# Crocs, Inc.: Form 10-K for the period ended Dec 31, 2016

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-K
- Filed: 2017-03-01
- Accepted by EDGAR: Mar 1, 2017, 17:07 ET
- Period: 2016-12-31
- Accession: 0001628280-17-002068
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000162828017002068/crox-20161231x10k.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000162828017002068/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-12-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-10-01 to 2016-12-31 | $187.4m | us-gaap:SalesRevenueNet |
| Gross profit | 3 months, 2016-10-01 to 2016-12-31 | $78.7m | us-gaap:GrossProfit |
| Gross profit | 12 months, 2016-01-01 to 2016-12-31 | $500.2m | us-gaap:GrossProfit |
| Research and development | 12 months, 2016-01-01 to 2016-12-31 | $11.9m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 12 months, 2016-01-01 to 2016-12-31 | $503.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2016-10-01 to 2016-12-31 | −$39.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 12 months, 2016-01-01 to 2016-12-31 | −$6.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 12 months, 2016-01-01 to 2016-12-31 | $836.0k | us-gaap:InterestExpense |
| Income tax | 12 months, 2016-01-01 to 2016-12-31 | $9.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-10-01 to 2016-12-31 | −$40.6m | us-gaap:NetIncomeLoss |
| Net income | 12 months, 2016-01-01 to 2016-12-31 | −$16.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-10-01 to 2016-12-31 | −$0.60 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 12 months, 2016-01-01 to 2016-12-31 | −$0.43 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-10-01 to 2016-12-31 | −$0.60 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 12 months, 2016-01-01 to 2016-12-31 | −$0.43 | us-gaap:EarningsPerShareBasic |
| Capital expenditure | 12 months, 2016-01-01 to 2016-12-31 | $13.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 12 months, 2016-01-01 to 2016-12-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-12-31 | $147.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-12-31 | $425.5m | us-gaap:AssetsCurrent |
| Total assets | at 2016-12-31 | $566.4m | us-gaap:Assets |
| Current liabilities | at 2016-12-31 | $149.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-12-31 | $167.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-12-31 | $220.4m | us-gaap:StockholdersEquity |

## Business

As filed, 31,028 characters.

### The Company

Crocs, Inc. and its consolidated subsidiaries (collectively the "Company," "we," "our," or "us") are engaged in the design, development, manufacturing, worldwide marketing, distribution and sale of casual lifestyle footwear and accessories for men, women, and children. We strive to be the global leader in the sale of molded footwear featuring comfort, color, and functionality. The Company, a Delaware corporation, is the successor to a Colorado corporation of the same name, and was originally organized in 1999 as a limited liability company. Our products include footwear and accessories that utilize our proprietary closed-cell resin, called Croslite, as well as casual lifestyle footwear that use a range of materials. Our CrosliteTM material enables us to produce innovative, lightweight, non-marking, and odor-resistant footwear. We currently sell our products in more than 90 countries through domestic and international retailers and distributors, and directly to consumers through our company-operated retail stores, outlets, e-commerce store sites, and kiosks.

Since the initial introduction of our original Classic clog designs in 2002, we have expanded our product ranges to include a variety of styles and products. Going forward, we are focusing on our core molded styles, clogs, sandals, flips and slides as well as developing select casual styles. The broad appeal of our footwear has allowed us to market our products through a wide range of distribution channels, our own Crocs single-branded stores including both full price and outlet stores, our own e-commerce sites, traditional multi-branded stores including family footwear stores, sporting goods stores and a variety of specialty and independent retail channels, and third-party e-commerce sites. In select markets we also sell to distributors that are typically granted the rights to distribute our products in a given geographical area.

### Products

Our product offerings have grown significantly since we first introduced the single-style clog in six colors in 2002. Recognized across the world for our iconic clog silhouette, we have taken the successful formula of a simple design aesthetic paired with modern comfort and expanded into a wide variety of casual footwear products including sandals, flips and slides, shoes, and boots that meet the needs of the whole family.

At the heart of our brand reside the Classic and Crocband clogs, our most iconic styles for adults and kids - product that embodies our innovation in molding, simplicity of design and all-day comfort. A key differentiating feature of our footwear products is our proprietary closed-cell resin Croslite material, which is uniquely suited for comfort and functionality. For further information on Croslite, see Raw Materials below.

We strive to provide our global consumer with a year-round product assortment featuring fun, comfortable, casual, colorful, and innovative styles. Our collections are designed to meet the needs of the family by focusing on key wearing occasions. Our goal is to deliver product assortments for the family with all of the comfort, features and benefits Crocs is known for.

The unique look and feel of the Classic clog can be experienced throughout our entire product line due to the use and design of Croslite. We have expanded our core molded product line, with the addition of dual density technology, warm lined styles, sandals, flips and slides, shoes and boots. We enjoy highly successful licensing partnerships with Disney, Marvel, Nickelodeon, and Warner Bros., among others, which allows us to bring popular global franchises and characters to life on our product in a fun, exciting way.

We continue to leverage our expertise and innovation in injection molding to create a fresh, distinctive point of view in the casual footwear market and to deliver a winning combination of comfort, style and versatility to our consumer year round.

### Sales and Marketing

Each season we focus on presenting a compelling brand story and experience for our new product introductions as well as our on-going core products. Our marketing efforts center on story-telling across diverse wearing occasions and product silhouettes. For the years ended December 31, 2016, 2015, and 2014, total advertising costs were approximately $56.0 million, $58.2 million, and $44.7 million, respectively.

We run our business across three major geographic regions: the Americas, Asia Pacific, and Europe, which are discussed in more detail in Business Segments and Geographic Information below. In developing our market growth and expansion strategies, we prioritize five core markets including: (i) the United States, (ii) Japan, (iii) China, (iv) South Korea and (v) Germany. These countries have been identified as large-scale geographies where we believe the greatest opportunities for growth exist. We are also focusing our marketing efforts on these countries in an effort to increase customer awareness of both our brand and our full product range.

We have three primary sales channels: wholesale, which includes distributors, Crocs owned retail, and Crocs e-commerce (discussed in more detail below). Our marketing efforts are aimed at driving business to both our wholesale partners and our company-operated Crocs retail stores and e-commerce sites. Our marketing efforts in the wholesale and retail channels are focused on social and digital outreach to consumers to shop and visual merchandising. Company operated retail stores provide a unique opportunity to engage with consumers at a deeper level by showcasing our full assortment of molded and casual footwear. No single wholesale customer accounted for 10% or more of our revenues for any of the years ended December 31, 2016, 2015, and 2014.

### Wholesale Channel

During the years ended December 31, 2016, 2015, and 2014, approximately 52.7%, 54.2% and 55.7% of revenues, respectively, were derived through the wholesale channel which consists of distributors and third-party retailers. Wholesale customers include family footwear retailers, national and regional retail chains, sporting goods stores, independent footwear retailers as well as e-tailers.

Many of our agreements allow us to accept returns from wholesale customers for defective products, on an exception basis, and to extend pricing discounts in lieu of such returns. We also may accept returns from our wholesale customers, on an exception basis, for the purpose of stock re-balancing, to ensure that our products are merchandised in the proper assortments.

Outside the United States, in addition to wholesale customers, we use third-party distributors in select markets where we believe such arrangements are preferable to direct sales. These third-party distributors purchase products pursuant to a price list and are granted the right to resell the products in a defined territory, usually a country or group of countries. Our typical distribution agreements have terms of one to five years, are generally terminable upon 30 days prior notice, and have minimum sales requirements that allow us to terminate or renegotiate the contract if minimum requirements are not met.

### Retail Channel

During the years ended December 31, 2016, 2015, and 2014, approximately 34.7%, 34.7%, and 35.5%, respectively, of our revenues were derived from sales through our retail channel. We operate our retail channel through three integrated platforms: full-price retail locations, outlet locations, kiosk and store-in-store locations. Our three types of store platforms enable us to promote the breadth of our product offering in high-traffic, highly visible locations. With the worldwide consumer shift in shopping patterns out of traditional retail to e-commerce, we are focused on carefully managing and reducing our physical retail portfolio. We intend to continue to moderate the pace of our retail expansion in 2017 with a focus on outlet locations as well as enhancing the profitability of existing locations. We opened 83 company-operated stores during the year ended December 31, 2016 and closed 84 company-operated stores. As retail store performance will vary in new and existing markets due to many factors, including maturity of the market and brand recognition, we periodically evaluate the fixed assets and leasehold improvements related to our retail locations for impairment.

#### Full-Price Retail Locations

Our company-operated full-price retail locations allow us to effectively showcase the full extent of our product ranges to consumers. In addition, our full-price retail locations provide us with the opportunity to interact with our consumers directly. The optimal space for our retail locations is between approximately 1,500 and 1,800 square feet, and is located in high-traffic shopping malls or districts. During the year ended December 31, 2016, we closed 66 stores and opened 19 new full-price retail stores. As of December 31, 2016, 2015, and 2014, we operated 228, 275, and 311 full-price retail stores, respectively.

#### Outlet Locations

Our company-operated outlet locations allow us to sell discontinued and overstock merchandise directly to consumers at discounted prices. We also sell full-priced products in certain of our outlet stores as well as built for outlet products in certain locations. Outlet locations are similar in size to our full-price retail stores; however, they are generally located within outlet shopping centers. During the year ended December 31, 2016, we closed four outlet locations and opened 50 outlet locations. As of December 31, 2016, 2015, and 2014, we operated 232, 186, and 174 outlet stores, respectively.

#### Kiosk / Store-in-Store Locations

Our company-operated kiosks and store-in-store locations allow us to market specific product lines with the further flexibility to tailor products to consumer preferences in shopping malls and other high foot traffic areas. With efficient use of retail space, and limited capital investment, we believe that kiosks and store-in-store locations can be an effective vehicle for marketing our products where this business model is applicable. During the year ended December 31, 2016, we closed 14 kiosk and store-in-store locations and opened 14 new kiosk and store-in-store locations. As of December 31, 2016, 2015, and 2014, we operated 98, 98, and 100 kiosks and store-in-stores, respectively.

The following table illustrates the net change in 2016 with respect to the number of our company-operated retail locations by reportable operating segment and country:

| Company-Operated Retail Locations Americas | December 31, 2015 | Opened | Closed | December 31, 2016 |
| --- | ---: | ---: | ---: | ---: |
| United States | 179 | 7 | 12 | 174 |
| Canada | 10 | — | — | 10 |
| Puerto Rico | 7 | — | 1 | 6 |
| **Total Americas** | **196** | **7** | **13** | **190** |
| **Asia Pacific** |  |  |  |  |
| Korea | 84 | 9 | 6 | 87 |
| Japan | 52 | 1 | 4 | 49 |
| China | 55 | 43 | 19 | 79 |
| Hong Kong | 21 | 5 | 9 | 17 |
| Singapore | 15 | 3 | — | 18 |
| Australia | 11 | 5 | 8 | 8 |
| United Arab Emirates | 14 | 1 | 3 | 12 |
| South Africa | 9 | — | 9 | — |
| **Total Asia Pacific** | **261** | **67** | **58** | **270** |
| **Europe** |  |  |  |  |
| Russia | 37 | 2 | 3 | 36 |
| Germany | 18 | — | — | 18 |
| Great Britain | 10 | — | 3 | 7 |
| France | 12 | — | 2 | 10 |
| Netherlands | 6 | — | 1 | 5 |
| Finland | 5 | — | 1 | 4 |
| Spain | 6 | — | 1 | 5 |
| Austria | — | 7 | 1 | 6 |
| Other | 8 | — | 1 | 7 |
| **Total Europe** | **102** | **9** | **13** | **98** |
| **Total** | **559** | **83** | **84** | **558** |

### E-commerce Channel

As of December 31, 2016, we offered our products through 12 company-operated e-commerce sites worldwide. We also offer our products through third-party e-commerce sites. Revenues from third-party e-commerce sites are reported in our wholesale channel. During the years ended December 31, 2016, 2015, and 2014, approximately 12.6%, 11.1% and 8.8%, respectively, of our revenues were derived from sales through our e-commerce channel. Our e-commerce presence enables us to have increased access to our consumers and provides us with an opportunity to educate them about our products and brand. Improving our e-commerce capabilities is one of our key growth strategies. We will continue to improve our consumer's online experience, and our in stock reliability and will look for new ways to leverage digital technologies to connect with consumers, including mobile optimization of our sites.

### Business Segments and Geographic Information

We have three reportable operating segments based on the geographic nature of our operations: Americas, Asia Pacific, and Europe. We also have an "Other businesses" category which aggregates insignificant operating segments that do not meet the reportable operating segment threshold, including manufacturing operations located in Mexico and Italy, and corporate operations. See additional discussion of our segments and geographic information, including results of operations and assets by segment and geography in Note 16 — Operating Segments and Geographic Information in the accompanying notes to the consolidated financial statements included in Part II — Item 8. *Financial Statements and Supplementary Data* of this Annual Report.

### Americas

The Americas segment consists of revenues and expenses related primarily to product sales in North and South America. Regional wholesale channel customers consist of a broad range of family footwear, sporting goods and e-tailers as well as independent retailers and distributors. The Americas retail channel sells directly to consumers through 190 company-operated retail store locations in the Americas as well as through e-commerce sites. During the years ended December 31, 2016, 2015, and 2014, revenues from the Americas segment were approximately 45.1%, 43.7%, and 40.9% of our consolidated revenues, respectively. Specifically, revenues from the United States were approximately 37.1%, 35.8%, and 36.3% of our consolidated revenues, respectively, for the years ended December 31, 2016, 2015, and 2014.

### Asia Pacific

The Asia Pacific segment consists of revenues and expenses related primarily to product sales throughout Asia, Australia, New Zealand, Africa and the Middle East. The Asia Pacific wholesale channel consists of sales to a broad range of retailers similar to the wholesale channel we have established in the Americas segment, plus distributors in select markets. We also sell products directly to consumers through 270 company-operated retail stores located in Asia as well as through our e-commerce sites. During the years ended December 31, 2016, 2015, and 2014, revenues from our Asia Pacific segment were 38.1%, 39.0%, and 39.6%, of our consolidated revenues, respectively.

### Europe

The Europe segment consists of revenues and expenses related primarily to product sales throughout Western Europe, Eastern Europe and Russia. The Europe segment wholesale channel customers consist of a broad range of retailers, similar to the wholesale channel we have established in the Americas segment, plus distributors in select markets. We also sell our products directly to consumers through 98 company-operated retail stores located in Europe as well as through our e-commerce sites. During the years ended December 31, 2016, 2015, and 2014, revenues from the Europe segment were 16.7 %, 17.3%, and 19.5% of our consolidated revenues, respectively.

### Distribution and Logistics

On an ongoing basis, we look to enhance our distribution and logistics network to further streamline our supply chain, increase our speed to market, and lower operating costs. During the year ended December 31, 2016, we stored our raw material and finished goods inventories in company-operated warehouse and distribution facilities located in the United States, Mexico, the Netherlands, Japan, Russia, and Italy. We also utilize third-party operated distribution centers located in China, Japan, Hong Kong, Australia, Korea, Singapore, India, Taiwan, the United Arab Emirates, Russia, Brazil, Argentina, Chile, Puerto Rico, and Italy. As of December 31, 2016, our company-operated warehouse and distribution facilities provided us with approximately 0.9 million square feet and our third-party operated distribution facilities provided us with approximately 0.5 million square feet. We also ship a portion of our products directly to our wholesale customers from our internal and third-party manufacturers.

### Raw Materials

Croslite, our branded proprietary closed-cell resin, is the primary raw material used in the majority of our footwear and some of our accessories. Croslite is soft, durable, and allows our products to be non-marking and extremely lightweight. Croslite is carefully formulated to create extremely lightweight, odor-resistant, water-resistant and non-marking footwear that conforms to the shape of the foot and increases comfort.

We continue to invest in research and development in order to refine our materials to enhance these properties and to develop new properties for specific applications.

Croslite material is produced by compounding elastomer resins that we or one of our third-party processors purchase from major chemical manufacturers, together with certain other production inputs such as color dyes. We have identified multiple suppliers that produce the elastomer resins used in the Croslite material. We may also in the future identify and utilize materials produced by other suppliers as an alternative to, or in addition to, the elastomer resins we currently use in the production of our proprietary material. All of the other raw materials that we use to produce the Croslite products are readily available for purchase from multiple suppliers.

Since our inception in 2002, we have substantially increased the number of footwear products we offer. Many of these new products are constructed using leather, textile fabrics, or other non-Croslite materials. We, or our third-party manufacturers, obtain these materials from a number of third-party sources and we believe these materials are broadly available. We also outsource the compounding of the Croslite material and continue to purchase a portion of our compounded raw materials from a third-party in Europe.

### Research, Design and Development

We continue to dedicate significant resources to product design and development as we expand the footwear styles we offer based on opportunities we identify in the marketplace. Our design and development process is highly collaborative and we continually strive to improve our development function so we can bring products to market quickly and at reduced costs, while maintaining product quality. We spent $11.9 million, $14.0 million, and $16.7 million in research, design, and development activities for the years ended December 31, 2016, 2015, and 2014, respectively.

### Manufacturing and Sourcing

Our strategy is to maintain a flexible, globally diversified, low-cost manufacturing base. We currently have company-operated production facilities in Mexico and Italy. We also contract with third-party manufacturers to produce certain of our footwear styles or to provide support to our internal production processes.

In the years ended December 31, 2016, 2015, and 2014, we manufactured approximately 14.6%, 11.3%, and 13.9%, respectively, of our footwear products internally. We sourced the remaining footwear production from multiple third-party manufacturers primarily in China, Vietnam, Eastern Europe and South America. During the years ended December 31, 2016, 2015, and 2014, our largest third-party manufacturer in China produced approximately 23.4%, 26.6%, and 27.5%, respectively, of our third-party footwear unit volume. We do not have written supply agreements with our primary third-party manufacturers in Asia.

### Intellectual Property and Trademarks

We rely on a combination of trademarks, copyrights, trade secrets, trade dress and patent protections to establish, protect and enforce our intellectual property rights in our product designs, brands, materials, and research and development efforts, although no such methods can afford complete protection. We own or license the material trademarks used in connection with the marketing, distribution, and sale of all of our products, both domestically and internationally, in most countries where our products are currently either sold or manufactured. Our major trademarks include the Crocs logo and the Crocs word mark, both of which are registered or pending registration in the U.S., the European Union, Japan, Taiwan, China, and Canada among other countries. We also have registrations or pending trademark applications for other marks and logos in various countries around the world.

In the U.S., our patents are generally in effect for up to 20 years from the date of filing the patent application. Our trademarks registered within and outside of the U.S. are generally valid as long as they are in use and their registrations are properly maintained and have not been found to become generic. We believe our trademarks and copyrights are crucial to the successful marketing and sale of our products. We will continue to strategically register, both domestically and internationally, the trademarks and copyrights we utilize today and those we develop in the future. We also intend to continue to aggressively police our patents, trademarks and copyrights and pursue those who infringe upon them, both domestically and internationally, as we deem necessary.

We consider the formulations of the materials covered by our trademark Croslite and used to produce our shoes to be a valuable trade secret. Croslite material is manufactured through a process that combines a number of components in various proportions to achieve the properties for which our products are known. We use multiple suppliers to source these components but protect the formula by using exclusive supply agreements for key components, confidentiality agreements with our third-party processors, and by requiring our employees to execute confidentiality agreements concerning the protection of our confidential information. Other than our third-party processors, we are unaware of any third party using our formula in the production of shoes. We believe the comfort and utility of our products depend on the properties achieved from the compounding of Croslite material and constitute a key competitive advantage for us, and we intend to continue to vigorously protect this trade secret.

We also actively combat counterfeiting through monitoring of the global marketplace. We use our employees, sales representatives, distributors, and retailers, as well as outside investigators and attorneys, to police against infringing products by encouraging them to notify us of any suspect products and to assist law enforcement agencies. Our sales representatives and distributors are also educated on our patents, pending patents, trademarks and trade dress to assist in preventing potentially infringing products from obtaining retail shelf space. The laws of certain countries do not protect intellectual property rights to the same extent or in the same manner as do the laws of the U.S., and, therefore, we may have difficulty obtaining legal protection for our intellectual property in certain foreign jurisdictions.

### Seasonality

Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warm weather, revenues generated during our fourth quarter are typically less than revenues generated during our first three quarters, when the northern hemisphere is experiencing warmer weather. We continue to expand our product line to include more winter oriented styles to reduce the seasonality of our revenues. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new model introductions, or general economic conditions, or consumer confidence. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of expected results for any other quarter or for any other year.

### Backlog

We receive a significant portion of orders from our wholesale customers and distributors that remain unfilled as of any date and, at that point, represent orders scheduled to be shipped at a future date. We refer to these unfilled orders as backlog, which can be canceled by our customers at any time prior to shipment. Backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders, and excludes potential sales in our retail and e-commerce channels. Backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedules and the timing of product shipments. Backlog also is affected by the timing of customers' orders and product availability. Due to these factors and business model differences around the globe, we believe backlog is an imprecise indicator of future revenues that may be achieved in a fiscal period and cannot be relied upon.

### Competition

The global casual, athletic and fashion footwear markets are highly competitive. Although we believe that we do not compete directly with any single company with respect to the entire spectrum of our products, we believe portions of our wholesale, retail, and e-commerce businesses compete with companies including, but not limited to, Nike Inc., adidas AG, Under Armour, Inc., Deckers Outdoor Corporation, Skechers USA, Inc., Steve Madden, Ltd., Wolverine World Wide, Inc. and VF Corporation. Our company-operated retail locations also compete with footwear retailers such as Genesco, Inc., Macy's Inc., Dillard's, Inc., Dick's Sporting Goods, Inc., The Finish Line Inc., and Foot Locker, Inc.

The principal elements of competition in these markets include brand awareness, product functionality, design, comfort, quality, pricing, customer service, and marketing and distribution. We believe that our unique footwear designs, our Croslite material, our prices, our expanded product line, and our distribution network continue to position us well in the marketplace. However, a number of companies in the casual footwear industry have greater financial resources, more comprehensive product lines, broader market presence, longer standing relationships with wholesalers, longer operating histories, greater distribution capabilities, stronger brand recognition and greater marketing resources than we have. Furthermore, we face competition from new companies who have been attracted to the market with products similar to ours as the result of the unique design and success of our footwear products.

### Foreign Currency Fluctuations on Revenues and Net Income (Loss)

As a global company, we have significant revenues and costs denominated in currencies other than the U.S. Dollar. We are exposed to the risk of gains and losses resulting from changes in exchange rates on monetary assets and liabilities within our international subsidiaries that are denominated in currencies other than the subsidiary’s functional currency. Likewise, our U.S. companies are also exposed to the risk of gains and losses resulting from changes in exchange rates on monetary assets and liabilities that are denominated in a currency other than the U.S. Dollar.

We have experienced, and will continue to experience, changes in international currency rates, impacting both results of operations and the value of assets and liabilities denominated in foreign currencies. We 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.

Changes in exchange rates have a direct effect on our reported U.S. Dollar 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 average exchange rates each reporting period. As a result, comparisons of reported results between reporting periods may be impacted significantly by differences in the exchange rates used to translate the operating results of our international subsidiaries.

For example, in our European segment, when the U.S. Dollar strengthens relative to the Euro, our reported U.S. Dollar results are less than if there had been no change in the exchange rate, because more Euros are required to generate the same U.S. Dollar translated amount. Conversely, when the U.S. Dollar weakens relative to the Euro, the reported U.S. Dollar results of our Europe segment are higher compared to a period with a stronger U.S. Dollar relative to the Euro. Similarly, the reported U.S. Dollar results of our Asia Pacific segment, where the functional currencies are primarily the Japanese Yen, Chinese Yuan, Korean Won and the Singapore Dollar, are comparatively lower or higher when the U.S. Dollar strengthens or weakens, respectively, relative to these currencies. See Item 7. *Management's Discussion and Analysis of Financial Condition and Results of Operations* in Part II of this Form 10-K for a discussion of the impact of the change in foreign exchange rates on our U.S. Dollar consolidated statements of operations for the years ended December 31, 2016 and 2015.

### Employees

As of December 31, 2016, we had approximately 5,068 full-time, part-time, and seasonal employees, of which approximately 3,390 were engaged in retail-related functions.

### Available Information

We file with, or furnish to, the SEC reports, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended . These reports are available free of charge on our corporate website (www.crocs.com) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov or at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of any of these documents will be provided in print to any stockholder who submits a request in writing to Integrated Corporate Relations, 761 Main Avenue, Norwalk, CT 06851. The foregoing website addresses are provided as inactive textual references only. The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this Annual Report on Form 10-K.

## Risk factors

As filed, 67,779 characters.

The reader should carefully consider the following risk factors and all other information presented within this report. The risks set forth below are those that our management believes are applicable to our business and the industry in which we operate. These risks have the potential to have a material adverse effect on our business, results of operations, cash flows, financial condition, liquidity, or access to sources of financing. The risks included here are not exhaustive and there may be additional risks that are not presently material or known. You should carefully consider each of the following risks described below in conjunction with all other information presented in this report. Since we operate in a very competitive and rapidly changing environment, new risk factors emerge from time to time and it is not possible for management to predict all risk factors, nor can it assess the impact of all such risk factors on our business.

### Risks Specific to Our Company

***Uncertainty about current and future global economic conditions may adversely affect consumer spending and the financial health of our customers and others with whom we do business, which may adversely affect our financial condition, results of operations and cash resources.***

Uncertainty about current and future global economic conditions may cause consumers and retailers to defer purchases or cancel purchase orders for our products in response to tighter credit, decreased cash availability, and weakened consumer confidence. Our financial success is sensitive to changes in general economic conditions, both globally and in specific markets, that may adversely affect the demand for our products including recessionary economic cycles, higher interest rates, higher fuel and other energy costs, inflation, increases in commodity prices, higher levels of unemployment, higher consumer debt levels, higher tax rates and other changes in tax laws, or other economic factors. For example, in 2015 and 2014, we experienced difficulty in our Asia Pacific segment primarily due to decreased performance in our China business which resulted in delayed collections of receivables and increased the risk of customer nonpayment. Due to the continued adverse macroeconomic conditions in China during 2016 and 2015, we also experienced volatility in revenues in our Asia Pacific segment. If global economic and financial market conditions deteriorate further or remain weak for an extended period of time, the following factors, among others, could have a material adverse effect on our business and financial results:

- Changes in foreign currency exchange rates relative to the U.S. Dollar could have a material impact on our reported financial results.
- Slower consumer spending may result in our inability to maintain or increase our sales to new and existing customers, cause reduced product orders or product order cancellations from wholesale accounts that are directly impacted by fluctuations in the broader economy, difficulties managing inventories, higher discounts, and lower product margins.
- If consumer demand for our products declines, we may not be able to profitably establish new retail stores, or continue to operate existing stores, due to higher fixed costs of the retail business.
- A decrease in credit available to our wholesale or retail customers, product suppliers and other service providers, or financial institutions that are counterparties to our credit facility or derivative instruments may result in credit pressures other financial difficulties or insolvency for these parties, with a potential adverse impact on our ability to obtain future financing, our business and our financial results.
- If our wholesale customers experience diminished liquidity, we may experience a reduction in product orders, an increase in customer order cancellations, and/or the need to extend customer payment terms which could lead to larger balances and delayed collection of our accounts receivable, reduced cash flows, greater expenses for collection efforts, and increased risk of nonpayment by our wholesalers.
- If our manufacturers or other parties in our supply chain experience diminished liquidity, and as a result are unable to fulfill their obligations to us, we may be unable to provide our customers with our products in a timely manner, resulting in lost sales opportunities or a deterioration in our customer relationships.

***China's deteriorating macro-economic environment could adversely affect sales in our Asia Pacific segment which may adversely affect our business financial results.***

Current and future global economic conditions may adversely affect consumer spending and the financial health of our customers and others with whom we do business, which may adversely affect our financial condition, results of operations, and cash resources. Macro-economic conditions in China have deteriorated over the past several quarters resulting in softening consumer demand and payment delays from our China distributors which have negatively impacted the sales volumes and cash collections for our China operations. During 2015 we discontinued relationships with several distributors and also changed terms to require cash payment at delivery. During 2015, we increased our allowance for doubtful accounts receivable in China by $23.2 million as a result of a default by several distributors that were unable to make payments to us. If the economic conditions in China continue to decline, we may experience further reductions in consumer demand in the China market resulting in additional losses. As our China operations represent approximately 7% of our total revenues, the impact of declining sales volumes in China could have a material adverse impact on our business and financial results in future periods.

***Changes in foreign exchange rates, most significantly but not limited to the Singapore Dollar, Chinese Yuan, Japanese Yen, Korean Won, the Euro and British Pound, could have a material adverse effect on our business and financial results.***

As a global company, we have significant revenues and costs denominated in currencies other than the U.S. Dollar (“USD”). We pay the majority of our overseas third-party manufacturers, located primarily in China and Vietnam, in USD. Our ability to sell our products in foreign markets and the USD value of the sales made in foreign currencies can be significantly influenced by changes in exchange rates. A decrease in the value of foreign currencies relative to the USD could result in lower revenues, product price pressures, and increased losses from currency exchange rates. Foreign exchange rate volatility could also disrupt the business of the third-party manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance, as we generally pay our overseas third-party manufacturers in U.S. Dollars. In 2016, we experienced an increase of approximately $3.3 million in our Asia Pacific segment revenues as a result of increases in the value of Asian currencies relative to the U.S. Dollar, and a decrease of approximately $3.2 million in our Europe revenues as a result of decreases in the Euro and Russian Ruble relative to the U.S. Dollar. Strengthening of the USD against Asian and European currencies, and various other global currencies would adversely impact our USD reported results due to the impact on foreign currency translation. While we enter into foreign currency exchange forward contracts as economic cash flow hedges to reduce our exposure to changes in exchange rates, the volatility of foreign currency exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy and as a result our forward contracts may not prove effective in reducing our exposures.

### We face significant competition.

The footwear industry is highly competitive. Continued growth in the market for casual footwear has encouraged the entry of new competitors into the marketplace and has increased competition from established companies. Our competitors include most major athletic and non-athletic footwear companies and retailers with their own private label footwear products. A number of our competitors have significantly greater financial resources than us, more comprehensive product lines, a broader market presence, longer standing relationships with wholesalers, a longer operating history, greater distribution capabilities, stronger brand recognition, and spend substantially more than we do on product marketing. Our competitors' greater financial resources and capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry and general economic conditions, compete more effectively on the basis of price and production, and more quickly develop new products. Some of our competitors are offering products that are substantially similar, in design and materials, to our products. In addition, access to offshore manufacturing is also making it easier for new companies to enter the markets in which we compete. If we are unable to compete successfully in the future, our sales and profits may decline, we may lose market share, our business and financial results may deteriorate, and the market price of our common stock would likely fall.

***Our business relies significantly on the use of information technology. A significant disruption to our operational technology or failure to protect the integrity and security of customer and employee information could harm our reputation and/or our ability to effectively operate our business.***

We rely heavily on the use of information technology systems and networks in our operations and supporting departments including marketing, accounting, finance, and human resources. The future success and growth of our business depend on streamlined processes made available through information systems, global communications, internet activity, and other network processes. We rely exclusively on information services providers worldwide for our information technology functions including network, help desk, hardware and software configuration. Additionally, we rely on internal networks and information systems and other technology, including the internet and third-party hosted services, to support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, invoicing and collection of payments. We use information systems for certain human resource activities and to process our employee benefits, as well as to process financial information for internal and external reporting purposes and to comply with various reporting, legal and tax requirements. We also have outsourced a significant portion of work associated with our finance and accounting, human resources and other information technology functions to third-party service providers. Despite our current security measures, our systems, and those of our third-party service providers, we may be vulnerable to information security breaches, acts of vandalism, computer viruses, credit card fraud, phishing, and interruption or loss of valuable business data. Any disruption to these systems or networks could result in product fulfillment delays, key personnel being unable to perform duties or communicate throughout the organization, loss of retail and internet sales, significant costs for data restoration, and other adverse impacts on our business and reputation.

Over the last several years, we have implemented numerous information systems designed to support various areas of our business, including a fully-integrated global accounting, operations, and finance enterprise resource planning system, and warehouse management, order management, retail point-of-sale, and internet point-of-sale systems, as well as various interfaces between these systems and supporting back office systems. Issues in implementing or integrating new systems with our current operations, failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could cause delays in product fulfillment and reduced efficiency of our operations and require significant additional capital investments, to remediate, and may have an adverse effect on our business and financial results.

We routinely possess sensitive customer and employee information. Hackers and data thieves are increasingly sophisticated and operate large-scale and complex automated attacks. Any breach of our network may result in the loss of valuable business data, misappropriation of our consumers' or employees' personal information, or a disruption of our business. Despite our existing security procedures and controls, if our network becomes compromised, it could give rise to unwanted media attention, materially damage our customer relationships, harm our business, our reputation, and our financial results, which could result in fines or lawsuits, and may increase the costs we incur to protect against such information security breaches, such as increased investment in technology, the costs of compliance with consumer protection laws, and costs resulting from consumer fraud.

***We may be unable to successfully execute our long-term growth strategy, maintain or grow our current revenue and profit levels, or accurately forecast geographic demand and supply for our products.***

Our ability to maintain our revenue and profit levels or to grow in the future depends on, among other things, the continued success of our efforts to maintain our brand image, our ability to bring compelling and profit enhancing footwear offerings to market, and our ability to expand within our current distribution channels and increase sales of our products into new locations internationally. Successfully executing our long-term growth and profitability strategy will depend on many factors, including:

- Our ability to strengthen our brand globally into a leading casual lifestyle footwear provider;
- Our ability to focus on relevant geographies and markets, product innovation and profitable new growth platforms while maintaining demand for our current offerings;
- Our ability to effectively manage our retail stores (including closures of existing stores) while meeting operational and financial targets at the retail store level;
- Our ability to accurately forecast the global demand for our products and the timely execution of supply chain strategies to deliver product around the globe efficiently based on that demand;
- Our ability to use and protect the Crocs brand and our other intellectual property in new markets and territories;
- Our ability to achieve and maintain a strong competitive position in new and existing markets;
- Our ability to attract and retain qualified distributors, agents, and to continue to develop direct sales channels;
- Our ability to consolidate our distribution and supply chain network to leverage resources and simplify our fulfillment process; and
- Our ability to execute a multi-channel advertising and marketing campaign to effectively communicate our message directly to our consumers and employees.

If we are unable to successfully implement any of the above mentioned strategies and the many other factors mentioned throughout these risk factors, our business may fail to grow, our brand may suffer, and our business and financial results may be adversely impacted.

***There can be no assurance that the strategic plans we have begun to implement will be successful.***

In July 2014, we announced strategic plans for long-term improvement and growth of our business, which is comprised of four key initiatives: (1) streamlining the global product and marketing portfolio, (2) reducing direct investment in smaller geographic markets, (3) creating a more efficient organizational structure including reducing duplicative and excess overhead which will also enhance the decision making process, and (4) optimizing our retail locations around the world.

While these strategic plans, along with other steps to be taken, are intended to improve and grow our business, there can be no assurance that this will be the case, or that additional steps or accrual of additional material accounting charges will not be required. If additional steps are required, there can be no assurance that they will be properly implemented or will be successful. The initial charges for the strategic plan were incurred in the first quarter of 2014 and continued through 2015. During 2014 and 2015, we closed 172 retail locations, offset in part by 112 new retail locations opened. We completed our restructuring plan in 2015.

***We conduct significant business activity outside the U.S. which exposes us to risks of international commerce.***

A significant portion of our revenues is from foreign sales. Our ability to maintain the current level of operations in our existing international markets is subject to risks associated with international sales operations as well as the difficulties associated with promoting products in unfamiliar cultures. In addition to foreign manufacturing, we operate retail stores and sell our products to retailers outside of the U.S. Foreign manufacturing and sales activities are subject to numerous risks including: tariffs, anti-dumping fines, import and export controls, and other non-tariff barriers such as quotas and local content rules; delays associated with the manufacture, transportation and delivery of products; increased transportation costs due to distance, energy prices, or other factors; delays in the transportation and delivery of goods due to increased security concerns; restrictions on the transfer of funds; restrictions, due to privacy laws, on the handling and transfer of consumer and other personal information; changes in governmental policies and regulations; political unrest, changes in law, terrorism, or war, any of which can interrupt commerce; potential violations of U.S. and foreign anti-corruption and anti-bribery laws by our employees, business partners or agents, despite our policies and procedures relating to compliance with these laws; expropriation and nationalization; difficulties in managing foreign operations effectively and efficiently from the U.S.; difficulties in understanding and complying with local laws, regulations and customs in foreign jurisdictions; longer accounts receivable payment terms and difficulties in collecting foreign accounts receivables; difficulties in enforcing contractual and intellectual property rights; greater risk that our business partners do not comply with our policies and procedures relating to labor, health and safety; and increased accounting and internal control costs. In addition, we are subject to customs laws and regulations with respect to our export and import activity which are complex and vary within legal jurisdictions in which we operate. We cannot assure that there will be not be a control failure around customs enforcement despite the precautions we take. We are currently subject to audits by various customs authorities including the U.S. and Mexico. Any failure to comply with customs laws and regulations could be discovered during a U.S. or foreign government customs audit, or customs authorities may disagree with our tariff treatments, and such actions could result in substantial fines and penalties, which could have an adverse effect on our business and financial results. In addition, changes to U.S. trade laws may adversely impact our operations.

In addition, as a global company, we are subject to foreign and U.S. laws and regulations designed to combat governmental corruption, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries and a materially negative effect on our brands and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these foreign and U.S. laws and regulations, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, there can be no assurance that our employees, business partners or agents will not violate our policies.

***Our success depends substantially on the value of our brand and failure to strengthen and preserve this value, either through our actions or those of our business partners, could have a negative impact on our financial results.***

We believe much of our success has been attributable to the strengthening of the Crocs global brand. To be successful in the future, particularly outside of the U.S., where the Crocs global brand is less well-known and perceived differently, we believe we must timely and appropriately respond to changing consumer demand and leverage the value of our brand across all sales channels. We may have difficulty managing our brand image across markets and international borders as certain consumers may perceive our brand image to be out of style, outdated, one-dimensional or otherwise undesirable. Brand value is based in part on consumer perceptions on a variety of subjective qualities. In the past, several footwear companies including ours have experienced periods of rapid growth in revenues and earnings followed by periods of declining sales and losses, and our business may be similarly affected in the future. Business incidents that erode consumer trust, such as perceived product safety issues, whether isolated or recurring, in particular incidents that receive considerable publicity or result in litigation, can significantly reduce brand value and have a negative impact on our business and financial results. Consumer demand for our products and our brand equity could diminish significantly if we fail to preserve the quality of our products, are perceived to act in an unethical or socially irresponsible manner, fail to comply with laws and regulations, or fail to deliver a consistently positive consumer experience in each of our markets. Additionally, counterfeit reproductions of our products or other infringement of our intellectual property rights, including unauthorized uses of our trademarks by third parties, could harm our brand and adversely impact our business.

***If our online e-commerce store sites do not function effectively, our business and financial results could be materially adversely affected.***

Many of our customers buy our products on our e-commerce store sites as well as third-party e-commerce store sites. Any failure on our part or third-party platform providers to provide effective, reliable, user-friendly e-commerce platforms that offer a wide assortment of our merchandise could place us at a competitive disadvantage, result in the loss of sales, and could have a material adverse impact on our business and financial results. Sales in our e-commerce channel may also divert sales from our retail and wholesale channels.

***Opening retail stores globally involves substantial investment, including the construction costs of leasehold improvements, furniture and fixtures, equipment, information systems, inventory and personnel. Operating global retail stores incurs fixed*** ***costs. If we are unable to generate sales, operate our retail stores profitably or otherwise fail to meet expectations, we may be unable to reduce such fixed costs and avoid losses or negative cash flows.***

Opening and operating additional retail locations requires substantial financial commitments, including fixed costs, and are subject to numerous risks including consumer preferences, location and other factors that we do not control. Declines in revenue and operating performance of our retail locations could cause us to record impairment charges and have a material adverse effect on our business and financial results. During 2016, we opened, closed and operated 19, 66 and 228 retail locations, respectively.

Although we have slowed the expansion of our retail sales channel, we intend to continue to open new retail locations globally. Our ability to open new locations successfully depends on our ability to identify suitable store locations, negotiate acceptable lease terms, hire, train, and retain store personnel and satisfy the fashion preferences in new geographic areas. Many of our retail locations are located in shopping malls and our success depends in part on obtaining prominent locations and the overall ability of the malls to successfully generate and maintain customer traffic. We cannot control the success of individual malls or store closures by other retailers, which may lead to mall vacancies and reduced customer foot traffic. Reduced customer foot traffic could reduce sales at our retail stores or hinder our ability to open retail stores in new markets, which could in turn negatively affect our business and financial results. In addition, some of our retail stores and kiosks occupy street locations that are heavily dependent on customer traffic generated by tourism. Any substantial decrease in tourism resulting from an economic slowdown, political, terrorism, social or military events or otherwise, is likely to adversely affect sales in our existing stores and kiosks. For example, in 2016 we closed our retail locations in Belgium in part as a result of the terrorist attacks in Europe.

***We may be required to record impairments of long-lived assets relating to our retail operations.***

Impairment testing of our retail stores' long-lived assets requires us to make estimates about our future performance and cash flows that are inherently uncertain. These estimates can be affected by numerous factors, including changes in economic conditions, our results of operations, and competitive conditions in the industry. Due to the fixed-cost structure associated with our retail operations, negative cash flows or the closure of a store could result in write-downs of inventory, impairment of leasehold improvements, impairment of other long-lived assets, severance costs, significant lease termination costs or the loss of working capital, which could adversely impact our business and financial results. For example, during 2016, 2015, and 2014, we recorded impairments of which $2.7 million, $9.6 million and $8.8 million, respectively, related to our retail stores. These impairment charges may increase as we continue to evaluate our retail operations. The recording of additional impairments in the future may have a material adverse impact on our business and financial results.

***We depend on key personnel across the globe, the loss of whom would harm our business.***

We rely on executives and senior management to drive the financial and operational performance of our business. Turnover of executives and senior management can adversely impact our stock price, our results of operations, and our client relationships and may make recruiting for future management positions more difficult or may require us to offer more generous executive compensation packages to attract top executives. Changes in other key management positions may temporarily affect our financial performance and results of operations as new management becomes familiar with our business. In recent years, we have experienced management turnover. Our future success depends on our ability to identify, attract and retain qualified personnel on a timely basis. In addition, we must successfully integrate any newly hired management personnel within our organization in order to achieve our operating objectives. The key initiatives directed by these executives may take time to implement and yield positive results, if at all. If our new executives do not perform up to expectations, we may experience declines in our financial performance and/or delays in our long-term growth strategy.

As a global company, we also rely on the expertise and knowledge of a limited number of key international personnel in many of our geographic regions. In certain instances, one or two personnel may be the primary knowledge base for business operations in a geographic region. The loss of key international personnel could adversely impact our operations and our client relationships.

***If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have greater difficulty filling our customers' orders, either of which could adversely affect our business.***

The footwear industry is subject to cyclical variations, consolidation, contraction and closings, as well as fashion trends, rapid changes in consumer preferences, the effects of weather, general economic conditions and other factors affecting consumer demand. In addition, sales to our wholesale customers are generally subject to rights of cancellation and rescheduling by the customer. These factors make it difficult to forecast consumer demand. If we overestimate demand for our products, we may be forced to liquidate excess inventories at discounted prices resulting in lower gross margins. Conversely, if we underestimate consumer demand, we could have inventory shortages which can result in lower sales, delays in shipments to customers, expedited shipping costs, and adversely affect our relationships with our customers and diminish brand loyalty. A decline in demand for our products, or any failure on our part to satisfy increased demand for our products, could adversely affect our business and financial results.

***Refining our footwear product line may be difficult and expensive. If we are unable to do so successfully, our brand may be adversely affected and we may not be able to maintain or grow our current revenue and profit levels.***

To successfully refine our footwear product line, we must anticipate, understand, and react to the rapidly changing tastes of consumers and provide appealing merchandise in a timely manner. New footwear models that we introduce may not be successful with consumers or our brand may fall out of favor with consumers. If we are unable to anticipate, identify, or react appropriately to changes in consumer preferences, our revenues may decrease, our brand image may suffer, our operating performance may decline, and we may not be able to execute our growth plans.

In producing new footwear models, we may encounter difficulties that we did not anticipate during the product development stage. Our development schedules for new products are difficult to predict and are subject to change in response to consumer preferences and competing products. If we are not able to efficiently manufacture new products in quantities sufficient to support retail and wholesale distribution, we may not be able to recover our investment in the development of new styles and product lines and we would continue to be subject to the risks inherent to having a limited product line. Even if we develop and manufacture new footwear products that consumers find appealing, the ultimate success of a new style may depend on our pricing. We have a limited history of introducing new products in certain target markets; as such, we may set the prices of new styles too high for the market to bear or we may not provide the appropriate level of marketing in order to educate the market and potential consumers about our new products. Achieving market acceptance will require us to exert substantial product development and marketing efforts, which could result in a material increase in our selling, general and administrative expenses and there can be no assurance that we will have the resources necessary to undertake such efforts effectively or that such efforts will be successful. Failure to gain market acceptance for new products could impede our ability to maintain or grow current revenue levels, reduce profits, adversely affect the image of our brands, erode our competitive position and result in long-term harm to our business and financial results.

***Our quarterly revenues and operating results are subject to fluctuation as a result of a variety of factors, including seasonal variations, which could increase the volatility of the price of our common stock.***

Sales of our products are subject to seasonal variations and are sensitive to weather conditions. A significant portion of our revenues are attributable to footwear styles that are more suitable for fair weather and are derived from sales in the northern hemisphere. We typically experience our highest sales activity during the second and third quarters of the calendar year, when there is warmer weather in the northern hemisphere. While we continue to create new footwear styles that are more suitable for cold weather, the effects of favorable or unfavorable weather on sales can be significant enough to affect our quarterly results which could adversely affect our common stock price. Quarterly results may also fluctuate as a result of other factors, including new style introductions, general economic conditions or changes in consumer preferences. Results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year. This could lead to results outside of analyst and investor expectations, which could increase volatility of our stock price.

### We depend heavily on third-party manufacturers located outside the U.S.

Third-party manufacturers located in China and Vietnam produced the majority of our footwear products in 2016 and are expected to do so in 2017. We depend on the ability of these manufacturers to finance the production of goods ordered, maintain adequate manufacturing capacity and meet our quality standards. We compete with other companies for the production capacity of our third-party manufacturers, and we do not exert direct control over the manufacturers' operations. As such, from time to time we have experienced delays or inabilities to fulfill customer demand and orders, particularly in China and Vietnam. We cannot guarantee that any third-party manufacturer will have sufficient production capacity, meet our production deadlines or meet our quality standards.

In addition, we do not have supply contracts with many of these third-party manufacturers and any of them may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge us. As a result, we are not assured of an uninterrupted supply of products of an acceptable quality and price from our third-party manufacturers. Foreign manufacturing is subject to additional risks, including transportation delays and interruptions, work stoppages, political instability, expropriation, nationalization, foreign currency fluctuations, changing economic conditions, changes in governmental policies and the imposition of tariffs, import and export controls, and other barriers. We may not be able to offset any interruption or decrease in supply of our products by increasing production in our internal manufacturing facilities due to capacity constraints, and we may not be able to substitute suitable alternative third-party manufacturers in a timely manner or at acceptable prices. Any disruption in the supply of products from our third-party manufacturers may harm our business and could result in a loss of sales and an increase in production costs, which would adversely affect our results of operations. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, more expensive transportation methods, such as aircraft, which could adversely affect our profit margins. The cost of fuel is a significant component in transportation costs. Increases in the price of petroleum products can adversely affect our product margins.

In addition, because our footwear products are manufactured outside the U.S., the possibility of adverse changes in trade or political relations between the U.S. and other countries, political instability, increases in labor costs, changes in international trade agreements and tariffs, or adverse weather conditions could significantly interfere with the production and shipment of our products, which would have a material adverse effect on our operations and financial results. For example, the Trump Administration has suggested modifying existing trade agreements and/or imposing tariffs on foreign products. Changes in existing trade agreements, including the North American Free Trade Agreement ("NAFTA"), or the imposition of tariffs on our products could have a material adverse effect on our operations and financial results.

***We manufacture a portion of our products which causes us to incur greater fixed costs. Any difficulties or disruptions in our manufacturing operations could adversely affect our sales and results of operations.***

We produce a portion of our footwear products at our company-owned internal manufacturing facilities in Mexico and Italy. There are significant fixed costs associated with the ownership and operations of these facilities and, as a result, efficient production of a sufficient volume of products is necessary to enable recovery of these costs. In addition, the manufacture of our products from the Croslite material requires the use of a complex process and we may experience difficulty in producing footwear that meets our high quality control standards. We absorb the manufacturing and disposal costs of products that do not meet our quality standards. Further, significant excess capacity at any of our manufacturing facilities as a result of increased efficiencies in our supply chain process or continued volume declines, could result in under-utilization of our facilities, which could lead to excess fixed overhead costs per unit and reduced product margins. Any increases in our manufacturing costs, lack of operating efficiency or product quality could adversely impact our product margins. Furthermore, our manufacturing capabilities are subject to many of the same risks and challenges faced by our third-party manufacturers, including our ability to scale our production capabilities to meet the needs of our customers. Our manufacturing may also be disrupted for reasons beyond our control, including work stoppages, fires, earthquakes, floods or other natural disasters. Any disruption to our manufacturing operations will hinder our ability to deliver products to our customers in a timely manner and could have a material and adverse effect on our business and financial results.

***Our third-party manufacturing operations must comply with labor, trade and other laws; failure to do so may adversely affect us.***

We require our third-party manufacturers to meet our quality control standards and footwear industry standards for working conditions and other matters, including compliance with applicable labor, environmental, and other laws; however, we do not control our third-party manufacturers or their respective labor practices. A failure by any of our third-party manufacturers to adhere to quality standards or labor, environmental and other laws could cause us to incur additional costs for our products, generate negative publicity, damage our reputation and the value of our brand, and discourage customers from buying our products. We also require our third-party manufacturers to meet certain product safety standards. A failure by any of our third-party manufacturers to adhere to such product safety standards could lead to a product recall which could result in critical media coverage and harm our business, brand and reputation and cause us to incur additional costs.

In addition, if we or our third-party manufacturers violate U.S. or foreign trade laws or regulations, we may be subject to extra duties, significant monetary penalties, the seizure and the forfeiture of the products we are attempting to import, or the loss of our import privileges. Possible violations of U.S. or foreign laws or regulations could include inadequate record keeping of our imported products, misstatements or errors as to the origin, quota category, classification, marketing or valuation of our imported products, and fraudulent visas or labor violations. The effects of these factors could render our conduct of business in a particular country undesirable or impractical and have a negative impact on our operating results. We cannot predict whether additional U.S. or foreign customs quotas, duties, taxes other charges, or restrictions will be imposed upon the importation of foreign produced products in the future or what effect such actions could have on our business, or results.

***Our senior revolving credit facility agreement (the "Credit Agreement") contains financial covenants that require us to maintain certain financial measures, ratios and includes restrictive covenants that limit our ability to take certain actions. A breach of restrictive covenants may cause us to be in default under the facility, and our lenders could foreclose on our assets.***

Our Credit Agreement requires us to maintain certain financial covenants. A failure to maintain current revenue levels or an inability to control costs or capital expenditures could negatively impact our ability to meet these financial covenants. If we breach any of these restrictive covenants, the lenders could either refuse to lend funds to us or and accelerate the repayment of any outstanding borrowings under the Credit Agreement. In February 2016, we obtained a waiver to remedy noncompliance with certain coverage ratios in December 2015 and amended our Credit Agreement with more favorable terms. We may not have sufficient assets to repay such indebtedness upon a default or receive a waiver of the default from the lender. If we are unable to repay the indebtedness, the lender could initiate a bankruptcy proceeding or collection proceedings with respect to our assets, all of which secure our indebtedness under the Credit Agreement.

The Credit Agreement also contains certain restrictive covenants that limit and in some circumstances prohibit, our ability to, among other things incur additional debt, sell, lease or transfer our assets, pay dividends on our common stock, make capital expenditures and investments, guarantee debt or obligations, create liens, repurchase our common stock, enter into transactions with our affiliates and enter into certain merger, consolidation or other reorganizations transactions. These restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand the current or future downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise, any of which could place us at a competitive disadvantage relative to our competitors.

***Our financial success may be limited to the strength of our relationships with our wholesale and distribution customers and the success of our wholesalers and distributors.***

Our financial success is related to the willingness of our current and prospective wholesale and distributors customers to carry our products. We do not have long-term contracts and sales to our wholesalers and distributors are generally on an order-by-order basis and subject to cancellation and rescheduling. If we cannot fill orders in a timely manner, the sales of our products and our relationships may suffer. Alternatively, if our wholesalers or distributors experience diminished liquidity or other financial issues, we may experience a reduction in product orders, an increase in order cancellations and/or the need to extend payment terms which could lead to larger outstanding balances, delays in collections of accounts receivable, increased expenses associated with collection efforts, increases in bad debt expenses and reduced cash flows if our collection efforts are unsuccessful. For example, we recorded an increase in bad debts expense of approximately $23.2 million in China in 2015, primarily as a result of delayed payments and payment defaults from certain distribution partners in China. Additional problems with our distribution customers, including continued payment delays in the Asia Pacific segment or other segments, may have a material adverse effect on our product sales, financial condition, results of operations and our ability to grow our product line.

***We depend on a limited number of suppliers for key production materials, and any disruption in the supply of such materials could interrupt product manufacturing and increase product costs.***

We depend on a limited number of sources for the primary materials used to make our footwear. We source the elastomer resins that constitute the primary raw materials used in compounding our Croslite products, which we use to produce our various footwear products, from multiple suppliers. If the suppliers we rely on for elastomer resins were to cease production of these materials, we may not be able to obtain suitable substitute materials in time to avoid interruption of our production schedules. We are also subject to market issues related to supply and demand for our raw materials. We may have to pay substantially higher prices in the future for the elastomer resins or any substitute materials we use, which would increase our production costs and could have an adverse impact on our product margins. If we are unable to obtain suitable elastomer resins or if we are unable to procure sufficient quantities of the Croslite material, we may not be able to meet our production requirements in a timely manner or may need to modify our product characteristics, which could result in less favorable market acceptance, lost potential sales, delays in shipments to customers, strained relationships with customers and diminished brand loyalty.

***Failure to adequately protect our trademarks and other intellectual property rights and counterfeiting of our brands could divert sales, damage our brand image and adversely affect our business.***

We utilize trademarks, trade names, copyrights, trade secrets, issued and pending patents and trade dress, and designs on nearly all of our products. We believe that having distinctive marks that are readily identifiable trademarks and intellectual property is important to our brand, our success and our competitive position. The laws of some countries, for example, China, do not protect intellectual property rights to the same extent as do U.S. laws. We frequently discover products that are counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights. If we are unsuccessful in challenging another party's products on the basis of trademark or design or utility patent infringement, particularly in some foreign countries, or if we are required to change our name or use a different logo, or it is otherwise found that we infringe on others intellectual property rights, continued sales of such competing products by third parties could harm our brand or we may be forced to cease selling certain products, which could adversely impact our business, financial condition, revenues, and results of operations by resulting in the shift of consumer preference away from our products. If our brands are associated with inferior counterfeit reproductions, the integrity and reputation of our brands could be adversely affected. Furthermore, our efforts to enforce our intellectual property rights are typically met with defenses and counterclaims attacking the validity and enforceability of our intellectual property rights. We may face significant expenses and liability in connection with the protection of our intellectual property, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition could be adversely affected.

We also rely on trade secrets, confidential information, and other unpatented proprietary rights and information related to, among other things, the Croslite material and product development, particularly where we do not believe patent protection is appropriate or obtainable. Using third-party manufacturers and compounding facilities may increase the risk of misappropriation of our trade secrets, confidential information and other unpatented proprietary information. The agreements we use in an effort to protect our intellectual property, confidential information, and other unpatented proprietary information may be ineffective or insufficient to prevent unauthorized use or disclosure of such trade secrets and information. A party to one of these agreements may breach the agreement and we may not have adequate remedies for such breach. As a result, our trade secrets, confidential information, and other unpatented proprietary rights and information may become known to others, including our competitors. Furthermore, our competitors or others may independently develop or discover such trade secrets and information, which would render them less valuable to us.

***We have substantial cash requirements in the U.S. However, a majority of our cash is generated and held outside of the U.S. The risks of maintaining significant cash abroad could adversely affect our cash flows in the U.S. business and financial results.***

We have substantial cash requirements in the U.S., but the majority of our cash is generated and held abroad. We generally consider unremitted earnings of subsidiaries operating outside the U.S. to be indefinitely reinvested and it is not our current intent to change this position. Cash held outside of the U.S. is primarily used for the ongoing operations of the business in the locations in which the cash is held. Most of the cash held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. Certain countries, including China, may have monetary laws which may limit our ability to utilize cash resources in those countries for operations in other countries. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and may adversely affect our liquidity. Since repatriation of such cash is subject to limitations and may be subject to significant taxation, we cannot be certain that we will be able to repatriate such cash on favorable terms or in a timely manner. If we incur operating losses on a continued basis and require cash that is held in international accounts for use in our U.S. operations, a failure to repatriate such cash in a timely and cost-effective manner could adversely affect our business and financial results. Further, U.S. legislative initiatives to reform U.S. tax law could have a material impact on our future tax rate and our repatriation plans.

***We are subject to periodic litigation, which could result in unexpected expense of time and resources.***

From time to time, we are called upon to defend ourselves against lawsuits relating to our business. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. We are currently involved in several, potentially adverse legal proceedings. For a detailed discussion of our current material legal proceedings, see Item 3*. Legal Proceedings* in Part I of this Form 10-K. An unfavorable outcome in any of these proceedings or any future legal proceedings could have an adverse impact on our business, and financial results. In addition, any significant litigation in the future, regardless of its merits, could divert management's attention from our operations and result in substantial legal fees. In the past, securities class action litigation has been brought against us. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management's attention and resources that are needed to successfully run our business.

***We may fail to meet analyst expectations, which could cause the price of our stock to decline.***

Our common stock is traded publicly and various securities analysts follow our financial results and frequently issue reports on us which include information about our historical financial results as well as their estimates of our future performance. These estimates are based on their own opinions and are often different from management's estimates or expectations of our business. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline.

***Changes in tax laws and unanticipated tax liabilities and the results of tax audits or litigation could adversely affect our effective income tax rate and profitability.***

We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of factors, including changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, the outcome of income tax audits in various jurisdictions around the world and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes. We regularly assess all of these matters to determine the adequacy of our tax provision, which is subject to significant discretion and we could face significant adverse impact if our assumptions are incorrect and/or face significant cost to defend our practices from international and U.S. tax authorities. We are regularly subject to, and are currently undergoing, audits by tax authorities in the United States and foreign jurisdictions for prior tax years. Please refer to Item 3. *Legal Proceedings* in Part I of this Form 10-K as well as Note 15 — Commitments and Contingencies in the accompanying notes to the consolidated financial statements for additional details regarding current tax audits. Although we believe our tax estimates are reasonable and we intend to defend our positions through litigation if necessary, the final outcome of tax audits and related litigation is inherently uncertain and could be materially different than that reflected in our historical income tax provisions and accruals. Moreover, we could be subject to assessments of substantial additional taxes and/or fines or penalties relating to ongoing or future audits. The unfavorable resolution of any audits or litigation could have an adverse effect on our financial position and results of operations. Future changes in domestic or international tax laws and regulations could also adversely affect our income tax liabilities. Recent developments, including the European Commission's investigations of local country tax authority rulings and whether those rulings comply with European Union rules on state aid, as well as the Organization for Economic Co-operation and Development's project on Base Erosion and Profit Shifting, may result in changes to long-standing tax principles. Any such changes could adversely affect our effective tax rate or result in higher cash tax liabilities.

***Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns.***

From time to time, we may invest in business infrastructure, acquisitions of new businesses, and expansion of existing businesses, such as our retail operations, which require substantial cash investment and management attention. We believe cost effective investments are essential to business growth and profitability; however, significant investments are subject to risks and uncertainties inherent in acquiring or expanding a business. The failure of any significant investment to provide the returns or profitability we expect or the failure to integrate newly acquired businesses could have a material adverse effect on our financial results and divert management attention from more profitable business operations.

***If our internal controls are ineffective, our operating results and market confidence in our reported financial information could be adversely affected.***

Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls or if we experience difficulties in their implementation, our business and operating results and market confidence in our reported financial information could be harmed, we could incur significant costs to evaluate and remediate weaknesses, and we could fail to meet our financial reporting obligations.

As of December 31, 2015, we identified material weaknesses in our internal control over financial reporting, which led us to conclude that our internal control over financial reporting as of such date was not effective. The material weaknesses identified were related to controls over the period end closing procedures and inventory monitoring, which we believe have been remediated as of December 31, 2016 as further explained in Item 9A. *Controls and Procedures* in Part II of this Form 10-K.

The existence of a material weakness precludes management from concluding that our internal control over financial reporting is effective and precludes our independent auditors from issuing an unqualified opinion that our internal controls are effective. In addition, a material weakness could cause investors to lose confidence in our financial reporting and may negatively affect the price of our common stock. We also can make no assurances that we will be able to remediate any future internal control deficiencies timely and in a cost effective manner. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we are unable to satisfactorily remediate future deficiencies or if we discover other deficiencies in our internal control over financial reporting, such deficiencies may lead to misstatements in our financial statements or otherwise negatively impact our business, financial results and reputation.

***Natural disasters could negatively impact our operating results and financial condition.***

Natural disasters such as earthquakes, hurricanes, tsunamis or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, and the consequences and effects thereof, including damage to our supply chain, manufacturing or distribution centers, retail locations, energy shortages, and public health issues, could disrupt our operations or the operations of our vendors other suppliers, or customers, or result in economic instability that may negatively impact our operating results and financial condition. Additionally, certain catastrophes are not covered by our general insurance policies, which could result in significant unrecoverable losses.

***Our restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of an investment in our stock.***

Our restated certificate of incorporation, amended and restated bylaws, and Delaware corporate law each contain provisions that could delay, defer, or prevent a change in control of us or changes in our management. These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions, which may prevent a change of control or changes in our management that a stockholder might consider favorable. In addition, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of us. Any delay or prevention of a change of control or change in management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to decline.

### Risks Specific to Our Capital Stock

***The issuance of 200,000 shares of our Series A Convertible Preferred Stock ("Series A") to Blackstone Capital Partners VI L.P. ("Blackstone") in 2014 and certain of its permitted transferees reduces the relative voting power of holders of our common stock, may dilute the ownership of such holders, and may adversely affect the market price of our common stock.***

On January 27, 2014, we issued 200,000 shares of Series A Preferred Stock to Blackstone and certain of its permitted transferees (collectively, the "Blackstone Purchasers") pursuant to an Investment Agreement between us and Blackstone, dated December 28, 2013 (as amended, the "Investment Agreement"). The Blackstone Purchasers currently own all of the outstanding shares of Series A Preferred Stock, and based on the number of shares of our common stock outstanding as of December 31, 2016, the Blackstone Purchasers collectively own Series A Preferred Stock convertible into approximately 15.8% of our common stock. As holders of our Series A Preferred Stock are entitled to vote, on an as-converted basis, together with holders of our common stock as a single class on all matters submitted to a vote of our common stockholders, the issuance of the Series A Preferred Stock to the Blackstone Purchasers has effectively reduced the relative voting power of the holders of our common stock.

In addition, conversion of the Series A Preferred Stock to common stock will dilute the ownership interest of existing holders of our common stock, and any sales in the public market of the common stock issuable upon conversion of the Series A Preferred Stock could adversely affect prevailing market prices of our common stock. We have granted the Blackstone Purchasers registration rights in respect of the shares of Series A Preferred Stock and any shares of common stock issued upon conversion of the Series A Preferred Stock. These registration rights would facilitate the resale of such securities into the public market, and any such resale would increase the number of shares of our common stock available for public trading. Sales by the Blackstone Purchasers of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.

***We are required to pay regular dividends on the Series A issued to Blackstone in 2014, which ranks senior to our common stock, and we may be required under certain circumstances to repurchase the outstanding shares of Series A Preferred Stock; such obligations could adversely affect our liquidity and financial condition.***

The Series A Preferred Stock ranks senior to our common stock with respect to dividend rights, and holders of Series A Preferred Stock are entitled to quarterly cumulative cash dividends at a rate of 6% per annum of the stated value of $1,000 per share. If we fail to make timely dividend payments, the dividend rate will increase to 8% per annum until such time as all accrued but unpaid dividends have been paid in full. In addition, the holders of our Series A Preferred Stock have certain redemption rights, including upon certain change in control events involving us, which, if exercised, could require us to repurchase all of the outstanding shares of Series A Preferred Stock at 100% or more of the stated value of the shares, plus all accrued but unpaid dividends. Our obligations to pay regular dividends to the holders of our Series A Preferred Stock or any required repurchase of the outstanding shares of Series A Preferred Stock could impact our liquidity and reduce the amount of cash flows available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes. Our obligations to the holders of Series A Preferred Stock could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our business and financial results.

***Blackstone may exercise significant influence over us, including through its ability to elect up to two members of our Board of Directors.***

As of December 31, 2016, the shares of Series A Preferred Stock owned by the Blackstone Purchasers represent approximately 15.8% of the voting rights of our common stock, on an as-converted basis, so the Blackstone Purchasers will have the ability to significantly influence the outcome of any matter submitted for the vote of our stockholders. In addition, the Certificate of Designations of the Series A Preferred Stock grants certain consent rights to the holders of Series A Preferred Stock in respect of certain actions by the Company, including the issuance of *pari passu* or senior equity securities of the Company, certain amendments to our certificate of incorporation or bylaws, any increase in the size of our Board of Directors (the "Board") above eight members, the payment of certain distributions to our stockholders, and the origination or refinancing of a certain level of indebtedness. The Blackstone Purchasers may have interests that diverge from, or even conflict with, those of our other stockholders. For example, Blackstone and its affiliates may have an interest in directly or indirectly pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their other equity investments, even though such transactions might involve risks to us. Blackstone and its affiliates are in the business of making or advising on investments in companies, including businesses that may directly or indirectly compete with certain portions of our business. They may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

In addition, the Investment Agreement grants Blackstone certain rights to designate directors to serve on our Board. For so long as the Blackstone Purchasers (i) beneficially own at least 95% of the Series A Preferred Stock or the as-converted common stock purchased pursuant to the Investment Agreement or (ii) maintain beneficial ownership of at least 12.5% of our outstanding common stock (the "Two-Director Threshold"), Blackstone will have the right to designate for nomination two directors to our Board. For so long as the Blackstone Purchasers beneficially own shares of Series A Preferred Stock or the as-converted common stock purchased pursuant to the Investment Agreement that represent less than the Two-Director Threshold but more than 25% of the number of shares of the as-converted common stock purchased pursuant to the Investment Agreement, Blackstone will have the right to designate for nomination one director to our Board. The directors designated by Blackstone are entitled to serve on Board committees, subject to applicable law and stock exchange rules.

## Properties

As filed, 2,383 characters.

Our principal executive and administrative offices are located at 7477 East Dry Creek Parkway, Niwot, Colorado 80503. We lease all of our domestic and international facilities. We currently enter into short-term and long-term leases for kiosk, manufacturing, office, retail, and warehouse space. The terms of our leases include fixed monthly rents and/or contingent rents based on percentage of revenues for certain of our retail locations, and expire at various dates through the year 2033. The general location, use and approximate size of our principal properties, and the reportable operating segment are given below.

| Location | Reportable Operating Segment | Use | Approximate Square Feet | Expiration (1) |
| --- | --- | --- | ---: | --- |
| Ontario, California | Americas | Warehouse | 339,000 | Mar 2019 |
| Shenzen, China | Asia Pacific | Warehouse/offices | 266,000 | Jun 2017 |
| Rotterdam, the Netherlands | Europe | Warehouse | 174,000 | Dec 2021 |
| Leon, Mexico | Americas, Other Businesses | Manufacturing/warehouse/offices | 166,000 | Mar 2019 |
| Narita, Japan | Asia Pacific | Warehouse | 156,000 | Apr 2019 |
| Niwot, Colorado | Americas | Corporate headquarters and regional offices | 98,000 | Jun 2021 |
| Padova, Italy | Americas, Other Businesses | Manufacturing/warehouse/offices | 45,000 | Sep 2018 |
| Hoofddorf, the Netherlands | Europe | Regional offices | 31,000 | May 2020 |
| Singapore | Asia Pacific | Regional offices | 17,000 | Dec 2018 |
| Westwood, Massachusetts | Americas | Global Commercial Center | 16,000 | Sep 2021 |
| Tokyo, Japan | Asia Pacific | Regional offices | 14,000 | Oct 2018 |
| Shanghai, China | Asia Pacific | Regional offices | 13,000 | Jul 2018 |
| Bhiwandi, India | Asia Pacific | Warehouse | 11,000 | Oct 2017 |
| Moscow, Russia (2) | Europe | Warehouse/offices | 11,000 | Dec 2016 |

(1) Expiration of the initial or existing lease term, excluding optional renewals.

(2) On month-to-month renewal after December 2016.

In addition to the principal properties listed above, we maintain sales offices in the United States, Canada, South America, Hong Kong, Australia, Korea, China, the United Arab Emirates, India and Europe. We also lease more than 550 retail, outlet and kiosk/store in store locations worldwide. See Item 1. *Business* of this Form 10-K for further discussion regarding global company-operated stores.

## Legal proceedings

As filed, 3,130 characters.

The Company is currently subject to an audit by U.S. Customs & Border Protection (“CBP”) in respect of the period from 2006 to 2010. In October 2013, CBP issued the final audit report. In that report CBP projects that unpaid duties totaling approximately $12.4 million are due for the period under review and recommends collection of the duties due. The Company responded that these projections are erroneous and provided arguments that demonstrate the amount due in connection with this matter is considerably less than the projection. Additionally, on December 12, 2014, we made an offer to settle CBP’s potential claims and paid $3.5 million. In 2016, after discussions with CBP's local counsel, we increased our settlement offer to $7.0 million and paid an additional $3.5 million in the quarterly period ended December 31, 2016. The revised offer is subject to formal acceptance by the CBP. At this time, it is not possible to determine how long this process will take or to predict whether a negotiated settlement can be reached. Likewise, if a settlement cannot be reached, it is not possible to predict with any certainty whether CBP will seek to assert a claim for penalties in addition to any unpaid duties, but such an assertion is a possibility.

We are currently subject to an audit by the Brazilian Federal Tax Authorities related to imports of footwear from China between 2010 and 2014. On January 13, 2015, we were notified about the issuance of assessments totaling approximately $4.5 million for the period January 2010 through May 2011. The Company has disputed these assessments and asserted defenses to the claims. On February 25, 2015, we received additional assessments totaling approximately $10.2 million related to the remainder of the audit period. We have also disputed these assessments and asserted defenses and filed appeals to these claims. On May 11, 2016, we were notified of a decision rejecting the defense filed against the first assessment covering the period of January 2010 through May 2011. We filed an appeal against that decision on June 8, 2016. It is anticipated that this matter will take up to two or more years to be resolved. It is not possible at this time to predict the outcome of this matter.

For all other claims and other disputes, where we are able to estimate possible losses or a range of possible losses, we estimate that as of December 31, 2016, it is reasonably possible that losses associated with these claims and other disputes could potentially exceed amounts accrued by us by up to $0.4 million.

In the aggregate, the Company has accrued $7.4 million associated with our estimated obligations related to legal claims, which is reported in the consolidated balance sheet in 'Accrued expenses and other liabilities'.

Although the Company is subject to other litigation from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, the Company is not party to any other pending legal proceedings that we believe would reasonably have a material adverse impact on our business and financial results.

## Management's discussion and analysis

As filed, 114,375 characters.

### Business Overview

Crocs, Inc. and its consolidated subsidiaries (collectively, the “Company,” “Crocs,” “we,” “our,” or “us”) are engaged in the design, development, manufacturing, worldwide marketing, distribution and sale of casual lifestyle footwear and accessories for men, women, and children. The broad appeal of our footwear has allowed us to market our products through a wide range of distribution channels, our own Crocs single-branded stores including both full price and outlet stores, our own e-commerce sites, traditional multi-branded stores including family footwear stores, sporting goods stores and a variety of specialty and independent retail channels, and third-party e-commerce sites. In select markets we also sell to distributors that are typically granted the rights to distribute our products in a given geographical area.

### Known or Anticipated Trends

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

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

### Use of Non-GAAP Financial Measures

In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present “non-GAAP selling, general, and administrative expenses”, which is a non-GAAP financial measure, within this Management's Discussion and Analysis of Financial Condition and Results of Operation (“MD&A”). Adjusted results exclude the impact of items that management believes affect the comparability or underlying business trends in our consolidated financial statements in the periods presented.

We also present certain information related to our current period results of operations in this MD&A through “constant currency”, which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable operating segments under U.S. GAAP. Constant currency represents current period results that have been recast using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.

Management uses adjusted results to assist in comparing business trends from period to period on a consistent non-GAAP basis in communications with the Board, stockholders, analysts, and investors concerning our financial performance. We believe that these non-GAAP measures are useful to investors and other users of our consolidated financial statements as an additional tool to evaluate operating performance. We believe they also provide a useful baseline for analyzing trends in our operations. Investors should not consider these non-GAAP measures in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. Please refer to our ‘Results of Operations’ within this section for a reconciliation of adjusted selling, general and administrative expenses to U.S. GAAP selling, general and administrative expenses.

### 2016 Financial Highlights

During the year ended December 31, 2016, we experienced a decrease in our revenues of 5.0% compared to the year ended December 31, 2015. The decrease in 2016 revenues as compared to 2015 revenues was due to: (i) lower sales volumes, including store closures, which reduced revenues by $46.3 million, or 4.2%; (ii) lower average selling prices which decreased revenues by $4.7 million, or 0.5%; and (iii) unfavorable changes in exchange rates which reduced revenues by $3.4 million or 0.3%.

The following are significant developments in our business during the year ended December 31, 2016:

- We sold 56.1 million pairs of shoes worldwide, a decrease of 4.2% from 58.6 million compared to 2015.
- Gross profit decreased $10.6 million, or 2.1%, to $500.2 million. However, our gross profit percentage increased 150 basis points to 48.3% compared to 46.8% in 2015, in spite of unfavorable exchange rates which reduced our gross profit by $2.2 million, or 1.5%.
- Selling, general and administrative ("SG&A") expenses decreased $55.9 million, or 10.0%, to $503.2 million compared to the same period in 2015. This change was primarily driven by decreased sales, building and bad debt expense.
- We incurred $3.1 million in asset impairments during 2016, which included $2.7 million related to certain underperforming retail locations in our Americas, Europe, and Asia Pacific segments, and $0.4 million of goodwill in a retail business within our Europe segment.
- Net loss attributable to common stockholders decreased $66.3 million to a net loss of $31.7 million compared to a net loss of $98.0 million for 2015. Net loss per share was $0.43 during the year ended December 31, 2016 compared to net loss per share of $1.30 during the year ended December 31, 2015. The decrease in our net loss is primarily the result of decreased asset impairment charges, restructuring charges and SG&A expenses.
- We continued to focus on improving the efficiency and effectiveness of our operations, including continuing to shift the mix of our retail business from full-price retail to outlet stores. During the year ended December 31, 2016, we opened 50 outlet stores and closed 66 full-price stores. In total, during the year ended December 31, 2016 we opened 83 stores and closed 84 stores.
- We continued to focus on simplifying our product line and disciplined inventory management and reduced our inventory by $21.2 million or 12.6% from $168.2 million to $147.0 million.
- During 2016, we did not repurchase any shares.

### Future Outlook

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

(1) developing **powerful product stories** supported with effective marketing,

(2) driving global **cohesive brand positioning,**

(3) increasing **working marketing spend,**

(4) enhancing engagement with **key wholesale accounts,**

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

(6) prioritizing investment in **larger-scale geographies,**

(7) streamlining the **cost structure** by reducing duplication & complexity across regional offices & the corporate center, and

(8) investing to drive **supply chain effectiveness and reliability.**

We believe these changes will better position Crocs to adapt to changing consumer demands and global economic developments. We are focusing on our core molded footwear heritage by narrowing our product line with an emphasis on higher margin units, as well as developing innovative new casual lifestyle footwear platforms. By streamlining the product portfolio and reducing non-core product development, we believe we will create a more powerful consumer connection to the brand.

We are refining our business model around the world, prioritizing direct investment in larger-scale geographies to focus our resources on the markets with the largest growth prospects, moving away from direct investment in the retail and wholesale businesses in smaller markets and transferring significant commercial responsibilities to distributors and third party agents. Further, we intend to expand our engagement with leading wholesale accounts in select markets to drive sales growth, optimize product placement and enhance brand reputation.

Additionally, we addressed the declining collection rates we experienced in 2015 from our China operations by limiting or terminating our relationship with distributors who we have identified as being a significant credit risk. In 2015, we recorded bad debts expense of $23.2 million associated with our China operations. As of December 31, 2016, we have terminated our relationship with multiple distributors in China and we expanded our relationship with existing business partners who are in a stronger financial position and who have a proven track record. We have also implemented a more restrictive credit policy for several China distributors to reduce our exposure in that market. For the year ended December 31, 2016, our bad debt expense related to our China operations was lower by $22.1 million compared to the year ended December 31, 2015. We are unable to predict future economic conditions in China, but if economic conditions in China continue to decline, we may experience further declines in consumer demand in our China markets. As our China operations represents 7% of our total revenues, the net impact of declining sales volumes in China could have a material adverse impact on our financial results in future periods.

### Results of Operations

### Comparison of the Years Ended December 31, 2016 to 2015

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

|  | Year Ended December 31, 2016 | 2015 | Change $% |  |  |
| --- | ---: | ---: | ---: | --- | ---: |
| Revenues | $1,036,273 | $1,090,630 | $(54,357) |  | (5.0)% |
| Cost of sales | 536,109 | 579,825 | (43,716) |  | (7.5)% |
| Gross profit | 500,164 | 510,805 | (10,641) |  | (2.1)% |
| Selling, general and administrative expenses | 503,174 | 559,095 | (55,921) |  | (10.0)% |
| Restructuring charges | — | 8,728 | (8,728) |  | (100.0)% |
| Asset impairments | 3,144 | 15,306 | (12,162) |  | (79.5)% |
| Loss from operations | (6,154) | (72,324) | 66,170 |  | (91.5)% |
| Foreign currency loss, net | (2,454) | (3,332) | 878 |  | (26.4)% |
| Interest income | 692 | 967 | (275) |  | (28.4)% |
| Interest expense | (836) | (969) | 133 |  | (13.7)% |
| Other income, net | 1,539 | 914 | 625 |  | 68.4% |
| Income (loss) before income taxes | (7,213) | (74,744) | 67,531 |  | (90.3)% |
| Income tax expense | (9,281) | (8,452) | (829) |  | 9.8% |
| Net loss | $(16,494) | $(83,196) | $66,702 |  | (80.2)% |
| Dividends on Series A convertible preferred stock | (12,000) | (11,833) | (167) |  | 1.4% |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (3,244) | (2,978) | $(266) |  | 8.9% |
| Net loss attributable to common stockholders | $(31,738) | $(98,007) | $66,269 |  | (67.6)% |
| Net loss per common share: |  |  |  |  |  |
| Basic | $(0.43) | $(1.30) | $0.87 |  | (66.9)% |
| Diluted | $(0.43) | $(1.30) | $0.87 |  | (66.9)% |
| Gross profit | 48.3% | 46.8% | 143 | bps | 3.1% |
| Operating loss | (0.6)% | (6.6)% | 600 | bps | 6.1% |
| Footwear unit sales | 56,097 | 57,763 | (1,666) |  | (3.7)% |
| Average footwear selling price | $18.21 | $18.53 | $(0.32) |  | (1.7)% |

***Revenues.*** During the year ended December 31, 2016, revenue decreased 5.0% compared to the same period in 2015. The decrease in revenue is due to the net impact of (i) a $46.3 million, or 4.2%, decrease associated with lower sales volumes, (ii) a $4.7 million or 0.5% decrease associated with lower average selling prices per pair, and (iii) a $3.4 million or 0.3% decrease associated with unfavorable changes in foreign currency rates.

During the year ended December 31, 2016, revenues from our wholesale channel decreased $45.0 million, or 7.6%, compared to the same period in 2015. The decrease in wholesale channel revenue is driven primarily by a $23.4 million decrease in our Asia Pacific segment due to lower average selling prices related to a lower priced product mix, the unfavorable impact of foreign currency translation, and store closures.

During the year ended December 31, 2016, revenues from our retail channel decreased $18.9 million, or 5.0%, compared to the same period in 2015, primarily driven by the Asia Pacific segment, which decreased $11.3 million primarily as a result of a lower average selling prices related to a lower priced product mix and the unfavorable impact of foreign currency translation.

During the year ended December 31, 2016, revenues from our e-commerce channel increased $9.5 million, or 7.9%, compared to the same period in 2015, primarily driven by increased sales volumes in all segments, partially offset by the unfavorable impact of foreign currency translation and lower average selling prices, also in all segments. Our e-commerce sales totaled approximately 12.6% and 11.1% of our consolidated net sales during the year ended December 31, 2016 and 2015, respectively. We continue to benefit from our online presence through e-commerce sites worldwide enabling us to have increased access to our consumers in a low cost, attractive manner and providing us with an opportunity to educate them about our products and brand.

***Cost of sales.*** During the year ended December 31, 2016, cost of sales decreased $43.7 million, or 7.5%, compared to the same period in 2015. The decrease in cost of sales was primarily due to the net impact of: (i) a $24.6 million, or 4.2% decrease, due to lower sales volumes, (ii) an $18.6 million, or 3.2%, decrease due to a lower average cost per unit sold, and (iii) a $0.5 million, or 0.1%, decrease due to the impact of foreign currency translation. The impact of sales volumes on cost of sales was reduced by approximately $1.6 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Gross profit.*** During the year ended December 31, 2016, gross profit decreased $10.6 million, or 2.1%, and gross margin increased 143 basis points to 48.3% compared to the same period in 2015. The decrease in gross profit is primarily due to the net impact of: (i) a $21.6 million, or 4.2%, decrease due to lower sales volumes, (ii) a $14.0 million, or 2.7%, increase due to the combined impact of a lower average cost of sales per unit partially offset by a lower average selling price, and (iii) a $3.0 million, or 0.6%, decrease due to the unfavorable impact of foreign currency translation. Gross profit declined by approximately $1.0 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***SG&A.*** SG&A decreased $55.9 million, or 10.0%, during the year ended December 31, 2016 compared to the same period in 2015. This change was primarily driven by (i) bad debt expense decrease of $22.8 million, (ii) an $8.7 million decrease in rent expenses associated with contingent rents and closed retail stores partially offset by (iii) $4.3 million increase in outside services expense. During the year ended December 31, 2016, our bad debt expense was $3.2 million compared to $26.0 million in the same period in the prior year. Substantially all of this decrease in bad debt expense is due to stricter credit collection policies from our China operations, which is included in our Asia Pacific segment.

During the year ended December 31, 2016 and 2015, our bad debt expense was $3.2 million and $26.0 million, respectively. Of the $3.2 million expense recorded during the year ended December 31, 2016, immaterial amounts related to our China operations. The decrease in bad debt expense associated with our China operations is primarily due to the implementation of a more restrictive credit policy for several China distributors in 2016, to reduce our exposure in that market.

In addition to these fluctuations, we have identified certain SG&A expenses that affect the comparability or underlying business trends in our consolidated financial statements. The following table summarizes these expenses and describes the additional drivers of the decrease above by reconciling our U.S. GAAP SG&A to non-GAAP SG&A.

*(in thousands)*

| Selling general and administrative expenses reconciliation: | Year Ended December 31, 2016 | 2015 |
| --- | ---: | ---: |
| U.S. GAAP SG&A expenses | $503,174 | $559,095 |
| Reorganization charges (1) | (458) | (8,391) |
| Customs audit settlements (2) | (354) | — |
| ERP implementation and other contract termination fees(3) | (1,361) | (12,569) |
| Improper disbursements and related legal fees (4) | — | (7,895) |
| Bad debt expense related to South Africa (5) | — | (613) |
| Total adjustments | (2,173) | (29,468) |
| Non-GAAP Selling, general and administrative expenses | $501,001 | $529,627 |

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

(2) Amount paid in partial settlement of a customs audit.

(3) Represents operating expenses incurred in 2015 related to the implementation of our enterprise resource planning system ("ERP") and the termination of certain information technology, royalty and other contracts. Expense in 2016 relates to early lease termination costs.

(4) Represents legal expenses related to invalid disbursements that occurred in 2015 and California wage settlements.

(5) Represents certain bad debt and impairment expenses in 2015 related to the sales of operations in South Africa.

***Restructuring charges.*** During 2015, we incurred $8.7 million of restructuring charges related to the 2014 plan to create efficiencies and close global retail locations. The Company concluded its restructuring efforts on December 31, 2015.

***Asset impairment charges.*** During the years ended December 31, 2016 and 2015, we incurred $2.7 million and $15.3 million, respectively, in retail asset impairment charges related to certain underperforming retail locations, primarily in our Americas segment, that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over their remaining economic life. In addition, we incurred $0.4 million in goodwill impairment charges.

***Foreign currency loss, net. ‘***Foreign currency loss, net’ consists of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies and foreign currency derivative instruments. During the year December 31, 2016, we recognized a net loss of $2.5 million compared to a net loss of $3.3 million on foreign currency transactions during the year ended December 31, 2015.

***Income tax expense.*** During the year ended December 31, 2016, we recognized income tax expense of $9.3 million on pre-tax book loss of $7.2 million, representing an effective tax rate of (128.7)%, compared to income tax expense of $8.5 million on pre-tax book loss of $74.7 million in 2015, which represented an effective tax rate of (11.3)%. Generally, our effective tax rate has varied dramatically during 2016 and in recent years due to differences in our profitability level and relative operating earnings across multiple jurisdictions, and is most notably impacted by the significant amount of operating losses that cannot be benefitted for tax purposes.

The following are some of our key jurisdictions and the income tax expense for each in 2016 and 2015, respectively:

*(in thousands)*

|  | For the Year Ended December 31, 2016 United States | Netherlands | Japan | Canada | China | Korea | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Book income (loss) | $(55,617) | $39,184 | $(5,229) | $740 | $821 | $2,529 | $10,359 | $(7,213) |
| Income tax expense (benefit) | 437 | 4,711 | — | 361 | (473) | 511 | 3,734 | 9,281 |
| Effective tax rate | (0.8)% | 12.0% | —% | 48.8% | (57.6)% | 20.2% | 36.0% | (128.7)% |

*(in thousands)*

|  | For the Year Ended December 31, 2015 United States | Netherlands | Japan | Canada | China | Korea | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Book income (loss) | $(83,537) | $25,988 | $(69) | $(850) | $(21,572) | $4,141 | $1,155 | $(74,744) |
| Income tax expense (benefit) | (3,345) | 4,262 | 2,345 | (391) | 4,433 | 1,081 | 67 | 8,452 |
| Effective tax rate | 4.0% | 16.4% | (3,398.6)% | 46.0% | (20.5)% | 26.1% | 5.8% | (11.3)% |

The differences in total tax expense and effective rate variances in the table above resulted primarily from the following factors. We incurred significant changes in many of the key jurisdictions in book income/loss (U.S. losses of $55.6 million in 2016 versus $83.5 million in 2015, Netherlands income of $39.2 million in 2016 versus $26.0 million in 2015, Japanese losses of $5.2 million in 2016 versus $0.1 million in 2015, Chinese income of $0.8 million in 2016 versus losses of $21.6 million in 2015). Additionally, differences in the Netherlands income tax rate relates to consistent withholding tax expense year over year, compared with increased operating income in that jurisdiction during the same period. In 2016, the Company recorded a taxable loss position in Japan with no corresponding tax benefit realized as a result of a valuation allowance. In 2015, the total tax provision in Japan was impacted by the settlement of uncertain tax positions which resulted in a benefit of approximately $3.6 million which was more than offset by the accrual of expense for an increased valuation allowance of $4.8 million. While there are effective tax rate differences in China related to differences in operating losses, we also incurred additional tax expense in 2015 of approximately $9.5 million due to increased valuation allowances established during 2015 which are unlikely to recur.

The tax effect of non-deductible/non-taxable items changed from a $2.2 million tax benefit in 2015, which is a favorable rate impact of 2.9%, to a $2.7 million tax expense in 2016, which is an unfavorable rate impact of 37.4%. The expense recognized in 2016 primarily relates to non-deductible executive and foreign share-based compensation. We anticipate that these expenses will recur in the foreseeable future.

The change in the 'Effect of rate differences' line of the rate reconciliation table in Note 13 — Income Taxes is principally driven by differences in pre-tax book income between the periods compared, and the source of this income, which is subject to different jurisdictional tax rates. During 2016, the effect of rate differences resulted in a $12.6 million tax benefit compared to a $3.7 million tax benefit in 2015. The primary reason for this incremental benefit results from increased foreign book earnings included in consolidated results. During 2016, foreign book income before taxes was $48.4 million as compared with $8.8 million in 2015, all of which is subject to tax at rates lower than the U.S. statutory rate. Further, we employ a tax planning strategy that directly impacts the total tax expense directly attributable to the level of foreign earnings in the specific jurisdictions. However, we note that the impact on the effective tax rate is different due to higher book earnings recorded in 2016 compared to 2015. The relative impact of this has existed in the recent past; however, there is no assurance that this circumstance will be recurring beyond 2019. Through at least 2019, we will continue to have an equivalent favorable impact on the tax provision and effective tax rate based on the specific foreign earnings. We currently do not anticipate significant near-term changes to our overall tax strategies, meaning that relative income tax benefits provided from the expected U.S. federal tax rate are anticipated to recur in the foreseeable future. The amount of this tax benefit, if any, is subject to continued profitability in various foreign jurisdictions.

The impact of the 'U.S. tax on foreign earnings' line of the rate reconciliation table includes the impact of foreign inclusions and the tax expense accrued on undistributed foreign earnings net of the related foreign tax credits. During 2016, inclusions for these items resulted in $23.1 million of tax expense, reflecting an unfavorable impact of 320.6 % on the total provision. During 2015, inclusions for these items resulted in $82.3 million of tax expense, reflecting an unfavorable impact of 110.0 % on the total provision. Foreign inclusions are primarily related to business results and cash repatriations during a specific period as well as the accrual on foreign earnings. During 2016, we provided for U.S. income taxes on an additional $50 million of current year undistributed foreign earnings, for a combined total of $178 million of undistributed foreign earnings for which U.S. tax has been accrued, representing a total deferred tax liability of approximately $32.4 million. We further note that actual cash repatriations decreased from approximately $127.3 million in 2015 to approximately $37 million in 2016 (and note that no withholding tax is due with respect to the repatriation of these earnings to the U.S. and none has been provided for). Furthermore during 2015, there was a $24.6 million tax charge recognized for the accrual of unremitted foreign earnings as compared to a $7.9 million tax charge in 2016 for unremitted foreign earnings. As of 2016, we anticipate continued repatriation of foreign earnings to the extent of the $178 million currently accrued. We will also continue to assess various cash needs in the U.S. and abroad, which could result in the prospective accrual and repatriation of some or all future current year earnings on an annual basis.

We continue to evaluate the realizability of our deferred tax assets. As such, additional valuation allowances of $34.3 million were recorded on deferred tax assets are not anticipated to be realized. This is in addition to the $56.6 million accrued on deferred tax assets during 2015. Furthermore, the change in the valuation allowance reflected on the cumulative schedule of deferred tax assets includes $18.3 million, which does not impact the tax provision because this amount reflects the cumulative impact of unrecorded tax attributes related to the adoption in 2016 of new US GAAP guidance related to income tax effect of share-based compensation and changes in cumulative translation adjustment. The specific circumstances regarding management's assertion of the realizability of certain deferred tax assets is discussed as part of the disclosures in Note 13 — Income Taxes. We maintain total valuation allowances of approximately $90.9 million as of December 31, 2016, which may be reduced in the future depending upon the achieved or sustained profitability of certain entities.

During both 2015 and 2016, we recorded tax expense for audits settled during the year of $1.2 million and $0.3 million, respectively. The amount included in settlements during 2016 is net against total uncertain tax position releases during the same period relating to the same positions. Furthermore, the uncertain tax benefits line item in 2016 includes net accruals related to current year positions recorded, and is consistent with amounts accrued during prior years. We have released a significant portion of historical uncertain tax benefits based on effective and actual settlements. As such, there is not currently an expectation that uncertain tax positions will significantly impact our tax expense on an ongoing basis.

We incur state income tax losses during the period due to net operating losses recorded in the U.S., as well as applicable state modifications related to the taxability of foreign dividends. The tax provision benefit of these losses are offset by a valuation allowance. We are subject to certain minimal state income taxes.

### Revenues by Channel

*(in thousands)*

| Wholesale: | Year Ended December 31, 2016 | 2015 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $202,211 | $210,887 | $(8,676) | (4.1)% | $(5,555) | (2.6)% |
| Asia Pacific | 232,541 | 255,897 | (23,356) | (9.1)% | (26,408) | (10.3)% |
| Europe | 110,511 | 123,131 | (12,620) | (10.2)% | (11,441) | (9.3)% |
| Other businesses | 745 | 1,096 | (351) | (32.0)% | (352) | (32.1)% |
| Total wholesale | 546,008 | 591,011 | (45,003) | (7.6)% | (43,756) | (7.3)% |
| **Retail:** |  |  |  |  |  |  |
| Americas | 191,855 | 197,306 | (5,451) | (2.8)% | (5,168) | (2.6)% |
| Asia Pacific | 125,037 | 136,320 | (11,283) | (8.3)% | (12,077) | (8.9)% |
| Europe | 42,712 | 44,873 | (2,161) | (4.8)% | (189) | (0.4)% |
| Total retail | 359,604 | 378,499 | (18,895) | (5.0)% | (17,434) | (4.6)% |
| **E-commerce:** |  |  |  |  |  |  |
| Americas | 72,940 | 68,017 | 4,923 | 7.2% | 5,088 | 7.5% |
| Asia Pacific | 37,500 | 32,274 | 5,226 | 16.2% | 5,741 | 17.8% |
| Europe | 20,221 | 20,829 | (608) | (2.9)% | (578) | (2.8)% |
| Total e-commerce | 130,661 | 121,120 | 9,541 | 7.9% | 10,251 | 8.5% |
| **Total revenues** | $1,036,273 | $1,090,630 | $(54,357) | (5.0)% | $(50,939) | (4.7)% |

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

***Wholesale channel revenues.*** During the year ended December 31, 2016, revenues from our wholesale channel decreased $45.0 million, or 7.6%, compared to the same period in 2015. The decrease in wholesale channel revenues was due to the net impact of: (i) a $42.0 million, or 7.1%, decrease in sales volumes, (ii) a $3.6 million, or 1.0%, decrease due to a lower average selling price, and (iii) a $1.5 million, or 0.4%, decrease due to the unfavorable impact of foreign currency translation. Sales volumes for the year ended December 31, 2016 were negatively impacted by approximately $8.4 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Retail channel revenues.*** During the year ended December 31, 2016, revenues from our retail channel decreased $18.9 million, or 5.0%, compared to the same period in 2015. The decrease in retail channel revenues was due to the net impact of: (i) a $13.8 million, or 3.7%, decrease in sales volumes, (ii) a $3.6 million, or 1.0%, decrease due to a lower average selling price, and (iii) a $1.5 million, or 0.4%, decrease due to the unfavorable impact of foreign currency translation.

***E-commerce channel revenues.*** During the year ended December 31, 2016, revenues from our e-commerce channel increased $9.5 million, or 7.9%, compared to the same period in 2015. The increase in e-commerce revenues was due to the net impact of: (i) a $30.2 million, or 24.9%, increase in sales volumes (primarily due to increased sales volumes in the Americas and Asia Pacific segments), (ii) a $20.0 million, or 16.4%, decrease due to a lower average selling price, and (iii) a $0.7 million, or 0.6%, decrease due to the unfavorable impact of foreign currency translation.

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

### Reportable Operating Segments

The following table sets forth information related to our reportable operating business segments for the years ended December 31, 2016 and 2015:

*(in thousands, except % data)*

| Revenues: | Year Ended December 31, 2016 | 2015 | Change $% |  | Constant Currency Change (3) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $467,006 | $476,210 | $(9,204) | (1.9)% | $(3,569) | (0.7)% |
| Asia Pacific | 395,078 | 424,491 | (29,413) | (6.9) | 3,331 | 0.8 |
| Europe | 173,444 | 188,833 | (15,389) | (8.1) | (3,181) | (1.7) |
| Total segment revenues | 1,035,528 | 1,089,534 | (54,006) | (5.0) | (3,419) | (0.3) |
| Other businesses | 745 | 1,096 | (351) | (32.0) | 1 | 0.1 |
| Total consolidated revenues | $1,036,273 | $1,090,630 | $(54,357) | (5.0)% | $(3,418) | (0.3)% |
| Operating income: |  |  |  |  |  |  |
| Americas | $58,844 | $49,422 | $9,422 | 19.1% | $(1,372) | (2.8) |
| Asia Pacific | 78,907 | 48,447 | 30,460 | 62.9 | 1,378 | 2.8 |
| Europe | 17,757 | 15,629 | 2,128 | 13.6 | (249) | (1.6) |
| Total segment operating income | 155,508 | 113,498 | 42,010 | 37.0 | (243) | (0.2) |
| Reconciliation of total segment operating income to income before income taxes: |  |  |  |  |  |  |
| Other businesses | (26,935) | (30,092) | 3,157 | (10.5) | 3,006 | (10.0) |
| Unallocated corporate and other (1) | (134,727) | (155,730) | 21,003 | (13.5) | 23,341 | (15.0) |
| Total consolidated operating income (loss) | $(6,154) | $(72,324) | $66,170 | (91.5) | $26,104 | (36.1) |
| Foreign currency transaction gain (loss), net | (2,454) | (3,332) | 878 | (26.4) |  |  |
| Interest income | 692 | 967 | (275) | (28.4) |  |  |
| Interest expense | (836) | (969) | 133 | (13.7) |  |  |
| Other income (expense), net | 1,539 | 914 | 625 | 68.4 |  |  |
| Income (loss) before income taxes | $(7,213) | $(74,744) | $67,531 | (90.3)% |  |  |

(1) Revenues for the year ended December 31, 2016 were negatively impacted by approximately $8.4 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

### Americas Operating Segment

***Revenues.*** During the year ended December 31, 2016, revenues for our Americas segment decreased $9.2 million, or 1.9%, compared to the same period in 2015. The decrease in the Americas segment revenues was due to the net impact of: (i) a $13.6 million, or 2.9%, decrease related to lower sales volumes, (ii) an $8.0 million, or 1.7%, increase related to an increase in the average sales price, and (iii) a $3.6 million, or 0.7%, decrease due to the unfavorable impact of foreign currency translation.

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

***Cost of Sales.*** During the year ended December 31, 2016, cost of sales for our Americas segment decreased $10.2 million, or 4.0%, compared to the same period in 2015. The decrease in the Americas segment cost of sales was due to the net impact of: (i) a $7.2 million, or 2.9%, decrease due to lower sales volumes, (ii) a $1.3 million, or 0.5%, decrease due to lower average costs per unit sold, and (iii) a $1.6 million, or 0.6%, decrease due to the impact of foreign currency translation.

***Gross Profit.*** During the year ended December 31, 2016, gross profit for the Americas segment increased $1.0 million, or 0.4%, and gross margin increased 115 basis points to 48.3% compared to the same period in 2015. The increase in the Americas segment gross profit is due to the net impact of: (i) an $6.4 million, or 2.9%, decrease due to lower sales volumes, (ii) an $9.3 million, or 4.2%, increase due to the combined impact of a higher average sales price and a lower average cost of sales per unit, and (iii) a $2.0 million, or 0.9%, decrease due to the impact of foreign currency translation.

***SG&A.*** During the year ended December 31, 2016, SG&A for our Americas segment decreased $1.7 million, or 1.0%, compared to the same period in 2015.

### Asia Pacific Operating Segment

***Revenues.*** During the year ended December 31, 2016, revenues for our Asia Pacific segment decreased $29.4 million, or 6.9%, compared to the same period in 2015. The decrease in the Asia Pacific segment revenues was due to the net impact of: (i) a $2.4 million, or 0.6%, decrease due to lower sales volumes, (ii) a $30.3 million, or 7.1%, decrease in the average sales price and (iii)

a $3.3 million, or 0.8%, increase due to the favorable impact of foreign currency translation. Sales volumes for the year ended December 31, 2016 were negatively impacted by approximately $8.4 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Cost of Sales.*** During the year ended December 31, 2016, cost of sales for our Asia Pacific segment decreased $20.9 million, or 10.8%, compared to the same period in 2015. The decrease in the Asia Pacific segment cost of sales was due to the net impact of: (i) a $1.1 million, or 0.6%, decrease due to lower sales volumes, (ii) a $21.6 million, or 11.2%, decrease due to lower average costs per unit sold, and (iii) a $1.5 million, or 1.5%, increase due to the impact of foreign currency translation. The impact of sales volumes on cost of sales includes approximately $8.5 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***Gross Profit.*** During the year ended December 31, 2016, gross profit for the Asia Pacific segment decreased $8.5 million, or 3.7%, and gross margin increase 190 basis points to 56.3% compared to the same period in 2015. The decrease in the Asia Pacific segment gross profit is due to the net impact of: (i) a $1.3 million, or 0.6%, decrease due to lower sales volumes, (ii) a $8.8 million, or 3.7%, decrease due to a lower average sales prices in excess of a lower average cost per unit, and (iii) a $1.5 million, or 0.6%, increase due to the impact of foreign currency translation. Gross profit declined by approximately $0.1 million as a result of the sale of our South Africa operations, which was completed on April 15, 2016.

***SG&A.*** During the year ended December 31, 2016, SG&A for our Asia Pacific segment decreased $29.6 million, or 17.2%, compared to the same period in 2015. The decrease in SG&A was primarily due to the net impact of: (i) a $25.4 million decrease associated with bad debt expense, (ii) a $5.5 million increase associated with services, (iii) a $6.3 million decrease in sales expense, (iv) a $5.0 million decrease in rent expense, and (v) other items that are individually insignificant.

### Europe Operating Segment

***Revenues.*** During the year ended December 31, 2016, revenues for our Europe segment decreased $15.4 million, or 8.1%, compared to the same period in 2015. The decrease in the Europe segment revenues was due to the net impact of: (i) a $22.8 million, or 12.1%, decrease due to lower sales volumes, (ii) a $10.6 million, or 5.7%, increase due to a higher average sales price, and (iii) a $3.2 million, or 1.7%, decrease due to the impact of foreign currency translation.

***Cost of Sales.*** During the year ended December 31, 2016, cost of sales for our Europe segment decreased $11.2 million, or 11.3%, compared to the same period in 2015. The decrease in the Europe segment cost of sales was mainly due to the net impact of: (i) a $12.0 million, or 12.1%, decrease due to lower sales volumes, (ii) a $2.3 million or 2.3%, increase due to higher average cost per unit sold and (iii) a $1.5 million, or 1.5%, decrease due to the impact of foreign currency translation.

***Gross Profit.*** During the year ended December 31, 2016, gross profit for the Europe segment decreased $4.2 million, or 4.7%, and gross margin increased 180 basis points to 48.9% compared to the same period in 2015. The decrease in the Europe segment gross profit is due to the net impact of: (i) a $10.8 million, or 12.1%, decrease due to lower sales volumes, (ii) a $8.3 million, or 9.3%, increase due to a higher average sales price in excess of higher costs per unit, and (iii) a $1.7 million, or 1.9%, decrease due to the impact of foreign currency translation.

***SG&A.*** During the year ended December 31, 2016, SG&A for our Europe segment decreased $2.6 million, or 3.8%, compared to the same period in 2015. The decrease in SG&A was primarily due to the net impact of: (i) a $2.0 increase in bad debt expense, (ii) a $0.9 million decrease in rent expense, and (iv) other items that are individually insignificant.

The changes in the number of our company-operated retail locations by reportable operating segment and type of store were:

| Company-operated retail locations Type | December 31, 2015 | Opened | Closed | December 31, 2016 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store in store | 98 | 14 | 14 | 98 |
| Retail stores | 275 | 19 | 66 | 228 |
| Outlet stores | 186 | 50 | 4 | 232 |
| Total | 559 | 83 | 84 | 558 |
| Operating segment |  |  |  |  |
| Americas | 196 | 7 | 13 | 190 |
| Asia Pacific | 261 | 67 | 58 | 270 |
| Europe | 102 | 9 | 13 | 98 |
| Total | 559 | 83 | 84 | 558 |

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

| Comparable store sales (retail only) (1) | Constant Currency (2) Year Ended December 31, 2016 | Year Ended December 31, 2015 |
| --- | ---: | ---: |
| Americas | (2.3)% | (3.2)% |
| Asia Pacific | (5.9)% | (4.5)% |
| Europe | 1.9% | 3.0% |
| Global | (3.0)% | (2.8)% |

38

| DTC comparable store sales (includes retail and e-commerce) (1) | Constant Currency (2) Year Ended December 31, 2016 | Year Ended December 31, 2015 |
| --- | ---: | ---: |
| Americas | 0.3% | 3.3% |
| Asia Pacific | (0.4)% | 3.0% |
| Europe | 0.2% | 7.8% |
| Global | 0.1% | 3.9% |

(1) Comparable store status is determined on a monthly basis. Comparable store sales includes 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 revenues. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening. E-commerce revenues are based on same site sales period over period.

(2) Reflects quarter over quarter change on a “constant currency” basis, which is a non-GAAP financial measure that restates current period results using prior year foreign exchange rates for the comparative period to enhance visibility of the underlying business trends, excluding the impact of foreign currency.

Comparable store sales (retail only) decreased 3.0% on a global basis for the year ended December 31, 2016, compared to a decrease of 2.8% for the year ended December 31, 2015. Direct to Consumer (DTC) comparable store sales, which includes retail and e-commerce, increased 0.1% on a global basis for the year ended December 31, 2016, compared to an increase of 3.9% for the year ended December 31, 2015.

***Impact on revenues due to foreign exchange rate fluctuations.*** Changes in average foreign currency exchange rates used to translate revenue from our functional currencies to our reporting currency during the year ended December 31, 2016 resulted in a $3.4 million decrease in revenue compared to the same period in 2015.

***Gross profit.*** During the year ended December 31, 2016, gross profit decreased $10.6 million, or 2.1%, compared to the same period in 2015. The decrease in gross profit was primarily attributable to the 5.0% decrease in revenue partially offset by the gross margin increase of 150 basis points compared to the same period in 2015 due to a lower selling price.

***Impact on gross profit due to foreign exchange rate fluctuations.*** Changes in average foreign currency exchange rates used to translate revenue and costs of sales from our functional currencies to our reporting currency during the year ended December 31, 2016 decreased our gross profit by $2.1 million, or 0.4%, compared to the same period in 2015.

### Comparison of the Years Ended December 31, 2015 to 2014

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

|  | Year Ended December 31, 2015 | 2014 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $1,090,630 | $1,198,223 | $(107,593) | (9.0)% |
| Cost of sales | 579,825 | 603,893 | (24,068) | (4.0) |
| Restructuring charges | — | 3,985 | (3,985) | (100.0) |
| Gross profit | 510,805 | 590,345 | (79,540) | (13.5) |
| Selling, general and administrative expenses | 559,095 | 565,712 | (6,617) | (1.2) |
| Restructuring charges | 8,728 | 20,532 | (11,804) | (57.5) |
| Asset impairments | 15,306 | 8,827 | 6,479 | 73.4 |
| Loss from operations | (72,324) | (4,726) | (67,598) | 1,430.3 |
| Foreign currency loss, net | (3,332) | (4,885) | 1,553 | (31.8) |
| Interest income | 967 | 1,664 | (697) | (41.9) |
| Interest expense | (969) | (806) | (163) | 20.2 |
| Other income, net | 914 | 204 | 710 | 348.0 |
| Loss before income taxes | (74,744) | (8,549) | (66,195) | 774.3 |
| Income tax (expense) benefit | (8,452) | 3,623 | (12,075) | (333.3) |
| Net loss | $(83,196) | $(4,926) | $(78,270) | 1,588.9% |
| Dividends on Series A convertible preferred stock | (11,833) | (11,301) | (532) | 4.7 |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (2,978) | (2,735) | (243) | 8.9 |
| Net loss attributable to common stockholders | $(98,007) | $(18,962) | $(79,045) | 416.9% |
| Net income (loss) per common share: |  |  |  |  |
| Basic | $(1.30) | $(0.22) | $(1.08) | 490.9% |
| Diluted | $(1.30) | $(0.22) | $(1.08) | 490.9% |
| Gross margin | 46.8% | 49.3% | (250) | (5.1)% |
| Operating margin | (6.6)% | (0.4)% | (620) | 1,550.0% |
| Footwear unit sales | 57,763 | 55,700 | 2,063 | 3.7% |
| Average footwear selling price | $18.53 | $20.92 | $(2.39) | (11.4)% |

***Revenues.*** During the year ended December 31, 2015, revenues declined $107.6 million, or 9.0%, compared to the same period in 2014. The decrease in revenues is due to the net impact of (i) a $85.3 million, or 7.1%, decrease associated with foreign currency exchange rate adjustments associated with a strong U.S. Dollar, (ii) a $37.8 million, or 3.1%, increase associated with higher sales volumes, and (iii) a $34.4 million, or 2.9%, decrease associated with store closures, partially offset by (iv) a $25.7 million, or 2.1%, decrease associated with a lower average selling price due to changes in product mix.

During the year ended December 31, 2015, revenues from our wholesale channel decreased $76.6 million, or 11.5%, compared to the same period in 2014. The decrease in wholesale channel revenue is driven primarily by a $52.1 million unfavorable impact related to foreign currency translation, primarily in our Europe segment, a $30.5 million unfavorable impact due to lower average sales prices related to a lower priced product style mix, primarily in our Americas segment, partially offset by higher sales volume in our Americas and Europe segments.

During the year ended December 31, 2015, revenues from our retail channel decreased $47.3 million, or 11.1%, compared to the same period in 2014, primarily driven by the Asia Pacific segment, which decreased $23.1 million primarily as a result of a lower average selling price related to a lower priced product mix, the unfavorable impact of foreign currency translation, and store closures. Additionally we experienced a $15.4 million decrease in the Europe segment largely associated with the impact of store closures.

During the year ended December 31, 2015, revenues from our e-commerce channel increased $16.3 million, or 15.6%, compared to the same period in 2014, primarily driven by increased sales volumes in all segments, partially offset by the unfavorable impact of foreign currency translation and lower average sales prices, also in all segments. Our e-commerce sales totaled approximately 11.1% and 8.7% of our consolidated net sales during the year ended December 31, 2015 and 2014, respectively. We continue to benefit from our online presence through web stores worldwide enabling us to have increased access to our customers in a low cost, attractive manner and providing us with an opportunity to educate them about our products and brand.

***Cost of sales.*** Cost of sales, including restructuring charges, decreased $28.1 million, or 4.8%, for the year ended December 31, 2015, as compared to the prior year. The net decrease in cost of sales is due to: (i) a $44.4 million, or 7.4%, decrease due to the impact of foreign currency translation, (ii) a $24.0 million, or 3.9%, increase due to a higher average costs, (iii) a $22.8 million, or 3.8%, decrease associated with store closures, (iv) a $19.1 million, or 3.2%, increase due to higher sales volumes, and (v) a $4.0 million, or 0.7%, decrease associated with lower restructuring charges in cost of sales (these restructuring efforts were completed as of December 31, 2015).

***Gross Profit.*** Gross profit decreased $79.5 million, or 13.5%, for the year ended December 31, 2015, as compared to the prior year. The net decrease in gross profit is primarily due to the impact of: (i) a $49.7 million, or 8.4%, decrease associated with lower average selling price and higher costs of sales, (ii) a $40.9 million, or 6.9%, decrease associated with the unfavorable impact of foreign currency translation, (iii) a $18.7 million, or 3.2%, increase associated with higher sales volumes (iv) an $11.6 million, or 2.0%, decrease associated with store closures, and (v) a $4.0 million, or 0.6%, increase associated with lower restructuring charges in cost of sales (these restructuring efforts were completed as of December 31, 2015). For the year ended December 31, 2015 we realized a gross profit margin of 46.8%.

***SG&A.*** SG&A expenses decreased $6.6 million, or 1.2%, during the year ended December 31, 2015 compared to the same period in 2014. This change was primarily driven by wage and salary decreases of $22.1 million, and a $17.0 million decrease in building expenses partially offset by a $13.6 million increase in marketing expenses, and a $13.6 million increase in bad debt expense, largely associated with our Asia Pacific operations relating to China. During the year ended December 31, 2015, our bad debt expense was $25.7 million compared to $12.1 million in the same period in the prior year. Substantially all of this increase in bad debt expense is due to lower collections from our China operations, which is included in our Asia Pacific segment.

We believe declining collections from our China operations is associated with deteriorating macro-economic conditions in China resulting in declining customer demand and the deteriorating working capital position of our distributors. We are unable to predict future economic conditions in China, but if economic conditions in China continue to decline, we may experience further reductions in consumer demand in our China markets. As our China operations represent approximately 8% of our total revenue in 2015, the net impact of declining sales volumes in China could have a material adverse impact on our financial results in future periods.

In addition to these fluctuations, we have identified certain selling, general and administrative expenses that affect the comparability or underlying business trends in our consolidated financial statements. The following table summarizes these expenses and describes the additional drivers of the increase above by reconciling our GAAP selling, general and administrative expenses to non-GAAP selling, general and administrative expenses:

*(in thousands)*

| Selling, general and administrative expenses reconciliation: | Year Ended December 31, 2015 | 2014 |
| --- | ---: | ---: |
| GAAP selling, general and administrative expenses | $559,095 | $565,712 |
| ERP implementation and other contract termination fees(1) | (12,569) | (13,268) |
| Reorganization charges(2) | (8,391) | (8,872) |
| Legal settlements and disbursement(3) | (7,895) | (2,646) |
| Bad debt expense related to South Africa(4) | (613) | — |
| Non-GAAP selling, general and administrative expenses | $529,627 | $540,926 |

(1) This represents operating expenses related to the implementation of our new enterprise resource planning ("ERP") system and the termination of certain IT contracts for better alignment with strategic initiatives as well as fees associated with the termination of certain royalty and other contracts.

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

(3) Expenses in 2015 relate primarily to legal expenses for matters surrounding disbursements to invalid vendors and California wage settlements. Expenses in 2014 relate primarily to other legal settlements.

(4) Bad debt and impairment expenses were incurred in 2015 relating to the planned sale of operations in South Africa.

***Impact on Selling, General, and Administrative Expenses due to Foreign Exchange Rate Fluctuations.*** Changes in average foreign currency exchange rates used to translate expenses from our functional currencies to our reporting currency during the year ended December 31, 2015, negatively impacted, or increased, selling, general and administrative expenses by approximately $35.6 million compared to 2014.

***Restructuring charges.*** During the years ended December 31, 2015 and 2014, we recorded $8.7 million and $24.5 million, respectively, in restructuring charges. These restructuring charges arose primarily as a result of our strategic plans for long-term improvement and growth of the business. Restructuring charges for the years ended December 31, 2015 and 2014 consisted of:

- $5.5 million and $12.5 million in severance costs during the years ended December 31, 2015 and 2014, respectively;
- $2.6 million and $4.2 million in contract termination costs primarily related to the early termination of operating leases during the years ended December 31, 2015 and 2014, respectively; and
- $0.6 million and $7.8 million in other restructuring charges primarily related to expenses to exiting stores and legal fees during the years ended December 31, 2015 and included the write-off of obsolete inventory and store exiting and legal fees for the year ended December 31, 2014.

***Asset impairments.*** During the year ended December 31, 2015 and 2014, we incurred $15.3 million and $8.8 million, respectively, in asset impairment charges. For the year ended December 31, 2015, $9.6 million of this amount related to certain underperforming retail locations, primarily in our Americas and Europe segments, which were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores' assets over their remaining economic life and $5.7 million related to the impairment of our South Africa asset group that is currently held for sale.

***Foreign currency loss, net.*** Foreign currency loss, net is comprised of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. During the year ended December 31, 2015 and 2014, the effect of foreign currency transactions was a net loss of $3.3 million and $4.9 million, respectively.

***Income Taxes:*** The following are some of our key jurisdictions and the income tax expense for each in 2015,

*(in thousands)*

|  | For the Year Ended December 31, 2015 United States | Netherlands | Japan | Canada (1) | China | Korea | Other | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| **Book income (loss)** | $(83,537) | $25,988 | $(69) | $(850) | $(21,572) | $4,141 | $1,155 | $(74,744) |
| **Income tax expense (benefit)** | (3,345) | 4,262 | 2,345 | (391) | 4,433 | 1,081 | 67 | 8,452 |
| **Effective tax rate** | 4.0% | 16.4% | (3,398.6)% | 46.0% | (20.5)% | 26.1% | 5.8% | (11.3)% |

(1) Primarily driven by a $2.9 million net benefit related to a tax settlement with the Canada Revenue Agency. The principal drivers impacting the rate other than the overall profitability or loss of the Company disclosed in our rate reconciliation table in Note 13 — Income Taxes includes:

The differences in total tax expense and effective rate difference in the table above resulted primarily from the following factors. In the U.S. and Japan, the Company incurred significant changes in book income/loss (U.S. losses of $84 million in 2015 versus $34 million in 2014, and Japanese losses of $69 thousand in 2015 versus income of $9.6 million in 2014). In addition, in the U.S. in 2014, the Company received a net benefit of $10.7 million related the settlement of a tax audit and the release of related uncertain tax positions. While the operating losses in the U.S. can differ in future years based upon the Company’s performance and risk factors for the business, the benefits associated with the audit settlement and release of uncertain tax positions are not likely to recur in the future. Tax expense in Canada was also impacted materially by the net impact of $9.8 million related to the settlement of a tax audit and release of related uncertain tax positions, which is not likely to recur in the future. While there are effective rate differences in China related to differences in operating losses, the Company also incurred additional tax expense of approximately

$9.5 million due to increased valuation allowances established during 2015. The increase in valuation allowances or potential release of such allowances will depend upon the increase in future taxable income of the Company’s China operations. The total tax expense, and associated effective tax rate, for Japan was also impacted in 2015 by the settlement of uncertain tax positions which resulted in a benefit of approximately $3.6 million which is not likely to recur in the future, and the accrual of expense for an increased valuation allowance of $4.8 million due to the ongoing operating losses in that jurisdiction. Lastly, the difference in the Netherlands effective tax rate relates to consistent withholding tax expense year over year, compared with decreased operating income in that jurisdiction in 2015.

### Revenues by Channel

The following table summarizes our total revenue by channel for the years ended December 31, 2015 and 2014:

*(in thousands)*

| Wholesale: | Years Ended December 31, 2015 | 2014 | Change $% |  | Constant Currency Change(1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $210,887 | $228,615 | $(17,728) | (7.8)% | $(10,241) | (4.5)% |
| Asia Pacific | 255,897 | 290,610 | (34,713) | (11.9) | (16,194) | (5.6) |
| Europe | 123,131 | 147,561 | (24,430) | (16.6) | 1,886 | 1.3 |
| Other businesses | 1,096 | 794 | 302 | 38.0 | 194 | 24.4 |
| Total wholesale | 591,011 | 667,580 | (76,569) | (11.5) | (24,355) | (3.6) |
| **Retail:** |  |  |  |  |  |  |
| Americas | 197,306 | 206,053 | (8,747) | (4.2) | (6,652) | (3.2) |
| Asia Pacific | 136,320 | 159,464 | (23,144) | (14.5) | (11,552) | (7.2) |
| Europe | 44,873 | 60,309 | (15,436) | (25.6) | (3,012) | (5.0) |
| Total retail | 378,499 | 425,826 | (47,327) | (11.1) | (21,216) | (5.0) |
| **E-commerce:** |  |  |  |  |  |  |
| Americas | 68,017 | 55,247 | 12,770 | 23.1 | 13,434 | 24.3 |
| Asia Pacific | 32,274 | 23,836 | 8,438 | 35.4 | 10,256 | 43.0 |
| Europe | 20,829 | 25,734 | (4,905) | (19.1) | (380) | (1.5) |
| Total e-commerce | 121,120 | 104,817 | 16,303 | 15.6 | 23,310 | 22.2 |
| **Total revenues** | $1,090,630 | $1,198,223 | $(107,593) | (9.0)% | $(22,261) | (1.9)% |

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

***Wholesale channel revenues.*** During the year ended December 31, 2015, revenues from our wholesale channel decreased $76.6 million, or 11.5%, compared to the same period in 2014. The decrease in wholesale channel revenues was due to the net impact of: (i) an $8.7 million, or 1.3%, increase in sales volumes, (ii) a $33.0 million, or 5.0%, decrease due to a lower average sales price, and (iii) a $52.2 million, or 7.8%, decrease due to the unfavorable impact of foreign currency translation.

***Retail channel revenues.*** During the year ended December 31, 2015, revenues from our retail channel decreased $47.3 million, or 11.1%, compared to the same period in 2014. The decrease in retail channel revenues was due to the net impact of: (i) a $7.0 million, or 1.6%, decrease in sales volumes, (ii) a $14.2 million, or 3.4%, decrease due to a lower average sales price, and (iii) a $26.1 million, or 6.1%, decrease due to the favorable impact of foreign currency translation.

***E-commerce channel revenues.*** During the year ended December 31, 2015, revenues from our e-commerce channel increased $16.3 million, or 15.6%, compared to the same period in 2014. The increase in e-commerce revenues was due to the net impact of: (i) a $47.4 million, or 45.2%, increase in sales volumes (primarily due to increased sales volumes in the Americas and Asia Pacific segments), (ii) a $24.1 million, or 22.9%, decrease due to a lower average sales price, and (iii) a $7.0 million, or 6.7%, decrease associated with the unfavorable impact of foreign currency translation.

### Reportable Operating Segments

The following table sets forth information related to our reportable operating business segments for the years ended December 31, 2015 and 2014:

*(in thousands, except % data)*

| Revenues: | Year Ended December 31, 2015 | 2014 | Change $% |  | Constant Currency Change(3) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $476,210 | $489,915 | $(13,705) | (2.8)% | $(3,459) | (0.7)% |
| Asia Pacific | 424,491 | 473,910 | (49,419) | (10.4) | (17,490) | (3.7) |
| Europe | 188,833 | 233,604 | (44,771) | (19.2) | (1,506) | (0.6) |
| Total segment revenues | 1,089,534 | 1,197,429 | (107,895) | (9.0) | (22,455) | (1.9) |
| Other businesses | 1,096 | 794 | 302 | 38.0 | 194 | 24.4 |
| Total consolidated revenues | $1,090,630 | $1,198,223 | $(107,593) | (9.0)% | $(22,261) | (1.9)% |
| Operating income: |  |  |  |  |  |  |
| Americas | $49,422 | $48,347 | $1,075 | 2.2% | $1,251 | 2.6% |
| Asia Pacific | 48,447 | 75,135 | (26,688) | (35.5) | (20,730) | (27.6) |
| Europe | 15,629 | 24,517 | (8,888) | (36.3) | (2,507) | (10.2) |
| Total segment operating income | 113,498 | 147,999 | (34,501) | (23.3) | (21,986) | (14.9) |
| Reconciliation of total segment operating income to income before income taxes: |  |  |  |  |  |  |
| Other businesses(1) | (30,092) | (19,400) | (10,692) | 55.1 | (13,410) | 69.1 |
| Intersegment eliminations | — | (1,498) | 1,498 | (100.0) | — | — |
| Unallocated corporate and other(2) | (155,730) | (131,827) | (23,903) | 18.1 | (36,917) | 28.0 |
| Total consolidated operating income (loss) | $(72,324) | $(4,726) | $(67,598) | $1,430.3 | $(72,313) | 1,530.1% |
| Foreign currency loss, net | (3,332) | (4,885) | 1,553 | (31.8) |  |  |
| Interest income | 967 | 1,664 | (697) | (41.9) |  |  |
| Interest expense | (969) | (806) | (163) | 20.2 |  |  |
| Other income (expense), net | 914 | 204 | 710 | 348.0 |  |  |
| Income (loss) before income taxes | $(74,744) | $(8,549) | $(66,195) | 774.3% |  |  |

(1) During the year ended December 31, 2015, operating losses of Other businesses increased $10.7 million compared to 2014, primarily due to a $12.0 million decrease in gross margin.

(2) Includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, depreciation on corporate and other assets not allocated to operating segments and other corporate costs. For the year ended December 31, 2015, 'Unallocated corporate and other' operating losses increased $23.9 million compared to the same period in 2014, primarily due to an increase in administrative expenses.

(3) Reflects year over year change as if the current period results were in "constant currency," which is a non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" above for more information.

### Americas Operating Segment

***Revenues.*** During the year ended December 31, 2015, revenues for our Americas segment decreased $13.7 million, or 2.8%, compared to the same period in 2014. The decrease in the Americas segment revenues was due to the net impact of: (i) a $17.8 million, or 3.6%, increase related to higher sales volumes, (ii) a $21.3 million, or 4.3%, decrease related to a lower average sales price, and (iii) a $10.2 million, or 2.1%, decrease due to the unfavorable impact of foreign currency translation.

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

***Cost of Sales (including restructuring charge).*** During the year ended December 31, 2015, cost of sales for our Americas segment decreased $4.0 million, or 1.6%, compared to the same period in 2014. The net decrease in cost of sales was due to: (i) a $9.2 million, or 3.6%, increase due to higher sales volumes, (ii) a $6.2 million, or 2.4%, decrease due to lower average costs per unit sold, (iii) a $5.8 million, or 2.3%, decrease due to the impact of foreign currency translation, and (iv) a $1.2 million, or 0.4%, decrease associated with lower restructuring charges recorded in cost of sales (these restructuring efforts were completed as of December 31, 2015).

***Gross Profit.*** The combined impact of the decrease in the Americas segment revenues and cost of sales resulted in a $9.7 million, or 4.2%, decrease in gross profit during the year ended December 31, 2015 compared to the same period in 2014. The net decrease in the Americas segment gross profit was due to: (i) a $15.1 million, or 6.4%, decrease due to the combined impact of a lower average sale price partially offset by a lower average cost per unit sold, (ii) an $8.6 million, or 3.7%, increase due to higher sales volumes, (iii) a $4.4 million, or 1.9%, decrease due to the impact of foreign currency translation, and (iv) a $1.2 million, or 0.4%, increase due to lower restructuring costs recorded in cost of sales.

***SG&A.*** During the year ended December 31, 2015, SG&A for the Americas segment decreased $12.3 million, or 6.9%, compared to the same period in 2014. This net decrease is primarily due to: (i) a $7.3 million, or 4.1%, decrease in compensation expense, (ii) a $4.2 million, or 2.3%, decrease in rent expense, (iii) a $1.2 million, or 0.7%, decrease in contract labor, and (iv) and other items that are individually insignificant.

***Restructuring Charges.*** Restructuring charges for the Americas segment decreased $1.7 million as compared to the prior year as the majority of our restructure efforts were completed in 2014.

***Asset Impairment Charges.*** Asset impairment charges for the Americas segment increased $3.2 million for the year ended December 31, 2015 as compared to the same period in 2014. This increase is largely due to the impairment of certain retail locations that experienced declining sales volumes.

***Income from Operations.*** The $1.1 million, or 2.2%, increase in income from operations for the Americas segment is due to the net impact of: (i) a $9.7 million decrease in gross profit, as discussed above, (ii) a $12.3 million decrease in SG&A, as discussed above, (iii) a $1.7 million decrease in restructure charges, as discussed above, and (iv) a $3.2 million increase in asset impairment charges, as discussed above.

### Asia Pacific Operating Segment

***Revenues.*** During the year ended December 31, 2015, revenues for our Asia Pacific segment decreased $49.4 million, or 10.4%, compared to the same period in 2014. The decrease in the Asia Pacific segment revenues was due to the net impact of: (i) an $11.0 million, or 2.3%, increase due to higher sales volumes, (ii) a $28.5 million, or 6.0%, decrease in the average sales price and (iii) a $31.9 million, or 6.7%, decrease due to the unfavorable impact of foreign currency translation.

***Cost of Sales.*** During the year ended December 31, 2015, cost of sales for our Asia Pacific segment decreased $21.7 million, or 8.9%, compared to the same period in 2014. The decrease in the Asia Pacific segment cost of sales was due to the net impact of: (i) a $4.9 million, or 2.3%, increase due to higher sales volumes, (ii) a $9.6 million, or 4.5%, decrease due to lower average costs per unit sold, (iii) a $14.2 million, or 6.7%, decrease due to the impact of foreign currency translation, and (iv) a $2.8 million, or 1.3%, decrease associated with lower restructuring charges recorded in cost of sales (these restructuring efforts were completed as of December 31, 2015).

***Gross Profit.*** During the year ended December 31, 2015, gross profit for the Asia Pacific segment decreased $27.7 million, or 10.7%, and gross margin decreased 18 basis points compared to the same period in 2014 to 54.4%. The decrease in the Asia Pacific segment gross profit is due to the net impact of: (i) a $6.1 million, or 2.4%, increase due to higher sales volumes, (ii) a $16.1 million, or 6.3%, decrease due to a lower average sales prices in excess of a lower average cost per unit, and (iii) a $17.7 million, or 6.8%, decrease due to the impact of foreign currency translation.

***SG&A.*** During the year ended December 31, 2015, SG&A for our Asia Pacific segment decreased $3.6 million, or 2.0%, compared to the same period in 2014. The decrease in SG&A was primarily due to the net impact of: (i) a $10.0 million decrease associated with salaries and wages, (ii) a $14.3 million increase associated with bad debt expense.

***Restructuring Charges.*** Restructuring charges for the Asia Pacific segment were $3.5 million for the year ended December 31, 2015 compared to $3.5 million in the same period of 2014.

***Asset Impairment Charges.*** Asset impairment charges for the Asia Pacific segment were $6.5 million for the year ended December 31, 2015, compared to $2.8 million in the same period of 2014, primarily due the impairments associated with the sale of the South Africa operations.

Our Asia Pacific operating segment continues to perform poorly primarily due to adverse macro-economic conditions and overall weakness in China's economy. The macro-economic environment in China has deteriorated over the past several quarters which has decreased revenue from our China operations by 53.0%, for the year ended December 31, 2015 as compared to the same period in 2014. We have also experienced significant declines in collection rates from our China operations due to the adverse macro-economic environment and the deteriorating working capital position of our distributors. The impact of these declines became apparent in September 2015, when multiple China distributors defaulted on their payment obligations. As a result, we have reassessed the collectability of our accounts receivable balances, for our China operations, and we concluded a significant increase in reserves is required. Accordingly, we have increased our China allowance for doubtful accounts by an additional $23.2 million, resulting in total allowances for our China operations of $30.3 million as of December 31, 2015. Our net accounts receivable balance for our China operations as of December 31, 2015 is $5.1 million.

If the economic conditions in China continue to decline, we may experience further reductions in consumer demand in our China markets which could result in additional declines. As our China operations represent approximately 8% of our total revenue, declining sales volumes in China could have a material adverse impact on our financial results in future periods.

### Europe Operating Segment

***Revenues.*** During the year ended December 31, 2015, revenues for our Europe segment decreased $44.8 million, or 19.2%, compared to the same period in 2015. The decrease in the Europe segment revenues was due to the net impact of: (i) an $8.2 million, or 3.5%, increase due to higher sales volumes, (ii) a $9.7 million, or 4.2%, decrease due to a lower average sales price, and (iii) a $43.3 million, or 18.5%, decrease due to the impact of foreign currency translation.

***Cost of Sales.*** During the year ended December 31, 2015, cost of sales for our Europe segment decreased $16.4 million, or 14.1%, compared to the same period in 2015. The decrease in the Europe segment cost of sales was due to the net impact of: (i) a $4.1 million, or 3.5%, increase due to higher sales volumes, (ii) a $2.7 million or 2.3%, decrease due to lower average cost per unit sold and (iii) a $17.9 million, or 15.4% decrease due to the impact of foreign currency translation.

***Gross Profit.*** During the year ended December 31, 2015, gross profit for our Europe segment decreased $28.4 million, or 24.2%, and gross margin decreased 311 basis points compared to the same period in 2015, to 47.2%. The decrease in the Europe segment gross profit is due to the net impact of: (i) a $4.1 million, or 3.5%, increase due to higher sales volumes, (ii) a $7.1 million, or 6.1%, decrease due to a lower average sales price in excess of the decrease in costs per unit, and (iii) a $25.4 million, or 21.6%, decrease due to the impact of foreign currency translation.

***SG&A.*** During the year ended December 31, 2015, SG&A for our Europe segment decreased $17.9 million, or 20.6%, compared to the same period in 2014. The decrease in SG&A was primarily due to the net impact of: (i) a $9.5 million decrease associated with salaries and wages, (ii) a $6.7 million decrease associated with building expenses, and (iii) a $2.2 million decrease in services expense.

***Restructuring Charges.*** Restructuring charges for our Europe segment were $2.8 million for the year ended December 31, 2015, compared to $4.0 million in the same period of 2014.

***Asset Impairment Charges.*** Asset impairment charges for our Europe segment were $1.6 million for the year ended December 31, 2015, compared to $2.0 million in the same period of 2014.

The changes in the number of our company-operated retail locations by reportable operating segment and type of store were:

| Company-operated retail locations Type | December 31, 2014 | Opened | Closed | December 31, 2015 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store in store | 100 | 11 | 13 | 98 |
| Retail stores | 311 | 15 | 51 | 275 |
| Outlet stores | 174 | 16 | 4 | 186 |
| Total | 585 | 42 | 68 | 559 |
| **Operating segment** |  |  |  |  |
| Americas | 210 | 4 | 18 | 196 |
| Asia Pacific | 258 | 36 | 33 | 261 |
| Europe | 117 | 2 | 17 | 102 |
| Total | 585 | 42 | 68 | 559 |

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

| Comparable store sales (retail only)(1) | Constant Currency(2) Year Ended December 31, 2015 | Constant Currency(2) Year Ended December 31, 2014 |
| --- | ---: | ---: |
| Americas | (3.2)% | (4.4)% |
| Asia Pacific | (4.5)% | (4.7)% |
| Europe | 3.0% | 0.7% |
| Global | (2.8)% | (3.7)% |

| DTC comparable store sales (includes retail and e-commerce)(1) | Constant Currency(2) Year Ended December 31, 2015 | Constant Currency(2) Year Ended December 31, 2014 |
| --- | ---: | ---: |
| Americas | 3.3% | (3.8)% |
| Asia Pacific | 3.0% | 0.6% |
| Europe | 7.8% | (0.6)% |
| Global | 3.9% | (1.9)% |

(1) Comparable store status is determined on a monthly basis. Comparable store sales includes the revenues of stores that have been in operation for more than twelve months. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening. E-commerce revenues are based on same site sales period over period.

(2) Reflects quarter over quarter change on a “constant currency” basis, which is a non-GAAP financial measure that restates current period results using prior year foreign exchange rates for the comparative period to enhance visibility of the underlying business trends, excluding the impact of foreign currency.

Comparable store sales decreased 2.8% on a global basis for the year ended December 31, 2015, compared to a decrease of 3.7% for the year ended December 31, 2014. Comparable store sales for our direct to consumer customers, which includes retail and ecommerce, increased 3.9% on a global basis for the year ended December 31, 2015, compared to a decrease of 1.9% for the year ended December 31, 2014.

***Impact on revenues due to foreign exchange rate fluctuations.*** Changes in average foreign currency exchange rates used to translate revenue from our functional currencies to our reporting currency during the year ended December 31, 2015 resulted in an $85.3 million decrease in revenue compared to the same period in 2014.

***Gross profit.*** During the year ended December 31, 2015, gross profit decreased $79.5 million, or 13.5%, compared to the same period in 2014, and was primarily attributable to the 9.0% decrease in revenue partially offset by a decrease of $24.1 million, or 4.0% to cost of sales compared to the same period in 2014 primarily due to foreign currency translation. Gross margin percentage decreased 250 basis points compared to the same period in 2014.

***Impact on gross profit due to foreign exchange rate fluctuations.*** Changes in average foreign currency exchange rates used to translate revenue and costs of sales from our functional currencies to our reporting currency during the year ended December 31, 2015 decreased our gross profit by $41.7 million, or 7.1%, compared to the same period in 2014.

### Liquidity and Capital Resources

Cash and cash equivalents were $147.6 million at December 31, 2016, compared to $143.3 million at December 31, 2015. Cash and cash equivalents increased during 2016 by $4.2 million compared to a decrease of $124.2 million during 2015. We did not make any repurchases of our common stock during 2016 compared to repurchases of $85.9 million during 2015. The remaining increase in cash and cash equivalents in 2016 primarily resulted from increases of $30.1 million in net loss adjusted for non-cash items and working capital items, $13.5 million from the effects of exchange rates and $1.1 million of other financing activities.

### Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

### Cash Flows

*(in thousands)*

|  | Years Ended December 31, 2016 | 2015 | Change |
| --- | ---: | ---: | ---: |
| Cash provided by (used in) operating activities | $39,754 | $9,698 | $30,056 |
| Cash used in investing activities | (18,657) | (18,627) | (30) |
| Cash used in financing activities | (16,443) | (101,260) | 84,817 |
| Effect of exchange rate changes on cash | (430) | (13,982) | 13,552 |
| Net increase (decrease) in cash and cash equivalents | $4,224 | $(124,171) | $128,395 |

*Net Cash Provided by Operating Activities.* Cash provided by operating activities increased to $39.8 million during 2016 compared to $9.7 million during 2015. The $30.1 million net increase in cash provided by operating activities resulted from the net effects of a $13.8 million increase in cash from net loss adjusted for non-cash items, and improved cash from operating assets of $16.3 million, primarily in working capital. The $13.8 million increase in cash from net loss adjusted for non-cash items include a $66.7 million improvement in net loss, partially offset by a $52.9 million decrease in non-cash items, which consist of: (i) a $22.8 million decrease from the prior year in non-cash expense associated with doubtful accounts, primarily in Asia; (ii) a $15.3 million decrease from the prior year in asset impairments related to closed retail locations and inventory reserves; (iii) an $8.2 million increase in net unrealized foreign currency gains; and (iv) a $6.7 million decrease from other non-cash items.

Improvements in cash from operating acitivites of $16.3 million include: (i) reductions in accounts receivable of $18.0 million; (ii) reductions in inventories of $29.0 million due to increased inventory management efforts; offset in part by decreases in accounts payable and accrued expenses of $29.6 million; and (iv) other working capital items that decreased cash from operations by $1.1 million.

*Net Cash Used in Investing Activities.* Net cash used in investing activities was $18.7 million during 2016 compared to $18.6 million during 2015. The $3.7 million increase in capital expenditures, primarily associated with enhancements to our information technology infrastructure, was offset by proceeds received of approximately $2.4 million on the sale of our South Africa business and $1.2 million of other investing activities.

*Net Cash Used in Financing Activities.* Net cash used in financing activities decreased to $16.4 million during 2016 compared to $101.3 million during 2015. The decrease of $84.9 million was primarily attributable to the net impact of: (i) we made no repurchases of our common shares during 2016 as compared to repurchases of $85.9 million during 2015; (ii) a $1.4 million decrease in cash received in 2016 from issuances of common stock associated with our stock compensation plans compared to 2015; and (iii) other cash used in financing activities related to net borrowings and repayments associated with our Senior Revolving Credit Facility.

### Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

*(in thousands)*

|  | Years Ended December 31, 2015 | 2014 | Change |
| --- | ---: | ---: | ---: |
| Cash provided by (used in) operating activities | $9,698 | $(11,651) | $21,349 |
| Cash used in investing activities | (18,627) | (57,992) | 39,365 |
| Cash provided by (used in) financing activities | (101,260) | 23,431 | (124,691) |
| Effect of exchange rate changes on cash | (13,982) | (3,420) | (10,562) |
| Net increase (decrease) in cash and cash equivalents | $(124,171) | $(49,632) | $(74,539) |

During the year ended December 31, 2015, cash and cash equivalents decreased $124.2 million to $143.3 million, compared to a decrease of $49.6 million during December 31, 2014. The primary drivers of this decrease were the repurchase of $85.9 million of our common stock including related commissions under our publicly-announced repurchase plan, strategic reinvestments into the business including $5.8 million in capital spend primarily related to our ERP system implementation, dividend payments of $11.9 million on our Series A Preferred Stock, of which $3.0 million was recorded as dividends payable and prepaid dividends as of December 31, 2016, and debt payments, including principal and interest, of $3.0 million related to long-term bank borrowings.

Cash provided by operations was $9.7 million for the year ended December 31, 2015 compared to cash used in operations of $11.7 million for the year ended December 31, 2014. This increase was primarily driven by the change in working capital accounts year over year which accounted for $36.4 million of our cash provided by operating activities. During the year ended December 31, 2016, we paid $19.9 million in cash related to taxes that were accrued for as of December 31, 2014, which accounted for half of this change.

As of December 31, 2015, accounts receivable, net decreased $17.6 million compared to December 31, 2014. During the year ended December 31, 2015, we recorded a reserve for doubtful accounts of $23.2 million in our Asia Pacific segment primarily as a result of delayed payments from our partner stores in China. As of December 31, 2015, other long-term assets decreased by approximately $4.3 million primarily due to the decrease in derivative instruments recorded on our balance sheet, as no such instruments were outstanding as of December 31, 2015. As of December 31, 2015, accounts payable increased $20.4 million compared to December 31, 2014. As a result of the January 2015 implementation of our new ERP system, we accelerated payments of our outstanding payables in late 2014 to accommodate the transition. Accrued expenses and other liabilities increased $11.6 million compared to December 31, 2014 primarily due to an accrued loss on our South Africa operations held for sale as of December 31, 2015.

### Sources of Liquidity

Our primary sources of liquidity are cash flows generated from our operations, our cash and cash equivalents and available borrowing capacity under our Senior Revolving Credit Facility.

The following table presents the total availability under our credit facilities as of December 31 2016:

*(in thousands)*

| Description | December 31, 2016 Borrowing Capacity | Borrowings Outstanding | Remaining Availability |
| --- | ---: | ---: | ---: |
| Senior Revolving Credit Facility(1) | $80,000 | $1,253 | $78,747 |
| Asia Revolving Credit Facility(2) | 8,625 | — | — |

(1) Borrowing capacity is subject to certain financial covenants as further described in Note 9 — Revolving Credit Facility and Bank Borrowings. Outstanding amount represents letters of credit. The term of this facility expires in February 2021.

(2) Borrowing capacity is the U.S. Dollar equivalent of 60 million Chinese Renminbi and has been suspended as more fully described in Note 9 — Revolving Credit Facility and Bank Borrowings. The term of this facility expires in February 2021.

The Senior Revolving Credit Facility is with a single lender, PNC Bank. We have no reason to believe that the lender would be unable to fulfill its obligation to provide financing in accordance with the terms of the Senior Revolving Credit Facility in the event of our election to borrow funds.

We also have notes payable obligations totaling $2.4 million as of December 31, 2016, which represent funds borrowed to finance the purchase and implementation of our ERP system under a Master IPA agreement that expires in February 2021, and certain insurance coverage premiums.

### Repatriation of Cash

As we are a global business, we have cash balances which are located in various countries and 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.

We generally consider unremitted earnings of subsidiaries operating outside of the U.S. to be indefinitely reinvested; however, our Board has approved a foreign cash repatriation strategy. As part of this strategy, we repatriated approximately $37 million during the year ended December 31, 2016 for which income taxes have already been accrued or paid. Further cash repatriation will depend on future cash requirements in the U.S. We maintain approximately $178 million of foreign earnings for which tax has previously been provided, and which has not been repatriated at this time.

Most of the cash balances held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal and state income taxes less applicable foreign tax credits. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. Certain countries have monetary laws which may limit our ability to utilize cash resources in those countries for operations in other countries. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and could adversely affect our liquidity. As of December 31, 2016, we held $121.9 million of our total $147.6 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 $121.9 million, $.3 million could potentially be restricted, as described above. If the remaining $121.6 million were to be immediately repatriated to the U.S., no additional tax expense would be incurred as all amounts are currently provided for in the statement of operations.

### Sale of Preferred Stock

On January 27, 2014, we sold 200,000 shares of the Company's Series A Convertible Preferred Stock ("Series A Preferred") for $182.2 million of net proceeds. The Series A Preferred has a par value of $0.001 per share, with a liquidation value of $200.0 million, or $1,000 per share, and an aggregate purchase price of $198.0 million, or $990.00 per share. We are obligated to pay cash dividends of $3 million each quarter to the Holders of Series A Preferred in cash as well as any dividends declared or paid on our common stock. More information regarding the Series A Preferred is included in Note10 — Equity.

Our sources of liquidity are used to fund our ongoing cash requirements, including our working capital, global retail, distribution and e-commerce development and construction, investments in our infrastructure including technology, payments of dividends, repayments of debt and borrowings, settlements of contingent liabilities (including uncertain tax positions), and other ongoing corporate activities. We believe that our existing sources of liquidity, including cash on hand, accounts receivable and borrowing capacity under our Senior Revolving Credit Facility will be sufficient to meet our liquidity needs over the next year as well as the foreseeable future.

### Contractual Obligations

In December 2011, the Company renewed and amended its supply agreement with Finproject S.p.A. (formerly known as Finproject s.r.l.), which provides the Company the right to purchase certain raw materials used to manufacture its products. The supply agreement requires that the Company meet minimum purchase requirements throughout the term of the agreement, which renews annually on January 1st unless terminated by either party. Historically, the minimum purchase requirements have not been onerous and the Company does not expect them to become onerous in the future. Depending on the material purchased, pricing is based either on contracted price or is subject to quarterly reviews and fluctuates based on order volume, currency fluctuations, and raw material prices. Pursuant to the agreement, the Company guarantees the payment for certain third-party manufacturer purchases of these raw materials up to a maximum potential amount of €3.5 million (approximately $3.7 million as of December 31, 2016).

The following table summarizes aggregate information about our significant contractual cash obligations as of December 31, 2016:

*(in thousands)*

|  | Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating lease obligations(1) | $310,555 | 68,241 | 134,519 | 29,230 | 78,565 |
| Inventory purchase obligations with third-party manufacturers(2) | 125,987 | 125,987 | — | — | — |
| Dividends payable(3) | 60,866 | 12,000 | 24,000 | 24,000 | 866 |
| Other contracts(4) | 39,872 | 27,442 | 10,083 | 2,347 | — |
| Debt obligations(5)(8) | 2,329 | 2,329 | — | — | — |
| Minimum licensing royalties(6) | 6,403 | 4,023 | 2,374 | 6 | — |
| Capital lease obligations(7) | 49 | 9 | 29 | 11 | — |
| Total | $546,061 | $240,031 | $171,005 | $55,594 | $79,431 |

(1) Our operating lease obligations consist of leases for retail stores, offices, warehouses, vehicles, and equipment expiring at various dates through 2033. This balance represents the minimum cash commitment under contract to various third parties for operating lease obligations including the effect of rent escalation clauses and deferred rent and minimum sublease rentals due in the future under non-cancelable subleases. This balance does not include certain contingent rent clauses that may require additional rental amounts based on sales volume, inventories, etc. as these amounts are not determinable for future periods.

(2) Our inventory purchase obligations with third-party manufacturers consist of open purchase orders for footwear products and include an immaterial amount of purchase commitments with certain third-party manufacturers for yet-to-be-received finished product where title passes to us upon receipt. All purchase obligations with third-party manufacturers are expected to be paid within one year.

(3) Dividends payable are associated with our Series A Preferred Stock at a rate of 6.0% of the stated value of the stock. The amounts represent expected dividend payments over the eight year redemption accretion period.

(4) Other contracts consist of various agreements with third-party providers, primarily for IT and financial services, distribution and logistics service providers, and other agreements.

(5) Our current debt obligations consist of five separate notes issued under our agreement with PNC to finance the purchase and implementation of our new ERP system, which bear interest rates ranging from 2.45% to 2.79% and maturities ranging from September 2016 to September 2017. We will continue to finance the ERP implementation on an as needed basis through this agreement. Interest rates and payment terms are subject to change as further financing occurs.

(6) Our minimum licensing royalties consist of usage-based payments for the right to use various licenses, trademarks and copyrights in the production of our footwear and accessories. Royalty obligations are based on minimum guarantees under contract; however, may include additional royalty obligations based on sales volume that are not determinable for future periods.

(7) Our capital lease obligations consist of leases for office equipment expiring at various dates through 2020. This balance represents the minimum cash commitment under contract to various third-parties for capital lease obligations.

(8) Amounts include anticipated interest payments.

Excluded from the table above is a $4.8 million liability for unrecognized tax benefits as of December 31, 2016, as we cannot make a reliable estimate of the period in which the liability will be settled, if ever.

### Off-Balance Sheet Arrangements

In accordance with generally accepted accounting principles, our operating leases are not reflected in our consolidated balance sheets. See Part II—Item 8, *Financial Statements and Supplementary Data*, Note 15 — Commitments and Contingencies for further discussion of these off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K). As of December 31, 2016, we did not have any other material off-balance sheet arrangements other than certain operating leases and other commitments.

### Critical Accounting Policies and Estimates

### General

Our discussion and analysis of financial condition and results of operations, outside of discussions regarding constant currency and non-GAAP financial measures, is based on the consolidated financial statements which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our assumptions and estimates on an on-going basis.

An accounting policy is considered to be critical if it is important to our results of operations, financial condition, and cash flows, and requires significant judgment and estimates on the part of management in its application. Our estimates are often based on historical experience, complex judgments, assessments of probability, and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. We believe that the following discussion represents those accounting policies that are the most critical to the reporting of our financial condition and results of operations. For a discussion of our significant accounting policies, see Note 1 — Basis of Presentation and Significant Accounting Policies to the accompanying consolidated financial statements.

### Reserves for Uncollectible Accounts Receivable

We make ongoing estimates related to the collectibility of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. Our estimates are based on a variety of factors, including the length of time receivables are past due, economic trends and conditions affecting our customer base, significant non-recurring events and historical write-off experience. Specific provisions are recorded for individual receivables when we become aware of a customer's inability or unwillingness to meet its financial obligations. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates and we may experience changes in the amount of reserves we recognize for accounts receivable that we deem uncollectible. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine that a smaller or larger reserve is appropriate, we would record a credit or a charge, respectively, to 'Selling, general and administrative expenses' in our consolidated statement of operations in the period in which we made such a determination.

See Note 12 — Allowances to the accompanying consolidated financial statements for an analysis of the activity in our allowance for doubtful accounts.

### Sales Returns, Allowances and Discounts

A significant area of judgment affecting reported revenues and net income involves estimating reserves for sales returns, allowances and discounts, which represent the portion of revenues not expected to be realized. Wholesale revenues are reduced by estimates of returns, allowance, discounts and contractual discounts to major customers. We also accept returns at our sole discretion from our wholesalers and distributors to rebalance stock and to ensure that our products are merchandised in the proper assortments, and may provide markdown allowances at our sole discretion to key wholesalers and distributors to facilitate sales of slower moving products. We also record reductions to revenues for estimated customer credits as a result of price markdowns in certain markets. Retail revenues, including e-commerce store sales, are also reduced by an estimate of returns.

Our estimated sales returns and allowances are based on customer return history and actual outstanding returns yet to be received. Changes to our estimates for customer returns, allowances and discounts may be caused by many factors, including, but not limited to whether customers accept our new styles, customer inventory levels, shipping delays or errors, known or suspected product defects, the seasonal nature of our products and macroeconomic factors affecting our customers. Historically, actual amounts of customer returns, allowances and discounts have not differed significantly from our estimates. A hypothetical 1% increase in our reserves for returns, allowances and discounts as of December 31, 2016 would have decreased our 2016 revenues by approximately $7.2 million.

See Note 12 — Allowances to the accompanying consolidated financial statements for an analysis of the activity in our sales returns, allowances and discounts.

### Inventory Valuation

Our products are sold through wholesale distribution channels department stores, sporting goods stores, distributors, national, regional and independent retailers. We also sell directly to consumers through wholly-owned full-service retail stores, kiosks, outlet stores and e-commerce store sites. Substantially all of our inventories are finished goods, which are stated at the lower of cost or market, with cost determined using the moving average cost method.

We estimate the market value of inventory based on an analysis of historical sales trends of our individual product lines, the impact of market trends and economic conditions, and a forecast of future demand, giving consideration to the value of current orders in-house for future sales of inventory, as well as plans to sell discontinued or end of life inventory through our outlet stores, among other off-price channels. Estimates may differ from actual results due to the quantity, quality, and mix of products in inventory, consumer and retailer preferences, and market conditions. If the estimated market value is less than its carrying value, the carrying value is adjusted to the market value and the difference is recorded in 'Cost of sales' in our consolidated statements of operations. Reserves for the risk of physical loss of inventory are estimated based on historical experience and are adjusted based upon physical inventory counts, and recorded within 'Cost of sales' in our consolidated statements of operations. The ultimate results achieved in selling excess and discontinued products in future periods may differ significantly from our estimates. A hypothetical 1% increase in the level of our inventory reserves as of December 31, 2016 would have decreased our 2016 gross profit by approximately $0.1 million.

See Note 3 — Inventories to the accompanying consolidated financial statements for a discussion of our inventory reserves.

### Impairment of Other Long-Lived Assets

Property and equipment along with other long-lived assets are evaluated for impairment periodically whenever events or changes in circumstances indicate that their carrying values may not be fully recoverable. Testing of long-lived assets for impairment is at the level of an asset group, which is the is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. In our retail business, the asset group for impairment testing is each individual retail store. In evaluating long-lived assets for recoverability, we use our best estimate of future cash flows expected to result from the use of the asset and its eventual disposition, where applicable. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than its carrying value, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal are reported at the lower of carrying value or fair value, less costs to sell.

In determining future cash flows, we take various factors into account, including the remaining useful life of each asset group, forecasted growth rates, pricing, working capital, capital expenditures, and other cash needs specific to the asset group. Additional considerations when assessing impairment include changes in our strategic operational and financial decisions, global and regional economic conditions, demand for our product and other corporate initiatives which may eliminate or significantly decrease the realization of future benefits from our long-lived assets. Since the determination of future cash flows is an estimate of future performance, future impairments may arise in the event that future cash flows do not meet expectations.

During 2016, 2015, and 2014, we recorded non-cash impairment of $2.7 million, $15.3 million, and $8.8 million, respectively, to reduce the net carrying value of certain long-lived assets, primarily related to underperforming company owned retail stores, to their estimated fair values. See Note 4 — Property and Equipment to the accompanying consolidated financial statements for further information related to long-lived asset impairments.

### Stock-Based Compensation

#### Stock Options

Stock options are granted to employees and non-employee directors with exercise prices equal to the fair market value of our common stock on the date of grant. We use the Black-Scholes option-pricing model to estimate the grant date fair value of stock options, which requires the use of assumptions, including the expected term of the option, expected volatility of our stock price, our expected dividend yield, and the risk-free interest rate, among others. These assumptions reflect our best estimates, however; they involve inherent uncertainties including market conditions and employee behavior that are generally outside of our control. Generally, once stock option values are determined, accounting practices do not permit them to be changed, even if the estimates used are different from actual results. We expense all stock-based compensation awarded to employees and non-employee directors based on the grant date fair value of the awards over the requisite service period, adjusted for forfeitures.

#### Restricted Stock Awards and Units ("RSUs")

We grant restricted shares of our common stock to our non-employee directors, and service-based RSUs to certain executives, as well as to certain non-executive employees. In addition, we grant performance-based RSUs to certain executives. The fair values of restricted stock shares and RSUs are based on the fair value of our unrestricted common stock, adjusted to reflect the absence of dividends for those restricted securities that are not entitled to dividend equivalents prior to vesting. Compensation expense for performance-based RSUs is recognized over the employees' requisite service period when attainment of the performance goals is deemed probable, which involves judgment as to achievement of certain performance metrics.

Our performance-based RSU awards vest based upon attainment of certain performance conditions, including earnings levels, revenue and cash flow targets, and certification by our Compensation Committee. The fair value of these awards is estimated using a Monte Carlo simulation valuation model prepared by an independent third party. This pricing model utilizes multiple input variables that determine the probability of satisfying each performance condition stipulated in the terms of the award to estimate its grant date fair value. Compensation expense, net of forfeitures, is updated for the Company's expected performance level against each related goal at the end of each reporting period.

#### Sensitivity

The assumptions used in calculating the grant date fair values of stock-based compensation awards represent our best estimates. In addition, judgment is required in estimating the number of stock-based awards that will vest upon achievement of performance conditions. If actual results differ significantly from our estimates and assumptions, if we change the assumptions used to estimate the grant date fair value for future stock-based award grants, or if there are changes in market conditions, stock-based compensation expense and, therefore, our results of operations could be materially impacted. A hypothetical 1% change in our stock-based compensation expense would have affected our 2016 net income by approximately $0.1 million.

See Note 11 — Stock Compensation to the accompanying consolidated financial statements for further information related to stock-based compensation.

### Contingencies and Legal Proceedings

We are periodically exposed to various contingencies in the ordinary course of conducting our business, including certain litigation, contractual disputes, employee relations matters, various tax or other governmental audits, and trademark and intellectual property matters and disputes. We record a liability for such contingencies to the extent that we conclude their occurrence is probable and the related losses are estimable. In addition, if it is reasonably possible that an unfavorable settlement of a contingency could exceed the established liability, we disclose the estimated impact on our liquidity, financial condition, and results of operations, if practicable. Management considers many factors in making these assessments. As the ultimate resolution of contingencies is inherently unpredictable, these assessments can involve a series of complex judgments about future events including, but not limited to, court rulings, negotiations between affected parties, and governmental actions. As a result, the accounting for loss contingencies relies heavily on management's judgment in developing the related estimates and assumptions. See Note 15 —Commitments and Contingencies in the accompanying notes to the audited consolidated financial statements for additional information regarding our contingencies and legal proceedings.

### Income Taxes

We account for income taxes using the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities. We provide for income taxes at the current and future enacted tax rates and laws applicable in each taxing jurisdiction. We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The impact of an uncertain tax position that is more likely than not of being sustained upon examination by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest expense is recognized on the full amount of deferred benefits for uncertain tax positions. While the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. We recognize interest and penalties related to unrecognized tax benefits within the “Income tax expense” line in the accompanying consolidated statement of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.

Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions. Tax laws require items to be included in our tax returns at different times than when these items are reflected in the consolidated financial statements. As a result, the annual tax rate reflected in our consolidated financial statements is different than that reported in our tax return (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are the enacted tax rates in effect for the year in which the differences are expected to reverse. Based on an evaluation of all available information, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that realizing these benefits is considered more likely than not.

We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our forecasted taxable income using both historical and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry back years (if permitted) and the availability of tax planning strategies. A valuation allowance is required to be established unless management determines that it is more likely than not that we will ultimately realize the tax benefit associated with a deferred tax asset. Undistributed earnings of a subsidiary are accounted for as a temporary difference, except that deferred tax liabilities are not recorded for undistributed earnings of a foreign subsidiary that are deemed to be indefinitely reinvested in the foreign jurisdiction. We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-U.S. operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our U.S. and foreign subsidiaries. U.S. income and foreign withholding taxes have not been provided on approximately $208.1 million of cumulative undistributed foreign earnings of the non-US subsidiaries as of December 31, 2016. These historical earnings are indefinitely reinvested outside of the United States.

Should we change our plans, we would be required to record a significant amount of deferred tax liabilities. The amount of unrecognized deferred U.S. income tax liability on the unremitted earnings has not been determined because the hypothetical calculation is not practicable.

See Note 13 — Income Taxes in the accompanying notes to the consolidated financial statements for additional information regarding our income taxes.

***Recent Accounting Pronouncements.*** See Note 2 — Recent Accounting Pronouncements in the accompanying notes to the consolidated financial statements for recently adopted and issued accounting pronouncements.

## Market risk

As filed, 6,205 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 credit facility and certain financial instruments. In addition to the revolving credit facility, we have incurred indebtedness related to the implementation of our enterprise resource planning software ("ERP") system. Borrowings under these debt instruments bear fixed interest rates and therefore, do not have the potential for market risk.

Borrowings under the revolving credit facility bear interest at a variable rate. For domestic rate loans, including swing loans, the interest rate is equal to a daily base rate plus a margin ranging from 0.50% to 0.75% based on certain conditions. For domestic London Interbank Borrowing Rate ("LIBOR") rate loans, the interest rate is equal to a LIBOR rate plus a margin ranging from 1.50% to 1.75% based on certain conditions.

Borrowings under the revolving credit facility are therefore subject to risk based upon prevailing market interest rates. Interest rates fluctuate as a result of many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. As of December 31, 2016 and 2015, there were no borrowings outstanding under the revolving credit facility.

We additionally hold cash equivalents including certificate of deposits, time deposits and money market funds. Interest income generated from these cash equivalents will fluctuate with the general level of interest rates. As of December 31, 2016, we held $3.4 million in cash equivalents subject to variable interest rates. The effects of an increase or decrease of 10% in prevailing market interest rates earned on these investments on interest income during the year ended December 31, 2016, is not significant to our consolidated results of operations, financial condition or cash flows.

### Foreign Currency Exchange Risk

As a global company, we have significant revenues and costs denominated in currencies other than the U.S. Dollar. We are exposed to the risk of gains and losses resulting from changes in exchange rates on monetary assets and liabilities within our international subsidiaries that are denominated in currencies other than the subsidiary’s functional currency. Likewise, our U.S. companies are also exposed to the risk of gains and losses resulting changes in exchange rates on monetary assets and liabilities that are denominated in a currency other than the U.S. Dollar.

We have experienced and will continue to experience changes in international currency rates, impacting both results of operations and the value of assets and liabilities denominated in foreign currencies. We 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. As of December 31, 2016, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $328.2 million. The net fair value of these contracts at December 31, 2016 was a liability $0.2 million.

We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our forward foreign currency exchange contracts. To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect of hypothetical changes in foreign currency exchange rates. This analysis assumes a like movement by the foreign currencies in our hedge portfolio against the U.S. Dollar. As of December 31, 2016, 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 $5.5 million.

### Effects of Changes in Exchange Rates on Translated Results of International Subsidiaries

Changes in exchange rates have a direct effect on our reported U.S. dollar 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 average exchange rates each reporting period. As a result, comparisons of reported results between reporting periods may be impacted significantly due to differences in the exchange rates used in translate the operating results of our international subsidiaries.

For example, in our European segment, when the U.S. Dollar strengthens relative to the Euro, our reported U.S. Dollar results are lower than if there had been no change in the exchange rate, because more Euros are required to generate the same U.S. Dollar translated amount. Conversely, when the U.S. Dollar weakens relative to the Euro, the reported U.S. Dollar results of our Europe segment are higher compared to a period with a stronger U.S. Dollar relative to the Euro. Similarly, the reported U.S. Dollar results of our Asia Pacific segment, where the functional currencies are primarily the Japanese Yen, Chinese Yuan, Korean Won and the

Singapore Dollar, are comparatively lower or higher when the U.S. Dollar strengthens or weakens, respectively, relative to these currencies.

An increase of 1% of the value of the U.S. Dollar relative to foreign currencies would have increased our loss before taxes during the year ended December 31, 2016 by approximately $0.8 million. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy. See Item 7. *Management's Discussion and Analysis of Financial Condition and Results of Operations* in Part II of this Form 10-K for a discussion of the impact of the change in foreign exchange rates on our U.S Dollar consolidated statement of operations for the years ended December 31, 2016 and 2015.

## Controls and procedures

As filed, 6,448 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"). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016, 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 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.

### Management's Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become ineffective due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our Chief Executive Officer and Chief Financial Officer, with assistance from other members of management, assessed the effectiveness of our internal control over financial reporting as of December 31, 2016, based on the framework and criteria established in *Internal Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2016.

Our independent registered public accounting firm has audited the effectiveness of our internal control over financial reporting as of December 31, 2016, as stated in the report which appears herein.

### Changes in Internal Controls over Financial Reporting

During 2016, the Company completed a number of initiatives designed to remediate certain material weaknesses with respect to internal controls over the Company's financial close process and inventory. Specifically, management completed the following with respect to its internal controls.

### Financial Close Process.

The Company implemented internal control procedures over the financial close process, including: (i) added internal control review and documentation procedures that ensure that all manual journal entries, including deferred income tax and period end adjusting entries, are properly documented and reviewed by competent personnel; (ii) global account reconciliation procedures that ensure all key accounts are properly reconciled on a timely basis, documented and reviewed by competent personnel; (iii) hired personnel with the requisite skills in income taxes and accounting; (iv) improved the organizational structure of our tax and accounting departments; and (v) provided training to global accounting process owners on policies and controls over account analysis, documentation, review, and approval of manual journal entries, and data integrity procedures.

***Inventory Accounting Controls.***

The Company implemented internal control procedures over inventory accounting controls, including: (i) additional procedures to ensure all inventory physical observations and counts are performed timely, all resulting adjustments are recorded and appropriately documented in our inventory management system; (ii) additional inventory reconciliation procedures to ensure our inventory management system is appropriately reconciled to the general ledger on a regular basis; (iii) improvements to our analysis of inventory cost absorption to ensure the proper valuation; (iv) provided training to our supply chain personnel to ensure appropriate understanding of our inventory policies and procedures including the importance of timely and accurate recording; and (v) hired additional personnel to our inventory management team to implement and maintain our inventory accounting controls.

As described above in “Management’s Annual Report on Internal Control Over Financial Reporting”, the Company concluded that its internal control over financial reporting was effective as of December 31, 2016 based, in part, on the effectiveness of the changed and new controls implemented during 2016 as described above.

Other than the changes described above, there have been no changes in our internal controls over financial reporting (as defined in Rule 13(a)-15(f) of the Exchange Act) during the year ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Filed Mar 1, 2017.
Source: SEC EDGAR, the filing index for accession 0001628280-17-002068. Last ingested by Listed: Nov 6, 2026, 18:01 ET. No prices; not investment advice.