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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, 2022
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 19, 2023, the number of outstanding shares of the registrant's common stock, par value $0.01 per share, was 26,359,258.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
For the Three and Nine Months Ended December 31, 2022, and 2021
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, 2022 (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, contain forward-looking statements relating to, among other things:
•the impacts of the COVID-19 global pandemic (pandemic) and related developments on our business, financial condition, results of operations and liquidity, including similar impacts on our customers, consumers, suppliers, and business partners;
•the operational challenges faced by our warehouses and distribution centers (DCs), wholesale partners, global third-party logistics providers (3PLs), and third-party carriers, including as a result of global supply chain disruptions and labor shortages;
•availability of raw materials and manufacturing capacity, and reliability of overseas production and storage;
•global geopolitical tensions, including the impact of economic sanctions on our transportation and energy costs;
•global economic trends, including foreign currency exchange rate fluctuations, changes in interest rates, inflationary pressures, changes in commodity pricing, and recessionary concerns;
•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 product allocation and segmentation strategies;
•trends impacting the purchasing behavior of wholesale partners and consumers;
•changes in consumer preferences impacting our brands and products, and the footwear and fashion industries;
•the impact of seasonality and weather on consumer behavior and the demand for our products;
•our business, operating, investing, capital allocation, marketing, and financing plans and strategies;
•expansion of and investments in our Direct-to-Consumer (DTC) capabilities, including our distribution facilities and e-commerce platforms;
•the impact of climate change, including changes in the regulatory environment and consumer demand;
•the impact of our efforts to continue to advance sustainable and socially conscious business operations, and the expectations and standards that our investors and other stakeholders have with respect to our environmental, social and governance practices;
•our interpretation of global tax regulations and changes in tax laws that may impact our tax liability and effective tax rates;
•our cash repatriation strategy regarding earnings of non-United States (US) subsidiaries and the resulting tax impacts;
•the outcomes of legal proceedings, including the impact they may have on our business and intellectual property rights; and
•the value of goodwill and other intangible assets, and potential write-downs or impairment charges.
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 occasionally, 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® (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. 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 their rights to the fullest extent under applicable law.
Unless otherwise indicated, all dollar amounts herein are expressed in thousands, except for per share or share data.
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, 2022 | | March 31, 2022 |
ASSETS | | | (AUDITED) |
Cash and cash equivalents | $ | 1,057,843 | | | $ | 843,527 | |
Trade accounts receivable, net of allowances ($49,295 and $30,591 as of December 31, 2022, and March 31, 2022, respectively) | 326,341 | | | 302,688 | |
Inventories | 723,364 | | | 506,796 | |
Prepaid expenses | 33,832 | | | 25,610 | |
Other current assets | 97,838 | | | 55,264 | |
Income tax receivable | 4,531 | | | 18,243 | |
Total current assets | 2,243,749 | | | 1,752,128 | |
Property and equipment, net of accumulated depreciation ($312,662 and $282,571 as of December 31, 2022, and March 31, 2022, respectively) (Note 12) | 242,594 | | | 222,449 | |
Operating lease assets | 166,525 | | | 182,459 | |
Goodwill | 13,990 | | | 13,990 | |
Other intangible assets, net of accumulated amortization ($80,288 and $79,061 as of December 31, 2022, and March 31, 2022, respectively) | 38,007 | | | 39,688 | |
Deferred tax assets, net | 63,318 | | | 64,217 | |
Other assets | 41,106 | | | 57,319 | |
Total assets | $ | 2,809,289 | | | $ | 2,332,250 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
| | | |
Trade accounts payable | $ | 487,354 | | | $ | 327,487 | |
Accrued payroll | 50,120 | | | 67,553 | |
Operating lease liabilities | 49,298 | | | 50,098 | |
Other accrued expenses | 131,950 | | | 81,400 | |
Income tax payable | 76,362 | | | 12,426 | |
Value added tax payable | 20,222 | | | 2,720 | |
Total current liabilities | 815,306 | | | 541,684 | |
Long-term operating lease liabilities | 151,107 | | | 171,972 | |
Income tax liability | 46,241 | | | 54,259 | |
Other long-term liabilities | 27,463 | | | 25,510 | |
Total long-term liabilities | 224,811 | | | 251,741 | |
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Commitments and contingencies (Note 6) | | | |
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Stockholders' equity | | | |
Common stock ($0.01 par value; 125,000 shares authorized; shares issued and outstanding of 26,358 and 26,982 as of December 31, 2022, and March 31, 2022, respectively) | 264 | | | 270 | |
Additional paid-in capital | 226,320 | | | 210,825 | |
Retained earnings | 1,582,864 | | | 1,352,685 | |
Accumulated other comprehensive loss (Note 9) | (40,276) | | | (24,955) | |
Total stockholders' equity | 1,769,172 | | | 1,538,825 | |
Total liabilities and stockholders' equity | $ | 2,809,289 | | | $ | 2,332,250 | |
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, |
| 2022 | | 2021 | | 2022 | | 2021 |
| $ | 1,345,640 | | | $ | 1,187,752 | | | $ | 2,835,715 | | | $ | 2,414,332 | |
Cost of sales | 633,111 | | | 566,531 | | | 1,406,513 | | | 1,165,520 | |
Gross profit | 712,529 | | | 621,221 | | | 1,429,202 | | | 1,248,812 | |
Selling, general, and administrative expenses | 349,869 | | | 327,825 | | | 882,370 | | | 765,403 | |
Income from operations (Note 11) | 362,660 | | | 293,396 | | | 546,832 | | | 483,409 | |
Interest income | (3,571) | | | (369) | | | (6,669) | | | (1,311) | |
Interest expense | 1,155 | | | 999 | | | 3,245 | | | 2,808 | |
Other income, net | (228) | | | (191) | | | (968) | | | (376) | |
Total other (income) expense, net | (2,644) | | | 439 | | | (4,392) | | | 1,121 | |
Income before income taxes | 365,304 | | | 292,957 | | | 551,224 | | | 482,288 | |
Income tax expense (Note 4) | 86,642 | | | 60,014 | | | 126,189 | | | 99,158 | |
Net income | 278,662 | | | 232,943 | | | 425,035 | | | 383,130 | |
| | | | | | | |
Other comprehensive income (loss), net of tax | | | | | | | |
Unrealized (loss) gain on cash flow hedges | (2,083) | | | (1,517) | | | (237) | | | 974 | |
Foreign currency translation gain (loss) | 14,169 | | | (2,744) | | | (15,084) | | | (3,388) | |
Total other comprehensive income (loss), net of tax | 12,086 | | | (4,261) | | | (15,321) | | | (2,414) | |
Comprehensive income | $ | 290,748 | | | $ | 228,682 | | | $ | 409,714 | | | $ | 380,716 | |
Net income per share | | | | | | | |
Basic | $ | 10.55 | | | $ | 8.49 | | | $ | 16.00 | | | $ | 13.87 | |
Diluted | $ | 10.48 | | | $ | 8.42 | | | $ | 15.90 | | | $ | 13.73 | |
Weighted-average common shares outstanding (Note 10) | | | | | | | |
Basic | 26,418 | | | 27,428 | | | 26,570 | | | 27,630 | |
Diluted | 26,586 | | | 27,663 | | | 26,740 | | | 27,904 | |
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, 2022 |
| | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance, March 31, 2022 | 26,982 | | | $ | 270 | | | $ | 210,825 | | | $ | 1,352,685 | | | $ | (24,955) | | | $ | 1,538,825 | |
Stock-based compensation | 1 | | | — | | | 3,735 | | | — | | | — | | | 3,735 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Shares withheld for taxes | — | | | — | | | (43) | | | — | | | — | | | (43) | |
Repurchases of common stock (Note 9) | (384) | | | (4) | | | — | | | (99,989) | | | — | | | (99,993) | |
Net income | — | | | — | | | — | | | 44,849 | | | — | | | 44,849 | |
Total other comprehensive loss | — | | | — | | | — | | | — | | | (14,966) | | | (14,966) | |
Balance, June 30, 2022 | 26,599 | | | 266 | | | 214,517 | | | 1,297,545 | | | (39,921) | | | 1,472,407 | |
Stock-based compensation | 1 | | | — | | | 6,779 | | | — | | | — | | | 6,779 | |
Shares issued upon vesting | 27 | | | — | | | 1,046 | | | — | | | — | | | 1,046 | |
Exercise of stock options | 27 | | | — | | | 1,830 | | | — | | | — | | | 1,830 | |
| | | | | | | | | | | |
Shares withheld for taxes | — | | | — | | | (5,059) | | | — | | | — | | | (5,059) | |
Repurchases of common stock (Note 9) | (173) | | | (1) | | | — | | | (50,246) | | | — | | | (50,247) | |
Net income | — | | | — | | | — | | | 101,524 | | | — | | | 101,524 | |
Total other comprehensive loss | — | | | — | | | — | | | — | | | (12,441) | | | (12,441) | |
Balance, September 30, 2022 | 26,481 | | | 265 | | | 219,113 | | | 1,348,823 | | | (52,362) | | | 1,515,839 | |
Stock-based compensation | 1 | | | — | | | 7,479 | | | — | | | — | | | 7,479 | |
Shares issued upon vesting | 2 | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 1 | | | — | | | 40 | | | — | | | — | | | 40 | |
| | | | | | | | | | | |
Shares withheld for taxes | — | | | — | | | (312) | | | — | | | — | | | (312) | |
Repurchases of common stock (Note 9) | (127) | | | (1) | | | — | | | (44,621) | | | — | | | (44,622) | |
Net income | — | | | — | | | — | | | 278,662 | | | — | | | 278,662 | |
Total other comprehensive income | — | | | — | | | — | | | — | | | 12,086 | | | 12,086 | |
Balance, December 31, 2022 | 26,358 | | | $ | 264 | | | $ | 226,320 | | | $ | 1,582,864 | | | $ | (40,276) | | | $ | 1,769,172 | |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(amounts in thousands)
(continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended December 31, 2021 |
| | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance, March 31, 2021 | 27,910 | | | $ | 279 | | | $ | 203,310 | | | $ | 1,257,379 | | | $ | (16,743) | | | $ | 1,444,225 | |
Stock-based compensation | 1 | | | — | | | 5,469 | | | — | | | — | | | 5,469 | |
| | | | | | | | | | | |
Exercise of stock options | 1 | | | — | | | 69 | | | — | | | — | | | 69 | |
| | | | | | | | | | | |
Shares withheld for taxes | — | | | — | | | (85) | | | — | | | — | | | (85) | |
Repurchases of common stock (Note 9) | (249) | | | (2) | | | — | | | (82,164) | | | — | | | (82,166) | |
Net income | — | | | — | | | — | | | 48,124 | | | — | | | 48,124 | |
Total other comprehensive income | — | | | — | | | — | | | — | | | 3,351 | | | 3,351 | |
Balance, June 30, 2021 | 27,663 | | | 277 | | | 208,763 | | | 1,223,339 | | | (13,392) | | | 1,418,987 | |
Stock-based compensation | 1 | | | — | | | 6,288 | | | — | | | — | | | 6,288 | |
Shares issued upon vesting | 36 | | | — | | | 914 | | | — | | | — | | | 914 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Shares withheld for taxes | — | | | — | | | (9,195) | | | — | | | — | | | (9,195) | |
Repurchases of common stock (Note 9) | (133) | | | (1) | | | — | | | (53,806) | | | — | | | (53,807) | |
Net income | — | | | — | | | — | | | 102,063 | | | — | | | 102,063 | |
Total other comprehensive loss | — | | | — | | | — | | | — | | | (1,504) | | | (1,504) | |
Balance, September 30, 2021 | 27,567 | | | 276 | | | 206,770 | | | 1,271,596 | | | (14,896) | | | 1,463,746 | |
Stock-based compensation | — | | | — | | | 6,386 | | | — | | | — | | | 6,386 | |
Shares issued upon vesting | 2 | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 28 | | | — | | | 1,135 | | | — | | | — | | | 1,135 | |
| | | | | | | | | | | |
Shares withheld for taxes | — | | | — | | | (4,496) | | | — | | | — | | | (4,496) | |
Repurchases of common stock (Note 9) | (354) | | | (4) | | | — | | | (130,707) | | | — | | | (130,711) | |
Net income | — | | | — | | | — | | | 232,943 | | | — | | | 232,943 | |
Total other comprehensive loss | — | | | — | | | — | | | — | | | (4,261) | | | (4,261) | |
Balance, December 31, 2021 | 27,243 | | | $ | 272 | | | $ | 209,795 | | | $ | 1,373,832 | | | $ | (19,157) | | | $ | 1,564,742 | |
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, |
| 2022 | | 2021 |
OPERATING ACTIVITIES | | | |
Net income | $ | 425,035 | | | $ | 383,130 | |
Reconciliation of net income to net cash provided by (used in) operating activities: |
Depreciation, amortization, and accretion | 35,089 | | | 31,202 | |
| | | |
Amortization on cloud computing arrangements | 1,572 | | | 1,154 | |
Loss on extinguishment of debt | 226 | | | — | |
| | | |
Bad debt expense (benefit) | 3,692 | | | (254) | |
Deferred tax benefit | (343) | | | (4,263) | |
| | | |
Stock-based compensation | 18,130 | | | 18,281 | |
| | | |
| | | |
Loss on disposal of long-lived assets | 18 | | | 37 | |
| | | |
| | | |
Impairment of operating lease and other long-lived assets | 2,085 | | | 3,186 | |
| | | |
| | | |
| | | |
| | | |
Changes in operating assets and liabilities: | | | |
Trade accounts receivable, net | (27,345) | | | (118,568) | |
Inventories | (216,569) | | | (272,508) | |
Prepaid expenses and other current assets | (47,782) | | | (33,936) | |
Income tax receivable | 13,712 | | | (7,743) | |
Net operating lease assets and lease liabilities | (6,339) | | | 2,643 | |
Other assets | 14,641 | | | (27,331) | |
Trade accounts payable | 161,512 | | | 246,964 | |
| | | |
Other accrued expenses | 42,681 | | | 10,782 | |
Income tax payable | 63,936 | | | (10,151) | |
Other long-term liabilities | (6,068) | | | 4,745 | |
Net cash provided by operating activities | 477,883 | | | 227,370 | |
| | | |
INVESTING ACTIVITIES | | | |
| | | |
| | | |
Purchases of property and equipment | (56,059) | | | (41,315) | |
Proceeds from sales of property and equipment | 6 | | | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
Net cash used in investing activities | (56,053) | | | (41,315) | |
| | | |
FINANCING ACTIVITIES | | | |
| | | |
| | | |
Loan origination costs on revolving credit facilities | (1,537) | | | — | |
Proceeds from issuance of stock | 1,046 | | | 914 | |
Proceeds from exercise of stock options | 1,870 | | | 1,204 | |
Repurchases of common stock | (194,862) | | | (266,684) | |
Cash paid for shares withheld for taxes | (5,414) | | | (13,776) | |
| | | |
Net cash used in financing activities | (198,897) | | | (278,342) | |
Effect of foreign currency exchange rates on cash and cash equivalents | (8,617) | | | 1,187 | |
Net change in cash and cash equivalents | 214,316 | | | (91,100) | |
Cash and cash equivalents at beginning of period | 843,527 | | | 1,089,361 | |
Cash and cash equivalents at end of period | $ | 1,057,843 | | | $ | 998,261 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
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DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
(continued)
| | | | | | | | | | | |
| Nine Months Ended December 31, |
| 2022 | | 2021 |
SUPPLEMENTAL CASH FLOW DISCLOSURE | | | |
Cash paid during the period | | | |
Income taxes, net of refunds of $1,286 and $77, as of December 31, 2022, and 2021, respectively | $ | 59,418 | | | $ | 124,651 | |
Interest | 1,415 | | | 1,399 | |
Operating leases | 45,244 | | | 43,257 | |
Non-cash investing activities | | | |
Change in accounts payable and other accrued expenses for purchases of property and equipment | (2,696) | | | 240 | |
Accrued for asset retirement obligation assets related to leasehold improvements | 1,051 | | | 3,702 | |
Leasehold improvements acquired through tenant allowances | — | | | 4,061 | |
| | | |
| | | |
| | | |
| | | |
| | | |
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, 2022, and 2021
(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 lifestyle 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 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 UGG brand business has historically been seasonal, requiring the Company to build inventory levels during certain quarters in its fiscal year to support higher selling seasons, which has contributed to the variation in its results from quarter to quarter. However, as the Company continues to take steps to diversify and expand its product offerings by creating more year-round styles, and as net sales of the HOKA brand continue to increase as a percentage of our aggregate net sales, the Company expects the impact from seasonality to continue to decrease over time.
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, 2022, and for the three and nine months ended December 31, 2022, and 2021 (the prior period) are prepared in accordance with generally accepted accounting principles in the US (US GAAP) for interim financial information pursuant to Rule 10-01 of Regulation S-X issued by the SEC. Accordingly, the condensed consolidated financial statements 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, 2022, is 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 actual 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, 2022 (prior fiscal year), which was filed with the SEC on May 27, 2022 (2022 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.
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 it believes to be reasonable. In addition, the Company has considered the potential impact of the pandemic, as well as certain macroeconomic factors, including inflation, foreign currency exchange rate volatility, changes in interest rates, inflationary pressures, changes in commodity pricing, and recessionary concerns, on its business and operations. Although the full impact of these factors 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. To the extent there are differences between these estimates and actual results, the Company's condensed consolidated financial statements may be materially affected.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2022, and 2021
(dollar amounts in thousands, except share and per share data)
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 measure its operating lease assets and lease liabilities.
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 (collectively, the Company's reportable operating segments). Refer to Note 11, "Reportable Operating Segments," for further information on the Company's reportable operating segments.
Impairment of Operating Lease and Other Long-Lived Assets. During the three and nine months ended December 31, 2022, the Company recorded impairment charges of $1,017 and $2,085, within its DTC reportable operating segment in selling, general, and administrative (SG&A) expenses in the condensed consolidated statements of comprehensive income for retail store related operating lease and other long-lived assets (asset group). These impairment charges were due to the underperformance of certain retail stores that resulted in the carrying value exceeding the estimated fair value of the asset group, which is determined based on an estimate of the discounted future cash flows for the asset group. For the three and nine months ended December 31, 2021, the Company recorded impairment charges of $3,186 on the asset group within its DTC reportable operating segment in SG&A expenses in the condensed consolidated statements of comprehensive income.
Recent Accounting Pronouncements. Set forth below are the Financial Accounting Standards Board's recently issued Accounting Standard Updates (ASU) that have and have not yet been adopted by the Company for its annual and interim reporting periods.
Recently Adopted. The following is a summary of an ASU recently adopted during January 2023 and its impact on the Company:
| | | | | | | | | | | | | | | | |
Standard | | Description | | Impact Upon Adoption | | |
ASU No. 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (as amended by ASUs 2021-01 and 2022-06) | | 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 calendar year 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; however, this was deferred to December 31, 2024, to provide relief and allow flexibility until the cessation of USD LIBOR. | | While the sunset date was deferred with a recent amendment to this ASU, the Company elected to adopt this ASU as of January 1, 2023.
The Company has evaluated the impact of the adoption of this ASU on its revolving credit facilities, lease agreements, cash flow hedges and other relevant agreements; however, the adoption did not have a material impact on its condensed consolidated financial statements.
During December 2022, the Company entered into a new credit agreement with Secured Overnight Financing Rate (SOFR) interest terms and the previous credit agreement with LIBOR interest terms was terminated. Refer to Note 5, "Revolving Credit Facilities," for further information on the Company's Revolving Credit Facilities. | | |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2022, and 2021
(dollar amounts in thousands, except share and per share data)
Not Yet Adopted. The following is a summary of an ASU that has been issued and is applicable to the Company, but which has not yet been adopted, as well as the planned period of adoption, and the expected impact on the Company upon adoption:
| | | | | | | | | | | | | | | | | | | | |
Standard | | Description | | Planned Period of Adoption | | Expected Impact Upon Adoption |
ASU 2022-04 - Supplier Finance Program (SFP) | | The ASU requires that a buyer in an SFP disclose qualitative and quantitative information about its program, including the nature and potential magnitude. Interim and annual requirements include disclosure of outstanding amounts under the SFP. Annual requirements include an activity roll forward of outstanding amounts under the SFP.
This ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, except for the disclosure of roll forward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, on a retrospective basis, except for the disclosure of roll forward information. | | Q1 FY 2024 and Q1 FY 2025 | | The Company is currently evaluating this ASU and its implications on the presentation of and disclosure in the condensed consolidated financial statements. The Company currently has an SFP program with a third-party financial institution that allows certain participating suppliers to finance payment obligations of the Company, prior to their scheduled due dates, at a discounted price to the third-party financial institution. |
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.
Variable Consideration. Components of variable consideration include estimated sales discounts, markdowns or chargebacks, and sales returns. Estimates for variable consideration are based on the amounts earned or estimates to be claimed as an adjustment to sales. 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 to 60 days.
Sales Return Asset and Liability. Reserves are recorded for anticipated future returns of goods shipped prior to the end of the reporting period. In general, the Company accepts returns for damaged or defective products for up to one year. The Company also has a policy whereby returns are generally accepted from customers and end consumers between 30 to 90 days from the point of sale for cash or credit. The amounts of these reserves are determined based on several factors, including actual and any recent events that could result in a change to historical return rates. Sales returns are a refund asset for the right to recover the inventory and a refund liability for the stand-ready right of return. Changes to the refund liability are recorded against gross sales and changes to the refund asset for the right to recover the inventory are recorded against cost of sales in the condensed consolidated statements of comprehensive income. The refund liability is recorded in other accrued expenses and the related asset for the right to recover the inventory is recorded in other current assets 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, 2022, and 2021
(dollar amounts in thousands, except share and per share data)
Activity during the nine months ended December 31, 2022, related to estimated sales returns were as follows:
| | | | | | | | | | | |
| Recovery Asset | | Refund Liability |
Balance, March 31, 2022 | $ | 11,491 | | | $ | (39,867) | |
Net additions to sales return liability* | 55,080 | | | (182,914) | |
Actual returns | (41,202) | | | 146,695 | |
Balance, December 31, 2022 | $ | 25,369 | | | $ | (76,086) | |
Activity during the nine months ended December 31, 2021, related to estimated sales returns were as follows:
| | | | | | | | | | | |
| Recovery Asset | | Refund Liability |
Balance, March 31, 2021 | $ | 10,704 | | | $ | (37,717) | |
Net additions to sales return liability* | 29,603 | | | (122,153) | |
Actual returns | (26,774) | | | 111,851 | |
Balance, December 31, 2021 | $ | 13,533 | | | $ | (48,019) | |
*Net additions to the sales return liability include a provision for anticipated sales returns, which consists of both contractual return rights and discretionary authorized returns.
Contract Liabilities. 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 liabilities are recorded in other accrued expenses in the condensed consolidated balance sheets, and include loyalty programs and other deferred revenue.
Loyalty Programs. The Company has a loyalty program for the UGG brand in its DTC channel where consumers can earn rewards from qualifying purchases or activities. The Company defers recognition of revenue for unredeemed awards until one of the following occurs: (1) rewards are redeemed by the consumer, (2) points or certificates expire, or (3) an estimate of the expected unused portion of points or certificates is applied, which is based on historical redemption patterns. The Company’s contract liability for loyalty programs is recorded in other accrued expenses in the condensed consolidated balance sheets.
Activity during the nine months ended December 31, 2022, related to loyalty programs were as follows:
| | | | | |
| Amounts |
Balance, March 31, 2022 | $ | (10,883) | |
Redemptions and expirations for loyalty certificates and points recognized in net sales | 32,096 | |
Deferred revenue for loyalty points and certificates issued | (41,354) | |
Balance, December 31, 2022 | $ | (20,141) | |
Activity during the nine months ended December 31, 2021, related to loyalty programs were as follows:
| | | | | |
| Amounts |
Balance, March 31, 2021 | $ | (12,231) | |
Redemptions and expirations for loyalty certificates and points recognized in net sales | 38,034 | |
Deferred revenue for loyalty points and certificates issued | (42,834) | |
Balance, December 31, 2021 | $ | (17,031) | |
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2022, and 2021
(dollar amounts in thousands, except share and per share data)
Deferred Revenue. Revenue is deferred for wholesale channel transactions when certain conditions outlined within the contract terms, including the transfer of control or delivery of product, has not occurred, such as when a wholesale channel customer prepays for ordered product. The contract liability for deferred revenue is recorded in other accrued expenses in the condensed consolidated balance sheets.
Activity during the nine months ended December 31, 2022, related to deferred revenue were as follows:
| | | | | |
| Amounts |
Balance, March 31, 2022 | $ | (15,804) | |
Additions of customer cash payments | (41,782) | |
Revenue recognized | 46,138 | |
Balance, December 31, 2022 | $ | (11,448) | |
Activity during the nine months ended December 31, 2021, related to deferred revenue were as follows:
| | | | | |
| Amounts |
Balance, March 31, 2021 | $ | (5,425) | |
Additions of customer cash payments | (36,507) | |
Revenue recognized | 28,341 | |
Balance, December 31, 2021 | $ | (13,591) | |
Refer to Note 11, "Reportable Operating Segments," for further information on the Company's disaggregation of revenue by reportable operating segment.
Note 3. 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. When the Company makes short-term borrowings, the carrying amounts, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt. The Company does not currently have any Level 3 assets or liabilities.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2022, and 2021
(dollar amounts in thousands, except share and per share data)
Assets and liabilities that are measured on a recurring basis at fair value in the condensed consolidated balance sheets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of | | Measured Using |
| December 31, 2022 | Level 1 | | Level 2 | | Level 3 |
Money-market funds | $ | 761,356 | | | $ | 761,356 | | | $ | — | | | $ | — | |
Non-qualified deferred compensation asset | 8,196 | | | 8,196 | | | — | | | — | |
Non-qualified deferred compensation liability | (10,543) | | | (10,543) | | | — | | | — | |
Designated Derivative Contracts asset | 185 | | | — | | | 185 | | | — | |
Designated Derivative Contracts liability | (498) | | | — | | | (498) | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of | | Measured Using |
| March 31, 2022 | Level 1 | | Level 2 | | Level 3 |
Money-market funds | $ | 524,063 | | | $ | 524,063 | | | $ | — | | | $ | — | |
Non-qualified deferred compensation asset | 8,933 | | | 8,933 | | | — | | | — | |
Non-qualified deferred compensation liability | (9,573) | | | (9,573) | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The carrying value of money-market funds approximates the fair value as it is considered a highly liquid investment with an original maturity of three months or less when purchased. Money-market funds are recorded in cash and cash equivalents in the condensed consolidated balance sheets.
The Company sponsors an unfunded, non-qualified deferred compensation plan (NQDC Plan) that permits certain members of its management team the opportunity to defer compensation into the NQDC Plan. A rabbi trust was established as a reserve for benefits payable under the NQDC Plan, with the assets invested in Company-owned life insurance policies. Deferred compensation is recognized based on the fair value of the participants' accounts.
As of December 31, 2022, the non-qualified deferred compensation asset of $8,196 is recorded in other assets in the condensed consolidated balance sheets. As of December 31, 2022, the non-qualified deferred compensation liability of $10,543 is recorded in the condensed consolidated balance sheets, with $602 in other accrued expenses and $9,941 in other long-term liabilities. As of March 31, 2022, the non-qualified deferred compensation asset of $8,933 is recorded in other assets in the condensed consolidated balance sheets. Further, the non-qualified deferred compensation liability of $9,573 is recorded in the condensed consolidated balance sheets, with $936 in other accrued expenses and $8,637 in other long-term liabilities.
The fair value of foreign currency forward or option contracts is determined using quoted forward spot rates at the end of the applicable reporting period from counterparties, which are corroborated by market-based pricing (Level 2). 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 8, "Derivative Instruments," for further information, including definitions of the terms Designated Derivative Contracts and Non-Designated Derivative Contracts.
The Company's non-financial assets, such as other long-lived assets and definite-lived intangible assets, which include operating lease assets, machinery and equipment, leasehold improvements, and definite-lived trademarks; as well as indefinite-lived intangible assets and goodwill, are not required to be carried at fair value on a recurring basis and are reported at carrying value. Instead, these assets are tested for impairment annually, or when an event occurs or changes in circumstances indicate the carrying value may not be recoverable. When determining fair value, Level 3 measurements are used for the estimates and assumptions, including undiscounted future cash flows expected to be generated by the asset groups based upon historical experience, expected market conditions, as well and management's plans.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2022, and 2021
(dollar amounts in thousands, except share and per share data)
Note 4. Income Taxes
Income tax expense and the effective income tax rate were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Income tax expense | $ | 86,642 | | | $ | 60,014 | | | $ | 126,189 | | | $ | 99,158 | |
Effective income tax rate | 23.7 | % | | 20.5 | % | | 22.9 | % | | 20.6 | % |
The tax provisions during the three and nine months ended December 31, 2022, and 2021 were computed using the estimated effective income tax rate applicable to each of the domestic and foreign taxable jurisdictions for the fiscal years ending March 31, 2023 (current fiscal year), and March 31, 2022, respectively, and were adjusted for discrete items that occurred within the periods presented above.
During the three months ended December 31, 2022, the net increase in the effective income tax rate, compared to the prior period, was primarily driven by higher income from operations, including changes in jurisdictional mix of worldwide income before income taxes, as well as reduced net discrete tax benefits, primarily due to stock-based compensation and return to provision adjustments, partially offset by reserves for uncertain tax positions.
During the nine months ended December 31, 2022, the net increase in the effective income tax rate, compared to the prior period, was primarily driven by higher income from operations, including changes in jurisdictional mix of worldwide income before income taxes, as well as reduced net discrete tax benefits, primarily due to stock-based compensation and reserves for uncertain tax positions, partially offset by return to provision adjustments.
Note 5. Revolving Credit Facilities
Primary Credit Facility. In December 2022, the Company refinanced in full and terminated its prior credit agreement originally entered into in September 2018 (Prior Credit Agreement). There were no outstanding borrowings during the nine months ended December 31, 2022, nor at the time of termination, and no penalties paid as a result of the termination. However, the Company has outstanding letters of credit of $940 under the Prior Credit Agreement as of December 31, 2022, which are expected to be transferred to the Credit Agreement (as defined below) during the remainder of the Company's current fiscal year.
The refinanced revolving credit facility agreement is with Citibank, N.A. (Citibank) as administrative agent, Comerica Bank, as sole syndication agent, and the lenders party thereto (Credit Agreement). The Credit Agreement 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 December 19, 2027, subject to extension on early termination as described in the Credit Agreement.
In addition to allowing borrowings in US dollars, the Primary Credit Facility provides a $175,000 sublimit for borrowings in Euros, Sterling, Canadian dollars and any other foreign currency that is subsequently approved by Citibank, each lender and each bank issuing letters of credit. Subject to customary conditions, the Company has the option to increase the maximum principal amount available up to an additional $300,000, resulting in a maximum available principal amount of $700,000. However, none of the lenders has committed at this time to provide any such increase in the commitments.
The obligations of the Company and each other borrower under the Primary Credit Facility are guaranteed by the Company’s existing and future wholly owned domestic subsidiaries that meet certain materiality thresholds, subject to limited exceptions. All obligations under the Primary Credit Facility and the foregoing guaranty are unsecured, and amounts borrowed may be prepaid at any time without a premium or penalty, subject to limited exceptions.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2022, and 2021
(dollar amounts in thousands, except share and per share data)
Certain of the Company's foreign subsidiaries may also borrow under the Primary Credit Facility, which permits the Company, subject to customary conditions, to designate one or more additional subsidiaries organized in foreign jurisdictions to borrow. The Company is liable for the obligations of each foreign borrower, but the obligations of the foreign borrowers are several (not joint) in nature.
Interest Rate Terms. At the Company’s election, revolving loans issued under the Primary Credit Facility will bear interest at the adjusted term SOFR, the adjusted Euro InterBank Offered Rate (EURIBOR), the Sterling Overnight Index Average (SONIA), the Canadian Dollar Offered Rate (CDOR), or the adjusted Alternate Base Rate (ABR), in each case plus the applicable interest rate margin.
Interest for borrowings in US dollars will be variable and will fluctuate between SOFR, plus 1.00% and 0.10% based on the Company's total net leverage ratio per annum, and ABR, plus 0% per annum. The applicable interest rate margin is based on a pricing grid based on the Company’s total net leverage ratio and ranges from 1.00% per annum to 1.625% per annum in the case of loans based on the SOFR, EURIBOR, SONIA, or CDOR, and from 0.00% to 0.625% per annum in the case of loans based on ABR.
As of December 31, 2022, the effective interest rates for SOFR and ABR, with relevant spreads for SOFR and ABR borrowings made during this quarterly period, are 5.16% and 7.50%, respectively.
Commitment Fees. The Company is required to pay fees of 0.125% to 0.20% per annum on the daily unused amount of the Primary Credit Facility, with the exact commitment fee based on the Company’s total net leverage ratio.
Borrowing Activity. During the three months ended December 31, 2022, the Company made no borrowings or repayments under the Primary Credit Facility. As of December 31, 2022, the Company has no outstanding balance, no outstanding letters of credit, and available borrowings of $400,000 under the Primary Credit Facility, with the exception of letters of credit outstanding under the Prior Credit Agreement, discussed above.
Deferred Financing Costs. The Company paid certain commitment, arrangement and other fees to certain parties to the Credit Agreement, and reimbursed certain of the parties’ expenses, which totaled $1,537, with $313 recorded in other current assets and $1,224 recorded in other assets in the condensed consolidated balance sheets. These costs will be amortized on a straight-line basis over the term of the Credit Agreement. Deferred financing costs associated with the Prior Credit Agreement had a remaining unamortized balance previously recorded in other current assets in the condensed consolidated balance sheets of $226, and, on the date of refinancing the Primary Credit Facility, were written off to interest expense during the three months ended December 31, 2022.
China Credit Facility. In October 2021, 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 CNY300,000, or $43,483, with an overdraft facility sublimit of CNY100,000, or $14,494. 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, 2022, the effective interest rate is 3.95%.
During the nine months ended December 31, 2022, the Company made no borrowings or repayments under the China Credit Facility. As of December 31, 2022, the Company has no outstanding balance, outstanding bank guarantees of $29, and available borrowings of $43,454 under the China Credit Facility.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2022, and 2021
(dollar amounts in thousands, except share and per share data)
Japan Credit Facility. In March 2016, Deckers Japan, G.K. (Deckers Japan), 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 JPY3,000,000, or $22,876, for a maximum term of six months for each draw on the facility. Interest is based on the Tokyo Interbank Offered Rate (TIBOR) plus 0.40%. As of December 31, 2022, the effective interest rate is 0.47%.
The Japan Credit Facility expires on January 31, 2023, and the Company plans to cancel the parent guarantee. If borrowing needs arise, Deckers Japan is able to borrow from one or more of the Company's subsidiaries through intercompany loans as permitted under the Primary Credit Facility.
During the nine months ended December 31, 2022, the Company made no borrowings or repayments under the Japan Credit Facility. As of December 31, 2022, the Company has no outstanding balance and available borrowings of $22,876 under the Japan Credit Facility.
Debt Covenants. Under the Credit Agreement, the Company is subject to usual and customary representations and warranties, and contains usual and customary affirmative and negative covenants, which include limitations on liens, additional indebtedness, investments, restricted payments, indemnification provisions in favor of the lenders and transactions with affiliates. The financial covenant requires the total net leverage ratio must not be greater than 3.75 to 1.00).
Under the Credit Agreement, the Company is subject to other customary limitations, as well as usual and customary events of default, which include non-payment of principal, interest, fees and other amounts; breach of a representation or warranty; non-performance of covenants and obligations; default on other material debt; bankruptcy or insolvency; material judgments; incurrence of certain material Employee Retirement Income Security Act of 1974 (ERISA) liabilities; and a change of control of the Company.
As of December 31, 2022, the Company is in compliance with all financial covenants under the Primary Credit Facility, China Credit Facility, and Japan Credit Facility.
Note 6. Commitments and Contingencies
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 between 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, was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Nine Months Ended December 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
Non-cash operating activities | | | | | | | |
Operating lease assets obtained in exchange for lease liabilities* | $ | 12,849 | | | $ | 8,859 | | | $ | 26,058 | | | $ | 35,153 | |
Reductions to operating lease assets for reductions to lease liabilities* | (1,241) | | | (4,669) | | | (1,649) | | | (5,293) | |
*Amounts disclosed include non-cash additions or reductions resulting from lease remeasurements.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2022, and 2021
(dollar amounts in thousands, except share and per share data)
Operating lease liabilities recorded in the condensed consolidated balance sheets exclude an aggregate of $52,443 of undiscounted minimum lease payments due pursuant to leases signed but not yet commenced. These leases are primarily for the following:
•additional space for the Company's US warehouse and DC in Mooresville, Indiana with an initial lease term of ten years, which the Company expects to be operational in the second quarter of its next fiscal year ending March 31, 2024 (next fiscal year);
•a new international UGG brand flagship retail store in Munich, Germany with an initial term of five years, which the Company expects to be opened in the first quarter of its next fiscal year; and,
•a new HOKA brand retail store in Nagoya, Japan with an initial lease term of six years, which the Company expects to be opened in the second quarter of its next fiscal year.
Purchase Obligations. The Company has been subject to the following adjustments to its purchase obligations:
3PL Agreements. Since March 31, 2022, the Company has entered into 3PL agreements relating to international logistics operations that require additional minimum commitments of approximately $86,000, which is expected to be paid over a period of three to five years.
Commodities. During December 2022, the Company received refunds of deposits of $10,000 reflecting the return of funds previously advanced to sheepskin suppliers under certain expired supply agreements. Deposits are initially recorded in other assets in the condensed consolidated balance sheets and are returned from sheepskin suppliers as the Company, its affiliates, third-party manufacturers, factories, and other agents (each or collectively, a Buyer) purchase the remaining minimum commitments corresponding to unused sheepskins on previously expired contracts. As of December 31, 2022, an additional deposit refund due but not yet paid of $6,877 was reclassified from other assets to other current assets in the condensed consolidated balance sheets. As of December 31, 2022, remaining deposits recorded in other assets in the condensed consolidated balance sheets is $16,266.
Except as described above, there were no other material changes outside the ordinary course of business during the nine months ended December 31, 2022, to the contractual obligations and other commitments last disclosed in the Company's 2022 Annual Report and as of March 31, 2022.
Litigation. From time to time, the Company is involved in various legal proceedings, disputes, and other claims arising in the ordinary course of business, including employment, intellectual property, and product liability claims. Although the results of these matters cannot be predicted with certainty, the Company currently believes that the outcome of these ordinary course matters will not, individually or in the aggregate, have a material adverse effect on its business, results of operations, financial condition, or cash flows. However, regardless of the outcome, these ordinary course matters can have an adverse impact on the Company because of legal costs, diversion of management time and resources, and other factors.
Note 7. Stock-Based Compensation
From time to time, the Company grants various types of stock-based compensation under the 2015 Stock Incentive Plan (2015 SIP), including time-based restricted stock units (RSUs), performance-based restricted stock units (PSUs), and long-term incentive plan PSUs (LTIP PSUs), to key personnel, including employees and directors. During the nine months ended December 31, 2022, no additional awards were granted under the 2015 SIP, with the exception of the RSUs and LTIP PSUs awards summarized below. Refer to Note 8, “Stock-Based Compensation,” of our consolidated financial statements in Part IV of our 2022 Annual Report for further information on previously granted awards under the 2015 SIP.
Annual Awards. The Company granted the following awards under the 2015 SIP during the periods presented, which were recorded in the condensed consolidated statements of comprehensive income:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended December 31, |
| | 2022 | | 2021 |
| | Shares Granted | | Weighted-average grant date fair value per share | | Shares Granted | | Weighted-average grant date fair value per share |
RSUs | | 50,923 | | | $ | 337.44 | | | 40,062 | | | $ | 386.17 | |
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| | | | | | | | |
RSUs are subject to time-based vesting criteria and typically vest in equal annual installments over three years following the date of grant. Stock-based compensation is recorded net of estimated forfeitures in SG&A expenses in the condensed consolidated statements of comprehensive income. Future unrecognized stock-based compensation for annual awards, including RSUs outstanding, as of December 31, 2022 was $18,720.
Long-Term Incentive Plan Awards. During the nine months ended December 31, 2022, the Company approved awards under the 2015 SIP for the issuance of PSUs (2023 LTIP PSUs), which were awarded to certain members of the Company's management team, including the Company's named executive officers and vice presidents. The 2023 LTIP PSUs are subject to vesting based on service conditions over either two or three years. The Company must meet certain revenue and pre-tax income performance targets individually over three reporting periods for the fiscal years ending March 31, 2023, 2024, and 2025 (collectively, the Measurement Periods). The 2023 LTIP PSUs incorporate a relative total stockholder return (TSR) modifier for both the 24-month performance period (commencing April 1, 2022) ending March 31, 2024, and the 36-month performance period (commencing April 1, 2022) ending March 31, 2025 (collectively, the Performance Periods). To the extent financial performance is achieved above the threshold levels for each of these performance criteria, the number of 2023 LTIP PSUs that vest will increase up to a maximum of 200% of the targeted amount for that award. No vesting of any portion of the 2023 LTIP PSUs will occur if the Company fails to achieve the pre-established minimum revenue and pre-tax income amounts for each reporting period. Following the determination of the Company’s achievement with respect to the revenue and pre-tax income criteria for the Measurement Periods, the vesting of each 2023 LTIP PSU will be subject to adjustment based on the application of the TSR modifier. The amount of the adjustment will be determined based on a comparison of the Company's TSR relative to the TSR of a pre-determined set of peer group companies for the Performance Periods. A Monte-Carlo simulation model was used to determine the grant date fair value by simulating a range of possible future stock prices for the Company and each member of the peer group over the Performance Periods.
The Company granted awards of 32,735 2023 LTIP PSUs at the target performance level during the nine months ended December 31, 2022. The weighted-average grant date fair value per share of these 2023 LTIP PSUs was $387.44. Based on the Company's current long-range forecast, the Company determined that the achievement of at least the minimum threshold target performance criteria was probable as of December 31, 2022. Future unrecognized stock-based compensation for the current performance attainment level of all LTIP PSUs outstanding as of December 31, 2022, including the 2023 LTIP PSUs discussed above, the 2022 LTIP PSUs, and the 2021 LTIP PSUs, is $17,813.
Note 8. Derivative Instruments
The Company enters into foreign currency forward or option contracts (derivative contracts), generally with maturities of 15 months or less, to manage foreign currency risk and 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 Company does not use derivative contracts for trading purposes.
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2022, and 2021
(dollar amounts in thousands, except share and per share data)
The after-tax unrealized gains or losses from changes in fair value of Designated Derivative Contracts is 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. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting and the accumulated gains or losses in AOCL related to the hedging relationship are immediately recorded in other comprehensive income (OCI) in the condensed consolidated statements of comprehensive income. 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, 2022, the Company has the following derivative contracts recorded at fair value in the condensed consolidated balance sheets:
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| Designated Derivative Contracts | | Non-Designated Derivative Contracts | | Total |
Notional value | $ | 33,525 | | | $ | — | | | $ | 33,525 | |
Fair value recorded in other current assets | 185 | | | — | | | 185 | |
Fair value recorded in other accrued expenses | (498) | | | — | < |