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Summary Of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2015

Summary Of Significant Accounting Policies [Abstract]

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management believes that the estimates, judgments, and assumptions made when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts, customer rebates, sales returns, impairment assessments and charges, recoverability of assets (including deferred tax assets), uncertain tax positions, share-based compensation expense, the assessment of lower of cost or market on inventory, useful lives assigned to long-lived assets, depreciation, and provisions for contingencies are reasonable based on information available at the time they are made. Management also makes estimates in the assessments of potential losses in relation to tax and customs matters and threatened or pending legal proceedings (see Note 17—Commitments & Contingencies and Note 19—Legal Proceedings). Actual results could materially differ from these estimates. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, Crocs recognizes an expense for the estimated loss. If there is the potential to recover a portion of the estimated loss from a third party, Crocs makes a separate assessment of recoverability and reduces the estimated loss if recovery is deemed probable.

Accumulated Other Comprehensive Income

Activity within the accumulated other comprehensive income (“AOCI”) balance consists solely of gains and losses resulting from the translation of foreign subsidiary financial statements to the Company’s reporting currency. Foreign currency translation resulting in changes to other comprehensive income and related reclassification adjustments are presented net of tax effects on the consolidated statements of other comprehensive income. Foreign currency reclassification adjustments are included within the line item entitled ‘Foreign currency transaction loss, net’ on the consolidated statements of operations.

Fair Value

Fair value is the price that would be received from the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, Crocs considers the principal or most advantageous market in which a hypothetical sale or transfer would take place and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.

The fair value hierarchy is made up of three levels of inputs, which may be used to measure fair value:

Level 1—observable inputs such as quoted prices for identical instruments in active markets;

Level 2—observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model derived valuations in which all significant inputs are observable in active markets; and

Level 3—unobservable inputs for which there is little or no market data, which require Crocs to develop its own assumptions. Crocs categorizes fair value measurements within the fair value hierarchy based upon the lowest level of the most significant inputs used to determine such fair value measurement.

Cash equivalents primarily include time deposits and certificates of deposit with original maturities of three months or less. Time deposits and certificates of deposit included in cash equivalents are valued at amortized cost, which approximates fair value. These investments have been classified as a Level 1 measurement.

Derivative financial instruments are required to be recorded at their fair value, on a recurring basis. The fair values of any derivative instruments, should Crocs enter into them, would be determined using a discounted cash flow valuation model. The significant inputs used in the model are readily available in public markets or can be derived from observable market transactions, and therefore, have been classified as Level 2. These inputs are based on the prevailing LIBOR deposit rates and include the applicable exchange rates, forward rates, and discount rates.

The Company’s other financial instruments are not required to be carried at fair value on a recurring basis. The carrying value of these financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximates fair value due to their short maturities. The carrying values of capital lease obligations and the line of credit approximate their fair values based on borrowing rates currently available to Crocs, with similar terms.

Inventories and long-lived assets such as property and equipment and intangible assets are also not required to be carried at fair value on a recurring basis. For a discussion of inventory values, see “Inventory Valuation” below. Crocs reviews the carrying amounts of property and equipment and intangible assets when events and circumstances indicate the carrying value of the asset may not be recoverable. For such determination, Crocs generally uses either an income approach with inputs that are mainly unobservable, such as expected future cash flows, or a market approach using observable inputs such as replacement cost or third party appraisals, as appropriate. Estimated future cash flows are based on management’s operating budgets and forecasts which take into consideration both observable and unobservable inputs including growth rates, pricing, new markets and other factors expected to affect the business, as well as management’s forecasts for inventory, receivables, capital spending, and other cash needs. Crocs considers this type of estimate to be classified as a Level 3 measurement. See Note 9—Fair Value Measurements for further discussion related to fair value measurements.

Cash and Cash Equivalents

Cash and cash equivalents represent cash and short-term, highly liquid investments with maturities of three months or less at the date of purchase. Crocs considers receivables from credit card companies to be cash equivalents, if expected to be received within five days.

Accounts Receivable

Accounts receivable represent amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, and do not bear interest. Crocs uses its best estimate to determine the required allowance for doubtful accounts based on a variety of factors including the length of time receivables are past due, economic trends and conditions affecting the Company’s customer base and historical collection experience. Specific provisions are recorded for individual receivables when the Company becomes aware of a customer’s inability to meet its financial obligations. See Note 13—Allowances for further discussion related to provisions for doubtful accounts, sale returns and allowances, and reserve for unapplied rebates.

Inventory Valuation

Inventories are valued at the lower of cost or market. Inventory cost is determined using the moving average cost method. At least annually, or more frequently if events and circumstances indicate fair value is less than carrying value, Crocs evaluates its inventory for possible impairment. Crocs estimates inventory fair value based on several subjective assumptions including estimated future demand and market conditions, as well as other observable factors such as current sell-through of the Company’s products, recent changes in demand for Crocs products, global and regional economic conditions, historical experience selling through liquidation and price discounted channels, and the amount of inventory on hand. If the estimated inventory fair value is less than its carrying value, the carrying value is adjusted to market value and the resulting impairment charge is recorded in ‘Cost of sales’ on the consolidated statements of operations. See Note 4—Inventories for further discussion related to inventories.

Property and Equipment

Property, equipment, furniture, and fixtures are stated at cost and depreciation is computed using the straight-line method based on the assets estimated useful life, which typically ranges from two to five years. Leasehold improvements are stated at cost and amortized on the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Depreciation of manufacturing assets is included in cost of sales on the consolidated statements of operations. Depreciation related to corporate, non-product and non-manufacturing assets is included in ‘Selling, general and administrative expenses’ on the consolidated statements of operations.

Assets and Liabilities Held for Sale

The Company classifies a disposal group to be sold as held for sale when management approves and commits to a formal plan to actively market a disposal group and expects the sale to close within twelve months. Upon classifying a disposal group as held for sale, the disposal group is recorded at the lower of its carrying amount or its estimated fair value, reduced for selling costs. In determining the fair value of a disposal group, the Company considers both the net book value of the disposal group as a whole and the impact of any related foreign currency translation adjustments recorded within stockholders’ equity. Any losses are recognized as asset impairment charges in the Consolidated Statement of Operations. Depreciation expense is no longer recorded for any assets within a disposal group that is classified as held for sale.

The fair value of a disposal group less any selling costs is assessed each reporting period it remains classified as held for sale and any subsequent changes are reported as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the disposal group at the time it was initially classified as held for sale.

Impairment of Long-Lived Assets

Long-lived assets to be held and used are evaluated for impairment when events or circumstances indicate the carrying value of a long-lived asset may not be fully recoverable. Events that may indicate the impairment of a long-lived asset (or asset group, as defined below) include (i) a significant decrease in its market price, (ii) a significant adverse change in the extent or manner in which it is being used or in its physical condition, (iii) a significant adverse change in legal factors or business climate that could affect its value, including an adverse action or assessment by a regulator, (iv) an accumulation of costs significantly in excess of the amount originally expected for its acquisition or construction, (v) its current period operating or cash flow losses combined with historical operating or cash flow losses or a forecast of its cash flows demonstrate continuing losses associated with its use, and (vi) a current expectation that, more likely than not, it will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. If such facts indicate a potential impairment of a long-lived asset (or asset group), Crocs assesses the recoverability by determining if its carrying value exceeds the sum of its projected undiscounted cash flows from its use and eventual disposition over its remaining economic life. If the asset’s carrying value is not supported, on an undiscounted cash flow basis, the amount of impairment is measured as the difference between the asset’s carrying value and its estimated fair value. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell. Assets, or groups of assets, to be abandoned or from which no future benefit is expected, are written down to zero in the period it is determined the asset or asset groups will no longer be used, and the assets, or asset groups, are removed entirely from service. An asset group is the lowest level of assets and liabilities for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets involved in Crocs’ retail business, the asset group is at the retail store level. See Note 5 – Property and Equipment for a discussion of impairment losses recorded during the periods presented.

Intangible Assets & Goodwill

Intangible Assets

Intangible assets that are determined to have finite lives are amortized over their estimated useful lives on a straight-line basis and are evaluated for impairment when events or circumstances indicate a carrying value may not be fully recoverable. Customer relationships are amortized on a straight-line basis. Intangible assets that are determined to have indefinite lives, such as trade names, are not amortized and are evaluated for impairment at least annually, or more frequently when circumstances imply possible impairment. Recoverability is based on the estimated future undiscounted cash flows of the asset. If the asset is not supported on an undiscounted cash flow basis, the amount of impairment is measured as the difference between its carrying value and its estimated fair value.

Amortization of manufacturing intangible assets is included in cost of sales on the consolidated statements of operations. Amortization related to corporate, non-product, and non-manufacturing assets, such as the Company’s global information systems, is included in selling, general, and administrative expenses on the consolidated statements of operations. The following table sets forth Crocs’ definite lived intangible assets and the periods over which they are amortized.



Intangible Asset Class			Weighted Average Amortization Period
Patents			10 years
Customer relationships			Estimated customer life
Core technology			5 years
Non-competition agreement			Contractual term
Capitalized software			Shorter of 7 years or useful life

Capitalized Software

Crocs capitalizes certain internal and external software acquisition and development costs, including the costs of employees and contractors devoting time to software development projects and external direct costs for materials and services. Initial costs associated with internally-developed-and-used software are expensed until it is determined that the project has reached the application development stage. Once in its development stage, subsequent additions, modifications or upgrades to an internal-use software project are capitalized to the extent that they add functionality. Software maintenance and training costs are expensed in the period in which they are incurred. Capitalized software primarily consists of Crocs’ enterprise resource system software, warehouse management software, and point of sale software. At least annually, Crocs considers the potential impairment of capitalized software by assessing the substantive service potential of the software, as well as changes, if any, in the extent or manner in which the software is used or is expected to be used, and the actual cost of software development or modification compared to expected cost. See Note 6—Goodwill and Intangible Assets for further discussion.

Goodwill

Goodwill represents the excess purchase price paid over the fair value of assets acquired and liabilities assumed in acquisitions. Goodwill is considered an indefinite lived asset and therefore is not amortized. The Company assesses goodwill for impairment annually on the last day of the year, or more frequently if events and circumstances indicate impairment may have occurred. If the carrying value of goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference. See Note 6—Goodwill and Intangible Assets for discussion of goodwill balances and discussion of impairment losses recorded during the periods presented.

Earnings per Share

Basic and diluted earnings per common share (“EPS”) is presented using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividend rights and participation rights in undistributed earnings. Under the two-class method, EPS is computed by dividing the sum of distributed and undistributed earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. A participating security is a security that may participate in undistributed earnings with common stock had those earnings been distributed in any form. The Company’s Series A convertible preferred stock issued in 2014 represents participating securities as holders of the Series A preferred stock are entitled to receive any and all dividends declared or paid on common stock on an as-converted basis. In addition, shares of the Company’s non-vested restricted stock and restricted stock unit awards are considered participating securities as they represent unvested share-based payment awards containing non-forfeitable rights to dividends. As such, these participating securities must be included in the computation of EPS pursuant to the two-class method on a pro-rata, as-converted basis. Diluted EPS reflects the potential dilution from securities that could share in the Company’s earnings. In addition, the dilutive effect of each participating security, if any, is calculated using the more dilutive of the two-class method described above. This method assumes the if-converted method, which assumes conversion to common stock as of the beginning of the reporting date for any security that is more dilutive upon conversion. Anti-dilutive securities are excluded from diluted EPS. See Note 15—Earnings Per Share for further discussion.

Beneficial Conversion Feature

The issuance of the Company’s Series A preferred stock generated a beneficial conversion feature, which arises when a debt or equity security is issued with an embedded conversion option that is beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. Crocs recognized the beneficial conversion feature by allocating the intrinsic value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference between the effective conversion price per share and the fair value of common stock per share on the commitment date, to additional paid-in capital, resulting in a discount on the Series A preferred stock. Crocs is accreting the discount over eight years from the date of issuance through the redemption date. Accretion expense is recognized as dividend equivalents over the eight-year period utilizing the effective interest method.

Recognition of Revenues

Revenues are recognized when the customer takes title and assumes risk of loss, collection of related receivables is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Title passes on shipment or on receipt by the customer depending on the country in which the sale occurs and the agreement terms with the customer. Allowances for estimated returns and discounts are recognized when the related revenue is recognized.

Shipping and Handling Costs and Fees

Shipping and handling costs are expensed as incurred and are included in ‘Cost of sales’ in the consolidated statements of operation. Shipping and handling fees billed to customers are included in revenues.

Share-based Compensation

Crocs share-based compensation plans allows stock options, restricted stock, and stock performance awards to be granted to plan participants, which includes certain officers, employees and members of the Company’s Board of Directors (the “Board”). Awards granted under these plans are fair valued, and are amortized, net of estimated forfeitures, over the vesting period using the straight-line method. The fair value of stock options is calculated by using the Monte Carlo simulation model and the Black Scholes option pricing model, both of which require estimates for expected volatility, expected dividends, the risk-free interest rate, and the term of the option. If any of the assumptions used in these models or the anticipated number of shares to be awarded change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period. Share-based compensation expense associated with Crocs’ manufacturing and retail employees is included in ‘Cost of sales’ in the consolidated statements of operations. Share-based compensation expense associated with selling, marketing and administrative employees is included ‘Selling, general and administrative expenses’ on the consolidated statements of operations. Share-based compensation directly associated with the construction or implementation of certain long-term projects for internal use are capitalized to the consolidated balance sheets and will be amortized over the useful life of the assets beginning on the date the asset is placed in service. See Note 12—Equity for additional information related to share-based compensation.

Defined Contribution Plans

Crocs has a 401(k) plan known as the Crocs, Inc. 401(k) Plan (the “Plan”). The Plan is available to Crocs U.S. employees and provides employees with tax deferred salary deductions and alternative investment options. The Plan does not provide employees with the option to invest in the Company’s common stock. Employees may contribute up to 75.0% of their salary, subject to certain limitations. The Company matches employees’ contributions to the Plan up to a maximum of 4.0% of eligible compensation. The Company’s expense related to the matching contributions to the Plan was $6.0 million, $7.1 million and $6.8 million for the years ended December 31, 2015, 2014, and 2013, respectively.

Advertising

Advertising costs are expensed as incurred and production costs are expensed when the advertising is first run. Total advertising costs reflected in ‘Selling, general, and administrative expenses’ on the consolidated statement of operations were $58.2 million, $44.7 million and $47.6 million for the years ended December 31, 2015, 2014, and 2013, respectively.

Research and Development

Research and development costs are expensed as incurred. Research and development expenses were $14.0 million, $16.7 million and $15.4 million for the years ended December 31, 2015, 2014, and 2013, respectively, and are included in ‘Selling, general, and administrative expenses’ in the consolidated statement of operations.

Foreign Currency Translation and Foreign Currency Transactions

Crocs’ reporting currency is the U.S. Dollar. Assets and liabilities of foreign operations denominated in local currencies are translated at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the weighted average rate of exchange during the applicable period. Adjustments resulting from translating foreign functional currency financial statements into U.S. Dollars are included in the foreign currency translation adjustment, a component of accumulated other comprehensive income in stockholders’ equity.

Gains and losses generated by transactions denominated in currencies other than the local functional currencies are reflected in the consolidated statement of operations in the period in which they occur and are primarily associated with payables and receivables arising from intercompany transactions.

Derivative Foreign Currency Contracts

Crocs is directly and indirectly affected by fluctuations in foreign currency rates, which may adversely impact its financial performance. To mitigate the potential impact of foreign currency exchange rate risk, Crocs may employ derivative financial instruments including forward contracts and option contracts. Forward contracts are agreements to buy or sell a quantity of a currency at a predetermined future date and at a predetermined rate. An option contract is an agreement that conveys the purchaser the right, but not the obligation, to buy or sell a quantity of a currency at a predetermined rate during a period or at a time in the future. These derivative financial instruments are viewed as risk management tools and are not used for trading or speculative purposes. Crocs recognizes derivative financial instruments as either assets or liabilities in the consolidated balance sheets and measure those instruments at fair value. Changes in the fair value of derivatives not designated or effective as hedges are recorded in ‘Foreign currency transaction loss, net’ in the consolidated statements of operations. Crocs had no derivative instruments that qualified for hedge accounting during any of the periods presented. See Note 9—Fair Value Measurements and Financial Instruments for further discussion.

Income Taxes

Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of other assets and liabilities. Crocs provides for income taxes at the current and future enacted tax rates and laws applicable in each taxing jurisdiction. Crocs uses a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. Crocs recognizes interest and penalties related to income tax matters in income tax expense in the consolidated statement of operations. See Note 14—Income Taxes for further discussion.

Taxes Assessed by Government Authorities

Taxes Assessed by Governmental Authorities

Taxes assessed by governmental authorities that are directly imposed on a revenue transaction, including value added tax, are recorded on a net basis and are therefore excluded from sales.