TMCnet News
CROCS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Business Overview We are a designer, developer, manufacturer, worldwide marketer and distributor of casual lifestyle footwear, apparel and accessories for men, women and children. We strive to be the global leader in the sale of molded footwear featuring fun, comfort, color and functionality. Our products include footwear and accessories that utilize our proprietary closed cell-resin, called Croslite. The use of this unique material enables us to produce innovative, lightweight, non-marking, and odor-resistant footwear. We currently sell our products in more than 90 countries through domestic and international retailers and distributors and directly to end-user consumers through our company-operated retail stores, outlets, kiosks and webstores. Since the initial introduction and popularity of the Beach and Crocs Classic designs, we have expanded our Croslite products to include a variety of new styles and products and have further extended our product reach through the acquisition of brand platforms. Going forward, we intend to focus our footwear product lines on our core molded footwear heritage, as well as develop innovative casual footwear platforms. We intend to streamline our product portfolio, eliminate non-core product development and explore strategic alternatives for non-core brands. The broad appeal of our footwear has allowed us to market our products to a wide range of distribution channels, including department stores and traditional footwear retailers as well as a variety of specialty and independent retail channels. We intend to drive cohesive global brand positioning from region-to-region and year-to-year to create a clearer and consistent product portfolio and message, resulting in a more powerful consumer connection to the brand. This strategy will be accomplished through developing powerful product stories supported with effective, consistent and clear marketing. As a global company, we have significant revenues and costs denominated in currencies other than the U.S. Dollar. Sales in international markets in foreign currencies are expected to continue to represent a substantial portion of our revenues. Likewise, we expect that our subsidiaries with functional currencies other than the U.S. Dollar will continue to represent a substantial portion of our overall gross margin and related expenses. Accordingly, changes in foreign currency exchange rates could materially affect revenues and costs or the comparability of revenues and costs from period to period as a result of translating our financial statements into our reporting currency. 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 current period 'adjusted selling, general and administrative expenses', which is a non-GAAP financial measure, within this Management's Discussion and Analysis. Adjusted results exclude the impact of items that management believes affect the comparability or underlying business trends in our condensed consolidated financial statements in the periods presented. We also present certain information related to our current period results of operations in this Item 2 through "constant currency", which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable segments under U.S. GAAP. Constant currency represents current period results that have been restated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations. Management uses adjusted results to assist in comparing business trends from period to period on a consistent basis without regard to the impact of non-GAAP adjustments in communications with the board of directors, stockholders, analysts and investors concerning our financial performance. We believe that these non-GAAP measures are used by, and are useful to, investors and other users of our financial statements in evaluating operating performance by providing better comparability between reporting periods because they provide an additional tool to evaluate our performance without regard to non-GAAP adjustments that may not be indicative of overall business trends. They also provide a better baseline for analyzing trends in our operations. We do not suggest that investors should consider these non-GAAP measures in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. Please refer to our 'Results of Operations' within this section for a reconciliation of adjusted selling, general and administrative expenses to GAAP selling, general and administrative expenses. Recent Events On May 13, 2014, the board of directors (the "Board") of the Company appointed Andrew Rees as President of the Company with principal responsibilities for the Crocs brand, effective June 9, 2014. In addition, the Board appointed Mr. Rees as principal executive officer to serve until such time as the Board appoints a Chief Executive Officer of the Company. 23 -------------------------------------------------------------------------------- Table of Contents On July 21, 2014, we announced strategic plans for long-term improvement and growth of the business. These plans comprise four key initiatives including: (1) streamlining the global product and marketing portfolio, (2) reducing direct investment in smaller geographic markets, (3) creating a more efficient organizational structure including reducing duplicative and excess overhead which will also enhance the decision making process, and (4) closing or converting approximately 75 to 100 Crocs branded retail stores around the world. Financial Highlights During the three months ended June 30, 2014, we experienced revenue growth of 3.6%. We continued to experience strong revenue results in our Asia Pacific and Europe segments as market demand continues to grow through our wholesale and direct-to-consumer channels. Specifically, we experienced a 1.1% increase in comparable store sales in our Europe segment led by increased sales in Belgium, Russia and Spain. We experienced difficulty in our Americas segment as wholesale accounts remain lean on inventory and our retail channel remained flat despite an increase in retail locations primarily due to a 6.2% decrease in comparable store sales. On a constant-currency basis, our Japan segment experienced modest improvement; however, limited ability for growth in Japan due to macroeconomic turmoil continues to present challenges for the business as we saw the lingering decline of Japanese Yen decrease quarter-over-quarter revenues by almost $1.6 million and operating income by $0.5 million. Globally, we are focused on expanding and improving current relationships with wholesale partners; however, as mentioned above, wholesale accounts remain lean on inventory levels and at-once ordering. We experienced a $4.9 million, or 3.7%, increase in retail channel revenues primarily through the addition of 49 global retail locations (net of store closures) since June 30, 2013 partially offset by a 5.1% decrease in comparable store sales compared to prior year. As we continue to diversify our product line with new footwear brands such as the Stretch Sole and Busy Day and carryover products such as the Huarache and A-Leigh wedge, we are experiencing a reduction in clog sales as a percentage of revenues. The following are the more significant developments in our businesses during the three months ended June 30, 2014: † † Revenues increased $13.1 million, or 3.6%, to $376.9 million compared to the same period in 2013. Revenue growth was predominately driven by a 0.6% increase in global average footwear selling price realized through new and classic product expansion as well as a 3.6% increase in global footwear unit sales. † Gross profit increased $1.7 million, or 0.8%, to $202.6 million and gross margin percentage decreased 150 basis points, or 2.7%, to 53.7% compared to the same period in 2013. The decline in gross margin percentage is primarily driven by the evolution of our product assortment and is consistent with our product strategy. As we expand our product lines, product mix shifts into styles that may utilize more expensive materials such as textile fabric and leather compared to the traditional clog. † Selling, general and administrative expenses increased $3.1 million, or 2.1%, to $153.4 million compared to the same period in 2013. Selling, general and administrative expenses increased due to the year-over-year global expansion of our retail channel and increased bad debt expense in our Asia Pacific segment as we are seeing slow payments from some of our wholesale accounts partially offset by cost savings in variable compensation. In addition, we experienced an increase of $0.3 million in expenses that we believe to be non-indicative of our underlying business trends including reorganizational charges as a result of transition activities, additional operating expenses related to our ERP implementation and charges related to litigation settlements. † We incurred $4.1 million in restructuring charges as a result of our strategic plans for long-term improvement and growth of the business. These charges included severance costs related to executive management as well as retail store closure costs. † We incurred $3.2 million in asset impairment charges related to certain underperforming retail locations in our Americas, Europe and Asia Pacific segments that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores' assets over their remaining economic life. † Net income attributable to common stockholders decreased $15.8 million, or 44.8%, to $19.5 million compared to the same period in 2013 driving our diluted earnings per share from $0.40 to $0.19. This decrease is primarily attributable to the increase in certain infrequent expenses such as restructuring and asset impairment charges as well as dividends declared on our Series A preferred stock and dividend equivalents as a result of our recent investment from Blackstone Capital Partners VI L.P. ("Blackstone"), which contributed a decrease of $3.8 million in net income attributable to common stockholders or $0.04 in diluted earnings per share. † We have halted our expansion of our retail channel locations and have begun to focus on the long-term profitability of current locations. We opened one global retail location in the second quarter 2014 (net of store closures) as compared to 28 global retail locations in the second quarter of 2013 (net of store closures). In addition, we closed an aggregate of eight locations in our Americas, Europe and Asia Pacific segments which were not scheduled to close until future periods and were selected for closure by management based on historical and projected profitability levels, relocation plans, and other factors. † We continue to fund the implementation of our customized and fully integrated operations, accounting, and finance ERP system. We recently launched the ERP in Australia and Japan with success and now expect the full implementation to launch globally in early 2015. We believe the introduction of the new ERP system to our current environment will allow for seamless and high-quality data across the Company. As of June 30, 2014, total costs to date related to the ERP 24 -------------------------------------------------------------------------------- Table of Contents implementation were $66.3 million, of which $54.4 million has been capitalized and $11.9 million has been expensed. As of June 30, 2014, we had $14.4 million in outstanding borrowings related to the ERP system under a Master Installment Payment Agreement ("Master IPA") with PNC Equipment Finance, LLC ("PNC Equipment"). † We repurchased approximately 2.3 million shares at a weighted average price of $14.71 per share for an aggregate price of approximately $33.9 million excluding related commission charges under our publicly-announced repurchase plan. As of June 30, 2014, we had approximately $303.1 million available for repurchase under our repurchase authorization. Since June 30, 2014, we have repurchased approximately 0.6 million shares at a weighted average price of $14.72 per share for an aggregate price of approximately $8.2 million excluding related commission charges under our publicly-announced repurchase plan. Remaining 2014 Outlook As mentioned above, we recently announced strategic plans for long-term improvement and growth of the business. These plans comprise four key initiatives including: (1) streamlining the global product and marketing portfolio, (2) reducing direct investment in smaller geographic markets, (3) creating a more efficient organizational structure including reducing duplicative and excess overhead which will also enhance the decision making process, and (4) closing or converting approximately 75 to 100 Crocs branded retail stores around the world. First, we intend to focus on our core molded footwear heritage, as well as develop innovative casual footwear platforms. We intend to streamline the product portfolio, eliminate non-core product development and will explore strategic alternatives for the non-core products and brands. We expect more centralized product line control will also result in a reduction of the SKU proliferation that has occurred over the past few years, a more simplified and efficient supply chain and a reduction in overall product line costs and inventory levels. Further, we intend to drive cohesive global brand positioning from region-to-region and year-to-year to create a clearer and consistent product portfolio and message, resulting in a more powerful consumer connection to the brand. This strategy will be accomplished through developing powerful product stories supported with effective consistent and clear marketing. Finally, we intend to increase working market spend, defined as funds that put marketing messages in front of consumers, by approximately 50%, funded primarily from a reduction of marketing overhead. Second, we intend to refine our business model around the world, prioritizing direct investment in larger-scale geographies to focus our resources on the biggest opportunities and moving away from direct investment in the retail and wholesale businesses in smaller markets and transferring significant commercial responsibilities to distributors and third-party agents. These re-alignments are already underway in Brazil, Taiwan and other markets around the globe. Further, we intend to expand engagement with leading wholesale accounts in select markets to drive sales growth, optimize product placement and enhance brand reputation Third, we have reorganized key business functions to improve efficiency and have eliminated 185 global positions of which the majority occurred on July 21, 2014, reducing structural complexity, size and cost. In addition, we plan to open a Global Commercial Center in the Boston area in late 2014, housing key merchandising, marketing and retail executives. The Boston location was selected in order to attract experienced senior footwear and business development management talent. The Global Commercial Center in Boston will join the Product Creation and Global Shared Services Center in Niwot, Colorado, the cornerstone of support for Crocs' global business. We intend to strengthen our Regional Commercial Centers in the Netherlands, Singapore and Japan with responsibility for managing Crocs' global business. Fourth, we plan to rationalize under-performing business units, in order to re-align cost-structure and place greater focus on assets and operations with higher profit potential. This action will enable us to gain greater strategic and economic leverage from our direct-to-consumer assets, including owned retail and e-commerce stores. We intend to close or convert approximately 75 to 100 company-owned retail locations around the world, with 18 stores already closed or converted to partner stores in the second quarter of 2014. The impact of these closures and conversions is expected to reduce annual revenue by approximately $35.0 to $50.0 million and reduce selling, general and administrative expenses by approximately $17.5 to $27.5 million, with an insignificant impact on future operating income. We intend to consolidate global company-operated e-commerce sites from 21 to 11. Overall, we undertook a comprehensive strategic review of the business and its operations globally, and identified four key areas of opportunity in the business: products, geographies, organization and channels. These plans prioritize earnings growth and our focus on becoming the leading brand in casual lifestyle footwear. 25 -------------------------------------------------------------------------------- Table of Contents At June 30, 2014, our backlog was up approximately $45.1 million to $206.2 million. The following table summarizes wholesale backlog by reportable operating segment as of June 30, 2014 and 2013: June 30, ($ thousands) 2014 2013 Americas $ 68,693 $ 58,628 Asia Pacific 67,299 53,430 Japan 29,340 28,748 Europe 40,836 20,230 Total backlog (1) $ 206,168 $ 161,036 -------------------------------------------------------------------------------- (1) We receive a significant portion of orders from our wholesale customers and distributors that remain unfilled as of any date and, at that point, represent orders scheduled to be shipped at a future date. We refer to these unfilled orders as backlog. While all orders in our backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled within one year. Backlog as of a particular date is affected by a number of factors, including seasonality, manufacturing schedule and the timing of product shipments. Further, the mix of future and immediate delivery orders can vary significantly period over period. Backlog only relates to wholesale and distributor orders for the next season and current season fill-in orders and excludes potential sales in our retail and internet channels. Backlog also is affected by the timing of customers' orders and product availability. Due to these factors and since the unfulfilled orders can be canceled at any time prior to shipment by our customers, we believe that backlog may be an imprecise indicator of future revenues that may be achieved in a fiscal period and comparisons of backlog from period to period may be misleading. In addition, our historical cancellation experience may not be indicative of future cancellation rates. 26 -------------------------------------------------------------------------------- Table of Contents Results of Operations Comparison of the Three Months Ended June 30, 2014 and 2013 Three Months Ended June 30, Change ($ thousands, except per share data and average footwear selling price) 2014 2013 $ % Revenues $ 376,920 $ 363,827 $ 13,093 3.6 % Cost of sales 174,349 162,960 11,389 7.0 Gross profit 202,571 200,867 1,704 0.8 Selling, general and administrative expenses 153,370 150,246 3,124 2.1 Restructuring charges 4,060 - 4,060 * Asset impairment charges 3,230 202 3,028 1,499.0 Income from operations 41,911 50,419 (8,508 ) (16.9 ) Foreign currency transaction losses, net 219 814 (595 ) (73.1 ) Interest income (403 ) (517 ) 114 (22.1 ) Interest expense 128 266 (138 ) (51.9 ) Other (income) expense, net (30 ) 195 (225 ) (115.4 ) Income before income taxes 41,997 49,661 (7,664 ) (15.4 ) Income tax expense 18,719 14,305 4,414 30.9 Net income 23,278 35,356 (12,078 ) (34.2 ) Dividends on Series A convertible preferred shares 3,033 - 3,033 *Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature 721 - 721 * Net income attributable to common stockholders $ 19,524 $ 35,356 $ (15,832 ) (44.8 )% Net income per common share: Basic $ 0.19 $ 0.40 $ (0.21 ) (51.5 )% Diluted $ 0.19 $ 0.40 $ (0.21 ) (52.0 )% Gross margin 53.7 % 55.2 % (150 )bps (2.7 )% Operating margin 11.1 % 13.9 % (280 )bps (20.1 )% Footwear unit sales 16,874 16,286 588 3.6 % Average footwear selling price $ 21.77 $ 21.65 $ 0.12 0.6 % -------------------------------------------------------------------------------- * Percentage change is not relevant as prior years amounts were zero. 27 -------------------------------------------------------------------------------- Table of Contents Revenues. During the three months ended June 30, 2014, revenues increased $13.1 million, or 3.6%, compared to the same period in 2013, primarily due to an increase of 0.6 million, or 3.6%, in global footwear unit sales and an increase of $0.12 per unit, or 0.6%, in average footwear selling price primarily driven by new product introductions with higher average selling prices and a product mix shift from clogs to non-clog styles. For the three months ended June 30, 2014, revenues from our wholesale channel increased $7.3 million, or 3.6%, compared to the same period in 2013, which was primarily driven by an increase in our Asia Pacific and Europe segments as a result of expansion of our wholesale doors and the continued support from existing customers partially offset by decreased wholesale channel revenues in our Americas and Japan segments. This decrease was mainly due to a soft wholesale market and slow sell-through of inventory as a result of macroeconomic declines leading to lower average footwear selling prices. For the three months ended June 30, 2014, revenues from our retail channel increased $4.9 million, or 3.7%, compared to the same period in 2013, which was primarily driven by our global retail expansion as we opened 49 company-operated stores (net of store closures) since June 30, 2013 partially offset by a 5.1% decrease in comparable store sales. Although we expanded our global retail presence since 2013, we have begun to and plan on continuing to moderate the pace of our retail expansion in 2014 with a focus on consolidating and enhancing the profitability of existing locations. For the three months ended June 30, 2014, revenues from our internet channel increased $0.9 million, or 2.9%, compared to the same period in 2013, which was primarily driven by increased internet sales in our Asia Pacific segment partially offset by a decrease in internet sales in our Americas segment. Our internet sales totaled approximately 8.2% and 8.3% of our consolidated net sales in the three months ended June 30, 2014 and 2013, respectively. We continue to benefit from our online presence through webstores worldwide enabling us to have increased access to our customers in a low cost, attractive manner and providing an opportunity to educate them about our products and brand. However, we intend to consolidate global company-operated e-commerce sites from 21 to 11 in order to focus our internet strategy in our principal geographical locations. Impact on Revenues due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues from our functional currencies to our reporting currency during the three months ended June 30, 2014 increased our revenues by $0.2 million compared to the same period in 2013. The majority of this increase was related to the increase in value of the Euro compared to the U.S. Dollar partially offset by a decrease in the Japanese Yen, Brazilian Real and Russian Ruble compared to the U.S. Dollar. 28 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our total revenue by channel for the three months ended June 30, 2014 and 2013: Three Months Ended June 30, Change Constant Currency Change(1) ($ thousands) 2014 2013 $ % $ % Channel revenues: Wholesale: Americas $ 65,715 $ 69,089 $ (3,374 ) (4.9 )% $ (2,632 ) (3.8 )% Asia Pacific 71,748 67,383 4,365 6.5 4,731 7.0 Japan 26,697 31,053 (4,356 ) (14.0 ) (3,275 ) (10.5 ) Europe 44,576 33,742 10,834 32.1 9,254 27.4 Other businesses (86 ) 98 (184 ) (187.8 ) (184 ) (187.8 ) Total Wholesale 208,650 201,365 7,285 3.6 7,894 3.9 Consumer-direct: Retail: Americas 60,622 61,041 (419 ) (0.7 ) 2 0.0 Asia Pacific 44,648 40,871 3,777 9.2 2,565 6.3 Japan 12,328 12,327 1 0.0 432 3.5 Europe 19,620 18,050 1,570 8.7 1,292 7.2 Total Retail 137,218 132,289 4,929 3.7 4,291 3.2 Internet: Americas 15,231 16,125 (894 ) (5.5 ) (812 ) (5.0 ) Asia Pacific 5,090 3,578 1,512 42.3 1,541 43.1 Japan 2,170 2,092 78 3.7 160 7.6 Europe 8,561 8,378 183 2.2 (166 ) (2.0 ) Total Internet 31,052 30,173 879 2.9 723 2.4 Total revenues: $ 376,920 $ 363,827 $ 13,093 3.6 % $ 12,908 3.5 % -------------------------------------------------------------------------------- (1) Reflects quarter over quarter 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" above for more information. The table below illustrates the overall growth in the number of our company-operated retail locations by type of store and reportable operating segment from June 30, 2013 to June 30, 2014: Company-operated retail locations: June 30, 2013 Opened Closed March 31, 2014 Opened Closed June 30, 2014 Type: Kiosk/Store in Store 125 7 (12 ) 120 2 (12 ) 110 Retail Stores 305 46 (17 ) 334 19 (13 ) 340 Outlet Stores 145 35 (11 ) 169 7 (2 ) 174 Total 575 88 (40 ) 623 28 (27 ) 624 Operating segment: Americas 207 20 (14 ) 213 8 (12 ) 209 Asia Pacific 206 55 (21 ) 240 13 (10 ) 243 Japan 49 5 (2 ) 52 1 - 53 Europe 113 8 (3 ) 118 6 (5 ) 119 Total 575 88 (40 ) 623 28 (27 ) 624 29 -------------------------------------------------------------------------------- Table of Contents The table below sets forth our comparable store sales by reportable operating segment for the three months ended June 30, 2014 as compared to 2013: Constant Currency Constant Currency Three Months Ended Three Months Ended Comparable store sales (1) June 30, 2014(2) June 30, 2013(2) Americas (6.2 )% 1.5 % Asia Pacific (6.0 ) 8.3 Japan (6.4 ) (19.5 ) Europe 1.1 1.0 Global (5.1 )% 1.0 % -------------------------------------------------------------------------------- (1) Comparable store status is determined on a monthly basis. Comparable store sales begin in the thirteenth month of a store's operation. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening. Comparable store sales exclude the impact of our internet channel revenues and are calculated on a currency neutral basis using historical annual average currency rates. (2) Reflects quarter over quarter 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" above for more information. Gross profit. During the three months ended June 30, 2014, gross profit decreased $1.7 million, or 0.8%, compared to the same period in 2013, which was primarily attributable to a $11.4 million, or 7.0%, increase in cost of sales, partially offset by the 3.6% increase in revenues as a result of higher average footwear selling prices and global footwear unit sales. Gross margin percentage decreased 150 basis points compared to 2013. The decline in gross margin percentage is primarily driven by the evolution of our product assortment and is consistent with our product strategy. As we expand our product lines, product mix shifts into styles that may utilize more expensive materials such as textile fabric and leather compared to the traditional clog. In addition, we experienced increased shipping costs globally and a $2.0 million write-down of obsolete inventory partially offset by a decrease in promotional and clearance activity. Impact on Gross Profit due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues and costs of sales from our functional currencies to our reporting currency during the three months ended June 30, 2014 increased our gross profit by $0.8 million compared to the same period in 2013. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $3.1 million, or 2.1%, during the three months ended June 30, 2014 compared to the same period in 2013. As a percentage of revenue, selling, general and administrative expenses decreased 60 basis points from 41.3% to 40.7% during the three months ended June 30, 2014 compared to the same period in 2013. This increase in selling, general and administrative expenses is predominately due to: † an increase of $3.7 million in expenses associated with the expansion of our global retail presence in which we opened 49 company-operated locations (net of store closures) between June 30, 2013 and June 30, 2014; and † a decrease of $0.3 million related to cost saving initiatives and lower variable compensation partially offset by an increase in bad debt expense as we are experiencing slow payments from some of our Asia Pacific wholesale accounts. In addition to these fluctuations, we have identified certain selling, general and administrative expenses that affect the comparability or underlying business trends in our condensed consolidated financial statements. The following table summarizes these expenses as well as the remaining $0.3 million decrease discussed above by reconciling our GAAP selling, general and administrative expenses to non-GAAP selling, general and administrative expenses: Three Months Ended June 30, Selling, general and administrative expenses reconciliation: 2014 2013 GAAP selling, general and administrative expenses $ 153,370 $ 150,246 Reorganizational expenses (1) (2,380 ) - New ERP implementation (2) (4,639 ) (1,628 ) Legal settlement (3) (424 ) - Brazil tax credits (4) - (6,094 )Non-GAAP selling, general and administrative expenses $ 145,927 $ 142,524 -------------------------------------------------------------------------------- (1) This relates to bonuses, consulting fees and other expenses related to recent reorganizational activities and our investment agreement with Blackstone. 30 -------------------------------------------------------------------------------- Table of Contents (2) This represents operating expenses related to the implementation of our new ERP system and the add-back of accelerated depreciation and amortization on tangible and intangible items related to our current ERP system and supporting platforms that will no longer be utilized once the implementation of a new ERP is complete. (3) This represents legal settlement expenses. (4) This represents a net expense related to the resolution of a statutory tax audit in Brazil. Impact on Selling, General, and Administrative Expenses due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate expenses from our functional currencies to our reporting currency during the three months ended June 30, 2014, increased selling, general and administrative expenses by approximately $0.5 million compared to the same period in 2013. Restructuring Charges. We recorded $4.1 million in restructuring charges during the three months ended June 30, 2014. These restructuring charges arose primarily as a result of our strategic plans for long-term improvement and growth of the business. Restructuring charges for the three months ended June 30, 2014 consisted of: † $2.9 million in severance costs, of which $2.1 million was related to the resignation or termination of executive management; † $0.6 million in contract termination costs primarily related to the exiting of retail operating leases and certain distribution agreements; and † $0.6 million in other restructuring costs primarily related to the write-off of long-lived assets associated with the exiting of retail locations. Asset Impairment Charges. We recorded $3.2 million in asset impairment charges during the three months ended June 30, 2014 related to certain underperforming retail locations in our Americas, Europe and Asia Pacific segments that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores' assets over their remaining economic life. Foreign Currency Transaction Losses. The line item entitled 'Foreign currency transaction losses, net' is comprised of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. During the three months ended June 30, 2014, losses on foreign currency transactions decreased $0.6 million, or 73.1%, compared to the same period in 2013. Income tax expense. During the three months ended June 30, 2014, income tax expense increased $4.4 million. Our effective tax rate increased 15.8% compared to the same period in 2013, as a result of increased profitability in higher tax jurisdictions and losses recorded in tax jurisdictions for which no tax benefits are being recorded. Our effective tax rate of 44.6% for the three months ended June 30, 2014 differs from the federal U.S. statutory rate primarily because of differences between income tax rates between U.S. and foreign jurisdictions and due to increased profitability in higher tax jurisdictions. 31 -------------------------------------------------------------------------------- Table of Contents Comparison of the Six Months Ended June 30, 2014 and 2013 Six Months Ended June 30, Change ($ thousands, except per share data and average footwear selling price) 2014 2013 $ % Revenues $ 689,349 $ 675,483 $ 13,866 2.1 % Cost of sales 330,551 308,767 21,784 7.1 Gross profit 358,798 366,716 (7,918 ) (2.2 ) Selling, general and administrative expenses 290,525 278,445 12,080 4.3 Restructuring charges 6,310 - 6,310 * Asset impairment charges 3,230 202 3,028 1,499.0 Income from operations 58,733 88,069 (29,336 ) (33.3 ) Foreign currency transaction losses, net 2,988 3,414 (426 ) (12.5 ) Interest income (880 ) (823 ) (57 ) 6.9 Interest expense 319 475 (156 ) (32.8 ) Other (income) expense, net (171 ) 167 (338 ) (202.4 ) Income before income taxes 56,477 84,836 (28,359 ) (33.4 ) Income tax expense 24,076 20,519 3,557 17.3 Net income $ 32,401 $ 64,317 $ (31,916 ) (49.6 )% Dividends on Series A convertible preferred shares 5,166 - 5,166 * Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature 1,339 - 1,339 * Net income attributable to common stockholders $ 25,896 $ 64,317 $ (38,421 ) (59.7 )% Net income per common share: Basic $ 0.26 $ 0.73 $ (0.47 ) (65.0 )% Diluted $ 0.25 $ 0.72 $ (0.47 ) (65.1 )% Gross margin 52.0 % 54.3 % (230 )bps (4.2 )% Operating margin 8.5 % 13.0 % (450 )bps (34.6 )% Footwear unit sales 31,855 31,577 278 0.9 % Average footwear selling price $ 21.12 $ 20.80 $ 0.32 1.5 % -------------------------------------------------------------------------------- * Percentage change is not relevant as prior years amounts were zero. 32 -------------------------------------------------------------------------------- Table of Contents Revenues. During the six months ended June 30, 2014, revenues increased $13.9 million, or 2.1%, compared to the same period in 2013 primarily due to an increase of $0.32 per unit, or 1.5%, in average footwear selling price primarily driven by new product introductions and a product mix shift from clogs to non-clog styles as well as an increase of 0.3 million, or 0.9%, in global footwear unit sales. For the six months ended June 30, 2014, revenues from our wholesale channel increased $4.3 million, or 1.0%, compared to the same period in 2013, which was primarily driven by an increase in our Asia Pacific and Europe segments as a result of expansion of our wholesale doors and the continued support from existing customers partially offset by decreased wholesale channel revenues in our Americas and Japan segments. For the six months ended June 30, 2014, revenues from our retail channel increased $9.4 million, or 4.6%, compared to the same period in 2013, which was primarily driven by our global retail expansion as we opened 49 company-operated stores (net of store closures) since June 30, 2013 partially offset by a 3.8% decrease in comparable store sales. Although we expanded our global retail presence since 2013, we have begun to and plan on continuing to moderate the pace of our retail expansion in 2014 with a focus on consolidating and enhancing the profitability of existing locations. For the six months ended June 30, 2014, revenues from our internet channel increased $0.2 million, or 0.4%, compared to the same period in 2013, which was primarily driven by increased internet sales in our Asia Pacific segment partially offset by a decrease in internet sales in our Americas segment. Our internet sales totaled approximately 7.4% and 7.5% of our consolidated net sales in the six months ended June 30, 2014 and 2013, respectively. We continue to benefit from our online presence through webstores worldwide enabling us to have increased access to our customers in a low cost, attractive manner and providing an opportunity to educate them about our products and brand. However, we intend to consolidate global company-operated e-commerce sites from 21 to 11 in order to focus our internet strategy in our principal geographical locations. Impact on Revenues due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues from our functional currencies to our reporting currency during the six months ended June 30, 2014 decreased our revenues by $3.7 million compared to the same period in 2013. The majority of this decrease was related to the decrease in value of the Japanese Yen, Brazilian Real and Russian Ruble compared to the U.S. Dollar partially offset by an increase in the Euro compared to the U.S. Dollar. 33 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our total revenue by channel for the six months ended June 30, 2014 and 2013: Six Months Ended June 30, Change Constant Currency Change(1) ($ thousands) 2014 2013 $ % $ % Channel revenues: Wholesale: Americas $ 135,890 $ 150,693 $ (14,803 ) (9.8 )% $ (12,926 ) (8.6 )% Asia Pacific 149,745 136,937 12,808 9.4 13,619 9.9 Japan 47,744 53,580 (5,836 ) (10.9 ) (2,739 ) (5.1 ) Europe 92,356 80,275 12,081 15.0 8,929 11.1 Other businesses 172 163 9 5.5 (18 ) (11.0 ) Total Wholesale 425,907 421,648 4,259 1.0 6,865 1.6 Consumer-direct: Retail: Americas 97,203 96,945 258 0.3 1,091 1.1 Asia Pacific 66,767 60,468 6,299 10.4 5,572 9.2 Japan 18,458 18,228 230 1.3 1,362 7.5 Europe 30,350 27,739 2,611 9.4 2,377 8.6 Total Retail 212,778 203,380 9,398 4.6 10,402 5.1 Internet: Americas 25,595 28,046 (2,451 ) (8.7 ) (2,256 ) (8.0 ) Asia Pacific 6,839 4,884 1,955 40.0 2,089 42.8 Japan 4,043 4,023 20 0.5 326 8.1 Europe 14,187 13,502 685 5.1 171 1.3 Total Internet 50,664 50,455 209 0.4 330 0.7 Total revenues: $ 689,349 $ 675,483 $ 13,866 2.1 % $ 17,597 2.6 % -------------------------------------------------------------------------------- (1) Reflects quarter over quarter 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" above for more information. The table below illustrates the overall growth in the number of our company-operated retail locations by type of store and reportable operating segment from June 30, 2013 to June 30, 2014: Company-operated retail locations: June 30, 2013 Opened Closed December 31, 2013 Opened Closed June 30, 2014 Type: Kiosk/Store in Store 125 6 (9 ) 122 4 (16 ) 110 Retail Stores 305 34 (12 ) 327 33 (20 ) 340 Outlet Stores 145 26 (1 ) 170 16 (12 ) 174 Total 575 66 (22 ) 619 53 (48 ) 624 Operating segment: Americas 207 19 (10 ) 216 12 (19 ) 209 Asia Pacific 206 40 (10 ) 236 28 (21 ) 243 Japan 49 1 (1 ) 49 5 (1 ) 53 Europe 113 6 (1 ) 118 8 (7 ) 119 Total 575 66 (22 ) 619 53 (48 ) 624 34 -------------------------------------------------------------------------------- Table of Contents The table below sets forth our comparable store sales by reportable operating segment for the six months ended June 30, 2014 as compared to 2013: Constant Currency Constant Currency Six Months Ended Six Months Ended Comparable store sales (1) June 30, 2014(2) June 30, 2013(2) Americas (5.7 )% (3.0 )% Asia Pacific (2.6 ) 8.0 Japan (4.4 ) (16.0 ) Europe 1.0 (1.7 ) Global (3.8 )% (1.2 )% -------------------------------------------------------------------------------- (1) Comparable store sales is determined on a monthly basis. Comparable store sales begin in the thirteenth month of a store's operation. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening. Comparable store sales growth is calculated on a currency neutral basis using historical annual average currency rates. (2) Reflects quarter over quarter 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" above for more information. Gross profit. During the six months ended June 30, 2014, gross profit decreased $7.9 million, or 2.2%, compared to the same period in 2013, which was primarily attributable to a $21.8 million, or 7.1%, increase in cost of sales, partially offset by the 2.1% increase in revenues as a result of higher average footwear selling prices and global footwear unit sales. Gross margin percentage decreased 230 basis points compared to 2013. The decline in gross margin percentage is primarily driven by the evolution of our product assortment and is consistent with our product strategy. As we expand our product lines, product mix shifts into styles that may utilize more expensive materials such as textile fabric and leather compared to the traditional clog. In addition, we experienced increased shipping costs globally and a $2.0 million non-recurring write-down of obsolete inventory partially offset by a decrease in promotional and clearance activity. Impact on Gross Profit due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate revenues and costs of sales from our functional currencies to our reporting currency during the six months ended June 30, 2014 decreased our gross profit by $1.0 million compared to the same period in 2013. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $12.1 million, or 4.3%, during the six months ended June 30, 2014 compared to the same period in 2013. As a percentage of revenue, selling, general and administrative expenses increased 90 basis points from 41.2% to 42.1% during the six months ended June 30, 2014 compared to the same period in 2013.This increase is predominately due to: † an increase of $8.0 million in retail channel expenses predominately associated with the expansion of our global retail presence in which we opened 49 company-operated locations (net of store closures) between June 30, 2013 and June 30, 2014; and † an increase of $0.3 million primarily related to an increase in bad debt expense as we are experiencing slow payments from some of our Asia Pacific wholesale accounts partially offset by cost saving initiatives and lower variable compensation. In addition to these fluctuations, we have identified certain selling, general and administrative expenses that affect the comparability or underlying business trends in our condensed consolidated financial statements. The following table summarizes these expenses as well as the remaining $3.8 million increase discussed above by reconciling our GAAP selling, general and administrative expenses to non-GAAP selling, general and administrative expenses: Six Months Ended June 30, Selling, general and administrative expenses reconciliation: 2014 2013 GAAP selling, general and administrative expenses $ 290,525 $ 278,445 Reorganizational expenses (1) (4,451 ) - New ERP implementation (2) (7,028 ) (3,481 ) Legal settlement (3) (1,846 ) - Brazil tax credits (4) - (6,094 )Non-GAAP selling, general and administrative expenses $ 277,200 $ 268,870 35 -------------------------------------------------------------------------------- Table of Contents -------------------------------------------------------------------------------- (1) This relates to bonuses, consulting fees and other expenses related to recent reorganizational activities and our investment agreement with Blackstone. (2) This represents operating expenses related to the implementation of our new ERP system and the add-back of accelerated depreciation and amortization on tangible and intangible items related to our current ERP system and supporting platforms that will no longer be utilized once the implementation of a new ERP is complete. (3) This represents legal settlement expenses. (4) This represents a net expense related to the resolution of a statutory tax audit in Brazil. Impact on Selling, General, and Administrative Expenses due to Foreign Exchange Rate Fluctuations. Changes in average foreign currency exchange rates used to translate expenses from our functional currencies to our reporting currency during the six months ended June 30, 2014, decreased selling, general and administrative expenses by approximately $1.0 million compared to the same period in 2013. Restructuring Charges. We recorded $6.3 million in restructuring charges during the six months ended June 30, 2014. These restructuring charges arose primarily as a result of our strategic plans for long-term improvement and growth of the business. Restructuring charges for the six months ended June 30, 2014 consisted of: † $4.5 million in severance costs, of which $3.7 million was related to the resignation or termination of executive management; † $1.2 million in contract termination costs primarily related to the exiting or ongoing liabilities of retail operating leases and certain distribution agreements; and † $0.7 million in other restructuring costs primarily related to the write-off of long-lived assets associated with the exiting of retail locations. Asset Impairment Charges. We recorded $3.2 million in asset impairment charges during the six months ended June 30, 2014 related to certain underperforming retail locations in our Americas, Europe and Asia Pacific segments that were unlikely to generate sufficient cash flows to fully recover the carrying value of the stores' assets over their remaining economic life. Foreign Currency Transaction Losses. The line item entitled 'Foreign currency transaction losses, net' is comprised of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies and the impact of certain foreign currency derivative instruments. During the three months ended June 30, 2014, losses on foreign currency transactions decreased $0.4 million, or 12.5%, compared to the same period in 2013. Income tax expense. During the six months ended June 30, 2014, income tax expense increased $3.6 million. Our effective tax rate increased 18.4% compared to the same period in 2013, as a result of increased profitability in higher tax jurisdictions and losses recorded in tax jurisdictions for which no tax benefits are being recorded. Our effective tax rate of 42.6% for the six months ended June 30, 2014 differs from the federal U.S. statutory rate primarily because of differences between income tax rates between U.S. and foreign jurisdictions and due to increased profitability in higher tax jurisdictions. 36 -------------------------------------------------------------------------------- Table of Contents Presentation of Reportable Segments We have four reportable operating segments based on the geographic nature of our operations: Americas, Asia Pacific, Japan and Europe. We also have an "Other businesses" category which aggregates insignificant operating segments that do not meet the reportable threshold and represent manufacturing operations located in Mexico, Italy and Asia. The composition of our reportable operating segments is consistent with that used by our Chief Operating Decision Maker ("CODM") to evaluate performance and allocate resources. Each of our reportable operating segments derives its revenues from the sale of footwear, apparel and accessories to external customers as well as intersegment sales. Revenues of the "Other businesses" category are primarily made up of intersegment sales. The remaining revenues for the "Other businesses" represent non-footwear product sales to external customers. Intersegment sales are not included in the measurement of segment operating income or regularly reviewed by the CODM and are eliminated when deriving total consolidated revenues. The primary financial measure utilized by the CODM to evaluate performance and allocate resources is segment operating income. Segment performance evaluation is based primarily on segment results without allocating corporate expenses, or indirect general, administrative and other expenses. Segment profits or losses of our reportable operating segments include adjustments to eliminate intersegment profit or losses on intersegment sales. As such, reconciling items for segment operating income represent unallocated corporate and other expenses as well as intersegment eliminations. Segment assets consist of cash and cash equivalents, accounts receivable and inventory as these balances are regularly reviewed by the CODM. Comparison of the Three Months Ended June 30, 2014 and 2013 by Segment The following table sets forth information related to our reportable operating business segments for the three months ended June 30, 2014 and 2013: Three Months Ended June 30, Change Constant Currency Change (4) ($ thousands) 2014 2013 $ % $ % Revenues: Americas $ 141,568 $ 146,255 $ (4,687 ) (3.2 )% $ (3,442 ) (2.4 )% Asia Pacific 121,486 111,832 9,654 8.6 8,837 7.9 Japan 41,195 45,472 (4,277 ) (9.4 ) (2,683 ) (5.9 ) Europe 72,757 60,170 12,587 20.9 10,380 17.3 Total segment revenues 377,006 363,729 13,277 3.7 13,092 3.6 Other businesses (86 ) 98 (184 ) (187.8 ) (184 ) (187.8 ) Total consolidated revenues $ 376,920 $ 363,827 $ 13,093 3.6 % $ 12,908 3.5 % Operating income (loss): Americas $ 24,920 $ 23,005 $ 1,915 8.3 % $ 1,805 7.8 % Asia Pacific 33,895 35,685 (1,790 ) (5.0 ) (1,971 ) (5.5 ) Japan 13,868 17,463 (3,595 ) (20.6 ) (3,077 ) (17.6 ) Europe 12,026 11,657 369 3.2 129 1.1 Total segment operating income 84,709 87,810 (3,101 ) (3.5 ) (3,114 ) (3.5 ) Other businesses(1) (4,589 ) (5,535 ) 946 (17.1 ) 660 (11.9 ) Intersegment eliminations 15 15 - 0.0 - - Unallocated corporate and other(2) (38,224 ) (31,871 ) (6,353 ) 19.9 (6,330 ) 19.9 Total consolidated operating income(3) $ 41,911 $ 50,419 $ (8,508 ) (16.9 )% $ (8,784 ) (17.4 )% -------------------------------------------------------------------------------- (1) During the three months ended June 30, 2014, operating losses of Other businesses increased $0.9 million compared to the same period in 2013, primarily due to a $0.5 million increase in gross margin and a $0.4 million decrease in selling, general and administrative expenses. (2) Includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, depreciation on corporate and other assets not allocated to operating segments and costs of the same nature of certain corporate holding companies. For the three months ended June 30, 2014, Unallocated corporate and other operating income increased $6.4 million compared to the same period in 2013, primarily due to a $2.1 million increase in restructuring charges related to the resignation or termination of certain executives, a $2.0 million inventory write-down and a $1.4 million increase in selling, general and administrative expenses primarily related to the implementation of our ERP system partially offset by cost savings in variable compensation. 37 -------------------------------------------------------------------------------- Table of Contents (3) Please refer to our Results of Operations to reconcile total consolidated operating income to net income as segment information does not have an effect on values below total consolidated operating income. (4) Reflects quarter over quarter 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" above for more information. Americas Operating Segment. During the three months ended June 30, 2014, revenues from our Americas segment decreased $4.7 million, or 3.2%, compared to the same period in 2013 primarily due to a 10.6% decrease in footwear units sold and a $1.2 million unfavorable impact from foreign currency fluctuations driven by weakening of the Brazilian Real against the U.S. Dollar. This decrease was partially offset by a 9.4% increase in average footwear unit selling price. During the three months ended June 30, 2014, revenue declines for the region were realized primarily in the wholesale channel which decreased $3.4 million, or 4.9%, compared to 2013. The decrease in wholesale channel revenue was predominately driven by a mix of lower than anticipated at-once sales as a result of accounts remaining lean on inventory and a decline in activity in Latin America. In addition to the wholesale channel, revenue declines for the region were also realized in the retail channel which decreased $0.4 million and the internet channel which decreased $0.9 million, or 5.5%, compared to 2013. The decrease in retail channel revenue was driven by high promotional activity in the second quarter of 2013 and a 6.2% decrease in comparable store sales. The decrease in internet channel revenue was predominately driven by a decrease in traffic and conversion rates. During the three months ended June 30, 2014, segment operating income increased $1.9 million, or 8.3%, compared to the same period in 2013 driven predominately by an increase in segment gross margins of 90 basis points, or 1.8%, and a $5.3 million, or 10.5%, decrease in selling, general and administrative expenses due to a non-repeating charge of $6.1 million in 2013 related to the resolution of a statutory tax audit in Brazil. Partially offsetting these increases was the revenue decrease noted above, a $1.0 million increase in retail asset impairment charges related to the long-lived assets in 16 company-operated stores and a $1.2 million increase in restructuring charges related to the reorganization of our business in Brazil. Asia Pacific Operating Segment. During the three months ended June 30, 2014, revenues from our Asia Pacific segment increased $9.7 million, or 8.6%, compared to the same period in 2013 primarily due to an 8.3% increase in average footwear selling price and a $0.8 million favorable impact from foreign currency fluctuations. During the three months ended June 30, 2014, we realized revenue growth in the region in all three channels compared to 2013. Our wholesale channel revenue increased $4.4 million, or 6.5%, primarily due to the expansion of our wholesale doors and the continued support from existing customers. Our direct-to-consumer channel revenues increased $5.3 million, or 11.9%, primarily due to increased traffic during the quarter and the addition of 37 company-operated stores (net of store closures) since June 30, 2013 as we focus on high-traffic, outlet locations. Partially offsetting this increase was a 6.0% decrease in comparable store sales primarily driven by decreases in China and Korea. During the three months ended June 30, 2014, segment operating income decreased $1.8 million, or 5.0%, compared to the same period in 2013 driven predominately by a $5.3 million, or 15.2%, increase in selling, general and administrative expenses compared to 2013 due to the expansion of our retail channel, a $0.4 million increase in retail asset impairment charges related to the long-lived assets in 12 company-operated stores and a $0.4 million increase in restructuring charges related to the reorganization of our business in Asia and the closure of certain retail locations as well as a decrease in segment gross margins of 140 basis points, or 2.2%. Partially offsetting these decreases was the revenue increase noted above and a $0.2 million favorable impact from foreign currency fluctuations. Japan Operating Segment. During the three months ended June 30, 2014, revenues from our Japan segment decreased $4.3 million, or 9.4%, compared to the same period in 2013 primarily due to an 8.7% decrease in average footwear selling price and a $1.6 million unfavorable impact from foreign currency fluctuations. During the three months ended June 30, 2014, revenue declines for the region were realized entirely in the wholesale channel which decreased $4.4 million, or 14.0%, compared to 2013. This decrease was mainly due to a soft at-once wholesale market and slow sell-through of inventory as a result of macroeconomic declines leading to lower average footwear selling prices. Partially offsetting this decrease in wholesale channel revenues was an increase of $0.1 million, or 0.5%, in our direct-to-consumer channel revenues which is primarily the result of the addition of four company-operated stores (net of store closures) since June 30, 2013 largely offset by a 6.4% decrease in comparable stores sales. During the three months ended June 30, 2014, segment operating income decreased $3.6 million, or 20.6%, compared to the same period in 2013 driven predominately by the revenue decrease noted above, a $0.5 million unfavorable impact from foreign currency fluctuations and a decrease in segment gross margins of 310 basis points, or 5.1%. Partially offsetting these decreases was a $0.3 million, or 2.7%, decrease in selling, general and administrative expenses compared to 2013. Europe Operating Segment. During the three months ended June 30, 2014, revenues from our Europe segment increased $12.6 million, or 20.9%, compared to the same period in 2013 primarily due to a 52.6% increase in footwear units sold. This increase was partially offset by a 20.4% decrease in average footwear selling price. This contrasting increase in average footwear units sold and decrease in average footwear selling price is primarily related to discounting on certain products in our wholesale channel. In addition to sales metrics, our Europe segment realized a $3.1 million favorable impact from foreign currency fluctuations on segment revenues driven by the strengthening of the Euro and British Pound Sterling, which was partially offset by a $0.9 million unfavorable impact from foreign currency fluctuations on segment revenues as a result of the sudden weakening of the Russian Ruble against the U.S. Dollar throughout the quarter due to political uncertainty. During the three months ended June 30, 2014, we realized revenue growth in the region in all three channels compared to 2013. Our wholesale channel revenue increased $10.8 million, or 32.1%, primarily due 38 -------------------------------------------------------------------------------- Table of Contents to the expansion in our number of wholesale doors and strong sales performance in Germany, the United Kingdom and France. Our direct-to-consumer channel revenues increased $1.8 million, or 6.6%, primarily due to the addition of six company-operated stores (net of store closures) since June 30, 2013 coupled with a 1.1% increase in comparable store sales. During the three months ended June 30, 2014, segment operating income increased $0.4 million, or 3.2%, compared to the same period in 2013 driven predominately by the revenue increase noted above and a $0.2 million favorable impact from foreign currency fluctuations. Partially offsetting these increases was a $2.8 million, or 12.9%, increase in selling, general and administrative expenses compared to 2013 due to the expansion of our retail channel and legal settlement fees of $0.4 million, a decrease in segment gross margins of 310 basis points, or 5.6%, a $1.5 million increase in retail asset impairment charges related to the long-lived assets in 9 company-operated stores and a $0.3 million increase in restructuring charges related to the reorganization of our business in Europe and the closure of certain retail locations. 39 -------------------------------------------------------------------------------- Table of Contents Comparison of the Six Months Ended June 30, 2014 and 2013 by Segment The following table sets forth information related to our reportable operating business segments for the six months ended June 30, 2014 and 2013: Six Months Ended June 30, Change Constant Currency Change (4) ($ thousands) 2014 2013 $ % $ % Revenues: Americas $ 258,688 $ 275,684 $ (16,996 ) (6.2 )% $ (14,091 ) (5.1 )% Asia Pacific 223,351 202,289 21,062 10.4 21,280 10.5 Japan 70,245 75,831 (5,586 ) (7.4 ) (1,051 ) (1.4 ) Europe 136,893 121,516 15,377 12.7 11,477 9.4 Total segment revenues 689,177 675,320 13,857 2.1 17,615 2.6 Other businesses 172 163 9 5.5 (18 ) (11.0 ) Total consolidated revenues $ 689,349 $ 675,483 $ 13,866 2.1 % $ 17,597 2.6 % Operating income (loss): Americas $ 38,357 $ 43,818 $ (5,461 ) (12.5 )% $ (5,610 ) (12.8 )% Asia Pacific 61,578 62,788 (1,210 ) (1.9 ) (1,397 ) (2.2 ) Japan 20,330 25,023 (4,693 ) (18.8 ) (3,651 ) (14.6 ) Europe 19,565 24,328 (4,763 ) (19.6 ) (5,348 ) (22.0 ) Total segment operating income 139,830 155,957 (16,127 ) (10.3 ) (16,006 ) (10.3 ) Other businesses(1) (8,345 ) (9,412 ) 1,067 (11.3 ) 1,020 (10.8 ) Intersegment eliminations 30 30 - 0.0 - - Unallocated corporate and other(2) (72,782 ) (58,506 ) (14,276 ) 24.4 (14,219 ) 24.3 Total consolidated operating income(3) $ 58,733 $ 88,069 $ (29,336 ) (33.3 )% $ (29,205 ) (33.2 )% Foreign currency transaction losses, net 2,988 3,414 (426 ) (12.5 ) Interest income (880 ) (823 ) (57 ) 6.9 Interest expense 319 475 (156 ) (32.8 ) Other (income) expense, net (171 ) 167 (338 ) (202.4 ) Income before income taxes $ 56,477 $ 84,836 $ (28,359 ) (33.4 )% -------------------------------------------------------------------------------- (1) During the six months ended June 30, 2014, operating losses of Other businesses decreased $1.1 million compared to 2013, primarily due to a $0.9 million increase in gross margin and a $0.2 million decrease in selling, general and administrative expenses. (2) Includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, depreciation on corporate and other assets not allocated to operating segments and costs of the same nature of certain corporate holding companies. For the six months ended June 30, 2014, Unallocated corporate and other operating income increased $14.3 million compared to the same period in 2013, primarily due to a $8.6 million increase in selling, general and administrative expenses primarily related to the implementation of our ERP system and our investment agreement with Blackstone partially offset by cost savings in variable compensation. (3) Please refer to our Results of Operations to reconcile total consolidated operating income to net income as segment information does not have an effect on values below total consolidated operating income. (4) Reflects quarter over quarter 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" above for more information. Americas Operating Segment. During the six months ended June 30, 2014, revenues from our Americas segment decreased $17.0 million, or 6.2%, compared to 2013 primarily due to a 10.9% decrease in footwear units sold and a $2.9 million unfavorable impact from foreign currency fluctuations driven by weakening of the Brazilian Real against the U.S. Dollar. This decrease was partially offset by a 6.0% increase in average footwear unit selling price. During the three months ended June 30, 2014, revenue declines for the region were realized primarily in the wholesale channel which decreased $14.8 million, or 9.8%, and in the internet channel which decreased $2.5 million, or 8.7%, compared to 2013. The decrease in wholesale channel revenue was predominately driven by a mix of lower than anticipated at-once sales as a result of accounts remaining lean on inventory and a decline in activity in Latin America. The decrease in internet channel revenue was predominately driven by a decrease in average footwear selling price and footwear unit sales related to internet sales. Partially offsetting this decrease was a $0.3 million, or 0.3%, increase in retail channel revenues, which is primarily the result of the addition of two company-operated stores (net of store closures) since June 30, 2013. This increase in retail revenue was partially offset by a 5.7% decrease in comparable store sales as we reduced promotions within the region. During the six 40 -------------------------------------------------------------------------------- Table of Contents months ended June 30, 2014, segment operating income decreased $5.5 million, or 12.5%, compared to 2013 driven predominately by the revenue decrease noted above, a $1.0 million increase in retail asset impairment charges related to the long-lived assets in 16 company-operated stores, a $1.2 million increase in restructuring charges related to the reorganization of our business in Brazil and a decrease in segment gross margins of 90 basis points, or 1.8%. Partially offsetting this decrease was a $7.7 million, or 8.1%, decrease in selling, general and administrative expenses due to a non-repeating charge of $6.1 million in 2013 related to the resolution of a statutory tax audit in Brazil. Asia Pacific Operating Segment. During the six months ended June 30, 2014, revenues from our Asia Pacific segment increased $21.1 million, or 10.4%, compared to 2013 primarily due to an 8.1% increase in average footwear selling price and a 2.3% increase in footwear units sold. Partially offsetting this increase was a $0.2 million unfavorable impact from foreign currency fluctuations. During the six months ended June 30, 2014, we realized revenue growth in the region in all three channels compared to 2013. Our wholesale channel revenue increased $12.8 million, or 9.4%, primarily due to the expansion of our wholesale doors and the continued support from existing customers. Our direct-to-consumer channel revenues increased $8.3 million, or 12.6%, primarily due to increased traffic during the year and the addition of 37 company-operated stores (net of store closures) since June 30, 2013 as we focus on high-traffic, outlet locations. Partially offsetting this increase was a 2.6% decrease in comparable store sales. During the six months ended June 30, 2014, segment operating income decreased $1.2 million, or 1.9%, compared to 2013 driven predominately by a $8.3 million, or 13.2%, increase in selling, general and administrative expenses due to the expansion of our retail channel, a $0.4 million increase in retail asset impairment charges related to the long-lived assets in 12 company-operated stores and a $0.4 million increase in restructuring charges related to the reorganization of our business in Asia and the closure of certain retail locations as well as a decrease in segment gross margins of 230 basis points, or 3.7%. Partially offsetting these decreases was the revenue increase noted above and a $0.2 million favorable impact from foreign currency fluctuations. Japan Operating Segment. During the six months ended June 30, 2014, revenues from our Japan segment decreased $5.6 million, or 7.4%, compared to 2013 primarily due to a 10.7% decrease in average footwear selling price and a $4.5 million unfavorable impact from foreign currency fluctuations. Partially offsetting this decrease was a 4.1% increase in footwear units sold. During the six months ended June 30, 2014, revenue declines for the region were realized entirely in the wholesale channel which decreased $5.8 million, or 10.9%, compared to 2013. This decrease was mainly due to a soft wholesale market and slow sell-through of inventory as a result of macroeconomic declines leading to lower average footwear selling prices. Partially offsetting this decrease in wholesale channel revenues was an increase of $0.3 million, or 1.1%, in our direct-to-consumer channel revenues which is primarily the result of the addition of four company-operated stores (net of store closures) since June 30, 2013 offset by a 4.4% decrease in comparable stores sales. During the six months ended June 30, 2014, segment operating income decreased $4.7 million, or 18.8%, compared to 2013 driven predominately by the revenue decrease noted above, a $1.0 million unfavorable impact from foreign currency fluctuations and a decrease in segment gross margins of 280 basis points, or 4.8%. Partially offsetting these decreases was a $0.5 million, or 2.7%, decrease in selling, general and administrative expenses compared to 2013. Europe Operating Segment. During the six months ended June 30, 2014, revenues from our Europe segment increased $15.4 million, or 12.7%, compared to 2013 primarily due to a 26.4% increase in footwear units sold. This increase was partially offset by a 10.8% decrease in average footwear selling price. In addition to sales metrics, our Europe segment realized a $5.6 million favorable impact from foreign currency fluctuations on segment revenues driven by the strengthening of the Euro and British Pound Sterling, which was partially offset by a $1.7 million unfavorable impact from foreign currency fluctuations on segment revenues as a result of the weakening of the Russian Ruble against the U.S. Dollar throughout the year due to political uncertainty. During the six months ended June 30, 2014, we realized revenue growth in the region in all three channels compared to 2013. Our wholesale channel revenue increased $12.1 million, or 15.0%, primarily due to the expansion in our number of wholesale doors and strong sales performance throughout the region. Our direct-to-consumer channel revenues increased $3.3 million, or 8.0%, primarily due to the addition of 6 company-operated stores (net of store closures) since June 30, 2013 coupled with a 1.0% increase in comparable store sales. During the six months ended June 30, 2014, segment operating income decreased $4.8 million, or 19.6%, compared to 2013 driven predominately by a $6.7 million, or 15.7%, increase in selling, general and administrative expenses compared to 2013 due to the expansion of our retail channel and legal settlement fees of $1.8 million, a $1.5 million increase in retail asset impairment charges related to the long-lived assets in 9 company-operated stores, a $1.0 million increase in restructuring charges related to the reorganization of our business in Europe and the closure of certain retail locations and a decrease in segment gross margins of 360 basis points, or 6.5%. Partially offsetting this decrease was the revenue increase noted above and a $0.6 million favorable impact from foreign currency fluctuations. 41 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Cash Flows During the six months ended June 30, 2014, cash and cash equivalents increased $91.8 million, 28.9%, to $409.0 million compared to $317.1 million at December 31, 2013. The primary driver of this increase is the $182.2 million in net cash proceeds from our investment agreement with Blackstone. This increase was partially offset by strategic reinvestments into the business, including $30.1 million in net capital additions primarily related to our ERP system implementation, and the repurchase of $47.0 million of stock associated with board authorized repurchases. We anticipate that cash flows from operations will be sufficient to meet the ongoing needs of our business for the next twelve months. In order to provide additional liquidity in the future and to help support our strategic goals, we have a revolving credit facility with a syndicate of lenders, including PNC Bank, National Association ("PNC"), which currently provides us with up to $100.0 million in borrowing capacity and matures in December 2017 (see Revolving Credit Facility below). Additional future financing may be necessary and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all. Sale of Preferred Stock On January 27, 2014, we received approximately $182.2 million of proceeds for the sale of 200,000 shares of Series A preferred stock to Blackstone and its permitted transferees. The Series A preferred stock has an aggregate stated value of $200.0 million, or $1,000.0 per share. The Series A preferred stock ranks senior to our common stock with respect to dividend rights and rights on liquidation, winding-up and dissolution. Holders of Series A preferred stock are entitled to cumulative dividends payable quarterly in cash at a rate of 6% per annum as well as any dividends declared or paid on common stock and are entitled to vote together with the holders of common stock on an as-converted basis. As of June 30, 2014, accrued dividends amounted to $3.0 million, which were paid to Blackstone on July 1, 2014. The Series A preferred stock has several conversion features as well as redemption rights. The conversion rate is subject to customary anti-dilution and other adjustments subject to certain share caps and other restrictions. As of June 30, 2014, the Blackstone investment represented approximately 13.8% ownership of the Company. Stock Repurchase Plan Authorizations We continue to evaluate options to maximize the returns on our cash and maintain an appropriate capital structure, including, among other alternatives, repurchases of our common stock. Subject to certain restrictions on repurchases under our revolving credit facility, in December 2013, the board of directors authorized the repurchase up to $350.0 million of our common stock. 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 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 of directors may suspend, modify or terminate the repurchase program at any time without prior notice. During the three months ended June 30, 2014, we repurchased approximately 2.3 million shares at a weighted average price of $14.71 per share for an aggregate price of approximately $33.9 million excluding related commission charges, under our publicly-announced repurchase plan. During the six months ended June 30, 2014, we repurchased approximately 3.2 million shares at a weighted average price of $14.77 per share for an aggregate price of approximately $46.9 million excluding related commission charges, under our publicly-announced repurchase plan. As of June 30, 2014, we had approximately $303.1 million available for repurchase under our repurchase authorization. Since June 30, 2014, we have repurchased approximately 0.6 million shares at a weighted average price of $14.72 per share for an aggregate price of approximately $8.2 million excluding related commission charges under our publicly-announced repurchase plan. Revolving Credit Facility On December 16, 2011, we entered into an 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. The Credit Agreement enables us to borrow up to $100.0 million, with the ability to increase commitments to up to $125 million subject to certain conditions, and is currently set to mature on December 16, 2017. The Credit Agreement is available for working capital, capital expenditures, permitted acquisitions, reimbursement of drawings under letters of credit, and permitted dividends, distributions, purchases, redemptions and retirements of equity interests. Borrowings under the Credit Agreement are secured by all of 42 -------------------------------------------------------------------------------- Table of Contents our assets including all receivables, equipment, general intangibles, inventory, investment property, subsidiary stock and intellectual property. Borrowings under the Credit Agreement bear interest at a variable rate. For domestic rate loans, the interest rate is equal to the highest of (i) the daily federal funds open rate as quoted by ICAP North America, Inc. plus 0.5%, (ii) PNC's prime rate and (iii) a daily LIBOR rate plus 1.0%, in each case there is an additional margin ranging from 0.25% to 1.00% based on certain conditions. For LIBOR rate loans, the interest rate is equal to a LIBOR rate plus a margin ranging from 1.25% to 2.00% based on certain conditions. The Credit Agreement requires monthly interest payments with respect to domestic rate loans and at the end of each interest period with respect to LIBOR rate loans. The Credit Agreement further provides for a limit on the issuance of letters of credit to a maximum of $20.0 million. The Credit Agreement contains provisions requiring us to maintain compliance with certain restrictive and financial covenants. As of June 30, 2014 and December 31, 2013, we had no outstanding borrowings under the Credit Agreement. As of June 30, 2014 and December 31, 2013, we had issued and outstanding letters of credit of $7.4 million and $7.2 million, respectively, which were reserved against the borrowing base under the terms of the Credit Agreement. As of June 30, 2014, we were in compliance with all restrictive and financial covenants under the Credit Agreement. Long-term Bank Borrowings On December 10, 2012, we entered into a Master Installment Payment Agreement ("Master IPA") with PNC in which PNC finances our purchase of software and services, which may include but are not limited to third party costs to design, install and implement software systems, and associated hardware described in the schedules defined within the Master IPA. The Master IPA was entered into to finance our implementation of a new enterprise resource planning ("ERP") system, which began in October 2012 and is estimated to continue through early 2015. The terms of each note payable under the Master IPA consist of variable interest rates and payment terms based on amounts borrowed and timing of activity throughout the implementation of the ERP system. As of June 30, 2014 and December 31, 2013, we had $14.4 million and $16.8 million, respectively, of long-term debt outstanding under five separate notes payable under the Master IPA, of which $5.4 million and $5.1 million, respectively, represent current installments. As of June 30, 2014, the notes bear interest rates ranging from 2.45% to 2.79% and maturities ranging from September 2016 to September 2017. As this debt arrangement relates solely to the construction and implementation of an ERP system for use by the Company, all interest expense incurred under the arrangement has been capitalized to the condensed consolidated balance sheets until the assets are ready for intended use and will be amortized over the useful life of the software upon that date. During the three and six months ended June 30, 2014, we capitalized $0.1 million and $0.2 million, respectively, in interest expense related to this debt arrangement to the condensed consolidated balance sheets. During the three and six months ended June 30, 2013, we did not capitalize any interest expense related to this debt arrangement. Working Capital During the six months ended June 30, 2014, accounts receivable increased $91.5 million, or 87.6%, to $195.9 million compared to $104.4 million at December 31, 2013, which is primarily the result of seasonality as second quarter revenues exceeded our fourth quarter revenues. During the six months ended June 30, 2014, inventories increased $29.3 million, or 18.1%, to $191.6 million compared to $162.3 million at December 31, 2013, which is primarily related to seasonality, product mix and a slight increase in company-operated retail locations. Capital Assets During the three months and six months ended June 30, 2014, net capital expenditures acquired, inclusive of intangible assets, were $15.5 million and $33.0 million, respectively, compared to $16.0 million and $32.5 million, respectively, during the same period in 2013 primarily due to an increase in the capitalization of our ERP implementation costs in 2014 partially offset by a decrease in retail expansion. We have entered into various operating leases that require cash payments on a specified schedule. Over the next five years we are committed to make payments of approximately $245.4 million related to our operating leases. We plan to continue to enter into operating leases related to our retail stores; however, we plan to reduce our overall retail footprint in 2014. We also continue to evaluate cost reduction opportunities. Our evaluation of cost reduction opportunities will include an evaluation of contracts for sponsorships, operating lease contracts and other contracts that require future minimum payments resulting in fixed operating costs. Any changes to these contracts may require early termination fees or other charges that could result in significant cash expenditures. 43 -------------------------------------------------------------------------------- Table of Contents Repatriation of Cash As we are a global business, we have cash balances which are located in various countries and are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries may have additional restrictions and covenants associated with them which could adversely impact our liquidity and ability to timely access and transfer cash balances between entities. We generally consider unremitted earnings of subsidiaries operating outside of the U.S. to be indefinitely reinvested; however, our board of directors recently approved a foreign cash repatriation strategy. As part of this strategy, we have repatriated approximately $90.0 million for which income taxes have already been accrued for or paid. Further cash repatriation will depend on future cash requirements in the U.S. We maintain approximately $52.0 million of foreign earnings for which tax has previously been provided, and which has not been repatriated at this time. Most of the cash balances held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal and state income taxes less applicable foreign tax credits. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. Certain countries, including China, have monetary laws which may limit our ability to utilize cash resources in those countries for operations in other countries. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and could adversely affect our liquidity. As of June 30, 2014, we held $245.4 million of our total $409.0 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the $245.4 million, $1.3 million could potentially be restricted, as described above. If the remaining $244.1 million were to be immediately repatriated to the U.S., we would be required to incur approximately $43.6 million in taxes that were not previously provided for in our consolidated statement of operations. Contractual Obligations In February 2011, we renewed and amended our supply agreement with Finproject S.r.l. which provides us the exclusive right to purchase certain raw materials used to manufacture our products. The agreement also provides that we meet minimum purchase requirements to maintain exclusivity throughout the term of the agreement, which expires December 31, 2014. Historically, the minimum purchase requirements have not been onerous and we do not expect them to become onerous in the future. Depending on the material purchased, pricing is either based on contracted price or is subject to quarterly reviews and fluctuates based on order volume, currency fluctuations and raw material prices. Pursuant to the agreement, we guarantee the payment for certain third-party manufacturer purchases of these raw materials up to a maximum potential amount of €3.5 million (approximately $4.8 million as of June 30, 2014), through a letter of credit that was issued to Finproject S.r.l. The following table summarizes aggregate information about our significant contractual cash obligations as of June 30, 2014: Payments due by period Less than 1 - 3 3 - 5 More than ($ thousands) Total 1 year years years 5 years Operating lease obligations (1) $ 376,436 $ 70,666 $ 105,333 $ 69,428 $ 131,009 Inventory purchase obligations with third party manufacturers (2) 108,699 108,699 - - - Dividends payable (3) 96,000 12,033 24,000 24,000 35,967 Other contracts (4) 32,238 10,292 17,102 4,844 - Debt obligations (5) (9) 15,010 5,739 8,956 315 - Estimated liability for uncertain tax positions (6) 884 884 - - - Minimum licensing royalties (7) 3,095 973 1,409 713 - Capital lease obligations (8) (9) 61 45 16 - - Total $ 632,423 $ 209,331 $ 156,816 $ 99,300 $ 166,976 -------------------------------------------------------------------------------- (1) Our operating lease obligations consist of retail stores, offices, warehouses, vehicles, and equipment expiring at various dates through 2033. This balance represents the minimum cash commitment under contract to various third-parties for operating lease obligations including the effect of rent escalation clauses, deferred rent and minimum sublease rentals due in the future under non-cancelable subleases. This balance does not include certain contingent rent clauses that may require additional rental amounts based on sales volume, inventories, etc. as these amounts are not determinable for future periods. 44 -------------------------------------------------------------------------------- Table of Contents (2) Our inventory purchase obligations with third party manufacturers consist of open purchase orders for footwear products and includes an immaterial amount of purchase commitments with certain third-party manufacturers for yet-to-be-received finished product where title passes to us upon receipt. All purchase obligations with third party manufacturers are expected to be paid within one year. (3) Dividends payable are associated with our investment agreement with Blackstone at a rate of 6.0% the stated value of the investment. The amounts represent expected dividend payments over the eight year redemption accretion period. (4) Other contracts consist of various agreements with third-party providers. (5) We have entered into an agreement with PNC to finance the purchase of software and services related to the implementation of our new ERP system, which began in October 2012 and is expected to continue into late 2014. Our current debt obligations consist of five separate notes issued under the agreement, which bear interest rates ranging from 2.45% to 2.79% and maturities ranging from September 2016 to September 2017. (6) Our estimated liability for uncertain tax positions are unrecognized tax benefits taken in our income tax return that would reduce our effective tax rate, if recognized. As of June 30, 2014, we had gross unrecognized tax benefits recorded in non-current liabilities of $23.0 million and an additional $2.8 million in gross interest and penalties. Of the $23.0 million, we expect approximately $0.9 million to be paid within less than a year. Of the remaining $22.1 million uncertain tax liabilities, we are unable to make a reasonable estimate of the timing of payments in individual years and therefore, such amounts are not included in the contractual obligation table above. (7) Our minimum licensing royalties consist of usage-based payments for the right to use various licenses, trademarks and copyrights in the production of our footwear, apparel and accessories. Royalty obligations are based on minimum guarantees under contract; however, may include additional royalty obligations based on sales volume that are not determinable for future periods. (8) Our capital lease obligations consist of office equipment expiring at various dates through 2016. This balance represents the minimum cash commitment under contract to various third-parties for capital lease obligations. (9) Amounts include anticipated interest payments. Off-Balance Sheet Arrangements We had no material off balance sheet arrangements as of June 30, 2014. Seasonality Due to the seasonal nature of our footwear which is more heavily focused on styles suitable for warm weather, revenues generated during our first and fourth quarters are typically less than revenues generated during our second and third quarters, when the northern hemisphere is experiencing warmer weather. We continue to expand our product line to include more winter-oriented styles to mitigate some of the seasonality of our revenues. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new model introductions or general economic or consumer conditions. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any other year. Critical Accounting Policies and Estimates For a discussion of accounting policies that we consider critical to our business operations and an understanding of our results of operations and that affect the more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" contained in our Annual Report on Form 10-K for the year ended December 31, 2013 and incorporated by reference herein. |