skx-10q_20180331.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2018

OR

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

For the transition period from ____ to____

Commission File Number 001-14429

 

SKECHERS U.S.A., INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-4376145

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

228 Manhattan Beach Blvd.

Manhattan Beach, California

 

90266

(Address of Principal Executive Office)

 

(Zip Code)

(310) 318-3100

(Registrant’s Telephone Number, Including Area Code)

 

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

Indicate by check mark whether the registrant has submitted electronically 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 No

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

 

 

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

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

The number of shares of Class A Common Stock outstanding as of May 1, 2018: 135,799,652.

The number of shares of Class B Common Stock outstanding as of May 1, 2018: 24,163,312.

 

 

 

 

 


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

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited):

 

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Earnings

4

 

Condensed Consolidated Statements of Comprehensive Income

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

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

19

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

Item 4.

Controls and Procedures

28

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

29

 

Item 1A.

Risk Factors

31

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

Item 6.

Exhibits

33

 

 

Signatures

34

 

 

 

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par values)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

700,071

 

 

$

736,431

 

Trade accounts receivable, less allowances of $19,885 in 2018 and $51,180 in 2017

 

 

692,569

 

 

 

405,921

 

Other receivables

 

 

31,271

 

 

 

27,083

 

Total receivables

 

 

723,840

 

 

 

433,004

 

Inventories

 

 

800,323

 

 

 

873,016

 

Prepaid expenses and other current assets

 

 

68,920

 

 

 

62,573

 

Total current assets

 

 

2,293,154

 

 

 

2,105,024

 

Property, plant and equipment, net

 

 

552,540

 

 

 

541,601

 

Deferred tax assets

 

 

29,575

 

 

 

29,922

 

Other assets, net

 

 

60,715

 

 

 

58,535

 

Total non-current assets

 

 

642,830

 

 

 

630,058

 

TOTAL ASSETS

 

$

2,935,984

 

 

$

2,735,082

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current installments of long-term borrowings

 

$

1,805

 

 

$

1,801

 

Short-term borrowings

 

 

12,200

 

 

 

8,011

 

Accounts payable

 

 

524,427

 

 

 

505,334

 

Accrued expenses

 

 

135,588

 

 

 

82,202

 

Total current liabilities

 

 

674,020

 

 

 

597,348

 

Long-term borrowings, excluding current installments

 

 

70,646

 

 

 

71,103

 

Deferred tax liabilities

 

 

161

 

 

 

161

 

Other long-term liabilities

 

 

107,832

 

 

 

118,259

 

Total non-current liabilities

 

 

178,639

 

 

 

189,523

 

Total liabilities

 

 

852,659

 

 

 

786,871

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000 shares authorized; none issued

   and outstanding

 

 

 

 

 

 

Class A common stock, $0.001 par value; 500,000 shares authorized;

   132,414 and 131,784 shares issued and outstanding at March 31, 2018

   and December 31, 2017, respectively

 

 

132

 

 

 

132

 

Class B common stock, $0.001 par value; 75,000 shares authorized;

   24,163 and 24,545 shares issued and outstanding at March 31, 2018

   and December 31, 2017, respectively

 

 

24

 

 

 

24

 

Additional paid-in capital

 

 

450,377

 

 

 

453,417

 

Accumulated other comprehensive loss

 

 

(12,250

)

 

 

(14,744

)

Retained earnings

 

 

1,507,887

 

 

 

1,390,235

 

Skechers U.S.A., Inc. equity

 

 

1,946,170

 

 

 

1,829,064

 

Non-controlling interests

 

 

137,155

 

 

 

119,147

 

Total stockholders' equity

 

 

2,083,325

 

 

 

1,948,211

 

TOTAL LIABILITIES AND EQUITY

 

$

2,935,984

 

 

$

2,735,082

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


 

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

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net sales

 

$

1,250,078

 

 

$

1,072,808

 

Cost of sales

 

 

666,974

 

 

 

596,310

 

Gross profit

 

 

583,104

 

 

 

476,498

 

Royalty income

 

 

5,522

 

 

 

4,230

 

 

 

 

588,626

 

 

 

480,728

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling

 

 

84,446

 

 

 

73,809

 

General and administrative

 

 

355,381

 

 

 

282,496

 

 

 

 

439,827

 

 

 

356,305

 

Earnings from operations

 

 

148,799

 

 

 

124,423

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

755

 

 

 

413

 

Interest expense

 

 

(1,078

)

 

 

(1,490

)

Other, net

 

 

3,403

 

 

 

696

 

Total other income (expense)

 

 

3,080

 

 

 

(381

)

Earnings before income tax expense

 

 

151,879

 

 

 

124,042

 

Income tax expense

 

 

14,621

 

 

 

17,407

 

Net earnings

 

 

137,258

 

 

 

106,635

 

Less: Net earnings attributable to non-controlling interests

 

 

19,606

 

 

 

12,640

 

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

 

$

117,652

 

 

$

93,995

 

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

 

 

 

 

 

 

 

 

Basic

 

$

0.75

 

 

$

0.61

 

Diluted

 

$

0.75

 

 

$

0.60

 

Weighted average shares used in calculating net earnings per

   share attributable to Skechers U.S.A, Inc.:

 

 

 

 

 

 

 

 

Basic

 

 

156,433

 

 

 

155,097

 

Diluted

 

 

157,630

 

 

 

155,927

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


 

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

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net earnings

 

$

137,258

 

 

$

106,635

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Gain on foreign currency translation adjustment

 

 

5,333

 

 

 

4,583

 

Comprehensive income

 

 

142,591

 

 

 

111,218

 

Less: Comprehensive income attributable to non-controlling

   interests

 

 

22,445

 

 

 

14,323

 

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

 

$

120,146

 

 

$

96,895

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


 

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

137,258

 

 

$

106,635

 

Adjustments to reconcile net earnings to net cash provided by

(used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of property, plant and equipment

 

 

24,175

 

 

 

18,879

 

Amortization of other assets

 

 

3,001

 

 

 

3,454

 

Provision for bad debts and returns

 

 

13,571

 

 

 

11,988

 

Non-cash share-based compensation

 

 

8,678

 

 

 

6,628

 

Deferred income taxes

 

 

435

 

 

 

 

Gain (loss) on non-current assets

 

 

17

 

 

 

(585

)

Net foreign currency adjustments

 

 

(469

)

 

 

(492

)

(Increase) decrease in assets:

 

 

 

 

 

 

 

 

Receivables

 

 

(275,837

)

 

 

(233,676

)

Inventories

 

 

79,926

 

 

 

117,963

 

Prepaid expenses and other current assets

 

 

(7,910

)

 

 

(180

)

Other assets

 

 

(711

)

 

 

(4,087

)

Increase (decrease) in liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

11,097

 

 

 

(98,279

)

Accrued expenses and other long-term liabilities

 

 

10,307

 

 

 

(12,653

)

Net cash provided by (used in) operating activities

 

 

3,538

 

 

 

(84,405

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(34,464

)

 

 

(28,882

)

Purchases of investments

 

 

(1,468

)

 

 

(684

)

Proceeds from sales of investments

 

 

347

 

 

 

240

 

Net cash used in investing activities

 

 

(35,585

)

 

 

(29,326

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments on long-term debt

 

 

(458

)

 

 

(444

)

Proceeds from long-term debt

 

 

 

 

 

2,065

 

Proceeds (payments) from short-term borrowings

 

 

4,189

 

 

 

(219

)

Payments for taxes related to net share settlement of equity awards

 

 

(8,718

)

 

 

 

Repurchase of Class A common stock

 

 

(3,000

)

 

 

 

Distributions to non-controlling interests of consolidated entity

 

 

(4,437

)

 

 

(892

)

Contributions from non-controlling interests of consolidated entity

 

 

 

 

 

46

 

Net cash provided by (used in) financing activities

 

 

(12,424

)

 

 

556

 

Net decrease in cash and cash equivalents

 

 

(44,471

)

 

 

(113,175

)

Effect of exchange rates on cash and cash equivalents

 

 

8,111

 

 

 

2,452

 

Cash and cash equivalents at beginning of the period

 

 

736,431

 

 

 

718,536

 

Cash and cash equivalents at end of the period

 

$

700,071

 

 

$

607,813

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

1,080

 

 

$

1,455

 

Income taxes, net

 

 

16,283

 

 

 

10,538

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

6


 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018 and 2017

(Unaudited)

(1)

GENERAL

Basis of Presentation

The accompanying condensed consolidated financial statements of Skechers U.S.A., Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S‑X. Accordingly, they do not include certain notes and financial presentations normally required under U.S. GAAP for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2018.

Inventories

Inventories, principally finished goods, are stated at the lower of cost (based on the first-in, first-out method) or market (net realizable value). Cost includes shipping and handling fees and costs, which are subsequently expensed to cost of sales. The Company provides for estimated losses from obsolete or slow-moving inventories, and writes down the cost of inventory at the time such determinations are made. Reserves are estimated based on inventory on hand, historical sales activity, industry trends, the retail environment, and the expected net realizable value. The net realizable value is determined using estimated sales prices of similar inventory through off-price or discount store channels.

Fair Value of Financial Instruments

The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt.

As of August 12, 2015, the Company entered into an interest rate swap agreement concurrent with refinancing its domestic distribution center construction loan (see Note 2). The fair value of the interest rate swap was determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipt was based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with U.S. GAAP, credit valuation adjustments were incorporated to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. The majority of the inputs used to value the interest rate swap were within Level 2 of the fair value hierarchy. As of March 31, 2018 and December 31, 2017, the interest rate swap was a Level 2 derivative and HF Logistics is responsible for any amounts related to the interest rate swap agreement.

Use of Estimates

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

 

7


 

Revenue Recognition

The Company recognizes revenue when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.  The Company derives income from the sale of footwear and royalties earned from licensing the Skechers brand. For North America, goods are shipped Free on Board (“FOB”) shipping point directly from the Company’s domestic distribution center in Rancho Belago, California. For international wholesale customers product is shipped FOB shipping point, (i) direct from the Company’s distribution center in Liege, Belgium, (ii) to third-party distribution centers in Central America, South America and Asia, (iii) directly from third-party manufacturers to our other international customers.  For our distributor sales, the goods are generally delivered directly from the independent factories to third-party distribution centers or to our distributors’ freight forwarders on a Free Named Carrier (“FCA”) basis. The Company recognizes revenue on wholesale sales upon shipment as that is when the customer obtains control of the promised goods. Related costs paid to third-party shipping companies are recorded as cost of sales and are accounted for as a fulfillment cost and not as a separate performance obligation.  The Company generates retail revenues primarily from the sale of footwear to customers at retail locations or through the Company’s websites. For our in-store sales, the Company recognizes revenue at the point of sale. For sales made through our websites, we recognize revenue upon shipment to the customer which is when the customer obtains control of the promised good.  Sales and value added taxes collected from e-commerce or retail customers are excluded from reported revenues.  

The Company records accounts receivable at the time of shipment when the Company’s right to the consideration becomes unconditional. The Company typically extends credit terms to our wholesale customers based on their creditworthiness and generally does not receive advance payments. Generally, wholesale customers do not have the right to return goods, however, the Company periodically decides to accept returns or provide customers with credits. Allowances for estimated returns, discounts, doubtful accounts and chargebacks are provided for when related revenue is recorded.  Retail and e-commerce sales represent amounts due from credit card companies and are generally collected within a few days of the purchase. As such, the Company has determined that no allowance for doubtful accounts is necessary.

The Company earns royalty income from its licensing arrangements which qualify as symbolic licenses rather than functional licenses. Upon signing a new licensing agreement, we receive up-front fees, which are generally characterized as prepaid royalties. These fees are initially deferred and recognized as revenue as earned (i.e., as licensed sales are reported to the Company or on a straight-line basis over the term of the agreement). The first calculated royalty payment is based on actual sales of the licensed product or, in some cases, minimum royalty payments. The Company calculates and accrues estimated royalties based on the agreement terms and correspondence with the licensees regarding actual sales.

Judgments

The Company considered several factors in determining that control transfers to the customer upon shipment of products. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership at the time of shipment.   The Company accrues a reserve for product returns at the time of sale based on our historical experience. The Company also accrues amounts for goods expected to be returned in salable condition. As of March 31, 2018 and December 31, 2017, the Company’s sales returns reserve totaled $30.7 million and $43.4 million, respectively, and was included in other accrued liabilities and accounts receivable in the condensed consolidated balance sheet, respectively.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers,” (“ASU 2014-09”) which amended the FASB Accounting Standards Codification (“ASC”) and created a new Topic ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). This amendment prescribes that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The amendment supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance throughout the Industry Topics of the Codification. For the Company’s annual and interim reporting periods the mandatory adoption date of ASC 606 is January 1, 2018, and there will be two methods of adoption allowed, either a full retrospective adoption or a modified retrospective adoption. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to the first quarter of 2018. In March 2016, April 2016, May 2016, and December 2016, the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20, respectively, as clarifications to ASU 2014-09. ASU 2016‑08 clarifies how to identify the unit of accounting for the principal versus agent evaluation, how to apply the control principle to certain types of arrangements, such as service transactions, and reframed the indicators in the guidance to focus on evidence that an entity is acting as a principal rather than as an agent. ASU 2016-10 clarifies the existing guidance on identifying performance obligations and licensing implementation. ASU 2016-12 adds practical expedients related to the transition for contract modifications and further defines a completed contract, clarifies the objective of the collectability assessment and how revenue is recognized if collectability is not probable, and when non-cash considerations should be measured. ASU 2016-20 corrects or improves guidance in thirteen narrow focus aspects of the guidance. The effective dates for these

 

8


 

ASUs are the same as the effective date for ASU No. 2014-09, for the Company’s annual and interim periods beginning January 1, 2018. These ASU’s also require enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows.  The Company adopted the new revenue standard effective January 1, 2018 using the modified retrospective method.  The adoption of these standards did not have a material impact on the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The new standard requires lessees to recognize most leases on the balance sheet, which will increase lessees’ reported assets and liabilities. ASU 2016-02 is effective for the Company’s annual and interim reporting periods beginning January 1, 2019. ASU 2016-02 mandates a modified retrospective transition method. The Company is currently assessing the impact of the new standard on its consolidated financial statements, but anticipates an increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases, such as real estate leases for corporate headquarters, administrative offices, retail stores, showrooms, and distribution facilities, as well as additional disclosure on all of the Company’s lease obligations. The earnings statement recognition of lease expense is not expected to change materially from the current methodology.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02). The standard permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 is effective for the Company’s annual and interim reporting periods beginning December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of ASU 2018-02; however, at the current time the Company does not expect that the adoption of this ASU will have a material impact on its condensed consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, “Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). The standard requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs. The standard will require any deferred taxes not yet recognized on intra‑entity transfers to be recorded to retained earnings under a modified retrospective approach. Early adoption is permitted. Effective January 1, 2018, the Company adopted ASU 2016-16.  The adoption of ASU 2016-16 did not have a material impact on its condensed consolidated financial statements.

(2)

LINE OF CREDIT, SHORT-TERM AND LONG-TERM BORROWINGS

The Company had $4.4 million of outstanding letters of credit as of March 31, 2018 and December 31, 2017, respectively, and approximately $12.2 million and $8.0 million in short-term borrowings as of March 31, 2018 and December 31, 2017, respectively.

Long-term borrowings at March 31, 2018 and December 31, 2017 are as follows (in thousands):

 

 

 

2018

 

 

2017

 

Note payable to banks, due in monthly installments of $337.1

   (includes principal and interest), variable-rate interest at

   3.88% per annum, secured by property, balloon payment of

   $62,843 due August 2020

 

$

66,240

 

 

$

66,604

 

Note payable to Luen Thai Enterprise, Ltd., balloon payment

   of $5,741 due January 2021

 

 

5,741

 

 

 

5,745

 

Note payable to TCF Equipment Finance, Inc., due in monthly

   installments of $31 (includes principal and interest), fixed-

   rate interest at 5.24% per annum, due July 2019

 

 

470

 

 

 

555

 

Subtotal

 

 

72,451

 

 

 

72,904

 

Less current installments

 

 

1,805

 

 

 

1,801

 

Total long-term borrowings

 

$

70,646

 

 

$

71,103

 

 

 

9


 

The Company’s long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions. The Company is in compliance with its non-financial covenants, including any cross-default provisions and financial covenants of its long-term borrowings as of March 31, 2018.

On June 30, 2015, the Company entered into a $250.0 million loan and security agreement, subject to increase by up to $100.0 million, (the “Credit Agreement”), with the following lenders: Bank of America, N.A., MUFG Union Bank, N.A. and HSBC Bank USA, National Association. The Credit Agreement matures on June 30, 2020. The Credit Agreement replaces the credit agreement dated June 30, 2009, which expired on June 30, 2015. The Credit Agreement permits the Company and certain of its subsidiaries to borrow based on a percentage of eligible accounts receivable plus the sum of (a) the lesser of (i) a percentage of eligible inventory to be sold at wholesale and (ii) a percentage of net orderly liquidation value of eligible inventory to be sold at wholesale, plus (b) the lesser of (i) a percentage of the value of eligible inventory to be sold at retail and (ii) a percentage of net orderly liquidation value of eligible inventory to be sold at retail, plus (c) the lesser of (i) a percentage of the value of eligible in-transit inventory and (ii) a percentage of the net orderly liquidation value of eligible in-transit inventory. Borrowings bear interest at the Company’s election based on (a) LIBOR or (b) the greater of (i) the Prime Rate, (ii) the Federal Funds Rate plus 0.5% and (iii) LIBOR for a 30-day period plus 1.0%, in each case, plus an applicable margin based on the average daily principal balance of revolving loans available under the Credit Agreement. The Company pays a monthly unused line of credit fee of 0.25%, payable on the first day of each month in arrears, which is based on the average daily principal balance of outstanding revolving loans and undrawn amounts of letters of credit outstanding during such month. The Credit Agreement further provides for a limit on the issuance of letters of credit to a maximum of $100.0 million. The Credit Agreement contains customary affirmative and negative covenants for secured credit facilities of this type, including covenants that will limit the ability of the Company and its subsidiaries to, among other things, incur debt, grant liens, make certain acquisitions, dispose of assets, effect a change of control of the Company, make certain restricted payments including certain dividends and stock redemptions, make certain investments or loans, enter into certain transactions with affiliates and certain prohibited uses of proceeds. The Credit Agreement also requires compliance with a minimum fixed-charge coverage ratio if Availability drops below 10% of the Revolver Commitments (as such terms are defined in the Credit Agreement) until the date when no event of default has existed and Availability has been over 10% for 30 consecutive days. The Company paid closing and arrangement fees of $1.1 million on this facility which are included in other assets in the condensed consolidated balance sheets, and are being amortized to interest expense over the five-year life of the facility. As of March 31, 2018 and December 31, 2017, there was $0.1 million outstanding under the Company’s credit facilities, classified as short-term borrowings in the Company’s condensed consolidated balance sheets. The remaining balance in short-term borrowings, as of March 31, 2018, is related to the Company’s international operations.

On April 30, 2010, HF Logistics-SKX, LLC (the “JV”), through its subsidiary HF-T1, entered into a construction loan agreement with Bank of America, N.A., as administrative agent and as a lender, and Raymond James Bank, FSB, as a lender (collectively, the "Construction Loan Agreement"), pursuant to which the JV obtained a loan of up to $55.0 million used for construction of the project on certain property (the "Original Loan"). On November 16, 2012, HF-T1 executed a modification to the Construction Loan Agreement (the "Modification"), which added OneWest Bank, FSB as a lender, and increased the borrowings under the Original Loan to $80.0 million and extended the maturity date of the Original Loan to October 30, 2015. On August 11, 2015, the JV, through HF-T1, entered into an amended and restated loan agreement with Bank of America, N.A., as administrative agent and as a lender, and CIT Bank, N.A. (formerly known as OneWest Bank, FSB) and Raymond James Bank, N.A., as lenders (collectively, the "Amended Loan Agreement"), which amends and restates in its entirety the Construction Loan Agreement and the Modification.

As of the date of the Amended Loan Agreement, the outstanding principal balance of the Original Loan was $77.3 million. In connection with this refinancing of the Original Loan, the JV, the Company and its joint-venture partner HF Logistics (“HF”) agreed that the Company would make an additional capital contribution of $38.7 million to the JV, through HF-T1, to make a prepayment on the Original Loan based on the Company’s 50% equity interest in the JV. The prepayment equaled the Company’s 50% share of the outstanding principal balance of the Original Loan. Under the Amended Loan Agreement, the parties agreed that the lenders would loan $70.0 million to HF-T1 (the "New Loan"). The New Loan was used by the JV, through HF-T1, to (i) refinance all amounts owed on the Original Loan after taking into account the prepayment described above, (ii) pay $0.9 million in accrued interest, loan fees and other closing costs associated with the New Loan and (iii) make a distribution of $31.3 million less the amounts described in clause (ii) to HF. Pursuant to the Amended Loan Agreement, the interest rate on the New Loan is the LIBOR Daily Floating Rate (as defined in the Amended Loan Agreement) plus a margin of 2%. The maturity date of the New Loan is August 12, 2020, which HF-T1 has one option to extend by an additional 24 months, or until August 12, 2022, upon payment of a fee and satisfaction of certain customary conditions. On August 11, 2015, HF-T1 and Bank of America, N.A. entered into an ISDA Master Agreement (together with the schedule related thereto, the "Swap Agreement") to govern derivative and/or hedging transactions that HF-T1 concurrently entered into with Bank of America, N.A. Pursuant to the Swap Agreement, on August 14, 2015, HF-T1 entered into a confirmation of swap transactions (the "Interest Rate Swap") with Bank of America, N.A. The Interest Rate Swap has an effective date of August 12, 2015 and a maturity date of August 12, 2022, subject to early termination at the option of HF-T1, commencing on August 1, 2020. The Interest Rate Swap fixes the effective interest rate of the New Loan at 4.08% per annum. Pursuant to the terms of the JV, HF is

 

10


 

responsible for the related interest expense payments on the New Loan, and any amounts related to the Swap Agreement. The full amount of interest expense paid related to the New Loan has been included in the Company’s consolidated statement of equity within non-controlling interests. The Amended Loan Agreement and the Swap Agreement are subject to customary covenants and events of default. Bank of America, N.A. also acts as a lender and syndication agent under the Credit Agreement dated June 30, 2015.

(3)

NON-CONTROLLING INTERESTS

The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products primarily throughout Asia or to construct the Company’s domestic distribution facility. These joint ventures are variable interest entities (“VIEs”) under ASC 810-10-15-14. The Company’s determination of the primary beneficiary of a VIE considers all relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. The Company has determined for its VIEs that the Company is the primary beneficiary because it has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Accordingly, the Company includes the assets and liabilities and results of operations of these entities in its condensed consolidated financial statements, even though the Company may not hold a majority equity interest. There have been no changes during 2018 in the accounting treatment or characterization of any previously identified VIE. The Company continues to reassess these relationships quarterly. The assets of these joint ventures are restricted in that they are not available for general business use outside the context of such joint ventures. The holders of the liabilities of each joint venture have no recourse to the Company. The Company does not have a variable interest in any unconsolidated VIEs.

The following VIEs are consolidated into the Company’s condensed consolidated financial statements and the carrying amounts and classification of assets and liabilities were as follows (in thousands):

 

HF Logistics-SKX, LLC

 

March 31, 2018

 

 

December 31, 2017

 

Current assets

 

$

2,474

 

 

$

1,540

 

Non-current assets

 

 

102,093

 

 

 

103,407

 

Total assets

 

$

104,567

 

 

$

104,947

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

3,155

 

 

$

2,718

 

Non-current liabilities

 

 

65,914

 

 

 

66,367

 

Total liabilities

 

$

69,069

 

 

$

69,085

 

 

 

 

 

 

 

 

 

 

Distribution joint ventures (1)

 

March 31, 2018

 

 

December 31, 2017

 

Current assets

 

$

490,142

 

 

$

389,687

 

Non-current assets

 

 

89,940

 

 

 

90,972

 

Total assets

 

$

580,082

 

 

$

480,659

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

250,847

 

 

$

188,700

 

Non-current liabilities

 

 

6,072

 

 

 

9,201

 

Total liabilities

 

$

256,919

 

 

$

197,901

 

_____________________

(1)

Distribution joint ventures include Skechers Footwear Ltd. (Israel), Skechers China Limited, Skechers Korea Limited, Skechers Southeast Asia Limited, Skechers (Thailand) Limited, Skechers Retail India Private Limited, and Skechers South Asia Private Limited.

The following is a summary of net earnings attributable to, distributions to and contributions from non-controlling interests (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net earnings attributable to non-controlling interests

 

$

19,606

 

 

$

12,640

 

Distributions to:

 

 

 

 

 

 

 

 

HF Logistics-SKX, LLC

 

 

1,327

 

 

 

892

 

Skechers China Limited

 

 

3,110

 

 

 

 

Contributions from:

 

 

 

 

 

 

 

 

Skechers Footwear Ltd. (Israel)

 

 

 

 

 

46

 

 

11


 

 

(4)

STOCKHOLDERS’ EQUITY

During the three months ended March 31, 2018, 381,876 shares of Class B common stock were converted into shares of Class A common stock. During the three months ended March 31, 2017, no shares of Class B common stock were converted into shares of Class A common stock.

The following table reconciles equity attributable to non-controlling interests (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Non-controlling interests, beginning of period

 

$

119,147

 

 

$

81,881

 

Net earnings

 

 

19,606

 

 

 

12,640

 

Foreign currency translation adjustment

 

 

2,839

 

 

 

1,683

 

Capital contributions

 

 

 

 

 

46

 

Capital distributions

 

 

(4,437

)

 

 

(892

)

Non-controlling interests, end of period

 

$

137,155

 

 

$

95,358

 

 

(5)SHARE REPURCHASE PROGRAM

On February 6, 2018, the Company's Board of Directors authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which the Company may, from time to time, purchase shares of its Class A common stock, par value $0.001 per share (“Class A common stock”), for an aggregate repurchase price not to exceed $150.0 million. The Share Repurchase Program expires on February 6, 2021. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements and other relevant factors. The Share Repurchase Program does not obligate the Company to acquire any particular amount of shares of Class A common stock and the program may be suspended or discontinued at any time.

The following table provides a summary of the Company’s stock repurchase activities during the three months ended March 31, 2018:

 

 

 

March 31, 2018

 

Shares repurchased

 

 

75,991

 

Average cost per share

 

$

39.47

 

Total cost of shares repurchased

 

$

3,000,000

 

(6)

EARNINGS PER SHARE

Basic earnings per share represent net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share, in addition to the weighted average determined for basic earnings per share, includes potential dilutive common shares using the treasury stock method.

The Company has two classes of issued and outstanding common stock: Class A Common Stock and Class B Common Stock. Holders of Class A Common Stock and holders of Class B Common Stock have substantially identical rights, including rights with respect to any declared dividends or distributions of cash or property and the right to receive proceeds on liquidation or dissolution of the Company after payment of the Company’s indebtedness. The two classes have different voting rights, with holders of Class A Common Stock entitled to one vote per share while holders of Class B Common Stock are entitled to ten votes per share on all matters submitted to a vote of stockholders. The Company uses the two-class method for calculating net earnings per share. Basic and diluted net earnings per share of Class A Common Stock and Class B Common Stock are identical. The shares of Class B Common Stock are convertible at any time at the option of the holder into shares of Class A Common Stock on a share-for-share basis. In addition, shares of Class B Common Stock will be automatically converted into a like number of shares of Class A Common Stock upon transfer to any person or entity who is not a permitted transferee.

 

12


 

The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating basic earnings per share (in thousands, except per share amounts):

 

 

 

Three Months Ended March 31,

 

Basic earnings per share

 

2018

 

 

2017

 

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

 

$

117,652

 

 

$

93,995

 

Weighted average common shares outstanding

 

 

156,433

 

 

 

155,097

 

Basic earnings per share attributable to

   Skechers U.S.A., Inc.

 

$

0.75

 

 

$

0.61

 

 

The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating diluted earnings per share (in thousands, except per share amounts):

 

 

 

Three Months Ended March 31,

 

Diluted earnings per share

 

2018

 

 

2017

 

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

 

$

117,652

 

 

$

93,995

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

156,433

 

 

 

155,097

 

Dilutive effect of nonvested shares

 

 

1,197

 

 

 

830

 

Weighted average common shares outstanding

 

 

157,630

 

 

 

155,927

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share attributable to

   Skechers U.S.A., Inc.

 

$

0.75

 

 

$

0.60

 

 

There were 190,364 and 126,636 shares excluded from the computation of diluted earnings per share for the three months ended March 31, 2018 and 2017, respectively because they are anti-dilutive.

(7)

STOCK COMPENSATION

 

(a)

Incentive Award Plan

On April 16, 2007, the Company’s Board of Directors adopted the 2007 Incentive Award Plan (the “2007 Plan”), which became effective upon approval by the Company’s stockholders on May 24, 2007 and expired pursuant to its terms on May 24, 2017.  

On April 17, 2017, the Company’s Board of Directors adopted the 2017 Incentive Award Plan (the “2017 Plan”), which became effective upon approval by the Company’s stockholders on May 23, 2017.  The 2017 Plan replaced and superseded in its entirety the 2007 Plan.  A total of 10,000,000 shares of Class A Common Stock are reserved for issuance under the 2017 Plan, which provides for grants of ISOs, non-qualified stock options, restricted stock and various other types of equity awards as described in the plan to the employees, consultants and directors of the Company and its subsidiaries. The 2017 Plan is administered by the Company’s Board of Directors with respect to awards to non-employee directors and by the Company’s Compensation Committee with respect to other eligible participants.

For stock-based awards, the Company recognized compensation expense based on the grant date fair value. Share‑based compensation expense was $8.7 million and $6.6 million for the three months ended March 31, 2018 and 2017, respectively.  During the quarter ended March 31, 2018, the Company redeemed 212,930 shares of Class A Common Stock for $8.7 million to satisfy employee tax withholding requirements.

 

13


 

A summary of the status and changes of the Company’s nonvested shares related to the 2007 Plan and the 2017 Plan, as of and for the three months ended March 31, 2018 is presented below:

 

 

 

Shares

 

 

Weighted Average

Grant-Date Fair Value

 

Nonvested at December 31, 2017

 

 

2,303,557

 

 

$

26.25

 

Granted

 

 

1,637,500

 

 

 

39.00

 

Vested

 

 

(537,500

)

 

 

18.93

 

Cancelled

 

 

(18,333

)

 

 

30.89

 

Nonvested at March 31, 2018

 

 

3,385,224

 

 

 

33.55

 

 

As of March 31, 2018, there was $92.4 million of unrecognized compensation cost related to nonvested common shares. The cost is expected to be amortized over a weighted average period of 3.0 years.

 

(b)

Stock Purchase Plan

On April 17, 2017, the Company’s Board of Directors adopted the 2018 Employee Stock Purchase Plan (the “2018 ESPP”), which the Company’s stockholders approved on May 23, 2017. The 2018 Employee Stock Purchase Plan provides eligible employees of the Company and its subsidiaries with the opportunity to purchase shares of the Company’s Class A Common Stock at a purchase price equal to 85% of the Class A Common Stock’s fair market value on the first trading day or last trading day of each purchase period, whichever is lower. The 2018 ESPP generally provides for two six-month purchase periods every twelve months: June 1 through November 30 and December 1 through May 31, except that the initial purchase period under the 2018 ESPP will have a duration of five months, commencing on January 1, 2018 and ending on May 31, 2018. Eligible employees participating in the 2018 ESPP will, for a purchase period, be able to invest up to 15% of their compensation through payroll deductions during each purchase period. A total of 5,000,000 shares of Class A Common Stock are available for sale under the 2018 ESPP.

(8)

INCOME TAXES

Income tax expense and the effective tax rate for the three months ended March 31, 2018 and 2017 were as follows (in thousands, except the effective tax rate):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Income tax expense

 

$

14,621

 

 

$

17,407

 

Effective tax rate

 

 

9.6

%

 

 

14.0

%

 

The tax provisions for the three months ended March 31, 2018 and 2017 were computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year. The Company estimates its effective annual tax rate for 2018 to be between 12% and 17%, which is subject to management’s quarterly review and revision, as necessary.

The Company’s provision for income tax expense and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign earnings (loss) before income taxes. In the foreign jurisdictions in which the Company has operations, the applicable statutory rates range from 0% to 34%, which is on average significantly lower than the U.S. federal and state combined statutory rate of approximately 25%.  Due to the enactment of Tax Cuts and Jobs Act (“the Tax Act”) in December 2017, the Company is subject to a tax on global intangible low-taxed income (“GILTI”).  GILTI is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for temporary differences including outside basis differences expected to reverse as GILTI. The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in its effective tax rate calculation for the three months ended March 31, 2018.

 

14


 

The SEC staff issued Staff Accounting Bulletin 118, (“SAB 118”), which provides guidance on accounting for certain tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification 740 (“ASC 740”). For the three months ended March 31, 2018, the Company obtained additional information which reduced the Company’s provisional accounting for certain tax effects of the Tax Act by $8.0 million, from $99.9 million as reported at December 31, 2017, to $91.9 million at March 31, 2018. Additional work is still necessary to complete a more detailed analysis of the Company's accounting for certain tax effects of the Tax Act. Any subsequent adjustment to certain accounting for the tax effects of the Tax Act will be recorded to current tax expense during the quarter of 2018 when the analysis is completed.

For the three months ended March 31, 2018, the decrease in the Company’s effective tax rate as compared to the three months ended March 31, 2017, was primarily due to an $8.0 million reduction in the Company’s accounting for certain tax effects of the Tax Act, and an increase of $1.1 million in excess tax benefits under ASU 2016-09.

As of March 31, 2018, the Company had approximately $700.1 million in cash and cash equivalents, of which $297.4 million, or 42.5%, was held outside the U.S. Of the $297.4 million held by the Company’s non-U.S. subsidiaries, approximately $124.9 million is available for repatriation to the U.S. without incurring U.S. income taxes and applicable non-U.S. income and withholding taxes in excess of the amounts accrued in the Company’s condensed consolidated financial statements as of March 31, 2018.

The Company’s cash and cash equivalents held in the U.S. and cash provided from operations are sufficient to meet the Company’s liquidity needs in the U.S. for the next twelve months.  However, in anticipation of the needs of the Company’s share repurchase program and the need to provide payment of the Company’s provisional Transition Tax liability, the Company may repatriate certain funds held outside the U.S. for which all applicable U.S. and non-U.S. tax has been fully provided as of March 31, 2018. Because of the need for cash for operating capital and continued overseas expansion, the Company also does not foresee the need for any of its foreign subsidiaries to distribute funds up to an intermediate foreign parent company in any form of taxable dividend. Under current applicable tax laws, if the Company chooses to repatriate some or all of the funds the Company has designated as indefinitely reinvested outside the U.S., the amount repatriated would not be subject to U.S. income taxes but may be subject to applicable non-U.S. income and withholding taxes.

(9)

BUSINESS AND CREDIT CONCENTRATIONS

The Company generates sales in the United States; however, several of its products are sold into various foreign countries, which subjects the Company to the risks of doing business abroad. In addition, the Company operates in the footwear industry, and its business depends on the general economic environment and levels of consumer spending. Changes in the marketplace may significantly affect management’s estimates and the Company’s performance. Management performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable, which generally do not require collateral from customers, were $317.8 million and $206.1 million before allowances for bad debts, sales returns and chargebacks at March 31, 2018 and December 31, 2017, respectively. Foreign accounts receivable, which in some cases are collateralized by letters of credit, were $394.6 million and $251.0 million before allowance for bad debts, sales returns and chargebacks at March 31, 2018 and December 31, 2017, respectively. The Company’s credit losses attributable to write-offs for the three months ended March 31, 2018 and 2017 were $2.0 million and $0.1 million, respectively.

Assets located outside the U.S. consist primarily of cash, accounts receivable, inventory, property, plant and equipment, and other assets. Net assets held outside the United States were $1.364 billion and $1.273 billion at March 31, 2018 and December 31, 2017, respectively.

The Company’s net sales to its five largest customers accounted for approximately 10.8% and 13.2% of total net sales for the three months ended March 31, 2018 and 2017, respectively. No customer accounted for more than 10.0% of the Company’s net sales during the three months ended March 31, 2018 and 2017. No customer accounted for more than 10.0% of trade receivables at March 31, 2018 or December 31, 2017.

 

15


 

The Company’s top five manufacturers produced the following, as a percentage of total production, for the three months ended March 31, 2018 and 2017:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Manufacturer #1

 

 

15.5

%

 

 

22.8

%

Manufacturer #2

 

 

11.9

%

 

 

10.9

%

Manufacturer #3

 

 

8.6

%

 

 

9.4

%

Manufacturer #4

 

 

6.9

%

 

 

5.6

%

Manufacturer #5

 

 

5.4

%

 

 

4.6

%

 

 

 

48.3

%

 

 

53.3

%

 

The majority of the Company’s products are produced in China and Vietnam. The Company’s operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations and revaluations, custom duties and related fees, various import controls and other monetary barriers, restrictions on the transfer of funds, labor unrest and strikes, and, in certain parts of the world, political instability. The Company believes it has acted to reduce these risks by diversifying manufacturing among various factories. To date, these business risks have not had a material adverse impact on the Company’s operations.

(10)

SEGMENT AND GEOGRAPHIC REPORTING

The Company has three reportable segments – domestic wholesale sales, international wholesale sales, and retail sales, which includes e-commerce sales. Management evaluates segment performance based primarily on net sales and gross profit. All other costs and expenses of the Company are analyzed on an aggregate basis, and these costs are not allocated to the Company’s segments. Net sales, gross margins, identifiable assets and additions to property and equipment for the domestic wholesale, international wholesale, retail sales segments on a combined basis were as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net sales:

 

 

 

 

 

 

 

 

Domestic wholesale

 

$

389,029

 

 

$

358,432

 

International wholesale

 

 

578,003

 

 

 

490,452

 

Retail

 

 

283,046

 

 

 

223,924

 

Total

 

$

1,250,078

 

 

$

1,072,808

 

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Gross profit:

 

 

 

 

 

 

 

 

Domestic wholesale

 

$

142,143

 

 

$

139,808

 

International wholesale

 

 

279,362

 

 

 

210,314

 

Retail

 

 

161,599

 

 

 

126,376

 

Total

 

$

583,104

 

 

$

476,498

 

 

 

 

March 31,

2018

 

 

December 31, 2017

 

Identifiable assets:

 

 

 

 

 

 

 

 

Domestic wholesale

 

$

1,367,211

 

 

$

1,259,119

 

International wholesale

 

 

1,196,652

 

 

 

1,116,928

 

Retail

 

 

372,121

 

 

 

359,035

 

Total

 

$

2,935,984

 

 

$

2,735,082

 

 

16


 

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Additions to property, plant and equipment:

 

 

 

 

 

 

 

 

Domestic wholesale

 

$

11,375

 

 

$

1,533

 

International wholesale

 

 

10,938

 

 

 

11,793

 

Retail

 

 

12,151

 

 

 

15,556

 

Total

 

$

34,464

 

 

$

28,882

 

 

Geographic Information:

The following summarizes the Company’s operations in different geographic areas for the periods indicated (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net Sales (1):

 

 

 

 

 

 

 

 

United States

 

$

575,525

 

 

$

522,796

 

Canada

 

 

57,040

 

 

 

48,228

 

Other international (2)

 

 

617,513

 

 

 

501,784

 

Total

 

$

1,250,078

 

 

$

1,072,808

 

 

 

 

March 31,

2018

 

 

December 31, 2017

 

Property, plant and equipment, net:

 

 

 

 

 

 

 

 

United States

 

$

391,607

 

 

$

382,426

 

Canada

 

 

9,421

 

 

 

9,888

 

Other international (2)

 

 

151,512

 

 

 

149,287

 

Total

 

$

552,540

 

 

$

541,601

 

_____________________

(1)

The Company has subsidiaries in Asia, Central America, Europe, the Middle East, North America, and South America that generate net sales within those respective regions and in some cases the neighboring regions. The Company has joint ventures in Asia that generate net sales from those regions. The Company also has a subsidiary in Switzerland that generates net sales from that country in addition to net sales to distributors located in numerous non-European countries. External net sales are attributable to geographic regions based on the location of each of the Company’s subsidiaries. A subsidiary may earn revenue from external net sales and external royalties, or from inter-subsidiary net sales, royalties, fees and commissions provided in accordance with certain inter-subsidiary agreements. The resulting earnings of each subsidiary in its respective country are recognized under each respective country’s tax code. Inter-subsidiary revenues and expenses subsequently are eliminated in the Company’s condensed consolidated financial statements and are not included as part of the external net sales reported in different geographic areas.

(2)

Other international includes Asia, Central America, Europe, the Middle East, and South America.

In response to the State Department’s trade restrictions with Sudan and Syria, we do not authorize or permit any distribution or sales of our product in these countries, and we are not aware of any current or past distribution or sales of our product in Sudan or Syria.

(11)

RELATED PARTY TRANSACTIONS

On July 29, 2010, the Company formed the Skechers Foundation (the “Foundation”), which is a 501(c)(3) non-profit entity that does not have any shareholders or members. The Foundation is not a subsidiary of, and is not otherwise affiliated with the Company, and the Company does not have a financial interest in the Foundation. However, two officers and directors of the Company, Michael Greenberg, the Company’s President, and David Weinberg, the Company’s Chief Operating Officer, are also officers and directors of the Foundation. During the three months ended March 31, 2018, the Company did not make any contributions to the Foundation. The Company made a contribution to the Foundation of $250,000 during the three months ended March 31, 2017.

 

17


 

(12)

LITIGATION

In accordance with U.S. GAAP, the Company records a liability in its condensed consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings are inherently difficult to predict, particularly when the matters are in the procedural stages or with unspecified or indeterminate claims for damages, potential penalties, or fines. Accordingly, the Company cannot determine the final amount, if any, of its liability beyond the amount accrued in the condensed consolidated financial statements as of March 31, 2018, nor is it possible to estimate what litigation-related costs will be in the future; however, the Company believes that the likelihood that claims related to litigation would result in a material loss to the Company, either individually or in the aggregate, is remote.

 

18


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and Notes thereto in Item 1 of this report and our annual report on Form 10-K for the year ended December 31, 2017.

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

This quarterly report on Form 10-Q may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking language such as “intend,” “may,” “will,” “believe,” “expect,” “anticipate” or other comparable terms. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected in forward-looking statements, and reported results shall not be considered an indication of our future performance. Factors that might cause or contribute to such differences include:

 

global economic, political and market conditions including the challenging consumer retail market in the United States;

 

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

 

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

 

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

 

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

 

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

 

our ability to predict our revenues, which have varied significantly in the past and can be expected to fluctuate in the future due to a number of reasons, many of which are beyond our control;

 

sales levels during the spring, back-to-school and holiday selling seasons; and

 

other factors referenced or incorporated by reference in our annual report on Form 10-K for the year ended December 31, 2017 under the captions “Item 1A: Risk Factors” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

FINANCIAL OVERVIEW

Our net sales for the three months ended March 31, 2018 were $1.250 billion, an increase of $177.2 million, or 16.5%, as compared to net sales of $1.073 billion for the three months ended March 31, 2017, which was attributable to increased sales across all of our business segments.  Gross margins increased to 46.6% for the three months ended March 31, 2018 from 44.4% for the same period in the prior year. Net earnings attributable to Skechers U.S.A., Inc. were $117.7 million for the three months ended March 31, 2018, an increase of $23.7 million, or 25.2%, compared to net earnings of $94.0 million in the prior-year period. Diluted net earnings per share attributable to Skechers U.S.A., Inc. for the three months ended March 31, 2018 were $0.75, which reflected a 25.0% increase from the $0.60 diluted net earnings per share reported in the same prior-year period. The increase in net earnings and

 

19


 

diluted net earnings per share attributable to Skechers U.S.A., Inc. for the three months ended March 31, 2018 was due to increased net sales and gross margins and a lower effective tax rate which were partially offset by increased selling expenses of $10.6 million and increased general and administrative expenses of $72.9 million. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2018.

We have three reportable segments – domestic wholesale sales, international wholesale sales, and retail sales, which includes e‑commerce sales. We evaluate segment performance based primarily on net sales and gross margins.

Revenue by segment as a percentage of net sales was as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Percentage of revenues by segment:

 

 

 

 

 

 

 

 

Domestic wholesale

 

 

31.1

%

 

 

33.4

%

International wholesale

 

 

46.2

%

 

 

45.7

%

Retail

 

 

22.7

%

 

 

20.9

%

Total

 

 

100.0

%

 

 

100.0

%

As of March 31, 2018, we owned and operated 657 stores, which included 454 domestic retail stores and 203 international retail stores. We have established our presence in what we believe to be most of the major domestic retail markets. During the first three months of 2018, we opened eight domestic warehouse stores, six international concept stores, and one international outlet store. In addition, we closed three domestic concept stores. We review all of our stores for impairment annually, or more frequently if events occur that may be an indicator of impairment, and we carefully review our under-performing stores and consider the potential for non-renewal of leases upon completion of the current term of the applicable lease.

During the remainder of 2018, we intend to focus on: (i) continuing to develop new lifestyle and performance product at affordable prices to increase product count for all customers, (ii) continuing to manage our inventory and expenses to be in line with expected sales levels, (iii) growing our international business, and (iv) strategically expanding our retail distribution channel by opening another 60 to 75 Company-owned retail stores during the remainder of the year.

 

20


 

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected information from our results of operations (in thousands) and as a percentage of net sales:

 

 

 

Three Months Ended March 31,

 

 

 

 

2018

 

 

 

2017

 

 

Net sales

 

$

1,250,078

 

 

 

100.0

 

%

 

$

1,072,808

 

 

 

100.0

 

%

Cost of sales

 

 

666,974

 

 

 

53.4

 

 

 

 

596,310

 

 

 

55.6

 

 

Gross profit

 

 

583,104

 

 

 

46.6

 

 

 

 

476,498

 

 

 

44.4

 

 

Royalty income

 

 

5,522

 

 

 

0.4

 

 

 

 

4,230

 

 

 

0.4

 

 

 

 

 

588,626

 

 

 

47.0

 

 

 

 

480,728

 

 

 

44.8

 

 

Operating expenses: