(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:8)(cid:9)(cid:10)(cid:11)(cid:6)(cid:12)(cid:13)(cid:14)(cid:15)(cid:16)(cid:17)
(cid:2)
2013 Shareholder Letter
Dear Shareholders,
As I reflect on the past year, I’m proud of the success we have achieved. Through the outstanding work
of our employees and leadership team, we delivered record revenue of $1.56 billion and invested in our
brands and distribution channels to build a more diversified global business that is well positioned for
growth in the years ahead. The innovation engine that fueled the UGG® brand’s(cid:2) evolution from a
regional, domestic women’s wholesale brand just a few years ago, into the global, multi-channel luxurious
comfort brand that it is today, is stronger than ever and helping drive gains across our brand portfolio.
At the same time, our growing Direct-to-Consumer (“DTC”) platform and broadening Omni-Channel
capabilities are enabling us to increasingly connect with existing and target consumers in more intimate,
one-on-one settings. And we are supporting our great product stories with more compelling, more
effective and more personalized marketing programs than ever before. With the consumer based firmly
at the center of everything we do, we are confident we have the right strategies in place to execute a
long-term plan that we believe will deliver double digit sales and earnings growth annually for the next
several years and generate increased value for our shareholders.
Evolving our Product Lines
In the footwear industry, it all starts with great product. The 2013 UGG brand line was the most complete
and diverse we’ve ever developed. We featured a much more robust offering of year-round boots and
casual shoes aimed at generating demand early in the year and better bridging the gap between late
summer and the start of the holiday season. We infused the Classic collection with new specialty items
that drove heightened interest and solid demand starting early in the back half of the year with a
significant ramp up throughout the fourth quarter. Specialty Classics provide a great complement to our
core business that we plan to continually update each year to drive excitement and incremental demand.
Our slippers sold well during the year and were once again a gift-giving favorite while our cold weather
collection was up meaningfully, supported in part by more favorable selling conditions compared with the
past two winters. We believe that the success of the entire line highlights that consumers are choosing
the UGG brand for our great styling at sharp price points and not just for our Classic or cold weather
products. This is underscored by the fact that UGG Core Classics units represented just one-third of our
business in 2013, compared to approximately 50% five years ago. This is a very important shift as it
shows the evolution of the UGG product line and the growth opportunities ahead for the brand.
The main focus with our other brands has been on developing compelling products that leverage their
individual strengths and unique market positions to fuel consumer interest and demand. For Teva®, that
means a renewed focus on the brand’s heritage, which has led to an entirely new, updated collection of
Original Sandals for women and men. This strategy has broadened the Teva brand’s distribution footprint
beyond outdoor to family footwear, specialty and department stores. At the same time core accounts
have embraced the return to our roots and increased the brand’s shelf space.
Our work at Sanuk® has concentrated on expanding the brand’s offering of sandals, including our very
popular women’s Yoga Sling Collection, as well as casual footwear, to target a wider women’s audience.
We believe the development of a more robust casual canvas collection will resonate with more style-
conscious consumers who are in the early stages of discovering the brand. This is leading to increased
shelf space with existing accounts as well as new distribution in the action sports lifestyle channel and
beyond.
(cid:2)
From a product perspective, we believe that HOKA ONE ONE® is on to something big. With a unique
midsole that features a higher volume, softer density and greater rebounding foam than standard running
shoes, we believe that sales at HOKA are poised to take off. The brand’s newest lightweight shoe, The
Conquest, featuring a proprietary R-Mat mid-sole material and much improved styling has won numerous
industry awards and is currently one of the hottest selling shoes in specialty running. With the
introduction of two new super lightweight trainers as well as a broader range of price points, HOKA is
creating a lot of excitement in the market, which is opening up significant new distribution opportunities for
the brand.
Additionally, we continue to look for ways to maximize growth potential in our other brands – including
Ahnu®, Tsubo® and MOZO® – as they evolve in their respective markets.
Investing in our Brands & People
Our brands deserve marketing that is as strong as our product. We have been enhancing our marketing
efforts especially when it comes to the UGG brand, which is now aligned around around the single brand
message “Feels Like Nothing Else.” Along with great product design and quality, our improved marketing
has fueled growth of the brand’s Non-Classic business and is providing an improved platform to extend
our product lines into new categories. We are pleased with the important progress we’ve made
diversifying UGG’s business. However, for a brand with so much global opportunity UGG is still
underinvested when it comes to marketing, especially on the digital front. In 2014, we are increasing our
total company marketing spend as a percent of sales to approximately 6% with a significant portion of the
marketing increase going towards the UGG brand and driving traffic to our DTC channel.
Throughout Deckers’ 40-year history one of the main pillars behind the company’s success has been its
people. We are continually investing in our employees to ensure they have the tools and resources
necessary to achieve their personal goals, the collective goals of the organization and increase
shareholder value. We are committed to investing in our great talent as well as looking outside the
company for the additional expertise and leadership that we believe will help take Deckers to the next
level. In concert with this philosophy, we announced an organizational restructuring in early 2014, which
included the promotion of Dave Powers to the newly created position of President of Omni-Channel.
Since joining Deckers in 2012 as President, Global Direct-to-Consumer, Dave has significantly improved
the sophistication of our retail and E-Commerce operations. In order to keep the consumer at the center
of our decision-making process and ensure we continue to advance our Omni-Channel capabilities
across each of our regions, we expanded Dave’s responsibilities to now include all wholesale, distributor,
retail and E-Commerce channels in our International regions. The restructuring also included the
formation of another new position, President of Brands. The President of Brands will be charged with
driving best practices in merchandising, design and development across our brand portfolio to ensure we
are fully harnessing the collective knowhow of the entire organization to benefit the overall Company. We
look forward to securing the right person to fill this important new role.
Pursuing our Omni-Channel Strategy
Technology has dramatically reshaped the retail landscape over the past several years. The lines
between brick-and-mortar and digital have become increasingly blurred. We’ve reacted quickly to the
changing dynamics of how consumers interact with, and shop for, brands. And we have been hard at
work re-aligning our resources to optimize the advantages of an Omni-Channel approach to accelerate
growth across our business globally. This requires us to better identify and understand our customers
and their preferences, expand the accessibility to our inventory across all channels, and directly connect
with them to cultivate loyalty and growth. Our version of the Omni-Channel strategy is a program we titled
“DTC 360”, which is positively transforming all aspects of our organization. To build on our recent
progress and drive further success, we are expanding our global footprint in a strategic and measured
manner, elevating the in-store and online experience to drive conversion, further evolving our Omni-
Channel capabilities in order to better serve the consumer; and continuing to accelerate growth in our E-
Commerce channels globally.
(cid:2)
We ended 2013 with 117 company owned retail stores after opening 36 throughout the year. We believe
there is additional runway for concept and outlet locations particularly in Asia, which continues to be the
main focus of our near-term expansion plans. At the same time, we are exploring opportunities aimed at
further enhancing our store economic model including testing a smaller prototype. Within our stores, our
priority is to build upon the consumer experience through improved storytelling, enhanced visual
presentations and programs like Infinite UGG, which generated meaningful incremental sales following its
launch in the fourth quarter. From a product standpoint, going forward stores will feature much more
focused assortments supplemented by category extensions with a focus on men’s, accessories and
loungewear. We’ll also be resetting the floor sets more frequently to keep the merchandise fresh and
more seasonally relevant.
The strong performance of our E-Commerce channel was a standout in 2013. E-Commerce sales
increased 30% as the the emphasis on more effective marketing programs helped drive additional traffic
to our sites and positive response to new products along with the impact from new Omni-Channel
initiatives contributed to improved conversion rates. We see opportunities to increase the productivity of
our E-Commerce business through leveraging key technology partnerships, offering more channel
exclusive styles, re-launching our domestic UGG website and expanding UGG by You in the U.S. and
Japan. In addition, we will launch new UGG websites in Italy and Germany as well as drive growth
through HOKA’s initial E-Commerce site, which went live earlier this year.
Financial Success
The execution of our strategic plan and the concerted efforts of our organization culminated in a strong
year financially for the company. We grew net sales in the double digits on a percentage basis to a
record $1.56 billion, fueled by demand for the UGG brand particularly in our fast growing DTC channel.
DTC comparable sales, which include worldwide retail same store sales and worldwide E-Commerce
sales, increased 16% in 2013 over 2012 levels. Our earnings per share grew at more than twice the rate
of net sales as we were able to expand gross margins 260 basis points over 2012 levels. This
improvement was primarily the result of two contributing factors; the increased penetration of our DTC
operations which represented approximately 33% of overall net sales in 2013, up from 22% just three
years ago; and the reduction in product costs which was driven by lower sheepskin prices and the
increased penetration of UGGpure™, a premium and natural material developed in-house by our
innovation team. For the full year, we generated over $237 million in cash from operations which more
than funded our retail expansion, the build out of our new headquarters and other capital needs, while
allowing us to add over $120 million in cash and cash equivalents to our balance sheet.
Our Future
The past year was all about taking control of our own destiny. While we will never be fully immune from
changes in weather or swings in raw material prices, we have made important strides to reduce the
impact of external factors on our results through the introduction of more non-seasonal footwear and the
creation of UGGpure. With our defenses better fortified, we enter 2014 in a more offensive position to
grow our business through product, marketing & brand building, and distribution strategies that put the
consumer at the center of everything we do.
I am very excited about the many growth opportunities I believe exist across our portfolio of brands,
channels and geographies and I am more confident than ever about our organization’s ability to execute
and fully capitalize on all that lies ahead. Supported by a strong balance sheet, we are well positioned to
invest in long-term growth initiatives balanced by our commitment to driving operating margin expansion,
increased earnings power, and significant value for our shareholders in the years ahead.
Thank you for your continued support.
Angel Martinez
Chairman of the Board, Chief Executive Officer and President
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-22446
DECKERS OUTDOOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
250 Coromar Drive, Goleta, California
(Address of principal executive offices)
95-3015862
(I.R.S. Employer
Identification No.)
93117
(Zip Code)
Registrant's telephone number, including area code: (805) 967-7611
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Exchange
Act. Yes
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller
reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of June 28, 2013, the last business day of our most recently completed second fiscal quarter, the aggregate market value of the
voting and non-voting stock held by the non-affiliates of the registrant was approximately $1,693,099,089, based on the number
of shares held by non-affiliates of the registrant as of that date, and the last reported sale price of the registrant's common stock
on The NASDAQ Global Select market on that date, which was $50.51. This calculation does not reflect a determination that
persons are affiliates for any other purposes.
The number of shares of the registrant's Common Stock outstanding at February 14, 2014 was 34,620,587.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement on Schedule 14A relating to the registrant's 2014 annual meeting of
stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered
by this annual report, are incorporated by reference into Part III of this annual report. With the exception of the portions of the
Proxy Statement specifically incorporated herein by reference, the Proxy Statement and related proxy solicitation materials are
not deemed to be filed as part of this annual report.
DECKERS OUTDOOR CORPORATION
For the Fiscal Year Ended December 31, 2013
Table of Contents to Annual Report on Form 10-K
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
Signatures
PART IV
Page
3
7
17
17
18
18
19
21
27
43
43
44
44
45
46
46
46
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This report and the information incorporated by reference in this report contain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, that concern matters that involve risks and uncertainties that could cause actual results to differ materially from those
anticipated or projected in the forward-looking statements. These forward-looking statements are intended to qualify for the safe
harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of
historical fact contained in this annual report, including statements regarding future events, our future financial performance, our
future business strategy and the plans and objectives of management for future operations, are forward-looking statements. We
have attempted to identify forward-looking statements by using words such as "anticipate," "believe," "estimate," "expect," "intend,"
"may," "project," 'plan", "predict", "should," "will," and similar expressions, or the negative of these expressions, as they relate
to us, our management and our industry, to identify forward-looking statements. Specifically, this report and the information
incorporated by reference in this report contain forward-looking statements relating to, among other things:
•
•
•
•
•
•
•
•
•
•
•
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our global business, growth, operating, investing, and financing strategies;
our product offerings, distribution channels and geographic mix;
the success of our new products, brands, and growth initiatives;
the impact of seasonality on our operations;
expectations regarding our net sales and earnings growth and other financial metrics;
our development of worldwide distribution channels;
trends affecting our financial condition, results of operations, or cash flows;
our expectations for expansion of our retail and E-Commerce capabilities;
information security and privacy of customer, employee or company information;
overall global economic trends;
reliability of overseas factory production and storage; and
the availability and cost of raw materials.
We have based our forward-looking statements on our current expectations and projections about trends affecting our business
and industry and other future events. Although we do not make forward-looking statements unless we believe we have a reasonable
basis for doing so, we cannot guarantee their accuracy. As a result, actual results may differ materially from the results stated in
or implied by our forward-looking statements. Some of the risks, uncertainties and assumptions that may cause actual results to
differ from these forward-looking statements are described in Part I, Item 1A of this annual report in the section entitled "Risk
Factors," as well as in our other filings with the Securities and Exchange Commission (SEC). In addition, actual results may differ
as a result of additional risks and uncertainties of which we are currently unaware or which we do not currently view as material
to our business.
You should read this annual report in its entirety, together with the documents that we file as exhibits to this annual report
and the documents that we incorporate by reference in this annual report, with the understanding that our future results may be
materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements
and we expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such
statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules of the
NASDAQ Stock Market.
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PART I
References in this Annual Report on Form 10-K to "Deckers", "we", "our", "us", or the "Company" refer to Deckers Outdoor
Corporation together with its consolidated subsidiaries. Ahnu®, Deckers®, Hoka One One® (Hoka), MOZO®, Sanuk®, Teva®,
TSUBO®, and UGG® are some of our trademarks. Other trademarks or trade names appearing elsewhere in this report are the
property of their respective owners.
Item 1. Business.
Unless otherwise specifically indicated, all amounts in Item 1. and Item 1A. herein are expressed in thousands, except for
employees, share quantity, per share data, and selling prices.
General
Deckers Outdoor Corporation was incorporated in 1975 under the laws of the State of California and, in 1993, reincorporated
under the laws of the State of Delaware. We are a global leader in designing, marketing and distributing innovative footwear,
apparel and accessories developed for both everyday casual lifestyle use and high performance activities. We believe that our
footwear is distinctive and appeals broadly to men, women and children. We sell our products, including accessories such as
handbags and loungewear, through quality domestic and international retailers, international distributors, and directly to end-user
consumers both domestically and internationally, through our websites, call centers, and retail stores. Our primary objective is
to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and
products by offering diverse lines that emphasize authenticity, functionality, quality, and comfort and products tailored to a variety
of activities, seasons, and demographic groups. All of our products are currently manufactured by independent contractors primarily
in Asia. Our continued growth will depend upon the broadening of our products offered under each brand, the appeal of our
products to our consumers, expanding domestic and international distribution, successfully opening new retail stores, increasing
sales to consumers, and developing or acquiring new brands.
Products
We market our products primarily under three proprietary brands:
UGG. The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights the
Company’s successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world,
the UGG brand has proven to be a highly resilient line of premium footwear, with an expanding product offering and a growing
global audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous
outlets both organically and from strategic public relations efforts, including an increasing amount of exposure internationally.
Teva. Teva is our active lifestyle brand, born from the outdoors and rooted in adventure. Originator of the original sport
sandal, today the Teva product line includes casual sandals, shoes, boots and amphibious footwear built for ultimate versatility.
We are focused on regaining our leadership position in the sandal market, and continuing to expand our casual and women’s
offering to appeal to a wider range of consumers through utility driven design, color and premium materials.
Sanuk. Sanuk is our fun lifestyle footwear brand rooted in surf culture but embraced by an eclectic mix of style-savvy
optimists. The Sanuk brand is probably best known for the patented SIDEWALK SURFERS® shoe which effectively introduced
the hanging deconstructed footwear movement. Other primary offerings include the Beer CozyTM and Yoga MatTM sandal collections
made from real yoga mat material. The brand has a history of innovation, product invention, foot-friendly comfort, unexpected
materials and clever branding.
The brand's SIDEWALK SURFERS are marketed with the hand-crafted, humor driven "Cut&Paste" ad campaign and the
slogan "THESE ARE NOT SHOES, THEY'RE SANDALS®" which references the patented sandal construction. We plan to build
on the Sanuk brand's authentic position in the surf and outdoor markets through its relationships with prominent professional
athletes and ambassadors, including surfers, rock climbers, photographers, artists, and musicians known as much for their unique
personal styles and charisma as for their specialized talents.
In addition to our primary brands, our other brands include TSUBO, a line of mid and high-end dress and dress casual
footwear that incorporates style, function, and maximum comfort; Ahnu, a line of outdoor performance and lifestyle footwear;
MOZO, a line of footwear crafted for culinary professionals that redefines the industry dress code; Hoka, a line of footwear for
all capacities of runners designed with a unique performance midsole geometry, oversize midsole volume and active footframe.
Sales and Distribution
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At the wholesale level, we distribute our products in the US through sales representatives, who are organized geographically
and by brand. In addition to our wholesale business, we also sell products directly to consumers through our websites and retail
stores. Our brands are generally advertised and promoted through a variety of consumer media campaigns. We benefit from
editorial coverage in both consumer and trade publications. Each brand's dedicated marketing team works closely with targeted
accounts to maximize advertising and promotional effectiveness. We also manage brand marketing on a global basis to ensure
consistent consumer communications in all regions and channels. We determine our global communication plans based on brand
strategies, consumer insights, and return on investment measures.
Our sales force is generally separated by brand, as each brand generally has certain specialty consumers; however, there is
overlap between the sales teams and customers. We have aligned our brands' sales forces to position them for the future of the
brands. Each brand's respective sales manager recruits and manages their network of sales representatives. We believe this approach
for the US market maximizes the selling efforts to our national retail accounts on a cost-effective basis.
We distribute products sold in the US through our distribution centers in Camarillo and Ventura, California. Our distribution
centers feature a warehouse management system that enables us to efficiently pick and pack products for direct shipment to
customers. We are also in the early stages of opening a new distribution center in Moreno Valley, California. For certain customers
requiring special handling, each shipment is pre-labeled and packed to the retailer's specifications, enabling the retailer to easily
unpack our product and immediately display it on the sales floor. All incoming and outgoing shipments must meet our quality
inspection process.
Internationally, we distribute our products through independent distributors and retailers in many countries, including
throughout Europe, Asia Pacific, Canada, and Latin America, among others. In addition, as we do in the US, in certain countries,
we sell products directly to international consumers through our websites and our retail stores. For our wholesale and Direct-to-
Consumer businesses, we operate distribution centers in certain international locations and utilize third-party distribution companies
in other countries. We may also work with trading companies for importation, as needed. Our principal wholesale customers
include specialty retailers, selected department stores, outdoor retailers, sporting goods retailers, shoe stores, and online retailers.
Our five largest customers accounted for approximately 23.0% of worldwide net sales for 2013, compared to 22.8% for
2012. No single customer accounted for greater than 10% of our consolidated net sales in 2013.
UGG. We sell our UGG footwear and accessories primarily through higher-end department stores such as Nordstrom,
Neiman Marcus and Bloomingdale's, as well as independent specialty retailers such as Journey's, and online retailers such as
Zappos.com. We believe these retailers support the luxury positioning of our brand and are the destination shopping choice for
the consumer who seeks out the fashion and functional elements of our UGG products.
Teva. We sell our Teva footwear primarily through specialty outdoor and sporting goods retailers such as REI, L.L. Bean,
Dick's Sporting Goods, and The Sports Authority as well as online retailers such as Zappos.com. Our brand strength in casual
and women’s has also expanded our business to a wider distribution of department store and mall channels including Nordstrom,
Dillard’s and Journey’s, as well as family footwear with DSW and Famous Footwear. We believe distribution that services active
lifestyle consumers with premium assortments, merchandising and customer experience will continue to be areas of growth for
the brand.
Sanuk. We sell our Sanuk footwear primarily through independent action sports retailers including specialty surf and skate
shops, outdoor retailers such as REI and Bass Pro Shops, specialty footwear retailers and larger national retail chains including
Nordstrom, Journey's, Dillard's, DSW, and The Buckle. We believe these retailers showcase the brand's creativity, fun, and comfort
and allow us to effectively reach our target consumers for the brand.
Other brands. Our other brands are sold primarily at better department stores, outdoor specialty accounts, independent
specialty retailers, and with online retailers that support our brand ideals of comfort, style, and quality. Key accounts of our other
brands include Nordstrom, Dillard's, Hanigs, REI, and Zappos.com.
E-Commerce. Our E-Commerce business enables us to market, communicate and build our relationships with the
consumer. E-Commerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide
significant incremental operating income. The E-Commerce business provides us an opportunity to communicate to the consumer
with a consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers
targeted information to specific consumer segments. We operate our E-Commerce business through the Uggaustralia.com,
Teva.com, Sanuk.com, Tsubo.com, Ahnu.com, and Hokaoneone.com websites. Our websites also drive wholesale and distributor
sales through brand awareness and by directing consumers to retailers that carry our brands, including our own retail stores. In
recent years, our E-Commerce business has had significant revenue growth, much of which occurred as the UGG brand gained
popularity and as consumers continued to increase internet usage for footwear and other purchases.
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We have expanded our international capabilities by developing sites to service certain international markets. These sites
are translated into the local language, may provide product through local distribution centers and price the products in the consumers'
local currency. In 2012, we launched additional sites in the US for our Sanuk brand and launched mobile sites for several of our
brands in the US, Europe and Japan. Our E-Commerce business sells products directly to consumers throughout the world,
including the US, the United Kingdom, Japan and China. In order to reduce the cost of order fulfillment, minimize out of stock
positions, and further leverage our distribution centers' operations, order fulfillment is performed by our distribution centers in
California, the UK, the Netherlands, China, and Japan. Products sold through our E-Commerce business are sold at prices which
approximate retail prices, enabling us to capture the full retail margin on each Direct-to-Consumer transaction.
Retail Stores. Our retail stores are predominantly UGG concept stores and UGG outlet stores. In 2013 we expanded our
fleet and opened our first Sanuk (two concept, one outlet) and Teva (one outlet) stores. Our retail stores enable us to directly
impact our customers' experience, meet the growing demand for these products, sell the products at retail prices and generate
strong annual operating income. In addition, our UGG concept stores allow us to showcase our entire product line including
footwear, accessories, handbags, home, outerwear, lounge, and retail exclusive items; whereas, a wholesale account may not
represent all of these categories. Through our outlet stores, we sell some of our discontinued styles from prior seasons, plus
products made specifically for the outlet stores.
In 2013, we opened 14 stores in the US and 26 internationally. As of December 31, 2013, we had a total of 80 UGG concept
stores and 33 UGG outlet stores worldwide. During 2014, we plan to open additional retail stores in the US and internationally.
Product Design and Development
The design and product development staff for each of our brands creates new innovative footwear products that combine
our standards of high quality, comfort, and functionality. The design function for all of our brands is performed by a combination
of our internal design and development staff plus outside freelance designers. By utilizing outside designers, we believe we are
able to review a variety of different design perspectives on a cost-efficient basis and anticipate color and style trends more quickly.
Refer to Note 1 to our accompanying consolidated financial statements for a discussion of our research and development costs
for the last three years.
In order to ensure quality, consistency, and efficiency in our design and product development process, we continually evaluate
the availability and cost of raw materials, the capabilities and capacity of our independent contract manufacturers, and the target
retail price of new models and lines. The design and development staff works closely with brand management to develop new
styles of footwear and accessories for our various product lines. We develop detailed drawings and prototypes of our new products
to aid in conceptualization and to ensure our contemplated new products meet the standards for innovation and performance that
our consumers demand. Throughout the development process, we have multiple design and development reviews, which we then
coordinate with our independent manufacturers. This ensures that we are addressing the needs of our consumers and are working
toward a common goal of developing and producing a high quality product to be delivered on a timely basis.
Manufacturing and Supply Chain
We do not manufacture our products; we outsource the production of our brand footwear to independent manufacturers
primarily in Asia. We require our independent contract manufacturers and designated suppliers to adopt our Supplier Code of
Conduct, which specifies that they comply with all local laws and regulations governing human rights, working conditions, and
environmental compliance before we are willing to conduct business with them. We also require our manufacturing partners and
licensees to comply with our Restricted Substances policy as a condition of doing business with our company. We have no long-
term contracts with our manufacturers. As we grow, we expect to continue to rely exclusively on independent manufacturers for
our sourcing needs.
The production of footwear by our independent manufacturers is performed in accordance with our detailed specifications
and is subject to our quality control standards. We maintain an on-site supervisory office in Pan Yu City, China that serves as a
local link to our independent manufacturers, enabling us to carefully monitor the production process from receipt of the design
brief to production of interim and final samples and shipment of finished product. We believe this local presence provides greater
predictability of material availability, product flow and adherence to final design specifications than we could otherwise achieve
through an agency arrangement. To ensure the production of high quality products, the majority of the materials and components
used in production of our products by these independent manufacturers are purchased from independent suppliers designated by
us. Excluding sheepskin, we believe that substantially all the various raw materials and components used to manufacture our
footwear, including wool, rubber, leather, and nylon webbing are generally available from multiple sources at competitive prices.
Beginning in 2013, in some of our UGG products we used a new raw material, UGGpure, which is wool woven into a durable
backing. We generally outsource our manufacturing requirements on the basis of individual purchase orders or short-term purchase
commitments rather than maintaining long-term purchase commitments with our independent manufacturers.
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At our direction, our manufacturers currently purchase the majority of the sheepskin used in our products from two tanneries
in China, which source their skins for our products primarily from Australia, Europe, and the US. We maintain communication
with the tanneries to monitor the supply of sufficient high quality sheepskin available for our projected UGG brand production.
To ensure adequate supplies for our manufacturers, we forecast our usage of sheepskin in advance at a forward price. We have
also entered into minimum purchase commitments with certain sheepskin suppliers (see Note 7 to our accompanying consolidated
financial statements.) We believe current supplies are sufficient to meet our needs in the near future, but we continue to investigate
our options to accommodate any unexpected future growth.
We have instituted pre-production, in-line, and post-production inspections to meet or exceed the high quality demanded
by us and consumers of our products. Our quality assurance program includes our own employee on-site inspectors at our
independent manufacturers who oversee the production process and perform quality assurance inspections. We also inspect our
products upon arrival at our distribution centers.
Patents and Trademarks
We utilize trademarks on virtually all of our products and believe that having distinctive marks that are readily identifiable
is an important factor in creating a market for our goods, toward identifying the Company, and in distinguishing our goods from
the goods of others. We currently hold trademark registrations for UGG, Teva, Sanuk, TSUBO, Ahnu, MOZO, Hoka One One,
and other marks in the US and in many other countries, including the countries of the European Union, Canada, China, Japan and
Korea. We now hold more than 160 utility and design patent registrations in the US and abroad and have filed more than 20 new
patent applications which are currently pending. These patents expire at various times. We regard our proprietary rights as valuable
assets and vigorously protect such rights against infringement by third parties. No single patent is critical to our business, and no
group of patents expiring in the same year is critical to our business.
Seasonality
Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September
30 and December 31 and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 and
June 30 of each year. Our financial results include the Sanuk brand beginning July 1, 2011 and the Hoka brand beginning September
27, 2012. Historically, our total net sales in the quarters ending September 30 and December 31 have exceeded total net sales for
the quarters ending March 31 and June 30 of each year, and we expect this trend to continue. Our other brands do not have a
significant seasonal impact on our business. Nonetheless, actual results could differ materially depending upon consumer
preferences, availability of product, competition, and our wholesale and distributor customers continuing to carry and promote
our various product lines, among other risks and uncertainties. See Part I, Item 1A, "Risk Factors." For further discussion on our
working capital and inventory management, see Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition
and Results of Operations — Liquidity and Capital Resources."
Backlog
Historically, we have encouraged our wholesale and distributor customers to place, and we have received, a significant
portion of orders as preseason orders, generally four to eight months prior to the anticipated shipment date. We work with our
wholesale customers through preseason programs to enable us to better plan our production schedule, inventory and shipping
needs. Unfilled customer orders as of any date, which we refer to as backlog, represent orders scheduled to be shipped at a future
date, which can be cancelled prior to shipment. The backlog as of a particular date is affected by a number of factors, including
seasonality, manufacturing schedule, and the timing of product shipments as well as variations in the quarter-to-quarter and year-
to-year preseason incentive programs. The mix of future and immediate delivery orders can vary significantly from quarter-to-
quarter and year-to-year. As a result, comparisons of the backlog from period-to-period may be misleading.
At December 31, 2013, our backlog of orders from our wholesale customers and distributors was approximately $401,000
compared to approximately $323,000 at December 31, 2012. While all orders in the backlog are subject to cancellation by
customers, we expect that the majority of such orders will be filled in 2014. We believe that backlog at year-end is an imprecise
indicator of total revenue that may be achieved for the full year for several reasons. Backlog only relates to wholesale and distributor
orders for the next season and current season fill-in orders, and excludes potential sales in our E-Commerce business and retail
stores during the year. Backlog also is affected by the timing of customers' orders and product availability.
Competition
The casual, outdoor, athletic, fashion, and formal footwear markets are highly competitive. Our competitors include athletic
and footwear companies, branded apparel companies, and retailers with their own private labels. Although the footwear industry
is fragmented to a certain degree, many of our competitors are larger and have substantially greater resources than us, including
athletic shoe companies, several of which compete directly with some of our products. In addition, access to offshore manufacturing
has made it easier for new companies to enter the markets in which we compete, further increasing competition in the footwear
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and accessory industries. In particular, in part due to the popularity of our UGG products, we face increasing competition from
a significant number of competitors selling products designed to compete directly or indirectly with our UGG products.
We believe that our footwear lines and other product lines compete primarily on the basis of brand recognition and authenticity,
product quality and design, functionality, performance, comfort, fashion appeal, and price. Our ability to successfully compete
depends on our ability to:
•
•
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•
shape and stimulate consumer tastes and preferences by offering innovative, attractive, and exciting products;
anticipate and respond to changing consumer demands in a timely manner;
maintain brand authenticity;
develop high quality products that appeal to consumers;
price our products suitably;
provide strong and effective marketing support; and
ensure product availability.
We believe we are well positioned to compete in the footwear industry. We continually look to acquire or develop more
footwear brands to complement our existing portfolio and grow our existing consumer base.
Employees
At December 31, 2013, we employed approximately 3,200 employees in the US, Europe, and Asia, none of whom were
represented by a union. This figure includes approximately 2,000 employees in our retail stores worldwide, which includes part-
time and seasonal employees. The increase in employees during the year was primarily related to increased expansion efforts.
We intend to increase our employee count further in 2014 primarily related to the opening of new retail stores and our other
expansion initiatives. We believe our relationships with our employees are good.
Financial Information about Segments and Geographic Areas
Our six reportable business segments include the strategic business units responsible for the worldwide operations of our
brands' (UGG, Teva, Sanuk and other brands) wholesale divisions, as well as our E-Commerce and retail store businesses. The
majority of our sales and long-lived assets are in the US. Refer to Note 8 to our accompanying consolidated financial statements
for further discussion of our business segment data. Refer to Item 1A of this Part I for a discussion of the risks related to our
foreign operations.
Compliance with federal, state, and local environmental regulations has not had, nor is it expected to have, any material
effect on our capital expenditures, earnings, or competitive position based on information and circumstances known to us at this
time.
Available Information
Our internet address is www.deckers.com. We post links to our website to the following filings as soon as reasonably
practicable after they are electronically filed with or furnished to the SEC: annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, Proxy Statements, and any amendments to those reports filed or furnished pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available through our website free
of charge. Our filings may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC
20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The
SEC also maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
Item 1A. Risk Factors.
Our short and long-term success is subject to many factors beyond our control. Investing in our common stock involves
substantial risk. Before investing in our stock, stockholders and potential stockholders should carefully consider the following
risk factors related to our company as well as general investor risks, in addition to the other information contained in this report
and the information incorporated by reference in this report. If any of the following risks occur, our business, financial condition
or results of operations could be adversely affected. In that case, the value of our common stock could decline and stockholders
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may lose all or part of their investment. Please also see the section entitled "Special Note on Forward-Looking Statements" on
page 2 of this Annual Report on Form 10-K.
Many of our products are seasonal, and our sales are sensitive to weather conditions.
Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our control. For example,
extended periods of unseasonably warm weather during the fall and winter months may reduce demand for our UGG products.
During 2011 and 2012, we experienced mild winters which negatively impacted our sales for UGG products. Furthermore,
variations in weather conditions across the globe may impact sales of our products in ways that we cannot predict. If management
is not able to timely adjust expenses in reaction to adverse events such as unfavorable weather, weak consumer spending patterns
or unanticipated levels of order cancellations because of seasonal circumstances, our profitability may be materially affected.
Even though we are creating more year-round styles for our brands, the effect of favorable or unfavorable weather on sales can
be significant enough to affect our quarterly and annual results, with a resulting effect on our common stock price.
If raw materials do not meet our specifications, consumer expectations or experience price increases or shortages, we
could realize interruptions in manufacturing, increased costs, higher product return rates, a loss of sales, or a reduction in
our gross margins.
We depend on a limited number of key sources for certain raw materials. For sheepskin, the raw material used in many of
our UGG products, we rely on two tanneries. Both the top grade twinface and other grades of sheepskin used in UGG products
are in high demand and limited supply. Furthermore, our unique sheepskin needs require certain types of sheepskin that may only
be found in certain geographic locations and tanneries with sufficient expertise and capacity to deliver sheepskin which meets our
specifications. The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that
are completely outside our control. For example, if the price of wool increases, sheep herders may choose not to harvest their
sheep and instead choose to shear their sheep for wool, thus decreasing the supply of sheepskin. Sheepskin is also a by-product
of the food industry and is therefore dependent upon the demand by the food industry, which has generally been decreasing thus
leading to an overall reduction in the number of sheep available. The potential inability to obtain sheepskin and other raw materials
could impair our ability to meet our production requirements and could lead to inventory shortages, which can result in lost sales,
delays in shipments to customers, strain on our relationships with customers, and diminished brand loyalty. There have also been
significant fluctuations in the prices of sheepskin as the demand from competitors for this material and the supply of sheep have
changed. We experienced an increase in sheepskin costs in 2012 and a decrease in 2013, with the majority of the decrease being
realized in the fourth quarter of 2013. We attempt to cover the full amount of our sheepskin purchases under fixed price contracts.
Any price increases in key raw materials will likely raise our costs and decrease our profitability unless we are able to
commensurately increase our selling prices and implement other cost savings measures.
In addition, our sheepskin suppliers warehouse their inventory at a limited number of facilities in China, the loss of any of
which due to natural disasters and other adverse events would likely result in shortages of sheepskin leading to delays in the
production of our products and could result in a loss of sales and earnings.
Our independent manufacturers use various raw materials in the production of our footwear and accessories that must meet
our design specifications and, in some cases, additional technical requirements for performance footwear. Beginning in 2013, in
some of our UGG products we used a new raw material, UGGpure, which is wool woven into a durable backing. If these raw
materials and the end product do not conform to our specification or fail to meet consumer expectations, we could experience a
higher rate of customer returns and deterioration in the image of our brands, which could have a material adverse effect on our
business, results of operations, and financial condition.
Our new and existing retail stores may not realize returns on our investments.
Our retail segment has grown substantially in both net sales and total assets during the past year, and we intend to rapidly
expand this segment in the future. We have entered into significant long-term leases for many of our retail locations. Global store
openings involve substantial investments, including constructing leasehold improvements, furniture and fixtures, equipment,
information systems, inventory, and personnel. In addition, since a certain amount of our retail store costs are fixed, if we have
insufficient sales, we may be unable to reduce expenses in order to avoid losses or negative cash flows. Due to the high fixed cost
structure associated with the retail segment, negative cash flows or the closure of a store could result in significant write-downs
of inventory, severance costs, lease termination costs, impairment losses on long-lived assets, or loss of our working capital, which
could adversely impact our financial position, results of operations, or cash flows.
In addition, from time to time we license the right to operate retail stores for our brands to third parties, including our
independent distributors. We provide training to support these stores, and set and monitor operational standards. However, the
quality of these store operations may decline due to the failure of these third parties to operate the stores in a manner consistent
with our standards, which could harm their sales and as a result harm our results of operations or cause our brand image to suffer.
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If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have difficulty filling
our customers' orders.
Because the footwear industry has relatively long lead times for design and production, we must plan our production tooling
and projected volumes many months before consumer tastes become apparent. The footwear and fashion industry is subject to
rapid changes in consumer preferences, making it difficult to accurately forecast demand for our products and our future results
of operations. Many factors may significantly affect demand for our products, which include: consumer acceptance of our products,
changes in consumer demand for products of our competitors, effects of weather conditions, our reliance on manual processes
and judgment for certain supply and demand planning functions that are subject to human error, unanticipated changes in general
market conditions, and weak economic conditions or consumer confidence that reduces demand for discretionary items, such as
our products.
A large number of models, colors, and sizes in our product lines can increase these risks. As a result, we may fail to accurately
forecast styles, colors, and features that will be in demand. If we overestimate demand for any products or styles, we may be
forced to incur higher markdowns or sell excess inventories at reduced prices resulting in lower, or negative, gross margins. On
the other hand, if we underestimate demand for our products or if our independent factories are unable to supply products when
we need them, we may experience inventory shortages that may prevent us from fulfilling customer orders or delaying shipments
to customers. This could negatively affect our relationship with customers and diminish our brand loyalty, which may have an
adverse effect on our financial condition and results of operations.
Failure to adequately protect our trademarks, patents, and other intellectual property rights or deter counterfeiting could
diminish the value of our brands and reduce sales.
We believe that our trademarks and other intellectual property rights are of value and are integral to our success and our
competitive position. Some countries' laws do not protect intellectual property rights to the same extent as do US laws. Furthermore,
our efforts to enforce our intellectual property rights are typically met with defenses and counterclaims attacking the validity and
enforceability of our intellectual property rights. Unplanned increases in legal fees and other costs associated with the defense of
our intellectual property or rebranding could result in higher operating expenses and lower earnings.
Similarly, from time to time, we may need to defend against claims that the word "ugg" is a generic term. Such a claim was
successful in Australia, but such claims have been rejected by courts in the United States, China, Turkey and in the Netherlands.
We have also faced claims that “UGG Australia” is geographically deceptive. Any decision or settlement in any of these matters
that prevents trademark protection of the "UGG" brand in our major markets, or that allows a third party to continue to use our
brand trademarks in connection with the sale of products similar to our products, or to continue to manufacture or distribute
counterfeit products could result in intensified commercial competition and could have a material adverse effect on our results of
operations and financial condition.
The success of the UGG brand has lead to trademark counterfeiting, product imitation and other infringements of our
intellectual property rights. If we are unsuccessful in challenging a third party's products on the basis of trademark design patent
and trade dress rights, this could adversely affect our continued sales, financial condition, and results of operation. If our brands
are associated with infringers' or competitors' inferior products, this could also adversely affect the integrity of our brands.
Our success depends on our ability to anticipate fashion trends.
Our success depends largely on the continued strength of our brands, on our ability to anticipate, understand, and react to
the rapidly changing fashion tastes of footwear, apparel, and accessory consumers and to provide appealing merchandise in a
timely and cost effective manner. Our products must appeal to a broad range of consumers whose preferences cannot be predicted
with certainty and are subject to rapid change. We are also dependent on consumer receptivity to our products and marketing
strategy. There can be no assurance that consumers will continue to prefer our brands or that we will (1) respond quickly enough
to changes in consumer preferences, (2) market our products successfully, or (3) successfully introduce acceptable new models
and styles of footwear or accessories to our target consumer. We believe that the ongoing economic uncertainty in many countries
where we sell our products and the corresponding impact on consumer confidence and discretionary income may increase this
uncertainty. Achieving market acceptance for new products also likely will require us to exert substantial product development
and marketing efforts and expend significant funds to attract consumers. A failure to introduce new products that gain market
acceptance or maintain market share with our current products would erode our competitive position, which would reduce our
profits and could adversely affect the image of our brands, resulting in long-term harm to our business.
UGG products include fashion items that could go out of style at any time and competition for the sale of products by the
UGG brand is intense and has increased over time. UGG products represent a majority of our business, and if UGG product sales
were to decline or fail to increase in the future, our overall financial performance and common stock price would be adversely
affected.
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We may not succeed in implementing our growth strategies.
As part of our growth strategy, we seek to enhance the positioning of our brands, extend our brands into complementary
product categories and markets, partner with or acquire compatible companies or brands, expand geographically, increase our
retail presence, and improve our operational performance. We continue to expand the nature and scope of our operations
considerably, including significantly increasing the number of our employees worldwide. We anticipate that substantial further
expansion will be required to realize our growth potential and new market opportunities.
We are growing globally through our retail, E-Commerce, wholesale, and distributor channels. In addition, as part of our
international growth strategy, we may continue to transition from third-party distribution to direct distribution through wholly-
owned subsidiaries. Implementing our growth strategies, or failure to effectively execute them, could affect near term revenues
from the postponement of sales recognition to future periods, our rate of growth or profitability, which in turn could have a negative
effect on the value of our common stock. In addition, our growth initiatives could:
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increase our working capital needs beyond our capacity;
increase costs if we fail to successfully integrate a newly acquired business or achieve expected cost savings;
result in impairment charges related to acquired businesses;
create remote-site management issues, which would adversely affect our internal control environment;
have significant domestic or international legal or compliance implications;
make it difficult to attract, retain, and manage adequate human resources in remote locations;
cause additional inventory manufacturing, distribution, and management costs;
cause us to experience difficulty in filling customer orders;
result in distribution termination transaction costs; or
create other production, distribution, and operating difficulties.
Our goodwill and other intangible assets may incur impairment losses.
We conducted our annual impairment tests of goodwill and other intangible assets for 2013, 2012, and 2011. In addition,
we conducted interim impairment evaluations when impairment indicators arose. In 2013, 2012, and 2011, we did not recognize
any material impairment charges on our goodwill and other intangible assets.
If any brand's product sales or operating margins decline to a point that the fair value falls below its carrying value, we may
be required to write down the related intangible assets. These or other related declines could cause us to incur additional impairment
losses, which could materially affect our consolidated financial statements and results of operations. The value of our trademarks
is highly dependent on forecasted revenues and earnings before interest and taxes for our brands, as well as derived discount and
royalty rates. In addition, the valuation of intangible assets is subject to a high degree of judgment and complexity. We may also
decide to discontinue a brand which would result in the write down of all related intangible assets. The balances of goodwill and
nonamortizable intangibles by brand are as follows:
As of December 31, 2013
Trademarks
Goodwill
Total nonamortizable intangibles
UGG
$
154
6,101
$ 6,255
Teva
$ 15,301
—
$ 15,301
Sanuk
Other
$
— $
— $
113,944
$ 113,944
8,680
$ 8,680
Total
15,455
128,725
$ 144,180
Because we depend on independent manufacturers, we face challenges in maintaining a continuous supply of finished
goods that meet our quality standards.
Most of our production is performed by a limited number of independent manufacturers. We depend on these manufacturers'
ability to finance the production of goods ordered and to maintain manufacturing capacity, and store completed goods in a safe
and sound location pending shipment. We do not possess direct control over either the independent manufacturers or their materials
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suppliers, so we may be unable to obtain timely and continuous delivery of acceptable products. In addition, while we do have
long standing relationships with most of our factories, we currently do not have long-term contracts with these independent
manufacturers, and any of them may unilaterally terminate their relationship with us at any time or seek to increase the prices they
charge us. As a result, we are not assured of an uninterrupted supply of acceptable quality and competitively priced products from
our independent manufacturers. If there is an interruption, we may not be able to substitute suitable alternative manufacturers to
provide products or services of a comparable quality at an acceptable price or on a timely basis. If a change in our independent
manufacturers becomes necessary, we would likely experience increased costs as well as substantial disruption of our business,
which could result in a loss of sales and earnings.
Interruptions in the supply chain can also result from natural disasters and other adverse events that would impair our
manufacturers' operations. We keep proprietary materials involved in the production process, such as shoe molds, knives, and raw
materials, under the custody of our independent manufacturers. If these independent manufacturers were to experience loss or
damage to our proprietary materials involved in the production process, we cannot be assured that such independent manufacturers
would have adequate insurance to cover such loss or damage and, in any event, the replacement of such materials would likely
result in significant delays in the production of our products and could result in a loss of sales and earnings.
Most of our independent manufacturers are located outside the US, where we are subject to the risks of international
commerce.
Most of our independent manufacturers are in Asia and Latin America, with the majority of production performed by a
limited number of manufacturers in China. Foreign manufacturing is subject to numerous risks, including the following:
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tariffs, import and export controls, and other non-tariff barriers such as quotas and local content rules on raw
materials and finished products, including the potential threat of anti-dumping duties and quotas;
increasing transportation costs and a limited supply of international shipping capacity;
increasing labor costs;
poor infrastructure and shortages of equipment, which can disrupt transportation and utilities;
restrictions on the transfer of funds;
changing economic conditions;
violations or changes in governmental policies and regulations including labor, safety, and environmental
regulations in China, Vietnam, the US, and elsewhere;
refusal to adopt or comply with our Supplier Code of Conduct and Restricted Substances Policy;
customary business traditions in China and Vietnam such as local holidays, which are traditionally
accompanied by high levels of turnover in the factories;
labor unrest, which can lead to work stoppages and interruptions in transportation or supply;
delays during shipping, at the port of entry or at the port of departure;
political instability, which can interrupt commerce;
use of unauthorized or prohibited materials or reclassification of materials;
expropriation and nationalization; and
adverse changes in consumer perception of goods, trade, or political relations with China and Vietnam.
These factors, or others of which we are currently unaware or which we do not currently view as material, could severely
interfere with the manufacture or shipment of our products. This could make it difficult to obtain adequate supplies of quality
products when we need them, thus materially affecting our sales and results of operations.
While we require that our independent manufacturers adhere to environmental, ethical, health, safety, and other standard
business practices and applicable local laws, and we periodically visit and audit their operations, we do not control their business
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practices. If we discovered non-compliant manufacturers or suppliers that cannot or will not become compliant, we would cease
dealing with them, and we could suffer an interruption in our product supply chain. In addition, the manufacturers' or designated
suppliers' violations of such standards and laws could damage our reputation and the value of our brands, resulting in negative
publicity and discouraging customers and consumers from buying our products.
We conduct business outside the US, which exposes us to foreign currency, global liquidity, and other risks.
The state of the global economy continues to influence the level of consumer spending for discretionary items. This affects
our business as it is highly dependent on consumer demand for our products. The current political and economic environments in
certain countries in Europe have resulted in significant macroeconomic risks, including high rates of unemployment, high fuel
prices, and continued global economic uncertainty largely precipitated by the European debt crisis.
We operate on a global basis, with approximately 33.0% of our net sales for the year ended December 31, 2013 from
operations outside the US. As we continue to increase our international operations, our sales and expenditures in foreign currencies
become more material and subject to currency fluctuations and global credit markets. A significant portion of our international
operating expenses are paid in local currencies. Also, our foreign distributors sell in local currencies, which impacts the price to
foreign consumers. Many of our subsidiaries operate with their local currency as their functional currency. We currently utilize
forward contracts or other derivative instruments for the amounts we expect to purchase and sell in foreign currencies to mitigate
exposure to fluctuations in the foreign currency exchange rate. As we continue to expand international operations and increase
purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative instruments, as needed, to hedge
our foreign currency exposures. Our hedging strategies depend on our forecasts of sales, expenses, and cash flows, which are
inherently subject to inaccuracies. Therefore, our hedging strategies may be ineffective. Future changes in foreign currency
exchange rates and global credit markets may cause changes in the US dollar value of our purchases or sales and materially affect
our sales, profit margins, or results of operations, when converted to US dollars. In addition, the failure of financial institutions
that underwrite our derivative contracts may negate our efforts to hedge our foreign currency exposures and result in material
foreign currency or contract losses. Foreign currency hedging activities, transactions, or translations could materially impact our
consolidated financial statements.
While our purchases from overseas factories are currently denominated in US dollars, certain operating and manufacturing
costs of the factories are denominated in other currencies. As a result, fluctuations in these currencies versus the US dollar could
impact our purchase prices from the factories in the event that they adjust their selling prices accordingly.
Key business processes and supporting information systems could be interrupted and adversely affect our business.
Our future success and growth depend on the continued operation of our key business processes, including information
systems, global communications, the internet, and key personnel. Hackers and computer viruses have disrupted operations at
many major companies. We may be vulnerable to similar acts of sabotage. Key processes could also be interrupted by a failure
due to weather, natural disaster, power loss, telecommunications failure, failure of our computer systems, sabotage, terrorism, or
similar event such that:
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critical business systems become inoperable or require significant costs to restore;
key personnel are unable to perform their duties, communicate, or access information systems;
significant quantities of merchandise are damaged or destroyed;
we are required to make unanticipated investment in state-of-the-art technologies and security measures;
key wholesale and distributor customers cannot place or receive orders;
E-Commerce customer orders may not be received or fulfilled;
confidential information about our customers may be misappropriated or lost damaging our reputation and
customer relationships;
we are exposed to unanticipated liabilities; or
carriers cannot ship or unload shipments.
These interruptions to key business processes could have a material adverse effect on our business and operations and result
in lost sales and reduced earnings.
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We rely on our information management, internet cloud providers, and other enterprise resource planning systems to operate
our business, prepare forecasts and track our operating results. Our information management and enterprise planning systems will
require modification and refinement as we grow and our business needs change. We may experience difficulties in transitioning
to new or upgraded information technology systems, including loss of data, unreliable data, and decreases in productivity as our
personnel become familiar with the new systems. If we experience a significant system failure or if we are unable to competitively
modify our information management systems to respond to changes in our business needs, then our ability to properly run our
business and report financial results could be adversely affected.
The loss of the services and expertise of any key employee could also harm our business. Our future success depends on
our ability to identify, attract, and retain qualified personnel on a timely basis.
We may not be able to attract or retain highly capable employees who can achieve our strategic goals and objectives.
Our future success depends on our ability to identify, attract, and retain qualified personnel on a timely basis. The loss of
the services and expertise of any key employee could also harm our business through business process interruptions, loss of
institutional knowledge, and recruitment and training costs.
We could be adversely affected by the loss of our warehouses.
The warehousing of our inventory is located at a limited number of self-managed domestic facilities and self-managed and
third party managed international facilities, the loss of any of which could adversely impact our sales, business performance, and
operating results. In addition, we could face a significant disruption in our domestic distribution center operations if our automated
pick module does not perform as anticipated or ceases to function for an extended period, or if our plans for a new distribution
facility are disrupted or delayed.
Our sales in international markets are subject to a variety of laws and political and economic risks that may adversely
impact our sales and results of operations in certain regions, which could increase our costs and adversely impact our operating
results.
Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing
international markets is subject to risks associated with international operations that could adversely affect our sales and results
of operations. These include:
•
•
•
•
•
•
•
•
•
•
•
•
changes in currency exchange rates, which impact the price to international consumers;
ability to move currency out of international markets;
the burdens of complying with a variety of foreign laws and regulations, the interpretation and application of
which are uncertain;
legal costs and penalties related to defending allegations of non-compliance;
unexpected changes in legal and regulatory requirements;
inability to successfully import into a country;
changes in tax laws;
complications due to lack of familiarity with local customs;
difficulties associated with promoting products in unfamiliar cultures;
political instability;
changes in diplomatic and trade relationships; and
general economic fluctuations in specific countries or markets.
International trade and import regulations may impose unexpected duty costs or other non-tariff barriers to markets
while the increasing number of free trade agreements has the potential to stimulate increased competition; security procedures
may cause significant delays.
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Products manufactured overseas and imported into the US and other countries are subject to import duties. While we have
implemented internal measures to comply with applicable customs regulations and to properly calculate the import duties applicable
to imported products, customs authorities may disagree with our claimed tariff treatment for certain products, resulting in
unexpected costs that may not have been factored into the sales price of the products and our forecasted gross margins.
We cannot predict whether future domestic laws, regulations or trade remedy actions or international agreements may impose
additional duties or other restrictions on the importation of products from one or more of our sourcing venues. Such changes could
increase the cost of our products, require us to withdraw from certain restricted markets, or change our business methods and
could make it difficult to obtain products of our customary quality at a competitive price. Meanwhile, the continued negotiation
of bilateral and multilateral free trade agreements by the US and our other market countries with countries other than our principal
sourcing venues may stimulate competition from manufacturers in these other sourcing venues, which now export, or may seek
to export, footwear and accessories to our target markets at preferred rates of duty, which may have an effect on our sales and
operations.
Additionally, the increased threat of terrorist activity and law enforcement responses to this threat have required greater
levels of inspection of imported goods and have caused delays in bringing imported goods to market. Any tightening of security
procedures, for example, in the aftermath of a terrorist incident, could worsen these delays and increase our costs.
Our revolving credit facility provides our lenders with a first-priority lien against substantially all of our assets and
contains financial covenants and other restrictions on our actions.
From time to time, we have financed our liquidity needs in part from borrowing made under a revolving credit facility. Our
credit facility provides for a committed revolving credit line of up to $400,000. Our obligations under the agreement are guaranteed
by our existing and future domestic subsidiaries, other than certain immaterial subsidiaries and foreign subsidiaries, and are secured
by a first priority security interest in substantially all of our assets and our subsidiaries' assets, including a portion of the equity
interests of certain of our domestic and foreign subsidiaries. The agreement for our credit facility also contains a number of
customary financial covenants and restrictions, which may restrict our ability to engage in transactions that would otherwise be
in our best interests. Failure to comply with any of the covenants under the credit agreement could result in a default. A default
under the credit agreement could cause the lenders to accelerate the timing of payments and exercise their lien on essentially all
of our assets, which would have a material adverse effect on our business, operations, financial condition and liquidity. In addition,
because borrowings under the revolving credit facility bear interest at variable interest rates, which we do not anticipate hedging
against, increases in interest rates would increase our cost of borrowing, resulting in a decline in our net income and cash flow.
There were no outstanding borrowings under our committed revolving credit facility as of December 31, 2013. In addition, we
have a credit facility in China (China Credit Facility), which provides for an uncommitted revolving line of credit of up to CNY
60,000, or approximately $10,000. At December 31, 2013, the Company had approximately $10,000 of outstanding borrowings
under the China Credit Facility.
The tax laws applicable to our business are very complex and we may be subject to additional tax liabilities as a result
of audits by various taxing authorities or changes in tax laws applicable to our business.
We conduct our operations through subsidiaries in several countries including the US, the UK, Japan, China, Hong Kong,
Macau, the Netherlands, Bermuda, France, and Canada. As a result, we are subject to tax laws and regulations in each of those
jurisdictions, and to tax treaties between the US and other nations. These tax laws are highly complex, and significant judgment
and specialized expertise is required in evaluating and estimating our worldwide provision for income taxes.
We are subject to audits in each of the various jurisdictions where we conduct business, and any of these jurisdictions may
assess additional taxes against us as a result of their audits. Although we believe our tax estimates are reasonable, and we undertake
to prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any
related litigation, could be materially different from our estimates or from our historical tax provisions and accruals. The results
of an audit or litigation could have a material effect on our operating results or cash flows in the periods for which that determination
is made and may require a restatement of prior financial reports at a material cost. In addition, future period earnings may be
adversely impacted by litigation costs, settlements, penalties, or interest assessments.
We are also subject to constant changes in tax laws, regulations and treaties in and between the nations in which we operate.
Our tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense was
incurred. A change in these tax laws, treaties or regulations, including those in and involving the US, or in the interpretation thereof,
could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings. It is possible that tax
proposals could result in changes to the existing US tax laws that affect us. We are unable to predict whether any proposals will
ultimately be enacted. Any such changes could increase our income tax liability and adversely affect our net income and long term
effective tax rates.
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We face intense competition, including competition from companies with significantly greater resources than ours, and
if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.
The footwear industry is highly competitive, and many new competitors have entered into the marketplace. We believe that
some of these competitors have entered the market place in response to the success of our brands and that such competitors have
targeted or intend to target our products with their product offerings. Additionally, we have experienced increased competition
from established companies. A number of our competitors have significantly greater financial, technological, engineering,
manufacturing, marketing, and distribution resources than we do, as well as greater brand awareness in the footwear and accessory
markets. Our competitors include fashion, athletic and footwear companies, branded apparel companies, and retailers with their
own private labels. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the footwear
industry, compete more effectively on the basis of price and production, and develop new products more quickly. In addition,
access to offshore manufacturing has made it easier for new companies to enter the markets in which we compete, further increasing
competition in the footwear and accessory industries.
Additionally, efforts by our competitors to dispose of their excess inventories may significantly reduce prices that we can
expect to receive for the sale of our competing products and may cause our consumers to shift their purchases away from our
products. If we fail to compete successfully in the future, our sales and earnings will decline, as will the value of our business,
financial condition, and common stock price.
The disruption, expense, and potential liability associated with existing and future litigation.
We are involved in various claims, litigations and other legal and regulatory proceedings and governmental investigations
that arise from time to time in the ordinary course of our business. Due to inherent uncertainties of litigation and other such
proceedings and investigations, we cannot predict with accuracy the ultimate outcome of any such matters. An unfavorable outcome
could have an adverse impact on our business, financial position, and results of operations. The amount of insurance coverage we
maintain to address such matters may be inadequate to cover these or other claims. In addition, any significant litigation,
investigation, or proceeding, regardless of its merits, could divert financial and management resources that would otherwise be
used to benefit our operations or could negatively impact our reputation in the marketplace.
Our common stock price has been volatile, which could result in substantial losses for stockholders.
Our common stock is traded on the NASDAQ Global Select Market. While our average daily trading volume for the 52-
week period ended February 14, 2014 was approximately 1,180,000 shares, we have experienced more limited volume in the past
and may do so in the future. The trading price of our common stock has been and may continue to be volatile. The closing prices
of our common stock, as reported by the NASDAQ Global Select Market, have ranged from $40.35 to $88.56 for the 52-week
period ended February 14, 2014. The trading price of our common stock could be affected by a number of factors, including, but
not limited to the following:
•
•
•
•
•
•
•
•
•
•
•
•
changes in expectations of our future performance, whether realized or perceived;
changes in estimates by securities analysts or failure to meet such estimates;
published research and opinions by securities analysts and other market forecasters;
changes in our credit ratings;
the financial results and liquidity of our customers;
shift of revenue recognition as a result of changes in our distribution model, delivery of merchandise, or
entering into agreements with related parties;
claims brought against us by a regulatory agency or our stockholders;
quarterly fluctuations in our sales, expenses, and financial results;
general equity market conditions and investor sentiment;
economic conditions and consumer confidence;
broad market fluctuations in volume and price;
increasing short sales of our stock;
15
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•
•
•
announcements to repurchase our stock;
the declaration of stock or cash dividends; and
a variety of risk factors, including the ones described elsewhere in this Annual Report on Form 10-K and in
our other periodic reports.
In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of individual companies. Accordingly, the price of our common stock is volatile
and any investment in our stock is subject to risk of loss. These broad market and industry factors and other general macroeconomic
conditions unrelated to our financial performance may also affect our common stock price.
The loss, theft or misuse of sensitive customer or company information, or the failure or interruption of key information
technology and resource planning systems, could materially adversely affect our business.
Our business involves the storage and transmission of sensitive information including the personal information of our
customers, credit card information, employee information, data relating to consumer preferences, and proprietary company financial
and strategic data. The protection of our customer, employee and company data is vitally important to us as the loss, theft or misuse
of such information could lead to significant reputational or competitive harm, litigation and potential liability. As a result, we
believe that our future success and growth depends, in part, on the ability of our key business processes, including our information
and global communication systems, to prevent the theft, loss or misuse of this sensitive information. However, as with many
businesses, we are subject to numerous security and cybersecurity risks which may prevent us from maintaining the privacy of
sensitive information and require us to expend significant resources attempting to secure such information.
As has been well documented in the media, hackers and computer viruses have disrupted operations at many major companies,
and we may be vulnerable to similar security breaches. While we have expended, and will continue to expend, resources to protect
our customers and ourselves against these breaches and to ensure an effective response to a security or cybersecurity breach, we
cannot be certain that we will be able to adequately defend against any such breach. Techniques used to obtain unauthorized access
to or attack our systems are constantly evolving and, in some cases, becoming more sophisticated and harder to detect. Despite
our efforts, we may be unable to anticipate these techniques or implement adequate preventive measures in response, and any
breaches that we do not detect may remain undetected for some period. In addition, measures that we do take to prevent risks of
fraud and security breaches have the potential to harm relations with our customers or suppliers, or decrease activity on our websites
by making them more difficult to use or restricting the ability to meet our customers' expectations in terms of their online shopping
experience. We are also subject to payment card association rules and obligations under our contracts with payment card processors.
Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for associated expenses
and penalties. In addition, if we fail to follow payment card industry security standards, even if no customer information is
compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.
In addition, we rely on certain information technology management and enterprise resource planning systems to prepare
sales forecasts, track our financial and operating results, and otherwise operate our business. As our business grows and we expand
into additional distribution channels and geographic regions, these systems may require expansion or modification. We may
experience difficulties expanding these information technology and resource planning systems or transitioning to new or upgraded
systems, which may result in loss of data or unreliable data, decreases in productivity as our personnel become familiar with the
new systems, and increased costs for the implementation of the new or upgraded systems. If we are unable to modify our information
technology or resource planning systems to respond to changes in our business needs, or if we experience a failure or interruption
in these systems, our ability to accurately forecast sales, report our financial and operating results, or otherwise operate our business
could be adversely affected.
Changes in economic conditions may adversely affect our financial condition and results of operations.
Volatile economic conditions and general changes in the market have affected, and will likely continue to affect consumer
spending generally and the buying habits and preferences of our customers and end-user consumers in particular. A significant
portion of the products we sell, especially those sold under the UGG brand, are considered to be luxury retail products. The purchase
of these products by consumers is largely discretionary, and is therefore highly dependent upon the level of consumer spending,
particularly among affluent consumers. Sales of these products may be adversely affected by a continuation or worsening of recent
economic conditions, increases in consumer debt levels, uncertainties regarding future economic prospects, or a decline in consumer
confidence. During an actual or perceived economic downturn, fewer consumers may shop for our products and those who do
shop may limit the amounts of their purchases. As a result, we could be required to reduce the price we can charge for our products
or increase our marketing and promotional expenses in response to lower than anticipated levels of demand for our products. In
either case, these changes, or other similar changes in our marketing strategy, would reduce our revenues and profit margins and
could have a material adverse effect on our financial condition and results of operations.
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We sell our products through higher-end specialty and department store retailers. These retailer customers may be impacted
by continuing economic uncertainty, reduced customer demand for luxury products, and a significant decrease in available credit.
If reduced consumer spending, lower demand for luxury products, or credit pressures result in financial difficulties or insolvency
for these customers, it would adversely impact our estimated allowances and reserves as well as our overall financial results. Also,
economic factors such as increased transportation costs, inflation, higher costs of labor, and higher insurance and healthcare costs
may increase our cost of sales and our operating expenses, and otherwise adversely affect our financial condition, results of
operations, and cash flows. Our business, access to credit, and trading price of common stock could be materially and adversely
affected if the current economic conditions do not improve or worsen.
Our financial success is influenced by the success of our customers.
Much of our financial success is directly related to the success of our retailers and distributor partners to market and sell
our brands through to the consumer. If a retailer fails to meet annual sales goals, it may be difficult to locate an acceptable substitute
retailer. If a distributor fails to meet annual sales goals, it may be difficult and costly to either locate an acceptable substitute
distributor or convert to a wholesale direct model. If a change becomes necessary, we may experience increased costs, loss of
customers, increased credit risk, and increased inventory risk, as well as substantial disruption to operations and a potential loss
of sales.
We currently do not have long-term contracts with any of our retailers. We do have contracts with our distributors with terms
ranging up to five-years, however, while these contracts may have annual purchase minimums which must be met in order to
retain the distribution rights, the distributors are not otherwise obligated to purchase product. Sales to our retailers and distributors
are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by our wholesale customers.
We use the timing of delivery dates in our wholesale customer orders to forecast our sales and earnings for future periods. If any
of our major customers, including independent distributors, experience a significant downturn in business or fail to remain
committed to our products or brands, then these customers could postpone, reduce, or discontinue purchases from us. As a result,
we could experience a decline in sales or gross margins, write downs of excess inventory, increased discounts or extended credit
terms to our customers, which could have a material adverse effect on our business, results of operations, financial condition, cash
flows, and our common stock price.
Our five largest customers accounted for approximately 23.0% of worldwide net sales in 2013 and 22.8% of worldwide net
sales in 2012. Any loss of a key customer, the financial collapse or bankruptcy of a key customer, or a significant reduction in
purchases from a key customer could have a material adverse effect on our business, results of operations, and financial condition.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters are located in Goleta, California. We have two US distribution centers, both in California, and
international distribution centers in the Netherlands, the UK, China, and Japan. We are in the early stages of opening a new
distribution center in Moreno Valley, California. Our E-Commerce operations are in Arizona, the UK, China, and Japan. We also
have offices in China and Vietnam to oversee the quality and manufacturing standards of our products, an office in Macau to
coordinate logistics, an office in Hong Kong to coordinate sales and marketing efforts, and offices in the UK and the Netherlands
to oversee European operations and administration. As of December 31, 2013, we had 40 retail stores in the US ranging from
approximately 2,000 to 7,000 square feet. Internationally, we had 77 retail stores in the UK, China, Japan, France, Belgium,
Canada, the Netherlands and Hong Kong. We have no manufacturing facilities, as all of our products are manufactured by
independent manufacturers. We also utilize third-party managed distribution centers in certain international countries. In 2011,
we purchased approximately fourteen acres of land to build new corporate headquarters in Goleta, California. The construction
of the headquarters was substantially completed in January 2014, although additional construction continues. Other than our new
corporate headquarters, we lease, rather than own, our facilities from unrelated parties. With the exception of our E-Commerce
and retail store facilities, our facilities are attributable to multiple segments of our business and are not allocated to the reportable
segments. We believe our space is adequate for our current needs and that suitable additional or substitute space will be available
to accommodate the foreseeable expansion of our business and operations. We may utilize additional third-party managed
distribution centers internationally, as we continue converting selective international distributor businesses into wholesale
businesses.
The following table reflects the location, use, segment, and approximate size of our significant physical properties as of
December 31, 2013:
17
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Facility Location
Camarillo, California
Goleta California
Description
Warehouse Facility
Corporate Offices
Business Segment
Unallocated
Unallocated
Approximate Square Footage
723,000
91,000
Item 3. Legal Proceedings.
On May 31, 2012, a purported shareholder class action lawsuit was filed in the United States District Court for the Central
District of California against the Company and certain of its officers. On August 1, 2012, a similar purported shareholder class
action lawsuit was filed in the United States District Court for the District of Delaware against the Company and certain of its
officers. These actions alleged violations of the federal securities laws and were purportedly brought on behalf of purchasers of
the Company's publicly traded securities between October 27, 2011 and April 26, 2012. Both cases were dismissed with prejudice,
and no appeal was taken from either dismissal.
On July 17, 2012 and July 26, 2012, two purported shareholder derivative lawsuits were filed in the California Superior
Court for the County of Santa Barbara against our Board of Directors and several of our officers. The Company is named as
nominal defendant. Plaintiffs in the state derivative actions allege, among other things, that the Board allowed certain officers to
make allegedly false and misleading statements. The complaints include claims for breach of fiduciary duties, insider trading,
unjust enrichment, and violations of the California Corporations Code. The complaints seek compensatory damages, disgorgement,
and other relief. The actions were consolidated on September 13, 2012, and the Plaintiffs filed a consolidated complaint on
November 20, 2012. On March 21, 2013, the Company’s demurrer to the consolidated complaint was sustained with leave to
amend. The Plaintiffs did not timely amend the consolidated complaint and a final judgment and order of dismissal with prejudice
was entered on May 6, 2013. The Plaintiffs filed an appeal on May 22, 2013, which is still pending.
As part of our policing program for our intellectual property rights, from time to time, we file lawsuits in the US and abroad
alleging acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, trademark
dilution, and state or foreign law claims. At any given point in time, we may have a number of such actions pending. These actions
often result in seizure of counterfeit merchandise or out of court settlements with defendants or both. From time to time, we are
subject to claims where plaintiffs will raise, or defendants will raise, either as affirmative defenses or as counterclaims, the invalidity
or unenforceability of certain of our intellectual properties, including our trademark registration for UGG Australia. We also are
aware of many instances throughout the world in which a third party is using our UGG trademarks within its internet domain
name, and we have discovered and are investigating several manufacturers and distributors of counterfeit Teva, UGG, and Sanuk
products.
Although we are subject to other routine legal proceedings from time to time in the ordinary course of business, including
employment, intellectual property and product liability claims, we believe that the outcome of all pending legal proceedings in
the aggregate will not have a material adverse effect on our business or consolidated financial statements.
Item 4. Mine Safety Disclosures.
Not applicable.
18
Table of Contents
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the NASDAQ Global Select Market under the symbol "DECK."
The following table shows the range of low and high closing sale prices per share of our common stock as reported by the
NASDAQ Global Select Market for the periods indicated.
Year ended December 31, 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year ended December 31, 2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Common Stock
Price Per Share
Low
High
$
$
$
$
$
$
$
$
36.12
47.35
51.07
57.84
62.90
43.25
34.99
28.63
$
$
$
$
$
$
$
$
55.69
59.69
66.09
86.09
90.21
69.46
51.21
42.76
As of February 14, 2014, we had approximately 58 stockholders of record based upon the records of our transfer agent,
which does not include beneficial owners of our common stock whose shares are held in the names of various securities brokers,
dealers and registered clearing agencies.
We did not sell any equity securities during the year ended December 31, 2013 that were not registered under the Securities
Act of 1933, as amended.
STOCK PERFORMANCE GRAPH
Below is a graph comparing the percentage change in the cumulative total stockholder return on the Company's common
stock against the cumulative total return of the NASDAQ Market Index, a peer group index and the S&P 500 Apparel, Accessories
& Luxury Goods Index for the five-year period commencing December 31, 2008 and ending December 31, 2013. The data
represented below assumes one hundred dollars invested in each of the Company's common stock, the NASDAQ Market Index,
the peer group index and the S&P 500 Apparel, Accessories & Luxury Goods Index on January 1, 2009.
Beginning in 2013, we are using the S&P 500 Apparel, Accessories & Luxury Goods Index as our industry index rather
than the peer group index that we used in prior years. We believe that the S&P 500 Apparel, Accessories & Luxury Goods
Index provides a more representative average of the market performance of the companies in our industry versus the peer group
index. For this annual report, we have included both the peer group index and the S&P 500 Apparel, Accessories & Luxury
Goods Index.
The stock performance graph shall not be deemed incorporated by reference by any general statement incorporating by
reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended, or under the Securities
Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under either of such Acts. Total return assumes reinvestment of dividends; we have paid
no dividends on our common stock and have not done so since our inception.
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COMPARISON OF CUMULATIVE TOTAL RETURN
ASSUMES $100 INVESTED ON JAN. 01, 2009
ASSUMES DIVIDEND REINVESTED
Deckers Outdoor Corporation
NASDAQ Market Index#
S&P 500 Apparel, Accessories & Luxury Goods Index
Peer Group Index*
December 31,
2008
2009
2010
2011
2012
2013
$ 100.0
$ 127.4
$ 299.6
$ 283.9
$ 151.3
$ 317.3
100.0
100.0
100.0
145.3
162.7
186.7
171.7
229.8
242.4
170.3
285.7
238.0
200.6
293.1
279.6
281.1
366.2
406.3
#
*
The NASDAQ Market Index is the same NASDAQ Index used in our 2012 Form 10-K.
The Peer Group Index consists of Steven Madden, Ltd.; Wolverine World Wide, Inc.; Crocs, Inc.;
and Skechers USA, Inc. In our 2012 Form 10-K the peer group also included K-Swiss Inc.,
LaCrosse Footwear, Inc. and Kenneth Cole Productions which are not included in the current
presentation because K-Swiss Inc. was acquired in January 2013 and LaCrosse Footwear, Inc. and
Kenneth Cole Productions became private companies during 2012.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock since our inception. We currently do not anticipate
declaring or paying any cash dividends in the foreseeable future. Our current credit agreement allows us to make cash dividends,
provided that no event of default has occurred or is continuing and provided that we have a minimum amount of cash plus unused
credit of $150,000 during the quarters ended March 31, June 30 and December 31, and cash plus unused credit of $75,000 during
the quarter ended September 30.
STOCK REPURCHASE PROGRAM
In February 2012, our Board of Directors approved a stock repurchase program to repurchase up to $100,000 of our common
stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and
20
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other factors. The program did not obligate us to acquire any particular amount of common stock and the program could have
been suspended at any time at our discretion. As of June 30, 2012, the Company repurchased approximately 1,749,000 shares
under this program, for approximately $100,000, or an average price of $57.16. As of June 30, 2012, the Company had repurchased
the full amount authorized under this program. The purchases made under this program were funded from available working
capital.
In June 2012, the Company approved a new stock repurchase program to repurchase up to $200,000 of the Company's
common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements,
and other factors. The program does not obligate the Company to acquire any particular amount of common stock and the program
may be suspended at any time at the Company's discretion. As of December 31, 2013, the Company had repurchased approximately
2,765,000 shares under this program, for approximately $120,700, or an average price of $43.66, leaving the remaining approved
amount at $79,300. There were no stock repurchases during the year ended December 31, 2013.
Item 6. Selected Financial Data.
We derived the following selected consolidated financial data from our consolidated financial statements. Historical results
are not necessarily indicative of the results to be expected in the future. You should read the following consolidated financial
information together with our consolidated financial statements and the related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained in Part II, Item 7 of this annual report.
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Statements of operations data
Net sales:
UGG wholesale
Teva wholesale
Sanuk wholesale
Other brands wholesale
E-Commerce
Retail stores
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Other expense (income), net
Income before income taxes
Income taxes
Net income
Net income attributable to noncontrolling
interest
Net income attributable to Deckers Outdoor
Corporation
Net income per share attributable to Deckers
Outdoor Corporation common stockholders:
Years ended December 31,
2013
2012
2011
2010
2009
(In thousands, except per share data)
$ 818,377
$ 819,256
$ 915,203
$ 663,854
$ 566,964
109,334
108,591
118,742
96,207
71,952
94,420
38,276
169,534
326,677
89,804
20,194
130,592
245,961
26,039
21,801
106,498
189,000
—
23,476
91,808
125,644
1,556,618
1,414,398
1,377,283
1,000,989
820,135
736,483
528,586
207,897
2,340
205,557
59,868
145,689
782,244
632,154
445,206
186,948
2,830
184,118
55,104
129,014
698,288
678,995
394,157
284,838
(424)
285,262
83,404
201,858
498,051
502,938
253,850
249,088
(1,021)
250,109
89,732
160,377
—
19,644
75,666
78,951
813,177
442,087
371,090
189,843
181,247
(1,976)
183,223
66,304
116,919
—
(148)
(2,806)
(2,142)
(133)
$ 145,689
$ 128,866
$ 199,052
$ 158,235
$ 116,786
Basic
Diluted
$
$
4.23
4.18
$
$
3.49
3.45
$
$
5.16
5.07
$
$
4.10
4.03
$
$
2.99
2.96
Weighted-average common shares outstanding:
Basic
Diluted
34,473
34,829
36,879
37,334
38,605
39,265
38,615
39,292
39,024
39,393
Balance sheet data
Cash and cash equivalents
Working capital
Total assets
Long-term liabilities
2013
2012
2011
2010
2009
As of December 31,
(In thousands)
$ 237,125
508,786
1,259,729
51,092
$ 110,247
424,569
1,068,064
62,246
$ 263,606
585,823
1,146,196
72,687
$ 445,226
570,869
808,994
8,456
$ 315,862
420,117
599,043
6,269
Total Deckers Outdoor Corporation
stockholders' equity
888,119
738,801
835,936
652,987
491,358
22
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
References to "Deckers," "we," "us," "our," or similar terms refer to Deckers Outdoor Corporation together with its
consolidated subsidiaries. Unless otherwise specifically indicated, all amounts herein are expressed in thousands, except for share
quantity, per share data, and selling prices. The following discussion of our financial condition and results of operations should
be read together with our consolidated financial statements and the accompanying notes to those statements included elsewhere
in this annual report.
Overview
We are a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed
for both everyday casual lifestyle use and high performance activities. We market our products primarily under three
proprietary brands:
•
•
•
UGG®: Premier brand in luxurious comfort footwear, handbags, apparel, and cold weather accessories;
Teva®: Born from the outdoors, active lifestyle footwear for the adventurous spirit; and
Sanuk®: Innovative action sport footwear brand rooted in the surf community.
Our financial condition and results of operations include the operations of Sanuk beginning July 1, 2011 and Hoka One
One® (Hoka) beginning September 27, 2012, the acquisition dates. In addition to our primary brands, our other brands include
TSUBO®, a line of mid and high-end dress and dress casual footwear that incorporates style, function and maximum comfort;
Ahnu®, a line of outdoor performance and lifestyle footwear; MOZO®, a line of footwear crafted for culinary professionals that
redefines the industry dress code; Hoka, a line of footwear for all capacities of runner designed with a unique performance midsole
geometry, oversized midsole volume and active foot frame; and Simple®, a line for which we ceased distribution effective
December 31, 2011.
We sell our brands through higher-end domestic retailers and international distributors and retailers, as well as directly to
our end-user consumers through our E-Commerce business and our retail stores. Independent third parties manufacture all of our
products.
Our business has been impacted by, what we believe are, several important trends and we expect that it will continue to be
impacted:
•
•
•
•
•
•
•
Sales of our products are highly seasonal and are sensitive to weather conditions, which are beyond our
control. Even though we are creating more year-round styles for our brands, the effect of favorable or
unfavorable weather on sales can be significant.
Continuing uncertainty surrounding US and global economic conditions has adversely impacted businesses
worldwide. Some of our customers have been, and more may be, adversely affected, which in turn has, and
may continue to, adversely impact our financial results.
The sheepskin used in certain UGG products is in high demand and limited supply, and there have been
significant fluctuations in the price of sheepskin as the demand from competitors for this material has changed.
However, our sheepskin costs decreased in 2013 compared to 2012 due to lower pricing negotiated for our Fall
2013 product costs, as well as the use of UGGpure, real wool woven into a durable backing used as an
alternative to table grade sheepskin, in select linings and foot beds.
The markets for casual, outdoor, and athletic footwear have grown significantly during the last decade. We
believe this growth is a result of the trend toward casual dress in the workplace, increasingly active outdoor
lifestyles, and a growing emphasis on comfort.
Consumers are more often seeking footwear designed to address a broader array of activities with the same
quality, comfort, and high performance attributes they have come to expect from traditional athletic footwear.
Consumers have narrowed their footwear product breadth, focusing on brands with a rich heritage and
authenticity as market category creators and leaders.
Consumers have become increasingly focused on luxury and comfort, seeking out products and brands that are
fashionable while still comfortable.
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•
•
There is an emerging sustainable lifestyle movement happening all around the world, and consumers are
demanding that brands and companies become more environmentally responsible.
Consumers are following a recent trend of buy now, wear now. This trend entails the consumer waiting to
purchase shoes until they will actually wear them, contrasted with a tendency in the past to purchase shoes
they did not plan to wear until later.
By emphasizing our brands' images and our focus on comfort, performance and authenticity, we believe we can continue to
maintain a loyal consumer following that is less susceptible to fluctuations caused by changing fashions and changes in consumer
preferences. We have also responded to consumer focus on sustainability by establishing objectives, policies, and procedures to
help us drive key sustainability initiatives around human rights, environmental sustainability, and community affairs.
We have experienced significant cost fluctuations, most over the past several years, notably with respect to sheepskin. We
attempt to cover the full amount of our sheepskin purchases under fixed price contracts. We continually strive to contain our
material costs through increasing the mix of non-sheepskin products, exploring new footwear materials and new production
technologies, and utilizing lower cost production, including in the US from where we began sourcing products in 2012. Also, refer
to Item 7A. Quantitative and Qualitative Disclosures about Market Risk for further discussion of our commodity price risk.
Below is an overview of the various components of our business, including some key factors that affect each business and
some of our strategies for growing each business.
UGG Brand Overview
The UGG brand is one of the most iconic and recognized brands in the global footwear industry and highlights the Company’s
successful track record of building niche brands into lifestyle market leaders. With loyal consumers around the world the UGG
brand has proven to be a highly resilient line of premium footwear, with an expanding product offering and a growing global
audience that attracts women, men and children. UGG brand footwear continually earns media exposure from numerous outlets
both organically and from strategic public relations efforts, including an increasing amount of exposure internationally. The UGG
brand has invested in creating holistic, impactful integrated campaigns across paid, earned and owned media channels, including
digital, social, out-of-home (OOH) and print, which are globally scalable, contributing to broader public awareness of the brand.
We believe the increased global media focus and demand for UGG products has been driven by the following:
•
•
•
•
•
•
•
•
•
•
High consumer brand loyalty, due to over 35 years of delivering quality and luxuriously comfortable UGG
footwear;
Continued innovation of new product categories and styles, including those beyond footwear such as
loungewear, handbags, cold-weather accessories and a new home offering;
A more robust footwear offering, including transitional collections to better bridge the gap between late
summer and the start of the holiday season;
Expanded slipper category showing incremental growth with added styles for both women and men;
Growing Direct-to-Consumer platform and enhanced omni-channel capabilities that enable us to increasingly
engage existing and prospective consumers in a more connected environment to introduce our evolving
product lines;
Product customization with our UGG by You program allows for deeper connection with brand and products;
Focus on mobile consumers with responsive site design providing shoppers access to the brand from their
mobile device;
Year-round holistic paid advertising approach for women, men and kids in targeted high-end print, OOH,
digital and social media;
Holiday focused advertising campaign to drive important seasonal sales;
Continued creation of targeted UGG for Men campaigns featuring brand ambassador Tom Brady;
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•
•
•
•
•
•
•
•
Targeted E-Commerce based marketing to existing and prospective consumers through integrated outreach
including email blasts, interactive site design and search engine optimization based content;
Successful targeting of higher-end distribution;
Expanded product assortments from existing accounts;
Adoption by high-profile celebrities as a favored footwear brand;
Continued media attention that has enabled us to introduce the brand to consumers much faster than we would
have otherwise been able to;
Increased exposure to the brand driven by our concept stores that showcase all of our product offerings;
Continued expansion of worldwide retail through new UGG stores; and
Continued geographic expansion through our UGG concept and outlet stores globally.
We believe the luxurious comfort of UGG products will continue to drive long-term consumer demand. Recognizing that
there is a significant fashion element to UGG footwear and that footwear fashions fluctuate, our strategy seeks to prolong the
longevity of the brand by offering a broader product line suitable for wear in a variety of climates and occasions and by presenting
UGG as a global, premium lifestyle brand and limiting distribution to selected higher-end retailers. As part of this strategy, we
have increased our product offering, including a growing transitional collections and spring line, an expanded men’s line, a fall
line that consists of a range of luxurious collections for both genders, an expanded kids’ line, as well as home, handbags, cold
weather accessories, and apparel. We have also recently expanded our marketing and promotional efforts, which we believe has
contributed, and will continue to contribute, to our growth. We believe that the evolution of the UGG brand and our strategy of
product diversification will also help decrease our reliance on sheepskin, which is in high demand and subject to price volatility.
Nonetheless, we cannot assure investors that our efforts will continue to provide UGG brand growth.
Teva Brand Overview
For 30 years Teva has fueled the adventure lifestyle around the globe. Teva pioneered the sport sandal category in 1984 and
today our mission remains steadfast: to enable spontaneous adventure with versatile, utility-centered footwear for active consumers.
By designing simple, functional footwear, Teva is driving growth by extending our established global platforms in sandals and
water-related products and by leveraging our authenticity with active lifestyle consumers.
We believe that Teva’s Originals product line will be a key platform in driving market penetration for the brand. In the US,
we believe the line will continue to bolster our leadership position in sandals and grow our market share through casual category
extensions. Globally, we expect that the Originals line will establish Teva’s position across the warm-weather climates of Asia
and Latin America, setting the foundation to support core lifestyle collections within these regions.
Within the US, Teva maintains its position as a market leader within the sport sandal category. Growth opportunities within
our current core channels of distribution - outdoor specialty and sporting goods - will be pursued through deepening penetration
with evolved and expanded product offerings. Teva plans to support its channel expansion beyond present distribution with focused
investments in targeted, solution-driven marketing programs in order to attract new lifestyle consumers to the brand. However,
we cannot assure investors that these efforts will be successful.
Sanuk Brand Overview
The Sanuk brand was founded 15 years ago, and from its origins in the Southern California surf culture, has grown into a
global brand with an expanding consumer audience and growing presence in the casual canvas and sandals categories. The Sanuk
brand’s use of unexpected materials and unconventional constructions combined with its fun and funky branding has contributed
to the brand’s identity and growth since its inception, and led to successful products such as the Yoga MatTM sandal collection and
the patented SIDEWALK SURFERS®. We believe that the Sanuk brand provides substantial growth opportunities, especially
within the casual canvas markets, supporting our strategic initiatives spanning new product launches, and Direct-to-Consumer
channel development and global expansion. However, we cannot assure investors that our efforts to grow the brand will be
successful.
Other Brands Overview
Our other brands consist of TSUBO, Ahnu, MOZO, and Hoka. Our other brands are all sold through most of our distribution
channels, with the majority sold through wholesale channels.
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TSUBO, meaning pressure point in Japanese, is marketed as high-end casual footwear for men and women. The brand is
the synthesis of ergonomics and style, with a full line of sport and dress casuals, boots, sandals and heels constructed to provide
consumers with contemporary footwear that incorporates style, function, and maximum comfort. We are positioning the TSUBO
brand as the premium footwear solution for people in the city. We are continuing to create products to address consumers' unique
needs of all-day comfort, innovative style, and superior quality.
The Ahnu brand is an outdoor performance and lifestyle footwear brand for men and women. The name Ahnu is derived
from the Celtic goddess representing the balance of well-being and prosperity. The brand focuses primarily on women consumers
offering style and comfort for active women on both trails and pavement. The product goal is to achieve uncompromising footwear
performance by developing footwear that will provide the appropriate balance of traction, grip, flexibility, cushioning, and durability
for a variety of outdoor activities — whether on trails, beaches, or sidewalks.
MOZO creates footwear for culinary professionals that redefines the industry dress code. Crafted for the most discerning
of palates, MOZO shoes blend function, performance, and style. Each product is lightweight, durable, comfortable, and easy to
clean. MOZO footwear is designed for casual, every day wear and built to challenge any culinary environment so you never have
to compromise your personal style to perform at your very best. MOZO shoes are sold through food service equipment and supply
distributors and online at Zappos.com and Amazon.com. Beginning in 2014, we expect that MOZO products will be available at
footwear retailers nationwide.
The Hoka brand focuses on designing shoes with a unique performance midsole geometry, oversized midsole volume and
an active foot frame. Runners from around the world are experiencing the benefits of Hoka brand products. These shoes are used
by marathon runners, and even ultra-marathon runners as well as every day runners to enjoy running.
We expect to leverage our design, marketing, and distribution capabilities to grow our other brands over the next several
years, consistent with our mission to build niche brands into global market leaders. Nevertheless, we cannot assure investors that
our efforts to grow these brands will be successful.
E-Commerce Overview
Our E-Commerce business, which sells all of our brands except Mozo, allows us to build our relationship with the consumer.
E-Commerce enables us to meet the growing demand for our products, sell the products at retail prices, and provide significant
incremental operating income. The E-Commerce business provides us an opportunity to communicate to the consumer with a
consistent brand message that is in line with our brands' promises, drives awareness of key brand initiatives, and offers targeted
information to specific consumer segments. Our websites also drive wholesale and distributor sales through brand awareness and
directing consumers to retailers that carry our brands, including our own retail stores. In recent years, our E-Commerce business
has had significant revenue growth, much of which occurred as the UGG brand gained popularity and as consumers continued to
increase internet usage for footwear and other purchases.
Managing our E-Commerce business requires us to focus on the latest trends and techniques for web design and marketing,
to generate internet traffic to our websites, to effectively convert website visits into orders, and to maximize average order sizes.
We plan to continue to grow our E-Commerce business through improved website features and performance, increased marketing,
expansion into more international markets, and utilization of mobile and tablet technology. Nevertheless, we cannot assure investors
that revenue from our E-Commerce business will continue to grow.
Retail Stores Overview
Our retail stores are predominantly UGG concept stores and UGG outlet stores. In 2013 we expanded our fleet and opened
our first Sanuk (two concept, one outlet) and Teva (one outlet) stores. Our retail stores enable us to directly impact our customers'
experience, meet the growing demand for these products, sell the products at retail prices and generate strong annual operating
income. In addition, our UGG concept stores allow us to showcase our entire product line including footwear, accessories,
handbags, home, outerwear, lounge and retail exclusive items; whereas, a wholesale account may not represent all of these
categories. Through our outlet stores, we sell some of our discontinued styles from prior seasons, plus products made specifically
for the outlet stores.
As of December 31, 2013, we had a total of 117 retail stores worldwide. These stores are company-owned and operated
and include our China stores, which prior to April 2, 2012 were owned and operated with our joint venture partner. On April 2,
2012, we purchased the remaining interest in our Chinese joint venture. During 2014, we plan to open additional retail stores
worldwide.
Seasonality
Our business is seasonal, with the highest percentage of UGG brand net sales occurring in the quarters ending September
30 and December 31 and the highest percentage of Teva and Sanuk brand net sales occurring in the quarters ending March 31 and
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June 30 of each year. Our financial results include the Sanuk brand beginning July 1, 2011. Our other brands do not have a
significant seasonal impact.
Subsequent to December 31, 2013, our Board of Directors approved a change in the Company's fiscal year end from December
31 to March 31. The change is intended to better align our planning, financial and reporting functions with the seasonality of our
business. Under the applicable rules of the Securities and Exchange Commission, the Company intends to file a transition report
on Form 10-QT for the quarter ending March 31, 2014.
Net sales
Income (loss) from operations
Net sales
Income (loss) from operations
2013
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
263,760
2,652
$
$
170,085
$
(42,751) $
386,725
46,497
$
$
736,048
201,499
2012
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
246,306
11,933
$
$
174,436
$
(28,708) $
376,392
59,609
$
$
617,264
144,114
$
$
$
$
With the level of UGG brand net sales over the past several years, net sales in the last half of the calendar year have exceeded
net sales for the first half of the calendar year. Given our expectations for our brands, we currently expect this trend to continue.
Nonetheless, actual results could differ materially depending upon consumer preferences, availability of product, competition,
and our wholesale and distributor customers continuing to carry and promote our various product lines, among other risks and
uncertainties. See Part I, Item 1A, "Risk Factors."
Results of Operations
Year ended December 31, 2013 Compared to Year ended December 31, 2012
The following table summarizes our results of operations:
2013
2012
Change
Years ended December 31,
Net sales
Cost of sales
Gross profit
Selling, general and administrative
expenses
Income from operations
Other expense, net
Income before income taxes
Income taxes
Net income
Net income attributable to the
noncontrolling interest
Net income attributable to Deckers
Outdoor Corporation
Amount
$ 1,556,618
820,135
736,483
528,586
207,897
2,340
205,557
59,868
145,689
—
Amount
%
100.0% $ 1,414,398
782,244
632,154
52.7
47.3
33.9
13.4
0.2
13.2
3.8
9.4
—
445,206
186,948
2,830
184,118
55,104
129,014
(148)
%
100.0% $
55.3
44.7
31.5
13.2
0.2
13.0
3.9
9.1
—
Amount
142,220
37,891
104,329
83,380
20,949
(490)
21,439
4,764
16,675
%
10.1%
4.8
16.5
18.7
11.2
(17.3)
11.6
8.6
12.9
148
*
$
145,689
9.4% $
128,866
9.1% $
16,823
13.1%
* Calculation of percentage change is not meaningful.
Overview. The increase in net sales was primarily due to increased UGG brand sales through our retail stores and E-
Commerce sites. In addition, net sales increased from our other brands, Sanuk brand and Teva brand sales through our wholesale
channel, and increased Sanuk brand sales through our E-Commerce sites and retail stores. The increase in income from operations
resulted from increased sales and gross margin, partially offset by higher selling, general and administrative expenses (SG&A).
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Table of Contents
Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel:
Net sales by location:
US
International
Total
Net sales by brand and distribution
channel:
UGG:
Wholesale
E-Commerce
Retail stores
Total
Teva:
Wholesale
E-Commerce
Retail stores
Total
Sanuk:
Wholesale
E-Commerce
Retail stores
Total
Other brands:
Wholesale
E-Commerce
Retail stores
Total
Total
Total E-Commerce
Total Retail stores
Years Ended December 31,
Change
2013
2012
Amount
%
$ 1,042,274
514,344
$ 1,556,618
$
972,987
441,411
$ 1,414,398
$
69,287
72,933
$ 142,220
7.1 %
16.5
10.1 %
$
818,377
155,635
324,868
1,298,880
$
819,256
118,886
245,397
1,183,539
$
(879)
36,749
79,471
115,341
109,334
6,627
426
116,387
94,420
6,077
1,183
101,680
108,591
6,578
347
115,516
89,804
4,172
20
93,996
743
49
79
871
4,616
1,905
1,163
7,684
38,276
1,195
200
39,671
$ 1,556,618
169,534
$
326,677
$
20,194
956
197
21,347
$ 1,414,398
130,592
$
245,961
$
18,082
239
3
18,324
$ 142,220
38,942
$
80,716
$
(0.1)%
30.9
32.4
9.7
0.7
0.7
22.8
0.8
5.1
45.7
5,815.0
8.2
89.5
25.0
1.5
85.8
10.1 %
29.8 %
32.8 %
In order to provide a framework for assessing how our underlying businesses performed, excluding the effect of foreign
currency rate fluctuations, we provide certain financial information on a “constant currency basis”, which is in addition to the
actual financial information presented. In order to calculate our constant currency information, we translate the current period
financial information using the foreign currency exchange rates that were in effect during the previous comparable period. However,
constant currency measures should not be considered in isolation or as an alternative to U.S. dollar measures that reflect current
period exchange rates, or to other financial measures calculated and presented in accordance with U.S. generally accepted
accounting principles.
The increase in net sales was primarily due to increased UGG brand sales through our retail stores and E-Commerce sites.
In addition, net sales increased from our other brands, Sanuk brand and Teva brand sales through our wholesale channel and
increased Sanuk brand sales through our E-Commerce sites and retail stores. On a constant currency basis, net sales increased by
11.1% to approximately $1,571,000. We experienced an increase in the number of pairs sold in all segments. This resulted in a
10.1% overall increase in the volume of footwear sold for all brands and channels to approximately 26.1 million pairs for the year
ended December 31, 2013 compared to approximately 23.7 million pairs for 2012. Our weighted-average wholesale selling price
per pair decreased to $46.87 for the year ended December 31, 2013 from $49.17 for 2012. The decreased average selling price
was primarily due to our UGG, Teva and Sanuk wholesale segments, partially offset by an increase in the average selling price in
our other brands wholesale segment. Our overall weighted-average selling price per pair across all channels decreased to $59.63
for the year ended December 31, 2013 from $60.12 for 2012. The decrease in overall average selling price per pair was primarily
28
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due to the decreased weighted-average wholesale selling price per pair, partially offset by the increased mix of Direct-to-Consumer
sales which carry higher price points.
Wholesale net sales of our UGG brand decreased primarily due to a decrease in the weighted-average wholesale selling
price per pair as well as the negative impact of foreign currency exchange rate fluctuations, partially offset by an increase in the
volume of pairs sold. On a constant currency basis, wholesale sales of our UGG brand increased by 0.6% to approximately
$824,000. The decrease in average selling price was primarily due to increased closeout sales at a lower price, as well as the
negative impact of foreign currency exchange rate fluctuations. For UGG wholesale net sales, the decrease in average selling
price had an estimated impact of approximately $28,000, including approximately $6,000 related to the negative impact of foreign
currency exchange rate fluctuations, partially offset by an increase in volume of approximately $27,000.
Wholesale net sales of our Teva brand increased primarily due to an increase in the volume of pairs sold, partially offset by
a decrease in the weighted-average wholesale selling price per pair. The decrease in average selling price was largely due to a
higher proportion of the sales coming from sandals which carry lower average selling prices. For Teva wholesale net sales, the
increase in volume had an estimated impact of approximately $4,000 and the decrease in average selling price had an estimated
impact of approximately $3,000.
Wholesale net sales of our Sanuk brand increased primarily due to an increase in the volume of pairs sold, partially offset
by a decrease in the weighted-average wholesale selling price per pair. The decrease in average selling price was primarily due
to an increased impact of closeout sales. For Sanuk wholesale net sales, the increase in volume had an estimated impact of
approximately $10,000 and the decrease in average selling price had an estimated impact of approximately $5,000.
Wholesale net sales of our other brands increased due to an increase in the weighted-average wholesale selling price per
pair, as well as an increase in the volume of pairs sold. The increase in average selling price was primarily due to the addition
of the Hoka brand, which carries higher average selling prices than the other brands included in this segment. The increase in
volume of pairs sold was primarily due to the addition of the Hoka brand. Hoka sales are included from our acquisition date of
September 27, 2012 and, therefore, comparable sales amounts are not included in the sales for the year ended December 31,
2012. Excluding the Hoka brand, our other brands’ wholesale net sales increased by approximately $4,000 due to an increase
in sales of approximately $5,000 from an increase in the volume of pairs sold, partially offset by a decrease in sales of
approximately $1,000 due to a decrease in the average selling price. The decrease in average selling price was primarily due to
the increased impact of closeout sales.
Net sales of our E-Commerce business increased due to an increase in the volume of pairs sold primarily attributable to the
UGG brand. For E-Commerce net sales, the increase in volume had an impact of approximately $39,000. The change in average
selling price had no material impact on net sales.
Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of 40 new
stores opened since December 31, 2012, partially offset by the negative impact of foreign currency exchange rate fluctuations.
On a constant currency basis, net sales of our retail store business increased by 36.4% to approximately $335,000. Over half of
the new stores were in Asia, primarily in China and Japan, with the remaining new stores in the US and Europe. Same store sales
for the 52 weeks ending December 29, 2013 increased 2.8% compared to the same period in 2012. For retail same store sales,
we experienced an increase in volume of approximately $4,500 partially offset by a decrease in weighted-average selling price of
approximately $500. As we continue to increase the number of retail stores, each new store will have less significant impact on
our growth rate.
International sales, which are included in the segment sales above, for all of our products combined increased by 16.5% for
the year ended December 31, 2013 as compared to the year ended December 31, 2012, partially offset by the negative impact of
foreign currency exchange rate fluctuations. On a constant currency basis, international sales increased by 19.9% to approximately
$529,000. International sales represented 33.0% and 31.2% of worldwide net sales for the year ended December 31, 2013 and
2012, respectively. The increase in international sales as a percentage of worldwide net sales was largely due to the continued
growth in our UGG brand's international retail and E-Commerce business of approximately $65,000, as well as increased sales to
our distributors throughout Asia and Latin America of approximately $8,000 and wholesale customers in France of approximately
$7,000, partially offset by decreased sales to our distributors in Canada and Europe of approximately $11,000.
Foreign income before income taxes was $60,851 and $51,409, and worldwide income before income taxes was $205,557
and $184,118 for the year ended December 31, 2013 and 2012, respectively. Foreign income before income taxes represented
29.6% and 27.9% of worldwide income before income taxes for the year ended December 31, 2013 and 2012, respectively. The
increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to
a 16.5% international sales growth rate compared to a 7.1% US sales growth rate, as well as an increase in gross margin earned
on foreign sales. These increases were primarily related to the increase in international retail and E-Commerce sales which
generally carry higher margins than wholesale sales.
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Table of Contents
We expect that our foreign income before income taxes will continue to fluctuate from year to year based on several factors,
including our expansion initiatives. In addition, we believe that the continued evolution and geographic scope of the UGG brand
and our continuing strategy of enhancing product diversification will contribute to growth in our international retail and E-
Commerce business in future years.
Gross Profit. As a percentage of net sales, gross margin increased compared to the same period in 2012. Gross profit
increased by approximately 1.5 percentage points due to reduced sheepskin costs and increased use of UGGpure, real wool woven
into a durable backing used as an alternative to table grade sheepskin in select linings and foot beds, as well as an increased mix
of retail and E-Commerce sales, which generally carry higher margins than our wholesale segments, of approximately 1.2 percentage
points. These increases were partially offset by the negative impact of foreign currency exchange rate fluctuations of approximately
30 basis points. The change in sales between our wholesale customers and distributors is immaterial to gross margin. Our gross
margins fluctuate based on several factors, and we expect our gross margin to increase for the full year 2014 compared to 2013,
primarily due to realizing a full year of reduced sheepskin prices, the increased use of UGGpure and an increase in the proportion
of direct-to-consumer (DTC) sales which generally carry higher margins.
Selling, General and Administrative Expenses. SG&A increased primarily from:
•
•
•
•
•
increased retail costs of approximately $53,000 largely related to 40 new retail stores that were not open as of
December 31, 2012 and related corporate infrastructure;
increased recognition of performance-based compensation of approximately $17,000;
increased E-Commerce expenses of approximately $13,000 largely related to increased marketing and
advertising;
increased expenses of approximately $9,000 for the Hoka brand which we acquired on September 27, 2012;
partially offset by
decreased expense related to the fair value of the Sanuk contingent consideration liability of approximately
$8,000 primarily due to changes made during 2012 to the brand's forecast of sales and gross profit through
2015, which increased the expense in 2012 without a comparable increase in 2013.
Performance-Based Compensation
As noted above, the recognition of performance-based compensation increased by approximately $17,000 over the prior
year period. As of December 31, 2013, the target level of the performance objectives relating to our 2013 performance-based
cash awards was achieved, and we have recognized the expense accordingly. In contrast, as of December 31, 2012, we did not
achieve the same level of the performance objectives relating to our 2012 performance-based cash awards and we recognized
expense for those 2012 awards accordingly at that time.
At the beginning of each year, our Compensation Committee reviews our operating results from the prior fiscal year, as
well as the financial and strategic plan for the next fiscal year and for subsequent years. The Committee then establishes
specific annual Company financial goals and specific strategic goals for each executive. Performance-based cash
compensation awards for the fiscal year ended December 31, 2012 were only partially earned, and performance-based cash
compensation awards for the fiscal year ended December 31, 2013 were earned at higher levels, based on our achievement of
certain targets for annual earnings before interest, taxes, depreciation and amortization (EBITDA), as well as achievement of
pre-determined individual financial and non-financial performance goals that are tailored to individual employees based on
their role and responsibilities at the Company. The performance objectives and goals, as well as the targets, differ each year
and are based upon many factors, including the Company’s current business stage and strategies, recent Company financial
and operating performance, expected growth rates over prior year’s performance, business and general economic conditions
and market and peer group analysis. For example, in evaluating targets for the 2012 fiscal year, our Compensation Committee
reviewed, among other things, our EBITDA for the fiscal year ended December 31, 2011, which was approximately $314.6
million, and, in evaluating targets for the 2013 fiscal year, our Compensation Committee reviewed, among other things, our
EBITDA for the fiscal year ended December 31, 2012, which was approximately $229.7 million. Performance objectives for
the 2013 fiscal year were based, in part, upon the expected achievement of growth in the Company’s EBITDA for the fiscal
year ended December 31, 2013 as compared to the Company’s EBITDA for the fiscal year ended December 31, 2012. While
expected growth rates over prior year performance were not reduced, the Company’s lower EBITDA for the fiscal year ended
December 31, 2012 as compared to the fiscal year ended December 31, 2011 resulted in 2013 EBITDA targets that were lower
than the 2012 EBITDA targets.
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In accordance with applicable accounting guidance, we recognize performance-based compensation expenses when it is
deemed probable that the applicable performance-based goal will be met. We evaluate the probability of achieving
performance-based goals on a quarterly basis. Our assessment of the probability of achieving specified goals can fluctuate
from quarter to quarter as we assess our projected achievement as compared to specified performance targets. As a result, the
compensation expense we recognize may also fluctuate from period to period.
Income (Loss) from Operations. Refer to note 8 to our accompanying consolidated financial statements for a discussion
of our reportable segments. The following table summarizes operating income (loss) by segment:
Years Ended December 31,
UGG wholesale
Teva wholesale
Sanuk wholesale
Other brands wholesale
E-Commerce
Retail stores
2013
224,736
2012
206,039
$
$
$
9,165
20,591
(9,807)
66,819
65,716
9,228
14,398
(4,523)
56,190
63,306
Unallocated overhead costs
(169,323)
(157,690)
Total
$
207,897
$
186,948
$
Change
Amount
%
18,697
(63)
6,193
(5,284)
10,629
2,410
(11,633)
20,949
9.1%
(0.7)
43.0
(116.8)
18.9
3.8
(7.4)
11.2%
Income from operations increased due to the increase in sales and gross margin, partially offset by higher SG&A expenses
and the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income from operations
increased by 13.7% to approximately $213,000. Beginning January 1, 2013, all gross profit derived from the sales to third parties
of the E-Commerce and retail stores segments is reported in income from operations of the E-Commerce and retail stores segments,
respectively. In prior periods, the gross profit derived from the sales to third parties of the E-Commerce and retail stores segments
was separated into two components: (i) the wholesale profit was included in the related operating income or loss of each wholesale
segment, and represented the difference between the Company’s cost and the Company’s wholesale selling price, and (ii) the retail
profit was included in the operating income of the E-Commerce and retail stores segments, and represented the difference between
the Company’s wholesale selling price and the Company’s retail selling price. Each of the wholesale segments charged the E-
Commerce and retail segments the same price that they charged third party retail customers, with the resulting profit from inter-
segment sales included in income (loss) from operations of each respective wholesale segment. Inter-segment sales and cost of
sales are eliminated upon consolidation. These changes in reporting only changed the presentation within the table above and did
not impact the Company’s consolidated financial statements for any periods. We believe that these changes better align with how
we view the business, which is that sales of the E-Commerce and retail stores segments each generate a cash flow of their own
and the wholesale segments are not active in generating those cash flows. The income from operations information for the year
ended December 31, 2012 has been adjusted retrospectively to conform to the current period presentation.
The increase in income from operations of UGG brand wholesale was primarily the result of a 2.1 percentage point increase
in gross margin primarily related to decreased sheepskin costs of approximately $18,000, as well as reduced operating expenses
of approximately $2,000, partially offset by the negative impact of foreign currency exchange rate fluctuations. On a constant
currency basis, income from operations of UGG brand wholesale increased 11.0% to approximately $229,000. We expect gross
margin to continue to increase in 2014 due to a full year of reduced sheepskin costs as well as increased use of UGGpure.
Income from operations of Teva brand wholesale was comparable to the same period in 2012.
The increase in income from operations of Sanuk brand wholesale was primarily the result of decreased expense related
to the fair value of the Sanuk contingent consideration liability of approximately $8,000, which was primarily due to changes
made during 2012 to the brand's forecast of sales and gross profit through 2015, which increased the expense in 2012 without a
comparable increase in 2013. In addition, income from operations increased due to the increase in net sales, partially offset by
a 1.4 percentage point decrease in gross margin due to increased closeout sales as well as an increase in sales expenses of
approximately $2,000.
The increase in loss from operations of our other brands wholesale was primarily the result of the activity of our Hoka
brand, which we purchased on September 27, 2012, and includes initial costs to expand the brand.
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The increase in income from operations of our E-Commerce business was primarily the result of the increase in net sales
and resulting gross profit, partially offset by increased operating expenses of approximately $15,000. The increased operating
expenses were largely due to increased marketing and advertising costs.
Income from operations of our retail store business, which primarily involves the UGG brand, increased due to the increase
in net sales, largely offset by increased operating expenses of approximately $53,000 primarily attributable to 40 new stores opened
during the year as well as the negative impact of foreign currency exchange rate fluctuations. On a constant currency basis, income
from operations of our retail store business increased 7.9% to approximately $68,000.
The increase in unallocated overhead costs resulted most significantly from an increase of approximately $8,000 in the
recognition of performance-based compensation that was not allocated to any of our reportable segments.
Other Expense, Net. Other expense, net decreased primarily due to a decrease in interest expense related to our short-
term borrowings.
Income Taxes. Income tax expense and effective income tax rates were as follows:
Income tax expense
Years Ended December 31,
2013
59,868
$
2012
55,104
$
Effective income tax rate
29.1%
29.9%
The decrease in the effective tax rate was primarily due to the increase in our annual foreign pre-tax income as a percentage
of worldwide pre-tax income, as income generated in the foreign jurisdictions is taxed at significantly lower rates than the US.
For the full year 2013, we generated approximately 11.0% of our pre-tax earnings from a country which does not impose a corporate
income tax. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings
would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of December 31,
2013, we had approximately $95,000 of cash and cash equivalents outside the US that would be subject to additional income taxes
if it were to be repatriated. We have no plans to repatriate any of our foreign cash.
Net Income Attributable to the Noncontrolling Interest. Prior to April 2, 2012, we owned 51% of a joint venture with an
affiliate of Stella International Holdings Limited (Stella International) for the primary purpose of opening and operating retail
stores for the UGG brand in China. Stella International is also one of our major manufacturers in China. On April 2, 2012, we
purchased, for a total purchase price of $20,000, the 49% noncontrolling interest owned by Stella International. Prior to this
purchase, we already had a controlling interest in this entity, and therefore, the subsidiary had been and will continue to be
consolidated with our operations.
Net Income Attributable to Deckers Outdoor Corporation. Our net income increased as a result of the items discussed
above. Our diluted earnings per share increased primarily as a result of the increase in net income, as well as by a reduced number
of diluted weighted-average common shares outstanding. The reduction in the diluted weighted-average common shares
outstanding was the result of our share repurchases which commenced during the year ended December 31, 2012. The weighted-
average impact of the share repurchases was a reduction of approximately 2,600,000 shares.
Year ended December 31, 2012 Compared to Year ended December 31, 2011
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The following table summarizes our results of operations:
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Other expense (income), net
Income before income taxes
Income taxes
Net income
Net income attributable to the noncontrolling
interest
Net income attributable to Deckers Outdoor
Corporation
2012
Amount
$ 1,414,398
Years Ended December 31,
2011
Change
%
Amount
%
Amount
100.0% $ 1,377,283
100.0% $
37,115
%
2.7 %
782,244
632,154
445,206
186,948
2,830
184,118
55,104
129,014
(148)
55.3
44.7
31.5
13.2
0.2
13.0
3.9
9.1
—
698,288
678,995
394,157
284,838
(424)
285,262
83,404
201,858
50.7
49.3
28.6
20.7
—
20.7
6.1
14.7
83,956
(46,841)
51,049
(97,890)
3,254
(101,144)
(28,300)
(72,844)
12.0
(6.9)
13.0
(34.4)
767.5
(35.5)
(33.9)
(36.1)
(2,806)
(0.2)
2,658
94.7
$
128,866
9.1% $
199,052
14.5% $
(70,186)
(35.3)%
Overview. The Sanuk brand operations are included in our results of operations effective upon the acquisition date of
July 1, 2011. The increase in net sales was primarily due to the addition of the Sanuk brand as well as increased UGG brand sales
through our retail stores and E-Commerce sites, partially offset by decreased UGG, Teva and other brands product sales through
our wholesale channel. The decrease in income from operations resulted from higher SG&A expenses and lower gross margin.
Net Sales. The following table summarizes net sales by location and net sales by brand and distribution channel:
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Net sales by location:
US
International
Total
Net sales by brand and distribution channel:
UGG:
Wholesale
E-Commerce
Retail stores
Total
Teva:
Wholesale
E-Commerce
Retail stores
Total
Sanuk:
Wholesale
E-Commerce
Retail stores
Total
Other brands:
Wholesale
E-Commerce
Retail stores
Total
Total
Total E-Commerce
Total Retail stores
Years Ended December 31,
Change
2012
2011
Amount
%
$
972,987
$
945,109
441,411
432,174
$ 1,414,398
$ 1,377,283
$
$
27,878
9,237
37,115
2.9 %
2.1
2.7 %
$
819,256
$
915,203
118,886
245,397
98,256
188,377
1,183,539
1,201,836
$ (95,947)
20,630
57,020
(18,297)
108,591
118,742
6,578
347
5,571
452
115,516
124,765
(10,151)
1,007
(105)
(9,249)
(10.5)%
21.0
30.3
(1.5)
(8.5)
18.1
(23.2)
(7.4)
89,804
4,172
20
93,996
20,194
956
197
21,347
26,039
539
—
63,765
3,633
244.9
674.0
20
*
26,578
67,418
253.7
21,801
2,132
171
24,104
(1,607)
(1,176)
26
(2,757)
37,115
24,094
56,961
(7.4)
(55.2)
15.2
(11.4)
2.7 %
22.6 %
30.1 %
$ 1,414,398
$ 1,377,283
$
$
130,592
245,961
$
$
106,498
189,000
$
$
$
*Calculation of percentage change is not meaningful.
The increase in net sales was primarily driven by the addition of the Sanuk brand as well as increased UGG brand sales
through our retail stores and E-Commerce sites, partially offset by decreased UGG, Teva and other brands wholesale sales. We
experienced an increase in the number of pairs sold primarily through our Sanuk wholesale channel and continued retail and E-
Commerce growth, partially offset by a decrease in pairs sold in our UGG, Teva, and other brands wholesale segments. This
resulted in a 3.9% overall increase in the volume of footwear sold for all brands and channels to approximately 23.7 million pairs
for the year ended December 31, 2012 compared to approximately 22.8 million pairs for 2011. Our weighted-average wholesale
selling price per pair decreased to $49.17 for the year ended December 31, 2012 from $52.38 for 2011. The decreased average
selling price was primarily due to our Sanuk wholesale segment, which has lower overall average selling prices due to the nature
of the brand. We experienced an increase in the average selling price in all other wholesale segments.
Wholesale net sales of our UGG brand decreased primarily due to the volume of pairs sold, partially offset by an increase
in the average selling price. For UGG wholesale net sales, the decrease in volume had an estimated impact of approximately
$103,000 and the increase in weighted-average wholesale selling price per pair had an estimated impact of approximately $7,000.
We believe the decline was partially due to reduced orders for the fall season caused by our customers' increased carryover inventory
levels resulting from the warm winter in the prior year, a new trend of on-demand purchasing whereby consumers shift the timing
of their purchases to when they plan to actually wear the shoes, as well as recessionary conditions in Europe.
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Table of Contents
Wholesale net sales of our Teva brand decreased primarily due to a decrease in the volume of pairs sold, partially offset by
an increase in the weighted-average wholesale selling price per pair. For Teva wholesale net sales, the decrease in volume had an
estimated impact of approximately $24,000 and the increase in average selling price had an estimated impact of approximately
$14,000.
Wholesale net sales of our Sanuk brand were $89,804 for the fiscal year ending December 31, 2012, compared to $26,039
for the six months commencing on July 1, 2011, the acquisition date, and ending on December 31, 2011.
Wholesale net sales of our other brands decreased due to a decrease in the volume of pairs sold, partially offset by an increase
in the average selling price. The decrease in volume of pairs sold was due to ceasing distribution of the Simple brand as of
December 31, 2011. Excluding the Simple brand, our other brands experienced an increase in both average selling price and
volume of pairs sold.
Net sales of our E-Commerce business increased due to an increase in the volume of pairs sold primarily attributable to the
UGG brand, partially offset by a decrease in the average selling price. The decrease in the average selling price was primarily
due to the addition of Sanuk brand sales which carry lower average selling prices.
Net sales of our retail store business, which are primarily UGG brand sales, increased largely due to the addition of 30 new
stores opened since December 31, 2011. For those stores that were open for the full 52 weeks ending December 30, 2012 compared
to the 52 weeks ending January 1, 2012, same store sales decreased by 3.4%.
International sales, which are included in the segment sales above, for all of our products combined increased by 2.1% for
the year ended December 31, 2012 as compared to the year ended December 31, 2011. International sales represented 31.2% and
31.4% of worldwide net sales for the year ended December 31, 2012 and 2011, respectively. The slight decrease in international
sales as a percentage of worldwide net sales was largely due to decreased sales to our wholesale customers in Benelux and the
UK and distributors in Europe, partially offset by increased sales to our retail, E-Commerce and Japan wholesale customers.
Foreign income before income taxes was $51,409 and $108,738, and worldwide income before income taxes was $184,118
and $285,262 for the year ended December 31, 2012 and 2011, respectively. Foreign income before income taxes represented
27.9% and 38.1% of worldwide income before income taxes for the year ended December 31, 2012 and 2011, respectively. The
increase in foreign income before income taxes as a percentage of worldwide income before income taxes was primarily due to
an increase in the gross margin on foreign sales. The increase in gross margin was primarily related to the expansion of our
international retail and E-Commerce business which generally carry higher margins than wholesale sales.
Gross Profit. As a percentage of net sales, gross margin decreased primarily due to increased sheepskin and other material
costs as well as an increased impact of discounted and closeout sales for our UGG and Teva brands. Our sheepskin costs in 2012
were approximately 40% higher than our 2011 costs. These decreases to gross margin were partially offset by the contribution of
the Sanuk brand, which generally carries higher margins, and increased gross profits for our E-Commerce and retail stores segments.
Selling, General and Administrative Expenses. SG&A increased primarily from:
•
•
•
•
•
•
•
increased retail costs of approximately $36,000 largely related to 30 new retail stores that were not open as of
December 31, 2011;
approximately $25,000 of expenses for our Sanuk brand, including an increase of approximately $9,000 to the
fair value of the contingent consideration liability from the Company's purchase of the brand;
increased marketing expenses of approximately $14,000 largely related to our new UGG women's prospects,
UGG Men's and Classic campaigns;
increased E-Commerce expenses of approximately $7,000 largely related to increased marketing and
advertising; partially offset by
decreased performance-based cash compensation of approximately $16,000;
decreased legal expense of approximately $10,000, due to having fewer litigation costs in the current year, a
decrease in anti-counterfeiting expenses, as well as receiving increased judgments and collections in the
current year from our website litigation;
decreased sales commissions of approximately $5,000 primarily due to the decrease in wholesale sales; and
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Table of Contents
•
decreased UGG amortization expense of approximately $4,000 primarily related to order books we acquired
from our distributor conversions in Europe being fully amortized in 2011.
Income (Loss) from Operations. Beginning January 1, 2013, all gross profit derived from the sales to third parties of the
E-Commerce and retail stores segments is reported in income from operations of the E-Commerce and retail stores segments,
respectively. For the years ended December 31, 2012 and 2011, the gross profit derived from the sales to third parties of the E-
Commerce and retail stores segments was separated into two components: (i) the wholesale profit was included in the related
operating income or loss of each wholesale segment, and represented the difference between the Company’s cost and the Company’s
wholesale selling price, and (ii) the retail profit was included in the operating income of the E-Commerce and retail stores segments,
and represented the difference between the Company’s wholesale selling price and the Company’s retail selling price. Each of the
wholesale segments charged the E-Commerce and retail segments the same price that they charged third party retail customers,
with the resulting profit from inter-segment sales included in income (loss) from operations of each respective wholesale segment.
These changes in segment reporting only changed the presentation within the table below and did not impact the Company’s
consolidated financial statements for any periods. The Company believes that these changes better depict how management views
the business, which is that sales of the E-Commerce and retail stores segments each generate a cash flow of their own and the
wholesale segments are not active in generating those cash flows. The segment information for the years ended December 31,
2012 and 2011 have been adjusted retrospectively to conform to the current period presentation.
Inter-segment sales and cost of sales are eliminated upon consolidation. The following table summarizes operating income
(loss) by segment:
Years Ended December 31,
Change
2012
$ 206,039
2011
$ 339,665
9,228
14,398
19,265
798
Amount
$ (133,626)
(10,037)
13,600
%
(39.3)%
(52.1)
1,704.3
UGG wholesale
Teva wholesale
Sanuk wholesale
Other brands wholesale
(4,523)
(9,993)
E-Commerce
Retail stores
56,190
63,306
47,244
58,552
5,470
8,946
4,754
Unallocated overhead costs
(157,690)
(170,693)
Total
$ 186,948
$ 284,838
13,003
$ (97,890)
54.7
18.9
8.1
7.6
(34.4)%
Income from operations as a percentage of sales decreased due to increased SG&A and decreased gross margin, partially
offset by increased sales.
The decrease in income from operations of UGG brand wholesale was primarily the result of the decrease in net sales and
a 10.5 percentage point decrease in gross margin primarily related to increased sheepskin and other material costs of approximately
$16,000 as well as an increase in the impact of closeout sales in the US and lower sales in Europe, which generally carry higher
margins. We also experienced increases in marketing and promotional expenses of approximately $10,000 and increased
international sales expenses of approximately $3,000. These increases to expenses were partially offset by decreased sales
commissions of approximately $7,000 and decreased amortization expenses, primarily related to order books we acquired from
our distributor conversions in Europe being fully amortized in 2011, of approximately $4,000.
The decrease in income from operations of Teva brand wholesale was primarily the result of the decrease in net sales and a
4.1 percentage point decrease in gross margin primarily due to lower sales in Europe, which generally carry higher margins, and
an increased impact of closeout sales. In addition, we recognized increased marketing and promotional expenses and other
divisional expenses totaling approximately $2,000.
The income from operations of our Sanuk brand, which we acquired in July 2011, was $14,398.
The loss from operations of our other brands wholesale decreased primarily due to an increase in gross profit of approximately
$2,500 as well as a decrease in operating expenses of approximately $3,000 primarily due to ceasing of the Simple brand operations
as of December 31, 2011. Gross profit increased despite the decrease in net sales because sales of Simple brand products in fiscal
year 2011 had significantly lower gross margins.
The increase in income from operations of our E-Commerce business was primarily the result of the increase in net sales,
partially offset by increased operating expenses of approximately $7,000.
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Income from operations of our retail store business, which primarily involves the UGG brand, decreased due to an increase
in operating expenses of approximately $36,000 largely attributable to 30 new stores opened during the year, partially offset by
an increase in gross profit of approximately $40,000 due primarily to the increase in net sales.
The decrease in unallocated overhead costs resulted most significantly from a decrease in legal expenses of approximately
$10,000 due to having fewer litigation costs in the current year, a decrease in anti-counterfeiting expenses, as well as receiving
increased judgments and collections in the current year from our website litigation. We also experienced a decrease in performance-
based cash compensation of approximately $9,000 and the positive impact of currency exchange rate fluctuations of approximately
$2,000, partially offset by an increase in international expenses of approximately $7,000.
Other Expense (Income), Net. Other expense, net for the twelve months ended December 31, 2012 was $2,830 compared
to other income, net for the twelve months ended December 31, 2011 of $424. In fiscal year 2012, we had an increase in interest
expense related to increases in our short-term borrowings, partially offset by income primarily related to expired E-Commerce
website customer credits.
Income Taxes. Income tax expense and effective income tax rates were as follows:
Income tax expense
Years Ended December 31,
2012
55,104
$
2011
83,404
$
Effective income tax rate
29.9%
29.2%
The increase in the effective tax rate was primarily due to the increase in our annual US pre-tax income as a percentage of
worldwide pre-tax income, as income generated in the US is taxed at significantly higher rates than most of our foreign jurisdictions.
For the full year 2012, we generated approximately 21.0% of our pre-tax earnings from a country which does not impose a corporate
income tax. Unremitted earnings of non-US subsidiaries are expected to be reinvested outside of the US indefinitely. Such earnings
would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends. As of December 31,
2012, we had approximately $37,000 of cash and cash equivalents outside the US that would be subject to additional income taxes
if it were to be repatriated. We have no plans to repatriate any of our foreign cash.
Net Income Attributable to the Noncontrolling Interest. On April 2, 2012, we purchased the remaining 49%
noncontrolling interest in our joint venture with Stella International. Prior to this purchase, we already had a controlling interest
in this entity, and therefore, the subsidiary had been and will continue to be consolidated with our operations. For the twelve
months ended December 31, 2012, net income attributable to the noncontrolling interest was $148, which represents the
noncontrolling interest's share of income prior to April 2, 2012.
Net Income Attributable to Deckers Outdoor Corporation. Our net income decreased as a result of the items discussed
above. Our diluted earnings per share decreased primarily as a result of the decrease in net income, partially offset by a reduced
number of diluted weighted-average common shares outstanding due to share repurchases we made under our stock repurchase
program.
Off-Balance Sheet Arrangements
We have off-balance sheet arrangements consisting of guarantee contracts. See "Contractual Obligations" below.
Liquidity and Capital Resources
We finance our working capital and operating needs using a combination of our cash and cash equivalents balances, cash
generated from operations, and as needed, the credit available under our credit agreement. In an economic recession or under
other adverse economic conditions, our cash generated from operations may decline, and we may be unable to realize a return on
our cash and cash equivalents, secure additional credit on favorable terms, or renew or access our existing credit. These factors
may impact our working capital reserves and have a material adverse effect on our business.
Our cash flow cycle includes the purchase of or deposits for raw materials, the purchase of inventories, the subsequent sale
of the inventories, and the eventual collection of the resulting accounts receivables. As a result, our working capital requirements
begin when we purchase, or make deposits on, raw materials and inventories and continue until we ultimately collect the resulting
receivables. The seasonality of our UGG brand business requires us to build fall and winter inventories in the quarters ending June
30 and September 30 to support sales for the UGG brand’s major selling seasons, which historically occur during the quarters
ending September 30 and December 31; whereas, the Teva and Sanuk brands build inventory levels beginning in the quarters
ending December 31 and March 31 in anticipation of the spring selling season that occurs in the quarters ending March 31 and
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Table of Contents
June 30. Given the seasonality of our UGG, Teva, and Sanuk brands, our working capital requirements fluctuate significantly
throughout the year. The cash required to fund these working capital fluctuations has been provided using our internal cash flows
and short-term borrowings. As needed, we borrow funds under our credit agreement.
The following table summarizes our cash flows and working capital:
Net cash provided by operating activities $
Net cash used in investing activities
Net cash used in financing activities
Cash and cash equivalents
Trade accounts receivable
Inventories
Prepaids and other current assets
Total current assets
Trade accounts payable
Other current liabilities
Total current liabilities
Net working capital
$
$
$
$
$
$
$
Year Ended December 31,
2013
262,125
$
(85,197) $
(50,513) $
2012
163,906
$
(75,362) $
(242,621) $
2011
30,091
(184,766)
(27,160)
237,125
$
110,247
$
263,606
184,013
260,791
147,375
829,304
151,037
169,481
320,518
508,786
$
$
$
$
190,756
300,173
90,410
691,586
133,457
133,560
267,017
424,569
$
$
$
$
193,375
253,270
107,651
817,902
110,853
121,226
232,079
585,823
Cash from Operating Activities. Net cash provided by operating activities increased primarily due to reduced inventory
purchases and increases in accrued payroll and income taxes payable. The change in inventory was primarily related to efforts
to manage inventory levels relative to expected future sales and the timing of our inventory purchases and payments. The change
in accrued payroll was primarily due to larger payroll accruals, including performance-based compensation, during the year ended
December 31, 2013 versus 2012, as well as decreased performance-based compensation accrued for at December 31, 2012 and
paid during the first quarter of 2013 versus performance-based compensation accrued for at December 31, 2011 and paid during
the first quarter of 2012. The increase in income taxes payable was due to the increase in earnings. These increases in operating
cash flows were partially offset by prepaids and other current assets increasing during the year ended December 31, 2013 compared
to a decrease during the year ended December 31, 2012. The change in prepaids and other current assets was due to less refunds
of deposits received in accordance with our contracts to purchase sheepskin. Net working capital increased as of December 31,
2013 from December 31, 2012, primarily as a result of increased cash and prepaid and other current assets. These increases to
working capital were partially offset by higher other current liabilities, lower inventory and higher accounts payable. Changes in
working capital are due to the items discussed above, as well as our normal seasonality and timing of cash receipts and cash
payments.
Net cash provided by operating activities for the year ended December 31, 2012 increased compared to the year ended
December 31, 2011 primarily due to the differences in yearly changes in prepaid expenses and other current assets, inventories
and trade accounts receivable. Prepaid expenses and other current assets decreased in fiscal year 2012, adding to net cash provided
by operating activities, while they increased in fiscal year 2011. Inventories increased by less in fiscal year 2012 than they did in
fiscal year 2011, resulting in less cash used in operating activities. Trade accounts receivable decreased slightly in fiscal year
2012, while they increased in fiscal year 2011. The change in prepaid expenses and other current assets was due to refunds of
deposits received in accordance with our contracts to purchase sheepskin in fiscal year 2012 compared to deposits paid in fiscal
year 2011. The smaller increase in inventory was primarily due to the international expansion that occurred in fiscal year 2011
and did not repeat in fiscal year 2012. The change in accounts receivable was primarily due to decreased wholesale sales as well
as increased cash collections in fiscal year 2012 versus fiscal year 2011. These increases in operating cash flows were partially
offset by a smaller increase in accounts payable, which increased less in fiscal year 2012 versus fiscal year 2011. Accounts payable
increased less primarily due to our decreased inventory purchases. Net working capital decreased as of December 31, 2012 from
December 31, 2011, primarily as a result of decreased cash and prepaid and other current assets, and an increase in our short-term
borrowings and accounts payable. These decreases to working capital were partially offset by higher inventory. Changes in
working capital are due to the items discussed above, as well as our normal seasonality and timing of cash receipts and cash
payments.
Wholesale accounts receivable turnover increased to 6.6 times in the twelve months ended December 31, 2013 from 6.1
times for the twelve months ended December 31, 2012, primarily due to lower average accounts receivable balances, as well as
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increased wholesale sales for the twelve months ended December 31, 2013 compared to the twelve months ended December 31,
2012. The lower average accounts receivable balances were primarily due to improved cash collections.
Inventory turnover was consistent at 2.5 times for the twelve months ended December 31, 2013 compared to 2.4 times for
the twelve months ended December 31, 2012. We anticipate the trend of inventory turns to remain consistent or improve in the
future as certain material costs are expected to decrease.
Cash from Investing Activities. Net cash used in investing activities for the year ended December 31, 2013 resulted
primarily from the purchases of property and equipment. The capital expenditures include the build out of our new corporate
facilities and retail stores, and purchases of computer hardware and software. The new corporate facilities will replace several
leased spaces and we plan to finance a portion of the facilities cost.
For the year ended December 31, 2012, net cash used in investing activities resulted primarily from the purchases of property
and equipment, as well as our acquisitions of the Hoka brand and an intangible asset for lease rights for a retail store location in
France. Capital expenditures in fiscal year 2012 included the build out of new retail stores and our corporate facilities.
For the year ended December 31, 2011, net cash used in investing activities resulted primarily from our acquisition of the
Sanuk brand and purchases of property and equipment. Capital expenditures in fiscal year 2011 included the purchase of land
for our new corporate headquarters and the build out of new retail stores. In November 2011, we made a cash payment of
approximately $20,000 for approximately fourteen acres of land for our new headquarters facility in Goleta, California.
As of December 31, 2013, we had approximately $4,000 of material commitments for future capital expenditures primarily
related to the build out of new retail stores. We estimate that the capital expenditures for 2014 including the aforementioned
commitments will range from approximately $95,000 to $100,000. We anticipate these expenditures will primarily include
equipment costs of our new distribution center, build out of our new retail stores and upgrade of our enterprise resource planning
system. The actual amount of capital expenditures for the year may differ from this estimate, largely depending on the timing of
new store openings or any unforeseen needs to replace existing assets and the timing of other expenditures.
Cash from Financing Activities. For the year ended December 31, 2013, net cash used in financing activities was comprised
primarily of repayments of short-term borrowings, as well as contingent consideration paid related to our Sanuk acquisition. The
cash used was partially offset by cash from our short-term borrowings, leaving approximately a $10,000 balance for borrowings
as of December 31, 2013.
For the year ended December 31, 2012, net cash used in financing activities was comprised primarily of repayments of short-
term borrowings and repurchases of our common stock, as well as contingent consideration paid related to our Sanuk acquisition,
and the purchase of the remaining 49% noncontrolling interest in our joint venture with Stella International. The cash used was
partially offset by cash from our short-term borrowings, leaving a $33,000 balance for borrowings as of December 31, 2012.
For the year ended December 31, 2011, net cash used in financing activities was comprised primarily of repayments of
short-term borrowings, cash paid for shares withheld for taxes from employee stock unit vesting and for repurchases of our
common stock. The cash used was partially offset by cash from our short-term borrowings and excess tax benefits from stock
compensation.
In February 2012, our Board of Directors approved a stock repurchase program to repurchase up to $100,000 of our common
stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements, and
other factors. The program did not obligate us to acquire any particular amount of common stock and the program could have
been suspended at any time at our discretion. As of June 30, 2012, the Company repurchased approximately 1,749,000 shares
under this program, for approximately $100,000, or an average price of $57.16. As of June 30, 2012, the Company had repurchased
the full amount authorized under this program. The purchases were funded from available working capital.
In June 2012, the Company approved a new stock repurchase program to repurchase up to $200,000 of the Company's
common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements,
and other factors. The program does not obligate the Company to acquire any particular amount of common stock and the program
may be suspended at any time at the Company's discretion. As of December 31, 2013, the Company had repurchased approximately
2,765,000 shares under this program, for approximately $120,700, or an average price of $43.66, leaving the remaining approved
amount at $79,300.
In August 2011, we entered into a Credit Agreement (the Credit Agreement) with JPMorgan Chase Bank, National Association
as the administrative agent, Comerica Bank and HSBC Bank USA, National Association, as syndication agents, and the lenders
party thereto. In August 2012 we amended and restated in its entirety the Credit Agreement (Amended and Restated Credit
Agreement). The Amended and Restated Credit Agreement is a five-year, $400,000 secured revolving credit facility. In June
2013 we amended the Amended and Restated Credit Agreement to permit additional borrowings in China of $12,500 and revised
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certain financial covenants including an increase in the maximum amount permitted to be spent on the headquarters building from
$75,000 to $80,000 and revised the terms of the total adjusted leverage ratio to not exceed 3.25 to 1.00 for the quarter ending
September 30, from 2.75 to 1.00. In August 2013 one of the Company’s subsidiaries entered into a new credit agreement in China
(China Credit Facility). Refer to Note 3 to our accompanying consolidated financial statements for further information on our
Amended and Restated Credit Agreement and China Credit Facility. At December 31, 2013, we had no outstanding borrowings
under the Amended and Restated Credit Agreement and outstanding letters of credit of approximately $200, leaving an unused
balance of approximately $399,800 under the Amended and Restated Credit Agreement. As of December 31, 2013, we were in
compliance with all covenants and we remain in compliance as of March 3, 2014.
Contractual Obligations. The following table summarizes our contractual obligations at December 31, 2013 and the effects
such obligations are expected to have on liquidity and cash flow in future periods.
Payments Due by Period
Total
Less than
1 Year
Operating lease obligations(1) $ 322,630
$
46,060
Purchase obligations(2)
245,168
245,168
Total
$ 567,798
$ 291,228
1-3 Years
87,630
—
3-5 Years
$ 72,347
More than
5 Years
$ 116,593
—
—
87,630
$ 72,347
$ 116,593
$
$
(1)
(2)
Our operating lease obligations consist primarily of building leases for our retail locations, distribution centers,
and regional offices. The majority of other long-term liabilities on our consolidated balance sheets, with the
exception of our Sanuk contingent consideration liability discussed below, are related to deferred rents, of
which the cash lease payments are included in operating lease obligations in this table.
Our purchase obligations consist mostly of open purchase orders. They also include capital expenditures,
promotional expenses and service contracts. Outstanding purchase orders are primarily with our third party
manufacturers and are expected to be paid within one year. These are outstanding open orders and not minimum
purchase obligations. Our promotional expenditures and service contracts are due periodically through 2014.
We have also entered into minimum purchase commitments with certain suppliers (see Note 7 to our accompanying
consolidated financial statements). Certain of the agreements require that we advance specified minimum payment
amounts. We have included the total remaining cash commitments under these agreements, net of deposits, as of
December 31, 2013 in this table. We expect sheepskin purchases by third party factories supplying UGG product
to us will eventually exceed the minimum commitment levels; therefore we believe the deposits will become fully
refundable, and thus, we believe this will not materially affect our results of operations, as it is in the normal course
of our business.
Commitments and Contingencies. The following reflect the additional commitments and contingent liabilities that may
have a material impact on liquidity and cash flow in future periods.
The purchase price for the Sanuk brand also includes contingent consideration over the next three years as follows:
•
•
36.0% of the Sanuk brand gross profit in 2013, which was approximately $18,600, and
40.0% of the Sanuk brand gross profit in 2015.
There is no maximum to the contingent consideration payments for 2013 and 2015. Estimated contingent consideration
payments of approximately $46,200 are included within other accrued expenses and long-term liabilities in the consolidated balance
sheet as of December 31, 2013, and are not included in the table above. See Note 1 to our accompanying consolidated financial
statements.
The purchase price for the Hoka brand also includes contingent consideration through 2017, with a maximum of $2,000.
Estimated contingent consideration payments of approximately $1,800 are included within other accrued expenses and long-term
liabilities in the consolidated balance sheet as of December 31, 2013, and are not included in the table above. See Note 1 to our
accompanying consolidated financial statements.
We believe that cash generated from operations, the available borrowings under our existing Amended and Restated Credit
Agreement, and our cash and cash equivalents will provide sufficient liquidity to enable us to meet our working capital requirements
for at least the next 12 months and the foreseeable future. However, risks and uncertainties that could impact our ability to maintain
or grow our cash position include our earnings growth rate, the continued strength of our brands, our ability to respond to changes
in consumer preferences, our ability to collect our receivables in a timely manner, our ability to effectively manage our inventories,
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our ability to generate returns on our acquisitions of businesses, and market volatility, among others. See Part I, Item 1A, "Risk
Factors" for a discussion of additional factors that may affect our cash position. Furthermore, we may require additional cash
resources due to changed business conditions or other future developments, including any investments or acquisitions we may
decide to pursue. If these sources are insufficient to satisfy our cash requirements, we may seek to sell debt securities or additional
equity securities or to obtain a new credit agreement or draw on our existing Amended and Restated Credit Agreement. The sale
of convertible debt securities or additional equity securities could result in additional dilution to our stockholders. The incurrence
of indebtedness would result in incurring debt service obligations and could result in operating and financial covenants that would
restrict our operations. In addition, there can be no assurance that any additional financing will be available on acceptable terms,
if at all. Although there are no other material present understandings, commitments or agreements with respect to the acquisition
of any other businesses, we may evaluate acquisitions of other businesses or brands.
Impact of Inflation
We believe that the rates of inflation in the three most recent fiscal years have not had a significant impact on our net sales
or profitability.
Critical Accounting Policies and Estimates
Refer to Note 1 to our accompanying consolidated financial statements for a discussion of our significant accounting policies.
Those policies and estimates that we believe are most critical to the understanding of our consolidated financial statements contained
in this report are revenue recognition; use of estimates, which includes the below reserves and allowances; inventories; accounting
for long-lived assets; goodwill and other intangible assets; fair value of contingent consideration; and stock compensation.
Use of Estimates. The preparation of financial statements in conformity with US generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts during the reporting period. Management
reasonably could use different estimates and assumptions, and changes in estimates and assumptions could occur from period to
period, with the result in each case being a potential material change in the financial statement presentation of our financial
condition or results of operations. We have historically been materially accurate in our estimates used for the reserves and allowances
below.
The following table summarizes data related to the critical accounting estimates for accounts receivable allowances and
reserves, which are discussed below:
Gross trade accounts receivable
Allowance for doubtful accounts
Allowance for sales discounts
Allowance for estimated chargebacks
Net sales for the three months ended
Allowance for estimated returns
Estimated returns liability
$
$
$
$
$
$
$
December 31, 2013
December 31, 2012
Amount
209,081
2,039
3,540
4,935
% of Gross
Trade Accounts
Receivable
Amount
$
215,842
% of Gross
Trade Accounts
Receivable
1.0% $
1.7% $
2.4% $
2,782
3,836
5,563
1.3%
1.8%
2.6%
Amount
% of Net Sales
Amount
% of Net Sales
736,048
14,554
10,144
$
617,264
2.0% $
1.4% $
12,905
6,471
2.1%
1.0%
Allowance for Doubtful Accounts. We provide a reserve against trade accounts receivable for estimated losses that may
result from customers' inability to pay. We determine the amount of the reserve by analyzing known uncollectible accounts, aged
trade accounts receivables, economic conditions and forecasts, historical experience and the customers' credit-worthiness. Trade
accounts receivable that are subsequently determined to be uncollectible are charged or written off against this reserve. The reserve
includes specific reserves for accounts, which all or a portion of are identified as potentially uncollectible, plus a non-specific
reserve for the balance of accounts based on our historical loss experience. Reserves have been established for all projected losses
of this nature. Our use of different estimates and assumptions could produce different financial results. For example, a 1.0% change
in the rate used to estimate the reserve for the accounts we consider to have credit risk and are not specifically identified as
uncollectible would change the allowance for doubtful accounts at December 31, 2013 by approximately $1,000.
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Allowance for Sales Discounts. A significant portion of our wholesale sales and resulting trade accounts receivable reflects
a discount that our customers may take, generally based upon meeting certain order, shipment and payment timelines. We use the
amount of the discounts that are available to be taken against the period-end trade accounts receivable to estimate and record a
corresponding reserve for sales discounts.
Allowance for Estimated Chargebacks. When our wholesale customers pay their invoices, they often take deductions for
chargebacks against their invoices, which are often valid. Therefore, we record an allowance for the balance of chargebacks that
are outstanding in our accounts receivable balance as of the end of each period, along with an estimated reserve for chargebacks
that have not yet been taken against outstanding accounts receivable balances. This estimate is based on historical trends of the
timing and amount of chargebacks taken against invoices.
Allowance for Estimated Returns and Estimated Returns Liability. We record an allowance for anticipated future returns
of goods shipped prior to period-end and a liability for anticipated returns of goods sold direct to consumers. In general, we accept
returns for damaged or defective products. We also have a policy whereby we accept returns from our retail and E-Commerce
customers for a thirty day period. We base the amounts of the allowance and liability on any approved customer requests for
returns, historical returns experience, and any recent events that could result in a change from historical returns rates, among other
factors. The allowance for estimated returns as a percentage of net sales was comparable to the same period in the prior year. Our
use of different estimates and assumptions could produce different financial results. For example, a 1.0% change in the rate used
to estimate the percentage of sales expected to ultimately be returned would change the allowance and liability reserves for returns
in total at December 31, 2013 by approximately $6,000. Our historical estimates for returns have been reasonably accurate.
Inventory Write-Downs. We review the various items in inventory on a regular basis for excess, obsolete, and impaired
inventory. In doing so, we write the inventory down to the lower of cost or expected future net selling prices. At December 31,
2013, inventories were stated at $260,791, net of inventory write-downs of $6,142. At December 31, 2012, inventories were stated
at $300,173 net of inventory write-downs of $3,645. The amount of inventory write-downs as a percentage of inventory were 2.4
and 1.2 as of December 31, 2013 and 2012, respectively. The increase in inventory write-downs was primarily due to write-downs
of certain UGG, Teva and other brands styles that are not being continued. Our use of different estimates and assumptions could
produce different financial results. For example, a 10.0% change in the estimated selling prices of our potentially obsolete inventory
would change the inventory write-down reserve at December 31, 2013 by approximately $1,000.
Valuation of Goodwill, Intangible and Other Long-Lived Assets. We assess the impairment of goodwill, intangible, and
other long-lived assets on a separate asset basis based on assumptions and judgments regarding the carrying amount of these assets
individually.
We performed our 2013 annual impairment tests for goodwill and nonamortizable intangible assets. We evaluated our UGG,
Sanuk and other brands' goodwill and our Teva trademarks. Based on the carrying amounts of the UGG, Teva, Sanuk and other
brands' goodwill, trademarks, and net assets, the brands' 2013 sales and operating results, and the brands' long-term forecasts of
sales and operating results as of their evaluation dates, we concluded that the carrying amounts of the UGG, Sanuk and other
brands' goodwill, as well as the Teva trademarks, were not impaired. Our Teva trademarks were evaluated under ASU, Testing
Indefinite-Lived Intangible Assets for Impairment, and we concluded, based on an evaluation of all relevant qualitative factors,
including macroeconomic conditions, industry and market considerations, cost factors, financial performance, entity-specific
events, and legal, regulatory, contractual, political, business, or other factors, that it is not more likely than not that the fair value
of the Teva trademarks is less than its carrying amount, and accordingly we did not perform a quantitative impairment test for the
Teva trademarks. Our goodwill balance at December 31, 2013 represents goodwill in the UGG, Sanuk and other brands' reporting
units. We believe that it is not more likely than not that the fair value of the UGG reporting unit's fair value and the other brands'
reporting unit's fair value are less than their respective carrying values. The UGG and other brands' goodwill was evaluated based
on qualitative analyses.
We performed a quantitative analysis of the Sanuk reporting unit's fair value as of October 31, 2013, and concluded that the
fair value exceeded its carrying value by 37.4%, which management believes is substantially in excess of carrying value and,
therefore, no additional sensitivity analysis was performed. The Sanuk brand's goodwill was evaluated based on Level 3 inputs.
We also evaluated amortizable long-lived assets, including intangible assets as of December 31, 2013 and 2012. As of
December 31, 2013 we recorded immaterial impairment losses for three of our retail stores for which the fair values did not exceed
their carrying values. As of December 31, 2012 we recorded immaterial impairment losses for one of our retail stores for which
the fair values did not exceed their carrying values. We recorded certain amortizable intangible assets related to our Hoka acquisition
(see Note 10 to our accompanying consolidated financial statements for the valuation methodologies used). Our other valuation
methodologies used as of December 31, 2013 did not change from the prior year.
Fair Value of Contingent Consideration. We have entered into contingent consideration arrangements when we acquired
brands. The fair value of our Sanuk brand contingent consideration is material and highly subjective. It is based on estimated
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future sales and gross profits, and discount rates, among other variables and estimates, and certain years have no maximum payment
(see Note 1 to our accompanying consolidated financial statements). These are evaluated each reporting period and the contingent
consideration is adjusted accordingly. Our estimated revenue forecasts include a compound annual growth rate of 22.0% from
fiscal year 2013 through fiscal year 2015. Our use of different estimates and assumptions could produce different financial results.
For example, a 5.0% change in the estimated compound annual growth rate would change the total liability balance at December 31,
2013 by approximately $5,000.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Commodity Price Risk. We purchase certain materials that are affected by commodity prices, the most significant of which
is sheepskin. The supply of sheepskin used in certain UGG products is in high demand and there are a limited number of suppliers
able to meet our expectations for the quantity and quality of sheepskin required. There have been significant fluctuations in the
price of sheepskin in recent years as the demand from us and our competitors for this commodity has varied. We experienced an
increase in sheepskin costs in 2012 compared to 2011, and a decrease in sheepskin costs in 2013 compared to 2012. We expect
a decrease in sheepskin costs in 2014 compared to 2013 due to realizing a full year of reduced sheepskin prices and the increased
use of UGGpure. Other significant factors affecting the price of sheepskin include weather patterns, harvesting decisions, global
economic conditions, and other factors which are not considered predictable or within our control. We use purchasing contracts,
pricing arrangements, and refundable deposits to attempt to reduce the impact of price volatility as an alternative to hedging
commodity prices. The purchasing contracts and pricing arrangements we use may result in unconditional purchase obligations,
which are not reflected in our consolidated balance sheets. In the event of significant commodity cost increases, we will likely
not be able to adjust our selling prices sufficiently to mitigate the impact on our margins.
Foreign Currency Exchange Rate Risk. We face market risk to the extent that changes in foreign currency exchange rates
affect our foreign assets, liabilities, revenues and expenses. We hedge certain foreign currency forecasted transactions and exposures
from existing assets and liabilities. Other than an increasing amount of sales, expenses, and financial positions denominated in
foreign currencies, we do not believe that there has been a material change in the nature of our primary market risk exposures,
including the categories of market risk to which we are exposed and the particular markets that present the primary risk of loss.
As of the date of this Annual Report on Form 10-K, we do not know of or expect there to be any material change in the general
nature of our primary market risk exposure in the near term.
We currently utilize forward contracts and other derivative instruments to mitigate exposure to fluctuations in the foreign
currency exchange rate, for a portion of the amounts we expect to purchase and sell in foreign currencies. As our international
operations grow and we increase purchases and sales in foreign currencies, we will evaluate and may utilize additional derivative
instruments, as needed, to hedge our foreign currency exposures. We do not use foreign currency contracts for trading purposes.
As of December 31, 2013, our designated derivative contracts had notional amounts totaling approximately $77,000. These
contracts were held by four counterparties and were expected to mature over the next 12 months. Based upon sensitivity analysis
as of December 31, 2013, a 10.0% change in foreign exchange rates would cause the fair value of our financial instruments to
increase or decrease by approximately $8,000.
Although the majority of our sales and inventory purchases are denominated in US currency, these sales and inventory
purchases may be impacted by fluctuations in the exchange rates between the US dollar and the local currencies in the international
markets where our products are sold and manufactured. Our foreign currency exposure is generated primarily from our Asian and
European operations. Approximately $395,000, or 25.4%, of our total net sales for the year ended December 31, 2013 were
denominated in foreign currencies. Certain of our foreign subsidiaries' local currency is their designated functional currency. As
we begin to hold more cash and other monetary assets and liabilities in currencies other than our subsidiary's functional currency,
we are exposed to financial statement transaction gains and losses as a result of remeasuring the operating results and financial
positions into their functional currency. We remeasure these monetary assets and liabilities using the exchange rate as of the end
of the reporting period. In addition, we translate assets and liabilities of subsidiaries with reporting currencies other than US dollars
into US dollars using the exchange rates at of the end of the reporting period, which results in financial statement translation gains
and losses in other comprehensive income. Changes in foreign exchange rates affect our reported profits and can distort comparisons
from year to year. In addition, if the US dollar strengthens, it may result in increased pricing pressure on our foreign distributors,
and retailers, which may have a negative impact on our net sales and gross margins.
Interest Rate Risk. Our market risk exposure with respect to financial instruments is tied to changes in the prime rate in
the US and changes in the London Interbank Offered Rate (LIBOR). Our Amended and Restated Credit Agreement provides for
interest on outstanding borrowings at rates tied to the prime rate or, at our election, tied to LIBOR. At December 31, 2013, we had
no outstanding borrowings under the credit agreement. A 1.0% increase in interest rates on our borrowings during the current
period would not have a material impact on income before income taxes.
Item 8. Financial Statements and Supplementary Data.
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Financial Statements and the Reports of Independent Registered Public Accounting Firm are filed with this Annual Report
on Form 10-K in a separate section following Part IV, as shown on the index under Item 15 of this Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Disclosure Controls and Procedures.
The Company maintains a system of disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended, or the Exchange Act) which are designed to provide reasonable assurance that information
required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures include,
among other processes, controls and procedures designed to ensure that information required to be disclosed in the reports that
the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal
executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing
and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as
ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
The Company carried out an evaluation, under the supervision and with the participation of management, including the
principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2013 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the principal
executive officer and the principal financial officer concluded that the Company's disclosure controls and procedures were effective
at the reasonable assurance level as of the end of the period covered by this annual report to ensure that the information required
to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and to ensure that the information required to be disclosed by us
in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the
principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Management's Report on Internal Control over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting at the
Company. Our internal control over financial reporting is a process designed under the supervision of the Chief Executive Officer
and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
the Company's financial statements for external reporting purposes in accordance with US generally accepted accounting principles
(GAAP). A company's internal control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and the directors of the company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company's assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2013.
Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control —
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management's assessment included an evaluation of the design of the Company's internal control over financial reporting and
testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its
assessment with the Audit Committee of our Board of Directors.
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Based on this assessment, management determined that, as of December 31, 2013, the Company maintained effective internal
control over financial reporting. The registered public accounting firm that audited the consolidated financial statements included
in this Annual Report has issued an attestation report on the Company's internal control over financial reporting. The Reports of
our Independent Registered Public Accounting Firm are filed with this annual report in a separate section following Part IV, as
shown on the index under Item 15 of this Annual Report.
(c) Changes in Internal Control over Financial Reporting.
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31,
2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a written code of ethics that applies to our principal executive officer, principal financial and accounting
officer, controller and persons performing similar functions and is posted on our website at www.deckers.com. Our code of ethics
is designed to meet the requirements of Section 406 of Regulation S-K and the rules promulgated thereunder. To the extent required
by law, any amendments to, or waivers from, any provision of the code will be promptly disclosed publicly either on a report on
Form 8-K or on our website at www.deckers.com.
All additional information required by this item, including information relating to Directors and Executive Officers of the
Registrant, is set forth in the Company's definitive proxy statement relating to the Registrant's 2014 annual meeting of stockholders,
which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31,
2013, and such information is incorporated herein by reference.
Item 11. Executive Compensation.
Information relating to Executive Compensation is set forth under "Proposal No. 1-Election of Directors" in the Company's
definitive proxy statement relating to the Registrant's 2014 annual meeting of stockholders, which will be filed pursuant to
Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 2013, and such information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information relating to Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
is set forth under "Proposal No. 1-Election of Directors" in the Company's definitive proxy statement relating to the Registrant's
2014 annual meeting of stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's
fiscal year ended December 31, 2013, and such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information relating to Certain Relationships and Related Transactions is set forth under "Proposal No. 1-Election of
Directors" in the Company's definitive proxy statement relating to the Registrant's 2014 annual meeting of stockholders, which
will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended December 31, 2013,
and such information is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
Information relating to Principal Accountant Fees and Services is set forth under "Proposal No. 2-Independent Registered
Public Accounting Firm" in the Company's definitive proxy statement relating to the Registrant's 2014 annual meeting of
stockholders, which will be filed pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year ended
December 31, 2013, and such information is incorporated herein by reference.
46
Table of Contents
PART IV
Item 15. Exhibits, Financial Statement Schedules
Consolidated Financial Statements and Schedules required to be filed hereunder are indexed on Page F-1 hereof.
Exhibit
Number
Description of Exhibit
3.1 Amended and Restated Certificate of Incorporation of Deckers Outdoor Corporation as amended through
May 27, 2010 (Exhibit 3.1 to the Registrant's Form 10-Q for the quarterly period ended June 30, 2010
and incorporated by reference herein)
*3.2 Restated Bylaws of Deckers Outdoor Corporation
10.1 Lease Agreement dated November 1, 2003 between Ampersand Aviation, LLC and Deckers Outdoor
Corporation for office building at 495-A South Fairview Avenue, Goleta, California, 93117
(Exhibit 10.34 to the Registrant's Form 10-K for the period ended December 31, 2003 and incorporated
by reference herein)
10.2 Lease Agreement dated September 15, 2004 between Mission Oaks Associates, LLC and Deckers
Outdoor Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012
(Exhibit 10.37 to the Registrant's Form 10-K for the period ended December 31, 2004 and incorporated
by reference herein)
10.3 First Amendment to Lease Agreement between Mission Oaks Associates, LLC and Deckers Outdoor
Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012, dated
December 1, 2004 (Exhibit 10.38 to the Registrant's Form 10-K for the period ended December 31, 2004
and incorporated by reference herein)
10.4 Amendment to Lease Agreement between Mission Oaks Associates, LLC and Deckers Outdoor
Corporation for distribution center at 3001 Mission Oaks Blvd., Camarillo, CA 93012, dated September
1, 2011 (Exhibit 10.23 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by
reference herein)
10.5 Amendment to Lease Agreement between 450 N. Baldwin Park Associates, LLC and Deckers Outdoor
Corporation for distribution center at 3175 Mission Oaks Blvd., Camarillo, CA 93012, dated September
1, 2011 (Exhibit 10.24 to the Registrant's Form 10-K filed on February 29, 2012 and incorporated by
reference herein)
*10.6 Lease Agreement between Deckers Outdoor Corporation and Moreno Knox, LLC dated as of December
5, 2013
#10.7 Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by reference to
Appendix A to the Registrant's Definitive Proxy Statement dated April 21, 2006 in connection with its
2006 Annual Meeting of Stockholders)
#10.8 First Amendment to Deckers Outdoor Corporation 2006 Equity Incentive Plan (incorporated herein by
reference to Appendix A to the Registrant's Definitive Proxy Statement dated April 9, 2007 in connection
with its 2007 Annual Meeting of Stockholders)
#10.9 Deckers Outdoor Corporation Amended and Restated Deferred Stock Unit Compensation Plan, a Sub
Plan under the Deckers Outdoor Corporation 2006 Equity Incentive Plan, adopted by the Board of
Directors on December 14, 2010 (Exhibit 10.24 to the Registrant's Form 10-K filed on March 1, 2011
and incorporated by reference herein)
*#10.10 Deckers Outdoor Corporation Amended and Restated Deferred Compensation Plan effective as of August
1, 2013
#10.11 Form of Deckers Outdoor Corporation Management Incentive Program under the 2006 Equity Incentive
Plan (Exhibit 10.28 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference
herein)
#10.12 Form of Restricted Stock Unit Award Agreement (Level 2) Under 2006 Equity Incentive Plan (Exhibit
10.3 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference herein)
#10.13 Form of Restricted Stock Unit Award Agreement (Level III) Under 2006 Equity Incentive Plan adopted
on June 22, 2011 (Exhibit 10.1 to the Registrant's Form 8-K filed on June 28, 2011 and incorporated by
reference herein)
#10.14 Form of Stock Appreciation Rights Award Agreement (Level 2) Under 2006 Equity Incentive Plan
(Exhibit 10.5 to the Registrant's Form 8-K filed on May 11, 2007 and incorporated by reference herein)
#10.15 Form of Restricted Stock Unit Award Agreement (2012 LTIP) Under 2006 Equity Incentive Plan (Exhibit
10.1 to the Registrant's Form 8-K filed on May 31, 2012 and incorporated by reference herein
47
Table of Contents
Exhibit
Number
Description of Exhibit
#10.16 Form of Restricted Stock Unit Award Agreement (2013 LTIP) Under 2006 Equity Incentive Plan (Exhibit
10.1 to the Registrant's Form 8-K filed on December 19, 2013 and incorporated by reference herein)
#10.17 Form of Stock Unit Award Agreement under the Deckers Outdoor Corporation 2006 Equity Incentive
Plan (Exhibit 10.27 to the Registrant’s Form 10-K filed on March 1, 2013 and incorporated by reference
herein)
#10.18 Form of Indemnification Agreement (Exhibit 10.1 to the Registrant's Form 8-K filed on June 2, 2008 and
incorporated by reference herein)
#10.19 Change of Control and Severance Agreement with Deckers Outdoor Corporation for Angel Martinez on
December 22, 2009 (Exhibit 10.33 to the Registrant's Form 10-K filed on March 1, 2010 and
incorporated by reference herein)
#10.20 Change of Control and Severance Agreement with Deckers Outdoor Corporation for Zohar Ziv on
December 22, 2009 (Exhibit 10.34 to the Registrant's Form 10-K filed on March 1, 2010 and
incorporated by reference herein)
#10.21 Change of Control and Severance Agreement with Deckers Outdoor Corporation for Thomas George on
December 22, 2009 (Exhibit 10.35 to the Registrant's Form 10-K filed on March 1, 2010 and
incorporated by reference herein)
#10.22 Change of Control and Severance Agreement with Deckers Outdoor Corporation for Constance Rishwain
on December 22, 2009 (Exhibit 10.36 to the Registrant's Form 10-K filed on March 1, 2010 and
incorporated by reference herein)
*#10.23 Employment Agreement with Deckers Europe Limited for Stephen Murray dated February 28, 2011
10.24 Asset Purchase Agreement, dated as of May 19, 2011 by and among Deckers Outdoor Corporation,
Deckers Acquisition, Inc., Deckers International Limited, Sanuk USA, LLC, Thomas J. Kelley, Ian L.
Kessler, C&C Partners, Ltd., Donald A. Clark and Paul Carr (Exhibit 10.1 to the Registrant's Form 8-K
filed on May 19, 2011 and incorporated herein by reference)
10.25 Amendment No. 1 to Asset Purchase Agreement, dated as of July 1, 2011, by and among Deckers
Outdoor Corporation, Deckers Acquisition, Inc., Deckers International Limited, Sanuk USA, LLC,
Thomas J. Kelley, Ian L. Kessler, C&C Partners, Ltd., Donald A. Clark and Paul Carr (Exhibit 10.1 to the
Registrant's Form 8-K filed on July 6, 2011 and incorporated by reference herein)
10.26 Amended and Restated Credit Agreement, dated as of August 10, 2012, by and among Deckers Outdoor
Corporation, as Borrower, JPMorgan Chase Bank, National Association, as Administrative Agent,
Comerica Bank and HSBC Bank USA, National Association, as Co-Syndication Agents, and the lenders
from time to time party thereto (Exhibit 10.1 to the Registrant's Form 8-K filed on August 16, 2012 and
incorporated by reference herein)
*10.27 Amendment No. 1 to Amended and Restated Credit Agreement, dated as of June 24, 2013, by and among
Deckers Outdoor Corporation, as Borrower, and the Lenders party thereto
*10.28 Form of Stock Unit Award Agreement under the Deckers Outdoor Corporation 2006 Equity Incentive
Plan
*21.1 Subsidiaries of Registrant
*23.1 Consent of Independent Registered Public Accounting Firm
*31.1 Certification of the Chief Executive Officer pursuant to Rule 13A-14(a) under the Exchange Act, adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2 Certification of the Chief Financial Officer pursuant to Rule 13A-14(a) under the Exchange Act, adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
**32.1 Certification pursuant to 18 USC. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
*101.1 The following materials from the Company's Annual Report on Form 10-K for the annual period ended
December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated
Balance Sheets as of December 31, 2013 and 2012; (ii) Consolidated Statements of Comprehensive
Income for the years ended December 31, 2013, 2012, and 2011; (iii) Consolidated Statements of Cash
Flows for the years ended December 31, 2013, 2012, and 2011, and (iv) Notes to Consolidated Financial
Statements.
* Filed herewith.
** Furnished herewith
# Management contract or compensatory plan or arrangement.
48
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
DECKERS OUTDOOR CORPORATION
(Registrant)
/s/ ANGEL R. MARTINEZ
Angel R. Martinez
Chief Executive Officer
Date: March 3, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ ANGEL R. MARTINEZ
Angel R. Martinez
/s/ THOMAS A. GEORGE
Thomas A. George
/s/ KARYN O. BARSA
Karyn O. Barsa
/s/ MAUREEN CONNERS
Maureen Conners
/s/ MICHAEL DEVINE
Michael Devine
/s/ JOHN M. GIBBONS
John M. Gibbons
/s/ REX A. LICKLIDER
Rex A. Licklider
/s/ JOHN G. PERENCHIO
John G. Perenchio
/s/ JAMES QUINN
James Quinn
/s/ LAURI SHANAHAN
Lauri Shanahan
Chairman of the Board,
President and Chief Executive
Officer (Principal Executive Officer)
March 3, 2014
Chief Financial Officer
(Principal Financial and Accounting
Officer)
March 3, 2014
Director
March 3, 2014
Director
March 3, 2014
Director
March 3, 2014
Director
March 3, 2014
Director
March 3, 2014
Director
March 3, 2014
Director
March 3, 2014
Director
March 3, 2014
49
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended
December 31, 2013
Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended
December 31, 2013
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31,
2013
Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedule
Page
F-2
F-4
F-5
F-6
F-7
F-8
Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, 2013
F-33
All other schedules are omitted because they are not applicable or the required information is shown in the Company's
consolidated financial statements or the related notes thereto.
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Deckers Outdoor Corporation:
We have audited the accompanying consolidated financial statements of Deckers Outdoor Corporation and subsidiaries as
listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the
related consolidated financial statement schedule as listed in the accompanying index. These consolidated financial statements
and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Deckers Outdoor Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of their operations
and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information
set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the internal control over financial reporting of Deckers Outdoor Corporation as of December 31, 2013, based on criteria established
in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 3, 2014 expressed an unqualified opinion on the effectiveness of the internal
control over financial reporting of Deckers Outdoor Corporation.
Los Angeles, California
March 3, 2014
/s/ KPMG LLP
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Deckers Outdoor Corporation:
We have audited the internal control over financial reporting of Deckers Outdoor Corporation as of December 31, 2013
based on criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management's Report on Internal Control over Financial Reporting in Item 9A(b). Our responsibility is to
express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Deckers Outdoor Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2013, based on criteria established in Internal Control — Integrated Framework (1992) issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Deckers Outdoor Corporation and subsidiaries as of December 31, 2013 and 2012, and the
related consolidated statements of comprehensive income, stockholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 2013 and our report dated March 3, 2014 expressed an unqualified opinion on those consolidated
financial statements.
Los Angeles, California
March 3, 2014
/s/ KPMG LLP
F-3
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except par value)
Current assets:
ASSETS
Cash and cash equivalents
Trade accounts receivable, net of allowances of $25,068 and $25,086 as of
December 31, 2013 and December 31, 2012, respectively
Inventories
Prepaid expenses
Other current assets
Deferred tax assets
Total current assets
Property and equipment, net of accumulated depreciation of $99,473 and
$69,580 as of December 31, 2013 and December 31, 2012, respectively
Goodwill
Other intangible assets, net of accumulated amortization of $24,140 and
$16,164 as of December 31, 2013 and December 31, 2012, respectively
Deferred tax assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings
Trade accounts payable
Accrued payroll
Other accrued expenses
Income taxes payable
Value added tax (VAT) payable
Total current liabilities
Long-term liabilities
Commitments and contingencies (note7)
Stockholders' equity:
Deckers Outdoor Corporation stockholders' equity:
Common stock, $0.01 par value; authorized 125,000 shares; issued and
outstanding 34,618 and 34,400 shares for 2013 and 2012, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and equity
December 31,
2013
2012
$
237,125
$
110,247
184,013
260,791
14,980
112,514
19,881
829,304
174,066
128,725
93,278
15,751
18,605
190,756
300,173
14,092
59,028
17,290
691,586
125,370
128,725
95,965
13,372
13,046
$ 1,259,729
$ 1,068,064
$
9,728
$
33,000
151,037
133,457
35,725
45,301
49,453
29,274
320,518
51,092
15,896
43,858
25,067
15,739
267,017
62,246
346
143,916
746,500
(2,643)
888,119
344
139,046
600,811
(1,400)
738,801
$ 1,259,729
$ 1,068,064
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Other expense (income), net:
Interest income
Interest expense
Other, net
Income before income taxes
Income taxes
Net income
Other comprehensive (loss) income, net of tax:
Unrealized loss on foreign currency hedging
Foreign currency translation adjustment
Total other comprehensive (loss) income
Comprehensive income
Net income attributable to:
Deckers Outdoor Corporation
Noncontrolling interest
Comprehensive income attributable to:
Deckers Outdoor Corporation
Noncontrolling interest
Net income per share attributable to Deckers Outdoor Corporation
common stockholders:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
Years Ended December 31,
2013
$ 1,556,618
2012
$ 1,414,398
2011
$ 1,377,283
820,135
736,483
528,586
207,897
(60)
3,079
(679)
2,340
205,557
59,868
145,689
(486)
(757)
(1,243)
144,446
782,244
632,154
445,206
186,948
(217)
3,840
(793)
2,830
184,118
55,104
129,014
(633)
963
330
$
129,344
$
145,689
—
145,689
144,446
—
144,446
$
$
$
$
128,866
148
129,014
129,196
148
129,344
$
$
$
$
698,288
678,995
394,157
284,838
(180)
249
(493)
(424)
285,262
83,404
201,858
(931)
(1,952)
(2,883)
198,975
199,052
2,806
201,858
196,169
2,806
198,975
4.23
4.18
$
$
3.49
3.45
$
$
5.16
5.07
34,473
34,829
36,879
37,334
38,605
39,265
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands)
Years Ended December 31, 2011, 2012 and 2013
Common Stock
Shares Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total Deckers
Outdoor Corp.
Stockholders'
Equity
Non-
controlling
Interest
Total
Stockholders'
Equity
Balance December 31, 2010
38,581
$
386
$ 137,989
$ 513,459
$
1,153
$
652,987
$
2,688
$
655,675
Stock compensation expense
Exercise of stock options
Shares issued upon vesting
Excess tax benefit from stock
compensation
Shares withheld for taxes
Stock repurchase
Net income
Total other comprehensive loss
10
12
334
—
—
(245)
—
—
—
—
3
—
—
(2)
—
—
14,803
62
(3)
15,330
(23,497)
—
—
—
—
—
—
—
—
(19,916)
199,052
—
—
—
—
—
—
—
14,803
62
—
15,330
(23,497)
(19,918)
—
—
—
—
—
—
14,803
62
—
15,330
(23,497)
(19,918)
199,052
2,806
201,858
—
(2,883)
(2,883)
—
(2,883)
Balance December 31, 2011
38,692
$
387
$ 144,684
$ 692,595
$
(1,730) $
835,936
$
5,494
$
841,430
Stock compensation expense
Exercise of stock options
Shares issued upon vesting
Deficient tax benefit from stock
compensation
Shares withheld for taxes
19
4
199
—
—
—
—
2
—
—
14,661
9
(2)
(381)
(5,888)
—
—
—
—
—
Stock repurchase
(4,514)
(45)
— (220,650)
Net income
Acquisition of noncontrolling
interest
Total other comprehensive income
—
—
—
—
—
—
—
128,866
(14,037)
—
—
—
—
—
—
—
—
—
—
—
14,661
9
—
(381)
(5,888)
(220,695)
—
—
—
—
—
—
14,661
9
—
(381)
(5,888)
(220,695)
128,866
148
129,014
(14,037)
(5,642)
(19,679)
330
330
—
330
Balance December 31, 2012
34,400
$
344
$ 139,046
$ 600,811
$
(1,400) $
738,801
$
— $
738,801
Stock compensation expense
Exercise of stock options
Shares issued upon vesting
Excess tax benefit from stock
compensation
Shares withheld for taxes
Net income
Total other comprehensive loss
15
8
195
—
—
—
—
—
—
2
—
—
—
—
13,136
52
(2)
319
(8,635)
—
—
—
—
—
—
—
145,689
—
—
—
—
—
—
13,136
52
—
319
(8,635)
145,689
—
—
—
—
—
—
—
(1,243)
(1,243)
13,136
52
—
319
(8,635)
145,689
(1,243)
Balance, December 31, 2013
34,618
$
346
$ 143,916
$ 746,500
$
(2,643) $
888,119
$
— $
888,119
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
145,689
$
129,014
$ 201,858
Years Ended December 31,
2013
2012
2011
Depreciation, amortization, and accretion
Change in fair value of contingent consideration
Provision for (recovery of) doubtful accounts, net
Deferred tax provision
Stock compensation
Other
Changes in operating assets and liabilities, net of assets and
liabilities acquired in the acquisition of businesses:
Trade accounts receivable
Inventories
Prepaid expenses and other current assets
Other assets
Trade accounts payable
Contingent consideration
Accrued expenses
Income taxes payable
Long-term liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Acquisitions of businesses and equity method investment
Purchases of intangible assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of short-term borrowings
Repayments of short-term borrowings
Cash paid for shares withheld for taxes
Excess tax benefit from stock compensation
Cash received from issuances of common stock
Loan origination costs on short-term borrowings
Contingent consideration paid
Cash paid for noncontrolling interest
Cash paid for repurchases of common stock
Net cash used in financing activities
Effect of exchange rates on cash
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes
Interest
Non-cash investing and financing activity:
Deferred purchase payments for acquisition of business
Accruals for purchases of property and equipment
Contingent consideration arrangement for acquisition of business
Accruals for asset retirement obligations
Accruals for shares withheld for taxes
Write-off for shares exercised with a tax deficit
$
$
$
$
$
$
$
$
$
41,439
1,815
125
(4,092)
13,136
1,306
6,618
40,580
(58,554)
(4,290)
21,251
(6,458)
33,556
24,386
5,618
262,125
(79,829)
—
(5,368)
(85,197)
320,728
(344,000)
(6,736)
2,071
52
—
(22,628)
—
—
(50,513)
463
126,878
110,247
237,125
39,122
2,586
$
$
$
2,283
— $
$
— $
$
$
$
1,936
3,702
1,752
33,367
8,659
2,128
(5,657)
14,661
1,229
491
(46,903)
23,511
(3,028)
18,932
(959)
(9,983)
(5,820)
4,264
163,906
(61,575)
(8,829)
(4,958)
(75,362)
307,000
(274,000)
(6,535)
2,457
—
(1,807)
(29,041)
(20,000)
(220,695)
(242,621)
718
(153,359)
263,606
110,247
28,977
—
(704)
(67)
14,803
2,735
(63,199)
(120,730)
(75,525)
(5,385)
38,237
—
850
5,722
2,519
30,091
(55,538)
(125,203)
(4,025)
(184,766)
45,000
(45,000)
(22,634)
15,330
62
—
—
—
(19,918)
(27,160)
215
(181,620)
445,226
$ 263,606
66,899
3,338
3,671
489
1,128
526
1,804
2,838
$
$
$
$
$
$
$
$
62,405
88
—
3,268
88,100
236
2,460
—
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(amounts in thousands, except share quantity and per share data)
(1) The Company and Summary of Significant Accounting Policies
The Company and Basis of Presentation
The consolidated financial statements include the accounts of Deckers Outdoor Corporation and its wholly-owned
subsidiaries (collectively referred to as the Company). Accordingly, all references herein to Deckers Outdoor Corporation or
Deckers include the consolidated results of the Company and its subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
Deckers Outdoor Corporation is a global leader in designing, marketing and distributing innovative footwear, apparel and
accessories developed for both everyday casual lifestyle use and high performance activities. The Company's business is
seasonal, with the highest percentage of UGG® brand net sales occurring in the quarters ending September 30 and December
31 and the highest percentage of Teva® and Sanuk® brand net sales occurring in the quarters ending March 31 and June 30 of
each year. The other brands do not have a significant seasonal impact on the Company.
Prior to April 2, 2012, the Company owned 51% of a joint venture with an affiliate of Stella International Holdings Limited
(Stella International) for the primary purpose of opening and operating retail stores for the UGG brand in China. Stella International
is also one of the Company's major manufacturers in China. On April 2, 2012, the Company purchased, for a total purchase price
of approximately $20,000, the 49% noncontrolling interest owned by Stella International. The Company accounted for this
transaction as an acquisition of the remaining interest of an entity that had already been majority-owned by the Company. The
purchase resulted in a reduction to additional paid in capital of $14,037 representing excess purchase price over the carrying
amount of the noncontrolling interest. Prior to this purchase, the Company already had a controlling interest in this entity, and
therefore, the subsidiary had been and will continue to be consolidated with the Company's operations.
On May 19, 2011, the Company entered into an asset purchase agreement with Sanuk USA LLC, C&C Partners, Ltd., and
the equity holders of both entities (collectively referred to as Sanuk or the Sanuk brand). On July 1, 2011, the Company completed
the acquisition of the purchased assets and the assumption of the assumed liabilities of the Sanuk brand. Deckers Outdoor
Corporation's consolidated financial statements include the operations of Sanuk beginning July 1, 2011.
In May 2012, the Company purchased a noncontrolling interest in the Hoka One One® (Hoka) brand, a privately held
footwear company, which was accounted for as an equity method investment. In September 2012, the Company acquired the
remaining ownership interest in Hoka. The acquisition of Hoka was not material to the Company’s consolidated financial statements
and did not have a significant seasonal impact on the Company in 2013.
Subsequent to December 31, 2013, our Board of Directors approved a change in the Company's fiscal year end from December
31 to March 31. The change is intended to better align our planning, financial and reporting functions with the seasonality of our
business. Under the applicable rules of the Securities and Exchange Commission, the Company intends to file a transition report
on Form 10-QT for the quarter ending March 31, 2014.
We sell our brands through our quality domestic retailers and international distributors and retailers, as well as directly to
our end-user consumers through our E-Commerce business and our retail stores. Independent third parties manufacture all of
our products.
Inventories
Inventories, principally finished goods, are stated at the lower of cost (first-in, first-out) or market (net realizable value).
Cost includes initial molds and tooling that are amortized over the life of the mold in cost of sales. Cost also includes shipping
and handling fees and costs, which are subsequently expensed to cost of sales. Market values are determined by historical experience
with discounted sales, industry trends, and the retail environment.
Revenue Recognition
The Company recognizes wholesale, E-Commerce, and international distributor revenue when products are shipped and
retail revenue at the point of sale. All sales are recognized when the customer takes title and assumes risk of loss, collection of
the related receivable is reasonably assured, persuasive evidence of an arrangement exists, and the sales price is fixed or
determinable. For wholesale and international distributor sales, allowances for estimated returns, discounts, chargebacks, and bad
debts are provided for when related revenue is recorded. For E-Commerce sales, allowances for estimated returns and bad debts
F-8
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
are provided for when related revenue is recorded. For retail sales, allowances for estimated returns are provided for when related
revenue is recorded. Amounts billed for shipping and handling costs are recorded as a component of net sales, while the related
costs paid to third-party shipping companies are recorded as a cost of sales. The Company presents revenue net of taxes collected
from customers and remitted to governmental authorities.
Accounting for Long-Lived Assets
Other long-lived assets, such as machinery and equipment, leasehold improvements, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount
to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds the estimated
future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the
asset. Intangible assets subject to amortization are amortized over their respective estimated useful lives to their estimated residual
values. The Company uses the straight-line method for depreciation and amortization of long-lived assets, except for certain
intangible assets where the Company can reliably determine the pattern in which the economic benefits of the assets will be
consumed.
At least quarterly, the Company evaluates whether any impairment triggering events, including the following, have occurred
which would require such asset groups to be tested for impairment:
•
•
•
•
•
•
A significant decrease in the market price of a long-lived asset group;
a significant adverse change in the extent or manner in which a long-lived asset group is being used or in its
physical condition;
a significant adverse change in legal factors or in business climate that could affect the value of a long-lived
asset group, including an adverse action or assessment by a regulator;
an accumulation of costs significantly in excess of the amount originally expected for the acquisition or
construction of a long-lived asset group;
a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a
projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset group;
or
a current expectation that, more likely than not, a long-lived asset group will be sold or otherwise disposed of
significantly before the end of its previously estimated useful life.
When an impairment triggering event has occurred, the Company tests for recoverability of the asset group's carrying value
using estimates of undiscounted future cash flows based on the existing service potential of the applicable asset group. In determining
the service potential of a long-lived asset group, the Company considers its remaining useful life, cash-flow generating capacity,
and physical output capacity. These estimates include the undiscounted cash flows associated with future expenditures necessary
to maintain the existing service potential. Long-lived assets are grouped with other assets and liabilities at the lowest level for
which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company assesses
potential impairment of its retail group long-lived assets by comparing trailing twelve month (TTM) store cash flows to the current
carrying value of the store's long-lived assets. Stores that have been opened for more than one year, or have otherwise been
identified by management as having one or more indicators of impairment, with TTM cash flows less than the current carrying
amount of the store's long-lived assets are then reviewed to determine if an impairment exists. An impairment loss, if any, would
only reduce the carrying amount of long-lived assets in the group based on the fair value of the group assets.
Goodwill and Other Intangible Assets
Intangible assets consist primarily of goodwill, trademarks, customer and distributor relationships, patents, lease rights, and
non-compete agreements arising from the application of purchase accounting. Intangible assets with estimable useful lives are
amortized and reviewed for impairment. Goodwill and intangible assets with indefinite useful lives are not amortized, but are
tested for impairment at least annually, as of December 31, except for the Teva trademarks and Sanuk goodwill, which are tested
as of October 31.
F-9
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
The assessment of goodwill impairment involves valuing the Company's reporting units that carry goodwill. Currently, the
Company's reporting units are the same as the Company's operating segments. The Company first assesses qualitative factors to
determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company does not calculate
the fair value of the reporting unit unless the Company determines, based on a qualitative assessment, that it is more likely than
not that its fair value is less than its carrying amount. If the Company determines this, then the first quantitative step is a comparison
of the fair value of the reporting unit with its carrying amount. If the fair value exceeds the carrying amount, the goodwill is not
impaired. If the fair value of the reporting unit is below the carrying amount, then a second step is performed to measure the
amount of the impairment, if any. The test for impairment involves the use of estimates related to the fair values of the business
operations with which goodwill is associated and the fair values of the intangible assets with indefinite lives.
The Company also evaluates the fair values of other intangible assets with indefinite useful lives in relation to their carrying
values. The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative assessment
of the indefinite life intangible asset. The Company does not calculate the fair value of the indefinite life intangible unless the
Company determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying
amount. If the Company concludes that it is more likely than not that its fair value is less than its carrying amount, then the
Company compares the fair value of the indefinite life intangible to its carrying amount, and if the fair value of the indefinite life
intangible exceeds its carrying amount, no impairment charge will be recognized. If the fair value of the indefinite life intangible
is less than the carrying amount, the Company will record an impairment charge to write-down the intangible asset to its fair value.
Determining fair value of goodwill and other intangible assets is highly subjective and requires the use of estimates and
assumptions. The Company uses estimates including future revenues, royalty rates, discount rates, attrition rates, and market
multiples, among others. The Company also considers the following factors:
•
•
•
the assets' ability to continue to generate income from operations and positive cash flow in future periods;
changes in consumer demand or acceptance of the related brand names, products, or features associated with
the assets; and
other considerations that could affect fair value or otherwise indicate potential impairment.
In addition, facts and circumstances could change, including further deterioration of general economic conditions or the
retail environment, customers reducing orders in response to such conditions, and increased competition. These or other factors
could result in changes to the calculation of fair value which could result in impairment of the Company's remaining goodwill and
other intangible assets. Changes in any one or more of these estimates and assumptions could produce different financial results.
Property and Equipment, Depreciation and Amortization
Property and equipment has a useful life expectancy of at least one year. Property and equipment includes tangible, non-
consumable items owned by the Company valued at or above $3, certain computer software costs and internal or external computer
system consulting work valued at or above $3 as defined below, and portable electronic devices valued at or above $1.5. Tangible,
non-consumable items below these amounts are expensed. The value includes the purchase price, as well as costs to acquire
(shipping and handling), install (excluding site preparation costs), secure, and prepare the item for its intended use.
Depreciation of property and equipment is calculated using the straight-line method based on estimated useful lives.
Machinery and equipment has estimated useful lives ranging from two to ten years, and furniture and fixtures has estimated useful
lives ranging from three to five years. Capitalized website costs, which are included in the machinery & equipment category, are
immaterial to the Company's consolidated financial statements. Leasehold improvements are amortized to their residual value on
the straight-line basis over their estimated economic useful lives or the lease term, whichever is shorter. Leasehold improvement
lives range from one to fifteen years. The Company allocates depreciation and amortization of property, plant, and equipment to
cost of sales and selling, general and administrative expenses (SG&A). The majority of the Company's depreciation and
amortization is included in SG&A due to the nature of its operations. Most of the Company's depreciation and amortization is
from its warehouses and its retail stores. The Company outsources all manufacturing; therefore, the amount allocated to cost of
sales is not material.
Fair Value Measurements
F-10
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
The fair values of the Company's cash and cash equivalents, trade accounts receivable, prepaid expenses, and other current
assets, short-term borrowings, trade accounts payable, accrued payroll, accrued expenses, income taxes payable and VAT payable
approximate the carrying values due to the relatively short maturities of these instruments. The fair values of the Company's long-
term liabilities, other than contingent consideration, recalculated using current interest rates, would not significantly differ from
the recorded amounts. The fair value of the contingent consideration related to acquisitions and of the Company's derivatives are
measured and recorded at fair value on a recurring basis. Changes in fair value resulting from either accretion or changes in discount
rates or in the expectations of achieving the performance targets are recorded in SG&A. The Company records the fair value of
assets or liabilities associated with derivative instruments and hedging activities in other current assets or other current liabilities,
respectively, in the consolidated balance sheets.
The inputs used in measuring fair value are prioritized into the following hierarchy:
•
•
•
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly
observable.
Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to
develop its own assumptions about the assumptions that market participants would use in pricing.
The tables below summarize the Company's financial liabilities and assets that are measured on a recurring basis at fair
value:
Fair Value at
December 31,
2013
Fair Value Measurement Using
Level 1
Level 2
Level 3
Assets (Liabilities) at fair value
Nonqualified deferred compensation asset
Nonqualified deferred compensation liability
Designated derivatives liability
$
$
$
Contingent consideration for acquisition of business $
4,410
$
(4,410) $
(550)
(48,000) $
4,410
(4,410)
$
(550)
— $
— $
(48,000)
Fair Value at
December 31,
2012
Fair Value Measurement Using
Level 1
Level 2
Level 3
Assets (Liabilities) at fair value
Nonqualified deferred compensation asset
Nonqualified deferred compensation liability
Non-designated derivatives asset
Non-designated derivatives liability
$
$
$
$
Contingent consideration for acquisition of business $
$
3,653
(3,653) $
839
$
(336) $
(71,500) $
$
3,653
(3,653) $
— $
— $
— $
— $
— $
839
$
(336) $
— $
—
—
—
—
(71,500)
The Level 2 inputs consist of forward spot rates at the end of the reporting period (see Note 9).
The fair value of the contingent consideration is based on subjective assumptions. It is reasonably possible the estimated
fair value of the contingent consideration could change in the near-term and the effect of the change could be material. The
estimated fair value of the contingent consideration attributable to our Sanuk brand acquisition is based on the Sanuk brand's
estimated future gross profits, using a probability weighted average sales forecast to determine a best estimate of gross profits.
Estimated contingent consideration payments of approximately $46,200 are included within other accrued expenses and long-
term liabilities in the consolidated balance sheet as of December 31, 2013. The estimated sales forecasts include a compound
annual growth rate (CAGR) of 22.0% from fiscal year 2013 through fiscal year 2015. The gross profit forecasts for fiscal years
2013 through 2015 range from approximately $52,000 to $80,000, which are then used to apply the contingent consideration
percentages in accordance with the applicable agreement (see Note 7). The total estimated contingent consideration is then
F-11
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
discounted to the present value with a discount rate of 7.0%. The Company's use of different estimates and assumptions could
produce different estimates of the value of the contingent consideration. For example, a 5.0% change in the estimated CAGR
would change the total liability balance at December 31, 2013 by approximately $5,000.
In connection with the Company's acquisition of the Hoka brand, the purchase price includes contingent consideration which
is based on the Hoka brand's estimated net sales for each year from 2013 through 2017, with a total maximum payout of $2,000.
The Company uses a probability weighted average sales forecast to determine a best estimate. Estimated contingent consideration
payments of approximately $1,800 are included within other accrued expenses and long-term liabilities in the consolidated balance
sheet as of December 31, 2013. The Company's use of different estimates and assumptions would not have a material impact to
the value of the contingent consideration.
Refer to Note 7 for further information on the contingent consideration arrangements.
The following table presents a reconciliation of the approximate beginning and ending amounts related to the fair value for
contingent consideration for acquisition of business, categorized as Level 3:
Beginning balance, January 1, 2012
Payments
Hoka acquisition contingent consideration
Change in fair value
Balance, December 31, 2012
Payments
Change in fair value
Balance, December 31, 2013
$
$
$
91,600
(30,000)
1,100
8,800
71,500
(25,400)
1,900
48,000
Stock Compensation
All of the Company's stock compensation issuances are classified within stockholders' equity. Stock compensation cost is
measured at the grant date based on the value of the award and is expensed ratably over the vesting period. The Company recognizes
expense only for those awards that management deems probable of achieving the performance and service objectives. Determining
the expense of share-based awards requires judgment, including estimating the percentage of awards that will be forfeited and
probabilities of meeting the awards' performance criteria. If actual forfeitures differ significantly from the estimates or if
probabilities change during a period, stock compensation expense and the Company's results of operations could be materially
impacted.
Nonqualified Deferred Compensation
In 2010, the Company established a nonqualified deferred compensation program (referred to as the Plan). The Plan permits
a select group of management employees, designated by the Plan Committee, to defer earnings to a future date on a nonqualified
basis. For each plan year, on behalf of the Company, the Board may, but is not required to, contribute any amount it desires to
any participant under the Plan. The Company's contribution will be determined by the Board annually in the fourth quarter. No
such contribution has been approved as of December 31, 2013. All amounts deferred under this plan are presented in long-term
liabilities in the consolidated balance sheets. The value of the deferred compensation is recognized based on the fair value of the
participants' accounts. The Company has established a rabbi trust as a reserve for the benefits payable under the Plan.
Use of Estimates
The preparation of the Company's consolidated financial statements in accordance with US generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial
statements and accompanying notes. Management bases these estimates and assumptions upon historical experience, existing and
known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable.
Significant areas requiring the use of management estimates relate to inventory write-downs, accounts receivable reserves, returns
liabilities, stock compensation, impairment assessments, depreciation and amortization, income tax liabilities and uncertain tax
positions, fair value of financial instruments, and fair values of acquired intangibles, assets and liabilities, including estimated
contingent consideration payments. Actual results could differ materially from these estimates.
F-12
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
Research and Development Costs
All research and development costs are expensed as incurred. Such costs amounted to $19,257, $15,617 and $14,160 in
2013, 2012 and 2011, respectively, and are included in SG&A in the consolidated statements of comprehensive income.
Advertising, Marketing, and Promotion Costs
Advertising production costs are expensed the first time the advertisement is run. All other costs of advertising, marketing,
and promotion are expensed as incurred. These expenses charged to operations for the years ended 2013, 2012 and 2011 were
$86,510, $78,528 and $57,259, respectively. Included in prepaid and other current assets at December 31, 2013 and 2012 were
$212 and $119, respectively, related to prepaid advertising, marketing, and promotion expenses for programs to take place after
December 31, 2013 and 2012, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes
in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company accounts for
interest and penalties generated by income tax contingencies as interest expense and SG&A, respectively in the consolidated
statements of comprehensive income.
Net Income per Share Attributable to Deckers Outdoor Corporation Common Stockholders
Basic net income per share represents net income attributable to Deckers Outdoor Corporation divided by the weighted-
average number of common shares outstanding for the period. Diluted net income per share represents net income attributable to
Deckers Outdoor Corporation divided by the weighted-average number of shares outstanding, including the dilutive impact of
potential issuances of common stock. For the years ended December 31, 2013, 2012 and 2011, the difference between the weighted-
average number of basic and diluted common shares resulted from the dilutive impact of nonvested stock units (NSUs), restricted
stock units (RSUs), stock appreciation rights (SARs), and options to purchase common stock. The reconciliations of basic to
diluted weighted-average common shares outstanding were as follows:
Year Ended December 31,
2013
2012
2011
Weighted-average shares used in basic
computation
34,473,000
36,879,000
38,605,000
Dilutive effect of stock-based awards*
356,000
455,000
660,000
Weighted-average shares used for diluted
computation
34,829,000
37,334,000
39,265,000
*Excluded NSUs as of December 31,
2013, 2012, and 2011
*Excluded RSUs as of December 31,
2013, 2012, and 2011
*Excluded SARs as of December 31,
2013, 2012, and 2011
—
200,000
—
795,000
671,000
319,000
525,000
525,000
525,000
The share-based awards that were excluded from the dilutive effect were excluded because the necessary conditions had
not been satisfied for the shares to be issuable based on the Company's performance through December 31, 2013, 2012 and 2011,
F-13
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
respectively. As of December 31, 2013, the excluded RSUs include the maximum amount of the Level III, 2012 and 2013 Long-
Term Incentive Plan (LTIP) Awards. As of December 31, 2012, the excluded RSUs included the maximum amount of the Level III
and 2012 LTIP Awards (see Note 5).
Foreign Currency Translation
The Company considers the US dollar as its functional currency. The Company has certain wholly-owned foreign subsidiaries
with functional currencies other than the US dollar. Certain of the Company's foreign subsidiaries' local currency is their designated
functional currency. The Company holds a portion of its cash and other monetary assets and liabilities in currencies other than
its subsidiary's functional currency, and is exposed to financial statement transaction gains and losses as a result of remeasuring
the operating results and financial positions into their functional currency. The Company remeasures these monetary assets and
liabilities using the exchange rate as of the end of the reporting period, which results in gains and losses that are included in SG&A
in the results of operations as incurred, except for gains and losses arising on intercompany foreign currency transactions that are
of a long-term investment nature. In addition, the Company translates assets and liabilities of subsidiaries with reporting currencies
other than US dollars into US dollars using the exchange rates at of the end of the reporting period, which results in financial
statement translation gains and losses in other comprehensive income.
Derivative Instruments and Hedging Activities
The Company transacts business in various foreign currencies and has international sales and expenses denominated in
foreign currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward or
option contracts, generally with maturities of 15 months or less, to reduce the volatility of cash flows primarily related to forecasted
revenue denominated in certain foreign currencies. In addition, the Company utilizes foreign exchange forward and option contracts
to mitigate foreign currency exchange rate risk associated with foreign currency-denominated assets and liabilities, primarily
intercompany balances. The Company does not use foreign currency contracts for speculative or trading purposes.
Certain of the Company's foreign currency forward contracts are designated cash flow hedges of forecasted intercompany
sales and are subject to foreign currency exposures. These contracts allow the Company to sell Euros, British Pounds and Yen in
exchange for US dollars at specified contract rates. Forward contracts are used to hedge forecasted intercompany sales over
specific quarters. Changes in the fair value of these forward contracts designated as cash flow hedges are recorded as a component
of accumulated other comprehensive (loss) income within stockholders' equity, and are recognized in the consolidated statements
of comprehensive income during the period which approximates the time the corresponding third-party sales occur. The Company
may also enter into foreign exchange contracts that are not designated as hedging instruments for financial accounting purposes.
These contracts are generally entered into to offset the gains and losses on certain intercompany balances until the expected time
of repayment. Accordingly, any gains or losses resulting from changes in the fair value of the non-designated contracts are reported
in SG&A in the consolidated statements of comprehensive income. The gains and losses on these contracts generally offset the
gains and losses associated with the underlying foreign currency-denominated balances, which are also reported in SG&A. See
Note 9 for the impact of derivative instruments and hedging activities on the Company's consolidated financial statements.
The Company records the assets or liabilities associated with derivative instruments and hedging activities at fair value
based on Level 2 inputs in other current assets or other current liabilities, respectively, in the consolidated balance sheets. The
Level 2 inputs consist of forward spot rates at the end of the reporting period. The accounting for gains and losses resulting from
changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting.
For all hedging relationships, the Company formally documents the hedging relationship and its risk management objective
and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how
the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a
description of the method used to measure ineffectiveness. The Company factors the nonperformance risk of the Company and
the counterparty into the fair value measurements of its derivatives. The Company also formally assesses, both at the inception
of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly
effective in offsetting changes in cash flows of hedged transactions. The Company assesses hedge effectiveness and measures
hedge ineffectiveness at least quarterly. For derivative instruments that are designated and qualify as part of a cash flow hedging
relationship, the effective portion of the gain or loss on the derivative is reported in other comprehensive income (OCI) and
reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses
on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness
are recognized in current earnings.
F-14
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in
offsetting cash flows attributable to the hedged risk, the derivative expires or is sold, terminated, or exercised, the cash flow hedge
is dedesignated because a forecasted transaction is not probable of occurring, or management determines to remove the designation
of the cash flow hedge. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the
Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair
value in earnings. When it is probable that a forecasted transaction will not occur, the Company discontinues hedge accounting
and recognizes immediately in earnings gains and losses that were accumulated in OCI related to the hedging relationship.
Comprehensive Income
Comprehensive income is the total of net earnings and all other non-owner changes in equity. Except for net income, foreign
currency translation adjustments, and unrealized gains and losses on cash flow hedges, the Company does not have any transactions
and other economic events that qualify as comprehensive income.
Business Segment Reporting
Management of the Company has determined its reportable segments are its strategic business units and it is by these segments
that information is reported to the Chief Operating Decision Maker (CODM). The six reportable segments are the UGG, Teva,
Sanuk and other brands wholesale divisions, the E-Commerce business, and the retail store business. The CODM is the Principal
Executive Officer. The Company performs an annual analysis of the appropriateness of its reportable segments. Information
related to the Company's business segments is summarized in Note 8.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Cash and cash equivalents include $154,105 and $52,650 of money market funds at December 31, 2013 and 2012, respectively.
Retirement Plan
The Company provides a 401(k) defined contribution plan that eligible US employees may elect to participate in through
tax-deferred contributions. The Company matches 50% of each eligible participant's tax-deferred contributions on up to 6% of
eligible compensation on a per payroll period basis, with a true-up contribution if such eligible participant is employed by the
Company on the last day of the calendar year. Internationally, the Company has various defined contribution plans. Certain
international locations require mandatory contributions under social programs, and the Company contributes at least the statutory
minimums. Domestic 401(k) matching contributions totaled $1,386, $1,066 and $1,710 during 2013, 2012 and 2011, respectively.
In addition, the Company may also make discretionary profit sharing contributions to the plan. However, the Company did not
make any profit sharing contributions for the years ended December 31, 2013, 2012 or 2011.
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU, Testing Indefinite - Lived Intangible Assets for Impairment, which allows an entity to
first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset, other than
goodwill is impaired. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely
than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it will not be required to perform
a quantitative impairment test for that asset. Entities are required to test indefinite-lived assets for impairment at least annually
and more frequently if indicators of impairment exist. This ASU is effective for the Company January 1, 2013, with early adoption
permitted. As permitted, the Company early adopted this update with its December 31, 2012 reporting period.
(2) Property and Equipment
Property and equipment is summarized as follows:
F-15
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
Land
Machinery and equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation and amortization
December 31,
2013
2012
$
19,954
$
84,941
25,961
142,683
273,539
99,473
19,954
67,582
22,280
85,134
194,950
69,580
Net property and equipment
$
174,066
$
125,370
(3) Notes Payable and Long-Term Debt
In August 2011, the Company entered into a Credit Agreement (the Credit Agreement) with JPMorgan Chase Bank, National
Association as the administrative agent, Comerica Bank and HSBC Bank USA, National Association as syndication agents, and
the lenders party thereto. In August 2012, the Company amended and restated in its entirety the Credit Agreement (Amended and
Restated Credit Agreement). The Amended and Restated Credit Agreement is a five-year, $400,000 secured revolving credit
facility that contains a $75,000 sublimit for the issuance of letters of credit and a $5,000 sublimit for swingline loans and matures
on August 30, 2017. Subject to customary conditions and the approval of any lender whose commitment would be increased, the
Company has the option to increase the maximum principal amount available under the Amended and Restated Credit Agreement
by up to an additional $100,000. None of the lenders under the Amended and Restated Credit Agreement has committed at this
time or is obligated to provide any such increase in the commitments. At the Company's option, revolving loans issued under the
Amended and Restated Credit Agreement will bear interest at either the adjusted London Interbank Offered Rate (LIBOR) for 30
days (0.17% at December 31, 2013) plus 1.75% per annum, in the case of LIBOR borrowings, or at the alternate base rate plus
0.75% per annum, and thereafter the interest rate will fluctuate between adjusted LIBOR plus 1.50% per annum and adjusted
LIBOR plus 2.25% per annum (or between the alternate base rate plus 0.50% per annum and the alternate base rate plus 1.25%
per annum), based upon the Company's total adjusted leverage ratio at such time. In addition, the Company will initially be required
to pay fees of 0.25% per annum on the daily unused amount of the revolving credit facility, and thereafter the fee rate will fluctuate
between 0.20% and 0.35% per annum, based upon the Company's total adjusted leverage ratio.
The Company's obligations under the Amended and Restated Credit Agreement are guaranteed by the Company's existing
and future domestic subsidiaries, other than certain immaterial subsidiaries, and foreign subsidiaries (the Guarantors), and is
secured by a first-priority security interest in substantially all of the assets of the Company and the Guarantors, including all or a
portion of the equity interests of certain of the Company's domestic and foreign subsidiaries.
The Amended and Restated Credit Agreement contains financial covenants which include: the asset coverage ratio must be
greater than 1.10 to 1.00; the sum of the consolidated annual earnings before interest, taxes, depreciation, and amortization
(EBITDA) and annual rental expense, divided by the sum of the annual interest expense and the annual rental expense must be
greater than 2.25 to 1.00; and other customary limitations. The Amended and Restated Credit Agreement contains certain other
covenants which include: the maximum additional secured debt related to a capital asset may not exceed $65,000 per year, excluding
$75,000 for the Company's new corporate headquarters, the maximum additional unsecured debt may not exceed $200,000; the
maximum secured debt not related to a capital asset may not exceed $5,000, a judgment may not exceed $10,000; maximum
ERISA event of $10,000 in one year, $20,000 in all years; the Company may not have a change of control (as defined in the
Amended and Restated Credit Agreement); acquisitions may not exceed $100,000, if the total adjusted leverage ratio does not
exceed 2.75 to 1.00 and the Company must have a minimum amount of cash plus unused credit of $75,000. There is no restriction
on dividends or share repurchases if the minimum amount of cash and unused credit is $150,000 for the quarters ending March
31, June 30 and December 31 and $75,000 for the quarter ending September 30 and the total adjusted leverage ratio does not
exceed 2.75 to 1.00.
In June 2013, the Company amended the Amended and Restated Credit Agreement to permit additional borrowings in China
of $12,500 and revised certain financial covenants including an increase in the maximum amount permitted to be spent on the
headquarters building from $75,000 to $80,000 and revised the terms of the total adjusted leverage ratio to not exceed 3.25 to 1.00
for the quarter ending September 30, from 2.75 to 1.00.
F-16
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
In August 2013, Deckers (Beijing) Trading Co., LTD, a fully owned subsidiary, entered into a credit facility in China (China
Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 60,000, or approximately $10,000, in the
quarters ending September 30 and December 31 and CNY 20,000, or approximately $3,300, in the quarters ending March 31 and
June 30. Interest is based on the People’s Bank of China rate, which was 6.0% at December 31, 2013. The China Credit Facility
is on demand and subject to annual review and renewal. The obligations under the China Credit Agreement are guaranteed by
the Company for 110% of the facility amount in USD. In December 2013, the China Credit Facility was amended to provide for
the uncommitted revolving line of credit of up to CNY 60,000 to be extended to the entire year. At December 31, 2013, the
Company had approximately $10,000 of outstanding borrowings under the China Credit Facility.
At December 31, 2013, the Company had no outstanding borrowings under the Amended and Restated Credit Agreement
and outstanding letters of credit of approximately $200. As a result, the unused balance under the Amended and Restated Credit
Agreement was approximately $399,800 at December 31, 2013. After applying the asset coverage ratio and adjusted leverage
ratio, the amount available to borrow at December 31, 2013 was approximately $251,800. In 2012 the Company incurred
approximately $1,800 of deferred financing costs which are included in prepaid expenses and are amortized over the term of the
Amended and Restated Credit Agreement using the straight-line method.
(4) Income Taxes
Components of income tax expense (benefit) are as follows:
2013:
Current
Deferred
2012:
Current
Deferred
2011:
Current
Deferred
Federal
State
Foreign
Total
$
$
$
$
$
$
51,058
(2,580)
48,478
50,911
(6,083)
44,828
63,758
1,003
64,761
$
$
$
$
$
$
6,252
(209)
6,043
6,482
414
6,896
12,226
(1,067)
11,159
$
$
$
$
$
$
6,650
(1,303)
5,347
3,368
12
3,380
7,487
(3)
7,484
$
$
$
$
$
$
63,960
(4,092)
59,868
60,761
(5,657)
55,104
83,471
(67)
83,404
Foreign income before income taxes was $60,851, $51,409 and $108,738 during the years ended December 31, 2013, 2012
and 2011, respectively.
Actual income taxes differed from that obtained by applying the statutory federal income tax rate to income before income
taxes as follows:
Years Ended December 31,
2013
2012
2011
Computed expected income taxes
$
71,945
$
64,282
$
99,842
State income taxes, net of federal income
tax benefit
Foreign rate differential
Other
4,435
(16,399)
(113)
59,868
$
3,562
(12,908)
168
55,104
$
6,912
(24,783)
1,433
83,404
$
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities
are presented below:
F-17
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
2013
2012
Deferred tax assets (liabilities), current:
Uniform capitalization adjustment to inventory
$
5,492
$
Bad debt and other reserves
State taxes
Prepaid expenses
Accrued bonus
Foreign currency hedge
Total deferred tax assets, current
Deferred tax assets (liabilities), noncurrent:
Amortization and impairment of intangible assets
Depreciation of property and equipment
Share-based compensation
Foreign currency translation
Deferred rent
Acquisition costs
Other
Net operating loss carryforwards
Total deferred tax assets, noncurrent
10,655
508
(2,193)
5,071
348
19,881
4,603
(6,034)
11,226
667
4,028
755
—
506
15,751
Net deferred tax assets
$
35,632
$
6,870
11,582
799
(1,961)
—
—
17,290
5,312
(8,524)
11,906
244
3,247
834
111
242
13,372
30,662
In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately
$94,000. The deferred tax assets are primarily related to the Company's domestic operations. The change in net deferred tax assets
between December 31, 2013 and December 31, 2012 includes approximately $500 attributable to OCI and approximately $400
attributable to goodwill. Domestic taxable income for the years ended December 31, 2013 and 2012 was $151,204 and $141,660,
respectively. Based upon the level of historical taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes it is more likely than not that the results of future operations
will generate sufficient taxable income to realize the net deferred tax assets and, accordingly, no valuation allowance was recorded
in 2013 or 2012.
As of December 31, 2013, withholding and US taxes have not been provided on approximately $271,000 of unremitted
earnings of non-US subsidiaries because the earnings are expected to be reinvested outside of the US indefinitely. Repatriation
of all foreign earnings would result in approximately $80,000 of US income tax. Such earnings would become taxable upon the
sale or liquidation of these subsidiaries or upon the remittance of dividends. As of December 31, 2013, the Company had
approximately $95,000 of cash and cash equivalents outside the US that would be subject to additional income taxes if it were to
be repatriated. If the Company were to repatriate foreign cash, the Company would record the US tax liability net of any foreign
income taxes previously paid on this cash. The Company has no plans to repatriate any of its foreign cash. For the full year 2013,
the Company generated approximately 11.0% of its pre-tax earnings from a country which does not impose a corporate income
tax.
When tax returns are filed, some positions taken are subject to uncertainty about the merits of the position taken or the
amount that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period
during which management believes it is more likely than not that the position will be sustained upon examination. Tax positions
that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50%
likely of being realized upon settlement. A reconciliation of the beginning and ending amounts of total unrecognized tax benefits
is as follows:
F-18
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
Balance at January 1, 2012
Gross decrease related to prior years' tax positions
Settlements
Balance at December 31, 2012
Gross change related to current and prior years' tax positions
Balance at December 31, 2013
$
$
$
3,271
—
(3,271)
—
—
—
As of December 31, 2013 and 2012, interest of $360 and $452, respectively, was accrued in the consolidated balance sheets
resulting from outstanding state liabilities as a result of resolved Federal examinations.
The Company files income tax returns in the US federal jurisdiction and various state, local, and foreign jurisdictions. With
few exceptions, the Company is no longer subject to US federal, state, local, or non-US income tax examinations by tax authorities
for years before 2008.
Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable
tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the
Company's estimates or from its historical income tax provisions and accruals. The results of an audit or litigation could have a
material effect on operating results or cash flows in the periods for which that determination is made. In addition, future period
earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments.
The Company has on-going income tax examinations under various state tax jurisdictions. It is the opinion of management
that these audits and inquiries will not have a material impact on the Company's consolidated financial statements.
(5) Stockholders' Equity
In May 2006, the Company adopted the 2006 Equity Incentive Plan (the 2006 Plan), which was amended May 9, 2007. The
primary purpose of the 2006 Plan is to encourage ownership in the Company by key personnel, whose long-term service is
considered essential to the Company's continued success. The 2006 Plan provides for 6,000,000 shares of the Company's common
stock that are reserved for issuance to employees, directors, or consultants. The maximum aggregate number of shares that may
be issued under the 2006 Plan through the exercise of incentive stock options is 4,500,000. Pursuant to the Deferred Stock Unit
Compensation Plan, a Sub Plan under the 2006 Plan, a participant may elect to defer settlement of their outstanding unvested
awards until such time as elected by the participant.
The Company grants NSUs annually to key personnel. The NSUs granted entitle the employee recipients to receive shares
of common stock in the Company upon vesting of the NSUs. The vesting of most NSUs is subject to achievement of certain
performance targets, with the remaining NSUs subject only to time restrictions. For NSUs granted prior to 2011, these awards
vest in quarterly increments between the third and fourth anniversary of the grant. For the majority of NSUs granted in 2011 and
after, if the performance goals are achieved, these awards vest in equal one-third installments at the end of each of the three years
after the performance goals are achieved. For NSUs granted in 2012, the performance target was not met and, therefore, the awards
will not vest.
The Company also has long-term incentive award agreements under the 2006 Plan for issuance of SAR awards and RSU
awards to the Company's current and future executive officers. These awards vest subject to certain long-term performance
objectives and certain long-term service conditions. One-half of the SAR and RSU awards vested 80% on December 31, 2010
and 20% on December 31, 2011, and, provided that the conditions are met, one-half of the SAR and RSU awards vest 80% on
December 31, 2015 and 20% on December 31, 2016. The Company considers achievement of the remaining performance
conditions as probable and is recognizing such compensation cost over the service period.
In June 2011, the Board of Directors of the Company adopted a long-term incentive award under its 2006 Equity Incentive
Plan (Level III Awards). The shares under these awards will be available for issuance to current and future members of the
Company's management team, including the Company's named executive officers. Each recipient will receive a specified maximum
number of RSUs, each of which will represent the right to receive one share of the Company's common stock. These awards vest
subject to certain long-term performance objectives and certain long-term service conditions. The awards will vest on December 31,
2014 only if the Company meets certain revenue targets ranging between $1,850,000 and $2,500,000 and certain diluted earnings
per share targets ranging between $7.00 and $9.60 for the year ended December 31, 2014. No vesting of any Level III Award will
F-19
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
occur if either of the threshold performance criteria is not met for the year ending December 31, 2014. To the extent financial
performance is achieved above the threshold levels, the number of RSUs that will vest will increase up to the maximum number
of units granted under the award. Under this program, the Company granted a maximum amount of 275,000 RSUs during the
year ended December 31, 2011. The grant date fair value of these RSUs was $82.09 per share. As of December 31, 2013, 2012
and 2011, the Company did not believe that the achievement of the performance objectives for the Level III Awards was probable,
and therefore the Company did not recognize compensation expense for these awards. If the performance objectives become
probable, the Company will then begin recording an expense for the Level III Awards and would recognize a cumulative catch-
up adjustment in the period they become probable. As of December 31, 2013, the cumulative amount would be approximately
$14,000 based on the maximum number of units if the performance objectives were probable.
In May 2012, the Board of Directors of the Company adopted a long-term incentive award under its 2006 Equity Incentive
Plan (2012 LTIP Awards). The shares under these awards will be available for issuance to current and future members of the
Company's management team, including the Company's named executive officers. Each recipient will receive a specified maximum
number of RSUs, each of which will represent the right to receive one share of the Company's common stock. These awards vest
subject to certain long-term performance objectives and certain long-term service conditions. The awards will vest on December 31,
2015 only if the Company meets certain revenue targets ranging between $2,200,000 and $2,900,000 and certain diluted earnings
per share targets ranging between $7.00 and $10.50 for the year ended December 31, 2015. No vesting of any 2012 LTIP Awards
will occur if either of the threshold performance criteria is not met for the year ending December 31, 2015. To the extent financial
performance is achieved above the threshold levels, the number of RSUs that will vest will increase up to the maximum number
of units granted under the award. Under this program, the Company granted awards that contain a maximum amount of 352,000
RSUs during the year ended December 31, 2012. The grant date fair value of these RSUs was $56.12 per share. As of December 31,
2013 and 2012, the Company did not believe that the achievement of the performance objectives of these awards was probable,
and therefore the Company did not recognize compensation expense for these awards. If the performance objectives become
probable, the Company will then begin recording an expense for the 2012 LTIP Awards and would recognize a cumulative catch-
up adjustment in the period they become probable. As of December 31, 2013, the cumulative amount would be approximately
$8,000 based on the maximum number of units if the performance objectives were probable.
In December 2013, the Board of Directors of the Company adopted a long-term incentive award under its 2006 Equity
Incentive Plan (2013 LTIP Awards). The shares under these awards will be available for issuance to current and future members
of the Company's management team, including the Company's named executive officers. Each recipient will receive a specified
maximum number of RSUs, each of which will represent the right to receive one share of the Company's common stock. These
awards vest subject to certain long-term performance objectives and certain long-term service conditions. The recipients of these
awards are divided into two participant groups, revenue generating and non-revenue generating. The awards for the non-revenue
generating participants will vest on March 31, 2016 only if the Company meets certain revenue targets ranging between $2,290,000
and $2,558,000 and certain EBITDA targets ranging between $372,000 and $415,000 for the fiscal year ending March 31, 2016.
The awards for the revenue generating participants will vest on March 31, 2016 only if the Company achieves EBITDA of $350,000
and the respective revenue by brand and channel managed by each participant meets certain revenue targets that are tailored to
each brand and channel for the fiscal year ending March 31, 2016. No vesting of any 2013 LTIP Awards will occur if either of
the threshold performance criteria is not met for the year ending March 31, 2016. To the extent financial performance is achieved
above the threshold levels, the number of RSUs that will vest will increase up to the maximum number of units granted under the
award. Under this new program, the Company granted awards that contain a maximum amount of 156,000 RSUs during the year
ended December 31, 2013. The grant date fair value of these RSUs was $84.52 per share. As of December 31, 2013, as a result
of the Company's current long-range forecast, the Company believed that the achievement of at least the threshold performance
objectives of these awards was probable, and therefore the Company recognized compensation expense accordingly. The amount
recognized was immaterial to the Company's consolidated financial statements.
In February 2012, the Company approved a stock repurchase program to repurchase up to $100,000 of the Company's
common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements,
and other factors. The program did not obligate the Company to acquire any particular amount of common stock and the program
could have been suspended at any time at the Company's discretion. During the six months ended June 30, 2012, the Company
repurchased approximately 1,749,000 shares under this program, for approximately $100,000, or an average price of $57.16. As
of June 30, 2012, the Company had repurchased the full amount authorized under this program. The purchases were funded from
available working capital.
In June 2012, the Company approved a new stock repurchase program to repurchase up to $200,000 of the Company's
common stock in the open market or in privately negotiated transactions, subject to market conditions, applicable legal requirements,
F-20
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
and other factors. The program does not obligate the Company to acquire any particular amount of common stock and the program
may be suspended at any time at the Company's discretion. As of December 31, 2013 and 2012, the Company had repurchased
approximately 2,765,000 shares under this program, for approximately $120,700, or an average price of $43.66, leaving the
remaining approved amount at $79,300.
On a quarterly basis, the Company grants fully-vested shares of its common stock to each of its outside directors. The fair
value of such shares is expensed on the date of issuance.
The table below summarizes stock compensation amounts recognized in the consolidated statements of comprehensive
income:
Compensation expense recorded for:
NSUs
SARs
RSUs
Directors' shares
Total compensation expense
Income tax benefit recognized
Net compensation expense
Year Ended December 31,
2013
2012
2011
$
10,545
$
11,849
$
1,302
287
1,002
1,501
231
1,080
13,136
(4,950)
8,186
$
14,661
(5,573)
9,088
$
$
11,719
1,813
305
966
14,803
(5,788)
9,015
The table below summarizes the total remaining unrecognized compensation cost related to nonvested awards that are
considered probable of vesting as of December 31, 2013, and the weighted-average period over which the cost is expected to be
recognized as of December 31, 2013:
Unrecognized
Compensation
Cost
Weighted-
Average
Remaining
Vesting Period
(Years)
$
$
1.8
2.2
2.2
12,427
3,582
4,859
20,868
NSUs
SARs
RSUs
Total
The unrecognized compensation cost excludes a maximum of $19,825 and $18,445 of compensation cost on the Level III
Awards and 2012 LTIP Awards, respectively, as achievement of the performance conditions are not considered probable.
F-21
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
Nonvested Stock Units Issued Under the 2006 Plan
Nonvested at January 1, 2011
Granted
Vested
Forfeited
Nonvested at December 31, 2011
Granted
Vested
Forfeited
Cancelled*
Nonvested at December 31, 2012
Granted
Vested
Forfeited
Nonvested at December 31, 2013
Number of
Shares
798,000
$
199,000
(263,000)
(57,000)
677,000
209,000
(297,000)
(18,000)
(200,000)
371,000
304,000
(315,000)
(20,000)
340,000
$
$
$
Weighted-
Average
Grant-Date
Fair Value
35.61
87.50
40.31
46.61
48.14
63.18
35.90
63.68
62.17
58.51
57.30
53.19
61.08
62.23
_______________________________________________________________________________
* Nonvested Stock Units cancelled during the period represent awards granted whose performance criteria were
not met.
Stock Appreciation Rights Issued Under the 2006 Plan
Outstanding at January 1, 2011
Granted
Exercised
Forfeited
Number of
SARs
1,125,000
$
—
(365,000)
—
Outstanding at December 31, 2011
760,000
$
Granted
Exercised
Forfeited
—
(15,000)
—
Outstanding at December 31, 2012
745,000
$
Granted
Exercised
Forfeited
Outstanding at December 31, 2013
Exercisable at December 31, 2013
Expected to vest and exercisable at
December 31, 2013
—
(15,000)
—
730,000
205,000
694,817
$
$
$
F-22
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
26.73
—
26.73
—
26.73
—
26.73
—
26.73
—
26.73
—
26.73
26.73
3.4
26.73
6.9
8.7
$
59,636
8.8
$
37,118
7.9
$
10,087
6.9
$
$
$
42,143
11,835
40,112
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
The maximum contractual term is 10 and 15 years from the date of grant for those SARs with final vesting dates of
December 31, 2011 and December 31, 2016, respectively. The number of SARs expected to vest is based on the probability of
achieving certain performance conditions and is also reduced by estimated forfeitures. The difference between the amount
outstanding and the amount expected to vest and exercisable at December 31, 2013 was estimated forfeitures for estimated failure
to meet the long-term service conditions. On February 29, 2012, 120,000 SARs that vested on December 31, 2011 became
exercisable.
Restricted Stock Units Issued Under the 2006 Plan
Nonvested at January 1, 2011
Granted
Vested
Forfeited
Nonvested at December 31, 2011
Granted
Vested
Forfeited
Nonvested at December 31, 2012
Granted
Vested
Forfeited
Nonvested at December 31, 2013
Number of
Shares
Weighted-
Average
Grant-Date
Fair Value
85,000
$
275,000
(16,000)
(25,000)
319,000
352,000
$
—
—
671,000
$
156,000
—
(32,000)
795,000
$
26.73
82.09
26.73
82.09
70.15
56.12
—
—
62.80
84.52
—
63.69
67.03
The amounts granted in 2011, 2012 and 2013 are the maximum amount under the Level III Awards, 2012 LTIP Awards and
2013 LTIP Awards, respectively.
(6) Accumulated Other Comprehensive Loss
Accumulated balances of the components within accumulated other comprehensive loss are as follows:
Cumulative foreign currency translation adjustment
Unrealized loss on foreign currency hedging, net of tax
Accumulated other comprehensive loss
December 31,
2013
2012
$
$
(2,157) $
(486)
(2,643) $
(1,400)
—
(1,400)
F-23
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
(7) Commitments and Contingencies
The Company leases office, distribution, retail facilities, and automobiles, under operating lease agreements, which expire
through 2028. Some of the leases contain renewal options for approximately one to fifteen years. Future minimum commitments
under the lease agreements are as follows:
Year ending December 31:
2014
2015
2016
2017
2018
Thereafter
$
$
46,060
45,194
42,436
39,129
33,218
116,593
322,630
Rent expense is recorded using the straight-line method to account for scheduled rental increases or rent holidays. Lease
incentives for tenant improvement allowances are recorded as reductions of rent expense over the lease term. The rental payments
under some of our retail store leases are based on a minimum rental plus a percentage of the store's sales in excess of stipulated
amounts. The following schedule shows the composition of total rental expense.
Minimum rentals
Contingent rentals
Years Ended December 31,
2013
2012
2011
$
$
47,871
12,318
60,189
$
$
37,270
9,366
46,636
$
$
26,645
6,085
32,730
Purchase Obligations. The Company had $238,947 of outstanding purchase orders with its manufacturers as of December
31, 2013. In addition, the Company entered into agreements for the build out of new retail stores, promotional activities and other
services. Future commitments under these purchase orders and other agreements for the year ending December 31, 2014 total
$245,168. Included in the 2014 amount are remaining commitments, net of deposits, that are also unconditional purchase obligations
relating to sheepskin contracts. The Company enters into contracts requiring minimum purchase commitments of sheepskin that
Deckers' affiliates, manufacturers, factories, and other agents (each or collectively, a Buyer) must make on or before a specified
target date. Under certain contracts, the Company may pay an advance deposit that shall be repaid to the Company as Buyers
purchase goods under the terms of these agreements. Included in other current assets on the consolidated balance sheets is
approximately $67,000 and $39,000 of advance deposits as of December 31, 2013 and 2012, respectively. In the event that a Buyer
does not purchase certain minimum commitments on or before certain target dates, the supplier may retain a portion of the advance
deposit until the amounts of the commitments are fulfilled. These agreements may result in unconditional purchase obligations
if a Buyer does not meet the minimum purchase requirements. In the event that a Buyer does not purchase such minimum
commitments by the target dates, the Company shall be responsible for compliance with any and all minimum purchase
commitments under these contracts, and the Company would make additional deposit payments towards the purchase of the
remaining minimum commitments and such additional deposits would be returned as the Buyers purchase the remaining minimum
commitments. The contracts do not permit net settlement. Minimum commitments for these contracts as of December 31, 2013
were as follows:
F-24
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
Contract
Effective Date
Final
Target Date
Advance
Deposit
Total
Minimum
Commitment
Remaining
Deposit
Remaining
Commitment,
Net of Deposit
October 2011
September 2014
$50,000
$286,000
$38,273
$13,034
October 2012
September 2013
—
$83,000
—
$3,265
April 2013
September 2014
$28,931
$42,800
$28,931
$13,869
September 2013
September 2014
—
$50,730
—
$39,958
Subsequent to December 31, 2013 the Company entered into an amendment to the sheepskin contract effective April 2013
for an additional commitment of $21,400. The Company also entered into two new contracts with a final target date of
September 30, 2014. One of these contracts requires a minimum purchase commitment of sheepskin of $8,550 and the other
contract requires a minimum purchase commitment of UGGpure of $27,600. In the event that the minimum commitment has
not been reached by September 30, 2014 the Company will advance funds to cover the remaining commitment under the
contract, with such advanced amounts to be refunded upon the future purchase of the minimum purchase commitment by a
Buyer.
Indemnification and Legal Contingencies. The Company is currently involved in various legal claims arising from the
ordinary course of business. Management does not believe that the disposition of these matters will have a material effect on the
Company's financial position or results of operations. In addition, the Company has agreed to indemnify certain of its licensees,
distributors, and promotional partners in connection with claims related to the use of the Company's intellectual property. The
terms of such agreements range up to 5 years initially and generally do not provide for a limitation on the maximum potential
future payments. Management believes the likelihood of any payments is remote and would be immaterial. The Company
determined the risk was low based on a prior history of insignificant claims. The Company is not currently involved in any
indemnification matters in regards to its intellectual property.
Contingent Consideration. In July 2011, the Company acquired the Sanuk brand, and the total purchase price included
contingent consideration payments. As of December 31, 2013, the remaining contingent consideration payments, which have no
maximum, are as follows:
•
•
36.0% of the Sanuk brand gross profit in 2013, which was approximately $18,600, and
40.0% of the Sanuk brand gross profit in 2015.
As of December 31, 2013 and 2012, contingent consideration for the acquisition of the Sanuk brand of approximately $46,200
and $70,400, respectively, are included within other accrued expenses (approximately $18,600 and $25,400 at December 31, 2013
and 2012, respectively) and long-term liabilities (approximately $27,600 and $45,000 at December 31, 2013 and 2012, respectively)
in the consolidated balance sheets.
In September 2012, the Company acquired Hoka, and the total purchase price included contingent consideration payments
with a maximum of $2,000. Based on current projections as of December 31, 2013, contingent consideration for the acquisition
of the Hoka brand of approximately $1,800 is included within other accrued expenses and long-term liabilities in the consolidated
balance sheets.
(8) Business Segments, Concentration of Business, and Credit Risk and Significant Customers
The Company's accounting policies of the segments below are the same as those described in the summary of significant
accounting policies (see Note 1), except that the Company does not allocate corporate overhead costs or non-operating income
and expenses to segments. The Company evaluates segment performance primarily based on net sales and income or loss from
operations. The Company's reportable segments include the strategic business units for the worldwide wholesale operations of
the UGG brand, Teva brand, Sanuk brand, and its other brands, its E-Commerce business and its retail store business. The wholesale
operations of each brand are managed separately because each requires different marketing, research and development, design,
sourcing, and sales strategies. The E-Commerce and retail store segments are managed separately because they are Direct-to-
F-25
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
Consumer sales, while the brand segments are wholesale sales. The income or loss from operations for each of the segments
includes only those costs which are specifically related to each segment, which consist primarily of cost of sales, costs for research
and development, design, selling and marketing, depreciation, amortization, and the costs of employees and their respective
expenses that are directly related to each business segment. The unallocated corporate overhead costs include the following: costs
of the distribution centers, certain executive and stock compensation, accounting and finance, legal, information technology, human
resources, and facilities costs, among others. Beginning January 1, 2013, all gross profit derived from the sales to third parties of
the E-Commerce and retail stores segments is reported in income from operations of the E-Commerce and retail stores segments,
respectively. In prior periods, the gross profit derived from the sales to third parties of the E-Commerce and retail stores segments
was separated into two components: (i) the wholesale profit was included in the related operating income or loss of each wholesale
segment, and represented the difference between the Company’s cost and the Company’s wholesale selling price, and (ii) the retail
profit was included in the operating income of the E-Commerce and retail stores segments, and represented the difference between
the Company’s wholesale selling price and the Company’s retail selling price. Each of the wholesale segments charged the E-
Commerce and retail segments the same price that they charged third party retail customers, with the resulting profit from inter-
segment sales included in income (loss) from operations of each respective wholesale segment. Inter-segment sales and cost of
sales are eliminated upon consolidation. These changes in segment reporting only changed the presentation within the table below
and did not impact th e Company’s consolidated financial statements for any periods. The Company believes that these changes
better align with how management views the business, which is that sales of the E-Commerce and retail stores segments each
generate a cash flow of their own and the wholesale segments are not active in generating those cash flows. The segment information
for the years ended December 31, 2012 and 2011 have been adjusted retrospectively to conform to the current period presentation.
The Company's other brands include Simple®, TSUBO®, Ahnu®, MOZO®, and Hoka. The Company ceased distribution
of the Simple brand effective December 31, 2011. The results of operations for Hoka are included in the other brands segments
beginning from the acquisition date of September 27, 2012. The wholesale operations of the Company's other brands are included
as one reportable segment, other wholesale, presented in the figures below. The Sanuk brand operations are included in the
Company's segment reporting effective upon the acquisition date of July 1, 2011. Business segment information is summarized
as follows:
F-26
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
Net sales to external customers:
UGG wholesale
Teva wholesale
Sanuk wholesale
Other brands wholesale
E-Commerce
Retail stores
Income (loss) from operations:
UGG wholesale
Teva wholesale
Sanuk wholesale
Other brands wholesale
E-Commerce
Retail stores
Unallocated overhead
Depreciation and amortization:
UGG wholesale
Teva wholesale
Sanuk wholesale
Other brands wholesale
E-Commerce
Retail stores
Unallocated overhead
Capital expenditures:
UGG wholesale
Teva wholesale
Sanuk wholesale
Other brands wholesale
E-Commerce
Retail stores
Unallocated overhead
Total assets from reportable segments:
UGG wholesale
Teva wholesale
Sanuk wholesale
Other brands wholesale
E-Commerce
Retail stores
Years Ended December 31,
2013
2012
2011
$
818,377
109,334
94,420
38,276
169,534
326,677
$ 1,556,618
$
819,256
108,591
89,804
20,194
130,592
245,961
$ 1,414,398
$
915,203
118,742
26,039
21,801
106,498
189,000
$ 1,377,283
206,039
9,228
14,398
(4,523)
56,190
63,306
(157,690)
186,948
622
515
8,838
1,622
839
12,073
8,911
33,420
314
326
448
197
347
34,004
25,966
61,602
377,997
59,641
209,861
29,446
5,058
134,804
816,807
$
$
$
$
$
$
$
$
339,665
19,265
798
(9,993)
47,244
58,552
(170,693)
284,838
4,375
587
5,125
533
540
6,082
8,185
25,427
706
305
1,778
198
1,419
22,297
29,083
55,786
347,213
61,893
217,936
10,690
5,964
80,514
724,210
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
224,736
9,165
20,591
(9,807)
66,819
65,716
(169,323)
207,897
641
641
7,761
507
744
21,117
9,959
41,370
313
63
91
477
676
34,993
43,217
79,830
314,122
54,868
208,669
34,315
7,331
182,491
801,796
F-27
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
Inter-segment sales from the Company’s wholesale segments to the Company’s E-Commerce and retail stores segments are
at the Company’s cost, and there is no inter-segment profit on these inter-segment sales. Income (loss) from operations of the
wholesale segments does not include any inter-segment gross profit from sales to the E-Commerce and retail stores segments.The
assets allocable to each segment generally include accounts receivable, inventory, fixed assets, intangible assets, and certain other
assets that are specifically identifiable with one of the Company's segments. Unallocated assets are the assets not specifically
related to the segments and include cash and cash equivalents, deferred tax assets, and various other assets shared by the Company's
segments. Reconciliations of total assets from reportable segments to the consolidated balance sheets are as follows:
Total assets from reportable segments
$
Unallocated cash and cash equivalents
Unallocated deferred tax assets
Other unallocated corporate assets
December 31,
$
2013
801,796
237,125
35,632
185,176
2012
816,807
110,247
30,662
110,348
Consolidated total assets
$ 1,259,729
$ 1,068,064
The Company does not consider international operations a separate segment, as management reviews such operations in the
aggregate with the aforementioned segments. Long-lived assets, which consist of property and equipment, in the US and all other
countries combined were as follows:
US
All other countries*
Total
December 31,
2013
136,726
37,340
174,066
$
$
2012
89,423
35,947
125,370
$
$
* No other country's long-lived assets comprised more than 10% of total long-lived assets as of
December 31, 2013 and 2012.
The Company sells its products to customers throughout the US and to foreign customers located in Europe, Canada, Australia,
Asia, and Latin America, among other regions. International sales were 33.0%, 31.2% and 31.4%, of the Company's total net sales
for the years ended December 31, 2013, 2012 and 2011, respectively. For the years ended December 31, 2013 and 2012, no single
foreign country comprised more than 10% of total sales.
Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a
provision for doubtful accounts based upon these evaluations. No single customer accounted for more than 10% of net sales in
the years ended December 31, 2013 and 2012. As of December 31, 2013 and 2012 the Company had one customer representing
19.7% and 18.8% of net trade accounts receivable, respectively. At December 31, 2013 the Company had a second customer
representing 11.4% of net trade accounts receivable.
The Company's production is concentrated at a limited number of independent contractor factories. Sheepskin is the principal
raw material for certain UGG products and the majority of sheepskin is purchased from two tanneries in China, which is sourced
primarily from Australia, Europe and the US. The source for other materials used by the Company is concentrated in Australia
and China. The Company's operations are subject to the customary risks of doing business abroad, including, but not limited to,
currency fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the
transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability. The supply of sheepskin can be
adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside the Company's control.
Further, the price of sheepskin is impacted by demand, industry, and competitors.
A portion of the Company's cash and cash equivalents are held as cash in operating accounts that are with third party financial
institutions. These balances, at times, exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While the
Company regularly monitors the cash balances in its operating accounts and adjusts the balances as appropriate, these cash balances
F-28
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets.
As of December 31, 2013, the Company had experienced no loss or lack of access to cash in its operating accounts.
The remainder of the Company's cash equivalents is invested in interest bearing funds managed by third party investment
management institutions. These investments can include US treasury bonds and securities, money market funds, and municipal
bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and interest rate
risks. Investment risk has been and may further be exacerbated by US mortgage defaults, credit and liquidity issues, and sovereign
debt concerns in Europe, which have affected various sectors of the financial markets. As of December 31, 2013, the Company
had experienced no loss or lack of access to its invested cash and cash equivalents.
The Company's cash and cash equivalents are as follows:
Money market fund accounts
Cash
Total cash and cash equivalents
December 31,
2013
154,105
83,020
237,125
$
$
2012
52,650
57,597
110,247
$
$
(9) Foreign Currency Exchange Contracts and Hedging
As of December 31, 2013, the Company had foreign currency forward contracts designated as cash-flow hedges with notional
amounts totaling approximately $77,000. These contracts were held by four counterparties and were expected to mature over the
next 12 months. At December 31, 2012, the Company had non-designated derivative contracts with notional amounts totaling
approximately $19,000, which were comprised of offsetting contracts with the same counterparty and expired in March 2013.
The nonperformance risk of the Company and the counterparties did not have a material impact on the fair value of the
derivatives. During the year ended December 31, 2013, the ineffective portion relating to these hedges was immaterial and the
hedges remained effective as of December 31, 2013. The effective portion of the gain or loss on the derivative is reported in other
comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction
affects earnings. As of December 31, 2013, the total amount in accumulated other comprehensive loss (see Note 6) was expected
to be reclassified into income within the next 15 months.
As of December 31, 2013, the Company had no outstanding non-designated hedges.
The following tables summarize the effect of derivative instruments on the consolidated financial statements:
For the Year
Ended
December 31,
2013
2012
Derivatives in
Designated
Cash Flow
Hedging
Relationships
Foreign
Exchange
Contracts
Foreign
Exchange
Contracts
Amount of
Gain (Loss)
Recognized in
OCI on
Derivative
(Effective
Portion)
Location of
Gain (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
Amount of
Gain (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
Location of
Amount
Excluded from
Effectiveness
Testing
Gain (Loss)
from Amount
Excluded from
Effectiveness
Testing
$(779)
Net Sales
$17
SG&A
$(11)
$(1,191)
Net Sales
$617
SG&A
$26
F-29
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
For the Year Ended
December 31,
2013
2012
Derivatives Not Designated
as Hedging Instruments
Location of Gain (Loss)
Recognized in Income on
Derivatives
Amount of Gain (Loss)
Recognized in Income on
Derivatives
Foreign Exchange
Contracts
Foreign Exchange
Contracts
SG&A
SG&A
$728
$1,030
(10) Goodwill and Other Intangible Assets
Most of the Company's goodwill is related to the Sanuk reportable segment, with the remaining related to the UGG and
other brands reportable segments. The Company's goodwill and other intangible assets are summarized as follows:
As of December 31, 2013
Intangibles subject to amortization
$
101,963
14 years
$
24,140
$
77,823
Gross
Carrying
Amount
Weighted-
Average
Amortization
Period
Accumulated
Amortization
Net Carrying
Amount
Intangibles not subject to amortization:
Goodwill
Trademarks
Total goodwill and other intangible assets
As of December 31, 2012
128,725
15,455
$
222,003
Intangibles subject to amortization
$
96,674 * 14 years
$
16,164
$
80,510 *
Intangibles not subject to amortization:
Goodwill
Trademarks
Total goodwill and other intangible assets
Changes in the Company's goodwill are summarized as follows:
128,725 *
15,455
$
224,690
Balance at January 1, 2012
Additions through acquisitions
Impairment loss
Balance at December 31, 2012
Additions through acquisitions
Impairment loss
Goodwill,
Gross
135,876
$
Accumulated
Impairment
$
Goodwill, Net
120,045
8,680 *
—
$
144,556 * $
—
—
(15,831) $
—
—
(15,831) $
—
—
(15,831) $
8,680 *
—
128,725 *
—
—
128,725
Balance at December 31, 2013
$
144,556
$
The additions to goodwill through acquisitions were attributable to the other brands reportable segments (see Note 8).
As of December 31, 2013 and 2012, the Company performed its annual impairment tests and evaluated its UGG and other
brands' goodwill. As of October 31, 2013 and 2012, the Company performed its annual impairment tests and evaluated its Teva
trademarks and Sanuk goodwill. Based on the carrying amounts of the UGG, Teva, Sanuk, and other brands' goodwill, trademarks,
and net assets, the brands' 2013 and 2012 sales and operating results, and the brands' long-term forecasts of sales and operating
results as of their evaluation dates, the Company concluded that the carrying amounts of the UGG, Sanuk and other brands'
goodwill, as well as the Teva trademarks, were not impaired. The Sanuk brand goodwill was evaluated based on qualitative
F-30
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
analyses as of October 31, 2012 and based on Level 3 inputs as of October 31, 2013. As of December 31, 2013 and 2012, and as
of October 31, 2013 and 2012, all goodwill other than the Sanuk brand goodwill and all other nonamortizable intangibles were
evaluated based on qualitative analyses.
As of December 31, 2013 and 2012, total goodwill by segment is as follows:
UGG brand
Sanuk brand
Other brands
Total
As of December 31,
2013
2012
$
6,101
$
6,101
113,944
8,680
113,944
8,680 *
$
128,725
$
128,725 *
*The above tables, as well as the Consolidated Balance Sheet at December 31, 2012, have been retrospectively adjusted to
reflect adjustments to the purchase price allocation from our prior year acquisition. Goodwill was increased and other intangible
assets were decreased by $2,458. The adjustments to amortization expense as a result of these changes was immaterial.
Aggregate amortization expense for amortizable intangible assets for the years ended December 31, 2013, 2012 and 2011,
was $7,975, $9,312 and $9,599, respectively. The following table summarizes the expected amortization expense on existing
intangible assets, excluding indefinite-lived intangible assets of $10,237, for the next five years:
Year ending December 31
2014
2015
2016
2017
2018
Thereafter
$
$
7,524
7,024
5,789
5,620
5,620
36,009
67,586
(11) Quarterly Summary of Information (Unaudited)
Summarized unaudited quarterly financial data are as follows:
Net sales
Gross profit
Net income (loss) attributable to Deckers
Outdoor Corporation
2013
March 31
June 30
$
263,760
123,559
$
170,085
69,832
September 30
386,725
$
166,892
December 31
736,048
$
376,200
1,007
(29,275)
33,060
140,897
Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders:
$
$
(0.85) $
(0.85) $
Basic
Diluted
0.96
0.95
0.03
0.03
$
$
$
$
4.08
4.04
F-31
Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(amounts in thousands, except share quantity and per share data)
Net sales
Gross profit
2012
March 31
June 30
$
246,306
$
174,436
September 30
376,392
$
December 31
617,264
$
113,288
73,579
159,293
285,994
Net income (loss) attributable to Deckers
Outdoor Corporation
7,887
(20,139)
43,061
98,057
Net income (loss) per share attributable to Deckers Outdoor Corporation common stockholders:
Basic
Diluted
$
$
0.20
0.20
$
$
(0.53) $
(0.53) $
1.19
1.18
$
$
2.81
2.77
F-32
Table of Contents
Schedule II
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 2013, 2012 and 2011
Balance at
Beginning of
Year
Additions
Deductions
Balance at
End of Year
Year ended December 31, 2013
Allowance for doubtful accounts(1)
$
2,782
$
125
$
868
$
Allowance for sales discounts(2)
Allowance for sales returns(3)
Chargeback allowance(4)
Year ended December 31, 2012
3,836
12,905
5,563
46,989
67,800
187
47,285
66,151
815
Allowance for doubtful accounts(1)
$
1,719
$
2,128
$
1,065
$
Allowance for sales discounts(2)
Allowance for sales returns(3)
Chargeback allowance(4)
Year ended December 31, 2011
4,629
11,313
4,031
35,759
53,165
5,879
36,552
51,573
4,347
Allowance for doubtful accounts(1)
$
1,379
$
642
$
302
$
Allowance for sales discounts(2)
Allowance for sales returns(3)
Chargeback allowance(4)
5,819
4,039
2,535
36,254
37,355
1,744
37,444
30,081
248
_______________________________________________________________________________
2,039
3,540
14,554
4,935
2,782
3,836
12,905
5,563
1,719
4,629
11,313
4,031
(1)
(2)
(3)
(4)
The additions to the allowance for doubtful accounts represent the estimates of our bad debt expense based
upon the factors for which we evaluate the collectability of our accounts receivable, with actual recoveries
netted into additions. Deductions are the actual write offs of the receivables.
The additions to the allowance for sales discounts represent estimates of discounts to be taken by our customers
based upon the amount of available outstanding terms discounts in the year-end aging. Deductions are the
actual discounts taken by our customers.
The additions to the allowance for returns represent estimates of returns based upon our historical returns
experience. Deductions are the actual returns of products.
The additions to the chargeback allowance represent chargebacks taken in the respective year as well as an
estimate of chargebacks related to sales in the respective reporting period that will be taken subsequent to the
respective reporting period. Deductions are the actual chargebacks written off against outstanding accounts
receivable. The Company has estimated the additions and deductions by netting each quarter's change and
summing the four quarters for the respective year.
See accompanying report of independent registered public accounting firm.
F-33
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