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

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-Q
- Filed: 2016-11-09
- Accepted by EDGAR: Nov 9, 2016, 13:37 ET
- Period: 2016-09-30
- Accession: 0001104659-16-155805
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000110465916155805/a16-17152_110q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000110465916155805/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-01 to 2016-09-30 | $245.9m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2016-01-01 to 2016-09-30 | $848.9m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-07-01 to 2016-09-30 | $123.5m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2016-01-01 to 2016-09-30 | $427.4m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2016-07-01 to 2016-09-30 | $122.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2016-01-01 to 2016-09-30 | $421.4m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2016-07-01 to 2016-09-30 | $122.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2016-01-01 to 2016-09-30 | $386.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-07-01 to 2016-09-30 | −$1.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2016-01-01 to 2016-09-30 | $33.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $184.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2016-01-01 to 2016-09-30 | $661.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-01 to 2016-09-30 | $1.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2016-01-01 to 2016-09-30 | $7.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-07-01 to 2016-09-30 | −$1.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2016-01-01 to 2016-09-30 | $24.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | −$0.07 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2016-01-01 to 2016-09-30 | $0.14 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | −$0.07 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2016-01-01 to 2016-09-30 | $0.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 73,493,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2016-01-01 to 2016-09-30 | 74,730,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 9 months, 2016-01-01 to 2016-09-30 | $12.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-09-30 | $150.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-09-30 | $475.9m | us-gaap:AssetsCurrent |
| Total assets | at 2016-09-30 | $625.2m | us-gaap:Assets |
| Current liabilities | at 2016-09-30 | $153.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-09-30 | $172.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-09-30 | $274.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 71,132 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. 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.

### Known or Anticipated Trends

Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends to impact our operating results:

- Softening of the global economy and a cautious retail environment may continue to negatively affect customer purchasing trends.
- Foreign exchange rates may continue to unfavorably impact revenues from our foreign operations for the foreseeable future.
- Consumers spending preferences continue to shift toward e-commerce and away from brick and mortar stores. This has resulted in continued sales growth in our e-commerce channel, which has been largely offset by declining foot traffic in our retail locations.

### 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 recasted 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 September 30, 2016:

- Revenues for the three months ended September 30, 2016 were $245.9 million, a decrease of $28.2 million, or 10.3%, compared to the same period in 2015.
- Cost of sales for the three months ended September 30, 2016 was $123.5 million, a decrease of $29.8 million, or 19.5%, compared to the same period in 2015.
- Gross profit for the three months ended September 30, 2016 was $122.4 million, an increase of $1.6 million, or 1.3%, and gross margin decreased 570 basis points to 49.8%, compared to the same period in 2015.
- Selling, general and administrative expense (“SG&A”) decreased $12.4 million, or 9.2%, for the three months ended September 30, 2016 compared to the same period in 2015.
- Net loss attributable to common stockholders decreased $22.4 million to a loss of $5.4 million compared to a loss of $27.8 million for the same period in 2015. Net earnings per common share (“EPS”) was a loss of $0.07 for the three months ended September 30, 2016 compared to a loss of $0.37 for the three months ended September 30, 2015.

### Future Outlook

We intend to continue our strategic plans for long-term improvement and growth of the business, which comprise these key initiatives:

(1) developing powerful product stories supported with increased marketing spend,

(2) driving global cohesive brand positioning,

(3) enhancing engagement with key wholesale accounts,

(4) gaining greater strategic and economic leverage from our direct-to-consumer assets,

(5) prioritizing investment in larger-scale geographies,

(6) streamlining the organization cost structure by reducing excess overhead costs, and

(7) enhancing our inventory management processes and our delivery performance.

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 by narrowing our product line with an emphasis on higher margin units, 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 addressed the declining collection rates we experienced in 2015 from our China operations by limiting or terminating our relationship with distributors who we have identified as being a significant credit risk, and recording a charge for bad debts of $22.9 million. As of September 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. For the nine months ended September 30, 2016, our bad debt expense related to our China operations was lower by $21.1 million compared to the nine months ended September 30, 2015. 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 less than 10.0% 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.

### Quarter to Date Results of Operations

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

|  | Three Months Ended September 30, 2016 | 2015 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $245,888 | $274,088 | $(28,200) | (10.3)% |
| Cost of sales | 123,454 | 153,267 | (29,813) | (19.5)% |
| Gross profit | 122,434 | 120,821 | 1,613 | 1.3% |
| Selling, general and administrative expenses | 122,719 | 135,110 | (12,391) | (9.2)% |
| Asset impairment charges | 930 | 5,460 | (4,530) | (83.0)% |
| Restructuring charges | — | 981 | (981) | (100.0)% |
| Loss from operations | (1,215) | (20,730) | 19,515 | (94.1)% |
| Foreign currency transaction gain (loss), net | 1,379 | (2,908) | 4,287 | (147.4)% |
| Interest income | 178 | 268 | (90) | (33.6)% |
| Interest expense | (184) | (171) | (13) | 7.6% |
| Other income (expense), net | (1) | 405 | (406) | (100.2)% |
| Income (loss) before income taxes | 157 | (23,136) | 23,293 | (100.7)% |
| Income tax expense | (1,690) | (888) | (802) | 90.3% |
| Net loss | $(1,533) | $(24,024) | $22,491 | (93.6)% |
| 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 | (819) | (752) | (67) | 8.9% |
| Net loss attributable to common stockholders | $(5,352) | $(27,776) | $22,424 | (80.7)% |
| Net loss per common share: |  |  |  |  |
| Basic | $(0.07) | $(0.37) | $0.30 | (81.1)% |
| Diluted | $(0.07) | $(0.37) | $0.30 | (81.1)% |
| Gross margin | 49.8% | 44.1% | 570 bps | 12.9% |
| Operating margin | (0.5)% | (7.6)% | 710 bps | (93.4)% |
| Footwear unit sales | 12,135 | 14,599 | (2,464) | (16.9)% |
| Average footwear selling price | $19.96 | $18.66 | $1.30 | 7.0% |

***Revenues.*** Revenues decreased $28.2 million, or 10.3%, in the three months ended September 30, 2016, compared to the same period in 2015. The decrease in revenues was due to the net effect of: (i) a decrease of $46.3 million, or 16.9%, due to lower sales volumes, (ii) an increase of $14.6 million, or 5.3%, associated with a higher average sales price, and (iii) an increase of $3.5 million, or 1.3%, associated with favorable exchange rates. Sales volumes for the quarter were negatively impacted by approximately $2.6 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 September 30, 2016, cost of sales decreased $29.8 million, or 19.5%, compared to the same period in 2015. The decrease in cost of sales was due to the net impact of: (i) a $25.9 million, or 16.9% decrease, due to lower sales volumes, (ii) a $6.2 million, or 4.1%, decrease due to a lower average cost per unit sold, and (iii) a $2.3 million, or 1.5%, increase due to the impact of foreign currency translation. The impact of sales volumes on cost of sales was reduced by approximately $1.6 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 September 30, 2016, gross profit increased $1.6 million, or 1.3%, and gross margin increased 570 basis points to 49.8% compared to the same period in 2015. The increase in gross profit is due to the net impact of: (i) a $20.8 million, or 17.2%, increase due to the combined impact of a higher average sales price and a lower average cost of sales per unit, (ii) a $20.4 million, or 16.9%, decrease due to lower sales volumes, and (iii) a $1.2 million, or 1.0%, increase due to the favorable 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.

***SG&A.*** SG&A decreased $12.4 million, or 9.2%, during the three months ended September 30, 2016, compared to the same period in 2015. This decrease was primarily due to the combined impact of: (i) a $17.8 million decrease associated with bad debt expense, primarily related to an $18.9 million bad debt expense recognized in the third quarter of 2015 for our China operations, (ii) a $4.0 million increase associated with higher professional and contract labor fees, and (iii) a $1.9 million increase associated with salary expense.

During the three months ended September 30, 2016 and 2015, our bad debt expense was $1.2 million and $19.7 million, respectively. Of the $19.7 million expense recorded during the three months ended September 30, 2015, $18.9 million related to our China operations. During the three months ended September 30, 2016, bad debt expense related to our China operations was immaterial. 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 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 to non-GAAP SG&A.

*(in thousands)*

| SG&A reconciliation: | Three Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| U.S. GAAP SG&A | $122,719 | $135,110 |
| Reorganization charges (1) | — | (573) |
| ERP implementation (2) | — | (712) |
| Legal fees related to improper disbursements (3) | — | (631) |
| Legal settlements (4) | — | (234) |
| Total adjustments | — | (2,150) |
| Non-GAAP SG&A | $122,719 | $132,960 |

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

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

(3) Represents legal expenses related to invalid disbursements that occurred in 2015.

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

***Asset impairment charges.*** During the three months ended September 30, 2016 and 2015, we incurred $0.9 million and $5.5 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. ‘***Foreign currency transaction gain (loss), net’ consists of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. During the three months ended September 30, 2016, we recognized a net gain of $1.4 million compared to a net loss of $2.9 million on foreign currency transactions during the three months ended September 30, 2015.

***Income tax expense.*** During the three months ended September 30, 2016, income tax expense increased $0.8 million compared to the same period in 2015. The effective tax rate for the three months ended September 30, 2016 was 1,076.4% compared to a negative effective tax rate of 3.8% for the same period in 2015, resulting in a 1,080.2% increase in the effective tax rate. The increase in the effective tax rate was driven primarily by operating losses in certain jurisdictions where Crocs is unable to record tax benefits because it has determined that it is not more likely than not that such tax benefits will be realized, as well as an increase in profitability in certain jurisdictions for which tax expense is recorded. Our effective tax rate of 1,076.4% for the three months ended September 30, 2016 differs from the federal U.S. statutory rate primarily due to the fact that there are book losses in certain jurisdictions for which tax benefits cannot be recognized.

### Revenues by Channel

*(in thousands)*

| Wholesale: | Three Months Ended September 30, 2016 | 2015 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $41,389 | $48,880 | $(7,491) | (15.3)% | $(6,913) | (14.1)% |
| Asia Pacific | 45,565 | 53,411 | (7,846) | (14.7)% | (10,822) | (20.3)% |
| Europe | 21,909 | 30,260 | (8,351) | (27.6)% | (8,288) | (27.4)% |
| Other businesses | 271 | 418 | (147) | (35.2)% | (150) | (35.9)% |
| Total wholesale | 109,134 | 132,969 | (23,835) | (17.9)% | (26,173) | (19.7)% |
| Retail: |  |  |  |  |  |  |
| Americas | 56,607 | 59,468 | (2,861) | (4.8)% | (2,818) | (4.7)% |
| Asia Pacific | 37,259 | 38,374 | (1,115) | (2.9)% | (2,626) | (6.8)% |
| Europe | 13,194 | 13,813 | (619) | (4.5)% | (150) | (1.1)% |
| Total retail | 107,060 | 111,655 | (4,595) | (4.1)% | (5,594) | (5.0)% |
| E-commerce: |  |  |  |  |  |  |
| Americas | 16,662 | 16,321 | 341 | 2.1% | 351 | 2.2% |
| Asia Pacific | 8,096 | 7,094 | 1,002 | 14.1% | 801 | 11.3% |
| Europe | 4,936 | 6,049 | (1,113) | (18.4)% | (1,105) | (18.3)% |
| Total e-commerce | 29,694 | 29,464 | 230 | 0.8% | 47 | 0.2% |
| Total revenues | $245,888 | $274,088 | $(28,200) | (10.3)% | $(31,720) | (11.6)% |

(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.

***Wholesale channel revenues.*** During the three months ended September 30, 2016, revenues from our wholesale channel decreased $23.8 million, or 17.9%, compared to the same period in 2015. The decrease in wholesale channel revenues was due to the net impact of: (i) a $35.5 million, or 26.7%, decrease in sales volumes, (ii) a $9.4 million, or 7.0%, increase due to a higher average sales price, and (iii) a $2.3 million, or 1.8%, increase due to the favorable impact of foreign currency translation. Sales volumes for the three months ended September 30, 2016 were negatively impacted by approximately $2.6 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Retail channel revenues.*** During the three months ended September 30, 2016, revenues from our retail channel decreased $4.6 million, or 4.1%, compared to the same period in 2015. The decrease in retail channel revenues was due to the net impact of: (i) a $5.1 million, or 4.5%, decrease due to a lower average sales price, (ii) a $1.0 million, or 0.9%, increase due to the favorable impact of foreign currency translation, and (iii) a $0.5 million, or 0.5%, decrease in sales volumes.

***E-commerce channel revenues.*** During the three months ended September 30, 2016, revenues from our e-commerce channel increased $0.2 million, or 0.8%, compared to the same period in 2015. The increase in e-commerce revenues was due to the net impact of: (i) a $6.1 million, or 20.8%, increase in sales volumes (primarily due to increased sales volumes in the Americas and Asia Pacific segments), (ii) a $6.1 million, or 20.6%, decrease due to a lower average sales price, and (iii) a $0.2 million, or 0.6%, increase associated with the favorable 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 table below illustrates the overall change in the number of our company-operated retail locations by type of store and reportable operating segment:

| Company-operated retail locations Type | June 30, 2016 | Opened | Closed | September 30, 2016 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store in store | 103 | 3 | 7 | 99 |
| Retail stores | 253 | 4 | 20 | 237 |
| Outlet stores | 202 | 16 | — | 218 |
| Total | 558 | 23 | 27 | 554 |
| Operating segment |  |  |  |  |
| Americas | 195 | — | 4 | 191 |
| Asia Pacific | 258 | 22 | 16 | 264 |
| Europe | 105 | 1 | 7 | 99 |
| Total | 558 | 23 | 27 | 554 |

28

Comparable retail store sales and Direct to Consumer store sales by operating segment are as follows:

| Comparable store sales (retail only) (1) | Constant Currency (2) Three Months Ended September 30, 2016 | Three Months Ended September 30, 2015 |
| --- | ---: | ---: |
| Americas | (2.8)% | (1.6)% |
| Asia Pacific | (5.8)% | (1.5)% |
| Europe | (0.9)% | 2.9% |
| Global | (3.5)% | (0.9)% |

| Direct to Consumer comparable store sales (includes retail and e-commerce) (1) | Constant Currency (2) Three Months Ended September 30, 2016 | Three Months Ended September 30, 2015 |
| --- | ---: | ---: |
| Americas | (1.7)% | 4.3% |
| Asia Pacific | (2.4)% | 4.1% |
| Europe | (6.7)% | 7.1% |
| Global | (2.6)% | 4.7% |

(1) Comparable store status is determined on a monthly basis. Comparable store sales includes the revenues 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 revenues are 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 segments, including a comparison of revenue and operating income by segment:

*(in thousands)*

| Revenues: | Three Months Ended September 30, 2016 | 2015 | Change $% |  | Constant Currency Change (4) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $114,659 | $124,669 | $(10,010) | (8.0)% | $(9,380) | (7.5)% |
| Asia Pacific (1) | 90,920 | 98,879 | (7,959) | (8.0)% | (12,647) | (12.8)% |
| Europe | 40,038 | 50,122 | (10,084) | (20.1)% | (9,543) | (19.0)% |
| Total segment revenues | 245,617 | 273,670 | (28,053) | (10.3)% | (31,570) | (11.5)% |
| Other businesses | 271 | 418 | (147) | (35.2)% | (150) | (35.9)% |
| Total consolidated revenues | $245,888 | $274,088 | $(28,200) | (10.3)% | $(31,720) | (11.6)% |
| Operating income: (2) |  |  |  |  |  |  |
| Americas | $16,329 | $11,734 | $4,595 | 39.2% | $5,355 | 45.6% |
| Asia Pacific | 17,303 | 178 | 17,125 | 9,620.8% | 15,989 | 8,982.6% |
| Europe | 1,751 | 3,834 | (2,083) | (54.3)% | (2,094) | (54.6)% |
| Total segment operating income | 35,383 | 15,746 | 19,637 | 124.7% | 19,250 | 122.3% |
| Reconciliation of total segment operating income to income before income taxes: |  |  |  |  |  |  |
| Other businesses | (7,179) | (6,549) | (630) | 9.6% | (644) | 9.8% |
| Unallocated corporate and other (3) | (29,419) | (29,927) | 508 | (1.7)% | 455 | (1.5)% |
| Total consolidated operating loss | (1,215) | (20,730) | 19,515 | (94.1)% | $19,061 | (91.9)% |
| Foreign currency transaction gain (loss), net | 1,379 | (2,908) | 4,287 | (147.4)% |  |  |
| Interest income | 178 | 268 | (90) | (33.6)% |  |  |
| Interest expense | (184) | (171) | (13) | 7.6% |  |  |
| Other income (expense), net | (1) | 405 | (406) | (100.2)% |  |  |
| Income (loss) before income taxes | $157 | $(23,136) | $23,293 | (100.7)% |  |  |

(1) Revenues for the three months ended September 30, 2016 were negatively impacted by approximately $2.6 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 September 30, 2015 was negatively impacted by restructuring charges of $0.8 million, $0.1 million, and $0.1 million for the Europe, Asia Pacific, and Americas segments, respectively. As we completed our restructuring efforts in 2015, we had no similar expenses in the 2016 periods presented. Additionally, operating income for the Asia Pacific segment for the three months ended September 30, 2015 was negatively impacted by $18.9 million of bad debt expense related to our China operations. During the three months ended September 30, 2016, bad debt expense related to our China operations was immaterial.

(3) Unallocated corporate and other 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.

(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

***Revenues.*** During the three months ended September 30, 2016, revenues for our Americas segment decreased $10.0 million, or 8.0%, compared to the same period in 2015. The decrease in the Americas segment revenues was due to the net impact of: (i) an $18.3 million, or 14.7%, decrease related to lower sales volumes, (ii) an $8.9 million, or 7.2%, increase related to an increase in the average sales price, and (iii) a $0.6 million, or 0.5%, decrease due to the unfavorable impact of foreign currency translation.

***Cost of Sales.*** During the three months ended September 30, 2016, cost of sales for our Americas segment decreased $12.3 million, or 18.0%, 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 $10.0 million, or 14.7%, decrease due to lower sales volumes, (ii) a $2.4 million, or 3.4%, decrease due to lower average costs per unit sold, and (iii) a $0.1 million, or 0.1%, increase due to the impact of foreign currency translation.

***Gross Profit.*** During the three months ended September 30, 2016, gross profit for the Americas segment increased $2.3 million, or 4.1%, and gross margin increased 590 basis points to 51.1% compared to the same period in 2015. The increase in the Americas segment gross profit is due to the net impact of: (i) an $11.3 million, or 20.0%, increase due to the combined impact of an increased average sales price and a lower average cost of sales per unit, (ii) an $8.3 million, or 14.7%, decrease due to lower sales volumes, and (iii) a $0.7 million, or 1.2%, decrease due to the impact of foreign currency translation.

***SG&A.*** During the three months ended September 30, 2016, SG&A for our Americas segment increased $2.3 million, or 5.8%, compared to the same period in 2015. The increase in SG&A was primarily due to the net impact of: (i) a $1.8 million increase in marketing expense, (ii) a $1.0 million increase in salary expense, and (i) a $0.4 million decrease in depreciation and amortization expense.

### Asia Pacific Operating Segment

***Revenues.*** During the three months ended September 30, 2016, revenues for our Asia Pacific segment decreased $8.0 million, or 8.0%, compared to the same period in 2015. The decrease in the Asia Pacific segment revenues was due to the net impact of: (i) an $8.7 million, or 8.8%, decrease due to lower sales volumes, (ii) a $4.6 million, or 4.7%, increase due to the favorable impact of foreign currency translation, and (iii) a $3.9 million, or 3.9%, decrease in the average sales price. Sales volumes for the three months ended September 30, 2016 were negatively impacted by approximately $2.6 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 September 30, 2016, cost of sales for our Asia Pacific segment decreased $6.8 million, or 15.0%, 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 $5.2 million, or 11.4%, decrease due to lower average costs per unit sold, (ii) a $4.0 million, or 8.8%, decrease due to lower sales volumes, and (iii) a $2.4 million, or 5.2%, increase due to the impact of foreign currency translation. The impact of sales volumes on cost of sales was reduced by approximately $1.6 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 September 30, 2016, gross profit for the Asia Pacific segment decreased $1.1 million, or 2.1%, and gross margin increased 350 basis points to 57.5% compared to the same period in 2015. The decrease in the Asia Pacific segment gross profit is due to the net impact of: (i) a $4.7 million, or 8.8%, decrease due to lower sales volumes, (ii) a $2.3 million, or 4.4%, increase due to the impact of foreign currency translation, and (iii) a $1.3 million, or 2.3%, increase due to a lower average cost per unit in excess of a lower average sales price. 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.

***SG&A.*** During the three months ended September 30, 2016, SG&A for our Asia Pacific segment decreased $18.3 million, or 34.5%, compared to the same period in 2015. The decrease in SG&A was primarily due to the net impact of: (i) a $19.8 million decrease associated with bad debt expense, (ii) a $1.7 million increase associated with salaries and wages, (iii) a $1.6 million increase associated with higher contract labor expense, and (iv) a $1.5 million decrease in marketing expense.

### Europe Operating Segment

***Revenues.*** During the three months ended September 30, 2016, revenues for our Europe segment decreased $10.1 million, or 20.1%, compared to the same period in 2015. The decrease in the Europe segment revenues was due to the net impact of: (i) a $16.2 million, or 32.3%, decrease due to lower sales volumes, (ii) a $6.6 million, or 13.3%, increase due to a higher average sales price, and (iii) a $0.5 million, or 1.1%, decrease due to the impact of foreign currency translation.

***Cost of Sales.*** During the three months ended September 30, 2016, cost of sales for our Europe segment decreased $9.4 million, or 32.9%, compared to the same period in 2015. The decrease in the Europe segment cost of sales was due to the net impact of: (i) a $9.2 million, or 32.3%, decrease due to lower sales volumes and (ii) a $0.2 million, or 0.6%, decrease due to the impact of foreign currency translation.

***Gross Profit.*** During the three months ended September 30, 2016, gross profit for the Europe segment decreased $0.7 million, or 3.3%, and gross margin increased 910 basis points to 52.3% compared to the same period in 2015. The decrease in the Europe segment gross profit is due to the net impact of: (i) a $7.0 million, or 32.3%, decrease due to lower sales volumes, (ii) a $6.6 million, or 30.6%, increase due to a higher average sales price, and (iii) a $0.3 million, or 1.6%, decrease due to the impact of foreign currency translation.

***SG&A.*** During the three months ended September 30, 2016, SG&A for our Europe segment increased $2.4 million, or 14.5%, compared to the same period in 2015. The increase in SG&A was primarily due to the net impact of: (i) a $2.4 million increase associated with bad debt expense, (ii) a $1.1 million increase associated with salaries and wages, and (iii) a $1.0 million decrease in marketing expense.

### Year to Date Results of Operations

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

|  | Nine Months Ended September 30, 2016 | 2015 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $848,856 | $881,952 | $(33,096) | (3.8)% |
| Cost of sales | 427,416 | 443,891 | (16,475) | (3.7)% |
| Gross profit | 421,440 | 438,061 | (16,621) | (3.8)% |
| Selling, general and administrative expenses | 386,112 | 429,815 | (43,703) | (10.2)% |
| Asset impairment charges | 1,695 | 7,535 | (5,840) | (77.5)% |
| Restructuring charges | — | 7,454 | (7,454) | (100.0)% |
| Net income (loss) from operations | 33,633 | (6,743) | 40,376 | (598.8)% |
| Foreign currency transaction loss, net | (1,568) | (2,631) | 1,063 | (40.4)% |
| Interest income | 558 | 752 | (194) | (25.8)% |
| Interest expense | (661) | (650) | (11) | 1.7% |
| Other expense, net | (108) | (6) | (102) | 1,700.0% |
| Income (loss) before income taxes | 31,854 | (9,278) | 41,132 | (443.3)% |
| Income tax expense | (7,704) | (3,745) | (3,959) | 105.7% |
| Net income (loss) | $24,150 | $(13,023) | $37,173 | (285.4)% |
| Dividends on Series A convertible preferred stock | $(9,000) | $(8,833) | $(167) | 1.9% |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (2,406) | (2,209) | (197) | 8.9% |
| Net income (loss) attributable to common stockholders | $12,744 | $(24,065) | $36,809 | (153.0)% |
| Net income (loss) per common share: |  |  |  |  |
| Basic | $0.15 | $(0.32) | $0.47 | (146.9)% |
| Diluted | $0.14 | $(0.32) | $0.46 | (143.8)% |
| Gross margin | 49.6% | 49.7% | (10 )bps | (0.2)% |
| Operating margin | 4.0% | (0.8)% | 480 bps | (600.0)% |
| Footwear unit sales | 46,136 | 46,788 | (652) | (1.4)% |
| Average footwear selling price | $18.13 | $18.51 | $(0.38) | (2.1)% |

***Revenues.*** Revenues decreased $33.1 million, or 3.8%, in the nine months ended September 30, 2016, compared to the same period in 2015. The decrease in revenues was due to the net effect of: (i) a $16.8 million, or 1.9%, decrease associated with a lower average sales price, (ii) a $12.3 million, or 1.4%, decrease due to lower sales volumes, and (iii) a decrease of $4.0 million, or 0.5%, associated with unfavorable exchange rates. Sales volumes for the nine months ended September 30, 2016 were negatively impacted by approximately $6.7 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Cost of sales.*** During the nine months ended September 30, 2016, cost of sales decreased $16.5 million, or 3.7%, compared to the same period in 2015. The decrease in cost of sales was due to the net impact of: (i) an $8.1 million, or 1.8%, decrease in average cost per unit sold, (ii) a $6.2 million, or 1.4%, decrease due to lower sales volumes, and (iii) a $2.2 million, or 0.5%, decrease due to the impact of foreign currency translation. The impact of sales volumes on cost of sales was reduced by approximately $4.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Gross profit.*** During the nine months ended September 30, 2016, gross profit decreased $16.6 million, or 3.8%, and gross margin decreased 10 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) an $8.7 million, or 2.0%, decrease due to the combined impact of a lower average sales price and a lower average cost per unit, (ii) a $6.1 million, or 1.4%, decrease due to lower sales volumes, and (iii) a $1.8 million, or 0.4%, decrease due to the unfavorable impact of foreign currency translation. Gross profit declined by approximately $2.7 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***SG&A.*** SG&A decreased $43.7 million, or 10.2%, during the nine months ended September 30, 2016, compared to the same period in 2015. This decrease was primarily due to the combined impact of: (i) a $23.5 million decrease associated with bad debt expense, primarily related to a $22.9 million bad debt expense recognized in the third quarter of 2015 for our China operations, (ii) a $5.7 million decrease associated with lower rent expense, (iii) a $5.7 million decrease associated with invalid vendor payments and related legal fees that occurred in 2015, (iv) a $2.6 million decrease in marketing expense, (v) a $2.6 million decrease in employee travel related expenses, and (vi) a $2.4 million increase associated with higher professional fees.

During the nine months ended September 30, 2016 and 2015, our bad debt expense was $1.8 million and $25.5 million, respectively. Of the $25.5 million expense recorded during the nine months ended September 30, 2015, $22.9 million related to our China operations. During the nine months ended September 30, 2016, bad debt expense related to our China operations was immaterial. 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 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 to non-GAAP SG&A:

*(in thousands)*

| SG&A reconciliation: | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| U.S. GAAP SG&A | $386,112 | $429,815 |
| Reorganization charges (1) | (458) | (4,126) |
| Customs audit settlements (2) | (354) | — |
| ERP implementation (3) | — | (9,099) |
| Improper disbursements and related legal fees (4) | — | (5,653) |
| Legal settlements (5) | — | (2,035) |
| Total adjustments | (812) | (20,913) |
| Non-GAAP SG&A | $385,300 | $408,902 |

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

(2) Represents penalties and fees related to customs audit settlements.

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

(4) Represents invalid disbursements and related legal expenses that occurred in 2015.

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

***Asset impairment charges.*** During the nine months ended September 30, 2016 and 2015, we incurred $1.7 million and $7.5 million, respectively, in retail asset impairment charges related to certain underperforming retail locations, primarily in our Americas segment, that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over their remaining economic life.

***Foreign currency transaction loss, net. ‘***Foreign currency transaction loss, net’ consists of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. During the nine months ended September 30, 2016, we recognized a net loss of $1.6 million compared to a net loss of $2.6 million on foreign currency transactions during the nine months ended September 30, 2015.

***Income tax expense.*** During the nine months ended September 30, 2016, income tax expense increased $4.0 million compared to the same period in 2015. The effective tax rate for the nine months ended September 30, 2016 was 24.2% compared to a negative effective tax rate of 40.4% for the same period in 2015, resulting in an effective tax rate increase of 64.6%. This increase in the effective tax rate was driven primarily by operating losses in certain jurisdictions where Crocs is unable to record tax benefits because it has determined that it is not more likely than not that such tax benefits will be realized, as well as an increase in profitability in certain jurisdictions for which tax expense is recorded. Our effective tax rate of 24.2% for the nine months ended September 30, 2016, differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions.

### Revenues by Channel

*(in thousands)*

| Wholesale: | Nine Months Ended September 30, 2016 | 2015 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $170,165 | $175,306 | $(5,141) | (2.9)% | $(1,654) | (0.9)% |
| Asia Pacific | 197,359 | 218,730 | (21,371) | (9.8)% | (23,853) | (10.9)% |
| Europe | 97,163 | 105,719 | (8,556) | (8.1)% | (7,591) | (7.2)% |
| Other businesses | 667 | 970 | (303) | (31.2)% | (306) | (31.5)% |
| Total wholesale | 465,354 | 500,725 | (35,371) | (7.1)% | (33,404) | (6.7)% |
| Retail: |  |  |  |  |  |  |
| Americas | 150,142 | 152,394 | (2,252) | (1.5)% | (1,976) | (1.3)% |
| Asia Pacific | 101,097 | 107,619 | (6,522) | (6.1)% | (6,981) | (6.5)% |
| Europe | 34,699 | 36,747 | (2,048) | (5.6)% | (264) | (0.7)% |
| Total retail | 285,938 | 296,760 | (10,822) | (3.6)% | (9,221) | (3.1)% |
| E-commerce: |  |  |  |  |  |  |
| Americas | 53,579 | 45,857 | 7,722 | 16.8% | 7,882 | 17.2% |
| Asia Pacific | 27,812 | 21,862 | 5,950 | 27.2% | 6,298 | 28.8% |
| Europe | 16,173 | 16,748 | (575) | (3.4)% | (616) | (3.7)% |
| Total e-commerce | 97,564 | 84,467 | 13,097 | 15.5% | 13,564 | 16.1% |
| Total revenues | $848,856 | $881,952 | $(33,096) | (3.8)% | $(29,061) | (3.3)% |

(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.

***Wholesale channel revenues.*** During the nine months ended September 30, 2016, revenues from our wholesale channel decreased $35.4 million, or 7.1%, compared to the same period in 2015. The decrease in wholesale channel revenues was due to the net impact of: (i) a $24.8 million, or 5.0%, decrease in sales volumes, (ii) an $8.6 million, or 1.7%, decrease due to a lower average sales price (primarily due to declining prices in the Asia Pacific segment), and (iii) a $2.0 million, or 0.4%, decrease due to the unfavorable impact of foreign currency translation. Sales volumes for the nine months ended September 30, 2016 were negatively impacted by approximately $6.7 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Retail channel revenues.*** During the nine months ended September 30, 2016, revenues from our retail channel decreased $10.8 million, or 3.6%, compared to the same period in 2015. The decrease in retail channel revenues was due to the net impact of: (i) a $12.0 million, or 4.0%, decrease due to a lower average sales price, (ii) a $2.8 million, or 0.9%, increase in sales volumes, and (iii) a $1.6 million, or 0.5%, decrease due to the unfavorable impact of foreign currency translation.

***E-commerce channel revenues.*** During the nine months ended September 30, 2016, revenues from our e-commerce channel increased $13.1 million, or 15.5%, compared to the same period in 2015. The increase in e-commerce revenues was due to the net impact of: (i) a $31.4 million, or 37.2%, increase in sales volumes (primarily due to increased sales volumes in the Asia Pacific segment), (ii) a $17.8 million, or 21.1%, decrease due to a lower average sales price (primarily due to price decreases in the Asia Pacific segment), and (iii) a $0.5 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 table below illustrates the overall change in the number of our company-operated retail locations by type of store and reportable operating segment:

| Company-operated retail locations Type | December 31, 2015 | Opened | Closed | September 30, 2016 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store in store | 98 | 12 | 11 | 99 |
| Retail stores | 275 | 14 | 52 | 237 |
| Outlet stores | 186 | 34 | 2 | 218 |
| Total | 559 | 60 | 65 | 554 |
| Operating segment |  |  |  |  |
| Americas | 196 | 3 | 8 | 191 |
| Asia Pacific | 261 | 49 | 46 | 264 |
| Europe (1) | 102 | 8 | 11 | 99 |
| Total | 559 | 60 | 65 | 554 |

(1) Opened stores include retail locations acquired in Austria on March 31, 2016.

Comparable retail store sales and Direct to Consumer store sales by operating segment are as follows:

| Comparable store sales (retail only) (1) | Constant Currency (2) Nine Months Ended September 30, 2016 | Nine Months Ended September 30, 2015 |
| --- | ---: | ---: |
| Americas | (1.4)% | (3.2)% |
| Asia Pacific | (4.4)% | (6.7)% |
| Europe | 2.1% | 2.5% |
| Global | (2.0)% | (3.6)% |
|  | **Constant Currency (2)** |  |
|  | **Nine Months Ended September 30, 2016** | **Nine Months Ended September 30, 2015** |
| Direct to Consumer comparable store sales (includes retail and e-commerce) (1) |  |  |
| Americas | 3.0% | 2.2% |
| Asia Pacific | 2.3% | (4.9)% |
| Europe | 0.3% | 6.6% |
| Global | 2.4% | 0.7% |

(1) Comparable store status is determined on a monthly basis. Comparable store sales includes the revenues 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 revenues are 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 segments, including a comparison of revenue and operating income by segment:

*(in thousands)*

| Revenues: | Nine Months Ended September 30, 2016 | 2015 | Change $% |  | Constant Currency Change (4) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $373,886 | $373,557 | $329 | 0.1% | $4,252 | 1.1% |
| Asia Pacific (1) | 326,268 | 348,211 | (21,943) | (6.3)% | (24,536) | (7.0)% |
| Europe | 148,035 | 159,214 | (11,179) | (7.0)% | (8,471) | (5.3)% |
| Total segment revenues | 848,189 | 880,982 | (32,793) | (3.7)% | (28,755) | (3.3)% |
| Other businesses | 667 | 970 | (303) | (31.2)% | (306) | (31.5)% |
| Total consolidated revenues | $848,856 | $881,952 | $(33,096) | (3.8)% | $(29,061) | (3.3)% |
| Operating income: (2) |  |  |  |  |  |  |
| Americas | $50,919 | $48,884 | $2,035 | 4.2% | $3,068 | 6.3% |
| Asia Pacific | 77,687 | 58,775 | 18,912 | 32.2% | 17,667 | 30.1% |
| Europe | 16,712 | 18,177 | (1,465) | (8.1)% | (1,179) | (6.5)% |
| Total segment operating income | 145,318 | 125,836 | 19,482 | 15.5% | 19,556 | 15.5% |
| Reconciliation of total segment operating income to income before income taxes: |  |  |  |  |  |  |
| Other businesses | (19,291) | (18,843) | (448) | 2.4% | (560) | 3.0% |
| Unallocated corporate and other (3) | (92,394) | (113,736) | 21,342 | (18.8)% | 23,177 | (20.4)% |
| Total consolidated operating income (loss) | 33,633 | (6,743) | 40,376 | (598.8)% | $42,173 | (625.4)% |
| Foreign currency transaction loss, net | (1,568) | (2,631) | 1,063 | (40.4)% |  |  |
| Interest income | 558 | 752 | (194) | (25.8)% |  |  |
| Interest expense | (661) | (650) | (11) | 1.7% |  |  |
| Other expense, net | (108) | (6) | (102) | 1,700.0% |  |  |
| Income (loss) before income taxes | $31,854 | $(9,278) | $41,132 | (443.3)% |  |  |

(1) Revenues for the nine months ended September 30, 2016 were negatively impacted by approximately $6.7 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

(2) Operating income for the nine months ended September 30, 2015 was negatively impacted by restructuring charges of $0.5 million, $3.1 million, and $2.4 million for the Americas, Asia Pacific, and Europe segments, respectively. As we completed our restructuring efforts in 2015, we had no similar expenses in the 2016 periods presented. Additionally, operating income for the Asia Pacific segment for the nine months ended September 30, 2015 was negatively impacted by $22.9 million of bad debt expense related to our China operations. During the nine months ended September 30, 2016, bad debt expense related to our China operations was immaterial.

(3) Unallocated corporate and other 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. During the nine months ended September 30, 2016 and 2015, unallocated corporate and other operating loss was $92.4 million and $113.7 million, respectively, resulting in a $21.3 million decrease that is primarily associated with: (i) a $5.8 million decrease in employee wages, (ii) a $5.7 million decrease associated with nonrecurring disbursements made to invalid vendors, (iii) a $1.9 million decrease associated with employee travel expenses, and (iv) a $1.1 million decrease in rent related expenses. 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

***Revenues.*** During the nine months ended September 30, 2016, revenues for our Americas segment increased $0.3 million, or 0.1%, compared to the same period in 2015. The increase in our Americas segment revenues was due to the net impact of: (i) a $3.9 million, or 1.1%, decrease due to the unfavorable impact of foreign currency translation, (ii) a $2.2 million, or 0.7%, increase in the average sales price, and (iii) a $2.0 million, or 0.5%, increase in sales volumes.

***Cost of Sales.*** During the nine months ended September 30, 2016, cost of sales for our Americas segment increased $1.0 million, or 0.5%, compared to the same period in 2015. The increase in our Americas segment cost of sales was due to the net impact of: (i) a $2.3 million, or 1.2%, decrease due to the impact of foreign currency translation, (ii) a $2.3 million, or 1.2%, increase due to a higher average cost per unit, and (iii) a $1.0 million, or 0.5%, increase in sales volumes.

***Gross Profit.*** During the nine months ended September 30, 2016, gross profit for the Americas segment decreased $0.6 million, or 0.3%, and gross margin decreased 20 basis points to 48.7% compared to the same period in 2015. The decrease in the Americas segment gross profit is due to the net impact of: (i) a $1.6 million, or 0.8%, decrease due to the impact of foreign currency translation and (ii) a $1.0 million, or 0.5%, increase due to higher sales volumes.

***SG&A.*** During the nine months ended September 30, 2016, SG&A for our Americas segment increased $2.7 million, or 2.1%, compared to the same period in 2015. The increase in SG&A was primarily associated with a $2.8 million increase in salary expense.

### Asia Pacific Operating Segment

***Revenues.*** During the nine months ended September 30, 2016, revenues for our Asia Pacific segment decreased $21.9 million, or 6.3%, compared to the same period in 2015. The decrease in the Asia Pacific segment revenues was due to the net impact of: (i) a $26.2 million, or 7.5%, decrease in the average sales price, (ii) a $2.6 million, or 0.7%, increase due to the impact of foreign currency translation, and (iii) a $1.7 million, or 0.5%, increase due to higher sales volumes. Sales volumes for the nine months ended September 30, 2016 were negatively impacted by approximately $6.7 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Cost of Sales.*** During the nine months ended September 30, 2016, cost of sales for our Asia Pacific segment decreased $10.9 million, or 7.4%, 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 $12.9 million, or 8.8%, decrease due to a lower average cost per unit sold, (ii) a $1.3 million, or 0.9%, increase due to the impact of foreign currency translation, and (iii) a $0.7 million, or 0.5%, increase due to higher sales volumes. The impact of sales volumes on cost of sales was reduced by approximately $4.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Gross Profit.*** During the nine months ended September 30, 2016, gross profit for the Asia Pacific segment decreased $11.0 million, or 5.5%, and gross margin increased 50 basis points to 58.0% compared to the same period in 2015. The decrease in our Asia Pacific segment gross profit was due to the net impact of: (i) a $13.3 million, or 6.6%, decrease due to a lower average sales price in excess of a lower average cost per unit, (ii) a $1.3 million, or 0.6%, increase due to the impact of foreign currency translation, and (iii) a $1.0 million, or 0.5%, increase due to higher sales volumes. Gross profit declined by approximately $2.7 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***SG&A.*** During the nine months ended September 30, 2016, SG&A for our Asia Pacific segment decreased $26.4 million, or 19.2%, compared to the same period in 2015. The decrease in SG&A in our Asia Pacific segment was primarily due to the net impact of: (i) a $25.3 million decrease associated with bad debt expense, (ii) a $5.5 million decrease associated marketing expense, and (iii) a $4.8 million increase associated with contract labor.

### Europe Operating Segment

***Revenues.*** During the nine months ended September 30, 2016, revenues for our Europe segment decreased $11.2 million, or 7.0%, compared to the same period in 2015. The decrease in the Europe segment revenues was due to the net impact of: (i) an $11.9 million, or 7.4%, decrease due to lower sales volumes, (ii) a $3.4 million, or 2.1%, increase due to a higher average sales price, and (iii) a $2.7 million, or 1.7%, decrease due to the impact of foreign currency translation.

***Cost of Sales.*** During the nine months ended September 30, 2016, cost of sales for our Europe segment decreased $6.6 million, or 8.0%, compared to the same period in 2015. The decrease in the Europe segment cost of sales was due to the net impact of: (i) a $6.1 million, or 7.4%, decrease due to lower sales volumes, (ii) a $1.3 million, or 1.6%, decrease due to the impact of foreign currency translation, and (iii) a $0.8 million, or 1.0%, increase due to a higher average cost per unit.

***Gross Profit.*** During the nine months ended September 30, 2016, gross profit for our Europe segment decreased $4.6 million, or 6.0%, and gross margin increased 50 basis points to 48.9% compared to the same period in 2015. The decrease in our Europe segment gross profit is due to the net impact of: (i) a $5.8 million, or 7.4%, decrease due to lower sales volumes, (ii) a $2.6 million, or 3.3%, increase due to the net impact of a higher average sales price and a higher average cost per unit, and (iii) a $1.4 million, or 1.9%, decrease due to the impact of foreign currency translation.

***SG&A.*** During the nine months ended September 30, 2016, SG&A for our Europe segment increased $0.3 million, or 0.5%, compared to the same period in 2015. The increase in SG&A for our Europe segment was primarily the net impact of: (i) a $1.5 million increase associated with bad debt expense, (ii) a $0.7 million decrease associated with rent expense, (iii) a $0.3 million decrease in marketing expense, and (iv) a $0.2 million decrease in salary expense.

### Liquidity and Capital Resources

### Condensed Consolidated Statements of Cash Flows

Our condensed consolidated statements of cash flows are summarized as follows:

*(in thousands)*

|  | Nine Months Ended September 30, 2016 | 2015 | Change |
| --- | ---: | ---: | ---: |
| Cash provided by operating activities | $29,354 | $6,940 | $22,414 |
| Cash used in investing activities | (14,871) | (11,796) | (3,075) |
| Cash used in financing activities | (12,134) | (87,885) | 75,751 |
| Effect of exchange rate changes on cash | 4,526 | (6,305) | 10,831 |
| Net change in cash and cash equivalents | $6,875 | $(99,046) | $105,921 |

During the nine months ended September 30, 2016, cash and cash equivalents increased $6.9 million to $150.2 million compared to $143.3 million at December 31, 2015. The primary drivers of this increase include the net impact of: (i) a $25.5 million source of cash associated with non cash depreciation and amortization charges, (ii) a $24.2 million source of cash due to net income in the current period, (iii) $15.8 million use of cash due to higher outstanding accounts receivable as compared to December 31, 2016, (iv) a $14.6 million use of cash associated with a decrease in accounts payable as compared to December 31, 2015, and (v) a $12.7 million use of cash related to purchase property and equipment in the current period.

***Operating Activities.*** Cash provided by operating activities increased $22.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The increase in cash provided by operating activities is primarily due to the net impact of: (i) a $53.5 million decrease in cash associated with lower accounts payables, (ii) a $37.2 million increase in cash associated with the change in net income, compared to the prior year, (iii) a $32.3 million increase in cash associated with lower accounts receivable primarily due to improved collections, (iv) a $31.5 million increase in cash associated improved inventory management, and (v) a $23.5 million decrease in non-cash expense associated with doubtful accounts primarily associated with the prior year increase in allowances associated with our China operations.

***Investing Activities***. The $3.1 million increase in cash used in investing activities for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 is primarily due to the net impact of: (i) an $8.4 million decrease in cash associated with a higher spend on property and equipment in the current period related to opening new retail stores and renovating existing stores, (ii) $2.4 million increase in cash associated with proceeds from the disposal of property and equipment, and (iii) a $2.0 million increase in cash due to reduced spending on intangible assets in the current period.

***Financing Activities.*** The $75.8 million decrease in cash used in financing activities was primarily attributable to the net impact of: (i) a $75.9 million decrease in cash spend on the purchase of treasury stock compared to the prior year and (ii) a $1.2 million decrease in net repayments of bank borrowings and capital lease obligations.

### Working Capital

As of September 30, 2016, accounts receivable increased by $18.0 million, as compared to December 31, 2015, primarily due to the higher seasonal sales volumes in the second and third quarters as compared to the fourth quarter of each year. As of September 30, 2016, accounts payable decreased $12.5 million compared to December 31, 2015, primarily due to improved inventory management. As of September 30, 2016, other receivables increased $3.6 million, compared to December 31, 2015, due to higher value added tax receivable associated with the timing of settlements in various foreign jurisdictions. Additionally, cash on hand increased $6.9 million as of September 30, 2016 compared to December 31, 2015.

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 September 30, 2016, we have no 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.

### Stock Repurchase Plan Authorizations

On December 26, 2013, the Board approved the repurchase of up to $350.0 million of our common stock, 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 September 30, 2016, we had $118.7 million of remaining common stock repurchase authorizations under our 2013 stock repurchase plan. During the three months and nine months ended September 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, 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 1.10 to 1.00, (v) set the maximum leverage ratio to 2.00 to 1.00, (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 interest 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 line usage exceeds 25% of the borrowing capacity, or $20.0 million, over a 30-day period, starting on the 15th day of the last month of each quarter. As of September 30, 2016, the financial covenants under the credit agreement were not applicable.

As of September 30, 2016, we would have been in compliance with each of the covenants under the Credit Agreement had we exceeded borrowings greater than 25% of the borrowing capacity. Actual calculations of the financial covenants under the Credit Agreement were 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 1.49 to 1.00, compared to the minimum allowable amount of 1.10 to 1.00, (ii) the leverage ratio *(which is calculated as consolidated indebtedness divided by adjusted EBITDA for a rolling four quarters)* was 0.30 to 1.00, compared to the maximum allowable amount of 2.00 to 1.00, (iii) stock repurchases were zero, and (iv) capital expenditures and commitments were $25.3 million. For the three and nine months ended September 30, 2016, the weighted average/effective interest rate for outstanding borrowings under the Credit Agreement was 0.00% and 3.15%, respectively. We currently anticipate remaining in compliance with each of its debt covenant obligations for the foreseeable future.

As of September 30, 2016, we had no outstanding borrowings under the Credit Agreement and outstanding letters of credit of $1.3 million, which were reserved against the borrowing base under the terms of the Credit Agreement. As of September 30, 2016, we had $78.7 million of available borrowing capacity. During the three and nine months ended September 30, 2016, we capitalized $0.0 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 is recorded in ‘Prepaid expenses and other assets’ and the long-term portion is recorded in ‘Other assets’ on the condensed consolidated balance sheets.

### Long-term Bank Borrowings

As of September 30, 2016 and December 31, 2015 Crocs had $2.3 million and $6.4 million, respectively, of debt outstanding under five separate notes payable, of which $2.3 million and $4.8 million, respectively, represent current installments. As of September 30, 2016, the notes bear interest rates ranging from 2.45% to 2.79% and mature in September 2017.

### Capital Assets

During the nine months ended September 30, 2016, net capital assets acquired, inclusive of intangible assets, were $18.2 million compared to $11.8 million during the nine months ended September 30, 2015. As of September 30, 2016, Crocs has committed additional purchases of capital assets of approximately $14.2 million. Capital spend during the nine months ended September 30, 2016 related primarily to information technology investments, opening new retail stores, and renovating existing stores.

### 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 $19.3 million of current earnings during the nine months ended September 30, 2016 without a tax impact. Further cash repatriation will depend on future cash requirements in the U.S. As of September 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 September 30, 2016, we held $134.9 million of our total $150.2 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 $134.9 million, $0.2 million could potentially be restricted, as described above. If the remaining $134.7 million were immediately repatriated to the U.S., no additional tax expense would be incurred as $128.0 million is currently provided for in our condensed consolidated statement of operations and the remaining $6.7 million is offset by the additional foreign tax credits generated from our year-to-date repatriation of $19.3 million.

### Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of September 30, 2016, other than certain operating leases and other commitments.

### 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, 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, 4,516 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, Asia Pacific revolving credit facility, and certain financial instruments that have variable rates. As of September 30, 2016, there were no borrowings under the Credit Agreement and therefore, we are currently not exposed to market interest rate risk. As of September 30, 2016, there were no borrowings under the Asia Pacific revolving credit facility as the facility was suspended and therefore, we are currently not exposed to market interest rate risk.

We also hold cash equivalents including certificate of deposits, time deposits, and money market funds. Interest income generated from these cash equivalents will fluctuate with the general level of interest rates. As of September 30, 2016, we held $4.8 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 and nine months ended September 30, 2016, interest income would have increased or decreased by an immaterial amount.

### Foreign Currency Exchange Risk

As a global company, we have significant revenues and costs denominated in currencies other than the U.S. Dollar. We pay the majority of expenses attributable to our foreign operations in the functional currency of the country in which such operations are conducted and pay the majority of our overseas third party manufacturers in U.S. Dollars. Our ability to sell our products in foreign markets and the U.S. Dollar value of the sales made in foreign currencies can be significantly influenced by foreign currency fluctuations. Fluctuations in the value of foreign currencies relative to the U.S. Dollar could result in downward price pressure for our products and increase losses from currency exchange rates. An increase or decrease of 1% in value of the U.S. Dollar relative to foreign currencies would have increased or decreased loss before taxes for the three and nine months ended September 30, 2016 by approximately $0.1 million and $1.1 million, respectively. The volatility of the applicable exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy. In the event our foreign sales and purchases increase and are denominated in currencies other than the U.S. Dollar, our operating results may be affected by fluctuations in the exchange rate of currencies we receive for such sales. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a discussion of the impact of foreign exchange rate variances experienced for the three and nine months ended September 30, 2016 and 2015.

We have experienced and will continue to experience changes in international currency rates, impacting both results of operations and the value of assets and liabilities denominated in foreign 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. As of September 30, 2016, the notional value of our outstanding foreign currency exchange contracts was $273.0 million. This does not necessarily represent amounts exchanged by the parties and, therefore, are not a measure of our exposure to foreign currency exchange risks. The notional amounts of these derivative financial instruments are denominated in their U.S. Dollar equivalents and represent the amount of all contracts of the foreign currency specified.

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 September 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 $5.4 million.

## Controls and procedures

As filed, 6,473 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 September 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 September 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 September 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.*** At the direction of management, our internal and third party resources are in the process of executing the following initiatives to remediate the financial close process material weakness:

- Enhancing our control procedures for manual journal entries to ensure all entries are properly supported, reviewed, and documented;
- Enhancing 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;
- Assessing 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;
- Assessing the organizational structure of our accounting department to identify opportunities to improve the efficiency and effectiveness of our control procedures;
- Providing 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.*** At the direction of management, our internal and third party resources are in the process of executing the following initiatives to remediate the inventory accounting controls material weakness:

- Enhancing our cycle count procedures to ensure all counts performed and adjustments recorded are appropriately documented in the warehouse management system;
- Enhancing our inventory reconciliation procedures to ensure the warehouse management system is appropriately reconciled to the general ledger on a daily basis;
- Providing 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 also 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 September 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 September 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 Nov 9, 2016.
Source: SEC EDGAR, the filing index for accession 0001104659-16-155805. Last ingested by Listed: Nov 6, 2026, 18:01 ET. No prices; not investment advice.