Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017March 31, 2018
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            

Commission File No. 000-51754

CROCS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
20-2164234
(I.R.S. Employer
Identification No.)
7477 East Dry Creek Parkway, Niwot, Colorado 80503
(Address, including zip code, of registrant’s principal executive offices)

(303) 848-7000
(Registrant’s telephone number, including area code)


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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   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. (Check one):
Large accelerated filer ýo
Accelerated filer oý
Non-accelerated filer o
 (do not check if a
smaller reporting company)
Smaller reporting company o
Emerging growth company o

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 x

As of July 31, 2017,April 30, 2018, Crocs, Inc. had 71,761,50968,279,522 shares of its $0.001 par value common stock outstanding.
 


Cautionary Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"“Exchange Act”). From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.

Statements that refer to industry trends, projections of our future financial performance, anticipated trends in our business and other characterizations of future events or circumstances are forward-looking statements. These statements, which express management’s current views concerning future events or results, use words like “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “future,” “intend,” “plan,” “project,” “strive,” and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will,” “would,” and similar expressions or variations. Examples of forward-looking statements include, but are not limited to, statements we make regarding:

our expectations regarding future trends, expectations and performance of our business;
our belief that we have sufficient liquidity to fund our business operations during the next twelve months; and
our expectations about the impact of our strategic plans; and
our expectations regarding our level of capital expenditures in 2017.plans

Forward-looking statements are subject to risks, uncertainties and other factors, which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, those described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 20162017, and our subsequent filings with the Securities and Exchange Commission. Caution should be taken not to place undue reliance on any such forward-looking statements. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
 


i

Table of Contents

Crocs, Inc.
Table of Contents to the Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2017March 31, 2018
 
PART I — Financial Information 
   
 
 
 
 
 
   
   
 
 


ii

Table of Contents

PART I — Financial Information
 
ITEM 1. Financial Statements
 
CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share data)
 
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended
March 31,
2017
2016 2017 20162018
2017
Revenues$313,221
 $323,828
 $581,128
 $602,968
$283,148
 $267,907
Cost of sales143,414
 154,188
 277,737
 303,962
143,275
 134,323
Gross profit169,807
 169,640
 303,391
 299,006
139,873
 133,584
Selling, general and administrative expenses140,361
 149,035
 258,363
 264,158
113,951
 118,002
Income from operations29,446
 20,605
 45,028
 34,848
25,922
 15,582
Foreign currency gain (loss), net162
 (1,700) 438
 (2,947)
Foreign currency gains, net1,071
 276
Interest income157
 164
 307
 380
279
 150
Interest expense(188) (234) (372) (477)(113) (184)
Other income (loss)9
 (189) 133
 (107)
Other income, net53
 124
Income before income taxes29,586
 18,646
 45,534
 31,697
27,212
 15,948
Income tax expense7,627
 3,109
 12,564
 6,014
10,758
 4,938
Net income21,959
 15,537
 32,970
 25,683
16,454
 11,010
Dividends on Series A convertible preferred stock(3,000) (3,000) (6,000) (6,000)(3,000) (3,000)
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature(873) (802) (1,729) (1,587)(931) (855)
Net income attributable to common stockholders$18,086
 $11,735
 $25,241
 $18,096
$12,523
 $7,155
Net income per common share: 
  
       
Basic$0.21
 $0.13
 $0.29
 $0.21
$0.15
 $0.08
Diluted$0.20
 $0.13
 $0.29
 $0.20
$0.15
 $0.08
       
Weighted average common shares outstanding - basic73,953
 73,389
 73,882
 73,238
Weighted average common shares outstanding - diluted74,572
 74,243
 74,625
 74,389
Weighted average common shares outstanding:   
Basic68,705
 73,810
Diluted71,668
 74,561
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)
  
Three Months Ended June 30, Six Months Ended June 30,
Three Months Ended
March 31,
2017 2016 2017 20162018 2017
Net income$21,959
 $15,537
 $32,970
 $25,683
$16,454
 $11,010
Other comprehensive income: 
  
     
  
Foreign currency translation gain, net2,951
 1,871
 7,465
 6,671
2,229
 4,514
Total comprehensive income$24,910
 $17,408
 $40,435
 $32,354
$18,683
 $15,524

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except per value)share and par value amounts)
June 30,
2017
 December 31,
2016
March 31,
2018
 December 31,
2017
ASSETS 
  
 
  
Current assets: 
  
 
�� 
Cash and cash equivalents$156,962
 $147,565
$101,953
 $172,128
Accounts receivable, net of allowances of $50,700 and $48,138, respectively135,893
 78,297
Accounts receivable, net of allowances of $30,380 and $31,389, respectively169,954
 83,518
Inventories155,749
 147,029
148,187
 130,347
Income tax receivable5,830
 2,995
Income taxes receivable7,781
 3,652
Other receivables14,219
 14,642
11,554
 10,664
Restricted cash - current2,461
 2,534
2,359
 2,144
Prepaid expenses and other assets25,052
 32,413
21,981
 22,596
Total current assets496,166
 425,475
463,769
 425,049
Property and equipment, net of accumulated depreciation and amortization of $93,929, and $88,603, respectively41,018
 44,090
Property and equipment, net of accumulated depreciation and amortization of $90,554 and $91,806, respectively30,746
 35,032
Intangible assets, net68,411
 72,700
53,023
 56,427
Goodwill1,615
 1,480
1,734
 1,688
Deferred tax assets, net7,079
 6,825
10,097
 10,174
Restricted cash2,856
 2,547
2,513
 2,783
Other assets13,449
 13,273
11,001
 12,542
Total assets$630,594
 $566,390
$572,883
 $543,695
      
LIABILITIES AND STOCKHOLDERS’ EQUITY 
  
 
  
Current liabilities: 
  
 
  
Accounts payable$82,980
 $61,927
$87,751
 $66,381
Accrued expenses and other liabilities84,900
 78,282
85,448
 84,446
Income taxes payable14,978
 6,593
15,142
 5,515
Current portion of borrowings and capital lease obligations1,722
 2,338
281
 676
Total current liabilities184,580
 149,140
188,622
 157,018
Long-term income tax payable4,865
 4,464
Long-term capital lease obligations40
 40
Long-term income taxes payable6,195
 6,081
Other liabilities13,766
 13,462
11,218
 12,298
Total liabilities203,251
 167,106
206,035
 175,397
Commitments and contingencies

 

Series A convertible preferred stock, 1.0 million authorized, 0.2 million shares outstanding, liquidation preference $203 million180,629
 178,901
Commitments and contingencies:

 

Series A convertible preferred stock, 1.0 million shares authorized, 0.2 million outstanding, liquidation preference $203 million183,364
 182,433
Stockholders’ equity: 
  
 
  
Preferred stock, par value $0.001 per share, 4.0 million shares authorized, none outstanding
 

 
Common stock, par value $0.001 per share, 94.7 million and 93.9 million issued, 73.0 million and 73.6 million shares outstanding, respectively95
 94
Treasury stock, at cost, 21.7 million and 20.3 million shares, respectively(294,252) (284,237)
Common stock, par value $0.001 per share, 250 million shares authorized, 95.7 million and 94.8 million issued, 68.3 million and 68.8 million outstanding, respectively96
 95
Treasury stock, at cost, 27.4 million and 26.0 million shares, respectively(355,209) (334,312)
Additional paid-in capital368,036
 364,397
376,808
 373,045
Retained earnings220,966
 195,725
202,954
 190,431
Accumulated other comprehensive loss(48,131) (55,596)(41,165) (43,394)
Total stockholders’ equity246,714
 220,383
183,484
 185,865
Total liabilities and stockholders’ equity$630,594
 $566,390
$572,883
 $543,695
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six Months Ended June 30,Three Months Ended
March 31,
2017 20162018 2017
Cash flows from operating activities: 
  
 
  
Net income$32,970
 $25,683
$16,454
 $11,010
Adjustments to reconcile net income to net cash provided by operating activities: 
  
Adjustments to reconcile net income to net cash used in operating activities: 
  
Depreciation and amortization16,815
 17,031
7,643
 8,446
Unrealized gains on foreign exchange, net(1,744) (4,884)
Unrealized foreign currency (gain) loss, net(787) 856
Share-based compensation3,945
 5,898
2,674
 2,611
Other non-cash items(2,872) 1,685
941
 (689)
Changes in operating assets and liabilities:   
   
Accounts receivable, net of allowances(53,086) (47,129)(86,850) (66,917)
Inventories(4,743) 2,148
(20,853) (28,591)
Prepaid expenses and other assets12,567
 (5,107)5,112
 9,618
Accounts payable, accrued expenses and other liabilities35,528
 24,493
29,065
 13,766
Cash provided by operating activities39,380
 19,818
Cash used in operating activities(46,601) (49,890)
Cash flows from investing activities: 
  
 
  
Cash paid for purchases of property and equipment(4,958) (10,280)
Purchases of property, equipment, and software(1,668) (5,410)
Proceeds from disposal of property and equipment1,506
 2,428
16
 12
Cash paid for intangible assets(7,273) (2,561)
Change in restricted cash30
 (845)
Cash used in investing activities(10,695) (11,258)(1,652) (5,398)
Cash flows from financing activities: 
  
 
  
Proceeds from bank borrowings5,500
 29,582

 5,500
Repayments of bank borrowings and capital lease obligations(7,565) (30,662)(400) (3,376)
Dividends—Series A preferred stock(6,000) (6,000)(3,000) (3,000)
Repurchases of common stock(10,000) 
(20,061) 
Other(240) (363)(692) (240)
Cash used in financing activities(18,305) (7,443)(24,153) (1,116)
Effect of exchange rate changes on cash(983) 2,204
Net change in cash and cash equivalents9,397
 3,321
Cash and cash equivalents—beginning of period147,565
 143,341
Cash and cash equivalents—end of period$156,962
 $146,662
Effect of exchange rate changes on cash, cash equivalents, and restricted cash2,176
 (1,389)
Net change in cash, cash equivalents, and restricted cash(70,230) (57,793)
Cash, cash equivalents, and restricted cash—beginning of period177,055
 152,646
Cash, cash equivalents, and restricted cash—end of period$106,825
 $94,853
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CROCS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
��
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unless otherwise noted in this report, any description of "we," "us"“the Company,” “Crocs,” “we,” “us,” or "our"“our” includes Crocs, Inc. ("Crocs" or the "Company,") and its wholly-ownedconsolidated subsidiaries within our reportable operating segments and corporate operations. The Company is engaged in the design, development, manufacturing, worldwide marketing, distribution, and distributionsale of casual lifestyle footwear and accessories for men, women, and children. We strive to be the global leader in the sale of molded footwear featuring fun,characterized by functionality, comfort, color, and functionality.lightweight design. Our reportable operating segments include: the Americas, operating in North and South America; Asia Pacific, operating throughout Asia, Australia, New Zealand, Africa, and the Middle East; and Europe, operating throughout Western Europe, Eastern Europe, and Russia.

The accompanying unaudited condensed consolidated interim financial statements include the Company’s accounts and those of its wholly-owned subsidiaries, and reflect all adjustments which are necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. ("U.S. GAAP"GAAP”). Such unaudited interim condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.U.S. GAAP.

These unaudited condensed consolidated interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 ("2017 (“Annual Report"Report”), and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes to the Audited Consolidated Financial Statements ("Notes") included in our Annual Report. Our accounting policies did not change induring the sixthree months ended June 30, 2017, exceptMarch 31, 2018, other than for the change in accounting principle described in “Inventories” below and the new accounting pronouncements adopted as described in Note 2 — Recent Accounting Pronouncements.

Seasonality of Business

Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warm weather, revenues generated during our fourth quarter are typically less than revenues generated during our first three quarters, when the northern hemisphere is experiencing warmer weather, the Company's business is typically affected by seasonal trends, with higher levels of wholesale sales in its first and second quarters and higher retail sales in its second and third quarters. In addition, ourweather. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new model introductions, general economic conditions, orand consumer confidence. Accordingly, the Company's operating results of operations and cash flows for the three and six months ended June 30, 2017any one quarter are not necessarily indicative of the operatingexpected results and cash flows for any other quarter or for the fullany other year.

Transactions with Affiliates

The Company receives services from three subsidiaries of Blackstone Capital Partners VI L.P. (“Blackstone”). Blackstone and certain of its permitted transferees currently beneficially own all the outstanding shares of the Company’s Series A Convertible Preferred Stock, which is convertible into approximately 15.9%13,793,100 shares, or 16.8%, of the Company’s common stock as of June 30, 2017. TwoMarch 31, 2018. Blackstone also has the right to nominate two representatives alsoto serve on the Company’s boardBoard of directors (the “Board”).Directors.

Certain Blackstone subsidiaries provide various services to the Company, including inventory count, cybersecurity and consulting, and workforce management services. The Company paid $0.4expenses of $0.1 million and $0.2 millionrelated to these services for each of the three months ended June 30,March 31, 2018 and 2017, and 2016, respectively, and $0.5 million and $0.4 million for the six months ended June 30, 2017 and 2016, respectively, for these services. Expenses related to these serviceswhich are reported in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of operations.

Research, DesignRestricted Cash

Restricted cash primarily consists of funds to secure certain retail store leases, certain customs requirements, and Developmentother contractual arrangements.


Inventories

Inventories are stated at the lower of cost or net realizable value. Effective January 1, 2018, the Company completed implementation of a new inventory costing system for approximately 95% of its inventories. In connection with the implementation, the Company changed its method of inventory costing from a moving average cost method to a first-in-first-out method. The Company believes this change in accounting principle is preferable because it results in more precision and consistency in global and regional inventory costs, more efficient analysis and better matching of inventory costs with revenues, better matches the physical flow of inventories, and improves comparability with industry peers. The change from the Company’s former inventory cost method did not have a material effect on inventory or cost of sales, and, as a result, prior comparative financial statements have not been restated.

As of March 31, 2018 and December 31, 2017, our finished goods inventories accounted for 97.5% of our consolidated inventories, and the remaining balance consists of raw materials and work-in-process.

Marketing Expenses

Research, designTotal marketing expenses inclusive of advertising, production, promotion, and developmentagency expenses were $2.2$15.5 million and $2.9$12.0 million for the three months ended June 30,March 31, 2018 and 2017, and 2016, respectively, and $5.1 million and $5.6 million for the six months ended June 30, 2017 and 2016, respectively, and are reported in 'Selling,‘Selling, general and administrative expenses'expenses’ in the condensed consolidated statements of operations.


Marketing, Advertising and Promotional Expenses

Production of advertising and promotion costs are expensed when the advertising is first run. Advertising communication costs are expensed in the periods that the communications occur. Certain of the Company’s promotional expenses result from payments under endorsement contracts. Payments under endorsement contracts are expensed on a straight-line basis over the related annual contract terms.

Total marketing expenses inclusive of advertising, production, promotional and agency expenses reported in 'Selling, general and administrative expenses' were:
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
 (in thousands)
Advertising, production, promotional and agency expenses$27,656
 $29,342
 $39,668
 $37,598

Prepaid advertising and promotional endorsement costs of $4.1$4.5 million and $4.5$7.0 million wereare included in ‘Prepaids‘Prepaid expenses and other current assets’ in the condensed consolidated balance sheets at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.

Depreciation and Amortization Expense

Depreciation and amortization expense related to property and equipment, and amortization expense related to definite-lived intangible assets, reported in ‘Cost of sales’ and ‘Selling, general and administrative expenses’ was:
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
 (in thousands)
Property and equipment:       
  Selling, general and administrative expenses$3,151
 $3,509
 $6,342
 $6,808
  Cost of sales570
 420
 1,123
 806
  Total depreciation and amortization expense3,721
 3,929
 7,465
 7,614
Intangibles:       
  Selling, general and administrative expenses3,463
 3,188
 6,947
 6,748
  Cost of sales1,185
 1,334
 2,403
 2,669
    Total amortization expense4,648
 4,522
 9,350
 9,417
Total depreciation and amortization expense$8,369
 $8,451
 $16,815
 $17,031
2. RECENT ACCOUNTING PRONOUNCEMENTS
 
New Accounting Pronouncement Adopted

Inventory MeasurementIncome Tax Accounting Implications of the Tax Cuts and Jobs Act

In July 2015,March 2018, the Financial Accounting Standards Board ("FASB"(“FASB”) issued authoritative guidance on the income tax accounting implications of the U.S. Tax Cuts and Job Act (“Tax Act”), addressing the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to measure in-scope inventory atcomplete the loweraccounting for certain income tax effects of cost or net realizable value.the Tax Act. The Company adopted thisguidance provides a measurement period for companies to evaluate the impacts of the Tax Act on their financial statements. This measurement period begins in the reporting period that includes the enactment date and ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements, and cannot exceed one year.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements for the three months ended March 31, 2018 and the year ended December 31, 2017, including provisional estimates for BEAT, GILTI, and Transition Tax. The U.S. Treasury Department, the Internal Revenue Service (“IRS”), and other standard-setting bodies may issue guidance on January 1, 2017 on a prospective basis. The adoption did not have a significant effect onhow the provisions of the Tax Act will be applied or otherwise administered that is different from our consolidatedinterpretation. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the IRS or other standard-setting bodies, we may make adjustments to the provisional amounts that could materially affect our financial position orand results of operations.

New Accounting Pronouncements Not Yet Adoptedoperations as well as our effective tax rate in the period in which the adjustments are made. See Note 10 — Income Taxes for more information.

Stock Compensation Scope of Modification Accounting

In May 2017, the FASB issued authoritative guidance intended to clarify those changes to terms and conditions of stock-based compensation awards that are required to be accounted for as modifications of existing stock-based awards. This guidance is to be applied prospectively and becomes effective for annual reporting periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted during any interim period. The Company doesadopted this guidance as of January 1, 2018. The adoption did not expect this standard will have a materialan impact on the Company’sour consolidated financial statements.position or results of operations.

Clarifying the Definition of a Business

In January 2017, the FASB issued authoritative guidance intended to clarify the definition of a business, for purposes of determining whether a business has been acquired or sold, and consequently whether transactions should be accounted for as acquisitions or disposals of a business or as acquisitions or disposals of assets. This guidance is to be applied prospectively and becomes effective for annual reporting periods beginning after December 15, 2017, including interim periods within those periods. The Company doesadopted this guidance as of January 1, 2018. The adoption did not expect this standard will have a materialan impact on the Company’sour consolidated financial statements.position or results of operations.


Statement of Cash Flows - Classification and Change in Restricted Cash

In August 2016, the FASB issued authoritative guidance intended to clarify how entities should classify certain cash receipts and cash payments onin the statement of cash flows. Further, inIn November 2016, the FASB issued additional guidance requiring that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown onreported in the statement of cash flows. These updates areThe guidance is applied retrospectively to all periods presented and is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted.periods. The Company adopted this guidance should be applied retrospectively unless it is impractical to do so; in which case, the guidance should be applied prospectively as of January 1, 2018. As a result of the earliest date practicable. Theadoption, the Company is currently assessingchanged the impact that adopting this new accounting standard will have onpresentation in its consolidated financial statements.statements of cash flows for all periods presented.

Prepaid Stored-Value Products

In March 2016, the FASB issued guidance related to the recognition of breakage for certain prepaid stored-value products. This update aligns recognition of the financial liabilities related to prepaid stored-value products (for example, prepaid gift cards), with Topic 606, Revenue from Contracts with Customers, for non-financial liabilities. In general, certain of these liabilities may be extinguished proportionally in earnings as redemptions occur, or when redemption is remote if issuers are not entitled to the unredeemed stored value. ThisThe standard is effective for annual periods (including interim periods) beginning after December 15, 2017,2017. The Company adopted this guidance as of January 1, 2018. The adoption did not have a significant impact on our consolidated financial position or results of operations.

Revenue Recognition

In May 2014, the FASB issued authoritative guidance related to revenue recognition from contracts with customers. On January 1, 2018, the Company adopted the guidance using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenues, gross margins or income from operations.

Substantially all of the Company’s revenues are recognized when control of product passes to customers when the products are shipped or delivered. Effective January 1, 2018, the Company changed its balance sheet presentation for expected product returns by reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns. The product return asset is reported within ‘Prepaid expenses and other assets’ in the condensed consolidated balance sheet. The returns liability and payments received from customers for future delivery of products are reported within ‘Accrued liabilities and other expenses’ in the condensed consolidated balance sheet.

The Company elected to account for shipping and handling costs associated with outbound freight after control of product passes to customers as fulfillment costs, which are expensed as incurred and included in ‘Cost of sales’ in our condensed consolidated statements of operations. There is no change to the Company’s comparative reporting of shipping and handling costs as a result of adoption.
The Company elected to expense incremental costs to obtain customer contracts, consisting primarily of commission incentives, when incurred and reports these costs within ‘Selling, general and administrative expenses’ in its condensed consolidated statement of operations. There is no change to the Company’s comparative reporting of incremental costs to obtain customer contracts as a result of adoption.

The impact of adoption on the January 1, 2018 consolidated balance sheet was:
  December 31, 2017 
Impact of Adoption (1)
 January 1, 2018
  (in thousands)
Assets:      
Accounts receivable, net $83,518
 $1,801
 $85,319
  Prepaid expenses and other assets 22,596
 1,555
 24,151
       
Liabilities:      
Accrued expenses and other liabilities 84,446
 3,356
 87,802
(1) Prior to adoption, product return assets and return liabilities were reported within ‘Accounts receivable, net’, within the allowance for doubtful accounts. As of the adoption date, the product return assets were reclassified and reported as a component of ‘Prepaid expenses and other assets’, and return liabilities were reclassified to ‘Accrued expenses and other liabilities’ in the Company’s condensed consolidated balance sheet.

The impact of the new revenue recognition guidance on our condensed consolidated balance sheet as of March 31, 2018 was:
  March 31, 2018
  Balances Without Adoption 
Effects of New Guidance (1)
 As Reported
  (in thousands)
Assets:      
Accounts receivable, net $165,238
 $4,716
 $169,954
Prepaid expenses and other assets 18,937
 3,044
 21,981
       
Liabilities:      
Accrued expenses and other liabilities 77,688
 7,760
 85,448
(1) The new revenue recognition guidance requires comparative disclosures of the effects of the new guidance on the Company’s condensed consolidated financial statements for all interim periods during the year of adoption. The new guidance did not have a significant effect on the Company’s condensed consolidated statement of operations for the three months ended March 31, 2018.

See Note 8 — Revenues for additional disclosures.

New Accounting Pronouncements Not Yet Adopted

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued authoritative guidance that permits reclassification of the income tax effects of the Tax Act on other accumulated comprehensive income (“AOCI”) to retained earnings. This guidance may be adopted retrospectively to each period (or periods) in which the income tax effects of the Tax Act related to items remaining in AOCI are recognized, or at the beginning of the period of adoption. The guidance becomes effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The Company has elected the modified retrospective methoddoes not expect adoption of adoption. The Company is currently assessing the impact that adopting this new accounting standard will have a significant impact on itsthe Company’s consolidated financial statements.

Leases

In February 2016, the FASB issued authoritative guidance intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Additionally, this guidance will require disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The guidance shouldwill be applied under a modified retrospective transition approach for leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements. Any leases that expire before the initial application date will not require any accounting adjustment. Thisapproach. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted.

The Company will adopt this guidance beginning witheffective January 1, 2019. In July 2017, the quarterly reporting period ending March 31, 2019.Company established an implementation team and engaged external advisers and solution providers to develop a multi-phase plan to assess the Company’s leasing arrangements, as well as any changes to accounting policies, processes or systems necessary to adopt the requirements of the new standard. The Company has entered into agreements to procure software and services for the adoption and has begun assessments of its lease agreements, system capabilities and requirements. The Company is evaluating the full impact this guidance will have on its consolidated financial statements, and expects that adoption will result in significant increases in lease relatedlease-related assets and liabilities on its consolidated balance sheet.

Revenue Recognition

In May 2014, the FASB issued authoritative guidance related to new accounting requirements for the recognition of revenue from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for the goods or services. Subsequent to the release of this guidance, the FASB has issued additional updates intended to provide interpretive clarifications and to reduce the cost and complexity of applying the new revenue recognition standard both at transition and on an ongoing basis. The new standard and related amendments are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Upon adoption of the new standard, the use of either a full retrospective or modified retrospective transition method is permitted.


In December 2016, the Company established an implementation team and engaged external advisers to develop a multi-phase plan to assess the Company’s business and contracts, as well as any changes to accounting policies, processes or systems necessary to adopt the requirements of the new standard. The Company has completed an initial review of its revenue contracts and terms and is assessing how adoption of the new standard will affect its consolidated financial statements and disclosures. The Company has elected the modified retrospective method of adoption. The Company is continuing its evaluation of the impact of the accounting and disclosure changes on its business processes, controls and systems. The Company will provide additional information regarding expected effects on its consolidated financial statements and disclosures in subsequent quarterly and annual reports.

Other Pronouncements

Other new pronouncements issued but not effective until after June 30, 2017March 31, 2018 are not expected to have a material impact on the Company’s condensed consolidated financial statements.


3. INVENTORIES
The following table summarizes inventories by major classification: 
 June 30,
2017
 December 31,
2016
 (in thousands)
Finished goods$151,639
 $142,333
Raw materials3,290
 4,042
Work-in-progress820
 654
Total inventories$155,749
 $147,029

4. INTANGIBLE ASSETS, NET
Intangible Assets, Net
Other intangible assets consist of the following:
   June 30, 2017 December 31, 2016
 Useful Life Gross Accum. Amortiz. Net Gross Accum. Amortiz. Net
 (Years) (in thousands)
Intangible assets subject to amortization:             
  Capitalized software2 - 7 $144,461
 $(83,892) $60,569
 $142,358
 $(74,530) $67,828
Patents, copyrights, and trademarks6 - 25 6,493
 (5,626) 867
 6,438
 (5,471) 967
Other  2,235
 (2,235) 
 2,855
 (2,855) 
Intangible assets not subject to amortization:             
  In progress (1)  6,663
 
 6,663
 3,616
 
 3,616
  Trademarks and other  312
 
 312
 289
 
 289
  Total  $160,164
 $(91,753) $68,411
 $155,556
 $(82,856) $72,700


(1) Primarily capitalized software project costs under development.

Estimated future annual amortization expense of intangible assets is:
  June 30, 2017


 (in thousands)
2017 (remainder of year) $8,829
2018 16,175
2019 13,809
2020 11,094
2021 10,701
Thereafter 828
Total $61,436


5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 
The following table summarizes accruedAmounts reported in ‘Accrued expenses and other current liabilities: liabilities’ in the condensed consolidated balance sheets were:
 June 30,
2017
 December 31,
2016
 (in thousands)
Accrued compensation and benefits$29,716
 $20,898
Fulfillment, freight and duties (1)12,661
 14,572
Professional Services8,840
 10,900
Sales/use and value added tax payable6,430
 4,978
Accrued rent and occupancy7,721
 7,335
Royalties payable and deferred revenue7,250
 7,475
Other (2)12,282
 12,124
Total accrued expenses and other current liabilities$84,900
 $78,282


 March 31,
2018
 December 31,
2017
 (in thousands)
Accrued compensation and benefits$21,960
 $34,955
Professional services10,082
 10,835
Accrued rent and occupancy8,907
 8,535
Fulfillment, freight, and duties13,311
 6,921
Royalties payable and deferred revenue5,822
 6,193
Sales/use and value added taxes payable5,623
 3,509
Return liabilities (1)
7,760
 
Other (2)
11,983
 13,498
Total accrued expenses and other liabilities$85,448
 $84,446
(1) Includes customs duty legal accrual liability at December 31, 2016, which was settled Return liabilities are presented within ‘Accrued expenses and other liabilities’ upon adoption of new authoritative guidance on revenue recognition effective January 1, 2018, as described in April 2017.Note 2 — Recent Accounting Pronouncements.
(2) Includes current liabilities of $3.0 million related to Series A preferred stock dividends at June 30, 2017both March 31, 2018 and December 31, 2016. Other accrued liabilities at December 31, 2016 also includes net derivative liabilities.2017.


6.4. FAIR VALUE MEASUREMENTS
 
Recurring Fair Value Measurements
 
U.S. GAAP for fair value establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). The Company utilizes a combination of market and income approaches to value derivative instruments. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels of the hierarchy are as follows:
Level 1Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2Unadjusted quoted prices in active markets for similar assets and liabilities;
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or
Inputs other than quoted prices that are observable for the asset or liability.
Level 3Unobservable inputs for the asset or liability.


The financial assets and liabilities that are measured and recorded at fair value on a recurring basis consist of the Company's derivative instruments. The Company's derivative instruments are foreign currency forward exchange contracts. The Company manages credit risk of its derivative instruments on the basis of its net exposure with its counterparty and has elected to measure the fair value in the same manner. All of the Company'sCompany’s derivative instruments are classified as Level 2 and are reported in the condensed consolidated balance sheets within ‘Prepaid‘Accrued expenses and other assets’liabilities’ at June 30, 2017, and 'Accrued expenses and other liabilities' at DecemberMarch 31, 2016. There were no transfers between Level 1 or Level 2, nor were there any outstanding derivative instruments classified as Level 3 as of June 30, 2017 or December 31, 2016. The fair value of the Company's derivative instruments was an asset of $2.8 million and a liability of $0.2 million at June 30, 2017,2018 and December 31, 2016,2017. The fair values of the Company’s derivative instruments were liabilities of $0.1 million and $0.4 million at March 31, 2018 and December 31, 2017, respectively. See Note 75 — Derivative Financial Instruments for more information.

The carrying amounts of the Company'sCompany’s cash, and cash equivalents and restricted cash, accounts receivable, accounts payable, and current accrued expenses and other liabilities approximate their fair value as recorded due to the short-term maturity of these instruments.

The Company'sCompany’s borrowing instruments are recorded at their carrying values in the condensed consolidated balance sheets, which may differ from their respective fair values. The fair values of the Company'sCompany’s outstanding notes payable approximate their carrying values at June 30, 2017March 31, 2018 and December 31, 20162017, based on interest rates currently available to the Company for similar borrowings.
 June 30, 2017 December 31, 2016
 Carrying Value Fair Value Carrying Value Fair Value
 (in thousands)
Borrowings and capital lease obligations$1,762
 $1,762
 $2,378
 $2,378
 March 31, 2018 December 31, 2017
 Carrying Value Fair Value Carrying Value Fair Value
 (in thousands)
Borrowings and capital lease obligations$309
 $309
 $706
 $706
Non-Financial Assets and Liabilities
The Company'sCompany’s non-financial assets, which primarily consist of property and equipment, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value.
Impairment is reported in 'Selling, general and administrative expenses' in the Company's condensed consolidated statements of operations. The fair values of these assets wereare determined based on Level 3 measurements, including estimates of the amount and timing of future cash flows based upon historical experience, expected market conditions, and management'smanagement’s plans. The Company did not record any impairments duringImpairment expense is reported in ‘Selling, general and administrative expenses’ in the six months ended June 30, 2017.Company’s condensed consolidated statements of operations. During the three and six months ended June 30, 2016,March 31, 2018, the Company recorded non-cash impairment expenses of $0.6 million and $0.9 million, respectively, to reduce the carrying values of certain retail store assets in the Asia Pacific segment and certain supply chain assets, included in ‘Other businesses,’ to their estimated fair value, as follows:
  Three Months Ended June 30, Six Months Ended June 30,
  2017 2016 2017 2016
  (in thousands)
Retail store asset impairment $
 $572
 $
 $765
values. The Company did not record impairment in the three months ended March 31, 2017.


7.5. DERIVATIVE FINANCIAL INSTRUMENTS
 
The Company transacts business in various foreign countries and is therefore exposed to foreign currency exchange rate risk that impacts the reported U.S. Dollar amounts of revenues, costs, and certain foreign currency monetary assets and liabilities. In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in earnings caused by fluctuations in foreign exchange rates, the Company enters into forward contracts to buy and sell foreign currency. By policy, the Company does not enter into these contracts for trading purposes or speculation.

Counterparty default risk is considered low because the forward contracts that the Company enters into are over-the-counter instruments transacted with highly-rated financial institutions. The Company was not required to and did not post collateral as of June 30, 2017March 31, 2018 or December 31, 2016.2017.

The Company'sCompany’s derivative instruments are recorded at fair value as a derivative asset or liability in the condensed consolidated balance sheets. The Company reports derivative instruments with the same counterparty on a net basis when a master netting arrangement is in place. Changes in fair value are recognized within 'Foreign‘Foreign currency gain (loss), net'gains, net’ in the condensed consolidated statements of operations. For the condensed consolidated statements of cash flow statement,flows, the Company classifies cash flows from derivative instruments at settlement in the same category as the cash flows from the related hedged items within 'Cash used in‘Cash provided by (used in) operating activities'.activities.’

Results of Derivative Activities

The fair values of derivative assets and liabilities, net, all of which are classified as Level 2 and are reported within either ‘Prepaid expenses and other assets’ or 'Accrued‘Accrued expenses and other liabilities'liabilities’ in the condensed consolidated balance sheets, were:
 June 30, 2017 December 31, 2016
 Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
 (in thousands)
Forward foreign exchange contracts       
  Level 1$
 $
 $
 $
  Level 24,350
 (1,597) 6,541
 (6,698)
  Level 3
 
 
 
 4,350
 (1,597) 6,541
 (6,698)
Netting of counterparty contracts(1,597) 1,597
 (6,541) 6,541
  Foreign currency forward contract derivatives$2,753
 $
 $
 $(157)
 March 31, 2018 December 31, 2017
 Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
 (in thousands)
Forward foreign currency exchange contracts$1,346
 $(1,469) $1,241
 $(1,647)
Netting of counterparty contracts(1,346) 1,346
 (1,241) 1,241
  Foreign currency forward contract derivatives$
 $(123) $
 $(406)

The notional amounts of outstanding foreign currency forward exchange contracts shownpresented below report the total U.S. Dollar equivalent position and the net contract fair values for each foreign currency position.
June 30, 2017 December 31, 2016March 31, 2018 December 31, 2017
Notional Fair Value Notional Fair ValueNotional Fair Value Notional Fair Value
(in thousands)(in thousands)
Singapore Dollar$45,297
 $(7) $73,455
 $364
Euro46,410
 39
 37,718
 (122)
Japanese Yen$64,840
 $1,722
 $87,171
 $4,180
38,076
 (1,015) 30,688
 (89)
Euro53,732
 611
 94,763
 (2,611)
Singapore Dollar33,618
 427
 71,228
 (1,441)
South Korean Won16,243
 38
 14,332
 (660)17,202
 (182) 15,888
 (134)
British Pound Sterling8,833
 (4) 8,278
 407
11,023
 
 13,233
 80
Other currencies62,418
 (41) 52,449
 (32)68,094
 1,042
 53,698
 (505)
Total$239,684
 $2,753
 $328,221
 $(157)$226,102
 $(123) $224,680
 $(406)
              
Latest maturity dateJuly 2017
   January 2017
  April 2018 January 2018


Amounts reported in 'Foreign‘Foreign currency gain (loss), net'gains, net’ in the condensed consolidated statements of operations include both realized and unrealized gains (losses) from foreign currency transactions and derivative contracts, and were as follows:were:
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
 (in thousands)
Foreign currency transaction gain (loss)$(1,417) $6,503
 $1,794
 $8,765
Foreign currency forward exchange contracts gain (loss)1,579
 (8,203) (1,356) (11,712)
Foreign currency transaction gain (loss), net$162
 $(1,700) $438
 $(2,947)
 
Three Months Ended
March 31,
 2018 2017
 (in thousands)
Foreign currency transaction gains$1,051
 $3,211
Foreign currency forward exchange contracts gains (losses)20
 (2,935)
Foreign currency gains, net$1,071
 $276



8.6. REVOLVING CREDIT FACILITYFACILITIES AND BANK BORROWINGS
 
The Company’s borrowings consistconsisted of:
June 30,
2017
 December 31,
2016
March 31,
2018
 December 31,
2017
(in thousands)(in thousands)
Notes payable$1,712
 $2,329
$266
 $662
Capital lease obligations50
 49
43
 44
Total borrowings and capital lease obligations1,762
 2,378
309
 706
Less: Current portion of borrowings and capital lease obligations1,722
 2,338
281
 676
Total long-term capital lease obligations$40
 $40
$28
 $30

Senior Revolving Credit Facility

The Company's Senior RevolvingIn December 2011, the Company entered into a revolving credit facility (“the Facility”), pursuant to an Amended and Restated Credit Facility (the "Facility"Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association (“PNC”), as amended, providesa lender and administrative agent for borrowings of up to $80 million through February 2021.the lenders. The FacilityCredit Agreement, as amended, contains certain covenants that restrict certain actions by the Company, under the Facility, including limitations on: (i) stock repurchases to $50$100.0 million per year, subject to certain restrictions; and (ii) capital expenditures and commitments to $50$50.0 million per year. The FacilityCredit Agreement also permits intercompany loans of up to $375.0 million and requires the Company to meet certain financial covenant ratios that become effective when totalaverage outstanding borrowings under the Facility,Credit Agreement, including letters of credit, exceed $20the lesser of $40.0 million or 40% of the total commitments during certain periods or if the outstanding borrowings exceed the borrowing base. If the financial covenant ratios are in effect, the Company must maintain a minimum fixed charge coverage ratio of 1.10 to 1.00, and a maximum leverage ratio of 2.00 to 1.00. The weighted average interest rate on borrowings as of June 30, 2017 was 2.49%. As of June 30, 2017,March 31, 2018, the Company was in compliance with all financial covenants.

As of June 30, 2017,March 31, 2018, the total commitments available from the lenders under the Facility were $100.0 million. At March 31, 2018, the Company had no outstanding borrowings and $0.6 million in outstanding letters of credit of $1.3 million,under the Facility, which reduce thereduces amounts available for borrowing under the terms of the Facility. As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the Company had $78.7$99.4 million of available borrowing capacity under the Facility.
Asia Revolving Credit FacilityFacilities
The Company’s revolving credit facility agreement (the "Asia Facility") with HSBC Bank (China) Company Limited, Shanghai Branch ("HSBC"(“HSBC”), or the “HSBC Facility,” provides the Company uncommitted dual currency revolving loan facilities of up to 40.0 million Chinese Renminbi ("RMB"(“RMB”), or $5.9$6.4 million, with a combined facility limit of RMB 60.0 million, or $8.8$9.6 million. As of June 30, 2017March 31, 2018 and December 31, 2016,2017, borrowings under the AsiaHSBC Facility remained suspended at the discretion of HSBC.
The AsiaCompany’s revolving credit facility agreement with China Merchants Bank Company Limited, Shanghai Branch (the “CMBC Facility”), provides the Company a revolving loan facility of up to 30.0 million RMB, or $4.8 million, subject to consent by the lender. The CMBC Facility will mature in February 2021.January 2019. The CMBC Facility may be canceled or suspended at any time by either party. As of March 31, 2018, there were no borrowings outstanding on this credit facility.
Notes Payable

Notes payable to finance the Company’s enterprise software system costs and certain insurance premiums incur interest at fixed rates ranging from 1.95% to 2.83%.


Maturities

The maturities of the Company'sCompany’s debt and capital lease obligations were:
June 30, 2017As of March 31, 2018
(in thousands)(in thousands)
2017 (remainder of year)$1,722
201813
2018 (remainder of year)$277
201913
14
202011
12
20213
6
Total principal debt maturities and capital lease obligations1,762
309
Less: current portion1,722
281
Non-current portion$40
$28


9. EQUITY7.
COMMON STOCK REPURCHASE PROGRAM
Common Stock

The Company has one class of common stock with a par value of $0.001 per share. There are 250 million shares of common stock authorized for issuance. Holders of common stock are entitled to one vote per share on all matters presented to the stockholders.
Common Stock Repurchase Program
For the sixthree months ended June 30, 2017,March 31, 2018, the Company repurchased 1.4 million shares of its common stock for $10.0at a cost of $20.1 million, including commissions during the month of June 2017.commissions. During the sixthree months ended June 30, 2016,March 31, 2017, the Company did not repurchase any of its common stock. As of June 30, 2017,March 31, 2018, the Company had remaining authorization to repurchase approximately $108.7$198.8 million of its common stock.stock, subject to restrictions under its Credit Agreement.

Preferred Stock
8. REVENUES

The Company adopted authoritative guidance related to the recognition of revenue from contracts with customers effective January 1, 2018 using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented. See ‘Revenue Recognition’ in Note 2 — Recent Accounting Pronouncements for a discussion of the significant changes resulting from adoption of the guidance. The adoption of the guidance did not have a significant impact on revenues.

Revenues by reportable operating segment and by channel were:
  Three Months Ended March 31, 2018
  Americas Asia Pacific Europe Other Businesses Total
  (in thousands)
Wholesale $72,674
 $71,733
 $49,877
 $313
 $194,597
Retail 34,716
 17,614
 7,176
 
 59,506
E-commerce 16,440
 7,815
 4,790
 
 29,045
Total revenues $123,830
 $97,162
 $61,843
 $313
 $283,148

Revenues are recognized in the amount expected to be received in exchange when control of the products transfers to customers, and excludes various forms of promotions, which range from contractually-fixed percentage price reductions to sales returns, discounts, rebates, and other incentives that may vary in amount and must be estimated. Variable amounts are estimated based on an analysis of historical experience and adjusted as better estimates become available. During the three months ended March 31, 2018, the Company recognized an increase of $0.8 million to wholesale revenues due to changes in estimates related to products transferred to customers in prior periods. There were no changes to estimates in retail and e-commerce channels during the three months ended March 31, 2018.

The Company elected to exclude from revenues taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and concurrent with revenue-producing activities, and as a result there is no change in presentation from prior comparative periods.

The following is a description of our principal revenue-generating activities by distribution channel. The Company has three reportable operating segments and sells its products using three primary distribution channels. For more detailed information about reportable operating segments, see ‘Note 13 — Operating Segments and Geographic Information’.

Wholesale Channel

For the majority of wholesale customers, control transfers and revenues are recognized when the product is shipped or delivered from a manufacturing facility or distribution center to the wholesale customer. In certain cases, control of the product transfers and revenues are recognized when the customer receives the product at the designated delivery point. For certain customers, primarily in the Asia Pacific region, cash payment from customers is required in advance of delivery and revenues are recognized upon the later of cash receipt or delivery of the product. For a small number of customers in the Asia Pacific region, products are sold on consignment and revenues are recognized on a sell-through basis. Wholesale customers are invoiced when products are shipped or delivered.

The Company has authorized and availablearrangements that grant certain wholesale customers exclusive licenses, concurrent with the terms of the related distribution agreements, to use the Company’s intellectual property in exchange for issuance 4.0 million sharesa sales-based royalty. Sales-based royalty revenues are recognized over the terms of preferred stock. None of these preferred sharesthe related license agreements as sales are issued or outstanding.made by the wholesalers.

Series A Convertible Preferred StockRetail Channel

The Company is authorized to issue up to 1.0 million sharestransfers control of Seriesproducts and recognizes revenues at retail stores at the point of sale, in exchange for cash or other payment, primarily debit or credit card. A Preferred Stock, par value $0.001 per share, of which 0.2 million shares were issued to Blackstone and certain of its permitted transferees in January 2014. The Series A Preferred Stock has a stated value of $1,000 per share.
Participation Rights and Dividends
Holdersportion of the Series A Preferred Stocktransaction price charged to our customers is variable, primarily due to promotional discounts or allowances, and terms that permit retail customers to exchange or return products for a full refund within a limited period of time. When recognizing revenues, the amount of revenues associated with expected sales returns is estimated based on historical experience, and adjustments to our estimates are entitledmade when the most likely amount of consideration we expect to receive dividends declared or paid onchanges.

E-commerce Channel

In the Company’s common stocke-commerce channel, the Company transfers control and are entitledrecognizes revenues when the product is shipped from the distribution centers. Payment from customers is primarily through debit and credit card and is made at the time the customer order is shipped.

Similar to vote together with the holdersretail channel, a portion of the Company’s common stock as a single class,amount of revenue is variable, primarily due to sales returns, discounts, and other promotional allowances offered to our customers. When recognizing revenues, the amount of revenues associated with expected sales returns is estimated based on historical experience, and adjustments are made when the most likely amount of consideration changes. Historically, the amount of revenues associated with product returns in each case, on an as-converted basis. Holdersthe e-commerce channel has been higher than the retail channel.

Contract Liabilities

Contract liabilities consist of the Series A Preferred Stock also have certain limited special approval rights, includingadvance cash deposits received from wholesale customers to secure product orders in connection with respect to the issuanceseasonal selling seasons, and payments received in advance of pari passu or senior equity securities of the Company.
The Series A Preferred Stock ranks senior to the Company's common stock with respect to rights to preferred dividends, liquidation, winding-up,delivery. As products are shipped and dissolution. Holders of Series A preferred stock are entitled to cumulative dividends payable quarterly in cash at a rate of 6% per annum. Ifcontrol transfers, the Company fails to make timely dividend payments,recognizes the dividend rate will increase to 8% per annum until such time as all accrued but unpaid dividends have been paiddeferred revenue in full. As‘Revenues’ in the condensed consolidated statement of June 30, 2017operations. At January 1 and DecemberMarch 31, 2016, the Company had accrued preferred dividends2018, $1.3 million and $2.1 million, respectively, of $3.0 million, which aredeferred revenues associated with advance customer deposits were reported in ‘Accrued expenses and other liabilities'liabilities’ in the condensed consolidated balance sheets. These accrued dividendsDeferred revenues of $0.8 million were paidrecognized in cashrevenues during the three months ended March 31, 2018. The remainder of deferred revenues at March 31, 2018 are expected to be recognized in July 2017 and January 2017, respectively.
Conversion Rightsrevenues during the second quarter of the Company and Blackstone
The Series A Preferred Stock is convertible at the option of the holders at any time into shares of common stock at a conversion price of $14.50 per share, subject to adjustment for customary anti-dilution provisions. Beginning January 27, 2017, provided the closing price of the Company's common stock has been equal to2018 as products are shipped or greater than $29.00 for 20 consecutive trading days, the Company may elect to convert all or a portion of the Series A Preferred Stock into an equivalent number of shares of common stock. At June 30, 2017, had the holders converted or the Company been entitled to exercise its conversion right, the Series A Preferred Stock would have been convertible into 13,793,100 shares of common stock.
Redemption Rights of the Company and Blackstone
The Company has the option to redeem the Series A Preferred Stock anytime on or after January 27, 2022 for 100% of the stated redemption value of $200 million plus all accrued and unpaid dividends.
Blackstone has the option to cause the redemption of the Series A Preferred Stock any time after January 27, 2022 or upon a change in control. Further, upon certain change of control events, Blackstone can require the Company to repurchase the Series A Preferred Stock at 101% of the redemption value plus all accrued and unpaid dividends. The carrying value of the Series A Preferred Stock is accreted up to its $200 million redemption value on a straight-line basis through the redemption date.delivered.

Refund Liabilities

10.Refund liabilities, primarily associated with product sales returns, retrospective volume rebates, and early payment discounts are estimated based on an analysis of historical experience, and adjustments to revenues made when the most likely amount of consideration expected changes. At January 1 and March 31, 2018, $3.4 million and $7.8 million, respectively, of refund liabilities, primarily associated with product returns, were reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheet.

9. SHARE-BASED COMPENSATION
The Company’s share-based compensation awards are issued under the 2015 Equity Incentive Plan (“2015 Plan”) and two predecessor plans, the 2005 Equity Incentive Plan, and the 2007 Equity Incentive Plan (the “2007 Plan”). Any awards that expire or are forfeited under the 2007 Plan become available for issuance under the 2015 Plan. Shares As of March 31, 2018, 2.2 million shares

of common stock reserved and authorizedremained available for future issuance at June 30, 2017 under all plans, were 8,033,135 shares, subject to adjustment for future stock splits, stock dividends, and similar changes in capitalization.
Refer to Notes 1 and 1110 of the Company’s Annual Report on Form 10-K for a detailed description of the Company’s share-based compensation awards, including information related to grant date fair value, vesting terms, performance, and other conditions.
Share-Based Compensation Expense
Pre-tax share-based compensation expense reported in the Company’s condensed consolidated statements of operations was as follows:was:
Three Months Ended June 30, Six Months Ended June 30,
Three Months Ended
March 31,
2017 2016 2017 20162018 2017
(in thousands)(in thousands)
Cost of sales$111
 $123
 $200
 $251
$79
 $89
Selling general and administrative expenses1,225
 2,949
 3,745
 5,647
Selling, general and administrative expenses2,595
 2,522
Total share-based compensation expense$1,336
 $3,072
 $3,945
 $5,898
$2,674
 $2,611

Stock Option Activity

Stock option activity during the sixthree months ended June 30, 2017March 31, 2018 was:
 Number of Options
(in thousands)
Outstanding December 31, 20162017518,252541
Granted200,000
Exercised(26
)
Forfeited or expired(113,45011)
Outstanding June 30, 2017March 31, 2018604,802504

As of June 30, 2017,March 31, 2018, the Company had $0.6$0.4 million of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted average period of 2.732.06 years. The weighted average exercise price of vested options was $16.47 per share.
The grant date fair value of options granted during the three months ended June 30, 2017 was estimated using a Black-Scholes option pricing model and the following assumptions:
Three Months Ended June 30,
2017
Risk free rate1.76%
Dividend yield%
Volatility40.7%
Expected term (years)4


Restricted Stock Awards and Restricted Stock Units Activity

The Company grants time-based Restricted Stock Awards (“RSAs”) as well as time-based and performance-based Restricted Stock Units (“RSUs”), and time-based Restricted Stock Awards (“RSAs”). RSA and RSU activity during the sixthree months ended June 30, 2017March 31, 2018 was:

Restricted Stock Awards Restricted Stock UnitsRestricted Stock Awards Restricted Stock Units
Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair ValueShares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value
Unvested at December 31, 201611,430
 $10.28
 3,855,368
 $10.31
(in thousands, except fair value data)
Unvested at December 31, 201717
 $6.84
 3,791
 $7.99
Granted35,114
 6.84
 2,399,876
 6.80

 
 1,137
 14.11
Vested(11,430) 10.28
 (652,076) 10.69
(8) 6.84
 (919) 8.28
Forfeited
 
 (1,663,792) 9.64

 
 (761) 6.96
Unvested at June 30, 201735,114
 $6.84
 3,939,376
 $8.39
Unvested at March 31, 20189
 $6.84
 3,248
 $10.64

RSAs vested during the six months ended June 30, 2017 consisted entirely of time-based awards. As of June 30, 2017,March 31, 2018, unrecognized share-based compensation expense for RSAs was $0.2less than $0.1 million, which is expected to amortize over a remaining weighted average period of 0.930.18 years.

RSUs vested during the sixthree months ended June 30, 2017March 31, 2018 consisted of 583,7590.7 million time-based awards and 68,3170.3 million performance-based awards. As of June 30, 2017,March 31, 2018, unrecognized share-based compensation expenseexpenses for time-based and performance-based

awards was $13.7were $12.6 million and $5.2$8.2 million, respectively, and isare expected to amortize over a remaining weighted average period of 2.19 years.1.87 years and 2.73 years, respectively.

11.10. INCOME TAXES

U.S. Federal Income Tax Reform

The Tax Act resulted in a number of significant changes to U.S. federal income tax law for U.S. corporations. Most notably, the statutory U.S. federal corporate income tax rate was changed from 35% to 21% for corporations. In addition to the change in the corporate income tax rate, the Tax Act further introduced a number of other changes including a one-time transition tax via a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits; the introduction of a tax on Global Intangible Low-Taxed Income (“GILTI”) for tax years beginning after December 31, 2017; the limitation of deductible net interest to 30% of adjustable taxable income; the further limitation of the deductibility of share-based compensation of certain highly-compensated employees; the ability to elect to accelerate bonus depreciation on certain qualified assets; and the Base Erosion and Anti-Abuse Tax (“BEAT”).

Income tax expense and effective tax rates were as follows:

were:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2017 2016 2017 20162018 2017
(in thousands, except effective tax rate)(in thousands, except effective tax rate)
Income before income taxes$29,586
 $18,646
 $45,534
 $31,697
$27,212
 $15,948
Income tax expense7,627
 3,109
 12,564
 6,014
10,758
 4,938
Effective tax rate25.8% 16.7% 27.6% 19.0%39.5% 31.0%

DuringThe increase in the effective tax rate for the three and six months ended June 30, 2017, the increase in effective tax rate,March 31, 2018, compared to the same periodsperiod in 2016,2017, is primarilypartially due to the impact of the GILTI provisions included in the Tax Act. The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in the effective tax rate calculation. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The increase in the effective tax rate is also due to operating losses in certain jurisdictions where the Company is unable to record tax benefits because it has determined that it is not more likely than not that such tax benefits will be realized, as well as an increase in profitability in certain jurisdictions for which tax expense is recorded. The Company’s effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions, the GILTI tax, as well as book losses in certain jurisdictions for which tax benefits cannot be recognized. There were no significant or unusual discrete tax items during the three and six months ended June 30, 2017.March 31, 2018. The Company had unrecognized tax benefits of $5.1 million and $4.8$6.2 million at June 30, 2017March 31, 2018 and December 31, 2016, respectively,2017, and the Company does not expect any significant changes in tax benefits in the next twelve months.


12.11. EARNINGS PER SHARE
 
Basic and diluted earnings per common share (“EPS”) for the three and six months ended June 30,March 31, 2018 and 2017 and 2016 were as follows: were:
Three Months Ended June 30, Six Months Ended June 30,
Three Months Ended
March 31,
2017 2016 2017 20162018 2017
(in thousands)(in thousands)
Numerator: 
  
     
  
Net income attributable to common stockholders$18,086
 $11,735
 $25,241
 $18,096
$12,523
 $7,155
Less: adjustment for income allocated to participating securities(2,843) (1,857) (3,971) (2,868)
Net income attributable to common stockholders - basic and diluted$15,243
 $9,878
 $21,270
 $15,228
Less: Net income allocable to Series A convertible preferred stockholders (1)
(2,094) (1,127)
Adjusted net income available to common stockholders - basic and diluted$10,429
 $6,028
Denominator: 
  
     
  
Weighted average common shares outstanding - basic73,953
 73,389
 73,882
 73,238
68,705
 73,810
Plus: dilutive effect of stock options and unvested restricted stock units619
 854
 743
 1,151
2,963
 751
Weighted average common shares outstanding - diluted74,572
 74,243
 74,625
 74,389
71,668
 74,561
          
Net income per common share: 
  
     
  
Basic$0.21
 $0.13
 $0.29
 $0.21
$0.15
 $0.08
Diluted$0.20
 $0.13
 $0.29
 $0.20
$0.15
 $0.08
(1) Represents the amount which would have been paid to preferred stockholders in the event the Company had declared a dividend on its common stock.

Diluted EPS is calculated using the two-class method. For the three months ended June 30,March 31, 2018 and 2017, and 2016, 2.20.4 million and 0.60.8 million options and restricted stock units, respectively, were excluded from the calculation of diluted EPS under the two-class method because the effect was anti-dilutive. For the six months ended June 30, 2017 and 2016, 0.8 million and 1.0 million stock options and RSUs, respectively, and all potentially convertible Series A Preferred Stock shares were excluded from the calculation of diluted EPS under the two-class method because the effect would be anti-dilutive. If converted, Series A Preferred Stock would represent approximately 15.9%16.8% of the Company'sCompany’s common stock outstanding, or 13.8 million additional common shares as of June 30, 2017.March 31, 2018.

13.12. COMMITMENTS AND CONTINGENCIES
 
Rental Commitments and Contingencies

The Company rents retail store, office and warehouse space, vehicles, and equipment under operating leases expiring at various dates through 2033. Rent expense for leases with escalations or rent holidays is recognized on a straight-line basis over the lease term beginning on the lease inception date. Certain leases also provide for contingent rents, which are generally determined as a percent of sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when the Company determines that achieving the specified levels during the period is probable.

Future minimum lease payments under operating leases were as follows:were:

June 30, 2017
As of
March 31, 2018
(in thousands)(in thousands)
2017 (remainder of year)$38,784
201866,144
2018 (remainder of year)$38,831
201939,172
36,087
202027,723
28,726
202122,453
22,914
202216,510
Thereafter68,175
52,356
Total minimum lease payments$262,451
$195,424

Minimum sublease rental income of $0.1$0.2 million under non-cancelable subleases, and contingent rentals which may be paid under certain retail leases on a basis of percentage of sales in excess of stipulated amounts, are excluded from the commitment schedule.


Rent expense under operating leases are as follows:was: 
 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
 (in thousands)
Minimum rentals (1)$20,403
 $22,588
 $41,188
 $44,983
Contingent rentals5,562
 5,430
 7,822
 7,560
Less: Sublease rental income(52) (71) (89) (73)
Total rent expense$25,913
 $27,947
 $48,921
 $52,470


 
Three Months Ended
March 31,
 2018 2017
 (in thousands)
Minimum rentals (1)
$18,279
 $20,786
Contingent rentals2,160
 2,260
Less: Sublease rentals(40) (37)
Total rent expense$20,399
 $23,009
(1) Minimum rentals include all lease payments as well as fixed and variable common area maintenance, parking, and storage fees, which were approximately $2.8$2.3 million and $2.7$2.6 million during the three months ended June 30,March 31, 2018 and 2017, and 2016, respectively, and $5.7 million and $5.2 million during the six months ended June 30, 2017 and 2016, respectively.

Purchase Commitments

Under the terms of an annual supply agreement, the Company guarantees payment for certain third-party manufacturer purchases of raw materials used in the manufacture of its products, up to a maximum of €3.5 million (approximately $4.0$4.3 million as of June 30, 2017)March 31, 2018).

As of June 30, 2017,March 31, 2018, the Company had purchase commitments with otherto third-party manufacturers, primarily for materials and supplies used in the manufacture of the Company’s products, for an aggregate of $81.6 million, and had renewed its agreement with a service provider for information technology services for three years at $5.0 million per year.$110.2 million.
Government Tax Audits
Other

The Company is regularly subject to, and is currently undergoing, audits by various tax authorities in the United States and several foreign jurisdictions, including customs duties, import, and other taxes for prior tax years. See Note 15 — Legal Proceedings for additional information.
Other
During its normal course of business, the Company may make certain indemnities, commitments, and guarantees under which it may be required to make payments in relation to certain matters.payments. The Company cannot determine a range of estimated future payments and has not recorded any liability for indemnities, commitments, and guarantees in the accompanying condensed consolidated balance sheets.

See Note 1514 — Legal Proceedings for further details regarding potential loss contingencies related to government tax audits and other current legal proceedings.


14.13. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION

The Company has three reportable operating segments based on the geographic nature of its operations: the Americas, Asia Pacific, and Europe. In addition, the 'Other businesses'‘Other businesses’ category aggregates insignificant operating segments that do not meet the reportable segment threshold, including manufacturing operations located in Mexico and Italy, and corporate operations.

Each of the reportable operating segments derives its revenues from the sale of footwear and accessories to external customers. Revenues for 'Other businesses'‘Other businesses’ include non-footwear product sales to external customers that are excluded from the measurement of segment operating revenues and income.
Segment performance is evaluated based on segment results without allocating corporate expenses, or indirect general, administrative, and other expenses. Segment profits or losses include adjustments to eliminate inter-segment sales. As such, reconcilingReconciling items forbetween segment operating income representfrom operations and income from operations consist of other businesses and unallocated corporate and other expenses, as well as inter-segment eliminations. The following tables set forth information related to reportable operating segments:

 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
 (in thousands)
Revenues: (1)       
Americas$136,154
 $135,097
 $253,877
 $259,227
Asia Pacific124,644
 130,846
 222,989
 235,347
Europe52,320
 57,660
 103,971
 107,997
Total segment revenues313,118
 323,603
 580,837
 602,571
Other businesses103
 225
 291
 397
Total consolidated revenues$313,221
 $323,828
 $581,128
 $602,968
Operating income: (1)       
Americas$25,205
 $18,015
 $47,207
 $34,592
Asia Pacific33,305
 34,533
 60,030
 60,383
Europe10,031
 8,437
 22,305
 14,960
Total segment income from operations68,541
 60,985
 129,542
 109,935
Reconciliation of total segment income from operations to income before income taxes: 
  
    
Other businesses(5,035) (6,038) (10,650) (12,111)
Unallocated corporate and other(34,060) (34,342) (73,864) (62,976)
Income from operations29,446
 20,605
 45,028
 34,848
Foreign currency gain (loss), net162
 (1,700) 438
 (2,947)
Interest income157
 164
 307
 380
Interest expense(188) (234) (372) (477)
Other income9
 (189) 133
 (107)
Income before income taxes$29,586
 $18,646
 $45,534
 $31,697
Depreciation and amortization:       
Americas$1,347
 $1,504
 $2,692
 $2,982
Asia Pacific920
 992
 1,847
 2,070
Europe379
 718
 764
 1,497
Total segment depreciation and amortization2,646
 3,214
 5,303
 6,549
Other businesses1,741
 1,736
 3,488
 3,446
Unallocated corporate and other3,982
 3,501
 8,024
 7,036
Total consolidated depreciation and amortization$8,369
 $8,451
 $16,815
 $17,031


(1) Revenues and operating results reflect targeted reductions of company-operated stores and discount channel sales, a focus on higher margin core molded products, and continued focus on driving selling, general and administrative expenses lower.
 
Three Months Ended
March 31,
 2018 2017
 (in thousands)
Revenues:   
Americas$123,830
 $117,722
Asia Pacific97,162
 98,344
Europe61,843
 51,651
Total segment revenues282,835
 267,717
Other businesses313
 190
Total consolidated revenues$283,148
 $267,907
Income from operations:   
Americas$28,539
 $22,002
Asia Pacific26,584
 26,726
Europe17,863
 12,274
Total segment income from operations72,986
 61,002
Reconciliation of total segment income from operations to income before income taxes: 
  
Other businesses(10,934) (5,617)
Unallocated corporate and other(36,130) (39,803)
Income from operations25,922
 15,582
Foreign currency gains, net1,071
 276
Interest income279
 150
Interest expense(113) (184)
Other income53
 124
Income before income taxes$27,212
 $15,948
Depreciation and amortization:   
Americas$1,304
 $1,345
Asia Pacific696
 926
Europe352
 385
Total segment depreciation and amortization2,352
 2,656
Other businesses1,524
 1,746
Unallocated corporate and other3,767
 4,044
Total consolidated depreciation and amortization$7,643
 $8,446

15.14. LEGAL PROCEEDINGS

The Company was subjected to an audit by the Brazilian Federal Tax Authorities related to imports of footwear from China between 2010 and 2014. On January 13, 2015, the Company was notified about the issuance of assessments totaling 14.4 million Brazilian Real (“BRL”), or approximately $4.4$4.3 million, plus interest and penalties, for the period January 2010 through May 2011. The Company has disputed these assessments and asserted defenses to the claims. On February 25, 2015, the Company received additional assessments totaling 33.3 million BRL, or approximately $10.1 million, plus interest and penalties, related to the remainder of the audit period. The Company has also disputed these assessments and asserted defenses to these claims in administrative appeals, and is awaiting definitive resolution of those administrative appeals. In the event that the definitive resolution of these administrative appeals is adverse toOn August 29, 2017, the Company received a favorable ruling on its appeal of the Company has recoursefirst assessment, which dismissed all fines, penalties, and interest. The tax authorities have requested a special appeal to further judicial processes,that decision. If the appeal is accepted, Crocs will have the opportunity to both defend the appeal as well as challenge it procedurally. Should the Brazilian Tax Authority prevail in this final administrative appeal, Crocs may still challenge the assessments through the court system, which would likely require the posting of a bond. ItAdditionally, the second appeal for the remaining assessments was heard on March 22, 2018. That decision was partially favorable and resulted in an approximately 38% reduction in principal, penalties, and interest, leaving approximately $8.0 million at risk for those assessments. Both parties can appeal that decision, without posting a bond, through the special appeal process being used for the first assessment. We have not recorded these items within the condensed consolidated financial statements as it is not possible at this time to predict the timing or outcome of this matter or to estimate a potential amount of loss, if any.


The Company was subjected to an audit by U.S. Customs & Border Protection ("CBP") in respect of the period from 2006 to2010. In October 2013, CBP issued their final audit report. In that report CBP projected that unpaid duties totaling approximately $12.4 million were due for the period under review and recommended collection of the duties due. On April 20, 2017, CBP agreed to settle the matter and accepted the Company’s previously tendered payment of $7 million. This matter is now closed. The settlement was reported in the Company’s condensed financial statements as of March 31, 2017.
For all other claims and other disputes, the Company has accrued estimated losses of $0.2$0.3 million within ‘Accrued expenses and other liabilities’ in its condensed consolidated balance sheet as of June 30, 2017.March 31, 2018. Where the Company is able to estimate possible losses or a range of possible losses, the Company estimates that as of June 30, 2017, it is reasonably possible thatMarch 31, 2018, losses associated with these claims and other disputes could potentially exceed amounts accrued byare immaterial.

Although the Company by up to $0.1 million.
The Company is subject to other litigation from time to time in the ordinary course of business, including employment, intellectual property and product liability claims. Theclaims, the Company is not party to any other pending legal proceedings that it believes would reasonably have a material adverse impact on its business and financial position, results of operations or cash flows.results.

15. SUBSEQUENT EVENT

On May 3, 2018, the Company made the decision to close its manufacturing and distribution facilities in Mexico. Manufacturing has ceased, and the Company will execute plans to dispose of or redeploy facility assets, primarily during the second quarter. The distribution center will be closed by the end of the third quarter.




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

Crocs, Inc. and its consolidated subsidiaries (collectively the “Company,” “Crocs,” “we,” “our,” or “us”) are engaged in the design, development, manufacturing, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for men, women, and children. The broad appealWe strive to be the global leader in the sale of molded footwear characterized by functionality, comfort, color, and lightweight design. All of our footwear has allowedproducts utilize our proprietary closed-cell resin, called CrosliteTM, along with a range of other materials, enabling us to market our products throughproduce innovative, lightweight footwear. The Company, a wide rangeDelaware corporation, is the successor to a Colorado corporation of distribution channels, our own Crocs single-branded stores including both full-pricethe same name, and outlet stores, our own e-commerce sites, traditional multi-branded stores including family footwear stores, sporting goods stores andwas originally organized in 1999 as a variety of specialty and independent retail channels, and third-party e-commerce sites. In select markets we also sell to distributors that are typically granted the rights to distribute our products in a given geographical area.limited liability company.

Known or Anticipated Trends

Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends towill impact our operating results:

Continued softening in select global regional economies and a cautious retail environment may negatively affect customer purchasing trends. 

Foreign exchange rate volatility may continue to impact our reported U.S. dollar results from our foreign operations for the foreseeable future.

Consumer spending preferences continue to shift toward e-commerce and away from brick and mortar stores. This has resulted in continued sales growth in our e-commerce channel, as well as on various e-tail sites operated by wholesalers, and contributed to declining foot traffic in our retail locations.

We anticipate lower retail revenues and selling, general and administrative expenses (“SG&A”) as we close less productive stores as leases expire and transfer select company-operated stores to distributors. Distributor revenues are reported within our wholesale channel.

Foreign exchange rate volatility impacts our reported U.S. Dollar results from our foreign operations.
We anticipate that ourIn 2017 we identified annual gross margin for 2017 will trend to approximately 50%, as our seasonal sale volumes are lower in our third and fourth quarters.

We have identified reductions in SG&A in the amount of $75 to $85 million. These actionsmillion which, once implemented, are projected to generate an annual $30 to $35 million improvement in earnings before interest and taxes by 2019.2019, compared to 2016. We expect to achieveachieved approximately $30$23 million of these SG&A reductions in 2017. We expect to incur charges of2017 while incurring approximately $10 million of costs related to $15variable compensation. We remain on track to achieve the targeted SG&A reductions by 2019. We incurred $11 million over the next two yearsin non-recurring charges to achieve these SG&A reductions within 2017 and expect to incur approximately $7$5 million in additional non-recurring charges related to $10 millionSG&A reductions in 2018. We reduced our company-operated retail stores by 111 in 2017 and anticipate an additional reduction of that being incurred in 2017. We anticipate closing or transferring approximately 90 and 7050 company-operated retail stores in 2017 and 2018, respectively, thereby reducing our total store count to approximatelyunder 400 from 558 at the end of 2016.over a two year period. The majority of company-operated store closures will occurare occurring as store leases expire. We completed 22 store closures in the first quarter of 2018.
We are prioritizing growth in our lower-priced, higher-margin molded styles, primarily in clog and sandal silhouettes, as we drive global alignment of our product portfolio and focus on sustainable, profitable revenue growth.
In connection with ongoing efforts to simplify the business and improve profitability, the Company has made the decision to close its manufacturing and distribution facilities in Mexico. Manufacturing has ceased, and the Company will execute plans to dispose of or redeploy facility assets, primarily during the second quarter. The distribution center will be closed by the end of the third quarter. The Company expects to record total charges related to these actions of approximately $10 million before taxes over the course of the second and third quarters of 2018. These charges are expected to include lease termination, facility closure and asset redeployment, expense recognition of cumulative translation adjustments, and employee-related costs. Approximately half of these charges will be non-cash.

 Use of Non-GAAP Financial Measures

 
In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present certain information related to our current period results of operations through “constant currency”,currency,” which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable operating segments under U.S. GAAP. Constant currency represents current period results that have been retranslated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.
 
Management uses constant currency to assist in comparing business trends from period to period on a consistent basis in communications with the Board of Directors (the “Board”), stockholders, analysts, and investors concerning our financial performance. We believe constant currency is useful to investors and other users of our condensed consolidated financial statements as an additional tool to evaluate operating performance. We believe it also provides a useful baseline for analyzing trends in our

operations. Investors should not consider constant currency in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP.

First Quarter 2018 Financial Highlights

The following arewere significant developments in our businesses during the three months ended June 30, 2017:March 31, 2018:

Revenues for the three months ended June 30, 2017 were $313.2$283.1 million, a decreasean increase of $10.6$15.2 million, or 3.3%5.7%, compared to the same period in 2016.2017.

CostWe sold 17.0 million pairs of sales forshoes worldwide, an increase of 3.9% from 16.4 million pairs in the three months ended June 30, 2017March 31, 2017.
Gross margin was $143.449.4%, declining 50 basis points from last year’s first quarter. At the beginning of the first quarter, the Company changed its inventory costing methodology from average cost to first-in-first-out, or FIFO. This change resulted in a timing-related charge to cost of sales in the first quarter, but will have no impact on the full year. Absent this charge, first quarter gross margin would have been up modestly to prior year.
SG&A was $114.0 million, a decrease of $10.8$4.1 million, or 7.0%3.4%, compared to the same period in 2016.2017, and included $2.5 million of non-recurring costs associated with our SG&A reduction plan, compared to $2.2 million in the same period in 2017.

Gross profitIncome from operations improved $10.3 million to $25.9 million compared to $15.6 million for the three months ended June 30, 2017 was $169.8 million, an increase of $0.2 million, or 0.1%. Gross margin increased 180 basis points to 54.2%, compared to the same period in 2016.

Selling, general and administrative expenses decreased $8.7 million, or 5.8%, including $1.8 million in strategic consulting and reorganization costs, for the three months ended June 30, 2017 compared to the same period in 2016.

March 31, 2017.
Net income attributable to common stockholders increased $6.3improved $5.4 million to $18.1$12.5 million compared to $11.7$7.2 million for the same period in 2016.2017. Basic and diluted net earningsincome per common share (“EPS”) were $0.21 and $0.20 respectively,was $0.15 for the three months ended June 30, 2017,March 31, 2018, compared to basic and diluted EPS of $0.13$0.08 for the three months ended June 30, 2016.March 31, 2017.
We continued to focus on improving the efficiency and effectiveness of our operations, including carefully managing and reducing our retail fleet, especially full-priced retail stores, and enhancing the profitability of the retail channel. During the three months ended March 31, 2018, we opened no stores and closed 22 company-operated retail stores.
We repurchased 1.4 million shares of common stock at an aggregate cost of $20.1 million.

Future Outlook
 
We intend to continue pursuing our strategic plans for long-term improvement and growth of the business, which comprise theseobjectives, focusing on three key initiatives:

(1) focusing on driving clogs and sandals growth (sandals includes flips, and slides),

sustainable, profitable revenue growth;
(2) enhancing brand relevanceimproving the quality of revenues; and esteem through our “Come as You Are” campaign, using effective digital marketing,

(3) focusing on driving consistent growth in e-commerce and wholesale, and optimizing distributor and outlet productivity and performance,simplifying our business to reduce costs.

(4)    focusing time and investment on driving growth in core markets in Asia and the Americas,

(5)    driving improved profitability through greater cost and working capital efficiency, and

(6)    elevating internal communication and employee engagement.

We believe these initiatives will better position Crocs to adapt to changing customer demands and global economic developments. We are focusing on our core molded footwear heritage by narrowing our product line with an emphasis on higher marginto emphasize higher-margin units, as well as developing innovative new casual lifestyle footwear platforms. By streamlining theour product portfolio to focus on the most successful designs, driving global alignment of our product offerings, and reducing non-core product development,investing in marketing, we believe we will create a more powerful consumer connection to the brand.


We are refining our business model around the world, prioritizing direct investment in larger-scale geographies to focus our resources on the demographics with the largest growth prospects, moving away from direct investment in the retail and wholesale businesses in smaller markets, and transferring significant commercial responsibilities to distributors and third-party agents.distributors. Further, we intend to expandare expanding our engagement with leading wholesale accounts in select markets to drive sales growth, optimize product placement, and enhance brand reputation.


Comparison of the Three Months Ended June 30, 2017March 31, 2018 to the Three Months Ended June 30, 2016March 31, 2017

Results of Operations
Three Months Ended June 30, ChangeThree Months Ended March 31,  
2017 2016 $ %2018 2017 % Change
(in thousands, except per share, margin, unit sales and average selling price data)(in thousands, except per share, margin, and average selling price data)
Revenues$313,221
 $323,828
 $(10,607) (3.3)%$283,148
 $267,907
 5.7 %
Cost of sales143,414
 154,188
 (10,774) (7.0)%143,275
 134,323
 (6.7)%
Gross profit169,807
 169,640
 167
 0.1 %139,873
 133,584
 4.7 %
Selling, general and administrative expenses140,361
 149,035
 (8,674) (5.8)%113,951
 118,002
 3.4 %
Income from operations29,446
 20,605
 8,841
 42.9 %25,922
 15,582
 66.4 %
Foreign currency gain (loss), net162
 (1,700) 1,862
 109.5 %
Foreign currency gains, net1,071
 276
 288.0 %
Interest income157
 164
 (7) (4.3)%279
 150
 86.0 %
Interest expense(188) (234) 46
 (19.7)%(113) (184) 38.6 %
Other income, net9
 (189) 198
 (104.8)%
Other income53
 124
 (57.3)%
Income before income taxes29,586
 18,646
 10,940
 58.7 %27,212
 15,948
 70.6 %
Income tax expense7,627
 3,109
 4,518
 145.3 %10,758
 4,938
 (117.9)%
Net income21,959
 15,537
 6,422
 41.3 %16,454
 11,010
 49.4 %
Dividends on Series A convertible preferred stock(3,000) (3,000) 
  %(3,000) (3,000)  %
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature(873) (802) (71) 8.9 %(931) (855) (8.9)%
Net income attributable to common stockholders$18,086
 $11,735
 $6,351
 54.1 %$12,523
 $7,155
 75.0 %
       
Net income per common share:            
Basic$0.21
 $0.13
 $0.08
 61.5 %$0.15
 $0.08
 87.5 %
Diluted$0.20
 $0.13
 $0.07
 53.8 %$0.15
 $0.08
 87.5 %
            
Gross margin54.2% 52.4% 180
 3.5 %
Operating margin9.4% 6.4% 300
 46.9 %
Gross margin (1)
49.4% 49.9% (50)bp
Operating margin (1)
9.2% 5.8% 340bp
Footwear unit sales17,422
 17,734
 (312) (1.8)%17,033
 16,396
 3.9 %
Average footwear selling price$17.66
 $18.05
 $(0.39) (2.2)%
Average footwear selling price - nominal basis$16.28
 $16.11
 1.1 %
Average footwear selling price - constant currency basis (2)
$15.50
 $16.11
 (3.8)%
(1) Changes for gross margin and operating margin are shown in basis points (“bp”).
(2) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. Constant currency represents current period results that have been retranslated using exchange rates in effect in the prior comparative period.

Revenues. Revenues decreased $10.6increased $15.2 million, or 3.3%5.7%, in the three months ended June 30, 2017, compared to the same period in 2016. The revenue decrease was primarily due to the sale of2017. By growing our Taiwan business in December 2016, targeted reductions in the number of our company-operatedwholesale and e-commerce channels, we offset lower retail revenues resulting from operating 117 fewer retail stores and additional actions takencompared to optimize our wholesale, retail and e-commerce channels. Approximately $5.7 million, or 1.8%, of the decrease was due to lower sales volumes, $2.9 million, or 0.9%, was due toMarch 31, 2017. A lower average selling prices asprice (“ASP”), a reflection of our product, store and channel mix continued to change, and the remaining decrease of $2.0focus on lower-priced, higher-margin molded footwear, reduced revenues by approximately $8.6 million, or 0.6%3.2%. Continued strength in our clog and growth in our sandal silhouettes drove higher sales volumes, primarily in our e-commerce and wholesale channels, which increased revenues by $10.4 million, or 3.9%. An increase of $13.4 million, or 5.0%, resulted from foreign currency translation.
 

Cost of sales. During the three months ended June 30, 2017, costCost of sales decreased $10.8increased $9.0 million, or 7.0%6.7%, compared to the same period in 2016. Lower average costs per unit were primarily the result of2017. Changes in product mix including sandals and clog silhouettes which cost less to produce, and continued supply chain cost reductions, including relocationa reallocation of third-party manufacturing production to lower-cost suppliers within the Asia Pacific region. Approximately $2.7 million, or 1.8%, of the decrease was due to lower unit sales volumes, $7.5 million, or 4.8%, was relatedregion, contributed to lower average costs per unit, and $0.6accounting for a $1.7 million, or 0.4%1.3%, fromdecline in cost of sales. Higher sales volume resulted in an increase in cost of sales of $5.2 million, or 3.9%, and foreign currency translation.translation resulted in an increase of $5.5 million, or 4.1%.

Gross profit.Profit. During the three months ended June 30, 2017, grossGross profit increased $0.2$6.3 million, or 0.1%4.7%, and gross margin increased 180declined 50 basis points to 54.2%49.4%, compared to the same period in 2016. The2017. An increase in gross profit was primarily due to our continued focus on sales of higher margin core molded products, and reduced sales through discount channels. Approximately $4.5approximately $5.2 million, or 2.7%3.9%, resulted from higher sales volumes and an increase of the increase was due to the combined impact of decreases in average costs per unit which exceeded decreases in average selling prices,$7.9 million, or 5.9%, resulted from foreign currency translation. These increases were partially offset by decreasesa decrease of $3.0$6.8 million, or 1.8%5.1%, resulting from the lower sales unit volumes, and $1.3 million, or 0.8%, from foreign currency translation.ASP, as our product mix shifts to molded styles.

Selling, general and administrative expenses.SG&A decreased $8.7$4.1 million, or 5.8%3.4%, during the three months ended June 30, 2017, compared to the same period in 2016.2017. As a percent of sales, SG&A improved by 380 basis points to 40.2%. The decrease was primarily due to the combined impacts of a timing related deferral of $1.7 million in marketing expense related to our advertising and promotional activities, a decrease in facilities expenses of $2.6$3.1 million reflectingas a result of fewer company-operated retail stores, and the sale of our Taiwan business, a decrease in net bad debts expensecompensation expenses of $1.2$2.5 million, due to recoverieslower professional services fees of previously reserved accounts receivable in China,$1.5 million, and decreaseslower travel and other expenses of $3.2$2.0 million, related towhich were results of our SG&A reduction efforts, noneefforts. These savings were partially offset by increased marketing expenses of which were individually significant.
Bad debt expense$3.5 million, due to both increased investment and timing, and non-cash impairment expenses of $1.5 million related to our China operations was not significant during 2017 or 2016, due to the implementation of a more restrictive credit policy in 2015retail store and our continued focus on the creditworthiness of our distribution partners.supply chain assets.

Foreign currency gain (loss),gains, net. Foreign currency gain (loss),gains, net, consists of unrealized and realized foreign currency gains and losses from the re-measurementremeasurement and settlement of monetary assets and liabilities denominated in non-functional currencies andas well as realized and unrealized gains and losses on foreign currency derivative instruments. During the three months ended June 30, 2017,March 31, 2018, we recognized realized and unrealized net foreign currency gains of $0.2$1.1 million compared to net losses of $1.7$0.3 million during the three months ended June 30, 2016.March 31, 2017.

Income tax expense. During the three months ended June 30, 2017, incomeIncome tax expense increased $4.5$5.8 million compared to the same period in 2016.2017. The effective tax rate for the three months ended June 30, 2017March 31, 2018 was 25.8%39.5% compared to an effective tax rate of 16.7%31.0% for the same period in 2016, a 9.1%2017, an 8.5% increase. The increase in the effective rate was partially driven primarilyby the impact of our provisional estimate of the global intangible low-taxed income (“GILTI”) provisions included in the U.S. Tax Cuts and Job Act “Tax Act”). The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in the effective tax rate calculation. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The increase in the effective tax rate is also driven by operating losses in certain jurisdictions where we are unable to record tax benefits because we have determined that it is not more likely than not that such tax benefits will be realized, as well as an increase in profitability in certain jurisdictions for which tax expense is recorded. Our effective tax rate of 25.8%39.5% for the three months ended June 30, 2017March 31, 2018 differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions, the GILTI tax, as well as book losses in certain jurisdictions for which tax benefits cannot be recognized.

Revenues By Channel
Three Months Ended June 30, Change 
Constant Currency
Change (1)
 Three Months Ended March 31, % Change 
Constant  Currency
% Change (1)
2017 2016 $ % $ % 2018 2017 
(in thousands) (in thousands)
Wholesale: 
  
  
  
  
  
  
  
  
  
Americas$57,307
 $54,620
 $2,687
 4.9 % $2,516
 4.6 % $72,674
 $71,023
 2.3 % 2.5 %
Asia Pacific65,146
 74,640
 (9,494) (12.7)% (8,541) (11.4)% 71,733
 70,935
 1.1 % (5.2)%
Europe30,947
 36,192
 (5,245) (14.5)% (5,234) (14.5)% 49,877
 40,583
 22.9 % 7.6 %
Other businesses103
 225
 (122) (54.2)% (121) (53.8)% 313
 190
 64.7 % 46.3 %
Total wholesale153,503
 165,677
 (12,174) (7.3)% (11,380) (6.9)% 194,597
 182,731
 6.5 % 0.7 %
Retail: 
  
  
  
  
  
  
  
  
  
Americas55,576
 57,786
 (2,210) (3.8)% (2,108) (3.6)% 34,716
 32,829
 5.7 % 5.6 %
Asia Pacific39,429
 41,319
 (1,890) (4.6)% (1,566) (3.8)% 17,614
 21,532
 (18.2)% (22.4)%
Europe13,071
 13,950
 (879) (6.3)% (1,138) (8.2)% 7,176
 7,419
 (3.3)% (12.7)%
Total retail108,076
 113,055
 (4,979) (4.4)% (4,812) (4.3)% 59,506
 61,780
 (3.7)% (6.4)%
E-commerce:

 

 

 

 

 

 

 

 

  
Americas23,271
 22,691
 580
 2.6 % 659
 2.9 % 16,440
 13,869
 18.5 % 18.0 %
Asia Pacific20,069
 14,887
 5,182
 34.8 % 6,008
 40.4 % 7,815
 5,877
 33.0 % 24.3 %
Europe8,302
 7,518
 784
 10.4 % 902
 12.0 % 4,790
 3,650
 31.2 % 15.0 %
Total e-commerce51,642
 45,096
 6,546
 14.5 % 7,569
 16.8 % 29,045
 23,396
 24.1 % 19.1 %
Total revenues$313,221
 $323,828
 $(10,607) (3.3)% $(8,623) (2.7)% $283,148
 $267,907
 5.7 % 0.7 %
(1) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. Constant currency represents current period results that have been retranslated using exchange rates in effect in the prior comparative period.

Wholesale channel revenues. During the three months ended June 30, 2017, revenuesRevenues from our wholesale channel, decreased $12.2which includes sales through our e-tail partners as well as distributor-operated retail store sales, increased $11.9 million, or 7.3%6.5%, compared to the same period in 2016.2017. An increase of approximately $8.4 million, or 4.6%, from higher sales volumes resulted from increased customer demand, especially in the

e-tail sector as consumers shift towards online purchasing. Strength in volume was partially offset by a decrease of $7.0 million, or 3.9%, attributable to a lower ASP, reflective of our focus on lower-priced, higher-margin molded footwear. Foreign currency translation drove an increase of $10.5 million, or 5.8%.

Retail channel revenues. Revenues from our retail channel decreased $2.3 million or 3.7%, compared to the same period in 2017. The decrease resulted from an intentional reductionin retail channel revenues was due to targeted reductions in our company-operated retail store count, consistent with our store rationalization plan. We operated 117 fewer stores compared to the end of last year’s first quarter. Our comparable retail store sales through discount channels and reduced sales to select, overstocked distributorsshowed growth of 7.6% on a global basis, indicative of increased traffic in Asia, which we began in the third quarter of 2016 to improve the quality of our earnings.remaining company-operated stores. Approximately $8.2$4.0 million, or 4.9%6.5%, of the decrease resulted from lower sales volumes $3.2 million, or 1.9%, is attributablerelated to lower average selling prices, and $0.8 million, or 0.5%, resulted from foreign currency translation.
Retail channel revenues. During the three months ended June 30, 2017, revenues from our retail channel decreased $5.0 million or 4.4%, compared to the same period in 2016. The decrease in retail channel revenues compared to the same period in 2016 was due primarily to lower average sales prices as we shift to lower-priced molded product, combined with a net decrease of 55 company-operated retail store locations, as we work to optimize our store fleet. Approximately $5.7 million, or 5.1%, of the decrease was attributable to lower average selling prices, a decrease of $0.2 million, or 0.1%, resulted from foreign currency translation, which werecount reduction, partially offset by an increase of $0.9$1.7 million, or 0.8%2.7%, from higher sales volumes.foreign currency translation.

E-commerce channel revenues. During the three months ended June 30, 2017, revenuesRevenues from our e-commerce channel, which includes our own e-commerce sites as well as sales through third-party marketplaces, increased $6.6$5.6 million, or 14.5%24.1%, compared to the same period in 2016,2017, as this channel continuescontinued to grow in importance to our overall business. Revenues associated with an increase of $15.4increased by $4.8 million, or 34.0%20.4%, infrom higher sales volumes particularlyas a result of increased consumer demand and a shift toward online purchasing. The increase in the Asia Pacific segment, werevolume was partially offset in part by a decrease of $7.8$0.3 million, or 17.3%1.3%, in lower average selling prices, anddue to a decrease in ASP, reflecting our focus on lower-priced molded footwear. Foreign currency translation resulted in an increase of $1.0$1.1 million, or 2.2%, from foreign currency translation.5.0%.

Future changes in average selling prices will be impacted by: (i) the mix of products sold, (ii) the sales channel under which the sales are made (as we generally realize higher sales prices from our retail and e-commerce channels as compared to our wholesale channel), and (iii) the level of sales discounts and incentives we offer our customers.


Comparison of the Three Months Ended June 30,March 31, 2018 and 2017 and 2016 by Reportable Operating Segment

The following table sets forth information related to our reportable operating segments, including a comparison of revenues and operating income by segment:
 Three Months Ended June 30, Change 
Constant Currency
Change (1)
 2017 2016 $ % $ %
 (in thousands)
Revenues: 
  
  
  
  
  
Americas$136,154
 $135,097
 $1,057
 0.8 % $1,067
 0.8 %
Asia Pacific124,644
 130,846
 (6,202) (4.7)% (4,099) (3.1)%
Europe52,320
 57,660
 (5,340) (9.3)% (5,470) (9.5)%
  Total segment revenues313,118
 323,603
 (10,485) (3.2)% (8,502) (2.6)%
Other businesses103
 225
 (122) (54.2)% (121) (53.8)%
Total revenues$313,221
 $323,828
 $(10,607) (3.3)% $(8,623) (2.7)%
            
Income from operations:     
  
  
  
Americas$25,205
 $18,015
 $7,190
 39.9 % $7,294
 40.5 %
Asia Pacific33,305
 34,533
 (1,228) (3.6)% (654) (1.9)%
Europe10,031
 8,437
 1,594
 18.9 % 1,284
 15.2 %
  Total segment operating income68,541
 60,985
 7,556
 12.4 % 7,924
 13.0 %
Other businesses (2)(5,035) (6,038) 1,003
 (16.6)% 1,008
 (16.7)%
Unallocated corporate and other (3)(34,060) (34,342) 282
 (0.8)% (41) 0.1 %
Total operating income$29,446
 $20,605
 $8,841
 42.9 % $8,891
 43.1 %


 Three Months Ended March 31, % Change 
Constant  Currency
% Change (1)
 2018 2017  
 (in thousands)
Revenues: 
  
  
  
Americas$123,830
 $117,722
 5.2 % 5.2 %
Asia Pacific97,162
 98,344
 (1.2)% (7.2)%
Europe61,843
 51,651
 19.7 % 5.2 %
  Total segment revenues282,835
 267,717
 5.6 % 0.7 %
Other businesses313
 190
 64.7 % 46.3 %
Total consolidated revenues$283,148
 $267,907
 5.7 % 0.7 %
        
Income from operations:     
  
Americas$28,539
 $22,002
 29.7 % 30.0 %
Asia Pacific26,584
 26,726
 (0.5)% (8.9)%
Europe17,863
 12,274
 45.5 % 23.6 %
Total segment income from operations72,986
 61,002
 19.6 % 11.6 %
Other businesses (2)
(10,934) (5,617) (94.7)% 89.6 %
Unallocated corporate and other (3)
(36,130) (39,803) 9.2 % (12.0)%
Total consolidated income from operations$25,922
 $15,582
 66.4 % 44.0 %
(1) Reflects year over year change as if the current period results were in “constant currency”,constant currency, which is a non-GAAP financial measure. “Constant currency”Constant currency represents current period results that have been retranslated using exchange rates in effect in the prior comparative period.

(2) Other businesses consists primarily of our owned and leased manufacturing facilities, which manufacture products for sale by our operating segments.

(3) Unallocated corporate and other includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, and depreciation and amortization of corporate and other assets not allocated to operating segments.segments.

Americas Operating Segment
 
Revenues. During the three months ended June 30, 2017, revenuesRevenues for our Americas segment increased $1.1$6.1 million, or 0.8%5.2%, compared to the same period in 2016. Higher wholesale2017, reflecting growth in each channel. The increase in revenues as a result of increased customer acceptance of our products in key family footwear accounts, and a modestwas led by an 18.5% increase in e-commerce revenues were partially offset by lowerwith additional increases of 5.7% in retail, revenues resulting fromdespite operating 12 fewer company-operated retail stores.stores in the segment compared to the same period last year, and 2.3% in wholesale revenues. Higher sales volumes resulted in an increase of approximately $3.0$11.4 million, or 2.2%9.7%, which was partially offset by a decrease in average selling pricesASP of $1.9$5.3 million, or 1.4%.4.5%, reflecting our focus on lower-priced molded footwear. Foreign currency translation had no significant impact on results.
 
Income from Operations. DuringIncome from operations for the Americas segment was $28.5 million, an increase of $6.5 million, or 29.7%, compared to the three months ended June 30, 2017, grossMarch 31, 2017. Gross profit for the Americas segment increased $3.3$2.3 million, or 4.8%3.9%, and gross margin increased 206decreased 60 basis points to 53.3%50.4%, compared to the same period in 2016.2017. The increase in theour Americas segment gross profit is due to the net impact of an increase of $1.5$6.5 million, or 2.2%10.9%, due to higher sales volumes an increaseand a decrease of $1.9$4.2 million, or 2.8%6.9%, due to a declinedecrease in average costs per unit which exceeded the decline in average selling prices, and a decreaseASP, reflecting our focus on lower-priced, higher-margin molded footwear. The impact of $0.1 million, or 0.2%, due to foreign currency translation.translation on gross margin was insignificant.

During the three months ended June 30, 2017, SG&A for our Americas segment decreased $3.9$4.2 million, or 7.5%11.0%, compared to the same period in 2016.2017. The decrease in SG&A was primarily due to the impacts of a decrease in marketing expenses of $1.2 million, decreases of $1.1 million in compensation expense and $1.2 million in travel and other expenses as a result of our SG&A reduction efforts, and a decrease of $0.7 million in facilities expense, due primarily to reduced retail store locations. 


Asia Pacific Operating Segment

Revenues. Revenues for our Asia Pacific segment decreased $1.2 million, or 1.2%, compared to the same period in 2017. Increased e-commerce revenues of 33.0% and increased wholesale revenues of 1.1% were offset by a decline in retail channel revenues. Retail revenues decreased by 18.2% as we operated 83 fewer stores in the region compared to the same period last year. Wholesale revenues increased modestly as we continue to pursue business model changes to drive higher quality revenues and improve profitability across Asia. Lower sales volumes drove a decrease of $4.6 million, or 4.7%, and a lower ASP resulted in a decrease of $2.5 million, or 2.5%. These decreases were partially offset by an increase of $5.9 million, or 6.0%, from foreign currency translation.
Income from Operations. Income from operations for the Asia Pacific segment was $26.6 million, substantially unchanged compared to the three months ended March 31, 2017. Gross profit decreased $2.1 million, or 3.9%, and gross margin decreased 150 basis points to 53.3% compared to the same period in 2017. The decrease in gross profit is due to the net impact of a decrease of $2.2 million, or 4.2%, due to lower sales volumes, a result of targeted reductions in company-operated retail stores, and a decrease of $3.4 million, or 6.3%, due to a lower ASP, reflecting our focus on lower-priced molded footwear, partially offset by a $3.5 million, or 6.6%, increase from foreign currency translation.
SG&A for our Asia Pacific segment decreased $2.0 million or 7.2%, compared to the same period in 2017. The decrease in SG&A was primarily due to the net impact of a decrease of $0.9 million in salaries and wages, a decrease of $0.7$1.8 million in facilities expenses due primarily to reduced retail store locations, decreases of $1.0 million in marketing, information technology and bad debts expenses, and decreases of $1.3 million in services and other expenses, none of which were individually significant.
Asia Pacific Operating Segment
Revenues. During the three months ended June 30, 2017, revenues for our Asia Pacific segment decreased $6.2 million, or 4.7%, compared to the same period in 2016. Wholesale revenues decreased due to the sale of our Taiwan business in December 2016, and reduced sales to select, overstocked distributors. Retail revenues decreased due to a lower number of company-operated retail stores. E-commerce revenues increased, with particularly strong results in China. Approximately $13.8 million, or 10.5%, of the decrease was due to lower average selling prices, accompanied by a decrease of $2.1 million, or 1.6%, from foreign currency translation, which were offset in part by an increase of $9.7 million, or 7.4%, due to higher sales volumes.
Income from Operations. During the three months ended June 30, 2017, gross profit for the Asia Pacific segment decreased $4.7 million, or 5.9%, and gross margin decreased 72 basis points to 59.9% compared to the same period in 2016. The decrease in the Asia Pacific segment gross profit is due to the net impact of an increase of $5.9 million, or 7.4%, due to higher unit sales volumes, a decrease of $9.2 million, or 11.6%, due to a decline in average selling prices that exceeded the decline in average costs per unit, and a $1.4 million, or 1.7%, decrease from foreign currency translation.
During the three months ended June 30, 2017, SG&A for our Asia Pacific segment decreased $3.4 million or 7.7%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of a reduction in net bad debts expense of $0.9 million due to due to recoveries of previously reserved accounts receivable in China, a decrease of $2.4 million in salaries, wages and facilities expenses as a result of the reduction in the number of company-operated retail stores, a decrease of $0.9 million in compensation expense, and a net increase in services and other expenses of $0.7 million, impacts of our SG&A reduction efforts, and a decrease of $0.1 million in services and other costs. efforts.

Europe Operating Segment
 
Revenues. During the three months ended June 30, 2017, revenuesRevenues for our Europe segment decreased $5.3increased $10.2 million, or 9.3%19.7%, compared to the same period in 2016,2017. E-commerce and wholesale channels grew, while retail results were negatively impacted as we continued reducing discount channel salesoperated 22 fewer stores in the region compared to last year and our company-operated stores, while growing our e-commerce business. Approximately $13.1store traffic fell as the region experienced harsh winter weather. Revenues increased $2.2 million, or 22.7%4.3%, of the decrease was due to lowerhigher sales volumes which was offsetand $0.5 million, or 1.0%, due to a higher ASP in part bythe region. Foreign currency translation drove an increase of $7.6$7.5 million, or 13.2%, attributable to higher average selling prices and an increase of $0.2 million, or 0.2%, from foreign currency translation.14.4%.

Income from Operations. DuringIncome from operations for the Europe segment was $17.9 million, an increase of $5.6 million, or 45.5%, compared to the three months ended June 30, 2017, grossMarch 31, 2017. Gross profit for the Europe segment decreased $0.9increased $6.4 million, or 3.3%25.0%, and gross margin increased 332220 basis points to 53.4%51.9% compared to the same period in 2016.2017. The decreaseincrease in the Europe segment gross profit was due to the net impact of a decreasean increase of $6.5$1.1 million, or 22.7%4.4%, from lowerhigher unit sales volumes, an increase of $5.5$1.0 million, or 19.1%3.7%, from a higher average selling prices that exceeded an increase in cost per unit,ASP, and a $0.1$4.3 million, or 0.3%17.0%, increase from foreign currency translation.
 
During the three months ended June 30, 2017, SG&A for our Europe segment decreased $2.5increased $0.8 million, or 12.4%6.2%, compared to the same period in 2016.2017. The decreaseincrease in SG&A was primarily due to the net impact of a decreasean increase of $1.4$1.1 million in salaries, wages andcompensation expense, partially offset by decreases in facilities expenses,expense of $0.4 million, resulting from reductions in the number of company-operated retail stores and our SG&A reduction efforts, a $0.7 million decrease in marketing expenses due to a timing deferral, and a decrease in services and other costs of $0.4 million.efforts.

Other Businesses and Unallocated Corporate and Other

During the three months ended June 30, 2017,March 31, 2018, total net costs within Other Businesses and Unallocated Corporate and Other decreasedincreased by $0.3$1.6 million or 0.8%, compared to the same period in 2016.2017. The decreaseincrease was primarily due to decreasesincreased marketing expense of $4.4 million, partially offset by $1.6 million in lower compensation expense and $1.2 million in lower services and other corporate expenses.


Store Locations and Comparable Store Sales

The table below illustrates the overall change in the number of our company-operated retail locations by type of store and reportable operating segment:
March 31, 2017 Opened Closed (1) June 30, 2017December 31, 2017 Opened Closed March 31, 2018
Company-operated retail locations:              
Type:              
Kiosk/store-in-store90
 
 6
 84
71
 
 
 71
Retail stores219
 1
 29
 191
161
 
 16
 145
Outlet stores233
 3
 8
 228
215
 
 6
 209
Total542
 4
 43
 503
447
 
 22
 425
Operating segment:              
Americas186
 
 2
 184
175
 
 1
 174
Asia Pacific260
 3
 35
 228
186
 
 9
 177
Europe96
 1
 6
 91
86
 
 12
 74
Total542
 4
 43
 503
447
 
 22
 425

(1) We completed the transfer of twenty-five company-operated stores in the Middle-East and China to distributors during the period.
Comparable retail store sales and direct to consumer store sales by operating segment are as follows:were:
Constant Currency (1)
Constant Currency (1)
Three Months Ended June 30,Three Months Ended March 31,
2017 20162018 2017
Comparable store sales (retail only): (2)   
Comparable retail store sales: (2)
   
Americas0.4 % (2.5)%10.9 % (6.0)%
Asia Pacific(0.9)% (6.8)%4.7 % (1.4)%
Europe0.7 % 1.8 %(2.6)% (7.7)%
Global0.0 % (3.4)%7.6 % (4.8)%
 
Constant Currency (1)
Constant Currency (1)
Three Months Ended June 30,Three Months Ended March 31,
2017 20162018 2017
Direct to consumer comparable store sales (includes retail and e-commerce): (2)      
Americas1.1% 2.4%13.1% (5.0)%
Asia Pacific13.3% 4.3%10.4% 5.5 %
Europe5.1% 1.6%4.2% (5.2)%
Global5.7% 2.9%11.2% (2.2)%

(1) Reflects period over period change on a “constant currency”constant currency basis, which is a non-GAAP financial measure. “Constant currency”Constant currency represents current period results that have been retranslated using exchange rates used in the prior comparative period.
(2) Comparable store status is determined on a monthly basis. Comparable store sales includes the revenues of stores that have been in operation for more than twelve months. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion, or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening. E-commerce revenues are based on same site sales period over period.


Comparison of the Six Months Ended June 30, 2017 to the Six Months Ended June 30, 2016Financial Condition, Capital Resources, and Liquidity

ResultsLiquidity

Our liquidity position as of Operations March 31, 2018 was:
 Six Months Ended June 30, Change
 2017 2016 $ %
 (in thousands, except per share, margin, unit sales and average selling price data)
Revenues$581,128
 $602,968
 $(21,840) (3.6)%
Cost of sales277,737
 303,962
 (26,225) (8.6)%
Gross profit303,391
 299,006
 4,385
 1.5 %
Selling, general and administrative expenses258,363
 264,158
 (5,795) (2.2)%
Income from operations45,028
 34,848
 10,180
 29.2 %
Foreign currency transaction gain (loss), net438
 (2,947) 3,385
 (114.9)%
Interest income307
 380
 (73) (19.2)%
Interest expense(372) (477) 105
 (22.0)%
Other expense, net133
 (107) 240
 (224.3)%
Income before income taxes45,534
 31,697
 13,837
 43.7 %
Income tax expense12,564
 6,014
 6,550
 108.9 %
Net income32,970
 25,683
 7,287
 28.4 %
Dividends on Series A convertible preferred stock(6,000) (6,000) 
  %
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature(1,729) (1,587) (142) 8.9 %
Net income attributable to common stockholders$25,241
 $18,096
 $7,145
 39.5 %
        
Net income per common share:   
    
Basic$0.29
 $0.21
 $0.08
 38.1 %
Diluted$0.29
 $0.20
 $0.09
 45.0 %
        
Gross margin52.2% 49.6% 260
 5.3 %
Operating margin7.7% 5.8% 197
 34.1 %
Footwear unit sales33,817
 34,001
 (184) (0.5)%
Average footwear selling price$16.91
 $17.48
 $(0.57) (3.3)%
  March 31, 2018
  (in thousands)
Cash, cash equivalents, and restricted cash $106,825
Available borrowings 99,386

Revenues. Revenues decreased $21.8 million, or 3.6%, in the six months ended June 30, 2017, compared to the same period in 2016. The decrease in revenues was primarily due to the saleAs of our Taiwan business in December 2016, targeted reductions in the number of company-operated retail stores, and additional actions taken to optimize our wholesale, retail and e-commerce channels. Approximately $3.2 million, or 0.5%, of the decrease was due to lower sales volumes, $17.6 million, or 2.9%, was due to lower average selling prices as our product, store, and channel mix continued to change, and $1.0 million, or 0.2%, resulted from foreign currency translation.

Cost of sales. During the six months ended June 30, 2017, cost of sales decreased $26.2 million, or 8.6%, compared to the same period in 2016. Lower average costs per unit were primarily the result of product mix, including sandals and clog silhouettes which cost less to produce, and continued supply chain cost reductions, including relocation of third-party manufacturing production within the Asia Pacific region. Approximately $24.7 million, or 8.1%, of the decrease was due to lower average costs per unit, and $1.6 million, or 0.5%, due to lower unit sales volumes, which was partially offset by an increase of $0.1 million, or less than 1%, from foreign currency translation.

Gross profit. During the six months ended June 30, 2017, gross profit increased $4.4 million, or 1.5%, and gross margin increased approximately 260 basis points to 52.2% compared to the same period in 2016. The increase in gross profit was primarily due to our continued focus on sales of higher margin core molded products, and reduced sales through discount channels. Approximately $7.1 million, or 2.4%, of the increase was due to decreases in average costs per unit which exceeded decreases in average selling prices, which was partially offset by decreases of $1.6 million, or 0.5%, from lower sales unit volumes, and $1.1 million, or 0.4%, from foreign currency translation.
Selling, general and administrative expenses. SG&A decreased $5.8 million, or 2.2%, during the six months ended June 30, 2017, compared to the same period in 2016. The decrease was primarily due to the combined net impacts of a decrease of $6.1March 31, 2018, we had $106.8 million in facilities expenses reflecting fewer company-owned retail stores, including impairment in 2016cash, cash equivalents, and restricted cash and up to $99.4 million of $0.8 million, lower net bad debts expense of $2.2 million due to recoveries of previously reserved accounts receivable in China, partially offset by higher marketing expenses of $2.1 million and an increase in other expenses of $0.4 million.
Bad debt expense related toremaining availability under our China operations was not significant during 2017 or 2016, due to the implementation of a more restrictiverevolving credit policy in 2015 and continued focus on the creditworthiness of our distribution partners.

Foreign currency gain (loss), net. Foreign currency gain (loss), net consists of foreign currency gains and losses from the re-measurement and settlement of monetary assets and liabilities denominated in non-functional currencies, and realized and unrealized gains and losses on foreign currency derivative instruments. During the six months ended June 30, 2017, we recognized realized and unrealized foreign currency net gains of $0.4 million compared to net losses of $2.9 million during the six months ended June 30, 2016
Income tax expense. During the six months ended June 30, 2017, income tax expense increased $6.6 million compared to the same period in 2016. The effective tax rate for the six months ended June 30, 2017 was 27.6% compared to an effective tax rate of 19.0% for the same period in 2016, an 8.6% increase. The increase in the effective rate was driven primarily by operating losses in certain jurisdictions where we are unable to record tax benefits because we have determinedfacilities. We believe that it is not more likely than not that such tax benefits will be realized, as well as an increase in profitability in certain jurisdictions for which tax expense is recorded. Our effective tax rate of 27.6% for the six months ended June 30, 2017 differs from the federal U.S. statutory rate primarily due to differences in income tax rates between U.S. and foreign jurisdictions as well as book losses in certain jurisdictions for which tax benefits cannot be recognized.

Revenues By Channel
 Six Months Ended June 30, Change 
Constant Currency
Change (1)
 2017 2016 $ % $ %
 (in thousands)
Wholesale: 
  
  
  
  
  
Americas$128,333
 $128,775
 $(442) (0.3)% $(1,762) (1.4)%
Asia Pacific136,081
 151,793
 (15,712) (10.4)% (14,760) (9.7)%
Europe71,530
 75,254
 (3,724) (4.9)% (3,096) (4.1)%
Other businesses291
 397
 (106) (26.7)% (100) (25.2)%
Total wholesale336,235
 356,219
 (19,984) (5.6)% (19,718) (5.5)%
Retail:           
Americas88,405
 93,535
 (5,130) (5.5)% (5,066) (5.4)%
Asia Pacific60,961
 63,838
 (2,877) (4.5)% (2,730) (4.3)%
Europe20,490
 21,505
 (1,015) (4.7)% (1,549) (7.2)%
Total retail169,856
 178,878
 (9,022) (5.0)% (9,345) (5.2)%
E-commerce:           
Americas37,139
 36,917
 222
 0.6 % 267
 0.7 %
Asia Pacific25,946
 19,716
 6,230
 31.6 % 7,111
 36.1 %
Europe11,952
 11,238
 714
 6.4 % 869
 7.7 %
Total e-commerce75,037
 67,871
 7,166
 10.6 % 8,247
 12.2 %
Total revenues$581,128
 $602,968
 $(21,840) (3.6)% $(20,816) (3.5)%

Wholesale channel revenues. During the six months ended June 30, 2017, revenues from our wholesale channel decreased $20.0 million, or 5.6%, compared to the same period in 2016. The decrease was due to lower average sales prices as we shift to lower-priced molded product, an intentional reduction of sales through discount channels, and reduced sales to select, overstocked distributors in Asia, which we began in the third quarter of 2016 to improve the quality of our earnings. Approximately $3.8 million, or 1.1%, of the decrease resulted from lower sales volumes, $15.9 million, or 4.5%, was due to lower average selling prices, and $0.3 million, or less than 1%, resulted from foreign currency translation.
Retail channel revenues. During the six months ended June 30, 2017, revenues from our retail channel decreased $9.0 million, or 5.0% compared to the same period in 2016. The decrease in retail channel revenues was due primarily to lower average sales prices as we shift to lower-priced molded product, and a net decrease of 55 company-operated retail store locations, as we work to optimize our store base. Approximately $7.0 million, or 3.9%, of the decrease was due to lower average selling prices, along with a decrease of $2.4 million, or 1.3%, in sales volumes, partially offset by an increase of $0.2 million, or 0.2%, from foreign currency translation.

E-commerce channel revenues. During the six months ended June 30, 2017, revenues from our e-commerce channel increased $7.2 million, or 10.6%, compared to the same period in 2016., as this channel continued to grow in importance to our business. Approximately $17.7 million, or 26.1%, of the increase resulted from higher sales volumes, primarily in the Asia Pacific segment, which was partially offset by decreases of $9.5 million, or 14.0%, due to lower average selling prices, and $1.0 million, or 1.5%, from foreign currency translation.

Future changes in average selling prices will be impacted by: (i) the mix of products sold, (ii) the sales channel under which the sales are made (as we generally realize higher sales prices from our retail and e-commerce channels as compared to our wholesale channel), and (iii) the level of sales discounts and incentives we offer our customers.

Comparison of the Six Months Ended June 30, 2017 and 2016 by Reportable Operating Segment

The following table sets forth information related to our reportable operating segments, including a comparison of revenues and operating income by segment:
 Six Months Ended June 30, Change  
 2017 2016 $ % $ %
  
Revenues: 
  
  
  
  
  
Americas$253,877
 $259,227
 $(5,350) (2.1)% $(6,561) (2.5)%
Asia Pacific222,989
 235,347
 (12,358) (5.3)% (10,379) (4.4)%
Europe103,971
 107,997
 (4,026) (3.7)% (3,776) (3.5)%
Total segment revenues580,837
 602,571
 (21,734) (3.6)% (20,716) (3.4)%
Other businesses291
 397
 (106) (26.7)% (100) (25.2)%
Total revenues$581,128
 $602,968
 $(21,840) (3.6)% $(20,816) (3.5)%
            
Income from operations:     
  
  
  
Americas$47,207
 $34,592
 $12,615
 36.5 % $12,599
 36.4 %
Asia Pacific60,030
 60,383
 (353) (0.6)% 165
 0.3 %
Europe22,305
 14,960
 7,345
 49.1 % 7,118
 47.6 %
Total segment operating income129,542
 109,935
 19,607
 17.8 % 19,882
 18.1 %
Other businesses (2)$(10,650) (12,111) 1,461
 (12.1)% 1,430
 (11.8)%
Unallocated corporate and other (3)(73,864) (62,976) (10,889) 17.3 % 28,593
 (45.4)%
Total operating income$45,028
 $34,848
 $10,179
 29.2 % $49,905
 143.2 %

(1) Reflects year over year change as if the current period results were in “constant currency”, which is a non-GAAP financial measure. “Constant currency” represents current period results that have been retranslated using exchange rates used in the prior comparative period.

(2) Other businesses consists primarily of our owned and leased manufacturing facilities, which manufacture products for sale by our operating segments.
(3) Unallocated corporate and other includes a corporate component consisting primarily of corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, depreciation and amortization of corporate and other assets not allocated to operating segments.

Americas Operating Segment
Revenues. During the six months ended June 30, 2017, revenues for our Americas segment decreased $5.4 million, or 2.1%, compared to the same period in 2016. The decrease in revenues resulted primarily from lower retail revenues as a result of fewer company-operated retail stores. Approximately $4.0 million, or 1.5%, of the decrease related to a decrease in average selling prices, $2.6 million, or 1.0%, resulted from lower unit sales volumes, which were partially offset by an increase of $1.2 million, or 0.4%, from foreign currency translation.
Income from Operations. During the six months ended June 30, 2017, gross profit for the Americas segment increased $8.9 million, or 7.2%, and gross margin increased 451 basis points to 52.2%, compared to the same period in 2016. The increase in the Americas segment gross profit is due to the net impact of a decrease of $1.2 million, or 1.0%, due to lower unit sales volumes, an increase of $9.9 million, or 8.0%, due to a decline in average costs per unit which exceeded the decline in average selling prices, and an increase of $0.2 million, or 0.2%, due to foreign currency translation.
During the six months ended June 30, 2017, SG&A for our Americas segment decreased $3.7 million, or 4.2%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of a decrease of $1.3 million in facilities expenses as a result of reductions in the number of company-operated retail stores, a decrease of $0.7 million in impairment expense recorded in 2016, and a decrease of $1.7 million in services, information technology, and other expenses, none of which were individually significant.
Asia Pacific Operating Segment
Revenues. During the six months ended June 30, 2017, revenues for our Asia Pacific segment decreased $12.4 million, or 5.3%, compared to the same period in 2016. Wholesale revenues decreased due to the combined effects of the sale of our Taiwan business in December 2016, and reduced sales to select, overstocked distributors. Retail revenues decreased as a result of a lower number of company-operated retail stores. E-commerce revenues increased, with particularly strong performance in China. Approximately $33.5 million, or 14.2%, of the decrease resulted from lower average selling prices, along with a decrease of $2.0 million, or 0.9%, from foreign currency translation, partially offset by an increase of $23.1 million, or 9.8%, due to higher sales volumes.
Income from Operations. During the six months ended June 30, 2017, gross profit for the Asia Pacific segment decreased $8.5 million, or 6.2%, and gross margin decreased 60 basis points to 57.6% compared to the same period in 2016. The decrease in the Asia Pacific segment gross profit is due to the net impact of a decrease of $20.7 million, or 15.1%, due to a decline in average selling prices that exceeded the decline in average costs per unit, a decrease of $1.3 million, or 0.9%, from foreign currency translation, partially offset by an increase of $13.5 million, or 9.8%, resulting from higher sales volumes,.
During the six months ended June 30, 2017, SG&A for our Asia Pacific segment decreased $8.2 million, or 10.7%, compared to the same period in 2016. The decrease in SG&A was primarily due to the net impact of decreases of $2.5 million in salaries and wages, and $2.5 million in facilities expenses, as a result of the reduction in the number of company-operated retail stores, lower net bad debts expense of $1.9 million due to recoveries of previously reserved accounts receivable in China, a decrease of $0.4 million in marketing expenses due to a timing deferral, and a decrease of $0.9 million services and other costs.
Europe Operating Segment
Revenues. During the six months ended June 30, 2017, revenues for our Europe segment decreased $4.0 million, or 3.7%, compared to the same period in 2016, as we continued to reduce discount channel sales and company-operated stores, while growing our e-commerce business. Approximately $15.8 million, or 14.6%, of the decrease was due to lower unit sales volumes, along with a decrease of $0.2 million, or 0.2%, from foreign currency translation, partially offset by an increase of $12.0 million, or 11.1%, from a higher average selling prices.


Income from Operation. During the six months ended June 30, 2017, gross profit for the Europe segment increased $2.1 million, or 4.1%, and gross margin increased by 387 basis points to 51.5% compared to the same period in 2016. The increase in the Europe segment gross profit is due to the net impact of a decrease of $7.5 million, or 14.6%, due to lower unit sales volumes, an increase of $9.7 million, or 18.9%, due to a higher average selling prices, and a decrease of $0.1 million, or 0.2%, from foreign currency translation.
During the six months ended June 30, 2017, SG&A for our Europe segment decreased $5.2 million, or 14.4%, compared to the same period in 2016. The decrease in SG&A was primarily due to decreases in salaries and wages of $1.6 million, and facilities expenses of $1.2 million, as a result of the reduction in company-operated retail stores, a decrease of $1.7 million in marketing expenses due to a timing deferral, and a decrease in services and other costs of $0.7 million.

Unallocated Corporate and Other

During the six months ended June 30, 2017, total net costs within Unallocated Corporate and Other increased by $10.9 million, or 17.3%, compared to the same period in 2016. The increase was primarily due to an increase of $2.6 million in salaries and wages, including $1.2 million in severance costs, an increase of $4.7 million in marketing expenses, primarily related to our advertising and promotional activities, increases in strategic consulting fees of $1.6 million, reorganization costs of $1.6 million, and an increase of $0.4 million in other corporate costs.

Store Locations and Comparable Store Sales

The table below illustrates the overall change in the number of our company-operated retail locations by type of store and reportable operating segment:
 December 31, 2016 Opened Closed (1) June 30, 2017
Company-operated retail locations:       
Type:       
Kiosk/store-in-store98
 
 14
 84
Retail stores228
 4
 41
 191
Outlet stores232
 10
 14
 228
Total558
 14
 69
 503
Operating segment:       
Americas190
 1
 7
 184
Asia Pacific270
 12
 54
 228
Europe98
 1
 8
 91
Total558
 14
 69
 503
 _________________________________________________________________
(1) We completed the transfer of thirty company-operated stores in the Middle-East and China to distributors during the period.
Comparable retail store sales and direct to consumer store sales by operating segment are as follows:
 Constant Currency (1)
 Six Months Ended June 30,
 2017 2016
Comparable store sales (retail only): (2)   
Americas(2.1)% (0.5)%
Asia Pacific(1.1)% (3.7)%
Europe(2.5)% 3.9 %
Global(1.8)% (1.0)%

 Constant Currency (1)
 Six Months Ended June 30,
 2017 2016
Direct to consumer comparable store sales (includes retail and e-commerce): (2)   
Americas1.2% 5.9%
Asia Pacific10.9% 4.8%
Europe1.4% 4.4%
Global2.9% 5.4%


(1) Reflects period over period change on a “constant currency” basis, which is a non-GAAP financial measure. “Constant currency” represents current period results that have been retranslated using exchange rates used in the prior comparative period.

(2) Comparable store status is determined on a monthly basis. Comparable store sales includes the revenues of stores that have been in operation for more than twelve months. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening. E-commerce revenues are based on same site sales period over period.

Liquidity and Capital Resources

We anticipate our cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our revolving credit facility (as described below)facilities and other financing instruments will be sufficient to meet the ongoingour liquidity needs of our businessand capital expenditure requirements for at least the next twelve months. As of June 30, 2017, we had $157.0 million in cash and cash equivalents and up to $78.7 million in available borrowings under our revolving credit facility. At June 30, 2017, $131.8 million of our $157.0 million in cash and cash equivalents was held in international locations. See “Repatriation of Cash” below for more information. Additional future financing may be necessary to fund our operations and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, among other factors, could impact our business and liquidity.

Condensed Consolidated StatementsDue to the seasonal nature of Cash Flows
Our condensed consolidated statements ofour footwear, which is more heavily focused on styles suitable for warm weather, cash flows are summarized as follows:
 Six Months Ended June 30,
 2017 2016 Change
 (in thousands)
Cash provided by operating activities$39,380
 $19,818
 $19,562
Cash used in investing activities(10,695) (11,258) 563
Cash used in financing activities(18,305) (7,443) (10,862)
Effect of exchange rate changes on cash(983) 2,204
 (3,187)
Net change in cash and cash equivalents$9,397
 $3,321
 $6,076
Operating Activities. Cash provided byfrom operating activities increased $19.6 millionduring our first quarter are typically lower as customer receivables and inventories rise in preparation for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. The increase in cash provided bySpring/Summer season. Cash flows from operating activities resulted from a favorable change in net income as adjusted for non-cash items of $3.7 million, and a favorable change in our operating assets and liabilities of $15.9 million. Net income as adjusted for non-cash items increased due to: (i) an increase of $3.1 million from net unrealized foreign currency forward contracts gains and losses; (ii) an increase of $7.3 million from higher net income; (iii) a decrease of share-based compensation expense of $2.0 million; and (iv) a decrease of $4.5 million in other non-cash items including a decrease of $2.2 million in bad debts.


Investing Activities. The $0.6 million decrease in cash used in investing activities for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 is primarily due to the net impact of: (i) a $0.9 million decrease in long-term restricted cash; and (ii) a $0.6 million increase in capital expenditures for property, equipment and intangible assets; partially offset by (iii) a decrease in proceeds from asset disposals of $0.9 million. Our capital expenditures in the six months ended June 30, 2017 did not change significantly compared to the same period in 2016.

Financing Activities. The $10.9 million increase in cash used in financing activities for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 resulted from repurchases of 1.4 million shares of our common stock for approximately $10.0 million, and net repayments on borrowings of $0.9 milliongenerated during the six months ended June 30, 2017 compared to the same period in 2016. Our net borrowings decreased because we financed more of our short-term cash requirements from internal cash generated from operations.

Working Capital. Changes in cash from working capital during the six months ended June 30, 2017 were due primarily to the following: (i) an increase of $57.6 million from higher accounts receivable, primarily due to our seasonal revenues which are higher in our second quarter; (ii) an increaseand third quarters are generally higher, when the northern hemisphere is experiencing warmer weather. Accordingly, results of $8.7 million from higher inventory levels, due to a seasonal increase related to our summer selling season; (iii) a decrease of $5.0 million in prepaids expenses and other assets driven primarily by decreases in prepaid advertising, endorsement and other prepaids; and (iv) an increase of $27.7 million from higher accounts payable and accrued expenses, primarily related to increased inventory levels in advance of our summer selling season. Cashoperations and cash equivalents increased by $9.4 million to $157.0 million asflows for any one quarter are not necessarily indicative of June 30, 2017.

Bad debt expense related to our China operations was not significant during 2017expected results for any other quarter or 2016, due to the implementation of a more restrictive credit policy in 2015 and continued focus on the creditworthiness of our distribution partners.

Senior Revolving Credit Facility

In order to provide additional liquidity in the future and to help support our strategic goals, our Senior Revolving Credit Facility (the "Facility"), as amended, provides for borrowings of up to $80.0 million through February 2021. The Facility contains financial covenants that restrict certain actions by us, including limitations on: (i) stock repurchases to $50.0 million per year, subject to certain restrictions; and (ii) capital expenditures and commitments to $50.0 million per year. The Facility also requires us to meet certain financial covenant ratios that become effective when total borrowings, including letters of credit, exceed $20.0 million during certain periods or when the outstanding borrowings exceed the borrowing base. If the financial covenants are in effect, we must maintain a minimum fixed charge coverage ratio of 1.10 to 1.00, and a maximum leverage ratio of 2.00 to 1.00. The weighted average interest rate on borrowings during the three months ended June 30, 2017 was 2.49%. As of June 30, 2017, we were in compliance with all covenants.As of June 30, 2017, we had no outstanding borrowings on the Facility and $1.3 million of outstanding letters of credit, resulting in $78.7 million of available credit for future financing needs.

Short-term Bank Borrowings

As of June 30, 2017 and December 31, 2016, we had $1.7 million and $2.3 million, respectively, of current debt outstanding under notes payable. As of June 30, 2017, the notes bear interest rates ranging from 1.95% to 2.83%.

Stock Repurchase Plan Authorizations
On December 26, 2013, the Board approved the repurchase of up to $350.0 million of our common stock. The number, price, structure, and timing of the repurchases will be at our sole discretion and may be made in the open market or in privately negotiated transactions. The repurchase authorization does not have an expiration date and does not oblige us to acquire any particular amount of our common stock. The Board may suspend, modify, or terminate the repurchase program at any time without prior notice.

During June 2017, we repurchased 1.4 million shares of our common stock for approximately $10.0 million. As of June 30, 2017, we had $108.7 million of remaining common stock repurchase authorizations under our 2013 stock repurchase plan. During the six months ended June 30, 2016, we had no repurchases.
Capital Assets Expenditures and Commitments
During the six months ended June 30, 2017, net capital assets acquired, inclusive of intangible assets, were $12.2 million compared to $12.8 million during the six months ended June 30, 2016. As of June 30, 2017, we have committed to additional purchases of capital assets of approximately $5.4 million. Capital spend during the six months ended June 30, 2017 related primarily to information technology investments, opening new retail stores and renovating existing stores. In addition, we renewed an agreement with our information technology service provider for three years at $5.0 million perother year.

Repatriation of Cash

WeAs a global business, we have cash balances located in various countries and denominations associated with our international operations.amounts are denominated in various currencies. Fluctuations in foreign currency exchange rates impact theour results of our operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries may have additional restrictions and covenants thatassociated with them which could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities.

We generally consider unremitted earnings of subsidiaries operating outsideAs a result of the U.S. to be indefinitely reinvested; however, our Board has approved a foreign cash repatriation strategy. As part of this strategy, we repatriated approximately $28.1 million of current earnings during the six months ended June 30, 2017 without a tax impact. Further cash repatriation will depend on future cash requirements in the U.S. As of June 30, 2017, we maintain approximately $178.0 million of foreign earnings for which tax has previously been provided that has not yet been repatriated.

MostTax Act, most of the cash balances held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to without incurring additional U.S. federal and state income taxes less applicable foreign tax credits.taxes. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. Certain countries have monetary laws, which may limit our ability to utilize cash resources in those countries for operations in other countries. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and could adversely affect our liquidity. As of June 30, 2017,March 31, 2018, we held $131.8$88.5 million of our total $157.0 millionin cash balance in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the $131.8$88.5 million, $0.5$0.9 million could potentially be restricted, as described above.restricted. If the remaining $131.3$87.6 million were to be immediately repatriated to the U.S., no additional U.S. federal income tax expense would be incurredincurred.

Senior Revolving Credit Facility

In order to provide additional liquidity in the future and to help support our strategic goals, our senior revolving credit facility (“the Facility”), pursuant to an Amended and Restated Credit agreement (“the Credit Agreement”), provides for borrowings of up to $100.0 million through February 2021. The Facility contains financial covenants that restrict certain actions by us, including limitations on: (i) stock repurchases to $100.0 million per year, subject to certain restrictions; and (ii) capital expenditures and commitments to $50.0 million per year. The Credit Agreement also permits intercompany loans of up to $375.0 million and requires the Company to meet certain financial covenant ratios that become effective when average outstanding borrowings under the Credit Agreement, including letters of credit, exceed the lesser of $40.0 million or 40% of the total commitments during certain periods or if the outstanding borrowings exceed the borrowing base. If the financial covenant ratios are in effect, the Company must maintain a minimum fixed charge coverage ratio of 1.10 to 1.00, and a maximum leverage ratio of 2.00 to 1.00. As of March 31, 2018, the Company was in compliance with all financial covenants.

As of March 31, 2018, the total commitments available from the lenders under the Facility were $100.0 million. At March 31, 2018, the Company had no outstanding borrowings and $0.6 million in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As of March 31, 2018 and December 31, 2017, the Company had $99.4 million of available borrowing capacity under the Facility.

Asia Revolving Credit Facilities

In January 2018, the Company entered into a revolving credit facility with China Merchants Bank Company Limited, Shanghai Branch, or the “CMBC Facility,” which provides the Company a revolving loan facility of up to 30.0 million RMB, or $4.8 million, subject to consent by the lender. The CMBC Facility will mature in January 2019. For RMB loans under the CMBC Facility, interest is based on a benchmark interest rate plus a certain number of basis points upon agreement by the lender and the Company at the time of borrowing. The CMBC Facility may be canceled or suspended at any time by either party. As of March 31, 2018, there were no borrowings outstanding on this credit facility.

Cash Flows
 Three Months Ended March 31,  
 2018 2017 $ Change % Change
 (in thousands)  
Cash used in operating activities$(46,601) $(49,890) $3,289
 6.6 %
Cash used in investing activities(1,652) (5,398) 3,746
 69.4 %
Cash used in financing activities(24,153) (1,116) (23,037) (2,064.2)%
Effect of exchange rate changes on cash, cash equivalents, and restricted cash2,176
 (1,389) 3,565
 256.7 %
Net change in cash, cash equivalents, and restricted cash$(70,230) $(57,793) $(12,437) (21.5)%

Operating Activities. Our primary source of liquidity is cash provided by operating activities, consisting of net income adjusted for noncash items and changes in working capital. Cash used in operating activities decreased $3.3 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The decrease in cash used in operating activities resulted from the combined impacts of an increase in net income as $178.0adjusted for non-cash items, which resulted in a source of $4.7 million, has previouslyand an unfavorable change in our operating assets and liabilities of $1.4 million. The favorable change in net income adjusted for non-cash items was driven primarily by net income, higher by $5.4 million, offset in part by a gain in unrealized foreign currency compared to a loss in 2017, and lower depreciation and amortization expenses. Increased accounts payable, accrued expenses, and other liabilities at March 31, 2018 compared to March 31, 2017, were a source of $15.3 million in cash. Lower inventories, a result of our focus on improved inventory management, were a $7.7 million source of cash compared to the same period in 2017. Higher accounts receivable, reflective of higher revenues, drove a use of cash $19.9 million higher compared to 2017. Changes in prepaid expenses and other assets contributed an additional use of cash of $4.5 million compared to 2017.

Investing Activities. The $3.7 million decrease in cash used in investing activities for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 is primarily due to lower net capital asset expenditures. Capital spend during the three months ended March 31, 2018 related primarily to information technology investment, patents, and retail store improvements.

Financing Activities. The $23.0 million increase in cash used in financing activities for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 resulted primarily from repurchase of 1.4 million shares of our common stock for approximately $20.1 million compared to none in the first three months of 2017 and net repayments on borrowings of $0.4 million during the three months ended March 31, 2018 compared to net proceeds from borrowings of $2.1 million for the same period in 2017. Our net borrowings decreased in the three months ended March 31, 2018 as we financed more of our short-term cash requirements from internal cash generated from operations.

Contractual Obligations

There have been providedno significant changes to the contractual obligations reported in our Annual Report on Form 10-K for in prior periods.the fiscal year ended December 31, 2017.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of June 30, 2017,March 31, 2018, other than certain operating lease and purchase commitments, which are described in Note 1312 — Commitments and Contingencies.


Critical Accounting Policies and Estimates
 
The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

As of January 1, 2018, we adopted authoritative guidance related to revenue recognition from contracts with customers using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenues, gross margins or income from operations.We changed our balance sheet presentation for expected product returns by reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns. The product return asset is reported within ‘Prepaid expenses and other assets’. The returns liability and payments received from customers for future delivery of products are reported within ‘Accrued liabilities and other expenses’ in the condensed consolidated balance sheets.

Effective January 1, 2018, the Company changed its inventory costing method for approximately 95% of its inventories from a lower of net realizable value or cost, using a moving average cost method, to lower of net realizable value or cost using a first-in-first-out method. The change from the Company’s former inventory cost method did not have a significant effect on inventory or cost of sales, and, as a result, prior comparative financial statements have not been restated.

For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2016.2017, and ‘Note 2 — Recent Accounting Pronouncements — Revenue Recognition’. There have been no other significant changes in our critical accounting policies or their application since December 31, 2016.2017.

Recent Accounting Pronouncements
 
See Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements for a description of recently adopted accounting pronouncements, and issued accounting pronouncements that we believe may have an impact on our consolidated financial statements when adopted.

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

As a global company, we have significant revenues and costs denominated in currencies other than the U.S. Dollar. We are exposed to the risk of gains and losses resulting from changes in exchange rates on monetary assets and liabilities within our international subsidiaries that are denominated in currencies other than the subsidiary’s functional currency. Likewise, our U.S. companies are also exposed to the risk of gains and losses and the resulting changes in exchange rates on monetary assets and liabilities that are denominated in a currency other than the U.S. Dollar.

We have experienced and will continue to experience changes in international currency rates, impacting both results of operations and the value of assets and liabilities denominated in foreign currencies. We enter into forward foreign exchange contracts to buy or sell various foreign currencies to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities. Changes in the fair value of these forward contracts are recognized in earnings in the period that the changes occur. As of June 30, 2017,March 31, 2018, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $239.7$226.1 million. The net fair value of these contracts at June 30, 2017March 31, 2018 was an asseta liability of $2.8$0.1 million. 

We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our foreign currency forward exchange contracts. To perform the sensitivity analysis, we assess the risk of losschanges in fair values from the effect of hypothetical changes in foreign currency exchange rates. This analysis assumes a like movement by the foreign currencies in our hedge portfolio against the U.S. Dollar. As of June 30, 2017,March 31, 2018, a 10% appreciation in the value of the U.S. Dollar would result in a net increase in the fair value of our derivative portfolio of approximately $3.7$4.2 million.


Effects of Changes in Exchange Rates on Translated Results of International Subsidiaries


Changes in exchange rates have a direct effect on our reported U.S. Dollar consolidated financial statements because we translate the operating results and financial position of our international subsidiaries to U.S. Dollars using current period exchange rates. Specifically, we translate the statements of operations of our foreign subsidiaries into the U.S. Dollar reporting currency using average exchange rates in effect during each reporting period. As a result, comparisons of reported results between reporting periods may be impacted significantly due to differences in the exchange rates used to translate the operating results of our international subsidiaries.


For example, in our European operating segment, when the U.S. Dollar strengthens relative to the Euro, our reported U.S. Dollar results are lower than if there had been no change in the exchange rate, because more Euros are required to generate the same U.S. Dollar translated amount. Conversely, when the U.S. Dollar weakens relative to the Euro, the reported U.S. Dollar results of our Europe segment are higher compared to a period with a stronger U.S. Dollar relative to the Euro. Similarly, the reported U.S. Dollar results of our Asia Pacific operating segment, where the functional currencies are primarily the Japanese Yen, Chinese Yuan, Korean Won and the Singapore Dollar, are comparatively lower or higher when the U.S. Dollar strengthens or weakens, respectively, relative to these currencies.

An increase of 1% of the value of the U.S. Dollar relative to foreign currencies would have increased our income before taxes during the three and six months ended June 30, 2017March 31, 2018 by approximately $0.4 million and $0.7 million, respectively.$0.6 million. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy. See Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this Form 10-Q for a discussion of the impact of the change in foreign exchange rates on our U.SU.S. Dollar condensed consolidated statement of operations for the three months ended June 30, 2017March 31, 2018 and 2016.2017.

ITEM 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures as such item is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("(“Exchange Act"Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2017,March 31, 2018, to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECSecurities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can only provide reasonable assurance regarding management'smanagement’s control objectives.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended June 30, 2017,March 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II — Other Information
 
ITEM 1. Legal Proceedings

We were subjectThe Company was subjected to an audit by the Brazilian Federal Tax Authorities related to imports of footwear from China between 2010 and 2014. On January 13, 2015, we werethe Company was notified about the issuance of assessments totaling 14.4 million Brazilian Real (“BRL”), or approximately $4.4$4.3 million, plus interest and penalties, for the period January 2010 through May 2011. We haveThe Company has disputed these assessments and asserted defenses to the claims. On February 25, 2015, wethe Company received additional assessments totaling 33.3 million BRL, or approximately $10.1 million, plus interest and penalties, related to the remainder of the audit period. We haveThe Company has also disputed these assessments and asserted defenses to these claims in administrative appeals,appeals. On August 29, 2017, the Company received a favorable ruling on its appeal of the first assessment, which dismissed all fines, penalties, and are awaiting definitive resolution of thoseinterest. The tax authorities have requested a special appeal to that decision. If the appeal is accepted, Crocs will have the opportunity to both defend the appeal as well as challenge it procedurally. Should the Brazilian Tax Authority prevail in this final administrative appeals. Inappeal, Crocs may still challenge the event thatassessments through the definitive resolution of these administrative appeals is adverse to us, we have recourse to further judicial processes,court system, which would likely require the posting of a bond. It is not possible at this time to predictAdditionally, the timing or the outcome of this matter.

The Company was subjected to an audit by U.S. Customs & Border Protection (“CBP”) in respect of the period from 2006 to 2010. In October 2013, CBP issued their final audit report. In that report CBP projected that unpaid duties totaling approximately $12.4 million were duesecond appeal for the period under reviewremaining assessments was heard on March 22, 2018. That decision was partially favorable and recommended collection ofresulted in approximately a 38% reduction in principal, penalties, and interest, leaving approximately $8 million at risk for those assessments. Both parties can appeal that decision, without posting a bond, through the duties due. On April 2017, CBP agreed to settlespecial appeal process being used for the matter and accepted our previously tendered payment of $7 million. This matter is now closed. The settlement was reported in our condensed consolidated financial statements as of March 31, 2017.first assessment.

Although we are subject to other litigation from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we are not party to any other pending legal proceedings that we believe would reasonably have a material adverse impact on our business and financial results.

ITEM 1A. Risk Factors
 
There have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
Issuer Purchases of Equity Securities
Period Total Number of Shares Purchased Average Price Paid per Share 
Total Number of Shares Purchased as Part of Publicly
Announced Plans or Programs (1)
 Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs Total Number of Shares Purchased Average Price Paid per Share 
Total Number of Shares Purchased as Part of Publicly
Announced Plans or Programs (1)
 Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
April 1 - April 30, 2017 
 $
 
 $118,679,553
May 1 - May 31, 2017 
 
 
 118,679,553
June 1 - June 30, 2017 1,371,470
 7.27
 1,371,470
 108,710,137
January 1 - January 31, 2018 
 $
 
 $218,796,140
February 1 - February 28, 2018 
 
 
 218,796,140
March 1 - March 31, 2018 1,398,932
 14.32
 1,398,932
 198,759,463
Total 1,371,470
 $7.27
 1,371,470
 $108,710,137
 1,398,932
 $14.32
 1,398,932
 $198,759,463

(1) On December 26, 2013, the Company’s Board of Directors approved and authorized a program to repurchase up to $350$350.0 million of our common stock. On February 20, 2018, the Board increased the repurchase authorization up to $500.0 million of our common stock. As of June 30, 2017,March 31, 2018, approximately $108.7$198.8 million of shares remained available for repurchase under our share repurchase authorization. The number, price, structure and timing of the repurchases, if any, will be at our sole discretion and future repurchases will be evaluated by us depending on market conditions, liquidity needs, restrictions under our Credit Agreement, and other factors. Share repurchases may be made in the open market or in privately negotiated transactions. The repurchase authorization does not have an expiration date and does not oblige us to acquire any particular amount of our common stock. The Board may suspend, modify, or terminate the repurchase program at any time without prior notice.

ITEM 5. Other Information

On May 3, 2018, the Company made the decision to close its manufacturing and distribution facilities in Mexico. Manufacturing has ceased, and the Company will execute plans to dispose of or redeploy facility assets, primarily during the second quarter. The distribution center will be closed by the end of the third quarter. The Company expects to recognize total charges related to these actions of approximately $10 million before taxes over the course of the second and third quarters of 2018, including approximately:

(i) $3 million of facility closure, asset redeployment, and other costs; (ii) $2 million of employee-related costs; (iii) $1 million of lease termination costs; and (iv) $4 million of cumulative translation adjustments. Approximately half of these charges will be non-cash.


ITEM 6. Exhibits
Exhibit Number Description
3.1 
   
3.2 
   
3.3 
   
3.4 
   
4.1 
   
10.118† Second Amendment to Investment Agreement, dated June 6, 2017, between Crocs Inc. and Blackstone Capital Partners VI L.P. (incorporated herein by reference to Exhibit 10.1 to Crocs, Inc.’s Current Report on Form 8-K, filed on June 7, 2017).
10.2*Crocs Inc. 2008 Cash Income Plan (as amended and revised), (incorporated herein by reference to Exhibit 10.2 to Crocs, Inc.’s Current Report on Form 8-K, filed on June 7, 2017).
   
31.1† 
   
31.2† 
   
32† 
   
101.INS† XBRL Instance Document.
   
101.SCH† XBRL Taxonomy Extension Schema Document.
   
101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document.
   
101.DEF† XBRL Taxonomy Extension Definition Linkbase Document.
   
101.LAB† XBRL Taxonomy Extension Label Linkbase Document.
   
101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document.

†              Filed herewith.
* Compensatory plan or arrangement.


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.
 
  CROCS, INC.
    
Date: August 9, 2017May 8, 2018 By:/s/ Carrie W. Teffner
   Name:Carrie W. Teffner
   Title:PrincipalExecutive Vice President and Chief Financial and Accounting
Officer


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