XNAS:DECK Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended June 30, 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: 000-22446

 

DECKERS OUTDOOR CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-3015862

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

495-A South Fairview Avenue, Goleta, California

 

93117

(Address of principal executive offices)

 

(zip code)

 

(805) 967-7611

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at July 26, 2012

 

 

 

Common Stock, $0.01 par value

 

37,051,455

 

 

 



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

 

Table of Contents

 

 

 

Page

 

 

 

Part I.     Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

1

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2012 and 2011

2

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

3

 

 

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

 

Item 2.

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

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

30

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

Part II.     Other Information

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

33

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

Item 3.

Defaults Upon Senior Securities

33

 

 

 

Item 4.

Mine Safety Disclosures

33

 

 

 

Item 5.

Other Information

33

 

 

 

Item 6.

Exhibits

34

 

 

 

Signatures

 

35

 


 


Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(amounts in thousands, except par value)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

114,401

 

$

263,606

 

Trade accounts receivable, net of allowances of $9,275 and $21,692 as of June 30, 2012 and December 31, 2011, respectively

 

123,182

 

193,375

 

Inventories

 

346,257

 

253,270

 

Prepaid expenses

 

13,397

 

8,697

 

Other current assets

 

54,972

 

84,540

 

Income taxes receivable

 

16,858

 

 

Deferred tax assets

 

14,409

 

14,414

 

Total current assets

 

683,476

 

817,902

 

 

 

 

 

 

 

Property and equipment, net

 

103,280

 

90,257

 

Goodwill

 

120,045

 

120,045

 

Other intangible assets, net

 

90,130

 

94,449

 

Deferred tax assets

 

13,360

 

13,223

 

Other assets

 

14,712

 

10,320

 

Total assets

 

$

1,025,003

 

$

1,146,196

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

191,773

 

$

110,853

 

Accrued payroll

 

15,224

 

32,594

 

Other accrued expenses

 

38,889

 

57,744

 

Income taxes payable

 

3,851

 

30,888

 

Total current liabilities

 

249,737

 

232,079

 

 

 

 

 

 

 

Long-term liabilities

 

55,142

 

72,687

 

 

 

 

 

 

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Deckers Outdoor Corporation stockholders’ equity:

 

 

 

 

 

Common stock, $0.01 par value; authorized 125,000 shares; issued and outstanding 37,051 and 38,692 shares as of June 30, 2012 and December 31, 2011, respectively

 

370

 

387

 

Additional paid-in capital

 

139,141

 

144,684

 

Retained earnings

 

580,360

 

692,595

 

Accumulated other comprehensive income (loss)

 

253

 

(1,730

)

Total Deckers Outdoor Corporation stockholders’ equity

 

720,124

 

835,936

 

Noncontrolling interest

 

 

5,494

 

Total equity

 

720,124

 

841,430

 

Total liabilities and equity

 

$

1,025,003

 

$

1,146,196

 

 

See accompanying notes to condensed consolidated financial statements.

 

1



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited)

(amounts in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

174,436

 

$

154,222

 

$

420,742

 

$

359,073

 

Cost of sales

 

100,857

 

88,310

 

233,875

 

190,683

 

Gross profit

 

73,579

 

65,912

 

186,867

 

168,390

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

102,287

 

76,710

 

203,642

 

150,993

 

(Loss) income from operations

 

(28,708

)

(10,798

)

(16,775

)

17,397

 

 

 

 

 

 

 

 

 

 

 

Other (income) expense, net:

 

 

 

 

 

 

 

 

 

Interest income

 

(69

)

(35

)

(171

)

(87

)

Interest expense

 

50

 

13

 

99

 

(45

)

Other, net

 

(160

)

(21

)

(508

)

(49

)

 

 

(179

)

(43

)

(580

)

(181

)

(Loss) income before income taxes

 

(28,529

)

(10,755

)

(16,195

)

17,578

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(8,390

)

(3,227

)

(4,091

)

5,273

 

Net (loss) income

 

(20,139

)

(7,528

)

(12,104

)

12,305

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on foreign currency hedging

 

1,090

 

1,274

 

22

 

(1,442

)

Foreign currency translation adjustment

 

1,223

 

(425

)

1,961

 

(679

)

Total other comprehensive income (loss)

 

2,313

 

849

 

1,983

 

(2,121

)

Comprehensive (loss) income

 

$

(17,826

)

$

(6,679

)

$

(10,121

)

$

10,184

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to:

 

 

 

 

 

 

 

 

 

Deckers Outdoor Corporation

 

(20,139

)

(7,339

)

(12,252

)

11,839

 

Noncontrolling interest

 

 

(189

)

148

 

466

 

 

 

$

(20,139

)

$

(7,528

)

$

(12,104

)

$

12,305

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income attributable to:

 

 

 

 

 

 

 

 

 

Deckers Outdoor Corporation

 

(17,826

)

(6,490

)

(10,269

)

9,718

 

Noncontrolling interest

 

 

(189

)

148

 

466

 

 

 

$

(17,826

)

$

(6,679

)

$

(10,121

)

$

10,184

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share attributable to Deckers Outdoor Corporation common stockholders:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.53

)

$

(0.19

)

$

(0.32

)

$

0.31

 

Diluted

 

$

(0.53

)

$

(0.19

)

$

(0.32

)

$

0.30

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

37,873

 

38,670

 

38,244

 

38,640

 

Diluted

 

37,873

 

38,670

 

38,244

 

39,304

 

 

See accompanying notes to condensed consolidated financial statements.

 

2



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

 

$

(12,104

)

$

12,305

 

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation, amortization and accretion

 

14,666

 

11,539

 

Change in fair value of contingent consideration

 

6,223

 

 

Provision for (recovery of) doubtful accounts, net

 

479

 

(53

)

Write-down of inventory

 

1,593

 

3,005

 

Stock compensation

 

8,957

 

6,830

 

Other

 

295

 

(437

)

Changes in operating assets and liabilities:

 

 

 

 

 

Trade accounts receivable

 

69,714

 

9,763

 

Inventories

 

(94,580

)

(88,054

)

Prepaid expenses and other current assets

 

25,307

 

(5,880

)

Income tax receivable

 

(16,858

)

(16,285

)

Other assets

 

(2,768

)

(3,070

)

Trade accounts payable

 

80,919

 

40,302

 

Contingent consideration

 

(959

)

 

Accrued expenses

 

(25,379

)

(28,959

)

Income taxes payable

 

(25,694

)

(20,902

)

Long-term liabilities

 

757

 

1,517

 

Net cash provided by (used in) operating activities

 

30,568

 

(78,379

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(25,951

)

(13,910

)

Equity method investment

 

(2,000

)

 

Purchases of intangible assets

 

 

(4,458

)

Net cash used in investing activities

 

(27,951

)

(18,368

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Cash paid for shares withheld for taxes

 

(4,725

)

(10,682

)

Excess tax benefits from stock compensation

 

1,795

 

6,641

 

Cash paid for repurchases of common stock

 

(100,000

)

(19,918

)

Contingent consideration paid

 

(29,041

)

 

Cash paid for noncontrolling interest in consolidated entity

 

(20,000

)

 

Net cash used in financing activities

 

(151,971

)

(23,959

)

 

 

 

 

 

 

Effect of exchange rates on cash

 

149

 

650

 

Net change in cash and cash equivalents

 

(149,205

)

(120,056

)

Cash and cash equivalents at beginning of period

 

263,606

 

445,226

 

Cash and cash equivalents at end of period

 

$

114,401

 

$

325,170

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes

 

$

35,916

 

$

35,777

 

Interest

 

$

47

 

$

12

 

Non-cash investing activity:

 

 

 

 

 

Accruals for purchases of property and equipment

 

$

1,034

 

$

162

 

Accruals for asset retirement obligations

 

$

62

 

$

13

 

Non-cash financing activity:

 

 

 

 

 

Accruals for shares withheld for taxes

 

$

1,014

 

$

1,934

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

(1)                      General

 

(a)          Basis of Presentation

 

The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments necessary for a fair presentation for each of the periods presented.  The results of operations for interim periods are not necessarily indicative of results to be achieved for full fiscal years or other interim periods.  Deckers Outdoor Corporation (also referred to as Deckers or the Company) strives to be a premier lifestyle marketer that builds niche brands into global market leaders by designing and marketing innovative, functional and fashion-oriented footwear and accessories, developed for both high performance outdoor activities and everyday casual lifestyle use.  The Company’s business is seasonal, with the highest percentage of UGG® brand net sales occurring in the third and fourth quarters and the highest percentage of Teva® and Sanuk® brand net sales occurring in the first and second quarters of each year.  The other brands do not have a significant seasonal impact on the Company.

 

In January 2011, the Company acquired certain assets from its UGG and Teva brands distributor that sold to retailers in the United Kingdom (UK) and from its UGG brand distributor that sold to retailers in Benelux and France.  The distribution rights in these regions reverted back to the Company on December 31, 2010 upon the expiration of the distribution agreements.  On July 1, 2011, the Company acquired the Sanuk brand.  Deckers Outdoor Corporation’s condensed consolidated financial statements include the operations of the Sanuk brand beginning July 1, 2011.

 

Prior to April 2, 2012, the Company owned 51% of a joint venture with an affiliate of Stella International Holdings Limited (Stella International) for the primary purpose of opening and operating retail stores for the UGG brand in China.  Stella International is also one of the Company’s major manufacturers in China.  On April 2, 2012, the Company purchased, for a total purchase price of $20,000, the 49% noncontrolling interest owned by Stella International.  The Company accounted for this transaction as acquiring the remaining interest of an entity that had already been majority-owned by the Company.  The purchase resulted in a reduction to additional paid in capital of $14,357 representing excess purchase price over the carrying amount of the noncontrolling interest.  Prior to this purchase, the Company already had a controlling interest in this entity, and therefore, the subsidiary had been and will continue to be consolidated with the Company’s operations.

 

On May 21, 2012, the Company purchased a portion of a privately held footwear company as an equity method investment for $2,000.

 

As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements and related footnotes have been condensed and do not contain certain information that will be included in the Company’s annual consolidated financial statements and footnotes thereto.  For further information, refer to the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 29, 2012.

 

b)             Use of Estimates

 

The preparation of the Company’s condensed consolidated financial statements in accordance with US generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes.  Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable.  Significant areas requiring the use of management estimates relate to inventory write-downs, accounts receivable reserves, returns liabilities, stock compensation, impairment assessments, depreciation and amortization, income tax liabilities and uncertain tax positions, fair value of financial instruments, and fair values of acquired intangibles, assets and liabilities, including estimated contingent consideration payments.  Actual results could differ materially from these estimates.

 

(2)                      Accounts Receivable Factoring Agreement

 

The Company has a deferred purchase factoring agreement with CIT Commercial Services (CIT) whereby CIT collects the Sanuk brand’s accounts receivable.  CIT is responsible for the servicing and administration of accounts receivables collected on behalf of the Company and, to the extent that an eligible account is in default, CIT is required to purchase the account from the Company.  Open receivables held by CIT totaled approximately $16,204 and $4,700 at June 30, 2012 and December 31, 2011, respectively, and are included in accounts receivable in the condensed consolidated balance sheets.

 

4



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

(3)                      Stockholders’ Equity

 

In May 2006, the Company adopted the 2006 Equity Incentive Plan (2006 Plan), which was amended by Amendment No. 1 dated May 9, 2007.  The primary purpose of the 2006 Plan is to encourage ownership in the Company by key personnel, whose long-term service is considered essential to the Company’s continued success.  The 2006 Plan reserves 6,000,000 shares of the Company’s common stock for issuance to employees, directors, or consultants.  The maximum aggregate number of shares that may be issued under the 2006 Plan through the exercise of incentive stock options (Options) is 4,500,000.  Pursuant to the Deferred Stock Unit Compensation Plan, a Sub Plan under the 2006 Plan, a participant may elect to defer settlement of their outstanding unvested awards until such time as elected by the participant.

 

The Company has elected to grant nonvested stock units (NSUs) annually to key personnel.  The NSUs granted entitle the employee recipients to receive shares of common stock in the Company upon vesting of the NSUs.  The vesting of all NSUs is subject to achievement of certain performance targets.  For NSUs granted in 2012 and 2011, one-third of these awards will vest at the end of each of the three years after the performance goals are achieved.  On a quarterly basis, the Company grants fully-vested shares of its common stock to each of its outside directors.  The fair value of such shares is expensed on the date of issuance.

 

In February 2012, the Company approved a new stock repurchase program to repurchase up to $100,000 of the Company’s common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors.  The program did not obligate the Company to acquire any particular amount of common stock and the program could be suspended at any time at the Company’s discretion.  During the three months ended June 30, 2012, the Company repurchased approximately 1,475,000 shares under this program, for approximately $80,000, or an average price of $54.26.  During the six months ended June 30, 2012, the Company repurchased approximately 1,749,000 shares under this program, for approximately $100,000, or an average price of $57.19.  As of June 30, 2012, the Company had repurchased the full amount authorized under this program.  The purchases were funded from available working capital.

 

In June 2012, the Company approved a new stock repurchase program to repurchase up to $200,000 of the Company’s common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and other factors.  The program does not obligate the Company to acquire any particular amount of common stock and the program may be suspended at any time at the Company’s discretion.  As of June 30, 2012, the Company had not repurchased any stock under this new program.  Through August 8, 2012, the Company repurchased 636,000 shares under this program, for approximately $26,800, or an average price of $42.13, leaving the remaining approved amount at $173,200.

 

During the three months ended June 30, 2012, the Company granted 128,000 NSUs under the 2006 Plan, at a weighted-average grant-date fair value of $63.19 per share.  During the six months ended June 30, 2012, the Company granted 192,000 NSUs under the 2006 Plan, at a weighted-average grant-date value of $63.09.  As of June 30, 2012, future unrecognized compensation cost for these awards, excluding estimated forfeitures, is $5,350.  As of June 30, 2012, the Company believed that the achievement of at least the threshold performance objective of these awards was probable, and therefore recognized compensation expense accordingly for these awards.

 

In May 2012, the Board of Directors of the Company adopted a new long-term incentive award under its 2006 Equity Incentive Plan (2012 LTIP Awards).  These awards will be available for issuance to current and future members of the Company’s management team, including the Company’s named executive officers.  Each recipient will receive a specified maximum number of restricted stock units (RSUs), each of which will represent the right to receive one share of the Company’s common stock.  These awards vest subject to certain long-term performance objectives and certain long-term service conditions.  The awards will vest on December 31, 2015 only if the Company meets certain revenue targets ranging between $2,200,000 and $2,900,000 and certain diluted earnings per share targets ranging between $7.00 and $10.50 for the year ended December 31, 2015.  No vesting of any 2012 LTIP Award will occur if either of the threshold performance criteria is not met for the year ending December 31, 2015.  To the extent financial performance is achieved above the threshold levels, the number of RSUs that will vest will increase up to the maximum number of units granted under the award.  Under this new program, during the three months ended June 30, 2012, the Company granted a maximum amount of 351,338 RSUs.  The grant date fair value of these RSUs was $56.12 per share.   As of June 30, 2012, the Company believed that the achievement of at least the threshold performance objective of these awards was probable, and therefore recognized compensation expense accordingly for these awards.  As of June 30, 2012, future unrecognized compensation cost for these awards, excluding estimated forfeitures, is $10,093.

 

5



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

The following is a reconciliation of the Company’s retained earnings:

 

 

 

Retained

 

 

 

Earnings

 

Balance at December 31, 2011

 

$

692,595

 

Net loss attributable to Deckers Outdoor Corporation

 

(12,252

)

Repurchase of common stock

 

(99,983

)

Balance at June 30, 2012

 

$

580,360

 

 

(4)                      Accumulated Other Comprehensive Income (Loss)

 

Accumulated balances of the components within accumulated other comprehensive income (loss) (AOCI) were as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Unrealized gain on foreign currency hedging, net of tax

 

$

655

 

$

633

 

Cumulative foreign currency translation adjustment, net of tax

 

(402

)

(2,363

)

Accumulated other comprehensive income (loss)

 

$

253

 

$

(1,730

)

 

(5)                      Net (Loss) Income per Share Attributable to Deckers Outdoor Corporation Common Stockholders

 

Basic net (loss) income per share represents net (loss) income attributable to Deckers Outdoor Corporation divided by the weighted-average number of common shares outstanding for the period.  Diluted net (loss) income per share represents net (loss) income attributable to Deckers Outdoor Corporation divided by the weighted-average number of shares outstanding, including the dilutive impact of potential issuances of common stock.  For the three and six months ended June 30, 2012 and 2011, the reconciliations of basic to diluted weighted-average common shares outstanding were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Weighted-average shares used in basic computation

 

37,873,000

 

38,670,000

 

38,244,000

 

38,640,000

 

Dilutive effect of share-based awards*

 

 

 

 

664,000

 

Weighted-average shares used in diluted computation

 

37,873,000

 

38,670,000

 

38,244,000

 

39,304,000

 

 


*Excluded NSUs, RSUs and Options as of June 30, 2012 and 2011

 

1,419,000

 

1,255,000

 

1,419,000

 

553,000

 

*Excluded SARs as of June 30, 2012 and 2011

 

745,000

 

945,000

 

745,000

 

645,000

 

 

The Company excluded all NSUs, RSUs, Options and Stock Appreciation Rights (SARs) for the three and six months ended June 30, 2012, and for the three months ended June 30, 2011, from the diluted net (loss) income per share computation because they were anti-dilutive due to the net loss for each of those periods. For the six months ended June 30, 2011, the share-based awards that were excluded from the dilutive effect were excluded because the necessary conditions had not been satisfied for the shares to be issuable based on the Company’s performance through June 30, 2011.  The excluded awards include the maximum amounts achievable for these awards.

 

6



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

(6)                      Fair Value Measurements

 

The fair values of the Company’s cash and cash equivalents, trade accounts receivable, prepaid expenses, other current assets, trade accounts payable, accrued expenses, and income taxes receivable and payable approximate the carrying values due to the relatively short maturities of these instruments.  The fair values of the Company’s long-term liabilities, except as noted otherwise, if recalculated based on current interest rates, would not significantly differ from the recorded amounts.  The fair value of the contingent consideration and the derivatives are measured and recorded at fair value on a recurring basis.  The Company records the fair value of assets or liabilities associated with derivative instruments and hedging activities in other current assets or other accrued expenses, respectively, in the condensed consolidated balance sheets.

 

In 2010, the Company established a nonqualified deferred compensation program that permits a select group of management employees to defer earnings to a future date on a nonqualified basis.  For each plan year, on behalf of the Company, the Board may, but is not required to, contribute any amount it desires to any participant under this program.  The Company’s contribution will be determined by the Board annually in the fourth quarter.  No such contribution has been approved as of June 30, 2012.  The value of the deferred compensation is recognized based on the fair value of the participants’ accounts. The Company has established a rabbi trust as a reserve for the benefits payable under this program.  The assets of the trust are reported in other assets in the Company’s condensed consolidated balance sheets.  All amounts deferred are presented in long-term liabilities in the condensed consolidated balance sheets.

 

The inputs used in measuring fair value are prioritized into the following hierarchy:

 

·                  Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

·                  Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.

·                  Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

 

The table below summarizes the Company’s financial assets and liabilities that are measured on a recurring basis at fair value:

 

 

 

Fair Value at
June 30,

 

Fair Value Measurement Using

 

 

 

2012

 

Level 1

 

Level 2

 

Level 3

 

Assets (liabilities) at fair value

 

 

 

 

 

 

 

 

 

Nonqualified deferred compensation asset

 

$

3,415

 

$

3,415

 

$

 

$

 

Nonqualified deferred compensation liability

 

$

(3,415

)

$

(3,415

)

$

 

$

 

Designated derivatives assets

 

$

1,482

 

$

 

$

1,482

 

$

 

Designated derivatives liabilities

 

$

(544

)

$

 

$

(544

)

$

 

Contingent consideration for acquisition of business

 

$

(67,900

)

$

 

$

 

$

(67,900

)

 

 

 

Fair Value at
December 31,

 

Fair Value Measurement Using

 

 

 

2011

 

Level 1

 

Level 2

 

Level 3

 

Assets (liabilities) at fair value

 

 

 

 

 

 

 

 

 

Nonqualified deferred compensation asset

 

$

1,991

 

$

1,991

 

$

 

$

 

Nonqualified deferred compensation liability

 

$

(1,991

)

$

(1,991

)

$

 

$

 

Designated derivatives assets

 

$

1,117

 

$

 

$

1,117

 

$

 

Designated derivatives liabilities

 

$

(87

)

$

 

$

(87

)

$

 

Contingent consideration for acquisition of business

 

$

(91,600

)

$

 

$

 

$

(91,600

)

 

The Level 2 inputs consist of forward spot rates at the end of the reporting period (see note 7).

 

7



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

The fair value of the contingent consideration is based on subjective assumptions.  It is reasonably possible the estimated fair value of the contingent consideration could change in the near-term and the effect of the change could be material.  The estimated fair value of the contingent consideration is based on the Sanuk brand estimated future gross profits, using a probability weighted average sales forecast to determine a best estimate of gross profits.  The estimated sales forecasts include a compound annual growth rate (CAGR) of 18.8% from fiscal year 2011 through fiscal year 2015.  The gross profit forecasts for fiscal years 2012 through 2015 range from approximately $54,000 to $72,000, which are then used to apply the contingent consideration percentages in accordance with the applicable agreement (see note 10).  The total estimated contingent consideration is then discounted to the present value with a discount rate of 7.0%.  The Company’s use of different estimates and assumptions could produce different estimates of the value of the contingent consideration.  For example, a 5.0% change in the estimated CAGR would change the total liability balance at June 30, 2012 by approximately $7,000.  Refer to note 10 for further information on the contingent consideration arrangement.  The following table presents a reconciliation of the Level 3 measurement:

 

Balance, December 31, 2011

 

$

91,600

 

Payments

 

(30,000

)

Change in fair value

 

6,300

 

Balance, June 30, 2012

 

$

67,900

 

 

(7)                      Foreign Currency Exchange Contracts and Hedging

 

The Company’s total hedging contracts had notional amounts totaling approximately $61,000 and $66,000 as of June 30, 2012 and December 31, 2011, respectively, held by one counterparty.  At June 30, 2012, the outstanding contracts were expected to mature over the next six months.

 

The nonperformance risk of the Company and the counterparty did not have a material impact on the fair value of the derivatives.  During the three and six months ended June 30, 2012, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of June 30, 2012.  The effective portion of the gain or loss on the derivative is reported in other comprehensive income (OCI) and reclassified into earnings (loss) in the same period or periods during which the hedged transaction affects earnings.  As of June 30, 2012, the total amount in AOCI (see note 4) was expected to be reclassified into income (loss) within the next nine months.

 

The following table summarizes the effect of foreign exchange contracts designated as cash flow hedging relationships on the condensed consolidated financial statements:

 

 

 

 

 

 

 

Amount of Gain (Loss)

 

 

 

 

 

 

 

Amount of Gain (Loss)

 

Location of Gain (Loss)

 

Reclassified from

 

 

 

 

 

For the Six

 

Recognized in OCI

 

Reclassified from

 

AOCI into

 

Location of Amount

 

Gain (Loss) from

 

Months Ended

 

on Derivative

 

AOCI into Income

 

Income (Effective

 

Excluded from

 

Amount Excluded from

 

June 30,

 

(Effective Portion)

 

(Effective Portion)

 

Portion)

 

Effectiveness Testing

 

Effectiveness Testing

 

2012

 

$

(111

)

Net Sales

 

$

382

 

SG&A

 

$

10

 

2011

 

$

(3,011

)

Net Sales

 

$

201

 

SG&A

 

$

(10

)

 

The following table summarizes the effect of foreign exchange contracts not designated as hedging instruments on the condensed consolidated financial statements:

 

For the Six

 

Location of Gain (Loss)

 

Amount of Gain (Loss)

 

Months Ended

 

Recognized in Income (Loss) on

 

Recognized in Income (Loss) on

 

June 30,

 

Derivatives

 

Derivatives

 

2012

 

SG&A

 

$

74

 

2011

 

SG&A

 

$

(670

)

 

(8)                      Credit Agreement

 

In August 2011, the Company entered into a Credit Agreement (Credit Agreement) with JPMorgan Chase Bank, National Association as the administrative agent, Comerica Bank and HSBC Bank USA, National Association as syndication agents, and the lenders party thereto.  The Credit Agreement is a five-year, $200,000 secured revolving credit facility that contains a $50,000 sublimit for the issuance of letters of credit and a $5,000 sublimit for swingline loans and matures on August 30, 2016.

 

8



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

Subject to customary conditions and the approval of any lender whose commitment would be increased, the Company has the option to increase the maximum principal amount available under the Credit Agreement by up to an additional $100,000, resulting in a maximum available principal amount of $300,000.  None of the lenders under the Credit Agreement has committed at this time or is obligated to provide any such increase in the commitments.  At the Company’s option, revolving loans issued under the Credit Agreement will bear interest at either the adjusted London Interbank Offered Rate (LIBOR) for 30 days (0.25% at June 30, 2012) plus 1.25% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus 0.25% per annum, and thereafter the interest rate will fluctuate between adjusted LIBOR plus 1.25% per annum and adjusted LIBOR plus 1.50% per annum (or between the alternate base rate plus 0.25% per annum and the alternate base rate plus 0.50% per annum), based upon the Company’s total adjusted leverage ratio at such time.  In addition, the Company will initially be required to pay fees of 0.20% per annum on the daily unused amount of the revolving credit facility, and thereafter the fee rate will fluctuate between 0.20% and 0.30% per annum, based upon the Company’s total adjusted leverage ratio.

 

The Company’s obligations under the Credit Agreement are guaranteed by the Company’s existing and future domestic subsidiaries, other than certain immaterial subsidiaries, and foreign subsidiaries (the “Guarantors”), and is secured by a first-priority security interest in substantially all of the assets of the Company and the Guarantors, including all or a portion of the equity interests of certain of the Company’s domestic and foreign subsidiaries.

 

The Credit Agreement contains financial covenants which include: the asset coverage ratio must be greater than 1.10 to 1.00; the sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization (EBITDA) and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be greater than 2.25 to 1.00; and other customary limitations.  The Credit Agreement contains certain other covenants which include: the maximum additional secured debt related to a capital asset may not exceed $20,000, the maximum additional unsecured debt may not exceed $200,000; the maximum secured debt not related to a capital asset may not exceed $5,000, a judgment may not exceed $10,000; maximum ERISA event of $10,000 in one year, $20,000 in all years; the Company may not have a change of control (as defined in the Credit Agreement); there is no limit on acquisitions, if the total adjusted leverage ratio does not exceed 2.75 to 1.00 and the Company must have a minimum amount of cash plus unused credit of $75,000; and there is no restriction on dividends or share repurchases, if the minimum amount of cash plus unused credit is $75,000.

 

At June 30, 2012, the Company had no outstanding borrowings under the Credit Agreement and outstanding letters of credit of $189.  As a result, $199,811 was available under the Credit Agreement at June 30, 2012.  Subsequent to June 30, 2012, the Company borrowed approximately $102,000 under the Credit Agreement through the date of this report.

 

(9)                      Business Segments, Concentration of Business, and Credit Risk and Significant Customers

 

The Company’s accounting policies of the segments below are the same as those described in the summary of significant accounting policies in the Company’s Annual Report, except that the Company does not allocate corporate overhead costs or non-operating income and expenses to segments.  The Company evaluates segment performance primarily based on net sales and income or loss from operations.  The Company’s reportable segments include the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, Sanuk brand, and its other brands, its eCommerce business and its retail store business.  The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing, and sales strategies.  The eCommerce and retail store segments are managed separately because they are direct to consumer sales, while the brand segments are wholesale sales.  The income or loss from operations for each of the segments includes only those costs which are specifically related to each segment, which consist primarily of cost of sales, costs for research and development, design, selling and marketing, depreciation, amortization, and the costs of employees and their respective expenses that are directly related to each segment.  The unallocated corporate overhead costs include: costs of the distribution centers, certain executive and stock compensation, accounting and finance, legal, information technology, human resources, and facilities costs, among others.  The gross profit derived from the sales to third parties of the eCommerce and retail stores segments is separated into two components: (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the retail profit is included in the operating income of the eCommerce and retail stores segments.  In prior periods, certain operating expenses were classified as segment expenses and are now classified as unallocated expenses.  This change in segment reporting only changed the presentation within the below table and did not impact the Company’s condensed consolidated financial statements for any period.  The segment information for the three and six months ended June 30, 2011 has been adjusted retrospectively to conform to the current period presentation.

 

9



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

In 2012, the Company’s other brands include TSUBO®, Ahnu®, and MOZO®. In 2011, the Company’s other brands also included Simple®, a brand for which the Company ceased distribution effective December 31, 2011.  The wholesale operations of the Company’s other brands are included as one reportable segment, other wholesale, presented in the figures below.  The Sanuk brand operations are included in the Company’s segment reporting effective upon the acquisition date of July 1, 2011.  Business segment information is summarized as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers:

 

 

 

 

 

 

 

 

 

UGG wholesale

 

$

78,643

 

$

85,347

 

$

170,577

 

$

176,431

 

Teva wholesale

 

31,757

 

38,080

 

80,165

 

87,566

 

Sanuk wholesale

 

26,723

 

 

58,995

 

 

Other wholesale

 

4,155

 

4,963

 

9,942

 

10,415

 

eCommerce

 

7,999

 

5,709

 

29,705

 

29,169

 

Retail stores

 

25,159

 

20,123

 

71,358

 

55,492

 

 

 

$

174,436

 

$

154,222

 

$

420,742

 

$

359,073

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

UGG wholesale

 

$

10,747

 

$

23,430

 

$

39,101

 

$

62,210

 

Teva wholesale

 

5,727

 

7,679

 

13,807

 

21,965

 

Sanuk wholesale

 

3,030

 

 

13,678

 

 

Other wholesale

 

(564

)

(2,682

)

(1,934

)

(4,608

)

eCommerce

 

(108

)

(389

)

4,252

 

5,284

 

Retail stores

 

(7,693

)

(3,006

)

(4,434

)

2,176

 

Unallocated overhead costs

 

(39,847

)

(35,830

)

(81,245

)

(69,630

)

 

 

$

(28,708

)

$

(10,798

)

$

(16,775

)

$

17,397

 

 

Business segment asset information is summarized as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Total assets for reportable segments:

 

 

 

 

 

UGG wholesale

 

$

366,920

 

$

347,213

 

Teva wholesale

 

63,984

 

61,893

 

Sanuk wholesale

 

220,636

 

217,936

 

Other wholesale

 

10,435

 

10,690

 

eCommerce

 

3,610

 

5,964

 

Retail stores

 

88,858

 

80,514

 

 

 

$

754,443

 

$

724,210

 

 

10



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

The assets allocable to each segment include accounts receivable, inventory, fixed assets, intangible assets, and certain other assets that are specifically identifiable with one of the Company’s segments. Unallocated assets are the assets not specifically related to the segments and include cash and cash equivalents, deferred tax assets, and various other assets shared by the Company’s segments. Reconciliations of total assets from reportable segments to the condensed consolidated balance sheets are as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Total assets for reportable segments

 

$

754,443

 

$

724,210

 

Unallocated cash and cash equivalents

 

114,401

 

263,606

 

Unallocated deferred tax assets

 

27,769

 

27,637

 

Other unallocated corporate assets

 

128,390

 

130,743

 

Consolidated total assets

 

$

1,025,003

 

$

1,146,196

 

 

A portion of the Company’s cash and cash equivalents are held as cash in operating accounts that are with third party financial institutions.  These balances, at times, exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits.  While the Company regularly monitors the cash balances in its operating accounts and adjusts the balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets.  As of June 30, 2012, the Company had experienced no loss or lack of access to cash in its operating accounts.

 

The remainder of the Company’s cash equivalents is invested in interest bearing funds managed by third party investment management institutions.  These investments can include US treasuries and government agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and interest rate risks.  Investment risk has been and may further be exacerbated by US mortgage defaults, credit and liquidity issues, and the European debt crisis, which have affected various sectors of the financial markets.  As of June 30, 2012, the Company had experienced no loss or lack of access to its invested cash and cash equivalents.

 

The Company sells its products to customers throughout the US and to foreign customers located in Europe, Canada, Australia, Asia, and Latin America, among other regions.  International sales were 34.9% and 46.3% of the Company’s total net sales for the three months ended June 30, 2012 and 2011, respectively.  International sales were 32.5% and 35.7% of the Company’s total net sales for the six months ended June 30, 2012 and 2011, respectively.  For the six months ended June 30, 2012, no single foreign country comprised more than 10% of total net sales.  The Company does not consider international operations a separate segment, as management reviews such operations in the aggregate with the aforementioned segments.  Long-lived assets, which consist of property and equipment, by major country were as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

US

 

$

74,473

 

$

65,034

 

All other countries*

 

28,807

 

25,223

 

Total

 

$

103,280

 

$

90,257

 

 


*  No foreign country’s long-lived assets comprised more than 10% of total long-lived assets as of June 30, 2012 and December 31, 2011.

 

Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations.  No single customer accounted for more than 10% of net sales for either the six months ended June 30, 2012 or 2011.  As of June 30, 2012 and December 31, 2011, one customer accounted for 12.7% and 17.1% of net trade accounts receivable, respectively.

 

The Company’s production is concentrated at a limited number of independent contractor factories in China.  The Company’s materials sourcing is concentrated in Australia and China and includes a limited number of key sources for the principal raw material for certain UGG products, sheepskin.  The Company’s operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability.  The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside the Company’s control.  Further, the price of sheepskin is impacted by demand, industry, and competitors.

 

11



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

(10)                Commitments and Contingencies

 

The Company is currently involved in various legal claims arising from the ordinary course of business.  Management does not believe that the disposition of these matters will have a material effect on the Company’s financial position or results of operations.  In addition, the Company has agreed to indemnify certain of its licensees, distributors, and promotional partners in connection with claims related to the use of the Company’s intellectual property.  The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments.  Management believes the likelihood of any payments is remote and would be immaterial.  The Company determined the risk was low based on a prior history of insignificant claims.  The Company is not currently involved in any indemnification matters in regards to its intellectual property.

 

The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions.  When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the amount that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which the Company believes it is more likely than not that the position will be sustained upon examination. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement. The portion of the benefits that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying condensed consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  It is reasonably possible that the Company’s unrecognized tax benefits could change; however, the Company believes its unrecognized tax benefits are adequate.  With few exceptions, the Company is no longer subject to US federal, state, local, or non-US income tax examinations by tax authorities for years before 2006.  The Company’s federal income tax returns for the years ended December 31, 2006 through December 31, 2009 were under examination by the Internal Revenue Service (IRS).  In connection with the examination, the Company has received notices of proposed adjustments (NOPAs), which the Company agreed with and recorded in its condensed consolidated financial statements.  In addition, in March 2011, the Company received a NOPA related to transfer pricing arrangements with the Company’s subsidiaries in which adjustments were asserted totaling approximately $55,000 of additional taxable income, representing additional federal taxes and penalties of approximately $27,000, excluding interest.  The Company responded to this NOPA indicating that it disagrees with the proposed adjustments.  The Company had a meeting with IRS Appeals in June 2012.  It is possible that the Company’s unrecognized tax benefit could change; however, the Company believes its unrecognized tax benefits are adequate.

 

Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates or from its historical income tax provisions and accruals.  The results of an audit or litigation could have a material effect on operating results or cash flows in the periods for which that determination is made.  In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments.

 

12



Table of Contents

 

DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

The Company has on-going income tax examinations under various state tax jurisdictions.  It is the opinion of management that these audits and inquiries will not have a material impact on the Company’s condensed consolidated financial statements.

 

The Company has unconditional purchase obligations relating to sheepskin contracts.  The Company enters into contracts requiring minimum purchase commitments of sheepskin that Deckers’ affiliates, manufacturers, factories, and other agents (each or collectively, a “Buyer”) must make on or before a specified target date.  Under certain contracts, the Company may pay an advance deposit, which is included in other current assets on the condensed consolidated balance sheets and shall be repaid to the Company as Buyers purchase goods under the terms of these agreements.  In the event that a Buyer does not purchase certain minimum commitments on or before certain target dates, the supplier may retain a portion of the advance deposit until the amounts of the commitments are fulfilled.  These agreements may result in unconditional purchase obligations if a Buyer does not meet the minimum purchase requirements.  In the event that a Buyer does not purchase such minimum commitments, the Company shall be responsible for compliance with any and all minimum purchase commitments under these contracts.  The contracts do not permit net settlement.  The Company expects sheepskin purchases by third party factories will eventually exceed the contract levels.  Therefore, management believes the likelihood of any non-performance payments under these contractual arrangements is remote and would have an immaterial effect on the condensed consolidated statements of comprehensive (loss) income.  The Company determined this based upon its projected sales and inventory purchases.  Minimum commitments by contract as of June 30, 2012 were as follows:

 

Contract
Effective Date

 

Final
Target Date

 

Advance
Deposit

 

Total
Minimum
Commitment

 

Remaining
Deposit

 

Remaining
Commitment,
Net of Deposit

 

October 2011

 

January 31, 2013

 

$

50,000

 

$

183,000

 

$

33,340

 

$

64,852

 

 

In July 2011, the Company acquired the Sanuk brand, and the total purchase price included contingent consideration payments.  As of June 30, 2012, the remaining contingent consideration payments, which have no maximum, are as follows:

 

·                  51.8% of the Sanuk brand gross profit in 2012,

·                  36.0% of the Sanuk brand gross profit in 2013, and

·                  40.0% of the Sanuk brand gross profit in 2015.

 

As of June 30, 2012 and December 31, 2011, contingent consideration of $67,900 and $91,600, respectively, are included within other accrued expenses and long-term liabilities in the condensed consolidated balance sheets.  Refer to note 6 for further information on the contingent consideration amounts.

 

(11)                Recent Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), which was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between US GAAP and IFRS. Effective for the Company beginning January 1, 2012, this ASU changed certain fair value measurement principles and enhanced the disclosure requirements, particularly for Level 3 fair value measurements.  The Company adopted this update on January 1, 2012 and its adoption did not impact the Company’s condensed consolidated financial statements and only enhanced the disclosures for estimates requiring Level 3 fair value measurements (see note 6).

 

In June 2011, the FASB issued ASU, Presentation of Comprehensive Income, an amendment to Accounting Standards Codification (ASC) 220, Comprehensive Income, which brings US GAAP into alignment with IFRS for the presentation of OCI.  Effective for the Company beginning January 1, 2012, the option in GAAP that permitted the presentation of OCI in the statement of changes in equity was eliminated.  The provisions of the update provide that an entity that reports items of OCI has two options:  (1) a single statement must present the components of net income, total net income, the components of OCI, total OCI, and total comprehensive income; or (2) a two-statement approach whereby an entity must present the components of net income and total net income in the first statement.  That statement must be immediately followed by a financial statement that presents the components of OCI, a total for OCI, and a total for comprehensive income.  Beginning January 1, 2012, the Company adopted this ASU using the single statement approach, which only changed the presentation of OCI on the Company’s condensed consolidated financial statements.

 

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DECKERS OUTDOOR CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(amounts in thousands, except share quantity and per share data)

 

In September 2011, the FASB issued ASU, Intangibles - Goodwill and Other, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  Under this update, an entity is not required to perform the two step impairment test for a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.  This ASU was effective for the Company January 1, 2012, with early adoption permitted.  As permitted, the Company early adopted this update effective with its December 31, 2011 reporting period.

 

In July 2012, the FASB issued ASU, Testing Indefinite-Lived Intangible Assets for Impairment, which allows an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill is impaired.  If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it will not be required to perform a quantitative impairment test for that asset.  Entities are required to test indefinite-lived assets for impairment at least annually and more frequently if indicators of impairment exist.  This ASU will be effective for the Company January 1, 2013, with early adoption permitted.

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

 

This report and the information incorporated by reference in this report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.  We sometimes use words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “project,” “see,” “will,” and similar expressions, as they relate to us, our management and our industry, to identify forward-looking statements.  Forward-looking statements relate to our expectations, beliefs, plans, strategies, prospects, future performance, anticipated trends and other future events.  Specifically, this report and the information incorporated by reference in this report contain forward-looking statements relating to, among other things:

 

·                  our global business, growth, operating, investing, and financing strategies;

·                  our product, distribution channel, and geographic mix;

·                  the success of new products, new brands, and other growth initiatives;

·                  the impact of seasonality on our operations;

·                  expectations regarding our net sales and earnings growth and other financial metrics;

·                  our development of worldwide distribution channels;

·                  trends affecting our financial condition, results of operations, or cash flows;

·                  our expectations for expansion of our retail and eCommerce capabilities;

·                  overall global economic trends; and

·                  reliability of overseas factory production and storage and availability of raw materials.

 

We have based our forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. Actual results may differ materially.  Some of the risks, uncertainties and assumptions that may cause actual results to differ from these forward-looking statements are described in Part II, Item 1A, “Risk Factors.”  In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this report and the information incorporated by reference in this report might not happen.  You should read this report in its entirety, together with the documents that we file as exhibits to this report and the documents that we incorporate by reference in this report with the understanding that our future results may be materially different from what we expect.  We qualify all of our forward-looking statements by these cautionary statements and we assume no obligation to update such forward-looking statements publicly for any reason.

 

References to “Deckers,” “we,” “us,” “our,” or similar terms refer to Deckers Outdoor Corporation together with its consolidated subsidiaries.  Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share quantity, per share data, and selling prices.  The following discussion of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the accompanying notes to those statements included elsewhere in this document.

 

Overview

 

You should read this report in its entirety, together with our Annual Report on Form 10-K, filed with the Securities Exchange Commission (SEC) on February 29, 2012, and the documents that we file as exhibits to these reports and the documents that we incorporate by reference in these reports.

 

We are a leading designer, producer, marketer, and brand manager of innovative, high-quality footwear, apparel, and accessories. We market our products primarily under three proprietary brands:

 

·                  UGG®: Premier brand in luxury and comfort footwear, handbags, apparel, and cold weather accessories;

·                  Teva®: High performance, outdoor footwear and sandals; and

·                  Sanuk®: Innovative action sport footwear rooted in the surf community.

 

Our financial condition and results of operations include the operations of the Sanuk brand beginning July 1, 2011, the acquisition date.  In addition to our primary brands, our other brands include TSUBO®, a line of high-end casual footwear that incorporates style, function and maximum comfort; Ahnu®, a line of outdoor performance and lifestyle footwear; and MOZO®, a line of footwear that combines running shoe technology with work shoe toughness for individuals that spend long hours working on their feet.

 

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We sell our brands through our quality domestic retailers and international distributors and retailers, as well as directly to our end-user consumers through our eCommerce business and our retail stores. Independent third parties manufacture all of our products.  On April 2, 2012, we purchased the remaining interest in our Chinese joint venture.  Prior to this purchase, we already had a controlling interest in this entity, and therefore, the subsidiary has been and will continue to be consolidated with our operations.

 

We believe that our business has been, and will continue to be, impacted by several important trends affecting our end markets:

 

·                  The prolonged US and global economic conditions have adversely impacted businesses worldwide in general. Some of our customers have been, and more may be, adversely affected, which in turn has, and may continue to, adversely impact our financial results.

·                  The sheepskin used in certain UGG products is in high demand and limited supply, and there have been significant increases in the prices of sheepskin.

·                  The markets for casual, outdoor, and athletic footwear have grown significantly during the last decade. We believe this growth is a result of the trend toward casual dress in the workplace, increasingly active outdoor lifestyles, and a growing emphasis on comfort.

·                  We believe that consumers are more often seeking footwear designed to address a broader array of activities with the same quality, comfort, and high performance attributes they have come to expect from traditional athletic footwear.

·                  We believe that consumers have narrowed their footwear product breadth, focusing on brands with a rich heritage and authenticity as market category creators and leaders.

·                  We believe that consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are fashionable while still comfortable.

·                  We believe that there is an emerging sustainable lifestyle movement happening all around the world, and consumers are demanding that brands and companies become more environmentally responsible.

 

By emphasizing our brands’ images and our focus on comfort, performance, and authenticity, we believe we can continue to maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer preferences. We have also responded to consumer focus on sustainability by establishing objectives, policies, and procedures to help us drive key sustainability initiatives around human rights, environmental sustainability, and community affairs.

 

We have experienced cost increases, most significantly with sheepskin. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts. We continually strive to contain our material costs through increasing the mix of non-sheepskin products, exploring new footwear materials and new production technologies, and utilizing lower cost production, including in the US from where we have begun sourcing product this year. Also, refer to Item 3. Quantitative and Qualitative Disclosures about Market Risk for further discussion of our commodity price risk.

 

Below is an overview of the various components of our business, including the key factors that affect each business and our principal strategies for growing each business.

 

UGG Brand Overview

 

UGG® Australia has grown to be well-known in the US and internationally in the footwear industry. With loyal consumers around the world, including high-profile celebrities, the UGG brand continually earns media exposure from numerous outlets both organically and from strategic public relations efforts. The UGG brand has invested in paid media creating impactful integrated campaigns across multiple channels (including television, out-of-home (OOH), print, digital and social) that are globally scalable, contributing to broader public awareness of the brand.

 

We believe the increased global media focus and demand for UGG products has been driven by the following:

 

·                  consumer brand loyalty, due to the luxury and comfort of UGG footwear;

·                  continued innovation of new product categories and styles, including those beyond footwear;

·                  increased marketing for women and men in targeted high-end print, OOH, digital and social advertising;

·                  a targeted UGG for Men campaign featuring Tom Brady;

·                  targeted marketing at prospective consumers through email blasts, new catalogs and direct mail pieces;

·                  successful targeting of higher-end distribution;

·                  expanded product assortment purchases from existing accounts;

·                  adoption by high-profile celebrities as a favored footwear brand;

·                  increased media attention that has enabled us to introduce the brand to consumers much faster than we would have otherwise been able to;

 

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·                  increased exposure to the brand driven by our concept stores that showcase all of our product offerings;

·                  continued expansion of worldwide retail through new UGG Australia stores;

·                  continued geographic expansion across the US and internationally; and

·                  expansion of our shop-in-shop program worldwide.

 

We believe the luxurious comfort of UGG products will continue to drive long-term consumer demand. Recognizing that there is a significant fashion element to UGG footwear and that footwear fashions fluctuate, our strategy seeks to prolong the longevity of the brand by offering a broader product line suitable for wear in a variety of climates and occasions and by limiting distribution to selected higher-end retailers. As part of this strategy, we have increased our product offering, including a growing spring line, an expanded men’s line, and a fall line that consists of a range of luxurious collections for both genders, an expanded kids’ line, as well as handbags, cold weather accessories, and apparel. We have also recently expanded our marketing and promotional efforts, which we believe has contributed, and will continue to contribute, to our growth. We believe that the evolution of the UGG brand and our strategy of product diversification also will help decrease our reliance on sheepskin, which is in high demand and subject to price volatility. Nonetheless, we cannot assure investors that our efforts will continue to provide UGG brand growth.

 

Teva Brand Overview

 

We believe that our Teva brand is a leading innovative, global, action-outdoor brand, with over 25 years of contributions to the outdoor experience. The Teva brand pioneered the water sport sandal category in 1984, and today our brand mission is to inspire better stories through adventures. Leveraging our core performance competencies in footwear and delivering our brand promise to help our consumers Live Better Stories™, we are focused on driving growth through innovation in the growing outdoor space through off-road trail activities, freestyle mountain bike riding, action water sports, and other outdoor lifestyle products.

 

Our efforts to expand the Teva brand beyond sandals, while embracing our core water-based competencies, contributed to significant revenue growth over the past few years. Additionally, our broader range of footwear demonstrated strong retail sell-through across all channels, and we believe that our retail partners have viewed both our product and marketing innovations as relevant and compelling.

 

We see an opportunity to grow the Teva brand significantly outside of the US.  In January 2011, we converted our Teva brand international business from an independent distributor to a wholesale model in the UK, including Scotland and Ireland, which now affords us the opportunity to better drive our brand building and growth initiatives in this influential market.  In 2013, we plan to further our Teva brand’s global expansion in Asia and Latin America.  Within the US, we see strong growth opportunities within our current core channels of distribution, outdoor specialty and sporting goods, as our product assortment evolves and expands.  We continue to see strong sandal sales and growth in our closed-toe offerings. Also, through effective product and distribution segmentation, we see significant expansion opportunities within the family value, department store, better footwear, and action sports channels. However, we cannot assure investors that these efforts will be successful.

 

Sanuk Brand Overview

 

The Sanuk brand was founded 15 years ago, and from its origins in the Southern California surf culture, has grown into a global presence. The Sanuk brand’s use of unexpected materials and unconventional constructions has contributed to the brand’s identity and growth since its inception, and led to successful products such as the Yoga Mat sandal collection and the patented SIDEWALK SURFERS®.  We believe that the Sanuk brand provides substantial growth opportunities within the action sports market, as well as other domestic and global markets and channels in which Deckers is already established.

 

Other Brands Overview

 

Our other brands consist of TSUBO, Ahnu, and MOZO. Our other brands are all sold through most of our distribution channels, with the majority sold through wholesale channels.

 

TSUBO, meaning pressure point in Japanese, is marketed as high-end casual footwear for men and women. The brand is the synthesis of ergonomics and style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide consumers with contemporary footwear that incorporates style, function, and maximum comfort. We are positioning the TSUBO brand as the premium footwear solution for people in the city. We are continuing to create products to address consumers’ unique needs of all-day comfort, innovative style, and superior quality.

 

The Ahnu brand is an outdoor performance and lifestyle footwear brand for men and women. The name Ahnu is derived from the Celtic goddess representing the balance of well-being and prosperity. The brand focuses primarily on women consumers offering style and comfort for active women on both trails and pavement. The product goal is to achieve uncompromising footwear performance by developing footwear that will provide the appropriate balance of traction, grip, flexibility, cushioning, and durability for a variety of outdoor activities — whether on trails, beaches, or sidewalks.

 

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The MOZO brand strives to deliver revolutionary footwear for creative, passionate, and talented professionals who spend long hours working on their feet. Our high-performance footwear is designed to the standards of these professionals, not just their workplace. In 2011, MOZO introduced The Chef Signature Collection: footwear designed by global style icon Marcus Samuelsson, recently-appointed head chef for the House of Blues group, Aaron Sanchez, and current Iron Chef competitor, Chris Cosentino. This collection put the MOZO brand in the media for the first time and allowed the brand to open up new distribution opportunities. This year the brand signed the only female Iron Chef winner, Cat Cora, to design a collection built for women to wear in the home kitchen and anywhere else their busy lives take them. Current distribution includes culinary trade wholesale, large on-line retailers and the health care worker market.

 

We expect to leverage our design, marketing, and distribution capabilities to grow our other brands over the next several years, consistent with our mission to build niche brands into global market leaders. Nevertheless, we cannot assure investors that our efforts to grow these brands will be successful.

 

eCommerce Overview

 

Our eCommerce business, which sells all of our brands, allows us to reinforce our relationship with the consumer. eCommerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide significant incremental operating income. The eCommerce business provides us an opportunity to communicate to the consumer with a consistent brand message that is in line with our brands’ promises, drives awareness of key brand initiatives, and offers targeted information to specific consumer segments. Our websites also drive wholesale and distributor sales through brand awareness and directing consumers to retailers that carry our brands, including our own retail stores. In recent years, our eCommerce business has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to increase internet usage for footwear and other purchases.

 

Managing our eCommerce business requires us to focus on the latest trends and techniques for web design and marketing, to generate internet traffic to our websites, to effectively convert website visits into orders, and to maximize average order sizes. We plan to continue to grow our eCommerce business through improved website features and performance, increased marketing, expansion into more international markets, and utilization of mobile and tablet technology. Nevertheless, we cannot assure investors that revenue from our eCommerce business will continue to grow.

 

Retail Stores Overview

 

Our retail stores are predominantly UGG Australia concept stores and UGG Australia outlet stores. Our retail stores enable us to directly impact our customers’ experience, meet the growing demand for these products, sell the products at retail prices and generate strong annual operating income. In addition, our UGG Australia concept stores allow us to showcase our entire product line including footwear, accessories, handbags, and outerwear; whereas, a wholesale account may not represent all of these categories. Through our outlet stores, we sell some of our discontinued styles from prior seasons, plus products made specifically for the outlet stores. We sell Teva products as well as some of our other brands through limited outlet locations.

 

As of June 30, 2012, we had a total of 53 retail stores worldwide. These stores are company-owned and operated and include our China stores, which prior to April 2, 2012 were owned and operated with our joint venture partner.  On April 2, 2012, we purchased the remaining interest in our Chinese joint venture.  During 2012, we plan to open additional retail stores, with the majority in international locations, with the total being more than the number of stores we opened in 2011.  We intend to continue opening more retail stores worldwide beyond 2012.

 

Seasonality

 

Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the third and fourth calendar quarters and the highest percentage of Teva and Sanuk brand net sales occurring in the first and second calendar quarters of each year. Our financial results include the Sanuk brand beginning July 1, 2011. Our other brands do not have a significant seasonal impact.

 

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2012

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Net sales

 

$

246,306

 

$

174,436

 

 

 

 

 

Income (loss) from operations

 

$

11,933

 

$

(28,708

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

 

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

 

Net sales

 

$

204,851

 

$

154,222

 

$

414,358

 

$

603,852

 

Income (loss) from operations

 

$

28,195

 

$

(10,798

)

$

90,661

 

$

176,780

 

 

With the large growth in the UGG brand over the past several years, net sales in the last half of the year have exceeded net sales for the first half of the year.  We currently expect this trend to continue.  Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and uncertainties.

 

Results of Operations

 

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

 

The following table summarizes the Company’s results of operations:

 

 

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

Change

 

 

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Net sales

 

$

174,436

 

100.0

%

$

154,222

 

100.0

%

$

20,214

 

13.1

%

Cost of sales

 

100,857

 

57.8

 

88,310

 

57.3

 

12,547

 

14.2

 

Gross profit

 

73,579

 

42.2

 

65,912

 

42.7

 

7,667

 

11.6

 

Selling, general and administrative expenses

 

102,287

 

58.6

 

76,710

 

49.7

 

25,577

 

33.3

 

Loss from operations

 

(28,708

)

(16.5

)

(10,798

)

(7.0

)

(17,910

)

(165.9

)

Other income, net

 

(179

)

(0.1

)

(43

)

 

(136

)

(316.3

)

Loss before income taxes

 

(28,529

)

(16.4

)

(10,755

)

(7.0

)

(17,774

)

(165.3

)

Income tax benefit

 

(8,390

)

(4.8

)

(3,227

)

(2.1

)

(5,163

)

(160.0

)

Net loss

 

(20,139

)

(11.5

)

(7,528

)

(4.9

)

(12,611

)

(167.5

)

Net loss attributable to the noncontrolling interest

 

 

 

189

 

0.1

 

(189

)

(100.0

)

Net loss attributable to Deckers Outdoor Corporation

 

$

(20,139

)

(11.5

)%

$

(7,339

)

(4.8

)%

$

(12,800

)

(174.4

)%

 

Overview.  The Sanuk brand operations are included in our results of operations effective upon our acquisition date of July 1, 2011.  The increase in net sales was primarily due to the addition of Sanuk product sales as well as an increase in UGG retail sales, partially offset by a reduction in UGG and Teva wholesale sales in Europe.  The increase in loss from operations resulted primarily from higher selling, general and administrative expenses, partially offset by the increase in net sales.

 

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Net Sales.  The following tables summarize net sales by location, brand, and distribution channel:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

Net sales by location:

 

 

 

 

 

 

 

 

 

US

 

$

113,480

 

$

82,772

 

$

30,708

 

37.1

%

International

 

60,956

 

71,450

 

(10,494

)

(14.7

)

Total

 

$

174,436

 

$

154,222

 

$

20,214

 

13.1

%

 

 

 

 

 

 

 

 

 

 

Net sales by brand and distribution channel:

 

 

 

 

 

 

 

 

 

UGG:

 

 

 

 

 

 

 

 

 

Wholesale

 

$

78,643

 

$

85,347

 

$

(6,704

)

(7.9

)%

eCommerce

 

4,270

 

2,969

 

1,301

 

43.8

 

Retail stores

 

24,980

 

19,950

 

5,030

 

25.2

 

Total

 

107,893

 

108,266

 

(373

)

(0.3

)

Teva:

 

 

 

 

 

 

 

 

 

Wholesale

 

31,757

 

38,080

 

(6,323

)

(16.6

)

eCommerce

 

2,207

 

2,089

 

118

 

5.6

 

Retail stores

 

129

 

123

 

6

 

4.9

 

Total

 

34,093

 

40,292

 

(6,199

)

(15.4

)

Sanuk:

 

 

 

 

 

 

 

 

 

Wholesale

 

26,723

 

 

26,723

 

*

 

eCommerce

 

1,264

 

 

1,264

 

*

 

Retail stores

 

 

 

 

 

Total

 

27,987

 

 

27,987

 

*

 

Other:

 

 

 

 

 

 

 

 

 

Wholesale

 

4,155

 

4,963

 

(808

)

(16.3

)

eCommerce

 

258

 

651

 

(393

)

(60.4

)

Retail stores

 

50

 

50

 

 

 

Total

 

4,463

 

5,664

 

(1,201

)

(21.2

)

Total

 

$

174,436

 

$

154,222

 

$

20,214

 

13.1

%

 

 

 

 

 

 

 

 

 

 

Total eCommerce

 

$

7,999

 

$

5,709

 

$

2,290

 

40.1

%

 

 

 

 

 

 

 

 

 

 

Total Retail stores

 

$

25,159

 

$

20,123

 

$

5,036

 

25.0

%

 


* Calculation of percentage change is not meaningful.

 

The increase in net sales was primarily driven by the addition of the Sanuk brand as well as an increase in UGG retail sales, partially offset by a reduction in UGG and Teva wholesale sales in Europe.  We experienced an increase in the number of pairs sold through the addition of our Sanuk wholesale segment and continued retail growth, partially offset by a decrease in pairs sold in our UGG, Teva, and other brands wholesale segments.  This resulted in an increase in the overall volume of footwear sold for all brands of 22.2% to approximately 4.4 million pairs sold for the three months ended June 30, 2012 from 3.6 million pairs for the three months ended June 30, 2011.  Our weighted-average wholesale selling price per pair decreased to $35.06 for the three months ended June 30, 2012 from $38.28 for the three months ended June 30, 2011.  The decreased average selling price was primarily due to the addition of our Sanuk wholesale segment, which has lower overall average selling prices due to the nature of the brand, partially offset by increases in all other segments excluding eCommerce.

 

Wholesale net sales of our UGG brand decreased primarily due to a decrease in the volume of pairs sold, partially offset by an increase in the average selling price.  The decrease in volume was primarily to our distributors in Europe, as well as our wholesale customers in Europe.  We believe the decline was partially due to reduced distributor orders for the fall season caused by the weakening economy in Europe and our distributors having increased carryover inventory levels resulting from the warm winter in the prior year.

 

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Wholesale net sales of our Teva brand decreased primarily due to a decrease in the volume of pairs sold, partially offset by an increase in the average selling price.  The decrease in volume was primarily in the domestic and European markets, with Europe having a larger percentage decrease.  We believe the decline in Europe was partially due to a tightening in consumer spending as a result of the weakening economy, leading retailers to be similarly cautious. The domestic market had a slight increase in sales due to increased average selling prices, despite the decrease in the volume of pairs sold.

 

Wholesale net sales of our Sanuk brand, which we acquired in July 2011, were $26,723.

 

Wholesale net sales of our other brands decreased due to a decrease in volume of pairs sold, partially offset by an increase in the average selling price.  The decreases in net sales and volume of pairs sold were due to ceasing distribution of the Simple brand as of December 31, 2011.  Excluding the Simple brand, our other brands experienced an increase in both net sales and volume of pairs sold.

 

Net sales of our eCommerce business increased due to an increase in the number of pairs sold, partially offset by a decrease in the average selling price. The decrease in the average selling price was primarily due to lower average selling prices for the UGG brand due to a shift in product mix, and the addition of Sanuk brand sales, which carry lower average selling prices.

 

Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of 21 new stores opened since June 30, 2011.  For the thirteen weeks ended July 1, 2012 compared to July 3, 2011, same store sales grew by 6.8%.  All stores not included in same store sales contributed approximately $3,900 of retail sales during the thirteen weeks ended July 1, 2012.  As we continue to increase the number of our stores, each new store will have less proportional impact on our growth rate.   Previously, we calculated our same store sales using full calendar quarters and adjustments to reflect foreign exchange impacts, and included all stores that were open for the full quarter or year-to-date periods, respectively.  Beginning the three months ended March 31, 2012, we changed the method of our calculation to a traditional retail weekly calendar, excluded adjustments to reflect foreign exchange impacts, and excluded other items such as stores under relocation or remodel to more accurately reflect comparable store sales.  This calculation is more consistent with how management views the business and we believe it is more consistent with financial measures used in the retail industry.  We cannot assure investors that revenue from our retail store business will continue to increase.

 

International sales, which are included in the segment sales above, for all of our products combined represented 34.9% and 46.3% of worldwide net sales for the three months ended June 30, 2012 and 2011, respectively.  The decrease in international sales was largely due to decreased sales for our Teva and UGG wholesale channel, primarily in the European region.

 

Gross Profit.  As a percentage of net sales, gross margin decreased primarily due to increased sheepskin and other material costs as well as an increased impact of discounted and closeout  sales in Europe for our UGG and Teva brands.  The decrease was partially offset by the contribution of the Sanuk brand, which generally carries higher margins, and increased margins for our retail segment.  We expect to experience continued pressure on gross profit, primarily due to the increased sheepskin costs, for the full year 2012.

 

Selling, General and Administrative Expenses (SG&A).  The change in SG&A was primarily due to:

 

·                  approximately $15,000 of SG&A expenses for our Sanuk brand, including an increase to the fair value of the contingent consideration liability of approximately $5,000, that we did not own as of June 30, 2011;

·                  increased retail costs of approximately $8,000, largely related to 21 new retail stores that were not open as of June 30, 2011;

·                  increased marketing expenses of approximately $4,000, largely related to our new UGG men’s and Classic campaigns; and

·                  increased international division expenses of approximately $4,000 in support of our continued international expansion;

·                  decreased amortization expense of approximately $2,000 due to an acquired order book being fully amortized during the first six months of 2011;

·                  decreased legal expense of approximately $2,000.

 

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Loss from Operations.  Refer to Note 9 to our accompanying condensed consolidated financial statements for a discussion of our reportable segments.  The following table summarizes operating income (loss) by segment:

 

 

 

Three Months Ended June 30,

 

 

 

 

 

 

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

UGG wholesale

 

$

10,747

 

$

23,430

 

$

(12,683

)

(54.1

)%

Teva wholesale

 

5,727

 

7,679

 

(1,952

)

(25.4

)

Sanuk wholesale

 

3,030

 

 

3,030

 

*

 

Other wholesale

 

(564

)

(2,682

)

2,118

 

79.0

 

eCommerce

 

(108

)

(389

)

281

 

72.2

 

Retail stores

 

(7,693

)

(3,006

)

(4,687

)

(155.9

)

Unallocated overhead costs

 

(39,847

)

(35,830

)

(4,017

)

(11.2

)

Total

 

$

(28,708

)

$

(10,798

)

$

(17,910

)

(165.9

)%

 


* Calculation of percentage change is not meaningful.

 

Loss from operations increased primarily due to an increase in SG&A expenses, partially offset by the increase in net sales.

 

The decrease in income from operations of UGG brand wholesale was primarily the result of a 9.3 percentage point decrease in gross margin, primarily attributable to higher sheepskin and other material costs and an increased impact of discounted and closeout sales in Europe.  The decrease in income was also due to higher marketing and promotional expenses of approximately $4,000, related to our new men’s and Classic campaigns.  These decreases to income were partially offset by approximately $1,500 in decreased commissions and approximately $2,000 in decreased amortization expenses, due to an acquired order book being fully amortized during the first six months of 2011.

 

The decrease in income from operations of Teva brand wholesale was primarily the result of approximately a $2,000 reduction in gross profit, mostly attributable to the decrease in net sales.

 

The income from operations from our Sanuk brand, which we acquired in July 2011, was $3,030.

 

The loss from operations of our other brands wholesale decreased due to an increase in gross profit of approximately $1,000 and a decrease in selling and other expenses of approximately $1,000.

 

The decrease in loss from operations of our eCommerce business was primarily due to the increase in net sales, partially offset by an increase in marketing and promotional expenses.

 

The increase in loss from operations of our retail store business, which primarily relates to the UGG brand, was primarily due to approximately $8,000 of higher operating expenses largely related to our new store openings.  These results were partially offset by increased net sales and a 4.3 percentage point increase in gross margin, primarily due to an increased mix of international sales which generally carry higher margins.

 

The increase in unallocated overhead costs resulted most significantly from an increase of approximately $5,000 related to international infrastructure costs to support our expansion.

 

Other (Income) Expense, Net.  Other income, net increased primarily due to royalty income and expired eCommerce website customer credits.

 

Income Taxes.  Income taxes for the interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management and can vary from quarter to quarter.  Income tax benefit and effective income tax rates were as follows:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Income tax benefit

 

$

8,390

 

$

3,227

 

Effective income tax rate

 

29.4

%

30.0

%

 

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Table of Contents

 

The decrease in the effective tax rate was primarily due to US federal and state tax adjustments, partially offset by a change in the jurisdictional mix of expected annual pre-tax income.  Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely.  Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends.  As of June 30, 2012, we had approximately $6,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to be repatriated.  We have no plans to repatriate any of our foreign cash.  We anticipate our effective tax rate for the full year 2012 to be higher than the full year rate of 29.2% in 2011.  The higher expected rate is due to an increase in our projected annual US pre-tax income as a percentage of worldwide pre-tax income compared to the prior year, as income generated in the US is taxed at higher rates than most of our foreign jurisdictions.

 

Net Loss Attributable to the Noncontrolling Interest.  On April 2, 2012, we purchased the remaining 49% noncontrolling interest in our joint venture with Stella International.  Prior to this purchase, we already had a controlling interest in this entity, and therefore, the subsidiary had been and will continue to be consolidated with our operations.

 

Net Loss Attributable to Deckers Outdoor Corporation.   Our net loss increased as a result of the items discussed above.  Our diluted loss per share increased, primarily as a result of the increase in net loss.

 

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

 

The following table summarizes the Company’s results of operations:

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Change

 

 

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Net sales

 

$

420,742

 

100.0

%

$

359,073

 

100.0

%

$

61,669

 

17.2

%

Cost of sales

 

233,875

 

55.6

 

190,683

 

53.1

 

43,192

 

22.7

 

Gross profit

 

186,867

 

44.4

 

168,390

 

46.9

 

18,477

 

11.0

 

Selling, general and administrative expenses

 

203,642

 

48.4

 

150,993

 

42.1

 

52,649

 

34.9

 

(Loss) income from operations

 

(16,775

)

(4.0

)

17,397

 

4.8

 

(34,172

)

(196.4

)

Other income, net

 

(580

)

(0.1

)

(181

)

(0.1

)

(399

)

(220.4

)

(Loss) income before income taxes

 

(16,195

)

(3.8

)

17,578

 

4.9

 

(33,773

)

(192.1

)

Income tax (benefit) expense

 

(4,091

)

(1.0

)

5,273

 

1.5

 

(9,364

)

(177.6

)

Net (loss) income

 

(12,104

)

(2.9

)

12,305

 

3.4

 

(24,409

)

(198.4

)

Net income attributable to the noncontrolling interest

 

(148

)

 

(466

)

(0.1

)

318

 

68.2

 

Net (loss) income attributable to Deckers Outdoor Corporation

 

$

(12,252

)

(2.9

)%

$

11,839

 

3.3

%

$

(24,091

)

(203.5

)%

 

Overview.  The Sanuk brand operations are included in our results of operations effective upon our acquisition date of July 1, 2011.  The increase in net sales was primarily due to the addition of Sanuk product sales as well as an increase in UGG retail sales and UGG wholesale sales in Canada, Asia and the US, partially offset by a reduction in UGG and Teva wholesale sales in Europe.  The decrease in income from operations resulted primarily from higher selling, general and administrative expenses as well as a 2.5 percentage point decrease in gross margin, partially offset by the increase in net sales.

 

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Table of Contents

 

Net Sales.  The following tables summarize net sales by location, brand, and distribution channel:

 

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

Change

 

 

 

2012

 

2011

 

Amount

 

%

 

Net sales by location:

 

 

 

 

 

 

 

 

 

US

 

$

284,038

 

$

230,894

 

$

53,144

 

23.0

%

International

 

136,704

 

128,179

 

8,525

 

6.7

 

Total

 

$

420,742

 

$

359,073

 

$

61,669

 

17.2

%

 

 

 

 

 

 

 

 

 

 

Net sales by brand and distribution channel:

 

 

 

 

 

 

 

 

 

UGG:

 

 

 

 

 

 

 

 

 

Wholesale

 

$

170,577

 

$

176,431

 

$

(5,854

)

(3.3

)%

eCommerce

 

24,328

 

25,057

 

(729