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3: EX-31.2 Certification -- §302 - SOA'02 HTML 26K
4: EX-32 Certification -- §906 - SOA'02 HTML 24K
11: R1 Cover Page HTML 74K
12: R2 Condensed Consolidated Statements of Operations HTML 96K
(Unaudited)
13: R3 Condensed Consolidated Statements of Comprehensive HTML 47K
Income (Unaudited)
14: R4 Condensed Consolidated Balance Sheets (Unaudited) HTML 144K
15: R5 Condensed Consolidated Balance Sheets (Unaudited) HTML 47K
(Parenthetical)
16: R6 Condensed Consolidated Statements of Stockholders? HTML 82K
Equity (Unaudited)
17: R7 Condensed Consolidated Statements of Cash Flows HTML 102K
(Unaudited)
18: R8 Basis of Presentation and Summary of Significant HTML 33K
Accounting Policies
19: R9 Recent Accounting Pronouncements HTML 26K
20: R10 Accrued Expenses and Other Liabilities HTML 35K
21: R11 Leases HTML 56K
22: R12 Fair Value Measurements HTML 35K
23: R13 Derivative Financial Instruments HTML 68K
24: R14 Long-Term Borrowings HTML 49K
25: R15 Common Stock Repurchase Program HTML 29K
26: R16 Revenues HTML 87K
27: R17 Share-Based Compensation HTML 35K
28: R18 Income Taxes HTML 40K
29: R19 Earnings Per Share HTML 45K
30: R20 Commitments and Contingencies HTML 26K
31: R21 Operating Segments and Geographic Information HTML 110K
32: R22 Legal Proceedings HTML 26K
33: R23 Basis of Presentation and Summary of Significant HTML 51K
Accounting Policies (Policies)
34: R24 Basis of Presentation and Summary of Significant HTML 26K
Accounting Policies (Tables)
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36: R26 Leases (Tables) HTML 58K
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44: R34 Operating Segments and Geographic Information HTML 104K
(Tables)
45: R35 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT HTML 24K
ACCOUNTING POLICIES - Supplemental Schedule of
Noncash Investing and Financing Activities
(Details)
46: R36 ACCRUED EXPENSES AND OTHER LIABILITIES - Schedule HTML 43K
Of Accrued Expenses & Other Current Liabilities
(Details)
47: R37 LEASES - Right-of-Use Assets and Operating Lease HTML 30K
Liabilities (Details)
48: R38 LEASES - Lease Costs and Other Information HTML 35K
(Details)
49: R39 LEASES - Narrative (Details) HTML 27K
50: R40 LEASES - Maturities of Company's Operating Lease HTML 40K
Liabilities (Details)
51: R41 FAIR VALUE MEASUREMENTS - Schedule of Assets and HTML 49K
Liabilities at Fair Value (Details)
52: R42 DERIVATIVE FINANCIAL INSTRUMENTS - Fair Value of HTML 41K
Derivative Assets and Liabilities (Details)
53: R43 DERIVATIVE FINANCIAL INSTRUMENTS - Summary of HTML 42K
Derivative Financial Instruments Notional Amounts
on Outstanding Positions (Details)
54: R44 DERIVATIVE FINANCIAL INSTRUMENTS - Gains / Losses HTML 28K
on Foreign Currency Derivatives (Details)
55: R45 LONG-TERM BORROWINGS - Schedule of the Company's HTML 48K
Borrowings (Details)
56: R46 LONG-TERM BORROWINGS - Narrative (Details) HTML 78K
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59: R49 REVENUES - Disaggregated Revenues (Details) HTML 56K
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63: R53 INCOME TAXES - Summary of Tax Expense and HTML 32K
Effective Tax Rates (Details)
64: R54 INCOME TAXES - Narrative (Details) HTML 32K
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Earnings Per Share (Details)
66: R56 EARNINGS PER SHARE - Narrative (Details) HTML 26K
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Commitments (Details)
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Narrative (Details)
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Information Related to Reportable Operating
Business Segments (Details)
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Impact of Segment Composition Change (Details)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading symbol:
Name of each exchange on which registered:
iCommon
Stock, par value $0.001 per share
iCROX
iThe Nasdaq Global Select Market
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. iYes☒ 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). iYes☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
iLarge
accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☐
i☐
i☐
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 i☒
As
of July 15, 2021, Crocs, Inc. had i62,385,533 shares of its common stock, par value $0.001 per share, outstanding.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.
Statements that refer to industry trends, projections of our future financial performance, anticipated trends in our business and other characterizations of future events or circumstances are forward-looking statements.
These statements, which express management’s current views concerning future events or results, use words like “anticipate,”“assume,”“believe,”“continue,”“estimate,”“expect,”“future,”“intend,”“plan,”“project,”“strive,” and future or conditional tense verbs like “could,”“may,”“might,”“should,”“will,”“would,” and similar expressions or variations. Examples of forward-looking statements include, but are not limited to, statements we make regarding
•our expectations regarding future trends, expectations, and performance of our business;
•our belief that we have sufficient liquidity to fund our business operations during the next twelve months;
•our
expectations about the impact of our strategic plans;
•the amount and timing of our capital expenditures; and
•our intent to achieve various Environmental, Social, and Governance initiatives.
Forward-looking statements are subject to risks, uncertainties, and other factors, which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, those described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2020 and our subsequent filings
with the Securities and Exchange Commission. Caution should be taken not to place undue reliance on any such forward-looking statements. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Reclassification
of foreign currency translation loss to income (1)
i—
i—
i—
(i164)
Total
comprehensive income
$
i322,396
$
i60,094
$
i410,166
$
i59,655
(1) Represents
the reclassification of cumulative foreign currency translation adjustment upon liquidation of foreign subsidiaries during the six months ended June 30, 2020.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Accounts
receivable, net of allowances of $i22,508 and $i21,093, respectively
i233,262
i149,847
Inventories
i209,089
i175,121
Income
taxes receivable
i1,352
i1,857
Other
receivables
i14,438
i10,816
Prepaid
expenses and other assets
i21,052
i17,856
Total
current assets
i678,515
i492,841
Property
and equipment, net of accumulated depreciation and amortization of $i85,351 and $i86,305,
respectively
i76,949
i57,467
Intangible
assets, net of accumulated amortization of $i103,741 and $i95,426, respectively
i33,731
i37,636
Goodwill
i1,669
i1,719
Deferred
tax assets, net
i515,667
i350,784
Restricted
cash
i3,857
i1,929
Right-of-use
assets
i175,378
i167,421
Other
assets
i8,036
i8,926
Total
assets
$
i1,493,802
$
i1,118,723
LIABILITIES
AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
i166,817
$
i112,778
Accrued
expenses and other liabilities
i156,565
i126,704
Income
taxes payable
i11,814
i5,038
Current
operating lease liabilities
i45,726
i47,064
Total
current liabilities
i380,922
i291,584
Long-term
income taxes payable
i200,969
i205,974
Long-term
borrowings
i386,383
i180,000
Long-term
operating lease liabilities
i162,552
i146,401
Other
liabilities
i4,212
i4,131
Total
liabilities
i1,135,038
i828,090
Commitments
and contingencies
i
i
Stockholders’ equity:
Preferred
stock, par value $ii0.001/ per share,
ii5.0/ million shares authorized
including ii1.0/ million authorized
as Series A Convertible Preferred Stock, iino/ne
outstanding
i—
i—
Common
stock, par value $ii0.001/ per share, ii250.0/
million shares authorized, i105.7 million and i105.0 million issued, i62.4
million and i65.9 million outstanding, respectively
i106
i105
Treasury
stock, at cost, i43.3 million and i39.1 million shares, respectively
(i1,078,857)
(i688,849)
Additional
paid-in capital
i530,357
i482,385
Retained
earnings
i970,698
i553,346
Accumulated
other comprehensive loss
(i63,540)
(i56,354)
Total
stockholders’ equity
i358,764
i290,633
Total
liabilities and stockholders’ equity
$
i1,493,802
$
i1,118,723
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
iBASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
iUnless
otherwise noted in this report, any description of the “Company,”“Crocs,”“we,”“us,” or “our” includes Crocs, Inc. and our consolidated subsidiaries within our reportable operating segments and corporate operations. We are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for women, men, and children. We strive to be the global leader in the sale of molded footwear characterized by functionality, comfort, color, and lightweight design.
iOur
reportable operating segments include: the Americas, operating in North and South America; Asia Pacific, operating throughout Asia, Australia, and New Zealand; and Europe, Middle East, and Africa (“EMEA”), operating throughout Europe, Russia, the Middle East, and Africa. See Note 14 — Operating Segments and Geographic Information for additional information.
iThe accompanying unaudited condensed consolidated interim financial statements include our accounts and those of our wholly-owned subsidiaries,
and reflect all adjustments which are necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such unaudited condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
These unaudited condensed consolidated interim financial
statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 (“Annual Report”) and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes to the Audited Consolidated Financial Statements included in our Annual Report. Our accounting policies did not change during the six months ended June 30, 2021, other than with respect to the new accounting pronouncements adopted as described in Note 2 — Recent Accounting Pronouncements.
i
Reclassifications
We
have reclassified certain amounts on the condensed consolidated statements of cash flows, Note 9 — Revenues, and Note 14 — Operating Segments and Geographic Information to conform to current period presentation.
i
Use of Estimates
U.S. GAAP requires us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions used to determine certain amounts that affect the financial statements are reasonable, based on information available at the time they are made. Management believes that the estimates,
judgments, and assumptions made when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts, customer rebates, sales returns, impairment assessments and charges, recoverability of long-lived assets, deferred tax assets, valuation allowances, uncertain tax positions, income tax expense, share-based compensation expense, the assessment of lower of cost or net realizable value on inventory, useful lives assigned to long-lived assets, and depreciation and amortization, are reasonable based on information available at the time they are made. To the extent there are differences between these estimates and actual results, our condensed consolidated financial statements may be materially affected.
i
Condensed
Consolidated Statements of Cash Flows - Supplemental Schedule of Non-Cash Investing and Financing Activities
In December 2019, the FASB issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles and also simplification of areas such as franchise taxes, intra-period income tax expense allocation exceptions, and interim recognition of enactment of tax laws or rate changes. On January 1, 2021, we adopted this guidance. The adoption did not have a material effect on our condensed consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020, the FASB issued optional guidance related
to reference rate reform, which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for our revolving borrowing instruments, which use LIBOR as a reference rate, and is available for adoption effective immediately, but is only available through December 31, 2022. We are currently evaluating the potential impact of this standard on our condensed consolidated financial statements.
Other Pronouncements
Other new pronouncements issued but not effective until after June 30, 2021 are not expected
to have a material impact on our condensed consolidated financial statements.
3. iACCRUED EXPENSES AND OTHER LIABILITIES
i
Amounts
reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets were:
Lease-related costs reported within ‘Cost of sales’ and ‘Selling, general and administrative expenses’ in our condensed consolidated statements of operations were:
Right-of-use
assets obtained in exchange for operating lease liabilities
i43,582
i27,586
/
The
weighted average remaining lease term and discount rate related to our lease liabilities as of June 30, 2021 were i7.3 years and i3.9%, respectively.
As of June 30, 2020, the weighted average remaining lease term and discount rate related to our lease liabilities were i6.3 years and i4.7%,
respectively.
As of June 30, 2021, we had significant obligations
for a lease not yet commenced related to the expansion of our Americas distribution center in Dayton, Ohio. The total contractual commitment related to the lease, with payments expected to begin in the first quarter of 2022 and continue through September 2030, is approximately $i31 million.
5. iFAIR
VALUE MEASUREMENTS
Recurring Fair Value Measurements
All of our derivative instruments are classified as Level 2 of the fair value hierarchy and are reported in the condensed consolidated balance sheets within ‘Accrued expenses and other liabilities’ at June 30, 2021 and December 31, 2020. The fair values of our derivative instruments were an immaterial liability at June 30, 2021 and December 31, 2020. See Note 6 — Derivative Financial Instruments for more information.
The carrying amounts of our cash, cash equivalents, and
current restricted cash, accounts receivable, accounts payable, and current accrued expenses and other liabilities approximate their fair value as recorded due to the short-term maturity of these instruments.
Our borrowing instruments are recorded at their carrying values in the condensed consolidated balance sheets, which may differ from their respective fair values. In the six months ended June 30, 2021, we completed the issuance and sale of $i350.0 million
aggregate principal amount of i4.250% Senior Notes (the “Notes”), as defined and described in more detail in Note 7 — Long-Term Borrowings. The Notes are classified as Level 1 of the fair value hierarchy and are reported in our condensed consolidated balance sheet at face value, less unamortized issuance costs. iThe
carrying and fair values of our revolving credit facilities approximate their carrying values at June 30, 2021 and December 31, 2020 based on interest rates currently available to us for similar borrowings. The carrying value and fair value of our borrowing instruments as of June 30, 2021 and December 31, 2020 were:
Our non-financial assets, which primarily consist of property and equipment, right-of-use assets, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. The fair values of these assets are determined based on Level 3 measurements, including estimates of the amount and timing of future cash
flows based upon historical experience, expected market conditions, and management’s plans. Impairment expense is reported in ‘Selling, general and administrative expenses’ in our condensed consolidated statements of operations. We did iino/t
record impairment expense in the three and six months ended June 30, 2021. Additionally, iino/
impairment expense was recorded in the three or six months ended June 30, 2020.
6. iDERIVATIVE FINANCIAL INSTRUMENTS
We transact business in various foreign countries and are therefore exposed
to foreign currency exchange rate risk that impacts the reported U.S. Dollar amounts of revenues, expenses, and certain foreign currency monetary assets and liabilities. In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in earnings caused by fluctuations in foreign exchange rates, we may enter into forward contracts to buy and sell foreign currency. By policy, we do not enter into these contracts for trading purposes or speculation.
Counterparty default risk is considered low because the forward contracts that we enter into are over-the-counter instruments transacted with
highly-rated financial institutions. We were not required to and did not post collateral as of June 30, 2021 or December 31, 2020.
iOur derivative instruments are recorded at fair value as a derivative asset or liability in the condensed consolidated balance sheets. We report derivative instruments with the same counterparty on a net basis when a master netting arrangement is in place. Changes in fair value are recognized within ‘Foreign currency losses, net’ in the condensed
consolidated statements of operations. For the condensed consolidated statements of cash flows, we classify cash flows from derivative instruments at settlement in the same category as the cash flows from the related hedged items within ‘Cash provided by operating activities.’
Results of Derivative Activities
i
The fair values of derivative assets and liabilities,
net, all of which are classified as Level 2, reported within either ‘Accrued expenses and other liabilities’ or ‘Prepaid expenses and other assets’ in the condensed consolidated balance sheets, were:
The notional amounts of outstanding foreign currency forward exchange contracts presented below report the total U.S. Dollar equivalent position and the net contract fair values for each foreign currency position.
Amounts reported in ‘Foreign currency losses, net’ in the condensed consolidated
statements of operations include both realized and unrealized gains (losses) from foreign currency transactions and derivative contracts and were:
In July 2019, the Company and certain of our subsidiaries (the “Borrowers”) entered into a Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association, as a lender and administrative agent for the lenders, which provided for a revolving credit facility of $i500.0
million, which can be increased by an additional $i100.0 million subject to certain conditions (the “Facility”). Borrowings under the Credit Agreement bear interest at a variable rate based on (A) a domestic base rate (defined as the highest of (i) the Federal Funds open rate, plus i0.25%,
(ii) the Prime Rate, and (iii) the Daily LIBOR rate, plus i1.00%), plus an applicable margin ranging from i0.25% to i0.875%
based on our leverage ratio, or (B) a LIBOR rate, plus an applicable margin ranging from i1.25% to i1.875% based on our leverage ratio. Borrowings under the Credit
Agreement are secured by all of the assets of the Borrowers and guaranteed by certain other subsidiaries of the Borrowers.
The Credit Agreement requires us to maintain a minimum interest coverage ratio of i4.00
to 1.00, and a maximum leverage ratio of (i) i3.50 to 1.00 from the quarter ended December 31, 2020 to the quarter ended December 31, 2021, and (ii) i3.25
to 1.00 from the quarter ended March 31, 2022 and thereafter (subject to adjustment in certain circumstances). The Credit Agreement permits (i) stock repurchases subject to certain restrictions, including after giving effect to such stock repurchases, the maximum leverage ratio does not exceed certain levels; and (ii) certain acquisitions so long as there is borrowing availability under the Credit Agreement of at least $i40.0 million. As of June 30,
2021, we were in compliance with all financial covenants under the Credit Agreement.
As of June 30, 2021, the total commitments available from the lenders under the Facility were $i500.0 million. At June 30, 2021, we had $i45.0
million outstanding borrowings and $i0.3 million in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As of June 30, 2021 and December 31, 2020, we had $i454.7
million and $i319.4 million, respectively, of available borrowing capacity under the Facility.
Asia Revolving Credit Facilities
During the six months ended June 30, 2021, we had itwo
revolving credit facilities in Asia, the revolving credit facility with Citibank (China) Company Limited, Shanghai Branch, which provided up to an equivalent of $i5.0 million, and the revolving credit facility with China Merchants Bank Company Limited, Shanghai Branch, which matured in May 2021 and provided up to i30.0
million RMB, or $i4.7 million using current exchange rates as of May 2021.
On March 12, 2021, the Company completed the issuance and sale of $i350.0 million
aggregate principal amount of i4.250% Senior Notes due March 15, 2029 (the “Notes”), pursuant to the indenture related thereto (“the Indenture”). Interest on the Notes is payable semi-annually.
The Notes rank pari passu in right of payment with all of
the Company’s existing and future senior debt, including the Credit Agreement, and are senior in right of payment to any of the Company’s future debt that is, by its term, expressly subordinated in right of payment to the Notes. The Notes are unconditionally guaranteed by each of the Company’s restricted subsidiaries that is a borrower or guarantor under the Credit Agreement and by each of the Company’s wholly-owned restricted subsidiaries that
guarantees any debt of the Company or any guarantor under any syndicated credit facility or capital markets debt in an aggregate principal amount in excess of $i25.0 million.
The Company will have the option to redeem all or any portion of the Notes, at once or over time, at any time on or after March
15, 2024, at a redemption price equal to i100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the Notes at any time before March 15, 2024 at a redemption price of i100%
of the principal amount of the Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before March 15, 2024, the Company may redeem up to i40% of the aggregate principal amount of the Notes at a redemption price of i104.250%
of the principal amount of the Notes with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.
The Indenture contains covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to incur additional debt or issue certain preferred stock; pay dividends or repurchase or redeem capital stock or make other restricted payments; declare or pay dividends or other payments; incur liens; enter into certain types of transactions with the
Company’s affiliates; and consolidate or merge with or into other companies. As of June 30, 2021, we were in compliance with all financial covenants under the Notes.
During the three months ended June 30, 2021, we repurchased i2.9 million shares of our common stock at a cost of $i300.0
million, including commissions, under a $i300.0 million April 2021 accelerated share repurchase arrangement (“ASR”). Under the ASR, a financial institution delivers shares of our common stock during the purchase period in exchange for an up-front payment. The total number of shares ultimately delivered under the ASR, and therefore the average repurchase price paid per share, is determined based on the volume-weighted average price of our common stock during the purchase period. The purchase period for this ASR ended in June 2021.
During the six months ended June 30, 2021, we repurchased i4.0 million shares of our common stock at an aggregate cost of $i350.0
million, including commissions. This includes i0.5 million shares received in January 2021 at the conclusion of the purchase period for an accelerated share repurchase agreement we entered into in November 2020.
During the three months ended June 30, 2020, we did inot
repurchase shares of our common stock to preserve maximum liquidity and flexibility as a result of the COVID-19 pandemic. During the six months ended June 30, 2020, we repurchased i1.6 million shares of our common stock at a cost of $i39.2
million, including commissions.
In April 2021, the Board of Directors (the “Board”) approved a $i712.2 million increase to our share repurchase authorization, after which $i1.0 billion
remained available for future common stock repurchases. As of June 30, 2021, we had remaining authorization to repurchase approximately $i700.0 million of our common stock, subject to restrictions under our Notes and Credit Agreement.
9. iREVENUES
i
Revenues by reportable operating segment and by channel were:
(1) Direct-to-consumer
revenues consist of sales generated through our company-operated retail stores (previously our “Retail” channel) and company-operated e-commerce websites and third-party e-commerce marketplaces (previously our “E-commerce” channel).
During the three and six months ended June 30, 2021, we recognized iino/
changes to estimates for wholesale revenues and iino/
changes to estimates for direct-to-consumer revenues. We recognized immaterial changes during the three months ended June 30, 2020 and an increase of $i0.5 million during six months ended June 30, 2020 to wholesale revenues due to changes in estimates related to products transferred to customers in prior
period. There were iino/
changes to estimates for direct-to-consumer revenues during the three or six months ended June 30, 2020.
There were no material changes in contract liabilities or refund liabilities in the six months ended June 30, 2021 or 2020.
10. iSHARE-BASED
COMPENSATION
Our share-based compensation awards are issued under the 2020 Equity Incentive Plan (“2020 Plan”) and a predecessor plan, the 2015 Equity Incentive Plan (“2015 Plan”). Any awards that expire or are forfeited under the 2015 Plan become available for issuance under the 2020 Plan.
i
Pre-tax
share-based compensation expense reported in our condensed consolidated statements of operations was:
On
January 11, 2021, our Board awarded i0.4 million market-condition restricted stock units (“RSUs”) to certain senior executives. For the executives to earn the target number of shares, the i30
trading day average of the daily volume weighted average trading price of the common stock must meet or exceed certain performance hurdles. Any earned shares will also be subject to time vesting. When a performance hurdle is met or exceeded, one third of the earned portion of the RSUs will vest immediately, and the remaining two thirds will be subject to the executive’s continued employment, with one third vesting one year later and the remaining one third vesting two years later, but in no case later than the fourth anniversary of the award, in each case, subject to certain change in control provisions.
The grant date
fair value and derived service period for the market-condition RSUs granted on January 11, 2021 (“January market-condition RSUs”) were estimated using a Monte Carlo simulation valuation model. The grant date fair value for the January market-condition RSUs was $i21.9 million. As of June 30,
2021, unrecognized share-based compensation for the January market-condition RSUs, which are expected to be recognized through March 2024 based on the Monte Carlo valuation model, was $i14.2 million.
The
decrease in the effective tax rate for the three months ended June 30, 2021, compared to the same period in 2020, was driven primarily by the release of valuation allowances. Our effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate primarily due to the release of valuation allowances, as well as differences in income tax rates between U.S. and foreign jurisdictions. There was a $i176.9 million discrete
tax benefit during the three months ended June 30, 2021 for the release of valuation allowances resulting from the enactment of a tax law change. We had unrecognized tax benefits of $i200.2 million and $i206.2
million at June 30, 2021 and December 31, 2020, respectively, and we do not expect any significant changes in unrecognized tax benefits in the next twelve months.
During the six months ended June 30, 2021, income tax expense decreased $i110.0 million compared to the same period in 2020.
The effective tax rate for the six months ended June 30, 2021 was (i33.3)% compared to an effective tax rate of i7.9%
for the same period in 2020, a i41.2% decrease. This decrease in the effective rate was driven primarily by the release of valuation allowances resulting from the enactment of a tax law change. Our effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate primarily due to the release of valuation allowances, as well as differences in income tax rates between U.S. and foreign jurisdictions.
Our
valuation allowances are primarily the result of uncertainties regarding the future realization of tax attributes recorded in various jurisdictions. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not that the deferred tax assets will not be realized. We have evaluated the realizability of our deferred tax assets in each jurisdiction by assessing the adequacy of expected taxable income, including the reversal of existing temporary differences, historical and projected operating results and the availability of prudent and feasible tax planning strategies. In assessing our valuation allowance, we considered all available evidence, including the magnitude of recent and current operating results, the duration of statutory carryforward periods, our historical experience utilizing tax attributes prior to their expiration dates, the historical volatility of operating results of these jurisdictions
and our assessment regarding the sustainability of their profitability. The weight we give to any particular item is, in part, dependent upon the degree to which it can be objectively verified. A jurisdiction for which we have historically recorded significant valuation allowances has enacted a favorable change in the tax law related to net operating loss carryforwards during the period. The change in tax law impacts the assessment of valuation allowances in the jurisdiction as the reversal of existing deferred tax assets would generate indefinite carryforward net operating losses instead of losses with a limited carryforward period. The release of the valuation allowance resulting from the tax law change is recorded as a discrete tax benefit of $i176.9 million
during the three months ended June 30, 2021. We will continue to assess the realizability of our deferred tax assets.
Our tax rate is volatile and may increase or decrease with changes in, among other things, the amount of income or loss by jurisdiction, our ability to utilize net operating losses and foreign tax credits, changes in tax laws, and the movement of liabilities established pursuant to accounting guidance for uncertain tax positions as statutes of limitations expire, positions are effectively settled, or when additional information becomes available. There are proposed or pending tax law changes in various jurisdictions and other changes to regulatory environments in countries in which we do business that, if enacted, may have an impact on our effective tax rate.
Weighted
average common shares outstanding - basic
i63,595
i67,416
i64,526
i67,674
Plus:
Dilutive effect of stock options and unvested restricted stock units
i1,045
i622
i1,218
i990
Weighted
average common shares outstanding - diluted
i64,640
i68,038
i65,744
i68,664
Net
income per common share:
Basic
$
i5.02
$
i0.84
$
i6.47
$
i1.00
Diluted
$
i4.93
$
i0.83
$
i6.35
$
i0.99
/
For
the three and six months ended June 30, 2021, an aggregate of less than ii0.1/ million
options and restricted stock units (“RSUs”) were excluded from the calculation of diluted EPS because the effect was anti-dilutive. For the three and six months ended June 30, 2020, an aggregate of less than ii0.1/
million options and RSUs were excluded from the calculation of diluted EPS because the effect was anti-dilutive.
13. iCOMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of June 30,
2021, we had purchase commitments to third-party manufacturers, primarily for materials and supplies used in the manufacture of our products, for an aggregate of $i177.5 million. We expect to fulfill our commitments under these agreements in the normal course of business, and as such, no liability has been recorded.
Other
We are regularly subject to, and are
currently undergoing, audits by various tax authorities in the United States and several foreign jurisdictions, including customs duties, import, and other taxes for prior tax years.
During our normal course of business, we may make certain indemnities, commitments, and guarantees under which we may be required to make payments. We cannot determine a range of estimated future payments and have not recorded any liability for indemnities, commitments, and guarantees in the accompanying condensed consolidated balance sheets.
See Note 15 — Legal Proceedings for further details regarding potential loss contingencies related to government tax audits and other current legal proceedings.
14.
iOPERATING SEGMENTS AND GEOGRAPHIC INFORMATION
We have iithree/
reportable operating segments based on the geographic nature of our operations: Americas, Asia Pacific, and EMEA. Each of the reportable operating segments derives its revenues from the sale of footwear and accessories to external customers.
Segment performance is evaluated based on segment results without allocating corporate expenses, or indirect general, administrative, and other expenses. Segment profits or losses include adjustments to eliminate inter-segment sales. Reconciling items between segment income from operations and income from operations consist of unallocated corporate and other expenses, as well as inter-segment eliminations.
In the first quarter of 2021, certain costs previously reported within ‘Other Businesses’ were shifted to the Americas, Asia Pacific, and EMEA segments, as applicable, to reflect changes in the way management evaluates segment performance, makes operating decisions, and allocates resources. Additionally, any costs remaining in ‘Other Businesses,’ including depreciation and amortization, had been consolidated into ‘Unallocated corporate and other.’ The previously reported amounts for income from operations for the three and six months ended June 30, 2020 have been revised to conform to current period presentation, as shown in the following tables.
In the second quarter of 2021, to reflect changes in the way management evaluates segment performance, makes operating decisions,
and allocates resources, and as a response to our incremental investments in marketing in line with our growth, certain marketing expenses previously reported within ‘Unallocated corporate and other’ were shifted to the Americas, Asia Pacific, and EMEA segments, as applicable, to better align these investments with segment profitability. The previously reported amounts for income from operations included in the six months ended June 30, 2021 and for the three and six months ended June 30, 2020 have been revised to conform to current period presentation, as shown in the following tables.
We do not report asset information by segment because that information is not used to evaluate performance or allocate resources between segments.
Reconciliation
of total segment income from operations to income before income taxes:
Unallocated corporate and other (1)(2)
(i66,262)
(i31,536)
(i116,403)
(i72,808)
Income
from operations
i195,322
i56,595
i320,008
i77,407
Foreign
currency losses, net
(i117)
(i687)
(i621)
(i918)
Interest
income
i71
i49
i98
i146
Interest
expense
(i4,712)
(i2,170)
(i6,344)
(i4,091)
Other
income, net
i2
i907
i13
i928
Income
before income taxes
$
i190,566
$
i54,694
$
i313,154
$
i73,472
Depreciation
and amortization:
Americas
$
i825
$
i896
$
i1,768
$
i1,750
Asia
Pacific
i325
i286
i612
i565
EMEA
i163
i163
i329
i339
Total
segment depreciation and amortization
i1,313
i1,345
i2,709
i2,654
Unallocated
corporate and other (1)(2)
i6,382
i5,247
i13,040
i10,845
Total
consolidated depreciation and amortization
$
i7,695
$
i6,592
$
i15,749
$
i13,499
(1) In
the first quarter of 2021, certain costs previously reported within ‘Other Businesses’ were shifted to the Americas, Asia Pacific, and EMEA segments. Additionally, any costs remaining in ‘Other Businesses,’ including depreciation and amortization, have been consolidated into ‘Unallocated corporate and other.’ In the second quarter of 2021, certain marketing expenses previously reported within ‘Unallocated corporate and other’ were shifted to the Americas, Asia Pacific, and EMEA segments. The previously reported amounts for income from operations for the three and six months ended June 30, 2020 have been revised to conform to current period presentation. See the ‘Impacts of segment composition change’ and ‘Impacts of marketing expense allocations’ tables below for more information.
(2) Unallocated corporate and other primarily includes corporate support
and administrative functions, certain royalty income, costs associated with share-based compensation, research and development, brand marketing, legal, and depreciation and amortization of corporate and other assets not allocated to operating segments.
We were subject to an audit by the Brazilian Federal Tax Authorities related to imports of footwear from China between 2010 and 2014. On January 13, 2015, we were notified about the issuance of assessments totaling i14.4
million Brazilian Real (“BRL”), or approximately $i2.9 million at current exchange rates, plus interest and penalties, for the period January 2010 through May 2011. We disputed these assessments and asserted defenses to the claims. On February 25, 2015, we received additional assessments totaling i33.3
million BRL, or approximately $i6.7 million at current exchange rates, plus interest and penalties, related to the remainder of the audit period. We also disputed these assessments and asserted defenses to these claims in administrative appeals. On August 29, 2017, we received a favorable ruling on our appeal of the first assessment, which dismissed all fines, penalties, and interest. The tax authorities have appealed that decision and we challenged the appeal on both the merits and procedure. Additionally,
the second appeal for the remaining assessments was heard on March 22, 2018. That decision was partially favorable for us and resulted in an approximately i38% reduction in principal, penalties, and interest. The tax authorities have appealed that decision, and we filed a response to the tax authorities’ appeal as well as a separate appeal against the unfavorable portion of the ruling. Taking current rulings into consideration, we estimate the remaining principal for these assessments to be $i5.0
million at current exchange rates, plus interest and penalties. Should the Brazilian Tax Authority prevail in these final administrative appeals, we may challenge the assessments through the court system, which would likely require the posting of a bond. We have not recorded these items within the condensed consolidated financial statements as it is not possible at this time to predict the timing or outcome of this matter or to estimate a potential amount of loss, if any.
For all other claims and disputes, we have accrued estimated losses of $i0.9 million
within ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheet as of June 30, 2021. As we are able, we estimate reasonably possible losses or a range of reasonably possible losses. As of June 30, 2021, we estimated that reasonably possible losses associated with these claims and other disputes could potentially exceed amounts accrued by an immaterial amount.
Although we are subject to other litigation from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, other than as set forth above, we are not party to any other pending legal proceedings that we believe would reasonably have a material adverse impact on our business, financial results, and cash flows.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Crocs, Inc. and our consolidated subsidiaries (collectively the “Company,”“Crocs,”“we,”“us,” or “our”) are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for women, men, and children. We strive to be the world leader in innovative casual footwear for women, men, and children, combining comfort and style
with a value that consumers want. The vast majority of shoes within our collection contain Croslite™ material, a proprietary, molded footwear technology, delivering extraordinary comfort with each step.
Known or Anticipated Trends
Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends will continue to impact our operating results:
•We have committed to several Environmental, Social, and Governance (“ESG”) initiatives, including a plan to achieve net zero emissions by 2030 through sustainable ingredients and packaging as well as responsible resource use and exploring innovative product afterlife solutions. We continue to expand efforts to help serve
our communities and create a welcoming environment for everyone, rooted in a culture of transparency and accountability. As such, we launched a new Brand Purpose section on our Crocs.com site and a new ESG section on our investor site to share our progress.
•Global industry-wide logistics challenges have continued to impact us, including the blockage of the Suez Canal, which primarily impacted our EMEA segment in the second quarter of 2021, and significant bottlenecks in West Coast ports, which have impacted 2021 operations, and we expect this to continue to impact future quarters this year. We are exploring various options related to global logistics congestion, including additional port locations and air freight. To date, we also have benefited and believe we will continue to benefit from efficiencies in our U.S. distribution network.
•Beginning
in the third quarter of 2021, COVID-19 spikes in Vietnam, where we have significant third-party manufacturing operations, have begun to impact production and distribution, as some factories and ports are temporarily closed or are operating at reduced hours. We continue to be proactive in the supervision of factory operations.
•In 2021, we have invested, and plan to continue to invest, in selling, general and administrative expenses (“SG&A”), including marketing, talent, and digital commerce, to fuel long-term growth, while continuing to leverage revenue growth.
•Capital expenditures for supply chain investments to support our growth are expected to be between $80 million and $100 million for the year ended December 31, 2021.
•We
continued to experience store closures in Western Europe and Southeast Asia throughout much of the second quarter as a result of the COVID-19 pandemic. Additionally, our year-over-year results discussed below were, and we expect for the remainder of 2021 will be, impacted to some extent by prior year store closures and operating hour reductions as a result of the COVID-19 impact in 2020.
Use of Non-GAAP Financial Measures
In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present certain information related to our results of operations through “constant currency,” which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation
of reportable segments under U.S. GAAP. Constant currency represents current period results that have been retranslated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rates on reported amounts.
Management uses constant currency to assist in comparing business trends from period to period on a consistent basis in communications with the Board, stockholders, analysts, and investors concerning our financial performance. We believe constant currency is useful to investors and other users of our condensed consolidated financial statements as an additional tool to evaluate operating performance and trends. Investors should not consider constant currency in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP.
Second Quarter 2021 Financial and Operational Highlights
Revenues were $640.8 million for the second quarter of 2021, a 93.3% increase compared to the second quarter of 2020. The increase was due to the net effects of: (i) higher unit sales volumes, which increased revenues by $234.5 million, or 70.7%, driven by increased consumer demand for our products, a portion of which was due to improved sales in our DTC businesses as the pandemic continued to subside; (ii) higher average selling prices, driven primarily by reduced promotions and higher pricing, as well as favorable product mix, including increased sales of charms per shoe, which increased revenues by $58.5 million, or 17.7%; and (iii) favorable changes in exchange rates, which increased revenues by $16.3 million, or 4.9%.
The
following were significant developments affecting our businesses and capital structure during the three months ended June 30, 2021:
•Revenues nearly doubled compared to the second quarter of 2020, led by our Americas segment, which grew by 136.4%, or 135.6% on a constant currency basis. Our EMEA segment revenues grew by 63.1%, or 52.6% on a constant currency basis, and our Asia segment revenues grew by 35.5%, or 27.1% on a constant currency basis, compared to the second quarter of 2020.
•We sold 29.1 million pairs of shoes worldwide, an increase from 16.3 million pairs in the second quarter of 2020.
•Gross margin was 61.7%, an increase of 740 basis points from last year’s second
quarter, as a result of increased pricing and fewer promotions and discounts, favorable channel mix, and favorable product mix.
•SG&A was $199.9 million compared to $123.3 million in the second quarter of 2020. As a percent of revenues, SG&A decreased to 31.2% of revenues compared to 37.2% of revenues in the second quarter of 2020.
•Income from operations increased to $195.3 million from $56.6 million in last year’s second quarter. Net income was $319.0 million, or $4.93 per diluted share, compared to $56.6 million, or $0.83 per diluted share, in last year’s second quarter.
•We entered into an accelerated share repurchase arrangement (“ASR”) in April 2021 that concluded in June 2021, under which we repurchased 2.9 million shares of our common stock at
a cost of $300.0 million, including commissions.
(1) Reflects
year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” for more information.
(2) Direct-to-consumer revenues consist of sales generated through our company-operated retail stores (previously our “Retail” channel) and company-operated e-commerce websites and third-party e-commerce marketplaces (previously our “E-commerce” channel).
(1) The
change due to price is based on the change in ASP.
Revenues. In the three months ended June 30, 2021, revenues increased compared to the same period in 2020. This was mostly driven by sales volume increases in all regions, most significantly in our Americas segment. The volume increase was due to increased consumer demand, attributable in part to the negative impact of the COVID-19 pandemic on prior year wholesale and retail store revenues. Higher ASP, due to less promotional activity and higher pricing, as well as favorable product mix, including increased sales of charms per shoe, led to higher revenues in all regional segments and almost all channels. Foreign exchange fluctuations also increased revenues, primarily due to favorable changes in the Euro, Korean Won, and Chinese Yuan.
Revenues
also increased in the six months ended June 30, 2021, primarily as a result of volume increases in all regions, led by the Americas segment, as a result of increased consumer demand, attributable in part to the negative impact of the COVID-19 pandemic on prior year wholesale and retail store revenues. Higher ASP, primarily in the DTC channel in our Americas and
Asia Pacific segments, also contributed to higher revenues. Foreign exchange favorability to revenue was driven by the Euro, Korean Won, and Chinese Yuan.
Cost of sales. In the three
months ended June 30, 2021, compared to the same period in 2020, cost of sales increased due to higher volume of $102.2 million, or 67.4%, primarily in our Americas segment, and foreign currency fluctuations, which increased cost of sales by $7.2 million, or 4.7%, offset in part by lower average cost per unit on a constant currency basis (“AUC”), driven by channel mix, efficiencies in our distribution and logistics network, and the non-recurrence of a prior year COVID-19 inventory write-off, which decreased cost of sales by $15.4 million, or 10.1%.
In the six months ended June 30, 2021, compared to the same period in 2020, cost of sales increased primarily due to higher volume of $177.5 million, or 59.4%. Foreign currency fluctuations further increased cost of sales by $11.4 million,
or 3.8%. These increases were partially offset by lower AUC of $35.0 million, or 11.7%, as a result of favorable product mix and increased efficiencies in our distribution and logistics network.
Gross profit. Gross margin increased in the three months ended June 30, 2021 to 61.7%, compared to 54.3% in the same period in 2020, driven by increased pricing and fewer promotions and discounts, favorable channel mix, and favorable product mix. Gross profit increased $215.2 million, or 119.6%, as a result of higher volume of $132.3 million, or 73.6%, the combined impact of lower AUC and higher ASP, of $73.8 million, or 41.0%, and favorable foreign currency changes of $9.1 million, or 5.0%.
Gross margin in the six months ended June
30, 2021 was 58.9% compared to 51.3% in 2020, due to favorable channel and product mix, increased pricing, and fewer promotions and discounts. Gross profit increased $334.3 million, or 106.4%, as a result of higher volumes of $215.6 million, or 68.6%, the combined impact of lower AUC and higher ASP of $105.2 million, or 33.5%, and positive foreign currency changes of $13.5 million, or 4.3%.
Selling, general and administrative expenses. SG&A as a percent of revenue improved to 31.2% in the three months ended June 30, 2021 from 37.2% in the same period in 2020 as a result of strong sales growth and our continued efforts to leverage operating costs. SG&A expenses increased $76.5 million, or 62.0%, in the three months ended June 30, 2021 compared to the same
period in 2020. This was primarily due to a $39.9 million increase in compensation expense, which was driven by a combination of investments in employee headcount to support the growth of the business, the impact of the prior year temporary and permanent elimination of certain roles in response to COVID-19, and higher variable and executive compensation. Marketing expense increased by $26.4 million, in part as an investment to fuel future growth and in part as a result of prior year COVID-19 savings. Facilities expense was higher by $8.4 million as a result of variable rent associated with an increase in retail sales, particularly in the Americas. Services costs, including consulting and legal fees, as well as variable costs associated with higher sales, were higher by $7.9 million and information technology and other net costs were higher by $5.8 million. These increases were offset in part by $7.6 million lower donations of inventory as a result of prior year COVID-19
donations to frontline healthcare workers and other organizations that did not recur at the same magnitude in the current year and decreases in bad debt expense of $4.4 million from the prior year COVID-19 related impact on our distributors that did not recur in the current year, as well as collections on previously reserved bad debt expense.
SG&A increased $91.7 million, or 38.7%, during the six months ended June 30, 2021, compared to the same period in 2020. This was driven in large part by higher compensation expense of $52.1 million as a result of increased employee headcount and higher variable and executive compensation and by additional investments in marketing of $28.1 million, both of which support the growth of the business. Services costs, including consulting and legal fees, as well as variable costs associated with higher
sales, were up $11.4 million, facilities expense was up $10.6 million as a result of variable rent associated with higher sales, and information technology and other net costs were up by $7.9 million. These increases were offset in part by $9.3 million lower donations of inventory as a result of prior year COVID-19 donations to frontline healthcare workers and other organizations that did not recur at the same magnitude in the current year and decreases in bad debt expense of $9.1 million primarily due to the prior year COVID-19 related impact on our distributors that did not recur in the current year, as well as collections on previously reserved bad debt expense.
Foreign currency losses, net. Foreign currency losses, net, consist of realized and unrealized foreign currency gains and losses from the remeasurement and settlement of monetary assets and liabilities
denominated in non-functional currencies as well as realized and unrealized gains and losses on foreign currency derivative instruments. During the three months ended June 30, 2021, we recognized realized and unrealized net foreign currency losses of $0.1 million, compared to losses of $0.7 million during the three months ended June 30, 2020.
During the six months ended June 30, 2021, we recognized realized and unrealized net foreign currency losses of $0.6 million, compared to losses of $0.9 million during the six months ended June 30, 2020.
Income tax expense. During the three months ended June 30, 2021, income tax benefit increased $126.5 million compared to the same period in 2020. The effective tax rate for the three months ended June 30, 2021 was (67.4)% compared to an effective tax rate of (3.4)% for the same period in 2020, a 64.0% decrease. This decrease in the effective rate was driven primarily by a $176.9 million discrete tax benefit during the three months ended June 30, 2021 for the release of valuation allowances resulting from the enactment of a tax law change. Our effective income tax rate for each period presented also differs from the federal U.S. statutory rate primarily due to the release of valuation allowances, as well as differences in income tax
rates between U.S. and foreign jurisdictions.
During the six months ended June 30, 2021, income tax expense decreased $110.0 million compared to the same period in 2020. The effective tax rate for the six months ended June 30, 2021 was (33.3)% compared to an effective tax rate of 7.9% for the same period in 2020, a 41.2% decrease. This decrease in the effective rate was driven primarily by the release of valuation allowances resulting from the enactment of a tax law change. Our effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate primarily due to the release of valuation allowances, as well as differences in income tax rates between U.S. and foreign jurisdictions.
The
Company assesses the recoverability of its deferred tax assets each period by considering whether it is more likely than not that all or a portion of the deferred tax assets will be realized. In making such determination, the Company considers all available (both positive and negative) evidence, including future reversals of temporary differences, tax-planning strategies, projected future taxable income, and results of operations.
The
following table sets forth information related to our reportable operating segments, including a comparison of revenues and operating income by segment:
Three
Months Ended June 30,
Six Months Ended June 30,
% Change
Constant Currency
% Change (1)
Favorable (Unfavorable)
2021
2020
2021
2020
Q2
2021-2020
YTD 2021-2020
Q2 2021-2020
YTD 2021-2020
(in thousands)
Revenues:
Americas
$
405,680
$
171,584
$
682,089
$
319,308
136.4
%
113.6
%
135.6
%
113.4
%
Asia
Pacific
126,834
93,573
209,426
159,033
35.5
%
31.7
%
27.1
%
24.3
%
EMEA
108,250
66,376
209,308
134,276
63.1
%
55.9
%
52.6
%
46.7
%
Total
segment revenues
640,764
331,533
1,100,823
612,617
93.3
%
79.7
%
88.4
%
75.6
%
Unallocated
corporate and other (3)
9
16
48
92
(43.8)
%
(47.8)
%
(43.8)
%
(47.8)
%
Total
consolidated revenues
$
640,773
$
331,549
$
1,100,871
$
612,709
93.3
%
79.7
%
88.4
%
75.6
%
Income
from operations:
Americas (2)
$
192,781
$
52,974
$
308,848
$
91,191
263.9
%
238.7
%
263.2
%
238.5
%
Asia
Pacific (2)
32,016
12,726
54,131
19,193
151.6
%
182.0
%
135.5
%
165.5
%
EMEA
(2)
36,787
22,431
73,432
39,831
64.0
%
84.4
%
54.2
%
74.1
%
Total
segment income from operations
261,584
88,131
436,411
150,215
196.8
%
190.5
%
191.6
%
185.5
%
Unallocated
corporate and other (2)(3)
(66,262)
(31,536)
(116,403)
(72,808)
(110.1)
%
(59.9)
%
(109.2)
%
(59.1)
%
Total
consolidated income from operations
$
195,322
$
56,595
$
320,008
$
77,407
245.1
%
313.4
%
237.4
%
304.5
%
(1) Reflects
year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” for more information.
(2) In the first quarter of 2021, certain costs previously reported within ‘Other Businesses’ were shifted to the Americas, Asia Pacific, and EMEA segments. Additionally, any costs remaining in ‘Other Businesses,’ including depreciation and amortization, have been consolidated into ‘Unallocated corporate and other.’ In the second quarter of 2021, certain marketing expenses previously reported within ‘Unallocated corporate and other’ were shifted to the Americas, Asia Pacific, and EMEA segments. The previously reported amounts for income from operations for the three and six months ended June 30, 2020 have been revised to conform to current period presentation. See
the ‘Impacts of segment composition change’ and ‘Impacts of marketing expense allocations’ tables below for more information.
(3) Unallocated corporate and other includes corporate support and administrative functions, certain royalty income, costs associated with share-based compensation, research and development, brand marketing, legal, and depreciation and amortization of corporate and other assets not allocated to operating segments.
(1) The
change due to price for revenues is based on ASP, as defined earlier in this section.
Americas Operating Segment
Revenues. Americas revenues increased in the three months ended June 30, 2021, compared to the same period in 2020, most significantly as a result of higher volumes in both our wholesale and DTC channels, driven by increased consumer demand, partially due to the prior year impact of COVID-19 on our wholesale brick-and-mortar and partner stores and our retail stores. Higher ASP of 26.6% also contributed to higher sales, mostly from higher pricing and less promotions in our DTC channel, as well as favorable product mix, including increased sales of charms per shoe. Favorable foreign currency fluctuations were driven
by the Canadian Dollar.
The increase in Americas revenues in the six months ended June 30, 2021, compared to the same period in 2020, was primarily due to higher volumes in both channels as a result of increased consumer demand, partially due to the prior year impact of COVID-19 on our brick-and-mortar stores. Higher ASP also contributed to higher sales, mostly from higher pricing and fewer promotions in our DTC channel, particularly in retail, as well as favorable product mix, including increased sales of charms per shoe. Favorable foreign currency fluctuations were driven by the Canadian Dollar, offset in part by unfavorable changes in the Brazilian Real in the first part of the year.
Income from Operations. Income from operations
for our Americas segment was $192.8 million for the three months ended June 30, 2021, an increase of $139.8 million, or 263.9%, compared to the same period in 2020. Gross profit increased $164.7 million, or 170.3%, as a result of higher volume of $108.6 million, or 112.3%, in both channels, and higher ASP, supplemented by lower AUC, of $55.6 million, or 57.5%, due to increased efficiencies in our U.S. distribution network, product mix, including increased sales of charms per shoe, higher prices and less promotions, and channel mix. There were also insignificant favorable currency changes.
SG&A for our Americas segment increased $24.9 million, or 57.0%, during the three months ended June 30, 2021 compared to the same period in 2020. We invested an additional $14.9 million in marketing
compared to prior year to support our growth. Additionally, compensation expense was higher by $11.2 million, due to increased employee headcount in 2021, compounded by the prior year temporary and permanent elimination of certain roles in response to COVID-19, facilities expense was higher by $5.7 million primarily as a result of variable rent associated with an increase in retail sales, and other net costs were higher by $3.9 million, mostly as a result of variable costs associated with higher DTC sales. These increases were partially offset by
lower donations of inventory of $7.8 million as a result of prior year COVID-19 donations to frontline healthcare
workers that did not recur in the current year and decreases in bad debt expense of $3.0 million from the prior year COVID-19 related impact on our distributors that did not recur in the current year, as well as collections on previously reserved bad debt expense.
Income from operations for our Americas segment was $308.8 million for the six months ended June 30, 2021, an increase of $217.7 million, or 238.7%, compared to the same period in 2020. Gross profit increased $249.8 million, or 144.7%, primarily due to volume increases of $175.9 million, or 101.9%, in both our wholesale and DTC channels, and due to $73.6 million, or 42.6%, of higher ASP, primarily in our DTC channel, and lower AUC, as a result of increased efficiencies in our U.S. distribution network, product mix including increased sales of charms per shoe, higher prices and
less promotions, and channel mix. Insignificant favorable currency changes also impacted gross profit.
SG&A for our Americas segment increased $32.1 million, or 39.4%, during the six months ended June 30, 2021 compared to the same period in 2020, due to an investment in marketing of $18.2 million to support growth, including some variable costs associated with higher revenues, higher compensation expense of $13.0 million primarily due to the prior year temporary and permanent elimination of certain roles in response to COVID-19, higher facilities costs of $7.1 million associated with variable rent driven by higher retail sales, higher services costs of $3.3 million mostly from variable costs associated with higher DTC sales, and other net costs of $2.9 million. These increases were offset by lower donations of inventory of $8.3 million
as a result of prior year COVID-19 donations to frontline healthcare workers that did not recur in the current year and lower bad debt expense of $4.1 million as a result of the prior year impact of COVID-19 on our distributors and subsequent collections in the current year.
Asia Pacific Operating Segment
Revenues. Asia Pacific revenues increased in the three months ended June 30, 2021, compared to the same period in 2020, primarily as a result of volume increases in our wholesale channel driven by the prior year COVID-19 impact on our distributor markets, while higher ASP, as a result of increased pricing and fewer promotions, was the largest contributor to DTC growth. Favorable foreign currency fluctuations, primarily in the Korean Won and Chinese
Yuan, also increased revenues.
Revenues in the six months ended June 30, 2021, compared to the same period in 2020, in our Asia Pacific segment increased as a result of volume increases in our wholesale channel. Additionally, ASP increases in both channels, as a result of increased pricing and fewer promotions, and favorable foreign currency fluctuations in the Korean Won, Chinese Yuan, and Singapore Dollar also resulted in higher revenues.
Income from Operations. Income from operations for the Asia Pacific segment was $32.0 million for the three months ended June 30, 2021, an increase of $19.3 million, or 151.6%, compared to the same period in 2020. Gross profit increased by $27.7
million, or 55.3%, mostly from ASP growth, combined with AUC savings, of $16.1 million, or 32.3%, driven by increased pricing and less promotional activity, favorable product mix, and greater purchasing power from currency changes, partially offset by unfavorable channel mix as a result of increased wholesale share. Increases in sales volume of $6.4 million, or 12.7%, and favorable changes in foreign currency of $5.2 million, or 10.3%, led by the Korean Won and Chinese Yuan, also contributed to higher gross profit.
SG&A for our Asia Pacific segment increased $8.4 million, or 22.5%, during the three months ended June 30, 2021, compared to the same period in 2020, primarily due to an investment in marketing of $5.8 million and increases in facilities expense, compensation expense, and other net costs of $2.6 million.
Income
from operations for the Asia Pacific segment was $54.1 million for the six months ended June 30, 2021, an increase of $34.9 million, or 182.0%, compared to the same period in 2020. Gross profit increased by $39.7 million, or 48.3%, mostly due to the net impact of higher ASP and lower AUC of $25.1 million, or 30.6%, resulting from price increases and less promotional activity, favorable product mix, and greater purchasing power from currency changes. Favorable currency impacts of $7.4 million, or 9.0%, and higher volumes of $7.2 million, or 8.7%, also increased gross profit.
SG&A for our Asia Pacific segment increased $4.8 million, or 7.6% in the six months ended June 30, 2021 compared to the same period in 2020, primarily due to an investment in marketing of $5.4 million and an increase
in facilities expense of $2.8 million associated with variable rent driven by higher retail sales. There were also increases in compensation and other net costs of $1.5 million. These increases were partially offset by lower bad debt expense of $3.5 million, primarily from a charge taken in the prior year in response to COVID-19, and prior year inventory donations to healthcare workers and other organizations of $1.4 million, neither of which recurred in 2021.
Revenues. Revenues
increased in our EMEA segment in the three months ended June 30, 2021, compared to the same period in 2020, driven mostly by increased volume in our wholesale channel. This increase was a result of higher demand for our products, as well as the prior year impact of the COVID-19 pandemic on our wholesale brick-and-mortar and distributor markets. Positive net foreign currency fluctuations in the Euro and higher ASP, driven by favorable product mix and price increases, also increased revenues.
During the six months ended June 30, 2021, EMEA revenues increased compared to the same period in 2020, primarily due to higher wholesale revenues resulting from increased product demand and prior year COVID-19 impacts. Higher ASP in our DTC channel resulted from increased pricing and less promotions.
Favorable foreign currency fluctuations in the Euro, partially offset by negative fluctuations in the Russian Ruble, also contributed to higher revenues.
Income from Operations. Income from operations for the EMEA segment was $36.8 million for the three months ended June 30, 2021, an increase of $14.4 million, or 64.0%, compared to the same period in 2020. Gross profit increased $21.0 million, or 59.3%, due mostly to higher volume of $15.4 million, or 43.5%. ASP growth outpaced AUC growth, leading to higher gross profit of $2.1 million, or 6.0%. This was driven by favorable purchasing power from currency changes, favorable product mix, and increased pricing, offset in part by higher freight costs from global supply chain challenges including the blockage in the Suez Canal and in part by a channel mix shift towards
wholesale. Foreign currency changes, primarily in the Euro, were favorable, impacting gross profit by $3.5 million, or 9.8%.
SG&A for our EMEA segment increased $6.6 million, or 50.7%, during three months ended June 30, 2021, compared to the same period in 2020, primarily from increases in marketing investments to support growth of $4.6 million, compensation expense of $1.6 million, and facilities and other net costs of $1.4 million. These were offset in part by $1.0 million lower bad debt expense as a result of collections on previously reserved bad debt.
Income from operations for the EMEA segment was $73.4 million for the six months ended June 30, 2021, an increase of $33.6 million, or 84.4%, compared
to the same period in 2020. Gross profit increased $41.4 million, or 62.9%, due to higher sales volumes of $28.8 million, or 43.8%. Higher ASP and lower AUC, led to a net impact on gross profit of $6.5 million, or 9.9%, as a result of favorable purchasing power, price increases, and fewer promotions, offset in part by higher freight costs from global supply chain challenges. Positive currency changes led to increases of $6.1 million, or 9.2%.
SG&A for our EMEA segment increased $7.8 million, or 30.0%, during the six months ended June 30, 2021, compared to the same period in 2020. Additional investments in marketing to support growth of $5.7 million, higher compensation expense of $2.1 million, and higher facilities and other net costs of $1.3 million were offset in part by $1.3 million lower bad debt expense.
Unallocated
Corporate and Other
During the three months ended June 30, 2021, total net costs within ‘Unallocated Corporate and Other’ increased $34.7 compared to the same period in 2020, driven mostly by higher compensation costs of $26.0 million as a result of increased employee headcount, compounded by the prior year temporary and permanent elimination of certain roles in response to COVID-19, as well as higher variable and executive compensation in 2021. Higher services costs including consulting fees and legal fees resulted in $6.1 million of additional costs and information technology costs were higher by $2.5 million. There were also higher other net costs of $0.1 million.
During the six months ended June 30, 2021,
total net costs within ‘Unallocated Corporate and Other’ increased $43.6 million compared to the same period in 2020, primarily driven by an increase in compensation expense of $35.9 million due to increased employee headcount and higher variable and executive compensation, higher services costs including consulting and legal fees of $8.0 million, and higher information technology costs of $4.5 million. These increases were offset in part by lower other net costs of $4.8 million.
The tables below illustrate the overall change in
the number of our company-operated retail locations by reportable operating segment for the three and six months ended June 30, 2021:
Digital
sales, which includes sales through our company-owned websites, third party marketplaces, and e-tailers (which are reported in our wholesale channel), as a percent of total revenues, by operating segment were:
As of June 30, 2021, we had $197.9 million in cash and cash equivalents and up to $454.7 million of remaining borrowing availability under our Facility (as defined below). We believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our Facility will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at least the next twelve months. We will also continue to be opportunistic with respect to our capital structure and our capital returns. Additionally, in March 2021, we completed the issuance and sale of $350.0 million aggregate principal amount of Notes (as defined below). A portion of the net proceeds were used to repay the then-outstanding
balance of $115.0 million under our Facility and the remainder was used for general corporate purposes and share repurchases. See “Senior Notes Issuance” below for more information. Further, in April 2021, the Board approved a $712.2 million increase to our share repurchase authorization, after which $1.0 billion remained available for future common stock repurchases. As of June 30, 2021, we had remaining authorization to repurchase approximately $700.0 million of our common stock, subject to restrictions under our Notes and Credit Agreement.
Additional future
financing may be necessary to fund our operations, and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, among other factors, could each impact our business and liquidity.
Repatriation of Cash
As a global business, we have cash balances in various countries and amounts are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances
held in foreign countries may have additional restrictions and covenants associated with them which could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities.
All of the cash held outside of the U.S. could be repatriated to the U.S. without incurring additional U.S. federal income taxes. As of June 30, 2021, we held $117.1 million of our total $197.9 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. The repatriation of the $117.1 million held in international locations is not limited by local regulations.
Senior Revolving Credit Facility
In
July 2019, the Company and certain of our subsidiaries (the “Borrowers”) entered into a Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association, as a lender and administrative agent for the lenders, which provided for a revolving credit facility of $500.0 million, which can be increased by an additional $100.0 million subject to certain conditions (the “Facility”). Borrowings under the Credit Agreement bear interest at a variable rate based on (A) a domestic base rate (defined as the highest of (i) the Federal Funds open rate, plus 0.25%, (ii) the Prime Rate, and (iii) the Daily LIBOR rate, plus 1.00%), plus an applicable margin ranging from 0.25% to 0.875% based on our leverage
ratio, or (B) a LIBOR rate, plus an applicable margin ranging from 1.25% to 1.875% based on our leverage ratio. Borrowings under the Credit Agreement are secured by all of the assets of the Borrowers and guaranteed by certain other subsidiaries of the Borrowers.
The Credit Agreement requires us to maintain a minimum interest coverage ratio of 4.00 to 1.00, and a maximum leverage ratio of (i) 3.50 to 1.00 from the quarter ended December 31, 2020 to the quarter ended December 31, 2021, and (ii) 3.25 to 1.00 from the quarter ended March 31, 2022 and thereafter (subject to adjustment in certain circumstances). The Credit Agreement permits (i) stock repurchases
subject to certain restrictions, including after giving effect to such stock repurchases, the maximum leverage ratio does not exceed certain levels; and (ii) certain acquisitions so long as there is borrowing availability under the Credit Agreement of at least $40.0 million. As of June 30, 2021, we were in compliance with all financial covenants under the Credit Agreement.
As of June 30, 2021, the total commitments available from the lenders under the Facility were $500.0 million. At June 30, 2021, we had $45.0 million outstanding borrowings and $0.3 million in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As of June 30, 2021
and December 31, 2020, we had $454.7 million and $319.4 million, respectively, of available borrowing capacity under the Facility.
Senior Notes Issuance
On March 12, 2021, the Company completed the issuance and sale of $350.0 million aggregate principal amount of 4.250% Senior Notes due March 15, 2029 (the “Notes”), pursuant to the indenture related thereto (“the Indenture”). Interest
on the Notes is payable semi-annually.
The Notes rank pari passu in right of payment with all of the Company’s existing and future senior debt, including the Credit Agreement, and are senior in right of payment to any of the Company’s future debt that is, by its term, expressly subordinated in right of payment to the Notes. The Notes are unconditionally guaranteed by each of the Company’s restricted subsidiaries that is a borrower or guarantor under the Credit Agreement and by each of the
Company’s wholly-owned restricted subsidiaries that guarantees any debt of the Company or any guarantor under any syndicated credit facility or capital markets debt in an aggregate principal amount in excess of $25.0 million.
The Company will have the option to redeem all or any portion of the Notes, at once or over time, at any time on or after March 15, 2024, at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual
basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the Notes at any time before March 15, 2024 at a redemption price of 100% of the principal amount of the Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before March 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the Notes at a redemption price of 104.250% of the principal amount of the Notes with the proceeds from certain equity
issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.
The Indenture contains covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to incur additional debt or issue certain preferred stock; pay dividends or repurchase or redeem capital stock or make other restricted payments; declare or pay dividends or other payments; incur liens; enter into certain types of transactions with the Company’s affiliates; and consolidate or merge with or into other companies.
As of June 30, 2021, we were in compliance with all financial covenants under the Notes.
Cash Flows
Six Months Ended June 30,
$ Change
%
Change
2021
2020
Favorable (Unfavorable)
(in thousands)
Cash provided by operating activities
$
242,366
$
40,267
$
202,099
501.9
%
Cash
used in investing activities
(21,323)
(24,010)
2,687
11.2
%
Cash provided by (used in) financing activities
(155,344)
28,877
(184,221)
(638.0)
%
Effect
of exchange rate changes on cash, cash equivalents, and restricted cash
(1,793)
(2,360)
567
24.0
%
Net change in cash, cash equivalents, and restricted cash
$
63,906
$
42,774
$
21,132
49.4
%
Operating
Activities. Cash provided by operating activities consists of net income adjusted for noncash items and changes in working capital. Cash provided by operating activities increased $202.1 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, driven by higher net income, adjusted for non-cash items, of $169.6 million and by net increases in operating assets and liabilities of $32.5 million.
Investing Activities. There was an $2.7 million decrease in cash used in investing activities for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The decrease is primarily due to a decrease
in the purchases of property, equipment, and software, mainly from expenditures in 2020 that did not recur in the current year related to the relocation of our Corporate headquarters.
Financing Activities. Cash provided by financing activities decreased by $184.2 million in the six months ended June 30, 2021 compared to the six months ended June 30, 2020. This decrease was primarily driven by a $205.0 million decrease in borrowings, net of repayments, on our Facility. Increases in repurchases of our common stock and repurchases of common stock for tax withholding of $310.9 million and $9.0 million, respectively, also contributed to the overall decrease of cash provided by financing activities. The overall decrease was offset by an increase of $350.0 million in proceeds
from the Notes issuance, net of cash used in other financing activities of $9.3 million, which is primarily due to deferred debt issuance costs related to the Notes.
Contractual Obligations
There have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, other than (i) borrowings and repayments on the Facility and the issuance of the Notes, as described above; and (ii) in the six months ended June 30, 2021, we signed contracts to further expand our U.S. distribution center, resulting in (a) future lease payments of approximately
$31 million through 2030, as described in Note 4 — Leases in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q, and (b) other contractual commitments of approximately $48 million through 2022, the majority of which is expected to be paid during 2021.
We had no material off-balance sheet arrangements as of June 30,
2021, other than certain purchase commitments, which are described in Note 13 — Commitments and Contingencies in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our assumptions and estimates on an on-going basis. We base our
estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2020 and Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q. There have been no other significant changes in our critical accounting policies or their application since December 31,
2020.
Recent Accounting Pronouncements
See Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q for a description of recently adopted accounting pronouncements and issued accounting pronouncements that we believe may have an impact on our condensed consolidated financial statements when adopted.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our exposure to market risk includes interest rate fluctuations in connection with our Facility and certain financial instruments.
Borrowings under our Facility bear interest at a variable rate and are therefore subject to risk based upon prevailing market interest rates. Interest rates fluctuate as a result of many factors, including governmental monetary and tax policies, domestic and international economic and political
considerations, and other factors that are beyond our control.
As of June 30, 2021, we had long-term borrowings with a face value of $395.0 million, mainly comprised of the Notes, which carry a fixed rate, and $0.3 million in outstanding letters of credit under our Facility. As of December 31, 2020, we had $180.0 million in outstanding borrowings and $0.6 million in outstanding letters of credit under our Facility.
A hypothetical increase of 1% in the interest rate on the Facility borrowings would have increased interest expense by $0.2 million and $0.5 million for the three and six months ended June 30, 2021, respectively.
Foreign
Currency Exchange Risk
Changes in exchange rates have a direct effect on our reported U.S. Dollar condensed consolidated financial statements because we translate the operating results and financial position of our international subsidiaries to U.S. Dollars using current period exchange rates. Specifically, we translate the statements of operations of our foreign subsidiaries into the U.S. Dollar reporting currency using exchange rates in effect during each reporting period. As a result, comparisons of reported results between reporting periods may be impacted significantly due to differences in the exchange rates in effect at the time such exchange rates are used to translate the operating results of our
international subsidiaries.
An increase of 1% of the value of the U.S. Dollar relative to foreign currencies would have decreased our revenues during the three and six months ended June 30, 2021 by $2.5 million and $4.5 million, respectively. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy.
We may enter into forward foreign exchange contracts to buy or sell various foreign currencies to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities.
Changes in the fair value of these forward contracts are recognized in earnings in the period that the changes occur. As of June 30, 2021, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $152.3 million. The net fair value of these contracts at June 30, 2021 was a liability of $0.8 million.
We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our foreign currency forward exchange contracts.
To perform the sensitivity analysis, we assess the risk of changes in fair values from the effect of hypothetical changes in foreign currency exchange rates. This analysis assumes a like movement by the foreign currencies in our hedge portfolio against the U.S. Dollar. As of June 30, 2021, a 10% appreciation in the value of the U.S. Dollar would result in a net increase in the fair value of our derivative portfolio of approximately $0.9 million.
See Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q for a discussion of the impact of the change in foreign exchange rates on our U.S. Dollar condensed consolidated statements of operations for the three and six months ended June
30, 2021 and 2020.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures as such item is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2021, to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures
that, by their nature, can only provide reasonable assurance regarding management’s control objectives.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
A discussion of legal matters is found in Note 15 — Legal Proceedings in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
ITEM 1A. Risk Factors
There have
been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer
Purchases of Equity Securities
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly
Announced Plans or Programs (1)
Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (1)
April 1 - 30, 2021
Open
market or privately negotiated purchases
—
$
—
—
$
1,000,000,000
April 2021 ASR (2)
2,300,143
130.43
2,300,143
700,000,000
May
1 - 31, 2021
—
—
—
700,000,000
June 1 - 30, 2021
Open market or privately negotiated purchases
—
—
—
700,000,000
April
2021 ASR (2)
590,225
(2)
590,225
700,000,000
Total
2,890,368
$
103.79
2,890,368
$
700,000,000
(1) On
February 20, 2018, the Board approved and authorized a program to repurchase up to $500.0 million of our common stock. On May 5, 2019, the Board approved an increase to the repurchase authorization of up to an additional $500.0 million of our common stock. Further, on April 23, 2021, the Board approved a $712.2 million increase to our share repurchase authorization, after which $1.0 billion remained available for future common stock repurchases. As of June 30, 2021, approximately $700.0 million remained available for repurchase under our share repurchase authorization. The number, price, structure and timing of the repurchases, if any, will be at our sole discretion and future repurchases will be evaluated by us depending on market conditions, liquidity needs, restrictions
under our debt arrangements, and other factors. Share repurchases may be made in the open market or in privately negotiated transactions. The repurchase authorization does not have an expiration date and does not oblige us to acquire any particular amount of our common stock. The Board may suspend, modify, or terminate the repurchase program at any time without prior notice.
(2) In April 2021, we entered into an accelerated share repurchase arrangement (“ASR”) to repurchase $300.0 million of our common stock. In exchange for an up-front payment of $300.0 million, the financial institution that was a party to the ASR committed to deliver to us shares of our common stock during the ASR’s purchase period, which ended June 2021. In April 2021, 2.3 million shares were delivered and retired at an average price of $130.43 (which is based on a partial share delivery in April 2021). Subsequently, in June
2021, an additional 0.6 million shares were delivered and retired. The average price paid per share for the complete ASR, which includes shares delivered in June 2021, was $103.79.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.