Crocs(CROX) - 2023 Q1 - Quarterly Report

PART I — Financial Information Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Q1 2023, including income, balance sheets, and cash flows, with accompanying notes Condensed Consolidated Statements of Income Revenues increased 33.9% to $884.2 million in Q1 2023, with net income rising to $149.5 million and diluted EPS reaching $2.39 Condensed Consolidated Statements of Income (Q1 2023 vs Q1 2022) | Financial Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--- | :--- | :--- | | Revenues | $884,166 | $660,148 | | Gross profit | $476,370 | $324,924 | | Income from operations | $234,928 | $118,677 | | Income before income taxes | $191,766 | $99,060 | | Net income | $149,543 | $72,760 | | Diluted EPS | $2.39 | $1.19 | Condensed Consolidated Balance Sheets Total assets increased to $4.60 billion as of March 31, 2023, while total liabilities decreased to $3.63 billion, and stockholders' equity rose to $968.5 million Condensed Consolidated Balance Sheet Highlights | Balance Sheet Item | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total current assets | $1,114,662 | $1,025,975 | | Total assets | $4,595,635 | $4,501,797 | | Total current liabilities | $634,366 | $641,274 | | Long-term borrowings | $2,250,288 | $2,298,027 | | Total liabilities | $3,627,135 | $3,683,866 | | Total stockholders' equity | $968,500 | $817,931 | Condensed Consolidated Statements of Cash Flows Operating cash flow improved to a $9.9 million inflow in Q1 2023 from a $68.8 million outflow, while investing and financing activities reflect reduced acquisition-related spending Cash Flow Summary (Q1 2023 vs Q1 2022) | Cash Flow Activity | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--- | :--- | :--- | | Cash provided by (used in) operating activities | $9,931 | $(68,765) | | Cash used in investing activities | $(27,581) | $(2,071,466) | | Cash provided by (used in) financing activities | $(52,306) | $2,099,484 | | Net change in cash | $(65,956) | $(41,557) | Notes to Condensed Consolidated Financial Statements Detailed notes cover accounting policies, the HEYDUDE acquisition, segment reporting, and the company's $2.33 billion long-term debt structure - The company has four reportable operating segments: Crocs Brand (North America, Asia Pacific, EMEALA) and the HEYDUDE Brand[36][122] - The acquisition of HEYDUDE was completed on February 17, 2022, for an aggregate price of $2.3 billion, consisting of $2.05 billion in cash and 2.85 million shares of common stock[23][105] - As of March 31, 2023, total long-term borrowings had a face value of $2.325 billion, including a $1.425 billion Term Loan B Facility and $700 million in Senior Notes[82] - The company had remaining authorization to repurchase approximately $1.05 billion of its common stock as of March 31, 2023[67] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial results, highlighting 33.9% revenue growth to $884.2 million, improved margins, and brand performance, alongside liquidity and capital resources - Key trends include the integration of HEYDUDE, with plans for a new distribution center and ERP system, and caution regarding consumer confidence in Western markets due to macroeconomic pressures[150] Q1 2023 vs Q1 2022 Key Metrics | Metric | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $884.2M | $660.1M | 33.9% | | Gross Margin | 53.9% | 49.2% | +470 bp | | Operating Margin | 26.6% | 18.0% | +860 bp | | Diluted EPS | $2.39 | $1.19 | 100.8% | - Revenue growth of 33.9% was driven by a 37.8% increase in unit sales volume, partially offset by a 2.3% decrease from unfavorable currency exchange rates and a 1.6% decrease from lower average selling prices[135][156] - The company paid down $41.4 million of net borrowings during the quarter, reducing total borrowings to $2.28 billion[150] Results of Operations Consolidated revenues rose 33.9% to $884.2 million, driven by strong growth in both Crocs and HEYDUDE brands, leading to improved gross margin and operating income Revenues by Brand and Channel (Q1 2023 vs Q1 2022) | Brand / Channel | Q1 2023 (in thousands) | Q1 2022 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Crocs Brand | $648,778 | $545,225 | 19.0% | | - Wholesale | $410,563 | $344,258 | 19.3% | | - DTC | $238,215 | $200,967 | 18.5% | | HEYDUDE Brand | $235,388 | $114,923 | 104.8% | | - Wholesale | $167,863 | $86,919 | 93.1% | | - DTC | $67,525 | $28,004 | 141.1% | | Total Revenues | $884,166 | $660,148 | 33.9% | - Gross margin increased to 53.9% from 49.2% in Q1 2022, partly due to higher air freight in the prior year and a 420 basis point benefit from adjustments to the fair value of HEYDUDE inventory costs upon acquisition in 2022[153][157][181] - SG&A as a percentage of revenues decreased to 27.3% from 31.2% in Q1 2022, mainly because prior year costs associated with the HEYDUDE acquisition did not recur[153] Reportable Operating Segments Crocs Brand revenues grew across all regions, notably Asia Pacific at 46.1%, while HEYDUDE Brand revenue surged 104.8%, contributing to significant operating income increases for both brands Segment Revenues and Operating Income (Q1 2023 vs Q1 2022) | Segment | Revenue Q1 2023 (in thousands) | Revenue Q1 2022 (in thousands) | Operating Income Q1 2023 (in thousands) | Operating Income Q1 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Crocs - North America | $351,308 | $319,450 | $127,783 | $129,611 | | Crocs - Asia Pacific | $140,002 | $95,847 | $56,605 | $30,106 | | Crocs - EMEALA | $157,467 | $129,921 | $65,776 | $34,927 | | Total Crocs Brand | $648,778 | $545,225 | $218,007 | $163,935 | | HEYDUDE Brand | $235,388 | $114,923 | $76,620 | $15,658 | - Asia Pacific revenue growth was driven by China (due to relief of COVID-19 restrictions), Australia, South Korea, and Southeast Asia distributors[167] - HEYDUDE's operating income increase of 389.3% was partly due to prior year adjustments of $27.9 million to the fair value of inventory costs upon acquisition[220] Financial Condition, Capital Resources, and Liquidity The company maintains a strong liquidity position with $125.7 million in cash and $550.7 million in available borrowings, supported by improved operating cash flow and compliance with debt covenants Liquidity Position as of March 31, 2023 | Component | Amount (in thousands) | | :--- | :--- | | Cash and cash equivalents | $125,687 | | Available borrowings | $550,719 | - Cash provided by operating activities increased by $78.7 million year-over-year, driven by higher net income and favorable changes in working capital[238] - Financing activities used $52.3 million in cash, a stark contrast to the $2.1 billion provided in Q1 2022, which was used to fund the HEYDUDE acquisition[33][213] - The company is in compliance with all financial covenants for its debt facilities, which include a maximum leverage ratio and a minimum interest coverage ratio[59][230] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate fluctuations on variable-rate debt and foreign currency volatility, with mitigation strategies in place - The company is exposed to interest rate risk on its variable-rate Term Loan B Facility and Revolving Facility; a hypothetical 1% rate increase would have raised Q1 2023 interest expense by $4.2 million[216][244] - The company faces foreign currency exchange risk; a hypothetical 1% appreciation of the U.S. Dollar would have reduced Q1 2023 revenues by $3.3 million and income before taxes by $1.3 million[245] - To manage currency risk, the company uses foreign currency forward contracts, with a notional value of approximately $144.3 million as of March 31, 2023[262] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with ongoing integration of HEYDUDE into internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of March 31, 2023[248] - The company is in the process of integrating HEYDUDE into its overall internal control over financial reporting and will complete the evaluation for the year ending December 31, 2023[249] PART II — Other Information Item 1. Legal Proceedings The company is subject to ordinary course litigation but does not anticipate any pending legal proceedings to have a material adverse impact - A discussion of legal matters is provided in Note 12 — Commitments and Contingencies[268] - The company believes no pending legal proceedings would reasonably have a material adverse impact on its business, financial results, and cash flows[98] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes to the risk factors from the Annual Report on Form 10-K for the year ended December 31, 2022[269] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate documents, CEO/CFO certifications, and XBRL data files - The report includes certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act[251][271] - Interactive Data Files (XBRL) are included as exhibits[251]