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SKECHERS USA INC - Quarter Report: 2022 June (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2022

or

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

Commission File Number 001-14429

SKECHERS U.S.A., INC.

(Exact name of registrant as specified in its charter)

 

 Delaware

 

95-4376145

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

228 Manhattan Beach Blvd.

Manhattan Beach, California

 

90266

(Address of principal executive office)

 

(Zip Code)

 

(310) 318-3100

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol

 

Name of each exchange on which registered

Class A Common Stock, par value $0.001 per share

 

SKX

 

New York Stock Exchange

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

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

 

As of July 29, 2022, 134,844,529 shares of the registrant’s Class A Common Stock, $0.001 par value per share, were outstanding.

As of July 29, 2022, 20,888,571 shares of the registrant’s Class B Common Stock, $0.001 par value per share, were outstanding.

 

 

 

 


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

Condensed Consolidated Balance Sheets (Unaudited)

3

 

Condensed Consolidated Statements of Earnings (Unaudited)

4

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

5

 

Condensed Consolidated Statements of Equity (Unaudited)

6

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

8

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

 

Item 4.

Controls and Procedures

23

 

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

24

 

Item 1A.

Risk Factors

24

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

Item 3.

Defaults Upon Senior Securities

25

 

Item 4.

Mine Safety Disclosures

25

 

Item 5.

Other Information

25

Item 6.

Exhibits

25

 

Signatures

26

 

 

 

2


 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

As of

 

 

As of

 

(in thousands)

 

June 30, 2022

 

 

December 31, 2021

 

ASSETS

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

751,904

 

 

$

796,283

 

Short-term investments

 

 

105,099

 

 

 

98,580

 

Trade accounts receivable, less allowances of $53,799 and $62,684

 

 

916,784

 

 

 

732,793

 

Other receivables

 

 

55,039

 

 

 

80,043

 

Inventory

 

 

1,563,907

 

 

 

1,470,994

 

Prepaid expenses and other

 

 

177,236

 

 

 

193,547

 

Total current assets ($986,204 and $1,040,765 related to VIEs)

 

 

3,569,969

 

 

 

3,372,240

 

Property, plant and equipment, net

 

 

1,225,529

 

 

 

1,128,909

 

Operating lease right-of-use assets

 

 

1,168,385

 

 

 

1,224,580

 

Deferred tax assets

 

 

452,747

 

 

 

451,355

 

Long-term investments

 

 

89,423

 

 

 

145,590

 

Goodwill

 

 

93,497

 

 

 

93,497

 

Other assets, net

 

 

77,046

 

 

 

75,109

 

Total non-current assets ($591,827 and $608,607 related to VIEs)

 

 

3,106,627

 

 

 

3,119,040

 

TOTAL ASSETS

 

$

6,676,596

 

 

$

6,491,280

 

LIABILITIES AND EQUITY

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

972,399

 

 

$

876,342

 

Accrued expenses

 

 

258,640

 

 

 

265,420

 

Operating lease liabilities

 

 

223,230

 

 

 

225,658

 

Current installments of long-term borrowings

 

 

73,414

 

 

 

76,967

 

Short-term borrowings

 

 

 

 

 

1,195

 

Total current liabilities ($520,979 and $601,929 related to VIEs)

 

 

1,527,683

 

 

 

1,445,582

 

Long-term operating lease liabilities

 

 

1,049,330

 

 

 

1,094,748

 

Long-term borrowings

 

 

253,260

 

 

 

263,445

 

Deferred tax liabilities

 

 

9,712

 

 

 

11,820

 

Other long-term liabilities

 

 

118,507

 

 

 

133,613

 

Total non-current liabilities ($345,658 and $368,994 related to VIEs)

 

 

1,430,809

 

 

 

1,503,626

 

Total liabilities

 

 

2,958,492

 

 

 

2,949,208

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred Stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

Class A Common Stock, $0.001 par value; 500,000 shares authorized;

   134,845 and 135,107 shares issued and outstanding

 

 

135

 

 

 

135

 

Class B Common Stock, $0.001 par value; 75,000 shares authorized;

   20,889 and 20,939 shares issued and outstanding

 

 

21

 

 

 

21

 

Additional paid-in capital

 

 

402,360

 

 

 

429,608

 

Accumulated other comprehensive loss

 

 

(75,784

)

 

 

(48,323

)

Retained earnings

 

 

3,089,530

 

 

 

2,877,903

 

Skechers U.S.A., Inc. equity

 

 

3,416,262

 

 

 

3,259,344

 

Noncontrolling interests

 

 

301,842

 

 

 

282,728

 

Total stockholders' equity

 

 

3,718,104

 

 

 

3,542,072

 

TOTAL LIABILITIES AND EQUITY

 

$

6,676,596

 

 

$

6,491,280

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except per share data)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Sales

 

$

1,867,804

 

 

$

1,661,871

 

 

$

3,687,398

 

 

$

3,096,326

 

Cost of sales

 

 

970,225

 

 

 

808,279

 

 

 

1,965,656

 

 

 

1,557,075

 

Gross profit

 

 

897,579

 

 

 

853,592

 

 

 

1,721,742

 

 

 

1,539,251

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

166,609

 

 

 

141,470

 

 

 

274,818

 

 

 

232,795

 

General and administrative

 

 

576,812

 

 

 

510,912

 

 

 

1,116,862

 

 

 

947,578

 

Total operating expenses

 

 

743,421

 

 

 

652,382

 

 

 

1,391,680

 

 

 

1,180,373

 

Earnings from operations

 

 

154,158

 

 

 

201,210

 

 

 

330,062

 

 

 

358,878

 

Other income (expense)

 

 

(19,259

)

 

 

2,158

 

 

 

(25,005

)

 

 

(12,016

)

Earnings before income taxes

 

 

134,899

 

 

 

203,368

 

 

 

305,057

 

 

 

346,862

 

Income tax expense

 

 

28,739

 

 

 

41,545

 

 

 

62,731

 

 

 

70,530

 

Net earnings

 

 

106,160

 

 

 

161,823

 

 

 

242,326

 

 

 

276,332

 

Less: Net earnings attributable to noncontrolling interests

 

 

15,756

 

 

 

24,454

 

 

 

30,699

 

 

 

40,390

 

Net earnings attributable to Skechers U.S.A., Inc.

 

$

90,404

 

 

$

137,369

 

 

$

211,627

 

 

$

235,942

 

Net earnings per share attributable to Skechers U.S.A., Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

0.88

 

 

$

1.36

 

 

$

1.52

 

Diluted

 

$

0.58

 

 

$

0.88

 

 

$

1.35

 

 

$

1.51

 

Weighted-average shares used in calculating net earnings per share attributable to Skechers U.S.A., Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

155,941

 

 

 

155,561

 

 

 

155,969

 

 

 

155,196

 

Diluted

 

 

156,748

 

 

 

156,674

 

 

 

157,074

 

 

 

156,321

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands)

2022

 

 

2021

 

 

2022

 

 

2021

 

Net earnings

 

$

106,160

 

 

$

161,823

 

 

$

242,326

 

 

$

276,332

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on derivative contract

 

 

1,254

 

 

 

(129

)

 

 

7,097

 

 

 

1,623

 

Gain (loss) on foreign currency translation adjustment

 

 

(42,229

)

 

 

3,012

 

 

 

(40,740

)

 

 

(9,493

)

Comprehensive income

 

 

65,185

 

 

 

164,706

 

 

 

208,683

 

 

 

268,462

 

Less: Comprehensive income attributable to noncontrolling interests

 

 

3,743

 

 

 

25,978

 

 

 

23,764

 

 

 

40,225

 

Comprehensive income attributable to Skechers U.S.A., Inc.

 

$

61,442

 

 

$

138,728

 

 

$

184,919

 

 

$

228,237

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Additional

 

 

other

 

 

 

 

 

 

Skechers

 

 

 

 

 

 

Total

 

 

 

Common

 

 

Common

 

 

Common

 

 

Common

 

 

paid-in

 

 

comprehensive

 

 

Retained

 

 

U.S.A., Inc.

 

 

Noncontrolling

 

 

stockholders'

 

(in thousands)

 

Stock

 

 

Stock

 

 

Stock

 

 

Stock

 

 

capital

 

 

loss

 

 

earnings

 

 

equity

 

 

interests

 

 

equity

 

Balance at March 31, 2022

 

 

134,829

 

 

 

20,939

 

 

$

135

 

 

$

21

 

 

$

415,357

 

 

$

(46,822

)

 

$

2,999,126

 

 

$

3,367,817

 

 

$

298,099

 

 

$

3,665,916

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90,404

 

 

 

90,404

 

 

 

15,756

 

 

 

106,160

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,962

)

 

 

 

 

 

(28,962

)

 

 

(13,267

)

 

 

(42,229

)

Net unrealized gain on derivative contract

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,254

 

 

 

1,254

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,828

 

 

 

 

 

 

 

 

 

15,828

 

 

 

 

 

 

15,828

 

Proceeds from the employee stock purchase plan

 

 

144

 

 

 

 

 

 

 

 

 

 

 

 

4,836

 

 

 

 

 

 

 

 

 

4,836

 

 

 

 

 

 

4,836

 

Shares issued under the incentive award plan

 

 

692

 

 

 

 

 

 

1

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares redeemed for employee tax withholdings

 

 

(234

)

 

 

 

 

 

 

 

 

 

 

 

(9,429

)

 

 

 

 

 

 

 

 

(9,429

)

 

 

 

 

 

(9,429

)

Repurchases of common stock

 

 

(636

)

 

 

 

 

 

(1

)

 

 

 

 

 

(24,231

)

 

 

 

 

 

 

 

 

(24,232

)

 

 

 

 

 

(24,232

)

Conversion of Class B Common Stock into Class A Common Stock

 

 

50

 

 

 

(50

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2022

 

 

134,845

 

 

 

20,889

 

 

$

135

 

 

$

21

 

 

$

402,360

 

 

$

(75,784

)

 

$

3,089,530

 

 

$

3,416,262

 

 

$

301,842

 

 

$

3,718,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2021

 

 

134,172

 

 

 

20,949

 

 

$

134

 

 

$

21

 

 

$

377,350

 

 

$

(36,349

)

 

$

2,234,973

 

 

$

2,576,129

 

 

$

255,417

 

 

$

2,831,546

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

137,369

 

 

 

137,369

 

 

 

24,454

 

 

 

161,823

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,359

 

 

 

 

 

 

1,359

 

 

 

1,653

 

 

 

3,012

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(750

)

 

 

(750

)

Net unrealized loss on derivative contract

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(129

)

 

 

(129

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,645

 

 

 

 

 

 

 

 

 

14,645

 

 

 

 

 

 

14,645

 

Proceeds from the employee stock purchase plan

 

 

141

 

 

 

 

 

 

 

 

 

 

 

 

4,027

 

 

 

 

 

 

 

 

 

4,027

 

 

 

 

 

 

4,027

 

Shares issued under the incentive award plan

 

 

572

 

 

 

 

 

 

1

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares redeemed for employee tax withholdings

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

(70

)

 

 

 

 

 

 

 

 

(70

)

 

 

 

 

 

(70

)

Balance at June 30, 2021

 

 

134,884

 

 

 

20,949

 

 

$

135

 

 

$

21

 

 

$

395,951

 

 

$

(34,990

)

 

$

2,372,342

 

 

$

2,733,459

 

 

$

280,645

 

 

$

3,014,104

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

6


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Additional

 

 

other

 

 

 

 

 

 

Skechers

 

 

 

 

 

 

Total

 

 

 

Common

 

 

Common

 

 

Common

 

 

Common

 

 

paid-in

 

 

comprehensive

 

 

Retained

 

 

U.S.A., Inc.

 

 

Noncontrolling

 

 

stockholders'

 

(in thousands)

 

Stock

 

 

Stock

 

 

Stock

 

 

Stock

 

 

capital

 

 

loss

 

 

earnings

 

 

equity

 

 

interests

 

 

equity

 

Balance at December 31, 2021

 

 

135,107

 

 

 

20,939

 

 

$

135

 

 

$

21

 

 

$

429,608

 

 

$

(48,323

)

 

$

2,877,903

 

 

$

3,259,344

 

 

$

282,728

 

 

$

3,542,072

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

211,627

 

 

 

211,627

 

 

 

30,699

 

 

 

242,326

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,461

)

 

 

 

 

 

(27,461

)

 

 

(13,279

)

 

 

(40,740

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,650

)

 

 

(4,650

)

Net unrealized gain on derivative contract

 

 

 

 

 

 

 

 

 

 

 

 

 

 

753

 

 

 

 

 

 

 

 

 

753

 

 

 

6,344

 

 

 

7,097

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,796

 

 

 

 

 

 

 

 

 

33,796

 

 

 

 

 

 

33,796

 

Proceeds from the employee stock purchase plan

 

 

144

 

 

 

 

 

 

 

 

 

 

 

 

4,836

 

 

 

 

 

 

 

 

 

4,836

 

 

 

 

 

 

4,836

 

Shares issued under the incentive award plan

 

 

1,258

 

 

 

 

 

 

1

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares redeemed for employee tax withholdings

 

 

(427

)

 

 

 

 

 

 

 

 

 

 

 

(17,401

)

 

 

 

 

 

 

 

 

(17,401

)

 

 

 

 

 

(17,401

)

Repurchases of common stock

 

 

(1,287

)

 

 

 

 

 

(1

)

 

 

 

 

 

(49,231

)

 

 

 

 

 

 

 

 

(49,232

)

 

 

 

 

 

(49,232

)

Conversion of Class B Common Stock into Class A Common Stock

 

 

50

 

 

 

(50

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2022

 

 

134,845

 

 

 

20,889

 

 

$

135

 

 

$

21

 

 

$

402,360

 

 

$

(75,784

)

 

$

3,089,530

 

 

$

3,416,262

 

 

$

301,842

 

 

$

3,718,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

 

133,618

 

 

 

21,016

 

 

$

134

 

 

$

21

 

 

$

372,165

 

 

$

(27,285

)

 

$

2,136,400

 

 

$

2,481,435

 

 

$

244,228

 

 

$

2,725,663

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

235,942

 

 

 

235,942

 

 

 

40,390

 

 

 

276,332

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,705

)

 

 

 

 

 

(7,705

)

 

 

(1,788

)

 

 

(9,493

)

Contributions from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

14

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(750

)

 

 

(750

)

Purchase of noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,856

)

 

 

 

 

 

 

 

 

(6,856

)

 

 

(3,072

)

 

 

(9,928

)

Net unrealized gain on derivative contract

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,623

 

 

 

1,623

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26,686

 

 

 

 

 

 

 

 

 

26,686

 

 

 

 

 

 

26,686

 

Proceeds from the employee stock purchase plan

 

 

141

 

 

 

 

 

 

 

 

 

 

 

 

4,027

 

 

 

 

 

 

 

 

 

4,027

 

 

 

 

 

 

4,027

 

Shares issued under the incentive award plan

 

 

1,059

 

 

 

 

 

 

1

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares redeemed for employee tax withholdings

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

(70

)

 

 

 

 

 

 

 

 

(70

)

 

 

 

 

 

(70

)

Conversion of Class B Common Stock into Class A Common Stock

 

 

67

 

 

 

(67

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2021

 

 

134,884

 

 

 

20,949

 

 

$

135

 

 

$

21

 

 

$

395,951

 

 

$

(34,990

)

 

$

2,372,342

 

 

$

2,733,459

 

 

$

280,645

 

 

$

3,014,104

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

7


 

 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Six Months Ended June 30,

 

(in thousands)

 

2022

 

 

2021

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net earnings

 

$

242,326

 

 

$

276,332

 

Adjustments to reconcile net earnings to net cash provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

72,032

 

 

 

66,649

 

Provision for bad debts and returns

 

 

9,542

 

 

 

12,563

 

Stock compensation

 

 

33,796

 

 

 

26,686

 

Deferred income taxes

 

 

(4,110

)

 

 

1,764

 

Net foreign currency adjustments

 

 

12,336

 

 

 

(6,148

)

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Receivables

 

 

(210,229

)

 

 

(156,551

)

Inventory

 

 

(125,485

)

 

 

(41,866

)

Other assets

 

 

10,766

 

 

 

49,108

 

Accounts payable

 

 

118,667

 

 

 

87,345

 

Other liabilities

 

 

(4,932

)

 

 

1,279

 

Net cash provided by operating activities

 

 

154,709

 

 

 

317,161

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(163,511

)

 

 

(146,219

)

Purchases of investments

 

 

(32,770

)

 

 

(122,748

)

Proceeds from sales and maturities of investments

 

 

82,418

 

 

 

101,759

 

Net cash used in investing activities

 

 

(113,863

)

 

 

(167,208

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net proceeds from the employee stock purchase plan

 

 

4,836

 

 

 

4,027

 

Repayments on long-term borrowings

 

 

(29,777

)

 

 

(477,835

)

Proceeds from long-term borrowings

 

 

16,040

 

 

 

57,629

 

Net repayments on short-term borrowings

 

 

(1,195

)

 

 

(2,722

)

Payments for employee taxes related to stock compensation

 

 

(17,401

)

 

 

(70

)

Repurchases of common stock

 

 

(49,232

)

 

 

 

Purchase of noncontrolling interests

 

 

 

 

 

(9,928

)

Contributions from noncontrolling interests

 

 

 

 

 

14

 

Distributions to noncontrolling interests

 

 

(4,650

)

 

 

(750

)

Net cash used in financing activities

 

 

(81,379

)

 

 

(429,635

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(3,846

)

 

 

211

 

Net change in cash and cash equivalents

 

 

(44,379

)

 

 

(279,471

)

Cash and cash equivalents at beginning of the period

 

 

796,283

 

 

 

1,370,826

 

Cash and cash equivalents at end of the period

 

$

751,904

 

 

$

1,091,355

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the period for

 

 

 

 

 

 

 

 

Interest

 

$

8,855

 

 

$

7,354

 

Income taxes, net

 

 

50,817

 

 

 

53,610

 

Non-cash transactions

 

 

 

 

 

 

 

 

ROU assets exchanged for lease liabilities

 

 

154,448

 

 

 

72,833

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

8


 

 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(1)

General

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Skechers U.S.A., Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S‑X. In the opinion of management, all normal adjustments and accruals considered necessary to provide a fair statement of the results of operations for the interim periods presented have been included. The December 31, 2021 balance sheet data was derived from audited financial statements; however, the accompanying notes to condensed consolidated financial statements do not include all of the annual disclosures required under GAAP and should be read in conjunction with the Company’s 2021 Annual Report on Form 10-K. Certain reclassifications have been made to the condensed consolidated financial statements in prior years to conform to the current year presentation, including but not limited to combining royalty income into sales.

Noncontrolling Interests

The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products throughout Mexico, Asia and the Middle East or to construct the Company’s domestic distribution facility. These joint ventures are variable interest entities (“VIE”), and the Company is considered the primary beneficiary. This determination is based on the relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. Specifically, the Company has both of the following characteristics: (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance; and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE, or the right to receive benefits from the entity that could potentially be significant to the VIE. The assets and liabilities and results of operations of these entities are included in the Company’s condensed consolidated financial statements, even though the Company may not hold a majority equity interest.

In March 2021, the minority interest related to the Hong Kong joint venture was purchased for $10.0 million. The Hong Kong entity continues to be included in the Company’s condensed consolidated financial statements. There have been no changes during 2022 in the accounting treatment or characterization of any previously identified VIEs. The Company continues to reassess these relationships quarterly. The assets of these joint ventures are restricted, as they are not available for general business use outside the context of such joint ventures. The holders of the liabilities of each joint venture have no recourse to the Company.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value hierarchy as defined by applicable accounting standards prioritizes the use of inputs used in valuation techniques into the following three levels:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data.

 

Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity’s own assumptions.

The Company’s Level 1 investments primarily include money market funds and United States (“U.S.”) Treasury securities; Level 2 investments primarily include corporate notes and bonds, asset-backed securities, and actively traded mutual funds; and the Company does not currently have any Level 3 assets or liabilities. The Company has one Level 2 derivative instrument which is an interest rate swap related to the refinancing of its U.S. distribution center (see Note 4 – Financial Commitments) classified as other assets, net. The fair value of the interest rate swap was determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipt was based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Credit valuation adjustments were incorporated to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

The carrying amount of receivables, payables and other amounts arising out of the normal course of business approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based on current rates and terms available to the Company for similar debt.

9


 

DERIVATIVE INSTRUMENTS

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, the Company uses an interest rate swap as part of its interest rate risk management strategy. The Company’s interest rate swap, designated as a cash flow hedge, involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. By utilizing an interest rate swap, the Company is exposed to credit-related losses in the event that the counterparty fails to perform under the terms of the derivative contract. To mitigate this risk, the Company enters into derivative contracts with major financial institutions based upon credit ratings and other factors. The Company continually assesses the creditworthiness of its counterparties. As of June 30, 2022, all counterparties to the interest rate swap had performed in accordance with their contractual obligations.

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general income tax accounting methodology including an exception for the recognition of a deferred tax liability when a foreign subsidiary becomes an equity method investment and an exception for interim periods showing operating loss in excess of anticipated operating loss for the year. The amendment also reduces the complexity surrounding franchise tax recognition; the step up in the tax basis of goodwill in conjunction with business combinations; and the accounting for the effect of changes in tax laws enacted during interim periods. The Company adopted ASU 2019-12 on January 1, 2021, and the adoption did not have a material impact on its condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, as amended and supplemented by subsequent ASUs (collectively, “ASU 2020-04”), which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for borrowing instruments, which use LIBOR as a reference rate, and is effective immediately, but is only available through December 31, 2022. The Company has evaluated this ASU and does not expect its adoption to have a material impact on its condensed consolidated financial statements.

(2)

Cash, Cash Equivalents, Short-term and Long-term Investments

The following tables show the Company’s cash, cash equivalents, short-term and long-term investments by significant investment category:

 

 

As of June 30, 2022

 

(in thousands)

 

Adjusted Cost

 

 

Fair Value

 

 

Cash and Cash Equivalents

 

 

Short-Term Investments

 

 

Long-Term Investments

 

Cash

 

$

633,767

 

 

$

633,767

 

 

$

633,767

 

 

$

 

 

$

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

118,137

 

 

 

118,137

 

 

 

118,137

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

20,132

 

 

 

20,132

 

 

 

 

 

 

11,419

 

 

 

8,713

 

Total level 1

 

 

138,269

 

 

 

138,269

 

 

 

118,137

 

 

 

11,419

 

 

 

8,713

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes and bonds

 

 

109,172

 

 

 

109,172

 

 

 

 

 

 

89,335

 

 

 

19,837

 

Asset-backed securities

 

 

14,495

 

 

 

14,495

 

 

 

 

 

 

4,345

 

 

 

10,150

 

Mutual funds

 

 

50,723

 

 

 

50,723

 

 

 

 

 

 

 

 

 

50,723

 

Total level 2

 

 

174,390

 

 

 

174,390

 

 

 

 

 

 

93,680

 

 

 

80,710

 

Total

 

$

946,426

 

 

$

946,426

 

 

$

751,904

 

 

$

105,099

 

 

$

89,423

 

 

10


 

 

 

 

As of December 31, 2021

 

(in thousands)

 

Adjusted Cost

 

 

Fair Value

 

 

Cash and Cash Equivalents

 

 

Short-Term Investments

 

 

Long-Term Investments

 

Cash

 

$

664,220

 

 

$

664,220

 

 

$

664,220

 

 

$

 

 

$

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

132,063

 

 

 

132,063

 

 

 

132,063

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

25,437

 

 

 

25,437

 

 

 

 

 

 

8,896

 

 

 

16,541

 

Total level 1

 

 

157,500

 

 

 

157,500

 

 

 

132,063

 

 

 

8,896

 

 

 

16,541

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate notes and bonds

 

 

148,373

 

 

 

148,373

 

 

 

 

 

 

84,783

 

 

 

63,590

 

Asset-backed securities

 

 

17,180

 

 

 

17,180

 

 

 

 

 

 

4,901

 

 

 

12,279

 

Mutual funds

 

 

53,180

 

 

 

53,180

 

 

 

 

 

 

 

 

 

53,180

 

Total level 2

 

 

218,733

 

 

 

218,733

 

 

 

 

 

 

89,684

 

 

 

129,049

 

Total

 

$

1,040,453

 

 

$

1,040,453

 

 

$

796,283

 

 

$

98,580

 

 

$

145,590

 

The Company’s investments consist of U.S. Treasury securities, corporate notes and bonds and asset-backed securities, which the Company has the intent and ability to hold to maturity and therefore are classified as held-to-maturity. The Company holds mutual funds in its deferred compensation plan which are classified as trading securities. The Company may sell certain of its investments prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s long-term investments are less than two years. The Company minimizes the potential risk of principal loss by investing in highly-rated securities and limiting the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio.

When evaluating an investment for its current expected credit losses, the Company reviews factors such as historical experience with defaults, losses, credit ratings, term, market sector and macroeconomic trends, including current conditions and forecasts to the extent they are reasonable and supportable.

(3)

Accrued Expenses

Accrued expenses were as follows:

 

 

As of

 

 

As of

 

(in thousands)

 

June 30, 2022

 

 

December 31, 2021

 

Accrued payroll, taxes, and other

 

$

137,248

 

 

$

143,295

 

Return reserve liability

 

 

63,452

 

 

 

68,944

 

Accrued inventory purchases

 

 

57,940

 

 

 

53,181

 

Accrued expenses

 

$

258,640

 

 

$

265,420

 

 

(4)

Financial Commitments

The Company had $3.0 million and $17.2 million of outstanding letters of credit as of June 30, 2022 and December 31, 2021, no short-term borrowings as of June 30, 2022, and $1.2 million in short-term borrowings as of December 31, 2021. Interest expense was $4.6 million and $3.4 million for the three months ended June 30, 2022 and 2021 and $9.1 million and $7.5 million for six months ended June 30, 2022 and 2021.

Long-term borrowings were as follows:

 

 

As of

 

 

As of

 

(in thousands)

 

June 30, 2022

 

 

December 31, 2021

 

HF-T1 Distribution Center Loan

 

$

129,505

 

 

$

129,505

 

HF-T2 Distribution Center Construction Loan

 

 

65,722

 

 

 

57,227

 

China Distribution Center Construction Loan

 

 

66,352

 

 

 

75,621

 

China Operational Loans

 

 

57,108

 

 

 

69,796

 

Other

 

 

7,987

 

 

 

8,263

 

Subtotal

 

 

326,674

 

 

 

340,412

 

Less: Current installments

 

 

73,414

 

 

 

76,967

 

Total long-term borrowings

 

$

253,260

 

 

$

263,445

 

 

11


 

 

Revolving Credit Facility

The Company maintains a revolving credit facility to manage liquidity; including working capital and capital expenditures. On December 15, 2021, the Company amended its $500.0 million senior, unsecured revolving credit agreement dated November 21, 2019 (the “Amended Credit Agreement”). The Amended Credit Agreement expands its senior, unsecured credit facility to $750.0 million, which may be increased by up to $250.0 million under certain conditions and provides for the issuance of letters of credit up to a maximum of $100.0 million and swingline loans up to a maximum of $50.0 million. The Amended Credit Agreement extends the maturity date of the credit agreement, which was due to expire on November 21, 2024, to December 15, 2026. The Company had approximately $50.2 million in short-term borrowings as of March 31, 2022 on its revolving credit facility which it fully repaid during the second quarter of 2022. The weighted-average annual interest rate on borrowings was approximately 1.70% during the six months ended June 30, 2022. The unused credit capacity was $747.0 million and $732.8 million as of June 30, 2022 and December 31, 2021.

The Company is required to maintain a maximum total adjusted net leverage ratio of 3.75:1, except in the event of an acquisition in which case the ratio may be increased at the Company’s election to 4.25:1 for the quarter in which such acquisition occurs and for the next three quarters thereafter. The Company was in compliance with the financial covenants as of June 30, 2022.

HF-T1 Distribution Center Loan

To finance construction and improvements to the Company’s North American distribution center, the Company’s joint venture with HF Logistics I, LLC (“HF”), HF Logistics-SKX, LLC (the “JV”), through a wholly-owned subsidiary of the JV (“HF-T1”), entered into a $129.5 million construction loan agreement which matures on March 18, 2025 (the “HF-T1 2020 Loan”) with interest of LIBOR Daily Floating Rate plus a margin of 1.75% per annum.

HF-T1 also entered into an ISDA master agreement (together with the schedule related thereto, the “Swap Agreement”) with Bank of America, N.A. to govern derivative and/or hedging transactions that HF-T1 concurrently entered into with Bank of America, N.A. Pursuant to the Swap Agreement, on August 14, 2015, HF-T1 entered into a confirmation of swap transactions (the “Interest Rate Swap”) as amended (the “Swap Agreement Amendment”) on March 18, 2020 with Bank of America, N.A with a maturity date of March 18, 2025. The Swap Agreement Amendment fixes the effective interest rate on the HF-T1 2020 Loan at 2.55% per annum. The HF-T1 2020 Loan and Swap Agreement Amendment are subject to customary covenants and events of default. Bank of America, N.A. also acts as a lender and syndication agent under the Company’s revolving credit facility.

The Interest Rate Swap involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of both June 30, 2022 and December 31, 2021, the Interest Rate Swap had an aggregate notional amount of $129.5 million. Under the terms of the Swap Agreement Amendment, the Company will pay a weighted-average fixed rate of 0.795% on the notional amount and receive payments from the counterparty based on the 30-day LIBOR rate, effectively modifying the Company’s exposure to interest rate risk by converting floating-rate debt to a fixed rate of 4.08%.

HF-T2 Distribution Center Construction Loan

To finance the expansion of the Company’s North American distribution center, the JV, through HF Logistics-SKX T2, LLC, a wholly-owned subsidiary of the JV (“HF-T2”) entered into a construction loan agreement of up to $73.0 million which matures on April 3, 2025. Under the 2020 Construction Loan Agreement, the interest rate per annum on the HF-T2 2020 Construction Loan is BSBY Daily Floating Rate (as defined therein) plus a margin of 190 basis points, reducing to 175 basis points upon substantial completion of the construction and certain other conditions being satisfied. The weighted-average annual interest rate on borrowings under the HF-T2 Distribution Center Construction Loan was approximately 2.40% during the six months ended June 30, 2022. The obligations of the JV under this loan are guaranteed by TGD Holdings I, LLC, which is an affiliate of HF.

China Distribution Center Construction Loan

The Company entered into a 700.0  million yuan loan agreement to finance the construction of its distribution center in China which matures on September 28, 2023. The interest rate at June 30, 2022 was 4.00% and may increase or decrease over the life of the loan, and will be evaluated every 12 months. Beginning in 2021, the principal of the loan is repaid in semi-annual installments of variable amounts. The obligations of the China distribution center construction loan, entered through the Company’s Taicang Subsidiary are jointly and severally guaranteed by the Company’s China joint venture. As of June 30, 2022 and December 31, 2021, the outstanding balance under this loan included approximately $33.3 million and $28.2 million classified as current installments of long-term borrowings in the Company’s condensed consolidated balance sheets.

 

China Operational Loans

The Company has entered certain secured credit facilities to support the operations of its China joint venture. The balance of working capital loans was approximately $42.6 million with interest rates ranging from 1.63% to 2.83% per annum as of June 30, 2022. The balance of working capital loans as of December 31, 2021 was approximately $52.6 million with interest rates ranging from 1.00% to 3.70% per annum. The balance of loans related to a corporate office building in Shanghai was approximately $14.5 million, with interest at 4.13% per annum, as of June 30, 2022 and $17.2 million as of December 31, 2021, with interest at

12


 

4.28% per annum, payable at terms agreed by the lender. As of June 30, 2022 the outstanding balances classified as current borrowings in the Company’s condensed consolidated balance sheets included $28.4 million related to the working capital loans and $4.2 million related to the office building loans. As of December 31, 2021, the outstanding balances classified as current borrowings in the Company’s condensed consolidated balance sheets included $37.6 million related to the working capital loans and $4.0 million related to the office building loans.

(5)

Stockholders Equity and Stock Compensation

SHARE REPURCHASE PROGRAM

On January 31, 2022, the Company’s Board of Directors authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which the Company may, from time to time, purchase shares of its Class A common stock, for an aggregate repurchase price not to exceed $500 million. The Share Repurchase Program expires on January 31, 2025 and does not obligate the Company to acquire any particular amount of shares. As of June 30, 2022, there was $450.8 million remaining to repurchase shares under the Share Repurchase Program.

The following table provides a summary the Company’s stock repurchase activities:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Shares repurchased

 

 

635,712

 

 

 

 

 

 

1,287,486

 

 

 

 

Average cost per share

 

$

38.12

 

 

$

 

 

$

38.24

 

 

$

 

Total cost of shares repurchased (in thousands):

 

$

24,232

 

 

$

 

 

$

49,232

 

 

$

 

INCENTIVE AWARD PLAN

In the six months ended June 30, 2022, the Company granted restricted stock with time-based vesting as well as performance-based awards. The performance-based awards include a market condition tied to the Company’s total shareholder return in relation to its peer companies as well as a financial performance condition tied to annual earnings per share (“EPS”) growth. The vesting and ultimate payout of performance awards is determined at the end of the three-year performance period and can vary from zero to 200% based on actual results. As of June 30, 2022, there were 2,835,299 shares available for grant as equity awards under the 2017 Incentive Award Plan if target levels are achieved for performance-based awards and 2,135,299 if maximum levels are achieved.

The Company issued the following stock-based instruments:

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

Granted

 

 

Weighted-Average Grant-Date Fair Value

 

 

Granted

 

 

Weighted-Average Grant-Date Fair Value

 

Restricted stock

 

 

1,314,850

 

 

$

38.57

 

 

 

699,300

 

 

$

43.40

 

Performance-based restricted stock

 

 

116,250

 

 

$

42.46

 

 

 

108,750

 

 

$

38.95

 

Market-based restricted stock

 

 

116,250

 

 

$

58.85

 

 

 

108,750

 

 

$

54.34

 

A summary of the status and changes of the Company’s unvested shares is presented below:

 

 

Shares

 

 

Weighted-Average Grant-Date Fair Value

 

Unvested at December 31, 2021

 

 

3,253,316

 

 

$

38.97

 

Granted

 

 

1,547,350

 

 

 

40.39

 

Vested

 

 

(1,256,281

)

 

 

36.09

 

Cancelled

 

 

(41,000

)

 

 

41.18

 

Unvested at June 30, 2022

 

 

3,503,385

 

 

$

40.60

 

The Company determines the fair value of restricted stock awards and any performance-related components based on the closing market price of the Company’s common stock on the date of grant. For share-based awards with a performance-based vesting requirement, the Company evaluates the probability of achieving the performance criteria throughout the performance period and will adjust stock compensation expense up or down based on its estimated probable outcome. Certain performance-based awards contain market condition components which are valued on the date of grant using a Monte Carlo simulation model.

For the three months ended June 30, 2022 and 2021, the Company recognized $15.1 million and $13.9 million of incentive stock compensation expense. For the six months ended June 30, 2022 and 2021, the Company recognized $32.3 million and $25.5 million of incentive stock compensation expense. As of June 30, 2022, the unamortized stock compensation of $114.9 million is expected to be recognized over a weighted-average period of 2.24 years.

13


 

STOCK PURCHASE PLAN

A total of 5,000,000 shares of Class A Common Stock are available for sale under the 2018 Employee Stock Purchase Plan (“2018 ESPP”). The 2018 ESPP provides eligible employees of the Company and its subsidiaries the opportunity to purchase shares of the Company’s Class A Common Stock at a purchase price equal to 85% of the fair market value on the first trading day or last trading day of each purchase period, whichever is lower. Eligible employees can invest up to 15% of their compensation through payroll deductions during each purchase period. The purchase price discount and the look-back feature cause the 2018 ESPP to be compensatory and the Company recognizes compensation expense, which is computed using the Black-Scholes valuation model.

For each of the three months ended June 30, 2022 and 2021, the Company recognized $0.7 million of ESPP stock compensation expense. For the six months ended June 30, 2022 and 2021, the Company recognized $1.5 million and $1.2 million of ESPP stock compensation expense. As of June 30, 2022, there were 3,914,503 shares available for sale under the 2018 ESPP.

 

(6)

Earnings Per Share

Basic EPS and diluted EPS are calculated by dividing net earnings by the following: for basic EPS, the weighted-average number of common shares outstanding for the period; and for diluted EPS, the sum of the weighted-average number of both outstanding common shares and potentially dilutive common shares using the treasury stock method.

The calculation of EPS is as follows: 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands, except per share data)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net earnings attributable to Skechers U.S.A., Inc.

 

$

90,404

 

 

$

137,369

 

 

$

211,627

 

 

$

235,942

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic

 

 

155,941

 

 

 

155,561

 

 

 

155,969

 

 

 

155,196

 

Dilutive effect of nonvested shares

 

 

807

 

 

 

1,113

 

 

 

1,105

 

 

 

1,125

 

Weighted-average common shares outstanding, diluted

 

 

156,748

 

 

 

156,674

 

 

 

157,074

 

 

 

156,321

 

Anti-dilutive common shares excluded above

 

 

67

 

 

 

10

 

 

 

37

 

 

 

35

 

Net earnings per share attributable to Skechers U.S.A., Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

0.88

 

 

$

1.36

 

 

$

1.52

 

Diluted

 

$

0.58

 

 

$

0.88

 

 

$

1.35

 

 

$

1.51

 

 

(7)

Income Taxes

The tax provisions for the three and six months ended June 30, 2022 and 2021 were computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year. The Company’s tax rate is subject to management’s quarterly review and revision, as necessary. The Company’s provision for income tax expense and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign earnings (loss) before income taxes. In the foreign jurisdictions in which the Company has operations, the applicable statutory rates range from 0.0% to 34.0%, which is on average significantly lower than the U.S. federal and state combined statutory rate of approximately 25%. The Company’s effective tax rate was 21.3% and 20.4% for the three months ended June 30, 2022 and 2021 and 20.6% and 20.3% for the six months ended June 30, 2022 and 2021 The minor increases for both the three and six month rates are the result of additional withholding taxes on certain foreign distributions.

 

(8)

Related Party Transactions

The Skechers Foundation (the “Foundation”) is a 501(c)(3) non-profit entity and not a subsidiary or otherwise affiliated with the Company. The Company does not have a financial interest in the Foundation. However, two officers and directors of the Company, Michael Greenberg, the Company’s President, and David Weinberg, the Company’s Chief Operating Officer, are officers and directors of the Foundation. During each of the three months ended June 30, 2022 and 2021, the Company made contributions of $0.5 million, and contributions of $1.0 million for each of the six-month periods ended June 30, 2022 and 2021. In March 2021, the Company purchased two properties for $2.7 million, from an entity controlled by its President, Michael Greenberg, to facilitate future expansion of our corporate office buildings in Manhattan Beach, California. The terms of the sale were no less favorable than could be obtained from an unrelated third party.  

14


 

(9)

Segment and Geographic Information

During the first quarter of 2022, the Company refined the way in which management assesses performance and allocates resources and now presents its reportable segment results as Wholesale and Direct-to-Consumer. Comparative periods have been recast to reflect these changes. Management continues to evaluate segment performance based primarily on sales and gross margin. Other costs and expenses of the Company are analyzed on an aggregate basis and not allocated to the segments. The following summarizes the Company’s operations by segment and geographic area:

Segment Information

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Wholesale sales

 

$

1,140,325

 

 

$

964,228

 

 

$

2,391,631

 

 

$

1,907,338

 

Gross profit

 

 

414,479

 

 

 

379,426

 

 

 

869,439

 

 

 

748,992

 

Gross margin

 

 

36.3

%

 

 

39.4

%

 

 

36.4

%

 

 

39.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct-to-Consumer sales

 

$

727,479

 

 

$

697,643

 

 

$

1,295,767

 

 

$

1,188,988

 

Gross profit

 

 

483,100

 

 

 

474,166

 

 

 

852,303

 

 

 

790,259

 

Gross margin

 

 

66.4

%

 

 

68.0

%

 

 

65.8

%

 

 

66.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total sales

 

$

1,867,804

 

 

$

1,661,871

 

 

$

3,687,398

 

 

$

3,096,326

 

Gross profit

 

 

897,579

 

 

 

853,592

 

 

 

1,721,742

 

 

 

1,539,251

 

Gross margin

 

 

48.1

%

 

 

51.4

%

 

 

46.7

%

 

 

49.7

%

 

(in thousands)

 

As of

June 30, 2022

 

 

As of

December 31, 2021

 

Identifiable assets

 

 

 

 

 

 

 

 

Wholesale

 

$

3,813,653

 

 

$

3,816,513

 

Direct-to-Consumer

 

 

2,862,943

 

 

 

2,674,767

 

Total

 

$

6,676,596

 

 

$

6,491,280

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Additions to property, plant and equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

$

49,965

 

 

$

51,059

 

 

$

114,663

 

 

$

125,193

 

Direct-to-Consumer

 

 

24,148

 

 

 

10,923

 

 

 

48,848

 

 

 

21,026

 

Total

 

$

74,113

 

 

$

61,982

 

 

$

163,511

 

 

$

146,219

 

Geographic Information

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Geographic sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic Wholesale

 

$

521,041

 

 

$

401,277

 

 

$

1,059,610

 

 

$

778,515

 

Domestic Direct-to-Consumer

 

 

319,508

 

 

 

326,981

 

 

 

558,956

 

 

 

554,433

 

Total domestic sales

 

 

840,549

 

 

 

728,258

 

 

 

1,618,566

 

 

 

1,332,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

International Wholesale

 

 

619,284

 

 

 

562,951

 

 

 

1,332,021

 

 

 

1,128,823

 

International Direct-to-Consumer

 

 

407,971

 

 

 

370,662

 

 

 

736,811

 

 

 

634,555

 

Total international sales

 

 

1,027,255

 

 

 

933,613

 

 

 

2,068,832

 

 

 

1,763,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total sales

 

$

1,867,804

 

 

$

1,661,871

 

 

$

3,687,398

 

 

$

3,096,326

 

 

Regional Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas (AMER)

 

$

1,033,879

 

 

$

855,240

 

 

$

1,980,765

 

 

$

1,580,858

 

Europe, Middle East & Africa (EMEA)

 

 

374,566

 

 

 

348,080

 

 

 

815,767

 

 

 

643,566

 

Asia Pacific (APAC)

 

 

459,359

 

 

 

458,551

 

 

 

890,866

 

 

 

871,902

 

Total

 

$

1,867,804

 

 

$

1,661,871

 

 

$

3,687,398

 

 

$

3,096,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

China sales

 

$

254,917

 

 

$

316,872

 

 

$

527,948

 

 

$

567,474

 

 

15


 

 

(in thousands)

 

As of

June 30, 2022

 

 

As of

December 31, 2021

 

Property, plant and equipment, net

 

 

 

 

 

 

 

 

Domestic

 

$

780,329

 

 

$

708,763

 

International

 

 

445,200

 

 

 

420,146

 

Total

 

$

1,225,529

 

 

$

1,128,909

 

 

 

 

 

 

 

 

 

 

China property plant and equipment, net

 

$

250,529

 

 

$

255,421

 

The Company’s sales to its five largest customers accounted for approximately 11.1% and 9.0% of total sales for the three months ended June 30, 2022 and 2021, and for the six months ended June 30, 2022 and 2021 were 10.2% and 8.3%.

Assets located outside the U.S. consist primarily of cash, accounts receivable, inventory, property, plant and equipment, and other assets. Net assets held outside the U.S. were $4.1 billion and $4.2 billion at June 30, 2022 and December 31, 2021. Goodwill of $93.5 million is included in the Wholesale segment as of June 30, 2022.

The Company performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable generally do not require collateral. Foreign accounts receivable are generally collateralized by letters of credit. The Company’s additions to the provision for expected credit losses for the three months ended June 30, 2022 and 2021 were $0.7 million and $0.3 million and for the six months ended June 30, 2022 and 2021 were $1.0 million and $0.3 million.

The Company’s accounts receivables, excluding allowances for bad debts, allowances and chargebacks, by geography are summarized as follows:

 

(in thousands)

 

As of

June 30, 2022

 

 

As of

December 31, 2021

 

Domestic Accounts Receivable

 

$

393,644

 

 

$

270,404

 

International Accounts Receivable

 

 

576,939

 

 

 

525,073

 

 

 

The Company’s top five manufacturers produced the following:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(percentage of total production)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Manufacturer #1

 

 

16.1

 

 

 

17.0

 

 

 

16.9

 

 

 

17.9

 

Manufacturer #2

 

 

6.3

 

 

 

7.3

 

 

 

5.6

 

 

 

6.1

 

Manufacturer #3

 

 

6.1

 

 

 

5.0

 

 

 

5.6

 

 

 

4.9

 

Manufacturer #4

 

 

6.0

 

 

 

4.8

 

 

 

5.1

 

 

 

4.8

 

Manufacturer #5

 

 

5.0

 

 

 

4.6

 

 

 

4.7

 

 

 

4.3

 

 

 

 

39.5

 

 

 

38.7

 

 

 

37.9

 

 

 

38.0

 

 

(10)

Commitments and Contingencies

In accordance with GAAP, the Company records a liability in its condensed consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings are inherently difficult to predict, particularly when the matters are in the procedural stages or with unspecified or indeterminate claims for damages, potential penalties, or fines. Accordingly, the Company cannot determine the final amount, if any, of its liability beyond the amount accrued in the condensed consolidated financial statements as of June 30, 2022, nor is it possible to estimate what litigation-related costs will be in the future; however, the Company believes that the likelihood that claims related to litigation would result in a material loss to the Company, either individually or in the aggregate, is remote.

16


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and Notes thereto in Item 1 of this report and our annual report on Form 10-K for the year ended December 31, 2021.

We intend for this discussion to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of our company as a whole.

This quarterly report on Form 10-Q contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements with regards to future revenue, projected operating results, earnings, spending, margins, cash flow, orders, expected timing of shipment of products, inventory levels, future growth or success in specific countries, categories or market sectors, continued or expected distribution to specific retailers, liquidity, capital resources and market risk, strategies and objectives. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or simply state future results, performance or achievements, and can be identified by the use of forward-looking language such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will,” “could,” “may,” “might,” or any variations of such words with similar meanings. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected in forward-looking statements, and reported results shall not be considered an indication of our future performance. Factors that might cause or contribute to such differences include:

 

the COVID-19 pandemic and its adverse impact on our operations and our business, sales and results of operations around the world;

 

our ability to manage the impact from delays and disruptions in our supply chain;

 

our ability to sustain, manage and forecast our costs and proper inventory levels;

 

our ability to continue to manufacture and ship our products that are sourced in China and Vietnam, which could be adversely affected by various economic, political or trade conditions, or a natural disaster in China or Vietnam;

 

our ability to maintain our brand image and to anticipate, forecast, identify, and respond to changes in fashion trends, consumer demand for the products and other market factors;

 

the loss of any significant customers, decreased demand by industry retailers and the cancellation of order commitments;

 

our ability to remain competitive among sellers of footwear for consumers, including in the highly competitive performance footwear market;

 

global economic, political and market conditions including the effects of inflation around the world, challenging consumer retail market in the United States (“U.S.”) and the impact of Russia’s war with Ukraine; and

 

other factors referenced or incorporated by reference in our annual report on Form 10-K for the year ended December 31, 2021 under the captions “Item 1A: Risk Factors” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The risks included herein are not exhaustive. Other sections of this report may include additional factors that could adversely impact our business, financial condition and results of operations. Moreover, we operate in a very competitive and rapidly changing environment, and new risk factors emerge from time to time. We cannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these inherent and changing risks and uncertainties, investors should not place undue reliance on forward-looking statements, which reflect our opinions only as of the date of this quarterly report, as a prediction of actual results. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document, except as otherwise required by reporting requirements of applicable federal and states securities laws.

OVERVIEW

Sales exceeded $1.8 billion in the second quarter. This is a new quarterly sales record, reflecting the continued broad-based demand for our product. Sales increased across both of our segments compared to the same period in 2021. This global growth came despite ongoing challenges, including COVID-related temporary store closures and operating restrictions, shipping delays, and macroeconomic volatility.

Our core product philosophy of comfort, style, innovation, and quality at the right price continues to resonate with consumers, and we remain focused on delivering our comfort technology footwear as quickly as possible to meet the consumer demand.

17


 

We remain confident in the strength of our brand and the relevance of our distinct product offering. We continue to invest for growth with a focus on enhancing our global infrastructure, direct-to-consumer technologies and developing innovative footwear. Current global infrastructure investments, technology projects and activities include:

 

Expanding our e-commerce presence internationally.

 

Completing the expansion, in July, of our North American LEED Gold Certified distribution center to increase capacity.

 

Continuing development on our LEED Gold Certified corporate headquarters expansion, which we expect to be completed in 2024.

 

Expanding our international distribution and supply chain footprint.

 

Exploring new recycled materials to expand our sustainable product offering.

RESULTS OF OPERATIONS – SECOND QUARTER

 

During the first quarter of 2022, the Company realigned its reporting structure to two reportable segments, Wholesale and Direct-to-Consumer. Prior period amounts have been recast. Wholesale includes sales to department stores, family shoe stores, specialty running and sporting goods retailers, and big box club stores; franchisee and licensee third-party store operators; dedicated e-commerce retailers; and international distributors. Direct-to-Consumer includes direct sales to consumers through an integrated retail format of company-owned physical stores and digital platforms and hosted digital marketplaces in select international markets.

Selected information from our results of operations follows:

 

 

 

Three Months Ended June 30,

 

 

Change

 

(in thousands)

 

2022

2021

 

 

$

%

 

Sales

 

$

1,867,804

 

 

$

1,661,871

 

 

 

205,933

 

 

 

12.4

 

Cost of sales

 

 

970,225

 

 

 

808,279

 

 

 

161,946

 

 

 

20.0

 

Gross profit

 

 

897,579

 

 

 

853,592

 

 

 

43,987

 

 

 

5.2

 

Gross margin

 

 

48.1

 

%

 

51.4

 

%

 

 

 

 

 

(330

)bps

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

166,609

 

 

 

141,470

 

 

 

25,139

 

 

 

17.8

 

General and administrative

 

 

576,812

 

 

 

510,912

 

 

 

65,900

 

 

 

12.9

 

Total operating expenses

 

 

743,421

 

 

 

652,382

 

 

 

91,039

 

 

 

14.0

 

As a % of sales

 

 

39.8

 

%

 

39.3

 

%

 

 

 

 

 

50

bps

Earnings from operations

 

 

154,158

 

 

 

201,210

 

 

 

(47,052

)

 

 

(23.4

)

Operating margin

 

 

8.3

 

%

 

12.1

 

%

 

 

 

 

 

(390

)bps

Other income (expense)

 

 

(19,259

)

 

 

2,158

 

 

 

(21,417

)

 

n/m

 

Earnings before income taxes

 

 

134,899

 

 

 

203,368

 

 

 

(68,469

)

 

 

(33.7

)

Income tax expense

 

 

28,739

 

 

 

41,545

 

 

 

(12,806

)

 

 

(30.8

)

Net earnings

 

 

106,160

 

 

 

161,823

 

 

 

(55,663

)

 

 

(34.4

)

Net earnings attributable to noncontrolling interests

 

 

15,756

 

 

 

24,454

 

 

 

(8,698

)

 

 

(35.6

)

Net earnings attributable to Skechers U.S.A., Inc.

 

$

90,404

 

 

$

137,369

 

 

 

(46,965

)

 

 

(34.2

)

Sales

Sales increased $205.9 million, or 12.4%, to $1.9 billion as compared to $1.7 billion as a result of a 15.4% increase in domestic sales and a 10.0% increase in international sales, primarily driven by strength in wholesale sales. Sales increased across both segments including Wholesale growth of 18.3% and Direct-to-Consumer growth of 4.3%. Sales increased overall due to improved volume and higher average selling prices.

Gross margin

Gross margin decreased 330 basis points to 48.1% compared to 51.4%, primarily driven by higher per unit freight costs and a higher proportion of wholesale sales, partially offset by average selling price increases.

Operating expenses

Operating expenses increased $91.0 million, or 14.0%, to $743.4 million, and as a percentage of sales, increased 50 basis points to 39.8% compared to 39.3% in the prior year. Selling expenses increased $25.1 million, or 17.8%, to $166.6 million primarily due to higher demand creation expenditures. General and administrative expenses increased $65.9 million, or 12.9%, to $576.8 million, primarily due to volume-driven increases in labor and warehouse and distribution expenses of $25.4 million, as well as higher rent and store operating costs of $10.8 million.

18


 

Other income (expense)

Other expense of $19.3 million changed $21.4 million from other income of $2.2 million, primarily due to unfavorable losses on foreign currency exchange rates, largely in Europe.

Income taxes

Income tax expense and the effective tax rate were as follows:

 

 

 

Three Months Ended June 30,

 

(in thousands)

 

2022

 

 

2021

 

Income tax expense

 

$

28,739

 

 

$

41,545

 

Effective tax rate

 

 

21.3

%

 

 

20.4

%

 

Our income tax expense and effective income tax rate are significantly impacted by the mix of our domestic and foreign earnings before income taxes. In the foreign jurisdictions in which we have operations, the applicable statutory rates range from 0.0% to 34%, which on average is significantly lower than the U.S. federal and state combined statutory rate of approximately 25%. For the quarter, the increase in the effective tax rate primarily reflects additional withholding taxes on certain foreign distributions.

Noncontrolling interests in net income of consolidated joint ventures

Noncontrolling interests represents the share of net earnings that is attributable to our joint venture partners. Net earnings attributable to noncontrolling interests decreased $8.7 million to $15.8 million as compared to $24.5 million, primarily due to lower earnings by our joint ventures, predominantly China, due to impacts of COVID-related restrictions.

RESULTS OF SEGMENT OPERATIONS – SECOND QUARTER

Wholesale

 

 

Three Months Ended June 30,

 

 

2022 vs 2021 Change

 

 

2021 vs 2020 Change

 

(in thousands)

 

2022

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

$

 

 

%

 

Sales

 

$

1,140,325

 

 

$

964,228

 

 

$

385,862

 

 

 

176,097

 

 

 

18.3

 

 

 

578,366

 

 

 

149.9

 

Gross profit

 

 

414,479

 

 

 

379,426

 

 

 

154,574

 

 

 

35,053

 

 

 

9.2

 

 

 

224,852

 

 

 

145.5

 

Gross margin

 

 

36.3

%

 

 

39.4

%

 

 

40.1

%

 

 

 

 

 

 

(300

)bps

 

 

 

 

 

 

(70

)bps

2022 to 2021 Comparison

Wholesale sales increased $176.1 million, or 18.3% to $1.1 billion, led by growth of 34.9% in the Americas. Volume increased 14.8% in the number of units sold and average selling price per unit increased 3.1%.

Wholesale gross margin decreased 300 basis points to 36.3% due to higher average cost per unit, driven by increased freight costs, partially offset by average selling price increases.

2021 to 2020 Comparison

Wholesale sales increased $578.4 million, or 149.9% to $964.2 million, as a result of growth across all regions which experienced COVID restrictions in 2020. Growth was 207.5% in the Americas, 148.7% in Europe, Middle East & Africa, and 77.6% in Asia Pacific. Volume increased 143.1% in the number of units sold and average selling price per unit increased 3.1%.

Wholesale gross margin decreased 70 basis points to 39.4% primarily due to higher average per unit costs, partially offset by average selling price increases.

Direct-to-Consumer

 

 

Three Months Ended June 30,

 

 

2022 vs 2021 Change

 

 

2021 vs 2020 Change

 

(in thousands)

 

2022

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

$

 

 

%

 

Sales

 

$

727,479

 

 

$

697,643

 

 

$

346,209

 

 

 

29,836

 

 

 

4.3

 

 

 

351,434

 

 

 

101.5

 

Gross profit

 

 

483,100

 

 

 

474,166

 

 

 

216,590

 

 

 

8,934

 

 

 

1.9

 

 

 

257,576

 

 

 

118.9

 

Gross margin

 

 

66.4

%

 

 

68.0

%

 

 

62.6

%

 

 

 

 

 

 

(160

)bps

 

 

 

 

 

 

540

bps

2022 to 2021 Comparison

Direct-to-Consumer sales increased $29.8 million, or 4.3%, to $727.5 million, led by increases in the Americas of 3.7%, Europe, Middle East & Africa of 13.5%, and Asia Pacific of 2.7%. Volume was essentially flat with a decrease of 1.0% in the number of units sold and average selling price per unit increased 5.3%.

Direct-to-Consumer gross margin decreased 160 basis points to 66.4%, primarily due to higher average per unit costs, partially offset by average selling price increases.

19


 

2021 to 2020 Comparison

Direct-to-Consumer sales increased $351.4 million, or 101.5%, to $697.6 million, driven by increases across all regions which experienced COVID restrictions in 2020. Growth was 127.6% in the Americas, 439.7% in Europe, Middle East & Africa, and 48.6% in Asia Pacific. Volume increased 66.2% in the number of units sold and average selling price per unit increased 21.1%.

Direct-to-Consumer gross margin increased 540 basis points to 68.0% primarily driven by higher average selling prices, partially offset by higher average per unit costs.

RESULTS OF OPERATIONS – SIX MONTHS

Selected information from our results of operations follows:

 

 

 

Six Months Ended June 30,

 

 

Change

 

(in thousands)

 

2022

 

 

2021

 

 

$

%

 

Sales

 

$

3,687,398

 

 

$

3,096,326

 

 

 

591,072

 

 

 

19.1

 

Cost of sales

 

 

1,965,656

 

 

 

1,557,075

 

 

 

408,581

 

 

 

26.2

 

Gross profit

 

 

1,721,742

 

 

 

1,539,251

 

 

 

182,491

 

 

 

11.9

 

Gross margin

 

 

46.7

 

%

 

49.7

 

%

 

 

 

 

 

(300

)bps

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

274,818

 

 

 

232,795

 

 

 

42,023

 

 

 

18.1

 

General and administrative

 

 

1,116,862

 

 

 

947,578

 

 

 

169,284

 

 

 

17.9

 

Total operating expenses

 

 

1,391,680

 

 

 

1,180,373

 

 

 

211,307

 

 

 

17.9

 

As a % of sales

 

 

37.7

 

%

 

38.1

 

%

 

 

 

 

 

(40

)bps

Earnings from operations

 

 

330,062

 

 

 

358,878

 

 

 

(28,816

)

 

 

(8.0

)

Operating margin

 

 

9.0

 

%

 

11.6

 

%

 

 

 

 

 

(260

)bps

Other expense

 

 

(25,005

)

 

 

(12,016

)

 

 

(12,989

)

 

 

108.1

 

Earnings before income taxes

 

 

305,057

 

 

 

346,862

 

 

 

(41,805

)

 

 

(12.1

)

Income tax expense

 

 

62,731

 

 

 

70,530

 

 

 

(7,799

)

 

 

(11.1

)

Net earnings

 

 

242,326

 

 

 

276,332

 

 

 

(34,006

)

 

 

(12.3

)

Net earnings attributable to noncontrolling interests

 

 

30,699

 

 

 

40,390

 

 

 

(9,691

)

 

 

(24.0

)

Net earnings attributable to Skechers U.S.A., Inc.

 

$

211,627

 

 

$

235,942

 

 

 

(24,315

)

 

 

(10.3

)

Sales

Sales increased $0.6 billion, or 19.1%, to $3.7 billion as compared to $3.1 billion as a result of a 21.4% increase in domestic sales and a 17.3% increase in international sales, primarily driven by strength in wholesale sales. Sales grew across both segments with increases to Wholesale of 25.4% and Direct-to-Consumer of 9.0%. Sales increased overall due to improved volume and higher average selling prices.

Gross margin

Gross margin decreased 300 basis points to 46.7% compared to 49.7%, primarily driven by higher per unit freight costs and a higher proportion of wholesale sales, partially offset by average selling price increases.

Operating expenses

Operating expenses increased $211.3 million, or 17.9%, to $1.4 billion, and as a percentage of sales, improved 40 basis points to 37.7% compared to 38.1% in the prior year. Selling expenses increased $42.0 million, or 18.1%, to $274.8 million from $232.8 million primarily due to higher demand creation expenditures. General and administrative expenses increased $169.3 million, or 17.9%, to $1.1 billion, primarily due to higher labor and incentive compensation costs of $82.8 million, rent of $15.6 million, and volume-driven warehouse and distribution expenses of $14.9 million.

Other income (expense)

Other expense increased $13.0 million to $25.0 million as compared to $12.0 million, primarily due to unfavorable losses on foreign currency exchange rates in Europe, Middle East & Africa.

Income taxes

Income tax expense and the effective tax rate were as follows:

 

 

Six Months Ended June 30,

 

(in thousands)

 

2022

 

 

2021

 

Income tax expense

 

$

62,731

 

 

$

70,530

 

Effective tax rate

 

 

20.6

%

 

 

20.3

%

20


 

 

Our provision for income tax expense and effective income tax rate are significantly impacted by the mix of our domestic and foreign earnings (loss) before income taxes. In the foreign jurisdictions in which we have operations, the applicable statutory rates range from 0.0% to 34.0%, which on average are generally significantly lower than the U.S. federal and state combined statutory rate of approximately 25%. Year-to-date, the effective tax rate was essentially flat.

Noncontrolling interest in net income of consolidated joint ventures

Noncontrolling interest represents the share of net earnings that is attributable to our joint venture partners. Net earnings attributable to noncontrolling interest decreased $9.7 million to $30.7 million as compared to $40.4 million, primarily due to lower earnings by our joint ventures, predominantly China, due to impacts of COVID-related restrictions.

RESULTS OF SEGMENT OPERATIONS – SIX MONTHS

Wholesale

 

 

Six Months Ended June 30,

 

 

2022 vs 2021 Change

 

 

2021 vs 2020 Change

 

(in thousands)

 

2022

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

$

 

 

%

 

Sales

 

$

2,391,631

 

 

$

1,907,338

 

 

$

1,272,007

 

 

 

484,293

 

 

 

25.4

 

 

 

635,331

 

 

 

49.9

 

Gross profit

 

 

869,439

 

 

 

748,992

 

 

 

487,966

 

 

 

120,447

 

 

 

16.1

 

 

 

261,026

 

 

 

53.5

 

Gross margin

 

 

36.4

%

 

 

39.3

%

 

 

38.4

%

 

 

 

 

 

 

(290

)bps

 

 

 

 

 

 

90

bps

2022 to 2021 Comparison

Wholesale sales increased $0.5 billion, or 25.4% to $2.4 billion, driven primarily by growth of 38.2% in the Americas and Europe, Middle East & Africa of 24.0%. Volume increased 18.8% in the number of units sold and average selling price per unit increased 5.9%.

Wholesale gross margin decreased 290 basis points to 36.4% due to higher average cost per unit, primarily driven by increased freight costs, partially offset by average selling price increases.

2021 to 2020 Comparison

Wholesale sales increased $0.6 billion, or 49.9% to $1.9 billion, as a result of growth across the Americas of 51.4%, Europe, Middle East & Africa of 35.4% and Asia Pacific of 70.5% which were impacted by 2020 COVID-related market closures. Volume increased 43.6% in the number of units sold and average selling price per unit increased 4.5%.

Wholesale gross margin increased 90 basis points to 39.3% primarily due to higher average selling prices.

Direct-to-Consumer

 

 

Six Months Ended June 30,

 

 

2022 vs 2021 Change

 

 

2021 vs 2020 Change

 

(in thousands)

 

2022

 

 

2021

 

 

2020

 

 

$

 

 

%

 

 

$

 

 

%

 

Sales

 

$

1,295,767

 

 

$

1,188,988

 

 

$

707,656

 

 

 

106,779

 

 

 

9.0

 

 

 

481,332

 

 

 

68.0

 

Gross profit

 

 

852,303

 

 

 

790,259

 

 

 

436,113

 

 

 

62,044

 

 

 

7.9

 

 

 

354,146

 

 

 

81.2

 

Gross margin

 

 

65.8

%

 

 

66.5

%

 

 

61.6

%

 

 

 

 

 

 

(70

)bps

 

 

 

 

 

 

480

bps

2022 to 2021 Comparison

Direct-to-Consumer sales increased $106.8 million, or 9.0%, to $1.3 billion, led by increases in the Americas of 6.8%, Europe, Middle East & Africa of 44.2%, and Asia Pacific of 5.3%. Volume decreased 0.4% in the number of units sold and average selling price per unit increased 9.4%.

Direct-to-Consumer gross margin decreased 70 basis points to 65.8%, driven by increased freight costs, partially offset by average selling price increases.

2021 to 2020 Comparison

Direct-to-Consumer sales increased $0.5 billion, or 68.0%, to $1.2 billion, driven by increases of 68.8% in the Americas, and 61.8% in Asia Pacific, and 100.6% in Europe, Middle East & Africa which experienced COVID restrictions in 2020. Volume increased 47.0% in the number of units sold and average selling price per unit increased 14.2%.

Direct-to-Consumer gross margin increased 480 basis points to 61.6% primarily driven by higher average selling prices and lower average per unit costs.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity outlook

We have cash and cash equivalents of $751.9 million at June 30, 2022. Amounts held outside the U.S. were $587.3 million, or 78.1%, and approximately $232.4 million was available for repatriation to the U.S. as of June 30, 2022 without incurring additional U.S. federal income taxes and applicable non-U.S. income and withholding taxes.

21


 

In the second quarter of 2022, we fully repaid the $50.2 million balance on our revolving credit facility that had been drawn down during the first quarter. As of June 30, 2022, our unused credit capacity under this agreement was $747.0 million with an additional $250.0 million available through an accordion feature. We believe that anticipated cash flows from operations, existing cash and investments balances, available borrowings under our revolving credit facility, and current financing arrangements will be sufficient to provide us with the liquidity necessary to fund our anticipated working capital and capital requirements for the next twelve months.

Cash Flows

Our working capital at June 30, 2022 was $2.0 billion, an increase of $0.1 billion from working capital of $1.9 billion at December 31, 2021. Our cash and cash equivalents at June 30, 2022 were $751.9 million, compared to $796.3 million at December 31, 2021. Our primary sources of operating cash are collections from customers. Our primary uses of cash are inventory purchases, selling, general and administrative expenses and capital expenditures.

Operating Activities

For the six months ended June 30, 2022, net cash provided by operating activities was $154.7 million as compared to $317.2 million for the six months ended June 30, 2021. The $162.5 million decrease in net cash provided by operating activities primarily resulted from increased inventory purchases and receivables balances on wholesale sales.

Investing Activities

Net cash used in investing activities was $113.9 million for the six months ended June 30, 2022 as compared to $167.2 million for the six months ended June 30, 2021. The $53.3 million decrease was due to reduced net investment activity of $70.6 million, offset by increased capital expenditures of $17.3 million.

Our capital investments remain focused on supporting our strategic growth priorities, growing our Direct-to-Consumer business, as well as expanding the presence of our brand internationally. Capital expenditures for the six months ended June 30, 2022 were $163.5 million, which included $50.7 million of investments in our expanded corporate offices domestically and in India; $49.9 million related to the expansion of our global distribution infrastructure; and $49.1 million related to investments in our retail stores and direct-to-consumer technologies. We expect our ongoing capital expenditures for the remainder of 2022 to be approximately $100.0 million to $150.0 million, which is primarily related to the expansion of our worldwide distribution capabilities, continued investments in retail and e-commerce technologies and stores, and our corporate offices in Southern California. We expect to fund ongoing capital expenses through a combination of borrowings and available cash.

Financing Activities

Net cash used in financing activities was $81.4 million during the six months ended June 30, 2022 compared to $429.6 million during the six months ended June 30, 2021. The decrease is primarily the result of lower repayments on long-term borrowings of $448.1 million, partially offset by repurchasing $49.2 million of common stock.

Capital Resources and Prospective Capital Requirements

Financing Arrangements

As of June 30, 2022, outstanding short-term and long-term borrowings were $326.7 million, of which $261.6 million relates to loans for our domestic and China distribution centers, $57.1 million relates to our operations in China, and the remainder relates to our international operations. Our long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions. We were in compliance with all debt covenants related to our short-term and long-term borrowings as of the date of this quarterly report. See Note 4 – Financial Commitments of the Condensed Consolidated Financial Statements for additional information.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates did not change materially during the quarter ended June 30, 2022.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes from the information previously reported under Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

 

22


 

 

Item 4. Controls and Procedures

DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the design and effectiveness of our disclosure controls and procedures, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective in the timely and accurate recording, processing, summarizing and reporting of material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our CEO and CFO also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in our internal control over financial reporting during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

23


 

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Michael Conte v. Robert Greenberg, et al. – On July 21, 2022, Skechers and certain past and present members of the Board of Directors were sued by a stockholder on behalf of our company in a derivative action in the Chancery Court of the State of Delaware, Case No. 2022-0633, alleging breach of fiduciary duty, waste of corporate assets, breach of duty of candor and breach of contract in connection with certain executive officers’ personal use of two company-owned aircraft. The complaint seeks actual damages in favor of Skechers sustained as the alleged result of defendants’ alleged breaches of fiduciary duties, judgment directing our company to take all necessary actions to reform and improve its corporate governance practices, termination of certain executive officers for allegedly violating their employment agreements, judgment directing the sale of one of the company-owned aircraft and attorneys’, accountants’ and experts’ fees, costs and expenses. We believe that we have meritorious defenses and intend to defend this matter vigorously. Notwithstanding, given the early stages of these proceedings and the limited information available, we cannot predict the outcome of this legal proceeding or whether an adverse result in this case would have a material adverse impact on our results of operations or financial position.

In addition to the matters included in our reserve for loss contingencies, we occasionally become involved in litigation arising from the normal course of business, and we are unable to determine the extent of any liability that may arise from any such unanticipated future litigation. We have no reason to believe that there is a reasonable possibility or a probability that we may incur a material loss, or a material loss in excess of a recorded accrual, with respect to any other such loss contingencies. However, the outcome of litigation is inherently uncertain and assessments and decisions on defense and settlement can change significantly in a short period of time. Therefore, although we consider the likelihood of such an outcome to be remote with respect to those matters for which we have not reserved an amount for loss contingencies, if one or more of these legal matters were resolved against our company in the same reporting period for amounts in excess of our expectations, our consolidated financial statements of a particular reporting period could be materially adversely affected.

 

Item 1A. Risk Factors

Except as described below, there have been no material developments with respect to the information previously reported under Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Risks Related to Economic, Political and External Factors

The Uncertainty Of Global Market Conditions May Continue To Have A Negative Impact On Our Business, Results Of Operations Or Financial Condition.

The uncertain state of global economic and political conditions, including the impact of inflation and challenging consumer retail market, may negatively impact our business, which depends on the general economic environment and levels of consumers’ discretionary spending. If the current economic situation does not improve or if it weakens, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new retail stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, or maintain or improve our earnings from operations as a percentage of sales. Furthermore, Russia’s war with Ukraine and the subsequent economic sanctions imposed by the U.S., NATO and other countries may impact the economic conditions or our ability to sell products to customers in the affected region. The conflict could also have broader implications on economies outside the region, such as the global inflationary impact of a potential boycott of Russian oil and gas by other countries. If there is an unexpected decline in sales, our results of operations will depend on our ability to implement a corresponding and timely reduction in our costs and manage other aspects of our operations. These challenges include (i) managing our infrastructure, (ii) hiring and maintaining, as required, the appropriate number of qualified employees, (iii) managing inventory levels and (iv) controlling other expenses. If the uncertain global market conditions continue for a significant period or worsen, our results of operations, financial condition, and cash flows could be materially adversely affected.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In January 2022, the Board of Directors approved a $500 million share repurchase program. The program allows the Company to repurchase shares of Class A common stock from time to time and does not obligate the Company to acquire any particular amount. The following table summarizes the share repurchase activity during the quarter ended June 30, 2022.

 

Month Ended

 

Total Number of

Shares Purchased

 

 

Average Price

Paid Per Share

 

 

Maximum Dollar Value of Shares that May Yet Be Purchased under the Program

(in thousands)

 

April 30, 2022

 

 

 

 

$

 

 

$

475,000

 

May 31, 2022

 

 

252,787

 

 

 

36.54

 

 

 

465,762

 

June 30, 2022

 

 

382,925

 

 

 

39.16

 

 

 

450,768

 

Total

 

 

635,712

 

 

$

38.12

 

 

 

 

 

24


 

 

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

 

Item 6. Exhibits

 

Exhibit

Number

 

Description

 

 

 

  31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.1*

 

Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

  101

 

Financial statements from the quarterly report on Form 10-Q of Skechers U.S.A., Inc. for the quarter ended June 30, 2022 formatted in inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (vi) the Notes to the Condensed Consolidated Financial Statements

 

 

 

  104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

 

 

*

In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.

 

25


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 5, 2022

SKECHERS U.S.A., INC.

 

 

 

By:

/s/ John Vandemore

 

 

John Vandemore

 

 

Chief Financial Officer

(Principal Financial Officer and Duly Authorized Signatory)

 

26