Business Context and Reporting Period
Company: Deckers Outdoor Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: Deckers operates three strategic business units: Teva, Simple, and Ugg. The company designs, markets, and distributes footwear. The reporting period covers the second quarter and the first six months of fiscal year 2002.
Key Financial Metrics
Results of Operations (Six Months Ended June 30, 2002)
| Metric | 2002 (6 Months) | 2001 (6 Months) |
|---|---|---|
| Net Sales | $55,628,000 | $56,497,000 |
| Gross Profit | $25,185,000 | $25,331,000 |
| Gross Margin | 45.3% | 44.8% |
| Income from Operations | $4,818,000 | $5,430,000 |
| Net Income (Loss) | $(6,169,000) | $3,218,000 |
| Diluted EPS (Loss) | $(0.64) | $0.34 |
Note: The 2002 net loss includes a non-cash cumulative effect of accounting change (goodwill impairment) of $8,973,000. Excluding this charge, net income was $2,804,000.
Liquidity and Balance Sheet (As of June 30, 2002)
- Cash and Cash Equivalents: $21,996,000 (up from $16,689,000 at Dec 31, 2001).
- Working Capital: $46,670,000.
- Total Assets: $74,364,000 (down from $85,884,000 due to goodwill write-down).
- Debt: No outstanding borrowings under the revolving credit facility. Long-term debt is minimal ($81,000).
- Credit Facility: $20,000,000 maximum availability; $12,173,000 available at period end.
Cash Flow (Six Months Ended June 30, 2002)
- Operating Cash Flow: $6,116,000 provided by operating activities.
- Investing Cash Flow: $(855,000) used in investing activities (primarily capital expenditures for ERP system).
- Financing Cash Flow: $46,000 provided by financing activities.
Material Changes vs. Prior Period
- Revenue: Net sales decreased 1.5% year-over-year for the six-month period, driven by a 15.2% decline in international sales, particularly in Europe and Asia. Domestic sales volume increased, but average wholesale price per pair decreased 5.1% due to higher volumes of discounted sales.
- Profitability: Operating income decreased 11.3% to $4.8 million. This was primarily due to increased selling, general, and administrative (SG&A) expenses (up 2.3%) driven by bad debt expense, ERP implementation costs, and marketing, partially offset by the elimination of goodwill amortization.
- Accounting Change: Implementation of SFAS 142 resulted in a one-time goodwill impairment charge of $8,973,000 (net of tax), turning a reported operating profit into a net loss for the six-month period.
- Segment Performance:
- Teva: Sales down 1.0%; operating income up slightly to $11.96 million.
- Simple: Sales down 4.5%; operating income increased to $630,000.
- Ugg: Sales down 7.1%; operating loss widened to $(804,000) due to bad debt and marketing costs.
Guidance, Outlook, and Risks
Management Guidance (Fiscal Year 2002)
- Q3 2002 Sales: Expected to range from $18 million to $19 million.
- Q3 2002 EPS: Expected diluted loss per share of $(0.06) to $(0.07).
- Full Year 2002 Sales: Expected to range from $94 million to $97 million.
- Full Year 2002 EPS:
- Excluding SFAS 142 impact: $0.28 to $0.30.
- Including SFAS 142 impact: Net loss per share of $(0.63) to $(0.65).
Key Risks and Contingencies
- Teva License Agreement: The company holds a license to sell Teva footwear until 2004 (with renewal options). The agreement requires minimum annual sales of $107.9 million in 2004. Management believes achieving this target is unlikely and is in discussions with the licensor. Failure to resolve this could result in the loss of the Teva brand.
- Legal Proceedings:
- Molly Strong-Butts Litigation: A prior judgment of ~$2.0 million was paid. The case was remanded for exemplary damages and attorney fees; potential additional exposure is up to $2.5 million.
- Netherlands Distributor: Litigation regarding breach of contract; potential exposure up to $500,000.
- Antidumping Duties: European Commission duties on footwear from China/Indonesia. Company has accrued $500,000 for potential exposure and is shifting sourcing to non-Chinese suppliers.
- Seasonality and Weather: Sales are highly sensitive to weather conditions (cool springs hurt Teva; warm winters hurt Ugg).
Investor Verification Checklist
- Teva License Status: Verify the outcome of negotiations regarding the 2004 minimum sales requirement and the potential for license termination.
- Goodwill Impairment: Confirm the remaining goodwill balance ($6.1 million for Ugg; $0 for Simple) and future impairment testing schedules.
- International Sales Recovery: Monitor trends in European and Asian sales, which declined significantly in the first half of 2002.
- Legal Exposure: Track the August 22, 2002 oral argument regarding the Molly Strong-Butts case for potential additional liability.
- ERP Implementation: Assess the impact of the new Enterprise Resource Planning system on operating costs and efficiency.