# Crocs, Inc.: Form 10-Q for the period ended Sep 30, 2015

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-Q
- Filed: 2015-11-09
- Accepted by EDGAR: Nov 6, 2015, 21:14 ET
- Period: 2015-09-30
- Accession: 0001104659-15-076806
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000110465915076806/a15-18010_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000110465915076806/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-07-01 to 2015-09-30 | $274.1m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2015-01-01 to 2015-09-30 | $882.0m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2015-07-01 to 2015-09-30 | $153.3m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2015-01-01 to 2015-09-30 | $443.9m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2015-07-01 to 2015-09-30 | $120.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2015-01-01 to 2015-09-30 | $438.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2015-07-01 to 2015-09-30 | $135.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2015-01-01 to 2015-09-30 | $429.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2015-07-01 to 2015-09-30 | −$20.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2015-01-01 to 2015-09-30 | −$6.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2015-07-01 to 2015-09-30 | $171.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2015-01-01 to 2015-09-30 | $650.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2015-07-01 to 2015-09-30 | $888.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2015-01-01 to 2015-09-30 | $3.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-07-01 to 2015-09-30 | −$24.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2015-01-01 to 2015-09-30 | −$13.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-07-01 to 2015-09-30 | −$0.37 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2015-01-01 to 2015-09-30 | −$0.32 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-07-01 to 2015-09-30 | −$0.37 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2015-01-01 to 2015-09-30 | −$0.32 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-07-01 to 2015-09-30 | 74,322,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2015-01-01 to 2015-09-30 | 76,318,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2015-01-01 to 2015-09-30 | $6.9m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2015-01-01 to 2015-09-30 | $4.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2015-01-01 to 2015-09-30 | $75.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-09-30 | $168.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-09-30 | $539.1m | us-gaap:AssetsCurrent |
| Total assets | at 2015-09-30 | $721.9m | us-gaap:Assets |
| Current liabilities | at 2015-09-30 | $194.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-09-30 | $213.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2015-09-30 | $333.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 77,549 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, as well as casual lifestyle footwear that use a range of materials. Our Croslite material enables us to produce innovative, lightweight, non-marking, and odor-resistant footwear. We currently sell our products in more than 90 countries through domestic and international retailers and distributors and directly to end-user consumers through our company-operated retail stores, outlets, web stores and kiosks.

Since the initial introduction of our popular Beach and Crocs Classic designs, we have expanded our Croslite products to include a variety of new styles and products and have further extended our product reach through the acquisition of brand platforms. Going forward, we are focusing on our core molded footwear heritage, as well as developing innovative new casual lifestyle footwear. By streamlining the product portfolio and reducing non-core product development, we believe that we can realize our strategy of generating a more powerful consumer connection to our brand and products.

The broad appeal of our footwear has allowed us to market our products to a wide range of distribution channels, including family footwear stores, department stores, sporting goods stores and traditional footwear retailers as well as a variety of specialty and independent retail channels and via the internet. We intend to drive cohesive global brand positioning from region to region and year to year to create a clearer and more consistent product portfolio and message. This strategy will be accomplished through developing powerful product stories supported by effective and consistent global marketing campaigns. Finally, we intend to increase our working market spend, a term we define as funds that put marketing messages in front of consumers.

As a global company, we have significant revenues and costs denominated in currencies other than the U.S. Dollar. Sales in international markets in foreign currencies are expected to continue to represent a substantial portion of our revenues. Likewise, we expect that our subsidiaries with functional currencies other than the U.S. Dollar will continue to represent a substantial portion of our overall gross margin and related expenses. Accordingly, changes in foreign currency exchange rates can materially affect both revenues and costs as well as the comparability of revenues and costs from period to period as a result of the impact of foreign currency translation adjustments.

### Use of Non-GAAP Financial Measures

In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“GAAP”), we present current period “adjusted selling, general and administrative expenses”, which is a non-GAAP financial measure, within Management’s Discussion and Analysis of Financial Condition and Results of Operation (“MD&A”). Adjusted results exclude the impact of items that management believes affect the comparability or underlying business trends in our condensed consolidated financial statements in the periods presented.

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

Management uses adjusted results to assist in comparing business trends from period to period on a consistent non-GAAP basis in communications with the board of directors (the “Board”), stockholders, analysts and investors concerning our financial performance. We believe that these non-GAAP measures are useful to investors and other users of our condensed consolidated financial statements as an additional tool to evaluate our performance. We believe they also provide a useful baseline for analyzing trends in our operations. Investors should not consider these non-GAAP measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Please refer to our ‘Results of Operations’ within this section for a reconciliation of adjusted selling, general and administrative expenses to GAAP selling, general and administrative expenses.

### Recent Events

On September 7, 2015, Jeffrey J. Lasher resigned as Senior Vice President - Finance and Chief Financial Officer of Crocs. His resignation was effective October 1, 2015 and he will remain employed to provide transition services to the Company through November 7, 2015. On September 7, 2015, the Company appointed Mike Smith as Interim Chief Financial Officer, effective October 1, 2015.

On November 4, 2015, Carrie Teffner was appointed as Executive Vice President and Chief Financial Officer of the Company, effective December 16, 2015. In connection with her appointment, Ms. Teffner will resign as a member of the Board prior to her start date with the Company. She will serve as the Company’s principal financial officer and principal accounting officer. Mike Smith will no longer serve as Interim Chief Financial Officer on her start date.

### Financial Highlights

During the three months ended September 30, 2015, revenue declined 9.4% compared to the same period in 2014. The decrease in revenue is due to the net impact of (i) a $26.0 million, or 8.6%, decrease due to foreign currency exchange rate adjustments associated with a strong U.S. Dollar, (ii) a $19.6 million, or 6.5%, increase associated with higher sales volumes, (iii) a $11.6 million, or 3.9%, decrease associated with a lower average sales price, and (iv) a $10.3 million, or 3.4%, decrease associated with store closures.

The following are additional significant developments in our businesses during the three months ended September 30, 2015:

- During the three months ended September 30, 2015, we sold 14.5 million pairs of shoes worldwide, an increase of 8.8% compared to the same period in the prior year.
- During the three months ended September 30, 2015, gross margin was 44.1%, which decreased 718 basis points compared to the same period in the prior year. This is the result of the combined impact of a lower average sales price and the negative impact of foreign currency fluctuations. The average sales price decline is related to additional discounts provided, especially on discontinued products and styles.
- Selling, general and administrative (“SG&A”) expenses decreased $8.6 million, or 6.0%, during the three months ended September 30, 2015 compared to the same period in 2014. This change was driven primarily by a net impact of a $13.7 million increase in bad debt expense, largely associated with our Asia Pacific operations relating to China, which was more than offset by an $11.2 million decrease related to foreign currency translation, a $6.4 million decrease associated with store closures, and a $4.7 million decrease in other administrative expenses.
- During the three months ended September 30, 2015, our bad debt expense was $19.0 million compared to $5.3 million in the same period in the prior year. Of this amount, our China operations within our Asia Pacific segment accounted for $18.9 million of our bad debt expense for the three months ended September 30, 2015 and $3.3 million in the same period in the prior year. The decline in collections is associated with deteriorating macro-economic conditions in China resulting in declining customer demand and deteriorating working capital position of our distributors.
- During the three months ended September 30, 2015, we had continued progress on our strategic objectives announced in 2014. We incurred $1.0 million in restructuring charges as a result of our strategic plans for long-term improvement and growth of the business. These charges primarily related to severance costs, lease termination and other exit related costs. We also incurred $0.7 million related to the launch of our enterprise resource planning (“ERP”) system.
- During the three months ended September 30, 2015, we incurred $5.5 million in retail asset impairment charges related to certain underperforming retail locations, primarily in our Americas segment, that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over their remaining economic life.
- We repurchased approximately 2.3 million shares at an average price of $14.50 per share for a total value of $33.1 million, excluding related commission charges. As of September 30, 2015, we have remaining repurchase authorizations for up to $128.6 million.

### Future Outlook

During 2014, we announced strategic plans for long-term improvement and growth of the business. These plans comprised four key initiatives including (1) streamlining the global product and marketing portfolio, (2) reducing direct investment in smaller geographic markets, (3) creating a more efficient organizational structure by reducing excess overhead costs and enhancing the decision making process, and (4) closing or converting Crocs branded retail stores around the world. During the nine months ended September 30, 2015, we closed 18 stores that were identified in the initial restructuring plan and we will continue to execute our strategy during 2015.

These changes will better position Crocs to adapt to changing customer demands and global economic developments. We are focusing on our core molded footwear heritage, as well as developing innovative new casual lifestyle footwear platforms. By streamlining the product portfolio and reducing non-core product development, we will create a more powerful consumer connection to the brand.

We are increasing our working market spend, a term we define as funds that put marketing messages in front of consumers. During March 2015, we launched our global ad campaign, #FindYourFun, our largest marketing investment in our 12-year history and our first global marketing campaign. Slated to run throughout 2015, ads encourage consumers to #FindYourFun, with imagery featuring Crocs’ iconic clog. These ads are being featured in the U.S., U.K., Germany, Japan, China and South Korea. The whimsical imagery incorporates the Crocs clog into some of the world’s most notable landmarks and destinations, including Las Vegas, Times Square and Piccadilly Circus in London, as well as locations in Shanghai and Seoul.

We are refining our business model around the world, prioritizing direct investment in larger-scale geographies to focus our resources on the demographics with the largest growth prospects, moving away from direct investment in the retail and wholesale businesses in smaller markets and transferring significant commercial responsibilities to distributors and third-party agents. These re-alignments are already underway in Brazil, Taiwan and other markets around the globe. Further, we intend to expand our engagement with leading wholesale accounts in select markets to drive sales growth, optimize product placement and enhance brand reputation.

We reorganized key business functions to improve efficiency and eliminated over 200 global positions, the majority of which occurred in the third quarter of 2014, resulting in reduced structural complexity, size and cost. In addition, we opened our Global Commercial Center in the Boston area in late 2014, which is housing key merchandising, marketing and retail executives. The Boston location was selected in order to attract experienced senior footwear and business development management talent. The Global Commercial Center in Boston joins the Product Creation and Global Shared Services Center in Niwot, Colorado, the cornerstone of support for Crocs’ global business. We continue to strengthen our Regional Commercial Centers in the Netherlands, and Singapore with responsibility for managing Crocs’ global business.

We believe declining collections from our China operations is associated with deteriorating macro-economic conditions in China resulting in declining customer demand and deteriorating working capital position of our distributors. We are unable to predict future economic conditions in China, but if economic conditions in China continue to decline, we may experience further reductions in consumer demand in our China markets. As our China operations represent nearly 10% of our total revenue, the net impact of declining sales volumes in China could have a material adverse impact on our financial results in future periods.

### Results of Operations

### Comparison of the Three Months Ended September 30, 2015 to 2014

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

|  | Three Months Ended September 30, 2015 | 2014 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $274,088 | $302,401 | $(28,313) | (9.4)% |
| Cost of sales | 153,267 | 146,801 | 6,466 | 4.4 |
| Restructuring charges | — | 583 | (583) | (100.0) |
| Gross profit | 120,821 | 155,017 | (34,196) | (22.1) |
| Selling, general and administrative expenses | 135,110 | 143,719 | (8,609) | (6.0) |
| Restructuring charges | 981 | 7,585 | (6,604) | (87.1) |
| Asset impairment charges | 5,460 | 2,600 | 2,860 | 110.0 |
| Income (loss) from operations | (20,730) | 1,113 | (21,843) | (1,962.5) |
| Foreign currency transaction loss, net | (2,908) | (1,290) | (1,618) | 125.4 |
| Interest income | 268 | 424 | (156) | (36.8) |
| Interest expense | (171) | (366) | 195 | (53.3) |
| Other income (loss), net | 405 | 217 | 188 | 86.6 |
| Income (loss) before income taxes | (23,136) | 98 | (23,234) | (23,708.2) |
| Income tax benefit (expense) | (888) | 15,669 | (16,557) | (105.7) |
| Net income (loss) | $(24,024) | $15,767 | $(39,791) | (252.4)% |
| Dividends on Series A convertible preferred stock | (3,000) | (3,067) | 67 | (2.2) |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (752) | (691) | (61) | 8.8 |
| Net income (loss) attributable to common stockholders | $(27,776) | $12,009 | $(39,785) | (331.3)% |
| Net income (loss) per common share: |  |  |  |  |
| Basic | $(0.37) | $0.12 | $(0.49) | (411.44)% |
| Diluted | $(0.37) | $0.12 | $(0.49) | (411.44)% |
| Gross margin | 44.1% | 51.3% | (718 )bps | (14.0)% |
| Operating margin | (7.6)% | 0.4% | (793 )bps | (2,154.9)% |
| Footwear unit sales | 14,456 | 13,290 | 1,166 | 8.8% |
| Average footwear selling price | $18.93 | $22.09 | $(3.16) | (14.3)% |

35

***Revenues.*** During the three months ended September 30, 2015, revenue declined 9.4% compared to the same period in 2014. The decrease in revenue is due to the net impact of (i) a $26.0 million, or 8.6%, decrease due to foreign currency exchange rate adjustments associated with a strong U.S. Dollar, (ii) a $19.6 million, or 6.5%, increase associated with higher sales volumes, (iii) a $11.6 million, or 3.9%, decrease associated with a lower average sales price, and (iv) a $10.3 million, or 3.4%, decrease associated with store closures.

During the three months ended September 30, 2015, revenues from our wholesale channel decreased $18.2 million, or 12.1%, compared to the same period in 2014, and was driven primarily by the Asia Pacific segment, which decreased $10.6 million as a result of the unfavorable impact of foreign currency translation as well as lower sales volumes and declining prices. Additionally, we experienced a decrease in the Americas segment of $4.2 million due to a lower average selling price and the unfavorable impact of foreign currency translation, which was partially offset by an increase in sales volume. We experienced a decrease in the Europe segment of $3.4 million due a decrease in the average sales price, a decrease related to fluctuations of foreign currency translation, largely offset by an increase in sales volume. Lower averages sales prices in all regions are due to a shift in product mix towards lower priced styles.

During the three months ended September 30, 2015, revenues from our retail channel decreased $13.9 million, or 11.1%, compared to the same period in 2014, and was primarily driven by both Asia Pacific and Europe segments. The decrease associated with the Asia Pacific segment is primarily attributed to a lower average selling price related to a lower priced product mix, the unfavorable impact of foreign currency translation and store closures, partially offset by increases in sales volumes. The decrease in the Europe segment is primarily associated with store closures and the unfavorable impact of foreign currency fluctuations.

During the three months ended September 30, 2015, revenues from our e-commerce channel increased $3.9 million, or 15.1%, compared to the same period in 2014, and was primarily driven by the Americas segment, which increased by $3.7 million, primarily due to higher sales volume. Our e-commerce sales totaled approximately 10.7% and 8.5% of our consolidated net sales during the three months ended September 30, 2015 and 2014, respectively. We continue to benefit from our online presence through web stores worldwide enabling us to have increased access to our customers in a low cost, attractive manner and providing us with an opportunity to educate them about our products and brand.

The following table summarizes our total revenue by channel for the three months ended September 30, 2015 and 2014:

*(in thousands)*

| Wholesale: | Three Months Ended September 30, 2015 | 2014 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $48,880 | $53,097 | $(4,217) | (7.9)% | $(1,629) | (3.1)% |
| Asia Pacific | 53,411 | 63,972 | (10,561) | (16.5) | (4,343) | (6.8) |
| Europe | 30,260 | 33,691 | (3,431) | (10.2) | 2,442 | 7.2 |
| Other businesses | 418 | 435 | (17) | (3.9) | (31) | (7.1) |
| Total wholesale | 132,969 | 151,195 | (18,226) | (12.1) | (3,561) | (2.4) |
| Consumer-direct: |  |  |  |  |  |  |
| Retail: |  |  |  |  |  |  |
| Americas | 59,468 | 61,721 | (2,253) | (3.7) | (1,455) | (2.4) |
| Asia Pacific | 38,374 | 44,387 | (6,013) | (13.5) | (1,786) | (4.0) |
| Europe | 13,813 | 19,494 | (5,681) | (29.1) | (1,561) | (8.0) |
| Total retail | 111,655 | 125,602 | (13,947) | (11.1) | (4,802) | (3.8) |
| E-commerce: |  |  |  |  |  |  |
| Americas | 16,321 | 12,657 | 3,664 | 28.9 | 3,891 | 30.7 |
| Asia Pacific | 7,094 | 5,487 | 1,607 | 29.3 | 2,192 | 39.9 |
| Europe | 6,049 | 7,460 | (1,411) | (18.9) | (91) | (1.2) |
| Total e-commerce | 29,464 | 25,604 | 3,860 | 15.1 | 5,992 | 23.4 |
| Total revenues | $274,088 | $302,401 | $(28,313) | (9.4)% | $(2,371) | (0.8)% |

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

The table below illustrates the overall change in the number of our company-operated retail locations by type of store and reportable operating segment for the three months ended September 30, 2015:

| Company-operated retail locations Type | June 30, 2015 | Opened | Closed | September 30, 2015 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store in store | 95 | 4 | 1 | 98 |
| Retail stores | 290 | 1 | 12 | 279 |
| Outlet stores | 174 | 6 | — | 180 |
| Total | 559 | 11 | 13 | 557 |
| Operating segment |  |  |  |  |
| Americas | 199 | 1 | 2 | 198 |
| Asia Pacific | 251 | 9 | 4 | 256 |
| Europe | 109 | 1 | 7 | 103 |
| Total | 559 | 11 | 13 | 557 |

37

The table below sets forth our comparable store sales by reportable operating segment for the three months ended September 30, 2015 and 2014:

| Comparable store sales (1) | Constant Currency Three Months Ended September 30, 2015 (2) | Constant Currency Three Months Ended September 30, 2014 (2) |
| --- | ---: | ---: |
| Americas | (1.6)% | (3.1)% |
| Asia Pacific | (1.5)% | (8.8)% |
| Europe | 2.9% | 0.1% |
| Global | (0.9)% | (4.5)% |

(1) Comparable store status is determined on a monthly basis. Comparable store sales begin in the thirteenth month of a store’s operation. Stores where 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 exclude the impact of our e-commerce channel revenues and are calculated on a currency neutral basis using historical quarterly 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 “Use of Non-GAAP Financial Measures” above for more information.

***Impact on revenues due to foreign exchange rate fluctuations.*** Changes in average foreign currency exchange rates used to translate revenue from our functional currencies to our reporting currency during the three months ended September 30, 2015 resulted in a $25.9 million, or 8.6%, decrease in revenue compared to the same period in 2014.

***Gross profit.*** During the three months ended September 30, 2015, gross profit decreased $34.2 million, or 22.1%, compared to the same period in 2014, and was primarily attributable to the 9.4% decrease in revenue. The decrease in revenue was impacted by a lower average sales price, largely driven by the liquidation of discontinued styles. Cost of sales increased $6.5 million, or 4.4% compared to the same period in 2014. Gross margin percentage decreased 718 basis points compared to the same period in 2014.

***Impact on gross profit due to foreign exchange rate fluctuations.*** Changes in average foreign currency exchange rates used to translate revenue and costs of sales from our functional currencies to our reporting currency during the three months ended September 30, 2015 decreased our gross profit by $10.6 million, or 6.8%, compared to the same period in 2014.

***Selling, general and administrative expenses.*** SG&A expenses decreased $8.6 million, or 6.0%, during the three months ended September 30, 2015 compared to the same period in 2014. This change was driven primarily by a net impact of a $13.7 million increase in bad debt expense, largely associated with our Asia Pacific operations relating to China, which was more than offset by an $11.2 million decrease related to foreign currency translation, a $6.4 million decrease associated with store closures, and a $4.7 million decrease in other administrative expenses. During the three months ended September 30, 2015, our bad debt expense was $19.0 million compared to $5.3 million in the same period in the prior year. Of this amount our China operations accounted for $18.9 million of our bad debt expense for the three months ended September 30, 2015 and $3.3 million for the same period in the prior year.

We believe declining collections from our China operations is associated with deteriorating macro-economic conditions in China resulting in declining customer demand and deteriorating working capital position of our distributors. We are unable to predict future economic conditions in China, but if economic conditions in China continue to decline, we may experience further reductions in consumer demand in our China markets. As our China operations represent nearly 10% of our total revenue, the net impact of declining sales volumes in China could have a material adverse impact on our financial results in future periods.

In addition to these fluctuations, we have identified certain selling, general and administrative expenses that affect the comparability or underlying business trends in our condensed consolidated financial statements. The following table summarizes these expenses and describes the additional drivers of the increase above by reconciling our GAAP selling, general and administrative expenses to non-GAAP selling, general and administrative expenses:

*(in thousands)*

| Selling, general and administrative expenses reconciliation: | Three Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: |
| GAAP selling, general and administrative expenses | $135,110 | $143,719 |
| Legal settlements and fees (1) | (1,438) | (1,612) |
| New ERP implementation (2) | (712) | (4,094) |
| Non-GAAP selling, general and administrative expenses | $132,960 | $138,013 |

(1) This represents certain legal fees, legal settlements, and reorganization expenses related to our investment agreement with Blackstone.

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

***Restructuring Charges.*** We recorded $1.0 million in restructuring charges during the three months ended September 30, 2015. These restructuring charges arose primarily as a result of our strategic plans for long-term improvement and growth of the business. Restructuring charges for the three months ended September 30, 2015, consisted of:

- $0.1 million in severance costs and
- $0.9 million in contract termination costs primarily related to the early termination of operating leases.

***Asset impairment charges.*** During the three months ended September 30, 2015 and 2014, we incurred $5.5 million and $2.6 million, respectively, in retail asset impairment charges related to certain underperforming retail locations, primarily in our Americas segment, that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over their remaining economic life.

***Foreign currency transaction loss, net.*** The line item entitled foreign currency transaction loss, 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 September 30, 2015 and 2014, net loss on foreign currency transactions was $2.9 million and $1.3 million, respectively.

***Income tax expense.*** During the three months ended September 30, 2015, income tax expense increased $16.6 million compared to the same period in 2014. The increase in the tax expense was driven primarily by the result of the recognition of unrecognized tax benefits, of approximately $10.6 million, in connection with various favorable audit settlements in foreign jurisdictions in 2014 that are not recurring in 2015. Also driving an increase in tax expense were losses in various jurisdictions for which tax benefits cannot be recognized because management has determined that it is not more likely than not that we will be able to utilize the tax losses. Our effective tax rate for the three months ended September 30, 2015 differs from the federal U.S. statutory rate primarily because of differences in income tax rates between U.S. and foreign jurisdictions.

### Comparison of the Nine Months Ended September 30, 2015 to 2014

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

|  | Nine Months Ended September 30, 2015 | 2014 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $881,952 | $991,750 | $(109,798) | (11.1)% |
| Cost of sales | 443,891 | 475,323 | (31,432) | (6.6) |
| Restructuring charges | — | 2,612 | (2,612) | (100.0) |
| Gross profit | 438,061 | 513,815 | (75,754) | (14.7) |
| Selling, general and administrative expenses | 429,815 | 434,244 | (4,429) | (1.0) |
| Restructuring charges | 7,454 | 13,895 | (6,441) | (46.4) |
| Asset impairment charges | 7,535 | 5,830 | 1,705 | 29.2 |
| Income (loss) from operations | (6,743) | 59,846 | (66,589) | (111.3) |
| Foreign currency transaction loss, net | (2,631) | (4,278) | 1,647 | (38.5) |
| Interest income | 752 | 1,304 | (552) | (42.3) |
| Interest expense | (650) | (685) | 35 | (5.1) |
| Other income (loss), net | (6) | 388 | (394) | (101.5) |
| Income (loss) before income taxes | (9,278) | 56,575 | (65,853) | (116.4) |
| Income tax benefit (expense) | (3,745) | (8,407) | 4,662 | (55.5) |
| Net income (loss) | $(13,023) | $48,168 | $(61,191) | (127.0)% |
| Dividends on Series A convertible preferred stock | (8,833) | (8,233) | (600) | 7.3 |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (2,209) | (2,030) | (179) | 8.8 |
| Net income (loss) attributable to common stockholders | $(24,065) | $37,905 | $(61,970) | (163.5)% |
| Net income (loss) per common share: |  |  |  |  |
| Basic | $(0.32) | $0.38 | $(0.70) | (182.98)% |
| Diluted | $(0.32) | $0.37 | $(0.69) | (187.93)% |
| Gross margin | 49.7% | 51.8% | (214 ) bps | (4.1)% |
| Operating margin | (0.8)% | 6.0% | (680 ) bps | (112.7)% |
| Footwear unit sales | 46,542 | 45,145 | 1,397 | 3.1% |
| Average footwear selling price | $18.93 | $21.40 | $(2.47) | (11.5)% |

***Revenues.*** During the nine months ended September 30, 2015, revenue declined 11.1% compared to the same period in 2014. The decrease in revenue is due to the net impact of (i) a $73.2 million, or 7.4%, decrease associated with foreign currency exchange rate adjustments associated with a strong U.S. Dollar, (ii) a $32.7 million, or 3.3% decrease associated with a lower average selling price due to changes in product mix, (iii) a $28.6 million, or 2.9%, decrease associated with store closures, and (iv) a $24.3 million, or 2.5% increase associated with higher sales volumes.

During the nine months ended September 30, 2015, revenues from our wholesale channel decreased $76.4 million, or 13.2%, compared to the same period in 2014, and was driven primarily by the Asia Pacific segment, which decreased $42.7 million as a result of the unfavorable impact of foreign currency translation, lower average sales prices related to a lower priced product style mix, and lower sales volume. Additionally, we experienced a $20.3 million decrease in the Europe segment primarily associated with the unfavorable impact of foreign currency translation.

During the nine months ended September 30, 2015, revenues from our retail channel decreased $41.6 million, or 12.3%, compared to the same period in 2014, primarily driven by the Asia Pacific segment, which decreased $22.0 million as a result of a lower average selling price related to a lower priced product mix, the unfavorable impact of foreign currency translation, and store closures. Additionally we experienced a $13.1 million decrease in the Europe segment largely associated with the impact of store closures and the unfavorable impact of foreign currency translation.

During the nine months ended September 30, 2015, revenues from our e-commerce channel increased $8.2 million, or 10.8%, compared to the same period in 2014, primarily driven by increased sales volumes in all segments, partially offset by the unfavorable impact of foreign currency translation and lower average sales prices, especially in our Europe segment. Our e-commerce sales totaled approximately 9.6% and 7.7% of our consolidated net sales during the nine months ended September 30, 2015 and 2014, respectively. We continue to benefit from our online presence through web stores worldwide enabling us to have increased access to our customers in a low cost, attractive manner and providing us with an opportunity to educate them about our products and brand.

The following table summarizes our total revenue by channel for the nine months ended September 30, 2015 and 2014:

*(in thousands)*

| Wholesale: | Nine Months Ended September 30, 2015 | 2014 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $175,306 | $188,987 | $(13,681) | (7.2)% | $(8,479) | (4.5)% |
| Asia Pacific | 218,730 | 261,461 | (42,731) | (16.3) | (26,239) | (10.0) |
| Europe | 105,719 | 126,047 | (20,328) | (16.1) | 3,147 | 2.5 |
| Other businesses | 970 | 607 | 363 | 59.8 | 304 | 50.1 |
| Total wholesale | 500,725 | 577,102 | (76,377) | (13.2) | (31,267) | (5.4) |
| Consumer-direct: |  |  |  |  |  |  |
| Retail: |  |  |  |  |  |  |
| Americas | 152,394 | 158,924 | (6,530) | (4.1) | (4,890) | (3.1) |
| Asia Pacific | 107,619 | 129,612 | (21,993) | (17.0) | (12,400) | (9.6) |
| Europe | 36,747 | 49,844 | (13,097) | (26.3) | (2,164) | (4.3) |
| Total retail | 296,760 | 338,380 | (41,620) | (12.3) | (19,454) | (5.7) |
| E-commerce: |  |  |  |  |  |  |
| Americas | 45,857 | 38,252 | 7,605 | 19.9 | 8,107 | 21.2 |
| Asia Pacific | 21,862 | 16,369 | 5,493 | 33.6 | 6,851 | 41.9 |
| Europe | 16,748 | 21,647 | (4,899) | (22.6) | (926) | (4.3) |
| Total e-commerce | 84,467 | 76,268 | 8,199 | 10.8 | 14,032 | 18.4 |
| Total revenues | $881,952 | $991,750 | $(109,798) | (11.1)% | $(36,689) | (3.7)% |

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

The table below illustrates the overall change in the number of our company-operated retail locations by type of store and reportable operating segment for the nine months ended September 30, 2015:

| Company-operated retail locations Type | December 31, 2014 | Opened | Closed | September 30, 2015 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store in store | 100 | 9 | 11 | 98 |
| Retail stores | 311 | 10 | 42 | 279 |
| Outlet stores | 174 | 10 | 4 | 180 |
| Total | 585 | 29 | 57 | 557 |
| Operating segment |  |  |  |  |
| Americas | 210 | 3 | 15 | 198 |
| Asia Pacific | 258 | 24 | 26 | 256 |
| Europe | 117 | 2 | 16 | 103 |
| Total | 585 | 29 | 57 | 557 |

41

The table below sets forth our comparable store sales by reportable operating segment for the nine months ended September 30, 2015 and 2014:

| Comparable store sales (1) | Constant Currency Nine Months Ended September 30, 2015 (2) | Constant Currency Nine Months Ended September 30, 2014 (2) |
| --- | ---: | ---: |
| Americas | (3.2)% | (4.7)% |
| Asia Pacific | (6.7)% | (5.2)% |
| Europe | 2.5% | 0.6% |
| Global | (3.6)% | (4.1)% |

(2) Comparable store status is determined on a monthly basis. Comparable store sales begin in the thirteenth month of a store’s operation. Stores where 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 exclude the impact of our e-commerce channel revenues and are calculated on a currency neutral basis using historical quarterly average currency rates.

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

***Impact on revenues due to foreign exchange rate fluctuations.*** Changes in average foreign currency exchange rates used to translate revenue from our functional currencies to our reporting currency during the nine months ended September 30, 2015 resulted in a $73.1 million decrease in revenue compared to the same period in 2014.

***Gross profit.*** During the nine months ended September 30, 2015, gross profit decreased $75.7 million, or 14.7%, compared to the same period in 2014, and was primarily attributable to the 11.1% decrease in revenue. Cost of sales decreased $31.4 million, or 6.6% compared to the same period in 2014. Gross margin percentage decreased 214 basis points compared to the same period in 2014.

***Impact on gross profit due to foreign exchange rate fluctuations.*** Changes in average foreign currency exchange rates used to translate revenue and costs of sales from our functional currencies to our reporting currency during the nine months ended September 30, 2015 decreased our gross profit by $35.6 million, or 6.9%, compared to the same period in 2014.

***Selling, general and administrative expenses.*** SG&A expenses decreased $4.4 million, or 1.0%, during the nine months ended September 30, 2015 compared to the same period in 2014. This change was primarily driven by a net impact of a $26.7 million decrease related to foreign currency translation, a $19.3 million decrease associated with store closures, offset by a $25.6 million increase in other administrative expenses, and a $16.0 million increase in bad debt expense, primarily associated with our Asia Pacific operations. During the nine months ended September 30, 2015, our bad debt expense was $25.2 million compared to $9.1 million in the same period in the prior year. Substantially all of this increase in bad debt expense is due to lower collections from our China operations, which included in our Asia Pacific segment. A significant portion of the increased administrative expense related to higher marketing expense incurred compared to the same period in the prior year.

We believe declining collections from our China operations is associated with deteriorating macro-economic conditions in China resulting in declining customer demand and deteriorating working capital position of our distributors. We are unable to predict future economic conditions in China, but if economic conditions in China continue to decline, we may experience further reductions in consumer demand in our China markets. As our China operations represent nearly 10% of our total revenue, the net impact of declining sales volumes in China could have a material adverse impact on our financial results in future periods.

In addition to these fluctuations, we have identified certain selling, general and administrative expenses that affect the comparability or underlying business trends in our condensed consolidated financial statements. The following table summarizes these expenses and describes the additional drivers of the increase above by reconciling our GAAP selling, general and administrative expenses to non-GAAP selling, general and administrative expenses:

*(in thousands)*

| Selling, general and administrative expenses reconciliation: | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: |
| GAAP selling, general and administrative expenses | $429,815 | $434,244 |
| Legal settlements, disbursements and reorganization (1) | (11,814) | (7,909) |
| New ERP implementation (2) | (9,099) | (11,122) |
| Non-GAAP selling, general and administrative expenses | $408,902 | $415,213 |

(1) This represents certain legal liabilities, disbursements made to invalid vendors, and reorganization expenses related to our investment agreement with Blackstone.

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

***Restructuring charges.*** We recorded $7.5 million in restructuring charges during the nine months ended September 30, 2015. These restructuring charges arose primarily as a result of our strategic plans for long-term improvement and growth of the business. Restructuring charges for the nine months ended September 30, 2015 consisted of:

- $4.1 million in severance costs;
- $2.8 million in contract termination costs primarily related to the early termination of operating leases; and
- $0.6 million in other restructuring charges.

***Asset impairment charges.*** During the nine months ended September 30, 2015 and 2014, we incurred $7.5 million and $5.8 million, respectively, in retail asset impairment charges related to certain underperforming retail locations, primarily in our Americas and Europe segments, which were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over their remaining economic life.

***Foreign currency transaction loss, net.*** The line item entitled foreign currency transaction loss, 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 nine months ended September 30, 2015 and 2014, the effect of foreign currency transactions was a net loss of $2.6 million and $4.3 million, respectively.

***Income tax expense.*** During the nine months ended September 30, 2015, income tax expense decreased $4.7 million compared to the same period in 2014. This decrease was primarily a result of an increase in losses in various jurisdictions for which tax benefits were unable to be recognized as management has determined that it is not more likely than not that we will be able to utilize the tax losses. Our effective tax rate for the nine months ended September 30, 2015 differs from the federal U.S. statutory rate primarily because of differences in income tax rates between U.S. and foreign jurisdictions as well as increased profitability in higher tax jurisdictions.

### Presentation of Reportable Segments

During 2014, we had four reportable operating segments based on the geographic nature of our operations: Americas, Asia Pacific, Japan and Europe. Our “Other businesses” category aggregates insignificant operating segments that do not meet the reportable segment threshold and includes our 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.

Subsequent to December 31, 2014, our internal reports reviewed by the CODM began consolidating Japan into the Asia Pacific segment. This change aligned our internal reporting to our new strategic model and management structure, as Japan and Asia Pacific are now managed and analyzed as one operating segment by management and the CODM. Accordingly, we now have three reportable segments for 2015 as well as our “Other Businesses” category and prior period segment results have been reclassified to reflect this change.

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

Segment performance is evaluated based on segment results without allocating corporate expenses, or indirect general, administrative and other expenses. Segment profits or losses include adjustments to eliminate intersegment sales. As such, reconciling items for segment operating income represent unallocated corporate and other expenses as well as intersegment eliminations. Our CODM evaluates the performance of our segments based on gross margin and direct operating profit excluding unallocated amounts.

### Comparison of the Three Months Ended September 30, 2015 and 2014 by Segment

The following table sets forth information related to our reportable operating business segments for the three months ended September 30, 2015 and 2014:

*(in thousands, except % data)*

| Revenues: | Three Months Ended September 30, 2015 | 2014 | Change $% |  | Constant Currency Change (3) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $124,669 | $127,475 | $(2,806) | (2.2)% | $807 | 0.6% |
| Asia Pacific | 98,879 | 113,846 | (14,967) | (13.1) | (3,938) | (3.5) |
| Europe | 50,122 | 60,645 | (10,523) | (17.4) | 791 | 1.3 |
| Total segment revenues | 273,670 | 301,966 | (28,296) | (9.4) | (2,340) | (0.8) |
| Other businesses | 418 | 435 | (17) | (3.9) | (31) | (7.1) |
| Total consolidated revenues | $274,088 | $302,401 | $(28,313) | (9.4)% | $(2,371) | (0.8)% |
| Operating income: |  |  |  |  |  |  |
| Americas | $11,734 | $15,094 | $(3,360) | (22.3)% | $(3,132) | (20.7)% |
| Asia Pacific | 178 | 13,475 | (13,297) | (98.7) | (11,998) | (89.0) |
| Europe | 3,834 | 9,689 | (5,855) | (60.4) | (3,885) | (40.1) |
| Total segment operating income | 15,746 | 38,258 | (22,512) | (58.8) | (19,015) | (49.7) |
| Reconciliation of total segment operating income to income before income taxes: |  |  |  |  |  |  |
| Other businesses (1) | (6,549) | (5,405) | (1,144) | 21.2 | (2,072) | 38.3 |
| Intersegment eliminations | — | 15 | (15) | (100.0) | — | — |
| Unallocated corporate and other (2) | (29,927) | (31,755) | 1,828 | (5.8) | 3,050 | (9.6) |
| Total consolidated operating income (loss) | (20,730) | 1,113 | (21,843) | (1,962.5) | $(18,037) | (1,620.6)% |
| Foreign currency transaction gain (loss), net | (2,908) | (1,290) | (1,618) | 125.4 |  |  |
| Interest income | 268 | 424 | (156) | (36.8) |  |  |
| Interest expense | (171) | (366) | 195 | (53.3) |  |  |
| Other income (expense), net | 405 | 217 | 188 | 86.6 |  |  |
| Income (loss) before income taxes | $(23,136) | $98 | $(23,234) | (23,708.2)% |  |  |

(1) During the three months ended September 30, 2015, operating losses of Other businesses increased $1.1 million compared to 2014, primarily due to a $2.9 million decrease in gross margin and a $1.8 million decrease 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 other corporate costs. For the three months ended September 30, 2015, ‘Unallocated corporate and other’ operating losses decreased as a result of certain variable compensation adjustments.

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

***Americas Operating Segment.*** During the three months ended September 30, 2015, revenues from our Americas segment decreased $2.8 million, or 2.2%, compared to the same period in 2014 primarily due to the net impact of an increase in sales volumes offset partially by the negative impact of foreign currency translation and store closures, and a lower average sales price.

During the three months ended September 30, 2015, segment operating income decreased $3.4 million, or 22.3%, compared to the same period in 2014 primarily related to the net effect of:

- a decrease in revenue of $2.8 million, or 2.2%, and an increase in cost of sales of $4.7 million, or 7.4%;
- a decrease in selling, general and administrative expenses of $5.8 million, or 12.9%, related to lower employee compensation related expenses, lower professional fees, lower building expenses and lower depreciation and amortization expenses;
- a decrease in restructuring expense of $1.4 million, or 96.6%, related to severance and store closure costs; and
- an increase in retail asset impairment of $3.1 million, or 156.9%, primarily attributable to a retail store in New York.

***Asia Pacific Operating Segment.*** During the three months ended September 30, 2015, revenues from our Asia Pacific segment decreased $15.0 million, or 13.1%, compared to the same period in 2014, primarily due to the net impact of unfavorable foreign currency fluctuations and a lower average selling price, slightly offset by an increase in footwear units sold.

Our Asia Pacific operating segment continues to perform poorly primarily due to adverse macro-economic conditions and overall weakness in China’s economy. The macro-economic environment in China has deteriorated over the past several quarters which decreased revenue from our China operations by 16.4%, for the three months ended September 30, 2015 as compared to the same period in 2014. We have also experienced significant declines in collection rates from our China operations due to the adverse macro-economic environment and the deteriorating working capital position of our distributors. The impact of these declines became apparent in September 2015, when multiple China distributors defaulted on their payment obligations. As a result, we have reassessed the collectability of our accounts receivable balances, for our China operations, and we concluded a significant increase in reserves is required. Accordingly, we have increased our China allowance for doubtful accounts by an additional $18.9 million, resulting in total allowances for our China operations of $40.3 million as of September 30, 2015. Our net accounts receivable balance for our China operations as of September 30, 2015 was $4.6 million.

If the economic conditions in China continue to decline, we may experience further reductions in consumer demand in our China markets which could result in additional declines. As our China operations represent nearly 10% of our total revenue, declining sales volumes in China could have a material adverse impact on our financial results in future periods.

During the three months ended September 30, 2015, segment operating income decreased $13.3 million, or 98.7%, compared to the same period in 2014 primarily related to the net effect of:

- a decrease in revenue of $15.0 million, or 13.1%, primarily due to the net impact of unfavorable foreign currency fluctuations and a lower average selling price, slightly offset by an increase in footwear units sold;
- a decrease in cost of sales of $4.7 million, or 9.3%, primarily due to declining sales and the impact of foreign currency fluctuations;
- a decrease in restructuring charges of $2.3 million, or 95.9%; and
- a net increase in selling, general and administrative expenses of $5.3 million, or 11.1%, due to the net impact of (i) a $13.5 million increase in bad debt expense, which is almost exclusively associated with our China operations, partially offset by (ii) a $4.0 million decrease in salary expense, (iii) a $2.4 million decrease in rent expense, and (iv) a $1.8 million decrease in other administrative expenses.

***Europe Operating Segment.*** During the three months ended September 30, 2015, revenues from our Europe segment decreased $10.5 million, or 17.4%, compared to the same period in 2014 due to the net impact of an increase in sales volume, unfavorable foreign currency fluctuations, the negative impact of store closures, and a lower average selling price.

During the three months ended September 30, 2015, segment operating income decreased $5.9 million, or 60.4%, compared to the same period in 2014 primarily related to the net impact of:

- a decrease in revenue of $10.5 million, or 17.4%, partially offset by an increase in cost of sales of $0.6 million, or 2.3%;
- a decrease of $4.7 million, or 22.5%, in selling, general and administrative expenses related to lower employee compensation related expenses, rent and occupancy related expenses and lower depreciation and amortization expense, partially offset by an increase in marketing expenses;
- a decrease in restructuring charges of $0.6 million, or 39.8%, related to severance and store closure costs; and
- an increase in asset impairment of $0.1 million, or 42.5%.

### Comparison of the Nine Months Ended September 30, 2015 and 2014 by Segment

The following table sets forth information related to our reportable operating business segments for the nine months ended September 30, 2015 and 2014:

*(in thousands, except % data)*

| Revenues: | Nine Months Ended September 30, 2015 | 2014 | Change $% |  | Constant Currency Change (3) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $373,557 | $386,163 | $(12,606) | (3.3)% | $(5,262) | (1.4)% |
| Asia Pacific | 348,211 | 407,442 | (59,231) | (14.5) | (31,788) | (7.8) |
| Europe | 159,214 | 197,538 | (38,324) | (19.4) | 57 | 0.0 |
| Total segment revenues | 880,982 | 991,143 | (110,161) | (11.1) | (36,993) | (3.7) |
| Other businesses | 970 | 607 | 363 | 59.8 | 304 | 50.1 |
| Total consolidated revenues | $881,952 | $991,750 | $(109,798) | (11.1)% | $(36,689) | (3.7)% |
| Operating income: |  |  |  |  |  |  |
| Americas | $48,884 | $53,451 | $(4,567) | (8.5)% | $(4,406) | (8.2)% |
| Asia Pacific | 58,775 | 95,383 | (36,608) | (38.4) | (31,211) | (32.7) |
| Europe | 18,177 | 29,254 | (11,077) | (37.9) | (4,463) | (15.3) |
| Total segment operating income | 125,836 | 178,088 | (52,252) | (29.3) | (40,080) | (22.5) |
| Reconciliation of total segment operating income to income before income taxes: |  |  |  |  |  |  |
| Other businesses (1) | (18,843) | (13,750) | (5,093) | 37.0 | (6,080) | 44.2 |
| Intersegment eliminations | — | 45 | (45) | (100.0) | — | — |
| Unallocated corporate and other (2) | (113,736) | (104,537) | (9,199) | 8.8 | (22,914) | 21.9 |
| Total consolidated operating income (loss) | (6,743) | 59,846 | (66,589) | (111.3) | $(69,074) | (115.4)% |
| Foreign currency transaction gain (loss), net | (2,631) | (4,278) | 1,647 | (38.5) |  |  |
| Interest income | 752 | 1,304 | (552) | (42.3) |  |  |
| Interest expense | (650) | (685) | 35 | (5.1) |  |  |
| Other income (expense), net | (6) | 388 | (394) | (101.5) |  |  |
| Income (loss) before income taxes | $(9,278) | $56,575 | $(65,853) | (116.4)% |  |  |

(1) During the nine months ended September 30, 2015, operating losses of Other businesses increased $5.1 million compared to 2014, primarily due to a $5.9 million decrease in gross margin and a $0.9 million decrease 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 other corporate costs. For the nine months ended September 30, 2015, ‘Unallocated corporate and other’ operating losses increased $9.2 million compared to the same period in 2014, primarily due to an increase in administrative expenses related to certain legal liabilities and disbursements made to invalid vendors.

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

***Americas Operating Segment.*** During the nine months ended September 30, 2015, revenues from our Americas segment decreased $12.6 million, or 3.3%, compared to the same period in 2014 primarily due to unfavorable foreign currency fluctuations, a negative impact of store closures, increased sales volume and decreased average selling prices.

During the nine months ended September 30, 2015, segment operating income decreased $4.6 million, or 8.5%, compared to the same period in 2014 primarily related to the net effect of:

- a decrease in revenue of $12.6 million, or 3.3%, slightly offset by a decrease in cost of sales of $4.5 million, or 2.3%;
- a decrease of $4.2 million, or 3.2% , in selling, general and administrative expenses related to lower employee compensation expense, lower building expense and lower depreciation and amortization expense;
- a decrease in restructuring expense of $1.8 million related to severance and store closure costs; and
- an increase in retail asset impairment of $2.5 million, primarily attributable to a retail store in New York.

***Asia Pacific Operating Segment.*** During the nine months ended September 30, 2015, revenues from our Asia Pacific segment decreased $59.2 million, or 14.5%, compared to the same period in 2014 primarily due a decrease associated with unfavorable foreign currency fluctuations, lower average selling prices, the negative impact of store closures, and a decrease in footwear units sold.

Our Asia Pacific operating segment continues to perform poorly primarily due to adverse macro-economic conditions and overall weakness in China’s economy. The macro-economic environment in China has deteriorated over the past several quarters which has decreased revenue from our China operations by 29.0%, for the nine months ended September 30, 2015 as compared to the same period in 2014. We have also experienced significant declines in collection rates from our China operations due to the adverse macro-economic environment and the deteriorating working capital position of our distributors. The impact of these declines became apparent in September 2015, when multiple China distributors defaulted on their payment obligations. As a result, we have reassessed the collectability of our accounts receivable balances, for our China operations, and we concluded a significant increase in reserves is required. Accordingly, we have increased our China allowance for doubtful accounts by an additional $22.9 million, resulting in total allowances for our China operations of $40.3 million as of September 30, 2015. Our net accounts receivable balance for our China operations as of September 30, 2015 is $4.6 million.

If the economic conditions in China continue to decline, we may experience further reductions in consumer demand in our China markets which could result in additional declines. As our China operations represent nearly 10% of our total revenue, declining sales volumes in China could have a material adverse impact on our financial results in future periods.

During the nine months ended September 30, 2015, segment operating income decreased $36.6 million, or 38.4%, compared to the same period in 2014 primarily related to the net effect of:

- a decrease in revenue of $59.2 million, or 14.5% due to unfavorable foreign currency fluctuations, and a decrease in footwear units sold, partially offset by a decrease in cost of sales of $23.5 million, or 13.7%;
- an increase of $1.4 million, or 1.0% , in selling, general and administrative expenses primarily as a result of bad debt expense relating to China and an increase in marketing and sales expenses, partially offset by lower employee compensation related expenses and lower rent and occupancy related expenses;
- an increase in restructuring expense of $0.5 million, or 16.8%, related to severance and store closure costs;
- a decrease in retail asset impairment of $0.2 million; and
- a decrease in other general expense of $0.8 million.

***Europe Operating Segment.*** During the nine months ended September 30, 2015, revenues from our Europe segment decreased $38.3 million, or 19.4%, compared to the same period in 2014, primarily due to unfavorable foreign currency fluctuations, the negative impact of store closures, and an increase in sales volume.

During the nine months ended September 30, 2015, segment operating income decreased $11.1 million, or 37.9%, compared to the same period in 2014 primarily related to the net effect of:

- a decrease in revenue of $38.3 million, or 19.4%, and an increase in cost of sales by $12.1 million, or 12.9%;
- a decrease of $15.5 million, or 21.9% , in selling, general and administrative expenses related to lower employee compensation related expenses, lower rent and occupancy related expenses and lower services expense, partially offset by an increase in marketing expenses;
- an increase in restructuring charges of $1.0 million related to severance and store closure costs; and
- a decrease in asset impairment of $0.6 million.

### Liquidity and Capital Resources

### Condensed Consolidated Statements of Cash Flows

Our condensed consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014 are summarized as follows:

*(in thousands)*

|  | Nine Months Ended September 30, 2015 | 2014 | Change |
| --- | ---: | ---: | ---: |
| Cash provided by (used in) operating activities | $6,940 | $(5,295) | $12,235 |
| Cash used in investing activities | (11,796) | (44,829) | 33,033 |
| Cash provided by (used in) financing activities | (87,885) | 83,527 | (171,412) |
| Effect of exchange rate changes on cash | (6,305) | (176) | (6,129) |
| Net increase (decrease) in cash and cash equivalents | $(99,046) | $33,227 | $(132,273) |

During the nine months ended September 30, 2015, cash and cash equivalents decreased $99.0 million, or 37.0%, to $168.5 million compared to $267.5 million at December 31, 2014.

***Operating Activities.*** The $12.2 million increase in net cash provided by (used in) operating activities is primarily attributable to the net effect of (i) a decrease in cash associated with the net loss compared to net income in the prior period (ii) an increase in cash associated with changes in operating assets and liabilities, (iii) a non-cash cash adjustment primarily associated with an increase in bad debt expense, and (iv) an increase in cash associated with changes in foreign exchange rates.

***Investing Activities***. We placed a new global ERP system into service in January 2015. With the introduction of the new ERP system, we are now able to obtain seamless and high quality data across all regions of the Company. We anticipate the new ERP will result in improved operational processes, a more efficient supply chain and increased transparency of business drivers. While we expect to realize these benefits, there can be no assurance that the anticipated savings and performance benefits will have a positive impact on future performance.

The $33.0 million decrease in net cash used in investing activities is primarily attributable to a $21.9 million decrease in cash spend for intangible assets and a $9.7 million decrease in cash spend for property and equipment during the nine months period ended September 30, 2015, compared to the same period in the prior year. The decrease in intangible asset spend is primarily associated with a $22.3 million decrease in cash spend on our ERP system as compared to the prior year. For the nine months ended September 30, 2015, we spent $5.8 million associated with our ERP implementation and enhancements compared to $28.1 million for same period in the prior year. On a go forward basis, we may have additional expenditures for annual maintenance and enhancements.

***Financing Activities.*** The $171.4 million decrease in net cash provided by (used in) financing activities is primarily attributable to preferred stock issuances of $182.2 million in the nine month period ended September 30, 2014 in connection with the Blackstone investment with no similar transactions occurring in the nine month period ended September 30, 2015.

***Effect of Exchange Rates***. The effect of exchange rate changes on cash of $6.1 million is primarily associated with a decrease in the value of the Euro and the Japanese Yen relative to the U.S. Dollar.

### Working Capital

Accounts receivable and inventory balances increased $16.6 million and $19.8 million, respectively, from December 31, 2014 to September 30, 2015, due to the seasonal nature of our operations as third quarter revenues typically exceed our fourth quarter revenues and the increase in accounts receivable was partially offset by the significant increase in allowance for bad debt as of September 30, 2015, as a result of deteriorating collection rates in our Asia Pacific segment, specifically related to China. Accounts payable increased $36.2 million as of September 30, 2015, compared to December 31, 2014. As a result of the January 2015 implementation of our new ERP system, we accelerated payments of our outstanding payables in late 2014 to accommodate the transition. Therefore, the increase in accounts payable is due to the normal course of business, as our business cycles have returned to normal.

We anticipate our 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 have a revolving credit facility with a syndicate of lenders, including PNC Bank, National Association (“PNC”) as lead lender, which currently provides us with up to $100.0 million in borrowing capacity and matures in December 2017. Additionally, in August 2015, we entered into a revolving credit facility with HSBC (China) Company Limited, Shanghai Branch (“HSBC”) as the lender, which provides up to RMB 60.0 million, or the USD equivalent of $9.4 million at the September 30, 2015 exchange rate, in borrowing capacity (see *Asia Pacific 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.

### Stock Repurchase Plan Authorizations

We continue to evaluate options to maximize the returns on our cash and to maintain an appropriate capital structure, including, among other alternatives, repurchases of our common stock.

On December 26, 2013, the Board approved the repurchase of up to $350.0 million of our common stock, subject to certain restrictions on repurchases under our revolving credit facility. The number, price, structure and timing of the repurchases 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 may suspend, modify or terminate the repurchase program at any time without prior notice.

During the nine months ended September 30, 2015, we repurchased 5.6 million shares at an average price of $13.64 per share for an aggregate price of approximately $75.8 million, excluding related commission charges, under our publicly-announced repurchase plan.

As of September 30, 2015, subject to certain restrictions on repurchases under our revolving credit facility, we had $128.6 million remaining under the repurchase authorizations.

### Senior Revolving Credit Facility

On September 25, 2009, we entered into a Revolving Credit and Security Agreement (as amended, the “Credit Agreement”) with the lenders named therein and PNC, as a lender and administrative agent for the lenders.

The Credit Agreement enables us to borrow up to $100.0 million, with the ability to increase commitments to $125.0 million subject to certain conditions, and is currently set to mature 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 September 30, 2015 and December 31, 2014, we had no outstanding borrowings under the Credit Agreement. As of September 30, 2015 and December 31, 2014, we had outstanding letters of credit of $1.5 million and $1.8 million, respectively, which were reserved against the borrowing base under the terms of the Credit Agreement. As of September 30, 2015, the Company was not in compliance with the fixed charge coverage ratio and the leverage ratio under the Credit Agreement. On November 3, 2015, the Company entered into the Ninth Amendment to Amended and Restated Credit Agreement pursuant to which the Company received a waiver from the lenders of the financial covenant violations as of September 30, 2015 and the Credit Agreement was amended to allow for up to $15.0 million in stock repurchases in the fourth quarter of 2015. The Company anticipates it will be in compliance with its covenants as of December 31, 2015, however, there can be no assurance that the Company will be in compliance at that date.

### Asia Pacific Revolving Credit Facility

On August 28, 2015, a Crocs subsidiary entered into a revolving credit facility agreement with HSBC Bank (China) Company Limited, Shanghai Branch (“HSBC”) as the lender. The revolving credit facility enables Crocs to borrow uncommitted dual currency revolving loan facilities up to RMB 40.0 million, or the USD equivalent, and import facilities up to RMB 60.0 million, or the USD equivalent, however, the total combined facility amount may not exceed an aggregate facility limit of RMB 60.0 million. This revolving credit facility supports possible future net working capital needs in China. For loans denominated in USD, the interest rate is 2.1% per annum plus LIBOR for three months or any other period as may be determined by HSBC at the end of each interest period. For loans denominated in RMB, interest equals the one year benchmark lending rate effective on the loan drawdown date set forth by the People’s Bank of China with a 10% mark-up and is payable on the maturity date of the related loan. The revolving credit facility is guaranteed by Crocs, Inc. and certain accounts receivables in China are pledged as security under the revolving credit facility. The revolving credit facility contains provisions requiring Crocs to maintain compliance with certain restrictive covenants and as of September 30, 2015, Crocs was in compliance with all relevant covenants. As of September 30, 2015, Crocs had no outstanding borrowings under the revolving credit facility.

### Long-Term Bank Borrowings

On December 10, 2012, we entered into a Master Installment Payment Agreement (“Master IPA”) with PNC in which PNC financed the Company’s recent implementation of a new ERP system which began in October 2012 and was substantially completed in early 2015. The terms of each note payable, under the Master IPA, consist of a fixed interest rate and payment terms based on the amount borrowed and the timing of activity throughout the implementation of the ERP system. The Master IPA is subject to cross-default, cross-termination, and is co-terminous with the Credit Agreement. As discussed above, as of September 30, 2015, the Company was not in compliance with the fixed charge coverage ratio and the leverage ratio under the Credit Agreement. On November 3, 2015, the Company received a waiver from the lenders of the financial covenant violations as of September 30, 2015. The Company anticipates it will be in compliance with its covenants as of December 31, 2015.

As of September 30, 2015 and December 31, 2014, Crocs had $7.7 million and $11.6 million, respectively, of debt outstanding under five separate notes payable, of which $5.4 million and $5.3 million, respectively, represents current installments. As of September 30, 2015, the notes bear interest rates ranging from 2.45% to 2.79% and maturities ranging from September 2016 to September 2017. As this debt arrangement relates solely to the construction and implementation of an ERP system for use by the entity, interest expense was capitalized to the condensed consolidated balance sheets until the assets were placed into service on January 1, 2015. During the three and nine months ended September 30, 2015, no interest was capitalized. During the three and nine months ended September 30, 2014, Crocs capitalized $0.1 million and $0.3 million, respectively, in interest expense related to this debt arrangement. Interest rates and payment terms are subject to changes as further financing occurs under the Master IPA.

### Capital Assets

During the nine months ended September 30, 2015, net capital assets acquired, inclusive of intangible assets, were $11.8 million compared to $43.3 million during the same period in 2014. The decrease is primarily due to decreased capital spending related to our ERP implementation, as the implementation phase has ended.

### Repatriation of Cash

As we are a global business, we have cash balances located in various countries that are denominated in various currencies. Fluctuations in foreign currency exchange rates impact the results of our 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 that could adversely impact our liquidity and our 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 has approved a foreign cash repatriation strategy related to certain historical intercompany receivables or related to certain royalties paid to the U.S. during the year. As part of this strategy, we repatriated approximately $107.8 million during the three months ended September 30, 2015 without a tax impact. Further cash repatriation will depend on future cash requirements in the U.S. We maintain approximately $65.8 million of foreign earnings for which tax has previously been provided, and 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 have monetary laws that 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 September 30, 2015, we held $149.7 million of our total $168.5 million cash balance in international locations. This cash is primarily used for the ongoing operations of the business in the locations where the cash is held. Of the $149.7 million, $1.9 million could potentially be restricted, as described above. If the remaining $147.8 million were to be immediately repatriated to the U.S., we would be required to incur approximately $16.3 million in taxes that were not previously provided for in our consolidated statement of operations.

### Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of September 30, 2015.

### Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of our critical accounting policies, please refer to our annual report on Form 10-K for the year ended December 31, 2014.

### Recent Accounting Pronouncements

See Note 1 - Organization and Basis of Presentation in the accompanying notes to the condensed consolidated financial statements for recently adopted and issued accounting pronouncements.

## Market risk

As filed, 6,876 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 PNC 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 PNC 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. As of September 30, 2015 and December 31, 2014, there were no borrowings under the revolving credit facility. Therefore, we are currently not exposed to market interest rate risk under the revolving credit facility.

Borrowings under the HSBC revolving credit facility bear interest at a variable rate. For loans denominated in USD, the interest rate is 2.1% per annum plus LIBOR for three months or any other period as may be determined by HSBC at the end of each interest period. For loans denominated in RMB, interest equals the one year benchmark lending rate effective on the loan drawdown date set forth by the People’s Bank of China with a 10% mark-up and is payable on the maturity date of the related loan. Borrowings under the HSBC 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. As of September 30, 2015 and December 31, 2014, there were no borrowings under the revolving credit facility. Therefore, we are currently not exposed to market interest rate risk under the revolving credit facility.

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 September 30, 2015, we held $15.3 million in cash equivalents subject to variable interest rates. If the prevailing market interest rates relative to these investments increased or decreased by 10% during the three months ended September 30, 2015, interest income would have increased or decreased by a negligible amount.

### 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 or decrease of 1% in value of the U.S. Dollar relative to foreign currencies would have increased or decreased loss before taxes for the three and nine months ended September 30, 2015 by approximately $0.2 million and $0.4 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 for the three and nine months ended September 30, 2015 and 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 as of September 30, 2015 and December 31, 2014. The notional amounts of the derivative financial instruments shown below are denominated in their U.S. Dollar equivalents and represent the amount of all contracts of the foreign currency specified. These notional values do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the foreign currency exchange risks.

*(in thousands)*

| Foreign currency exchange forward contracts by currency: | September 30, 2015 | December 31, 2014 |
| --- | ---: | ---: |
| Japanese Yen | $96,015 | $44,533 |
| Singapore Dollar | 62,325 | 61,887 |
| British Pound Sterling | 20,372 | 17,230 |
| Euro | 16,902 | 134,755 |
| South Korean Won | 11,795 | 14,590 |
| Mexican Peso | 9,823 | 13,180 |
| South African Rand | 6,481 | 4,355 |
| Australian Dollar | 5,935 | 7,913 |
| Indian Rupee | 5,144 | 3,356 |
| New Taiwan Dollar | 3,410 | 3,229 |
| Swedish Krona | 2,552 | 1,918 |
| Brazilian Real | 1,910 | — |
| Canadian Dollar | 1,237 | 3,005 |
| Russian Ruble | 781 | 1,838 |
| Hong Kong Dollar | 676 | 814 |
| Norwegian Krone | 560 | 917 |
| New Zealand Dollar | — | 743 |
| Chinese Yuan Renminbi | — | 5,376 |
| Total notional value, net | $245,918 | $319,639 |
| Latest maturity date | November 2015 | January 2015 |

56

## Controls and procedures

As filed, 1,551 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 Interim 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 September 30, 2015 (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Interim 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 Interim 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 September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than certain changes and improvements to our processes and procedures resulting from our implementation of our new ERP system.

## Risk factors

As filed, 2,996 characters.

In addition to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2014, you should consider the following risk factors in evaluating our results of operations, financial condition, business and operations or an investment in the shares of our Company.

***China’s deteriorating macro-economic environment could adversely affect sales in our Asia Pacific segment which may adversely affect our financial condition and results of operations.***

Current and future global economic conditions may adversely affect consumer spending and the financial health of our customers and others with whom we do business which may adversely affect our financial condition, results of operations and cash resources. Macro-economic conditions in China have deteriorated over the past several quarters resulting in softening consumer demand and payment delays from our China distributors which have negatively impacted the sales volumes and cash collections for our China operations. In the third quarter of 2015, we recorded a bad debt expense of $18.9 million related to receivables in China as a result of distributors defaulting on their payment obligations. As a result of this adjustment, our remaining net receivable balance in China is $4.6 million as of September 30, 2015. If the economic conditions in China continue to decline, we may experience further reductions in consumer demand in the China market resulting in additional losses. As our China operations represent nearly 10% of our total revenue, the impact of declining sales volumes in China could have a material adverse impact on our financial results in future periods.

***We are currently in negotiations with multiple China distributors regarding our terms of payment and there can be no assurance that these negotiations will be successful. If we are not able to agree on acceptable terms with our China distributors, we may need to establish new distributor relationships and we cannot guarantee if we will be able to do so within a reasonable time frame, if at all.***

In the third quarter of 2015, multiple China distributors failed to comply with the terms of their payment obligations. As a result, we have ceased all shipments to these distributors until we are able to develop mutually beneficial terms of payment for both current sales and aged receivables. In the event we are not able to reach an agreement with these distributors we may terminate our relationship and look for new partners in the region. At this time we do not know how long it will take to establish new distributor relationships on acceptable terms to us or if we will be able to establish such relationships at all. If we are unable to establish new partnerships within a reasonable time frame, we could experience a significant decline in sales volumes within China in future periods which could have a material adverse effect on our business including our financial results, cash flows and financial condition.

Filed Nov 9, 2015.
Source: SEC EDGAR, the filing index for accession 0001104659-15-076806. Last ingested by Listed: Nov 6, 2026, 18:01 ET. No prices; not investment advice.