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 June 30, 2022
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 July 29, 2022, 134,844,529 shares of the registrant’s Class A Common Stock, $0.001 par value per share, were outstanding.
As of July 29, 2022, 20,888,571 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)
8
Notes to Condensed Consolidated Financial Statements (Unaudited)
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
22
Item 4.
Controls and Procedures
23
PART II – OTHER INFORMATION
Legal Proceedings
24
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
25
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
26
2
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
As of
(in thousands)
June 30, 2022
December 31, 2021
ASSETS
Current assets
Cash and cash equivalents
$
751,904
796,283
Short-term investments
105,099
98,580
Trade accounts receivable, less allowances of $53,799 and $62,684
916,784
732,793
Other receivables
55,039
80,043
Inventory
1,563,907
1,470,994
Prepaid expenses and other
177,236
193,547
Total current assets ($986,204 and $1,040,765 related to VIEs)
3,569,969
3,372,240
Property, plant and equipment, net
1,225,529
1,128,909
Operating lease right-of-use assets
1,168,385
1,224,580
Deferred tax assets
452,747
451,355
Long-term investments
89,423
145,590
Goodwill
93,497
Other assets, net
77,046
75,109
Total non-current assets ($591,827 and $608,607 related to VIEs)
3,106,627
3,119,040
TOTAL ASSETS
6,676,596
6,491,280
LIABILITIES AND EQUITY
Current liabilities
Accounts payable
972,399
876,342
Accrued expenses
258,640
265,420
Operating lease liabilities
223,230
225,658
Current installments of long-term borrowings
73,414
76,967
Short-term borrowings
—
1,195
Total current liabilities ($520,979 and $601,929 related to VIEs)
1,527,683
1,445,582
Long-term operating lease liabilities
1,049,330
1,094,748
Long-term borrowings
253,260
263,445
Deferred tax liabilities
9,712
11,820
Other long-term liabilities
118,507
133,613
Total non-current liabilities ($345,658 and $368,994 related to VIEs)
1,430,809
1,503,626
Total liabilities
2,958,492
2,949,208
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;
134,845 and 135,107 shares issued and outstanding
135
Class B Common Stock, $0.001 par value; 75,000 shares authorized;
20,889 and 20,939 shares issued and outstanding
21
Additional paid-in capital
402,360
429,608
Accumulated other comprehensive loss
(75,784
)
(48,323
Retained earnings
3,089,530
2,877,903
Skechers U.S.A., Inc. equity
3,416,262
3,259,344
Noncontrolling interests
301,842
282,728
Total stockholders' equity
3,718,104
3,542,072
TOTAL LIABILITIES AND EQUITY
See accompanying notes to unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended June 30,
Six Months Ended June 30,
(in thousands, except per share data)
2022
2021
Sales
1,867,804
1,661,871
3,687,398
3,096,326
Cost of sales
970,225
808,279
1,965,656
1,557,075
Gross profit
897,579
853,592
1,721,742
1,539,251
Operating expenses
Selling
166,609
141,470
274,818
232,795
General and administrative
576,812
510,912
1,116,862
947,578
Total operating expenses
743,421
652,382
1,391,680
1,180,373
Earnings from operations
154,158
201,210
330,062
358,878
Other income (expense)
(19,259
2,158
(25,005
(12,016
Earnings before income taxes
134,899
203,368
305,057
346,862
Income tax expense
28,739
41,545
62,731
70,530
Net earnings
106,160
161,823
242,326
276,332
Less: Net earnings attributable to noncontrolling interests
15,756
24,454
30,699
40,390
Net earnings attributable to Skechers U.S.A., Inc.
90,404
137,369
211,627
235,942
Net earnings per share attributable to Skechers U.S.A., Inc.
Basic
0.58
0.88
1.36
1.52
Diluted
1.35
1.51
Weighted-average shares used in calculating net earnings per share attributable to Skechers U.S.A., Inc.
155,941
155,561
155,969
155,196
156,748
156,674
157,074
156,321
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive income, net of tax
Net unrealized gain (loss) on derivative contract
1,254
(129
7,097
1,623
Gain (loss) on foreign currency translation adjustment
(42,229
3,012
(40,740
(9,493
Comprehensive income
65,185
164,706
208,683
268,462
Less: Comprehensive income attributable to noncontrolling interests
3,743
25,978
23,764
40,225
Comprehensive income attributable to Skechers U.S.A., Inc.
61,442
138,728
184,919
228,237
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Shares
Amount
Accumulated
Class A
Class B
Additional
other
Skechers
Total
Common
paid-in
comprehensive
Retained
U.S.A., Inc.
Noncontrolling
stockholders'
Stock
capital
loss
earnings
equity
interests
Balance at March 31, 2022
134,829
20,939
415,357
(46,822
2,999,126
3,367,817
298,099
3,665,916
Foreign currency translation adjustment
(28,962
(13,267
Net unrealized gain on derivative contract
Stock compensation expense
15,828
Proceeds from the employee stock purchase plan
144
4,836
Shares issued under the incentive award plan
692
1
(1
Shares redeemed for employee tax withholdings
(234
(9,429
Repurchases of common stock
(636
(24,231
(24,232
Conversion of Class B Common Stock into Class A Common Stock
50
(50
Balance at June 30, 2022
134,845
20,889
Balance at March 31, 2021
134,172
20,949
134
377,350
(36,349
2,234,973
2,576,129
255,417
2,831,546
1,359
1,653
Distributions to noncontrolling interests
(750
Net unrealized loss on derivative contract
14,645
141
4,027
572
(70
Balance at June 30, 2021
134,884
395,951
(34,990
2,372,342
2,733,459
280,645
3,014,104
Balance at December 31, 2021
135,107
(27,461
(13,279
(4,650
753
6,344
33,796
1,258
(427
(17,401
(1,287
(49,231
(49,232
Balance at December 31, 2020
133,618
21,016
372,165
(27,285
2,136,400
2,481,435
244,228
2,725,663
(7,705
(1,788
Contributions from noncontrolling interests
14
Purchase of noncontrolling interest
(6,856
(3,072
(9,928
26,686
1,059
67
(67
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization
72,032
66,649
Provision for bad debts and returns
9,542
12,563
Stock compensation
Deferred income taxes
(4,110
1,764
Net foreign currency adjustments
12,336
(6,148
Changes in operating assets and liabilities
Receivables
(210,229
(156,551
(125,485
(41,866
Other assets
10,766
49,108
118,667
87,345
Other liabilities
(4,932
1,279
Net cash provided by operating activities
154,709
317,161
Cash flows from investing activities
Capital expenditures
(163,511
(146,219
Purchases of investments
(32,770
(122,748
Proceeds from sales and maturities of investments
82,418
101,759
Net cash used in investing activities
(113,863
(167,208
Cash flows from financing activities
Net proceeds from the employee stock purchase plan
Repayments on long-term borrowings
(29,777
(477,835
Proceeds from long-term borrowings
16,040
57,629
Net repayments on short-term borrowings
(1,195
(2,722
Payments for employee taxes related to stock compensation
Purchase of noncontrolling interests
Net cash used in financing activities
(81,379
(429,635
Effect of exchange rate changes on cash and cash equivalents
(3,846
211
Net change in cash and cash equivalents
(44,379
(279,471
Cash and cash equivalents at beginning of the period
1,370,826
Cash and cash equivalents at end of the period
1,091,355
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest
8,855
7,354
Income taxes, net
50,817
53,610
Non-cash transactions
ROU assets exchanged for lease liabilities
154,448
72,833
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, 2021 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 2021 Annual Report on Form 10-K. Certain reclassifications have been made to the condensed consolidated financial statements in prior years to conform to the current year presentation, including but not limited to combining royalty income into sales.
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. The Hong Kong entity continues to be included in the Company’s condensed consolidated financial statements. There have been no changes during 2022 in the accounting treatment or characterization of any previously identified VIEs. 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 United States (“U.S.”) Treasury securities; Level 2 investments primarily include corporate notes and bonds, asset-backed 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 assets, net. 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 June 30, 2022, 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 loss in excess of anticipated operating loss 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 has evaluated this ASU and does not expect its adoption 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 June 30, 2022
Adjusted Cost
Fair Value
Cash and Cash Equivalents
Short-Term Investments
Long-Term Investments
Cash
633,767
Level 1
Money market funds
118,137
U.S. Treasury securities
20,132
11,419
8,713
Total level 1
138,269
Level 2
Corporate notes and bonds
109,172
89,335
19,837
Asset-backed securities
14,495
4,345
10,150
Mutual funds
50,723
Total level 2
174,390
93,680
80,710
946,426
10
As of December 31, 2021
664,220
132,063
25,437
8,896
16,541
157,500
148,373
84,783
63,590
17,180
4,901
12,279
53,180
218,733
89,684
129,049
1,040,453
The Company’s investments consist of U.S. Treasury securities, corporate notes and bonds and asset-backed 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 were as follows:
Accrued payroll, taxes, and other
137,248
143,295
Return reserve liability
63,452
68,944
Accrued inventory purchases
57,940
53,181
(4)
Financial Commitments
The Company had $3.0 million and $17.2 million of outstanding letters of credit as of June 30, 2022 and December 31, 2021, no short-term borrowings as of June 30, 2022, and $1.2 million in short-term borrowings as of December 31, 2021. Interest expense was $4.6 million and $3.4 million for the three months ended June 30, 2022 and 2021 and $9.1 million and $7.5 million for six months ended June 30, 2022 and 2021.
Long-term borrowings were as follows:
HF-T1 Distribution Center Loan
129,505
HF-T2 Distribution Center Construction Loan
65,722
57,227
China Distribution Center Construction Loan
66,352
75,621
China Operational Loans
57,108
69,796
Other
7,987
8,263
Subtotal
326,674
340,412
Less: Current installments
Total long-term borrowings
11
Revolving Credit Facility
The Company maintains a revolving credit facility to manage liquidity; including working capital and capital expenditures. On December 15, 2021, the Company amended its $500.0 million senior, unsecured revolving credit agreement dated November 21, 2019 (the “Amended Credit Agreement”). The Amended Credit Agreement expands its senior, unsecured credit facility to $750.0 million, which may be increased by up to $250.0 million under certain conditions and provides for the issuance of letters of credit up to a maximum of $100.0 million and swingline loans up to a maximum of $50.0 million. The Amended Credit Agreement extends the maturity date of the credit agreement, which was due to expire on November 21, 2024, to December 15, 2026. The Company had approximately $50.2 million in short-term borrowings as of March 31, 2022 on its revolving credit facility which it fully repaid during the second quarter of 2022. The weighted-average annual interest rate on borrowings was approximately 1.70% during the six months ended June 30, 2022. The unused credit capacity was $747.0 million and $732.8 million as of June 30, 2022 and December 31, 2021.
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. The Company was in compliance with the financial covenants as of June 30, 2022.
To finance construction and improvements to the Company’s North American distribution center, 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. 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 revolving credit facility.
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 June 30, 2022 and December 31, 2021, 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%.
To finance the expansion of the Company’s North American distribution center, the JV, through HF Logistics-SKX T2, LLC, a wholly-owned subsidiary of the JV (“HF-T2”) entered into a construction loan agreement of up to $73.0 million which matures on April 3, 2025. Under the 2020 Construction Loan Agreement, the interest rate per annum on the HF-T2 2020 Construction Loan is BSBY Daily Floating Rate (as defined therein) plus a margin of 190 basis points, reducing to 175 basis points upon substantial completion of the construction and certain other conditions being satisfied. The weighted-average annual interest rate on borrowings under the HF-T2 Distribution Center Construction Loan was approximately 2.40% during the six months ended June 30, 2022. The obligations of the JV under this loan are guaranteed by TGD Holdings I, LLC, which is an affiliate of HF.
The Company entered into a 700.0 million yuan loan agreement to finance the construction of its distribution center in China which matures on September 28, 2023. The interest rate at June 30, 2022 was 4.00% 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 is 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 June 30, 2022 and December 31, 2021, the outstanding balance under this loan included approximately $33.3 million and $28.2 million classified as current installments of long-term borrowings in the Company’s condensed consolidated balance sheets.
The Company has entered certain secured credit facilities to support the operations of its China joint venture. The balance of working capital loans was approximately $42.6 million with interest rates ranging from 1.63% to 2.83% per annum as of June 30, 2022. The balance of working capital loans as of December 31, 2021 was approximately $52.6 million with interest rates ranging from 1.00% to 3.70% per annum. The balance of loans related to a corporate office building in Shanghai was approximately $14.5 million, with interest at 4.13% per annum, as of June 30, 2022 and $17.2 million as of December 31, 2021, with interest at
12
4.28% per annum, payable at terms agreed by the lender. As of June 30, 2022 the outstanding balances classified as current borrowings in the Company’s condensed consolidated balance sheets included $28.4 million related to the working capital loans and $4.2 million related to the office building loans. As of December 31, 2021, the outstanding balances classified as current borrowings in the Company’s condensed consolidated balance sheets included $37.6 million related to the working capital loans and $4.0 million related to the office building loans.
(5)
Stockholders Equity and Stock Compensation
SHARE REPURCHASE PROGRAM
On January 31, 2022, the Company’s Board of Directors authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which the Company may, from time to time, purchase shares of its Class A common stock, for an aggregate repurchase price not to exceed $500 million. The Share Repurchase Program expires on January 31, 2025 and does not obligate the Company to acquire any particular amount of shares. As of June 30, 2022, there was $450.8 million remaining to repurchase shares under the Share Repurchase Program.
The following table provides a summary the Company’s stock repurchase activities:
Shares repurchased
635,712
1,287,486
Average cost per share
38.12
38.24
Total cost of shares repurchased (in thousands):
24,232
49,232
INCENTIVE AWARD PLAN
In the six months ended June 30, 2022, 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 earnings per share (“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. As of June 30, 2022, there were 2,835,299 shares available for grant as equity awards under the 2017 Incentive Award Plan if target levels are achieved for performance-based awards and 2,135,299 if maximum levels are achieved.
The Company issued the following stock-based instruments:
Granted
Weighted-Average Grant-Date Fair Value
Restricted stock
1,314,850
38.57
699,300
43.40
Performance-based restricted stock
116,250
42.46
108,750
38.95
Market-based restricted stock
58.85
54.34
A summary of the status and changes of the Company’s unvested shares is presented below:
Unvested at December 31, 2021
3,253,316
38.97
1,547,350
40.39
Vested
(1,256,281
36.09
Cancelled
(41,000
41.18
Unvested at June 30, 2022
3,503,385
40.60
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 with 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 June 30, 2022 and 2021, the Company recognized $15.1 million and $13.9 million of incentive stock compensation expense. For the six months ended June 30, 2022 and 2021, the Company recognized $32.3 million and $25.5 million of incentive stock compensation expense. As of June 30, 2022, the unamortized stock compensation of $114.9 million is expected to be recognized over a weighted-average period of 2.24 years.
13
STOCK PURCHASE PLAN
A total of 5,000,000 shares of Class A Common Stock are available for sale under the 2018 Employee Stock Purchase Plan (“2018 ESPP”). The 2018 ESPP provides eligible employees of the Company and its subsidiaries the opportunity to purchase shares of the Company’s Class A Common Stock at a purchase price equal to 85% of the fair market value on the first trading day or last trading day of each purchase period, whichever is lower. Eligible employees can invest up to 15% of their compensation through payroll deductions during each purchase period. The purchase price discount and the look-back feature cause the 2018 ESPP to be compensatory and the Company recognizes compensation expense, which is computed using the Black-Scholes valuation model.
For each of the three months ended June 30, 2022 and 2021, the Company recognized $0.7 million of ESPP stock compensation expense. For the six months ended June 30, 2022 and 2021, the Company recognized $1.5 million and $1.2 million of ESPP stock compensation expense. As of June 30, 2022, there were 3,914,503 shares available for sale under the 2018 ESPP.
(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
807
1,113
1,105
1,125
Weighted-average common shares outstanding, diluted
Anti-dilutive common shares excluded above
37
35
(7)
Income Taxes
The tax provisions for the three and six months ended June 30, 2022 and 2021 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 25%. The Company’s effective tax rate was 21.3% and 20.4% for the three months ended June 30, 2022 and 2021 and 20.6% and 20.3% for the six months ended June 30, 2022 and 2021 The minor increases for both the three and six month rates are the result of additional withholding taxes on certain foreign distributions.
(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 officers and directors of the Foundation. During each of the three months ended June 30, 2022 and 2021, the Company made contributions of $0.5 million, and contributions of $1.0 million for each of the six-month periods ended June 30, 2022 and 2021. 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
During the first quarter of 2022, the Company refined the way in which management assesses performance and allocates resources and now presents its reportable segment results as Wholesale and Direct-to-Consumer. Comparative periods have been recast to reflect these changes. Management continues to evaluate segment performance based primarily on sales and gross margin. 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:
Segment Information
Wholesale sales
1,140,325
964,228
2,391,631
1,907,338
414,479
379,426
869,439
748,992
Gross margin
36.3
%
39.4
36.4
39.3
Direct-to-Consumer sales
727,479
697,643
1,295,767
1,188,988
483,100
474,166
852,303
790,259
66.4
68.0
65.8
66.5
Total sales
48.1
51.4
46.7
49.7
Identifiable assets
Wholesale
3,813,653
3,816,513
Direct-to-Consumer
2,862,943
2,674,767
Additions to property, plant and equipment
49,965
51,059
114,663
125,193
24,148
10,923
48,848
21,026
74,113
61,982
163,511
146,219
Geographic Information
Geographic sales
Domestic Wholesale
521,041
401,277
1,059,610
778,515
Domestic Direct-to-Consumer
319,508
326,981
558,956
554,433
Total domestic sales
840,549
728,258
1,618,566
1,332,948
International Wholesale
619,284
562,951
1,332,021
1,128,823
International Direct-to-Consumer
407,971
370,662
736,811
634,555
Total international sales
1,027,255
933,613
2,068,832
1,763,378
Regional Sales
Americas (AMER)
1,033,879
855,240
1,980,765
1,580,858
Europe, Middle East & Africa (EMEA)
374,566
348,080
815,767
643,566
Asia Pacific (APAC)
459,359
458,551
890,866
871,902
China sales
254,917
316,872
527,948
567,474
15
Domestic
780,329
708,763
International
445,200
420,146
China property plant and equipment, net
250,529
255,421
The Company’s sales to its five largest customers accounted for approximately 11.1% and 9.0% of total sales for the three months ended June 30, 2022 and 2021, and for the six months ended June 30, 2022 and 2021 were 10.2% and 8.3%.
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 $4.1 billion and $4.2 billion at June 30, 2022 and December 31, 2021. Goodwill of $93.5 million is included in the Wholesale segment as of June 30, 2022.
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 additions to the provision for expected credit losses for the three months ended June 30, 2022 and 2021 were $0.7 million and $0.3 million and for the six months ended June 30, 2022 and 2021 were $1.0 million and $0.3 million.
The Company’s accounts receivables, excluding allowances for bad debts, allowances and chargebacks, by geography are summarized as follows:
Domestic Accounts Receivable
393,644
270,404
International Accounts Receivable
576,939
525,073
The Company’s top five manufacturers produced the following:
(percentage of total production)
Manufacturer #1
16.1
17.0
16.9
17.9
Manufacturer #2
6.3
7.3
5.6
6.1
Manufacturer #3
5.0
4.9
Manufacturer #4
6.0
4.8
5.1
Manufacturer #5
4.6
4.7
4.3
39.5
38.7
37.9
38.0
(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 June 30, 2022, 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.
16
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, 2021.
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 contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements with regards to future revenue, projected operating results, earnings, spending, margins, cash flow, orders, expected timing of shipment of products, inventory levels, future growth or success in specific countries, categories or market sectors, continued or expected distribution to specific retailers, liquidity, capital resources and market risk, strategies and objectives. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or simply state future results, performance or achievements, and can be identified by the use of forward-looking language such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will,” “could,” “may,” “might,” or any variations of such words with similar meanings. 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 manage the impact from delays and disruptions in our supply chain;
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;
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 effects of inflation around the world, challenging consumer retail market in the United States (“U.S.”) and the impact of Russia’s war with Ukraine; and
other factors referenced or incorporated by reference in our annual report on Form 10-K for the year ended December 31, 2021 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 exceeded $1.8 billion in the second quarter. This is a new quarterly sales record, reflecting the continued broad-based demand for our product. Sales increased across both of our segments compared to the same period in 2021. This global growth came despite ongoing challenges, including COVID-related temporary store closures and operating restrictions, shipping delays, and macroeconomic volatility.
Our core product philosophy of comfort, style, innovation, and quality at the right price continues to resonate with consumers, and we remain focused on delivering our comfort technology footwear as quickly as possible to meet the consumer demand.
We remain confident in the strength of our brand and the relevance of our distinct product offering. We continue to invest for growth with a focus on enhancing our global infrastructure, direct-to-consumer technologies and developing innovative footwear. Current global infrastructure investments, technology projects and activities include:
Expanding our e-commerce presence internationally.
Completing the expansion, in July, of our North American LEED Gold Certified distribution center to increase capacity.
Continuing development on our LEED Gold Certified corporate headquarters expansion, which we expect to be completed in 2024.
Expanding our international distribution and supply chain footprint.
Exploring new recycled materials to expand our sustainable product offering.
RESULTS OF OPERATIONS – SECOND QUARTER
During the first quarter of 2022, the Company realigned its reporting structure to two reportable segments, Wholesale and Direct-to-Consumer. Prior period amounts have been recast. Wholesale includes sales to department stores, family shoe stores, specialty running and sporting goods retailers, and big box club stores; franchisee and licensee third-party store operators; dedicated e-commerce retailers; and international distributors. Direct-to-Consumer includes direct sales to consumers through an integrated retail format of company-owned physical stores and digital platforms and hosted digital marketplaces in select international markets.
Selected information from our results of operations follows:
Change
205,933
12.4
161,946
20.0
43,987
5.2
(330
)bps
25,139
17.8
65,900
12.9
91,039
14.0
As a % of sales
39.8
bps
(47,052
(23.4
Operating margin
8.3
12.1
(390
(21,417
n/m
(68,469
(33.7
(12,806
(30.8
(55,663
(34.4
Net earnings attributable to noncontrolling interests
(8,698
(35.6
(46,965
(34.2
Sales increased $205.9 million, or 12.4%, to $1.9 billion as compared to $1.7 billion as a result of a 15.4% increase in domestic sales and a 10.0% increase in international sales, primarily driven by strength in wholesale sales. Sales increased across both segments including Wholesale growth of 18.3% and Direct-to-Consumer growth of 4.3%. Sales increased overall due to improved volume and higher average selling prices.
Gross margin decreased 330 basis points to 48.1% compared to 51.4%, primarily driven by higher per unit freight costs and a higher proportion of wholesale sales, partially offset by average selling price increases.
Operating expenses increased $91.0 million, or 14.0%, to $743.4 million, and as a percentage of sales, increased 50 basis points to 39.8% compared to 39.3% in the prior year. Selling expenses increased $25.1 million, or 17.8%, to $166.6 million primarily due to higher demand creation expenditures. General and administrative expenses increased $65.9 million, or 12.9%, to $576.8 million, primarily due to volume-driven increases in labor and warehouse and distribution expenses of $25.4 million, as well as higher rent and store operating costs of $10.8 million.
18
Other expense of $19.3 million changed $21.4 million from other income of $2.2 million, primarily due to unfavorable losses on foreign currency exchange rates, largely in Europe.
Income taxes
Income tax expense and the effective tax rate were as follows:
Effective tax rate
21.3
20.4
Our income tax expense and effective income tax rate are significantly impacted by the mix of our domestic and foreign earnings before income taxes. In the foreign jurisdictions in which we have operations, the applicable statutory rates range from 0.0% to 34%, which on average is significantly lower than the U.S. federal and state combined statutory rate of approximately 25%. For the quarter, the increase in the effective tax rate primarily reflects additional withholding taxes on certain foreign distributions.
Noncontrolling interests in net income of consolidated joint ventures
Noncontrolling interests represents the share of net earnings that is attributable to our joint venture partners. Net earnings attributable to noncontrolling interests decreased $8.7 million to $15.8 million as compared to $24.5 million, primarily due to lower earnings by our joint ventures, predominantly China, due to impacts of COVID-related restrictions.
RESULTS OF SEGMENT OPERATIONS – SECOND QUARTER
2022 vs 2021 Change
2021 vs 2020 Change
2020
385,862
176,097
18.3
578,366
149.9
154,574
35,053
9.2
224,852
145.5
40.1
(300
2022 to 2021 Comparison
Wholesale sales increased $176.1 million, or 18.3% to $1.1 billion, led by growth of 34.9% in the Americas. Volume increased 14.8% in the number of units sold and average selling price per unit increased 3.1%.
Wholesale gross margin decreased 300 basis points to 36.3% due to higher average cost per unit, driven by increased freight costs, partially offset by average selling price increases.
2021 to 2020 Comparison
Wholesale sales increased $578.4 million, or 149.9% to $964.2 million, as a result of growth across all regions which experienced COVID restrictions in 2020. Growth was 207.5% in the Americas, 148.7% in Europe, Middle East & Africa, and 77.6% in Asia Pacific. Volume increased 143.1% in the number of units sold and average selling price per unit increased 3.1%.
Wholesale gross margin decreased 70 basis points to 39.4% primarily due to higher average per unit costs, partially offset by average selling price increases.
346,209
29,836
351,434
101.5
216,590
8,934
1.9
257,576
118.9
62.6
(160
540
Direct-to-Consumer sales increased $29.8 million, or 4.3%, to $727.5 million, led by increases in the Americas of 3.7%, Europe, Middle East & Africa of 13.5%, and Asia Pacific of 2.7%. Volume was essentially flat with a decrease of 1.0% in the number of units sold and average selling price per unit increased 5.3%.
Direct-to-Consumer gross margin decreased 160 basis points to 66.4%, primarily due to higher average per unit costs, partially offset by average selling price increases.
19
Direct-to-Consumer sales increased $351.4 million, or 101.5%, to $697.6 million, driven by increases across all regions which experienced COVID restrictions in 2020. Growth was 127.6% in the Americas, 439.7% in Europe, Middle East & Africa, and 48.6% in Asia Pacific. Volume increased 66.2% in the number of units sold and average selling price per unit increased 21.1%.
Direct-to-Consumer gross margin increased 540 basis points to 68.0% primarily driven by higher average selling prices, partially offset by higher average per unit costs.
RESULTS OF OPERATIONS – SIX MONTHS
591,072
19.1
408,581
26.2
182,491
11.9
42,023
18.1
169,284
211,307
37.7
38.1
(40
(28,816
(8.0
9.0
11.6
(260
Other expense
(12,989
108.1
(41,805
(12.1
(7,799
(11.1
(34,006
(12.3
(9,691
(24.0
(24,315
(10.3
Sales increased $0.6 billion, or 19.1%, to $3.7 billion as compared to $3.1 billion as a result of a 21.4% increase in domestic sales and a 17.3% increase in international sales, primarily driven by strength in wholesale sales. Sales grew across both segments with increases to Wholesale of 25.4% and Direct-to-Consumer of 9.0%. Sales increased overall due to improved volume and higher average selling prices.
Gross margin decreased 300 basis points to 46.7% compared to 49.7%, primarily driven by higher per unit freight costs and a higher proportion of wholesale sales, partially offset by average selling price increases.
Operating expenses increased $211.3 million, or 17.9%, to $1.4 billion, and as a percentage of sales, improved 40 basis points to 37.7% compared to 38.1% in the prior year. Selling expenses increased $42.0 million, or 18.1%, to $274.8 million from $232.8 million primarily due to higher demand creation expenditures. General and administrative expenses increased $169.3 million, or 17.9%, to $1.1 billion, primarily due to higher labor and incentive compensation costs of $82.8 million, rent of $15.6 million, and volume-driven warehouse and distribution expenses of $14.9 million.
Other expense increased $13.0 million to $25.0 million as compared to $12.0 million, primarily due to unfavorable losses on foreign currency exchange rates in Europe, Middle East & Africa.
20.6
20.3
20
Our provision for income tax expense and effective income tax rate are significantly impacted by the mix of our domestic and foreign earnings (loss) 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 25%. Year-to-date, the effective tax rate was essentially flat.
Noncontrolling interest in net income of consolidated joint ventures
Noncontrolling interest represents the share of net earnings that is attributable to our joint venture partners. Net earnings attributable to noncontrolling interest decreased $9.7 million to $30.7 million as compared to $40.4 million, primarily due to lower earnings by our joint ventures, predominantly China, due to impacts of COVID-related restrictions.
RESULTS OF SEGMENT OPERATIONS – SIX MONTHS
1,272,007
484,293
25.4
635,331
49.9
487,966
120,447
261,026
53.5
38.4
(290
90
Wholesale sales increased $0.5 billion, or 25.4% to $2.4 billion, driven primarily by growth of 38.2% in the Americas and Europe, Middle East & Africa of 24.0%. Volume increased 18.8% in the number of units sold and average selling price per unit increased 5.9%.
Wholesale gross margin decreased 290 basis points to 36.4% due to higher average cost per unit, primarily driven by increased freight costs, partially offset by average selling price increases.
Wholesale sales increased $0.6 billion, or 49.9% to $1.9 billion, as a result of growth across the Americas of 51.4%, Europe, Middle East & Africa of 35.4% and Asia Pacific of 70.5% which were impacted by 2020 COVID-related market closures. Volume increased 43.6% in the number of units sold and average selling price per unit increased 4.5%.
Wholesale gross margin increased 90 basis points to 39.3% primarily due to higher average selling prices.
707,656
106,779
481,332
436,113
62,044
7.9
354,146
81.2
61.6
480
Direct-to-Consumer sales increased $106.8 million, or 9.0%, to $1.3 billion, led by increases in the Americas of 6.8%, Europe, Middle East & Africa of 44.2%, and Asia Pacific of 5.3%. Volume decreased 0.4% in the number of units sold and average selling price per unit increased 9.4%.
Direct-to-Consumer gross margin decreased 70 basis points to 65.8%, driven by increased freight costs, partially offset by average selling price increases.
Direct-to-Consumer sales increased $0.5 billion, or 68.0%, to $1.2 billion, driven by increases of 68.8% in the Americas, and 61.8% in Asia Pacific, and 100.6% in Europe, Middle East & Africa which experienced COVID restrictions in 2020. Volume increased 47.0% in the number of units sold and average selling price per unit increased 14.2%.
Direct-to-Consumer gross margin increased 480 basis points to 61.6% primarily driven by higher average selling prices and lower average per unit costs.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity outlook
We have cash and cash equivalents of $751.9 million at June 30, 2022. Amounts held outside the U.S. were $587.3 million, or 78.1%, and approximately $232.4 million was available for repatriation to the U.S. as of June 30, 2022 without incurring additional U.S. federal income taxes and applicable non-U.S. income and withholding taxes.
In the second quarter of 2022, we fully repaid the $50.2 million balance on our revolving credit facility that had been drawn down during the first quarter. As of June 30, 2022, our unused credit capacity under this agreement was $747.0 million with an additional $250.0 million available through an accordion feature. We believe that anticipated cash flows from operations, existing cash and investments balances, available borrowings under our revolving credit facility, 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.
Cash Flows
Our working capital at June 30, 2022 was $2.0 billion, an increase of $0.1 billion from working capital of $1.9 billion at December 31, 2021. Our cash and cash equivalents at June 30, 2022 were $751.9 million, compared to $796.3 million at December 31, 2021. 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 six months ended June 30, 2022, net cash provided by operating activities was $154.7 million as compared to $317.2 million for the six months ended June 30, 2021. The $162.5 million decrease in net cash provided by operating activities primarily resulted from increased inventory purchases and receivables balances on wholesale sales.
Investing Activities
Net cash used in investing activities was $113.9 million for the six months ended June 30, 2022 as compared to $167.2 million for the six months ended June 30, 2021. The $53.3 million decrease was due to reduced net investment activity of $70.6 million, offset by increased capital expenditures of $17.3 million.
Our capital investments remain focused on supporting our strategic growth priorities, growing our Direct-to-Consumer business, as well as expanding the presence of our brand internationally. Capital expenditures for the six months ended June 30, 2022 were $163.5 million, which included $50.7 million of investments in our expanded corporate offices domestically and in India; $49.9 million related to the expansion of our global distribution infrastructure; and $49.1 million related to investments in our retail stores and direct-to-consumer technologies. We expect our ongoing capital expenditures for the remainder of 2022 to be approximately $100.0 million to $150.0 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 corporate offices in Southern California. We expect to fund ongoing capital expenses through a combination of borrowings and available cash.
Financing Activities
Net cash used in financing activities was $81.4 million during the six months ended June 30, 2022 compared to $429.6 million during the six months ended June 30, 2021. The decrease is primarily the result of lower repayments on long-term borrowings of $448.1 million, partially offset by repurchasing $49.2 million of common stock.
Capital Resources and Prospective Capital Requirements
Financing Arrangements
As of June 30, 2022, outstanding short-term and long-term borrowings were $326.7 million, of which $261.6 million relates to loans for our domestic and China distribution centers, $57.1 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.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates did not change materially during the quarter ended June 30, 2022.
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, 2021.
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 June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
Michael Conte v. Robert Greenberg, et al. – On July 21, 2022, Skechers and certain past and present members of the Board of Directors were sued by a stockholder on behalf of our company in a derivative action in the Chancery Court of the State of Delaware, Case No. 2022-0633, alleging breach of fiduciary duty, waste of corporate assets, breach of duty of candor and breach of contract in connection with certain executive officers’ personal use of two company-owned aircraft. The complaint seeks actual damages in favor of Skechers sustained as the alleged result of defendants’ alleged breaches of fiduciary duties, judgment directing our company to take all necessary actions to reform and improve its corporate governance practices, termination of certain executive officers for allegedly violating their employment agreements, judgment directing the sale of one of the company-owned aircraft and attorneys’, accountants’ and experts’ fees, costs and expenses. We believe that we have meritorious defenses and intend to defend this matter vigorously. Notwithstanding, given the early stages of these proceedings and the limited information available, we cannot predict the outcome of this legal proceeding or whether an adverse result in this case would have a material adverse impact on our results of operations or financial position.
In addition to the matters included in our reserve for loss contingencies, we occasionally become involved in litigation arising from the normal course of business, and we are unable to determine the extent of any liability that may arise from any such unanticipated future litigation. We have no reason to believe that there is a reasonable possibility or a probability that we may incur a material loss, or a material loss in excess of a recorded accrual, with respect to any other such loss contingencies. However, the outcome of litigation is inherently uncertain and assessments and decisions on defense and settlement can change significantly in a short period of time. Therefore, although we consider the likelihood of such an outcome to be remote with respect to those matters for which we have not reserved an amount for loss contingencies, if one or more of these legal matters were resolved against our company in the same reporting period for amounts in excess of our expectations, our consolidated financial statements of a particular reporting period could be materially adversely affected.
Item 1A. Risk Factors
Except as described below, 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, 2021.
Risks Related to Economic, Political and External Factors
The Uncertainty Of Global Market Conditions May Continue To Have A Negative Impact On Our Business, Results Of Operations Or Financial Condition.
The uncertain state of global economic and political conditions, including the impact of inflation and challenging consumer retail market, may negatively impact our business, which depends on the general economic environment and levels of consumers’ discretionary spending. If the current economic situation does not improve or if it weakens, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new retail stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, or maintain or improve our earnings from operations as a percentage of sales. Furthermore, Russia’s war with Ukraine and the subsequent economic sanctions imposed by the U.S., NATO and other countries may impact the economic conditions or our ability to sell products to customers in the affected region. The conflict could also have broader implications on economies outside the region, such as the global inflationary impact of a potential boycott of Russian oil and gas by other countries. If there is an unexpected decline in sales, our results of operations will depend on our ability to implement a corresponding and timely reduction in our costs and manage other aspects of our operations. These challenges include (i) managing our infrastructure, (ii) hiring and maintaining, as required, the appropriate number of qualified employees, (iii) managing inventory levels and (iv) controlling other expenses. If the uncertain global market conditions continue for a significant period or worsen, our results of operations, financial condition, and cash flows could be materially adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In January 2022, the Board of Directors approved a $500 million share repurchase program. The program allows the Company to repurchase shares of Class A common stock from time to time and does not obligate the Company to acquire any particular amount. The following table summarizes the share repurchase activity during the quarter ended June 30, 2022.
Month Ended
Total Number of
Shares Purchased
Average Price
Paid Per Share
Maximum Dollar Value of Shares that May Yet Be Purchased under the Program
April 30, 2022
475,000
May 31, 2022
252,787
36.54
465,762
382,925
39.16
450,768
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibit
Number
Description
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 June 30, 2022 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: August 5, 2022
By:
/s/ John Vandemore
John Vandemore
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Signatory)