# Crocs, Inc.: Form 10-Q for the period ended Jun 30, 2016

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-Q
- Filed: 2016-08-05
- Accepted by EDGAR: Aug 5, 2016, 16:47 ET
- Period: 2016-06-30
- Accession: 0001104659-16-137631
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000110465916137631/a16-11540_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000110465916137631/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-04-01 to 2016-06-30 | $323.8m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2016-01-01 to 2016-06-30 | $603.0m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-04-01 to 2016-06-30 | $154.2m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2016-01-01 to 2016-06-30 | $304.0m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2016-04-01 to 2016-06-30 | $169.6m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2016-01-01 to 2016-06-30 | $299.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2016-04-01 to 2016-06-30 | $148.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2016-01-01 to 2016-06-30 | $263.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-04-01 to 2016-06-30 | $20.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2016-01-01 to 2016-06-30 | $34.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-04-01 to 2016-06-30 | $234.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2016-01-01 to 2016-06-30 | $477.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-04-01 to 2016-06-30 | $3.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2016-01-01 to 2016-06-30 | $6.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | $15.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2016-01-01 to 2016-06-30 | $25.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.13 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2016-01-01 to 2016-06-30 | $0.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-04-01 to 2016-06-30 | $0.13 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2016-01-01 to 2016-06-30 | $0.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-04-01 to 2016-06-30 | 74,243,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2016-01-01 to 2016-06-30 | 74,389,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2016-01-01 to 2016-06-30 | $19.8m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2016-01-01 to 2016-06-30 | $10.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-06-30 | $146.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-06-30 | $513.4m | us-gaap:AssetsCurrent |
| Total assets | at 2016-06-30 | $666.4m | us-gaap:Assets |
| Current liabilities | at 2016-06-30 | $192.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-06-30 | $211.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-06-30 | $277.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 79,256 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 U.S. GAAP selling, general and administrative expenses.

### Financial Highlights

The following are significant developments in our businesses during the three months ended June 30, 2016:

- Revenue decreased $21.8 million or 6.3% in the three months ended June 30, 2016, compared to the same period in 2015. The decrease in revenue was due to the net effect of: (i) a $23.7 million or 6.9% decrease associated with lower average selling prices, (ii) a $2.3 million or 0.7% increase associated with higher sales volumes, and (iii) a $0.4 million or 0.1% decrease associated with unfavorable exchange rates. Sales volumes for the quarter were negatively impacted by approximately $3.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.
- We sold 17.7 million pairs of shoes worldwide, an increase of 0.7% compared to the same period in the prior year.
- During the three months ended June 30, 2016, cost of sales decreased $1.6 million or 1.0% compared to the same period in 2015. The decrease in cost of sales was due to the net impact of: (i) a $2.6 million or 1.6% decrease in average cost per unit, (ii) a $1.1 million or 0.7% increase due to higher sales volumes, and (iii) a $0.1 million or 0.1% decrease due to the impact of foreign currency translation. The impact of sales volumes on cost of sales was reduced by approximately $2.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.
- Gross profit decreased $20.2 million or 10.7% to $169.6 million and gross margin decreased 250 basis points, to 52.4%, compared to the same period in 2015. The decrease in gross profit is due to the net impact of: (i) a $21.1 million or 11.2% decrease due to the combined impact of lower average sale prices and a lower average cost of sales per unit, (ii) a $1.2 million or 0.7% increase due to higher sales volumes, and (iii) a $0.3 million or 0.2% decrease due to the unfavorable impact of foreign currency translation. Gross profit declined by approximately $1.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.
- Selling, general and administrative (“SG&A”) expenses decreased $20.2 million or 12.0% for the three months ended June 30, 2016 compared to the same period in 2015. The decrease is primarily due to the combined impact of: (i) a $5.0 million or 3.0% decrease associated with nonrecurring disbursements made to invalid vendors, (ii) a $4.8 million or 2.8% decrease associated with lower bad debt expense, (iii) a $2.7 million or 1.6% decrease associated with implementation costs for the new ERP system, (iv) a $2.2 million or 1.3% decrease associated with reorganization charges, (v) a $1.8 million or 1.1% decrease associated with legal settlements, and a (vi) $1.5 million or 0.9% decrease associated with variable compensation. No other changes were individually significant.
- Net income attributable to common stockholders increased $2.0 million to $11.7 million compared to $9.7 million for the same period of 2015. Net earnings per common share (“EPS”) was $0.13 for the three months ended June 30, 2016 compared to $0.11 for the three months ended June 30, 2015. These increases were primarily the result of a decrease in

selling general and administrative expense, and a decrease in restructuring expense associated with the completion of our restructuring efforts in 2015 resulting in zero restructuring costs in the current period compared to restructuring charges of $2.8 million in the same period of 2015. These cost savings were partially offset by a decrease in gross profit.

### Future Outlook

During the remainder of 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.

As of June 30, 2016, we have terminated our relationship with multiple distributors in China and we expanded our relationship with existing business partners who are in a stronger financial position and who have a proven track record. We have also implemented a more restrictive credit policy for several China distributors to reduce our exposure in that market. 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 8.1% 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 June 30, 2016 to 2015

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

|  | Three Months Ended June 30, 2016 | 2015 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $323,828 | $345,671 | $(21,843) | (6.3)% |
| Cost of sales | 154,188 | 155,801 | (1,613) | (1.0)% |
| Gross profit | 169,640 | 189,870 | (20,230) | (10.7)% |
| Selling, general and administrative expenses | 148,463 | 168,636 | (20,173) | (12.0)% |
| Asset impairment charges | 572 | 2,075 | (1,503) | (72.4)% |
| Restructuring charges | — | 2,810 | (2,810) | (100.0)% |
| Income from operations | 20,605 | 16,349 | 4,256 | 26.0% |
| Foreign currency transaction gain (loss), net | (1,700) | (217) | (1,483) | 683.4% |
| Interest income | 164 | 196 | (32) | (16.3)% |
| Interest expense | (234) | (260) | 26 | (10.0)% |
| Other expense, net | (189) | (80) | (109) | 136.3% |
| Income before income taxes | 18,646 | 15,988 | 2,658 | 16.6% |
| Income tax expense | (3,109) | (2,562) | (547) | 21.4% |
| Net income | $15,537 | $13,426 | $2,111 | 15.7% |
| Dividends on Series A convertible preferred stock | $(3,000) | $(3,000) | $— | —% |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (802) | (736) | (66) | 9.0% |
| Net income attributable to common stockholders | $11,735 | $9,690 | $2,045 | 21.1% |
| Net income per common share: |  |  |  |  |
| Basic | $0.13 | $0.11 | $0.02 | 18.2% |
| Diluted | $0.13 | $0.11 | $0.02 | 18.2% |
| Gross margin | 52.4% | 54.9% | (250 )bps | (4.6)% |
| Operating margin | 6.4% | 4.7% | 170 bps | 36.2% |
| Footwear unit sales | 17,734 | 17,614 | 120 | 0.7% |
| Average footwear selling price | $18.05 | $19.27 | $(1.22) | (6.3)% |

***Revenues.*** Revenue decreased $21.8 million or 6.3% in the three months ended June 30, 2016, compared to the same period in 2015. The decrease in revenue was due to the net effect of: (i) a decrease of $23.7 million or 6.9% associated with lower average selling prices, (ii) an increase of $2.3 million or 0.7% due to higher sales volumes, and (iii) a decrease of $0.4 million or 0.1% associated with unfavorable exchange rates. Sales volumes for the quarter were negatively impacted by approximately $3.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Cost of sales.*** During the three months ended June 30, 2016, cost of sales decreased $1.6 million or 1.0% compared to the same period in 2015. The decrease in cost of sales was due to the net impact of: (i) a $2.6 million or 1.6% decrease due to lower average costs per unit sold, (ii) a $1.1 million or 0.7% increase due to higher sales volumes, and (iii) a $0.1 million or 0.1% decrease due to the impact of foreign currency translation. The impact of sales volumes on cost of sales was reduced by approximately $2.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Gross profit.*** During the three months ended June 30, 2016, gross profit decreased $20.2 million or 10.7% and gross margin decreased 250 basis points, to 52.4%, compared to the same period in 2015. The decrease in gross profit is due to the net impact of: (i) a $21.1 million or 11.2% decrease due to the combined impact of lower average sale prices and a lower average cost of sales per unit, (ii) a $1.2 million or 0.7% increase due to higher sales volumes, and (iii) a $0.3 million or 0.2% decrease due to the unfavorable impact of foreign currency translation. Gross profit declined by approximately $1.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Selling, general and administrative expenses. SG&A*** expenses decreased $20.2 million or 12.0% during the three months ended June 30, 2016, compared to the same period in 2015. This decrease was primarily due to the combined impact of: (i) a $5.0 million or 3.0% decrease associated with nonrecurring disbursements made to invalid vendors, (ii) a $4.8 million or 2.8% decrease associated with lower bad debt expense, (iii) a $2.7 million or 1.6% decrease associated with implementation costs for the new ERP system, (iv) a $2.2 million or 1.3% decrease associated with reorganization charges, (v) a $1.8 million or 1.1% decrease associated with legal settlements, and (vi) a $1.5 million or 0.9% decrease associated with variable compensation. All other changes were individually significant.

During the three months ended June 30, 2016 and 2015, our bad debt expense was $0.2 million and $4.9 million, respectively. Of this amount, our China operations recognized $0.2 million and $3.8 million in bad debt expense for the three months ended June 30, 2016 and 2015, respectively. The decrease in bad debt expense associated with our China operations is primarily due to the implementation of a more restrictive credit policy for several China distributors in 2016, to reduce our exposure in that market.

In addition to these fluctuations, we have identified certain SG&A 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 decrease above by reconciling our U.S. GAAP SG&A expenses to non-GAAP SG&A expenses.

### Reconciliation of Non-GAAP SG&A for the Three Months Ended June 30, 2016 and 2015

*(in thousands)*

| Selling, general and administrative expenses reconciliation: | Three Months Ended June 30, 2016 | 2015 |
| --- | ---: | ---: |
| U.S. GAAP selling, general and administrative expenses | $148,463 | $168,636 |
| Reorganization charges (1) | (274) | (2,154) |
| Improper disbursements (2) | — | (5,022) |
| ERP implementation (3) | — | (2,739) |
| Legal settlements (4) | — | (1,801) |
| Total selling, general and administrative adjustments | (274) | (11,716) |
| Non-GAAP selling, general and administrative expenses | $148,189 | $156,920 |

(1) Relates to severance expenses, bonuses, store closure costs, consulting fees and other expenses related to recent reorganization activities and our investment agreement with Blackstone.

(2) Represents legal expenses and other expenses for matters surrounding disbursements to invalid vendors that occurred in 2015.

(3) Represents operating expenses incurred in 2015 related to the implementation of the new ERP system.

(4) Relates primarily to legal expenses for matters surrounding California wage settlements that occurred in 2015.

***Asset impairment charges.*** During the three months ended June 30, 2016 and 2015, we incurred $0.6 million and $2.1 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 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 June 30, 2016, we recognized a net loss of $1.7 million compared to a net loss of $0.2 million on foreign currency transactions during the three months ended June 30, 2015.

***Income tax expense.*** During the three months ended June 30, 2016, income tax expense increased $0.5 million compared to the same period in 2015, resulting in a 0.7% increase in the effective tax rate. The increase in the effective tax rate was driven primarily by an increase in profitability in certain jurisdictions, compared to the same period in 2015. Also affecting the rate were losses in certain 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 16.7% for the three months ended June 30, 2016 differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions.

### Revenue by Channel for the Three Months Ended June 30, 2016 and 2015

*(in thousands)*

| Wholesale: | Three Months Ended June 30, 2016 | 2015 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $54,620 | $65,250 | $(10,630) | (16.3)% | $(9,845) | (15.1)% |
| Asia Pacific | 74,640 | 92,824 | (18,184) | (19.6)% | (19,692) | (21.2)% |
| Europe | 36,192 | 30,807 | 5,385 | 17.5% | 5,306 | 17.2% |
| Other businesses | 225 | 327 | (102) | (31.2)% | (104) | (31.8)% |
| Total wholesale | 165,677 | 189,208 | (23,531) | (12.4)% | (24,335) | (12.9)% |
| Retail: |  |  |  |  |  |  |
| Americas | 57,786 | 58,309 | (523) | (0.9)% | (397) | (0.7)% |
| Asia Pacific | 41,319 | 45,898 | (4,579) | (10.0)% | (4,498) | (9.8)% |
| Europe | 13,950 | 14,522 | (572) | (3.9)% | 223 | 1.5% |
| Total retail | 113,055 | 118,729 | (5,674) | (4.8)% | (4,672) | (3.9)% |
| E-commerce: |  |  |  |  |  |  |
| Americas | 22,691 | 19,560 | 3,131 | 16.0% | 3,196 | 16.3% |
| Asia Pacific | 14,887 | 10,835 | 4,052 | 37.4% | 4,423 | 40.8% |
| Europe | 7,518 | 7,339 | 179 | 2.4% | (17) | (0.2)% |
| Total e-commerce | 45,096 | 37,734 | 7,362 | 19.5% | 7,602 | 20.1% |
| Total revenues | $323,828 | $345,671 | $(21,843) | (6.3)% | $(21,405) | (6.2)% |

(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.

### Revenues by channel

***Wholesale channel revenues.*** During the three months ended June 30, 2016, revenues from our wholesale channel decreased $23.5 million or 12.4%, compared to the same period in 2015. The decrease in wholesale channel revenue was due to the net impact of: (i) a $20.9 million or 11.0% decrease due to lower average selling prices (primarily due to lower average selling prices in the Asia Pacific segment), (ii) a $3.4 million or 1.8% decrease in sales volumes (primarily due to lower sales volumes in the Americas segment), and (iii) a $0.8 million or 0.4% increase due to the favorable impact of foreign currency translation. Sales volumes for the three months ended June 30, 2016 were negatively impacted by approximately $3.0 million as a result of the sale of the Company’s South Africa operations, which was completed on April 15, 2016.

***Retail channel revenues.*** During the three months ended June 30, 2016, revenues from our retail channel decreased $5.7 million, or 4.8%, compared to the same period in 2015. The decrease in retail channel revenues was due to the net impact of: (i) a $6.8 million or 5.7% decrease due to lower average selling prices, (ii) a $2.1 million or 1.7% increase in sales volumes, and (iii) a $1.0 million or 0.8% decrease due to the unfavorable impact of foreign currency translation.

***E-commerce channel revenues.*** During the three months ended June 30, 2016, revenues from our e-commerce channel increased $7.4 million or 19.5%, compared to the same period in 2015. The increase in e-commerce revenue was due to the net impact of: (i) a $8.2 million or 21.8% increase in sales volumes (primarily due to increased sales volumes in the Americas and Asia Pacific segments), (ii) a $0.6 million or 1.7% decrease due to lower average selling prices, and (iii) a $0.2 million or 0.6% decrease associated with the unfavorable impact of foreign currency translation.

Future change in the average selling price per unit will be impacted by: (i) the mix of products sold, (ii) the sales channel (as we generally realize higher sales prices from our retail and e-commerce channels as compared to our wholesale channel), and (iii) the level of sales discounts and incentives we offer our customers.

The tables 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 June 30, 2016, and the comparable store sales by operating segment for the same periods.

### Change in Store Count by Type and Segment for the Three Months Ended June 30, 2016 and 2015

| Company-operated retail locations Type | March 31, 2016 | Opened |  | Closed | June 30, 2016 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Kiosk/store in store | 97 | 7 |  | 1 | 103 |
| Retail stores | 265 | 9 |  | 21 | 253 |
| Outlet stores | 188 | 15 |  | 1 | 202 |
| Total | 550 | 31 |  | 23 | 558 |
| Operating segment |  |  |  |  |  |
| Americas | 196 | 2 |  | 3 | 195 |
| Asia Pacific | 254 | 22 |  | 18 | 258 |
| Europe | 100 | 7 | (1) | 2 | 105 |
| Total | 550 | 31 |  | 23 | 558 |

(1) Includes retail locations acquired in Austria on March 31, 2016 as revenue associated with those locations began to be recognized in the three months ended June 30, 2016.

### Comparable Store Sales by Operating Segment for the Three Months Ended June 30, 2016 and 2015

| Comparable store sales (retail only) (1) | Constant Currency (2) Three months ended June 30, 2016 | Constant Currency (2) Three months ended June 30, 2015 |
| --- | ---: | ---: |
| Americas | (2.5)% | (3.4)% |
| Asia Pacific | (6.8)% | (9.4)% |
| Europe | 1.8% | 0.3% |
| Global | (3.4)% | (5.1)% |

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 June 30, 2016 and 2015:

| Direct to Consumer comparable store sales (includes retail and e-commerce) (1) | Constant Currency (2) Three months ended June 30, 2016 | Constant Currency (2) Three months ended June 30, 2015 |
| --- | ---: | ---: |
| Americas | 2.4% | 4.1% |
| Asia Pacific | 4.3% | (0.6)% |
| Europe | 1.6% | 8.6% |
| Global | 2.9% | 3.2% |

(1) Comparable store status is determined on a monthly basis. Comparable store sales includes the revenue of stores that have been in operation for more than twelve months. 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. 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.

The following table sets forth information related to our reportable operating business segments.

### Comparison of Revenue and Operating Income by Segment for the Three Months Ended June 30, 2016 and 2015

*(in thousands)*

| Revenues: | Three Months Ended June 30, 2016 | 2015 | Change $% |  | Constant Currency Change (4) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $135,097 | $143,119 | $(8,022) | (5.6)% | $(7,046) | (4.9)% |
| Asia Pacific (1) | 130,846 | 149,557 | (18,711) | (12.5)% | (19,767) | (13.2)% |
| Europe | 57,660 | 52,668 | 4,992 | 9.5% | 5,512 | 10.5% |
| Total segment revenues | 323,603 | 345,344 | (21,741) | (6.3)% | (21,301) | (6.2)% |
| Other businesses | 225 | 327 | (102) | (31.2)% | (104) | (31.8)% |
| Total consolidated revenues | $323,828 | $345,671 | $(21,843) | (6.3)% | $(21,405) | (6.2)% |
| Operating income: (2) |  |  |  |  |  |  |
| Americas | $18,015 | $21,771 | $(3,756) | (17.3)% | $(3,654) | (16.8)% |
| Asia Pacific | 34,533 | 41,262 | (6,729) | (16.3)% | (7,418) | (18.0)% |
| Europe | 8,437 | 6,105 | 2,332 | 38.2% | 2,570 | 42.1% |
| Total segment operating income | 60,985 | 69,138 | (8,153) | (11.8)% | (8,502) | (12.3)% |
| Reconciliation of total segment operating income to income before income taxes: |  |  |  |  |  |  |
| Other businesses | (6,038) | (6,890) | 852 | (12.4)% | 902 | (13.1)% |
| Unallocated corporate and other (3) | (34,342) | (45,899) | 11,557 | (25.2)% | 11,521 | (25.1)% |
| Total consolidated operating income (loss) | 20,605 | 16,349 | 4,256 | 26.0% | $3,921 | 24.0% |
| Foreign currency transaction gain (loss), net | (1,700) | (217) | (1,483) | 683.4% |  |  |
| Interest income | 164 | 196 | (32) | (16.3)% |  |  |
| Interest expense | (234) | (260) | 26 | (10.0)% |  |  |
| Other income (expense), net | (189) | (80) | (109) | 136.3% |  |  |
| Income (loss) before income taxes | $18,646 | $15,988 | $2,658 | 16.6% |  |  |

(1) Revenues for the three months ended June 30, 2016 were negatively impacted by approximately $3.0 million as a result of the sale of the Company’s South Africa operations, which was completed on April 15, 2016.

(2) Operating income for the three months ended June 30, 2015 was negatively impacted by restructuring charges of $1.3 million and $0.4 million for the Asia Pacific and Europe segments, respectively. As we completed our restructure efforts in 2015, we had no similar expenses in the 2016 periods presented.

(3) 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 unallocated corporate and other operating loss of $11.6 million for the three months ended June 30, 2016 is primarily associated with: (i) various cost reductions related to the Company’s 2015 restructuring efforts (including a $3.8 million decrease in contract labor and professional fees and a $3.2 million decrease in employee compensation) and (ii) a $5.0 million decrease associated with nonrecurring disbursements made to invalid vendors.

(4) 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 June 30, 2016, revenues for our Americas segment decreased $8.0 million or 5.6% compared to the same period in 2015. The decrease in the Americas segment revenue was due to the net impact of: (i) a $7.4 million or 5.2% decrease in sales volumes, (ii) a $1.0 million or 0.7% decrease due to the unfavorable impact of foreign currency translation, and (iii) a $0.4 million or 0.3% increase in average selling prices.

***Cost of Sales.*** During the three months ended June 30, 2016 cost of sales for our Americas segment decreased $4.3 million or 6.1% compared to the same period in 2015. The decrease in the Americas segment cost of sales was due to the net impact of: (i) a $3.6 million or 5.2% decrease due to lower sales volumes and (ii) a $0.7 million or 0.9% decrease due to the impact of foreign currency translation.

***Gross Profit.*** During the three months ended June 30, 2016, gross profit for the Americas segment decreased $3.7 million or 5.1% and gross margin increased 30 basis points, to 51.2%, compared to the same period in 2015. The decrease in the Americas segment’s gross profit is due to the net impact of: (i) a $3.8 million or 5.2% decrease due to lower sales volumes, (ii) a $0.4 million or 0.5% increase due to the combined impact of increased average sale prices and higher average cost of sales per unit, and (iii) a $0.3 million or 0.4% decrease due to the impact of foreign currency translation.

***SG&A.*** During the three months ended June 30, 2016, SG&A for our Americas segment increased $0.2 million, or 0.3%, compared to the same period in 2015. There were no individually significant items associated with the change in SG&A in the Americas segment.

### Asia Pacific Operating Segment

***Revenue.*** During the three months ended June 30, 2016, revenues for our Asia Pacific segment decreased $18.7 million or 12.5% compared to the same period in 2015. The decrease in the Asia Pacific segment revenue was due to the net impact of: (i) a $14.6 million or 9.7% decrease in average selling prices, (ii) a $5.2 million or 3.5% decrease due to lower sales volumes, (iii) a $1.1 million or 0.7% increase due to the favorable impact of foreign currency translation. Sales volumes for the three months ended June 30, 2016 were negatively impacted by approximately $3.0 million as a result of the sale of the Company’s South Africa operations, which was completed on April 15, 2016.

***Cost of Sales.*** During the three months ended June 30, 2016 cost of sales for our Asia Pacific segment decreased $4.3 million or 7.6% compared to the same period in 2015. The decrease in the Asia Pacific segment cost of sales was due to the net impact of: (i) a $3.0 million or 5.1% decrease due to a lower average costs per unit sold, (ii) a $1.9 million or 3.5% decrease due to lower sales volumes, and (iii) a $0.6 million or 1.0% increase due to the impact of foreign currency translation. The impact of sales volumes on cost of sales was reduced by approximately $1.7 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Gross Profit.*** During the three months ended June 30, 2016, gross profit for the Asia Pacific segment decreased $14.5 million or 15.4% and gross margin decreased 210 basis points, to 60.6%, compared to the same period in 2015. The decrease in the Asia Pacific segment’s gross profit is due to the net impact of: (i) a $11.7 million or 12.4% decrease due to lower average sales price in excess of the lower average cost per unit, (ii) a $3.3 million or 3.5% decrease due to lower sales volumes, and (iii) a $0.5 million or 0.5% increase due to the impact of foreign currency translation. Gross profit declined by approximately $1.3 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***SG&A.*** During the three months ended June 30, 2016, SG&A for our Asia Pacific segment decreased $6.0 million or 11.7% 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 $4.5 million or 8.8% decrease associated with bad debt expense, and (ii) a $2.5 million or 5.0% increase associated with higher contract labor service fees, (iii) a $2.4 million or 4.7% decrease associated with marketing expense, primarily due to a change in the timing of our marketing efforts, and (iv) a $1.7 million or 3.3% decrease associated with rent expense.

### Europe Operating Segment

***Revenue.*** During the three months ended June 30, 2016, revenues for our Europe segment increased $5.0 million or 9.5% compared to the same period in 2015. The increase in the Europe segment revenue was due to the net impact of: (i) a $11.4 million or 21.7% increase due to higher sales volumes, (ii) a $5.9 million or 11.2% decrease due to a lower average selling price, and (iii) a $0.5 million or 1.0% decrease due to the impact of foreign currency translation.

***Cost of Sales.*** During the three months ended June 30, 2016, cost of sales for our Europe segment increased $5.1 million or 21.5% compared to the same period in 2015. The increase in the Europe segment cost of sales was due to the net impact of: (i) a $5.1 million or 21.7% increase due to higher sales volumes, (ii) a $0.2 million or 0.7% decrease due to the impact of foreign currency translation, and (iii) a $0.2 million or 0.5% increase due to higher average cost per unit sold.

***Gross Profit.*** During the three months ended June 30, 2016, gross profit for the Europe segment decreased $0.1 million or 0.4% and gross margin decreased 490 basis points, to 50.1%, compared to the same period in 2015. The decrease in the Europe segment’s gross profit is due to the net impact of: (i) a $6.3 million or 21.7% increase due to higher sales volumes, (ii) a $6.0 million or 20.9% decrease due to a decrease in the average selling price and slight increase in the average cost per unit sold, and (iii) a $0.4 million or 1.2% decrease due to the impact of foreign currency translation.

***SG&A.*** During the three months ended June 30, 2016, SG&A for our Europe segment decreased $1.2 million, or 5.6%, compared to the same period in 2015. The decrease in SG&A for the Europe segment was primarily a result of: (i) a $0.8 million or 3.7% decrease associated with bad debt expense and (ii) a $0.5 million or 2.1% decrease associated with salaries and wages.

### Results of Operations

### Comparison of the Six Months Ended June 30, 2016 to 2015

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

|  | Six Months Ended June 30, 2016 | 2015 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $602,968 | $607,864 | $(4,896) | (0.8)% |
| Cost of sales | 303,962 | 290,624 | 13,338 | 4.6% |
| Gross profit | 299,006 | 317,240 | (18,234) | (5.7)% |
| Selling, general and administrative expenses | 263,393 | 294,705 | (31,312) | (10.6)% |
| Asset impairment charges | 765 | 2,075 | (1,310) | (63.1)% |
| Restructuring charges | — | 6,473 | (6,473) | (100.0)% |
| Income from operations | 34,848 | 13,987 | 20,861 | 149.1% |
| Foreign currency transaction gain (loss), net | (2,947) | 277 | (3,224) | (1,163.9)% |
| Interest income | 380 | 484 | (104) | (21.5)% |
| Interest expense | (477) | (479) | 2 | (0.4)% |
| Other expense, net | (107) | (411) | 304 | (74.0)% |
| Income before income taxes | 31,697 | 13,858 | 17,839 | 128.7% |
| Income tax expense | (6,014) | (2,857) | (3,157) | 110.5% |
| Net income | $25,683 | $11,001 | $14,682 | 133.5% |
| Dividends on Series A convertible preferred stock | $(6,000) | $(5,833) | $(167) | 2.9% |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (1,587) | (1,457) | (130) | 8.9% |
| Net income attributable to common stockholders | $18,096 | $3,711 | $14,385 | 387.6% |
| Net income per common share: |  |  |  |  |
| Basic | $0.21 | $0.04 | $0.17 | 425.0% |
| Diluted | $0.20 | $0.04 | $0.16 | 400.0% |
| Gross margin | 49.6% | 52.2% | (260 )bps | (5.0)% |
| Operating margin | 5.8% | 2.3% | 350 bps | 152.2% |
| Footwear unit sales | 34,001 | 32,474 | 1,527 | 4.7% |
| Average footwear selling price | $17.48 | $18.38 | $(0.90) | (4.9)% |

***Revenues.*** Revenue decreased $4.9 million or 0.8% in the six months ended June 30, 2016, compared to the same period in 2015. The decrease in revenue was due to the net effect of: (i) a $28.6 million or 4.7% increase due to higher sales volumes, (ii) a $25.9 million or 4.3% decrease associated with lower average selling prices, and (iii) a decrease of $7.6 million or 1.2% associated with unfavorable exchange rates. Sales volumes for the six months ended June 30, 2016 were negatively impacted by approximately $3.0 million as a result of the sale of the Company’s South Africa operations, which was completed on April 15, 2016.

***Cost of sales.*** During the six months ended June 30, 2016, cost of sales increased $13.3 million or 4.6% compared to the same period in 2015. The increase in cost of sales was due to the net impact of: (i) a $13.7 million or 4.7% increase due to higher sales volumes, (ii) a $4.5 million or 1.5% decrease due to the impact of foreign currency translation, and (iii) a $4.1 million or 1.4% increase in average costs per unit sold. The impact of sales volumes on cost of sales was reduced by approximately $2.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Gross profit.*** During the six months ended June 30, 2016, gross profit decreased $18.2 million or 5.7% and gross margin decreased 260 basis points, to 49.6%, compared to the same period in 2015. The decrease in gross profit is due to the net impact of: (i) a $30.0 million or 9.4% decrease due to the combined impact of lower average sale prices and a higher average cost of sales per unit, (ii) a $14.9 million or 4.7% increase due to higher sales volumes, and (iii) a $3.1 million or 1.0% decrease due to the unfavorable impact of foreign currency translation. Gross profit declined by approximately $1.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Selling, general and administrative expenses. SG&A*** expenses decreased $31.3 million or 10.6% during the six months ended June 30, 2016, compared to the same period in 2015. This decrease was primarily due to the combined impact of: (i) a $8.4 million or 2.8% decrease associated with implementation costs associated with the new ERP system, (ii) a $5.6 million or 1.9% decrease associated with bad debt expense, (iii) a $5.0 million or 1.7% decrease associated with nonrecurring disbursements made to invalid vendors, (iv) a $3.6 million or 1.2% decrease associated with marketing expense, (v) a $3.6 million or 1.2% decrease associated with reorganization charges, and (vi) a $1.8 million or 0.6% decrease associated with legal settlements.

During the six months ended June 30, 2016 and 2015, our bad debt expense was $0.6 million and $4.9 million, respectively. Of this amount, our China operations recognized $0.2 million and $4.0 million in bad debt expense for the six months ended June 30, 2016 and 2015, respectively. The decrease in bad debt expense associated with our China operations is primarily due to the implementation of a more restrictive credit policy for several China distributors in 2016, to reduce our exposure in that market.

In addition to these fluctuations, we have identified certain SG&A 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 U.S. GAAP SG&A expenses to non-GAAP SG&A expenses:

### Reconciliation of Non-GAAP SG&A for the Six Months Ended June 30, 2016 and 2015

*(in thousands)*

| Selling, general and administrative expenses reconciliation: | Six Months Ended June 30, 2016 | 2015 |
| --- | ---: | ---: |
| U.S. GAAP selling, general and administrative expenses | $263,393 | $294,705 |
| Reorganization charges (1) | (458) | (3,553) |
| Customs audit settlements (2) | (354) | — |
| Improper disbursements (3) | — | (5,022) |
| ERP implementation (4) | — | (8,387) |
| Legal settlements (5) | — | (1,801) |
| Total selling, general and administrative adjustments | (812) | (18,763) |
| Non-GAAP selling, general and administrative expenses | $262,581 | $275,942 |

(1) Relates to severance expenses, bonuses, store closure costs, consulting fees and other expenses related to recent reorganization activities and our investment agreement with Blackstone.

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

(3) Represents legal expenses and other expenses for matters surrounding disbursements to invalid vendors that occurred in 2015.

(4) Represents operating expenses incurred in 2015 related to the implementation of the new ERP system.

(5) Relates primarily to legal expenses for matters surrounding California wage settlements that occurred in 2015.

***Asset impairment charges.*** During the six months ended June 30, 2016 and 2015, we incurred $0.8 million and $2.1 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 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 six months ended June 30, 2016, we recognized a net loss of $2.9 million compared to a net gain of $0.3 million on foreign currency transactions during the six months ended June 30, 2015.

***Income tax expense.*** During the six months ended June 30, 2016, income tax expense increased $3.2 million compared to the same period in 2015, resulting in a 1.6% decrease in the effective tax rate. The decrease in the effective tax rate was driven primarily by a decrease in the relative proportion of losses in jurisdictions for which tax benefits cannot be recognized to global consolidated book income. Also affecting the rate were losses in certain 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 19.0% for the six months ended June 30, 2016 differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions.

### Revenue by Channel for the Six Months Ended June 30, 2016 and 2015:

*(in thousands)*

| Wholesale: | Six Months Ended June 30, 2016 | 2015 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $128,775 | $126,427 | $2,348 | 1.9% | $5,258 | 4.2% |
| Asia Pacific | 151,793 | 165,319 | (13,526) | (8.2)% | (13,030) | (7.9)% |
| Europe | 75,254 | 75,460 | (206) | (0.3)% | 695 | 0.9% |
| Other businesses | 397 | 552 | (155) | (28.1)% | (156) | (28.3)% |
| Total wholesale | 356,219 | 367,758 | (11,539) | (3.1)% | (7,233) | (2.0)% |
| Retail: |  |  |  |  |  |  |
| Americas | 93,535 | 92,925 | 610 | 0.7% | 843 | 0.9% |
| Asia Pacific | 63,838 | 69,244 | (5,406) | (7.8)% | (4,354) | (6.3)% |
| Europe | 21,505 | 22,933 | (1,428) | (6.2)% | (113) | (0.5)% |
| Total retail | 178,878 | 185,102 | (6,224) | (3.4)% | (3,624) | (2.0)% |
| E-commerce: |  |  |  |  |  |  |
| Americas | 36,917 | 29,536 | 7,381 | 25.0% | 7,531 | 25.5% |
| Asia Pacific | 19,716 | 14,769 | 4,947 | 33.5% | 5,496 | 37.2% |
| Europe | 11,238 | 10,699 | 539 | 5.0% | 489 | 4.6% |
| Total e-commerce | 67,871 | 55,004 | 12,867 | 23.4% | 13,516 | 24.6% |
| Total revenues | $602,968 | $607,864 | $(4,896) | (0.8)% | $2,659 | 0.4% |

(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.

### Revenues by channel

***Wholesale channel revenues.*** During the six months ended June 30, 2016, revenues from our wholesale channel decreased $11.5 million or 3.1%, compared to the same period in 2015. The decrease in wholesale channel revenue was due to the net impact of: (i) a $21.3 million or 5.7% decrease due to lower average selling prices (primarily due to declining prices in the Asia Pacific segment), (ii) a $14.1 million or 3.8% increase in sales volumes (primarily due to higher sales volumes in the Americas segment), and (iii) a $4.3 million or 1.2% decrease due to the unfavorable impact of foreign currency translation. Sales volumes for the six months ended June 30, 2016 were negatively impacted by approximately $3.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Retail channel revenues.*** During the six months ended June 30, 2016, revenues from our retail channel decreased $6.2 million, or 3.4%, compared to the same period in 2015. The decrease in retail channel revenues was due to the net impact of: (i) a $6.9 million or 3.8% decrease due to lower average selling prices, (ii) a $3.3 million or 1.8% increase in sales volumes, and (iii) a $2.6 million or 1.4% decrease due to the unfavorable impact of foreign currency translation.

***E-commerce channel revenues.*** During the six months ended June 30, 2016, revenues from our e-commerce channel increased $12.9 million or 23.4%, compared to the same period in 2015. The increase in e-commerce revenue was due to the net impact of: (i) a $13.8 million or 25.1% increase in sales volumes (primarily due to increased sales volumes in the Americas and Asia Pacific segments), (ii) a $0.6 million or 1.2% decrease associated with the unfavorable impact of foreign currency translation, and (iii) a $0.3 million or 0.5% decrease due to lower average selling prices.

Future change in the average selling price per unit will be impacted by: (i) the mix of products sold, (ii) the sales channel (as we generally realize higher sales prices from our retail and e-commerce channels as compared to our wholesale channel), and (iii) the level of sales discounts and incentives we offer our customers.

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 six months ended June 30, 2016 and comparable store sales by operating segment for the same periods.

### Change in Store Count by Type and Segment for the Six Months Ended June 30, 2016 and 2015

| Company-operated retail locations Type | December 31, 2015 | Opened |  | Closed | June 30, 2016 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Kiosk/store in store | 98 | 9 |  | 4 | 103 |
| Retail stores | 275 | 10 |  | 32 | 253 |
| Outlet stores | 186 | 18 |  | 2 | 202 |
| Total | 559 | 37 |  | 38 | 558 |
| Operating segment |  |  |  |  |  |
| Americas | 196 | 3 |  | 4 | 195 |
| Asia Pacific | 261 | 27 |  | 30 | 258 |
| Europe | 102 | 7 | (1) | 4 | 105 |
| Total | 559 | 37 |  | 38 | 558 |

(1) Includes retail locations acquired in Austria on March 31, 2016 as revenue associated with those locations began to be recognized in the three months ended June 30, 2016.

The table below sets forth our comparable store sales by reportable operating segment for the six months ended June 30, 2016 and 2015:

### Comparable Store Sales by Operating Segment for the Six Months Ended June 30, 2016 and 2015

| Comparable store sales (retail only) (1) | Constant Currency (2) Six Months Ended June 30, 2016 | Constant Currency (2) Six Months Ended June 30, 2015 |
| --- | ---: | ---: |
| Americas | (0.5)% | (4.3)% |
| Asia Pacific | (3.7)% | (9.4)% |
| Europe | 3.9% | 2.3% |
| Global | (1.0)% | (5.2)% |

The table below sets forth Direct to Consumer comparable stores sales, which includes our e-commerce and retail operating segments, for the six months ended June 30, 2016 and 2015:

| Direct to Consumer comparable store sales (includes retail and e-commerce) (1) | Constant Currency (2) Six Months Ended June 30, 2016 | Constant Currency (2) Six Months Ended June 30, 2015 |
| --- | ---: | ---: |
| Americas | 5.9% | 0.9% |
| Asia Pacific | 4.8% | (2.3)% |
| Europe | 4.4% | 6.2% |
| Global | 5.4% | 0.7% |

(1) Comparable store status is determined on a monthly basis. Comparable store sales includes the revenue of stores that have been in operation for more than twelve months. 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. E-commerce revenue is based on same site sales period over period.

(2) Reflects period over period 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.

The following table sets forth information related to our reportable operating business segments.

### Comparison of Revenue and Operating Income by Segment for the Six Months Ended June 30, 2016 and 2015

*(in thousands)*

| Revenues: (1) | Six Months Ended June 30, 2016 | 2015 | Change $% |  | Constant Currency Change (4) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $259,227 | $248,888 | $10,339 | 4.2% | $13,632 | 5.5% |
| Asia Pacific | 235,347 | 249,332 | (13,985) | (5.6)% | (11,888) | (4.8)% |
| Europe | 107,997 | 109,092 | (1,095) | (1.0)% | 1,071 | 1.0% |
| Total segment revenues | 602,571 | 607,312 | (4,741) | (0.8)% | 2,815 | 0.5% |
| Other businesses | 397 | 552 | (155) | (28.1)% | (156) | (28.3)% |
| Total consolidated revenues | $602,968 | $607,864 | $(4,896) | (0.8)% | $2,659 | 0.4% |
| Operating income: (2) |  |  |  |  |  |  |
| Americas | $34,592 | $37,149 | $(2,557) | (6.9)% | $(2,285) | (6.2)% |
| Asia Pacific | 60,383 | 58,597 | 1,786 | 3.0% | 1,677 | 2.9% |
| Europe | 14,960 | 14,343 | 617 | 4.3% | 916 | 6.4% |
| Total segment operating income | 109,935 | 110,089 | (154) | (0.1)% | 308 | 0.3% |
| Reconciliation of total segment operating income to income before income taxes: |  |  |  |  |  |  |
| Other businesses | (12,111) | (12,294) | 183 | (1.5)% | 84 | (0.7)% |
| Unallocated corporate and other (3) | (62,976) | (83,808) | 20,832 | (24.9)% | 20,825 | (24.8)% |
| Total consolidated operating income (loss) | 34,848 | 13,987 | 20,861 | 149.1% | $21,217 | 151.7% |
| Foreign currency transaction gain (loss), net | (2,947) | 277 | (3,224) | (1,163.9)% |  |  |
| Interest income | 380 | 484 | (104) | (21.5)% |  |  |
| Interest expense | (477) | (479) | 2 | (0.4)% |  |  |
| Other income (expense), net | (107) | (411) | 304 | (74.0)% |  |  |
| Income (loss) before income taxes | $31,697 | $13,858 | $17,839 | 128.7% |  |  |

(1) Revenues for the six months ended June 30, 2016 were negatively impacted by approximately $3.0 million as a result of the sale of the Company’s South Africa operations, which was completed on April 15, 2016.

(2) Operating income for the six months ended June 30, 2015 was negatively impacted by restructuring charges of $0.5 million, $3.0 million, and $1.5 million for the Americas, Asia Pacific, and Europe segments, respectively. As we completed our restructure efforts in 2015, we had no similar expenses in the 2016 periods presented.

(3) 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 unallocated corporate and other operating loss of $20.8 million for the six months ended June 30, 2016 is primarily associated with: (i) various cost reductions related to the Company’s 2015 restructuring efforts (including a $4.4 million decrease in employee compensation a $4.1 million decrease in contract labor and professional fees) and (ii) a $5.0 million decrease associated with nonrecurring disbursements made to invalid vendors. No other items were individually significant.

(4) 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 six months ended June 30, 2016, revenues for our Americas segment increased $10.3 million or 4.2% compared to the same period in 2015. The increase in the Americas segment revenue was due to the net impact of: (i) a $20.8 million or 8.3% increase in sales volumes, (ii) a $7.2 million or 2.8% decrease in average selling prices, and (iii) a $3.3 million or 1.3% decrease due to the unfavorable impact of foreign currency translation.

***Cost of Sales.*** During the six months ended June 30, 2016, cost of sales for our Americas segment increased $13.3 million or 10.8% 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 $10.2 million or 8.3% increase in sales volumes, (ii) a $5.5 million or 4.4% increase due to higher average costs per unit, and (iii) a $2.4 million or 1.9% decrease due to the impact of foreign currency translation.

***Gross Profit.*** During the six months ended June 30, 2016, gross profit for the Americas segment decreased $2.9 million or 2.3% and gross margin decreased 310 basis points, to 47.7%, compared to the same period in 2015. The decrease in the Americas segment gross profit is due to the net impact of: (i) a $12.6 million or 9.9% decrease due to the combined impact of decreased average sale prices and higher average cost of sales per unit, (ii) a $10.6 million or 8.3% increase due to higher sales volumes, and (iii) a $0.9 million or 0.7% decrease due to the impact of foreign currency translation.

***SG&A.*** During the six months ended June 30, 2016, SG&A for our Americas segment increased $0.1 million, or 0.1%, compared to the same period in 2015. There were no individually significant items associated with the change in SG&A in the Americas segment.

### Asia Pacific Operating Segment

***Revenue.*** During the six months ended June 30, 2016, revenues for our Asia Pacific segment decreased $14.0 million or 5.6% compared to the same period in 2015. The decrease in the Asia Pacific segment revenue was due to the net impact of: (i) a $16.1 million or 6.5% decrease in average selling prices, (ii) a $4.2 million or 1.7% increase due to higher sales volumes, (iii) a $2.1 million or 0.8% decrease due to the unfavorable impact of foreign currency translation. Sales volumes for the six months ended June 30, 2016 were negatively impacted by approximately $3.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Cost of Sales.*** During the six months ended June 30, 2016, cost of sales for our Asia Pacific segment decreased $4.1 million or 4.0% compared to the same period in 2015. The decrease in the Asia Pacific segment cost of sales was due to the net impact of: (i) a $4.8 million or 4.7% decrease due to a lower average costs per unit sold, (ii) a $1.7 million or 1.7% increase due to higher sales volumes, and (iii) a $1.0 million or 1.0% decrease due to the impact of foreign currency translation. The impact of sales volumes on cost of sales was reduced by approximately $1.7 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Gross Profit.*** During the six months ended June 30, 2016, gross profit for the Asia Pacific segment decreased $9.9 million or 6.7% and gross margin decreased 70 basis points, to 58.3%, compared to the same period in 2015. The decrease in the Asia Pacific segment’s gross profit is due to the net impact of: (i) a $11.3 million or 7.7% decrease due to lower average sales price in excess of the lower average cost per unit, (ii) a $2.5 million or 1.7% increase due to higher sales volumes, and (iii) a $1.1 million or 0.7% decrease due to the impact of foreign currency translation. Gross profit declined by approximately $1.3 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***SG&A.*** During the six months ended June 30, 2016, SG&A for our Asia Pacific segment decreased $8.2 million or 9.6% 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 $5.5 million or 6.5% decrease associated with bad debt expense, and (ii) a $3.8 million or 4.5% decrease associated with salary expense which was largely offset by, (iii) a $3.2 million or 3.8% increase associated with contract labor, and (iv) a $2.4 million or 2.9% decrease associated with rent expense.

### Europe Operating Segment

***Revenue.*** During the six months ended June 30, 2016, revenues for our Europe segment decreased $1.1 million or 1.0% compared to the same period in 2015. The decrease in the Europe segment revenue was due to the net impact of: (i) a $3.3 million or 3.1% increase due to higher sales volumes, (ii) a $2.2 million or 2.1% decrease due to a lower average selling prices, and (iii) a $2.2 million or 2.0% decrease due to the impact of foreign currency translation.

***Cost of Sales.*** During the six months ended June 30, 2016, cost of sales for our Europe segment increased $2.8 million or 5.2% compared to the same period in 2015. The increase in the Europe segment cost of sales was due to the net impact of: (i) a $2.3 million or 4.1% increase due to higher average costs (ii) a $1.6 million or 3.1% increase due to higher sales volumes, and (iii) a $1.1 million or 2.0% decrease due to the impact of foreign currency translation.

***Gross Profit.*** During the six months ended June 30, 2016, gross profit for the Europe segment decreased $3.9 million or 7.0% and gross margin decreased 310 basis points, to 47.7%, compared to the same period in 2015. The decrease in the Europe segment’s gross profit is due to the net impact of: (i) a $4.5 million or 8.1% decrease due to a lower average selling price and increase in the average unit cost, (ii) a $1.7 million or 3.1% increase due to higher sales volumes, and (iii) a $1.1 million or 2.0% decrease due to the impact of foreign currency translation.

***SG&A.*** During the six months ended June 30, 2016, SG&A for our Europe segment decreased $2.1 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: (i) a $1.3 million or 3.5% decrease associated with salary and labor expense, and (ii) a $1.1 million or 2.7% decrease associated with rent expense.

### Liquidity and Capital Resources

### Condensed Consolidated Statements of Cash Flows

Our condensed consolidated statements of cash flows for the six months ended June 30, 2016 and 2015 are summarized as follows:

*(in thousands)*

|  | Six Months Ended June 30, 2016 | 2015 | Change |
| --- | ---: | ---: | ---: |
| Cash provided by (used in) operating activities | $19,818 | $(3,051) | $22,869 |
| Cash used in investing activities | (11,258) | (9,141) | (2,117) |
| Cash used in financing activities | (7,443) | (50,616) | 43,173 |
| Effect of exchange rate changes on cash | 2,204 | (7,425) | 9,629 |
| Net change in cash and cash equivalents | $3,321 | $(70,233) | $73,554 |

During the six months ended June 30, 2016, cash and cash equivalents increased $3.3 million to $146.7 million compared to $143.3 million at December 31, 2015. The primary drivers of this increase include the net impact of: (i) a $47.1 million decrease in cash associated with changes in outstanding accounts receivable, net of allowances, primarily related to seasonal increase in sales volumes, (ii) a $25.7 million increase in cash from net income, (iii) a $17.0 million increase associated non-cash depreciation and amortization expense, (iv) a $15.6 million increase associated with higher accrued expenses and other liabilities, (v) a $10.3 million decrease associated with cash paid for property and equipment, (vi) a $8.9 million increase associated with higher accounts payable, (vii) a $7.5 million decrease associated with higher prepaid expenses and other assets,

(viii) a $6.0 million decrease in cash due to dividend payments on our Series A Preferred Stock, and (ix) a $5.9 million increase associated with share based compensation.

***Operating Activities.*** Cash from operating activities increased $22.9 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. The increase in cash and cash equivalents from operating activities is primarily due to the net impact of: (i) a $34.5 million decrease associated with the change in accounts payable, (ii) a $33.1 million increase associated with the change in accounts receivable, (iii) a $18.0 million increase associated with the change in inventory, and (iv) a $14.7 million increase in cash due to higher net income for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.

***Investing Activities***. The $2.1 million increase in cash used in investing activities for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 was due to the net impact of: (i) a $6.1 million increase in cash paid to purchase property, plant, and equipment, (ii) a $2.9 million decrease in cash paid for intangible assets, (ii) a $2.4 million increase in cash proceeds from the disposal of property and equipment, (iii) a $1.3 million decrease associated with changes in restricted cash.

***Financing Activities.*** The $43.2 million decrease in net cash used in financing activities was primarily attributable to the net impact of: (i) a $42.7 million decrease in cash spent on the purchase of treasury stock, compared to the same quarter of the prior year, (ii) a $29.6 million net increase in proceeds from bank borrowings, and (iii) a $28.0 million increase in repayments of bank borrowings and capital lease obligations.

### Working Capital

As of June 30, 2016, accounts receivable increased by $50.5 million compared to December 31, 2015. The increase in accounts receivable is primarily attributable to the higher seasonal sales volumes we generally experience in the first half of the year as compared to the last half of the year. As of June 30, 2016, we had total reserves of $55.9 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 June 30, 2016, accrued expenses and other liabilities increased $12.8 million and accounts payable increased $10.1 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. Other receivables also increased by $7.0 million compared to December 31, 2015.

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 June 13, 2016, that provides us with up to $80.0 million in borrowing capacity and matures in February 2021 (see *Revolving Credit Facility* below). As of June 30, 2016, we have zero borrowings on the revolving credit facility and we have $1.3 million of outstanding letters of credit resulting in $78.7 million of available credit, for future financing needs, as of June 30, 2016.

### 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 Credit Agreement, 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 June 30, 2016, we had $118.7 million of remaining common stock repurchase authorizations under our 2013 stock repurchase plan. During the three months and six months ended June 30, 2016, we had no repurchases. Future stock repurchases are subject to the terms of our Credit Agreement, 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 Bank, National Association (“PNC”), as a lender and administrative agent for the lenders. On February 18, 2016, we entered into the Eleventh Amendment to the 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 the Company, (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. The Eleventh Amendment also changed the variable lending rates. 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.

On June 13, 2016, we entered into the Twelfth Amendment to the Credit Agreement, which primarily increased the borrowing capacity of the facility from $75.0 million to $80.0 million. Under the terms of the Credit Agreement, the above financial covenants are only applicable when average borrowings exceed $20.0 million over a 30-day period, starting on the 15th day of the last month of each quarter.

As of June 30, 2016, we were in compliance with each of our financial covenants under the Credit Agreement, with actual calculations as follows: (i) the fixed charge coverage ratio *(which is calculated as adjusted EBITDA plus fixed charges before tax for a rolling four quarters divided by fixed charges before tax plus interest for a rolling four quarters)* was 3.41 to 1.00, compared to the minimum allowable amount of 1.00 to 1.00 (ii) the leverage ratio *(which is calculated as a consolidated indebtedness divided by adjusted EBITDA for a rolling four quarters)* was 0.23 to 1.00, compared to the maximum allowable amount of 2.50 to 1.00 (iii) stock repurchases were zero, and (iv) capital expenditures and commitments were $24.0 million. For the three and six months ended June 30, 2016, the weighted average/effective interest rate for outstanding borrowings under the Credit Agreement was 2.75% and 3.15%, respectively. The Company currently anticipates remaining in compliance with each of its debt covenant obligations for the foreseeable future.

As of both June 30, 2016 and December 31, 2015, we had no outstanding borrowings under the Credit Agreement. As of both June 30, 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 June 30, 2016 and December 31, 2015, the Company had $78.7 million and $73.7 million, respectively, of available borrowing capacity. During the three and six months ended June 30, 2016, Crocs capitalized less than $0.1 million and $0.6 million, respectively, in fees and third party costs as deferred financing costs associated with the Credit Agreement and the negotiation of a new debt financing agreement that has not yet been executed. The short-term portion of these fees are recorded in the ‘Prepaid expenses and other assets’ account and the long-term portion are recorded in the ‘Other assets’ accounts.

### Asia Pacific Revolving Credit Facility

On August 28, 2015, a 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. The revolving credit facility can be canceled or suspended at any time at the discretion of the lender and contains provisions requiring us to maintain compliance with certain restrictive covenants. As of June 30, 2016 and December 31, 2015, the revolving credit facility remained suspended at the discretion of the lender and we had no outstanding borrowings or borrowings available 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 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 clauses, and is coterminous with the Credit Agreement.

As of June 30, 2016 and December 31, 2015 Crocs had $3.7 million and $6.4 million, respectively, of debt outstanding under five separate notes payable, of which $3.4 million and $4.8 million, respectively, represent current installments. As of June 30, 2016, the notes bear interest rates ranging from 2.45% to 2.79% and maturities ranging from September 2016 to September 2017.

### Capital Assets

During the six months ended June 30, 2016, net capital assets acquired, inclusive of intangible assets, were $12.8 million compared to $9.7 million during the six months ended June 30, 2015. As of June 30, 2016, Crocs has committed additional purchases of capital assets through December 31, 2016 of approximately $14.1 million.

### 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 $11.8 million of current earnings during the six months ended June 30, 2016 without a tax impact. Further cash repatriation will depend on future cash requirements in the U.S. As of June 30, 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 June 30, 2016, we held $125.9 million of our total $146.7 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 $125.9 million, $0.3 million could potentially be restricted, as described above. If the remaining

$125.6 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 June 30, 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 SG&A expenses, 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. There were no changes in our critical accounting policies since December 31, 2015.

### Recent Accounting Pronouncements

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

## Market risk

As filed, 7,399 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 Credit Agreement and certain financial instruments. In addition to the Credit Agreement, we have incurred short-term indebtedness associated with certain vendor financing arrangements as well as certain 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 Credit Agreement 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 Credit Agreement 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 both June 30, 2016 and December 31, 2015, there were zero borrowings, respectively, under the Credit Agreement and therefore, we are currently not exposed to market interest rate risk.

Borrowings under the HSBC revolving credit facility bear interest at a variable rate. For loans denominated in USD, the interest rate is 2.10% 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 both June 30, 2016 and December 31, 2015, there were no borrowings under the revolving credit facility as the facility was 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 June 30, 2016, we held $7.0 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 June 30, 2016, interest income would have increased or decreased by less than $1.0 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 and six months ended June 30, 2016 by approximately $0.8 million and $1.0 million, respectively. The volatility of the applicable exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy. In the event our foreign sales and purchases increase and are denominated in currencies other than the U.S. Dollar, our operating results may be affected by fluctuations in the exchange rate of currencies we receive for such sales. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a discussion of the impact of foreign exchange rate variances experienced for the three and six months ended June 30, 2016 and 2015.

We transact business in various foreign countries and are therefore exposed to foreign currency exchange rate risk inherent in revenues, expenses, 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.

The following table summarizes the notional amounts of the outstanding foreign currency exchange contracts as of June 30, 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: | June 30, 2016 | December 31, 2015 |
| --- | ---: | ---: |
| Japanese Yen | $183,990 | $98,390 |
| Singapore Dollar | 62,629 | — |
| Euro | 46,076 | 34,219 |
| South Korean Won | 20,290 | 7,981 |
| British Pound Sterling | 18,569 | 21,859 |
| Canadian Dollar | 11,510 | 1,980 |
| Mexican Peso | 10,933 | 7,277 |
| Australian Dollar | 7,736 | 6,459 |
| Indian Rupee | 6,461 | 5,036 |
| New Taiwan Dollar | 5,924 | 1,798 |
| Russian Ruble | 3,692 | 667 |
| Brazilian Real | 2,584 | — |
| Swedish Krona | 1,663 | 1,655 |
| Hong Kong Dollar | 667 | 668 |
| South African Rand | — | 6,402 |
| Total notional value, net | $382,724 | $194,391 |
| Latest maturity date | July 2016 | January 2016 |

We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our forward foreign currency exchange contracts. To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect of hypothetical changes in foreign currency exchange rates. This analysis assumes a like movement by the foreign currencies in our hedge portfolio against the U.S. Dollar. As of June 30, 2016, a 10% appreciation or depreciation of the U.S. Dollar against the exchange rates for foreign currencies under contract would result in a net increase or decrease, respectively, in the fair value of our derivative portfolio of approximately $17.2 million.

## Controls and procedures

As filed, 6,367 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 June 30, 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 disclosure controls and procedures over financial reporting were ineffective as of June 30, 2016, as management identified material weaknesses in our disclosure controls and procedures related to our internal controls over financial reporting, as further described below. The material weaknesses were first identified in connection with our evaluation of disclosure controls and procedures as of December 31, 2015, and such weaknesses have not been remediated as of June 30, 2016. 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 disclosure 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 analysis, 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.

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 as of June 30, 2016.

### Changes in Internal Control over Financial Reporting

Other than the remediation efforts noted above, there were no material changes in our disclosure control over financial reporting that occurred during the three months ended June 30, 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 Aug 5, 2016.
Source: SEC EDGAR, the filing index for accession 0001104659-16-137631. Last ingested by Listed: Nov 6, 2026, 18:01 ET. No prices; not investment advice.