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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            

Commission File No. 000-51754
_____________________________________________________________
CROCS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-2164234
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
7477 East Dry Creek Parkway, Niwot, Colorado 80503
(Address, including zip code, of registrant’s principal executive offices)
(303848-7000
(Registrant’s telephone number, including area code)
_____________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class:
Trading symbol:
Name of each exchange on which registered:
 
 
Common Stock, par value $0.001 per share
CROX
The Nasdaq Global Select Market
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No 

As of October 23, 2019, Crocs, Inc. had 68,607,426 shares of its common stock, par value $0.001 per share, outstanding.
 




Cautionary Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.

Statements that refer to industry trends, projections of our future financial performance, anticipated trends in our business and other characterizations of future events or circumstances are forward-looking statements. These statements, which express management’s current views concerning future events or results, use words like “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “future,” “intend,” “plan,” “project,” “strive,” and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will,” “would,” and similar expressions or variations. Examples of forward-looking statements include, but are not limited to, statements we make regarding:

our expectations regarding future trends, selling, general and administrative cost savings, expectations, and performance of our business;
our belief that we have sufficient liquidity to fund our business operations during the next twelve months;
our expectations about the impact of our strategic plans; and
our expectations regarding our level of capital expenditures in 2019 and beyond.

Forward-looking statements are subject to risks, uncertainties and other factors, which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, those described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2018, and our subsequent filings with the Securities and Exchange Commission. Caution should be taken not to place undue reliance on any such forward-looking statements. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
 


i


Crocs, Inc.
Table of Contents to the Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2019
 
 


ii


PART I — Financial Information
 
ITEM 1. Financial Statements
 
CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019

2018
 
2019
 
2018
Revenues
$
312,766

 
$
261,064

 
$
967,614

 
$
872,216

Cost of sales
148,942

 
122,005

 
476,796

 
411,884

Gross profit
163,824

 
139,059

 
490,818

 
460,332

Selling, general and administrative expenses
123,940

 
125,164

 
370,525

 
383,451

Income from operations
39,884

 
13,895

 
120,293

 
76,881

Foreign currency gains (losses), net
585

 
233

 
(893
)
 
1,587

Interest income
167

 
422

 
493

 
847

Interest expense
(2,505
)
 
(126
)
 
(6,743
)
 
(371
)
Other income (expense), net
(34
)
 
160

 
(48
)
 
229

Income before income taxes
38,097

 
14,584

 
113,102

 
79,173

Income tax expense
2,421

 
4,092

 
13,518

 
17,850

Net income
35,676

 
10,492

 
99,584

 
61,323

Dividends on Series A convertible preferred stock

 
(3,000
)
 

 
(9,000
)
Dividend equivalents on Series A convertible preferred stock related to redemption value accretion and beneficial conversion feature

 
(972
)
 

 
(2,854
)
Net income attributable to common stockholders
$
35,676

 
$
6,520

 
$
99,584

 
$
49,469

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.52

 
$
0.08

 
$
1.40

 
$
0.60

Diluted
$
0.51

 
$
0.07

 
$
1.38

 
$
0.58

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
69,097

 
67,821

 
71,003

 
68,223

Diluted
70,176

 
72,774

 
72,342

 
71,104

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


1


CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
  
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
35,676

 
$
10,492

 
$
99,584

 
$
61,323

Other comprehensive income:
 

 
 

 
 
 
 
Foreign currency translation gains (losses), net
(8,730
)
 
3,415

 
(8,679
)
 
(7,140
)
Reclassification of foreign currency translation loss to income (1)

 
(3,572
)
 

 
(4,412
)
Total comprehensive income
$
26,946

 
$
10,335

 
$
90,905

 
$
49,771


(1) For the three and nine months ended September 30, 2018, represents reclassification of cumulative foreign currency translation adjustment of manufacturing subsidiaries.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



2


CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and par value amounts)
 
September 30,
2019
 
December 31,
2018
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
87,909

 
$
123,367

Accounts receivable, net of allowances of $20,921 and $20,477, respectively
121,716

 
97,627

Inventories
139,839

 
124,491

Income taxes receivable
7,380

 
3,041

Other receivables
9,523

 
7,703

Restricted cash - current
1,469

 
1,946

Prepaid expenses and other assets
23,427

 
22,123

Total current assets
391,263

 
380,298

Property and equipment, net of accumulated depreciation and amortization of $83,750 and $80,956, respectively
42,266

 
22,211

Intangible assets, net
47,222

 
45,690

Goodwill
1,534

 
1,614

Deferred tax assets, net
10,174

 
8,663

Restricted cash
1,757

 
2,217

Right-of-use assets
183,040

 

Other assets
8,259

 
8,208

Total assets
$
685,515

 
$
468,901

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
85,938

 
$
77,231

Accrued expenses and other liabilities
88,762

 
102,171

Income taxes payable
13,266

 
5,089

Current operating lease liabilities
45,486

 

Total current liabilities
233,452

 
184,491

Long-term income taxes payable
5,633

 
4,656

Long-term borrowings
185,000

 
120,000

Long-term operating lease liabilities
143,632

 

Other liabilities
274

 
9,446

Total liabilities
567,991

 
318,593

Stockholders’ equity:
 

 
 

Preferred stock, par value $0.001 per share, 4.0 million shares authorized, none outstanding

 

Common stock, par value $0.001 per share, 250.0 million shares authorized, 104.0 million and 103.0 million issued, 68.6 million and 73.3 million outstanding, respectively
104

 
103

Treasury stock, at cost, 35.4 million and 29.7 million shares, respectively
(532,220
)
 
(397,491
)
Additional paid-in capital
492,399

 
481,133

Retained earnings
220,572

 
121,215

Accumulated other comprehensive loss
(63,331
)
 
(54,652
)
Total stockholders’ equity
117,524

 
150,308

Total liabilities and stockholders’ equity
$
685,515

 
$
468,901

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands)

 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at June 30, 2019
69,615

 
$
104

 
34,350

 
$
(507,193
)
 
$
488,730

 
$
184,896

 
$
(54,601
)
 
$
111,936

Share-based compensation

 

 

 

 
3,619

 

 

 
3,619

Exercises of stock options, issuance of restricted stock awards, and vests of restricted stock units
30

 

 
1

 
(27
)
 
50

 

 

 
23

Repurchases of common stock
(1,042
)
 

 
1,042

 
(25,000
)
 

 

 

 
(25,000
)
Net income

 

 

 

 

 
35,676

 

 
35,676

Other comprehensive income

 

 

 

 

 

 
(8,730
)
 
(8,730
)
Balance at September 30, 2019
68,603

 
$
104

 
35,393

 
$
(532,220
)
 
$
492,399

 
$
220,572

 
$
(63,331
)
 
$
117,524


 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at June 30, 2018
68,109

 
$
96

 
27,802

 
$
(360,032
)
 
$
379,571

 
$
233,380

 
$
(54,789
)
 
$
198,226

Share-based compensation

 

 

 

 
3,305

 

 

 
3,305

Exercises of stock options, issuance of restricted stock awards, and vests of restricted stock units
89

 

 
(1
)
 
25

 
214

 

 

 
239

Repurchases of common stock
(604
)
 

 
604

 
(11,100
)
 

 

 

 
(11,100
)
Series A convertible preferred stock dividends

 

 

 

 

 
(3,000
)
 

 
(3,000
)
Series A convertible preferred stock accretion

 

 

 

 

 
(972
)
 

 
(972
)
Net income

 

 

 

 

 
10,492

 

 
10,492

Other comprehensive loss

 

 

 

 

 

 
(157
)
 
(157
)
Balance at September 30, 2018
67,594

 
$
96

 
28,405

 
$
(371,107
)
 
$
383,090

 
$
239,900

 
$
(54,946
)
 
$
197,033


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4


CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands)

 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018
73,306

 
$
103

 
29,656

 
$
(397,491
)
 
$
481,133

 
$
121,215

 
$
(54,652
)
 
$
150,308

Adjustments to beginning retained earnings (1)

 

 

 

 

 
(227
)
 

 
(227
)
Share-based compensation

 

 

 

 
11,020

 

 

 
11,020

Exercises of stock options, issuance of restricted stock awards, and vests of restricted stock units
984

 
1

 
50

 
(1,254
)
 
246

 

 

 
(1,007
)
Repurchases of common stock
(5,687
)
 

 
5,687

 
(133,475
)
 

 

 

 
(133,475
)
Net income

 

 

 

 

 
99,584

 

 
99,584

Other comprehensive income

 

 

 

 

 

 
(8,679
)
 
(8,679
)
Balance at September 30, 2019
68,603

 
$
104

 
35,393

 
$
(532,220
)
 
$
492,399

 
$
220,572

 
$
(63,331
)
 
$
117,524

(1) Decrease to beginning retained earnings as a result of the adoption of new lease accounting standards as of January 1, 2019, as discussed in Note 2 — Recent Accounting Pronouncements.

 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders'
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2017
68,791

 
$
95

 
25,987

 
$
(334,312
)
 
$
373,045

 
$
190,431

 
$
(43,394
)
 
$
185,865

Share-based compensation

 

 

 

 
9,040

 

 

 
9,040

Exercises of stock options, issuance of restricted stock awards, and vests of restricted stock units
1,184

 
1

 
37

 
251

 
(221
)
 

 

 
31

Repurchases of common stock
(2,381
)
 

 
2,381

 
(37,046
)
 

 

 

 
(37,046
)
Series A convertible preferred stock dividends

 

 

 

 

 
(9,000
)
 

 
(9,000
)
Series A convertible preferred stock accretion

 

 

 

 

 
(2,854
)
 

 
(2,854
)
Net income

 

 

 

 

 
61,323

 

 
61,323

Other comprehensive loss

 

 

 

 

 

 
(11,552
)
 
(11,552
)
Other

 

 

 

 
1,226

 

 

 
1,226

Balance at September 30, 2018
67,594

 
$
96

 
28,405

 
$
(371,107
)
 
$
383,090

 
$
239,900

 
$
(54,946
)
 
$
197,033


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5


CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 

 
 

Net income
$
99,584

 
$
61,323

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
17,508

 
21,535

Operating lease cost
44,776

 

Share-based compensation
11,020

 
9,320

Other non-cash items
(688
)
 
6,076

Changes in operating assets and liabilities:
 
 
 

Accounts receivable, net of allowances
(30,619
)
 
(37,394
)
Inventories
(17,178
)
 
4,468

Prepaid expenses and other assets
(3,501
)
 
5,271

Accounts payable, accrued expenses and other liabilities
1,955

 
15,271

Operating lease liabilities
(49,668
)
 

Cash provided by operating activities
73,189

 
85,870

Cash flows from investing activities:
 

 
 

Purchases of property, equipment, and software
(32,852
)
 
(5,224
)
Proceeds from disposal of property and equipment
302

 
1,325

Cash used in investing activities
(32,550
)
 
(3,899
)
Cash flows from financing activities:
 

 
 

Proceeds from bank borrowings
310,000

 

Repayments of bank borrowings
(245,000
)
 
(680
)
Dividends—Series A convertible preferred stock (1)
(2,985
)
 
(9,000
)
Repurchases of common stock
(133,475
)
 
(37,046
)
Other
(3,275
)
 
31

Cash used in financing activities
(74,735
)
 
(46,695
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(2,299
)
 
(5,133
)
Net change in cash, cash equivalents, and restricted cash
(36,395
)
 
30,143

Cash, cash equivalents, and restricted cash—beginning of period
127,530

 
177,055

Cash, cash equivalents, and restricted cash—end of period
$
91,135

 
$
207,198

(1) Represents $3.0 million paid to induce conversion of Series A Convertible Preferred Stock to common stock for the nine months ended September 30, 2019 and $9.0 million paid in Series A Convertible Preferred Stock cash dividends for the nine months ended September 30, 2018.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


CROCS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unless otherwise noted in this report, any description of the “Company,” “Crocs,” “we,” “us,” or “our” includes Crocs, Inc. and its consolidated subsidiaries within our reportable operating segments and corporate operations. The Company is 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.

Our reportable operating segments include: the Americas, operating in North and South America; Asia Pacific, operating throughout Asia, Australia, and New Zealand; and Europe, Middle East, and Africa (“EMEA”), operating throughout Europe, Russia, the Middle East, and Africa. See Note 14 — Operating Segments and Geographic Information for additional information.

The accompanying unaudited condensed consolidated interim financial statements include the Company’s accounts and those of its wholly-owned subsidiaries, and reflect all adjustments which are necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such unaudited condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

These unaudited condensed consolidated interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 (“Annual Report”), and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes to the Audited Consolidated Financial Statements included in our Annual Report. Our accounting policies did not change during the nine months ended September 30, 2019, other than for the new accounting pronouncements adopted as described in Note 2 — Recent Accounting Pronouncements and “Critical Accounting Policies and Estimates” within Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q.

Reclassifications

The Company has reclassified certain amounts on the condensed consolidated statements of cash flows to conform to current period presentation.

Seasonality of Business

Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warm weather, revenues generated during our fourth quarter, when the northern hemisphere is experiencing cooler weather, are typically less than revenues generated during our first three quarters. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new model introductions, general economic conditions, and consumer confidence. 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.

Transactions with Affiliates

The Company receives services from three affiliates of Blackstone Capital Partners VI L.P. (“Blackstone”). Blackstone and certain of its permitted transferees beneficially owned 6,896,548 shares of the Company’s common stock as of September 30, 2019. Blackstone also has the future right to designate for nomination one director to our Board, and currently has two designees serving on the Board.

Certain Blackstone affiliates provide various services to the Company, including inventory count services, cybersecurity and consulting, and workforce management services. The Company incurred expenses for services from these affiliates of $0.3 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and $1.3 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively. Expenses related to these services are reported in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of operations.

7



2. RECENT ACCOUNTING PRONOUNCEMENTS
 
New Accounting Pronouncement Adopted

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that permits reclassification of the income tax effects of the U.S. Tax Cuts and Job Act (“Tax Act”) on accumulated other comprehensive income (“AOCI”) to retained earnings. This guidance may be adopted retrospectively to each period (or periods) in which the income tax effects of the Tax Act related to items remaining in AOCI are recognized, or at the beginning of the period of adoption. The guidance became effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. This guidance became effective during the first quarter of 2019; however, the Company did not elect to make the optional reclassification. Our policy is to release stranded tax effects from AOCI using either a specific identification approach or portfolio approach based on the nature of the underlying item.

Leases

In February 2016, the FASB issued authoritative guidance related to accounting for leases. On January 1, 2019, the Company adopted the guidance using the modified retrospective method applied as of the date of adoption. 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 Company has elected all of the available transition practical expedients, including the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company has elected not to apply ‘hindsight’ when adopting the standard for determining the reasonably certain lease term and in assessing impairments. The Company has elected the short-term lease exemption, which means the Company has not and will not recognize a right-of-use asset or liability for leases that qualify for the short-term exemption and will recognize those lease expenses on a straight-line basis over the lease term in its condensed consolidated statements of operations. Further, the Company has elected to combine lease and non-lease components for all of its leases.

Adoption of the new standard resulted in the recognition of right-of-use assets and liabilities of approximately $176.1 million and $187.4 million, respectively, as of January 1, 2019, with additional adjustments to ‘Prepaid expenses and other assets’, ‘Accrued expenses and other liabilities’, and ‘Retained earnings’. As a result of the adoption of new lease accounting standards, the Company assessed the initial right-of-use assets for impairment and recorded non-cash impairments of $0.2 million within ‘Retained earnings’ in the Company’s condensed consolidated balance sheet. The adoption of this guidance did not have a significant impact on the condensed consolidated statements of operations or cash flows.

New Accounting Pronouncements Not Yet Adopted

Implementation Costs Incurred in Cloud Computing Arrangements

In August 2018, the FASB issued authoritative guidance related to the treatment of implementation costs incurred in a hosting arrangement that is considered a service contract. This guidance becomes effective for annual reporting periods beginning after December 15, 2019, including interim periods within those periods, with early adoption permitted, and will be applied prospectively to all implementation costs incurred after the date of adoption. The Company does not expect this standard to have a material impact on its condensed consolidated financial statements.

Other Pronouncements

Other new pronouncements issued but not effective until after September 30, 2019 are not expected to have a material impact on the Company’s condensed consolidated financial statements.


8


3. ACCRUED EXPENSES AND OTHER LIABILITIES
 
Amounts reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets were:
 
September 30,
2019
 
December 31,
2018
 
(in thousands)
Accrued compensation and benefits
$
33,081

 
$
43,970

Fulfillment, freight, and duties
9,731

 
12,234

Professional services
14,498

 
11,124

Accrued rent and occupancy (1)
4,219

 
6,956

Return liabilities
8,523

 
6,429

Sales/use and value added taxes payable
5,605

 
5,601

Royalties payable and deferred revenue
2,365

 
3,356

Other (2)
10,740

 
12,501

Total accrued expenses and other liabilities
$
88,762

 
$
102,171


(1) At September 30, 2019, includes accrued rent and occupancy costs for leases with original terms of one year or less, which are excluded from recognition under the new lease accounting standards adopted as of January 1, 2019. See Note 2 — Recent Accounting Pronouncements for more information.
(2) At December 31, 2018, includes accrued payments of $3.0 million to induce the conversion of Series A Convertible Preferred Stock into shares of common stock.

4. LEASES

The Company adopted authoritative guidance related to leases effective January 1, 2019 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. See ‘Leases’ in Note 2 — Recent Accounting Pronouncements for a discussion of the significant changes resulting from adoption of the guidance.

The Company’s lease portfolio consists primarily of real estate assets, which includes retail, warehouse, distribution center, and office spaces, under operating leases expiring at various dates through 2033. Leases with an original term of twelve months or less are not reported in the condensed consolidated balance sheet; expense for these short-term leases is recognized on a straight-line basis over the lease term.

Many leases include one or more options to renew, with renewal terms that, if exercised by us, may extend the lease term. The exercise of these renewal options is at the Company’s discretion. When assessing the likelihood of a renewal or termination, the Company considers the significance of leasehold improvements, availability of alternative locations, and the cost of relocation or replacement, among other considerations. The depreciable lives of leasehold improvements are the shorter of the useful lives of the improvements or the expected lease term. The Company determines the lease term for each lease based on the terms of each contract and factors in renewal and early termination options if such options are reasonably certain to be exercised.

Due to the Company’s centralized treasury function, the Company utilizes a portfolio approach to discount its lease obligations. The Company assesses the expected lease term at lease inception and discounts the lease using a fully-secured annual incremental borrowing rate, adjusted for time value corresponding with the expected lease term.

Certain of our retail store leases include rental payments based upon a percentage of retail sales in excess of a minimum fixed rental. In some cases, there is no fixed minimum rental and the entire rental payment is based upon a percentage of sales. Certain of our warehouse leases have rental payments that vary based upon the volume of product placed in storage. In addition, certain leases include rental payments adjusted periodically for changes in price level indexes. We recognize expense for these types of payments as incurred and report them as variable lease expense.


9


Right-of-Use Assets and Operating Lease Liabilities

Amounts reported in the condensed consolidated balance sheet were:
 
September 30, 2019
 
(in thousands)
Assets:
 
Right-of-use assets
$
183,040

Liabilities:
 
Current operating lease liabilities
$
45,486

Long-term operating lease liabilities
143,632

Total operating lease liabilities
$
189,118



Lease Costs and Other Information

Lease-related costs reported in the Company’s condensed consolidated statement of operations were:
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
(in thousands)
Operating lease cost
$
15,097

 
$
44,776

Short-term lease cost
982

 
2,729

Variable lease cost
6,643

 
13,932

Total lease costs
$
22,722

 
$
61,437


Other information related to leases, including supplemental cash flow information, consists of:
 
Nine Months Ended September 30, 2019
 
(in thousands)
Cash paid for operating leases
$
48,569

Right-of-use assets obtained in exchange for operating lease liabilities (1)
222,401


(1) Includes $176.1 million for operating leases existing on January 1, 2019 and $46.3 million for operating leases that commenced in the nine months ended September 30, 2019.
 
As of
September 30, 2019
Weighted average remaining lease term (in years)
6.1

Weighted average discount rate
4.8
%



10


Maturities

The maturities of the Company’s operating lease liabilities were:
 
As of
September 30, 2019
 
(in thousands)
2019 (remainder of year)
$
9,628

2020
52,107

2021
44,573

2022
31,423

2023
22,591

Thereafter
61,881

Total future minimum lease payments
222,203

Less: imputed interest
(33,085
)
Total operating lease liabilities
$
189,118



Lease Commencements

In the third quarter of 2019, the Company began recognition of its lease for a new distribution center in Dayton, Ohio, the impact of which is included in the above lease disclosures.

Leases That Have Not Yet Commenced

As of September 30, 2019, the Company had significant obligations for a lease that has not yet commenced related to our office relocation project. In the first quarter of 2019, the Company entered into a lease for its new corporate headquarters and regional office in Broomfield, Colorado. The contractual commitment related to this lease, with payments beginning in March 2020 and continuing through August 2030, is approximately $20.4 million, with expected net capital investments totaling $7.0 million.

Comparative Information as Reported Under Previous Accounting Standards

The following comparative information is reported based upon previous accounting standards in effect for the periods presented.

Future minimum lease payments under operating leases were:
 
As of
December 31, 2018
 
(in thousands)
2019
$
42,455

2020
36,299

2021
29,714

2022
20,721

2023
15,334

Thereafter
54,149

     Total minimum lease payments (1)
$
198,672

(1) Includes future minimum lease payments of $25.4 million related to the new distribution center in Dayton, Ohio.


11


Rent expense for operating leases was:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
(in thousands)
Minimum rentals (1)
$
15,070

 
$
50,841

Contingent rentals
4,175

 
11,870

Total rent expense
$
19,245

 
$
62,711

(1) Minimum rentals include all lease payments as well as fixed and variable common area maintenance, parking, and storage fees, which were approximately $2.3 million and $7.1 million in the three and nine months ended September 30, 2018, respectively.

5. FAIR VALUE MEASUREMENTS
 
Recurring Fair Value Measurements
 
All of the Company’s derivative instruments are classified as Level 2 of the fair value hierarchy and are reported in the condensed consolidated balance sheets within ‘Accrued expenses and other liabilities’ at September 30, 2019 and December 31, 2018. The fair values of the Company’s derivative instruments were liabilities of $0.9 million and $1.3 million at September 30, 2019 and December 31, 2018, respectively. See Note 6 — Derivative Financial Instruments for more information.

The carrying amounts of the Company’s cash, cash equivalents, and restricted cash, accounts receivable, accounts payable, and current accrued expenses and other liabilities approximate their fair value as recorded due to the short-term maturity of these instruments.

The Company’s borrowing instruments are recorded at their carrying values in the condensed consolidated balance sheets, which may differ from their respective fair values. The fair values of the Company’s outstanding borrowings approximate their carrying values at September 30, 2019 and December 31, 2018, based on interest rates currently available to the Company for similar borrowings and were:
 
September 30, 2019
 
December 31, 2018
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(in thousands)
Borrowings
$
185,000

 
$
185,000

 
$
120,000

 
$
120,000



Non-Financial Assets and Liabilities

The Company’s non-financial assets, which primarily consist of property and equipment, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. The fair values of these assets are determined based on Level 3 measurements, including estimates of the amount and timing of future cash flows based upon historical experience, expected market conditions, and management’s plans. Impairment expense is reported in ‘Selling, general and administrative expenses’ in the Company’s condensed consolidated statements of operations. The Company did not record impairment expense in the three and nine months ended September 30, 2019. During the three and nine months ended September 30, 2018, the Company recorded non-cash impairment expenses of $0.2 million and $0.9 million, respectively, to reduce the carrying values of certain retail store assets. During the three and nine months ended September 30, 2018, the Company recorded non-cash impairment expenses of $0.1 million and $1.3 million, respectively, to reduce the carrying values of certain supply chain assets, included in ‘Other businesses,’ to their estimated fair values.

6. DERIVATIVE FINANCIAL INSTRUMENTS
 
The Company transacts business in various foreign countries and is therefore exposed to foreign currency exchange rate risk that impacts the reported U.S. Dollar amounts of revenues, expenses, and certain foreign currency monetary assets and liabilities. In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in earnings caused by fluctuations in foreign exchange rates, the Company enters into forward contracts to buy and sell foreign currency. By policy, the Company does not enter into these contracts for trading purposes or speculation.


12


Counterparty default risk is considered low because the forward contracts that the Company enters into are over-the-counter instruments transacted with highly-rated financial institutions. The Company was not required to and did not post collateral as of September 30, 2019 or December 31, 2018.

The Company’s derivative instruments are recorded at fair value as a derivative asset or liability in the condensed consolidated balance sheets. The Company reports derivative instruments with the same counterparty on a net basis when a master netting arrangement is in place. Changes in fair value are recognized within ‘Foreign currency gains (losses), net’ in the condensed consolidated statements of operations. For the condensed consolidated statements of cash flows, the Company classifies cash flows from derivative instruments at settlement in the same category as the cash flows from the related hedged items within ‘Cash provided by operating activities.

Results of Derivative Activities

The fair values of derivative assets and liabilities, net, all of which are classified as Level 2, reported within ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets were:
 
September 30, 2019
 
December 31, 2018
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
 
(in thousands)
Forward foreign currency exchange contracts
$
771

 
$
(1,704
)
 
$
943

 
$
(2,256
)
Netting of counterparty contracts
(771
)
 
771

 
(943
)
 
943

  Foreign currency forward contract derivatives
$

 
$
(933
)
 
$

 
$
(1,313
)


The notional amounts of outstanding foreign currency forward exchange contracts presented below report the total U.S. Dollar equivalent position and the net contract fair values for each foreign currency position.
 
September 30, 2019
 
December 31, 2018
 
Notional
 
Fair Value
 
Notional
 
Fair Value
 
(in thousands)
Euro
$
45,086

 
$
(532
)
 
$
34,959

 
$
(92
)
Singapore Dollar
36,023

 
(489
)
 
34,584

 
254

Japanese Yen
22,337

 
75

 
25,561

 
(178
)
British Pound Sterling
10,377

 
(54
)
 
22,185

 
183

South Korean Won
13,297

 
128

 
9,408

 
63

Other currencies
38,762

 
(61
)
 
67,885

 
(1,543
)
Total
$
165,882

 
$
(933
)
 
$
194,582

 
$
(1,313
)
 
 
 
 
 
 
 
 
Latest maturity date
October 2019
 
January 2019


Amounts reported in ‘Foreign currency gains (losses), net’ in the condensed consolidated statements of operations include both realized and unrealized gains (losses) from foreign currency transactions and derivative contracts, and were:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Foreign currency transaction gains (losses)
$
1,743

 
$
(1,382
)
 
$
835

 
$
(894
)
Foreign currency forward exchange contracts gains (losses)
(1,158
)
 
1,615

 
(1,728
)
 
2,481

Foreign currency gains (losses), net
$
585

 
$
233

 
$
(893
)
 
$
1,587




13


7. REVOLVING CREDIT FACILITIES AND BANK BORROWINGS
 
The Company’s borrowings were as follows:
 
September 30,
2019
 
December 31,
2018
 
(in thousands)
Revolving credit facilities
$
185,000

 
$
120,000

Less: Current portion of borrowings

 

Total long-term borrowings
$
185,000

 
$
120,000



Senior Revolving Credit Facility

In July 2019, the Company and certain of its subsidiaries (the “Borrowers”) entered into a Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association, as a lender and administrative agent for the lenders, which provides for a revolving credit facility of $450.0 million, which can be increased by an additional $150.0 million subject to certain conditions (the “Facility”). Borrowings under the Credit Agreement bear interest at a variable rate based on a domestic base rate or a LIBOR rate, plus an applicable margin ranging from 0.00% to 1.875% based on the Company’s leverage ratio. Borrowings under the Credit Agreement are secured by all of the assets of the Borrowers, and guaranteed by certain other subsidiaries of the Borrowers.

The Credit Agreement requires the Company to maintain a minimum interest coverage ratio of 4.00 to 1.00, and a maximum leverage ratio of (i) 3.50 to 1.00 from September 30, 2019 to September 30, 2020, and (ii) 3.25 to 1.00 from December 31, 2020 and thereafter (subject to an increase to 4.00 to 1.00 in the event of certain permitted acquisitions or stock repurchases). The Credit Agreement permits (i) stock repurchases so long as after giving effect to such stock repurchases, the maximum leverage ratio does not exceed the applicable maximum leverage ratio, less 0.25; and (ii) certain acquisitions so long as there is borrowing availability under the Credit Agreement of at least $40.0 million. As of September 30, 2019, the Company was in compliance with all financial covenants under the Credit Agreement.

As of September 30, 2019, the total commitments available from the lenders under the Facility were $450.0 million. At September 30, 2019, the Company had $185.0 million in outstanding borrowings, which are due when the Facility matures in July 2024, and $4.6 million in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As of September 30, 2019 and December 31, 2018, the Company had $260.4 million and $129.4 million, respectively, of available borrowing capacity under the Facility.

The Company also has a suspended revolving credit facility in Asia, under which the Company had no borrowings during the nine months ended September 30, 2019 and year ended December 31, 2018 or borrowings outstanding at September 30, 2019 and December 31, 2018.

8. COMMON STOCK REPURCHASE PROGRAM 

During the three and nine months ended September 30, 2019, the Company repurchased 1.0 million and 5.7 million shares of its common stock at a cost of $25.0 million and $133.5 million, including commissions, respectively. During the three and nine months ended September 30, 2018, the Company repurchased 0.6 million and 2.4 million shares of its common stock at a cost of $11.1 million and $37.0 million, including commissions, respectively. As of September 30, 2019, the Company had remaining authorization to repurchase approximately $522.3 million of its common stock, subject to restrictions under its Credit Agreement.


14


9. REVENUES

Revenues by reportable operating segment and by channel were:

Fiscal Year 2019
 
 
Three Months Ended September 30, 2019
 
 
Americas
 
Asia Pacific
 
EMEA
 
Other Businesses
 
Total
 
 
(in thousands)
Channel:
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$
75,660

 
$
36,655

 
$
34,058

 
$
49

 
$
146,422

Retail
 
78,141

 
20,133

 
9,347

 

 
107,621

E-commerce
 
31,391

 
17,463

 
9,869

 

 
58,723

Total revenues
 
$
185,192

 
$
74,251

 
$
53,274

 
$
49

 
$
312,766


 
 
Nine Months Ended September 30, 2019
 
 
Americas
 
Asia Pacific
 
EMEA
 
Other Businesses
 
Total
 
 
(in thousands)
Channel:
 
 
 
 
 
 
 
 
 
 
Wholesale
 
$