skx-10q_20180930.htm

 

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 September 30, 2018

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 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

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

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

The number of shares of Class A Common Stock outstanding as of November 1, 2018: 133,880,258.

The number of shares of Class B Common Stock outstanding as of November 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

21

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

 

Item 4.

Controls and Procedures

33

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

34

 

Item 1A.

Risk Factors

35

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

Item 3.

Defaults Upon Senior Securities

37

 

Item 4.

Mine Safety Disclosures

37

 

Item 5.

Other Information

37

 

Item 6.

Exhibits

38

 

 

Signatures

39

 

 

 

 

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)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

802,771

 

 

$

736,431

 

Short-term investments

 

 

87,277

 

 

 

 

Trade accounts receivable, less allowances of $25,609 in 2018 and $51,180 in 2017

 

 

503,954

 

 

 

405,921

 

Other receivables

 

 

48,843

 

 

 

27,083

 

Total receivables

 

 

552,797

 

 

 

433,004

 

Inventories

 

 

755,068

 

 

 

873,016

 

Prepaid expenses and other current assets

 

 

83,085

 

 

 

62,573

 

Total current assets

 

 

2,280,998

 

 

 

2,105,024

 

Property, plant and equipment, net

 

 

565,395

 

 

 

541,601

 

Deferred tax assets

 

 

28,224

 

 

 

29,922

 

Long-term investments

 

 

91,086

 

 

 

17,396

 

Other assets, net

 

 

38,772

 

 

 

41,139

 

Total non-current assets

 

 

723,477

 

 

 

630,058

 

TOTAL ASSETS

 

$

3,004,475

 

 

$

2,735,082

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current installments of long-term borrowings

 

$

4,581

 

 

$

1,801

 

Short-term borrowings

 

 

12,674

 

 

 

8,011

 

Accounts payable

 

 

528,077

 

 

 

505,334

 

Accrued expenses

 

 

119,584

 

 

 

82,202

 

Total current liabilities

 

 

664,916

 

 

 

597,348

 

Long-term borrowings, excluding current installments

 

 

69,782

 

 

 

71,103

 

Deferred tax liabilities

 

 

160

 

 

 

161

 

Other long-term liabilities

 

 

102,362

 

 

 

118,259

 

Total non-current liabilities

 

 

172,304

 

 

 

189,523

 

Total liabilities

 

 

837,220

 

 

 

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;

   130,802 and 131,784 shares issued and outstanding at September 30, 2018

   and December 31, 2017, respectively

 

 

131

 

 

 

132

 

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

   24,163 and 24,545 shares issued and outstanding at September 30, 2018

   and December 31, 2017, respectively

 

 

24

 

 

 

24

 

Additional paid-in capital

 

 

410,467

 

 

 

453,417

 

Accumulated other comprehensive loss

 

 

(30,133

)

 

 

(14,744

)

Retained earnings

 

 

1,643,898

 

 

 

1,390,235

 

Skechers U.S.A., Inc. equity

 

 

2,024,387

 

 

 

1,829,064

 

Non-controlling interests

 

 

142,868

 

 

 

119,147

 

Total stockholders' equity

 

 

2,167,255

 

 

 

1,948,211

 

TOTAL LIABILITIES AND EQUITY

 

$

3,004,475

 

 

$

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

 

$

1,176,395

 

 

$

1,094,829

 

 

$

3,561,270

 

 

$

3,193,571

 

Cost of sales

 

 

612,529

 

 

 

574,842

 

 

 

1,853,344

 

 

 

1,708,765

 

Gross profit

 

 

563,866

 

 

 

519,987

 

 

 

1,707,926

 

 

 

1,484,806

 

Royalty income

 

 

4,860

 

 

 

2,917

 

 

 

15,732

 

 

 

10,368

 

 

 

 

568,726

 

 

 

522,904

 

 

 

1,723,658

 

 

 

1,495,174

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

90,138

 

 

 

89,559

 

 

 

288,606

 

 

 

263,318

 

General and administrative

 

 

354,676

 

 

 

316,852

 

 

 

1,080,984

 

 

 

904,631

 

 

 

 

444,814

 

 

 

406,411

 

 

 

1,369,590

 

 

 

1,167,949

 

Earnings from operations

 

 

123,912

 

 

 

116,493

 

 

 

354,068

 

 

 

327,225

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

3,008

 

 

 

780

 

 

 

6,280

 

 

 

1,574

 

Interest expense

 

 

(1,199

)

 

 

(1,560

)

 

 

(3,742

)

 

 

(4,895

)

Other, net

 

 

(2,849

)

 

 

2,147

 

 

 

(6,918

)

 

 

5,507

 

Total other income (expense)

 

 

(1,040

)

 

 

1,367

 

 

 

(4,380

)

 

 

2,186

 

Earnings before income tax expense

 

 

122,872

 

 

 

117,860

 

 

 

349,688

 

 

 

329,411

 

Income tax expense

 

 

16,821

 

 

 

11,030

 

 

 

45,521

 

 

 

42,546

 

Net earnings

 

 

106,051

 

 

 

106,830

 

 

 

304,167

 

 

 

286,865

 

Less: Net earnings attributable to non-controlling interests

 

 

15,323

 

 

 

14,520

 

 

 

50,504

 

 

 

41,025

 

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

 

$

90,728

 

 

$

92,310

 

 

$

253,663

 

 

$

245,840

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

 

$

0.59

 

 

$

1.62

 

 

$

1.58

 

Diluted

 

$

0.58

 

 

$

0.59

 

 

$

1.62

 

 

$

1.57

 

Weighted average shares used in calculating net earnings per

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

155,766

 

 

 

155,824

 

 

 

156,238

 

 

 

155,502

 

Diluted

 

 

156,298

 

 

 

156,741

 

 

 

156,981

 

 

 

156,276

 

 

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net earnings

 

$

106,051

 

 

$

106,830

 

 

$

304,167

 

 

$

286,865

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) gain on foreign currency translation adjustment

 

 

(8,634

)

 

 

4,713

 

 

 

(23,509

)

 

 

11,870

 

Comprehensive income

 

 

97,417

 

 

 

111,543

 

 

 

280,658

 

 

 

298,735

 

Less: Comprehensive income attributable to non-controlling

   interests

 

 

11,487

 

 

 

15,326

 

 

 

42,385

 

 

 

44,313

 

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

 

$

85,930

 

 

$

96,217

 

 

$

238,273

 

 

$

254,422

 

 

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)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

304,167

 

 

$

286,865

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization of property, plant and equipment

 

 

72,896

 

 

 

59,576

 

Amortization of other assets

 

 

8,364

 

 

 

10,474

 

Provision for bad debts and returns

 

 

27,975

 

 

 

13,397

 

Non-cash share-based compensation

 

 

23,588

 

 

 

21,737

 

Deferred income taxes

 

 

1,267

 

 

 

(4,694

)

Loss (gain) on non-current assets

 

 

467

 

 

 

(1,614

)

Net foreign currency adjustments

 

 

3,222

 

 

 

(7,431

)

(Increase) decrease in assets:

 

 

 

 

 

 

 

 

Receivables

 

 

(143,743

)

 

 

(164,379

)

Inventories

 

 

99,316

 

 

 

10,139

 

Prepaid expenses and other current assets

 

 

(30,856

)

 

 

(9,819

)

Other assets

 

 

(2,048

)

 

 

(7,319

)

Increase (decrease) in liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

48,334

 

 

 

(25,118

)

Accrued expenses and other long-term liabilities

 

 

(139

)

 

 

(6,311

)

Net cash provided by operating activities

 

 

412,810

 

 

 

175,503

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(97,309

)

 

 

(102,163

)

Intangible asset additions

 

 

 

 

 

(134

)

Purchases of investments

 

 

(408,126

)

 

 

(1,890

)

Proceeds from sales and maturities of investments

 

 

247,158

 

 

 

284

 

Net cash used in investing activities

 

 

(258,277

)

 

 

(103,903

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds from the issuances of common stock through the employee

   stock purchase plan

 

 

2,890

 

 

 

3,011

 

Payments on long-term debt

 

 

(1,381

)

 

 

(1,336

)

Proceeds from long-term debt

 

 

 

 

 

5,580

 

Proceeds from short-term borrowings

 

 

7,491

 

 

 

4,543

 

Payments for taxes related to net share settlement of equity awards

 

 

(11,402

)

 

 

 

Repurchase of Class A common stock

 

 

(58,027

)

 

 

 

Distributions to non-controlling interests of consolidated entity

 

 

(18,663

)

 

 

(9,347

)

Contributions from non-controlling interests of consolidated entity

 

 

 

 

 

46

 

Net cash provided by (used in) financing activities

 

 

(79,092

)

 

 

2,497

 

Net increase in cash and cash equivalents

 

 

75,441

 

 

 

74,097

 

Effect of exchange rates on cash and cash equivalents

 

 

(9,101

)

 

 

10,299

 

Cash and cash equivalents at beginning of the period

 

 

736,431

 

 

 

718,536

 

Cash and cash equivalents at end of the period

 

$

802,771

 

 

$

802,932

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

3,585

 

 

$

4,754

 

Income taxes, net

 

 

72,020

 

 

 

48,305

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

6


 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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 nine months ended September 30, 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 accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard established a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 non-derivative investments primarily include money market funds, U.S. Treasury securities, and actively traded mutual funds.

 

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 non-derivative investments primarily include corporate notes and bonds and U.S. Agency securities.  The Company has one Level 2 derivative which is an interest rate swap related to the refinancing of its domestic distribution center (see below).

 

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. The Company currently does not have any Level 3 assets or liabilities.

The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, short-term investments, accounts receivable, long-term investments, 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.

 

7


 

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 3). 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 September 30, 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.

Revenue Recognition

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 was January 1, 2018, and two methods of adoption were 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 January 1, 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 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.

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.  

 

8


 

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 for retail and e-commerce sales 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 is 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 September 30, 2018 and December 31, 2017, the Company’s sales returns reserve totaled $42.6 million and $43.4 million, respectively, and was included in accrued expenses and accounts receivable in the condensed consolidated balance sheets, respectively.

 

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842),” (“ASU 2016-02”). ASU 2016-02 is intended to increase transparency and comparability among organizations relating to leases. Lessees will be required to recognize a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. The FASB retained a dual model for lease classification, requiring leases to be classified as finance or operating leases to determine recognition in the earnings statement and cash flows; however, substantially all leases will be required to be recognized on the balance sheet. The standards update will also require quantitative and qualitative disclosures regarding key information about leasing arrangements. The standards update is effective using a modified retrospective approach for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. The Company will adopt the standard on January 1, 2019. As originally issued, the standards update requires application at the beginning of the earliest comparative period presented at the time of adoption. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” (“ASU 2018-10”). This ASU makes various targeted amendments to the leasing standard and the Company is evaluating this ASU in connection with adoption of the standard. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” (“ASU No. 2018-11”).  This standard allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The standard also provides for certain practical expedients.  The Company plans to elect this optional transition method. The Company is still assessing the impact of the new standard on its consolidated financial statements and its internal controls process, but anticipates a material 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 expected to be similar to the Company’s 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 August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,” (“ASU No. 2018-13”), which modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. ASU 2018-13 is effective for all entities for fiscal years

 

9


 

beginning after December 15, 2019, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company is currently evaluating the impact of ASU 2018-13; 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 August 2018, the FASB issued ASU No. 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,” (“ASU 2018-15”).  ASU 2018-15 requires that issuers follow the internal-use software guidance in Accounting Standards Codification (ASC) 350-40 to determine which costs to capitalize as assets or expense as incurred. The ASC 350-40 guidance requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as they are incurred. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of ASU 2018-15; 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.

 

 

(2)

CASH, CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS

The Company’s investments consists of mutual funds held in the company’s deferred compensation plan and classified as trading securities, U.S. Treasury securities, corporate notes and bonds and U.S. Agency securities, that the Company has the intent and ability to hold to maturity and therefore, are classified as held-to-maturity. The following tables show the Company’s cash, cash equivalents, short-term and long-term investments by significant investment category as of September 30, 2018 and December 31, 2017 (in thousands):

 

 

 

September 30, 2018

 

 

 

Adjusted Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair

Value

 

 

Cash and Cash Equivalents

 

 

 

 

Short-Term Investments

 

 

 

 

Long-Term Investments

 

Cash

 

$

628,753

 

 

$

-

 

 

$

-

 

 

$

628,753

 

 

$

628,753

 

 

 

 

$

-

 

 

 

 

$

-

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

159,815

 

 

 

-

 

 

 

-

 

 

 

159,815

 

 

 

159,815

 

 

 

 

 

-

 

 

 

 

 

-

 

U.S. Treasury securities

 

 

14,203

 

 

 

 

 

 

 

 

 

 

 

14,203

 

 

 

14,203

 

 

 

 

 

-

 

 

 

 

 

-

 

Mutual funds

 

 

21,308

 

 

 

-

 

 

 

-

 

 

 

21,308

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

21,308

 

Total level 1

 

 

195,326

 

 

 

-

 

 

 

-

 

 

 

195,326

 

 

 

174,018

 

 

 

 

 

-

 

 

 

 

 

21,308

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

-

 

 

 

 

 

-

 

Corporate notes and bonds

 

 

150,776

 

 

 

-

 

 

 

-

 

 

 

150,776

 

 

 

-

 

 

 

 

 

85,227

 

 

 

 

 

65,549

 

U.S. Agency securities

 

 

6,279

 

 

 

 

 

 

 

 

 

 

 

6,279

 

 

 

-

 

 

 

 

 

2,050

 

 

 

 

 

4,229

 

Total level 2

 

 

157,055

 

 

 

-

 

 

 

-

 

 

 

157,055

 

 

 

-

 

 

 

 

 

87,277

 

 

 

 

 

69,778

 

TOTAL

 

$

981,134

 

 

$

-

 

 

$

-

 

 

$

981,134

 

 

$

802,771

 

 

 

 

$

87,277

 

 

 

 

$

91,086

 

 

 

 

December 31, 2017

 

 

 

Adjusted Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair

Value

 

 

Cash and Cash Equivalents

 

 

Short-Term Investments

 

 

Long-Term Investments

 

Cash

 

$

736,431

 

 

$

-

 

 

$

-

 

 

$

736,431

 

 

$

736,431

 

 

$

-

 

 

$

-

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

 

17,396

 

 

 

-

 

 

 

-

 

 

 

17,396

 

 

 

-

 

 

 

-

 

 

 

17,396

 

TOTAL

 

$

753,827

 

 

$

-

 

 

$

-

 

 

$

753,827

 

 

$

736,431

 

 

$

-

 

 

$

17,396

 

 

The Company may sell certain of its investments prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s long-term investments are typically less than two years.

The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security in the investment portfolio. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis. As of September 30, 2018, the Company does not consider any of its investments to be other-than-temporarily impaired.

 

10


 

 

(3)

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

The Company had $2.9 million and $4.4 million of outstanding letters of credit as of September 30, 2018 and December 31, 2017, respectively, and approximately $12.7 million and $8.0 million in short-term borrowings as of September 30, 2018 and December 31, 2017, respectively.

Long-term borrowings at September 30, 2018 and December 31, 2017 are as follows (in thousands):

 

 

 

2018

 

 

2017

 

Note payable to banks, due in monthly installments of $348

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

   4.24% per annum, secured by property, balloon payment of

   $62,843 due August 2020

 

$

65,511

 

 

$

66,604

 

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

   of $5,725 due January 2021

 

 

5,725

 

 

 

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

 

 

298

 

 

 

555

 

Loan payable to a bank, variable-rate interest only at 4.28%

   per annum, due September 2023

 

 

2,829

 

 

 

 

Subtotal

 

 

74,363

 

 

 

72,904

 

Less current installments

 

 

4,581

 

 

 

1,801

 

Total long-term borrowings

 

$

69,782

 

 

$

71,103

 

 

The Company’s long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions. The Company is in compliance with the covenants of its long-term borrowings as of September 30, 2018.

 

On September 29, 2018, through a subsidiary of the Company’s Chinese joint venture (“the Subsidiary”), the Company entered into a 700 million yuan loan agreement with China Construction Bank Corporation (“the China DC Loan Agreement”). The proceeds from the China DC Loan Agreement will be used to finance the construction of the Company’s distribution center in China. Interest will be paid quarterly.  The interest rate will float and be calculated at a reference rate provided by the People’s Bank of China. The interest rate may increase or decrease over the life of the loan, and will be evaluated every 12 months.  The principal of the loan will be repaid in semi-annual installments, beginning in 2021, of variable amounts as specified in the China DC Loan Agreement. The China DC Loan Agreement contains customary affirmative and negative covenants for secured credit facilities of this type, including covenants that limit the ability of the Subsidiary to, among other things, allow external investment to be added, pledge assets, issue debt with priority over the China DC Loan Agreement, and adjust the capital stock structure of the Subsidiary. The China DC Loan Agreement matures on September 28, 2023.  The obligations of the Subsidiary under the China DC Loan Agreement are jointly and severally guaranteed by the Company’s Chinese joint venture. As of September 30, 2018 there was $2.8 million outstanding under this credit facility, which is classified as short-term borrowings in the Company’s condensed consolidated balance sheets.

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

 

11


 

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 September 30, 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 September 30, 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 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 non-controlling interests in the condensed consolidated balance sheets. 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.

(4)

NON-CONTROLLING INTERESTS

The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products 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.

 

12


 

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

 

September 30, 2018

 

 

December 31, 2017

 

Current assets

 

$

2,629

 

 

$

1,540

 

Non-current assets

 

 

99,463

 

 

 

103,407

 

Total assets

 

$

102,092

 

 

$

104,947

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

3,196

 

 

$

2,718

 

Non-current liabilities

 

 

65,065

 

 

 

66,367

 

Total liabilities

 

$

68,261

 

 

$

69,085

 

 

 

 

 

 

 

 

 

 

Distribution joint ventures (1)

 

September 30, 2018

 

 

December 31, 2017

 

Current assets

 

$

504,470

 

 

$

389,687

 

Non-current assets

 

 

101,292

 

 

 

90,972

 

Total assets

 

$

605,762

 

 

$

480,659

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

268,543

 

 

$

188,700

 

Non-current liabilities

 

 

4,453

 

 

 

9,201

 

Total liabilities

 

$

272,996

 

 

$

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net earnings attributable to non-controlling interests

 

$

15,323

 

 

$

14,520

 

 

$

50,504

 

 

$

41,025

 

Distributions to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HF Logistics-SKX, LLC

 

 

1,085

 

 

 

1,048

 

 

 

3,292

 

 

 

3,091

 

Skechers China Limited

 

 

7,270

 

 

 

 

 

 

12,660

 

 

 

4,710

 

Skechers Retail India Private Limited

 

 

 

 

 

 

 

 

68

 

 

 

 

Skechers Southeast Asia Limited

 

 

2,025

 

 

 

1,347

 

 

 

2,025

 

 

 

1,347

 

Skechers Hong Kong Limited

 

 

618

 

 

 

199

 

 

 

618

 

 

 

199

 

Contributions from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Skechers Footwear Ltd. (Israel)

 

 

 

 

 

 

 

 

 

 

 

46

 

 

(5)

STOCKHOLDERS’ EQUITY

During the three months ended September 30, 2018, no shares of Class B Common stock were converted into shares of Class A common stock. During the nine months ended September 30, 2018, 381,876 shares of Class B common stock were converted into shares of Class A common stock. During the three and nine months ended September 30, 2017, no shares of Class B common stock were converted into shares of Class A common stock.

 

13