CROCS, INC. Business Overview
Crocs, Inc. and our consolidated subsidiaries (collectively the "Company," "Crocs," "we," "us," or "our") are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for women, men, and children. We strive to be the world leader in innovative casual footwear for women, men, and children, combining comfort and style with a value that consumers want. Known or Anticipated Trends Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends will continue to impact our operating results: •OnFebruary 17, 2022 , (the "Acquisition Date"), we acquired (the "Acquisition") 100% of the equity of a privately-owned casual footwear brand business ("HEYDUDE"), pursuant to a securities purchase agreement (the "SPA") entered into onDecember 22, 2021 . HEYDUDE is engaged in the business of distributing and selling casual footwear, including footwear under the brand name "HEYDUDE." On the Acquisition Date, we purchased all of the issued and outstanding equity securities of HEYDUDE. The aggregate preliminary purchase price at the closing of the Acquisition was$2.3 billion . We paid aggregate consideration of$2.05 billion in cash (the "Cash Consideration"), subject to adjustment based on, among other things, the cash, indebtedness, transaction expenses, and working capital of the companies comprising HEYDUDE and their respective subsidiaries as of the Acquisition Date, and issued 2,852,280 shares of our common stock to one of the sellers, which shares are subject to a lock-up. The Cash Consideration was financed via our entry into the$2.0 billion Term Loan B Facility (as defined below) and$50.0 million of borrowings under our Revolving Facility (as defined below). The Acquisition has enabled us to further diversify our product portfolio under two brands. We intend to leverage our global presence, innovative marketing, and scale infrastructure to grow HEYDUDE and to create significant shareholder value. For more information on the Acquisition, refer to Note 16 - Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
•The results reported for the HEYDUDE brand herein represent the partial period
beginning on the Acquisition Date through
•In response to the ongoingRussia -Ukraine war, we paused ourRussia direct-to-consumer ("DTC") business, as well as imports of product into the country, during the quarter, and we have continued to pay our employees within the country. We have also donated over 200,000 pairs of shoes to Soles for Souls intended for Ukrainian refugees. The pause of our operations inRussia has impacted, and will continue to impact, sales in ourEurope ,Middle East ,Africa , andLatin America ("EMEALA") segment, butRussia has historically represented a small portion of our global business at less than 3% of consolidated revenues in the year endedDecember 31, 2021 . •Global industry-wide logistics challenges and global inflation have impacted, and we expect will continue to impact, our business, contributing to incremental freight costs, increased wages, particularly in our distribution centers, and increased raw materials costs. Partial COVID-19-related closures inVietnam in the fourth quarter of 2021 and first part of the first quarter of 2022 also negatively impacted our supply chain. Further, inApril 2022 , we have been impacted by similar closures inChina . We expect the situation to remain fluid as COVID-19 break-out rates fluctuate, including any deterioration in circumstances related to COVID-19 variants. In the first quarter of 2022, we incurred air freight costs of approximately$25 million of our total$75 million plan for 2022, which has helped mitigate supply delays.
Use of Non-GAAP Financial Measures
In addition to financial measures presented on the basis of accounting principles generally accepted inthe United States of America ("U.S. GAAP"), we present certain information related to our results of operations through "constant currency," which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable segments underU.S. GAAP. Constant currency represents current period results that have been retranslated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends, excluding the impact of foreign currency exchange rates on reported amounts. Management uses constant currency to assist in comparing business trends from period to period on a consistent basis in communications with the Board, stockholders, analysts, and investors concerning our financial performance. We believe 21 -------------------------------------------------------------------------------- Table of Contents constant currency is useful to investors and other users of our condensed consolidated financial statements as an additional tool to evaluate operating performance and trends. Investors should not consider constant currency in isolation from, or as a substitute for, financial information prepared in accordance withU.S. GAAP.
First Quarter 2022 Financial and Operational Highlights
Revenues were$660.1 million for the first quarter of 2022, a 43.5% increase compared to the first quarter of 2021. The increase was due to the net effects of: (i) the addition of HEYDUDE Brand revenues of$114.9 million in the Partial Period as a result of the Acquisition, which increased revenues by 25.0%; (ii) higher Crocs Brand average selling prices, driven primarily by reduced promotions and higher pricing, as well as favorable product mix, including increased sales of charms per shoe, which increased revenues by$104.3 million , or 22.6%; (iii) unfavorable changes in exchange rates for the Crocs Brand, which decreased revenues by$14.9 million , or 3.2%, and (iv) lower Crocs Brand unit sales volumes, which decreased revenues by$4.3 million , or 0.9%.
The following were significant developments affecting our businesses and capital
structure during the three months ended
•We acquired HEYDUDE, which added revenues of$114.9 million for the Partial Period. This represents 17.4% of total consolidated revenues in the three months endedMarch 31, 2022 . HEYDUDE represents a new reportable operating segment.
•Overall, revenues grew 43.5% compared to the first quarter of 2021, with strong growth in all regional segments and channels.
•During the three months endedMarch 31, 2022 , certain revenues and expenses associated with the Crocs Brand Latin America businesses previously reported in our 'Americas' segment were shifted into the 'EMEA' segment to better align how we manage our distributor business. To reflect this change, we renamed our 'Americas' segment to 'North America ' and renamed our 'EMEA' segment to 'EMEALA.' Prior period amounts have been revised to conform to current period presentation. •Within the Crocs Brand, ourNorth America segment revenues grew by 19.5% on both a nominal and constant currency basis, while our EMEALA segment revenues grew by 17.9%, or 26.8% on a constant currency basis, and ourAsia Pacific segment revenues grew by 16.0%, or 22.1% on a constant currency basis, compared to the first quarter of 2021. •Footwear units sold for the Crocs Brand in the first quarter of 2022 were relatively flat at approximately 25.6 million pairs worldwide compared to the first quarter of 2021. We sold 4.0 million pairs of shoes for the HEYDUDE brand in the Partial Period. •Gross margin was 49.2%, a decrease of 580 basis points from last year's first quarter. This is inclusive of an approximately 420 basis points impact from adjustments to the fair value of HEYDUDE inventory costs at the Acquisition Date. For more information on the Acquisition, refer to Note 16 - Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q. The remaining decrease in margins resulted from higher freight costs, including air freight, resulting from supply chain disruptions and inflation, offset in part by higher ASPs related to price increases.
•Selling, general and administrative expenses ("SG&A") was
•Income from operations decreased to$118.7 million from$124.7 million in last year's first quarter. Net income was$72.8 million , or$1.19 per diluted share, compared to$98.4 million , or$1.47 per diluted share, in last year's first quarter. •During the first quarter, we entered into a$2.0 billion Term Loan B Facility to partially fund the Acquisition and borrowed a net$150.0 million under our Revolving Facility,$50.0 million of which was used to partially fund the Acquisition. AtMarch 31, 2022 , we had the full$2.0 billion outstanding under the Term Loan B Facility and$364.7 million of available borrowing capacity under our Revolving Facility. 22 --------------------------------------------------------------------------------
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Results of Operations
Three Months Ended March 31, % Change
2022 2021 Favorable (Unfavorable)
(in thousands, except pershare, margin, and average selling price
data)
Revenues $ 660,148 $ 460,098 43.5 %
Cost of sales 335,224 206,879 (62.0) %
Gross profit 324,924 253,219 28.3 %
Selling, general and administrative expenses 206,247 128,533 (60.5) %
Income from operations 118,677 124,686 (4.8) %
Foreign currency gains (losses), net 480 (504) 195.2 %
Interest income 102 27 277.8 %
Interest expense (19,252) (1,632) (1,079.7) %
Other income (expense), net (947) 11 (8,709.1) %
Income before income taxes 99,060 122,588 (19.2) %
Income tax expense 26,300 24,190 (8.7) %
Net income $ 72,760 $ 98,398 (26.1) %
Net income per common share:
Basic $ 1.22 $ 1.50 (18.7) %
Diluted $ 1.19 $ 1.47 (19.0) %
Gross margin (1) 49.2 % 55.0 % (580) bp
Operating margin (1) 18.0 % 27.1 % (910) bp
Footwear unit sales:
Crocs Brand 25,615 25,908 (1.1) %
HEYDUDE Brand (3) 3,979 - - %
Average footwear selling price - nominal
basis (2):
Crocs Brand $ 21.10 $ 17.64 19.6 %
HEYDUDE Brand (3) $ 28.90 $ - - %
(1) Changes for gross margin and operating margin are shown in basis points
("bp").
(2) Average footwear selling price is calculated as footwear and charms revenues
divided by footwear units, as applicable.
(3) We acquired HEYDUDE on February 17, 2022 . Therefore, the amounts shown above
represent results during the Partial Period and there are no comparative amounts
for the three months ended March 31, 2021 .
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Revenues By Channel
Constant Currency
% Change % Change (1)
Three Months Ended March 31, Favorable (Unfavorable)
2022 2021 Q1 2022-2021 Q1 2022-2021
(in thousands)
Wholesale:
Crocs Brand $ 344,258 $ 290,039 18.7 % 22.9 %
HEYDUDE Brand (2) 86,919 - - % - %
Total wholesale 431,177 290,039 48.7 % 52.9 %
Direct-to-consumer:
Crocs Brand 200,967 170,059 18.2 % 19.7 %
HEYDUDE Brand (2) 28,004 - - % - %
Total direct-to-consumer 228,971 170,059 34.6 % 36.1 %
Total revenues $ 660,148 $ 460,098 43.5 % 46.7 %
(1) Reflects year over year change as if the current period results were in
constant currency, which is a non-GAAP financial measure. See "Use of Non-GAAP
Financial Measures" for more information.
(2) We acquired HEYDUDE on February 17, 2022 . Therefore, the amounts shown above
represent results during the Partial Period and there are no comparative amounts
for the three months ended March 31, 2021 .
Revenues. In the three months ended March 31, 2022 , revenues increased compared
to the same period in 2021. This was driven by (i) the addition of HEYDUDE Brand
revenues of $114.9 million in the Partial Period and (ii) higher average selling
price on a constant currency basis ("ASP") in the Crocs Brand of $104.3 million ,
or 22.6%, as a result of increased pricing, fewer promotions, and less
discounting in all regions. Negative foreign currency changes of $14.9 million ,
or 3.2%, most significantly in the Euro, decreased Crocs Brand revenues, while
volume in the Crocs Brand decreased 0.9%.
Cost of sales. HEYDUDE contributed to over half of the increase in cost of
sales, which was in line with the increase in HEYDUDE revenue discussed above
and is inclusive of a $27.9 million adjustment to the fair value of inventory at
the Acquisition Date. For more information on the Acquisition, refer to Note 16
- Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated
financial statements included in Part I - Item 1. Financial Statements of this
Quarterly Report on Form 10-Q. Additionally, in the three months ended March 31,
2022 , compared to the same period in 2021, higher average cost per unit on a
constant currency basis ("AUC") for the Crocs Brand of $47.4 million , or 22.9%,
was driven mostly by higher freight costs, including air freight of
$24.6 million , as well as an inventory write off of $1.8 million as a result of
the impact of the Russia -Ukraine war. Negative fluctuations in foreign currency
of $6.8 million , or 3.3%, increased Crocs Brand cost of sales, while volume had
minimal impact.
Gross profit. Gross margin decreased in the three months ended March 31, 2022 to
49.2%, compared to 55.0% in the same period in 2021, mostly driven by an
approximately 420 basis points impact from adjustments to the fair value of
HEYDUDE inventory costs at the Acquisition Date. Gross margin was also impacted
by higher freight costs as a result of supply chain challenges, which have
caused us to use more expensive shipping methods, such as air freight, to
satisfy consumer demand, and global inflation, which has broadly led to, among
other things, increased freight costs. This was partially mitigated by better
sales performance as a result of higher ASPs, as described above.
Gross profit increased $71.7 million , or 28.3%, as a result of the net impact of
higher Crocs Brand ASP and higher Crocs Brand AUC, of $56.9 million , or 22.5%.
This was offset by lower volume in the Crocs Brand of $5.6 million , or 2.2%, and
unfavorable foreign currency changes for the Crocs Brand of $8.1 million , or
3.2%. The HEYDUDE Brand contributed to the remainder of the increase.
Selling, general and administrative expenses. SG&A expenses increased $77.7
million , or 60.5%, in the three months ended March 31, 2022 compared to the same
period in 2021. This was due in part to costs associated with the Acquisition,
including consulting, legal, and accounting fees, among others, of $20.6
million . Higher salaries and wages, recruiting, commissions, and other
compensation costs increased $18.1 million due to increased headcount, including
employees associated with
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HEYDUDE, as we have grown the Company over the last year. We also continued to
invest in marketing to fuel revenue growth, with an increase of $15.6 million , a
large portion of which relates to variable marketing and additional investments
in our digital business. Other professional services costs increased $8.3
million , due to higher variable costs associated with increased revenues, higher
legal costs associated in part with ongoing defense of our intellectual
property, and supply chain projects. We had higher bad debt expense of $6.2
million as a result of receivables written off for our Russia business, driven
by the war in Ukraine . Other net costs, including facilities expense and
information technology costs, increased $8.9 million .
Foreign currency gains (losses), net. Foreign currency gains (losses), net,
consist of realized and unrealized foreign currency gains and losses from the
remeasurement and settlement of monetary assets and liabilities denominated in
non-functional currencies as well as realized and unrealized gains and losses on
foreign currency derivative instruments. During the three months ended March 31,
2022 , we recognized realized and unrealized net foreign currency gains of $0.5
million , compared to losses of $0.5 million during the three months ended March
31, 2021 .
Income tax expense. During the three months ended March 31, 2022 , income tax
expense increased $2.1 million compared to the same period in 2021. The
effective tax rate for the three months ended March 31, 2022 was 26.5% compared
to an effective tax rate of 19.7% for the same period in 2021, a 6.8% increase.
This increase in the effective rate was driven primarily driven by the prior
year realization of deferred tax assets which were subject to a valuation
allowance which did not reoccur in the current year. Our effective income tax
rate, for each period presented, also differs from the federal U.S. statutory
rate due differences in income tax rates between U.S. and foreign jurisdictions.
Reportable Operating Segments
The following table sets forth information related to our reportable operating
segments, including a comparison of revenues and operating income by segment:
Constant Currency
Three Months Ended March 31, % Change % Change (1)
2022 2021 Favorable (Unfavorable)
(in thousands)
Revenues:
North America (2) $ 319,450 $ 267,267 19.5 % 19.5 %
Asia Pacific 95,847 82,592 16.0 % 22.1 %
EMEALA (2) 129,921 110,201 17.9 % 26.8 %
Brand corporate (3) 7 38 (81.6) % (81.6) %
Crocs Brand revenues 545,225 460,098 18.5 % 21.7 %
HEYDUDE Brand revenues 114,923 - - % - %
Total consolidated revenues $ 660,148 $ 460,098 43.5 % 46.7 %
Income from operations:
North America (2) $ 129,611 $ 112,693 15.0 % 15.1 %
Asia Pacific 30,106 22,115 36.1 % 48.3 %
EMEALA (2) 34,927 40,019 (12.7) % (11.3) %
Brand corporate (3) (30,709) (20,008) (53.5) % (55.1) %
Crocs Brand income from
operations 163,935 154,819 5.9 % 7.8 %
HEYDUDE Brand income from
operations 15,658 - - % - %
Enterprise corporate (3) (60,916) (30,133) (102.2) % (102.3) %
Total consolidated income from
operations $ 118,677 $ 124,686 (4.8) % (2.4) %
(1) Reflects year over year change as if the current period results were in
constant currency, which is a non-GAAP financial measure. See "Use of Non-GAAP
Financial Measures" for more information.
(2) In the first quarter of 2022, certain revenues and expenses associated with
our Latin America businesses previously reported in our 'Americas' segment were
shifted into the 'EMEA' segment. To reflect this change, we renamed our
'Americas' segment to 'North America ' and renamed our 'EMEA' segment to
'EMEALA.' Additionally, in the second quarter of 2021, certain marketing
expenses previously reported within 'Unallocated corporate and other' were
shifted to the Americas , Asia Pacific , and EMEA segments (see footnote (2) for
more information on the current year presentation of costs previously reported
in 'Unallocated corporate and other'). As a result of these changes, the
previously reported amounts for revenues and income from operations for the
three months ended March 31, 2021 have been revised to conform to current period
presentation. See the 'Impacts of segment composition change'
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and 'Impacts of marketing expense allocations' tables below for more
information.
(3) In the first quarter of 2022, as a result of the Acquisition, all costs
previously reported in "Unallocated corporate and other" were recast between
'Brand corporate' costs associated with the Crocs Brand and 'Enterprise
corporate' costs, each of which is defined in Note 14 - Operating Segments and
Geographic Information in the accompanying notes to the condensed consolidated
financial statements included in Part I - Item 1. Financial Statements of this
Quarterly Report on Form 10-Q. As a result of these changes, the previously
reported amounts for income from operations for the three months ended March 31,
2021 have been revised to conform to current period presentation. See the
'Impacts of brand vs. enterprise recast' table below for more information.
(4) We acquired HEYDUDE on February 17, 2022 and added the HEYDUDE brand as a
new operating segment. Therefore, the amounts shown above represent results
during the Partial Period and there are no comparative amounts for the three
months ended March 31, 2021 .
Impacts of segment composition change associated with
Three Months Ended March 31, 2021
(in thousands)
Impact on revenues:
Americas (now "North America") $ (9,142)
EMEA (now "EMEALA") 9,142
Impact on income from operations:
Americas (now "North America") $ (3,374)
EMEA (now "EMEALA") 3,374
Impacts of marketing expense allocations:
Three Months Ended
March 31, 2021
(in thousands)
Impacts on income from operations:
Americas (now "North America") $ (2,277)
Asia Pacific (1,178)
EMEA (now "EMEALA") (468)
Total impact on segment income from operations $ (3,923)
Unallocated corporate and other (now in "Brand corporate") $ 3,923
Impacts of brand vs. enterprise recast:
Three Months Ended March 31, 2021
(in thousands)
Impacts on income from operations:
Brand corporate $ (20,008)
Enterprise corporate (30,133)
Unallocated corporate and other 50,141
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The primary drivers of changes in revenues by operating segment were:
Three Months Ended March 31, 2022 vs. 2021
Volume Price (1) Foreign Exchange Total
$ $ $ $
Change % Change Change % Change Change % Change Change % Change
(in thousands)
Segment Revenues:
Crocs Brand:
Americas $ (15,144) (5.7) % $ 67,349 25.2 % $ (22) - % $ 52,183 19.5 %
Asia Pacific 5,919 7.2 % 12,346 14.9 % (5,010) (6.1) % 13,255 16.0 %
EMEA 4,995 4.5 % 24,559 22.4 % (9,834) (8.9) % 19,720 17.9 %
HEYDUDE Brand - - % - - % - - % - - %
Total segment revenues $ (4,230) (0.9) % $ 104,254 22.6 % $ (14,866) (3.2) % $ 85,158 18.5 %
(1) The change due to price for revenues is based on ASP, as defined earlier in this section.
Crocs Brand
North America Operating Segment
Revenues.Americas revenues increased in the three months endedMarch 31, 2022 , compared to the same period in 2021, driven by higher ASP in both channels due to higher pricing. This was partially offset by lower volumes as a result of delays in the arrival of new product introductions driven by supply chain constraints. Income from Operations. Income from operations for ourAmericas segment was$129.6 million for the three months endedMarch 31, 2022 , an increase of$16.9 million , or 15.0%, compared to the same period in 2021. Gross profit increased$30.4 million , or 19.4%, as a result of the net impact of higher ASP and AUC, of$39.6 million , or 25.2%. This increase was due to higher prices and fewer promotions and favorable product mix, offset in part by higher freight costs, including air freight. Lower volume of$9.1 million , or 5.7%, partially offset this increase. SG&A for ourAmericas segment increased$13.5 million , or 30.5%, during the three months endedMarch 31, 2022 compared to the same period in 2021. We continued to invest in marketing, which increased by$7.7 million compared to prior year, particularly in our digital business, and employee headcount, with compensation costs increasing by$2.8 million . Facilities expense was higher by$1.3 million , primarily as a result of variable rent associated with an increase in retail sales, and other net costs were higher by$1.7 million , mostly as a result of variable costs associated with higher DTC sales.
Asia Pacific Operating Segment
Revenues.Asia Pacific revenues increased in the three months endedMarch 31, 2022 , compared to the same period in 2021, as a result of higher ASP as a result of higher pricing and less discounting and higher volume, driven by wholesale brick-and-mortar and distributor sales. These increases were partially offset by unfavorable foreign currency changes, primarily in the Korean Won, Japanese Yen, and Indian Rupee. Income from Operations. Income from operations for theAsia Pacific segment was$30.1 million for the three months endedMarch 31, 2022 , an increase of$8.0 million , or 36.1%, compared to the same period in 2021. Gross profit increased by$11.4 million , or 25.7%. This resulted from growth of$11.9 million , or 26.9%, driven by higher pricing and less discounting, which led to higher ASP. Increases in sales volume contributed$3.0 million , or 6.7%, to the increase in gross profit, while unfavorable changes in foreign currency of$3.5 million , or 7.9%, partially offset these increases. SG&A for ourAsia Pacific segment increased$3.4 million , or 15.2%, during the three months endedMarch 31, 2022 , compared to the same period in 2021, due to investments in marketing of$1.1 million , primarily related to ourChina business, and employee headcount of$0.8 million , as well as increases in other net costs of$1.5 million , primarily associated with variable costs in line with higher DTC revenues in facilities, contract labor, and outside services costs. 27 -------------------------------------------------------------------------------- Table of Contents EMEALA Operating Segment Revenues. In the three months endedMarch 31, 2022 , compared to the same period in 2021, the increase in revenues in our EMEALA segment was driven by increased volume, primarily in our wholesale channel. Additionally, increased ASPs, driven by increased prices and product mix, which was led by an increased share of clogs, also contributed to revenue growth. Significant unfavorable foreign currency fluctuations in the Euro partially offset these increases. Income from Operations. Income from operations for the EMEALA segment was$34.9 million for the three months endedMarch 31, 2022 , an increase of$5.1 million , or 12.7%, compared to the same period in 2021. Gross profit increased$3.6 million , or 6.6%, due mostly to an impact of$5.4 million , or 9.9% from higher ASP due to increased pricing, offset in part by higher AUC as a result of increased freight costs, including air freight, increased duties as a result of unfavorable sourcing mix driven by COVID-19-related closures inVietnam , and unfavorable purchasing power. Additionally, gross profit was negatively impacted by an inventory reserve expense of$1.8 million inRussia as a result of the war inUkraine . Higher volume drove increased gross profit of$2.7 million , or 4.8%. Foreign currency changes, primarily in the Euro, were unfavorable, impacting gross profit by$4.5 million , or 8.1%. SG&A for our EMEALA segment increased$8.7 million , or 58.2%, during three months endedMarch 31, 2022 , compared to the same period in 2021. Marketing investments increased$1.5 million , primarily in digital marketing. Bad debt expense increased$5.8 million , primarily due to a reserve for unrecoverable receivables for ourRussia business, driven by the war inUkraine . Other net costs increased, including compensation expense and professional services costs, of$1.4 million . Crocs Brand Corporate During the three months endedMarch 31, 2022 , total net costs within 'Brand corporate' increased$10.7 million , or 53.5%, compared to the same period in 2021, due to higher compensation costs of$3.6 million , inventory donations of$2.0 million , primarily comprised of donations to be distributed toUkraine refugees, higher services costs of$1.7 million , and higher information technology costs of$0.9 million . Other net costs increased by$0.3 million .
HEYDUDE Brand
For the Partial Period, revenues attributable to HEYDUDE were$114.9 million , with the majority of revenues attributable to our wholesale channel at 75.6%. Overall we sold 4.0 million pairs of shoes in the HEYDUDE Brand during the Partial Period. Income from operations during the Partial Period was$15.7 million and included SG&A costs comprised primarily of marketing, compensation, and amortization expense. Refer to Note 16 - Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q for additional information regarding the Acquisition.
Enterprise Corporate
During the three months endedMarch 31, 2022 , total net costs within 'Enterprise corporate' increased$30.8 million , or 102.2%, compared to the same period in 2021, due primarily to costs associated with the Acquisition, including consulting, legal, and accounting fees, among others, of$20.6 million . There were also higher other professional service costs of$4.6 million , higher compensation and related costs of$4.3 million and increases in other net costs, including information technology costs, of$1.3 million . 28
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Crocs Brand Store Locations and Digital Sales Percentage
The tables below illustrate the overall change in the number of our Crocs Brand company-operated retail locations by reportable operating segment for the three months endedMarch 31, 2022 : December 31, March 31, 2021 Opened Closed 2022 Company-operated retail locations: North America 173 2 - 175 Asia Pacific 153 1 1 153 EMEALA 47 1 4 44 Total 373 4 5 372 Digital sales, which includes sales through our company-owned websites, third party marketplaces, and e-tailers (which are reported in our wholesale channel), as a percent of total revenues, by operating segment were: Three Months Ended
2022 2021
Digital sales as a percent of total revenues: Crocs Brand 32.8 % 32.3 % HEYDUDE Brand (1) 25.9 % - % Total (2) 31.6 % 32.3 % (1) We acquired HEYDUDE onFebruary 17, 2022 . Therefore, the amounts shown above represent results during the Partial Period and there are no comparative amounts for the three months endedMarch 31, 2021 . (2) For the three months endedMarch 31, 2021 , the digital sales as a percent of total revenues represents the Crocs Brand. Direct-to-consumer ("DTC") comparable sales for the Crocs Brand are as follows: Constant Currency (1) Three Months Ended March 31, 2022 2021
Direct-to-consumer comparable sales: (2)
Crocs Brand 16.6 %
71.1 %
(1) Reflects period over period change on a constant currency basis, which is a
non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for more
information.
(2) Comparable store status, as included in the DTC comparable sales figures
above, is determined on a monthly basis. Comparable store sales include the
revenues of stores that have been in operation for more than twelve months.
Stores in which selling square footage has changed more than 15% as a result of
a remodel, expansion, or reduction are excluded until the thirteenth month in
which they have comparable prior year sales. Temporarily closed stores are
excluded from the comparable store sales calculation during the month of closure
and in the same month in the following year. Location closures in excess of
three months are excluded until the thirteenth month post re-opening. E-commerce
comparable revenues are based on same site sales period over period.
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Financial Condition, Capital Resources, and Liquidity
Liquidity
Our liquidity position as of
March 31, 2022
(in thousands)
Cash and cash equivalents $ 171,969
Available borrowings 371,132
As of March 31, 2022 , we had $172.0 million in cash and cash equivalents and up
to $371.1 million of available borrowings, including $364.7 million of remaining
borrowing availability under the Revolving Facility and $6.4 million of
remaining borrowing availability under the Asia Revolving Facilities (as defined
below). As of March 31, 2022 , the Term Loan B Facility was fully drawn at $2.0
billion , and there was no available borrowing capacity. We believe that cash
flows from operations, our cash and cash equivalents on hand, and available
borrowings under our Revolving Facility will be sufficient to meet our ongoing
liquidity needs and capital expenditure requirements for at least the next
twelve months.
We completed the Acquisition on February 17, 2022 . The consideration for the
Acquisition was comprised of $2.05 billion in Cash Consideration and 2,852,280
of Crocs shares. To finance a portion of the Cash Consideration, we entered into
the $2.0 billion Term Loan B Facility and borrowed $50.0 million under our
Revolving Facility. We also exercised the accordion provision for our Revolving
Facility to increase our borrowing capacity from $500.0 million to $600.0
million . In 2022, we plan to use excess cash generated by our operations to
begin to repay our outstanding debt, and, as such, we have suspended our share
repurchase program.
Additional future financing may be necessary to fund our operations and there
can be no assurance that, if needed, we will be able to secure additional debt
or equity financing on terms acceptable to us or at all. Although we believe we
have adequate sources of liquidity over the long term, the success of our
operations, the global economic outlook, and the pace of sustainable growth in
our markets could each impact our business and liquidity.
Repatriation of Cash
As a global business, we have cash balances in various countries and amounts are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries may have additional restrictions and covenants associated with them which could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities. All of the cash held outside of theU.S. could be repatriated to theU.S. without incurring additionalU.S. federal income taxes. As ofMarch 31, 2022 , we held$83.9 million of our total$172.0 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. The repatriation of the$83.9 million , held in international locations is not limited by local regulations.
Senior Revolving Credit Facility
InJuly 2019 , the Company and certain of its subsidiaries (the "Borrowers") entered into a Second Amended and Restated Credit Agreement (as amended, the "Credit Agreement"), with the lenders named therein andPNC Bank, National Association , as a lender and administrative agent for the lenders. InFebruary 2022 , we amended the Credit Agreement, which, as amended to date, provides for a revolving credit facility of$600.0 million , which can be increased by an additional$400.0 million subject to certain conditions (the "Revolving Facility"). Borrowings under the Credit Agreement bear interest at a variable interest rate based on (A) a Base Rate (defined as the highest of (i) the Overnight Bank Funding Rate (as defined in the Credit Agreement), plus 0.25%, (b) the Prime Rate (as defined in the Credit Agreement), and (c) the Daily Simple SOFR (as defined in the Credit Agreement), plus 1.00%), plus an applicable margin ranging from 0.25% to 0.875% based on our leverage ratio or 1.35% to 1.975% for the Daily Simple SOFR based on the leverage ratio, or (B) the Term SOFR Rate (as defined in the Credit Agreement), plus an applicable margin ranging from 1.35% to 1.975% based on our leverage ratio for one-month interest periods and 1.40% to 2.025% based on our leverage ratio for three month interest periods. Borrowings under the Credit Agreement are secured by all of the assets of the Borrowers and guaranteed by certain other subsidiaries of the Borrowers. 30 -------------------------------------------------------------------------------- Table of Contents The Credit Agreement requires us to maintain a minimum interest coverage ratio of 3.00 to 1.00, and a maximum leverage ratio of (i) 4.00 to 1.00 from the quarter endedMarch 31, 2022 through, and including, the quarter endingDecember 31, 2023 , (ii) 3.75 to 1.00 for the quarter endingMarch 31, 2024 , (iii) 3.50 to 1.00 for the quarter endingJune 30, 2024 , and (iv) 3.25 to 1.00 for the quarter endingSeptember 30, 2024 and thereafter (subject to adjustment in certain circumstances). The Credit Agreement permits, among other things, (i) stock repurchases subject to certain restrictions, including after giving effect to such stock repurchases, the maximum leverage ratio does not exceed certain levels; and (ii) certain acquisitions so long as there is borrowing availability under the Credit Agreement of at least$40.0 million . As ofMarch 31, 2022 , we were in compliance with all financial covenants under the Credit Agreement. As ofMarch 31, 2022 , the total commitments available from the lenders under the Revolving Facility were$600.0 million . AtMarch 31, 2022 , we had$235.0 million in outstanding borrowings, which are due when the Revolving Facility matures inJuly 2024 , and$0.3 million in outstanding letters of credit under the Revolving Facility, which reduces amounts available for borrowing under the Revolving Facility. As ofMarch 31, 2022 andDecember 31, 2021 , we had$364.7 million and$414.7 million , respectively, of available borrowing capacity under the Revolving Facility.
Term Loan B Facility
OnFebruary 17, 2022 , the Company entered into a credit agreement (the "Term Loan B Credit Agreement") withCitibank, N.A ., as administrative agent and lender, to among other things, finance a portion of the cash consideration for the Acquisition. The Term Loan B Credit Agreement provides for an aggregate term loan B facility in the principal amount of$2.0 billion (the "Term Loan B Facility"), which is secured by substantially all of the Company's and each subsidiary guarantor's assets on a pari passu basis with their obligations arising from the Credit Agreement and is scheduled to mature onFebruary 17, 2029 , subject to certain exceptions set forth in the Term Loan B Credit Agreement. Subject to certain conditions, including, without limitation, satisfying certain leverage ratios, the Company may, at any time, on one or more occasions, add one or more new classes of term facilities and/or increase the principal amount of the loans of any existing class by requesting one or more incremental term facilities. Each term loan borrowing which is an alternate base rate borrowing will bear interest at a rate per annum equal to the Alternate Base Rate (as defined in the Term Loan B Credit Agreement), plus 2.50%. Each term loan borrowing which is a term benchmark borrowing will bear interest at a rate per annum equal to the Adjusted Term SOFR Rate (as defined in the Term Loan B Credit Agreement) plus 3.50%. Outstanding principal of the Term Loan B Facility is payable on the last business day of each March, June, September and December, beginningJune 30, 2022 , in a quarterly aggregate principal amount of$5.0 million , with the entire remaining principal amount due onFebruary 17, 2029 , the maturity date. As ofMarch 31, 2022 , the Term Loan B Facility was fully drawn, and there was no available borrowing capacity under the Term Loan B Facility. The Term Loan B Credit Agreement also contains customary affirmative and negative covenants, incurrence financial covenants, representations and warranties, events of default and other provisions. As ofMarch 31, 2022 , we were in compliance with all financial covenants under the Term Loan B Credit Agreement.
Asia Revolving Credit Facilities
During the three months endedMarch 31, 2022 , we had two revolving credit facilities inAsia , the revolving credit facility with China Merchants Bank Company Limited,Shanghai Branch (the "CMBC Facility") which provides up to10.0 million RMB , or$1.6 million at current exchange rates, and matures inJanuary 2023 , and the revolving credit facility withCitibank (China) Company Limited ,Shanghai Branch (the "Citibank Facility"), which provides up to an equivalent of$10.0 million (together, the "Asia Revolving Facilities").
As of
Senior Notes Issuance
InMarch 2021 , the Company completed the issuance and sale of$350.0 million aggregate principal amount of 4.250% Senior Notes dueMarch 15, 2029 (the "2029 Notes"), pursuant to the indenture related thereto (as amended and/or supplemented to 31 -------------------------------------------------------------------------------- Table of Contents date, the "2029 Notes Indenture"). Additionally, inAugust 2021 , the Company completed the issuance and sale of$350.0 million aggregate principal amount of 4.125% Senior Notes dueAugust 15, 2031 (the "2031 Notes"), pursuant to the indenture related thereto (as amended and/or supplemented to date, "the 2031 Notes Indenture" and, together with the 2029 Notes Indenture, the "Indentures" and, each, an "Indenture"). Interest on each of the 2029 Notes and the 2031 Notes (collectively, the "Notes") is payable semi-annually. The Company will have the option to redeem all or any portion of the 2029 Notes, at once or over time, at any time on or afterMarch 15, 2024 , at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2029 Notes at any time beforeMarch 15, 2024 at a redemption price of 100% of the principal amount to be redeemed, plus a "make-whole" premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time beforeMarch 15, 2024 , the Company may redeem up to 40% of the aggregate principal amount of the 2029 Notes at a redemption price of 104.250% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will have the option to redeem all or any portion of the 2031 Notes, at once or over time, at any time on or afterAugust 15, 2026 , at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2031 Notes at any time beforeAugust 15, 2026 at a redemption price of 100% of the principal amount to be redeemed, plus a "make-whole" premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time beforeAugust 15, 2024 , the Company may redeem up to 40% of the aggregate principal amount of the 2031 Notes at a redemption price of 104.125% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Notes rank pari passu in right of payment with all of the Company's existing and future senior debt, including the Credit Agreement, and are senior in right of payment to any of the Company's future debt that is, by its term, expressly subordinated in right of payment to the Notes. The Notes are unconditionally guaranteed by each of the Company's restricted subsidiaries that is a borrower or guarantor under the Credit Agreement and by each of the Company's wholly-owned restricted subsidiaries that guarantees any debt of the Company or any guarantor under any syndicated credit facility or capital markets debt in an aggregate principal amount in excess of$25.0 million . The Indentures contain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to incur additional debt or issue certain preferred stock; pay dividends or repurchase or redeem capital stock or make other restricted payments; declare or pay dividends or other payments; incur liens; enter into certain types of transactions with the Company's affiliates; and consolidate or merge with or into other companies. As ofMarch 31, 2022 , we were in compliance with all financial covenants under the Notes. Cash Flows Three Months Ended March 31, $ Change % Change 2022 2021 Favorable (Unfavorable) (in thousands) Cash provided by (used in) operating activities$ (68,765) $ 30,150 $ (98,915) (328.1) % Cash used in investing activities (2,071,466) (7,983) (2,063,483) (25,848.5) % Cash provided by financing activities 2,099,484 102,243 1,997,241 (1,953.4) % Effect of exchange rate changes on cash, cash equivalents, and restricted cash (810) (2,437) 1,627 66.8 % Net change in cash, cash equivalents, and restricted cash$ (41,557) $ 121,973 $ (163,530) (134.1) % Operating Activities. Cash used in operating activities consists of net income adjusted for noncash items and changes in working capital. Cash used in operating activities increased$98.9 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , driven by increases in operating assets and liabilities of$84.3 million and lower net income, adjusted for non-cash items, of$14.6 million . 32 -------------------------------------------------------------------------------- Table of Contents Investing Activities. There was a$2,063.5 million increase in cash used in investing activities for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The increase is primarily due to the Cash Consideration for the Acquisition, net of cash acquired and$8.5 million of the Cash Consideration that was held back and retained as security (but not as the sole source of recovery) for any downward adjustments to the purchase price made in accordance with the SPA. Refer to Note 16 - Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q. Financing Activities. Cash provided by financing activities increased by$1,997.2 million in the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The increase was primarily due to an increase of$2,200.2 million in proceeds from borrowings, which includes borrowings under the Term Loan B Facility, Revolving Facility, and the Asia Revolving Facilities. Additionally, we had a decrease of$135.0 million in repayments of borrowings, a decrease of$50.0 million in repurchases of common stock, and a decrease of$4.1 million in repurchases of common stock for tax withholding. The overall increase was offset by a$350.0 million decrease in proceeds from the 2029 Notes issuance that occurred in the three months endedMarch 31, 2021 that did not recur in the current period, a$42.0 million increase in deferred debt issuance costs, primarily related to the Term Loan B Facility, and a$0.1 million increase in other cash used in financing activities.
Contractual Obligations
There have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , other than (i) borrowings and repayments on the Revolving Facility andAsia Facilities, (ii) borrowings of$2.0 billion under the Term Loan B Facility, which we entered into in the three months endedMarch 31, 2022 , and (iii) contractual obligations of$44 million related to leases not yet commenced in the three months endedMarch 31, 2022 , as described in Note 4 - Leases in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as ofMarch 31, 2022 , other than certain purchase commitments, which are described in Note 13 - Commitments and Contingencies in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Business Combinations
We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. Contingent consideration, if any, is included within the purchase price and is recognized at its fair value on the acquisition date. We allocate the purchase price of acquired businesses to the tangible assets, intangible assets, and contingent consideration based upon internal estimates of cash flows and consideration and/or the report of a third-party valuation expert, and requires a significant amount of management judgment. The determination of fair values of identifiable assets and liabilities as well as contingent consideration requires estimates and the use of valuation techniques when market value is not readily available. During the measurement period, which is up to one year from the acquisition date, adjustments to the assets acquired and liabilities assumed may be recorded, with the corresponding offset to goodwill. During the three months endedMarch 31, 2022 , we acquired HEYDUDE. The aggregate closing price of the Acquisition was$2.3 billion . The fair value of the acquired assets was determined by a third-party valuation specialist. The fair value of inventory was determined using a market approach and a cost approach, the replacement cost method. These methods were reconciled in order to allocate profit and expenses to measure the inventory value created by a seller. For the trademark, the third-party valuation team used the Multi Period Excess Earnings approach and for customer relationships, the valuation team used the distributor method. 33 -------------------------------------------------------------------------------- Table of Contents Deferred taxes associated with estimated fair value adjustments reflect an estimated tax rate applicable to the acquiree. Deferred tax has been calculated based on the fair value adjustments of inventories and intangible assets using the tax rates for US and HK entities. This determination is preliminary and subject to change based upon the final determination of the fair value of the acquired assets and assumed liabilities of the acquiree. The fair values of all the other assets and liabilities noted are equal to their carrying values due to the nature of the specific asset or liability. Refer to Note 16 - Acquisition of HEYDUDE in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q for additional details on the Acquisition. For a complete discussion of our critical accounting policies and estimates, please refer to our Annual Report on Form 10-K for the year endedDecember 31, 2021 and Note 2 - Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q. There have been no other significant changes in our critical accounting policies or their application sinceDecember 31, 2021 .
Recent Accounting Pronouncements
See Note 2 - Recent Accounting Pronouncements in the accompanying notes to the
condensed consolidated financial statements included in Part I - Item 1.
Financial Statements of this Quarterly Report on Form 10-Q for a description of
recently adopted accounting pronouncements and issued accounting pronouncements
that we believe may have an impact on our condensed consolidated financial
statements when adopted.
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