skx-10q_20170630.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2017

OR

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

For the transition period from ____ to____

Commission File Number 001-14429

 

SKECHERS U.S.A., INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

95-4376145

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

228 Manhattan Beach Blvd.

Manhattan Beach, California

 

90266

(Address of Principal Executive Office)

 

(Zip Code)

(310) 318-3100

(Registrant’s Telephone Number, Including Area Code)

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

(Do not check if a small reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

 

 

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

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

THE NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF AUGUST 1, 2017: 133,885,844.

THE NUMBER OF SHARES OF CLASS B COMMON STOCK OUTSTANDING AS OF AUGUST 1, 2017: 24,545,188.

 

 

 

 

 


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

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited):

 

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Earnings

4

 

Condensed Consolidated Statements of Comprehensive Income

5

 

Condensed Consolidated Statements of Cash Flows

6

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

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

20

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

Item 4.

Controls and Procedures

31

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

32

 

Item 1A.

Risk Factors

34

 

Item 5.

Other Information

35

 

Item 6.

Exhibits

37

 

 

Signatures

38

 

 

 

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par values)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

751,581

 

 

$

718,536

 

Trade accounts receivable, less allowances of $49,107 in 2017 and $41,647 in 2016

 

 

494,683

 

 

 

326,844

 

Other receivables

 

 

24,884

 

 

 

19,191

 

Total receivables

 

 

519,567

 

 

 

346,035

 

Inventories

 

 

669,741

 

 

 

700,515

 

Prepaid expenses and other current assets

 

 

54,119

 

 

 

62,680

 

Total current assets

 

 

1,995,008

 

 

 

1,827,766

 

Property, plant and equipment, net

 

 

527,441

 

 

 

494,473

 

Deferred tax assets

 

 

33,517

 

 

 

26,043

 

Other assets, net

 

 

53,324

 

 

 

45,388

 

Total non-current assets

 

 

614,282

 

 

 

565,904

 

TOTAL ASSETS

 

$

2,609,290

 

 

$

2,393,670

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current installments of long-term borrowings

 

$

1,792

 

 

$

1,783

 

Short-term borrowings

 

 

4,049

 

 

 

6,086

 

Accounts payable

 

 

528,251

 

 

 

520,437

 

Accrued expenses

 

 

101,518

 

 

 

93,424

 

Total current liabilities

 

 

635,610

 

 

 

621,730

 

Long-term borrowings, excluding current installments

 

 

68,271

 

 

 

67,159

 

Deferred tax liabilities

 

 

417

 

 

 

412

 

Other long-term liabilities

 

 

21,734

 

 

 

18,855

 

Total non-current liabilities

 

 

90,422

 

 

 

86,426

 

Total liabilities

 

 

726,032

 

 

 

708,156

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   and outstanding

 

 

 

 

 

 

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

   131,259 and 130,386 shares issued and outstanding at June 30, 2017

   and December 31, 2016, respectively

 

 

131

 

 

 

130

 

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

   authorized; 24,545 shares issued and outstanding at

   June 30, 2017 and December 31, 2016

 

 

24

 

 

 

24

 

Additional paid-in capital

 

 

436,296

 

 

 

419,038

 

Accumulated other comprehensive loss

 

 

(21,929

)

 

 

(26,604

)

Retained earnings

 

 

1,364,575

 

 

 

1,211,045

 

Skechers U.S.A., Inc. equity

 

 

1,779,097

 

 

 

1,603,633

 

Non-controlling interests

 

 

104,161

 

 

 

81,881

 

Total stockholders' equity

 

 

1,883,258

 

 

 

1,685,514

 

TOTAL LIABILITIES AND EQUITY

 

$

2,609,290

 

 

$

2,393,670

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


 

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

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net sales

 

$

1,025,934

 

 

$

877,810

 

 

$

2,098,742

 

 

$

1,856,604

 

Cost of sales

 

 

537,613

 

 

 

461,556

 

 

 

1,133,923

 

 

 

1,008,198

 

Gross profit

 

 

488,321

 

 

 

416,254

 

 

 

964,819

 

 

 

848,406

 

Royalty income

 

 

3,221

 

 

 

3,307

 

 

 

7,451

 

 

 

5,932

 

 

 

 

491,542

 

 

 

419,561

 

 

 

972,270

 

 

 

854,338

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

99,950

 

 

 

75,966

 

 

 

173,759

 

 

 

129,844

 

General and administrative

 

 

305,283

 

 

 

243,240

 

 

 

587,779

 

 

 

485,589

 

 

 

 

405,233

 

 

 

319,206

 

 

 

761,538

 

 

 

615,433

 

Earnings from operations

 

 

86,309

 

 

 

100,355

 

 

 

210,732

 

 

 

238,905

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

381

 

 

 

319

 

 

 

794

 

 

 

585

 

Interest expense

 

 

(1,845

)

 

 

(1,861

)

 

 

(3,334

)

 

 

(3,249

)

Other, net

 

 

2,664

 

 

 

(2,604

)

 

 

3,359

 

 

 

175

 

Total other income (expense)

 

 

1,200

 

 

 

(4,146

)

 

 

819

 

 

 

(2,489

)

Earnings before income tax expense

 

 

87,509

 

 

 

96,209

 

 

 

211,551

 

 

 

236,416

 

Income tax expense

 

 

14,109

 

 

 

12,200

 

 

 

31,516

 

 

 

42,768

 

Net earnings

 

 

73,400

 

 

 

84,009

 

 

 

180,035

 

 

 

193,648

 

Less: Net earnings attributable to non-controlling interests

 

 

13,865

 

 

 

9,902

 

 

 

26,505

 

 

 

21,929

 

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

 

$

59,535

 

 

$

74,107

 

 

$

153,530

 

 

$

171,719

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

 

$

0.48

 

 

$

0.99

 

 

$

1.12

 

Diluted

 

$

0.38

 

 

$

0.48

 

 

$

0.98

 

 

$

1.11

 

Weighted average shares used in calculating net earnings per

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

155,579

 

 

 

154,049

 

 

 

155,340

 

 

 

153,901

 

Diluted

 

 

156,174

 

 

 

155,023

 

 

 

156,016

 

 

 

154,912

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


 

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

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net earnings

 

$

73,400

 

 

$

84,009

 

 

$

180,035

 

 

$

193,648

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on foreign currency translation adjustment

 

 

2,574

 

 

 

338

 

 

 

7,156

 

 

 

6,336

 

Comprehensive income

 

 

75,974

 

 

 

84,347

 

 

 

187,191

 

 

 

199,984

 

Less: Comprehensive income attributable to non-controlling

   interests

 

 

14,663

 

 

 

8,353

 

 

 

28,987

 

 

 

21,326

 

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

 

$

61,311

 

 

$

75,994

 

 

$

158,204

 

 

$

178,658

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5


 

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

180,035

 

 

$

193,648

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization of property, plant and equipment

 

 

38,693

 

 

 

30,555

 

Amortization of other assets

 

 

6,878

 

 

 

5,820

 

Provision for bad debts and returns

 

 

11,252

 

 

 

8,385

 

Non-cash share-based compensation

 

 

14,248

 

 

 

10,870

 

Deferred income taxes

 

 

(7,498

)

 

 

692

 

Loss on non-current assets

 

 

665

 

 

 

557

 

Net foreign currency adjustments

 

 

(5,388

)

 

 

(441

)

(Increase) decrease in assets:

 

 

 

 

 

 

 

 

Receivables

 

 

(178,308

)

 

 

(130,707

)

Inventories

 

 

34,467

 

 

 

33,789

 

Prepaid expenses and other current assets

 

 

3,672

 

 

 

(4,142

)

Other assets

 

 

(5,986

)

 

 

(3,867

)

Increase (decrease) in liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

6,119

 

 

 

54,213

 

Accrued expenses and other long-term liabilities

 

 

10,302

 

 

 

(17,090

)

Net cash provided by operating activities

 

 

109,151

 

 

 

182,282

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(76,502

)

 

 

(55,034

)

Purchases of investments

 

 

(1,023

)

 

 

(2,194

)

Proceeds from sales of investments

 

 

240

 

 

 

131

 

Net cash used in investing activities

 

 

(77,285

)

 

 

(57,097

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds from the issuances of common stock through the employee

   stock purchase plan

 

 

3,011

 

 

 

2,928

 

Payments on long-term debt

 

 

(944

)

 

 

(14,768

)

Proceeds from long-term debt

 

 

2,065

 

 

 

 

Net proceeds from (payments on) short-term borrowings

 

 

(2,296

)

 

 

3,232

 

Excess tax benefits from share-based compensation

 

 

 

 

 

4,469

 

Distributions to non-controlling interests of consolidated entity

 

 

(6,753

)

 

 

(5,199

)

Contributions from non-controlling interests of consolidated entity

 

 

46

 

 

 

2,905

 

Net cash used in financing activities

 

 

(4,871

)

 

 

(6,433

)

Net increase in cash and cash equivalents

 

 

26,995

 

 

 

118,752

 

Effect of exchange rates on cash and cash equivalents

 

 

6,050

 

 

 

2,084

 

Cash and cash equivalents at beginning of the period

 

 

718,536

 

 

 

507,991

 

Cash and cash equivalents at end of the period

 

$

751,581

 

 

$

628,827

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

3,250

 

 

$

3,041

 

Income taxes, net

 

 

36,334

 

 

 

34,391

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

6


 

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017 and 2016

(Unaudited)

(1)

GENERAL

Basis of Presentation

The accompanying condensed consolidated financial statements of Skechers U.S.A., Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S‑X. Accordingly, they do not include certain notes and financial presentations normally required under U.S. GAAP for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2017.

Inventories

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

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires that inventory within the scope of this standard be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments apply to inventory that is measured using first-in, first-out or average cost.  Effective January 1, 2017, the Company adopted ASU 2015-11. The adoption of ASU 2015-11 did not have a material impact on the Company’s condensed consolidated financial statements.

Fair Value of Financial Instruments

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

As of August 12, 2015, the Company entered into an interest rate swap agreement concurrent with refinancing its domestic distribution center construction loan (see Note 2). The fair value of the interest rate swap was determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipt was based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with U.S. GAAP, credit valuation adjustments were incorporated to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. The majority of the inputs used to value the interest rate swap were within Level 2 of the fair value hierarchy. As of June 30, 2017 and December 31, 2016, the interest rate swap was a Level 2 derivative and was classified as other long-term liabilities on the Company’s condensed consolidated balance sheets.

 

7


 

Use of Estimates

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

Revenue Recognition

The Company recognizes revenue on wholesale sales when products are shipped and the customer takes title and assumes risk of loss, collection of the relevant receivable is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. This generally occurs at time of shipment. Related costs paid to third-party shipping companies are recorded as a cost of sales. The Company recognizes revenue from retail sales at the point of sale. Sales and value added taxes collected from retail customers are excluded from reported revenues. Generally, wholesale customers do not have the right to return goods, the Company periodically decides to accept returns or provide customers with credits. Allowances for estimated returns, discounts, doubtful accounts and chargebacks are provided for when related revenue is recorded.

Royalty income is earned from licensing arrangements. Upon signing a new licensing agreement, the Company receives up-front fees, which are generally characterized as prepaid royalties. These fees are initially deferred and recognized as revenue when earned. The first calculated royalty payment is based on actual sales of the licensed product or, in some cases, minimum royalty payments. Typically, at each quarter-end, the Company receives correspondence from licensees indicating actual sales for the period, which is used to calculate and accrue the related royalties currently receivable based on the terms of the agreement.

Recent Accounting Pronouncements

In October 2016, the FASB issued ASU No. 2016-16, “Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). The standard requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs. The standard will become effective for the Company’s annual and interim reporting periods beginning January 1, 2018 and will require any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings under a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2016-16; however at the current time the Company does not know what impact the adoption of this ASU will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), which eliminates the diversity in practice related to the classification of certain cash receipts and payments. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively adopted as of the earliest date practicable. ASU 2016-15 is effective for the Company’s annual and interim reporting periods beginning January 1, 2018. The Company is currently evaluating the impact of ASU 2016-15; however at the current time the Company does not know what impact the adoption of this ASU will have on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires measurement and recognition of expected versus incurred credit losses for financial assets held. ASU 2016-13 is effective for the Company’s annual and interim reporting periods beginning January 1, 2020, with early adoption permitted on January 1, 2019. The Company is currently evaluating the impact of ASU 2016-13; however at the current time the Company does not expect that the adoption of this ASU will have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The new standard requires lessees to recognize most leases on the balance sheet, which will increase lessees’ reported assets and liabilities. ASU 2016-02 is effective for the Company’s annual and interim reporting periods beginning January 1, 2019. ASU 2016-02 mandates a modified retrospective transition method. The Company is currently assessing the impact of the new standard on its consolidated financial statements, but anticipates an increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases, such as real estate leases for corporate headquarters, administrative offices, retail stores, showrooms, and distribution facilities, as well as additional disclosure on all of the Company’s lease obligations. The earnings statement recognition of lease expense is not expected to change materially from the current methodology.

 

8


 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The update to the standard should be applied prospectively and is effective for the Company’s annual and interim reporting periods beginning January 1, 2018. The Company is currently evaluating the impact of ASU 2016-01; however at the current time the Company does not expect that the adoption of this ASU will have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers”, Accounting Standards Codification 606 (“ASC 606”). This amendment prescribes that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The amendment supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance throughout the Industry Topics of the Codification. For the Company’s annual and interim reporting periods the mandatory adoption date of ASC 606 is January 1, 2018, and there will be two methods of adoption allowed, either a full retrospective adoption or a modified retrospective adoption. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to the first quarter of 2018. In March 2016, April 2016, May 2016, December 2016, and May 2017 the FASB issued ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20, and ASU 2017-10, respectively, as clarifications to ASU 2014-09. ASU 2016-08 clarifies how to identify the unit of accounting for the principal versus agent evaluation, how to apply the control principle to certain types of arrangements, such as service transactions, and reframed the indicators in the guidance to focus on evidence that an entity is acting as a principal rather than as an agent. ASU 2016-10 clarifies the existing guidance on identifying performance obligations and licensing implementation. ASU 2016-12 adds practical expedients related to the transition for contract modifications and further defines a completed contract, clarifies the objective of the collectability assessment and how revenue is recognized if collectability is not probable, and when non-cash considerations should be measured. ASU 2016-20 corrects or improves guidance in 13 narrow focus aspects of the guidance. ASU 2017-10 clarifies that the grantor in a service concession arrangement is the operating entity’s customer for purposes of revenue recognition. The effective dates for these ASUs are the same as the effective date for ASU No. 2014-09, for the Company’s annual and interim periods beginning January 1, 2018. These ASU’s also require enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows.  The Company will adopt the new revenue standards in the first quarter of 2018. The Company expects to adopt this pronouncement using the modified retrospective method. The Company is still completing the assessment of the impact of these ASUs on its consolidated financial statements; however at the current time the Company does not expect that the adoption of these ASUs will have a material impact on its consolidated financial statements.

(2)

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

The Company had $4.6 million and $2.0 million of outstanding letters of credit as of June 30, 2017 and December 31, 2016, respectively, and approximately $4.0 million and $6.1 million in short-term borrowings as of June 30, 2017 and December 31, 2016, respectively.

Long-term borrowings at June 30, 2017 and December 31, 2016 are as follows (in thousands):

 

 

 

2017

 

 

2016

 

Note payable to banks, due in monthly installments of $298.2

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

   3.23% per annum, secured by property, balloon payment of

   $62,843 due August 2020

 

$

67,331

 

 

$

68,059

 

Note payable to Luen Thai Enterprise, Ltd., balloon payment

   of $2,010 due January 2021

 

 

2,010

 

 

 

 

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

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

   rate interest at 5.24% per annum, due July 2019

 

 

722

 

 

 

883

 

Subtotal

 

 

70,063

 

 

 

68,942

 

Less current installments

 

 

1,792

 

 

 

1,783

 

Total long-term borrowings

 

$

68,271

 

 

$

67,159

 

 

The Company’s long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions. The Company is in compliance with its non-financial covenants, including any cross-default provisions, and financial covenants of its long-term borrowings as of June 30, 2017.

 

9


 

On June 30, 2015, the Company entered into a $250.0 million loan and security agreement, subject to increase by up to $100.0 million, (the “Credit Agreement”), with the following lenders: Bank of America, N.A., MUFG Union Bank, N.A. and HSBC Bank USA, National Association. The Credit Agreement matures on June 30, 2020. The Credit Agreement replaces the credit agreement dated June 30, 2009, which expired on June 30, 2015. The Credit Agreement permits the Company and certain of its subsidiaries to borrow based on a percentage of eligible accounts receivable plus the sum of (a) the lesser of (i) a percentage of eligible inventory to be sold at wholesale and (ii) a percentage of net orderly liquidation value of eligible inventory to be sold at wholesale, plus (b) the lesser of (i) a percentage of the value of eligible inventory to be sold at retail and (ii) a percentage of net orderly liquidation value of eligible inventory to be sold at retail, plus (c) the lesser of (i) a percentage of the value of eligible in-transit inventory and (ii) a percentage of the net orderly liquidation value of eligible in-transit inventory. Borrowings bear interest at the Company’s election based on (a) LIBOR or (b) the greater of (i) the Prime Rate, (ii) the Federal Funds Rate plus 0.5% and (iii) LIBOR for a 30-day period plus 1.0%, in each case, plus an applicable margin based on the average daily principal balance of revolving loans available under the Credit Agreement. The Company pays a monthly unused line of credit fee of 0.25%, payable on the first day of each month in arrears, which is based on the average daily principal balance of outstanding revolving loans and undrawn amounts of letters of credit outstanding during such month. The Credit Agreement further provides for a limit on the issuance of letters of credit to a maximum of $100.0 million. The Credit Agreement contains customary affirmative and negative covenants for secured credit facilities of this type, including covenants that will limit the ability of the Company and its subsidiaries to, among other things, incur debt, grant liens, make certain acquisitions, dispose of assets, effect a change of control of the Company, make certain restricted payments including certain dividends and stock redemptions, make certain investments or loans, enter into certain transactions with affiliates and certain prohibited uses of proceeds. The Credit Agreement also requires compliance with a minimum fixed-charge coverage ratio if Availability drops below 10% of the Revolver Commitments (as such terms are defined in the Credit Agreement) until the date when no event of default has existed and Availability has been over 10% for 30 consecutive days. The Company paid closing and arrangement fees of $1.1 million on this facility which are included in other assets in the condensed consolidated balance sheets, and are being amortized to interest expense over the five-year life of the facility. As of June 30, 2017 and December 31, 2016, there was $0.1 million outstanding under the Company’s credit facilities, classified as short-term borrowings in the Company’s condensed consolidated balance sheets. The remaining balance in short-term borrowings, as of June 30, 2017, is related to the Company’s international operations.

On April 30, 2010, HF Logistics-SKX, LLC (the “JV”), through its subsidiary HF-T1, entered into a construction loan agreement with Bank of America, N.A., as administrative agent and as a lender, and Raymond James Bank, FSB, as a lender (collectively, the "Construction Loan Agreement"), pursuant to which the JV obtained a loan of up to $55.0 million used for construction of the project on certain property (the "Original Loan"). On November 16, 2012, HF-T1 executed a modification to the Construction Loan Agreement (the "Modification"), which added OneWest Bank, FSB as a lender, and increased the borrowings under the Original Loan to $80.0 million and extended the maturity date of the Original Loan to October 30, 2015. On August 11, 2015, the JV, through HF-T1, entered into an amended and restated loan agreement with Bank of America, N.A., as administrative agent and as a lender, and CIT Bank, N.A. (formerly known as OneWest Bank, FSB) and Raymond James Bank, N.A., as lenders (collectively, the "Amended Loan Agreement"), which amends and restates in its entirety the Construction Loan Agreement and the Modification.

As of the date of the Amended Loan Agreement, the outstanding principal balance of the Original Loan was $77.3 million. In connection with this refinancing of the Original Loan, the JV, the Company and its joint-venture partner HF Logistics (“HF”) agreed that the Company would make an additional capital contribution of $38.7 million to the JV, through HF-T1, to make a prepayment on the Original Loan based on the Company’s 50% equity interest in the JV. The prepayment equaled the Company’s 50% share of the outstanding principal balance of the Original Loan. Under the Amended Loan Agreement, the parties agreed that the lenders would loan $70.0 million to HF-T1 (the "New Loan"). The New Loan was used by the JV, through HF-T1, to (i) refinance all amounts owed on the Original Loan after taking into account the prepayment described above, (ii) pay $0.9 million in accrued interest, loan fees and other closing costs associated with the New Loan and (iii) make a distribution of $31.3 million less the amounts described in clause (ii) to HF. Pursuant to the Amended Loan Agreement, the interest rate on the New Loan is the LIBOR Daily Floating Rate (as defined in the Amended Loan Agreement) plus a margin of 2%. The maturity date of the New Loan is August 12, 2020, which HF-T1 has one option to extend by an additional 24 months, or until August 12, 2022, upon payment of a fee and satisfaction of certain customary conditions. On August 11, 2015, HF-T1 and Bank of America, N.A. entered into an ISDA Master Agreement (together with the schedule related thereto, the "Swap Agreement") to govern derivative and/or hedging transactions that HF-T1 concurrently entered into with Bank of America, N.A. Pursuant to the Swap Agreement, on August 14, 2015, HF-T1 entered into a confirmation of swap transactions (the "Interest Rate Swap") with Bank of America, N.A. The Interest Rate Swap has an effective date of August 12, 2015 and a maturity date of August 12, 2022, subject to early termination at the option of HF-T1, commencing on August 1, 2020. The Interest Rate Swap fixes the effective interest rate of the New Loan at 4.08% per annum. Pursuant to the terms of the JV, HF is responsible for the related interest expense payments on the New Loan, and any amounts related to the Swap Agreement. The full amount of interest expense paid related to the New Loan has been included in the Company’s consolidated statement of equity within non-controlling interests. The Amended Loan Agreement and the Swap Agreement are subject to customary covenants and events of default. Bank of America, N.A. also acts as a lender and syndication agent under the Credit Agreement dated June 30, 2015.

 

10


 

(3)

STOCKHOLDERS’ EQUITY

During the three and six months ended June 30, 2017, no shares of Class B common stock were converted into shares of Class A common stock. During the three and six months ended June 30, 2016, 682,408 and 1,733,270 shares of Class B common stock were converted into shares of Class A common stock, respectively.

The following table reconciles equity attributable to non-controlling interests (in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Non-controlling interests, beginning of period

 

$

81,881

 

 

$

48,178

 

Net earnings

 

 

26,505

 

 

 

21,929

 

Foreign currency translation adjustment

 

 

2,482

 

 

 

(603

)

Capital contributions

 

 

46

 

 

 

2,905

 

Capital distributions

 

 

(6,753

)

 

 

(5,199

)

Non-controlling interests, end of period

 

$

104,161

 

 

$

67,210

 

 

 

(4)

NON-CONTROLLING INTERESTS

The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products primarily throughout Asia or to construct the Company’s domestic distribution facility. These joint ventures are variable interest entities (“VIEs”) under ASC 810-10-15-14. The Company’s determination of the primary beneficiary of a VIE considers all relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. The Company has determined for its VIEs that the Company is the primary beneficiary because it has both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Accordingly, the Company includes the assets and liabilities and results of operations of these entities in its condensed consolidated financial statements, even though the Company may not hold a majority equity interest. There have been no changes during 2017 in the accounting treatment or characterization of any previously identified VIE. The Company continues to reassess these relationships quarterly. The assets of these joint ventures are restricted in that they are not available for general business use outside the context of such joint ventures. The holders of the liabilities of each joint venture have no recourse to the Company. The Company does not have a variable interest in any unconsolidated VIEs.

 

11


 

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

 

HF Logistics-SKX, LLC

 

June 30,

2017

 

 

December 31, 2016

 

Current assets

 

$

2,073

 

 

$

2,006

 

Non-current assets

 

 

106,037

 

 

 

108,668

 

Total assets

 

$

108,110

 

 

$

110,674

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

2,606

 

 

$

2,469

 

Non-current liabilities

 

 

67,270

 

 

 

68,168

 

Total liabilities

 

$

69,876

 

 

$

70,637

 

 

 

 

 

 

 

 

 

 

Distribution joint ventures (1)

 

June 30,

2017

 

 

December 31, 2016

 

Current assets

 

$

307,395

 

 

$

289,227

 

Non-current assets

 

 

78,317

 

 

 

49,229

 

Total assets

 

$

385,712

 

 

$

338,456

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

131,946

 

 

$

132,518

 

Non-current liabilities

 

 

4,305

 

 

 

2,214

 

Total liabilities

 

$

136,251

 

 

$

134,732

 

 

(1)

Distribution joint ventures include Skechers Footwear Ltd. (Israel), Skechers China Limited, Skechers Korea Limited, Skechers Southeast Asia Limited, Skechers (Thailand) Limited, Skechers Retail India Private Limited, and Skechers South Asia Private Limited.

The following is a summary of net earnings attributable to, distributions to and contributions from non-controlling interests (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net earnings attributable to non-controlling

   interests

 

$

13,865

 

 

$

9,902

 

 

$

26,505

 

 

$

21,929

 

Distributions to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HF Logistics-SKX, LLC

 

 

1,151

 

 

 

1,210

 

 

 

2,043

 

 

 

2,116

 

Skechers China Limited

 

 

4,710

 

 

 

 

 

 

4,710

 

 

 

3,083

 

Contributions from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

India distribution joint ventures

 

 

 

 

 

 

 

 

 

 

 

2,905

 

Skechers Footwear Ltd. (Israel)

 

 

 

 

 

 

 

 

46

 

 

 

 

(5)

EARNINGS PER SHARE

Basic earnings per share represent net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share, in addition to the weighted average determined for basic earnings per share, includes potential dilutive common shares using the treasury stock method.

The Company has two classes of issued and outstanding common stock: Class A Common Stock and Class B Common Stock. Holders of Class A Common Stock and holders of Class B Common Stock have substantially identical rights, including rights with respect to any declared dividends or distributions of cash or property and the right to receive proceeds on liquidation or dissolution of the Company after payment of the Company’s indebtedness. The two classes have different voting rights, with holders of Class A Common Stock entitled to one vote per share while holders of Class B Common Stock are entitled to ten votes per share on all matters submitted to a vote of stockholders. The Company uses the two-class method for calculating net earnings per share. Basic and diluted net earnings per share of Class A Common Stock and Class B Common Stock are identical. The shares of Class B Common Stock are convertible at any time at the option of the holder into shares of Class A Common Stock on a share-for-share basis. In addition, shares of Class B Common Stock will be automatically converted into a like number of shares of Class A Common Stock upon transfer to any person or entity who is not a permitted transferee.

 

12


 

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Basic earnings per share

 

2017

 

 

2016

 

 

2017

 

 

2016

 

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

 

$

59,535

 

 

$

74,107

 

 

$

153,530

 

 

$

171,719

 

Weighted average common shares outstanding

 

 

155,579

 

 

 

154,049

 

 

 

155,340

 

 

 

153,901

 

Basic earnings per share attributable to

   Skechers U.S.A., Inc.

 

$

0.38

 

 

$

0.48

 

 

$

0.99

 

 

$

1.12

 

 

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Diluted earnings per share

 

2017

 

 

2016

 

 

2017

 

 

2016

 

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

 

$

59,535

 

 

$

74,107

 

 

$

153,530

 

 

$

171,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

155,579

 

 

 

154,049

 

 

 

155,340

 

 

 

153,901

 

Dilutive effect of nonvested shares

 

 

595

 

 

 

974

 

 

 

676

 

 

 

1,011

 

Weighted average common shares outstanding

 

 

156,174

 

 

 

155,023

 

 

 

156,016

 

 

 

154,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share attributable to

   Skechers U.S.A., Inc.

 

$

0.38

 

 

$

0.48

 

 

$

0.98

 

 

$

1.11

 

 

(6)

STOCK COMPENSATION

 

(a)

Incentive Award Plan

On April 16, 2007, the Company’s Board of Directors adopted the 2007 Incentive Award Plan (the “2007 Plan”), which became effective upon approval by the Company’s stockholders on May 24, 2007 and expired pursuant to its terms on May 24, 2017.  

On April 17, 2017, the Company’s Board of Directors adopted the 2017 Incentive Award Plan (the “2017 Plan”), which became effective upon approval by the Company’s stockholders on May 23, 2017.  The 2017 Plan replaced and superseded in its entirety the 2007 Plan.  A total of 10,000,000 shares of Class A Common Stock are reserved for issuance under the 2017 Plan, which provides for grants of ISOs, non-qualified stock options, restricted stock and various other types of equity awards as described in the plan to the employees, consultants and directors of the Company and its subsidiaries. The 2017 Plan is administered by the Company’s Board of Directors with respect to awards to non-employee directors and by the Company’s Compensation Committee with respect to other eligible participants.

For stock-based awards, the Company recognized compensation expense based on the grant date fair value. Share-based compensation expense was $7.6 million and $6.2 million for the three months ended June 30, 2017 and 2016, respectively. Share-based compensation expense was $14.2 million and $10.9 million for the six months ended June 30, 2017 and 2016, respectively.

A summary of the status and changes of the Company’s nonvested shares related to the 2007 Plan and the 2017 Plan, as of and for the six months ended June 30, 2017 is presented below:

 

 

 

Shares

 

 

Weighted Average

Grant-Date Fair Value

 

Nonvested at December 31, 2016

 

 

3,043,164

 

 

$

24.57

 

Granted

 

 

391,600

 

 

 

22.90

 

Vested

 

 

(729,875

)

 

 

21.95

 

Cancelled

 

 

(78,000

)

 

 

32.62

 

Nonvested at June 30, 2017

 

 

2,626,889

 

 

 

24.81

 

 

As of June 30, 2017, there was $50.1 million of unrecognized compensation cost related to nonvested common shares. The cost is expected to be amortized over a weighted average period of 2.2 years.

 

13


 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. As of January 1, 2017, the calculation of diluted weighted average shares outstanding was changed prospectively to no longer include excess tax benefits as assumed proceeds. This change did not have a material impact on the Company’s calculation of diluted earnings per share. Additionally, this ASU requires the recognition of excess tax benefits and deficiencies as income tax benefits or expenses in the income statement rather than to additional paid-in capital, which has been applied on a prospective basis to settlements of share-based payment awards occurring on or after January 1, 2017. The Company adopted ASU 2016-09 effective January 1, 2017. The Company recorded a $0.3 million expense and a $0.9 million tax benefit in the condensed consolidated statement of earnings for the three and six months ended June 30, 2017, respectively. ASU 2016-09 also requires that excess tax benefits be presented as operating activities on the statement of cash flows, which the Company has elected to apply on a prospective basis.

 

(b)

Stock Purchase Plan

On April 17, 2017, the Company’s Board of Directors adopted the 2018 Employee Stock Purchase Plan (the “2018 ESPP”), which the Company’s stockholders approved on May 23, 2017. The 2018 ESPP will replace the Company’s current employee stock purchase plan, the Skechers U.S.A., Inc. 2008 Employee Stock Purchase Plan (the “2008 ESPP”), which will expire pursuant to its terms on January 1, 2018. The 2018 Employee Stock Purchase Plan provides eligible employees of the Company and its subsidiaries with the opportunity to purchase shares of the Company’s Class A Common Stock at a purchase price equal to 85% of the Class A Common Stock’s fair market value on the first trading day or last trading day of each purchase period, whichever is lower. The 2018 ESPP generally provides for two six-month purchase periods every twelve months: June 1 through November 30 and December 1 through May 31, except that the initial purchase period under the 2018 ESPP will have a duration of five months, commencing on January 1, 2018 and ending on May 31, 2018. Eligible employees participating in the 2018 ESPP for a purchase period will be able to invest up to 15% of their compensation through payroll deductions during each purchase period. A total of 5,000,000 shares of Class A Common Stock will be available for sale under the 2018 ESPP.

(7)

INCOME TAXES

Income tax expense and the effective tax rate for the three and six months ended June 30, 2017 and 2016 were as follows (in thousands, except the effective tax rate):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Income tax expense

 

$

14,109

 

 

$

12,200

 

 

$

31,516

 

 

$

42,768

 

Effective tax rate

 

 

16.1

%

 

 

12.7

%

 

 

14.9

%

 

 

18.1

%

 

The tax provisions for the three and six months ended June 30, 2017 and 2016 were computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year. The Company estimates its ongoing effective annual tax rate for the remainder of 2017 to be between 14% and 19%, which is subject to management’s quarterly review and revision, as necessary.

The Company’s provision for income tax expense and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign earnings (loss) before income taxes. In the foreign jurisdictions in which the Company has operations, the applicable statutory rates range from 0% to 34%, which is generally significantly lower than the U.S. federal and state combined statutory rate of approximately 39%. For the three months ended June 30, 2017 and 2016, the increase in rate was due to an increase in the amount of projected domestic earnings relative to the projected foreign earnings. For the six months ended June 30, 2017 and 2016, the decrease in the effective tax rate was primarily due to an increase in the amount of projected foreign earnings relative to projected domestic earnings as compared to the same period in the previous year. In addition, the Company recorded a $0.3 million expense and a $0.9 million tax benefit due to implementing ASU 2016-09 during the three and six months ended June 30, 2017, respectively.

 

14


 

As of June 30, 2017, the Company had approximately $751.6 million in cash and cash equivalents, of which $453.9 million, or 60.4%, was held outside the U.S. Of the $453.9 million held by the Company’s foreign subsidiaries, approximately $40.9 million is available for repatriation to the U.S. without incurring further U.S. income taxes and applicable foreign income and withholding taxes in excess of the amounts accrued in the Company’s condensed consolidated financial statements. Under current applicable tax laws, if the Company chooses to repatriate some or all of the funds designated as indefinitely reinvested outside the U.S., the amount repatriated would be subject to U.S. income taxes and applicable foreign income and withholding taxes. The Company does not expect to repatriate any of the funds presently designated as indefinitely reinvested outside the U.S. As such, the Company did not provide for deferred income taxes on its accumulated undistributed earnings of the Company’s foreign subsidiaries.

(8)

BUSINESS AND CREDIT CONCENTRATIONS

The Company generates sales in the United States; however, several of its products are sold into various foreign countries, which subjects the Company to the risks of doing business abroad. In addition, the Company operates in the footwear industry, and its business depends on the general economic environment and levels of consumer spending. Changes in the marketplace may significantly affect management’s estimates and the Company’s performance. Management performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable, which generally do not require collateral from customers, were $271.5 million and $169.4 million before allowances for bad debts, sales returns and chargebacks at June 30, 2017 and December 31, 2016, respectively. Foreign accounts receivable, which in some cases are collateralized by letters of credit, were $272.3 million and $199.1 million before allowance for bad debts, sales returns and chargebacks at June 30, 2017 and December 31, 2016, respectively. The Company’s credit losses attributable to write-offs for the three months ended June 30, 2017 and 2016 were $2.1 million and $1.5 million, respectively. The Company’s credit losses attributable to write-offs for the six months ended June 30, 2017 and 2016 were $4.6 million and $4.0 million, respectively.

Assets located outside the U.S. consist primarily of cash, accounts receivable, inventory, property, plant and equipment, and other assets. Net assets held outside the United States were $1.235 billion and $1.060 billion at June 30, 2017 and December 31, 2016, respectively.

The Company’s net sales to its five largest customers accounted for approximately 14.0% and 11.8% of total net sales for the three months ended June 30, 2017 and 2016, respectively. The Company’s net sales to its five largest customers accounted for approximately 13.4% and 12.7% of total net sales for the six months ended June 30, 2017 and 2016, respectively. No customer accounted for more than 10.0% of the Company’s net sales during the three and six months ended June 30, 2017 and 2016. No customer accounted for more than 10.0% of trade receivables at June 30, 2017 or December 31, 2016.

The Company’s top five manufacturers produced the following, as a percentage of total production, for the three and six months ended June 30, 2017 and 2016:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Manufacturer #1

 

 

20.0

%

 

 

25.1

%

 

 

21.1

%

 

 

25.6

%

Manufacturer #2

 

 

11.0

%

 

 

10.4

%

 

 

11.0

%

 

 

10.7

%

Manufacturer #3

 

 

8.1

%

 

 

8.9

%

 

 

8.6

%

 

 

9.6

%

Manufacturer #4

 

 

6.3

%

 

 

6.6

%

 

 

6.0

%

 

 

5.4

%

Manufacturer #5

 

 

6.2

%

 

 

5.0

%

 

 

5.0

%

 

 

4.2

%

 

 

 

51.6

%

 

 

56.0

%

 

 

51.7

%

 

 

55.5

%

 

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

 

15


 

(9)

SEGMENT AND GEOGRAPHIC REPORTING

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic wholesale

 

$

341,105

 

 

$

320,498

 

 

$

699,537

 

 

$

680,768

 

International wholesale

 

 

358,059

 

 

 

303,432

 

 

 

848,511

 

 

 

723,467

 

Retail