Crocs, Inc. - Quarter Report: 2010 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2010

 

or

 

 

For the transition period from               to                

 

Commission File No. 000-51754

 

 

Crocs, Inc.

(Exact name of registrant as specified in its charter)

 

 

6328 Monarch Park Place, Niwot Colorado 80503

(Address of registrant’s principal executive offices)

 

(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 x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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:

 

 

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

 

As of October 29, 2010, Crocs, Inc. had 87,248,154 shares of its $0.001 par value common stock outstanding.

 

 

Table of Contents

 

Crocs, Inc.

Form 10-Q

Quarter Ended September 30, 2010

Table of Contents

 

PART I—Financial Information
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2010 and 2009	3
	Unaudited Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	29
PART II—Other Information
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	30
Item 6.	Exhibits	30
Signatures		31

 

2

Table of Contents

 

PART I—FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

CROCS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share data)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
Revenues		$	215,605		$	177,141		$	610,503		$	509,756
Cost of sales		96,797			87,291			273,072			269,115
Gross profit		118,808			89,850			337,431			240,641
Selling, general and administrative expenses		92,192			77,995			261,017			240,654
Foreign currency transaction gains, net		(908		)	(1,032		)	(2,329		)	(1,247		)
Restructuring charges		—			17			2,539			5,916
Impairment charges		—			1,722			141			25,447
Charitable contributions		78			2,178			496			7,296
Income (loss) from operations		27,446			8,970			75,567			(37,425		)
Interest expense		153			155			445			1,412
Gain on charitable contribution		(19		)	(810		)	(135		)	(2,833		)
Other expense (income), net		137			(125		)	87			(833		)
Income (loss) before income taxes		27,175			9,750			75,170			(35,171		)
Income tax expense (benefit)		2,179			(12,318		)	12,173			(4,541		)
Net income (loss)		$	24,996		$	22,068		$	62,997		$	(30,630	)
Net income (loss) per common share:
Basic		$	0.29		$	0.26		$	0.73		$	(0.36	)
Diluted		$	0.28		$	0.25		$	0.72		$	(0.36	)

 

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

 

3

Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

		September 30, 2010			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents		$	143,057		$	77,343
Restricted cash		577			1,144
Accounts receivable, net		81,303			50,458
Inventories		142,531			93,329
Deferred tax assets, net		7,973			7,358
Income tax receivable		9,597			8,611
Other receivables		11,008			16,140
Prepaid expenses and other current assets		13,699			12,871
Total current assets		409,745			267,254
Property and equipment, net		65,882			71,084
Restricted cash		1,675			1,506
Intangible assets, net		42,416			35,984
Deferred tax assets, net		18,859			18,479
Marketable securities		1,040			866
Other assets		15,054			14,565
Total assets		$	554,671		$	409,738
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	66,763		$	23,434
Accrued expenses and other current liabilities		65,216			53,589
Accrued restructuring charges		1,844			2,616
Income taxes payable		18,188			6,377
Note payable, current portion of long-term debt and capital lease obligations		1,861			640
Total current liabilities		153,872			86,656
Long term debt and capital lease obligations		1,235			912
Deferred tax liabilities, net		2,085			2,192
Long term restructuring		—			520
Other liabilities		32,532			31,838
Total liabilities		189,724			122,118
Commitments and contingencies (Note 15)
Stockholders’ equity:
Common shares, par value $0.001 per share; 250,000,000 shares authorized, 87,705,254 and 87,136,697 shares issued and outstanding, respectively, at September 30, 2010 and 86,224,760 and 85,659,581 shares issued and outstanding, respectively, at December 31, 2009		87			85
Treasury stock, at cost, 568,557 and 565,179 shares, respectively		(23,610		)	(25,260		)
Additional paid-in capital		273,418			266,472
Retained earnings		85,152			22,155
Accumulated other comprehensive income		29,900			24,168
Total stockholders’ equity		364,947			287,620
Total liabilities and stockholders’ equity		$	554,671		$	409,738

 

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

 

4

Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

		For the Nine Months Ended September 30,
		2010			2009
Cash flows from operating activities:
Net income (loss)		$	62,997		$	(30,630	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		26,704			28,585
Loss (gain) on disposal of fixed assets		905			(819		)
Unrealized gain on foreign exchange transactions		(1,183		)	(11,327		)
Deferred income taxes		(307		)	864
Asset impairment		133			25,387
Inventory write down		—			2,568
Charitable contributions		512			7,261
Gain on charitable contributions		(143		)	(2,828		)
Non-cash restructuring charges		196			1,768
Share-based compensation		5,511			24,860
Bad debt expense		2,608			836
Changes in operating assets and liabilities:
Accounts receivable		(30,876		)	(28,561		)
Income tax receivable		(431		)	31,433
Inventories		(48,674		)	24,250
Prepaid expenses and other assets		3,088			(12,214		)
Accounts payable		44,169			(1,372		)
Accrued restructuring charges		(1,324		)	1,809
Accrued expenses and other liabilities		24,003			(13,897		)
Cash provided by operating activities		87,888			47,973
Cash flows from investing activities:
Cash paid for purchases of property and equipment		(19,654		)	(13,792		)
Proceeds from disposal of property and equipment		1,014			2,065
Cash paid for intangible assets		(9,217		)	(5,366		)
Purchases of marketable securities		(5,585		)	—
Maturities of marketable securities		6,283			—
Change in restricted cash		335			316
Cash used in investing activities		(26,824		)	(16,777		)
Cash flows from financing activities:
Proceeds from note payable		27,100			293
Repayment of note payable and capital lease obligations		(28,173		)	(22,630		)
Debt issuance costs		—			(458		)
Repurchase of stock for stock option exercise tax withholding		(421		)	—
Exercise of stock options		3,311			1,023
Cash provided by (used in) financing activities		1,817			(21,772		)
Effect of exchange rate changes on cash		2,833			14,932
Net increase in cash and cash equivalents		65,714			24,356
Cash and cash equivalents—beginning of period		77,343			51,665
Cash and cash equivalents—end of period		$	143,057		$	76,021
Supplemental disclosure of cash flow information—cash paid during the period for:
Interest		$	425		$	1,380
Income taxes		$	9,289		$	11,158
Non-cash investing and financing activities:
Assets acquired through capital leases		$	2,606		$	1,760
Accrued purchases of property, plant and equipment		$	1,255		$	1,333
Accrued purchases of intangibles		$	1,118		$	1,702

 

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

 

5

Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. BASIS OF PRESENTATION

 

Crocs, Inc. and its subsidiaries (collectively, “we,” “us,” or the “Company”) are engaged in the design, manufacture, worldwide marketing and brand management of footwear, apparel and accessories made for men, women and children.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, these statements do not include all of the information and disclosures required by GAAP or Securities and Exchange Commission (“SEC”) rules and regulations for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting solely of normal recurring matters) considered necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

 

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, 2009 (the “2009 Form 10-K”). The accounting policies used in preparing these unaudited condensed consolidated financial statements are the same as those described in Note 2 — Summary of Significant Accounting Policies to the consolidated financial statements in the 2009 Form 10-K.

 

Certain reclassifications have been made to prior year amounts to conform to current year presentation. Net foreign currency transaction gains have been reclassified from selling, general, and administrative expenses and are now reported separately. Marketable securities of a long-term nature have been reclassified from long-term other assets and are now reported separately. There was no change to the Company’s income (loss) from continuing operations as a result of these reclassifications.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management believes that the estimates, judgments and assumptions made when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts, returns and discounts, impairment assessments and charges, recoverability of assets (including deferred tax assets), uncertain tax positions, share-based compensation expense, the fair value of acquired intangibles, the assessment of lower of cost or market on inventory, useful lives assigned to long-lived assets, depreciation and provisions for contingencies are reasonable based on information available at the time they are made. Management also makes estimates in the assessments of potential losses in relation to threatened or pending legal and tax matters. See Note 18 — Legal Proceedings. Actual results could materially differ from these estimates. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense for the estimated loss. If there is the potential to recover a portion of the estimated loss from a third party, the Company makes a separate assessment of recoverability and reduces the estimated loss if recovery is also deemed probable.

 

Change in Accounting Principle

 

Effective January 1, 2010, the Company changed its inventory valuation method for all inventories from the first-in, first-out (“FIFO”) cost method to the moving average cost method, which approximates FIFO. The Company believes the change to the moving average cost method is preferable because it results in better alignment with the physical flow of inventory than the FIFO methodology; it is calculated by our inventory information system which incorporates automated controls; and it is the method management uses when preparing budgets, reviewing actual and forecasted financial information and determining incentive management compensation. The moving average cost method results in substantially the same results of operations in each reporting period. Financial statements for periods ending on or before December 31, 2009 have not been retroactively adjusted due to immateriality. The impact of the change for the three and nine month periods ended September 30, 2010 was also immaterial.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures About Fair Value Measurement, which amends the disclosure requirements related to recurring and non-recurring fair value measurements. The guidance requires additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers

 

 

6

Table of Contents

 

between Levels 1, 2, and 3 of the fair value measurement hierarchy. The Company adopted this guidance at the beginning of 2010 with the exception of the disclosure requirements relating to purchases, sales, issuances and settlements of Level 3 assets and liabilities, which will be effective beginning January 1, 2011. As this guidance only requires expanded disclosures, its adoption did not and will not impact the unaudited condensed consolidated financial statements. See Note 8 — Fair Value Measurements.

 

In December 2009, the FASB issued ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The amendments in ASU 2009-17 replace the quantitative-based risks-and-rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has (1) the power to direct the activities of a variable interest entity that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity. The ASU also requires additional disclosures about a reporting entity’s involvement with variable interest entities and about any significant changes in risk exposure as a result of that involvement. The Company adopted the guidance at the beginning of 2010 with no material impact on the unaudited condensed consolidated financial statements. See Note 14 — Variable Interest Entities.

 

3. INVENTORIES

 

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

 

		September 30, 2010			December 31, 2009
Finished goods		$	133,110		$	88,775
Work-in-progress		203			220
Raw materials		9,218			4,334
Net Inventory		$	142,531		$	93,329

 

4. PROPERTY AND EQUIPMENT

 

Property and equipment includes the following (in thousands):

 

		September 30, 2010			December 31, 2009
Machinery and equipment		$	86,277		$	82,733
Leasehold improvements		46,132			38,436
Subtotal		132,409			121,169
Less: accumulated depreciation		(66,527		)	(50,085		)
Property and equipment, net		$	65,882		$	71,084

 

5. INTANGIBLE ASSETS

 

The following table summarizes the Company’s identifiable intangible assets (in thousands).

 

		September 30, 2010									December 31, 2009
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Intangible assets:
Patents, copyrights, and trademarks		$	5,622		$	1,810		$	3,812		$	5,673		$	1,396		$	4,277
Customer relationships		5,806			5,226			580			5,928			4,912			1,016
Core technology		4,690			4,690			—			4,614			4,614			—
Non-competition agreement		636			636			—			636			594			42
Capitalized software		50,071			12,047			38,024			38,884			8,235			30,649
Total intangible assets		$	66,825		$	24,409		$	42,416		$	55,735		$	19,751		$	35,984

 

For amortizable intangible assets denominated in a foreign currency, the Company translates the gross asset and accumulated amortization at the applicable period end exchange rate and records amortization expense using the weighted average exchange rate for the

 

7

Table of Contents

 

applicable period.  The difference between the two is recorded in accumulated other comprehensive income line item in the Company’s unaudited condensed consolidated balance sheets.

 

6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

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

 

		September 30, 2010			December 31, 2009
Accrued compensation and benefits		$	21,897		$	21,007
Fulfillment and freight and duties		9,941			10,765
Professional services		6,063			4,329
Sales/Use and VAT taxes payable		7,285			4,330
Other		20,030			13,158
Total accrued expenses and other current liabilities		$	65,216		$	53,589

 

7. RESTRUCTURING ACTIVITIES

 

During the year ended December 31, 2008, the Company announced its decision to restructure its operations, which included the closure of its Canadian and Brazilian manufacturing facilities and the consolidation of Canadian distribution activities into existing North American operations.  As of September 30, 2010, the Company has recorded $9.1 million in restructuring and exit costs in connection with these activities and does not expect to incur additional related costs in the future.

 

During the year ended December 31, 2009, the Company pursued further restructuring efforts and made certain organizational changes in order to better align costs with revenues which included the closure of various warehouses and office buildings as well as the settlement and termination of contracts prior to term.  As of September 30, 2010, the Company has recorded $16.0 million in restructuring and exit costs in connection with these activities and does not expect to incur additional related costs in the future.

 

During the nine months ended September 30, 2010, the Company recorded restructuring charges of $1.9 million, of which $1.4 million is reflected in cost of sales. These charges are primarily related to a change in the estimate in lease termination costs associated with the closure of distribution facilities in North America and Europe, pursuant to the cost savings initiatives undertaken by the Company in 2008 and 2009, as discussed above.  During the nine months ended September 30, 2010, the Company also recorded $2.0 million in restructuring expenses reflected in income from operations, primarily consisting of severance pay and additional stock-based compensation related to the departure of the Company’s former Chief Executive Officer. See Note 11 — Stock-Based Compensation.

 

Restructuring charges for the nine months ended September 30, 2010 were recorded by segment as follows: $1.0 million in the Americas segment; $0.9 million in the Europe segment; and $2.0 million in the Corporate and other group. As of September 30, 2010, restructuring charges were recorded by segment as follows: $15.9 million in the Americas segment; $4.3 million in the Europe segment; $0.4 million in the Asia segment; and $6.5 million in the Corporate and other group.

 

Restructuring charges are included in the following line items: cost of sales and restructuring charges on the Company’s unaudited condensed consolidated statements of operations. The following table summarizes the changes in the restructuring accruals during the nine months ended September 30, 2010 (in thousands).

 

Description		As of December 31, 2009			Additions			Cash Payments			Adjustments(1)			As of September 30, 2010
Termination benefits		$	516		$	1,853		$	(2,304	)	$	(65	)	$	—
Operating lease exit costs		2,233			1,840		(2)	(2,299		)	70		(2)	1,844
Other restructuring costs		387			—			(391		)	4			—
		$	3,136		$	3,693		$	(4,994	)	$	9		$	1,844

(1)          Adjustments relate primarily to differences resulting from the translation of the liability balance at the rate of exchange at the balance sheet date and restructuring expense translated at the weighted average rate of exchange for the applicable period.

 

(2)          Includes $0.5 million in lease exit costs associated with the closure of the Canadian facilities and $1.4 million in lease exit costs associated with the cost savings programs initiated in 2009.

 

8

Table of Contents

 

8. FAIR VALUE MEASUREMENTS

 

Fair value is defined by GAAP as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.

 

The fair value standards establish a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value standards establish three levels of inputs that may be used to measure fair value:

 

·                  Level 1 — quoted prices for identical instruments in active markets;

 

·                  Level 2 — quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets; and

 

·                  Level 3 — unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

Financial Instruments

 

The following table summarizes the Company’s financial assets and liabilities required to be measured at fair value on a recurring basis as of September 30, 2010 and December 31, 2009 (in thousands).

 

 

 

 

		Fair Value as of September 30, 2010									Fair Value as of December 31, 2009
		Level 1			Level 2			Level 3			Level 1			Level 2			Level 3			Balance Sheet Classification
Assets:
Certificates of deposit		$	—		$	1,040		$	—		$	—		$	866		$	—		Marketable securities(1)
Derivatives:
Foreign currency contracts		—			—			—			—			—			—			Other current assets and other long-term assets
Total Assets		$	—		$	1,040		$	—		$	—		$	866		$	—
Liabilities:
Derivatives:
Foreign currency contracts		$	—		$	23		$	—		$	—		$	—		$	—		Accrued liabilities and other long-term liabilities

(1)          Marketable securities consist of certificates of deposit with maturities greater than three months and up to three years at the time of purchase. These securities are carried at fair value and are held at financial institutions.

 

The fair values of the Company’s derivative instruments are determined using a discounted cash flow valuation model. The significant inputs used in the model are readily available in public markets or can be derived from observable market transactions, and therefore, have been classified as Level 2. These inputs include the applicable exchange rates and forward rates, and discount rates based on the prevailing LIBOR deposit rates.

 

The Company’s other financial instruments including debt are not required to be carried at fair value. The carrying value of these financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short maturities. Based on borrowing rates currently available to the Company, with similar terms, the carrying values of capital lease obligations and the line of credit approximate their fair values.

 

Non-Financial Instruments

 

The majority of the Company’s non-financial instruments, which include inventories, property, plant and equipment and intangible assets are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually) such that a non-financial instrument is required to be evaluated for impairment, a resulting asset impairment would require that the non-financial instrument be recorded at the lower of cost or its fair value. Fair values of property, plant and equipment and indefinite lived intangibles are primarily determined using an income approach with inputs that are mainly unobservable (Level 3), such as expected future cash flows. During the three and nine months ended September 30, 2010, the Company recorded $0 and $0.1 million,

 

9

Table of Contents

 

respectively, in impairment charges related to its property, plant and equipment. During the three and nine months ended September 30, 2009, the Company recorded $1.7 million and $25.4 million, respectively, in impairment charges primarily related to the write-off of obsolete long-lived assets associated with the consolidation of warehouse and distribution space, as well as the write-off of certain intangible assets that the Company no longer intended to utilize.

 

9. DERIVATIVE FINANCIAL INSTRUMENTS

 

In the normal course of business, the Company’s financial results are impacted by currency rate movements in foreign currency denominated assets, liabilities and cash flows as it makes a portion of its purchases and sales in local currencies. The Company may, from time to time, employ derivative financial instruments to manage its exposure to fluctuations in foreign currency rates such as forward currency exchange contracts to hedge its net investment and intercompany payable or receivable balances in foreign operations and to manage the foreign currency exchange rate risk on forecasted revenue and inventory purchases denominated in foreign currencies. Other forward foreign exchange contracts are entered into to hedge against changes in the functional currency value of monetary assets and liabilities denominated in a non-functional currency. These derivative financial instruments are viewed as risk management tools and are not used for trading or speculative purposes.

 

The Company recognizes all derivative financial instruments as either assets or liabilities in the unaudited condensed consolidated balance sheets and measures those instruments at fair value using Level 2 inputs (see Note 8 — Fair Value Measurements). The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. During the nine months ended September 30, 2010, the Company did not designate any of its derivatives as hedges and, therefore, all changes in fair value are reflected in the Company’s results of operations. The Company did not have any derivative instruments during the three and nine months ended September 30, 2009. The following tables present the amounts affecting the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2010 (in thousands).

 

		Three months ended September 30, 2010			Nine months ended September 30, 2010			Location of Loss (Gain) Recognized In Income on Derivatives
Derivatives not designated as hedging instruments:
Foreign currency exchange forwards		$	(96	)	$	23		Other expense (income), net

 

The following table summarizes the Company’s outstanding foreign currency exchange forward contracts at September 30, 2010 (in thousands). The Company had no outstanding foreign currency related financial instruments at December 31, 2009.

 

 

10. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

 

Notes Payable

 

On September 30, 2010, the Company amended its Revolving Credit and Security Agreement (“the Credit Agreement”) with PNC Bank, N.A. (“PNC”), originally dated September 25, 2009.  Based on the amended terms, the Credit Agreement provides for an asset-backed revolving credit facility of up to $30.0 million in total, which includes a $20.0 million sublimit for borrowings against the Company’s eligible inventory, a $2 million sublimit for borrowings against the Company’s eligible inventory in-transit, and a $10 million sublimit for letters of credit, and matures on September 24, 2014. Total borrowings available under the credit facility at any given time are subject to customary reserves and reductions to the extent the Company’s asset borrowing base changes. Borrowings under the credit facility are secured by all of the Company’s assets, including all receivables, equipment, general intangibles, inventory, investment property, subsidiary stock and leasehold interests. The Credit Agreement requires the Company to prepay borrowings under the Credit Agreement in the event of certain dispositions of property.

 

With respect to domestic rate loans, principal amounts outstanding bear interest at 1.5% plus the greater of either (i) PNC’s published reference rate, (ii) the Federal Funds Open Rate (as defined in the Credit Agreement) in effect on such day plus 0.5% or, (iii) the sum of the daily LIBOR rate and 1.0%. Eurodollar denominated principal amounts outstanding bear interest at 3.0% plus the Eurodollar rate (as defined in the Credit Agreement). The Credit Agreement requires monthly interest payments with respect to domestic rate loans and at the end of

 

10

Table of Contents

 

each interest period with respect to Eurodollar rate loans. The Credit Agreement contains certain customary restrictive and financial covenants. The Company was in compliance with these financial covenants as of September 30, 2010.

 

As of September 30, 2010 and December 31, 2009, the Company had no outstanding borrowings under the Credit Agreement and at September 30, 2010, had issued and outstanding letters of credit of $1.0 million which were reserved against the borrowing base.

 

Capital Leases

 

The Company holds various capital leases for certain equipment with a gross carrying value of $0.4 million, which is depreciated using the straight-line method over the economic life of the leased equipment. Depreciation of equipment under capitalized leases is included in cost of sales and selling, general and administrative expenses line items on the Company’s unaudited condensed consolidated statements of operations. Certain software acquired under various capital leases with a gross carrying value of $4.5 million is classified as capitalized software and amortized using the straight-line method over the economic life. Amortization of capitalized software under capitalized leases is included in the cost of sales and selling, general and administrative expenses line items on the Company’s unaudited condensed consolidated statements of operations.

 

Notes payable and capital lease obligations consist of the following (in thousands):

 

		September 30, 2010			December 31, 2009
Capital Lease Obligations (for certain capitalized software) bearing interest rates ranging from 8.7% to 12.4% and maturities through 2013		$	2,922		$	1,329
Capital Lease Obligations (for certain equipment) bearing interest at 8.8% and maturities through 2014		174			223
Total notes payable and capital lease obligations		$	3,096		$	1,552

 

11. STOCK-BASED COMPENSATION

 

Options granted generally vest ratably over four years with the first year vesting on a cliff basis followed by monthly vesting for the remaining three years. Restricted stock awards and restricted stock units granted generally vest ratably over three years. Stock-based compensation expense is recognized ratably over the applicable vesting period and is recognized in the cost of sales and selling, general and administrative expense line items in the Company’s unaudited condensed consolidated statements of operations. During the three and nine months ended September 30, 2010, $1.6 million and $5.5 million, respectively, of stock-based compensation expense was recorded. During the three and nine months ended September 30, 2009, $1.5 million and $26.6 million, respectively, of stock-based compensation was recorded.

 

During the three and nine months ended September 30, 2010, 0.3 million and 1.7 million shares of common stock, respectively, were issued related to stock option exercises and vested shares of restricted stock. During the year ended December 31, 2009, 1.4 million shares of common stock were issued related to stock option exercises and vested shares of restricted stock.

 

Stock Options

 

A summary of stock option activity for the three and nine months ended September 30, 2010 and 2009 is as follows:

 

		Three Months Ended September 30, 2010					Nine Months Ended September 30, 2010
Options		Shares		Weighted Average Exercise Price			Shares		Weighted Average Exercise Price
Outstanding at June 30, 2010 and December 31, 2009, respectively		6,350,336		$	7.93		7,755,254		$	7.67
Granted		100,000			12.51		249,750			10.75
Exercised		(251,590	)		3.85		(1,128,320	)		2.93
Forfeited or expired		(118,247	)		9.45		(796,185	)		11.75
Outstanding at September 30, 2010		6,080,499		$	8.14		6,080,499		$	8.14

 

11

Table of Contents

 

		Three Months Ended September 30, 2009					Nine Months Ended September 30, 2009
Options		Shares		Weighted Average Exercise Price			Shares		Weighted Average Exercise Price
Outstanding at June 30, 2009 and December 31, 2008, respectively		8,064,057		$	8.25		7,582,511	(1)	$	10.56
Granted		10,000			6.26		1,663,000			1.88
Exercised		(261,914	)		3.04		(463,587	)		2.12
Forfeited or expired		(515,985	)		18.93		(1,485,766	)		17.62
Outstanding at September 30, 2009		7,296,158		$	7.68		7,296,158		$	7.68

 

(1) Includes a reduction of 2,315,951 options representing options repurchased by the Company as a result of the April 2009 tender offer.

 

Restricted Stock Shares and Units

 

From time to time, the Company grants restricted stock units to certain employees located outside of the United States. The number of restricted stock units granted to employees during both the three and nine months ended September 30, 2010 was 0.1 million. No restricted stock units were issued during the same periods in 2009.

 

During 2010, the Company’s board of directors approved grants of shares and units of the Company’s restricted stock to certain executives and non-executives. Half of such restricted stock awards and units vest ratably on each of the first four anniversaries of the grant date and the remaining half vest on a cliff basis on the fourth anniversary of the grant date, provided that certain corporate performance metrics are achieved. During the three and nine months ended September 30, 2010, 0.5 and 0.7 million shares and units of restricted stock, respectively, were granted under this program.

 

A summary of the Company’s total restricted stock share activity for the three and nine months ended September 30, 2010 and 2009 is as follows:

 

		Three Months Ended September 30, 2010					Nine Months Ended September 30, 2010
Restricted Stock Shares		Shares		Weighted Average Grant Date Fair Value			Shares		Weighted Average Grant Date Fair Value
Non-vested at June 30, 2010 and December 31, 2009, respectively		806,852		$	5.02		1,322,240		$	3.04
Granted		419,200			12.51		637,557			12.10
Vested		(29,068	)		13.02		(537,479	)		10.03
Forfeited or expired		(16,667	)	1.14			(242,001	)		1.33
Non-vested at September 30, 2010		1,180,317		$	7.67		1,180,317		$	7.67

 

		Three Months Ended September 30, 2009					Nine Months Ended September 30, 2009
Restricted Stock Shares		Shares		Weighted Average Grant Date Fair Value			Shares		Weighted Average Grant Date Fair Value
Non-vested at June 30, 2009 and December 31, 2008, respectively		1,787,204		$	2.62		939,000		$	3.87
Granted		30,000			6.26		1,282,110			2.43
Vested		(149,859	)		4.97		(513,765	)		3.35
Forfeited or expired		(21,000	)	1.14			(61,000	)		4.60
Non-vested at September 30, 2009		1,646,345		$	2.78		1,646,345		$	2.78

 

Separation Agreement

 

On March 31, 2010, the Company entered into a separation agreement with its former Chief Executive Officer. Pursuant to the separation agreement, the vesting of options to purchase 100,000 shares of Company common stock, which were exercised, and 100,000 shares of restricted stock were accelerated as of March 31, 2010. Additionally, pursuant to the terms of the separation agreement, the Company’s former Chief Executive Officer forfeited options to purchase 200,000 shares of Company common stock and 200,000 shares of restricted stock. The Company recorded an insignificant amount to restructuring charges related to the acceleration of the vesting of these options and restricted stock awards.

 

12

Table of Contents

 

12. INCOME TAXES

 

During the three months ended September 30, 2010, the Company recognized an income tax expense of $2.2 million on pre-tax income of $27.2 million, representing an effective income tax rate of 8.0% compared to an income tax benefit of $12.3 million on pre-tax income of $9.8 million, representing an effective income tax rate of (126.2%) for the same period in 2009. During the nine months ended September 30, 2010, the Company recognized an income tax expense of $12.2 million on pre-tax income of $75.2 million, representing an effective income tax rate of 16.2% compared to an income tax benefit of $4.5 million on a pre-tax loss of $35.2 million, representing an effective income tax rate of (12.8%) for the same period in 2009. The change in effective tax rate is primarily the result of a one-time $3.0 million tax benefit recognized in the third quarter of 2010 due to a change in an international tax treaty which reduces certain taxes for which accruals have previously been made, a $14.4 million one-time tax benefit recognized in the third quarter of 2009 related to the Company’s restructuring of its international operations to streamline and simplify its business operations, and changes in the mix of profitability in foreign jurisdictions where the Company is taxable. The Company had unrecognized tax benefits of $29.9 million at September 30, 2010 and $29.2 million at December 31, 2009.

 

13. EARNINGS (LOSS) PER SHARE

 

For all periods presented, basic and diluted earnings (loss) per common share (“EPS”) is presented using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends rights and participation rights in undistributed earnings. Under the two-class method, EPS is computed by dividing the sum of distributed and undistributed earnings (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period.

 

A participating security is an unvested share-based payment award containing non-forfeitable rights to dividends and must be included in the computation of earnings per share pursuant to the two-class method.  Shares of the Company’s non-vested restricted stock awards and units are considered participating securities.

 

Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Anti-dilutive securities are excluded from diluted EPS.

 

The following table sets forth EPS for the three and nine months ended September 30, 2010 and 2009 (in thousands, except share and per share data).

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
Net income (loss) attributable to common stockholders		$	24,996		$	22,068		$	62,997		$	(30,630	)
Income allocated to participating securities		(323		)	—			(724		)	—
Net income (loss) attributable to common stockholders — basic		$	24,673		$	22,068		$	62,273		$	(30,630	)
Weighted average common shares outstanding — basic		85,787,809			85,514,385			85,155,931			84,933,858
Dilutive effect of stock options		1,554,207			1,964,933			1,878,645			—
Weighted average common shares outstanding - diluted		87,342,016			87,479,318			87,034,576			84,933,858
Net income (loss) per common share:
Basic		$	0.29		$	0.26		$	0.73		$	(0.36	)
Diluted		$	0.28		$	0.25		$	0.72		$	(0.36	)

 

For all periods presented above, there were certain outstanding share based payments which could potentially dilute basic EPS in the future which were not included in diluted income (loss) per share as their effect would have been anti-dilutive. Due to the Company’s net loss for the nine months ended September 30, 2009, the Company had participating securities that were not allocated net loss and the dilutive effect of stock options were not included in the computation of diluted EPS, since they would have an anti-dilutive effect.

 

For both the three and nine months ended September 30, 2010, 3.1 million options, which could potentially dilute basic EPS in the future, were not included in diluted income (loss) per share as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2009, 8.0 million and 5.4 million options, respectively, were anti-dilutive. The weighted average exercise price per share of the options that were anti-dilutive was $13.70 and $13.72 for the three and nine months ended September 30, 2010, respectively, and $6.34 and $5.97 for the three and nine months ended September 30, 2009, respectively.

 

13

Table of Contents

 

14. VARIABLE INTEREST ENTITIES

 

In 2007, the Company established a relationship with Shanghai Shengyiguan Trade, Ltd Co (“ST”) for the purpose of serving as a distributor of the Company’s products in the People’s Republic of China. The Company has determined that ST is a variable interest entity for which it is the primary beneficiary. The Company currently controls all business activities and absorbs substantially all of the expected residual returns and substantially all of the expected losses of ST based on agreements with ST. The Company determined that it is the primary beneficiary of ST by virtue of its variable interest in the equity of ST. All voting rights have been assigned to the Company and there is a transfer agreement between ST and the Company under which all of the equity, assets, and liabilities are to be transferred to the Company at the Company’s sole discretion, subject to certain conditions.

 

The unaudited condensed consolidated financial statements include $7.1 million in total assets as of September 30, 2010, primarily consisting of cash, inventory and receivables, partially offset by $0.3 million in liabilities as of September 30, 2010, primarily consisting of accounts payable and accrued expenses, excluding liabilities related to the support provided by the Company. ST carries cash assets which are restricted to the extent that the monetary laws of the People’s Republic of China may limit the Company’s ability to utilize ST’s cash.

 

15. COMMITMENTS AND CONTINGENCIES

 

On July 26, 2005, the Company entered into an amended and restated supply agreement with Finproject S.P.A., the former majority owner of Crocs Canada, pursuant to 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). The supply agreement automatically renews for one-year terms and provides that the Company meet minimum 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 to one of its raw material suppliers for purchases of material used by one of its third-party manufacturers 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 $2.9 million at September 30, 2010). The Company evaluates the estimated loss for the guarantee under Accounting Standards Codification Topic 450, Contingencies, and Topic 460, Guarantees. 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, 2010, has not recorded a liability related to the guarantee in its unaudited condensed consolidated 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 unaudited condensed consolidated balance sheets in the accrued expenses and other current liabilities line item.

 

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. The Company reimburses the officers and directors that are subject to the securities class action filed in 2007 for the defense costs relating to such action, which are partially or fully offset by insurance that covers these expenditures. The Company has other various immaterial commitments and contingencies that are not discussed above.

 

16. OPERATING SEGMENTS AND RELATED INFORMATION

 

The Company operates in the consumer products industry internationally in which the Company principally designs, manufactures, markets and sells its branded footwear, apparel and accessories for men, women and children. During 2009, the Company changed the information that was presented to the chief operating decision maker and has restated its revenues, depreciation and amortization, operating income and assets by segment as shown below. The Company identifies its reportable segments as those geographic regions that represent 10% or more of its revenue, operating income (as defined below), or total assets. The Company has three reportable segments: Americas, Europe and Asia. All of the reportable segments derive their revenue from the sale of footwear, apparel and accessories. The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue and operating income.

 

14

Table of Contents

 

Operating income is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance and to decide how to allocate resources to segments. Operating income is defined as operating income before asset impairment charges and restructuring charges. The Company evaluates the performance of its segments based primarily on the results of the segment without allocating corporate expenses, or indirect general, administrative and other expenses. The Corporate and other category includes (i) Ocean Minded, (ii) Colorado Footwear CV, and (iii) corporate category, which maintains corporate costs such as stock-based compensation, research and development, brand marketing, legal expenses, depreciation on global long-lived assets such as molds, tooling, IT systems, and other global costs that are not allocated to the regions.

 

Segment profits or losses include adjustments to eliminate intercompany profit or losses on intercompany sales.  Net revenues as shown below represent sales to external customers for each segment.

 

		Three Months Ended September 30						Nine Months Ended September 30,
		2010			2009			2010			2009
		(in thousands)						(in thousands)
Revenues:
Americas		$	103,540		$	78,638		$	279,163		$	229,178
Europe		32,597			29,854			105,095			90,350
Asia		79,053			68,013			222,404			186,979
Total segments		215,190			176,505			606,662			506,507
Corporate and other		415			636			3,841			3,249
Total consolidated revenues		$	215,605		$	177,141		$	610,503		$	509,756
Operating Income:
Americas		$	22,256		$	8,355		$	56,913		$	16,148
Europe		4,813			2,974			22,488			16,054
Asia		23,792			20,028			68,070			49,867
Total segments		50,861			31,357			147,471			82,069
SG&A restructuring		—			(17		)	(2,539		)	(5,916		)
Asset impairment		—			(1,722		)	(141		)	(25,447		)
Corporate and other		(23,415		)	(20,648		)	(69,224		)	(88,131		)
Total consolidated operating income (loss)		27,446			8,970			75,567			(37,425		)
Interest expense		153			155			445			1,412
Gain on charitable contributions		(19		)	(810		)	(135		)	(2,833		)
Other expense (income), net		137			(125		)	87			(833		)
Income (loss) before income taxes		$	27,175		$	9,750		$	75,170		$	(35,171	)
Depreciation and Amortization:
Americas		$	2,446		$	3,773		$	7,037		$	8,297
Europe		625			1,036			2,078			2,757
Asia		1,411			1,870			4,354			5,149
Total segments		4,482			6,679			13,469			16,203
Corporate and other		4,612			2,729			13,235			12,382
Total consolidated depreciation and amortization		$	9,094		$	9,408		$	26,704		$	28,585

 

15