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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2016

 

or

 

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

 

For the transition period from            to

 

Commission File No. 000-51754

 

 

CROCS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware (State or other jurisdiction of incorporation or organization)

20-2164234 (I.R.S. Employer Identification No.)

 

7477 East Dry Creek Parkway, Niwot, Colorado 80503

(Address, including zip code, of registrant’s principal executive offices)

 

(303) 848-7000

(Registrant’s telephone number, including area code)

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   x    No  o

 

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

 

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

 

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

 

As of July 31, 2016, Crocs, Inc. had 73,485,284 shares of its $0.001 par value common stock outstanding.

 

 

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Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends, our future expectations, and other matters that do not relate strictly to historical facts and are based on certain assumptions of our management. These statements, which express management’s current views concerning future events or results, use words like “anticipate,” “assume,” “ believe,” “continue,” “estimate,” “expect,” “future,” “intend,” “plan,” “project,” “strive,” and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will,” “would” and similar expressions or variations. Forward-looking statements are subject to risks, uncertainties and other factors, which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, those described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2015 and subsequent filings with the Securities and Exchange Commission. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

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Crocs, Inc.

Tabl e of Contents to the Quarterly Report on Form 10-Q

For the Quarterly Period Ended June 30, 2016

 

PART I — Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015	2
	Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	48
PART II — Other Information		51
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 6.	Exhibits	52
Signatures		53

 

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PART I — Financial Information

 

ITEM 1. Financial Statements

 

CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2016			2015			2016			2015
Revenues		$	323,828		$	345,671		$	602,968		$	607,864
Cost of sales		154,188			155,801			303,962			290,624
Gross profit		169,640			189,870			299,006			317,240
Selling, general and administrative expenses		148,463			168,636			263,393			294,705
Asset impairment charges		572			2,075			765			2,075
Restructuring charges		—			2,810			—			6,473
Income from operations		20,605			16,349			34,848			13,987
Foreign currency transaction gain (loss), net		(1,700		)	(217		)	(2,947		)	277
Interest income		164			196			380			484
Interest expense		(234		)	(260		)	(477		)	(479		)
Other expense, net		(189		)	(80		)	(107		)	(411		)
Income before income taxes		18,646			15,988			31,697			13,858
Income tax expense		(3,109		)	(2,562		)	(6,014		)	(2,857		)
Net income		$	15,537		$	13,426		$	25,683		$	11,001
Dividends on Series A convertible preferred stock		$	(3,000	)	$	(3,000	)	$	(6,000	)	$	(5,833	)
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature		(802		)	(736		)	(1,587		)	(1,457		)
Net income attributable to common stockholders		$	11,735		$	9,690		$	18,096		$	3,711
Net income per common share:
Basic		$	0.13		$	0.11		$	0.21		$	0.04
Diluted		$	0.13		$	0.11		$	0.20		$	0.04

 

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

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in thousands)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2016			2015			2016			2015
Net income		$	15,537		$	13,426		$	25,683		$	11,001
Other comprehensive income (loss):
Foreign currency translation gain (loss), net		1,871			6,297			6,671			(17,567		)
Total comprehensive income (loss)		$	17,408		$	19,723		$	32,354		$	(6,566	)

 

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

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except number of shares)

 

		June 30, 2016			December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents		$	146,662		$	143,341
Accounts receivable, net of allowances of $55,953 and $49,364, respectively		134,155			83,616
Inventories		169,853			168,192
Income tax receivable		10,184			10,233
Other receivables		21,266			14,233
Prepaid expenses and other assets		31,270			26,334
Total current assets		513,390			445,949
Property and equipment, net		46,409			49,490
Intangible assets, net		77,393			82,297
Goodwill		2,561			1,973
Deferred tax assets, net		6,612			6,608
Other assets		20,031			21,703
Total assets		$	666,396		$	608,020
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	73,429		$	63,336
Accrued expenses and other liabilities		105,404			92,573
Income taxes payable		8,793			6,416
Current portion of borrowings and capital lease obligations		4,993			4,772
Total current liabilities		192,619			167,097
Long-term income tax payable		4,810			4,547
Long-term borrowings and capital lease obligations		329			1,627
Other liabilities		13,606			13,120
Total liabilities		211,364			186,391
Commitments and contingencies:
Series A convertible preferred stock, par value $0.001 per share, 1,000,000 shares authorized, 200,000 shares issued and outstanding, redemption amount and liquidation preference of $203,000 and $203,000 as of June 30, 2016 and December 31, 2015, respectively		177,244			175,657
Stockholders’ equity:
Preferred stock, par value $0.001 per share, 4,000,000 shares authorized, none outstanding		—			—
Common stock, par value $0.001 per share, 250,000,000 shares authorized, 93,760,311 and 73,481,889 shares issued and outstanding, respectively, as of June 30, 2016 and 93,101,007 and 72,851,418 shares issued and outstanding, respectively, as of December 31, 2015		95			94
Treasury stock, at cost, 20,278,422 and 20,249,589 shares as of June 30, 2016 and December 31, 2015, respectively		(284,176		)	(283,913		)
Additional paid-in capital		359,554			353,241
Retained earnings		246,557			227,463
Accumulated other comprehensive loss		(44,242		)	(50,913		)
Total stockholders’ equity		277,788			245,972
Total liabilities and stockholders’ equity		$	666,396		$	608,020

 

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

 

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CROCS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

		Six Months Ended June 30,
		2016			2015
Cash flows from operating activities:
Net income		$	25,683		$	11,001
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		17,031			19,108
Unrealized gain on foreign exchange, net		(4,884		)	(180		)
Deferred income taxes		211			71
Asset impairment charges		765			2,075
Provision for doubtful accounts, net		591			6,220
Share-based compensation		5,898			6,492
Other non-cash items		118			92
Changes in operating assets and liabilities:
Accounts receivable, net of allowances		(47,129		)	(80,201		)
Inventories		2,148			(15,862		)
Prepaid expenses and other assets		(7,533		)	(3,347		)
Accounts payable		8,920			43,383
Accrued expenses and other liabilities		15,573			18,122
Income taxes		2,426			(10,025		)
Cash provided by (used in) operating activities		19,818			(3,051		)
Cash flows from investing activities:
Cash paid for purchases of property and equipment		(10,280		)	(4,176		)
Proceeds from disposal of property and equipment		2,428			—
Cash paid for intangible assets		(2,561		)	(5,496		)
Change in restricted cash		(845		)	531
Cash used in investing activities		(11,258		)	(9,141		)
Cash flows from financing activities:
Proceeds from bank borrowings		29,582			—
Repayments of bank borrowings and capital lease obligations		(30,662		)	(2,630		)
Dividends - Series A preferred stock		(6,000		)	(5,900		)
Deferred debt issuance costs		(466		)	(57		)
Issuances of common stock		366			959
Purchase of treasury stock, net of issuances		—			(42,727		)
Repurchase of common stock for tax withholding		(263		)	(261		)
Cash used in financing activities		(7,443		)	(50,616		)
Effect of exchange rate changes on cash		2,204			(7,425		)
Net change in cash and cash equivalents		3,321			(70,233		)
Cash and cash equivalents - beginning of period		143,341			267,512
Cash and cash equivalents - end of period		$	146,662		$	197,279
Supplemental disclosure of cash flow information - cash paid during the period for:
Interest, net of capitalized interest		$	275		$	479
Income taxes		$	6,403		$	13,371
Supplemental disclosure of non-cash investing and financing activities:
Accrued dividends		$	3,000		$	3,000

 

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

 

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CROCS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. ORGANIZATION & BASIS OF PRESENTATION

 

Organization

 

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

 

Basis of Presentation

 

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

 

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

 

Transactions with Affiliates

 

The Company receives inventory count services from RGIS, LLC (“RGIS”), a wholly-owned subsidiary of Blackstone Capital Partners VI L.P. (“Blackstone”), which currently beneficially owns 99.99% of the outstanding shares of Company’s series A convertible preferred stock (“Series A Preferred Stock”), which is convertible into approximately 15.8% of the Company’s common stock as of June 30, 2016. Two Blackstone representatives also serve on the Company’s board of directors (the “Board”). During the six months ended June 30, 2016 and 2015, Crocs paid $0.4 million and $0.2 million, respectively to RGIS for services received.

 

Recently Issued Accounting Pronouncements

 

Financial Instruments - Credit Losses

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments , which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This standard is effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the impact of the adoption of this standard on its condensed consolidated financial statements.

 

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Stock Compensation

 

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

 

Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating the expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The Company is currently assessing the impact of adoption of this standard on its condensed consolidated financial statements.

 

Prepaid Stored-Value Products

 

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

 

Leases

 

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

 

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Financial Instruments

 

In January 2016, the FASB issued ASU 2016-01:  Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. These changes become effective for fiscal years beginning after December 15, 2017. The expected adoption method of ASU 2016-01 is being evaluated by the Company and the adoption is not expected to have a significant impact on its condensed consolidated financial statements.

 

Inventory

 

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

 

Debt Issuance Costs

 

In April 2015, the FASB issued ASU 2015-03:  Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 requires retrospective adoption and is effective for fiscal years beginning after December 15, 2015. In August 2015, the FASB issued ASU 2015-15:  Interest — Imputation of Interest (Subtopic 835-30), which relates to the presentation of debt issuance costs associated with line-of-credit arrangements. This standard clarifies the guidance set forth in FASB ASU 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability rather than as an asset. The new pronouncement clarifies that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. The Company considered this clarification in conjunction with the adoption of FASB ASU 2015-03, which occurred during the three months ended March 31, 2016. These pronouncements do not have a material impact on the Company’s condensed consolidated financial statements. In adopting ASU 2015-15, the Company elected to present debt issuance costs related to line-of-credit arrangements as an asset.

 

Share-Based Payments

 

In June 2014, the FASB issued ASU 2014-12 in response to the EITF consensus on Issue 13-D. The ASU clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. The ASU does not contain any new disclosure requirements. This ASU is effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015. During the three months ended March 31, 2016, the Company adopted this pronouncement, which did not have a material impact on its condensed consolidated financial statements.

 

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Revenue Recognition

 

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

 

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

 

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

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Asset Impairments

 

Crocs periodically evaluates all of its long-lived assets for impairment when events or circumstances would indicate the carrying value of a long-lived asset may not be fully recoverable. The following table summarizes retail asset impairment charges by reportable operating segment for the three and six months ended June 30, 2016 and 2015 related to certain underperforming stores that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores’ assets over the remaining economic life or lease terms of those assets:

 

		Three Months Ended June 30,
		2016					2015
		Impairment Charge			Number of Stores (1)		Impairment Charge			Number of Stores (1)
		(in thousands, except store count data)
Americas		$	532		3		$	686		4
Asia Pacific		14			1		515			8
Europe		26			2		874			7
Total asset impairment		$	572		6		$	2,075		19

 

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		Six Months Ended June 30,
		2016					2015
		Impairment Charge			Number of Stores (1)		Impairment Charge			Number of Stores (1)
		(in thousands, except store count data)
Americas		$	701		5		$	686		4
Asia Pacific		38			4		515			8
Europe		26			2		874			7
Total asset impairment		$	765		11		$	2,075		19

 

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

 

Depreciation

 

Depreciation is computed using the straight-line method based on the assets’ estimated useful life, which typically ranges from two to five years. During the three months ended June 30, 2016 and 2015, Crocs recorded $3.9 million and $4.3 million, respectively, in depreciation expense of which $0.4 million for both periods was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations. During the six months ended June 30, 2016 and 2015, Crocs recorded $7.6 million and $9.0 million, respectively, in depreciation expense of which $0.8 million and $1.0 million, respectively, was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations. As of June 30, 2016 and December 31, 2015, accumulated depreciation was $103.1 million and $97.7 million, respectively.

 

Accounts Receivable

 

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

 

3. INVENTORIES

 

The following table summarizes inventories by major classification as of June 30, 2016 and December 31, 2015:

 

		June 30, 2016			December 31, 2015
		(in thousands)
Finished goods		$	164,858		$	162,341
Raw materials		4,465			4,933
Work-in-progress		530			918
Total inventories		$	169,853		$	168,192

 

4. GOODWILL & INTANGIBLE ASSETS

 

The following table summarizes the goodwill and identifiable intangible assets as of June 30, 2016, and December 31, 2015:

 

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		June 30, 2016									December 31, 2015
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
		(in thousands)
Capitalized software		$	166,777	(1)	$	(91,287	)(2)	$	75,490		$	162,700	(1)	$	(82,596	)(2)	$	80,104
Customer relationships (3)		4,103			(4,103		)	—			4,016			(4,016		)	—
Patents, copyrights, and trademarks		6,902			(5,303		)	1,599			6,892			(5,135		)	1,757
Core technology (3)		3,746			(3,746		)	—			3,498			(3,498		)	—
Other		636			(636		)	—			776			(637		)	139
Total finite lived intangible assets		182,164			(105,075		)	77,089			177,882			(95,882		)	82,000
Indefinite lived intangible assets (3)		304			—			304			297			—			297
Goodwill (4)		2,561			—			2,561			1,973			—			1,973
Goodwill and intangible assets		$	185,029		$	(105,075	)	$	79,954		$	180,152		$	(95,882	)	$	84,270

 

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(1)         Includes $4.1 million of software held under a capital lease classified as capitalized software as of both June 30, 2016, and December 31, 2015.

 

(2)         Includes $3.4 million and $3.1 million of accumulated amortization of software held under a capital lease as of June 30, 2016, and December 31, 2015, respectively, and is amortized using the straight-line method over the useful life.

 

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

 

(4)         Includes $0.5 million associated with the acquisition of operations in Austria on March 31, 2016. The remainder of the increase is associated with the impact of foreign currency translation.

 

The following table summarizes estimated future annual amortization of intangible assets as of June 30, 2016:

 

		Amortization
Fiscal years ending December 31,		(in thousands)
2016 (remainder of year)		$	10,590
2017		17,389
2018		15,392
2019		13,777
2020		11,508
Thereafter		8,433
Total		$	77,089

 

During the three months ended June 30, 2016 and 2015, amortization expense recorded for intangible assets with finite lives was $4.5 million and $5.1 million, respectively, of which $1.3 million and $1.6 million, respectively, was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations. During the six months ended June 30, 2016 and 2015, amortization expense recorded for intangible assets with finite lives was $9.4 million and $10.1 million, respectively, of which $2.7 million and $3.0 million, respectively, was recorded in ‘Cost of sales,’ with the remaining amounts recorded in ‘Selling, general and administrative expenses’ on the condensed consolidated statements of operations. As of June 30, 2016 and December 31, 2015, accumulated amortization was $105.1 million and $95.9 million, respectively.

 

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5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

The following table summarizes accrued expenses and other current liabilities as of June 30, 2016 and December 31, 2015:

 

		June 30, 2016			December 31, 2015
		(in thousands)
Accrued compensation and benefits		$	25,563		$	20,973
Professional services		15,608			15,019
Sales/use and VAT tax payable		15,134			7,018
Fulfillment, freight and duties		14,603			14,776
Accrued rent and occupancy		8,248			7,639
Deferred revenue and royalties payable		7,411			1,430
Derivatives Liability		4,137			55
Customer deposits		3,797			3,236
Dividend payable		3,000			3,000
Accrued legal liabilities		1,526			1,971
Travel and entertainment liabilities		1,100			2,150
Accrued loss on disposal group (1)		—			6,743
Other (2)		5,277			8,563
Total accrued expenses and other current liabilities		$	105,404		$	92,573

 

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

 

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

 

6. FAIR VALUE MEASUREMENTS

 

Recurring Fair Value Measurements

 

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

 

The following table summarizes, for assets or liabilities measured at fair value, the respective fair value and the classification by level of input within the fair value hierarchy:

 

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					Fair Value Measurement at Reporting Date Using
Description		June 30, 2016			Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
		(in thousands)
Cash and cash equivalents:
Deposits		$	4,682		$	4,682		$	—		$	—
Prepaid expenses and other assets:
Restricted deposits		2,346			2,346			—			—
Total assets		$	7,028		$	7,028		$	—		$	—
Accrued expenses and other liabilities:
Foreign currency derivative liability		$	4,137		$	—		$	4,137		$	—

 

					Fair Value Measurement at Reporting Date Using
Description		December 31, 2015			Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
		(in thousands)
Cash and cash equivalents:
Deposits		$	6,174		$	6,174		$	—		$	—
Prepaid expenses and other assets:
Restricted deposits		1,310			1,310			—			—
Total assets		$	7,484		$	7,484		$	—		$	—
Accrued expenses and other liabilities:
Foreign currency derivative liability		$	55		$	—		$	55		$	—

 

Non-Recurring Fair Value Measurements

 

The majority of the Company’s non-financial instruments, inventories, property and equipment, and intangible assets, are Level 3 assets and are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment and the carrying value is not recoverable, the carrying value would be adjusted to the lower of its cost or fair value and an impairment charge would be recorded. During the three and six months ended June 30, 2016, Crocs recorded $0.6 million and $0.8 million, respectively, in impairment charges associated with the Company’s retail locations. During both the three and six months ended June 30, 2015, Crocs recorded $2.1 million in impairment charges associated with the Company’s retail locations. During the three and six months ended June 30, 2016 and 2015, Crocs had no impairment charges related to inventories.

 

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7. DERIVATIVE FINANCIAL INSTRUMENTS

 

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

 

The following table summarizes the notional amounts of outstanding foreign currency exchange contracts as of June 30, 2016 and December 31, 2015. The notional amounts of the derivative financial instruments shown below are denominated in their U.S. Dollar equivalents and represent the amount of all contracts of the foreign currency specified. These notional values do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of the Company’s exposure to the foreign currency exchange risks.

 

		June 30, 2016			December 31, 2015
		(in thousands)
Foreign currency exchange forward contracts by currency:
Japanese Yen		$	183,990		$	98,390
Singapore Dollar		62,629			—
Euro		46,076			34,219
South Korean Won		20,290			7,981
British Pound Sterling		18,569			21,859
Canadian Dollar		11,510			1,980
Mexican Peso		10,933			7,277
Australian Dollar		7,736			6,459
Indian Rupee		6,461			5,036
New Taiwan Dollar		5,924			1,798
Russian Ruble		3,692			667
Brazilian Real		2,584			—
Swedish Krona		1,663			1,655
Hong Kong Dollar		667			668
South African Rand		—			6,402
Total notional value, net		$	382,724		$	194,391
Latest maturity date		July 2016			January 2016

 

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The following table presents the amounts affecting the condensed consolidated statements of operations from derivative instruments and exposure from day-to-day business transactions in various foreign currencies for the three and six months ended June 30, 2016 and 2015:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2016			2015			2016			2015
		(in thousands)
Foreign currency gain (loss)		$	6,503		$	(1,597	)	$	8,765		$	4,620
Derivatives not designated as hedging instruments:
Foreign currency exchange forwards gain (loss)		(8,203		)	1,380			(11,712		)	(4,343		)
Foreign currency transaction gain (loss), net		$	(1,700	)	$	(217	)	$	(2,947	)	$	277

 

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

 

8. REVOLVING CREDIT FACILITY & BANK BORROWINGS

 

Senior Revolving Credit Facility

 

In December 2011, Crocs entered into an Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association (“PNC”), as a lender and administrative agent for the lenders. On February 18, 2016, the Company entered into the Eleventh Amendment to the Credit Agreement which, primarily: (i) extended the maturity date to February 2021, (ii) resized the borrowing capacity of the facility to $75.0 million, (iii) amended certain definitions of the financial covenants to become more favorable to the Company, (iv) set the minimum fixed charge coverage ratio to 1.00 to 1.00 through the period ended June 30, 2016 and 1.10 to 1.00 thereafter, (v) set the maximum leverage ratio to 2.50 to 1.00 through the period ended June 30, 2016 and 2.00 to 1.00 thereafter, (vi) allows up to $50.0 million in stock repurchases to be made each fiscal year, subject to certain restrictions, and (vii) limited certain capital expenditures and commitments to an aggregate of $50.0 million per year. The Eleventh Amendment also changed the variable lending rates. For domestic base rate loans, including swing loans, the interest rate is equal to a daily base rate plus a margin ranging from 0.50% to 0.75% based on certain conditions. For domestic LIBOR rate loans, the interest rate is equal to a LIBOR rate plus a margin ranging from 1.50% to 1.75% based on certain conditions.

 

On June 13, 2016, Crocs entered into the Twelfth Amendment to the Credit Agreement, which primarily increased the borrowing capacity of the facility from $75.0 million to $80.0 million. Under the terms of the Credit Agreement, the above financial covenants are only applicable when average borrowings exceed $20.0 million over a 30-day period, starting on the 15th day of the last month of each quarter.

 

As of June 30, 2016, the Company was in compliance with each of its financial covenants under the Credit Agreement, with actual calculations as follows: (i) the fixed charge coverage ratio (which is calculated as adjusted EBITDA plus fixed charges before tax for a rolling four quarters divided by fixed charges before tax plus interest for a rolling four quarters) was 3.41 to 1.00, compared to the minimum allowable amount of 1.00 to 1.00 (ii) the leverage ratio (which is calculated as consolidated indebtedness divided by adjusted EBITDA for a rolling four quarters) was 0.23 to 1.00, compared to the maximum allowable amount of 2.50 to 1.00 (iii) stock repurchases were zero, and (iv) capital expenditures and commitments were $24.0 million. For the three and six months ended June 30, 2016, the weighted average/effective interest rate for outstanding borrowings under the Credit Agreement was 2.75% and 3.15%, respectively. The Company currently anticipates remaining in compliance with each of its debt covenant obligations for the foreseeable future.

 

As of both June 30, 2016 and December 31, 2015, the Company had no outstanding borrowings under the Credit Agreement. As of both June 30, 2016 and December 31, 2015, the Company had outstanding letters of credit of $1.3 million, which were reserved against the borrowing base under the terms of the Credit Agreement. As of June 30, 2016 and December 31, 2015, the

 

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Company had $78.7 million and $73.7 million, respectively, of available borrowing capacity. During the three and six months ended June 30, 2016, Crocs capitalized less than $0.1 million and $0.6 million, respectively, in fees and third party costs as deferred financing costs associated with the Credit Agreement and the negotiation of a new debt financing agreement that has not yet been executed. The short-term portion of these fees is recorded in the ‘Prepaid expenses and other assets’ account and the long-term portion is recorded in the ‘Other assets’ accounts.

 

Asia Pacific Revolving Credit Facility

 

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

 

Long-term Bank Borrowings

 

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

 

As of June 30, 2016 and December 31, 2015 Crocs had $3.7 million and $6.4 million, respectively, of debt outstanding under five separate notes payable, of which $3.4 million and $4.8 million, respectively, represent current installments. As of June 30, 2016, the notes bear interest rates ranging from 2.45% to 2.79% and maturities ranging from September 2016 to September 2017.

 

The components of the Company’s consolidated debt and capital lease obligations as of June 30, 2016 and December 31, 2015 are as follows:

 

				Unused Borrowing Capacity (2)							Carrying Value (3)
		Weighted Average Interest Rate (1)		Borrowing Currency				U.S.D. Equivalent			June 30, 2016			December 31, 2015
				(in thousands)
Debt obligations
Senior revolving credit facility		Base rate plus 0.50% - 0.75% LIBOR plus 1.50% - 1.75%		$	78,697		(4)	$	78,697	(4)	$	—		$	—
Asia Pacific revolving credit facility		LIBOR plus 2.10%		RMB		—	(5)	—		(5)	—			—
Long-term bank borrowings		2.64%		—				—			3,687			6,375
Other term debt financing		1.90%		—				—			1,612		(6)	—
Total								$	78,697		5,299			6,375
Capital lease obligations											23			24
Total debt and capital lease obligations											$	5,322		$	6,399
Current maturities											$	4,993		$	4,772
Long-term debt and capital lease obligations											$	329		$	1,627

 

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(1)         Carrying value represents the weighted average interest rate in effect at June 30, 2016 for all borrowings outstanding pursuant to each debt instrument, including any applicable margin. The interest rates presented represent stated rates and do not include the impact of the derivative instruments, deferred financing costs, original issue premiums or discounts, and commitment fees, all of which affect Crocs’ overall cost of borrowing.

 

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

 

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

 

(4)          On February 18, 2016, the Company entered into the Eleventh Amendment to the Credit Agreement, which, among other things, resized the borrowing capacity of the facility to $75.0 million. On June 13, 2016, the Company entered into the Twelfth Amendment to the Credit Agreement, which increased the borrowing capacity of the facility to $80.0 million. As of June 30, 2016, the unused borrowing capacity was reduced by $1.3 million of outstanding letters of credit.

 

(5)         As of June 30, 2016, the Asia Pacific revolving credit facility remained suspended.

 

(6)         This amount is associated with short term vendor financing arrangements.

 

The maturities of the Company’s debt obligations as of June 30, 2016 are presented below:

 

		June 30, 2016
		(in thousands)
Maturities of debt and capital lease obligations
2016 (remainder of year)		$	2,974
2017		2,339
2018		5
2019		4
2020		—
Thereafter		—
Total principal debt and capital lease maturities		$	5,322
Current portion		$	4,993
Non-current portion		$	329

 

9. SHARE-BASED COMPENSATION

 

Share-based compensation expense is based on the grant date fair value and is recognized on a straight-line basis over the applicable vesting period. During the three months ended June 30, 2016 and 2015, Crocs recorded $3.1 million and $3.5 million, respectively, of pre-tax share-based compensation expense, of which $2.9 million and $3.3 million, respectively, is included in selling, general and administrative expense, and the remainder for both periods included in cost of sales on the condensed consolidated statements of operations. During the six months ended June 30, 2016 and 2015, Crocs recorded $5.9 million and $6.5 million, respectively, of pre-tax share-based compensation expense, of which $5.6 million and $6.2 million, respectively, is included in selling, general and administrative expense, and the remainder included in cost of sales on the condensed consolidated statements of operations.

 

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Stock Option Activity

 

A summary of Crocs’ stock option activity as of and for the three and six months ended June 30, 2016 is presented below:

 

		Stock Option Shares		Weighted Average Exercise Price
Outstanding as of March 31, 2016		791,561		$	15.90
Granted		—		$	—
Exercised		(54,350	)	$	3.88
Forfeited or expired		(32,489	)	$	18.62
Outstanding as of June 30, 2016		704,722		$	16.70

 

		Stock Option Shares		Weighted Average Exercise Price
Outstanding as of December 31, 2015		1,295,749		$	14.09
Granted		—		$	—
Exercised		(91,297	)	$	4.01
Forfeited or expired		(499,730	)	$	12.25
Outstanding as of June 30, 2016		704,722		$	16.70

 

As of June 30, 2016, there was $0.5 million of unrecognized compensation expense related to stock options. The expense is expected to be amortized over a weighted average period of 2.24 years.

 

Restricted Stock Awards and Units Activity

 

A summary of the Company’s restricted stock award (“RSA”) and restricted stock unit (“RSU”) activity as of and for the three and six months ended June 30, 2016 is presented below:

 

		Restricted Stock Awards					Restricted Stock Units
		Shares		Weighted Average Grant Date Fair Value			Units		Weighted Average Grant Date Fair Value
Unvested at March 31, 2016		3,334		$	15.00		3,813,082		$	9.63
Granted		22,860		$	10.28		392,757		$	8.68
Vested		(3,334	)	$	15.00		(59,456	)	$	14.38
Forfeited		—		$	—		(79,238	)	$	13.08
Unvested at June 30, 2016		22,860		$	10.28		4,067,145		$	9.40

 

		Restricted Stock Awards					Restricted Stock Units
		Shares		Weighted Average Grant Date Fair Value			Units		Weighted Average Grant Date Fair Value
Unvested at December 31, 2015		6,667		$	15.00		3,088,378		$	10.75
Granted		22,860		$	10.28		2,239,837		$	9.15
Vested		(6,667	)	$	15.00		(498,395	)	$	13.17
Forfeited		—		$	—		(762,675	)	$	11.46
Unvested at June 30, 2016		22,860		$	10.28		4,067,145		$	9.40

 

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