# Crocs, Inc.: Form 10-Q for the period ended Sep 30, 2018

- Company: [Crocs, Inc.](/companies/crox.md) (CIK 1334036)
- Form: 10-Q
- Filed: 2018-11-08
- Accepted by EDGAR: Nov 8, 2018, 11:03 ET
- Period: 2018-09-30
- Accession: 0001628280-18-013946
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1334036/000162828018013946/croxq3-201810q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1334036/000162828018013946/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $261.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $872.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $122.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $411.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-07-01 to 2018-09-30 | $139.1m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-01-01 to 2018-09-30 | $460.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-07-01 to 2018-09-30 | $125.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-01-01 to 2018-09-30 | $383.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | $13.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | $76.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-07-01 to 2018-09-30 | $126.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-01-01 to 2018-09-30 | $371.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | $4.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | $17.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | $10.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | $61.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.07 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | $0.58 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-07-01 to 2018-09-30 | $0.08 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-01-01 to 2018-09-30 | $0.60 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-07-01 to 2018-09-30 | 72,774,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-01-01 to 2018-09-30 | 71,104,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | $85.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $5.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2018-01-01 to 2018-09-30 | $37.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-09-30 | $203.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $480.2m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $577.9m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $181.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $195.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2018-09-30 | $197.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 63,600 characters.

### Business Overview

Crocs, Inc. and its consolidated subsidiaries (collectively the “Company,” “Crocs,” “we,” “our,” or “us”) are engaged in the design, development, 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.

### 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.
- As we close less productive stores as leases expire and transfer select company-operated stores to distributors, we are experiencing a reduction in retail revenues and a benefit to selling, general and administrative expenses (“SG&A”). 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 expenses 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 $6 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 we completed 62 store closures and transfers in the first nine months of 2018, which brought our total store count to 389 from 558 over a two year period. The majority of company-operated store closures are occurring as store leases expire.
- We are prioritizing growth in our lower-priced, higher-margin molded footwear 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, we decided to fully outsource our production to third-party manufacturers and to close our manufacturing facilities in Mexico and Italy. The manufacturing facilities in Mexico and Italy and the distribution facility in Mexico were closed in the third quarter of 2018. We have incurred total charges of $13.0 million before taxes in the first nine months of 2018 related to the closures, approximately $6 million of which were non-cash. We do not expect to incur any significant additional expenses related to the Mexico and Italy closures through the remainder of 2018.

### 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.

### Third Quarter 2018 Financial Highlights

The following were significant developments in our businesses during the three months ended September 30, 2018:

- Revenues were $261.1 million, growing 7.3% over the third quarter of 2017, or 9.3% on a constant currency basis. Our wholesale revenues grew 9.3% and our e-commerce revenues grew 23.2%, which more than offset the 0.8% decline in our retail revenues resulting from the store closures discussed below.
- We sold 13.3 million pairs of shoes worldwide, an increase of 2.0% from 13.1 million pairs in the three months ended September 30, 2017.
- Gross margin was 53.3%, an increase of 250 basis points from last year’s third quarter.
- SG&A was $125.2 million compared to $120.8 million in the third quarter of 2017. As a percent of revenues, SG&A improved 170 basis points to 47.9% of revenues. Third quarter 2018 results included $1.3 million of non-recurring charges associated with our SG&A reduction plan compared to $3.6 million in last year’s third quarter and $5.0 million of non-recurring charges associated with the closure of company-operated manufacturing and distribution facilities.
- Income from operations of $13.9 million increased 417.5% compared to $2.7 million in last year’s third quarter. Net income attributable to common stockholders was $6.5 million, or $0.07 per diluted share, compared to a net loss of $2.3 million, or $0.03 per diluted share, in last year’s third quarter. We had 72.8 million and 71.9 million weighted average diluted common shares outstanding on September 30, 2018 and 2017, respectively.
- We continued to focus on improving the efficiency and effectiveness of our operations, including carefully managing and reducing our retail store fleet, especially full-priced retail stores. During the three months ended September 30, 2018, we opened three and closed 12 company-operated retail stores, to end the quarter with 389 stores.
- We repurchased 0.6 million shares of common stock at an aggregate cost of $11.1 million.

### Future Outlook

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

(1) drive sustainable, profitable revenue growth;

(2) improve the quality of revenues to enhance gross margins, and;

(3) simplify 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 are creating 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.

We are on track to complete our SG&A reduction plan this year, which will enable us to reduce our annualized SG&A budget by $75 to $85 million compared to 2016. As of September 30, 2018, we have exceeded our 160 company-operated retail store closure target and reduced our store count by 169 stores since the end of 2016.

### Results of Operations

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

|  | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 | % Change Q3 2018-2017 | YTD 2018-2017 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenues | $261,064 | $243,273 | $872,216 | $824,401 | 7.3% | 5.8% |
| Cost of sales | 122,005 | 119,810 | 411,884 | 397,547 | (1.8)% | (3.6)% |
| Gross profit | 139,059 | 123,463 | 460,332 | 426,854 | 12.6% | 7.8% |
| Selling, general and administrative expenses | 125,164 | 120,778 | 383,451 | 379,141 | (3.6)% | (1.1)% |
| Income from operations | 13,895 | 2,685 | 76,881 | 47,713 | 417.5% | 61.1% |
| Foreign currency gains (losses), net | 233 | (257) | 1,587 | 181 | 190.7% | 776.8% |
| Interest income | 422 | 269 | 847 | 576 | 56.9% | 47.0% |
| Interest expense | (126) | (167) | (371) | (539) | 24.6% | 31.2% |
| Other income | 160 | 54 | 229 | 187 | 196.3% | 22.5% |
| Income before income taxes | 14,584 | 2,584 | 79,173 | 48,118 | 464.4% | 64.5% |
| Income tax expense | 4,092 | 955 | 17,850 | 13,519 | (328.5)% | (32.0)% |
| Net income | 10,492 | 1,629 | 61,323 | 34,599 | 544.1% | 77.2% |
| Dividends on Series A convertible preferred stock | (3,000) | (3,000) | (9,000) | (9,000) | —% | —% |
| Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (972) | (892) | (2,854) | (2,621) | (9.0)% | (8.9)% |
| Net income (loss) attributable to common stockholders | $6,520 | $(2,263) | $49,469 | $22,978 | 388.1% | 115.3% |
| Net income (loss) per common share: |  |  |  |  |  |  |
| Basic | $0.08 | $(0.03) | $0.60 | $0.26 | 366.7% | 130.8% |
| Diluted | $0.07 | $(0.03) | $0.58 | $0.26 | 333.3% | 123.1% |
| Gross margin (1) | 53.3% | 50.8% | 52.8% | 51.8% | 250 bp | 100 bp |
| Operating margin (1) | 5.3% | 1.1% | 8.8% | 5.8% | 420 bp | 300 bp |
| Footwear unit sales | 13,309 | 13,050 | 48,188 | 46,868 | 2.0% | 2.8% |
| Average footwear selling price - nominal basis | $18.90 | $18.17 | $17.66 | $17.26 | 4.0% | 2.3% |
| Average footwear selling price - constant currency basis (2) | $19.25 | $18.17 | $17.71 | $17.26 | 5.9% | 2.6% |

(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 $17.8 million, or 7.3%, during the three months ended September 30, 2018 compared to the same period in 2017. Growth in our wholesale and e-commerce channels more than offset a decline in our retail channel resulting from our targeted reduction in the number of company-operated retail stores. Our wholesale channel grew by 9.3%, with especially strong performance in Asia Pacific and the Americas during the third quarter. Our e-commerce channel grew by 23.2% due to increased traffic, higher units per transaction, and a higher average selling price (“ASP”) as consumers continued to migrate to online shopping channels, and the Company continued to invest in digital marketing. Our retail channel decreased by 0.8% in the third quarter of 2018 compared to the same period of 2017, as we operated 85 fewer retail stores compared to September 30, 2017. Higher ASP increased revenues by approximately $17.7 million, or 7.2%. Higher unit sales volume increased revenues by $4.8 million, or 2.0%. A decrease of $4.7 million, or 1.9%, resulted from unfavorable foreign currency translation.

Revenues increased $47.8 million, or 5.8%, in the nine months ended September 30, 2018, compared to the same period in 2017. The increase in revenues was led by 23.7% growth in our e-commerce channel and 7.4% growth in our wholesale channel. These increases more than offset a reduction in our retail channel of 4.3%, resulting from our targeted reduction in the number of company-operated retail stores, partially offset by increased units per transactions in our remaining company-operated retail stores. Higher unit sales volume resulted in an increase in revenues of approximately $23.2 million, or 2.8%, and an increase of $7.7 million, or 1.0%, was attributable to a higher ASP as our product, store, and channel mix continued to change due to store closures and business model changes as we implement our strategic plan. An increase of $16.9 million, or 2.0%, resulted from favorable foreign currency translation.

Future changes in ASP 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), (iii) the level of sales discounts and incentives we offer our customers, and (iv) the impact of foreign currency translation.

***Cost of sales.*** Cost of sales increased $2.2 million, or 1.8%, during the three months ended September 30, 2018 compared to the same period in 2017. Higher unit sales volume resulted in an increase in cost of sales of $2.4 million, or 2.0%, and foreign currency translation resulted in a decrease of $2.2 million, or 1.8%. Changes in product mix contributed to a higher average cost per unit, accounting for a $2.0 million, or 1.6%, increase in cost of sales.

During the nine months ended September 30, 2018, cost of sales increased $14.3 million, or 3.6%, compared to the same period in 2017. Higher unit sales volume resulted in an increase of $11.2 million, or 2.8%, in cost of sales, partially offset by a decrease of $4.8 million, or 1.2%, due to a lower average cost per unit. Lower average cost 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. The effect of foreign currency translation was an increase of $7.9 million, or 2.0%, in cost of sales.

***Gross Profit.*** Gross profit increased $15.6 million, or 12.6%, during the three months ended September 30, 2018 compared to the same period in 2017. Gross margin improved 250 basis points to 53.3% compared to the same period in 2017, driven by favorable product mix. An increase of $15.7 million, or 12.7%, resulted from increases in ASP. An increase of approximately $2.4 million, or 1.9%, resulted from higher unit sales volume and a decrease of $2.5 million, or 2.0%, resulted from foreign currency translation.

During the nine months ended September 30, 2018, gross profit increased $33.5 million, or 7.8%, and gross margin increased 100 basis points to 52.8% compared to the same period in 2017, driven by favorable product mix and the favorable impact of currency on inventory costs in our overseas markets. Higher unit sales volume drove an increase of approximately $12.1 million, or 2.8%, an increase of $12.5 million, or 2.9%, resulted from a higher ASP, and an increase of $8.9 million, or 2.1%, resulted from foreign currency translation.

***Selling, general and administrative expenses.*** SG&A increased $4.4 million, or 3.6%, during the three months ended September 30, 2018 compared to the same period in 2017. The increase was primarily due to higher variable compensation of $7.0 million associated with higher revenues, increased marketing expense of $4.6 million, and non-recurring expenses of $6.3 million compared to $3.6 million for the same period in 2017, partially offset by lower professional service fees of $3.4 million, facilities expense of $2.2 million, and other net expenses of $4.3 million, none of which were individually significant. As a percent of sales, SG&A improved by 170 basis points to 47.9%, a reflection of our SG&A reduction efforts.

SG&A increased $4.3 million, or 1.1%, for the nine months ended September 30, 2018, compared to the same period in 2017. As a percent of sales, SG&A improved by 200 basis points to 44.0%. The increase was primarily due to non-recurring expenses of $17.2 million compared to $7.6 million for the same period in 2017, higher variable compensation of $6.7 million associated with higher revenues, and higher marketing expense of $5.8 million, partially offset by decreases of $8.3 million in professional service fees, $6.5 million in facilities expense as a result of fewer company-owned retail stores, and other net expenses of $3.0 million.

***Foreign currency gains (losses), net.*** Foreign currency gains (losses), net, consists of realized and unrealized foreign currency gains and losses from the remeasurement and settlement of monetary assets and liabilities denominated in non-functional currencies as well as realized and unrealized gains and losses on foreign currency derivative instruments. During the three months ended September 30, 2018, we recognized realized and unrealized net foreign currency gains of $0.2 million compared to losses of $0.3 million during the three months ended September 30, 2017. During the nine months ended September 30, 2018, we recognized realized and unrealized foreign currency net gains of $1.6 million, compared to $0.2 million during the nine months ended September 30, 2017.

***Income tax expense.*** During the three months ended September 30, 2018, income tax expense increased $3.1 million compared to the same period in 2017. The effective tax rate for the three months ended September 30, 2018 was 28.1% compared to an effective tax rate of 37.0% for the same period in 2017, an 8.9% decrease. The decrease in the effective rate was due to the release of valuation allowances in certain 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, tax expense recorded in profitable jurisdictions, and the impact of the Global Intangible Low-Taxed Income (“GILTI”) provisions included in the U.S. Tax Cuts and Job Act (“Tax Act”). The Company evaluates the need for valuation allowances by analyzing all available positive and negative evidence. The Company has determined that it is more likely than not to realize the associated tax benefits in certain jurisdictions and the valuation allowances in these jurisdictions have been released. In other jurisdictions, the Company has determined that it is not more likely than not to realize the associated tax benefits and has maintained or recorded valuation allowances against the deferred tax assets in these jurisdictions. The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in the effective tax rate calculation. Our effective tax rate of 28.1% for the three months ended September 30, 2018 differs from the federal U.S. statutory rate due to the release of valuation allowances in certain jurisdictions and differences in income tax rates between U.S. and foreign jurisdictions.

During the nine months ended September 30, 2018, income tax expense increased $4.3 million compared to the same period in 2017. The effective tax rate for the nine months ended September 30, 2018 was 22.5% compared to an effective tax rate of 28.1% for the same period in 2017, a 5.6% decrease. This decrease in the effective rate was due to the release of valuation allowances in certain 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, tax expense recorded in profitable jurisdictions, and the impact of the GILTI provisions included in the Tax Act. The Company evaluates the need for valuation allowances by analyzing all available positive and negative evidence. The Company has determined that it is more likely than not to realize the associated tax benefits in certain jurisdictions and the valuation allowances in these jurisdictions have been released. In other jurisdictions, the Company has determined that it is not more likely than not to realize the associated tax benefits and has maintained or recorded valuation allowances against the deferred tax assets in these jurisdictions.The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in the effective tax rate calculation. Our effective tax rate of 22.5% for the nine months ended September 30, 2018 differs from the federal U.S. statutory rate 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.

The Company’s tax rate fluctuates and may increase or decrease with changes in, among other things, the amount of income or loss by jurisdiction, the Company’s ability to utilize net operating losses and foreign tax credits, changes in tax laws, and the movement of liabilities established pursuant to accounting guidance for uncertain tax positions as statutes of limitations expire, positions are effectively settled, or when additional information becomes available. There are proposed or pending tax law changes in various jurisdictions and other changes to regulatory environments in countries in which we do business that, if enacted, may have an impact on the Company’s effective tax rate.

Additionally, the Company continues to evaluate the impacts of the Tax Act. As the Company further understands its implications, as well as the related, and yet to be issued, regulations and interpretations, the Company’s effective tax rate could be impacted. The Company is still evaluating the GILTI provisions of the Tax Act and the related implications and has concluded that the Company will record as a periodic expense as incurred, and, therefore has not recorded deferred taxes for GILTI. During the three months ended September 30, 2018, the Company made adjustments to the amounts recorded as of December 31, 2017, as a result of the Tax Act related to U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax. As of December 31, 2017, the Company recorded provisional amounts based on estimates of the effects of the Tax Act as the analysis requires significant data from its foreign subsidiaries that is not regularly collected or analyzed. The U.S. federal transition tax liability, net of newly generated income tax credits, was an obligation of $17.1 million. Upon gathering additional information, the Company determined this liability to be $19.5 million. The Company has existing foreign tax credits and other attributes which fully offset this transition tax obligation. However, the Company continues to consider these amounts provisional for the reasons discussed above. Additional impacts from the Tax Act will be recorded as they are identified during the measurement period pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 118 ("SAB 118"). The Company’s determination of the tax effects of the Tax Act will be completed no later than one year from the enactment date as permitted under SAB 118. Any further adjustments to provisional amounts that are identified during the measurement period will be recorded and be finalized as part of our fourth quarter income tax procedures and recorded as part of the December 31, 2018 provision.

### Revenues By Channel

*(in thousands)*

| Wholesale: | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 | % Change Q3 2018-2017 | YTD 2018-2017 | Constant Currency % Change (1) Q3 2018-2017 | YTD 2018-2017 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | 44,883 | $41,642 | $171,477 | $169,975 | 7.8% | 0.9% | 12.2% | 2.2% |
| Asia Pacific (2) | 40,938 | 36,286 | 172,152 | 155,541 | 12.8% | 10.7% | 16.1% | 7.6% |
| Europe (2) | 29,373 | 28,576 | 130,150 | 116,932 | 2.8% | 11.3% | 5.5% | 3.8% |
| Other businesses | 1,525 | 254 | 2,133 | 545 | 500.4% | 291.4% | 515.0% | 288.3% |
| Total wholesale | 116,719 | 106,758 | 475,912 | 442,993 | 9.3% | 7.4% | 12.9% | 4.9% |
| Retail: |  |  |  |  |  |  |  |  |
| Americas | 65,247 | 57,404 | 156,557 | 145,809 | 13.7% | 7.4% | 13.9% | 7.4% |
| Asia Pacific (2) | 22,942 | 29,497 | 71,359 | 87,631 | (22.2)% | (18.6)% | (22.1)% | (21.0)% |
| Europe (2) | 10,345 | 12,434 | 29,601 | 35,751 | (16.8)% | (17.2)% | (13.3)% | (18.5)% |
| Total retail | 98,534 | 99,335 | 257,517 | 269,191 | (0.8)% | (4.3)% | (0.2)% | (5.3)% |
| E-commerce: |  |  |  |  |  |  |  |  |
| Americas | 26,827 | 21,413 | 70,515 | 58,552 | 25.3% | 20.4% | 25.7% | 20.3% |
| Asia Pacific | 11,283 | 9,537 | 45,134 | 35,483 | 18.3% | 27.2% | 19.6% | 22.2% |
| Europe | 7,701 | 6,230 | 23,138 | 18,182 | 23.6% | 27.3% | 25.4% | 20.8% |
| Total e-commerce | 45,811 | 37,180 | 138,787 | 112,217 | 23.2% | 23.7% | 24.1% | 21.0% |
| Total revenues | $261,064 | $243,273 | $872,216 | $824,401 | 7.3% | 5.8% | 9.3% | 3.8% |

(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) In the third quarter of 2018, certain revenues previously reported within the ‘Asia Pacific’ segment were shifted to the ‘Europe’ segment. The previously reported amounts for wholesale and retail revenues in these regions for the three and nine months ended September 30, 2017 have been revised to conform to the current year presentation. See ‘Impacts on revenue of segment composition change’ table below for more information.

### Impacts on revenue of segment composition change:

*(in thousands)*

| Wholesale: | Three Months Ended September 30, 2017 Increase (Decrease) | Nine Months Ended September 30, 2017 |
| --- | ---: | ---: |
| Asia Pacific | $(4,719) | $(21,545) |
| Europe | 4,719 | 21,545 |
| Retail: |  |  |
| Asia Pacific | — | (2,827) |
| Europe | — | 2,827 |

***Wholesale channel revenues.*** Revenues from our wholesale channel increased $10.0 million, or 9.3%, during the three months ended September 30, 2018 compared to the same period in 2017. An increase of $7.0 million, or 6.5%, was driven by a higher ASP. An increase of approximately $6.8 million, or 6.4%, resulted from higher unit sales volume due to increased customer demand with distributors and e-tail customers as consumers shift towards online purchasing. Foreign currency translation drove a decrease of $3.8 million, or 3.6%.

During the nine months ended September 30, 2018, revenues from our wholesale channel increased $32.9 million, or 7.4%, compared to the same period in 2017. Higher unit sales volume of approximately $22.7 million, or 5.1%, were partially offset by a lower ASP of $1.0 million, or 0.2%, while the effect of foreign currency translation was an increase $11.2 million, or 2.5%.

***Retail channel revenues.*** Revenues from our retail channel decreased $0.8 million, or 0.8%, during the three months ended September 30, 2018 compared to the same period in 2017. The decrease in retail channel revenues was due to targeted reductions in our company-operated retail store fleet, consistent with our store rationalization plan. As of September 30, 2018, we operated

85 fewer stores compared to the end of last year’s third quarter. Our comparable retail store sales grew 15.0% on a global basis, attributable to higher ASP and units per transaction. A decrease of $6.9 million, or 7.0%, was due to lower unit sales volume related to store count reduction, partially offset by a favorable impact of $6.7 million, or 6.8%, due to ASP related to product mix and improved quality of revenues. The effect of foreign currency translation was a decrease of $0.6 million, or 0.6%.

During the nine months ended September 30, 2018, revenues from our retail channel decreased $11.7 million, or 4.3%, compared to the same period in 2017. The decrease in retail channel revenues was due primarily to net reduction of 85 company-operated retail stores, consistent with our store rationalization plan, partially offset by ASP gains and favorable foreign currency impacts. Unit sales volume decreased by approximately $24.0 million, or 8.9%. Favorable product mix and improved quality of revenues, the results of less promotional discounting and improved inventory composition, resulted in a higher ASP impact of $9.7 million, or 3.6%. An increase of $2.6 million, or 1.0%, resulted 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 $8.6 million, or 23.2%, during the three months ended September 30, 2018 compared to the same period in 2017, as this channel continued to grow in each region. Improved in-stock levels and investment in digital marketing resulted in increased e-commerce traffic. Changes in product mix resulted in an increase of $6.0 million, or 16.2%, from higher ASP. Revenues increased by $2.9 million, or 7.9%, from higher unit sales volume as a result of increased consumer demand and a continuing shift toward online purchasing. Foreign currency translation resulted in a decrease of $0.3 million, or 0.9%.

During the nine months ended September 30, 2018, revenues from our e-commerce channel increased $26.6 million, or 23.7%, compared to the same period in 2017. Revenues increased by $17.0 million, or 15.1%, from higher unit sales volume, and higher ASP related to mix contributed an additional $6.6 million, or 5.9%. Favorable foreign currency translation resulted in an increase of $3.0 million, or 2.7%.

### Reportable Operating Segments

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

*(in thousands)*

| Revenues: | Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 | % Change Q3 2018-2017 | YTD 2018-2017 | Constant Currency % Change (1) Q3 2018-2017 | YTD 2018-2017 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Americas | $136,957 | $120,459 | $398,549 | $374,336 | 13.7% | 6.5% | 15.4% | (0.6)% |
| Asia Pacific (2) | 75,163 | 75,320 | 288,645 | 278,656 | (0.2)% | 3.6% | 1.6% | 3.1% |
| Europe (2) | 47,419 | 47,240 | 182,889 | 170,864 | 0.4% | 7.0% | 3.2% | 6.1% |
| Total segment revenues | 259,539 | 243,019 | 870,083 | 823,856 | 6.8% | 5.6% | 8.7% | 8.6% |
| Other businesses | 1,525 | 254 | 2,133 | 545 | 500.4% | 291.4% | 515.0% | 3.1% |
| Total consolidated revenues | $261,064 | $243,273 | $872,216 | $824,401 | 7.3% | 5.8% | 9.3% | 2.0% |
| Income from operations: (3) |  |  |  |  |  |  |  |  |
| Americas | $42,586 | $24,398 | $110,814 | $81,132 | 74.5% | 36.6% | 78.0% | 37.6% |
| Asia Pacific (2) | 16,861 | 14,115 | 74,640 | 70,880 | 19.5% | 5.3% | 28.9% | 10.5% |
| Europe (2) | 12,064 | 4,870 | 53,819 | 35,182 | 147.7% | 53.0% | 139.7% | 29.0% |
| Total segment income from operations | 71,511 | 43,383 | 239,273 | 187,194 | 64.8% | 27.8% | 69.0% | 25.7% |
| Other businesses(4) | (14,092) | (6,233) | (41,557) | (16,883) | (126.1)% | (146.1)% | 70.0% | 149.6% |
| Unallocated corporate and other (5) | (43,524) | (34,465) | (120,835) | (122,598) | (26.3)% | 1.4% | 4.2% | (70.7)% |
| Total consolidated income from operations | $13,895 | $2,685 | $76,881 | $47,713 | 417.5% | 61.1% | 898.1% | 229.7% |

(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.

(2) In the third quarter of 2018, certain revenues and expenses previously reported within the ‘Asia Pacific’ segment were shifted to the ‘Europe’ segment. The previously reported amounts for revenues and income from operations for the three and nine months ended September 30, 2017 have also been revised to conform to the current period presentation. See ‘Impacts of segment composition change’ table below for more information.

(3) In 2018, certain global marketing expenses previously reported within the operating segments are managed and reported within ‘Unallocated corporate and other’. The previously reported amounts for income from operations for the three and nine months ended September 30, 2017 have been revised to conform to the current year presentation. See ‘Impacts of global marketing expense realignment’ table below for more information.

(4) ‘Other businesses’ consists primarily of our owned and leased manufacturing facilities, which manufacture products for sale by our operating segments, which substantially ceased operations in the third quarter of 2018, other expenses as a result of outsourcing, and other supply chain cost changes.

(5) 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.

### Impacts of segment composition change:

*(in thousands)*

| Impacts on revenues: | Three Months Ended September 30, 2017 Increase (Decrease) | Nine Months Ended September 30, 2017 |
| --- | ---: | ---: |
| Asia Pacific | $(4,719) | $(24,372) |
| Europe | 4,719 | 24,372 |
| Impacts on income from operations: |  |  |
| Asia Pacific | 527 | (6,203) |
| Europe | (527) | 6,203 |

### Impacts of global marketing expense realignment:

*(in thousands)*

| Impacts on income from operations: | Three Months Ended September 30, 2017 Increase (Decrease) | Nine Months Ended September 30, 2017 |
| --- | ---: | ---: |
| Americas | $297 | $9,823 |
| Asia Pacific | 323 | 3,789 |
| Europe | (19) | 1,258 |
| Unallocated corporate and other | (601) | (14,870) |

### Americas Operating Segment

***Revenues.*** Revenues for our Americas segment increased $16.5 million, or 13.7%, during the three months ended September 30, 2018 compared to the same period in 2017. The increase in revenues was led by a 25.3% increase in e-commerce revenues due to increased traffic and units per transaction. Retail revenues increased by 13.7%, despite operating 10 fewer retail stores compared to the same period last year, due to comparable sales growth of 19.9%. Higher unit sales volume resulted in an increase of approximately $4.6 million, or 3.8%, with an increase in ASP generating $14.0 million, or 11.6%. Wholesale channel revenues increased 7.8% in response to greater customer demand in North America. The effect of foreign currency translation was a decrease of $2.1 million, or 1.7%.

During the nine months ended September 30, 2018, revenues for our Americas segment increased by $24.2 million, or 6.5%, compared to the same period in 2017. The increase in revenues resulted from a 20.4% increase in e-commerce revenues, a 7.4% increase in retail revenues, as well as a 0.9% increase in wholesale revenues. For all channels combined, a higher ASP resulted in an increase of $16.7 million, or 4.5%, while higher unit sales volume resulted in an increase of $9.8 million, or 2.6%, and the effect of foreign currency translation was a decrease of $2.3 million, or 0.6%.

***Income from Operations.*** Income from operations for the Americas segment was $42.6 million for the three months ended September 30, 2018, an increase of $18.2 million, or 74.5%, compared to the same period in 2017. Gross profit increased $17.6 million, or 28.3%, and gross margin increased 670 basis points to 58.4%, compared to the same period in 2017. The increase is due to an increase in ASP of $17.4 million, or 27.9%, and an increase of $1.3 million, or 2.2%, from higher unit sales volume, partially offset by unfavorable foreign currency translation impacts of $1.1 million, or 1.8%.

SG&A for our Americas segment decreased $0.6 million, or 1.5%, during the three months ended September 30, 2018 compared to the same period in 2017 due to a decrease in facilities expense of $0.9 million related to store closures, partially offset by net increases in marketing and other expenses of $0.3 million.

Income from operations for the Americas segment was $110.8 million for the nine months ended September 30, 2018, an increase of $29.7 million, or 36.6%, compared to the same period in 2017. Gross profit increased $26.3 million, or 13.5%, and gross margin increased 350 basis points to 55.5%, compared to the same period in 2017. The increase in the Americas segment gross profit is due to an increase of $23.3 million, or 12.0%, in our ASP and an increase of $4.1 million, or 2.1%, from higher unit sales volume. The impact of foreign currency translation on gross margin was a decrease of $1.1 million, or 0.6%.

During the nine months ended September 30, 2018, SG&A for our Americas segment decreased $3.4 million, or 2.9%, compared to the same period in 2017. The decrease in SG&A was due to decreases of $1.9 million in facilities expense and $1.6 million in compensation expense as a result of the reduction in the number of company-operated retail stores, and a net increase of $0.1 million in other expenses.

### Asia Pacific Operating Segment

***Revenues.*** Revenues for our Asia Pacific segment decreased $0.2 million, or 0.2%, during the three months ended September 30, 2018 compared to the same period in 2017. E-commerce revenues increased by 18.3% and wholesale revenues increased by 12.8% as we continue to strengthen our wholesale network. Retail revenues decreased by 22.2% as we operated 51 fewer stores in the region compared to the same period last year. Retail comparable sales growth of 3.2% reflected a higher ASP in company-operated stores. The impact of volume was a $3.4 million, or 4.5%, reduction to revenues, which was more than offset by a higher ASP, resulting in an increase of $4.6 million, or 6.1%. The effect of foreign currency translation was a decrease of $1.4 million, or 1.8%.

During the nine months ended September 30, 2018, revenues for our Asia Pacific segment increased $10.0 million, or 3.6%, compared to the same period in 2017. E-commerce revenues increased by 27.2%, with growth in every country we operate in and strong results in key markets in the region, and wholesale revenues increased by 10.7%. Retail revenues decreased by 18.6% as a result of 51 fewer company-operated retail stores compared to September 30, 2017. For all channels combined, an increase in unit sales volume of approximately $5.7 million, or 2.1%, was partially offset by a decrease in ASP of $4.3 million, or 1.6%. The effect of foreign currency translation was an increase of $8.6 million, or 3.1%.

***Income from Operations.*** Income from operations for the Asia Pacific segment was $16.9 million for the three months ended September 30, 2018, an increase of $2.7 million, or 19.5%, compared to the same period in 2017. Gross profit decreased $1.0 million, or 2.3%, and gross margin decreased 120 basis points to 56.3% compared to the same period in 2017. The decrease in gross profit is due to a $0.7 million, or 1.7%, decrease from unfavorable foreign currency translation and a decrease of $0.6 million, or 1.3%, due to an increase in average cost per unit that exceeded the increases in ASP, partially offset by the favorable impact of unit sales volume on margin, an increase of $0.3 million, or 0.7%.

SG&A for our Asia Pacific segment decreased $3.7 million, or 12.8%, during the three months ended September 30, 2018 compared to the same period in 2017. The decrease in SG&A was due to decreases of $1.4 million in compensation expense and $0.7 million in facilities expense as a result of the reduction in the number of company-operated retail stores, and a net decrease in other expenses of $1.6 million, none of which were individually significant.

Income from operations for the Asia Pacific segment was $74.6 million for the nine months ended September 30, 2018, an increase of $3.8 million, or 5.3%, compared to the same period in 2017. Gross profit increased $0.9 million, or 0.6%, and gross margin increased 170 basis points to 56.8% compared to the same period in 2017. The increase in the Asia Pacific segment gross profit was due to an increase in unit sales volume of $8.9 million, or 5.5%, and an increase of $4.8 million, or 2.9%, from favorable foreign currency translation, partially offset by a decrease of $12.8 million, or 7.8%, resulting from a lower ASP.

During the nine months ended September 30, 2018, SG&A for our Asia Pacific segment decreased $2.9 million, or 3.1%, compared to the same period in 2017. The decrease in SG&A was primarily due to decreases of $3.0 million in compensation expense and $2.5 million in facilities expense as a result of the reduction in the number of company-operated retail stores and our SG&A reduction efforts, combined with a net decrease of $1.4 million in sales and other expenses, partially offset by an increase of $2.0 million in marketing expense and lower recoveries of previously written off accounts receivable of $2.0 million.

### Europe Operating Segment

***Revenues.*** Revenues for our Europe segment increased $0.2 million, or 0.4%, during the three months ended September 30, 2018 compared to the same period in 2017. E-commerce revenue grew 23.6%, reflecting higher online traffic, and wholesale revenue grew 2.8%, more than offsetting a decline of 16.8% in retail results as we operated 24 fewer stores in the region compared to last year. Our retail comparable sales growth of 15.1% for the quarter benefited from increased demand and improved inventory positioning. Higher unit sales volume resulted in an increase of $0.3 million, or 0.7%, and a higher ASP in the region resulted in an increase of $1.2 million, or 2.5%. Foreign currency translation resulted in a decrease of $1.3 million, or 2.8%.

During the nine months ended September 30, 2018, revenues for our Europe segment increased $12.0 million, or 7.0%, compared to the same period in 2017. E-commerce revenue grew 27.3% and wholesale revenue grew 11.3%, more than offsetting a 17.2% decline in retail revenues as we reduced the number of company-operated retail stores in the region. An increase of $3.0 million, or 1.8%, resulted from a higher ASP, partially offset by a decrease of $1.4 million, or 0.8%, due to unit sales volume. Favorable foreign currency translation resulted in an increase of $10.4 million, or 6.0%.

***Income from Operations.*** Income from operations for the Europe segment was $12.1 million for the three months ended September 30, 2018, an increase of $7.2 million, or 147.7%, compared to the same period in 2017. Gross profit for the Europe segment increased $1.6 million, or 6.7%, and gross margin increased 320 basis points to 53.6% compared to the same period in 2017. The increase in gross profit was due to the net impact of an increase of $1.5 million, or 6.2%, from a higher ASP, an increase of $0.8 million, or 3.4%, from higher unit sales volume, and a $0.7 million, or 2.9%, decrease from foreign currency translation.

SG&A for our Europe segment decreased $5.6 million, or 29.5%, during the three months ended September 30, 2018 compared to the same period in 2017 primarily due to an $0.8 million reduction in compensation expense, a reduction in bad debt expense of $0.8 million, a $0.7 million reduction in facilities expense, and a $3.3 million reduction of net other expenses, none of which were individually significant.

Income from operations for the Europe segment was $53.8 million for the nine months ended September 30, 2018, an increase of $18.6 million, or 53.0%, compared to the same period in 2017. During the nine months ended September 30, 2018, gross profit increased $11.4 million, or 13.3%, and gross margin increased by 290 basis points to 53.4% compared to the same period in 2017. The increase in the Europe segment gross profit is due to the net impact of an increase of $5.8 million, or 6.8%, due to a higher ASP, an increase of $0.4 million, or 0.5%, due to the favorable impact of unit sales volume, and an increase of $5.2 million, or 6.0%, from foreign currency translation.

During the nine months ended September 30, 2018, SG&A for our Europe segment decreased $7.2 million, or 14.2%, compared to the same period in 2017.The decrease in SG&A was primarily due to a decrease of $2.6 million in facilities expense as a result of the reduction in company-operated retail stores, a decrease of $1.0 million in compensation expense, a decrease in bad debt expense of $0.9 million, and a net decrease in other expenses of $2.7 million, none of which were individually significant.

### Other Businesses and Unallocated Corporate

During the three months ended September 30, 2018, total net costs within ‘Other Businesses and Unallocated Corporate’ increased by $16.9 million compared to the same period in 2017. The increase was primarily due to increased variable compensation expense of $9.3 million associated with higher revenues, expenses related to our Mexico and Italy facility closures totaling $5.0 million, increased marketing expense of $3.1 million, and increases in other net expenses of $2.7 million, partially offset by a decrease in professional service fees of $3.2 million.

During the nine months ended September 30, 2018, total net costs within ‘Other Businesses and Unallocated Corporate’ increased by $22.9 million compared to the same period in 2017. The increase was primarily due to $13.0 million in expenses related to our Mexico and Italy facility closures, higher variable compensation expense of $12.2 million associated with higher revenues, and higher marketing expense of $2.7 million, partially offset by a net decrease in professional service fees and other net expenses of $5.0 million.

### Store Locations and Comparable Store Sales

The tables below illustrate the overall change in the number of our company-operated retail locations by type of store and reportable operating segment for the three and nine months ended September 30, 2018:

| Company-operated retail locations: Type: | June 30, 2018 | Opened | Closed/Transferred | September 30, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store in store | 69 | — | — | 69 |
| Retail stores | 126 | 1 | 6 | 121 |
| Outlet stores | 203 | 2 | 6 | 199 |
| Total | 398 | 3 | 12 | 389 |
| Operating segment: |  |  |  |  |
| Americas | 169 | 1 | 1 | 169 |
| Asia Pacific | 161 | 2 | 8 | 155 |
| Europe | 68 | — | 3 | 65 |
| Total | 398 | 3 | 12 | 389 |

| Company-operated retail locations: Type: | December 31, 2017 | Opened | Closed/Transferred | September 30, 2018 |
| --- | ---: | ---: | ---: | ---: |
| Kiosk/store-in-store | 71 | — | 2 | 69 |
| Retail stores | 161 | 1 | 41 | 121 |
| Outlet stores | 215 | 3 | 19 | 199 |
| Total | 447 | 4 | 62 | 389 |
| Operating segment: |  |  |  |  |
| Americas | 175 | 1 | 7 | 169 |
| Asia Pacific | 186 | 3 | 34 | 155 |
| Europe | 86 | — | 21 | 65 |
| Total | 447 | 4 | 62 | 389 |

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 September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Americas | 19.9% | 2.8% | 13.0% | (0.3)% |
| Asia Pacific (3) | 3.2% | (2.9)% | 3.4% | (1.8)% |
| Europe | 15.1% | (2.1)% | 11.4% | (2.1)% |
| Global | 15.0% | 0.4% | 10.1% | (1.0)% |

33

| Direct to consumer comparable store sales (includes retail and e-commerce): (2) | Constant Currency (1) Three Months Ended September 30, 2018 | 2017 | Nine Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Americas | 21.6% | 9.2% | 15.2% | 2.4% |
| Asia Pacific (3) | 8.4% | 3.7% | 10.4% | 8.6% |
| Europe (3) | 19.3% | 4.9% | 15.4% | 2.5% |
| Global | 17.9% | 7.0% | 13.8% | 4.3% |

(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.

(3) In the third quarter of 2018, certain revenues and expenses previously reported within the ‘Asia Pacific’ segment were shifted to the ‘Europe’ segment. The previously reported amounts for comparable retail store sales and direct to consumer store sales for the three months ended September 30, 2017 were not impacted. The previously reported amounts for comparable retail store sales and direct to consumer store sales for the nine months ended September 30, 2017 have been revised to conform to the current period presentation. The adjustments for this revision had the following impacts: Asia Pacific comparable retail stores decreased by 0.1%; Europe comparable retail stores increased by 0.2%; Asia Pacific direct to consumer comparable store sales increased by 0.2%; Europe direct to consumer comparable store sales decreased by 0.1%.

### Financial Condition, Capital Resources, and Liquidity

### Liquidity

Our liquidity position as of September 30, 2018 was:

*(in thousands)*

|  | September 30, 2018 |
| --- | ---: |
| Cash, cash equivalents, and restricted cash | $207,198 |
| Available borrowings | 99,400 |

As of September 30, 2018, we had $207.2 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 September 30, 2018, we held $109.4 million of our total $203.0 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the $109.4 million, repatriation of $0.8 million could potentially be limited by local regulations. If the remaining $108.6 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 September 30, 2018, the Company was in compliance with all financial covenants.

As of September 30, 2018, the total commitments available from the lenders under the Facility were $100.0 million. At September 30, 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 September 30, 2018, the Company had $99.4 million of available borrowing capacity under the Facility. The Facility matures in February 2021.

On November 5, 2018, the Company entered into the Sixteenth Amendment to the Amended and Restated Credit Agreement which, among other things: (i) increased the total commitments under the Credit Agreement to $150.0 million from $100.0 million; (ii) increased permitted stock repurchases to $200.0 million from $100.0 million per year; (iii) increased total permitted stock repurchases to $800.0 million from $600.0 million cumulatively; and (iv) added an additional lender under the Credit Agreement.

### Asia Revolving Credit Facilities

The Company’s revolving credit facility agreement with HSBC Bank (China) Company Limited, Shanghai Branch (“HSBC”), or the “HSBC Facility,” provides the Company uncommitted dual currency revolving loan facilities of up to 40.0 million Chinese Renminbi (“RMB”), or $5.8 million, with a combined facility limit of RMB 60.0 million, or $8.7 million. The HSBC Facility may be canceled at any time by either party. As of September 30, 2018, there were no borrowings outstanding and borrowings under the HSBC Facility remained suspended at the discretion of HSBC.

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 $4.4 million, subject to consent by the lender. The CMBC Facility matures 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 September 30, 2018, there were no borrowings outstanding on this credit facility.

### Cash Flows

*(in thousands)*

|  | Nine Months Ended September 30, 2018 | 2017 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Cash provided by operating activities | $85,870 | $80,415 | $5,455 | 6.8% |
| Cash used in investing activities | (3,899) | (12,701) | 8,802 | 69.3% |
| Cash used in financing activities | (46,695) | (37,600) | (9,095) | (24.2)% |
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (5,133) | 499 | (5,632) | 1,128.7% |
| Net change in cash, cash equivalents, and restricted cash | $30,143 | $30,613 | $(470) | (1.5)% |

***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 provided by operating activities increased $5.5 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The increase in cash provided by operating activities resulted from the combined impacts of an increase in net income as adjusted for non-cash items, which resulted in a favorable change of $32.3 million, and an unfavorable change in our operating assets and liabilities of $26.8 million. The favorable change in net income adjusted for non-cash items was driven primarily by higher net income of $26.7 million, as well as higher non-cash stock-based compensation, offset in part by a gain in unrealized foreign currency compared to a loss in 2017, and lower depreciation and amortization expenses. Higher accounts receivable, reflective of higher revenues, drove a use of cash $28.3 million higher compared to 2017. Changes in inventories were an $8.0 million use of cash compared to the same period in 2017. Changes in prepaid expenses and other assets contributed an additional use of cash of $7.7 million compared to 2017. Increased accounts payable, accrued expenses, and other liabilities at September 30, 2018 compared to September 30, 2017, were a source of $17.2 million in cash as we improved our cash management.

***Investing Activities.*** The $8.8 million decrease in cash used in investing activities for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 is due to lower net capital asset expenditures, as we are opening fewer new stores and remodeling fewer stores each year as our retail fleet is reduced. Capital spend during the nine months ended September 30, 2018 related primarily to information technology investment and distribution center and retail store improvements.

***Financing Activities.*** The $9.1 million increase in cash used in financing activities for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 resulted primarily from repurchase of 2.4 million shares of our common stock for approximately $37.0 million compared to 3.3 million shares for approximately $25.6 million in the first nine months of

2017 and net repayments on borrowings of $0.7 million during the nine months ended September 30, 2018 compared to $2.7 million for the same period in 2017. Our net borrowings decreased in both the nine months ended September 30, 2018 and 2017 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 September 30, 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 contained in the condensed consolidated financial statements in this report. 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, 5,055 characters.

### Interest Rate Risk

We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. Our exposure to market risk includes interest rate fluctuations in connection with our Facility and certain financial instruments.

Borrowings under our Facility bear interest at a variable rate and are therefore subject to risk based upon prevailing market interest rates. Interest rates fluctuate as a result of many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. As of September 30, 2018 and December 31, 2017, there were no borrowings outstanding under our Facility.

### 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, 2018, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $270.2 million. The net fair value of these contracts at September 30, 2018 was an asset of $0.6 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, 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 $3.0 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 Europe 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 operating 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 decreased our income before taxes during the three and nine months ended September 30, 2018 by approximately $0.1 million and $1.1 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 statements of operations for the three and nine months ended September 30, 2018 and 2017.

## Controls and procedures

As filed, 1,581 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, 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 September 30, 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 Nov 8, 2018.
Source: SEC EDGAR, the filing index for accession 0001628280-18-013946. Last ingested by Listed: Nov 6, 2026, 18:01 ET. No prices; not investment advice.