UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-14429
SKECHERS U.S.A., INC.
(Exact name of registrant as specified in its charter)
Delaware
95-4376145
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
228 Manhattan Beach Blvd.
Manhattan Beach, California
90266
(Address of Principal Executive Office)
(Zip Code)
(310) 318-3100
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Class A Common Stock, par value $0.001 per share
SKX
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 30, 2021, 134,172,217 shares of the registrant’s Class A Common Stock, $0.001 par value per share, were outstanding.
As of April 30, 2021, 20,949,425 shares of the registrant’s Class B Common Stock, $0.001 par value per share, were outstanding.
SKECHERS U.S.A., INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
3
Condensed Consolidated Statements of Earnings (Unaudited)
4
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
5
Condensed Consolidated Statements of Equity (Unaudited)
6
Condensed Consolidated Statements of Cash Flows (Unaudited)
7
Notes to Condensed Consolidated Financial Statements (Unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
19
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
20
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
21
Signatures
22
2
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
As of March 31,
As of December 31,
(in thousands, except par values)
2021
2020
ASSETS
Current assets
Cash and cash equivalents
$
1,284,540
1,370,826
Short-term investments
106,028
100,767
Trade accounts receivable, less allowances of $47,468 and $48,562
798,836
619,800
Other receivables
70,758
69,222
Total receivables
869,594
689,022
Inventory
1,067,437
1,016,774
Prepaid expenses and other current assets
137,138
166,962
Total current assets ($920,986 and $862,954 related to VIEs)
3,464,737
3,344,351
Property, plant and equipment, net
992,512
935,441
Operating lease right-of-use assets
1,159,339
1,171,521
Deferred tax assets
63,339
63,884
Long-term investments
124,379
108,412
Goodwill
93,497
Other assets, net
87,763
95,263
Total non-current assets ($686,035 and $682,068 related to VIEs)
2,520,829
2,468,018
TOTAL ASSETS
5,985,566
5,812,369
LIABILITIES AND EQUITY
Current liabilities
Current installments of long-term borrowings
60,942
52,250
Short-term borrowings
1,138
3,297
Accounts payable
807,949
744,077
Operating lease liabilities
217,241
204,370
Accrued expenses
184,109
208,712
Total current liabilities ($544,355 and $526,466 related to VIEs)
1,271,379
1,212,706
Long-term borrowings, excluding current installments
717,595
679,415
Long-term operating lease liabilities
1,039,763
1,065,069
Deferred tax liabilities
10,835
11,439
Other long-term liabilities
114,448
118,077
Total non-current liabilities ($385,807 and $365,235 related to VIEs)
1,882,641
1,874,000
Total liabilities
3,154,020
3,086,706
Commitments and contingencies (Note 10)
Stockholders’ equity
Preferred Stock, $0.001 par value; 10,000 shares authorized; none issued and outstanding
—
Class A Common Stock, $0.001 par value; 500,000 shares authorized;
134,172 and 133,618 shares issued and outstanding
134
Class B Common Stock, $0.001 par value; 75,000 shares authorized;
20,949 and 21,016 shares issued and outstanding
Additional paid-in capital
377,350
372,165
Accumulated other comprehensive loss
(36,349
)
(27,285
Retained earnings
2,234,973
2,136,400
Skechers U.S.A., Inc. equity
2,576,129
2,481,435
Noncontrolling interests
255,417
244,228
Total stockholders' equity
2,831,546
2,725,663
TOTAL LIABILITIES AND EQUITY
See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31,
(in thousands, except per share data)
Sales
1,428,418
1,242,345
Cost of sales
748,796
694,677
Gross profit
679,622
547,668
Royalty income
6,037
5,248
685,659
552,916
Operating expenses
Selling
85,296
74,055
General and administrative
442,695
434,051
Selling, general and administrative
527,991
508,106
Earnings from operations
157,668
44,810
Other income (expense)
Interest income
796
2,307
Interest expense
(4,113
(1,999
Other, net
(10,857
3,471
Total other income (expense)
(14,174
3,779
Earnings before income tax expense
143,494
48,589
Income tax expense
28,985
7,429
Net earnings
114,509
41,160
Less: Net earnings (loss) attributable to noncontrolling interests
15,936
(7,941
Net earnings attributable to Skechers U.S.A., Inc.
98,573
49,101
Net earnings per share attributable to Skechers U.S.A., Inc.
Basic
0.64
0.32
Diluted
0.63
Weighted-average shares used in calculating net earnings per share
attributable to Skechers U.S.A, Inc.
154,818
153,555
155,936
154,652
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(in thousands)
Other comprehensive income, net of tax
Loss on foreign currency translation adjustment
(12,505
(29,764
Comprehensive income
102,004
11,396
Less: Comprehensive income (loss) attributable to noncontrolling interests
12,495
(14,879
Comprehensive income attributable to Skechers U.S.A., Inc.
89,509
26,275
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
SHARES
AMOUNT
ACCUMULATED
CLASS A
CLASS B
ADDITIONAL
OTHER
SKECHERS
NON
TOTAL
COMMON
PAID-IN
COMPREHENSIVE
RETAINED
U.S.A., INC.
CONTROLLING
STOCKHOLDERS'
STOCK
CAPITAL
LOSS
EARNINGS
EQUITY
INTEREST
Balance at December 31, 2020
133,618
21,016
Foreign currency translation adjustment
(9,064
(3,441
Contribution from noncontrolling interests
14
Purchase of noncontrolling interest
(6,856
(3,072
(9,928
Net unrealized gain on derivative contract
1,752
Stock compensation expense
12,041
Shares issued under the incentive award plan
487
Conversion of Class B Common Stock into Class A
Common Stock
67
(67
Balance at March 31, 2021
134,172
20,949
Balance at December 31, 2019
131,071
22,408
131
306,669
(29,993
2,037,836
2,314,665
221,442
2,536,107
(22,826
(6,938
Distributions to noncontrolling interests
(14,865
Noncontrolling interest of acquired businesses
49,045
12,441
376
Shares redeemed for employee tax withholdings
(171
(5,659
Balance at March 31, 2020
131,276
313,451
(52,819
2,086,937
2,347,722
240,743
2,588,465
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net earnings to net cash from operating activities
Depreciation and amortization
33,008
39,559
Provision for bad debts and returns
7,348
26,277
Stock compensation
Deferred income taxes
(446
(4,885
Net settlement gain
(13,877
Net foreign currency adjustments
6,015
6,513
Changes in operating assets and liabilities
Receivables
(196,331
(187,786
(57,392
77,539
Other assets
29,705
29,733
69,184
(141,815
Other liabilities
(31,415
(19,840
Net cash used in operating activities
(13,774
(134,981
Cash flows from investing activities
Capital expenditures
(84,237
(74,887
Purchases of investments
(71,132
(43,788
Proceeds from sales and maturities of investments
49,905
42,418
Net cash used in investing activities
(105,464
(76,257
Cash flows from financing activities
Repayments on long-term borrowings
(46
(107
Proceeds from long-term borrowings
46,918
570,767
Proceeds from (repayments on) short-term borrowings, net
(2,159
7,912
Payments for employee taxes related to stock compensation
Contributions from noncontrolling interests
Net cash provided by financing activities
34,799
558,048
Effect of exchange rate changes on cash and cash equivalents
(1,847
(12,920
Net change in cash and cash equivalents
(86,286
333,890
Cash and cash equivalents at beginning of the period
824,876
Cash and cash equivalents at end of the period
1,158,766
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest
3,992
2,000
Income taxes, net
18,291
13,044
Non-cash transactions
ROU assets exchanged for lease liabilities
42,143
9,581
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)
GENERAL
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Skechers U.S.A., Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S‑X. In the opinion of management, all normal adjustments and accruals considered necessary to provide a fair statement of the results of operations for the interim periods presented have been included. The December 31, 2020 balance sheet data was derived from audited financial statements; however, the accompanying notes to condensed consolidated financial statements do not include all of the annual disclosures required under GAAP and should be read in conjunction with the Company’s 2020 Annual Report on Form 10-K.
As previously disclosed in the Company’s 2020 Annual Report on Form 10-K, the duration and magnitude of the COVID-19 pandemic remains uncertain. The COVID-19 pandemic has had and may continue to have a significant impact on the Company’s consolidated results of operations, financial position and cash flows.
Noncontrolling Interests
The Company has equity interests in several joint ventures that were established either to exclusively distribute the Company’s products throughout Mexico, Asia and the Middle East or to construct the Company’s domestic distribution facility. These joint ventures are variable interest entities (“VIE”), and the Company is considered the primary beneficiary. This determination is based on the relationships between the Company and the VIE, including management agreements, governance documents and other contractual arrangements. Specifically, the Company has both of the following characteristics: (a) the power to direct the activities of the entity that most significantly impact the entity’s economic performance; and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE, or the right to receive benefits from the entity that could potentially be significant to the VIE. The assets and liabilities and results of operations of these entities are included in the Company’s condensed consolidated financial statements, even though the Company may not hold a majority equity interest.
In March 2021, the minority interest related to the Hong Kong joint venture was purchased for $10.0 million. Other than the change in the Company’s ownership of the Hong Kong entity, which continues to be included in the Company’s condensed consolidated financial statements, there have been no changes during 2021 in the accounting treatment or characterization of any previously identified variable interest entities. The Company continues to reassess these relationships quarterly. The assets of these joint ventures are restricted, as they are not available for general business use outside the context of such joint ventures. The holders of the liabilities of each joint venture have no recourse to the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value hierarchy as defined by applicable accounting standards prioritizes the use of inputs used in valuation techniques into the following three levels:
•
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Other observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that cannot be corroborated by market data that reflect the reporting entity’s own assumptions.
The Company’s Level 1 investments primarily include money market funds and U.S. Treasury securities; Level 2 investments primarily include corporate notes and bonds, asset-backed securities, U.S. Agency securities, and actively traded mutual funds; and the Company does not currently have any Level 3 assets or liabilities. The Company has one Level 2 derivative instrument which is an interest rate swap related to the refinancing of its U.S. distribution center (see Note 4 – Financial Commitments) classified as other long-term liabilities. The fair value of the interest rate swap was determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipt was based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Credit valuation adjustments were incorporated to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
The carrying amount of receivables, payables and other amounts arising out of the normal course of business approximates fair value because of the relatively short maturity of such instruments. The carrying amount of the Company’s short-term and long-term borrowings, which are considered Level 2 liabilities, approximates fair value based on current rates and terms available to the Company for similar debt.
DERIVATIVE INSTRUMENTS
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, the Company uses an interest rate swap as part of its interest rate risk management strategy. The Company’s interest rate swap, designated as a cash flow hedge, involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. By utilizing an interest rate swap, the Company is exposed to credit-related losses in the event that the counterparty fails to perform under the terms of the derivative contract. To mitigate this risk, the Company enters into derivative contracts with major financial institutions based upon credit ratings and other factors. The Company continually assesses the creditworthiness of its counterparties. As of March 31, 2021, all counterparties to the interest rate swap had performed in accordance with their contractual obligations.
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general income tax accounting methodology including an exception for the recognition of a deferred tax liability when a foreign subsidiary becomes an equity method investment and an exception for interim periods showing operating losses in excess of anticipated operating losses for the year. The amendment also reduces the complexity surrounding franchise tax recognition; the step up in the tax basis of goodwill in conjunction with business combinations; and the accounting for the effect of changes in tax laws enacted during interim periods. The Company adopted ASU 2019-12 on January 1, 2021, and the adoption did not have a material impact on its condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, as amended and supplemented by subsequent ASUs (collectively, “ASU 2020-04”), which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for borrowing instruments, which use LIBOR as a reference rate, and is effective immediately, but is only available through December 31, 2022. The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.
(2)
CASH, CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS
The following tables show the Company’s cash, cash equivalents, short-term and long-term investments by significant investment category:
As of March 31, 2021
Adjusted Cost
Fair Value
Cash and Cash Equivalents
Short-Term Investments
Long-Term Investments
Cash
866,621
Level 1
Money market funds
417,919
U.S. Treasury securities
22,551
8,362
14,189
Total level 1
440,470
Level 2
Corporate notes and bonds
138,507
93,422
45,085
Asset-backed securities
25,831
2,257
23,574
U.S. Agency securities
1,987
Mutual funds
41,531
Total level 2
207,856
97,666
110,190
1,514,947
9
As of December 31, 2020
946,961
423,865
21,146
8,067
13,079
445,011
117,253
83,521
33,732
28,253
5,498
22,755
3,681
38,846
188,033
92,700
95,333
1,580,005
The Company’s investments consist of United States (“U.S.”) Treasury securities, corporate notes and bonds, asset-backed securities and U.S. Agency securities, which the Company has the intent and ability to hold to maturity and therefore are classified as held-to-maturity. The Company holds mutual funds in its deferred compensation plan which are classified as trading securities. The Company may sell certain of its investments prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. The maturities of the Company’s long-term investments are less than two years. The Company minimizes the potential risk of principal loss by investing in highly-rated securities and limiting the amount of credit exposure to any one issuer. Fair values were determined for each individual security in the investment portfolio.
When evaluating an investment for its current expected credit losses, the Company reviews factors such as historical experience with defaults, losses, credit ratings, term, market sector and macroeconomic trends, including current conditions and forecasts to the extent they are reasonable and supportable.
(3)
ACCRUED EXPENSES
Accrued expenses at March 31, 2021 and December 31, 2020 are summarized as follows:
Accrued payroll, taxes, and other
71,013
104,004
Return reserve liability
77,675
77,219
Accrued inventory purchases
35,421
27,489
(4)
FINANCIAL COMMITMENTS
The Company had $37.0 million and $38.7 million of outstanding letters of credit as of March 31, 2021 and December 31, 2020, and approximately $1.1 million and $3.3 million in short-term borrowings as of March 31, 2021 and December 31, 2020.
Long-term borrowings were as follows:
Revolving Credit Facility
452,500
HF-T1 Distribution Center Loan
129,505
HF-T2 Distribution Center Construction Loan
36,532
22,169
China Distribution Center Construction Loan
78,302
77,501
China Operational Loans
80,497
48,743
Other
1,201
1,247
Subtotal
778,537
731,665
Less: Current installments
(60,942
(52,250
Total long-term borrowings
10
The weighted-average annual interest rate on borrowings under the 2019 revolving credit facility was approximately 1.37% during the three months ended March 31, 2021. The credit facility was amended during the first quarter to define letters of credit.
The Company is required to maintain a maximum total adjusted net leverage ratio of 3.75:1, except in the event of an acquisition in which case the ratio may be increased at the Company’s election to 4.25:1 for the quarter in which such acquisition occurs and for the next three quarters thereafter.
As of March 31, 2021 and December 31, 2020, the unused credit capacity was $10.5 million and $8.8 million, respectively, on the Company’s 2019 revolving credit facility. The Company was in compliance with the financial covenants under the 2019 credit facility as of March 31, 2021.
The Company’s joint venture with HF Logistics I, LLC (“HF”), HF Logistics-SKX, LLC (the “JV”), through a wholly-owned subsidiary of the JV (“HF-T1”), entered into a $129.5 million construction loan agreement which matures on March 18, 2025 (the “HF-T1 2020 Loan”) with interest of LIBOR Daily Floating Rate plus a margin of 1.75% per annum.
HF-T1 also entered into an ISDA master agreement (together with the schedule related thereto, the “Swap Agreement”) with Bank of America, N.A. to govern derivative and/or hedging transactions that HF-T1 concurrently entered into with Bank of America, N.A. The Company’s objective in using the Swap Agreement is to stabilize interest expense and manage exposure to interest rate volatility. Pursuant to the Swap Agreement, on August 14, 2015, HF-T1 entered into a confirmation of swap transactions (the “Interest Rate Swap”) as amended (the “Swap Agreement Amendment”) on March 18, 2020 with Bank of America, N.A with a maturity date of March 18, 2025. The Swap Agreement Amendment fixes the effective interest rate on the HF-T1 2020 Loan at 2.55% per annum. The HF-T1 2020 Loan and Swap Agreement Amendment are subject to customary covenants and events of default. Bank of America, N.A. also acts as a lender and syndication agent under the Company’s 2019 Credit Agreement.
The Interest Rate Swap involves the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of both March 31, 2021 and December 31, 2020, the Interest Rate Swap had an aggregate notional amount of $129.5 million. Under the terms of the Swap Agreement Amendment, the Company will pay a weighted-average fixed rate of 0.795% on the notional amount and receive payments from the counterparty based on the 30-day LIBOR rate, effectively modifying the Company’s exposure to interest rate risk by converting floating-rate debt to a fixed rate of 4.08%.
The weighted-average annual interest rate on borrowings under the 2020 distribution center construction loan was approximately 2.02% during the three months ended March 31, 2021. The obligations of the JV under this loan are guaranteed by TGD Holdings I, LLC, which is an affiliate of HF.
The interest rate at March 31, 2021 was 4.15% and may increase or decrease over the life of the loan, and will be evaluated every 12 months. Beginning in 2021, the principal of the loan will be repaid in semi-annual installments of variable amounts. The obligations of the China distribution center construction loan, entered through the Company’s Taicang Subsidiary are jointly and severally guaranteed by the Company’s China joint venture. As of March 31, 2021, the outstanding balance under this loan included approximately $13.9 million classified as short-term borrowings in the Company’s condensed consolidated balance sheets.
The balance of working capital loans was approximately $61.4 million with interest rates ranging from 1.73% to 3.65% per annum as of March 31, 2021. The balance of working capital loans as of December 31, 2020 was approximately $30.1 million with interest rates ranging from 1.75% to 3.92% per annum. The balance of loans related to a corporate office building in Shanghai was approximately $19.1 million and $18.6 million as of March 31, 2021 and December 31, 2020 with interest at 4.28% per annum, for both periods, payable at terms agreed by the lender. As of March 31, 2021, the outstanding balance under this loan included approximately $47.0 million classified as short-term borrowings in the Company’s condensed consolidated balance sheets.
(5)
STOCK COMPENSATION
INCENTIVE AWARD PLAN
As of March 31, 2021, there were 5,121,800 shares available for grant as equity awards under the 2017 Incentive Award Plan. In the first quarter of 2021, the Company granted restricted stock with time-based vesting as well as performance-based awards. The performance-based awards include a market condition tied to the Company’s total shareholder return in relation to its peer companies as well as a financial performance condition tied to annual EPS growth. The vesting and ultimate payout of performance awards is determined at the end of the three-year performance period and can vary from zero to 200% based on actual results.
11
The Company issued the following stock-based instruments:
Granted
Weighted-Average Grant-Date Fair Value
Restricted stock
406,250
39.53
1,013,500
36.96
Performance-based restricted stock
108,750
38.95
Market-based restricted stock
54.34
A summary of the status and changes of the Company’s unvested shares is presented below:
Shares
Unvested at December 31, 2020
3,112,023
35.06
623,750
42.01
Vested
(487,550
36.59
Cancelled
(8,500
37.31
Unvested at March 31, 2021
3,239,723
36.16
The Company determines the fair value of restricted stock awards and any performance-related components based on the closing market price of the Company’s common stock on the date of grant. For share-based awards that have a performance-based vesting requirement, the Company evaluates the probability of achieving the performance criteria throughout the performance period and will adjust stock compensation expense up or down based on its estimated probable outcome. Certain performance-based awards contain market condition components which are valued on the date of grant using a Monte Carlo simulation model.
For the three months ended March 31, 2021 and 2020, the Company recognized $12.0 million and $12.4 million of compensation expense for grants under the 2017 Incentive Award Plan. As of March 31, 2021, the balance of unamortized stock compensation was $92.9 million which is expected to be recognized over a weighted-average period of 2.06 years.
(6)
EARNINGS PER SHARE
Basic EPS and diluted EPS are calculated by dividing net earnings by the following: for basic EPS, the weighted-average number of common shares outstanding for the period; and for diluted EPS, the sum of the weighted-average number of both outstanding common shares and potentially dilutive common shares using the treasury stock method.
The calculation of EPS is as follows:
Weighted-average common shares outstanding, basic
Dilutive effect of nonvested shares
1,118
1,097
Weighted-average common shares outstanding, diluted
Anti-dilutive common shares excluded above
52,792
36,766
Net earnings attributable to Skechers U.S.A., Inc. per common share
12
(7)
INCOME TAXES
The tax provisions for the three months ended March 31, 2021 and 2020 were computed using the estimated effective tax rates applicable to each of the domestic and international taxable jurisdictions for the full year. The Company’s tax rate is subject to management’s quarterly review and revision, as necessary. The Company’s provision for income tax expense and effective income tax rate are significantly impacted by the mix of the Company’s domestic and foreign earnings (loss) before income taxes. In the foreign jurisdictions in which the Company has operations, the applicable statutory rates range from 0.0% to 34.0%, which is on average significantly lower than the U.S. federal and state combined statutory rate of approximately 24.5%. The Company’s effective tax rate was 20.2% and 15.3% for the three months ended March 31, 2021 and 2020. The increase primarily reflects the increased profitability in certain higher tax jurisdictions such as China and the United States.
(8)
RELATED PARTY TRANSACTIONS
The Skechers Foundation (the “Foundation”) is a 501(c)(3) non-profit entity and not a subsidiary or otherwise affiliated with the Company. The Company does not have a financial interest in the Foundation. However, two officers and directors of the Company, Michael Greenberg, the Company’s President, and David Weinberg, the Company’s Chief Operating Officer, are also officers and directors of the Foundation. During the three months ended March 31, 2021 and 2020, the Company made contributions of $500,000 to the Foundation in each period. In March 2021, the Company purchased two properties for $2.7 million, from an entity controlled by its President, Michael Greenberg, to facilitate future expansion of our corporate office buildings in Manhattan Beach, California. The terms of the sale were no less favorable than could be obtained from an unrelated third party.
(9)
SEGMENT AND GEOGRAPHIC INFORMATION
The Company has three reportable segments – Domestic Wholesale, International Wholesale and Direct-to-Consumer. Management evaluates segment performance based primarily on sales and gross margin. All other costs and expenses of the Company are analyzed on an aggregate basis and not allocated to the segments. The following summarizes the Company’s operations by segment and geographic area for the periods indicated:
Domestic Wholesale
374,665
377,962
International Wholesale
712,175
575,199
Direct-to-Consumer
341,578
289,184
Total
139,924
145,277
320,781
240,475
218,917
161,916
Sales (1)
United States
602,117
555,174
International
826,301
687,171
During the three months ended March 31, 2021 and 2020, sales in China were $250.6 million and $91.3 million.
The Company’s sales to its five largest customers accounted for approximately 9.5% and 11.4% of total sales for the three months ended March 31, 2021 and 2020.
The following summarizes the Company’s assets by segment and geographic area for the periods indicated:
As of
March 31, 2021
December 31, 2020
Identifiable assets
1,971,630
1,945,681
2,616,429
2,436,568
1,397,507
1,430,120
13
Additions to property, plant and equipment
64,121
11,818
10,813
44,900
9,303
18,169
84,237
74,887
Property, plant and equipment, net (1)
588,542
535,648
403,970
399,793
Property, plant and equipment, net in China was $245.4 million and $241.6 million at March 31, 2021 and December 31, 2020.
Assets located outside the U.S. consist primarily of cash, accounts receivable, inventory, property, plant and equipment, and other assets. Net assets held outside the U.S. were $3.7 billion and $3.1 billion at March 31, 2021 and December 31, 2020, respectively.
The Company performs regular evaluations concerning the ability of customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic accounts receivable generally do not require collateral. Foreign accounts receivable are generally collateralized by letters of credit. The Company’s credit losses charged to expense for the three months ended March 31, 2021 and 2020 were $6.3 million and $1.5 million.
The Company’s accounts receivables, excluding the allowance for bad debts, sales returns and chargebacks, in different geographic areas are summarized as follows:
Domestic Accounts Receivable
314,131
230,546
Foreign Accounts Receivable
532,173
437,816
For the periods presented below, the Company’s top five manufacturers produced, as a percentage of total production, the following:
Manufacturer #1
18.6
%
24.9
Manufacturer #2
5.0
7.5
Manufacturer #3
4.8
6.7
Manufacturer #4
3.9
Manufacturer #5
4.3
3.7
37.5
46.7
(10)
COMMITMENTS AND CONTINGENCIES
In accordance with GAAP, the Company records a liability in its condensed consolidated financial statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings are inherently difficult to predict, particularly when the matters are in the procedural stages or with unspecified or indeterminate claims for damages, potential penalties, or fines. Accordingly, the Company cannot determine the final amount, if any, of its liability beyond the amount accrued in the condensed consolidated financial statements as of March 31, 2021, nor is it possible to estimate what litigation-related costs will be in the future; however, the Company believes that the likelihood that claims related to litigation would result in a material loss to the Company, either individually or in the aggregate, is remote.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and Notes thereto in Item 1 of this report and our annual report on Form 10-K for the year ended December 31, 2020.
We intend for this discussion to provide the reader with information that will assist in understanding our condensed consolidated financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our condensed consolidated financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of our company as a whole.
This quarterly report on Form 10-Q may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking language such as “intend,” “may,” “will,” “believe,” “expect,” “anticipate” or other comparable terms. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected in forward-looking statements, and reported results shall not be considered an indication of our future performance. Factors that might cause or contribute to such differences include:
the COVID-19 pandemic and its adverse impact on our operations and our business, sales and results of operations around the world;
our ability to maintain our brand image and to anticipate, forecast, identify, and respond to changes in fashion trends, consumer demand for the products and other market factors;
the loss of any significant customers, decreased demand by industry retailers and the cancellation of order commitments;
our ability to remain competitive among sellers of footwear for consumers, including in the highly competitive performance footwear market; global economic, political and market conditions including the challenging consumer retail market in the United States;
our ability to sustain, manage and forecast our costs and proper inventory levels;
our ability to continue to manufacture and ship our products that are sourced in China and Vietnam, which could be adversely affected by various economic, political or trade conditions, or a natural disaster in China or Vietnam;
other factors referenced or incorporated by reference in our annual report on Form 10-K for the year ended December 31, 2020 under the captions “Item 1A: Risk Factors” and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The risks included herein are not exhaustive. Other sections of this report may include additional factors that could adversely impact our business, financial condition and results of operations. Moreover, we operate in a very competitive and rapidly changing environment, and new risk factors emerge from time to time. We cannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these inherent and changing risks and uncertainties, investors should not place undue reliance on forward-looking statements, which reflect our opinions only as of the date of this quarterly report, as a prediction of actual results. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this document, except as otherwise required by reporting requirements of applicable federal and states securities laws.
OVERVIEW
Sales were a new quarterly record of $1.4 billion, reflecting growth in our International Wholesale and Direct-to-Consumer segments despite continued impacts to global markets and business channels from the COVID-19 pandemic. The quarter began as expected with the pandemic continuing to influence tepid consumer trends worldwide, especially as many markets reinstituted lockdowns. However, mid-quarter, we began seeing signs of consumer engagement and optimism domestically that we have not seen in over a year. Consumers are returning to a new normalcy, one that involves more walking, more comfort on the job, and a casual lifestyle mindset. We are a natural choice for any demographic worldwide with comfort technology at our core.
We continue to invest for growth with a focus on enhancing our global infrastructure.
To further enhance our consumer shopping experience, we updated our point of sale system in our domestic retail locations, including enhancements to our omnichannel capabilities, and began plans to launch new e-commerce sites internationally.
We are in the process of opening new distribution centers in Peru, the United Kingdom and Japan.
Our new China distribution center remains on-track for full implementation by mid-year.
Development continued on our North American distribution center expansion, which we expect to be completed in 2022.
We opened 12 company-owned stores and 183 third-party Skechers stores globally.
RESULTS OF OPERATIONS
We have three reportable segments – Domestic Wholesale, International Wholesale, and Direct-to-Consumer, which includes results from both our retail store and e-commerce channels. We evaluate segment performance based primarily on sales and gross margin.
The following table sets forth, for the periods indicated, selected information from our results of operations:
Change
186,073
15.0
54,119
7.8
131,954
24.1
Gross margin
47.6
44.1
350
bps
789
132,743
24.0
Operating expenses:
11,241
15.2
8,644
2.0
19,885
112,858
251.9
(1,511
(65.5
(2,114
105.8
(14,328
(412.8
94,905
195.3
21,556
290.2
73,349
178.2
23,877
(300.7
49,472
100.8
Sales increased $186.1 million, or 15.0%, to $1.4 billion as compared to $1.2 billion as a result of a 20.2% increase in the Company’s international sales and an 8.5% increase in domestic sales. Increases in international sales were driven by wholesale. Domestic sales increases were driven by direct-to-consumer, partially offset by a slight decline in wholesale. Our International Wholesale segment sales increased 23.8% and Direct-to-Consumer segment sales increased 18.1% offset by decreased Domestic Wholesale segment sales of 0.9%.
Gross margin increased 350 basis points to 47.6% compared to 44.1% as a result of increased margins in both the International Wholesale and Direct-to-Consumer segments. The strong margin performance was driven by an increase in selling price across all channels and a favorable mix of e-commerce sales.
Selling expenses
Selling expenses increased by $11.2 million, or 15.2%, to $85.3 million from $74.1 million primarily due to higher domestic marketing spending of $12.0 million. As a percentage of sales, selling expenses were 6.0% for both of the three-month periods ended March 31, 2021 and 2020.
General and administrative expenses
General and administrative expenses increased by $8.6 million, or 2.0%, primarily driven by increased global warehouse and distribution expenses of $21.8 million, offset by reduced retail labor of $10.0 million.
Interest income decreased $1.5 million to $0.8 million as compared to $2.3 million, primarily due to lower average interest rates compared to the prior year period. Interest expense increased $2.1 million due to a full quarter of borrowing under our credit facility in the current year and additional borrowings to support China operations. Other decreased $14.3 million as a result of a $13.9 million gain related to the acquisition of our Mexico joint venture in the prior year.
16
Income taxes
Income tax expense and the effective tax rate were as follows:
Effective tax rate
20.2
15.3
Our provision for income tax expense and effective income tax rate are significantly impacted by the mix of our domestic and foreign earnings (losses) before income taxes. In the foreign jurisdictions in which we have operations, the applicable statutory rates range from 0.0% to 34.0%, which on average are generally significantly lower than the U.S. federal and state combined statutory rate of approximately 24.5%. For the quarter, the increase in the effective tax rate was primarily due to increased profitability in certain higher tax jurisdictions such as China and the United States.
Noncontrolling interest in net income of consolidated subsidiaries
Net earnings attributable to noncontrolling interest increased $23.9 million to $15.9 million as compared to a loss of $7.9 million, primarily due to increased profitability by our joint ventures, due to reduced impacts related to the COVID-19 pandemic. Noncontrolling interest represents the share of net earnings that is attributable to our joint venture partners.
RESULTS OF SEGMENT OPERATIONS
(3,297
(0.9
(5,353
(3.7
37.3
38.4
(110
) bps
Domestic Wholesale sales decreased $3.3 million, or 0.9% to $374.7 million. Sales volume decreased slightly to 16.9 million pairs sold, partially offset by an increase in average selling price. The average selling price increased to $21.89 per pair from $21.32.
Domestic Wholesale gross margin decreased 110 basis points to 37.3% due to higher cost per pair partially offset by an increase in the average selling price.
136,976
23.8
80,306
33.4
45.0
41.8
320
International Wholesale sales increased $137.0 million, or 23.8%, to $712.2 million compared to sales of $575.2 million, primarily driven by growth in China of 174.4%, partially offset by an 8.1% decline in Europe and a 6.5% decline in distributor sales. Direct sales by our foreign subsidiaries and joint ventures were $632.0 million, an increase of $142.6 million, or 29.1%. Volume increased 12.7% in the number of units sold and average selling price per unit increased 9.9%.
International Wholesale gross margin increased 320 basis points to 45.0% primarily due to the aforementioned increase in average selling price per unit and a favorable mix of joint venture sales.
52,394
18.1
57,001
35.2
64.1
56.0
810
Direct-to-Consumer sales increased $52.4 million, or 18.1%, to $341.6 million as compared to sales of $289.2 million, primarily driven by an increase in e-commerce sales of 143.0% and an increase in retail sales of 13.6%. Direct-to-Consumer comparable same store sales increased 10.2%, including increases of 25.7% domestically, partially offset by decreases of 27.4% internationally. Average selling price per unit increased 9.8% and volume increased 7.6% in the number of units sold.
Direct-to-Consumer gross margin increased 810 basis points to 64.1%, primarily driven by a higher mix of e-commerce sales which have higher margins as well as the aforementioned increase in average selling price per unit.
17
Comparable store sales mentioned above includes stores that have been opened for at least thirteen calendar months as well as sales on our company-owned websites. We did not make any adjustments for the effects of the COVID-19 pandemic and the related impacts of store closures and reduced operating hours. Definitions and calculations of comparable store sales differ among companies in the retail industry, and therefore comparable store sales disclosed by us may not be comparable to the metrics disclosed by other companies.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity outlook
Our liquidity remains ample and we believe we are well-positioned to endure the economic environment associated with the COVID-19 pandemic. As a precautionary measure, in March 2020, we borrowed $490.0 million on our unsecured revolving credit facility. At March 31, 2021, we have unused credit capacity of $10.5 million along with an additional $250.0 million available through an accordion feature on the unsecured revolving credit facility. We continue to partner with our vendors, landlords, and lenders to maximize our liquidity and mitigate cash flow risk. We believe that anticipated cash flows from operations, existing cash and investments balances, available borrowings under our credit agreement, and current financing arrangements will be sufficient to provide us with the liquidity necessary to fund our anticipated working capital and capital requirements for the next twelve months.
As of March 31, 2021, we had approximately $1.3 billion in cash and cash equivalents, of which $741.3 million, or 58%, was held outside the U.S. Of the $741.3 billion held outside of the U.S., approximately $379.3 million is available for repatriation to the U.S. without incurring U.S. federal income taxes and applicable non-U.S. income and withholding taxes in excess of the amounts accrued in our Condensed Consolidated Financial Statements as of March 31, 2021.
Cash Flows
Our working capital at March 31, 2021 was $2.2 billion, an increase of $0.1 billion from working capital of $2.1 billion at December 31, 2020. Our cash and cash equivalents at March 31, 2021 were $1.3 billion, compared to $1.4 billion at December 31, 2020. Our primary sources of operating cash are collections from customers. Our primary uses of cash are inventory purchases, selling, general and administrative expenses and capital expenditures.
Operating Activities
For the three months ended March 31, 2021, net cash used in operating activities was $13.8 million as compared to $135.0 million for the three months ended March 31, 2020. On a comparative year-over-year basis, the $121.2 million decrease in net cash used in operating activities primarily resulted from the timing of payments to vendors and increased net earnings, partially offset by increased inventory purchases.
Investing Activities
Net cash used in investing activities was $105.5 million for the three months ended March 31, 2021 as compared to $76.3 million for the three months ended March 31, 2020. The $29.2 million increase was primarily due to an increase in investment purchases of $27.3 million. Capital expenditures for the three months ended March 31, 2021 were approximately $84.2 million, which consisted primarily of approximately $42.9 million related to the expansion of our joint-venture owned domestic distribution center, $13.8 million related to investments in our new corporate offices in California and $12.4 million related to investments in our direct-to-consumer technology and retail stores. We expect our ongoing capital expenditures for the remainder of 2021 to be approximately $200.0 million to $250.0 million, which is primarily related to the expansion of our worldwide distribution capabilities, continued investments in retail and e-commerce technologies and stores, and our new corporate offices in California. We expect to fund ongoing capital expenses through a combination of borrowings and available cash.
Financing Activities
Net cash provided by financing activities was $34.8 million during the three months ended March 31, 2021 compared to $558.0 million in net cash provided by financing activities during the three months ended March 31, 2020. The $523.2 million decrease is primarily reduced proceeds from long-term borrowings of $523.8 million.
Capital Resources and Prospective Capital Requirements
Financing Arrangements
As of March 31, 2021, outstanding short-term and long-term borrowings were $779.7 million, of which $452.5 million relates to our unsecured revolving credit facility, $244.3 million relates to loans for our domestic and China distribution centers, $80.5 million relates to our operations in China and the remainder relates to our international operations. Our long-term debt obligations contain both financial and non-financial covenants, including cross-default provisions. We were in compliance with all debt covenants related to our short-term and long-term borrowings as of the date of this quarterly report. See Note 4 – Financial Commitments of the Condensed Consolidated Financial Statements for additional information.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously reported under Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the design and effectiveness of our disclosure controls and procedures, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our CEO and CFO concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were effective in the timely and accurate recording, processing, summarizing and reporting of material financial and non-financial information within the time periods specified within the SEC’s rules and forms. Our CEO and CFO also concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to the information previously reported under Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
ITEM 1A. RISK FACTORS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Recent Sales of Unregistered Securities: None.
(b) Use of Proceeds from Registered Securities: None.
(c) Issuer Purchases of Equity Securities: None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number
Description
10.1
First Amendment to Credit Agreement dated March 23, 2021, by and among the Registrant, and Bank of America, N.A., HSBC Bank USA, N.A., JPMorgan Chase Bank, N.A. and other lenders.
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Financial statements from the quarterly report on Form 10-Q of Skechers U.S.A., Inc. for the quarter ended March 31, 2021 formatted in inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (vi) the Notes to the Condensed Consolidated Financial Statements
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.
SIGNATURES
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.
Date: May 7, 2021
By:
/s/ John Vandemore
John Vandemore
Chief Financial Officer