Crocs, Inc. 10-Q Summary: Quarter Ended September 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009, and the nine months ended September 30, 2009. Crocs, Inc. designs, manufactures, and markets footwear made of specialty resins. The company is currently executing a turnaround strategy to align its cost structure with reduced revenue levels following a period of rapid growth and subsequent market saturation and economic downturn. Management has expressed substantial doubt about the company's ability to continue as a going concern, dependent on achieving a cost structure that supports current revenue levels.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Revenues | $177.1 million | $509.8 million |
| Gross Profit | $89.9 million | $240.6 million |
| Gross Margin | 50.7% | 47.2% |
| Net Income (Loss) | $22.1 million | ($30.6) million |
| Diluted EPS | $0.25 | ($0.36) |
| Cash and Cash Equivalents | $76.0 million | $76.0 million (Balance Sheet) |
| Operating Cash Flow (9mo) | $48.0 million | |
| Total Debt (Notes Payable) | $2.0 million | $2.0 million |
Material Changes vs. Prior Period
- Revenue Trend: Revenues increased 1.7% year-over-year in the third quarter to $177.1 million, driven by a 17.3% increase in unit sales (9.5 million pairs). However, for the nine-month period, revenues declined 14.4% to $509.8 million compared to $595.5 million in 2008.
- Profitability Shift: The company reported a net income of $22.1 million for the quarter, a significant turnaround from a net loss of $148.0 million in the same period in 2008. This improvement was driven by a one-time income tax benefit of $11.8 million, the sale of previously impaired inventory at prices higher than estimated, and reduced operating expenses.
- Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased 26.2% in the quarter to $77.0 million, largely due to foreign currency gains and reduced marketing and legal expenses. Restructuring charges for the nine months totaled $11.7 million, and impairment charges totaled $25.4 million.
- Debt Repayment: The company fully repaid its previous revolving credit facility with Union Bank of California on August 3, 2009, eliminating $17.3 million in debt prior to maturity.
Guidance, Outlook, and Risks
- Going Concern: The filing explicitly states that the company's ability to continue as a going concern is dependent on achieving a cost structure aligned with revenue levels. There is no assurance that actions taken will result in a return to profitability.
- Liquidity: As of September 30, 2009, the company held $76.0 million in cash. On September 25, 2009, it secured a new asset-backed revolving credit facility with PNC Bank for up to $30.0 million. A subsequent amendment on October 14, 2009, reduced the tangible net worth covenant requirement from $266 million to $205 million.
- Seasonality and Demand: Management anticipates potential revenue declines in the fourth quarter due to historical seasonality and the economic downturn. The company is actively managing inventory levels and has reduced capital expenditures.
- Legal Proceedings: The company is involved in significant patent litigation with the International Trade Commission (ITC) and the Federal Circuit regarding infringement claims. Additionally, a class-action lawsuit filed by investors alleges false and misleading statements between 2007 and 2008. A trademark dispute with Porsche AG regarding the "Cayman" shoe model resulted in an injunction in Germany.
- Unusual Items: The Q3 net income was materially impacted by a one-time tax benefit of $11.8 million from international restructuring and a gain on the sale of impaired inventory. Stock-based compensation included a $16.3 million charge in the second quarter related to a tender offer for underwater options.
Investor Verification Checklist
- Going Concern Status: Verify if the company has met the revised tangible net worth covenant ($205 million) and if cash burn rates remain sustainable without further equity or debt financing.
- Inventory Realization: Assess the remaining inventory of $113.7 million and the risk of further write-downs if the company cannot sell through discontinued or impaired products at profitable margins.
- Legal Outcomes: Monitor the resolution of the ITC/Federal Circuit patent litigation and the class-action lawsuit, as adverse rulings could result in significant damages or loss of market exclusivity.
- Revenue Quality: Analyze the sustainability of Q3 revenue growth, which was partially driven by the liquidation of impaired stock at lower prices, versus organic demand for new product lines.
- Debt Covenants: Review the terms of the new PNC credit agreement, specifically the fixed charge coverage ratio and restrictions on capital expenditures and dividends.