e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-14429
SKECHERS U.S.A., INC.
(Exact name of registrant as specified in its charter)
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Delaware
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95-4376145 |
(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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228 Manhattan Beach Blvd. |
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Manhattan Beach, California
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90266 |
(Address of Principal Executive Office)
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(Zip Code) |
(310) 318-3100
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
THE NUMBER OF SHARES OF CLASS A COMMON STOCK OUTSTANDING AS OF AUGUST 1, 2011: 38,587,554.
THE NUMBER OF SHARES OF CLASS B COMMON STOCK OUTSTANDING AS OF AUGUST 1, 2011: 11,296,970.
SKECHERS U.S.A., INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par values)
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June 30, |
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December 31, |
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2011 |
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2010 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
250,782 |
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$ |
233,558 |
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Trade accounts receivable, net |
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275,958 |
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266,057 |
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Other receivables |
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10,375 |
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9,650 |
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Total receivables |
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286,333 |
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275,707 |
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Inventories, net |
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325,815 |
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398,588 |
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Prepaid expenses and other current assets |
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70,072 |
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53,791 |
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Deferred tax assets |
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11,720 |
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11,720 |
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Total current assets |
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944,722 |
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973,364 |
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Property and equipment, at cost, less accumulated depreciation and amortization |
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367,152 |
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293,802 |
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Intangible assets, less accumulated amortization |
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6,587 |
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7,367 |
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Deferred tax assets |
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12,323 |
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12,323 |
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Other assets, at cost |
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17,679 |
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17,938 |
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TOTAL ASSETS |
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$ |
1,348,463 |
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$ |
1,304,794 |
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LIABILITIES AND EQUITY |
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Current Liabilities: |
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Current installments of long-term borrowings |
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$ |
9,893 |
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$ |
11,984 |
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Short-term borrowings |
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46,096 |
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18,346 |
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Accounts payable |
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245,185 |
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246,595 |
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Accrued expenses |
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19,259 |
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30,385 |
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Total current liabilities |
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320,433 |
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307,310 |
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Long-term borrowings, excluding current installments |
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81,075 |
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51,650 |
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Deferred tax liabilities |
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77 |
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0 |
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Total liabilities |
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401,585 |
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358,960 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred Stock, $.001 par value; 10,000 authorized; none issued and outstanding |
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0 |
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0 |
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Class A Common Stock, $.001 par value; 100,000 shares authorized; 37,146 and
36,894 shares issued and outstanding at June 30, 2011 and December 31,
2010, respectively respectively |
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37 |
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37 |
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Class B Common Stock, $.001 par value; 100,000 shares authorized; 11,297 and
11,311 shares issued and outstanding at June 30, 2011 and December 31,
2010, respectively respectively |
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11 |
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11 |
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Additional paid-in capital |
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313,380 |
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303,877 |
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Accumulated other comprehensive income |
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13,209 |
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4,265 |
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Retained earnings |
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581,905 |
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600,013 |
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Skechers U.S.A., Inc. equity |
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908,542 |
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908,203 |
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Non-controlling interests |
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38,336 |
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37,631 |
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Total equity |
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946,878 |
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945,834 |
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TOTAL LIABILITIES AND EQUITY |
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$ |
1,348,463 |
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$ |
1,304,794 |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(In thousands, except per share data)
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Three-Months Ended June 30, |
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Six-Months Ended June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Net sales |
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$ |
434,351 |
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$ |
504,859 |
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$ |
910,585 |
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$ |
997,623 |
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Cost of sales |
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291,021 |
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267,214 |
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574,645 |
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522,560 |
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Gross profit |
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143,330 |
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237,645 |
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335,940 |
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475,063 |
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Royalty income |
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1,376 |
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875 |
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3,024 |
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1,260 |
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144,706 |
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238,520 |
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338,964 |
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476,323 |
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Operating expenses: |
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Selling |
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53,099 |
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52,437 |
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90,659 |
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86,746 |
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General and administrative |
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139,965 |
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127,299 |
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281,948 |
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249,786 |
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193,064 |
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179,736 |
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372,607 |
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336,532 |
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Earnings (loss) from operations |
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(48,358 |
) |
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58,784 |
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(33,643 |
) |
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139,791 |
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Other income (expense): |
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Interest income |
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756 |
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436 |
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1,343 |
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1,864 |
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Interest expense |
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(2,352 |
) |
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(118 |
) |
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(4,317 |
) |
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(833 |
) |
Other, net |
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(944 |
) |
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1,611 |
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(595 |
) |
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1,820 |
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(2,540 |
) |
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1,929 |
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(3,569 |
) |
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2,851 |
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(Loss) earnings before income taxes |
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(50,898 |
) |
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60,713 |
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(37,212 |
) |
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142,642 |
|
Income tax (benefit) expense |
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(20,846 |
) |
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20,396 |
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(19,313 |
) |
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46,202 |
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Net (loss) earnings |
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(30,052 |
) |
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40,317 |
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(17,899 |
) |
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96,440 |
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Less: Net (loss) earnings attributable to
non-controlling interests |
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(136 |
) |
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80 |
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209 |
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(93 |
) |
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Net (loss) earnings attributable to Skechers U.S.A., Inc. |
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$ |
(29,916 |
) |
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$ |
40,237 |
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$ |
(18,108 |
) |
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$ |
96,533 |
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Net (loss) earnings per share attributable to Skechers
U.S.A., Inc.: |
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Basic |
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$ |
(0.62 |
) |
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$ |
0.85 |
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$ |
(0.38 |
) |
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$ |
2.05 |
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Diluted |
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$ |
(0.62 |
) |
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$ |
0.82 |
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$ |
(0.38 |
) |
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$ |
1.97 |
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Weighted average shares used in calculating earnings (loss)
per share attributable to Skechers U.S.A., Inc.: |
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Basic |
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48,341 |
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47,422 |
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48,292 |
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47,107 |
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Diluted |
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48,341 |
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49,130 |
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48,292 |
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48,955 |
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Comprehensive (loss) income: |
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Net (loss) earnings |
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$ |
(29,916 |
) |
|
$ |
40,237 |
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|
$ |
(18,108 |
) |
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$ |
96,533 |
|
(Loss) gain on foreign currency translation adjustment, net
of tax |
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|
4,671 |
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(6,147 |
) |
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8,943 |
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(10,415 |
) |
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Total comprehensive (loss) income |
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$ |
(25,245 |
) |
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$ |
34,090 |
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$ |
(9,165 |
) |
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$ |
86,118 |
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See accompanying notes to unaudited condensed consolidated financial statements.
4
SKECHERS U.S.A., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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Six-Months Ended June 30, |
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2011 |
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2010 |
|
Cash flows from operating activities: |
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Net (loss) earnings |
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$ |
(18,108 |
) |
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$ |
96,533 |
|
Adjustments to reconcile net (loss) earnings to net cash
provided by (used in) operating activities: |
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Non-controlling interest in subsidiaries |
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209 |
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|
(93 |
) |
Depreciation of property and equipment |
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|
15,088 |
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|
10,870 |
|
Amortization of deferred financing costs |
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|
652 |
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|
741 |
|
Amortization of intangible assets |
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|
790 |
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|
892 |
|
Provision for bad debts and returns |
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|
5,748 |
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|
3,135 |
|
Non-cash stock compensation |
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|
7,242 |
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|
|
6,665 |
|
Loss on disposal of equipment |
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|
232 |
|
|
|
50 |
|
Deferred income taxes |
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|
75 |
|
|
|
(12 |
) |
(Increase) decrease in assets: |
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Receivables |
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(8,271 |
) |
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|
(91,260 |
) |
Inventories |
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|
73,875 |
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|
3,718 |
|
Prepaid expenses and other current assets |
|
|
(15,973 |
) |
|
|
(2,215 |
) |
Other assets |
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|
65 |
|
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|
(22,555 |
) |
Increase (decrease) in liabilities: |
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|
|
|
|
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Accounts payable |
|
|
1,871 |
|
|
|
(5,058 |
) |
Accrued expenses |
|
|
(11,428 |
) |
|
|
(9,381 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
52,067 |
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|
|
(7,970 |
) |
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|
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|
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Cash flows from investing activities: |
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Capital expenditures |
|
|
(92,881 |
) |
|
|
(29,721 |
) |
Maturities of investments |
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|
0 |
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|
30,000 |
|
Intangible additions |
|
|
0 |
|
|
|
(31 |
) |
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|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(92,881 |
) |
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|
248 |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net proceeds from the issuances of stock through employee stock
purchase plan and the exercise of stock options |
|
|
2,042 |
|
|
|
10,772 |
|
Increase in long-term borrowings |
|
|
36,751 |
|
|
|
0 |
|
Payments on long-term debt |
|
|
(9,390 |
) |
|
|
(281 |
) |
Increase (decrease) in short-term borrowings |
|
|
27,705 |
|
|
|
(61 |
) |
Contribution from non-controlling interest of consolidated entity |
|
|
115 |
|
|
|
1,000 |
|
Excess tax benefits from stock-based compensation |
|
|
219 |
|
|
|
5,758 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
57,442 |
|
|
|
17,188 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
16,628 |
|
|
|
9,466 |
|
Effect of exchange rates on cash and cash equivalents |
|
|
596 |
|
|
|
(1,875 |
) |
Cash and cash equivalents at beginning of the period |
|
|
233,558 |
|
|
|
265,675 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period |
|
$ |
250,782 |
|
|
$ |
273,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
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|
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Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
2,439 |
|
|
$ |
1,512 |
|
Income taxes |
|
|
7,588 |
|
|
|
53,343 |
|
|
|
|
|
|
|
|
|
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
Land contribution from noncontrolling interest
of consolidated entity |
|
|
0 |
|
|
|
30,000 |
|
Note payable contribution from noncontrolling
interest of consolidated entity |
|
|
0 |
|
|
|
14,567 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
SKECHERS U.S.A., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 and 2010
(Unaudited)
(1) GENERAL
Basis of Presentation
The accompanying condensed consolidated financial statements of Skechers U.S.A., Inc. (the
Company) have been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and in accordance with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include certain footnotes
and financial presentations normally required under accounting principles generally accepted in the
United States of America for complete financial reporting. The interim financial information is
unaudited, but reflects all normal adjustments and accruals which are, in the opinion of
management, considered necessary to provide a fair presentation for the interim periods presented.
The accompanying condensed consolidated financial statements should be read in conjunction with the
audited consolidated financial statements included in the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2010.
The results of operations for the three and six months ended June 30, 2011 are not necessarily
indicative of the results to be expected for the entire fiscal year ending December 31, 2011.
Use of Estimates
The preparation of the condensed consolidated financial statements, in conformity with
accounting principles generally accepted in the United States of America, requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Non-controlling interests
The Company has interests in certain joint ventures which are consolidated into its financial
statements. Non-controlling interest was a loss of $0.1 million and income of $0.1 million for the
three months ended June 30, 2011 and 2010, respectively, which represents the share of net earnings
or loss that is attributable to our joint venture partners. Non-controlling interest was income of
$0.2 million and a loss of $0.1 million for the six months ended June 30, 2011 and 2010,
respectively.
The Company has determined that its joint venture with HF Logistics I, LLC (HF) is a
variable interest entity (VIE) and that the Company is the primary beneficiary. The VIE is
consolidated into the condensed consolidated financial statements and the carrying amounts and
classification of assets and liabilities was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Current assets |
|
$ |
4,311 |
|
|
$ |
6,058 |
|
Noncurrent assets |
|
|
129,320 |
|
|
|
107,723 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
133,631 |
|
|
$ |
113,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
55,791 |
|
|
$ |
36,364 |
|
Noncurrent liabilities |
|
|
17,766 |
|
|
|
17,359 |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
73,557 |
|
|
$ |
53,723 |
|
|
|
|
|
|
|
|
6
The assets of these joint ventures are restricted in that they are not available for our
general business use outside the context of the joint venture. The holders of the liabilities of
each joint venture have no recourse to Skechers U.S.A., Inc. The Company does not have a
significant variable interest in any unconsolidated VIEs.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, (ASU
2011-05). ASU 2011-05 eliminates the option to report other comprehensive income and its
components in the statement of changes in equity. ASU 2011-05 requires that all non-owner changes
in stockholders equity be presented in either a single continuous statement of comprehensive
income or in two separate but consecutive statements. This new guidance is to be applied
retrospectively. ASU 2011-05 is effective for annual periods beginning after December 15, 2011.
We do not expect that the adoption of this standard update will have a material impact on the
Companys consolidated financial statements.
(2) REVENUE RECOGNITION
The Company recognizes revenue on wholesale sales when products are shipped and the customer
takes title and assumes risk of loss, collection of relevant receivable is reasonably assured,
persuasive evidence of an arrangement exists and the sales price is fixed or determinable. This
generally occurs at time of shipment. The Company recognizes revenue from retail sales at the point
of sale. Allowances for estimated returns, discounts, doubtful accounts and chargebacks are
provided for when related revenue is recorded. Related costs paid to third-party shipping companies
are recorded as a cost of sales.
Royalty income is earned from licensing arrangements. Upon signing a new licensing agreement,
we receive up-front fees, which are generally characterized as prepaid royalties. These fees are
initially deferred and recognized as revenue as earned (i.e., as licensed sales are reported to the
company or on a straight-line basis over the term of the agreement). The first calculated royalty
payment is based on actual sales of the licensed product. Typically, at each quarter-end we receive
correspondence from our licensees indicating the actual sales for the period. This information is
used to calculate and accrue the related royalties based on the terms of the agreement.
(3) OTHER COMPREHENSIVE (LOSS) INCOME
In addition to net (loss) earnings, other comprehensive (loss) income includes changes in
foreign currency translation adjustments and income (loss) attributable to non-controlling
interests. The Company operates internationally through several foreign subsidiaries. Assets and
liabilities of the foreign operations denominated in local currencies are translated at the rate of
exchange at the balance sheet date. Revenues and expenses are translated at the weighted average
rate of exchange during the period of translation. The resulting translation adjustments along with
translation adjustments related to intercompany loans of a long-term nature are included in the
translation adjustment in other comprehensive income (loss).
The activity in other comprehensive (loss) income, net of income taxes, was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended June 30, |
|
|
Six-Months Ended June 30, |
|
Comprehensive income (loss) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net (loss) earnings |
|
$ |
(30,052 |
) |
|
$ |
40,317 |
|
|
$ |
(17,899 |
) |
|
$ |
96,440 |
|
Gain (loss) on foreign currency translation
adjustment, net of tax |
|
|
4,781 |
|
|
|
(6,120 |
) |
|
|
9,324 |
|
|
|
(10,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
|
(25,271 |
) |
|
|
34,197 |
|
|
|
(8,575 |
) |
|
|
86,090 |
|
Comprehensive income (loss) attributable to
non-controlling interest |
|
|
26 |
|
|
|
(107 |
) |
|
|
(590 |
) |
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income attributable to parent |
|
$ |
(25,245 |
) |
|
$ |
34,090 |
|
|
$ |
(9,165 |
) |
|
$ |
86,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
(4) SHARE-BASED COMPENSATION
For stock-based awards we have recognized compensation expense based on the grant date fair
value. Share-based compensation expense was $3.5 million and $3.4 million for the three months
ended June 30, 2011 and 2010, respectively. Share-based compensation expense was $7.2 million and
$6.7 million for the six months ended June 30, 2011 and 2010, respectively.
Stock options granted pursuant to the 1998 Stock Option, Deferred Stock and Restricted Stock
Plan and the 2007 Incentive Award Plan (the Equity Incentive Plans) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted Average |
|
Aggregate |
|
|
|
|
|
|
Average |
|
Remaining |
|
Intrinsic |
|
|
Shares |
|
Exercise Price |
|
Contractual Term |
|
Value |
Outstanding at December 31, 2010 |
|
|
451,308 |
|
|
$ |
11.26 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(98,503 |
) |
|
|
9.08 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(85,058 |
) |
|
|
23.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2011 |
|
|
267,747 |
|
|
|
8.26 |
|
|
1.4 years |
|
$ |
1,664,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2011 |
|
|
267,747 |
|
|
|
8.26 |
|
|
1.4 years |
|
$ |
1,664,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status and changes of our nonvested shares related to our Equity Incentive
Plans as of and for the six months ended June 30, 2011 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant-Date Fair |
|
|
|
Shares |
|
|
Value |
|
Nonvested at December 31, 2010 |
|
|
1,493,329 |
|
|
$ |
18.97 |
|
Granted |
|
|
10,000 |
|
|
|
21.00 |
|
Vested |
|
|
(46,667 |
) |
|
|
31.37 |
|
Cancelled |
|
|
(12,333 |
) |
|
|
17.44 |
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2011 |
|
|
1,444,329 |
|
|
|
18.77 |
|
|
|
|
|
|
|
|
|
As of June 30, 2011, there was $18.3 million of unrecognized compensation cost related to
nonvested common shares. The cost is expected to be amortized over a weighted average period of 1.4
years.
(5) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share represents net earnings (loss) divided by the weighted average
number of common shares outstanding for the period. Diluted earnings (loss) per share represents
the weighted average number of common shares and potential common shares, if dilutive, that would
arise from the exercise of stock options and nonvested shares using the treasury stock method.
8
The following is a reconciliation of net earnings (loss) and weighted average common shares
outstanding for purposes of calculating basic earnings (loss) per share (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended June 30, |
|
Six-Months Ended June 30, |
Basic earnings (loss) per share |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Net earnings (loss) attributable to Skechers
U.S.A., Inc. |
|
$ |
(29,916 |
) |
|
$ |
40,237 |
|
|
$ |
(18,108 |
) |
|
$ |
96,533 |
|
Weighted average common shares outstanding |
|
|
48,341 |
|
|
|
47,422 |
|
|
|
48,292 |
|
|
|
47,107 |
|
Basic earnings (loss) per share attributable to
Skechers U.S.A., Inc. |
|
$ |
(0.62 |
) |
|
$ |
0.85 |
|
|
$ |
(0.38 |
) |
|
$ |
2.05 |
|
The following is a reconciliation of net earnings (loss) and weighted average common shares
outstanding for purposes of calculating diluted earnings (loss) per share (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended June 30, |
|
|
Six-Months Ended June 30, |
|
Diluted earnings (loss) per share |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net earnings (loss) attributable to Skechers U.S.A., Inc. |
|
$ |
(29,916 |
) |
|
$ |
40,237 |
|
|
$ |
(18,108 |
) |
|
$ |
96,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
48,341 |
|
|
|
47,422 |
|
|
|
48,292 |
|
|
|
47,107 |
|
Dilutive effect of stock options |
|
|
0 |
|
|
|
1,708 |
|
|
|
0 |
|
|
|
1,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
48,341 |
|
|
|
49,130 |
|
|
|
48,292 |
|
|
|
48,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share attributable to Skechers
U.S.A., Inc. |
|
$ |
(0.62 |
) |
|
$ |
0.82 |
|
|
$ |
(0.38 |
) |
|
$ |
1.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 851 shares and 38,938 shares of Class A common stock were not included in
the computation of diluted earnings (loss) per share for the three months and six months ended June
30, 2011, respectively, because their effect would have been anti-dilutive. There were no options
excluded from the computation of diluted earnings per share for the three months and six months
ended June 30, 2010, respectively.
(6) INCOME TAXES
The Companys effective tax rates for the second quarter and first six months of 2011 were
41.0% and 51.9%, respectively, compared to the effective tax rates of 33.6% and 32.4% for the
second quarter and first six months of 2010, respectively. Income tax benefit for the three months
ended June 30, 2011 was $20.8 million compared to expense of $20.4 million for the same period in
2010. Income tax benefit for the six months ended June 30, 2011 was $19.3 million compared to
expense of $46.2 million for the same period in 2010.
(7) LINE OF CREDIT, SHORT-TERM AND LONG-TERM BORROWINGS
The Company and its subsidiaries had $1.6 million of outstanding letters of credit and
short-term borrowings of $46.1 million as of June 30, 2011 and $18.3 million at December 31, 2010.
9
Long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Note payable to bank, due in monthly
installments of $531.4 (includes
principal and interest), fixed rate
interest at 3.54%, secured by
property, balloon payment of $12,635
due December 2015 |
|
$ |
36,814 |
|
|
$ |
39,325 |
|
Note payable to bank, due in monthly
installments of $483.9 (includes
principal and interest), fixed rate
interest at 3.19%, secured by
property, balloon payment of $11,670
due June 2016 |
|
|
36,344 |
|
|
|
0 |
|
Note payable to bank, due in monthly
installments of $57.6 (includes
principal and interest), fixed rate
interest at 7.89%, secured by
property, balloon payment of $6,889
paid in January 2011 |
|
|
0 |
|
|
|
6,900 |
|
Loan from HF Logistics I, LLC |
|
|
17,766 |
|
|
|
17,358 |
|
Capital lease obligations |
|
|
44 |
|
|
|
51 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
90,968 |
|
|
|
63,634 |
|
Less current installments |
|
|
9,893 |
|
|
|
11,984 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
81,075 |
|
|
$ |
51,650 |
|
|
|
|
|
|
|
|
(8) LITIGATION
The Company recognizes legal fees in connection with loss contingencies and other related
matters as incurred.
The Company occasionally becomes involved in litigation arising from the normal course of
business, and management is unable to estimate the extent of any liability that may arise from
unanticipated future litigation. The
Company has no reason to believe that there was a reasonable possibility or a probability the
Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with
respect to 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 management considers the likelihood of such an outcome to be remote, if
one or more of these legal matters were resolved against the Company in the same reporting period
for amounts in excess of managements expectations, the Companys consolidated financial statements
of a particular reporting period could be materially adversely affected.
(9) STOCKHOLDERS EQUITY
During the three months and six months ended June 30, 2011, 13,640 shares of Class B common
stock were converted into shares of Class A common stock, respectively. During the three months
and six months ended June 30, 2010, 852,225 and 1,014,105 shares of Class B common stock were
converted into shares of Class A common stock, respectively.
The following table reconciles equity attributable to non-controlling interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six-Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Non-controlling interest, January 1 |
|
$ |
37,631 |
|
|
$ |
3,448 |
|
Net earnings (loss) attributable to non-controlling interest |
|
|
209 |
|
|
|
(93 |
) |
Foreign currency translation adjustment |
|
|
381 |
|
|
|
70 |
|
Capital contribution by non-controlling interest |
|
|
115 |
|
|
|
31,000 |
|
|
|
|
|
|
|
|
Non-controlling interest, June 30 |
|
$ |
38,336 |
|
|
$ |
34,425 |
|
|
|
|
|
|
|
|
(10) SEGMENT AND GEOGRAPHIC REPORTING INFORMATION
We have four reportable segments domestic wholesale sales, international wholesale sales,
retail sales, and e-commerce sales. Management evaluates segment performance based primarily on
net sales and gross profit. All other costs and expenses of the Company are analyzed on an
aggregate basis, and these costs are not allocated to the
10
Companys segments. Net sales, gross
profit and identifiable assets and additions to property and equipment for the domestic wholesale
segment, international wholesale, retail, and the e-commerce segment on a combined basis were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale |
|
$ |
217,241 |
|
|
$ |
317,788 |
|
|
$ |
428,775 |
|
|
$ |
591,747 |
|
International wholesale |
|
|
105,002 |
|
|
|
77,779 |
|
|
|
274,413 |
|
|
|
201,128 |
|
Retail |
|
|
106,573 |
|
|
|
102,344 |
|
|
|
196,363 |
|
|
|
189,586 |
|
E-commerce |
|
|
5,535 |
|
|
|
6,948 |
|
|
|
11,034 |
|
|
|
15,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
434,351 |
|
|
$ |
504,859 |
|
|
$ |
910,585 |
|
|
$ |
997,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Gross margins |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale |
|
$ |
37,608 |
|
|
$ |
134,643 |
|
|
$ |
103,855 |
|
|
$ |
257,983 |
|
International wholesale |
|
|
39,826 |
|
|
|
32,017 |
|
|
|
112,643 |
|
|
|
86,003 |
|
Retail |
|
|
63,120 |
|
|
|
67,331 |
|
|
|
113,859 |
|
|
|
123,113 |
|
E-commerce |
|
|
2,776 |
|
|
|
3,654 |
|
|
|
5,583 |
|
|
|
7,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
143,330 |
|
|
$ |
237,645 |
|
|
$ |
335,940 |
|
|
$ |
475,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Identifiable assets |
|
|
|
|
|
|
|
|
Domestic wholesale |
|
$ |
883,705 |
|
|
$ |
891,671 |
|
International wholesale |
|
|
333,258 |
|
|
|
300,153 |
|
Retail |
|
|
131,323 |
|
|
|
112,774 |
|
E-commerce |
|
|
177 |
|
|
|
196 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,348,463 |
|
|
$ |
1,304,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Additions to property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic wholesale |
|
$ |
42,993 |
|
|
$ |
15,409 |
|
|
$ |
78,784 |
|
|
$ |
16,742 |
|
International wholesale |
|
|
851 |
|
|
|
2,154 |
|
|
|
1,824 |
|
|
|
2,592 |
|
Retail |
|
|
5,658 |
|
|
|
5,509 |
|
|
|
12,273 |
|
|
|
10,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
49,502 |
|
|
$ |
23,072 |
|
|
$ |
92,881 |
|
|
$ |
29,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Information:
The following summarizes our operations in different geographic areas for the period indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net sales (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
313,345 |
|
|
$ |
416,122 |
|
|
$ |
607,398 |
|
|
$ |
776,833 |
|
Canada |
|
|
11,715 |
|
|
|
11,851 |
|
|
|
27,517 |
|
|
|
27,875 |
|
Other international (2) |
|
|
109,291 |
|
|
|
76,886 |
|
|
|
275,670 |
|
|
|
192,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
434,351 |
|
|
$ |
504,859 |
|
|
$ |
910,585 |
|
|
$ |
997,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Long-lived assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
349,515 |
|
|
$ |
276,457 |
|
Canada |
|
|
1,374 |
|
|
|
1,590 |
|
Other international (2) |
|
|
16,263 |
|
|
|
15,755 |
|
|
|
|
|
|
|
|
Total |
|
$ |
367,152 |
|
|
$ |
293,802 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company has subsidiaries in Canada, United Kingdom, Germany, France, Spain, Portugal,
Italy, Netherlands, Brazil, and Chile that generate net sales within those respective
countries and in some cases the neighboring regions. The Company has joint ventures in China,
Hong Kong, Malaysia, Singapore, and Thailand that generate net sales from those countries.
The Company also has a subsidiary in Switzerland that generates net sales from that country in
addition to net sales to our distributors located in numerous non-European countries. Net
sales are attributable to geographic regions based on the location of the Company subsidiary. |
|
(2) |
|
Other international consists of Switzerland, United Kingdom, Germany, France, Spain,
Portugal, Italy, Netherlands, China, Hong Kong, Malaysia, Singapore, Thailand, Brazil, Chile,
and Vietnam. |
(11) BUSINESS AND CREDIT CONCENTRATIONS
The Company generates the majority of its sales in the United States; however, several of its
products are sold into various foreign countries, which subjects the Company to the risks of doing
business abroad. In addition, the Company operates in the footwear industry, which is impacted by
the general economy, and its business depends on the general economic environment and levels of
consumer spending. Changes in the marketplace may significantly affect managements estimates and
the Companys performance. Management performs regular evaluations concerning the ability of
customers to satisfy their obligations and provides for estimated doubtful accounts. Domestic
accounts receivable, which generally do not require collateral from customers, were equal to $163.1
million and $164.4 million before allowances for bad debts, sales returns and chargebacks at
June 30, 2011 and December 31, 2010, respectively. Foreign accounts receivable, which in some
cases are collateralized by letters of credit, were equal to $135.8 million and $121.4 million
before allowance for bad debts, sales returns and chargebacks at June 30, 2011 and December 31,
2010, respectively. The Companys credit losses attributable to write-offs for the three months
ended June 30, 2011 and 2010 were $1.8 million and $0.2 million, respectively. The Companys
credit losses attributable to write-offs for the six months ended June 30, 2011 and 2010 were $2.5
million and $1.6 million, respectively.
Assets located outside the U.S. consist primarily of cash, accounts receivable, inventory,
property and equipment, and other assets. Net assets held outside the United States were $356.8
million and $322.0 million at June 30, 2011 and December 31, 2010, respectively.
The Companys net sales to its five largest customers accounted for approximately 25.2% and
31.3% of total net sales for the three months ended June 30, 2011 and 2010, respectively. The
Companys net sales to its five largest customers accounted for approximately 20.1% and 28.2% of
total net sales for the six months ended June 30, 2011 and 2010, respectively. No customer
accounted for more than 10% of our net sales during the three months ended June 30, 2011. One
customer accounted for 10.9% of our net sales during the three months ended June 30, 2010. No
customer accounted for more than 10% of our net sales during the six months ended June 30, 2011 and
2010, respectively. No customer accounted for more than 10% of our outstanding accounts receivable
balance at June 30, 2011 and December 31, 2010, respectively.
12
The Companys top five manufacturers produced the following for the three and six months ended
June 30, 2011 and 2010, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
Manufacturer #1 |
|
|
31.7 |
% |
|
|
36.8 |
% |
|
|
30.8 |
% |
|
|
34.6 |
% |
Manufacturer #2 |
|
|
11.2 |
% |
|
|
14.2 |
% |
|
|
11.4 |
% |
|
|
13.3 |
% |
Manufacturer #3 |
|
|
7.6 |
% |
|
|
9.4 |
% |
|
|
8.6 |
% |
|
|
10.1 |
% |
Manufacturer #4 |
|
|
6.8 |
% |
|
|
8.1 |
% |
|
|
6.7 |
% |
|
|
8.6 |
% |
Manufacturer #5 |
|
|
6.3 |
% |
|
|
4.6 |
% |
|
|
6.3 |
% |
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63.6 |
% |
|
|
73.1 |
% |
|
|
63.8 |
% |
|
|
71.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the Companys products are produced in China. The Companys operations are
subject to the customary risks of doing business abroad, including, but not limited to, currency
fluctuations and revaluations, custom duties and related fees, various import controls and other
monetary barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain
parts of the world, political instability. The Company believes it has acted to reduce these risks
by diversifying manufacturing among various factories. To date, these business risks have not had a
material adverse impact on the Companys operations.
(12) RELATED PARTY TRANSACTIONS
On July 29, 2010, the Company formed Skechers Foundation (the Foundation), which
is a 501(c)(3) non-profit entity that does not have any shareholders or members. The Foundation is
not a subsidiary of and is not otherwise affiliated with the Company, and the Company does not have
a financial interest in the Foundation. However, two officers and directors of the Company,
Michael Greenberg who is its President and David Weinberg who is its Chief Operating Officer and
Chief Financial Officer, are also officers and directors of the Foundation. The Company
contributed $250,000 and $750,000 to the Foundation to use for various charitable causes during the
three months and six months ended June 30, 2011, respectively.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Condensed Consolidated
Financial Statements and Notes thereto in Item 1 of this report and our companys annual report on
Form 10-K for the year ended December 31, 2010.
We intend for this discussion to provide the reader with information that will assist in
understanding our 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 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
companys future performance. Factors that might cause or contribute to such differences include:
|
|
|
international, national and local general economic, political and market conditions
including the recent global economic recession and the uncertain pace of recovery in our
markets; |
|
|
|
|
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; |
|
|
|
|
our ability to remain competitive among sellers of footwear for consumers, including
in the highly competitive performance footwear market; |
|
|
|
|
our ability to sustain, manage and forecast our costs and proper inventory levels; |
|
|
|
|
the loss of any significant customers, decreased demand by industry retailers and
the cancellation of order commitments; |
|
|
|
|
our ability to continue to manufacture and ship our products that are sourced in
China, which could be adversely affected by various economic, political or trade
conditions, or a natural disaster in China; |
|
|
|
|
our ability to predict our quarterly revenues, which have varied significantly in the
past and can be expected to fluctuate in the future due to a number of reasons, many of
which are beyond our control; and |
|
|
|
|
other factors referenced or incorporated by reference in our companys annual report
on Form 10-K for the year ended December 31, 2010 under the captions Item 1A: Risk
Factors and Item 7: Managements Discussion and Analysis of Financial Condition and
Results of Operations. |
The risks included here 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. New risk
factors emerge from time to time and 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 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.
14
FINANCIAL OVERVIEW
Our net loss and gross margins for the first six months of 2011 were negatively impacted by
several factors, including (i) an excess supply of footwear in the toning market from all
manufacturers, including our competitors, which led to (ii) sales of lower margin toning product
through our domestic wholesale channel and (iii) lower retail margins due to sales price markdowns
in order to reduce excess inventory levels of toning product. During the second quarter in an
effort to eliminate excess inventory, we aggressively reduced our toning inventory by selling two
million pairs of our original Shape-ups at a loss of $21.0 million. We also recorded a $4.4
million reserve for additional toning product, which we believe reflects net realizable value of
the remaining toning inventory. We anticipate our domestic revenues and margins will be lower for
2011 compared to 2010 as a result of the reduced demand and lower pricing of product in the toning
category. We continue to closely monitor our inventory position of toning product, which we expect
to continue to decline in the second half of 2011. We believe that new styles and lines of
footwear that we will be launching later this year will have an offsetting positive impact on our
results of operations in the second half of 2011 and into 2012.
We have four reportable segments domestic wholesale sales, international wholesale sales,
retail sales, which includes domestic and international retail sales, and e-commerce sales. We
evaluate segment performance based primarily on net sales and gross profit. The largest portion of
our revenue is derived from the domestic wholesale segment. Net loss for the three months ended
June 30, 2011 was $29.9 million, or $0.62 per diluted share.
Revenue as a percentage of net sales was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Percentage of revenues by segment |
|
|
|
|
|
|
|
|
Domestic wholesale |
|
|
50.0 |
% |
|
|
62.9 |
% |
International wholesale |
|
|
24.2 |
% |
|
|
15.4 |
% |
Retail |
|
|
24.5 |
% |
|
|
20.3 |
% |
E-commerce |
|
|
1.3 |
% |
|
|
1.4 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
As of June 30, 2011, we owned 261 domestic retail stores and 44 international retail stores,
and we have established our presence in most of what we believe to be the major domestic retail
markets. During the first six months of 2011, we opened 13 domestic concept stores, five domestic
outlet stores, two domestic warehouse stores, and one international concept store and we closed one
domestic concept store, one domestic warehouse store, and one international concept store. We
annually review all of our stores for impairment, or more frequently if triggering events occur
which may be an indicator of impairment, and we carefully review our under-performing stores and
consider the potential for non-renewal of leases upon completion of the current term of the
applicable lease.
During the remainder of 2011, we intend to focus on: (i) completing our domestic distribution
center, (ii) managing our inventory and expense structure to be in line with expected sales levels
(iii) growing our international business, (iv) strategically expanding our retail distribution
channel by opening another 15 to 20 stores, including several international company-owned stores,
and (v) increasing the product count for all customers by delivering trend-right styles at
reasonable prices.
15
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected information from our results of
operations (in thousands) and as a percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Months Ended June 30, |
|
|
Six-Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net sales |
|
$ |
434,351 |
|
|
|
100.0 |
% |
|
$ |
504,859 |
|
|
|
100.0 |
% |
|
$ |
910,585 |
|
|
|
100.0 |
% |
|
$ |
997,623 |
|
|
|
100.0 |
% |
Cost of sales |
|
|
291,021 |
|
|
|
67.0 |
|
|
|
267,214 |
|
|
|
52.9 |
|
|
|
574,645 |
|
|
|
63.1 |
|
|
|
522,560 |
|
|
|
52.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
143,330 |
|
|
|
33.0 |
|
|
|
237,645 |
|
|
|
47.1 |
|
|
|
335,940 |
|
|
|
36.9 |
|
|
|
475,063 |
|
|
|
47.6 |
|
Royalty income |
|
|
1,376 |
|
|
|
0.3 |
|
|
|
875 |
|
|
|
0.1 |
|
|
|
3,024 |
|
|
|
0.3 |
|
|
|
1,260 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,706 |
|
|
|
33.3 |
|
|
|
238,520 |
|
|
|
47.2 |
|
|
|
338,964 |
|
|
|
37.2 |
|
|
|
476,323 |
|
|
|
47.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
53,099 |
|
|
|
12.2 |
|
|
|
52,437 |
|
|
|
10.4 |
|
|
|
90,659 |
|
|
|
10.0 |
|
|
|
86,746 |
|
|
|
8.7 |
|
General and administrative |
|
|
139,965 |
|
|
|
32.2 |
|
|
|
127,299 |
|
|
|
25.2 |
|
|
|
281,948 |
|
|
|
30.9 |
|
|
|
249,786 |
|
|
|
25.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,064 |
|
|
|
44.4 |
|
|
|
179,736 |
|
|
|
35.6 |
|
|
|
372,607 |
|
|
|
40.9 |
|
|
|
336,532 |
|
|
|
33.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
|
(48,358 |
) |
|
|
(11.1 |
) |
|
|
58,784 |
|
|
|
11.6 |
|
|
|
(33,643 |
) |
|
|
(3.7 |
) |
|
|
139,791 |
|
|
|
14.0 |
|
Interest income |
|
|
756 |
|
|
|
0.1 |
|
|
|
436 |
|
|
|
0.1 |
|
|
|
1,343 |
|
|
|
0.2 |
|
|
|
1,864 |
|
|
|
0.2 |
|
Interest expense |
|
|
(2,352 |
) |
|
|
(0.5 |
) |
|
|
(118 |
) |
|
|
0 |
|
|
|
(4,317 |
) |
|
|
(0.5 |
) |
|
|
(833 |
) |
|
|
(0.1 |
) |
Other, net |
|
|
(944 |
) |
|
|
(0.2 |
) |
|
|
1,611 |
|
|
|
0.3 |
|
|
|
(595 |
) |
|
|
(0.1 |
) |
|
|
1,820 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
|
(50,898 |
) |
|
|
(11.7 |
) |
|
|
60,713 |
|
|
|
12.0 |
|
|
|
(37,212 |
) |
|
|
(4.1 |
) |
|
|
142,642 |
|
|
|
14.3 |
|
Income tax (benefit) expense |
|
|
(20,846 |
) |
|
|
(4.8 |
) |
|
|
20,396 |
|
|
|
4.0 |
|
|
|
(19,313 |
) |
|
|
(2.1 |
) |
|
|
46,202 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
|
(30,052 |
) |
|
|
(6.9 |
) |
|
|
40,317 |
|
|
|
8.0 |
|
|
|
(17,899 |
) |
|
|
(2.0 |
) |
|
|
96,440 |
|
|
|
9.7 |
|
Less: Net (loss) income
attributable to non-controlling
interests |
|
|
(136 |
) |
|
|
0 |
|
|
|
80 |
|
|
|
0 |
|
|
|
209 |
|
|
|
0 |
|
|
|
(93 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net (loss) earnings
attributable to Skechers
U.S.A., Inc. |
|
$ |
(29,916 |
) |
|
|
(6.9 |
)% |
|
$ |
40,237 |
|
|
|
8.0 |
% |
|
$ |
(18,108 |
) |
|
|
(2.0 |
)% |
|
$ |
96,533 |
|
|
|
9.7 |
% |
|
|
|
|
|
|
|
|
|
|
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THREE MONTHS ENDED JUNE 30, 2011 COMPARED TO THREE MONTHS ENDED JUNE 30, 2010
Net sales
Net sales for the three months ended June 30, 2011 were $434.4 million, a decrease of $70.5
million, or 14.0%, as compared to net sales of $504.9 million for the three months ended June 30,
2010. The decrease in net sales was primarily attributable to lower sales in our domestic
wholesale segment due to reduced sales of toning products partially offset by higher sales in our
international wholesale segment.
Our domestic wholesale net sales decreased $100.6 million, or 31.6%, to $217.2 million for the
three months ended June 30, 2011 from $317.8 million for the three months ended June 30, 2010. The
largest decrease in our domestic wholesale segment came in our womens and mens toning divisions.
The average selling price per pair within the domestic wholesale segment decreased to $19.22 per
pair for the three months ended June 30, 2011 from $24.87 per pair in the same period last year,
primarily as a result of selling two million pairs of our original Shape-ups at a loss of $21.0
million. The decrease in the domestic wholesale segments net sales came on an 11.5% unit sales
volume decrease to 11.3 million pairs for the three months ended June 30, 2011 from 12.8 million
pairs for the same period in 2010.
Our international wholesale segment sales increased $27.2 million, or 35.0%, to $105.0 million
for the three months ended June 30, 2011 compared to sales of $77.8 million for the three months
ended June 30, 2010. Our international wholesale sales consist of direct subsidiary sales those
we make to department stores and specialty retailers and sales to our distributors, who in turn
sell to retailers in various international regions where we do not sell directly. Direct
subsidiary sales increased $12.8 million, or 22.7%, to $68.8 million for the three months ended
June 30, 2011 compared to net sales of $56.0 million for the three months ended June 30, 2010. The
largest sales increases during the quarter came from our subsidiaries in Italy and Spain. Our
distributor sales increased $14.5 million to $36.2 million for the three months ended June 30,
2011, a 66.6% increase from sales of $21.7 million for the three months ended June 30, 2010. This
was primarily attributable to increased sales to our distributors in Japan and the United Arab
Emirates (UAE).
16
Our retail segment sales increased $4.3 million to $106.6 million for the three months ended
June 30, 2011, a 4.1% increase over sales of $102.3 million for the three months ended June 30,
2010. The increase in retail sales was attributable to a net increase of 43 domestic and
international stores compared to the same period in 2010. For the three months ended June 30,
2011, we realized negative comparable store sales of 10.2% in our domestic retail stores and
positive comparable store sales of 0.3% in our international retail stores. The comparable store
sales decline domestically was principally driven by reduced demand for our toning product as well
as reduced average retail pricing as described above. During the three months ended June 30, 2011,
we opened ten new domestic concept stores, four domestic outlet stores, two domestic warehouse
stores, and we closed one domestic concept store and one domestic warehouse store. Our domestic
retail sales decreased 0.6% for the three months ended June 30, 2011 compared to the same period in
2010 as the result of negative comparable store sales partially offset by a net increase of 33
domestic stores. Our international retail sales increased 42.4% for the three months ended June
30, 2011 compared to the same period in 2010 attributable to a net increase of 10 international
stores.
Our e-commerce sales decreased $1.4 million from $6.9 million for the three months ended June
30, 2010 to $5.5 million for the three months ended June 30, 2011, a 20.3% decrease. Our
e-commerce sales made up approximately 1% of our consolidated net sales for each of the three-month
periods ended June 30, 2011 and 2010.
Gross profit
Gross profit for the three months ended June 30, 2011 decreased $94.3 million to $143.3
million as compared to $237.6 million for the three months ended June 30, 2010. Gross profit as a
percentage of net sales, or gross margin, decreased to 33.0% for the three months ended June 30,
2011 from 47.1% for the same period in the prior year. Our domestic wholesale segment gross profit
decreased $97.0 million, or 72.1%, to $37.6 million for the three months ended June 30, 2011
compared to $134.6 million for the three months ended June 30, 2010. Domestic wholesale margins
decreased to 17.3% in the three months ended June 30, 2011 from 42.4% for the same period in the
prior year. The decrease in domestic wholesale margins was primarily attributable to the
sell-through of toning product to reduce this excess inventory. During the second quarter we sold
two million pairs of our original Shape-ups at a loss of $21.0 million as well as recorded a $4.4
million reserve for our remaining toning product.
Gross profit for our international wholesale segment increased $7.8 million, or 24.4%, to
$39.8 million for the three months ended June 30, 2011 compared to $32.0 million for the three
months ended June 30, 2010. Gross margins were 37.9% for the three months ended June 30, 2011
compared to 41.2% for the three months ended June 30, 2010. The decrease in gross margins for the
international wholesale segment was attributable to increased distributor sales, which achieved
lower gross margins than our international wholesale sales through our foreign subsidiaries. Gross
margins for our direct subsidiary sales were 45.4% for the three months ended June 30, 2011 as
compared to 46.9% for the three months ended June 30, 2010. Gross margins for our distributor
sales were 23.8% for the three months ended June 30, 2011 as compared to 26.4% for the three months
ended June 30, 2010.
Gross profit for our retail segment decreased $4.2 million, or 6.3%, to $63.1 million for the
three months ended June 30, 2011 as compared to $67.3 million for the three months ended June 30,
2010. Gross margins for all stores were 59.2% for the three months ended June 30, 2011 as compared
to 65.8% for the three months ended June 30, 2010. Gross margins for our domestic stores were
59.5% for the three months ended June 30, 2011 as compared to 65.7% for the three months ended June
30, 2010. Gross margins for our international stores were 57.7% for the three months ended June
30, 2011 as compared to 66.4% for the three months ended June 30, 2010. The decrease in domestic
and international retail margins was primarily because of lower average selling prices that
resulted from increased competition and the sell-through of our excess toning inventory.
Our cost of sales includes the cost of footwear purchased from our manufacturers, royalties,
duties, quota costs, inbound freight (including ocean, air and freight from the dock to our
distribution centers), broker fees and storage costs. Because we include expenses related to our
distribution network in general and administrative expenses while some of our competitors may
include expenses of this type in cost of sales, our gross margins may not be comparable, and we may
report higher gross margins than some of our competitors in part for this reason.
17
Selling expenses
Selling expenses increased by $0.7 million, or 1.3%, to $53.1 million for the three months
ended June 30, 2011 from $52.4 million for the three months ended June 30, 2010. As a percentage
of net sales, selling expenses were 12.2% and 10.4% for the three months ended June 30, 2011 and
2010, respectively. The increase in selling expenses was primarily the result of higher sales
commission rates on our toning products and sales representative sample costs.
Selling expenses consist primarily of the following: sales representative sample costs, sales
commissions, trade shows, advertising and promotional costs, which may include television, print
ads, ad production costs and point-of-purchase (POP) costs.
General and administrative expenses
General and administrative expenses increased by $12.7 million, or 9.9%, to $140.0 million for
the three months ended June 30, 2011 from $127.3 million for the three months ended June 30, 2010.
As a percentage of sales, general and administrative expenses were 32.2% and 25.2% for the three
months ended June 30, 2011 and 2010, respectively. The increase in general and administrative
expenses was primarily attributable to increased research and development costs for new products of
$2.7 million, increased rent expense of $2.5 million attributable to an additional 43 stores from
the prior year, increased outside professional fees of $2.3 million, and increased depreciation
expense of $2.1 million. In addition, the expenses related to our distribution network, including
purchasing, receiving, inspecting, allocating, warehousing and packaging of our products, totaled
$30.2 million and $25.7 million for the three months ended June 30, 2011 and 2010, respectively.
General and administrative expenses consist primarily of the following: salaries, wages and
related taxes and various overhead costs associated with our corporate staff, stock-based
compensation, domestic and international retail operations, non-selling related costs of our
international operations, costs associated with our domestic and European distribution centers,
professional fees related to legal, consulting and accounting, insurance, depreciation and
amortization, and expenses related to our distribution network, which includes the functions of
purchasing, receiving, inspecting, allocating, warehousing and packaging our products. These costs
are included in general and administrative expenses and are not allocated to segments.
Interest income
Interest income was $0.8 million for the three months ended June 30, 2011 compared to $0.4
million for the same period in 2010.
Interest expense
Interest expense was $2.4 million for the three months ended June 30, 2011 compared to $0.1
million for the same period in 2010. The increase was attributable to increased interest paid to
our foreign manufacturers.
Income taxes
Our effective tax rate was 41.0% and 33.6% for the three months ended June 30, 2011
and 2010, respectively. Income tax benefit for the three months ended June 30, 2011 was $20.8
million compared to expense of $20.4 million for the same period in 2010.
After the first quarter of 2011, estimating a reliable annual effective tax rate for our
company for the year became increasingly difficult because of the uncertainty in forecasting
taxable income or loss for the remainder of the year for each of our domestic and international
operations. Such forecasts may vary significantly from quarter to quarter and even small changes
in forecasts or actual results for either our domestic or international operations can result in
significant changes in our estimated annual effective tax rate. Since forecasting an annual
effective tax rate under these circumstances would not provide a meaningful estimate, we believe
that the actual year-to-date effective tax
18
rate is the best estimate of the annual tax rate in accordance with ASC 740-270. Our income
tax benefit has been calculated utilizing our actual effective tax rate for the six month period
ended June 30, 2011.
Non-controlling interest in net income and loss of consolidated subsidiaries
Non-controlling interest for the three months ended June 30, 2011 decreased $0.2 million to a
loss of $0.1 million as compared to income of $0.1 million for the same period in 2010.
Non-controlling interest represents the share of net earnings (loss) that is attributable to our
joint venture partners.
SIX MONTHS ENDED JUNE 30, 2011 COMPARED TO SIX MONTHS ENDED JUNE 30, 2010
Net sales
Net sales for the six months ended June 30, 2011 were $910.6 million, a decrease of $87.0
million, or 8.7%, as compared to net sales of $997.6 million for the six months ended June 30,
2010. The decrease in net sales was primarily attributable to lower sales in our domestic
wholesale segment due to reduced sales of toning products partially offset by higher sales in our
international wholesale segment.
Our domestic wholesale net sales decreased $162.9 million, or 27.5%, to $428.8 million for the
six months ended June 30, 2011, from $591.7 million for the six months ended June 30, 2010. The
largest decrease in our domestic wholesale segment came in our womens and mens toning divisions.
The average selling price per pair within the domestic wholesale segment decreased to $19.52 per
pair for the six months ended June 30, 2011 from $24.28 per pair in the same period last year, as a
result of the sell-through of our excess toning inventory. The decrease in the domestic wholesale
segments net sales came on a 9.9% unit sales volume decrease to 22.0 million pairs for the six
months ended June 30, 2011 from 24.4 million pairs for the same period in 2010.
Our international wholesale segment sales increased $73.3 million, or 36.4%, to $274.4 million
for the six months ended June 30, 2011, compared to sales of $201.1 million for the six months
ended June 30, 2010. Direct subsidiary sales increased $44.0 million, or 28.4%, to $199.3 million
for the six months ended June 30, 2011 compared to net sales of $155.3 million for the six months
ended June 30, 2010. The largest sales increases during the six months came from our subsidiaries
in Italy, United Kingdom, Brazil, and Spain. Our distributor sales increased $29.3 million to
$75.1 million for the six months ended June 30, 2011, a 63.9% increase from sales of $45.8 million
for the six months ended June 30, 2010. This was primarily attributable to increased sales to our
distributors in Japan, the United Arab Emirates (UAE), and Korea.
Our retail segment sales increased $6.8 million to $196.4 million for the six months ended
June 30, 2011, a 3.6% increase over sales of $189.6 million for the six months ended June 30, 2010.
The increase in retail sales was attributable to a net increase of 43 domestic and international
stores compared to the same period in 2010. For the six months ended June 30, 2011, we realized
negative comparable store sales of 10.7% in our domestic retail stores and positive comparable
store sales of 2.9% in our international retail stores. The comparable store sales decline
domestically was principally driven by reduced demand for our toning product as well as reduced
average retail pricing as described above. During the six months ended June 30, 2011, we opened 13
new domestic concept stores, five domestic outlet stores, two domestic warehouse stores, one
international concept store, and we closed one domestic concept store, one domestic warehouse
store, and one international concept store. Our domestic retail sales decreased 1.4% for the six
months ended June 30, 2011 compared to the same period in 2010 as the result of negative comparable
store sales partially offset by a net increase of 33 domestic stores. Our international retail
sales increased 46.3% for the six months ended June 30, 2011 compared to the same period in 2010
attributable to positive comparable store sales and a net increase of 10 international stores.
Our e-commerce sales decreased $4.2 million from $15.2 million for the six months ended June
30, 2010 to $11.0 million for the six months ended June 30, 2011, a 27.2% decrease. Our e-commerce
sales made up approximately 1% of our consolidated net sales in the six months ended June 30, 2011
compared to approximately 2% during the same period in the prior year.
19
Gross profit
Gross profit for the six months ended June 30, 2011 decreased $139.2 million to $335.9 million
as compared to $475.1 million for the six months ended June 30, 2010. Gross profit as a percentage
of net sales, or gross margin, decreased to 36.9% for the six months ended June 30, 2011 from 47.6%
for the same period in the prior year. Our domestic wholesale segment gross profit decreased
$154.1 million, or 59.7%, to $103.9 million for the six months ended June 30, 2011 compared to
$258.0 million for the six months ended June 30, 2010. Domestic wholesale margins decreased to
24.2% in the six months ended June 30, 2011 from 43.6% for the same period in the prior year. The
decrease in domestic wholesale margins was attributable to the sell-through of our excess toning
inventory resulting from the oversupply of products from all manufacturers, including our
competitors, in the toning market. During the six months ended June 30, 2011, we reduced our
excess toning inventory by selling two million pairs of our original Shape-ups at a loss of $21.0
million and recorded an additional $4.4 million reserve for our remaining toning product.
Gross profit for our international wholesale segment increased $26.6 million, or 31.0%, to
$112.6 million for the six months ended June 30, 2011 compared to $86.0 million for the six months
ended June 30, 2010. Gross margins were 41.1% for the six months ended June 30, 2011 compared to
42.8% for the six months ended June 30, 2010. The decrease in gross margins for the international
wholesale segment was attributable to increased distributor sales, which achieved lower gross
margins than our international wholesale sales through our foreign subsidiaries. Gross margins for
our direct subsidiary sales were 46.9% for the six months ended June 30, 2011 as compared to 47.1%
for the six months ended June 30, 2010. Gross margins for our distributor sales were 25.5% for the
six months ended June 30, 2011 as compared to 28.0% for the six months ended June 30, 2010.
Gross profit for our retail segment decreased $9.2 million, or 7.5%, to $113.9 million for the
six months ended June 30, 2011 as compared to $123.1 million for the six months ended June 30,
2010. Gross margins for all stores were 58.0% for the six months ended June 30, 2011 as compared
to 64.9% for the six months ended June 30, 2010. Gross margins for our domestic stores were 58.5%
for the six months ended June 30, 2011 as compared to 65.1% for the six months ended June 30, 2010.
Gross margins for our international stores were 54.9% for the six months ended June 30, 2011 as
compared to 64.0% for the six months ended June 30, 2010. The decrease in domestic and
international retail margins was primarily attributable to lower average selling prices of our
toning inventory.
Selling expenses
Selling expenses increased by $4.0 million, or 4.5%, to $90.7 million for the six months ended
June 30, 2011 from $86.7 million for the six months ended June 30, 2010. As a percentage of net
sales, selling expenses were 10.0% and 8.7% for the six months ended June 30, 2011 and 2010,
respectively. The increase in selling expenses was primarily attributable to higher advertising
expenses of $2.3 million for the six months ended June 30, 2011.
General and administrative expenses
General and administrative expenses increased by $32.1 million, or 12.9%, to $281.9 million
for the six months ended June 30, 2011 from $249.8 million for the six months ended June 30, 2010.
As a percentage of sales, general and administrative expenses were 30.9% and 25.0% for the six
months ended June 30, 2011 and 2010, respectively. The increase in general and administrative
expenses was primarily attributable to higher rent expense of $6.0 million attributable to an
additional 43 stores from the prior year, increased outside professional fees of $5.8 million,
increased depreciation expense of $4.1 million, and increased research and development costs for
new products of $2.5 million. In addition, the expenses related to our distribution network,
including purchasing, receiving, inspecting, allocating, warehousing and packaging of our products,
totaled $66.8 million and $58.8 million for the six months ended June 30, 2011 and 2010,
respectively.
20
Interest income
Interest income was $1.3 million for the six months ended June 30, 2011 compared to $1.9
million for the same period in 2010. The decrease in interest income was primarily attributable to
interest received on refunds of customs and duties payments for the six months ended June 30, 2010.
Interest expense
Interest expense was $4.3 million for the six months ended June 30, 2011 compared to $0.8
million for the same period in 2010. The increase was attributable to increased interest paid to
our foreign manufacturers.
Income taxes
Our effective tax rate was 51.9% and 32.4% for the six months ended June 30, 2011
and 2010, respectively. Income tax benefit for the six months ended June 30, 2011 was $19.3
million compared to expense of $46.2 million for the same period in 2010.
After the first quarter of 2011, estimating a reliable annual effective tax rate for our
company for the year became increasingly difficult because of the uncertainty in forecasting
taxable income or loss for the remainder of the year for each of our domestic and international
operations. Such forecasts may vary significantly from quarter to quarter and even small changes
in forecasts or actual results for either our domestic or international operations can result in
significant changes in our companys estimated annual effective tax rate. Since forecasting an
annual effective tax rate under these circumstances would not provide a meaningful estimate, we
believe that the actual year-to-date effective tax rate is the best estimate of the annual tax rate
in accordance with ASC 740-270. Our income tax benefit has been calculated utilizing our actual
effective tax rate for the six month period ended June 30, 2011.
Non-controlling interest in net income and loss of consolidated subsidiaries
Non-controlling interest for the six months ended June 30, 2011 increased $0.3 million to
income of $0.2 million as compared to a loss of $0.1 million for the same period in 2010.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital at June 30, 2011 was $624.3 million, a decrease of $41.8 million from
working capital of $666.1 million at December 31, 2010. Our cash and cash equivalents at June 30,
2011 were $250.8 million compared to $233.6 million at December 31, 2010. The increase in cash and
cash equivalents of $17.2 million was the result of reduced inventory levels of $73.9 million and
increased borrowings of $64.4 million, partially offset by capital expenditures of $92.9 million
and a net loss of $18.1 million.
For the six months ended June 30, 2011, net cash provided by operating activities was $52.1
million as compared to net cash used of $8.0 million for the six months ended June 30, 2010. The
increase in net cash provided by operating activities in the six months ended June 30, 2011 as
compared to the same period in the prior year was primarily the result of reduced inventory levels.
Net cash used in investing activities was $92.9 million for the six months ended June 30, 2011
as compared to net cash provided by investing activities of $0.2 million for the six months ended
June 30, 2010. The decrease in net cash provided by investing activities in the six months ended
June 30, 2011 as compared to the same period in the prior year was the result of increased capital
expenditures and the maturity of short-term investments in the prior year. Capital expenditures
for the six months ended June 30, 2011 were approximately $92.9 million, which consisted of $36.0
million of development costs for our new distribution center, $38.4 million in warehouse equipment
upgrades, and $12.3 million for new store openings and remodels. Capital expenditures for the six
months ended June 30, 2010 were $29.7 million, which primarily consisted of new store openings and
remodels and development costs for our new distribution center. Excluding the costs of our new
distribution center and distribution equipment, we expect our ongoing capital expenditures for the
remainder of 2011 to be approximately
21
$10 million to $15 million, which includes opening an additional 15 to 20 retail stores along
with store remodels. We are currently in the process of designing and purchasing the equipment to
be used in our new distribution center and estimate the cost of this equipment to be approximately
$85.0 million, of which $77.7 million was incurred as of June 30, 2011. We expect to spend the
remaining balance during the second half of 2011. In January 2010, we entered into a joint venture
agreement to build our new 1.8 million square foot distribution facility in Rancho Belago,
California, which we expect to occupy when completed in 2011. We believe our operating cash flows,
current cash, available lines of credit and current financing arrangements should be adequate to
fund these capital expenditures, although we may seek additional funding for all or a portion of
these expenditures.
Net cash provided by financing activities was $57.4 million during the six months ended June
30, 2011 compared to $17.2 million during the six months ended June 30, 2010. The increase in cash
provided by financing activities in the six months ended June 30, 2011 as compared to the same
period in the prior year was primarily attributable to increased borrowings.
On December 29, 2010, we entered into a master loan and security agreement (the Master
Agreement), by and between us and Banc of America Leasing & Capital, LLC, and an Equipment
Security Note (together with the Master Agreement, the Loan Documents), by and among us, Banc of
America Leasing & Capital, LLC, and Bank of Utah, as agent (Agent). We used the proceeds to
refinance certain equipment already purchased and to purchase new equipment for use in our Rancho
Belago distribution facility. Borrowings made pursuant to the Master Agreement may be in the form
of one or more equipment security notes (each a Note, and, collectively, the Notes) up to a
maximum limit of $80.0 million and each for a term of 60 months. The Note entered into on the same
date as the Master Agreement represents a borrowing of approximately $39.3 million. Interest will
accrue at a fixed rate of 3.54% per annum. On June 30, 2011, we entered into another Note
agreement for approximately $36.3 million. Interest will accrue at a fixed rate of 3.19% per
annum. As of June 30, 2011, the total outstanding amount on these notes was $73.2 million. We
paid commitment fees of $825,000 on this loan, which are being amortized over the five-year life of
the facility.
On April 30, 2010, we entered into a construction loan agreement (the Loan Agreement), by
and between HF Logistics-SKX, LLC and Bank of America, N.A. as administrative agent and as lender
(Bank of America or the Administrative Agent) and Raymond James Bank, FSB. The proceeds from
the Loan Agreement are being used to construct our domestic distribution facility in Rancho Belago,
California. Borrowings made pursuant to the Loan Agreement may be made up to a maximum limit of
$55.0 million and the loan matures on April 30, 2012, which may be extended for six months if
certain conditions are met. Borrowings bear interest based on LIBOR. We had $43.6 million
outstanding under this facility, which is included in short-term borrowings on June 30, 2011. We
paid commitment fees of $737,500 on this loan, which are being amortized over the life of the
facility.
On January 30, 2010, we entered into a joint venture agreement with HF Logistics I, LLC
through Skechers R.B., LLC, a wholly-owned subsidiary, regarding the ownership and management of HF
Logistics-SKX, LLC, a Delaware limited liability company. The purpose of the JV was to acquire and
to develop real property consisting of approximately 110 acres situated in Rancho Belago,
California, and to construct approximately 1.8 million square feet of buildings and other
improvements to lease to us as a distribution facility. The term of the JV is fifty years. The
parties are equal fifty percent partners. In April 2010, we made an initial cash capital
contribution of $30 million and HF made an initial capital contribution of land to the JV.
Additional capital contributions, if necessary, would be made on an equal basis by Skechers R.B.,
LLC and HF. We have completed our assessment of the joint venture and have determined it to be a
variable interest entity (VIE) and that Skechers is the primary beneficiary, and therefore
consolidate the operations of the joint venture into our financial statements.
On June 30, 2009, we entered into a $250.0 million secured credit agreement, (the Credit
Agreement) with a syndicate of seven banks that replaced the previous $150 million credit
agreement. On November 5, 2009, March 4, 2010 and May 3, 2011, we entered into three successive
amendments to the Credit Agreement (collectively, the Amended Credit Agreement). The Amended
Credit Agreement matures in June 2015. The credit agreement permits us and certain of our
subsidiaries to borrow up to $250.0 million based upon a borrowing base of eligible accounts
receivable and inventory, which amount can be increased to $300.0 million at our request and upon
satisfaction of certain conditions including obtaining the commitment of existing or prospective
lenders willing to
22
provide the incremental amount. Borrowings bear interest at our election based on LIBOR or a
Base Rate (defined as the greatest of the base LIBOR plus 1.00%, the Federal Funds Rate plus 0.5%
or one of the lenders prime rate), in each case, plus an applicable margin based on the average
daily principal balance of revolving loans under the credit agreement (1.00%, 1.25% or 1.50% for
Base Rate loans and 2.00%, 2.25% or 2.50% for LIBOR loans). We pay a monthly unused line of credit
fee of 0.375% or 0.5% per annum, which varies based on the average daily principal balance of
outstanding revolving loans and undrawn amounts of letters of credit outstanding during such month.
The Amended Credit Agreement further provides for a limit on the issuance of letters of credit to
a maximum of $50.0 million. The Amended Credit Agreement contains customary affirmative and
negative covenants for secured credit facilities of this type, including a fixed charge coverage
ratio that applies when excess availability is less than $40.0 million. In addition, the Amended
Credit Agreement places limits on additional indebtedness that we are permitted to incur as well as
other restrictions on certain transactions. We paid syndication and commitment fees of $6.7
million on this facility, which are being amortized over the remaining four-year life of the
facility.
We had outstanding short-term and long-term borrowings of $137.1 million as of June 30, 2011,
of which $73.2 million relates to notes payable for warehouse equipment for our new distribution
center which are secured by the equipment, $43.6 million relates to our construction loan for our
new distribution center, $17.8 million relates to a note for development costs paid by and due to
HF for our new distribution center, and the remaining balance relates to our joint venture in
China.
We believe that anticipated cash flows from operations, available borrowings under our secured
line of credit, existing cash balances and current financing arrangements will be sufficient to
provide us with the liquidity necessary to fund our anticipated working capital and capital
requirements through June 30, 2012. However, in connection with our current strategies, we will
incur significant working capital requirements and capital expenditures. Our future capital
requirements will depend on many factors, including, but not limited to, the global recession and
the pace of recovery in our markets, costs associated with moving to a new distribution facility,
the levels at which we maintain inventory, sale of excess inventory at discounted prices, the
market acceptance of our footwear, the success of our international operations, the levels of
advertising and marketing required to promote our footwear, the extent to which we invest in new
product design and improvements to our existing product design, any potential acquisitions of other
brands or companies, and the number and timing of new store openings. To the extent that available
funds are insufficient to fund our future activities, we may need to raise additional funds through
public or private financing of debt or equity. Recently, we have been successful in raising
additional funds through financing activities however, we cannot be assured that additional
financing will be available to us or that, if available, it can be obtained on past terms which
have been favorable to our stockholders and us. Failure to obtain such financing could delay or
prevent our current business plans, which could adversely affect our business, financial condition
and results of operations. In addition, if additional capital is raised through the sale of
additional equity or convertible securities, dilution to our stockholders could occur.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any relationships with unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or special purpose entities, established for
the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or
limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk
that could arise if we had engaged in such relationships.
23
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Managements Discussion and Analysis of Financial Condition and Results of Operations is based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions.
For a detailed discussion of the our critical accounting policies, please refer to our annual
report on Form 10-K for the year ended December 31, 2010 filed with the U.S. Securities and
Exchange Commission (SEC) on March 1, 2011. Our critical accounting policies and estimates did
not change materially during the quarter ended June 30, 2011.
QUARTERLY RESULTS AND SEASONALITY
While sales of footwear products have historically been seasonal in nature with the strongest
sales generally occurring in the second and third quarters, we believe that changes in our product
offerings have somewhat mitigated the effect of this seasonality.
We have experienced, and expect to continue to experience, variability in our net sales and
operating results on a quarterly basis. Our domestic customers generally assume responsibility for
scheduling pickup and delivery of purchased products. Any delay in scheduling or pickup which is
beyond our control could materially negatively impact our net sales and results of operations for
any given quarter. We believe the factors which influence this variability include (i) the timing
of our introduction of new footwear products, (ii) the level of consumer acceptance of new and
existing products, (iii) general economic and industry conditions that affect consumer spending and
retail purchasing, (iv) the timing of the placement, cancellation or pickup of customer orders, (v)
increases in the number of employees and overhead to support growth, (vi) the timing of
expenditures in anticipation of increased sales and customer delivery requirements, (vii) the
number and timing of our new retail store openings and (viii) actions by competitors. Because of
these and other factors, the operating results for any particular quarter are not necessarily
indicative of the results for the full year.
INFLATION
We do not believe that the rates of inflation experienced in the United States over the last
three years have had a significant effect on our sales or profitability. However, we cannot
accurately predict the effect of inflation on future operating results. Although higher rates of
inflation have been experienced in a number of foreign countries in which our products are
manufactured, we do not believe that inflation has had a material effect on our sales or
profitability. While we have been able to offset our foreign product cost increases by increasing
prices or changing suppliers in the past, we cannot assure you that we will be able to continue to
make such increases or changes in the future.
EXCHANGE RATES
Although we currently invoice most of our customers in U.S. dollars, changes in the value of
the U.S. dollar versus the local currency in which our products are sold, along with economic and
political conditions of such foreign countries, could adversely affect our business, financial
condition and results of operations. Purchase prices for our products may be impacted by
fluctuations in the exchange rate between the U.S. dollar and the local currencies of the contract
manufacturers, which may have the effect of increasing our cost of goods in the future. In
addition, the weakening of an international customers local currency and banking market may
negatively impact such customers ability to meet their payment obligations to us. We regularly
monitor the creditworthiness of our international customers and make credit decisions based on both
prior sales experience with such customers and their current financial performance, as well as
overall economic conditions. While we currently believe that our international customers have the
ability to meet all of their obligations to us, there can be no assurance that they will
24
continue to be able to meet such obligations. During 2010 and the first six months of 2011,
exchange rate fluctuations did not have a material impact on our inventory costs. We do not engage
in hedging activities with respect to such exchange rate risk.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any derivative securities that require fair value presentation per ASC 815-25.
Market risk is the potential loss arising from the adverse changes in market rates and prices,
such as interest rates and foreign currency exchange rates. Changes in interest rates and changes
in foreign currency exchange rates have and will have an impact on our results of operations.
Interest rate fluctuations. The interest rate charged on our secured line of credit facility
is based on the prime rate of interest, and changes in the prime rate of interest will have an
effect on the interest charged on outstanding balances. No amounts relating to this secured line
of credit facility are currently outstanding at June 30, 2011. We had $46.1 million of outstanding
short-term borrowings subject to changes in interest rates; however, we do not expect any changes
will have a material impact on our financial condition or results of operations.
Foreign exchange rate fluctuations. We face market risk to the extent that changes in foreign
currency exchange rates affect our non-U.S. dollar functional currency foreign subsidiaries
revenues, expenses, assets and liabilities. In addition, changes in foreign exchange rates may
affect the value of our inventory commitments. Also, inventory purchases of our products may be
impacted by fluctuations in the exchange rates between the U.S. dollar and the local currencies of
the contract manufacturers, which could have the effect of increasing the cost of goods sold in the
future. We manage these risks by primarily denominating these purchases and commitments in U.S.
dollars. We do not engage in hedging activities with respect to such exchange rate risks.
Assets and liabilities outside the United States are located in the United Kingdom, France,
Germany, Spain, Portugal, Switzerland, Italy, Canada, Belgium, the Netherlands, Brazil, Chile,
China, Hong Kong, Singapore, Malaysia Thailand and Vietnam. Our investments in foreign subsidiaries
with a functional currency other than the U.S. dollar are generally considered long-term.
Accordingly, we do not hedge these net investments. The fluctuation of foreign currencies resulted
in a cumulative foreign currency translation gain of $8.9 million and loss of $10.4 million for the
six months ended June 30, 2011 and 2010, respectively, that are deferred and recorded as a
component of accumulated other comprehensive income in stockholders equity. A 200 basis point
reduction in each of these exchange rates at June 30, 2011 would have reduced the values of our net
investments by approximately $7.1 million.
ITEM 4. CONTROLS AND PROCEDURES
Attached as exhibits to this quarterly report on Form 10-Q are certifications of our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), which are required in accordance
with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This
Controls and Procedures section includes information concerning the controls and controls
evaluation referred to in the certifications.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The term disclosure controls and procedures refers to the controls and procedures of a
company that are designed to ensure that information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded, processed, summarized and reported within
required time periods. We have established disclosure controls and procedures to ensure that
material information relating to Skechers and its consolidated subsidiaries is made known to the
officers who certify our financial reports as well as other members of senior management and the
Board of Directors to allow timely decisions regarding required disclosures. As of the end of the
period covered by this quarterly report on Form 10-Q, we carried out an evaluation under the
supervision and with the participation of our management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15 of the Exchange Act. Based upon that
25
evaluation, our CEO and CFO concluded that our disclosure controls and procedures are
effective in timely alerting them, at the reasonable assurance level, to material information
related to our company that is required to be included in our periodic reports filed with the SEC
under the Exchange Act.
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, 2011 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls or our internal control over financial reporting will prevent
or detect all error and all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control systems objectives will be met.
The design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Further, because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
misstatements as a result of error or fraud will not occur or that all control issues and instances
of fraud, if any, within the company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns can occur because of
simple error or mistake. Controls can also be circumvented by the individual acts of some persons,
by collusion of two or more people, or by management override of the controls. The design of any
system of controls is based in part on certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Projections of any evaluation of controls effectiveness to future
periods are subject to risks. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or procedures. Because of the
inherent limitations in a cost-effective control system, misstatements as a result of error or
fraud may occur and not be detected.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our claims and advertising for our toning products including for our Shape-ups are subject to
the requirements of, and routinely come under review by regulators including the U.S. Federal Trade
Commission (FTC), states Attorneys General and government and quasi-government regulators in
foreign countries. We are currently responding to requests for information regarding our claims
and advertising from regulatory and quasi-regulatory agencies in the United States and several
other countries and are fully cooperating with those requests. While we believe that our claims
and advertising with respect to our core toning products are supported by scientific tests, expert
opinions and other relevant data, and while we have been successful in defending our claims and
advertising in several different countries, we have discontinued using certain test results and we
periodically review and update our claims and advertising. The regulatory inquiries may conclude
in a variety of outcomes, including the closing of the inquiry with no further regulatory action,
settlement of any issues through changes in our claims and advertising, settlement of any issues
through payment to the regulatory entity, or litigation.
Based on our current discussions with the FTC staff, we do not believe that the pending
inquiry will likely end in a closure letter assuring no further regulatory action. The FTC
inquiry currently is at the staff level. If the need arises, we plan to vigorously defend the
companys position directly to the Director of the FTCs Bureau of Consumer Protection and the FTC
Commissioners. It is still too early in the process to predict the outcome of any pending
inquiries or a reasonable range of potential losses and whether such an outcome will have a
material effect on our advertising, promotional claims, business, results of operations or
financial position.
26
The toning footwear category, including our Shape-ups products, has also been the subject of
some media attention arising from a number of consumer complaints and allegations of injury while
wearing Shape-ups. We believe our products are safe and are defending ourselves from these media
stories and injury allegations. It is too early, however, to predict the outcome of the ongoing
inquiries and whether such an outcome will have a material effect on our advertising, promotional
claims, business, results of operations or financial position.
Asics Corporation and Asics America Corporation v. Skechers U.S.A., Inc. On May 11, 2010,
Asics Corporation and Asics America Corporation (collectively, Asics) filed an action against our
company in the United States District Court for the Central District of California, SACV 10-00636
CJC/MLG, alleging trademark infringement, unfair competition, and trademark dilution under both
federal and California law and false advertising under California law arising out of our alleged
use of stripe designs similar to Asics trademarks. The complaint seeks, among other things,
permanent and preliminary injunctive relief, compensatory damages, profits, treble and punitive
damages, and attorneys fees. The matter is in the early discovery phase. While it is too early to
predict the outcome of the litigation and whether an adverse result would have a material adverse
impact on our operations or financial position, we believe we have meritorious defenses and
counterclaims, vehemently deny the allegations and intend to defend the case vigorously.
Tamara Grabowski v. Skechers U.S.A., Inc. On June 18, 2010, Tamara Grabowski filed an
action against our company in the United States District Court for the Southern District of
California, Case No. 10 CV 1300 JM (WVG), on her behalf and on behalf of all others similarly
situated. The complaint, as subsequently amended, alleges that our advertising for Shape-ups
violates Californias Unfair Competition Law and the California Consumer Legal Remedies Act, and
constitutes a breach of express warranty (the Grabowski action). The complaint seeks
certification of a nationwide class, damages, restitution and disgorgement of profits, declaratory
and injunctive relief, corrective advertising, and attorneys fees and costs. On March 7, 2011, the
court stayed the action on the ground that the outcomes in pending appeals in two unrelated actions
will significantly affect whether a class should be certified. While it is too early to predict the
outcome of the litigation or a reasonable range of potential losses and whether an adverse result
would have a material adverse impact on our results of operations or financial position, we believe
we have meritorious defenses, vehemently deny the allegations, believe that class certification is
not warranted and intend to defend the case vigorously.
Sonia Stalker v. Skechers U.S.A., Inc. On July 2, 2010, Sonia Stalker filed an action
against our company in the Superior Court of the State of California for the County of Los Angeles,
on her behalf and on behalf of all others similarly situated, alleging that our advertising for
Shape-ups violates Californias Unfair Competition Law and the California Consumer Legal Remedies
Act. The complaint, as subsequently amended, seeks certification of a nationwide class, actual and
punitive damages, restitution, declaratory and injunctive relief, corrective advertising, and
attorneys fees and costs. On July 23, 2010, we removed the case to the United States District
Court for the Central District of California, and it is now pending as Sonia Stalker v. Skechers
USA, Inc., CV 10-5460 SJO (JEM). On August 23, 2010, we filed a motion to dismiss the action or
transfer it to the United States District Court for the Southern District of California, in view of
the prior pending Grabowski action. On August 27, 2010, plaintiff moved to certify the class, which
motion we have opposed. On January 21, 2011, the court stayed the action for the separate reasons
that the Grabowski action was filed first and takes priority under the first-to-file doctrine and
that the outcomes in pending appeals in two unrelated actions will significantly affect the outcome
of plaintiffs motion for class certification and the resolution of this action. While it is too
early to predict the outcome of the litigation or a reasonable range of potential losses and
whether an adverse result would have a material adverse impact on our results of operations or
financial position, we believe we have meritorious defenses, vehemently deny the allegations,
believe that class certification is not warranted and intend to defend the case vigorously.
Venus Morga v. Skechers U.S.A., Inc. On August 25, 2010, Venus Morga filed an action
against our company in the United States District Court for the Southern District of California,
Case No. 10 CV 1780 JM (WVG), on her behalf and on behalf of all others similarly situated. The
complaint, as subsequently amended, alleges that our advertising for Shape-ups violates
Californias Unfair Competition Law and the California Consumer Legal Remedies Act, and constitutes
a breach of express warranty. The complaint seeks certification of a nationwide class, damages,
restitution and disgorgement of profits, declaratory and injunctive relief, corrective advertising,
and attorneys fees and costs. On March 7, 2011, the court stayed the action on the ground that the
outcomes in pending appeals in two unrelated actions will significantly affect whether a class
should be certified. While it is too early to predict the outcome of the litigation or a reasonable
range of potential losses and whether an adverse result would
27
have a material adverse impact on our results of operations or financial position, we believe we
have meritorious defenses, vehemently deny the allegations, believe that class certification is not
warranted and intend to defend the case vigorously.
Tamia Richmond v. Skechers U.S.A., Inc. and HKM Productions, Inc. On August 31, 2010, Tamia
Richmond filed a lawsuit against our company and HKM Productions in California Superior Court,
County of Los Angeles, Case No. BC444730. The complaint alleged, among other things, that we had
used Ms. Richmonds image and likeness in certain unauthorized forms of media. We subsequently
settled the matter and, on July 13, 2011, Ms. Richmond filed a dismissal with prejudice with the
court. The settlement will not have a material adverse impact on our results of operations or
financial position.
Patty Tomlinson v. Skechers U.S.A., Inc. On January 13, 2011, Patty Tomlinson filed a
lawsuit against our company in Circuit Court in Washington County, Arkansas, Case No. CV11-121-7.
The complaint alleges, on her behalf and on behalf of all others similarly situated, that our
advertising for Shape-ups violates Arkansas Deceptive Trade Practices Act, constitutes a breach of
certain express and implied warranties, and is resulting in unjust enrichment (the Tomlinson
action). The complaint seeks certification of a statewide class, compensatory damages, prejudgment
interest, and attorneys fees and costs. On February 18, 2011, we removed the case to the United
States District Court for the Western District of Arkansas, and it is now pending as Patty
Tomlinson v. Skechers U.S.A., Inc., CV 11-05042 JLH. On March 16, 2011, we filed a motion to
dismiss the action or transfer it to the United States District Court for the Southern District of
California, in view of the prior pending Grabowski action. On March 21, 2011, Ms. Tomlinson moved
to remand the action back to Arkansas state court, which motion we opposed. On May 25, 2011, the
court ordered the case remanded to Arkansas state court and denied our motion to dismiss or
transfer as moot, but has stayed remand pending completion of appellate review. We have sought
appellate review by the Eighth Circuit Court of Appeals and, if necessary, will pursue a petition
for certiorari to the United States Supreme Court. While it is too early to predict the outcome of
the litigation or a reasonable range of potential losses and whether an adverse result would have a
material adverse impact on our results of operations or financial position, we believe we have
meritorious defenses, vehemently deny the allegations, believe that class certification is not
warranted and intend to defend the case vigorously.
Terena Lovston v. Skechers U.S.A., Inc. On May 13, 2011, Terena Lovston filed a lawsuit
against our company in Circuit Court in Lonoke County, Arkansas, Case No. CV-11-321. The complaint
alleges, on her behalf and on behalf of all others similarly situated, that our advertising for our
toning footwear products violates Arkansas Deceptive Trade Practices Act, and is resulting in
unjust enrichment. The complaint seeks certification of a statewide class and compensatory
damages. On June 3, 2011, we removed the case to the United States District Court for the Eastern
District of Arkansas, and it is now pending as Terena Lovston v. Skechers U.S.A., Inc., 4:11-
cv-00460-DPM. On June 6, 2011, we filed a motion to dismiss the action or transfer it to the
United States District Court for the Southern District of California, in view of the prior pending
Grabowski action. On July 19, 2011, the court indicated its intent to remand the case to Arkansas
state court but stayed remand pending further briefing by the parties. On August 5, 2011, the
court issued an order staying the case pending completion of the appellate process in the Tomlinson
action. While it is too early to predict the outcome of the litigation or a reasonable range of
potential losses and whether an adverse result would have a material adverse impact on our results
of operations or financial position, we believe we have meritorious defenses, vehemently deny the
allegations, believe that class certification is not warranted and intend to defend the case
vigorously.
Skechers U.S.A., Inc. and Skechers U.S.A., Inc. II v. Elon A. Pollack, Elon A. Pollack, a
Professional Corporation dba Law Offices of Elon A. Pollock, and Stein, Shostak, Shostak, Pollack &
OHara, LLP On March 3, 2011, we filed a complaint against Elon A. Pollack, Elon A. Pollack, a
Professional Corporation dba Law Offices of Elon A. Pollock, and Stein, Shostak, Shostak, Pollack &
OHara, LLP (collectively, the Defendants) in Superior Court of the State of California in Los
Angeles County, Case No. YC064333. In our complaint, we alleged, among other things, that the
Defendants had breached their duties of care, loyalty and fidelity to us by negligently and
carelessly providing legal representation, and that the Defendants had engaged in self-dealing and
breaches of their fiduciary duties to us. We are seeking actual and consequential damages,
declaratory relief, interest, punitive damages, and attorneys fees and costs. On April 29, 2010,
the Defendants filed a cross complaint against us, which alleges breach of written contract for
failure to pay certain contingency fees, entitlement to contingency fees based on the principal of
quantum meruit, breach of implied covenant of good faith and fair dealing, and fraud and
intentional misrepresentation. The Defendants seek damages under the retainer agreement, the
reasonable value of
28
their services, as well as consequential and incidental damages, interest, punitive damages, and
attorneys fees and costs. While it is too early to predict the outcome of the litigation and
whether an adverse result would have a material adverse impact on our operations or financial
position, we believe we have meritorious defenses and counterclaims, vehemently deny the
allegations and intend to defend the case vigorously.
Skechers U.S.A., Inc. and Skechers U.S.A., Inc. II v. Larrie Corporation (M) Sdn Bhd On
March 17, 2011, we filed a complaint against Larrie Corporation (M) Sdn Bhd (Larrie) in the High
Court of Malaya at Kuala Lumpur (Commercial Division), Case No. D-22IP-12-2011. In our complaint,
we alleged that Larrie passed off footwear bearing marks that resemble our trademarks, and
unlawfully interfered with our trade in Malaysia. We are seeking declaratory and injunctive relief,
economic damages including profits, interest, and attorneys fees and costs. On May 4, 2011, Larrie
filed a defense and counterclaim against us, which alleges that Larrie is entitled to the exclusive
right to use an S logo in Malaysia in connection with footwear, that we have unlawfully
interfered with Larries business, and that we have maliciously commenced this lawsuit and made
false and malicious allegations. Larrie seeks declaratory and injunctive relief, general damages,
aggravated and/or exemplary damages, interest, and attorneys fees and costs. While it is too early
to predict the outcome of the litigation and whether an adverse result would have a material
adverse impact on our operations or financial position, we believe we have meritorious defenses and
counterclaims, vehemently deny the allegations and intend to defend the case vigorously.
Holly and Timothy Ward v. Skechers U.S.A., Inc., Skechers U.S.A., Inc. II and Skechers Fitness
Group On February 10, 2011, Holly and Timothy Ward filed a lawsuit against our company in United
States District Court, Southern District of Ohio, Case No. 1:11-cv-00080-MPB. The complaint
alleges, among other things, that Shape-ups are defective and unreasonably dangerous, that we were
negligent in their design and manufacture, that we failed to provide consumers with adequate
warnings, and that the shoes do not conform to the representations that we made about them. Ms.
Ward is seeking economic damages for past and future medical expenses, past and future impairment
of earning capacity, pain and suffering, loss of enjoyment of life, and attorneys fees and costs.
Mr. Ward is seeking damages for his loss of consortium, and attorneys fees and costs. While it is
too early to predict the outcome of the litigation and whether an adverse result would have a
material adverse impact on our operations or financial position, we believe we have meritorious
defenses and counterclaims, vehemently deny the allegations and intend to defend the case
vigorously.
Allison Drury v. Skechers U.S.A., Inc., Skechers U.S.A., Inc. II and Skechers Fitness Group
On April 4, 2011, Allison Drury filed a lawsuit against our company in United States District
Court, Western District of Kentucky, Louisville Division, Case No. 3:11-cv-00201-CRS. The complaint
alleges, among other things, that Shape-ups are defective and unreasonably dangerous, that we were
negligent in their design and manufacture, that we failed to provide consumers with adequate
warnings, that we breached express and implied warranties, and that we made false, misleading and
deceptive representations about the benefits of the shoes and thereby engaged in fraud and
violations of the Kentucky Consumer Protection Act. Ms. Drury is seeking economic damages for past
and future medical expenses, past and future loss of income, pain and suffering, loss of enjoyment
of life, and attorneys fees and costs, as well as punitive damages. While it is too early to
predict the outcome of the litigation and whether an adverse result would have a material adverse
impact on our operations or financial position, we believe we have meritorious defenses, vehemently
deny the allegations and intend to defend the case vigorously.
Nellie Barker v. Skechers U.S.A., Inc. and J.C. Penney Company, Inc. On April 25, 2011,
Nellie Barker filed a lawsuit against our company and J.C. Penney in Superior Court of the State of
California in Orange County, Case No. 30-2011-00469782. The complaint alleges, among other things,
that Shape-ups are defective and unreasonably dangerous, that we were negligent in their design and
manufacture, that we failed to provide consumers with adequate warnings, and that we made false,
misleading and deceptive representations about the benefits of the shoes. Ms. Barker is seeking
general damages, economic damages for past and future medical expenses, past and future loss of
income, interest, punitive and exemplary damages, and attorneys fees and costs. While it is too
early to predict the outcome of the litigation and whether an adverse result would have a material
adverse impact on our operations or financial position, we believe we have meritorious defenses,
vehemently deny the allegations and intend to defend the case vigorously.
Melissa and Richard Kearnely v. Skechers U.S.A., Inc., Skechers U.S.A., Inc. II and Skechers
Fitness Group On May 13, 2011, Melissa and Richard Kearnely filed a lawsuit against our company
in United States District Court, Eastern District of Kentucky, London Division, Case No.
6:11-cv-139-GFVT. The complaint alleges, among other
29
things, that Shape-ups are defective and unreasonably dangerous, that we were negligent in their
design and manufacture, that we failed to provide consumers with adequate warnings, that we
breached express and implied warranties, and that we made false, misleading and deceptive
representations about the benefits of Shape-ups and thereby engaged in fraud and violations of the
Kentucky Consumer Protection Act. Ms. Kearnely is seeking economic damages for past and future
medical expenses, past and future loss of income, pain and suffering, loss of enjoyment of life,
and attorneys fees and costs, as well as punitive damages. Mr. Kearnely is seeking damages for his
loss of consortium, and attorneys fees and costs. While it is too early to predict the outcome of
the litigation and whether an adverse result would have a material adverse impact on our operations
or financial position, we believe we have meritorious defenses, vehemently deny the allegations and
intend to defend the case vigorously.
Donna Burkett v. Skechers U.S.A., Inc. On May 26, 2011, Donna Burkett filed a lawsuit
against us in Circuit Court in Jefferson County, Alabama, Case No. CV-2011-901878.00. The
complaint alleges, among other things, that Shape-ups are defective and unreasonably dangerous,
that we were negligent and wanton in their design and manufacture, and that we failed to provide
consumers with adequate warnings. Ms. Burkett is seeking compensatory and punitive damages, and
attorneys fees and costs. While it is too early to predict the outcome of the litigation and
whether an adverse result would have a material adverse impact on our operations or financial
position, we believe we have meritorious defenses, vehemently deny the allegations and intend to
defend the case vigorously.
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 unanticipated future litigation. We
have no reason to believe that there was a reasonable possibility or
a probability our
company may have incurred a material loss, or a material loss in excess of a recorded accrual, with
respect to 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, if
one or more of these legal matters were resolved against us 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
The information presented below updates the risk factors disclosed in our annual report on
Form 10-K for the year ended December 31, 2010 and should be read in conjunction with the risk
factors and other information disclosed in our 2010 annual report that could have a material effect
on our business, financial condition and results of operations.
We Depend Upon A Relatively Small Group Of Customers For A Large Portion Of Our Sales.
During the six months ended June 30, 2011 and 2010, our net sales to our five largest
customers accounted for approximately 20.1% and 28.2% of total net sales, respectively. No
customer accounted for more than 10% of our net sales during the six months ended June 30, 2011 or
2010. No customer accounted for more than 10% of outstanding accounts receivable balance at June
30, 2011. One customer accounted for 15.1% of our outstanding accounts receivable balance at June
30, 2010. Although we have long-term relationships with many of our customers, our customers do
not have a contractual obligation to purchase our products and we cannot be certain that we will be
able to retain our existing major customers. Furthermore, the retail industry regularly experiences
consolidation, contractions and closings which may result in our loss of customers or our inability
to collect accounts receivable of major customers. If we lose a major customer, experience a
significant decrease in sales to a major customer or are unable to collect the accounts receivable
of a major customer, our business could be harmed.
We Rely On Independent Contract Manufacturers And, As A Result, Are Exposed To Potential Disruptions In Product Supply.
Our footwear products are currently manufactured by independent contract manufacturers. During
the six months ended June 30, 2011 and 2010, the top five manufacturers of our manufactured
products produced approximately 63.8% and 71.3% of our total purchases, respectively. One
manufacturer accounted for 30.8% of total purchases for the six months ended June 30, 2011, and the
same manufacturer accounted for 34.6% of total purchases for the same period in 2010. A second
manufacturer accounted for 11.4% of our total purchases during
30
the six months ended June 30, 2011 and the same manufacturer accounted for 13.3% of total
purchases for the same period in 2010. A third manufacturer accounted for 8.6% of total purchases
during the six months ended June 30, 2011 and the same manufacturer accounted for 10.1% of total
purchases for the same period in 2010. We do not have long-term contracts with manufacturers and we
compete with other footwear companies for production facilities. We could experience difficulties
with these manufacturers, including reductions in the availability of production capacity, failure
to meet our quality control standards, failure to meet production deadlines or increased
manufacturing costs. This could result in our customers canceling orders, refusing to accept
deliveries or demanding reductions in purchase prices, any of which could have a negative impact on
our cash flow and harm our business.
If our current manufacturers cease doing business with us, we could experience an interruption
in the manufacture of our products. Although we believe that we could find alternative
manufacturers, we may be unable to establish relationships with alternative manufacturers that will
be as favorable as the relationships we have now. For example, new manufacturers may have higher
prices, less favorable payment terms, lower manufacturing capacity, lower quality standards or
higher lead times for delivery. If we are unable to provide products consistent with our standards
or the manufacture of our footwear is delayed or becomes more expensive, our business would be
harmed.
One Principal Stockholder Is Able To Exert Significant Influence Over All Matters Requiring A Vote
Of Our Stockholders And His Interests May Differ From The Interests Of Our Other Stockholders.
As of June 30, 2011, Robert Greenberg, Chairman of the Board and Chief Executive Officer,
beneficially owned 29.8% of our outstanding Class B common shares and members of Mr. Greenbergs
immediate family beneficially owned an additional 15.6% of our outstanding Class B common shares.
The remainder of our outstanding Class B common shares is held in two irrevocable trusts for the
benefit of Mr. Greenberg and his immediate family members, and voting control of such shares
resides with the independent trustee. The holders of Class A common shares and Class B common
shares have identical rights except that holders of Class A common shares are entitled to one vote
per share while holders of Class B common shares are entitled to ten votes per share on all matters
submitted to a vote of our stockholders. As a result, as of June 30, 2011, Mr. Greenberg
beneficially owned approximately 22.2% of the aggregate number of votes eligible to be cast by our
stockholders, and together with shares beneficially owned by other members of his immediate family,
they beneficially owned approximately 35.0% of the aggregate number of votes eligible to be cast by
our stockholders. Therefore, Mr. Greenberg is able to exert significant influence over all matters
requiring approval by our stockholders. Matters that require the approval of our stockholders
include the election of directors and the approval of mergers or other business combination
transactions. Mr. Greenberg also has significant influence over our management and operations. As a
result of such influence, certain transactions are not likely without the approval of Mr.
Greenberg, including proxy contests, tender offers, open market purchase programs or other
transactions that can give our stockholders the opportunity to realize a premium over the
then-prevailing market prices for their shares of our Class A common shares. Because Mr.
Greenbergs interests may differ from the interests of the other stockholders, Mr. Greenbergs
significant influence on actions requiring stockholder approval may result in our company taking
action that is not in the interests of all stockholders. The differential in the voting rights may
also adversely affect the value of our Class A common shares to the extent that investors or any
potential future purchaser view the superior voting rights of our Class B common shares to have
value.
The Toning Footwear Category Has Come Under Public and Regulatory Scrutiny That May Have A Negative
Impact On Our Business And Results Of Operations.
The relatively new toning footwear product category, including our own Shape-ups products, has
come under significant scrutiny in the past year, including highly publicized negative professional
opinions, some negative publicity and media attention, personal injury lawsuits and attorneys
publicly marketing their services to consumers who were allegedly aggrieved by the marketing of our
toning products or injured by Shape-ups. The negative publicity and media attention has ranged from
questioning the validity of our advertising and promotional claims to the allegations of personal
injury lawsuits and overall safety of these products. We believe that Shape-ups and our other
toning products are safe but are not able to predict what effect this negative publicity will have
on sales of
31
toning footwear generally and our Shape-ups products in particular, whether such publicity
will continue, and what the overall effect will be on our business and our results of operations.
It Is Difficult To Predict The Effect Of Regulatory Inquiries About Advertising And Promotional
Claims Related To Our Products In The Fitness Footwear Market.
The toning footwear market is a relatively new product category dominated by a handful of
competitors who design, market and advertise their products to promote benefits associated with
wearing the footwear. Advertising promoting benefits associated with these products routinely comes
under review from regulators including the U.S. Federal Trade Commission (FTC), states Attorneys
General and government and quasi-government regulators in foreign countries. As noted under Legal
Proceedings in Part I, Item 3 of this quarterly report, we have received requests for information
relating to our advertising claims for Shape-ups and other toning products. These inquiries may
conclude in a variety of outcomes, including the closing of the inquiry with no further regulatory
action, settlement of any issues through changes in our claims and advertising, settlement of any
issues through payment to the regulatory entity, or litigation. Based on our current discussions
with the FTC, we do not believe that pending inquiry likely will end in a closure letter that
assures no further regulatory action. We continue to defend our claims and advertising with
respect to our core toning products vigorously before the FTC and other regulators, and we are not
able to predict the outcome of these inquiries and what, if any, effect, they may have on our
advertising, promotional claims, business, or results of operations.
32
ITEM 6. EXHIBITS
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Exhibit |
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Number |
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Description |
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31.1
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Certification of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1*
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Certification of the Chief Executive Officer and the
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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101.INS**
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XBRL Instance Document. |
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101.SCH**
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XBRL Taxonomy Extension Schema Document. |
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|
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101.CAL**
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XBRL Taxonomy Extension Calculation Linkbase Document. |
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|
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101.LAB**
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Taxonomy Extension Label Linkbase Document. |
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|
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101.PRE**
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XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF**
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XBRL Taxonomy Extension Definition Linkbase Document. |
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|
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* |
|
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. |
|
** |
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Furnished, not filed, herewith. |
33
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.
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Date: August 9, 2011 |
SKECHERS U.S.A., INC.
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|
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By: |
/S/ DAVID WEINBERG
|
|
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David Weinberg |
|
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Chief Financial Officer |
|
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34