UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2019

or

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

Commission File Number 001-14429

SKECHERS U.S.A., INC.

(Exact name of registrant as specified in its charter)

 

 

 Delaware

 

95-4376145

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

228 Manhattan Beach Blvd.

Manhattan Beach, California

 

90266

(Address of Principal Executive Office)

 

(Zip Code)

(310) 318-3100

(Registrant’s Telephone Number, Including Area Code)

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol

 

Name of each exchange on which registered

Class A Common Stock, par value $0.001 per share

 

SKX

 

New York Stock Exchange

 

As of May 1, 2019, 134,384,834 shares of the registrant’s Class A Common Stock, $0.001 par value per share, were outstanding.

As of May 1, 2019, 23,015,771 shares of the registrant’s Class B Common Stock, $0.001 par value per share, were outstanding.

 

 

 

 

 

 


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

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.

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 Equity

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Condensed Consolidated Financial Statements

8

 

Item 2.

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

23

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

 

Item 4.

Controls and Procedures

33

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

34

 

Item 1A.

Risk Factors

36

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

Item 3.

Defaults Upon Senior Securities

37

 

Item 4.

Mine Safety Disclosures

37

 

Item 5.

Other Information

37

 

Item 6.

Exhibits

38

 

 

Signatures

39

 

 

 

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par values)

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

687,498

 

 

$

872,237

 

Short-term investments

 

 

96,387

 

 

 

100,029

 

Trade accounts receivable, less allowances of $25,206 in 2019 and $25,616 in 2018

 

 

736,563

 

 

 

501,913

 

Other receivables

 

 

35,347

 

 

 

55,683

 

Total receivables

 

 

771,910

 

 

 

557,596

 

Inventories

 

 

740,869

 

 

 

863,260

 

Prepaid expenses and other current assets

 

 

85,137

 

 

 

79,018

 

Total current assets

 

 

2,381,801

 

 

 

2,472,140

 

Property, plant and equipment, net

 

 

605,876

 

 

 

585,457

 

Operating lease right-of-use assets

 

 

970,379

 

 

 

 

Deferred tax assets

 

 

36,562

 

 

 

39,431

 

Long-term investments

 

 

95,906

 

 

 

93,745

 

Other assets, net

 

 

36,889

 

 

 

37,482

 

Total non-current assets

 

 

1,745,612

 

 

 

756,115

 

TOTAL ASSETS

 

$

4,127,413

 

 

$

3,228,255

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current installments of long-term borrowings

 

$

1,576

 

 

$

1,666

 

Short-term borrowings

 

 

14,966

 

 

 

7,222

 

Accounts payable

 

 

456,306

 

 

 

679,553

 

Operating lease liabilities

 

 

170,834

 

 

 

 

Accrued expenses

 

 

175,492

 

 

 

161,781

 

Total current liabilities

 

 

819,174

 

 

 

850,222

 

Long-term borrowings, excluding current installments

 

 

93,755

 

 

 

88,119

 

Long-term operating lease liabilities

 

 

875,701

 

 

 

 

Deferred tax liabilities

 

 

443

 

 

 

451

 

Other long-term liabilities

 

 

102,822

 

 

 

100,188

 

Total non-current liabilities

 

 

1,072,721

 

 

 

188,758

 

Total liabilities

 

 

1,891,895

 

 

 

1,038,980

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

Class A common stock, $0.001 par value; 500,000 shares authorized;

   130,242 and 129,525 shares issued and outstanding at March 31, 2019

   and December 31, 2018, respectively

 

 

130

 

 

 

129

 

Class B common stock, $0.001 par value; 75,000 shares authorized;

   23,016 and 23,983 shares issued and outstanding at March 31, 2019

   and December 31, 2018, respectively

 

 

23

 

 

 

24

 

Additional paid-in capital

 

 

291,867

 

 

 

375,017

 

Accumulated other comprehensive loss

 

 

(29,522

)

 

 

(31,488

)

Retained earnings

 

 

1,800,034

 

 

 

1,691,276

 

Skechers U.S.A., Inc. equity

 

 

2,062,532

 

 

 

2,034,958

 

Non-controlling interests

 

 

172,986

 

 

 

154,317

 

Total stockholders' equity

 

 

2,235,518

 

 

 

2,189,275

 

TOTAL LIABILITIES AND EQUITY

 

$

4,127,413

 

 

$

3,228,255

 

 

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 March 31,

 

 

 

 

2019

 

 

2018

 

 

Net sales

 

$

1,276,756

 

 

$

1,250,078

 

 

Cost of sales

 

 

686,247

 

 

 

666,974

 

 

Gross profit

 

 

590,509

 

 

 

583,104

 

 

Royalty income

 

 

5,201

 

 

 

5,522

 

 

 

 

 

595,710

 

 

 

588,626

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling

 

 

70,214

 

 

 

84,446

 

 

General and administrative

 

 

359,632

 

 

 

355,381

 

 

 

 

 

429,846

 

 

 

439,827

 

 

Earnings from operations

 

 

165,864

 

 

 

148,799

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

 

3,142

 

 

 

755

 

 

Interest expense

 

 

(1,277

)

 

 

(1,078

)

 

Other, net

 

 

(4,986

)

 

 

3,403

 

 

Total other income (expense)

 

 

(3,121

)

 

 

3,080

 

 

Earnings before income tax expense

 

 

162,743

 

 

 

151,879

 

 

Income tax expense

 

 

31,724

 

 

 

14,621

 

 

Net earnings

 

 

131,019

 

 

 

137,258

 

 

Less: Net earnings attributable to non-controlling interests

 

 

22,261

 

 

 

19,606

 

 

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

 

$

108,758

 

 

$

117,652

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

$

0.71

 

 

$

0.75

 

 

Diluted

 

$

0.71

 

 

$

0.75

 

 

Weighted average shares used in calculating net earnings per

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

 

 

 

 

 

 

 

 

 

Basic

 

 

153,480

 

 

 

156,433

 

 

Diluted

 

 

154,134

 

 

 

157,630

 

 

 

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 March 31,

 

 

 

2019

 

 

2018

 

Net earnings

 

$

131,019

 

 

$

137,258

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Gain on foreign currency translation adjustment

 

 

3,452

 

 

 

5,333

 

Comprehensive income

 

 

134,471

 

 

 

142,591

 

Less: Comprehensive income attributable to non-controlling

   interests

 

 

23,747

 

 

 

22,445

 

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

 

$

110,724

 

 

$

120,146

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


 

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

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In thousands)

 

 

 

SHARES

 

 

AMOUNT

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLASS A

 

 

CLASS B

 

 

CLASS A

 

 

CLASS B

 

 

ADDITIONAL

 

 

OTHER

 

 

 

 

 

 

SKECHERS

 

 

NON

 

 

TOTAL

 

 

 

COMMON

 

 

COMMON

 

 

COMMON

 

 

COMMON

 

 

PAID-IN

 

 

COMPREHENSIVE

 

 

RETAINED

 

 

U.S.A., INC.

 

 

CONTROLLING

 

 

STOCKHOLDERS'

 

 

 

STOCK

 

 

STOCK

 

 

STOCK

 

 

STOCK

 

 

CAPITAL

 

 

INCOME (LOSS)

 

 

EARNINGS

 

 

EQUITY

 

 

INTERESTS

 

 

EQUITY

 

Balance at December 31, 2018

 

 

129,525

 

 

 

23,983

 

 

$

129

 

 

$

24

 

 

$

375,017

 

 

$

(31,488

)

 

$

1,691,276

 

 

$

2,034,958

 

 

$

154,317

 

 

$

2,189,275

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

108,758

 

 

 

108,758

 

 

 

22,261

 

 

 

131,019

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,966

 

 

 

 

 

 

1,966

 

 

 

1,486

 

 

 

3,452

 

Contribution from noncontrolling interest of consolidated

   entity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,565

 

 

 

7,565

 

Distribution to noncontrolling interest of consolidated

   entity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,014

)

 

 

(1,014

)

Purchase of non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(71,265

)

 

 

 

 

 

 

 

 

(71,265

)

 

 

(11,629

)

 

 

(82,894

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,940

 

 

 

 

 

 

 

 

 

8,940

 

 

 

 

 

 

8,940

 

Shares issued under the Incentive Award Plan

 

 

378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares redeemed for employee tax withholdings

 

 

(170

)

 

 

 

 

 

 

 

 

 

 

 

(5,816

)

 

 

 

 

 

 

 

 

(5,816

)

 

 

 

 

 

(5,816

)

Conversion of Class B Common Stock into Class A

   Common Stock

 

 

967

 

 

 

(967

)

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(458

)

 

 

 

 

 

 

 

 

 

 

 

(15,009

)

 

 

 

 

 

 

 

 

(15,009

)

 

 

 

 

 

(15,009

)

Balance at March 31, 2019

 

 

130,242

 

 

 

23,016

 

 

$

130

 

 

$

23

 

 

$

291,867

 

 

$

(29,522

)

 

$

1,800,034

 

 

$

2,062,532

 

 

$

172,986

 

 

$

2,235,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

131,784

 

 

 

24,545

 

 

$

132

 

 

$

24

 

 

$

453,417

 

 

$

(14,744

)

 

$

1,390,235

 

 

$

1,829,064

 

 

$

119,147

 

 

$

1,948,211

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

117,652

 

 

 

117,652

 

 

 

19,606

 

 

 

137,258

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,494

 

 

 

 

 

 

2,494

 

 

 

2,839

 

 

 

5,333

 

Distribution to noncontrolling interest of consolidated

   entity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,437

)

 

 

(4,437

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,678

 

 

 

 

 

 

 

 

 

8,678

 

 

 

 

 

 

8,678

 

Shares issued under the Incentive Award Plan

 

 

538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares redeemed for employee tax withholdings

 

 

(213

)

 

 

 

 

 

 

 

 

 

 

 

(8,718

)

 

 

 

 

 

 

 

 

(8,718

)

 

 

 

 

 

(8,718

)

Conversion of Class B Common Stock into Class A

   Common Stock

 

 

382

 

 

 

(382

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(76

)

 

 

 

 

 

 

 

 

 

 

 

(3,000

)

 

 

 

 

 

 

 

 

(3,000

)

 

 

 

 

 

(3,000

)

Balance at March 31, 2018

 

 

132,415

 

 

 

24,163

 

 

$

132

 

 

$

24

 

 

$

450,377

 

 

$

(12,250

)

 

$

1,507,887

 

 

$

1,946,170

 

 

$

137,155

 

 

$

2,083,325

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6


 

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

131,019

 

 

$

137,258

 

Adjustment to reconcile net earnings to net cash from operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

27,421

 

 

 

27,176

 

Provision for bad debts and returns

 

 

9,665

 

 

 

13,571

 

Share based compensation

 

 

8,940

 

 

 

8,678

 

Deferred income taxes

 

 

3,074

 

 

 

435

 

Other items, net

 

 

304

 

 

 

17

 

Net foreign currency adjustments

 

 

4,422

 

 

 

(469

)

(Increase) decrease in assets:

 

 

 

 

 

 

 

 

Receivables

 

 

(218,863

)

 

 

(275,837

)

Inventories

 

 

126,810

 

 

 

79,926

 

Other assets

 

 

(27,229

)

 

 

(8,621

)

Increase (decrease) in liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

(135,976

)

 

 

11,097

 

Other liabilities

 

 

6,908

 

 

 

10,307

 

Net cash provided by (used in) operating activities

 

 

(63,505

)

 

 

3,538

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(38,144

)

 

 

(34,464

)

Purchases of investments

 

 

(63,580

)

 

 

(1,468

)

Proceeds from sales and maturities of investments

 

 

65,060

 

 

 

347

 

Net cash used in investing activities

 

 

(36,664

)

 

 

(35,585

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments on long-term borrowings

 

 

(457

)

 

 

(458

)

Proceeds from long-term borrowings

 

 

3,855

 

 

 

 

Proceeds from short-term borrowings

 

 

7,743

 

 

 

4,189

 

Payments for taxes related to net share settlement of equity awards

 

 

(5,816

)

 

 

(8,718

)

Repurchase of Class A common stock

 

 

(15,009

)

 

 

(3,000

)

Cash used for purchase of non-controlling interest

 

 

(82,894

)

 

 

 

Distributions to non-controlling interests

 

 

(1,014

)

 

 

(4,437

)

Net cash used in financing activities

 

 

(93,592

)

 

 

(12,424

)

Effect of exchange rate changes on cash and cash equivalents

 

 

9,022

 

 

 

8,111

 

Net decrease in cash and cash equivalents

 

 

(184,739

)

 

 

(36,360

)

Cash and cash equivalents at beginning of the period

 

 

872,237

 

 

 

736,431

 

Cash and cash equivalents at end of the period

 

$

687,498

 

 

$

718,536

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

1,295

 

 

$

1,080

 

Income taxes, net

 

 

18,390

 

 

 

16,283

 

Non-cash transactions:

 

 

 

 

 

 

 

 

Land and other assets contribution from non-controlling interest

 

 

7,565

 

 

 

 

Note payable contribution from non-controlling interest

 

 

2,150

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

7


 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019 and 2018

(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 generally accepted accounting principles in the United States of America (“U.S. GAAP”), for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S‑X. Accordingly, they do not include certain notes and financial presentations normally required under U.S. GAAP for complete financial reporting. The interim financial information is unaudited, but 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, 2018.

The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2019.

Inventories

Inventories, principally finished goods, are stated at the lower of cost (based on the first-in, first-out method) or market (net realizable value). Cost includes shipping and handling fees and costs, which are subsequently expensed to cost of sales. The Company provides for estimated losses from obsolete or slow-moving inventories, and writes down the cost of inventory at the time such determinations are made. Reserves are estimated based on inventory on hand, historical sales activity, industry trends, the retail environment, and the expected net realizable value. The net realizable value is determined using estimated sales prices of similar inventory through off-price or discount store channels.

Fair Value of Financial Instruments

The accounting standard for fair value measurements provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. This accounting standard established a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 non-derivative investments primarily include money market funds and U.S. Treasury securities.

 

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 non-derivative investments primarily include corporate notes and bonds, asset-backed securities, U.S. Agency securities, and actively traded mutual funds.  The Company has one Level 2 derivative which is an interest rate swap related to the refinancing of its domestic distribution center (see below).

 

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. The Company currently does not have any Level 3 assets or liabilities.

The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, short-term investments, accounts receivable, long-term investments, accounts payable and accrued expenses approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt.

 

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As of August 12, 2015, the Company entered into an interest rate swap agreement concurrent with refinancing its domestic distribution center construction loan (see Note 4). The fair value of the interest rate swap was determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipt was based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with U.S. GAAP, credit valuation adjustments were incorporated to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. The majority of the inputs used to value the interest rate swap were within Level 2 of the fair value hierarchy. As of March 31, 2019 and December 31, 2018, the interest rate swap was a Level 2 derivative and was classified as other long-term liabilities in the Company’s condensed consolidated balance sheets.

Use of Estimates

The preparation of the condensed consolidated financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the 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

In accordance with Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”), the Company recognizes revenue when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.  The Company derives income from the sale of footwear and royalties earned from licensing the Skechers brand. For North America, goods are shipped Free on Board (“FOB”) shipping point directly from the Company’s domestic distribution center in Rancho Belago, California. For international wholesale customers product is shipped FOB shipping point, (i) direct from the Company’s distribution center in Liege, Belgium, (ii) to third-party distribution centers in Central America, South America and Asia, (iii) directly from third-party manufacturers to our other international customers.  For our distributor sales, the goods are generally delivered directly from the independent factories to third-party distribution centers or to our distributors’ freight forwarders on a Free Named Carrier (“FCA”) basis. The Company recognizes revenue on wholesale sales upon shipment as that is when the customer obtains control of the promised goods. Related costs paid to third-party shipping companies are recorded as cost of sales and are accounted for as a fulfillment cost and not as a separate performance obligation.  The Company generates retail revenues primarily from the sale of footwear to customers at retail locations or through the Company’s websites. For our in-store sales, the Company recognizes revenue at the point of sale. For sales made through our websites, we recognize revenue upon shipment to the customer which is when the customer obtains control of the promised good.  Sales and value added taxes collected from e-commerce or retail customers are excluded from reported revenues.  

The Company records accounts receivable at the time of shipment when the Company’s right to the consideration becomes unconditional. The Company typically extends credit terms to our wholesale customers based on their creditworthiness and generally does not receive advance payments. Generally, wholesale customers do not have the right to return goods, however, the Company periodically decides to accept returns or provide customers with credits. Allowances for estimated returns, discounts, doubtful accounts and chargebacks are provided for when related revenue is recorded.  Retail and e-commerce sales represent amounts due from credit card companies and are generally collected within a few days of the purchase. As such, the Company has determined that no allowance for doubtful accounts for retail and e-commerce sales is necessary.

The Company earns royalty income from its licensing arrangements which qualify as symbolic licenses rather than functional licenses. Upon signing a new licensing agreement, the Company receives up-front fees, which are generally characterized as prepaid royalties. These fees are initially deferred and recognized as revenue is earned (i.e., as licensed sales are reported to the Company or on a straight-line basis over the term of the agreement).  The Company applies the sales-based royalty exception for the royalty income based on sales and recognizes revenue only when subsequent sales occur. The Company calculates and accrues estimated royalties based on the agreement terms and correspondence with the licensees regarding actual sales.

 

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Judgments

The Company considered several factors in determining that control transfers to the customer upon shipment of products. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risks and rewards of ownership at the time of shipment.   The Company accrues a liability for product returns at the time of sale based on our historical experience. The Company also accrues amounts for goods expected to be returned in salable condition. As of March 31, 2019 and December 31, 2018, the Company’s sales returns liability totaled $75.0 million and $67.3 million, respectively, and was included in accrued expenses in the condensed consolidated balance sheets.

 

 

Accounting Standards Adopted in 2019

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (“ASU 2016-02”), to enhance the transparency and comparability of financial reporting related to leasing arrangements. Subsequently, the FASB issued various amendments to ASU 2016-02 (collectively with ASU 2016-02 “ASC 842”). The company adopted ASC 842 on January 1, 2019, using the optional transition method and also elected to use the 'package of practical expedients', which permits the company to treat conclusions about lease identification, lease classification and initial direct costs as fixed. Therefore, the company will not apply the standard to the comparative periods presented in the company condensed consolidated financial statements. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with the Company's historic lease methodology under ASC 840, Leases.  The company elected the practical expedient that permits the company not to recognize right-of-use assets and related liabilities that arise from short-term leases with terms of less than twelve months.  As a result of the new lease standard operating leases are required to be recognized on the balance sheet as right-of-use (“ROU”) assets and operating lease liabilities.  Disclosure requirements have been enhanced with the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases.   The standard did not have an impact on debt-covenant compliance under the Company's current debt agreements because it is a result of a change in accounting principle. See Note 3 - Leases for additional information regarding the accounting for leases.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” (“ASU 2018-02”). The standard permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company has elected not to reclassify the income tax effects of the 2017 Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for the Company’s annual and interim reporting periods beginning December 15, 2018, with early adoption permitted. The Company adopted ASU 2018-02 on January 1, 2019 and the adoption of this ASU did not have a material impact on its condensed consolidated financial statements.

 

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,” (“ASU No. 2018-13”), which modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019, but entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The Company is currently evaluating the impact of ASU 2018-13; however, at the current time the Company does not expect that the adoption of this ASU will have a material impact on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,” (“ASU 2018-15”).  ASU 2018-15 requires that issuers follow the internal-use software guidance in Accounting Standards Codification (ASC) 350-40 to determine which costs to capitalize as assets or expense as incurred. The ASC 350-40 guidance requires that certain costs incurred during the application development stage be capitalized and other costs incurred during the preliminary project and post-implementation stages be expensed as they are incurred. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of ASU 2018-15; however, at the current time the Company does not expect that the adoption of this ASU will have a material impact on its condensed consolidated financial statements.

 

 

 

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(2)

CASH, CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS

The Company’s investments consist of mutual funds held in the company’s deferred compensation plan and classified as trading securities, U.S. Treasury securities, corporate notes and bonds, asset-backed securities and U.S. Agency securities, that the Company has the intent and ability to hold to maturity and therefore, are classified as held-to-maturity. The following tables show the Company’s cash, cash equivalents, short-term and long-term investments by significant investment category as of March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

March 31, 2019

 

 

 

Adjusted Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

 

Cash and Cash Equivalents

 

 

Short-Term Investments

 

 

Long-Term Investments

 

Cash

 

$

527,116

 

 

$

-

 

 

$

-

 

 

$

527,116

 

 

$

527,116

 

 

$

-

 

 

$

-

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

160,382

 

 

 

-

 

 

 

-

 

 

 

160,382

 

 

 

160,382

 

 

 

-

 

 

 

-

 

U.S. Treasury securities

 

 

9,994

 

 

 

-

 

 

 

-

 

 

 

9,994

 

 

 

-

 

 

 

-

 

 

 

9,994

 

Total level 1

 

 

170,376

 

 

 

-

 

 

 

-

 

 

 

170,376

 

 

 

160,382

 

 

 

-

 

 

 

9,994

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-