# Crocs, Inc.: Form 10-Q for the period ended Jun 30, 2017

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-Q
- Filed: 2017-08-09
- Accepted by EDGAR: Aug 9, 2017, 15:12 ET
- Period: 2017-06-30
- Accession: 0001628280-17-008449
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000162828017008449/crox2017630-10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000162828017008449/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-04-01 to 2017-06-30 | $143.4m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 6 months, 2017-01-01 to 2017-06-30 | $277.7m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2017-04-01 to 2017-06-30 | $169.8m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2017-01-01 to 2017-06-30 | $303.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2017-04-01 to 2017-06-30 | $2.2m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2017-01-01 to 2017-06-30 | $5.1m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2017-04-01 to 2017-06-30 | $140.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2017-01-01 to 2017-06-30 | $258.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-04-01 to 2017-06-30 | $29.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2017-01-01 to 2017-06-30 | $45.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-04-01 to 2017-06-30 | $188.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2017-01-01 to 2017-06-30 | $372.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-04-01 to 2017-06-30 | $7.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2017-01-01 to 2017-06-30 | $12.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-04-01 to 2017-06-30 | $22.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2017-01-01 to 2017-06-30 | $33.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-04-01 to 2017-06-30 | $0.20 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2017-01-01 to 2017-06-30 | $0.29 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-04-01 to 2017-06-30 | $0.21 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2017-01-01 to 2017-06-30 | $0.29 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-04-01 to 2017-06-30 | 74,572,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2017-01-01 to 2017-06-30 | 74,625,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 6 months, 2017-01-01 to 2017-06-30 | $5.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-06-30 | $157.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-06-30 | $496.2m | us-gaap:AssetsCurrent |
| Total assets | at 2017-06-30 | $630.6m | us-gaap:Assets |
| Current liabilities | at 2017-06-30 | $184.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-06-30 | $203.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2017-06-30 | $246.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 58,720 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:

- Continued softening in select global regional economies and a cautious retail environment may negatively affect customer purchasing trends.
- Foreign exchange rate volatility may continue to impact our reported U.S. dollar results from our foreign operations for the foreseeable future.
- Consumer 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, as well as on various e-tail sites operated by wholesalers, and contributed to declining foot traffic in our retail locations.
- We anticipate lower retail revenues and selling, general and administrative expenses (“SG&A”) as we close less productive stores as leases expire and transfer select company-operated stores to distributors. Distributor revenues are reported within our wholesale channel.
- We anticipate that our annual gross margin for 2017 will trend to approximately 50%, as our seasonal sale volumes are lower in our third and fourth quarters.
- We have identified reductions in SG&A in the amount of $75 to $85 million. These actions are projected to generate an annual $30 to $35 million improvement in earnings before interest and taxes by 2019. We expect to achieve approximately $30 million of these SG&A reductions in 2017. We expect to incur charges of approximately $10 to $15 million over the next two years to achieve these SG&A reductions, with approximately $7 to $10 million of that being incurred in 2017. We anticipate closing or transferring approximately 90 and 70 company-operated retail stores in 2017 and 2018, respectively, thereby reducing our total store count to approximately 400 from 558 at the end of 2016. The majority of company-operated store closures will occur as store leases expire.

### Use of Non-GAAP Financial Measures

In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present certain information related to our current period results of operations through “constant currency”, which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable segments under U.S. GAAP. Constant currency represents current period results that have been retranslated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.

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

### Financial Highlights

The following are significant developments in our businesses during the three months ended June 30, 2017:

- Revenues for the three months ended June 30, 2017 were $313.2 million, a decrease of $10.6 million, or 3.3%, compared to the same period in 2016.
- Cost of sales for the three months ended June 30, 2017 was $143.4 million, a decrease of $10.8 million, or 7.0%, compared to the same period in 2016.
- Gross profit for the three months ended June 30, 2017 was $169.8 million, an increase of $0.2 million, or 0.1%. Gross margin increased 180 basis points to 54.2%, compared to the same period in 2016.
- Selling, general and administrative expenses decreased $8.7 million, or 5.8%, including $1.8 million in strategic consulting and reorganization costs, for the three months ended June 30, 2017 compared to the same period in 2016.
- Net income attributable to common stockholders increased $6.3 million to $18.1 million compared to $11.7 million for the same period in 2016. Basic and diluted net earnings per common share (“EPS”) were $0.21 and $0.20 respectively, for the three months ended June 30, 2017, compared to basic and diluted EPS of $0.13 for the three months ended June 30, 2016.

### Future Outlook

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

(1) focusing on driving clogs and sandals growth (sandals includes flips, and slides),

(2) enhancing brand relevance and esteem through our “Come as You Are” campaign, using effective digital marketing,

(3) focusing on driving consistent growth in e-commerce and wholesale, and optimizing distributor and outlet productivity and performance,

(4) focusing time and investment on driving growth in core markets in Asia and the Americas,

(5) driving improved profitability through greater cost and working capital efficiency, and

(6) elevating internal communication and employee engagement.

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

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

### Comparison of Three Months Ended June 30, 2017 to Three Months Ended June 30, 2016

### Results of Operations

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

|  | Three Months Ended June 30, 2017 | 2016 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $313,221 | $323,828 | $(10,607) | (3.3)% |
| Cost of sales | 143,414 | 154,188 | (10,774) | (7.0)% |
| Gross profit | 169,807 | 169,640 | 167 | 0.1% |
| Selling, general and administrative expenses | 140,361 | 149,035 | (8,674) | (5.8)% |
| Income from operations | 29,446 | 20,605 | 8,841 | 42.9% |
| Foreign currency gain (loss), net | 162 | (1,700) | 1,862 | 109.5% |
| Interest income | 157 | 164 | (7) | (4.3)% |
| Interest expense | (188) | (234) | 46 | (19.7)% |
| Other income, net | 9 | (189) | 198 | (104.8)% |
| Income before income taxes | 29,586 | 18,646 | 10,940 | 58.7% |
| Income tax expense | 7,627 | 3,109 | 4,518 | 145.3% |
| Net income | 21,959 | 15,537 | 6,422 | 41.3% |
| Dividends on Series A convertible preferred stock | (3,000) | (3,000) | — | —% |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (873) | (802) | (71) | 8.9% |
| Net income attributable to common stockholders | $18,086 | $11,735 | $6,351 | 54.1% |
| Net income per common share: |  |  |  |  |
| Basic | $0.21 | $0.13 | $0.08 | 61.5% |
| Diluted | $0.20 | $0.13 | $0.07 | 53.8% |
| Gross margin | 54.2% | 52.4% | 180 | 3.5% |
| Operating margin | 9.4% | 6.4% | 300 | 46.9% |
| Footwear unit sales | 17,422 | 17,734 | (312) | (1.8)% |
| Average footwear selling price | $17.66 | $18.05 | $(0.39) | (2.2)% |

***Revenues.*** Revenues decreased $10.6 million, or 3.3%, in the three months ended June 30, 2017, compared to the same period in 2016. The revenue decrease was primarily due to the sale of our Taiwan business in December 2016, targeted reductions in the number of our company-operated retail stores, and additional actions taken to optimize our wholesale, retail and e-commerce channels. Approximately $5.7 million, or 1.8%, of the decrease was due to lower sales volumes, $2.9 million, or 0.9%, was due to lower average selling prices as our product, store and channel mix continued to change, and the remaining decrease of $2.0 million, or 0.6%, resulted from foreign currency translation.

***Cost of sales.*** During the three months ended June 30, 2017, cost of sales decreased $10.8 million, or 7.0%, compared to the same period in 2016. Lower average costs per unit were primarily the result of product mix, including sandals and clog silhouettes which cost less to produce, and continued supply chain cost reductions, including relocation of third-party manufacturing production within the Asia Pacific region. Approximately $2.7 million, or 1.8%, of the decrease was due to lower unit sales volumes, $7.5 million, or 4.8%, was related to lower average costs per unit, and $0.6 million, or 0.4%, from foreign currency translation.

***Gross profit.*** During the three months ended June 30, 2017, gross profit increased $0.2 million, or 0.1%, and gross margin increased 180 basis points to 54.2%, compared to the same period in 2016. The increase in gross profit was primarily due to our continued focus on sales of higher margin core molded products, and reduced sales through discount channels. Approximately $4.5 million, or 2.7%, of the increase was due to the combined impact of decreases in average costs per unit which exceeded decreases in average selling prices, partially offset by decreases of $3.0 million, or 1.8%, resulting from lower sales unit volumes, and $1.3 million, or 0.8%, from foreign currency translation.

***Selling, general and administrative expenses.*** SG&A decreased $8.7 million, or 5.8%, during the three months ended June 30, 2017, compared to the same period in 2016. The decrease was primarily due to the combined impacts of a timing related deferral of $1.7 million in marketing expense related to our advertising and promotional activities, a decrease in facilities expenses of $2.6 million, reflecting fewer company-operated retail stores and the sale of our Taiwan business, a decrease in net bad debts expense of $1.2 million due to recoveries of previously reserved accounts receivable in China, and decreases of $3.2 million related to our SG&A reduction efforts, none of which were individually significant.

Bad debt expense related to our China operations was not significant during 2017 or 2016, due to the implementation of a more restrictive credit policy in 2015 and our continued focus on the creditworthiness of our distribution partners.

***Foreign currency gain (loss), net.*** Foreign currency gain (loss), net consists of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies, and realized and unrealized gains and losses on foreign currency derivative instruments. During the three months ended June 30, 2017, we recognized realized and unrealized net foreign currency gains of $0.2 million compared to net losses of $1.7 million during the three months ended June 30, 2016.

***Income tax expense.*** During the three months ended June 30, 2017, income tax expense increased $4.5 million compared to the same period in 2016. The effective tax rate for the three months ended June 30, 2017 was 25.8% compared to an effective tax rate of 16.7% for the same period in 2016, a 9.1% increase. The increase in the effective rate was driven primarily by operating losses in certain jurisdictions where we are unable to record tax benefits because we have determined that it is not more likely than not that such tax benefits will be realized, as well as an increase in profitability in certain jurisdictions for which tax expense is recorded. Our effective tax rate of 25.8% for the three months ended June 30, 2017 differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions as well as book losses in certain jurisdictions for which tax benefits cannot be recognized.

### Revenues By Channel

*(in thousands)*

| Wholesale: | Three Months Ended June 30, 2017 | 2016 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $57,307 | $54,620 | $2,687 | 4.9% | $2,516 | 4.6% |
| Asia Pacific | 65,146 | 74,640 | (9,494) | (12.7)% | (8,541) | (11.4)% |
| Europe | 30,947 | 36,192 | (5,245) | (14.5)% | (5,234) | (14.5)% |
| Other businesses | 103 | 225 | (122) | (54.2)% | (121) | (53.8)% |
| Total wholesale | 153,503 | 165,677 | (12,174) | (7.3)% | (11,380) | (6.9)% |
| Retail: |  |  |  |  |  |  |
| Americas | 55,576 | 57,786 | (2,210) | (3.8)% | (2,108) | (3.6)% |
| Asia Pacific | 39,429 | 41,319 | (1,890) | (4.6)% | (1,566) | (3.8)% |
| Europe | 13,071 | 13,950 | (879) | (6.3)% | (1,138) | (8.2)% |
| Total retail | 108,076 | 113,055 | (4,979) | (4.4)% | (4,812) | (4.3)% |
| E-commerce: |  |  |  |  |  |  |
| Americas | 23,271 | 22,691 | 580 | 2.6% | 659 | 2.9% |
| Asia Pacific | 20,069 | 14,887 | 5,182 | 34.8% | 6,008 | 40.4% |
| Europe | 8,302 | 7,518 | 784 | 10.4% | 902 | 12.0% |
| Total e-commerce | 51,642 | 45,096 | 6,546 | 14.5% | 7,569 | 16.8% |
| Total revenues | $313,221 | $323,828 | $(10,607) | (3.3)% | $(8,623) | (2.7)% |

***Wholesale channel revenues.*** During the three months ended June 30, 2017, revenues from our wholesale channel decreased $12.2 million, or 7.3%, compared to the same period in 2016. The decrease resulted from an intentional reduction of sales through discount channels and reduced sales to select, overstocked distributors in Asia, which we began in the third quarter of 2016 to improve the quality of our earnings. Approximately $8.2 million, or 4.9%, of the decrease resulted from lower sales volumes, $3.2 million, or 1.9%, is attributable to lower average selling prices, and $0.8 million, or 0.5%, resulted from foreign currency translation.

***Retail channel revenues.*** During the three months ended June 30, 2017, revenues from our retail channel decreased $5.0 million or 4.4%, compared to the same period in 2016. The decrease in retail channel revenues compared to the same period in 2016 was due primarily to lower average sales prices as we shift to lower-priced molded product, combined with a net decrease of 55 company-operated retail store locations, as we work to optimize our store fleet. Approximately $5.7 million, or 5.1%, of the decrease was attributable to lower average selling prices, a decrease of $0.2 million, or 0.1%, resulted from foreign currency translation, which were partially offset by an increase of $0.9 million, or 0.8%, from higher sales volumes.

***E-commerce channel revenues.*** During the three months ended June 30, 2017, revenues from our e-commerce channel increased $6.6 million, or 14.5%, compared to the same period in 2016, as this channel continues to grow in importance to our overall business. Revenues associated with an increase of $15.4 million, or 34.0%, in sales volumes, particularly in the Asia Pacific segment, were offset in part by a decrease of $7.8 million, or 17.3%, in lower average selling prices, and a decrease of $1.0 million, or 2.2%, from foreign currency translation.

Future changes in average selling prices will be impacted by: (i) the mix of products sold, (ii) the sales channel under which the sales are made (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.

### Comparison of the Three Months Ended June 30, 2017 and 2016 by Reportable Operating Segment

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

*(in thousands)*

| Revenues: | Three Months Ended June 30, 2017 | 2016 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $136,154 | $135,097 | $1,057 | 0.8% | $1,067 | 0.8% |
| Asia Pacific | 124,644 | 130,846 | (6,202) | (4.7)% | (4,099) | (3.1)% |
| Europe | 52,320 | 57,660 | (5,340) | (9.3)% | (5,470) | (9.5)% |
| Total segment revenues | 313,118 | 323,603 | (10,485) | (3.2)% | (8,502) | (2.6)% |
| Other businesses | 103 | 225 | (122) | (54.2)% | (121) | (53.8)% |
| Total revenues | $313,221 | $323,828 | $(10,607) | (3.3)% | $(8,623) | (2.7)% |
| Income from operations: |  |  |  |  |  |  |
| Americas | $25,205 | $18,015 | $7,190 | 39.9% | $7,294 | 40.5% |
| Asia Pacific | 33,305 | 34,533 | (1,228) | (3.6)% | (654) | (1.9)% |
| Europe | 10,031 | 8,437 | 1,594 | 18.9% | 1,284 | 15.2% |
| Total segment operating income | 68,541 | 60,985 | 7,556 | 12.4% | 7,924 | 13.0% |
| Other businesses (2) | (5,035) | (6,038) | 1,003 | (16.6)% | 1,008 | (16.7)% |
| Unallocated corporate and other (3) | (34,060) | (34,342) | 282 | (0.8)% | (41) | 0.1% |
| Total operating income | $29,446 | $20,605 | $8,841 | 42.9% | $8,891 | 43.1% |

(1) Reflects year over year change as if the current period results were in “constant currency”, which is a non-GAAP financial measure. “Constant currency” represents current period results that have been retranslated using exchange rates in effect in the prior comparative period.

(2) Other businesses consists primarily of our owned and leased manufacturing facilities, which manufacture products for sale by our operating segments.

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

### Americas Operating Segment

***Revenues.*** During the three months ended June 30, 2017, revenues for our Americas segment increased $1.1 million, or 0.8%, compared to the same period in 2016. Higher wholesale revenues, as a result of increased customer acceptance of our products in key family footwear accounts, and a modest increase in e-commerce revenues, were partially offset by lower retail revenues resulting from fewer company-operated retail stores. Higher sales volumes resulted in an increase of approximately $3.0 million, or 2.2%, which was partially offset by a decrease in average selling prices of $1.9 million, or 1.4%.

***Income from Operations.*** During the three months ended June 30, 2017, gross profit for the Americas segment increased $3.3 million, or 4.8%, and gross margin increased 206 basis points to 53.3%, compared to the same period in 2016. The increase in the Americas segment gross profit is due to the net impact of an increase of $1.5 million, or 2.2%, due to higher sales volumes, an increase of $1.9 million, or 2.8%, due to a decline in average costs per unit which exceeded the decline in average selling prices, and a decrease of $0.1 million, or 0.2%, due to foreign currency translation.

During the three months ended June 30, 2017, SG&A for our Americas segment decreased $3.9 million, or 7.5%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of a decrease of $0.9 million in salaries and wages, a decrease of $0.7 million in facilities expenses due primarily to reduced retail store locations, decreases of $1.0 million in marketing, information technology and bad debts expenses, and decreases of $1.3 million in services and other expenses, none of which were individually significant.

### Asia Pacific Operating Segment

***Revenues.*** During the three months ended June 30, 2017, revenues for our Asia Pacific segment decreased $6.2 million, or 4.7%, compared to the same period in 2016. Wholesale revenues decreased due to the sale of our Taiwan business in December 2016, and reduced sales to select, overstocked distributors. Retail revenues decreased due to a lower number of company-operated retail stores. E-commerce revenues increased, with particularly strong results in China. Approximately $13.8 million, or 10.5%, of the decrease was due to lower average selling prices, accompanied by a decrease of $2.1 million, or 1.6%, from foreign currency translation, which were offset in part by an increase of $9.7 million, or 7.4%, due to higher sales volumes.

***Income from Operations.*** During the three months ended June 30, 2017, gross profit for the Asia Pacific segment decreased $4.7 million, or 5.9%, and gross margin decreased 72 basis points to 59.9% compared to the same period in 2016. The decrease in the Asia Pacific segment gross profit is due to the net impact of an increase of $5.9 million, or 7.4%, due to higher unit sales volumes, a decrease of $9.2 million, or 11.6%, due to a decline in average selling prices that exceeded the decline in average costs per unit, and a $1.4 million, or 1.7%, decrease from foreign currency translation.

During the three months ended June 30, 2017, SG&A for our Asia Pacific segment decreased $3.4 million or 7.7%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of a reduction in net bad debts expense of $0.9 million due to due to recoveries of previously reserved accounts receivable in China, a decrease of $2.4 million in salaries, wages and facilities expenses as a result of the reduction in the number of company-operated retail stores and our SG&A reduction efforts, and a decrease of $0.1 million in services and other costs.

### Europe Operating Segment

***Revenues.*** During the three months ended June 30, 2017, revenues for our Europe segment decreased $5.3 million, or 9.3%, compared to the same period in 2016, as we continued reducing discount channel sales and our company-operated stores, while growing our e-commerce business. Approximately $13.1 million, or 22.7%, of the decrease was due to lower sales volumes, which was offset in part by an increase of $7.6 million, or 13.2%, attributable to higher average selling prices and an increase of $0.2 million, or 0.2%, from foreign currency translation.

***Income from Operations.*** During the three months ended June 30, 2017, gross profit for the Europe segment decreased $0.9 million, or 3.3%, and gross margin increased 332 basis points to 53.4% compared to the same period in 2016. The decrease in the Europe segment gross profit was due to the net impact of a decrease of $6.5 million, or 22.7%, from lower unit sales volumes, an increase of $5.5 million, or 19.1%, from higher average selling prices that exceeded an increase in cost per unit, and a $0.1 million, or 0.3%, increase from foreign currency translation.

During the three months ended June 30, 2017, SG&A for our Europe segment decreased $2.5 million, or 12.4%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of a decrease of $1.4 million in salaries, wages and facilities expenses, resulting from reductions in the number of company-operated retail stores and our SG&A reduction efforts, a $0.7 million decrease in marketing expenses due to a timing deferral, and a decrease in services and other costs of $0.4 million.

### Unallocated Corporate and Other

During the three months ended June 30, 2017, total net costs within Unallocated Corporate and Other decreased by $0.3 million or 0.8%, compared to the same period in 2016. The decrease was primarily due to decreases in services and other corporate expenses.

### Store Locations and Comparable Store Sales

The table below illustrates the overall change in the number of our company-operated retail locations by type of store and reportable operating segment:

| Company-operated retail locations: Type: | March 31, 2017 | Opened | Closed (1) | June 30, 2017 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store-in-store | 90 | — | 6 | 84 |
| Retail stores | 219 | 1 | 29 | 191 |
| Outlet stores | 233 | 3 | 8 | 228 |
| Total | 542 | 4 | 43 | 503 |
| Operating segment: |  |  |  |  |
| Americas | 186 | — | 2 | 184 |
| Asia Pacific | 260 | 3 | 35 | 228 |
| Europe | 96 | 1 | 6 | 91 |
| Total | 542 | 4 | 43 | 503 |

(1) We completed the transfer of twenty-five company-operated stores in the Middle-East and China to distributors during the period.

Comparable retail store sales and direct to consumer store sales by operating segment are as follows:

| Comparable store sales (retail only): (2) | Constant Currency (1) Three Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Americas | 0.4% | (2.5)% |
| Asia Pacific | (0.9)% | (6.8)% |
| Europe | 0.7% | 1.8% |
| Global | 0.0% | (3.4)% |

| Direct to consumer comparable store sales (includes retail and e-commerce): (2) | Constant Currency (1) Three Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Americas | 1.1% | 2.4% |
| Asia Pacific | 13.3% | 4.3% |
| Europe | 5.1% | 1.6% |
| Global | 5.7% | 2.9% |

(1) Reflects period over period change on a “constant currency” basis, which is a non-GAAP financial measure. “Constant currency” represents current period results that have been retranslated using exchange rates used in the prior comparative period.

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

### Comparison of the Six Months Ended June 30, 2017 to the Six Months Ended June 30, 2016

### Results of Operations

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

|  | Six Months Ended June 30, 2017 | 2016 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $581,128 | $602,968 | $(21,840) | (3.6)% |
| Cost of sales | 277,737 | 303,962 | (26,225) | (8.6)% |
| Gross profit | 303,391 | 299,006 | 4,385 | 1.5% |
| Selling, general and administrative expenses | 258,363 | 264,158 | (5,795) | (2.2)% |
| Income from operations | 45,028 | 34,848 | 10,180 | 29.2% |
| Foreign currency transaction gain (loss), net | 438 | (2,947) | 3,385 | (114.9)% |
| Interest income | 307 | 380 | (73) | (19.2)% |
| Interest expense | (372) | (477) | 105 | (22.0)% |
| Other expense, net | 133 | (107) | 240 | (224.3)% |
| Income before income taxes | 45,534 | 31,697 | 13,837 | 43.7% |
| Income tax expense | 12,564 | 6,014 | 6,550 | 108.9% |
| Net income | 32,970 | 25,683 | 7,287 | 28.4% |
| Dividends on Series A convertible preferred stock | (6,000) | (6,000) | — | —% |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (1,729) | (1,587) | (142) | 8.9% |
| Net income attributable to common stockholders | $25,241 | $18,096 | $7,145 | 39.5% |
| Net income per common share: |  |  |  |  |
| Basic | $0.29 | $0.21 | $0.08 | 38.1% |
| Diluted | $0.29 | $0.20 | $0.09 | 45.0% |
| Gross margin | 52.2% | 49.6% | 260 | 5.3% |
| Operating margin | 7.7% | 5.8% | 197 | 34.1% |
| Footwear unit sales | 33,817 | 34,001 | (184) | (0.5)% |
| Average footwear selling price | $16.91 | $17.48 | $(0.57) | (3.3)% |

***Revenues.*** Revenues decreased $21.8 million, or 3.6%, in the six months ended June 30, 2017, compared to the same period in 2016. The decrease in revenues was primarily due to the sale of our Taiwan business in December 2016, targeted reductions in the number of company-operated retail stores, and additional actions taken to optimize our wholesale, retail and e-commerce channels. Approximately $3.2 million, or 0.5%, of the decrease was due to lower sales volumes, $17.6 million, or 2.9%, was due to lower average selling prices as our product, store, and channel mix continued to change, and $1.0 million, or 0.2%, resulted from foreign currency translation.

***Cost of sales.*** During the six months ended June 30, 2017, cost of sales decreased $26.2 million, or 8.6%, compared to the same period in 2016. Lower average costs per unit were primarily the result of product mix, including sandals and clog silhouettes which cost less to produce, and continued supply chain cost reductions, including relocation of third-party manufacturing production within the Asia Pacific region. Approximately $24.7 million, or 8.1%, of the decrease was due to lower average costs per unit, and $1.6 million, or 0.5%, due to lower unit sales volumes, which was partially offset by an increase of $0.1 million, or less than 1%, from foreign currency translation.

***Gross profit.*** During the six months ended June 30, 2017, gross profit increased $4.4 million, or 1.5%, and gross margin increased approximately 260 basis points to 52.2% compared to the same period in 2016. The increase in gross profit was primarily due to our continued focus on sales of higher margin core molded products, and reduced sales through discount channels. Approximately $7.1 million, or 2.4%, of the increase was due to decreases in average costs per unit which exceeded decreases in average selling prices, which was partially offset by decreases of $1.6 million, or 0.5%, from lower sales unit volumes, and $1.1 million, or 0.4%, from foreign currency translation.

***Selling, general and administrative expenses.*** SG&A decreased $5.8 million, or 2.2%, during the six months ended June 30, 2017, compared to the same period in 2016. The decrease was primarily due to the combined net impacts of a decrease of $6.1 million in facilities expenses reflecting fewer company-owned retail stores, including impairment in 2016 of $0.8 million, lower net bad debts expense of $2.2 million due to recoveries of previously reserved accounts receivable in China, partially offset by higher marketing expenses of $2.1 million and an increase in other expenses of $0.4 million.

Bad debt expense related to our China operations was not significant during 2017 or 2016, due to the implementation of a more restrictive credit policy in 2015 and continued focus on the creditworthiness of our distribution partners.

***Foreign currency gain (loss), net.*** Foreign currency gain (loss), net consists of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies, and realized and unrealized gains and losses on foreign currency derivative instruments. During the six months ended June 30, 2017, we recognized realized and unrealized foreign currency net gains of $0.4 million compared to net losses of $2.9 million during the six months ended June 30, 2016

***Income tax expense.*** During the six months ended June 30, 2017, income tax expense increased $6.6 million compared to the same period in 2016. The effective tax rate for the six months ended June 30, 2017 was 27.6% compared to an effective tax rate of 19.0% for the same period in 2016, an 8.6% increase. The increase in the effective rate was driven primarily by operating losses in certain jurisdictions where we are unable to record tax benefits because we have determined that it is not more likely than not that such tax benefits will be realized, as well as an increase in profitability in certain jurisdictions for which tax expense is recorded. Our effective tax rate of 27.6% for the six months ended June 30, 2017 differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions as well as book losses in certain jurisdictions for which tax benefits cannot be recognized.

### Revenues By Channel

*(in thousands)*

| Wholesale: | Six Months Ended June 30, 2017 | 2016 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $128,333 | $128,775 | $(442) | (0.3)% | $(1,762) | (1.4)% |
| Asia Pacific | 136,081 | 151,793 | (15,712) | (10.4)% | (14,760) | (9.7)% |
| Europe | 71,530 | 75,254 | (3,724) | (4.9)% | (3,096) | (4.1)% |
| Other businesses | 291 | 397 | (106) | (26.7)% | (100) | (25.2)% |
| Total wholesale | 336,235 | 356,219 | (19,984) | (5.6)% | (19,718) | (5.5)% |
| Retail: |  |  |  |  |  |  |
| Americas | 88,405 | 93,535 | (5,130) | (5.5)% | (5,066) | (5.4)% |
| Asia Pacific | 60,961 | 63,838 | (2,877) | (4.5)% | (2,730) | (4.3)% |
| Europe | 20,490 | 21,505 | (1,015) | (4.7)% | (1,549) | (7.2)% |
| Total retail | 169,856 | 178,878 | (9,022) | (5.0)% | (9,345) | (5.2)% |
| E-commerce: |  |  |  |  |  |  |
| Americas | 37,139 | 36,917 | 222 | 0.6% | 267 | 0.7% |
| Asia Pacific | 25,946 | 19,716 | 6,230 | 31.6% | 7,111 | 36.1% |
| Europe | 11,952 | 11,238 | 714 | 6.4% | 869 | 7.7% |
| Total e-commerce | 75,037 | 67,871 | 7,166 | 10.6% | 8,247 | 12.2% |
| Total revenues | $581,128 | $602,968 | $(21,840) | (3.6)% | $(20,816) | (3.5)% |

28

***Wholesale channel revenues.*** During the six months ended June 30, 2017, revenues from our wholesale channel decreased $20.0 million, or 5.6%, compared to the same period in 2016. The decrease was due to lower average sales prices as we shift to lower-priced molded product, an intentional reduction of sales through discount channels, and reduced sales to select, overstocked distributors in Asia, which we began in the third quarter of 2016 to improve the quality of our earnings. Approximately $3.8 million, or 1.1%, of the decrease resulted from lower sales volumes, $15.9 million, or 4.5%, was due to lower average selling prices, and $0.3 million, or less than 1%, resulted from foreign currency translation.

***Retail channel revenues.*** During the six months ended June 30, 2017, revenues from our retail channel decreased $9.0 million, or 5.0% compared to the same period in 2016. The decrease in retail channel revenues was due primarily to lower average sales prices as we shift to lower-priced molded product, and a net decrease of 55 company-operated retail store locations, as we work to optimize our store base. Approximately $7.0 million, or 3.9%, of the decrease was due to lower average selling prices, along with a decrease of $2.4 million, or 1.3%, in sales volumes, partially offset by an increase of $0.2 million, or 0.2%, from foreign currency translation.

***E-commerce channel revenues.*** During the six months ended June 30, 2017, revenues from our e-commerce channel increased $7.2 million, or 10.6%, compared to the same period in 2016., as this channel continued to grow in importance to our business. Approximately $17.7 million, or 26.1%, of the increase resulted from higher sales volumes, primarily in the Asia Pacific segment, which was partially offset by decreases of $9.5 million, or 14.0%, due to lower average selling prices, and $1.0 million, or 1.5%, from foreign currency translation.

Future changes in average selling prices will be impacted by: (i) the mix of products sold, (ii) the sales channel under which the sales are made (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.

### Comparison of the Six Months Ended June 30, 2017 and 2016 by Reportable Operating Segment

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

| Revenues: | Six Months Ended June 30, 2017 | 2016 | Change $% |  | $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $253,877 | $259,227 | $(5,350) | (2.1)% | $(6,561) | (2.5)% |
| Asia Pacific | 222,989 | 235,347 | (12,358) | (5.3)% | (10,379) | (4.4)% |
| Europe | 103,971 | 107,997 | (4,026) | (3.7)% | (3,776) | (3.5)% |
| Total segment revenues | 580,837 | 602,571 | (21,734) | (3.6)% | (20,716) | (3.4)% |
| Other businesses | 291 | 397 | (106) | (26.7)% | (100) | (25.2)% |
| Total revenues | $581,128 | $602,968 | $(21,840) | (3.6)% | $(20,816) | (3.5)% |
| Income from operations: |  |  |  |  |  |  |
| Americas | $47,207 | $34,592 | $12,615 | 36.5% | $12,599 | 36.4% |
| Asia Pacific | 60,030 | 60,383 | (353) | (0.6)% | 165 | 0.3% |
| Europe | 22,305 | 14,960 | 7,345 | 49.1% | 7,118 | 47.6% |
| Total segment operating income | 129,542 | 109,935 | 19,607 | 17.8% | 19,882 | 18.1% |
| Other businesses (2) | $(10,650) | (12,111) | 1,461 | (12.1)% | 1,430 | (11.8)% |
| Unallocated corporate and other (3) | (73,864) | (62,976) | (10,889) | 17.3% | 28,593 | (45.4)% |
| Total operating income | $45,028 | $34,848 | $10,179 | 29.2% | $49,905 | 143.2% |

(1) Reflects year over year change as if the current period results were in “constant currency”, which is a non-GAAP financial measure. “Constant currency” represents current period results that have been retranslated using exchange rates used in the prior comparative period.

(2) Other businesses consists primarily of our owned and leased manufacturing facilities, which manufacture products for sale by our operating segments.

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

### Americas Operating Segment

***Revenues.*** During the six months ended June 30, 2017, revenues for our Americas segment decreased $5.4 million, or 2.1%, compared to the same period in 2016. The decrease in revenues resulted primarily from lower retail revenues as a result of fewer company-operated retail stores. Approximately $4.0 million, or 1.5%, of the decrease related to a decrease in average selling prices, $2.6 million, or 1.0%, resulted from lower unit sales volumes, which were partially offset by an increase of $1.2 million, or 0.4%, from foreign currency translation.

***Income from Operations.*** During the six months ended June 30, 2017, gross profit for the Americas segment increased $8.9 million, or 7.2%, and gross margin increased 451 basis points to 52.2%, compared to the same period in 2016. The increase in the Americas segment gross profit is due to the net impact of a decrease of $1.2 million, or 1.0%, due to lower unit sales volumes, an increase of $9.9 million, or 8.0%, due to a decline in average costs per unit which exceeded the decline in average selling prices, and an increase of $0.2 million, or 0.2%, due to foreign currency translation.

During the six months ended June 30, 2017, SG&A for our Americas segment decreased $3.7 million, or 4.2%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of a decrease of $1.3 million in facilities expenses as a result of reductions in the number of company-operated retail stores, a decrease of $0.7 million in impairment expense recorded in 2016, and a decrease of $1.7 million in services, information technology, and other expenses, none of which were individually significant.

### Asia Pacific Operating Segment

***Revenues.*** During the six months ended June 30, 2017, revenues for our Asia Pacific segment decreased $12.4 million, or 5.3%, compared to the same period in 2016. Wholesale revenues decreased due to the combined effects of the sale of our Taiwan business in December 2016, and reduced sales to select, overstocked distributors. Retail revenues decreased as a result of a lower number of company-operated retail stores. E-commerce revenues increased, with particularly strong performance in China. Approximately $33.5 million, or 14.2%, of the decrease resulted from lower average selling prices, along with a decrease of $2.0 million, or 0.9%, from foreign currency translation, partially offset by an increase of $23.1 million, or 9.8%, due to higher sales volumes.

***Income from Operations.*** During the six months ended June 30, 2017, gross profit for the Asia Pacific segment decreased $8.5 million, or 6.2%, and gross margin decreased 60 basis points to 57.6% compared to the same period in 2016. The decrease in the Asia Pacific segment gross profit is due to the net impact of a decrease of $20.7 million, or 15.1%, due to a decline in average selling prices that exceeded the decline in average costs per unit, a decrease of $1.3 million, or 0.9%, from foreign currency translation, partially offset by an increase of $13.5 million, or 9.8%, resulting from higher sales volumes,.

During the six months ended June 30, 2017, SG&A for our Asia Pacific segment decreased $8.2 million, or 10.7%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of decreases of $2.5 million in salaries and wages, and $2.5 million in facilities expenses, as a result of the reduction in the number of company-operated retail stores, lower net bad debts expense of $1.9 million due to recoveries of previously reserved accounts receivable in China, a decrease of $0.4 million in marketing expenses due to a timing deferral, and a decrease of $0.9 million services and other costs.

### Europe Operating Segment

***Revenues.*** During the six months ended June 30, 2017, revenues for our Europe segment decreased $4.0 million, or 3.7%, compared to the same period in 2016, as we continued to reduce discount channel sales and company-operated stores, while growing our e-commerce business. Approximately $15.8 million, or 14.6%, of the decrease was due to lower unit sales volumes, along with a decrease of $0.2 million, or 0.2%, from foreign currency translation, partially offset by an increase of $12.0 million, or 11.1%, from a higher average selling prices.

***Income from Operation.*** During the six months ended June 30, 2017, gross profit for the Europe segment increased $2.1 million, or 4.1%, and gross margin increased by 387 basis points to 51.5% compared to the same period in 2016. The increase in the Europe segment gross profit is due to the net impact of a decrease of $7.5 million, or 14.6%, due to lower unit sales volumes, an increase of $9.7 million, or 18.9%, due to a higher average selling prices, and a decrease of $0.1 million, or 0.2%, from foreign currency translation.

During the six months ended June 30, 2017, SG&A for our Europe segment decreased $5.2 million, or 14.4%, compared to the same period in 2016. The decrease in SG&A was primarily due to decreases in salaries and wages of $1.6 million, and facilities expenses of $1.2 million, as a result of the reduction in company-operated retail stores, a decrease of $1.7 million in marketing expenses due to a timing deferral, and a decrease in services and other costs of $0.7 million.

### Unallocated Corporate and Other

During the six months ended June 30, 2017, total net costs within Unallocated Corporate and Other increased by $10.9 million, or 17.3%, compared to the same period in 2016. The increase was primarily due to an increase of $2.6 million in salaries and wages, including $1.2 million in severance costs, an increase of $4.7 million in marketing expenses, primarily related to our advertising and promotional activities, increases in strategic consulting fees of $1.6 million, reorganization costs of $1.6 million, and an increase of $0.4 million in other corporate costs.

### Store Locations and Comparable Store Sales

The table below illustrates the overall change in the number of our company-operated retail locations by type of store and reportable operating segment:

| Company-operated retail locations: Type: | December 31, 2016 | Opened | Closed (1) | June 30, 2017 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store-in-store | 98 | — | 14 | 84 |
| Retail stores | 228 | 4 | 41 | 191 |
| Outlet stores | 232 | 10 | 14 | 228 |
| Total | 558 | 14 | 69 | 503 |
| Operating segment: |  |  |  |  |
| Americas | 190 | 1 | 7 | 184 |
| Asia Pacific | 270 | 12 | 54 | 228 |
| Europe | 98 | 1 | 8 | 91 |
| Total | 558 | 14 | 69 | 503 |

(1) We completed the transfer of thirty company-operated stores in the Middle-East and China to distributors during the period.

Comparable retail store sales and direct to consumer store sales by operating segment are as follows:

| Comparable store sales (retail only): (2) | Constant Currency (1) Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Americas | (2.1)% | (0.5)% |
| Asia Pacific | (1.1)% | (3.7)% |
| Europe | (2.5)% | 3.9% |
| Global | (1.8)% | (1.0)% |

31

| Direct to consumer comparable store sales (includes retail and e-commerce): (2) | Constant Currency (1) Six Months Ended June 30, 2017 | 2016 |
| --- | ---: | ---: |
| Americas | 1.2% | 5.9% |
| Asia Pacific | 10.9% | 4.8% |
| Europe | 1.4% | 4.4% |
| Global | 2.9% | 5.4% |

(1) Reflects period over period change on a “constant currency” basis, which is a non-GAAP financial measure. “Constant currency” represents current period results that have been retranslated using exchange rates used in the prior comparative period.

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

### Liquidity and Capital Resources

We anticipate our cash flows from operations and available borrowings under our revolving credit facility (as described below) will be sufficient to meet the ongoing liquidity needs of our business for the next twelve months. As of June 30, 2017, we had $157.0 million in cash and cash equivalents and up to $78.7 million in available borrowings under our revolving credit facility. At June 30, 2017, $131.8 million of our $157.0 million in cash and cash equivalents was held in international locations. See “Repatriation of Cash” below for more information. Additional future financing may be necessary to fund our operations and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all.

### Condensed Consolidated Statements of Cash Flows

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

*(in thousands)*

|  | Six Months Ended June 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: |
| Cash provided by operating activities | $39,380 | $19,818 | $19,562 |
| Cash used in investing activities | (10,695) | (11,258) | 563 |
| Cash used in financing activities | (18,305) | (7,443) | (10,862) |
| Effect of exchange rate changes on cash | (983) | 2,204 | (3,187) |
| Net change in cash and cash equivalents | $9,397 | $3,321 | $6,076 |

***Operating Activities.*** Cash provided by operating activities increased $19.6 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. The increase in cash provided by operating activities resulted from a favorable change in net income as adjusted for non-cash items of $3.7 million, and a favorable change in our operating assets and liabilities of $15.9 million. Net income as adjusted for non-cash items increased due to: (i) an increase of $3.1 million from net unrealized foreign currency forward contracts gains and losses; (ii) an increase of $7.3 million from higher net income; (iii) a decrease of share-based compensation expense of $2.0 million; and (iv) a decrease of $4.5 million in other non-cash items including a decrease of $2.2 million in bad debts.

***Investing Activities.*** The $0.6 million decrease in cash used in investing activities for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 is primarily due to the net impact of: (i) a $0.9 million decrease in long-term restricted cash; and (ii) a $0.6 million increase in capital expenditures for property, equipment and intangible assets; partially offset by (iii) a decrease in proceeds from asset disposals of $0.9 million. Our capital expenditures in the six months ended June 30, 2017 did not change significantly compared to the same period in 2016.

***Financing Activities.*** The $10.9 million increase in cash used in financing activities for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 resulted from repurchases of 1.4 million shares of our common stock for approximately $10.0 million, and net repayments on borrowings of $0.9 million during the six months ended June 30, 2017 compared to the same period in 2016. Our net borrowings decreased because we financed more of our short-term cash requirements from internal cash generated from operations.

***Working Capital.*** Changes in cash from working capital during the six months ended June 30, 2017 were due primarily to the following: (i) an increase of $57.6 million from higher accounts receivable, primarily due to our seasonal revenues which are higher in our second quarter; (ii) an increase of $8.7 million from higher inventory levels, due to a seasonal increase related to our summer selling season; (iii) a decrease of $5.0 million in prepaids expenses and other assets driven primarily by decreases in prepaid advertising, endorsement and other prepaids; and (iv) an increase of $27.7 million from higher accounts payable and accrued expenses, primarily related to increased inventory levels in advance of our summer selling season. Cash and cash equivalents increased by $9.4 million to $157.0 million as of June 30, 2017.

Bad debt expense related to our China operations was not significant during 2017 or 2016, due to the implementation of a more restrictive credit policy in 2015 and continued focus on the creditworthiness of our distribution partners.

### Senior Revolving Credit Facility

In order to provide additional liquidity in the future and to help support our strategic goals, our Senior Revolving Credit Facility (the "Facility"), as amended, provides for borrowings of up to $80.0 million through February 2021. The Facility contains financial covenants that restrict certain actions by us, including limitations on: (i) stock repurchases to $50.0 million per year, subject to certain restrictions; and (ii) capital expenditures and commitments to $50.0 million per year. The Facility also requires us to meet certain financial covenant ratios that become effective when total borrowings, including letters of credit, exceed $20.0 million during certain periods or when the outstanding borrowings exceed the borrowing base. If the financial covenants are in effect, we must maintain a minimum fixed charge coverage ratio of 1.10 to 1.00, and a maximum leverage ratio of 2.00 to 1.00. The weighted average interest rate on borrowings during the three months ended June 30, 2017 was 2.49%. As of June 30, 2017, we were in compliance with all covenants.As of June 30, 2017, we had no outstanding borrowings on the Facility and $1.3 million of outstanding letters of credit, resulting in $78.7 million of available credit for future financing needs.

### Short-term Bank Borrowings

As of June 30, 2017 and December 31, 2016, we had $1.7 million and $2.3 million, respectively, of current debt outstanding under notes payable. As of June 30, 2017, the notes bear interest rates ranging from 1.95% to 2.83%.

### Stock Repurchase Plan Authorizations

On December 26, 2013, the Board approved the repurchase of up to $350.0 million of our common stock. The number, price, structure, and timing of the repurchases will be at our sole discretion and may be made in the open market or in privately negotiated transactions. The repurchase authorization does not have an expiration date and does not oblige us to acquire any particular amount of our common stock. The Board may suspend, modify, or terminate the repurchase program at any time without prior notice.

During June 2017, we repurchased 1.4 million shares of our common stock for approximately $10.0 million. As of June 30, 2017, we had $108.7 million of remaining common stock repurchase authorizations under our 2013 stock repurchase plan. During the six months ended June 30, 2016, we had no repurchases.

### Capital Assets Expenditures and Commitments

During the six months ended June 30, 2017, net capital assets acquired, inclusive of intangible assets, were $12.2 million compared to $12.8 million during the six months ended June 30, 2016. As of June 30, 2017, we have committed to additional purchases of capital assets of approximately $5.4 million. Capital spend during the six months ended June 30, 2017 related primarily to information technology investments, opening new retail stores and renovating existing stores. In addition, we renewed an agreement with our information technology service provider for three years at $5.0 million per year.

### Repatriation of Cash

We have cash balances located in various countries and denominations associated with our international operations. Fluctuations in foreign currency exchange rates impact the results of our operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries may have additional restrictions and covenants that could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities.

We generally consider unremitted earnings of subsidiaries operating outside of the U.S. to be indefinitely reinvested; however, our Board has approved a foreign cash repatriation strategy. As part of this strategy, we repatriated approximately $28.1 million of current earnings during the six months ended June 30, 2017 without a tax impact. Further cash repatriation will depend on future cash requirements in the U.S. As of June 30, 2017, we maintain approximately $178.0 million of foreign earnings for which tax has previously been provided that has not yet been repatriated.

Most of the cash balances held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal and state income taxes less applicable foreign tax credits. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. Certain countries have monetary laws, which may limit our ability to utilize cash resources in those countries for operations in other countries. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and could adversely affect our liquidity. As of June 30, 2017, we held $131.8 million of our total $157.0 million cash balance in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the $131.8 million, $0.5 million could potentially be restricted, as described above. If the remaining $131.3 million were immediately repatriated to the U.S., no additional tax expense would be incurred as $178.0 million has previously been provided for in prior periods.

### Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of June 30, 2017, other than certain operating lease and purchase commitments, which are described in Note 13 — Commitments and Contingencies.

### Critical Accounting Policies and Estimates

The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes in our critical accounting policies or their application since December 31, 2016.

### Recent Accounting Pronouncements

See Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements for a description of recently adopted accounting pronouncements, and issued accounting pronouncements that we believe may have an impact on our consolidated financial statements when adopted.

## Market risk

As filed, 4,227 characters.

### 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 and the 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 in the period that the changes occur. As of June 30, 2017, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $239.7 million. The net fair value of these contracts at June 30, 2017 was an asset of $2.8 million.

We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our foreign currency forward exchange contracts. To perform the sensitivity analysis, we assess the risk of 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 June 30, 2017, 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 $3.7 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 to translate the operating results of our international subsidiaries.

For example, in our European operating 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 operating 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 income before taxes during the three and six months ended June 30, 2017 by approximately $0.4 million and $0.7 million, respectively. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy. See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I of this Form 10-Q for a discussion of the impact of the change in foreign exchange rates on our U.S Dollar condensed consolidated statement of operations for the three months ended June 30, 2017 and 2016.

## Controls and procedures

As filed, 1,540 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 June 30, 2017, 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.

### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended June 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 137 characters.

There have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

Filed Aug 9, 2017.
Source: SEC EDGAR, the filing index for accession 0001628280-17-008449. Last ingested by Listed: Nov 6, 2026, 18:01 ET. No prices; not investment advice.