Crocs, Inc. - Quarter Report: 2016 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

or

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

Commission File No. 000-51754

 

 

CROCS, INC.

(Exact name of registrant as specified in its charter)

 

 

7477 East Dry Creek Parkway, Niwot, Colorado 80503

(Address, including zip code, 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 (§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  x   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):

 

Large accelerated filer x		Accelerated filer o
Non-accelerated filer o (do not check if a smaller reporting company)		Smaller reporting companyo

 

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

 

As of October 31, 2016, Crocs, Inc. had 73,546,841 shares of its $0.001 par value common stock outstanding.

 

 

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Cautionary Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of 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, 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, which express management’s current views concerning future events or results, use words like “anticipate,” “assume,” “ believe,” “continue,” “estimate,” “expect,” “future,” “intend,” “plan,” “project,” “strive,” and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will,” “would” and similar expressions or variations. Examples of forward-looking statements include, but are not limited to, statements we make regarding:

 

·                  the matters discussed below under “Known or Anticipated Trends” and

·                  our belief that we have sufficient liquidity to fund our business operations during the next twelve months; and

·                  our expectations regarding our level of capital expenditures in fiscal 2017; and

·                  our expectations regarding the future performance of our business.

 

Forward-looking statements are subject to risks, uncertainties and other factors, which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, those described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2015 and subsequent filings with the Securities and Exchange Commission. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

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Crocs, Inc.

Table of Contents to the Quarterly Report on Form 10-Q

For the Quarterly Period Ended September 30, 2016

 

PART I — Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015	2
	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	45
PART II — Other Information		47
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 6.	Exhibits	48
Signatures		49

 

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PART I — Financial Information

 

ITEM 1. Financial Statements

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

 

		Three Months Ended  September 30,						Nine Months Ended September 30,
		2016			2015			2016			2015
Revenues		$	245,888		$	274,088		$	848,856		$	881,952
Cost of sales		123,454			153,267			427,416			443,891
Gross profit		122,434			120,821			421,440			438,061
Selling, general and administrative expenses		122,719			135,110			386,112			429,815
Asset impairment charges		930			5,460			1,695			7,535
Restructuring charges		—			981			—			7,454
Income (loss) from operations		(1,215		)	(20,730		)	33,633			(6,743		)
Foreign currency transaction gain (loss), net		1,379			(2,908		)	(1,568		)	(2,631		)
Interest income		178			268			558			752
Interest expense		(184		)	(171		)	(661		)	(650		)
Other income (expense), net		(1		)	405			(108		)	(6		)
Income (loss) before income taxes		157			(23,136		)	31,854			(9,278		)
Income tax expense		(1,690		)	(888		)	(7,704		)	(3,745		)
Net income (loss)		$	(1,533	)	$	(24,024	)	$	24,150		$	(13,023	)
Dividends on Series A convertible preferred stock		$	(3,000	)	$	(3,000	)	$	(9,000	)	$	(8,833	)
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature		(819		)	(752		)	(2,406		)	(2,209		)
Net income (loss) loss attributable to common stockholders		$	(5,352	)	$	(27,776	)	$	12,744		$	(24,065	)
Net income (loss) per common share:
Basic		$	(0.07	)	$	(0.37	)	$	0.15		$	(0.32	)
Diluted		$	(0.07	)	$	(0.37	)	$	0.14		$	(0.32	)

 

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

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in thousands)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2016			2015			2016			2015
Net income (loss)		$	(1,533	)	$	(24,024	)	$	24,150		$	(13,023	)
Other comprehensive income (loss):
Foreign currency translation gain (loss), net		(140		)	(11,739		)	6,531			(29,306		)
Total comprehensive income (loss)		$	(1,673	)	$	(35,763	)	$	30,681		$	(42,329	)

 

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

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share amounts)

 

		September 30, 2016			December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents		$	150,216		$	143,341
Accounts receivable, net of allowances of $50,412 and $49,364, respectively		101,651			83,616
Inventories		169,376			168,192
Income tax receivable		6,979			10,233
Other receivables		17,793			14,233
Prepaid expenses and other assets		29,925			26,334
Total current assets		475,940			445,949
Property and equipment, net of accumulated depreciation of $104,213 and $97,650, respectively		45,820			49,490
Intangible assets, net		75,740			82,297
Goodwill		2,586			1,973
Deferred tax assets, net		6,699			6,608
Other assets		18,388			21,703
Total assets		$	625,173		$	608,020
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	50,881		$	63,336
Accrued expenses and other liabilities		90,194			92,573
Income taxes payable		9,173			6,416
Current portion of borrowings and capital lease obligations		3,593			4,772
Total current liabilities		153,841			167,097
Long-term income tax payable		4,965			4,547
Long-term borrowings and capital lease obligations		27			1,627
Other liabilities		13,848			13,120
Total liabilities		172,681			186,391
Commitments and contingent liabilities:
Series A convertible preferred stock, par value $0.001 per share, 1,000,000 shares authorized, 200,000 shares issued and outstanding, redemption amount and liquidation preference of $203,000 as of both September 30, 2016 and December 31, 2015		178,063			175,657
Stockholders’ equity:
Preferred stock, par value $0.001 per share, 4,000,000 shares authorized, none outstanding		—			—
Common stock, par value $0.001 per share, 250,000,000 shares authorized, 93,814,222 and 73,535,800 shares issued and outstanding, respectively, as of September 30, 2016 and 93,101,007 and 72,851,418 shares issued and outstanding, respectively, as of December 31, 2015		94			94
Treasury stock, at cost, 20,278,422 and 20,249,589 shares as of September 30, 2016 and December 31, 2015, respectively		(284,176		)	(283,913		)
Additional paid-in capital		361,688			353,241
Retained earnings		241,205			227,463
Accumulated other comprehensive loss		(44,382		)	(50,913		)
Total stockholders’ equity		274,429			245,972
Total liabilities and stockholders’ equity		$	625,173		$	608,020

 

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

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

		Nine Months Ended September 30,
		2016			2015
Cash flows from operating activities:
Net income (loss)		$	24,150		$	(13,023	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		25,473			28,019
Unrealized gain on foreign exchange, net		(7,863		)	(99		)
Deferred income taxes		(85		)	175
Asset impairment charges		1,695			7,535
Provision for doubtful accounts, net		1,805			25,258
Share-based compensation		8,006			8,886
Other non-cash items		254			241
Changes in operating assets and liabilities:
Accounts receivable, net of allowances		(15,762		)	(48,092		)
Inventories		3,750			(27,713		)
Prepaid expenses and other assets		(7,559		)	(321		)
Accounts payable		(14,592		)	38,864
Accrued expenses and other liabilities		4,071			2,836
Income taxes		6,011			(15,626		)
Cash provided by operating activities		29,354			6,940
Cash flows from investing activities:
Cash paid for purchases of property and equipment		(12,651		)	(4,235		)
Proceeds from disposal of property and equipment		2,425			—
Cash paid for intangible assets		(5,598		)	(7,572		)
Change in restricted cash		953			11
Cash used in investing activities		(14,871		)	(11,796		)
Cash flows from financing activities:
Proceeds from bank borrowings		29,582			—
Repayments of bank borrowings and capital lease obligations		(32,378		)	(3,957		)
Dividends - Series A preferred stock		(9,000		)	(8,900		)
Deferred debt issuance costs		(466		)	(94		)
Issuances of common stock		391			1,255
Purchase of treasury stock, net of issuances		—			(75,928		)
Repurchase of common stock for tax withholding		(263		)	(261		)
Cash used in financing activities		(12,134		)	(87,885		)
Effect of exchange rate changes on cash		4,526			(6,305		)
Net change in cash and cash equivalents		6,875			(99,046		)
Cash and cash equivalents - beginning of period		143,341			267,512
Cash and cash equivalents - end of period		$	150,216		$	168,466
Supplemental disclosure of cash flow information - cash paid during the period for:
Interest, net of capitalized interest		$	417		$	688
Income taxes		$	10,274		$	17,668
Supplemental disclosure of non-cash investing and financing activities:
Accrued dividends		$	3,000		$	3,000

 

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

 

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CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. ORGANIZATION & BASIS OF PRESENTATION

 

Organization

 

Crocs, Inc. and its subsidiaries (collectively the “Company,” “Crocs,” “we,” “our,” or “us”) are engaged in the design, development, manufacturing, marketing, and distribution of footwear and accessories for men, women, and children.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for reporting on Form 10-Q. Accordingly, these financial statements do not include all information required for complete financial statements. The condensed consolidated balance sheet at December 31, 2015, was derived from audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring adjustments, considered necessary for a fair statement of the results for the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with our 2015 consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of results for the full year.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company. All intercompany transactions and balances have been eliminated.

 

Transactions with Affiliates

 

The Company receives inventory count services from RGIS, LLC (“RGIS”), a wholly owned subsidiary of Blackstone Capital Partners VI L.P. (“Blackstone”), which currently beneficially owns all the outstanding shares of the Company’s series A convertible preferred stock (“Series A Preferred Stock”), which is convertible into approximately 15.8% of the Company’s common stock as of September 30, 2016. Two Blackstone representatives also serve on the Company’s board of directors (the “Board”). During the three and nine months ended September 30, 2016, the Company paid less than $0.1 million and $0.3 million, respectively, to RGIS for services received. During the three and nine months ended September 30, 2015, the Company paid $0.1 million and $0.3 million, respectively, to RGIS for services received. Expenses related to these services provided are recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statement of operations.

 

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Recently Adopted Accounting Standards

 

Debt Issuance Costs

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03: Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 requires retrospective adoption and is effective for fiscal years beginning after December 15, 2015. In August 2015, the FASB issued ASU 2015-15: Interest — Imputation of Interest (Subtopic 835-30), which relates to the presentation of debt issuance costs associated with line-of-credit arrangements. This standard clarifies the guidance set forth in ASU 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability rather than as an asset. The new pronouncement clarifies that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. The Company considered this clarification in conjunction with the adoption of ASU 2015-03, which occurred on January 1, 2016. These pronouncements did not have a material impact on the Company’s condensed consolidated financial statements. In adopting ASU 2015-15, the Company elected to present debt issuance costs related to line-of-credit arrangements as an asset.

 

Share-Based Payments

 

In June 2014, the FASB issued ASU 2014-12 in response to the Emerging Issues Task Force consensus on Issue 13-D. The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. This ASU is effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015. On January 1, 2016, the Company adopted this pronouncement, which did not have a material impact on its condensed consolidated financial statements.

 

Recently Issued Accounting Standards - Not Yet Adopted

 

Statement of Cash Flows - Classification

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance for how certain transactions are classified in the statement of cash flows. This standard requires a retrospective transition method to each period presented and is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the impact of the adoption of this standard on its condensed consolidated financial statements.

 

Stock Compensation

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718), which is intended to increase simplification of accounting for equity share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This standard is effective for annual periods (including interim periods) beginning after December 15, 2016, with early adoption permitted.

 

Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits

 

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and tax deficiencies in the income statement and the practical expedient for estimating the expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The Company is currently assessing the impact of adoption of this standard on its condensed consolidated financial statements.

 

Prepaid Stored-Value Products

 

In March 2016, the FASB issued ASU No. 2016-04, Liabilities — Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. This update aligns recognition of the financial liabilities related to prepaid stored-value products (for example, prepaid gift cards), with Topic 606, Revenue from Contracts with Customers, for non-financial liabilities. In general, certain of these liabilities may be extinguished proportionally in earnings as redemptions occur, or when redemption is remote if issuers are not entitled to the unredeemed stored value. This standard is effective for annual periods (including interim periods) beginning after December 15, 2017, with early adoption permitted. At adoption, this update will be applied either using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective or retrospectively to each period presented. The Company is currently assessing the adoption method and the impact that adopting this new accounting standard will have on its condensed consolidated financial statements.

 

Leases

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability of accounting for lease transactions. This update revises accounting for operating leases by a lessee, among other changes, and requires a lessee to recognize a liability to make lease payments and an asset representing a company’s right to use the underlying asset for the lease term in the balance sheet. The distinction between finance and operating leases has not changed and the update does not significantly change the effect of finance and operating leases on the statement of operations. This standard is effective for annual periods (including interim periods) beginning after December 15, 2018, with early adoption permitted. At adoption, this update will be applied using a modified retrospective approach. The Company is currently assessing the impact of adoption of this standard on its condensed consolidated financial statements.

 

Financial Instruments

 

In January 2016, the FASB issued ASU 2016-01: Financial Instruments — Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The ASU requires the adoption method by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments relating to equity securities without readily determinable fair values (including disclosure requirements) will be applied prospectively to equity investments that exist as of the date of adoption. These changes become effective for fiscal years beginning after December 15, 2017. The expected adoption method is being evaluated by the Company and is not expected to have a significant impact on its condensed consolidated financial statements.

 

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Inventory

 

In July 2015, the FASB issued ASU 2015-11: Simplifying the Measurement of Inventory, which modifies existing requirements regarding measuring inventory at the lower of cost or market. Specifically, this standard eliminates the need to determine and consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. This ASU requires a prospective adoption method and is effective prospectively after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact that this pronouncement will have on its condensed consolidated financial statements.

 

Revenue Recognition

 

In May 2014, the FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” ASU 2014-09 becomes effective for reporting periods (including interim periods) beginning after December 15, 2017. Early application is permitted for reporting periods (including interim periods) beginning after December 15, 2016. This new standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the impact that this pronouncement will have on its condensed consolidated financial statements. The Company has not yet selected a transition method or determined the effect of the standard on financial reporting once the standard is effective.

 

In May 2016, the FASB issued ASU 2016-12: Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides narrow scope improvements and practical expedients related to ASU 2014-09: Revenue from Contracts with Customers (Topic 606). The purpose of ASU 2016-12 is to clarify certain narrow aspects of Topic 606 such as assessing the collectability criterion, presentation of sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition, and technical correction. The standard has the same effective date as ASU 2014-09 described above. The Company is currently evaluating the impact that this pronouncement will have on its condensed consolidated financial statements. The Company has not yet selected a transition method or determined the effect of the standard on financial reporting once the standard is effective.

 

Other new pronouncements issued but not effective until after September 30, 2016 are not expected to have a material impact on the Company’s condensed consolidated financial statements.

 

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Asset Impairments

 

The Company periodically evaluates all of its long-lived assets for impairment when events or circumstances would indicate the carrying value of a long-lived asset may not be fully recoverable. Retail asset impairment charges relate to certain underperforming stores that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over the remaining economic life or lease terms of those assets. Retail impairment expense by operating segment is summarized as follows:

 

		Three Months Ended September 30,
		2016					2015
		Impairment Charge			Number of Stores (1)		Impairment Charge			Number of Stores (1)
		(in thousands, except store count data)
Americas		$	586		4		$	5,024		15
Asia Pacific		226			5		103			4
Europe		118			3		333			7
Total asset impairment		$	930		12		$	5,460		26

 

		Nine Months Ended September 30,
		2016					2015
		Impairment Charge			Number of Stores (1)		Impairment Charge			Number of Stores (1)
		(in thousands, except store count data)
Americas		$	1,287		9		$	5,710		18
Asia Pacific		264			9		618			12
Europe		144			5		1,207			13
Total asset impairment		$	1,695		23		$	7,535		43

 

(1) Represents stores with partially and fully depreciated assets.

 

Depreciation

 

During the three months ended September 30, 2016 and 2015, the Company recorded $3.6 million and $4.0 million, respectively, in depreciation expense of which $0.4 million for both periods was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations. During the nine months ended September 30, 2016 and 2015, the Company recorded $11.2 million and $13.0 million, respectively, in depreciation expense of which $1.2 million and $1.4 million, respectively, was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations.

 

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3. INVENTORIES

 

The following table summarizes inventories by major classification:

 

		September 30, 2016			December 31, 2015
		(in thousands)
Finished goods		$	163,673		$	162,341
Raw materials		5,224			4,933
Work-in-progress		479			918
Total inventories		$	169,376		$	168,192

 

4. GOODWILL & INTANGIBLE ASSETS

 

The following table summarizes goodwill and identifiable intangible assets:

 

		September 30, 2016									December 31, 2015
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
		(in thousands)
Capitalized software (1) (2)		$	169,628		$	(96,069	)	$	73,559		$	162,700		$	(82,596	)	$	80,104
Customer relationships (3)		4,082			(4,082		)	—			4,016			(4,016		)	—
Patents, copyrights, and trademarks		7,266			(5,393		)	1,873			6,892			(5,135		)	1,757
Core technology (3)		3,688			(3,688		)	—			3,498			(3,498		)	—
Other (3)		636			(636		)	—			776			(637		)	139
Total finite lived intangible assets		185,300			(109,868		)	75,432			177,882			(95,882		)	82,000
Indefinite lived intangible assets (3)		308			—			308			297			—			297
Goodwill (4)		2,586			—			2,586			1,973			—			1,973
Goodwill and intangible assets		$	188,194		$	(109,868	)	$	78,326		$	180,152		$	(95,882	)	$	84,270

 

(1) Gross carrying amount at September 30, 2016 includes $4.1 million of software held under a capital lease classified as capitalized software as of both September 30, 2016, and December 31, 2015.

 

(2) Accumulated amortization includes $3.5 million and $3.1 million for software held under a capital lease as of September 30, 2016, and December 31, 2015, respectively, and is amortized using the straight-line method over the useful life.

 

(3) Change is due to the impact of foreign currency translation.

 

(4) Gross carrying amount at September 30, 2016 includes $0.5 million associated with the acquisition of operations in Austria on June 30, 2016. The remainder of the increase at September 30, 2016 compared to December 31, 2015, is associated with the impact of foreign currency translation.

 

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The following table summarizes estimated future annual amortization of intangible assets:

 

Fiscal years ending December 31,		September 30,  2016
		(in thousands)
2016 (remainder of year)		$	6,805
2017		17,950
2018		15,970
2019		14,337
2020		12,073
Thereafter		8,297
Total		$	75,432

 

During the three months ended September 30, 2016 and 2015, amortization expense recorded for intangible assets with finite lives was $4.8 million and $4.9 million, respectively, of which $1.2 million and $1.4 million, respectively, was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations. During the nine months ended September 30, 2016 and 2015, amortization expense recorded for intangible assets with finite lives was $14.3 million and $15.0 million, respectively, of which $3.9 million and $4.5 million, respectively, was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations.

 

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

The following table summarizes accrued expenses and other current liabilities:

 

		September 30,  2016			December 31, 2015
		(in thousands)
Accrued compensation and benefits		$	22,195		$	20,973
Fulfillment, freight, and duties		18,399			14,776
Professional services		12,534			15,019
Sales/use and VAT tax payable		7,997			7,018
Accrued rent and occupancy		7,575			7,639
Deferred revenue and royalties payable		6,575			1,430
Customer deposits		3,310			3,236
Dividend payable		3,000			3,000
Derivatives liability		2,445			55
Accrued legal liabilities		1,617			1,971
Travel and entertainment liabilities		815			2,150
Accrued loss on disposal group (1)		—			6,743
Other (2)		3,732			8,563
Total accrued expenses and other current liabilities		$	90,194		$	92,573

 

(1) The December 31, 2015 balance represents accrued losses related to the South Africa disposal group. The sale of the South Africa operations was completed on April 15, 2016 and the associated gain on disposal was immaterial.

 

(2) The amounts in ‘Other’ consist of various accrued expenses, of which no individual item accounted for more than 5% of the total balance as of September 30, 2016 or December 31, 2015.

 

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6. FAIR VALUE MEASUREMENTS

 

Recurring Fair Value Measurements

 

U.S. GAAP provides for a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.

 

Assets or liabilities measured at fair value and the classification by level of input within the fair value hierarchy are as follows:

 

		September 30, 2016
		Level 1			Level 2			Level 3			Total
		(in thousands)
Cash and cash equivalents:
Deposits		$	2,413		$	—		$	—		$	2,413
Prepaid expenses and other assets:
Restricted deposits		2,341			—			—			2,341
Total assets		$	4,754		$	—		$	—		$	4,754
Accrued expenses and other liabilities:
Foreign currency derivative liability		$	—		$	2,445		$	—		$	2,445

 

		December 31, 2015
		Level 1			Level 2			Level 3			Total
		(in thousands)
Cash and cash equivalents:
Deposits		$	6,174		$	—		$	—		$	6,174
Prepaid expenses and other assets:
Restricted deposits		1,310			—			—			1,310
Total assets		$	7,484		$	—		$	—		$	7,484
Accrued expenses and other liabilities:
Foreign currency derivative liability		$	—		$	55		$	—		$	55

 

7. DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company transacts business in various currencies worldwide, which exposes the Company to foreign currency exchange risk. As a result, changes in international currency rates can impact both the Company’s results of operations and the value of assets and liabilities denominated in foreign currencies.

 

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In general, the Company enters into foreign currency exchange forward contracts and currency swap derivative instruments to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities. As these derivative instruments do not qualify as hedging instruments under the accounting standards for derivatives and hedging, they are recorded at fair value as a derivative asset or liability on the balance sheet with their corresponding change in fair value recognized in ‘Foreign currency transaction gain (loss), net’ in the condensed consolidated statements of operations. As of September 30, 2016 and December 31, 2015, the Company had associated liability balances reported in ‘Accrued expenses and other liabilities’ on the condensed consolidated balance sheet. For purposes of the cash flow statement, the Company classifies the cash flows from derivative instruments at settlement from undesignated instruments in the same category as the cash flows from the related hedged items, generally within ‘Cash provided by operating activities’.

 

The following table summarizes the notional amounts of outstanding foreign currency exchange contracts. The notional amounts of the derivative financial instruments are denominated in their U.S. Dollar equivalents and represent the amount of all contracts of the foreign currency specified. These notional values do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of the Company’s exposure to the foreign currency exchange risks.

 

		September 30,  2016
		(in thousands)
Foreign currency exchange forward contracts by currency:
Euro		$	79,459
Singapore Dollar		76,968
Japanese Yen		58,860
Canadian Dollar		15,073
Mexican Peso		12,659
South Korean Won		9,033
Australian Dollar		8,080
Other		12,821
Total notional value		$	272,953
Latest maturity date		October 2016

 

The following table presents the amounts affecting the condensed consolidated statements of operations from derivative instruments and exposure from day-to-day business transactions in various foreign currencies:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2016			2015			2016			2015
		(in thousands)
Foreign currency gain (loss)		$	3,039		$	(288	)	$	11,804		$	4,332
Derivatives not designated as hedging instruments:
Foreign currency exchange forwards loss		(1,660		)	(2,620		)	(13,372		)	(6,963		)
Foreign currency transaction gain (loss), net		$	1,379		$	(2,908	)	$	(1,568	)	$	(2,631	)

 

Both realized and unrealized gains/losses from underlying foreign currency activity and derivative contracts are reported on a net basis in ‘Foreign currency transaction gain (loss), net’ on the condensed consolidated statements of operations.

 

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8. REVOLVING CREDIT FACILITY & BANK BORROWINGS

 

Senior Revolving Credit Facility

 

In December 2011, the Company entered into an Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association (“PNC”), as a lender and administrative agent for the lenders. On February 18, 2016, the Company entered into the Eleventh Amendment to the Credit Agreement which, primarily: (i) extended the maturity date to February 2021, (ii) resized the borrowing capacity of the facility to $75.0 million, (iii) amended certain definitions of the financial covenants to become more favorable to the Company, (iv) set the minimum fixed charge coverage ratio to 1.10 to 1.00, (v) set the maximum leverage ratio to 2.00 to 1.00, (vi) allows up to $50.0 million in stock repurchases to be made each fiscal year, subject to certain restrictions, and (vii) limited certain capital expenditures and commitments to an aggregate of $50.0 million per year. The Eleventh Amendment also changed the variable interest rates. For domestic base rate loans, including swing loans, the interest rate is equal to a daily base rate plus a margin ranging from 0.50% to 0.75% based on certain conditions. For domestic LIBOR rate loans, the interest rate is equal to a LIBOR rate plus a margin ranging from 1.50% to 1.75% based on certain conditions.

 

On June 13, 2016, the Company entered into the Twelfth Amendment to the Credit Agreement, which primarily increased the borrowing capacity of the facility from $75.0 million to $80.0 million. Under the terms of the Credit Agreement, the above financial covenants are only applicable when average line usage exceeds 25% of the borrowing capacity, or $20.0 million, over a 30-day period, starting on the 15th day of the last month of each quarter. As of September 30, 2016, the financial covenants under the credit agreement were not applicable.

 

As of September 30, 2016, the Company would have been in compliance with each of the covenants under the Credit Agreement had the Company exceeded borrowings greater than 25% of the borrowing capacity. Actual calculations of the financial covenants under the Credit Agreement were as follows: (i) the fixed charge coverage ratio (which is calculated as adjusted EBITDA plus fixed charges before tax for a rolling four quarters divided by fixed charges before tax plus interest for a rolling four quarters) was 1.49 to 1.00, compared to the minimum allowable amount of 1.10 to 1.00, (ii) the leverage ratio (which is calculated as consolidated indebtedness divided by adjusted EBITDA for a rolling four quarters) was 0.30 to 1.00, compared to the maximum allowable amount of 2.00 to 1.00, (iii) stock repurchases were zero, and (iv) capital expenditures and commitments were $25.3 million. For the three and nine months ended September 30, 2016, the weighted average/effective interest rate for outstanding borrowings under the Credit Agreement was 0.00% and 3.15%, respectively.

 

As of both September 30, 2016 and December 31, 2015, the Company had no outstanding borrowings under the Credit Agreement and had outstanding letters of credit of $1.3 million, which were reserved against the borrowing base under the terms of the Credit Agreement. As of September 30, 2016 and December 31, 2015, the Company had $78.7 million and $73.7 million, respectively, of available borrowing capacity. During the three and nine months ended September 30, 2016, the Company capitalized $0.0 million and $0.6 million, respectively, in fees and third party costs as deferred financing costs associated with the Credit Agreement and the negotiation of a new debt financing agreement that has not yet been executed. The short-term portion of these fees is recorded in ‘Prepaid expenses and other assets’ and the long-term portion is recorded in ‘Other assets’ on the condensed consolidated balance sheets.

 

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Asia Pacific Revolving Credit Facility

 

On August 28, 2015, a Company subsidiary entered into a revolving credit facility agreement with HSBC Bank (China) Company Limited, Shanghai Branch (“HSBC”) as the lender. The revolving credit facility enables the Company to borrow uncommitted dual currency revolving loan facilities up to RMB 40.0 million, or the USD equivalent, and import facilities up to RMB 60.0 million, or the USD equivalent, with a combined facility limit of RMB 60.0 million. For loans denominated in USD, the interest rate is 2.1% per annum plus LIBOR for three months or any other period as may be determined by HSBC at the end of each interest period. For loans denominated in RMB, interest equals the one year benchmark lending rate effective on the loan draw-down date set forth by the People’s Bank of China with a 10% mark-up and is payable on the maturity date of the related loan. The revolving credit facility can be canceled or suspended at any time at the discretion of the lender and contains provisions requiring the Company to maintain compliance with certain restrictive covenants. As of September 30, 2016 and December 31, 2015, the revolving credit facility remained suspended at the discretion of the lender and the Company had no outstanding borrowings or borrowings available under the revolving credit facility.

 

Term Bank Borrowings

 

On December 10, 2012, the Company entered into a Master Installment Payment Agreement (“Master IPA”) with PNC in which PNC financed the Company’s implementation of a new ERP system, which began in October 2012 and was substantially completed in early 2015. The terms of each note payable, under the Master IPA, consist of a fixed interest rate and payment terms based on the amount borrowed and the timing of activity throughout the implementation of the ERP system. The Master IPA is subject to cross-default, cross-termination clauses, and is coterminous with the Credit Agreement.

 

As the interest rate of each credit agreement is variable, typically based on either the base rate plus an additional margin or the daily LIBOR rates plus an additional margin, the estimated fair value of each debt instrument approximates its carrying value.

 

As of September 30, 2016 and December 31, 2015 the Company had $2.3 million and $6.4 million, respectively, of debt outstanding under five separate notes payable, of which $2.3 million and $4.8 million, respectively, represent current installments. As of September 30, 2016, the notes bear interest rates ranging from 2.45% to 2.79% and matures on September 2017.

 

The components of the Company’s consolidated debt and capital lease obligations are as follows:

 

				Unused Borrowing Capacity (2)							Carrying Value (4)
		Weighted Average Interest Rate (1)		Borrowing Currency				U.S.D. Equivalent			September 30, 2016			December 31, 2015
				(in thousands)
Senior revolving credit facility (3)		Base rate plus 0.50% - 0.75% LIBOR plus 1.50% - 1.75%		$	78,697			$	78,697		$	—		$	—
Asia Pacific revolving credit facility		LIBOR plus 2.10%		RMB		—		—			—			—
Term bank borrowings		2.65%		—				—			2,330			6,375
Short term vendor financing arrangement		1.90%									1,256			—
Capital lease obligations											34			24
Total obligations											$	3,620		$	6,399
Current maturities											$	3,593		$	4,772
Long-term debt and capital lease obligations											$	27		$	1,627

 

(1) The weighted average interest rate in effect at September 30, 2016 for all borrowings outstanding pursuant to each debt instrument, including any applicable margin. The interest rates presented represent stated rates and do not include the

 

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impact of the derivative instruments, deferred financing costs, original issue premiums or discounts, and commitment fees, all of which affect the Company’ overall cost of borrowing.

 

(2) Unused borrowing capacity represents the maximum available under the applicable facility at September 30, 2016 without regard to covenant compliance calculations or other conditions precedent to borrowing.

 

(3) As of September 30, 2016, the unused borrowing capacity of $80.0 million was reduced by $1.3 million of outstanding letters of credit.

 

(4) As the interest rate of each credit agreement is variable, typically based on either the base rate plus an additional margin or the daily LIBOR rates plus an additional margin, the estimated fair value of each debt instrument approximates its carrying value.

 

The maturities of the Company’s debt obligations are presented below:

 

		September 30, 2016
		(in thousands)
2016 (remainder of year)		$	1,264
2017		2,338
2018		8
2019		8
2020		2
Thereafter		—
Total principal debt and capital lease maturities		$	3,620
Current portion		$	3,593
Non-current portion		$	27

 

9. SHARE-BASED COMPENSATION

 

Share-based compensation expense is based on the grant date fair value and is recognized on a straight-line basis over the applicable vesting period. During the three months ended September 30, 2016 and 2015, the Company recorded $2.1 million and $2.4 million, respectively, of pre-tax share-based compensation expense, of which $2.0 million and $2.3 million, respectively, is recorded in ‘Selling, general and administrative expense’, and the remainder for both periods is recorded in ‘Cost of sales’ on the condensed consolidated statements of operations. During the nine months ended September 30, 2016 and 2015, the Company recorded $8.0 million and $8.9 million, respectively, of pre-tax share-based compensation expense, of which $7.6 million and $8.5 million, respectively, is recorded in ‘Selling, general and administrative expense’, and the remainder is recorded in ‘Cost of sales’ on the condensed consolidated statements of operations.

 

Stock Option Activity

 

A summary of the Company’s stock option activity is presented as follows:

 

		Stock Option Shares		Weighted Average Exercise Price
Outstanding as of June 30, 2016		704,722		$	16.70
Granted		—		$	—
Exercised		(7,697	)	$	3.33
Forfeited or expired		(116,452	)	$	14.70
Outstanding as of September 30, 2016		580,573		$	17.27

 

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		Stock Option Shares		Weighted Average Exercise Price
Outstanding as of December 31, 2015		1,295,749		$	14.09
Granted		—		$	—
Exercised		(98,994	)	$	3.95
Forfeited or expired		(616,182	)	$	12.71
Outstanding as of September 30, 2016		580,573		$	17.27

 

As of September 30, 2016, there was $0.4 million of unrecognized compensation expense related to stock options. The expense is expected to be amortized over a weighted average period of 2.04 years.

 

Restricted Stock Awards and Units Activity

 

A summary of the Company’s restricted stock award (“RSA”) and restricted stock unit (“RSU”) activity is presented as follows:

 

		Restricted Stock Awards					Restricted Stock Units
		Shares		Weighted Average Grant Date Fair Value			Units		Weighted Average Grant Date Fair Value
Unvested at June 30, 2016		22,860		$	10.28		4,067,145		$	9.40
Granted		—		$	—		72,284		$	9.48
Vested		(5,715	)	$	10.28		(46,214	)	$	14.90
Forfeited		—		$	—		(115,706	)	$	10.48
Unvested at September 30, 2016		17,145		$	10.28		3,977,509		$	9.31

 

		Restricted Stock Awards					Restricted Stock Units
		Shares		Weighted Average Grant Date Fair Value			Units		Weighted Average Grant Date Fair Value
Unvested at December 31, 2015		6,667		$	15.00		3,088,378		$	10.75
Granted		22,860		$	10.28		2,312,121		$	9.16
Vested		(12,382	)	$	12.82		(544,609	)	$	13.31
Forfeited		—		$	—		(878,381	)	$	11.33
Unvested at September 30, 2016		17,145		$	10.28		3,977,509		$	9.31

 

The total grant date fair value of RSAs vested during both the three months ended September 30, 2016 and 2015 was $0.1 million. The total grant date fair value of RSAs vested during both the nine months ended September 30, 2016 and 2015 was $0.2 million. As of September 30, 2016, the Company had $0.2 million of total unrecognized share-based compensation expense related to non-vested, time-based RSAs, net of expected forfeitures. As of September 30, 2016, the unvested RSAs are expected to be amortized over the remaining weighted average period of 0.68 years.

 

The total grant date fair value of RSUs vested during the three months ended September 30, 2016 and 2015 was $0.7 million and $0.5 million, respectively. The total grant date fair value of RSUs vested during the nine months ended September 30, 2016 and 2015 was $7.3 million and $7.6 million, respectively. As of September 30, 2016, the Company had $20.2 million of total unrecognized share-based compensation expense related to unvested RSUs, net of expected forfeitures, of which $13.9 million is related to time-based awards and $6.3 million is related to performance-based awards. As of September 30, 2016, the unvested RSUs are expected to be amortized over the remaining weighted average period of 1.86 years, which consists of a remaining weighted average period of 1.79 years related to performance-based awards and a remaining weighted average period of 1.92 years related to time-based awards.

 

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