Crocs, Inc.: Form 10-Q for the period ended Mar 31, 2020

Business Overview

Crocs, Inc. and our consolidated subsidiaries (collectively the “Company,” “Crocs,” “we,” “us,” or “our”) are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for men, women, and children. We strive to be the world leader in innovative casual footwear for women, men, and children, combining comfort and style with a value that consumers want. The vast majority of shoes within our collection contain Croslite™ material, a proprietary, molded footwear technology, delivering extraordinary comfort with each step.

Known or Anticipated Trends

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

• The COVID-19 pandemic continues to drive global uncertainty and disruption. It has impacted our business globally, including, among other things, through store closures or reduced operating hours and decreased retail traffic. In response to the outbreak, first and foremost, we have prioritized the health and safety of our employees. Additionally, many of our 367 company-operated stores, our partner stores, and our wholesale customers’ stores were closed at some point during the first quarter and many have remained closed through the beginning of April. In all locations where stores are closed, our stores, and likely those of our partners, will remain closed until it is safe, and in line with local regulations, to reopen. At this time, we estimate that stores will begin to open in stages over the coming months but cannot reasonably estimate the impact such closures will have on our retail and wholesale sales and overall results. We expect revenue declines to continue in our retail and wholesale channels as “social distancing” practices remain in effect. Further, we expect a larger decline in revenues in the second quarter of 2020, as the majority of our retail and partner stores may be closed for the whole period. We are beginning to see some recovery in store traffic and sales in China and Korea where almost all stores are now open. However, we are also seeing declines in Japan, India, and much of Southeast Asia, areas that have been impacted by a second wave of the virus.
• While many brick-and-mortar stores have been closed, Crocs.com and other digital commerce have remained open. We have seen strong trends in our e-commerce channel that we expect to continue, as consumers migrate to online shopping.
• We have committed to donating up to $11 million globally in shoes to healthcare workers and other organizations.
• We have taken the following actions to address the impact of COVID-19 and the recessionary environment that may follow, to efficiently manage the business and maintain adequate liquidity and maximum flexibility:
• Board of Director and Executive Compensation: The compensation for our Board of Directors and senior leadership team has been significantly reduced for the foreseeable future.
• Retail: We have temporarily furloughed retail employees but have retained store managers and assistant store managers, with reduced hours in North America. These employees continue to receive benefits. In other parts of the world, retail employees are receiving full or reduced pay in accordance with local government regulations.
• Distribution Centers: Our owned distribution centers globally are operational. In the U.S., our distribution center qualifies as an “essential business” and is being used to distribute and supply companies with essential products for healthcare workers during the pandemic. To help ensure the well-being of our associates, we have enhanced safety protocols in place, including temperature checks, strict social distancing, hand sanitizer in all areas, and heightened cleaning of the facility in accordance with Center for Disease Control and Prevention and state guidelines.
• Corporate Office: Many of our corporate offices are closed or have enhanced safety protocols in place to ensure the well-being of our employees. We have been able to successfully conduct business virtually.
• Other Compensation Measures: We have reduced hiring and suspended annual salary increases, market adjustments, and promotions that were scheduled to go into effect in 2020. We have also asked some employees to shift to a reduced work day, have placed some employees on a temporary unpaid leave, and have eliminated some roles as we adjust to an organization structure for the future.
• Operating Expenses: Selling, general and administrative expenses (“SG&A”) for 2020 is now expected to be between $440 and $460 million, which is approximately $30 to $50 million lower than 2019 and

approximately $100 million lower than our original plan for 2020. The savings are primarily comprised of reduced compensation, lower marketing investment, and fewer discretionary expenses. Additionally, we began to implement travel restrictions in January, which has also reduced our expected SG&A.

• Working Capital: We are tightly managing inventories by reducing supply, rebalancing existing inventory, and consolidating future seasonal collections. We are also working closely with both our customers and vendors to manage accounts receivable and accounts payable.
• Capital Expenditures: Capital expenditures for 2020 are expected to be approximately $30 million, compared to prior guidance of approximately $50 to $60 million. This reduction reflects the deferral or cancellation of certain investments that we were making to support growth.
• Credit Facility: The Company amended and restated its revolving credit facility with PNC Bank, National Association, and a consortium of other lenders (the “Credit Facility”) on March 26, 2020. The Credit Facility was increased to $500 million from $450 million. In addition, the amended Credit Facility has a modified leverage ratio of 4.00x for the second and third quarters of fiscal 2020, after which the leverage ratio decreases to 3.50x through the fourth quarter of 2021 and 3.25x thereafter. The Credit Facility maturity date of July 2024 remains unchanged.
• Share Repurchase: We have suspended share repurchases to preserve maximum liquidity and flexibility.

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 certain information related to our results of operations 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 retranslated 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 rates on reported amounts.

Management uses constant currency to assist in comparing business trends from period to period on a consistent basis in communications with the Board of Directors, stockholders, analysts, and investors concerning our financial performance. We believe constant currency is useful to investors and other users of our condensed consolidated financial statements as an additional tool to evaluate operating performance and trends. Investors should not consider constant currency in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP.

First Quarter 2020 Financial and Operational Highlights

Revenues were $281.2 million for the first quarter of 2020, a 5.0% decrease compared to the first quarter of 2019. The decrease was due to the net effects of: (i) lower unit sales volumes, which decreased revenues by $26.4 million, or 8.9%, driven by the COVID-19 pandemic; (ii) higher average selling prices, which increased revenues by $16.7 million, or 5.7%, as we increased direct-to-consumer revenues (which include our retail and e-commerce channels), increased prices, and reduced promotions; and (iii) unfavorable changes in exchange rates, which decreased revenues by $5.2 million, or 1.7%.

The following were significant developments affecting our businesses and capital structure during the three months ended March 31, 2020:

• We sold 17.1 million pairs of shoes worldwide, a decrease from 18.4 million pairs in the first quarter of 2019.
• Revenues in our Americas segment increased 14.4%, and global e-commerce revenue increased by 15.8%, with strong performance across all three operating segments. Additionally, retail comparable store sales (as defined under “Store Locations and Comparable Store Sales” below) were higher in January and February 2020 in our Americas and EMEA segments than in the comparable periods in 2019 .
• Gross margin was 47.7%, an increase of 120 basis points from last year’s first quarter, as a result of price increases, lower promotional activity, and prior year costs for our U.S. distribution center that did not recur in the current year.
• SG&A was $113.4 million compared to $105.0 million in the first quarter of 2019. As a percent of revenues, SG&A increased 480 basis points to 40.3% of revenues compared to 35.5% of revenues in the first quarter of 2019. First quarter 2020 results included $4.7 million in non-recurring charges recognized as a result of COVID-19, including bad debt expense of $2.8 million and $1.7 million of inventory donations to healthcare workers and other organizations, including over 100,000 pairs of shoes donated in March through various programs.
• Income from operations of $20.8 million decreased 36.1% compared to $32.6 million in last year’s first quarter. Net income was $11.1 million, or $0.16 per diluted share, compared to $24.7 million, or $0.33 per diluted share, in last year’s first quarter.
• We repurchased 1.6 million shares of common stock at an aggregate cost of $39.2 million. We have suspended share repurchases to preserve maximum liquidity and flexibility.
• We increased total commitments under our revolving credit facility to $500.0 million from $450.0 million to further support liquidity needs, and have not increased the amount outstanding on our facility subsequent to March 31, 2020.

Results of Operations

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

(1) Changes for gross margin and operating margin are shown in basis points (“bp”).

Revenues By Channel

(in thousands)

(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” for more information.

The primary drivers of changes in revenue were:

(in thousands)

(1) The change due to price is based on the change in average selling price on a constant currency basis (“ASP”).

Revenues. The temporary closure of retail locations, partner stores, and brick-and-mortar retailers as a result of the COVID-19 pandemic contributed to a decrease in sales volume in the three months ended March 31, 2020, compared to the same period in 2019. The decrease due to foreign currency translation was primarily due to fluctuations in the Euro and Russian Ruble. These decreases were partially offset by an increase in ASP, primarily as a result of an increased share of direct-to-consumer revenues, price increases, and reduced promotions. An increase in e-commerce revenues of 15.8%, as a result of our continued success in the channel, was offset by decreases in retail revenues of 15.0% and wholesale revenues of 5.6%, which were impacted by COVID-19 related store closures.

Cost of sales. Cost of sales decreased with revenue, with lower volume of $13.7 million, or 8.7%, partially offset by higher average cost per unit on a constant currency basis (“AUC”) of $5.1 million, or 3.2%, due to purchasing power related to currency changes, primarily in our EMEA segment, and higher costs as a result of channel mix. Foreign currency translation resulted in a decrease of $2.7 million, or 1.7%.

Gross profit. Gross margin was 47.7% compared to 46.5% in 2019, as a result of higher product margin driven by price increases, lower promotional activity, and prior year costs for the new distribution center that did not recur in 2020. Gross profit decreased $3.5 million, or 2.5%. Sales volume changes decreased gross profit by $12.6 million, or 9.2%, while increases in ASP, partially offset by AUC, led to an increase in gross profit of $11.6 million, or 8.5%. Foreign currency translation decreased gross profit by $2.5 million, or 1.8%.

Selling, general and administrative expenses. SG&A increased $8.3 million, or 7.9%, during the three months ended March 31, 2020 compared to the same period in 2019. The increase was primarily due to an additional investment in marketing of $5.5 million, higher bad debt expense of $2.9 million, primarily related to COVID-19 in our Asia Pacific segment, inventory donations of $1.7 million to healthcare workers and other organizations in response to the COVID-19 pandemic, and increases in professional services, information technology, and other expenses of $2.0 million. These increases were partially offset by decreases in compensation expense of $2.6 million due to reduced variable compensation, and other expenses of $1.2 million.

Foreign currency losses, net. Foreign currency losses, net, consist of realized and unrealized foreign currency gains and losses from the remeasurement and settlement of monetary assets and liabilities denominated in non-functional currencies as well as realized and unrealized gains and losses on foreign currency derivative instruments. During the three months ended March 31, 2020, we recognized realized and unrealized net foreign currency losses of $0.2 million compared to losses of $1.2 million during the three months ended March 31, 2019.

Income tax expense. During the three months ended March 31, 2020, income tax expense increased $2.1 million compared to the same period in 2019. The effective tax rate for the three months ended March 31, 2020 was 40.9% compared to an effective tax rate of 18.5% for the same period in 2019, a 22.4% increase. The increase in the effective rate was driven primarily by tax expense recorded in profitable jurisdictions and by operating losses in certain jurisdictions where we had determined that it is not more likely than not to realize the associated tax benefits. Our effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions.

There were no significant or unusual discrete tax items during the three months ended March 31, 2020. We had unrecognized tax benefits of $4.3 million and $4.6 million at March 31, 2020 and December 31, 2019, respectively, and we do not expect any significant changes in tax benefits in the next twelve months.

Our tax rate is volatile and may increase or decrease with changes in, among other things, the amount of income or loss by jurisdiction, our ability to utilize net operating losses and foreign tax credits, changes in tax laws, and the movement of liabilities established pursuant to accounting guidance for uncertain tax positions as statutes of limitations expire, positions are effectively settled, or when additional information becomes available. There are proposed or pending tax law changes in various jurisdictions and other changes to regulatory environments in countries in which we do business that, if enacted, may have an impact on our effective tax rate.

Reportable Operating Segments

The following table sets forth information related to our reportable operating segments, including a comparison of revenues and operating income by segment:

(in thousands)

(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” for more information.

(2) Unallocated corporate and other includes corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, and depreciation and amortization of corporate and other assets not allocated to operating segments.

The primary drivers of changes in revenues by operating segment were:

(in thousands)

(1) The change due to price for revenues is based on ASP, as defined earlier in this section.

Americas Operating Segment

Revenues. During the three months ended March 31, 2020, the increase in revenues for our Americas segment over the same period in 2019 was primarily due to increased ASP, as a result of price increases and fewer promotional activities, and increased volume, primarily in wholesale. Wholesale revenues for the three months ended March 31, 2020 increased 27.5% due in part to the continued success of our brand in the first two months of the quarter, prior to the aforementioned store closures, as well as the continued strength of our e-tail partners. E-commerce revenues increased 12.5%, in part due to increased online shopping as customers migrate shopping to digital commerce during the pandemic. These increases were partially offset by a decrease in retail revenues of 9.1%, primarily as a result of retail store closures in March as a result of the COVID-19 pandemic.

Income from Operations. Income from operations for our Americas segment was $46.7 million for the three months ended March 31, 2020, an increase of $13.1 million, or 38.8%, compared to the same period in 2019. Gross profit increased $15.3 million, or 22.7%, primarily due to increased ASP, of $16.3 million, or 24.1%. There were also lower sales volumes of $0.6 million, or 0.8%, and a $0.4 million, or 0.6%, decrease as a result of negative currency changes.

SG&A for our Americas segment increased $2.2 million, or 6.7%, during the three months ended March 31, 2020 compared to the same period in 2019. This was primarily due to an additional marketing investment of $1.0 million, in part due to variable marketing related to growth in our e-commerce channel, inventory donations to healthcare workers associated with COVID-19 of $0.5 million, higher compensation expense of $0.5 million as a result of investment in headcount, and higher net other costs of $0.2 million.

Asia Pacific Operating Segment

Revenues. The decrease in our Asia Pacific revenues in the three months ended March 31, 2020, compared to the same period in 2019, was primarily due to lower sales volume in our wholesale and retail channels of 31.0% and 24.8%, respectively, partially offset by an increase in sales volumes of 37.5% in our e-commerce channel. These changes were driven by the closure of our partner and company-owned retail stores in China and sharp declines in customer traffic in both direct and distributor markets as a result of the COVID-19 pandemic, somewhat offset by the continued increases in e-commerce sales, further bolstered by increased online traffic during the pandemic. Lower ASP as a result of increased focus on higher margin products and negative currency changes, primarily in the Chinese Yuan, Korean Won, and Indian Rupee, also contributed to lower revenues.

Income from Operations. Income from operations for the Asia Pacific segment was $9.4 million for the three months ended March 31, 2020, a decrease of $17.3 million, or 64.7%, compared to the same period in 2019. Gross profit decreased by $14.3 million, or 30.7%, as a result of lower volume of $10.2 million, or 21.9%, from the aforementioned temporary store closures and decline in consumer traffic and by $3.2 million, or 6.8%, due to an increase in supply chain costs that was offset by a decrease in ‘Other Businesses.’ Negative currency impacts decreased gross profit by $0.9 million, or 2.0%, as a result of negative currency impacts.

SG&A for our Asia Pacific segment increased $3.0 million, or 14.7%, during the three months ended March 31, 2020 compared to the same period in 2019, due to higher bad debt expense of $2.6 million, primarily as a result of the impact of COVID-19 on distributor partners, inventory donations associated with COVID-19 to healthcare workers and other organizations of $1.2 million, and an additional marketing investment of $0.6 million. These increases were offset in part by lower facilities expense of $1.2 million, primarily related to savings on variable rent at retail locations, and lower professional services and net other expenses of $0.2 million.

EMEA Operating Segment

Revenues. During the three months ended March 31, 2020, the decrease in revenues for our EMEA segment compared to the same period in 2019, was primarily due to a decrease in sales volume in our wholesale and retail channels of 12.3% and 26.1%, respectively, driven by the closure of wholesale brick-and-mortar stores and company-operated retail stores due to the COVID-19 pandemic, and a negative currency impact as a result of fluctuations in the Euro and Russian Ruble, offset in part by increased ASP as a result of increased prices in our wholesale channel and an increased share of direct-to-consumer revenue, particularly in the e-commerce channel.

Income from Operations. Income from operations for the EMEA segment was $17.6 million for the three months ended March 31, 2020, a decrease of $7.4 million, or 29.5%, compared to the same period in 2019. Gross profit decreased $6.7 million, or 18.2%, due to lower sales volume of $4.2 million, or 11.5%, negative currency impacts of $1.0 million, or 2.8%, and higher AUC, partially offset by higher ASP, of $1.5 million, or 4.0%, as a result of purchasing power from currency changes.

SG&A for our EMEA segment increased $0.7 million, or 5.5%, during the three months ended March 31, 2020 compared to the same period in 2019, primarily as a result of an additional marketing investment of $0.6 million, higher professional services expenses of $0.4 million, offset in part by a decrease in other net costs of $0.3 million.

Other Businesses and Unallocated Corporate

During the three months ended March 31, 2020, total net costs within ‘Other Businesses’ and ‘Unallocated Corporate and Other’ increased $0.2 million compared to the same period in 2019. This increase was a result of an additional marketing investment of $2.8 million, higher professional services expenses of $1.4 million, and an increase to other costs of $1.3 million. Conversely, we had lower supply chain costs of $2.3 million, partially as a result of a decrease in supply chain costs offset in the regions, and lower compensation expense and other costs of $3.0 million due in part to a reduction in variable compensation.

Store Locations and Comparable Store Sales

The tables below illustrate the overall change in the number of our company-operated retail locations by type of store and reportable operating segment for the three months ended March 31, 2020:

Digital sales, which includes sales through our company-owned website, third party marketplaces, and e-tailers (which are reported in our wholesale channel), as a percent of total revenues, by operating segment were:

Comparable retail store sales and direct-to-consumer store sales by operating segment were:

25

(1) Reflects period over period change on a constant currency basis, which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” for more information.

(2) 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.

Financial Condition, Capital Resources, and Liquidity

Liquidity

Our liquidity position as of March 31, 2020 was:

(in thousands)

As of March 31, 2020, we had $107.0 million in cash and cash equivalents and up to $145.4 million of remaining borrowing availability under our Facility (as defined below), which was amended in March 2020 to provide additional flexibility and borrowing commitments as we continue to operate in a business landscape impacted by the COVID-19 pandemic. This is discussed in more detail under “Senior Revolving Facility” below. Additionally, we have encountered payment term extension requests and, thus, delays in collections from our customers, and we have recognized bad debt expense of $2.8 million associated with distributor customers in Asia as a result of the COVID-19 pandemic. We have taken several defensive measures to maximize liquidity in response to the COVID-19 pandemic, including reducing expenses, extending payment terms with vendors, reducing inventory levels, and deferring discretionary capital expenditures. We also suspended our share repurchase program.

Based on these actions, we believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our Facility will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at least the next twelve months. Additional future financing may be necessary to fund our operations, and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all, especially in light of the market volatility and uncertainty as a result of the COVID-19 outbreak. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity.

Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warm weather, revenues generated during our fourth quarter, when the northern hemisphere is experiencing cooler weather, are typically less than revenues generated during our first three quarters. Accordingly, cash flows from operating activities during our first quarter are typically lower as we collect on the related fourth quarter customer receivables and as customer receivables and inventories rise in preparation for the Spring/Summer season. Cash flows from operating activities generated during our second and third quarters are generally higher, when the northern hemisphere is experiencing warmer weather. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of expected results for any other quarter or for any other year.

Repatriation of Cash

As a global business, we have cash balances in various countries and amounts are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries may have additional restrictions and covenants associated with them which could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities.

Most of the cash held outside of the U.S. could be repatriated to the U.S. without incurring additional U.S. federal income taxes. 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. As of March 31, 2020, we held $51.5 million of our total $107.0 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. None of the $51.5 million held in international locations could potentially be limited by local regulations. If the remaining $51.5 million were to be immediately repatriated to the U.S., no additional U.S. federal income tax expense would be incurred.

Senior Revolving Credit Facility

In July 2019, the Company and certain of our subsidiaries (the “Borrowers”) entered into a Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association, as a lender and administrative agent for the lenders, which provided for a revolving credit facility of $450.0 million. In March 2020, we amended the Credit Agreement to, among other things, increase the total commitments under the Credit Agreement by $50.0 million, resulting in total commitments of $500.0 million, which can be increased by an additional $100.0 million subject to certain conditions (the “Facility”). Borrowings under the Credit Agreement bear interest at a variable rate based on (A) a domestic base rate (defined as the highest of (i) the Federal Funds open rate, plus 0.25%, (ii) the Prime Rate, and (iii) the Daily LIBOR rate, plus 1.00%), plus an applicable margin ranging from 0.25% or 0.875% based on our leverage ratio, or (B) a LIBOR rate, plus an applicable margin ranging from 1.25% to 1.875% based on our leverage ratio. Borrowings under the Credit Agreement are secured by all of the assets of the Borrowers and guaranteed by certain other subsidiaries of the Borrowers.

The Credit Agreement requires us to maintain a minimum interest coverage ratio of 4.00 to 1.00, and a maximum leverage ratio of (i) 4.00 to 1.00 until September 30, 2020, (ii) 3.50 to 1.00 from December 31, 2020 to December 31, 2021, and (iii) 3.25 to 1.00 from March 31, 2022 and thereafter (subject to adjustment in certain circumstances). The Credit Agreement permits (i) stock repurchases subject to certain restrictions, including after giving effect to such stock repurchases, the maximum leverage ratio does not exceed certain levels; and (ii) certain acquisitions so long as there is borrowing availability under the Credit Agreement of at least $40.0 million. As of March 31, 2020, we were in compliance with all financial covenants under the Credit Agreement.

As of March 31, 2020, the total commitments available from the lenders under the Facility were $500.0 million. At March 31, 2020, we had $350.0 million in outstanding borrowings, which are due when the Facility matures in July 2024, and $4.6 million in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As of March 31, 2020 and December 31, 2019, we had $145.4 million and $240.4 million, respectively, of available borrowing capacity under the Facility, and we have not increased the amount outstanding on the Facility subsequent to March 31, 2020.

Cash Flows

(in thousands)

27

Operating Activities. Our primary source of liquidity is cash provided by operating activities, consisting of net income adjusted for noncash items and changes in working capital. Cash used in operating activities increased $21.2 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, driven by lower net income adjusted for non-cash items of $5.7 million and by net decreases in operating assets and liabilities of $15.5 million. The change in operating assets and liabilities resulted primarily from increased inventories in the current quarter to meet anticipated higher customer demand and annual payouts of variable compensation, offset by decreased receivables associated with lower revenues in the three months ended March 31, 2020.

Investing Activities. The $5.8 million increase in cash used in investing activities for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily reflects expenditures related to the relocation of our Corporate headquarters in Broomfield, which we expect to complete later this year, continued investment in our U.S. distribution center, and information technology investments.

Financing Activities. Cash provided by financing activities increased by $66.2 million in the three months ended March 31, 2020 compared to the three months ended March 31, 2019. This was primarily driven by borrowings on our Facility of $145.0 million in the current quarter, compared to $95.0 million in first quarter of 2019, and decreased stock repurchases of our common stock of $14.3 million, both of which were in response to the COVID-19 outbreak. In the three months ended March 31, 2019, we also had a final payment of $3.0 million related to the conversion of our Series A Convertible Preferred Stock that did not recur in the current year. These increases were partially offset by an increase in uses of cash in financing activities of $1.1 million.

Contractual Obligations

There have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, other than borrowings on the Facility, as described above and in Note 7 — Revolving Credit Facilities and Bank Borrowings in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements and Supplementary Data of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of March 31, 2020, other than certain purchase commitments, which are described in Note 13 — Commitments and Contingencies in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements and Supplementary Data of this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

The preparation of these condensed consolidated 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.

For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2019, and Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements and Supplementary Data of this Quarterly Report on Form 10-Q. There have been no other significant changes in our critical accounting policies or their application since December 31, 2019.

Recent Accounting Pronouncements

See Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements and Supplementary Data of this Quarterly Report on Form 10-Q for a description of recently adopted accounting pronouncements and issued accounting pronouncements that we believe may have an impact on our condensed consolidated financial statements when adopted.

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 Facility and certain financial instruments.

Borrowings under our Facility bear interest at a variable rate and are therefore subject to risk based upon prevailing market interest rates. Interest rates fluctuate as a result of many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.

As of March 31, 2020, we had $350.0 million in outstanding borrowings and $4.6 million in outstanding letters of credit under our Facility. As of December 31, 2019, we had $205.0 million in outstanding borrowings and $4.6 million in outstanding letters of credit under our Facility.

A hypothetical increase of 1% in the interest rate on these borrowings would have increased interest expense by $0.9 million for the three months ended March 31, 2020.

Foreign Currency Exchange Risk

Changes in exchange rates have a direct effect on our reported U.S. Dollar condensed consolidated financial statements because we translate the operating results and financial position of our international subsidiaries to U.S. Dollars using current period exchange rates. Specifically, we translate the statements of operations of our foreign subsidiaries into the U.S. Dollar reporting currency using exchange rates in effect during each reporting period. As a result, comparisons of reported results between reporting periods may be impacted significantly due to differences in the exchange rates in effect at the time such exchange rates are used to translate the operating results of our international subsidiaries.

An increase of 1% of the value of the U.S. Dollar relative to foreign currencies, excluding the impact on our purchasing power, would have decreased our income before taxes during the three months ended March 31, 2020 by an immaterial amount. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy.

We enter into forward foreign exchange contracts to buy or sell various foreign currencies to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities. Changes in the fair value of these forward contracts are recognized in earnings in the period that the changes occur. As of March 31, 2020, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $143.7 million. The net fair value of these contracts at March 31, 2020 was a liability of $1.0 million.

We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our foreign currency forward exchange contracts. To perform the sensitivity analysis, we assess the risk of changes 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 March 31, 2020, a 10% appreciation in the value of the U.S. Dollar would result in a net increase in the fair value of our derivative portfolio of approximately $0.5 million.

See Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q for a discussion of the impact of the change in foreign exchange rates on our U.S. Dollar condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures as such item is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2020, to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can only provide reasonable assurance regarding management’s control objectives.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

You should carefully consider the factors discussed in Part I - Item 1A. Risk Factors in our Annual Report, which could materially affect our business, financial condition, cash flows, or future results. Except as set forth below, there have been no material changes in our risk factors included in our Annual Report.

The novel coronavirus (COVID-19) pandemic has had, and may continue to have, a material adverse impact on our business, operations, liquidity, financial condition and results of operations.

The COVID-19 pandemic continues to drive global uncertainty and disruption and has spread throughout the geographic regions in which we run our business and where our suppliers, third-party manufacturers, retail stores, wholesale customers and consumers are located. The total impact of the pandemic on us will depend on developments outside of our control, including, among other factors, the duration and spread of the outbreak, actions that may be taken by governmental authorities to contain the outbreak or mitigate its impact, including related restrictions on movement and commercial activities, the economic or other impacts on our wholesale partners, the impact on and recovery time of our supply chain, consequential staffing shortages, manufacturing delays and the uncertainty with respect to the accessibility of additional liquidity or to the capital markets.

Additionally, many of our 367 company-operated stores, our partner stores and wholesale partner stores globally were closed at some point during the first quarter and many have remained closed through late April. At this time, we cannot reasonably estimate the length of time these closures will remain in effect and the inability to sell our products in our retail and wholesale channels has had and will continue to have a material adverse effect on our revenues and results of operation.

We also rely upon the facilities of our third-party manufacturers outside of the U.S. to support our business as well as to export our products throughout the world. As a result of COVID-19 and the measures designed to contain the spread of the virus, our third-party manufacturers may not have the materials, capacity, or capability to manufacture our products according to our schedule and specifications. If our third-party manufacturers’ operations are curtailed, we may need to seek alternate manufacturing sources, which may be unavailable, more expensive or face the same constraints. The duration of any production and supply chain disruption, and related financial impact, if any, cannot be estimated at this time. Should any production and distribution closures continue for an extended period of time, the impact on our global supply chain could have a material adverse effect on our results of operations and cash flows. See “We depend solely on third-party manufacturers located outside the U.S.” in Item 1A - Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019.

The effects of COVID-19 could affect our ability to successfully operate in many ways, including, but not limited to, the following factors:

• the impact of the pandemic on the economies and financial markets of the countries and regions in which we operate, including a potential global recession, a decline in consumer confidence and spending, or a further increase in unemployment levels, has resulted, and could continue to result, in consumers having less disposable income and, in turn, decreased sales of our products;
• “shelter in place” and other similar mandated or suggested isolation protocols, which have disrupted, and could continue to disrupt, our retail locations, partner stores and brick-and-mortar retailers via store closures or reduced operating hours and decreased retail traffic;
• difficulty accessing debt and equity on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our ability to access capital necessary to operate our business;
• our success in attempting to reduce operating costs and conserve cash;
• our inability to obtain rent and other relief from our landlords with respect to closed retail stores, which may involve litigation or other disruptions;
• the failure of our wholesale customers to whom we extend credit to pay amounts owed to us on time, or at all, particularly if such customers are significantly impacted by COVID-19;
• the risk that even after the pandemic has initially subsided, fear of COVID-19 re-occurrence could cause customers to avoid public places where our stores and those of our wholesale partners are located such as malls and outlets;
• obstacles and delays in re-opening company-owned stores as we may have to hire and train a substantial number of new employees as a result of the temporary furlough of our retail employees in North America and the risk that some of those employees may seek employment elsewhere during the furlough; and
• we may be required to revise certain accounting estimates and judgments such as, but not limited to, those related to the valuation of long-lived assets and deferred tax assets, which could have a material adverse effect on our financial position and results of operations.

The rapid development and fluidity of the pandemic precludes any prediction as to the ultimate impact of COVID-19. The full extent of the impact and effects of COVID-19 on our business, operations, liquidity, financial condition and results of operations remain uncertain at this time.