Crocs, Inc. - Quarter Report: 2008 September (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File No. 000-51754

Crocs, Inc.
(Exact name of registrant as specified in its charter)

(303) 848-7000
(Registrant's telephone number, including area code)

         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 ý    No o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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

         As of November 1, 2008, Crocs, Inc. had 82,998,037 shares of its $0.001 par value common stock outstanding.

Table of Contents

Crocs, Inc.
Form 10-Q
Quarter Ended September 30, 2008
Table of Contents

2

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1.    Financial Statements

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

See notes to condensed consolidated financial statements.

3

Table of Contents

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

See notes to condensed consolidated financial statements.

4

Table of Contents

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See notes to condensed consolidated financial statements.

5

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

        Crocs, Inc. ("Crocs" or the "Company") is a designer, manufacturer, distributor, worldwide marketer, and brand manager of footwear and accessories for men, women, and children. From its inception through the year ended December 31, 2007, the Company experienced rapid revenue growth and had difficulty meeting demand for its footwear products. During this period, the Company increased production capacity and increased inventory in an effort to meet demand. This pattern changed in 2008. The Company's revenue growth moderated in the three months ended March 30, 2008. The Company's total revenues declined during the three months ended June 30, 2008. During the three months ended September 30, 2008, revenues declined in the North American and European markets. The Company believes the decline in revenues in the North American and European markets are largely attributable to the following factors:

•

economic conditions in the United States and Europe, namely reduced consumer spending and decreased foot traffic at shopping malls; and



•

the challenges it faces in merchandising expanded product lines in existing wholesale channels as well as lessening demand for core products as such products reach a more mature stage in their product life.

        Continued declines in revenues could have a material adverse effect on the Company's overall cash flow and capital resources. The Company currently has the financial resources to meet its obligations when they come due; however, the Company cannot fully anticipate future conditions given the substantial uncertainties in the credit markets and the economy in general. The Company may have unexpected costs and liabilities; revenue and cash provided by operations may decline; economic conditions may continue to weaken; and competitive pressures may increase, resulting in difficulty maintaining liquidity. Due to recent turmoil in the credit markets and the continued decline in the economy, the Company may not be able to obtain additional financing on terms that are acceptable to the Company or at all.

        The Company's current credit agreement expires on December 31, 2008 (see Note 9). The Company is currently exploring alternatives for a new borrowing arrangement or an extension of the existing credit facility and may seek other sources of capital for ongoing needs. There is no assurance that any such lending arrangement or capital will be available on terms acceptable to the Company or at all.

        The accompanying unaudited condensed consolidated financial statements of Crocs, Inc. and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature, except for asset impairment and restructuring charges recorded in the three and nine months ended September 30, 2008, as further discussed in these notes. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2008.

        These statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31,

6

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2007 (the "2007 Form 10-K"). The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in Note 2 to the consolidated financial statements in the 2007 Form 10-K.

        The Company reclassified inventory write-down charges in the statement of cash flows from changes in inventories to non-cash adjustments within operating activities. These write-down charges were previously included within changes in inventories because they were immaterial. There was no change to operating cash flows as a result of this reclassification.

2. RECENT ACCOUNTING PRONOUNCEMENTS

        In December 2007, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 141(R), Business Combinations ("SFAS 141(R)"), which amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in the acquiree. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for the Company's fiscal year beginning January 1, 2009 and is to be applied prospectively. Accordingly, the Company will record and disclose business combinations under SFAS 141(R) beginning January 1, 2009.

        The Company has adopted FASB Statement No. 157, Fair Value Measurements ("SFAS 157"), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective January 1, 2008 for financial assets and liabilities measured on a recurring basis. SFAS 157 applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. There was an immaterial impact of the adoption of SFAS 157 to the condensed consolidated financial statements as of September 30, 2008.

        In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements- an amendment of ARB No. 51("SFAS 160"), which establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for the Company's fiscal year beginning January 1, 2009. The Company is currently evaluating the impact this new standard will have on its consolidated financial position, results of operations and cash flows but does not expect the adoption of SFAS 160 will have a material impact on its consolidated financial position or results of operations.

        In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161"), which is intended to improve financial reporting regarding derivative instruments and hedging activities by requiring enhanced disclosures to provide transparency to these activities and their effects on an entity's financial position, financial performance and cash flows. The provisions of SFAS 161 are effective for the Company's fiscal year beginning January 1, 2009. The Company is currently evaluating the impact this new standard will have on its consolidated

7

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

financial position, results of operations and cash flows but does not expect that the adoption of SFAS 161 will have a material impact on its consolidated financial position or results of operations.

        In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"), which identifies the sources of accounting principles and the framework for selecting principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 162 emphasizes that an organization's management and not its auditors has the responsibility to follow GAAP and categorizes sources of accounting principles that are generally accepted in descending order of authority. The Company will be required to adopt SFAS 162 within 60 days following the Securities and Exchange Commission's ("SEC") approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS 162 will not impact the Company's consolidated financial statements.

3. INVENTORIES

        Inventories by major classification are as follows (in thousands):

        In the three and nine months ended September 30, 2008, the Company recorded approximately $65.8 million and $75.6 million, respectively, of inventory write-downs related to certain discontinued products, core products in colors that have experienced substantial declines in consumer demand and defective Jibbitz products. An additional $4.2 million was recorded related to expected losses on future purchase commitments and is included in accrued expenses at September 30, 2008. These charges are reported in the cost of sales line item in the condensed consolidated statement of operations for the three and nine months ended September 30, 2008.

4. PROPERTY AND EQUIPMENT

        Property and equipment includes the following (in thousands):

8

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. PROPERTY AND EQUIPMENT (Continued)

        During the three and nine months ended September 30, 2008, the Company recognized an impairment charge of $8.0 million and $20.4 million, respectively, on fixed assets, primarily related to equipment and shoe molds. Management evaluated the production capacity at the Company operated facilities compared with demand projections and capacity requirements and made the decision to abandon certain manufacturing equipment that represented excess capacity. The impairment charge on molds relate primarily to shoe styles that the Company either no longer intends to manufacture or to styles for which the Company has more molds on hand than is necessary to meet projected demand. These charges are recorded in the impairment charges line item of the condensed consolidated statement of operations for the three and nine months ended September 30, 2008, and are accounted for as assets to be abandoned in accordance with FASB Statement 144, Accounting for the Impairment and Disposal of Long-Lived Assets ("SFAS 144").

5. ASSETS HELD FOR SALE

        At June 30, 2008, the Company had assets held for sale of $1.1 million in connection with the restructuring of the Company's Canadian manufacturing operations. The assets held for sale consisted of production equipment used in the Company's Canadian manufacturing facilities. During the three months ended September 30, 2008, the Company sold all assets held for sale for a net gain of approximately $779,000. The gain on disposal of assets is recorded in the line item selling, general and administrative expenses on the condensed consolidated statement of operations for the three and nine months ended September 30, 2008. As of September 30, 2008, the Company had no remaining assets held for sale. There were no assets held for sale as of December 31, 2007.

6. GOODWILL AND INTANGIBLE ASSETS

        The following table summarizes the Company's identifiable intangible assets as of September 30, 2008, and December 31, 2007 (in thousands):

9

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6. GOODWILL AND INTANGIBLE ASSETS (Continued)

        A portion of the incremental change in the gross carrying amounts of intangibles and goodwill from December 31, 2007 to September 30, 2008, is due to the impact of foreign exchange rate fluctuations, since a portion of intangibles and goodwill are denominated in foreign currencies, including the Canadian dollar (CAD), the Japanese Yen (JPY), the Euro (EUR) and the South African Rand (ZAR).

Intangible Assets

        On April 1, 2008, the Company acquired substantially all of the assets of Tidal Trade, Inc. ("Tidal Trade"), the Company's third party distributor in South Africa, for $4.6 million. The Company recorded $1.4 million in customer relationships on the date of acquisition. As part of the acquisition, the Company repurchased inventory previously sold to Tidal Trade and accordingly recognized a reduction of revenue of approximately $2.1 million.

        On April 2, 2008, the Company acquired substantially all of the assets of Tagger International B.V. ("Tagger"), a private limited liability company incorporated under the laws of the Netherlands that manufactures messenger bags. Tagger was partially owned by the Managing Director of Crocs Europe B.V. The Company acquired all of the assets of Tagger for $2.0 million, of which approximately $90,000 was assigned to inventory and the remaining $1.9 million was assigned to the value of the Tagger trademark on the date of acquisition.

        In June 2008, the Company decided to liquidate Fury, Inc. ("Fury") after efforts to sell the entity were unsuccessful. As a result, the Company wrote off $250,000 related to the remaining customer relationships intangible asset and trademarks in the three months ended June 30, 2008.

        As a result of the Company's evaluation of indefinite lived intangible assets, the Jibbitz, LLC ("Jibbitz") trade name of $150,000 was fully impaired and written off as of September 30, 2008. The Company recognized additional impairment charges of $632,000 in the three months ended September 30, 2008, related to patents which the Company no longer intends to utilize.

Goodwill

        The Company's goodwill balance of $23.8 million as of December 31, 2007, was primarily related to the acquisitions of Ocean Minded, LLC ("Ocean Minded") and Bite, LLC ("Bite") in 2007, Jibbitz and Fury in 2006, and Foam Creations, Inc. ("Foam Creations") in 2004.

        The goodwill balance of Fury in the amount of $1.0 million was written off in the three months ended March 31, 2008 prior to its liquidation in June 2008.

        During the three months ended September 30, 2008, the Company's stock price declined substantially, which represented a triggering event for potential goodwill impairment. As of September 30, 2008, the Company has performed an interim goodwill impairment evaluation, as required under FASB Statement No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Pursuant to SFAS 142, goodwill and intangible assets with indefinite lives must be tested for impairment at least once a year or more frequently if management believes indicators of impairment exist. Carrying values are compared with fair values, and when the carrying value exceeds the fair value, the carrying value of the impaired asset is reduced to its fair value. The performance of the test involves a two-step process.

10

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6. GOODWILL AND INTANGIBLE ASSETS (Continued)

Step 1 of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, the Company performs Step 2 of the goodwill impairment test to determine the amount of impairment loss. Step 2 of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill against the carrying value of that goodwill.

        The Company has completed Step 1 of the impairment test and has concluded that a potential impairment exists. The Company is in the process of conducting the Step 2 analysis; however, that analysis remains incomplete as of the date of this report. The Company will complete the Step 2 analysis during the fourth quarter of 2008. Management has reviewed the results of the Step 1 analysis and concluded that an impairment of goodwill exists at September 30, 2008 and has estimated that the entire balance of goodwill at that date is impaired. This provisional impairment adjustment will be revised, if necessary, during the fourth quarter of 2008. Management believes any adjustment to this preliminary charge will not be material; however, until such time as the evaluation is complete any potential changes are uncertain. Additionally, if management concludes based on the results of the Step 2 analysis that goodwill is not fully impaired as of September 30, 2008, the Company will be required to reassess the remaining balance as of December 31, 2008, which is the Company's annual goodwill impairment evaluation date. Through November 14, 2008, the Company's stock price has experienced further significant reductions in value.

        The non-cash impairment of goodwill and the Jibbitz trade name of $22.8 million and $150,000, respectively, were recorded in the three months ended September 30, 2008. The following table summarizes the activity affecting the Company's goodwill balance as of September 30, 2008 (in thousands):

11

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

        Accrued expenses and other current liabilities include the following (in thousands):

8. RESTRUCTURING ACTIVITIES

        On April 14, 2008, the Company announced its intent to restructure its North American operations. In connection with these actions, the Company made the decision to cease Canadian manufacturing activities and consolidate Canadian manufacturing and distribution into existing North American operations. The Company has established reserves to cover the future known obligations related to the closure of manufacturing and distribution operations at its Canadian facility. These reserves are included in the line items accrued restructuring and long-term restructuring in the Company's condensed consolidated balance sheets and are recorded under the line items restructuring charges and cost of sales on the Company's condensed consolidated statement of operations.

        Reserves at September 30, 2008, were $2.0 million, consisting of $1.8 million of rent obligations for the leased facilities, net of expected sublease income, and $200,000 of contract termination fees and termination benefits accounted for in accordance with SFAS 112, Employers' Accounting for Post Employment Benefits—an amendment of FASB Statements No. 5 and 43.

        The Company recorded $3.8 million, $1.4 million and $2.5 million of expenses associated with the closure of the Canadian facilities in the three months ended March 31, June 30 and September 30, 2008, respectively. The expenses consisted of the following:

(i)

termination benefits of $3.8 million for the three months ended March 31, 2008;



(ii)

rent obligations for leased facilities, net of expected sublease income of $1.7 million, in the three months ended September 30, 2008; and



(iii)

early termination costs for operating leases, cancellation of purchase obligations and freight and duty charges related to transferring inventory and equipment to the United States and Mexico facilities of $1.4 million and $715,000 for the three months ended June 30, 2008 and September 30, 2008, respectively, of which $901,000 was recorded in cost of sales.

12

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. RESTRUCTURING ACTIVITIES (Continued)

        The following table details the changes in the restructuring accruals during the nine months ended September 30, 2008 (in thousands):

(1)

Other restructuring costs include cancellation of purchase obligations and freight and duty charges related to transferring inventory and equipment to our United States and Mexico facilities.

        In addition to these amounts, the Company recognized $2.6 million related to the write down of inventory included within the line item cost of sales on the Company's condensed consolidated statement of operations, and $10.7 million in asset impairment charges in the nine months ended September 30, 2008. The asset impairments charges are comprised of $9.4 million related to the write down of equipment and molds, $1.0 million related to the write off of Fury goodwill and $250,000 related to Fury customer relationships and intangible assets.

9. NOTES PAYABLE

        Notes payable include the following (in thousands):

        On May 8, 2007, the Company entered into a credit agreement with Union Bank of California, N.A. ("Revolving Credit Facility"). The Revolving Credit Facility consisted of a $15.0 million revolving loan facility. Included within the Revolving Credit Facility was $10.0 million available for the issuance of letters of credit. On November 21, 2007, the Company amended the Revolving Credit Facility, increasing the available borrowing amount to $25.0 million. Under the amended Revolving Credit Facility, the Company must satisfy specified financial covenants, such as a minimum level of consolidated EBITDA, minimum net worth requirement and a minimum adjusted quick ratio.

        On January 4, 2008, the Company entered into a second amendment of the Revolving Credit Facility to increase the borrowing amount to $50.0 million. No financing fees were incurred as part of the amendment. In addition, terms of specified financial covenants were modified.

        On March 6, 2008, the Company entered into a third amendment of the Revolving Credit Facility to increase the borrowing amount to $60.0 million. No financing fees were incurred as part of the amendment.

13

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. NOTES PAYABLE (Continued)

        On August 7, 2008, the Company entered into a fourth amendment of the Revolving Credit Facility to decrease the borrowing amount to $40.0 million. As part of this amendment, the borrowing amount further decreased to $30.0 million as of October 1, 2008, and matures on December 31, 2008. Borrowings under the Revolving Credit Facility are unsecured and bear an interest rate based, at the option of the Company, on (i) a base rate defined as the Bank's LIBOR rate plus 3.0%, or (ii) 1.0% in excess of the Reference Rate. In addition, terms of specified financial covenants were modified.

        As of June 30, 2008, the Company was not in compliance with the financial covenants of the Revolving Credit Facility related to the minimum quarterly EBITDA test. The Company obtained a waiver of such covenants, effective June 30, 2008, and was required to pay a fee to Union Bank in the amount of $40,000. The fee addressed charges associated with the covenant violation and those necessary to amend the then current agreement.

        On November 17, 2008, the Company entered into a fifth amendment of the Revolving Credit Facility. The amendment removed all financial covenants in the Revolving Credit Facility as of September 30, 2008. In addition, the amendment limits the available borrowings to $19.8 million plus an outstanding $2.6 million letter of credit, subject to the total outstanding amount not being in excess of the "borrowing base," defined as the sum of 70% of the Company's U.S. receivables plus 40% of the Company's U.S. inventories. If at any time the amount outstanding is in excess of the borrowing base, the Company must pay down the loan to the borrowing base. Any amounts repaid on the Revolving Credit Facility cannot be borrowed again. The amendment also requires that the Company pay a fee of $112,000 to Union Bank. The Revolving Credit Facility matures on December 31, 2008.

10. STOCK-BASED COMPENSATION

        During the three months ended September 30, 2008, the Company granted 1,206,800 options to purchase shares of its common stock to eligible employees with a weighted average grant date fair value of $2.00 per share and a weighted average exercise price of $4.49. All options granted will vest ratably over four years with the first year vesting on a "cliff" basis followed by monthly vesting for the remaining three years. Compensation expense is recognized equally over the four year vesting period. The Company also granted 45,000 shares of restricted stock to employees, which vest over three years and have a grant date fair value of $4.48 per share.

        During the three months ended June 30, 2008, the Company granted 672,200 options to purchase shares of its common stock to eligible employees with a weighted average grant date fair value of $4.52 per share and a weighted average exercise price of $10.01 per share. All options granted will vest ratably over four years with the first year vesting on a "cliff" basis followed by monthly vesting for the remaining three years. The Company also granted 283,500 shares of restricted stock to employees, which vest over three years and have a grant date fair value of $10.77 per share, and issued 68,964 shares of restricted stock to non-employee directors, which were immediately vested, with a grant date fair value of $8.70 per share.

        During the three months ended March 31, 2008, the Company issued 985,900 options to purchase shares of its common stock, with a weighted average grant date fair value of $14.55 per share and a weighted average exercise price of $32.31 per share. All options granted will vest ratably over four

14

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. STOCK-BASED COMPENSATION (Continued)

years with the first year vesting on a "cliff" basis followed by monthly vesting for the remaining three years.

        Stock-based compensation expense, including options and non-vested shares, was $3.2 million and $14.0 million in the three and nine months ended September 30, 2008, respectively, and $6.3 million and $16.0 million in the three and nine months ended September 30, 2007, respectively. For the three and nine months ended September 30, 2008, $566,671 and $789,452, respectively, of the stock-based compensation was capitalized in inventory as part of the overhead allocation. For the three and nine months ended September 30, 2007, $658,000 and $2.5 million, respectively, of the stock-based compensation was capitalized in inventory as part of the overhead allocation.

        During the three and nine months ended September 30, 2008, 159,429 and 642,116 options to purchase common shares were exercised, 707,801 and 1,160,698 options to purchase common stock were forfeited, and 29,142 and 156,522 shares of restricted stock vested, respectively. During the three and nine months ended September 30, 2007, 775,095 and 2,821,519 options to purchase common shares were exercised, 39,210 and 405,589 options to purchase common stock were forfeited, and 208,626 and 490,926 shares of restricted stock vested, respectively.

11. INCOME TAXES

        During the three and nine months ended September 30, 2008, the provision for income taxes included tax charges of approximately $1.4 million and $9.6 million, respectively, related to amounts required to be recorded on our uncertain tax positions under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes.

        The Company has deferred tax assets primarily related to net operating losses in certain tax jurisdictions. Due to a negative trend in the Company's financial outlook during the three months ended September 30, 2008, the Company has concluded that it is no longer more likely than not that the Company will be able to realize certain deferred tax assets. Therefore, the Company has recorded valuation allowances totaling $40.6 million on these deferred tax assets.

        During the three months ended September 30, 2008, the Company recognized an income tax expense of $12.3 million on a pre-tax loss of $135.7 million, compared to income tax expense of $22.7 million on pre-tax income of $79.2 million during the three months ended September 30, 2007. The net expense primarily resulted from the application of valuation allowances against deferred tax assets resulting from the tax benefits on net operating losses caused by impairment and other charges and other deferred tax asset balances for which the Company believes it is not more likely than not that that those tax benefits will be realized, due to the Company's financial outlook as of September 30, 2008.

        During the nine months ended September 30, 2008, the Company recognized an income tax expense of $4.4 million on a pre-tax loss of $146.0 million, compared to income tax expense of $55.7 million on pre-tax income of $185.6 million during the nine months ended September 30, 2007. The net expense resulted from the application of valuation allowances against deferred tax assets resulting from the tax benefits on net operating losses caused by impairment and other charges and other deferred tax asset balances for which the Company believes it is not more likely than not that

15

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

11. INCOME TAXES (Continued)

that those tax benefits will be realized, due to the Company's financial outlook as of September 30, 2008.

12. EARNINGS (LOSS) PER SHARE

        Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution from securities that could share in the earnings of the Company. Anti-dilutive securities are excluded from diluted earnings (loss) per share. Earnings (loss) per share for the three and nine months ended September 30, 2008 and 2007 is as follows (in thousands except share and per share data):

        Due to the Company's net loss for the three and nine months ended September 30, 2008, the dilutive effect of stock options and awards were not included in the computation of diluted earnings (loss) per share, as their inclusion would have been anti-dilutive. For the three and nine months ended September 30, 2008 and 2007, there were options outstanding to purchase 8.0 million and 647,100 shares of the Company's common stock, respectively, with a weighted average exercise price of $8.88 and $50.44, respectively, which could potentially dilute basic earnings (loss) per share in the future, but were not included in diluted earnings (loss) per share as their effect would have been anti-dilutive.

13. COMMITMENTS AND CONTINGENCIES

        At September 30, 2008, the Company had committed to purchase 3.1 million pairs of shoes, with certain of its third-party manufacturers during the three months ended December 31, 2008, at prices in

16

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

13. COMMITMENTS AND CONTINGENCIES (Continued)

excess of net realizable value, given the Company's current plans for sales of the product. The Company recorded an expected loss on the purchase commitments of $4.2 million in the three months ended September 30, 2008.

        On July 26, 2005, the Company entered into an amended and restated four-year supply agreement with Finproject S.P.A., the former majority owner of Crocs Canada, in which the Company has the exclusive right to purchase the material for the manufacture of finished shoe products, except for certain current customer dealings (including boot manufacturers). Based on the supply agreement, the Company has contractual purchase requirements to maintain exclusivity throughout the term of the agreement. The pricing is to be agreed upon each quarter and fluctuates based on order volume, currency fluctuations, and raw material prices.

        The Company guarantees the payment of its third-party manufacturer in China for purchases of material for the manufacture of finished shoe products. The maximum potential amount of future payments the Company could be required to make under the guarantee is €2.1 million (approximately $3.0 million at September 30, 2008). The Company evaluates the estimated loss for the guarantee under FASB Statement No. 5, Accounting for Contingencies ("SFAS 5"), as interpreted by FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45"). The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. The Company has recourse as a matter of common law. To date, the Company has not made any payments under the guarantee and, as of September 30, 2008, has not recorded a liability related to the guarantee in its financial statements, as the Company does not believe the potential obligation under this guarantee is material.

        The Company leases space for certain of its offices, warehouses, vehicles and equipment under leases expiring at various dates through 2026. Certain leases also contain rent escalation clauses (step rents) that require additional rental amounts in the later years of the term. Rent expense for leases with step rents is recognized on a straight-line basis over the minimum lease term. Step rents, tenant improvement allowances, rent holidays and other items are factored into the minimum lease payment and recognized on a straight-line basis over the minimum lease term. Deferred rent is included in the balance sheet in accrued expenses.

        The Company indemnifies certain of its vendors and its directors and executive officers for specified claims. To date, the Company has not paid or been required to defend any indemnification claims, and accordingly, has not accrued any amounts for its indemnification obligations.

14. OPERATING SEGMENTS AND RELATED INFORMATION

        The Company operates in the consumer products industry in which the Company designs, manufactures, markets and distributes footwear, apparel and accessories. Operating results are assessed on an aggregate basis to make decisions about necessary resources and in assessing performance. Consequently, under the provisions of FASB Statement No. 131, Disclosure About Segments of an Enterprise and Related Information ("SFAS 131"), and based on the nature of the financial information that is received by the chief executive officer, as chief operating decision maker, the Company has one reportable segment for financial statement purposes.

17

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. OPERATING SEGMENTS AND RELATED INFORMATION (Continued)

        The Company's sales by product line are as follows (in thousands):

        The Company has allocated revenues to geographical locations based on the location of the customer. Geographic information about the United States and international territories is presented below (in thousands):

        There were no customers that comprised greater than 10% of the consolidated revenues of the Company for the three or nine months ended September 30, 2008 and 2007.

18

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

15. COMPREHENSIVE INCOME (LOSS)

        Comprehensive income (loss) for the three and nine months ended September 30, 2008 and 2007 was as follows (in thousands):

16. LEGAL PROCEEDINGS

        On March 31, 2006, Crocs filed a complaint with the ITC against Acme Ex-Im, Inc., Australia Unlimited, Inc., Cheng's Enterprises, Inc., Collective Licensing International, LLC, D. Myers & Sons, Inc., Double Diamond Distribution, Ltd., Effervescent, Inc., Gen-X Sports, Inc., Holey Soles Holdings, Ltd., Inter-Pacific Trading Corporation, and Shaka Holdings, Inc., alleging patent and trade dress infringement and seeking an exclusion order banning the importation and sale of infringing products. On August 10, 2006, Crocs filed a motion to voluntarily remove its trade dress claim from the investigation to focus on the patent claims. Crocs' motion was granted by Order No. 20 on August 24, 2006. The utility and design patents asserted in the complaint were issued to Crocs, Inc. on February 7, 2006 and March 28, 2006, respectively, by the United States Patent and Trademark Office. The ITC has issued final determinations terminating Shaka Holdings, Inc., Inter-Pacific Trading Corporation, Acme Ex-Im, Inc., D. Myers & Sons, Inc. and Australia Unlimited, Inc. from the ITC investigation No. 337-TA-567 on the basis of settlement and Cheng's Enterprises, Inc. on the suspension of accused activities. The ITC Administrative Law Judge ("ALJ") issued an Initial Determination of non-
infringement related to one of the patents at issue. Crocs filed a petition with the ITC to review this determination. The ITC granted Crocs' petition and on February 15, 2007, after briefing by the parties, the ITC vacated the ALJ's determination of non-infringement with respect to the remaining respondents and remanded it to the ALJ for further proceedings consistent with the ITC's order. In light of the ITC's Order, the procedural schedule and hearing date were reset pursuant to Order No. 38. A trial was held before the ALJ from September 7-14, 2007. The ALJ issued an Initial Determination on April 11, 2008 with a finding of no violation, finding infringement of the utility patent by certain accused products, but also finding that the utility patent was invalid as obvious. The ALJ also found that the design patent was valid, but not infringed by the accused products. Crocs filed a Petition for Review of the Initial Determination which was due on April 24, 2008. On June 18, 2008, the ITC issued a Notice that it would review the ALJ's findings in the Initial Determination with respect to the determination of non-infringement of the design patent and the determination of invalidity of the utility patent. On July 25, 2008, the ITC issued a Notice of its decision to terminate the Investigation with a finding of no violation as to either patent. Crocs filed a Petition for Review of the decision with the United States Court of Appeals for the Federal Circuit on September 22, 2008.

        On April 3, 2006, Crocs filed a complaint in the U.S. District Court for the District of Colorado alleging patent and trade dress infringement and seeking injunctive relief against Acme EX-IM, Inc., Australia Unlimited, Inc., Cheng's Enterprises, Inc., Collective Licensing International, LLC,

19

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

16. LEGAL PROCEEDINGS (Continued)

D. Myers & Sons, Inc., Double Diamond Distribution, Ltd., Effervescent, Inc., Gen-X Sports, Inc., Holey Soles Holdings, Ltd, Inter-Pacific Trading Corporation, Shaka Holdings, Inc., and Does 1-10 based upon certain utility and design patents that were issued to Crocs, Inc. on February 7, 2006 and March 28, 2006 respectively, by the United States Patent and Trademark Office. Consent judgments have been entered against Shaka Holdings, Inc., Interpacific Trading Corporation and Acme Ex-Im, Inc. Crocs entered into a settlement agreement with Australia Unlimited, and filed a stipulation for dismissal of all claims and counterclaims on January 25, 2007. Crocs has entered into settlement agreement with D. Myers & Sons, Inc. and has obtained a consent judgment in connection therewith on May 23, 2007. This action has been stayed pending resolution in the ITC Proceeding, Investigation No. 337-TA-567, which is currently on appeal to the U.S. Court of Appeals for the Federal Circuit. The Company does not expect that the ultimate resolution of this matter will have a material adverse impact on its business.

        The Company and certain officers and directors have been named as defendants in complaints filed by investors in the United States District Court for the District of Colorado. The first complaint was filed in November 2007; several other complaints were filed shortly thereafter. The cases purport to be brought on behalf of a class of all persons who purchased the Company's stock between July 27, 2007 and October 31, 2007 (the "Class Period"). The complaints allege that defendants made false and misleading public statements about the Company and its business and prospects in press releases and at investor conferences during the Class Period, and that the market price of the Company's stock was artificially inflated as a result. The complaints allege claims under Section 10(b) and Section 20(a) of the Exchange Act, and seek compensatory damages on behalf of the alleged class in an unspecified amount, interest, and an award of attorneys' fees and costs of litigation. These actions were consolidated and, in September 2008, the Court appointed a lead plaintiff and counsel. The Company expects that an amended consolidated complaint will be filed in December 2008. Thereafter, the Company and the other defendants will respond. The Company believes the claims lack merit and intends to defend the action vigorously. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, the Company cannot at this time accurately predict the ultimate outcome of the matter or the amount or range of potential loss.

        In December 2007, plaintiffs filed a shareholder derivative action in the Colorado District Court for the City and County of Boulder alleging that certain officers and directors of the Company breached their fiduciary duties, wasted corporate assets, and were unjustly enriched. This derivative action purports to state a claim on behalf of the Company. Plaintiffs filed an amended complaint in July 2008, which alleges claims that arise from the conduct alleged in the federal shareholder class action and allegations regarding additional statements made by the Company between November 2007 and May 2008. The defendants and the Company have filed motions to dismiss this action on various grounds. Briefing is ongoing. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, the Company cannot at this time accurately predict the ultimate outcome of the matter.

        On March 17, 2008, Cellect LLC and Sentinel Products Corp. filed a complaint against Crocs, Inc. with the U.S. District Court for the Northern District of New York alleging that Crocs' Croslite materials infringe U.S. Patent No. 5,932,659. Crocs filed an answer on July 11, 2008. Discovery is

20

Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

16. LEGAL PROCEEDINGS (Continued)

ongoing and Plaintiff's preliminary infringement contentions are currently due on November 17, 2008. At this stage it is not possible to calculate the risk of an unfavorable outcome.

        Although the Company is subject to other litigation from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, the Company is not party to any other pending legal proceedings that the Company believes will have a material adverse impact on its business.

17. SUBSEQUENT EVENTS

        In October 2008, the Company made the decision to cease its manufacturing activities in Brazil and consolidate Brazilian manufacturing operations into existing North American operations and third party manufacturing.

        On November 17, 2008, the Company entered into a fifth amendment of the Revolving Credit Facility as more fully discussed in note 9.

21

Table of Contents

ITEM 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

        This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends and our future expectations and other matters that do not relate strictly to historical facts and are based on certain assumptions of our management. These statements are often identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in the section entitled "Risk Factors" under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2007, under Part II, Item 1A of this Quarterly Report on Form 10-Q, and other filings we have made with the SEC. These factors include, without limitation:

•

our limited operating history;



•

our significant recent expansion;



•

changing fashion trends;



•

our reliance on market acceptance of the small number of products we sell;



•

our ability to develop and sell new products;



•

our limited manufacturing capacity and distribution channels;



•

our reliance on third party manufacturing and logistics providers for the production and distribution of products;



•

our reliance on a single-source supply for certain raw materials;



•

our management and information systems infrastructure;



•

our ability to obtain and protect intellectual property rights;



•

the effect of competition in our industry;



•

our ability to attract, assimilate and retain management talent;



•

retail environment;



•

macroeconomic issues;



•

our ability to accurately forecast consumer demand for our products;



•

our ability to manage our future growth effectively;



•

the effect of potential adverse currency exchange rate fluctuations;



•

our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results;



•

our ability to maintain effective internal controls; and



•

our ability to effectively market and maintain a positive brand image.

22

Table of Contents

        We caution the reader to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

        We are a designer, manufacturer, distributor, worldwide marketer, and brand manager of footwear and accessories for men, women, and children. We primarily design and sell a broad offering of products that use our proprietary closed-cell resin, called Croslite. Croslite is a unique material that enables us to produce an innovative, soft, lightweight, non-marking, slip and odor-resistant shoe. Crocs shoes combine fun colors and innovative designs to provide a new level of comfort, functionality and style in the casual lifestyle footwear category.

        Since the initial introduction and popularity of our Beach and Cayman models, we have expanded our Croslite products to include a variety of new styles and products and have extended our product reach and appeal through acquisitions of companies with complementary accessories and other footwear. We continue to actively promote brand recognition through various licensing agreements, sponsorships and print and media commercials.

        We currently sell our Crocs-branded products in over 100 countries. We sell our products through domestic and international retailers and distributors and directly to end-user consumers through our web stores, Company-operated retail stores, and kiosks. The broad appeal of our footwear has allowed us to market our products to a wide range of distribution channels, including department stores and traditional footwear retailers as well as a variety of specialty channels.

General

        Revenues are recorded when products are shipped and the customer takes title and assumes risk of loss, collection of related receivables are probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Title passes on shipment or on receipt by the customer depending on the country of the sale and the agreement with the customer. Allowances for estimated returns and discounts are recognized when related revenue is recorded. If we determine that actual or expected returns or allowances were significantly greater or lower than the reserves we had established, we record a reduction or increase, as appropriate, to net sales in the period in which the determination is made. Because we use both internal manufacturing and contract with third parties to manufacture our products, our cost of sales represents our costs to manufacture products in our Company-operated facilities, including raw materials costs and all overhead expenses related to production, as well as the cost to purchase finished products from our third-party manufacturers. Cost of sales also includes the cost to transport these products to our facilities and all warehouse and outbound freight expenses. Our selling, general and administrative expense consists primarily of selling, marketing, wages and related payroll and employee benefit costs for selling, marketing and administrative employees, travel and insurance expenses, depreciation, amortization, professional fees, legal expenses, facility expenses, bank charges and non-cash charges for share-based compensation.

Recent Events

        From our inception through the year ended December 31, 2007, we experienced rapid revenue growth and had difficulty meeting demand for our footwear products. During this period, we increased production capacity and increased inventory in an effort to meet demand. This pattern changed in 2008. Our revenue growth moderated in the three months ended March 31, 2008. Our total revenues declined during the three months ended June 30, 2008.

        In the three months ended September 30, 2008, our revenues declined in the North American and European markets. Our Asian revenue growth has also moderated during the three months ended

23

Table of Contents

September 30, 2008. We believe the decline in revenues in the North American and European markets are largely attributable to the following factors:

•

the economic conditions in the United States and Europe, namely reduced consumer spending and decreased foot traffic at shopping malls; and



•

the challenges we face in merchandising our expanded product lines in existing wholesale channels as well as lessening demand for our core products as such products reach a more mature stage in their product life.

        Should the economic conditions deteriorate further globally, we may experience declines in revenues in our Asian market as well as further declines in the North American and European markets. Additionally, we believe the decline in revenues in our European market may result from the challenge of increased competition from producers of imitation products that are sold at substantially lower prices.

        During the three months ended September 30, 2008, we experienced challenges related to higher inventory positions of our products at many of our North American and European accounts because unit sell through was lower than the internal projections of many of our wholesale customers and European distributors. Certain major retailers and distributors have curtailed orders to reduce their inventories to target levels. We also observed increased discounting of certain product styles and colors at a number of our resellers during the three months ended September 30, 2008. Management is working closely with each of our key wholesale customers and distributors to provide support that facilitates a well structured work-down of their inventories. Our action plan includes providing additional marketing, merchandising and advertising support as well as accepting returns of certain product styles and colors and granting additional mark down allowances for certain in-channel products.

        The decline in revenues during the three months ended June 30, 2008 and September 30, 2008, as described above, resulted in inventory levels that were significantly higher than we had in the past. Our inventory includes certain styles and colors with substantially diminished demand during the three months ended June 30, 2008 and September 30, 2008. Based on decreased demand for these products, we have decided to discontinue them from our product portfolio. We are currently developing a plan for the disposal of our discontinued product inventories. Our plan is expected to include structured sales to established discount retailers, sales through our Company-operated outlet stores, and donations to our Soles United charitable organization. We expect to implement these actions in a manner that minimizes adverse impacts to our reseller, distributors, and Company-operated retail channels. We recorded write-downs of $75.6 million in the nine months ended September 30, 2008 related to these discontinued inventories and defective Jibbitz products to properly reflect the lower of cost or market value in the accompanying financial statements. We recorded an additional $4.2 million related to expected losses on future purchase commitments.

        As s result of these changes in demand, we have evaluated our production capacity and operations structure, and during the nine months ended September 30, 2008, we took the following actions with respect to our operations:

•

we restructured our Canadian operations by discontinuing our Canadian manufacturing operations and consolidating our Canadian distribution activities with other existing North American distribution operations;



•

we abandoned certain manufacturing equipment and molds that represent excess capacity; and



•

we discontinued manufacturing operations at our Brazilian manufacturing facility.

        We believe these actions are necessary in order to align our production and distribution capacities with our revised demand projections. Furthermore, we have taken actions to reduce our selling, general

24

Table of Contents

and administrative costs, including reductions in personnel, reducing our space costs by consolidating certain offices and reducing other discretionary spending.

        During the three months ended September 30, 2008, our stock price declined substantially, which represented a triggering event for potential goodwill impairment. As of September 30, 2008, we have performed an interim goodwill impairment evaluation, as required under FASB Statement No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Pursuant to SFAS 142, goodwill and intangible assets with indefinite lives must be tested for impairment at least once a year or more frequently if management believes indicators of impairment exist. Carrying values are compared with fair values, and when the carrying value exceeds the fair value, the carrying value of the impaired asset is reduced to its fair value. The performance of the test involves a two-step process. Step 1 of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, a company then performs Step 2 of the goodwill impairment test to determine the amount of impairment loss. Step 2 of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill against the carrying value of that goodwill.

        We have completed Step 1 of the impairment test and have concluded that a potential impairment exists. We are in the process of conducting the Step 2 analysis; however, that analysis remains incomplete as of the date of this report. We will complete the Step 2 analysis during the fourth quarter of 2008. We have reviewed the results of the Step 1 analysis and concluded that an impairment of goodwill exists at September 30, 2008, and has estimated that the entire balance of goodwill at that date is impaired. This provisional impairment adjustment will be revised, if necessary, during the three months ended December 31, 2008. We believe any adjustment to this preliminary charge will not be material; however, until such time as the evaluation is complete any potential changes are uncertain. If we conclude based of the results of our analysis that goodwill is not fully impaired as of September 30, 2008, we will be required to reassess the remaining balance as of December 31, 2008, which is our annual goodwill impairment evaluation date. Through November 14, 2008, our stock price has experienced further significant reductions in value.

        The following table summarizes our restructuring, asset impairment, including goodwill and other intangible assets, and inventory write-down charges for the three months ended September 30, 2008:

25

Table of Contents

        The following table summarizes our restructuring, asset impairment, including goodwill and other intangible assets, and inventory write-down charges for the nine months ended September 30, 2008: