Crocs, Inc.: Form 10-Q for the period ended Sep 30, 2024

Business Overview

Crocs, Inc. and our consolidated subsidiaries (collectively the “Company,” “we,” “us,” or “our”) are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for all. 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:

• We continue to operate in an environment where consumers are feeling the effects of elevated interest rates and inflation, and as a result, they are spending more cautiously. In addition, geopolitical tensions have increased across the globe. We remain focused on making the right decisions for the health of our brands, maintaining tight inventory control, and investing in strategic initiatives to support durable long-term growth.
• We continue to invest in our strategic pillars, including marketing globally for both brands, China and sandal market penetration for the Crocs Brand, product innovation, and various initiatives supporting our global digital business. Specific to the HEYDUDE Brand, we are focused on building a consistent and profitable growth brand. We continue to invest in marketing and talent in order to increase awareness and relevance.
• Our liquidity position remains strong with approximately $186.1 million in cash and cash equivalents and $574.2 million in available borrowing capacity as of September 30, 2024. Our total borrowings were $1.42 billion as of September 30, 2024. We repurchased $151.2 million of our common stock during the quarter.

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.

Third Quarter 2024 Financial and Operational Highlights

Revenues were $1,062.2 million for the third quarter of 2024, a 1.6% increase compared to the third quarter of 2023. The increase was due to the net effects of: (i) higher unit sales volume in the Crocs Brand, partially offset by lower unit sales volume in the HEYDUDE Brand, which resulted in a net increase in revenues of $33.1 million, or 3.2%; (ii) lower average selling price on a constant currency basis (“ASP”) in the Crocs Brand, partially offset by higher ASP in the HEYDUDE Brand, which decreased revenues by $12.9 million, or 1.2%; and (iii) net unfavorable changes in exchange rates, which decreased revenues by $3.7 million, or 0.4%.

The following were significant developments affecting our businesses and capital structure during the three months ended September 30, 2024:

• We grew revenues in the Crocs Brand by 7.4% compared to the same period in 2023.
• Gross margin was 59.6%, an increase of 400 basis points from last year’s third quarter. This was primarily due to prior year distribution costs associated with the move to our new HEYDUDE distribution center in Las Vegas, Nevada that did not recur in the current year, lower product costs, favorable brand mix, and lower freight costs.
• Selling, general and administrative expenses (“SG&A”) were $363.5 million compared to $307.8 million in the third quarter of 2023, as a result of continued increased investment in talent and marketing. As a percent of revenues, SG&A increased to 34.2% of revenues compared to 29.4% of revenues in the third quarter of 2023.
• Income from operations decreased to $269.8 million from $273.9 million in last year’s third quarter. Net income was $199.8 million, or $3.36 per diluted share, compared to $177.0 million, or $2.87 per diluted share, in last year’s third quarter.

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”).

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

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” above for more information.

Revenues. In the three months ended September 30, 2024, revenues increased compared to the same period in 2023, driven by higher Crocs Brand revenues, partially offset by lower HEYDUDE Brand revenues. Revenues increased $16.5 million, or 1.6%, from higher volume of $33.1 million, or 3.2%, due to higher volume in the Crocs Brand, partially offset by lower volume in the HEYDUDE Brand. The overall increase was offset in part by lower ASP of $12.9 million, or 1.2%, driven by lower ASP in the Crocs Brand as a result of unfavorable product mix as well as slight net price decreases. This decrease in ASP was partially offset by higher ASP in the HEYDUDE Brand from less discounting and increased pricing as well as favorable channel mix as we grow our retail business. Net unfavorable foreign currency fluctuations of $3.7 million, or 0.4%, primarily in the Brazilian Real and Korean Won, also decreased revenues.

Revenues also increased in the nine months ended September 30, 2024, primarily due to higher ASP of $144.9 million, or 4.8%, driven by increased pricing and favorable channel mix in both brands, favorable product mix in the Crocs Brand, and less discounting in the HEYDUDE Brand. This was offset in part by net unfavorable foreign currency fluctuations of $23.1 million, or 0.8%, primarily in the Korean Won, Chinese Yuan, and Japanese Yen. Lower volume of $11.7 million, or 0.4%, as a result of lower HEYDUDE Brand volumes, partially offset by higher Crocs Brand volumes, also decreased the overall increase in revenues.

Gross margin. Gross margin increased in the three months ended September 30, 2024 to 59.6% compared to 55.6% in the same period in 2023. This was primarily driven by prior year distribution costs of approximately 180 basis points associated with the move to our new HEYDUDE distribution center in Las Vegas, Nevada that did not recur in the current year, lower product costs of 70 basis points, favorable brand mix of 70 basis points, and lower freight costs of 40 basis points.

Gross margin in the nine months ended September 30, 2024 was 59.0% compared to 55.9% in 2023. This was primarily driven by lower freight costs in both brands of approximately 100 basis points, prior year distribution costs of approximately 80 basis points associated with the move to our new HEYDUDE distribution center in Las Vegas, Nevada that did not recur in the current year, favorable brand mix of 70 basis points, and lower product costs of 50 basis points.

Selling, general and administrative expenses. SG&A increased $55.7 million, or 18.1%, in the three months ended September 30, 2024 compared to the same period in 2023. This increase was primarily driven by increased investments in talent and marketing of $17.9 million and $14.4 million, respectively. Additionally, there were various other net cost increases, including incremental costs in our DTC channel, of $23.4 million.

SG&A expenses increased $163.3 million, or 19.2%, during the nine months ended September 30, 2024 compared to the same period in 2023, driven by increased investments in talent and marketing of $55.1 million and $40.9 million, respectively, as well as incremental costs in our DTC channel of $27.2 million. The increase in SG&A expenses was also due to an $18.2 million impairment charge for information technology systems related to the HEYDUDE integration and impairment charges of $5.9 million related to our former warehouses in Las Vegas, Nevada and the Netherlands. Other net costs increased SG&A by $16.0 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 September 30, 2024, we recognized realized and unrealized net foreign currency losses of $0.3 million compared to losses of $1.8 million during the three months ended September 30, 2023.

During the nine months ended September 30, 2024, we recognized realized and unrealized net foreign currency losses of $3.9 million compared to losses of $1.6 million during the nine months ended September 30, 2023.

Interest expense. Interest expense during the three months ended September 30, 2024 decreased $13.0 million, or 33.2%, compared to the three months ended September 30, 2023. Interest expense during the nine months ended September 30, 2024 decreased $39.0 million, or 31.2%, compared to the nine months ended September 30, 2023. The decrease in interest expense for both the three and nine months ended September 30, 2024 was due to lower outstanding borrowings and lower weighted average interest rates on the Term Loan B Facility (as defined herein) in the current year.

Income tax expense. During the three months ended September 30, 2024, income tax expense decreased $11.3 million compared to the same period in 2023. The effective tax rate for the three months ended September 30, 2024 was 18.4% compared to an effective tax rate of 24.2% for the same period in 2023, a 5.8% decrease. This decrease in the effective tax rate was primarily driven by a shift in the mix of the Company's domestic and foreign earnings. 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 nine months ended September 30, 2024, income tax expense decreased $9.2 million compared to the same period in 2023. The effective tax rate for the nine months ended September 30, 2024 was 21.0% compared to an effective tax rate of 23.3% for the same period in 2023, a 2.3% decrease. This decrease in the effective rate was primarily driven by a shift in the mix of the Company’s domestic and foreign earnings. 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)

(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) Our business has continued to evolve in the period following the consummation of the HEYDUDE acquisition, as we have grown the brand and staffed and developed our leadership team at HEYDUDE. In the fourth quarter of 2023, to reflect changes in the way management evaluates performance, makes operating decisions, and allocates resources, we updated our reportable operating segments to be (i) Crocs Brand and (ii) HEYDUDE Brand. Our ‘North America,’ ‘Asia Pacific,’ and ‘EMEALA’ segments as well as revenues and expenses related to Crocs ‘Brand corporate’ have been consolidated to the ‘Crocs Brand.’ As a result of these changes, the previously reported amounts for revenues and income from operations for the three and nine months ended September 30, 2023 have been recast to conform to current period presentation.

(3) In the first quarter of 2024, to reflect a change in the way management evaluates segment performance, makes operating decisions, and allocates resources, we made changes to segment profitability related to certain foreign currency amounts impacting cost of sales. These amounts have shifted costs or benefits that were previously presented in each of our reportable segments to ‘Enterprise corporate.’ We believe that the impact of these changes on prior periods is insignificant to each segment and thus have not recast prior periods.

Crocs Brand

Revenues. Crocs Brand revenues increased in the three months ended September 30, 2024 compared to the same period in 2023, primarily due to higher volume. The overall increase was partially offset by lower ASP, driven by unfavorable product mix and slight net price decreases.

The increase in Crocs Brand revenues in the nine months ended September 30, 2024 compared to the same period in 2023 is primarily due to higher volume and higher ASP, due to favorable product mix, price increases in international markets, and favorable channel mix.

Income from Operations. Income from operations for our Crocs Brand segment was $313.3 million for the three months ended September 30, 2024, an increase of $15.8 million, or 5.3%, compared to the same period in 2023. Gross margin was 62.5%, an increase of 60 basis points compared to prior year, driven primarily by lower product costs and lower freight and fulfillment costs. The overall increase was partially offset by unfavorable channel mix.

SG&A for our Crocs Brand segment increased $25.7 million, or 13.0%, during the three months ended September 30, 2024 compared to the same period in 2023. This increase was primarily due to increased investments in talent and marketing.

During the nine months ended September 30, 2024, income from operations for our Crocs Brand was $932.9 million, an increase of $99.8 million, or 12.0%, compared to the same period in 2023. Gross margin was 61.8%, an increase of 160 basis points, primarily due to lower product costs, lower freight costs, and price increases in international markets. The overall increase was partially offset by unfavorable channel mix.

SG&A for our Crocs Brand increased $83.0 million, or 15.4%, during the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to increased investments in marketing and talent, increased facilities costs as we expand our retail footprint, increased depreciation and amortization expense, and higher variable expenses related to higher revenues in the DTC channel.

HEYDUDE Brand

Revenues. For the three months ended September 30, 2024, revenues decreased compared to 2023, primarily due to lower volume. Higher ASP, primarily due to less discounting and increased pricing as well as favorable channel mix as we grow our retail business, partially offset the overall decrease to revenues.

During the nine months ended September 30, 2024, revenues decreased compared to the same period in 2023, primarily due to lower volume. Higher ASPs, driven by less discounting and increased pricing, favorable channel mix, and product mix, partially offset this decrease.

Income from Operations. Income from operations for the HEYDUDE segment was $26.2 million for the three months ended September 30, 2024, a decrease of $5.6 million, or 17.6%, compared to 2023. Gross margin was 47.9%, an increase of 1,230 basis points, primarily due to lower freight costs, favorable channel mix, and higher ASP, as described above. Additionally, there were prior year distribution costs associated with the move to our new HEYDUDE distribution center in Las Vegas, Nevada that did not recur in the current year, offset in part by infrastructure investments incurred in the current year associated with the move.

SG&A for the HEYDUDE Brand segment increased $15.4 million, or 27.5%, during the three months ended September 30, 2024 compared to the same period in 2023. This increase was primarily due to an increased investment in marketing and talent.

Income from operations for the HEYDUDE segment was $108.7 million for the nine months ended September 30, 2024, a decrease of $65.2 million, or 37.5%, compared to the same period in 2023. Gross margin was 47.7%, an increase of 380 basis points, driven in part by higher ASP, as discussed above, lower freight costs, and favorable channel mix. Additionally, there were prior year distribution costs associated with the move to our new HEYDUDE distribution center in Las Vegas, Nevada that did not recur in the current year, offset in part by transition costs and infrastructure investments incurred in the current year associated with the move.

SG&A for the HEYDUDE Brand segment increased $32.6 million, or 22.8%, during the nine months ended September 30, 2024 compared to the same period in 2023. This is primarily due to an increase in investment talent and marketing, impairment costs of the right-of-use assets for our former HEYDUDE Brand warehouses in Las Vegas, Nevada in the current year, and increased facilities costs as we grow our retail business. The overall increase was partially offset by lower variable expenses related to lower revenues in the DTC channel.

Enterprise Corporate

During the three months ended September 30, 2024, total net costs within ‘Enterprise corporate’ increased $14.2 million, or 25.7%, compared to the same period in 2023. This increase was in part due to an increased investment in talent.

During the nine months ended September 30, 2024, total net costs within ‘Enterprise corporate’ increased $39.8 million, or 22.2%, compared to the same period in 2023. This was primarily due to an increased investment in talent, an impairment charge for information technology systems related to the HEYDUDE integration, higher depreciation and amortization expense, and higher information technology costs.

Store Locations and Direct-to-Consumer Comparable Sales

As of September 30, 2024, we had 372 company-operated retail locations for the Crocs Brand, inclusive of 173 retail locations in North America and 199 retail locations internationally. The Crocs Brand store count includes 9 temporary clearance stores. As of September 30, 2024, we had 43 company-operated retail locations for the HEYDUDE Brand, inclusive of 9 temporary clearance stores. As of September 30, 2023, we had 347 company-operated retail locations for the Crocs Brand, inclusive of 173 retail locations in North America and 174 retail locations internationally. As of September 30, 2023, we had 11 company-operated retail locations for the HEYDUDE Brand, all of which were temporary clearance stores.

Direct-to-consumer (“DTC”) comparable sales were as follows:

(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. Additionally, comparable sales do not include leap days in leap years.

Financial Condition, Capital Resources, and Liquidity

Liquidity

Our liquidity position as of September 30, 2024 was:

(in thousands)

As of September 30, 2024, we had $186.1 million in cash and cash equivalents and up to $574.2 million of available borrowings, including $559.2 million of remaining borrowing availability under the Revolving Facility (as defined below) and $15.0 million of remaining borrowing availability under the Citibank Facility (as defined below). As of September 30, 2024, the Term Loan B Facility (as defined below) 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.

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, global economic conditions, and the pace of sustainable growth in our markets, among other things, 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. could be repatriated to the U.S. as of September 30, 2024 without incurring additional U.S. federal income taxes. In some countries, repatriation of certain foreign balances is restricted by local laws. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and could adversely affect our liquidity. As of September 30, 2024, we held $132.6 million of our total $186.1 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. Of the $132.6 million, $2.4 million could potentially be restricted by local laws.

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. Since that time, we have amended the Credit Agreement, which, as amended to date, provides for a revolving credit facility of $750.0 million, which can be increased by an additional $250.0 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 or required, as applicable, 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 ended December 31, 2023, (ii) 3.75 to 1.00 for the quarter ended March 31, 2024, (iii) 3.50 to 1.00 for the quarter ended June 30, 2024, and (iv) 3.25 to 1.00 for the quarter ended 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 September 30, 2024, we were in compliance with all financial covenants under the Credit Agreement.

As of September 30, 2024, the total commitments available from the lenders under the Revolving Facility were $750.0 million. At September 30, 2024, we had $190.0 million in outstanding borrowings and $0.8 million in outstanding letters of credit under the Revolving Facility, which reduces amounts available for borrowing under the Revolving Facility. As of September 30, 2024 and December 31, 2023, we had $559.2 million and $558.7 million, respectively, of available borrowing capacity under the Revolving Facility, which matures in November 2027.

Term Loan B Facility

On February 17, 2022, the Company entered into a credit agreement (the “Original 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 HEYDUDE acquisition, which was amended on August 8, 2023 (the “August 2023 Amendment”) and on February 13, 2024 (the “February 2024 Amendment”). The Original Term Loan B Credit Agreement, as amended by the August 2023 Amendment and the February 2024 Amendment is referred to herein as the “Term Loan B Credit Agreement.”

The Original Term Loan B Credit Agreement provided for an aggregate term loan B facility in the principal amount of $2.0 billion. Prior to the February 2024 Amendment, the outstanding balance was $820.0 million. Among other things, the February 2024 Amendment provided for a new $820.0 million tranche of term loans (the “2024 Refinancing Term Loans” and, such facility, the "Term Loan B Facility"), to refinance the then-outstanding principal balance. The 2024 Refinancing Term Loans are 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 Term Loan B 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.

Pursuant to the reduced interest rate margins applicable to the 2024 Refinancing Term Loans, 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 1.25%. Each term loan borrowing which is a term SOFR 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 2.25%.

As of September 30, 2024, the Term Loan B Facility was fully drawn with no remaining borrowing capacity, and we had $575.0 million in outstanding principal on the Term Loan B Facility, which matures on February 17, 2029.

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 September 30, 2024, we were in compliance with all financial covenants under the Term Loan B Credit Agreement.

Asia Revolving Credit Facility

During the nine months ended September 30, 2024, we had one revolving credit facility in Asia with Citibank (China) Company Limited, Shanghai Branch (the “Citibank Facility”), which, as amended, provides up to an equivalent of $15.0 million.

As of September 30, 2024, we had no borrowings outstanding on the Citibank Facility. As of December 31, 2023, we had borrowings outstanding of $3.3 million on the Citibank Facility.

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 had or will have, as applicable, 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 also had 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 could have redeemed 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 had or will have, as applicable, 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 could have redeemed 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 September 30, 2024, we were in compliance with all financial covenants under the Notes.

Cash Flows

(in thousands)

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 increased $89.8 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, driven by higher net income, adjusted for non-cash items, of $102.5 million, partially offset by decreases in operating assets and liabilities of $12.7 million, primarily due to the change in accounts payable, accrued expenses and other liabilities.

Investing Activities. There was a $35.6 million decrease in cash used in investing activities for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This was due to a decrease in purchases of property, equipment, and software.

Financing Activities. Cash used in financing activities increased by $25.8 million in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase in cash used in financing activities was primarily due to a decrease in proceeds from borrowings of $136.5 million and an increase of $176.2 million in repurchases of common stock. The overall increase in cash used in financing activities was partially offset by a decrease in repayments of borrowings of $277.3 million, a decrease of $8.8 million in repurchases of common stock for tax withholding, a decrease of $0.6 million in deferred debt issuance costs, and other decreases in cash used of $0.2 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, 2023, other than borrowings and repayments on the Term Loan B Facility, Revolving Facility, and Citibank Facility.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of September 30, 2024, other than certain purchase commitments, which are described in Note 12 — 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 our 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 and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2023 and Note 1 — Basis of Presentation and Summary of Significant Accounting Policies 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, 2023.

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.

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 Term Loan B Facility and 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 September 30, 2024, we had borrowings with a face value of $1,465.0 million, comprised of the Notes, which carry a fixed rate, the Term Loan B Facility, and borrowings under our Revolving Facility. We also had $0.8 million in outstanding letters of credit under our Revolving Facility as of September 30, 2024. As of December 31, 2023, we had long-term borrowings with a face value of $1,713.3 million and $1.3 million in outstanding letters of credit under our Revolving Facility.

A hypothetical increase of 1% in the interest rate on the variable rate borrowings under our Term Loan B Facility and Revolving Facility would increase our interest expense over the next twelve months by $7.7 million based on the balances outstanding for these borrowings as of September 30, 2024.

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 income 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 when translating our financial results would have decreased our revenues and income before taxes during the three months ended September 30, 2024 by $4.1 million and $0.7 million, respectively. During the nine months ended September 30, 2024, 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 $12.8 million and $2.6 million, respectively. This analysis does not account for transactional fluctuations in accounts, such as those driven by purchasing power, which is defined as purchasing foreign goods in the U.S. Dollar but recognizing the cost in foreign currencies. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy.

In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in earnings caused by fluctuations in foreign exchange rates, we may enter into forward foreign exchange contracts to buy or sell various foreign currencies. Changes in the fair value of these forward contracts are recognized in earnings in the period that the changes occur or in the period in which the hedged transaction affects earnings for derivatives classified as non-hedged or hedged, respectively, as defined in Note 6 — Derivative Financial Instruments 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 of September 30, 2024, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $226.6 million. The fair value of these contracts at September 30, 2024 was an insignificant liability.

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 September 30, 2024, a 10% appreciation in the value of the U.S. Dollar would result in a net decrease in the fair value of our derivative portfolio of approximately $1.1 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 income for the three and nine months ended September 30, 2024 and 2023.

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 September 30, 2024. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2024, 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

There were changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The changes included the implementation of information technology systems related to HEYDUDE, which resulted in additions and changes to our internal control over financial reporting. Except as described herein, there have been no other changes in our internal control over financial reporting.

There have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2023.