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Table of Contents
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, 2022
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.)
13601 Via Varra, Broomfield, Colorado 80020
(Address, including zip code, of registrant’s principal executive offices)
(303) 848-7000
(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 shareCROXThe 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, a 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 filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging 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 27, 2022, Crocs, Inc. had 61,744,934 shares of its common stock, par value $0.001 per share, outstanding.


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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, expectations, and performance of our business;
•our expectations regarding leveraging selling, general and administrative expense as a percent of revenues;
•our expectations regarding leveraging our global presence, innovative marketing, and scale infrastructure to grow HEYDUDE and to create significant shareholder value;
•our expectations regarding supply chain disruptions and inflation trends;
•our belief that we have sufficient liquidity to fund our business operations during the next twelve months; and
•our expectations about the impact of our strategic plans.

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, 2021 and our subsequent filings with the Securities and Exchange Commission, including those described in the section entitled “Risk Factors” under Item 1A in this report. 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, except as required by applicable law.
 

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Crocs, Inc.
Table of Contents to the Quarterly Report on Form 10-Q
For the Quarterly Period Ended September 30, 2022
 
PART I — Financial Information
 

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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,
2022202120222021
Revenues
$985,094 $625,919 $2,609,823 $1,726,790 
Cost of sales
443,792 226,123 1,245,864 678,594 
Gross profit
541,302 399,796 1,363,959 1,048,196 
Selling, general and administrative expenses
277,239 196,728 733,255 525,120 
Income from operations
264,063 203,068 630,704 523,076 
Foreign currency gains (losses), net
(393)537 (1,115)(84)
Interest income
31 615 219 713 
Interest expense
(34,142)(6,486)(86,357)(12,830)
Other income (expense), net
16 2 (512)15 
Income before income taxes
229,575 197,736 542,939 510,890 
Income tax expense (benefit)
60,226 44,247 140,515 (59,951)
Net income
$169,349 $153,489 $402,424 $570,841 
Net income per common share:
Basic
$2.75 $2.47 $6.59 $8.96 
Diluted
$2.72 $2.42 $6.51 $8.79 
Weighted average common shares outstanding:
Basic
61,693 62,033 61,042 63,695 
Diluted
62,367 63,324 61,840 64,937 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
  
 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Net income
$169,349 $153,489 $402,424 $570,841 
Other comprehensive income (loss), net of tax:
  
Derivatives designated as hedging instruments:
Unrealized gains (losses) on derivative instruments
568 — 568 — 
Net increase (decrease) from derivatives designated as hedging instruments
568 — 568 — 
Foreign currency translation losses, net
(34,285)(12,867)(70,788)(20,053)
Total comprehensive income, net of tax
$135,632 $140,622 $332,204 $550,788 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and par value amounts)
September 30,
2022		December 31,
2021
ASSETS
  
Current assets:
  
Cash and cash equivalents
$142,971 $213,197 
Restricted cash - current
2 65 
Accounts receivable, net of allowances of $31,039 and $20,715, respectively
397,657 182,629 
Inventories
513,748 213,520 
Income taxes receivable
2,464 22,301 
Other receivables
23,560 12,252 
Prepaid expenses and other assets
42,770 22,605 
Total current assets
1,123,172 666,569 
Property and equipment, net of accumulated depreciation and amortization of $91,037 and $83,745, respectively
163,374 108,398 
Intangible assets, net of accumulated amortization of $121,717 and $108,167, respectively
1,802,576 28,802 
Goodwill
714,380 1,600 
Deferred tax assets, net
481,897 567,201 
Restricted cash
2,980 3,663 
Right-of-use assets
248,548 160,768 
Other assets
6,241 8,067 
Total assets
$4,543,168 $1,545,068 
LIABILITIES AND STOCKHOLDERS’ EQUITY
  
Current liabilities:
  
Accounts payable
$190,097 $162,145 
Accrued expenses and other liabilities
228,971 166,887 
Income taxes payable
76,990 16,279 
Current borrowings
20,000 — 
Current operating lease liabilities
55,102 42,932 
Total current liabilities
571,160 388,243 
Deferred tax liabilities, net
312,813 — 
Long-term income taxes payable
204,769 219,744 
Long-term borrowings
2,595,767 771,390 
Long-term operating lease liabilities225,395 149,237 
Other liabilities
2,462 2,372 
Total liabilities
3,912,366 1,530,986 
Commitments and contingencies
Stockholders’ equity:
  
Preferred stock, par value $0.001 per share, 5.0 million shares authorized including 1.0 million authorized as Series A Convertible Preferred Stock, none outstanding
— — 
Common stock, par value $0.001 per share, 250.0 million shares authorized, 109.5 million and 105.9 million issued, 61.7 million and 58.3 million outstanding, respectively
109 106 
Treasury stock, at cost, 47.7 million and 47.6 million shares, respectively
(1,695,463)(1,684,262)
Additional paid-in capital
791,750 496,036 
Retained earnings
1,681,464 1,279,040 
Accumulated other comprehensive loss
(147,058)(76,838)
Total stockholders’ equity
630,802 14,082 
Total liabilities and stockholders’ equity
$4,543,168 $1,545,068 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands)

 Common StockTreasury StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Total
Stockholders'
Equity
 SharesAmountSharesAmount
Balance at June 30, 2022
61,627 $109 47,667 $(1,690,780)$783,862 $1,512,115 $(113,341)$491,965 
Share-based compensation— — — — 7,888 — — 7,888 
Exercises of stock options, issuance of restricted stock awards, and vests of restricted stock units, net of shares withheld for taxes
118 — 62 (4,683)— — — (4,683)
Net income
— — — — — 169,349 — 169,349 
Other comprehensive loss
— — — — — — (33,717)(33,717)
Balance at September 30, 2022
61,745 $109 47,729 $(1,695,463)$791,750 $1,681,464 $(147,058)$630,802 

 Common StockTreasury StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Total
Stockholders'
Equity
 SharesAmountSharesAmount
Balance at June 30, 2021
62,382 $106 43,283 $(1,078,857)$530,357 $970,698 $(63,540)$358,764 
Share-based compensation— — — — 10,591 — — 10,591 
Exercises of stock options, issuance of restricted stock awards, and vests of restricted stock units, net of shares withheld for taxes
174 — 52 (7,146)— — — (7,146)
Repurchases of common stock
(1,055)— 1,055 (150,000)— — — (150,000)
Net income
— — — — — 153,489 — 153,489 
Other comprehensive loss
— — — — — — (12,867)(12,867)
Balance at September 30, 2021
61,501 $106 44,390 $(1,236,003)$540,948 $1,124,187 $(76,407)$352,831 

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



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

 Common StockTreasury StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Total
Stockholders'
Equity
 SharesAmountSharesAmount
Balance at December 31, 2021
58,330 $106 47,583 $(1,684,262)$496,036 $1,279,040 $(76,838)$14,082 
Share-based compensation— — — — 25,463 — — 25,463 
Exercises of stock options, issuance of restricted stock awards, and vests of restricted stock units, net of shares withheld for taxes
563 — 146 (11,201)(142)— — (11,343)
Share issuance at Acquisition2,852 3 — — 270,393 — — 270,396 
Net income
— — — — — 402,424 — 402,424 
Other comprehensive loss
— — — — — — (70,220)(70,220)
Balance at September 30, 2022
61,745 $109 47,729 $(1,695,463)$791,750 $1,681,464 $(147,058)$630,802 

 Common StockTreasury StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Total
Stockholders'
Equity
 SharesAmountSharesAmount
Balance at December 31, 2020
65,856 $105 39,132 $(688,849)$482,385 $553,346 $(56,354)$290,633 
Share-based compensation— — — — 29,939 — — 29,939 
Exercises of stock options, issuance of restricted stock awards, and vests of restricted stock units, net of shares withheld for taxes
702 1 201 (18,766)236 — — (18,529)
Repurchases of common stock
(5,057)— 5,057 (528,388)28,388 — — (500,000)
Net income
— — — — — 570,841 — 570,841 
Other comprehensive loss
— — — — — — (20,053)(20,053)
Balance at September 30, 2021
61,501 $106 44,390 $(1,236,003)$540,948 $1,124,187 $(76,407)$352,831 

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

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CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine Months Ended September 30,
 20222021
Cash flows from operating activities:
  
Net income
$402,424 $570,841 
Adjustments to reconcile net income to net cash provided by operating activities:
  
Depreciation and amortization
26,498 23,832 
Operating lease cost
47,945 44,067 
Share-based compensation
25,463 29,939 
Deferred income taxes— (176,873)
Other non-cash items (1)
12,568 (2,672)
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
 
Accounts receivable
(166,864)(80,981)
Inventories
(139,682)(41,193)
Prepaid expenses and other assets (1)
(20,526)(9,936)
Accounts payable, accrued expenses and other liabilities
51,608 30,997 
Right-of-use assets and operating lease liabilities
(45,824)(37,723)
Income taxes (1)
53,075 4,867 
Cash provided by operating activities
246,685 355,165 
Cash flows from investing activities:
  
Purchases of property, equipment, and software
(89,588)(35,758)
Acquisition of HEYDUDE, net of cash acquired
(2,046,881)— 
Other (1)
(20)(9)
Cash used in investing activities
(2,136,489)(35,767)
Cash flows from financing activities:
  
Proceeds from notes issuance— 700,000 
Proceeds from borrowings
2,240,677 170,000 
Repayments of borrowings
(350,285)(350,000)
Deferred debt issuance costs(51,395)(14,491)
Repurchases of common stock
— (500,000)
Repurchases of common stock for tax withholding(11,439)(18,766)
Other
95 237 
Cash provided by (used in) financing activities
1,827,653 (13,020)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(8,821)(3,907)
Net change in cash, cash equivalents, and restricted cash
(70,972)302,471 
Cash, cash equivalents, and restricted cash—beginning of period
216,925 139,273 
Cash, cash equivalents, and restricted cash—end of period
$145,953 $441,744 
Non-Cash Investing and Financing Activities:
Accrued purchases of property, equipment, and software
$80,098 $13,061 
Share issuance at Acquisition270,396 — 
(1) Amounts for the nine months ended September 30, 2021 have been reclassified to conform to current period presentation.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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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 our consolidated subsidiaries within our reportable operating segments and corporate operations. We are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for women, men, and children. We strive to be the global leader in the sale of casual footwear characterized by functionality, comfort, color, and lightweight design.

On February 17, 2022, we acquired (the “Acquisition”) 100% of the equity of a privately-owned casual footwear brand business (“HEYDUDE”), pursuant to a securities purchase agreement (the “SPA”) entered into on December 22, 2021. HEYDUDE is engaged in the business of distributing and selling casual footwear under the brand name “HEYDUDE.”

Our reportable operating segments include: (i) North America for the Crocs Brand, operating throughout the United States and Canada; (ii) Asia Pacific for the Crocs Brand, operating throughout Asia, Australia, and New Zealand; (iii) Europe, Middle East, Africa, and Latin America (“EMEALA”) for the Crocs Brand; and (iv) the HEYDUDE Brand. See Note 15 — Operating Segments and Geographic Information for additional information.

The accompanying unaudited condensed consolidated interim financial statements include our accounts and those of our 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, 2021 (“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, 2022, other than with respect to the new accounting pronouncements adopted as described in Note 2 — Recent Accounting Pronouncements, our accounting policy for hedged derivatives as described in Note 7 — Derivative Financial Instruments, and our business combination policy as described in Note 17 — Acquisition of HEYDUDE.

Reclassifications

We have reclassified certain amounts on the condensed consolidated statements of cash flows, in Note 4 — Accrued Expenses and Other Liabilities, and in Note 15 — Operating Segments and Geographic Information to conform to current period presentation.

Use of Estimates

U.S. GAAP requires us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions used to determine certain amounts that affect the financial statements are reasonable, based on information available at the time they are made. 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 long-lived assets, deferred tax assets, valuation allowances, uncertain tax positions, income tax expense, share-based compensation expense, the assessment of lower of cost or net realizable value on inventory, useful lives assigned to long-lived assets, depreciation and amortization, and purchase price allocation for the Acquisition, as described in Note 17 — Acquisition of HEYDUDE, are reasonable based on information available at the time they are made. To the extent there are differences between these estimates and actual results, our condensed consolidated financial statements may be materially affected.



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2. RECENT ACCOUNTING PRONOUNCEMENTS
 
New Accounting Pronouncement Adopted

Income Taxes

The CHIPS and Science Act of 2022 (CHIPS) and the Inflation Reduction Act (IRA) of 2022 were signed into law by President Biden on August 9, 2022 and August 16, 2022, respectively. The legislation introduces new options for monetizing certain credits, a corporate alternative minimum tax, and a stock repurchase excise tax. The Company is currently evaluating the impact of CHIPS and IRA, but at present does not expect that the any of the provisions included in these acts would result in a material impact to our deferred tax assets, liabilities, or income taxes payable.

Business Combinations

In October 2021, the FASB issued new guidance primarily related to the accounting for contract assets and liabilities from contracts with customers in a business combination. The standard will be effective for annual reporting periods beginning after December 31, 2022, including interim reporting periods within those periods, with early adoption permitted. On January 1, 2022, we early adopted this guidance on a prospective basis. The adoption did not have a material impact on our consolidated financial statements.

New Accounting Pronouncement Not Yet Adopted

New pronouncements issued but not effective until after September 30, 2022 are not expected to have a material impact on our condensed consolidated financial statements.

3. PROPERTY AND EQUIPMENT, NET

‘Property and equipment, net’ consists of the following:
September 30, 2022December 31, 2021
 (in thousands)
Leasehold improvements$66,532 $64,625 
Machinery and equipment126,451 53,976 
Furniture, fixtures, and other36,151 20,210 
Construction-in-progress25,277 53,332 
Property and equipment254,411 192,143 
Less: Accumulated depreciation and amortization(91,037)(83,745)
Property and equipment, net$163,374 $108,398 

4. ACCRUED EXPENSES AND OTHER LIABILITIES
 
Amounts reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets were:
September 30, 2022December 31, 2021
 (in thousands)
Accrued compensation and benefits$53,008 $62,945 
Professional services 48,293 33,997 
Fulfillment, freight, and duties46,340 15,629 
Sales/use and value added taxes payable21,714 13,049 
Return liabilities18,185 10,342 
Accrued rent and occupancy8,641 7,431 
Royalties payable and deferred revenue8,699 7,425 
Accrued legal fees (1)
4,541 5,872 
Other (1)
19,550 10,197 
Total accrued expenses and other liabilities$228,971 $166,887 
(1) Amounts as of December 31, 2021 have been reclassified to conform to current period presentation.
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5. LEASES

Right-of-Use Assets and Operating Lease Liabilities

Amounts reported in the condensed consolidated balance sheets were:
September 30, 2022December 31, 2021
(in thousands)
Assets:
Right-of-use assets$248,548 $160,768 
Liabilities:
Current operating lease liabilities$55,102 $42,932 
Long-term operating lease liabilities225,395 149,237 
Total operating lease liabilities$280,497 $192,169 

Lease Costs and Other Information

Lease-related costs reported within ‘Cost of sales’ and ‘Selling, general and administrative expenses’ in our condensed consolidated statements of operations were:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(in thousands)
Operating lease cost $17,058 $14,309 $47,945 $44,067 
Short-term lease cost2,490 2,095 7,493 5,499 
Variable lease cost12,161 10,568 28,726 24,875 
Total lease costs$31,709 $26,972 $84,164 $74,441 

Other information related to leases, including supplemental cash flow information, consists of:
Nine Months Ended September 30,
20222021
(in thousands)
Cash paid for operating leases$45,192 $46,345 
Right-of-use assets obtained in exchange for operating lease liabilities96,292 52,145 

The weighted average remaining lease term and discount rate related to our lease liabilities as of September 30, 2022 were 7.2 years and 3.6%, respectively. As of September 30, 2021, the weighted average remaining lease term and discount rate related to our lease liabilities were 7.1 years and 3.9%, respectively.

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Maturities

The maturities of our operating lease liabilities were:
As of
September 30, 2022
(in thousands)
2022 (remainder of year)$11,809 
202361,580 
202447,943 
202536,329 
202631,275 
Thereafter133,028 
Total future minimum lease payments321,964 
Less: imputed interest(41,467)
Total operating lease liabilities$280,497 

Leases That Have Not Yet Commenced

As of September 30, 2022, we had significant obligations for a lease not yet commenced related to a new HEYDUDE distribution center in Las Vegas, Nevada. The total contractual commitment related to the lease, with payments expected to begin in the third quarter of 2023 and continue through December 2033, is approximately $75 million.

6. FAIR VALUE MEASUREMENTS
 
Recurring Fair Value Measurements
 
All of our derivative instruments are classified as Level 2 of the fair value hierarchy and are reported in the condensed consolidated balance sheets within either ‘Prepaid expenses and other assets’ or ‘Accrued expenses and other liabilities’ at September 30, 2022 and December 31, 2021. The fair values of our derivative instruments were an insignificant asset at September 30, 2022 and an insignificant liability at December 31, 2021. See Note 7 — Derivative Financial Instruments for more information.

The carrying amounts of our 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.

Our borrowing instruments are recorded at their carrying values in the condensed consolidated balance sheets, which may differ from their respective fair values. During the nine months ended September 30, 2022, we entered into a credit agreement for a term loan B facility in the aggregate principal amount of $2.0 billion (the “Term Loan B Facility”), as described in more detail in Note 8 — Borrowings. The Term Loan B Facility is classified as Level 1 of the fair value hierarchy. The Notes (as defined below) are also classified as Level 1 of the fair value hierarchy and are reported in our condensed consolidated balance sheet at face value, less unamortized issuance costs. The fair values of our revolving credit facilities approximate their carrying values at September 30, 2022 and December 31, 2021 based on interest rates currently available to us for similar borrowings. The carrying value and fair value of our borrowing instruments as of September 30, 2022 and December 31, 2021 were:
September 30, 2022December 31, 2021
Carrying ValueFair ValueCarrying ValueFair Value
(in thousands)
Term Loan B Facility$1,975,000 $1,856,500 $— $— 
2029 Notes350,000 275,844 350,000 346,281 
2031 Notes350,000 267,750 350,000 341,250 
Revolving credit facilities— — 85,000 85,000 

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Non-Financial Assets and Liabilities

Our non-financial assets, which primarily consist of property and equipment, right-of-use assets, 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, as required, 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.

7. DERIVATIVE FINANCIAL INSTRUMENTS
 
We transact business in various foreign countries and are 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, we may enter into forward contracts to buy and sell foreign currency. By policy, we do not enter into these contracts for trading purposes or speculation.

Counterparty default risk is considered low because the forward contracts that we enter into are over-the-counter instruments transacted with highly-rated financial institutions. We were not required to and did not post collateral as of September 30, 2022 or December 31, 2021.

Our derivative instruments and cash flow hedges are recorded at fair value as a derivative asset or liability in the condensed consolidated balance sheets within either ‘Prepaid expenses and other assets’ or ‘Accrued expenses and other liabilities’ at September 30, 2022 and December 31, 2021. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or we elect not to apply hedge accounting.

We report 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, we classify 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.’

As of September 30, 2022, we have derivatives not designated as hedging instruments (“non-hedged derivatives”), which consist of foreign currency forward contracts primarily used to hedge monetary assets and liabilities denominated in non-functional currencies and cash flow hedges (“hedged derivatives”), as described in the following section.

Cash Flow Hedges of Foreign Exchange Risk

We are exposed to fluctuations in various foreign currencies against our functional currency, the U.S. Dollar. Specifically, we have subsidiaries that transact in currencies other than their functional currency. We use cash flow hedges to minimize the variability in cash flows caused by fluctuations in foreign currency exchange rates related to our external sales and external purchases of inventory. Currency forward agreements involve fixing the exchange rates for delivery of a specified amount of foreign currency on a specified date. The currency forward agreements are typically cash settled in U.S. Dollars for their fair value at or close to their settlement date. We may also use currency option contracts under which we will pay a premium for the right to sell a specified amount of a foreign currency prior to the maturity date of the option.

For derivatives designated and that qualify as cash flow hedges of foreign exchange risk, the gain or loss on the derivative is recorded in ‘Accumulated other comprehensive loss’ in the condensed consolidated balance sheets. In the period during which the hedged transaction affects earnings, the related gain or loss is subsequently reclassified to ‘Revenues’ or ‘Cost of sales’ in the condensed consolidated statement of operations, which is consistent with the nature of the hedged transaction. During the three months ended September 30, 2022, there were no gains or losses reclassified from ‘Accumulated other comprehensive loss’ to ‘Revenues’ or ‘Cost of sales.’ During the next twelve months, we estimate that approximately $0.6 million will be reclassified to the condensed consolidated statement of operations.

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Results of Derivative Activities

The fair values of derivative assets and liabilities, net, all of which are classified as Level 2, reported within either ‘Accrued expenses and other liabilities’ or ‘Prepaid expenses and other assets’ in the condensed consolidated balance sheets, were:
September 30, 2022December 31, 2021
Derivative AssetsDerivative LiabilitiesDerivative AssetsDerivative Liabilities
(in thousands)
Non-hedged derivatives:
Forward foreign currency exchange contracts$1,368 $(1,226)$724 $(938)
Netting of counterparty contracts(1,226)1,226 (724)724 
  Foreign currency forward contract derivatives142 — — (214)
Hedged derivatives:
Cash flow foreign currency contracts568 — — — 
Netting of counterparty contracts— — — — 
Cash flow foreign currency contract derivatives568 — — — 
Total derivatives$710 $— $— $(214)

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, 2022December 31, 2021
NotionalFair ValueNotionalFair Value
(in thousands)
Non-hedged derivatives:
Singapore Dollar$67,673 $(1,226)$43,723 $(296)
South Korean Won19,635 646 14,201 (112)
Indian Rupee21,590 484 10,379 (86)
British Pound Sterling17,513 49 25,795 104 
Japanese Yen9,528 75 12,910 80 
Euro6,119 114 21,198 162 
Other currencies— — 19,481 (66)
Total non-hedged derivatives142,058 142 147,687 (214)
Hedged derivatives:
 Euro 12,800 113 — — 
 South Korean Won 8,860 271 — — 
 Indian Rupee 6,960 138 — — 
 British Pound Sterling 6,812 46 — — 
Total hedged derivatives35,432 568 — — 
Total derivatives$177,490 $710 $147,687 $(214)
Latest maturity date, non-hedged derivativesDecember 2022January 2022
Latest maturity date, hedged derivativesJune 2023N/A




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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,
 2022202120222021
 (in thousands)
Non-hedged derivatives:
Foreign currency transaction gains (losses)
$(2,126)$493 $(6,178)$148 
Foreign currency forward exchange contracts gains
1,733 44 5,063 (232)
Foreign currency gains (losses), net
$(393)$537 $(1,115)$(84)

8. BORROWINGS
 
Our long-term borrowings were as follows:
MaturityStated Interest RateEffective Interest RateSeptember 30, 2022December 31, 2021
(in thousands)
Notes issuance of $350.0 million
20294.250 %4.64 %$350,000 $350,000 
Notes issuance of $350.0 million
20314.125 %4.35 %350,000 350,000 
Term Loan B Facility20291,975,000 — 
Revolving credit facilities— 85,000 
Total face value of long-term borrowings2,675,000 785,000 
Less:
Unamortized issuance costs59,233 13,610 
Current portion of long-term borrowings (1)
20,000 — 
Total long-term borrowings$2,595,767 $771,390 
(1) Represents the current portion of the borrowings on the Term Loan B facility.

At September 30, 2022 and December 31, 2021, $2.1 million and $10.4 million, respectively, of accrued interest related to our borrowings was reported in ‘Accounts payable’ in the condensed consolidated balance sheets.

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. In February 2022, we amended the Credit Agreement, which, as amended to date, provides for a revolving credit facility of $600.0 million, which can be increased by an additional $400.0 million subject to certain conditions (the “Revolving Facility”). Borrowings under the Credit Agreement bear interest at a variable interest rate based on (A) a Base Rate (defined as the highest of (i) the Overnight Bank Funding Rate (as defined in the Credit Agreement), plus 0.25%, (ii) the Prime Rate (as defined in the Credit Agreement), and (iii) the Daily Simple SOFR (as defined in the Credit Agreement), plus 1.00%), plus an applicable margin ranging from 0.25% to 0.875% based on our leverage ratio or 1.35% to 1.975% for the Daily Simple SOFR based on the leverage ratio, or (B) the Term SOFR Rate (as defined in the Credit Agreement), plus an applicable margin ranging from 1.35% to 1.975% based on our leverage ratio for one-month interest periods and 1.40% to 2.025% based on our leverage ratio for three month interest periods. 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 us to maintain a minimum interest coverage ratio of 3.00 to 1.00, and a maximum leverage ratio of (i) 4.00 to 1.00 from the quarter ended March 31, 2022 through, and including, the quarter ending December 31, 2023, (ii) 3.75 to 1.00 for the quarter ending March 31, 2024, (iii) 3.50 to 1.00 for the quarter ending June 30, 2024, and (iv) 3.25 to 1.00 for the quarter ending September 30, 2024 and thereafter (subject to adjustment in certain circumstances). The Credit Agreement permits, among other things, (i) stock repurchases subject to certain restrictions, including after giving effect to such
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stock repurchases, the maximum leverage ratio does not exceed certain levels; 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, 2022, we were in compliance with all financial covenants under the Credit Agreement.

As of September 30, 2022, the total commitments available from the lenders under the Revolving Facility were $600.0 million. At September 30, 2022, we had no outstanding borrowings and $0.3 million in outstanding letters of credit under the Revolving Facility, which reduces amounts available for borrowing under the Revolving Facility. As of September 30, 2022 and December 31, 2021, we had $599.7 million and $414.7 million, respectively, of available borrowing capacity under the Revolving Facility.

Term Loan B Facility

On February 17, 2022, the Company entered into a credit agreement (the “Term Loan B Credit Agreement”) with Citibank, N.A., as administrative agent and lender, to among other things, finance a portion of the cash consideration for the Acquisition.

The Term Loan B Credit Agreement provides for an aggregate term loan B facility in the principal amount of $2.0 billion (the “Term Loan B Facility”), which is secured by substantially all of the Company’s and each subsidiary guarantor’s assets on a pari passu basis with their obligations arising from the Credit Agreement and is scheduled to mature on February 17, 2029, subject to certain exceptions set forth in the Term Loan B Credit Agreement. Additionally, subject to certain conditions, including, without limitation, satisfying certain leverage ratios, the Company may, at any time, on one or more occasions, add one or more new classes of term facilities and/or increase the principal amount of the loans of any existing class by requesting one or more incremental term facilities.

Each term loan borrowing which is an alternate base rate borrowing bears interest at a rate per annum equal to the Alternate Base Rate (as defined in the Term Loan B Credit Agreement), plus 2.50%. Each term loan borrowing which is a term benchmark borrowing bears interest at a rate per annum equal to the Adjusted Term SOFR Rate (as defined in the Term Loan B Credit Agreement) plus 3.50%.

Outstanding principal under the Term Loan B Facility is payable on the last business day of each March, June, September and December, in a quarterly aggregate principal amount of $5.0 million. Quarterly aggregate principal payments began on June 30, 2022, with the remaining principal amount due on February 17, 2029, the maturity date. As of September 30, 2022, we had $1,975 million in outstanding principal and the Term Loan B Facility was fully drawn with no remaining borrowing capacity.