UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2015

OR

¨

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

For the transition period from ____ to____

 

Commission File Number 001-14429

 

SKECHERS U.S.A., INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-4376145

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

228 Manhattan Beach Blvd.

Manhattan Beach, California

 

90266

(Address of Principal Executive Office)

 

(Zip Code)

(310) 318-3100

(Registrant’s Telephone Number, Including Area Code)

 

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, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

x

 

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨ 

 

Smaller reporting company

 

¨

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

THE NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF AUGUST 1, 2015: 42,686,958.

THE NUMBER OF SHARES OF CLASS B COMMON STOCK OUTSTANDING AS OF AUGUST 1, 2015: 9,395,486.

 

 

 

 


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited):

 

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Earnings

4

 

Condensed Consolidated Statements of Comprehensive Income

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

Item 4.

Controls and Procedures

27

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

27

 

Item 1A.

Risk Factors

32

 

Item 5.

Other Information

33

 

Item 6.

Exhibits

34

 

 

Signatures

35

 

 

 

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par values)

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

513,902

 

 

$

466,685

 

Trade accounts receivable, less allowances of $23,313 in 2015 and $21,007 in 2014

 

 

434,191

 

 

 

272,103

 

Other receivables

 

 

15,314

 

 

 

16,510

 

Total receivables

 

 

449,505

 

 

 

288,613

 

Inventories

 

 

470,640

 

 

 

453,837

 

Prepaid expenses and other current assets

 

 

51,633

 

 

 

57,015

 

Deferred tax assets

 

 

18,866

 

 

 

18,864

 

Total current assets

 

 

1,504,546

 

 

 

1,285,014

 

Property, plant and equipment, net

 

 

381,853

 

 

 

373,183

 

Other assets

 

 

26,126

 

 

 

16,721

 

Total non-current assets

 

 

407,979

 

 

 

389,904

 

TOTAL ASSETS

 

$

1,912,525

 

 

$

1,674,918

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Current installments of long-term borrowings

 

$

109,290

 

 

$

101,407

 

Short-term borrowings

 

 

1,340

 

 

 

1,810

 

Accounts payable

 

 

430,422

 

 

 

352,815

 

Accrued expenses

 

 

53,626

 

 

 

49,705

 

Total current liabilities

 

 

594,678

 

 

 

505,737

 

Long-term borrowings, excluding current installments

 

 

1,592

 

 

 

15,081

 

Other long-term liabilities

 

 

24,400

 

 

 

19,993

 

Total non-current liabilities

 

 

25,992

 

 

 

35,074

 

Total liabilities

 

 

620,670

 

 

 

540,811

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred Stock, $.001 par value; 10,000 shares authorized; none issued and

outstanding

 

 

 

 

 

 

Class A Common Stock, $.001 par value; 100,000 shares authorized; 41,563 and

40,287 shares issued and outstanding at June 30, 2015 and December 31, 2014,

respectively

 

 

42

 

 

 

40

 

Class B Common Stock, $.001 par value; 60,000 shares authorized; 9,395 and 10,470

shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively

 

 

9

 

 

 

10

 

Additional paid-in capital

 

 

369,404

 

 

 

355,636

 

Accumulated other comprehensive loss

 

 

(18,747

)

 

 

(16,077

)

Retained earnings

 

 

871,502

 

 

 

735,640

 

Skechers U.S.A., Inc. equity

 

 

1,222,210

 

 

 

1,075,249

 

Noncontrolling interests

 

 

69,645

 

 

 

58,858

 

Total equity

 

 

1,291,855

 

 

 

1,134,107

 

TOTAL LIABILITIES AND EQUITY

 

$

1,912,525

 

 

$

1,674,918

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net sales

 

$

800,464

 

 

$

587,051

 

 

$

1,568,461

 

 

$

1,133,569

 

Cost of sales

 

 

425,856

 

 

 

317,676

 

 

 

861,313

 

 

 

623,791

 

Gross profit

 

 

374,608

 

 

 

269,375

 

 

 

707,148

 

 

 

509,778

 

Royalty income

 

 

3,630

 

 

 

1,836

 

 

 

5,512

 

 

 

4,858

 

 

 

 

378,238

 

 

 

271,211

 

 

 

712,660

 

 

 

514,636

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

64,875

 

 

 

53,839

 

 

 

113,967

 

 

 

90,581

 

General and administrative

 

 

201,021

 

 

 

163,616

 

 

 

398,162

 

 

 

322,139

 

 

 

 

265,896

 

 

 

217,455

 

 

 

512,129

 

 

 

412,720

 

Earnings from operations

 

 

112,342

 

 

 

53,756

 

 

 

200,531

 

 

 

101,916

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

157

 

 

 

197

 

 

 

344

 

 

 

300

 

Interest expense

 

 

(3,041

)

 

 

(3,656

)

 

 

(5,878

)

 

 

(6,352

)

Other, net

 

 

2,990

 

 

 

148

 

 

 

(1,771

)

 

 

(934

)

Total other income (expense)

 

 

106

 

 

 

(3,311

)

 

 

(7,305

)

 

 

(6,986

)

Earnings before income tax expense

 

 

112,448

 

 

 

50,445

 

 

 

193,226

 

 

 

94,930

 

Income tax expense

 

 

25,383

 

 

 

12,232

 

 

 

44,503

 

 

 

23,669

 

Net earnings

 

 

87,065

 

 

 

38,213

 

 

 

148,723

 

 

 

71,261

 

Less: Net earnings attributable to non-controlling interests

 

 

7,283

 

 

 

3,411

 

 

 

12,861

 

 

 

5,494

 

Net earnings attributable to Skechers U.S.A., Inc.

 

$

79,782

 

 

$

34,802

 

 

$

135,862

 

 

$

65,767

 

Net earnings per share attributable to Skechers U.S.A., Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.57

 

 

$

0.69

 

 

$

2.67

 

 

$

1.30

 

Diluted

 

$

1.55

 

 

$

0.68

 

 

$

2.65

 

 

$

1.29

 

Weighted average shares used in calculating net earnings per share

attributable to Skechers U.S.A, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

50,904

 

 

 

50,565

 

 

 

50,855

 

 

 

50,562

 

Diluted

 

 

51,342

 

 

 

50,914

 

 

 

51,259

 

 

 

50,879

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

4


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net earnings

 

$

87,065

 

 

$

38,213

 

 

$

148,723

 

 

$

71,261

 

Other comprehensive gain (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on foreign currency translation adjustment

 

 

1,742

 

 

 

801

 

 

 

(2,879

)

 

 

1,102

 

Comprehensive income

 

 

88,807

 

 

 

39,014

 

 

 

145,844

 

 

 

72,363

 

Less: Comprehensive income attributable to non-controlling

interests

 

 

7,307

 

 

 

3,516

 

 

 

12,652

 

 

 

5,519

 

Comprehensive income attributable to Skechers U.S.A., Inc.

 

$

81,500

 

 

$

35,498

 

 

$

133,192

 

 

$

66,844

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 

5


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

148,723

 

 

$

71,261

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation of property, plant and equipment

 

 

27,676

 

 

 

22,886

 

Amortization of deferred financing costs

 

 

601

 

 

 

601

 

Amortization of intangible assets

 

 

16

 

 

 

467

 

Provision for bad debts and returns

 

 

4,216

 

 

 

6,597

 

Tax benefits from share-based compensation

 

 

 

 

 

10

 

Non-cash share-based compensation

 

 

8,874

 

 

 

2,920

 

Loss (gain) on disposal of property, plant and equipment

 

 

(20

)

 

 

244

 

Deferred income taxes

 

 

2,215

 

 

 

20,162

 

(Increase) decrease in assets:

 

 

 

 

 

 

 

 

Receivables

 

 

(166,970

)

 

 

(95,196

)

Inventories

 

 

(19,209

)

 

 

(3,249

)

Prepaid expenses and other current assets

 

 

4,997

 

 

 

(10,942

)

Other assets

 

 

(8,223

)

 

 

(474

)

Increase in liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

75,679

 

 

 

53,985

 

Accrued expenses

 

 

8,368

 

 

 

4,994

 

Net cash provided by operating activities

 

 

86,943

 

 

 

74,266

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(33,004

)

 

 

(23,927

)

Intangible asset additions

 

 

(95

)

 

 

 

Purchases of investments

 

 

(2,106

)

 

 

 

Sales of investments

 

 

105

 

 

 

 

Net cash used in investing activities

 

 

(35,100

)

 

 

(23,927

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds from the issuances of stock through employee stock purchase plan

 

 

2,238

 

 

 

1,721

 

Net payments on long-term debt

 

 

(5,599

)

 

 

(5,967

)

Net proceeds (payments) on short-term borrowings

 

 

(487

)

 

 

97

 

Excess tax benefits from share-based compensation

 

 

2,656

 

 

 

 

Contribution from non-controlling interests of consolidated entity

 

 

485

 

 

 

83

 

Distributions to non-controlling interests of consolidated entity

 

 

(2,350

)

 

 

(1,975

)

Net cash used in financing activities

 

 

(3,057

)

 

 

(6,041

)

Net increase in cash and cash equivalents

 

 

48,786

 

 

 

44,298

 

Effect of exchange rates on cash and cash equivalents

 

 

(1,569

)

 

 

(1,501

)

Cash and cash equivalents at beginning of the period

 

 

466,685

 

 

 

372,011

 

Cash and cash equivalents at end of the period

 

$

513,902

 

 

$

414,808

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

4,947

 

 

$

5,735

 

Income taxes

 

 

32,487

 

 

 

13,577

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

6


 

SKECHERS U.S.A., INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 and 2014

(Unaudited)

 

(1)

GENERAL

Basis of Presentation

The accompanying condensed consolidated financial statements of Skechers U.S.A., Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S‑X. Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

The results of operations for the six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2015.

Fair Value of Financial Instruments

The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value because of the relatively short maturity of such instruments.

The carrying amount of the Company’s long-term borrowings are considered Level 2 liabilities that approximates fair value based upon current rates and terms available to the Company for similar debt.

Use of Estimates

The preparation of the condensed consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.

 

Revenue Recognition

The Company recognizes revenue on wholesale sales when products are shipped and the customer takes title and assumes risk of loss, collection of the relevant receivable is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. This generally occurs at time of shipment. Wholesale sales, which include amounts billed for shipping and handling costs, are recognized net of allowances for estimated returns, sales allowances, discounts, and chargebacks. Allowances for estimated returns, discounts, and chargebacks are recorded when related revenue is recorded. Related costs paid to third-party shipping companies are recorded as cost of sales. The Company recognizes revenue from retail and e-commerce sales at the point of sale. Sales and value added taxes collected from retail customers are excluded from reported revenues.

Royalty income is earned from licensing arrangements. Upon signing a new licensing agreement, the Company receives up-front fees, which are generally characterized as prepaid royalties. These fees are initially deferred and recognized as revenue as earned. In addition, the Company receives royalty payments based on actual sales of the licensed products. Typically, at each quarter-end the Company receives correspondence from licensees indicating the actual sales for the period. This information is used to calculate and record the related royalties based on the terms of the agreement.

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) amended the FASB Accounting Standards Codification and created a new Topic ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). This amendment prescribes 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 those goods or services. The amendment supersedes the revenue

 

7


 

recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance throughout the Industry Topics of the Codification. For annual and interim reporting periods the mandatory adoption date of ASC 606 is January 1, 2018, and there will be two methods of adoption allowed, either a full retrospective adoption or a modified retrospective adoption. The Company is currently evaluating the impact of ASC 606, but at the current time does not know what impact the new standard will have on revenue recognized and other accounting decisions in future periods, if any, nor what method of adoption will be selected if the impact is material.

In August 2014, the FASB amended the FASB Accounting Standards Codification and amended Subtopic 205-40, “Presentation of Financial Statements – Going Concern.” This amendment prescribes that an entity should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The amendments will become effective for the Company’s annual and interim reporting periods beginning January 1, 2017. The Company will begin evaluating going concern disclosures based on this guidance upon adoption. The Company does not expect that the adoption of this standard will have a material impact on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 amends the consolidation guidance for variable interest entities (“VIEs”) and general partners’ investments in limited partnerships and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. The amendment will be effective for the Company’s annual and interim reporting periods beginning January 1, 2016, with early adoption permitted. The Company will begin evaluating the impact of ASU 2015-02 based on this guidance upon adoption. The Company does not expect that the adoption of this standard will have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires an entity to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendment will be effective for the Company’s annual and interim reporting periods beginning January 1, 2016 and should be applied on a retrospective basis. The adoption of ASU 2015-03 will not have any impact on the Company’s results of operations, but will result in debt issuance costs being presented as a direct reduction from the carrying amount of debt liabilities. This standard will not have a material impact on the Company’s consolidated financial statements.

(2)

LINE OF CREDIT, SHORT-TERM AND LONG-TERM BORROWINGS

The Company and its subsidiaries had $4.4 million and $3.4 million of outstanding letters of credit as of June 30, 2015 and December 31, 2014, respectively, and approximately $1.3 million and $1.8 million in short-term borrowings as of June 30, 2015 and December 31, 2014, respectively.

 

8


 

Long-term borrowings at June 30, 2015 and December 31, 2014 are as follows (in thousands):

 

 

 

2015

 

 

2014

 

Note payable to banks, due in monthly installments of $338.0

(includes principal and interest), variable-rate interest at

3.94% per annum, secured by property, balloon payment of

$77,060 due October 2015

 

$

77,396

 

 

$

77,900

 

Note payable to banks, due in monthly installments of $531.4

(includes principal and interest), fixed-rate interest at 3.54%

per annum, secured by property, balloon payment of $12,635

due December 2015

 

 

15,048

 

 

 

17,940

 

Note payable to banks, due in monthly installments of $483.9

(includes principal and interest), fixed-rate interest at 3.19%

per annum, secured by property, balloon payment of $11,670

due June 2016

 

 

16,544

 

 

 

19,159

 

Note payable to TCF Equipment Finance, Inc., due in monthly

installments of $30.5, (includes principal and interest) fixed-

rate interest at 5.24% per annum, maturity date of July 2019

 

 

1,344

 

 

 

1,489

 

Note payable to bank from Skechers Retail India Private Ltd.

 

 

550

 

 

 

 

Subtotal

 

 

110,882

 

 

 

116,488

 

Less current installments

 

 

109,290

 

 

 

101,407

 

Total long-term borrowings

 

$

1,592

 

 

$

15,081

 

 

On June 30, 2015, the Company entered into a $250.0 million loan and security agreement, subject to increase by up to $100 million, (the “Credit Agreement”), with the following lenders: Bank of America, N.A., MUFG Union Bank, N.A. and HSBC Bank USA, National Association. The Credit Agreement matures on June 30, 2020. The Credit Agreement replaces the credit agreement dated June 30, 2009, which expired on June 30, 2015. The Credit Agreement permits the Company and certain of its subsidiaries to borrow based on a percentage of eligible accounts receivable plus the sum of (a) the lesser of (i) a percentage of eligible inventory to be sold at wholesale and (ii) a percentage of net orderly liquidation value of eligible inventory to be sold at wholesale, plus (b) the lesser of (i) a percentage of the value of eligible inventory to be sold at retail and (ii) a percentage of net orderly liquidation value of eligible inventory to be sold at retail, plus (c) the lesser of (i) a percentage of the value of eligible in-transit inventory and (ii) a percentage of the net orderly liquidation value of eligible in-transit inventory. Borrowings bear interest at our election based on (a) LIBOR or (b) the greater of (i) the Prime Rate, (ii) the Federal Funds Rate plus 0.5% and (iii) LIBOR for a 30-day period plus 1.0%, in each case, plus an applicable margin based on the average daily principal balance of revolving loans available under the Credit Agreement. The Company pays a monthly unused line of credit fee of 0.25%, payable on the first day of each month in arrears, which is based on the average daily principal balance of outstanding revolving loans and undrawn amounts of letters of credit outstanding during such month. The Credit Agreement further provides for a limit on the issuance of letters of credit to a maximum of $100.0 million. The Credit Agreement contains customary affirmative and negative covenants for secured credit facilities of this type, including covenants that will limit the ability of the Company and its subsidiaries to, among other things, incur debt, grant liens, make certain acquisitions, dispose assets, effect a change of control of the Company, make certain restricted payments including certain dividends and stock redemptions, make certain investments or loans, enter into certain transactions with affiliates and certain prohibited uses of proceeds. The Credit Agreement also requires compliance with a minimum fixed-charge coverage ratio if Availability drops below 10% of the Revolver Commitments (as such terms are defined in the Credit Agreement) until the date when no event of default has existed and Availability has been over 10% for 30 consecutive days. The Company paid closing and arrangement fees of $1.1 million on this facility, which are being amortized to interest expense over the five-year life of the facility. As of June 30, 2015, there was $1.3 million outstanding under this credit facility, which is classified as short-term borrowings in our condensed consolidated balance sheets.

 

(3)

STOCKHOLDERS’ EQUITY

During the three months ended June 30, 2015, 818,910 shares of Class B common stock were converted into shares of Class A common stock. During the three months ended June 30, 2014, 289,480 shares of Class B common stock were converted into shares of Class A common stock. During the six months ended June 30, 2015, 1,074,432 shares of Class B common stock were converted into shares of Class A common stock. During the six months ended June 30, 2014, 299,776 shares of Class B common stock were converted into shares of Class A common stock.

 

9


 

The following table reconciles equity attributable to noncontrolling interests (in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

Non-controlling interests, beginning of period

 

$

58,858

 

 

$

49,598

 

Net earnings attributable to non-controlling interests

 

 

12,861

 

 

 

5,494

 

Foreign currency translation adjustment

 

 

(209

)

 

 

25

 

Capital contribution by non-controlling interests

 

 

485

 

 

 

83

 

Capital distribution to non-controlling interests

 

 

(2,350

)

 

 

(1,975

)

Non-controlling interests, end of period

 

$

69,645

 

 

$

53,225

 

 

 

(4)

NON-CONTROLLING INTERESTS

The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products throughout Asia or to construct the Company’s domestic distribution facility. These joint ventures are VIEs under Accounting Standards Codification (“ASC”) 810-10-15-14. The Company’s determination of the primary beneficiary of a VIE considers all relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. The Company has determined for its VIEs that the Company is the primary beneficiary because it has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Accordingly, the Company includes the assets and liabilities and results of operations of these entities in its consolidated financial statements, even though the Company may not hold a majority equity interest. There have been no changes during 2015 in the accounting treatment or characterization of any previously identified VIE. The Company continues to reassess these relationships quarterly. The assets of these joint ventures are restricted in that they are not available for general business use outside the context of such joint ventures. The holders of the liabilities of each joint venture have no recourse to the Company. The Company does not have a variable interest in any unconsolidated VIEs.

The following VIEs are consolidated into the Company’s condensed consolidated financial statements and the carrying amounts and classification of assets and liabilities were as follows (in thousands):

 

HF Logistics-SKX, LLC

 

June 30, 2015

 

 

December 31, 2014

 

Current assets

 

$

7,908

 

 

$

6,812

 

Noncurrent assets

 

 

116,214

 

 

 

118,837

 

Total assets

 

$

124,122

 

 

$

125,649

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

78,678

 

 

$

78,668

 

Noncurrent liabilities

 

 

1,041

 

 

 

1,194

 

Total liabilities

 

$

79,719

 

 

$

79,862

 

 

 

 

 

 

 

 

 

 

Distribution joint ventures (1)

 

June 30, 2015

 

 

December 31, 2014

 

Current assets

 

$

117,333

 

 

$

94,819

 

Noncurrent assets

 

 

13,001

 

 

 

10,322

 

Total assets

 

$

130,334

 

 

$

105,141

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

40,547

 

 

$

38,470

 

Noncurrent liabilities

 

 

616

 

 

 

66

 

Total liabilities

 

$

41,163

 

 

$

38,536

 

 

(1)

Distribution joint ventures include Skechers China Limited, Skechers Southeast Asia Limited, Skechers Thailand Limited, Skechers Retail India Private Limited, and Skechers South Asia Private Limited.

Net earnings attributable to non-controlling interests were $7.3 million and $3.4 million for the three months ended June 30, 2015 and 2014, respectively, which represents the share of net earnings that is attributable to our joint venture partners. Net earnings attributable to non-controlling interests were $12.9 million and $5.5 million for the six months ended June 30, 2015 and 2014, respectively. HF Logistics-SKX, LLC made capital distributions of $0.8 million and $1.9 million during the three and six months ended June 30, 2015, respectively. HF Logistics-SKX, LLC made capital distributions of $0.7 million and $1.6 million during the three and six months ended June 30, 2014, respectively. Skechers China Limited made capital distributions of $0.5 million during the

 

10


 

three and six months ended June 30, 2015. Skechers China Limited made capital distributions of $0.3 million during the three and six months ended June 30, 2014. Our distribution joint venture partners made cash capital contributions of $0.5 during the three and six months ended June 30, 2015, respectively. Our distribution joint venture partners made cash capital contributions of $0.1 million during the three and six months ended June 30, 2014.

(5)

EARNINGS PER SHARE

Basic earnings per share represents net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share, in addition to the weighted average determined for basic earnings per share, includes potential common shares, if dilutive, that would arise from the exercise of stock options and nonvested shares using the treasury stock method.

The Company has two classes of issued and outstanding common stock, Class A Common Stock and Class B Common Stock. Holders of Class A Common Stock and holders of Class B Common Stock have substantially identical rights, including rights with respect to any declared dividends or distributions of cash or property and the right to receive proceeds on liquidation or dissolution of the Company after payment of the Company’s indebtedness. The two classes have different voting rights, with holders of Class A Common Stock entitled to one vote per share while holders of Class B Common Stock are entitled to ten votes per share. The Company uses the two-class method for calculating net earnings per share. Basic and diluted net earnings per share of Class A Common Stock and Class B Common Stock are identical.

The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating basic earnings per share (in thousands, except per share amounts):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Basic earnings per share

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net earnings attributable to Skechers

U.S.A., Inc.

 

$

79,782

 

 

$

34,802

 

 

$

135,862

 

 

$

65,767

 

Weighted average common shares

outstanding

 

 

50,904

 

 

 

50,565

 

 

 

50,855

 

 

 

50,562

 

Basic earnings per share attributable to

Skechers U.S.A., Inc.

 

$

1.57

 

 

$

0.69

 

 

$

2.67

 

 

$

1.30

 

 

The following is a reconciliation of net earnings and weighted average common shares outstanding for purposes of calculating diluted earnings per share (in thousands, except per share amounts):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Diluted earnings per share

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net earnings attributable to Skechers

U.S.A., Inc.

 

$

79,782

 

 

$

34,802

 

 

$

135,862

 

 

$

65,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

outstanding

 

 

50,904

 

 

 

50,565

 

 

 

50,855

 

 

 

50,562

 

Dilutive effect of nonvested shares

 

 

438

 

 

 

349

 

 

 

404

 

 

 

317

 

Weighted average common shares

outstanding

 

 

51,342

 

 

 

50,914

 

 

 

51,259

 

 

 

50,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share attributable to

Skechers U.S.A., Inc.

 

$

1.55

 

 

$

0.68

 

 

$

2.65

 

 

$

1.29

 

 

There were no options excluded in the computation of diluted earnings per share for the three and six months ended June 30, 2015 and 2014.

(6)

STOCK COMPENSATION

For stock-based awards the Company recognized compensation expense based on the grant date fair value. Share-based compensation expense was $4.5 million and $1.6 million for the three months ended June 30, 2015 and 2014, respectively. Share-based compensation expense was $8.9 million and $2.9 million for the six months ended June 30, 2015 and 2014, respectively.

 

11


 

A summary of the status and changes of our nonvested shares related to the Company’s Equity Incentive Plans as of and for the six months ended June 30, 2015 is presented below:

 

 

 

Shares

 

 

Weighted Average

Grant-Date Fair Value

 

Nonvested at December 31, 2014

 

 

1,263,833

 

 

$

43.38

 

Granted

 

 

7,500

 

 

 

68.01

 

Vested

 

 

(153,500

)

 

 

29.02

 

Cancelled

 

 

 

 

 

 

Nonvested at June 30, 2015

 

 

1,117,833

 

 

$

45.52

 

 

As of June 30, 2015, there was $40.9 million of unrecognized compensation cost related to nonvested common shares. The cost is expected to be amortized over a weighted average period of 2.3 years.

(7)

INCOME TAXES

Income tax expense and the effective tax rate for the three and six months ended June 30, 2015 and 2014 were as follows (in thousands, except the effective tax rate):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Income tax expense

 

$

25,383

 

 

$

12,232

 

 

 

44,503

 

 

$

23,669

 

Effective tax rate

 

 

22.6

%

 

 

24.2

%

 

 

23.0

%

 

 

24.9

%

 

The tax provision for the three and six months ended June 30, 2015 and 2014 was computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year. The Company estimates its ongoing effective annual tax rate in 2015 to be between 21% and 25%, which is subject to management’s quarterly review and revision, if necessary.

The Company’s provision for income tax expense and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign earnings (loss) before income taxes. In the foreign jurisdictions in which the Company has operations, the applicable statutory rates range from 0% to 34%, which is generally significantly lower than the U.S. federal and state combined statutory rate of approximately 39%. For the three and six months ended June 30, 2015, the decrease in the effective tax rate was primarily attributable to an increase in the amount of foreign earnings relative to domestic earnings as compared to the same period in the prior year.

As of June 30, 2015, the Company had approximately $513.9 million in cash and cash equivalents, of which $233.6 million, or 45.4%, was held outside the U.S. Of the $233.6 million held by the Company’s foreign subsidiaries, approximately $82.9 million is available for repatriation to the U.S. without incurring U.S. income taxes and applicable foreign income and withholding taxes in excess of the amounts accrued in the Company’s condensed consolidated financial statements as of June 30, 2015. Under current applicable tax laws, if the Company chooses to repatriate some or all of the funds designated as indefinitely reinvested outside the U.S., the amount repatriated would be subject to U.S. income taxes and applicable foreign income and withholding taxes. The Company does not expect to repatriate any of the funds presently designated as indefinitely reinvested outside the U.S. As such, the Company did not provide for deferred income taxes on its accumulated undistributed earnings of the Company’s foreign subsidiaries.

 

 

(8)

BUSINESS AND CREDIT CONCENTRATIONS

The Company generates the majority of its sales in the United States; however, several of its products are sold into various foreign countries, which subjects the Company to the risks of doing business abroad. In addition, the Company operates in the footwear industry, and its business depends on the general economic environment and levels of consumer spending. Changes in the marketplace may significantly affect management’s estimates and the Company’s performance. Management performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable, which generally do not require collateral from customers, were $256.0 million and $166.9 million before allowances for bad debts, sales returns and chargebacks at June 30, 2015 and December 31, 2014, respectively. Foreign accounts receivable, which in some cases are collateralized by letters of credit, were equal to $201.5 million and $126.2 million before allowance for bad debts, sales returns and chargebacks at June 30, 2015 and December 31, 2014, respectively. The Company’s charges for bad debt and reserves for credit losses for the six months ended June 30, 2015 and 2014 were $4.2 million and $6.6

 

12


 

million, respectively. The Company’s credit losses attributable to write-offs for the six months ended June 30, 2015 and 2014 were $0.7 million and $4.9 million, respectively.

Assets located outside the U.S. consist primarily of cash, accounts receivable, inventory, property, plant and equipment, and other assets. Net assets held outside the United States were $659.8 million and $548.9 million at June 30, 2015 and December 31, 2014, respectively.

The Company’s net sales to its five largest customers accounted for approximately 15.9% and 16.2% of total net sales for the three months ended June 30, 2015 and 2014, respectively. The Company’s net sales to its five largest customers accounted for approximately 16.3% and 16.6% of total net sales for the six months ended June 30, 2015 and 2014, respectively. No customer accounted for more than 10% of our net sales during the three and six months ended June 30, 2015 and 2014. No customer accounted for more than 10% of net trade receivables at June 30, 2015 or December 31, 2014.

The Company’s top five manufacturers produced the following, as a percentage of total production, for the three and six months ended June 30, 2015 and 2014:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Manufacturer #1

 

 

32.8

%

 

 

35.8

%

 

 

33.5

%

 

 

36.3

%

Manufacturer #2

 

 

7.5

%

 

 

7.1

%

 

 

7.9

%

 

 

6.3

%

Manufacturer #3

 

 

7.4

%

 

 

6.0

%

 

 

7.2

%

 

 

5.7

%

Manufacturer #4

 

 

6.9

%

 

 

4.9

%

 

 

5.7

%

 

 

5.3

%

Manufacturer #5

 

 

3.5

%

 

 

3.9

%

 

 

3.9

%

 

 

4.3

%

 

 

 

58.1

%

 

 

57.7

%

 

 

58.2

%

 

 

57.9

%

 

The majority of the Company’s products are produced in China. The Company’s operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations and revaluations, custom duties and related fees, various import controls and other monetary barriers, restrictions on the transfer of funds, labor unrest and strikes, and, in certain parts of the world, political instability. The Company believes it has acted to reduce these risks by diversifying manufacturing among various factories. To date, these business risks have not had a material adverse impact on the Company’s operations.

(9)

SEGMENT AND GEOGRAPHIC REPORTING INFORMATION

The Company has four reportable segments – domestic wholesale sales, international wholesale sales, retail sales, and e-commerce sales. Management evaluates segment performance based primarily on net sales and gross profit. All other costs and expenses of the Company are analyzed on an aggregate basis, and these costs are not allocated to the Company’s segments. Net sales, gross margins, identifiable assets and additions to property and equipment for the domestic wholesale, international wholesale, retail, and the e-commerce segments on a combined basis were as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic wholesale

 

$

338,646

 

 

$

256,684

 

 

$

659,975

 

 

$

489,177

 

International wholesale

 

 

241,872

 

 

 

151,051

 

 

 

527,443

 

 

 

330,134

 

Retail

 

 

212,667

 

 

 

171,881

 

 

 

367,224

 

 

 

300,759

 

E-commerce

 

 

7,279

 

 

 

7,435

 

 

 

13,819

 

 

 

13,499

 

Total

 

$

800,464

 

 

$

587,051

 

 

$

1,568,461

 

 

$

1,133,569

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic wholesale

 

$

135,062

 

 

$

94,186

 

 

$

260,793

 

 

$

178,741

 

International wholesale

 

 

103,771

 

 

 

64,792

 

 

 

217,148

 

 

 

141,081

 

Retail

 

 

130,669

 

 

 

106,817

 

 

 

220,939

 

 

 

183,578

 

E-commerce

 

 

5,106

 

 

 

3,580

 

 

 

8,268

 

 

 

6,378

 

Total

 

$

374,608

 

 

$

269,375

 

 

$

707,148

 

 

$

509,778

 

 

 

13


 

 

 

June 30, 2015

 

 

December 31, 2014

 

Identifiable assets:

 

 

 

 

 

 

 

 

Domestic wholesale

 

$

1,096,705

 

 

$

979,582

 

International wholesale

 

 

616,080

 

 

 

510,063

 

Retail

 

 

199,497

 

 

 

185,041

 

E-commerce

 

 

243

 

 

 

232

 

Total

 

$

1,912,525

 

 

$

1,674,918

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015