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10-K
CROCS, INC. filed this Form 10-K on 02/25/2013
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Form 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2012

or

 

  ¨ 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. 0-51754

 

 

CROCS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   20-2164234

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

7477 East Dry Creek Parkway

Niwot, Colorado 80503

(303) 848-7000

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

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

 

   

Title of each class:

      

Name of each exchange on which registered:

   
  Common Stock, par value $0.001 per share      The NASDAQ Global Select Market  

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x  No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨  No x

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 ¨

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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. x

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 ¨   Non-accelerated filer ¨   Smaller reporting company ¨
   

(do not check if a

smaller reporting company)

 

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

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2012 was $1.4 billion. For the purpose of the foregoing calculation only, all directors and executive officers of the registrant and owners of more than 10% of the registrant’s common stock are assumed to be affiliates of the registrant. This determination of affiliate status is not necessarily conclusive for any other purpose.

The number of shares of the registrant’s common stock outstanding as of January 31, 2013 was 88,134,790.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference from the registrant’s proxy statement for the 2013 annual meeting of stockholders to be filed no later than 120 days after the end of the registrant’s fiscal year ended December 31, 2012.

 

 

 


Table of Contents

Crocs, Inc.

Table of Contents to the Annual Report on Form 10-K

For the Year Ended December 31, 2012

 

PART I   
Item 1.  

Business

     1   
Item 1A.  

Risk Factors

     8   
Item 1B.  

Unresolved Staff Comments

     18   
Item 2.  

Properties

     19   
Item 3.  

Legal Proceedings

     19   
Item 4.  

Mine Safety Disclosures

     21   
PART II   
Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     21   
Item 6.  

Selected Financial Data

     24   
Item 7.  

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

     25   
Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

     44   
Item 8.  

Financial Statements and Supplementary Data

     45   
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     45   
Item 9A.  

Controls and Procedures

     45   
Item 9B.  

Other Information

     48   
PART III   
Item 10.  

Directors, Executive Officers and Corporate Governance

     48   
Item 11.  

Executive Compensation

     48   
Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     48   
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

     49   
Item 14.  

Principal Accountant Fees and Services

     49   
PART IV   
Item 15.  

Exhibits and Financial Statement Schedules

     49   
Signatures      53   


Table of Contents

PART I

 

ITEM 1. Business

The Company

Crocs, Inc. and its consolidated subsidiaries (collectively the “Company,” “we,” “our” or “us”) is a designer, manufacturer and distributor of footwear and accessories for men, women and children. We strive to be the global leader in the sale of molded footwear featuring fun, comfort, color and functionality. Our primary products utilize our proprietary closed cell-resin, called Croslite. The use of this unique material allows us to produce innovative, lightweight, non-marking and odor-resistant footwear. We currently sell our products in more than 90 countries through domestic and international retailers and distributors and directly to end-user consumers through our company-operated retail stores, outlets, kiosks and webstores. In 2002, we launched the marketing and distribution of our original clog style footwear in the United States. The unique characteristics of Croslite enabled us to offer consumers a shoe unlike any other footwear model then available.

Since the initial introduction and popularity of the Beach and Crocs Classic designs, we have expanded our Croslite products to include a variety of new styles and products and have further extended our product reach through the acquisition of brand platforms such as Jibbitz, LLC (“Jibbitz”) and Ocean Minded, Inc. (“Ocean Minded”). We continue to branch out into other types of footwear so as to bring a unique and original perspective to the consumer in styles that may be unexpected from Crocs. We believe this will help us to continue to build a stable year-round business as we look to offer more styles oriented for cold weather. Our marketing efforts surround specific product launches and employ a fully integrated approach utilizing a variety of media outlets, including print and online. Our marketing efforts drive business to both our wholesale partners and our company-operated retail and internet stores, ensuring that our presentation and story are first class and drive purchasing at the point of sale.

We were organized in 1999 as a limited liability company. In January 2005, we converted to a Colorado corporation and subsequently re-incorporated as a Delaware corporation in June 2005. In February 2006, we completed our initial public offering and trading of our common stock on NASDAQ commenced.

Products

While the majority of our products consist of footwear, we also offer accessories and apparel which generated approximately 3.5% and 0.1%, respectively, of our total revenues during the year ended December 31, 2012. Our footwear products are divided into four product offerings: Core-Comfort, Active, Casual and Style. The Core-Comfort product offering primarily includes molded and unisex products targeted toward a wide range of consumers established through core Crocs attributes which include comfort, easy on-and-off capability, and color. The Active product offering is comprised of footwear intended for healthy living and includes sport inspired products and footwear suited for activities such as boating, walking, hiking and even recovery after workouts. The Casual product offering includes sporty and relaxed styles appealing to a broad range of customers. The Style product offering includes stylish products which are intended to broaden the wearing occasion for Crocs lovers.

We have an active licensing program that includes licensing various marks from companies such as Disney, Marvel and Viacom, among others, for Crocs branded footwear and Jibbitz branded shoe charms. We also license certain of our own marks to third parties in connection with a strategy to extend the Crocs brand into new product types.

Footwear

Our footwear product offering has grown significantly since we first introduced the Crocs single style clog in six colors, in 2002. We currently offer a wide product line of footwear, some of which include boots, sandals, sneakers, mules and flats which are made of materials like leather and textile fabrics as well as Croslite.

 

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A key differentiating feature of our footwear products is the Croslite material, which is uniquely suited for comfort and functionality. Croslite is carefully formulated to be of a density that creates extremely lightweight, comfortable and non-marking footwear which conforms to the shape of the foot and increases comfort. Croslite is a closed cell resin material which is water resistant, virtually odor free and allows many of our footwear styles to be cleaned simply with water. As we have expanded our product offering, we have incorporated traditional materials such as textile fabric and leather into many new styles. However, we continue to utilize the Croslite material for the foot bed, sole and other key structural components for many of these styles.

As a global leader in casual footwear, we recognize the responsibility we have to our employees and the global communities we serve. We strive to maintain a spirit of “giving back” as a part of the Crocs culture and worldwide reputation. With the help of our donation partners, we are able to provide a basic necessity—shoes—to millions of individuals that may not otherwise have a pair. As of December 31, 2012, we have donated over 3 million pairs of shoes to individuals in need both domestically and internationally in more than 40 countries including Democratic Republic of The Congo, Haiti, Iraq, and Malawi. These donations and other social responsibility initiatives, form the Crocs Cares program. Crocs is dedicated to providing robust programs, donations, and community work opportunities designed to make a difference in the lives of our employees as well as both local and global communities.

Footwear sales made up 95.8%, 95.6% and 95.5% of total revenues for the years ended December 31, 2012, 2011 and 2010, respectively. During the years ended December 31, 2012, 2011 and 2010, approximately 75.3%, 73.1% and 75.5% of unit sales consisted of products geared towards adults, respectively, compared to 24.7%, 26.9% and 24.5% of unit sales of products geared towards children, respectively.

Accessories

In addition to our footwear brands, we own the Jibbitz brand, a unique accessory product-line with colorful snap-on charms specifically suited for Crocs shoes. We acquired Jibbitz in December 2006 and have expanded the product-line to include a wide variety of charms in varying shapes and sizes, with designs such as flowers, sports gear, seasonal and holiday designs, animals, symbols, letters and rhinestones. Crocs licensing agreements also extend to Jibbitz, which allows Jibbitz to create designs bearing logos and emblems of Disney, Nickelodeon and the Crocs collegiate line, among others. Jibbitz designs allow Crocs consumers to personalize their footwear to creatively express their individuality. As of December 31, 2012, more than 3,000 unique Jibbitz charm designs were sold to consumers for personalizing their Crocs footwear. Sales from Jibbitz designs made up 3.5%, 3.7% and 3.5% of total revenues for the years ended December 31, 2012, 2011 and 2010, respectively.

Sales and Marketing

The broad appeal of our footwear has allowed us to market our products in a wide range of distribution channels, including department stores, traditional footwear retailers and a variety of specialty and independent retail channels. Each season, we focus on presenting a compelling “brand story and experience” for our new product collections and our broader casual lifestyle assortment. Our marketing efforts center on multi-level story telling across diverse wearing occasions and product silhouettes.

As we are a global brand, our model is based on global relevance while still allowing for regional flexibility in execution and message. At the regional or market level, campaigns are initiated using a mix of digital, social, and traditional media outlets that align with local marketplaces and target consumer dynamics. This strategy allows for relevant cross-channel input coordinated through our global brand objectives to drive an aligned global marketing and brand strategy.

We utilize an in-house creative team to execute our marketing efforts. Local marketing teams focus on localizing campaigns by establishing and executing marketing programs to effectively engage target customers in a

 

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meaningful manner. We utilize a proprietary Brand Performance System to help prioritize demand generation initiatives and optimize local marketing activities. The Brand Performance System integrates multiple research and consumer database platforms across key markets to provide guidance on highest yielding customer growth opportunities and market performance analysis.

We have three primary sales channels: wholesale, retail and internet (discussed at a more detailed level below). Our marketing efforts are aimed toward driving business to both our wholesale partners and our company-operated retail and internet stores. Our marketing efforts in the wholesale and retail channels are focused on visual product merchandising with alignment on key stories, activation materials and creative materials. Retail stores provide a unique opportunity to engage with customers in a three-dimensional manner. Strong emphasis is placed on making the store experience a meaningful and memorable showcase of our larger assortment of casual lifestyle footwear and key new product launches. Our marketing, merchandising, and visual merchandising departments work closely together to ensure the store environment and merchandise are aligned to support key seasonal product stories while promoting the larger product lines and iconic product collections.

We have an in-house digital marketing team that oversees digital marketing programs and platforms that include paid-and-organic search, display, re-targeting, email and affiliate marketing to drive new customers to the brand and retain existing customers. Under our universal seasonal brand campaign, the team helps to adapt key brand story content and produces additional web-specific content for our internet channel.

Wholesale Channel

During the years ended December 31, 2012, 2011 and 2010, approximately 57.5%, 59.8% and 60.8% of net revenues, respectively, were derived from sales through the wholesale channel which consists of sales to distributors and third party retailers. Wholesale customers include national and regional retail chains, department stores, sporting goods stores, independent footwear retailers and family footwear retailers, such as Dick’s Sporting Goods, Famous Footwear, Academy, Kohl’s, Nordstrom, Xebio and Murasaki Sports, as well as on-line retailers such as Zappos and Amazon. No single customer accounted for 10% or more of our revenues for the years ended December 31, 2012, 2011 and 2010.

We use third party distributors in select markets where we believe such arrangements are preferable to direct sales. These third party distributors purchase products pursuant to a price list and are granted the right to resell the products in a defined territory, usually a country or group of countries. Our typical distribution agreements have terms of one to four years, are generally terminable on 30 days prior notice and have minimum sales requirements. Many of our agreements allow us to accept returns from wholesale customers at our discretion for defective products, quality issues and shipment errors on an exception basis or, for certain wholesale customers, extend pricing discounts in lieu of defective product returns. We also may accept returns from our wholesale customers, on an exception basis, for the purpose of stock re-balancing to ensure that our products are merchandised in the proper assortments. Additionally, we may provide markdown allowances to key wholesale customers to facilitate in-channel product markdowns where sell-through is less than anticipated.

Consumer Direct Channels

Consumer direct sales channels include retail and internet channels and serve as an important and effective means to enhance our product and brand awareness as they provide direct access to our consumers and an opportunity to showcase our entire line of footwear and accessory offerings. Consequently, we view the consumer direct channels to be complementary to our wholesale channel.

 

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Retail Channel

During the years ended December 31, 2012, 2011 and 2010, approximately 33.4%, 30.6% and 29.7%, respectively, of our net revenues were derived from sales through our retail channel, which consists of kiosks/store in stores, company-operated retail and outlet stores.

Retail Stores As of December 31, 2012, 2011 and 2010, we operated 287, 180 and 136 global retail stores, respectively. Our retail stores allow us to effectively market the full breadth and depth of our new and existing products and interact with customers in order to enhance brand awareness.

Outlet Stores As of December 31, 2012, 2011 and 2010, we operated 129, 92 and 78 global outlet stores, respectively. Outlet stores help us move older products in an orderly fashion. We also sell full priced products in our outlet stores.

Kiosks/Store in Stores As of December 31, 2012, 2011 and 2010, we operated 121, 158 and 153 global retail kiosks and store in stores, respectively, located in malls and other high foot traffic areas.

Of our 537 global stores, 199 stores operated in our Americas segment, including 170 located in the U.S. and 12 located in Canada; 241 stores operated in our Asia segment, including 63 located in Korea, 43 located in Taiwan, 40 located in Japan, 39 located in China and 17 located in Hong Kong; and 97 stores operated in our Europe segment, including 29 located in Russia, 18 located in Germany, and 16 located in Great Britain. The remaining stores were located throughout Asia, Europe, Australia, the Middle East, South America and South Africa.

Internet Channel

As of December 31, 2012, 2011 and 2010, we offered our products through 43, 42 and 37 company-operated internet webstores, respectively, worldwide. During the years ended December 31, 2012, 2011 and 2010, approximately 9.1%, 9.6% and 9.5%, respectively, of our net revenues were derived from sales through our internet channel. Our internet presence enables us to have increased access to our customers and provides us with an opportunity to educate them about our products and brand. We continue to expand our web-based marketing efforts to increase consumer awareness of our full product range and have begun expanding the implementation of locally executed internet web stores at the regional level.

Business Segments and Geographic Information

We have three reportable operating segments: Americas, Europe and Asia. Revenues of each of our reportable operating segments represent sales to external customers. We also have an “Other businesses” category which aggregates insignificant operating segments that do not meet the reportable threshold and represent manufacturing operations located in Mexico and Italy. Revenues of the “Other businesses” category are primarily made up of intersegment sales which are eliminated when deriving total consolidated revenues. The remaining revenues for the “Other businesses” represent non-footwear product sales to external customers. Financial information relating to our operating segments as well as foreign country revenues and long-lived assets is provided in Note 14—Operating Segments and Geographic Information in the accompanying notes to the consolidated financial statements.

Americas

The Americas segment consists of revenues and expenses related primarily to product sales in the North and South America geographic regions. Regional wholesale channel customers consist of a broad range of sporting goods and department stores as well as specialty retailers. The regional retail channel sells directly to the consumer through 199 company-operated store locations as well as through webstores. During the years ended December 31, 2012, 2011 and 2010, revenues from the Americas segment constituted approximately 44.1%, 44.8% and 47.5% of our consolidated revenues, respectively.

 

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Asia

The Asia segment consists of revenues and expenses related primarily to product sales throughout Asia, Australia, New Zealand, the Middle East and South Africa. The Asia wholesale channel consists of sales to a broad range of retailers similar to the wholesale channel we have established in the Americas. We also sell products directly to the consumer through 241 company-operated stores as well as through our webstores. During the years ended December 31, 2012, 2011 and 2010, revenues from the Asia segment constituted 40.7%, 38.1% and 36.1% of our consolidated revenues, respectively.

Europe

The Europe segment consists of revenues and expenses related primarily to product sales throughout Europe and Russia. Europe segment wholesale channel customers consist of a broad range of retailers, similar to the wholesale channel we have established in the Americas. We also sell our products directly to the consumer through 97 company-operated stores including kiosks and retail stores as well as through our webstores. During the years ended December 31, 2012, 2011 and 2010, revenues from the Europe segment constituted 15.1%, 17.1% and 16.2% of our consolidated revenues, respectively.

Distribution and Logistics

On an ongoing basis, we look to enhance our distribution and logistics network so as to further streamline our supply chain, increase our speed to market and lower operating costs. During the year ended December 31, 2012, we stored our raw material and finished goods inventories in company-operated warehouse and distribution facilities located in the United States, Mexico, the Netherlands, Japan, Finland, South Africa, Russia and Italy. We also utilize distribution centers which are operated by third parties located in the United States, China, Japan, Hong Kong, Australia, Korea, Singapore, India, Taiwan, the United Arab Emirates, Russia, Brazil, Argentina, Chile, Puerto Rico and Italy. Throughout 2012, we continued to engage in efforts to consolidate our global warehouse and distribution facilities to maintain a lean cost structure. As of December 31, 2012, 2011 and 2010, our company-operated warehouse and distribution facilities provided us with approximately 1.0 million square feet, 1.0 million square feet and 1.3 million square feet, respectively, and our third party operated distribution facilities provided us with approximately 0.3 million square feet, 0.5 million square feet and 0.3 million square feet, respectively. We also ship a portion of our products directly to our customers from our internal and third party manufacturers. We are actively pursuing initiatives aimed at shipping more of our product directly to our customers in an effort to lower future cost of sales.

Raw Materials

“Croslite”, our branded proprietary closed-cell resin, is the primary raw material used in the majority of our footwear and some of our accessories. Croslite is soft and durable and allows our material to be non-marking in addition to being extremely lightweight. We continue to invest in research and development in order to refine our materials to enhance these properties and to target the development of new properties for specific applications.

Croslite material is produced by compounding elastomer resins that we or one of our third party processors purchase from major chemical manufacturers together with certain other production inputs such as color dyes. At this time, we have identified multiple suppliers that produce the elastomer resins used in the Croslite material. We may, however, in the future identify and utilize materials produced by other suppliers as an alternative to the elastomer resins we currently use in the production of our proprietary material. All of the other raw materials that we use to produce the Croslite products are readily available for purchase from multiple suppliers.

Since our inception, we have substantially increased the number of footwear products that we offer. Many of our new products are constructed using leather, textile fabrics or other non-Croslite materials. We, or our third party manufacturers, obtain these materials from a number of third party sources and we believe these materials are

 

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broadly available. We also outsource the compounding of the Croslite material and continue to purchase a portion of our compounded raw materials from a third party in Europe.

Design and Development

We continue to dedicate significant resources to product design and development as we develop footwear styles based on opportunities we identify in the marketplace. Our design and development process is highly collaborative, as members of the regional design teams, including our EXO Italia (“EXO”) location, which specializes in EVA (Ethylene Vinyl Acetate) based finish products for the footwear industry, frequently meet with sales and marketing staff, production and supply managers and certain of our retail customers to further refine our products to meet the particular needs of our target market. We continually strive to improve our development function so we can bring products to market quickly and reduce costs while maintaining product quality. We spent $12.0 million, $10.8 million and $7.8 million in research, design and development activities for the years ended December 31, 2012, 2011 and 2010, respectively.

Manufacturing and Sourcing

Our strategy is to maintain a flexible, globally diversified, low-cost manufacturing base. We currently have company-operated production facilities in Mexico and Italy. We also contract with third party manufacturers to produce certain of our footwear styles or provide support to our internal production processes. We believe that our internal manufacturing capabilities enable us to rapidly make changes to production, providing us with the flexibility to quickly respond to orders for high demand models and colors throughout the year, while outsourcing allows us to capitalize on the efficiencies and cost benefits of using contracted manufacturing services. We believe this strategy will continue to minimize our production costs, increase overall operating efficiencies and shorten production and development times.

In the years ended December 31, 2012, 2011 and 2010, we manufactured approximately 21.1%, 20.6% and 21.0%, respectively, of our footwear products internally. We sourced the remaining footwear production from multiple third party manufacturers primarily in China, Vietnam, Eastern Europe and South America. During the years ended December 31, 2012, 2011 and 2010, our largest third party manufacturer in China produced approximately 31.7%, 33.1% and 38.8%, respectively, of our footwear unit volume. We do not have written supply agreements with our primary third party manufacturers in China.

Intellectual Property and Trademarks

We rely on a combination of trademark, copyright, trade secret, trade dress and patent protection to establish, protect and enforce our intellectual property rights in our product designs, brand, materials and research and development efforts, although no such methods can afford complete protection. We own or license the material trademarks used in connection with the marketing, distribution and sale of all of our products, both domestically and internationally, in most countries where our products are currently either sold or manufactured. Our major trademarks include the Crocs logo and the Crocs word mark, both of which are registered or pending registration in the U.S., the European Union, Japan, Taiwan, China and Canada among other places. We also have registrations or pending trademark applications for the marks Jibbitz, Jibbitz Logo, YOU by Crocs, YOU by Crocs Logo, Ocean Minded, Tail Logo, Bite, Bite Logo, Crocband, Crocs Tone and Crocs Littles, “ Croslite” and the Croslite logo, as well as other marks in various countries around the world.

In the U.S., our patents are generally in effect for up to 20 years from the date of the filing of the patent application. Our trademarks registered within and outside of the U.S. are generally valid as long as they are in use and their registrations are properly maintained and have not been found to become generic. We believe our trademarks are crucial to the successful marketing and sale of our products. We intend to continue to strategically register, both domestically and internationally, the trademarks and copyrights we utilize today and those we develop in the future. We will also continue to aggressively police our patent, trademarks and copyrights and pursue those who infringe upon them, both domestically and internationally, as we deem necessary.

 

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We consider the formulations of the materials covered by our trademark Croslite and used to produce our shoes to be a valuable trade secret. Croslite material is manufactured through a process that combines a number of components in various proportions to achieve the properties for which our products are known. We use multiple suppliers to source these components but protect the formula by using exclusive supply agreements for key components, confidentiality agreements with our third party processors and by requiring our employees to execute confidentiality agreements concerning the protection of our confidential information. Other than our third party processors and a third party licensee, we are not aware of any third party that has independently developed the formula or that otherwise has the right to use the formula. We believe the comfort and utility of our products depend on the properties achieved from the compounding of Croslite material and constitute a key competitive advantage for us, and we intend to continue to vigorously protect this trade secret.

We also actively combat counterfeiting through monitoring of the global marketplace. We use our employees, sales representatives, distributors and retailers, as well as outside investigators and attorneys, to police against infringing products by encouraging them to notify us of any suspect products and to assist law enforcement agencies. Our sales representatives and distributors are also educated on our patents, pending patents, trademarks and trade dress to assist in preventing potentially infringing products from obtaining retail shelf space. The laws of certain countries do not protect intellectual property rights to the same extent or in the same manner as do the laws of the U.S., and, therefore, we may have difficulty obtaining legal protection for our intellectual property in certain jurisdictions.

Seasonality

Due to the seasonal nature of our footwear which is more heavily focused on styles suitable for warm weather, revenues generated during our first and fourth quarters are typically less than revenues generated during our second and third quarters, when the northern hemisphere is experiencing warmer weather. We continue to expand our product line to include more winter oriented styles to mitigate some of the seasonality of our revenues. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new model introductions or general economic or consumer conditions. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of results to be expected for any other quarter or year.

Backlog

We receive a significant portion of orders as preseason orders, generally four to six months prior to shipment date. We provide customers with price incentives to participate in such preseason programs to enable us to better plan our production schedule, inventory and shipping needs. Unfulfilled customer orders as of any date are referred to as backlog and represent orders scheduled to be shipped at a future date. Backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule and the timing of product shipments. Further, the mix of future and immediate delivery orders can vary significantly period over period. Due to these factors and since the unfulfilled orders can be canceled at any time prior to shipment by our customers, backlog may not be a reliable measure of future sales and comparisons of backlog from period to period may be misleading. In addition, our historical cancellation experience may not be indicative of future cancellation rates. Backlog as of December 31, 2012 and 2011 was $354.3 million and $307.4 million, respectively.

Competition

The global casual, athletic and fashion footwear markets are highly competitive. Although we believe that we do not compete directly with any single company with respect to the entire spectrum of our products, we believe portions of our wholesale business compete with companies such as, but not limited to, Deckers Outdoor Corp., Skechers USA Inc., Steve Madden, Ltd., Wolverine World Wide, Inc. and VF Corporation. Our company-operated retail locations also compete with footwear retailers such as Genesco, Inc., Macy’s, Dillard’s, Dick’s Sporting Goods Inc., The Finish Line, Inc and Footlocker, Inc.

 

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The principal elements of competition in these markets include brand awareness, product functionality, design, quality, pricing, customer service, marketing and distribution. We believe that our unique footwear designs, the Croslite material, our prices, expanded product-line and our distribution network continue to position us well in the marketplace. However, some companies in the casual footwear and apparel industry have greater financial resources, more comprehensive product lines, broader market presence, longer standing relationships with wholesalers, longer operating histories, greater distribution capabilities, stronger brand recognition and greater marketing resources than we have. Furthermore, we face competition from new players who have been attracted to the market with imitation products similar to ours as the result of the unique design and success of our footwear products.

Employees

As of December 31, 2012, we had approximately 4,900 full-time, part-time and seasonal employees, none of which were represented by a union.

Available Information

Our internet address is www.crocs.com on which we post the following filings, free of charge, as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Copies of any of these documents will be provided in print to any stockholder who submits a request in writing to Integrated Corporate Relations, 761 Main Avenue, Norwalk, CT 06851.

 

ITEM 1A. Risk Factors

Special Note Regarding Forward Looking Statements

Statements in this Form 10-K and in documents incorporated by reference herein (or otherwise made by us or on our behalf) contain “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 are often identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “strive,” “will,” and variations of such words or similar expressions. Further, these statements are based on the beliefs and assumptions of management based on information currently available. Such forward looking statements are subject to risks, uncertainties and other factors that could 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, the risk factors mentioned below. 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.

The risks included herein are not exhaustive. Other sections of this Form 10-K may include additional factors which could adversely affect our business and financial performance. Since we operate in a very competitive and rapidly changing environment, new risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it 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 risks and uncertainties, investors should not place undue reliance on forward looking statements as a prediction of actual results.

 

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Current global economic conditions may adversely affect consumer spending and the financial health of our customers and others with whom we do business which may adversely affect our financial condition, results of operations and cash resources.

Uncertainty about the current and future global economic conditions may cause consumers and retailers to defer purchases or cancel purchase orders for our products in response to tighter credit, decreased cash availability and weakened consumer confidence. For example, sales and operating performance in our Europe segment in 2012 were adversely affected by the macroeconomic conditions surrounding the European sovereign debt crisis and may continue to be affected if such conditions do not improve. Our financial success is sensitive to changes in general economic conditions, both globally and nationally. Recessionary economic cycles, higher interest borrowing rates, higher fuel and other energy costs, inflation, increases in commodity prices, higher levels of unemployment, higher consumer debt levels, higher tax rates and other changes in tax laws or other economic factors that may affect consumer spending could adversely affect the demand for our products. As a result, 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 or increase our international operations on a profitable basis, or maintain or improve our earnings from operations as a percentage of net sales. Our financial success is also significantly related to the success of our wholesale customers who are directly impacted by fluctuations in the broader economy including the global economic downturns which reduce foot traffic in shopping malls and lessen consumer demand for our products.

In addition, any decrease in available credit caused by a weakened global economy may result in financial difficulties for our wholesale and retail customers, product suppliers and other service providers, as well as the financial institutions that are counterparties to our credit facility and derivative transactions. If credit pressures or other financial difficulties result in insolvency for these parties, it could adversely impact our estimated reserves, our ability to obtain future financing and our financial results. In particular, if our customers experience diminished liquidity, we may experience a reduction in product orders, an increase in customer order cancellations and/or the need to extend customer payment terms which could lead to higher accounts receivable balances, reduced cash flows, greater expense associated with collection efforts and increased bad debt expense.

We face significant competition.

The footwear industry is highly competitive. Continued growth in the market for casual footwear has encouraged the entry of new competitors into the marketplace and has increased competition from established companies. Our competitors include most major athletic and footwear companies, branded apparel companies and retailers with their own private label footwear products. A number of our competitors have significantly greater financial resources than us, more comprehensive product lines, a broader market presence, longer standing relationships with wholesalers, a longer operating history, greater distribution capabilities, stronger brand recognition and spend substantially more than we do on product marketing. Our competitors’ greater capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production and more quickly develop new products. Additionally, some of our competitors are offering products that are substantially similar, in design and materials, to Crocs branded footwear. In addition, access to offshore manufacturing is also making it easier for new companies to enter the markets in which we compete. If we fail to compete successfully in the future, our sales and profits may decline, we may lose market share, our financial condition may deteriorate and the market price of our common stock is likely to fall.

We may be unable to successfully execute our long-term growth strategy or maintain our current revenue levels.

Our ability to maintain our revenue levels or to grow in the future depends on, among other things, the continued success of our efforts to maintain our brand image and bring compelling and revenue enhancing footwear offerings to market and our ability to expand within our current distribution channels and increase sales of our

 

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products into new locations internationally. Successfully executing our long-term growth and profitability strategy will depend on many factors, including the strength of the Crocs brand, execution of supply chain strategies, competitive conditions in new markets that we attempt to enter, our ability to attract and retain qualified distributors or agents or to continue to develop direct sales channels, our ability to secure strategic retail store locations, our ability to use and protect the Crocs brand and our other intellectual property in these new markets and territories and our ability to consolidate our network to leverage resources and simplify our fulfillment process. If we are unable to successfully maintain our brand image, expand distribution channels, streamline our supply chain and sell our products in new markets abroad, our business may fail to grow, our brand may suffer and our results of operations may be adversely impacted.

Expanding our footwear product line may be difficult and expensive. If we are unable to successfully continue such expansion, our brand may be adversely affected and we may not be able to maintain or grow our current revenue and profit levels.

To successfully expand our footwear product line, we must anticipate, understand and react to the rapidly changing tastes of consumers and provide appealing merchandise in a timely manner. New footwear models that we introduce may not be successful with consumers or our brand may fall out of favor with consumers. If we are unable to anticipate, identify, or react appropriately to changes in consumer preferences, our revenues may decrease, our brand image may suffer, our operating performance may decline and we may not be able to execute our growth plans.

In producing new footwear models, we may encounter difficulties that we did not anticipate during the product development stage. Our development schedules for new products are difficult to predict and are subject to change in response to consumer preferences and competing products. If we are not able to efficiently manufacture new products in quantities sufficient to support retail and wholesale distribution, we may not be able to recover our investment in the development of new styles and product lines and we would continue to be subject to the risks inherent to having a limited product line. Even if we develop and manufacture new footwear products that consumers find appealing, the ultimate success of a new style may depend on our pricing. We have a limited history of introducing new products in certain target markets; as such, we may set the prices of new styles too high for the market to bear or we may not provide the appropriate level of marketing in order to educate the market and potential consumers about our new products. Achieving market acceptance will require us to exert substantial product development and marketing efforts, which could result in a material increase in our selling, general and administrative expenses and there can be no assurance that we will have the resources necessary to undertake such efforts effectively or that such efforts will be successful. Failure to gain market acceptance for new products could impede our ability to maintain or grow current revenue levels, reduce profits, adversely affect the image of our brands, erode our competitive position and result in long-term harm to our business.

Opening and operating additional retail stores are subject to numerous risks including the dependency on customer traffic in shopping malls; declines in revenue of such retail stores could adversely affect our profitability.

In recent years, we have significantly expanded and intend to continue the expansion of our retail sales channel. Opening retail stores globally involves substantial investment, including the construction of leasehold improvements, furniture and fixtures, equipment, information systems, inventory and personnel. Operating global retail stores incurs fixed costs; if we have insufficient sales, we may be unable to reduce such fixed costs and avoid losses or negative cash flows. Due to the high fixed cost structure associated with the retail segment, negative cash flows or the closure of a store could result in write downs of inventory, impairment of leasehold improvements, impairment losses on other long-lived assets, severance costs, significant lease termination costs or the loss of working capital, which could adversely impact our financial position, results of operations or cash flows. Our ability to recover the investment in and expenditures of our retail operations can be adversely affected if sales at our retail stores are lower than anticipated.

 

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In addition, our ability to open new stores successfully depends on our ability to identify suitable store locations, negotiate acceptable lease terms, hire, train and retain store personnel and satisfy the fashion preferences in new geographic areas. Many of our retail stores are located in shopping malls where we depend on obtaining prominent locations and the overall success of the malls to generate customer traffic. We cannot control the success of individual malls and an increase in store closures by other retailers may lead to mall vacancies and reduced foot traffic. Reduced customer traffic could reduce sales of existing retail stores or hinder our ability to open retail stores in new markets, which could negatively affect our operating results.

We have incurred substantial financial commitments and fixed costs related to our retail stores that we will not be able to recover if our stores are not successful.

The success of an individual store location is dependent on the success of the shopping mall or outlet center where the store is located, and may be influenced by changing customer demographic and consumer spending patterns. These factors cannot be predicted with accuracy. Because we enter into long-term financial commitments when leasing retail store locations and incur substantial fixed costs for each store’s design, leasehold improvements, fixtures and management information systems, it would be costly for us to close a store that does not prove successful.

The testing of our retail stores’ long-lived assets for impairment requires us to make significant estimates about our future performance and cash flows that are inherently uncertain. These estimates can be affected by numerous factors, including changes in economic conditions, our results of operations, and competitive conditions in the industry. Due to the high fixed cost structure associated with our retail operations, negative cash flows or the closure of a store could result in write downs of inventory, impairment of leasehold improvements, impairment losses on other long-lived assets, severance costs, significant lease termination costs or the loss of working capital, which could adversely impact our financial position, results of operations or cash flows. For example, during 2012, we recorded impairments relating to retail stores of $1.4 million, and these impairment charges may increase as we expand our retail operations.

Our revolving credit facility contains financial covenants that require us to maintain certain financial metrics and ratios and restrictive covenants that limit our flexibility. A breach of those covenants may cause us to be in default under the facility, and our lenders could foreclose on our assets.

The credit agreement for our revolving credit facility requires us to maintain a certain leverage ratio at all times, a certain level of unrestricted cash at all times, and a minimum fixed charge coverage ratio on a quarterly basis. A failure to maintain current revenue levels or an inability to control costs could negatively impact our ability to meet these financial covenants and, if we breach such covenants or any of the restrictive covenants described below, the lenders could either refuse to lend funds to us or accelerate the repayment of any outstanding borrowings under the revolving credit facility. We might not have sufficient assets to repay such indebtedness upon a default. If we are unable to repay the indebtedness, the lenders could initiate a bankruptcy proceeding against us or collection proceedings with respect to our assets, all of which secure our indebtedness under the revolving credit facility.

The credit agreement also contains certain restrictive covenants that limit and in some circumstances prohibit, our ability to, among other things incur additional debt, sell, lease or transfer our assets, pay dividends, make capital expenditures and investments, guarantee debt or obligations, create liens, enter into transactions with our affiliates and enter into certain merger, consolidation or other reorganizations transactions. These restrictions could limit our ability to obtain future financing, make acquisitions or needed capital expenditures, withstand the current or future downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise, any of which could place us at a competitive disadvantage relative to our competitors that have less debt and are not subject to such restrictions.

 

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We manufacture a portion of our products which causes us to incur greater fixed costs. Any difficulties or disruptions in our manufacturing operations could adversely affect our sales and results of operations.

We produce a portion of our footwear products at our internal manufacturing facilities in Mexico and Italy. Ownership of these facilities adds fixed costs to our cost structure which are not as easily scalable as variable costs. In addition, the manufacture of our products from the Croslite material requires the use of a complex process and we may experience difficulty in producing footwear that meets our high quality control standards. We will be required to absorb the costs of manufacturing and disposing of products that do not meet our quality standards. Any increases in our manufacturing costs could adversely impact our profit margins. Furthermore, our manufacturing capabilities are subject to many of the same risks and challenges faced by our third party manufacturers (as noted in the risk factor below), including our ability to scale our production capabilities to meet the needs of our customers. Our manufacturing may also be disrupted for reasons beyond our control, including work stoppages, fires, earthquakes, floods or other natural disasters. Any disruption to our manufacturing operations will hinder our ability to deliver products to our customers in a timely manner and could have a material and adverse effect on our business and results of operations.

We depend heavily on third party manufacturers located outside the U.S.

Third party manufacturers located in China and Vietnam produce most of our footwear products. We depend on the ability of these manufacturers to finance the production of goods ordered, maintain adequate manufacturing capacity and meet our quality standards. We compete with other companies for the production capacity of our third party manufacturers, and we do not exert direct control over the manufacturers’ operations. As such, we have experienced at times, delays or inabilities to fulfill customer demand and orders, particularly in China. We cannot guarantee that any third party manufacturer will have sufficient production capacity, meet our production deadlines or meet our quality standards.

In addition, we do not have long-term supply contracts with these third party manufacturers and any of them may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge us. As a result, we are not assured of an uninterrupted supply of products of an acceptable quality and price from our third party manufacturers. Foreign manufacturing is subject to additional risks, including transportation delays and interruptions, work stoppages, political instability, expropriation, nationalization, foreign currency fluctuations, changing economic conditions, changes in governmental policies and the imposition of tariffs, import and export controls and other non-tariff barriers. We may not be able to offset any interruption or decrease in supply of our products by increasing production in our internal manufacturing facilities due to capacity constraints, and we may not be able to substitute suitable alternative third party manufacturers in a timely manner or at acceptable prices. Any disruption in the supply of products from our third party manufacturers may harm our business and could result in a loss of sales and an increase in production costs, which would adversely affect our results of operations. In addition, manufacturing delays or unexpected demand for our products may require us to use faster, more expensive transportation methods, such as aircraft, which could adversely affect our profit margins. The cost of fuel is a significant component in transportation costs. Increases in the price of petroleum products can adversely affect our profit margins.

In addition, because a large portion of our footwear products is manufactured in China and Vietnam, the possibility of adverse changes in trade or political relations between the U.S. and these countries, political instability in China, increases in labor costs, or adverse weather conditions could significantly interfere with the production and shipment of our products, which would have a material adverse affect on our operations and financial results.

Our third party manufacturing operations must comply with labor, trade and other laws; failure to do so may adversely affect us.

We require our third party manufacturers to meet our quality control standards and footwear industry standards for working conditions and other matters, including compliance with applicable labor, environmental and other

 

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laws. However, we do not control our third party manufacturers or their respective labor practices. A failure by any of our third party manufacturers to adhere to quality standards or labor, environmental and other laws could cause us to incur additional costs for our products, generate negative publicity, damage our reputation and the value of our brand and discourage customers from buying our products. We also require our third party manufacturers to meet certain product safety standards. A failure by any of our third party manufacturers to adhere to such product safety standards could lead to a product recall which could result in critical media coverage and harm our business and reputation and could cause us to incur additional costs.

In addition, if we or our third party manufacturers violate U.S. or foreign trade laws or regulations, we may be subject to extra duties, significant monetary penalties, the seizure and the forfeiture of the products we are attempting to import or the loss of our import privileges. Possible violations of U.S. or foreign laws or regulations could include inadequate record keeping of our imported products, misstatements or errors as to the origin, quota category, classification, marketing or valuation of our imported products, fraudulent visas or labor violations. The effects of these factors could render our conduct of business in a particular country undesirable or impractical and have a negative impact on our operating results. We cannot predict whether additional U.S. or foreign customs quotas, duties, taxes or other changes or restrictions will be imposed upon the importation of foreign produced products in the future or what effect such actions could have on our business, financial condition or results of operations.

We conduct significant business activity outside the U.S. which exposes us to risks of international commerce.

A significant portion of our revenues is from foreign sales. Our ability to maintain the current level of operations in our existing international markets is subject to risks associated with international sales operations as well as the difficulties associated with promoting products in unfamiliar cultures. In addition to foreign manufacturing, we operate retail stores and sell our products to retailers outside of the U.S. Foreign manufacturing and sales activities are subject to numerous risks, including tariffs, anti-dumping fines, import and export controls, and other non-tariff barriers such as quotas and local content rules; delays associated with the manufacture, transportation and delivery of products; increased transportation costs due to distance, energy prices, or other factors; delays in the transportation and delivery of goods due to increased security concerns; restrictions on the transfer of funds; restrictions, due to privacy laws, on the handling and transfer of consumer and other personal information; changes in governmental policies and regulations; political unrest, changes in law, terrorism, or war, any of which can interrupt commerce; U.S. and foreign anti-corruption laws; expropriation and nationalization; difficulties in managing foreign operations effectively and efficiently from the U.S.; and difficulties in understanding and complying with local laws, regulations and customs in foreign jurisdictions. In addition, we are subject to customs laws and regulations with respect to our export and import activity which are complex and vary within legal jurisdictions in which we operate. We cannot assure that there will be no control failure around customs enforcement despite the precautions we take. We are currently subject to audits by various Customs Authorities including the U.S. and Mexico. Any failure to comply with customs laws and regulations could be discovered during a U.S. or foreign government customs audit and could result in substantial fines and penalties, which could have an adverse effect on our financial position and results of operations.

Foreign currency fluctuations could have a material adverse effect on our results of operations and financial condition.

As a global company, we have significant revenues, costs, assets, liabilities and intercompany balances denominated in currencies other than the U.S. dollar. We pay the majority of expenses attributable to our foreign operations in the functional currency of the country in which such operations are conducted and pay the majority of our overseas third-party manufacturers in U.S. dollars.

Our ability to sell our products in foreign markets and the U.S. dollar value of the sales made in foreign currencies can be significantly influenced by foreign currency fluctuations. A decrease in the value of foreign currencies relative to the U.S. dollar could result in lower revenues, product price pressures and increased losses

 

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from currency exchange rates. Price increases caused by currency exchange rate fluctuations could make our products less competitive or have an adverse effect on our profitability as most of our purchases from third party suppliers are denominated in U.S. dollars. Currency exchange rate fluctuations could also disrupt the business of the third party manufacturers that produce our products by making their purchases of raw materials more expensive and more difficult to finance. While we enter into foreign currency exchange forward contracts as economic cash flow hedges to reduce our exposure to changes in exchange rates, the volatility of foreign currency exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy.

Our financial success may be limited to the strength of our relationships with our wholesale customers and to the success of such wholesale customers.

Our financial success is related to the willingness of our current and prospective wholesale customers to carry our products. We do not have long term contracts with any of our wholesale customers. Sales to our wholesale customers are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by the customer. If we cannot fill our customers’ orders in a timely manner, the sales of our products and our relationships with those customers may suffer. This could have a material adverse effect on our product sales and ability to grow our product lines.

Changes in the global credit market could also affect our customers’ liquidity and capital resources and their ability to meet payment obligations to us which could have a material adverse impact on our cash flows and capital resources. We continue to monitor our accounts receivable aging and record reserves against such receivables as we deem appropriate. Additionally, many of our wholesale customers compete with each other. If they perceive that we are offering their competitors better pricing and support, they may reduce purchases of our products. Moreover, we compete directly with our wholesale customers by selling our products directly to consumers over the internet and through our company-operated retail locations. If our wholesale customers believe that our direct sales to consumers divert sales from their stores, our relationships with such customers may weaken and cause them to reduce purchases of our products. As we continue to grow our consumer direct channels (company-operated retail and internet) this issue could be exacerbated.

We depend on a limited number of suppliers for key production materials, and any disruption in the supply of such materials could interrupt product manufacturing and increase product costs.

We depend on a limited number of sources for the primary materials used to make our footwear. We source the elastomer resins that constitute the primary raw materials used in compounding our Croslite products, which we use to produce our various footwear products, from multiple suppliers. If the suppliers we rely on for elastomer resins were to cease production of these materials, we may not be able to obtain suitable substitute materials in time to avoid interruption of our production cycle. We are also subject to market issues related to supply and demand for our raw materials. We may have to pay substantially higher prices in the future for the elastomer resins or any substitute materials we use, which would increase our production costs and could have a significantly adverse impact on our profit margins and results of operations. If we are unable to obtain suitable elastomer resins or if we are unable to procure sufficient quantities of the Croslite material, we may not be able to meet our production requirements in a timely manner or may need to modify our product characteristics resulting in less favorable market acceptance which could result in lost potential sales, delays in shipments to customers, strained relationships with customers and diminished brand loyalty.

Failure to adequately protect our trademarks and other intellectual property rights and counterfeiting of our brands could divert sales, damage our brand image and adversely affect our business.

We utilize trademarks, trade names, copyrights, trade secrets, issued and pending patents and trade dress and designs on nearly all of our products. We believe that having distinctive marks that are readily identifiable is important to our brand, our success and our competitive position. The laws of some countries, for example, China, do not protect intellectual property rights to the same extent as do U.S. laws. We frequently

 

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discover products that are counterfeit reproductions of our products or that otherwise infringe on our intellectual property rights. If we are unsuccessful in challenging another party’s products on the basis of trademark or design or utility patent infringement, particularly in some foreign countries, or if we are required to change our name or use a different logo, continued sales of such competing products by third parties could harm our brand and adversely impact our business, financial condition, revenues and results of operations by resulting in the shift of consumer preference away from our products. If our brands are associated with inferior counterfeit reproductions, the integrity and reputation of our brands could be adversely affected. Furthermore, our efforts to enforce our intellectual property rights are typically met with defenses and counterclaims attacking the validity and enforceability of our intellectual property rights. We may face significant expenses and liability in connection with the protection of our intellectual property, and if we are unable to successfully protect our rights or resolve intellectual property conflicts with others, our business or financial condition could be adversely affected.

We also rely on trade secrets, confidential information and other unpatented proprietary rights and information related to, among other things, the Croslite material and product development, particularly where we do not believe patent protection is appropriate or obtainable. Using third party manufacturers and compounding facilities may increase the risk of misappropriation of our trade secrets, confidential information and other unpatented proprietary information. The agreements we use in an effort to protect our intellectual property, confidential information and other unpatented proprietary information may be ineffective or insufficient to prevent unauthorized use or disclosure of such trade secrets and information. A party to one of these agreements may breach the agreement and we may not have adequate remedies for such breach. As a result, our trade secrets, confidential information and other unpatented proprietary rights and information may become known to others, including our competitors. Furthermore, our competitors or others may independently develop or discover such trade secrets and information, which would render them less valuable to us.

If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have greater difficulty filling our customers’ orders, either of which could adversely affect our business.

The footwear industry is subject to cyclical variations, consolidation, contraction and closings, as well as fashion trends, rapid changes in consumer preferences, the effects of weather, general economic conditions and other factors affecting demand and possibly impairing our brand image. In addition, sales to our wholesale customers are generally subject to rights of cancellation and rescheduling by the customer. These factors make it difficult to forecast consumer demand. If we overestimate demand for our products, we may be forced to liquidate excess inventories at discounted prices resulting in lower gross margins. Conversely, if we underestimate consumer demand, we could have inventory shortages which can result in lower sales, delays in shipments to customers, strains on our relationships with customers and diminished brand loyalty. A decline in demand for our products, or any failure on our part to satisfy increased demand for our products, could adversely affect our business and results of operations.

We have substantial cash requirements in the U.S.; however, a majority of our cash is generated and held outside of the U.S. The consequential risks of holding cash abroad could adversely affect our financial condition and results of operations.

We have substantial cash requirements in the U.S., but the majority of our cash is generated and held abroad. We generally consider unremitted earnings of subsidiaries operating outside of the U.S. to be indefinitely reinvested and it is not our current intent to change this position. Cash held outside of the U.S. is primarily used for the ongoing operations of the business in the locations in which the cash is held. Most of the cash held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. Certain countries, including China, may have monetary laws which may limit our ability to utilize cash resources in those countries for operations in other countries. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and may adversely affect our liquidity. Since repatriation of such cash is subject to limitations and may be subject to significant taxation, we cannot be certain that we will be able to repatriate such cash on favorable terms or in a timely manner. If we incur operating losses on a continued

 

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basis and require cash that is held in international accounts for use in our U.S. operations, a failure to repatriate such cash in a timely and cost-effective manner could adversely affect our business, financial condition and results of operations.

We have been named as a defendant in a securities class action lawsuit that may result in substantial costs and could divert management’s attention.

Starting in November 2007, certain stockholders filed several purported shareholder class actions in the U.S. District Court for the District of Colorado alleging violations of Sections 10(b) and 20(a) of the Exchange Act based on alleged statements made by us between July 27, 2007 and October 31, 2007. We and certain of our current and former officers and directors have been named as defendants in complaints filed by investors in the United States District Court for the District of Colorado. The first complaint was filed in November 2007; several other complaints were filed shortly thereafter. These actions were consolidated and, in September 2008, the Court appointed a lead plaintiff and counsel. An amended consolidated complaint was filed in December 2008. The amended complaint purports to state claims under Section 10(b), 20(a), and 20A of the Exchange Act on behalf of a class of all persons who purchased our stock between April 2, 2007 and April 14, 2008 (the “Class Period”). The amended complaint alleges that, during the Class Period, defendants made false and misleading public statements about us and our business and prospects and that, as a result, the market price of our stock was artificially inflated. The amended complaint also claims that certain current and former officers and directors traded our stock on the basis of material non-public information. The amended complaint seeks compensatory damages on behalf of the alleged class in an unspecified amount, interest and an award of attorneys’ fees and costs of litigation. On February 28, 2011, the District Court granted motions to dismiss filed by the defendants and dismissed all claims. A final judgment was thereafter entered. Plaintiffs subsequently appealed to the United States Court of Appeals for the Tenth Circuit. We and those current and former officers and directors named as defendants have entered into a Stipulation of Settlement with the plaintiffs that would, if approved by the United States District Court for the District of Colorado, resolve all claims asserted against us by the plaintiffs on behalf of the putative class, and plaintiffs’ appeal would be dismissed. Our independent auditor is not a party to the Stipulation of Settlement. The Stipulation of Settlement is subject to customary conditions, including preliminary court approval, and final court approval following notice to stockholders. If the settlement becomes final, all amounts required by the settlement will be paid by our insurers. There can be no assurance that the settlement will be finally approved by the District Court, or that approval by the District Court will, if challenged, be upheld by the Tenth Circuit.

We are subject to periodic litigation, which could result in unexpected expense of time and resources.

From time to time, we are called upon to defend ourselves against lawsuits relating to our business. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. An unfavorable outcome could have an adverse impact on our business, financial condition and results of operations. In addition, any significant litigation in the future, regardless of its merits, could divert management’s attention from our operations and result in substantial legal fees. In the past, securities class action litigation has been brought against us. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.

Our quarterly revenues and operating results are subject to fluctuation as a result of a variety of factors, including seasonal variations, which could increase the volatility of the price of our common stock.

Sales of our products are subject to seasonal variations and are sensitive to weather conditions. As a significant portion of our revenues are attributable to footwear styles that are more suitable for fair weather, we typically experience our highest sales activity during the second and third quarters of the calendar year, when there is a revenue concentration in countries in the northern hemisphere. While we continue to create new footwear styles that are more suitable for cold weather, the effects of favorable or unfavorable weather on sales can be significant enough to affect our quarterly results which could adversely affect our common stock price. Quarterly results may also fluctuate as a result of other factors, including new style introductions, general economic conditions or

 

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changes in consumer preferences. Results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and revenues for any particular period may fluctuate. This could lead to results outside of analyst and investor expectations, which could increase volatility of our stock price.

We may fail to meet analyst expectations, which could cause the price of our stock to decline.

Our common stock is traded publicly and various securities analysts follow our financial results and frequently issue reports on us which include information about our historical financial results as well as their estimates of our future performance. These estimates are based on their own opinions and are often different from management’s estimates or expectations of our business. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline.

We may fail to protect the integrity and security of customer and associate information.

We routinely possess sensitive customer and associate information and, while we believe we have taken reasonable and appropriate steps to protect that information, if our security procedures and controls were compromised, it could harm our business, reputation, results of operations and financial condition and may increase the costs we incur to protect against such information security breaches, such as increased investment in technology, the costs of compliance with consumer protection laws and costs resulting from consumer fraud.

We depend on key personnel, the loss of whom would harm our business.

The loss of the services and expertise of any key employee could harm our business. Our future success depends on our ability to identify, attract and retain qualified personnel on a timely basis. In addition, we must successfully integrate any newly hired management personnel within our organization in order to achieve our operating objectives. Changes in other key management positions may temporarily affect our financial performance and results of operations as new management becomes familiar with our business. We have experienced management turnover in recent years. Turnover of senior management can adversely impact our stock price, our results of operations and our client relationships and may make recruiting for future management positions more difficult. In some cases, we may be required to pay significant amounts of severance to terminated management employees.

Our current management information systems may not be sufficient for our business and planned system improvements may not be successfully implemented on a timely basis or be sufficient for our business.

We are in the process of implementing numerous information systems designed to support several areas of our business, including warehouse management, order management, retail point-of-sale and internet point-of-sale as well as various systems that provide interfaces between these systems. These systems are intended to assist in streamlining our operational processes and eliminating certain manual processes. However, for certain business planning, finance and accounting functions, we still rely on manual processes that are difficult to control and are subject to human error. We may experience difficulties in transitioning to our new or upgraded systems, including loss of data and decreases in productivity, as our personnel become familiar with these new systems. In addition, our management information systems will require modification and refinement as our business needs change which could prolong the difficulties we experience with systems transitions and we may not always employ the most effective systems for our purposes. If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our management information systems to respond to changes in our business needs, our ability to properly run our business could be adversely affected.

Changes in tax laws and unanticipated tax liabilities and the results of tax audits or litigation could adversely affect our effective income tax rate and profitability.

We are subject to income taxes in the United States and numerous foreign jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of factors, including: changes in the mix of earnings in

 

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countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, the outcome of income tax audits in various jurisdictions around the world and any repatriation of non-US earnings for which we have not previously provided for U.S. taxes. We regularly assess all of these matters to determine the adequacy of our tax provision, which is subject to significant discretion and we could face significant adverse impact if our assumptions are incorrect and/or face significant cost to defend our practices from international and U.S. tax authorities. We are regularly subject to, and are currently undergoing, audits by tax authorities in the United States and foreign jurisdictions for prior tax years. For example, we are currently subject to a tax audit in Mexico on the value of imported raw material and have been notified of a $22.0 million penalty. See Part I Item 3 “Legal Proceedings” for additional details regarding the Mexican tax audit. In addition, in Brazil we have been assessed $1.1 million in additional sales taxes, excluding penalties and interest, relating to our usage of tax credits for the period May 2009 through April 2010. Although we believe our tax estimates are reasonable and we intend to defend our positions through litigation if necessary, the final outcome of tax audits and related litigation is inherently uncertain and could be materially different than that reflected in our historical income tax provisions and accruals. Moreover, we could be subject to assessments of substantial additional taxes and/or fines or penalties relating to ongoing or future audits. The adverse resolution of any audits or litigation could have an adverse effect on our financial position and results of operations.

Our financial results may be adversely affected if substantial investments in businesses and operations fail to produce expected returns.

From time to time, we may invest in business infrastructure, acquisitions of new businesses and expansion of existing businesses, such as our retail operations, which require substantial cash investment and management attention. We believe cost effective investments are essential to business growth and profitability. However, significant investments are subject to typical risks and uncertainties inherent in acquiring or expanding a business. The failure of any significant investment to provide the returns or profitability we expect or the failure to integrate newly acquired businesses could have a material adverse effect on our financial results and divert management attention from more profitable business operations.

Natural disasters could negatively impact our operating results and financial condition.

Natural disasters such as earthquakes, hurricanes, tsunamis or other adverse weather and climate conditions, whether occurring in the U.S. or abroad, and the consequences and effects thereof, including energy shortages and public health issues, could disrupt our operations or the operations of our vendors and other suppliers, or result in economic instability that may negatively impact our operating results and financial condition.

Our restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of an investment in our stock.

Our restated certificate of incorporation, amended and restated bylaws, and Delaware corporate law each contain provisions that could delay, defer, or prevent a change in control of us or changes in our management. These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions, which may prevent a change of control or changes in our management that a stockholder might consider favorable. In addition, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of us. Any delay or prevention of a change of control or change in management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to decline.

ITEM 1B. Unresolved Staff Comments

None.

 

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ITEM 2. Properties

Our principal executive and administrative offices are located at 7477 East Dry Creek Parkway, Niwot, Colorado. We lease, rather than own, all of our facilities. We enter into short-term and long-term leases for kiosks, office, retail, manufacturing and warehouse space domestically and internationally. The terms of these leases include fixed monthly rents and/or contingent rents based on percentage of revenues, for our retail stores, and have expirations between 2013 and 2023. The general location, use and approximate size of our principal properties are given below.

 

Location

 

Operating Segment(s)

that Use this Property

 

Use

  Approximate
     Square Feet    
 

Ontario, California

  Americas   Warehouse     399,000   

Leon, Mexico

  Americas, Asia, Other businesses   Manufacturing/offices     219,000   

Leon, Mexico

  Americas, Asia, Other businesses   Warehouse     173,000   

Rotterdam, the Netherlands

  Europe   Warehouse     174,000   

Niwot, Colorado

  Americas   Corporate headquarters and regional offices     160,000   

Narita, Japan

  Asia   Warehouse     156,000   

Tampere, Finland(1)

  Europe   Warehouse/offices     61,000   

Padova, Italy

  Americas, Asia, Europe, Other businesses   EXO’s regional offices/manufacturing/warehouse     45,000   

Hoopddorf, the Netherlands

  Europe   Regional offices     31,000   

Shenzen, China

  Americas, Asia, Europe, Other businesses   Manufacturing/offices     28,000   

Moscow, Russia

  Europe   Warehouse/offices     27,000   

Gordon’s Bay, South Africa

  Asia   Warehouse/offices     24,000   

Singapore

  Asia   Regional offices     23,000   

Shanghai, China

  Asia   Regional offices     17,000   

Tokyo, Japan

  Asia   Regional offices     13,000   

 

(1) 

The warehouse facilities in this location are fully or partially subleased.

In addition to the properties listed above, we maintain small branch sales offices in the United States, Canada, South America, Taiwan, Hong Kong, Australia, Korea, China, the United Emirates, India and Europe. We also lease retail space for 287 retail stores, 129 outlet stores and 121 kiosks and store in stores, globally as of December 31, 2012.

Of our 537 global stores, 199 stores operated in our Americas segment, including 170 located in the U.S. and 12 located in Canada; 241 stores operated in our Asia segment, including 63 located in Korea, 43 located in Taiwan, 40 located in Japan, 39 located in China and 17 located in Hong Kong; and 97 stores operated in our Europe segment, including 29 located in Russia, 18 located in Germany, and 16 located in Great Britain. The remaining stores were located throughout Asia, Europe, Australia, the Middle East, South America and South Africa.

 

ITEM 3. Legal Proceedings

We and certain current and former officers and directors have been named as defendants in complaints filed by investors in the United States District Court for the District of Colorado. The first complaint was filed in November 2007 and several other complaints were filed shortly thereafter. These actions were consolidated and, in September 2008, the district court appointed a lead plaintiff and counsel. An amended consolidated complaint was filed in December 2008. The amended complaint purports to state claims under Section 10(b), 20(a), and

 

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20A of the Exchange Act on behalf of a class of all persons who purchased our common stock between April 2, 2007 and April 14, 2008 (the “Class Period”). The amended complaint also added our independent auditor as a defendant. The amended complaint alleges that, during the Class Period, the defendants made false and misleading public statements about us and our business and prospects and, as a result, the market price of our common stock was artificially inflated. The amended complaint also claims that certain current and former officers and directors traded in our common stock on the basis of material non-public information. The amended complaint seeks compensatory damages on behalf of the alleged class in an unspecified amount, including interest, and also added attorneys’ fees and costs of litigation. On February 28, 2011, the District Court granted motions to dismiss filed by the defendants and dismissed all claims. A final judgment was thereafter entered. Plaintiffs subsequently appealed to the United States Court of Appeals for the Tenth Circuit. We and those current and former officers and directors named as defendants have entered into a Stipulation of Settlement with the plaintiffs that would, if approved by the United States District Court for the District of Colorado, resolve all claims asserted against us by the plaintiffs on behalf of the putative class, and plaintiffs’ appeal would be dismissed. Our independent auditor is not a party to the Stipulation of Settlement. The Stipulation of Settlement is subject to customary conditions, including preliminary court approval, and final court approval following notice to stockholders. If the settlement becomes final, all amounts required by the settlement will be paid by our insurers. There can be no assurance that the settlement will be finally approved by the District Court, or that approval by the District Court will, if challenged, be upheld by the Tenth Circuit.

On October 27, 2010, Spectrum Agencies (“Spectrum”) filed suit against our subsidiary, Crocs Europe B.V. (“Crocs Europe”), in the High Court of Justice, Queen’s Bench Division, Royal Courts of Justice in London, United Kingdom (“UK”). Spectrum acted as an agent for Crocs products in the UK from 2005 until Crocs Europe terminated the relationship on July 3, 2008 due to Spectrum’s breach of its duty to act in good faith towards Crocs Europe. Spectrum alleges that Crocs Europe unlawfully terminated the agency relationship and failed to pay certain sales commissions. A trial on the liability, not quantum (compensation and damages), was held at the High Court in London from November 30, 2011 to December 5, 2011. On December 16, 2011, the High Court of Justice issued a judgment that found that although Spectrum’s actions were a breach of its duty to act in good faith towards Crocs Europe the breach was not sufficiently severe to justify termination. We believe that the trial judge erred in his findings and subsequently appealed the judgment. On October 30, 2012, the Court of Appeal handed down its judgment confirming the trial judge’s findings. We submitted a request to the Supreme Court seeking permission to appeal and anticipate that a decision by the Supreme Court on permission to appeal will be rendered in the first quarter of 2013. Given that this phase of the proceedings only pertains to liability, there have been no findings in relation to the amount of compensation or damages other than with respect to legal fees. Under English law, the prevailing party is entitled to reimbursement of reasonable legal fees incurred in the liability proceedings. Spectrum has not quantified its claim for compensation and damages and the amount will be assessed later in the proceedings. Proceedings on quantum may be stayed until a decision on permission to appeal has been handed down or in the event that permission is granted, until a final decision on the merits.

We are currently subject to an audit by U.S. Customs & Border Protection (“CBP”) in respect of the period from 2006 to 2010. CBP issued a draft audit report to which we subsequently filed comments and objections. We believe that a final report (and notice of a formal claim) will not be issued until sometime in mid-2013. CBP has provided us with preliminary projections and a draft audit report that reflect unpaid duties totaling approximately $14.3 million during the period under review. We have responded that these projections are erroneous and provided arguments that demonstrate the amount due in connection with this matter is considerably less than the preliminary projection. CBP is currently reviewing this response. It is not possible at this time to predict whether our arguments will be successful in eliminating or reducing the amount in dispute. Likewise, it is not possible to predict whether CBP may seek to assert a claim for penalties in addition to any loss of revenue claim.

We are currently subject to an audit by Mexico’s Federal Tax Authority (“SAT”) for the period from January 2006 to July 2011. There are two phases to the audit, the first for capital equipment and finished goods and the second for raw materials. The first phase is complete and no major discrepancies were noted by the SAT. On January 9, 2013, Crocs received a notice for the second phase in which the SAT proposed a tax assessment (taxes

 

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and penalties) of roughly 280 million pesos (approximately $22.0 million) based on the value of all of Crocs’ imported raw materials during the audit period. We believe that the proposed penalty amount is unfounded and without merit. We have retained local counsel to handle the matter and who will argue that the amount due in connection with the matter, if any, is substantially less than that proposed by the SAT. We expect it to take between two and three years for resolution of this matter in the Mexican courts. It is not possible at this time to predict the outcome of this matter or reasonably estimate any potential loss.

Although we are subject to other litigation from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we are not party to any other pending legal proceedings that we believe will have a material adverse impact on our business.

ITEM 4. Mine Safety Disclosures

None.

PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock, par value $0.001, is listed on the NASDAQ Global Select Market and trades under the stock symbol “CROX”. The following table shows the high and low sales prices of our common stock for the periods indicated.

 

Fiscal Year 2012 Three Months Ended

   High      Low  

March 31, 2012

   $ 22.40       $ 15.06   

June 30, 2012

     22.59         15.24   

September 30, 2012

     18.60         13.80   

December 31, 2012

   $ 16.79       $ 12.00   

 

Fiscal Year 2011 Three Months Ended

   High      Low  

March 31, 2011

   $ 19.61       $ 15.28   

June 30, 2011

     26.04         17.88   

September 30, 2011

     32.47         23.12   

December 31, 2011

   $ 27.68       $ 14.20   

 

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Performance Graph

The following performance graph illustrates a five-year comparison of cumulative total return of our common stock, the NASDAQ Composite Index and the Dow Jones U.S. Footwear Index from December 31, 2007 through December 31, 2012. The graph assumes an investment of $100 on December 31, 2007 and assumes the reinvestment of all dividends and other distributions and reflects our stock prices post-stock split.

Comparison of Cumulative Total Return on Investment

 

LOGO

 

    12/31/2007       12/31/2008       12/31/2009       12/31/2010       12/31/2011       12/31/2012    

Crocs, Inc.

  $ 100.00      $ 3.37      $ 15.62      $ 46.51      $ 40.12      $ 39.09   

Nasdaq Composite Index

    100.00        59.46        85.55        100.02        98.22        113.85   

Dow Jones US Footwear Index

  $ 100.00      $ 71.61      $ 91.56      $ 119.87      $ 134.10      $ 140.52   

The Dow Jones U.S. Footwear Index includes companies in the major line of business in which we compete. This index does not encompass all of our competitors or all of our product categories and lines of business. The Dow Jones U.S. Footwear Index consists of Crocs, Inc., NIKE, Inc., Deckers Outdoor Corp. and Wolverine World Wide, Inc. As Crocs, Inc. is part of the Dow Jones U.S. Footwear Index, the price and returns of our stock have an effect on this index.

The stock performance shown on the performance graph above is not necessarily indicative of future performance. We do not make nor endorse any predictions as to future stock performance.

Holders

The approximate number of stockholders of record of our common stock was 168 as of January 31, 2013. Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these stockholders of record.

Dividends

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash

 

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dividends in the foreseeable future. Our financing arrangements also contain restrictions on our ability to pay cash dividends. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to compliance with covenants under any then-existing financing agreements.

ISSUER PURCHASE OF EQUITY SECURITIES

 

Period

  Total Number
of Shares
(or Units)
Purchased
    Average
Price Paid
per Share
(or Unit)
    Total Number of
Shares (or Units)
Purchased as Part  of
Publicly Announced
Plans or Programs
    Maximum Number (or
Approximate Dollar Value) of
Shares (or  Units) that May Yet
Be Purchased Under the Plans
Programs(1)
 

October 1, 2012—October 31, 2012

         $               5,476,000   

November 1, 2012—November 30, 2012

    625,900        12.24        625,900        4,850,100   

December 1, 2012—December 31, 2012

    1,257,640        13.78        1,257,640        3,592,460   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,883,540      $     13.27        1,883,540        3,592,460   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) On November 1, 2007 and April 14, 2008, our Board of Directors approved an authorization to repurchase up to 1.0 million shares and 5.0 million shares, respectively, of our common stock. As of December 31, 2012, approximately 3.6 million shares remained available for repurchase under our share repurchase authorization. Share repurchases may be made in the open market or in privately negotiated transactions. The repurchase authorization does not have an expiration date and does not oblige us to acquire any particular amount of our common stock. The repurchase authorization maybe be modified, suspended or discontinued at any time.

 

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ITEM 6. Selected Financial Data

The following table presents selected historical financial data for each of our last five fiscal years. The information in this table should be read in conjunction with the consolidated financial statements and accompanying notes beginning on page F-1 and with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included in Item 7 of this Form 10-K.

 

    For the Year Ended December 31,  

($ thousands, except share data)

  2012     2011     2010     2009     2008  

Consolidated Statements of Operations Data

         

Revenues

  $ 1,123,301      $ 1,000,903      $ 789,695      $ 645,767      $ 721,589   

Cost of sales

    515,324        464,493        364,631        337,720        486,722   

Restructuring charges

                  1,300        7,086        901   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    607,977        536,410        423,764        300,961        233,966   

Selling, general and administrative expenses

    460,393        404,803        342,961        319,102        343,362   

Restructuring charges

                  2,539        7,623        7,664   

Asset impairments

    1,410        528        141        26,085        45,784   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    146,174        131,079        78,123        (51,849     (162,844

Foreign currency transaction (gains) losses, net

    2,500        (4,886     (2,325     (665     25,438   

Other income, net

    (2,711     (1,578     (1,001     (4,058     (565

Interest expense

    837        853        657        1,495        1,793   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    145,548        136,690        80,792        (48,621     (189,510

Income tax (benefit) expense

    14,205        23,902        13,066        (6,543     (4,434
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

  $ 131,343      $ 112,788      $ 67,726      $ (42,078   $ (185,076
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) per common share:

         

Basic

  $ 1.46      $ 1.27      $ 0.78      $ (0.49   $ (2.24

Diluted

  $ 1.44      $ 1.24      $ 0.76      $ (0.49   $ (2.24

Weighted average common shares:

         

Basic

    89,571,105        88,317,898        85,482,055        85,112,461        82,767,540   

Diluted

    90,588,416        89,981,382        87,595,618        85,112,461        82,767,540   

 

     December 31,  

($ thousands)

   2012      2011      2010      2009      2008  

Consolidated Balance Sheets Data

              

Cash and cash equivalents

   $ 294,348       $ 257,587       $ 145,583       $ 77,343       $ 51,665   

Total assets

     829,638         695,453         549,481         409,738         455,999   

Long term obligations

     54,300         48,370         35,613         35,462         35,303   

Total stockholders’ equity

   $ 617,400       $ 491,780       $ 376,106       $ 287,620       $ 287,163   

 

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

We are a designer, manufacturer, distributor, worldwide marketer and brand manager of innovative casual lifestyle footwear, apparel and accessories for men, women and children. We strive to be the global leader in molded footwear design and development. We design, manufacture and sell a broad product offering that provides new and exciting molded footwear products that feature comfort, fun, color and functionality. Our products include footwear and accessories that utilize our proprietary closed cell-resin, called Croslite. Our Croslite material is unique in that it enables us to produce an innovative, lightweight, non-marking, and odor-resistant shoe.

Since the initial introduction and popularity of our Beach and Crocs Classic designs, we have expanded our Croslite products to include a variety of new styles and products and have extended our product reach through the acquisition of brand platforms such as Jibbitz and Ocean Minded. We intend to continue to expand the breadth of our footwear product lines, bringing a unique and original perspective to the consumer in styles that may be unexpected from Crocs. We believe this will help us to continue to build a stable year-round business as we move towards becoming a four-season brand.

We currently sell our Crocs-branded products globally through domestic and international retailers and distributors. We also sell our products directly to consumers through our company-operated retail stores, outlets, kiosks and webstores,. The broad appeal of our footwear has allowed us to market our products to a wide range of distribution channels, including department stores and traditional footwear retailers as well as a variety of specialty and independent retail channels.

As a global company, we have significant revenues and costs denominated in currencies other than the U. S. dollar. Sales in international markets in foreign currencies are expected to continue to represent a substantial portion of our revenues. Likewise, we expect our subsidiaries with functional currencies other than the U.S. dollar will continue to represent a substantial portion of our overall gross margin and related expenses. Accordingly, changes in foreign currency exchange rates could materially affect revenues and costs or the comparability of revenues and costs from period to period as a result of translating our financial statements into our reporting currency.

2012 Financial Highlights

Our business continues to experience positive results primarily from higher sales volumes and higher average shoe prices. Results for 2012 reflect increases in both consolidated revenues and earnings driven by balanced international growth, operational efficiency, and customer focus.

The following are the more significant developments in our businesses during the year ended December 31, 2012:

 

   

Revenues increased $122.4 million, or 12.2%, from 2011 to $1,123.3 million in 2012. Revenue growth was driven by increased sales volume and focused improvements on average footwear selling prices with new product styles as we continue to transform Crocs brand awareness into an all-season footwear brand.

 

   

Gross profit increased $71.6 million, or 13.3%, from 2011 to $608.0 million in 2012. Gross margin percentage increased slightly compared to last year driven by higher average selling prices and higher footwear unit sales, which are results of the continued growth and expansion of our retail and internet channels as the growth in combined sales from these channels began to outpace our wholesale channel. These drivers were offset by higher costs primarily from the expansion of our

 

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product offerings in 2012 utilizing traditional materials, such as textile fabric and leather, and increased offerings of discounted products and promotional items through our wholesale and direct-to-consumer channels.

 

   

Selling, general, and administrative expenses increased $55.6 million, or 13.7%, from 2011 to $460.4 million in 2012, which consists of $229.8 million in indirect expenses and $230.6 million in direct expenses. Selling, general, and administrative expenses continue to increase as we continue to increase our retail store locations and continue to make strategic purchases to improve the operational efficiency of the Company.

 

   

Net income increased $18.6 million, or 16.5%, from 2011 to $131.3 million in 2012 driving our basic and diluted earnings per share from $1.27 to $1.46 and $1.24 to $1.44, respectively, due to higher operating results and to a lesser extent a lower effective tax rate.

 

   

In October 2012, we began the implementation of a customized and fully integrated operations, accounting, and finance enterprise resource planning (“ERP”) system which is expected to launch in the first half of 2014. The introduction of the new ERP to our current environment will allow for seamless, high-quality, and compliant data across the Company. As of December 31, 2012, total costs related to the ERP implementation were $9.9 million, of which $9.0 million was capitalized and $0.9 million was expensed. We have financed $6.6 million of our total costs related to the ERP under a Master Installment Payment Agreement with PNC Bank National Association (“PNC”). Our total anticipated expenses to complete the ERP implementation are $25.0 million.

 

   

In December 2012, we renegotiated our Credit Agreement to increase our credit line to $100 million, extending the agreement until December 2017, reducing our interest rate by 50 basis points for both domestic and LIBOR rate loans, as well as allowing for up to $50 million per quarter, or $150 million per year, to be used towards share repurchases.

 

   

In the fourth quarter of 2012, approximately 1.9 million shares were repurchased at an average price of $13.27 for a total of value of $25.0 million, excluding related commission charges.

2013 Outlook

In 2013, we expect another year of increased revenue and earnings as indicated by increased year-over-year global preseason orders from our wholesale customers for spring and summer and an estimated expansion of retail locations across the globe by 70 to 95 net stores. We expect to have increased revenues driven by continued higher volumes as a result of improving selling conditions, higher average selling prices, and positive market acceptance on new products contributing to the continued expansion of our reputation as a four season brand. We anticipate margins to continually increase in 2013 as we expand our retail and internet channels. These channels give us the ability to focus on visual merchandising of new products.

During 2013, we plan to make significant investments in the operational and technological efficiency of the Company as well as consumer marketing. These investments include a new ERP system, as discussed above, which we currently expect to reduce our 2013 earnings per share by $0.08—$0.10 per diluted share and represents a transformational change intended to improve our operational efficiency as we adapt as a global company, retail store metrics including increased size of stores and visual merchandising with a focus on high traffic, outlet locations, and the launching of new web designs in certain regions complimented by suggestive selling tactics and mobile point of sale systems to better assist customers. We intend to focus on organic growth including the launch of new innovative products, attracting new consumers, retail excellence and wholesale channel expansion with key partners.

 

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Results of Operations

Comparison of the Years Ended December 31, 2012 and 2011

 

     Year Ended
December 31,
    Change  

($ thousands, except per share data and average footwear selling
price)

   2012     2011     $     %  

Revenues

   $ 1,123,301      $ 1,000,903      $ 122,398        12.2  % 

Cost of sales

     515,324        464,493        50,831        10.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     607,977        536,410        71,567        13.3   

Selling, general and administrative expenses

     460,393        404,803        55,590        13.7   

Asset impairments

     1,410        528        882        167.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     146,174        131,079        15,095        11.5   

Foreign currency transaction (gains) losses, net

     2,500        (4,886     7,386        (151.2

Other income, net

     (2,711     (1,578     (1,133     71.8   

Interest expense

     837        853        (16     (1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     145,548        136,690        8,858        6.5   

Income tax expense

     14,205        23,902        (9,697     (40.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 131,343      $ 112,788      $ 18,555        16.5  % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 1.46      $ 1.27      $ 0.19        15.0  % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.44      $ 1.24      $ 0.20        16.1  % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     54.1%        53.6%        50 bps        0.9  % 

Operating margin

     13.0%        13.1%        (10) bps        (0.8 )% 

Footwear unit sales

     49,947        47,736        2,211        4.6  % 

Average footwear selling price

   $ 21.55      $ 20.04      $ 1.51        7.5  % 

Revenues. The following table sets forth revenues by channel for the years ended December 31, 2012 and 2011. During the year ended December 31, 2012, revenues increased $122.4 million, or 12.2%, compared to the same period in 2011, primarily due to an increase of 2.2 million, or 4.6%, in global footwear unit sales and an increase of $1.51, or 7.5%, in footwear average selling price. For the year ended December 31, 2012, revenues from our wholesale channel increased $47.5 million, or 7.9%, which was primarily driven by increased wholesale sales in Americas and Asia. Revenues from our retail channel increased $68.2 million, or 22.2%, primarily driven by strong demand in all three reportable segments as well as continued growth of our retail presence by opening 107 retail stores net during 2012. We also continue to close certain kiosks as branded stores allow us to better merchandise the full breadth and depth of our product line. Revenues from our internet channel increased $6.7 million, or 7.0%, compared to 2011 primarily driven by increased brand awareness in the Americas and Asia operating segments and focus on improving our regional webstore presence.

 

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The following table summarizes our total revenue by channel for the years ended December 31, 2012 and 2011.

 

     Year Ended
December 31,
     Change     Constant  Currency
Change(1)
 

($ thousands)

   2012      2011      $     %     $     %  

Channel revenues:

              

Wholesale:

              

Americas

   $ 235,988       $ 214,062       $ 21,926        10.2   $ 25,920        12.1  % 

Asia

     298,350         259,104         39,246        15.1        38,984        15.0   

Europe

     110,947         124,995         (14,048     (11.2     (5,168     (4.1

Other businesses

     574         191         383        200.5        406        212.4   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Wholesale

     645,859         598,352         47,507        7.9        60,142        10.1   

Consumer-direct:

              

Retail:

              

Americas

     196,711         174,840         21,871        12.5        22,691        13.0   

Asia

     143,062         111,650         31,412        28.1        32,543        29.1   

Europe

     35,052         20,167         14,885        73.8        16,093        79.8   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Retail

     374,825         306,657         68,168        22.2        71,327        23.3   

Internet:

              

Americas

     63,153         59,175         3,978        6.7        4,069        6.9   

Asia

     15,999         11,012         4,987        45.3        5,049        45.8   

Europe

     23,465         25,707         (2,242     (8.7     (163     (0.6
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Internet

     102,617         95,894         6,723        7.0        8,955        9.3   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues:

   $ 1,123,301       $ 1,000,903       $ 122,398        12.2   $ 140,424        14.0  % 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Reflects year over year change as if the current period results were in “constant currency,” which is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for more information.

The table below illustrates the overall growth in the number of our company-operated retail locations as of December 31, 2012 and 2011.

 

     December 31,
          2012         
       Opened          Closed       December 31,
          2011         
 

Type:

          

Kiosk/Store in Store

     121         39         (76     158   

Retail Stores

     287         120         (13     180   

Outlet Stores

     129         42         (5     92   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     537         201         (94     430   

Geography:

          

Americas

     199         44         (42     197   

Asia

     241         94         (51     198   

Europe

     97         63         (1     35   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     537         201         (94     430   

Gross profit. During the year ended December 31, 2012, gross profit increased $71.6 million, or 13.3%, compared to the same period in 2011, which was primarily attributable to the 4.6% increase in sales volume and a 7.5% increase in footwear average selling price. Higher prices and sales volume are the result of the continued growth and expansion of our retail and internet channels as the growth in combined sales from these channels began to outpace our wholesale channel. These drivers were offset by higher costs primarily from the expansion of our product offerings in 2012 which utilize traditional materials, such as textile fabric and leather, and increased offerings of discounted products and promotional items through our wholesale and direct-to-consumer channels.

 

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Impact on Gross Profit due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues and costs of sales from our functional currencies to our reporting currency during the year ended December 31, 2012 decreased our gross profit by $7.8 million compared to the same period in 2011.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $55.6 million, or 13.7%, during the year ended December 31, 2012 compared to the same period in 2011 primarily due to:

 

  (i) an increase of $23.7 million in rent and building related costs, both of which resulted from continued growth in the number of company operated retail stores;

 

  (ii) an increase of $14.4 million in salaries and related costs, including variable compensation, resulting from higher global headcount including those needed for new retail store openings and increased stock compensation;

 

  (iii) an increase of $9.7 million in other expenses primarily from increases in depreciation and amortization expenses related to additional retail store locations, and capitalized software as well as bad debt and sales tax expense increases;

 

  (iv) an increase of $9.8 million in professional service expenses resulting from increased use of outside accounting and finance services, consulting for our new ERP implementation which began in October 2012, certain legal contingency accruals, increased outside IT costs related to the implementation of new networking devices in our corporate headquarters, and increased costs associated with contracted customer service, sales support, and performance improvement; and

 

  (v) the remaining difference is primarily a result of $2.1 million of net decreases in selling, general, and administrative expenses including travel, as we continue to be conscious of operating expenses throughout the company.

As a percentage of revenues, selling, general and administrative expenses increased 1.5%, or 60 basis points, to 41.0% in 2012 from 40.4% in 2011.

Impact on Selling, General, and Administrative Expenses due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate expenses from our functional currencies to our reporting currency during the year ended December 31, 2012, decreased selling, general and administrative expenses by approximately $4.8 million as compared to the same period in 2011.

Asset Impairments. Asset impairments increased $0.9 million, or 167%, during the year ended December 31, 2012 primarily due to the impairment of $1.4 million of long-lived assets related to retail stores in the United States and Canada. During 2012, we recorded impairments related to four retail locations as our projected discounted future cash flows of these locations is currently not sufficient to cover our fixed asset investments for these stores.

Foreign Currency Transaction (Gains)/Losses. The line item entitled “Foreign currency transaction (gains)/losses, net” is comprised of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. In 2012, we recognized a loss of $2.5 million related to foreign currency transactions, compared to a $4.9 million gain in 2011, primarily due to a $4.3 million loss in the first quarter of 2012 as a result of large currency fluctuations and an increase in international business. We implemented a foreign currency hedging strategy in the second quarter of 2012. As a result of this strategy, we have been able to reduce the impacts of foreign currency fluctuations on our financial statements.

 

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Income tax (benefit) expense. During the year ended December 31, 2012, income tax expense decreased $9.7 million resulting in a 7.7% decrease in effective tax rate compared to the same period in 2011, which was primarily due to a reversal of certain tax provisions and the release of certain valuation allowances associated with deferred tax assets. Our effective tax rate of 9.8% for the year ended December 31, 2012 differs from the federal U.S. statutory rate primarily because of the above releases as well as differences between income tax rates between U.S. and foreign jurisdictions.

Comparison of the Years Ended December 31, 2011 and 2010

 

     Year Ended December 31,     Change  

($ thousands, except per share data and average footwear selling price)

   2011     2010     $     %  

Revenues

   $ 1,000,903      $ 789,695      $ 211,208        26.7  % 

Cost of sales

     464,493        364,631        99,862        27.4   

Restructuring charges

            1,300        (1,300     (100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     536,410        423,764        112,646        26.6   

Selling, general and administrative expenses

     404,803        342,961        61,842        18.0   

Restructuring charges

            2,539        (2,539     (100.0

Asset impairments

     528        141        387        274.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     131,079        78,123        52,956        67.8   

Foreign currency transaction gains, net

     (4,886     (2,325     (2,561     110.2   

Other income, net

     (1,578     (1,001     (577     57.6   

Interest expense

     853        657        196        29.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     136,690        80,792        55,898        69.2   

Income tax expense

     23,902        13,066        10,836        82.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 112,788      $ 67,726      $ 45,062        66.5  % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 1.27      $ 0.78      $ 0.49        62.8  % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.24      $ 0.76      $ 0.48        63.2  % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     53.6  %      53.7  %      (10) bps        (0.2 )% 

Operating margin

     13.1  %      9.9  %      320 bps        32.3  % 

Footwear unit sales

     47,736        42,618        5,118        12.0  % 

Average footwear selling price

   $ 20.04      $ 17.69      $ 2.35        13.3  % 

Revenues. During the year ended December 31, 2011, revenues from our wholesale channel increased $118.3 million, or 24.6%, which was primarily driven by strong demand in all three operating segments, particularly Asia. Revenues from our retail channel increased $72.0 million, or 30.7%, as we continued to grow our retail presence by opening new retail stores. We also closed certain kiosks as branded stores allow us to better merchandise the full breadth and depth of our product line. Revenues from our internet channel increased $20.9 million, or 27.9%, primarily driven by increased internet sales in the Americas and Europe operating segments.

 

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The following table summarizes our total revenue by channel for the years ended December 31, 2011 and 2010.

 

     Year Ended
December, 31
     Change     Constant Currency
Change(1)
 

($ thousands)

   2011      2010      $     %     $     %  

Channel revenues:

              

Wholesale:

              

Americas

   $ 214,062       $ 182,149       $ 31,913        17.5  %    $ 29,914        16.4  % 

Asia

     259,104         200,013         59,091        29.5        40,317        20.2   

Europe

     124,995         95,806         29,189        30.5        23,629        24.7   

Other businesses

     191         2,119         (1,928     (91.0     (1,927     (90.9
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Wholesale

     598,352         480,087         118,265        24.6        91,934        19.1   

Consumer-direct:

              

Retail:

              

Americas

     174,840         141,892         32,948        23.2        32,369        22.8   

Asia

     111,650         77,319         34,331        44.4        27,561        35.6   

Europe

     20,167         15,426         4,741        30.7        3,799        24.6   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Retail

     306,657         234,637         72,020        30.7        63,729        27.2   

Internet:

              

Americas

     59,175         50,832         8,343        16.4        8,246        16.2   

Asia

     11,012         7,685         3,327        43.3        2,382        31.0   

Europe

     25,707         16,454         9,253        56.2        7,890        48.0   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Internet

     95,894         74,971         20,923        27.9        18,518        24.7   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues:

   $ 1,000,903       $ 789,695       $ 211,208        26.7  %    $ 174,181        22.1  % 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Reflects year over year change as if the current period results were in “constant currency,” which is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for more information.

The table below illustrates the overall growth in the number of our company-operated retail locations as of December 31, 2011 and 2010.

 

     December 31,
          2011         
       Opened          Closed       December 31,
          2010         
 

Type:

          

Kiosk/Store in Store

     158         30         (25     153   

Retail Stores

     180         57         (13     136   

Outlet Stores

     92         14                78   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     430         101         (38     367   

Geography:

          

Americas

     197         27         (22     192   

Asia

     198         63         (16     151   

Europe

     35         11                24   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

     430         101         (38     367   

Gross Profit. During the year ended December 31, 2011, gross profit increased $112.6 million, or 26.6%, compared to the same period in 2010, which was primarily attributable to the 12.0% increase in sales volume and 13.3% in footwear average selling price as margin remained relatively flat year over year.

Impact on Gross Profit due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues and costs of sales from our functional currencies to our reporting currency, the U.S. dollar, during the year ended December 31, 2011 increased our gross profit by $22.2 million compared to the same period in 2010.

 

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Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $61.8 million, or 18.0%, during the year ended December 31, 2011 compared to the same period in 2010 primarily due to (i) an increase of $29.3 million in salaries and related costs resulting from higher global headcount, (ii) an increase of $20.0 million in rent and building related costs, both of which resulted from continued growth in the number of company-operated retail stores and (iii) an increase of $6.5 million in contract labor which was primarily attributable to higher internet channel outsourced services, increased costs associated with contracted customer service and sales support, and other costs associated with IT support and process improvement. As a percentage of revenues, selling, general and administrative expenses decreased 6.9%, or 300 basis points, to 40.4% in 2011 from 43.4% in 2010.

Impact on Selling, General, and Administrative Expenses due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate expenses from our functional currencies to our reporting currency during the year ended December 31, 2011 increased selling, general and administrative expenses by approximately $14.8 million as compared to the same period in 2010.

Restructuring charges. Restructuring charges decreased by $3.8 million during the year ended December 31, 2011 compared to the same period in 2010 as we had no restructurings during 2011. The 2010 restructuring charges consisted of $2.0 million in severance costs related to the departure of a former executive and $1.8 million related to a change in estimate of our original accrual for lease termination costs for our office facility in Canada, which was closed in 2008.

Foreign Currency Transaction (Gains)/Losses. Foreign currency transaction gains increased $2.6 million, or 110.2%, during the year ended December 31, 2011 compared to the same period in 2010, primarily due to a correction related to an error in the classification of certain intercompany receivables and payables balances that should have been deemed permanently invested in certain prior periods.

Income tax (benefit) expense. During the year ended December 31, 2011, income tax expense increased $10.8 million compared to the same period in 2010, which was primarily due to an increase in pre-tax income. In addition, the company recognized a one-time $3.6 million tax benefit recorded during the second quarter of 2011 as a result of a change in our international structure and a $3.0 million tax benefit recognized in the third quarter of 2010 due to a change in an international tax treaty which reduced certain taxes for which accruals had previously been made. Our effective tax rate of 17.5% for the year ended December 31, 2011 differs from the federal U.S. statutory rate primarily because of differences between income tax rates between US and foreign jurisdictions.

Presentation of Reportable Segments

We have three reportable operating segments: Americas, Europe and Asia. Revenues of each of our reportable operating segments represent sales to external customers. We also have an “Other businesses” category which aggregates insignificant operating segments that do not meet the reportable threshold and represent manufacturing operations located in Mexico and Italy. The composition of our reportable operating segments is consistent with that used by our chief operating decision maker (“CODM”) to evaluate performance and allocate resources. Each of our reportable operating segments derives its revenues from the sale of footwear, apparel and accessories to external customers. Revenues for the “Other businesses” represent non-footwear product sales to external customers. Segment assets consist of cash and cash equivalents, accounts receivable and inventory.

Segment operating income is the primary measure used by our CODM to evaluate segment operating performance and to decide how to allocate resources to segments. Segment performance evaluation is based primarily on segment results without allocating corporate expenses, or indirect general, administrative and other expenses. Segment profits or losses of our reportable operating segments include adjustments to eliminate intersegment profit or losses on intersegment sales.

 

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During the first quarter of 2012, we changed the internal reports used by our CODM to align the definition of our segment operating income with “Income from operations.” Previously, segment operating income excluded asset impairment charges and restructuring costs not included in cost of sales. Segment operating income also reflects the reclassification of “Foreign currency transaction (gains) losses, net” from “Income from operations” on the consolidated statements of income. See Note 1—Organization & Summary of Significant Accounting Policies for further discussion. Segment information for all periods presented has been reclassified to reflect these changes.

Comparison of the Years Ended December 31, 2012 and 2011

The following tables set forth information related to our reportable operating business segments for the years ended December 31, 2012 and 2011.

 

     Year Ended December 31,     Change     Constant Currency  Change(4)  

($ thousands)

   2012     2011     $     %             $                     %          

Revenues:

            

Americas

   $ 495,852      $ 448,077      $ 47,775        10.7   $ 52,680        11.8

Asia

     457,411        381,766        75,645        19.8        76,576        20.1   

Europe

     169,464        170,869        (1,405     (0.8     10,762        6.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total segment revenues

     1,122,727        1,000,712        122,015        12.2        140,018        14.0   

Other businesses

     574        191        383        200.5        406        212.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated revenues

   $ 1,123,301      $ 1,000,903      $ 122,398        12.2   $ 140,424        14.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

            

Americas

   $ 85,538      $ 70,532      $ 15,006        21.3   $ 14,962        21.2

Asia

     140,828        123,918        16,910        13.6        16,701        13.5   

Europe

     21,678        37,106        (15,428     (41.6     (12,137     (32.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating income

     248,044        231,556        16,488        7.1        19,526        8.4   

Other businesses(1)

     (10,805     (14,128     3,323        (23.5     3,235        (22.9

Intersegment eliminations

     60        66        (6     (9.1     (16     (23.6

Unallocated corporate and other(2)

     (91,125     (86,415     (4,710     5.5        (4,785     5.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated operating income(3)

   $ 146,174      $ 131,079      $ 15,095        11.5   $ 17,960        13.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

During the year ended December 31, 2012, operating losses of Other businesses decreased $3.3 million primarily due to a $2.5 million increase in gross margin and a $0.8 million decrease in selling, general and administrative expenses.

(2) 

Includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, depreciation on corporate and other assets not allocated to operating segments and costs of the same nature of certain corporate holding companies. For the year ended December 31, 2012, Unallocated corporate and other expenses increased $4.7 million compared to the same period in 2011, primarily due to a $3.3 million increase in cost of sales and a $2.0 million increase in selling, general, and administrative costs due to higher corporate headcount partially offset by a decrease of $0.5 million in asset impairments and a decrease of $0.1 million in charitable contributions.

(3) 

Please refer to our Results of Operations to reconcile total consolidated operating income to net income as segment information does not have an effect on values below total consolidated operating income.

(4) 

Reflects year over year change as if the current period results were in “constant currency,” which is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for more information.

Americas Operating Segment. During the year ended December 31, 2012, revenues from the Americas segment increased $47.8 million, or 10.7%, compared to the same period in 2011 primarily due to a 4.3% increase in

 

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footwear units sold and a 5.8% increase in average footwear selling price partially offset by a $4.9 million unfavorable impact from foreign currency fluctuations. Revenue growth for the region was realized primarily in the wholesale channel which increased $21.9 million, or 10.2%, and in the retail channel which increased $21.9 million, or 12.5%. We continue to focus on disciplined expansion of our retail channel by opening 22 full price stores net and 15 outlet stores net in 2012, offset by the closing of 35 underperforming kiosk locations net. Segment operating income increased by $15.0 million, or 21.3%, driven mainly by the revenue increase and a slight increase in segment gross margin of approximately 2.2%, or 110 basis points, which was largely offset by a $12.5 million, or 8.3%, increase in selling, general and administrative expenses resulting from the continued expansion of the retail channel. Foreign currency fluctuations had a net negative impact of $1.8 million on gross margin and an immaterial impact on operating income for the Americas region.

Asia Operating Segment. During the year ended December 31, 2012, revenues from the Asia segment increased $75.6 million, or 19.8%, compared to the same period in 2011 primarily due to a 14.5% increase in footwear units sold and a 5.1% increase in average footwear selling price partially offset by a $0.9 million unfavorable impact from foreign currency fluctuations. Revenue growth for the region was realized in all three channels as we retain strong support from our wholesale channel customers, continue to focus on disciplined expansion of our retail channel and continue to implement new, consumer-friendly webstores in various countries in our internet channel. Wholesale channel revenue increased $39.2 million, or 15.1%, retail channel revenue increased $31.4 million, or 28.1%, and internet channel revenue increased $5.0 million, or 45.3%. In 2012, we opened 43 total stores net in the Asia region including 41 full price stores net and 8 outlet stores net partially offset by the closing of 6 underperforming kiosk locations net. Segment operating income increased $16.9 million, or 13.6%, primarily due to the increase in revenues and a $0.2 million favorable net impact from foreign currency fluctuations which were partially offset by a $27.7 million, or 24.3%, increase in selling, general and administrative expenses resulting from the continued expansion of the retail channel and a slight decrease in segment gross margin of approximately 1.0%, or 60 basis points. Foreign currency fluctuations had a net negative impact of $0.5 million on the Asia gross margin.

Europe Operating Segment. During the year ended December 31, 2012, revenues from the Europe segment decreased $1.4 million, or 0.8%, compared to the same period in 2011 primarily due to an 11.3% decrease in footwear units sold and a $12.2 million unfavorable impact from foreign currency fluctuations partially offset by a 13.4% increase in average footwear selling price. A decrease of $14.0 million, or 11.2%, in wholesale channel revenue and a decrease of $2.2 million, or 8.7%, in internet channel revenue drove the decline in total segment revenues which was primarily due to the decrease in footwear units sold and unfavorable impact of foreign currency fluctuations as a result of challenging macroeconomic conditions in Europe. The wholesale and internet channel revenue decreases were partially offset by a revenue increase of $14.9 million, or 73.8%, in the retail channel as we opened 62 stores net in 2012 including 44 full price stores net, 14 outlet stores net and 4 kiosk locations net. Segment operating income decreased by $15.4 million, or 41.6%, driven mainly by decreased revenues, an increase of $14.3 million, or 28.4%, in selling, general, and administrative expenses resulting from the continued expansion of the retail channel, a $3.3 million unfavorable net impact from foreign currency fluctuations, and a slight decrease in segment gross margin of approximately 0.4%, or 20 basis points. Foreign currency fluctuations had a net negative impact of $6.1 million on the Europe gross margin.

 

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Comparison of the Years Ended December 31, 2011 and 2010

The following tables set forth information related to our reportable operating business segments for the years ended December 31, 2011 and 2010.

 

     Year Ended December 31,     Change     Constant Currency  Change(4)  

($ thousands)

   2011     2010     $     %             $                     %          

Revenues:

            

Americas

   $ 448,077      $ 374,873      $ 73,204        19.5   $ 70,529        18.8

Asia

     381,766        285,017        96,749        33.9        70,260        24.7   

Europe

     170,869        127,686        43,183        33.8        35,319        27.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total segment revenues

     1,000,712        787,576        213,136        27.1        176,108        22.4   

Other businesses

     191        2,119        (1,928     (91.0     (1,927     (90.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated revenues

   $ 1,000,903      $ 789,695      $ 211,208        26.7      $ 174,181        22.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

            

Americas

   $ 70,532      $ 64,099      $ 6,433        10.0      $ 6,138        9.6

Asia

     123,918        89,248        34,670        38.8        24,707        27.7   

Europe

     37,106        22,258        14,848        66.7        12,739        57.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating income

     231,556        175,605        55,951        31.9        43,584        24.8   

Other businesses(1)

     (14,128     (23,321     9,193        (39.4     9,598        (41.2

Intersegment eliminations

     66        1,360        (1,294     (95.1     (1,294     (95.2

Unallocated corporate and other(2)

     (86,415     (75,522     (10,893     14.4        (10,721     14.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated operating income(3)

   $ 131,079      $ 78,122      $ 52,957        67.8   $ 41,167        52.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

During the year ended December 31, 2011, operating losses of Other businesses decreased $9.2 million primarily due to a $7.6 million increase in gross profit related to higher revenues and a $1.5 million decrease in selling, general, and administrative expenses primarily related to lower salaries and wages associated with lower supply chain headcount.

(2) 

Includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, depreciation on corporate and other assets not allocated to operating segments and costs of the same nature of certain corporate holding companies. For the year ended December 31, 2011, Unallocated corporate and other expense increased $10.9 million compared to the same period in 2010, primarily due to a $4.7 million increase in salaries and wages due to higher corporate headcount, a $2.9 million increase in outside services primarily costs associated with IT support and process improvement, a $1.8 million increase in depreciation and amortization of unallocated corporate long-lived assets and a $1.2 million increase in marketing and travel costs.

(3) 

Please refer to our Results of Operations to reconcile total consolidated operating income to net income as segment information does not have an effect on values below total consolidated operating income.

(4) 

Reflects year over year change as if the current period results were in “constant currency,” which is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for more information.

Americas Operating Segment. During the year ended December 31, 2011, revenues from the Americas segment increased $73.2 million, or 19.5%, compared to the same period in 2010 primarily due to a 9.3% increase in footwear units sold, a 7.8% increase in average footwear selling price and a $2.7 million favorable impact from foreign currency fluctuations. Significant sales growth for the segment included an increase of $31.9 million, or 17.5%, in wholesale channel revenue and an increase of $32.9 million, or 23.2%, in retail channel revenue. Segment operating income increased by $6.4 million, or 10.0%, driven mainly by the revenue increase and a $0.3 million favorable net impact from foreign currency fluctuations which was largely offset by a $16.9 million,

 

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or 12.6%, increase in selling, general and administrative expenses resulting from the continued expansion of the retail channel and a decrease in segment gross margin of approximately 6.8%, or 360 basis points.

Asia Operating Segment. During the year ended December 31, 2011, revenues from the Asia segment increased $96.8 million, or 33.9%, compared to the same period in 2010 primarily due to a 13.0% increase in average footwear selling price, a 10.6% increase in footwear units sold and a $26.5 million favorable impact from foreign currency fluctuations. Significant sales growth for the segment included an increase of $59.1 million, or 29.5% in wholesale channel revenue, an increase of $34.3 million, or 44.4%, in retail channel revenue, and an increase of $3.3 million, or 43.3%, in internet channel revenue. Segment operating income increased $34.7 million, or 38.8%, primarily due to the increase in revenues and a $10.0 million favorable net impact from foreign currency fluctuations which were partially offset by a $24.3 million, or 27.0% increase in selling, general and administrative expenses resulting from the continued expansion of the retail channel as segment gross margin remained relatively flat.

Europe Operating Segment. During the year ended December 31, 2011, revenues from the Europe segment increased $43.2 million, or 33.8%, compared to the same period in 2010 primarily due to a 23.2% increase in footwear units sold, a 4.8% increase in average footwear selling price and a $7.9 million favorable impact from foreign currency fluctuations. Significant sales growth for the segment included an increase of $29.2 million, or 30.5%, in wholesale channel revenue, an increase of $4.7 million, or 30.7%, in retail channel revenue and an increase of $9.3 million, or 56.2%, in internet channel revenue. Segment operating income increased $14.8 million, or 66.7%, primarily due to higher revenues, an increase in segment gross margin of approximately 3.7% or 180 basis points and a $2.1 million favorable net impact from foreign currency fluctuations which were partially offset by a $9.8 million, or 24.1%, increase in selling, general and administrative expenses resulting from the continued expansion of the retail channel.

Non-GAAP Financial Measures

In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present current period results below in ‘adjusted net income’, which is a non-GAAP financial measure. Adjusted net income excludes the impact of new enterprise resource planning system (“ERP”) implementation expenses, non-recurring tax benefits, accelerated depreciation and amortization of our current ERP system and certain legal and other contingency accruals.

We also present certain information related to our current period results of operations in this Item 7 through “constant currency”, which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable segments under U.S. GAAP. Constant currency represents current period results that have been restated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.

Management uses adjusted net income and constant currency figures to assist in comparing business trends from period to period on a consistent basis without regard to the impact of non-recurring items and foreign exchange rate fluctuations and in communications with the board of directors, stockholders, analysts and investors concerning our financial performance. We believe that these non-GAAP measures are used by, and are useful to, investors and other users of our financial statements in evaluating operating performance by providing better comparability between reporting periods because they provide an additional tool to evaluate our performance without regard to foreign currency fluctuations and non-recurring items that may not be indicative of overall business trends and provide a better baseline for analyzing trends in our operations. We do not suggest that investors should consider these non-GAAP measures in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP.

 

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The following table is a reconciliation of our net income, the most directly comparable U.S. GAAP measure, to non-GAAP net income:

 

     Year Ended December, 31  

Reconciliation of GAAP Net Income to Non-GAAP Adjusted

Net Income:

   2012     2011     2010  

GAAP net income

   $ 131,343      $ 112,788      $ 67,726   

New ERP implementation(1)

     870                 

Contingency accruals(2)

     5,904                 

Depreciation and Amortization(3)

     903                 
  

 

 

   

 

 

   

 

 

 

Non-GAAP adjusted net income before income taxes

   $ 139,020      $ 112,788      $ 67,726   

Income tax benefit(4)

     (11,368     (3,634     (3,080
  

 

 

   

 

 

   

 

 

 

Non-GAAP adjusted net income

   $ 127,652      $ 109,154      $ 64,646   
  

 

 

   

 

 

   

 

 

 

Non-GAAP adjusted net income per diluted share

   $ 1.40      $ 1.20      $ 0.73   
  

 

 

   

 

 

   

 

 

 

 

(1) 

This proforma adjustment in the GAAP to Non-GAAP reconciliations above represents expenses related to the implementation of a new ERP system.

(2) 

This proforma adjustment in the GAAP to Non-GAAP reconciliations above represents contingency accruals of which $2.2 million was recorded in selling, general and administrative expenses and $3.7 million was recorded in cost of sales.

(3) 

This proforma adjustment in this GAAP to Non-GAAP reconciliation represents the add-back of accelerated depreciation and amortization on tangible and intangible items related to our current ERP system and supporting platforms that will no longer be utilized once the implementation of a new ERP is complete.

(4) 

The proforma adjustments in this GAAP to Non-GAAP reconciliation represent the add-back of certain one-time income tax benefits. The year-ended December 31, 2012 includes a one-time tax benefit of $11.4 million related to the reversal of reserves related to specific uncertain tax positions and the release of certain valuation allowances associated with deferred tax assets. The year-ended December 31, 2011 includes a one-time tax benefit of $3.6 million related to a change in the international tax structure. The year-ended December 31, 2010 includes a one-time tax benefit of $3.0 million related to a change in an international tax treaty.

Liquidity and Capital Resources

Cash and cash equivalents at December 31, 2012 increased 14.2% to $294.3 million compared to $257.6 million at December 31, 2011. We anticipate that cash flows from operations will be sufficient to meet the ongoing needs of our business for the next twelve months. In order to provide additional liquidity in the future and to help support our strategic goals, we also have a revolving credit facility with a syndicate of lenders, including PNC Bank, N.A. (“PNC”) (further discussed below), which currently provides us with up to $100.0 million in borrowing capacity and matures in December 2017. Additional future financing may be necessary and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all.

We continue to evaluate options to maximize the returns on our cash and maintain an appropriate capital structure, including, among other alternatives, repurchases of our common stock. Subject to certain restrictions on repurchases under our revolving credit facility, we have authorization to repurchase up to 5.5 million shares of our common stock under previous board authorizations. During the fourth quarter of 2012, the Company repurchased approximately 1.9 million shares for an aggregate price of approximately $25.0 million, excluding related commission charges. The number, price and timing of repurchases, if any, will be at our sole discretion and future repurchases will be evaluated depending on market conditions, liquidity needs and other factors.

 

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Revolving Credit Facility

On December 10, 2012, Crocs, Inc. (the “Company”) and its subsidiaries, Crocs Retail, Inc., Ocean Minded, Inc., Jibbitz, LLC and Bite, Inc. (collectively with the Company, the “Borrowers”) entered into the First Amendment to Amended and Restated Credit Agreement (the “First Amendment”) with the lenders named therein and PNC Bank, National Association (“PNC”), as a lender and administrative agent for the lenders, pursuant to which certain terms of the Amended and Restated Credit Agreement (the “Credit Agreement”), dated December 16, 2011, were amended. The First Amendment, among other things, (i) extends the maturity date from December 16, 2016 to December 16, 2017, (ii) increases the total commitments under the revolving credit facility from $70 million to $100 million, with the ability to increase commitments to up to $125 million subject to certain conditions, (iii) decreases the revolving interest rate by 50 basis points for both domestic and LIBOR rate loans, (iv) increases the ability of the Company to make stock repurchases from up to $25 million per year to up to $150 million per year, subject to certain conditions, (v) increases the limit for permitted acquisitions from up to $40 million per year to up to $100 million per year, subject to certain conditions, (vi) adds a covenant to maintain unrestricted cash of at least $100 million at all times, subject to limitations, and (vii) amends certain restrictive covenants to be more favorable to the Borrowers.

The Credit Agreement is available for working capital, capital expenditures, permitted acquisitions, reimbursement of drawings under letters of credit, and permitted dividends, distributions, purchases, redemptions and retirements of equity interests. Borrowings under the Credit Agreement are secured by all of our assets including all receivables, equipment, general intangibles, inventory, investment property, subsidiary stock and intellectual property. Borrowings under the Credit Agreement bear interest at a variable rate. For domestic rate loans, the interest rate is equal to the highest of (i) the daily federal funds open rate as quoted by ICAP North America, Inc. plus 0.5%, (ii) PNC’s prime rate and (iii) a daily LIBOR rate plus 1.0%, in each case there is an additional margin ranging from 0.25% to 1.00% based on certain conditions. For LIBOR rate loans, the interest rate is equal to a LIBOR rate plus a margin ranging from 1.25% to 2.00% based on certain conditions. The Credit Agreement requires monthly interest payments with respect to domestic rate loans and at the end of each interest period with respect to LIBOR rate loans and contains certain customary restrictive and financial covenants. We were in compliance with these restrictive financial covenants as of December 31, 2012. As of December 31, 2012 and 2011, we had no outstanding borrowings and $0.4 million of outstanding borrowings, respectively, under the Credit Agreement. At December 31, 2012 and 2011, we had issued and outstanding letters of credit of $6.4 million and $6.0 million, respectively, which were reserved against the borrowing base. During the years ended December 31, 2012 and 2011, we capitalized $0.5 million and $0.4 million, respectively, in fees and third party costs which were incurred in connection with the Credit Agreement, as deferred financing costs.

Long-term Debt Agreement

On December 10, 2012, we entered into a Master Installment Payment Agreement (“Master IPA”) with PNC Bank National Association (“PNC”) in which PNC will finance our purchase of software and services, which may include but are not limited to third party costs to design, install and implement software systems, and associated hardware described in the schedules defined within the Master IPA. This agreement was entered into to finance the recent implementation of a new ERP system which began in October 2012 and is estimated to continue through early 2014. The terms of the agreement consist of variable interest rates and payment terms based on amounts borrowed and timing of activity throughout the implementation of the ERP. As of December 31, 2012, we had $6.6 million of long-term debt outstanding under the agreement payable over the next four years bearing interest at a rate of 2.63% per annum. Interest rates and payment terms are subject to changes as further financing occurs under the Master IPA.

Acquisitions

On July 16, 2012, our subsidiaries Crocs Europe B.V., Crocs Stores B.V. and Crocs Belgium N.V. (collectively referred to as “Crocs Europe”), acquired certain net assets and activities from Crocs Benelux B.V. (“Benelux”)

 

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pursuant to a sale and purchase agreement dated July 9, 2012. Prior to the acquisition, Benelux was a distributor of the Company. The Company acquired Benelux’ retail business and wholesale business, including inventory, fixed assets, customer relationships, 10 retail stores and their associated leases. Total consideration paid was cash of € 3.6 million (approximately $4.6 million). This acquisition will allow us to take direct control in expanding our business in the Europe region.

Working Capital

As of December 31, 2012, accounts receivable increased $7.5 million to $92.3 million when compared to December 31, 2011, primarily due to higher sales in the fourth quarter of 2012 compared to the fourth quarter of 2011. Inventories increased $35.2 million, or 27.1%, to $164.8 million as of December 31, 2012 when compared to December 31, 2011, primarily due to wholesale order growth and higher cost new product introductions, particularly in the Americas and Asia segments, in addition to the global increase in company-operated retail stores.

Capital Assets

During the year ended December 31, 2012, net capital expenditures, inclusive of intangible assets, acquired with cash increased to $59.5 million compared to $41.6 million during the same period in 2011 primarily due to the capitalization of our ERP implementation costs and leasehold improvements related to our retail store expansion.

We have entered into various operating leases that require cash payments on a specified schedule. Over the next five years we are committed to make payments of approximately $278.5 million related to our operating leases. We plan to continue to enter into operating leases related to our retail stores. We also continue to evaluate cost reduction opportunities. Our evaluation of cost reduction opportunities will include an evaluation of contracts for sponsorships, operating lease contracts and other contracts that require future minimum payments resulting in fixed operating costs. Any changes to these contracts may require early termination fees or other charges that could result in significant cash expenditures.

Repatriation of Cash

As we are a global business, we have cash balances which are located in various countries and are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries have additional restrictions and covenants associated with them which adds increased strains on our liquidity and ability to timely access and transfer cash balances between entities.

We generally consider unremitted earnings of subsidiaries operating outside of the U.S. to be indefinitely reinvested and it is not our current intent to change this position with the exception of the expected repatriation of up to approximately $13.6 million in cash that was previously accrued for as a repatriation of 2010 foreign subsidiary earnings and approximately $25.0 million of 2012 foreign subsidiary earnings. Most of the cash balances held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal and state income taxes less applicable foreign tax credits. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. Certain countries, including China, have monetary laws which may limit our ability to utilize cash resources in those countries for operations in other countries. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and could adversely affect our liquidity. As of December 31, 2012, we held $272.0 million of our total $294.3 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the $272.0 million, $38.2 million could potentially be restricted, as described above. If the remaining $233.8 million were to be immediately repatriated to the U.S., we would be required to pay approximately $50.8 million in taxes that were not previously provided for in our consolidated statement of operations.

 

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Contractual Obligations

In February 2011, we renewed and amended our supply agreement with Finproject S.r.l. which provides us the exclusive right to purchase certain raw materials used to manufacture our products. The agreement also provides that we meet minimum purchase requirements to maintain exclusivity throughout the term of the agreement, which expires December 31, 2014. Historically, the minimum purchase requirements have not been onerous and we do not expect them to become onerous in the future. Depending on the material purchased, pricing is either based on contracted price or is subject to quarterly reviews and fluctuates based on order volume, currency fluctuations and raw material prices. Pursuant to the agreement, we guarantee the payment for certain third-party manufacturer purchases of these raw materials up to a maximum potential amount of €3.5 million (approximately $4.6 million as of December 31, 2012), through a letter of credit that was issued to Finproject S.r.l.

The following table summarizes aggregate information about our significant contractual cash obligations as of December 31, 2012.

 

     Payments due by period  

($ thousands)

   Total      Less than
1 year
     1 - 3
years
     4 - 5
years
     More than
5 years
 

Operating lease obligations

   $ 410,904       $ 80,020       $ 117,535       $ 80,959       $ 132,390   

Inventory purchase obligations with third party manufacturers(1)

     152,779         152,779                           

Estimated liability for uncertain tax positions

     31,900         216         11,766         10,333         9,585   

Other contracts(2)

     42,257         13,356         14,992         12,418         1,491   

Debt obligations(3)(4)

     6,910         2,159         3,455         1,296           

Minimum licensing royalties

     3,247         709         1,316         815         407   

Capital lease obligations(4)

     57         27         21         9           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 648,054       $ 249,266       $ 149,085       $ 105,830       $ 143,873   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes $5.9 million in purchase commitments with certain third party manufacturers for yet-to-be-received finished product where title passes to us upon receipt.

(2) 

The Other contracts line item consists of various agreements with third-party providers primarily for IT renovation and maintenance in our Niwot, CO facility and global accounting services.

(3) 

In December 2012, we entered into an agreement with PNC Bank to finance the purchase of software and services related to a new ERP system installation, which began in October 2012 and is estimated to continue through early 2014.

(4) 

Amounts include anticipated interest payments.

Off-Balance Sheet Arrangements

We had no material off balance sheet arrangements as of December 31, 2012.

Critical Accounting Policies and Estimates

General

Our discussion and analysis of financial condition and results of operations is based on the consolidated financial statements which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis

 

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for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following discussion pertains to accounting policies management believes are most critical to the portrayal of our financial condition and results of operations that require management’s most difficult, subjective or complex judgments.

Reserves for Uncollectible Accounts Receivable.  We make ongoing estimates related to the collectability of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. Our estimates are based on a variety of factors, including the length of time receivables are past due, economic trends and conditions affecting our customer base, significant one-time events and historical write-off experience. Specific provisions are recorded for individual receivables when we become aware of a customer’s inability to meet its financial obligations. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates and we may experience changes in the amount of reserves we recognize for accounts receivable that we deem uncollectible. If the financial condition of some of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine that a smaller or larger reserve is appropriate, we would record a credit or a charge to selling, general and administrative expenses in the period in which we made such a determination.

Sales Returns, Allowances and Discounts.  We record reductions to revenue for estimated customer returns, allowances and discounts. Our estimated sales returns and allowances are based on customer return history and actual outstanding returns yet to be received. Provisions for customer specific discounts based on contractual obligations with certain major customers are recorded as reductions to net sales. We may accept returns from our wholesale and distributor customers on an exception basis at the sole discretion of management for the purpose of stock re-balancing to ensure that our products are merchandised in the proper assortments. Additionally, at the sole discretion of management, we may provide markdown allowances to key wholesale and distributor customers to facilitate the “in-channel” markdown of products where we have experienced less than anticipated sell-through. We also record reductions to revenue for estimated customer credits as a result of price mark-downs in certain markets. Fluctuations in our estimates for sales returns, allowances and discounts may be caused by many factors, including, but not limited to, fluctuations in our sales revenue and changes in demand for our products. Our judgment in determining these estimates is impacted by various factors including customer acceptance of our new styles, customer inventory levels, shipping delays or errors, known or suspected product defects, the seasonal nature of our products and macroeconomic factors affecting our customers. Because we cannot predict or control certain of these factors, the actual amounts of customer returns and allowances may differ from our estimates.

Inventory Valuation.  Inventories are valued at the lower of cost or market. Inventory cost is determined using the moving average cost method. At least annually, we evaluate our inventory for possible impairment using standard categories to classify inventory based on the degree to which we believe that the products may need to be discounted below cost to sell within a reasonable period. We base inventory fair value on several subjective and unobservable assumptions including estimated future demand and market conditions and other observable factors such as current sell-through of our products, recent changes in demand for our product, shifting demand between the products we offer, global and regional economic conditions, historical experience selling through liquidation and “off-price” channels and the amount of inventory on hand. If the estimated inventory fair value is less than its carrying value, the carrying value is adjusted to market value and the resulting impairment charge is recorded in cost of sales on the consolidated statements of operations. The ultimate results achieved in selling excess and discontinued products in future periods may differ significantly from management’s fair value estimates. See Note 2—Inventories in the accompanying notes to the consolidated financial statements for additional information regarding inventory.

Impairment of Long-Lived Assets.  We test long-lived assets to be held and used for impairment when events or circumstances indicate the carrying value of a long-lived asset may not be fully recoverable. Events that may indicate the impairment of a long-lived asset (or asset group, as defined below) include: (i) a significant decrease

 

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in its market price, (ii) a significant adverse change in the extent or manner in which it is being used or in its physical condition, (iii) a significant adverse change in legal factors or business climate that could affect its value, including an adverse action or assessment by a regulator, (iv) an accumulation of costs significantly in excess of the amount originally expected for its acquisition or construction, (v) its current period operating or cash flow losses combined with historical operating or cash flow losses or a forecast of its cash flows demonstrate continuing losses associated with its use, and (vi) a current expectation that, more likely than not, it will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. If such facts indicate a potential impairment of a long-lived asset (or asset group), we assess the recoverability by determining if its carrying value exceeds the sum of its projected undiscounted cash flows expected from its use and eventual disposition over its remaining economic life. If the asset is not supported on an undiscounted cash flow basis, the amount of impairment is measured as the difference between its carrying value and its fair value. Assets held for sale are reported at the lower of the carrying amount or fair value less costs to sell. Fair value is determined by independent third party appraisals, the net present value of expected cash flows, or other valuation techniques as appropriate. Assets to be abandoned or from which no further benefit is expected are written down to zero at the time that the determination is made and the assets are removed entirely from service.

An asset group is the lowest level of assets and liabilities for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For assets involved in our retail business, our asset group is at the retail store level. Our estimates of future cash flows over the remaining useful life of the asset group are based on management’s operating budgets and forecasts. These budgets and forecasts take into consideration inputs from our regional management related to growth rates, pricing, new markets and other factors expected to affect the business, as well as management’s forecasts for inventory, receivables, capital spending, and other cash needs. These considerations and expectations are inherently uncertain, and estimates included in our operating forecasts beyond a three to six month future period are extremely subjective. Accordingly, actual cash flows may differ significantly from our estimated future cash flows.

Impairment charges are driven by, among other things, changes in our strategic operational and financial decisions, global and regional economic conditions, demand for our product and other corporate initiatives which may eliminate or significantly decrease the realization of future benefits from our long-lived assets and result in impairment charges in future periods. Significant impairment charges recognized during a reporting period could have an adverse effect on our reported financial results.

Impairment of Goodwill & Intangible Assets.  Intangible assets with indefinite lives (i.e. goodwill) are evaluated for impairment when events or changes in circumstances indicate that the carrying value may not be fully recoverable and, at least, annually. Intangible assets that are determined to have definite lives, such as customer relationships, core technology, capitalized software, patents and non-compete agreements are amortized over their useful lives and are evaluated for impairment only when events or circumstances indicate a carrying value may not be fully recoverable. Recoverability is based on the estimated future undiscounted cash flows of an asset. If the asset is not supported on an undiscounted cash flow basis, the amount of impairment is measured as the difference between its carrying value and its fair value. Determination of the fair value of indefinite lived intangible assets involves a number of management assumptions including the expected future operating performance of our reporting units which may change in future periods due to technological changes, economic conditions, changes to our business operations, or the inability to meet business plans, among other things. The valuation is sensitive to the actual results of any of these uncertain factors which could be negatively affected and may result in additional impairment charges should the actual results differ from management’s estimates. See Note 4—Goodwill & Intangible Assets, in the accompanying notes to the consolidated financial statements for additional information regarding our intangible assets.

Share-based Compensation.  We estimate the fair value of our stock option awards using a Black Scholes valuation model, the inputs of which require various assumptions including the expected volatility of our stock price and the expected life of the option. The expected volatility assumptions are derived using our historical stock price volatility and the historical volatilities of competitors whose shares are traded in the public markets.

 

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These assumptions reflect our best estimates, however; they involve inherent uncertainties based on market conditions generally outside of our control. If factors change and we use a different methodology for deriving the Black Scholes assumptions, our share- based compensation expense may differ materially in the future from that recorded in the current period. Additionally, we make certain estimates about the number of awards which will be made under performance based incentive plans. As a result, if other assumptions or estimates had been used, share-based compensation expense could have been materially impacted. Furthermore, if we use different assumptions in future periods, share-based compensation expense could be materially impacted in future periods. See Note 9—Equity in the accompanying notes to the consolidated financial statements for additional information regarding our share-based compensation.

Income Taxes.  We account for income taxes using the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities. We provide for income taxes at the current and future enacted tax rates and laws applicable in each taxing jurisdiction. We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The impact of an uncertain tax position that is more likely than not of being sustained upon examination by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest expense is recognized on the full amount of deferred benefits for uncertain tax positions. While the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous.

Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax expense and in evaluating our tax positions. Tax laws require items to be included in our tax returns at different times than when these items are reflected in the consolidated financial statements. As a result, the annual tax rate reflected in our consolidated financial statements is different than that reported in our tax return (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are the enacted tax rates in effect for the year in which the differences are expected to reverse. Based on the evaluation of all available information, we recognize future tax benefits, such as net operating loss carryforwards, to the extent that realizing these benefits is considered more likely than not.

We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our forecasted taxable income using both historical and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry back years (if permitted) and the availability of tax planning strategies. A valuation allowance is required to be established unless management determines that it is more likely than not that we will ultimately realize the tax benefit associated with a deferred tax asset. Undistributed earnings of a subsidiary are accounted for as a temporary difference, except that deferred tax liabilities are not recorded for undistributed earnings of a foreign subsidiary that are deemed to be indefinitely reinvested in the foreign jurisdiction. We have operated under a specific plan for reinvestment of undistributed earnings of our foreign subsidiaries which demonstrates that such earnings will be indefinitely reinvested in the applicable tax jurisdictions. Should we change our plans, we would be required to record a significant amount of deferred tax liabilities. We recognize interest and penalties related to unrecognized tax benefits within the “Income tax expense” line in the accompanying consolidated statement of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets. See Note 11—Income Taxes in the accompanying notes to the consolidated financial statements for additional information regarding our income taxes.

Recent Accounting Pronouncements.  See Note 1—Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements for recently adopted and issued accounting pronouncements.

 

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ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk includes interest rate fluctuations in connection with our revolving credit facility. Borrowings under the revolving credit facility bear interest at a variable rate. For domestic rate loans, the interest rate is equal to the highest of (i) the daily federal funds open rate as quoted by ICAP North America, Inc. plus 0.5%, (ii) PNC’s prime rate and (iii) a daily LIBOR rate plus 1.0%, in each case there is an additional margin ranging from 0.25% to 1.00% based on certain conditions. For LIBOR rate loans, the interest rate is equal to a LIBOR rate plus a margin ranging from 1.25% to 2.00% based on certain conditions. Borrowings under the revolving credit facility are therefore subject to risk based upon prevailing market interest rates. Interest rates fluctuate as a result of many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. During the year ended December 31, 2012, the maximum amount borrowed under the Credit Facility was $31.0 million and the average amount of borrowings outstanding was $6.1 million. As of December 31, 2012, there were no borrowings outstanding under the revolving credit facility. If the prevailing market interest rates relative to these borrowings increased by 10%, our interest expense during the year ended December 31, 2012 would have increased by $0.1 million.

Fluctuations in the prevailing market interest rates, earned on our cash and cash equivalents and restricted cash balances during the year ended December 31, 2012, would have impacted the consolidated statements of operations by $0.2 million.

Foreign Currency Exchange Risk

As a global company, we have significant revenues and costs denominated in currencies other than the U.S. dollar. We pay the majority of expenses attributable to our foreign operations in the functional currency of the country in which such operations are conducted and pay the majority of our overseas third-party manufacturers in U.S. dollars. Our ability to sell our products in foreign markets and the U.S. dollar value of the sales made in foreign currencies can be significantly influenced by foreign currency fluctuations. Fluctuations in the value of foreign currencies relative to the U.S. dollar could result in downward price pressure for our products and increase losses from currency exchange rates. A decrease of 1% in value of the U.S. dollar relative to foreign currencies would have decreased income before taxes during the year ended December 31, 2012 by approximately $2.4 million. The volatility of the applicable exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy. In the event our foreign sales and purchases increase and are denominated in currencies other than the U.S. dollar, our operating results may be affected by fluctuations in the exchange rate of currencies we receive for such sales. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a discussion of the impact of foreign exchange rate variances experienced during the years ended December 31, 2012 and 2011.

We transact business in various foreign countries and are therefore exposed to foreign currency exchange rate risk inherent in revenues, costs, and monetary assets and liabilities denominated in non-functional currencies. We have entered into foreign currency exchange forward contracts and currency swap derivative instruments to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities, and of future cash flows caused by changes in foreign currency exchange rates.

 

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The following table summarizes the notional amounts of the outstanding foreign currency exchange contracts at December 31, 2012 and 2011. 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 our exposure to the foreign currency exchange risks.

 

     December 31,  

($ thousands)

   2012      2011  

Foreign currency exchange forward contracts by currency:

     

Japanese Yen

   $ 112,500       $ 27,500   

Euro

     5,159         10,055   

Australian Dollar

     4,178           

Mexican Peso

     11,400         6,500   

Pound Sterling

     8,742         6,345   

New Zealand Dollar

     1,137           
  

 

 

    

 

 

 

Total notional value, net

   $ 143,116       $ 50,400   
  

 

 

    

 

 

 

Latest maturity date

     December 2015         December 2012   

 

ITEM 8. Financial Statements and Supplementary Data

The consolidated financial statements and supplementary data are as set forth in the “Index to Consolidated Financial Statements” on page 46.

 

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

ITEM 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2012 (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of the Evaluation Date, our disclosure controls and procedures were effective such that the information relating to us, including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012, using the criteria set forth in the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2012.

 

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Deloitte & Touche LLP, our independent registered public accounting firm, has issued a report on our internal control over financial reporting, which is included herein.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Crocs, Inc.

Niwot, Colorado

We have audited the internal control over financial reporting of Crocs, Inc. and subsidiaries (the Company) as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2012 of the Company and our report dated February 25, 2013 expressed an unqualified opinion on those financial statements.

/s/ Deloitte & Touche LLP

Denver, Colorado

February 25, 2013

 

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ITEM 9B. Other Information

On December 10, 2012, we entered into the Master Installment Payment Agreement (“Master IPA”) with PNC Bank to finance our purchase of software and services, which may include but are not limited to third party costs to design, install and implement software systems, and associated hardware described in the schedules defined within the Master IPA. The Master IPA was entered into to finance the implementation of a new ERP system, which began in October 2012 and is expected to continue through early 2014. The Master IPA has a borrowing capacity of $25.0 million and provides for variable interest rates and variable payment terms based on amounts borrowed and timing of activity throughout the implementation of the ERP system. As of December 31, 2012, we had borrowings of $6.6 million outstanding under the Master IPA, payable over the next four years bearing interest at a rate of 2.63% per annum.

PART III

 

ITEM 10. Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated herein by reference to our definitive proxy statement for the 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2012.

Code of Ethics

We have a written code of ethics in place that applies to all our employees, including our principal executive officer, principal financial officer, principal accounting officer and controller. A copy of our business code of conduct and ethics policy is available on our website: www.crocs.com. We are required to disclose any change to, or waiver from, our code of ethics for our senior financial officers. We intend to use our website as a method of disseminating any change to, or waiver from, our business code of conduct and ethics policy as permitted by applicable SEC rules.

 

ITEM 11. Executive Compensation

The information required by this item is incorporated herein by reference to our definitive proxy statement for the 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2012.

 

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated herein by reference to our definitive proxy statement for the 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2012, with the exception of those items listed below.

 

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Securities Authorized for Issuance under Equity Compensation Plans

As shown in the table below, we reserved 2.6 million shares of common stock for future issuance on exercise of outstanding options under equity compensation plans as of December 31, 2012.

 

Plan Category    Number of
Securities to be
Issued
on Exercise of
Outstanding Options
     Weighted Average
Exercise Price of
Outstanding
Options
     Number of Securities
Remaining Available
for Future

Issuance Under
Plans, Excluding
Securities Available
in First Column
 

Equity compensation plans approved by stockholders(1)

     2,621,686       $ 13.03         5,711,637   

Equity compensation plans not approved by stockholders

                       
  

 

 

    

 

 

    

 

 

 

Total

     2,621,686       $ 13.03         5,711,637   
  

 

 

    

 

 

    

 

 

 

 

(1) 

On July 9, 2007, at the annual stockholders’ meeting, our stockholders approved the 2007 Equity Incentive Plan (the “2007 Plan”), which previously had been approved by our board of directors and which became effective as of July 19, 2007. On June 28, 2011, our stockholders approved an amendment to the 2007 Plan to increase the number of shares of our common stock available for issuance from 9.0 million shares to 15.3 million shares, subject to adjustment for future stock splits, stock dividends and similar changes in our capitalization. On April 27, 2005, our board of directors adopted the 2005 Equity Incentive Plan (the “2005 Plan”). On January 10, 2006, our board of directors amended the 2005 Plan to increase the number of shares of our common stock available for issuance under the 2005 Plan from 11.7 million shares to 14.0 million shares. Following the adoption of the 2007 Plan, no future grants were made under the 2005 Plan.

 

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated herein by reference to our definitive proxy statement for the 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2012.

 

ITEM 14. Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference to our definitive proxy statement for the 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2012.

PART IV

 

ITEM 15. Exhibits and Financial Statement Schedules

 

(1) Financial Statements

The financial statements filed as part of this report are listed on the index to financial statements on page 46.

 

(2) Financial Statement Schedules

All financial statement schedules have been omitted because they are not required, are not applicable or the information is included in the Financial Statements or Notes thereto.

 

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(3) Exhibit list

 

Exhibit

    Number    

 

Description

  3.1   Restated Certificate of Incorporation of Crocs, Inc. (incorporated herein by reference to Exhibit 4.1 to Crocs, Inc.’s Registration Statement on Form S-8, filed on March 9, 2006 (File No. 333-132312)).
  3.1   Certificate of Amendment to Restated Certificate of Incorporation of Crocs, Inc. (incorporated herein by reference to Exhibit 3.1 to Crocs, Inc.’s Current Report on Form 8-K, filed on July 12, 2007).
  3.2   Amended and Restated Bylaws of Crocs, Inc. (incorporated herein by reference to Exhibit 4.2 to Crocs, Inc.’s Registration Statement on Form S-8, filed on March 9, 2006 (File No. 333-132312)).
  4.1   Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.2 to Crocs, Inc.’s Registration Statement on Form S-1/A, filed on January 19, 2006 (File No. 333-127526)).
10.1*   Form of Indemnification Agreement between Crocs, Inc. and each of its directors and executive officers (incorporated herein by reference to Exhibit 10.1 to Crocs, Inc.’s Registration Statement on Form S-1, filed on August 15, 2005 (File No. 333-127526)).
10.2*   Crocs, Inc. 2005 Equity Incentive Plan (the “2005 Plan”) (incorporated herein by reference to Exhibit 10.2 to Crocs, Inc.’s Registration Statement on Form S-1, filed on August 15, 2005 (File No. 333-127526)).
10.3*   Amendment No. 1 to the 2005 Plan (incorporated herein by reference to Exhibit 10.2.2 to Crocs, Inc.’s Registration Statement on Form S-1/A, filed on January 19, 2006 (File No. 333-127526)).
10.4*   Form of Notice of Grant of Stock Option under the 2005 Plan (incorporated herein by reference to Exhibit 10.3 to Crocs, Inc.’s Registration Statement on Form S-1, filed on August 15, 2005 (File No. 333-127526)).
10.5*   Form of Notice of Grant of Stock Option for Non-Exempt Employees under the 2005 Plan (incorporated herein by reference to Exhibit 10.4 to Crocs, Inc.’s Registration Statement on Form S-1, filed on August 15, 2005 (File No. 333-127526)).
10.6*   Form of Stock Purchase Agreement under the 2005 Plan (incorporated herein by reference to Exhibit 10.5 to Crocs, Inc.’s Registration Statement on Form S-1, filed on August 15, 2005 (File No. 333-127526)).
10.7*   Form of Stock Option Agreement under the 2005 Plan (incorporated herein by reference to Exhibit 10.6 to Crocs, Inc.’s Registration Statement on Form S-1, filed on August 15, 2005 (File No. 333-127526)).
10.8*   Form of Restricted Stock Award Grant Notice under the 2005 Plan (incorporated herein by reference to Exhibit 10.7 to Crocs, Inc.’s Registration Statement on Form S-1, filed on August 15, 2005 (File No. 333-127526)).
10.9*   Form of Restricted Stock Award Agreement under the 2005 Plan (incorporated herein by reference to Exhibit 10.8 to Crocs, Inc.’s Registration Statement on Form S-1, filed on August 15, 2005 (File No. 333-127526)).
10.10*   Form of Non Statutory Stock Option Agreement under the 2005 Plan (incorporated herein by reference to Exhibit 10.9 to Crocs, Inc.’s Registration Statement on Form S-1, filed on August 15, 2005 (File No. 333-127526)).
10.11*   Crocs, Inc. 2011 Board of Directors Compensation Plan.

 

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Exhibit

    Number    

 

Description

10.12*   Crocs, Inc. Amended and Restated 2007 Senior Executive Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.15 to Crocs, Inc.’s Annual Report on Form 10-K, filed on March 17, 2009).
10.14*   2008 Cash Incentive Plan (As Amended and Restated Effective June 4, 2012) (incorporated herein by reference to Exhibit 10.1 to Crocs, Inc.’s Current Report on Form 8-K, filed on June 7, 2012).
10.15*   Crocs, Inc. 2007 Equity Incentive Plan (As Amended and Restated) (the “2007 Plan”) (incorporated herein by reference to Exhibit 10.1 to Crocs, Inc.’s Current Report on Form 8-K, filed on July 1, 2011).
10.16*   Form of Incentive Stock Option Agreement under the 2007 Plan (incorporated herein by reference to Exhibit 10.1 to Crocs, Inc.’s Quarterly Report on Form 10-Q, filed on November 14, 2007).
10.17*   Form of Non-Statutory Stock Option Agreement under the 2007 Plan (incorporated herein by reference to Exhibit 10.2 to Crocs, Inc.’s Quarterly Report on Form 10-Q, filed on November 14, 2007).
10.18*   Form of Non-Statutory Stock Option Agreement for Non-Employee Directors under the 2007 Plan (incorporated herein by reference to Exhibit 10.3 to Crocs, Inc.’s Quarterly Report on Form 10-Q, filed on November 14, 2007).
10.19*   Form of Restricted Stock Unit Agreement under the 2007 Plan (incorporated herein by reference to Exhibit 10.2 to Crocs, Inc.’s Current Report on Form 8-K, filed on July 1, 2011).
10.20*   Employment Agreement, dated February 9, 2009, between Crocs, Inc. and John McCarvel (incorporated herein by reference to Exhibit 10.1 to Crocs, Inc.’s Current Report on Form 8-K, filed on February 13, 2009).
10.21*   Employment Agreement, dated May 18, 2009, between Crocs, Inc. and Daniel P. Hart (incorporated herein by reference to Crocs, Inc.’s Quarterly Report on Form 10-Q, filed on August 5, 2010).
10.22   Amended and Restated Credit Agreement, dated December 16, 2011, among Crocs, Inc., Crocs Retail, Inc., Ocean Minded, Inc., Jibbitz, LLC, Bite, Inc., the lenders named therein and PNC Bank, National Association, as a lender and administrative agent for the lenders (the “Amended and Restated Credit Agreement”) (incorporated herein by reference to Crocs, Inc.’s Current Report on Form 8-K, filed on December 19, 2011).
10.23   First Amendment to the Amended and Restated Credit Agreement, dated December 10, 2012, among Crocs, Inc., Crocs Retail, Inc., Ocean Minded, Inc., Jibbitz, LLC, Bite, Inc., the lenders named therein and PNC Bank, National Association, as a lender and administrative agent (incorporated herein by reference to Crocs, Inc.’s Current Report on Form 8-K, filed on December 11, 2012).
10.24†   Master Installment Payment Agreement, dated December 10, 2012, among Crocs, Inc. the lender named therein and PNC Bank National Association, as a lender and administrative agent.
21†   Subsidiaries of the registrant.
23.1†   Consent of Deloitte & Touche LLP.
31.1†   Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2†   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes- Oxley Act.
32†   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.

 

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Exhibit

    Number    

 

Description

101.INS†   XBRL Instance Document**
101.SCH†   XBRL Taxonomy Extension Schema Document**
101.CAL†   XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEF†   XBRL Taxonomy Extension Definition Linkbase Document**
101.LAB†   XBRL Taxonomy Extension Label Linkbase Document**
101.PRE†   XBRL Taxonomy Extension Presentation Linkbase Document**

 

* Compensatory plan or arrangement
** Pursuant to Rule 406T of Regulation S-T, the information in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, as of February 25, 2013.

 

CROCS, INC.

a Delaware Corporation

By:  

/s/ JOHN P. MCCARVEL

  Name:  John P. McCarvel
  Title:    President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/S/ JOHN P. MCCARVEL

John P. McCarvel

   President, Chief Executive Officer and Director (Principal Executive Officer)   February 25, 2013

/S/ JEFFREY J. LASHER

Jeffrey J. Lasher

   Senior Vice President-Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)   February 25, 2013

/S/ W. STEPHEN CANNON

W. Stephen Cannon

   Director   February 25, 2013

/S/ RAYMOND D. CROGHAN

Raymond D. Croghan

   Director   February 25, 2013

/S/ RONALD L. FRASCH

Ronald L. Frasch

   Director   February 25, 2013

/S/ PETER A. JACOBI

Peter A. Jacobi

   Director   February 25, 2013

/S/ THOMAS J. SMACH

Thomas J. Smach

   Chairman of the Board   February 25, 2013

/S/ DOREEN A. WRIGHT

Doreen A. Wright

   Director   February 25, 2013

/S/ JEFFREY H. MARGOLIS

Jeffrey H. Margolis

   Director   February 25, 2013

 

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INDEX TO FINANCIAL STATEMENTS

 

Financial Statements:

  

Report of Independent Registered Public Accounting Firm

     F-1   

Consolidated Statements of Operations for the Years Ended December 31, 2012, 2011 and 2010

     F-2   

Consolidated Statements of Comprehensive Income as of December 31, 2012, 2011 and 2010

     F-3   

Consolidated Balance Sheets as of December 31, 2012 and 2011

     F-4   

Consolidated Statements of Stockholders’ Equity for the Years Ended December  31, 2012, 2011 and 2010

     F-5   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2012, 2011 and 2010

     F-6   

Notes to Consolidated Financial Statements

     F-7   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Crocs, Inc.

Niwot, Colorado

We have audited the accompanying consolidated balance sheets of Crocs, Inc. and subsidiaries (the “Company”) as of December 31, 2012 and 2011 and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Crocs, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Denver, Colorado

February 25, 2013

 

F-1


Table of Contents

CROCS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Year Ended December 31,  

($ thousands, except per share data)

   2012     2011     2010  

Revenues

   $     1,123,301      $     1,000,903      $         789,695   

Cost of sales

     515,324        464,493        364,631   

Restructuring charges

                   1,300   
  

 

 

   

 

 

   

 

 

 

Gross profit

     607,977        536,410        423,764   

Selling, general and administrative expenses

     460,393        404,803        342,961   

Restructuring charges

                   2,539   

Asset impairments

     1,410        528        141   

Income from operations

     146,174        131,079        78,123   

Foreign currency transaction (gains) losses, net

     2,500        (4,886     (2,325

Other income, net

     (2,711     (1,578     (1,001

Interest expense

     837        853        657   
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     145,548        136,690        80,792   

Income tax expense

     14,205        23,902        13,066   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 131,343      $ 112,788      $ 67,726   
  

 

 

   

 

 

   

 

 

 

Net income per common share (Note 12):

      

Basic

   $ 1.46      $ 1.27      $ 0.78   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.44      $ 1.24      $ 0.76   
  

 

 

   

 

 

   

 

 

 

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

 

F-2


Table of Contents

CROCS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     December 31,  

($ thousands)

   2012     2011     2010  

Net income

   $ 131,343      $ 112,788      $ 67,726   

Other comprehensive income (loss):

      

Foreign currency translation

     5,525        (16,031     9,048   

Reclassification of cumulative foreign exchange translation adjustments to net income

     (658            (2,364
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 136,210      $ 96,757      $ 74,410   
  

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

CROCS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     December 31,  

($ thousands, except number of shares)

   2012     2011  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 294,348      $ 257,587   

Accounts receivable, net of allowances of $13,315 and $15,508, respectively

     92,278        84,760   

Inventories

     164,804        129,627   

Deferred tax assets, net

     6,284        7,047   

Income tax receivable

     5,613        5,828   

Other receivables

     24,821        20,295   

Prepaid expenses and other current assets

     24,967        20,199   
  

 

 

   

 

 

 

Total current assets

     613,115        525,343   

Property and equipment, net

     82,241        67,684   

Intangible assets, net

     59,931        48,641   

Deferred tax assets, net

     34,112        30,375   

Other assets

     40,239        23,410   
  

 

 

   

 

 

 

Total assets

   $ 829,638      $ 695,453   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 63,976      $ 66,517   

Accrued expenses and other current liabilities

     81,371        76,506   

Deferred tax liabilities, net

     2,405        2,889   

Income taxes payable

     8,147        8,273   

Current portion of long-term borrowings and capital lease obligations

     2,039        1,118   
  

 

 

   

 

 

 

Total current liabilities

     157,938        155,303   

Long term income tax payable

     36,343        41,665   

Long-term borrowings and capital lease obligations

     4,596          

Other liabilities

     13,361        6,705   
  

 

 

   

 

 

 

Total liabilities

     212,238        203,673   
  

 

 

   

 

 

 

Commitments and contingencies (Note 13)

    

Stockholders’ equity:

    

Preferred shares, par value $0.001 per share, 5,000,000 shares authorized, none outstanding

              

Common shares, par value $0.001 per share, 250,000,000 shares authorized, 91,047,297 and 88,662,845 shares issued and outstanding, respectively, at December 31, 2012 and 90,306,432 and 89,807,146 shares issued and outstanding, respectively, at December 31, 2011

     91        90   

Treasury stock, at cost, 2,384,452 and 499,286 shares, respectively

     (44,214     (19,759

Additional paid-in capital

     307,823        293,959   

Retained earnings

     334,012        202,669   

Accumulated other comprehensive income

     19,688        14,821   
  

 

 

   

 

 

 

Total stockholders’ equity

     617,400        491,780   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $         829,638      $         695,453   
  

 

 

   

 

 

 

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

 

F-4


Table of Contents

CROCS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

     Common Stock      Treasury Stock     Additional
Paid in

Capital
    Retained
Earnings
     Accumulated
Other
Comprehensive

Income
    Total  Stock
Holders’

Equity
 

($ thousands)

   Shares     Amount      Shares     Amount           

BALANCE—January 1, 2010

     85,659      $ 85         565      $ (25,260   $ 266,472      $ 22,155       $ 24,168      $ 287,620   

Amortization of stock compensation

                                  7,594                       7,594   

Forfeitures

     (454                           (288                    (288

Exercises of stock options and issuance of restricted stock awards

     2,908        3         (77     3,673        3,515                       7,191   

Repurchase of common stock for tax withholding

     (47             47        (421                           (421

Net income

                                         67,726                67,726   

Foreign currency translation

                                                 9,048        9,048   

Reclassification of cumulative foreign exchange translation adjustments to net income

                                                 (2,364     (2,364
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

BALANCE—December 31, 2010

     88,066      $ 88         535      $ (22,008   $ 277,293      $ 89,881       $ 30,852      $ 376,106   

Amortization of stock compensation

                                  8,928                       8,928   

Forfeitures

     (149                           (435                    (435

Exercises of stock options and issuance of restricted stock awards

     1,912        2         (58     2,739        8,173                       10,914   

Repurchase of common stock for tax withholding

     (22             22        (490                           (490

Net income

                                         112,788                112,788   

Foreign currency translation

                                                 (16,031     (16,031
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

BALANCE—December 31, 2011

     89,807      $ 90         499      $ (19,759   $ 293,959      $ 202,669       $ 14,821      $ 491,780   

Amortization of stock compensation

                                  11,764                       11,764   

Forfeitures

     (43                           (493                    (493

Exercises of stock options and issuance of restricted stock awards

     783        1         (29     1,112        2,593                       3,706   

Repurchase of common stock for tax withholding

                    30        (493                           (493

Purchase of treasury stock

     (1,884             1,884        (25,074                           (25,074

Net income

                                         131,343                131,343   

Foreign currency translation

                                                 5,525        5,525   

Reclassification of cumulative foreign exchange translation adjustments to net income

                                                 (658     (658
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

BALANCE—December 31, 2012

     88,663      $ 91         2,384      $ (44,214   $ 307,823      $ 334,012       $ 19,688      $ 617,400   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

 

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CROCS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  

($ thousands)

   2012     2011     2010  

Cash flows from operating activities:

      

Net income

   $ 131,343     $ 112,788     $ 67,726  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     36,694       37,263       37,059  

Unrealized (gain) loss on foreign exchange, net

     13,928       (11,892     1,334  

Deferred income taxes

     (2,981     (819     (4,999

Charitable contributions

     1,743       2,034       840  

Non-cash restructuring charges

                   196  

Provision for (recovery of) doubtful accounts, net

     2,166       (383     2,204  

Share-based compensation

     11,321       8,550       7,109  

Other non-cash items

     1,392       339       1,083  

Changes in operating assets and liabilities:

      

Accounts receivable

     (9,475     (23,278     (13,165

Inventories

     (35,493     (13,328     (27,908

Prepaid expenses and other assets

     (25,490     (17,598     2,230  

Accounts payable

     99       30,314       12,689  

Accrued expenses and other liabilities

     8,016       19,922       20,344  

Accrued restructuring

            (439     (2,696

Income taxes

     (4,907     (1,097     228  
  

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

     128,356        142,376       104,274  

Cash flows from investing activities:

      

Purchases of marketable securities

                   (5,654

Sales of marketable securities

                   7,369  

Cash paid for purchases of property and equipment

     (39,762     (27,718     (31,257

Proceeds from disposal of property and equipment

     2,216       319       1,274  

Cash paid for intangible assets

     (21,074     (13,922     (13,848

Business acquisitions, net of cash

     (5,169              

Restricted cash

     (2,154     (343     38  
  

 

 

   

 

 

   

 

 

 

Cash (used in) investing activities

     (65,943     (41,664     (42,078

Cash flows from financing activities:

      

Proceeds from bank borrowings

     96,086       316,595       83,100  

Repayment of bank borrowings and capital lease obligations

     (90,625     (317,704     (84,625

Deferred debt issuance costs

     (225     (398       

Issuances of common stock

     3,706       10,914       7,191  

Purchase of treasury stock

     (25,074              

Repurchase of common stock for tax withholding

     (493     (490     (421
  

 

 

   

 

 

   

 

 

 

Cash provided by (used in) financing activities

     (16,625     8,917       5,245  

Effect of exchange rate changes on cash

     (9,027     2,375       799  
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     36,761       112,004       68,240  

Cash and cash equivalents—beginning of year

     257,587       145,583       77,343  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents—end of year

   $ 294,348     $ 257,587     $ 145,583  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information—cash paid during the year for:

      

Interest

   $ 619     $ 843     $ 639  

Income taxes

   $ 29,385     $ 26,632     $ 11,048  

Supplemental disclosure of non-cash, investing, and financing activities:

      

Assets acquired under capitalized leases

   $ 34     $      $ 2,606  

Accrued purchases of property and equipment

   $ 2,368     $ 4,022     $ 1,826  

Accrued purchases of intangibles

   $ 768     $ 223     $ 3,786  

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

 

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Table of Contents

CROCS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization—Crocs, Inc. and its subsidiaries (collectively the “Company,” “we,” “our” or “us”) are engaged in the design, development, manufacturing, marketing and distribution of consumer products, primarily casual and athletic shoes and shoe charms, manufactured from specialty resins referred to as Croslite. Our wholly owned subsidiaries include, among others, EXO Italia (“EXO”), which designs and develops EVA (Ethylene Vinyl Acetate) based finished products, primarily for the footwear industry; Jibbitz, LLC (“Jibbitz”), a unique accessory brand with colorful snap-on charms specifically suited for our shoes; and Ocean Minded, Inc. (“Ocean Minded”), which designs, manufactures, markets and distributes high quality leather and EVA based sandals primarily for the beach, adventure and action sports markets.

Basis of Consolidation and Variable Interest Entities—The consolidated financial statements include the accounts of our wholly-owned and majority-owned subsidiaries as well as variable interest entities (“VIE”) for which we are the primary beneficiary after the elimination of intercompany accounts and transactions. The primary beneficiary of a VIE is the entity that has (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

In 2007, we established a relationship with Shanghai Shengyiguan Trade, Ltd Co (“ST”) for the purpose of serving as a distributor of our products in the People’s Republic of China. We had previously determined that ST was a VIE for which we were the primary beneficiary and consequently it was consolidated as if a wholly-owned subsidiary. On March 15, 2012, the Company exercised an Equity Option Agreement that we had in place with ST and became the sole owner of ST.

In April 2011, we and an unrelated third party formed Crocs Gulf, LLC (“Crocs Gulf”) for the purpose of selling our products in the United Arab Emirates. We have determined that Crocs Gulf is also a VIE for which we are the primary beneficiary due our variable interest in Crocs Gulf’s equity and because we currently control all of the VIE’s business activities and will absorb all of its expected residual returns and expected losses. All voting and dividend rights have been assigned to us. As of December 31, 2012 and 2011, the consolidated financial statements included $2.5 million and $1.4 million in total assets of Crocs Gulf, respectively, which primarily consisted of cash and cash equivalents, inventory and property and equipment. The total assets as of December 31, 2012 were partially offset by $0.2 million in total liabilities, which primarily consisted of accounts payable and accrued expenses, excluding liabilities related to the support provided by us. The total assets as of December 31, 2011 were partially offset by an immaterial amount of total liabilities primarily consisting of accrued expenses, excluding intercompany payables.

Noncontrolling Interests—As of December 31, 2012, all of our subsidiaries were, in substance, wholly owned.

Concentrations of Risk—We are exposed to concentrations of risks in the following categories.

Cash and cash equivalents—Our cash and cash equivalents are maintained in several different financial institutions in amounts that typically exceed U.S. federally insured limits or in financial institutions in international jurisdictions where insurance is not provided and restrictions may exist.

As we are a global business, we have cash and cash equivalent balances which are located in various countries and are denominated in various currencies. Most of the cash balances held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal and state income

 

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Table of Contents

taxes less applicable foreign tax credits. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. Certain countries, including China, have monetary laws which may limit our ability to utilize cash resources in those countries for operations in other countries. These limitations may affect our ability to fully utilize our cash and cash equivalent resources for needs in the U.S. or other countries and could adversely affect our liquidity. As of December 31, 2012, we held $272.0 million of our total $294.3 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the $272.0 million held in international locations, $38.2 million could potentially be restricted, as described above.

Accounts receivable—We have not experienced any significant losses in such accounts and believe we are not exposed to significant credit risk. We consider any concentration of credit risk related to accounts receivable to be mitigated by our credit policy, the insignificance of outstanding balances owed by each individual customer at any point in time and the geographic dispersion of our customers.

Manufacturing sources—We rely on a limited source of internal and external manufacturers. Establishing a replacement source could require significant additional time and expense.

Suppliers of certain raw materials—We source the elastomer resins that constitute the primary raw materials used in compounding Croslite, which we use to produce our footwear products, from multiple suppliers. If the suppliers we rely on for elastomer resins were to cease production of these materials, we may not be able to obtain suitable substitute materials in time to avoid interruption of our production cycle, if at all. We may also have to pay materially higher prices in the future for the elastomer resins or any substitute materials we use, which would increase our production costs and could have a materially adverse impact on our margins and results of operations.

Reclassifications—Certain prior period amounts presented in the consolidated financial statements have been reclassified to conform to current period presentation as follows. We reclassified ‘Foreign currency transaction (gains) losses, net’ line item from ‘Income from operations’ to ‘Income before income taxes’ in the Consolidated Statements of Operations. We also reclassified (gains) losses on our derivative contracts from ‘Other (income) expense’ to the ‘Foreign currency transactions (gains) losses, net’ line item. As a result of these reclassifications, ‘Income from operations’ decreased $5.4 million and $2.9 million, respectively, for the years ended December 31, 2011 and 2010.

Summary of Significant Accounting Policies

Management Estimates—The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management believes that the estimates, judgments and assumptions made when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts, sales returns, impairment assessments and charges, recoverability of assets (including deferred tax assets), uncertain tax positions, share-based compensation expense, the assessment of lower of cost or market on inventory, useful lives assigned to long-lived assets, depreciation and provisions for contingencies are reasonable based on information available at the time they are made. Management also makes estimates in the assessments of potential losses in relation to tax and customs matters and threatened or pending legal proceedings (see Note 15—Legal Proceedings). Actual results could materially differ from these estimates. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If there is the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is deemed probable.