Crocs, Inc. - Quarter Report: 2016 March (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 March 31, 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 April 30, 2016, Crocs, Inc. had 73,348,471 shares of its $0.001 par value common stock outstanding.

 

 

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Special 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. 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 March 31, 2016

 

PART I — Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2016 and 2015	2
	Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	33
PART II — Other Information
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	36
Signatures		37

 

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PART I — Financial Information

 

ITEM 1. Financial Statements

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

($ thousands, except per share data)

 

		Three Months Ended
		March 31,
		2016			2015
Revenues		$	279,140		$	262,193
Cost of sales		149,774			134,823
Gross profit		129,366			127,370
Selling, general and administrative expenses		114,930			126,069
Asset impairment charges		193			—
Restructuring charges		—			3,663
Income (loss) from operations		14,243			(2,362		)
Foreign currency transaction gain (loss), net		(1,247		)	494
Interest income		216			288
Interest expense		(243		)	(219		)
Other income (expense), net		82			(331		)
Income (loss) before income taxes		13,051			(2,130		)
Income tax expense		(2,905		)	(295		)
Net income (loss)		$	10,146		$	(2,425	)
Dividends on Series A convertible preferred stock		$	(3,000	)	$	(2,833	)
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature		(785		)	(721		)
Net income (loss) attributable to common stockholders		$	6,361		$	(5,979	)
Net income (loss) per common share:
Basic		$	0.07		$	(0.08	)
Diluted		$	0.07		$	(0.08	)

 

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)

($ thousands)

 

		Three Months Ended
		March 31,
		2016			2015
Net income (loss)		$	10,146		$	(2,425	)
Other comprehensive income (loss):
Foreign currency translation gain (loss), net		4,800			(23,864		)
Total comprehensive income (loss)		$	14,946		$	(26,289	)

 

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)

($ thousands, except number of shares)

 

		March 31,			December 31,
		2016			2015
ASSETS
Current assets:
Cash and cash equivalents		$	89,080		$	143,341
Accounts receivable, net of allowances of $52,254 and $49,364, respectively		157,159			83,616
Inventories		186,113			168,192
Income tax receivable		10,001			10,233
Other receivables		16,925			14,233
Prepaid expenses and other assets		35,477			26,334
Total current assets		494,755			445,949
Property and equipment, net		50,047			49,490
Intangible assets, net		79,651			82,297
Goodwill		2,611			1,973
Deferred tax assets, net		6,746			6,608
Other assets		21,676			21,703
Total assets		$	655,486		$	608,020
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	83,331		$	63,336
Accrued expenses and other liabilities		96,265			92,573
Income taxes payable		7,682			6,416
Current portion of long-term borrowings and capital lease obligations		12,658			4,772
Total current liabilities		199,936			167,097
Long-term income tax payable		4,684			4,547
Long-term borrowings and capital lease obligations		901			1,627
Other liabilities		13,623			13,120
Total liabilities		219,144			186,391
Commitments and contingencies
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 and $203,000 as of March 31, 2016 and December 31, 2015, respectively		176,442			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, 93,576,893 and 73,298,471 shares issued and outstanding, respectively, as of March 31, 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 March 31, 2016 and December 31, 2015, respectively		(284,176		)	(283,913		)
Additional paid-in capital		356,271			353,241
Retained earnings		233,824			227,463
Accumulated other comprehensive loss		(46,113		)	(50,913		)
Total stockholders’ equity		259,900			245,972
Total liabilities, commitments and contingencies and stockholders’ equity		$	655,486		$	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)

($ thousands)

 

		Three Months Ended March 31,
		2016			2015
Cash flows from operating activities:
Net income (loss)		$	10,146		$	(2,425	)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		8,595			9,719
Unrealized (gain) loss on foreign exchange, net		(5,613		)	(1,751		)
Deferred income taxes		143			194
Asset impairment charges		193			—
Provision for doubtful accounts, net		410			1,272
Share-based compensation		2,826			2,949
Other non-cash items		62			25
Changes in operating assets and liabilities:
Accounts receivable, net of allowances		(69,763		)	(78,436		)
Inventories		(14,383		)	(18,955		)
Prepaid expenses and other assets		(8,312		)	2,541
Accounts payable		18,487			42,783
Accrued expenses and other liabilities		(1,227		)	2,628
Income taxes		1,498			(7,256		)
Cash used in operating activities		(56,938		)	(46,712		)
Cash flows from investing activities:
Cash paid for purchases of property and equipment, net		(3,216		)	(1,340		)
Cash paid for intangible assets		(2,714		)	(5,145		)
Change in restricted cash		(1,760		)	272
Cash used in investing activities		(7,690		)	(6,213		)
Cash flows from financing activities:
Proceeds from bank borrowings		20,000			—
Repayments of bank borrowings and capital lease obligations		(12,842		)	(1,309		)
Dividends - Series A preferred stock		(3,000		)	(3,067		)
Deferred debt issuance costs		(50		)	—
Issuances of common stock		155			174
Purchase of treasury stock, net of issuances		—			(19,997		)
Repurchase of common stock for tax withholding		(263		)	(261		)
Cash provided by (used in) financing activities		4,000			(24,460		)
Effect of exchange rate changes on cash		6,367			(9,429		)
Net decrease in cash and cash equivalents		(54,261		)	(86,814		)
Cash and cash equivalents - beginning of period		143,341			267,512
Cash and cash equivalents - end of period		$	89,080		$	180,698
Supplemental disclosure of cash flow information - cash paid during the period for:
Interest, net of capitalized interest		$	149		$	616
Income taxes		$	2,648		$	7,101
Supplemental disclosure of non-cash investing and financing activities:
Accrued dividends		$	3,000		$	2,833

 

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. In the opinion of management, these condensed consolidated financial statements reflect all adjustments (consisting solely of normal recurring matters) considered necessary for a fair statement of the results for the interim periods presented. The accompanying unaudited condensed consolidated financial statements and these notes thereto should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015. 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, 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 expense 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, customer rebates, sales returns, impairment assessments and charges, recoverability of assets (including deferred tax assets), uncertain tax positions, share-based compensation expense, 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 tax and customs matters and threatened or pending legal proceedings (see Note 13—Commitments & Contingencies and Note 15—Legal Proceedings). Actual results could materially differ from these estimates.

 

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 owns all of the outstanding shares of 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 March 31, 2016. Crocs paid $0.2 million to RGIS for services received during each of the three months ended March 31, 2016 and 2015.

 

Recently Issued Accounting Pronouncements

 

Stock Compensation

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. In addition, the amendments in this update eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. 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 and tax deficiencies in the income statement and the practical expedient for estimating 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

 

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transition method or a retrospective transition method. The Company is currently assessing the impact of adoption of this standard on the Company’s 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 a 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 its 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 the Company’s 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. These changes become effective for fiscal years beginning after December 15, 2017. The expected adoption method of ASU 2016-01 is being evaluated by the Company and the adoption is not expected to have a significant impact on the Company’s condensed consolidated financial statements.

 

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 standard 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.

 

Debt Issuance Costs

 

In April 2015, the FASB issued 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 FASB 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. Crocs considered this clarification in conjunction with the adoption of FASB ASU 2015-03, which occurred during the three months ended March 31, 2016.

 

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These pronouncements do not have a material impact on the Company’s condensed consolidated financial statements. In adopting ASU 2015-15, Crocs 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 EITF 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. During the three months ended March 31, 2016, Crocs adopted this pronouncement, which does not have a material impact on the Company’s condensed consolidated financial statements.

 

Revenue Recognition

 

In May 2014, the FASB issued their final standard on revenue from contracts with customers. The standard, issued as ASU 2014-09:  Revenue from Contracts with Customers (Topic 606) by the FASB, 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. Crocs is currently evaluating the impact that this pronouncement will have on its condensed consolidated financial statements. Crocs 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 March 31, 2016 are not expected to have a material impact on the Company’s condensed consolidated financial statements.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Earnings per Share

 

Basic and diluted earnings 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 dividend rights and participation rights in undistributed earnings. Under the two-class method, EPS is computed by dividing the sum of distributed and undistributed earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. A participating security is a security that may participate in undistributed earnings with common stock had those earnings been distributed in any form. The Company’s Series A convertible preferred stock (“Series A preferred stock”) issued in 2014 represents participating securities as holders of the Series A preferred stock are entitled to receive any and all dividends declared or paid on common stock on an as-converted basis. In addition, shares of the Company’s non-vested restricted stock and restricted stock unit awards are considered participating securities as they represent unvested share-based payment awards containing non-forfeitable rights to dividends. As such, these participating securities must be included in the computation of EPS pursuant to the two-class method on a pro-rata, as-converted basis. Diluted EPS reflects the potential dilution from securities that could share in the Company’s earnings. In addition, the dilutive effect of each participating security, if any, is calculated using the more dilutive of the two-class method described above. This method assumes that the securities remain in their current form, or the if-converted method, which assumes conversion to common stock as of the beginning of the reporting date. Anti-dilutive securities are excluded from diluted EPS. See Note 11—Earnings Per Share for further discussion.

 

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Asset Impairments

 

Crocs 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. The following table summarizes retail asset impairment charges by reportable operating segment for the three months ended March 31, 2016 and 2015 related 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:

 

		Three Months Ended March 31,
		2016					2015
		Impairment Charge			Number of Stores (1)		Impairment Charge			Number of Stores (1)
		(in thousands, except store count data)
Americas		$	169		2		$	—		—
Asia Pacific		24			3		—			—
Total asset impairment		$	193		5		$	—		—

 

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

 

Depreciation

 

During the three months ended March 31, 2016 and 2015, Crocs recorded $3.7 million and $4.7 million, respectively, in depreciation expense of which $0.4 million and $0.6 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. As of March 31, 2016 and December 31, 2015, accumulated depreciation was $101.7 million and $97.7 million, respectively.

 

Accounts Receivable

 

Accounts receivable represent amounts due from customers. Accounts receivable are recorded at invoiced amounts, net of reserves and allowances, and do not bear interest. Crocs uses its best estimate to determine the required allowance for doubtful accounts based on a variety of factors including the length of time receivables are past due, economic trends and conditions affecting the Company’s customer base and historical collection experience. Specific provisions are recorded for individual receivables when the Company becomes aware of a customer’s inability to meet its financial obligations.

 

3. INVENTORIES

 

The following table summarizes inventories by major classification as of March 31, 2016 and December 31, 2015:

 

		March 31,			December 31,
		2016			2015
		(in thousands)
Finished goods		$	181,454		$	162,341
Work-in-progress		669			918
Raw materials		3,990			4,933
Total inventories		$	186,113		$	168,192

 

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4. GOODWILL & INTANGIBLE ASSETS

 

The following table summarizes the goodwill and identifiable intangible assets as of March 31, 2016, and December 31, 2015:

 

		March 31, 2016									December 31, 2015
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
		(in thousands)
Capitalized software		$	164,451	(1)	$	(86,771	)(2)	$	77,680		$	162,700	(1)	$	(82,596	)(2)	$	80,104
Customer relationships		4,113			(4,113		)	—			4,016			(4,016		)	—
Patents, copyrights, and trademarks		6,879			(5,219		)	1,660			6,892			(5,135		)	1,757
Core technology (3)		3,723			(3,723		)	—			3,498			(3,498		)	—
Other		636			(636		)	—			776			(637		)	139
Total finite lived intangible assets		179,802			(100,462		)	79,340			177,882			(95,882		)	82,000
Indefinite lived intangible assets (3)		311			—			311			297			—			297
Goodwill (4)		2,611			—			2,611			1,973			—			1,973
Goodwill and intangible assets		$	182,724		$	(100,462	)	$	82,262		$	180,152		$	(95,882	)	$	84,270

 

(1)         Includes $4.1 million of software held under a capital lease classified as capitalized software as of both March 31, 2016, and December 31, 2015.

 

(2)         Includes $3.2 million and $3.1 million of accumulated amortization of software held under a capital lease as of March 31, 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)         Includes $0.5 million associated with the acquisition of operations in Austria in March 2016. The remainder of the increase is associated with the impact of foreign currency translation.

 

The following table summarizes estimated future annual amortization of intangible assets as of March 31, 2016:

 

		Amortization
Fiscal years ending December 31,		(in thousands)
2016 (remainder of year)		$	14,233
2017		16,792
2018		14,812
2019		13,210
2020		10,943
Thereafter		9,350
Total		$	79,340

 

During the three months ended March 31, 2016 and 2015, amortization expense recorded for intangible assets with finite lives was $4.9 million and $5.0 million, respectively, of which $1.3 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. As of March 31, 2016 and December 31, 2015, accumulated amortization was $100.5 million and $95.9 million, respectively.

 

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5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

The following table summarizes accrued expenses and other current liabilities as of March 31, 2016 and December 31, 2015:

 

		March 31,			December 31,
		2016			2015
		(in thousands)
Accrued compensation and benefits		$	22,556		$	20,973
Fulfillment, freight and duties		18,935			14,776
Professional services		11,297			15,019
Sales/use and VAT tax payable		9,123			7,018
Accrued loss on disposal group (1)		7,502			6,743
Accrued rent and occupancy		7,040			7,639
Customer deposits		3,569			3,236
Dividend payable		3,000			3,000
Accrued legal liabilities		1,858			1,971
Deferred revenue and royalties payable		1,634			1,430
Travel and entertainment liabilities		1,456			2,150
Other (2)		8,295			8,618
Total accrued expenses and other current liabilities		$	96,265		$	92,573

 

(1)   This amount represents accrued losses related to the South Africa disposal group held for sale and is inclusive of $6.7 million in foreign currency translation adjustments recorded within stockholders’ equity. The sale of the Company’s South Africa operations was completed on April 15, 2016, and we do not anticipate a significant gain or loss on disposal in the second quarter of 2016.

 

(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 March 31, 2016 or December 31, 2015.

 

6. FAIR VALUE MEASUREMENTS

 

Recurring Fair Value Measurements

 

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.

 

As of March 31, 2016 and December 31, 2015, our assets subject to fair value measurements consisted solely of cash equivalents of $7.7 million and $7.5 million, respectively, which are Level 1 assets, and foreign currency derivative assets of $1.3 million and liabilities of $0.1 million, respectively, which are Level 2 assets. The Company’s Level 1 assets are classified in the condensed consolidated balance sheets as ‘Cash and cash equivalents’ and ‘Prepaid expenses and other assets’. As of March 31, 2016 and December 31, 2015, the Level 2 assets or liabilities are classified in the condensed consolidated balance sheets as ‘Prepaid expenses and other assets’ and ‘Accrued expenses and other liabilities’, respectively.

 

Non-Recurring Fair Value Measurements

 

The majority of the Company’s non-financial instruments, inventories, property and equipment, and intangible assets, are Level 3 assets and are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment and the carrying value is not recoverable, the carrying value would be adjusted to the lower of its cost or fair value and an impairment charge would be recorded. During the three months ended March 31, 2016, Crocs recorded $0.2 million in impairment charges associated with the Company’s retail locations. During the three months ended March 31, 2015, the Company had no impairment charges associated with the Company’s retail locations or inventory write-down charges.

 

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7. DERIVATIVE FINANCIAL INSTRUMENTS

 

Crocs transacts business in various foreign countries and is therefore exposed to foreign currency exchange rate risk inherent in revenues, costs, and monetary assets and liabilities denominated in non-functional currencies. In general, Crocs 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, and of future cash flows caused by changes in foreign currency exchange rates. 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. For purposes of the cash flow statement, Crocs 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 (used in) operating activities’.

 

The following table summarizes the notional amounts of outstanding foreign currency exchange contracts as of March 31, 2016 and December 31, 2015. The notional amounts of the derivative financial instruments shown below 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.

 

		March 31,			December 31,
		2016			2015
		(in thousands)
Foreign currency exchange forward contracts by currency:
Japanese Yen		$	109,340		$	98,390
Singapore Dollar		54,028			—
Euro		34,625			34,219
South Korean Won		20,719			7,981
British Pound Sterling		20,368			21,859
Australian Dollar		10,248			6,459
Canadian Dollar		8,959			1,980
Mexican Peso		7,382			7,277
Indian Rupee		7,320			5,036
New Taiwan Dollar		4,012			1,798
Russian Ruble		1,903			667
Brazilian Real		1,727			—
Swedish Krona		1,515			1,655
Hong Kong Dollar		668			668
South African Rand		—			6,402
Total notional value, net		$	282,814		$	194,391
Latest maturity date		April 2016			January 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 for the three months ended March 31, 2016 and 2015:

 

		Three Months Ended March 31,
		2016			2015
		(in thousands)
Foreign currency gain		$	2,262		$	6,217
Derivatives not designated as hedging instruments:
Foreign currency exchange forwards gain (loss)		(3,509		)	(5,723		)
Foreign currency transaction gain (loss), net		$	(1,247	)	$	494

 

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

 

8. REVOLVING CREDIT FACILITY & BANK BORROWINGS

 

Senior Revolving Credit Facility

 

In December 2011, Crocs 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 Amended and Restated 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 1.00 to 1.00 through the period ended June 30, 2016 and 1.10 to 1.00 thereafter, (v) set the maximum leverage ratio to 2.50 to 1.00 through the period ended June 30, 2016 and 2.00 to 1.00 thereafter, (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. Under the terms of the agreement, the above financial covenants are only applicable when borrowings exceed an average of $18.8 million over a 30-day period, starting on the 15th of the last month of each quarter. The Eleventh Amendment also changed the variable lending rate. 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.

 

As of March 31, 2016, the Company was in compliance with each of these covenants: (i) the fixed charge coverage ratio was 3.94 to 1.00, compared to the minimum covenant requirement of 1.00 to 1.00 (ii) the leverage ratio was 0.37 to 1.00, compared to the maximum covenant requirement of 2.50 to 1.00 (iii) stock repurchases were zero, and (iv) capital expenditures and commitments were $11.5 million. For the three months ended March 31, 2016, the weighted average/effective interest rate for outstanding senior revolving credit facility borrowings was 4.0%.

 

As of March 31, 2016 and December 31, 2015, the Company had $8.5 million and zero, respectively, of outstanding borrowings under the Credit Agreement. As of both March 31, 2016 and December 31, 2015, the Company 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 March 31, 2016 and December 31, 2015, the Company had $65.2 million and $73.7 million, respectively, of available borrowing capacity. During the three months ended March 31, 2016, Crocs capitalized $0.6 million in fees and third party costs as deferred financing costs associated with the negotiation of a new debt financing agreement that has not yet been executed. The short-term portion of these fees are recorded in the ‘Prepaid expenses and other assets’ account and the long-term portion are recorded in the ‘Other assets’ accounts. Crocs did not capitalize any fees in connection with the Credit Agreement during the three months ended March 31, 2015.

 

Asia Pacific Revolving Credit Facility

 

On August 28, 2015, a Crocs 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 Crocs 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. This revolving credit facility supports possible future net working capital needs in China. 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 drawdown 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 is guaranteed by Crocs, Inc. The revolving credit facility can be canceled or suspended at any time at the discretion of the lender and contains provisions requiring Crocs to maintain compliance with certain restrictive covenants. As of March 31, 2016 and December 31, 2015, the revolving credit facility remained temporarily suspended at the discretion of the lender and Crocs had no outstanding borrowings under the revolving credit facility.

 

Long-term Bank Borrowings

 

On December 10, 2012, Crocs 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.

 

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As of March 31, 2016 and December 31, 2015 Crocs had $5.0 million and $6.4 million, respectively, of debt outstanding under five separate notes payable, of which $4.2 million and $4.8 million, respectively, represent current installments. As of March 31, 2016, the notes bear interest rates ranging from 2.45% to 2.79% and maturities ranging from September 2016 to September 2017.

 

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

 

		March 31, 2016
				Unused Borrowing Capacity (2)								Carrying Value (3)
		Weighted Average Interest Rate (1)		Borrowing Currency					U.S.D. Equivalent			March 31, 2016			December 31, 2015
				(in thousands)
Debt obligations
Senior revolving credit facility		Base rate plus 0.50% - 0.75% LIBOR plus 1.50% - 1.75%		$		65,247		(4)	$	65,247	(4)	$	8,500		$	—
Asia Pacific revolving credit facility		LIBOR plus 2.10%		RMB			—	(5)	—		(5)	—			—
Long-term bank borrowings		2.63%										5,036			6,375
Total									$	65,247		13,536			6,375
Capital lease obligations												23			24
Total debt and capital lease obligations												$	13,559		$	6,399
Current maturities												$	12,658		$	4,772
Long-term debt and capital lease obligations												$	901		$	1,627

 

(1)         Carrying value represents the weighted average interest rate in effect at March 31, 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 impact of the derivative instruments, deferred financing costs, original issue premiums or discounts, and commitment fees, all of which affect Crocs’ overall cost of borrowing.

 

(2)         Unused borrowing capacity represents the maximum available under the applicable facility at March 31, 2016 without regard to covenant compliance calculations or other conditions precedent to borrowing.

 

(3)         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.

 

(4)         On February 18, 2016, the Company entered into the Eleventh Amendment to the Amended and Restated Credit Agreement, which extended the maturity date to February 2021, resized the borrowing capacity of the facility to $75.0 million, and amended certain definitions of the financial covenants to become more favorable to the Company. As of March 31, 2016, the unused borrowing capacity was reduced by $8.5 million of outstanding borrowings and $1.3 million of outstanding letters of credit.

 

(5)         As of March 31, 2016, the Asia Pacific revolving credit facility remained suspended.

 

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The maturities of the Company’s debt obligations as of March 31, 2016 are presented below:

 

		March 31, 2016
		(in thousands)
Maturities of debt and capital lease obligations
2016 (remainder of year)		$	11,932
2017		1,616
2018		5
2019		4
2020		2
Thereafter		—
Total principal debt maturities		$	13,559
Current portion		$	12,658
Noncurrent portion		$	901

 

As of March 31, 2016 and December 31, 2015, the fair value of the Company’s debt instruments approximates their reported carrying amounts.

 

9. STOCK-BASED COMPENSATION

 

Stock-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 March 31, 2016 and 2015, Crocs recorded $2.8 million and $2.9 million, respectively, of pre-tax stock-based compensation expense, of which $2.7 million and $2.9 million, respectively, is included in selling, general and administrative expense, and the remainder included in cost of sales on the condensed consolidated statements of operations.

 

Stock Option Activity

 

A summary of Crocs’ stock option activity as of and for the three months ended March 31, 2016 is presented below:

 

		Stock Option Shares		Weighted Average Exercise Price
Outstanding as of December 31, 2015		1,295,749		$	14.09
Granted		—		$	—
Exercised		(36,947	)	$	4.19
Forfeited or expired		(467,241	)	$	11.80
Outstanding as of March 31, 2016		791,561		$	15.90

 

As of March 31, 2016, there was $0.6 million of unrecognized compensation expense related to stock options. The expense is expected to be amortized over a weighted average period of 2.37 years.

 

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Restricted Stock Awards and Units Activity

 

A summary of the Company’s Restricted Stock Award (“RSA”) and Restricted Stock Unit (“RSU”) activity as of and for the three months ended March 31, 2016 is presented below:

 

		Restricted Stock Awards					Restricted Stock Units
				Weighted					Weighted
				Average					Average
				Grant Date					Grant Date
		Shares		Fair Value			Units		Fair Value
Unvested at December 31, 2015		6,667		$	15.00		3,088,378		$	10.75
Granted		—		$	—		1,847,080		$	9.24
Vested		(3,333	)	$	15.00		(438,939	)	$	13.00
Forfeited		—		$	—		(683,437	)	$	11.27
Unvested at March 31, 2016		3,334		$	15.00		3,813,082		$	9.63

 

The total grant date fair value of RSAs vested during the three months ended March 31, 2016 and 2015 was less than $0.1 million and $0.1 million, respectively. As of March 31, 2016, Crocs had less than $0.1 million of total unrecognized stock-based compensation expense related to non-vested, time-based restricted stock awards, net of expected forfeitures. As of March 31, 2016, the unvested RSAs are expected to be amortized over the remaining weighted average period of 0.19 years.

 

The total grant date fair value of RSUs vested during the three months ended March 31, 2016 and 2015 was $5.7 million and $6.5 million, respectively. As of March 31, 2016, Crocs had $23.6 million of total unrecognized stock-based compensation expense related to unvested restricted stock units, net of expected forfeitures, of which $15.5 million is related to time-based awards and $8.1 million is related to performance-based awards. As of March 31, 2016, the unvested RSUs are expected to be amortized over the remaining weighted average period of 2.21 years, which consists of a remaining weighted average period of 2.23 years related to performance-based awards and a remaining weighted average period of 2.19 years related to time-based awards.

 

10. INCOME TAXES

 

During the three months ended March 31, 2016, the Company recognized income tax expense of $2.9 million on pre-tax income of $13.1 million. This represents an effective income tax rate of 22.1%. For the same period in 2015, the Company recognized income tax expense of $0.3 million on a pre-tax loss of $2.1 million, representing an effective tax rate of (13.9%).

 

The change in effective tax rate is primarily due to an increase in profitability in various jurisdictions, compared to the same period in 2015. The Company’s effective income tax rate, for each period presented, differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions. There were no significant or unusual discrete tax items during the quarter. The Company had unrecognized tax benefits of $5.1 million and $5.0 million at March 31, 2016 and December 31, 2015, respectively, and the Company does not expect any significant changes in this balance in the next twelve months.

 

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11. EARNINGS PER SHARE

 

The following table illustrates the basic and diluted EPS computations for the three months ended March 31, 2016 and 2015:

 

		Three Months Ended March 31,
		2016			2015
		(in thousands)
Numerator
Net income (loss) attributable to common stockholders		$	6,361		$	(5,979	)
Less: adjustment for income allocated to participating securities		(1,010		)	—
Net income (loss) attributable to common stockholders - basic and diluted		$	5,351		$	(5,979	)
Denominator
Weighted average common shares outstanding - basic		73,087			77,825
Plus: dilutive effect of stock options and unvested restricted stock units		946			—
Weighted average common shares outstanding - diluted		74,033			77,825
Net income (loss) attributable per common share:
Basic		$	0.07		$	(0.08	)
Diluted		$	0.07		$	(0.08	)

 

Diluted EPS is calculated using the two-class method for options and RSUs and the if-converted method for Series A preferred stock. For the three months ended March 31, 2016 and 2015, 1.9 million and 2.3 million options and RSUs, respectively, were excluded from the calculation of diluted EPS under the two-class method because the effect would be anti-dilutive. The Series A preferred shares were excluded from the calculation of diluted EPS under the if-converted method because the effect would be anti-dilutive. If converted, Series A preferred stock would represent approximately 15.8% of the Company’s common stock outstanding or 13.8 million additional common shares, as of March 31, 2016. See Note 12—Series A Preferred Stock for further details regarding the preferred share offering.

 

Stock Repurchase Plan Authorizations

 

Crocs continues to evaluate options to maximize the returns on its cash and maintain an appropriate capital structure, including, among other alternatives, repurchases of common stock. On December 26, 2013, Crocs’ board of directors (the “Board”) approved the repurchase of up to $350.0 million of the Company’s common stock. The number, price, structure, and timing of the repurchases will be at the Company’s sole discretion and future repurchases will be evaluated by the Company depending on market conditions, liquidity needs, any restrictions under the Company’s debt arrangements, and other factors. Share repurchases may be made in the open market or in privately negotiated transactions. The repurchase authorization does not have an expiration date and does not obligate Crocs to acquire any particular amount of its common stock. The Board may suspend, modify, or terminate the repurchase program at any time without prior notice.

 

During the three months ended March 31, 2016, Crocs had no repurchases of shares under the publicly-announced repurchase plan. As of March 31, 2016, subject to certain restrictions on repurchases under the Company’s revolving credit facility, Crocs had $118.7 million remaining under the repurchase authorizations.

 

12. SERIES A PREFERRED STOCK

 

On January 27, 2014, Crocs issued 200,000 shares of Series A preferred stock to Blackstone and certain of its permitted transferees, for an aggregate purchase price of $198.0 million, or $990 per share, pursuant to an Investment Agreement between Crocs and Blackstone, dated December 28, 2013. In connection with the issuance of the Series A preferred stock, Crocs received proceeds of $182.2 million after deducting the issuance discount of $2.0 million and direct and incremental expenses of $15.8 million including financial advisory fees, closing costs, legal expenses and other offering-related expenses. As of March 31, 2016 and December 31, 2015, Crocs had accrued dividends of $3.0 million on the condensed consolidated balance sheets, which were paid in cash to holders of the Series A preferred stock on April 1, 2016 and January 4, 2016, respectively.

 

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13. COMMITMENTS AND CONTINGENCIES

 

Rental Commitments and Contingencies

 

Crocs rents space for its retail stores, offices, warehouses, vehicles, and equipment under operating leases expiring at various dates through 2033. Certain leases 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 or rent holidays is recognized on a straight-line basis over the lease term beginning on the lease inception date. Deferred rent is included in the condensed consolidated balance sheets in ‘Accrued expenses and other current liabilities.’

 

The following table summarizes the composition of rent expense under operating leases for the three months ended March 31, 2016 and 2015:

 

		Three Months Ended March 31,
		2016			2015
		(in thousands)
Minimum rentals (1)		$	22,456		$	24,812
Contingent rentals		2,129			2,077
Less: Sublease rentals		(61		)	(59		)
Total rent expense		$	24,524		$	26,830

 

(1)   Minimum rentals include all lease payments as well as fixed and variable common area maintenance, parking and storage fees, which were approximately $2.5 million and $2.3 million during the three months ended March 31, 2016 and 2015, respectively.

 

Purchase Commitments

 

As of March 31, 2016 and December 31, 2015, Crocs had firm purchase commitments with certain third party manufacturers of $106.4 million and $158.2 million, respectively.

 

14. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION

 

Crocs has three reportable operating segments based on the geographic nature of the Company’s operations: Americas, Asia Pacific, and Europe. Crocs’ “Other businesses” category aggregates insignificant operating segments that do not meet the reportable segment threshold and includes manufacturing operations located in Mexico, Italy and Asia. The composition of the Company’s reportable operating segments is consistent with that used by Crocs’ chief operating decision maker (“CODM”) to evaluate performance and allocate resources.

 

Each of the reportable operating segments derives its revenues from the sale of footwear and accessories to external customers as well as intersegment sales. Revenues of the ‘Other businesses’ category are primarily made up of intersegment sales. The remaining revenues for ‘Other businesses’ represent non-footwear product sales to external customers. Intersegment sales are not included in the measurement of segment operating income or regularly reviewed by the CODM and are eliminated when deriving total consolidated revenues.

 

Segment performance is evaluated based on segment results without allocating corporate expenses, or indirect general, administrative, and other expenses. Segment profits or losses include adjustments to eliminate intersegment sales. As such, reconciling items for segment operating income represent unallocated corporate and other expenses as well as intersegment eliminations.

 

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The following tables set forth information related to Crocs’ reportable operating business segments as of and for the three months ended March 31 2016 and 2015:

 

		Three Months Ended March 31,
		2016			2015
		(in thousands)
Revenues:
Americas		$	124,130		$	105,769
Asia Pacific		104,502			99,775
Europe		50,336			56,424
Total segment revenues		278,968			261,968
Other businesses		172			225
Total consolidated revenues		$	279,140		$	262,193
Operating income:
Americas		$	16,576		$	15,378
Asia Pacific		25,851		(1)	17,335		(1)
Europe		6,523			8,238
Total segment operating income		48,950			40,951
Reconciliation of total segment operating income to income before income taxes:
Other businesses		$	(6,074	)	$	(5,403	)
Unallocated corporate and other (2)		(28,633		)	(37,910		)
Total consolidated operating income (loss)		14,243			(2,362		)
Foreign currency transaction gain (loss), net		(1,247		)	494
Interest income		216			288
Interest expense		(243		)	(219		)
Other income (expense), net		82			(331		)
Income (loss) before income taxes		$	13,051		$	(2,130	)
Depreciation and amortization:
Americas		$	1,478		$	1,974
Asia Pacific		1,078			1,213
Europe		780			803
Total segment depreciation and amortization		3,336			3,990
Other businesses		1,710			1,987
Unallocated corporate and other (2)		3,549			3,742
Total consolidated depreciation and amortization		$	8,595		$	9,719

 

(1)         Increase of $8.5 million is primarily due to the combined impact of: (i) a $4.7 million increase in revenues, (ii) a $2.2 million decrease in selling, general and administrative expenses, primarily associated with decreases in commissions and marketing expenses, and (iii) a $1.8 million decrease in restructuring charges.

 

(2)         Includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, restructuring, depreciation and amortization of corporate and other assets not allocated to operating segments and costs of the same nature related to certain corporate holding companies. The decrease in ‘Unallocated corporate and other’ operating loss of $9.3 million is primarily associated with various cost reductions related to the Company’s 2015 reorganization efforts.

 

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