anticipated at-once sales as a result of accounts remaining lean on inventory. The decrease in internet channel revenue was predominately driven by a decrease in average footwear selling price related to internet sales. Partially offsetting these decreases in wholesale and internet channel revenues was an increase of $0.7 million, or 1.9%, in our retail channel, which is primarily the result of the addition of ten company-operated stores (net of store closures) since March 31, 2013. This increase in retail revenue was partially offset by a 5.0% decrease in comparable store sales and the shift of the Easter holiday from March in 2013 to April in 2014. During the three months ended March 31, 2014, segment operating income decreased $7.4 million, or 35.4%, compared to 2013 driven predominately by the revenue decrease noted above and a decrease in segment gross margins of 310 basis points, or 6.3%. Partially offsetting these decreases was a $2.3 million, or 5.3%, decrease in selling, general and administrative expenses compared to 2013.

***Asia Pacific Operating Segment.*** During the three months ended March 31, 2014, revenues from our Asia Pacific segment increased $11.4 million, or 12.6%, compared to 2013 primarily due to a 8.3% increase in average footwear selling price and a 4.8% increase in footwear units sold. These increases were partially offset by a $1.0 million unfavorable impact from foreign currency fluctuations. During the three months ended March 31, 2014, we realized revenue growth in the region in all three channels compared to 2013. Our wholesale channel revenue increased $8.4 million, or 12.1%, primarily due to the expansion of our wholesale doors and the continued support from existing customers. Our direct-to-consumer channel revenues increased $3.0 million, or 14.2%, primarily due to the addition of 45 company-operated stores (net of store closures) since March 31, 2013 coupled with a 4.5% increase in comparable store sales. During the three months ended March 31, 2014, segment operating income increased $0.6 million, or 2.1%, compared to 2013 driven predominately by the revenue increase noted above. Partially offsetting this increase was a $2.9 million, or 10.6%, increase in selling, general and administrative expenses compared to 2013 driven predominantly by the expansion of our retail channel and increased salaries and wages as we added approximately 54 full-time employees to our growing Asia Pacific business, and a decrease in segment gross margins of 330 basis points, or 5.5%.

***Japan Operating Segment.*** During the three months ended March 31, 2014, revenues from our Japan segment decreased $1.3 million, or 4.3%, compared to 2013 primarily due to a 13.7% decrease in average footwear selling price and a $2.9 million unfavorable impact from foreign currency fluctuations. These decreases were partially offset by an 11.1% increase in footwear unit sales. During the three months ended March 31, 2014, revenue declines for the region were realized primarily in the wholesale channel which decreased $1.5 million, or 6.6%, compared to 2013. This decrease was mainly due to a soft wholesale market and slow sell-through of inventory as a result of macroeconomic declines. Partially offsetting this decrease in wholesale channel revenues was an increase of $0.2 million, or 2.2%, in our direct-to-consumer channel revenues which is primarily the result of the addition of six company-operated stores (net of store closures) since March 31, 2013. During the three months ended March 31, 2014, segment operating income decreased $1.1 million, or 14.5%, compared to 2013 driven predominately by the revenue decrease noted above, a $0.5 million unfavorable impact from foreign currency fluctuations and a decrease in segment gross margins of 220 basis points, or 4.0%. Partially offsetting these decreases was a $0.3 million, or 2.8%, decrease in selling, general and administrative expenses compared to 2013.

***Europe Operating Segment.*** During the three months ended March 31, 2014, revenues from our Europe segment increased $2.8 million, or 4.5%, compared to 2013 primarily due to a 5.2% increase in footwear units sold. This increase was partially offset by a 0.7% decrease in average footwear selling price. In addition to sales metrics, our Europe segment realized a $2.5 million favorable impact from foreign currency fluctuations on segment revenues driven by the strengthening of the Euro and British Pound Sterling, which was partially offset by a $0.8 million unfavorable impact from foreign currency fluctuations on segment revenues as a result of the sudden weakening of the Russian Ruble against the U.S. Dollar throughout the quarter due to political uncertainty. During the three months ended March 31, 2014, we realized revenue growth in the region in all three channels compared to 2013 despite the impact of the Easter holiday moving from March in 2013 to April in 2014. Our direct-to-consumer channel revenues increased $1.5 million, or 10.4%, primarily due to the addition of 15 company-operated stores (net of store closures) since March 31, 2013 coupled with a 0.6% increase in comparable store sales on a constant currency basis and increased internet conversion rates. Our wholesale channel revenue increased $1.2 million, or 2.7%, primarily due to the expansion in our number of wholesale doors leading to improved backlog sales. During the three months ended March 31, 2014, segment operating income decreased $5.1 million, or 40.5%, compared to 2013 driven predominately by a decrease in segment gross margins of 430 basis points, or 7.9%, and a $3.9 million, or 18.7%, increase in selling, general and administrative expenses as a result of the expansion of our retail channel, a legal contingency accrual of $1.4 million related to on-going litigation and a infrequent liability of $0.7 million related to the closure of certain retail locations. Partially offsetting this decrease was the revenue increase noted above and a $0.3 million favorable impact from foreign currency fluctuations.

### Non-GAAP Financial Measures

In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present current period ‘adjusted results of operations’, which is a non-GAAP financial measure. Adjusted results of operations exclude the impact of items that management believes affect the comparability or underlying business trends in our condensed consolidated financial statements in the periods presented.

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

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

The following table is a reconciliation of our results of operations, the most directly comparable U.S. GAAP measures, to non-GAAP adjusted results of operations:

*($ thousands, except per share data)*

|  | Three Months Ended March 31, 2014 GAAP | Non-GAAP Adjustments Cash Non-Cash | Non-GAAP | 2013 GAAP | Non-GAAP Adjustments Cash Non-Cash | Non-GAAP |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Revenues** | $312,429 | $$ | $312,429 | $311,656 | $$ | $311,656 |
| Cost of sales | 156,202 | — — | 156,202 | 145,807 | — — | 145,807 |
| **Gross profit** | **156,227** |  | **156,227** | **165,849** |  | **165,849** |
| Gross margin | **50.0%** |  | **50.0%** | **53.2%** |  | **53.2%** |
| Selling, general and administrative expenses (“SG&A”) | 139,405 |  |  | 128,199 |  |  |
| Restructuring charges and expenses (1) |  | (3,645) — | (3,645) |  | — — | — |
| New ERP implementation (2) |  | (1,985) — | (1,985) |  | (1,131) — | (1,131) |
| Contingency accruals (3) |  | (1,422) — | (1,422) |  | — — |  |
| Store closure costs (4) |  | — (675) | (675) |  | — — | — |
| Depreciation and amortization (5) |  | — (404) | (404) |  | — (722) | (722) |
| SG&A |  | (7,052) (1,079) | 131,274 |  | (1,131) (722) | 126,346 |
| SG&A as a percentage of revenues | **44.6%** |  | **42.0%** | **41.1%** |  | **40.5%** |
| **Income from operations** | **16,822** | (7,052) (1,079) | **24,953** | **37,650** | (1,131) (722) | **39,503** |
| Foreign currency transaction losses, net | 2,768 | — — | 2,768 | 2,600 | — — | 2,600 |
| Interest income | (477) | — — | (477) | (306) | — — | (306) |
| Interest expense | 191 | — — | 191 | 209 | — — | 209 |
| Other income, net | (141) | — — | (141) | (28) | — — | (28) |
| **Income before income taxes** | **14,481** | (7,052) (1,079) | **22,612** | **35,175** | (1,131) (722) | **37,028** |
| Income tax expense | 5,357 | — — | 5,357 | 6,214 | — — | 6,214 |
| **Net income** | $9,124 | $(7,052) $(1,079) | $17,255 | $28,961 | $(1,131) $(722) | $30,814 |
| Net income per common share (exclusive of Series A preferred shares) |  |  |  |  |  |  |
| Diluted |  |  | $0.19 |  |  | $0.35 |
| Dividends on Series A preferred shares | $2,133 | $— $— | $2,133 | $— | $— $— | $— |
| Dividend equivalents on Series A preferred shares related to redemption value accretion and beneficial conversion feature | 618 | — — | 618 | **—** | — — | **—** |
| **Net income attributable to common stockholders** | $6,373 | $(7,052) $(1,079) | $14,504 | $28,961 | $(1,131) $(722) | $30,814 |
| Net income per common share: |  |  |  |  |  |  |
| Diluted | $0.06 |  | $0.14 | $0.33 |  | $0.35 |

(1) This relates to severance expenses, bonuses and consulting fees related to recent restructuring activities and our investment agreement with Blackstone.

(2) This represents operating expenses related to the implementation of our new ERP system.

(3) This represents certain legal contingency accruals.

(4) This represents a non-cash liability recorded as a result of exit costs related to retail store restructuring.

(5) This 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 Flows

Cash and cash equivalents at March 31, 2014 increased $94.7 million, or 29.9%, to $411.8 million compared to $317.1 million at December 31, 2013. The primary reason for this increase is the $182.2 million in net cash proceeds from our investment agreement with Blackstone Capital Partners VI L.P. (“Blackstone”). This increase was partially offset by strategic reinvestments into the business, including $15.3 million in net capital additions primarily related to our ERP system implementation and a $13.0 million repurchase of stock associated with board authorized repurchases.

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 issued Series A preferred stock to Blackstone on January 27, 2014 (see *Sale of Preferred Stock* below) and we 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 (see *Revolving Credit Facility* 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.

### Sale of Preferred Stock

On January 27, 2014, we received approximately $182.2 million of proceeds for the sale of 200,000 shares of Series A preferred stock to Blackstone and its permitted transferees. The Series A preferred stock has an aggregate stated value of $200.0 million, or $1000 per share.

The Series A preferred stock ranks senior to our common stock with respect to dividend rights and rights on liquidation, winding-up and dissolution. Holders of Series A preferred stock are entitled to cumulative dividends payable quarterly in cash at a rate of 6% per annum as well as any dividends declared or paid on common stock and are entitled to vote together with the holders of common stock on an as-converted basis. As of March 31, 2014, accrued dividends amounted to $2.1 million, which were paid to Blackstone on April 1, 2014. The Series A preferred stock has several conversion features as well as redemption rights. The conversion rate is subject to customary anti-dilution and other adjustments subject to certain share caps and other restrictions. As of March 31, 2014, the Blackstone investment represented approximately 13.5% ownership of the Company.

### Stock Repurchase Plan Authorizations

We continue to evaluate options to maximize the returns on our cash and maintain an appropriate capital structure, including, among other alternatives, repurchases of our common stock. Subject to certain restrictions on repurchases under our revolving credit facility, we have authorization to repurchase up to $350.0 million of our common stock. The number, price, structure and timing of the repurchases, if any, will be at our sole discretion and future repurchases will be evaluated by us depending on market conditions, liquidity needs and other factors. Share repurchases may be made in the open market or in privately negotiated transactions. The repurchase authorization does not have an expiration date and does not oblige us to acquire any particular amount of our common stock. The board of directors may suspend, modify or terminate the repurchase program at any time without prior notice.

During the three months ended March 31, 2014, we repurchased approximately 0.9 million shares at an average price of $14.94 for an aggregate price of approximately $13.0 million excluding related commission charges, under our publicly-announced repurchase plan. As of March 31, 2014, we had approximately $337.0 million available for repurchase under our repurchase authorization.

### Revolving Credit Facility

On December 16, 2011, we entered into an Amended and Restated Credit Agreement, (as amended, the “Credit Agreement”) with the lenders named therein and PNC Bank, National Association (“PNC”), as a lender and administrative agent for the lenders.

On March 27, 2014, we entered into the Fourth Amendment to Amended and Restated Credit Agreement (the “Fourth Amendment”), pursuant to which certain terms of the Credit Agreement were amended. The Fourth Amendment primarily (i) alters the minimum fixed charge coverage ratio from 1.25 to 1.00 to a scaled quarterly ratio of 1.15 to 1.00 in the first and second quarters of 2014, 1.20 to 1.00 in the third and fourth quarters of 2014 and 1.25 to 1.00 at the end of each quarter thereafter, and (ii) amends certain definitions of the financial covenants to become more favorable to us.

The Credit Agreement enables us to borrow up to $100.0 million, with the ability to increase commitments to up to $125 million subject to certain conditions, and is currently set to mature on December 16, 2017. The Credit Agreement is available for working capital, capital expenditures, permitted acquisitions, reimbursement of drawings under letters of credit, and permitted dividends, distributions, purchases, redemptions and retirements of equity interests. Borrowings under the Credit Agreement are secured by all of our assets including all receivables, equipment, general intangibles, inventory, investment property, subsidiary stock and intellectual property. Borrowings under the Credit Agreement bear interest at a variable rate. For domestic rate loans, the interest rate is equal to the highest of (i) the daily federal funds open rate as quoted by ICAP North America, Inc. plus 0.5%, (ii) 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 requires monthly interest payments with respect to domestic rate loans and at the end of each interest period with respect to LIBOR rate loans. The Credit Agreement further provides for a limit on the issuance of letters of credit to a maximum of $20.0 million. The Credit Agreement contains provisions requiring us to maintain compliance with certain restrictive and financial covenants.

As of March 31, 2014 and December 31, 2013, we had no outstanding borrowings under the Credit Agreement. As of March 31, 2014 and December 31, 2013, we had issued and outstanding letters of credit of $7.3 million and $7.2 million, respectively, which were reserved against the borrowing base under the terms of the Credit Agreement. As of March 31, 2014, we were in compliance with all restrictive financial covenants under the Credit Agreement.

### Long-term Bank Borrowings

On December 10, 2012, we entered into a Master Installment Payment Agreement (“Master IPA”) with PNC in which PNC finances our purchase of software and services, which may include but are not limited to third party costs to design, install and implement software systems, and associated hardware described in the schedules defined within the Master IPA. The Master IPA was entered into to finance our implementation of a new enterprise resource planning (“ERP”) system which began in October 2012 and is estimated to continue through late 2014. The terms of each note payable under the Master IPA consist of variable interest rates and payment terms based on amounts borrowed and timing of activity throughout the implementation of the ERP system.

As of March 31, 2014 and December 31, 2013, we had $15.5 million and $16.8 million, respectively, of long-term debt outstanding under five separate notes payable under the Master IPA, of which $5.2 million and $5.1 million, respectively, represent current installments. As of March 31, 2014, the notes bear interest rates ranging from 2.45% to 2.79% and maturities ranging from September 2016 to September 2017. As this debt arrangement relates solely to the construction and implementation of an ERP system for use by the entity, all interest expense incurred under the arrangement has been capitalized to the condensed consolidated balance sheets until the assets are ready for intended use and will be amortized over the useful life of the software upon that date. During the three months ended March 31, 2014 and 2013, we capitalized $0.1 million and $0.0 million, respectively, in interest expense related to this debt arrangement to the condensed consolidated balance sheets.

### Working Capital

As of March 31, 2014, accounts receivable increased $101.8 million, or 97.5%, to $206.2 million as compared to $104.4 million at December 31, 2013, which is primarily the result of seasonality as first quarter wholesale revenues increase in comparison to fourth quarter revenues in anticipation for spring and summer product delivery.

As of March 31, 2014, inventories increased $30.0 million, or 18.5%, to $192.4 million as compared to $162.3 million at December 31, 2013, which is primarily the result of seasonality as we increase our inventory for spring and summer demand as well as the impact of the Easter holiday shift.

### Capital Assets

During the three months ended March 31, 2014, net capital expenditures acquired, inclusive of intangible assets, decreased to $15.5 million compared to $16.5 million in 2013 primarily due to a reduction in global retail store expansion partially offset by an increase in capitalization of our ERP implementation costs.

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 $249.8 million related to our operating leases. We plan to continue to enter into operating leases related to our retail stores; however, we plan to reduce our overall retail expansion in 2014. 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 may have additional restrictions and covenants associated with them which could adversely impact 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; however, our board of directors recently approved a foreign cash repatriation strategy. As part of this strategy, we have repatriated approximately $90.0 million for which income taxes have already been accrued for or paid. Further cash repatriation will depend on future cash requirements in the U.S. We maintain approximately $52.0 million of foreign earnings for which tax has previously been provided, and which has not been repatriated at this time.

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 March 31, 2014, we held $212.9 million of our total $411.8 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 $212.9 million, $1.2 million could potentially be restricted, as described above. If the remaining $211.7 million were to be immediately repatriated to the U.S., we would be required to incur approximately $36.1 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 $4.8 million as of March 31, 2014), 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 March 31, 2014:

| ($ thousands) | Payments due by period Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating lease obligations (1) | $380,968 | $71,934 | $107,057 | $70,850 | $131,127 |
| Inventory purchase obligations with third party manufacturers (2) | 210,385 | 210,385 | — | — | — |
| Dividends payable (3) | 96,000 | 11,133 | 24,000 | 24,000 | 36,867 |
| Other contracts (4) | 84,392 | 13,554 | 22,291 | 12,317 | 36,230 |
| Debt obligations (5) (9) | 16,177 | 5,525 | 9,759 | 893 | — |
| Estimated liability for uncertain tax positions (6) | 6,306 | — | 6,306 | — | — |
| Minimum licensing royalties (7) | 4,378 | 1,335 | 2,049 | 994 | — |
| Capital lease obligations (8) (9) | 65 | 40 | 25 | — | — |
| Total | $798,671 | $313,906 | $171,487 | $109,054 | $204,224 |

(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, deferred rent and minimum sublease rentals due in the future under non-cancelable subleases. 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 an immaterial amount of 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) Dividends payable are associated with our investment agreement with Blackstone at a rate of 6.0% the stated value of the investment. The amounts represent expected dividend payments over the eight year redemption accretion period.

(4) Other contracts consist of various agreements with third-party providers.

(5) We have entered into an agreement with PNC to finance the purchase of software and services related to the implementation of our new ERP system, which began in October 2012 and is expected to continue into late 2014. Our current debt obligations consist of five separate notes issued under the agreement, which bear interest rates ranging from 2.45% to 2.79% and maturities ranging from September 2016 to September 2017.

(6) 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. As of March 31, 2014, we had gross unrecognized tax benefits recorded in non-current liabilities of $31.2 million and an additional $5.3 million in gross interest and penalties. Of the $31.2 million, we expect approximately $6.3 million to be paid within less than a year. Of the remaining $24.9 million uncertain tax liabilities, we are unable to make a reasonable estimate of the timing of payments in individual years and therefore, such amounts are not included in the contractual obligation table above.

(7) 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.

(8) 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.

(9) Amounts include anticipated interest payments.

### Off-Balance Sheet Arrangements

We had no material off balance sheet arrangements as of March 31, 2014.

### 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, 2013 and incorporated by reference herein.

## Market risk

As filed, 5,535 characters.

### Interest Rate Risk

We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. Our exposure to market risk includes interest rate fluctuations in connection with our revolving credit facility and certain financial instruments. In addition to the revolving credit facility, we have incurred short- and long-term indebtedness related to the implementation of our ERP system. Borrowings under these debt instruments bear fixed interest rates and therefore, do not have the potential for market risk.

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 three months ended March 31, 2014, we did not borrow on our revolving credit facility and had no outstanding borrowings as of March 31, 2014.

We additionally hold cash equivalents including certificate of deposits, time deposits and money market funds. Interest income generated from these cash equivalents will fluctuate with the general level of interest rates. As of March 31, 2014, we held $118.9 million in cash equivalents subject to variable interest rates. If the prevailing market interest rates relative to these investments increased 10% during the three months ended March 31, 2014, there would not have been a material impact on interest 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 months ended March 31, 2014 by approximately $0.9 million. 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 months ended March 31, 2014.

We transact business in various foreign countries and are therefore exposed to foreign currency exchange rate risk inherent in revenues, costs, and monetary assets and liabilities denominated in non-functional currencies. We have entered into foreign currency exchange forward contracts and currency swap derivative instruments to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities, and of future cash flows caused by changes in foreign currency exchange rates.

The following table summarizes the notional amounts of the outstanding foreign currency exchange contracts at March 31, 2014 and December 31, 2013. 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 arties and, therefore, are not a direct measure of our exposure to the foreign currency exchange risks.

| ($ thousands) Foreign currency exchange forward contracts by currency: | March 31, 2014 | December 31, 2013 |
| --- | ---: | ---: |
| Japanese Yen | $67,413 | $68,707 |
| Euro | 52,850 | 38,577 |
| Russian Ruble | 38,754 | 17,588 |
| British Pound Sterling | 36,702 | 15,487 |
| South Korean Won | 34,867 | 12,100 |
| Singapore Dollar | 25,200 | 28,225 |
| Mexican Peso | 18,125 | 18,350 |
| Australian Dollar | 12,689 | 4,941 |
| New Taiwan Dollar | 8,779 | 3,463 |
| South African Rand | 7,746 | 3,076 |
| Indian Rupee | 5,525 | 2,150 |
| Canadian Dollar | 4,972 | 3,428 |
| Hong Kong Dollar | 3,533 | 1,844 |
| New Zealand Dollar | 2,468 | 943 |
| Swedish Krona | 2,222 | 1,615 |
| Norwegian Krone | 388 | — |
| Total notional value, net | $322,233 | $220,494 |
| Latest maturity date | May 2014 | December 2015 |

36

## Controls and procedures

As filed, 1,386 characters.

### 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 March 31, 2014 (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 March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 137 characters.

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, 2013.

Filed May 1, 2014.
Source: SEC EDGAR, the filing index for accession 0001104659-14-032919. Last ingested by Listed: Nov 6, 2026, 18:01 ET. No prices; not investment advice.