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

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-Q
- Filed: 2017-11-07
- Accepted by EDGAR: Nov 7, 2017, 12:06 ET
- Period: 2017-09-30
- Accession: 0001628280-17-011037
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000162828017011037/crox2017930-10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000162828017011037/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Gross profit | 3 months, 2017-07-01 to 2017-09-30 | $123.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2017-01-01 to 2017-09-30 | $426.9m | us-gaap:GrossProfit |
| Research and development | 3 months, 2017-07-01 to 2017-09-30 | $2.3m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2017-01-01 to 2017-09-30 | $7.4m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2017-07-01 to 2017-09-30 | $120.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2017-01-01 to 2017-09-30 | $379.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2017-07-01 to 2017-09-30 | $2.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2017-01-01 to 2017-09-30 | $47.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-07-01 to 2017-09-30 | $167.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2017-01-01 to 2017-09-30 | $539.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | $955.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-01-01 to 2017-09-30 | $13.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | $1.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2017-01-01 to 2017-09-30 | $34.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | −$0.03 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2017-01-01 to 2017-09-30 | $0.26 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-07-01 to 2017-09-30 | −$0.03 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2017-01-01 to 2017-09-30 | $0.26 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-07-01 to 2017-09-30 | 71,895,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2017-01-01 to 2017-09-30 | 74,160,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2017-01-01 to 2017-09-30 | $80.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2017-01-01 to 2017-09-30 | $6.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2017-01-01 to 2017-09-30 | $25.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-09-30 | $178.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-30 | $459.7m | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-30 | $589.7m | us-gaap:Assets |
| Current liabilities | at 2017-09-30 | $155.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-30 | $174.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2017-09-30 | $234.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 60,042 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.
- 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 sales volumes are lower in our third and fourth quarters.
- We have identified reductions in SG&A in the amount of $75 to $85 million which are projected to generate an annual $30 to $35 million improvement in earnings before interest and taxes by 2019, compared to 2016. 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 $10 million of that being incurred in 2017, of which $7.6 million had been incurred through September 30, 2017. We anticipate closing or transferring approximately 95 and 65 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.
- We anticipate lower retail revenues as we continue to optimize our sales channels.

### 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 September 30, 2017:

- Revenues for the three months ended September 30, 2017 were $243.3 million, a decrease of $2.6 million, or 1.1%, compared to the same period in 2016.
- Cost of sales for the three months ended September 30, 2017 was $119.8 million, a decrease of $3.6 million, or 3.0%, compared to the same period in 2016.
- Gross profit for the three months ended September 30, 2017 was $123.5 million, an increase of $1.0 million, or 0.8%. Gross margin increased 100 basis points to 50.8%, compared to the same period in 2016.
- SG&A decreased $2.9 million, or 2.3%, after the effects of $3.6 million in strategic consulting and reorganization costs, for the three months ended September 30, 2017 compared to the same period in 2016.
- Income from operations improved by $3.9 million, coming in at $2.7 million compared to last year’s third quarter loss of $1.2 million.
- Net loss attributable to common stockholders improved $3.1 million to a loss of $2.3 million compared to a loss of $5.4 million for the same period in 2016. Basic and diluted net loss per common share was $0.03 for the three months ended September 30, 2017, compared to $0.07 for the three months ended September 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 other third-parties. 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 September 30, 2017 to Three Months Ended September 30, 2016

### Results of Operations

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

|  | Three Months Ended September 30, 2017 | 2016 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $243,273 | $245,888 | $(2,615) | (1.1)% |
| Cost of sales | 119,810 | 123,454 | (3,644) | (3.0)% |
| Gross profit | 123,463 | 122,434 | 1,029 | 0.8% |
| Selling, general and administrative expenses | 120,778 | 123,649 | (2,871) | (2.3)% |
| Income (loss) from operations | 2,685 | (1,215) | 3,900 | 321.0% |
| Foreign currency gain (loss), net | (257) | 1,379 | (1,636) | (118.6)% |
| Interest income | 269 | 178 | 91 | 51.1% |
| Interest expense | (167) | (184) | 17 | 9.2% |
| Other income (expense) | 54 | (1) | 55 | 5,500.0% |
| Income before income taxes | 2,584 | 157 | 2,427 | 1,545.9% |
| Income tax expense | 955 | 1,690 | (735) | (43.5)% |
| Net income (loss) | 1,629 | (1,533) | 3,162 | 206.3% |
| 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 | (892) | (819) | (73) | (8.9)% |
| Net loss attributable to common stockholders | $(2,263) | $(5,352) | $3,089 | 57.7% |
| Net loss per common share: |  |  |  |  |
| Basic | $(0.03) | $(0.07) | $0.04 | 57.1% |
| Diluted | $(0.03) | $(0.07) | $0.04 | 57.1% |
| Gross margin | 50.8% | 49.8% | 100 | 2.0% |
| Operating margin | 1.1% | (0.5)% | 160 | 320.0% |
| Footwear unit sales | 13,050 | 12,135 | 915 | 7.5% |
| Average footwear selling price | $18.17 | $19.96 | $(1.79) | (9.0)% |

***Revenues.*** Revenues decreased $2.6 million, or 1.1%, in the three months ended September 30, 2017, compared to the same period in 2016. The revenues decreased primarily due to the sale of our Taiwan business in the fourth quarter of 2016, the sale of our Middle East business in the second quarter of 2017, targeted reductions in the number of company-operated retail stores, and additional actions taken to optimize our wholesale, retail, and e-commerce channels. Lower average footwear selling prices reduced revenues by approximately $22.5 million, or 9.0%, as our product, store, and channel mix continued to change. This was partially offset by higher sales volumes, which increased revenues by $18.6 million, or 7.5%, and by an increase of $1.3 million, or 0.5%, from foreign currency translation.

***Cost of sales.*** During the three months ended September 30, 2017, cost of sales decreased $3.6 million, or 3.0%, compared to the same period in 2016. Lower average costs per unit were primarily the result of product mix, reflecting our ongoing focus on core molded products, which cost less to produce, and continued supply chain cost reductions, including a reallocation of third-party manufacturing production to lower-cost suppliers within the Asia Pacific region. Lower average costs per unit reduced cost of sales by approximately $13.6 million, or 11.1%, which was partially offset by an increase due to higher unit sales volume of $9.3 million, or 7.5%, and by an increase of $0.7 million, or 0.6%, from foreign currency translation.

***Gross profit.*** During the three months ended September 30, 2017, gross profit increased $1.0 million, or 0.8%, and gross margin increased 100 basis points to 50.8%, compared to the same period in 2016. The increase in gross profit was primarily due to our continued focus on sales of higher margin products. Increases of approximately $9.2 million, or 7.5%, resulting from higher sales unit volumes and $0.6 million, or 0.5%, from foreign currency translation, were offset in part by a decrease of $8.8 million, or 7.2%, which resulted from a decline in our average selling prices that exceeded the decrease in our average costs per unit.

***Selling, general and administrative expenses.*** SG&A decreased $2.9 million, or 2.3%, during the three months ended September 30, 2017, compared to the same period in 2016. The decrease was primarily due to the combined impacts of a decrease in facilities expenses of $3.9 million, as a result of fewer company-operated retail stores and the sales of our Taiwan and Middle East businesses, and lower retail store impairment expense of $0.8 million. These savings were offset in part by higher stock compensation expense of $0.8 million and higher services and other expenses of $1.0 million, none of which were individually significant.

***Foreign currency gain, net.*** Foreign currency gain, net, consists of unrealized and realized foreign currency gains and losses from the remeasurement 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 September 30, 2017, we recognized realized and unrealized net foreign currency losses of $0.3 million compared to net gains of $1.4 million during the three months ended September 30, 2016.

***Income tax expense.*** During the three months ended September 30, 2017, income tax expense decreased $0.7 million compared to the same period in 2016. The effective tax rate for the three months ended September 30, 2017 was 37.0% compared to an effective tax rate of 1,076.4% for the same period in 2016, a 1,039.4% decrease. The 2016 effective tax rate was atypical as a result of the amount of income tax expense as compared to low income before income taxes for the period. Additionally, there is an impact due to operating losses in certain jurisdictions where the Company has determined that it is not more likely than not to realize the associated tax benefits, partially offset by tax expense recorded in profitable jurisdictions. Our effective tax rate of 37.0% for the three months ended September 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 September 30, 2017 | 2016 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $41,642 | $41,389 | $253 | 0.6% | $153 | 0.4% |
| Asia Pacific | 41,005 | 45,565 | (4,560) | (10.0)% | (4,034) | (8.9)% |
| Europe | 23,857 | 21,909 | 1,948 | 8.9% | 604 | 2.8% |
| Other businesses | 254 | 271 | (17) | (6.3)% | (28) | (10.3)% |
| Total wholesale | 106,758 | 109,134 | (2,376) | (2.2)% | (3,305) | (3.0)% |
| Retail: |  |  |  |  |  |  |
| Americas | 57,404 | 56,607 | 797 | 1.4% | 689 | 1.2% |
| Asia Pacific | 29,497 | 37,259 | (7,762) | (20.8)% | (7,213) | (19.4)% |
| Europe | 12,434 | 13,194 | (760) | (5.8)% | (1,457) | (11.0)% |
| Total retail | 99,335 | 107,060 | (7,725) | (7.2)% | (7,981) | (7.5)% |
| E-commerce: |  |  |  |  |  |  |
| Americas | 21,413 | 16,662 | 4,751 | 28.5% | 4,668 | 28.0% |
| Asia Pacific | 9,537 | 8,096 | 1,441 | 17.8% | 1,708 | 21.1% |
| Europe | 6,230 | 4,936 | 1,294 | 26.2% | 974 | 19.7% |
| Total e-commerce | 37,180 | 29,694 | 7,486 | 25.2% | 7,350 | 24.8% |
| Total revenues | $243,273 | $245,888 | $(2,615) | (1.1)% | $(3,936) | (1.6)% |

(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.

***Wholesale channel revenues.*** During the three months ended September 30, 2017, revenues from our wholesale channel decreased $2.4 million, or 2.2%, compared to the same period in 2016. Wholesale revenues decreased due to the sale of our Taiwan business in the fourth quarter of 2016 and reduced sales in our Asia-Pacific segment as we continue to pursue business model changes to drive higher quality revenues and improve profitability across Asia. An increase of approximately $10.3 million, or 9.4%, from higher sales volumes, was offset by a decrease of $13.6 million, or 12.5%, attributable to lower average selling prices, while an increase of $0.9 million, or 0.9%, resulted from foreign currency translation.

***Retail channel revenues.*** During the three months ended September 30, 2017, revenues from our retail channel decreased $7.7 million or 7.2%, compared to the same period in 2016. The decrease in retail channel revenues compared to the same period in 2016 was due primarily to our declining full-price store count, consistent with our store rationalization plan, as well as lower average selling prices as we shift to lower-priced molded product. We operated 80 fewer stores compared to the end of last year’s third quarter, achieving a net decrease of 29 company-operated retail store locations in the third quarter of 2017. Approximately $3.3 million, or 3.1%, of the decrease resulted from lower sales volumes, a decrease of $4.6 million, or 4.3%, was attributable to lower average selling prices, partially offset by an increase of $0.2 million, or 0.2%, from foreign currency translation.

***E-commerce channel revenues.*** During the three months ended September 30, 2017, revenues from our e-commerce channel increased $7.5 million, or 25.2%, compared to the same period in 2016, as this channel continued to grow in importance to our overall business. Revenues increased by $8.8 million, or 29.7%, from higher sales volumes, were offset in part by a decrease of $1.4 million, or 5.0%, due to lower average selling prices, while foreign currency translation resulted in an increase of $0.1 million, or 0.5%.

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 September 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 September 30, 2017 | 2016 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $120,459 | $114,658 | $5,801 | 5.1% | $5,510 | 4.8% |
| Asia Pacific | 80,039 | 90,920 | (10,881) | (12.0)% | (9,539) | (10.5)% |
| Europe | 42,521 | 40,039 | 2,482 | 6.2% | 121 | 0.3% |
| Total segment revenues | 243,019 | 245,617 | (2,598) | (1.1)% | (3,908) | (1.6)% |
| Other businesses | 254 | 271 | (17) | (6.3)% | (28) | (10.3)% |
| Total revenues | $243,273 | $245,888 | $(2,615) | (1.1)% | $(3,936) | (1.6)% |
| Income (loss) from operations: |  |  |  |  |  |  |
| Americas | $24,102 | $16,329 | $7,773 | 47.6% | $7,377 | 45.2% |
| Asia Pacific | 13,264 | 17,303 | (4,039) | (23.3)% | 606 | 3.5% |
| Europe | 5,416 | 1,751 | 3,665 | 209.4% | 570 | 32.6% |
| Total segment operating income | 42,782 | 35,383 | 7,399 | 20.9% | 8,553 | 24.2% |
| Other businesses (2) | (6,233) | (7,179) | 946 | 13.2% | 2,149 | 29.9% |
| Unallocated corporate and other (3) | (33,864) | (29,419) | (4,445) | (15.1)% | (4,964) | (16.9)% |
| Total operating income (loss) | $2,685 | $(1,215) | $3,900 | 321.0% | $5,738 | 472.3% |

(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 September 30, 2017, revenues for our Americas segment increased $5.8 million, or 5.1%, compared to the same period in 2016, reflecting growth in each channel. The increase in revenues was led by a 28.5% increase in e-commerce revenues, and additional modest increases in both wholesale and retail revenues, despite 12 fewer company-operated retail stores compared to last year. Higher sales volumes resulted in an increase of approximately $10.4 million, or 9.1%, which was partially offset by a decrease in average selling prices of $4.9 million, or 4.3%, while foreign currency translation resulted in an increase of $0.3 million or 0.3%.

***Income from Operations.*** During the three months ended September 30, 2017, gross profit for the Americas segment increased $3.7 million, or 6.3%, and gross margin increased 60 basis points to 51.7%, 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 $5.3 million, or 9.1%, due to higher sales volumes and a decrease of $1.6 million, or 2.8%, due to a decline in our average selling prices that exceeded the decline in our average costs per unit. The effect of foreign currency translation on gross margin was insignificant.

During the three months ended September 30, 2017, SG&A for our Americas segment decreased $4.1 million, or 9.7%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of a decrease in marketing expenses of $2.6 million, a decrease of $0.9 million in facilities expenses due primarily to reduced retail store locations, and our SG&A reduction efforts, a decrease of $0.4 million in retail store impairments, and decreases of $0.2 million in services and other expenses, none of which were individually significant.

### Asia Pacific Operating Segment

***Revenues.*** During the three months ended September 30, 2017, revenues for our Asia Pacific segment decreased $10.9 million, or 12.0%, compared to the same period in 2016. Increased e-commerce revenues of 17.8% were offset by declines in wholesale and retail channel revenues. Wholesale revenues decreased due to the sale of our Taiwan business in the fourth quarter of 2016, and reduced sales as we continue to pursue business model changes to drive higher quality revenues and improve profitability across Asia. Retail revenues declined by 20.8% as we operated 58 fewer stores in the region compared to last year. Higher sales volumes of approximately $8.1 million, or 8.9%, were offset by a decrease in average selling prices of $17.6 million, or 19.4%, accompanied by a decrease of $1.4 million, or 1.5%, from foreign currency translation.

***Income from Operations.*** During the three months ended September 30, 2017, gross profit for our Asia Pacific segment decreased $7.1 million, or 13.5%, and gross margin decreased 110 basis points to 56.4% 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 $4.6 million, or 8.9%, due to higher unit sales volumes, a decrease of $11.1 million, or 21.2%, due to a decline in average selling prices that exceeded the decline in average costs per unit, and a $0.6 million, or 1.2%, decrease from foreign currency translation.

During the three months ended September 30, 2017, SG&A for our Asia Pacific segment decreased $3.0 million or 8.7%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of a decrease of $3.8 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, partially offset by an increase in services and other expenses of $0.8 million, none of which were individually significant.

### Europe Operating Segment

***Revenues.*** During the three months ended September 30, 2017, revenues for our Europe segment increased $2.5 million, or 6.2%, compared to the same period in 2016. E-commerce and wholesale channels grew, while retail results were negatively impacted by both planned store closures and the aftermath of terrorist activity in Russia. Revenues increased by approximately $0.5 million, or 1.1%, due to higher sales volumes, which was offset in part by a decrease of $0.4 million, or 0.9%, attributable to lower average selling prices and an increase of $2.4 million, or 5.9%, from foreign currency translation.

***Income from Operations.*** During the three months ended September 30, 2017, gross profit for the Europe segment increased $1.0 million, or 5.0%, and gross margin increased 60 basis points to 51.7% compared to the same period in 2016. The increase in the Europe segment gross profit was due to the net impact of an increase of $0.2 million, or 1.2%, from higher unit sales volumes, which was offset by a decrease of $0.4 million, or 2.1%, from lower average selling prices that exceeded the increase in our cost per unit, and a $1.2 million, or 5.9%, increase from foreign currency translation.

During the three months ended September 30, 2017, SG&A for our Europe segment decreased $2.6 million, or 13.6%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of a decrease of $1.8 million in salaries, wages, and facilities expenses, resulting from reductions in the number of company-operated retail stores and our SG&A reduction efforts, and lower bad debts expenses of $2.1 million, which were partially offset by an increase of $1.3 million in services and other SG&A costs.

### Unallocated Corporate and Other

During the three months ended September 30, 2017, total net costs within Unallocated Corporate and Other increased by $4.4 million or 15.1%, compared to the same period in 2016. The increase was primarily due to increased incentive compensation of $6.6 million, partially offset by $2.2 million in lower 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: | June 30, 2017 | Opened | Closed (1) | September 30, 2017 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store-in-store | 84 | — | 9 | 75 |
| Retail stores | 191 | 1 | 17 | 175 |
| Outlet stores | 228 | 3 | 7 | 224 |
| Total | 503 | 4 | 33 | 474 |
| Operating segment: |  |  |  |  |
| Americas | 184 | 1 | 6 | 179 |
| Asia Pacific | 228 | 3 | 25 | 206 |
| Europe | 91 | — | 2 | 89 |
| Total | 503 | 4 | 33 | 474 |

(1) We completed the transfer of one company-operated store in China to a distributor 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 September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Americas | 2.8% | (2.8)% |
| Asia Pacific | (2.9)% | (5.8)% |
| Europe | (2.1)% | (0.9)% |
| Global | 0.4% | (3.5)% |

| Direct to consumer comparable store sales (includes retail and e-commerce): (2) | Constant Currency (1) Three Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Americas | 9.2% | (1.7)% |
| Asia Pacific | 3.7% | (2.4)% |
| Europe | 4.8% | (6.7)% |
| Global | 7.0% | (2.6)% |

(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 Nine Months Ended September 30, 2017 to the Nine Months Ended September 30, 2016

### Results of Operations

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

|  | Nine Months Ended September 30, Change 2017 | 2016 | $% |  |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $824,401 | $848,856 | $(24,455) | (2.9)% |
| Cost of sales | 397,547 | 427,416 | (29,869) | (7.0)% |
| Gross profit | 426,854 | 421,440 | 5,414 | 1.3% |
| Selling, general and administrative expenses | 379,141 | 387,807 | (8,666) | (2.2)% |
| Income from operations | 47,713 | 33,633 | 14,080 | 41.9% |
| Foreign currency gain (loss), net | 181 | (1,568) | 1,749 | 111.5% |
| Interest income | 576 | 558 | 18 | 3.2% |
| Interest expense | (539) | (661) | 122 | 18.5% |
| Other income (expense), net | 187 | (108) | 295 | 273.1% |
| Income before income taxes | 48,118 | 31,854 | 16,264 | 51.1% |
| Income tax expense | 13,519 | 7,704 | 5,815 | 75.5% |
| Net income | 34,599 | 24,150 | 10,449 | 43.3% |
| Dividends on Series A convertible preferred stock | (9,000) | (9,000) | — | —% |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (2,621) | (2,406) | (215) | (8.9)% |
| Net income attributable to common stockholders | $22,978 | $12,744 | $10,234 | 80.3% |
| Net income per common share: |  |  |  |  |
| Basic | $0.26 | $0.15 | $0.11 | 73.3% |
| Diluted | $0.26 | $0.14 | $0.12 | 85.7% |
| Gross margin | 51.8% | 49.6% | 220 | 4.3% |
| Operating margin | 5.8% | 4.0% | 180 | 46.2% |
| Footwear unit sales | 46,868 | 46,136 | 732 | 1.6% |
| Average footwear selling price | $17.26 | $18.13 | $(0.87) | (4.8)% |

***Revenues.*** Revenues decreased $24.5 million, or 2.9%, in the nine months ended September 30, 2017, compared to the same period in 2016. The decrease in revenues was primarily due to the sale of our Taiwan business in the fourth quarter of 2016, the sale of our Middle East business in the second quarter of 2017, targeted reductions in the number of company-operated retail stores, and additional actions taken to optimize our wholesale, retail, and e-commerce channels. Higher sales volumes of approximately $13.4 million, or 1.6%, were offset by a decrease of $38.2 million, or 4.5%, attributable to lower average selling prices as our product, store, and channel mix continued to change. This was partially offset by an increase of $0.3 million, or less than one percent, from foreign currency translation.

***Cost of sales.*** During the nine months ended September 30, 2017, cost of sales decreased $29.9 million, or 7.0%, compared to the same period in 2016. Lower average costs per unit were primarily the result of product mix, reflecting our ongoing focus on core molded products, and continued supply chain cost reductions, including a shift of third-party manufacturing production within the Asia Pacific region to lower-cost suppliers. Higher unit sales volumes of approximately $6.8 million, or 1.6%, were offset by a decrease of $37.5 million, or 8.8%, due to lower average costs per unit, while the effect of foreign currency translation was an increase of $0.8 million, or 0.2%.

***Gross profit.*** During the nine months ended September 30, 2017, gross profit increased $5.4 million, or 1.3%, and gross margin increased approximately 220 basis points to 51.8% compared to the same period in 2016. The increase in gross profit was primarily due to our continued focus on sales of higher margin products. Higher unit sales volumes of approximately $6.7 million, or 1.6%, were partially offset by a decrease of $0.7 million, or 0.2%, which resulted from a decline in our average selling prices that exceeded the decrease in our average costs per unit, and by a decrease of $0.6 million, or 0.1%, from foreign currency translation.

***Selling, general and administrative expenses.*** SG&A decreased $8.7 million, or 2.2%, during the nine months ended September 30, 2017, compared to the same period in 2016. The decrease was primarily due to the combined net impacts of a decrease of $8.5 million in facilities expenses as a result of fewer company-owned retail stores, lower retail store impairments of $1.5 million, lower net bad debts expense of $2.5 million due to recoveries of previously reserved accounts receivable in China. These savings were partially offset by higher marketing expenses of $1.0 million and an increase in other SG&A expenses of $2.8 million, none of which were individually significant.

***Foreign currency gain (loss), net.*** Foreign currency gain (loss), net, consists of unrealized and realized foreign currency gains and losses from the remeasurement 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 nine months ended September 30, 2017, we recognized realized and unrealized foreign currency net gains of $0.2 million compared to net losses of $1.6 million during the nine months ended September 30, 2016.

***Income tax expense.*** During the nine months ended September 30, 2017, income tax expense increased $5.8 million compared to the same period in 2016. The effective tax rate for the nine months ended September 30, 2017 was 28.1% compared to an effective tax rate of 24.2% for the same period in 2016, an increase of 3.9%. The increase in the effective rate was driven primarily by tax expense recorded in profitable jurisdictions, partially offset by operating losses in certain jurisdictions where the Company has determined that it is not more likely than not to realize the associated tax benefits. Our effective tax rate of 28.1% for the nine months ended September 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: | Nine Months Ended September 30, 2017 | 2016 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $169,975 | $170,165 | $(190) | (0.1)% | $(1,611) | (0.9)% |
| Asia Pacific | 177,086 | 197,359 | (20,273) | (10.3)% | (18,796) | (9.5)% |
| Europe | 95,387 | 97,163 | (1,776) | (1.8)% | (2,493) | (2.6)% |
| Other businesses | 545 | 667 | (122) | (18.3)% | (127) | (19.0)% |
| Total wholesale | 442,993 | 465,354 | (22,361) | (4.8)% | (23,027) | (4.9)% |
| Retail: |  |  |  |  |  |  |
| Americas | 145,809 | 150,142 | (4,333) | (2.9)% | (4,377) | (2.9)% |
| Asia Pacific | 90,458 | 101,097 | (10,639) | (10.5)% | (9,943) | (9.8)% |
| Europe | 32,924 | 34,699 | (1,775) | (5.1)% | (3,006) | (8.7)% |
| Total retail | 269,191 | 285,938 | (16,747) | (5.9)% | (17,326) | (6.1)% |
| E-commerce: |  |  |  |  |  |  |
| Americas | 58,552 | 53,579 | 4,973 | 9.3% | 4,935 | 9.2% |
| Asia Pacific | 35,483 | 27,812 | 7,671 | 27.6% | 8,819 | 31.7% |
| Europe | 18,182 | 16,173 | 2,009 | 12.4% | 1,845 | 11.4% |
| Total e-commerce | 112,217 | 97,564 | 14,653 | 15.0% | 15,599 | 16.0% |
| Total revenues | $824,401 | $848,856 | $(24,455) | (2.9)% | $(24,754) | (2.9)% |

(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.

***Wholesale channel revenues.*** During the nine months ended September 30, 2017, revenues from our wholesale channel decreased $22.4 million, or 4.8%, compared to the same period in 2016. The decrease was due to lower average sales prices as we shifted to lower-priced molded product, and reduced sales in our Asia-Pacific segment, as we continue to pursue business model changes to drive higher quality revenues and improve profitability across Asia. Higher sales volumes of approximately $5.7 million, or 1.2%, were offset by lower average selling prices of $28.7 million, or 6.2%, while the effect of foreign currency translation was an increase $0.6 million, or 0.1%.

***Retail channel revenues.*** During the nine months ended September 30, 2017, revenues from our retail channel decreased $16.7 million, or 5.9%, compared to the same period in 2016. The decrease in retail channel revenues was due primarily to lower average sales prices as we shifted to lower-priced molded product, and a net decrease of 84 company-operated retail store locations, as we worked to optimize our store fleet. Sales volumes decreased by approximately $5.6 million, or 2.0%, and average selling prices were lower by $11.7 million, or 4.1%, partially offset by an increase of $0.6 million, or 0.2%, from foreign currency translation.

***E-commerce channel revenues.*** During the nine months ended September 30, 2017, revenues from our e-commerce channel increased $14.7 million, or 15.0%, compared to the same period in 2016, as this channel continued to grow in importance to our business. Revenues increased by approximately $26.8 million, or 27.5%, from higher sales volumes, and were offset in part by decreases of $11.2 million, or 11.5%, due to lower average selling prices, and $0.9 million, or 1.0%, from foreign currency translation.

### Comparison of the Nine Months Ended September 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: | Nine Months Ended September 30, 2017 | 2016 | Change $% |  | Constant Currency Change (1) $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $374,336 | $373,886 | $450 | 0.1% | $(1,053) | (0.3)% |
| Asia Pacific | 303,028 | 326,268 | (23,241) | (7.1)% | (19,920) | (6.1)% |
| Europe | 146,492 | 148,035 | (1,542) | (1.0)% | (3,654) | (2.5)% |
| Total segment revenues | 823,856 | 848,189 | (24,333) | (2.9)% | (24,627) | (8.9)% |
| Other businesses | 545 | 667 | (122) | (18.3)% | (127) | (19.0)% |
| Total revenues | $824,401 | $848,856 | $(24,455) | (2.9)% | $(24,754) | (2.9)% |
| Income from operations: |  |  |  |  |  |  |
| Americas | $71,309 | $50,919 | $20,390 | 40.0% | $(3,728) | (7.3)% |
| Asia Pacific | 73,294 | 77,687 | (4,393) | (5.7)% | (17,139) | (22.1)% |
| Europe | 27,721 | 16,712 | 11,009 | 65.9% | 5,366 | 32.1% |
| Total segment operating income | 172,324 | 145,318 | 27,006 | 18.6% | (15,501) | (10.7)% |
| Other businesses (2) | (16,883) | (19,291) | 2,408 | 12.5% | 8,610 | 44.6% |
| Unallocated corporate and other (3) | (107,728) | (92,394) | (15,334) | (16.6)% | 58,011 | 62.8% |
| Total operating income | $47,713 | $33,633 | $14,080 | 41.9% | $51,120 | 152.0% |

(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 nine months ended September 30, 2017, revenues for our Americas segment increased by $0.5 million, or 0.1%, compared to the same period in 2016. The increase in revenues resulted primarily from higher e-commerce revenues, which offset decreases in wholesale and retail revenues. Higher unit sales volumes of approximately $7.1 million, or 1.9%, were offset by a decrease in average selling prices of $8.1 million, or 2.2%, while the effect of foreign currency translation was an increase of $1.5 million, or 0.4%.

***Income from Operations.*** During the nine months ended September 30, 2017, gross profit for the Americas segment increased $12.6 million, or 6.9%, and gross margin increased 330 basis points to 52.1%, 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 $3.5 million, or 1.9%, due to higher unit sales volumes, an increase of $8.9 million, or 4.9%, due to a decrease in our average selling prices that exceeded the decline in our average costs per unit, and an increase of $0.2 million, or 0.1%, from foreign currency translation.

During the nine months ended September 30, 2017, SG&A for our Americas segment decreased $7.8 million, or 6.0%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of a decrease of $2.2 million in facilities expenses as a result of reductions in the number of company-operated retail stores and our SG&A reduction efforts, a decrease of $1.1 million in impairment expense, a decrease of $2.5 million in marketing expenses, and a decrease of $2.0 million in services, information technology, and other expenses, none of which were individually significant.

### Asia Pacific Operating Segment

***Revenues.*** During the nine months ended September 30, 2017, revenues for our Asia Pacific segment decreased $23.2 million, or 7.1%, compared to the same period in 2016. Wholesale revenues decreased due to the combined effects of the sales of our Taiwan business in the fourth quarter of 2016, and our Middle East business in the second quarter of 2017, and reduced sales as we continue to pursue business model changes to drive higher quality revenues and improve profitability across Asia. 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. An increase in sales volumes of approximately $31.3 million, or 9.6%, was offset by a decrease in average selling prices of of $51.2 million, or 15.7%, while the effect of foreign currency translation was a decrease of $3.3 million, or 1.0%.

***Income from Operations.*** During the nine months ended September 30, 2017, gross profit for the Asia Pacific segment decreased $15.6 million, or 8.3%, and gross margin decreased 70 basis points to 57.3% compared to the same period in 2016. The decrease in the Asia Pacific segment gross profit was due to the net impact of an increase in unit sales volumes of $18.1 million, or 9.6%, offset by a decrease in our average selling prices that exceeded the decline in our average costs per unit of $31.8 million, or 16.8%, and a decrease of $1.9 million, or 1.0%, from foreign currency translation.

During the nine months ended September 30, 2017, SG&A for our Asia Pacific segment decreased $11.2 million, or 10.1%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of decreases of $4.2 million in salaries and wages and $4.6 million in facilities expenses as a result of the reduction in the number of company-operated retail stores and our SG&A reduction efforts, lower bad debts expense of $0.3 million, a decrease of $1.2 million in marketing expenses, and a decrease of $0.9 million in services and other costs, none of which were individually significant.

### Europe Operating Segment

***Revenues.*** During the nine months ended September 30, 2017, revenues for our Europe segment decreased $1.5 million, or 1.0%, 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 $16.6 million, or 11.2%, of the decrease was due to lower unit sales volumes, partially offset by an increase of $13.0 million, or 8.7%, from higher average selling prices, and an increase of $2.1 million, or 1.4%, from foreign currency translation.

***Income from Operations.*** During the nine months ended September 30, 2017, gross profit for the Europe segment increased $3.1 million, or 4.3%, and gross margin decreased by 270 basis points to 51.6% 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 $8.1 million, or 11.2%, due to lower unit sales volumes, offset by an increase of $10.1 million, or 14.0%, due to decreases in average selling prices, and an increase of $1.1 million, or 1.6%, from foreign currency translation.

During the nine months ended September 30, 2017, SG&A for our Europe segment decreased $7.9 million, or 14.1%, compared to the same period in 2016. The decrease in SG&A was primarily due to decreases in salaries and wages of $1.7 million and facilities expenses of $2.1 million as a result of the reduction in company-operated retail stores and SG&A reduction efforts, a decrease of $1.2 million in marketing expenses, lower bad debts expense of $2.0 million, and a decrease in services and other costs of $0.9 million, none of which were individually significant.

### Unallocated Corporate and Other

During the nine months ended September 30, 2017, total net costs within ‘Unallocated Corporate and Other’ increased by $15.3 million, or 16.6%, compared to the same period in 2016. The increase was primarily due to an increase of $10.5 million in salaries and wages, including $2.8 million in severance costs, an increase of $5.9 million in marketing expenses, primarily related to our endorsement and promotional activities, partially offset by a decrease of $1.1 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) | September 30, 2017 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store-in-store | 98 | — | 23 | 75 |
| Retail stores | 228 | 5 | 58 | 175 |
| Outlet stores | 232 | 13 | 21 | 224 |
| Total | 558 | 18 | 102 | 474 |
| Operating segment: |  |  |  |  |
| Americas | 190 | 2 | 13 | 179 |
| Asia Pacific | 270 | 15 | 79 | 206 |
| Europe | 98 | 1 | 10 | 89 |
| Total | 558 | 18 | 102 | 474 |

(1) We completed the transfer of thirty-one 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) Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Americas | (0.3)% | (1.4)% |
| Asia Pacific | (1.7)% | (4.4)% |
| Europe | (2.3)% | 2.1% |
| Global | (1.0)% | (2.0)% |

| Direct to consumer comparable store sales (includes retail and e-commerce): (2) | Constant Currency (1) Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Americas | 2.4% | 3.0% |
| Asia Pacific | 8.4% | 2.3% |
| Europe | 2.6% | 0.3% |
| Global | 4.3% | 2.4% |

(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 September 30, 2017, we had $178.2 million in cash and cash equivalents and up to $78.7 million in available borrowings under our revolving credit facility. At September 30, 2017, $135.0 million of our $178.2 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)*

|  | Nine Months Ended September 30, 2017 | 2016 | Change |
| --- | ---: | ---: | ---: |
| Cash provided by operating activities | $80,415 | $29,354 | $51,061 |
| Cash used in investing activities | (12,318) | (14,871) | 2,553 |
| Cash used in financing activities | (37,600) | (12,134) | (25,466) |
| Effect of exchange rate changes on cash | 127 | 4,526 | (4,399) |
| Net change in cash and cash equivalents | $30,624 | $6,875 | $23,749 |

***Operating Activities.*** Cash provided by operating activities increased $51.1 million for the nine months ended September 30, 2017 compared to the nine months ended September 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 $12.5 million, and a favorable change in our operating assets and liabilities of $38.6 million. Net income as adjusted for non-cash items increased due to: (i) an increase of $10.4 million from higher net income; (ii) an increase of $8.9 million from net unrealized foreign currency forward contract gains; (iii) a decrease of share-based compensation expense of $1.2 million; (iv) a decrease of $2.5 million in bad debts; (v) a decrease of $1.5 million in impairment charges; and (vi) a decrease of $1.6 million in other non-cash items

***Investing Activities.*** The $2.6 million decrease in cash used in investing activities for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 is primarily due to the net impact of: (i) a $0.6 million decrease in long-term restricted cash; and (ii) a $4.0 million decrease in capital expenditures for property, equipment, and intangible assets; partially offset by (iii) a decrease in proceeds from asset disposals of $0.9 million.

***Financing Activities.*** The $25.5 million increase in cash used in financing activities for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 resulted from repurchases of 3.3 million shares of our common stock for approximately $25.6 million, and net repayments on borrowings of $0.1 million during the nine months ended September 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 nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 were due primarily to the following: (i) a favorable change of $6.7 million from higher accounts receivable, (ii) a favorable change of $8.7 million from lower inventory levels, due to enhanced inventory management; (iii) a favorable change of $20.6 million in prepaids expenses and other assets; and (iv) a favorable change of $2.6 million from accounts payable, accrued expenses, and other liabilities. Cash and cash equivalents for the nine months ended September 30, 2017 increased by $30.6 million to $178.2 million as of September 30, 2017.

Bad debt expense related to our China operations was not significant during the first nine months of 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.

### Revolving Credit Facility

In order to provide additional liquidity in the future and to help support our strategic goals, our revolving credit facility (“the Facility”), pursuant to an Amended and Restated Credit agreement (“the Credit Agreement”), provides for borrowings of up to $100.0 million through February 2021 (increased from $80.0 million in October 2017). 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 Credit Agreement also requires us to meet certain financial covenant ratios that become effective when average outstanding borrowings under the Credit Agreement, including letters of credit, exceed the lesser of $40.0 million or 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. As of September 30, 2017, we were in compliance with all financial covenants. As of September 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 September 30, 2017 and December 31, 2016 we had $1.1 million and $2.3 million, respectively, of current debt outstanding under notes payable. As of September 30, 2017, the notes bore fixed 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 the third quarter and first nine months of 2017, we repurchased 2.1 million and 3.4 million shares, respectively, of our common stock at a cost of $17.1 million and $27.1 million, respectively, including unsettled trades for 150,000 shares totaling $1.4 million, which were completed on October 2, 2017. As of September 30, 2017, we had $91.7 million of remaining common stock repurchase authorizations under our 2013 stock repurchase plan. During the three and nine months ended September 30, 2016, we had no repurchases.

### Capital Assets Expenditures

During the nine months ended September 30, 2017, net capital assets acquired, inclusive of intangible assets, were $14.3 million compared to $18.2 million during the nine months ended September 30, 2016. As of September 30, 2017, we have committed to additional purchases of capital assets of approximately $1.9 million. Capital spend during the nine months ended September 30, 2017, related primarily to information technology investments, opening new retail stores, and renovating existing stores.

### 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 $65.1 million of current earnings during the nine months ended September 30, 2017 without a tax impact. Further repatriation will depend on future cash requirements in the U.S., future cash requirements in non-U.S. subsidiaries, as well as U.S. tax reform. As of September 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 September 30, 2017, we held $135.0 million of our total $178.2 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 $135.0 million, $0.9 million could potentially be restricted, as described above. If the remaining $134.1 million were immediately repatriated to the U.S., no additional tax expense would be incurred as tax has previously been provided for $178.0 million of foreign earnings in prior periods.

### Contractual Obligations

We renewed agreements with two service providers for three years at $5.0 million per year and 18 months at $2.0 million per year, respectively.

### Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of September 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, 4,275 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 September 30, 2017, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $192.4 million. The net fair value of these contracts at September 30, 2017 was an asset of $0.3 million.

We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our foreign currency forward exchange contracts. To perform the sensitivity analysis, we assess the risk of changes in fair values from the effect of hypothetical changes in foreign currency exchange rates. This analysis assumes a like movement by the foreign currencies in our hedge portfolio against the U.S. Dollar. As of September 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 $1.1 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 exchange rates in effect during each reporting period. As a result, comparisons of reported results between reporting periods may be impacted significantly due to differences in the exchange rates 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 nine months ended September 30, 2017 by approximately $0.1 million and $0.8 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 and nine months ended September 30, 2017 and 2016.

## Controls and procedures

As filed, 1,550 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 September 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 September 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 Nov 7, 2017.
Source: SEC EDGAR, the filing index for accession 0001628280-17-011037. Last ingested by Listed: Nov 13, 2026, 17:07 ET. No prices; not investment advice.