XNAS:SHOO Steven Madden Ltd Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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, 2012
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________________ to _____________________
 
Commission File Number 0-23702 
STEVEN MADDEN, LTD.
(Exact name of registrant as specified in its charter) 
Delaware
 
13-3588231
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
52-16 Barnett Avenue, Long Island City, New York
 
11104
(Address of principal executive offices)
 
(Zip Code)
 
(718) 446-1800
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (do not check if smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o   No x 

As of August 5, 2012, the latest practicable date, there were 45,814,143 shares of the registrant’s common stock, $.0001 par value, outstanding.


STEVEN MADDEN, LTD.
FORM 10-Q
QUARTERLY REPORT
June 30, 2012


 
TABLE OF CONTENTS
 
 





PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
 
 
June 30,
2012
 
December 31,
2011
 
June 30,
2011
 
 
(unaudited)
 
 
 
(unaudited)
ASSETS
 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

Cash and cash equivalents
 
$
80,717

 
$
102,830

 
$
31,261

Accounts receivable, net of allowances of $5,342, $5,894 and $3,763
 
89,706

 
91,407

 
77,822

Due from factor, net of allowances of $11,609, $12,325 and $10,777
 
97,649

 
62,017

 
82,784

Inventories
 
90,999

 
59,644

 
67,723

Marketable securities – available for sale
 
11,011

 
5,659

 
7,709

Prepaid expenses and other current assets
 
18,931

 
15,289

 
9,891

Deferred taxes
 
9,691

 
9,711

 
9,394

Total current assets
 
398,704

 
346,557

 
286,584

Notes receivable
 
7,714

 
7,401

 
7,237

Note receivable – related party
 
3,541

 
4,090

 
3,967

Property and equipment, net
 
37,929

 
31,587

 
25,896

Deferred taxes
 

 
2,428

 
4,271

Deposits and other
 
2,176

 
1,257

 
2,730

Marketable securities – available for sale
 
98,076

 
72,004

 
93,228

Goodwill – net
 
91,559

 
75,595

 
75,644

Intangibles – net
 
137,321

 
98,867

 
96,720

Total Assets
 
$
777,020

 
$
639,786

 
$
596,277

LIABILITIES
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Accounts payable
 
$
118,286

 
$
69,747

 
$
96,208

Accrued expenses
 
43,300

 
34,327

 
23,979

Income taxes payable
 

 

 
7,263

Contingent payment liability – current portion
 
22,731

 
14,133

 
5,899

Accrued incentive compensation
 
3,489

 
16,881

 
7,961

Total current liabilities
 
187,806

 
135,088

 
141,310

Contingent payment liability
 
39,999

 
23,788

 
36,904

Deferred rent
 
6,953

 
6,004

 
5,752

Deferred taxes
 
2,062

 

 

Other liabilities
 
131

 
148

 
163

Total Liabilities
 
236,951

 
165,028

 
184,129

Commitments, contingencies and other
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 

 
 

 
 

Preferred stock – $.0001 par value, 5,000 shares authorized; none issued; Series A Junior Participating preferred stock – $.0001 par value, 60 shares authorized; none issued
 

 

 

Common stock – $.0001 par value, 60,000 shares authorized, 52,931, 51,408 and 51,217 shares issued, 44,528, 43,005 and 42,814 outstanding
 
5

 
5

 
5

Additional paid-in capital
 
202,468

 
186,325

 
178,663

Retained earnings
 
469,178

 
420,411

 
364,728

Other comprehensive income
 
1,031

 
678

 
1,384

Treasury stock – 8,403, 8,403 and 8,403 shares at cost
 
(132,543
)
 
(132,543
)
 
(132,543
)
Total Steven Madden, Ltd. stockholders’ equity
 
540,139

 
474,876

 
412,237

Noncontrolling interests
 
(70
)
 
(118
)
 
(89
)
Total stockholders’ equity
 
540,069

 
474,758

 
412,148

Total Liabilities and Stockholders’ Equity
 
$
777,020

 
$
639,786

 
$
596,277

 
See accompanying notes to condensed consolidated financial statements unaudited.

1



STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(unaudited)
(in thousands, except per share data)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
Net sales
 
$
288,692

 
$
209,152

 
$
554,662

 
$
374,907

Cost of sales
 
184,438

 
125,057

 
354,315

 
221,680

Gross profit
 
104,254

 
84,095

 
200,347

 
153,227

 
 
 
 
 
 
 
 
 
Commission and licensing fee income – net
 
4,252

 
4,432

 
8,725

 
8,999

Operating expenses
 
(66,702
)
 
(51,339
)
 
(131,909
)
 
(97,583
)
Impairment of note receivable and provision for litigation
 
(4,310
)
 

 
(4,310
)
 

Income from operations
 
37,494

 
37,188

 
72,853

 
64,643

Interest and other income – net
 
1,663

 
1,656

 
2,133

 
3,173

Income before provision for income taxes
 
39,157

 
38,844

 
74,986

 
67,816

Provision for income taxes
 
12,269

 
15,149

 
26,171

 
26,269

Net income
 
26,888

 
23,695

 
48,815

 
41,547

Net income (loss) attributable to noncontrolling interests
 
(11
)
 
(89
)
 
48

 
(89
)
Net income attributable to Steven Madden, Ltd.
 
$
26,899

 
$
23,784

 
$
48,767

 
$
41,636

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per share
 
$
0.63

 
$
0.56

 
$
1.14

 
$
0.99

 
 
 
 
 
 
 
 
 
Diluted net income per share
 
$
0.61

 
$
0.55

 
$
1.11

 
$
0.97

 
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
 
42,980

 
42,156

 
42,837

 
42,053

Effect of dilutive securities – options/restricted stock
 
963

 
1,103

 
1,075

 
972

Diluted weighted average common shares outstanding
 
43,943

 
43,259

 
43,912

 
43,025

 


See accompanying notes to condensed consolidated financial statements - unaudited.

2



STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2012
 
2011
 
2012
 
2011
Net income
 
$
26,888

 
$
23,695

 
$
48,815

 
$
41,547

Other comprehensive income (loss) (net of tax):
 
 

 
 

 
 
 
 
Foreign currency translation adjustment
 
(81
)
 

 
(93
)
 

Unrealized gain (loss) on marketable securities
 
(162
)
 
494

 
446

 
412

 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss) (net of tax)
 
(243
)
 
494

 
353

 
412

 
 
 
 
 
 
 
 
 
Comprehensive income
 
26,645

 
24,189

 
49,168

 
41,959

Comprehensive (loss) income attributable to noncontrolling interests
 
(11
)
 
(89
)
 
48

 
(89
)
 
 
 
 
 
 
 
 
 
Comprehensive income attributable to Steven Madden, Ltd.
 
$
26,656

 
$
24,278

 
$
49,120

 
$
42,048

 



See accompanying notes to condensed consolidated financial statements - unaudited. 

3



STEVEN MADDEN, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
 
Six Months Ended
June 30,
 
 
2012
 
2011
Cash flows from operating activities:
 
 

 
 

Net income
 
$
48,815

 
$
41,547

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

 
 

Tax benefit from the exercise of options
 
(3,243
)
 
(3,841
)
Depreciation and amortization
 
6,102

 
4,772

Loss on disposal of fixed assets
 
176

 
580

Impairment of note receivable
 
1,810

 

Stock-based compensation
 
7,950

 
5,565

Provision for doubtful accounts and chargebacks
 
(1,268
)
 
(718
)
Accrued interest on note receivable – related party
 
549

 
(118
)
Deferred rent expense
 
1,018

 
(594
)
Realized gain on sale of marketable securities
 
(715
)
 
(438
)
Changes in:
 
 

 
 

Accounts receivable
 
4,747

 
(1,040
)
Due from factor
 
(34,916
)
 
(28,555
)
Inventories
 
(29,135
)
 
(15,982
)
Prepaid expenses, deposits and other assets
 
(2,514
)
 
1,730

Accounts payable and other accrued expenses
 
43,681

 
18,986

Net cash provided by operating activities
 
43,057

 
21,894

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property and equipment
 
(8,030
)
 
(5,973
)
Purchases of marketable securities
 
(42,729
)
 
(13,984
)
Advance to seller of SM Canada
 
(3,085
)
 

Payment of contingent liability
 
(2,367
)
 

Sale of marketable securities
 
12,215

 
41,081

Acquisition, net of cash acquired
 
(29,367
)
 
(85,234
)
Net cash used in investing activities
 
(73,363
)
 
(64,110
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from exercise of stock options
 
4,950

 
3,485

Tax benefit from the exercise of options
 
3,243

 
3,841

Net cash provided by financing activities
 
8,193

 
7,326

Net decrease in cash and cash equivalents
 
(22,113
)
 
(34,890
)
Cash and cash equivalents – beginning of period
 
102,830

 
66,151

Cash and cash equivalents – end of period
 
$
80,717

 
$
31,261

 

See accompanying notes to condensed consolidated financial statements - unaudited. 

4


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)



Note A – Basis of Reporting
 
The accompanying unaudited condensed consolidated financial statements of Steven Madden, Ltd. and subsidiaries (the “Company”) have been prepared in accordance with the generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the financial position of the Company and the results of its operations and cash flows for the periods presented. The results of its operations for the three- and six-month periods ended June 30, 2012 are not necessarily indicative of the operating results for the full year. It is suggested that these financial statements be read in conjunction with the financial statements and related disclosures for the year ended December 31, 2011 included in the Annual Report of Steven Madden, Ltd. on Form 10-K filed with the SEC on February 29, 2012.
Note B – Recently Adopted Accounting Standards
In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-08, “Intangibles – Goodwill and Other” (“ASU 2011-08”). Under ASU 2011-08, when testing goodwill for impairment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment that the fair value of a reporting unit is less than its carrying amount, performing the current two-step impairment test is not required. The guidance also includes a number of events and circumstances that an entity should consider in conducting the qualitative assessment. The adoption of this guidance, which became effective for the Company on January 1, 2012, did not have a material impact on our financial statements.
 
In June 2011, the FASB issued Accounting Standards Update No. 2011-05 “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”). Under ASU No. 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of which option is selected, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU No. 2011-05 which became effective for the Company on January 1, 2012, only affected the presentation of financial statements and thus had no impact on the financial results or financial position. In October 2011, the FASB announced plans to defer the presentation of items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income.
Note C – Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Significant areas involving management estimates include allowances for bad debts, returns and customer chargebacks and contingent payment liability. The Company provides reserves on trade accounts receivables and due from factors for future customer chargebacks and markdown allowances, discounts, returns and other miscellaneous compliance related deductions that relate to the current period sales. The Company evaluates anticipated chargebacks by reviewing several performance indicators of its major customers. These performance indicators, which include retailers’ inventory levels, sell-through rates and gross margin levels, are analyzed by management to estimate the amount of the anticipated customer allowance.

5


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note D – Due From Factor
The Company has a collection agency agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”) that became effective on September 15, 2009. The agreement can be terminated by the Company or Rosenthal at any time upon 60 days prior written notice. Under the agreement the Company can request advances from Rosenthal of up to 85% of aggregate receivables submitted to Rosenthal. The agreement provides the Company with a $30 million credit facility with a $15 million sub-limit for letters of credit at an interest rate based, at the Company’s election, upon either the prime rate or LIBOR. The Company also pays a fee of 0.275% of the gross invoice amount submitted to Rosenthal. Rosenthal assumes the credit risk on a substantial portion of the receivables the Company submits to it and, to the extent of any loans made to the Company, Rosenthal maintains a lien on all of the Company’s receivables to secure the Company’s obligations.
Note E – Notes Receivable
As of June 30, 2012 and December 31, 2011, Notes Receivable were comprised of the following: 
 
 
June 30,
2012
 
December 31,
2011
Due from Bakers Footwear Group, Inc.
 
$
4,129

 
$
4,092

Due from Betsey Johnson LLC
 
500

 
3,309

Due from seller of SM Canada (see Note R)
 
3,085

 

Total
 
$
7,714

 
$
7,401

On August 26, 2010, the Company entered into a Debenture and Stock Purchase Agreement with Bakers Footwear Group, Inc. (“Bakers”) pursuant to which the Company paid $5,000 to acquire a subordinated debenture in the principal amount of $5,000 and 1,844,860 unregistered shares of Bakers common stock which trades on the Over-the-Counter Bulletin Board. The Company allocated $996 of the purchase price to the common stock and $4,004 to the subordinated debenture based upon their relative fair values. Interest accrues on the debenture at the rate of 11% per annum and is payable quarterly in cash. The principal amount of the debenture is payable by Bakers in four equal installments of $1,250 due on August 31, 2017, 2018, 2019 and 2020. The difference between the $4,004 purchase price of the debenture and the $5,000 principal amount of the debenture is considered original issue discount and is being amortized over the life of the debenture. As of June 30, 2012 and 2011, the total amount of the discount amortized was $125 and $52, bringing the value of the note to $4,129 and $4,056, respectively.
In April 2012, Betsey Johnson LLC filed for Chapter 11 protection in the United States Bankruptcy Court. Shortly thereafter, Betsey Johnson announced that it would commence an orderly liquidation of all of its assets. As a consequence of the bankruptcy, the note receivable due from Betsey Johnson LLC is considered impaired, and accordingly, the value of the note was reduced by $1,810 to $500 in the second quarter of 2012. The $1,810 charge was included in impairment of note receivable and provision for litigation line in the Condensed Consolidated Statements of Income. The note was valued using the estimated future recoveries from the bankruptcy proceeding.
Note F – Note Receivable – Related Party
On June 25, 2007, the Company made a loan to Steve Madden, its Creative and Design Chief and a principal stockholder of the Company, in the amount of $3,000 in order for Mr. Madden to satisfy a personal tax obligation resulting from the exercise of options that were due to expire and retain the underlying Company common stock, which he pledged to the Company as collateral to secure the loan. Mr. Madden executed a secured promissory note in favor of the Company bearing interest at an annual rate of 8%, which was due on the earlier of the date Mr. Madden ceases to be employed by the Company or December 31, 2007. The note was amended and restated as of December 19, 2007 to extend the maturity date to March 31, 2009, and amended and restated again as of April 1, 2009 to change the interest rate to 6% and extend the maturity date to June 30, 2015 at which time all principal and accrued interest would become due. On January 3, 2012, in connection with an amendment of Mr. Madden’s employment contract, the note was again amended and restated (the “Third Amended and Restated Note”) to extend the maturity date to December 31, 2023 and eliminate accrual of interest after December 31, 2011. In addition, the Third Amended and Restated Note provides that, commencing on December 31, 2014 and annually on each December 31 thereafter through the maturity date, one-tenth of the principal amount thereof, together with accrued interest, will be cancelled by the Company provided that Mr. Madden

6


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements –Unaudited
June 30, 2012
($ in thousands except share and per share data)

Note F – Note Receivable – Related Party (continued)

continues to be employed by the Company on each such December 31. As of December 31, 2011, $1,090 of interest has accrued on the principal amount of the loan related to the period prior to the elimination of the accrual of interest and has been reflected on the Company’s Condensed Consolidated Financial Statements. Due to the three-for-two stock split effected on May 3, 2010, the number of shares securing the loan increased from 510,000 shares to 765,000 shares. Based upon the increase in the market value of the Company’s common stock since the inception of the loan, on July 12, 2010, the Company released from its security interest 555,000 shares of the Company’s common stock, retaining 210,000 shares with a total market value on that date of $6,798, as collateral for the loan. Subsequently, pursuant to the three-for-two stock split effected on May 31, 2011, the number of shares securing the repayment of the loan has increased from 210,000 shares to 315,000 shares. On June 30, 2012, the total market value of these shares was $10,001. Pursuant to the elimination of further interest accumulation under the Third Amended and Restated Note, the outstanding principal and the accrued interest as of December 31, 2011 has been discounted to reflect imputed interest, which will be amortized over the remaining life of the loan.
Note G – Marketable Securities
Marketable securities consist primarily of corporate bonds with maturities greater than three months and up to ten years at the time of purchase as well as marketable equity securities. These securities, which are classified as available-for-sale, are carried at fair value, with unrealized gains and losses, net of any tax effect, reported in stockholders’ equity as accumulated other comprehensive income (loss). These securities are classified as current and non-current marketable securities based upon their maturities. Amortization of premiums and discounts is included in interest income. For the three- and six-month periods ended June 30, 2012, the amortization of bond premiums totals $279 and $529, respectively, compared to $321 and $664 for the comparable periods in 2011. The values of these securities may fluctuate as a result of changes in equity values, market interest rates and credit risk.
Note H – Fair Value Measurement
The accounting guidance under “Fair Value Measurements and Disclosures” (“ASC 820-10”) requires the Company to make disclosures about the fair value of certain of its assets and liabilities. ASC 820-10 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. ASC 820-10 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. A brief description of those three levels is as follows:
 
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3: Significant unobservable inputs.

 The Company’s financial assets and liabilities subject to fair value measurements as of June 30, 2012 and December 31, 2011 are as follows: 

7


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements –Unaudited
June 30, 2012
($ in thousands except share and per share data)


Note H – Fair Value Measurement (continued)
 
 
 
 
June 30, 2012
 
 
 
 
Fair Value Measurements
Using Fair Value Hierarchy
 
 
Fair value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Cash equivalents
 
$
12,286

 
$
12,286

 
$

 
$

Current marketable securities – available for sale
 
11,011

 
11,011

 

 

Investment in Bakers
 
996

 

 
996

 

Note receivable – related party
 
3,541

 

 

 
3,541

Note receivable – Bakers
 
4,129

 

 

 
4,129

Note receivable – Betsey Johnson
 
500

 

 

 
500

Note receivable – Seller of SM Canada
 
3,085

 

 

 
3,085

Long-term marketable securities – available for sale
 
98,076

 
98,076

 

 

Total assets
 
$
133,624

 
$
121,373

 
$
996

 
$
11,255

Liabilities:
 
 

 
 

 
 

 
 

Contingent consideration
 
$
62,730

 

 

 
$
62,730

Total liabilities
 
$
62,730

 

 

 
$
62,730

 
 
 
 
 
 
December 31, 2011
 
 
 
 
Fair Value Measurements
Using Fair Value Hierarchy
 
 
Fair value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Cash equivalents
 
$
57,652

 
$
57,652

 
$

 
$

Current marketable securities – available for sale
 
5,659

 
5,659

 

 

Investment in Bakers
 
996

 

 
996

 

Note receivable – related party
 
4,090

 

 

 
4,090

Note receivable – Bakers
 
4,092

 

 

 
4,092

Note receivable – Betsey Johnson
 
3,309

 

 

 
3,309

Long-term marketable securities – available for sale
 
72,004

 
72,004

 

 

Total assets
 
$
147,802

 
$
135,315

 
$
996

 
$
11,491

Liabilities:
 
 

 
 

 
 

 
 

Contingent consideration
 
$
37,921

 

 

 
$
37,921

Total liabilities
 
$
37,921

 

 

 
$
37,921

 







8


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements –Unaudited
June 30, 2012
($ in thousands except share and per share data)


Note H – Fair Value Measurement (continued)
Pursuant to the Debenture and Stock Purchase Agreement with Bakers (see Note E), the Company acquired 1,844,860 unregistered shares of Bakers common stock, which trades on the OTC Bulletin Board. These shares, which are thinly traded, were valued using the quoted price of similar registered shares of Bakers common stock adjusted for the effect of the transfer restriction, considering factors such as the nature and duration of the transfer restriction, the volatility of the stock and the risk free interest rate. The shares are included in deposits and other assets on the Company’s Condensed Consolidated Balance Sheets. For the note receivable due from Bakers (see Note E), which was purchased at a substantial discount, the carrying value was determined to be the fair value. For the note receivable due from related party and due from the sellers of SM Canada (see Note R), the carrying value was determined to be the fair value, based upon their imputed or actual interest rates, which approximate current market interest rates. In April of 2012, Betsey Johnson announced that it would commence an orderly liquidation under the protection of U.S. Bankruptcy Court. The note receivable due from Betsey Johnson was valued using the estimated future recoveries from the bankruptcy proceeding.
 
The Company has recorded a liability for potential contingent consideration in connection with the February 21, 2012 acquisition of SM Canada (see Note R). Pursuant to the terms of an earn-out agreement between the Company and the seller of SM Canada, earn-out payments will be due annually to the seller of SM Canada based on the financial performance of SM Canada for each of the twelve-month periods ending on March 31, 2013 through 2017, inclusive. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of SM Canada during the earn-out period.
 
The Company has recorded a liability for potential contingent consideration in connection with the May 25, 2011 acquisition of Cejon Inc., Cejon Accessories, Inc. and New East Designs, LLC (collectively "Cejon") (see Note R). Pursuant to the terms of an earn-out agreement between the Company and the sellers of Cejon, earn-out payments will be made annually to the sellers of Cejon, based on the financial performance of Cejon for each of the twelve-month periods ending on June 30, 2012 through 2016, inclusive. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Cejon during the earn-out period.
 
The Company has recorded a liability for potential contingent consideration in connection with the May 20, 2011 acquisition of The Topline Corporation ("Topline") (see Note R). Pursuant to the terms of the acquisition agreement, an earn-out payment will be made to the seller of Topline based on the financial performance of Topline for the twelve-month period ending on June 30, 2012. The fair value of the contingent payment was estimated using the present value of management’s projections of the financial results of Topline during the earn-out period.
 
The Company has recorded a liability for contingent consideration as a result of the February 10, 2010 acquisition of Big Buddha, Inc. The contingent consideration will be payable to the seller of Big Buddha based on the financial performance of Big Buddha for each of the twelve-month periods ending on March 31, 2011, 2012 and 2013. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Big Buddha during the earn-out period.
 
Accounting guidance permits entities to choose to measure financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The accounting guidance also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that chose different measurement attributes for similar assets and liabilities. The Company has elected not to measure any eligible items at fair value.

9


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note I – Inventories
Inventories, which consist of finished goods on hand and in transit, are stated at the lower of cost (first-in, first-out method) or market.
Note J – Fair Value of Financial Instruments
The carrying value of certain financial instruments such as accounts receivable, due from factor and accounts payable approximates their fair values due to the short-term nature of their underlying terms. The fair values of investment in Bakers and marketable securities available for sale are determined by reference to market data and other valuation techniques, as appropriate. Fair value of the notes receivable held by the Company approximates their carrying value based upon their imputed or actual interest rate, which approximates current market interest rates.
Note K – Revenue Recognition
 
The Company recognizes revenue on wholesale sales when products are shipped pursuant to its standard terms, which are freight on board (“FOB”) warehouse, or when products are delivered to the consolidators as per the terms of the customers’ purchase order, persuasive evidence of an arrangement exists, the price is fixed or determinable and collection is reasonably assured. Sales reductions on wholesale sales for anticipated discounts, allowances and other deductions are recognized during the period when sales are recorded. Customers retain the right to replacement of the product for poor quality or improper or short shipments, which have historically been immaterial. Retail sales are recognized when the payment is received from customers and are recorded net of estimated returns. The Company also generates commission income acting as a buying agent by arranging to manufacture private label shoes to the specifications of its clients. The Company’s commission revenue includes fees charged for its design, product and development services provided to certain suppliers in connection with the Company’s private label business. Commission revenue and product and development fees are recognized as earned when title to the product transfers from the manufacturer to the customer and collections are reasonably assured and are reported on a net basis after deducting related operating expenses.
 
The Company licenses its Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and sleepwear. In addition, the Company licenses the Betsey Johnson® trademarks for use in connection with the manufacture, marketing and sale of sleepwear, jewelry, swimwear, eyewear, watches, fragrances, outerwear and luggage. The license agreements require the licensee to pay the Company a royalty and, in substantially all of the agreements, an advertising fee based on the higher of a minimum or a net sales percentage as defined in the various agreements. In addition, under the terms of retail selling agreements, most of the Company’s international distributors are required to pay the Company a royalty based on a percentage of net sales, in addition to a commission and a design fee on the purchases of the Company’s products. Licensing revenue is recognized on the basis of net sales reported by the licensees, or the minimum guaranteed royalties, if higher. In substantially all of the Company’s license agreements, the minimum guaranteed royalty is earned and payable on a quarterly basis.
Note L – Taxes Collected From Customers
 
The Company accounts for certain taxes collected from its customers in accordance with the accounting guidance which permits companies to adopt a policy of presenting taxes in the income statement on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues). Taxes within the scope of this accounting guidance would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes and some types of excise taxes. The Company has consistently recorded all taxes on a net basis.
Note M – Sales Deductions
 
The Company supports retailers’ initiatives to maximize sales of the Company’s products on the retail floor by subsidizing the co-op advertising programs of such retailers, providing them with inventory markdown allowances and participating in various other marketing initiatives of its major customers. In addition, the Company accepts returns for damaged products for which the Company’s costs are normally charged back to the responsible third-party factory. Such expenses are reflected in the financial statements as deductions to net sales.

10


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note N – Cost of Sales
 
All costs incurred to bring finished products to the Company’s distribution center or to the customers’ freight forwarder and, in the Retail segment, the costs to bring products to the Company’s stores, are included in the cost of sales line on the Condensed Consolidated Statements of Income. These include the cost of finished products, purchase commissions, letter of credit fees, brokerage fees, sample expenses, custom duty, inbound freight, royalty payments on licensed products, labels and product packaging. All warehouse and distribution costs related to the Wholesale segments and freight to customers, if any, are included in the operating expenses line item of the Company’s Condensed Consolidated Statements of Income. The Company’s gross margins may not be comparable to those of other companies in the industry because some companies may include warehouse and distribution costs, as well as other costs excluded from cost of sales by the Company, as a component of cost of sales, while other companies report on the same basis as the Company and include them in operating expenses.
Note O – Income Taxes

During the second quarter of 2012, the Company determined to invest indefinitely, a portion of its 2012 earnings from its foreign operations in its Canadian operations. As a result of this investment, the Company's effective income tax rate decreased to 31.3% and 34.9% for the three and six months ended June 30, 2012, respectively.
Note P – Net Income Per Share of Common Stock
 
Basic net income per share is based on the weighted average number of shares of common stock outstanding during the period, which does not include unvested restricted stock subject to forfeiture. Diluted net income per share reflects: a) the potential dilution assuming shares of common stock were issued upon the exercise of outstanding in-the-money options and the proceeds thereof were used to purchase shares of the Company’s common stock at the average market price during the period, and b) the vesting of granted nonvested restricted stock awards for which the assumed proceeds upon vesting are deemed to be the amount of compensation cost not yet recognized attributable to future services using the treasury stock method, to the extent dilutive. For both the three- and six-month periods ended June 30, 2012, options exercisable into approximately 85,000 shares of common stock, respectively, have been excluded in the calculation of diluted income per share as compared with 150,000 shares that were excluded for both the three- and six-month periods ended June 30, 2011, as the result would have been antidilutive. For the three- and six-month periods ended June 30, 2012 and 2011, the unvested restricted stock awards were dilutive.
Note Q – Stock-Based Compensation
 
In March 2006, the Board of Directors approved the Steven Madden, Ltd. 2006 Stock Incentive Plan (the “Plan”) under which nonqualified stock options, stock appreciation rights, performance shares, restricted stock, other stock-based awards and performance-based cash awards may be granted to employees, consultants and non-employee directors. The stockholders approved the Plan on May 26, 2006. On May 25, 2007, the stockholders approved an amendment to the Plan to increase the maximum number of shares that may be issued under the Plan from 2,700,000 to 3,487,500. On May 22, 2009, the stockholders approved a second amendment to the Plan that increased the maximum number of shares that may be issued under the Plan to 9,144,000. On May 25, 2012, the stockholders approved a third amendment to the Plan that increased the maximum number of shares that may be issued under the Plan to 15,644,000. The following table summarizes the number of shares of common stock authorized for use under the Plan, the number of stock-based awards granted (net of expired or cancelled awards) under the Plan and the number of shares of common stock available for the grant of stock-based awards under the Plan:
 
Common stock authorized
15,644,000

Stock-based awards, including restricted stock and stock options granted, net of expired or cancelled
(8,655,000
)
 
 

Common stock available for grant of stock-based awards as of June 30, 2012
6,989,000

 



11


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


 Note Q – Stock-Based Compensation (continued)

Total equity-based compensation for the three and six months ended June 30 is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Restricted stock
$
2,407

 
$
1,420

 
$
4,858

 
$
2,608

Stock options
1,536

 
1,620

 
3,092

 
2,957

Total
$
3,943

 
$
3,040

 
$
7,950

 
$
5,565

 
Equity-based compensation is included in operating expenses on the Company’s Condensed Consolidated Statements of Income.
 
Stock Options
 
Cash proceeds and intrinsic values related to total stock options exercised during the three- and six-month periods ended June 30, 2012 and 2011 are as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Proceeds from stock options exercised
$
1,478

 
$
3,254

 
$
4,950

 
$
3,485

Intrinsic value of stock options exercised
$
2,963

 
$
7,510

 
$
8,232

 
$
7,799

 
During the three and six months ended June 30, 2012, options to purchase approximately 456,000 shares of common stock with a weighted average exercise price of $14.75 and options to purchase approximately 680,000 shares of common stock with a weighted average exercise price of $17.55 vested, respectively. During the three and six months ended June 30, 2011, options to purchase approximately 489,000 shares of common stock with a weighted average exercise price of $13.48 and options to purchase approximately 611,000 shares of common stock with a weighted average exercise price of $13.92 vested, respectively. As of June 30, 2012, there were unvested options relating to 1,348,000 shares of common stock with a total of $9,054 of unrecognized compensation cost and an average vesting period of 2.2 years.
 
The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted, which requires several assumptions. The expected term of the options represents the estimated period of time until exercise and is based on the historical experience of similar awards. Expected volatility is based on the historical volatility of the Company’s common stock. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. With the exception of special dividends paid in November of 2005 and 2006, the Company historically has not paid regular cash dividends and thus the expected dividend rate is assumed to be zero. The following weighted average assumptions were used for stock options granted:

 
 
2012
 
2011
Volatility
 
41.1% to 47.4%
 
47.6% to 48.7%
Risk free interest rate
 
0.48% to 0.87%
 
1.22% to 1.78%
Expected life in years
 
3.1 to 4.6
 
2.8 to 4.4
Dividend yield
 
0.00%
 
0.00%
Weighted average fair value
 
$14.03
 
$10.83
 




12


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note Q – Stock-Based Compensation (continued)

Activity relating to stock options granted under the Company’s plans and outside the plans during the six months ended June 30, 2012 is as follows: 
 
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
Outstanding at January 1, 2012
 
2,703,000

 
$
17.79

 
 
 
 

Granted
 
190,000

 
40.71

 
 
 
 

Exercised
 
(316,000
)
 
15.69

 
 
 
 

Cancelled/Forfeited
 
(1,000
)
 
24.71

 
 
 
 

Outstanding at June 30, 2012
 
2,576,000

 
$
19.73

 
4.5 years
 
$
33,405

Exercisable at June 30, 2012
 
1,228,000

 
$
16.49

 
4.0 years
 
$
19,328

 
Restricted Stock
 
The following table summarizes restricted stock activity during the six months ended June 30, 2012 and 2011:
 
 
 
2012
 
2011
 
 
Number of Shares
 
Weighted Average Fair Value at Grant Date
 
Number of Shares
 
Weighted Average Fair Value at Grant Date
Non-vested at January 1
 
671,000

 
$
25.44

 
563,000

 
$
17.20

Granted
 
1,140,000

 
41.13

 
323,000

 
31.16

Vested
 
(169,000
)
 
24.80

 
(179,000
)
 
14.93

Forfeited
 

 

 

 

Non-vested at June 30
 
1,642,000

 
$
36.40

 
707,000

 
$
24.15

 
As of June 30, 2012, there was $55,362 of total unrecognized compensation cost related to restricted stock awards granted under the Plan. This cost is expected to be recognized over a weighted average of 9 years. The Company determines the fair value of its restricted stock awards based on the market price of its common stock on the date of grant.
 
On January 3, 2012, the Company and its Creative and Design Chief, Steven Madden, entered into an amendment of Mr. Madden’s existing employment agreement, pursuant to which, on February 8, 2012, Mr. Madden was granted 975,371 restricted shares of the Company’s common stock at the then market price of $41.01, which will vest in equal annual installments over a seven-year period commencing on December 31, 2017 and, thereafter, on each December 31 through December 31, 2023, subject to Mr. Madden’s continued employment on each such vesting date. Pursuant to the contract, on June 30, 2012, Mr. Madden exercised his right to receive an additional restricted stock award, and on July 3, 2012 he was granted 1,262,228 restricted shares of the Company's common stock at the then market price of $31.69, which will vest in the same manner as the prior grant.

13


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note R – Acquisitions
 
Steve Madden Canada
 
On February 21, 2012, the Company purchased all of the assets of Steve Madden Canada Inc., Steve Madden Retail Canada Inc., Pasa Agency Inc. and Gelati Imports Inc. (collectively, “SM Canada”), the Company’s sole distributor in Canada since 1994, comprising SM Canada’s footwear, handbags and accessories wholesale and retail businesses. The transaction was completed for consideration of approximately $29,367 plus potential earn-out payments of up to a maximum of $38,000 (Canadian dollars, which converts to approximately the same in US dollars), in the aggregate, based on achievement of certain earnings targets for each of the twelve-month periods ending on March 31, 2013 through 2017, inclusive. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of SM Canada during the earn-out period. As of June 30, 2012, the Company estimates the fair value of the contingent consideration to be $19,975.
 
The transaction was accounted for using the acquisition method required by GAAP. Accordingly, the assets and liabilities of SM Canada were adjusted to their fair values, and the excess of the purchase price over the fair value of the assets acquired, including identified intangible assets, was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, which are subject to change. The purchase price has been preliminarily allocated as follows: 
Accounts receivable
$
2,496

Inventory
2,220

Prepaid expenses and other assets
147

Fixed assets
1,005

Re-acquired right
35,200

Customer relationships
4,400

Non-compete agreement
455

Accounts payable
(2,645
)
Accrued expenses
(802
)
Total fair value excluding goodwill
42,476

Goodwill
4,185

 
 

Net assets acquired
$
46,661

 
Prior to the acquisition, the Company and SM Canada had a preexisting relationship under which SM Canada had the right to use the Steve Madden brand throughout Canada in connection with the sale and distribution of merchandise. The settlement of the preexisting relationship is considered a re-acquired right and was valued based on the present value of estimated future cash flows.

The purchase price and related allocation are preliminary and may be revised as a result of adjustments made to the purchase price as may be required as additional information regarding assets and liabilities is revealed. Contingent consideration classified as a liability will be remeasured at fair value at each reporting date, until the contingency is resolved, with changes recognized in earnings. The goodwill related to this transaction is expected to be deductible for tax purposes over 15 years.
 
The Company incurred approximately $951 in acquisition related costs applicable to the SM Canada transaction, $800 of which were incurred in 2012. These expenses are included in operating expenses in the Company’s Condensed Consolidated Statements of Income.
 
In connection with the acquisition, the Company provided an interest free loan to the seller of SM Canada in the principal amount of $3,107 (Canadian dollars, $3,085 in US dollars). The note will be paid in five annual installments which are due on the dates the five annual earn-out payments are paid. The note was recorded net of the imputed interest, which will be amortized to income over the term of the note.

14


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note R – Acquisitions (continued)

Cejon
 
On May 25, 2011, the Company acquired all of the outstanding shares of capital stock of closely held Cejon, Inc. and Cejon Accessories, Inc. from the sole stockholder of these companies, as well as all of the outstanding membership interests in New East Designs, LLC (together with Cejon Inc. and Cejon Accessories, “Cejon”) from its members (together with the sole stockholder of Cejon, the “Cejon Sellers”). Founded in 1991, Cejon designs, markets and sells cold weather accessories, fashion scarves, wraps and other trend accessories primarily under the Cejon brand name, private labels and under the Steve Madden brand name. Cejon had been a licensee of the Company for cold weather and selected other fashion accessories since September 2006. Management expects the Cejon acquisition will further strengthen and expand the Company’s accessories platform. The acquisition was completed for consideration of approximately $29,502 cash plus potential contingent payments pursuant to an earn-out agreement with the Cejon Sellers. The earn-out agreement specifies two tiers of potential payments to the Cejon Sellers based on the financial performance of Cejon for each of the twelve-month periods ending on June 30, 2012 through 2016, inclusive. The tier one earn-out is based on a graduated percentage of EBITDA up to a maximum EBITDA of $11,000 in each of the earn-out periods, provided that the total aggregate payments under this tier do not exceed $25,000. The tier two earn-out is based on a multiple of the amount that EBITDA exceeds certain levels in each of the earn-out periods, provided that the total aggregate payments under this tier do not exceed $33,000.
 
The transaction was accounted for using the acquisition method required by GAAP. Accordingly, the assets and liabilities of Cejon were adjusted to their fair values, and the excess of the purchase price over the fair value of the assets acquired, including identified intangible assets, was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The purchase price has been allocated as follows:
 
Accounts receivable
$
3,631

Inventory
3,998

Prepaid expenses and other current assets
196

Fixed assets
190

Trade name
27,065

Customer relationships
3,225

Non-compete agreement
305

Other assets
24

Accounts payable
(1,318
)
Accrued expenses
(2,242
)
Total fair value excluding goodwill
35,074

Goodwill
17,759

 
 

Net assets acquired
$
52,833

 
Contingent consideration classified as a liability will be remeasured at fair value at each reporting date, until the contingency is resolved, with changes recognized in earnings. The goodwill related to this transaction is expected to be deductible for tax purposes over 15 years.

The Company incurred approximately $531 in acquisition related costs applicable to the Cejon transaction during the year ended December 31, 2011. These expenses were included in operating expenses in the Company’s Consolidated Statements of Income for the year ended December 31, 2011.



15


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note R – Acquisitions (continued)

Topline
 
On May 20, 2011, the Company acquired all of the outstanding shares of capital stock of the closely held company, Topline from its sole stockholder (the “Topline Seller”). Founded in 1980, Topline and its subsidiaries design, manufacture, market and sell private label and branded women’s footwear primarily to department stores, specialty retailers and mass merchants. Topline has sourcing capabilities, sample making facilities and product development capabilities in China, including personnel and facilities engaged in direct sourcing. Management believes that Topline is an excellent strategic fit for the Company. The acquisition was completed for consideration of approximately $56,128 cash, plus potential contingent payments pursuant to an earn-out agreement with the Topline Seller. The earn-out agreement provides for potential payments to the Topline Seller based on the financial performance of Topline for the twelve-month period ending on June 30, 2012. The fair value of the contingent payments was estimated using the present value of management’s projections of the financial results of Topline during the earn-out period (see Note H).
 
The transaction was accounted for using the acquisition method required by GAAP. Accordingly, the assets and liabilities of Topline were adjusted to their fair values, and the excess of the purchase price over the fair value of the assets acquired, including identified intangible assets, was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The purchase price, net of an estimated working capital adjustment due to the Company, has been allocated as follows: 
Accounts receivable
$
55,950

Inventory
8,460

Prepaid expenses and other current assets
990

Fixed assets
3,895

Trade name
16,600

Customer relationships
7,900

Non-compete agreement
300

Other assets
108

Accounts payable
(40,475
)
Accrued expenses
(7,784
)
Income tax payable
(3,082
)
Deferred tax liability
(8,491
)
Total fair value excluding goodwill
34,371

Goodwill
31,003

 
 

Net assets acquired
$
65,374

 
Contingent consideration classified as a liability will be remeasured at fair value at each reporting date, until the contingency is resolved, with changes recognized in earnings. The trade name, customer relationships, non-compete agreement and goodwill related to this transaction are not deductible for tax purposes. 

The Company incurred approximately $529 in acquisition related costs applicable to the Topline transaction during the year ended December 31, 2011. These expenses were included in operating expenses in the Company’s Condensed Consolidated Statements of Income.
 
The results of operations of SM Canada, Cejon and Topline have been included in the Company’s Condensed Consolidated Statements of Income from the date of the acquisition. Unaudited pro forma information related to these acquisitions is not included, as the impact of these transactions is not material to the Company’s consolidated results.

16


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note S – Goodwill and Intangible Assets
 
The following is a summary of the carrying amount of goodwill by segment as of June 30, 2012:

 
 
Wholesale 
 
 

 
Net Carrying 
 
 
Footwear
 
Accessories
 
Retail
 
Amount
Balance at January 1, 2012
 
$
20,939

 
$
49,155

 
5,501

 
$
75,595

Purchase accounting adjustment
 
11,610

 
169

 
 

 
11,779

Acquisition of SM Canada
 
2,971

 

 
1,214

 
4,185

Balance at June 30, 2012
 
$
35,520

 
$
49,324

 
6,715

 
$
91,559

The following table details identifiable intangible assets as of June 30, 2012:

 
 
Estimated Lives
 
Cost Basis
 
Accumulated Amortization
 
Net Carrying Amount
Trade names
 
6–10 years
 
$
4,590

 
$
1,401

 
$
3,189

Customer relationships
 
10 years
 
27,234

 
6,267

 
20,967

License agreements
 
3–6 years
 
5,600

 
5,600

 

Non-compete agreement
 
5 years
 
2,440

 
1,363

 
1,077

Other
 
3 years
 
14

 
14

 

 
 
 
 
39,878

 
14,645

 
25,233

Re-acquired right
 
indefinite
 
35,200

 

 
35,200

Tradenames
 
indefinite
 
76,888

 

 
76,888

 
 
 
 
$
151,966

 
$
14,645

 
$
137,321



The estimated future amortization expense of purchased intangibles as of June 30, 2012 is as follows:
 
2012 (remaining six months)
$
1,661

2013
3,351

2014
3,284

2015
3,101

2016
2,795

Thereafter
11,041

 
$
25,233


17


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note T – Commitments, Contingencies and Other
Legal proceedings:
 
(a)
On July 19, 2011, an individual purporting to act on behalf of a class of similarly situated individuals commenced a civil action in the United States District Court for the Central District of California, Samantha Ellison, individually and on behalf of a class of similarly situated individuals v. Steven Madden, Ltd., No. CV11-05935 (the “Ellison Action”). The Ellison Action asserts that the Company made unsolicited commercial text calls to wireless telephone numbers of the class in violation of the Telecommunications Privacy Act and seeks, on behalf of the class, an injunction requiring the Company to cease all wireless spam activities and an award of statutory damages to the class members together with costs and reasonable attorneys' fees. The Company responded by challenging the suit on several grounds. Settlement discussions have resulted in a settlement being reached on July 30, 2012 for an aggregate gross fund amount of $10,000, including all settlement costs and administration fees, as well as the fees recoverable by class counsel. As the settlement calls for the reversion of all monies not paid to class claimants, it is possible that the actual settlement amount paid will be substantially less than $10,000. In addition, the Company's insurance coverage will cover a portion of the settlement at the rate of 45% of the initial settlement payment of $5,000 and 30% of amounts over and above the initial settlement payment. The settlement remains subject to Court approval. Based on the settlement as contemplated and applying the insurance coverage as applicable, the maximum exposure to the Company is approximately $6,250, however, in light of historical "take rates" in cases of this type, counsel estimates that the actual liability to the Company will be between approximately $2,000 and $2,500. Accordingly, the Company has recorded a liability in the amount of $2,500 in the second quarter of 2012. This liability is subject to change to reflect any change in the status of this matter.

(b)
On February 2, 2012, two individuals purporting to be stockholders of the Company commenced separate civil actions in the Supreme Court of New York, Queens County, Mark Ioffe, Derivatively on Behalf of Nominal Defendant Steven Madden, Ltd. v. Steven Madden, et. al, No. 700188-2012 (the “Ioffe Action”) and Catherine L. Phillips, Derivatively on Behalf of Nominal Defendant Steven Madden, Ltd. v. Steven Madden, et. al, No. 700189-2012 (together with the Ioffe Action, the “Actions”). The Actions assert derivative claims challenging the decision of the Company’s Board of Directors in January 2012 to amend Steven Madden’s employment agreement dated July 15, 2005, and amended as of December 14, 2009 (the “Madden Employment Agreement”) and to amend the promissory note (the “Promissory Note”) setting forth Mr. Madden’s obligations in respect of a loan made by the Company to Mr. Madden in 2007 and amended in 2009. The Actions assert that the Board violated its duties of loyalty and good faith by approving the amendments to the Madden Employment Agreement and the Promissory Note and that the changes set forth in the amendments constitute a waste of corporate assets. The Actions also assert claims of unjust enrichment against Mr. Madden. The Actions seek, on behalf of the Company, disgorgement of any compensation that Mr. Madden has received as a result of the amended Madden Employment Agreement, an award of damages to the Company, and a declaration that the amendments of the Madden Employment Agreement and the Promissory Note are void. The Company intends to seek dismissal of the Actions based on, among other things, the plaintiffs’ failure to make a demand that the Company’s Board of Directors investigate their claims.

(c)
On August 10, 2005, following the conclusion of an audit of the Company conducted by auditors for U.S. Customs and Border Protection (“U.S. Customs”) during 2004 and 2005, U.S. Customs issued a report that asserts that certain commissions that the Company treated as “buying agents’ commissions” (which are non-dutiable) should be treated as “selling agents’ commissions” and hence are dutiable. Subsequently, U.S. Immigration and Customs Enforcement notified the Company’s legal counsel that a formal investigation of the Company’s importing practices had been commenced as a result of the audit. In September of 2007, U.S. Customs notified the Company that it had finalized its assessment of the underpaid duties at $1,400. The Company, with the advice of legal counsel, evaluated the liability in the case, including additional duties, interest and penalties, and believed that it was not likely to exceed $3,045, and accordingly, a liability for this amount was recorded as of December 31, 2009. The Company contested the conclusions of the U.S. Customs audit and filed a request for review and issuance of rulings thereon by U.S. Customs Headquarters, of Regulations and Rulings, under internal advice procedures. On September 20, 2010, the Company was advised by legal counsel that U.S. Customs had issued a ruling in the matter, concluding that the commissions paid by the Company pursuant to buying agreements entered into by the Company and one of its two buying agents under review were bona fide buying-agent commissions and, therefore, were non-dutiable. With respect to the second

18


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note T – Commitments, Contingencies and Other (continued)

buying agent, U.S. Customs also ruled that beginning in February of 2002, commissions paid by the Company were bona fide buying agent commissions and, therefore, were non-dutiable. However, U.S. Customs found that the Company’s pre-2002 buying agreements with the second agent were legally insufficient to substantiate a buyer-buyer’s agent relationship between the Company and the agent and that commissions paid to the second agent under such buying agreements, in fact, were dutiable. On the basis of the U.S. Customs ruling, the Company reevaluated the liability in the case and believes that it is not likely to exceed $1,248 and the liability was reduced from $3,045 to such amount as of September 30, 2010.
In November 21, 2011, U.S. Customs issued a pre-penalty notice to the Company in which it alleges that gross negligence by the Company resulted in an underpayment of duties with respect to certain pre-2002 buying agreements and claims that the Company owes $342 as an additional duty and $1,367 in monetary penalties. In its February 16, 2012 response to the pre-penalty notice, the Company submitted that it owes no additional duty and, further, did not through negligence or gross negligence fail to pay any duty or engage in conduct amounting to either gross negligence or negligence. The Company requested that U.S. Customs withdraw its proposal to issue a notice of penalty and take no further adverse action against the Company. In the event that U.S. Customs is not inclined to withdraw the pre-penalty notice after review of the Company’s response, the Company has requested the opportunity to make an oral presentation to U.S. Customs prior to the issuance of a notice of penalty. In the event that U.S. Customs decides to issue a notice of penalty, the Company intends to file a petition for relief requesting a reduction of the level of culpability and mitigation of the penalty amount assessed. The maximum total amount of damages related to this matter is approximately $1,700 for which the Company has accrued $1,248.
(d)
The Company has been named as a defendant in certain other lawsuits in the normal course of business. In the opinion of management, after consulting with legal counsel, the liabilities, if any, resulting from these matters should not have a material effect on the Company’s financial position or results of operations. It is the policy of management to disclose the amount or range of reasonably possible losses in excess of recorded amounts in its annual report.


19


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note U – Operating Segment Information
 
The Company operates the following business segments: Wholesale Footwear, Wholesale Accessories, Retail, First Cost and Licensing. The Wholesale Footwear segment, through sales to department stores, mid-tier retailers, mass merchants and specialty stores, derives revenue, both domestically and worldwide through our international business, from sales of branded and private label women’s, men’s, girls’ and children’s footwear. The Wholesale Accessories segment, which includes branded and private label handbags, belts and small leather goods as well as cold weather and selected other fashion accessories, derives revenue from sales to department, mid-tier retailers, mass merchants and specialty stores, domestically and worldwide through our international business. Our aforementioned Wholesale Footwear and Wholesale Accessories segments international business derive revenue from Canada and, under special distribution arrangements, from Asia, Europe, the Middle East, Mexico, Australia, India and Central and South America. The Retail segment, through the operation of Company-owned retail stores in the United States and Canada and the Company’s websites, derives revenue from sales of branded women’s, men’s and children’s footwear, accessories and licensed products to consumers. The First Cost segment represents activities of a subsidiary which earns commissions for serving as a buying/selling agent of footwear products to mass-market merchandisers, mid-tier department stores and other retailers with respect to their purchase of footwear. In the Licensing segment, the Company licenses its Steve Madden® and Steven by Steve Madden® trademarks for use in connection with the manufacture, marketing and sale of sunglasses, eyewear, outerwear, bedding, hosiery and sleepwear. In addition, this segment licenses the Betsey Johnson® trademarks for use in connection with the manufacture, marketing and sale of sleepwear, jewelry, swimwear, eyewear, watches, fragrances, outerwear and luggage.

20


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note U – Operating Segment Information (continued)

As of and three months ended,
 
Wholesale Footwear
 
Wholesale Accessories
 
Total Wholesale
 
Retail
 
First Cost
 
Licensing
 
Corporate
 
Consolidated
June 30, 2012:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Net sales to external customers
 
$
198,694

 
$
49,439

 
$
248,133

 
$
40,559

 
 

 
 

 
 
 
$
288,692

Gross profit
 
59,448

 
18,955

 
78,403

 
25,851

 
 

 
 

 
 
 
104,254

Commissions and licensing fees – net
 

 

 

 

 
$
2,412

 
$
1,840

 
 
 
4,252

Income from operations
 
24,692

 
8,558

 
33,250

 
4,302

 
2,412

 
1,840

 
(4,310
)
 
37,494

Segment assets
 
$
487,029

 
$
156,740

 
643,769

 
81,682

 
51,569

 

 
 
 
777,020

Capital expenditures
 
 

 
 

 
$
1,152

 
$
3,608

 
$

 
$

 
 
 
$
4,760

June 30, 2011:
 
 

 
 

 


 
 

 
 

 
 

 
 
 


Net sales to external customers
 
$
148,530

 
$
26,642

 
$
175,172

 
$
33,980

 
 

 
 

 
 
 
$
209,152

Gross profit
 
51,913

 
10,163

 
62,076

 
22,019

 
 

 
 

 
 
 
84,095

Commissions and licensing fees – net
 

 

 

 

 
$
2,612

 
$
1,820

 
 
 
4,432

Income from operations
 
23,890

 
3,020

 
26,910

 
5,846

 
2,612

 
1,820

 

 
37,188

Segment assets
 
$
349,839

 
$
133,718

 
483,557

 
66,239

 
46,481

 

 
 
 
596,277

Capital expenditures
 
 

 
 

 
$
1,221

 
$
1,050

 
$

 
$

 
 
 
$
2,271

As of and six months ended,
 
Wholesale Footwear
 
Wholesale Accessories
 
Total Wholesale
 
Retail
 
First Cost
 
Licensing
 
Corporate
 
Consolidated
June 30, 2012:
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Net sales to external customers
 
$
390,194

 
$
86,882

 
$
477,076

 
$
77,586

 
 

 
 

 
 
 
$
554,662

Gross profit
 
118,176

 
34,085

 
152,261

 
48,086

 
 

 
 

 
 
 
200,347

Commissions and licensing fees – net
 

 

 

 

 
$
4,740

 
$
3,985

 
 
 
8,725

Income from operations
 
48,180

 
13,825

 
62,005

 
6,433

 
4,740

 
3,985

 
(4,310
)
 
72,853

Segment assets
 
$
487,029

 
$
156,740

 
643,769

 
81,682

 
51,569

 

 
 
 
777,020

Capital expenditures
 
 

 
 

 
$
2,133

 
$
5,897

 
$

 
$

 
 
 
$
8,030

June 30, 2011:
 
 

 
 

 


 
 

 
 

 
 

 
 
 


Net sales to external customers
 
$
256,981

 
$
52,450

 
$
309,431

 
$
65,476

 
 

 
 

 
 
 
$
374,907

Gross profit
 
92,663

 
20,240

 
112,903

 
40,324

 
 

 
 

 
 
 
153,227

Commissions and licensing fees – net
 

 

 

 

 
$
5,287

 
$
3,712

 
 
 
8,999

Income from operations
 
42,097

 
7,646

 
49,743

 
5,901

 
5,287

 
3,712

 

 
64,643

Segment assets
 
$
349,839

 
$
133,718

 
483,557

 
66,239

 
46,481

 

 
 
 
596,277

Capital expenditures
 
 

 
 

 
$
3,637

 
$
2,336

 
$

 
$

 
 
 
$
5,973






21


STEVEN MADDEN, LTD. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial StatementsUnaudited
June 30, 2012
($ in thousands except share and per share data)


Note U – Operating Segment Information (continued)

Revenues by geographic area for the three- and six-month quarters ended June 30, 2012 and 2011 are as follows:
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Domestic
 
$
267,658

 
$
195,724

 
$
519,303

 
$
352,535

International
 
21,034

 
13,428

 
35,359

 
22,372

Total
 
$
288,692

 
$
209,152

 
$
554,662

 
$
374,907


22


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this document.
This Quarterly Report contains certain “forward-looking statements” as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, forward-looking statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may”, “will”, “expect”, “believe”, “anticipate”, “project”, “plan”, “intend”, “estimate”, and “continue”, and their opposites and similar expressions are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include, but are not limited to, the risks and uncertainties discussed in our Annual Report on Form 10-K for the year ended December 31, 2011. Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

Overview: 
($ in thousands, except retail sales data per square foot, earnings per share and per share data)
 
Steven Madden, Ltd. and its subsidiaries (collectively the “Company”) design, source, market and sell fashion-forward branded and private label footwear for women, men and children. In addition, we design, source, market and sell name brand and private label fashion handbags and accessories, through our Accessories Division. We distribute our products through department stores, specialty stores, luxury retailers, national chains, mass merchants and in our retail stores and our e-commerce websites throughout the United States, Canada and under special distribution arrangements in Asia, Europe, the Middle East, Mexico, Australia, India and Central and South America. Our product line includes a broad range of contemporary styles designed to establish or capitalize on market trends, complemented by core product offerings. We have established a reputation for design creativity and our ability to offer quality products in popular styles at accessible price points.
 
For the quarter ended June 30, 2012, the Company posted positive sales and earnings growth, despite a challenging retail environment. In the second quarter of 2012, net sales increased 38% to $288,692 from $209,152 in the same period of last year. Net income increased 13% to $26,899 in the second quarter of 2012 compared to $23,784 in the same period of last year. Net income included $2,500 reserved for a class action lawsuit related to unauthorized text messaging and a $1,810 charge for impairment of a note receivable from our former licensee for Betsey Johnson retail and apparel. The effective tax rate for the second quarter of 2012 decreased to 31.3% compared to 39.0% in the second quarter of last year due primarily to a tax benefit of $2,800 related to the year-to-date impact of a portion of earnings from the Company's foreign operations that have been invested indefinitely in its Canadian operations. Diluted earnings per share increased to $0.61 per share on 43,943,000 diluted weighted average shares outstanding compared to $0.55 per share on 43,259,000 diluted weighted average shares outstanding in the first quarter of last year.
 
In our retail segment, same store sales (sales of those stores, including the e-commerce website, that were in operation throughout the second quarters of 2012 and 2011) increased 6.8%, and sales per square foot increased to $849 in 2012 compared to sales per square foot of $824 in 2011. As of June 30, 2012, we had 96 stores in operation, compared to 83 stores as of June 30, 2011.
Our inventory turnover (calculated on a trailing twelve month average) increased to 10.5 times compared to 9.8 times in the prior comparable period of last year. Our accounts receivable average collection days were 67 days in the second quarter of 2012 compared to 60 days in the same period of 2011, primarily due to the addition of our Topline and Cejon businesses and the significant growth in our private label Target business, all of which have customers with extended payment terms. As of June 30, 2012, we had $189,804 in cash, cash equivalents and marketable securities, no short or long-term debt, and total stockholders’ equity of $540,069. Working capital increased to $210,898 as of June 30, 2012, compared to $145,274 on June 30, 2011.

23


The following tables set forth information on operations for the periods indicated:
Selected Financial Information
Three Months Ended
June 30,
($ in thousands)

 
 
2012
 
2011
CONSOLIDATED:
 
 

 
 

 
 

 
 

Net sales
 
$
288,692

 
100.0
%
 
$
209,152

 
100.0
%
Cost of sales
 
184,438

 
63.9
%
 
125,057

 
59.8
%
Gross profit
 
104,254

 
36.1
%
 
84,095

 
40.2
%
Other operating income – net of expenses
 
4,252

 
1.5
%
 
4,432

 
2.1
%
Operating expenses
 
66,702

 
23.1
%
 
51,339

 
24.5
%
Impairment of note receivable and provision for litigation
 
4,310

 
1.5
%
 

 
%
Income from operations
 
37,494

 
13.0
%
 
37,188

 
17.8
%
Interest and other income – net
 
1,663

 
0.6
%
 
1,656

 
0.8
%
Income before income taxes
 
39,157

 
13.6
%
 
38,844

 
18.6
%
Net income
 
26,899

 
9.3
%
 
23,784

 
11.4
%
 
 
 
 
 
 
 
 
 
By Segment:
 
 

 
 

 
 

 
 

WHOLESALE FOOTWEAR SEGMENT:
 
 

 
 

 
 

 
 

Net sales
 
$
198,694

 
100.0
%
 
$
148,530

 
100.0
%
Cost of sales
 
139,246

 
70.1
%
 
96,617

 
65.0
%
Gross profit
 
59,448

 
29.9
%
 
51,913

 
35.0
%
Operating expenses
 
34,756

 
17.5
%
 
28,023

 
18.9
%
Income from operations
 
24,692

 
12.4
%
 
23,890

 
16.1
%
 
 
 
 
 
 
 
 
 
WHOLESALE ACCESSORIES SEGMENT:
 
 

 
 

 
 

 
 

Net sales
 
$
49,439

 
100.0
%
 
$
26,642

 
100.0
%
Cost of sales
 
30,484

 
61.7
%
 
16,479

 
61.9
%
Gross profit
 
18,955

 
38.3
%
 
10,163

 
38.1
%
Operating expenses
 
10,397

 
21.0
%
 
7,143

 
26.8
%
Income from operations
 
8,558

 
17.3
%
 
3,020

 
11.3
%
 
 
 
 
 
 
 
 
 
RETAIL SEGMENT:
 
 

 
 

 
 

 
 

Net sales
 
$
40,559

 
100.0
%
 
$
33,980

 
100.0
%
Cost of sales
 
14,708

 
36.3
%
 
11,961

 
35.2
%
Gross profit
 
25,851

 
63.7
%
 
22,019

 
64.8
%
Operating expenses
 
21,549

 
53.1
%
 
16,173

 
47.6
%
Income from operations
 
4,302

 
10.6
%
 
5,846

 
17.2
%
Number of stores
 
96

 
 

 
83

 
 

 
 
 
 
 
 
 
 
 
FIRST COST SEGMENT:
 
 

 
 

 
 

 
 

Other commission income – net of expenses
 
$
2,412

 
100.0
%
 
$
2,612

 
100.0
%
 
 
 
 
 
 
 
 
 
LICENSING SEGMENT: