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Crocs 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32
  6. Ex-32

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

x

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

 

For the quarterly period ended June 30, 2010

 

or

 

o

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

 

For the transition period from               to              

 

Commission File No. 000-51754

 


 

Crocs, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-2164234

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

6328 Monarch Park Place, Niwot Colorado 80503

(Address of registrant’s principal executive offices)

 

(303) 848-7000

(Registrant’s telephone number, including area code)

 


 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

As of July 31, 2010, Crocs, Inc. had 86,630,707 shares of its $0.001 par value common stock outstanding.

 

 

 



Table of Contents

 

Crocs, Inc.

Form 10-Q

Quarter Ended June 30, 2010

Table of Contents

 

PART I—Financial Information

 

Item 1. Financial Statements

 

Unaudited Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2010 and 2009

 

Unaudited Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Item 4. Controls and Procedures

 

PART II—Other Information

 

Item 1. Legal Proceedings

 

Item 1A. Risk Factors

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Item 6. Exhibits

 

Signatures

 

 

2



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

CROCS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except share and per share data)

 

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenues

 

$

228,046

 

$

197,722

 

$

394,898

 

$

332,614

 

Cost of sales

 

96,127

 

96,610

 

176,275

 

181,771

 

Gross profit

 

131,919

 

101,112

 

218,623

 

150,843

 

Selling, general and administrative expenses

 

94,047

 

94,606

 

168,825

 

163,395

 

Foreign currency transaction losses (gains), net

 

(1,129

)

(3,623

)

(1,421

)

(214

)

Restructuring charges

 

 

5,915

 

2,539

 

5,953

 

Impairment charges

 

 

23,655

 

141

 

23,724

 

Charitable contributions

 

275

 

5,078

 

418

 

5,119

 

Income (loss) from operations

 

38,726

 

(24,519

)

48,121

 

(47,134

)

Interest expense

 

163

 

562

 

292

 

1,257

 

Gain on charitable contribution

 

(32

)

(2,024

)

(116

)

(2,024

)

Other expense (income), net

 

(291

)

(343

)

(50

)

(1,446

)

Income (loss) before income taxes

 

38,886

 

(22,714

)

47,995

 

(44,921

)

Income tax expense

 

6,602

 

7,567

 

9,994

 

7,777

 

Net income (loss)

 

$

32,284

 

$

(30,281

)

$

38,001

 

$

(52,698

)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

$

(0.36

)

$

0.44

 

$

(0.62

)

Diluted

 

$

0.37

 

$

(0.36

)

$

0.43

 

$

(0.62

)

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share data)

 

(Unaudited)

 

 

 

June 30, 2010

 

December 31, 2009

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

96,867

 

$

77,343

 

Restricted cash

 

590

 

1,144

 

Accounts receivable, net

 

93,974

 

50,458

 

Inventories

 

113,553

 

93,329

 

Deferred tax assets, net

 

7,569

 

7,358

 

Income tax receivable

 

11,297

 

8,611

 

Other receivables

 

11,715

 

16,140

 

Prepaid expenses and other current assets

 

14,277

 

12,871

 

Total current assets

 

349,842

 

267,254

 

Property and equipment, net

 

66,731

 

71,084

 

Restricted cash

 

1,466

 

1,506

 

Intangible assets, net

 

41,335

 

35,984

 

Deferred tax assets, net

 

17,403

 

18,479

 

Marketable securities

 

5,444

 

866

 

Other assets

 

14,832

 

14,565

 

Total assets

 

$

497,053

 

$

409,738

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

51,841

 

$

23,434

 

Accrued expenses and other current liabilities

 

58,544

 

53,589

 

Accrued restructuring charges

 

3,977

 

2,616

 

Income taxes payable

 

20,120

 

6,377

 

Note payable, current portion of long-term debt and capital lease obligations

 

1,556

 

640

 

Total current liabilities

 

136,038

 

86,656

 

Long term debt and capital lease obligations

 

1,434

 

912

 

Deferred tax liabilities, net

 

1,867

 

2,192

 

Long term restructuring

 

103

 

520

 

Other liabilities

 

31,803

 

31,838

 

Total liabilities

 

171,245

 

122,118

 

Commitments and contingencies (note 15)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common shares, par value $0.001 per share; 250,000,000 shares authorized, 87,079,451 and 86,482,574 shares issued and outstanding, respectively, at June 30, 2010 and 86,224,760 and 85,659,581 shares issued and outstanding, respectively, at December 31, 2009

 

87

 

85

 

Treasury stock, at cost, 596,877 and 565,179 shares, respectively

 

(24,963

)

(25,260

)

Additional paid-in capital

 

272,146

 

266,472

 

Retained earnings

 

60,156

 

22,155

 

Accumulated other comprehensive income

 

18,382

 

24,168

 

Total stockholders’ equity

 

325,808

 

287,620

 

Total liabilities and stockholders’ equity

 

$

497,053

 

$

409,738

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

(Unaudited)

 

 

 

For the Six Months
Ended June 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

38,001

 

$

(52,698

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

17,610

 

19,177

 

Loss (gain) on disposal of fixed assets

 

796

 

(753

)

Unrealized gain on foreign exchange rates

 

(3,309

)

(10,729

)

Deferred income taxes

 

1,089

 

1,342

 

Asset impairment

 

133

 

23,656

 

Inventory write down

 

 

2,568

 

Charitable contributions

 

435

 

5,075

 

Gain on charitable contributions

 

(124

)

(2,024

)

Non-cash restructuring charges

 

196

 

1,768

 

Share-based compensation

 

3,870

 

23,419

 

Bad debt expense

 

1,653

 

1,263

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(46,659

)

(31,650

)

Income tax receivable

 

(3,480

)

23,130

 

Inventories

 

(23,255

)

25,944

 

Prepaid expenses and other assets

 

1,304

 

(5,889

)

Accounts payable

 

30,063

 

225

 

Accrued restructuring charges

 

1,745

 

4,644

 

Accrued expenses and other liabilities

 

19,768

 

(2,351

)

Cash provided by operating activities

 

39,836

 

26,117

 

Cash flows from investing activities:

 

 

 

 

 

Cash paid for purchases of property and equipment

 

(13,281

)

(6,024

)

Proceeds from disposal of property and equipment

 

937

 

1,108

 

Cash paid for intangible assets

 

(6,985

)

(2,450

)

Purchases of marketable securities

 

(5,482

)

 

Maturities of marketable securities

 

1,701

 

 

Restricted cash

 

299

 

264

 

Cash used in investing activities

 

(22,811

)

(7,102

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from note payable

 

18,400

 

 

Repayment of note payable and capital lease obligations

 

(19,054

)

(5,130

)

Repurchase of stock for stock option exercise tax withholding

 

(421

)

 

Exercise of stock options

 

2,341

 

227

 

Cash provided by (used in) financing activities

 

1,266

 

(4,903

)

Effect of exchange rate changes on cash

 

1,233

 

11,700

 

Net increase in cash and cash equivalents

 

19,524

 

25,812

 

Cash and cash equivalents—beginning of period

 

77,343

 

51,665

 

Cash and cash equivalents—end of period

 

$

96,867

 

$

77,477

 

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

 

 

 

 

 

Interest

 

$

284

 

$

1,233

 

Income taxes

 

$

6,674

 

$

6,745

 

Non-cash investing and financing activities:

 

 

 

 

 

Assets acquired through capital leases

 

$

2,089

 

$

1,024

 

 

See notes to condensed consolidated financial statements.

 

5



Table of Contents

 

CROCS, INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

1. BASIS OF PRESENTATION

 

Crocs, Inc. and its subsidiaries (collectively, “we,” “us,” or the “Company”) are engaged in the design, manufacture, worldwide marketing and brand management of footwear made for men, women and children.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, these statements do not include all of the information and disclosures required by GAAP or Securities and Exchange Commission (“SEC”) rules and regulations for complete financial statements. In the opinion of management, these financial statements reflect all adjustments considered necessary for a fair presentation of the results for the interim periods presented.  The results of operations for any interim period are not necessarily indicative of results for the full year.

 

These statements should be read in conjunction with the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”). The accounting policies used in preparing these unaudited condensed consolidated financial statements are the same as those described in Note 2 to the consolidated financial statements in the 2009 Form 10-K.

 

Certain reclassifications have been made to prior year amounts to conform to current year presentation as follows:  Foreign currency transaction losses (gains), net have been reclassified from selling, general, and administrative expenses and are now reported separately. There was no change to the Company’s loss from continuing operations as a result of these reclassifications.  Marketable securities of a long-term nature have been reclassified from long-term other assets and are now reported separately.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Management believes that the estimates, judgments and assumptions made when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts, returns and discounts; impairment assessments and charges; recoverability of assets (including deferred tax assets); uncertain tax positions; share-based compensation expense; fair value of acquired intangibles; assessment of lower of cost or market on inventory; useful lives assigned to long-lived assets; depreciation; and provisions for contingencies; are reasonable based on information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements as well as the reported amounts of revenue and expenses during the periods presented. Management also makes estimates in our assessments of potential losses in relation to threatened or pending legal and tax matters. See Note 18—Legal Proceedings. Actual results could materially differ from these estimates. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense for the estimated loss. If there is the potential to recover a portion of the estimated loss from a third party, the Company makes a separate assessment of recoverability and reduces the estimated loss if recovery is also deemed probable.

 

Change in Accounting Principle

 

Effective January 1, 2010, the Company changed its inventory valuation method for all inventories from the first-in, first-out (“FIFO”) cost method to the moving average cost method, which approximates FIFO.  The Company believes the change to the moving average cost method is preferable under the circumstances because the moving average methodology results in better alignment with the physical flow of inventory than the FIFO methodology, it is calculated by our inventory information system, which incorporates automated controls, and is also the method management uses when preparing budgets, reviewing actual and forecasted financial information, as well as the method used in determining incentive management compensation.  The moving average cost results in substantially the same results of operations per period.

 

6



Table of Contents

 

Financial statements for periods ending on or before December 31, 2009 have not been retroactively adjusted due to immateriality. The impact of the change for the three and six month period ended June 30, 2010 is also immaterial.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

 

In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The amendments in ASU 2009-17 replace the quantitative-based risks-and-rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has (1) the power to direct the activities of a variable interest entity that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity. The ASU also requires additional disclosures about a reporting entity’s involvement with variable interest entities and about any significant changes in risk exposure as a result of that involvement. The Company adopted the guidance at the beginning of 2010 and such adoption did not have a material impact on the Company’s unaudited condensed financial statements.  See Note 14 — Variable Interest Entities.

 

3. INVENTORIES

 

Inventories by major classification are as follows (in thousands):

 

 

 

June 30,
2010

 

December 31,
2009

 

Finished goods

 

$

107,363

 

$

88,775

 

Work-in-progress

 

215

 

220

 

Raw materials

 

5,975

 

4,334

 

Net Inventory

 

$

113,553

 

$

93,329

 

 

4. PROPERTY AND EQUIPMENT

 

Property and equipment includes the following (in thousands):

 

 

 

June 30,
2010

 

December 31,
2009

 

Machinery and equipment

 

$

85,059

 

$

82,733

 

Leasehold improvements

 

42,509

 

38,436

 

Subtotal

 

127,568

 

121,169

 

Less: Accumulated depreciation

 

(60,837

)

(50,085

)

Property and equipment, net

 

$

66,731

 

$

71,084

 

 

5. INTANGIBLE ASSETS

 

The following table summarizes the Company’s identifiable intangible assets as of June 30, 2010 and December 31, 2009 (in thousands):

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents, copyrights, and trademarks

 

$

5,631

 

$

1,655

 

$

3,976

 

$

5,673

 

$

1,396

 

$

4,277

 

Customer relationships

 

5,633

 

4,947

 

686

 

5,928

 

4,912

 

1,016

 

Core technology

 

4,618

 

4,618

 

 

4,614

 

4,614

 

 

Non-competition agreement

 

636

 

636

 

 

636

 

594

 

42

 

Capitalized software

 

47,129

 

10,456

 

36,673

 

38,884

 

8,235

 

30,649

 

Total Intangible assets

 

$

63,647

 

$

22,312

 

$

41,335

 

$

55,735

 

$

19,751

 

$

35,984

 

 

7



Table of Contents

 

For amortizable intangible assets denominated in a foreign currency, the Company translates the gross asset and accumulated amortization at the balance sheet rate and records amortization expense using the weighted average rate of exchange for the applicable period causing a difference.  This difference between the recorded amortization expense and the change in accumulated amortization is reflected in the accumulated other comprehensive income line item on the Company’s unaudited condensed consolidated balance sheets.

 

6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities include the following (in thousands):

 

 

 

June 30,
2010

 

December 31,
2009

 

Accrued compensation and benefits

 

$

16,941

 

$

21,007

 

Fulfillment and freight and duties

 

10,298

 

10,765

 

Professional services

 

5,152

 

4,329

 

Sales/Use and VAT taxes payable

 

7,171

 

4,330

 

Other

 

18,982

 

13,158

 

 

 

$

58,544

 

$

53,589

 

 

7. RESTRUCTURING ACTIVITIES

 

During the three months ended June 30, 2010, the Company incurred $1.3 million in restructuring expenses reflected in cost of sales, resulting from a change in estimates related to lease termination costs for distribution facilities in North America and Europe.  These facilities were closed pursuant to cost-savings initiatives undertaken by the Company in 2008 and 2009.  During the six months ended June 30, 2010, in addition to the restructuring expenses discussed above, the Company incurred an additional $2.5 million in restructuring expenses reflected in income from operations, primarily consisting of severance pay and additional stock-based compensation related to the retirement of the Company’s former Chief Executive Officer.  See further discussion in Note 11 — Stock- Based Compensation.

 

Restructuring charges, for the six months ended June 30, 2010,  were recorded by segment as follows: $1.0 million in the Americas segment; $0.8 million in the Europe segment; and $2.0 million in the Corporate and other group.

 

Restructuring charges are included in the following line items: accrued restructuring charges and long-term restructuring in the Company’s unaudited condensed consolidated balance sheets and cost of sales and restructuring charges on the Company’s unaudited condensed consolidated statements of operations.

 

The following table details the changes in the restructuring accruals during the six months ended June 30, 2010 (in thousands):

 

Description

 

Year Ended
December 31,
2009

 

Additions

 

Cash
Payments

 

Adjustments

 

Six Months
Ended

June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Termination benefits

 

$

516

 

$

1,847

 

$

(534

)

$

(58

)

$

1,771

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease exit costs

 

2,233

 

1,754

 

(1,509

)

(169

)

2,309

 

 

 

 

 

 

 

 

 

 

 

 

 

Other restructuring costs

 

387

 

 

 

(391

)

4

 

 

 

 

$

3,136

 

$

3,601

 

$

(2,434

)

$

(223

)

$

4,080

 

 

8



Table of Contents

 

8. FAIR VALUE MEASUREMENTS

 

The Company performs fair value measurements in accordance with the guidance provided by fair value standards. The fair value standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

 

The fair value standards establish a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value standards establish three levels of inputs that may be used to measure fair value:

 

·                  Level 1 — Quoted prices for identical instruments in active markets.

 

·                  Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active market.

 

·                  Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

A summary of the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 is as follows (in thousands):

 

 

 

Fair Value
as of
June 30, 2010

 

Level 1

 

Level 2

 

Level 3

 

Balance Sheet Classification

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

5,444

 

 

$

5,444

 

 

Marketable securities

 

Foreign currency contracts

 

 

 

 

 

Other current assets and other long-term assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

5,444

 

$

 

$

5,444

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities — Foreign currency contracts

 

$

119

 

$

 

$

119

 

$

 

Accrued liabilities and other long-term liabilities

 

 

Marketable securities consist of certificates of deposit with maturities greater than three months and up to three years at the time of purchase. These securities are carried at fair value and are held at financial institutions.

 

The Company did not have any derivative instruments as of December 31, 2009.

 

Foreign Currency

 

Sales in foreign countries, as well as certain expenses related to those sales, are transacted in currencies other than our reporting currency, the U.S. dollar. The Company’s foreign currency exchange rate risk is primarily limited to the Japanese Yen and the Euro. The Company may, from time to time, employ derivative financial instruments to manage our exposure to fluctuations in foreign currency rates or enter into forward currency exchange contracts to hedge its net investment and intercompany payable or receivable balances in foreign operations. The Company did not have any material outstanding foreign currency related financial instruments at June 30, 2010 and December 31, 2009.

 

9. RISK MANAGEMENT AND DERIVATIVES

 

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is foreign currency exchange rate risk. Forward contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk on forecasted revenue and inventory purchases denominated

 

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in foreign currencies. Other forward foreign exchange contracts are entered into to hedge against changes in the functional currency value of monetary assets and liabilities denominated in a non functional currency.

 

Accounting standards for derivative instruments and hedging activities requires the Company to recognize all of its derivative instruments as either assets or liabilities in its condensed unaudited consolidated balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship. At June 30, 2010 the Company did not designate any of our derivatives as hedges and, therefore, all changes in fair value are reflected in our results of operations.

 

The following table presents the fair values of derivative instruments included within the unaudited condensed consolidated balance sheet as of June 30, 2010 is as follows (in thousands):

 

Liability Derivatives

 

 

 

June 30, 2010

 

Balance Sheet Location

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

Foreign currency exchange forwards

 

$

119

 

Accrued liabilities

 

 

The Company did not have any derivative instruments as of December 31, 2009.

 

The following tables present the amounts affecting the unaudited condensed consolidated statements of operations for the three and six month periods ended June 30, 2010 (in thousands):

 

Amount of Loss (Gain) Recognized in Income on Derivatives

 

 

 

Three months ended
June 30, 2010

 

Six months ended
June 30, 2010

 

Location of Loss (Gain) Recognized in
Income on Derivatives

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

Foreign currency exchange forwards

 

$

119

 

$

119

 

Other expense (income), net

 

 

The Company did not have any derivative instruments during the three and six months ended June 30, 2009.

 

Foreign Currency Exchange Forwards

 

The following table summarizes the Company’s outstanding foreign currency exchange forward contracts at June 30, 2010 (in thousands):

 

Currency Purchased Forward

 

Currency Sold Forward

 

Maturity Date

 

Peso

2,570

 

$

200

 

July 2010

 

$

 1,210

 

1,000

 

July 2010

 

$

 2,922

 

£

2,000

 

July 2010

 

$

 2,000

 

¥

180,000

 

July 2010

 

 

10. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

 

Notes payable and capital lease obligations consist of the following (in thousands):

 

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June 30,
2010

 

December 31,
2009

 

Capital Lease Obligations: Certain Capitalized Software at 9.97% weighted average interest, due through 2012

 

$

2,802

 

$

1,329

 

 

 

 

 

 

 

Capital Lease Obligations: Certain Equipment at 8.8% weighted average interest, due through 2014

 

188

 

223

 

Total notes payable and capital lease obligations

 

$

2,990

 

$

1,552

 

 

Capital Leases

 

The Company holds various capital leases for certain equipment with a gross value of $0.4 million, which is depreciated using the straight-line method over its useful life.  Depreciation of equipment under capitalized leases is included in cost of sales and selling, general and administrative expenses line items on the Company’s unaudited condensed consolidated statements of operations.  Certain software acquired under various capital leases for a gross value of $3.6 million is classified as capitalized software and amortized using the straight-line method over the useful life.  Amortization of capitalized software under capitalized leases is included in the cost of sales and selling, general and administrative expenses line items on the Company’s unaudited condensed consolidated statements of operations.

 

Notes Payable

 

On September 25, 2009, the Company entered into a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, N.A. (“PNC”), which matures on September 25, 2012.  The Credit Agreement provides for an asset-backed revolving credit facility of up to $30 million in total, which includes a $17.5 million sublimit for borrowings against the Company’s eligible inventory, a $2 million sublimit for borrowings against the Company’s eligible inventory in-transit, and a $4 million sublimit for letters of credit.  The total borrowings available under the Credit Agreement at any given time are subject to customary reserves and reductions to the extent the Company’s asset borrowing base changes.  Borrowings under the Credit Agreement are secured by all of the assets of the Company, including all receivables, equipment, general intangibles, inventory, investment property, subsidiary stock and leasehold interests.  The Credit Agreement requires the Company to prepay borrowings under the Credit Agreement in the event of certain dispositions of property.

 

With respect to domestic rate loans, principal amounts outstanding under the Credit Agreement bear interest at a two percent (2%) premium over a rate that is the greater of either (i) PNC’s published reference rate, (ii) the Federal Funds Open Rate (as defined in the Credit Agreement) in effect on such day plus one half of one percent (0.5%) or, (iii) the sum of the daily LIBOR rate and one percent (1.0%).  Eurodollar denominated principal amounts outstanding under the Credit Agreement bear interest at the sum of three and one half percent (3.50%) premium over a rate that is the greater of (i) the Eurodollar rate, or (ii) one and one half percent (1.50%) with respect to Eurodollar loans, as applicable.   The Credit Agreement requires monthly interest payments with respect to domestic rate loans and at the end of each period with respect to Eurodollar rate loans.

 

The Credit Agreement contains certain customary restrictive and financial covenants.  The Company was in compliance with these financial covenants as of June 30, 2010.

 

As of June 30, 2010 and December 31, 2009, the Company had no outstanding borrowings under the Credit Agreement and at June 30, 2010 had issued and outstanding letters of credit of $1.0 million which were reserved against the borrowing base.

 

11. STOCK-BASED COMPENSATION

 

Options granted generally vest ratably over four years with the first year vesting on a “cliff” basis followed by monthly vesting for the remaining three years.  Compensation expense is recognized ratably over the four-year vesting period.  Stock-based compensation expense recognized, including options and non-vested shares, was $2.2 million and $3.9 million in the three and six months ended June 30, 2010, respectively.  For the three and six months ended June 30, 2009,

 

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stock-based compensation expense, including options and non-vested shares, was $19.4 million and $25.1 million.  Stock-based compensation is recognized in the cost of sales and selling, general and administrative expenses line item in the Company’s unaudited condensed statement of operations.

 

Stock Options

 

A summary of stock option activity for the three and six months ended June 30, 2010 is as follows:

 

 

 

Three Months Ended June 30, 2010

 

Six Months Ended June 30, 2010

 

Options

 

Shares

 

Weighted
Average
Exercise Price

 

Shares

 

Weighted
Average
Exercise Price

 

Outstanding at March 31, 2010 and December 31, 2009, respectively

 

7,054,554

 

$

7.82

 

7,755,254

 

$

7.67

 

Granted

 

100,000

 

$

10.70

 

149,750

 

$

9.58

 

Exercised

 

(575,447

)

$

3.04

 

(876,730

)

$

2.67

 

Forfeited or expired

 

(228,771

)

$

18.21

 

(677,938

)

$

12.15

 

Outstanding at June 30, 2010

 

6,350,336

 

$

7.93

 

6,350,336

 

$

7.93

 

 

Restricted Stock Awards

 

A summary of restricted stock award activity for the three and six months ended June 30, 2010 is as follows:

 

 

 

Three Months Ended June 30, 2010

 

Six Months Ended June 30, 2010

 

Non-
vested

 

Shares

 

Weighted
Average
Grant Date
Fair Value

 

Shares

 

Weighted
Average
Grant Date
Fair Value

 

Non-vested at March 31, 2010 and December 31, 2009, respectively

 

839,298

 

$

3.04

 

1,322,240

 

$

3.04

 

Granted

 

218,357

 

$

11.31

 

218,357

 

$

11.31

 

Vested

 

(250,803

)

$

10.66

 

(508,411

)

$

9.82

 

Forfeited or expired

 

 

 

(225,334

)

$

1.34

 

Non-vested at June 30, 2010

 

806,852

 

$

4.92

 

806,852

 

$

4.92

 

 

Separation Agreement.

 

On March 31, 2010, the Company entered into a separation agreement with its former Chief Executive Officer.  Pursuant to the separation agreement, the vesting of options to purchase 100,000 shares of Company common stock, which were exercised, and 100,000 shares of restricted stock were accelerated as of March 31, 2010.  Additionally, pursuant to the terms of the separation agreement, the Company’s former Chief Executive Officer forfeited options to purchase 200,000 shares of Company common stock and 200,000 shares of restricted stock.  The Company recorded an insignificant amount to restructuring charges related to the acceleration of the vesting of these options and restricted stock awards.

 

12. INCOME TAXES

 

During the three months ended June 30, 2010, the Company recognized an income tax expense of $6.6 million on pre-tax income of $38.9 million, representing an effective income tax rate of 17.0% compared to an income tax expense of $7.6 million on a pre-tax loss of $22.7 million, representing an effective income tax rate of (33.3%) for the three months ended June 30, 2009.  During the six months ended June 30, 2010, the Company recognized an income tax expense of $10.0 million on a pre-tax income of $48.0 million, representing an effective income tax rate of 20.8% compared to an income tax expense of $7.8 million on a pre-tax loss of $44.9 million, representing an effective income tax rate of (17.3%) for the six months ended June 30, 2009.  The change in effective tax rate is primarily the result of the Company restructuring its international

 

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operations, cost sharing arrangements and release of valuation allowances related to net operating losses in various international entities.  The Company had unrecognized tax benefits of $29.2 million at January 1, 2010 and $29.5 million at June 30, 2010.

 

13. EARNINGS (LOSS) PER SHARE

 

Basic income (loss) per share (“EPS”) is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period.  Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company.  Anti-dilutive securities are excluded from diluted EPS.  The Company has a small number of participating securities and consequently is computing basic income (loss) per share by dividing net income or loss attributable to common stockholders by the weighted average common shares outstanding during the period.

 

 

EPS for the three and six months ended June 30, 2010 and 2009 is as follows (in thousands, except share and per share data):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to common stockholders

 

$

32,284

 

$

(30,281

)

$

38,001

 

$

(52,698

)

Income allocated to participating securities

 

(303

)

 

(358

)

 

Net income (loss) attributable to common stockholders – basic

 

$

31,981

 

$

(30,281

)

$

37,643

 

$

(52,698

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic

 

85,179,948

 

84,882,241

 

84,834,756

 

84,638,783

 

Dilutive effect of stock options

 

1,552,295

 

 

1,771,269

 

 

Dilutive effect of unvested shares

 

806,852

 

 

806,852

 

 

Weighted average common shares outstanding - diluted

 

87,539,095

 

84,882,241

 

87,412,877

 

84,638,783

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

$

(0.36

)

$

0.44

 

$

(0.62

)

Diluted

 

$

0.37

 

$

(0.36

)

$

0.43

 

$

(0.62

)

 

For all periods presented above, there were options outstanding which could potentially dilute basic EPS in the future but were not included in diluted income (loss) per share as their effect would have been anti-dilutive.  Due to the Company’s net loss for the three and six months ended June 30, 2009, the dilutive effect of stock options and unvested restricted stock awards were not included in the computation of diluted EPS, as their inclusion would have been anti-dilutive.  During 2009 the Company had participating securities that were not allocated net loss nor included in the computation of diluted EPS due to the Company’s net loss for the three and six months ended June 30, 2009.  The weighted average exercise price per share of the options that were anti-dilutive was $13.77 for both the three and six months ended June 30, 2010, and $5.65 and $10.84 for the three and six months ended June 30, 2009, respectively.  The total number of anti-dilutive options was 3,093,432 for both the three and six months ended June 30, 2010, and 4,869,628 for both the three and six months ended June 30, 2009.

 

14. VARIABLE INTEREST ENTITIES

 

In 2007, the Company established a relationship with Shanghai Shengyiguan Trade, Ltd Co (“ST”) for the purpose of serving as a distributor of the Company’s products in the People’s Republic of China. The Company has determined that ST is a variable interest entity for which it is the primary beneficiary and there are no other non-controlling interests. The Company currently controls all business activities and absorbs substantially all of the expected residual returns and substantially all of the expected losses of ST based on agreements with ST. The Company determined that it is the primary beneficiary of ST by virtue of its variable interest in the equity of ST. All voting rights have been assigned to the Company and there is a transfer agreement between ST and the Company under which all of the equity, assets, and liabilities are to be

 

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transferred to the Company at the Company’s sole discretion, subject to certain conditions. Accordingly, the Company’s consolidation of ST does not reflect a non-controlling interest.

 

The Company did not provide material financial support during the six months ended June 30, 2010 for the funding of ST’s operations. The condensed consolidated financial statements include $5.8 million in total assets as of June 30, 2010, primarily consisting of cash, inventory and receivables, partially offset by $0.2 million in liabilities as of June 30, 2010, primarily consisting of accounts payable and accrued expenses, excluding liabilities related to the support provided by the Company.  ST carries cash assets which are restricted to the extent that the monetary laws of the People’s Republic of China may limit the Company’s ability to utilize ST’s cash.

 

15. COMMITMENTS AND CONTINGENCIES

 

On July 26, 2005, the Company entered into an amended and restated four-year supply agreement with Finproject S.P.A., the former majority owner of Crocs Canada, pursuant to which the Company has the exclusive right to purchase the material for the manufacture of finished shoe products, except for certain current customer dealings (including boot manufacturers). The supply agreement was extended through June 30, 2010, and provides that the Company meet minimum purchase requirements to maintain exclusivity throughout the term of the agreement. The pricing is to be agreed upon each quarter and fluctuates based on order volume, currency fluctuations, and raw material prices.  The Company is currently in negotiations to extend the supply agreement.  The Company guarantees the payment to one of its raw material suppliers for purchases of material used by one of its third-party manufactures of finished shoe products. The maximum potential amount of future payments the Company could be required to make under the guarantee is €2.1 million (approximately $2.6 million at June 30, 2010). The Company evaluates the estimated loss for the guarantee under ASC Topic 450, Contingencies, and Topic 460, Guarantees.  The Company considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. The Company has recourse as a matter of common law. To date, the Company has not made any payments under the guarantee and, as of June 30, 2010, has not recorded a liability related to the guarantee in its unaudited condensed consolidated financial statements, as the Company does not believe the potential obligation under this guarantee is material.

 

The Company leases space for certain of its offices, warehouses, vehicles and equipment under leases expiring at various dates through 2026. Certain leases also contain rent escalation clauses (step rents) that require additional rental amounts in the later years of the term. Rent expense for leases with step rents is recognized on a straight-line basis over the minimum lease term. Step rents, tenant improvement allowances, rent holidays and other items are factored into the minimum lease payment and recognized on a straight-line basis over the minimum lease term.  Deferred rent is included in the unaudited condensed consolidated balance sheets in the accrued expenses and other current liabilities line item.

 

The Company indemnifies certain of its vendors and its directors and executive officers for specified claims. To date, the Company has not paid or been required to defend any indemnification claims, and accordingly, has not accrued any amounts for its indemnification obligations.

 

The Company has other various immaterial commitments and contingencies that are not discussed above.

 

16. OPERATING SEGMENTS AND RELATED INFORMATION

 

The Company operates in the consumer products industry internationally in which the Company principally designs, manufactures, markets and sells its branded footwear for men, women and children.  During 2009, the Company changed the information that was presented to the chief operating decision maker and has restated its revenues, depreciation and amortization, operating income and assets by segment as shown below.  The Company identifies its reportable segments as those geographic regions that represent 10% or more of its revenue, operating income (as defined below), or total assets.  The Company has three reportable segments: Americas, Europe and Asia. All of the reportable segments derive their revenue from the sale of footwear, apparel and accessories.  The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue and operating income.

 

Operating income is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance and to decide how to allocate resources to segments.  Operating income is defined as operating income before asset impairment charges and restructuring charges.  The Company evaluates the performance of its segments based primarily on the results of the segment without allocating corporate expenses, or indirect general, administrative and

 

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other expenses.  The corporate and other category includes (i) Ocean Minded, (ii) Colorado Footwear CV, and (iii) corporate category, which maintains corporate costs such as stock-based compensation, research and development, brand marketing, legal expenses, depreciation on global long-lived assets such as molds, tooling, IT systems, and other global costs that are not allocated to the regions.

 

Segment profits or losses include adjustments to eliminate intercompany profit or losses on intercompany sales.  Segment assets include the elimination of any intersegment profits or losses in inventory and the elimination of intercompany receivables.  Segment assets, primarily in the Americas segment, include certain long-lived assets that are depreciated in the corporate category due to their global functionality.  Negative assets within the Corporate and other category primarily include eliminations of investments made from the Americas segment in the other reportable segments.  Net revenues as shown below represent sales to external customers for each segment.

 

 

 

Three Months
Ended June 30

 

Six Months
Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(in thousands)

 

(in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

Americas

 

$

103,473

 

$

84,128

 

$

175,623

 

$

150,540

 

Europe

 

34,556

 

32,224

 

72,498

 

60,496

 

Asia

 

88,681

 

79,968

 

143,351

 

118,966

 

Total segments

 

226,710

 

196,320

 

391,472

 

330,002

 

Corporate and other

 

1,336

 

1,402

 

3,426

 

2,612

 

Total consolidated revenues

 

$

228,046

 

$

197,722

 

$

394,898

 

$

332,614

 

 

 

 

 

 

 

 

 

 

 

Operating Income:

 

 

 

 

 

 

 

 

 

Americas

 

$

23,423

 

$

5,697

 

$

34,657

 

$

7,923

 

Europe

 

8,049

 

11,241

 

17,675

 

12,224

 

Asia

 

31,742

 

33,708

 

44,278

 

29,877

 

Total segments

 

63,214

 

50,646

 

96,610

 

50,024

 

SG&A restructuring

 

 

(5,915

)

(2,539

)

(5,953

)

Asset impairment

 

 

(23,655

)

(141

)

(23,724

)

Corporate and other

 

(24,488

)

(45,595

)

(45,809

)

(67,481

)

Total consolidated operating income (loss)

 

38,726

 

(24,519

)

48,121

 

(47,134

)

Interest expense

 

163

 

562

 

292

 

1,257

 

Gain on charitable contributions

 

(32

)

(2,024

)

(116

)

(2,024

)

Other expense (income), net

 

(291

)

(343

)

(50

)

(1,446

)

Income (loss) before income taxes

 

$

38,886

 

$

(22,714

)

$

47,995

 

$

(44,921

)

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization:

 

 

 

 

 

 

 

 

 

Americas

 

$

2,406

 

$

2,048

 

$

4,591

 

$

4,524

 

Europe

 

680

 

1,717

 

1,453

 

3,280

 

Asia

 

1,358

 

902

 

2,943

 

1,722

 

Total segments

 

4,444

 

4,667

 

8,987

 

9,526

 

Corporate and other

 

4,367

 

5,006

 

8,623

 

9,651

 

Total consolidated depreciation and amortization

 

$

8,811

 

$

9,673

 

$

17,610

 

$

19,177

 

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

Americas

 

$

241,646

 

$

277,454

 

Europe

 

63,919

 

66,838

 

Asia

 

73,983

 

151,052

 

Total segments

 

379,548

 

495,344

 

Corporate and other

 

117,505

 

(85,606

)

Total consolidated assets

 

$

497,053

 

$

409,738

 

 

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17. COMPREHENSIVE INCOME (LOSS)

 

Comprehensive income (loss) for the three and six months ended June 30, 2010 and 2009 was as follows (in thousands):

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income (loss)

 

$

32,284

 

$

(30,281

)

$

38,001

 

$

(52,698

)

Foreign currency translation

 

(4,087

)

6,236

 

(5,786

)

2,306

 

Comprehensive income (loss)

 

$

28,197

 

$

(24,045

)

$

32,215

 

$

(50,392

)

 

18. LEGAL PROCEEDINGS

 

On March 31, 2006, the Company filed a complaint with the International Trade Commission (“ITC”) against Acme Ex-Im, Inc., Australia Unlimited, Inc., Cheng’s Enterprises, Inc., Collective Licensing International, LLC, D. Myers & Sons, Inc., Double Diamond Distribution, Ltd., Effervescent, Inc., Gen-X Sports, Inc., Holey Soles Holdings, Ltd., Inter-Pacific Trading Corporation, and Shaka Holdings, Inc., alleging patent and trade dress infringement and seeking an exclusion order banning the importation and sale of infringing products. On August 10, 2006, the Company filed a motion to voluntarily remove its trade dress claim from the investigation to focus on the patent claims. The Company’s motion was granted by Order No. 20 on August 24, 2006. The utility and design patents asserted in the complaint were issued to the Company on February 7, 2006 and March 28, 2006 respectively, by the United States Patent and Trademark Office. The ITC has issued final determinations terminating Shaka Holdings, Inc., Inter-Pacific Trading Corporation, Acme Ex-Im, Inc., D. Myers & Sons, Inc., Australia Unlimited, Inc. and Gen-X Sports, Inc. from the ITC investigation No. 337-TA-567 on the basis of settlement and Cheng’s Enterprises, Inc. on the suspension of accused activities. The ITC Administrative Law Judge (“ALJ”) issued an Initial Determination of non-infringement related to one of the patents at issue. The Company filed a petition with the Commission to review this determination. The Commission granted the Company’s petition and on February 15, 2007, after briefing by the parties, the Commission vacated the ALJ’s determination of non-infringement with respect to the remaining respondents and remanded it to the ALJ for further proceedings consistent with the Commission’s order. In light of the Commission’s Order, the procedural schedule and hearing date were reset pursuant to Order No. 38. A trial was held before the ALJ from September 7 to 14, 2007. The ALJ issued an Initial Determination on April 11, 2008 with a finding of no violation, finding infringement of the utility patent by certain accused products, but also finding that the utility patent was invalid as obvious. The ALJ also found that the design patent was valid, but not infringed by the accused products. The Company filed a Petition for Review of the Initial Determination which was due on April 24, 2008. On June 18, 2008, the Commission issued a Notice that it would review the ALJ’s findings in the Initial Determination with respect to the determination of non-infringement of the design patent and the determination of invalidity of the utility patent. On July 25, 2008, the Commission issued a Notice of its decision to terminate the Investigation with a finding of no violation as to either patent. The Company filed a Petition for Review of the decision with the United States Court of Appeals for the Federal Circuit on September 22, 2008, and filed its initial brief on January 21, 2009. Briefing before the Federal Circuit was completed in April 2009 and oral arguments were heard on July 10, 2009. On October 4, 2009, the Company and Collective Licensing International, LLC reached a settlement. Collective Licensing International, LLC agreed to cease and desist infringing on the Company’s patents and to pay the Company certain monetary damages, which was recorded upon receipt. On February 24, 2010, the Federal Circuit found that the Commission erred in finding that the utility patent was obvious and reversed the Commission’s determination of non-infringement of the design patent.  On April 12, 2010, one of the remaining parties, Effervescent, Inc., filed a request for a panel or en banc hearing with the Federal Circuit of the February 24, 2010 decision to which the Company responded on April 28, 2010.  The Federal Circuit denied the petition on May 20, 2010 and the matter has been remanded to the ITC.  On July 6, 2010, the Commission ordered the matter to be assigned to an ALJ for a determination on enforceability.

 

On April 3, 2006, the Company filed a complaint in the U.S. District Court for the District of Colorado alleging patent and trade dress infringement and seeking injunctive relief against Acme EX-IM, Inc., Australia Unlimited, Inc., Cheng’s Enterprises, Inc., Collective Licensing International, LLC, D. Myers & Sons, Inc., Double Diamond Distribution, Ltd., Effervescent, Inc., Gen-X Sports, Inc., Holey Soles Holdings, Ltd, Inter-Pacific Trading Corporation, Shaka Holdings, 

 

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Inc., and Does 1-10 based upon certain utility and design patents that were issued to the Company on February 7, 2006 and March 28, 2006 respectively, by the United States Patent and Trademark Office. Consent judgments have been entered against Shaka Holdings, Inc., Interpacific Trading Corporation and Acme Ex-Im, Inc. The Company entered into a settlement with Australia Unlimited, and filed a stipulation for dismissal of all claims and counterclaims on January 25, 2007. The Company has entered into a settlement agreement with D. Myers & Sons and obtained a consent judgment in connection therewith on May 23, 2007. On June 11, 2009, the Company filed a Notice of Voluntary Dismissal of Gen-X Sports, Inc. on the basis of settlement and on November 4, 2009, the Company filed a Notice of Voluntary Dismissal with prejudice of Collective Licensing International, LLC on the basis of settlement. This action has been stayed pending resolution in the ITC Proceeding, Investigation No. 337 TA-567.

 

The Company and certain current and former officers and directors have been named as defendants in complaints filed by investors in the United States District Court for the District of Colorado. The first complaint was filed in November 2007; several other complaints were filed shortly thereafter. These actions were consolidated and, in September 2008, the Court appointed a lead plaintiff and counsel. An amended consolidated complaint was filed in December 2008. The amended complaint purports to state claims under Section 10(b), 20(a), and 20A of the Exchange Act on behalf of a class of all persons who purchased the Company’s stock between April 2, 2007 and April 14, 2008 (the “Class Period”). The amended complaint alleges that, during the Class Period, defendants made false and misleading public statements about the Company and its business and prospects and that, as a result, the market price of the Company’s stock was artificially inflated. The amended complaint also claims that certain current and former officers and directors traded in the Company’s stock on the basis of material non-public information. The amended complaint seeks compensatory damages on behalf of the alleged class in an unspecified amount, interest, and an award of attorneys’ fees and costs of litigation. The Company believes the claims lack merit and intends to defend the action vigorously. Motions to dismiss are currently pending with the Court. On November 11, 2009, presiding Judge Blackburn recused himself because a relative of a member of his staff held a substantial position in Crocs stock.  The clerk’s office has transferred the case to Judge Brimmer.  As a result, the timing for a ruling on any motion to dismiss is uncertain. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, the Company cannot at this time accurately predict the ultimate outcome of the matter.

 

On December 8, 2009, Columbia Sportswear Company (“Columbia”) filed an Amended Complaint adding the Company as a defendant in a case between Columbia and Brian P. O’Boyle and 1 Pen. Inc. in the Multnomah County Circuit Court in the State of Oregon. Columbia asserted claims against the Company for misappropriation of trade secrets, aiding and abetting breach of fiduciary duty, intentional interference with contract, injunctive relief, disgorgement and an accounting. The Amended Complaint sought damages in an unspecified amount, return of patent rights, reasonable attorney’s fees and costs and expenses against the Company. The Company and Columbia settled all issues between them and Columbia dismissed with prejudice all claims against the Company in exchange for certain monetary and other considerations.

 

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

 

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications from time to time that contain such statements. Forward-looking statements include statements as to industry trends and our future expectations and other matters that do not relate strictly to historical facts and are based on certain assumptions of our management. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. This Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, among others, the risks described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2009 and subsequent filings with the Securities and Exchange Commission.  We caution the reader to carefully consider such factors. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Overview

 

We are a designer, manufacturer, distributor, worldwide marketer and brand manager of footwear for men, women and children.  We strive to be the global leader in molded footwear design and development.  We design, manufacture and sell a broad product offering that provides new and exciting molded footwear products that feature fun, comfort and functionality. Our products include footwear and accessories that utilize our proprietary closed cell-resin, called Croslite.  Our Croslite material is unique in that it enables us to produce an innovative, lightweight, non-marking, and odor-resistant shoe.  Certain shoes made with the Croslite material have been certified by U.S. Ergonomics to reduce peak pressure on the foot, reduce muscular fatigue while standing and walking and to relieve the musculoskeletal system.

 

Since the initial introduction and popularity of our Beach and Crocs Classic designs, we have expanded our Croslite products to include a variety of new styles and products and have extended our product reach through the acquisition of brand platforms such as Jibbitz, LLC (“Jibbitz”) and Ocean Minded, Inc. (“Ocean Minded”).  We intend to continue branching out into other types of footwear, bringing a unique and original perspective to the consumer in styles that may be unexpected from Crocs.  In part, we believe this will help us to continue to build a stable year-round business as we look to offer more winter-oriented styles.

 

Our marketing efforts surround specific product launches and employ a fully integrated approach utilizing a variety of media outlets, including print and online media and television.  Our marketing efforts strive to drive business to both our wholesale partners and our company-operated retail and internet stores, ensuring that our presentation and story are first class and drive purchasing at the point of sale.

 

We currently sell our Crocs-branded products throughout the U.S. and in more than 100 countries.  We sell our products through domestic and international retailers and distributors and directly to end-user consumers through our webstores, Company-operated retail stores, outlets and kiosks. 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.

 

Presentation of Operating Segments

 

We have three operating segments: Americas, Europe and Asia.  All of the reportable segments derive their revenue from the sale of footwear, apparel and accessories.  We evaluate performance and make decisions about allocating resources to our operating segments based on financial measures such as revenue and operating income.   We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses or indirect general, administrative and other expenses.  The corporate and other category includes (i) Ocean Minded, (ii) Colorado Footwear CV, and (iii) corporate category, which maintains corporate costs such as stock-based compensation, research and development,

 

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brand marketing, legal expenses, depreciation on global long-lived assets such as molds, tooling, IT systems, and other global costs that are not allocated to the regions.  Segment profits or losses include adjustments to eliminate intercompany profit or losses on intercompany sales.  Net revenues in the discussion that follows represent sales to external customers for each segment.

 

Recent Events

 

During the three months ended June 30, 2010, revenues increased 15.3%, or $30.3 million, compared to the three months ended June 30, 2009 as a result of stronger sales in each of our geographic operating segments.  Our diluted earnings per share for the second quarter of 2010 improved to $0.37 diluted earnings per share compared to the second quarter of 2009, when we reported a net loss per diluted share of ($0.36).  We believe these financial improvements are a reflection of our 2009 cost savings initiatives described below, an increased marketing presence and an improved global economic climate.

 

During 2009, we undertook various cost savings initiatives in an effort to better align our cost structure with revenue.  These cost savings initiatives included the consolidation of our global distribution centers; reduction of warehouse space; impairments of certain assets we no longer intended to utilize, including molds, tooling, equipment and other assets; reduction in future stock-based compensation expense as a result of a tender offer; and reduction in our global workforce.  In addition, during 2009, we executed against a plan to dispose of excess discontinued and impaired product inventories.  Much of this product had been written down to a level that we considered realizable; however, we were able to sell this product at prices substantially higher than what we had previously estimated.  Accordingly, the net effect of these sales was accretive to our gross profit and revenue in 2009.  In the second quarter of 2010, sales of discontinued and impaired product were at more normal levels given seasonality and historical fluctuations in our business.

 

General

 

Revenues are recorded when products are shipped and the customer takes title and assumes risk of loss, collection of related receivables are probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. Title passes on shipment or on receipt by the customer depending on the country of the sale and the agreement with the customer. Allowances for estimated returns and discounts are recognized when related revenue is recorded. Because we use both internal manufacturing and contract with third parties to manufacture our products, our cost of sales represents our costs to manufacture products in our Company-operated facilities, including raw materials costs and all direct overhead expenses related to production, as well as the cost to purchase finished products from our third-party manufacturers and costs to transport these products to our facilities, inclusive of all warehouse and outbound freight and duties expenses. Cost of sales also includes depreciation and amortization of manufacturing assets such as molds and tooling. Our selling, general and administrative expense consists primarily of wages and related payroll and employee benefit costs for selling, marketing and administrative employees, unrealized gains or losses on foreign currency exchange, all non-product retail-related expenses (including rent and depreciation) and professional fees, facility expenses, bank charges and non-cash charges for share-based compensation. Selling, general and administrative expenses also include depreciation and amortization related to non-product, non-manufacturing assets such as our global information systems.

 

Results of Operations

 

Comparison of the Three Months Ended June 30, 2010 and 2009

 

 

 

Three Months Ended June 30,

 

Change

 

 

 

2010

 

2009

 

$

 

%

 

 

 

(amounts in thousands, except per share data)

 

 

 

Revenues

 

$

228,046

 

$

197,722

 

$

30,324

 

15.3

%

Cost of sales

 

96,127

 

96,610

 

(483

)

(0.5

)%

Gross profit

 

131,919

 

101,112

 

30,807

 

30.5

%

Selling, general and administrative expenses

 

94,047

 

94,606

 

(559

)

(0.6

)%

Foreign currency transaction losses (gains), net

 

(1,129

)

(3,623

)

2,494

 

68.8

%

Restructuring charges

 

 

5,915

 

(5,915

)

N/M

 

Impairment charges

 

 

23,655

 

(23,655

)

N/M

 

Charitable contributions

 

275

 

5,078

 

(4,803

)

(94.6

)%

Income (loss) from operations

 

38,726

 

(24,519

)

63,245

 

257.9

%

Interest expense

 

163

 

562

 

(399

)

(71

)%

Other, net

 

(323

)

(2,367

)

2,044

 

86.4

%

Income (loss) before income taxes

 

38,886

 

(22,714

)

61,600

 

271.2

%

Income tax expense

 

6,602

 

7,567

 

(965

)

(12.8

)%

Net income (loss)

 

$

32,284

 

$

(30,281

)

$

62,565

 

206.6

%

Net income (loss) per diluted share

 

$

0.37

 

$

(0.36

)

$

0.73

 

N/M

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

57.8

%

51.1

%

 

 

 

 

Operating margin

 

17.0

%

(12.4

)%

 

 

 

 

 

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N/M — Not meaningful

 

Revenues  Revenues increased $30.3 million to $228.0 million in the three months ended June 30, 2010, compared to the three months ended June 30, 2009. Total unit sales of footwear products increased by 5.1% and average selling price per pair of shoes increased $1.96 during the three months ended June 30, 2010 compared to the same period in 2009, as shown in the table below.  During the three months ended June 30, 2009, we sold $23.7 million in end of life and impaired products as we disposed of excess and impaired inventory as described above in “Recent Events”.  The following table sets forth revenue by channel and by region as well as other revenue information for the second quarter of 2010 and 2009:

 

 

 

Three months ended June 30,

 

Change

 

 

 

2010

 

2009

 

$

 

%

 

 

 

(in millions, except average selling price)

 

 

 

Wholesale channel revenue

 

$

140.0

 

$

125.0

 

$

15.0

 

12.0

%

Retail channel revenue

 

66.4

 

55.3

 

11.1

 

20.1

%

Internet channel revenue

 

21.6

 

17.4

 

4.2

 

24.1

%

 

 

 

 

 

 

 

 

 

 

Americas revenue (includes Corporate)

 

$

104.8

 

$

85.5

 

$

19.3

 

22.6

%

Asia revenue

 

88.6

 

80.0

 

8.6

 

10.8

%

Europe revenue

 

34.6

 

32.2

 

2.4

 

7.5

%

 

 

 

 

 

 

 

 

 

 

Footwear unit sales

 

12.3

 

11.7

 

0.6

 

5.1

%

Average selling price

 

$

17.76

 

$

15.80

 

$

1.96

 

12.4

%

 

Revenue from our wholesale channel grew in the three months ended June 30, 2010 compared to the three months ended June 30, 2009, particularly in the Americas and in Asia.  We believe the revenue increase in this channel is due to improved economic conditions and efforts made in 2009 and 2010 to improve our wholesale customer relationships.  Additionally, we believe that heightened brand awareness, a result of fully-integrated marketing campaigns during the quarter (described previously in “Overview”), has positively impacted sell-through for our wholesale customers.

 

Revenue from our company-operated retail locations increased 20.1% in the three months ended June 30, 2010 compared to the same period in the previous year, driven by the opening of 53 new company-operated retail locations year over year.  We plan to close certain kiosks and open more branded stores in the future.  The table below sets forth information about the number of company-operated retail locations as June 30, 2010 and 2009:

 

 

 

As of June 30,

 

 

 

2010

 

2009

 

Change

 

Company-operated retail locations - Total

 

363

 

310

 

53

 

Type:

 

 

 

 

 

 

 

Crocs Kiosk/Store in Store

 

185

 

188

 

(3

)

Crocs Retail Stores

 

110

 

76

 

34

 

Crocs Outlet Stores

 

68

 

46

 

22

 

 

 

 

 

 

 

 

 

Geography:

 

 

 

 

 

 

 

Americas company-operated retail locations

 

188

 

166

 

22

 

Asia company-operated retail locations

 

155

 

123

 

32

 

Europe company-operated retail locations

 

20

 

21

 

(1

)

 

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The increase in revenue from our internet channel was driven by increased sales in our Europe segment, resulting from the addition of local language internet sites for France, Germany, Spain and Italy as well as increased demand for our products overall.  These increases were partially offset by revenue declines from our internet channel in Asia where we saw a drop in demand due to prolonged cold weather and an increase in imitation products in the region, particularly in Japan.

 

Revenue from our combined consumer-direct sales channels, defined as our retail and internet channels, increased from 36.8% for the three months ended June 30, 2009 to 38.6% of revenue in the three months ended June 30, 2010.  As these channels become a larger portion of our business, we expect to see some improvements in total revenue and gross margin as we have traditionally been able to achieve a higher average selling price in this channel.

 

The majority of our revenues during the three months ended June 30, 2010 were attributable to our non-classic footwear models.  Our classic models and core products (defined below) have become a smaller portion of our total revenue in recent quarters. Sales of our classic models, core products and new 2010 footwear products as a percentage of our total unit sales is presented in the table below:

 

 

 

Three Months Ended June 30,

 

 

 

2010

 

2009

 

Classic models (Beach and Crocs Classic)

 

11.9

%

15.8

%

Core products(1)

 

21.3

%

30.1

%

New 2010 footwear products

 

23.7

%

N/A

 

 


(1) Core products includes Classic models, Kids Crocs Classic, Athens, Kids Athens, Mary Jane, Girls Mary Jane, Mammoth and Kids Mammoth.

 

Average foreign currency exchange rates during the three months ended June 30, 2010 increased revenue by $5.7 million as compared to the three months ended June 30, 2009.  We expect that sales in international markets in foreign currencies will continue to represent a substantial portion of our overall revenues. Accordingly, changes in foreign currency exchange rates could materially affect our overall revenues or the comparability of those revenues from period to period as a result of translating our financial statements into our reporting currency, the U.S. dollar.

 

Americas Segment - Revenue.  Our revenues from the Americas segment increased 23.1%, or $19.4 million, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009, primarily driven by revenue growth in all channels (wholesale, retail and internet).  Second quarter revenue from company-operated retail locations in the Americas increased 35.2%, or $10.3 million, to $39.6 million in 2010 compared to 2009 as we opened 22 additional company-operated retail locations in the region.  We continue to execute against plans to grow revenue in the U.S. wholesale channel which include, but are not limited to, investments in cooperative advertising and merchandising assistance for select locations at our largest U.S. wholesale accounts.

 

Asia Segment - Revenue.  Our revenues in Asia increased 10.8%, or $8.6 million, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 driven by continued strong demand in our Asia wholesale channel and favorable variances in foreign currency exchange rates, partially offset by a decline in internet revenue as discussed above.  Revenue from company-operated retail locations in Asia increased 1.3%, or $0.3 million, to $22.7 million in the three months ended June 30, 2010 compared to the three months ended June 30, 2009.  The number of company-operated retail locations in the region increased by 32 year over year.  Revenue growth from our company-operated retail locations was negatively affected by a prolonged cold weather season in parts of the region and an increase in imitation products in Japan.

 

Europe Segment - Revenue.  Our revenues in Europe increased 7.5%, or $2.4 million, to $34.6 million in the three months ended June 30, 2010 from $32.2 million for the same period in 2009 driven by increases across all revenue channels in the region.  Revenue from company-operated retail locations was $4.1 million in the three months ended June 30, 2010 versus $3.5 million for the three months ended June 30, 2009 and our company-operated retail locations decreased by 1.

 

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Gross profit. We achieved an increase in our gross profit, from $101.1 million to $131.9 million, and gross margin, from 51.1% to 57.8%, for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009.  The increase is primarily attributable to favorable shifts in product mix toward higher margin products as well as restructuring charges of $5.3 million recognized during the second quarter of 2009 as we closed and consolidated our distribution space in North America and Europe.  Additionally, we continue to execute against our strategy to increase shipments made directly from the factories to our wholesale customers and our retail channel.  These factory-direct shipments lower our distribution cost and, as factory-direct shipment volume increased, we began to realize benefits from this program in the second quarter of 2010.  Offsetting this increase was the accretive effect of impaired unit sales that took place during the second quarter of 2009 as discussed in “Recent Events.”  The net effect of these sales during the second quarter of 2009 was $25.3 million. Our consumer-direct (internet and retail) channels, which typically yield higher margins than our wholesale channel, stayed flat as a percentage of revenue.

 

Average foreign currency exchange rates during the three months ended June 30, 2010 increased our gross profit by $3.5 million as compared to the three month period ended June 30, 2009.  We expect that sales at subsidiary companies with functional currencies other than the U.S. dollar will continue to generate a substantial portion of our overall gross profit.  Accordingly, changes in foreign currency exchange rates could materially affect our overall gross profit or the comparability of our gross profit from period to period as a result of translating our financial statements into our reporting currency, the U.S. dollar.

 

Selling, general and administrative expenses and foreign currency transaction losses (gains).   Selling, general and administrative expense decreased 0.6% in the three months ended June 30, 2010 compared to the same period in 2009, driven primarily by a decrease in stock compensation expense of $14.0 million, $13.3 million of which was due to the acceleration of stock-based compensation expense in the second quarter of 2009 related to options purchased in our tender offer.  The decrease in stock-based compensation expense was offset by an increase in $11.5 million in selling, general and administrative expenses including: salaries expense, rent and building costs as a result of our continued expansion of our retail selling channel, and marketing expense for media and agency costs related to our spring marketing campaign. Selling, general and administrative expenses for the three months ended June 30, 2010 were favorably impacted by a net gain on changes in currency exchange rates for transactions denominated, and settled or to be settled, in a currency other than the functional currency of $1.1 million compared to a net gain on changes in currency exchange rates of $3.6 million for the three months ended June 30, 2009.

 

Average foreign currency exchange rates used to translate expenses from our functional currencies to our reporting currency, the U.S. dollar, during the three months ended June 30, 2010 increased selling, general and administrative expenses by approximately $0.7 million as compared to the three months ended June 30, 2009.

 

Restructuring charges.  We recorded $1.3 million in restructuring charges in the three months ended June 30, 2010, all of which was recorded to cost of sales.  These restructuring charges consisted primarily of a change in estimate of our original accruals for lease termination costs for our distribution facilities in North America and Europe.

 

For the three months ended June 30, 2009, we recorded a combined $11.2 million in restructuring charges, of which $5.3 million was included in costs of sales and $5.9 million was included within operating income.  These charges consisted of:

 

·                  $4.1 million in costs associated with the consolidation of our warehousing, distribution and office space worldwide;

 

·                  $2.2 million in severance costs;

 

·                  $1.1 million related to the release from further obligations under the earn-out provisions of our acquisition of Bite, LLC; and

 

·                  $3.8 million in other restructuring charges.

 

Impairment charges. During the three months ended June 30, 2009, we recorded $23.7 million in impairment charges.  These charges consisted of:

 

·                  $16.6 million related to the write-off of obsolete molds, tooling, manufacturing and distribution equipment, sales and marketing assets and other distribution and manufacturing assets, primarily associated with the consolidation of warehouse and distribution space;

 

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·                  $6.5 million related to the write-off of capitalized software, patents, trade names and other intangible assets that we no longer intend to utilize; and

 

·                  $0.6 million related to the write-off of other smaller items.

 

Income (Loss) from Operations.  During the three months ended June 30, 2010, we generated income from operations of $38.7 million compared to a loss from operations of $24.5 million for the three months ended June 30, 2009, for the reasons stated above.  The following table summarizes operating income (loss) by segment for the three months ended June 30, 2010 and 2009 (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

2010

 

2009

 

Operating Income:

 

 

 

 

 

Americas

 

$

23,423

 

$

5,697

 

Europe

 

8,049

 

11,241

 

Asia

 

31,742

 

33,708

 

Total segments

 

63,214

 

50,646

 

SG&A Restructuring

 

 

(5,915

)

Asset Impairment

 

 

(23,655

)

Corporate and other

 

(24,488

)

(45,595

)

 

 

 

 

 

 

Total consolidated operating income (loss)

 

$

38,726

 

$

(24,519

)

 

Segments — Operating Margin.  When compared to the three months ended June 30, 2009, we experienced improved operating income in our Americas operating segment during the three months ended June 30, 2010 driven by increased revenue and operational improvements resulting from cost savings initiatives undertaken in 2009.  The decline in our Europe segment during the three months ended June 30, 2010, when compared to the three months ended June 30, 2009, was primarily driven by restructuring charges recorded to cost of sales related to the change in estimate for lease termination costs at our distribution facility in Europe and the accretive effect of impaired unit sales that took place during the second quarter of 2009 as discussed in “Recent Events.”  The decrease in our Asia segment operating margin in the three months ended June 30, 2010, when compared to the same period in 2009, was primarily attributable to increased costs associated with the expansion of our retail selling channel, as discussed previously.

 

Interest expense.  Interest expense decreased $0.4 million to $0.2 million in the three months ended June 30, 2010 compared to $0.6 million in the three months ended June 30, 2009.  This decline was driven by lower borrowings under our current asset-backed credit facility during the second quarter of 2010 compared with borrowings under our revolving credit facility during second quarter of 2009.

 

Income tax expense.  During the three months ended June 30, 2010, we recognized an income tax expense of $6.6 million on pre-tax income of $38.9 million, compared to income tax expense of $7.6 million on pre-tax loss of $22.7 million for the three months ended June 30, 2009.  The effective tax rate was 17.0% during the three months ended June 30, 2010.   The change in effective tax rate is primarily the result of the Company restructuring its international operations, cost sharing arrangements and release of valuation allowances related to net operating losses in various international entities.

 

23



Table of Contents

 

Comparison of the Six Months Ended June 30, 2010 and 2009

 

 

 

Six Months Ended June 30,

 

Change

 

 

 

2010

 

2009

 

$

 

%

 

 

 

(amounts in thousands, except per share data)

 

 

 

Revenues

 

$

394,898

 

$

332,614

 

$

62,284

 

18.7

%

Cost of sales

 

176,275

 

181,771

 

(5,496

)

(3.0

)%

Gross profit

 

218,623

 

150,843

 

67,780

 

44.9

%

Selling, general and administrative expenses

 

168,825

 

163,395

 

5,430

 

3.3

%

Foreign currency transaction losses (gains), net

 

(1,421

)

(214

)

(1,207

)

(564

)%

Restructuring charges

 

2,539

 

5,953

 

(3,414

)

(57.3

)%

Impairment charges

 

141

 

23,724

 

(23,583

)

(99.4