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." 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 17 - 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 throughSeptember 30, 2022 (the "Partial Period"). •Global inflation, elevated interest rates, global industry-wide logistics challenges, and foreign currency fluctuations resulting in a strongerU.S. Dollar, have impacted, and we expect will continue to impact, our business, contributing to, among other things, incremental freight costs, increased wages, particularly in our distribution centers, and increased raw materials costs. A strongerU.S. Dollar also results in costs for foreign goods purchased inU.S. Dollars but recognized in foreign currencies ("purchasing power") that are unfavorable. As ofSeptember 30, 2022 , we have concluded our 2022$75 million air freight program initiated as a result of partial COVID-19-related factory closures inVietnam at the end of 2021. In the nine months endedSeptember 30, 2022 , we incurred air freight costs of approximately$67 million of our$75 million plan, which has helped mitigate supply delays as a result ofVietnam closures. AtSeptember 30, 2022 , our inventories balance was$513.7 million . While the majority of the total increase in inventories of 141.8% overSeptember 30, 2021 was due to the addition of the HEYDUDE Brand in the first quarter of 2022, inventories for the Crocs Brand were also up 52.6% compared to the prior year. Throughout 2021 and into the first half of 2022, inventories were historically lean across the footwear industry as a result of factory closures and other supply chain delays, as described above. However, in recent months, elevated inventory levels have caused the industry, including us, to become more promotional. This is particularly true inNorth America . We expect these challenges to remain fluid as macroeconomic and inflationary pressures continue and foreign exchange rates fluctuate. •To support the long-term growth of both brands we plan to continue to maintain our efficient selling, general and administrative expenses ("SG&A") structure, while continuing investments in certain key areas, including marketing, digital commerce, and talent. We also believe our ability to leverage Supply Chain, Information Technology, Finance, HR, and Legal resources across both brands will allow us to manage SG&A effectively in the future.
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 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. 24
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Third Quarter 2022 Financial and Operational Highlights
Revenues were$985.1 million for the third quarter of 2022, a 57.4% increase compared to the third quarter of 2021. The increase was due to the net effects of: (i) the addition of HEYDUDE Brand revenues of$269.4 million as a result of the Acquisition, which increased revenues by 43.1%; (ii) higher Crocs Brand unit sales volumes, which increased revenues by$131.0 million , or 20.9%; (iii) unfavorable changes in exchange rates for the Crocs Brand, which decreased revenues by$34.9 million , or 5.6%; and (iv) lower Crocs Brand average selling prices, driven primarily by increased promotions in ourNorth America segment, which in total decreased revenues by$6.2 million , or 1.0%.
The following were significant developments affecting our businesses and capital
structure during the three months ended
•We acquired HEYDUDE onFebruary 17, 2022 , which contributed revenues of$269.4 million in the three months endedSeptember 30, 2022 . This represented 27.3% of revenues in the quarter. The HEYDUDE Brand became a new reportable operating segment as of the Acquisition Date. •We grew Crocs Brand revenues, despite significant foreign currency headwinds and supply chain challenges. This was led by ourAsia Pacific segment, which grew revenues by 65.5%, or 82.3% on a constant currency basis, compared to the third quarter of 2021. Our EMEALA segment grew revenues by 26.2%, or 45.6% on a constant currency basis, and ourNorth America segment revenues grew by 1.7%, or 1.8% on a constant currency basis. •Footwear units sold for the Crocs Brand in the third quarter of 2022 were 30.3 million pairs worldwide, an increase of 19.2% from the third quarter of 2021. We sold 9.2 million pairs of shoes for the HEYDUDE Brand in the third quarter of 2022. •Gross margin was 54.9%, a decrease of 900 basis points from last year's third quarter. Gross margin for the Crocs Brand was 57.3%, a decrease of 660 basis points from last year's third quarter, as a result of ongoing global inflation, which negatively impacted material and freight costs, higher distribution and logistics costs due to continued supply chain challenges, and unfavorable purchasing power. Increased promotional activity in ourNorth America segment also contributed to the gross margin decrease, while higher pricing across all segments partially offset these declines. Gross margin for the HEYDUDE Brand was 48.8%, representing the continued effect of unfavorable pre-acquisition freight contracts on inventory costs, which are recognized in gross margin as inventory is sold, and higher inventory storage costs as we work to expand HEYDUDE distribution centers to support a larger business. •SG&A was$277.2 million compared to$196.7 million in the third quarter of 2021, as a result of investments in headcount and marketing as we continue to grow the business, and incremental operating costs associated with operating the HEYDUDE Brand. As a percent of revenues, SG&A decreased to 28.1% of revenues compared to 31.4% of revenues in the third quarter of 2021, as we leverage our cost structure with the addition of the HEYDUDE Brand and as we leverage revenue growth in both the Crocs and HEYDUDE Brands. •Income from operations increased to$264.1 million from$203.1 million in last year's third quarter. Net income was$169.3 million , or$2.72 per diluted share, compared to$153.5 million , or$2.42 per diluted share, in last year's third quarter. 25 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months EndedSeptember 30 , % Change Nine Months EndedSeptember 30 ,
Favorable (Unfavorable)
2022 2021 2022 2021 Q3 2022-2021 YTD 2022-2021
(in thousands, except per share, margin, and average selling price data)
Revenues $ 985,094 $ 625,919 $ 2,609,823 $ 1,726,790 57.4 % 51.1 %
Cost of sales 443,792 226,123 1,245,864 678,594 (96.3) % (83.6) %
Gross profit 541,302 399,796 1,363,959 1,048,196 35.4 % 30.1 %
Selling, general and administrative
expenses 277,239 196,728 733,255 525,120 (40.9) % (39.6) %
Income from operations 264,063 203,068 630,704 523,076 30.0 % 20.6 %
Foreign currency gains (losses), net (393) 537 (1,115) (84) (173.2) % (1,227.4) %
Interest income 31 615 219 713 (95.0) % (69.3) %
Interest expense (34,142) (6,486) (86,357) (12,830) (426.4) % (573.1) %
Other income (expense), net 16 2 (512) 15 700.0 % (3,513.3) %
Income before income taxes 229,575 197,736 542,939 510,890 16.1 % 6.3 %
Income tax expense (benefit) 60,226 44,247 140,515 (59,951) (36.1) % (334.4) %
Net income $ 169,349 $ 153,489 $ 402,424 $ 570,841 10.3 % (29.5) %
Net income per common share:
Basic $ 2.75 $ 2.47 $ 6.59 $ 8.96 11.3 % (26.5) %
Diluted $ 2.72 $ 2.42 $ 6.51 $ 8.79 12.4 % (25.9) %
Gross margin (1) 54.9 % 63.9 % 52.3 % 60.7 % (900) bp (840) bp
Operating margin (1) 26.8 % 32.4 % 24.2 % 30.3 % (560) bp (610) bp
Footwear unit sales:
Crocs Brand 30,292 25,410 88,304 80,402 19.2 % 9.8 %
HEYDUDE Brand (3) 9,167 - 21,232 - - % - %
Average footwear selling price - nominal
basis (2):
Crocs Brand $ 23.33 $ 24.42 $ 22.34 $ 21.30 (4.5) % 4.9 %
HEYDUDE Brand (3) $ 29.39 $ - $ 29.04 $ - - % - %
(1) Changes for gross margin and operating margin are shown in basis points
("bp").
(2) Average footwear selling price is calculated as footwear and charms revenues
divided by footwear units, as applicable.
(3) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE
Brand as a new operating segment. Therefore, the amounts shown above for the
nine months ended September 30, 2022 represent results during the Partial
Period, and there are no comparative amounts for the three and nine months ended
September 30, 2021 .
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Revenues By Channel
% Change Constant Currency % Change (1)
Three Months Ended September 30, Nine Months Ended September 30, Favorable (Unfavorable)
2022 2021 2022 2021 Q3 2022-2021 YTD 2022-2021 Q3 2022-2021 YTD 2022-2021
(in thousands)
Crocs Brand:
Wholesale $ 353,304 $ 309,611 $ 1,090,073 $ 906,978 14.1 % 20.2 % 21.8 % 26.7 %
Direct-to-consumer 362,403 316,308 903,075 819,812 14.6 % 10.2 % 18.1 % 13.1 %
Total Crocs Brand 715,707 625,919 1,993,148 1,726,790 14.3 % 15.4 % 19.9 % 20.2 %
HEYDUDE Brand (2):
Wholesale 181,768 - 431,186 - - % - % - % - %
Direct-to-consumer 87,619 - 185,489 - - % - % - % - %
Total HEYDUDE Brand 269,387 - 616,675 - - % - % - % - %
Total consolidated revenues (2)
57.4 % 51.1 % 63.0 % 55.9 %
(1) Reflects year over year change as if the current period results were in
constant currency, which is a non-GAAP financial measure. See "Use of Non-GAAP
Financial Measures" above for more information.
(2) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE
Brand as a new operating segment. Therefore, the amounts shown above for the
nine months ended September 30, 2022 represent results during the Partial
Period, and there are no comparative amounts for the three and nine months ended
September 30, 2021 .
Revenues. In the three months ended September 30, 2022 , revenues increased
compared to the same period in 2021. This was driven by the addition of HEYDUDE
Brand revenues of $269.4 million and higher volume in the Crocs Brand of $131.0
million , or 20.9%, as a result of volume increases in all segments. Partially
offsetting these increases were unfavorable foreign currency changes, most
significantly in the Euro, which decreased Crocs Brand revenues by $34.9
million , or 5.6%, and lower average selling price on a constant currency basis
("ASP") in the Crocs Brand of $6.2 million , or 1.0%, as a result of more
discounting and promotional activity, primarily in our North America segment.
Revenues also increased in the nine months ended September 30, 2022 , driven by
(i) the addition of HEYDUDE Brand revenues of $616.7 million during the Partial
Period, (ii) higher ASP in the Crocs Brand of $175.3 million , or 10.2%, as a
result of increased pricing in all regions, offset in part by more promotions,
and (iii) higher volume in all Crocs Brand segments of $173.2 million , or 10.0%,
led by our EMEALA and Asia Pacific segments. Unfavorable foreign currency
fluctuations, most significantly in the Euro and Korean Won, decreased Crocs
Brand revenues by $82.2 million , or 4.8%.
Cost of sales. In the three months ended September 30, 2022 , compared to the
same period in 2021, HEYDUDE contributed to the majority of the increase in cost
of sales, which was in line with its contributions to revenue. Additionally,
higher volume in the Crocs Brand increased cost of sales by $51.1 million , or
22.6%. Higher average cost per unit on a constant currency basis ("AUC") in the
Crocs Brand of $46.0 million , or 20.3%, was mostly due to higher material and
distribution and logistics costs, driven by inflation impacts and air freight
used to mitigate supply challenges, as well as unfavorable purchasing power.
Fluctuations in foreign currency decreased cost of sales by $17.4 million , or
7.7%.
In the nine months ended September 30, 2022 , compared to the same period in
2021, cost of sales increased due to the addition of HEYDUDE, which had cost of
sales in the Partial Period that were in line with its contributions to revenues
discussed above, and were inclusive of a $62.3 million non-cash step-up of
acquired HEYDUDE inventory to fair value. Higher AUC in the Crocs Brand of
$141.1 million , or 20.8%, resulted mostly from higher material and distribution
and logistics costs, driven by inflation and the use of air freight, as well as
unfavorable purchasing power, and volume in the Crocs Brand was higher by $82.1
million , or 12.1%. These increases were partially offset by decreases as a
result of foreign currency changes in the Crocs Brand of $37.5 million , or 5.5%.
Gross profit. Gross margin decreased in the three months ended September 30,
2022 to 54.9% compared to 63.9% in the same period in 2021. Gross margin for the
Crocs Brand was 57.3% compared to 63.9% in the same period in 2021, driven
mostly by higher material and freight costs due to global inflation and supply
chain challenges, which have caused us to use more expensive shipping methods,
and unfavorable purchasing power, as well as increased promotions, particularly
in our North America segment. Gross margin for the HEYDUDE Brand was 48.8%,
representing the continued effect of unfavorable pre-
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acquisition freight contracts on inventory costs, which are recognized in gross
margin as inventory is sold, and higher inventory storage costs as we work to
expand HEYDUDE distribution centers to support a larger business.
Gross profit increased $141.5 million , or 35.4%, mostly due to the addition of
the HEYDUDE Brand. Additionally, gross profit increased in the Crocs Brand as a
result of higher volume of $79.8 million , or 20.0%. These increases were
partially offset by the net impact of lower ASP and higher AUC of $52.2 million ,
or 13.1% and unfavorable foreign currency changes for the Crocs Brand of $17.6
million , or 4.4%.
Gross margin in the nine months ended September 30, 2022 was 52.3% compared to
60.7% in 2021. Gross margin for the Crocs Brand was 56.7% compared to 60.7% in
2021, due primarily to higher material and freight costs, as described above,
and unfavorable purchasing power, offset in part by higher pricing. Gross margin
for the HEYDUDE Brand was 38.3%, which is inclusive of an approximately 1,010
basis points unfavorable impact from a non-cash step-up of acquired HEYDUDE
inventory to fair value. This gross margin also represents the continued effect
of unfavorable pre-acquisition freight contracts on inventory costs, which are
recognized in gross margin as inventory is sold, and higher inventory storage
costs as we work to expand HEYDUDE distribution centers to support a larger
business.
Gross profit increased $315.8 million , or 30.1%, as a result of the addition of
the HEYDUDE Brand, which contributed to the majority of the increase, as well as
increases in the Crocs Brand due to the net impact of both higher ASP and AUC of
$34.2 million , or 3.3%, and higher volumes of $91.2 million , or 8.7%. These were
offset by unfavorable foreign currency changes in the Crocs Brand of $44.7
million , or 4.3%.
Selling, general and administrative expenses. SG&A expenses increased $80.5
million , or 40.9%, in the three months ended September 30, 2022 compared to the
same period in 2021. This was due to an increase in marketing costs of $35.1
million , mostly for investments in the HEYDUDE Brand. There was also an increase
in sales commissions of $9.9 million , due primarily to HEYDUDE, which used more
costly external sales representatives prior to the Acquisition Date. We are
currently in the process of transitioning off of this model. Higher professional
services costs of $9.7 million were due to variable costs associated with
revenue growth and higher legal costs in part from the ongoing defense of our
intellectual property. An increase in compensation expense of $7.4 million was
driven by investments in employee headcount, including employees associated with
HEYDUDE, offset in part by lower variable compensation. There was also an
increase in facilities expense of $4.4 million driven in part by duplicate rent
costs associated with our upcoming headquarters move and in part to variable
rent associated with revenue growth. Other net costs, including costs associated
with the integration of HEYDUDE and information technology costs, increased SG&A
by $14.0 million .
SG&A expenses increased $208.1 million , or 39.6%, during the nine months ended
September 30, 2022 compared to the same period in 2021. We have continued to
invest in marketing to fuel growth, with an increase of $66.9 million to SG&A,
primarily associated with investments in marketing in the Crocs Brand, including
for our digital business, as well as investments in marketing for our new
HEYDUDE Brand during the Partial Period. Additionally, costs of $33.2 million
associated with the Acquisition and related integration, including consulting,
legal, statutory, and accounting fees, contributed to the increase. Other
increases in compensation costs of $25.9 million were due primarily to increased
employee headcount as we have grown the Company over the last year, offset in
part by lower variable compensation. Increases in professional services costs of
$24.1 million were due to variable costs associated with revenue growth and
higher legal costs in part from the ongoing defense of our intellectual
property. There was an increase in sales commissions of $21.9 million , due
mostly to HEYDUDE, which used more costly external representatives prior to the
Acquisition, and an increase in facilities expenses of $11.2 million driven
primarily by lease exit costs and penalties associated with the continued
shutdown of our direct operations in Russia and duplicate rent costs associated
with our upcoming headquarters move. There were net increases in other costs,
including information technology, depreciation and amortization, and travel and
related costs, of $24.9 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 September
30, 2022 , we recognized realized and unrealized net foreign currency losses of
$0.4 million compared to gains of $0.5 million during the three months ended
September 30, 2021 . During the nine months ended September 30, 2022 , we
recognized realized and unrealized net foreign currency losses of $1.1 million
compared to losses of $0.1 million during the nine months ended September 30,
2021 .
Income tax expense (benefit). During the three months ended September 30, 2022 ,
income tax expense increased $16.0 million compared to the same period in 2021.
The effective tax rate for the three months ended September 30, 2022 was 26.2%
compared to an effective tax rate of 22.4% for the same period in 2021, a 3.8%
increase. This increase in the effective rate was primarily driven by the prior
year release of valuation allowances.
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During the nine months endedSeptember 30, 2022 , income tax expense increased$200.5 million compared to the same period in 2021. The effective tax rate for the nine months endedSeptember 30, 2022 was 25.9% compared to an effective tax rate of (11.7)% for the same period in 2021, a 37.6% increase. This increase in the effective rate was primarily driven by the prior year release of valuation allowances. Our effective income tax rate, for each period presented, also differs from the federalU.S. statutory rate primarily due to differences in income tax rates betweenU.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
% Change % Change (1)
Three Months Ended September 30 , Nine Months Ended September 30 , Favorable (Unfavorable)
2022 2021 2022 2021 Q3 2022-2021 YTD 2022-2021 Q3 2022-2021 YTD 2022-2021
(in thousands)
Revenues:
North America (2) $ 445,327 $ 437,746 $ 1,187,713 $ 1,098,165 1.7 % 8.2 % 1.8 % 8.3 %
Asia Pacific 138,450 83,645 383,187 293,071 65.5 % 30.7 % 82.3 % 41.6 %
EMEALA (2) 131,929 104,503 422,226 335,481 26.2 % 25.9 % 45.6 % 40.4 %
Brand corporate (3) 1 25 22 73 (96.0) % (69.9) % (96.0) % (69.9) %
Crocs Brand revenues 715,707 625,919 1,993,148 1,726,790 14.3 % 15.4 % 19.9 % 20.2 %
HEYDUDE Brand revenues (4) 269,387 - 616,675 - - % - % - % - %
Total consolidated revenues
2,609,823 $ 1,726,790 57.4 % 51.1 % 63.0 % 55.9 %
Income from operations:
North America (2) $ 191,438 $ 224,118 $ 498,413 $ 524,991 (14.6) % (5.1) % (14.4) % (4.9) %
Asia Pacific 40,286 16,361 121,823 70,492 146.2 % 72.8 % 167.9 % 89.3 %
EMEALA (2) 40,506 35,721 128,819 117,128 13.4 % 10.0 % 31.1 % 22.1 %
Brand corporate (3) (36,896) (27,992) (95,864) (69,393) (31.8) % (38.1) % (33.6) % (39.8) %
Crocs Brand income from
operations 235,334 248,208 653,191 643,218 (5.2) %
1.6 % (1.3) % 5.6 %
HEYDUDE Brand income from
operations (4) 79,056 - 136,381 - - % - % - % - %
Enterprise corporate (3) (50,327) (45,140)
(158,868) (120,142) (11.5) % (32.2) % (11.5) % (32.2) %
Total consolidated income from
operations $ 264,063 $ 203,068 $ 630,704 $ 523,076 30.0 % 20.6 % 34.8 % 25.5 %
(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.' As a result of these changes, the previously reported amounts for
revenues and income from operations for the three and nine months ended
September 30, 2021 have been revised to conform to current period presentation.
Refer to Part I - Item I. Financial Statements in our Quarterly Report on Form
10-Q for the period ended June 30, 2022 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 15 - 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 and nine months ended
September 30, 2021 have been revised to conform to current period presentation.
Refer to Part I - Item I. Financial Statements in our Quarterly Report on Form
10-Q for the period ended June 30, 2022 for more information.
(4) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE
Brand as a new operating segment. Therefore, the amounts shown above for the
nine months ended September 30, 2022 represent results during the Partial
Period, and there are no comparative amounts for the three and nine months ended
September 30, 2021 .
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The primary drivers of changes in revenues by operating segment were:
Three Months Ended September 30, 2022 vs. 2021
Volume Price (1) Foreign Exchange Total
$ $ $ $
Change % Change Change % Change Change % Change Change % Change
(in thousands)
Segment Revenues:
Crocs Brand:
North America $ 51,882 11.8 % $ (43,663) (10.0) % $ (638) (0.1) % $ 7,581 1.7 %
Asia Pacific 51,113 61.1 % 17,721 21.2 % (14,029) (16.8) % 54,805 65.5 %
EMEALA 27,982 26.8 % 19,705 18.8 % (20,261) (19.4) % 27,426 26.2 %
HEYDUDE Brand (2) - - % - - % - - % - - %
Total segment revenues $ 130,977 20.9 % $ (6,237) (1.0) % $ (34,928) (5.6) % $ 89,812 14.3 %
(1) The change due to price for revenues is based on ASP, as defined earlier in
this section.
(2) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE
Brand as a new operating segment. Therefore, there are no comparative amounts
for the three months ended September 30, 2021 .
Nine Months Ended September 30, 2022 vs. 2021
Volume Price (1) Foreign Exchange Total
$ $ $ $
Change % Change Change % Change Change % Change Change % Change
(in thousands)
Segment Revenues:
Crocs Brand:
North America $ 29,536 2.7 % $ 61,402 5.6 % $ (1,390) (0.1) % $ 89,548 8.2 %
Asia Pacific 69,200 23.6 % 52,924 18.0 % (32,008) (10.9) % 90,116 30.7 %
EMEALA 74,547 22.2 % 60,975 18.2 % (48,777) (14.5) % 86,745 25.9 %
HEYDUDE Brand (2) - - % - - % - - % - - %
Total segment revenues $ 173,283 10.0 % $ 175,301 10.2 % $ (82,175) (4.8) % $ 266,409 15.4 %
(1) The change due to price for revenues is based on ASP, as defined earlier in
this section.
(2) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE
Brand as a new operating segment. Therefore, the amounts shown above for the
nine months ended September 30, 2022 represent results during the Partial
Period, and there are no comparative amounts for the nine months ended September
30, 2021 .
Crocs Brand
North America Operating Segment
Revenues.North America revenues increased in the three months endedSeptember 30, 2022 compared to the same period in 2021, due to higher volumes, offset in part by lower ASP as a result of increased promotional activity. Foreign currency changes were relatively flat during the quarter, with slight decreases due to changes in the Canadian Dollar. The increase inNorth America revenues in the nine months endedSeptember 30, 2022 compared to the same period in 2021, due to higher ASP from higher pricing, offset in part by increased promotional activity in the third quarter, while volumes increased, primarily in DTC. Changes in the Canadian Dollar also slightly decreased revenues. Income from Operations. Income from operations for ourNorth America segment was$191.4 million for the three months endedSeptember 30, 2022 , a decrease of$32.7 million , or 14.6%, compared to the same period in 2021. Gross profit decreased by$25.3 million , or 8.6%, compared to prior year, primarily due to lower ASP driven by increased promotional activity and higher AUC driven by higher material costs, due in part to inflation, offset in part by favorable channel mix. Volume was up 13.7%, while foreign currency impacts were relatively flat. 30 -------------------------------------------------------------------------------- Table of Contents SG&A for ourNorth America segment increased$7.4 million , or 10.3%, during the three months endedSeptember 30, 2022 compared to the same period in 2021. Compensation cost increased$2.5 million as a result of investments in employee headcount, facilities expense increased$1.5 million , services costs, including variable costs associated with higher revenues, increased$1.3 million , and marketing costs increased$1.2 million . Other net costs increased by$0.9 million . During the nine months endedSeptember 30, 2022 , income from operations for ourNorth America segment was$498.4 million , a decrease of$26.6 million , or 5.1%, compared to the same period in 2021. Gross profit increased$5.6 million , or 0.8%, primarily due to higher volumes of$26.5 million , or 3.8%, partially offset by higher AUC, due to higher material and freight costs, that outpaced higher ASP, due to higher pricing, of$19.7 million , or 2.8%. Unfavorable foreign currency changes also partially offset the increase due to higher volumes. SG&A for ourNorth America segment increased$32.2 million , or 17.5%, during the nine months endedSeptember 30, 2022 compared to the same period in 2021, due to an increase in marketing costs of$12.4 million to fuel revenue growth and invest in digital marketing and higher compensation of$8.8 million primarily due to investments in employee headcount, including retail labor, which also had higher wages in 2022 compared to 2021. Facilities costs increased$3.3 million , and services costs, including variable costs associated with higher revenues, increased$2.8 million . Other net costs increased by$4.9 million .
Asia Pacific Operating Segment
Revenues. Increases in revenues in ourAsia Pacific segment led the Crocs Brand in the three months endedSeptember 30, 2022 compared to the same period in 2021, largely as a result of higher volume, leading to broad-based growth in the region, primarily with distributors inSoutheast Asia , which benefited from COVID-19 re-openings and the partial return of tourism to the region over prior year, as well as inIndia andSouth Korea . ASPs were also up in the region as a result of higher pricing, less discounting, and favorable product mix, offset in part by unfavorable channel mix towards wholesale. These increases were partially offset by unfavorable foreign currency changes in all currencies in the region, most significantly in the Korean Won and Japanese Yen.
Revenues in our
Income from Operations. Income from operations for the
SG&A for ourAsia Pacific segment increased$6.8 million , or 18.8%, during the three months endedSeptember 30, 2022 compared to the same period in 2021, primarily due to higher marketing costs of$2.7 million , mostly driven by the COVID-19-related closures during the second quarter, which delayed our marketing investment into the third quarter. Facilities expense increased$1.5 million as a result of variable rent associated with higher revenues, while other net costs increased$2.6 million . Income from operations for theAsia Pacific segment was$121.8 million for the nine months endedSeptember 30, 2022 , an increase of$51.3 million , or 72.8%, compared to the same period in 2021. Gross profit increased by$58.8 million , or 33.7%, due to higher ASPs, offset partially by higher AUCs, as a result of price increases, decreased promotional activity, and unfavorable purchasing power, which led to a net increase to gross profit of 24.7%. Higher volumes also increased gross profit by 20.8%, but changes in foreign currency offset these increases by 11.8%. SG&A for ourAsia Pacific segment increased$7.5 million , or 7.2%, in the nine months endedSeptember 30, 2022 compared to the same period in 2021, mostly due to higher facilities costs of$2.9 million associated with higher retail revenues and increased investments in employee headcount of$2.7 million . There were also higher other net costs of$1.9 million .
EMEALA Operating Segment
Revenues. Revenues increased in the EMEALA segment in the three months endedSeptember 30, 2022 compared to the same period in 2021, despite significant unfavorable currency headwinds due to fluctuations in the Euro and the shutdown of our direct operations inRussia as a result of theUkraine war. This performance was driven by increased volume, with growth particularly strong in our distributor markets, and increased ASPs, driven by increased prices and product mix, offset in part by unfavorable channel mix. 31
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During the nine months ended
Income from Operations. Income from operations for the EMEALA segment was$40.5 million for the three months endedSeptember 30, 2022 , an increase of$4.8 million , or 13.4%, compared to the same period in 2021. Gross profit increased$5.9 million , or 10.6%, mostly as a result of higher volume of 23.9%. Additionally, gains in ASP due to increased pricing and decreased promotions were largely offset by higher AUC as a result of unfavorable purchasing power and increased material and freight costs, leading to a net increase in gross profit of 3.3%. These increases were offset in part by unfavorable changes in foreign currency of$9.2 million , or 16.6%. SG&A for our EMEALA segment increased$1.1 million , or 5.4%, during the three months endedSeptember 30, 2022 compared to the same period in 2021. Marketing investments increased$1.3 million , while other net costs decreased$0.2 million . Income from operations for the EMEALA segment was$128.8 million for the nine months endedSeptember 30, 2022 , an increase of$11.7 million , or 10.0%, compared to the same period in 2021. Gross profit increased$23.1 million , or 13.4%, due to higher sales volumes of$35.5 million , or 20.6%, and increases in ASP that outpaced increases in AUC of$10.7 million , or 6.2%, as a result of price increases, offset in part by higher material and freight costs and unfavorable purchasing power. Negative currency changes, primarily in the Euro, led to decreases of 13.4%. SG&A for our EMEALA segment increased$11.4 million , or 20.6%, during the nine months endedSeptember 30, 2022 compared to the same period in 2021. This was primarily due to various costs associated with the continued shutdown of our direct operations inRussia , including severance and lease exit costs and penalties, of$5.8 million . Marketing costs, including investments in digital marketing, increased$5.1 million . There were also other net cost increases of$0.5 million . Crocs Brand Corporate During the three months endedSeptember 30, 2022 , total net costs within 'Brand corporate' increased$8.9 million , or 31.8%, compared to the same period in 2021, due to a larger investment in marketing of$3.0 million , an increase in compensation costs of$2.5 million , and an increase in other net costs, including contract labor, of$3.4 million . During the nine months endedSeptember 30, 2022 , total net costs within 'Brand corporate' increased$26.5 million , or 38.1%, compared to the same period in 2021, due to higher compensation costs of$7.6 million as a result of increased headcount, higher services costs, including consulting and contract labor, of$3.8 million , a larger investment in marketing of$3.0 million , and higher information technology costs of$2.1 million . Other net costs increased by$10.0 million . HEYDUDE Brand For the three months endedSeptember 30, 2022 , revenues attributable to HEYDUDE were$269.4 million , with the majority of revenues attributable to our wholesale channel at approximately 67%. Overall, we sold 9.2 million pairs of shoes during the quarter. Income from operations during the quarter was$79.1 million and included SG&A costs comprised primarily of marketing, sales commissions, and compensation expense. For the Partial Period, revenues attributable to HEYDUDE were$616.7 million , with the majority of revenues attributable to our wholesale channel at approximately 70%. Overall, we sold 21.2 million pairs of shoes during the Partial Period. Income from operations during the Partial Period was$136.4 million and included a$62.3 million non-cash step-up of acquired HEYDUDE inventory to fair value and SG&A costs comprised primarily of marketing, sales commissions, compensation expense, and depreciation and amortization expense.
Refer to Note 17 - 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.
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Enterprise Corporate
During the three months ended September 30, 2022 , total net costs within
'Enterprise corporate' increased $5.2 million , or 11.5%, compared to the same
period in 2021. This was primarily due to increases in various costs, including
services, facilities, and information technology costs, of $8.0 million , and
statutory costs associated with the HEYDUDE acquisition of $4.7 million , mostly
offset by decreased compensation costs of $5.2 million , due to lower variable
compensation, and decreases in other costs, including depreciation and
amortization, of $2.3 million .
During the nine months ended September 30, 2022 , total net costs within
'Enterprise corporate' increased $38.7 million , or 32.2%, compared to the same
period in 2021. This was primarily due to costs associated with the acquisition
and integration of HEYDUDE, including consulting, legal, statutory, and
accounting fees, among others, of $33.2 million . There were also increases in
other professional services costs of $8.4 million , information technology costs
of $4.3 million , facilities costs, including duplicate rent for our new
corporate headquarters, of $4.1 million , and other net costs of $1.8 million .
These increases were offset in part by lower compensation costs of $7.8 million
primarily due to lower variable compensation and lower depreciation and
amortization of $5.3 million .
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 and nine months endedSeptember 30, 2022 :June 30 ,
2022 Opened Closed 2022
Company-operated retail locations:
North America 175 3 - 178
Asia Pacific 152 3 2 153
EMEALA 41 - 19 22
Total 368 6 21 353
December 31, September 30,
2021 Opened Closed 2022
Company-operated retail locations:
North America 173 5 - 178
Asia Pacific 153 5 5 153
EMEALA 47 1 26 22
Total 373 11 31 353
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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Digital sales as a percent
of total revenues:
Crocs Brand 37.4 % 36.8 % 36.0 % 35.5 %
HEYDUDE Brand (1) 35.9 % - % 32.4 % - %
Total (2) 37.0 % 36.8 % 35.2 % 35.5 %
(1) We acquired HEYDUDE on February 17, 2022 and, as a result, added the HEYDUDE
Brand as a new operating segment. Therefore, the amounts shown above for the
nine months ended September 30, 2022 represent results during the Partial
Period, and there are no comparative amounts for the three and nine months ended
September 30, 2021 .
(2) For the three and nine months ended September 30, 2021 , the digital sales as
a percent of total revenues represents the Crocs Brand only. See footnote (1)
above.
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Direct-to-consumer ("DTC") comparable sales for the Crocs Brand are as follows:
Constant Currency (1)
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Direct-to-consumer comparable
sales: (2)
Crocs Brand (3) 18.2 % N/A 13.6 % N/A
(1) Reflects period over period change on a constant currency basis, which is a
non-GAAP financial measure. See "Use of Non-GAAP Financial Measures" for more
information.
(2) Comparable store status, as included in the DTC comparable sales figures
above, is determined on a monthly basis. Comparable store sales include the
revenues of stores that have been in operation for more than twelve months.
Stores in which selling square footage has changed more than 15% as a result of
a remodel, expansion, or reduction are excluded until the thirteenth month in
which they have comparable prior year sales. Temporarily closed stores are
excluded from the comparable store sales calculation during the month of closure
and in the same month in the following year. Location closures in excess of
three months are excluded until the thirteenth month post re-opening. E-commerce
comparable revenues are based on same site sales period over period. E-commerce
sites that are temporarily offline or unable to transact or fulfill orders
("site disruption") are excluded from the comparable sales calculation during
the month of site disruption and in the same month in the following year.
E-commerce site disruptions in excess of three months are excluded until the
thirteenth month after the site has re-opened.
(3) In the three and nine months ended September 30, 2021 , as a result of the
COVID-19 pandemic's impact on 2020 sales we did not disclose DTC comparable
sales, as they were not meaningful.
Financial Condition, Capital Resources, and Liquidity
Liquidity
Our liquidity position as of
September 30, 2022
(in thousands)
Cash and cash equivalents $ 142,971
Available borrowings 611,080
As of September 30, 2022 , we had $143.0 million in cash and cash equivalents and
up to $611.1 million of available borrowings, including $599.7 million of
remaining borrowing availability under the Revolving Facility (as defined below)
and $11.4 million of remaining borrowing availability under the Asia revolving
facilities. As of September 30, 2022 , the Term Loan B Facility (as defined
below) was fully drawn and there was no available borrowing capacity. We believe
that cash flows from operations, our cash and cash equivalents on hand, and
available borrowings under our Revolving Facility will be sufficient to meet our
ongoing liquidity needs and capital expenditure requirements for at least the
next twelve months.
We completed the Acquisition on February 17, 2022 . The consideration for the
Acquisition was comprised of $2.05 billion in cash 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. In the remainder of 2022, we plan to continue to use excess cash
generated by our operations to begin to repay our outstanding debt, and, as
such, our share repurchase program remains suspended.
Additional future financing may be necessary to fund our operations and there
can be no assurance that, if needed, we will be able to secure additional debt
or equity financing on terms acceptable to us or at all. Although we believe we
have adequate sources of liquidity over the long term, the success of our
operations, global economic conditions, and the pace of sustainable growth in
our markets, among other things, could each impact our business and liquidity.
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Repatriation of Cash
As a global business, we have cash balances in various countries and amounts are
denominated in various currencies. Fluctuations in foreign currency exchange
rates impact our results of operations and cash positions. Future fluctuations
in foreign currencies may have a material impact on our cash flows and capital
resources. Cash balances held in foreign countries may have additional
restrictions and covenants associated with them which could adversely impact our
liquidity and our ability to timely access and transfer cash balances between
entities.
All of the cash held outside of the U.S. could be repatriated to the U.S. as of
September 30, 2022 without incurring additional U.S. federal income taxes. As of
September 30, 2022 , we held $100.9 million of our total $143.0 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 $100.9 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%, (ii) the Prime Rate (as defined in the Credit Agreement), and (iii) the Daily Simple SOFR (as defined in the Credit Agreement), plus 1.00%), plus an applicable margin ranging from 0.25% to 0.875% based on our leverage ratio or 1.35% to 1.975% for the Daily Simple SOFR based on the leverage ratio, or (B) the Term SOFR Rate (as defined in the Credit Agreement), plus an applicable margin ranging from 1.35% to 1.975% based on our leverage ratio for one-month interest periods and 1.40% to 2.025% based on our leverage ratio for three month interest periods. Borrowings under the Credit Agreement are secured by all of the assets of the Borrowers and guaranteed by certain other subsidiaries of the Borrowers. The Credit Agreement requires us to maintain a minimum interest coverage ratio of 3.00 to 1.00, and a maximum leverage ratio of (i) 4.00 to 1.00 from the quarter 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 ofSeptember 30, 2022 , we were in compliance with all financial covenants under the Credit Agreement. As ofSeptember 30, 2022 , the total commitments available from the lenders under the Revolving Facility were$600.0 million . AtSeptember 30, 2022 , we had no outstanding borrowings and$0.3 million in outstanding letters of credit under the Revolving Facility, which reduces amounts available for borrowing under the Revolving Facility. As ofSeptember 30, 2022 andDecember 31, 2021 , we had$599.7 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. Additionally, subject to certain conditions, including, without limitation, satisfying certain leverage ratios, the Company may, at any time, on one or more occasions, add one or more new classes of term facilities and/or increase the principal amount of the loans of any existing class by requesting one or more incremental term facilities. Each term loan borrowing which is an alternate base rate borrowing bears interest at a rate per annum equal to the Alternate Base Rate (as defined in the Term Loan B Credit Agreement), plus 2.50%. Each term loan borrowing which is a term 35 -------------------------------------------------------------------------------- Table of Contents benchmark borrowing bears interest at a rate per annum equal to the Adjusted Term SOFR Rate (as defined in the Term Loan B Credit Agreement) plus 3.50%.
Outstanding principal under the Term Loan B Facility is payable on the last
business day of each March, June, September and December, in a quarterly
aggregate principal amount of
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 ofSeptember 30, 2022 , we were in compliance with all financial covenants under the Term Loan B Credit Agreement.
Asia Revolving Credit Facilities
During the nine months endedSeptember 30, 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$1.4 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 .
We had no borrowings outstanding under our
Senior Notes Issuances
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 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 36 -------------------------------------------------------------------------------- Table of Contents Company's affiliates; and consolidate or merge with or into other companies. As ofSeptember 30, 2022 , we were in compliance with all financial covenants under the Notes. Cash Flows Nine Months Ended September 30, $ Change % Change 2022 2021 Favorable (Unfavorable) (in thousands) Cash provided by operating activities$ 246,685 $ 355,165 $ (108,480) (30.5) % Cash used in investing activities (2,136,489) (35,767) (2,100,722) (5,873.4) % Cash provided by (used in) financing activities 1,827,653 (13,020) 1,840,673 14,137.3 % Effect of exchange rate changes on cash, cash equivalents, and restricted cash (8,821) (3,907) (4,914) (125.8) % Net change in cash, cash equivalents, and restricted cash$ (70,972) $ 302,471 $ (373,443) (123.5) % Operating Activities. Cash provided by operating activities consists of net income adjusted for noncash items and changes in working capital. Cash provided by operating activities decreased$108.5 million for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 , driven by decreases in operating assets and liabilities of$134.2 million , primarily due to accounts receivable, net and inventory, partially offset by higher net income, adjusted for non-cash items, of$25.8 million . Investing Activities. There was a$2,100.7 million increase in cash used in investing activities for the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The increase is primarily due to the Cash Consideration for the Acquisition, net of cash acquired. Refer to Note 17 - 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$1,840.7 million in the nine months endedSeptember 30, 2022 compared to the nine months endedSeptember 30, 2021 . The increase was primarily due to an increase of$2,070.7 million in proceeds from borrowings, which includes borrowings under the Term Loan B Facility, the Revolving Facility, and theAsia revolving facilities. Additionally, a decrease of$500.0 million in repurchases of common stock and a decrease of$7.3 million in repurchases of common stock for tax withholding. The overall increase was offset by a$700.0 million decrease in proceeds from the Notes issuances that occurred in the nine months endedSeptember 30, 2021 that did not recur in the current period, a$36.9 million increase in deferred debt issuance costs, primarily related to the Term Loan B Facility. We also had an increase of$0.3 million in repayments of borrowings 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 and repayments under the Term Loan B Facility, which we entered into in the nine months endedSeptember 30, 2022 , and (iii) future lease payments of approximately$75 million through 2033, as described in Note 5 - Leases in the accompanying notes to the condensed consolidated financial statements included in Part I - Item 1. Financial Statements of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of
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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 this 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 nine months endedSeptember 30, 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 specialist used the Multi Period Excess Earnings approach and for customer relationships, the valuation team used the distributor method. 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 17 - 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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