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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One) |
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended December 31, 2020
OR
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☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 001-36436
DECKERS OUTDOOR CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 95-3015862 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
250 Coromar Drive, Goleta, California 93117
(Address of principal executive offices and zip code)
(805) 967-7611
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | DECK | New York Stock Exchange |
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.
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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 the close of business on January 28, 2021, the number of outstanding shares of the registrant's common stock, par value $0.01 per share, was 28,169,920.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
For the Three and Nine Months Ended December 31, 2020
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | Defaults Upon Senior Securities | * |
Item 4. | Mine Safety Disclosures | * |
Item 5. | Other Information | * |
Item 6. | | |
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*Not applicable.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for our third fiscal quarter ended December 31, 2020 (Quarterly Report), and the information and documents incorporated by reference within this Quarterly Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference within, this Quarterly Report. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Quarterly Report, and the information and documents incorporated by reference within this Quarterly Report, contains forward-looking statements relating to, among other things:
•the impacts of the COVID-19 global pandemic on our business, financial condition, results of operations and liquidity, and the business, financial condition, results of operations and liquidity of our customers, suppliers, and business partners;
•changes to our business resulting from changes in discretionary spending, consumer confidence, unemployment rates, retail store activity, tourist activity, or governmental restrictions;
•the impact of government orders, local authority mandates and expert agency guidance on retail store closures and operating restrictions;
•our business, operating, investing, capital allocation, marketing, and financing plans and strategies;
•the expansion of our brands and product offerings;
•changes to the geographic and seasonal mix of our brands and products;
•changes to our product distribution strategies, including the implementation of our product allocation and segmentation strategies;
•changes in consumer preferences impacting our brands and products, and the footwear and fashion industries;
•trends impacting the purchasing behavior of wholesale customers and retail consumers, including those impacting retail and e-commerce businesses;
•bankruptcies or other financial difficulties impacting our wholesale customers or other business partners;
•the impact of seasonality and weather on consumer behavior, demand for our products, and our results of operations;
•the impact of our efforts to continue to advance sustainable and socially conscious business operations;
•expansion of and investments in our Direct-to-Consumer capabilities, including our e-commerce platforms;
•the operational challenges faced by our distribution center, our global third-party logistics providers, and third-party carriers, and the related impacts on our ability to deliver products;
•availability of raw materials and manufacturing capacity, and reliability of overseas production and storage;
•commitments and contingencies, including with respect to operating leases, purchase obligations for product and raw materials, and legal or regulatory proceedings;
•the impacts of new or proposed legislation, tariffs, regulatory enforcement actions, or legal proceedings;
•the value of goodwill and other intangible assets, and potential write-downs or impairment charges;
•changes impacting our tax liability and effective tax rates;
•repatriation of earnings of non-United States subsidiaries and any related tax impacts;
•the impact from adoption of recent accounting pronouncements; and
•overall global economic and political trends, including foreign currency exchange rate fluctuations, changes in interest rates, and changes in commodity pricing.
Forward-looking statements represent management’s current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed, or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part II, Item 1A, "Risk Factors," and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," within this Quarterly Report, as well as in our other filings with the Securities and Exchange Commission (SEC). You should read this Quarterly Report, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, new risks and uncertainties emerge from time to time and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange, we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all our forward-looking statements with these cautionary statements.
PART I. FINANCIAL INFORMATION
References within this Quarterly Report to "Deckers," "we," "our," "us," "management," or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), HOKA ONE ONE® (HOKA), Teva® (Teva), Sanuk® (Sanuk), and Koolaburra® (Koolaburra) are some of the Company's trademarks. Other trademarks or trade names appearing elsewhere within this Quarterly Report are the property of their respective owners. Solely for convenience, the trademarks and trade names within this Quarterly Report are referred to without the ® and ™ symbols, but such references should not be construed as any indication that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
Unless otherwise indicated, all dollar amounts herein are expressed in thousands.
ITEM 1. FINANCIAL STATEMENTS
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollar and share data amounts in thousands, except par value)
| | | | | | | | | | | |
| December 31, 2020 | | March 31, 2020 |
ASSETS | | | (AUDITED) |
Cash and cash equivalents | $ | 1,156,556 | | | $ | 649,436 | |
Trade accounts receivable, net of allowances ($37,777 and $21,146 as of December 31, 2020 and March 31, 2020, respectively) | 312,913 | | | 185,596 | |
Inventories, net of reserves ($17,382 and $12,227 as of December 31, 2020 and March 31, 2020, respectively) | 305,298 | | | 311,620 | |
Prepaid expenses | 21,117 | | | 17,760 | |
Other current assets | 51,099 | | | 21,548 | |
Income tax receivable | 10,456 | | | 8,151 | |
Total current assets | 1,857,439 | | | 1,194,111 | |
Property and equipment, net of accumulated depreciation ($258,177 and $242,138 as of December 31, 2020 and March 31, 2020, respectively) | 205,695 | | | 209,037 | |
Operating lease assets | 206,299 | | | 243,522 | |
Goodwill | 13,990 | | | 13,990 | |
Other intangible assets, net of accumulated amortization ($77,783 and $74,421 as of December 31, 2020 and March 31, 2020, respectively) | 46,068 | | | 48,016 | |
Deferred tax assets, net | 27,546 | | | 28,233 | |
Other assets | 30,813 | | | 28,209 | |
Total assets | $ | 2,387,850 | | | $ | 1,765,118 | |
| | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Short-term borrowings | $ | 663 | | | $ | 638 | |
Trade accounts payable | 303,013 | | | 147,892 | |
Accrued payroll | 58,410 | | | 42,309 | |
Operating lease liabilities | 47,774 | | | 49,091 | |
Other accrued expenses | 92,749 | | | 46,281 | |
Income taxes payable | 56,947 | | | 11,104 | |
Value added tax payable | 12,294 | | | 3,631 | |
Total current liabilities | 571,850 | | | 300,946 | |
Mortgage payable | 29,768 | | | 30,263 | |
Long-term operating lease liabilities | 186,934 | | | 215,724 | |
Income tax liability | 60,525 | | | 63,547 | |
Other long-term liabilities | 18,652 | | | 14,518 | |
Total long-term liabilities | 295,879 | | | 324,052 | |
Commitments and contingencies | | | |
Stockholders' equity | | | |
Common stock ($0.01 par value; 125,000 shares authorized; shares issued and outstanding of 28,152 and 27,999 as of December 31, 2020 and March 31, 2020, respectively) | 282 | | | 280 | |
Additional paid-in capital | 208,064 | | | 191,451 | |
Retained earnings | 1,323,065 | | | 973,948 | |
Accumulated other comprehensive loss | (11,290) | | | (25,559) | |
Total stockholders' equity | 1,520,121 | | | 1,140,120 | |
Total liabilities and stockholders' equity | $ | 2,387,850 | | | $ | 1,765,118 | |
See accompanying notes to the condensed consolidated financial statements.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollar and share data amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net sales | $ | 1,077,759 | | | $ | 938,735 | | | $ | 1,984,453 | | | $ | 1,757,779 | |
Cost of sales | 463,862 | | | 431,103 | | | 909,013 | | | 847,104 | |
Gross profit | 613,897 | | | 507,632 | | | 1,075,440 | | | 910,675 | |
Selling, general, and administrative expenses | 285,242 | | | 251,866 | | | 625,880 | | | 589,195 | |
Income from operations | 328,655 | | | 255,766 | | | 449,560 | | | 321,480 | |
| | | | | | | |
Interest income | (593) | | | (848) | | | (1,719) | | | (5,244) | |
Interest expense | 959 | | | 128 | | | 3,354 | | | 2,798 | |
Other income, net | (267) | | | (117) | | | (523) | | | (295) | |
Total other expense (income), net | 99 | | | (837) | | | 1,112 | | | (2,741) | |
Income before income taxes | 328,556 | | | 256,603 | | | 448,448 | | | 324,221 | |
Income tax expense | 73,020 | | | 55,010 | | | 99,331 | | | 64,169 | |
Net income | 255,536 | | | 201,593 | | | 349,117 | | | 260,052 | |
| | | | | | | |
Other comprehensive income (loss) | | | | | | | |
Unrealized (loss) gain on cash flow hedges, net of tax | (279) | | | (973) | | | (726) | | | 207 | |
Foreign currency translation gain (loss) | 7,947 | | | 2,667 | | | 14,995 | | | (656) | |
Total other comprehensive income (loss) | 7,668 | | | 1,694 | | | 14,269 | | | (449) | |
Comprehensive income | $ | 263,204 | | | $ | 203,287 | | | $ | 363,386 | | | $ | 259,603 | |
| | | | | | | |
Net income per share | | | | | | | |
Basic | $ | 9.09 | | | $ | 7.21 | | | $ | 12.44 | | | $ | 9.12 | |
Diluted | $ | 8.99 | | | $ | 7.14 | | | $ | 12.30 | | | $ | 9.02 | |
Weighted-average common shares outstanding | | | | | | | |
Basic | 28,114 | | | 27,978 | | | 28,054 | | | 28,515 | |
Diluted | 28,410 | | | 28,249 | | | 28,375 | | | 28,832 | |
See accompanying notes to the condensed consolidated financial statements.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended December 31, 2020 |
| | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance, March 31, 2020 | 27,999 | | | $ | 280 | | | $ | 191,451 | | | $ | 973,948 | | | $ | (25,559) | | | $ | 1,140,120 | |
Stock-based compensation | 1 | | | — | | | 3,618 | | | — | | | — | | | 3,618 | |
Shares issued upon vesting | 1 | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 4 | | | — | | | 247 | | | — | | | — | | | 247 | |
| | | | | | | | | | | |
Shares withheld for taxes | — | | | — | | | (90) | | | — | | | — | | | (90) | |
| | | | | | | | | | | |
Net loss | — | | | — | | | — | | | (7,973) | | | — | | | (7,973) | |
Total other comprehensive income | — | | | — | | | — | | | — | | | 1,006 | | | 1,006 | |
Balance, June 30, 2020 | 28,005 | | | 280 | | | 195,226 | | | 965,975 | | | (24,553) | | | 1,136,928 | |
Stock-based compensation | 1 | | | — | | | 4,019 | | | — | | | — | | | 4,019 | |
Shares issued upon vesting | 60 | | | 1 | | | 697 | | | — | | | — | | | 698 | |
Exercise of stock options | 16 | | | — | | | 1,134 | | | — | | | — | | | 1,134 | |
| | | | | | | | | | | |
Shares withheld for taxes | — | | | — | | | (6,964) | | | — | | | — | | | (6,964) | |
| | | | | | | | | | | |
Net income | — | | | — | | | — | | | 101,554 | | | — | | | 101,554 | |
Total other comprehensive income | — | | | — | | | — | | | — | | | 5,595 | | | 5,595 | |
Balance, September 30, 2020 | 28,082 | | | 281 | | | 194,112 | | | 1,067,529 | | | (18,958) | | | 1,242,964 | |
| | | | | | | | | | | |
Stock-based compensation | 1 | | | — | | | 9,900 | | | — | | | — | | | 9,900 | |
Shares issued upon vesting | 1 | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 68 | | | 1 | | | 4,201 | | | — | | | — | | | 4,202 | |
| | | | | | | | | | | |
Shares withheld for taxes | — | | | — | | | (149) | | | — | | | — | | | (149) | |
| | | | | | | | | | | |
Net income | — | | | — | | | — | | | 255,536 | | | — | | | 255,536 | |
Total other comprehensive income | — | | | — | | | — | | | — | | | 7,668 | | | 7,668 | |
Balance, December 31, 2020 | 28,152 | | | $ | 282 | | | $ | 208,064 | | | $ | 1,323,065 | | | $ | (11,290) | | | $ | 1,520,121 | |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(amounts in thousands)
(continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended December 31, 2019 |
| | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance, March 31, 2019 | 29,141 | | | $ | 291 | | | $ | 178,227 | | | $ | 889,266 | | | $ | (22,654) | | | $ | 1,045,130 | |
Stock-based compensation | 1 | | | — | | | 3,424 | | | — | | | — | | | 3,424 | |
Shares issued upon vesting | 4 | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 46 | | | 1 | | | 2,772 | | | — | | | — | | | 2,773 | |
Cumulative adjustment from adoption of recent accounting pronouncements | — | | | — | | | — | | | (1,069) | | | — | | | (1,069) | |
Shares withheld for taxes | — | | | — | | | (374) | | | — | | | — | | | (374) | |
Repurchases of common stock | (227) | | | (2) | | | — | | | (35,003) | | | — | | | (35,005) | |
Net loss | — | | | — | | | — | | | (19,351) | | | — | | | (19,351) | |
Total other comprehensive loss | — | | | — | | | — | | | — | | | (249) | | | (249) | |
Balance, June 30, 2019 | 28,965 | | | 290 | | | 184,049 | | | 833,843 | | | (22,903) | | | 995,279 | |
Stock-based compensation | 3 | | | — | | | 5,075 | | | — | | | — | | | 5,075 | |
Shares issued upon vesting | 73 | | | 1 | | | 617 | | | — | | | — | | | 618 | |
Exercise of stock options | 3 | | | — | | | 186 | | | — | | | — | | | 186 | |
| | | | | | | | | | | |
Shares withheld for taxes | — | | | — | | | (5,370) | | | — | | | — | | | (5,370) | |
Repurchases of common stock | (1,069) | | | (11) | | | — | | | (155,389) | | | — | | | (155,400) | |
Net income | — | | | — | | | — | | | 77,810 | | | — | | | 77,810 | |
Total other comprehensive loss | — | | | — | | | — | | | — | | | (1,894) | | | (1,894) | |
Balance, September 30, 2019 | 27,975 | | | 280 | | | 184,557 | | | 756,264 | | | (24,797) | | | 916,304 | |
Stock-based compensation | 1 | | | — | | | 4,221 | | | — | | | — | | | 4,221 | |
Shares issued upon vesting | 3 | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 3 | | | — | | | 186 | | | — | | | — | | | 186 | |
| | | | | | | | | | | |
Shares withheld for taxes | — | | | — | | | (251) | | | — | | | — | | | (251) | |
| | | | | | | | | | | |
Net income | — | | | — | | | — | | | 201,593 | | | — | | | 201,593 | |
Total other comprehensive income | — | | | — | | | — | | | — | | | 1,694 | | | 1,694 | |
Balance, December 31, 2019 | 27,982 | | | $ | 280 | | | $ | 188,713 | | | $ | 957,857 | | | $ | (23,103) | | | $ | 1,123,747 | |
See accompanying notes to the condensed consolidated financial statements.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
| | | | | | | | | | | |
| Nine Months Ended December 31, |
| 2020 | | 2019 |
OPERATING ACTIVITIES | | | |
Net income | $ | 349,117 | | | $ | 260,052 | |
Reconciliation of net income to net cash used in operating activities: |
Depreciation, amortization, and accretion | 30,637 | | | 29,437 | |
| | | |
Amortization on cloud computing arrangements | 420 | | | — | |
| | | |
| | | |
Bad debt expense | 6,392 | | | 693 | |
Deferred tax expense (benefit) | 1,859 | | | (1,020) | |
| | | |
Stock-based compensation | 17,559 | | | 12,766 | |
Excess tax benefit from stock-based compensation | (1,687) | | | (1,755) | |
| | | |
Loss on disposal of property and equipment | 259 | | | 679 | |
| | | |
| | | |
Impairment of operating lease assets and other long-lived assets | 4,060 | | | 1,382 | |
| | | |
Gain on settlement of asset retirement obligations | (207) | | | — | |
| | | |
| | | |
Changes in operating assets and liabilities: | | | |
Trade accounts receivable, net | (133,708) | | | (108,982) | |
Inventories, net | 6,321 | | | (87,104) | |
Prepaid expenses and other current assets | (32,387) | | | (19,970) | |
Income tax receivable | (2,305) | | | (5,781) | |
Net operating lease assets and liabilities | 1,652 | | | (1,692) | |
Other assets | (3,023) | | | (5,924) | |
Trade accounts payable | 152,797 | | | 119,794 | |
| | | |
Other accrued expenses | 75,658 | | | 21,504 | |
Income taxes payable | 47,530 | | | 23,545 | |
Long-term liabilities | 1,318 | | | 1,101 | |
Net cash provided by operating activities | 522,262 | | | 238,725 | |
| | | |
INVESTING ACTIVITIES | | | |
| | | |
| | | |
Purchases of property and equipment | (21,300) | | | (23,664) | |
Proceeds from sales of property and equipment | 49 | | | 266 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Net cash used in investing activities | (21,251) | | | (23,398) | |
| | | |
FINANCING ACTIVITIES | | | |
Proceeds from short-term borrowings | 9,100 | | | 69,336 | |
Repayments of short-term borrowings | (9,478) | | | (63,178) | |
| | | |
Proceeds from issuance of stock | 698 | | | 618 | |
Proceeds from exercise of stock options | 5,583 | | | 3,145 | |
Repurchases of common stock | — | | | (190,405) | |
Cash paid for shares withheld for taxes | (7,203) | | | (5,995) | |
| | | |
| | | |
Repayments of mortgage principal | (470) | | | (448) | |
| | | |
Net cash used in financing activities | (1,770) | | | (186,927) | |
Effect of foreign currency exchange rates on cash and cash equivalents | 7,879 | | | (1,228) | |
Net change in cash and cash equivalents | 507,120 | | | 27,172 | |
Cash and cash equivalents at beginning of period | 649,436 | | | 589,692 | |
Cash and cash equivalents at end of period | $ | 1,156,556 | | | $ | 616,864 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
(continued)
| | | | | | | | | | | |
| Nine Months Ended December 31, |
| 2020 | | 2019 |
SUPPLEMENTAL CASH FLOW DISCLOSURE | | | |
Cash paid during the period | | | |
Income taxes, net of refunds of $1,489 and $5,302, as of December 31, 2020 and 2019, respectively | $ | 56,957 | | | $ | 47,482 | |
Interest | 2,336 | | | 1,749 | |
Operating leases | 43,263 | | | 45,732 | |
Non-cash investing activities | | | |
Accrued for purchases of property and equipment | 1,900 | | | 1,444 | |
Accrued for asset retirement obligations | 1,595 | | | 38 | |
| | | |
| | | |
| | | |
| | | |
| | | |
See accompanying notes to the condensed consolidated financial statements.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2020 and 2019
(dollar amounts in thousands, except share and per share data)
Note 1. General
The Company
Deckers Outdoor Corporation and its wholly-owned subsidiaries (collectively, the Company) is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyles use and high-performance activities. As part of its omni-channel platform, the Company's proprietary brands are aligned across its Fashion Lifestyle group, including the UGG and Koolaburra brands, and Performance Lifestyle group, including the HOKA, Teva, and Sanuk brands.
The Company sells its products through domestic and international retailers, international distributors, and directly to its global consumers through its Direct-to-Consumer (DTC) business, which is comprised of its retail stores and e‑commerce websites. Independent third-party contractors manufacture all of the Company's products. A significant part of the Company's business is seasonal, requiring it to build inventory levels during certain quarters in its fiscal year to support higher selling seasons, which contributes to the variation in its results from quarter to quarter.
Basis of Presentation
The unaudited condensed consolidated financial statements and accompanying notes thereto (referred to herein as condensed consolidated financial statements) as of December 31, 2020 and for the three and nine months ended December 31, 2020 and 2019 were prepared in accordance with accounting principles generally accepted in the United States (US GAAP) for interim financial information pursuant to Rule 10-01 of Regulation S-X issued by the SEC. Accordingly, they do not include all the information and disclosures required by US GAAP for annual financial statements and accompanying notes thereto. The condensed consolidated balance sheet as of March 31, 2020 was derived from the Company's audited consolidated financial statements. In the opinion of management, the condensed consolidated financial statements include all normal and recurring entries necessary to fairly present the results of the interim periods presented but are not necessarily indicative of results to be achieved for full fiscal years or other interim periods. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2020, which was filed with the SEC on June 1, 2020 (2020 Annual Report).
Consolidation. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications. Certain reclassifications were made for prior periods presented to conform to the current period presentation.
Use of Estimates. The preparation of the Company's condensed consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements, and other factors that management believes to be reasonable. In addition, the Company has considered the potential impact of the COVID-19 global pandemic (pandemic) on its business and operations. Although the full impact of the pandemic is unknown and cannot be reasonably estimated, the Company believes it has made appropriate accounting estimates and assumptions based on the facts and circumstances available as of the reporting date. However, actual results could differ materially from these estimates and assumptions, which may result in material effects on the Company's financial condition, results of operations, and liquidity. Actual results could differ as a result of a number of factors, including, without limitation, the severity and duration of the pandemic (including the potential for additional waves of the pandemic that may vary by geographic region); the timing and extent of governmental actions taken to control the spread and mitigate the impact of the pandemic; the impact of the pandemic on discretionary spending, consumer confidence, unemployment rates, and retail store security; the scope and timing of any governmental assistance provided in
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2020 and 2019
(dollar amounts in thousands, except share and per share data)
response to the impacts of the pandemic; and the impact of the pandemic on global economic conditions and financial markets.
Significant areas requiring the use of management estimates and assumptions relate to inventory write-downs; trade accounts receivable allowances, including variable consideration for net sales provided to customers; contract assets and liabilities; stock-based compensation; impairment assessments, including for goodwill, other intangible assets, and long-lived assets; depreciation and amortization; income tax receivables and liabilities; uncertain tax positions; the fair value of financial instruments; the reasonably certain lease term; lease classification; and the Company's incremental borrowing rate utilized to discount its unpaid lease payments to measure its operating lease assets and liabilities.
There is uncertainty as to the nature and scope of the continued impacts of the pandemic over time. This uncertainty has affected, and is expected to continue to affect, management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional information becomes available.
Reportable Operating Segments
The Company's six reportable operating segments include the worldwide wholesale operations for each of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC (referred to herein as reportable operating segments). Refer to Note 12, “Reportable Operating Segments,” for further information on the Company's reportable operating segments.
Recent Accounting Pronouncements
Recently Adopted. The Financial Accounting Standards Board (FASB) has issued Accounting Standard Updates (ASUs) that have been adopted by the Company for its annual and interim reporting periods as stated below. The following is a summary of each standard and the impact on the Company:
| | | | | | | | | | | | | | |
Standard | | Description | | Impact on Adoption |
ASU No. 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment (as amended by ASU 2019-06) | | Requires annual and interim goodwill impairment tests be performed by comparing the fair value of a reporting unit with its carrying amount, effectively eliminating step two of the goodwill impairment test under legacy US GAAP. The amount by which the carrying amount exceeds the reporting unit’s fair value will continue to be recognized as an impairment charge. | | The Company adopted this ASU beginning April 1, 2020 on a prospective basis, which did not have a material impact on its condensed consolidated financial statements. |
ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (as amended by ASUs 2018-19, 2019-04, 2019-05, 2019-11, 2020-02, and 2020-03) | | Replaces the incurred loss impairment methodology in legacy US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. | | The Company adopted this ASU beginning April 1, 2020 on a prospective basis, which did not have a material impact on its condensed consolidated financial statements. |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2020 and 2019
(dollar amounts in thousands, except share and per share data)
Not Yet Adopted. The FASB has issued the following ASUs that have not yet been adopted by the Company. The following is a summary of each standard, planned period of adoption, and the expected impact on the Company:
| | | | | | | | | | | | | | | | | | | | |
Standard | | Description | | Planned Period of Adoption | | Expected Impact on Adoption |
ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes | | Removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation, and calculating income taxes in interim periods, as well as reduces complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. | | Q1 FY 2022 | | The Company is currently evaluating the impact on adoption of this ASU; however, the Company does not expect that the adoption will have a material impact on its condensed consolidated financial statements. |
ASU No. 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (as amended by ASU 2021-01) | | London Interbank Offered Rate (LIBOR) is a benchmark interest rate referenced in a variety of agreements that are used by all types of entities. At the end of 2021, banks will no longer be required to report information that is used to determine LIBOR. As a result, LIBOR could be discontinued. Other interest rates used globally could also be discontinued for similar reasons.
This ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Guidance is limited for adoption through December 31, 2022. | | Q3 FY 2023 | | The Company is currently evaluating the impact of the adoption of this ASU on its condensed consolidated financial statements. |
Note 2. Revenue Recognition
Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when they have the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. Components of variable consideration include estimated discounts, markdowns or chargebacks, and sales returns. Estimated variable consideration is included in the transaction price to the extent it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period.
The Company's customer contracts do not have a significant financing component due to their short durations, which are typically effective for one year or less and have payment terms that are generally 30-60 days.
Contract Assets and Liabilities
Contract assets represent the Company’s right to consideration subject to conditions other than the passage of time, such as additional performance obligations to be satisfied. Contract liabilities are performance obligations that the Company expects to satisfy or relieve within the next 12 months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancelable contracts before the transfer of goods or services to the customer has occurred. Contract assets and liabilities are recorded in other current assets and other accrued expenses, respectively, in the condensed consolidated balance sheets.
Sales Returns. The following table provides activity during the nine months ended December 31, 2020 related to estimated sales returns for the Company’s existing customer contracts for all channels:
| | | | | | | | | | | |
| Contract Asset | | Contract Liability |
Balance, March 31, 2020 | $ | 9,663 | | | $ | (25,667) | |
Net additions to sales return allowance* | 33,883 | | | (122,069) | |
Actual returns | (27,234) | | | 93,787 | |
Balance, December 31, 2020 | $ | 16,312 | | | $ | (53,949) | |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2020 and 2019
(dollar amounts in thousands, except share and per share data)
The following table provides activity during the nine months ended December 31, 2019 related to estimated sales returns for the Company’s existing customer contracts for all channels:
| | | | | | | | | | | |
| Contract Asset | | Contract Liability |
Balance, March 31, 2019 | $ | 10,441 | | | $ | (24,787) | |
Net additions to sales return allowance* | 28,186 | | | (92,694) | |
Actual returns | (25,415) | | | 78,437 | |
Balance, December 31, 2019 | $ | 13,212 | | | $ | (39,044) | |
*Net additions to sales return allowance include provision for anticipated sales returns which consists of both contractual return rights and discretionary authorized returns.
Loyalty Programs. The Company has a customer loyalty program for the UGG brand in its DTC channel where customers can earn rewards from qualifying purchases or activities. As of December 31, 2020 and March 31, 2020, the Company's contract liability for loyalty programs was $16,148 and $6,950, respectively.
Refer to Note 12, “Reportable Operating Segments,” for further information on the Company's disaggregation of revenue by reportable operating segment.
Note 3. Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
The Company's goodwill and other intangible assets are recorded in the condensed consolidated balance sheets, as follows:
| | | | | | | | | | | |
| December 31, 2020 | | March 31, 2020 |
Goodwill | | | |
UGG brand | $ | 6,101 | | | $ | 6,101 | |
HOKA brand | 7,889 | | | 7,889 | |
Total goodwill | 13,990 | | | 13,990 | |
| | | |
Other intangible assets | | | |
Indefinite-lived intangible assets | | | |
Trademarks | 15,454 | | | 15,454 | |
Definite-lived intangible assets | | | |
Trademarks | 55,245 | | | 55,245 | |
Other | 53,152 | | | 51,738 | |
Total gross carrying amount | 108,397 | | | 106,983 | |
Accumulated amortization | (77,783) | | | (74,421) | |
Net definite-lived intangible assets | 30,614 | | | 32,562 | |
Total other intangible assets, net | 46,068 | | | 48,016 | |
Total | $ | 60,058 | | | $ | 62,006 | |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2020 and 2019
(dollar amounts in thousands, except share and per share data)
Amortization Expense
Aggregate amortization expense for definite-lived intangible assets during the nine months ended December 31, 2020 and 2019 was $1,966 and $2,839, respectively. A reconciliation of the changes in total other intangible assets, net, recorded in the condensed consolidated balance sheets is as follows:
| | | | | |
Balance, March 31, 2020 | $ | 48,016 | |
| |
Amortization expense | (1,966) | |
Foreign currency translation net gain | 18 | |
Balance, December 31, 2020 | $ | 46,068 | |
Note 4. Fair Value Measurements
The accounting standard for fair value measurements provides a framework for measuring fair value, which is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy under this accounting standard requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:
•Level 1: Quoted prices in active markets for identical assets and liabilities.
•Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities.
•Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions.
The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, trade accounts receivable, net, trade accounts payable, accrued payroll, and other accrued expenses, approximates fair value due to their short-term nature. The carrying amount of the Company’s short-term borrowings and mortgage payable, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt.
Assets and liabilities that are measured on a recurring basis at fair value in the condensed consolidated balance sheets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Measured Using |
| December 31, 2020 | Level 1 | | Level 2 | | Level 3 |
Non-qualified deferred compensation asset | $ | 7,771 | | | $ | 7,771 | | | $ | — | | | $ | — | |
Non-qualified deferred compensation liability | (6,288) | | | (6,288) | | | — | | | — | |
| | | | | | | |
Designated Derivative Contracts liability | (956) | | | — | | | (956) | | | — | |
| | | | | | | |
Non-Designated Derivative Contracts liability | (255) | | | — | | | (255) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Measured Using |
| March 31, 2020 | Level 1 | | Level 2 | | Level 3 |
Non-qualified deferred compensation asset | $ | 6,164 | | | $ | 6,164 | | | $ | — | | | $ | — | |
Non-qualified deferred compensation liability | (3,756) | | | (3,756) | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2020 and 2019
(dollar amounts in thousands, except share and per share data)
The Company sponsors a non-qualified deferred compensation plan that permits a select group of management employees to defer earnings to a future date on a non-qualified basis. Deferred compensation is recognized based on the fair value of the participants' accounts. A rabbi trust was established as a reserve for benefits payable under this plan, with the assets invested in Company-owned life insurance policies. As of December 31, 2020, the non-qualified deferred compensation asset of $7,771 was recorded in other assets in the condensed consolidated balance sheets. As of December 31, 2020, the non-qualified deferred compensation liability of $6,288 was recorded in the condensed consolidated balance sheets, with $806 in other accrued expenses and $5,482 in other long-term liabilities.
The Level 2 inputs consist of forward spot rates at the end of the applicable reporting period. The fair values of assets and liabilities associated with derivative instruments and hedging activities are recorded in other current assets and other accrued expenses, respectively, in the condensed consolidated balance sheets. Refer to Note 9, “Derivative Instruments,” for further information, including definitions of the terms Designated Derivative Contracts and Non-Designated Derivative Contracts.
Note 5. Income Taxes
Effective Income Tax Rate
Income tax expense and the effective income tax rate were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Income tax expense | $ | 73,020 | | | $ | 55,010 | | | $ | 99,331 | | | $ | 64,169 | |
Effective income tax rate | 22.2 | % | | 21.4 | % | | 22.1 | % | | 19.8 | % |
The tax provisions during the nine months ended December 31, 2020 and 2019 were computed using the estimated effective income tax rates applicable to each of the domestic and foreign taxable jurisdictions for the full fiscal year and were adjusted for discrete items that occurred within the periods presented.
During the three months ended December 31, 2020, the slight increase in the effective income tax rate, compared to the prior period, was due to changes in the jurisdictional mix of worldwide income before income taxes forecasted for the fiscal year ending March 31, 2021, partially offset by lower net discrete tax expenses, primarily driven by reduced unrecognized tax benefits recorded in the current period. During the nine months ended December 31, 2020, the increase in the effective income tax rate, compared to the prior period, was due to changes in the jurisdictional mix of worldwide income before income taxes forecasted for the fiscal year ending March 31, 2021 as well as a reduced tax benefit during the nine months ended December 31, 2020, compared to the prior period, which recognized a tax benefit for the favorable settlement of a state income tax audit. The increase from prior year was partially offset by reduced discrete tax expense for unrecognized tax benefits recorded in the current period, compared to the prior period.
Unrecognized Tax Benefits
During the nine months ended December 31, 2020, the amount of gross unrecognized tax benefits increased by $1,801 to $19,439. This change is primarily related to a net increase in prior year tax position reserves recorded in income tax liability in the condensed consolidated balance sheets.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2020 and 2019
(dollar amounts in thousands, except share and per share data)
Note 6. Revolving Credit Facilities and Mortgage Payable
Primary Credit Facility
In September 2018, the Company entered into a credit agreement that provides for a five-year, $400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023.
At the Company's election, interest under the Primary Credit Facility is tied to the adjusted LIBOR or the alternate base rate (ABR). Interest for borrowings made in foreign currencies is based on currency-specific LIBOR or the Canadian deposit offered rate (CDOR) if made in Canadian dollars. As of December 31, 2020, the effective interest rates for US dollar LIBOR and ABR were 1.27% and 3.38%, respectively.
During the nine months ended December 31, 2020, the Company made no borrowings or repayments under the Primary Credit Facility. As of December 31, 2020, the Company had no outstanding balance, outstanding letters of credit of $549, and available borrowings of $399,451 under the Primary Credit Facility.
China Credit Facility
In August 2013, Deckers (Beijing) Trading Co., LTD, a wholly-owned subsidiary of the Company, entered into a credit agreement in China (as amended, the China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 300,000, or $45,581, with an overdraft facility sublimit of CNY 100,000, or $15,194.
The China Credit Facility is payable on demand and subject to annual review with a defined aggregate period of borrowing of up to 12 months. The obligations under the China Credit Facility are guaranteed by the Company for 108.5% of the facility amount in US dollars. Interest is based on the People’s Bank of China (PBOC) market rate multiplied by a variable liquidity factor. As of December 31, 2020, the effective interest rate was 4.24%.
During the nine months ended December 31, 2020, the Company made $9,627 in borrowings and repayments under the China Credit Facility. As of December 31, 2020, the Company had no outstanding balance, outstanding bank guarantees of $30, and available borrowings of $45,551 under the China Credit Facility.
Japan Credit Facility
In March 2016, Deckers Japan, G.K., a wholly-owned subsidiary of the Company, entered into a credit agreement in Japan (as amended, the Japan Credit Facility) that provides for an uncommitted revolving line of credit of up to JPY 3,000,000, or $28,810, for a maximum term of six months for each draw on the facility. The Japan Credit Facility can be renewed annually and is guaranteed by the Company. Interest is based on the Tokyo Interbank Offered Rate (TIBOR) plus 0.40%. As of December 31, 2020, the effective interest rate was 0.48%.
During the nine months ended December 31, 2020, the Company made no borrowings or repayments under the Japan Credit Facility. As of December 31, 2020, the Company had no outstanding balance and available borrowings of $28,810 under the Japan Credit Facility.
Mortgage
In July 2014, the Company obtained a mortgage secured by the property on which its corporate headquarters is located for a principal amount of $33,931. As of December 31, 2020, the outstanding principal balance under the mortgage was $30,431, which includes $663 in short-term borrowings and $29,768 in mortgage payable in the condensed consolidated balance sheets. The mortgage has a fixed interest rate of 4.928%. Payments include interest and principal in an amount that amortizes the principal balance over a 30-year period; however, the loan will mature and requires a balloon payment of $23,695, in addition to any then-outstanding balance, on July 1, 2029.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2020 and 2019
(dollar amounts in thousands, except share and per share data)
Debt Covenants
As of December 31, 2020, the Company was in compliance with all financial covenants under the revolving credit facilities and the mortgage.
Foreign Currency Exchange Rates
The amounts disclosed above for the China Credit Facility have been translated into US dollars using applicable foreign currency exchange spot rates in effect as of December 31, 2020. As a result, there are differences between the net borrowing amount within this footnote disclosure and that same amount recorded in the condensed consolidated statements of cash flows. Any amounts outstanding, including those amounts disclosed above, are recorded in short-term borrowings in the condensed consolidated balance sheets.
Note 7. Leases and Other Commitments
Leases
The Company primarily leases retail stores, showrooms, offices, and distribution facilities under operating lease contracts. Some of the Company's operating leases contain extension options ranging from one to 15 years. Historically, the Company has not entered into finance leases and its lease agreements generally do not contain residual value guarantees, options to purchase underlying assets, or material restrictive covenants.
Supplemental information for amounts presented in the condensed consolidated statements of cash flows related to operating leases is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Non-cash operating activities | | | | | | | |
Operating lease assets obtained in exchange for lease liabilities* | $ | 1,013 | | | $ | 827 | | | $ | 6,882 | | | $ | 28,964 | |
Reductions to operating lease assets for reductions to lease liabilities* | (9,206) | | | (616) | | | (11,619) | | | (5,285) | |
*Amounts disclosed include non-cash additions or reductions resulting from lease remeasurements.
Purchase Obligations
During the nine months ended December 31, 2020, the Company entered into a logistics and transportation services agreement with a new warehouse partner in Europe, intended to replace an existing services agreement with another provider, for a five-year initial term, and the Company expects its future minimum commitments under this agreement to be approximately $40,000.
Litigation
From time to time, the Company is involved in various legal proceedings and claims arising in the ordinary course of business. Although the results of legal proceedings and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters, including the matter outlined below, will not, individually or in the aggregate, have a material adverse effect on it business, results of operations, financial condition, or liquidity.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2020 and 2019
(dollar amounts in thousands, except share and per share data)
On March 28, 2016, the Company filed a lawsuit alleging trademark infringement, patent infringement, unfair competition and violation of deceptive trade practices in the US District Court for the Northern District of Illinois Eastern Division (District Court) against Australian Leather. Australian Leather counterclaimed alleging that the UGG trademark is invalid. On May 10, 2019, a jury returned a verdict in the Company's favor in its lawsuit against Australian Leather. The District Court entered judgments upholding the UGG trademark on February 6 and June 8, 2020. On August 12, 2020, Australian Leather filed an appeal to the US Court of Appeals for the Federal Circuit. While the Company believes there is no merit to the appeal, a judgment invalidating the UGG brand trademark would have a material adverse effect on the Company's business.
Note 8. Stock-Based Compensation
From time to time, the Company grants various types of stock-based compensation under the 2015 Stock Incentive Plan, as amended (2015 SIP), including time-based restricted stock units (RSUs), performance-based restricted stock units (PSUs), stock appreciation rights, and non-qualified stock options (NQSOs). The Company typically makes annual grants of RSUs (Annual RSUs) and PSUs (Annual PSUs), as well as long-term incentive plan (LTIP) awards, to certain executive officers and other key employees. During the nine months ended December 31, 2020, except for the Annual RSU grant activity summarized below, no additional awards were granted under the 2015 SIP. Refer to Note 8, “Stock-Based Compensation,” in our 2020 Annual Report for further information on previously granted awards under the 2015 SIP.
Annual Awards
The Company granted Annual RSUs and Annual PSUs, as summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended December 31, |
| | 2020 | | 2019 |
| | Shares Granted | | Weighted-average grant date fair value per share | | Shares Granted | | Weighted-average grant date fair value per share |
Annual RSUs | | 45,161 | | | $ | 215.66 | | | 44,702 | | | $ | 171.72 | |
Annual PSUs | | — | | | — | | | 19,509 | | | 174.34 | |
Total | | 45,161 | | | $ | 215.66 | | | 64,211 | | | $ | 172.51 | |
Stock-based compensation is recorded net of estimated forfeitures in selling, general, and administrative (SG&A) expenses in the condensed consolidated statements of comprehensive income. The Annual RSUs typically vest in equal annual installments over three years following the date of grant. The Annual PSUs are typically earned based on the achievement of pre-established Company performance criteria measured over the fiscal year during which they are granted and, to the extent the performance criteria are met, vest in equal annual installments over three years thereafter. Future unrecognized stock-based compensation expense for Annual RSUs and Annual PSUs outstanding as of December 31, 2020 was $11,717.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2020 and 2019
(dollar amounts in thousands, except share and per share data)
Long-Term Incentive Plan Awards
The Company evaluates at least quarterly the probability of achieving performance criteria included in its LTIP PSUs against its most current forecast. During the three months ended December 31, 2020, management determined that it is probable that the Company will exceed its previous estimates of projected performance against the respective performance criteria levels for the target level of 38,174 LTIP PSUs issued in September 2019 and the target level of 41,793 LTIP PSUs issued in September 2018. As a result, additional LTIP PSUs of approximately 86,360 are probable of vesting and the Company recognized a cumulative catch-up adjustment to stock-based compensation expenses based on the revised estimate of LTIP PSUs expected to vest and the estimated grant date fair value. As a result of this cumulative catch-up, $7,261 of total stock-based compensation expense was recorded in SG&A expenses in the condensed consolidated statements of comprehensive income during the three months ended December 31, 2020. Future unrecognized stock-based compensation expense for these LTIP PSUs outstanding as of December 31, 2020 was $6,098.
Note 9. Derivative Instruments
The Company may enter into foreign currency forward or option contracts (derivative contracts) to manage foreign currency risk on expected cash flows and certain existing assets and liabilities, primarily intercompany balances. Certain of these derivative contracts are designated as cash flow hedges of forecasted sales (Designated Derivative Contracts). The Company may also enter into derivative contracts that are not designated as cash flow hedges (Non-Designated Derivative Contracts), to offset a portion of anticipated gains and losses on certain intercompany balances until the expected time of repayment. The after-tax unrealized gains or losses from changes in the fair value of Designated Derivative Contracts are recorded as a component of accumulated other comprehensive loss (AOCL) and are reclassified to net sales in the condensed consolidated statements of comprehensive income in the same period or periods as the related sales are recognized. The Company includes all hedge components in its assessment of effectiveness for its derivative contracts.
Changes in the fair value of Non-Designated Derivative Contracts are recorded in SG&A expenses in the condensed consolidated statements of comprehensive income. The changes in fair value for these contracts are generally offset by the remeasurement gains or losses associated with the underlying foreign currency-denominated intercompany balances, which are recorded in SG&A expenses in the condensed consolidated statements of comprehensive income.
As of December 31, 2020, the Company had the following derivative contracts recorded at fair value in the condensed consolidated balance sheets:
| | | | | | | | | | | | | | | | | |
| Designated Derivative Contracts | | Non-Designated Derivative Contracts | | Total |
Notional value | $ | 15,015 | | | $ | 11,374 | | | $ | 26,389 | |
| | | | | |
Fair value recorded in other accrued expenses | (956) | | | (255) | | | (1,211) | |
As of December 31, 2020, the Company's outstanding derivative contracts were held by an aggregate of two counterparties, all with various maturity dates within the next three months. As of March 31, 2020, the Company had no outstanding derivative contracts.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2020 and 2019
(dollar amounts in thousands, except share and per share data)
The following table summarizes the effect of Designated Derivative Contracts and the related income tax effects for unrealized gains or losses recorded in the condensed consolidated statements of comprehensive income for changes in AOCL:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
(Loss) gain recorded in Other comprehensive income | $ | (556) | | | $ | (451) | | | $ | (1,265) | | | $ | 1,322 | |
Reclassifications from AOCL into net sales | 189 | | | (833) | | | 310 | | | (1,049) | |
Income tax benefit (expense) in Other comprehensive income | 88 | | | 311 | | | 229 | | | (66) | |
Total | $ | (279) | | | $ | (973) | | | $ | (726) | | | $ | 207 | |
The following table summarizes the effect of Non-Designated Derivative Contracts:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
(Loss) gain recorded in SG&A expenses | $ | (564) | | | $ | 192 | | | $ | (522) | | | $ | 338 | |
The non-performance risk of the Company and the counterparties did not have a material impact on the fair value of its derivative contracts. As of December 31, 2020, the amount of unrealized losses on derivative contracts recorded in AOCL is expected to be reclassified into net sales within the next three months. Refer to Note 10, “Stockholders' Equity,” for further information on the components of AOCL.
Note 10. Stockholders' Equity
Stock Repurchase Programs
The Company's Board of Directors has authorized various stock repurchase programs pursuant to which the Company may repurchase shares of its common stock. The Company's stock repurchase programs do not obligate it to acquire any amount of common stock and may be suspended at any time at the Company's discretion. During the nine months ended December 31, 2020, the Company made no stock repurchases. As of December 31, 2020, the aggregate remaining approved amount under the Company's stock repurchase programs was $159,807.
Accumulated Other Comprehensive Loss
The components within AOCL recorded in the condensed consolidated balance sheets, were as follows:
| | | | | | | | | | | |
| December 31, 2020 | | March 31, 2020 |
Unrealized loss on cash flow hedges, net of tax | $ | (726) | | | $ | |