Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading symbol:
Name of each exchange on which registered:
Common Stock, par value $0.001 per share
CROX
The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 20, 2023, Crocs, Inc. had 62,025,478 shares of its common stock, par value $0.001 per share, outstanding.
This Quarterly Report on Form 10-Q contains “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. From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.
Statements that refer to industry trends, projections of our future financial performance, anticipated trends in our business and other characterizations of future events or circumstances are forward-looking statements. These statements, which express management’s current views concerning future events or results, use words like “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “future,” “intend,” “plan,” “project,” “strive,” and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will,” “would,” and similar expressions or variations. Examples of forward-looking statements include, but are not limited to, statements we make regarding:
•our expectations regarding future trends, expectations, and performance of our business;
•our expectations regarding the impact on our business of economic trends;
•our belief that we have sufficient liquidity to fund our business operations during the next twelve months;
•the amount and timing of our capital expenditures; and
•our expectations about the impact of our strategic plans.
Forward-looking statements are subject to risks, uncertainties, and other factors, which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, those described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2022 and our subsequent filings with the Securities and Exchange Commission, including those described in the section entitled “Risk Factors” under Item 1A in this report. Caution should be taken not to place undue reliance on any such forward-looking statements. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements, except as required by applicable law.
(in thousands, except share and par value amounts)
March 31, 2023
December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents
$
125,687
$
191,629
Restricted cash - current
2
2
Accounts receivable, net of allowances of $25,960 and $24,493, respectively
418,959
295,594
Inventories
476,112
471,551
Income taxes receivable
3,083
14,752
Other receivables
31,481
18,842
Prepaid expenses and other assets
59,338
33,605
Total current assets
1,114,662
1,025,975
Property and equipment, net of accumulated depreciation and amortization of $104,088 and $97,136, respectively
190,492
181,529
Intangible assets, net of accumulated amortization of $130,768 and $125,014, respectively
1,798,918
1,800,167
Goodwill
711,560
714,814
Deferred tax assets, net
533,480
528,278
Restricted cash
3,240
3,254
Right-of-use assets
233,981
239,905
Other assets
9,302
7,875
Total assets
$
4,595,635
$
4,501,797
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
232,383
$
230,821
Accrued expenses and other liabilities
201,821
239,424
Income taxes payable
109,632
89,211
Current borrowings
32,970
24,362
Current operating lease liabilities
57,560
57,456
Total current liabilities
634,366
641,274
Deferred tax liabilities, net
301,968
302,030
Long-term income taxes payable
228,165
224,837
Long-term borrowings
2,250,288
2,298,027
Long-term operating lease liabilities
209,817
215,119
Other liabilities
2,531
2,579
Total liabilities
3,627,135
3,683,866
Commitments and contingencies
Stockholders’ equity:
Common stock, par value $0.001 per share, 250.0 million shares authorized, 109.8 million and 109.5 million issued, 62.0 million and 61.7 million outstanding, respectively
110
110
Treasury stock, at cost, 47.8 million and 47.7 million shares, respectively
(1,705,896)
(1,695,501)
Additional paid-in capital
805,078
797,614
Retained earnings
1,968,742
1,819,199
Accumulated other comprehensive loss
(99,534)
(103,491)
Total stockholders’ equity
968,500
817,931
Total liabilities and stockholders’ equity
$
4,595,635
$
4,501,797
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise noted in this report, any description of the “Company,” “we,” “us,” or “our” includes Crocs, Inc. and our consolidated subsidiaries within our reportable operating segments and corporate operations. We are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for women, men, and children. We strive to be the global leader in the sale of casual footwear characterized by functionality, comfort, color, and lightweight design.
Our reportable operating segments include: (i) North America for the Crocs Brand, operating throughout the United States and Canada; (ii) Asia Pacific for the Crocs Brand, operating throughout Asia, Australia, and New Zealand; (iii) Europe, Middle East, Africa, and Latin America (“EMEALA”) for the Crocs Brand; and (iv) the HEYDUDE Brand. See Note 13 — Operating Segments and Geographic Information for additional information.
The accompanying unaudited condensed consolidated interim financial statements include our accounts and those of our wholly-owned subsidiaries and reflect all adjustments which are necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such unaudited condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
These unaudited condensed consolidated interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 (“Annual Report”) and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes to Consolidated Financial Statements included in our Annual Report. Our accounting policies did not change during the three months ended March 31, 2023, other than with respect to the new accounting pronouncements adopted as described in Note 2 — Recent Accounting Pronouncements.
Reclassifications
We have reclassified certain amounts on the condensed consolidated statements of cash flows and Note 3 — Accrued Expenses and Other Liabilities to conform to current period presentation.
Use of Estimates
U.S. GAAP requires us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions used to determine certain amounts that affect the financial statements are reasonable, based on information available at the time they are made. Management believes that the estimates, judgments, and assumptions made when accounting for items and matters such as, but not limited to, the allowance for doubtful accounts, customer rebates, sales returns, impairment assessments and charges, recoverability of long-lived assets, deferred tax assets, valuation allowances, uncertain tax positions, income tax expense, share-based compensation expense, the assessment of lower of cost or net realizable value on inventory, useful lives assigned to long-lived assets, depreciation and amortization are reasonable based on information available at the time they are made. To the extent there are differences between these estimates and actual results, our condensed consolidated financial statements may be materially affected.
Condensed Consolidated Statements of Cash Flows - Supplemental Disclosures
Three Months Ended March 31,
2023
2022
(in thousands)
Cash paid for interest
$
47,729
$
15,926
Cash paid for income taxes
8,011
8,769
Cash paid for operating leases
17,436
14,500
Non-Cash Investing and Financing Activities:
Right-of-use assets obtained in exchange for operating lease liabilities, net of terminations
$
9,108
$
13,888
Accrued purchases of property, equipment, and software
11,720
9,369
Share issuance at Acquisition (1)
—
270,396
Adjustment Holdback Amount
—
8,500
(1) On February 17, 2022 (the “Acquisition Date”), we acquired (the “Acquisition”) 100% of the equity of a privately-owned casual footwear brand business (“HEYDUDE”), pursuant to a securities purchase agreement (the “SPA”) entered into on December 22, 2021.
2. RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncement Adopted
Income Taxes
The CHIPS and Science Act of 2022 (“CHIPS”) and the Inflation Reduction Act (“IRA”) of 2022 were signed into law on August 9, 2022 and August 16, 2022, respectively. The legislation introduces new options for monetizing certain credits, a corporate alternative minimum tax, and a stock repurchase excise tax. The corporate alternative minimum tax and stock repurchase excise tax were effective as of January 1, 2023 and are the main provisions that may be applicable to us. The Company is currently evaluating the impact of both the CHIPS and IRA, but at present does not expect that any of the provisions included in these acts would result in a material impact to our deferred tax assets, liabilities, or income taxes payable.
New Accounting Pronouncement Not Yet Adopted
Pillar Two Global Minimum Tax
On October 8, 2021, the Organization for Economic Co-operation and Development (“OECD”) released a statement on the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, which agreed to a two-pillar solution to address tax challenges of the digital economy. On December 20, 2021, the OECD released Pillar Two model rules defining a 15% global minimum tax rate for large multinational corporations. The OECD continues to release additional guidance and countries are implementing legislation with widespread adoption of the Pillar Two Framework expected by 2024. We are continuing to evaluate the Pillar Two Framework and its potential impact on future periods.
Other new pronouncements issued but not effective until after March 31, 2023 are not expected to have a material impact on our condensed consolidated financial statements.
Amounts reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets were:
March 31, 2023
December 31, 2022
(in thousands)
Accrued compensation and benefits
$
41,755
$
55,474
Professional services
39,229
45,351
Fulfillment, freight, and duties
34,408
41,646
Return liabilities
21,792
27,651
Sales/use and value added taxes payable
25,119
27,249
Royalties payable and deferred revenue
8,746
10,528
Accrued rent and occupancy
6,362
8,972
Accrued legal fees (1)
5,637
2,602
Other (1)
18,773
19,951
Total accrued expenses and other liabilities
$
201,821
$
239,424
(1) Amounts as of December 31, 2022 have been reclassified to conform to current period presentation.
4. LEASES
Right-of-Use Assets and Operating Lease Liabilities
Amounts reported in the condensed consolidated balance sheets were:
March 31, 2023
December 31, 2022
(in thousands)
Assets:
Right-of-use assets
$
233,981
$
239,905
Liabilities:
Current operating lease liabilities
$
57,560
$
57,456
Long-term operating lease liabilities
209,817
215,119
Total operating lease liabilities
$
267,377
$
272,575
Lease Costs and Other Information
Lease-related costs reported within ‘Cost of sales’ and ‘Selling, general and administrative expenses’ in our condensed consolidated statements of income were:
Three Months Ended March 31,
2023
2022
(in thousands)
Operating lease cost
$
18,199
$
14,231
Short-term lease cost
3,042
2,632
Variable lease cost
5,548
4,552
Total lease costs
$
26,789
$
21,415
The weighted average remaining lease term and discount rate related to our lease liabilities as of March 31, 2023 were 6.7 years and 4.0%, respectively. As of March 31, 2022, the weighted average remaining lease term and discount rate related to our lease liabilities were 7.2 years and 3.6%, respectively.
The maturities of our operating lease liabilities were:
As of
March 31, 2023
(in thousands)
2023 (remainder of year)
$
45,707
2024
54,986
2025
41,082
2026
34,593
2027
29,672
Thereafter
100,166
Total future minimum lease payments
306,206
Less: imputed interest
(38,829)
Total operating lease liabilities
$
267,377
Leases That Have Not Yet Commenced
As of March 31, 2023, we had significant obligations for a lease not yet commenced related to a new HEYDUDE distribution center in Las Vegas, Nevada. The total contractual commitment related to the lease, with payments expected to begin in the third quarter of 2023 and continue through December 2033, is approximately $111 million.
5. FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
All of our derivative instruments are classified as Level 2 of the fair value hierarchy and are reported in the condensed consolidated balance sheets within either ‘Prepaid expenses and other assets’ or ‘Accrued expenses and other liabilities’ at March 31, 2023 and December 31, 2022. The fair values of our derivative instruments were an insignificant asset and an insignificant liability at both March 31, 2023 and December 31, 2022. See Note 6 — Derivative Financial Instruments for more information.
The carrying amounts of our cash, cash equivalents, and restricted cash, accounts receivable, accounts payable, current accrued expenses and other liabilities, and our Asia revolving facilities approximate their fair value as recorded due to the short-term maturity of these instruments.
Our borrowing instruments are recorded at their carrying values in the condensed consolidated balance sheets, which may differ from their respective fair values. The Term Loan B Facility (as defined below) and the Notes (as defined below) are classified as Level 1 of the fair value hierarchy and are reported in our condensed consolidated balance sheet at face value, less unamortized issuance costs. The fair value of our Revolving Facility (as defined below) approximates its carrying value at March 31, 2023 and December 31, 2022 based on interest rates currently available to us for similar borrowings. The carrying value and fair value of our borrowing instruments as of March 31, 2023 and December 31, 2022 were:
Our non-financial assets, which primarily consist of property and equipment, right-of-use assets, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. The fair values of these assets are determined, as required, based on Level 3 measurements, including estimates of the amount and timing of future cash flows based upon historical experience, expected market conditions, and management’s plans.
6. DERIVATIVE FINANCIAL INSTRUMENTS
We transact business in various foreign entities and are therefore exposed to foreign currency exchange rate risk that impacts the reported U.S. Dollar (“USD”) amounts of revenues, expenses, and certain foreign currency monetary assets and liabilities. In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in earnings caused by fluctuations in foreign exchange rates, we may enter into forward contracts to buy and sell foreign currency. By policy, we do not enter into these contracts for trading purposes or speculation.
Counterparty default risk is considered low because the forward contracts we enter into are over-the-counter instruments transacted with highly-rated financial institutions. We were not required to and did not post collateral as of March 31, 2023 or December 31, 2022.
Our derivative instruments are recorded at fair value as a derivative asset or liability in the condensed consolidated balance sheets within either ‘Prepaid expenses and other assets’ or ‘Accrued expenses and other liabilities’ at March 31, 2023 or December 31, 2022. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain components of its risk, even though hedge accounting does not apply, or we elect not to apply hedge accounting.
We report derivative instruments with the same counterparty on a net basis when a master netting arrangement is in place. For the condensed consolidated statements of cash flows, we classify cash flows from derivative instruments at settlement in the same category as the cash flows from the related hedged items within ‘Cash provided by (used in) operating activities.’
As of March 31, 2023, we have derivatives not designated as hedging instruments (“non-hedged derivatives”), which consist of foreign currency forward contracts primarily used to hedge monetary assets and liabilities denominated in non-functional currencies. For our non-hedged derivatives, changes in fair value are recognized within ‘Foreign currency gains (losses), net’ in the condensed consolidated statements of income.
We also have cash flow hedges (“hedged derivatives”) as of March 31, 2023. We are exposed to fluctuations in various foreign currencies against our functional currency, the U.S. Dollar. Specifically, we have subsidiaries that transact in currencies other than their functional currency. We use cash flow hedges to minimize the variability in cash flows caused by fluctuations in foreign currency exchange rates related to our external sales and external purchases of inventory. Currency forward agreements involve fixing the exchange rates for delivery of a specified amount of foreign currency on a specified date. The currency forward agreements are typically cash settled in USD for their fair value at or close to their settlement date. We may also use currency option contracts under which we will pay a premium for the right to sell a specified amount of a foreign currency prior to the maturity date of the option.
For derivatives designated and that qualify as cash flow hedges of foreign exchange risk, the gain or loss on the derivative is recorded in ‘Accumulated other comprehensive loss’ in the condensed consolidated balance sheets. In the period during which the hedged transaction affects earnings, the related gain or loss is subsequently reclassified to ‘Revenues’ or ‘Cost of sales’ in the condensed consolidated statement of income, which is consistent with the nature of the hedged transaction. During the three months ended March 31, 2023, there was a loss of $0.5 million recognized due to reclassification from ‘Accumulated other comprehensive loss’ to ‘Revenues’ or ‘Cost of sales’ related to our hedged derivatives. During the next twelve months, we estimate that a loss of approximately $0.5 million will be reclassified to our condensed consolidated statement of income.
The fair values of derivative assets and liabilities, net, all of which are classified as Level 2, reported within either ‘Accrued expenses and other liabilities’ or ‘Prepaid expenses and other assets’ in the condensed consolidated balance sheets, were:
March 31, 2023
December 31, 2022
Derivative Assets
Derivative Liabilities
Derivative Assets
Derivative Liabilities
(in thousands)
Non-hedged derivatives:
Forward foreign currency exchange contracts
$
783
$
(429)
$
345
$
(360)
Hedged derivatives:
Cash flow foreign currency contracts
60
(519)
348
(1,116)
Total derivatives
843
(948)
693
(1,476)
Netting of counterparty contracts
(495)
495
(345)
345
Total derivatives, net of counterparty contracts
$
348
$
(453)
$
348
$
(1,131)
The notional amounts of outstanding foreign currency forward exchange contracts presented below report the total U.S. Dollar equivalent position and the net contract fair values for each foreign currency position.
Amounts reported in ‘Foreign currency gains (losses), net’ in the condensed consolidated statements of income include both realized and unrealized gains (losses) from foreign currency transactions and derivative contracts and were:
Three Months Ended March 31,
2023
2022
(in thousands)
Non-hedged derivatives:
Foreign currency transaction losses
$
(771)
$
(917)
Foreign currency forward exchange contracts gains
368
1,397
Foreign currency gains (losses), net
$
(403)
$
480
7. BORROWINGS
Our long-term borrowings were as follows:
Maturity
Stated Interest Rate
Effective Interest Rate
March 31, 2023
December 31, 2022
(in thousands)
Notes issuance of $350.0 million
2029
4.250
%
4.64
%
$
350,000
$
350,000
Notes issuance of $350.0 million
2031
4.125
%
4.35
%
350,000
350,000
Term Loan B Facility
2029
1,425,000
1,675,000
Revolving Facility
200,000
—
Total face value of long-term borrowings
2,325,000
2,375,000
Less:
Unamortized issuance costs
54,712
56,973
Current portion of long-term borrowings (1)
20,000
20,000
Total long-term borrowings
$
2,250,288
$
2,298,027
(1) Represents the current portion of the borrowings under the Term Loan B facility.
At March 31, 2023 and December 31, 2022, $3.2 million and $10.8 million, respectively, of accrued interest related to our borrowings was reported in ‘Accounts payable’ in the condensed consolidated balance sheets.
Senior Revolving Credit Facility
In July 2019, the Company and certain of its subsidiaries (the “Borrowers”) entered into a Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association, as a lender and administrative agent for the lenders. Since that time, we have amended the Credit Agreement, which, as amended to date, provides for a revolving credit facility of $750.0 million, which can be increased by an additional $250.0 million subject to certain conditions (the “Revolving Facility”). Borrowings under the Credit Agreement bear interest at a variable interest rate based on (A) a Base Rate (defined as the highest of (i) the Overnight Bank Funding Rate (as defined in the Credit Agreement), plus 0.25%, (ii) the Prime Rate (as defined in the Credit Agreement), and (iii) the Daily Simple SOFR (as defined in the Credit Agreement), plus 1.00%), plus an applicable margin ranging from 0.25% to 0.875% based on our leverage ratio or 1.35% to 1.975% for the Daily Simple SOFR based on the leverage ratio, or (B) the Term SOFR Rate (as defined in the Credit Agreement), plus an applicable margin ranging from 1.35% to 1.975% based on our leverage ratio for one-month interest periods and 1.40% to 2.025% based on our leverage ratio for three month interest periods. Borrowings under the Credit Agreement are secured by all of the assets of the Borrowers and guaranteed by certain other subsidiaries of the Borrowers.
The Credit Agreement requires us to maintain a minimum interest coverage ratio of 3.00 to 1.00, and a maximum leverage ratio of (i) 4.00 to 1.00 from the quarter ended March 31, 2022 through, and including, the quarter ending December 31, 2023, (ii) 3.75 to 1.00 for the quarter ending March 31, 2024, (iii) 3.50 to 1.00 for the quarter ending June 30, 2024, and (iv) 3.25 to 1.00 for the quarter ending September 30, 2024 and thereafter (subject to adjustment in certain circumstances). The Credit Agreement permits, among other things, (i) stock repurchases subject to certain restrictions, including after giving effect to such stock repurchases, the maximum leverage ratio does not exceed certain levels; and (ii) certain acquisitions so long as there is borrowing availability under the Credit Agreement of at least $40.0 million. As of March 31, 2023, we were in compliance with all financial covenants under the Credit Agreement.
As of March 31, 2023, the total commitments available from the lenders under the Revolving Facility were $750.0 million. At March 31, 2023, we had $200.0 million in outstanding borrowings and $1.3 million in outstanding letters of credit under the Revolving Facility, which reduces amounts available for borrowing under the Revolving Facility. As of March 31, 2023 and December 31, 2022, we had $548.7 million and $748.7 million, respectively, of available borrowing capacity under the Revolving Facility, which matures November 2027.
Term Loan B Facility
On February 17, 2022, the Company entered into a credit agreement (the “Term Loan B Credit Agreement”) with Citibank, N.A., as administrative agent and lender, to among other things, finance a portion of the cash consideration for the Acquisition.
The Term Loan B Credit Agreement provides for an aggregate term loan B facility in the principal amount of $2.0 billion (the “Term Loan B Facility”), which is secured by substantially all of the Company’s and each subsidiary guarantor’s assets on a pari passu basis with their obligations arising from the Credit Agreement and is scheduled to mature on February 17, 2029, subject to certain exceptions set forth in the Term Loan B Credit Agreement. Additionally, subject to certain conditions, including, without limitation, satisfying certain leverage ratios, the Company may, at any time, on one or more occasions, add one or more new classes of term facilities and/or increase the principal amount of the loans of any existing class by requesting one or more incremental term facilities.
Each term loan borrowing which is an alternate base rate borrowing bears interest at a rate per annum equal to the Alternate Base Rate (as defined in the Term Loan B Credit Agreement), plus 2.50%. Each term loan borrowing which is a term benchmark borrowing bears interest at a rate per annum equal to the Adjusted Term SOFR Rate (as defined in the Term Loan B Credit Agreement) plus 3.50%.
Outstanding principal under the Term Loan B Facility is payable on the last business day of each March, June, September and December, in a quarterly aggregate principal amount of $5.0 million. Quarterly aggregate principal payments began on June 30, 2022, with the remaining principal amount due on February 17, 2029, the maturity date. As of March 31, 2023, we had $1,425.0 million in outstanding principal and the Term Loan B Facility was fully drawn with no remaining borrowing capacity.
The Term Loan B Credit Agreement also contains customary affirmative and negative covenants, incurrence financial covenants, representations and warranties, events of default and other provisions. As of March 31, 2023, we were in compliance with all financial covenants under the Term Loan B Credit Agreement.
Asia Revolving Credit Facilities
During the three months ended March 31, 2023, we had two revolving credit facilities in Asia, the revolving credit facility with China Merchants Bank Company Limited, Shanghai Branch (the “CMBC Facility”), which matured in January 2023 and provided up to 10.0 million RMB, or $1.5 million using current exchange rates as of January 2023, and the revolving credit facility with Citibank (China) Company Limited, Shanghai Branch (the “Citibank Facility”), which, as amended, provides up to an equivalent of $15.0 million.
As of March 31, 2023, we had borrowings outstanding of $13.0 million on the Citibank Facility, which are due between May 2023 and September 2023. As of December 31, 2022, we had no outstanding borrowings on the CMBC Facility, and we had borrowings outstanding of $4.3 million on the Citibank Facility.
Senior Notes Issuances
In March 2021, the Company completed the issuance and sale of $350.0 million aggregate principal amount of 4.250% Senior Notes due March 15, 2029 (the “2029 Notes”), pursuant to the indenture related thereto (as amended and/or supplemented to date, the “2029 Notes Indenture”). Additionally, in August 2021, the Company completed the issuance and sale of $350.0 million aggregate principal amount of 4.125% Senior Notes due August 15, 2031 (the “2031 Notes”), pursuant to the indenture related thereto (as amended and/or supplemented to date, “the 2031 Notes Indenture” and, together with the 2029 Notes Indenture, the “Indentures” and, each, an “Indenture”). Interest on each of the 2029 Notes and the 2031 Notes (collectively, the “Notes”) is payable semi-annually.
The Company will have the option to redeem all or any portion of the 2029 Notes, at once or over time, at any time on or after March 15, 2024, at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2029 Notes at any time before March 15, 2024 at a redemption price of 100% of
the principal amount to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before March 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2029 Notes at a redemption price of 104.250% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.
The Company will have the option to redeem all or any portion of the 2031 Notes, at once or over time, at any time on or after August 15, 2026, at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2031 Notes at any time before August 15, 2026 at a redemption price of 100% of the principal amount to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before August 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2031 Notes at a redemption price of 104.125% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.
The Notes rank pari passu in right of payment with all of the Company’s existing and future senior debt, including the Credit Agreement, and are senior in right of payment to any of the Company’s future debt that is, by its term, expressly subordinated in right of payment to the Notes. The Notes are unconditionally guaranteed by each of the Company’s restricted subsidiaries that is a borrower or guarantor under the Credit Agreement and by each of the Company’s wholly-owned restricted subsidiaries that guarantees any debt of the Company or any guarantor under any syndicated credit facility or capital markets debt in an aggregate principal amount in excess of $25.0 million.
The Indentures contain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to incur additional debt or issue certain preferred stock; pay dividends or repurchase or redeem capital stock or make other restricted payments; declare or pay dividends or other payments; incur liens; enter into certain types of transactions with the Company’s affiliates; and consolidate or merge with or into other companies. As of March 31, 2023, we were in compliance with all financial covenants under the Notes.
8. COMMON STOCK REPURCHASE PROGRAM
During the three months ended March 31, 2023 and 2022, we did not repurchase any shares of our common stock.
As of March 31, 2023, we had remaining authorization to repurchase approximately $1,050.0 million of our common stock, subject to restrictions under our Indentures, Credit Agreement, and Term Loan B Credit Agreement.
(1) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the three months ended March 31, 2022 represent results during the partial period beginning February 17, 2022 through March 31, 2022.
10. INCOME TAXES
Income tax expense and effective tax rates were:
Three Months Ended March 31,
2023
2022
(in thousands, except effective tax rate)
Income before income taxes
$
191,766
$
99,060
Income tax expense
42,223
26,300
Effective tax rate
22.0
%
26.5
%
The decrease in the effective tax rate for the three months ended March 31, 2023, compared to the same period in 2022, was primarily driven by a shift in the mix of the Company's domestic and foreign earnings. Our effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate due to differences in income tax rates between U.S. and foreign jurisdictions. We had unrecognized tax benefits of $222.0 million and $219.4 million at March 31, 2023 and December 31, 2022, respectively, and we do not expect any significant changes in tax benefits in the next twelve months.
Our tax rate is volatile and may increase or decrease with changes in, among other things, the amount of income or loss by jurisdiction, our ability to utilize net operating losses and foreign tax credits, changes in tax laws, and the movement of liabilities established pursuant to accounting guidance for uncertain tax positions as statutes of limitations expire, positions are effectively settled, or when additional information becomes available.
Basic and diluted earnings per common share (“EPS”) for the three months ended March 31, 2023 and 2022 were:
Three Months Ended March 31,
2023
2022
(in thousands, except per share data)
Numerator:
Net income
$
149,543
$
72,760
Denominator:
Weighted average common shares outstanding - basic
61,836
59,823
Plus: Dilutive effect of stock options and unvested restricted stock units
793
1,073
Weighted average common shares outstanding - diluted
62,629
60,896
Net income per common share:
Basic
$
2.42
$
1.22
Diluted
$
2.39
$
1.19
In the three months ended March 31, 2023 and 2022, an insignificant number of outstanding shares issued under share-based compensation awards were anti-dilutive and, therefore, excluded from the calculation of diluted EPS.
12. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of March 31, 2023, we had purchase commitments to third-party manufacturers, primarily for materials and supplies used in the manufacture of our products, for an aggregate of $366.3 million. We expect to fulfill our commitments under these agreements in the normal course of business, and as such, no liability has been recorded.
Other
We are regularly subject to, and are currently undergoing, audits by various tax authorities in the United States and several foreign jurisdictions, including customs duties, import, and other taxes for prior tax years.
During our normal course of business, we may make certain indemnities, commitments, and guarantees under which we may be required to make payments. We cannot determine a range of estimated future payments and have not recorded any liability for indemnities, commitments, and guarantees in the accompanying condensed consolidated balance sheets.
We are also subject to litigation from time to time in the ordinary course of business, including employment, intellectual property, and product liability claims. Other than as set forth below, we are not party to any other pending legal proceedings that we believe would reasonably have a material adverse impact on our business, financial results, and cash flows.
For all claims and disputes, we have accrued insignificant estimated losses within ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheet as of March 31, 2023. As we are able, we estimate reasonably possible losses or a range of reasonably possible losses. As of March 31, 2023, we estimated that reasonably possible losses associated with these claims and other disputes could potentially exceed amounts accrued by an insignificant amount.
We have four reportable operating segments. For the Crocs Brand, we have three reportable operating segments based on the geographic nature of our operations: North America, Asia Pacific, and EMEALA. Our HEYDUDE Brand is also a reportable operating segment. Each of the reportable operating segments derives its revenues from the sale of footwear and accessories to external customers.
Additionally, Crocs ‘Brand corporate’ costs represent operating expense that includes product creation, design, and marketing expenses centrally managed for the Crocs Brand, as well as certain royalty income. Crocs Brand corporate costs are included within the Crocs Brand for presentation purposes to align with the way management views the Company. ‘Enterprise corporate’ costs include global corporate costs associated with both brands, including legal, information technology, human resources, and finance, as well as costs associated with global digital operations.
Each segment’s performance is evaluated based on segment results without allocating Brand corporate or Enterprise corporate expenses. Segment profits or losses include adjustments to eliminate inter-segment sales. Reconciling items between segment income from operations and income from operations consist of unallocated brand and enterprise corporate and other expenses, as well as inter-segment eliminations.
We do not report asset information by segment because that information is not used to evaluate performance or allocate resources between segments.
The following tables set forth information related to reportable operating segments:
Three Months Ended March 31,
2023
2022
(in thousands)
Revenues:
North America
$
351,308
$
319,450
Asia Pacific
140,002
95,847
EMEALA
157,467
129,921
Brand corporate
1
7
Total Crocs Brand
648,778
545,225
HEYDUDE Brand (1)
235,388
114,923
Total consolidated revenues
$
884,166
$
660,148
Income from operations:
North America
$
127,783
$
129,611
Asia Pacific
56,605
30,106
EMEALA
65,776
34,927
Brand corporate
(32,157)
(30,709)
Total Crocs Brand
218,007
163,935
HEYDUDE Brand (1)
76,620
15,658
Reconciliation of total segment income from operations to income before income taxes:
Enterprise corporate
(59,699)
(60,916)
Income from operations
234,928
118,677
Foreign currency gains (losses), net
(403)
480
Interest income
171
102
Interest expense
(42,637)
(19,252)
Other expense, net
(293)
(947)
Income before income taxes
$
191,766
$
99,060
Depreciation and amortization:
North America
$
4,367
$
2,220
Asia Pacific
630
523
EMEALA
1,230
724
Brand corporate
1,210
186
Total Crocs Brand
7,437
3,653
HEYDUDE Brand (1)
3,506
2,444
Enterprise corporate
2,193
1,798
Total consolidated depreciation and amortization
$
13,136
$
7,895
(1) We acquired HEYDUDE on February 17, 2022 and in connection therewith added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the three months ended March 31, 2022 represent results during the partial period beginning February 17, 2022 through March 31, 2022.
14. ACQUISITION OF HEYDUDE
On February 17, 2022, we acquired 100% of the equity of HEYDUDE, pursuant to the SPA. HEYDUDE is engaged in the business of distributing and selling casual footwear under the brand name “HEYDUDE.” The Acquisition has allowed us to diversify and expand our business by adding a second brand to the Crocs, Inc. portfolio.
The aggregate preliminary purchase price at the closing of the Acquisition was $2.3 billion. We paid aggregate consideration of $2.05 billion in cash (the “Cash Consideration”), subject to adjustment based on, among other things, the cash, indebtedness, transaction expenses, and working capital of the companies comprising HEYDUDE and their respective subsidiaries as of the Acquisition Date, and issued 2,852,280 shares of the Company’s common stock to one of the sellers (the “Equity Consideration Shares”). The Equity Consideration Shares were subject to a lock-up period beginning on the Acquisition Date, which has since expired so all of the Equity Consideration Shares have been released from the lock-up. The purchase price paid to the sellers is final.
The Cash Consideration was financed via the Company’s entry into the $2.0 billion Term Loan B Facility and $50.0 million of borrowings under the Revolving Facility. As a result of the Acquisition, HEYDUDE became wholly owned by Crocs, Inc. Accordingly, the results of HEYDUDE are included in our condensed consolidated financial statements from the Acquisition Date and are reported in the HEYDUDE operating segment. HEYDUDE contributed revenue of $114.9 million and income from operations of $15.7 million from the Acquisition Date through March 31, 2022.
Purchase Price Allocation
The Acquisition was accounted for in accordance with the ASC Topic 805 Business Combinations. As a result, we applied acquisition accounting, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their estimated fair values as of the Acquisition Date. For certain assets and liabilities, those fair values were consistent with historical carrying values. The fair value of inventory was determined using both a market approach and a cost approach. With respect to intangible assets, the estimated fair value was based on the Multi Period Excess Earnings approach for the trademark and the distributor method for the customer relationships. These models used primarily Level 2 and Level 3 inputs, including an estimate of future revenues, future cash flows, and discount rates.
The following table summarizes the final allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the Acquisition Date:
February 17, 2022
(in thousands)
Cash and cash equivalents
$
6,232
Accounts receivable, net
68,698
Inventories
155,773
Prepaid expenses and other assets (1)
7,880
Intangible assets
1,780,000
Goodwill (1)(2)
710,034
Right-of-use assets
2,844
Accounts payable (2)
(30,017)
Accrued expenses and other liabilities
(18,860)
Income taxes payable
(30,572)
Long-term deferred tax liability
(312,656)
Long-term income taxes payable
(13,004)
Operating lease liabilities
(2,843)
Net assets acquired
$
2,323,509
(1) Includes a valuation adjustment that increased prepaid expenses and other assets by $3.5 million and decreased goodwill by $3.5 million during the three months ended March 31, 2023.
(2) Includes a valuation adjustment that increased goodwill by $0.2 million and increased accounts payable by $0.2 million during the three months ended March 31, 2023.
The components of intangible assets acquired in connection with the Acquisition were as follows:
Weighted-Average Useful Life
Amortization Method
Estimated Fair Value
(in thousands)
Customer relationships
15
Straight-line
$
210,000
Trademark
Indefinite
—
1,570,000
Total intangible assets
$
1,780,000
Goodwill
The excess of the purchase price over the fair value of the acquired business's net assets represents goodwill. The goodwill amount of $710.0 million at March 31, 2023 includes an aggregate adjustment of $3.3 million recorded in the three months ended March 31, 2023 as a result of changes to preliminary valuation estimates. The purchase price allocation was finalized during the three months ended March 31, 2023.
Goodwill largely consists of the acquired workforce and economies of scale resulting from the Acquisition. The total goodwill amount acquired was assigned to the HEYDUDE operating segment. None of the goodwill will be deductible for income tax purposes.
Escrow and Holdback Amounts
Additionally, $125.0 million of the Cash Consideration (the “Escrow Amount”) was placed in an escrow account to partially secure the indemnification obligations of the sellers. The Escrow Amount will be released to the sellers after the date that is 18 months after the Acquisition Date, less any amounts that have been released to compensate the Company and any amounts for claims that were noticed prior to the date that is 18 months after the Acquisition Date but not yet resolved by that date, as provided in the SPA. As of March 31, 2023, certain receivables had been recorded related to the Escrow Amount. Further, $8.5 million of the Cash Consideration (the “Adjustment Holdback Amount”) was held back and retained as security (but not as the sole source of recovery) for any downward adjustments to the purchase price made in accordance with the SPA. During the year ended December 31, 2022, the Adjustment Holdback Amount was paid to the sellers.
Acquisition-related Costs
Costs incurred to complete the Acquisition are expensed as incurred and included in ‘Selling, general, and administrative expenses’ in our condensed consolidated statement of income. During the three months ended March 31, 2023, no Acquisition-related costs were recognized. During the three months ended March 31, 2022, $20.6 million of Acquisition-related costs were recognized.
Unaudited Pro Forma Information
The following unaudited pro forma financial information for the three months ended March 31, 2022 combines the historical results of Crocs and HEYDUDE, assuming that the companies were combined as of January 1, 2021 and include business combination accounting effects from the Acquisition, including amortization charges from acquired intangible assets, adjustments to the fair value of inventory, interest expense on the financing transactions used to fund the Acquisition, and Acquisition-related transaction costs and tax-related effects. The pro forma information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the Acquisition had taken place on January 1, 2021.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Crocs, Inc. and our consolidated subsidiaries (collectively the “Company,” “we,” “us,” or “our”) are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for women, men, and children. We strive to be the world leader in innovative casual footwear for women, men, and children, combining comfort and style with a value that consumers want.
Known or Anticipated Trends
Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends will continue to impact our operating results:
•We acquired HEYDUDE in February 2022. In the year since acquisition, we have penetrated top Crocs Brand wholesale accounts, hired an experienced leadership team, and made significant progress on integration. We have seen early signs of success in introducing new product styles and we continue to learn what resonates with the consumer. We also have expanded the HEYDUDE Brand internationally, specifically in Europe, where we plan to test in a few direct markets, including the United Kingdom, Germany, and the Netherlands, as well as a few distributor markets. Our two main integration efforts for HEYDUDE in 2023 are the construction of a new distribution center in Las Vegas, Nevada and the implementation of a new Enterprise Resource Planning system, both of which are planned to be completed by the end of the year.
•While overall we have seen evidence as to the underlying strength and growth potential of both the Crocs and HEYDUDE brands, we remain cautious relative to consumer confidence, particularly in Western markets, in the midst of macroeconomic pressures, including the costs of basic necessities and other goods, levels of employment, salaries and wage rates, and consumer perception of economic conditions. As a result, we anticipate declining traffic patterns throughout the year, as consumer purchasing patterns may be influenced by consumers’ disposable income. However, amidst a more challenging economic landscape, we believe we are well positioned to gain market share.
•Foreign currency fluctuations resulting in a stronger U.S. Dollar (“USD”) have impacted, and we expect will continue to impact, our business, contributing to, among other things, incremental freight costs, increased wages, particularly in our distribution centers, and increased raw materials costs. A stronger USD also results in costs for foreign goods purchased in USD but recognized in foreign currencies (“purchasing power”) that are unfavorable.
•We paid down $41.4 million of net borrowings, reducing total borrowings to $2.28 billion as of March 31, 2023.
Use of Non-GAAP Financial Measures
In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present certain information related to our results of operations through “constant currency,” which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable segments under U.S. GAAP. Constant currency represents current period results that have been retranslated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends, excluding the impact of foreign currency exchange rates on reported amounts.
Management uses constant currency to assist in comparing business trends from period to period on a consistent basis in communications with the Board, stockholders, analysts, and investors concerning our financial performance. We believe constant currency is useful to investors and other users of our condensed consolidated financial statements as an additional tool to evaluate operating performance and trends. Investors should not consider constant currency in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP.
First Quarter 2023 Financial and Operational Highlights
Revenues were $884.2 million for the first quarter of 2023, a 33.9% increase compared to the first quarter of 2022. The increase was due to the net effects of: (i) higher unit sales volumes, driven in part by operating HEYDUDE for a full quarter in 2023 compared to the Partial Period (as defined below) in 2022, as well as greater demand for both brands, which increased revenues by $250.1 million, or 37.8%; (ii) unfavorable changes in exchange rates, which decreased revenues by $15.3 million, or 2.3%; and (iii) lower average selling price on a constant currency basis (“ASP”), which decreased revenues by $10.8 million, or 1.6%, driven primarily by operating HEYDUDE for a full quarter in 2023, which includes a higher percentage of end-of-season clearance activity in the first half of the quarter. This decrease was offset in part by higher ASPs for the Crocs Brand.
The following were significant developments affecting our businesses and capital structure during the three months ended March 31, 2023:
•We grew revenues in all reportable operating segments and channels. The increase in revenues was driven in part by operating HEYDUDE for a full quarter in 2023 compared to the partial period from the acquisition date of February 17, 2022 through March 31, 2022 (the “Partial Period”). For the Crocs Brand, the increase in revenues was led by our Asia Pacific segment, which grew revenues by 46.1%, or 54.8% on a constant currency basis, compared to the first quarter of 2022. Our EMEALA segment grew revenues by 21.2%, or 25.1% on a constant currency basis, and our North America segment grew revenues by 10.0%, or 10.3% on a constant currency basis.
•We sold 30.7 million pairs of shoes for the Crocs Brand in the first quarter of 2023, an increase of 19.7% from the first quarter of 2022. We sold 8.9 million pairs of shoes for the HEYDUDE Brand in the first quarter of 2023, an increase of 124.4% compared to the Partial Period in 2022.
•Gross margin was 53.9%, an increase of 470 basis points from last year’s first quarter. This was in part due to higher air freight incurred in the prior year due to supply chain disruptions, as well as 420 basis points from adjustments in the prior year to the fair value of HEYDUDE inventory costs upon acquisition. This was offset in part by a more normalized end-of-season clearance in our North America segment and HEYDUDE segment, the latter of which was driven by operating HEYDUDE during first half of the quarter in 2023 compared to the Partial Period in 2022.
•Selling, general and administrative expenses (“SG&A”) was $241.4 million compared to $206.2 million in the first quarter of 2022, as a result of investments in marketing and talent in both brands and incremental operating costs associated with investments made in the HEYDUDE Brand over the last year since acquisition, offset in part by HEYDUDE acquisition-related costs in 2022 that did not recur in 2023. As a percent of revenues, SG&A decreased to 27.3% of revenues compared to 31.2% of revenues in the first quarter of 2022, mostly due to prior year costs associated with the acquisition of HEYDUDE that did not recur in the current year.
•Income from operations increased to $234.9 million from $118.7 million in last year’s first quarter. Net income was $149.5 million, or $2.39 per diluted share, compared to $72.8 million, or $1.19 per diluted share, in last year’s first quarter.
(in thousands, except per share, margin, and average selling price data)
Revenues
$
884,166
$
660,148
33.9
%
Cost of sales
407,796
335,224
(21.6)
%
Gross profit
476,370
324,924
46.6
%
Selling, general and administrative expenses
241,442
206,247
(17.1)
%
Income from operations
234,928
118,677
98.0
%
Foreign currency gains (losses), net
(403)
480
(184.0)
%
Interest income
171
102
67.6
%
Interest expense
(42,637)
(19,252)
(121.5)
%
Other expense, net
(293)
(947)
69.1
%
Income before income taxes
191,766
99,060
93.6
%
Income tax expense
42,223
26,300
(60.5)
%
Net income
$
149,543
$
72,760
105.5
%
Net income per common share:
Basic
$
2.42
$
1.22
98.4
%
Diluted
$
2.39
$
1.19
100.8
%
Gross margin (1)
53.9
%
49.2
%
470
bp
Operating margin (1)
26.6
%
18.0
%
860
bp
Footwear unit sales:
Crocs Brand
30,652
25,615
19.7
%
HEYDUDE Brand (3)
8,928
3,979
124.4
%
Average footwear selling price - nominal basis (2):
Crocs Brand
$
21.00
$
21.10
(0.5)
%
HEYDUDE Brand (3)
$
26.36
$
28.90
(8.8)
%
(1) Changes for gross margin and operating margin are shown in basis points (“bp”).
(2) Average footwear selling price is calculated as footwear and charms revenues divided by footwear units, as applicable.
(3) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the three months ended March 31, 2022 represent results during the Partial Period.
(1) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” above for more information.
(2) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the three months ended March 31, 2022 represent results during the Partial Period.
The primary drivers of changes in revenue were:
Three Months Ended March 31, 2023 vs. 2022 (1)
Volume
Price (2)
Foreign Exchange
Total
$ Change
% Change
$ Change
% Change
$ Change
% Change
$ Change
% Change
(in thousands)
Total revenues
$
250,137
37.8
%
$
(10,770)
(1.6)
%
$
(15,349)
(2.3)
%
$
224,018
33.9
%
(1) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for total revenues include a comparison of HEYDUDE results for the three months ended March 31, 2023 to results during the Partial Period in 2022.
(2) The change due to price is based on the change in ASP, as defined earlier in this section.
Revenues. In the three months ended March 31, 2023, revenues increased compared to the same period in 2022. This was primarily due to higher volume, driven in part by operating HEYDUDE for a full quarter in 2023 compared to the Partial Period in 2022, as well as greater demand for both brands. This was offset in part by unfavorable foreign currency changes, most significantly in the Euro, Korean Won, and Japanese Yen, and lower ASP, primarily resulting from operating HEYDUDE for a full quarter in 2023, which includes a higher percentage of end-of-season clearance activity in the first half of the quarter.
Cost of sales. In the three months ended March 31, 2023, compared to the same period in 2022, cost of sales increased $72.6 million, or 21.6%. This was driven by higher volumes of $148.4 million, or 44.2%, offset in part by lower average cost per unit on a constant currency basis (“AUC”) of $67.3 million, or 20.1%, which was a result of higher air freight incurred in the prior year as part of our initiative to combat supply chain disruptions, offset in part by higher product cost and unfavorable product mix. Fluctuations in foreign currency also decreased cost of sales by $8.5 million, or 2.5%. In the three months ended March 31, 2023 and 2022, respectively, cost of sales includes $105.1 million and $97.0 million of distribution expenses primarily related to receiving, inspecting, warehousing, and packaging product in owned and third-party warehouses, combined with transportation costs associated with delivering products from distribution centers to wholesale partners, retail stores and end customers.
Gross profit. Gross margin increased in the three months ended March 31, 2023 to 53.9% compared to 49.2% in the same period in 2022. This was in part due to higher air freight incurred in the prior year, as well as 420 basis points from adjustments
in the prior year to the fair value of HEYDUDE inventory costs upon acquisition, offset in part by lower ASPs, as described above.
Gross profit increased $151.4 million, or 46.6%, due to higher volumes of $101.7 million, or 31.3%, and the net impact of lower AUC and lower ASP of $56.6 million, or 17.4%. This was partially offset by unfavorable foreign currency changes of $6.8 million, or 2.1%.
Selling, general and administrative expenses. SG&A expenses increased $35.2 million, or 17.1%, in the three months ended March 31, 2023 compared to the same period in 2022. This is primarily due to investments in marketing and talent of $20.1 million and $15.4 million, respectively, as well as costs associated with the discontinuation of an information technology project of $4.1 million. There were also increases in other net costs, including variable costs associated with higher revenues, information technology costs, and duplicate rent for our corporate headquarters, of $14.9 million. These increases were partially offset by $19.3 million lower costs in 2023 associated with the prior year HEYDUDE acquisition and integration.
Foreign currency gains (losses), net. Foreign currency gains (losses), net, consist of realized and unrealized foreign currency gains and losses from the remeasurement and settlement of monetary assets and liabilities denominated in non-functional currencies as well as realized and unrealized gains and losses on foreign currency derivative instruments. During the three months ended March 31, 2023, we recognized realized and unrealized net foreign currency losses of $0.4 million compared to gains of $0.5 million during the three months ended March 31, 2022.
Income tax expense. During the three months ended March 31, 2023, income tax expense increased $15.9 million compared to the same period in 2022. The effective tax rate for the three months ended March 31, 2023 was 22.0% compared to an effective tax rate of 26.5% for the same period in 2022, a 4.5% decrease. This decrease in the effective rate was primarily driven by a shift in the mix of the Company's domestic and foreign earnings. Our effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate due differences in income tax rates between U.S. and foreign jurisdictions.
The following table sets forth information related to our reportable operating segments, including a comparison of revenues and operating income by segment:
Three Months Ended March 31,
% Change
Constant Currency
% Change (1)
Favorable (Unfavorable)
2023
2022
Q1 2023-2022
Q1 2023-2022
(in thousands)
Revenues:
North America
$
351,308
$
319,450
10.0
%
10.3
%
Asia Pacific
140,002
95,847
46.1
%
54.8
%
EMEALA
157,467
129,921
21.2
%
25.1
%
Brand corporate
1
7
(85.7)
%
(85.7)
%
Crocs Brand revenues
648,778
545,225
19.0
%
21.6
%
HEYDUDE Brand revenues (2)
235,388
114,923
104.8
%
105.7
%
Total consolidated revenues
$
884,166
$
660,148
33.9
%
36.2
%
Income from operations:
North America
$
127,783
$
129,611
(1.4)
%
(1.2)
%
Asia Pacific
56,605
30,106
88.0
%
96.4
%
EMEALA
65,776
34,927
88.3
%
90.1
%
Brand corporate
(32,157)
(30,709)
(4.7)
%
(5.5)
%
Crocs Brand income from operations
218,007
163,935
33.0
%
34.9
%
HEYDUDE Brand income from operations (2)
76,620
15,658
389.3
%
392.5
%
Enterprise corporate
(59,699)
(60,916)
2.0
%
2.0
%
Total consolidated income from operations
$
234,928
$
118,677
98.0
%
101.1
%
(1) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” for more information.
(2) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the three months ended March 31, 2022 represent results during the Partial Period.
The primary drivers of changes in revenues by operating segment were:
Three Months Ended March 31, 2023 vs. 2022
Volume
Price (1)
Foreign Exchange
Total
$ Change
% Change
$ Change
% Change
$ Change
% Change
$ Change
% Change
(in thousands)
Segment Revenues:
Crocs Brand:
North America
$
42,644
13.4
%
$
(9,820)
(3.1)
%
$
(966)
(0.3)
%
$
31,858
10.0
%
Asia Pacific
31,571
32.9
%
20,919
21.9
%
(8,335)
(8.7)
%
44,155
46.1
%
EMEALA
24,576
18.9
%
8,009
6.2
%
(5,039)
(3.9)
%
27,546
21.2
%
HEYDUDE Brand (2)
151,352
131.7
%
(29,878)
(26.0)
%
(1,009)
(0.9)
%
120,465
104.8
%
Total segment revenues
$
250,143
37.8
%
$
(10,770)
(1.6)
%
$
(15,349)
(2.3)
%
$
224,024
33.9
%
(1) The change due to price for revenues is based on ASP, as defined earlier in this section.
(2) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the HEYDUDE Brand represent a comparison of results for the three months ended March 31, 2023 to results during the Partial Period in 2022.
Crocs Brand
North America Operating Segment
Revenues. North America revenues increased in the three months ended March 31, 2023 compared to the same period in 2022, due primarily to higher volumes, driven by both channels. This increase was offset in part by lower ASP as a result of more normalized end-of-season clearance activity.
Income from Operations. Income from operations for our North America segment was $127.8 million for the three months ended March 31, 2023, a decrease of $1.8 million, or 1.4%, compared to the same period in 2022. Gross profit increased by $7.5 million, or 4.0%, compared to prior year, mostly as a result of higher volume of 12.5%.
SG&A for our North America segment increased $9.3 million, or 16.1%, during the three months ended March 31, 2023 compared to the same period in 2022. This increase was primarily due to higher compensation cost as a result of higher wages for hourly employees and higher variable expenses related to higher revenues in the DTC channel.
Asia Pacific Operating Segment
Revenues. Revenues in our Asia Pacific segment increased 46.1% in the three months ended March 31, 2023 compared to the same period in 2022, and was up in all countries in the region, driven by growth in China, in part as a result of the relief of COVID-19 restrictions, and Australia, as well as continued growth in South Korea and strong distributor growth in Southeast Asia. Higher ASP contributed to higher revenues as well, mostly as a result of less discounting in the current quarter. These increases were partially offset by unfavorable foreign currency changes, most significantly in the Korean Won and Japanese Yen.
Income from Operations. Income from operations for the Asia Pacific segment was $56.6 million for the three months ended March 31, 2023, an increase of $26.5 million, or 88.0%, compared to the same period in 2022. Gross profit increased by $31.7 million, or 57.0%, as a result of higher volumes and higher ASP, as described above, offset in part by unfavorable foreign currency changes.
SG&A for our Asia Pacific segment increased $5.2 million, or 20.5%, during the three months ended March 31, 2023 compared to the same period in 2022, primarily due to investments in marketing and increased variable rent associated with higher revenues.
Revenues. Revenues increased in the EMEALA segment in the three months ended March 31, 2023 compared to the same period in 2022, primarily as a result of increased volume. Higher ASPs also increased revenues due to increased pricing. Changes in foreign currency, primarily in the Euro, decreased revenues.
Income from Operations. Income from operations for the EMEALA segment was $65.8 million for the three months ended March 31, 2023, an increase of $30.8 million, or 88.3%, compared to the same period in 2022. Gross profit increased $28.1 million, or 47.9%, mostly as a result of a combination of higher ASPs, as described above, and lower AUCs as a result of prior year air freight costs incurred as part of our initiative to combat supply chain disruptions. Increased volume also contributed to higher gross profit. These increases were offset in part by unfavorable foreign currency fluctuations.
SG&A for our EMEALA segment decreased $2.7 million, or 11.6%, during the three months ended March 31, 2023 compared to the same period in 2022. This decrease was primarily due to a prior year reserve for unrecoverable receivables in Russia due to the war in Ukraine. This was offset in part by an investment in marketing.
Crocs Brand Corporate
During the three months ended March 31, 2023, total net costs within ‘Brand corporate’ increased $1.4 million, or 4.7%, compared to the same period in 2022, due to investments in brand marketing.
HEYDUDE Brand
Revenues. For the three months ended March 31, 2023, revenues increased compared to the Partial Period in 2022. The majority of this increase was due to higher volume, driven primarily by operating HEYDUDE for a full quarter in 2023 compared to 2022, but also due to higher demand compared to the pro forma quarter ended March 31, 2022 (as described in more detail in Note 14 — Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q). Partially offsetting this increase were lower ASP, primarily due to operating HEYDUDE for a full quarter in 2023, which includes a higher percentage of end-of-season clearance activity in the first half of the quarter, compared to the Partial Period in 2022.
Income from Operations. Income from operations for the HEYDUDE segment was $76.6 million for the three months ended March 31, 2023, an increase of $61.0 million, or 389.3%, compared to the Partial Period in 2022. Gross profit increased $87.2 million, or 295.9%, in part due to prior year adjustments of $27.9 million to the fair value of inventory costs upon close of the acquisition and in part due to higher volumes, as described above. Foreign currency fluctuations slightly offset these increases.
SG&A for the HEYDUDE Brand segment increased $26.2 million, or 189.9%, compared to the Partial Period in 2022. This is primarily due to investments in marketing and talent made over the past year since the acquisition in February 2022.
Enterprise Corporate
During the three months ended March 31, 2023, total net costs within ‘Enterprise corporate’ decreased $1.2 million, or 2.0%, compared to the same period in 2022. This decrease was primarily due to lower costs in 2023 associated with the prior year HEYDUDE acquisition and integration, offset in part by increases in compensation costs from a larger investment in talent and increases from costs associated with the discontinuation of an information technology project.
The tables below illustrate the overall change in the number of our company-operated retail locations by reportable operating segment for the three months ended March 31, 2023:
December 31, 2022
Opened
Closed
March 31, 2023
Company-operated retail locations:
North America
171
1
—
172
Asia Pacific
151
2
1
152
EMEALA
18
—
3
15
Total Crocs Brand
340
3
4
339
HEYDUDE Brand
5
3
—
8
Total
345
6
4
347
Digital sales, which includes sales through our company-owned websites, third party marketplaces, and e-tailers (which are reported in our wholesale channel), as a percent of total revenues, by operating segment were:
Three Months Ended March 31,
2023
2022
Digital sales as a percent of total revenues:
Crocs Brand
30.1
%
32.8
%
HEYDUDE Brand (1)
30.1
%
25.9
%
Total
30.1
%
31.6
%
(1) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. Therefore, the amounts shown above for the three months ended March 31, 2022 represent results during the Partial Period.
Direct-to-consumer (“DTC”) comparable sales were as follows:
Constant Currency (1)
Three Months Ended March 31,
2023
2022
Direct-to-consumer comparable sales: (2)
Crocs Brand
19.2
%
16.6
%
HEYDUDE Brand (3)
40.6
%
N/A
(1) Reflects period over period change on a constant currency basis, which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” for more information.
(2) Comparable store status, as included in the DTC comparable sales figures above, is determined on a monthly basis. Comparable store sales include the revenues of stores that have been in operation for more than twelve months. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion, or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure and in the same month in the following year. Location closures in excess of three months are excluded until the thirteenth month post re-opening. E-commerce comparable revenues are based on same site sales period over period. E-commerce sites that are temporarily offline or unable to transact or fulfill orders (“site disruption”) are excluded from the comparable sales calculation during the month of site disruption and in the same month in the following year. E-commerce site disruptions in excess of three months are excluded until the thirteenth month after the site has re-opened.
(3) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE Brand as a new operating segment. As such, in the three months ended March 31, 2022, we did not disclose DTC comparable sales for the HEYDUDE Brand.
Financial Condition, Capital Resources, and Liquidity
Liquidity
Our liquidity position as of March 31, 2023 was:
March 31, 2023
(in thousands)
Cash and cash equivalents
$
125,687
Available borrowings
550,719
As of March 31, 2023, we had $125.7 million in cash and cash equivalents and up to $550.7 million of available borrowings, including $548.7 million of remaining borrowing availability under the Revolving Facility (as defined below) and $2.0 million of remaining borrowing availability under the Asia revolving facilities. As of March 31, 2023, the Term Loan B Facility (as defined below) was fully drawn and there was no available borrowing capacity. We believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our Revolving Facility will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at least the next twelve months.
Additional future financing may be necessary to fund our operations and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, global economic conditions, and the pace of sustainable growth in our markets, among other things, could each impact our business and liquidity.
Repatriation of Cash
As a global business, we have cash balances in various countries and amounts are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries may have additional restrictions and covenants associated with them which could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities.
All of the cash held outside of the U.S. could be repatriated to the U.S. as of March 31, 2023 without incurring additional U.S. federal income taxes. In some countries, repatriation of certain foreign balances is restricted by local laws. These limitations may affect our ability to fully utilize our cash resources for needs in the U.S. or other countries and could adversely affect our liquidity.As of March 31, 2023, we held $84.2 million of our total $125.7 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the $84.2 million, $4.4 million could potentially be restricted by local laws.
Senior Revolving Credit Facility
In July 2019, the Company and certain of its subsidiaries (the “Borrowers”) entered into a Second Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association, as a lender and administrative agent for the lenders. Since that time, we have amended the Credit Agreement, which, as amended to date, provides for a revolving credit facility of $750.0 million, which can be increased by an additional $250.0 million subject to certain conditions (the “Revolving Facility”). Borrowings under the Credit Agreement bear interest at a variable interest rate based on (A) a Base Rate (defined as the highest of (i) the Overnight Bank Funding Rate (as defined in the Credit Agreement), plus 0.25%, (ii) the Prime Rate (as defined in the Credit Agreement), and (iii) the Daily Simple SOFR (as defined in the Credit Agreement), plus 1.00%), plus an applicable margin ranging from 0.25% to 0.875% based on our leverage ratio or 1.35% to 1.975% for the Daily Simple SOFR based on the leverage ratio, or (B) the Term SOFR Rate (as defined in the Credit Agreement), plus an applicable margin ranging from 1.35% to 1.975% based on our leverage ratio for one-month interest periods and 1.40% to 2.025% based on our leverage ratio for three month interest periods. Borrowings under the Credit Agreement are secured by all of the assets of the Borrowers and guaranteed by certain other subsidiaries of the Borrowers.
The Credit Agreement requires us to maintain a minimum interest coverage ratio of 3.00 to 1.00, and a maximum leverage ratio of (i) 4.00 to 1.00 from the quarter ended March 31, 2022 through, and including, the quarter ending December 31, 2023, (ii) 3.75 to 1.00 for the quarter ending March 31, 2024, (iii) 3.50 to 1.00 for the quarter ending June 30, 2024, and (iv) 3.25 to 1.00 for the quarter ending September 30, 2024 and thereafter (subject to adjustment in certain circumstances). The Credit Agreement permits, among other things, (i) stock repurchases subject to certain restrictions, including after giving effect to such
stock repurchases, the maximum leverage ratio does not exceed certain levels; and (ii) certain acquisitions so long as there is borrowing availability under the Credit Agreement of at least $40.0 million. As of March 31, 2023, we were in compliance with all financial covenants under the Credit Agreement.
As of March 31, 2023, the total commitments available from the lenders under the Revolving Facility were $750.0 million. At March 31, 2023, we had $200.0 million in outstanding borrowings and $1.3 million in outstanding letters of credit under the Revolving Facility, which reduces amounts available for borrowing under the Revolving Facility. As of March 31, 2023 and December 31, 2022, we had $548.7 million and $748.7 million, respectively, of available borrowing capacity under the Revolving Facility, which matures November 2027.
Term Loan B Facility
On February 17, 2022, the Company entered into a credit agreement (the “Term Loan B Credit Agreement”) with Citibank, N.A., as administrative agent and lender, to among other things, finance a portion of the cash consideration for the Acquisition.
The Term Loan B Credit Agreement provides for an aggregate term loan B facility in the principal amount of $2.0 billion (the “Term Loan B Facility”), which is secured by substantially all of the Company’s and each subsidiary guarantor’s assets on a pari passu basis with their obligations arising from the Credit Agreement and is scheduled to mature on February 17, 2029, subject to certain exceptions set forth in the Term Loan B Credit Agreement. Additionally, subject to certain conditions, including, without limitation, satisfying certain leverage ratios, the Company may, at any time, on one or more occasions, add one or more new classes of term facilities and/or increase the principal amount of the loans of any existing class by requesting one or more incremental term facilities.
Each term loan borrowing which is an alternate base rate borrowing bears interest at a rate per annum equal to the Alternate Base Rate (as defined in the Term Loan B Credit Agreement), plus 2.50%. Each term loan borrowing which is a term benchmark borrowing bears interest at a rate per annum equal to the Adjusted Term SOFR Rate (as defined in the Term Loan B Credit Agreement) plus 3.50%.
Outstanding principal under the Term Loan B Facility is payable on the last business day of each March, June, September and December, in a quarterly aggregate principal amount of $5.0 million. Quarterly aggregate principal payments began on June 30, 2022, with the remaining principal amount due on February 17, 2029, the maturity date. As of March 31, 2023, we had $1,425.0 million in outstanding principal and the Term Loan B Facility was fully drawn with no remaining borrowing capacity.
The Term Loan B Credit Agreement also contains customary affirmative and negative covenants, incurrence financial covenants, representations and warranties, events of default and other provisions. As of March 31, 2023, we were in compliance with all financial covenants under the Term Loan B Credit Agreement.
Asia Revolving Credit Facilities
During the three months ended March 31, 2023, we had two revolving credit facilities in Asia, the revolving credit facility with China Merchants Bank Company Limited, Shanghai Branch (the “CMBC Facility”), which matured in January 2023 and provided up to 10.0 million RMB, or $1.5 million using current exchange rates as of January 2023, and the revolving credit facility with Citibank (China) Company Limited, Shanghai Branch (the “Citibank Facility”), which, as amended, provides up to an equivalent of $15.0 million.
As of March 31, 2023, we had borrowings outstanding of $13.0 million on the Citibank Facility, which are due between May 2023 and September 2023. As of December 31, 2022, we had no outstanding borrowings on the CMBC Facility, and we had borrowings outstanding of $4.3 million on the Citibank Facility.
Senior Notes Issuances
In March 2021, the Company completed the issuance and sale of $350.0 million aggregate principal amount of 4.250% Senior Notes due March 15, 2029 (the “2029 Notes”), pursuant to the indenture related thereto (as amended and/or supplemented to date, the “2029 Notes Indenture”). Additionally, in August 2021, the Company completed the issuance and sale of $350.0 million aggregate principal amount of 4.125% Senior Notes due August 15, 2031 (the “2031 Notes”), pursuant to the indenture related thereto (as amended and/or supplemented to date, “the 2031 Notes Indenture” and, together with the 2029 Notes Indenture, the “Indentures” and, each, an “Indenture”). Interest on each of the 2029 Notes and the 2031 Notes (collectively, the “Notes”) is payable semi-annually.
The Company will have the option to redeem all or any portion of the 2029 Notes, at once or over time, at any time on or after March 15, 2024, at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2029 Notes at any time before March 15, 2024 at a redemption price of 100% of the principal amount to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before March 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2029 Notes at a redemption price of 104.250% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.
The Company will have the option to redeem all or any portion of the 2031 Notes, at once or over time, at any time on or after August 15, 2026, at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2031 Notes at any time before August 15, 2026 at a redemption price of 100% of the principal amount to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before August 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2031 Notes at a redemption price of 104.125% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.
The Notes rank pari passu in right of payment with all of the Company’s existing and future senior debt, including the Credit Agreement, and are senior in right of payment to any of the Company’s future debt that is, by its term, expressly subordinated in right of payment to the Notes. The Notes are unconditionally guaranteed by each of the Company’s restricted subsidiaries that is a borrower or guarantor under the Credit Agreement and by each of the Company’s wholly-owned restricted subsidiaries that guarantees any debt of the Company or any guarantor under any syndicated credit facility or capital markets debt in an aggregate principal amount in excess of $25.0 million.
The Indentures contain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to incur additional debt or issue certain preferred stock; pay dividends or repurchase or redeem capital stock or make other restricted payments; declare or pay dividends or other payments; incur liens; enter into certain types of transactions with the Company’s affiliates; and consolidate or merge with or into other companies. As of March 31, 2023, we were in compliance with all financial covenants under the Notes.
Cash Flows
Three Months Ended March 31,
$ Change
% Change
2023
2022
Favorable (Unfavorable)
(in thousands)
Cash provided by (used in) operating activities
$
9,931
$
(68,765)
$
78,696
114.4
%
Cash used in investing activities
(27,581)
(2,071,466)
2,043,885
98.7
%
Cash provided by (used in) financing activities
(52,306)
2,099,484
(2,151,790)
(102.5)
%
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
4,000
(810)
4,810
593.8
%
Net change in cash, cash equivalents, and restricted cash
$
(65,956)
$
(41,557)
$
(24,399)
(58.7)
%
Operating Activities. Cash provided by operating activities consists of net income adjusted for noncash items and changes in working capital. Cash provided by operating activities increased $78.7 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, driven by higher net income, adjusted for non-cash items, of $75.9 million and increases in operating assets and liabilities of $2.8 million, primarily due to inventory.
Investing Activities. There was a $2,043.9 million decrease in cash used in investing activities for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The decrease is primarily due to the cash paid for the acquisition, net of cash acquired, in the three months ended March 31, 2022 that did not recur in the current year. Refer to Note 14 — Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
Financing Activities. Cash provided by financing activities decreased by $2,151.8 million in the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The decrease was primarily due to a decrease of $2,025.5 million in proceeds from borrowings, which includes borrowings under the Term Loan B Facility of $2.0 billion used to fund the acquisition of HEYDUDE in part during the three months ended March 31, 2022 that did not recur in the current year. Additionally, there was an increase of $171.0 million in repayments of borrowings, an increase of $4.1 million in repurchases of common stock for tax withholding, and a decrease in cash provided by financing activities of $0.1 million. The overall decrease was offset by a $48.9 million decrease in deferred debt issuance costs.
Contractual Obligations
There have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, other than (i) borrowings and repayments on the Term Loan B Facility, Revolving Facility, and Asia revolving credit facilities and (ii) future lease payments of approximately $111 million through 2033, as described in Note 4 — Leases in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of March 31, 2023, other than certain purchase commitments, which are described in Note 12 — Commitments and Contingencies in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
For a complete discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year ended December 31, 2022 and Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q. There have been no other significant changes in our critical accounting policies or their application since December 31, 2022.
Recent Accounting Pronouncements
See Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q for a description of recently adopted accounting pronouncements and issued accounting pronouncements that we believe may have an impact on our condensed consolidated financial statements when adopted.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences, and overall financing strategies. Our exposure to market risk includes interest rate fluctuations in connection with our Revolving Facility and certain financial instruments.
Borrowings under our Term Loan B Facility and Revolving Facility bear interest at a variable rate and are therefore subject to risk based upon prevailing market interest rates. Interest rates fluctuate as a result of many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control.
As of March 31, 2023, we had borrowings with a face value of $2,338.0 million, comprised of the Notes, which carry a fixed rate, the Term Loan B Facility, and borrowings under our Revolving Facility and Asia revolving credit facilities. We also had $1.3 million in outstanding letters of credit under our Revolving Facility as of March 31, 2023. As of December 31, 2022, we had long-term borrowings with a face value of $2,379.3 million and $1.3 million in outstanding letters of credit under our Revolving Facility.
A hypothetical increase of 1% in the interest rate on the variable rate borrowings under our Term Loan B Facility and Revolving Facility would have increased interest expense by $4.2 million for the three months ended March 31, 2023.
Foreign Currency Exchange Risk
Changes in exchange rates have a direct effect on our reported U.S. Dollar condensed consolidated financial statements because we translate the operating results and financial position of our international subsidiaries to U.S. Dollars using current period exchange rates. Specifically, we translate the statements of income of our foreign subsidiaries into the U.S. Dollar reporting currency using exchange rates in effect during each reporting period. As a result, comparisons of reported results between reporting periods may be impacted significantly due to differences in the exchange rates in effect at the time such exchange rates are used to translate the operating results of our international subsidiaries.
An increase of 1% of the value of the U.S. Dollar relative to foreign currencies when translating our financial results would have decreased our revenues and income before taxes during the three months ended March 31, 2023 by $3.3 million and $1.3 million, respectively. This analysis does not account for transactional fluctuations in accounts, such as those driven by purchasing power, as defined in “Known or Anticipated Trends” in Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy.
In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in earnings caused by fluctuations in foreign exchange rates, we may enter into forward foreign exchange contracts to buy or sell various foreign currencies. Changes in the fair value of these forward contracts are recognized in earnings in the period that the changes occur or in the period in which the hedged transaction affects earnings for derivatives classified as non-hedged or hedged, respectively, as defined in Note 6 — Derivative Financial Instruments in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q. As of March 31, 2023, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $144.3 million. The fair value of these contracts at March 31, 2023 was an asset of $0.3 million and a liability of $0.5 million.
We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our foreign currency forward exchange contracts. To perform the sensitivity analysis, we assess the risk of changes in fair values from the effect of hypothetical changes in foreign currency exchange rates. This analysis assumes a like movement by the foreign currencies in our hedge portfolio against the U.S. Dollar. As of March 31, 2023, a 10% appreciation in the value of the U.S. Dollar would result in a net increase in the fair value of our derivative portfolio of approximately $0.2 million.
See Part I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q for a discussion of the impact of the change in foreign exchange rates on our U.S. Dollar condensed consolidated statements of income for the three months ended March 31, 2023 and 2022.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures as such item is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) as of March 31, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2023, to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can only provide reasonable assurance regarding management’s control objectives.
Changes in Internal Control over Financial Reporting
In the three months ended March 31, 2022, we closed the Acquisition, as discussed in Note 14 — Acquisition of HEYDUDE, and as such, we are in the process of integrating HEYDUDE into our overall internal control over financial reporting and will include HEYDUDE in Management’s Evaluation of Disclosure Controls and Procedures for the year ending December 31, 2023. This process may result in changes to our internal control over financial reporting. There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
A discussion of legal matters is found in Note 12 — Commitments and Contingencies in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
ITEM 1A. Risk Factors
There have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2022.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CROCS, INC.
Date: April 27, 2023
By:
/s/ Anne Mehlman
Name:
Anne Mehlman
Title:
Executive Vice President and Chief Financial Officer
