# Crocs, Inc.: Form 10-Q for the period ended Mar 31, 2018

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-Q
- Filed: 2018-05-08
- Accepted by EDGAR: May 8, 2018, 08:11 ET
- Period: 2018-03-31
- Accession: 0001628280-18-006136
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000162828018006136/crox2018331-10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000162828018006136/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-01-01 to 2018-03-31 | $283.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2018-01-01 to 2018-03-31 | $139.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-01-01 to 2018-03-31 | $114.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-01-01 to 2018-03-31 | $25.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-01-01 to 2018-03-31 | $113.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | $10.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | $16.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-31 | 71,668,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | −$46.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $1.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2018-01-01 to 2018-03-31 | $20.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-03-31 | $102.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-03-31 | $463.8m | us-gaap:AssetsCurrent |
| Total assets | at 2018-03-31 | $572.9m | us-gaap:Assets |
| Current liabilities | at 2018-03-31 | $188.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-03-31 | $206.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2018-03-31 | $183.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 40,301 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. We strive to be the global leader in the sale of molded footwear characterized by functionality, comfort, color, and lightweight design. All of our products utilize our proprietary closed-cell resin, called CrosliteTM, along with a range of other materials, enabling us to produce innovative, lightweight footwear. The Company, a Delaware corporation, is the successor to a Colorado corporation of the same name, and was originally organized in 1999 as a limited liability company.

### Known or Anticipated Trends

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

- 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.
- Foreign exchange rate volatility impacts our reported U.S. Dollar results from our foreign operations.
- In 2017 we identified annual reductions in SG&A in the amount of $75 to $85 million which, once implemented, are projected to generate an annual $30 to $35 million improvement in earnings before interest and taxes by 2019, compared to 2016. We achieved approximately $23 million of these SG&A reductions in 2017 while incurring approximately $10 million of costs related to variable compensation. We remain on track to achieve the targeted SG&A reductions by 2019. We incurred $11 million in non-recurring charges to achieve these SG&A reductions in 2017 and expect to incur approximately $5 million in additional non-recurring charges related to SG&A reductions in 2018. We reduced our company-operated retail stores by 111 in 2017 and anticipate an additional reduction of approximately 50 company-operated retail stores in 2018, thereby reducing our total store count to under 400 from 558 over a two year period. The majority of company-operated store closures are occurring as store leases expire. We completed 22 store closures in the first quarter of 2018.
- We are prioritizing growth in our lower-priced, higher-margin molded styles, primarily in clog and sandal silhouettes, as we drive global alignment of our product portfolio and focus on sustainable, profitable revenue growth.
- In connection with ongoing efforts to simplify the business and improve profitability, the Company has made the decision to close its manufacturing and distribution facilities in Mexico. Manufacturing has ceased, and the Company will execute plans to dispose of or redeploy facility assets, primarily during the second quarter. The distribution center will be closed by the end of the third quarter. The Company expects to record total charges related to these actions of approximately $10 million before taxes over the course of the second and third quarters of 2018. These charges are expected to include lease termination, facility closure and asset redeployment, expense recognition of cumulative translation adjustments, and employee-related costs. Approximately half of these charges will be non-cash.

### 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 operating 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 condensed 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.

### First Quarter 2018 Financial Highlights

The following were significant developments in our businesses during the three months ended March 31, 2018:

- Revenues were $283.1 million, an increase of $15.2 million, or 5.7%, compared to the same period in 2017.
- We sold 17.0 million pairs of shoes worldwide, an increase of 3.9% from 16.4 million pairs in the three months ended March 31, 2017.
- Gross margin was 49.4%, declining 50 basis points from last year’s first quarter. At the beginning of the first quarter, the Company changed its inventory costing methodology from average cost to first-in-first-out, or FIFO. This change resulted in a timing-related charge to cost of sales in the first quarter, but will have no impact on the full year. Absent this charge, first quarter gross margin would have been up modestly to prior year.
- SG&A was $114.0 million, a decrease of $4.1 million, or 3.4%, compared to the same period in 2017, and included $2.5 million of non-recurring costs associated with our SG&A reduction plan, compared to $2.2 million in the same period in 2017.
- Income from operations improved $10.3 million to $25.9 million compared to $15.6 million for the three months ended March 31, 2017.
- Net income attributable to common stockholders improved $5.4 million to $12.5 million compared to $7.2 million for the same period in 2017. Basic and diluted net income per common share was $0.15 for the three months ended March 31, 2018, compared to $0.08 for the three months ended March 31, 2017.
- We continued to focus on improving the efficiency and effectiveness of our operations, including carefully managing and reducing our retail fleet, especially full-priced retail stores, and enhancing the profitability of the retail channel. During the three months ended March 31, 2018, we opened no stores and closed 22 company-operated retail stores.
- We repurchased 1.4 million shares of common stock at an aggregate cost of $20.1 million.

### Future Outlook

We intend to continue pursuing our strategic objectives, focusing on three key initiatives:

(1) driving sustainable, profitable revenue growth;

(2) improving the quality of revenues; and

(3) simplifying our business to reduce costs.

We are focusing on our core molded footwear heritage by narrowing our product line to emphasize higher-margin units, as well as developing innovative new casual lifestyle footwear platforms. By streamlining our product portfolio to focus on the most successful designs, driving global alignment of our product offerings, and investing in marketing, 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, and transferring significant commercial responsibilities to distributors. Further, we are expanding our engagement with leading wholesale accounts in select markets to drive sales growth, optimize product placement, and enhance brand reputation.

### Comparison of the Three Months Ended March 31, 2018 to the Three Months Ended March 31, 2017

### Results of Operations

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

|  | Three Months Ended March 31, 2018 | 2017 | % Change |
| --- | ---: | ---: | ---: |
| Revenues | $283,148 | $267,907 | 5.7% |
| Cost of sales | 143,275 | 134,323 | (6.7)% |
| Gross profit | 139,873 | 133,584 | 4.7% |
| Selling, general and administrative expenses | 113,951 | 118,002 | 3.4% |
| Income from operations | 25,922 | 15,582 | 66.4% |
| Foreign currency gains, net | 1,071 | 276 | 288.0% |
| Interest income | 279 | 150 | 86.0% |
| Interest expense | (113) | (184) | 38.6% |
| Other income | 53 | 124 | (57.3)% |
| Income before income taxes | 27,212 | 15,948 | 70.6% |
| Income tax expense | 10,758 | 4,938 | (117.9)% |
| Net income | 16,454 | 11,010 | 49.4% |
| 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 | (931) | (855) | (8.9)% |
| Net income attributable to common stockholders | $12,523 | $7,155 | 75.0% |
| Net income per common share: |  |  |  |
| Basic | $0.15 | $0.08 | 87.5% |
| Diluted | $0.15 | $0.08 | 87.5% |
| Gross margin (1) | 49.4% | 49.9% | (50 )bp |
| Operating margin (1) | 9.2% | 5.8% | 340 bp |
| Footwear unit sales | 17,033 | 16,396 | 3.9% |
| Average footwear selling price - nominal basis | $16.28 | $16.11 | 1.1% |
| Average footwear selling price - constant currency basis (2) | $15.50 | $16.11 | (3.8)% |

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

(2) 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.

***Revenues.*** Revenues increased $15.2 million, or 5.7%, compared to the same period in 2017. By growing our wholesale and e-commerce channels, we offset lower retail revenues resulting from operating 117 fewer retail stores compared to March 31, 2017. A lower average selling price (“ASP”), a reflection of our focus on lower-priced, higher-margin molded footwear, reduced revenues by approximately $8.6 million, or 3.2%. Continued strength in our clog and growth in our sandal silhouettes drove higher sales volumes, primarily in our e-commerce and wholesale channels, which increased revenues by $10.4 million, or 3.9%. An increase of $13.4 million, or 5.0%, resulted from foreign currency translation.

***Cost of sales.*** Cost of sales increased $9.0 million, or 6.7%, compared to the same period in 2017. Changes in product mix and supply chain cost reductions, including a reallocation of third-party manufacturing production to lower-cost suppliers within the Asia Pacific region, contributed to lower average costs per unit, accounting for a $1.7 million, or 1.3%, decline in cost of sales. Higher sales volume resulted in an increase in cost of sales of $5.2 million, or 3.9%, and foreign currency translation resulted in an increase of $5.5 million, or 4.1%.

***Gross Profit.*** Gross profit increased $6.3 million, or 4.7%, and gross margin declined 50 basis points to 49.4%, compared to the same period in 2017. An increase of approximately $5.2 million, or 3.9%, resulted from higher sales volumes and an increase of $7.9 million, or 5.9%, resulted from foreign currency translation. These increases were partially offset by a decrease of $6.8 million, or 5.1%, resulting from the lower ASP, as our product mix shifts to molded styles.

***Selling, general and administrative expenses.*** SG&A decreased $4.1 million, or 3.4%, compared to the same period in 2017. As a percent of sales, SG&A improved by 380 basis points to 40.2%. The decrease was primarily due to a decrease in facilities expenses of $3.1 million as a result of fewer company-operated retail stores, a decrease in compensation expenses of $2.5 million, lower professional services fees of $1.5 million, and lower travel and other expenses of $2.0 million, which were results of our SG&A reduction efforts. These savings were partially offset by increased marketing expenses of $3.5 million, due to both increased investment and timing, and non-cash impairment expenses of $1.5 million related to retail store and supply chain assets.

***Foreign currency gains, net.*** Foreign currency gains, 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 as well as realized and unrealized gains and losses on foreign currency derivative instruments. During the three months ended March 31, 2018, we recognized realized and unrealized net foreign currency gains of $1.1 million compared to $0.3 million during the three months ended March 31, 2017.

***Income tax expense.*** Income tax expense increased $5.8 million compared to the same period in 2017. The effective tax rate for the three months ended March 31, 2018 was 39.5% compared to an effective tax rate of 31.0% for the same period in 2017, an 8.5% increase. The increase in the effective rate was partially driven by the impact of our provisional estimate of the global intangible low-taxed income (“GILTI”) provisions included in the U.S. Tax Cuts and Job Act “Tax Act”). The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in the effective tax rate calculation. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The increase in the effective tax rate is also driven 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 39.5% for the three months ended March 31, 2018 differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions, the GILTI tax, as well as book losses in certain jurisdictions for which tax benefits cannot be recognized.

### Revenues By Channel

*(in thousands)*

| Wholesale: | Three Months Ended March 31, 2018 | 2017 | % Change | Constant Currency % Change (1) |
| --- | ---: | ---: | ---: | ---: |
| Americas | $72,674 | $71,023 | 2.3% | 2.5% |
| Asia Pacific | 71,733 | 70,935 | 1.1% | (5.2)% |
| Europe | 49,877 | 40,583 | 22.9% | 7.6% |
| Other businesses | 313 | 190 | 64.7% | 46.3% |
| Total wholesale | 194,597 | 182,731 | 6.5% | 0.7% |
| Retail: |  |  |  |  |
| Americas | 34,716 | 32,829 | 5.7% | 5.6% |
| Asia Pacific | 17,614 | 21,532 | (18.2)% | (22.4)% |
| Europe | 7,176 | 7,419 | (3.3)% | (12.7)% |
| Total retail | 59,506 | 61,780 | (3.7)% | (6.4)% |
| E-commerce: |  |  |  |  |
| Americas | 16,440 | 13,869 | 18.5% | 18.0% |
| Asia Pacific | 7,815 | 5,877 | 33.0% | 24.3% |
| Europe | 4,790 | 3,650 | 31.2% | 15.0% |
| Total e-commerce | 29,045 | 23,396 | 24.1% | 19.1% |
| Total revenues | $283,148 | $267,907 | 5.7% | 0.7% |

(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.*** Revenues from our wholesale channel, which includes sales through our e-tail partners as well as distributor-operated retail store sales, increased $11.9 million, or 6.5%, compared to the same period in 2017. An increase of approximately $8.4 million, or 4.6%, from higher sales volumes resulted from increased customer demand, especially in the e-tail sector as consumers shift towards online purchasing. Strength in volume was partially offset by a decrease of $7.0 million, or 3.9%, attributable to a lower ASP, reflective of our focus on lower-priced, higher-margin molded footwear. Foreign currency translation drove an increase of $10.5 million, or 5.8%.

***Retail channel revenues.*** Revenues from our retail channel decreased $2.3 million or 3.7%, compared to the same period in 2017. The decrease in retail channel revenues was due to targeted reductions in our company-operated retail store count, consistent with our store rationalization plan. We operated 117 fewer stores compared to the end of last year’s first quarter. Our comparable retail store sales showed growth of 7.6% on a global basis, indicative of increased traffic in our remaining company-operated stores. Approximately $4.0 million, or 6.5%, of the decrease resulted from lower sales volumes related to store count reduction, partially offset by an increase of $1.7 million, or 2.7%, from foreign currency translation.

***E-commerce channel revenues.*** Revenues from our e-commerce channel, which includes our own e-commerce sites as well as sales through third-party marketplaces, increased $5.6 million, or 24.1%, compared to the same period in 2017, as this channel continued to grow in importance to our overall business. Revenues increased by $4.8 million, or 20.4%, from higher sales volumes as a result of increased consumer demand and a shift toward online purchasing. The increase in volume was partially offset by a decrease of $0.3 million, or 1.3%, due to a decrease in ASP, reflecting our focus on lower-priced molded footwear. Foreign currency translation resulted in an increase of $1.1 million, or 5.0%.

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

### Comparison of the Three Months Ended March 31, 2018 and 2017 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 March 31, 2018 | 2017 | % Change | Constant Currency % Change (1) |
| --- | ---: | ---: | ---: | ---: |
| Americas | $123,830 | $117,722 | 5.2% | 5.2% |
| Asia Pacific | 97,162 | 98,344 | (1.2)% | (7.2)% |
| Europe | 61,843 | 51,651 | 19.7% | 5.2% |
| Total segment revenues | 282,835 | 267,717 | 5.6% | 0.7% |
| Other businesses | 313 | 190 | 64.7% | 46.3% |
| Total consolidated revenues | $283,148 | $267,907 | 5.7% | 0.7% |
| Income from operations: |  |  |  |  |
| Americas | $28,539 | $22,002 | 29.7% | 30.0% |
| Asia Pacific | 26,584 | 26,726 | (0.5)% | (8.9)% |
| Europe | 17,863 | 12,274 | 45.5% | 23.6% |
| Total segment income from operations | 72,986 | 61,002 | 19.6% | 11.6% |
| Other businesses (2) | (10,934) | (5,617) | (94.7)% | 89.6% |
| Unallocated corporate and other (3) | (36,130) | (39,803) | 9.2% | (12.0)% |
| Total consolidated income from operations | $25,922 | $15,582 | 66.4% | 44.0% |

(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 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 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.*** Revenues for our Americas segment increased $6.1 million, or 5.2%, compared to the same period in 2017, reflecting growth in each channel. The increase in revenues was led by an 18.5% increase in e-commerce revenues with additional increases of 5.7% in retail, despite operating 12 fewer retail stores in the segment compared to the same period last year, and 2.3% in wholesale revenues. Higher sales volumes resulted in an increase of approximately $11.4 million, or 9.7%, which was partially offset by a decrease in ASP of $5.3 million, or 4.5%, reflecting our focus on lower-priced molded footwear. Foreign currency translation had no significant impact on results.

***Income from Operations.*** Income from operations for the Americas segment was $28.5 million, an increase of $6.5 million, or 29.7%, compared to the three months ended March 31, 2017. Gross profit increased $2.3 million, or 3.9%, and gross margin decreased 60 basis points to 50.4%, compared to the same period in 2017. The increase in our Americas segment gross profit is due to the net impact of an increase of $6.5 million, or 10.9%, due to higher sales volumes and a decrease of $4.2 million, or 6.9%, due to a decrease in ASP, reflecting our focus on lower-priced, higher-margin molded footwear. The impact of foreign currency translation on gross margin was insignificant.

SG&A for our Americas segment decreased $4.2 million, or 11.0%, compared to the same period in 2017. The decrease in SG&A was primarily due to the impacts of a decrease in marketing expenses of $1.2 million, decreases of $1.1 million in compensation expense and $1.2 million in travel and other expenses as a result of our SG&A reduction efforts, and a decrease of $0.7 million in facilities expense, due primarily to reduced retail store locations.

### Asia Pacific Operating Segment

***Revenues.*** Revenues for our Asia Pacific segment decreased $1.2 million, or 1.2%, compared to the same period in 2017. Increased e-commerce revenues of 33.0% and increased wholesale revenues of 1.1% were offset by a decline in retail channel revenues. Retail revenues decreased by 18.2% as we operated 83 fewer stores in the region compared to the same period last year. Wholesale revenues increased modestly as we continue to pursue business model changes to drive higher quality revenues and improve profitability across Asia. Lower sales volumes drove a decrease of $4.6 million, or 4.7%, and a lower ASP resulted in a decrease of $2.5 million, or 2.5%. These decreases were partially offset by an increase of $5.9 million, or 6.0%, from foreign currency translation.

***Income from Operations.*** Income from operations for the Asia Pacific segment was $26.6 million, substantially unchanged compared to the three months ended March 31, 2017. Gross profit decreased $2.1 million, or 3.9%, and gross margin decreased 150 basis points to 53.3% compared to the same period in 2017. The decrease in gross profit is due to the net impact of a decrease of $2.2 million, or 4.2%, due to lower sales volumes, a result of targeted reductions in company-operated retail stores, and a decrease of $3.4 million, or 6.3%, due to a lower ASP, reflecting our focus on lower-priced molded footwear, partially offset by a $3.5 million, or 6.6%, increase from foreign currency translation.

SG&A for our Asia Pacific segment decreased $2.0 million or 7.2%, compared to the same period in 2017. The decrease in SG&A was primarily due to the net impact of a decrease of $1.8 million in facilities expense as a result of the reduction in the number of company-operated retail stores, a decrease of $0.9 million in compensation expense, and a net increase in services and other expenses of $0.7 million, impacts of our SG&A reduction efforts.

### Europe Operating Segment

***Revenues.*** Revenues for our Europe segment increased $10.2 million, or 19.7%, compared to the same period in 2017. E-commerce and wholesale channels grew, while retail results were negatively impacted as we operated 22 fewer stores in the region compared to last year and store traffic fell as the region experienced harsh winter weather. Revenues increased $2.2 million, or 4.3%, due to higher sales volumes and $0.5 million, or 1.0%, due to a higher ASP in the region. Foreign currency translation drove an increase of $7.5 million, or 14.4%.

***Income from Operations.*** Income from operations for the Europe segment was $17.9 million, an increase of $5.6 million, or 45.5%, compared to the three months ended March 31, 2017. Gross profit for the Europe segment increased $6.4 million, or 25.0%, and gross margin increased 220 basis points to 51.9% compared to the same period in 2017. The increase in the Europe segment gross profit was due to the net impact of an increase of $1.1 million, or 4.4%, from higher unit sales volumes, an increase of $1.0 million, or 3.7%, from a higher ASP, and a $4.3 million, or 17.0%, increase from foreign currency translation.

SG&A for our Europe segment increased $0.8 million, or 6.2%, compared to the same period in 2017. The increase in SG&A was primarily due to the net impact of an increase of $1.1 million in compensation expense, partially offset by decreases in facilities expense of $0.4 million, resulting from reductions in the number of company-operated retail stores and our SG&A reduction efforts.

### Other Businesses and Unallocated Corporate

During the three months ended March 31, 2018, total net costs within Other Businesses and Unallocated Corporate increased by $1.6 million compared to the same period in 2017. The increase was primarily due to increased marketing expense of $4.4 million, partially offset by $1.6 million in lower compensation expense and $1.2 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: | December 31, 2017 | Opened | Closed | March 31, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store-in-store | 71 | — | — | 71 |
| Retail stores | 161 | — | 16 | 145 |
| Outlet stores | 215 | — | 6 | 209 |
| Total | 447 | — | 22 | 425 |
| Operating segment: |  |  |  |  |
| Americas | 175 | — | 1 | 174 |
| Asia Pacific | 186 | — | 9 | 177 |
| Europe | 86 | — | 12 | 74 |
| Total | 447 | — | 22 | 425 |

Comparable retail store sales and direct to consumer store sales by operating segment were:

| Comparable retail store sales: (2) | Constant Currency (1) Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Americas | 10.9% | (6.0)% |
| Asia Pacific | 4.7% | (1.4)% |
| Europe | (2.6)% | (7.7)% |
| Global | 7.6% | (4.8)% |

| Direct to consumer comparable store sales (includes retail and e-commerce): (2) | Constant Currency (1) Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Americas | 13.1% | (5.0)% |
| Asia Pacific | 10.4% | 5.5% |
| Europe | 4.2% | (5.2)% |
| Global | 11.2% | (2.2)% |

(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.

### Financial Condition, Capital Resources, and Liquidity

### Liquidity

Our liquidity position as of March 31, 2018 was:

*(in thousands)*

|  | March 31, 2018 |
| --- | ---: |
| Cash, cash equivalents, and restricted cash | $106,825 |
| Available borrowings | 99,386 |

As of March 31, 2018, we had $106.8 million in cash, cash equivalents, and restricted cash and up to $99.4 million of remaining availability under our revolving credit facilities. We believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our revolving credit facilities and other financing instruments will be sufficient to meet our liquidity needs and capital expenditure requirements for at least the next twelve months. Additional future financing may be necessary to fund our operations and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, among other factors, could impact our business and liquidity.

Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warm weather, cash flows from operating activities during our first quarter are typically lower as customer receivables and inventories rise in preparation for the Spring/Summer season. Cash flows from operating generated during our second and third quarters are generally higher, when the northern hemisphere is experiencing warmer weather. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of expected results for any other quarter or for any other year.

### Repatriation of Cash

As a global business, we have cash balances in various countries and amounts are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries may have additional restrictions and covenants associated with them which could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities.

As a result of the Tax Act, most of the cash held outside of the U.S. could be repatriated to the U.S. without incurring additional U.S. federal income taxes. 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. As of March 31, 2018, we held $88.5 million in cash in international locations. Of the $88.5 million, $0.9 million could potentially be restricted. If the remaining $87.6 million were to be immediately repatriated to the U.S., no additional U.S. federal income tax expense would be incurred.

### 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”), pursuant to an Amended and Restated Credit agreement (“the Credit Agreement”), provides for borrowings of up to $100.0 million through February 2021. The Facility contains financial covenants that restrict certain actions by us, including limitations on: (i) stock repurchases to $100.0 million per year, subject to certain restrictions; and (ii) capital expenditures and commitments to $50.0 million per year. The Credit Agreement also permits intercompany loans of up to $375.0 million and requires the Company 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 40% of the total commitments during certain periods or if the outstanding borrowings exceed the borrowing base. If the financial covenant ratios are in effect, the Company 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 March 31, 2018, the Company was in compliance with all financial covenants.

As of March 31, 2018, the total commitments available from the lenders under the Facility were $100.0 million. At March 31, 2018, the Company had no outstanding borrowings and $0.6 million in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As of March 31, 2018 and December 31, 2017, the Company had $99.4 million of available borrowing capacity under the Facility.

### Asia Revolving Credit Facilities

In January 2018, the Company entered into a revolving credit facility with China Merchants Bank Company Limited, Shanghai Branch, or the “CMBC Facility,” which provides the Company a revolving loan facility of up to 30.0 million RMB, or $4.8 million, subject to consent by the lender. The CMBC Facility will mature in January 2019. For RMB loans under the CMBC Facility, interest is based on a benchmark interest rate plus a certain number of basis points upon agreement by the lender and the Company at the time of borrowing. The CMBC Facility may be canceled or suspended at any time by either party. As of March 31, 2018, there were no borrowings outstanding on this credit facility.

### Cash Flows

*(in thousands)*

|  | Three Months Ended March 31, 2018 | 2017 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cash used in operating activities | $(46,601) | $(49,890) | $3,289 | 6.6% |
| Cash used in investing activities | (1,652) | (5,398) | 3,746 | 69.4% |
| Cash used in financing activities | (24,153) | (1,116) | (23,037) | (2,064.2)% |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 2,176 | (1,389) | 3,565 | 256.7% |
| Net change in cash, cash equivalents, and restricted cash | $(70,230) | $(57,793) | $(12,437) | (21.5)% |

***Operating Activities.*** Our primary source of liquidity is cash provided by operating activities, consisting of net income adjusted for noncash items and changes in working capital. Cash used in operating activities decreased $3.3 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The decrease in cash used in operating activities resulted from the combined impacts of an increase in net income as adjusted for non-cash items, which resulted in a source of $4.7 million, and an unfavorable change in our operating assets and liabilities of $1.4 million. The favorable change in net income adjusted for non-cash items was driven primarily by net income, higher by $5.4 million, offset in part by a gain in unrealized foreign currency compared to a loss in 2017, and lower depreciation and amortization expenses. Increased accounts payable, accrued expenses, and other liabilities at March 31, 2018 compared to March 31, 2017, were a source of $15.3 million in cash. Lower inventories, a result of our focus on improved inventory management, were a $7.7 million source of cash compared to the same period in 2017. Higher accounts receivable, reflective of higher revenues, drove a use of cash $19.9 million higher compared to 2017. Changes in prepaid expenses and other assets contributed an additional use of cash of $4.5 million compared to 2017.

***Investing Activities.*** The $3.7 million decrease in cash used in investing activities for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 is primarily due to lower net capital asset expenditures. Capital spend during the three months ended March 31, 2018 related primarily to information technology investment, patents, and retail store improvements.

***Financing Activities.*** The $23.0 million increase in cash used in financing activities for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 resulted primarily from repurchase of 1.4 million shares of our common stock for approximately $20.1 million compared to none in the first three months of 2017 and net repayments on borrowings of $0.4 million during the three months ended March 31, 2018 compared to net proceeds from borrowings of $2.1 million for the same period in 2017. Our net borrowings decreased in the three months ended March 31, 2018 as we financed more of our short-term cash requirements from internal cash generated from operations.

### Contractual Obligations

There have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

### Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of March 31, 2018, other than certain operating lease and purchase commitments, which are described in Note 12 — Commitments and Contingencies.

### Critical Accounting Policies and Estimates

The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

As of January 1, 2018, we adopted authoritative guidance related to revenue recognition from contracts with customers using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenues, gross margins or income from operations.We changed our balance sheet presentation for expected product returns by reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns. The product return asset is reported within ‘Prepaid expenses and other assets’. The returns liability and payments received from customers for future delivery of products are reported within ‘Accrued liabilities and other expenses’ in the condensed consolidated balance sheets.

Effective January 1, 2018, the Company changed its inventory costing method for approximately 95% of its inventories from a lower of net realizable value or cost, using a moving average cost method, to lower of net realizable value or cost using a first-in-first-out method. The change from the Company’s former inventory cost method did not have a significant effect on inventory or cost of sales, and, as a result, prior comparative financial statements have not been restated.

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, 2017, and ‘Note 2 — Recent Accounting Pronouncements — Revenue Recognition’. There have been no other significant changes in our critical accounting policies or their application since December 31, 2017.

### 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, 4,208 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 March 31, 2018, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $226.1 million. The net fair value of these contracts at March 31, 2018 was a liability of $0.1 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 March 31, 2018, 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 $4.2 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 months ended March 31, 2018 by approximately $0.6 million. 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 March 31, 2018 and 2017.

## Controls and procedures

As filed, 1,573 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 March 31, 2018, 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 Securities and Exchange Commission 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 March 31, 2018, 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, 2017.

Filed May 8, 2018.
Source: SEC EDGAR, the filing index for accession 0001628280-18-006136. Last ingested by Listed: Nov 6, 2026, 18:01 ET. No prices; not investment advice.