# Crocs, Inc.: Form 10-Q for the period ended Mar 31, 2016

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-Q
- Filed: 2016-05-10
- Accepted by EDGAR: May 10, 2016, 17:04 ET
- Period: 2016-03-31
- Accession: 0001104659-16-119786
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000110465916119786/a16-6620_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000110465916119786/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-01-01 to 2016-03-31 | $279.1m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-01-01 to 2016-03-31 | $149.8m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2016-01-01 to 2016-03-31 | $129.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2016-01-01 to 2016-03-31 | $114.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-01-01 to 2016-03-31 | $14.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-01-01 to 2016-03-31 | $243.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-01-01 to 2016-03-31 | $2.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | $10.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-01-01 to 2016-03-31 | $0.07 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-01-01 to 2016-03-31 | $0.07 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-01-01 to 2016-03-31 | 74,033,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | −$56.9m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2016-01-01 to 2016-03-31 | $3.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-03-31 | $89.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-03-31 | $494.8m | us-gaap:AssetsCurrent |
| Total assets | at 2016-03-31 | $655.5m | us-gaap:Assets |
| Current liabilities | at 2016-03-31 | $199.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-03-31 | $219.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-03-31 | $259.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 52,654 characters.

### Business Overview

Crocs, Inc. and its consolidated subsidiaries (collectively, the “Company,” “Crocs,” “we,” “our,” or “us”) are engaged in the design, development, manufacturing, worldwide marketing and distribution of casual lifestyle footwear 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. The Company, a Delaware corporation, is the successor of a Colorado corporation of the same name, and was originally organized in 1999, as a limited liability company. 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 65 countries through domestic and international retailers and distributors, and directly to consumers through our company-operated retail stores, outlets, webstores, and kiosks.

Since the initial introduction of our popular Beach and Crocs Classic designs in 2002, we have expanded our classic products to include a variety of new styles and products including clogs, sandals, wedges, flats, sneakers, and boots. Going forward, we are focusing on our core molded footwear heritage, as well as developing innovative casual lifestyle footwear. 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. Our goal is to deliver world-class product assortments for the family with all of the comfort features and benefits for which Crocs is known. We have discontinued our non-core products in order to focus on growing our core-molded heritage category while developing more compelling casual footwear platforms.

We have expanded our core molded product line with the addition of dual density technology, warm lined styles, seasonal flips and slides. Licensed style partnerships from Disney, Marvel, Sanrio, Nickelodeon, and Warner Bros., among others, provide popularity to our kids' core line along with our kids-only product innovations, including lights, color-change materials, and interactive elements. We have extended our core product assortment with new styling including 'built for her' and 'built for him' silhouettes, which are offered in multiple color and graphic treatments.

A key differentiating feature of our footwear products is the Croslite material, which is uniquely suited for comfort and functionality. Croslite is carefully formulated to create extremely lightweight, comfortable, and non-marking footwear that conforms to the shape of the foot and increases comfort. Croslite is a closed-cell resin material, which is water resistant, virtually odor free and allows many of our footwear styles to be cleaned simply with water. As we have expanded our product offering, we have incorporated traditional materials, such as textile fabric and leather, into many of our styles; however, we continue to utilize the Croslite material for the foot bed, sole, and other key structural components for many of these styles.

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 ("U.S. GAAP"), we present current period "non-GAAP selling, general, and administrative expenses", which is a non-GAAP financial measure, within this 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 U.S. GAAP. Constant currency represents current period results that have been restated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.

Management uses adjusted results 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 operating 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 U.S. 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.

### Financial Highlights

Revenue increased $16.9 million or 6.5% in the three months ended March 31, 2016 compared to the same period in 2015. The increase in revenue was due to the net effect of: (i) an increase of $25.9 million or 9.9% associated with higher sales volumes, (ii) a decrease of $7.1 million or 2.7% associated with unfavorable exchange rates driven by a stronger U.S. Dollar, and (iii) a $1.9 million or 0.7% decrease associated with lower average sales prices.

The following are significant developments in our businesses during the three months ended March 31, 2016:

- The $16.9 million or 6.5% increase in revenues over the three months ended March 31, 2016 compared to the same period in 2015, is inclusive of approximately $9.0 million in increased sales volumes due to improved shipping times, which reduced the number of unfilled orders at quarter end.
- We sold 16.3 million pairs of shoes worldwide, an increase of 9.9% compared to the same period in the prior year.
- During the three months ended March 31, 2016, cost of sales increased $15.0 million or 11.1% compared to the same period in 2015. The increase in cost of sales was due to the net impact of: (i) a $13.4 million or 9.9% increase due to higher sales volumes, (ii) a $5.9 million or 4.4% increase on a per unit basis, primarily related to higher distribution costs, (iii) a $4.3 million or 3.2% decrease due to the impact of foreign currency translation.
- Gross profit increased $2.0 million or 1.6% to $129.4 million and gross margin decreased 230 basis points, to 46.3%, compared to the same period in 2015. This resulted from increased revenue, from higher sales volumes, during the three months ended March 31, 2016 partially offset by a $15.0 million or 11.1% increase in cost of sales for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The increase in cost of sales was due to the net effect of: (i) an increase of $13.4 million or 9.9% due to higher sales volumes, (ii) an increase of $5.9 million or 4.4% on a per unit basis, primarily related to higher distribution costs, and (iii) a decrease of $4.3 million or 3.2% associated with changes in the exchange rates driven by a stronger U.S. Dollar.
- Selling, general and administrative (“SG&A”) expenses decreased $11.1 million or 8.8% for the three months ended March 31, 2016 compared to the same period in 2015. The decrease is primarily due to the combined impact of: (i) a $5.6 million or 4.4% decrease in implementation costs associated with the new ERP system, which was placed into service in 2015, (ii) a $2.1 million or 1.7% decrease due to foreign currency fluctuations, (iii) a $1.3 million or 1.0% decrease in marketing activities, primarily due to timing as we shifted a portion of our marketing efforts from the first quarter to the second quarter of 2016, and (iv) a $1.2 million or 0.9% decrease in reorganization charges.
- Net income (loss) attributable to common stockholders increased $12.3 million to net income of $6.4 million compared to net loss of $6.0 million for the same period of 2015. Net earnings per share was $0.07 for the three months ended March 31, 2016 compared to a net loss per share of $0.08 for the three months ended March 31, 2015. These increases were primarily the result of an increase in gross profit, a decrease in selling general and administrative expense, and a decrease associated with the completion of our restructuring efforts in 2015 resulting in zero restructuring costs in the current period compared to restructuring charges of $3.7 million in the same period of 2015.

### Future Outlook

During 2016, we intend to continue our strategic plans for long-term improvement and growth of the business. Our plans comprise four key initiatives: (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 certain underperforming Crocs branded retail stores around the world.

We believe 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 believe we will create a more powerful consumer connection to the brand.

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. 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.

Additionally, we have been addressing the declining collection rates we have experienced from our China operations by limiting or terminating our relationship with distributors who we have identified as being a significant credit risk. We have also been working to: (i) expand our relationship with distributors with whom we have a positive payment history and who are sufficiently collateralized, (ii) identify new business partners who are in a strong financial position and who have a proven track record, and (iii) supplement our distributor relationships by establishing a retail presence in select markets in China. As of March 31, 2016, we have entered into negotiations to terminate our relationships with certain unprofitable distributors and we have begun negotiations with existing distributors, who have a strong performance history, to open stores in locations being exited by unprofitable distributors. Additionally, we have begun identifying locations where we believe it will be beneficial to supplement our distributor model with company-owned retail stores. We believe we will complete most of these efforts within the second quarter of 2016.

We are unable to predict future economic conditions in China, but if economic conditions in China continue to decline, we may experience further declines in consumer demand in our China markets. As our China operations represent approximately 8.2% 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 March 31, 2016 to 2015

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

|  | Three Months Ended March 31, 2016 | 2015 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $279,140 | $262,193 | $16,947 | 6.5% |
| Cost of sales | 149,774 | 134,823 | 14,951 | 11.1 |
| Gross profit | 129,366 | 127,370 | 1,996 | 1.6 |
| Selling, general and administrative expenses | 114,930 | 126,069 | (11,139) | (8.8) |
| Asset impairment charges | 193 | — | 193 | 100.0 |
| Restructuring charges | — | 3,663 | (3,663) | (100.0) |
| Income (loss) from operations | 14,243 | (2,362) | 16,605 | (703.0) |
| Foreign currency transaction gain (loss), net | (1,247) | 494 | (1,741) | (352.4) |
| Interest income | 216 | 288 | (72) | (25.0) |
| Interest expense | (243) | (219) | (24) | 11.0 |
| Other income (expense), net | 82 | (331) | 413 | (124.8) |
| Income (loss) before income taxes | 13,051 | (2,130) | 15,181 | (712.7) |
| Income tax expense | (2,905) | (295) | (2,610) | 884.7 |
| Net income (loss) | $10,146 | $(2,425) | $12,571 | (518.4)% |
| Dividends on Series A convertible preferred stock | (3,000) | (2,833) | (167) | 5.9 |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (785) | (721) | (64) | 8.9 |
| Net income (loss) attributable to common stockholders | $6,361 | $(5,979) | $12,340 | (206.4)% |
| Net income (loss) per common share: |  |  |  |  |
| Basic | $0.07 | $(0.08) | $0.15 | (187.5)% |
| Diluted | $0.07 | $(0.08) | $0.15 | (187.5)% |
| Gross margin | 46.3% | 48.6% | (230 )bps | (4.7)% |
| Operating margin | 5.1% | (0.9)% | 600 bps | (666.7)% |
| Footwear unit sales | 16,268 | 14,802 | 1,466 | 9.9% |
| Average footwear selling price | $16.85 | $17.45 | $(0.60) | (3.4)% |

22

### Revenues by channel

***Wholesale channel revenues.*** During the three months ended March 31, 2016, revenues from our wholesale channel increased $12.0 million or 6.7%, compared to the same period in 2015. The increase in wholesale channel revenue was due to the net impact of: (i) a $17.4 million or 9.8% increase from higher sales volumes (primarily in the Americas segment), (ii) a $5.1 million or 2.9% decrease due to the unfavorable impact of foreign currency translation, and (iii) a $0.3 million or 0.2% decrease associated with reduced average selling prices.

***Retail channel revenues.*** During the three months ended March 31, 2016, revenues from our retail channel decreased $0.6 million, or 0.8%, compared to the same period in 2015. The decrease in retail channel revenues was due to the net impact of: (i) a $1.6 million or 2.4% decrease due to the unfavorable impact of foreign currency translation, (ii) a $1.2 million or 1.9% increase associated with higher sales volumes, and (iii) a $0.2 million or 0.3% decrease associated with reduced average selling prices.

***E-commerce channel revenues.*** During the three months ended March 31, 2016, revenues from our e-commerce channel increased $5.5 million or 31.9%, compared to the same period in 2015. The increase in e-commerce revenue was due to the net impact of: (i) a $7.7 million or 44.6% increase in sales volumes, (ii) a $1.8 million or 10.3% decrease due to lower average selling prices, and (iii) a $0.4 million or 2.4% decrease associated with the unfavorable impact of foreign currency translation.

The following table summarizes our total revenue by channel for the three months ended March 31, 2016 and 2015:

*(in thousands)*

| Wholesale: | Three Months Ended March 31, 2016 | 2015 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $74,155 | $61,176 | $12,979 | 21.2% | $15,104 | 24.7% |
| Asia Pacific | 77,154 | 72,497 | 4,657 | 6.4% | 6,659 | 9.2% |
| Europe | 39,062 | 44,653 | (5,591) | (12.5)% | (4,611) | (10.3)% |
| Other businesses | 172 | 225 | (53) | (23.6)% | (52) | (23.1)% |
| Total wholesale | 190,543 | 178,551 | 11,992 | 6.7% | 17,100 | 9.6% |
| Retail: |  |  |  |  |  |  |
| Americas | 35,749 | 34,617 | 1,132 | 3.3% | 1,238 | 3.6% |
| Asia Pacific | 22,519 | 23,345 | (826) | (3.5)% | 145 | 0.6% |
| Europe | 7,555 | 8,411 | (856) | (10.2)% | (336) | (4.0)% |
| Total retail | 65,823 | 66,373 | (550) | (0.8)% | 1,047 | 1.6% |
| E-commerce: |  |  |  |  |  |  |
| Americas | 14,226 | 9,976 | 4,250 | 42.6% | 4,335 | 43.5% |
| Asia Pacific | 4,829 | 3,933 | 896 | 22.8% | 1,074 | 27.3% |
| Europe | 3,719 | 3,360 | 359 | 10.7% | 507 | 15.1% |
| Total e-commerce | 22,774 | 17,269 | 5,505 | 31.9% | 5,916 | 34.3% |
| Total revenues | $279,140 | $262,193 | $16,947 | 6.5% | $24,063 | 9.2% |

(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 March 31, 2016:

| Company-operated retail locations Type | December 31, 2015 | Opened |  | Closed | March 31, 2016 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Kiosk/store in store | 98 | 2 |  | 3 | 97 |
| Retail stores | 275 | 1 |  | 11 | 265 |
| Outlet stores | 186 | 3 |  | 1 | 188 |
| Total | 559 | 6 |  | 15 | 550 |
| Operating segment |  |  |  |  |  |
| Americas | 196 | 1 |  | 1 | 196 |
| Asia Pacific | 261 | 5 |  | 12 | 254 |
| Europe | 102 | — | (1) | 2 | 100 |
| Total | 559 | 6 |  | 15 | 550 |

(1) Excludes eight retail locations acquired in Austria on March 31, 2016 as no revenue was recognized for those locations in the three months ended March 31, 2016.

The table below sets forth our comparable store sales by reportable operating segment for the three months ended March 31, 2016 and 2015:

| Comparable store sales (retail only) (1) | Constant Currency (2) Three Months Ended March 31, 2016 | Constant Currency (2) Three Months Ended March 31, 2015 |
| --- | ---: | ---: |
| Americas | 2.9% | (5.8)% |
| Asia Pacific | 2.0% | (9.4)% |
| Europe | 7.5% | 5.7% |
| Global | 3.1% | (5.3)% |

The table below sets forth Direct to Consumer comparable stores sales, which includes our e-commerce and retail operating segments, for the three months ended March 31, 2016 and 2015:

| Direct to Consumer comparable store sales (includes retail and e-commerce) (1) | Constant Currency (2) Three Months Ended March 31, 2016 | Constant Currency (2) Three Months Ended March 31, 2015 |
| --- | ---: | ---: |
| Americas | 12.2% | (4.3)% |
| Asia Pacific | 5.8% | (5.8)% |
| Europe | 9.7% | 2.1% |
| Global | 9.9% | (3.7)% |

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

(2) Reflects quarter over quarter change on a "constant currency" basis, which is a non-GAAP financial measure that restates current period results using prior year foreign exchange rates for the comparative period to enhance visibility of the underlying business trends, excluding the impact of foreign currency.

***Revenues.*** Revenue increased $16.9 million or 6.5% in the three months ended March 31, 2016 compared to the same period in 2015. The increase in revenue was due to the net effect of: (i) an increase of $25.9 million or 9.9% associated with higher sales volumes, (ii) a decrease of $7.1 million or 2.7% associated with unfavorable exchange rates driven by a stronger U.S. Dollar, and (iii) a $1.9 million or 0.7% decrease associated with lower average sales prices.

The $16.9 million or 6.5% increase in revenues over the three months ended March 31, 2016 compared to the same period in 2015, is inclusive of approximately $9.0 million in increased sales volumes due to improved shipping times, which reduced the number of unfilled orders at quarter end.

***Cost of sales.*** During the three months ended March 31, 2016, cost of sales increased $15.0 million or 11.1% compared to the same period in 2015. The increase in cost of sales was due to the net impact of: (i) a $13.4 million or 9.9% increase due to higher sales volumes, (ii) a $5.9 million or 4.4% increase due to increased average costs per unit sold, and (iii) a $4.3 million or 3.2% decrease due to the impact of foreign currency translation.

***Gross profit.*** During the three months ended March 31, 2016, gross profit increased $2.0 million or 1.6% and gross margin decreased 230 basis points, to 46.3%, compared to the same period in 2015. This resulted from increased revenue, from higher sales volumes, during the three months ended March 31, 2016 partially offset by a $15.0 million or 11.1% increase in cost of sales for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The increase in cost of sales was due to the net effect of: (i) a $12.6 million or 9.9% increase in higher sales volumes, (ii) a $7.8 million or 6.1% decrease associated with a higher average cost per unit in excess of the lower average sales price per unit, and (iii) a $2.8 million or 2.2% decrease due to the impact of foreign currency translation.

***Selling, general and administrative expenses.*** SG&A expenses decreased $11.1 million or 8.8% during the three months ended March 31, 2016 compared to the same period in 2015. This decrease was primarily due to the combined impact of: (i) a $5.6 million or 4.4% decrease in implementation costs associated with the new ERP system, (ii) a $2.1 million or 1.7% decrease due to foreign currency fluctuations, (iv) a $1.3 million or 1.0% decrease in marketing activities, primarily due to timing as we shifted a portion of our marketing efforts from the first quarter to the second quarter of 2016, (v) a $1.2 million or 0.9% decrease in reorganization charges.

During the three months ended March 31, 2016, our bad debt expense was $0.4 million compared to $1.6 million in the same period in the prior year. None of this amount relates to our China operations for the three months ended March 31, 2016 compared to bad debt expense for China of $0.2 million for the same period in the prior year.

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 March 31, 2016 | 2015 |
| --- | ---: | ---: |
| GAAP selling, general and administrative expenses | $114,930 | $126,069 |
| Reorganization charges (1) | (184) | (1,399) |
| Customs audit settlements (2) | (354) | — |
| ERP implementation (3) | — | (5,648) |
| Total selling, general and administrative adjustments | (538) | (7,047) |
| Non-GAAP selling, general and administrative expenses | $114,392 | $119,022 |

(1) Relates to severance expenses, bonuses, store closure costs, consulting fees and other expenses related to reorganization activities which began in 2015 and which were completed in this quarter.

(2) Represents penalties and fees related to the settlement of the customs audit.

(3) Represents operating expenses related to the implementation of our new ERP system.

***Asset impairment charges.*** During the three months ended March 31, 2016 and 2015, we incurred $0.2 million and zero, 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 gain (loss), net.*** The line item entitled ‘foreign currency transaction gain (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 March 31, 2016, we recognized a net loss of $1.2 million compared to a net gain on foreign currency transactions of $0.5 million during the three months ended March 31, 2015.

***Income tax expense.*** During the three months ended March 31, 2016, income tax expense increased $2.6 million compared to the same period in 2015, resulting in a 36% increase in the effective tax rate. The increase in the effective tax rate was driven primarily by an increase in profitability in various jurisdictions, compared to the same period in 2015. Also affecting the rate 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 the losses will be realized. Our effective tax rate of 22.1% for the three months ended March 31, 2016 differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions.

### Comparison of the Three Months Ended March 31, 2016 and 2015 by Segment

The following table sets forth information related to our reportable operating business segments for the three months ended March 31, 2016 and 2015:

*(in thousands, except % data)*

| Revenues: | Three Months Ended March 31, 2016 | 2015 | Change $% |  | Constant Currency Change (2) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $124,130 | $105,769 | $18,361 | 17.4% | $20,677 | 19.5% |
| Asia Pacific | 104,502 | 99,775 | 4,727 | 4.7% | 7,878 | 7.9% |
| Europe | 50,336 | 56,424 | (6,088) | (10.8)% | (4,440) | (7.9)% |
| Total segment revenues | 278,968 | 261,968 | 17,000 | 6.5% | 24,115 | 9.2% |
| Other businesses | 172 | 225 | (53) | (23.6)% | (52) | (23.1)% |
| Total consolidated revenues | $279,140 | $262,193 | $16,947 | 6.5% | $24,063 | 9.2% |
| Operating income: |  |  |  |  |  |  |
| Americas | $16,576 | $15,378 | $1,198 | 7.8% | $1,368 | 8.9% |
| Asia Pacific | 25,851 | 17,335 | 8,516 | 49.1% | 9,095 | 52.5% |
| Europe | 6,523 | 8,238 | (1,715) | (20.8)% | (1,656) | (20.1)% |
| Total segment operating income | 48,950 | 40,951 | 7,999 | 19.5% | 8,807 | 21.5% |
| Reconciliation of total segment operating income to income before income taxes: |  |  |  |  |  |  |
| Other businesses | $(6,074) | $(5,403) | $(671) | 12.4% | (820) | 15.2% |
| Unallocated corporate and other (1) | (28,633) | (37,910) | 9,277 | (24.5)% | 9,305 | (24.5)% |
| Total consolidated operating income (loss) | 14,243 | (2,362) | 16,605 | (703.0)% | $17,292 | (732.1)% |
| Foreign currency transaction gain (loss), net | (1,247) | 494 | (1,741) | (352.4)% |  |  |
| Interest income | 216 | 288 | (72) | (25.0)% |  |  |
| Interest expense | (243) | (219) | (24) | 11.0% |  |  |
| Other income (expense), net | 82 | (331) | 413 | (124.8)% |  |  |
| Income (loss) before income taxes | $13,051 | $(2,130) | $15,181 | (712.7)% |  |  |

(1) Includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, restructuring, depreciation and amortization of corporate and other assets not allocated to operating segments and costs of the same nature related to certain corporate holding companies. The decrease in operating loss of $9.3 million is primarily associated with various cost reductions related to with the Company’s 2015 restructuring efforts.

(2) 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

***Revenue.*** During the three months ended March 31, 2016 revenues for our Americas segment increased $18.4 million or 17.4% compared to the same period in 2015. The increase in the Americas segment revenue was due to the net impact of: (i) a $28.6 million or 27.0% increase due to higher sales volumes, (ii) a $7.9 million or 7.4% decrease in average selling prices, and (iii) a $2.3 million or 2.2% decrease due to the unfavorable impact of foreign currency translation.

***Cost of Sales.*** During the three months ended March 31, 2016 cost of sales for our Americas segment increased $17.5 million or 33.6% compared to the same period in 2015. The increase in the Americas segment cost of sales was due to the net impact of: (i) a $14.1 million or 27.0% increase due to higher sales volumes, (ii) a $5.1 million or 9.9% increase due to higher average costs per unit sold, and (iii) a $1.7 million or 3.3% decrease due to the impact of foreign currency translation.

***Gross Profit.*** The combined impact of the increase in the Americas segment revenue and cost of sales resulted in a $0.8 million or 1.5% increase in gross profit during the three months ended March 31, 2016 compared to the same period in 2015. The increase in the Americas segment gross profit was due to the net impact of: (i) a $14.5 million or 27.0% increase due to higher sales volumes, (ii) a $13.1 million or 24.4% decrease due to the combined impact of lower average sale prices and higher average cost of sales per unit, and (iii) a $0.6 million or 1.1% decrease due to the impact of foreign currency translation.

***SG&A.*** During the three months ended March 31, 2016, SG&A for our Americas segment decreased $0.1 million, or 0.2%, compared to the same period in 2015.

### Asia Pacific Operating Segment

***Revenue.*** During the three months ended March 31, 2016, revenues for our Asia Pacific segment increased $4.7 million or 4.7% compared to the same period in 2015. The increase in the Asia Pacific segment revenue was due to the net impact of: (i) a $9.9 million or 9.9% increase due to higher sales volumes, (ii) a $3.2 million or 3.2% decrease due to the unfavorable impact of foreign currency translation, and (iii) a $2.0 million or 2.0% decrease due to a decrease in average selling prices.

***Cost of Sales.*** During the three months ended March 31, 2016 cost of sales for our Asia Pacific segment increased $0.2 million or 0.4% compared to the same period in 2015. The increase in the Asia Pacific segment cost of sales was due to the net impact of: (i) a $4.6 million or 9.9% increase due to higher sales volumes, (ii) a $2.9 million or 6.1% decrease due to a lower average costs per unit sold, and (iii) a $1.5 million or 3.4% decrease due to the impact of foreign currency translation.

***Gross Profit.*** The combined impact of the increase in the Asia Pacific segment revenue and cost of sales resulted in a $4.6 million or 8.6% increase in gross profit during the three months ended March 31, 2016 compared to the same period in 2015. The increase in the Asia Pacific segment gross profit was due to the net impact of: (i) a $5.3 million or 9.9% increase due to higher sales volumes, (ii) a $1.5 million or 2.9% decrease due to the impact of foreign currency translation, and (iii) a $0.8 million or 1.6% increase due to lower average cost per unit in excess of the lower average sales price per unit.

***SG&A.*** During the three months ended March 31, 2016, SG&A for our Asia Pacific segment decreased $2.2 million or 6.5% compared to the same period in 2015. The decrease in SG&A in the Asia Pacific segment was primarily due to the net impact of: (i) a $1.0 million decrease associated with the impact of foreign currency translation, (ii) a $1.7 million decrease in marketing costs, and (iii) an increase of $0.5 million for other expenses.

### Europe Operating Segment

***Revenue.*** During the three months ended March 31, 2016, revenues for our Europe segment decreased $6.1 million or 10.8% compared to the same period in 2015. The decrease in the Europe segment revenue was due to the net impact of: (i) a $6.3 million or 11.2% decrease due to lower sales volumes, (ii) a $1.8 million or 3.3% increase due to an increase in the average selling price, and (iii) a $1.6 million or 2.9% decrease due to the unfavorable impact of foreign currency translation.

***Cost of Sales.*** During the three months ended March 31, 2016, cost of sales for our Europe segment decreased $2.3 million or 7.7% compared to the same period in 2015. The decrease in the Europe segment cost of sales was due to the net impact of: (i) a $3.4 million or 11.2% decrease due to lower sales volumes, (ii) a $2.0 million or 6.6% increase due to higher average cost per unit sold, and (iii) a $0.9 million or 3.1% decrease due to the impact of foreign currency translation.

***Gross Profit.*** The combined impact of the increase in the Europe segment revenue and cost of sales resulted in a $3.8 million or 14.3% decrease in gross profit during the three months ended March 31, 2016 compared to the same period in 2015. The decrease in the Europe segment gross profit was due to the net impact of: (i) a $3.0 million or 11.2% decrease due to lower sales volumes, (ii) a $0.7 million or 2.8% decrease due to the impact of foreign currency translation, and (iii) a $0.1 million or 0.3% decrease due to an increase in the average cost per unit sold in excess of the increase in the average selling price.

***SG&A.*** During the three months ended March 31, 2016, SG&A for our Europe segment decreased $0.9 million, or 5.5%, compared to the same period in 2015. The decrease in SG&A for the Europe segment was primarily a result of a $0.7 million or 4.0% decrease associated with the impact of foreign currency translation.

### Liquidity and Capital Resources

### Condensed Consolidated Statements of Cash Flows

Our condensed consolidated statements of cash flows for the three months ended March 31, 2016 and 2015 are summarized as follows:

*(in thousands)*

|  | Three Months Ended March 31, 2016 | 2015 | Change |
| --- | ---: | ---: | ---: |
| Cash used in operating activities | $(56,938) | $(46,712) | $(10,226) |
| Cash used in investing activities | (7,690) | (6,213) | (1,477) |
| Cash provided by (used in) financing activities | 4,000 | (24,460) | 28,460 |
| Effect of exchange rate changes on cash | 6,367 | (9,429) | 15,796 |
| Net decrease in cash and cash equivalents | $(54,261) | $(86,814) | $32,553 |

During the three months ended March 31, 2016, cash and cash equivalents decreased $54.3 million to $89.1 million compared to $143.3 million at December 31, 2015. The primary drivers of this decrease include the net impact of: (i) a $69.8 million decrease in cash associated with changes in outstanding accounts receivable, net of allowances, primarily related to seasonal increase in sales volumes, (ii) a $18.5 million increase in cash associated with changes in accounts payable, (iii) a $14.5 million decrease in cash associated with changes in inventories, (iv) a $8.3 million decrease in cash associated with changes in prepaid expenses, (v) a $7.7 million decrease in cash associated with investing activities, primarily due to investments in both retail and non-retail locations and investments in software, (vi) a $7.2 million increase in cash from bank borrowings, net of repayments, and (vii) a decrease in cash due to $3.0 million in dividend payments on our Series A preferred stock.

***Operating Activities.*** The $56.9 million and $46.7 million decrease in cash and cash equivalents from operating activities for the three months ended March 31, 2016 and 2015, respectively, is primarily due to a seasonal increase in working capital during the first quarter of the year. This seasonal increase is associated with the annual release of our new product lines in the first quarter of the year and in preparation for the higher sales volumes we general experience in the first half of each year as compared to the second half of each year. For the three months ended March 31, 2016, our cash position decreased by $69.8 million and $14.4 million due to seasonal increases in outstanding accounts receivable and inventories on hand, respectively. These increases were partially offset by a $18.5 million increase in cash associated with higher accounts payable outstanding as of March 31, 2016. For the three months ended March 31, 2015, our cash position decreased by $78.4 million and $19.0 million, respectively, due to seasonal increases in outstanding accounts receivable and inventories on hand. These increases were partially offset by a $42.8 million increase in cash associated with higher accounts payable outstanding as of March 31, 2015.

The $10.2 million increase in net cash used in operating activities was primarily attributable to the net effect of: (i) a $12.6 million increase in net income compared to the three months ended December 31, 2015, (ii) a $24.3 million decrease associated with the change in accounts payable, (iii) a $10.9 million decrease associated with the change in prepaid expenses and other assets, and (iv) a $8.8 million increase associated with the change in income tax liabilities.

***Investing Activities***. The $1.5 million increase in cash used in investing activities was primarily attributable to the net impact of: (i) a $2.4 million decrease in cash paid for intangible assets, (ii) a $2.0 million increase associated with the change in restricted cash, and (iii) a $1.9 million increase associated with additional cash paid to purchase property, plant, and equipment.

***Financing Activities.*** The $28.5 million decrease in net cash used in financing activities was primarily attributable to the net impact of: (i) a $20.0 million decrease in cash spent on the purchase of treasury stock, compared to the same quarter of the prior year, (ii) a $20.0 million increase in proceeds from bank borrowings, and (iii) a $11.5 million increase in repayments of bank borrowings and capital lease obligations.

### Working Capital

As of March 31, 2016, accounts receivable increased by $73.5 million compared to December 31, 2015. As of March 31, 2016, we had total reserves of $52.3 million compared to total reserves of $49.4 million on December 31, 2015. The increase in reserves was primarily associated with the increase in outstanding accounts receivable. As of March 31, 2016, accounts payable increased $20.0 million compared to December 31, 2015, primarily due to increased product purchases for inventory, associated with the seasonal increase in sales expected during the spring and summer months. Inventories also increased by $17.9 million compared to December 31, 2015 in preparation for the seasonal spring and summer sales increases. Prepaid expenses and other assets increased $9.1 million primarily related to: prepaid payroll, software purchases, and an increase in restricted cash. We also had outstanding borrowings of $8.5 million on our revolving line of credit for the three months ended March 31, 2016. The proceeds from these borrowings were primarily used to fund our seasonal increase in working capital during the first quarter of the year.

Consistent with prior years, we anticipate our net working capital needs will decrease throughout the remainder of 2016, which we believe will result in positive cash flows from operations for the remaining quarters of 2016.

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 PNC Bank, National Association ("PNC") as lead lender, which was amended on February 18, 2016, that provides us with up to $75.0 million in borrowing capacity and matures in February 2021 (see *Revolving Credit Facility* below). As of March 31, 2016, we have borrowed $8.5 million on the revolving credit facility and we have $1.3 million of outstanding letters of credit. The remaining $65.2 million is available to us for future financing needs.

### 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, under the 2013 stock repurchase plan, which replaced all of our prior stock repurchase authorizations. 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, restrictions under our revolving credit facility, 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.

As of March 31, 2016, we had $118.7 million of remaining common stock repurchase authorizations under our 2013 stock repurchase plan. During the three months ended March 31, 2016, we had no repurchases. Future stock repurchases are subject to the terms of our revolving credit facility, which allows for a maximum of $50.0 million in stock repurchases per year.

### Senior Revolving Credit Facility

In December 2011, we entered into an Amended and Restated Credit Agreement (as amended, the "Credit Agreement"), with the lenders named therein and PNC, as a lender and administrative agent for the lenders. On February 18, 2016, we entered into the Eleventh Amendment to the Amended and Restated Credit Agreement which primarily: (i) extended the maturity date to February 2021, (ii) resized the borrowing capacity of the facility to $75.0 million, (iii) amended certain definitions of the financial covenants to become more favorable to us, (iv) set the minimum fixed charge coverage ratio to 1.00 to 1.00 through the period ended June 30, 2016 and 1.10 to 1.00 thereafter, (v) set the maximum leverage ratio to 2.50 to 1.00 through the period ended June 30, 2016 and 2.00 to 1.00 thereafter, (vi) allows up to $50.0 million in stock repurchases to be made each fiscal year, subject to certain restrictions, and (vii) limited certain capital expenditures and commitments to an aggregate of $50.0 million per year. Under the terms of the agreement, the above financial covenants are only applicable when borrowings exceed an average of $18.8 million over a 30-day period, starting on the 15th of the last month of each quarter. The Eleventh Amendment also changed the variable lending rate. For domestic base rate loans, including swing loans, the interest rate is equal to a daily base rate plus a margin ranging from 0.50% to 0.75% based on certain conditions. For domestic LIBOR rate loans, the interest rate is equal to a LIBOR rate plus a margin ranging from 1.50% to 1.75% based on certain conditions. As of March 31, 2016, we were in compliance with each of these covenants.

As of March 31, 2016, we were in compliance with each of these covenants: (i) the fixed charge coverage ratio was 3.94 to 1.00, compared to the minimum covenant requirement of 1.00 to 1.00 (ii) the leverage ratio was 0.37 to 1.00, compared to the maximum covenant requirement of 2.50 to 1.00 (iii) stock repurchases were zero, and (iv) capital expenditures and commitments were $11.5 million. For the three months ended March 31, 2016, the weighted average/effective interest rate for outstanding senior revolving credit facility borrowings was 4.0%.

As of March 31, 2016 and December 31, 2015, we had $8.5 million and zero, respectively, of outstanding borrowings under the Credit Agreement. As of both March 31, 2016 and December 31, 2015, we had outstanding letters of credit of $1.3 million, which were reserved against the borrowing base under the terms of the Credit Agreement. As of March 31, 2016 and December 31, 2015, we had $65.2 million and $73.7 million, respectively, of available borrowing capacity. During the three months ended March 31, 2016, Crocs capitalized $0.6 million in fees and third party costs associated with the negotiation of a new debt financing agreement that has not yet been executed. During the three months ended March 31, 2015, Crocs did not capitalize any fees in connection with the Credit Agreement.

### Asia Pacific Revolving Credit Facility

On August 28, 2015, we entered into a revolving credit facility agreement with HSBC Bank (China) Company Limited, Shanghai Branch (“HSBC”) as the lender. The revolving credit facility enables us 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, with a combined 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. The revolving credit facility can be canceled or suspended at any time at the discretion of the lender and contains provisions requiring Crocs to maintain compliance with certain restrictive covenants. As of March 31, 2016, the revolving credit facility remained temporarily suspended at the discretion of the lender, and we have 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 our 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 coterminous with the Credit Agreement.

As of March 31, 2016 and December 31, 2015, we had $5.0 million and $6.4 million, respectively, of debt outstanding under five separate notes payable, of which $4.2 million and $4.8 million, respectively, represents current installments. As of March 31, 2016, the notes bear interest rates ranging from 2.45% to 2.79% and have maturities ranging from September 2016 to September 2017.

### Capital Assets

During the three months ended March 31, 2016, net capital assets acquired, inclusive of intangible assets, were $5.9 million compared to $6.5 million during the three months ended March 31, 2015.

### Repatriation of Cash

We have cash balances located in various countries and denominations associated with our international operations. 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. As part of this strategy, we repatriated approximately $8.0 million of current earnings during the three months ended March 31, 2016 without a tax impact. Further cash repatriation will depend on future cash requirements in the U.S. As of March 31, 2016, we maintain approximately $128.0 million of foreign earnings for which tax has previously been provided that has not yet been repatriated.

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, which may limit our ability to utilize cash resources in those countries for operations in other countries. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and could adversely affect our liquidity. As of March 31, 2016, we held $81.8 million of our total $89.1 million cash balance in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the $81.8 million, $1.1 million could potentially be restricted, as described above. If the remaining $80.7 million were immediately repatriated to the U.S., no additional tax expense would be incurred as all amounts are currently provided for in our condensed consolidated statement of operations.

### Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of March 31, 2016.

### Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations, outside of discussions regarding constant currency and non-GAAP financial measures, is based on the condensed consolidated financial statements, which have been prepared in accordance with U.S. 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 evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe 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, 2015.

### 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, 6,891 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 senior 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 our senior revolving credit facility bear interest at a variable rate. For domestic base rate loans, the interest rate is equal to the highest of (i) the daily federal funds open rate plus 0.50%, (ii) prime rate, and (iii) a daily LIBOR rate plus 1.00%. In each case there is an additional margin ranging from 0.50% to 0.75% based on certain conditions. For domestic LIBOR rate loans, the interest rate is equal to a LIBOR rate plus a margin ranging from 1.50% to 1.75% based on certain conditions. Borrowings under the revolving credit facility are therefore subject to risk based upon prevailing market interest rates. Interest rates fluctuate as a result of many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. As of March 31, 2016 and December 31, 2015, there were $8.5 million and zero borrowings, respectively, under the revolving credit facility. If the prevailing market interest rates relative to these borrowings increased or decreased by 10% during the three months ended March 31, 2016, interest expense would have increased or decreased by less than $0.1 million.

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 March 31, 2016 and December 31, 2015, there were no borrowings under the revolving credit facility as the facility was temporarily suspended. Therefore, we are currently not exposed to market interest rate risk under the HSBC 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 March 31, 2016, we held $7.7 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 March 31, 2016, interest income would have increased or decreased by less than $0.1 million.

### 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 months ended March 31, 2016 by approximately $0.2 million and $0.2 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 months ended March 31, 2016 and 2015.

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 March 31, 2016 and December 31, 2015. 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: | March 31, 2016 | December 31, 2015 |
| --- | ---: | ---: |
| Japanese Yen | $109,340 | $98,390 |
| Singapore Dollar | 54,028 | — |
| Euro | 34,625 | 34,219 |
| South Korean Won | 20,719 | 7,981 |
| British Pound Sterling | 20,368 | 21,859 |
| Australian Dollar | 10,248 | 6,459 |
| Canadian Dollar | 8,959 | 1,980 |
| Mexican Peso | 7,382 | 7,277 |
| Indian Rupee | 7,320 | 5,036 |
| New Taiwan Dollar | 4,012 | 1,798 |
| Russian Ruble | 1,903 | 667 |
| Brazilian Real | 1,727 | — |
| Swedish Krona | 1,515 | 1,655 |
| Hong Kong Dollar | 668 | 668 |
| South African Rand | — | 6,402 |
| Total notional value, net | $282,814 | $194,391 |
| Latest maturity date | April 2016 | January 2016 |

32

## Controls and procedures

As filed, 6,317 characters.

### Evaluation of Disclosure Controls and Procedures

The Company has evaluated, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of disclosure controls and procedures as of March 31, 2016. This is done to ensure information the Company is required to disclose in reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

Management concluded our internal control over financial reporting was ineffective as of December 31, 2015 as management identified material weaknesses, as further described below. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Management identified the following control deficiencies that constitute individually, or in the aggregate, material weaknesses in our internal control over financial reporting as disclosed in “Item 9A. Controls and Procedures” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015:

***Financial Close Process.*** We identified deficiencies related to the operating effectiveness of controls over the completeness and accuracy of our review and approval of certain journal entries and period end adjusting entries. In addition, we did not consistently maintain or perform on a timely basis our control procedures over certain account analyses, data integrity, documentation, review, and approval of year-end accounting entries to ensure the accuracy and completeness of the entries recorded. We also identified deficiencies regarding the review and approval of our income tax entries related to our deferred income tax accounts and the related impacts on income tax expense or benefit.

We also lacked a sufficient balance of personnel commensurate with our financial close reporting requirements. If not corrected, these controls could impact the accuracy and completeness of our financial statements.

***Inventory Accounting Controls.*** We identified deficiencies related to the operating effectiveness of our controls to ensure the existence, valuation, accuracy, and completeness of inventory on hand. Specifically, our physical inventory procedures were not performed with sufficient consistency to ensure the underlying quantities were accurate. Additionally, our cost absorption control procedures were not consistently maintained or performed on a timely basis in accordance with Company policy, to ensure inventory was properly valued. If not corrected, these ineffective controls could impact the accuracy and completeness of our cost of sales and inventory balances.

Management has concluded our internal control over financial reporting remains ineffective as of March 31, 2016, as these material weaknesses, disclosed in “Item 9A. Controls and Procedures” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, have not been remediated.

Notwithstanding the material weaknesses, management has concluded the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material aspects, the Company’s financial position, results of operations and cash flows for each of the periods presented.

### Plans for Remediation of Material Weaknesses

Management has formed a task force to ensure the timely remediation of the identified material weaknesses. The task force includes key internal resources as well as third party service providers with expertise in internal control remediation. Management has directed our internal resources and our third party service providers to work in partnership to execute the following initiatives to address each of the identified material weaknesses:

***Financial Close Process.*** Management has directed our internal and third party resources to execute the following initiatives to remediate the financial close process material weakness:

- Enhance our control procedures for manual journal entries to ensure all entries are properly supported, reviewed, and documented;
- Enhance our global account reconciliation procedures to ensure all key accounts are properly reconciled on a timely basis and to ensure reconciliations are properly documented and reviewed;
- Assess the internal structure of our tax department to ensure we have a sufficient complement of talent to ensure all entries are appropriately reviewed and approved in a timely manner;
- Assess the organizational structure of our accounting department to identify opportunities to improve the efficiency and effectiveness of our control procedures;
- Provide training to all accounting process owners regarding policies and controls over account analysis, documentation, review, and approval of manual journal entries, and data integrity procedures.

***Inventory Accounting Controls.*** Management has directed our internal and third party resources to execute the following initiatives to remediate the inventory accounting controls material weakness:

- Enhance our cycle count procedures to ensure all counts performed and adjustments recorded are appropriately documented in the warehouse management system;
- Enhance our inventory reconciliation procedures to ensure the warehouse management system is appropriately reconciled to the general ledger on a daily basis;
- Provide training to our supply chain personnel to ensure inventory control procedures are adequate, performed timely, and are properly recorded in accordance with our policies.

Management has expanded our inventory management team by adding key personnel who will be directing our inventory control remediation efforts.

Our remediation efforts were ongoing during the three months ended March 31, 2016.

### Changes in Internal Control over Financial Reporting

There were no material changes in our internal control over financial reporting that occurred during the three months ended March 31, 2016 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 137 characters.

There have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2015.

Filed May 10, 2016.
Source: SEC EDGAR, the filing index for accession 0001104659-16-119786. Last ingested by Listed: Nov 6, 2026, 18:01 ET. No prices; not investment advice.