UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020March 31, 2021
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-14429
SKECHERS U.S.A., INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 95-4376145 |
(State or Other Jurisdiction of Incorporation or Organization) |
| (I.R.S. Employer Identification No.) |
228 Manhattan Beach Blvd. Manhattan Beach, California |
| 90266 |
(Address of Principal Executive Office) |
| (Zip Code) |
(310) 318-3100
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading symbol |
| Name of each exchange on which registered |
Class A Common Stock, par value $0.001 per share |
| SKX |
| New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ |
| Accelerated filer | ☐ |
Non-accelerated filer | ☐ |
| Smaller reporting company | ☐ |
|
|
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of OctoberApril 30, 2020, 135,584,2122021, 134,172,217 shares of the registrant’s Class A Common Stock, $0.001 par value per share, were outstanding.
As of OctoberApril 30, 2020, 21,570,4772021, 20,949,425 shares of the registrant’s Class B Common Stock, $0.001 par value per share, were outstanding.
SKECHERS U.S.A., INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
| ||
Item 1. |
|
|
| 3 | |
| 4 | |
| Condensed Consolidated Statements of Comprehensive Income (Unaudited) | 5 |
| 6 | |
|
| |
| Notes to Condensed Consolidated Financial Statements (Unaudited) |
|
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 3. |
| |
Item 4. |
| |
PART II – OTHER INFORMATION | ||
Item 1. |
| |
Item 1A. |
| |
Item 2. |
| |
Item 3. |
| |
Item 4. |
| |
Item 5. |
| |
Item 6. |
| |
|
|
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par values)
|
| September 30, |
|
| December 31, |
|
| As of March 31, |
|
| As of December 31, |
| ||||
|
| 2020 |
|
| 2019 |
| ||||||||||
(in thousands, except par values) |
| 2021 |
|
| 2020 |
| ||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
| ||||||||
Current assets |
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents |
| $ | 1,294,222 |
|
| $ | 824,876 |
|
| $ | 1,284,540 |
|
| $ | 1,370,826 |
|
Short-term investments |
|
| 106,767 |
|
|
| 112,037 |
|
|
| 106,028 |
|
|
| 100,767 |
|
Trade accounts receivable, less allowances of $41,750 in 2020 and $24,106 in 2019 |
|
| 708,947 |
|
|
| 645,303 |
| ||||||||
Trade accounts receivable, less allowances of $47,468 and $48,562 |
|
| 798,836 |
|
|
| 619,800 |
| ||||||||
Other receivables |
|
| 74,727 |
|
|
| 53,932 |
|
|
| 70,758 |
|
|
| 69,222 |
|
Total receivables |
|
| 783,674 |
|
|
| 699,235 |
|
|
| 869,594 |
|
|
| 689,022 |
|
Inventories |
|
| 1,053,360 |
|
|
| 1,069,863 |
| ||||||||
Inventory |
|
| 1,067,437 |
|
|
| 1,016,774 |
| ||||||||
Prepaid expenses and other current assets |
|
| 147,607 |
|
|
| 113,580 |
|
|
| 137,138 |
|
|
| 166,962 |
|
Total current assets |
|
| 3,385,630 |
|
|
| 2,819,591 |
| ||||||||
Total current assets ($920,986 and $862,954 related to VIEs) |
|
| 3,464,737 |
|
|
| 3,344,351 |
| ||||||||
Property, plant and equipment, net |
|
| 870,162 |
|
|
| 738,925 |
|
|
| 992,512 |
|
|
| 935,441 |
|
Operating lease right-of-use assets |
|
| 1,106,047 |
|
|
| 1,073,660 |
|
|
| 1,159,339 |
|
|
| 1,171,521 |
|
Deferred tax assets |
|
| 60,934 |
|
|
| 49,088 |
|
|
| 63,339 |
|
|
| 63,884 |
|
Long-term investments |
|
| 98,698 |
|
|
| 94,589 |
|
|
| 124,379 |
|
|
| 108,412 |
|
Goodwill |
|
| 93,497 |
|
|
| 71,412 |
|
|
| 93,497 |
|
|
| 93,497 |
|
Other assets, net |
|
| 96,426 |
|
|
| 45,678 |
|
|
| 87,763 |
|
|
| 95,263 |
|
Total non-current assets |
|
| 2,325,764 |
|
|
| 2,073,352 |
| ||||||||
Total non-current assets ($686,035 and $682,068 related to VIEs) |
|
| 2,520,829 |
|
|
| 2,468,018 |
| ||||||||
TOTAL ASSETS |
| $ | 5,711,394 |
|
| $ | 4,892,943 |
|
| $ | 5,985,566 |
|
| $ | 5,812,369 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
| ||||||||
Current liabilities |
|
|
|
|
|
|
|
| ||||||||
Current installments of long-term borrowings |
| $ | 106,702 |
|
| $ | 66,234 |
|
| $ | 60,942 |
|
| $ | 52,250 |
|
Short-term borrowings |
|
| 21,720 |
|
|
| 5,789 |
|
|
| 1,138 |
|
|
| 3,297 |
|
Accounts payable |
|
| 742,226 |
|
|
| 764,844 |
|
|
| 807,949 |
|
|
| 744,077 |
|
Operating lease liabilities |
|
| 196,760 |
|
|
| 191,129 |
|
|
| 217,241 |
|
|
| 204,370 |
|
Accrued expenses |
|
| 193,032 |
|
|
| 210,235 |
|
|
| 184,109 |
|
|
| 208,712 |
|
Total current liabilities |
|
| 1,260,440 |
|
|
| 1,238,231 |
| ||||||||
Total current liabilities ($544,355 and $526,466 related to VIEs) |
|
| 1,271,379 |
|
|
| 1,212,706 |
| ||||||||
Long-term borrowings, excluding current installments |
|
| 683,611 |
|
|
| 49,183 |
|
|
| 717,595 |
|
|
| 679,415 |
|
Long-term operating lease liabilities |
|
| 1,004,584 |
|
|
| 966,011 |
|
|
| 1,039,763 |
|
|
| 1,065,069 |
|
Deferred tax liabilities |
|
| 11,926 |
|
|
| 322 |
|
|
| 10,835 |
|
|
| 11,439 |
|
Other long-term liabilities |
|
| 109,722 |
|
|
| 103,089 |
|
|
| 114,448 |
|
|
| 118,077 |
|
Total non-current liabilities |
|
| 1,809,843 |
|
|
| 1,118,605 |
| ||||||||
Total non-current liabilities ($385,807 and $365,235 related to VIEs) |
|
| 1,882,641 |
|
|
| 1,874,000 |
| ||||||||
Total liabilities |
|
| 3,070,283 |
|
|
| 2,356,836 |
|
|
| 3,154,020 |
|
|
| 3,086,706 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
| ||||||||
Stockholders’ equity: |
|
|
|
|
|
|
|
| ||||||||
Preferred stock, $0.001 par value; 10,000 shares authorized; NaN issued and outstanding |
|
| — |
|
|
| — |
| ||||||||
Class A common stock, $0.001 par value; 500,000 shares authorized; 132,912 and 131,071 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively |
|
| 133 |
|
|
| 131 |
| ||||||||
Class B common stock, $0.001 par value; 75,000 shares authorized; 21,570 and 22,408 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively |
|
| 22 |
|
|
| 22 |
| ||||||||
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
| ||||||||
Stockholders’ equity |
|
|
|
|
|
|
|
| ||||||||
Preferred Stock, $0.001 par value; 10,000 shares authorized; NaN issued and outstanding |
|
| — |
|
|
| — |
| ||||||||
Class A Common Stock, $0.001 par value; 500,000 shares authorized; 134,172 and 133,618 shares issued and outstanding |
|
| 134 |
|
|
| 134 |
| ||||||||
Class B Common Stock, $0.001 par value; 75,000 shares authorized; 20,949 and 21,016 shares issued and outstanding |
|
| 21 |
|
|
| 21 |
| ||||||||
Additional paid-in capital |
|
| 359,678 |
|
|
| 306,669 |
|
|
| 377,350 |
|
|
| 372,165 |
|
Accumulated other comprehensive loss |
|
| (40,549 | ) |
|
| (29,993 | ) |
|
| (36,349 | ) |
|
| (27,285 | ) |
Retained earnings |
|
| 2,083,118 |
|
|
| 2,037,836 |
|
|
| 2,234,973 |
|
|
| 2,136,400 |
|
Skechers U.S.A., Inc. equity |
|
| 2,402,402 |
|
|
| 2,314,665 |
|
|
| 2,576,129 |
|
|
| 2,481,435 |
|
Non-controlling interests |
|
| 238,709 |
|
|
| 221,442 |
| ||||||||
Noncontrolling interests |
|
| 255,417 |
|
|
| 244,228 |
| ||||||||
Total stockholders' equity |
|
| 2,641,111 |
|
|
| 2,536,107 |
|
|
| 2,831,546 |
|
|
| 2,725,663 |
|
TOTAL LIABILITIES AND EQUITY |
| $ | 5,711,394 |
|
| $ | 4,892,943 |
|
| $ | 5,985,566 |
|
| $ | 5,812,369 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||||||
(in thousands, except per share data) |
| 2021 |
|
| 2020 |
| ||||||||||||||||||
Sales |
| $ | 1,300,886 |
|
| $ | 1,353,998 |
|
| $ | 3,272,703 |
|
| $ | 3,889,319 |
|
| $ | 1,428,418 |
|
| $ | 1,242,345 |
|
Cost of sales |
|
| 675,765 |
|
|
| 700,934 |
|
|
| 1,731,349 |
|
|
| 2,035,911 |
|
|
| 748,796 |
|
|
| 694,677 |
|
Gross profit |
|
| 625,121 |
|
|
| 653,064 |
|
|
| 1,541,354 |
|
|
| 1,853,408 |
|
|
| 679,622 |
|
|
| 547,668 |
|
Royalty income |
|
| 3,216 |
|
|
| 6,285 |
|
|
| 11,061 |
|
|
| 17,827 |
|
|
| 6,037 |
|
|
| 5,248 |
|
|
|
| 628,337 |
|
|
| 659,349 |
|
|
| 1,552,415 |
|
|
| 1,871,235 |
|
|
| 685,659 |
|
|
| 552,916 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Operating expenses |
|
|
|
|
|
|
|
| ||||||||||||||||
Selling |
|
| 85,926 |
|
|
| 97,516 |
|
|
| 220,222 |
|
|
| 281,237 |
|
|
| 85,296 |
|
|
| 74,055 |
|
General and administrative |
|
| 450,285 |
|
|
| 414,417 |
|
|
| 1,256,228 |
|
|
| 1,165,637 |
|
|
| 442,695 |
|
|
| 434,051 |
|
|
|
| 536,211 |
|
|
| 511,933 |
|
|
| 1,476,450 |
|
|
| 1,446,874 |
| ||||||||
Selling, general and administrative |
|
| 527,991 |
|
|
| 508,106 |
| ||||||||||||||||
Earnings from operations |
|
| 92,126 |
|
|
| 147,416 |
|
|
| 75,965 |
|
|
| 424,361 |
|
|
| 157,668 |
|
|
| 44,810 |
|
Other income / (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other income (expense) |
|
|
|
|
|
|
|
| ||||||||||||||||
Interest income |
|
| 1,884 |
|
|
| 3,290 |
|
|
| 5,739 |
|
|
| 9,500 |
|
|
| 796 |
|
|
| 2,307 |
|
Interest expense |
|
| (4,643 | ) |
|
| (2,012 | ) |
|
| (11,428 | ) |
|
| (5,194 | ) |
|
| (4,113 | ) |
|
| (1,999 | ) |
Other, net |
|
| 7,726 |
|
|
| (4,194 | ) |
|
| 15,882 |
|
|
| (8,628 | ) |
|
| (10,857 | ) |
|
| 3,471 |
|
Total other income / (expense) |
|
| 4,967 |
|
|
| (2,916 | ) |
|
| 10,193 |
|
|
| (4,322 | ) | ||||||||
Total other income (expense) |
|
| (14,174 | ) |
|
| 3,779 |
| ||||||||||||||||
Earnings before income tax expense |
|
| 97,093 |
|
|
| 144,500 |
|
|
| 86,158 |
|
|
| 420,039 |
|
|
| 143,494 |
|
|
| 48,589 |
|
Income tax expense |
|
| 14,983 |
|
|
| 22,766 |
|
|
| 18,104 |
|
|
| 75,288 |
|
|
| 28,985 |
|
|
| 7,429 |
|
Net earnings |
|
| 82,110 |
|
|
| 121,734 |
|
|
| 68,054 |
|
|
| 344,751 |
|
|
| 114,509 |
|
|
| 41,160 |
|
Net earnings attributable to non-controlling interests |
|
| 17,832 |
|
|
| 18,644 |
|
|
| 22,771 |
|
|
| 57,723 |
| ||||||||
Less: Net earnings (loss) attributable to noncontrolling interests |
|
| 15,936 |
|
|
| (7,941 | ) | ||||||||||||||||
Net earnings attributable to Skechers U.S.A., Inc. |
| $ | 64,278 |
|
| $ | 103,090 |
|
| $ | 45,283 |
|
| $ | 287,028 |
|
| $ | 98,573 |
|
| $ | 49,101 |
|
Net earnings per share attributable to Skechers U.S.A., Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net earnings per share attributable to Skechers U.S.A., Inc. |
|
|
|
|
|
|
|
| ||||||||||||||||
Basic |
| $ | 0.42 |
|
| $ | 0.67 |
|
| $ | 0.29 |
|
| $ | 1.87 |
|
| $ | 0.64 |
|
| $ | 0.32 |
|
Diluted |
| $ | 0.41 |
|
| $ | 0.67 |
|
| $ | 0.29 |
|
| $ | 1.86 |
|
| $ | 0.63 |
|
| $ | 0.32 |
|
Weighted average shares used in calculating net earnings per share attributable to Skechers U.S.A., Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted-average shares used in calculating net earnings per share attributable to Skechers U.S.A, Inc. |
|
|
|
|
|
|
|
| ||||||||||||||||
Basic |
|
| 154,462 |
|
|
| 153,298 |
|
|
| 154,061 |
|
|
| 153,396 |
|
|
| 154,818 |
|
|
| 153,555 |
|
Diluted |
|
| 154,980 |
|
|
| 153,978 |
|
|
| 154,707 |
|
|
| 154,021 |
|
|
| 155,936 |
|
|
| 154,652 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||||||
(in thousands) | (in thousands) | 2021 |
|
| 2020 |
| ||||||||||||||||||
Net earnings |
| $ | 82,110 |
|
| $ | 121,734 |
|
| $ | 68,054 |
|
| $ | 344,751 |
|
| $ | 114,509 |
|
| $ | 41,160 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Gain / (loss) on foreign currency translation adjustment |
|
| 112,814 |
|
|
| (98,416 | ) |
|
| (11,215 | ) |
|
| (92,059 | ) | ||||||||
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
| ||||||||||||||||
Loss on foreign currency translation adjustment |
|
| (12,505 | ) |
|
| (29,764 | ) | ||||||||||||||||
Comprehensive income |
|
| 194,924 |
|
|
| 23,318 |
|
|
| 56,839 |
|
|
| 252,692 |
|
|
| 102,004 |
|
|
| 11,396 |
|
Comprehensive income / (loss) attributable to non- controlling interests |
|
| 46,956 |
|
|
| (7,700 | ) |
|
| 22,112 |
|
|
| 31,530 |
| ||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests |
|
| 12,495 |
|
|
| (14,879 | ) | ||||||||||||||||
Comprehensive income attributable to Skechers U.S.A., Inc. |
| $ | 147,968 |
|
| $ | 31,018 |
|
| $ | 34,727 |
|
| $ | 221,162 |
|
| $ | 89,509 |
|
| $ | 26,275 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
|
| SHARES |
|
| AMOUNT |
|
|
|
|
|
| ACCUMULATED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| CLASS A |
|
| CLASS B |
|
| CLASS A |
|
| CLASS B |
|
| ADDITIONAL |
|
| OTHER |
|
|
|
|
|
| SKECHERS |
|
| NON |
|
| TOTAL |
| |||||||||
|
| COMMON |
|
| COMMON |
|
| COMMON |
|
| COMMON |
|
| PAID-IN |
|
| COMPREHENSIVE |
|
| RETAINED |
|
| U.S.A., INC. |
|
| CONTROLLING |
|
| STOCKHOLDERS' |
| ||||||||||
|
| STOCK |
|
| STOCK |
|
| STOCK |
|
| STOCK |
|
| CAPITAL |
|
| INCOME (LOSS) |
|
| EARNINGS |
|
| EQUITY |
|
| INTEREST |
|
| EQUITY |
| ||||||||||
Balance at June 30, 2020 |
|
| 132,882 |
|
|
| 21,570 |
|
| $ | 133 |
|
| $ | 22 |
|
| $ | 329,958 |
|
| $ | (124,238 | ) |
| $ | 2,018,840 |
|
| $ | 2,224,715 |
|
| $ | 212,429 |
|
| $ | 2,437,144 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 64,278 |
|
|
| 64,278 |
|
|
| 17,832 |
|
|
| 82,110 |
|
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 83,689 |
|
|
| — |
|
|
| 83,689 |
|
|
| 29,125 |
|
|
| 112,814 |
|
Distribution to non-controlling interest of consolidated entity |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (20,788 | ) |
|
| (20,788 | ) |
Net unrealized loss on derivative contract |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 111 |
|
|
| 111 |
|
Stock compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 29,720 |
|
|
| — |
|
|
| — |
|
|
| 29,720 |
|
|
| — |
|
|
| 29,720 |
|
Shares issued under the Incentive Award Plan |
|
| 30 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Conversion of Class B common stock into Class A common stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance at September 30, 2020 |
|
| 132,912 |
|
|
| 21,570 |
|
| $ | 133 |
|
| $ | 22 |
|
| $ | 359,678 |
|
| $ | (40,549 | ) |
| $ | 2,083,118 |
|
| $ | 2,402,402 |
|
| $ | 238,709 |
|
| $ | 2,641,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019 |
|
| 130,275 |
|
|
| 23,016 |
|
| $ | 130 |
|
| $ | 23 |
|
| $ | 282,822 |
|
| $ | (25,282 | ) |
| $ | 1,875,214 |
|
| $ | 2,132,907 |
|
| $ | 190,766 |
|
| $ | 2,323,673 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 103,090 |
|
|
| 103,090 |
|
|
| 18,644 |
|
|
| 121,734 |
|
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (72,072 | ) |
|
| — |
|
|
| (72,072 | ) |
|
| (26,344 | ) |
|
| (98,416 | ) |
Distribution to non-controlling interest of consolidated entity |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (16,115 | ) |
|
| (16,115 | ) |
Stock compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,738 |
|
|
| — |
|
|
| — |
|
|
| 10,738 |
|
|
| — |
|
|
| 10,738 |
|
Shares issued under the Incentive Award Plan |
|
| 29 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shares redeemed for employee tax withholdings |
|
| (5 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (161 | ) |
|
| — |
|
|
| — |
|
|
| (161 | ) |
|
| — |
|
|
| (161 | ) |
Conversion of Class B common stock into Class A common stock |
|
| 112 |
|
|
| (112 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance at September 30, 2019 |
|
| 130,411 |
|
|
| 22,904 |
|
| $ | 130 |
|
| $ | 23 |
|
| $ | 293,399 |
|
| $ | (97,354 | ) |
| $ | 1,978,304 |
|
| $ | 2,174,502 |
|
| $ | 166,951 |
|
| $ | 2,341,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
|
| SHARES |
|
| AMOUNT |
|
|
|
|
|
| ACCUMULATED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| CLASS A |
|
| CLASS B |
|
| CLASS A |
|
| CLASS B |
|
| ADDITIONAL |
|
| OTHER |
|
|
|
|
|
| SKECHERS |
|
| NON |
|
| TOTAL |
| |||||||||
|
| COMMON |
|
| COMMON |
|
| COMMON |
|
| COMMON |
|
| PAID-IN |
|
| COMPREHENSIVE |
|
| RETAINED |
|
| U.S.A., INC. |
|
| CONTROLLING |
|
| STOCKHOLDERS' |
| ||||||||||
|
| STOCK |
|
| STOCK |
|
| STOCK |
|
| STOCK |
|
| CAPITAL |
|
| INCOME (LOSS) |
|
| EARNINGS |
|
| EQUITY |
|
| INTERESTS |
|
| EQUITY |
| ||||||||||
Balance at December 31, 2019 |
|
| 131,071 |
|
|
| 22,408 |
|
| $ | 131 |
|
| $ | 22 |
|
| $ | 306,669 |
|
| $ | (29,993 | ) |
| $ | 2,037,835 |
|
| $ | 2,314,664 |
|
| $ | 221,442 |
|
| $ | 2,536,107 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 45,283 |
|
|
| 45,283 |
|
|
| 22,771 |
|
|
| 68,054 |
|
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10,556 | ) |
|
| — |
|
|
| (10,556 | ) |
|
| (659 | ) |
|
| (11,215 | ) |
Distribution to noncontrolling interest of consolidated entity |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (51,842 | ) |
|
| (51,842 | ) |
Non-controlling interests of acquired businesses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 49,045 |
|
|
| 49,045 |
|
Net unrealized loss on derivative contract |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,048 | ) |
|
| (2,048 | ) |
Stock compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 54,983 |
|
|
| — |
|
|
| — |
|
|
| 54,983 |
|
|
| — |
|
|
| 54,983 |
|
Proceeds from issuance of common stock under the employee stock purchase plan |
|
| 138 |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| 3,686 |
|
|
| — |
|
|
| — |
|
|
| 3,687 |
|
|
| — |
|
|
| 3,687 |
|
Shares issued under the Incentive Award Plan |
|
| 1,036 |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shares redeemed for employee tax withholdings |
|
| (171 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,659 | ) |
|
| — |
|
|
| — |
|
|
| (5,659 | ) |
|
| — |
|
|
| (5,659 | ) |
Conversion of Class B common stock into Class A common stock |
|
| 838 |
|
|
| (838 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance at September 30, 2020 |
|
| 132,912 |
|
|
| 21,570 |
|
| $ | 133 |
|
| $ | 22 |
|
| $ | 359,678 |
|
| $ | (40,549 | ) |
| $ | 2,083,118 |
|
| $ | 2,402,402 |
|
| $ | 238,709 |
|
| $ | 2,641,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018 |
|
| 129,525 |
|
|
| 23,983 |
|
| $ | 129 |
|
| $ | 24 |
|
| $ | 375,017 |
|
| $ | (31,488 | ) |
| $ | 1,691,276 |
|
| $ | 2,034,958 |
|
| $ | 154,317 |
|
| $ | 2,189,275 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 287,028 |
|
|
| 287,028 |
|
|
| 57,723 |
|
|
| 344,751 |
|
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (65,866 | ) |
|
| — |
|
|
| (65,866 | ) |
|
| (26,193 | ) |
|
| (92,059 | ) |
Contribution from noncontrolling interest of consolidated entity |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 30,341 |
|
|
| 30,341 |
|
Distribution to noncontrolling interest of consolidated entity |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (37,608 | ) |
|
| (37,608 | ) |
Acquisition of minority interest in India joint-venture |
|
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (71,265 | ) |
|
| — |
|
|
| — |
|
|
| (71,265 | ) |
|
| (11,629 | ) |
|
| (82,894 | ) |
Stock compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 30,234 |
|
|
| — |
|
|
| — |
|
|
| 30,234 |
|
|
| — |
|
|
| 30,234 |
|
Proceeds from issuance of common stock under the employee stock purchase plan |
|
| 134 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,177 |
|
|
| — |
|
|
| — |
|
|
| 3,177 |
|
|
| — |
|
|
| 3,177 |
|
Shares issued under the Incentive Award Plan |
|
| 1,065 |
|
|
| — |
|
|
| 1 |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shares redeemed for employee tax withholdings |
|
| (423 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13,745 | ) |
|
| — |
|
|
| — |
|
|
| (13,745 | ) |
|
| — |
|
|
| (13,745 | ) |
Conversion of Class B common stock into Class A common stock |
|
| 1,079 |
|
|
| (1,079 | ) |
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Repurchases of common stock |
|
| (969 | ) |
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| (30,018 | ) |
|
| — |
|
|
| — |
|
|
| (30,019 | ) |
|
| — |
|
|
| (30,019 | ) |
Balance at September 30, 2019 |
|
| 130,411 |
|
|
| 22,904 |
|
| $ | 130 |
|
| $ | 23 |
|
| $ | 293,399 |
|
| $ | (97,354 | ) |
| $ | 1,978,304 |
|
| $ | 2,174,502 |
|
| $ | 166,951 |
|
| $ | 2,341,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| SHARES |
|
| AMOUNT |
|
|
|
|
|
| ACCUMULATED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| CLASS A |
|
| CLASS B |
|
| CLASS A |
|
| CLASS B |
|
| ADDITIONAL |
|
| OTHER |
|
|
|
|
|
| SKECHERS |
|
| NON |
|
| TOTAL |
| |||||||||
|
| COMMON |
|
| COMMON |
|
| COMMON |
|
| COMMON |
|
| PAID-IN |
|
| COMPREHENSIVE |
|
| RETAINED |
|
| U.S.A., INC. |
|
| CONTROLLING |
|
| STOCKHOLDERS' |
| ||||||||||
(in thousands) |
| STOCK |
|
| STOCK |
|
| STOCK |
|
| STOCK |
|
| CAPITAL |
|
| LOSS |
|
| EARNINGS |
|
| EQUITY |
|
| INTEREST |
|
| EQUITY |
| ||||||||||
Balance at December 31, 2020 |
|
| 133,618 |
|
|
| 21,016 |
|
| $ | 134 |
|
| $ | 21 |
|
| $ | 372,165 |
|
| $ | (27,285 | ) |
| $ | 2,136,400 |
|
| $ | 2,481,435 |
|
| $ | 244,228 |
|
| $ | 2,725,663 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 98,573 |
|
|
| 98,573 |
|
|
| 15,936 |
|
|
| 114,509 |
|
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,064 | ) |
|
| — |
|
|
| (9,064 | ) |
|
| (3,441 | ) |
|
| (12,505 | ) |
Contribution from noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14 |
|
|
| 14 |
|
Purchase of noncontrolling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,856 | ) |
|
| — |
|
|
| — |
|
|
| (6,856 | ) |
|
| (3,072 | ) |
|
| (9,928 | ) |
Net unrealized gain on derivative contract |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,752 |
|
|
| 1,752 |
|
Stock compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 12,041 |
|
|
| — |
|
|
| — |
|
|
| 12,041 |
|
|
| — |
|
|
| 12,041 |
|
Shares issued under the incentive award plan |
|
| 487 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Conversion of Class B Common Stock into Class A Common Stock |
|
| 67 |
|
|
| (67 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance at March 31, 2021 |
|
| 134,172 |
|
|
| 20,949 |
|
| $ | 134 |
|
| $ | 21 |
|
| $ | 377,350 |
|
| $ | (36,349 | ) |
| $ | 2,234,973 |
|
| $ | 2,576,129 |
|
| $ | 255,417 |
|
| $ | 2,831,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019 |
|
| 131,071 |
|
|
| 22,408 |
|
| $ | 131 |
|
| $ | 22 |
|
| $ | 306,669 |
|
| $ | (29,993 | ) |
| $ | 2,037,836 |
|
| $ | 2,314,665 |
|
| $ | 221,442 |
|
| $ | 2,536,107 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 49,101 |
|
|
| 49,101 |
|
|
| (7,941 | ) |
|
| 41,160 |
|
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,826 | ) |
|
| — |
|
|
| (22,826 | ) |
|
| (6,938 | ) |
|
| (29,764 | ) |
Distributions to noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14,865 | ) |
|
| (14,865 | ) |
Noncontrolling interest of acquired businesses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 49,045 |
|
|
| 49,045 |
|
Stock compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 12,441 |
|
|
| — |
|
|
| — |
|
|
| 12,441 |
|
|
| — |
|
|
| 12,441 |
|
Shares issued under the incentive award plan |
|
| 376 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Shares redeemed for employee tax withholdings |
|
| (171 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,659 | ) |
|
| — |
|
|
| — |
|
|
| (5,659 | ) |
|
| — |
|
|
| (5,659 | ) |
Balance at March 31, 2020 |
|
| 131,276 |
|
|
| 22,408 |
|
| $ | 131 |
|
| $ | 22 |
|
| $ | 313,451 |
|
| $ | (52,819 | ) |
| $ | 2,086,937 |
|
| $ | 2,347,722 |
|
| $ | 240,743 |
|
| $ | 2,588,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
| Nine Months Ended September 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
| $ | 68,054 |
|
| $ | 344,751 |
|
Adjustment to reconcile net earnings to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 105,752 |
|
|
| 80,731 |
|
Provision for bad debts and returns |
|
| 11,673 |
|
|
| 20,367 |
|
Share based compensation |
|
| 54,983 |
|
|
| 30,234 |
|
Deferred income taxes |
|
| (17,861 | ) |
|
| (11,224 | ) |
Net settlement gain |
|
| (13,877 | ) |
|
| — |
|
Other items, net |
|
| — |
|
|
| (223 | ) |
Net foreign currency adjustments |
|
| (2,523 | ) |
|
| 7,769 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
| (103,895 | ) |
|
| (143,266 | ) |
Inventories |
|
| 23,629 |
|
|
| 1,533 |
|
Other assets |
|
| (87,058 | ) |
|
| (47,112 | ) |
Accounts payable |
|
| (22,889 | ) |
|
| 48,317 |
|
Other liabilities |
|
| 41,008 |
|
|
| 17,385 |
|
Net cash provided by operating activities |
|
| 56,996 |
|
|
| 349,262 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (213,216 | ) |
|
| (174,663 | ) |
Acquisitions, net of cash acquired |
|
| — |
|
|
| (100,658 | ) |
Proceeds from sale of property, plant and equipment |
|
| — |
|
|
| 5,547 |
|
Purchases of investments |
|
| (131,307 | ) |
|
| (151,594 | ) |
Proceeds from sales and maturities of investments |
|
| 132,469 |
|
|
| 147,772 |
|
Net cash used in investing activities |
|
| (212,054 | ) |
|
| (273,596 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net proceeds from the issuances of Class A common stock through the employee stock purchase plan |
|
| 3,687 |
|
|
| 3,177 |
|
Repayments on long-term borrowings |
|
| (2,500 | ) |
|
| (3,456 | ) |
Proceeds from long-term borrowings |
|
| 677,788 |
|
|
| 17,941 |
|
Proceeds from short-term borrowings |
|
| 15,931 |
|
|
| 9,048 |
|
Payments for taxes related to net share settlement of equity awards |
|
| (5,659 | ) |
|
| (13,745 | ) |
Repurchase of Class A common stock |
|
| — |
|
|
| (30,019 | ) |
Cash used for purchase of non-controlling interest |
|
| — |
|
|
| (82,894 | ) |
Distributions to non-controlling interests |
|
| (51,842 | ) |
|
| (37,608 | ) |
Net cash provided by (used in) financing activities |
|
| 637,405 |
|
|
| (137,557 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| (13,001 | ) |
|
| 13,659 |
|
Net change in cash and cash equivalents |
|
| 469,346 |
|
|
| (48,232 | ) |
Cash and cash equivalents at beginning of the period |
|
| 824,876 |
|
|
| 872,237 |
|
Cash and cash equivalents at end of the period |
| $ | 1,294,222 |
|
| $ | 824,004 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
| $ | 11,240 |
|
| $ | 5,097 |
|
Income taxes, net |
|
| 39,542 |
|
|
| 92,855 |
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
Land and other assets contribution from non-controlling interest |
|
| — |
|
|
| 30,341 |
|
Note payable contribution from non-controlling interest |
|
| — |
|
|
| 2,150 |
|
Purchase price adjustment for Manhattan SKMX, S. de R.L. de C.V. |
|
| 49,045 |
|
|
| — |
|
|
| Three Months Ended March 31, |
| |||||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net earnings |
| $ | 114,509 |
|
| $ | 41,160 |
|
Adjustments to reconcile net earnings to net cash from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 33,008 |
|
|
| 39,559 |
|
Provision for bad debts and returns |
|
| 7,348 |
|
|
| 26,277 |
|
Stock compensation |
|
| 12,041 |
|
|
| 12,441 |
|
Deferred income taxes |
|
| (446 | ) |
|
| (4,885 | ) |
Net settlement gain |
|
| — |
|
|
| (13,877 | ) |
Net foreign currency adjustments |
|
| 6,015 |
|
|
| 6,513 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Receivables |
|
| (196,331 | ) |
|
| (187,786 | ) |
Inventory |
|
| (57,392 | ) |
|
| 77,539 |
|
Other assets |
|
| 29,705 |
|
|
| 29,733 |
|
Accounts payable |
|
| 69,184 |
|
|
| (141,815 | ) |
Other liabilities |
|
| (31,415 | ) |
|
| (19,840 | ) |
Net cash used in operating activities |
|
| (13,774 | ) |
|
| (134,981 | ) |
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (84,237 | ) |
|
| (74,887 | ) |
Purchases of investments |
|
| (71,132 | ) |
|
| (43,788 | ) |
Proceeds from sales and maturities of investments |
|
| 49,905 |
|
|
| 42,418 |
|
Net cash used in investing activities |
|
| (105,464 | ) |
|
| (76,257 | ) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Repayments on long-term borrowings |
|
| (46 | ) |
|
| (107 | ) |
Proceeds from long-term borrowings |
|
| 46,918 |
|
|
| 570,767 |
|
Proceeds from (repayments on) short-term borrowings, net |
|
| (2,159 | ) |
|
| 7,912 |
|
Payments for employee taxes related to stock compensation |
|
| — |
|
|
| (5,659 | ) |
Purchase of noncontrolling interest |
|
| (9,928 | ) |
|
| — |
|
Contributions from noncontrolling interests |
|
| 14 |
|
|
| — |
|
Distributions to noncontrolling interests |
|
| — |
|
|
| (14,865 | ) |
Net cash provided by financing activities |
|
| 34,799 |
|
|
| 558,048 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (1,847 | ) |
|
| (12,920 | ) |
Net change in cash and cash equivalents |
|
| (86,286 | ) |
|
| 333,890 |
|
Cash and cash equivalents at beginning of the period |
|
| 1,370,826 |
|
|
| 824,876 |
|
Cash and cash equivalents at end of the period |
| $ | 1,284,540 |
|
| $ | 1,158,766 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest |
| $ | 3,992 |
|
| $ | 2,000 |
|
Income taxes, net |
|
| 18,291 |
|
|
| 13,044 |
|
Non-cash transactions |
|
|
|
|
|
|
|
|
ROU assets exchanged for lease liabilities |
|
| 42,143 |
|
|
| 9,581 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
SKECHERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020 and 2019
(Unaudited)
(1) | GENERAL |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Skechers U.S.A., Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S‑X. Accordingly, they do not include certain notes and financial presentations normally required under U.S. GAAP for complete financial reporting. The interim financial information is unaudited, but reflectsIn the opinion of management, all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentationstatement of the results of operations for the interim periods presented.presented have been included. The December 31, 2020 balance sheet data was derived from audited financial statements; however, the accompanying notes to condensed consolidated financial statements do not include all of the annual disclosures required under GAAP and should be read in conjunction with the audited consolidated financial statements includedCompany’s 2020 Annual Report on Form 10-K.
As previously disclosed in the Company’s 2020 Annual Report on Form 10-K, for the fiscal year ended December 31, 2019.
Effects of the COVID-19 Pandemic on the Company’s Business
In March 2020, the Company temporarily closed its stores around the worldduration and temporarily furloughed a meaningful portion of its hourly employees. The Company began reopening its stores in April 2020, and as of September 30, 2020, all but a few of the Company owned retail stores have reopened. The Company continues to monitor and react to the COVID-19 pandemic, including conforming to local governments and global health organizations’ guidance, implementing global travel restrictions, and implementing “work from home” measures for many of its employees. The Company is actively monitoring and assessing the rapidly emerging government policies and economic stimulus responses to the COVID-19 pandemic around the world.
Although the Company has reopened nearly all of its worldwide retail stores, the economic impactmagnitude of the COVID-19 pandemic continues to negatively affect the Company’s results of operations. Many of the reopened retail stores continue to have temporarily reduced operating hours and less foot traffic, which has resulted in lower sales. Additionally, the reopening of stores and other offices required the Company to implement safety protocols, facilitate social distancing, enhance cleaning and sanitation activities, and provide masks and gloves to all employees. These safety processes and procedures have increased our costs to operate for the foreseeable future. Given the unprecedented impact theremains uncertain. The COVID-19 pandemic has had the Company is unableand may continue to forecast consumer demand and store productivity. Whether and how quickly customers may resume shopping, and the effect of the pandemichave a significant impact on consumer behavior and spending patterns remains highly uncertain. The Company expects customer demand to be suppressed in the near term. In addition, it is possible that there will be an increase in the number of COVID-19 cases in the future, which could require the Company’s stores to close again and negatively impact the Company’s sales.
As the COVID-19 pandemic is complex and rapidly evolving, the Company’s plans as described above may change. The Company expects that the ongoing impact of the COVID-19 pandemic and the resulting economic disruption will have a material adverse effect on its consolidated results of operations, financial position and cash flowsflows.
Noncontrolling Interests
The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products throughout Mexico, Asia and the remainder of fiscal year 2020,Middle East or to construct the Company’s domestic distribution facility. These joint ventures are variable interest entities (“VIE”), and beyond fiscal year 2020.
Inventories
Inventories, principally finished goods, are stated at the lower of cost (basedCompany is considered the primary beneficiary. This determination is based on the first-in, first-out method)relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. Specifically, the Company has both of the following characteristics: (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance; and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE, or market (net realizable value). Cost includes shippingthe right to receive benefits from the entity that could potentially be significant to the VIE. The assets and handling feesliabilities and costs,results of operations of these entities are included in the Company’s condensed consolidated financial statements, even though the Company may not hold a majority equity interest.
In March 2021, the minority interest related to the Hong Kong joint venture was purchased for $10.0 million. Other than the change in the Company’s ownership of the Hong Kong entity, which are subsequently expensedcontinues to costbe included in the Company’s condensed consolidated financial statements, there have been no changes during 2021 in the accounting treatment or characterization of sales.any previously identified variable interest entities. The Company providescontinues to reassess these relationships quarterly. The assets of these joint ventures are restricted, as they are not available for estimated losses from obsolete or slow-moving inventories, and writes downgeneral business use outside the costcontext of inventory atsuch joint ventures. The holders of the time such determinations are made. Reserves are estimated based on inventory on hand, historical sales activity, industry trends,liabilities of each joint venture have no recourse to the retail environment, and the expected net realizable value. The net realizable value is determined using estimated sales prices of similar inventory through off-price or discount store channels.Company.
Fair Value of Financial InstrumentsFAIR VALUE OF FINANCIAL INSTRUMENTS
The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard established a fair value hierarchy which requires an entity to maximizeas defined by applicable accounting standards prioritizes the use of observable inputs where available. Theused in valuation techniques into the following summarizes the three levels of inputs required:levels:
| • | Level |
|
|
| • | Level |
• | Level 3: Unobservable inputs that cannot be corroborated by market data that reflect |
The carrying amount of the Company’s financial instruments, which principallyLevel 1 investments primarily include cashmoney market funds and cash equivalents, short-term investments, accounts receivable, long-term investments, accounts payable and accrued expenses approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are consideredU.S. Treasury securities; Level 2 liabilities, approximates fair value based upon current ratesinvestments primarily include corporate notes and terms available tobonds, asset-backed securities, U.S. Agency securities, and actively traded mutual funds; and the company for similar debt.
Company does not currently have any Level 3 assets or liabilities. The Company has one1 Level 2 derivative instrument which is an interest rate swap related to the refinancing of its domesticU.S. distribution center (see Note 54 – Short-Term and Long-Term Borrowings) andFinancial Commitments) classified as other long-term liabilities.liabilities. The fair value of the interest rate swap was determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipt was based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Credit valuation adjustments were incorporated to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
UseThe carrying amount of Estimatesreceivables, payables and other amounts arising out of the normal course of business approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based on current rates and terms available to the Company for similar debt.
DERIVATIVE INSTRUMENTS
The preparationCompany’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, the Company uses an interest rate swap as part of its interest rate risk management strategy. The Company’s interest rate swap, designated as a cash flow hedge, involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the condensed consolidated financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dateagreements without exchange of the underlying notional amount. By utilizing an interest rate swap, the Company is exposed to credit-related losses in the event that the counterparty fails to perform under the terms of the derivative contract. To mitigate this risk, the Company enters into derivative contracts with major financial statementsinstitutions based upon credit ratings and the reported amounts of revenues and expenses during the reporting periods.other factors. The Company considered COVID-19 related impacts tocontinually assesses the creditworthiness of its estimates, as appropriate, within its condensed consolidated financial statements and there may be changes to those estimates in future periods. The Company believes that the accounting estimates are appropriate after giving considerationscounterparties. As of March 31, 2021, all counterparties to the increased uncertainties surrounding the severity and duration of the COVID-19 pandemic. Such estimates and assumptions are subject to inherent uncertainties, actual results could differ materially from those estimates.interest rate swap had performed in accordance with their contractual obligations.
Revenue RecognitionRecent Accounting Pronouncements
In accordance withDecember 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”), the Company recognizes revenue when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company derives income from the sale of footwear and royalties earned from licensing the Skechers brand. For North America, goods are shipped Free on Board (“FOB”) shipping point directly from the Company’s domestic distribution center in Rancho Belago, California. For international wholesale customers product is shipped FOB shipping point, (i) direct from the Company’s distribution center in Liege, Belgium, (ii) to third-party distribution centers in Central America, South America and Asia, (iii) directly from third-party manufacturers to other international customers. For distributor sales, the goods are generally delivered directly from the independent factories to third-party distribution centers or to distributors’ freight forwarders on a Free Named Carrier (“FCA”) basis. The Company recognizes revenue on wholesale sales upon shipment as that is when the customer obtains control of the promised goods. Related costs paid to third-party shipping companies are recorded as cost of sales and are accounted for as a fulfillment cost and not as a separate performance obligation.The Company generates direct-to-consumer revenues primarily from the sale of footwear to customers at retail locations or through the Company’s websites. For in-store sales, the Company recognizes revenue at the point of sale. For sales made through its websites, the Company recognizes revenue upon shipment to the customer which is when the customer obtains control of the promised good. Sales and value added taxes collected from direct-to-consumer customers are excluded from reported revenues. Reference in this quarterly report to “Sales” refer to Skechers’ net sales reported under generally accepted accounting principles in the United States.
The Company records accounts receivable at the time of shipment when the Company’s right to the consideration becomes unconditional. The Company typically extends credit terms to its wholesale customers based on their creditworthiness and generally does not receive advance payments. Generally, wholesale customers do not have the right to return goods, however, the Company periodically decides to accept returns or provide customers with credits. Allowances for estimated returns, discounts, doubtful accounts and chargebacks are provided for when related revenue is recorded. Retail and direct-to-consumer sales represent amounts due from credit card companies and are generally collected within a few days of the purchase. As such, the Company has determined that an allowance for doubtful accounts for retail and direct-to-consumer sales is not necessary.
The Company earns royalty income from its licensing arrangements which qualify as symbolic licenses rather than functional licenses. Upon signing a new licensing agreement, the Company receives up-front fees, which are generally characterized as prepaid royalties. These fees are initially deferred and recognized as revenue is earned (i.e., as licensed sales are reported to the Company or on a straight-line basis over the term of the agreement). The Company applies the sales-based royalty exception for the royalty income based on sales and recognizes revenue only when subsequent sales occur. The Company calculates and accrues estimated royalties based on the agreement terms and correspondence with the licensees regarding actual sales.
Judgments
The Company considered several factors in determining that control transfers to the customer upon shipment of products. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership at the time of shipment. The Company accrues a liability for product returns at the time of sale based on our historical experience. The Company also accrues amounts for goods expected to be returned in salable condition. As of September 30, 2020 and December 31, 2019, the Company’s sales returns liability totaled $96.3 million and $86.5 million, respectively, and was included in accrued expenses in the accompanying condensed consolidated balance sheets.
Business Combinations
Business acquisitions are accounted for under the acquisition method by assigning the purchase price to tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values and the excess of the purchase price over the amounts assigned is recorded as goodwill. Purchased intangible assets with finite lives are amortized over their estimated useful lives. Goodwill and intangible assets with indefinite lives are not amortized but are tested at least annually for impairment or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Fair value determinations require judgment and may involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples, among other items. In the second quarter of 2019, the Company purchased a 60% interest in Manhattan SKMX, S. de R.L. de C.V. (“Skechers Mexico”), for a total consideration of $120.6 million, net of cash acquired (see Note 7 – Acquisition). Skechers Mexico is a joint venture that operates and generates sales in Mexico. As a result of this purchase, Skechers Mexico became a majority-owned subsidiary and the results are included in the condensed consolidated financial statements from the date of acquisition. The purchase price allocation was completed during the quarter ended March 31, 2020. Pro forma results of operations have not been presented because the effects of the acquisition were not material to the Company’s condensed consolidated financial statements.
Accounting Standards Adopted in 2020
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” (“ASU 2016-13”), which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, which include trade and other receivables, loans and held-to-maturity debt securities, to record an allowance for credit risk based on expected losses rather than incurred losses, otherwise known as “CECL.” In addition, this guidance changes the recognition for credit losses on available-for-sale debt securities, which can occur as a result of market and credit risk and requires additional disclosures. The Company adopted ASU 2016-03 on January 1, 2020 and the adoption of this ASU did not have a material impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,” (“ASU 2018-13”), which modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company adopted ASU 2018-13 on January 1, 2020 and the adoption of this ASU did not have a material impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,” (“ASU 2018-15”). ASU 2018-15 requires that issuers follow the internal-use software guidance in Accounting Standards Codification (ASC) 350-40 to determine which costs to capitalize as assets or expense as incurred. The ASC 350-40 guidance requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as they are incurred. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-15 on January 1, 2020 and the adoption of this ASU did not have a material impact on its condensed consolidated financial statements.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” (“ASU 2019-12”). The amendmentASU 2019-12 removes certain exceptions to the general income tax accounting methodology including an exception for the recognition of a deferred tax liability when a foreign subsidiary becomes an equity method investment and an exception for interim periods showing operating losses in excess of anticipated operating losses for the year. The amendment also reduces the complexity surrounding franchise tax recognition; the step up in the tax basis of goodwill in conjunction with business combinations; and the accounting for the effect of changes in tax laws enacted during interim periods. The amendments in this update are effective for the Company for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact ofadopted ASU 2019-12; however, at the current time the Company does not expect that2019-12 on January 1, 2021, and the adoption of this ASU willdid not have a material impact on its condensed consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” (“ASUas amended and supplemented by subsequent ASUs (collectively, “ASU 2020-04”), which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for our borrowing instruments, which use LIBOR as a reference rate, and is effective immediately, but is only available through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04; however, at the current time the Company does not expect that the adoption of this ASU willto have a material impact on its condensed consolidated financial statements.
(2) | CASH, CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS |
The following tables show the Company’s cash, cash equivalents, short-term and long-term investments by significant investment category:
|
| As of March 31, 2021 |
| |||||||||||||||||
(in thousands) |
| Adjusted Cost |
|
| Fair Value |
|
| Cash and Cash Equivalents |
|
| Short-Term Investments |
|
| Long-Term Investments |
| |||||
Cash |
| $ | 866,621 |
|
| $ | 866,621 |
|
| $ | 866,621 |
|
| $ | — |
|
| $ | — |
|
Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
| 417,919 |
|
|
| 417,919 |
|
|
| 417,919 |
|
|
| — |
|
|
| — |
|
U.S. Treasury securities |
|
| 22,551 |
|
|
| 22,551 |
|
|
| — |
|
|
| 8,362 |
|
|
| 14,189 |
|
Total level 1 |
|
| 440,470 |
|
|
| 440,470 |
|
|
| 417,919 |
|
|
| 8,362 |
|
|
| 14,189 |
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds |
|
| 138,507 |
|
|
| 138,507 |
|
|
| — |
|
|
| 93,422 |
|
|
| 45,085 |
|
Asset-backed securities |
|
| 25,831 |
|
|
| 25,831 |
|
|
| — |
|
|
| 2,257 |
|
|
| 23,574 |
|
U.S. Agency securities |
|
| 1,987 |
|
|
| 1,987 |
|
|
| — |
|
|
| 1,987 |
|
|
| — |
|
Mutual funds |
|
| 41,531 |
|
|
| 41,531 |
|
|
| — |
|
|
| — |
|
|
| 41,531 |
|
Total level 2 |
|
| 207,856 |
|
|
| 207,856 |
|
|
| — |
|
|
| 97,666 |
|
|
| 110,190 |
|
TOTAL |
| $ | 1,514,947 |
|
| $ | 1,514,947 |
|
| $ | 1,284,540 |
|
| $ | 106,028 |
|
| $ | 124,379 |
|
|
| As of December 31, 2020 |
| |||||||||||||||||
(in thousands) |
| Adjusted Cost |
|
| Fair Value |
|
| Cash and Cash Equivalents |
|
| Short-Term Investments |
|
| Long-Term Investments |
| |||||
Cash |
| $ | 946,961 |
|
| $ | 946,961 |
|
| $ | 946,961 |
|
| $ | — |
|
| $ | — |
|
Level 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
| 423,865 |
|
|
| 423,865 |
|
|
| 423,865 |
|
|
| — |
|
|
| — |
|
U.S. Treasury securities |
|
| 21,146 |
|
|
| 21,146 |
|
|
| — |
|
|
| 8,067 |
|
|
| 13,079 |
|
Total level 1 |
|
| 445,011 |
|
|
| 445,011 |
|
|
| 423,865 |
|
|
| 8,067 |
|
|
| 13,079 |
|
Level 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and bonds |
|
| 117,253 |
|
|
| 117,253 |
|
|
| — |
|
|
| 83,521 |
|
|
| 33,732 |
|
Asset-backed securities |
|
| 28,253 |
|
|
| 28,253 |
|
|
| — |
|
|
| 5,498 |
|
|
| 22,755 |
|
U.S. Agency securities |
|
| 3,681 |
|
|
| 3,681 |
|
|
| — |
|
|
| 3,681 |
|
|
| — |
|
Mutual funds |
|
| 38,846 |
|
|
| 38,846 |
|
|
| — |
|
|
| — |
|
|
| 38,846 |
|
Total level 2 |
|
| 188,033 |
|
|
| 188,033 |
|
|
| — |
|
|
| 92,700 |
|
|
| 95,333 |
|
TOTAL |
| $ | 1,580,005 |
|
| $ | 1,580,005 |
|
| $ | 1,370,826 |
|
| $ | 100,767 |
|
| $ | 108,412 |
|
The Company’s investments consist of mutual funds held in the Company’s deferred compensation plan which are classified as trading securities, United States (“U.S.”) Treasury securities, corporate notes and bonds, asset-backed securities and U.S. Agency securities, which the Company has the intent and ability to hold to maturity and therefore are classified as held-to-maturity. The following tables show the Company’s cash, cash equivalents, short-term and long-term investments by significant investment categoryCompany holds mutual funds in its deferred compensation plan which are classified as of September 30, 2020 and December 31, 2019 (in thousands):
|
| September 30, 2020 |
| |||||||||||||||||||||||||
|
| Adjusted Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
|
| Cash and Cash Equivalents |
|
| Short-Term Investments |
|
| Long-Term Investments |
| |||||||
Cash |
| $ | 870,815 |
|
| $ | - |
|
| $ | - |
|
| $ | 870,815 |
|
| $ | 870,815 |
|
| $ | - |
|
| $ | - |
|
Level 1: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
| 423,407 |
|
|
| - |
|
|
| - |
|
|
| 423,407 |
|
|
| 423,407 |
|
|
| - |
|
|
| - |
|
U.S. Treasury securities |
|
| 18,242 |
|
|
| - |
|
|
| - |
|
|
| 18,242 |
|
|
| - |
|
|
| 7,199 |
|
|
| 11,043 |
|
Total level 1 |
|
| 441,649 |
|
|
| - |
|
|
| - |
|
|
| 441,649 |
|
|
| 423,407 |
|
|
| 7,199 |
|
|
| 11,043 |
|
Level 2: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
Corporate notes and bonds |
|
| 117,377 |
|
|
| - |
|
|
| - |
|
|
| 117,377 |
|
|
| - |
|
|
| 89,760 |
|
|
| 27,617 |
|
Asset-backed securities |
|
| 31,156 |
|
|
| - |
|
|
| - |
|
|
| 31,156 |
|
|
| - |
|
|
| 5,525 |
|
|
| 25,631 |
|
U.S. Agency securities |
|
| 4,283 |
|
|
| - |
|
|
| - |
|
|
| 4,283 |
|
|
| - |
|
|
| 4,283 |
|
|
| - |
|
Mutual funds |
|
| 34,407 |
|
|
| - |
|
|
| - |
|
|
| 34,407 |
|
|
| - |
|
|
| - |
|
|
| 34,407 |
|
Total level 2 |
|
| 187,223 |
|
|
| - |
|
|
| - |
|
|
| 187,223 |
|
|
| - |
|
|
| 99,568 |
|
|
| 87,655 |
|
TOTAL |
| $ | 1,499,687 |
|
| $ | - |
|
| $ | - |
|
| $ | 1,499,687 |
|
| $ | 1,294,222 |
|
| $ | 106,767 |
|
| $ | 98,698 |
|
|
| December 31, 2019 |
| |||||||||||||||||||||||||
|
| Adjusted Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
|
| Cash and Cash Equivalents |
|
| Short-Term Investments |
|
| Long-Term Investments |
| |||||||
Cash |
| $ | 662,355 |
|
| $ | - |
|
| $ | - |
|
| $ | 662,355 |
|
| $ | 662,355 |
|
| $ | - |
|
| $ | - |
|
Level 1: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
| 162,521 |
|
|
| - |
|
|
| - |
|
|
| 162,521 |
|
|
| 162,521 |
|
|
| - |
|
|
| - |
|
U.S. Treasury securities |
|
| 9,686 |
|
|
| - |
|
|
| - |
|
|
| 9,686 |
|
|
| - |
|
|
| 1,679 |
|
|
| 8,007 |
|
Total level 1 |
|
| 172,207 |
|
|
| - |
|
|
| - |
|
|
| 172,207 |
|
|
| 162,521 |
|
|
| 1,679 |
|
|
| 8,007 |
|
Level 2: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
Corporate notes and bonds |
|
| 132,431 |
|
|
| - |
|
|
| - |
|
|
| 132,431 |
|
|
| - |
|
|
| 104,130 |
|
|
| 28,301 |
|
Asset-backed securities |
|
| 23,614 |
|
|
| - |
|
|
| - |
|
|
| 23,614 |
|
|
| - |
|
|
| 263 |
|
|
| 23,351 |
|
U.S. Agency securities |
|
| 12,352 |
|
|
| - |
|
|
| - |
|
|
| 12,352 |
|
|
| - |
|
|
| 5,965 |
|
|
| 6,387 |
|
Mutual funds |
|
| 28,543 |
|
|
| - |
|
|
| - |
|
|
| 28,543 |
|
|
| - |
|
|
| - |
|
|
| 28,543 |
|
Total level 2 |
|
| 196,940 |
|
|
| - |
|
|
| - |
|
|
| 196,940 |
|
|
| - |
|
|
| 110,358 |
|
|
| 86,582 |
|
TOTAL |
| $ | 1,031,502 |
|
| $ | - |
|
| $ | - |
|
| $ | 1,031,502 |
|
| $ | 824,876 |
|
| $ | 112,037 |
|
| $ | 94,589 |
|
trading securities. The Company may sell certain of its investments prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s long-term investments are less than two years. The Company considers declines in market value of marketable securities investment portfolio to be temporary in nature. The Company minimizes the potential risk of principal loss by investing in highly-rated securities and limiting the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio.
When evaluating an investment for its current expected credit losses, the Company reviews factors such as historical experience with defaults, losses, credit ratings, term, market sector and macroeconomic trends, including current conditions and forecasts to the extent they are reasonable and supportable. As of September 30, 2020, the current expected credit losses were not material to the Company’s condensed consolidated financial statements.
(3) |
|
The Company evaluated the impairment of goodwill and other intangible assets. Based on the evaluation performed, 0 impairment loss was recorded for the goodwill and other intangible assets during the quarter ended September 30, 2020. As of September 30, 2020Accrued expenses at March 31, 2021 and December 31, 2019, the net carrying amount of goodwill and other intangible assets were $135.0 million and $72.3 million.2020 are summarized as follows:
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Goodwill |
|
|
|
|
|
|
|
|
Skechers Mexico |
| $ | 91,563 |
|
| $ | 69,836 |
|
Others |
|
| 1,934 |
|
|
| 1,576 |
|
Total goodwill |
|
| 93,497 |
|
|
| 71,412 |
|
|
|
|
|
|
|
|
|
|
Other intangible assets |
|
|
|
|
|
|
|
|
Reacquired rights |
|
| 46,100 |
|
|
| 641 |
|
Customer relationships and other acquisition related |
|
| 5,478 |
|
|
| — |
|
Others |
|
| 13,441 |
|
|
| 13,290 |
|
Total gross carrying amount |
|
| 65,019 |
|
|
| 13,931 |
|
Less: Accumulated amortization |
|
| (23,490 | ) |
|
| (13,066 | ) |
Total other intangible assets, net |
|
| 41,529 |
|
|
| 865 |
|
Total |
| $ | 135,026 |
|
| $ | 72,277 |
|
The expected future amortization expense for other intangible assets were as follows (in thousands):
|
| September 30, 2020 |
| |
2020 remaining months |
| $ | 1,720 |
|
2021 |
|
| 6,871 |
|
2022 |
|
| 6,871 |
|
2023 |
|
| 6,871 |
|
2024 |
|
| 6,871 |
|
Thereafter |
|
| 12,325 |
|
Total |
| $ | 41,529 |
|
|
| As of March 31, |
|
| As of December 31, |
| ||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Accrued payroll, taxes, and other |
| $ | 71,013 |
|
| $ | 104,004 |
|
Return reserve liability |
|
| 77,675 |
|
|
| 77,219 |
|
Accrued inventory purchases |
|
| 35,421 |
|
|
| 27,489 |
|
Accrued expenses |
| $ | 184,109 |
|
| $ | 208,712 |
|
(4) |
|
The Company determines if an arrangement is a lease at inception, and, if a lease, what type of lease it is. The Company regularly enters into non-cancellable operating leases for automobiles, retail stores, and real estate leases for offices, showrooms and distribution facilities. Most leases have fixed rental payments. Leases for retail stores typically have initial terms ranging from 5 to 10 years. Other real estate or facility leases may have initial lease terms of up to 20 years. These leases are included within operating lease right-of-use (“ROU”) assets and liabilities on the Company’s condensed consolidated balance sheet as of September 30, 2020. The predominant asset for most real estate leases is the right to occupy the space which the Company has determined is the single lease component. Many of the Company’s real estate leases include options to extend or to terminate the lease that are not reasonably certain at the time of determining the expected lease term. In addition, the Company’s real estate leases may also require additional payments for real estate taxes and other occupancy-related costs. The Company considers renewal options and other occupancy-related costs which it considers as non-lease components. Percentage rent expense, which is specified in the lease agreement, is owed when sales at individual retail store locations exceed a base amount. Percentage rent expense is recognized in the condensed consolidated financial statements when incurred. Rent expense for leases having rent holidays, landlord incentives or scheduled rent increases is recorded on a straight-line basis over the earlier of the beginning of the lease term or when the Company takes possession or control of the leased premises. The amount of the excess straight-line rent expense over scheduled payments is recorded as an operating lease liability. Operating lease ROU assets and operating lease liabilities are recognized based upon the present value of the future lease payments over the lease term at the commencement date. Most of the Company’s leases do not provide an implicit borrowing rate. Therefore, the Company uses an estimated incremental borrowing rate based upon a combination of market-based factors, such as market quoted forward yield curves and Company specific factors, such as lease size and duration. The incremental borrowing rate is then used at the commencement date of the lease to determine the present value of future lease payments.The operating lease ROU asset also includes lease payments made and lease incentives and initial direct costs incurred. Lease expense for fixed lease payments is recognized on a straight-line basis over the lease term. As of September 30, 2020 and December 31, 2019, current liabilities related to operating leases were $196.8 million and $191.1 million.
Operating lease cost and other information (in thousands):
|
| Three Months Ended September 30, |
|
| Nine months ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Fixed lease cost |
| $ | 68,059 |
|
| $ | 63,724 |
|
| $ | 194,714 |
|
| $ | 180,324 |
|
Variable lease cost |
|
| 1,141 |
|
|
| 1,219 |
|
|
| 2,152 |
|
|
| 10,157 |
|
Operating cash flows used for leases |
|
| 61,630 |
|
|
| 67,744 |
|
|
| 188,540 |
|
|
| 192,066 |
|
Noncash right-of-use assets recorded for lease liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For January 1 adoption of Topic 842 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,035,062 |
|
In exchange for new lease liabilities during the period |
|
| 45,327 |
|
|
| 74,500 |
|
|
| 177,379 |
|
|
| 114,542 |
|
Weighted-average remaining lease term |
| 4.41 years |
|
| 4.70 year |
|
| 4.41 years |
|
| 4.70 year |
| ||||
Weighted-average discount rate |
|
| 4.02 | % |
|
| 4.24 | % |
|
| 4.02 | % |
|
| 4.24 | % |
The maturities of lease liabilities were as follows (in thousands):
|
| September 30, 2020 |
| |
2020 remaining months |
| $ | 65,136 |
|
2021 |
|
| 240,845 |
|
2022 |
|
| 208,271 |
|
2023 |
|
| 184,152 |
|
2024 |
|
| 170,395 |
|
Thereafter |
|
| 515,258 |
|
Total lease payments |
|
| 1,384,057 |
|
Less: Imputed interest |
|
| (182,713 | ) |
|
| $ | 1,201,344 |
|
|
|
|
|
|
As of September 30, 2020, the Company has additional operating leases, primarily for new retail stores, that have not yet commenced which will generate additional right-of-use assets of $15.7 million. These operating leases will commence in 2020 and 2021 with lease terms ranging from 2 year to 10 years.
|
|
The Company had $8.5$37.0 million and $3.8$38.7 million of outstanding letters of credit as of September 30, 2020March 31, 2021 and December 31, 2019, respectively,2020, and approximately $21.7$1.1 million and $5.8$3.3 million in short-term borrowings as of September 30, 2020March 31, 2021 and December 31, 2019.2020.
Long-term borrowings at September 30, 2020 and December 31, 2019 arewere as follows (in thousands):follows:
|
| 2020 |
|
| 2019 |
| |||
Unsecured revolving credit facility, variable-rate interest at 1.30% per annum, due November 2024 |
| $ | 487,500 |
|
| $ | — |
| |
Note payable to banks, interest only, variable-rate interest at 2.55% per annum, secured by property, balloon payment of $129,505 due March 2025 |
|
| 129,505 |
|
|
| 63,692 |
| |
Loan payable to a bank, variable-rate interest at 2.26% per annum, due April 2025 |
|
| 9,102 |
|
|
| — |
| |
Note payable to Luen Thai Enterprise, Ltd. |
|
| — |
|
|
| 393 |
| |
Loan payable to a bank, variable-rate interest at 4.15% per annum, due September 2023 |
|
| 65,440 |
|
|
| 48,791 |
| |
Loans payable to banks, variable-rate interests at a range of 1.84% to 3.87% per annum, due June 2024 |
|
| 78,563 |
|
|
| 2,541 |
| |
Loan payable to a bank, variable-rate interest at 4.28% per annum, due May 2025 |
|
| 19,038 |
|
|
| — |
| |
Loan payable to a bank, variable-rate interest at 1.86% per annum, due June 2025 |
|
| 1,165 |
|
|
| — |
| |
Subtotal |
|
| 790,313 |
|
|
| 115,417 |
| |
Less: Current installments |
|
| (106,702 | ) |
|
| (66,234 | ) | |
Total long-term borrowings |
| $ | 683,611 |
|
| $ | 49,183 |
|
|
| As of March 31, |
|
| As of December 31, |
| ||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Revolving Credit Facility |
| $ | 452,500 |
|
| $ | 452,500 |
|
HF-T1 Distribution Center Loan |
|
| 129,505 |
|
|
| 129,505 |
|
HF-T2 Distribution Center Construction Loan |
|
| 36,532 |
|
|
| 22,169 |
|
China Distribution Center Construction Loan |
|
| 78,302 |
|
|
| 77,501 |
|
China Operational Loans |
|
| 80,497 |
|
|
| 48,743 |
|
Other |
|
| 1,201 |
|
|
| 1,247 |
|
Subtotal |
|
| 778,537 |
|
|
| 731,665 |
|
Less: Current installments |
|
| (60,942 | ) |
|
| (52,250 | ) |
Total long-term borrowings |
| $ | 717,595 |
|
| $ | 679,415 |
|
Unsecured
Revolving Credit Facility
On November 21,The weighted-average annual interest rate on borrowings under the 2019 the Company entered into a $500.0 million unsecured revolving credit facility which matures on November 21, 2024 (the “2019 Credit Agreement”), with Bank of America, N.A., as administrative agent and joint lead arranger, HSBC Bank USA, N.A. and JPMorgan Chase Bank, N.A., as joint lead arrangers, and other lenders.was approximately 1.37% during the three months ended March 31, 2021. The 2019 Credit Agreement replacedcredit facility was amended during the Company’s then existing $250.0 million loan and security agreement dated June 30, 2015 with Bank of America, N.A., MUFG Union Bank, N.A. and HSBC Bank USA, National Association that was setfirst quarter to expire on June 30, 2020. The 2019 Credit Agreement may be increased by up to $250.0 million under certain conditions and provides for the issuance ofdefine letters of credit up to a maximum of $100.0 million and swingline loans up to a maximum of $25.0 million. credit.
The Company may use the proceeds from the 2019 Credit Agreement for working capital and other lawful corporate purposes. At the Company’s option, any loan (other than swingline loans) will bear interest atis required to maintain a rate equal to (a) LIBOR plus an applicable margin between 1.125% and 1.625% based upon the Company’s Total Adjusted Net Leverage Ratio (as defined in the 2019 Credit Agreement) or (b) a base rate (defined as the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the Bank of America prime rate and (iii) LIBOR plus 1.00%) plus an applicable margin between 0.125% and 0.625% based upon the Company’s Total Adjusted Net Leverage Ratio. Any swingline loan will bear interest at the base rate. The Company will pay a variable commitment fee of between 0.125% and 0.25% of the actual daily unused amount of each lender’s commitment, and will also pay a variable letter of credit fee of between 1.125% and 1.625% on the maximum amount available to be drawn under each issued and outstanding letter of credit, both of which are based upon the Company’s Total Adjusted Net Leverage Ratio. The 2019 Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including covenants that limit the ability of the Company and its subsidiaries to, among other things, incur debt, grant liens, make certain acquisitions, dispose of assets, effect a change of control of the Company, make certain restricted payments including certain dividends and stock redemptions, make certain investments or loans, enter into certain transactions with affiliates and certain prohibited uses of proceeds. The 2019 Credit Agreement also requires that the total adjusted net leverage ratio not exceed 3.75,of 3.75:1, except in the event of an acquisition in which case the ratio may be increased at the Company’s election to 4.254.25:1 for the quarter in which such acquisition occurs and for the next three quarters thereafter.
As of March 31, 2021 and December 31, 2020, the September 30, 2020unused credit capacity, was $10.5 million and $8.8 million, respectively, on the Company’s adjusted net leverage ratio was 1.40. The 2019 Credit Agreement provides for customary events of default including payment defaults, breaches of representations or warranties or covenants, cross defaults with certain other indebtedness to third parties, certain judgments/awards/orders, a change of control, bankruptcy and insolvency events, inability to pay debts, ERISA defaults, and invalidity or impairment of the 2019 Credit Agreement or any loan documentation related thereto, with, in certain circumstances, cure periods. Certain of the lenders party to the 2019 Credit Agreement, and their respective affiliates, have performed, and may in the future perform for the Company and the Company’s subsidiaries, various commercial banking, investment banking, underwriting and other financial advisory services, for which they have received, and will receive, customary fees and expenses.revolving credit facility. The Company paid origination, arrangement and legal fees of $1.6 million onwas in compliance with the 2019 Credit Agreement, which are being amortized to interest expense over the five-year life of the facility. On March 19, 2020, as a precautionary measure to maximize liquidity and to increase available cash on hand, the Company borrowed $490.0 million on its unsecured revolving credit facility. The proceeds are available to be used for working capital, general corporate or other purposes. As of September 30, 2020, there was $487.5 million outstandingfinancial covenants under the 2019 Credit Agreement, which is classifiedcredit facility as long-term borrowings in theof March 31, 2021.
HF-T1 Distribution Center Loan
The Company’s condensed consolidated balance sheets. As of December 31, 2019, there was 0 amount outstanding under the 2019 Credit Agreement.
Construction Loans for U.S. Distribution Center
On April 30, 2010, the JV, throughjoint venture with HF Logistics I, LLC (“HF”), HF Logistics-SKX, T1, LLC (the “JV”), through a Delaware limited liability company and wholly-owned subsidiary of the JV (“HF-T1”HF-T1”), entered into a $129.5 million construction loan agreement which matures on March 18, 2025 (the “HF-T1 2020 Loan”) with Bankinterest of America, N.A. as administrative agent and as a lender, and Raymond James Bank, FSB, as a lender (collectively, the “Construction Loan Agreement”), pursuant to which the JV obtained a loan of up to $55.0 million used for construction of our U.S. distribution center (the “2010 Loan”). On November 16, 2012, HF-T1 executed an amendment to the Construction Loan Agreement (the “Amendment”), which added OneWest Bank, FSB as a lender, increased the borrowings under the 2010 Loan to $80.0 million and extended the maturity date of the 2010 Loan to October 30, 2015.
On August 11, 2015, the JV, through HF-T1, entered into an amended and restated loan agreement with Bank of America, N.A., as administrative agent and as a lender, and CIT Bank, N.A. (formerly known as OneWest Bank, FSB) and Raymond James Bank, N.A., as lenders (collectively, the “Amended Loan Agreement”), which amended and restated in its entirety the Construction Loan Agreement and the Amendment. Under the Amended Loan Agreement, the parties agreed that the lenders would loan $70.0 million to HF-T1 (the “2015 Loan”). Pursuant to the Amended Loan Agreement, the interest rate per annum on the 2015 Loan was LIBOR Daily Floating Rate (as defined therein) plus a margin of 2%. The maturity date of the 2015 Loan was August 12, 2020, subject to 1.75% per annum.
HF-T1 having an option to a 24-month extension upon payment of a fee and satisfaction of certain customary terms.
On August 11, 2015, HF-T1 and Bank of America, N.A. also entered into an ISDA master agreement (together with the schedule related thereto, the “Swap Agreement”) with Bank of America, N.A. to govern derivative and/or hedging transactions that HF-T1 concurrently entered into with Bank of America, N.A. The Company’s objective in using the Swap Agreement is to stabilize interest expense and manage exposure to interest rate volatility. Pursuant to the Swap Agreement, on August 14, 2015, HF-T1 entered into a confirmation of swap transactions (the “Interest Rate Swap”) with Bank of America, N.A. The Interest Rate Swap had an effective date of August 12, 2015 and a maturity date of August 12, 2022, subject to early termination at the option of HF-T1, commencing on August 1, 2020.
On March 18, 2020, HF-T1 entered into an amendment to the Amended Loan Agreement with Bank of America, N.A., Raymond James Bank, N.A. and CIT Bank, N.A. (the “2020 Amendment”) that increased the borrowings under the 2015 Loan to $129.5 million and extended the maturity date of the 2015 Loan to March 18, 2025 (the “2020 Loan”). As of the date of the 2020 Amendment, the outstanding principal balance of the 2015 Loan was $63.3 million. The additional indebtedness of $66.2 million under the 2020 Amendment is being used by the JV through HF-T1 to (i) refinance all amounts owed on the 2015 Loan, (ii) pay $1.0 million in accrued interest, loan fees and other closing costs associated with the 2020 Amendment and (iii) make a distribution of $64.4 million to HF. Pursuant to the 2020 Amendment, the interest rate per annum on the 2020 Loan is the LIBOR Daily Floating Rate (as defined therein) plus a margin of 1.75%.
On March 18, 2020, HF-T1 and Bank of America, N.A. also executed an amendment to the Swap Agreementas amended (the “Swap Agreement Amendment”) to extend theon March 18, 2020 with Bank of America, N.A with a maturity date of the Interest Rate Swap to March 18, 2025. The Swap Agreement Amendment fixes the effective interest rate on the HF-T1 2020 Loan at 2.55% per annum. The HF-T1 2020 AmendmentLoan and the Swap Agreement Amendment are subject to customary covenants and events of default. Bank of America, N.A. also acts as a lender and syndication agent under the Company’s credit agreement dated November 21, 2019. 2019 Credit Agreement.
On April 3,The Interest Rate Swap involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of both March 31, 2021 and December 31, 2020, the JV, through HF Logistics-SKX T2, LLC, a Delaware limited liability company and wholly-owned subsidiaryInterest Rate Swap had an aggregate notional amount of $129.5 million. Under the terms of the JV (“HF-T2), entered intoSwap Agreement Amendment, the Company will pay a weighted-average fixed rate of 0.795% on the notional amount and receive payments from the counterparty based on the 30-day LIBOR rate, effectively modifying the Company’s exposure to interest rate risk by converting floating-rate debt to a fixed rate of 4.08%.
HF-T2 Distribution Center Construction Loan
The weighted-average annual interest rate on borrowings under the 2020 distribution center construction loan agreement with Bank of America, N.A. as administrative agent and lender (collectively,was approximately 2.02% during the “2020 Construction Loan Agreement”), pursuant to which the JV obtained a loan of up to $73.0 million used for construction to expand our U.S. distribution center (the “2020 Construction Loan”)three months ended March 31, 2021. Under the 2020 Construction Loan Agreement, the interest rate per annum on the 2020 Construction Loan is LIBOR Daily Floating Rate (as defined therein) plus a margin of 190 basis points, reducing to 175 basis points upon substantial completion of the construction and certain other conditions being satisfied. The maturity date of the 2020 Construction Loan is April 3, 2025. The obligations of the JV under the 2020 Construction Loan Agreementthis loan are guaranteed by TGD Holdings I, LLC, which is an affiliate of HF.
Construction Loan forChina Distribution Center in ChinaConstruction Loan
On September 29, 2018, through the Taicang Subsidiary, the Company entered into a 700 million yuan loan agreement with China Construction Bank Corporation (“the China DC Loan Agreement”). The proceeds from the China DC Loan Agreement is being used to finance the construction of the Company’s distribution center in China. Interest is paid quarterly. The interest rate floats and is calculated at a reference rate provided by the People’s Bank of China. The interest rate at September 30, 2020March 31, 2021 was 4.15% and may increase or decrease over the life of the loan, and will be evaluated every 12 months. TheBeginning in 2021, the principal of the loan will be repaid in semi-annual installments beginning in 2021, of variable amounts as specified in the China DC Loan Agreement. The China DC Loan Agreement contains customary affirmative and negative covenants for secured credit facilities of this type, including covenants that limit the ability of the Subsidiary to, among other things, allow external investment to be added, pledge assets, issue debt with priority over the China DC Loan Agreement, and adjust the capital stock structure of the TC Subsidiary. The China DC Loan Agreement matures on September 28, 2023.amounts. The obligations of the TCChina distribution center construction loan, entered through the Company’s Taicang Subsidiary under the China DC Loan Agreement are jointly and severally guaranteed by the Company’s ChineseChina joint venture. As of September 30, 2020, there was $65.4 millionMarch 31, 2021, the outstanding balance under this credit facility, which isloan included approximately $13.9 million classified as long-termshort-term borrowings in the Company’s condensed consolidated balance sheets.
Total Debt ObligationsChina Operational Loans
AsThe balance of September 30,working capital loans was approximately $61.4 million with interest rates ranging from 1.73% to 3.65% per annum as of March 31, 2021. The balance of working capital loans as of December 31, 2020 outstanding short-term and long-term borrowing were $812.0was approximately $30.1 million with interest rates ranging from 1.75% to 3.92% per annum. The balance of which $487.5 million related to its unsecured revolving credit facility and $129.5 million for a loan for its domestic distribution center, $65.4 million for construction for its distribution center in China, $78.6 million related to the operations in China, and $19.0 millionloans related to a corporate office building in Shanghai Chinawas approximately $19.1 million and the remaining balance relates to the Company’s international operations. The Company’s long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions. The Company is in compliance with all debt covenants related to its short-term and long-term borrowings$18.6 million as of September 30, 2020.
|
|
The Company has equity interests in several joint ventures that were established either to exclusively distributeMarch 31, 2021 and December 31, 2020 with interest at 4.28% per annum, for both periods, payable at terms agreed by the Company’s products or to constructlender. As of March 31, 2021, the Company’s domestic distribution facility. These joint ventures are variable interest entities (“VIEs”)outstanding balance under ASC 810-10-15-14. The Company’s determination of the primary beneficiary of a VIE considers all relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. The Company has determined for its VIEs that the Company is the primary beneficiary because it has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Accordingly, the Company includes the assets and liabilities and results of operations of these entities in its condensed consolidated financial statements, even though the Company may not hold a majority equity interest. In April 2019, the Company acquired a 60% interest in a joint venture in Mexico (see Note 7 – Acquisition for additional information). In February 2019, the Company purchased the minority interest of its India joint-venture for $82.9this loan included approximately $47.0 million which made its India joint venture a wholly owned subsidiary. There have been no changes during 2020 in the accounting treatment or characterization of any previously identified VIE. The Company continues to reassess these relationships quarterly. The assets of these joint ventures are restricted in that they are not available for general business use outside the context of such joint ventures. The holders of the liabilities of each joint venture have no recourse to the Company. The Company does not have a variable interest in any unconsolidated VIEs.
The following VIEs are consolidated into the Company’s condensed consolidated financial statements and the carrying amounts and classification of assets and liabilities wereclassified as follows (in thousands):
HF Logistics (1) |
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Current assets |
| $ | 25,924 |
|
| $ | 5,297 |
|
Non-current assets |
|
| 116,700 |
|
|
| 104,527 |
|
Total assets |
| $ | 142,624 |
|
| $ | 109,824 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
| $ | 14,097 |
|
| $ | 64,600 |
|
Non-current liabilities |
|
| 133,042 |
|
|
| 1,009 |
|
Total liabilities |
| $ | 147,139 |
|
| $ | 65,609 |
|
|
|
|
|
|
|
|
|
|
Product distribution joint ventures (2) |
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Current assets |
| $ | 886,715 |
|
| $ | 747,668 |
|
Non-current assets |
|
| 510,102 |
|
|
| 325,283 |
|
Total assets |
| $ | 1,396,817 |
|
| $ | 1,072,951 |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
| $ | 583,166 |
|
| $ | 430,282 |
|
Non-current liabilities |
|
| 185,434 |
|
|
| 135,903 |
|
Total liabilities |
| $ | 768,600 |
|
| $ | 566,185 |
|
|
|
|
|
The following is a summary of net earnings attributable to, distributions to and contributions from non-controlling interests (in thousands):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net earnings attributable to non-controlling interests |
| $ | 17,832 |
|
| $ | 18,644 |
|
| $ | 22,771 |
|
| $ | 57,723 |
|
Distributions to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HF Logistics-SKX, LLC |
|
| 20,788 |
|
|
| 870 |
|
|
| 47,660 |
|
|
| 2,718 |
|
Skechers China Limited |
|
| — |
|
|
| 12,600 |
|
|
| 4,182 |
|
|
| 32,245 |
|
Skechers Southeast Asia Limited |
|
| — |
|
|
| 2,027 |
|
|
| — |
|
|
| 2,027 |
|
Skechers Hong Kong Limited |
|
| — |
|
|
| 618 |
|
|
| — |
|
|
| 618 |
|
Contributions from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HF Logistics-SKX, LLC |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,565 |
|
Manhattan SKMX, S. de R.L. de C.V. |
|
| — |
|
|
| — |
|
|
| 49,045 |
|
|
| 22,776 |
|
|
|
Mexico Joint Venture Acquisition
On April 1, 2019, the Company purchased a 60% interest in Manhattan SKMX, S. de R.L. de C.V. (“Skechers Mexico”) for a total consideration of $120.6 million, net of cash acquired. Skechers Mexico is a joint venture that operates and generates sales in Mexico. As a result of this purchase, Skechers Mexico became a majority-owned subsidiary of the Company and its results are consolidatedshort-term borrowings in the Company’s condensed consolidated financial statements beginning April 1, 2019.The formation of the joint venture provides significant merchandising, supply chain and retail operations in Mexico. The Company completed the purchase price allocation during the quarter ended March 31, 2020. The change to the provisional amounts resulted in a $22.1 million increase to goodwill, a $49.1 million increase to intangible assets and a $17.1 million increase to deferred tax liabilities. Additionally, the change to the provisional amounts resulted in a $13.9 million gain on reacquired rights and an increase in amortization expense and accumulated amortization of $7.0 million, of which $5.2 million relates to the prior year and an $8.0 million increase in inventory, of which $6.0 million relates to the prior year. The prior year amounts were not material to amortization expense or cost of sales within the consolidated statements of earnings for the ended December 31, 2019. Acquisition-related costs of $0.9 million associated with the acquisition were expensed as incurred, and included in general and administrative expenses in the condensed consolidated statement of earnings. Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company’s condensed consolidated financial statements.
The allocation of the total consideration has been recorded as follows (in thousands):
Cash |
| $ | 1,061 |
|
Accounts receivable |
|
| 31,763 |
|
Inventory (1) |
|
| 47,890 |
|
VAT receivable |
|
| 12,658 |
|
Deferred tax assets |
|
| 2,180 |
|
Property, plant, and equipment |
|
| 12,531 |
|
Reacquired rights intangible assets (2) |
|
| 46,100 |
|
Customer relationships intangible assets (2) |
|
| 3,000 |
|
Goodwill |
|
| 91,563 |
|
Total assets acquired |
|
| 248,746 |
|
|
|
|
|
|
Accounts payable |
|
| 25,454 |
|
VAT payable |
|
| 4,721 |
|
Deferred tax liability |
|
| 17,129 |
|
Total liabilities assumed |
|
| 47,304 |
|
|
|
|
|
|
Non-controlling interest |
|
| 79,798 |
|
Total purchase price |
| $ | 121,644 |
|
balance sheets.
|
|
|
|
|
|
Basic earnings per share represent net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share, in addition to the weighted average determined for basic earnings per share, includes potential dilutive common shares using the treasury stock method.
The Company has two classes of issued and outstanding common stock: Class A common stock, par value $0.001 per share (“Class A common stock”) and Class B common stock, par value $0.001 per share (“Class B common stock”). Holders of Class A common stock and holders of Class B common stock have substantially identical rights, including rights with respect to any declared dividends or distributions of cash or property and the right to receive proceeds on liquidation or dissolution of the Company after payment of the Company’s indebtedness. The two classes have different voting rights, with holders of Class A common stock entitled to one vote per share while holders of Class B common stock are entitled to ten votes per share on all matters submitted to a vote of stockholders. The Company uses the two-class method for calculating net earnings per share. Basic and diluted net earnings per share of Class A common stock and Class B common stock are identical. The shares of Class B common stock are convertible at any time at the option of the holder into shares of Class A common stock on a share-for-share basis. In addition, shares of Class B common stock will be automatically converted into a like number of shares of Class A common stock upon transfer to any person or entity who is not a permitted transferee.
The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating basic earnings per share (in thousands, except per share amounts):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
Basic earnings per share |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net earnings attributable to Skechers U.S.A., Inc. |
| $ | 64,278 |
|
| $ | 103,090 |
|
| $ | 45,283 |
|
| $ | 287,028 |
|
Weighted average common shares outstanding |
|
| 154,462 |
|
|
| 153,298 |
|
|
| 154,061 |
|
|
| 153,396 |
|
Basic earnings per share attributable to Skechers U.S.A., Inc. |
| $ | 0.42 |
|
| $ | 0.67 |
|
| $ | 0.29 |
|
| $ | 1.87 |
|
The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating diluted earnings per share (in thousands, except per share amounts):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
Diluted earnings per share |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net earnings attributable to Skechers U.S.A., Inc. |
| $ | 64,278 |
|
| $ | 103,090 |
|
| $ | 45,283 |
|
| $ | 287,028 |
|
Weighted average common shares outstanding |
|
| 154,462 |
|
|
| 153,298 |
|
|
| 154,061 |
|
|
| 153,396 |
|
Dilutive effect of unvested shares |
|
| 518 |
|
|
| 680 |
|
|
| 646 |
|
|
| 625 |
|
Weighted average common shares outstanding |
|
| 154,980 |
|
|
| 153,978 |
|
|
| 154,707 |
|
|
| 154,021 |
|
Diluted earnings per share attributable to Skechers U.S.A., Inc. |
| $ | 0.41 |
|
| $ | 0.67 |
|
| $ | 0.29 |
|
| $ | 1.86 |
|
There were 88,577 and 108,328 shares excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2020 because their effect would have been anti-dilutive. There were 6,454 and 101,992 shares excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2019 because they are anti-dilutive.
| STOCK COMPENSATION |
On April 17, 2017, the Company’s BoardINCENTIVE AWARD PLAN
As of Directors adoptedMarch 31, 2021, there were 5,121,800 shares available for grant as equity awards under the 2017 Incentive Award Plan (the “2017 Plan”), which became effective upon approval byPlan. In the first quarter of 2021, the Company granted restricted stock with time-based vesting as well as performance-based awards. The performance-based awards include a market condition tied to the Company’s stockholders on May 23, 2017. The 2017 Plan replaced and supersededtotal shareholder return in its entirety the 2007 Incentive Award Plan (the “2007 Plan”), which expired pursuantrelation to its terms on May 24, 2017. A totalpeer companies as well as a financial performance condition tied to annual EPS growth. The vesting and ultimate payout of 15,000,000 shares of Class A common stock are reserved for issuance underperformance awards is determined at the 2017 Plan, which provides for grants of ISOs, non-qualified stock options, restricted stock, employee stock purchase plan, and various other types of equity awards as described in the plan to the employees, consultants and directorsend of the Companythree-year performance period and its subsidiaries. The 2017 Plan is administered by the Company’s Board of Directors with respectcan vary from 0 to awards to non-employee directors and by the Company’s Compensation Committee with respect to other eligible participants.
For stock-based awards, the Company recognizes compensation expense200% based on actual results.
The Company issued the grant date fair value. Share‑based compensation expense was $29.7 million and $10.7 million for the three months ended September 30, 2020 and 2019. Share-based compensation expense was $55.0 million and $30.2 million for the nine months ended September 30, 2020 and 2019. Included in the compensation expense recognized in 2020 is an $18.2 million non-cash charge related to the cancellation of 750,000 unvested shares as a result of a legal settlement. During the three and nine months ended September 30, 2020, the Company redeemed 171,120 shares of Class A common stock for $5.7 million to satisfy employee tax withholding requirements. During the three and nine months ended September 30, 2019, the Company repurchased 4,821 and 423,206 shares of Class A common stock for $0.2 million and $13.7 million to satisfy employee tax withholding requirements, respectively.following stock-based instruments:
|
| Three Months Ended March 31, |
| |||||||||||||
|
| 2021 |
|
| 2020 |
| ||||||||||
|
| Granted |
|
| Weighted-Average Grant-Date Fair Value |
|
| Granted |
|
| Weighted-Average Grant-Date Fair Value |
| ||||
Restricted stock |
|
| 406,250 |
|
| $ | 39.53 |
|
|
| 1,013,500 |
|
| $ | 36.96 |
|
Performance-based restricted stock |
|
| 108,750 |
|
| $ | 38.95 |
|
|
| — |
|
| $ | — |
|
Market-based restricted stock |
|
| 108,750 |
|
| $ | 54.34 |
|
|
| — |
|
| $ | — |
|
A summary of the status and changes of the Company’s unvested shares related tois presented below:
|
| Shares |
|
| Weighted-Average Grant-Date Fair Value |
| ||
Unvested at December 31, 2020 |
|
| 3,112,023 |
|
| $ | 35.06 |
|
Granted |
|
| 623,750 |
|
| $ | 42.01 |
|
Vested |
|
| (487,550 | ) |
| $ | 36.59 |
|
Cancelled |
|
| (8,500 | ) |
| $ | 37.31 |
|
Unvested at March 31, 2021 |
|
| 3,239,723 |
|
| $ | 36.16 |
|
The Company determines the 2007 Planfair value of restricted stock awards and any performance-related components based on the closing market price of the Company’s common stock on the date of grant. For share-based awards that have a performance-based vesting requirement, the Company evaluates the probability of achieving the performance criteria throughout the performance period and will adjust stock compensation expense up or down based on its estimated probable outcome. Certain performance-based awards contain market condition components which are valued on the date of grant using a Monte Carlo simulation model.
For the three months ended March 31, 2021 and 2020, the Company recognized $12.0 million and $12.4 million of compensation expense for grants under the 2017 Plan as of and for the nine months ended September 30, 2020 is presented below:
|
| Shares |
|
| Weighted Average Grant-Date Fair Value |
| ||
Unvested at December 31, 2019 |
|
| 3,426,823 |
|
| $ | 32.54 |
|
Granted |
|
| 1,069,300 |
|
| $ | 36.52 |
|
Vested |
|
| (1,035,917 | ) |
| $ | 32.43 |
|
Cancelled |
|
| (784,000 | ) |
| $ | 32.25 |
|
Unvested at September 30, 2020 |
|
| 2,676,206 |
|
| $ | 34.26 |
|
Incentive Award Plan. As of September 30, 2020, thereMarch 31, 2021, the balance of unamortized stock compensation was $66.0$92.9 million of unrecognized compensation cost related to unvested common shares. The costwhich is expected to be amortizedrecognized over a weighted averageweighted-average period of 1.8 years.2.06 years.
| EARNINGS PER SHARE |
Basic EPS and diluted EPS are calculated by dividing net earnings by the following: for basic EPS, the weighted-average number of common shares outstanding for the period; and for diluted EPS, the sum of the weighted-average number of both outstanding common shares and potentially dilutive common shares using the treasury stock method.
The calculation of EPS is as follows:
|
| Three Months Ended March 31, |
| |||||
(in thousands, except per share data) |
| 2021 |
|
| 2020 |
| ||
Net earnings attributable to Skechers U.S.A., Inc. |
| $ | 98,573 |
|
| $ | 49,101 |
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic |
|
| 154,818 |
|
|
| 153,555 |
|
Dilutive effect of nonvested shares |
|
| 1,118 |
|
|
| 1,097 |
|
Weighted-average common shares outstanding, diluted |
|
| 155,936 |
|
|
| 154,652 |
|
Anti-dilutive common shares excluded above |
|
| 52,792 |
|
|
| 36,766 |
|
Net earnings attributable to Skechers U.S.A., Inc. per common share |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.64 |
|
| $ | 0.32 |
|
Diluted |
| $ | 0.63 |
|
| $ | 0.32 |
|
(7) | INCOME TAXES |
Income tax expense and the effective tax rate for the three and nine months ended September 30, 2020 and 2019 were as follows (dollar amounts in thousands):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Income tax expense |
| $ | 14,983 |
|
| $ | 22,766 |
|
| $ | 18,104 |
|
| $ | 75,288 |
|
Effective tax rate |
|
| 15.4 | % |
|
| 15.8 | % |
|
| 21.0 | % |
|
| 17.9 | % |
The tax provisions for the three and nine months ended September 30,March 31, 2021 and 2020 and 2019 were computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year. The Company’s tax rate is subject to management’s quarterly review and revision, as necessary.
The Company’s provision for income tax expense and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign earnings (losses)(loss) before income taxes. In the foreign jurisdictions in which the Company has operations, the applicable statutory rates range from 0.0% to 34.0%, which is on average significantly lower than the U.S. federal and state combined statutory rate of approximately 25%24.5%.
For the three monthsended September 30, 2020, the decrease in the The Company’s effective tax rate as compared to the tax ratewas 20.2% and 15.3% for the three months ended September 30, 2019 wasMarch 31, 2021 and 2020. The increase primarily due to areflects the increased profitability in certain higher tax favorable change in the mixture of the Company’s domestic and foreign earnings which was partially offset by the rate impact of the non-deductible charge for a restricted share cancellation which occurred during the quarter ended September 30, 2020. For the nine monthsended September 30, 2020, the increase in the effective tax rate,jurisdictions such as compared to the tax rate for the nine months ended September 30, 2019, was primarily due to the rate impact of the non-deductible charge for a restricted share cancellation which occurred during the nine months ended September 30, 2020.
As of September 30, 2020, the Company had approximately $1,294.2 million in cash and cash equivalents, of which $596.9 million, or 46%, was held outside the U.S. Of the $596.9 million held by the Company’s non-U.S. subsidiaries, approximately $299.6 million is available for repatriation to the U.S. without incurring U.S. federal income taxes and applicable non-U.S. income and withholding taxes in excess of the amounts accrued in the Company’s condensed consolidated financial statements as of September 30, 2020.
The Company’s cash and cash equivalents held in the U.S. and cash provided from operations are sufficient to meet the Company’s liquidity needs in the U.S. for the next twelve months. However, in anticipation of the Company’s U.S. cash requirementsChina and the need to provide payment of the Company’s provisional Transition Tax liability, the Company may begin repatriating certain funds held outside the U.S. for which all applicable U.S. federal and non-U.S. tax has been fully provided as of September 30, 2020. The Company has provided for the tax impact of expected distributions from its joint venture in China as well as from its subsidiary in Chile to its intermediate parent company in Switzerland. Otherwise, because of the need for cash for operating capital and continued overseas expansion, the Company does not foresee the need for our other foreign subsidiaries to distribute funds up to an intermediate foreign parent company in any form of taxable dividend. Under current applicable tax laws, if the Company choses to repatriate some or all of the funds it has designated as indefinitely reinvested outside the U.S., the amount repatriated would not be subject to U.S. income taxes but may be subject to applicable non-U.S. income and withholding taxes, and to certain state income taxes.
On March 27, 2020, the President signed into law the CARES Act. The CARES Act, among other things, includes certain beneficial tax provisions. While we are able to take advantage of some of these provisions, none had a material impact on our business, financial condition, results of operations, or liquidity for the three and nine months ended September 30, 2020. We will continue to monitor the impact that the CARES Act may have on our business, financial condition, results of operations, or liquidity.
Due to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017, the Company is subject to a tax on global intangible low-taxed income (“GILTI”). GILTI is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. Companies subject to GILTI have the option to account for the GILTI tax as a period cost when incurred, or to recognize deferred taxes for temporary differences including outside basis differences expected to reverse as GILTI. The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in its effective tax rate calculation for the three and nine months ended September 30, 2020 and 2019.
On July 27, 2015, the United States Tax Court issued a decision (the “Tax Court Decision”) in Altera Corp. v. Commissioner, which concluded that related parties in a cost sharing arrangement are not required to share expenses related to share-based compensation. The Tax Court Decision was appealed by the Commissioner to the Ninth Circuit Court of Appeals (the “Ninth Circuit”). On June 7, 2019, a three-judge panel from the Ninth Circuit issued an opinion (the “Altera Ninth Circuit Panel Opinion”) that reversed the Tax Court Decision. Based on the Altera Ninth Circuit Panel Opinion, the Company recorded a cumulative income tax expense of $1.5 million in the second quarter of 2019. On July 22, 2019, Altera requested a rehearing before the full Ninth Circuit, but the request was rejected on November 11, 2019. Altera subsequently appealed from the Ninth Circuit to the Supreme Court, but the request for hearing was denied on June 22, 2020. The tax impact of the decision of the Ninth Circuit was previously provided for and the Company currently includes share-based compensation in its cost sharing arrangement; therefore, the Supreme Court’s denial of hearing has no further tax impact.States.
|
|
The Company generates sales in the United States; however, several of its products are sold into various foreign countries, which subjects the Company to the risks of doing business abroad. In addition, the Company operates in the footwear industry, and its business depends on the general economic environment and levels of consumer spending. Changes in the marketplace may significantly affect management’s estimates and the Company’s performance. Management performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable, which generally do not require collateral from customers, were $264.3 million and $228.5 million before allowances for bad debts, sales returns and chargebacks at September 30, 2020 and December 31, 2019, respectively. Foreign accounts receivable, which in some cases are collateralized by letters of credit, were $486.4 million and $440.9 million before allowance for bad debts, sales returns and chargebacks at September 30, 2020 and December 31, 2019, respectively. The Company’s credit losses attributable to write-offs for the three months ended September 30, 2020 and 2019 were $0.9 million and $1.6 million, respectively.The Company’s credit losses attributable to write-offs for the nine months ended September 30, 2020 and 2019 were $3.8 million and $5.7 million, respectively.
Assets located outside the U.S. consist primarily of cash, accounts receivable, inventory, property, plant and equipment, and other assets. Net assets held outside the United States were $3,036.4 million and $2,643.8 million at September 30, 2020 and December 31, 2019, respectively.
The Company’s net sales to its 5 largest customers accounted for approximately 8.8% and 9.4% of total sales for the three months ended September 30, 2020 and 2019, respectively. The Company’s sales to its 5 largest customers accounted for approximately 8.9% and 9.7% of total sales for the nine months ended September 30, 2020 and 2019, respectively.
The Company’s top five manufacturers produced the following, as a percentage of total production, for the three and nine months ended September 30, 2020 and 2019:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Manufacturer #1 |
|
| 16.4 | % |
|
| 16.5 | % |
|
| 20.6 | % |
|
| 15.8 | % |
Manufacturer #2 |
|
| 6.7 | % |
|
| 8.3 | % |
|
| 6.9 | % |
|
| 8.3 | % |
Manufacturer #3 |
|
| 6.0 | % |
|
| 7.2 | % |
|
| 5.8 | % |
|
| 6.9 | % |
Manufacturer #4 |
|
| 5.7 | % |
|
| 5.5 | % |
|
| 4.5 | % |
|
| 5.1 | % |
Manufacturer #5 |
|
| 4.8 | % |
|
| 4.7 | % |
|
| 4.4 | % |
|
| 5.0 | % |
|
|
| 39.6 | % |
|
| 42.2 | % |
|
| 42.2 | % |
|
| 41.1 | % |
The majority of the Company’s products are produced in China and Vietnam. The Company’s operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations and revaluations, custom duties, tariffs and related fees, various import controls and other monetary barriers, restrictions on the transfer of funds, labor unrest and strikes, local disruptions and, in certain parts of the world, political instability. The Company believes it has acted to reduce these risks by diversifying manufacturing among various factories.
|
|
The Company has 3 reportable segments – domestic wholesale sales, international wholesale sales, and direct-to-consumer sales. Management evaluates segment performance based primarily on sales and gross profit. All other costs and expenses of the Company are analyzed on an aggregate basis, and these costs are not allocated to the Company’s segments. Sales, gross margins, identifiable assets and additions to property and equipment for the domestic wholesale, international wholesale, direct-to-consumer sales segments on a combined basis were as follows (in thousands):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale |
| $ | 318,449 |
|
| $ | 299,634 |
|
| $ | 827,148 |
|
| $ | 951,635 |
|
International wholesale |
|
| 643,393 |
|
|
| 646,596 |
|
|
| 1,603,774 |
|
|
| 1,824,214 |
|
Direct-to-consumer |
|
| 339,044 |
|
|
| 407,768 |
|
|
| 841,781 |
|
|
| 1,113,470 |
|
Total |
| $ | 1,300,886 |
|
| $ | 1,353,998 |
|
| $ | 3,272,703 |
|
| $ | 3,889,319 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale |
| $ | 123,122 |
|
| $ | 111,205 |
|
| $ | 318,824 |
|
| $ | 354,299 |
|
International wholesale |
|
| 295,565 |
|
|
| 298,799 |
|
|
| 716,489 |
|
|
| 837,467 |
|
Direct-to-consumer |
|
| 206,434 |
|
|
| 243,060 |
|
|
| 506,041 |
|
|
| 661,642 |
|
Total |
| $ | 625,121 |
|
| $ | 653,064 |
|
| $ | 1,541,354 |
|
| $ | 1,853,408 |
|
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Identifiable assets: |
|
|
|
|
|
|
|
|
Domestic wholesale |
| $ | 1,934,991 |
|
| $ | 1,472,323 |
|
International wholesale |
|
| 2,397,446 |
|
|
| 2,100,042 |
|
Direct-to-consumer |
|
| 1,378,957 |
|
|
| 1,320,578 |
|
Total |
| $ | 5,711,394 |
|
| $ | 4,892,943 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Additions to property, plant and equipment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale |
| $ | 36,036 |
|
| $ | 7,976 |
|
| $ | 71,245 |
|
| $ | 66,001 |
|
International wholesale |
|
| 13,647 |
|
|
| 27,947 |
|
|
| 96,091 |
|
|
| 73,922 |
|
Direct-to-consumer |
|
| 13,881 |
|
|
| 13,010 |
|
|
| 45,880 |
|
|
| 34,740 |
|
Total |
| $ | 63,564 |
|
| $ | 48,933 |
|
| $ | 213,216 |
|
| $ | 174,663 |
|
Geographic Information:
The following summarizes the Company’s operations in different geographic areas for the periods indicated (in thousands):
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Sales (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 537,528 |
|
| $ | 558,173 |
|
| $ | 1,386,522 |
|
| $ | 1,655,413 |
|
Canada |
|
| 36,995 |
|
|
| 46,576 |
|
|
| 97,203 |
|
|
| 138,900 |
|
Other international (2) |
|
| 726,363 |
|
|
| 749,249 |
|
|
| 1,788,978 |
|
|
| 2,095,006 |
|
Total |
| $ | 1,300,886 |
|
| $ | 1,353,998 |
|
| $ | 3,272,703 |
|
| $ | 3,889,319 |
|
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Property, plant and equipment, net: |
|
|
|
|
|
|
|
|
United States |
| $ | 491,600 |
|
| $ | 439,132 |
|
Canada |
|
| 5,959 |
|
|
| 7,286 |
|
Other international (2) |
|
| 372,603 |
|
|
| 292,507 |
|
Total |
| $ | 870,162 |
|
| $ | 738,925 |
|
|
|
|
|
In response to the State Department’s trade restrictions with Sudan and Syria, the Company does not authorize or permit any distribution or sales of its product in these countries, and the Company is not aware of any current or past distribution or sales of our product in Sudan or Syria.
| RELATED PARTY TRANSACTIONS |
On July 29, 2010, the Company formed theThe Skechers Foundation (the “Foundation”), which is a 501(c)(3) non-profit entity that does not have any shareholders or members. The Foundation isand not a subsidiary of, and is notor otherwise affiliated with the Company, and theCompany. The Company does not have a financial interest in the Foundation. However, two officers and directors of the Company, Michael Greenberg, the Company’s President, and David Weinberg, the Company’s Chief Operating Officer, are also officers and directors of the Foundation. During the three months ended September 30,March 31, 2021 and 2020, and 2019, the Company made contributions of $500,000 and $250,000 to the Foundation respectively. During the nine months ended September 30, 2020 and 2019,in each period. In March 2021, the Company made contributionspurchased 2 properties for $2.7 million, from an entity controlled by its President, Michael Greenberg, to facilitate future expansion of $1,500,000 and $750,000 toour corporate office buildings in Manhattan Beach, California. The terms of the Foundation, respectively.sale were no less favorable than could be obtained from an unrelated third party.
|
|
The Company has 3 reportable segments – Domestic Wholesale, International Wholesale and Direct-to-Consumer. Management evaluates segment performance based primarily on sales and gross margin. All other costs and expenses of the Company are analyzed on an aggregate basis and not allocated to the segments. The following summarizes the Company’s operations by segment and geographic area for the periods indicated:
|
| Three Months Ended March 31, |
| |||||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Sales |
|
|
|
|
|
|
|
|
Domestic Wholesale |
| $ | 374,665 |
|
| $ | 377,962 |
|
International Wholesale |
|
| 712,175 |
|
|
| 575,199 |
|
Direct-to-Consumer |
|
| 341,578 |
|
|
| 289,184 |
|
Total |
| $ | 1,428,418 |
|
| $ | 1,242,345 |
|
Gross profit |
|
|
|
|
|
|
|
|
Domestic Wholesale |
| $ | 139,924 |
|
| $ | 145,277 |
|
International Wholesale |
|
| 320,781 |
|
|
| 240,475 |
|
Direct-to-Consumer |
|
| 218,917 |
|
|
| 161,916 |
|
Total |
| $ | 679,622 |
|
| $ | 547,668 |
|
Sales (1) |
|
|
|
|
|
|
|
|
United States |
| $ | 602,117 |
|
| $ | 555,174 |
|
International |
|
| 826,301 |
|
|
| 687,171 |
|
Total |
| $ | 1,428,418 |
|
| $ | 1,242,345 |
|
(1) | During the three months ended March 31, 2021 and 2020, sales in China were $250.6 million and $91.3 million. |
The Company’s sales to its 5 largest customers accounted for approximately 9.5% and 11.4% of total sales for the three months ended March 31, 2021 and 2020.
The following summarizes the Company’s assets by segment and geographic area for the periods indicated:
(in thousands) |
| As of March 31, 2021 |
|
| As of December 31, 2020 |
| ||
Identifiable assets |
|
|
|
|
|
|
|
|
Domestic Wholesale |
| $ | 1,971,630 |
|
| $ | 1,945,681 |
|
International Wholesale |
|
| 2,616,429 |
|
|
| 2,436,568 |
|
Direct-to-Consumer |
|
| 1,397,507 |
|
|
| 1,430,120 |
|
Total |
| $ | 5,985,566 |
|
| $ | 5,812,369 |
|
|
| Three Months Ended March 31, |
| |||||
(in thousands) |
| 2021 |
|
| 2020 |
| ||
Additions to property, plant and equipment |
|
|
|
|
|
|
|
|
Domestic Wholesale |
| $ | 64,121 |
|
| $ | 11,818 |
|
International Wholesale |
|
| 10,813 |
|
|
| 44,900 |
|
Direct-to-Consumer |
|
| 9,303 |
|
|
| 18,169 |
|
Total |
| $ | 84,237 |
|
| $ | 74,887 |
|
(in thousands) |
| As of March 31, 2021 |
|
| As of December 31, 2020 |
| ||
Property, plant and equipment, net (1) |
|
|
|
|
|
|
|
|
United States |
| $ | 588,542 |
|
| $ | 535,648 |
|
International |
|
| 403,970 |
|
|
| 399,793 |
|
Total |
| $ | 992,512 |
|
| $ | 935,441 |
|
(1) | Property, plant and equipment, net in China was $245.4 million and $241.6 million at March 31, 2021 and December 31, 2020. |
Assets located outside the U.S. consist primarily of cash, accounts receivable, inventory, property, plant and equipment, and other assets. Net assets held outside the U.S. were $3.7 billion and $3.1 billion at March 31, 2021 and December 31, 2020, respectively.
The Company performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable generally do not require collateral. Foreign accounts receivable are generally collateralized by letters of credit. The Company’s credit losses charged to expense for the three months ended March 31, 2021 and 2020 were $6.3 million and $1.5 million.
The Company’s accounts receivables, excluding the allowance for bad debts, sales returns and chargebacks, in different geographic areas are summarized as follows:
(in thousands) |
| As of March 31, 2021 |
|
| As of December 31, 2020 |
| ||
Domestic Accounts Receivable |
| $ | 314,131 |
|
| $ | 230,546 |
|
Foreign Accounts Receivable |
|
| 532,173 |
|
|
| 437,816 |
|
For the periods presented below, the Company’s top five manufacturers produced, as a percentage of total production, the following:
|
| Three Months Ended March 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Manufacturer #1 |
|
| 18.6 | % |
|
| 24.9 | % |
Manufacturer #2 |
|
| 5.0 | % |
|
| 7.5 | % |
Manufacturer #3 |
|
| 4.8 | % |
|
| 6.7 | % |
Manufacturer #4 |
|
| 4.8 | % |
|
| 3.9 | % |
Manufacturer #5 |
|
| 4.3 | % |
|
| 3.7 | % |
|
|
| 37.5 | % |
|
| 46.7 | % |
(10) | COMMITMENTS AND CONTINGENCIES |
In accordance with U.S. GAAP, the Company records a liability in its condensed consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings are inherently difficult to predict, particularly when the matters are in the procedural stages or with unspecified or indeterminate claims for damages, potential penalties, or fines. Accordingly, the Company cannot determine the final amount, if any, of its liability beyond the amount accrued in the condensed consolidated financial statements as of September 30, 2020,March 31, 2021, nor is it possible to estimate what litigation-related costs will be in the future; however, the Company believes that the likelihood that claims related to litigation would result in a material loss to the Company, either individually or in the aggregate, is remote.
ITEMITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and Notes thereto in Item 1 of this report and our annual report on Form 10-K for the year ended December 31, 2019.2020.
We intend for this discussion to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of our company as a whole.
This quarterly report on Form 10-Q may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking language such as “intend,” “may,” “will,” “believe,” “expect,” “anticipate” or other comparable terms. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected in forward-looking statements, and reported results shall not be considered an indication of our future performance. Factors that might cause or contribute to such differences include:
| • | the COVID-19 pandemic and its adverse impact on our operations and our business, sales and results of operations around the world; |
| • |
|
| our ability to maintain our brand image and to anticipate, forecast, identify, and respond to changes in fashion trends, consumer demand for the products and other market factors; |
|
|
|
• |
|
| the loss of any significant customers, decreased demand by industry retailers and the cancellation of order commitments; |
| • | our ability to remain competitive among sellers of footwear for consumers, including in the highly competitive performance footwear market; global economic, political and market conditions including the challenging consumer retail market in the United States; |
• | our ability to sustain, manage and forecast our costs and proper inventory levels; |
• | our ability to continue to manufacture and ship our products that are sourced in China and Vietnam, which could be adversely affected by various economic, political or trade conditions, or a natural disaster in China or Vietnam; |
|
|
|
• |
|
| other factors referenced or incorporated by reference in our annual report on Form 10-K for the year ended December 31, |
The risks included herein are not exhaustive. Other sections of this report may include additional factors that could adversely impact our business, financial condition and results of operations. Moreover, we operate in a very competitive and rapidly changing environment, and new risk factors emerge from time to time. We cannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these inherent and changing risks and uncertainties, investors should not place undue reliance on forward-looking statements, which reflect our opinions only as of the date of this quarterly report, as a prediction of actual results. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document, except as otherwise required by reporting requirements of applicable federal and states securities laws.
OVERVIEW
The COVID-19 pandemic continuesSales were a new quarterly record of $1.4 billion, reflecting growth in our International Wholesale and Direct-to-Consumer segments despite continued impacts to impact variousglobal markets and business channels yetfrom the COVID-19 pandemic. The quarter began as expected with the pandemic continuing to influence tepid consumer trends worldwide, especially as many markets reinstituted lockdowns. However, mid-quarter, we saw meaningful improvements during the third quarterbegan seeing signs of 2020 including a return to growth in many markets. Although the recovery has been at a different pace across countries, we remain confident in our actionsconsumer engagement and strength of the brand. Consumers have gravitated towards comfort in their lives as people are predominately working from home and with increased focus on their well-being. We believe the actionsoptimism domestically that we have takennot seen in over a year. Consumers are returning to a new normalcy, one that involves more walking, more comfort on the job, and the strength ofa casual lifestyle mindset. We are a natural choice for any demographic worldwide with comfort technology at our brand positions Skechers well as a recovery continues.core.
We continue to invest for growth with a focus on enhancing our direct-to-consumer capabilities and global infrastructure.
| • | To further enhance our consumer shopping experience, we |
| • | We |
| • | Our new China distribution center remains on-track |
| • | Development continued on our North American distribution center expansion, which we expect to be |
| • |
|
RESULTS OF OPERATIONS
We have three reportable segments – domestic wholesale, international wholesale,Domestic Wholesale, International Wholesale, and direct-to-consumer,Direct-to-Consumer, which includes results from both our retail store and e-commerce channels. We evaluate segment performance based primarily on sales and gross margins.margin.
The following table sets forth, for the periods indicated, selected information from our results of operations (in thousands) and as a percentage of sales:operations:
|
| Three Months Ended September 30, |
|
|
| Nine Months Ended September 30, |
|
|
| Three Months Ended March 31, |
|
| Change |
| ||||||||||||||||||||||||||||||||||||||
|
| 2020 |
|
|
| 2019 |
|
|
| 2020 |
|
|
| 2019 |
|
| ||||||||||||||||||||||||||||||||||||
(in thousands) |
| 2021 | 2020 |
|
| $ | % |
| ||||||||||||||||||||||||||||||||||||||||||||
Sales |
| $ | 1,300,886 |
|
|
| 100.0 |
| % |
| $ | 1,353,998 |
|
|
| 100.0 |
| % |
| $ | 3,272,703 |
|
|
| 100.0 |
| % |
| $ | 3,889,319 |
|
|
| 100.0 |
| % |
| $ | 1,428,418 |
|
| $ | 1,242,345 |
|
| $ | 186,073 |
|
|
| 15.0 |
|
Cost of sales |
|
| 675,765 |
|
|
| 51.9 |
|
|
|
| 700,934 |
|
|
| 51.8 |
|
|
| 1,731,349 |
|
|
| 52.9 |
|
|
| 2,035,911 |
|
|
| 52.3 |
|
|
|
| 748,796 |
|
|
| 694,677 |
|
|
| 54,119 |
|
|
| 7.8 |
| ||
Gross profit |
|
| 625,121 |
|
|
| 48.1 |
|
|
|
| 653,064 |
|
|
| 48.2 |
|
|
| 1,541,354 |
|
|
| 47.1 |
|
|
| 1,853,408 |
|
|
| 47.7 |
|
|
|
| 679,622 |
|
|
| 547,668 |
|
|
| 131,954 |
|
|
| 24.1 |
| ||
Gross margin |
|
| 47.6 |
| % |
| 44.1 |
| % |
|
|
|
|
| 350 | bps | ||||||||||||||||||||||||||||||||||||
Royalty income |
|
| 3,216 |
|
|
| 0.2 |
|
|
|
| 6,285 |
|
|
| 0.5 |
|
|
| 11,061 |
|
|
| 0.3 |
|
|
| 17,827 |
|
|
| 0.4 |
|
|
|
| 6,037 |
|
|
| 5,248 |
|
|
| 789 |
|
|
| 15.0 |
| ||
|
|
| 628,337 |
|
|
| 48.3 |
|
|
|
| 659,349 |
|
|
| 48.7 |
|
|
| 1,552,415 |
|
|
| 47.4 |
|
|
| 1,871,235 |
|
|
| 48.1 |
|
|
|
| 685,659 |
|
|
| 552,916 |
|
|
| 132,743 |
|
|
| 24.0 |
| ||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Selling |
|
| 85,926 |
|
|
| 6.6 |
|
|
|
| 97,516 |
|
|
| 7.2 |
|
|
| 220,222 |
|
|
| 6.7 |
|
|
| 281,237 |
|
|
| 7.2 |
|
|
|
| 85,296 |
|
|
| 74,055 |
|
|
| 11,241 |
|
|
| 15.2 |
| ||
General and administrative |
|
| 450,285 |
|
|
| 34.6 |
|
|
|
| 414,417 |
|
|
| 30.6 |
|
|
| 1,256,228 |
|
|
| 38.4 |
|
|
| 1,165,637 |
|
|
| 30.0 |
|
|
|
| 442,695 |
|
|
| 434,051 |
|
|
| 8,644 |
|
|
| 2.0 |
| ||
|
|
| 536,211 |
|
|
| 41.2 |
|
|
|
| 511,933 |
|
|
| 37.8 |
|
|
| 1,476,450 |
|
|
| 45.1 |
|
|
| 1,446,874 |
|
|
| 37.2 |
|
| ||||||||||||||||||
Selling, general and administrative |
|
| 527,991 |
|
|
| 508,106 |
|
|
| 19,885 |
|
|
| 3.9 |
| ||||||||||||||||||||||||||||||||||||
Earnings from operations |
|
| 92,126 |
|
|
| 7.1 |
|
|
|
| 147,416 |
|
|
| 10.9 |
|
|
| 75,965 |
|
|
| 2.3 |
|
|
| 424,361 |
|
|
| 10.9 |
|
|
|
| 157,668 |
|
|
| 44,810 |
|
|
| 112,858 |
|
|
| 251.9 |
| ||
Interest income |
|
| 1,884 |
|
|
| 0.1 |
|
|
|
| 3,290 |
|
|
| 0.2 |
|
|
| 5,739 |
|
|
| 0.2 |
|
|
| 9,500 |
|
|
| 0.2 |
|
|
|
| 796 |
|
|
| 2,307 |
|
|
| (1,511 | ) |
|
| (65.5 | ) | ||
Interest expense |
|
| (4,643 | ) |
|
| (0.4 | ) |
|
|
| (2,012 | ) |
|
| (0.1 | ) |
|
| (11,428 | ) |
|
| (0.4 | ) |
|
| (5,194 | ) |
|
| (0.1 | ) |
|
|
| (4,113 | ) |
|
| (1,999 | ) |
|
| (2,114 | ) |
|
| 105.8 |
| ||
Other, net |
|
| 7,726 |
|
|
| 0.7 |
|
|
|
| (4,194 | ) |
|
| (0.3 | ) |
|
| 15,882 |
|
|
| 0.5 |
|
|
| (8,628 | ) |
|
| (0.2 | ) |
|
|
| (10,857 | ) |
|
| 3,471 |
|
|
| (14,328 | ) |
|
| (412.8 | ) | ||
Earnings before income tax expense |
|
| 97,093 |
|
|
| 7.5 |
|
|
|
| 144,500 |
|
|
| 10.7 |
|
|
| 86,158 |
|
|
| 2.6 |
|
|
| 420,039 |
|
|
| 10.8 |
|
|
|
| 143,494 |
|
|
| 48,589 |
|
|
| 94,905 |
|
|
| 195.3 |
| ||
Income tax expense |
|
| 14,983 |
|
|
| 1.2 |
|
|
|
| 22,766 |
|
|
| 1.7 |
|
|
| 18,104 |
|
|
| 0.5 |
|
|
| 75,288 |
|
|
| 1.9 |
|
|
|
| 28,985 |
|
|
| 7,429 |
|
|
| 21,556 |
|
|
| 290.2 |
| ||
Net earnings |
|
| 82,110 |
|
|
| 6.3 |
|
|
|
| 121,734 |
|
|
| 9.0 |
|
|
| 68,054 |
|
|
| 2.1 |
|
|
| 344,751 |
|
|
| 8.9 |
|
|
|
| 114,509 |
|
|
| 41,160 |
|
|
| 73,349 |
|
|
| 178.2 |
| ||
Less: Net earnings attributable to non-controlling interests |
|
| 17,832 |
|
|
| 1.4 |
|
|
|
| 18,644 |
|
|
| 1.4 |
|
|
| 22,771 |
|
|
| 0.7 |
|
|
| 57,723 |
|
|
| 1.5 |
|
| ||||||||||||||||||
Less: Net earnings (loss) attributable to noncontrolling interests |
|
| 15,936 |
|
|
| (7,941 | ) |
|
| 23,877 |
|
|
| (300.7 | ) | ||||||||||||||||||||||||||||||||||||
Net earnings attributable to Skechers U.S.A., Inc. |
| $ | 64,278 |
|
|
| 4.9 |
| % |
| $ | 103,090 |
|
|
| 7.6 |
| % |
| $ | 45,283 |
|
|
| 1.4 |
| % |
| $ | 287,028 |
|
|
| 7.4 |
| % |
| $ | 98,573 |
|
| $ | 49,101 |
|
| $ | 49,472 |
|
|
| 100.8 |
|
THREE MONTHS ENDED SEPTEMBER 30, 2020 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2019
Sales
Sales for the three months ended September 30, 2020 were $1,300.9 million, a decrease of $53.1increased $186.1 million, or 3.9%15.0%, to $1.4 billion as compared to sales of $1,354.0 million for the three months ended September 30, 2019. The decrease is$1.2 billion as a result of a 4.1% decrease20.2% increase in ourthe Company’s international businesssales and a 3.7% decreasean 8.5% increase in our domestic business. Our domestic wholesales segmentsales. Increases in international sales increased 6.3%, international wholesales segment sales decreased 0.5% and direct-to consumer segment sales decreased 16.9%.
Domestic wholesale sales increased $18.8 million, or 6.3%, to $318.5 million for the three months ended September 30, 2020 from $299.6 million for the three months ended September 30, 2019. The increase waswere driven by awholesale. Domestic sales volume increase of 11.9%,increases were driven by direct-to-consumer, partially offset by a 1.5% decreaseslight decline in average selling price. Sales volumewholesale. Our International Wholesale segment sales increased to14.6 million pairs from 13.0 million pairs for the same period in 2019. The average price per pair23.8% and Direct-to-Consumer segment sales increased 18.1% offset by decreased Domestic Wholesale segment sales of 0.9%.
Gross margin
Gross margin increased 350 basis points to $22.50 per pair from $22.85 per pair.
International wholesale sales decreased $3.2 million, or 0.5%, to $643.4 million for the three months ended September 30, 202047.6% compared to sales44.1% as a result of $646.6 million forincreased margins in both the three months ended September 30, 2019. Our international wholesale sales consist of direct salesInternational Wholesale and Direct-to-Consumer segments. The strong margin performance was driven by our foreign subsidiaries and joint ventures, that we make to department stores, specialty retailers and sales to our distributors, who in turn sell to retailers in various international regions where we do not sell directly. Distributor sales was $56.9 million, a decrease of $44.2 million, or 43.7% and direct sales by our foreign subsidiaries and joint ventures was $586.5 million, an increase of $41.0 million, or 7.5%. Substantially all of the decrease in international wholesale segment sales was due to a volume reduction of 0.5% in the number of units sold. The average selling price was flat compared to the same period in 2019.
Direct-to-consumer sales decreased $68.7 million, or 16.9%, to $339.0 million for the three months ended September 30, 2020, as compared to sales of $407.8 million for the three months ended September 30, 2019. Declines were driven by lower domesticacross all channels and international retail store sales, partially offset by a 172.1% increase in domestic e-commerce sales. Direct-to-consumer comparable same store sales decreased 22.1%, including decreases of 20.4% domestically and 26.1% internationally. Direct-to-consumer sales volume decreased due to a 17.8% reduction in the number of units sold, partially offset by a 1.1% increase in the average selling price per unit.
Gross profit
Gross profit for the three months ended September 30, 2020 decreased $28.0 million, or 4.3%, to $625.1 million as compared to $653.1 million for the three months ended September 30, 2019. Gross marginsremained relatively flat at 48.1%with higher promotional activity internationally, partially offset by a favorable mix of e-commerce and international sales.
Domestic wholesale gross profit increased $11.9 million, or 10.7%, to $123.1 million for the three months ended September 30, 2020, as compared to $111.2 million for the three months ended September 30, 2019. Domestic wholesale gross margins increased 1.6% to 38.7% due to lower cost per pair partially offset by a decrease in the average selling price.
International wholesale gross profit decreased $3.2 million, or 1.1%, to $295.6 million for the three months ended September 30, 2020 as compared to $298.8 million for the three months ended September 30, 2019. International wholesale gross margins decreased 0.3% to 45.9% primarily due to increased promotional activity, partially offset by reduced distributor sales which have lower margins.
Direct-to-consumer gross profit decreased $36.6 million, or 15.1%, to $206.4 million for the three months ended September 30, 2020 as compared to $243.1 million for the three months ended September 30, 2019. Direct-to-consumer gross margins increased 1.3% to 60.9% driven by a higher mix of e-commerce sales which have higher margins.
Our cost of sales includes the cost of footwear purchased from our manufacturers, duties, quota costs, inbound freight (including ocean, air and freight from the dock to our distribution centers), broker fees and storage costs. We include expenses related to our distribution network in general and administrative expenses while some of our competitors may include expenses of this type in cost of sales, our gross margins may not be comparable, and we may report higher gross margins than some of our competitors in part for this reason.
Selling expenses
Selling expenses decreasedincreased by $11.6$11.2 million, or 11.9%15.2%, to $85.9$85.3 million for the three months ended September 30, 2020 from $97.5$74.1 million for the three months ended September 30, 2019 primarily due to lower worldwide advertising andhigher domestic marketing spending of $7.0$12.0 million. As a percentage of net sales, selling expenses were 6.6% and 7.2%6.0% for the three months ended September 30, 2020 and 2019.
Selling expenses consist primarilyboth of the following: sales representative sample costs, sales commissions, trade shows, advertisingthree-month periods ended March 31, 2021 and promotional costs, which may include television, print ads, ad production costs, point-of-purchase costs, advertising and display costs.2020.
General and administrative expenses
General and administrative expenses increased by $35.9$8.6 million, or 8.7%2.0%, to $450.3 million for the three months ended September 30, 2020 from $414.4 million for the three months ended September 30, 2019. As a percentage of sales, general and administrative expenses were 34.6% and 30.6% for the three months ended September 30, 2020 and 2019, respectively. The $35.9 million increase in general and administrative expenses was primarily due to a one-time $18.2 million non-cash, equity compensation charge associated with a legal settlement, and $17.3 million of volume driven by increased global warehouse and distribution expenses in both international and domestic businesses.
General and administrative expenses consist primarily of the following: salaries, wages, related taxes and various overhead costs associated with our corporate staff, stock-based compensation, domestic and international$21.8 million, offset by reduced retail operations, non-selling related costslabor of our international operations, costs associated with our distribution centers, professional fees related to legal, consulting and accounting, insurance, depreciation and amortization, and expenses related to our distribution network, which includes the functions of purchasing, receiving, inspecting, allocating, warehousing and packaging our products.$10.0 million.
Other income (expense)
Interest income decreased $1.4$1.5 million to $1.9$0.8 million for the three months ended September 30, 2020 as compared to $3.3$2.3 million, for the three months ended September 30, 2019. The decrease in interest income was primarily due to lower average interest rates compared to the prior year period. Interest expense increased by $2.6 primarily$2.1 million due to additional borrowingsa full quarter of borrowing under our credit facility.facility in the current year and additional borrowings to support China operations. Other income increased $11.9decreased $14.3 million primarily attributableas a result of a $13.9 million gain related to favorable foreign currency exchange rates.the acquisition of our Mexico joint venture in the prior year.
Income taxes
Income tax expense and the effective tax rate for the three months ended September 30, 2020 and 2019 were as follows (dollar amounts in thousands):follows:
|
| Three Months Ended September 30, |
|
| Three Months Ended March 31, |
| ||||||||||
|
| 2020 |
|
| 2019 |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
| ||||||||||
Income tax expense |
| $ | 14,983 |
|
| $ | 22,766 |
|
| $ | 28,985 |
|
| $ | 7,429 |
|
Effective tax rate |
|
| 15.4 | % |
|
| 15.8 | % |
|
| 20.2 | % |
|
| 15.3 | % |
The tax provisions for the three months ended September 30, 2020 and 2019 were computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year.
Our provision for income tax expense and effective income tax rate are significantly impacted by the mix of our domestic and foreign earnings (losses) before income taxes. In the foreign jurisdictions in which we have operations, the applicable statutory rates range from 0.0% to 34.0%, which on average are generally significantly lower than the U.S. federal and state combined statutory rate of approximately 25%24.5%.
For the three months ended September 30, 2020,quarter, the decreaseincrease in the effective tax rate as compared to the tax rate for the three months ended September 30, 2019 was primarily due ato increased profitability in certain higher tax favorable change injurisdictions such as China and the mixture of our domestic and foreign earnings which was partially offset by the rate impact of the non-deductible charge for a restricted share cancellation which occurred during the quarter ended September 30, 2020.United States.
See Note 10 – Income Taxes of the Condensed Consolidated Financial Statements for additional information.
Non-controlling interestsNoncontrolling interest in net income of consolidated subsidiaries
Net earnings attributable to non-controlling interests for the three months ended September 30, 2020 decreased $0.8noncontrolling interest increased $23.9 million to $17.8$15.9 million as compared to $18.6a loss of $7.9 million, for the same period in 2019 primarily attributabledue to decreasedincreased profitability by our joint ventures, due to thereduced impacts related to the COVID-19 pandemic. Non-controlling interestsNoncontrolling interest represents the share of net earnings that is attributable to our joint venture partners.
RESULTS OF SEGMENT OPERATIONS
Domestic Wholesale
|
| Three Months Ended March 31, |
|
| Change |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||
Sales |
| $ | 374,665 |
|
| $ | 377,962 |
|
| $ | (3,297 | ) |
|
| (0.9 | ) |
Gross profit |
|
| 139,924 |
|
|
| 145,277 |
|
|
| (5,353 | ) |
|
| (3.7 | ) |
Gross margin |
|
| 37.3 | % |
|
| 38.4 | % |
|
|
|
|
|
| (110 | ) bps |
NINE MONTHS ENDED September 30, 2020 COMPARED TO NINE MONTHS ENDED September 30, 2019
Sales
Sales for the nine months ended September 30, 2020 were $3,272.7 million, a decrease of $616.6Domestic Wholesale sales decreased $3.3 million, or 15.9%, as compared0.9% to sales of $3,889.3 million for the nine months ended September 30, 2019, which reflected the impact of the global pandemic on our businesses worldwide.
Domestic wholesale sales decreased $124.5 million, or 13.1%, to $827.1 million for the nine months ended September 30, 2020 from $951.6 million for the nine months ended September 30, 2019.$374.7 million. Sales volume decrease driven by a 15.4% reduction in the number ofdecreased slightly to 16.9 million pairs sold, partially offset by a 1.0%an increase in average selling price. The average selling price increased to $21.89 per pair.pair from $21.32.
Domestic Wholesale gross margin decreased 110 basis points to 37.3% due to higher cost per pair partially offset by an increase in the average selling price.
International wholesaleWholesale
|
| Three Months Ended March 31, |
|
| Change |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||
Sales |
| $ | 712,175 |
|
| $ | 575,199 |
|
| $ | 136,976 |
|
|
| 23.8 |
|
Gross profit |
|
| 320,781 |
|
|
| 240,475 |
|
|
| 80,306 |
|
|
| 33.4 |
|
Gross margin |
|
| 45.0 | % |
|
| 41.8 | % |
|
|
|
|
|
| 320 | bps |
International Wholesale sales decreased $220.4increased $137.0 million, or 12.1%23.8%, to $1,603.8$712.2 million for the nine months ended September 30, 2020 compared to sales of $1,824.2$575.2 million, for the nine months ended September 30, 2019. Ourprimarily driven by growth in China of 174.4%, partially offset by an 8.1% decline in Europe and a 6.5% decline in distributor sales decreased to $186.2 million, a decrease of $103.7 million or 35.8% and directsales. Direct sales by our foreign subsidiaries and joint ventures were $1,417.6$632.0 million, a decreasean increase of $116.8$142.6 million, or 7.6%29.1%. TheVolume increased 12.7% in the number of units sold decreased 8.9% and the average selling price decreased by 3.5%per unit increased 9.9%.
Direct-to-consumerInternational Wholesale gross margin increased 320 basis points to 45.0% primarily due to the aforementioned increase in average selling price per unit and a favorable mix of joint venture sales.
Direct-to-Consumer
|
| Three Months Ended March 31, |
|
| Change |
| ||||||||||
(in thousands) |
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
| ||||
Sales |
| $ | 341,578 |
|
| $ | 289,184 |
|
| $ | 52,394 |
|
|
| 18.1 |
|
Gross profit |
|
| 218,917 |
|
|
| 161,916 |
|
|
| 57,001 |
|
|
| 35.2 |
|
Gross margin |
|
| 64.1 | % |
|
| 56.0 | % |
|
|
|
|
|
| 810 | bps |
Direct-to-Consumer sales decreased $271.7increased $52.4 million, or 24.4%18.1%, to $841.8$341.6 million for the nine months ended September 30, 2020 as compared to sales of $1,113.5$289.2 million, for the nine months ended September 30, 2019. Declines wereprimarily driven by lower domestican increase in e-commerce sales of 143.0% and internationalan increase in retail sales during temporary store closures, partially offset by a 243.3% increase in domestic e-commerce sales. Direct-to-consumerof 13.6%. Direct-to-Consumer comparable same store sales decreased 28.5% forincreased 10.2%, including increases of 25.7% domestically, partially offset by decreases of 27.4% internationally. Average selling price per unit increased 9.8% and volume increased 7.6% in the nine months ended September 30, 2020. The number of units sold decreased 25.3% and the average selling pricesold.
Direct-to-Consumer gross margin increased 1.2%.
Gross profit
Gross profit for the nine months ended September 30, 2020 decreased $312.1 million810 basis points to $1,541.3 million as compared to $1,853.4 million for the nine months ended September 30, 2019. Gross margin decreased 0.6% to 47.1% due to lower international gross margins as a result of higher promotional activity particularly in Asia.
Domestic wholesale gross profit decreased $35.5 million, or 10.0%64.1%, to $318.8 million for the nine months ended September 30, 2020 compared to $354.3 million for the nine months ended September 30, 2019. Domestic wholesale gross margins increased 1.3% to 38.5% primarily driven by lower product costs.
International wholesale gross profit decreased $121.0 million, or 14.4%, to $716.5 million for the nine months ended September 30, 2020 as compared to $837.5 million for the nine months ended September 30, 2019. International wholesale gross margins decreased 1.2% to 44.7% as a result of higher promotional activity in our joint-ventures, a lower mix of distributor sales, and non-cash purchase price adjustments related to the acquisition of our joint venture in Mexico.
Direct-to-consumer gross profit decreased $155.6 million, or 23.5%, to $506.0 million for the nine months ended September 30, 2020 as compared to $661.6 million for the nine months ended September 30, 2019. Direct-to-consumer gross margins increased 0.7% to 60.1% due to higher mix of e-commerce sales which have higher overall margins.margins as well as the aforementioned increase in average selling price per unit.
Selling expenses
Selling expenses decreased by $61.0 million, or 21.7%, to $220.2 millionComparable store sales mentioned above includes stores that have been opened for at least thirteen calendar months as well as sales on our company-owned websites. We did not make any adjustments for the nine months ended September 30, 2020 from $281.2 million foreffects of the nine months ended September 30, 2019. As a percentage of sales, selling expenses were 6.7% and 7.2% for the nine months ended September 30, 2020 and 2019, respectively. The decrease in selling expenses was primarily due to lower worldwide advertising and marketing spending of $48.1 million.
General and administrative expenses
General and administrative expenses increased by $90.6 million, or 7.8% primarily driven by $31.7 million of volume driven warehouse and distribution expenses for both international and domestic businesses and a one-time $18.2 million non-cash, equity compensation charge associated with a legal settlement.
Other income (expense)
Interest income decreased $3.8 million to $5.7 million for the nine months ended September 30, 2020 as compared to $9.5 million for the nine months ended September 30, 2019. The decrease in interest income was due primarily due to decreased interest rates. Interest expense increased $6.2 million due to additional borrowings under our credit facility. Other income increased $24.5 million primarily due to purchase price adjustments from the acquisition of our Mexico joint venture and interest generated from investments.
Income taxes
Income tax expenseCOVID-19 pandemic and the effective tax rate for the nine months ended September 30, 2020related impacts of store closures and 2019 were as follows (dollar amounts in thousands):
|
| Nine Months Ended September 30, |
| |||||
|
| 2020 |
|
| 2019 |
| ||
Income tax expense |
| $ | 18,104 |
|
| $ | 75,288 |
|
Effective tax rate |
|
| 21.0 | % |
|
| 17.9 | % |
The tax provisions for the nine months ended September 30, 2020reduced operating hours. Definitions and 2019 were computed using the estimated effective tax rates applicable to eachcalculations of the domestic and international taxable jurisdictions for the full year. Our effective tax rate is subject to management’s quarterly review and revision, as necessary.
Our provision for income tax expense and effective income tax rate are significantly impacted by the mix of our domestic and foreign earnings (losses) before income taxes. In the foreign jurisdictions in which we have operations, the applicable statutory rates range from 0.0% to 34.0%, which on average are generally significantly lower than the U.S. federal and state combined statutory rate of approximately 25%.
For the nine months ended September 30, 2020, the increasecomparable store sales differ among companies in the effective tax rate, as comparedretail industry, and therefore comparable store sales disclosed by us may not be comparable to the tax rate for the nine months ended September 30, 2019, was primarily due to the rate impact of the non-deductible charge for a restricted share cancellation which occurred during the nine months ended September 30, 2020.
See Note 10 – Income Taxes of the Condensed Consolidated Financial Statements for additional information.metrics disclosed by other companies.
Non-controlling interests in net earnings of consolidated subsidiaries
Net earnings attributable to non-controlling interests for the nine months ended September 30, 2020 decreased $35.0 million to $22.8 million as compared to net earnings $57.7 million for the same period in 2019 attributable to decreased profitability by countries still experiencing COVID related impacts. Non-controlling interests represents the share of net earnings that is attributable to our joint venture partners.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity outlook
Our liquidity remains ample and we believe we are well-positioned to endure the economic environment associated with the COVID-19 pandemic. We have taken actions to preserve our liquidity and manage our cash flow. As a precautionary measure, in March 2020, we borrowed $490.0 million on our unsecured revolving credit facility. There isAt March 31, 2021, we have unused credit capacity forof $10.5 million along with an additional $250.0 million available on our unsecured credit facility through an accordion feature. feature on the unsecured revolving credit facility. We continue to partner with our vendors, landlords, and lenders to maximize our liquidity and mitigate cash flow risk.We believe that anticipated cash flows from operations, existing cash and investments balances, available borrowings under our credit agreement, and current financing arrangements will be sufficient to provide us with the liquidity necessary to fund our anticipated working capital and capital requirements for the next twelve months.
As of March 31, 2021, we had approximately $1.3 billion in cash and cash equivalents, of which $741.3 million, or 58%, was held outside the U.S. Of the $741.3 billion held outside of the U.S., approximately $379.3 million is available for repatriation to the U.S. without incurring U.S. federal income taxes and applicable non-U.S. income and withholding taxes in excess of the amounts accrued in our Condensed Consolidated Financial Statements as of March 31, 2021.
Cash Flows
Our working capital at September 30, 2020March 31, 2021 was $2,125.2 million,$2.2 billion, an increase of $543.8 million$0.1 billion from working capital of $1,581.4 million$2.1 billion at December 31, 2019.2020. Our cash and cash equivalents at September 30, 2020March 31, 2021 were $1,294.2 million,$1.3 billion, compared to $824.9 million$1.4 billion at December 31, 2019.2020. Our primary sources of operating cash are collections from customers on wholesale and direct-to-consumer sales.customers. Our primary uses of cash are inventory purchases, selling, general and administrative expenses and capital expenditures.
Operating Activities
For the ninethree months ended September 30, 2020,March 31, 2021, net cash provided byused in operating activities was $57.0$13.8 million as compared to $349.3$135.0 million for the ninethree months ended September 30, 2019.March 31, 2020. On a comparative year-over-year basis, the $292.3$121.2 million decrease in net cash provided byused in operating activities primarily resulted from reducedthe timing of payments to vendors and increased net earnings, of $276.7 million.partially offset by increased inventory purchases.
Investing Activities
Net cash used in investing activities was $212.1$105.5 million for the ninethree months ended September 30, 2020March 31, 2021 as compared to $273.6$76.3 million for the ninethree months ended September 30, 2019.March 31, 2020. The $61.5$29.2 million decreaseincrease was primarily due to the acquisition of our Mexico joint-venture of $100.7 million in 2019 partially offset by an increase in capital expendituresinvestment purchases of $38.6 million.$27.3 million. Capital expenditures for the ninethree months ended September 30, 2020March 31, 2021 were approximately $213.2$84.2 million, which consisted primarily of $61.4approximately $42.9 million to support our worldwide distribution capabilities, $61.0 million was related to the acquisition of a corporate office building in Shanghai and for new retail stores in China, and $45.9 million for direct-to-consumer stores and e-commerce investments worldwide. Capital expenditures for the nine months ended September 30, 2019 were approximately $174.7 million, of which $41.2 million was related to the constructionexpansion of our joint-venture owned domestic distribution center, in China, $34.7$13.8 million related to investments in our new corporate offices in California and $12.4 million related to investments in our direct-to-consumer technology and retail stores worldwide, and $32.7 million to support our worldwide distribution capabilities.stores. We expect our ongoing capital expenditures for the remainder of 20202021 to be approximately $125.0$200.0 million to $150.0$250.0 million, which is primarily relatedrelated to the constructionexpansion of our China distribution center and expansions to our worldwide distribution capabilities.capabilities, continued investments in retail and e-commerce technologies and stores, and our new corporate offices in California. We expect to fund ongoing capital expenses through a combination of borrowings and available cash.cash.
Financing Activities
Net cash provided by financing activities was $637.4$34.8 million during the ninethree months ended September 30, 2020March 31, 2021 compared to $137.6558.0 million in net cash used inprovided by financing activities during the ninethree months ended September 30, 2019.March 31, 2020. The $775.0$523.2 million increasedecrease is primarily reduced proceeds from long-term borrowings of $660.8 million which includes $490.0 million on our unsecured revolving credit facility and $82.9 million for the purchase of the minority interest in our India joint venture in the prior year.$523.8 million.
Capital Resources and Prospective Capital Requirements
Share Repurchase Program
On February 6, 2018, our Board of Directors authorized a share repurchase program pursuant to which we may, from time to time, purchase shares of its Class A common stock, par value $0.001 per share (“Class A common stock”), for an aggregate repurchase price not to exceed $150.0 million. The Share Repurchase Program expires on February 6, 2021. Share repurchases may be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements and other relevant factors. The Share Repurchase Program does not obligate us to acquire any particular amount of shares of Class A common stock and the program may be suspended or discontinued at any time. As of September 30, 2020, there was $20.0 million available under the Share Repurchase Program.
Acquisitions
In the first quarter of 2019, we purchased the minority interest in our India joint-venture for $82.9 million, which made our India joint-venture entity a wholly-owned subsidiary.
In the second quarter of 2019, we purchased a 60% interest in Manhattan SKMX, S. de R.L. de C.V. (“Skechers Mexico”), for a total consideration of $120.6 million, net of cash acquired.Skechers Mexico is a joint venture that operates and generates sales in Mexico. As a result of this purchase, Skechers Mexico became a majority-owned subsidiary and the results are consolidated in our condensed consolidated financial statements from the date of the acquisition. The formation of the joint venture provides significant merchandising, supply chain and retail operations in Mexico. We completed the purchase price allocation during the quarter ended March 31, 2020. Pro forma results of operations have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to our condensed consolidated financial statements. For additional information see Note 7 – Acquisition in the Notes to Condensed Consolidated Financial Statements included in this quarterly report.
Financing Arrangements
As of September 30, 2020,March 31, 2021, outstanding short-term and long-term borrowings were $812.0$779.7 million, of which $487.5$452.5 million relates to our unsecured revolving credit facility, and $129.5$244.3 million for a loanrelates to loans for our domestic and China distribution center, $65.4centers, $80.5 million for a construction loan for our distribution center in China, $78.6 million relatedrelates to our operations in China and $19.0 million related to the an office building in Shanghai, China and the remaining balanceremainder relates to our international operations. Our long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions. We were in compliance with all debt covenants related to our short-term and long-term borrowings as of the date of this quarterly report. See Note 54 – Short-Term and Long-Term BorrowingsFinancial Commitments of the Condensed Consolidated Financial Statements for additional information.
We believe that anticipated cash flows from operations, available borrowings under our credit agreements, existing cash and investment balances and current financing arrangements will be sufficient to provide us with the liquidity necessary to fund our anticipated working capital and capital requirements for the next twelve months. Our future capital requirements will depend on many factors, including, but not limited to, duration and impact on overall consumer demand due to the COVID-19 pandemic, the global economy and the outlook for and return to growth in our markets, the levels at which we maintain inventory, sale of excess inventory at discounted prices, the market acceptance of our footwear, the number and timing of new store openings, the success of our international operations, costs associated with constructing our China distribution center and distribution center equipment, available borrowings with China Construction Bank Corporation, the costs of upgrading our domestic and European distribution centers, the levels of advertising and marketing required to promote our footwear, the extent to which we invest in new product design and improvements to our existing product design, costs associated with constructing new corporate offices, and any potential acquisitions of other brands or companies. To the extent that available funds are insufficient to fund our future activities or we desire to increase liquidity, we may raise additional funds through public or private financing of debt or equity. We have been successful in the past in raising additional funds through financing activities; however, we cannot be assured that additional financing will be available to us or that, if available, it can be obtained on past terms which have been favorable to our stockholders and us. Failure to obtain such financing could delay or prevent our current business plans, which could adversely affect our business, financial condition and results of operations. In addition, if additional capital is raised through the sale of additional equity or convertible securities, dilution to our stockholders could occur.
Income Taxes
As of September 30, 2020, we had approximately $1,294.2 million in cash and cash equivalents, of which $596.9 million, or 46%, was held outside the U.S. Of the $596.9 million held by our non-U.S. subsidiaries, approximately $299.6 million is available for repatriation to the U.S. without incurring U.S. federal income taxes and applicable non-U.S. income and withholding taxes in excess of the amounts accrued in our Condensed Consolidated Financial Statements as of September 30, 2020.
Our cash and cash equivalents held in the U.S. and cash provided from operations are sufficient to meet our liquidity needs in the U.S. for the next twelve months. However, in anticipation of our U.S. cash requirements and the need to provide payment of our provisional Transition Tax liability, we may begin repatriating certain funds held outside the U.S. for which all applicable U.S. federal and non-U.S. tax has been fully provided as of September 30, 2020. We have provided for the tax impact of expected distributions from our joint venture in China as well as from our subsidiary in Chile to our intermediate parent company in Switzerland. Otherwise, because of the need for cash for operating capital and continued overseas expansion, we do not foresee the need for any of our other foreign subsidiaries to distribute funds up to an intermediate foreign parent company in any form of taxable dividend. Under current applicable tax laws, if we choose to repatriate some or all of the funds we have designated as indefinitely reinvested outside the U.S., the amount repatriated would not be subject to U.S. federal income taxes but may be subject to applicable non-U.S. income and withholding taxes, and to certain state income taxes.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.information.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion of our critical accounting policies, please refer to our annual report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 1, 2020. Our critical accounting policies and estimates did not change materially during the quarter ended September 30, 2020.
Recent Accounting Pronouncements
Refer to the accompanying Notes to the Condensed Consolidated Financial Statements for recently adopted and recently issued accounting pronouncements.
QUARTERLY RESULTS AND SEASONALITY
While sales of footwear products have historically been seasonal in nature with the strongest domestic sales generally occurring in the second and third quarters, we believe that changes in our product offerings and growth in our international sales and retail sales segments have partially mitigated the effect of this seasonality.
We have experienced, and expect to continue to experience, variability in our sales and operating results on a quarterly basis. Our domestic customers generally assume responsibility for scheduling pickup and delivery of purchased products. Any delay in scheduling or pickup which is beyond our control could materially negatively impact our sales and results of operations for any given quarter. We believe the factors which influence this variability include (i) the timing of our introduction of new footwear products, (ii) the level of consumer acceptance of new and existing products, (iii) general economic and industry conditions that affect consumer spending and retail purchasing, (iv) the timing of the placement, cancellation or pickup of customer orders, (v) increases in the number of employees and overhead to support growth, (vi) the timing of expenditures in anticipation of increased sales and customer delivery requirements, (vii) the number and timing of our new retail store openings and (viii) actions by competitors. Because of these and other factors including those referenced or incorporated by reference in our annual report on Form 10-K for the year ended December 31, 2019 under the captions “Item 1A: Risk Factors” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the operating results for any particular quarter are not necessarily indicative of the results for the full year.
INFLATION
We do not believe that the rates of inflation experienced in the United States over the last three years have had a significant effect on our sales or profitability. However, we cannot accurately predict the effect of inflation on future operating results. Although higher rates of inflation have been experienced in a number of foreign countries in which our products are manufactured, we do not believe that inflation has had a material effect on our sales or profitability. While we have been able to offset our foreign product cost increases by increasing prices or changing suppliers in the past, we cannot assure you that we will be able to continue to make such increases or changes in the future.
EXCHANGE RATES
Although we currently invoice many of our customers in U.S. dollars, changes in the value of the U.S. dollar versus the local currency in which our products are sold, along with economic and political conditions of such foreign countries, could adversely affect our business, financial condition and results of operations. Purchase prices for our products may be impacted by fluctuations in the exchange rate between the U.S. dollar and the local currencies of the contract manufacturers, which may have the effect of increasing our cost of goods in the future. In addition, the weakening of an international customer’s local currency and banking market may negatively impact such customer’s ability to meet their payment obligations to us. We regularly monitor the creditworthiness of our international customers and make credit decisions based on both prior sales experience with such customers and their current financial performance, as well as overall economic conditions. While we currently believe that our international customers have the ability to meet all of their obligations to us, there can be no assurance that they will continue to be able to meet such obligations. During 2019 and the first nine months of 2020, exchange rate fluctuations did not have a material impact on our sales or inventory costs. We do not engage in hedging activities with respect to such exchange rate risk.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arisingThere have been no material changes from the adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates. Changes in interest rates and changes in foreign currency exchange rates have and will have an impactinformation previously reported under Part II, Item 7A of our Annual Report on our results of operations.
Interest rate fluctuations. As of September 30, 2020, we have $128.4 million and $683.6 million of outstanding short-term and long-term borrowings, respectively, subject to changes in interest rates. A 200 basis point increase in interest rates would have increased interest expense by approximately$3.4 millionForm 10-K for the quarterfiscal year ended September 30,December 31, 2020. We do not expect any changes in interest rates to have a material impact on our financial condition or results of operations or cash flows during the remainder of 2020. The interest rate charged on our unsecured revolving credit facility is based on LIBOR, our domestic distribution center loan is based on the one month LIBOR, and our China DC Loan and China DC Revolving Loan are based on variable-rates provided by the People’s Bank of China. Changes in these interest rates will have an effect on the interest charged on outstanding balances.
We may enter into derivative financial instruments such as interest rate swaps in order to limit our interest rate risk on our long-term debt. We will not enter into derivative transactions for speculative purposes. We had one derivative instrument in place as of September 30, 2020 to hedge the cash flows on our $129.5 million variable rate debt on our domestic distribution center. This instrument was a variable to fixed derivative with a notional amount of $129.5 million at September 30, 2020. Our average receive rate was one month LIBOR and the average pay rate was 0.795%. The rate swap agreement utilized by us effectively modifies our exposure to interest rate risk by converting our floating-rate debt to a fixed rate basis over the life of the loan, thus reducing the impact of interest-rate changes on future interest payments.
Foreign exchange rate fluctuations. We face market risk to the extent that changes in foreign currency exchange rates affect our non-U.S. dollar functional currency foreign subsidiaries’ revenues, expenses, assets and liabilities. In addition, changes in foreign exchange rates may affect the value of our inventory commitments. Also, inventory purchases of our products may be impacted by fluctuations in the exchange rates between the U.S. dollar and the local currencies of the contract manufacturers, which could have the effect of increasing the cost of goods sold in the future. We manage these risks by primarily denominating these purchases and commitments in U.S. dollars. We do not engage in hedging activities with respect to such exchange rate risks.
Assets and liabilities outside the United States are located in regions where we have subsidiaries or joint ventures: Asia, Central America, Europe, Middle East, North America, and South America. Our investments in foreign subsidiaries and joint ventures with a functional currency other than the U.S. dollar are generally considered long-term. Accordingly, we do not hedge these net investments. The fluctuation of foreign currencies resulted in a cumulative foreign currency translation loss of $10.6 million and a cumulative foreign currency translation loss of $65.9 million for the nine months ended September 30, 2020 and 2019, respectively, that are deferred and recorded as a component of accumulated other comprehensive income in stockholders’ equity. A 200 basis point reduction in each of these exchange rates at September 30, 2020 would have reduced the values of our net investments by approximately $59.8 million.
ITEM 4. CONTROLS AND PROCEDURES
Attached as exhibits toDISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly reportQuarterly Report on Form 10-Q, are certificationswe performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the design and effectiveness of our disclosure controls and procedures, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This Controls and Procedures section includes information concerning the controls and controls evaluation referred to in the certifications.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We have established “disclosure controls and procedures” that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods and that such information is accumulated and communicated to the officers who certify our financial reports as well as other members of senior management to allow timely decisions regarding required disclosures. As of the end of the period covered by this quarterly report on Form 10-Q, we evaluated under the supervision and with the participation of our management, including our CEO and CFO, the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures arewere effective atin the reasonable assurance level, astimely and accurate recording, processing, summarizing and reporting of such time.material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our CEO and CFO also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting during the three months ended September 30, 2020March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements attributable to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Assessments of any evaluation of controls’ effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements as a result of error or fraud may occur and not be detected.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Converse, Inc. v. Skechers U.S.A., Inc. – On October 14, 2014, Converse filed an action against our company in the United States District Court for the Eastern District of New York, Brooklyn Division, Case 1:14-cv-05977-DLI-MDG, alleging trademark infringement, false designation of origin, unfair competition, trademark dilution and deceptive practices arising out of our alleged use of certain design elements on footwear. The complaint seeks, among other things, injunctive relief, profits, actual damages, enhanced damages, punitive damages, costs and attorneys’ fees. On October 14, 2014, Converse also filed a complaint naming 27 respondents including our company with the U.S. International Trade Commission (the “ITC” or “Commission”), Federal Register Doc. 2014‑24890, alleging violations of federal law in the importation into and the sale within the United States of certain footwear. Converse has requested that the Commission issue a general exclusion order, or in the alternative a limited exclusion order, and cease and desist orders. On December 8, 2014, the District Court stayed the proceedings before it. On December 19, 2014, Skechers responded to the ITC complaint, denying theThere have been no material allegations and asserting affirmative defenses. A trial before an administrative law judge of the ITC was held in August 2015. On November 15, 2015, the ITC judge issued his Initial Determination finding that certain discontinued products (Daddy’$ Money and HyDee HyTops) infringed on Converse’s intellectual property, but that other, still active product lines (Twinkle Toes and Bobs Utopia) did not. On February 3, 2016, the ITC decided that it would review in part certain matters that were decided by the ITC judge. On June 28, 2016, the full ITC issued its Final Determination affirming that Skechers Twinkle Toes and Bobs Utopia shoes do not infringe Converse’s Chuck Taylor Midsole Trademark and affirming that Converse’s common law trademark was invalid. The full ITC also invalidated Converse’s registered trademark. Converse appealed this decision to the United States Court of Appeals for the Federal Circuit. On January 27, 2017, Converse filed its appellate brief but did not contest the portion of the decision that held that Skechers Twinkle Toes and Bobs Utopia shoes do not infringe. On June 26, 2017 we filed our responsive brief, on February 8, 2018 the court heard oral argument, and on June 7, 2018 the Court requested supplemental briefing on certain issues. On October 30, 2018, the United States Court of Appeals for the Federal Circuit vacated portions of the ITC’s ruling and remanded the matter back to the ITC for further proceedings. Although Converse did not appeal the Commission’s non-infringement findings for Skechers Twinkle Toes and Bobs Utopia shoes to the Federal Circuit, Converse asked the Commission to reconsider its previous non-infringement findings on remand. On October 9, 2019, the ITC judge issued his Remand Initial Determination (the “RID”) finding that Converse did not have any rights in the subject intellectual property as to Skechers, and that Skechers Twinkle Toes, Bobs Utopia, and Hydee Hytop did not infringe Converse’s intellectual property but the discontinued Daddy’$ Money would infringe, but only if Converse had rights in the subject intellectual property as to Skechers (which the ITC judge found that Converse did not). On October 22, 2019, the parties filed petitions seeking review of the RID. Converse did not, however, seek review of the finding in the RID that Skechers Twinkle Toes and Bobs Utopia do not infringe. On February 7, 2020, the full Commission decided to review the RID and outlined the issues it wanted briefed. The parties subsequently filed briefs on those issues and, on September 9, 2020, the full Commission issued its decision. In that decision, the Commission found that, although Converse had demonstrated enforceable rights in its Chuck Taylor Midsole Trademark, it had not proven that the Skechers Twinkle Toes, Bobs Utopia or Hydee Hytops infringe those rights, or otherwise established a violation of the applicable federal statutes by Skechers. While it is too early to predict the outcome of these legal proceedings or whether an adverse result in either or both of them would have a material adverse impact on our operations or financial position, we believe we have meritorious defenses and intend to defend these legal matters vigorously.
Nike, Inc. v. Skechers USA, Inc. – On January 4, 2016, Nike filed an action against our company in the United States District Court for the District of Oregon, Case No. 3:16-cv-0007, alleging that certain Skechers shoe designs (Men’s Burst, Women’s Burst, Women’s Flex Appeal, Men’s Flex Advantage, Girls’ Skech Appeal, and Boys’ Flex Advantage) infringe the claims of eight design patents. Nike seeks injunctive relief, disgorgement of Skechers’ profits, damages (including treble damages), pre-judgment and post-judgment interest, attorneys’ fees, and costs. In April and May 2016, we filed petitions with the United States Patent and Trademark Office’s Patent Trial and Appeal Board (the “PTAB”) for inter partes review of all eight design patents, seeking to invalidate those patents. In September and November 2016, the PTAB denied each of our petitions. On January 6, 2017, we filed several additional petitions for inter partes review with the PTAB, seeking to invalidate seven of the eight designs patents that Nike is asserting. In July 2017, we were notified that the PTAB granted our petitions and instituted inter partes review proceedingsdevelopments with respect to twothe information previously reported under Part I, Item 3 of the seven design patents but denied our petitions as to the others. In June 2017, we filed a motion to transfer venue from the District of Oregon to the Central District of California basedAnnual Report on a recent United States Supreme Court decision and the motion was granted on November 17, 2017. On June 28, 2018, the PTAB issued final decisions in the two inter partes review proceedings, rejecting the invalidity challenges made by our company in those proceedings. On June 4, 2018, the Court, over Nike’s opposition, granted our request for a claim construction hearing. On March 28, 2019, the Court issued an order declining to issue a claim construction at this stage of the proceedings, but it did not foreclose the issue, instead observing that it might be appropriate to address claim construction at a later stage. The parties have now completed discovery and have filed summary judgement motions. Nike has also withdrawn its claim for treble or enhanced damages. The summary judgment motions were heard on February 18, 2020, and on October 27, 2020, the Court issued its ruling. The Court granted Skechers’ motion for summary judgment of non-infringement as to three of the eight design patents at issue. The Court, however, concluded that whether Skechers had infringed any of the five remaining design patents presented issues for jury to resolve. The Court also denied Nike’s motion for summary judgment of validity as to the five remaining design patents, holding that Skechers’ invalidity challenges had to be resolved by the jury. While it is too early to predict the outcome of the case or whether an adverse result would have a material adverse impact on our operations or financial position, we believe we have meritorious defenses and intend to defend this legal matter vigorously.
Nike, Inc. v. Skechers USA, Inc. – On September 30, 2019, Nike filed an action against our company in the United States District CourtForm 10-K for the Central District of California, Case No. 2:19-cv-08418, alleging that certain Skechers’ shoe designs (Skech-Air Atlas, Skech-Air 92, Skech-Air Stratus and Skech-Air Blast) infringe the claims of twelve design patents. Nike seeks injunctive relief, disgorgement of Skechers’ profits, damages (including treble damages), pre-judgment and post-judgment interest, attorneys’ fees, and costs. Skechers has filed its answer and the case is in the early stages. While it is too early to predict the outcome of the case or whether an adverse result would have a material adverse impact on our operations or financial position, we believe we have meritorious defenses and intend to defend this legal matter vigorously.
Nike, Inc. v. Skechers USA, Inc. – On October 28, 2019, Nike filed an action against our company in the United States District Court for the Central District of California, Case No. 2:19-cv-09230, alleging that certain Skechers’ shoe designs (Skech-Air Jumpin’ Dots and Skech-Air Mega) infringe the claims of two utility patents. Nike seeks injunctive relief, disgorgement of Skechers’ profits, damages (including treble damages), pre-judgment and post-judgment interest, attorneys’ fees, and costs. Skechers has answered the complaint and the case is in the early stages. While it is too early to predict the outcome of the case or whether an adverse result would have a material adverse impact on our operations or financial position, we believe we have meritorious defenses and intend to defend this legal matter vigorously.
Steamfitters Local 449 Pension Plan v. Skechers USA, Inc., Robert Greenberg and David Weinberg. – On October 20, 2017, the Steamfitters Local 449 Pension Plan filed a securities class action, on behalf of itself and purportedly on behalf of other shareholders who purchased Skechers stock in a five-month period in 2015, against our company and certain of its officers in the United States District Court for the Southern District of New York, case number 1:17-cv-08107. On April 4, 2018, the plaintiffs filed an amended and consolidated complaint and on July 24, 2018 plaintiffs filed a second amended and consolidated complaint. The lawsuit alleges that, between April 23 and October 22, 2015, we made materially false statements or omissions of material fact about the anticipated performance of our Domestic Wholesale segment and asserts claims for unspecified damages, attorneys’ fees and equitable relief based on two counts for alleged violations of federal securities laws. On November 21, 2018, we filed a motion to dismiss the complaint and, on September 23, 2019, the court granted our motion without leave to amend. On October 22, 2019, the plaintiffs appealed to the United States Court of Appeals for the Second Circuit, and, on October 20, 2020, that court affirmed the lower court’s order dismissing the case without leave to amend.
Police & Fire Ret. Sys. of the City of Detroit, et al. v. Greenberg, et al. –On July 26, 2019, our company and most of the Board of Directors were sued by several shareholders on behalf of our company in a derivative action in the Court of Chancery of the State of Delaware, Case No. 2019-0578. The complaint alleges breach of fiduciary duty and waste of corporate assets in connection with the grant of compensation to certain officers, and seeks disgorgement of the challenged compensation, compensatory damages to our company, unspecified equitable relief, and attorneys’ fees and costs. The parties have reached a stipulated settlement, which was subject to Court approval, and the Court entered judgment on the stipulated settlement on August 12, 2020. The settlement involved cancellation of the 2019 and 2020 equity awards to certain executives and certain corporate governance undertakings on behalf of the parties. The judgment became Final Court Approval on September 11, 2020, when the time to file a notice of appeal expired without any party filing such notice. As a result, we cancelled the 2019 and 2020 equity awards to certain executives and recognized a non-cash compensation charge of $18.2 million during the quarterfiscal year ended September 30,December 31, 2020.
Kathleen Houseman v. Robert Greenberg, et al.– On November 27, 2018, our company, the Board of Directors and CFO John Vandemore were sued by a shareholder on behalf of our company in a derivative action in the United States District Court for the District of Delaware, Case No 1:18-cv-01878. The complaint is based largely on the same underlying factual allegations as In Re Skechers Securities Litigation. By mutual agreement of the parties this case has been stayed pending the outcome of In Re Skechers Securities Litigation which has now been dismissed with prejudice on defendants’ motion. On June 2, 2020, plaintiff filed a voluntary notice of dismissal in this matter. This matter has now been dismissed.
Ealeen Wilk v. Skechers U.S.A., Inc. – On September 10, 2018, Ealeen Wilk filed a putative class action lawsuit against our company in the United States District Court for the Central District of California, Case No. 5:18-cv-01921, alleging violations of the California Labor Code, including unpaid overtime, unpaid wages due upon termination and unfair business practices. The complaint seeks actual, compensatory, special and general damages; penalties and liquidated damages; restitutionary and injunctive relief; attorneys’ fees and costs; and interest as permitted by law. On July 5, 2019, the court granted, in part, plaintiff’s motion for conditional certification of a Fair Labor Standards Act (FLSA) collective action. On July 22, 2019, the parties submitted to the court an agreed upon notice to be sent to members of the collective. The parties are delaying the mailing of the Belaire-West privacy opt out notice until after mediation. The parties have agreed to an informal stay of discovery and have stipulated to continue all relevant discovery and motion deadlines accordingly. The parties reached a settlement in principle as a result of a January 27, 2020 mediation but the details of the settlement still need to be worked out and the settlement has to be documented. In the event the settlement is not concluded successfully, it is too early to predict the outcome of the litigation or a reasonable range of potential losses and whether an adverse result would have a material adverse impact on our results of operations or financial position, we believe that we have meritorious defenses, vehemently deny the allegations, and intend to defend the case vigorously.
In addition to the matters included in our reserve for loss contingencies, we occasionally become involved in litigation arising from the normal course of business, and we are unable to determine the extent of any liability that may arise from any such unanticipated future litigation. We have no reason to believe that there is a reasonable possibility or a probability that we may incur a material loss, or a material loss in excess of a recorded accrual, with respect to any other such loss contingencies. However, the outcome of litigation is inherently uncertain and assessments and decisions on defense and settlement can change significantly in a short period of time. Therefore, although we consider the likelihood of such an outcome to be remote with respect to those matters for which we have not reserved an amount for loss contingencies, if one or more of these legal matters were resolved against our company in the same reporting period for amounts in excess of our expectations, our consolidated financial statements of a particular reporting period could be materially adversely affected.
ITEM 1A. RISK FACTORS
TheThere have been no material developments with respect to the information presented below updates the risk factors disclosed inpreviously reported under Part I, Item 3 of our annual reportAnnual Report on Form 10-K for the fiscal year ended December 31, 2019 and should be read in conjunction with the risk factors and other information disclosed in our 2019 annual report on Form 10‑K that could have a material effect on our business, financial condition and results of operations.2020.
The COVID-19 Pandemic Has Had, And Is Expected To Continue To Have, A Material Adverse Effect On Our Business And Results Of Operations.
Impact on Global Economy and on Our Business and Financial Performance
The COVID-19 pandemic has negatively impacted the global economy, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets. The COVID-19 pandemic has had, and we expect it to continue to have, a material adverse impact on our business and financial performance. The extent of this impact on our business and financial performance, including our ability to execute our near-term and long-term business strategies and initiatives in the expected time frame, is highly uncertain and cannot be predicted, as information is rapidly evolving with respect to the duration and severity of the pandemic. It will depend on future developments, including the duration and severity of the pandemic, related restrictions on travel, temporary store closure requirements and the related impact on consumer confidence and spending, and the extent of any recession resulting from the pandemic. At this time, we cannot reasonably estimate the duration and severity of the COVID-19 pandemic, or its overall impact on our business and financial performance.
Closures and Operational Restrictions of Our Retail Stores and Our Wholesale Customers’ Stores
As a result of the COVID-19 pandemic, and in response to government mandates or recommendations, as well as decisions we have made to protect the health and safety of our employees, consumers and communities, beginning in March 2020, we (including our joint ventures), and our distributors, licensees and franchisees, temporarily closed a significant number of our company- and joint venture-owned retail stores, and our distributor-, licensee- and franchisee-owned retail stores, respectively, around the world. While over 90% of our company- and joint venture-owned retail stores and over 90% of our third party-owned retail stores around the world have reopened (although many with temporarily reduced operating hours) as of the filing date of this report, collectively, we may face recurring store closure requirements and other operational restrictions with respect to some or all of our physical locations for prolonged periods of time due to, among other factors, evolving or new increasingly stringent governmental restrictions including public health directives, quarantine policies or social distancing measures. In addition, many of our significant wholesale customers have closed many of their stores, which will adversely impact our revenues from these customers. As a result, our business and results of operations have been, and will continue to be, materially adversely impacted by store closures and operational restrictions.
Even as we and our wholesales customers reopen our stores, as the number of people affected by the COVID-19 pandemic continues to grow, consumer fear about becoming ill with the disease and recommendations and/or mandates from federal, state and local authorities to avoid large gatherings of people or self-quarantine may continue to increase, which has, and will continue to, adversely affect traffic to stores. Any significant reduction in consumer visits to, or spending at, our wholesale customers’ stores and our retail stores, caused by the COVID-19 pandemic, and any decreased spending at stores caused by decreased consumer confidence and spending during and following this pandemic, has resulted in, and will continue to result in, a loss of sales and profits and other material adverse effects on our business and results of operations.
Disruptions or Delays in Our Supply Chain
Although not a material issue as of the filing date of this report, the COVID-19 pandemic has also caused delays in shipments of our products and could once again have the potential to significantly impact our supply chain if the factories that manufacture our products, the distribution centers where we manage our inventory, or the operations of our logistics and other service providers are disrupted, temporarily closed or experience worker shortages. More specifically, the majority of our manufacturers are located primarily in China and Vietnam. To date, the Chinese and Vietnamese governments have imposed certain restrictions on business operations and the movement of people and goods, including the temporary closure of some factories and businesses in China and restrictions on others in Vietnam, to limit the spread of COVID-19. As a result, we have seen and may yet again see disruptions or delays in shipments, and we may experience negative impacts to pricing of our products due to changes in availability of inventory, which could materially adversely impact our business and results of operations.
Office Closures, Focus of Key Personnel and Productivity of Employees
As a result of the COVID-19 pandemic, including related governmental guidance or requirements, beginning in March 2020, we also temporarily closed many of our corporate offices and other facilities, including our corporate headquarters in Manhattan Beach, California, and implemented a policy for many of our corporate employees to work remotely. While we began to allow a limited number of personnel back to our corporate offices with added safety measures and staggered work schedules in June, these evolving work place arrangements may negatively impact productivity and cause other disruptions to our business.
In addition, our management team is focused on mitigating the adverse effects of the COVID-19 pandemic, which has required and will continue to require a large investment of time and resources across the entire company, thereby diverting their attention from other priorities that existed prior to the outbreak of the pandemic. If these conditions worsen, or last for an extended period of time, our ability to manage our business may be impaired, and operational risks and other risks facing us even prior to the COVID-19 pandemic may be elevated.
The COVID-19 Pandemic Has Had A Negative Impact On The Global Economy, And Our Sales Are Influenced By Economic Conditions That Impact Consumer Spending And Consumer Confidence.
Footwear is a cyclical industry that is dependent upon the overall level of consumer spending and consumer confidence. Consumer purchases of discretionary items, including our products, generally decline during periods when disposable income is adversely affected, there is economic uncertainty or volatility or during recessionary periods. Our wholesale customers anticipate and respond to adverse changes in economic conditions and uncertainty by closing doors, reducing inventories, canceling orders or increasing promotional activity. Our retail stores are also affected by these conditions, which may lead to a decline in consumer traffic and spending in these stores as they reopen. As a result, factors that diminish consumer spending and confidence in any of the markets in which we compete, particularly deterioration in general economic conditions, consumer credit availability, consumer debt levels, inflation, the impact of foreign exchange fluctuations on tourism and tourist spending, volatility in investment returns, fear of unemployment, increases in energy costs or tax or interest rates, housing market downturns, fear about and impact of pandemic illness (such as the impact of the COVID-19 pandemic, including reduced store traffic and widespread temporary store closures), and other factors such as acts of war, natural disasters or terrorist or political events that impact consumer confidence, have reduced, and may continue to reduce (with respect to the COVID-19 pandemic), our sales and may continue to have a material adverse effect on our operations and financial condition through their negative impact on our wholesale customers as well as decreased spending in our retail stores and potentially via our e-commerce business.
We Depend Upon A Relatively Small Group Of Customers For A Large Portion Of Our Sales.
During the nine months ended September 30, 2020 and 2019, our net sales to our five largest customers accounted for approximately 8.9% and 9.7% of total net sales, respectively. No one customer accounted for more than 10.0% of outstanding accounts receivable balance at September 30, 2020 or December 31, 2019. Although we have long-term relationships with many of our customers, our customers do not have a contractual obligation to purchase our products and we cannot be certain that we will be able to retain our existing major customers. Store closures or re-closures, decreased foot traffic and economic recession resulting from the COVID-19 pandemic has, and will likely continue to, adversely affect our performance and could continue to adversely affect the financial condition of many of our customers. If any major existing customer ceases or decreases its purchases from us, cancels its orders, delays or defaults on its payment obligations to us, reduces the floor space, assortments, fixtures or advertising for our products or changes its manner of doing business with us for any reason, such as due to store closures, decreased foot traffic or recession resulting from the COVID-19 pandemic, such actions may adversely affect our business and financial condition. Furthermore, the retail industry regularly experiences consolidation, contractions and closings, which may result in our loss of customers or our inability to collect accounts receivable of major customers, and we have recently experienced delays in payments from some of our customers and others have gone bankrupt. If we lose a major customer, experience a significant decrease in sales to a major customer or are unable to collect the accounts receivable of a major customer due to any of the foregoing reasons, our business and financial condition could be harmed.
We Rely On Independent Contract Manufacturers And, As A Result, Are Exposed To Potential Disruptions In Product Supply.
Our footwear products are currently manufactured by independent contract manufacturers. During the nine months ended September 30, 2020 and 2019, the top five manufacturers of our manufactured products produced approximately 42.2% and 41.1% of our total purchases, respectively. One manufacturer accounted for 20.6% of total purchases for the nine months ended September 30, 2020 and the same manufacturer accounted for 15.8% of total purchases for the same period in 2019.
We compete with other footwear companies for production facilities, and we do not have long-term contracts with any of our contract manufacturers. Under our current arrangements with them, these manufacturers generally may unilaterally terminate their relationship with us at any time. If our current manufacturers cease doing business with us, we could experience an interruption in the manufacture of our products. Although we believe that we could find alternative manufacturers, we may be unable to establish relationships with alternative manufacturers that will be as favorable as the relationships we have now. For example, new manufacturers may have higher prices, less favorable payment terms, lower manufacturing capacity, lower quality standards or higher lead times for delivery. If we are unable to provide products consistent with our standards or the manufacture of our footwear is delayed or becomes more expensive, our business and financial condition would be harmed.
While not a material issue as of the filing date of this report, the COVID-19 pandemic previously led to the Chinese and Vietnamese governments imposing temporary closures of some of our factories in China and restrictions on others in Vietnam that caused delays in shipment of our products. We may encounter similar challenges yet again with these manufacturers, or new difficulties could arise with our manufacturers or any raw material suppliers on which our manufacturers rely, including prolonged manufacturing or transportation disruptions due to public health conditions, such as the recent COVID-19 pandemic, reductions in the availability of production capacity due to government imposed restrictions, failure to meet our quality control standards, failure to meet production deadlines or increased manufacturing costs. This could result in our customers canceling orders, refusing to accept deliveries or demanding reductions in purchase prices, any of which could have a negative impact on our cash flow and harm our business and results of operations.
We Have Debt And Interest Payment Requirements At Levels That May Restrict Our Future Operations.
As of September 30, 2020, we had $812.0 million of debt and $250.0 million of additional borrowings available under our unsecured revolving credit facility. In March 2020, as a precautionary measure to maximize liquidity and to increase available cash on hand, we borrowed $490.0 million on our unsecured revolving credit facility. Our debt requires us to dedicate cash flow from operations to the payment of interest and principal due under our debt, which reduces funds available for other business purposes and results in us having lower net income than we would otherwise have had. This dedicated use of cash could impact our ability to successfully compete by, for example:
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In addition, a substantial portion of our short and long-term borrowings are made at variable rates that use LIBOR as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals for reform. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established or the establishment of an alternative reference rate(s). Changes in market interest rates may influence our financing costs and the valuation of derivative contracts and could reduce our cash flows and restrict our future operations.
One Principal Stockholder Is Able To Substantially Control All Matters Requiring Approval By Our Stockholders And Another Stockholder Is Able To Exert Significant Influence Over All Matters Requiring A Vote Of Our Stockholders, And Their Interests May Differ From The Interests Of Our Other Stockholders.
As of September 30, 2020, our Chairman of the Board and Chief Executive Officer, Robert Greenberg, beneficially owned 85.4% of our outstanding Class B common shares, members of Mr. Greenberg’s immediate family beneficially owned an additional 9.0% of our outstanding Class B common shares, and Gil Schwartzberg, trustee of several trusts formed by Mr. Greenberg and his wife for estate planning purposes, beneficially owned 29.0% of our outstanding Class B common shares. The holders of Class A common shares and Class B common shares have identical rights except that holders of Class A common shares are entitled to one vote per share while holders of Class B common shares are entitled to ten votes per share on all matters submitted to a vote of our stockholders. As a result, as of September 30, 2020, Mr. Greenberg beneficially owned 37.8% of the aggregate number of votes eligible to be cast by our stockholders, and together with shares beneficially owned by other members of his immediate family, Mr. Greenberg and his immediate family beneficially owned 44.3% of the aggregate number of votes eligible to be cast by our stockholders, and Mr. Schwartzberg beneficially owned 17.8% of the aggregate number of votes eligible to be cast by our stockholders. Therefore, Messrs. Greenberg and Schwartzberg are each able to exert significant influence over, all matters requiring approval by our stockholders. Matters that require the approval of our stockholders include the election of directors and the approval
of mergers or other business combination transactions. Mr. Greenberg also has significant influence over our management and operations. As a result of such influence, certain transactions are not likely without the approval of Messrs. Greenberg and Schwartzberg, including proxy contests, tender offers, open market purchase programs or other transactions that can give our stockholders the opportunity to realize a premium over the then-prevailing market prices for their shares of our Class A common shares. Because Messrs. Greenberg’s and Schwartzberg’s interests may differ from the interests of the other stockholders, their ability to substantially control or significantly influence, respectively, actions requiring stockholder approval, may result in our company taking action that is not in the interests of all stockholders. The differential in the voting rights may also adversely affect the value of our Class A common shares to the extent that investors or any potential future purchaser view the superior voting rights of our Class B common shares to have value.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Recent Sales of Unregistered Securities: None.
(b) Use of Proceeds from Registered Securities: None.
(c) Issuer Purchases of Equity Securities: None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit Number |
| Description |
10.1 | ||
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31.1 |
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31.2 |
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32.1* |
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101 |
| Financial statements from the quarterly report on Form 10-Q of Skechers U.S.A., Inc. for the quarter ended |
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104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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* | In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | SKECHERS U.S.A., INC. | |
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| By: | /s/ John Vandemore |
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| John Vandemore |
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| Chief Financial Officer |
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