# Crocs, Inc.: Form 10-Q for the period ended Jun 30, 2022

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-Q
- Filed: 2022-08-04
- Accepted by EDGAR: Aug 4, 2022, 10:16 ET
- Period: 2022-06-30
- Accession: 0001334036-22-000117
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000133403622000117/crox-20220630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000133403622000117/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-04-01 to 2022-06-30 | $964.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2022-01-01 to 2022-06-30 | $1.62bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-04-01 to 2022-06-30 | $466.8m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2022-01-01 to 2022-06-30 | $802.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-04-01 to 2022-06-30 | $497.7m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2022-01-01 to 2022-06-30 | $822.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-04-01 to 2022-06-30 | $249.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2022-01-01 to 2022-06-30 | $456.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-04-01 to 2022-06-30 | $248.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-01-01 to 2022-06-30 | $366.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-04-01 to 2022-06-30 | $33.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-01-01 to 2022-06-30 | $52.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-04-01 to 2022-06-30 | $54.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-01-01 to 2022-06-30 | $80.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | $160.3m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-01-01 to 2022-06-30 | $233.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | $2.58 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-01-01 to 2022-06-30 | $3.79 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | $2.60 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-01-01 to 2022-06-30 | $3.84 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-04-01 to 2022-06-30 | 62,236,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-01-01 to 2022-06-30 | 61,571,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-01-01 to 2022-06-30 | $84.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-01-01 to 2022-06-30 | $56.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2022-01-01 to 2022-06-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-06-30 | $187.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-06-30 | $1.17bn | us-gaap:AssetsCurrent |
| Total assets | at 2022-06-30 | $4.59bn | us-gaap:Assets |
| Current liabilities | at 2022-06-30 | $602.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-06-30 | $4.09bn | us-gaap:Liabilities |
| Long-term debt | at 2022-06-30 | $2.74bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-06-30 | $25.4m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-06-30 | $492.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 66,366 characters.

### 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 women, men, 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.

### 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:

- On February 17, 2022, (the “Acquisition Date”), we acquired (the “Acquisition”) 100% of the equity of a privately-owned casual footwear brand business (“HEYDUDE”), pursuant to a securities purchase agreement (the “SPA”) entered into on December 22, 2021. HEYDUDE is engaged in the business of distributing and selling casual footwear, including footwear under the brand name “HEYDUDE.” On the Acquisition Date, we purchased all of the issued and outstanding equity securities of HEYDUDE. The aggregate preliminary purchase price at the closing of the Acquisition was $2.3 billion. We paid aggregate consideration of $2.05 billion in cash (the “Cash Consideration”), subject to adjustment based on, among other things, the cash, indebtedness, transaction expenses, and working capital of the companies comprising HEYDUDE and their respective subsidiaries as of the Acquisition Date, and issued 2,852,280 shares of our common stock to one of the sellers, which shares are subject to a lock-up. The Cash Consideration was financed via our entry into the $2.0 billion Term Loan B Facility (as defined below) and $50.0 million of borrowings under our Revolving Facility (as defined below). The Acquisition has enabled us to further diversify our product portfolio under two brands. We intend to leverage our global presence, innovative marketing, and scale infrastructure to grow HEYDUDE and to create significant shareholder value. For more information on the Acquisition, refer to Note 16 — Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. *Financial Statements* of this Quarterly Report on Form 10-Q. The results reported for the HEYDUDE Brand herein represent the partial period beginning on the Acquisition Date through June 30, 2022 (the “Partial Period”).
- To support the long-term growth of both brands we plan to continue leveraging selling, general and administrative expenses (“SG&A”) as a percent of revenues, while maintaining investments in certain key areas, including marketing and digital commerce. We also believe our ability to leverage Supply Chain, Information Technology, Finance, HR, and Legal resources across both brands will allow us to manage SG&A effectively in the future.
- Global industry-wide logistics challenges, global inflation, and foreign currency fluctuations resulting in a stronger U.S. Dollar, have impacted, and we expect will continue to impact, our business, contributing to incremental freight costs, increased wages, particularly in our distribution centers, and increased raw materials costs. Partial COVID-19-related closures in Vietnam in the first quarter of 2022 and in China in the second quarter of 2022 also negatively impacted our supply chain. In the six months ended June 30, 2022, we incurred air freight costs of approximately $57 million of our $75 million plan for 2022, which has helped mitigate supply delays as a result of Vietnam closures. We expect the situation to remain fluid as COVID-19 break-out rates, including any deterioration in circumstances related to COVID-19 variants, and foreign exchange rates fluctuate, and inflationary pressure continues.
- Our inventories balance at June 30, 2022 was $501.5 million. Similar to the rest of the industry, our in-transit inventory levels remain elevated as a result of longer transit times. Additionally, inventories in the U.S. are higher as a result of a slower than anticipated growth rate in the country.

### 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, 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.

### Second Quarter 2022 Financial and Operational Highlights

Revenues were $964.6 million for the second quarter of 2022, a 50.5% increase compared to the second quarter of 2021. The increase was due to the net effects of: (i) the addition of HEYDUDE Brand revenues of $232.4 million as a result of the Acquisition, which increased revenues by 36.3%; (ii) higher Crocs Brand average selling prices, driven primarily by higher pricing, which increased revenues by $65.3 million, or 10.2%; (iii) higher Crocs Brand unit sales volumes, which increased revenues by $58.7 million, or 9.2%; and (iv) unfavorable changes in exchange rates for the Crocs Brand, which decreased revenues by $32.6 million, or 5.1%.

The following were significant developments affecting our businesses and capital structure during the three months ended June 30, 2022:

- We acquired HEYDUDE on February 17, 2022, which added revenues of $232.4 million in the three months ended June 30, 2022. This represented 24.1% of revenues in the quarter. The HEYDUDE Brand became a new reportable operating segment as of the Acquisition Date.
- We grew Crocs Brand revenues, despite significant foreign currency headwinds and COVID-19 related shutdowns impacting our supply chain in China. This was led by our EMEALA segment, which grew revenues by 32.8%, or 48.4% on a constant currency basis. Our North America segment revenues grew by 7.6%, or 7.8% on a constant currency basis, while our Asia Pacific segment revenues grew by 17.4%, or 27.6% on a constant currency basis, compared to the second quarter of 2021.
- Footwear units sold for the Crocs Brand in the second quarter of 2022 were 32.4 million pairs worldwide, an increase of 3.3 million from the second quarter of 2021. We sold 8.1 million pairs of shoes for the HEYDUDE Brand in the second quarter of 2022.
- Gross margin was 51.6%, a decrease of 1,010 basis points from last year’s second quarter. Gross margin for the Crocs Brand was 57.7%, a decrease of 400 basis points from last year’s second quarter, as a result of higher freight costs due to continued supply chain challenges and ongoing global inflation, which also impacts material costs, offset in part by higher pricing and product mix. Gross margin for the HEYDUDE Brand was 32.4%. This was lower than the Crocs Brand as a result of unfavorable channel mix and higher freight rates, as we work to leverage Crocs Brand freight contracts for the HEYDUDE Brand. The HEYDUDE gross margin is also inclusive of an approximately 1,470 basis points unfavorable impact from a non-cash step-up of acquired HEYDUDE inventory to fair value.
- SG&A was $249.8 million compared to $199.9 million in the second quarter of 2021, as a result of investments in headcount and marketing as we continue to grow the business, costs related to the integration of HEYDUDE, and incremental operating costs associated with operating the HEYDUDE Brand. As a percent of revenues, SG&A decreased to 25.9% of revenues compared to 31.2% of revenues in the second quarter of 2021, largely driven by the HEYDUDE Brand, which carried lower SG&A costs as a percentage of revenue than the Crocs Brand, as well as continued SG&A rate improvement in the Crocs Brand compared to the same period in 2021.
- Income from operations increased to $248.0 million from $195.3 million in last year’s second quarter. Net income was $160.3 million, or $2.58 per diluted share, compared to $319.0 million, or $4.93 per diluted share, in last year’s second quarter.

### Results of Operations

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

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 | % Change Favorable (Unfavorable) Q2 2022-2021 | YTD 2022-2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $964,581 | $640,773 | $1,624,729 | $1,100,871 | 50.5% | 47.6% |
| Cost of sales | 466,848 | 245,592 | 802,072 | 452,471 | (90.1)% | (77.3)% |
| Gross profit | 497,733 | 395,181 | 822,657 | 648,400 | 26.0% | 26.9% |
| Selling, general and administrative expenses | 249,769 | 199,859 | 456,016 | 328,392 | (25.0)% | (38.9)% |
| Income from operations | 247,964 | 195,322 | 366,641 | 320,008 | 27.0% | 14.6% |
| Foreign currency losses, net | (1,202) | (117) | (722) | (621) | (927.4)% | (16.3)% |
| Interest income | 86 | 71 | 188 | 98 | 21.1% | 91.8% |
| Interest expense | (32,963) | (4,712) | (52,215) | (6,344) | (599.6)% | (723.1)% |
| Other income (expense), net | 419 | 2 | (528) | 13 | 20,850.0% | (4,161.5)% |
| Income before income taxes | 214,304 | 190,566 | 313,364 | 313,154 | 12.5% | 0.1% |
| Income tax expense (benefit) | 53,989 | (128,388) | 80,289 | (104,198) | (142.1)% | (177.1)% |
| Net income | $160,315 | $318,954 | $233,075 | $417,352 | (49.7)% | (44.2)% |
| Net income per common share: |  |  |  |  |  |  |
| Basic | $2.60 | $5.02 | $3.84 | $6.47 | (48.2)% | (40.6)% |
| Diluted | $2.58 | $4.93 | $3.79 | $6.35 | (47.7)% | (40.3)% |
| Gross margin (1) | 51.6% | 61.7% | 50.6% | 58.9% | (1,010) bp | (830) bp |
| Operating margin (1) | 25.7% | 30.5% | 22.6% | 29.1% | (480) bp | (650) bp |
| Footwear unit sales: |  |  |  |  |  |  |
| Crocs Brand | 32,396 | 29,085 | 58,011 | 54,992 | 11.4% | 5.5% |
| HEYDUDE Brand (3) | 8,086 | — | 12,065 | — | —% | —% |
| Average footwear selling price - nominal basis (2): |  |  |  |  |  |  |
| Crocs Brand | $22.39 | $21.84 | $21.82 | $19.86 | 2.5% | 9.9% |
| HEYDUDE Brand (3) | $28.74 | $— | $28.78 | $— | —% | —% |

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

(2) Average footwear selling price is calculated as footwear and charms revenues divided by footwear units, as applicable.

(3) We acquired HEYDUDE on February 17, 2022. Therefore, the amounts shown above for the six months ended June 30, 2022 represent results during the Partial Period, and there are no comparative amounts for the three and six months ended June 30, 2021.

### Revenues By Channel

*(in thousands)*

| Crocs Brand: | Three Months Ended June 30, 2022 | Favorable (Unfavorable) 2021 | Six Months Ended June 30, 2022 | 2021 | % Change Q2 2022-2021 | YTD 2022-2021 | Constant Currency % Change (1) Q2 2022-2021 | YTD 2022-2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Wholesale | $392,511 | $307,327 | $736,768 | $597,366 | 27.7% | 23.3% | 35.2% | 29.2% |
| Direct-to-consumer | 339,705 | 333,446 | 540,673 | 503,505 | 1.9% | 7.4% | 4.8% | 9.8% |
| Total Crocs Brand | 732,216 | 640,773 | 1,277,441 | 1,100,871 | 14.3% | 16.0% | 19.4% | 20.3% |
| HEYDUDE Brand (2): |  |  |  |  |  |  |  |  |
| Wholesale | 162,499 | — | 249,418 | — | —% | —% | —% | —% |
| Direct-to-consumer | 69,866 | — | 97,870 | — | —% | —% | —% | —% |
| Total HEYDUDE Brand | 232,365 | — | 347,288 | — | —% | —% | —% | —% |
| Total consolidated revenues (2) | $964,581 | $640,773 | $1,624,729 | $1,100,871 | 50.5% | 47.6% | 55.6% | 51.9% |

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

(2) We acquired HEYDUDE on February 17, 2022. Therefore, the amounts shown above for the six months ended June 30, 2022 represent results during the Partial Period, and there are no comparative amounts for the three and six months ended June 30, 2021.

***Revenues.*** In the three months ended June 30, 2022, revenues increased compared to the same period in 2021. This was driven by (i) the addition of HEYDUDE Brand revenues of $232.4 million, (ii) higher average selling price on a constant currency basis (“ASP”) in the Crocs Brand of $65.3 million, or 10.2%, as a result of increased pricing, offset in part by unfavorable channel mix, and (iii) higher volume in the Crocs Brand of $58.7 million, or 9.2%, primarily in our Asia Pacific and EMEALA segments. Revenue increased despite unfavorable foreign currency headwinds, most significantly in the Euro and Korean Won, which decreased Crocs Brand revenues by $32.6 million, or 5.1%.

Revenues also increased in the six months ended June 30, 2022, driven by (i) the addition of HEYDUDE Brand revenues of $347.3 million during the Partial Period, (ii) higher ASP in the Crocs Brand of $174.1 million, or 15.8%, as a result of increased pricing in all regions, and (iii) higher volume in the Crocs Brand of $49.8 million, or 4.5%, led by our Asia Pacific and EMEALA segments, offset in part by lower volumes of 2.7% in our Americas segment. Unfavorable foreign currency fluctuations, most significantly in the Euro and Korean Won, decreased Crocs Brand revenues by $47.2 million, or 4.3%.

***Cost of sales.*** HEYDUDE contributed to the majority of the increase in cost of sales, which was in line with its contributions to revenue, and was inclusive of a $34.3 million due to a non-cash step-up of acquired HEYDUDE inventory to fair value. Additionally, in the three months ended June 30, 2022, compared to the same period in 2021, higher average cost per unit on a constant currency basis (“AUC”) in the Crocs Brand of $44.9 million, or 18.3%, was driven mostly by higher material and freight costs, driven by inflation impacts as well as air freight used to mitigate supply challenges, and unfavorable purchasing power as a result of foreign currency fluctuations. Higher volume in the Crocs Brand of $32.6 million, or 13.3%, also contributed to higher cost of sales, while fluctuations in foreign currency decreased cost of sales by $13.4 million, or 5.5%.

In the six months ended June 30, 2022, compared to the same period in 2021, cost of sales increased due to the addition of HEYDUDE, which had cost of sales in the Partial Period that were in line with its contributions to revenues discussed above, and were inclusive of a $62.3 million non-cash step-up of acquired HEYDUDE inventory to fair value. Higher AUC in the Crocs Brand of $94.1 million, or 20.8%, resulted mostly from higher material and freight costs, driven by inflation and the use of air freight, and higher volume in the Crocs Brand of $32.0 million, or 7.1%. These increases were partially offset by decreases as a result of foreign currency changes in the Crocs Brand of $20.2 million, or 4.5%.

***Gross profit.*** Gross margin decreased in the three months ended June 30, 2022 to 51.6%, compared to 61.7% in the same period in 2021. Gross margin for the Crocs Brand was 57.7%, compared to 61.7% in the same period in 2021, driven mostly by higher freight costs due to supply chain challenges, which have caused us to use more expensive shipping methods, such as air freight, and the impact of global inflation on our supply chain. We have been able to partially mitigate higher AUC with better sales performance as a result of higher ASPs, as described above, and favorable product mix. Gross margin for the HEYDUDE Brand was 32.4%, a lower rate than the Crocs Brand as a result of a unfavorable channel mix and higher freight rates, as we work to leverage Crocs Brand freight contracts for the HEYDUDE Brand. The HEYDUDE gross margin is also inclusive of an approximately 1,470 basis points unfavorable impact from a non-cash step-up of acquired HEYDUDE inventory to fair value.

Gross profit increased $102.6 million, or 26.0%, mostly due to the addition of the HEYDUDE Brand. Additionally, gross profit increased in the Crocs Brand as a result of higher volume of $26.1 million, or 6.6%, and the net impact of higher ASP and higher AUC of $20.4 million, or 5.2%. This was offset by unfavorable foreign currency changes for the Crocs Brand of $19.1 million, or 4.9%. The HEYDUDE Brand contributed to the remainder of the increase.

Gross margin in the six months ended June 30, 2022 was 50.6% compared to 58.9% in 2021. Gross margin for the Crocs Brand was 56.3%, compared to 58.9% in 2021, due primarily to higher freight costs, as described above, offset in part by higher pricing and product mix. Gross margin for the HEYDUDE Brand was 30.2%, a lower rate than the Crocs Brand, due to unfavorable channel mix and higher freight rates, as we work to leverage Crocs Brand freight contracts for the HEYDUDE Brand. The HEYDUDE gross margin is also inclusive of an approximately 1,790 basis points unfavorable impact from a non-cash step-up of acquired HEYDUDE inventory to fair value.

Gross profit increased $174.3 million, or 26.9%, as a result of the addition of the HEYDUDE Brand, which contributed to over half of the increase, as well as increases in the Crocs Brand due to the net impact of both higher ASP and AUC of $80.0 million, or 12.3%, and higher volumes of $17.8 million, or 2.8%. These were offset by unfavorable foreign currency changes in the Crocs Brand of $27.1 million, or 4.2%.

***Selling, general and administrative expenses.*** SG&A expenses increased $49.9 million, or 25.0%, in the three months ended June 30, 2022 compared to the same period in 2021. This was due to an increase in marketing costs of $16.2 million, the vast majority of which relates to both variable marketing, including variable marketing associated with HEYDUDE, and additional investments in our digital business. There was also an increase in professional services costs of $10.7 million, due in part to the integration of HEYDUDE, and an increase in sales commissions of $7.6 million, due mostly to HEYDUDE, which used more costly external sales representatives prior to the Acquisition Date. An increase in compensation expense of $7.1 million was driven by investments in employee headcount, including employees associated with HEYDUDE, variable labor costs in distribution centers and retail stores associated with revenue growth. Additionally, this increase includes severance costs related to the continued shutdown of our direct operations in Russia. There was also an increase in facilities expense of $4.4 million driven primarily by lease exit costs and penalties associated with the continued shutdown of our direct operations in Russia and duplicate rent costs associated with our upcoming headquarters move. Other net costs, including information technology costs, increased $3.9 million.

SG&A expenses increased $127.6 million, or 38.9%, during the six months ended June 30, 2022 compared to the same period in 2021. We have continued to invest in marketing to fuel growth, with an increase of $31.9 million to SG&A, primarily associated with variable marketing and investments in our digital business. Additionally, costs of $26.3 million associated with the Acquisition and related integration, including consulting, legal, and accounting fees, as well as compensation-related costs associated with the integration, contributed to the increase. Other increases in compensation costs of $18.0 million were due to increased employee headcount as we have grown the Company over the last year. Increases in professional services costs of $15.0 million were due to variable costs associated with revenue growth, supply chain projects, and higher legal costs associated in part with ongoing defense of our intellectual property. There was an increase in sales commissions of $12.0 million, due mostly to HEYDUDE, which used more costly external representatives prior to the Acquisition, and were net increases in other costs, including facilities expense and information technology costs, of $24.4 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 June 30, 2022, we recognized realized and unrealized net foreign currency losses of $1.2 million, compared to losses of $0.1 million during the three months ended June 30, 2021. During the six months ended June 30, 2022, we recognized realized and unrealized net foreign currency losses of $0.7 million, compared to losses of $0.6 million during the six months ended June 30, 2021.

***Income tax expense (benefit).*** During the three months ended June 30, 2022, income tax expense increased $182.4 million compared to the same period in 2021. The effective tax rate for the three months ended June 30, 2022 was 25.2% compared to an effective tax rate of (67.4)% for the same period in 2021, a 92.6% increase. This increase in the effective rate was primarily driven by the prior year release of valuation allowances resulting from the enactment of a tax law change. Our effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate due to differences in income tax rates between U.S. and foreign jurisdictions.

During the six months ended June 30, 2022, income tax expense increased $184.5 million compared to the same period in 2021. The effective tax rate for the six months ended June 30, 2022 was 25.6% compared to an effective tax rate of (33.3)% for the same period in 2021, a 58.9% increase. This increase in the effective rate was driven primarily by the prior year realization of deferred tax assets which were subject to a valuation allowance which did not reoccur in the current year. 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.

### 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)*

| Revenues: | Three Months Ended June 30, 2022 | Favorable (Unfavorable) 2021 | Six Months Ended June 30, 2022 | 2021 | % Change Q2 2022-2021 | YTD 2022-2021 | Constant Currency % Change (1) Q2 2022-2021 | YTD 2022-2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| North America (2) | $422,936 | $393,152 | $742,386 | $660,419 | 7.6% | 12.4% | 7.8% | 12.5% |
| Asia Pacific | 148,889 | 126,834 | 244,737 | 209,426 | 17.4% | 16.9% | 27.6% | 25.5% |
| EMEALA (2) | 160,377 | 120,778 | 290,297 | 230,978 | 32.8% | 25.7% | 48.4% | 38.0% |
| Brand corporate (3) | 14 | 9 | 21 | 48 | 55.6% | (56.3)% | 55.6% | (56.3)% |
| Crocs Brand revenues | 732,216 | 640,773 | 1,277,441 | 1,100,871 | 14.3% | 16.0% | 19.4% | 20.3% |
| HEYDUDE Brand revenues (4) | 232,365 | — | 347,288 | — | —% | —% | —% | —% |
| Total consolidated revenues | $964,581 | $640,773 | $1,624,729 | $1,100,871 | 50.5% | 47.6% | 55.6% | 51.9% |
| Income from operations: |  |  |  |  |  |  |  |  |
| North America (2) | $177,363 | $188,180 | $306,974 | $300,873 | (5.7)% | 2.0% | (5.4)% | 2.2% |
| Asia Pacific | 51,432 | 32,016 | 81,537 | 54,131 | 60.6% | 50.6% | 77.3% | 65.5% |
| EMEALA (2) | 53,385 | 41,388 | 88,314 | 81,407 | 29.0% | 8.5% | 46.9% | 18.2% |
| Brand corporate (3) | (28,259) | (21,393) | (58,968) | (41,401) | (32.1)% | (42.4)% | (33.8)% | (44.1)% |
| Crocs Brand income from operations | 253,921 | 240,191 | 417,857 | 395,010 | 5.7% | 5.8% | 11.1% | 9.8% |
| HEYDUDE Brand income from operations (4) | 41,666 | — | 57,324 | — | —% | —% | —% | —% |
| Enterprise corporate (3) | (47,623) | (44,869) | (108,540) | (75,002) | (6.1)% | (44.7)% | (6.1)% | (44.7)% |
| Total consolidated income from operations | $247,964 | $195,322 | $366,641 | $320,008 | 27.0% | 14.6% | 33.6% | 19.6% |

(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” for more information.

(2) In the first quarter of 2022, certain revenues and expenses associated with our Latin America businesses previously reported in our ‘Americas’ segment were shifted into the ‘EMEA’ segment. To reflect this change, we renamed our ‘Americas’ segment to ‘North America’ and renamed our ‘EMEA’ segment to ‘EMEALA.’ As a result of these changes, the previously reported amounts for revenues and income from operations for the three and six months ended June 30, 2021 have been revised to conform to current period presentation. See the ‘Impacts of segment composition change’ table below for more information.

(3) In the first quarter of 2022, as a result of the Acquisition, all costs previously reported in “Unallocated corporate and other” were recast between ‘Brand corporate’ costs associated with the Crocs Brand and ‘Enterprise corporate’ costs, each of which is defined in Note 14 — Operating Segments and Geographic Information in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q. As a result of these changes, the previously reported amounts for income from operations for the three and six months ended June 30, 2021 have been revised to conform to current period presentation. See the ‘Impacts of brand vs. enterprise recast’ table below for more information.

(4) We acquired HEYDUDE on February 17, 2022 and added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the six months ended June 30, 2022 represent results during the Partial Period, and there are no comparative amounts for the three and six months ended June 30, 2021.

### Impacts of segment composition change associated with Latin America:

*(in thousands)*

| Impact on revenues: | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 |
| --- | ---: | ---: |
| Americas (now “North America”) | $(12,528) | $(21,670) |
| EMEA (now “EMEALA”) | 12,528 | 21,670 |
| Impact on income from operations: |  |  |
| Americas (now “North America”) | $(4,601) | $(7,975) |
| EMEA (now “EMEALA”) | 4,601 | 7,975 |

### Impacts of brand vs. enterprise recast:

*(in thousands)*

| Impacts on income from operations: | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 |
| --- | ---: | ---: |
| Brand corporate | $(21,393) | $(41,401) |
| Enterprise corporate | (44,869) | (75,002) |
| Unallocated corporate and other | 66,262 | 116,403 |

29

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

*(in thousands)*

| Segment Revenues: Crocs Brand: | Three Months Ended June 30, 2022 vs. 2021 Volume $ Change | % Change | Price (1) $ Change | % Change | Foreign Exchange $ Change | % Change | Total $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| North America | $(230) | —% | $30,752 | 7.8% | $(738) | (0.2)% | $29,784 | 7.6% |
| Asia Pacific | 14,343 | 11.3% | 20,681 | 16.3% | (12,969) | (10.2)% | 22,055 | 17.4% |
| EMEALA | 44,577 | 36.9% | 13,898 | 11.5% | (18,876) | (15.6)% | 39,599 | 32.8% |
| HEYDUDE Brand (2) | — | —% | — | —% | — | —% | — | —% |
| Total segment revenues | $58,690 | 9.2% | $65,331 | 10.2% | $(32,583) | (5.1)% | $91,438 | 14.3% |

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

(2) We acquired HEYDUDE on February 17, 2022 and added the HEYDUDE Brand as a new operating segment. Therefore, there are no comparative amounts for the three months ended June 30, 2021.

*(in thousands)*

| Segment Revenues: Crocs Brand: | Six Months Ended June 30, 2022 vs. 2021 Volume $ Change | % Change | Price (1) $ Change | % Change | Foreign Exchange $ Change | % Change | Total $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| North America | $(17,574) | (2.7)% | $100,294 | 15.2% | $(753) | (0.1)% | $81,967 | 12.4% |
| Asia Pacific | 20,266 | 9.7% | 33,023 | 15.8% | (17,978) | (8.6)% | 35,311 | 16.9% |
| EMEALA | 47,098 | 20.4% | 40,737 | 17.6% | (28,516) | (12.3)% | 59,319 | 25.7% |
| HEYDUDE Brand (2) | — | —% | — | —% | — | —% | — | —% |
| Total segment revenues | $49,790 | 4.5% | $174,054 | 15.8% | $(47,247) | (4.3)% | $176,597 | 16.0% |

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

(2) We acquired HEYDUDE on February 17, 2022 and added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the six months ended June 30, 2022 represent results during the Partial Period, and there are no comparative amounts for the six months ended June 30, 2021.

### Crocs Brand

### North America Operating Segment

***Revenues.*** North America revenues increased in the three months ended June 30, 2022, compared to the same period in 2021, driven by higher ASP as a result of price increases. Volume and foreign currency changes were relatively flat during the quarter.

The increase in North America revenues in the six months ended June 30, 2022, compared to the same period in 2021, was most significantly due to higher ASP due to higher pricing, while volumes decreased, primarily in wholesale. Changes in the Canadian Dollar also slightly decreased revenues.

***Income from Operations.*** Income from operations for our North America segment was $177.4 million for the three months ended June 30, 2022, a decrease of $10.8 million, or 5.7%, compared to the same period in 2021. Gross profit was relatively flat with a $0.5 million, or 0.2%, increase compared to prior year. Unfavorable foreign currency changes and higher costs, due in part to inflation, partially offset a volume benefit to gross profit.

SG&A for our North America segment increased $11.3 million, or 16.8%, during the three months ended June 30, 2022 compared to the same period in 2021. Compensation cost increased $3.5 million as a result of investments in employee headcount, including retail labor, which also had higher wages for the full quarter in 2022 compared to 2021. Marketing costs increased by $3.5 million, bad debt expense increased by $1.6 million as a result of prior year collections on previously reserved bad debt which reduced SG&A in the comparative period, and other net costs increased by $2.7 million.

During the six months ended June 30, 2022. income from operations for our North America segment was $307.0 million, an increase of $6.1 million, or 2.0%, compared to the same period in 2021. Gross profit increased $30.9 million, or 7.5%, primarily due to higher ASP from price increases that outpaced higher AUC due to higher material and freight costs, including air freight used to combat supply chain disruptions, of $40.9 million, or 9.9%. Lower volumes of $9.3 million, or 2.2%, and unfavorable foreign currency changes partially offset this increase.

SG&A for our North America segment increased $24.8 million, or 22.2%, during the six months ended June 30, 2022 compared to the same period in 2021, due to an increase in marketing costs of $11.2 million to fuel revenue growth and continue our investment in digital marketing while operating in a higher cost environment and higher compensation of $6.3 million primarily due to investments in employee headcount, including retail labor, which also had higher wages in 2022 compared to 2021. Bad debt expense increased by $2.0 million as a result of prior year collections on previously reserved bad debt, while other net costs, including facilities expense and services costs, increased by $5.3 million.

### Asia Pacific Operating Segment

***Revenues.*** Asia Pacific revenues increased in the three months ended June 30, 2022, compared to the same period in 2021, as a result of higher ASP as a result of higher pricing and less discounting, offset in part by unfavorable channel mix, and higher volume, primarily in India and with distributors in Southeast Asia, which benefited from COVID-19 re-openings and the partial return of tourism to the region over prior year. This was offset in part by lower DTC volumes as a result of COVID-19 lockdowns in China that impacted distribution in the current quarter. These increases were partially offset by significant unfavorable foreign currency changes in all currencies in the region.

Revenues in our Asia Pacific segment increased in the six months ended June 30, 2022, compared to the same period in 2021, as a result of ASP increases, as a result of increased pricing and fewer promotions, and volume increases. Unfavorable foreign currency fluctuations in all currencies, but most significantly the Korean Won and Japanese Yen, partially offset ASP and volume increases.

***Income from Operations.*** Income from operations for the Asia Pacific segment was $51.4 million for the three months ended June 30, 2022, an increase of $19.4 million, or 60.6%, compared to the same period in 2021. Gross profit increased by $16.8 million, or 21.6%, as a result of higher ASP and volumes, offset by unfavorable foreign currency changes.

SG&A for our Asia Pacific segment decreased $2.6 million, or 5.7%, during the three months ended June 30, 2022, compared to the same period in 2021, primarily due to lower marketing costs of $3.0 million as a result of delayed investment driven by the COVID-19 impact on China factories during the second quarter. This was offset in part by higher other net costs, including facilities expense, of $0.4 million.

Income from operations for the Asia Pacific segment was $81.5 million for the six months ended June 30, 2022, an increase of $27.4 million, or 50.6%, compared to the same period in 2021. Gross profit increased by $28.2 million, or 23.1%, due to higher ASPs of 25.0% from increased price increases and decreased promotional activity, partially offset by unfavorable purchasing power as a result of foreign currency changes. Volumes increased gross profit by 8.4%. Changes in foreign currency offset these increases by 10.3%.

SG&A for our Asia Pacific segment increased $0.8 million, or 1.1%, in the six months ended June 30, 2022 compared to the same period in 2021, mostly due to increased investments in employee headcount of $1.7 million and higher facilities costs of $1.3 million associated with higher retail revenues, offset in part by lower marketing costs of $2.0 million, mostly as a result of delayed investment driven by the COVID-19 impact on China factories during the second quarter. There were also lower other net costs of $0.2 million.

### EMEALA Operating Segment

***Revenues.*** The EMEALA segment led the increase in overall revenues in the three months ended June 30, 2022, compared to the same period in 2021, despite significant unfavorable currency headwinds due to fluctuations in the Euro and the shutdown of our direct operations in Russia as a result of the Ukraine war. This performance was driven by increased volume, with growth particularly strong in our distributor markets and increased ASPs, driven by increased prices and product mix, offset in part by unfavorable channel mix.

During the six months ended June 30, 2022, EMEALA revenues increased compared to the same period in 2021, primarily due to increased volume and ASP, primarily in our wholesale channel, offset in part by significant unfavorable foreign currency fluctuations in the Euro.

***Income from Operations.*** Income from operations for the EMEALA segment was $53.4 million for the three months ended June 30, 2022, an increase of $12.0 million, or 29.0%, compared to the same period in 2021. Gross profit increased $13.6 million, or 21.9%, mostly as a result of higher volume of $20.7 million, or 33.3%. Gains in ASP due to increased pricing and decreased promotions were partially offset by higher AUC as a result of increased freight costs, mostly due to increased air freight, and unfavorable purchasing power, leading to a net increase in gross profit of $2.4 million, or 4.0%. These increases were offset in part by unfavorable changes in foreign currency of $9.5 million, or 15.4%.

SG&A for our EMEALA segment increased $1.6 million, or 7.8%, during three months ended June 30, 2022, compared to the same period in 2021. Marketing investments increased $2.3 million, primarily in digital marketing. Various costs associated with the continued shutdown of our direct operations in Russia, including severance and lease exit costs and penalties, increased SG&A $7.3 million. These increases were partially offset by a decrease in bad debt expense of $5.7 million, primarily due to collections on previously reserved receivables in Russia. Other net costs decreased SG&A by $2.3 million.

Income from operations for the EMEALA segment was $88.3 million for the six months ended June 30, 2022, an increase of $6.9 million, or 8.5%, compared to the same period in 2021. Gross profit increased $17.2 million, or 14.7%, due to higher sales volumes of $22.5 million, or 19.3%, and increases in ASP that outpaced increases in AUC of $8.6 million, or 7.3%, as a result of price increases, offset in part by higher freight costs and unfavorable purchasing power. Negative currency changes, primarily in the Euro, led to decreases of 11.9%.

SG&A for our EMEALA segment increased $10.3 million, or 29.0%, during the six months ended June 30, 2022, compared to the same period in 2021. Marketing investments, primarily in digital marketing, increased $3.8 million, while various costs associated with the continued shutdown of our direct operations in Russia, including severance and lease exit costs and penalties, increased SG&A $7.3 million. Other net cost decreases of $0.8 million partially offset these increases.

### Crocs Brand Corporate

During the three months ended June 30, 2022, total net costs within ‘Brand corporate’ increased $6.9 million, or 32.1%, compared to the same period in 2021, due to an increase in compensation costs of $1.6 million, information technology costs of $1.4 million, services costs of $1.2 million, and other net costs of $2.7 million.

During the six months ended June 30, 2022, total net costs within ‘Brand corporate’ increased $17.6 million, or 42.4%, compared to the same period in 2021, due to higher compensation costs of $5.2 million as a result of increased headcount, higher services costs of $2.9 million, and higher information technology costs of $2.3 million. Other net costs increased by $7.2 million.

### HEYDUDE Brand

For the three months ended June 30, 2022, revenues attributable to HEYDUDE were $232.4 million, with the majority of revenues attributable to our wholesale channel at approximately 70%. Overall, we sold 8.1 million pairs of shoes in the HEYDUDE Brand during the quarter. Income from operations during the quarter was $41.7 million and included a $34.3 million non-cash step-up of acquired HEYDUDE inventory to fair value and SG&A costs comprised primarily of marketing, sales commissions, and compensation expense.

For the Partial Period, revenues attributable to HEYDUDE were $347.3 million, with the majority of revenues attributable to our wholesale channel at approximately 72%. Overall, we sold 12.1 million pairs of shoes in the HEYDUDE Brand during the Partial Period. Income from operations during the Partial Period was $57.3 million and included a $62.3 million non-cash step-up of acquired HEYDUDE inventory to fair value and SG&A costs comprised primarily of marketing, sales commissions, and compensation expense.

Refer to Note 16 — Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. *Financial Statements* of this Quarterly Report on Form 10-Q for additional information regarding the Acquisition.

### Enterprise Corporate

During the three months ended June 30, 2022, total net costs within ‘Enterprise corporate’ increased $2.8 million, or 6.1%, compared to the same period in 2021, due to an increase in services costs of $5.6 million, primarily related to consulting costs associated with the integration of HEYDUDE into our business. There was also $2.2 million higher information technology and other net costs. These increases were offset by lower compensation costs of $5.0 million primarily due to lower variable compensation.

During the six months ended June 30, 2022, total net costs within ‘Enterprise corporate’ increased $33.5 million, or 44.7%, compared to the same period in 2021. This was primarily due to costs associated with the acquisition and integration of HEYDUDE, including consulting, legal, and accounting fees, among others, of $26.3 million. There were also higher other professional services costs of $6.1 million, higher information technology costs of $3.0 million, and higher other net costs of $4.9 million. These increases were offset in part by lower depreciation and amortization of $3.7 million and lower compensation costs of $3.1 million primarily due to lower variable compensation.

### Crocs Brand Store Locations and Digital Sales Percentage

The tables below illustrate the overall change in the number of our Crocs Brand company-operated retail locations by reportable operating segment for the six months ended June 30, 2022:

| Company-operated retail locations: | March 31, 2022 | Opened | Closed | June 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| North America | 175 | — | — | 175 |
| Asia Pacific | 153 | 1 | 2 | 152 |
| EMEALA | 44 | — | 3 | 41 |
| Total | 372 | 1 | 5 | 368 |

| Company-operated retail locations: | December 31, 2021 | Opened | Closed | June 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| North America | 173 | 2 | — | 175 |
| Asia Pacific | 153 | 2 | 3 | 152 |
| EMEALA | 47 | 1 | 7 | 41 |
| Total | 373 | 5 | 10 | 368 |

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

| Digital sales as a percent of total revenues: | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Crocs Brand | 37.2% | 36.4% | 35.3% | 34.7% |
| HEYDUDE Brand (1) | 31.5% | —% | 29.6% | —% |
| Total (2) | 35.8% | 36.4% | 34.1% | 34.7% |

(1) We acquired HEYDUDE on February 17, 2022. Therefore, the amounts shown above for the six months ended June 30, 2022 represent results during the Partial Period, and there are no comparative amounts for the three and six months ended June 30, 2021.

(2) For the three and six months ended June 30, 2021, the digital sales as a percent of total revenues represents the Crocs Brand.

Direct-to-consumer (“DTC”) comparable sales for the Crocs Brand are as follows:

| Direct-to-consumer comparable sales: (2) | Constant Currency (1) Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | --- | ---: | --- |
| Crocs Brand (3) | 7.5% | N/A | 10.7% | N/A |

(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, as included in the DTC comparable sales figures above, is determined on a monthly basis. Comparable store sales include 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 and in the same month in the following year. Location closures in excess of three months are excluded until the thirteenth month post re-opening. E-commerce comparable revenues are based on same site sales period over period. E-commerce sites that are temporarily offline or unable to transact or fulfill orders (“site disruption”) are excluded from the comparable sales calculation during the month of site disruption and in the same month in the following year. E-commerce site disruptions in excess of three months are excluded until the thirteenth month after the site has re-opened.

(3) In the three and six months ended June 30, 2021, as a result of the COVID-19 pandemic’s impact on 2020 sales we did not disclose DTC comparable sales, as they were not meaningful.

### Financial Condition, Capital Resources, and Liquidity

### Liquidity

Our liquidity position as of June 30, 2022 was:

*(in thousands)*

|  | June 30, 2022 |
| --- | ---: |
| Cash and cash equivalents | $187,352 |
| Available borrowings | 475,806 |

As of June 30, 2022, we had $187.4 million in cash and cash equivalents and up to $475.8 million of available borrowings, including $469.7 million of remaining borrowing availability under the Revolving Facility and $6.1 million of remaining borrowing availability under the Asia revolving facilities (as defined below). As of June 30, 2022, the Term Loan B Facility was fully drawn and there was no available borrowing capacity. We believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our Revolving Facility will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at least the next twelve months.

We completed the Acquisition on February 17, 2022. The consideration for the Acquisition was comprised of $2.05 billion in cash and 2,852,280 of Crocs shares. To finance a portion of the Cash Consideration, we entered into the $2.0 billion Term Loan B Facility and borrowed $50.0 million under our Revolving Facility. In 2022, we plan to use excess cash generated by our operations to begin to repay our outstanding debt, and, as such, we have suspended our share repurchase program.

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. 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 could each impact our business and liquidity.

### 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.

All of the cash held outside of the U.S. as of June 30, 2022 could be repatriated to the U.S. without incurring additional U.S. federal income taxes. As of June 30, 2022, we held $109.0 million of our total $187.4 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. The repatriation of the $109.0 million, held in international locations is not limited by local regulations.

### Senior Revolving Credit Facility

In July 2019, the Company and certain of its 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. In February 2022, we amended the Credit Agreement, which, as amended to date, provides for a revolving credit facility of $600.0 million, which can be increased by an additional $400.0 million subject to certain conditions (the “Revolving Facility”). Borrowings under the Credit Agreement bear interest at a variable interest rate based on (A) a Base Rate (defined as the highest of (i) the Overnight Bank Funding Rate (as defined in the Credit Agreement), plus 0.25%, (ii) the Prime Rate (as defined in the Credit Agreement), and (iii) the Daily Simple SOFR (as defined in the Credit Agreement), plus 1.00%), plus an applicable margin ranging from 0.25% to 0.875% based on our leverage ratio or 1.35% to 1.975% for the Daily Simple SOFR based on the leverage ratio, or (B) the Term SOFR Rate (as defined in the Credit Agreement), plus an applicable margin ranging from 1.35% to 1.975% based on our leverage ratio for one-month interest periods and 1.40% to 2.025% based on our leverage ratio for three month interest periods. 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 3.00 to 1.00, and a maximum leverage ratio of (i) 4.00 to 1.00 from the quarter ended March 31, 2022 through, and including, the quarter ending December 31, 2023, (ii) 3.75 to 1.00 for the quarter ending March 31, 2024, (iii) 3.50 to 1.00 for the quarter ending June 30, 2024, and (iv) 3.25 to 1.00 for the quarter ending September 30, 2024 and thereafter (subject to adjustment in certain circumstances). The Credit Agreement permits, among other things, (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 June 30, 2022, we were in compliance with all financial covenants under the Credit Agreement.

As of June 30, 2022, the total commitments available from the lenders under the Revolving Facility were $600.0 million. At June 30, 2022, we had $130.0 million in outstanding borrowings, which are due when the Revolving Facility matures in July 2024, and $0.3 million in outstanding letters of credit under the Revolving Facility, which reduces amounts available for borrowing under the Revolving Facility. As of June 30, 2022 and December 31, 2021, we had $469.7 million and $414.7 million, respectively, of available borrowing capacity under the Revolving Facility.

### Term Loan B Facility

On February 17, 2022, the Company entered into a credit agreement (the “Term Loan B Credit Agreement”) with Citibank, N.A., as administrative agent and lender, to among other things, finance a portion of the cash consideration for the Acquisition.

The Term Loan B Credit Agreement provides for an aggregate term loan B facility in the principal amount of $2.0 billion (the “Term Loan B Facility”), which is secured by substantially all of the Company’s and each subsidiary guarantor’s assets on a pari passu basis with their obligations arising from the Credit Agreement and is scheduled to mature on February 17, 2029, subject to certain exceptions set forth in the Term Loan B Credit Agreement. Additionally, subject to certain conditions, including, without limitation, satisfying certain leverage ratios, the Company may, at any time, on one or more occasions, add one or more new classes of term facilities and/or increase the principal amount of the loans of any existing class by requesting one or more incremental term facilities.

Each term loan borrowing which is an alternate base rate borrowing bears interest at a rate per annum equal to the Alternate Base Rate (as defined in the Term Loan B Credit Agreement), plus 2.50%. Each term loan borrowing which is a term benchmark borrowing bears interest at a rate per annum equal to the Adjusted Term SOFR Rate (as defined in the Term Loan B Credit Agreement) plus 3.50%.

Outstanding principal under the Term Loan B Facility is payable on the last business day of each March, June, September and December, in a quarterly aggregate principal amount of $5.0 million. Quarterly aggregate principal payments began on June 30,

2022, with the remaining principal amount due on February 17, 2029, the maturity date. As of June 30, 2022, we had $1,995.0 million in outstanding principal and the Term Loan B Facility was fully drawn with no remaining borrowing capacity.

The Term Loan B Credit Agreement also contains customary affirmative and negative covenants, incurrence financial covenants, representations and warranties, events of default and other provisions. As of June 30, 2022, we were in compliance with all financial covenants under the Term Loan B Credit Agreement.

### Asia Revolving Credit Facilities

During the six months ended June 30, 2022, we had two revolving credit facilities in Asia, the revolving credit facility with China Merchants Bank Company Limited, Shanghai Branch (the “CMBC Facility”) which provides up to 10.0 million RMB, or $1.5 million at current exchange rates, and matures in January 2023, and the revolving credit facility with Citibank (China) Company Limited, Shanghai Branch (the “Citibank Facility”), which provides up to an equivalent of $10.0 million.

As of June 30, 2022, we had borrowings outstanding of $0.5 million on the CMBC Facility, which are due in September 2022 and borrowings outstanding of $4.9 million on the Citibank Facility, which are due at various dates within the third quarter of 2022. We had no borrowings under our Asia revolving facilities during the year ended December 31, 2021 or outstanding at December 31, 2021.

### Senior Notes Issuances

In March 2021, the Company completed the issuance and sale of $350.0 million aggregate principal amount of 4.250% Senior Notes due March 15, 2029 (the “2029 Notes”), pursuant to the indenture related thereto (as amended and/or supplemented to date, the “2029 Notes Indenture”). Additionally, in August 2021, the Company completed the issuance and sale of $350.0 million aggregate principal amount of 4.125% Senior Notes due August 15, 2031 (the “2031 Notes”), pursuant to the indenture related thereto (as amended and/or supplemented to date, “the 2031 Notes Indenture” and, together with the 2029 Notes Indenture, the “Indentures” and, each, an “Indenture”). Interest on each of the 2029 Notes and the 2031 Notes (collectively, the “Notes”) is payable semi-annually.

The Company will have the option to redeem all or any portion of the 2029 Notes, at once or over time, at any time on or after March 15, 2024, at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2029 Notes at any time before March 15, 2024 at a redemption price of 100% of the principal amount to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before March 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2029 Notes at a redemption price of 104.250% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.

The Company will have the option to redeem all or any portion of the 2031 Notes, at once or over time, at any time on or after August 15, 2026, at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2031 Notes at any time before August 15, 2026 at a redemption price of 100% of the principal amount to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before August 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2031 Notes at a redemption price of 104.125% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.

The Notes rank pari passu in right of payment with all of the Company’s existing and future senior debt, including the Credit Agreement, and are senior in right of payment to any of the Company’s future debt that is, by its term, expressly subordinated in right of payment to the Notes. The Notes are unconditionally guaranteed by each of the Company’s restricted subsidiaries that is a borrower or guarantor under the Credit Agreement and by each of the Company’s wholly-owned restricted subsidiaries that guarantees any debt of the Company or any guarantor under any syndicated credit facility or capital markets debt in an aggregate principal amount in excess of $25.0 million.

The Indentures contain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to incur additional debt or issue certain preferred stock; pay dividends or repurchase or redeem capital stock or make other restricted payments; declare or pay dividends or other payments; incur liens; enter into certain types of transactions with the Company’s affiliates; and consolidate or merge with or into other companies. As of June 30, 2022, we were in compliance with all financial covenants under the Notes.

### Cash Flows

*(in thousands)*

|  | Six Months Ended June 30, 2022 | 2021 | $ Change Favorable (Unfavorable) | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cash provided by operating activities | $84,744 | $242,366 | $(157,622) | (65.0)% |
| Cash used in investing activities | (2,097,029) | (21,323) | (2,075,706) | (9,734.6)% |
| Cash provided by (used in) financing activities | 1,987,621 | (155,344) | 2,142,965 | 1,379.5% |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (1,690) | (1,793) | 103 | 5.7% |
| Net change in cash, cash equivalents, and restricted cash | $(26,354) | $63,906 | $(90,260) | (141.2)% |

***Operating Activities.*** Cash provided by operating activities consists of net income adjusted for noncash items and changes in working capital. Cash provided by operating activities decreased $157.6 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, driven by decreases in operating assets and liabilities of $158.7 million, primarily due to accounts receivable, net and inventory, partially offset by higher net income, adjusted for non-cash items, of $1.1 million.

***Investing Activities.*** There was a $2,075.7 million increase in cash used in investing activities for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The increase is primarily due to the Cash Consideration for the Acquisition, net of cash acquired. Refer to Note 16 — Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. *Financial Statements* of this Quarterly Report on Form 10-Q.

***Financing Activities.*** Cash provided by financing activities increased by $2,143.0 million in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The increase was primarily due to an increase of $2,070.7 million in proceeds from borrowings, which includes borrowings under the Term Loan B Facility, Revolving Facility, and the Asia revolving facilities. Additionally, we had a decrease of $110.0 million in repayments of borrowings, a decrease of $350.0 million in repurchases of common stock, and a decrease of $4.8 million in repurchases of common stock for tax withholding. The overall increase was offset by a $350.0 million decrease in proceeds from the 2029 Notes issuance that occurred in the six months ended June 30, 2021 that did not recur in the current period, a $42.4 million increase in deferred debt issuance costs, primarily related to the Term Loan B Facility, and a $0.1 million increase in other cash used in financing activities.

### 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, 2021, other than (i) borrowings and repayments on the Revolving Facility and Asia Facilities and (ii) borrowings of $2.0 billion under the Term Loan B Facility, which we entered into in the six months ended June 30, 2022.

### Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of June 30, 2022, 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* 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.

### Business Combinations

We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. Contingent consideration, if any, is included within the purchase price and is recognized at its fair value on the acquisition date. We allocate the purchase price of acquired businesses to the tangible assets, intangible assets, and contingent consideration based upon internal estimates of cash flows and consideration and/or the report of a third-party valuation expert, and this requires a significant amount of management judgment. The determination of fair values of identifiable assets and liabilities as well as contingent consideration requires estimates and the use of valuation techniques when market value is not readily available. During the measurement period, which is up to one year from the acquisition date, adjustments to the assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill.

During the six months ended June 30, 2022, we acquired HEYDUDE. The aggregate closing price of the Acquisition was $2.3 billion. The fair value of the acquired assets was determined by a third-party valuation specialist. The fair value of inventory was determined using a market approach and a cost approach, the replacement cost method. These methods were reconciled in order to allocate profit and expenses to measure the inventory value created by a seller. For the trademark, the third-party valuation team used the Multi Period Excess Earnings approach and for customer relationships, the valuation team used the distributor method.

Deferred taxes associated with estimated fair value adjustments reflect an estimated tax rate applicable to the acquiree. Deferred tax has been calculated based on the fair value adjustments of inventories and intangible assets using the tax rates for US and HK entities. This determination is preliminary and subject to change based upon the final determination of the fair value of the acquired assets and assumed liabilities of the acquiree.

The fair values of all the other assets and liabilities noted are equal to their carrying values due to the nature of the specific asset or liability. Refer to Note 16 — Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. *Financial Statements* of this Quarterly Report on Form 10-Q for additional details on the Acquisition.

For a complete discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2021 and Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. *Financial Statements* 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, 2021.

### 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* 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.

## Market risk

As filed, 4,323 characters.

### Interest Rate Risk

We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our exposure to market risk includes interest rate fluctuations in connection with our Revolving Facility and certain financial instruments.

Borrowings under our Revolving 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 June 30, 2022, we had borrowings with a face value of $2,830.4 million, comprised of the Notes, which carry a fixed rate, the Term Loan B Facility, and borrowings under the Revolving Facility and Asia revolving facilities. We also had $0.3 million in outstanding letters of credit under our Revolving Facility as of June 30, 2022. As of December 31, 2021, we had long-term borrowings with a face value of $785.0 million and $0.3 million in outstanding letters of credit under our Revolving Facility.

A hypothetical increase of 1% in the interest rate on the borrowings under our Term Loan B Facility and Revolving Facility would have increased interest expense by $5.6 million and $7.6 million for the three and six months ended June 30, 2022, respectively.

### 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 would have decreased our revenues and income before taxes during the three months ended June 30, 2022 by $3.2 million and $0.9 million, respectively. During the six months ended June 30, 2022, an increase of 1% of the value of the U.S. Dollar relative to foreign currencies would have decreased our revenues and income before taxes by $5.6 million and $1.4 million, respectively. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy.

We may 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 June 30, 2022, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $152.7 million. The net fair value of these contracts at June 30, 2022 was an asset of $0.2 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 June 30, 2022, 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 $0.8 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 and six months ended June 30, 2022 and 2021.

## Controls and procedures

As filed, 3,160 characters.

### 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”) as of June 30, 2022. During the six months ended June 30, 2022, we closed the Acquisition, as discussed in Note 16 — Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. *Financial Statements* of this Quarterly Report on Form 10-Q. As such, the scope of our assessment of the effectiveness of our disclosure controls and procedures did not include internal controls over financial reporting at HEYDUDE. HEYDUDE revenues represented approximately 24.1% and 21.4% of our total revenues for the three and six months ended June 30, 2022, respectively. This exclusion is consistent with the Securities and Exchange Commission (the “SEC”) staff's guidance that an assessment of a recently acquired business may be omitted from the scope of our assessment of the effectiveness of disclosure controls and procedures that are also part of internal control over financial reporting in the year of acquisition.

Based upon that this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2022, 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 SEC’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

As noted above, we are in the process of integrating HEYDUDE into our overall internal control over financial reporting and will include HEYDUDE in Management’s Evaluation of Disclosure Controls and Procedures for the year ended December 31, 2023. This process may result in addition or changes to our internal control over financial reporting. In addition, as a result of the Acquisition, we have implemented new processes and controls over accounting for an acquisition during the six months ended June 30, 2022, including determining the fair value of the assets acquired and liabilities assumed. Except as described herein, there were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three or six months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 2,301 characters.

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 ongoing war between Russia and Ukraine could cause further disruptions in the global economy as well as a negative impact on our business, financial condition and results of operations.***

The ongoing war between Russia and Ukraine has adversely affected the global economy, resulted in heightened economic sanctions against Russia from the United States, the United Kingdom, the European Union, and the international community and could result in geopolitical instability. As a result of the ongoing war between Russia and Ukraine, we have stopped DTC business operations in Russia. Even though revenues from Russia represented less than 3% of our consolidated revenues in 2021, the impact of these government measures and our continued withdrawal of the business, as well as retaliatory actions taken by Russia and the United States and foreign government bodies has caused a negative impact to the global economy, driving increases to the cost of transportation, energy and supplies, which have had, and could continue to have, a material adverse effect on our business, financial condition, results of operations, supply chain, intellectual property, partners, customers or employees and may expose us to adverse legal proceedings in Russia in the future. Further escalation of geopolitical tensions related to the war between Russia and Ukraine, including increased trade barriers or restrictions on global trade, could result in, among other things, broader impacts that expand into other markets, cyberattacks, supply chain and logistics disruptions, lower consumer demand, and changes to foreign exchange rates and financial markets, any of which may adversely affect our business and supply chain. In addition, the effects of the ongoing war between Russia and Ukraine could heighten many of our known risks described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 16, 2022.

Filed Aug 4, 2022.
Source: SEC EDGAR, the filing index for accession 0001334036-22-000117. Last ingested by Listed: Nov 6, 2026, 18:01 ET. No prices; not investment advice.